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https://www.courtlistener.com/api/rest/v3/opinions/4620013/	REGINA GALLO, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Gallo v. CommissionerDocket Nos. 2618-75, 2621-75, 2624-75, 2625-75.United States Tax CourtT.C. Memo 1975-366; 1975 Tax Ct. Memo LEXIS 7; 34 T.C.M. (CCH) 1578; T.C.M. (RIA) 75366; December 24, 1975, Filed Harvey R. Poe, for the petitioners. Gerald J. O'Tolle, for the respondent. FORRESTERMEMORANDUM OPINION FORRESTER, Judge: In each of these four unconsolidated cases, respondent has determined deficiencies in earlier years and on the same8 statutory deficiency notices has shown an overpayment in income tax for each petitioner's taxable year 1970. Respondent has now moved in each of these cases to strike the petitions and to dismiss for lack of jurisdiction as to taxable year 1970. The sole issue before us is whether we have jurisdiction over a year in which no deficiency has been determined. Sections 6214(b) and 6512(b) 2 provide the short answer. We have no jurisdiction over any taxable year in which the Commissioner of Internal Revenue has not first determined a deficiency. 3 The case law is uniform in so holding. E.g., Cornelius Cotton Mills,4 B.T.A. 255">4 B.T.A. 255 (1926); W. H. Morefieldet al,4 B.T.A. 394">4 B.T.A. 394 (1926); Opperman Coal Co.,6 B.T.A. 1215">6 B.T.A. 1215, 1221 (1927); Russell G. Finn et al,22 B.T.A. 799">22 B.T.A. 799, 802 (1931). Petitioners seek to distinguish these cases by arguing that what they refer to as "respondent's determinations of overpayment" for 1970 are prohibited by the statute of limitations. Even if true, we fail to see how such a factor confers jurisdiction upon us. 4 The respondent did not determine a deficiency for 1970 in any of the four cases, and9 consequently, we do not have jurisdiction in any of the four cases as to 1970. An appropriate order willbe entered.Footnotes1. Cases of the following petitioners were heard herewith: Mario Gallo (deceased) and Gloria Gallo, as Parent-guardian of Diane Marie Gallo, docket No. 2621-75; Diane Marie Gallo, docket No. 2624-75; and Mario Gallo (deceased) and Gloria Gallo, as Parent-guardian of Regina Gallo, docket No. 2625-75.↩2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954. ↩3. As of September 3, 1975, a limited exception to this general rule exists for actions brought seeking a declaratory judgment with regard to the qualification of retirement plans. Sec. 7476. ↩4. We note petitioners' argument that the statute of limitations has run as to 1970 so that, in the event respondent's position is sustained as to earlier years, petitioners will be unable to contest the amount of, or to collect, the 1970 overassessments which respondent has shown. We do not have that case before us here, but it does seem that sections 1311 et seq.↩ protect petitioners on both counts.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620014/	Ronald L. and Sandra J. Haberkorn, Petitioners v. Commissioner of Internal Revenue, RespondentHaberkorn v. CommissionerDocket No. 15361-79United States Tax Court75 T.C. 259; 1980 U.S. Tax Ct. LEXIS 32; November 12, 1980, Filed 32 Decision will be entered for the respondent. Held, P's mini-motorhome which provides living facilities is a "dwelling unit" within the meaning of sec. 280A(f)(1)(A), I.R.C. 1954, as amended. Ronald L. Haberkorn, pro se.Scott A. Taylor, for the respondent. Tietjens, Judge33 . TIETJENS260 OPINIONRespondent determined a deficiency of $ 156 in petitioners' Federal income tax for 1977. Since petitioners have conceded a reduction of $ 31 in their deduction for employee business expenses, the only issue is whether petitioners' minimotorhome is a "dwelling unit" within the meaning of section 280A(f)(1)(A)1 and, therefore, subject to the limitations imposed under section 280A(a).This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and exhibits are incorporated herein by reference.Petitioners timely filed a joint Federal income tax return for 1977. When they filed their petition, petitioners resided in Prior Lake, Minn.Ronald L. Haberkorn (hereinafter Ronald) owns a 1976 Holiday Rambler Mini-Motorhome which he rented to various individuals during 1977. During that year, in34 addition, Ronald used his mini-motorhome for personal purposes for 27 percent of the time if based on total miles driven or for 25 percent of the time if based on total days in use.The mini-motorhome is a four-wheeled, self-propelled vehicle which in 1977 was licensed by the State of Minnesota as a motor vehicle. With a length of 22 feet, the mini-motorhome is equipped with a bathroom which includes a tub/shower combination, sink, medicine cabinet, and commode; a kitchen area which contains cabinets, a double sink, four burners for cooking, a refrigerator, and a pantry; and a living area which is comprised of a three-way dinette, a gaucho/sofa, overhead cabinets, and an overcab sleeper measuring 60 inches by 88 inches.Petitioners argue that the mini-motorhome is a vehicle and that it is not similar to the examples of dwelling units specified in section 280A. Respondent, by contrast, maintains that a minimotorhome is an example of "similar property" as used in section 280A(f)(1)(A) and that petitioners are therefore subject to the restrictions imposed by section 280A.We hold for the respondent.261 Section 280A limits a taxpayer's allowable deductions attributable to the35 rental of a dwelling unit which a taxpayer personally uses in excess of specified periods of time. Section 280A(f)(1)(A) defines a dwelling unit as including "a house, apartment, condominium, mobile home, boat, or similar property."The legislative history of section 280A shows that Congress wanted to prevent taxpayers from converting nondeductible personal living expenses into deductible business expenses.In the case of so-called "vacation homes" that are used both for personal purposes and for rental purposes, it would appear that frequently personal motives predominate and the rental activities are undertaken to minimize the expenses of ownership of the property rather than to make an economic profit. [Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1976, 94th Cong., 2d Sess. 143, 1976-3 C.B. (Vol. 2) 155.]Essentially, a mini-motorhome, like all of the dwelling units specifically enumerated in section 280A(f)(1)(A), provides a shelter and accommodations for eating and sleeping. Although petitioners emphasize the relatively uncomfortable living that the mini-motorhome provides, whether a dwelling unit is primitive, cramped, 36 or palatial is not determinative of its use as a "vacation home" and its consequent classification as a dwelling unit under the definition of the statute. Similarly, that the mini-motorhome is also a means of transportation and must therefore be licensed, regulated, and insured, as such, is an unimportant factor in determining its inclusion as a dwelling unit. Boats, which likewise serve as transportation, are specifically mentioned in the statute as dwelling units. There is no reason to assume that Congress intended to imply, as petitioners suggest, that only those boats moored to the harbor are dwelling units; rather, it seems more reasonable to infer that Congress was intending to include all boats with living facilities as dwelling units since Congress, while stating its desire to cover "vacation homes," did not seem concerned with requiring immobility or permanence for those homes.Petitioners further argue that in Hollesen v. Commissioner, T.C. Memo. 1979-269, we implicitly held that mini-motorhomes are distinct from the dwelling units described in section 280A(f)(1)(A) when we determined that the taxpayers' rental of a 24-foot Winnebago motorhome37 was not an activity engaged in for profit by reference to percentage of miles rather than days 262 used. Petitioners, however, misinterpret Hollesen; in that case we examined the evidence to determine the existence of a profit motive. Although considering the nine factors set forth in section 1.183-2(b)(1)-(9), Income Tax Regs., we found the disproportionate percentage of miles used for personal use clearly indicated the lack of such motive. There was no conflicting evidence presented concerning the number of days used. Similarly, here, petitioners would not prevail whether we used a mileage or a days in use test.Finally, petitioners' contention that in an earlier year's audit, respondent's agents accepted petitioners' classification of the mini-motorhome as not falling under section 280A is not persuasive. One, treatment of an item in another year's return not at issue here is irrelevant to our inquiry and, two, respondent is not bound by the erroneous acts of his agents. See Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380">332 U.S. 380, 384 (1947); Utah Power & Light Co. v. United States, 243 U.S. 389">243 U.S. 389, 409 (1917);38 Peek v. Commissioner, 73 T.C. 912 (1980).Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue, unless otherwise stated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620015/	PAUL AKERS BOWDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bowden v. CommissionerDocket No. 54923.United States Board of Tax Appeals26 B.T.A. 1410; 1932 BTA LEXIS 1147; October 31, 1932, Promulgated 1147 Held, that dividends paid to the petitioner's wife upon corporation stock standing in her name and subsequently paid to him as credits upon a promissory note given to him by the wife, in payment for said stocks, in the circumstances shown, are not properly a part of his taxable income. J. Richard Bowden, Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent. LANSDON 1410 This proceeding seeks to review the action of the respondent in adding to the petitioner's reported taxable income for 1928, the sum of $43,968 paid to petitioner's wife in that year as dividends upon corporation stock held by her, which is the basis of the tax deficiency of $6,667.39 asserted. FINDINGS OF FACT. The petitioner is a resident of Thomson, Georgia, a municipality of about 2,000 inhabitants. Sometime about 1919, with other citizens of Thomson, he organized the Thomson Light and Water Company, a Georgia corporation, for the purpose of supplying the town with water and electric lights. This corporation was not financially successful. Sometime prior to 1927, the petitioner learned that the electric light and power franchise, which the1148 corporation owned, could be sold to a foreign power company at a price that would enable the corporation to make a substantial return of capital to the stockholders. In order to secure control of the corporation and assure the carrying out of any contract of sale he might negotiate for said franchise, the petitioner secretly purchased 450 shares of the capital stock of the Thomson Light and Water Company, paying $100 a share therefor. After purchase of such shares he, on May 25, 1928, transferred them all to his wife through a single certificate which he directed to be issued to her by the secretary of the corporation. A few days following this transfer the petitioner's wife executed and delivered to him her promissory note, due one day after date, for the sum of $45,000, that being the amount paid by him for the stock. Sometime in the spring of 1928, prior to, or at least near the dates of purchase and transfer of the stock, the Thomson Light and Water Company sold its electric light and power franchise for the gross sum of $115,000. An informal disbursement was made of $80,500 of such proceeds ratably among the stockholders of the corporation, 1411 in which the wife1149 of petitioner received the sum of $43,968 in virtue of her ownership of 450 shares of stock transferred to her by petitioner. Of the amount received the petitioner's wife paid to him $40,590 on June 16, 1928, and $2,706 on December 28, 1928, for which he gave her credits on her promissory note. In reporting his income for 1928 the petitioner omitted from his returns the amounts received from his wife, as aforesaid, and the respondent, in auditing said return, has added them to petitioner's taxable income for that year, upon the theory that petitioner, and not his wife, was the owner of the stock at the time the corporate dividends were paid. OPINION. LANSDON: As against the respondent's contention the petitioner has filed a lengthy petition, containing many assignments of error which he alleges the respondent committed in his determination of the tax. The real and only point at issue, however, relates to the ownership of the corporate stock which petitioner bought and caused to be transferred to his wife, as hereinbefore described. The respondent contends that the petitioner was the real owner of that stock when the dividends were declared and the owner in law of the dividends1150 paid to his wife. The petitioner claims that he bought the stock for his wife in accordance with prearranged plans pursuant to which he caused the same to be transferred to her and that he was at all times acting as the agent of his wife, and that the promissory note given to him by her following the issuance of the stock certificate to her was to evidence his expenditures in such connection, for future accounting between them. Both parties to this appeal have argued a number of collateral issues which, in the view we take of the law which must control our decision, need not be discussed in this opinion. The only person who testified at the hearing was the petitioner, who gave his version of the transaction as above stated. In connection with his testimony the petitioner put in evidence the stock certificate issued directly to his wife for the 450 shares of stock and her promissory note for the sum of $45,000, with the credits shown. Without going into the involved recitals of the petitioner's story, or discussing his motives in doing what he did with the stock; or his exact status while doing it, we think the record before us shows that he succeeded in vesting the legal title1151 to the stock in his wife and that her ownership of it at the time the dividends were paid was complete and unassailable. In this connection we consider it immaterial whether, in the first instance, the petitioner purchased the several shares of stock for himself, or for his wife as her agent. The certificate, being the sole muniment of title to the stock when 1412 issued to her by the secretary of the corporation, made her a stockholder and the only person, respecting this particular stock, to whom the corporation could legally pay the dividends. ; ; ; ; ; ; ; ; ; ; 1152 ; ; ; ; ; ; ; ; . Whether the transaction was a sale, or simply a gift from husband to wife, the substitution in stockholders became complete and title vested in her upon delivery and acceptance of the certificate. ; ; . ; . From the facts shown it follows that the dividends here considered belonged to petitioner's wife at the time paid to her and that the respondent erred in including them in petitioner's taxable income. The whole amount of income here disputed is $43,968. The1153 record accounts only for the two credits paid to petitioner on the note, which aggregate slightly less than that amount, and we are unable to say whether or not the respondent erred in respect to the excess. We therefore hold that the respondent erred only in respect to so much of the amount in dispute as is shown to have been paid to the petitioner by his wife upon the note shown. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620016/	Estate of Bernard H. Stauffer, Bonnie H. Stauffer, Executrix, Petitioner v. Commissioner of Internal Revenue, RespondentStauffer v. CommissionerDocket Nos. 4561-63, 4562-63, 4563-63United States Tax Court48 T.C. 277; 1967 U.S. Tax Ct. LEXIS 95; June 14, 1967, Filed 95 Decisions will be entered for the respondent. 1. Corporations A, B, and C, organized under the laws of California, Illinois, and New York, respectively, carried on separate but related businesses in different parts of the United States. A, B, and C were merged into a new corporation, D, organized under the laws of New Mexico. A, B, C, and D had the same sole stockholder and the same officers; and the businesses formerly conducted by A, B, and C were carried on by D in the same manner as before the merger. Held, the fusion of A, B, and C into D was not a "mere change in identity, form, or place of organization" within the meaning of sec. 368(a)(1)(F) of the 1954 Code, with the result, first, that A, B, and C were required to file closing returns for the taxable period ending at the time of the merger under sec. 381(b)(1), and second, that a subsequent net operating loss of D could not be carried back to a premerger year by reason of sec. 381(b)(3). Pridemark, Inc., 42 T.C. 510">42 T.C. 510, reversed 345 F. 2d 35 (C.A. 4), disapproved as to holding in respect of sec. 368(a)(1)(F).2. A, B, and C each valued its inventories at the lower of cost or market. Held, the market values of such inventories 96 on the date of the merger were not in fact less than cost, and A, B, and C are not entitled to have their inventories on that date reduced below cost or book value.3. Held, the erroneous refunds of A's taxes to D resulting from D's application under sec. 6411 for tentative allowance of a carryback of its post-merger net operating loss to A's premerger income resulted in deficiencies in A's taxes for such premerger years. Sec. 6211. Norman B. Barker and Arthur O. Armstrong, Jr., for the petitioners.Edward M. Fox, for the respondent. Raum, Judge. RAUM278 These consolidated cases involve the liability of Bernard H. Stauffer as ultimate transferee of the assets of three corporations ("Stauffer California," "Stauffer Illinois," and "Stauffer New York"), in respect of which the Commissioner determined deficiencies in income tax as follows:StaufferStaufferStaufferCaliforniaIllinoisNew YorkFiscal year ended Jan. 1, 1958$ 1,481,653.05Fiscal year ended Jan. 31, 1959213,472.258-month period Feb. 1 to Sept. 30, 1959412,021.19$ 340,822.82$ 6,943.95 The principal question is whether the absorption of these corporations by a new corporation ("Stauffer New Mexico") on October 1, 1959, was a reorganization 97 under section 368(a)(1)(F) of the 1954 Code with the consequence (a) that the taxable year of each of the three predecessor corporations was not required to end at that time pursuant to section 381(b)(1); and (b) that a subsequent net operating loss of the new corporation might be carried back to a tax year prior to the reorganization pursuant to section 381(b)(3). Other questions presented, in the event it is determined that no reorganization took place under section 368(a)(1)(F), are (1) whether there should be a downward revision of the value of the inventories of each of the three old companies as of September 30, 1959; and (2) whether the Commissioner properly determined deficiencies against Stauffer California for the fiscal years ended January 31, 1958 and 1959.FINDINGS OF FACTThe stipulations of fact together with accompanying exhibits are incorporated herein by this reference.The notices of deficiency in these cases were sent to Bernard H. Stauffer, determining his liability as the ultimate transferee of the assets of each of three corporations (hereinafter sometimes referred to collectively as the old Stauffer companies), namely, Stauffer Reducing, Inc., of California, a 98 California corporation (Stauffer California), Stauffer Reducing, Inc., an Illinois corporation (Stauffer Illinois), and Stauffer Reducing, Inc., of New York, a New York corporation (Stauffer New York). As more fully set forth hereinafter, 279 each of these corporations had transferred all of its assets to Stauffer Laboratories, Inc., a New Mexico corporation (Stauffer New Mexico), on October 1, 1959, and the assets of Stauffer New Mexico were thereafter transferred to Bernard H. Stauffer, its sole stockholder, on its liquidation on January 31, 1961. The transferee liabilities determined against Bernard H. Stauffer are based upon the deficiencies in income tax of the old Stauffer companies determined by the Commissioner. No notice of deficiency was ever sent to Stauffer New Mexico, or to Bernard H. Stauffer as transferee of a direct tax obligation of Stauffer New Mexico. No question of transferee liability is presented herein for decision, the only issue being whether the Commissioner correctly determined the deficiencies against the old Stauffer companies.Bernard H. Stauffer died after issuance of the notices of deficiency. Letters testamentary were issued to his wife, Bonnie H. 99 Stauffer, and the petitions herein were thereafter filed by his estate. At all times relevant both husband and wife were residents of California.Stauffer California filed Federal income tax returns for its fiscal years ended January 31, 1958 and 1959, with the district director of internal revenue at Los Angeles, Calif. No closing tax returns were filed by the old Stauffer companies for the period from February 1, 1959, to September 30, 1959, but Stauffer New Mexico filed a return for the entire fiscal year ended January 31, 1960, which included the operations of the old Stauffer companies for the period February 1, 1959, to September 30, 1959, as well as the operations of Stauffer New Mexico for the period from October 1, 1959, to January 31, 1960.For many years prior to 1954, Bernard H. Stauffer was the owner of a patent covering a mechanical oscillating unit designed to provide passive and resistive exercise for use in a program of weight and posture control. The business of exploiting the patented device was conducted for many years by Stauffer Laboratories, a California partnership composed of Bernard H. Stauffer and his sister, Sally Stauffer. For several years prior to 1954 100 the business had been carried on through franchised salons, where customers were counseled with respect to a weight control program and allowed to use one of the exercise units. In 1954, a "Stauffer Home Plan" was inaugurated for the retail sale of units embodying the patented device. Eventually, sales of these units by the Stauffer enterprise (as carried on by corporations hereinafter described) were handled by 23 regional distributors who operated in franchise territories; they in turn sold the products to the ultimate consumers through local distributors or branch offices which employed a staff of 3,500 "counselors."In 1956 the substantial bulk of the activities previously carried on by the partnership, Stauffer Laboratories, was taken over by the three 280 old Stauffer companies (Stauffer California, Stauffer Illinois, and Stauffer New York). All of the stock of these corporations was owned by the partnership, but in July 1958 Bernard H. Stauffer purchased the partnership interest of his sister, and was at all times thereafter the sole owner of the business, conducted as a sole proprietorship under the name of Stauffer Laboratories, and of the stock of the three corporations. 101 All of his interests in these various business entities were subject to the community property rights of his wife, Bonnie H. Stauffer.Stauffer California was incorporated under the laws of California in 1956. Its principal activity consisted of the manufacture and sale of mechanical reducing equipment. Until 1958, all units sold by the old Stauffer companies were manufactured by Stauffer California in its facilities in Los Angeles, but after that time Stauffer Illinois also manufactured some of these units. Stauffer California promoted the Stauffer Home Plan in the Western United States, and also granted franchise agreements within its specified territory, leasing certain exercise units to independent contractors who operated reducing salons offering the "Stauffer System," the trade name for this method of weight control. The corporation's principal place of business was 1919 Vineburn Avenue, Los Angeles, Calif.Stauffer Illinois was incorporated under the laws of Illinois in 1948. 1 At least from about 1956 it promoted the Stauffer Home Plan in the Midwest, and it entered into franchise agreements and leases with independent salons within its specified territory. From 1958 102 it also engaged in manufacturing some of the reducing equipment in rented facilities in West Memphis, Ark., and Little Rock, Ark. Its principal place of business was in Chicago, Ill.Stauffer New York was incorporated under the laws of New York in 1956. It conducted no manufacturing operations of its own, but sold the mechanical reducing apparatus manufactured by Stauffer California and Stauffer Illinois. It promoted the Stauffer Home Plan in the Northeastern United States. It also entered into franchise agreements and leases with independent salons within its specified territory. Its principal place of business was in New Jersey.The officers and directors of each of the three corporations were the following persons:NameOffice HeldBernard H. StaufferPresident and directorL. R. d'AssalenauxExecutive vice president anddirectorBonnie StaufferSecretary and directorSally StaufferDirector281 There was a fifth director of Stauffer New York, H. W. Parke, an employee of C-T Corp., who was designated as a director only to satisfy the requirements 103 of New York law that there be at least one resident director of every New York corporation. Parke never attended or participated in a meeting of the directors of Stauffer New York.Meetings of the boards of directors of the three Stauffer companies were always held at the offices of Stauffer California. No meetings of directors or shareholders were held in either Illinois or New York.Accounting records for each of the three corporations were prepared and kept by means of IBM machines located in the Los Angeles office of Stauffer California.During the latter part of 1958, Bernard H. Stauffer was approached by representatives of Deming and of Albuquerque, N. Mex., and solicited to relocate the Stauffer operations in those cities. It was ultimately determined to relocate in Albuquerque. Pursuant to this decision Stauffer California acquired an option to purchase an industrial plant site near that city.In connection with the proposed relocation of the Stauffer enterprise in New Mexico, Bernard H. Stauffer caused the formation of Stauffer New Mexico in August 1959. Its officers and directors were the same as those of the three old Stauffer companies, and Bernard H. Stauffer was similarly 104 the sole stockholder. A plan of reorganization was formulated whereby the three old Stauffer companies would merge into Stauffer New Mexico on October 1, 1959. In proposing the plan to the board of directors of Stauffer California on August 14, 1959, Bernard H. Stauffer stated that the merger was deemed advisable "in view of the possibility of effecting substantial reductions in manufacturing and overhead costs through the combination of all of the facilities and operations in one central location, to the greatest extent possible, and the coordination of supervisorial activities. Further, it would be possible through the merger to bring all of the activities of the business within a single corporate body subject to the jurisdiction of the State of New Mexico, in which State most of the assets of the business would be located." Pursuant to the plan, a formal merger agreement was approved by Bernard H. Stauffer in his capacity as sole stockholder of each of the four corporations and was executed by him and his wife on September 28, 1959, in their capacities as president and secretary, respectively, of each of the four corporations.The merger agreement was in fact carried out on October 105 1, 1959, pursuant to its terms which, in part, provided in substance (1) that each of the three old Stauffer companies would merge with Stauffer New Mexico in accordance with the laws relating to statutory mergers of domestic and foreign corporations in each of the four States 282 and that thereafter Stauffer New Mexico would be the surviving corporation; (2) that the stated capital, paid-in surplus and retained earnings of Stauffer New Mexico would be an amount equal to the sum of such items of the three constituent corporations; (3) that all property of any kind of the three constituent corporations would be vested in Stauffer New Mexico which would be responsible for all liabilities and obligations of the three constituent corporations; and (4) that on the effective date of the merger the separate existence of each of the three constituent corporations would cease.In connection with the consummation of the merger the agreement provided that it would not become effective or binding upon any of the constituent corporations, their officers, or stockholders until a copy of the agreement and any other certificates or documents required by law were properly filed and recorded with the proper 106 governmental agencies in each of the four States involved.The merger agreement was in fact filed in the office of the secretary of state of the State of New Mexico early in the morning of October 1, 1959. Counsel for the companies was advised thereof on that morning, and promptly called the secretary of state of the State of California to request that the merger agreement, which had been mailed to that office on September 30, 1959, be filed with the secretary of state of the State of California. The merger agreement was so filed in California on October 1, 1959. The merger agreement was filed with the secretary of state of the State of Illinois as of 5 p.m. on October 1. The merger agreement was filed with the Department of State of the State of New York at approximately 4:30 p.m. on October 1. Upon completion of the merger, on October 1, 1959, after issuance of additional stock of Stauffer New Mexico in respect of the stock of each of the three constituent corporations, Bernard H. Stauffer remained the sole stockholder of Stauffer New Mexico.On or about August 13, 1959, a request for a ruling as to the tax consequences of the proposed reorganization had been submitted to the 107 Internal Revenue Service. The merger, as planned, was outlined, and the Service was asked to rule, inter alia, that it would constitute a "reorganization" within the meaning of section 368(a) (1) (A) ("a statutory merger or consolidation"). There was no request for any ruling as to whether the proposed merger would also qualify as a reorganization within the meaning of section 368(a) (1) (F). On September 14, 1959, the Service ruled that the proposed merger would be a section 368(a) (1) (A) reorganization and ruled favorably on all other requests, such as those dealing with nonrecognition of gain or loss and carryover of basis of assets.The option to acquire the real property in the Albuquerque area which had been obtained by Bernard H. Stauffer on behalf of Stauffer 283 California, was exercised and the proposed industrial site acquired by Stauffer California on or about September 29, 1959, at a price of $ 130,500. Title was taken in the name of Stauffer New Mexico by deed recorded on October 1, 1959. However, because of reversals in business fortunes hereinafter more fully described, the contemplated relocation to New Mexico was never carried out. Instead, Stauffer New Mexico's 108 principal place of business was 1919 Vineburn Avenue, Los Angeles, Calif., which had previously served as the main office of Stauffer California and from which the affairs of all the Stauffer enterprises had been guided and controlled. It continued to carry on the operations previously conducted by the old Stauffer companies from the same locations and in the same manner as before the merger. The accounting records continued to be broken down as though the three old Stauffer companies were still in existence, except that no intercompany profits appeared on the books.Stauffer New Mexico was liquidated on January 31, 1961, and its assets, subject to its liabilities, were distributed to Bernard H. Stauffer, who thereafter continued the same business operations as a sole proprietor.The old Stauffer companies, each of which had previously filed separate corporate returns and had reported income on a fiscal year basis (February 1 to January 31), did not file closing tax returns for the period from February 1, 1959, the beginning of the new fiscal year, to September 30, 1959, the last day of their separate existence. It was originally intended that the old Stauffer companies would file 109 such closing returns, however, and on December 15, 1959, a request was filed on behalf of each of them for an extension of time for filing returns for the period February 1, 1959 to September 30, 1959. The following sums were paid along with these requests:Stauffer California$ 300,000Stauffer Illinois200,000Stauffer New York7,500Instead of filing closing returns for the old Stauffer companies, however, a return was filed in the name of Stauffer New Mexico which included both the operations of the old Stauffer companies for the period February 1, 1959-September 30, 1959, and the operations of Stauffer New Mexico for the period from October 1, 1959, to January 31, 1960. Attached to the return was a statement describing the merger of the old Stauffer companies into Stauffer New Mexico, which contained the following paragraph:Taxpayer has been advised by counsel that inasmuch as the reincorporation of California, Illinois, and New York in the State of New Mexico involved no change in the existing stockholders or change in the assets of the corporations 284 involved, but was intended to effectuate relocation of the corporate domiciles in the State of New Mexico, the reorganization is within 110 the scope of section 368(a) (1) (F) and section 381(b); and that under the authority of Rev. Rul. 57-276 (1 C.B. 126">1957-1 C.B. 126), a single return must therefore be filed by Stauffer Laboratories, Inc. [Stauffer New Mexico], for the fiscal year commencing February 1, 1959 and ending January 31, 1960, claiming only a single surtax exemption, and combining the operations of all of the corporations for the entire fiscal year, and that separate closing returns for New York, Illinois, and California should not be filed.The schedule below shows the total sales income, the cost of sales (based on inventory figures at cost rather than on alleged revised market values now contended for by petitioner), gross profit, other income, total expenses, taxable income, and the tax which would be due thereon for (1) each of the three old Stauffer companies for the period February 1, 1959, to September 30, 1959, (2) for Stauffer New Mexico for the period October 1, 1959, to January 31, 1960, and (3) for the combined operations of all four corporations for the full 12-month fiscal year ended January 31, 1960:Feb. 1, 1959-Sept. 30, 1959ItemCaliforniaIllinoisNew YorkTotalSales$ 10,357,866$ 4,643,536$ 1,132,368$ 16,133,770Cost of sales6,316,9673,719,456561,45010,597,873Gross4,040,899924,080570,9185,535,897Other income147,40238,26630,256215,924Total income4,188,301962,346601,1745,751,821Expenses3,385,377296,340578,0274,259,744Taxable802,924666,00623,1471,492,077Tax412,021340,8226,943759,787Oct. 1,FYE Jan.1959-Jan.31, 196031, 1960ItemNewTotal perMexicoreturnSales$ 1,546,410 $ 17,680,180Cost of sales933,391 11,531,264Gross613,019 6,148,916Other income10,671 226,595Total income623,690 6,375,511Expenses1,419,227 5,678,971Taxable(795,537)696,540Tax(403,086)356,701111 The figures appearing in the last column of the foregoing schedule are identical with those reported by Stauffer New Mexico in its return for the full year ended January 31, 1960, in respect of the operations of all four corporations. Thus, that return showed an income tax due in the amount of $ 356,701. The sums totaling $ 507,500 paid on behalf of Stauffer California, Stauffer Illinois, and Stauffer New York with their earlier requests for extensions of time to file closing returns were claimed by Stauffer New Mexico as taxes paid, and it claimed a refund of $ 150,799.During the summer and fall of 1960, Internal Revenue Service agents conducted an examination of the Federal income tax returns of the old Stauffer companies for the years ended January 31, 1958 and 285 1959, and of Stauffer New Mexico for the period ended January 31, 1960. A report was prepared on this examination under date of January 27, 1961. The Service did not contest the filing of a single return by Stauffer New Mexico for the year ended January 31, 1960, in the manner described above. Comparatively small deficiencies were assessed against each of the old Stauffer companies for the years ended January 31, 1958 112 and 1959, and an overassessment was determined as to Stauffer New Mexico for the year ended January 31, 1960. The following schedule details the amounts of taxable income and tax due reported by the three old Stauffer companies for the fiscal years ended January 31, 1958 and 1959, as well as the audit adjustments made by the Internal Revenue Service to the returns and the additional tax due and paid as a result of said adjustments:StaufferStaufferStaufferCaliforniaIllinoisNew YorkFYE Jan. 31, 1958Income originally reported$ 2,849,926$ 1,652,267$ 197,864Audit adjustments9,9845,9055,808Income as last adjusted2,859,9101,658,172203,672Tax originally paid1,476,462853,67997,389Additional tax, per audit5,1913,0703,020Tax paid1,481,653856,749100,409FYE Jan. 31, 1959Income originally reported4,075,701406,68566,977Audit adjustments22,78012,8086,687Income as last adjusted4,098,481419,49373,664Tax originally paid2,111,655205,97629,328Additional tax, per audit11,8456,6603,477Tax paid2,123,500212,63632,805In its closing Federal income tax return for the fiscal year ended January 31, 1961, Stauffer New Mexico reported a net operating loss of $ 3,366,052. The Stauffer corporations have at all times 113 consistently employed the lower of cost or market method of determining inventory values, and in computing the income of Stauffer New Mexico in that return, its closing inventories were written down from book value to an alleged market value that was less than book value. The opening inventories were valued at book.The following table, prepared from the books of Stauffer New Mexico, represents a breakdown of the income and expenses of Stauffer New Mexico for the year ended January 31, 1961, to show the loss attributable to each of the businesses previously conducted by the old Stauffer companies: 286 New YorkIllinoisCaliforniaTotalSales$ 173,412 $ 111,202 $ 617,332 $ 901,946 Cost of goods soldinventory -- Feb. 1, 1960137,367 711,231 1,413,503 2,262,101 Cost input343,521 361,596 705,117 Less inventory -- Jan. 31, 1961(7,428)(398,490)(60,270)(466,188)Cost of goods sold129,939 656,262 1,714,829 2,501,030 Gross profit (loss)43,473 (545,060)(1,097,497)(1,599,084)Expenses170,248 509,528 1,087,192 1,766,968 Loss for the year(126,775)(1,054,588)(2,184,689)(3,366,052) The loss figures for each of the old Stauffer companies are not strictly comparable with the premerger taxable income reported 114 on the separate returns filed by the three corporations, because intercompany profits, which constituted part of the cost of finished goods inventory in the premerger returns, did not appear in the post-merger books and were not reflected in inventory in this breakdown. However, home office expenses and executive salaries were allocated among the three businesses in the same manner both before and after the merger.The operating loss shown on the return of Stauffer New Mexico for the year ended January 31, 1961, was reflected on an Application for Tentative Carryback Adjustment filed by Stauffer New Mexico on or about April 10, 1961. In its application, Stauffer New Mexico requested a refund of (a) $ 1,481,653, consisting of all taxes theretofore paid by Stauffer California on its income for the year ended January 31, 1958, and (b) $ 263,194 of the income taxes paid by Stauffer California with respect to the year ended January 31, 1959. On the application Stauffer New Mexico stated that it was "a continuing corporation pursuant to a reorganization under IRC Section 368(a)(1)(F)," but it did not identify Stauffer California or any other named corporation as the predecessor in the 115 reorganization.This application for a so-called "quickie" refund was based on section 6411 of the Internal Revenue Code of 1954 which, so far as is relevant here, authorizes the Secretary or his delegate to make a refund to a taxpayer within 90 days of his application therefore based upon the tentative allowance of a net operating loss carryback. This allowance is to be made on the basis of a limited examination of facts and figures submitted by the taxpayer to determine whether omissions or errors of computation have been made. No omissions or errors in computations having been found, Stauffer New Mexico's tentative carryback claim was allowed. The amounts so allowed, $ 1,481,653 tax and $ 12,035.89 interest for fiscal 1958 and $ 263,194 tax and $ 2,138 interest for fiscal 1959, were paid by checks drawn to Stauffer New Mexico, and negotiated on April 18, 1961, by Bernard H. Stauffer as trustee in dissolution and former sole stockholder of the then-dissolved corporation.287 The book values of the assets transferred from each of the old Stauffer companies to Stauffer New Mexico on October 1, 1959 (exclusive of liability for Federal income taxes, if any), together with adjustments for 116 a disputed inventory write-down claimed by petitioner, were as follows:DisputedBook, net ofBook valueinventorydisputedwrite-downwrite-downStauffer California$ 4,510,158$ 842,883$ 3,667,285Stauffer Illinois1,828,285450,8891,377,396Stauffer New York183,97017,290166,680Total6,522,4231,311,0625,211,361The fair market value of these assets was at least equal to the book value, net of the inventory write-down, if any.At January 31, 1961, the net book value of the assets of Stauffer New Mexico transferred in liquidation to Bernard H. Stauffer was $ 3,778,303. The fair market value of those assets equaled or exceeded their net book value.On or about November 30, 1961, Bernard H. Stauffer, acting in his capacity as trustee in dissolution, former president, and former sole stockholder of Stauffer New Mexico, executed a document entitled "Transferee Agreement -- Corporation" (Form 2045) on behalf of Stauffer New Mexico. In this document Stauffer California was denominated as "Transferor" and Stauffer New Mexico as "Transferee." The document provided in part as follows:In consideration of the Commissioner of Internal Revenue not issuing a statutory notice of deficiency to and making an assessment 117 against the above-named transferor corporation, the undersigned admits that it is the transferee of assets received from said transferor corporation, and assumes and agrees to pay the amount of any and all Federal income, excess-profits, or profits taxes finally determined or adjudged as due and payable by the above-named transferor corporation for the taxable year (or years) ended 1/31/58 and 1/31/59, to the extent of its liability at law or in equity, as a transferee within the meaning of Section 6901 of the Internal Revenue Code of 1954 and corresponding provisions of prior internal revenue laws;Stauffer Laboratories, Inc.(dissolved January 31, 1961)By B. H. Stauffer,Transferee (former Pres. & sole stockholder)Facts Relating to Claimed Write-down of Inventory as of September 30, 1959. 2 -- For many years the Stauffer organization (i.e., the 288 various Stauffer entities considered in the aggregate) was recognized as a leader in the weight control industry. Prior to April of 1958, the only unit manufactured and sold with the Stauffer Home Plan was the model S or S-1 (S being the earlier version of S-1). This unit had a manufacturing cost of approximately $ 60, wholesaled at $ 144.75, 118 and retailed at $ 299.50.During 1958 a large number of competitors entered the reducing-aid field, offering promises of weight reduction through various means, at prices ranging upwards from a few dollars for various pills and dietary supplements. Mechanical and electrical devices were offered to the public at prices ranging as low as $ 8.88 per unit. Devices comparable in appearance to the products of the Stauffer companies were offered at a wide range of prices. Department stores offered units identified as having retail prices of $ 199 at "special" prices of $ 99.50 or even $ 79.95.From April 1958 until September 1959, the Stauffer companies, in an effort to combat competition, introduced a variety of models in different price ranges. Each of these models involved the same oscillating unit principle, to which were added various attachments. The models being sold during this period were the following:Model identificationManufacturingWholesaleRetail pricecostpriceS-1$ 60$ 144.75$ 299.50L4599.75199.50C124169.50399.00H5089.50179.00W192245.25545.00The 119 S-1 remained the most important model, but a substantial number of units of model L were also sold. The other models (except for H which first appeared at about the end of this period and which displaced L in relative importance in November 1959) were of distinctly lesser importance and accounted for a comparatively small number of sales.The greatly increased publicity resulting from the advertising done by the Stauffer companies and their competitors during 1958 and 1959 attracted the attention of the U.S. Department of Health, Education, and Welfare to mechanical reducing devices. On September 2, 1959, Arthur S. Fleming, then the Secretary of Health, Education, and Welfare, held a news conference at which he attacked the manufacturers of such devices on the ground that they were wholly ineffective to accomplish the results claimed. A news release to this general effect was issued at this conference, and was widely reported in the daily papers on the following day.289 Other unfavorable publicity followed. In its September 1959 issue, Consumer Research published a report on mechanical reducing equipment which concluded that expenditures for such equipment could only be justified as 120 an entertainment item for being "jiggled, jarred or electrified." In its December 1959 issue, Readers Digest published an article entitled "They Take Your Money -- You Keep Your Weight" which also treated weight reducing equipment in a disparaging manner. The sweeping derogatory comments on weight-reducing devices in these articles did not distinguish the mechanical devices producing vibration and massage (such as those commonly employed by Stauffer's competitors) from the Stauffer products embodying the oscillating principle. Finally, in March 1960, the Federal Trade Commission began proceedings to force Stauffer to cease and desist from the use of certain advertising regarding its products.Average Stauffer sales for the year 1959 were in excess of 7,000 units per month, and in September of 1959, notwithstanding the adverse publicity, 8,259 units were sold, substantially in excess of the 5,797 units sold during the preceding month of August 1959 and in excess of the 6,700 units sold during the corresponding month of September 1958. However, sales declined to 5,288 units in October, to 2,960 units in November, and to 557 units in December. By 1960 the unfavorable publicity had 121 taken its toll to the point where sales averaged only about 350 units a month for the entire year. The combined unit sales of all the Stauffer companies from January 1958 through December 1961 (including the period from February 1, 1961, through December 31, 1961, in which the business was run by Bernard H. Stauffer as a sole proprietorship) were as follows:Month1958195919601961January9,9657,102293106February7,93012,854543135March8,68214,463610147April11,61511,107524122May12,0888,528222139June9,5677,072387167July8,8476,618258148August14,0315,797422128September6,7008,259375148October8,0725,288408101November7,4792,96013993December7,62755714992Total112,60390,6054,3301,526 During the period from August 1959 through January 1961, the following wholesale and suggested retail prices were generally in effect: 290 Unit priceModelPeriod (inclusive)WholesaleSuggestedretailS-1August 1959-January 1960$ 144.75$ 299.50January 1960-May 1960124.00289.50June 1960-January 1961144.75289.50LAugust 1959-October 195980.00149.50November 1959-November 196099.75199.50December 1960-January 196160.00199.50WSeptember 1959-February 24, 1960245.25545.00March 1960-January 1961218.00545.00CMonth of August 1959169.50339.00September 1959-August 1960149.70339.00September 1960-October 1960129.50339.00November 1960-January 196139.50339.00HOctober 1959-January 196089.50179.00February 1960-January 196163.95139.50On 122 or about September 30, 1959, the accounting firm of Price, Waterhouse & Co. commenced an audit of the Stauffer companies for the period from February 1, 1959, to September 30, 1959, for the purpose of preparing certified financial statements for each of the companies. Representatives of the firm observed the inventories on or about September 30, 1959, and then returned in mid-October to begin actual work on the audit. During the course of the examination, the senior accountant in charge of the field work on the audit, Mr. Rubin Weprin, became concerned about the inventories. In his opinion there was an "imbalance" in various categories (i.e., a situation in which some parts needed to complete certain units were in oversupply as against others that were in undersupply). He was disturbed by the "bad shape" in which he found the companies' inventory records, and he had doubts about the salability of one of the new models, model C (a cradle embodying the oscillating device), which he did not regard as a "good product." He did not appear to have any doubts about any of the other models. And although he had additional concern based upon the downward trend in selling activities which 123 he observed during October and November of 1959, the record does not disclose that such concern was based in any part upon the level or trend of selling activities on or prior to September 30, 1959. Working balance sheets were prepared from the books of the companies, but Price, Waterhouse was not willing to certify the balance sheets, and it never certified any financial statements for the old Stauffer companies for this period.On January 31, 1960, and for sometime prior to that date, Bernard H. Stauffer was a party to a loan agreement with the Bank of America under which he had pledged all the capital stock of Stauffer New Mexico as security for a substantial personal loan. In the agreement, he promised to maintain the net worth and working capital of the corporation in excess of certain amounts, and to furnish the bank periodically with financial statements prepared in accordance with generally accepted accounting principles.291 On February 12, 1960, the controller of Stauffer New Mexico submitted financial statements of Stauffer New Mexico as of January 31, 1960, to the Bank of America, on which the value of Stauffer New Mexico's closing inventories, computed at the lower of cost 124 or market, was shown as $ 2,333,751. On or about March 15, 1960, Stauffer New Mexico filed its income tax return for the fiscal year ended January 31, 1960, in which the same inventories were valued at $ 2,262,101. The financial statements furnished to the Bank of America and tax return of Stauffer New Mexico, though showing different values for the closing inventory on January 31, 1960, reflected inventories at book value, computed at cost, and not market value. No inventory write-down from book value was claimed by Stauffer New Mexico on its Federal income tax return for its fiscal year ended January 31, 1960.Price, Waterhouse & Co. returned for a preliminary examination of the financial statements of Stauffer New Mexico for its fiscal year ended January 31, 1960 (which included the separate operations of the three old Stauffer companies for the first 8 months of the fiscal year), in March 1960. Rubin Weprin, again in charge of the field work, felt that the inventories on hand at January 31, 1960, were overstated on the books and the financial statements of Stauffer New Mexico. Uncertainty as to the ability of Stauffer New Mexico to realize the cost of its inventories was one 125 of the reasons why Price, Waterhouse did not certify the financial statements of the company for the year ended January 31, 1960.On August 3, 1960, accountants from Price, Waterhouse revisited Stauffer New Mexico and reviewed its financial statements for the 4 months ended May 31, 1960, to see if it was possible to assign a precise valuation to the January 31, 1960, inventory. The review disclosed that operations had not significantly changed since completion of the field work in connection with the January 31, 1960, statements, and that Bernard H. Stauffer was still highly optimistic about the business resuming profitable operations in the near future. In view of the conflict between the Price, Waterhouse auditors and Bernard H. Stauffer as to the ability of Stauffer New Mexico to sell its inventory in the future, Price, Waterhouse refused to certify the value of the inventory as of January 31, 1960.It was not until the fall of 1960 that the management of Stauffer New Mexico became convinced that a significant cutback in operations would be necessary to avoid further losses, and that an extended period of time would be required to rebuild public confidence in Stauffer products. 126 It was determined at that time that Stauffer New Mexico should be liquidated, with Bernard H. Stauffer continuing the business, in a diminished form, as a sole proprietorship. It was hoped that the remaining completed S-1 units could be sold, and that the partially 292 completed S-1 units would be completed and sold. All other models would be discontinued and the parts inventory for those models disposed of.Stauffer New Mexico was in fact liquidated on January 31, 1961. In its closing tax return for the fiscal year ended January 31, 1961, the book values of its inventories on hand at the close of the fiscal year were written down. All parts on hand were valued at their scrap value, and all finished units, except the model S-1, were treated as worthless. The S-1's were valued at $ 30, which was approximately 50 percent of their book value at cost.The following schedule shows the total finished units of models L, C, H, and W on hand as of October 1, 1959; the number of additional units manufactured between October 1, 1959, and January 31, 1960; the total of such units available for sale; the total sales of such units between October 1, 1959, and January 31, 1961, and the total of 127 such units unsold on January 31, 1961:ModelLCHWFinished units, Oct. 1, 19594,728541095Additional units manufactured by Jan. 31, 19601,6399541 4,174563Total units available for sale, Oct. 1, 1959 toJan. 31, 19606,3671,4951 4,174658Total units sold from Oct. 1, 1959 to Jan. 31, 19613,1971272,185156Units unsold, Jan. 31, 19613,1701,3681,989502In determining deficiencies in the income taxes of Stauffer California, Stauffer Illinois, and Stauffer New York resulting from their failure to file closing tax returns for the period February 1, 1959, to September 30, 1959, it was necessary for the Commissioner to determine the taxable income of the three corporations for this 8-month period. In arriving at figures for taxable income and, more particularly, in computing the cost of goods sold deduction for each corporation, the Commissioner used the book values of the inventories, at cost, as the valuation of the closing inventories on September 30, 1959.The Stauffer companies have at all times consistently employed the lower of cost or market method of determining inventory values, and the cost (or book value) 128 of the inventory of each of the Stauffer companies at September 30, 1959, thus used by the Commissioner was as follows:Stauffer California$ 1,185,757Stauffer Illinois757,585Stauffer New York324,4282,267,770293 During the early part of 1963, in connection with the processing of these proposed deficiencies, Price, Waterhouse & Co. was requested by petitioner to furnish a value of the closing inventory of the old Stauffer companies on September 30, 1959, using the lower of cost or market method of inventory valuation. At this time, Price, Waterhouse concluded that the market value of the closing inventories on September 30, 1959, was lower than its book value, at cost, in the amount of $ 1,311,062. The following schedule, prepared by Price, Waterhouse & Co., shows in summary form how Price, Waterhouse arrived at this write-down:STAUFFER LABORATORIES, INC.Summary of Inventory Write-down as at September 30, 1959Models W, C,Model S-1H and L andpartsand otherTotalpartsParts inventory:Inventory Sept. 30, 1959$ 528,800 $ 786,548 $ 1,315,348 Add purchase commitments334,906 105,760 440,666 Total available for use863,706 892,308 1,756,014 Less -- Cost of Sept. 30, 1959material used in production duringthe period Oct. 1, 1959 to Jan. 31,1960(213,665)(297,402)(511,067)Less -- Labor and burden included inSept. 30, 1959 inventory(54,613)(76,041)(130,654)Sept. 30, 1959 inventory still on handat Jan. 31, 1960 (material costsonly)595,428 518,865 1,114,293 Cost of material used in productionfrom Feb. 1, 1960 to Jan. 31, 1961(80,834)(34,933)(115,767)Sept. 30, 1959 inventory still on handat Jan. 31, 1961514,594 483,932 998,526 Proceeds from scrap sales Oct. 1, 1959to Jan. 31, 196162,668 Unrecovered cost of Sept. 30, 1959inventory as at Jan. 31, 1961935,858 Finished goods inventory:Losses on finished units --Model L140,306 Model C123,050 Model H57,931 Model W53,917 1,311,062 129 294 In its determination that the market value of the closing inventories on September 30, 1959, was $ 1,311,062 less than the cost figures used by the Commissioner, Price, Waterhouse used as its "market" figures the alleged "net realizable value" of the inventories rather than the reproductive or replacement values of the inventories.The cost values of the closing inventories of the old Stauffer companies as of September 30, 1959, used by the Commissioner, together with the proposed write-down of those inventories made by Price, Waterhouse in 1963, are as follows:Book valueWrite-downReduced valueStauffer California$ 1,185,757$ 842,883$ 342,874Stauffer Illinois757,585450,889306,696Stauffer New York324,42817,290307,138Total2,267,7701,311,062956,708Petitioner contends that the inventory of each of the three companies as thus reduced represents its net realizable value at September 30, 1959.The net realizable value of each of these inventories at September 30, 1959, was not less than its respective cost or book value.OPINION1. (F) Reorganization Issue. -- Each of the three old Stauffer companies (California, Illinois, and New York), the taxpayers herein, had a fiscal year ending January 130 31. On October 1, 1959, all three were absorbed by Stauffer New Mexico pursuant to the statutory merger laws of California, Illinois, New York, and New Mexico, and their separate existence ceased on that day. The two principal questions before us are (a) whether the taxable year of each of the old companies was required to end at the time of the merger, with the consequence that each was obliged to file a closing return for the period February 1-September 30, 1959, and (b) whether a net operating loss sustained by the new company for its fiscal year ending January 31, 1961, could be carried back and applied against the income of Stauffer California for its fiscal years ending January 31, 1958 and 1959. 3The mere fact that there has been a tax-free reorganization is not sufficient to relieve the old companies of their obligation to file closing returns, nor does it authorize the carryback in question. Indeed, section 295 381(b) (1) and (3) 4132 make it abundantly clear that unless the reorganization is one that qualifies under subparagraph (F) of section 368(a)(1), 5133 the two principal issues must be decided against the petitioner. 131 So much is not in dispute, and the matter turns entirely upon whether there was an (F) reorganization. An (F) reorganization is one of six types of transaction (subparagraphs (A) through (F)) that are included within the meaning of the term "reorganization" as it is defined in section 368(a)(1) -- all of which may result in tax-free transfers or 134 exchanges. However, an (F) reorganization is strictly limited to "a mere change in identity, form, or place of organization, however effected."296 Before consummating the reorganization in question the parties had sought and obtained from the Internal Revenue Service a ruling to the effect that the transaction would result in a tax-free reorganization as a "statutory merger or consolidation" within the meaning of subparagraph (A) of section 368(a)(1). It was then expected that each of the constituent companies would file closing returns, and indeed, as late as December 15, 1959, an application was filed on behalf of each of the three old Stauffer companies for an extension of time for filing returns for the period February 1-September 30, 1959. Accompanying that request was a payment of $ 300,000 on behalf of Stauffer California, $ 200,000 on behalf of Stauffer Illinois, and $ 7,000 on behalf of Stauffer New York. It was only later, when it became clearly apparent that the new company had sustained substantial losses during the 4-month period, October 1, 1959-January 31, 1960, that it was determined to file a single return for the full fiscal year February 1, 1959-January 31, 1960, 135 in the name of the new company and to include therein the profitable operations of the three old Stauffer companies for the first 8 months against which the losses of the last 4 months were applied. In order to justify that course of action, as well as the failure to file closing returns for the three old Stauffer companies, the position was taken that the merger of the three old companies into Stauffer New Mexico was an (F) reorganization. Of course, if the merger was an (F) reorganization then the course of action taken would have been proper under section 381(b)(1). Similarly, the existence of an (F) reorganization would have removed the prohibition against the carryback of the fiscal 1961 net operating loss to a pre-merger year pursuant to section 381(b)(3). We hold that the merger was not an (F) reorganization.It must be remembered at the outset that all reorganizations, (A) through (F), may result in tax-free exchanges, and that the reason for nonrecognition upon such transfers or exchanges is that the taxpayer's interest upon a corporate distribution or exchange of securities may represent "merely a new form of the previous participation in an enterprise, involving no change 136 of substance in the rights and relations of the interested parties one to another or to the corporate assets." Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737, 740. In the aggregate, subparagraphs (A) through (F) represent an attempt to set forth comprehensively the various types of transactions that may be regarded as reorganizations and thus qualify for specified tax-free treatment. But the problems generated by reorganizations went far beyond nonrecognition of gain or loss. Since the reorganized corporation was regarded at least to a certain extent as the successor to an enterprise or enterprises previously carried on in different form, it became necessary to provide for continuity of certain aspects of these businesses 297 from a tax point of view. Thus, section 381 spells out in great detail the extent to which the acquiring corporation in certain reorganizations and other related transactions shall succeed to and take into account various specified items of the distributor or transferor corporation. The general rule for such continuity is contained in section 381(a), footnote 4, supra, and a long list of items to which that general rule applies is set forth in section 381(c). That list 137 deals with such items as net operating loss carryovers, earnings and profits, methods of accounting, inventories, methods of computing depreciation allowance, and a variety of other matters, all cataloged in 22 numbered paragraphs each of which is subject to conditions or limitations set forth therein.However, Congress was unwilling to provide for complete continuity in every reorganization, and section 381(b), which is captioned "Operating Rules," sets forth certain limitations which in general preclude the continuity of certain items. Thus, except in the case of an (F) reorganization, section 381(b)(1) requires that the taxable year of the transferor corporation shall end on the date of transfer, and section 381(b)(3) explicitly deprives the acquiring corporation of the right to carry back a net operating loss for a taxable year after the transfer to a taxable year of the transferor corporation. This is spelled out in somewhat greater detail in section 1.381(b)-1(a) of the Treasury Regulations which provides:Sec. 1.381(b)-1 Operating rules applicable to carryovers in certain corporate acquisitions.(a) Closing of taxable year -- (1) In General. Except in the case of a reorganization 138 qualifying under section 368(a)(1)(F), the taxable year of the distributor or transferor corporation shall end with the close of the date of distribution or transfer.(2) Reorganizations under section 368(a)(1)(F). In the case of a reorganization qualifying under section 368(a)(1)(F) (whether or not such reorganization also qualifies under any other provision of section 368(a)(1)), the acquiring corporation shall be treated (for purposes of section 381) just as the transferor corporation would have been treated if there had been no reorganization. Thus, the taxable year of the transferor corporation shall not end on the date of transfer merely because of the transfer; a net operating loss of the acquiring corporation for any taxable year ending after the date of transfer shall be carried back in accordance with section 172(b) in computing the taxable income of the transferor corporation for a taxable year ending before the date of transfer; and the tax attributes of the transferor corporation enumerated in section 381(c) shall be taken into account by the acquiring corporation as if there had been no reorganization.[Italic supplied.]The underlying theory of these provisions quite 139 plainly is that there is such a complete identity between the pre- and post-reorganization enterprises in an (F) reorganization that the acquiring corporation is 298 to be treated exactly as the transferor corporation would have been treated in the absence of any reorganization. In other words, even though tax-free reorganizations in general are regarded as providing continuity of enterprise and ownership of the business so as to permit the carryover of the various items listed in section 381(c), they nevertheless are not treated as involving sufficient identity in the situations covered by section 381(b), unless the reorganization satisfies the stricter requirements of section 368(a)(1)(F). It is against this background that we must consider the question whether there was an (F) reorganization in this case.The Government argues that an (F) reorganization is limited to the reorganization of a single corporation and that it does not include the more involved combination of two or more corporations where each has been conducting a separate business. We think that its position is correct, and we reject petitioner's contention that there was an (F) reorganization here because of stockholder 140 identity and the fact that the businesses previously conducted by the three old companies were continued without interruption by the new entity.The scope of section 368(a)(1)(F) was recently described as follows in Hyman H. Berghash, 43 T.C. 743">43 T.C. 743, 752, affirmed 361 F. 2d 257 (C.A. 2):Although the exact function and scope of the (F) reorganization in the scheme of tax-deferred transactions described in section 368(a)(1) have never been clearly defined, it is apparent from the language of subparagraph (F) that it is distinguishable from the five preceding types of reorganizations as encompassing only the simplest and least significant of corporate changes. The (F)-type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences. Ahles Realty Corp v. Commissioner, 71 F. 2d 150, affirming an order of this Court. For instance, the (F) reorganization typically has been understood to comprehend only such insignificant modifications as the reincorporation of the same corporate business with the same assets and the same stockholders surviving under a new charter either in the same n3 or in a 141 different State, n4 the renewal of a corporate charter having a limited life, n5 or the conversion of a U.S.-chartered savings and loan association to a State-chartered institution. 6144 [Footnotes omitted.]In our judgment the merger of the three viable corporations herein into a single new corporate entity involved changes that were far too significant to be dismissed as a "mere" change in identity, form, or place of organization. True, there was a shift in place of organization to New Mexico. But the reorganization entailed much more. Prior to the merger each of the three old Stauffer companies carried on its own separate business, in its own geographical area. While each had the same officers, it is plain from the manner in which the businesses were conducted that each had its own employees within its own territory. 299 Moreover, only Stauffer California, with its factory in Los Angeles, and Stauffer Illinois in its rented facilities in West Memphis and Little Rock, manufactured Stauffer products. Stauffer New York purchased its needs from the other two and engaged only in selling and leasing activities. There was also an undisclosed amount of buying and selling between Stauffer 142 California and Stauffer Illinois. Moreover, after the merger, a creditor of any of the three could look to the combined assets of the new corporation to satisfy his claim. Important accounting changes also occurred. The respective capital and surplus accounts of the constituent corporations were combined. Yet, if petitioner is correct in the argument that an (F) reorganization is not limited to a single corporation, a deficit in one corporation would offset surplus in another, thus affecting future dividends that might be paid by the new entity under applicable State law. The fact that no such deficit existed here is not important; the point is that this possibility emphasizes the weakness of petitioner's position.The legislative history of subparagraph (F) throws further light upon the problem. The category of corporate transactions known today as (F) reorganizations has been a part of our tax law since it first appeared in section 202(c)(2) of the Revenue Act of 1921, which defined the term reorganization as including a "mere change in identity, form, or place of organization of a corporation." (Emphasis supplied.) When this definition was reenacted in otherwise identical language 143 in the Revenue Act of 1924, the last three words were dropped. But there was no indication whatever that the deletion was intended to have any significance. To the contrary, the most probable explanation is that the 1924 Act reflected merely a draftsman's preference whereby these words were eliminated as surplusage. Indeed, the House Ways and Means Committee explained the omission of these words and certain other language changes as "minor changes in phraseology." See H. Rept. No. 179, 68th Cong., 1st Sess., p. 13. And in general a type-(F) reorganization has since been regarded as encompassing "only the simplest and least significant of corporate changes" in which one corporation transfers its assets to another which "is the same corporation as its predecessor in every respect, except for minor and technical differences." Hyman H. Berghash, 43 T.C. 743">43 T.C. 743, 752, affirmed 361 F. 2d 257 (C.A. 2) (emphasis supplied). See also Ahles Realty Corp. v. Commissioner, 71 F. 2d 150 (C.A. 2), certiorari denied 293 U.S. 611">293 U.S. 611; George Whittell & Co., 34 B.T.A. 1070">34 B.T.A. 1070. 6Petitioner has relied upon statements in various cases to the effect that a transaction which shifts the ownership of the proprietary interest 300 in a corporation cannot qualify as a mere change in identity, etc., within the meaning of (F). Cf., e.g., Helvering v. Southwest Consolidated Corp., 315 U.S. 194">315 U.S. 194, 202-203. From such statements petitioner leaps to the conclusion that since there was no shift in proprietary interest here and since the enterprises conducted by each of the three constituent corporations were continued without change by Stauffer New Mexico it necessarily follows that there was an (F) reorganization in this case. The fallacy in such verbal sleight-of-hand is obvious. Certainly, it is necessary that there be continuity of both proprietary interest and enterprise in order to qualify as an (F) reorganization. But that is not enough, for there may be other changes that are too significant to be ignored in determining whether there was a "mere change in identity, form, or place of organization." And in this case substantial changes 145 did occur when the separate businesses of three separate corporations were united in a new corporation.Only by disregarding the corporate entities of the three old companies can it be said that there was merely that type of purely formal change that characterizes an (F) reorganization. These corporations were separate entities and were treated as such for all purposes, including the computation of taxes. Indeed, there were three separate surtax exemptions, one for each corporation, whereas the new entity admittedly was entitled to only one such exemption. This is not a case of multiple corporations carrying on a single business which may be ignored as a sham. Cf. Aldon Homes, Inc., 33 T.C. 582">33 T.C. 582. There is no question here that these were valid separate corporations, each conducting its own business. And we think that in such circumstances, the unification of these enterprises under a single corporate roof cannot qualify as the kind of mere change in identity, etc., contemplated by section 368(a)(1)(F).The Supreme Court's opinion in Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382, gives further support to the conclusion that the new corporation cannot be regarded the same, except for 146 minor and technical changes, as its collective predecessors. There, as here, separate corporations owned by the same interests and engaged in related businesses, were merged into one corporation which continued to conduct the entire enterprise in the same manner as before the merger. The Court refused to treat the survivor as the same "taxpayer" as its predecessors, and sustained a disallowance, under the 1939 Code, of a carryover of premerger losses to the post-merger income of the survivor. 7 One of the cases relied upon by the taxpayer was Newmarket Manufacturing Co. 301 v. United States, 233 F.2d 493 (C.A. 1), where a single corporation transferred its business to a corporate shell which the stockholders had set up in another jurisdiction, and a carryover of losses from the predecessor to the post-merger income of the survivor was allowed. The Supreme Court expressly distinguished the Newmarket case, which involved the typical (F) reorganization situation of the reincorporation of a single corporation in another jurisdiction, from the multiple corporation merger before it, on the ground that the multiple reincorporation involves combining several businesses which, up until the time 147 of the merger, had been taxed as separate entities. In the words of the Court, "this difference is not merely a matter of form." 353 U.S. 382">353 U.S. 382, 388. (Emphasis supplied.) There are indications in the 1954 Code that Congress regarded type (F) as including only the reorganization, by reincorporation or otherwise, of a single corporation, devoid of any other corporate or tax significance. Thus, section 1244 provides in general that losses on common stock of a "small business corporation," so-called "section 1244 stock," may be deducted as ordinary losses instead of losses from the sale or exchange of a capital asset. The applicability of these provisions turns upon a highly complex set of conditions, one of which reads as follows:Section 1244(d)(2): For purposes of paragraphs (1)(E) and (2)(A) of subsection 148 (c), a successor corporation in a reorganization described in section 368 (a)(1)(F) shall be treated as the same corporation as its predecessor. [Italic supplied.]The use of the singular words "corporation" and "predecessor" are again evidence that Congress thought of an (F) reorganization in terms of a single corporation. Moreover, if several predecessors can be involved in an (F) reorganization difficult problems would arise as to which predecessor or whether all predecessors taken together may be taken into account in determining whether the complex requirements of subsections (c)(1)(E) and (c)(2)(A) of section 1244 have been satisfied. Unless we follow the obviously intended "one-corporation" reading of the (F) reorganization, we would be faced with a difficult problem for which no solution is provided in the Code or regulations. 8149 302 Section 381, which is itself 150 involved herein, also reveals obviously unintended pitfalls and difficulties that would be encountered if the (F) definition were read so as to include the fusion of several brother-sister corporations each conducting an independent enterprise. Paragraph (b)(3) explicitly forbids the carryback of a net operating loss to a taxable year of "the distributor or transferor corporation." In this very case, the new corporation sustained a net operating loss for its fiscal year 1961, and it attempted to carry back that loss to fiscal 1958 and 1959 of only one of its predecessors, Stauffer California. There is no basis whatever in the statute for any such action, nor is there any statutory basis for an allocation as now urged by petitioner. And the plain reason why the problem is not dealt with in these otherwise exceedingly comprehensive provisions is that an (F) reorganization was regarded as involving only one corporation.The Code is an extraordinarily complex and sensitive instrument, and we should be careful not to give an interpretation to one provision that would generate unintended difficulties in respect of other provisions, unless such interpretation is clearly called for by the 151 statute itself. In the situation before us we can find no such command in the statute requiring the fusion of these three corporations to be treated as a "mere change in identity, form, or place of organization." To the contrary, the indications point the other way.Petitioner's strongest reliance perhaps is upon our decision in Pridemark, Inc., 42 T.C. 510">42 T.C. 510, reversed 345 F. 2d 35 (C.A. 4), where two corporations had been liquidated after disposing of a substantial portion of their business assets and where, after the lapse of a period of time, the remaining assets were transferred to a new corporation. The case arose in the difficult area of liquidation-reincorporation, and this Court held that there had been an (F) reorganization. The briefs on this issue were skimpy, and it is obvious that the Court did not have the benefit of a presentation of materials like the one before us. Upon appeal, the Court of Appeals held that there was no reorganization at all on the facts without specifically considering whether the unification of multiple corporations could qualify under (F). We think that our decision in Pridemark was wrong and it will no longer be followed to the extent that it 152 is inconsistent with our conclusion herein.Petitioner's position is also supported by an alternative holding in Davant v. Commissioner, 366 F. 2d 874 (C.A. 5), modifying 43 T.C. 540">43 T.C. 540, which held that a transaction involving the unification of the 303 businesses of more than one active corporation qualified as a reorganization under both (D) and (F). Like Pridemark, this case arose in the liquidation-reincorporation field, where it was to the Government's advantage to urge that there had been a tax-free reorganization. When the case was before this Court, we had held that there was a (D) reorganization and carefully refrained from characterizing the transaction in relation to (F). The Government's brief on appeal made no effort to support our decision on the ground that there had been an (F) reorganization, and the opinion of the Court of Appeals was rendered without the benefit of any comprehensive analysis of counsel of the matter. When the taxpayer petitioned the Supreme Court for certiorari, the Government's brief in opposition did not undertake in any way to support the conclusion of the Court of Appeals in respect of the applicability of (F), and defended the decision solely on 153 the ground that there had been a (D) reorganization in that case. Certiorari was denied, 386 U.S. 1022">386 U.S. 1022. With all due respect to the Court of Appeals, we do not accept its interpretation of subparagraph (F).Petitioner also relies heavily upon a ruling of the Internal Revenue Service, Rev. Rul. 58-422, 2 C.B. 145">1958-2 C.B. 145, and contends that it deals with a situation indistinguishable from the present case. Apart from the fact that we are not bound by that ruling, we think it is distinguishable. The facts in that case involve a parent corporation that was to be reincorporated in another State, and at the same time acquire the assets of its two wholly owned subsidiaries. The Service ruled that the reincorporation of the parent would be an (F) reorganization. No such ruling was given in respect of the subsidiaries, and since the subsidiaries or their businesses were always under the same corporate umbrella of the parent, both before and after the reorganization, it is plain that the situation presented in the ruling is not the same as the one before us. 9154 Finally, petitioner makes two alternative arguments on this issue, one, that there were three separate (F) reorganizations whereby each of the old Stauffer companies merged into Stauffer New Mexico, and, two, that in any event there was at least one (F) reorganization whereby Stauffer California merged into Stauffer New Mexico. We think that neither of these alternatives is sound.The merger agreement specifically stated that it would not be binding upon any of the constituent corporations, their officers, or stockholders until a copy of the agreement and any other certificates and documents 304 required by law were properly filed and recorded with the proper governmental authority of all four States. Even if Stauffer California complied with the laws of its jurisdiction before Stauffer Illinois and Stauffer New York did so, a finding we cannot make on the state of this record, by the terms of the merger agreement there was no valid merger between any of the corporations 155 until the laws of all the States involved had been complied with. Thus, the three old Stauffer companies merged into Stauffer New Mexico not seriatim but simultaneously. Either all three were parties to the (F) reorganization or none were. The three mergers were interdependent. They cannot be fragmented, nor can one of them be singled out as an (F) reorganization as was possible in the case of the parent corporation in Rev. Rul. 58-422.We hold that the statutory merger herein, although qualifying as a reorganization under (A), did not satisfy the more rigorous definition in (F) as "a mere change in identity, form, or place of organization." Accordingly, section 381(b)(1) required that the taxable year of the three old Stauffer companies come to an end when they transferred their businesses to the new corporation, and section 381(b)(3) explicitly forbade the carryback of the new corporation's net operating loss to a prior taxable year of any of the old companies.2. Write-down of Inventory as of September 30, 1959. -- Pursuant to his determination that the merger of the three old Stauffer companies into Stauffer New Mexico was not an (F) reorganization, the Commissioner computed 156 the taxable income of each of the old corporations for the 8-month period from February 1, 1959, the beginning of a new fiscal year for each corporation, to September 30, 1959, the last full day of their tax lives under section 381(b)(1). In computing the cost of goods sold during that period he took the closing September 30, 1959, inventories at book value or cost. Each of the old Stauffer companies had consistently used the lower of cost or market method of valuing inventories, and petitioner now argues that there should be a retroactive downward revision of the inventories as of September 30, 1959, in the aggregate amount of $ 1,311,062 which it is contended, is necessary to reflect a drop in market value below cost as of that date.A spirited controversy has developed between the parties as to whether "market" value in this context means the taxpayer's reproduction or replacement cost, as urged by the Government, or whether it means "net realizable value," as argued by petitioner. Taking the position in substance that the inventories did not have a fair market value equal to their cost and that the net realizable value was $ 1,311,062 less than cost, petitioner claims that the 157 inventories must be written down by that amount. We need not resolve the controversy between 305 the parties as to which concept of "market" is properly to be applied here, because as we evaluate the evidence before us petitioner has failed to prove that net realizable value of the inventories was less than cost on September 30, 1959.Petitioner presented no direct evidence as to value on September 30, 1959, and the valuations upon which it relies consist merely of the results of computations made by the accounting firm of Price, Waterhouse & Co. in 1963, which in turn were based in large part upon the facts as they existed on January 31, 1961, the date as of which the actual write-down of inventory was made on the Stauffer books. In our view no such write-down was justified as of September 30, 1959.The underlying theory of petitioner's position is that Stauffer's tarnished image as the result of unfavorable publicity made its products generally unsalable and that they could not profitably have been sold as of September 30, 1959. 10158 We think that conclusion is not warranted by the evidence.The record of Stauffer sales for the month of September 1959 itself goes far to undercut petitioner's position. Although the highly critical statement of the Secretary of Health, Education, and Welfare was issued on September 2, 1959, sales (in units) of Stauffer products for that month were the highest of any month since May of that year, and they in fact exceeded sales for September of the previous year. It is quite true that sales began to fall off shortly thereafter. There was a marked but not critical drop in October, a further sharp reduction in November, but it was not until December and the months of the following year that a devastatingly low level of sales was reached. Meanwhile, the new company continued to manufacture its products at least for some months, and there was no general reduction in prices. Indeed, although the wholesale price of model S-1 was reduced in January 1960 from $ 144.75 to $ 124, it was raised in June 1960 back to $ 144.75, its price on September 159 30, 1959. Also, the $ 80 wholesale price of model L, the second most popular model in October 1959, was raised to $ 99.75 at the beginning of the following month, and its suggested retail price was simultaneously increased from $ 149.50 to $ 199.50.Moreover, as late as February 12, 1960, Stauffer management submitted financial statements to the Bank of America showing January 31, 1960, inventories at cost without any reduction for any alleged decrease in market value. And such inventories at cost as of January 31, 1960, were still being used in the income tax return filed somewhat more than a month later, on March 15, 1960, on behalf of Stauffer New Mexico. Even as late as August 3, 1960, Bernard H. Stauffer was still 306 highly optimistic not only about being able to sell the inventory on hand, but about resuming profitable operations in the near future. 11160 We need not discuss the record further in respect of this matter. We have taken it fully into account and have concluded that the net realizable value of the inventories was not less than cost as of September 30, 1959. The fact that unfavorable publicity began in September 1959 is not enough. It was the sort of thing that could conceivably have had but very little permanent effect upon sales or profits. One would hardly have expected the tobacco companies to revalue their inventories of cigarettes below cost after a report of the Surgeon General of the United States pointing out the correlation between cigarette smoking and lung cancer or heart disease. The record establishes here that Stauffer sales held firm in September 1959 and in fact showed an increase. We find that there is no basis upon which to justify a downward revision of inventory values as of September 30, 1959. The fact that a ground for such reduction existed on January 31, 1961, or possibly even at an earlier date, does not warrant a push-back of that date to September 30, 1959.3. So-called "erroneous assessment" 161 Issue. -- As a result of the conclusion that the merger of the old Stauffer companies into Stauffer New Mexico was not an (F) reorganization, it is undisputed that Stauffer New Mexico was prohibited under section 381(b) (3) from carrying back its fiscal 1961 net operating loss to the fiscal years 1958 and 1959 of any of its predecessors. However, based upon such claimed carryback, Stauffer New Mexico applied for and in fact received a refund of the full amount of taxes paid by Stauffer California for fiscal 1958 ($ 1,481,653 tax plus $ 12,035.89 interest), and a portion of the taxes paid by Stauffer California for fiscal 1959 ($ 263,194 tax plus $ 2,138 interest). Although the claim for refund did not identify Stauffer California as the predecessor taxpayer, it is plain on this record and undisputed by the parties that such taxes were in fact those of Stauffer California that were refunded. Indeed, all of the figures set forth in that claim with respect to the income reported and tax previously determined for the fiscal years 1958 and 1959 related exclusively to Stauffer California. The refund was claimed under the so-called "quickie" refund procedure of section 6411 of the 1954 162 Code which directs the Secretary or his delegate to make a refund within 90 days of the application for a tentative allowance of a net operating loss carryback subject only to a limited review of such application. Accordingly, if there has been a refund of Stauffer California's 1958 307 and 1959 taxes based upon a net operating loss carryback deduction to which it was not entitled, there would result a deficiency 12163 in Stauffer California's 1958 and 1959 taxes 13 which the Commissioner determined herein.Petitioner contends, however, that if the merger did not qualify as an (F) reorganization, Stauffer New Mexico must be regarded as an entirely different taxpayer from Stauffer California, that Stauffer California's taxes were in effect refunded to a stranger, namely, Stauffer New Mexico, that there was thus no proper refund of Stauffer California's taxes, with the consequence that there can be no deficiency in Stauffer California's 1958 and 1959 taxes based upon such refund. We hold that the point is without merit.While 164 it is quite true that Stauffer New Mexico cannot be regarded as the same taxpayer as Stauffer California under section 368(a)(1)(F), it was nevertheless the successor to Stauffer California as the result of a statutory merger under section 368(a)(1)(A) and had full standing to apply for and receive a refund of Stauffer California's taxes. Rev. Rul. 54-17, 1 C.B. 160">1954-1 C.B. 160. If such refund were erroneously made, as was the situation in this case, there resulted a deficiency in Stauffer California's taxes (not Stauffer New Mexico's taxes), which the Commissioner was entitled to collect from the ultimate transferee of Stauffer California's assets, namely, the petitioner herein. To be sure, the claim for refund should have identified Stauffer California as the taxpayer, but there was never any doubt that the refund sought and received related to taxes paid by Stauffer California. Stauffer New Mexico was not even in existence during the 2 fiscal years in question, and it is difficult to see how the Commissioner could have determined deficiencies against it in respect of the improper refund. 308 When that refund was made, deficiencies arose in Stauffer California's taxes for its fiscal years 165 1958 and 1959. We hold that the Commissioner proceeded properly in determining the deficiencies and transferee liability herein. Decisions will be entered for the respondent. Footnotes1. Although the record indicates that Stauffer Illinois was incorporated in 1948, there is no clear evidence as to the nature of its activities prior to 1956.↩2. This inventory issue becomes pertinent only if it is held that the merger of the three old Stauffer companies failed to qualify as an (F) reorganization with the counsequence that closing returns were required to be filed by each of the old companies as of Sept. 30, 1959.↩1. 732 of these units were manufactured during period from Feb. 1, 1960, to Jan. 31, 1961.↩3. Other issues presented will be considered hereinafter.↩4. SEC. 381. CARRYOVERS IN CERTAIN CORPORATE ACQUISITIONS.(a) General Rule. -- In the case of the acquisition of assets of a corporation by another corporation -- (1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 344(b)(2); or(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D) (but only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met), or (F) of section 368(a)(1),the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c).(b) Operating Rules. -- Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a)(1) -- (1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.* * * (3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.↩5. SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.(a) Reorganization. -- (1) In General. -- For purposes of parts I and II and this part, the term "reorganization" means -- (A) a statutory merger or consolidation;(B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded;(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;(E) a recapitalization; or(F) a mere change in identity, form, or place of organization, however effected.↩6. In fact, the (F) reorganization has come to be identified with the typical case in which a single corporation reincorporates in a different jurisdiction. Cf. Marr v. United States, 268 U.S. 536">268 U.S. 536↩, Paul, Studies in Federal Taxation 82 (Harv. Univ. Press (3d ser.) 1940).7. It is true that Libson Shops involved the 1939 Code and that the provisions relating to carryover of losses have been changed in the 1954 Code, cf. Maxwell Hardware Co. v. Commissioner, 343 F.2d 713">343 F.2d 713↩ (C.A. 9); but its relevance to the issue before us in respect of the nature of the change effected by combining several active corporations into a single corporation remains unimpaired.8. Petitioner asserts that the regulations have taken this very situation into account. Sec. 1.1244(d)-3(d) (1), Income Tax Regs. These regulations provide that if common stock is received in an (F) reorganization partly in exchange for stock not meeting the requirements of sec. 1244, only that percentage of common stock received which is determined by the ratio of the basis of the nonqualifying shares given up to the basis of all shares given, will be disqualified as sec. 1244 stock. Thus, petitioner claims, not only is sec. 1244 not inconsistent with a multiple reincorporation (F) reorganization, but the regulations have in fact anticipated and provided for this very possibility. But a careful examination of the regulations discloses that such is not the case.An identical counterpart to this regulation deals with nonqualifying stock given up in an (E) reorganization, a recapitalization, which plainly involves only one corporation. Sec. 1.1244(d)-3(c) (2), Income Tax Regs. What the regulations are dealing with here, in both the (E) and the (F) reorganization situations, is the case in which a single corporation has more than one class of stock, and stock of a disqualified class (e.g., any class which cannot be considered common stock) is given up by the taxpayer, along with qualified stock, in exchange for common stock either of the same corporation (the (E) reorganization) or the successor corporation (in an (F) reorganization). See sec. 1.1244(d)-3(c)(3), examples (i) and (ii↩), Income Tax Regs.9. Also distinguishable is our recent decision in Dunlap & Associates, Inc., 47 T.C. 542">47 T.C. 542, where the reincorporation of a parent corporation in another State was held to be an (F) reorganization, a result that was unaffected by the parent's subsequent acquisition of outstanding minority interests in two subsidiary corporations through an exchange of stock.10. To the extent that this position is also based on Stauffer's increased and aggressive competition, beginning in 1958, it is without any merit. In the face of such competition the three old Stauffer companies realized an aggregate net profit of $ 1,492,077 for the 8-month period ending Sept. 30, 1959.11. Of course, objective facts as they existed on the pertinent date or dates rather than the beliefs of management may be controlling, cf. C-O Two Fire Equipment Co. v. Commissioner, 219 F. 2d 57 (C.A. 3), reversing 22 T.C. 124">22 T.C. 124, but such views, particularly those of top management that has had extensive experience in respect of the product, appear to be relevant in arriving at objective facts relating to salability of the product.12. SEC. 6211. DEFINITION OF A DEFICIENCY.(a) In General. -- For purposes of this title in the case of income, estate, and gift taxes, imposed by subtitles A and B, the term "deficiency" means the amount by which the tax imposed by subtitles A or B exceeds the excess of -- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus(B) the amounts previously assessed (or collected without assessment) as a deficiency, over --(2) the amount of rebates, as defined in subsection (b) (2), made.(b) Rules for Application of Subsection (a). -- For purposes of this section -- * * *(2) The term "rebate" means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed by subtitles A or B was less than the excess of the amount specified in subsection (a) (1) over the rebates previously made.↩13. Although the deficiency determined for fiscal 1958 was in the full amount of the refund taxes for that year ($ 1,481,653.05), the deficiency determined for fiscal 1959 ($ 213,472.25) was less than the full amount of the refunded taxes for fiscal 1959 because a $ 49,721.79 deficiency assessment for the same year in relation to another matter had previously been paid by Bernard H. Stauffer as transferee.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620018/	Empire Mortgage & Investment Co. v. Commissioner.Empire Mortg. & Inv. Co. v. CommissionerDocket No. 697-69.United States Tax CourtT.C. Memo 1971-270; 1971 Tax Ct. Memo LEXIS 62; 30 T.C.M. (CCH) 1161; T.C.M. (RIA) 71270; October 26, 1971, Filed. Edward R. Kane and Earle B. May, Jr., 4th Floor, Haas-Howell Bldg., Atlanta, Ga., for the petitioner. James D. Burroughs, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: A deficiency in the income tax of petitioner for its taxable year ended October 31, 1960, has been determined by the Commissioner in the amount of $20,982.87. The only issue to be decided is whether petitioner received for its covenant not to compete executed in that year the sum of $66,087.62, as determined by respondent, or the sum of $1 as reported by petitioner in its income tax return for that year. Findings of Fact Such facts as have been stipulated are found accordingly. Empire Mortgage & Investment Co., hereinafter referred to as the petitioner, was incorporated pursuant to63 the laws of the State of Georgia under the name of Commercial Securities Corporation on October 1, 1954. The charter was amended on February 23, 1962, to change the name of the corporation to Empire Mortgage & Investment Co. At the time the petition was filed in this case, petitioner maintained its principal 1162 office at Tucker, Georgia. Petitioner keeps its books and records on an accrual method of accounting and files its tax returns on a fiscal year ending October 31. Petitioner filed its income tax return for the fiscal year ended October 31, 1960, with the district director of internal revenue, Atlanta, Georgia. On August 6, 1960, and prior thereto, petitioner owned all the outstanding common stock of the following subsidiary finance corporations: Liberal Credit Company, Inc., of Dalton Liberal Credit Company, Inc., of Americus Liberal Credit Company, d/b/a Colonial Credit Company Delco Finance Company, Inc., d/b/a Colonial Credit Company These subsidiary corporations operated as personal loan companies. Prior to August 1960, negotiations were conducted between J. Mack Robinson, acting for Dixie Finance Company, Inc., hereinafter referred to as Dixie, and64 Conrad Sechler, president and 90-percent owner of the stock of petitioner, looking toward the acquisition by Dixie of the capital stock of the four loan companies owned by petitioner. These negotiations culminated in a sales agreement dated and executed on August 6, 1960, by and between Dixie and petitioner. Paragraph 2 of the sales agreement of August 6, 1960, provided that the purchase price for the stock was to be $152,952.40. This amount was to be paid in cash upon the consummation of the sale. The agreement further provided that $159,545.01 was to be paid for a covenant not to compete and goodwill which was to be paid by $39,545.01 in cash upon the consummation of the sale and $120,000 in bonds of Dixie. Paragraph 6 of the sales agreement of August 6, 1960, stated that a balance sheet was submitted by petitioner to Dixie for each of the subsidiary corporations as of July 31, 1960, and such balance sheets were submitted accordingly. Petitioner warranted and guaranteed that the balance sheets correctly reflected the assets, liabilities, and net worth of each of the subsidiary corporations as of July 31, 1960, in accordance with generally accepted accounting principles. At65 the time the sales agreement of August 6, 1960, was executed, the petitioner simultaneously executed and delivered to Dixie its covenant not to compete. Paragraph 3 of the covenant not to compete executed on August 6, 1960, provided that Dixie pay petitioner $51,419.17 for the covenant not to compete and $108,125.29 for a covenant not to compete and goodwill. 1Paragraph 4 of the covenant not to compete agreement executed on August 6, 1960, specified that the agreement was to apply for a period of 3 years and was made applicable to petitioner and its officers. Under its terms, 66 petitioner and its officers agreed not to induce the employees of the subsidiary corporations to leave their employment or to solicit any present or former customers. They also agreed to refrain from engaging in the business of purchasing installment sales contracts within the counties of Whitfield, Floyd, Fulton, and Sumter, Georgia. Approximately 2 weeks subsequent to August 6, 1960, Dixie determined that of the accounts receivable of the four subsidiary corporations set forth in the various balance sheets, about $33,000 thereof was worthless. Therefore, negotiations were begun in which Dixie contended that the total purchase price stated in the sales agreement should be reduced by a like amount. Petitioner, on the other hand, contended that inasmuch as the stated purchase price was lower than it had contemplated in the first place, it was willing to "live with" the agreement as written. Such negotiations continued until April 5, 1961, and were culminated by a written agreement between Dixie and petitioner which reduced the originally agreed-upon sales price by an amount in excess of $16,000 to $296,080.91. Petitioner agreed to the reduction in sales price only on 1163 condition67 that in the latter agreement, Dixie agree to a "more realistic" allocation of a portion of the sales price to the covenant not to compete. The result was paragraph 2 of the April 5, 1961, agreement which provided that the parties thereto mutually agree "that the value placed on the covenants not to compete included in the agreements dated August 6, 1960, shall not exceed $1.00." Petitioner's cost basis for the stock of the four subsidiaries sold by it to Dixie was $264,550.16. In the return filed for the fiscal year ended October 31, 1960, petitioner indicated that it was being liquidated under section 337 of the Internal Revenue Code of 1954. Subsequent to filing its return, petitioner informed the district director of internal revenue, Atlanta, Georgia, that the decision to liquidate under section 337 of the 1954 Code had been rescinded. In lieu of filing an amended return reflecting the gain on the sale of the stock of the four companies, it was suggested to the director that a revenue agent make a regular investigation of the petitioner's 1960 return as filed and include in his report the gain realized on the 1960 sale of the four companies. This procedure68 was followed and a revenue agent prepared a report increasing income by $31,530.75 identified as "net gains, sale of capital assets." The resulting deficiency of $7,882.69 was duly assessed on September 1, 1961, and has been paid. The $31,530.75 gain determined by the agent was determined as follows: Total sales price (as amended)$296,080.91Cost basis of stock 264,550.16Net gain realized31,530.75The taxable year ended October 31, 1960, was subsequently reopened and a determination made by the Commissioner that $66,087.62 of the sales price received by petitioner on the sale of the stock of the four subsidiaries was for a covenant not to compete, which is taxable as ordinary income. Ultimate Findings The agreement between Dixie and petitioner which was executed on April 5, 1961, did not supersede the agreements of August 6, 1960, for Federal tax purposes. The sum of $51,419.17 of the sales price received by petitioner for the sale of the stock in its four subsidiaries was for a covenant not to compete which is taxable as ordinary income. Opinion With respect to the fact that the purchase price received by a taxpayer for his covenant not to compete69 constitutes ordinary income, there is no dispute between the parties. Their disagreement arises in the answer to the question whether petitioner received $66,087.62 for its and its officers' joint covenant not to compete as contended by respondent or $1 as urged by petitioner. In an arm's length transaction, Dixie and petitioner on August 6, 1960, entered into a purchase and sale agreement whereby Dixie purchased all of the stock of four of petitioner's wholly-owned corporations which were each carrying on a finance business. Negotiations with respect to the purchase price of the stock and the amount to be paid for the covenant not to compete of petitioner and its officers preceded the agreement. Upon the basis of the accounts receivable of the four subsidiaries of petitioner, Dixie made its offer of $152,952.40 for the stock and $159,545.01 for the covenant not to compete and goodwill of petitioner. The offer was accepted by petitioner and the agreement of August 6, 1960, resulted. Simultaneously with the execution of that agreement, petitioner and its officers executed and delivered to Dixie a covenant not to compete among other covenants. The covenant, except for the agreement70 of Dixie to pay the mentioned purchase price, is unilateral in nature. It contains a breakdown of the purchase price between the covenant and "this covenant not to compete and goodwill," $51,419.17 being designated as consideration for the covenant alone and $108,125.29 for goodwill and the covenant. Petitioner's fiscal year ended on October 31, 1960. The purchase prices agreed upon were based upon Dixie's examination of the accounts receivable of the subsidiaries and their individual balance sheets furnished by petitioner. Shortly subsequent to the execution of the August 6, 1960, agreement, Dixie reviewed the accounts receivable and determined that the balance sheets contained worthless in the approximate amount of $33,000. It thereupon began negotiations with petitioner for a reduction of the purchase price for the stock and goodwill in a like amount. These negotiations continued until April 5, 1961, when a document entitled "Amendment to Covenants and Agreements dated August 6, 1960," was executed by Dixie and petitioner, the effect of which was to reduce the formerly agreed-upon purchase price for the stock and goodwill by 1164 $16,416.50. The document also provided that the71 value formerly agreed to with respect to the covenants not to compete "shall not exceed $1.00." It is on that premise that petitioner did not include any amount in its return for the year at issue representing the receipt of ordinary income from its covenant not to compete. We are satisfied that its premise for so doing is without substance and does not reflect the reality of its sales transaction with Dixie. As we view it, petitioner is here arguing that regardless of whether the real amount received by it for its covenant not to compete is that expressed in the document setting forth the terms of its covenant, nevertheless by its April 5, 1961, amendatory agreement, we are bound thereby to find a value therefor not to exceed $1. We are convinced that that portion of the latter agreement which relates to the value to be allocated to the covenant not to compete is ineffective for that purpose. It is an afterthought and a sham and bears no relationship to the realities or substance of the situation. The original amount allocated by the parties to the covenant ($51,419.17) was fixed by petitioner and Dixie in an arm's length transaction after extended negotiation. The record discloses72 no identifiable event occurring in the ensuing 8 months which would have the effect of reducing this value to virtually zero, yet that is the purport of the amendatory agreement. We find the value to have remained unchanged. To hold to the contrary results in an absurdity. Dixie, who was the aggrieved party seeking a reduction of the overall purchase price, which reduction to the extent of in excess of $16,000 was acceded to by petitioner, actually would bear the burden of paying a like amount for worthless accounts receivable in addition to being deprived of the tax advantage incident to the actual amount it paid petitioner for the covenants. While the value placed on the covenants in the amendatory agreement might be said to be binding as between Dixie and petitioner, it is certainly not binding on respondent for the reason that petitioner actually received the originally agreed-upon amount therefor. Neither the stringent "Danielson" rule of fraud ( Commissioner v. Danielson, 378 F. 2d 771 (C.A. 3, 1967), reversing 44 T.C. 549">44 T.C. 549 (1965)) nor the "Ullman" rule of strong proof ( Ullman v. Commissioner, 264 F. 2d 305 (C.A. 2, 1959), affirming 29 T.C. 129">29 T.C. 129 (1957))73 has application in this instance. Those cases involved the degree of proof which a taxpayer must produce to arrive at a tax result contrary to an agreement entered into by the taxpayer. In this case, it is the Commissioner who argues that the substance of the transaction was other than the form finally given. In a case generally following the Ullman rule, but with facts distinguishable from those present here, the Court of Appeals for the Fifth Circuit in Balthrope v. Commissioner, 356 F. 2d 28, 31 (C.A. 5, 1966), affirming a Memorandum Opinion of this Court, stated: Courts generally honor the parties' bargaining for tax consequences dependent upon the price of a vendor's covenant not to compete. Barran v. Commissioner of Internal Revenue, 5 Cir. 1964, 334 F. 2d 58. But there are limits. Courts need not honor a vendor's covenant which has no basis in economic reality. Schulz v. Commissioner of Internal Revenue, 9 Cir. 1961, 294 F. 2d 52, 53. * * Neither the Schulz nor the Barran case indicates that the Commissioner is subject to the "strong proof" rule of Ullman, supra. In this case the evidence adduced clearly shows that*74 the parties to the sale actively bargained for the covenants, and that Dixie considered them crucial to the transaction. It is without economic reality to assign to them $1 of the total consideration of the transaction. Petitioner has failed to convince us that the portion of the total consideration for the combined sale and covenant agreement which is attributable to the covenant is less than the $51,419.17 initially allocated by the parties. In his notice of deficiency respondent has allocated the amount of $66,087.62 to the covenants not to compete. We can find no explanation in the files or records of this case of his computation of this amount and we are convinced that the evidence does not support it. We have affirmatively found therefore on the evidence before us that of the total purchase price received by petitioner for stock, goodwill, and covenants not to compete, petitioner received $51,419.17 for the covenants. Decision will be entered under Rule 50. 1165 Footnotes1. The sales agreement of August 6, 1960, specifies the amount of $159,545.01 for a covenant not to compete and goodwill. The covenant not to compete agreement breaks down this total of $159,545.01 into two separate categories as follows: ItemAmountCovenant not to compete$ 51,419.17Covenant not to compete and goodwill108,125.29 The breakdown of these categories totals $159,544.46. There is a difference of 55 cents between the amount spelled out in the "Covenant Not to Compete" and the amount set forth in the sales agreement. This difference results from a mathematical error.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620020/	HOME INDUSTRY IRON WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Home Indus. Iron Works v. CommissionerDocket No. 7991.United States Board of Tax Appeals8 B.T.A. 1267; 1927 BTA LEXIS 2691; November 7, 1927, Promulgated 2691 1. Disallowance of a salary deduction, for the reason that it was not reasonable compensation for services rendered, approved. 2. Commissioner's determination that bonuses paid were in reality a distribution of profits approved. 3. The fair market value on March 1, 1913, of the petitioner's buildings determined. 4. Rate for purpose of a deduction under section 234(a)(7), Revenue Act of 1918, determined. Deduction under section 234(a)(7), Revenue Act of 1918, on account of machinery and equipment and patterns disallowed for lack of evidence. 5. Special assessment disallowed for lack of evidence. Geo. E. H. Goodner, Esq., for the petitioner. Harold Allen, Esq., for the respondent. MURDOCK1268 The Commissioner determined deficiencies in income and profits taxes amounting to $13,305.51 for 1919, and to $2,882.48 for 1920. The petitioner alleges that there was error in (1) disallowing deductions for expenses incurred by officers in 1919; (2) disallowing a deduction of $3,900 as compensation paid to Mary Kling in each year; (3) disallowing a deduction of $21,000 as compensation paid to the officers and directors in 1920; (4) 2692 failing to allow depreciation in each year on the March 1, 1913, value of buildings, machinery and equipment, and patterns; and (5) denying special assessment for the year 1919 under section 328 of the Revenue Act of 1918. The first allegation of error was later waived. FINDINGS OF FACT. The petitioner is an Alabama corporation, with its principal office at Mobile. It was organized in 1902 for the purpose of taking over a business founded in 1885 and operated as a sole proprietorship by A. Kling, Sr. Machinists, molders, boilermakers, blacksmiths, and pattern-makers were employed for the most part, in connection with repairing and reconditioning ships. Vessels were not built, but the tasks of reconditioning were sometimes so substantial as to assume the character of rebuilding rather than of ordinary repair work. After the death of A. Kling, Sr., which occurred in 1917 or 1918, the petitioner remained a close corporation. The stockholders were his widow, Mary Kling, her two sons, C. W. Kling and A. Kling, Jr., and J. S. Bogue. The latter had been general manager for many years. Regular salaries totaling $16,399.55 were paid during the year 1919 to the above-named persons, 2693 all of whom were officers except Mary Kling, who was merely a director but received $3,900 of the above amount. In June, 1919, Mary Kling transferred 42 shares of stock to her daughter, Mrs. Goodman, and 42 shares to her son, Leo Kling. Thereafter, the stockholdings, the offices held, and the regular salary and bonus paid to the several officers and stockholders during the year 1920 were as follows: StockholderShares heldPositionRegular Bonus paid insalaryJuly 1920C. W. Kling42President$4,560.00$3,000.00Leo Kling42Vice president2,704.903,000.00A. Kling, jr42Secretary and treasurer4,560.003,000.00Mrs. Goodman42Director3,000.00.J. S. Bogue42General manager5,340.003,000.00Mrs. Mary Kling90Director3,900.006,000.001269 All stockholders were directors. Bogue and the three Kling sons devoted all of their time to the business. They did all of the office work during 1920, although a marked increase in business, evidenced by a gain in gross income from $329,606.62 in 1919 to $654,212.94 in 1920, multiplied their duties. Mrs. Goodman acted as a director, held no office, and had2694 no regular appointed duties. She merely aided in a general way to obtain business for the petitioner. Mary Kling had assisted her husband in the development of the business and had become familiar with it. In August, 1920, she was 73 years of age and acted only in an advisory capacity during the years in controversy. She went down to the office several times monthly and her advice was sometimes obtained in business discussions at home. The additional compensation above listed as bonuses was agreed upon and authorized during July of 1920 at a meeting, held informally in accordance with the usual practice. The bonus payments were made by checks a few days later. The petitioner had not theretofore paid compensation in the form of bonuses. Such payments, however, have been made in subsequent years. Dividends of $15,000 and $21,000, representing 50 per cent and 70 per cent of the outstanding capital stock, were declared in 1919 and 1920, respectively. The Commissioner disallowed the salary payments to Mary Kling for both years, as not representing a return for services rendered, and determined that the bonus payments made in 1920 represented a distribution of profits rather2695 than reasonable compensation for services. The petitioner's buildings consisted of two large brick structures. Both were built prior to March 1, 1913. No additions or improvements have been made since that date. A large proportion of the machinery in use was installed in the early years of the petitioner's business development. Repairs and replacements both prior and subsequent to 1913 were made by employees, the cost of labor and parts used being charged to expense. The machinery used in March, 1913, was substantially the same as that in use at present, save for some new machines purchased in the interim, at a cost of approximately $3,000. 1270 Equipment on hand included a large number of patterns. These had been made from time to time as needed and stored for possible future use. As patterns became obsolete, they were discarded to make storage room for others. The petitioner not only used these patterns, but occasionally rented them for use by others. The cost of pattern making was sometimes charged against the customer in connection with the job for which they were needed. At other times the cost was too great to be thus included and was charged to expense. 2696 No pattern account has ever been set up on the petitioner's books and no cost records exist. The storage space devoted to patterns comprised three rooms, measuring 50 by 150 feet, 75 by 100 feet, and 45 by 100 feet. The number of patterns carried remained about the same from year to year. Some of those on hand on March 1, 1913, were still in use during the period in controversy, while others in storage then had been discarded from time to time during intervening years to provide room for others made during that time. No deduction for exhaustion, wear and tear, or obsolescence of buildings, machinery or equipment, including patterns, was claimed in the returns or allowed in computing the deficiencies. The Alabama Dry Dock & Shipbuilding Co., of Mobile, Ala., was engaged in a business similar in most respects to the one conducted by the petitioner. During 1919 and 1920 this company was a much larger organization than the petitioner and its volume of business was correspondingly greater. The two businesses differed in that the petitioner's work in the shipbuilding field was limited to repairs and reconditioning of vessels, while the other company built some new ships, including2697 mine sweepers, during the years involved. The petitioner's business also included several features not included in the business of the other company. The Commissioner determined the petitioner's net income for 1919 to be $56,692.57, and its excess-profits-tax liability for that year to be $15,865.38, which is in excess of 27 per cent of the taxable income. The excess-profits tax paid by the Alabama Dry Dock & Shipbuilding Co. was 18.4 per cent of its net income in 1919, and 22.1 per cent of its net income in 1920. The Commissioner in his calculation of the deficiency for 1919 used $110,922.21 as the amount of the petitioner's invested capital for the year. OPINION. MURDOCK: This Board is slow to reject the opinion of a corporation's directorate as to the reasonableness of salaries. However, when the Commissioner has determined that a salary is unreasonable a certain burden of proof rests upon the petitioner to overcome the presumption in favor of the Commissioner's determination. 1271 The determination herein denies the reasonableness of the salary of $3,900 paid to Mrs. Mary Kling in each of the years 1919 and 1920. The payment of such a salary to a woman 72 years2698 old, who was merely a director giving occasional advice, is, to say the least, exceptional. Her services do not seem to exceed those that a principal stockholder might be expected to give to a corporation. It further appears that she is the mother of all but one of the other stockholders. In view of these circumstances we would require more convincing proof of the reasonableness of her salary than has been presented before we would hold that the Commissioner was in error as to this point. It may well be that the officers of this corporation were deserving of more than their regular salaries as compensation for their extra-ordinary services in 1920. But the Commissioner has determined that the bonuses paid in that year were in reality a distribution of profits. They went to all stockholders in almost direct proportion of stockholdings without regard to services performed. Two of the stockholders rendered no services justifying the bonuses paid to them. These facts lead us to believe that the Commissioner was correct and we so hold. The petitioner claimed that for the purpose of a deduction under section 234(a)(7) of the Revenue Act of 1918, its buildings had a fair market2699 value on March 1, 1913, of at least $25,000 and that 2 per cent was a proper rate to allow for their exhaustion, wear and tear, and obsolescence. To support its contention it called two witnesses, each of whom knew the buildings in 1913. The one was an experienced contractor and the other was an architect. From their testimony we find that a value for the buildings of at least $25,000 has been established and that the deduction should be computed at the rate of one per cent for each year. The value and the rate might well be higher, but the burden of proof was upon the petitioner and the evidence does not justify any increase over these figures. In order to allow any deduction under this section for machinery and equipment we must know not only the value or cost but also the proper rate to apply to that value or cost. There was some evidence from which we might find the March 1, 1913, value of the machinery and equipment, but there is no satisfactory or convincing evidence to establish the rate. It appears that exhaustion, wear and tear were offset to a very large extent by repairs charged to expense. The only rate mentioned was far from a proper one as shown by other evidence. 2700 Consequently we can not allow any deduction on account of this property. The same is true in regard to a deduction on account of patterns. The evidence gives us no idea of a proper rate. *1272 The petitioner's remaining allegation of error is based on the Commissioner's refusal to give the benefit of sections 327 and 328 of the Revenue Act of 1918 in the computation of the petitioner's excess-profits tax for 1919. To show that this was error it alleges that its tax was disproportional to the tax of its competitors, due partly to the fact that its salary deductions were disallowed. The evidence fails to disclose any abnormalities within the intendment of section 327(d) of the Act. Judgment will be entered on notice of 15 days, under Rule 50.Considered by TRAMMELL, MORRIS, and SIEFKIN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620021/	ALBERT CONSTABLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentConstable v. CommissionerDocket No. 30684-87United States Tax CourtT.C. Memo 1989-554; 1989 Tax Ct. Memo LEXIS 552; 58 T.C.M. (CCH) 357; T.C.M. (RIA) 89554; October 10, 1989Lawrence M. Reisman and Paul Kerson, for the petitioner. Peggy Gartenbaum, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined a deficiency in petitioner's Federal income tax and additions to tax for the taxable year 1986 as follows: Additions to TaxDeficiency6651(a)(1) 16653(a)(1)6653(a)(1)(B)6654(a)6661$ 16,900$ 1,690$ 845 $ 331.40$ 4,225After concessions by petitioner, the issues for our decision are: (1) Whether petitioner's gross income for the taxable year 1986 included money seized by agents of the Drug Enforcement Administration in the amount of $ 26,380; and (2) whether petitioner is liable for an addition to tax pursuant to section 6661. 2554 FINDINGS OF FACT Some of the facts of this case have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated by this reference. Albert Constable (petitioner) resided in Brooklyn, New York, at the time he filed his petition in this case. On April 16, 1986, petitioner was preparing to board Pan Am flight #403 from John F. Kennedy Airport in Queens, New York, bound for Miami, Florida, when he was questioned by agents of the Drug Enforcement Administration (DEA). Petitioner's airline ticket to Miami was a one-way ticket and was purchased with cash. He was traveling to Miami under the name David Franklin. Pre-flight screening of petitioner's carry-on luggage revealed that petitioner was in physical possession of $ 26,380 in U.S. currency. When questioned by DEA agents, petitioner stated that the money found in his possession was not his, but was family money to be given to a Mr. Clifford Wardy in Orlando, Florida, for the purchase of real estate. After the money was seized, petitioner claimed that the money was his and that he had saved it over a period of years. Petitioner told the DEA agents that he was previously arrested555 only once, and the arrest was for having obstructed government administration. Petitioner's arrest record is as follows: Date ofReason forArrestArrestDate of PleaPleaMarch 18, 1980CriminalMay 30, 1980Guilty ofPossession ofDisorderlyMarijuanaConductMarch 7, 1984Criminal SaleMarch 14, 1984Guilty ofof MarijuanaAttemptedSaleJanuary 30, 1985Criminal Possession May 10, 1985Guilty ofof ControlledPossessionSubstanceApril 17, 1988Possession ofCase PendingStolen WeaponPetitioner's Federal income tax returns for the taxable years 1980 through 1985 were filed in 1987. Petitioner's adjusted gross income for the taxable years 1980 through 1985 as shown on those returns is as follows: Taxable YearAdjusted Gross Income1980$ 12,000198113,000198213,000198313,000198415,000198519,200Petitioner has not filed a Federal income tax return for the taxable year 1986 and respondent has made a termination assessment against petitioner for that year. Petitioner did not provide any information to the revenue agent nor was the556 revenue agent able to locate any documents concerning petitioner's income for 1986. Petitioner has been a self-employed handyman since 1980. He kept no books and records of his business and dealt whenever possible in cash. Petitioner and Lorna Constable were married in 1971 but have been separated and living in separate households since approximately 1982. Their two children live with their mother. In addition to supporting himself, petitioner has provided financial help to his two children during this period. In determining the amount of petitioner's income for the taxable year 1986, the revenue agent used a chart prepared by the Community Council of Greater New York outlining the weekly budget for a family of two living in New York City in 1980 adjusted for 1986 by statistics published by the Bureau of Labor Statistics. Petitioner's gross income was computed for the taxable year 1986 based upon a $ 240.90 weekly cost of living, adjusted by an inflation factor of 32.5 percent. The result was multiplied by 52 to obtain the yearly living expenses for a family of two in New York City in 1986. The cost of living was determined for two rather than three people because the revenue557 agent was unaware that petitioner was not supporting his wife but was, instead, supporting his two children. Based upon these calculations, petitioner's estimated cost of living for 1986 was $ 16,598. The following chart shows how much income petitioner could have saved from 1980 through 1985 using the revenue agent's cost of living analysis: Weekly Cost ofLiving TimesYearlyTotalIncomeInflationYearly CostSavingsSavingsYearReportedFactorof Living(Deficit)(Deficit)1980$ 12,000$ 240.90$ 12,527.00($ 527.00)($ 527.00)198113,000260.8913,566.00(566.00)(1,093.00)198213,000274.4614,272.00(1,272.00)(2,365.00)198313,000286.5414,900.00(1,900.00)(4,265.00)198415,000300.0015,600.00(600.00)(4,865.00)198519,200311.1116,178.003,022.00 (1,843.00)By analyzing petitioner's cost of living for the taxable years 1980 through 1985, in light of petitioner's reported income for those years, the revenue agent determined that petitioner could not have saved $ 26,380 during this period of time and thus included this amount in558 petitioner's income for the taxable year 1986. The Commissioner determined a deficiency in petitioner's Federal income taxes for the taxable year 1986 in the amount of $ 16,900. In addition, the Commissioner determined that petitioner was liable for additions to tax pursuant to sections 6651(a)(1), 6653(a)(1)(A), 6653(a)(1)(B), 6654(a), and 6661. OPINION Issue 1. Seized Cash as Gross IncomePetitioner does not contest respondent's use of cost of living tables to determine petitioner's gross income. Petitioner, however, argues that respondent cannot use the cost of living tables for the further purpose of determining how much money petitioner spent during the taxable years 1980 through 1985 in order to determine that petitioner could not have saved $ 26,380. With respect to the taxable years 1980 through 1985 petitioner did not file Federal income tax returns until 1987. He never filed a Federal tax return for 1986. Petitioner did not produce any information to the revenue agent from which a determination of his income for 1986 could be based. He maintained no books and records and admitted in his brief that whenever possible he dealt in cash. Because the agent559 could not locate any documents which would establish the amount of petitioner's income, he determined petitioner's income for 1986 based upon a chart prepared by the Community Council of Greater New York, adjusted for 1986 by statistics published by the Bureau of Labor Statistics. These statistics reflect the average living costs of similar families in the same locality, thus providing a basis for a determination as accurate as could be made without disclosure from petitioner as to his living costs and his children's living costs. Based upon this calculation, the agent estimated petitioner's cost of living to be $ 16,598. With respect to the cash seized by DEA agents, the revenue agent analyzed petitioner's cost of living for the taxable years 1980 through 1985 in light of petitioner's reported income for those years and concluded that petitioner could not have saved $ 26,380 during this period of time. Thus, $ 26,380 was included in petitioner's gross income in 1986. The Commissioner may use any method that clearly reflects income if no records have been kept by the taxpayer from which actual income can be determined. Sec. 446(b). The Commissioner's determinations are presumptively560 correct, , and petitioner bears the burden of proving them to be erroneous. Rule 142(a). In the absence of records, respondent can use indirect methods of proof to reconstruct the taxpayer's income. The method used in this case has been approved by this Court. . Using the cost of living charts, petitioner's gross income for 1986 was determined based solely upon an estimate of the amount of petitioner's personal living expenses for the taxable years 1980 through 1986. This theory is based upon the assumption that petitioner had income at least equal to the normal cost of supporting a family of two. Based upon the fact that the normal cost of supporting a family of two from 1980 through 1985 exceeded petitioner's income for all years but one, it is inconceivable that petitioner could have saved $ 26,380 over this period of time. 3Petitioner has offered no evidence whatsoever as to the amounts561 or sources of his income, nor has he claimed that he was in possession of a large amount of money prior to 1980. Petitioner testified that he saved the $ 26,380 from income earned over a period of years and that he kept this money in his residence in the form of cash. He argues in his brief that his testimony is plausible and need not be corroborated. However, we are not bound to accept a taxpayer's testimony at face value even when it is uncontradicted if it is improbable, unreasonable, or questionable. . We find petitioner's testimony to be improbable, unreasonable, and questionable. Petitioner admitted in his brief that he was part of what he refers to as an "underground economy." We are not aware of what this "underground economy" is; however, based upon petitioner's arrest record and testimony, we are confident that income earned by individuals who are members of such "economy" does not originate from legal sources. Although this inference does not, by itself, establish that petitioner was a drug dealer, it does cast doubt on his credibility. Further casting a shadow of doubt over his credibility is the562 fact that he lied to DEA agents regarding his arrest record, his use of an alias, and his testimony contradicting his statement to DEA agents that the cash found in his possession was not his. Gross income is defined by section 61 as all income from whatever source derived. Respondent included in petitioner's gross income for the taxable year 1986, the cash seized by DEA agents from petitioner in the amount of $ 26,380. Petitioner has failed to sustain his burden of proof establishing that this amount was earned in a different year or that the taxable income for 1986 was less than that determined by respondent. Issue 2. Section 6661The Commissioner determined that there was a substantial understatement of petitioner's Federal income tax for the taxable year 1986 pursuant to section 6661. An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return, or $ 5,000. Sec. 6661(b)(1)(A). Petitioner failed to file a Federal income tax return for the taxable year 1986. Petitioner argues that we should reconsider our opinion in . In Woods, the taxpayer argued563 that as he failed to file an income tax return he could not have an understatement of tax pursuant to section 6661. The taxpayer's argument failed in Woods as it does here. Petitioner's arguments requesting our reconsideration of Woods are without merit. As a result, petitioner's total deficiency for 1986 is $ 16,900 which is greater than both tests set forth in section 6661(b)(1)(A). We sustain the addition to tax pursuant to section 6661. Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section numbers refer to the Internal Revenue Code in effect for the taxable year 1986 and all rule numbers refer to the Rules of Practice and Procedure of this Court. 50 percent of the interest on $ 16,900.↩2. Petitioner has conceded all of the additions to tax with the exception of sec. 6661.↩3. In addition, respondent's calculations may be low as the revenue agent was not aware that petitioner was supporting a family of three as opposed to a family of two.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620022/	MARY R. SPENCER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARY R. PERRY (FORMERLY MARY R. SPENCER), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Spencer v. CommissionerDocket Nos. 25255, 42492.United States Board of Tax Appeals20 B.T.A. 58; 1930 BTA LEXIS 2209; June 13, 1930, Promulgated 2209 INCOME - PAYMENTS FOR DOWER RIGHTS AND IN LIEU OF ALIMONY BY MEANS OF INCOME FROM TRUST FUND. - Petitioner, pending hearing of her action for divorce, entered into an agreement with her husband whereby a trust fund was created from his estate, the income thereof not in excess of $14,000 per year to be paid her yearly for support of herself and child and for release of her dower rights, the trust to become effective only if and when she secured a decree of divorce. The divorce was granted, this agreement and deed of trust being submitted to the court as the settlement effected by the parties of the question of support and maintenance. Held that sums received by petitioner representing income of the trust, being payments in lieu of alimony and for surrender of dower rights, were not income taxable to her. Charles D. Miller, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. TRUSSELL 58 These two proceedings, consolidated for hearing and decision, are appeals from deficiencies of $626.93 and $732.76, determined by respondent for the calendar years 1923 and 1924, respectively, and resulting from his inclusion in petitioner's2210 income of sums representing income of a trust fund and paid her in those years. The issue is the same in each proceeding, petitioner contending that these amounts do not represent taxable income. The amount received by petitioner from the trust in each of the taxable years is not in dispute. 59 FINDINGS OF FACT. Petitioner, on February 4, 1922, was the wife of Lorillard Spencer, and had one child born of that marriage, a boy then about 16 years of age. At this time there was pending in the Superior Court of the State of Rhode Island, a proceeding by petitioner for divorce, and on that date petitioner entered into the following formal written agreement with her husband: MARY R. SPENCER, Petitioner. vs. LORILLARD SPENCER, Respondent. IN SUPERIOR COURT OF STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS IN AND FOR THE COUNTY OF NEWPORT THIS AGREEMENT made February 4th, 1922, between Lorillard Spencer, of the City, County and State of New York, party of the first part, and Mary R. Spencer, of the City and County of Newport, State of Rhode Island, party of the second part. WHEREAS the said parties were lawfully inter-married in the City and County of Newport, 2211 State of Rhode Island, on September 19, 1905; and WHEREAS Lorillard Spencer, Jr., a boy of about sixteen years of age, is the only issue of said marriage; and WHEREAS the party of the first part is the grandson of Lorillard Spencer who died on January 30, 1888, leaving a Last Will and Testameht, dated January 6, 1886, and duly proved in the office of the Surrogate of the City and County of New York, on May 1, 1888, a copy of which will is hereto annexed; and WHEREAS the said party of the first part is now entitled to a part of the income of a certain trust fund under Paragraph Ninth of said will and if he outlives his mother, Caroline S. Spencer, will be entitled to the principal of said trust fund; and WHEREAS an action for an absolute divorce brought by the party of the second part against the party of the first part on the ground of non-support or neglect to provide is now pending in the Superior Court, County of Newport, State of Rhode Island and Providence Plantations, entitled Mary R. Spencer, petitioner, versus Lorillard Spencer, respondent; and WHEREAS the parties hereto desire to agree between themselves as to the allowances that shall be made to the party of the2212 second part pending the said action, and further to agree in the event that an absolute divorce is granted in said action upon a definite provision for the separate support of the party of the second part during her life, for the support and custody of Lorillard Spencer, Jr., infant son of the parties hereto, and the payment to be made in full settlement for all counsel fees, etc., Now, THEREFORE, the parties hereto, in consideration of the premises and of all lawful covenants hereinafter contained and of the sum of One Dollar ($1.00) by each of the parties hereto to the other paid, the receipt whereof is hereby acknowledged, mutually covenant and agree each with the other, as follows: FIRST: That the said party of the first part agrees to transfer and convey to the NEW YORK LIFE INSURANCE AND TRUST COMPANY certain securities in trust for the benefit of the party of the second part and Lorillard Spencer, Jr., in the way and manner which is provided for in said deed, a copy of which is 60 hereto annexed, to be executed by said party of the first part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company2213 to be held in escrow, subject to the following conditions: In the event of a final decree for an absolute divorce being entered in this cause, now pending, in favor of the petitioner, within nine months after the date of this instrument, then said deed of trust and securities shall be, within ten days after the entry of any such decree, delivered to the New York life Insurance and Trust Company, with the intent that it shall become of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner within said nine months, then said deed of trust and securities shall be delivered by said New York Life Insurance and Trust Company to the party of the first part. SECOND: That the party of the first part, in addition to the provisions of paragraph "First", agrees to suitably support, maintain and educate the said Lorillard Spencer, Jr., and to pay all reasonable expenses except board, lodging and traveling expenses when he is with his mother until he is twenty-one years old or if he should enter College until he leaves or graduates therefrom and in no case beyond the time when2214 he is twenty-five years of age. THIRD: That until the said Lorillard Spencer, Jr., arrives at the age of twenty-one years, the party of the first part shall have the society and custody of the said Lorillard Spencer, Jr., during August of each year and also during the last half of his Christmas and Easter vacations, and that the party of the second part shall have such society or custody at all other times; that neither of the said parties shall take the said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties hereto shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties cannot agree upon the manner and place of such education, then each party hereto after five days' notice given by either party, to the other, shall choose one person to represent him or her in deciding the question or questions and if these two cannot agree, then, that they (the persons so chosen) shall within five days thereafter choose a third person whose decision shall be final. FOURTH: That the party of the first part agrees immediately after the final decree for an absolute2215 divorce is entered to pay to the party of the second part the sum of Twenty five thousand dollars ($25,000) in full settlement of all liability for counsel and witness fees, costs of the action, and for the care, support, maintenance and education of said Lorillard Spencer, Jr., to and including January 1, 1922, which said sum the said party of the second part hereby agrees to accept and take in full satisfaction of her claim for counsel and witness fees, costs of said action and for the care, custody and education of Lorillard Spencer, Jr., as aforesaid; and that the party of the first part further agrees to pay to the party of the second part One thousand one hundred sixty-six and 66/100 dollars ($1,166.66) per month after the decision for petitioner is obtained beginning January 1, 1922, until final decree is entered in the pending action for divorce, or until nine months have elapsed after the date of this agreement, whichever event shall first occur; and that the aforesaid sums are intended in place of any allowance which might be made by the court and to cover every possible liability of the said party of the first part to the said party of the second part except as provided2216 for in this agreement. FIFTH: That the said party of the first part agrees to transfer and convey to the New York Life Insurance and Trust Company an equal one-third interest 61 in the principal of said trust estate created by the will of his grandfather, Lorillard Spencer, in the way and manner, which is provided for in said deed, a copy of which is hereto annexed, to be executed by said party of the first part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company to be held in escrow, subject to the following conditions: In the event of a final decree for an absolute divorce being entered in said cause, now pending, in favor of the petitioner, within nine months after the date of this instrument, then said deed of trust shall be, within ten days after the entry of any such decree, delivered to the New York Life Insurance and Trust Company, with the intent that it shall become of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner, within said nine months, then said deed of trust shall2217 be delivered by said New York Life Insurance and Trust Company to the party of the first part. SIXTH: That the party of the second part will not incur any debt, obligation or liability in the name of the party of the first part for necessities or for any articles, furniture or property of any description purchased by the party of the second part or for any other matter or thing for the use of herself and shall make any and all obligations, indebtedness and contracts including those relating to the purchase of necessities or other articles or property of any description for the use of herself or others in her individual name and upon her own individual responsibility. SEVENTH: That the party of the second part has released and hereby releases all her claims against the party of the first part for maintenance and support except as provided in this agreement and all her dower and right of dower in any real estate of which the party of the first part is now seized or which he may hereafter acquire and all rights, present and future, which she now has or may hereafter have or acquire of, in and to the estate real or personal of the party of the first part under any statutes or statute2218 of distribution or otherwise or any right of administration, as widow or otherwise, of or upon the estate of the party of the first part in the event of his death; and the party of the second part further covenants and agrees to execute and acknowledge releases of dower, copies of which are hereto annexed, to be executed by said party of the second part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company to be held in escrow, subject to the following conditions: In the event of a final decree for an absolute divorce being entered in this cause now pending, in favor of the petitioner, within nine months after the date of this instrument, then said releases of dower shall be, within ten days after the entry of any such decree, delivered to the party of the first part with the intent that it shall be of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner within said nine months, then said releases of dower shall be delivered by the said New York Life Insurance and Trust Company to the party of2219 the second part, and said party of the second part further agrees at any time hereafter, whenever required by the party of the first part, to execute further releases of dower and right of dower in any real estate of which the party of the first part is now seized or which he may hereafter acquire. EIGHTH: That in the event of a final decree for an absolute divorce being entered in the cause now pending in favor of the petitioner within nine (9) months after the date of this instrument, then the party of the first part will release all his claim and right of curtesy in and to any real estate of which 62 the party of the second part is now seized or which she may hereafter acquire and any and all rights present and future, which he now has, or may hereafter acquire of, in and to the estate real and personal of the party of the second part under any statutes or statute of distribution or otherwise of or any right of administration as husband or otherwise of or upon the estate of the party of the second part in the event of her death. NINTH: That each of the parties will execute, acknowledge and deliver any and all other deeds of conveyance, releases and other instruments2220 in writing and under seal which may be required by the other party to effectuate and carry out this agreement or any clause thereof to its true and full intent, meaning and purpose. TENTH: That each party hereby waives any claim, right or demand which he or she has or may have against the other, except as provided in this agreement. ELEVENTH: That this agreement shall be binding upon the heirs, executors, administrators and assigns of the parties hereto. On the same date the deed of trust provided for by the foregoing agreement was executed and conveyance made by petitioner's husband to the New York Life Insurance & Trust Co. of the assets provided to be held thereunder, together with releases of his curtesy rights and the necessary agreement executed by the New York Life Insurance & Trust Co. providing that this deed of trust, together with the property covered thereby, should be held in escrow pending the entry of the final decree of divorce, and if and when such a decree were entered, the deed of trust would thereupon become effective and the property would from that time forward be held under its provisions. Petitioner, in accordance with the provisions of the agreement2221 above set out, executed and delivered in escrow to the New York Life Insurance & Trust Co. the releases of her dower interest in certain real estate belonging to her husband in New York City and on Long Island and a release of any and all claims or rights she might have in respect to real estate owned or which might later be acquired by him to be held and delivered to her husband if and when a final decree of divorce was entered. On March 2 petitioner and her husband entered into an agreement extending the period of nine months provided in the formal contract of February 4, 1922, to a date not more than 30 days following the earliest date at which a final decree of divorce could become effective in case the law of the State of Rhode Island should be changed by its legislature to require a longer period to elapse than the one required under existing law, and providing for the payment in such case of the $25,000 agreed upno for costs and counsel fees, in installments, this change being not material to the question here in issue. Thereafter, on the 6th day of March, 1922, an interlocutory decree of divorce was entered, the order of the court being as follows: 63 FIRST: 2222 That a decision for the petitioner for divorce from the bond of marriage be and the same hereby is rendered on the ground of neglect and refusal for the period of more than one year next before the filing of the petition on the part of the respondent to provide necessaries for the subsistence of the wife, said respondent being of sufficient ability to make such provision. SECOND: That the respondent shall have the society and custody of Lorillard Spencer, Jr., the child of the parties, during August of each year and also during the last half of the Christmas and Easter vacations, and that the petitioner shall have such society and custody at all other times; that neither of the parties shall take said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties cannot agree upon the manner and place of such education, then each party after five days' notice given by either party to the other shall choose one person to represent him or her in deciding the question or questions, and if these two cannot agree, 2223 then the persons so chosen shall within five days thereafter choose a third person whose decision shall be final. THIRD: That until entry of final decree herein the respondent shall pay to the petitioner such sums for her maintenance and support, and allowances, as are provided to be paid prior to the entry of such final decree in accordance with the provisions of a certain agreement entered into between the parties dated February 4, 1922, subsequent to the filing of the petition in this cause, and an agreement supplemental thereto dated March 2, 1922, and shall also pay for the suitable support, maintenance, education and other expenses of the said Lorillard Spencer, Jr., as provided in said agreement. FOURTH: That upon entry of final decree herein the right of said parties is hereby reserved to have a decree for permanent alimony, allowances for the support of said Lorillard Spencer, Jr., and for counsel fees and other allowances, entered therein in accordance with the further provisions of said agreement of February 4, 1922, and the other instruments referred to therein, and also a certain escrow agreement dated said 4th day of February, 1922, entered into between said parties2224 and the New York Life Insurance and Trust Company. On September 8, 1922, a final decree of divorce was entered into providing as follows: WHEREAS, after the trial of the above entitled petition decision granting the same was rendered upon the sixth day of March, A.D. 1922, now therefore six months having elapsed and no reason appearing why decree should not be entered, it is ORDERED, ADJUDGED AND DECREED. as follows: FIRST: That the prayer of said petition be and the same is hereby granted, and that the bond of matrimony now existing between the said Mary R. Spencer and the said Lorillard Spencer, be and the same is hereby dissolved upon the ground of neglect and refusal for the period of more than one year before the filing of the petition on the part of the respondent to provide necessaries for the subsistence of the wife, said respondent being of sufficient ability to make such provision. SECOND: That until Lorillard Spencer, Jr., the only child of said parties, arrives at the age of twenty-one years the respondent shall have the society 64 and custody of said Lorillard Spencer, Jr., during August of each year and also during the last half of his Christmas2225 and Easter vacations, and that the petitioner shall have such society and custody at all other times; that neither of the parties shall take said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties can not agree upon the manner and place of such education, then each party after five days' notice given by either party to the other shall choose one person to represent him or her in deciding the question or questions, and if these two cannot agree then the persons so chosen shall within five days thereafter choose a third person whose decision shall be final. THIRD: That the respondent shall suitably support, maintain and educate the said Lorillard Spencer, Jr., and shall pay all his reasonable expenses, except board, lodging and traveling expenses when he is with his mother, until he is twenty-one years old, or, if he should enter College, until he leaves or graduates therefrom, but in no case beyond the time when he is twenty-five years of age. FOURTH: That the respondent shall forthwith make2226 to the petitioner the payment provided for in the paragraph numbered Fourth of a certain agreement dated the 4th day of February, 1922, between the said Lorillard Spencer and the said Mary R. Spencer, for the care, support, maintenance and education of said Lorillard Spencer, Jr., to and including January 1, 1922, and in full settlement of all liability for counsel and witness fees and costs of this action. FIFTH: That forthwith upon the entry of this decree the deed of trust and securities described or referred to in paragraph numbered First of said agreement of February 4, 1922, and the deed of trust described or referred to in the paragraph numbered Fifth of said agreement of February 4, 1922, shall be delivered to the New York Life Insurance and Trust Company by itself to be held by it as trustee as provided in said deeds of trust respectively; and that the releases of dower and of curtesy and all other instruments provided for in said agreement shall likewise be delivered as stipulated in said agreement of February 4, 1922. SIXTH: That nothing herein contained shall be construed as merging in this decree said agreement between the parties dated February 4, 1922, or any of2227 the other instruments referred to therein; or the escrow agreement dated February 4, 1922, entered into between said parties and the New York Life Insurance and Trust Company, all the rights and remedies of the parties hereto in and under said agreements and other instruments being expressly reserved. SEVENTH: That, except as to the payments and other provisions provided for in this decree and in the interlocutory decree in said cause and in the agreements and deeds of trust referred to herein, the respondent shall not be required to make any payment as alimony or for any other matter connected with this cause or for the maintenance of the petitioner or their said minor son. Upon the entry of the final decree of divorce, delivery was made as provided, of the several conveyances and releases held in escrow, and since that date petitioner has received the payments agreed upon and provided for by the deed of trust. The amounts by which respondent has increased petitioner's income for each of the taxable years here in issue were amounts received by her from the trust. During each of said years petitioner's son, Lorillard Spencer, Jr., was a minor and for neither of said years did2228 petitioner claim any amount in her return as a credit for his support. 65 OPINION. TRUSSELL: Petitioner contends that the amounts received in each year by her from the trust did not represent income taxable to her, but amounts received in return for her release of dower rights in her husband's real estate and allowances for the maintenance and support of herself and minor son, or in other words, in lieu of the alimony which, in the absence of the agreement under which the trust was created, the court by its decree in the divorce action then pending would have had to provide for. Respondent insists that these amounts do not represent alimony, as no alimony was provided for by the divorce decree, as the parties had arranged the matter between them and petitioner was already, by the provisions of the deed of trust, amply provided for; that the deed of trust was executed under an agreement made between the parties and not in compliance with the order of the court, and as petitioner is admittedly the beneficiary of a trust, receiving payments of the income thereof, sections 219 of the Revenue Acts of 1921 and 1924 apply and require that these amounts be taxed as income2229 to her. The facts are not in dispute. Petitioner had filed an action for divorce and alimony against her husband, who was a man of means. She had one child, a minor. If successful in her suit, the court would, by its decree, require the payment by her husband of alimony, which in its broad meaning is an allowance to the wife out of her husband's estate for the support of herself and children. . "Alimony generally means an allowance to a wife for the support of herself and children out of her husband's estate, either during the pendency of a libel for divorce or at its termination in favor of the petitioner." ; . In this case the court quoted with approval from , that: "Alimony is not considered to be the separate property of the wife, but merely that part of the husband's estate allowed her for her present subsistence and livelihood." Pending the hearing of the divorce action petitioner and her husband entered into an agreement whereby an amount of $14,000 a year, determined as a reasonable2230 allowance, was provided to be paid through creation of a trust on certain property belonging to the husband, with directions to the trustee to pay an amount of the yearly income not in excess of $14,000 to petitioner. The creation of the trust and the payments arranged for thereby were made wholly dependent upon petitioner being successful in her action for divorce, and, to carry out the agreement, the deed of trust was deposited in escrow to take effect upon the entering of a final decree of divorce. 66 All of the arrangements contemplated by the agreement and the conveyances and releases made thereunder were submitted to the court and taken cognizance of by it in the entering of a final decree, by the provision therein that no payments were to be made by petitioner's husband for maintenance and support of herself and child other than those agreed upon and provided for by the contract and deed of trust. Respondent admits that under the rule laid down in , if the payments made petitioner were in satisfaction of an award of alimony by the court they would not represent income taxable to her, but insists that these amounts2231 were not so paid, but were sums received by her as beneficiary of a trust created for her benefit, and that on finding such fact we can not go further and consider the purpose for which the trust was created, but are forced to then apply sections 219 referred to avove, and that these require that such sums be taxed as income to her. We can not agree with respondent's theory, for several reasons. In the first place, we can not consider the execution of the agreement of February 4, 1922, and the creation of the trust under its provisions as things which preceded and were separate from the divorce action and that the decree of the court made no provision for the support of petitioner. The agreement of February 4, 1922, is clearly shown to have been an incident of the divorce action, made during the time when it was pending, liquidating a yearly amount which the court had been asked and would otherwise have been required to determine, and providing for its periodic payment. The creation of the trust was merely the carrying out of the agreement which, together with the various conveyances executed thereunder, are shown to have been submitted to and approved by the court. We can not2232 consider it as an agreement distinct from the divorce decree when by its terms the trust was to have effect only in case the divorce was granted, and when the decree entered by the court specifically recognized the agreement as providing the maintenance which the court had been asked to decree as alimony. The interlocutory decree provides: Upon entry of final decree herein, the right of said parties is hereby reserved to have a decree for permanent alimony, allowance for the support of said Lorillard Spencer, Jr. * * entered therein in accordance with the further provisions of said Agreement of February 4, 1922, and the other instruments referred to therein * * . and the final decree orders and directs that: SEVENTH: That, except as to the layments and other provisions provided for in this decree and in the interlocutory decree in said cause and in the agreements and deeds of trust referred to herein, the respondent shall not be required to make any payment as alimony or for any other matter connected with this cause or for the maintenance of the petitioner or their said minor son. 67 Paragraph "Sixth" of the final decree, which is relied upon by respondent as2233 showing that no alimony was decreed and that the court left to the parties that question, is nothing more than a reservation to the parties of their rights under the agreements referred to, in view of the specific approval and acceptance by the court of a settlement agreed upon on the question of maintenance and support of petitioner and her son. We can not agree with respondent's contention that sections 219 of the Revenue Acts of 1921 and 1924 make taxable to the beneficiary of a trust as income all amounts representing income of the trust paid thereunder to her, and that the purpose of the creation of the trust may not be looked to, as the requirements of those sections are satisfied when it is merely found that a trust exists and there are payments periodically of its income to such beneficiary. Were such the case, any taxpayer could convey his property in trust, the income to be distributed to his creditors in settlement of his debts, and thus, while his debts were being paid, escape tax upon his income while devoting it in this way to his own purposes, and his creditors would be taxed with receipt of income as beneficiaries of a trust, when in fact they had received merely2234 payment of debts which might represent no income whatsoever. In the present case there rested upon petitioner's husband the obligation to provide maintenance and support for her and for his minor son. Suit was pending for divorce and to enforce this obligation and the parties thereupon agreed upon an amount of $14,000 per year for that purpose and provided the means for its payment from the husband's estate by creation of a trust with provision that the income thereof to the extent of $14,000 per year be paid petitioner, the whole agreement being conditioned upon petitioner's obtaining the decree of divorce. It is true that this trust was one created for the benefit of petitioner and she was the beneficiary in the sense that $14,000 of the income of the trust fund was paid her in each year, but it must be remembered that these payments were made in discharge of the obligation of the husband; the trust being created merely to carry out his continuing obligation and to guarantee that the obligation would be performed. Petitioner had no interest in the corpus of the trust, all that she could receive being the yearly payments during her life and these being reduced to $7,000 per2235 year in case of her remarriage. All of the income from the trust estate over and above the amounts required to be paid petitioner were to be paid her husband. We can not see that , relied upon by respondent is in point. That case deals with a tax liability of a 68 donee of the income from a trust created, and construes the provision of the Act excluding "gifts" from taxable income, the court holding that Congress in its use of that term contemplated the corpus as distinguished from the income. The case before us is not one of a gift. The right of a wife to require support for herself and children and her dower interest are rights in her husband's estate. As the court said in , of the wife's right to support which would be represented on divorce by a decree for alimony: Permanent alimony is regarded rather as a portion of the husband's estate to which the wife is equitably entitled, than as strictly a debt; alimony from time to time may be regarded as a portion of his current income or earnings * * . We can see no distinction, in so far as petitioner's tax liability2236 is concerned, in whether the payments made her represented alimony specifically awarded by the court, or amounts agreed upon by her husband in lieu of alimony. Assuredly, the character of the payment, so far as this petitioner is concerned, is not changed by the fact that instead of having the amount set by the court and a decree requiring it to be paid entered, the parties agreed upon the amount, contracted for the payments, arranged the mode of payment, and submitted the agreement to the court. An examination of the agreement of February 4, 1922, leaves us in no doubt that by the provision made for payments of income of the trust to petitioner, it was understood that these payments were for the support of petitioner and her minor son, or in lieu of the allowance which the court would otherwise have decreed as alimony, and also included a consideration for the release of petitioner's dower rights in her husband's real estate; and an examination of the decrees entered leaves us in no doubt that the court so understood the agreement. To the extent that the payments received in the taxable years by petitioner represent sums in lieu of alimony, we hold they do not represent income*2237 to petitioner. ; . In so far as they may represent payments in lieu of dower rights, the same conclusion must be reached. ; ; . Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620023/	ST. LOUIS HILLS SYNDICATE FUND ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WELLSTON HILLS SYNDICATE FUND ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WEBSTER HILLS SYNDICATE FUND ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. KINGSHIGHWAY HILLS SYNDICATE FUND ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.St. Louis Hills Syndicate Fund v. CommissionerDocket Nos. 80258, 80259, 80260, 80261.United States Board of Tax Appeals36 B.T.A. 575; 1937 BTA LEXIS 691; September 28, 1937, Promulgated 691 By separate agreements four syndicate funds were created, which were used for the purchase, development, and sale of four real estate subdivisions. The subscribers thereto were to receive 6 percent interest upon their subscriptions and a share of the profits, if any, based upon the amount of their subscription. The personal liability of each subscriber was limited to the amount subscribed. Transferable shares or interests were created. Management and operation of the subdivisions and the funds were vested in corporate subscribers authorized to deal in real estate. During the taxable year each syndicate made distributions to its subscribers. Held, the syndicates are associations taxable as corporations. George M. Raissieur, Esq., and W. A. Helm, C.P.A., for the petitioners. B. H. Neblett, Esq., H. P. Noneman, Esq., and J. F. Gregory, Esq., for the respondent. ARNOLD575 The above entitled proceedings, consolidated for hearing and decision, have one common issue, namely, whether the syndicates are associations taxable as corporations. Two of the proceedings, Saint Louis Hills and Wellston Hills, present an additional question, 692 namely, whether payments made by the syndicates to their subscribers constituted allowable deductions as interest paid. Deficiencies were asserted for 1932 against each syndicate under the names and in the amounts following: Saint Louis Hills Syndicate Fund$5,058.66Wellston Hills Syndicate Fund1,936.17Webster Hills Syndicate Fund204.94Kingshighway Hills Syndicate Fund2,606.49576 In each proceeding the petitioners are stated to be the named syndicate and the subscribers thereto. The name of each subscriber and the amount of his, her, or its subscription to the total fund is set forth in describing the petitioner in each proceeding. For convenience, the first names only will be used in designating each "Syndicate Fund." FINDINGS OF FACT. Each of the foregoing syndicate funds came into existence by virtue of syndicate agreements entered into on the dates following: Kingshighway, February 1, 1926; Webster, April 21, 1928; Wellston, September 15, 1928; and Saint Louis, May 1, 1929. The principal subscriber to each fund was the Cyrus Crane Willmore Organization, Inc., hereinafter referred to as the Willmore Organization, a Missouri corporation693 created March 23, 1922. All the capital stock of the Willmore Organization was owned by Cyrus Crane Willmore, and the stated purpose of its incorporation was: To purchase or otherwise acquire, hold and own real estate, notes and bonds and mortgages securing notes and bonds, to subdivide and plat real estate acquired by the Company, to build houses and otherwise improve real estate, to sell, mortgage and otherwise dispose of the same, to lease or rent out or operate property belonging to the Company, and contract with respect to any and all of said purposes, and generally to engage in the real estate business. By warranty deed of September 29, 1925, the Board of Trustees of the Missouri Botanical Gardens transferred to the Willmore Organization the tract of land which later became the subdivision known as Kingshighway Hills. The purchase price of the property was $274,961.50, part of which was paid in cash and part by notes secured by deed of trust executed by the Willmore Organization. The parties to the Kingshighway Hills Syndicate agreement are the realty company, Willmore Organization, and the "subscribers hereto collectively." After reciting the acquisition, the terms694 of purchase, and the proposed subdivision of the land, it is stated therein that the Willmore Organization: * * * requires financial aid to enable it to develop and improve the said property with streets, alleys, sidewalks, gutters, sewers, water, electric light, gas, etc. and to pay the balance of the purchase price of the said property and to properly advertise the sale of the property and to employ a selling organization to sell the same; The syndicate subscribers "agreed to furnish such aid", their total subscription amounting to $250,000, of which the Willmore Organization subscribed $200,000. It was provided that the fund "shall be kept on separate deposit * * * and shall be used * * * only for the following purposes; * * "; to repay Willmore Organization 577 for disbursements in connection with the purchase of the property; (b) to pay the interest and principal due under the deed of trust; (c) to pay taxes; and (d) to pay engineering fees for platting, and to pay for improvements, including streets, alleys, sidewalks, gutters, sewers, water, electric light, gas, certificates of title, auditor's fees, legal fees, etc. The Willmore Organization reserved the sole695 right to determine where and what improvements were to be made and the prices and terms at which the lots were to be sold. Checks against the $250,000 fund were to be issued by the Willmore Organization as syndicate manager. The entire fund had to be paid in within two months, or the agreement became void and the money previously paid in was to be refunded by the Willmore Organization. The agreement provides that the subscribers "shall not be regarded as partners of each other or of the Company (Willmore Organization). The Syndicate subscribers are advancing the amounts subscribed by them respectively solely to aid the Company, to enable it to finance the project, but the amounts paid in by subscribers shall not be regarded as a loan to the Company and said amounts are not to be repaid to them except as hereinafter stated." In the other three agreements the wording of the last three lines was changed to read " * * but the amounts paid in by subscribers shall not be regarded as a loan for which the Company (Realty Company) assumes personal responsibility and said amounts are not to be repaid to the subscribers except as hereinafter stated." The amount of the fund could be increased696 by additional subscriptions if "a larger sum is required to enable it (Willmore Organization to finance the project; * ." Upon increase each subscriber was to have the opportunity to subscribe for his pro rata share. All the proceeds from the sale of lots were to be "deposited to the credit of Kingshighway Hills Syndicate Fund." The fund shall be used and applied as follows: (a) first 25 percent of sale price to Willmore Organization to cover salesmen's commissions, expenses of selling, advertising, postage, collecting deferred payments, keeping syndicate's accounts, clerical work, overhead expenses of every description, including compensation to Willmore Organization for managing; (b) next, out of Syndicate Fund, Willmore Organization "shall pay to the Syndicate subscribers, on account of their interest therein, a sum equal to 6 per cent per annum"; (c) next, pay all amounts which are to be paid out to fully pay for the property, improvements, taxes, interest, etc., also any income taxes the Willmore Organization has to pay because of profits resulting from sale of lots; (d) distributions to subscribers shall be made by Willmore 578 Organization only after reserves have697 been set aside to guarantee all payments when due; distributions shall be based on the pro rata share of each subscriber in the total fund. The Willmore Organization was "authorized to discount and sell outstandings" in order to wind up the syndicate. If not wound up on or before December 31, 1935, any subscriber could demand termination of the syndicate and distribution of its remaining assets. The agreement further provides that "no profits are to be retained" by the Willmore Organization except such profits as it may receive as a syndicate member, and the profit it is able to make out of the first 25 percent of all sales hereinbefore mentioned. The Willmore Organization guaranteed the subscribers "against any loss in excess of their subscription, * ." Transferable certificates or receipts were provided for, which were to be issued by the Willmore Organization in form substantially as follows: No. Amount $ KINGSHIGHWAY HILLS SYNDICATE CERTIFICATE. St. Louis, 192 We hereby certify that (or his assignor) has subscribed and duly paid Dollars into the Syndicate known as Kingshighway Hills Syndicate, formed to enable this Company to purchase, develop, improve and698 sell the property known as Kingshighway Hills Subdivision, as provided in the agreement entered into between this Company and the original Syndicate Subscribers, bearing date February 1, 1926. The Syndicate Fund originally subscribed is $250,000.00, but the Company reserves the right to accept additional subscriptions whenever the Company finds it necessary to do so. The registered holder hereof is entitled to participate pro rata with other Syndicate Subscribers in the distributions and profits of the Syndicate, upon presentation of this certificate to the Company for endorsement of such payment thereon. Distributions, not exceeding 6% per annum, may be made hereon to the registered holder hereof when and as may be determined by the Company without requiring the endorsement of such payments hereon. The rights hereunder are transferable only upon surrender to the Company of this certificate properly endorsed for transfer. CYRUS CRANE WILLMORE ORGANIZATION, INC., By President.AssignmentFor value received I hereby sell, assign and transfer unto all my right, title and interest in the within certificate and in the Syndicate therein referred to. Dated 19 699 Witness: 579 Although the agreement provided for the issuance of the above certificate, the procedure actually followed was different. Each subscriber signed a master copy of the agreement and received in lieu of the certificate, as evidence of his interest, a counterpart of the syndicate agreement executed by the realty company owning the property. Cyrus Crane Willmore followed the same procedure with respect to the Wellston, Webster, and Saint Louis syndicate agreements. On or about April 16, 1928, the Webster Hills Realty Co. was incorporated under the laws of Missouri. Its capital stock of $5,000 was all owned by the Willmore Organization. Its purpose and powers, as stated in its charter, are identical with those in the charter of the Willmore Organization, hereinabove set forth. Real estate acquired by Willmore was conveyed to the Webster Hills Realty Co. from a wholly owned subsidiary of the Willmore Organization by general warranty deed on or about April 25, 1928. The Webster Hills Syndicate agreement was between the Realty Co. and the subscribers collectively. The recitals therein are the same as hereinabove set forth for Kingshighway, except as to names700 and amounts. The total fund subscribed was $100,000, of which the Willmore Organization subscribed $69,000 and the Webster Hills Realty Co., $5,000. Except for the amount of the purchase price to be paid for the property, $80,162.98, and the termination date, December 31, 1938, the provisions of this agreement are identical with the provisions of Kingshighway agreement as hereinabove analyzed. On or about August 17, 1928, Willmore caused to be organized the Wellston Hills Realty Co., a Missouri corporation. It had a capital stock of $5,000, all of which was owned by the Willmore Organization. The purpose and power stated in its charter are identical with those of the Willmore Organization, hereinabove set forth. Willmore purchased certain unimproved property which he turned over to the Realty Co. for the purchase price that he had agreed to pay. The property was conveyed to the Wellston Hills Realty Co. by warranty deed on or about September 13, 1928. The Wellston Hills Syndicate agreement is between the Realty Co. and the subscribers collectively. The recitals in the agreement are the same as hereinabove set forth as to Kingshighway except as to names and amounts. The701 total fund subscribed was $100,000, of which the Willmore Organization subscribed $67,000 and the Wellston Hills Realty Co., $5,000. If not wound up by December 31, 1928, the syndicate could be terminated upon the demand of any subscriber. Except for the purchase price of the property, $127,518, the Wellston agreement corresponded in every other particular with the provisions of the Kingshighway and Webster agreements hereinabove considered. 580 While pushing his other subdivisions Willmore had been acquiring an undeveloped tract which later became known as Saint Louis Hills. It required about two years to secure the different parcels making up this tract. On or about August 17, 1928, Willmore caused to be organized the Saint Louis Hills Realty Co. It had $50,000 of capital stock, all of which was owned by the Willmore Organization. At different dates during September and October 1928 separate parcels of land composing the Saint Louis Hills Subdivision were conveyed to the Saint Louis Hills Realty Co. The syndicate agreement was between the Realty Co. and the subscribers thereto collectively, and it includes in the recitals, in addition to those common to the other702 three agreements already mentioned, a provision for the possible acquisition of additional lands in the vicinity of the tracts already owned "for the purpose of improving and marketing the same in connection with lands now owned; * * " The total fund subscribed was $750,000, of which the Willmore Organization subscribed $520,000 and the Realty Co., $50,000. In addition to the uses of the fund common to the other syndicate agreements, this syndicate's fund was to be used to pay interest on borrowed money, if any, and the principal amount of any such loans, and to pay the cost of arranging for suitable transportation facilities and to insure proper service, or to pay the cost of constructing such facilities and operating or contracting for the operation by others. Payments to the Willmore Organization out of the proceeds from the sale of each lot were to be on a sliding scale rather than a flat 25 percent, but were to be used for the same purposes as specified in (a) of the Kingshighway agreement, supra. With the exceptions above noted, the provisions of the Saint Louis Hills Syndicate agreement were substantially the same as the provisions of the other agreements heretofore703 considered. The notes, deeds of trust, contracts for grading, sewers, paving, and all other improvement contracts were executed by the realty company owning the property. The Willmore Organization was the selling agent for all of the realty companies. It advertised the subdivisions extensively, either in its own name, or by stressing the name "Willmore", using newspapers, magazines, billboards, and direct by mail methods. Advertisements were written in English, German, Italian, and Jewish. All applications for the purchase of lots were made to the realty company owning the land, and sales contracts, earnest money receipts, and warranty deeds were executed by the realty companies. Willmore's reason for forming separate realty companies to hold title to land in the various subdivisions was to prevent a loss to all if one failed. He was president of each company and the subscriptions to each fund were procured by him, individually. He told each 581 prospective subscriber of his plan, that his own funds were invested therein, and that there was a good chance of making more than 6 percent on their investment. He devised the syndicate plan in order to secure needed funds704 without obligation to repay at any definite time. The syndicate subscribers never held a meeting, they had no charter, bylaws, organization, or vote. No statements were furnished to syndicate subscribers, and no books or records were maintained for the syndicates as such, but books of account, consisting of a general ledger, cash receipts, cash disbursements, and journal, were kept by the realty companies. The realty company advised each syndicate subscriber by letter what portion of the profit the subscriber was entitled to and that such profit should be reported in all income tax returns. The terms of the various syndicate agreements have been carried out, and none of the syndicates have been liquidated. During the taxable year 1932, the following distributions were made to the syndicate subscribers as indicated: Kingshighway, as profits$3,030.00Wellston, as return of capital21,000.00Do., as interest1,512.50Webster, as profits5,000.00Saint Louis, as interest22,550.00The sums of $1,512.50 and $22,500, designated as interest payments by Wellston and Saint Louis, respectively, were deducted on the books and in the returns filed as interest705 paid. The syndicate subscribers in each of the above named syndicates were associated in a common enterprise for the purpose of transacting a real estate business. Each of the syndicates is an association taxable as a corporation. OPINION. ARNOLD: The principal issue in each of these proceedings is whether the syndicates are associations taxable as corporations. In discussing this issue it should be noted that the terms of the syndicate agreements are so nearly identical that a principle applicable to one is applicable to all. Likewise, we direct attention to the fact that the method of creating and operating each syndicate was so much alike that any principle applicable to one is applicable to all. In addition we have certain factors in these proceedings which are undisputed, or are so clearly established as to be indisputable. We are satisfied that, whatever designation may be given to the enterprises, there can be no doubt that each was essentially a business undertaking. Each subscriber put in capital with the expectation and hope of realizing a profit. Their subscriptions were pooled and 582 the fund used to purchase unimproved property, previously acquired706 by Cyrus Crane Willmore or by his wholly owned corporation, the Willmore Organization. Their subscriptions were further used to improve and subdivide the property purchased, and to pay the taxes thereon. The agreements, the testimony, and the other evidence of record indicate that the undertaking was one for mutual benefit and profit to all. The business of each enterprise was the subdivision and sale of tracts of land. There was no thought or even suggestion that liquidation of any sort was involved. Since the entire record points to the business nature of the enterprise, and since there obviously was a pooling of capital by the various subscribers who were participating, the question naturally arises whether the syndicates were not, from an income tax standpoint, associations taxable as corporations. Petitioners contend that these subdivision projects were actually Cyrus Crane Willmore's, because he owned the Willmore, Organization 100 percent, and it in turn owned the realty companies 100 percent. It is their contention that Willmore acquired the properties, but needed capital for their development and improvement. The syndicate agreements, they say, were financial vehicles707 which Willmore used to raise additional capital without being obligated to repay at any definite time and without any obligation to repay if the subdivision was a failure. Willmore was able to sell the idea because of his own ability and personality and because of the opportunity to share in the profits if his subdivisions proved successful. According to the petitioners, the subscriptions were loans or advances in the nature of loans. The Willmore Organization was the syndicate manager as to each syndicate, issued checks against the syndicate fund, and determined the improvements necessary, the prices and terms of sale, and otherwise operated under the provisions of each agreement. The other operating party under the agreement was the realty company holding title to the property. It contracted for improvements, receipted for money, executed deeds of trust and purchase agreements for lots, conveyed the land sold, etc. Both the syndicate manager and the titleholder of the property were Missouri corporations. It was by virtue of the activity of these two subscribers that the syndicate members secured centralized management and conduct of the business. The subscriber, by executing708 the agreement, specifically delegated to these two corporations the responsibilities of operating and managing the enterprise for the common benefit of all. The realty companies, holding title to the separate tracts, were authorized, by virtue of the corporate powers stated in their charters, to hold title to and engage in the real estate business. Since 583 the fund subscribed was to be, and was in fact, first applied to the purchase of the unimproved property, and since title thereto was held in the name of one of the subscribers, it seems idle to contend that no subscriber, other than the titleholder, had any interest whatsoever in the property purchased. It seems to us that each subscriber had a proportionate interest in the assets of the undertaking even though title was taken in the name of another. Cf. Central Republic Bank & Trust Co., Trustee,34 B.T.A. 391">34 B.T.A. 391. Each syndicate agreement provided expressly for the transferring of the subscriber's rights thereunder, and some of the agreements show that there were either transfers or reductions in members' interests during the existence of the syndicate. It does not appear that the death of any subscriber709 would terminate or interrupt the continuity of the enterprise one way or the other. In these respects each enterprise secured the continuity of existence, without interruption by death or transfer of interest, which is peculiar to corporate organizations. One other factor pointing to the ultimate answer is the express prohibition contained in each agreement against the unlimited liability that partners have in connection with their business. each syndicate agreement contains an express disclaimer as to any partnership liability between subscribers, or between a subscriber and the realty company holding the land. Each subscriber's personal liability was further limited by the guaranty of the realty company that his loss, if any, should not exceed the amount of his subscription. In this respect each subscriber secured a limitation of personal liability exactly like the liability of a corporate stockholder. Recent decisions of the Supreme Court have set forth the distinguishing features of a trust which may be regarded as making it analogous to a corporate organization, where the trust is created and maintained as a medium for the carrying on of a business enterprise and sharing710 in its gains, Morrissey v. Commissioner.296 U.S. 344">296 U.S. 344, and related cases in 296 U.S. at pages 362, 365, and 369. It is true that we do not have a trust here, but we do have "associates", and we do have resemblance to a corporate organization. In addition to considering trusts as associations, the Supreme Court in the Morrissey decision discussed associations as corporations, saying: The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity. The resemblance points to features distinguishing associations from partnerships as well as from ordinary trusts. As we have seen, the classification cannot be said to require organization under a statute, or with statutory privileges. The term embraces associations as they may exist at common law. Hecht v. Malley, supra. We have already referred to the definitions, quoted in that case, showing the ordinary meaning of the term as applicable to a body of persons united without a charter "but upon the 584 methods and forms used by incorporated bodies for the prosecution of some common enterprise." These definitions, while helpful, are not711 to be pressed so far as to make mere formal procedure a controlling test. The provision itself negatives such a construction. Thus unincorporated joint-stock companies have generally been regarded as bearing the closest resemblance to corporations. But, in the revenue acts, associations are mentioned separately and are not to be treated as limited to "joint-stock companies," although belonging to the same group. While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot be regarded as decisive. [P. 357.] In Swanson v. Commissioner,296 U.S. 362">296 U.S. 362, 365, the Court pointed out that the limited number of actual beneficiaries did not alter the nature and purpose of the common undertaking. Nor did the limitation of their operations to the property first acquired change the quality of that undertaking. Again in Helvering v. Coleman-Gilbert Associates,296 U.S. 369">296 U.S. 369, 373, the Supreme Court points out that mere differences of formal procedure should not be unduly emphasized. It is stated: 712 * * If such differences were to be made the test in determining whether or not an enterprise for the transaction of business constitutes an association, the subject would be enveloped in a cloud of uncertainty, and enterprises of the same essential character would be placed in different categories simply by reason of formal variations in mere procedural details. The significant resemblance to the action of directors does not lie in the formalities of meetings or records but in the fact that, by virtue of the agreement for the conduct of the business of a joint enterprise, the parties have secured the centralized management of their undertaking through designated representatives. [Emphasis supplied.] And so it is here. These subscribers formed an organization to conduct the business of holding, improving and selling real estate, with provision for the management of the undertaking through designated representatives (two Missouri corporations), Bing & Bing, Inc.,35 B.T.A. 1170">35 B.T.A. 1170, with continuity undisturbed by death or changes in ownership, and with limited liability. The subscribers were associated in a joint enterprise for the transaction of business*713 and the making of profits. In our opinion, therefore, each of the foregoing syndicates was an association taxable as corporations are taxed. Cf. Thrash Lease Trust,36 B.T.A. 444">36 B.T.A. 444. Our decision on the taxable status of the syndicates disposes of the question raised in two of the proceedings, Saint Louis and Wellston, that distributions made by them represented interest paid. These distributions can not be treated as interest payments, and respondent's action in disallowing deductions claimed therefor is approved. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620024/	ROBERT C. SUHR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Suhr v. CommissionerDocket Nos. 94999, 96143.United States Board of Tax Appeals41 B.T.A. 1270; 1940 BTA LEXIS 1069; May 29, 1940, Promulgated 1069 Where income of a trust created by petitioner was to be paid to his wife, the trustee in addition being permitted to invade corpus "to properly care for and support her", held the latter limitation so restricts the use of the income to her care and support that petitioner is taxable thereon, under Douglas v. Willcuts,296 U.S. 1">296 U.S. 1. J. Edward Johnston,41 B.T.A. 550">41 B.T.A. 550, followed. William H. Annat, Esq., for the petitioner. Paul A. Sebastian, Esq., DeWitt M. Evans, Esq., and W. W. Kerr, Esq., for the petitioner. OPPER1271 OPINION. OPPER: These proceedings were brought for a redetermination of deficiencies in income tax of $948.12 and $4,852.45 for the years 1935 and 1936, respectively. The only question presented is whether respondent erred in holding petitioner liable for the income of a trust. All of the facts in the case at bar are stipulated. The facts are hereby found accordingly, the pertinent parts being as follows: Petitioner and Lucille M. Suhr are husband and wife and have resided together in that status since their marriage on June 8, 1935. The family residence is at 12506 Edgewater1070 Drive, Lakewood, Ohio. For the years in question petitioner filed individual Federal income tax returns with the collector at Cleveland, Ohio. His wife filed her individual Federal tax return for the calendar year 1936 with the collector at Cleveland, reporting therein dividends in the sum of $12,600 received from the Cleveland Trust Co., trustee (as hereinafter shown), and deducting trustee's fees in the sum of $315. By instrument dated December 12, 1935, petitioner entered into a trust agreement with the Cleveland Trust Co. The pertinent parts of the agreement are as follows: (a) The entire net income shall be paid to Lucille M. Suhr, of Cleveland, Ohio, wife of First Party, so long as she shall live; (b) If First Party shall be living at the time of the death of said Lucille M. Suhr, then in such event, said trust shall terminate, and the Second Party shall thereupon pay over and distribute to First Party the principal and the accrued undistributed income of said trust estate as soon as practicable; (c) If, at the time of the death of said Lucille M. Suhr, said First Party shall not be living, the entire net income shall thereafter be paid, share and share alike, to1071 Philip Holland, who was born September 12, 1925, and Robert Holland, who was born August 27, 1927, stepsons of First Party, or to the lawful issue of either of them who shall decease (provided such issue shall take per stirpes the share of their deceased parent), until said Robert Holland shall attain the age of thirty (30) years, or, if he shall die prior to attaining such age, then until such time as, if living, he would have attained such age, at which time said trust shall terminate, and Second Party shall then, as soon as practicable, pay over the principal and the accrued undistributed income of said trust estate to the persons then entitled to the income thereof had this trust continued, the distribution of the trust estate to be in the same proportion as the distribution of income. In the event of either of said stepchildren dying without lawful issue surviving him, the other of said stepchildren, or, if deceased, then his lawful issue, shall taken all, such issue to take per stirpes. * * * Second Party may, in its sole discretion, pay to said Lucille M. Suhr during her lifetime, in addition to the income from the trust estate, such part of the principal of the trust1072 estate as Second Party shall deem necessary to properly care for and support her, taking into consideration such other means of support and sources of income as she shall then have, and if, after the death of said Lucille M. Suhr, the income so to be paid to any other beneficiary hereunder 1272 shall in the judgment of Second Party be insufficient to properly care for, support and educate such beneficiary, Second Party shall have full right, power and authority to pay to or for the use of such beneficiary, from time to time, such amounts from the principal of such beneficiary's share of the trust estate as Second Party in its judgment may see fit to use and deems for the best interest of said beneficiary. * * * On the date of the execution of the above trust agreement petitioner transferred to the trustee 500 shares of The City Ice & Fuel Co. common stock and 400 shares of The City Ice & Fuel Co. preferred stock. This trust agreement was in force and effect during the years in question and the trustee received dividends in the sum of $2,500 during the calendar year 1935, and deducted $62.50 for its trustee's fees and paid or credited to petitioner's wife the remaining1073 balance of $2,437.50 during the calendar year 1935. The trustee received during the calendar year 1936 dividends in the sum of $12,600 and deducted $315 for its trustee's fees and paid or credited to petitioner's wife the balance of $12,285 during the calendar year 1936. During the years in question petitioner had no living children. By a prior marriage his wife had two minor children, Philip Holland, born September 12, 1925, and Robert Holland, born August 27, 1927. During the year 1938 petitioner legally adopted these two children. Petitioner duly filed with the collector at Cleveland a gift tax return for the calendar year 1935, in which he listed for taxation the securities constituting the corpus of the trust and paid gift tax thereon. At all times since their marriage in 1935 and during the years in question petitioner maintained a home for his wife and family and paid for and furnished the money for the maintenance and upkeep of the home and for the support and maintenance of his wife and the two children. None of the income from the trust was used for the maintenance and upkeep of the home or for the support and maintenance of petitioner's wife and her two1074 children. Respondent by notices of deficiency increased petitioner's gross income by $2,437.50 for 1935 and $12,285.00 for 1936, which is the amount of the net trust income for the respective years in question, after deducting the fees paid the trustee. The provision of this trust indenture whereby the "Second Party [trustee] may, in its sole discretion, pay to said Lucille M. Suhr [petitioner's wife] during her lifetime, in addition to the income from the trust estate, such part of the principal of the trust estate as Second Party shall deem necessary to properly care for and support her," is essentially identical with the trust for the benefit of the wife in . As was said there (p. 556): * * * The 1273 limitation on the right of the trustee to invade corpus for the wife, we think, effectively restricts her use of the income to support and maintenance. * * There can be no question that petitioner was responsible for the support of his wife (Title VI, ch. 1, § 7997, Page's Ohio General Code). Accordingly, under the doctrine of *1075 , the entire trust income is taxable to him. Discussion of further contentions by respondent that petitioner is taxable on other theories is unnecessary. Reviewed by the Board. Decision will be entered for the respondent.MURDOCK MURDOCK, dissenting: The entire net income of the trust was payable to the petitioner's wife for life. There was absolutely no restriction placed upon her use of that income. A gift tax was paid upon the transfer. The facts further show that the petitioner has at all times maintained a home for his wife and family and has maintained and supported them fully. None of the income of the trust was used or was required to be used for maintenance, education, or support of the wife or children. The doctrine of Douglas v. Willcuts,296 U.S. 1">296 U.S. 1, does not apply under such circumstances. ARUNDELL agrees with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620025/	LEONARD AND FAITH THOMAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentThomas v. CommissionerDocket No. 31319-86.United States Tax CourtT.C. Memo 1988-505; 1988 Tax Ct. Memo LEXIS 528; 56 T.C.M. (CCH) 532; T.C.M. (RIA) 88505; October 20, 1988. Leonard and Faith Thomas, pro se. Stephen R. Doroghazi, for the respondent. BUCKLEYMEMORANDUM OPINION BUCKLEY, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b) of the Internal Revenue Code and Rules 180, 181 and 182. 1Respondent determined a deficiency in529 petitioners' Federal income tax for 1983 in the amount of $ 6,245.00 and an addition to tax under section 6651(a)(1) in the amount of $ 150.20. Some of the facts were stipulated and they are so found. Petitioners resided at Magnolia, New Jersey, when they filed their petition hereto. After concessions 2 the only issue remaining for determination concerns the deductibility on petitioners' return of expenditures totalling $ 12,167 made by Leonard E. Thomas (hereinafter petitioner) for travel, meals and lodging on behalf of his corporation. Respondent at trial conceded that petitioners had substantiated the amounts in question. Thus, we need only decide whether these amounts represent unreimbursed employee travel expenses of petitioners' or whether, as respondent argues, they should be considered expenditures deductible only by the corporation. Petitioners are the sole shareholders of L. E. Thomas and Associates, (hereinafter LETA) which was incorporated on June 28, 1982. Petitioner, Leonard Thomas, is the sole employee of LETA. Petitioner530 is an engineer. During 1983, LETA had a subcontract from another small firm, ORFI Systems, to do physical audits of matching-fund grantees of the U.S. Department of Energy who were making energy conversions. The subcontract required petitioner on behalf of LETA to travel to various facilities in the states of Pennsylvania, West Virginia, Virginia and New Jersey in order to accomplish the audits. LETA's function was to audit physical installations, monitor their compatibility with the terms of the grant and attempt to ascertain whether the funds were actually spent according to the grant terms. Many of the grantees were institutions, hospitals and private schools located in remote areas. The Department of Energy did not make advance payments to the contractors and the contractors did not make advance payments to subcontractors such as LETA. Since LETA had no funds in 1983 it was necessary for petitioner to pay for his own costs of travel, meals and lodging. Close to the end of the year and well after petitioner had incurred most of the costs in question, petitioners as directors and shareholders of LETA, met and determined that LETA would not reimburse petitioner for the expenses531 which he incurred on behalf of the corporation. Although the corporate meeting occurred in December, it was obvious to petitioners much earlier that delays in payments to LETA from ORFI would make payment by the corporation to petitioner impossible. For petitioner to be entitled to deduct the cost of the travels, meals and lodging he incurred on the LETA business, it is incumbent upon him to prove that he was required to incur such costs as an employee of LETA, not simply that LETA was financially unable to reimburse him for corporate expenses. Thus, in Noland v. Commissioner,269 F.2d 108">269 F.2d 108, 111 (4th Cir. 1959), cert. denied 361 U.S. 885">361 U.S. 885 (1959), affirming a Memorandum Opinion of this Court, it is said that: The business of a corporation, however, is not that of its officers, employees or stockholders. Though the individual stockholder -- executive, in his own mind, may identify his interest and business with those of the corporation, they legally are distinct, and, ordinarily, if he voluntarily pays or guarantees the corporation's obligations, his expense may not be deducted on his personal return. * See also Deputy v. du Pont,308 U.S. 488">308 U.S. 488, 493 (1940);532 Leamy v. Commissioner,85 T.C. 798">85 T.C. 798, 809 (1985). We considered a case similar to petitioners' situation in Harding v. Commissioner,T.C. Memo 1970-179">T.C. Memo. 1970-179, where the taxpayer was president of a corporation of which he and his brother owned all the outstanding stock. During the taxable year in question, taxpayer and his brother agreed that due to the fact the corporation was having a poor year, they would bear certain expenses of the corporation without reimbursement. Taxpayer, having borne such expenses, deducted them on his personal return. These expenses were, we held, expenses of the corporation which were not borne by the taxpayer in his capacity as an employee or officer. In the case at bar it appears that the expenditures made by petitioner were for LETA and not borne in his capacity as an employee or officer. Similarly, it is clear that petitioner would have been reimbursed had there been available corporate funds. The fact that he was not reimbursed does not change the nature of the expenditures made on behalf of the corporation into ordinary and necessary expenses of petitioner. The failure to reimburse may give rise to a debt due petitioner*533 from LETA but there is nothing in the record to indicate that such debt was worthless during 1983. See King v. Commissioner,T.C. Memo. 1980-373; Ockrant v. Commissioner,T.C. Memo. 1966-60; and Worth v. Commissioner,T.C. Memo 1961-39">T.C. Memo. 1961-39. The enactment of the corporate and shareholder resolution not to reimburse, made well after petitioner had incurred these expenses, in no manner serves to change the result herein. Accordingly, we hold that respondent's determination that these amounts are not deductible by petitioners is correct. To give effect to respondent's concessions, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided. ↩2. Respondent has conceded all other issues set forth in the deficiency notice including the addition to tax under section 6651(a)(1). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620026/	ESTATE OF LEOPOLD KAFFIE, HAROLD KAFFIE, JEANETTE KAFFIE, ANDSAERA KAFFIE, SOLE HEIRS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kaffie v. CommissionerDocket No. 100526.United States Board of Tax Appeals44 B.T.A. 843; 1941 BTA LEXIS 1268; June 27, 1941, Promulgated 1268 The value for estate tax purposes of the decedent's interest in a partnership composed of himself and his son, which terminated with his death, held, to be one-fourth of the book value of the assets of the partnership and not one-fourth of 10 times the average annual earnings of the partnership for the period of 5 years prior to the death of the decedent. Howell Ward, Esq., for the petitioner. Wilford H. Payne, Esq., for the respondent. SMITH 843 This proceeding is for the redetermination of a deficiency $13of,256.03 in the estate tax of Leopold Kaffie, deceased. The only question in issue is whether the value for estate tax purposes of decedent's interest in a partnership business, which had been conducted for a number of years by decedent and his son under the name of Kaffie Lumber & Building Co., was one-fourth of the book value of the partnership assets, which did not include therein any value for good will, or one-fourth of 10 times the average annual earnings of the partnership for a period of 5 years prior to the death of the decedent, as determined by the respondent, such determination being based solely upon large earnings of1269 the partnership. FINDINGS OF FACT. The petitioners, residents of Corpus Christi, Texas, are the sole heirs at law of Leopold Kaffie, a physician, who died a resident of Corpus Christi on September 29, 1937. For his estate the petitioners filed an estate tax return with the collector of internal revenue for the first district of Texas, at Austin. In such return was reported the value of decedent's interest in a partnership, the Kaffie Lumber & Building Co., of which the decedent and his son, Harold Kaffie, were equal partners, as being one-fourth of the book value of the partnership assets at the date of the death of the decedent, namely, $97,252.41. The partnership books did not reflect any value for intangibles. Therespondent, upon the theory that the earnings of the partnership reflect a large value for intangibles or good will, determined that the value of the partnership assets at date of death was 10 times the average annual earnings of the partnership for the 5-year period prior to decedent's death and took one-fourth of the amount, or $171,093.35, as the value of decedent's interest in the partnership at date of death 844 and substituted that amount for the $97,252.411270 returned in his determination of the deficiency. Leopold Kaffie, the decedent, left no will and no administration was had upon his estate because it owned no debts. The sole and only heirs of the decedent are Jeanette Kaffie, his widow, a daughtr, Saera Kaffie, and a son, Harold Kaffie, all of whom are over the age of 21 years and were at the time of decedent's death. In the fall of 1927, or the spring of 1928, the decedent began to buy lumber and building materials and supplies under the name of Kaffie Lumber & Building Co. for the principal purpose of supplying his needs in the construction of buildings. Gradually, in 1928 and1929, he began to sell small quantities of lumber and building materials to the public at retail. This business increased so that by March 1, 1931, the principal business of the Kaffie Lumber & BuildingCo. consisted of the purchase of lumber and building materials at wholesale and their sale at retail. On March 1, 1931, the decedent sold the business to his son, Harold Kaffie, who continued to operate it under the same name until December 31, 1932. On January 1, 1933, the decedent and his son, Harold, formed a partnership for the purpose of engaging1271 in the lumber business, each owning a one-half interest therein. This business was also conducted under the name of Kaffie Lumber & building Co., with its office and principal place of business in Corpus Christi. The articles of copartnership contained no provision relating to good will; nothing was ever paid and nothing was set up on the books of the partnership for good will. The partnership continued to operate the business for which it was organized until the death of the decedent on September 29, 1937. The one-half partnership interest in the Kaffie Lumber & BuildingCo. held by the decedent at the time of his death represented community property of decedent and his wife, Jeanette Kaffie. Upondecedent's death one-half of his one-half interest in the partnership passed, under the applicable provisions of law, in equal shares to decedent's only children, Harold Kaffie and Saera Kaffie. Immediately after the decedent's death a new partnership was formed by Harold Kaffie, Jeanette Kaffie, and Saera Kaffie for the purpose of continuing the lumber business at the same location. Thenew partnership was conducted under the name of Kaffie Lumber & Building Co. In the new partnership1272 Harold Kaffie owned a five-eighths interest, Jeanette Kaffie a two-eighths interest, and SaeraKaffie a one-eighth interest. The partnership net worth of Kaffie Lumber & Building Co. as of September 30, 1937, exclusive of any intangible value or good will, was shown by the partnership books of account as follows: AssetsCurrent assets$392,962.16Fixed assets26,912.64Oil properties15,310.56Other assets7,178.38Total assets$442,363.74Liabilities and net worthCurrent liabilities$53,354.11Net worth:Leopold Kaffie, 1/2$194,504.82Harold Kaffie, 1/2194,504.81389,009.63Total liabilities and net worth$442,363.74845 The net sales, net profits, and net worth of the Kaffie Lumber & Building Co. for the calendar years 1930 to 1933, inclusive, are shown as follows: YearNet salesNet profitsNet worth1930$70,872.62$8,708.65193181,147.7114,723.09193266,707.929,944.40193390,648.0227,539.77$106,801.541934140,457.9230,065.23134,788.911935292,205.5366,324.60201,113.511936700,369.99154,099.80350,637.601937798,299.67139,157.31450,239.271273 Prior to 1933 the business conducted under the name of Kaffie Lumber & Building Co. was confined to Corpus Christi. After the partnership was formed between the decedent and his son, effective January 1, 1933, the business was expanded. There was a large demand for lumber and building supplies in the oil fields. The son, Harold, contacted these operators and was instrumental in effecting large sales of lumber and building supplies to them. To supply the demand branch offices or lumber yards were set up at different places in Texas. These offices and lumber yards were moved from place to place to suit the convenience of the trade. Harold attended to all such business. The decedent confined his attention to the Corpus Christi Office and to the business in that city. At the date of his death about 75 percent of the sales of lumber and building supplies by the partnership were made to builders and oil operators in the oil fields. No salaries were paid by the partnership to either of the partners. It has been stipulated for the purposes of this proceeding that an aggregate salary of $15,000 per annum for the partners would be fair and reasonable. The actual withdrawals of1274 the partners, which were in equal amounts, were $2,077.86 in 1934, $4,994.74 in 1936, and $39,555.64 in 1937. There were no withdrawals by either of the partners in 1933 or 1935. In his determination of the deficiency the respondent increased the reported value of decedent's interest in the partnership by $73,840.94. Most of this increase, and the only portion here in controversy, resulted from the inclusion in the decedent's interest in the partnership of an amount said to represent one-fourth of the value of the good will of the partnership. The respondent determined the value of decedent's 846 interest in the partnership to be one-fourth of 10 times the average yearly earnings over the 5-year period ended with 1937, as follows: Valuation Method: Average yearly earnings$83,437.34Deduct yearly salary allowable to two partners15,000.00Average net earnings68,437.34Capitalized on the basis of ten year purchase (10%)684,373.40Decedent's one-half of the community one-half interest (1/4 $684of,373.40)171,093.35The fair market value of decedent's interest in the partnership business which passed to decedent's heirs was $97,252.41. 1275 OPINION. SMITH: The question presented by this proceeding is the value for estate tax purposes of the decedent's one-half community interest in his one-half interest in the partnership of Kaffie Lumber & Building Co., which respondent concedes was dissolved by the death of Leopold Kaffie on September 29, 1937. In the estate tax return such value was reported to be $97,252.41, which is one-fourth of the value of the partnership assets at the date of death, as shown by the partnership books of account. The partnership books of account did not, however, show any value for good will. As we understand the record in this proceeding the respondent does not contend that this amount does not reflect the fair market value for estate tax purposes of the decedent's interest in the tangible assets of the partnership which passed to his heirs at his death. He contends, however, that the partnership had a good will which enhanced the value of the decedent's interest in the business which passed to his heirs and that the value of the interest is $171,093.35. The method of his computation of value is shown in our findings of fact. His determination is based solely upon the large earnings1276 of the partnership in relation to invested capital for the period 1933 to 1937, inclusive. The incidence of the estate tax is upon "the transfer of the net estate." Sec. 301 (a), Revenue Act of 1926. Section 302 of that act (as amended by section 404 of the Revenue Act of 1934 - 48 Stat. 754), declares in part: 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 the United States - (a) To the extent of the interest therein of the decedent at the time of his death. Regulations 80 (1937 Edition), pertaining to the estate tax imposed by the Revenue Act of 1926, as amended, provides in part as follows: 847 ART. 10. Valuation of property. - (a) General. - The value of every item of property includible in the gross estate is the fair market value thereof [italics ours] at the time of the decedent's death; * * * The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. 1277 * * All relevant facts and elements of value as of the applicable valuation date should be considered in every case. * * * * * * (d) Interest in business. - Care should be taken to arrive at an accurate valuation of any business in which the decedent was interested, whether as partner or proprietor. A fair appraisal as of the applicable valuation date should be made of all the assets of the business, tangible and intangible, including good will, and the business should be given a net value equal to the amount which a willing purchaser, whether an individual or corporation, would pay therefor to a willing seller in view of the net value of the assets and the demonstrated earning capacity. Special attention should be given to fixing an adequate figure for the value of the good will of the business in all cases in which the decedent has not agreed, for an adequate and full consideration in money or money's worth, that his interest therein shall pass at his death to his surviving partner or partners. The respondent's determination that the fair market value of the decedent's interest in the partnership of Kaffie Lumber & Building Co. at the date of his death was $171,093.351278 is presumably correct. The burden of proof of showing otherwise is upon the petitioners. In an effort to bear such burden they have presented to the Board all of the material facts with respect to the carrying on of the partnership business, its earnings, invested capital, etc. So far as the Board has been able to determine the question presented by this proceeding is one of first impression. The Board has in many cases been requested to redetermine deficiencies in estate tax of estates of deceased persons owning shares of stock of corporations where the respondent has found that the value of the shares was in excess of cost or of the book value, due to the element of good will or other intangibles. Those cases are not, however, in point in this proceeding; for a corporation has a life independent of the life of a deceased stockholder. Also, it seems plain that where a decedent has operated a business as sole proprietor the business might have a value in excess of the cost or book value of the tangible assets of the business at date of death. The location of the business and the name under which it was conducted might give the property to be valued a fair market value in1279 excess of the cost or book value of the assets. In any consideration of such a case the question is the fair market value of the assets left by the decedent which are transferred to his heirs or legatees by reason of his death. We apprehend that the same rule would apply in the case of the death of a partner in a profitable business. In Rowley on Partnership 848 (1916), it is stated at section 278: "Partnership property includes the good will of the firm", citing ; ; ; ; ; ; affd., . Upon the death of a partner the surviving partner, at least under the laws of Texas, holds the assets of the dissolved partnership as trustee for the purpose of paying the debts of the partnership, winding up its affairs, and paying over to the deceased representatives their shares of the partnership assets. 1280 ; . If the partnership assets can be sold or liquidated at a price in excess of the net worth of the partnership, as shown by its books of account at the date of the death of the deceased partner, the deceased partner's representatives are entitled to received their share of the net assets. In the proceeding at bar that would be one-fourth of the total. It is a general rule, however, that the surviving partner may set up business for himself at the old stand without being liable for damages to the good will as a part of the firm assets. ; ; ; ; ; ; ; ; ; ; ; 1281 . He may also solicit the customers the old business where not prevented from doing so by the articles of copartnership, as is the condition which obtains in this case, without being liable to account to the deceased's representatives therefor. He may also conduct such business by the use of his own surname in connection therewith. He is not barred from so doing by the fact that a like business under the same name was formerly conducted by a partnership of which he was a member. . It was said in the Goidl case: * * It is now well settled that every person has the right to honestly use his own name in his own business, and any injury resulting from such use is damnum absque injuria. * * . It is difficult to see, upon the facts which obtain in the instant proceeding, wherein the decedent's interest in the Kaffie Lumber & Building Co. which passed to his heirs had a value in excess of one-fourth of the value of the tangible assets of the business. What is there in the facts of the case which would warrant a1282 willing buyer to pay more for the decedent's interest in the business than he would receive upon a liquidation of the tangible assets? There is nothing in the evidence that leads us to believe that the location of the partnership's lumber business was of any particular 849 value to the business. A breakdown of the fixed assets of the partnership business on September 30, 1937, shows as follows: Lumber yards, sheds, etc$16,987.72Rent houses810.36Delivery equipment8,897.63Office fixtures216.93Total26,912.64Most of the business was done in the oil fields. For such business the partnership found it necessary to "follow the fields", changing its offices and lumber yards to meet the demands of the trade. We can not conceive that location contributed any good will value to the partnership business. If it be true that the name "Kaffie Lumber & Building Company" had a value, we can not conceive what value it would have to a purchaser of the business, since Harold Kaffie, who was responsible for the profitable business, had the right to continue that business under the name Kaffie Lumber & Building Co. Quite clearly no willing purchaser1283 of the entire business would have given any more for it by reason of its name. He would appreciate that he would be in competition with the business which was to be carried on under the name of Kaffie Lumber & Building Co. by Harold Kaffie, who, as the evidence shows, had the contacts with the builders and oil operators and, indeed, was the business "go-getter" of the partnership. Furthermore, it is to be noted that the services of Leopold Kaffie to the partnership were lost by his death. To the extent that his efforts, business acumen, and popularity contributed to the good will, such value died with him. We have stated above that the determination of the respondent as to the value of the decedent's interest in the partnership is presumptively correct. It is a question as to the amount of proof that the petitioners must offer to rebut that presumption. The petitioners have offered evidence showing the earnings, net worth, and character of the business, and the manner in which it was conducted. They contend that any good will value which the partnership business might have had was lost upon the dissolution of the partnership. In their brief they state: * * * It is so1284 stated [that any good will ends with dissolution of a partnership] in a digest often cited and highly regarded by the Texas Courts, 32 Tex. Jur. 278: "If the firm name consists of the surnames of the partners, dissolution without any agreement or right to take and preserve the name and good will extinguishes both; it is otherwise, possibly, if the name is an assumed one not descriptive of the partners." [Italics ours.] 850 The respondent has made his determination of the value of the good will solely upon the basis of the earnings of the partnership. We think it is clear, however, that a partnership may have large earnings without having any appreciable good will which survives the partnership. The large earnings may be due to the efforts of the partners, to the exercise of business judgment, or to fortuitous circumstances in no wise related to good will. Such appears to be the situation in the instant case, for, as testified by Harold Kaffie, there was flush production in certain oil fields which created an enormous demand for lumber during the years 1935, 1936, and 1937. The large earnings of the partnership for those years appear to be due largely to such1285 demand and not to good will. We are furthermore of the opinion that the nature of the business was not such that good will, as the term is ordinarily understood, was of particular importance. Of course, honest dealings contribute to the prosperity of any business. But the retail lumber business is not one that is patronized by a large percentage of the public. It caters principally to builders and those having a use for lumber. In the majority of instances builders will purchase from those concerns which offer the lumber at the cheapest price and can make prompt deliveries. There is nothing in the facts in this case which leads us to believe that another retail lumber dealer having the knowledge and business acumen of the Kaffie Lumber & Building Co. could not have entered the field and done as well as that company did. The respondent has made his computation of an assumed good will upon the basis that the business of the partnership was worth 10 times the average annual earnings for the period 1933 to 1937. It has been recognized that where the evidence clearly warrants the finding of good will the good will may be based upon earnings. See 1286 ; ; affd., ; . The respondent on brief says that his determination of the good will value of the partnership is based upon A.R.M. 34 (1920), Cumulative Bulletin 2, p. 31. He admits, however, that other formulae provided by A.R.M. 34 might be applicable. He states that other formulae, possibly applicable, would show a value for the decedent's interest in the partnership varying from $115,105.46 to $171,093.35. We do not think, however, that any formula for the determination of the value of the good will of the dissolved partnership can be resorted to in this case; for we are of the opinion that the good will value of the partnership which passed to the heirs of Leopold Kaffie, the decedent, had no fair market value at the date of his death. Reviewed by the Board. Decision will be entered under Rule 50.STERNHAGEN, MURDOCK, MELLOTT, and OPPER dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620027/	ST. FRANCIS HOSPITAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.St. Francis Hospital v. CommissionerDocket No. 98575.United States Board of Tax Appeals42 B.T.A. 1004; 1940 BTA LEXIS 921; October 18, 1940, Promulgated 921 Petitioner executed a mortgage to a trust company in which it agreed to pay Federal income tax up to an amount not in excess of 2 percent per annum on interest paid to the holder or holders of the loan secured thereby. After receiving the mortgage, the trust company executed a declaration of trust reciting that it was holding the mortgage in trust for several estates of individuals for which it was guardian, trustee, agent, or other fiduciary to the extent of the contribution of each of these estates toward the principal of the loan. The semiannual installments of interest were paid by petitioner in a single check to the trust company, and the trust company distributed it among the various estates. Petitioner did not file the returns required by the withholding provisions of the applicable revenue acts. Held:(1) Under the provisions of sections 144 of the Revenue Act of 1928 and 143 of the Revenue Act of 1932, petitioner is liable for the payment to the Federal Government of the 2 percent specified in the mortgage. (2) Petitioner is also liable for the additions to tax under section 291 of the Revenue Acts of 1928 and 1932 for failure to file returns. Edward922 J. I. Gannon, Esq., for the petitioner. Orris Bennett, Esq., for the respondent. MELLOTT1005 OPINION. MELLOTT: The Commissioner determined that petitioner was obligated to deduct and withhold certain amounts of tax under section 144 of the Revenue Act of 1928 and section 143 of the Revenue Act of 1932. Based upon the information contained in certain "Ownership Certificates" (Form 1000 Treasury Department), on file in the Department, he prepared annual returns for the petitioner under the provisions of section 3176 of the Revised Statutes as amended, and, having determined that petitioner had failed to file annual returns, as required by sections 144 and 143, supra, added 25 percentum of the tax as provided in section 291 of the Revenue Acts of 1928 and 1932. He accordingly determined deficiencies and additions to tax in the following amounts: YearDeficiency25% addition1930$110.44$27.611931985.82246.461932974.41243.601933938.32234.58Total3,008.99752.25The proceeding was submitted upon the following stipulation of facts: 1. St. Francis Hospital of Pittsburgh is a non-profit corporation923 without capital stock for the purpose of establishing and maintaining a hospital in the City of Pittsburgh, incorporated under a decree of the Court of Common Pleas of Allegheny County, Pennsylvania, at No. 188 January Term, 1887 under the name of St. Franciscus Hospital of Pittsburgh. The said name was subsequently changed by order of court to St. Francis Hospital of Pittsburgh. The sisters of the Third Order of St. Francis of the Diocese of Pittsburgh is likewise a corporation not for profit incorporated under a decree of the Court of Common Pleas of Allegheny County, Pennsylvania. 2. At and prior to July 21, 1930 the said Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh held in trust for the said St. Francis Hospital the real estate on which the hospital and other buildings were erected, and for the purpose of erecting additional buildings at the request of the said hospital 1006 corporation executed a mortgage to the Union Trust Company of Pittsburgh in the sum of $1,100,000, with interest at the rate of 5 1/2% per annum, of record in the Recorder's Office of said County in Mortgage Book, Vol. 2252, page 47, which mortgage contains a provision924 as follows: "said payments of principal and interest to be made in gold coin of the United States of America of or equal to the present standard of weight and fineness at the office of said The Union Trust Company of Pittsburgh, Pittsburgh, Pennsylvania, and without deduction from either principal or interest for or on account of any tax or taxes (excepting inheritance or succession taxes and except the excess of any Federal income tax over two per cent. (2%) per annum), and without deduction for any tax or taxes up to but not in excess of four (4) mills per annum on the principal amount thereof, assessed against or payable by the holder or holders thereof, or any part thereof, under the laws of the State of Pennsylvania, which said Sisters or said The Union Trust Company of Pittsburgh, or any assignee or assignees of said The Union Trust Company of Pittsburgh, may be required or permitted to pay thereof or to retain or deduct therefrom under any present or future laws of the United States of America, or of the Commonwealth of Pennsylvania, or of any county or municipality thereof, said Sisters agreeing to pay any such tax or taxes insofar as they may lawfully do so;" said mortgage925 being executed in accordance with an order of the Court of Common Pleas of Allegheny County, Pennsylvania, at No. 582 October Term, 1930. 3. On March 1, 1933 the hospital corporation having requested a conveyance of the property so held in trust, the said Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh executed a conveyance therefor, reciting that the property had been held in trust for the hospital corporation, the said deed being of record in Deed Book, Vol. 2480, page 380. The said conveyance is made specifically subject to the said mortgage to the Union Trust Company. which the hospital corporation expressly assumed and agreed to pay in accordance with the terms and conditions thereof. The said mortgage was at all times considered by all of the parties as a debt of the hospital corporation and all payments of interest thereon were made by said hospital corporation. 4. Each semi-annual installment of interest during the tax years involved herein was paid by the said St. Francis Hospital in a single check to the Union Trust Company. Subsequent to the delivery of the mortgage and on or about August 21, 1930 the said Union Trust Company executed and926 retained in its own records a "Declaration of Trust" [a copy of the document is attached to the stipulation and marked "Exhibit A". It refers to the mortgage described above and states that the "mortgagee above named does hereby certify that the above recited mortgage and its accompanying bond, and all moneys secured thereby, are held in trust for the several estates interested therein to the extent of the contribution of each of said trust estates towards the principal thereof, as shown by the books of original entry, ledgers, vouchers, card and other records of the trust department pertaining thereto."] but no assignment or declaration of trust as to said mortgage was ever entered of record in the Recorder's Office of Allegheny County, Pennsylvania, and no notice of any such declaration was ever given to said St. Francis Hospital, unless as a matter of law receipt of the ownership certificates, Treasury Form 1000, referred to in paragraph 6 constitutes such notice. Said declaration remained in effect during the tax years involved herein. 5. After the delivery of said mortgage the said Union Trust Company allocated various portions thereof to various estates of individuals927 for which it was guardian, trustee, agent or other fiduciary by notation upon its records that certain funds of these estates were invested in said mortgage, some of which 1007 estates were so small the income thereof was less than the income tax exemption. 6. As the semi-annual installments of interest were paid to said Union Trust Company the said trust company distributed among the various estates referred to in paragraph 5 such portions of the interest payments as were applicable to such estates by reason of the allocation of their funds to said mortgage; and sent to the Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh at their headquarters, or Mother House, in Shaler Township, Pennsylvania, a number of forms (ownership certificate, Treasury Form 1000), showing the payments to such various estates, * * . 7. The Union Trust Company of Pittsburgh is a domestic corporation organized under the laws of the commonwealth of Pennsylvania and has its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania. Sections 144 and 291 of the Revenue Act of 1928 are shown in the margin. 1 The corresponding sections of the Revenue Act928 of 1932 are substantially the same. 929 1008 Petitioner contends that all of the interest here involved was "payable to" the Union Trust Co., a domestic corporation, either in its own right or as fiduciary; that no other person or corporation had any right to collect the same or any part thereof; that a payment of the interest or any part thereof to any person or corporation other than the Union Trust Co. would not have discharged the mortgagor's legal liability; that the withholding provisions of the Revenue Acts of 1928 and 1932 do not apply to payments to a domestic corporation; and that it is not liable, therefore, for the deficiencies and penalties. Respondent contends that the Union Trust Co. did not receive the interest payments in its own right; that the company had executed a written declaration of trust which specifically stated that the mortgage was held in trust by it; that the interest payments were necessarily received by it as trustee, with the obligation to distribute to those entitled to receive; and that the collection and distribution of these payments by the trust company did not relieve petitioner of its liability for tax as a withholding agent. The dispute here involved arises out of930 the provisions in the mortgage executed by petitioner to the Union Trust Co. wherein it agreed to pay the Federal income tax of the holder or holders of the bonds up to an amount not in excess of 2 percent per annum of the interest paid. Under the withholding provisions of the statute petitioner was liable to pay the income tax on this interest "if payable to an individual, a partnership, or a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein." No withholding is required in the case of bonds owned by domestic corporations, as such corporations are not entitled to claim the 2 percent credit for tax paid at the source. Art. 763, Regulations 74 and Regulations 77. The laws of Pennsylvania in effect at the time the mortgage here involved was executed require that trust companies "shall keep all trust funds and investments separate and apart from the assets of the companies, and all investments made by the said companies as fiduciaries shall be so designated as that the trust to which such investment shall belong shall be clearly known." Act of April 6, 1925, P.L. 152, § 1, amending the Act of May 9, 1889, P. 931 L. 159, § 1, which in turn amended the Act of April 29, 1874, P.L. 73. They also provide, however, that trust companies may assign to various trust estates "participation in a general trust fund of mortgages upon real estate securing bonds, in which case it shall be a sufficient compliance with the provisions of this section for the company to designate clearly on its records" the mortgages, the names of the participating trust estates, and the amounts of their respective partications; that the company may repurchase mortgages from the fund and substitute other mortgages therefor; and that no participating 1009 estate shall be deemed to have individual ownership in any mortgage in the fund. Act of April 11, 1929, P.L. 512. In discussing these statutory provisions in , the Supreme Court of Pennsylvania stated: * * If designation on the company's records is sufficient in the case of a participation pool consisting of a number of mortgages, it must likewise be sufficient where the participation is by a number of estates in but a single mortgage. It is plain that the Legislature saw fit to permit an exception to the932 rule in the case of participation in a pool of a number of mortgages because such pools could not be successfully operated otherwise. It is equally plain that the exception is no less necessary to the successful operation of participations in single mortgages, and that the legislative intention must therefore have been to include the latter within the exception. The distinction is between mortgages in which participation is allotted and those in which there is no participation. The single mortgage participation scheme is generically not distinguishable from that in which the participation is in a larger pool. Permission with regard to the greater must include permission as to the lesser. Here the Union Trust Co. allotted participation in a single mortgage to a number of estates of individuals for which it was acting as fiduciary, and executed a declaration of trust wherein it stated that it was holding the mortgage and accompanying bond in trust for the several estates interested therein to the extent of the contribution of each of the trust estates towards the principal thereof. In compliance with the statutory provisions above mentioned, the Union Trust Co. made notations933 on its records of the funds invested by the various estates in the mortgage, and as installments of interest were received from petitioner they were distributed among these estates in accordance with their participations. Under the stipulated facts we are unable to agree with petitioner's contention that the Union Trust Co. received the interest here involved in its own right. "The provisions of a mortgage are not personal to the party named in it as mortgagee, but are for the benefit and security of the real owner of the debt thereby secured." 41 C.J. 376. After the execution of the declaration of trust, the Union Trust Co. held the mortgage in trust for those estates which had contributed toward the principal of the loan, and was required by the laws of Pennsylvania to keep their respective interests in principal and interest separate and distinct from its own corporate assets. That is why, to use the language of the stipulation, "After the delivery of said mortgage the said Union Trust Company allocated various portions thereof to various estates of individuals for which it was guardian, trustee, agent or other fiduciary" and as "the semi-annual installments of interest were934 paid * * distributed among the various estates * * * such portions of the interest payments as were applicable to such estates by reason of the allocation of their funds to said mortgage." In our opinion no further discussion is 1010 necessary to show that the Union Trust Co. did not receive the interest in its own right. Petitioner's contention that the withholding provisions of the statute are not applicable because the interest payments were made to a domestic corporation, as guardian, trustee, agent, or other fiduciary remains to be considered. In support of this contention petitioner argues that the Union Trust Co., as fiduciary, had the legal ownership and control of the mortgage and was entitled to the interest thereon, and that under the Pennsylvania law the estates participating in an investment "Pool" have no "individual ownership in any bond or mortgage in such fund." The mortgage here involved was executed for the purpose of securing payment of the bond or bonds issued by petitioner. The bond was the primary contract to pay, and the mortgage was simply a separate contract to secure payment. 11 C.J.S. 399. The transfer of a part of a debt secured by a mortgage935 carries with it a proportionate interest in the mortgage and the security which it affords. 41 C.J. 674, 675. While it may be true that petitioner was justified in paying the interest to the Union Trust Co., the latter, after the execution of the declaration of trust, was merely an agency for collecting and distributing it to the estates entitled to receive it because of investments in the mortgage indebtedness. The fact that these estates had no "individual ownership" in the bond or mortgage is immaterial. The important factor is that as participants in the loan secured by the mortgage they were entitled to receive their aliquot part of the interest paid, and did receive it. It was income of the estates, and not of the trustee or other fiduciary, even though the trustee or other fiduciary might be required to pay the tax resulting from its receipt on behalf of the estates for which it acted. The payments of interest by petitioner to a domestic corporation which was under obligation to distribute it to estates to which it rightfully belonged, and for which the corporation was acting as trustee or other fiduciary, did not relieve petitioner of its liability to pay the Federal936 income tax under the tax free covenant contained in the mortgage. The trust company was under no obligation to report this income for Federal income tax in its corporate income tax return. Having received the interest, the estates were required by the provisions of section 144(d) of the Revenue Act of 1928 and 143(d) of the Revenue Act of 1932 to include it in their returns (whether filed by them or by fiduciaries acting for them) and were entitled to claim the credits provided for in these sections. They can not be deprived of such credits because their income is included in returns filed for them by a corporate trustee or other fiduciary. Individual income tax returns, Forms 1040 and 1040-A, and fiduciary income tax return, Form 1041, specifically provide for a credit for taxes paid at source. 1011 It is our conclusion that the interest here involved was not payable to a domestic corporation and that respondent correctly determined that, under the withholding provisions of the Revenue Acts of 1928 and 1932, petitioner was liable for tax on the interest paid to the various estates. Inasmuch as petitioner did not file the returns required by section 144(c) of the Revenue937 Act of 1928 and 143(c) of the Revenue Act of 1932, the imposition of the 25 percent addition to tax provided for in section 291, supra, is mandatory. ; . Judgment will be entered for the respondent.Footnotes1. SEC. 144. WITHHOLDING OF TAX AT SOURCE. (a) Tax-free covenant bonds. - (1) REQUIREMENT OF WITHHOLDING. - In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a corporation contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon, or to retain therefrom under any law of the United States, the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods, if payable to an individual, a partnership, or a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein: Provided, That if the liability assumed by the obligor does not exceed 2 per centum of the interest, then the deduction and withholding shall, after the date of the enactment of this Act, be at the following rates: (A) 5 per centum in the case of a nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (B) 12 per centum in the case of such a foreign corporation, and (C) 2 per centum in the case of other individuals and partnerships: Provided further, That if the owners of such obligations are not known to the withholding agent the Commissioner may authorize such deduction and withholding to be at the rate of 2 per centum, or, if the liability assumed by the obligor does not exceed 2 per centum of the interest, then at the rate of 5 per centum. * * (c) RETURN AND PAYMENT. - Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. Every such person is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (d) INCOME OF RECIPIENT. - Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return. * * * SEC. 291. FAILURE TO FILE RETURN. In case of any failure to make and file a return required by this titile, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to wilful neglect no such addition shall be made to the tax. The amount so added to any tax unless be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section shall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620028/	Anne Moen Bullitt Biddle Brewster, Petitioner v. Commissioner of Internal Revenue, RespondentBrewster v. CommissionerDocket No. 7063-71United States Tax Court67 T.C. 352; 1976 U.S. Tax Ct. LEXIS 17; November 30, 1976, Filed 17 Decision will be entered under Rule 155. Petitioner, a U.S. citizen residing abroad, operated a farming business as a sole proprietorship in Ireland at a loss. Petitioner's personal services as well as capital were material income-producing factors in the business. Held, under sec. 911(b), petitioner was required to exclude a portion of her gross farm income as "earned income." Brewster v. Commissioner, 473 F.2d 160">473 F.2d 160 (D.C. Cir. 1972), affg. per curiam 55 T.C. 251">55 T.C. 251 (1970); Jack E. Golsen, 54 T.C. 742 (1970), affd. on the substantive issue 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). Held, further, respondent's determination that 30 percent of gross farm income was a reasonable allowance as compensation for petitioner's personal services and, therefore, the amount of 18 excludable earned income, sustained. Held, further, respondent's determination that 30 percent of petitioner's farm expenses were allocable to or chargeable against excludable earned income and nondeductible under sec. 911(a) sustained. Thomas E. Jenks, Herbert L. Awe, and Michael Mulroney, for the petitioner.Jon T. Flask, for the respondent. Tannenwald, Judge. Sterrett and Quealy, JJ., did not 19 participate in the consideration and disposition of this case. Hall, J., concurring. Goffe, J., dissenting. Featherston, Irwin, and Wiles, JJ., agree with this dissent. TANNENWALD352 Respondent determined the 20 following deficiencies in petitioner's Federal income tax:YearDeficiency1962$ 25,071.98196317,945.48196432,787.4819652,498.02196724,505.82196816,435.89196968,912.27The questions before us are: (1) Whether a portion of petitioner's gross farm income was excludable as earned 353 income under section 9111 when her foreign farming proprietorship operated at a loss, (2) if a portion was so excludable, the amount thereof, and (3) the amount of petitioner's farming expenses "allocable to or chargeable against" the excludable income.FINDINGS OF FACTSome of the facts have been stipulated and, together with the stipulated exhibits, are incorporated herein by this reference.Petitioner was a citizen of the United States and a bona fide resident at Palmerstown Stud, in Kill, County Kildare, Ireland, at the time of filing her petition herein and21 during all of the years at issue. She filed timely individual Federal income tax returns for the years 1962 through 1969 with the Director, Office of International Operations, Internal Revenue Service, Washington, D.C.At all times material herein, petitioner was engaged in the farming business in Ireland as an individual proprietor. Both petitioner's personal services and capital were material income-producing factors in the business.Petitioner acquired her farm, Palmerstown Stud, in 1956 after an extensive search. The premises are favorably situated on limestone land which is considered to be desirable for raising horses. The farm encompasses 700 acres. In 1962, petitioner owned approximately 120 horses at Palmerstown. By 1969, that number had increased to about 200, most of which were brood mares and immature stock with approximately 25 to 30 racing horses in training. During the years in question, petitioner employed 45 or 50 individuals at all times.Petitioner operated both a horse breeding farm and a training and racing stable at Palmerstown. In addition, each year petitioner grazed about 250 head of cattle which were useful for keeping the horse pastures in good condition22 and for controlling parasites.Originally, petitioner intended only to carry on thoroughbred horse breeding; however, because of dissatisfaction with the results produced by public trainers, she began to train 354 horses at Palmerstown. Petitioner believed that the combination of breeding and racing operations, which had developed fully at Palmerstown by the beginning of the period in question, would produce a greater degree of knowledge about an individual horse's capacity, stamina, and temperament. Consequently, she believed that coordinated development would aid in both training and selection for breeding. With the exception of several smaller operations, a combined breeding farm and racing stable such as Palmerstown is unique in Ireland. During the years in question, Palmerstown was one of the largest thoroughbred horse operations in Ireland and horses bred and trained by petitioner won a number of internationally recognized races in Ireland, England, and France.Petitioner was general manager and directed the breeding and racing operations herself during the years in question. She employed a stud groom who functioned as a foreman in charge of the breeding operation. 23 Likewise, a head lad was employed and he functioned as a foreman in charge of the racing operation. During brief absences from Palmerstown by petitioner, the stud groom and head lad were left in charge of the breeding and racing functions. Petitioner performed all of the secretarial work. She employed an accountant to maintain Palmerstown's books and records. He also supervised planting, cattle grazing, and farm equipment operations. Petitioner supervised and directed the sale of the horses at Palmerstown.For the years 1962 through 1969, petitioner realized the following income and expenses from the farming operation. 224 GrossGrossNetfarmfarmfarmYearincomeexpensesloss1962$ 83,155$ 224,8683 $ 141,7131963123,502235,717112,215196438,238234,241196,003196555,647273,408217,761196664,070290,674226,604196758,947299,391240,444196848,809262,685213,876196957,840288,391230,551355 On her Federal tax returns for each of these years, petitioner reported all of her gross farm income and deducted all of her farming expenses. Her gain from the sale of horses was reported separately as long-term capital gain. Thus, she offset her U. S. source income with 100 percent of the losses she sustained from her foreign business.The respondent determined that 30 percent of petitioner's gross farm income was excludable from gross income under section 911 as earned income. He further determined that the portion of gross farm expenses allocable to the excludable income, and therefore nondeductible, was the same percentage of gross expenses that excludable income was of gross farm income. The net effect of respondent's determination (modified in accordance with n. 2 supra) is the reduction of petitioner's net farm loss for each year, except 1963, by 30 percent. 425 Petitioner's farming expenses for the years in question were as follows: wages, social insurance for employees, feed for horses, grass seed for pastures, general supplies, repairs, fertilizers, stud fees and boarding expenses of brood mares at other stud farms, veterinary and medicine expenses, machinery operating expenses, insurance, bank interest and charges, electricity, telephone, rent, local taxes, carriage and freight for transporting horses, motor car expenses, horseshoeing, 356 cost of training horses at other farms, straw, peatmoss, management fees, saddlery, periodicals, stationery, postage, gratuities to employees, travel and entertainment, subscription and entry fees for the registration of horses in stud book, tools and short life equipment, advertising, cattle buyers' commissions and fees, legal expenses, rental of special machinery, and entrance and jockey fees for horse races. 5 No part of these expenses claimed by petitioner was attributable to her personal expenditures.26 OPINIONSection 9116 affords a tax benefit to citizens who are residents of a foreign country to the extent that they realize income abroad as a result of their personal services (earned 357 income) rather than as a return on capital investments. In the case of a service-capital business, the statute provides that "a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income."27 On a prior occasion, this same taxpayer asked us to decide the identical question initially before us herein, namely, whether, under section 911, a citizen residing outside of the United States can have excludable "earned income" from a farming proprietorship in which both capital and personal services are material income-producing factors (service-capital business) when such proprietorship operates at a loss. In a Court-reviewed opinion, we answered that question affirmatively. Anne Moen Bullitt Brewster, 55 T.C. 251 (1970), affd. 473 F.2d 160">473 F.2d 160 (D.C. Cir. 1972). We reasoned that the 30-percent limitation on the amount of net profits deemed to be earned income only applies to a business realizing net profits, since the limitation is expressed in terms of a percentage of net profits. Based upon this approach and because the benefit conferred takes the statutory form of an exclusion from gross income, we held that the excludable compensation factor was to be determined with reference to gross income. 55 T.C. at 254. Our decision was affirmed by the Court of Appeals for the District of Columbia in28 a per curiam opinion (473 F.2d 160">473 F.2d 160 (D.C. Cir. 1972)), which rather extensively analyzed the issue involved and the views expressed by this Court.Petitioner herein renews her contention that a proprietor of a foreign service-capital business generating losses cannot have any earned income within the meaning of section 911(b) and urges us to reexamine and abandon our position to the contrary. Respondent counters with the assertion that the rule established in Jack E. Golsen, 54 T.C. 742">54 T.C. 742 (1970), affd. on the substantive issue 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), requires us to follow our prior decision in view of its affirmance by the Court of Appeals for the District of Columbia, to which an appeal from a decision herein would lie.358 It is clear that a decision herein for respondent on this threshold issue is required under Golsen. Such being the case, we reject petitioner's renewed contention. 729 We turn to the questions as to how the amounts of excludable gross income and related expenses should be calculated -- questions which did not have to be dealt with in the previous case because such amounts were stipulated by the parties.Petitioner contends that if she had realized "earned income" from her farming operations, it was not determinable as a flat percentage of gross income. Rather, she maintains that the proper measure of her earned income is the amount she would have had to pay employees as reasonable compensation to perform all of the services she performed.In making her argument, petitioner suggests that if we apply the prior decision in Anne Moen Bullitt Brewster, supra, then the 30-percent figure in the net profits limitation contained in the second sentence of section 911(b) should not be imposed in determining what portion of gross income constitutes "a reasonable allowance as compensation for the personal services rendered" as provided in the preceding portion of that sentence. To the extent that petitioner's argument is based upon the assertion that the 30-percent figure should not be mechanically applied, we agree with her 30 position. Given the theory of the decision in Anne Moen Bullitt Brewster, supra, we think that the amount of reasonable compensation can, depending upon the facts and circumstances of each case, be found to be above or below 30 percent of gross income.8 From this point on, however, petitioner's approach misses the mark.In the first place, we are not convinced, as petitioner urges, that we should adopt precisely the same test for determining 359 reasonable compensation under section 911(b) as is utilized in the cases involving the allowance of a deduction for compensation paid or accrued under section 162(a)(1), although we recognize that the two sections use substantially31 the same language. 9 There are numerous factors which enter into the determination of reasonableness under section 162(a)(1). See, e.g., Pepsi-Cola Bottling Co. of Salina, Inc., 61 T.C. 564">61 T.C. 564, 567-568 (1974), affd. 528 F.2d 176">528 F.2d 176 (10th Cir. 1975); 4A Mertens, Law of Federal Income Taxation secs. 25.69 -- 25.81 (Malone rev.). Some of these factors are not present in a situation, such as is involved herein, where there is no compensation actually paid or accrued; rather the determination herein requires the construction of an imputed "reasonable compensation" geared directly to the portion of petitioner's gross receipts attributable to her services as opposed to her capital input. As we view the situation, only a combination of capital and personal services permits any receipts and this necessitates an inquiry as to the portion of the receipts which should be deemed attributable to each of such elements. Cf. Mark Tobey, 60 T.C. 227 (1973).32 Thus, while it cannot be gainsaid that there are similarities in the decisional process under section 162(a)(1) and section 911(b), the latter situation has a somewhat different cast and the difficulties are perhaps even greater than those confronted in the former situation where, as has been observed, there is "no definite formula" (see Jones Bros. Bakery, Inc. v. United States, 411 F.2d 1282">411 F.2d 1282, 1291 (Ct. Cl. 1969)) or "universal rule" (see Charles McCandless Tile Service v. United States, 422 F.2d 1336">422 F.2d 1336, 1338 (Ct. Cl. 1970)). Compare D. & N. Auto Parts Co., 8 T.C. 1192">8 T.C. 1192, 1196-1197 (1947).In the second place, even if we were to agree that section 911(b) completely tracks section 162(a)(1), we would be unable to accept petitioner's argument herein. The bulk of that argument is based upon the contention that "the proper measure of petitioner's compensation is the amount she would have had to pay someone to replace her." Concededly, this is one of the elements to be taken into account but it cannot be 360 the sole element. If the latter were the case, the degree of profitability of the 33 business (or, more accurately, the existence of continual losses) would be eliminated from our consideration, a clearly unacceptable consequence (see The Barto Co., 21 B.T.A. 1197">21 B.T.A. 1197, 1199 (1931)) -- and one which also assumes that petitioner would be willing to expend the additional sums to compensate such replacement personnel notwithstanding the already large losses being incurred by the business (see Crescent Bed Co., a Memorandum Opinion of this Court dated April 6, 1942, affd. 133 F.2d 424">133 F.2d 424 (5th Cir. 1943)). Moreover, we would be unable to consider the degree to which petitioner's employees, such as the stud groom, the head lad, and the accountant (who discharged operational responsibilities), in fact performed services which would otherwise have been performed by the claimed replacement personnel and which lessened the extent of the activity demanded of petitioner. Finally, the standard suggested by petitioner would preclude consideration of the fact that petitioner's role was of a dual nature, consisting of contributions to the business not only in terms of the performance of services in a quasi-employee role but also34 in terms of her role as owner, i.e., using her resources to generate a return on her investment. Cf. Charles McCandless Tile Service v. United States, supra at 1338.The ultimate question is what was the worth of petitioner's services in the generation of gross income of the business. 10 Although there is testimony as to how long and hard petitioner worked, we have been furnished with no evidence as to the value thereof, aside from the amount which purportedly would have had to be paid for replacement personnel. Such being the case, we are compelled to conclude that petitioner has failed to carry her burden of proof in overcoming respondent's determination that 30 percent of gross farm income constitutes "a reasonable allowance as compensation for the personal services rendered" within the meaning of section 911(b). In so concluding, we again emphasize that we are not adopting a mechanical formula for all cases. See pp. 358-359, supra. We are merely holding that, 361 under the circumstances of this case, respondent's determination should not be overturned. In the foregoing context, any attempt by petitioner to upset respondent's determination35 on the ground that a flat percentage allowance will produce varying amounts of reasonable compensation from year to year falls by the wayside.Petitioner further contends that, in computing the amount of her excludable earned income, the dollar limitations contained in section 911(c)(1), applicable to taxable years 1963 through 1965, should be increased in accordance with section 911(c)(7)1137 by the amount representing the value of the facilities of the business which she used. Under our holding, the dollar limitation applies only to the taxable year 1963. See p. 355, supra. Petitioner's argument is without merit. Although petitioner utilized the facilities of the business for personal purposes, e.g., the house and the automobiles, we know of no theory pursuant to which the 36 value of such use or the deduction of the portion of the expenses allocable thereto could enter into the calculation of petitioner's taxable income from her sole proprietorship. 12 Even if some such theory could be constructed, it could not be said that such allocable portion of expenses was received as "compensation * * in the form of the right to use." Sec. 911(c)(7). Compare Challenge Manufacturing Co., 37 T.C. 650">37 T.C. 650, 663 (1962) (disallowed expenses paid on behalf of a shareholder-employee not treated as compensation because not paid as such), and Rapid Electric Co., 61 T.C. 232">61 T.C. 232, 241 (1973) (to the same effect). Indeed, given this statutory language, there is a serious question whether it 362 has any applicability with respect to the excludable gross income of sole proprietors.We now turn to the deduction side of the section 911 computations. The governing provision is contained in section 911(a) and reads as follows:An individual shall not be allowed, as a deduction from his gross income, any deductions (other than those allowed by section 151, relating to personal exemptions) properly allocable to or chargeable against amounts excluded from gross income under this subsection.Petitioner first asserts that, since earned income should be determined by equating reasonable compensation with the amount she would have paid others to perform her services, nondeductible expenses allocable to earned income should only be those that such hypothetical other employees would have incurred. Since, according to petitioner, they would have incurred none of the expenses claimed by petitioner as a proprietor of a service-capital business, the excluded income should not be charged with any such expenses. 38 Our rejection of the "employee approach" in respect of income disposes of this argument. The invalidity of petitioner's position is further revealed by the fact that such an approach, an exclusion from income without any disallowance of expenses, would produce a tax loss in excess of petitioner's actual loss. 13Petitioner next focuses on the statutory language disallowing deductions "allocable to or chargeable against" excludable income and argues that such language requires an item-by-item analysis of each farm expense to determine which expenses are definitely related to, or identified with, earned income. In this vein, petitioner takes the position that only four types of her farm expenses bore the requisite factual relationship to her personal services. Of these four expenses (motor car expense, motor car depreciation, travel39 and entertainment, and periodicals), petitioner claims only one-third of the costs was attributable to her personal services and the balance was attributable to her employees.While it is true that a good portion of petitioner's total farming expenses appears to be capital-related (e.g., feed, seed, 363 saddlery, repairs, etc.), the nature of this service-capital business is such that even these expenses are related to earned income since without them earned income could not have been realized. See George Rousku, 56 T.C. 548">56 T.C. 548, 552 (1971); Fred J. Sperapani, 42 T.C. 308">42 T.C. 308, 334 (1964). 14 Moreover, disallowed deductions are statutorily keyed to "amounts excludable from gross income," not to the personal services rendered per se, so that the standard urged by petitioner has no statutory foundation. In fact, petitioner's argument seeks to impart a definite identification of expenses with personal services on the deduction side, although, as petitioner herself recognizes, the assignment of a portion of receipts to personal services on the income side is not based upon any definite identification of a particular item of40 gross income with the rendition of personal services.15Petitioner attempts to attach some special significance to the words used by Congress in disallowing expenses "allocable to or chargeable against" excluded income in41 section 911(a). She argues that these words require the disallowance of only those expenses as to which there is a definite factual relationship to her services, with all other expenses to be allowed as deductions, and that, had Congress intended to disallow expenses in the same ratio that excluded income bears to gross foreign-source income, as respondent has done, it would have instead chosen the word "apportionment." We see no reason to conclude that Congress intended that the standard to be applied on the deduction side of section 911 should operate in such a beneficial fashion for the taxpayer. Indeed, if petitioner's interpretation is correct, it can be argued that she has read the word "allocate" out of the statute, since the existence of a definite factual relationship would seem to be encompassed within the phrase "chargeable 364 against." Cf. Carstairs v. United States, 75 F. Supp. 683">75 F.Supp. 683, 685 (E.D. Pa. 1936).Nor are we disposed to engage in a semantic exercise so as to divine shadings of legislative intention based on the use of the word "allocation" rather than "apportionment." It is of some significance that the dictionary defines "allocation" 42 in terms of "apportionment." See Webster's Third New International Dictionary (Unabridged) (1965). Whatever may be the interpretation of these words in other sections of the Code, 16 we are not persuaded that we should adopt a narrow interpretation of the phrase "allocable to or chargeable against" used in section 911. Cf. Carstairs v. United States, supra.In this connection, we note that, as in the case of petitioner's first argument relating to her deductions (see p. 362, supra), her "allocation vs. apportionment" theory could produce entitlement of a taxpayer to a loss in excess of the actual loss. 1743 We see no reason to construe a provision of the Code excluding amounts from gross income in a fashion so favorable to the taxpayer when the language of the provision does not compel this result. Perhaps there will be situations where the deductible items can be sufficiently identified as solely capital-related so as to justify the conclusion that they should not be disallowed under section 911(a). But such is not the case herein and consequently we sustain respondent's use of an allocation of 30 percent of expenses (except with respect to 1963, see p. 355 and n. 4, supra) to petitioner's excludable earned income. Here again we are constrained to note, as we did on the income side, that we are not putting our stamp of approval on the unvarying use of a percentage figure, much less a uniform 30 percent, on the deduction side, although we recognize that, in the usual situation, the use of the same 365 percentage on the income and deduction sides is likely to be appropriate.Perhaps because petitioner recognizes that her first two theories could produce situations where the deductible loss for tax purposes would exceed the actual loss, she makes a still further argument that44 in no event should the amount of the disallowed deductions exceed the amount of excluded earned income. The basis for petitioner's contention is that such an approach is all that is necessary to avoid the double tax benefit against which the deduction provision in section 911 was presumably directed. Clearly there is no language in the statutory provision which provides any basis whatsoever for importing the suggested limitation. Moreover, the arithmetic of petitioner's proposal is such that it eliminates the same dollar amount on the income side and deduction side, thereby producing the same loss as is produced by using the gross figures on both sides. Obviously, adoption of such a proposal would render entirely nugatory the prior decision in Anne Moen Bullitt Brewster, supra.It is no doubt for this reason that the Court of Appeals specifically rejected this position, although such rejection can arguably be characterized as dictum. See 473 F.2d at 164 n.6. 1845 Respondent determined that the amount of gross farm expenses to be disallowed is --Excluded earned income/Gross farm income x Gross farm expensesPetitioner argues that even if this formula is correct, the amount of gross farm expenses to be plugged in should not include an amount attributable to gain from the sale of horses. 19 Petitioner reasons that because such gain, subject to 366 beneficial capital gain treatment under section 1231, was not included in the gross farm income for purposes of computing earned income, no part of the expenses attributable to the horses sold should be disallowed as being allocable to the excluded earned income. Because petitioner cannot identify the expenses relating to the horses sold, which she would insulate from the proportional disallowance, she seeks to accomplish her objective by arguing that the amount of section 1231 gain realized each year should be added to the amount of gross farm income used by respondent in the denominator of the fraction previously noted.46 The fact that the amount of such gain was not treated as part of gross income for purposes of computing excludable earned income is of no relevance in light of our rejection of the mechanical application of any percentage of gross income in arriving at such computation and our conclusion that petitioner has failed to carry her burden of proof that the amount excluded did not represent "reasonable allowance as compensation for [petitioner's] personal services."As for petitioner's contention that a certain portion of her gross farm expenses should be immune from the operation of the disallowance because a portion of such expenses was attributable to horses sold, we disagree. On her tax returns, petitioner offset the gain from such sales with expenses clearly identifiable therewith (e.g., commissions). Other expenses relating to such horses were basically breeding, racing, or maintenance costs and the fact of the matter is that petitioner maintained many, if not all, of the horses sold for breeding and racing, activities generating ordinary gross farm income through the combination of capital input and petitioner's personal services. Compare Mark Tobey, supra;47 George Rousku, supra.Thus, we find no basis for adjusting respondent's formula (either by directly reducing the gross farm expense element or by increasing the gross farm income denominator, with a consequent reduction in the amount of expenses disallowed) to reflect the fact that some of petitioner's 367 ordinary farm expenses related to horses eventually sold.It cannot be gainsaid that the legislative and judicial situation relating to the treatment of earned income abroad is far from satisfactory. It has, as the Court of Appeals for the District of Columbia has observed in its opinion in the prior Brewster case, produced "certain incongruities" and a condition which "is not welcomed." See 473 F.2d at 163-164. Any remedy of such "incongruities" and "unwelcome condition" must, in our opinion, emanate from the Congress.Decision will be entered under Rule 155. HALL Hall, J. concurring: I agree with Judge Goffe on the merits but think Golsen requires a decision for respondent. GOFFEGoffe, J., dissenting: I respectfully dissent. The majority opinion is cast in terms of exclusions from gross income48 but the end result is to deny the full losses petitioner sustained in the operation of her farm. This result is produced by holding that Jack E. Golsen, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), precludes examination of our prior decision and requires a decision in favor of respondent.Our holding in Jack E. Golsen, supra, recognized that if a party losing a case in the Tax Court appealed to a Court of Appeals which previously held a position contrary to ours, that he would win on appeal. Therefore, in the interest of efficient and harmonious judicial administration we held that in such instances we would apply the holding of that Court of Appeals. We stated that "We shall remain able to foster uniformity by giving effect to our own views in cases appealable to courts whose views have not yet been expressed, and, even where the relevant Court of Appeals has already made its views known, by explaining why we agree or disagree with the precedent that we feel constrained to follow." 54 T.C. at 757. Golsen involved a position of the Court of Appeals49 that arose from an appeal from the District Court368 not the Tax Court. Golsen requires us to follow the position of the Court of Appeals for the circuit in which the taxpayer resided at the time he filed his petition in the Tax Court. All appeals from cases initiated in the Tax Court by United States citizens residing abroad lie in the United States Court of Appeals for the District of Columbia. If the Golsen rule is applied to the instant case, therefore, a whole class of taxpayers (U.S. citizens residing abroad), are precluded from having us reexamine our holding in the first Brewster case unless such taxpayers pay the tax and sue in the Court of Claims or unless they change their residence to the United States, except to the District of Columbia. The Golsen rule is solely a rule of law of the Tax Court. It is not etched in stone. It has been neither commended nor criticized by a Court of Appeals or the Supreme Court. It has never been extended to apply to the same taxpayer. Application of the Golsen rule in this case makes our prior opinion virtually "review-proof." I conclude, therefore, that Golsen should not compel a decision for respondent50 but we should, instead, freely examine our holding in the first Brewster case. Moreover, the recent holding of the Court of Claims in Vogt v. United States, 537 F.2d 405 (Ct. Cl. 1976), severely undermines the rationale of our prior Brewster decision and that of the Court of Appeals in the first Brewster case.The majority in the instant case disallows 30 percent of petitioner's deductions from the operations of her farm in Ireland under section 911(a) of the Code. This section is not a general section of the Code. It provides only for disallowance of deductions properly allocable to or chargeable against amounts excluded from gross income. The sole purpose of disallowing deductions so "allocable or chargeable" is to prevent a double benefit; i.e., excluding the income and deducting the expenses relating to such income. There is no statutory prohibition against offsetting foreign deductions against income from U.S. sources. Even the majority permits petitioner to offset the remaining 70 percent of her Ireland farm deductions against income from U.S. sources.The disallowance of petitioner's deductions comes about by requiring51 petitioner to exclude 30 percent of the gross income from operations of her farm in Ireland. On her returns petitioner excluded no income from the operation of the farm 369 because it operated at a loss. In the first Brewster case we held that she must exclude 30 percent of the gross profits from the farm although section 911(b)allows an exclusion not to exceed 30 percent of net profits. The exclusion is designed to permit a U.S. citizen residing abroad to exclude from income a portion of the net income from a trade or business attributable to the personal services rendered by such a taxpayer as distinguished from the portion of net income produced by invested capital. We held in the first Brewster case that the 30-percent limitation on the amount of income excludable was applicable only if there were net profits from the business; because there were only losses, not profits, the limitation did not come into play; and, therefore, petitioner must exclude 30 percent of gross profit. Accordingly, under section 911(a), we required that a portion of petitioner's deductions be disallowed (the amount to be disallowed was stipulated in the first52 Brewster case but not in the instant case).The exclusion provided in section 911(a) is for "earned income" as that term is defined in section 911(b). The definition of earned income which is embodied in section 911(b) originated in the Revenue Act of 1924. It had nothing to do with income earned from foreign sources but, instead, was defined in order to impose a lower rate of tax on all earned income. Sec. 209(a)(1), Revenue Act of 1924, ch. 234, 43 Stat. 263, 264. The limitation was enacted to facilitate administration of the Act. H. Rept. No. 179, 68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 241, 245. S. Rept. No. 398, 68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 266, 281; 65 Cong. Rec. 2850. The concept of earned income as distinguished from income derived from invested capital in the case of unincorporated businesses resulted from a floor amendment to the bill designed to aid farmers (as is petitioner here) and small businessmen. 65 Cong. Rec. 2849. The application of the "earned income" concept to exclude income earned outside the U.S. was first enacted in the Revenue Act of 1926. Sec. 213(b)(14), 53 Revenue Act of 1926, ch. 27, 44 Stat. 26. At that time Congress also provided that deductions properly allocable to or chargeable against such excluded income were not allowable (now sec. 911(a)). Although Congress has changed the percentage and has otherwise modified the percentage limitation on exclusion of earned income it has 370 never expressed the limitation in terms other than as a percentage of net profits. The effect of our prior decision, the decision of the Court of Appeals, and now, the majority, is to nullify the language of the percentage limitation when the business suffers a net loss. Such an interpretation is erroneous. There is no legislative history to support our prior conclusion. Moreover, it is fundamental in statutory construction to give effect to all of the language of the statute. Hellmich v. Hellman, 276 U.S. 233">276 U.S. 233 (1928); Larkin v. United States, 78 F.2d 951 (8th Cir. 1935); Stanford v. Commissioner, 297 F.2d 298">297 F.2d 298, 308 (9th Cir. 1961); William C. Stolk, 40 T.C. 345 (1963), affd. per curiam 326 F.2d 760">326 F.2d 760 (2d Cir. 1964).54 The limitation of 30 percent of net profits should be applied in all cases, regardless of the existence of net profits. Therefore, applying the limitation literally, to a net loss as we have here, 30 percent of zero is zero and the limitation of section 911(b) precludes exclusion of any portion of petitioner's income as "earned income." Because no income is excluded, no deductions are disallowed under section 911(a). Moreover, our interpretation in the first Brewster case is not consonant with the taxation of proprietorships generally; i.e., no income is realized by virtue of the efforts of the proprietor unless a net profit results.In the first Brewster case the Court of Appeals held that the statutory concept of "earned income" was structured in terms of gross income not net profits. Brewster v. Commissioner, 473 F.2d 160">473 F.2d 160, 162 (D.C. Cir. 1972). That conclusion has since been rejected by the Court of Claims. Vogt v. United States, 537 F.2d 405 (Ct. Cl. 1976). That case involved the method of computing the amount excludable from income under section 911(a) received from a partnership which operated outside 55 the U.S. It did not involve an allocation between the income attributable to the taxpayer's personal services and the income attributable to the invested capital but, instead, whether the dollar limitation on the amount excludable applied to the partner's distributive share of the gross profit of the partnership or its net profit. Relying in part on our decision in Warren R. Miller, Sr., 51 T.C. 755">51 T.C. 755 (1969), the Court exhaustively examined all of the interpretations of section 911 and concluded that the taxpayer demonstrated that there was a long-standing administrative interpretation that a 371 partner's "earned income" from a partnership is his share of net profits. The net profits concept, so aptly explored by the Court of Claims, in the partnership context should apply here to a sole proprietorship. In both cases a taxpayer includes in his gross income his net profit from a proprietorship or his distributive share of the profits of a partnership (except for items upon which the Code imposes limitations). By the same token, he deducts the net loss of his sole proprietorship or his distributive share of the net loss of 56 the partnership.The net profits concept is the only rationale that is consistent with taxation generally. Requiring petitioner to exclude 30 percent of the gross profits of the proprietorship is not consistent with the general scheme of taxation of sole proprietorships or partnerships. Expression of the exclusion in terms of an exclusion from gross income in section 911(a) does not make the exclusion a gross income concept. It merely identifies the point in the computation of the taxpayer's overall tax liability at which the exclusion applies. All exclusion provisions are expressed in terms of exclusion from gross income.The reliance by the Court of Claims on Warren R. Miller, Sr., supra, requires an examination of our holding in that case. We had before us the meaning of the term "earned income" for purposes of reduction of retirement income in connection with the retirement income credit. We were called upon to interpret that term as it is used in section 911(b), the identical section involved herein. We thoroughly analyzed the term and concluded that earned income was keyed to net profits, not gross profits. 51 T.C. at 762.57 In the first Brewster case we admitted that Miller "gave us pause"; however, we dismissed petitioner's contention that Miller applied by pointing out that in Miller we were coordinating two sections of the Code which we were not doing in Brewster. That is a distinction without a difference. Section 37, which allowed the retirement income credit, incorporated by reference section 911(b). We may have so lightly dismissed our prior interpretation of section 911(b) in Miller when we decided the first Brewster case but the Court of Claims considered it viable enough to quote from our Miller opinion in its opinion.I conclude that our interpretation of "earned income" in section 911(b) as being a net profits concept as fully developed 372 in Miller, was correct as is the opinion of the Court of Claims in Vogt, relying on Miller, and we erred in holding to the contrary in the first Brewster case which, in turn, led the Court of Appeals in Brewster to an erroneous conclusion. I would, therefore, hold that the 30-percent limitation of section 911(b) means exactly what it clearly says without any "court made" limitation; "30 58 percent of his share of the net profits of such trade or business." Applying the unmistakable language of section 911(b) to the "net profits" of petitioner's trade or business; i.e., a net loss, 30 percent of zero is zero and petitioner had no earned income and no deductions should be disallowed under section 911(a). Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during each of the years before the Court.↩2. The figures as to gross farm income and gross farm expenses include adjustments to the amounts of these items as shown in the deficiency notice to take into account the effect of petitioner's horse racing activities, adjustments based upon the stipulation of the parties. In addition, gross farm income is exclusive of gain realized from the sale of horses. See pp. 365-367, infra↩. The amount of such gain is stipulated as follows: 1962, $ 84,951; 1963, $ 67,712; 1964, $ 159,770; 1965, $ 25,657; 1966, $ 30,411; 1967, $ 138,265; 1968, $ 68,400; 1969, $ 209,760.3. The parties stipulated this figure to be $ 141,173 in an obvious typographical error.↩4. 30% of gross30% of farmReductionfarm incomeexpensesin farmYearexcludeddisallowedloss1962$ 24,947$ 67,460$ 42,5141963 * 35,000 * 66,80131,801196411,47170,27258,801196516,69482,02265,328196619,22187,20267,981196717,68489,81772,133196814,64378,80664,163196917,35286,51769,165* For this year, 30 percent of gross income exceeds the then-effective dollar limitation ($ 35,000) for the earned income exclusion. Sec. 911(c)(1)(B). The disallowance of farm expenses is accordingly proportionately reduced. See p. 365, infra↩.5. Petitioner also took deductions for depreciation in respect of property used in the business, but a portion of these deductions was attributed to the horses sold and reflected in the capital gain reported in respect of such sales.↩6. Sec. 911 provides in part:SEC. 911. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES.(a) General Rule. -- The following items shall not be included in gross income and shall be exempt from taxation under this subtitle: (1) Bona fide resident of foreign country. -- In the case of an individual citizen of the United States who establishes to the satisfaction of the Secretary or his delegate that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during such uninterrupted period. The amount excluded under this paragraph for any taxable year shall be computed by applying the special rules contained in subsection (c).* * *An individual shall not be allowed, as a deduction from his gross income, any deductions (other than those allowed by section 151, relating to personal exemptions) properly allocable to or chargeable against amounts excluded from gross income under this subsection.(b) Definition of Earned Income. -- For purposes of this section, the term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary or his delegate, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income↩. (Emphasis added.)7. We are cognizant of the intervening decision of the Court of Claims in Vogt v. United States, 537 F.2d 405">537 F.2d 405 (Ct. Cl. 1976). But the issue in Vogt was an entirely different one, i.e., whether the dollar limitation of sec. 911 should be applied to a partner's share of the gross income or net income of a profitable personal service partnership, and the Court of Claims carefully distinguished Brewster v. Commissioner, 473 F.2d 160 (D.C. Cir. 1972), affg. 55 T.C. 251">55 T.C. 251↩ (1970).8. Indeed, even if a 30-percent limitation applied under the gross income theory, it is clear from the second sentence of sec. 911(b)↩ that it only provides a ceiling and would not preclude a finding of less than 30 percent. That situation does not exist herein because neither party is contending for a lesser amount.9. Sec. 162(a)(1) allows a deduction, as an ordinary and necessary business expense, of "a reasonable allowance for salaries or other compensation for personal services actually rendered."↩10. At the time the earned income credit was enacted by the Congress, the test as applied to a service-capital business was articulated as one "to determine what the man's own personal services are worth." See 65 Cong. Rec. 2850 (1924).↩11. That paragraph provides:(7) Certain noncash remuneration. -- If an individual who qualifies under subsection (a)(1) receives compensation from sources without the United States (except from the United States or any agency thereof) in the form of the right to use property or facilities, the limitation under paragraph (1) applicable with respect to such individual --(A) for a taxable year ending in 1963, shall be increased by an amount equal to the amount of such compensation so received during such taxable year;(B) for a taxable year ending in 1964, shall be increased by an amount equal to two-thirds of such compensation so received during such taxable year; and(C) for a taxable year ending in 1965, shall be increased by an amount equal to one-third of such compensation so received during such taxable year.↩12. In point of fact, petitioner herself allocated a portion of such expenses attributable to those facilities as personal and excluded them from the deductions claimed on her return.↩13. This result would not obtain where it was possible to conclude that there were hypothetical employee expenses in an amount at least as great as the amount of excluded gross income.↩14. See also Frieda Hempel↩, a Memorandum Opinion of this Court dated June 23, 1947, in which all expenses of a business where capital was not a material income-producing factor were chargeable against earned income, although some of the expenses were of the type petitioner herein would allocate solely to capital (e.g., office supplies, managerial and secretarial expenses, etc.).15. We do not accept petitioner's suggestion that the comment of the Court of Appeals for the District of Columbia in the prior Brewster case (see 473 F.2d at 164↩ n. 6) requires an item-by-item analysis. That comment was made in the context of a stipulation in which the parties agreed as to which expenses were deductible and which were not, a situation which does not obtain herein.16. E.g., secs. 861 and 862 and the regulations thereunder, which were dealt with on a basis seemingly favorable to the taxpayer in F. W. Woolworth Co., 54 T.C. 1233">54 T.C. 1233, 1269 et seq. (1970), although we are constrained to note that respondent had the burden of proof. See 54 T.C. at 1264↩.17. Assume total gross income of $ 1,000, expenses of $ 1,500, of which only $ 100 are clearly identified with earned income. On the basis of a 30-percent exclusion from gross income, the taxpayer would report $ 700 of gross income and, under petitioner's theory, would be entitled to deduct $ 1,400. This produces a tax loss of $ 700, although the actual loss is only $ 500.↩18. Moreover, the allowance of excess deductions (which is the other side of the same coin) was specifically rejected in Frieda Hempel (n. 14 supra). Compare also the discussion in Ivor Cornman, 63 T.C. 653">63 T.C. 653, 660↩ (1975), with respect to the failure to obtain legislative sanction of this position in connection with excess deductions related to tax-exempt income under sec. 265.19. Petitioner also argues that the gross expenses should be reduced by expenses attributable to horserace winnings. It would appear that this argument is addressed to an error in respondent's deficiency notice calculations which netted gross race winnings and expenses. Respondent has conceded his error in this regard and the necessary corrections are reflected in the figures shown in our findings of fact. See pp. 354-355, supra. It would appear that this disposes of petitioner's contention in respect of this item.Although this adjustment results in the disallowance of more expenses than were disallowed in the notice of deficiency, it also results in the exclusion of more income. Thus, but for the operation of the dollar limitation on earned income in 1963, respondent's adjustment, like his deficiency notice, results in the same amount of reduction of petitioner's claimed losses. For 1963, the reduction in petitioner's allowable loss is less than that in the deficiency notice.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620029/	G. L. Christian and Hazel M. Christian, et al. 1 v. Commissioner. Christian v. CommissionerDocket Nos. 91746, 91747, 91750.United States Tax CourtT.C. Memo 1963-94; 1963 Tax Ct. Memo LEXIS 250; 22 T.C.M. (CCH) 446; T.C.M. (RIA) 63094; April 1, 1963Melvin M. Engel, Esq., for the petitioners. Robert I. White, Esq., for the respondent. TRAINMemorandum Findings of Fact and Opinion TRAIN, Judge: Respondent determined deficiencies in petitioners' income tax liability for the calendar year 1957 as follows: DocketNo.DeficiencyG. L. Christian and Hazel M.Christian91746$2,491.44F. A. Hunter and GladysHunter917475,395.53Oswald Gerrard, Jr., andKathryn Gerrard917503,104.34251 The issue for decision is whether petitioners are entitled to capital gains treatment on the gain from the disposal of rights which accrued to them, as joint venturers, under the name G. L. Christian and Associates, under a letter of acceptability from the Government dated December 17, 1956. Findings of Fact Some of the facts are stipulated and are hereby found as stipulated. Petitioners G. L. Christian (hereinafter sometimes referred to as Christian) and Hazel M. Christian are husband and wife and reside in Houston, Texas. They filed a joint individual income tax return for the year 1957 with the district director of internal revenue, Austin, Texas. Petitioners F. A. Hunter (hereinafter sometimes referred to as Hunter) and Gladys Hunter are husband and wife and reside in Houston, Texas. They filed a joint individual income tax return for the year 1957 with the district director of internal revenue, Austin, Texas. Petitioners Oswald Gerrard, Jr., (hereinafter sometimes referred to as Gerrard) and Kathryn Gerrard are husband and wife and reside in Cisco, Texas. They filed a joint individual income tax return for the year 1957 with the district director of internal revenue, 252 Austin, Texas. Christian, Hunter and Gerrard together with H. A. Crabb (hereinafter referred to as Crabb), A. J. Whipple (hereinafter referred to as Whipple), Paul H. Wolf (hereinafter referred to as Wolf), N. H. Mitchell (hereinafter referred to as Mitchell), and Preston R. Plumb, Sr., (hereinafter referred to as Plumb) formed a joint venture called G. L. Christian and Associates (hereinafter referred to as Associates) prior to November 1956. Shortly prior to November 16, 1956, the United States, through its agent and contracting officer, by advertisement requested interested parties to submit bids for the construction of 2,000 housing units at Fort Polk, Louisiana. These housing units were to be constructed under Title IV of the Housing Amendments of 1955 (Pub. L. No. 345, 84th Cong., 1st Sess., August 11, 1955) and Title V of the Housing Act of 1956 (Pub. L. No. 1020, 84th Cong., 2d Sess., ch. 1029, August 7, 1956). Associates submitted a bid dated November 16, 1956, to the contracting officer in the amount of $32,955,784. On December 17, 1956, W. P. McCrone (hereinafter referred to as McCrone), as agent and contracting officer of the United States, sent a "letter of acceptability" 253 to Associates. This letter apprised Associates that they had submitted the lowest acceptable bid on the Fort Polk housing project and required them to satisfy certain enumerated conditions before the contract for the construction of the 2,000 houses could be signed. The conditions set forth in the letter of acceptability required Associates to do, in substance, the following: (a) Organize a Delaware corporation. (b) Cause the stockholders of the corporation to execute a stock transfer and escrow agreement. (c) Make the necessary arrangements with a mortgage lendor acceptable to the Federal Housing Commissioner to finance the total cost of the housing project. Cause the newly organized Delaware corporation to enter into a building loan agreement with the mortgage lendor. Cause the mortgage lendor to apply to the Federal Housing Administration (hereinafter referred to as FHA) to obtain a commitment for mortgage insurance before January 16, 1957. (d) Cause the Delaware corporation to execute a certain lease. (e) Make arrangements for and obtain title insurance or other evidence of title of the housing project site. (f) Make arrangements for utility services necessary during254 the construction of the 2,000 unit housing project. (g) Be prepared to pay, prior to the execution of the construction contract, (1) to the Federal Housing Commissioner commitment fee, filing fee, processing fee, and premium for the mortgage insurance during the construction period; and (2) to the contracting officer the sum of $313,382 representing the cost of architect-engineer services, the inspection fee in the amount of $953,000 and the sum of $1,000 as consideration for the lease. (h) Be prepared to furnish necessary payment and performance bonds. (i) Execute whatever documents are necessary to consummate the construction contract. (j) Cause the Delaware corporation and the mortgage lendor to execute whatever documents are necessary and incidental to the construction contract. (k) Furnish the contracting officer with photostatic copies of the FHA insurance commitment and FHA project analysis as soon as available. (l) Furnish an executed trade payment breakdown. (m) Make application to the contracting officer for a wage determination for use in the construction project. (n) Acknowledge receipt of the letter of acceptability. The letter of acceptability further255 provided that should Associates fail to satisfy the conditions imposed, the United States could cancel its commitment in connection with the housing project and declare the $25,000 paid by Associates, as bid security, forfeited. Finally, the letter of acceptability provided that Associates was to be ready for closing of the final construction contract on or before February 15, 1957. Shortly prior to January 15, 1957, arrangements were made between Associates and the United States to extend the January 16, 1957, deadline, set on the issuance of the FHA commitment for insurance in condition (c) of the letter of acceptability, to January 26, 1957. Informal extensions of this deadline were obtained from time to time by Associates as it became necessary. By letter of January 23, 1957, McCrone, on behalf of the United States, advised Associates that they only had 22 days remaining in which to satisfy the conditions outlined in the letter of acceptability and to meet the February 15, 1957, deadline by entering into the construction contract. Associates had been having difficulty in arranging financing for the Fort Polk project. During the early part of February 1957, Associates began256 negotiating with H. B. Zachry Company (hereinafter referred to as Zachry) of San Antonio, Texas, with regard to assigning the joint venture's rights under the letter of acceptability to Zachry. Shortly after being contacted by Associates, Zachry contacted Centex Construction Co., Inc., (hereinafter referred to as Centex) of Dallas, Texas, with a view to arranging a joint venture between Zachry and Centex to take the assignment from Associates. Despite these negotiations with Zachry, Associates continued to try to arrange financing and to comply with the conditions set forth in the letter of acceptability. By mid-February 1957, Associates had arranged for the formation of a Delaware corporation to be known as Fort Polk Housing Corp. The capital stock of this corporation was to be $1,000 which was to be divided into 100 shares of $10 each. The shares were to be held as follows: Name ofShareholderNumber of SharesF. A. Hunter8Oswald Gerrard, Jr.8G. L. Christian8H. A. Crabb1Paul H. Wolf25A. J. Whipple25P. R. Plumb12 1/2N. H. Mitchell12 1/2Associates requested that the United States extend the February 15, 1957 deadline set in the257 letter of acceptability for entering into the construction contract for a 60-day period. By letter of February 27, 1957, McCrone, on behalf of the United States, advised Associates that an extension to April 15, 1957, had been granted. Because of difficulty in arranging interim financing with one mortgagee, during late February, Associates advised the United States that it might be necessary to divide the project into parts so that a number of mortgages could be arranged. By February 19, the $50,000 processing fee required by condition (g) of the letter of acceptability had been deposited with the FHA. In addition working capital of $2,000,000 and strong financial support had been arranged for. By March 1, 1957, Associates had requested the Shreveport office of the FHA to process eight applications for mortgage insurance and the joint venture's architect had prepared a proposed breakdown of the 2,000 unit project into eight areas. In addition, by March 1, 1957, Associates had taken steps to comply with the conditions set forth in the letter of acceptability of December 17, 1956, as follows: (a) The required Delaware corporation had been formed. (b) The officers of the corporation258 had been elected. The joint venture promised that the escrow agreement of the corporation's stock would be executed and delivered at the time of the signing of the construction contract. (c) The joint venture had promised to complete the conditions set forth in condition (c) as soon as arrangements for interim financing had been definitely concluded. (d) The joint venture had caused the Delaware corporation to approve the form of lease, execution thereof to be held in abeyance pending approval by both the institution that was to furnish the interim financing and the Federal National Mortgage Association which was to be the ultimate purchaser of the loan. (e) Title insurance arrangements had been completed. (f) Discussions had been held with the United States contracting officer's office and satisfactory arrangements to insure utility service had been made. (g) The joint venture had promised to pay the necessary sums prior to entering into the construction contract. (As heretofore mentioned the processing fee of $50,000 had been paid as of February 19.) (h) The joint venture had furnished the United States' contracting officer the name of the surety on the bonds; the bonds259 were to be executed at the time the construction contract was executed. (i) The joint venture's attorney had reviewed whatever contracts and documents were required and the joint venture was prepared timely to execute the instruments. (j) The Delaware corporation's attorney had reviewed whatever contracts and documents were required and was prepared timely to execute the instruments. (k) The joint venture had promised to furnish the insurance commitments and project analysis as soon as it was available. (l) The furnishing of the trade payment breakdown was held in abeyance pending receipt and analysis by architects and engineers of the project analysis. (m) Application for wage determination for use in the construction project had been made and the determination had been received. On March 8, 1957, Associates and representatives of Zachry conferred with McCrone and requested that he, on behalf of the United States, agree to the assignment of the whole housing contract. By letter of March 8, 1957, McCrone, on behalf of the United States, appraised Associates that they could proceed to sublet the contract. It was the understanding of the parties that the closing of the contract260 would be handled in the name of Associates with a simultaneous assignment of the contract to Zachry. On March 13, 1957, the FHA issued a commitment for mortgage insurance on the 2,000 housing unit project at Fort Polk. Upon the issuance of this commitment an application together with the commitment fee was immediately filed with the Federal National Mortgage Association (hereinafter referred to as FNMA) for its commitment to purchase the loan upon completion of the construction project. On March 14, 1957, a contract was entered into between Zachry, called therein the assignee, and Associates, called therein the assignors. The preliminary recitations in the contract were to the effect that the assignors had: (1) Submitted the lowest acceptable bid on the 2,000 unit Fort Polk housing project; (2) Received the letter of acceptability dated December 17, 1956; (3) On February 27, 1957, received an extension to April 15, 1957, of the deadline for entering into the housing contract provided in the letter of acceptability; (4) Organized a Delaware corporation; (5) Made the necessary arrangements with a mortgage lendor acceptable to the FHA as a mortgage for financing the total261 cost of the project; (6) Had the mortgagee apply to the FHA for mortgage insurance covering the 2,000 housing unit project which insurance had been duly issued; (7) Had the mortgagee agree to process its application for the FNMA for commitment to purchase the FHA insured mortgages; (8) Deposited cash of $25,000 with the United States Army Engineers at the time of submitting the bid and had deposited $50,000 with the FHA for processing fee. The contract provided further that: NOW, THEREFORE, in consideration of the premises and the consideration hereinbelow set out, Assignors hereby assign, transfer, set over and deliver unto H. B. Zachry Company all of their respective rights, titles and interest held or claimed by Assignors or either of them in and to the Fort Polk, Leesville, Louisiana, FHA No. 059-81003, Army No. 2, Project, described in letter of acceptability dated December 17, 1956, and letter extending the date for compliance therewith dated February 27, 1957, signed by W. P. McCrone, Colonel, CE, District Engineer, Corps of Engineers, United States Army, Galveston District, Galveston, Texas, including, but not limited thereto, all contracts issued or to be issued262 in connection therewith, and granting unto H. B. Zachry Company full and complete rights of subrogation in the premises. Upon proper assignment being made to H. B. Zachry Company, and approval thereof by the proper governmental agencies, it is understood and agreed that H. B. Zachry Company will in good faith enter into performance of the housing contract to be executed by Assignors, and all other contracts called for and required by the terms of said letter of acceptability and the letter extending the time for compliance therewith, dated December 17, 1956, and February 27, 1957, respectively. It is also understood and agreed that Assignors will secure from the proper governmental agencies the requisite written approval of this assignment at or prior to the date set for the execution of said housing contract and they further agree to execute any and all documents and papers necessary or required to effect this assignment. Assignors further agree for the same consideration to cause the stockholders of the Fort Polk Housing Corporation to execute and deliver to Assignee a stock transfer covering all of the capital stock of Fort Polk Housing Corporation. Upon the execution and263 delivery of this assignment to H. B. Zachry Company, and the approval thereof by the proper governmental agency, H. B. Zachry Company agrees to pay Assignors the aggregate sum of $250,000 at the times and in the following manner: (a) $100,000 in cash upon approval by the proper governmental agencies of this assignment; and (b) $150,000 in the form of a negotiable promissory note payable to the order of F. A. Hunter, Partner, in two installments, the first becoming due and payable on or before nine months from date of this assignment, in the amount of $75,000, and the remaining installment to be due and payable on or before eighteen months from said date; said note to bear interest at the rate of 4 1/2 per cent per annum payable on the same dates as the installments of principal are due and payable. H. B. Zachry Company agrees to reimburse Assignors the $25,000 deposited by Assignors with the submission of their bid for said project, together with the sum of $50,000 heretofore deposited by Assignors with the Federal Housing Administration District Office, Shreveport, Louisiana, as the processing fee in connection with the application for FHA mortgage insurance. Said sums are to264 be paid to Assignors in cash at the time provided in Subparagraph (2) above. Assignors agree and hereby do indemnify and save H. B. Zachry Company, Fort Polk Housing Corporation, their successors or assigns, free, clear and harmless from all claims of every kind resulting from the acts, omissions or commissions of Assignors or their agents in connection with the subject project to the effective date of this assignment. Assignors, jointly and severally, agree to reimburse Assignee all sums of money advanced to the mortgage-lender to secure issuance of F.N.M.A. commitment to purchase said FHA insured mortgages upon the failure to secure approval by the proper governmental agencies of this assignment within the time allowed Assignors to execute the above mentioned housing contract with the United States Army Engineers and other closing agreements. This agreement shall be binding upon the heirs and legal representatives of the parties hereto. EXECUTED IN MULTIPLE COPIES, this 14th day of March, 1957. On or about March 14, 1957, Associates was informed that FNMA was not in a position to issue the commitment to purchase as there was not sufficient funds remaining from the appropriation265 made by Congress for Capehart projects. On March 20, 1957, Associates, at the request of J. D. Lang (hereinafter referred to as Lang) of Zachry, requested the United States, through its contracting officer, to cause the FHA director in Shreveport, Louisiana, to resume processing the application for eight mortgages that eight commitments could be issued in lieu of the one commitment issued on March 13, 1957. This request resulted in the issuance of an amended letter of acceptability on April 11, 1957. On April 5, 1957, Harry F. Allen, director of the FHA, wrote the following letter of H. A. Crabb & Company, Inc.: Pursuant to Mr. F. A. Hunter's request of April 1, 1957, in regard to subletting the whole housing project to the H. P. Zachry Company of San Antonio, Texas, I wish to advise that this Administration would not object to such subletting provided the H. B. Zachry Company could first submit an acceptable FHA Form 2570 for approval by this Administration. On April 9, 1957, a joint venture contract was entered into by Zachry and Centex (hereinafter referred to as Zachry-Centex). This contract consummated negotiations between the two companies that commenced during February266 1957. The preamble to the joint venture contract provided as follows: THIS AGREEMENT, made and entered into by and between H. B. ZACHRY COMPANY, a Delaware corporation with offices in San Antonio, Texas, hereinafter called "First Party", and CENTEX CONSTRUCTION CO., INC., a Delaware corporation with an office in Dallas County, Texas, hereinafter called "Second Party", WITNESSETH: WHEREAS, First Party has heretofore made and entered into a contract with G. L. Christian and Associates, which contract is dated March 14, 1957, under the terms of which the said G. L. Christian and Associates have agreed to assign all of their rights and interests in the Fort Polk, Leesville, Louisiana, FHA No. 059-81003, Army No. 2, Project, described in Letter of Acceptability dated December 17, 1956, and letter extending the date for compliance therewith dated February 27, 1957, signed by W. P. McCrone, Colonel, CE, District Engineer, Corps of Engineers, U.S. Army, Galveston District, Galveston, Texas, and all contracts issued or to be issued thereunder with complete rights of subrogation, under certain conditions as therein set forth, and which contract is referred to and made a part hereof for267 all purposes; and WHEREAS, First Party and Second Party desire to associate themselves in a Joint Venture for the purpose of effecting or causing to be effected said contract of assignment, and undertaking the construction of said Armed Services Housing Project and all liabilities and obligations in connection therewith; and WHEREAS, it is desirable that the interests of the parties hereto, as such joint venturers, in performance of the premises, and any profits to be derived therefrom and any liability for any losses incurred in connection therewith, be defined by an agreement in writing: * 1. The parties hereto agree to associate themselves in a Joint Venture for the purpose of constructing and erecting an Armed Services Housing Project, being known and now designated as FHA Project No. 059-81003, Army No. 2, in the event that and only in the event that First Party is able to fully, finally and effectually obtain from G. L. Christian and Associates, by assignment or by subletting, whichever is appropriate and feasible, all the right, title and interest of the said G. L. Christian and Associates under the terms and provisions of the Letter of Acceptability dated December 17, 1956, as268 extended, or as may be hereafter extended. 2. Under the terms of this agreement, the interests of the parties hereto in and to the performance of said Housing Contract, and in any and all property, materials and equipment acquired in connection therewith, and in and to any and all monies which may be derived from the permormance of said Housing Contract, shall be in the proportion of one-third (1/3) to First Party and two-thirds (2/3) to Second Party. 3. Notwithstanding anything to the contrary herein, it is agreed that any and all sums of money payable under the terms of said agreement of March 14, 1957, or any amendment thereto made with the consent of the parties hereto, shall be payable by the parties hereto in the proportions set forth in Paragraph 2 above and deemed a part of the Joint Venture. It is also agreed that any and all sums of money required to be advanced, deposited or paid in connection with the Housing Contract, either before, after or at the time the Housing Contract is executed, shall likewise be paid and provided for in the same proportions. 4. All net profits, of any kind, received from the performance of the aforesaid Housing Contract, and any anl all269 losses resulting therefrom, shall be participated in and shared by the parties hereto proportionately and in accordance with their respective interests as set forth above. On April 11, 1957, an amended letter of acceptability was mailed to McCrone, acting as agent and contracting officer for the United States, to Associates. This letter amended the original letter of acceptability in that the 2,000 unit housing project at Fort Polk was divided into eight areas. The amended letter of acceptability also required the organization of eight corporations and the breakdown of the other relevant items into eight parts. In addition, Associates was required to take all steps necessary to cause the Federal Housing Commissioner to issue a commitment for insurance on or before April 25, 1957. Associates was given to May 15, 1957, to meet the conditions and to execute the contract or contracts for the construction of the 2,000 housing unit project at Fort Polk, Louisiana. On April 16, 1957, the following letter was sent by Associates' attorney to Zachry: Reference is made to the agreement between H. B. Zachry Company and G. L. Christian & Associates, dated March 14th, 1957, concerning the270 Fort Polk, Louisiana Armed Services Housing Project. Pursuant to the request of your Mr. J. D. Lang, said project has now been divided into eight areas and in connection therewith, I am enclosing herewith letter of acceptability (as amended) dated April 11th, 1957, from Col. W. P. McCrone, District Engineer, Contracting Officer, Corps of Engineers, U.S. Army, Galveston, Texas. It is called to your attention that as a result of having broken the project into eight areas, this letter of acceptability now requires certain immediate steps to be taken in order for the letter of acceptability to remain in force, and not jeopardize the contracts to be entered into as therein provided. In view of the aforementioned agreement with your company, it is presumed that the various steps outlined in said letter of acceptability will be undertaken and completed by you, all of which should be made known to the contracting officer as requested in said letter of acceptability. As previously indicated, the writer will be very happy to continue to assist you and the other members of your organization in whatever manner is desired to the end that the contracts and other required documents may be concluded271 at the earliest possible date. I have been instructed to advise you that each of the members of the joint venture comprising G. L. Christian & Associates, stand ready, willing and able to assist you in such manner as may be required of any or all of them. It is my understanding that you have been previously furnished with copies of letters from the proper governmental agencies approving the assignment and/or subletting of the whole of the aforementioned construction project to you. In the event, however, that same may not have come to your personal attention, I am attaching herewith an additional copy of each of same. FHA form No. 2570 is attached hereto which should be completed and returned to H. A. Crabb & Company, Inc. for submission to the Federal Housing Administration as indicated in the attached letter. If there is anything further which must be done by G. L. Christian & Associates in compliance with their agreement, I would appreciate your so advising me. We believe it advisable to bring this matter to as speedy a conclusion as possible. On April 18, 1957, Crabb, on behalf of Associates, returned to the director of FHA, in Shreveport, the commitment for insurance issued272 on the whole project. At that time, he requested that the FHA process eight applications for mortgage insurance to cover the eight areas into which the whole project had been divided and to issue eight commitments in accordance therewith. During the period March 14, 1957, to June 27, 1957, Associates continued negotiating with several other parties in an attempt to dispose of their rights under the letter of acceptability dated December 17, 1956, as amended. On May 15, 1957, pursuant to a request from Hunter, acting in behalf of Associates, McCrone extended the May 15, 1957, deadline provided in the amended letter of acceptability of April 11, 1957, to July 15, 1957. On June 3, 1957, Zachry-Centex called upon Associates to cause H. A. Crabb & Company, Inc., the party to whom the FHA insurance commitments had been issued, to assign same to the Republic National Bank of Dallas (hereinafter referred to as Republic National Bank). ZachryCentex had arranged for the Republic National Bank to handle the interim financing of the construction of the 2,000 housing units at Fort Polk, Louisiana. The Republic National Bank was to pay the commitment fee to the FHA and at the appropriate time273 to apply to the FNMA and pay the FNMA commitment fee. On June 3, 1957, the attorney for Zachry-Centex wrote the attorney for Associates a letter which provided, in part, as follows: In confirmation of our telephone conversation on this date concerning the closing of the Fort Polk housing project, you have agreed to send to me immediately the interim financing commitment documents of Republic National Bank of Dallas, executed by Mr. F. A. Hunter, attorney-in-fact for G. L. Christian and Associates. Heretofore you have been informed that I have been designated as the attorney for H. B. Zackry Co., and Centex Construction Co., Inc., a Joint Venture and that it is contemplated that G. L. Christian & Associates will assign the Housing Contract on this job to such Joint Venture, such assignment to be delivered and consummated at time of closing. As you know, presently the commitments in connection with this project have been issued to H. A. Crabb & Co. Since the interim financing will be handled by Republic National Bank of Dallas, an assignment of the same must be made from H. A. Crabb & Co., assignor, to Republic National Bank of Dallas, assignee. H. B. Zachry Co., and Centex Construction274 Co., Inc., will cause the Republic National Bank of Dallas, after the assignment aforesaid, to pay the commitment fees as required under the said commitments. Since these commitments were issued May 10, it will be necessary that this payment be made on or before Friday, June 8; otherwise, the commitments will expire by the terms thereof. You are therefore requested to obtain this assignment of the commitments immediately. At the appropriate time Republic National Bank of Dallas, to whom the commitments have been issued, will make application to FNMA and pay the FNMA commitment fee. Naturally, our commitments in connection with this matter are conditioned upon and subject to the Letter of Acceptability issued to G. L. Christian & Associates remaining in effect through closing of the project in the Joint Venture aforesaid, as intended in the agreement between H. B. Zachry Co., and G. L. Christian & Associates. At Galveston, on Wednesday, May 29, Col. McCrone, District Engineer, requested that G. L. Christian & Associates advise him in writing to the effect that it was contemplated that G. L. Christian & Associates were to assign the Housing Contract at closing to H. B. Zachry Co. 275 , and Centex Construction Co., a Joint Venture, and it is therefore requested that you so advise him immediately. Just prior to June 13, 1957, the Judge Advocate General, Department of the United Sttes Army, advised McCrone that because of the provisions of revised statute section 3737, the United States could not approve of any assignment between Associates and the Zachry-Centex joint venture. On June 13, 1957, McCrone was advised by the Judge Advocate General that Associates could enter into a 100 percent subcontract with Zachry-Centex and as part of the subcontract agreement Associates could execute an irrevocable power of attorney in favor of Zachry-Centex giving them complete control of the work and all of the administration in connection with it. On June 27, 1957, an agreement was entered into by and between Associates and Zachry-Centex which provided as follows: AGREEMENT TO SUB-CONTRACT WITH IRREVOCABLE POWER OF ATTORNEY ATTACHED THIS AGREEMENT, made this the 27th day of June, A.D. 1957, by and between G. L. Christian and Associates, consisting of G. L. Christian, F. A. Hunter, O. Gerrard, A. J. Whipple, Preston R. Plumb, N. H. Mitchell, P. H. Wolf and H. A. Crabb, a276 Joint Venture, and Centex Construction Co., Inc. and H. B. Zachry Co., a Joint Venture, WITNESSETH: WHEREAS, pursuant to Invitation No. ENG-41-243-57-8 issued by the Department of the Army, acting by and through the District Engineer, Corps of Engineers, Galveston District, under date of 16 November, 1956, G. L. Christian and Associates submitted a bid for the construction of an Armed Services Housing Project consisting of 2000 housing units to be constructed at Fort Polk, Louisiana, and WHEREAS, under date of 17 December, 1956 (as extended), G. L. Christian and Associates were given a Letter of Acceptability pursuant to their bid, and designated as eligible bidder, and WHEREAS, the invitation to bid provided in Paragraph 32 thereof that, with the approval of the Contracting Officer and the FHA, it would be permissible to subdivide the project into two or more units for mortgaging purposes, and WHEREAS, with the approval of the Contracting Officer and the FHA, the project has been sub-divided into eight units known and identified as Fort Polk Housing Corp., Fort Polk Housing Corp. H. Fort Polk Housing Corp. III, Fort Polk Housing Corp. IV, Fort Polk Housing Corp. V, Fort277 Polk Housing Corp. VI, Fort Polk Housing Corp. VII, and Fort Polk Housing Corp. VIII, and WHEREAS G. L. Christian and Associates proposes to enter into a contract for the construction of the 2000 units comprising the project, the parties to said contracts to be G. L. Christian and Associates, the Department of the Army and the eight mortgagor-builders designated immediately above, and WHEREAS, Invitation No. ENG-41-243-57-8 provides in Paragraph 27 thereof that with the prior written approval of the Department of the Army and the Federal Housing Administration, the eligible bidder may sub-contract substantially all construction, and WHEREAS, subsequent to the time of submission of its bid pursuant to the aforementioned invitation it became necessary for G. L. Christian and Associates to sub-contract with another party for the construction as provided for in said invitation to bid, and WHEREAS, Centex Construction Co., Inc. and H. B. Zachry Co. have reviewed to its complete satisfaction the bid of the eligible bidder for the construction of the housing project referred to in said letter of acceptability, as amended and extended, as well as the invitation for bids, the plans, 278 specifications and designs upon which said bid was predicated, together with all other contract documents, changes, alternates, additives and related matters whether contained in the specification forms and instructions or otherwise, without relying in any manner upon G. L. Christian & Associates or any of the members of said joint venture or its agents and representatives, and WHEREAS, Centex Construction Co., Inc. and H. B. Zachry Co., a Joint Venture, are experienced in the construction of housing to be constructed under Contract No. DA-41-243-eng-3361 and construction of the project will be expedited by having the direct control and supervision of construction in Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, and NOW THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration paid to G. L. Christian and Associates by Centex Construction Co., Inc. and H. B. Zachry Co., a Joint Venture, the receipt of which is hereby acknowledged, the parties hereto agree as follows 1. G. L. Christian and Associates hereby agree to sub-contract to Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, as general279 contractor all of the work provided for and contemplated in the aforesaid Letter of Acceptability, as amended and extended, for the contract price therein set out, or as may be hereafter changed and relinquishes all its right, title and interest in and to the proposed contract between G. L. Christian and Associates, the Department of the Army and the eight mortgagor-builders, to be known and identified as Contract No. DA-41-243-eng-3361. 2. Centex Construction Co., Inc. and H. B. Zachry Co., a Jointventure, accept this sub-contract from G. L. Christion and Associates together with all of the right, title, interest, liabilities and obligations of G. L. Christian and Associates in and to the proposed Contract No. DA-41-243-eng-3361 and hereby assumes all of the rights and obligations of G. L. Christian and Associates under the Letter of Acceptability, as amended and extended, and the proposed contract, and further agrees to relieve and save harmless the said G. L. Christian and Associates from its obligations and responsibilities set forth in said Letter of Acceptability, as amended and extended, and in the proposed contract. 3. Simultaneously with the execution of this agreement280 to sub-contract the whole of said work to be performed under said Housing Contract hereinabove designated to Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, G. L. Christian and Associates have executed an irrevocable power of attorney coupled with an interest, which irrevocable power of attorney is attached hereto and made a part hereof for all purposes as though fully and completely set out herein. 4. As part of the consideration for this agreement to sub-contract the whole of said work to be performed under the said housing contract hereinabove designated to Centex Construction Co., Inc. and H. B. Zachry Co., and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the undersigned, Centex Construction Co., Inc., its successors and assigns, and H. B. Zachry Co., its successors and assigns, jointly and severally, hereby covenant and agree to at all times save harmless and keep indemnified the said G. L. Christian & Associates, and each of said members constituting the joint venture of G. L. Christian & Associates, against any and all claims, suits, actions, debts, damages, costs, charges and expenses, including281 Court costs and attorney's fees, and against all liability, losses and damages of every nature whatsoever which G. L. Christian & Associates, or any of the members of the said joint venture, shall or may at any time sustain or be put to by reason of the aforementioned letter of acceptability, as amended and extended, the proposed housing contract No. DA-41-243-eng-3361, the Power of Attorney hereinbefore referred to and made a part hereof, and by the execution of this agreement. The irrevocable power of attorney attached to the agreement dated June 27, 1957, gave Zachry-Centex the power "to do any and every act and execute any and every power that Principal or each of us might or could do or exercise to fully, effectually and finally carry out and comply with all the terms and provisions of" the letter of acceptability, as amended. The procuration gave Zachry-Centex the power to enter into the housing contract and to do any and everything incident thereto. The procuration also recited that Associates intended to grant and give Zachry-Centex a "universal power of attorney only insofar as said Housing Contract is concerned and the projects to be constructed thereunder" including "the282 authority to bring and defend suits where necessary in the performance and completion of said Housing Contract or any right or rights incident thereto." The following letter dated June 27, 1957, was sent by Associates to Zachry-Centex: On this date G. L. Christian and Associates on the one part and Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, on the other part have executed a contract to subcontract coupled with an irrevocable power of attorney, which instruments are hereby referred to and made a part hereof. In connection therewith and in implementation thereof you will do the following: 1. You will pay or cause to paid the balance of the FHA commitment fees on the above projects when the same are due. 2. When FNMA will have funds available for this Capehart project, you will cause an application to be made for eight (8) commitments arising out of the above captioned project, and simultaneously with said application, will pay the necessary commitment fees. 3. You will meet all necessary requirements and take all necessary steps to keep the Letter of Acceptability (as amended and extended) heretofore issued in full force and effect. 4. Simultaneously283 with the execution of this agreement you will place in escrow in the Republic National Bank of Dallas the following: a. One Hundred Thousand ($100,000.00) Dollars in cash to be disbursed to G. L. Christian and Associates as provided in the escrow agreement. b. An amount equal to that which was put up by G. L. Christian and Associates with FHA at the time of filing the application, which amount is at the rate of One and 50/100 ($1.50) Dollars per One Thousand ($1,000.00) Dollars, or approximately Fifty Thousand ($50,000.00) Dollars. c. The sum of Twenty-Five Thousand ($25,000.00) Dollars, which represents the amount of the cash bid bond heretofore deposited by G. L. Christian and Associates with the United States of America. In this connection we agree that in the event said Twenty-Five Thousand ($25,000.00) Dollars is returned to G. L. Christian and Associates, same will be immediately endorsed in your favor and delivered to you. d. The notes aggregating One Hundred Fifty Thousand ($150,000.00) Dollars. If the said Housing Contract is not entered into and the projects closed within forty (40) days after FNMA has Capehart funds available therefor, then Centex Construction284 Co., Inc., and H. B. Zachry Co., a Joint Venture, has the option to (a) pay G. L. Christian and Associates all of the sums deposited in escrow, and to cause the escrow agent to deliver to G. L. Christian and Associates the notes hereinabove referred to at the expiration of sixty (60) days from the date FNMA has Capehart funds available therefor or at the closing, whichever is sooner; or (b) Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, may at the expiration of the forty (40) day period elect to terminate the entire contract as between the parties, and any sums paid by Centex Construction Co., Inc., and H. B. Zachry Co., a Joint Venture, for commitment or application fees will be forfeited. 6. It is represented and you are advised that paragraph 4 of the said agreement to sub-contract shall not be interpreted and it is not the intention thereof that you will be liable for any costs or expenses or claims incurred by G. L. Christian and Associates prior to March 14, 1957, nor will you be liable for any costs, expenses or claims incurred by G. L. Christian and Associates other than reimbursement of the Twenty-Five Thousand ($25,000.00) Dollar bid deposit and FHA285 application fee paid by G. L. Christian and Associates, it being the intention of said agreement that you be liable for all work or acts or activities in connection therewith. If this is your understanding, please indicate your acceptance thereof in the space provided below, Very truly yours, G. L. CHRISTIAN AND ASSOCIATES By /s/F. A. Hunter / F. A. Hunter, Individually and as Agent and Attorney-in-Fact ACCEPTED: CENTEX CONSTRUCTION CO., INC., AND H. B. ZACHRY CO., A JOINT VENTURE CENTEX CONSTRUCTION CO., INC. By /s/ Tom Lively / President H. B. ZACHRY CO. By /s/ H. B. Zachry / President On July 29, 1957, Zachry-Centex, as agent and attorney in fact for Associates, contracted with the United States for the construction of 2,000 housing units at Fort Polk for the aggregate consideration of $32,893,100. In connection with the housing contract, there were eight payment bonds and eight performance bonds executed. Associates, Centex and Zachry were the principals on all sixteen of these bonds. The total penal sums of the eight performance bonds aggregate $32,893,100. All records maintained by the United States in connection with the work being done on 2,000 housing units286 at Fort Polk, Louisiana, listed the name G. L. Christian and Associates as prime contractor. Associates were paid an aggregate of $250,000 as a result of their agreement to convey their rights under the letter of acceptability and ultimately their execution of the 100 percent subcontract on June 27, 1957. This payment was made as follows: (a) Cash in the amount of $174,500 was paid to cover respectively: (1) $100,000 consideration; (2) $25,000 reimbursement of bid deposit (not included in the $250,000 total); (3) $49,500 reimbursement of deposit made to the FHA district office in Shreveport, Louisiana (not included in the $250,000 total). (b) As further consideration, 14 promissory notes in the aggregate sum of $150,000 were executed by Centex and Zachry as makers all dated March 14, 1957, and payable to the respective members of the G. L. Christian and Associates joint venture. These notes matured and were paid by the Zachry-Centex joint venture as follows: PayeeDate PaidAmountF. A. Hunter12-14-57$ 9,500G. L. Christian12-14-579,500O. Gerrard12-14-579,500A. J. Whipple12-14-5721,375Paul H. Wolf12-14-5721,375N. H. Mitchell12-14-571,875Preston R. Plumb12-14-571,875F. A. Hunter9-14-589,500G. L. Christian9-14-589,500O. Gerrard9-14-589,500A. J. Whipple9-14-5821,375Paul H. Wolf9-14-5821,375N. H. Mitchell9-14-581,875Preston R. Plumb9-14-581,875$150,000287 By telegram dated February 5, 1958, the United States notified "G. L. Christian and Associates, Inc., c/o Centex Construction Co., Inc. and H. B. Zachry Co." that all work under the contract for the 2,000 dwelling unit project at Fort Polk, Louisiana, was to be terminated. Following the termination of the contract by the United States, a suit styled G. L. Christian and Associates v. United States of America was filed in the Court of Claims for damages sustained as a result of an alleged breach of contract. In this suit Associates was represented by its agent and attorney in fact, Zachry-Centex. The petitioners had no monetary interest in the proceedings before the Court of Claims. On their Federal income tax returns for 1957, petitioners reported their distributive share of the profit on the transaction with Zachry-Centex as long-term capital gains. As to each petitioner, respondent determined: you are not entitled to a deduction from gross income of * * which you claimed under Section 1202 of the Internal Revenue Code of 1954 against income you received in connection with a Letter of Acceptability issued on the Department of the Army Project No. 059-81003 at288 Fort Polk, Leesville, Louisiana, for the reason that you have not established that there was a sale. In the event you establish there was a sale, it is determined that the subject of the sale was not a capital asset. In any event, the Letter of Acceptability was held for less than six months. Opinion The issue is whether petitioners correctly reported their distributive share of the gains from the transaction with Zachry-Centex as long-term capital gain. In order for a transaction to result in a capital gain, there must be a "sale or exchange" of a "capital asset" that has been "held for more than six months." Section 1222(3), Internal Revenue Code of 1954. Assuming, arguendo, that petitioners' rights under the letter of acceptability constituted a capital asset 2 and there was a sale or exchange, petitioners have failed to show that the asset was held for more than six months. 289 Petitioners contend that their rights were held for more than six months. It is petitioners' position that their rights were acquired on December 17, 1956, when the letter of acceptability was issued to them and were sold on June 27, 1957, when the subcontract with irrevocable power of attorney was entered into. Petitioners assert that although they signed an agreement and attempted to sell their rights to Zachry on March 14, 1957, no valid contract ever resulted. Petitioners contend that when they signed the agreement they were advised by their attorney that it would not be binding on them unless financing was available from FNMA. They maintain that they did not intend to make a contract unless the FNMA financing was available. Since the financing did not materialize, petitioners contend that the agreement was never in force or effect. Petitioners contend that there was no unconditional delivery of the instrument. In addition, petitioners contend that the March 14 contract was ineffective because it was not signed or approved by any governmental official. It is also argued that petitioners' intent is evidenced by the fact that after March 14, 1957, they continued to negotiate with290 others in an attempt to dispose of their rights. The preponderance of the evidence is against petitioners. The contract of March 14, 1957, effectively disposed of any rights petitioners had. The attorney 3 representing Associates at the time of the March 14, 1957, contract negotiations testified that he advised petitioners, together with the other joint venturers, not to execute the contract unless it was conditioned on the FNMA financing being available. Assuming, arguendo, that this is true, there is no indication as to how long this limitation was to last. Was it intended to be limited to one day, one week, a month or a year"? In any event, there is no evidence that Zachry ever agreed to any such conditional signing. Petitioners' attorney also testified that in his opinion there was no unconditional delivery of the March 14 contract. We regard this as little more than an unsupported conclusion negatived by other facts. See Arden-Rayshine Co., 43 B.T.A. 314">43 B.T.A. 314, 320 (1941); 7- Up Fort Worth Co., 8 T.C. 52">8 T.C. 52 (1947).291 There are many factors of record which show that both Associates and Zachry considered the March 14, 1957, contract to be valid and binding. First, petitioners' contentions on brief are contradicted by their own testimony. Hunter and Christian were the only two joint venturers to testify. Both of these men testified that they intended to enter into a binding contract on March 14, 1957. Second, by mid-March 1957, it was known that the FNMA financing was not available. Yet, on April 1, 1957, Hunter had apparently written the director of the FHA regarding the subletting of the housing contract to Zachry. Further, in a letter dated April 5, 1957, to H. A. Crabb & Company, Inc., the director of the FHA stated there would be no objection to subletting the contract provided Zachry submitted a Form 2570 for approval. Third, on March 20, 1957, Associates, at the request of Zachry, requested the United States, through its contracting officer, to cause the FHA to resume processing of the application for eight mortgages so that eight commitments could be issued in lieu of the one issued March 13, 1957. Fourth, on April 9, 1957, Zachry and Centex entered into a joint venture agreement which stated, 292 in part, that: WHEREAS, First Party [Zachry] has heretofore made and entered into a contract with G. L. Christian and Associates, which contract is dated March 14, 1957, under the terms of which the said G. L. Christian and Associates have agreed to assign all of their rights and interests in the Fort Polk, Leesville, Louisiana, FHA No. 059-81003, Army No. 2, Project, described in Letter of Acceptability dated December 17, 1956, and letter extending the date for compliance therewith dated February 27, 1957, signed by W. P. McCrone, Colonel, CE, District Engineer, Corps of Engineers, U.S. Army, Galveston District, Galveston, Texas, and all contracts issued or to be issued thereunder with complete rights of subrogation, under certain conditions as therein set forth, and which contract is referred to and made a part hereof for all purposes; * * [Italics supplied.] Fifth, on April 16, 1957, petitioners' attorney wrote Zachry concerning the housing contract. References were made to the "agreement between H. B. Zachry Company and G. L. Christian & Associates, dated March 14th, 1957." The subject of the letter was that the project had been divided into eight areas as requested by293 Zachry. It was pointed out that after having been broken down, the amended letter of acceptability required certain immediate steps to be taken in order to remain in force, and not jeopardize the contracts to be entered into. It was then stated that: In view of the aforementioned agreement with your company, it is presumed that the various steps outlined in said letter of acceptability will be undertaken and completed by you, all of which should be made known to the contracting officer as requested in said letter of acceptability. * * It is my understanding that you have been previously furnished with copies of letters from the proper governmental agencies approving the assignment and/or subletting of the whole of the aforementioned construction project to you. In the event, however, that same may not have come to your personal attention, I am attaching herewith an additional copy of each of same. FHA form No. 2570 is attached hereto which should be completed and returned to H. A. Crabb & Company, Inc. for submission to the Federal Housing Administration as indicated in the attached letter. On cross examination, petitioners' attorney was asked why he used the term "agreement" 294 in his letter. The following testimony was given in response to the question: A. If you will notice, the letter refers to the breaking up of the project into eight areas. Now, after our fiasco in Dallas and not having the "Fannie May" funds available we tried to interest as many people as we could, and to see if the joint venture could get interim financing, permanent financing or make a sale of the project. Q. Mr. Witness, would you answer the question I asked you, please. Why did you use the term "agreement"? A. Counsel, I will answer that, but I have to lay a predicate to what you are attempting to show as an inconsistency. I have to lay a proper predicate for it. Q. Co ahead, Mr. Ladin. A. You must remember, and I am sure you know, that Colonel J. D. Lang with the Zachry Company was the immediate predecessor of the district engineer of the Corps of Engineers at Galveston. In other words, the contracting officer, Colonel W. P. McCrone was the immediate successor to Colonel J. D. Lang, who was employed by Zachry. Colonel Lang was very helpful to us, and inasmuch as he knew the modus operandi of the Corps of Engineers in Galveston and he was in a better position to advise295 us how various things could be accomplished. G. L. Christian and Associates would like to have had the March 14 contract in effect, but Zachry did not consider it in effect. I think that is borne out by the fact that in one of your exhibits - Q. Let me restate my question. It strikes me that this answer is not responsive. I said your sentence says: "reference is made to the agreement dated March 14." A. We were trying to cause him to cooperate with us. Q. All right. Thank you. A. And they were denying the validity of the contract, and we were trying to get him to assist us. If cooperation was sought, it would appear that it could have been obtained in a more direct manner than referring to an "agreement" which petitioners contend was never in force or effect. Furthermore, in his testimony petitioners' attorney is apparently referring to "J. D. Lang" whereas the letter in question was addressed to "H. B. Zachry." In addition, the idea that Zachry was denying the effect of the contract seems to conflict with the fact that on April 9, 1957, Zachry and Centex entered into a joint venture for the specific purpose of building the homes called for in the letter of acceptability. 296 As we have pointed out before, the joint venture agreement specifically states that a contract was entered into on March 14, 1957. Sixth, on April 18, 1957, H. A. Crabb & Company, Inc., sent certain forms to the director of the FHA. At that time he was advised that the FHA Form 2570, referred to supra, executed by Zachry would follow by separate mail. Seventh, on June 3, 1957, an attorney for Zachry wrote petitioners' attorney concerning the housing project. Among other things, it was stated that: Naturally, our commitments in connection with this matter are conditioned upon and subject to the Letter of Acceptability issued to G. L. Christian & Associates remaining in effect through closing of the project in the Joint Venture aforesaid, as intended in the agreement between H. B. Zachry Co., and G. L. Christian & Associates. [Italics supplied.] Eighth, in a letter dated June 27, 1957, from Associates to Zachry-Centex, it was stated that it was not intended that Zachry-Centex be liable for any expenses or costs Associates incurred prior to March 14, 1957. The only exceptions were the $25,000 bid deposit and the FHA application fee. Ninth, the notes by which petitioners were paid297 were dated March 14, 1957. Petitioners' attorney testified that the notes were not executed until three or four days prior to June 27, 1957. He stated that they were dated on March 14 so that they would mature earlier and petitioners would get a higher rate of interest. However, when he was first questioned about the matter, he stated that he had no knowledge of when the notes were executed or by whom. Tenth, the contract of March 14, 1957, contemplated that other instruments might be needed in order that petitioners' rights under the letter of acceptability be transferred. The contract specifically provided: It is also understood and agreed that Assignors will secure from the proper governmental agencies the requisite written approval of this assignment at or prior to the date set for the execution of said housing contract and they further agree to execute any and all documents and papers necessary or required to effect this assignment. The subcontract with the irrevocable power of attorney attached was one of those anticipated necessary instruments. The subcontract did not result from the fact that there was no contract on March 14, but because this is the form requested by the298 Government. The Government, as it has the power to do under revised statutes section 3737 as last amended by Act of May 15, 1951, ch. 75, 65 Stat. 41 (section 15, 41 U.S.C.) refused to allow petitioners to "assign" the housing contract. However, it was suggested the arrangement could be accomplished by a 100 percent subcontract and irrevocable power of attorney. Even the Zachry-Centex joint venture agreement contemplated that the rights might be transferred by assignment or subletting whichever was appropriate. It just so happened that the subcontract was appropriate. While petitioners' continued negotiations lend some weight toward their contention that no contract was entered into on March 14, 1957, we believe that in view of the other facts of record this is insufficient to negative a disposition on that date. Petitioners' unilateral action could not undo what had previously been done. It would appear that much of the difficulty concerning this aspect could have been cleared up if some representative of Zachry had testified in this case. There is also little merit in petitioners' contention that the March 14 contract was ineffective because it was not signed or approved by any299 governmental official. This argument can be disposed of by the following one sentence quotation from petitioners' attorney's letter of April 16, 1957, supra: It is my understanding that you have been previously furnished with copies of letters from the proper governmental agencies approving the assignment and/or subletting of the whole of the aforementioned construction project to you. * * *Based on the record before us, we hold that petitioners did not hold the asset disposed of for more than six months. Decisions will be entered for the respondent. Footnotes1. Proceedings of the following petitioners are consolidated herewith: F. A. Hunter and Gladys Hunter, Docket No. 91747; and Oswald Gerrard, Jr., and Kathryn Gerrard, Docket No. 91750.↩2. On brief, petitioners attempt to identify the asset disposed of by stating that: "After making a bid on a government contract, the Petitioners were given a letter of acceptability. The letter of acceptability gave the Petitioners the right, by meeting certain conditions, to a government contract. This letter of acceptability and the benefits which went with it, is what the Petitioners were paid $250,000 for."↩3. All references to "petitioners' attorney" in this opinion refer to their attorney during the negotiations with Zachry and Centex and not to their attorney in this proceeding.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620031/	NANCY HUFF, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHuff v. CommissionerDocket No. 8703-93United States Tax CourtT.C. Memo 1995-200; 1995 Tax Ct. Memo LEXIS 200; 69 T.C.M. (CCH) 2551; May 4, 1995, Filed 200 Decision will be entered under Rule 155. Nancy Huff, pro se. For respondent: Harris L. Bonnette, Jr.GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined deficiencies in petitioner's 1989, 1990, and 1991 Federal income taxes in the amounts of $ 38,104.16, $ 802.04, and $ 614.55, respectively. Respondent also determined accuracy-related penalties under section 6662 1 for the respective taxable years in the amounts of $ 7,620.83, $ 160.40, and $ 122.91. After concessions, the issues remaining for our consideration are: (1) Whether petitioner is entitled, under section 104, to exclude any part of the $ 187,500 lawsuit settlement she received in 1989; (2) whether petitioner is entitled to claim dependency exemption deductions for her daughter for 1990 and 1991 and to use head of household rates for those years; (3) whether petitioner is entitled to certain medical deductions; and (4) whether petitioner is liable for accuracy-related penalties under section 6662 for 1989, 1990, or 1991. 201 FINDINGS OF FACT 2Petitioner resided in Winter Haven, Florida, at the time her petition in this case was filed. Sometime during 1983, petitioner became involved with Joe Gandolfo (Gandolfo). Gandolfo lived near petitioner in Florida, and petitioner, at a time when she was anticipating a divorce, sought Gandolfo's financial advice, for which he charged $ 1,000. Gandolfo later sent petitioner prospective investment materials, and petitioner became more involved with and reliant on Gandolfo as her financial and tax adviser. Gandolfo referred petitioner to accountants, lawyers, and investment opportunities. Gandolfo advised petitioner to invest in the International Thoroughbred Bloodstock Agency, Inc. (ITBA), a horse syndication corporation. ITBA was based in Fort Lauderdale, 202 Florida, with a horse farm in Ocala, Florida. ITBA engaged in the breeding of racehorses and the syndicating of its stallions, broodmares, and yearlings for sales percentages. Unbeknownst to petitioner, Gandolfo received 15 percent of any referred investors' gross investment dollars flowing to ITBA. On July 24, 1984, petitioner invested $ 9,800 for a one-fortieth interest in an ITBA syndication known as "Mr. Pleasure I", involving a stallion and broodmares. A certified public accountant, Richard Derk, prepared petitioner's 1984 through 1991 Federal income tax returns. On her 1984 tax return (in connection with the ITBA investment) petitioner claimed depreciation deductions, based on the following reported costs of animals: Type of AnimalReported CostClaimed DepreciationStallion$ 20,000$ 3,000Four broodmares40,00010,000Stallion2,000300Four broodmares4,0001,000Total 66,00014,300Petitioner also claimed $ 836 for farrier expenses on her 1984 return. Petitioner invested an additional $ 50,000 in ITBA syndications during 1985, and on her 1985 return, claimed a combined total of $ 28,510 in depreciation deductions with respect to her ITBA 203 investments. Petitioner also claimed other farm expenses in connection with various horses totaling $ 82,343, and she reported income from the horses of $ 19,549. During 1986, ITBA collapsed and went into a liquidating bankruptcy. In May 1986, petitioner learned of these problems, and that she would not be paid anything from her ITBA investments. On her 1986 income tax return, petitioner claimed a $ 54,190 loss attributable to the undepreciated adjusted basis of the horses. That loss consisted of a $ 97,000 cost basis, less $ 42,810 of previously claimed depreciation. The entire $ 54,190 was used to offset petitioner's citrus farm income. On her 1986 return, petitioner reported $ 8,000 of income, and claimed $ 1,040 of expenses concerning the horses. The ITBA loss caused severe financial pressure and reversals to petitioner. In that connection, and, after learning of the collapse of ITBA in 1986, petitioner began to experience stress. Prior to 1986, petitioner had been successful in earning income from her citrus grove business activity, but the ITBA collapse resulted in her becoming heavily indebted with mortgages on her grove property and less able to repay the debt. During204 1988, petitioner's attorney filed a complaint against Gandolfo seeking money damages in excess of $ 145,000 in connection with her ITBA investment. Remuneration was sought on eight alternate grounds: (1) Federal securities laws, (2) Federal RICO laws, (3) Florida Civil Remedies for Criminal Practices Act, (4) common law fraud, (5) negligence, (6) breach of fiduciary duty, (7) Florida Deceptive and Unfair Trade Practices Act, and (8) misleading advertising. Petitioner sought actual damages, punitive damages, attorney's fees, prejudgment interest, court costs, and any other relief that the court deemed just and proper. Petitioner's complaint did not contain any specific personal injury allegation. Petitioner understood that her lawyer sought punitive damages because of her emotional distress and because of her loss regarding her business reputation. During 1989, petitioner executed a release of her claims against Gandolfo in exchange for $ 187,500. This document released Gandolfo and others from claims and demands "including but not limited to * * personal injuries, emotional distress, loss of reputation and damage to business reputation". Of the $ 187,500 settlement, petitioner205 received a net sum of $ 111,596.75 (after reductions for legal fees and court costs in the amounts of $ 75,000 and $ 903.25, respectively). When petitioner read and signed the release, she believed that the settlement was for emotional distress and mental stress. Thus, petitioner did not report any portion of the settlement on her 1989 income tax return. When petitioner signed the release and signed her 1989 Federal income tax return, she was not aware of the contents of the complaint filed against Gandolfo. Petitioner claimed her daughter, Sherry Brady (Sherry), as a dependent for 1990 and 1991. Sherry's 1990 Federal tax return (Form 1040EZ) reported adjusted gross income of $ 9,473.79. Sherry was 27 years old during 1990. During May or June 1990, Sherry moved in with petitioner and resided with her during the remainder of 1990 and until the fall of 1991. During 1990 petitioner provided Sherry with food, paid $ 559.90 for Sherry's auto insurance, and provided her with a $ 9,400 allowance. Sherry lived with petitioner until about September 1991, when she moved to Chicago to attend school. In 1991, Sherry did not have sufficient taxable income to file a tax return, and she206 was supported by petitioner. Petitioner paid $ 599 for auto insurance, and provided an allowance of $ 16,300 to Sherry during 1991. Petitioner spent $ 1,500 on Sherry's food for each of the years 1990 and 1991. At the end of 1991 (during the holiday season) Sherry occasionally worked in a department store in Chicago. OPINION 3Settlement of the Gandolfo litigation -- Petitioner relied on the advice of her financial and tax adviser, and invested in horse-breeding syndications. Her investment collapsed, and she claimed an ordinary loss to reduce her 1986 gross income (in an amount equal to the adjusted basis of her investment). Subsequently, petitioner sued her adviser and the complaint contained allegations of wrongdoing by Gandolfo, but did not specifically seek damages for personal injury. Petitioner's loss was substantial in relation to her total assets and sources of income, 207 and it placed her in a difficult financial situation. These financial reverses caused petitioner to experience extreme emotional stress and caused her to seek various types of medical treatment (which is more fully addressed in the "Medical Expenses" section of this opinion). In the final negotiation and resolution of petitioner's claim, Gandolfo agreed to settle petitioner's claim for an amount that was close to double her reported tax-cost basis for the investment. The settlement document contained the statement that the amount to be received by petitioner was for but "not limited to * * personal injuries, emotional distress, loss of reputation and damage to business reputation". Under these circumstances, petitioner did not report any portion of the settlement, contending that it was for personal injury. Respondent determined that petitioner's complaint did not sound in tort or plead any personal injury, so that no part of it could be tax exempt under section 104. Respondent argues that section 111 will apply if we find that any portion of the settlement is exempt. That section 4 would render taxable any portion of the settlement that is represented by tax benefits already208 received by petitioner. Section 104(a)(2) excludes damages received due to personal injuries. The term "personal injuries" includes nonphysical as well as physical injuries. Downey v. Commissioner, 97 T.C. 150">97 T.C. 150, 159 (1991) (and cases cited therein), supplemented by 100 T.C. 634">100 T.C. 634 (1993), revd. on other grounds and remanded 33 F.3d 836">33 F.3d 836 (7th Cir. 1994); see also United States v. Burke, 504 U.S. 229">504 U.S. 229, n.6 (1992). Accordingly, the distinction made is one between personal and nonpersonal injuries and not between physical and nonphysical injuries. Downey v. Commissioner, supra at 159 (citing Roemer v. Commissioner, 716 F.2d 693">716 F.2d 693, 697 (9th Cir. 1983), revg. 79 T.C. 398">79 T.C. 398 (1982)). 209 Excludable damages under section 104 are those that are received in pursuit of tortlike claims, and not those that arise out of economic or contractual rights. Id. at 160 (citing Byrne v. Commissioner, 883 F.2d 211">883 F.2d 211, 215 (3d Cir. 1989), revg. 90 T.C. 1000">90 T.C. 1000 (1988)). Where damages are received pursuant to a settlement, excludability depends on the nature of the claim that was the actual basis for settlement rather than the validity of the claim. Id. at 161 (and cases cited therein). Accordingly, we must determine here whether any portion of the $ 187,500 settlement was from a tort or tortlike injury. Respondent focuses solely on petitioner's complaint (which does not specifically plead any damages attributable to personal injuries). 5 Petitioner, on the other hand would have us focus solely on the settlement document (in the form of a release) which includes nonspecific claims for personal injuries and emotional distress. Obviously, we must consider both documents and other aspects of the record to decide the nature of the claim and the nature of the settlement. 210 Respondent's position is that the entire $ 187,500 settlement is nonpersonal. This, however, contradicts respondent's position that petitioner's investment was limited to $ 97,000, as opposed to the more than $ 200,000 that petitioner argues represents her basis. Petitioner testified that certain bank transfers, in excess of the $ 97,000 paid to ITBA and claimed on her income tax returns, were also payments made to ITBA for additional syndications. The record, however, does not support petitioner's testimony. The referenced bank transfers do not show the payee. Further, petitioner's income tax returns do reflect a tax cost basis of $ 97,000, both for purposes of claiming depreciation and for the ITBA loss. Moreover, this situation is further complicated by petitioner's complaint against Gandolfo alleging, without explanation, money damages in excess of $ 145,000. Finally, the parties do not address the farming expenses claimed concerning petitioner's ITBA investment. The settlement document (release) reflects: "personal injuries, emotional distress, loss of reputation and damage to business reputation". Considering the complaint, the settlement, and the relationship of the211 total investment to the total settlement, we conclude that the settlement was for $ 90,500 in personal injuries and for $ 97,000 for the nonpersonal loss of investment. Accordingly, $ 90,500 of the settlement is excludable under section 104(a)(2). See Stocks v. Commissioner, 98 T.C. 1">98 T.C. 1, 17 (1992). Having decided that the settlement should be allocated, and that $ 90,500 of the $ 187,500 is exempt from tax, we must also consider the allocation of the legal fees and costs under section 265(a)(1). That section precludes a deduction for legal fees attributable to tax-exempt income. Stocks v. Commissioner, surpa at 17-18; sec. 1.265-1(c), Income Tax Regs. Hence, the $ 75,000 in legal fees and the $ 903.25 in costs must be allocated. We hold, for the same reasons underlying our holding on the allocation of the settlement that petitioner is entitled to deduct a legal fee of $ 38,800 and costs of $ 467. 6212 Because we have held that $ 97,000, less the apportioned amounts for fees and costs, is taxable, it is unnecessary to consider respondent's alternate position (i.e., that section 111 would require petitioner to report the portion of the settlement attributable to the tax benefits). Dependency exemption for petitioner's daughter -- Petitioner claims that for 1990 and 1991 she was entitled to dependency exemption deductions for her daughter, Sherry, who was approximately 27 or 28 years old at the relevant times. Petitioner also claimed head of household filing status for 1990 and 1991, which would result in a lower rate of tax. Petitioner must show that she provided over one-half of her daughter's support and that her daughter earned less than the exemption amount for the taxable years in question, to claim the dependency exemptions. Secs. 152(a), 151(c)(1)(A). 7 Because petitioner's daughter earned more than the exemption amount in 1990, petitioner cannot claim a dependency exemption for her. 213 Petitioner's daughter lived with petitioner into the fall of 1991, and petitioner paid almost $ 17,000 for her daughter's support, not including food. Petitioner's daughter left petitioner's home during the fall of 1991 to become a student in Chicago, and she worked occasionally during the holiday season. Petitioner's testimony, along with the other evidence in the record, convinces us that her daughter did not earn more than the exemption amount during 1991. Accordingly, petitioner has shown that she is entitled to claim a dependency exemption for her daughter for 1991. Furthermore, petitioner was not married, and she maintained her home for more than one-half of the 1990 and 1991 tax years as her daughter's principal place of abode. Accordingly, petitioner was entitled to file her 1990 and 1991 returns using head of household rates, under section 2(b)(1)(A)(i). Medical expenses -- Respondent disallowed petitioner's claimed medical deductions for 1989, 1990, and 1991. Respondent conceded that certain of petitioner's medical expenses would be allowable in each year, but that the conceded amounts did not exceed the 7.5 percent of adjusted gross income threshold. Accordingly, 214 we review the record without considering any of respondent's concessions. Petitioner does not contend that her daughter was a dependent for 1989, and, accordingly, is not entitled to any 1989 medical deduction on her behalf. Secs. 152(a), 213(a). Although petitioner was not entitled to claim a dependency exemption deduction for Sherry for 1990 (because Sherry had income exceeding the exemption amount), Sherry was petitioner's dependent, and her medical expenses paid by petitioner for 1990 remain deductible for purposes of section 213. See secs. 1.213-1(a)(3)(i), 1.151-2, Income Tax Regs.For 1991, petitioner was entitled to claim an exemption for Sherry and is entitled to deduct any medical expenses paid on her behalf for that year. Under section 213, taxpayers are entitled to medical deductions for the cost of medical care (to the extent the total amount of such medical care exceeds 7.5 percent of one's adjusted gross income). "Medical care" is generally defined as "amounts paid * * for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, * * * [and] for insurance * * * covering medical215 care". Sec. 213(d)(1)(A), (C). Petitioner bears the burden of proving that she is entitled to the medical deductions that she claimed. Rule 142(a). We shall consider the general, broad categories of items, and then apply our findings and analysis to each specific enumerated item in controversy. Petitioner had experienced substantial emotional stress and physical problems concerning the financial crisis involving ITBA. At the time the suit against Gandolfo was settled, petitioner owed approximately $ 300,000, evidenced by notes, secured by mortgages on her citrus grove. The shortfall between petitioner's settlement and her outstanding debt caused her to lapse into a state of mental depression. Petitioner, who considers herself well versed in medical concepts, decided that, rather than go to a psychiatrist, she would attempt to relieve her stress by other means. Petitioner went to the Maharishi Ayur-Veda Health Center in Palm Beach, Florida, and sought the assistance of Dr. Deepak Chopra, who specializes in the treatment of stress-related problems of the nervous system. Petitioner spent 5 days, on an outpatient basis, in the clinic for "parchakarmic" treatment. Her treatment216 consisted of a special vegetarian diet to remove "toxics", two people performing body massages on petitioner, and hot oil bath treatments. In addition to her trip to the clinic in Palm Beach, petitioner had received massages from various individuals prior to and following her clinic visit. Donald D. Mayfield, a homeopathic acupuncture physician, whom petitioner used during 1990 and 1991, had suggested the use of body massage and colonic irrigation, in addition to her office visits with him. Petitioner must show that the massage treatment has a proximate relationship to "diagnosis, cure, mitigation, treatment, or prevention of disease". Sec. 213; Havey v. Commissioner, 12 T.C. 409">12 T.C. 409, 411-412 (1949). "In considering the question of deductibility of expenditures for 'medical care' under section 213, it is necessary to bear in mind that section 262 prohibits deductions for personal, living, and family expenses." Haines v. Commissioner, 71 T.C. 644">71 T.C. 644, 646 (1979). In this regard, an expenditure that is merely for the benefit of one's general health, such as a vacation, is not an expenditure for medical care. Sec. 1.213-1(e)(1)(ii), 217 Income Tax Regs.We have no doubt that petitioner believed that these massages would relieve her mental stress. Petitioner's acupuncturist also suggested massages for petitioner's "lymphatics", 8 in addition to his treatment. Despite these factors, we do not find that the section 213 medical care definition covers petitioner's massages. In this setting, we find that the massages were more for petitioner's general well-being than for the cure, mitigation, treatment, or prevention of a specific disease. See sec. 213. In reaching our conclusion, we have considered the fact that petitioner had received massages prior to her acupuncturist's suggestion -- which we note is not the same as, for example, a medical prescription. Certain treatments are inherently218 medical in nature (i.e., surgery), and taxpayers have little difficulty convincing the Commissioner or courts that such procedures fit within the section 213 definition. Other treatments, however, such as a massage, are more commonly recognized as nonmedical procedures intended for an individual's general well-being. In those instances where a normally nonmedical procedure is claimed as a basis for a medical deduction, the burden is on such taxpayers to show that the procedure comes within the requirements of the statute. See, e.g., Murray v. Commissioner, T.C. Memo 1982-269">T.C. Memo. 1982-269. Petitioner has not shown that her massages fit the requirements of the statute. Based on the record, we hold that the massages were for petitioner's general well-being, and were personal within the meaning of section 262, and therefore not deductible under section 213. Estate of Levine v. Commissioner, T.C. Memo. 1982-05, affd. without published opinion 729 F.2d 1441">729 F.2d 1441 (2d Cir. 1983); Gersten v. Commissioner, T.C. Memo 1980-487">T.C. Memo. 1980-487. Similarly, amounts paid by petitioner to attend a wellness219 center for use of the exercise and spa and her yoga lessons were also for her general well-being and do not meet the section 213 requirements. During 1989, petitioner visited Dr. Rothenberg, expressing concerns about obesity, intermittent depression, and stress-related fatigue. Dr. Rothenberg conducted an exam of petitioner for $ 165, and his advice was "HEALTH MAINTENANCE HOT TUB". Dr. Rothenberg was affiliated with the Maharishi Ayur-Veda Medical Center. Petitioner purchased a deck and hot tub to be annexed to her home. The cost of the hot tub alone was $ 3,157.74 and, together with the deck, petitioner's total hot tub expenditures were $ 4,528.68. Initially, petitioner had claimed about one-half the cost of the hot tub as a medical deduction, but for purposes of trial, she took the more aggressive position that the entire hot tub and deck should be deductible as a medical expense. During 1991, petitioner purchased a water filtration system for her home, on recommendation of the person who performed her colonic irrigation. Hot tubs and water filtration systems promote one's general well-being. Therefore, petitioner must show that her purchase and use meet the statutory 220 definition for a medical deduction. Although it is possible that a hot tub or water filtration system was somewhat beneficial to petitioner's condition, she has not shown that the cost incurred was for the primary purpose of and/or was directly related to her medical care. Haines v. Commissioner, 71 T.C. 644">71 T.C. 644, 647 (1979). Additionally, regarding petitioner's capital improvements, she must show that her expenditure did not result in increased value to her home. If the expenditure were deductible, a taxpayer would be entitled to deduct only the portion of the cost that does not enhance the value of the property. Ferris v. Commissioner, 582 F.2d 1112">582 F.2d 1112 (7th Cir. 1978), revg. T.C. Memo. 1977-186; Gerard v. Commissioner, 37 T.C. 826 (1962); Keen v. Commissioner, T.C. Memo. 1981-313; sec. 1.213-1(e)(1)(iii), Income Tax Regs. Petitioner has failed to meet her burdens with respect to the hot tub, water filtration system, and/or deck. See also Gardner v. Commissioner, T.C. Memo. 1983-541. Petitioner also engaged221 in a regimen that included vitamins and food supplements, and she purchased a juice extractor. Special diets and food supplements may be deductible for purposes of section 213. Randolph v. Commissioner, 67 T.C. 481">67 T.C. 481 (1976). However, petitioner must show that they were for her medical care. Ford v. Commissioner, T.C. Memo. 1979-109. Petitioner must also show that any cost claimed exceeded the normal cost of her diet. Clark v. Commissioner, 29 T.C. 196">29 T.C. 196, 200 (1957); Flemming v. Commissioner, T.C. Memo. 1980-583. With respect to her random purchases of vitamins and food supplements, petitioner has shown neither. Petitioner, experiencing symptoms of colitis, 9 went to Donald Mayfield, who practices acupuncture. Petitioner also had parasites in her colon. Mr. Mayfield, by inspecting specific pressure points in the body and with the aid of a computer, analyzed petitioner's body conditions. Petitioner was analyzed in Mr. Mayfield's office on numerous occasions during 1990 and 1991, and he provided petitioner with homeopathic 10 pills and liquid medicine to222 treat her condition. Mr. Mayfield also prescribed enterolavage (i.e., colon irrigation) treatment for petitioner. Following her overall treatment, petitioner's colitis and other intestinal problems were ameliorated. One of the larger items being claimed by petitioner is a $ 9,300 payment to Edward Sears for the purpose of "stress management". Petitioner has presented no evidence that would explain "stress management" vis-a-vis Edward Sears or how such expenditures would qualify as "medical * * * cure" under section 213. Petitioner has also failed to provide the Court with 223 sufficient information regarding several other disallowed items. Consequently, she is not entitled to deduct them, although they may appear to be, at least, potentially deductible (e.g., $ 41.09 paid to the Winter Haven Hospital). In accordance with our above findings, holdings, and discussion, the following chart reflects the amounts petitioner expended, the payees, and each alleged medical purpose claimed, and the amounts we find to be allowable and deductible (to the extent they cumulatively exceed 7.5 percent of petitioner's adjusted gross income in any of the 3 taxable years): AmountAmountPayee Medical Purpose Claimed Claimed Allowed 1989Susan MorganKathleen CookPam BrownMassages$ 540.00-0- Maharishi Ayur-VedaMedical Center Massages, oil baths1,413.84-0- Maharishi Ayur-VedaMedical Center Meditation tape44.75-0- Dr. RothenbergOffice physical165.00$ 165.00Prestige Spas/TubsHot tub forstress relief 3,157.74-0- Regency WellnessFitness evaluation127.50-0- Jackson NutritionalVitamins39.53-0- Maharishi Ayur-VedaMedical Center No purpose stated20.00-0- Bunnie BeattyYoga lessons30.00-0- Winter Haven Hosp.No purpose stated41.09-0- MetpathChlamydia-rapidscreen (Sherry) 43.00-0- Smith's PharmacyDrugs (Sherry)249.07-0- Ridge PathologyPap smear (Sherry)8.00-0- Drs. Baker/PuckettOffice visit (Sherry)60.00-0- Drs. Baker/PuckettOffice visit110.00110.00Fillastre, DentistDental work188.00188.00Bausch & LombInterplak29.00-0- Gessler ClinicFAA phy45.00-0- McLean ChiropracticNUC (energenics)36.00-0- Ridge PathologyPap smear8.008.00Heart of AmericaHealth insurance1,736.051,736.05Tom WallerVitamins77.25-0- Edward SearsStress management9,300.00-0- Total 1989 2,207.051990Fillastre, DentistDental work$ 639.80$ 639.80Drs. Baker/PuckettOffice physical(Sherry) 55.0055.00Drs. Baker/PuckettOffice physical55.0055.00Ridge PathologyPap smears18.0018.00Donald MayfieldAcupuncture2,489.652,489.65Doctor HighsmithColon Hydro-therapy2,983.002,983.00Susan MorganMassages285.00-0- Doctor WoodNo purpose stated45.00-0- Drs. Fisher/SchemmerEye exam32.5032.50Health Food CenterVitamins89.73-0- Maharishi Ayur-Vedaproducts No purpose stated15.00-0- Jackson NutritionalVitamins42.68-0- Dental InstituteDental work800.00800.00Smiths PharmacyMedicine499.05499.05Dr. HellerChiropractic30.0030.00Total 1990 7,602.001991Fillastre, DentistDental work$ 548.00$ 548.00Donald MayfieldAcupuncture1,759.001,759.00Dr. HighsmithColon hydro-therapy1,975.001,975.00John Shen Inst.Acupuncture200.00200.00Dr. LucidoNo purpose stated30.00-0- MBCANo purpose stated30.00-0- Susan MorganMassage400.00-0- Frank BrownTina KalbileischBecky JohnsonMassage240.00-0- Mr. McCloudChiropractic204.95204.95Nat'l. Health Fed.No medical purposestated 625.00-0- Health Food CenterFruit juicer andfood supplements 270.94-0- Payee unclearSinus medicine20.9320.93Dr. SolomonOffice visit, x-rays270.00270.00Matol BotanicalNo purpose stated1,142.40-0- Smiths PharmacyMedicine50.8450.84Highland HealthWater treatmentCtr. and purification system for home 3,986.00-0- Total 1991 5,028.72224 Section 6662 -- Negligence or intentional disregard of the rules and regulations -- Finally, we consider the accuracy-related penalties under section 6662. Respondent determined that petitioner was negligent or that she intentionally disregarded rules or regulations, and that the section 6662(a) 20-percent addition should apply with respect to the entire underpayment, or with respect to all adjustments determined in the notice of deficiency. Negligence has been defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner bears the burden of showing that she was not negligent. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). Petitioner stated her reasons for not reporting the Gandolfo settlement. She noted that the release indicated that it was for personal injuries and, based on her background and knowledge, we find that belief to be reasonable. Furthermore, we have found many of petitioner's disallowed medical expenditures to be allowable and a similar amount*225 not to be allowable. Petitioner generally provided fairly complete documentation, substantiating the expenditures. Some larger disallowed items involved technical distinctions. With respect to the medical expenses presented at trial, many larger items were items that petitioner had not claimed on her return, but were being claimed, perhaps in an attempt to offset any potential deficiency. We cannot say here that petitioner's claims were without any potential merit. This is especially true here because petitioner represented herself and is not an attorney, accountant, or one versed in tax law. Accordingly, we find reasonable cause and hold that petitioner is not liable under section 6662(a) with respect to her 1989, 1990, or 1991 tax years. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The parties' stipulation of facts and exhibits are incorporated by this reference. The fact findings regarding the medical deduction issues for 1989, 1990, and 1991 are combined with the legal discussion in the opinion portion of this report.↩3. For convenience, factual findings concerning the medical deduction issues are incorporated in that portion of this opinion.↩4. Sec. 111 is entitled "Recovery Of Tax Benefit Items", and subsec. (a) provides: "Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter."↩5. With respect to the release, respondent suggests that it was contrived for tax purposes. The facts of this case show that petitioner's financial losses for ITBA caused her substantial emotional stress and physical side effects. The record reflects that petitioner expended relatively large sums of money for medical solutions to address her emotional and physical problems. Additionally, Gandolfo settled for an amount in excess of that sought in the complaint, and respondent has not offered any plausible theory for the difference. Hence, we believe that the release was bona fide in all respects.↩6. Petitioner may deduct 51.7333 percent of the fees and costs ($ 97,000 divided by $ 187,500 times $ 75,000 and $ 97,000 divided by $ 187,500 times $ 903.25).↩7. Although there are exceptions to this requirement for full-time students, those students must be less than 24 years of age at the end of the year in question. See sec. 151(c)(1)(B).↩8. Lymphatic likely describes an improper functioning of the lymph glands. It has also been defined as a sluggish condition, which was formerly thought to be the result of too much lymph in the body. Webster's New World Dictionary of the American Language (1962).↩9. Colitis is an inflammation of the mucous membrane of the large intestine. Webster's New World Dictionary of the American Language (1962).↩10. Homeopathy is a system of medical treatment based on the theory that certain diseases can be cured by giving very small doses of drugs which in a healthy person and in large doses would produce symptoms like those of the disease. Webster's New World Dictionary of the American Language (1962).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620032/	W. D. and Sedley Roussel, Petitioners, v. Commissioner of Internal Revenue, RespondentRoussel v. CommissionerDocket No. 77992United States Tax Court37 T.C. 235; 1961 U.S. Tax Ct. LEXIS 30; November 21, 1961, Filed 30 Decision will be entered under Rule 50. In 1954, petitioner conducted a coffee brokerage business in his individual capacity, which business consisted mainly of acting as a local agent for Hard & Rand, Inc., a coffee importer. He also was manager and major shareholder of a corporation bearing his name which also bought and sold coffee. Both businesses were conducted from the same office, but separate books were maintained. In the latter part of 1954 the corporation, though solvent, was in need of cash and Hard & Rand, Inc., voluntarily loaned $ 75,000 to the corporation. Petitioner personally endorsed the note evidencing said loan and also executed a written agreement guaranteeing Hard & Rand, Inc., against any loss by reason of any indebtedness then due or by reason of any indebtedness arising thereafter and prior to December 31, 1954, becoming due it by W. D. Roussel & Co., Inc.The corporation suffered a severe financial loss in the early part of 1955, as a result of which its liabilities then exceeded its assets by approximately $ 385,000. It was unable to pay its obligations to Hard & Rand, Inc., when they became due on March 7, 1955. Petitioner paid Hard & Rand, Inc., 31 the sum of $ 102,340.57 as required by his guarantee. The remaining creditors, except (a) those whose claims were $ 500 or less; (b) petitioners; and (c) Swanson Brothers, Inc., executed a release of their claims. There was a "gentlemen's agreement" between the releasing creditors and petitioner that the corporation would continue its operations for the purpose of paying back such creditors as much as possible. The corporation was continued in operation and during its fiscal years ending May 31, 1956 through 1959, paid approximately $ 60,000 to the former creditors. No portion of the debt due petitioner (arising out of his payment to Hard & Rand, Inc., as required by his guarantee) has been repaid. Held, that the amount of $ 102,340.57 paid to Hard & Rand, Inc., by petitioner as required by his guarantee is not deductible as an expense. Held, further, that said payment by petitioner gave rise to a debt due to him by the corporation, but that petitioner has failed to prove that such debt became wholly worthless in 1955. Thomas H. Kingsmill, Jr., Esq., and Albert B. Koorie, Esq., for the petitioners.J. L. Bailey, Esq., E. A. Eagleton, Esq., and S. George Voss, Esq., for the respondent. 32 Fisher, Judge. FISHER235 Respondent determined deficiencies in income tax of the petitioners as follows:YearAmount1953$ 7,639.90195413,036.2419558,099.7719561,574.55It is stipulated that the deficiencies for the years 1953, 1954, and 1956, arose out of the disallowance of a claimed operating loss for 236 1955 carried back 2 years and forward 1 year, and that all of the deficiencies depend upon the correct amount of operating loss, if any, for the year 1955.The sole issue for our determination is whether the amount paid by petitioner in 1955 on behalf of the corporation as required by his guarantee, is deductible, in whole or in part, in 1955 either as a business expense, or as a worthless business or nonbusiness debt.FINDINGS OF FACT.Some of the facts have been stipulated and are incorporated herein by this reference.Petitioners, W. D. and Sedley Roussel, are husband and wife with residence in the parish of Orleans, State of Louisiana. Petitioners filed joint Federal income tax returns for the calendar years 1953 through 1956 with the district director of internal revenue, New Orleans, Louisiana. All property owned by petitioners forms a part of the community of acquets and gains which 33 has continuously existed since their marriage in 1928. However, since the transactions here involved are those of the husband, W. D. Roussel, he will be referred to as the petitioner.Petitioner has been in the coffee business since 1916 when he was 18 years of age. He was originally employed in that year by Hard & Rand, Inc., a coffee importer, in their branch office in New Orleans. In 1924, petitioner became the manager of the New Orleans branch which position he retained until 1936.In 1936 Hard & Rand, Inc., abandoned their branch offices, but retained petitioner as their agent in the New Orleans area. In addition to acting as an agent for Hard & Rand, Inc., petitioner conducted his own coffee business.Petitioner was financially successful in his ventures and as an agent. In 1949 he earned approximately $ 200,000 from his coffee ventures. As a tax-saving device petitioner was advised by his banker to form a corporation which would be devoted to trading in coffee for his own account.In 1950, petitioner formed the W. D. Roussel & Company, Inc. (hereinafter referred to as the corporation), a corporation organized under the laws of the State of Louisiana. Petitioner invested $ 34 150,000 in the corporation for which he received 1,498 of the total 1,500 shares outstanding. He also served as its president and sole operating manager.The formation of the corporation was known to Hard & Rand, Inc., and they were agreeable to it. Hard & Rand, Inc., insisted, however, that petitioner continue to represent them personally rather than through the corporation. Hard & Rand, Inc., on various occasions, dealt with the corporation in its purchasing of coffee.237 The corporation's business and petitioner's individual business were conducted from the same office. Separate books of account were maintained, however, by petitioner.Petitioner's individual business, which was basically the agency for Hard & Rand, Inc., accounted for the greater portion of his income during the years 1953 through 1956. The net income derived from each year was as follows:YearCorporationIndividual1953$ 12,000$ 16,002.53195412,00027,989.4119554,5001 23,772.58195626,472.83In September of 1954, Hard & Rand, Inc., after hearing that the corporation was slow in 35 meeting some of its obligations because of a lack of ready cash, contacted petitioner and asked him if the corporation needed a short-term loan. Although the offer was completely unsolicited by petitioner, an agreement was reached whereby Hard & Rand, Inc., agreed to negotiate a loan to the corporation for 6 months in the amount of $ 75,000.As a condition to making the loan, Hard & Rand, Inc., required petitioner to personally endorse the note and to guarantee all of the corporation's indebtedness to it which would accrue to December 31, 1954. Petitioner, thereupon, on September 2, 1954, executed a guaranty to Hard & Rand, Inc., which states, in part:we do hereby guarantee you against loss by reason of any indebtedness now owing to you by said W. D. Roussel & Co., Inc., or by reason of any indebtedness which shall hereafter, prior to December 31, 1954, be incurred and become and be owing to you by said W. D. Roussel & Co., Inc., and we do further promise and agree that, if and when requested by you, we, and each of us, will give to you a mortgage, in proper legal form under the laws of Louisiana, to protect you against any such loss, upon each of the following parcels now owned 36 by us individually or jointly: * * * [parcels enumerated].The real estate described in the said titles is free and clear of all encumbrances and the taxes on said property have been paid up to and including those for the year 1953, and we hereby bind and obligate ourselves neither to sell nor encumber the said real estate in any manner until all indebtedness covered by this guaranty to you has been paid in full.On September 7, 1954, Hard & Rand, Inc., loaned the corporation the sum of $ 75,000 and the latter signed a promissory note in that amount which was endorsed by petitioner individually. The note was payable on March 7, 1955.At the time of the loan and guaranty (September 1954) the corporation was in a solvent condition.238 On December 31, 1954, the cutoff date of the personal guaranty by petitioner to Hard & Rand, Inc., the corporation had accounts payable to Hard & Rand, Inc., in the amount of $ 30,840.57, in addition to the $ 75,000 on the note not yet due.In February of 1955, the corporation paid Hard & Rand, Inc., $ 5,000 toward the accounts payable leaving a balance of the 1954 accounts payable of $ 25,840.57. In March of 1955, due to severe business losses accruing from 37 the previous months, the corporation became insolvent and was unable to pay its note or accounts payable to Hard & Rand, Inc.Petitioner, recognizing his obligation to pay Hard & Rand, Inc., executed a mortgage for $ 115,000 on the property which was subject to the guaranty agreement in order to obtain the money to pay the corporate debts. Shortly before the note was due, Hard & Rand, Inc., sent its treasurer to New Orleans to obtain mortgages on the property, believing that the corporation was unable to pay the note. Instead of delivering mortgages, petitioner paid over to him $ 102,340.57, which was the full amount which the corporation owed to Hard & Rand, Inc., and covered the following:Promissory note$ 75,000.00Interest1,500.00Accounts payable as of Dec. 31, 195425,840.57102,340.57This amount was credited to petitioner's account on the books of the corporation.During the latter part of 1954 and the beginning of 1955 the corporation suffered severe financial losses due to a "straddle" operation anticipating the increase and decline of different coffees. In the middle of 1955 the corporation had liabilities in excess of $ 400,000 (including the $ 102,340.57 owed to petitioner) 38 while its assets totaled approximately $ 15,000.In spite of the corporation's obvious inability to pay all of its debts, and disregarding the advice of his attorney to initiate bankruptcy proceedings on behalf of the corporation, petitioner, fearful of the effect it would have on his reputation and standing in the coffee industry, and, therefore, upon his individual business, sought to effect a settlement with the creditors.In June 1955, the following agreement was signed by all of the creditors of the corporation having claims in excess of $ 500, except petitioner and Swanson Brothers, Inc.:The undersigned creditors of W. D. Roussel & Company, Inc., of New Orleans, Louisiana, each holding a claim substantially in excess of $ 500.00, being reliably informed and believing that said W. D. Roussel & Company, Inc. is hopelessly insolvent, owing debts demandable in the sum of approximately $ 400,000.00, with assets of a value of less than $ 15,000.00, and realizing that any attempt 239 that might be made to cause the distribution of these assets ratably among the creditors of said corporation, through bankruptcy proceedings, would result in the payment of nothing to the creditors, after the 39 payment of costs and expenses in such bankruptcy proceedings, do hereby, each for itself, forever waive, renounce and forgive their respective claims against said corporation.It is understood that this release is in consideration of its being signed and executed, and will not become effective until and unless it is signed and executed, by all of the creditors of said W. D. Roussel & Company, Inc., as shown on the attached list prepared and certified by Malcolm M. Dienes & Company, Certified Public Accountants, with the exception of (a) those creditors whose claims are $ 500.00 or less, (b) Mr. and/or Mrs. William D. Roussel, for the claims owing to them or either of them, and (c) Swanson Brothers, Inc., of Chicago, Illinois, for any and all claims owing to it.Attached to the release is the following list of creditors:MALCOLM M. DIENES AND COMPANY318 Carondelet StreetNew OrleansList of Accounts Payable Over $ 500.00W. D. Roussel & Co., Inc.As at June 1, 1955H. de Sola & HijosH. L. C. Bendiks, Inc.Wessel Duval & Co.Volkart Bros. Co.Ruffner, McDowell & Burch, Inc.Hard & Rand, Inc.Scholtz & Co.Swanson Bros., Inc.East Asiatic Co., Inc.Wm. MortonC. E. SchmidtR. C. Wilhelm & Co.W. R. Grace 40 & Co.Lafaye & ArnaudF. J. VaccaroMississippiShipping Co.United Fruit Co.Westfeldt Bros.Dupuy Storage & Forwarding CorpC. E. Bickford & Co.W. L. KorbinClifford J. LafayeAmerican National Bank & Trust Co.J. Aron & Co., Inc.Mr. and/or Mrs. W. D. RousselThe foregoing list of creditors with balances due them in excesses of $ 500.00 was prepared by us from the records of the corporation and from information obtained from Mr. W. D. Roussel. We did not confirm the balances due by direct communication with the creditors of record.Respectfully submitted,(Signed) Malcolm M. Dienes,Certified Public Accountants.240 Although petitioner was listed as a creditor of the corporation on its books and on the list attached to the release, he was specifically exempted from signing the release.At the time of the release, it was understood under a "gentlemen's agreement" between the creditors and petitioner that the operations of the corporation would be continued with the intention that it would repay the creditors in whole or in part if and when it was able to do so. At that time, there was also the thought that the corporation should continue its operations looking to possible sale as a loss corporation. 41 There is no evidence that the "gentlemen's agreement" was, or was intended to be, legally binding.The corporation thereupon transferred the amount of $ 435,630.01 from the accounts payable accounts to the paid-in surplus account. This amount was the total of the released claims of the creditors ($ 333,289.44), plus the claim of petitioner in the amount of $ 102,340.57, arising out of his payment to Hard & Rand, Inc., as required by the terms of his guarantee. Petitioner did not waive, cancel, or release his said claim against the corporation.The corporation maintained its books and records and filed its Federal income tax returns on a fiscal year basis ending May 31. For the fiscal year ending May 31, 1955, the corporation sustained a loss of $ 556,441.54. The assets at this time totaled $ 65,175.95, while the liabilities (excluding the released claims, but including petitioner's debt) totaled $ 184,970.16.For the fiscal year ending May 31, 1956, the corporation earned a profit from operations of $ 22,988.79, and the corporation paid $ 31,521.38 to its former creditors. A like amount was deducted from paid-in surplus. The assets at this time totaled $ 17,180.59 while the liabilities 42 (excluding the released claims but including petitioner's claim) totaled $ 145,507.39.From June 1, 1955, to May 31, 1959, the corporation paid the former creditors who had released their claims the amount of $ 59,307.56, each being paid the same percentage of their original claims. No part of the petitioner's debt of $ 102,340.57 has ever been repaid to him.Petitioner continued to be employed as an agent for Hard & Rand, Inc., until December 31, 1956. A change of management of that company occurred during 1956. Petitioner was not aware in 1955 that the agency relationship would be terminated.Petitioner filed his Federal income tax returns for the years 1953 through 1956 on the calendar year basis.Petitioner claimed the $ 102,340.57 which he paid to Hard & Rand, Inc., on behalf of the corporation as a business expense deduction on his 1955 Federal income tax return.In May 1956, an application for Tentative Carry-Back Adjustment (Form 1045) was filed by petitioner for the years 1953 and 1954. On 241 September 12, 1956, a Notice of Allowance of Tentative Carry-Back Adjustments for the years 1953 and 1954 was sent to petitioner. Subsequently thereto, petitioner received refunds of income 43 tax for those years in the amounts of $ 7,639.90 and $ 7,885.92, respectively.On petitioner's income tax return for the calendar year 1956, the balance of the $ 102,340.57 was deducted.Respondent determined deficiencies in income tax for the years 1953 through 1956. The determination for the first 2 years and for 1956 reflected disallowance of a claimed net operating loss for 1955 which had been based upon the payment of $ 102,340.57 by petitioner under his guarantee, the claimed loss having been carried back 2 years and carried forward 1 year.OPINION.In 1954, petitioner was the manager and owner of substantially all of the shares of a corporation bearing his name dealing in coffee. He also conducted, in his individual capacity, a coffee business which was basically a local agency for a coffee importer, Hard & Rand, Inc. During that year the corporation received a loan of $ 75,000 from Hard & Rand, Inc. Petitioner personally guaranteed the loan in addition to what subsequently amounted to about $ 25,000 of accounts payable by the corporation to Hard & Rand, Inc. In 1955, the corporation having suffered severe losses and becoming hopelessly insolvent, petitioner pursuant to his 44 guarantee paid Hard & Rand, Inc., the total owed by the corporation in the amount of $ 102,340.57. Petitioner deducted this amount on his 1955 joint Federal income tax return as a business expense. The net operating loss thereby created was deducted for the 2 preceding years, 1953 and 1954, and the balance was carried forward and deducted for the year 1956.Respondent determined deficiencies for the years 1953 through 1956 on the ground that the amount paid in 1955 by petitioner to Hard & Rand, Inc., under the terms of his guarantee was not an allowable deduction. All of the deficiences depend upon the deductibility of the payment made in 1955, and the parties have stipulated that the deficiencies determined for the years 1953, 1954, and 1956, shall be determined by the amount, if any, of the operating loss deduction for the year 1955 to be used as a carryback and carryover.The principal argument presented by petitioner is to the effect that the $ 102,340.57 which petitioner paid to Hard & Rand, Inc., on behalf of the corporation is a deductible business expense within the purview of section 162 of the 1954 Code. In the alternative, he argues that if it is not a deductible expense, 45 it is deductible as a worthless business debt.Petitioner's endorsement of his corporation's debt and his subsequent payment to Hard & Rand, Inc., was not abnormal in the course 242 of business relations. A situation may well arise, on occasion, in which one person assumes and pays the debts and obligations of another. These payments are made pursuant to various arrangements between the payor and the debtor and to various motives of the payor. It is not, however, always an easy task to characterize such a payment as a loan, an expense, or a capital contribution, or to classify it within the nebulous but necessary boundaries of applicable definition.When a person voluntarily assumes another's debt without prior obligation, the determination of whether the payment gives rise to a capital contribution or business expense, on the one hand, or a debt on the other, depends upon whether a debt is in fact created. The term "debt" not only implies a legal obligation to pay, but also implies the expectancy on the part of the creditor to receive payment. C. H. White, 15 B.T.A. 1375">15 B.T.A. 1375, 1387 (1929). If a debtor-creditor relationship is established at the time of the debt assumption and the payor 46 at that time reasonably expects to be reimbursed, a debt is created. Richard M. Drachman, 23 T.C. 558">23 T.C. 558 (1954).In Glendinning, McLeish & Co., 24 B.T.A. 518 (1931), affd. 61 F. 2d 950 (C.A. 2, 1932), we stated (p. 523):It is well settled by the decisions of this Board that, where the taxpayer makes expenditures under an agreement that he will be reimbursed therefor, such expenditures, are in the nature of loans or advancements and are not deductible as business expenses.On the other hand, if the debtor is not in existence at the time of the payment or is so hopelessly insolvent as to preclude any expectation of reimbursement or where reimbursement of no more than a small percentage of the amount of the advancement may be expected, it is presumed that the payor is not lending the money and that no debt is created. Such a payment would either be a capital contribution, or an expense, depending upon the fact situation. Alleghany Corporation, 28 T.C. 298">28 T.C. 298, 305 (1957); Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956).A problem arises, however, in the situation where one pays another's debts pursuant to a prior guaranty. At the time the guarantor is called upon to pay, the debtor presumably cannot 47 pay and is many times insolvent, giving the guarantor little if any hope at that time of reimbursement. Therefore, application of the test of expectation of reimbursement as of the time of the actual payment would generally preclude classification of any such payments as debts and bring them all into the class of capital contributions if the circumstances do not support classification as a business expense. The courts, therefore, have determined the character of the payment pursuant to the guaranty as of the time of the guaranty rather than the time of the payment. If the debtor is, at that time, solvent and the guarantor does 243 not expect to be called upon to pay without reimbursement, any payments subsequently made continue to be regarded as debts albeit the debtor is insolvent at the time of payment by the guarantor. George B. Markle, Jr., 17 T.C. 1593">17 T.C. 1593, 1598 (1952). Therefore, the fact that the corporation was insolvent when petitioner paid the debt and petitioner may have had at that time no expectation of being reimbursed, does not destroy the payment as creating a debt between him and the corporation if a debt was originally intended.The Supreme Court of the United States in Putnam v. Commissioner, supra, 48 has held that when a stockholder, as a guarantor of his corporation's obligations, makes payments pursuant thereto, the stockholder, by subrogation, acquired a debt, the loss resulting from the worthlessness of which can only be deducted as a bad debt.The taxpayer who voluntarily incurs a debt with knowledge that he will not be repaid, however, is considered not to have acquired a debt, but to have made a gratuitous contribution to capital or to have incurred an expense. In contrast, the guarantor pays the creditor in compliance with the obligation arising from his contract of guaranty. His loss arises not because he is making a gift or incurring an expense, but because the debtor is unable to reimburse him.The regulations provide:Sec. 1.166-8 Losses of guarantors, endorsers, and indemnitors.* * * (b) Corporate obligations. The loss sustained during the taxable year by a taxpayer other than a corporation in discharge of all of his obligation as a guarantor of an obligation issued by a corporation shall be treated, in accordance with section 166(d) and the regulations thereunder, as a loss sustained on the worthlessness of a nonbusiness debt if the debt created in the guarantor's 49 favor as a result of the payment does not come within the exceptions prescribed by section 166(d)(2) (A) or (B). See paragraph (a)(2) of § 1.166-5.This regulation is a reasonable implementation of the Code and is expressly directed to the situation in issue. Accordingly, petitioner's fulfillment of his obligation under the guaranty gave rise to an indebtedness due petitioner by the corporation. Kate Baker Sherman, 18 T.C. 746">18 T.C. 746 (1952).While evidence may be introduced in a proper case to prove that no debt was ever intended when the guarantee was executed and payment was made, we have no such situation here. Cf. Hoyt v. Commissioner, 145 F. 2d 634 (C.A. 2, 1944), affirming a Memorandum Opinion of this Court. The record in the instant case discloses that the payment of $ 102,340.57 which petitioner made was in fact originally treated as a debt and a debtor-creditor relationship was established between petitioner and the corporation. This amount was listed on the corporation's books as a debt owing to petitioner. Petitioner has acknowledged the existence of the debt and testified that he never 244 released the debt. Petitioner, in fact, does not contend that a debt was never created 50 or that he never expected reimbursement when he guaranteed the corporation's obligations or even when he paid them. His sole basis for maintaining that the payments resulted in a deductible business expense is that he had to pay the amount in order to retain his good name in the coffee industry and that he has never been repaid.Whether the payments or endorsement had any relationship to petitioner's business as opposed to that of the corporation, has a bearing on whether the debt was a business or nonbusiness debt rather than whether a debt or expense was incurred. Richard M. Drachman, 25 T.C. 558 (1954).The petitioner relies upon A. Harris & Co. v. Lucas, 48 F. 2d 187 (C.A. 5, 1931), reversing 16 B.T.A. 705">16 B.T.A. 705 (1929); Lutz v. Commissioner, 282 F. 2d 614 (C.A. 5, 1960), reversing a Memorandum Opinion of this Court; Cubbedge Snow, 31 T.C. 585">31 T.C. 585 (1958); and L. Heller & Son, Inc., 12 T.C. 1109">12 T.C. 1109 (1949). None of these cases, however, support petitioner's contention that the payment in question constituted an expense rather than a debt. In all of the above cases, the taxpayer paid the debts of another, but no debtor-creditor relationship ever existed between the taxpayer and the debtor. These 51 cases do not involve a guarantee of another's debt and they arose under circumstances where, at the time the voluntary advances were made, the debtor was either not in existence or there was no indication that the taxpayer would ever be reimbursed. Likewise, there was no evidence that a debtor-creditor relationship was ever established, or that the payments could have created debts. The sole issue was whether the payments constituted expenses or capital contributions.Upon the facts in the instant case, however, we conclude that at the time petitioner made the payments to Hard & Rand, Inc., on behalf of the corporation, a debt of the corporation was created in favor of petitioner. Thus, the loss which petitioner realized may be deducted, if at all, only as the loss on a worthless debt.Respondent concedes that a bona fide debt was originally created between petitioner and the corporation. He contends, however, that petitioner subordinated his debt to the released claims and that his debt was written off on the books of the corporation, resulting in the conversion of his debt into a capital contribution which would not be deductible.While the entries on the books are factors to be 52 considered, it is clear upon the record that petitioner did not by any legally enforcible agreement, subordinate his debt to those of the releasing creditors. Upon the execution of the release, the interest of these creditors ceased and their claims were accordingly closed into paid-in surplus. Petitioner, however, was specifically exempted from the execution of the 245 release and he neither released, waived, nor renounced the debt due him. It may well be that he intended, voluntarily and under the "gentlemen's agreement" to cause the corporation to pay the releasing creditors ahead of him (and his subsequent conduct gives support to this intent) but he entered into no binding obligation to do so. We note, also, that while petitioner no doubt caused the corporation to pay to the releasing creditors the amounts totaling about $ 60,000 made subsequent to the execution of the releases (while he received nothing) the corporation was not legally bound to do so. Had petitioner desired to do so, he could have required the corporation to make such payments to him and any other creditor who had not executed the release.We need not extend the discussion of respondent's argument, however, 53 because, assuming that we reject it, the alternative is to treat the item (as we do) as a debt which is not deductible for the year 1955 for the reasons hereinafter stated.Unfortunately, while the views we have expressed relate to essential steps in the ultimate determination of the case, they do not dispose of it. There remains at least the question of whether or not what we have held to be a debt became wholly worthless in 1955. Upon the record before us, we must hold that petitioner has failed to meet the burden of proving that the debt became worthless in that year.Much has been said to the general effect that the corporation became hopelessly insolvent during that year. Such evidence might be sufficient, in a proper case, where worthlessness of stock is involved. It does not, of itself, demonstrate worthlessness of a debt. Trinco Industries, Inc., 22 T.C. 959">22 T.C. 959, 965 (1954); Peabody Coal Co., 18 B.T.A. 1081">18 B.T.A. 1081, 1089 (1930), affd. 55 F.2d 7">55 F.2d 7 (C.A. 7, 1932).Petitioner has introduced no evidence establishing that the corporation had no assets of value in 1955. If there were assets, and if there were no priority creditors, the claims of general creditors would not be worthless even 54 though they greatly exceed liabilities.The balance sheets of the corporation for the fiscal years ending May 31, 1955, and 1956, show assets in the respective amounts of $ 65,175.95 and $ 17,180.59.The release executed by creditors in June 1955 refers to "assets of a value of less than $ 15,000." The release expresses the view that any attempt to distribute such assets ratably through bankruptcy would result in nothing to the creditors after paying costs and expenses. As a result of the execution of the releases, however, there were no bankruptcy proceedings and there is no evidence of payment of any such costs and expenses.We are, of course, concerned only with the question of the worthlessness of petitioner's debt. As a result of the releases, payment 246 of part of the claim of Swanson and payment to creditors whose claims were $ 500 or less, petitioner and any other nonreleasing creditor possibly including Swanson to the extent of the balance due it (as to which the record is not clear) appear to emerge as the only remaining creditors. Whether further current debts arose after the execution of the releases is not clear from the record, but this would not affect the applicable principle. 55 There is no evidence as to what the value of the corporation's assets may have been after paying Swanson in part and after payment of the claims of $ 500 or less.The corporation's operations were continued in the hope that something might be earned for the releasing creditors and it actually paid over some $ 60,000 to these creditors in the several succeeding years. We are mindful, of course, of the "gentlemen's agreement" and that petitioner got nothing. There is nothing in the record, however, which supports any legal obligation requiring petitioner to take this position, and it appears, from the legal standpoint, that his action was voluntary. At the same time, he retained his claim and did not release it.We recognize that petitioner's actions were highly commendable. Nevertheless, we are bound to examine the facts and law objectively, and whatever our sympathies may be, we cannot allow him a deduction to which he is not entitled. We are forced to conclude under all of the circumstances, that petitioner has not established the worthlessness of the debt in question in 1955.In view of our determination that worthlessness in 1955 has not been proved, there is no occasion to discuss 56 whether the debt in question was a business or nonbusiness debt.Decision will be entered under Rule 50. Footnotes1. This figure represents the net income before the $ 102,340.57 deduction in issue which petitioner has claimed as a business expense for 1955.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620033/	GEORGE D. HARTER BANK, EXECUTOR OF THE LAST WILL OF H. H. INK, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Harter Bank v. CommissionerDocket No. 53525.United States Board of Tax Appeals29 B.T.A. 926; 1934 BTA LEXIS 1460; January 25, 1934, Promulgated 1460 DEDUCTIONS - PAYMENTS MADE BY TRUSTEES UNDER A WILL, OF ANNUITY TO A WIDOW WHO ELECTED TO TAKE UNDER THE WILL IN LIEU OF DOWER RIGHTS, NOT DEDUCTIBLE FROM TRUST INCOME. - Where the decedent in his will directed the trustees of his estate to pay his widow an annuity of $24,000 per year and made such annuity a specific charge against property belonging to his estate and the widow elected to take under the will in lieu of the interest allowed her in decedent's estate by the laws of Ohio, held, that the sums distributed by the trustees to the widow in payment of such annuity are not deductible from the income of the trust estate although paid out of income. Helvering v. Pardee,290 U.S. 365">290 U.S. 365. Albert B. Arbaugh, Esq., for the petitioner. Maxwell M. Mahany, Esq., for the respondent. BLACK927 OPINION. BLACK: On March 16, 1933, division report in this proceeding was promulgated (), in which the Board held against petitioner, following ; 1461 . On March 18, 1933, decision was entered that there is a deficiency of $3,266.96 for the year 1928. On March 24, 1933, petitioner filed a motion for rehearing. On April 11, 1933, the Board entered an order reading in part as follows: In view of the conflict between the decisions cited by the petitioner in his motion for rehearing and the decision of the United States Circuit Court of Appeals for the First Circuit, in Atkins v. Commissioner, decided January 31, 1933, it is believed that the Supreme Court of the United States will grant writs of certiorari so as to review the conflict between said decisions and will decide the question involved. Therefore, the decision entered in this proceeding March 18, 1933, to the effect that there is a deficiency of $3,266.96 for the year 1928 is vacated and set aside. Petitioner's motion for rehearing will be entertained and held for decision a reasonable length of time, waiting for a decision of the Supreme Court of the United States on the question involved. On December 11, 1933, the Supreme Court of the United States rendered its opinion in 1462 , wherein it held that the will provided for the payment to the widow of an annuity at all events and not necessarily from income. Having elected to take under the will, she elected to take as an ordinary legatee and payments to her were not deductible from the income of the estate, on authority of . In the instant case the will of decedent contained the following provision: I hereby will and bequeath unto my wife, Mary Ink, the sum of Twenty-four Thousand Dollars ($24,000.00) per year payable in monthly payments of Two Thousand Dollars ($2,000.00) each, said annuity to be received by her in full of her dower, distributive share, year's support, and any and all other claims or demands whatsoever that she may or might have against my estate, and I hereby make said annuity a specific charge against my theatre property hereinafter referred to. The facts also show that by writing, signed, acknowledged, delivered to the executors of the decedent, and duly filed and recorded as required by the statutes of Ohio, Mary Ink, the widow, elected to take under the will in lieu of1463 the interest allowed her in decedent's estate by the laws of Ohio. During the year 1928 the petitioner received from the theatre property as net rental and income amounts in excess of $24,000, and pursuant to the terms of the will paid over or distributed to the widow during the year monthly payments aggregating $24,000. The sums so distributed, when added to payments of prior years, did not aggregate the amount which would have been apportionable to 928 her as of the date of decedent's death under the Ohio statutory provisions had she not elected to take under the will. From the foregoing recital of facts it appears clear that the situation in the instant case comes squarely within the rule laid down by the Supreme Court in the Pardee case. Accordingly petitioner's motion for rehearing is denied and the decision heretofore entered that there is a deficiency of $3,266.96 for the year 1928, which was subsequently vacated, will be reentered. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620034/	Paul W. Gant and Katherine Gant, Husband and Wife v. Commissioner.Gant v. CommissionerDocket No. 54447.United States Tax CourtT.C. Memo 1957-216; 1957 Tax Ct. Memo LEXIS 34; 16 T.C.M. (CCH) 990; T.C.M. (RIA) 57216; November 22, 195734 James W. Allen, Esq., Third National Bank Building, Nashville, Tenn., for the petitioners. George L. Hudspeth, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined the following deficiencies in and additions to petitioners' income tax: Additions to TaxSec. 294Sec. 294YearDeficiency(d)(1)(A)(d)(2)1950$ 718.82$345.32$142.3919511,215.341952970.00277.88 The issues are (1) whether $3,000 paid by Paul W. Gant, hereafter referred to as petitioner, in each year is deductible by him as a partnership distribution to one B. F. Clinton, and (2) whether petitioner is liable for the additions to tax under section 294 (d)(1)(A), Internal Revenue Code of 1939, for failure to file timely declarations of estimated tax. Katherine Gant is involved here solely because of her joining in returns with petitioner, her husband. The addition to tax under section 294(d)(2) has been conceded and other adjustments in the notice of deficiency are not contested. Findings of Fact Certain facts are stipulated and are hereby found. Petitioner and his wife, residing in McMinnville, 35 Tennessee, filed joint returns for each year with the collector of internal revenue for the district of Tennessee at Nashville, Tennessee. Between petitioner's discharge from the Army, about January 1, 1946 and September 1948, Gulf Refining Company, hereafter referred to as Gulf, employed him as a sales representative for the eastern part of Tennessee, known as the Chattanooga district. His duties as Gulf sales representative in the Chattanooga district entailed assisting distributors of Gulf products, including Clinton. Gulf owned real estate, buildings and other structures in McMinnville, Tennessee, used in the distribution of its products in that area. For several years prior to September 1, 1948, Gulf had leased its bulk distributing plant at McMinnville to Clinton who operated it under written annual agreements running from May 1 through April 30. Prior to the transaction here involved, Clinton owned the delivery equipment, office furniture, fixtures and other personal property used in operating the bulk plant and delivering Gulf products from the plant. This equipment and personal property had a total value of $6,565. The last lease and contract between Clinton and Gulf on36 the McMinnville bulk plant covered the period May 1, 1948 through April 30, 1949. Clinton's inability to attend properly to the business of distributing Gulf products in McMinnville caused petitioner, as Gulf sales representative, to devote the bulk of his time to managing the McMinnville plant. Clinton's inability, infirmity or disability had existed prior to 1948. Clinton's health was generally bad in August 1948. The Chattanooga district manager for Gulf, having become dissatisfied with the McMinnville operation, decided in the summer of 1948 to replace Clinton as Gulf distributor in McMinnville, and so notified petitioner. Petitioner had learned in advance of the several new Gulf retail outlets that began operating in and around McMinnville in 1948. Petitioner, for that and other reasons, considered the McMinnville Gulf distributorship a good opportunity for him. About August 1, 1948, the Chattanooga district manager met with petitioner and Clinton at Chattanooga to discuss the McMinnville situation. The district manager advised Clinton that his contract for the McMinnville territory would not be renewed in April 1949, and some other person would be given the contract unless37 Clinton entered into some arrangement with petitioner. The manager wanted to give Clinton an opportunity to retain some interest in the business and suggested to him that he arrange to form a partnership so as not to be completely out. The manager suggested to petitioner an arrangement on a partnership basis. Gulf officials had informed petitioner before August 14, 1948 that he would be granted a lease and contract for operating the McMinnville plant if he and Clinton could come to some agreement concerning it. Petitioner negotiated with Clinton on the basis of an equal partnership, with petitioner purchasing from Clinton a one-half undivided interest in the furniture, equipment and trucks used in the business. Clinton felt the earnings were not then favorable enough for him to want a division of profits. He insisted upon a minimum payment to himself of $250 per month. Clinton wanted certain changes in the contract as orginally written, resulting in a mutual agreement striking out certain items and inserting others. The original beginning paragraphs of the agreement were never changed. On August 14, 1948, petitioner and Clinton entered into a written agreement, the essential38 portion of which follows: "WHEREAS, B. F. Clinton is now the distributor of Gulf oil products under contract with * * Gulf * * , and in the operation of said business is the owner of certain equipment, * * value of $6,565.00; and "WHEREAS, * * * Clinton desires to retire and turn over said contract to * * * Gant, for which a new contract will be issued by * * * Gulf * * * in the name of * * * Gant; and "WHEREAS, it has been mutually agreed that * * * Gant will purchase a one-half interest in the equipment * * * for * * * $3282.50, to be paid in cash, and in further consideration of the transfer of said distributorship * * * Gant agrees to pay * * * Clinton, * * * $250,00 per month out of the income of the business for and during the life of * * * Clinton, or as long as contract with Gulf prevails; "NOW, THEREFORE, In consideration of the premises and mutual covenants and agreements herein contained, the parties agree as follows: "1. In consideration of * * * $3282.50 cash * * * paid to me, * * * I, B. F. Clinton do hereby sell and transfer to * * * Gant, a one-half interest in the equipment * * ; and I do hereby agree to the transfer to * * Gant of the contract * 39 * with * * * Gulf * * * in consideration of the payment to me of * * * $250.00 per month for * * * my natural life, which payments are to be guaranteed * * * by * * * Gant as long as Gant's contract prevails. "2. The one-half interest in the equipment aforesaid now owned by * * * Clinton shall be amortized or depreciated over * * * two years from * * * this contract, and at the expiration of said two years * * * the whole of said equipment shall become the property of * * * Gant, and if prior to expiration of two years B. F. Clinton should die, * * * Gant would be liable only to the estate of * * * Clinton for the * * * one-half interest in the equipment depreciated in proportion to the number of months remaining of the two years * * . "3. * * Gant agrees to the foregoing conditions and binds himself to see that the provisions hereof are fully carried out in any contract between him and * * * Gulf * * , and mutual prime object of this agreement being that * * Clinton shall be assured of a monthly pension income of $250.00 * * . "4. This agreement shall become effective and binding * * at the beginning of September * * * 1948." The parties notified the district manager40 of the contract on August 15. Petitioner paid Clinton $3,282.50 for a one-half interest in the personal property and Clinton signed a release agreeing to the termination of his contract with Gulf. Clinton contributed no capital to the Gulf distributorship operated by petitioner. Clinton was in no way obligated to share any losses or other obligations incurred in the Gulf distributorship after it was taken over by petitioner. Clinton performed no services in connection with the Gulf distributorship after the time it was taken over by petitioner and was never an employee of petitioner. On September 1, 1948, Gulf leased its bulk plant at McMinnville to petitioner for the period September 1, 1948 through April 30, 1949. On the same day Gulf entered into a consignment agreement with petitioner for the sale of Gulf products until April 30, 1949. Gulf has renewed its contracts with petitioner by letter from time to time until the present. Petitioner has no enforceable rights of renewal in these contracts, they being cancelable at the end of each year upon 30 days' written notice. Petitioner paid Clinton $250 per month during each of 1950, 1951 and 1952, pursuant to the agreement between41 them. Clinton had no transferable rights or equities in his contracts with Gulf. Responsible officials of Gulf were fully cognizant of the agreement between petitioner and Clinton. Petitioner brought new business to the venture. During 1950 and 1951, petitioner deducted the $3,000 yearly payments in Schedule C of the Form 1040 annual joint returns as compensation paid to Clinton. Petitioner filed no partnership returns (Forms 1065) for the alleged partnership between himself and Clinton. Petitioner and his wife filed a declaration of estimated tax for 1950 on June 15, 1950, declaring an estimated tax of $1,200. They filed a timely declaration of estimated tax for 1951 on March 15, 1951. They filed a declaration of estimated tax for 1952 on June 12, 1952, declaring an estimated tax of $2,700, which was amended on January 15, 1953, by increasing the estimated tax to $3,000. Petitioner and his wife employed a public accountant in McMinnville to keep their books and prepare their tax returns. They filed such declarations of estimated tax and other tax returns and reports and paid such estimated tax and other taxes as the accountant advised them were due to be filed and paid. 42 Petitioner, unable to keep his books or prepare tax returns for himself and the business, made no effort to do so. Petitioner is not entitled to deduct $3,000 paid to Clinton in each of 1950, 1951 and 1952 in computing taxable net income for those years. Failure of petitioner and his wife to file timely declarations of estimated tax for 1950 and 1952 was not due to reasonable cause. Petitioner and his wife substantially underestimated their 1950 estimated tax. Opinion Petitioner originally deducted the payments to Clinton, his vendor, as compensation for personal services. It seems now to be conceded that there is no justification for such treatment. The principal contention appears to be that a partnership or joint venture was created. But we think the contract which finally evolved from the negotiations precludes any such approach. While the parties, or at least petitioner, may have originally negotiated with the objective of a joint venture, petitioner's own testimony and the contract itself seem to us to leave no alternative but that Clinton wanted to be paid a specific annual amount, denominated a pension, in exchange for what was an outright transfer, although partly43 postponed, of all his assignable interests. He contributed neither services nor property to any venture, had no control, shared in neither profits nor losses, and presumably was given no authority to bind or commit the venture. Edward C. James, 16 T.C. 930">16 T.C. 930, affd. (C.A. 5) 197 Fed. (2d) 813; Roland P. Place, 17 T.C. 199">17 T.C. 199, 205, affirmed per curiam (C.A. 6) 199 Fed. (2d) 373. It is difficult to see that this was in any respect different from any other sale of property, especially of a kind comparable to a going business. The contract itself gives the value of the equipment which was sold. "We have heretofore held that in a capital transaction such as that involved in this proceeding, an amount paid in excess of the value of tangible assets purchased is not a deductible business expense, but constitutes a capital expenditure." Saline Motor Co., 22 B.T.A. 874">22 B.T.A. 874, 875. Whether what was purchased with this excess was good will, going concern value, or some other intangible, we need not pause to determine. All would have an indefinite anticipated life and, for that reason, be incapable of depreciation. Xpando Corporation, 7 T.C. 48">7 T.C. 48;44 Nachman v. Commissioner, (C.A. 5) 191 Fed. (2d) 934, affirming 12 T.C. 1204">12 T.C. 1204. Such items may indeed not depreciate at all but be worth as much at the time the business is ultimately sold as they were when originally acquired. X-Pando Corporation, supra. It follows that while payments made by petitioner to Clinton are capital investments and will presumably increase his basis as they continue to be paid and as time goes on, they must be recovered when the business is sold or otherwise disposed of, Nachman v. Commissioner, supra, and not by way of amortization or depreciation over an entirely unascertainable future period. Associated Patentees, Inc., 4 T.C. 979">4 T.C. 979, is not analogous for several reasons. There the percentages paid each year to the patentholders and which were allowed to be deducted as depreciation were said to be "a cost pertaining to that year alone and measured by income over that period." ( Italics added.) Furthermore, we said: "Respondent's regulations recognize the fact that there is no fixed rule, but that the cost should be apportioned over the useful life in such ratable amount as may reasonably be considered45 necessary to recover during the remaining useful life of the property the unrecovered cost or other basis." (Italics added.) Neither statement can properly be made here. The total monthly payments made to Clinton were in fixed amounts and had no relation to the current income of the business. That was, in fact, one of the conditions upon which Clinton had insisted. And we are given no information about the anticipated useful life of the property purchased with these payments. As to the intangibles, indeed, we think there could be no such showing. We are consequently unable to apply here the approach employed in Associated Patentees, Inc., supra.See also John A. Nelson Co., 28 B.T.A. 529">28 B.T.A. 529, affirmed on other issues (C.A. 7) 75 Fed. (2d) 696, reversed on other issues 296 U.S. 374">296 U.S. 374. Respondent did not err in disallowing the deductions sought. Respondent determined against petitioners additions to the tax under section 294(d)(1)(A) for failure to file timely declarations of estimated tax, and under 294(d)(2) for substantial underestimation. The latter seems now to be conceded. As to the former, what we said in Walter H. Kaltreider, 28 T.C. 121">28 T.C. 121, 126,46 is equally applicable: "Here, as there, no proof has been presented that petitioners' accountant was qualified to advise them concerning tax matters. As revealed by the record he had been a public accountant * *. No other qualifications have been shown. Though petitioners may have relied upon him in the preparation and filing of their returns, there is no evidence that their reliance was well placed. We therefore conclude that the petitioners' failure to file the declaration required by the statute was not due to reasonable cause." Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620035/	Lucille H. Rogers, Petitioner, v. Commissioner of Internal Revenue, RespondentRogers v. CommissionerDocket No. 15605United States Tax Court11 T.C. 435; 1948 U.S. Tax Ct. LEXIS 72; September 28, 1948, Promulgated 72 Decision will be entered for the respondent. Arrangement between petitioner and other interests for participation by means of jointly owned corporation in operation of vessels under War Shipping Administration general agency agreement, held to result in relationship of stockholder rather than coadventurer; and proceeds on termination of corporation's activity under general agency agreement, received by petitioner by means of checks drawn by corporation and other interests held, further, taxable to her as ordinary income. George E. Beechwood, Esq., for the petitioner.William H. Best, Jr., Esq., for the respondent. Opper, Judge. Harlan, J., dissenting. OPPER435 Respondent determined a deficiency in income tax for the calendar year 1944 in the amount of $ 6,627.78.Certain issues having been abandoned by petitioner, the sole remaining question is whether the whole or any part of a sum of money received by petitioner growing out of an arrangement for the operation of vessels under a general agency agreement with the War Shipping Administration is to be treated as ordinary income or as capital gain.Some of the facts have been stipulated.FINDINGS OF73 FACT.The stipulated facts are hereby found accordingly.Petitioner is a resident of Wynnewood, Pennsylvania, and filed her tax return for 1944 with the collector at Philadelphia.Prior to August 16, 1943, she was the sole owner of all of the outstanding stock of American Range Lines, Inc., a Delaware corporation organized in 1936 for the purpose of engaging in the shipping business. Hereinafter it will be referred to as Range.During the period immediately prior to August 1943 Range did not own or operate any vessels. All physical operations ceased about 436 the middle of 1942. But commencing at about that time, Range, through its president, Jacob W. Alwine, was endeavoring to have the War Shipping Administration, hereinafter referred to as W. S. A., allocate to it some vessels under a general agency agreement.At about the same time the American Liberty Steamship Corporation, also a Delaware corporation, hereinafter referred to as Liberty, was negotiating with W. S. A. But neither Range nor Liberty could comply fully with the requirements. It was the suggestion of W. S. A. that the two companies enter into a joint operation to secure the allocation of vessels, and a joint74 application was filed with W. S. A. for allocation under a general agency agreement.On August 16, 1943, an agreement was entered into by petitioner, Range, and Liberty, providing for a merger of the personnel of the two companies and the creation of a capital of $ 170,000 in cash, free and clear of all debts. The agreement recited:American Range Lines, Inc. and American Liberty Steamship Corporation have both been organized to carry on and conduct the business of shipping.The directors of the respective corporations deem it advantageous for the respective corporations and for the benefit of their stockholders to engage in a joint venture to operate under a General Agency Assignment for the War Shipping Administration. * * The mode of carrying the joint venture into effect shall be as follows: The name of American Range Lines, Inc. shall be changed to American Range-Liberty Lines, Inc. The Certificate of Incorporation of American Range Lines, Inc. shall be further amended as provided in this agreement so as to provide for an equal investment of $ 85,000.00 each, to carry out the business of the joint venture. The by-laws of American Range Lines, Inc. shall be amended so as75 to provide for equal management and control of the affairs of American Range-Liberty Lines, Inc. between American Liberty Steamship Corporation and Lucille H. Rogers.At the termination of the General Agency Assignment, it is proposed to restore each of the two corporations, American Liberty Steamship Corporation and American Range Lines, Inc. to their former position, so that each might pursue and conduct their own businesses separately and individually.* * * The agreement provided that the name of Range was to be changed to American Range-Liberty Lines, Inc., hereinafter referred to as Range-Liberty, and that its capital structure was also to be changed.The agreement further provided:Eighth: The present by-laws of American Range Lines, Inc. shall be amended in the following respects to provide for equal control and management of the affairs of American Range-Liberty Lines, Inc. during the term of this agreement between American Liberty Steamship Corporation and Lucille H. Rogers:(a) The number of Directors shall be increased from three to six.(b) Three members of the Board of Directors shall be persons nominated by the American Liberty Steamship Corporation, hereinafter designated76 as "Liberty Group", and an equal number of the Board of Directors shall be persons nominated by Lucille H. Rogers, hereinafter designated as "Rogers Group".437 (c) In the event of the death, resignation or inability to act of any director, the vacancy occurring shall be filled by the nominee of the group of stockholders or stockholder, who originally nominated the director whose office has become vacant, so that American Liberty Steamship Corporation and Lucille H. Rogers shall have at all times equal representation upon the Board of Directors.(d) The by-laws shall not be amended except by the affirmative vote of at least five of the whole Board of Directors. * * Ninth: The Board of Directors shall elect the President and Treasurer of the corporation as designated by the "Liberty Group". The Board of Directors shall elect the Executive Vice-President and Secretary as designated by the "Rogers Group". The Board of Directors shall also elect as its Chairman such person as is designated by the "Rogers Group". * * Tenth: Immediately upon the execution of this agreement and upon the amendment of the Certificate of Incorporation of American Range Lines, Inc. as above set77 forth, the American Liberty Steamship Corporation shall subscribe for 850 shares of preferred stock and shall pay therefor $ 85,000 in cash; Lucille H. Rogers shall also subscribe for 850 shares of the preferred stock and shall pay therefor $ 85,000 in cash. In addition to the preferred stock the American Liberty Steamship Corporation and Lucille H. Rogers shall each purchase 850 shares of the common stock, such stock to be deemed fully paid and shall be non-assessable.The total capital of $ 170,000.00 thus created, shall be used solely for the operation and conduct of the business of the corporation under the General Agency Assignment with the War Shipping Administration.* * * At the termination of the general agency agreement, the agreement between the parties was to be terminated and there was to be restored to the respective parties the capital contributed by each, or so much as remained after deducting losses, and they were otherwise to be placed in their former positions, as provided in the latter agreement.Petitioner invested the $ 85,000 required of her by having Range leave intact its existing bank balance of $ 78,199.99 and by executing and delivering her personal 78 check in the amount of $ 6,800.01. She fully performed all other obligations imposed upon her by the August 1943 agreement, including the establishment of an escrow fund and later an additional capital contribution.On September 8, 1943, W. S. A. entered into a general agency agreement with Range-Liberty, whereby the latter as general agent was "to manage and conduct the business of vessels assigned to it by the United States," and was to receive reasonable compensation for such services as determined by the W. S. A.In the course of operations, serious disputes arose between the two groups of stockholders, and on November 27, 1944, petitioner and Liberty agreed to terminate the arrangement, the consent of W. S. A. having theretofore been secured, as required by the general agency agreement. It was provided that the August 1943 agreement was to be "cancelled and terminated" as of December 1, 1944, and that:438 The American Liberty Steamship Corporation agrees to pay to Lucille H. Rogers in full satisfaction and discharge of all claims asserted by Lucille H. Rogers against American Liberty Steamship Corporation and for the promise of Lucille H. Rogers to cancel and terminate79 the above mentioned agreement and release the American Liberty Steamship Corporation from the obligations thereunder, the sum of Seventy-five Thousand ($ 75,000.00) Dollars, as follows: (a) The sum of $ 20,000.00 on December 1st, 1944.(b) The sum of $ 20,000.00 on March 1st, 1945.(c) The sum of $ 7,500.00 on July 1st, 1945.(d) The sum of $ 27,500.00 on February 1st, 1946.* * * It Is Further Understood and Agreed that the sum of $ 20,000.00 to be paid to Lucille H. Rogers by the American Liberty Steamship Corporation on December 1st, 1944, shall be reduced by all sums of money received by Lucille H. Rogers from the American Range-Liberty Lines, Inc. by virtue of dividends or otherwise on or after November 27, 1944 and it is understood and agreed that such sums so received by Lucille H. Rogers shall be deemed credits to the American Liberty Steamship Corporation and the amount to be paid by the American Liberty Steamship Corporation shall be reduced accordingly.Each party hereto releases and forever discharges the other party from all moneys, claims, demands, contracts, action, whatsoever arising under the agreement between the parties, dated the 16th day of August, 1943, 80 and nothing herein contained shall be deemed to be a release from the obligations contained in this agreement.On the same date Range-Liberty entered into an "Agreement and Bill of Sale" with Liberty, which provided in part that Range-Liberty was to release all its right and interest under the general agency agreement of September 8, 1943, and assent to the appointment of Liberty in its place, and thereupon assigned all of its rights to Liberty. Further, it transferred all of the property which had come into its possession since August 17, 1943, with certain specified exceptions, of which one was: "Cash in the sum of $ 125,850, representing the capital investment of Lucille H. Rogers."The sum of $ 20,000, payable to petitioner on December 1, 1944, was paid as follows: (a) $ 11,293.26 was paid by check of Range-Liberty, as one-half of the 1944 earnings and profits of that company; (b) the balance, $ 8,706.74, was paid by check of Liberty.In her income tax return for 1944, petitioner reported the $ 20,000 received on December 1, 1944, as a long term capital gain.In his notice of deficiency, respondent determined that the sums of $ 8,706.74 received from Liberty and $ 11,293.26 received81 from Range-Liberty were ordinary income. His explanations were:The amount of $ 8,706.74 received by you from the American Liberty Steamship Corporation, New York, N. Y., as damages paid for loss of anticipatory and past benefits has been added to gross income.A distribution of earnings made to you, in the amount of $ 11,293.26 by the American Range-Liberty Lines, Inc., New York, N. Y., has been added to gross income.439 OPINION.Although the parties designated their combined enterprise for the operation of vessels under a general agency agreement with the W. S. A. as a "joint venture," it seems clear the term was not used in the technical business sense, certainly not in its accepted meaning for tax purposes. 1Internal Revenue Code, sec. 3797 (2). The actual form adopted for the operation was that of a corporation; not merely an association taxable as such, Internal Revenue Code, sec. 3797 (3) -- although more nearly that than a true joint venture, Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344 -- but an actual de jure corporation with stockholders, of which petitioner was one, directors, and officers. Burnet v. Commonwealth Improvement Co., 287 U.S. 415">287 U.S. 415;82 Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436. The two participating groups acquired common and preferred stock and are referred to as "stockholders," the method of selection of directors is provided, and instructions for the designation of officers by the directors are set forth in careful language. 2 The device adopted was the temporary reconstruction of an existing corporation, but the corporate form and its consequence was no less effective than if a new corporation had been organized for the purpose.83 The assets newly acquired by this corporation were the contract with W. S. A. for operation of the vessels and the profits and other proceeds accumulated from its successful prosecution. All of these were "granted, bargained, sold, conveyed, transferred, assigned and set over" 3 by the corporation in the transaction of November 27, 1944, when the stockholders agreed to disagree. Petitioner's participation was apparently that of stockholder. She had nothing to sell except her interest in the corporation itself, and this, far from being sold, was carefully retained. As to her, the provisions of the original agreement had been fully executed, and merged into her participation as corporate shareholder.84 If we are correct so far, it makes no difference whether what the corporation received for the sale of its property was capital gain or ordinary income, since the corporation's tax liability is not presently 440 in issue. Cf. McAllister v. Commissioner (C. C. A., 2d Cir.), 157 Fed. (2d) 235; certiorari denied, 330 U.S. 826">330 U.S. 826; Estate of F. S. Bell v. Commissioner (C. C. A., 8th Cir.), 137 Fed. (2d) 454, with Hort v. Commissioner, 313 U.S. 28">313 U.S. 28; and Swastika Oil & Gas Co., 40 B. T. A. 798; affd. (C. C. A., 6th Cir.), 123 Fed. (2d) 382; certiorari denied, 317 U.S. 639">317 U.S. 639.Petitioner's profit came through her interest in the corporation. Cherokee Motor Coach Co. v. Commissioner (C. C. A., 6th Cir.), 135 Fed. (2d) 840. "* * * there can be no doubt that a corporation may normally distribute its assets among its stockholders. When it undertakes to do so, its act is nonetheless a corporate act though its shareholders receive new contractual85 rights enforceable by them alone against the transferee. That is to say their rights to receive the proceeds on the disposal of corporate assets are strictly derivative in origin. * * their claims to the proceeds flow from the corporation and are measured by the stake which they have in it. For the rental or purchase payments for the property conveyed by respondent [the corporation] could not lawfully be paid to another without its authority; and it could not lawfully dispose of them to others without the consent of its shareholders." United States v. Joliet & Chicago Railroad Co., 315 U.S. 44">315 U.S. 44, 48. "* * * under the theory of the Joliet decision [supra] the rights of the stockholders were those of distributees of current dividends." Commissioner v. Western Union Tel. Co. (C. C. A., 2d Cir.), 141 Fed. (2d) 774, 777; see also Home Furniture Co. v. Commissioner (C. C. A., 4th Cir.), 168 Fed. (2d) 312.The payment to petitioner was as much a dividend as if it had been made first to the corporation, and by it to her. "* * * all sums of money and considerations agreed to86 be paid for the use, possession, and occupation [here, the sale] of the corporate property belongs to the corporation, the legal owner of such corporate property. It is by way of dividends that the stockholders are entitled to the earnings of the road * ." Rensselaer & Saratoga Railroad Co. v. Irwin (Dist. Ct. N. Dist. N. Y.), 239 Fed. 739, 746; affd. (C. C. A., 2d Cir.), 249 Fed. 726. "The application of the rent [here proceeds of sale] * * is a mere labor-saving device, the effect being exactly the same as if it be paid to the lessor [seller] and by it paid out as far as necessary to bondholders for interest, and the surplus in dividends to its stockholders." Op. cit., 249 Fed. 726, 728. "There are two steps in the proceeding * * . There is a payment of rent and there is a distribution of dividends, and the failure to enter these transactions upon the books of account or to carry them through in any physical manner cannot deprive them of their essentially separate and distinct characters." American Telegraph & Cable Co., 2 B. T. A. 991, 1000, 1001; 441 87 see also Blalock v. Georgia Ry. & Elec. Co. (C. C. A., 5th Cir.), 246 Fed. 387; Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331.There is not, and can scarcely be, any question raised as to the adequacy of the corporation's accumulated earnings to support the payment of such a dividend, particularly since the major part of the payment for the instant year represented amounts conceded to be the current year's earnings. If for subsequent years accumulated earnings and profits are shown to be inadequate to constitute any payments a distribution of dividends, that is an issue not presented here and upon which we are in no position to express an opinion.None of the cases cited by petitioner brings this conclusion into question. Those most nearly similar, First Mechanics Bank of Trenton v. Commissioner (C. C. A., 3d Cir.), 91 Fed. (2d) 275, and Landreth v. United States (C. C. A., 5th Cir.), 164 Fed. (2d) 340, point up the distinction from this proceeding. In both, a true joint venture was found to exist, the issue being, not whether as here the88 participants had decided upon a corporation as the vehicle of their arrangement, but whether the relationship was one of employer and employee, rather than of coadventurers. In neither was any corporate stock owned by the participating taxpayer, and in neither was there any contention of receipt of the disputed gain by way of corporate dividend. Since we have concluded here that that was petitioner's sole claim to the payment which she concededly received and the taxability of which presents the only issue, these cases add no support to petitioner's case. We find no error in the deficiency determined.Decision will be entered for the respondent. HARLAN Harlan, J., dissenting: The contract between petitioner American Range Lines, Inc., and the American Liberty Steamship Corporation, which initiated the business relationship between the parties, repeatedly referred to that relationship as a "joint venture." This contract is set out in full as an exhibit to the stipulation of facts herein and, as such, is incorporated in the findings of fact. The parties to the contract agreed that one of the contracting parties, American Range Lines, Inc., should modify its structure and89 bylaws in such a way that each of the other two contracting parties would have exactly equal control therein and that this corporation as modified should be the agency through which the joint venture should be administered. The parties to the agreement banded together to carry out a definite project. They agreed to share all profits and losses and agreed that when the specific project was completed American Liberty 442 Steamship Corporation would surrender all interest in American Range Lines, Inc. (renamed American Range-Liberty Lines, Inc.) and that all accumulated capital would be divided between petitioner and American Liberty Steamship Corporation.This enterprise was called a joint venture by its participants; it had all the essential characteristics of a joint venture; and I disagree with the majority view that it was not a joint venture.The case of First Mechanics Bank of Trenton v. Commissioner, 91 Fed. (2d) 275, containing facts practically on all fours with those at bar, comes to a conclusion differing from that of the majority opinion herein, and I believe correctly states the law. In the First Mechanics Bank case the Commissioner90 contended that the money received by the taxpayer in settlement with the taxpayer's coventurer was merely money paid by the corporation created to carry out the joint venture as compensation for anticipated wages. The court therein held that the money received in settlement was capital gain from a joint venture. In the case at bar the Commissioner contends, under almost identical circumstances, that the money received by the taxpayer in the settlement represented in part dividends and in part ordinary income. The reasoning in the First Mechanics Bank case would seem to require the petitioner's income to be taxed as capital gains. Footnotes1. Even in its loose sense, the term is applied, not to petitioner, but to the two corporate participants: "The directors * * deem it advantageous for the respective corporations * * * to engage in a joint venture * * *."↩2. Although petitioner contends that there was an agreement to share losses, it is evident that this was so in the corporate, rather than the joint-venture sense; that is, only the capital committed to the venture by way of contribution to the corporation was liable for any losses sustained, not petitioner nor her fellow stockholder, individually.↩3. Petitioner attempts to explain away this language by some obscure reference to requirements of the W. S. A., but neither this, nor the suggestion that the corporation could not sell the contract because of the original agreement and of the required consent of the Government to any transfer, are persuasive. The original agreement makes no reference to such a situation, being confined to distribution after the W. S. A. contract had been concluded, which it had not been on November 27, 1944. And if the Government's consent to a sale was necessary, it was obtained.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620037/	Sam Novell and Ida Novell, et al., 1 Petitioners v. Commissioner. Novell v. Comm'rDocket Nos. 4735-67, 4749-67, 4757-67, 4758-67, 4919-67. United States Tax CourtT.C. Memo 1969-255; 1969 Tax Ct. Memo LEXIS 38; 28 T.C.M. (CCH) 1307; T.C.M. (RIA) 69255; December 2, 1969, Filed. Melvin I. Muroff, 150 S.E. 2nd Ave., Miami, Fla., for the petitioners. W. Reeder Glass, for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined deficiencies in income tax of the petitioners in these consolidated proceedings as follows: PetitionerYearDeficiencySam and Ida Novell -Docket No. 4735-671963$ 891.6519643,294.38Estate of Nathan Miller,Deceased, Amelia MillerExecutr x1961817.32 and Amelia Miller -Docket No. 4749-6719643,200.78Harvey and Linda Factor - Docket No. 4757-671963480.89 1964* 902.77Oscar J. and HarrietMannen - Docket No. 4758-671963907.38 1964* 2,676.89Manvil Development Corp.of Broward -Docket No. 4919-67.FYE 4-30-64$ 27,871.1539 We must decide whether Manvil Associates, Inc. qualified as an electing small business corporation under subchapter S of the Internal Revenue Code of 1954 during its taxable years 1963 and 1964 and whether Manvil Development Corp. of Broward similarly qualified during its taxable years 1963 and 1964. If we decide that either corporation so qualified during these years then we must decide whether there are nevertheless due from the individual petitioners deficiencies in income taxes for their taxable years 1963 and 1964 resulting from their recovery of money during 1964 from Manvil Development Corp. of Broward in excess of their bases in their respective stock and debt in that corporation and from their respective deductions of net operating losses of Manvil Associates, Inc. in excess of their bases in its stock and debt. Second, we must decide whether petitioner Oscar J. Mannen incurred in 1963 a deductible loss from the demolition of a building located in Hazleton City, Pennsylvania. 40 1308 General Findings of Fact Some of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference. Petitioner Manvil Development Corp. of Broward (hereinafter referred to as Manvil Development), a Florida corporation, had its principal place of business in Boca Raton, Florida at the time it filed its petition herein. Manvil Development filed small business corporate income tax returns for its fiscal years ending April 30, 1963 and April 30, 1964 with the district director of internal revenue, Jacksonville, Florida. Petitioners Sam and Ida Novell (hereinafter referred to as Novell), husband and wife, resided in Miami, Florida at the time they filed their petition herein. Petitioners Nathan and Amelia Miller (hereinafter referred to as Miller), husband and wife, resided in Miami Beach, Florida at the time they filed their petition herein. Nathan Miller is deceased. The Estate of Nathan Miller, Deceased, Amelia Miller, Executrix, has been substituted for him as a petitioner. Petitioners Harvey and Linda Factor (hereinafter referred to as Factor), husband and wife, resided in North Miami Beach, Florida41 at the time they filed their petition herein. Petitioners Oscar J. and Harriet Mannen (hereinafter referred to as Mannen), husband and wife, resided in Miami, Florida at the time they filed their petition herein. The individual petitioners referred to above all filed joint income tax returns for 1963 and 1964 with the district director of internal revenue, Jacksonville, Florida. Manvil Associates, Inc. (hereinafter referred to as Manvil Associates), a Florida corporation, filed small business corporate returns for its fiscal years ending April 30, 1963 and April 30, 1964 with the district director of internal revenue, Jacksonville, Florida. Issue I. Tax Consequences Relating to Manvil Associates, Manvil Development, and Their Respective Shareholders Findings of Fact Manvil Associates was incorporated on December 18, 1961, with authorized capital of 100 shares of $10 par value stock. It was specifically authorized to sponsor, build and develop cooperative apartment houses. The 100 authorized shares were issued at par to the following persons in the amounts indicated: StockholderNo. of SharesMannen (by the entirety)40Miller (by the entirety)18Novell (by the entirety)23Factor (by the entirety)10Joseph Rekant942 Manvil Associates had no assets other than the paid-in capital of $1,000. The company determined to construct and sell a 72-unit cooperative apartment complex to be named Floridian Arms. The land on which Floridian Arms was to be constructed was owned by Manvil Associates' shareholders in the same proportion as their ownership of Manvil Associates common stock: Mannen (by the entirety) an undivided 40% interest Novell (by the entirety) an undivided 23% interest Miller (by the entirety) an undivided 18% interest Factor (by the entirety) an undivided 10% interest Joseph Rekant an undivided 9% interest On May 1, 1962, these shareholders conveyed the land to Manvil Associates which then mortgaged the land to Peoples National Bank of North Miami Beach (hereinafter referred to as Peoples) as security for a $500,000 construction loan from Peoples to Manvil Associates. On May 5, 1962, Manvil Associates entered into a 99-year ground lease with Floridian Arms, Inc., a corporate entity to be comprised of the owners of the cooperative apartments in the Floridian Arms complex. The purchasers of cooperative apartments do not obtain an interest in the underlying ground. The lease43 provided for a monthly rental of $1,246.25 with an option to purchase the land for $186,937.50 between January 1, 1975 and December 31, 1978. On May 7, 1962, Manvil Associates reconveyed the land to the shareholders, restoring to them their original undivided interests. The land continued to be subject to the mortgage to Peoples. On May 23, 1962, all the shareholders of Manvil Associates entered into an "Agreement for Deed" with Oscar J. Mannen, Trustee, agreeing to convey the land to him in fee simple, free of all encumbrances (including the $500,000 construction loan mortgage) except the 99-year ground lease, for $171,000. The $171,000 was to be paid in the following manner: $30,000 on execution of the agreement $30,000 in thirty days $30,000 in sixty days 1309 Balance when the property was deliverable as above. Mannen was to be credited with interest at the rate of 10 percent per annum on each portion paid from the date of payment to the date of conveyance. The agreement did not provide for any particular date for delivery of title to the land except that if the property were not deliverable as promised within 18 months, Mannen was given the right to demand from44 the shareholders the return of his installments plus the interest provided. Upon his exercise of that right the "Agreement for Deed" was to become null and void. Instead of paying the $171,000 to the sellers under the "Agreement for Deed" Mannen paid it to Manvil Associates during its taxable year ending April 30, 1963. The entire amount was paid in during the 7 months after the "Agreement for Deed" was entered into. Interest in the amount of 10 percent per annum was paid on the installments and was reported on Mannen's income tax. Manvil Associates set up a "loan" account in Mannen's name on its books and credited the account with the $171,000 advanced by him. The money, which was used by Manvil Associates to finance the construction and operational costs of Floridian Arms, remained unpaid throughout Manvil Associates' taxable years ending April 30, 1963 and April 30, 1964. No note or other evidence of indebtedness was given to Mannen by Manvil Associates for this amount, nor was any collateral or security for repayment of the amount provided. Although amounts characterized as interest were paid on this money, there was no written agreement as to how much interest would be charged45 and there was no fixed maturity date provided for the payment of interest or the repayment of principal. Correspondingly, Mannen had no legal right to force repayment at any certain date. He would not have taken any action to force payment if to do so would have weakened the corporation's economic position. Mannen's status, as far as repayment was concerned, was inferior to the position of Peoples under its $500,000 construction loan. Manvil Associates could not have obtained the money received from Mannen through an outside lending institution or investor under the same terms and informal arrangement as it did in the instant situation, nor did it attempt to do so. The transaction with respect to the "Agreement for Deed" was closed and title to the land was transferred to Mannen on July 6, 1964. After title was transferred to Mannen, the $171,000 credit in the loan account in his name was taken out and the regular individual shareholders' loan accounts were credited with the $171,000 in proportion to their undivided interests in the land (and directly in proportion to the shareholder interests of Mannen, Novell, Miller, Factor, and Rekant). The gain from their sale of the land to46 Mannen was reported by the stockholders on their 1964 Federal income tax returns. In addition to the $500,000 construction loan from Peoples and the $171,000 advanced by Oscar J. Mannen, Manvil Associates financed the construction of Floridian Arms with advances from its shareholders. These advances were set up in shareholders' "loan" accounts. The balances in these accounts as of the end of Manvil Associates' taxable years 1963, 1964, and 1965 were reflected in Manvil Associates' income tax returns for these years as loans in the following amounts: 2196319641965Mannen$ 23,182$ 24,182$ 53,200Novell10,45513,20528,590Miller8,13310,68224,140Factor4,5235,04612,800Rekant4,0915,34111,970Total$ 50,384$ 58,456$ 130,70047 The 1964 and 1965 balances reflect the addition of current advances to the preceding year's balances. The alleged loan accounts were evidenced on the books of Manvil Associates by ledger sheets which indicated the advances as loans by the husband-shareholders. The loans were actually made by the husbands and wives jointly. Advance deposits from the sales of apartments were also used to finance the construction of Floridian Arms. The theory under which Manvil Associates entered into the Floridian Arms venture was to build the apartments and sell them, at a profit if possible, but more importantly to obtain a profitable lease of the underlying ground. As long as a profitable ground lease could be obtained, it did not make any difference to the stockholders whether Manvil Associates made money or not. The actual construction and operational costs incurred by Manvil Associates in completing the Floridian Arms exceeded the total sale price of all the cooperative apartments. Manvil Associates never operated at a profit. All of its creditors, however, with the exception of its stockholders, were paid. The stockholders profited from their sale to Mannen of the underlying ground lease. 48 Manvil Development was incorporated on February 19, 1962, with authorized capital of 100 shares of $10 par value stock. It was specifically authorized to sponsor, build and develop cooperative apartment houses, and was authorized during the years in question to construct and sell condominiums. The purchasers of condominium apartments, unlike the purchasers of cooperative apartments, obtain an interest in the underlying ground. The 100 authorized shares were issued at par to the following persons who held the stock in the amounts indicated through the taxable years involved in this suit: StockholderNo. of SharesPar ValueMannen (by the entirety)60$ 600Novell (by the entirety)15150 Factor (by the entirety)15150 Miller (by the entitety)10100 Manvil Development's primary business activity during its taxable years ending April 30, 1963 and April 30, 1964 was the construction and sale of an 82-unit cooperative apartment complex, hereinafter referred to as Venetian Park, to be constructed on land that had been conveyed to Manvil Development by its shareholders. To finance the construction of Venetian Park and to meet operational49 costs, Manvil Development obtained a $500,000 construction loan from Miami National Bank (hereinafter referred to as Miami). As security for this loan, on July 23, 1962, Manvil Development gave Miami a $500,000 mortgage on the land and apartments which were to be constructed on Venetian Park. On September 4, 1962, Manvil Development entered into a 99-year ground lease with Venetian Park, Inc., a corporate entity which would ultimately be comprised of the owners of the cooperative apartments in Venetian Park. On September 5, 1962, 1311 Manvil Development conveyed the land, subject to the lease, back to its shareholders who continued to own the land during the taxable years in question. In addition to the $500,000 construction loan from Miami, Manvil Development also financed the construction of Venetian Park with advances from its shareholders and from advance deposits from the sales of apartments. The shareholders' advances were set up in shareholder loan accounts on the books of Manvil Development in the names of the individual husbands Mannen, Novell, Miller and Factor. At the end of Manvil Development's taxable year ending April 30, 1963, the stockholder's loan accounts50 had the following balances: Account No. 1Mannen$128,35257%Novell37,58817Miller23,72511Factor 34,58815$224,253100% Although additional amounts were paid in during Manvil Development's taxable year ending April 30, 1964, by the end of that year all of the shareholder advances for the construction of Venetian Park had been repaid, either from advance payments by prospective purchasers of apartments or from the ultimate sales of apartments. During its taxable year ending April 30, 1964, Manvil Development completed construction of Venetian Park and sold most of the apartments. The theory under which Manvil Development entered into the Venetian Park venture was to construct and sell at a profit if possible, the cooperative apartments, but more importantly to obtain a profitable lease of the underlying ground. Manvil Development actually made a profit on its construction of Venetian Park. The construction loan from Miami and the shareholder advances for Venetian Park were all repaid. The shareholder advances to Manvil Associates to finance the construction of Floridian Arms and the shareholder advances to Manvil Development to finance51 the construction of Venetian Park had the following characteristics. No notes or other evidence of indebtedness were issued by either corporation to the stockholders nor was there provided any collateral or security for repayment of the advances. Although amounts characterized as interest were sometimes paid, there was no written agreement as to the rate of interest to be charged and no specific provision was made for payment at any particular time, except after the last apartment was sold. It was understood the stockholders would make no demands for repayment of their advances until such time as sales permitted, and that no demands for repayment would be made which would weaken the corporations' business. The corporations had no assets from which repayment of these sums could be effected except from the eventual sale of the cooperative apartments. No attempts were made to obtain these advances from an outside lending institution or investors nor could the advances have been obtained under the same terms and informal arrangement as existed here. The advances were subject to preference in payment to the construction loan mortgages held by Peoples and Miami National. When additional52 funds were needed to finance the construction of either Floridian Arms (Manvil Associates) or Venetian Park (Manvil Development), additional assessments would be made on Mannen, Novell, Miller, Factor and Rekant as their financial circumstances permitted at the time. It was understood that, at some point in time, adjustments would be made in the respective amounts to bring them into line with the ratio of their stockholdings. This arrangement was maintained on an informal basis and the ratios were corrected either by repayments of the advances or by payments between the individuals themselves. During its taxable year ending April 30, 1964, Manvil Development began construction of Venetian Park Gardens, an 84-unit condominium. On February 18, 1964 Manvil Development purchased the land upon which Venetian Park Gardens was to be constructed from its stockholders for $100,000 giving its shareholders a mortgage for $90,000. To finance the construction and operational costs incurred in the completion of Venetian Park Gardens, Manvil Development obtained a $180,000 construction loan from Atlantic Federal Savings and Loan Association. As security for this loan, on March 13, 1964, Manvil53 Development, Mannen, Novell, Miller and Factor mortgaged the land to Atlantic Federal Savings and Loan Association. Manvil Development also financed this project through advances made by its shareholders. Advance deposits from the sales of condominiums were also used as a source of financing. In connection with the Venetian Park Gardens project, a stockholders' agreement was drafted governing investments by the 1132 stockholders. This agreement was proposed to the shareholders by Mannen because he desired to let the other stockholders have a greater share of the profits in the condominium project than they were entitled to by their stock ownership or investment in Manvil Development. The terms of the agreement provided in pertinent part as follows: 1. Investment in the construction phase of Venetian Park Gardens Condominium shall be in equal proportions, 25% for each of the parties. Nevertheless the first $37,500 profit to be derived from the condominium dvelopment [sic] shall inure to the benefit of the parties in proportion to their respective stock interests. The next $37,500 of profit shall be divided equally, and all profits thereafter shall be divided in the following54 proportion: Mannen42 1/2%Factor20Miller17 1/2Novell202. If there be a loss in the condominium development it shall be charged equally to the parties. The rationale of this is that the land can be sold at a profit before development. 3. Miller shall enjoy a 5% override on profit and on income an all [phases] of the condominium development. 4. Unanimity shall be required in all votes concerning the affairs of the corporation. 5. The provisions of this agreement apply only to the condominium phase of development undertaken by the corporation. 6. Though this be a corporation the stockholders shall have fiduciary duties, each to the other, as if it were a partnership. This agreement shall remain in full force and effect so long as the corporation shall remain in existence and can be changed only in writing subscribed by all of the parties. * * * The provisions of this agreement shall govern if in conflict with a previous agreement entered into by the parties but the previous agreement, unless explicitly modified herein, shall survive this agreement. The agreement was never signed by all the stockholders and never became effective. Nevertheless, 55 between February 7, 1964 and April 20, 1964, Oscar J. Mannen, Samuel Novell, Nathan Miller and Harvey Factor all made equal advances of $16,000 in accordance with the terms of Mannen's proposal: MannenFactor2-7-64$ 1,0002-7-64$ 1,0002-26-642,000 2-26-642,000 3-17-644,000 3-17-644,000 4-3-643,000 4-2-643,000 4-13-643,000 4-11-643,000 4-20-643,000 4-20-643,000 $ 16,000$ 16,000MillerNovell2-7-64$ 1,0002-7-64$ 1,0002-21-642,000 3-4-642,000 3-17-644,000 3-17-644,000 4-3-643,000 4-3-643,000 4-11-643,000 4-11-643,000 4-20-643,000 4-20-643,000 $ 16,000$ 16,000 These advances were set up on the books of Manvil Development in a set of shareholder "loan" accounts, similar to the accounts used to reflect shareholders' advances to Venetian Park, Manvil Development's original cooperative apartment venture. These shareholder loan accounts were separate and distinct from the shareholder loan accounts which reflected advances by these stockholders for the financing of Venetian Park. The two sets of accounts were maintained separately in order to divide the56 activities of the two ventures. These shareholder advances had the following characteristics. No notes or other evidence of indebtedness were given to the shareholders. The advances were unsecured and no interest or repayment of principal was provided for in writing. There was no written agreement as to how much interest would be charged and there was no fixed maturity date provided for the repayment of principal other than after the sale of the last apartment. None of these stockholders would have taken any action to force payment if to do so would have weakened or undermined the corporation's economic position. The moneys advanced and invested were used to meet construction and operational costs and were all inferior to the position of the Atlantic Federal construction loan. No attempts were made by Manvil Development to obtain these advances or investments from outside sources, nor could it have done so under the same terms and informal arrangement. Before and at the time of the stockholders' advances in Manvil Associates and Manvil Development it was known that the said corporations would need additional capital for construction and operating costs. No attempts were made to57 obtain outside sources for the amounts obtained from the various stockholders during the years in 1313 question, nor could these amounts have been obtained from outside lending institutions or investors under the same terms and informal arrangement as they were obtained. The stockholders never demanded that their advances be repaid. The advances were repaid only if the money was available. Interest was not paid at any particular time; it was paid in most cases when mony was available. On May 28, 1962, Manvil Associates and Manvil Development filed elections to be treated as small business corporations under subchapter S of the Internal Revenue Code of 1954. These elections were to be effective for the taxable years of each corporation beginning May 1, 1962. Both elections were accepted by the district director and were in effect for the taxable years of both corporations ending April 30, 1963 and April 30, 1964. Manvil Associates paid Mannen, Novell, Miller and Factor the following amounts of interest during the calendar years 1963 and 1964, as reported on their income tax returns for those years respectively: 19631964Mannen$20,036.39$7,787.28Novell2,273.312,051.44Miller2,270.891,238.12Factor1,195.20575.1858 Manvil Development paid them the following amounts of interest during the calendar years 1963 and 1964, as reported on their income tax returns for those years respectively: 19631964Mannen$16,440.76$7,910.06Novell4,257.202,203.37Miller2,769.091,846.33Factor4,143.382,301.08Manvil Associates reported a net operating loss of $19,424.67 for its taxable year ending April 30, 1963, the first year that it reported either gain or loss. The above loss was deducted by the stockholder-petitioners in their 1963 income tax returns in the following amounts: Mannen$7,769.87Novell3,496.44Factor1,942.47Miller3,496.44For its taxable year ending April 30, 1964, Manvil Associates reported a net operating loss of $85,780.85 which was deducted by the stockholder-petitioners in their 1964 income tax returns as follows: Mannen$34,312.34Novell19,730.00Factor8,578.00Miller15,440.55Manvil Development reported a net operating loss of $18,794.47 for its taxable year ending April 30, 1963, the first year that it reported either gain or loss. The above loss was deducted by the stockholder-petitioners59 in their 1963 income tax returns in the following amounts: Mannen$11,276.68Novell2,819.17Factor2,819.17Miller1,879.45For its taxable year ended April 30, 1964, Manvil Development reported taxable income of $44,247.44. This income was reported by the shareholders on their 1964 income tax returns in the following amounts: Mannen$26,548.4660%Novell6,637.0015Factor6,637.0015Miller 4,424,7410$44,247.20100%The Commissioner determined deficiencies in petitioners' income taxes reflecting his determination that the elections of Manvil Associates and Manvil Development to be taxed under subchapter S of the 1954 Code were terminated in 1963. Accordingly, he determined that the individual petitioners were not entitled to deduct the losses they claimed from Manvil Associates in 1963 and 1964 and from Manvil Development in 1963. Further he determined that Manvil Development was taxable under subtitle A, chapter 1 of the 1954 Code on its 1964 income. He also made the following adjustments to the reported taxable income of $44,247.44: he disallowed an interest deduction of $27,814.29, for interest paid to its stockholders60 which he determined to constitute a dividend payment; he allowed a net operating loss deduction of $6,093.98. By amended pleadings, the Commissioner alleged in the alternative that petitioners Mannen, Novell, Miller and Factor received additional taxable income in 1964 from a recovery from Manvil Development and from a deduction of net operating losses of Manvil Associates in excess of their losses in the stock and debt of those corporations. Opinion Section 1372(e)(3), I.R.C. 1954, 3 provides that a small business corporation's election to be taxed under subchapter S of the Code shall terminate if at any time 1314 after the day on which the election is made the corporation ceases to be a small business corporation (as defined in section 1371(a)). Such termination shall be effective for the taxable year of the corporation in which the corporation ceases to be a small business corporation and for all suceeding taxable years of the corporation. Section 1371(a) defines a "small business corporation" as a corporation which, among other things, does not have more61 than one class of stock. We must decide whether the elections of Manvil Associates and Manvil Development to be taxed under subchapter S were terminated for their taxable years 1963 (and their succeeding taxable years 1964). The Commissioner claims that the advances to those corporations by their respective shareholders during their taxable years 1963 were actually advances of equity capital that were not made substantially in proportion to their holdings of the respective corporation's capital stock and thus constituted a second class of stock. The Commissioner relies on section 1.1371-1(g), Income Tax Regs., which provides in material part as follows: Sec. 1.1371-1(g). Classes of stock. - A corporation having more than one class of stock does not qualify as a small business corporation. * * If the outstanding shares of stock of the corporation are not identical with respect to the rights and interest which they convey in the control, profits, and assets62 of the corporation, then the corporation is considered to have more than one class of stock. Thus, a difference as to voting rights, dividend rights, or liquidation preferences of outstanding stock will disqualify a corporation. * * Obligations which purport to represent debt but which actually represent equity capital will generally constitute a second class of stock. However, if such purported debt obligations are owned solely by the owners of the nominal stock of the corporation in substantially the same proportion as they own such nominal stock, such purported debt obligations will be treated as contributions to capital rather than a second class of stock. But, if an issuance, redemption, sale, or other transfer of nominal stock, or of purported debt obligations which actually represent equity capital, results in a change in a shareholder's proportionate share of nominal stock or his proportionate share of such purported debt, a new determination shall be made as to whether the corporation has more than one class of stock as of the time of such change. We consider first whether the purported loans to Manvil Associates and to Manvil Development were made substantially in the63 same proportion as the shareholder-"creditors" owned stock in the respective corporations. If the "loans" were so proportionate, the elections were not terminated whether or not the obligations which purport to represent debt actually represent equity capital. W.C. Gamman, 46 T.C. 1">46 T.C. 1 (1966). There are essentially two groups of advances to Manvil Associates: (1) The $171,000 advanced by Oscar J. Mannen as Trustee; and (2) the advances by all the stockholders to finance the construction of Floridian Arms and to meet other operational costs of Manvil Associates. With respect to the $171,000, petitioners argue that in substance this advance represents an advance by all of Manvil Associates' shareholders in direct proportion to their stock ownership. These shareholders (husbands and wives as tenants by the entirety) held, as of May 1, 1962, undivided interests in the real property upon which the Floridian Arms was to be constructed in the same proportion as their stock interests in Manvil Associates, being: Mannen 40%; Novell 23%; Miller 18%; Factor 10%; and Joseph Rekant 9%. On May 1, 1962, these shareholders conveyed the land to Manvil Associates which then mortgaged64 the land to Peoples as security for its $500,000 construction loan to Manvil Associates. On May 5, 1962, Manvil Associates entered into a 99-year ground lease with Floridian Arms, Inc., a corporate entity to be comprised of Floridian Arms' apartment owners. The lease provided for a monthly rental of $1,246.25 with an option to purchase the property for $186,937.50 between January 1, 1975 and December 31, 1978. The land was then reconveyed to the shareholders on May 7, 1962, restoring to them their original undivided interests. On May 23, 1962, all the shareholders of Manvil Associates entered into an "Agreement for Deed" with Oscar J. Mannen, "Trustee," agreeing to convey the land to him in fee simple, free of all encumbrances except the 99-year ground lease, for $171,000. The $171,000 was to be paid in the following manner: $30,000 on execution of the agreement $30,000 in thirty days $30,000 in sixty days Balance when the property was "deliverable as above." 1315 The phrase "deliverable as above" apparently refers to the requirement that the land be free of all encumbrances, including the $500,000 mortgage to Peoples. Oscar J. Mannen was to be credited with interest65 at the rate of 10 percent per annum on each portion paid, from the date paid to the date of conveyance. Oscar J. Mannen paid $171,000 to Manvil Associates during its taxable year ending April 30, 1963. Rather than being paid in the installments provided for in the "Agreement for Deed," the entire $171,000 was paid within 7 months from the date of that agreement. Interest in the amount of 10 percent per annum was paid, presumably from the date of such advances to the date of conveyance, and was reported on Mannen's income tax. While the interest was paid by Manvil Associates, the interest obligors under the "Agreement for Deed" were obligated for the interest in amounts that were proportionate to their stockholdings so that payment of the interest by Manvil Associates would in effect constitute indirect payment by the sellers under the "Agreement for Deed." Indeed the reason alleged for the making of Mannen's payments to Manvil Associates rather than directly to the seller-shareholder was for convenience in the computation of interest. The shareholder account for the $171,000 in Mannen's name was kept separately from the normal shareholders' loan accounts to be discussed shortly. 66 The $171,000 account remained unpaid throughout Manvil Associates' taxable years 1963 and 1964. Title to the real property was transferred to Mannen on July 6, 1964, at which time the $171,000 was taken out of the account in his name and transferred to the individual accounts of the shareholder-sellers inproportion to their respective interests in the land (and directly in proportion to their respective shareholder interests in Manvil Associates). We are satisfied that the $171,000 was intended to and actually did represent a contribution by all of the shareholders directly in proportion to their interests as shareholders. The money was used by Manvil Associates to finance the construction of Floridian Arms. In form the advance appears to be from Mannen to the corporation and the interest appears to have been paid to Mannen by the corporation. Nevertheless, we are satisfied that the payments in substance were made pursuant to the "Agreement for Deed," that in effect they were indirect payments to the sellers under that agreement and that the 10 percent interest was paid indirectly by them. With respect to the regular shareholders' "loan" accounts, the shareholders had advanced the67 following amounts as of the end of Manvil Associates' taxable years 1963, 1964 and 1965: 196319641965Mannen$23,182$24,182$53,200Novell10,45513,20528,590Miller8,13310,68224,140Factor4,5235,04612,800Rekant4,0915,34111,970The proportion of such shareholders' advances as of such times to the total advances of all the shareholders was as follows: 196319641965Mannen46%41%41%Novell212322Miller161818Factor9910Rekant899The Commissioner contends that the advances represented in the shareholders' "loan" accounts - carried on the corporation's ledger sheets in the names of the husband-shareholders - were made by the husbands alone and that their wives had no interest in the advances. Accordingly he concludes that the advances were not made substantially in proportion with the husbands' shareholder interest, i.e., that the husbands, as "creditors" held preferences over their wives as regards income, liquidation, etc. To the contrary, we think the record as a whole indicates that these advances were in fact made by the respective family units, husbands and68 wives jointly. We attach little significance to the notations on the ledger sheets of the husbands' names only. They were the active members of their respective family units. Petitioners consistently failed to make any distinction between husbands and wives, vis-a-vis, their investment in Manvil Associates. Indeed these same ledger sheets all bear the notation, after the husband-shareholder's name, of the percentage of the total common stock owned by him and his wife as tenants. For example, the ledger sheet evidencing Mannen's loan reads "Loan - O.J. Mannen 40%," when that 40% was actually owned by the husband and wife. Also, in 1964 upon transfer of title to the land to Mannen the $171,000 was transferred from Mannen's separate account into these shareholder loan accounts. It is clear that the husbands and wives owned the $171,000 equally as it represented the proceeds from the sale of land, the undivided interests in 1316 which, it has been stipulated were held by the husbands and wives as tenants by the entirety. We find that the shareholder advances to Manvil Associates were made by the owners of the nominal stock of the corporation in substantially the same proportion as69 they owned such nominal stock. Accordingly we hold that Manvil Associates' election to be taxed under subchapter S was not terminated during either of the years in issue. In an alternative argument with respect to the tax treatment of Manvil Associates' shareholders the Commissioner contends that Novell, Miller, and Factor claimed "pass through" net operating loss deductions in 1964 in excess of their bases in the stock and debt of Manvil Associates contrary to the provisions of sections 1376 (b)(1) and (2) of the Code. Because we have decided that the $171,000 was advanced by all of the stockholders, their bases in their stock and "debt" of Manvil Associates are increased by the following amounts: Novell, $39,330 (23% of $171,000); Miller, $30,780 (18% of $171,000); Factor, $17,000 (10% of $171,000). Their bases, so adjusted, exceed the amounts of the corporation's net operating losses claimed by them during 1964. Accordingly we hold against the Commissioner on this alternative theory. As for Manvil Development, there are essentially two groups of advances to that corporation: (1) The shareholder advances to finance the construction and operational costs of Venetian Park, Manvil70 Development's original 82-unit cooperative apartment complex and (2) the shareholder advances to finance the construction of Venetian Park Gardens, Manvil Development's 84-unit condominium. With respect to the first group of shareholder advances, the stockholders' loan accounts had the following balances as of the end of Manvil Development's taxable year ending April 30, 1963: Mannen$128,35257%Novell37,58817Factor34,58815Miller 23,72511$224,253100% Although additional amounts were paid in by the shareholders to finance the Venetian Park development during Manvil Development's taxable year ending April 30, 1964, by the end of that year, all such advances had been repaid. We find that the shareholder advances for the construction of Venetian Park were made substantially in proportion to the shareholders' respective stockholdings. Again, we find the advances were actually made by the husbands and wives and that the husbands received no preference over their respective wives in the profits or assets of the corporation. As these advances were the only ones outstanding during Manvil Development's taxable year ending April 30, 1963, we hold71 that its election to be taxed as a subchapter S corporation was not terminated during that year. With respect to the second group of shareholder advances to Manvil Development, the stockholders all made equal advances of $16,000 in accordance with the terms of Mannen's proposed shareholders' agreement which was to govern the shareholders' investment and profit distribution from Venetian Park Gardens, the condominium. As of the end of Manvil Development's taxable year ending April 30, 1964, Mannen, Novell, Factor and Miller each had loan account balances of $16,000. These balances reflect the only outstanding shareholder advances to Manvil Development as of such time. (The shareholder advances for the construction of the cooperative apartment venture had all been repaid as of such time.) These equal advances obviously were not made substantially in proportion to the respective shareholders' interest, the advances being of equal amounts while Mannen, for example, owned 60% of Manvil Development's stock. Accordingly, we must decide whether these advances, which purport to represent debt, actually represent contributions of equity capital. The advances were made in a series of installments, 72 beginning in February 1964 and continuing into April 1964. During that same period of time Manvil Development had completed construction of Venetian Park and had sold most of the apartments in that complex. As of April 30, 1964, Manvil Development had paid off the $500,000 construction loan from Miami National and had repaid the shareholder advances used to finance the construction of Venetian Park. Thereafter the corporation continued to receive income from the sales of the remaining apartments in Venetian Park. The corporation had obtained a $180,000 construction loan from Atlantic Federal 1317 Savings and Loan but it appears it was not, as of April 30, 1964, actually indebted to Atlantic for any amount. Accordingly the only outstanding indebtedness of the corporation, as of April 30, 1964, was the $64,000 amount of advances. These advances, if they were actually intended to be loans, we think, enjoyed every reasonable prospect of repayment. Perhaps for this reason and because the shareholders otherwise appear to have dealt quite informally in regard to the nature of their advances to the corporation there is little formal evidence of the character of these advances. The advances73 were represented by ledger sheets, which sheets were identified merely by the notation "Mannen #2," or "Novell #2," (to distinguish these loans from the loans made to finance the construction of Venetian Park which were set up in account "#1."). These sheets also contained the notation "loan," and interest was paid on the advances. We think the advances were loans and not advances of equity capital. And we do not believe that the shareholders intended by these advances to create any preference in regards to income, liquidation, etc., that were disproportionate to their stockholdings. It appears that when Manvil Development's accountant discovered that these advances, unlike all the previous advances, were not substantially in proportion to their stockholdings he questioned the shareholders about it with the consequence that shortly after April 30, 1964, they made additional advances in order to make the outstanding advances proportionate with their stockholdings. We hold that Manvil Development's election to be taxed as a subchapter S corporation was not terminated during its fiscal year ended April 30, 1964. Issue 2.. Deductibility of Loss Arising from Demolition of Building 74 Findings of Fact Petitioner Oscar J. Mannen owned a building in Hazelton City, Pennsylvania, which, during 1959, a major discount house was interested in renting. As the discount house desired additional parking space for its customers, Mannen made efforts to purchase an old wooden frame building nearby which was owned by the Hazelton City School District and was being used by it as a vocational school. His intent was to demolish the building as soon as possible after acquiring it to provide the needed parking space. Mannen offered to pay the school district $100,000 if he could acquire the property in time to obtain the lease with the discount house. While he was negotiating with the school district, however, the discount house went elsewhere. Mannen finally purchased the school property in August 1962 after which the vocational school continued to occupy the building under an informal lease with Mannen. At the end of 1962, the school district vacated the building. Thereafter the building was left vacant until it was torn down in July 1963. Mannen claimed an abandonment loss of $7,599.99 in his joint income tax return for 1963. In his statutory notice of deficiency, the Commissioner75 disallowed the claimed deduction with the explanation: It has been determined that the loss claimed of $7,599.99 from demolition of real estate was a capital expenditure rather than an abandonment loss and, therefore, is not allowable. * * Opinion Section 165 provides there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. A loss, in order to be deductible must involve the unintentional or involuntary loss of something of value. Wood County Telephone Co; 51 T.C. 72">51 T.C. 72 (1968). Where a taxpayer purchases real property improved by a building and at the time of the purchase intends to demolish the building, he is not allowed a loss deduction under section 165 on account of the eventual demolition of the building, but must allocate the basis for the building to the underlying land. Section 1.165-3(a)(1), Income Tax Regs.; Hillside National Bank, 35 T.C. 879">35 T.C. 879 (1961). The Commissioner has determined that Mannen purchased the school property with the intent to demolish76 the building. The correctness of this determination involves a purely factual question. The burden is upon the petitioner to prove that he did not intend to demolish the building at the time he purchased it. The parties have stipulated that at the time of his negotiations with the school district in 1960, Mannen intended to demolish the building as soon as he acquired it. However, these early negotiaitons were unsuccessful. Mannen claims that at the time he actually purchased the building in 1962, he had abandoned his earlier intention to 1318 demolish the building. We do not think that he did. The building in fact was demolished approximately one year after its purchase. In the meantime, it had been leased informally to the school district on a month-to-month basis for a period of about four months. For the rest of the time, it remained vacant. There is no evidence that any improvements were made to the building or that any efforts were undertaken to make the building suitable for occupancy, although Mannen testified the building's exterior needed to be painted. Although Mannen testified that the building was suitable for office use and that efforts had been made to re-rent77 the building after the vocational school had abandoned it, his testimony in this regard was vague and unconvincing. There is no evidence of any changes in the economic or business conditions in the area surrounding the building from the time of its purchase until its demolition that would lead to an inference that during this period Mannen changed his alleged intention to preserve the building. We find but scant evidence that Mannen ever intended to do anything with the building other than to demolish it. As petitioner has failed to carry his burden of proof, we hold he is not entitled to the claimed loss deduction. Decisions will be entered under Rule 50. Footnotes1. Cases of the following petitioners are consolidated herewith: Estate of Nathan Miller, Deceased, Amelia Miller, Executrix and Amelia Miller, docket No. 4749-67; Harvey Factor and Linda Factor, docket No. 4757-67; Oscar J. Mannen and Harriet Mannen, docket No. 4758-67; Manvil Development Corp. of Broward, docket No. 4919-67.↩*. The figures indicated do not include respondent's claim for an increased deficiency in these years based on an alternative position taken in amendments to answers filed with the Court.↩2. The following schedules reflect the activity in the stockholders' "loan" accounts in Manvil Associates from the date of incorporation through April 30, 1964: Oscar J. Mannen DateDebitsCreditsBalance1/62$ 400.00$10,000.004/62 10,000.00Balance 4/30/62$19,600.005/62$ 400.006/62$15,000.003,621.926/627,378.088/622,182.353/63 5,000.00Balance 4/30/62$23,182.355/63$ 5,000.0010/63$ 8,000.0011/638,000.0011/6320,000.002/6422,000.0022,000.003/648,000.004/646,000.004/6410,000.00Balance 4/30/64$24,182.35Sam Novell4/62$ 230.00$ 230.006/6211,721.976/621,267.12Balance 4/30/63$10,454.855/63$ 5,75010/63$ 5,300.0011/6320,300.003/648,000.004/6410,000.00Balance 4/30/64$13,204.85Nathan Miller4/62$ 180.00$ 180.006/627,413.508/62768.564/6349.48Balance 4/30/63$ 8,132.585/63$ 2,000.005/632,499.945/6349.5610/63$ 4,200.0011/634,200.004/642,000.00Balance 4/30/64$10,682.08Harvey Factor4/62$ 100.00$ 100.006/625,905.488/621,359.894/6321.95Balance 4/30/63$ 4,523.645/63$ 2,000.00$ 2,521.9510/632,300.0011/632,300.00Balance 4/30/64$ 5,045.59Joseph Rekant4/62$ 90.00$ 90.006/624,414.938/62323.90Balance 4/30/63$ 4,091.035/63$ 2,249.974/64$ 1,000.00Balance 40/30/64$ 5,341.00The sources for the repayments indicated in these accounts were from advance deposits made by prospective purchasers of apartments and from the ultimate sales of apartments.↩3. All statutory references are to the Internal Revenue Code of 1954 unless otherwise specified.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620039/	ROBERT L. BENNETT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBennett v. CommissionerDocket No. 10081-82.United States Tax CourtT.C. Memo 1987-148; 1987 Tax Ct. Memo LEXIS 146; 53 T.C.M. (CCH) 403; T.C.M. (RIA) 87148; March 19, 1987. Robert L. Bennett, pro se. Louis John Zeller, Jr., for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined a deficiency of $18,665.99 in petitioner's Federal income tax for the taxable year 1977 and an addition to tax for fraud of $9,332.99 under section 6653(b). 1 The issues for decision are whether petitioner (1) received constructive dividends in the amounts determined by respondent, and (2) is liable for the addition to tax for fraud under section 6653(b). For convenience we have combined our findings of fact and opinion. Petitioner resided in Watertown, 147 New York at the time he filed his petition herein. During 1977, he was married to Joyce A. Bennett (who is not a party herein) and they filed a joint Federal income tax return (Form 1040A) for that year. On that return, petitioner listed his occupation as salesman but reported no taxable income attributable to him from any source; the only income reported on that return was wages earned by Joyce in the amount of $6,180.82. During 1977, petitioner was president and sole shareholder of Bobart Travel Agency, Inc. ("Bobart"), a corporation formed by petitioner in 1970 and engaged in the travel business. Petitioner maintained Bobart's books and records using the cash method of accounting. Bobart maintained checking accounts over which petitioner had signing authority, together with one Lois Parish ("Parish") who was a full-time employee of Bobart. Bobart's 1977 Federal income tax return, which petitioner signed, reported gross receipts of $1,009,409, gross income of $123,083, and taxable income (prior to an offsetting claimed net operating loss carry-forward) in the amount of $1,736. The return listed petitioner as devoting 100 percent of his time to the business of Bobart but receiving148 no compensation therefor. On that return, Bobart took the following deductions: Rent$21,940Amortization12,809Telephone & Utilities8,975Travel Expenses11,561Miscellaneous13,774Respondent's determination of constructive dividends to petitioner, as set forth in the notice of deficiency, consisted of all of the above amounts attributable to amortization, travel expenses and miscellaneous and one-half of the amounts attributable to rent and telephone and utilities, for a total of $53,602. During 1977, petitioner maintained no bank account, and he and his wife, Joyce Bennett, resided at 310 Ten Eyck Street, Watertown, New York. Title to the house was in the name of Joyce Bennett. During 1977, Bobart paid at least $15,465.43 to or for the benefit of petitioner, including mortgage payments on the home at 310 Ten Eyck Street, telephone services received at the home, water supplied to the home, electricity furnished to a second home owned by petitioner's wife and maintained by petitioner, and personal expenses of petitioner and members of his family (including payments in respect of credit card charges to a credit card in petitioner's name). The foregoing149 payments were made by checks of Bobart, many of which were signed by petitioner, the others having been signed by Parish. We first address the underlying deficiency. The burden of proof is on petitioner to show that respondent's determination is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioner, however, chose to present no evidence at trial beyond that covered by respondent's request for admissions which were the subject of review and ruling by the Court. 2 It seems clear that petitioner does not seriously dispute that Bobart made payments which benefited petitioner, who was Bobart's sole shareholder, and we have found that such payments were in fact made. Conferring such benefits is the hallmark of a constructive dividend. Falsetti v. Commissioner,85 T.C. 332">85 T.C. 332, 356 (1985); American Properties, Inc. v. Commissioner,28 T.C. 1100">28 T.C. 1100, 1114-1115 (1957), affd. 262 F.2d 150">262 F.2d 150 (9th Cir. 1958). On brief, petitioner seeks to persuade us that the notice of deficiency was arbitrary and capricious and that, consequently, the burden of going forward with the evidence as to the underlying deficiency shifts150 to respondent. He premises his position on the assertion that the record herein shows that, at most, petitioner received constructive dividends in the amount of $15,465.43, a sum far less than the $53,602 determined in the notice of deficiency. He seeks to buttress his position by the fact that respondent had Bobart's books and records in his possession and that the $15,465.43 must be all the books and records show as possible constructive dividends; if that were not the case, petitioner argues, respondent would have sought admissions by petitioner of a larger amount. Petitioner misconceives the proper application of the burden of proof and the151 burden of going forward with the evidence. Respondent was under no obligation to seek any particular amount of constructive dividends by way of a request for admissions. The function of such a request is to pin down facts as to which the requesting party believes cannot fairly be in dispute; it obviously does not extend to facts which the requesting party believes may be disputed. Consequently, no adverse inference should be drawn from the limited scope of respondent's request for admissions herein and petitioner is not relieved of his burden of proof and the burden of going forward. Nor can petitioner claim the benefit of the cases which impose upon respondent the obligation to connect petitioner with an income producing activity before requiring petitioner to satisfy his burden of proof. See Shriver v. Commissioner,85 T.C. 1">85 T.C. 1, 3 (1985). Aside from the fact that the constructive dividends were not illegal income, the fact is that the notice of deficiency clearly identifies the particular elements underlying respondent's calculations, and the source of those elements was clearly identified with information in Bobart's books and records. Thus, the cases requiring152 respondent to show a connection of the taxpayer to an income producing activity are not on point. Cf. Tokarski v. Commissioner,87 T.C. 74">87 T.C. 74 (1986). Finally, the fact that Bobart's books and records were in respondent's possession also does not serve to relieve petitioner of his burden of proof and the burden of going forward. The record shows that respondent offered to make them available to petitioner for use at trial. Petitioner, for reasons of his own, chose not to avail himself of respondent's offer. He must bear the consequences of his choice. 3In sum, we conclude that petitioner has failed to carry his burden of proof as to the underlying deficiency and hold that respondent's determination in this respect should be sustained. 4153 We turn to the issue of whether petitioner should be held liable for the additions to tax for fraud under section 6653(b). The burden is on respondent to show, by clear and convincing evidence, that some part of the underpayment is due to fraud and that petitioner had a specific purpose to evade a tax believed by him to be due and owing. Kotmair v. Commissioner,86 T.C. 1253">86 T.C. 1253, 1259-1260 (1986); section 7454(a); Rule 142(b). The existence of fraud is a question of fact to be determined from the entire record. 86 T.C. at 1259. Respondent may carry his burden on the basis of reasonable inferences to be drawn from that record, but he may not rely on petitioner's failure to carry his burden of proof as to the underlying deficiencies. Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304, 311-312 (1982). Moreover, respondent need only prove that "any part of any underpayment * * is due to fraud." Section 6653(b)(1); Estate of Beck v. Commissioner,56 T.C. 297">56 T.C. 297, 362 (1971). We have found that Bobart made payments for the benefit of petitioner and his family in at least the amount of $15,465.43. We are satisfied that such payments154 were made as part of a pattern of action conceived and implemented by petitioner which was designed to permit petitioner to avoid reporting such amounts for Federal income tax purposes and to conceal such payments from discovery by respondent. Consequently, we conclude that respondent has satisfied his burden that at least "[a] part of [the] underpayment * * is due to fraud" and, as a result, that petitioner is liable for the addition to tax for fraud under section 6653(b). 5 Cf. Hicks Co. v. Commissioner,56 T.C. 982">56 T.C. 982, 1028-1030 (1971), affd 470 F.2d 87">470 F.2d 87 (1st Cir. 1972). *155 Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect during the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. It is not clear why petitioner chose this course of action. To the extent that he was influenced to do so by his references to a Fifth Amendment claim, we note that, aside from the question of whether petitioner had an adequate foundation for any such claim (which we think he did not), he would not, in any event, be relieved of his burden of proof. United States v. Rylander,460 U.S. 752">460 U.S. 752 (1983); Steinbrecher v. Commissioner,712 F.2d 195">712 F.2d 195↩ (5th Cir. 1983), affg. a Memorandum Opinion of this Court.3. We note that the record reveals that respondent was able to obtain Bobart's books and records only after a protracted summons enforcement proceeding in which petitioner was faced with the possibility of punishment for contempt.↩4. Petitioner has at no time suggested that he had deductions which would reduce or offset the constructive dividend income. It was his obligation to come forward with evidence of such deductions not only to carry his burden of proof as to the underlying deficiency, but to impose upon respondent the obligation to negate such deductions in order to carry his burden of proof on the addition to tax for fraud. Cf. Elwert v. United States,231 F.2d 928">231 F.2d 928, 933 (9th Cir. 1956); United States v. Bender,218 F.2d 869">218 F.2d 869, 871-872 (7th Cir. 1955); Rivera v. Commissioner,T.C. Memo. 1979-343↩.5. On brief, petitioner seeks to overcome respondent's determination of fraud by reference to a statement by the Assistant United States Attorney at a hearing during the course of the summons enforcement proceedings, see note 3, supra,↩ that petitioner's "statements are an interesting amalgamation of misunderstood, misread, misconstrued cases and statutes." Aside from the fact that such statement is not in evidence herein, it was made in a totally different context and is therefore irrelevant to our analysis. We note, however, that, even if we considered the statement relevant, it would not be sufficient to overcome the proof of fraud which the record herein otherwise reveals.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620040/	JIMMY and THEDA SPURGEON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSpurgeon v. CommissionerDocket No. 9420-74United States Tax CourtT.C. Memo 1977-326; 1977 Tax Ct. Memo LEXIS 119; 36 T.C.M. (CCH) 1316; T.C.M. (RIA) 770326; September 21, 1977, Filed 119 Petitioners, husband and wife, engaged in a number of stock transactions in 1968. Held, petitioners failed to establish that they had acted as commission agents in these transactions. Accordingly, the proceeds received therefrom were income to petitioners in that year. Held further, petitioners failed to show that they had reasonably relied on bookkeeping services in reporting their income. Thus, failure to report such funds as income was due to negligence or intentional disregard of the rules and regulations. 120 J. Perry Abbott, for the petitioners. Raymond L. Collins, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: Respondent determined deficiencies in, and additions to, petitioners' Federal income taxes as follows: Jimmy SpurgeonAdditions to tax YearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541964$22,516.58$5,629.15$1,125.83$623.2119651,427.95356.9971.j032.7319661,045.16261.2952.2617.9019671,453.74363.4472.6946.53Theda SpurgeonAdditions to tax YearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541966$ 639.26$ 159.82$ 31.96$ 17.9019671,031.34257.8451.5733.00Jimmy and Theda SpurgeonAddition to tax YearDeficiencySection 6653(a)1968$47,626.81$2,381.3419695,157.01257.8519707,069.40353.47 The parties have stipulated that for settlement purposes petitioners' deficiencies and additions to tax, excluding applicable interest, for the years listed are as follows: Jimmy SpurgeonAdditions to tax YearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541964 $2,948.22$737.05$147.41$ 82.5519651,427.95356.9971.4032.7319661,045.16261.2952.2617.9019671,453.74363.4472.6946.53121 Theda SpurgeonAdditions to tax YearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 66541966$ 639.26$159.82$31.96$17.9019671,031.34257.8451.5733.00Jimmy and Theda SpurgeonAddition to tax YearDeficiencySection 6653(a)1969 $4,000.00$200.001970 5,200.00260.00Moreover, the parties agree that the issues relating to the tax year 1968 that remain for our decision 1 are whether the full amounts received by petitioners from sales of United Australian Oil Company (hereinafter UAO) stock in 1968 were income to them and, if so, whether petitioners' failure to report such funds as income was due to negligence or intentional disregard of rules and regulations pursuant to section 6653(a), I.R.C. 1954. 122 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. As the controversy has been narrowed to the UAO stock sales, only facts pertinent to such transactions will be presented. Petitioners Jimmy and Theda Spurgeon, husband and wife, resided in Fort Worth, Texas, at the time the petition herein was filed. Their joint Federal income tax return for the calendar year 1968 was filed with the southwest internal revenue service center, Austin, Texas. In 1968 petitioners, in several transactions, obtained and sold 285,000 shares of UAO stock receiving a total of $68,100.91. In addition, petitioners sold 30,000 shares of stock that for some unstated reason was not transferred on UAO's books. Petitioners repurchased that stock for $8,300. On schedule D of their 1968 return petitioners reported a short-term capital gain from the sale of the UAO stock, reporting $68,120.51 2 as the gross sales price, a cost basis of $61,320.51 and a gain of $6,800. This was the only income reported for that year. 123 During 1968 petitioners maintained two checking accounts at Gateway National Bank, Fort Worth, Texas, one under the name Theda Spurgeon and the other under the name Mine Motors, depositing therein $22,341.29 and $838, respectively. Petitioners admit that amounts deposited in the two checking accounts in 1968 in excess of the aforenoted reported $6,800, or $16,379.29 ($22,341.29 plus $838 less $6,800), were additional income that should have been reported in 1968. Respondent in his notice of deficiency, dated September 6, 1974, determined that petitioners "realized a gain of $68,120.51 3 from the sale of United Australian Oil Company stock, instead of $6,800 as reported * * * because the basis of such stock has not been established." Jimmy Spurgeon was interviewed by special agents Charles Rahren and Gene Boren on two occasions. 4 He told them that part of the UAO stock was purchased with funds he had borrowed. He was also interviewed by special agent Ron Bergmann in June of 1971 and on July 8, 1971. Again Spurgeon stated that the stock was obtained, in part, with borrowed funds. 124 Petitioners were in the automobile business in 1969. OPINION The primary issue for consideration is whether the total proceeds received from the sales of the UAO stock constituted short-term capital gain to petitioners under sections 61(a)(3) 5 and 1222(1). 6Petitioners allege that Spurgeon acted as a commission agent for Herb Fortson in the UAO stock transactions. On each occasion he received the stock from Fortson, delivered it for sale to one of two brokerage houses 7 and, when the sale was consummated by the brokers, remitted the sales proceeds to Fortson less a 10 percent commission. Such purported remittances to Fortson were in the form of a125 1968 Oldsmobile, 8 one year's insurance coverage and cash. Respondent contends that petitioners retained the UAO stock sales proceeds, depositing part thereof in the two Gateway National Bank checking accounts. He argues that the remaining proceeds were retained by petitioners because as the record indicates they were needed to repurchase the UAO stock that was not transferred and to aid in the establishment in 1969 of their used car business, each requiring the use of funds over and above amounts reflected in the foregoing checking accounts. After considering all relevant facts and the entire record we find that petitioners have failed to present sufficient evidence to establish that Spurgeon acted as a commission agent for Herb Fortson in the sale of the UAO stock. Though Spurgeon testified that the stock was sold by him as a commission agent for Fortson his testimony conflicts with statements he made at various times to three internal revenue126 special agents. Petitioner's testimony is uncorroborated; yet from the record it appears that not only the unavailable Fortson, but at least one of the stockbrokers involved in the transactions was cognizant of the details of these transactions. The testimony of the one nonparty witness (Spurgeon's brother) and the documents received in evidence on petitioners' behalf are subject to such diverse interpretations that we cannot find that they are of any meaningful help to petitioners in carrying their burden. It is, of course, well settled that the burden of proof is upon petitioners. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners have not made a concerted effort to meet this burden. Thus, we have no choice but to find that the sales proceeds were retained by petitioners. Additionally, petitioners have presented no evidence with respect to the cost of the stock. Under the general rule of section 1012 the basis of property shall be its cost. This element has not been established, therefore, the entire amount of the proceeds is income to petitioners. Finally, petitioners assert that their failure127 to declare the full amount of income in 1968 was inadvertent as they reasonably relied on a bookkeeping service to prepare their return. However, petitioners fail to show that their reasonable reliance on such services was based on the fact that all available records of their transactions for the year in question were supplied to the bookkeeper and that the bookkeeper was properly instructed. Leroy Jewelry Co., Inc. v. Commissioner,36 T.C. 443">36 T.C. 443 (1961). Once again, petitioners have failed to satisfy their burden. Decision will be entered under Rule 155. Footnotes. For these years the parties have settled on deficiencies and additions different from those initially determined.↩. For these years the parties have settled on deficiencies and additions different from those initially determined.↩1. Respondent on brief concedes that the determination increasing petitioners' 1968 schedule C income by $35,789.42 should be a $16,000 increase. Petitioners at trial and on brief have not commented on the foregoing and we, therefore, adopt respondent's concession.↩2. This conflicts with the stipulated gross sales price of $68,100.91.↩3. See footnote 2, supra↩.4. Rahren testified that the dates of the interviews were 12/22/69 and 1/19/70; Boren testified that they were 12/1/69 and 12/22/69.↩5. SEC. 61. GROSS INCOME DEFINED. (a) General Definition.--Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: * * (3) Gains derived from dealings in property * *. ↩6. Short-term capital gain.--The term "short-term capital gain" means gain from the sale or exchange of a capital asset held for not more than 6 months, if and to the extent such gain is taken into account in computing gross income.↩7. David H. Rankin & Co. and Abbett, Sommer & Co. ↩8. We note that respondent claims that the evidence presented by petitioners reflected not one but three automobiles, all with identical identification numbers and license tags.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620041/	WORSTELL CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Worstell Co. v. CommissionerDocket No. 14707.United States Board of Tax Appeals15 B.T.A. 413; 1929 BTA LEXIS 2860; February 14, 1929, Promulgated 2860 Held, that an amount of $2,214.12 representing an adjustment on a fire which occurred in 1920 was erroneously included in income for 1921. F. R. Shearer, Esq., for the respondent. GREEN 413 In this proceeding the petitioner seeks a redetermination of its income-tax liability for the calendar year 1921, for which period the respondent has determined a deficiency of $221.41. The petitioner contends that the respondent erred in including in its net taxable income the sum of $2,214.12, which represents the sum received by the petitioner in payment of a loss caused by fire in the previous year. FINDINGS OF FACT. The Worstell Co., Ltd., is a corporation organized under the laws of the State of Idaho, with its principal place of business at Wallace. Since 1909 the petitioner has been the owner of a two-story-and-basement brick building used in connection with its furniture and undertaking business. In September, 1920, a fire occurred in the basement of this building, causing considerable damage both to the building and the merchandise. Insurance in the amount of $6,972.34 was paid in January, 1921. Of this amount, $4,758.22 represented2861 an adjustment on account of merchandise destroyed and $2,214.12 represented an adjustment on account of the damages to the building. The petitioner at the close of 1920 accrued the $4,758.22 item, but did not accrue the damages to the building. This resulted in showing an increase in income of $2,214.12 for 1921. 414 OPINION. GREEN: The respondent has determined that the petitioner received income in 1921 in the amount of $2,214.12 from a fire which occurred in 1920. The record does not disclose that the insurance companies contested the payments on their policies and any gain or loss resulting from the fire should be returned or reported in the year in which the fire occurred. The record shows that while the payments of the losses sustained as to merchandise and building were not made until January, 1921, the losses were actually sustained in September, 1920. The receipt of an item in 1921 representing an adjustment of a fire loss in 1920 is not income in the year 1921, and the respondent's determination to that effect is erroneous. The petitioner's net income as determined by the respondent should be reduced by the amount of $2,214.12. Judgment will be entered*2862 under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620043/	Harley Alexander v. Commissioner. Maude Alexander v. Commissioner.Alexander v. CommissionerDocket Nos. 16573, 16574, 18923, 18924. United States Tax Court1950 Tax Ct. Memo LEXIS 211; 9 T.C.M. (CCH) 356; T.C.M. (RIA) 50105; April 21, 1950211 Arthur Glover, Esq., and Walter G. Russell, C.P.A., Amarillo Bldg., Amarillo, Tex., for the petitioners. Donald P. Chehock, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: These proceedings involve deficiencies in income taxes for each petitioner of $5,445.68 for 1943 (the year 1942 is involved because of the applicability of the Current Tax Payment Act of 1943), and deficiencies in income taxes for 1944 of $4,177.48 and $3,920.77 for the petitioner Harley Alexander and Maude Alexander, respectively. Certain issues have been eliminated by stipulation which will be reflected in decisions to be entered under Rule 50. The only questions remaining for our determination are: (1) Did the Commissioner err in his determination that 45 per cent of the profits from the partnership of Alexander & Alexander, reported by petitioners' daughter Mary for the years 1942, 1943, and 1944, was community income of the petitioners; (2) did the Commissioner err in his determination that the income reported by the daughter Frances for the years 1943 and 1944 was taxable community income of the petitioners, except for a dependency exemption each212 year. The proceedings were consolidated for hearing. From evidence both documentary and oral, we make the following Findings of Fact The petitioners, Harley Alexander and Maude Alexander, are husband and wife, residing on a ranch in Hansford County, Texas. They have three children, Mary, born December 2, 1920, Frances, born September 21, 1928, and one son, David, younger than his sisters. Petitioners filed their tax returns for the years in question with the collector of internal revenue for the second district of Texas, at Dallas. For the purpose of simplification, the use of the word "petitioner" in the singular will refer to the petitioner Harley Alexander. At a time not shown Robert Alexander and petitioner, his brother, agreed to enter into a partnership for operating about 1,800 acres of farm land and 1,000 acres of grass land, provided they could get a man to run the operation. One Albert Moen was contacted, and he agreed to handle the farming and cattle operation. All capital was to be furnished by petitioner and Robert Alexander. After petitioner's and Robert Alexander's investment had been returned to them the interest of the partnership was to be divided, as follows: 213 45 per cent each, petitioner and Robert Alexander, and 10 per cent to Moen. The partnership was known as Alexander & Alexander, and was engaged in farming and cattle business. At the time of the formation of this partnership, Robert Alexander did his banking at the First State Bank at Stratford, and petitioner was transacting his banking business at the First State Bank at Spearman. The partnership opened its bank account at the First State Bank of Stratford under the name of "Harley Alexander." The idea was that books would not have to be kept, and that the money there would belong to the partnership. Cash deposits were made by petitioner and Robert Alexander in 1940 and 1941 in the amount of $5,800. The first crop was put in by the partnership in 1940. The first cattle were purchased in January 1941 for $6,357.82. During August 1941, the partnership purchased 133 head of cattle at Oklahoma City for $6,311.42. Petitioner and Robert Alexander each paid half the amount. During December 1941 the partnership sold 133 head of cattle for $14,113.36. Alexander & Alexander showed a loss from farming operation for 1940 and 1941, in the amounts of $4,723.24 and $222.69, respectively, but214 showed a profit for the same period from their cattle operation of $7,374.08, making a net gain for the two years of $2,428.15. The $14,113.36, selling price of the aforementioned cattle, was deposited in Robert Alexander's bank account. On the date of the deposit of the $14,113.36 in Robert Alexander's account, December 23, 1941, Robert Alexander drew one check for $500, to the order of "Harley Alexander," and another for $500, to the order of "Deposit to Harley Alexander." These two checks were deposited in petitioner's account at the Stratford Bank. Robert Alexander drew a third check on the same day to the order of "Harley Alexander" for $6,806.68, with the notation "cattle sold at Kerrick 133 head," which was deposited in petitioner's bank account at Spearman. Shortly after the formation of the partnership the petitioner purchased a section of land adjoining the land operated by the partnership. The land was purchased for $6 an acre, of which the petitioner paid one dollar down. About April 1940 petitioner told Robert that he believed he would buy the land for Mary and "said he believed if we had any luck that this farming operation would pay for itself and as soon as he could215 get his money back out of the initial investment, why, he was going to give his interest to Mary" if it was all right with Robert, and Robert told him it was. About the spring of 1940 petitioner told H. B. Hart that as soon as he could get his money out of the deal with Robert he was going to turn it over to Mary. A wheat crop made enough money to make the first payment. The petitioner, later, paid an additional one dollar an acre on the land. This land was rented to the partnership from the time petitioner acquired it, and rents thereafter were paid to the petitioner and later to Mary. 1 Petitioner and his wife Maude executed a deed to this section of land to their daughter Mary under date of July 3, 1942, recorded January 15, 1943. On May 16, 1941, Mary signed a note with the First State Bank at Spearman for $3,127.77, giving as security a one-half interest in 133 steers belonging to Alexander & Alexander. The loan was made for the petitioner, and the petitioner got the money. The petitioner later repaid the loan, $1,982.94 of the amount216 being paid by a check drawn on the partnership bank account by petitioner under date of January 22, 1942. On December 25, 1941, petitioner's daughter Mary, then 21 years of age, became engaged to be married to Walter M. Hart. On January 22, 1942, the partnership of Alexander & Alexander owned two tractors and one plow, valued about $1,500. On January 22, 1942, Robert Alexander and Mary signed a note at the First State Bank of Spearman for $7,210, and $7,000 of the amount was deposited in the account of Alexander & Alexander in that bank. On the same day the following checks were drawn against the partnership's bank account: PayeeAmountSigner of check(1) Robert Alexander$ 355.56Alexander & Alexander, Harley Alexander(2) Robert Alexander3,155.71Alexander & Alexander, Harley Alexander(3) Harley Alexander1,164.87Alexander & Alexander, by Robert Alexander(4) First State Bank, Spearman,1,982.94Alexander & Alexander, HarleyTexasAlexander The following notations appeared on the checks: (1) "Less 225 pd Robert Alexander is to be refunded" (The back of the check has many items which appear to be amounts paid out for labor, the sub-total217 amount of which is $130.56, and another notation below the sub-total, "Combine $225.00," making the total $355.56); (2) "1/2 of 133 cattle Okla. City"; (3) "Bal. on 1/2 of cattle bought at Oklahoma City"; (4) "Mary's note." Robert told Albert Moen and Robert's nephew David McBryde that Mary was a partner in the business. Mary had learned, when Alexander & Alexander was formed, that she might receive an interest in it. The books kept for Alexander & Alexander did not show Mary as a partner until 1944, except that for 1943 they show division of company money, with $3,600 to Mary. For 1942 and 1944 the books show "Alexander & Alexander Partnership report" 2 as a heading on one page, and, for 1944, "Robert Alexander 45% Mary Hart 45% Albert Moen 10%" as a heading on another page, and show company money divided, $6,000 to Mary. The books covering 1940 to 1944, inclusive, consist of seven sheets. No capital accounts for partners are shown, except indication of distributions as above. No capital contributions by partners are shown. The sheets were made up the latter part of each year. On March 7, 1942, Mary218 was married to Walter M. Hart. From March until June of 1942, Mary was with her husband at College Station, Texas. Thereafter and until May 1943, except for occasional visits at home, she was with her husband at Army camps located in the United States. (In May 1943, her husband went overseas and was later killed while in the service.) During the school years of 1943 and 1944, and 1944 and 1945, Mary was in Amarillo, Texas, with her sister Frances. Mary and Frances returned to their parents' home in Hansford County on many week-ends. They also spent their summer vacations with their parents. During the years in controversy, petitioner and Robert Alexander drew checks on various bank accounts in payment of their personal expenses as well as the expenses of the partnership. Some examples of checks drawn by Harley Alexander on the Alexander & Alexander bank account are, as follows: DatePayeeAmount(1) 6- 2-42H. L. Wilbanks$ 8.34(2) 11- 1-42E. L. Leighton5.00(3) 11- 1-42L. R. Searlott10.05(4) 11- 3-42W. T. Martin15.63(5) 1-20-43Texas CountyMotor Co.8.24(6) 6- 9-43W. T. Martin93.30(7) 10-25-43L. K. Garrett3,131.17(8) 1-29-44R. L. McCellanGrain Co.465.10(9) 3-18-44Lewis Philipps25.00(10) 10- 7-44T. L. Moulton105.00219 These checks were written for the following reasons: (1) For license on truck owned by petitioner. (H. L. Wilbanks was tax collector of Hansford County.) (2) For pasture. (3) For inspection of 201 cattle. (4)For repairs for Alexander & Alexander. (5) For truck axle for Alexander & Alexander. (6) For repairs incurred by Moen, billed to petitioner. (7) For 73 cattle purchased by Alexander & Alexander, received by the petitioner at Gruver. (8) For a car load of hay used by Alexander & Alexander, petitioner, McBryde, and Robert Alexander. (9) For labor for unloading feed. (10) For one cow. Albert Moen wrote most of the Alexander & Alexander checks, in general paid the bills, and was supposed to pay all expense accounts, except cattle purchased "and probably feed that we bought and ordered." In 1942 the petitioner supervised the cutting of the wheat for Alexander & Alexander, and in connection therewith wrote the following checks on the partnership bank account: DateAmountFor7-18-42$400.00Cutting wheat7-18-4247.50Cutting wheat7-23-4222.83Repairs7-28-4228.00Labor7-28-4228.00LaborThe only cattle sold in 1942 were220 127 steers (purchased at Oklahoma City the year before) for $17,944.88. 3 The cattle were shipped to Kansas City. Robert Alexander was present when the first shipment was made and they were billed out in his name. Robert Alexander received payment for this shipment in the amount of $7,250.16 3 The remainder were shipped later and Moen billed them out in petitioner's name. Petitioner received payment for this shipment in the amount of $9,694.72. 3 The two checks were deposited to the partnership bank account. In 1943 Alexander & Alexander sold for $25,050.39 cattle costing $13,059.69. A bank account was opened for Mary at the First State Bank at Spearman on December 31, 1942, with a deposit of $981.64. During the period between December 31, 1942, and September 22, 1943, both inclusive, there was deposited to her account a total of $7,170.69. The checks written on the account are, as follows: DatePayeeCheck written byAmountFor1- 6-43H. D. Foust, Tax Col.Robert Alexander$ 47.07Taxes onSec. 9,Dallam Co.3-31-43Dalhart National Farm & Loan Ass'n.Harley Alexander362.814-27-43Col. of Int. Rev.C. A. Gibner 4171.83Fed incometaxes6-12-43Dalhart National Farm & Loan Ass'n.Harley Alexander2,000.00Payment onprincipalLoan # 43238-11-43Dalhart National Farm & Loan Ass'n.Mary2,686.05Loan #4323paid in full9-22-43First State BankHarley Alexander750.00Bond221 On September 22, 1943, the account had on deposit an amount of $1,152.96. Mary performed during 1942, 1943, and 1944 no services for Alexander & Alexander. During the year 1944, Alexander & Alexander sold two groups of cattle and participated in a trade of another. The partnership sold 55 steers in October for $6,033.35 and 54 steers in December for $5,967.50. During November the partnership entered into a cattle trade with H. B. Hart in which the partnership realized a gain of $175. The petitioner purchased 23 head of cattle from the Guymon Sales Co. and gave Alexander & Alexander's check signed by him in payment therefor in the amount of $1,439.43 under date of October 5, 1944. The partnership had 20 steers on hand at the end of 1944. In the fall of 1944, Alexander & Alexander borrowed a total of $5,000 from Mary's bank account. This money was repaid by December 1944. Alexander & Alexander reported net income of $15,928.94 on their partnership return for 1942 but made no distribution of profits that year. Mary reported Federal income of $7,168.02 from Alexander & Alexander for 1942. In 1943, the Alexander & Alexander222 partnership return showed net profits of $7,412.59. Distributions were made, as follows: DatePayeeCheck Signed byBank AccountAmount(1) 7-28-43Robert AlexanderRobert AlexanderAlexander & Alexander$1,800(2) 8- 5-43MaryHarley AlexanderAlexander & Alexander1,800(3) 9-22-43MaryHarley AlexanderAlexander & Alexander1,800(4) 2- 9-41Robert AlexanderRobert AlexanderAlexander & Alexander1,800(5) 4- 1-44Albert MoenRobert AlexanderAlexander & Alexander400 Explanation of (2) and (3) above: Those checks were not endorsed, but deposited in Mary's bank account at the First State Bank at Spearman. Mary reported $3,335.67 from Alexander & Alexander in her return for 1943. In 1944 the Alexander & Alexander partnership return showed net profits of $17,712.96. Distributions were made, as follows: DatePayeeCheck Signed byBank AccountAmount(1) 3-22-44MaryHarley AlexanderAlexander & Alexander$2,000.00(2) 4-11-44MaryHarley AlexanderAlexander & Alexander3,000.00(3) 4-22-44Albert MoenRobert AlexanderAlexander & Alexander1,333.33(4) 4-24-44Robert AlexanderRobert AlexanderAlexander & Alexander6,000.00223 Explanation of (1) and (2) above: These checks were not endorsed but deposited in Mary's bank account. Since Mary and Frances were small children they had performed services of the average ranch-reared child to their parents' business. Petitioners wanted to keep Frances interested in the ranching and farming business. Frances was 15 years of age on September 21, 1943. From September 1943 to May 1945, she was living with her sister, Mary, in Amarillo, except for week-end visits home, and the summer vacation period. During 1943, petitioner turned over to Frances two tracts of rented land, one containing 86.1 acres and the other containing 132 acres. The land-owner of these tracts was notified that the land had been turned over to Frances. Petitioner furnished the seed and equipment to plant this land. It furnished wheat pasturage. While at home, Frances helped petitioner, as the other children did, from 1942 on, drill wheat, drive, and brand cattle. She did little plowing. The harvesting of all wheat was hired. AAA applications, signed by petitioner, showed Frances the operator of these tracts for 1943 and 1944. A separate brand was used for the cattle claimed to be those of224 Frances. The first deposit made to Frances' bank account was made December 30, 1944, in the amount of $4,125 (check from Hart-Higgs Grain Co. for "3000 bu. wheat" as shown by deposit slip). In the year 1942 or 1943, petitioner purchased some cattle and branded them with the brand registered in Frances' name. The petitioner sold 79 head of these cattle for $8,945 during 1943. The cost attributable to the cattle sold was $4,526.70. The Federal income tax return filed for Frances (signed by Harley Alexander) reported income tax net income of $4,413.30. 5 Frances' Federal income tax return for 1944 reported $4,800.57 net profit from farming and stock business. Petitioner sold 25 head of cattle during 1944 for $2,919.25. The cost attributable to these cattle was $1,432.50. This amount was included in the amount reported by Frances on her 1944 Federal tax return. Also included was $4,110 from grain, $103.82 agricultural program payments, and $900 expenses for machine hire. 225 During the years in controversy, the petitioner ran from 500 to 800 head of cattle on their ranch. Hired hands were employed to assist in the operation of the petitioner's farming and ranching interests; these hired hands were paid a salary, and some had interest in cattle and wheat raised on the land controlled by the petitioner. The tax records of Hansford County show no real or personal property assessments in the name of Mary Alexander, Mrs. Walter Hart, or Frances Alexander, and there were none, for 1941, 1942, 1943, or 1944. Frances gave her father no notes. She had no money prior to the deposit on December 30, 1944. Petitioner collected from other sales, the money he furnished to buy cattle for Frances. The record fails to show that the income attributed to Mary Alexander, as a partner in Alexander & Alexander, was not earned by the petitioner, and fails to show that Mary Alexander, Robert Alexander, and Albert Moen in good faith entered into partnership. The evidence fails to show that Frances Alexander earned the income attributed to her, and that it was not the income of petitioner. Opinion Two problems are posed to us in this matter, first as to whether a partnership226 included the petitioner, or on the other hand his daughter Mary, and second as to whether he, or his daughter Frances, earned certain income. We will examine first the question as to Mary. Was she, and not the petitioner as in effect determined by the Commissioner, a partner in the firm of Alexander & Alexander? The question is one of fact and has entailed the careful examination and analysis of much detailed evidence, oral and documentary. The essential problem is whether the petitioner in fact continued to earn the income involved, after the alleged formation of partnership between Mary, Robert Alexander, and Albert Moen, since the Commissioner determined that petitioner's arrangement with Mary "represented only a gift of future income." In short, did petitioner retire from and Mary become a part of Alexander & Alexander on January 22, 1942, as is petitioner's theory? In approaching this question we note first that there is no contention of any written agreement of partnership, and that there is no evidence whatever of agreement of dissolution of partnership between petitioner, Robert, and Moen, or of formation by oral agreement of a partnership between Mary, Robert, and Moen. 227 There was no written transfer of petitioner's partnership interest to Mary. The most that can be found in the record is testimony that petitioner had, about the start of his partnership with Robert, told Robert, in connection with purchasing the section of land later deeded to Mary, that he would buy the land for Mary "and he said he believed if we had any luck that this farming operation would pay for itself and as soon as he could get his money back out of the initial investment, why, he was going to give his interest to Mary, if it was all right with me [Robert], and I told him, 'Well, it is all right with me'." This evidence helps us little for it is indefinite whether it refers to the land, or the partnership interest, in fact sounds like reference to the land, which was in fact deeded to Mary after it had paid petitioner's initial investment. Also, petitioner told H. B. Hart, about 1940, that he was going in with Robert on the deal, and as soon as he could get his money out of it he was going to turn it over to Mary. Robert told Albert Moen, and David McBryde, Robert's nephew, that Mary was a partner. Notice to no one else appears. Mary learned that she might receive an interest228 in Alexander & Alexander when that firm was formed. Nothing of record herein shows that Robert, Mary, and Moen ever had an agreement, oral or otherwise, to be partners. Though petitioner and Mary both testified, neither said anything of any agreement, or any intent, to form a partnership. The record is devoid of testimony that the parties intended in good faith to become partners in the conduct of business, within the thought of Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733. Partnership in this case must depend upon inference of agreement, for no agreement, even oral, or even mutual intent to be partners, is the subject of testimony. Such inference, it is in effect contended, arises in the main from the testimony of Robert that Harley turned his interest over to Mary, and that "we started anew when she went into the company," from the fact that the partnership records, for 1942 and 1944, bear a heading "Alexander & Alexander partnership report" and that the records show, as to 1943 and 1944, distribution of moneys to Mary along with Robert Alexander and Moen, and, for 1944, show in a heading, "Mary 45%." That Mary received a share is undoubted, but, of course, does not of229 itself establish partnership or meet the presumption that the Commissioner was correct in his view that petitioner earned the amounts received by her. Mary did not by her efforts earn the income. There is no contention that she contributed any services to the partnership. Petitioner's position is, as summarized on brief, that Mary, with Robert and Moen, was an owner of the firm Alexander & Alexander, and that a partner may transfer his interest so as not thereafter to be taxed thereon "whether or not the transferee thereafter renders substantial services to the business of the partnership." But, assuming the actuality of gift by petitioner to Mary of the capital which he had in the partnership with Robert and Moen, that alone is not sufficient to prove partnership by Mary with these two. Commissioner v. Culbertson supra; Herman Feldman, 14 T.C. 17">14 T.C. 17 (promulgated January 11, 1950). The petitioner, on the matter of transferring partnership interest, cites Simmons v. Commissioner, 164 Fed. (2d) 220; Kent v. Commissioner, 170 Fed. (2d) 131; Clifford R. Allen, Jr., 12 T.C. 227">12 T.C. 227. We, therefore, examine those cases. The Simmons230 case, primarily relied upon and discussed, is distinguished at once from the instant matter for this reason: The court pointed out that "Following the transfer [of partnership interest] the taxpayer had no vestige of right or control in the partnership, and it is undisputed that he in fact exercised none." ( Italics supplied.) Here perhaps the principal dispute is as to whether the petitioner, after the alleged formation of the new partnership, continued to exercise such control as to justify treating him as taxable earner of the income. With such difference it is apparent that the Simmons case is not helpful here. It is to be noted also that in the Simmons case there is no doubt about transfers to wives, agreement forming the new partnership, bill of sale of property to new partnership, the notification of the public thereof, registration of the partners' names as by law required, and filing of gift tax returns. The petitioner here seems to think that in the Simmons case the court considered that the mere transfer made the wives partners in the new partnership. Such conclusion is to be read only in the light of the new agreement of partnership, for without agreement there is no231 partnership. Here the question is whether there was such agreement. Kent v. Commissioner, supra, need not be discussed, for it merely involved gift of corporate stock to a wife, who used it in going into a partnership and the court concludes that the real test is the actuality of intention to become partners. That is the question here. Clifford R. Allen, Jr., supra, was another case of transfer of corporate stock to a wife, who went into a partnership of which the petitioner-husband was not a member and where he exercised no control. On this point, James Yiannias v. Commissioner, 180 Fed. (2d) 115 (February 14, 1950), though not altogether parallel in fact with this matter, is in principle helpful, for there though a husband assigned in writing to his wife his capital contribution to a going partnership, the contribution continued to be that of the husband, there was no new agreement of association, and she had no contract with the other partners and contributed no services, and he continued in control; he was, therefore, held taxable on the partnership profits. In Earp v. Jones, 131 Fed. (2d) 292, the husband conveyed a half232 interest in his insurance business to his wife, who released any claim to his estate. They entered into an agreement to conduct the business. She took no part in the management. It was held that the husband was taxable upon the partnership income. Without contract, there is no basis upon which a person may be held liable as a partner, in the absence of facts creating estoppel or partnership by implication of law. " * * according to the generally accepted rule, where no question of estoppel is involved, persons can not be held to be partners as to third persons in the absence of or in disregard of their intent as to the formation of the relation * * ." 47 C.J. 688. In Petition of Williams, 297 Fed. 696, 702, we find: "It has been said, and no doubt wisely, that it is not prudent to define a partnership; but there are certain things generally recognized as essential which may be stated, and they are probably nowhere better stated than by Judge Cooley in Beecher v. Bush, 45 Mich. 188">45 Mich. 188, 200, 7 N.W. 795">7 N.W. 795, 799 (40 Am. Rep. 465">40 Am. Rep. 465), where, after reviewing the cases generally, he says: 'Except when one allows the public or individual dealers to be deceived by the233 appearances of partnership when none exists, he is never to be charged as a partner unless by contract, and with intent he has formed a relation in which the elements of partnership are to be found. * * '" There need not be express contract, written or oral, " * * yet in every case in which a partnership is created there must be an agreement and a meeting of the minds of the parties." 40 Am. Juris. 140. We have here no question of estoppel binding petitioner to partnership. In the absence of either written or oral agreement of partnership between Mary and the two men, Robert and Moen, may we reasonably infer such agreement? Can it be found in "contract, and with intent" under the facts here? The three parties are never shown to have met to form a partnership or to discuss their rights and liabilities. Under the evidence, it was not until the latter part of 1944 that the expression "Robert Alexander 45% Mary Hart 45% Albert Moen 10%" on the heading of a page for 1944 was set down. They had no meeting of the minds. We have, therefore, searched the record to ascertain whether agreement should be inferred, contrary to the Commissioner's conclusion. After such study, it is our opinion234 there is no reasonable logical basis for holding that Mary supplanted the petitioner as partner in Alexander & Alexander, and that she, and not he, earned the income involved here. The respondent, as evidence that the petitioner continued to earn such income, points to a considerable number of checks written by him upon Alexander & Alexander during the taxable years, and to various partnership matters in which he participated. These the petitioner explains in substance as brotherly cooperation and mutual assistance, and contends that the checks represent only a small part of those actually issued by the partnership. In our opinion, some of the matters represented by the checks written by petitioner may be explained by the relationship and cooperation between the brothers, but the record by no means indicates that the number of checks written by petitioner is comparatively small. These checks on Alexander & Alexander, signed by petitioner, were brought into the case when petitioner's attorney started examination of them, as follows: "I have gone through the bank statements of Alexander & Alexander and I have pulled out certain checks that I noticed have been signed by Mr. Harley Alexander235 after January 1942." The checks are then the subject of detailed testimony. But we can not say that these were the only checks on Alexander & Alexander signed by the petitioner. There may have been many others. Those placed in evidence do not, aside from some cattle transactions, amount to a very large total, but they do show various payments by and matters transacted by the petitioner for the ranch, not fully explained by the witness' view that they were the result of authority given or mutual help between the brothers. Since Moen was manager, perhaps neither Robert nor Harley either wrote a large number of checks. The evidence is that Moen wrote most of the checks, in general paid the bills, and that he was supposed to pay all the expense accounts, except cattle bought, "and probably feed that we bought and ordered." So the number of checks written by petitioner may well be as great as that written by Robert. In 1943 Alexander & Alexander sold for $25,050.39 cattle costing $13,059.69, but, aside from one check for $3,131.17 written by petitioner, the record does not indicate who sold the cattle, received the proceeds, or wrote checks as to cattle. As to authority given, the bank236 where the partnership did business had no card authorizing Harley to sign checks. They usually dealt with Robert, who did his banking business there, while petitioner did so in another town. Considering the considerable number of the firms' checks signed by the petitioner, reason would indicate that the bank considered him still a member of the firm, since his signature for the firm was not authorized by card. Moen in November 1942 shipped cattle to Kansas City in the name of Harley Alexander. The explanation given by Robert Alexander was "force of habit." It is not convincing. The alleged new partnership had been in existence about ten months. The check for the cattle, $9,694.72, was made to and endorsed by Harley. Later, in October 1943, the petitioner bought cattle for Alexander & Alexander, signing check for $3,131.17. The explanation given was that Robert had bought the cattle but was absent and Harley received and gave the check. The check, however, in no way indicates that Harley was signing for Robert, but was merely "Alexander & Alexander" and beneath, "Harley Alexander." Even much later, in October 1944, petitioner bought cattle for $1,439.43, signing Alexander & Alexander's237 check, in the same manner. This could hardly be force of habit more than two and one-half years after the purported partnership, unless he was a member of it. No explanation is given why petitioner purchased except that Robert said petitioner often did so for him, and that Robert had told him to buy some cattle. More significant to the issue than these large checks, in our view, is the matter of Mary's receipt of income from Alexander & Alexander. Cooperation between the brothers is no explanation on this point. Two checks were made in Mary's name, as distribution of profits, in the amount of $1,800 each, in August and September 1943; and in 1944 profit-distributing checks were made in her name, $2,000 in March, $3,000 in April. Yet all of these checks were signed by Alexander & Alexander by petitioner. Moreover, none of these checks was endorsed by Mary. They were deposited in a bank account in her name. Again, though $7,170.69 was deposited to her credit between the opening of her account on December 31, 1942, and September 22, 1943, of the six checks written thereon, only one was written by Mary, while three were written by the petitioner, one by Robert, and one by the banker. These238 checks indicate that petitioner was handling this matter very largely, in the name of Mary. He testified, in fact, that he handled her part of it as a usual rule. It is difficult to see why, as late as 1943 and 1944, the petitioner would write the partnership-distribution checks to Mary, unless he was a partner in fact. Obviously, she or one of the other partners would be the logical one to write such checks if she was a partner and Harley was not. No evidence shows that either partner authorized Harley's check, and the bank had no card of authority to him. This has all of the appearance of a check by him as partner. Asked why he signed the $3,000 check to Mary (one of the distribution checks) petitioner's answer was: "She no doubt informed me that she needed the money." He also stated that she asked him several times to draw money for her. Why would Mary, if a partner, appeal to one who was not, for her partnership distribution? This is clear participation by him in the partnership, consistent only with his membership therein and indicative that he was merely giving to Mary his share of the partnership profits. This conclusion is strongly supported by the evidence as to use of the239 funds from the partnership after they were placed in Mary's bank account. The partnership books show, in September and October 1944, loans of $1,000 and $4,000 from Mary. The $1,000 was repaid September 21, 1944, and on December 16, 1944, $4,000 was deposited in her bank account. Mary did not remember making the loan. Asked what she thought transpired, she answered: "Well, I think they needed the money and took it, took the money from me. I just happened to have some money in my account and Uncle Rob needed the money, so he took the money from me. He could have asked Dad for it, and Dad could have looked in my account and gotten it from me." She had earlier, referring to the loans, and to her father and uncle Robert, testified: "A. This would be a generality, but what I know that in this particular case, which probably happened or would have happened, is that Dad needed some money and I went over to the bank and saw that I had some money in the account. "Q. Now, wait a minute. Who needed money? The loan was made to Alexander & Alexander? "A. In that case it would be Uncle Rob, then, who needed the money; it all depends on whether Dad or Uncle Rob, either one of them, and I had240 money in my account, and they would borrow money unbeknownst to me and put it in their account and use it, and the time came when they would put it in my account and pay it back and the chances are I didn't know of the transaction until I got home." No checks from Mary, for the loans, appear. Moreover, the $2,000 check on Mary's account, dated June 12, 1943, written by petitioner, appears not for her benefit, for though there was testimony that it was for the section of land, it can not be, since the petitioner, under the evidence, had paid $2 an acre or $1,280, and Mary, by the only check she wrote on her account, paid $2,686.05 on the land. At $6 an acre, the price under the evidence, or $3,840 for the section, her check was sufficient to complete payment, from which it appears the $2,000 did not in fact help pay for the land. Another check, $362.81, also by petitioner appears possibly to be interest, since it is to the same payee named as to the land. It appears from the above that the petitioner had control over Mary's funds. Such dominion over the partnership earnings, even after placed in Mary's account, indicates the income to be that of the petitioner. Robert could not remember241 Mary ever signing a check on Alexander & Alexander, and none appears; and, as above seen, on her own account she signed only one, up to September 22, 1943. The petitioner brings out the fact that Mary signed with Robert the note for $7,210 on January 22, 1942, the proceeds of which were divided among Robert and petitioner. But Mary had, on her own note, borrowed for her father, and on the security of Alexander & Alexander cattle, $3,127.77 on May 16, 1941, long before any partnership with her is claimed, and the $7,210 note is used in part to liquidate the earlier note. The $7,210 note offers little to indicate partnership with Mary. Robert testified, as evidencing a partnership including Mary, that previous to Mary's coming in, the ranch was run as "Alexander Brothers" and changed to Alexander & Alexander "when she went in." The books for 1940-1941, however, show "Alexander & Alexander" as the heading, and under the evidence were prepared the latter part of 1941. All of these considerations lead us to the conclusion that the Commissioner is by no means shown to have erred in considering that the income should be taxed to petitioner. Mary did not participate in the earning. Her242 only connection is an alleged transfer of a partnership interest by the petitioner. Though it is urged, as above seen, that petitioner did not write, comparatively, many checks or do a great deal, it is clear that he did far more than Mary did, for the partnership, for it is not contended that she did anything. He appears to have written checks probably as much as Robert. We can not, on this record, say that the Commissioner's conclusion against partnership, and that right to future income was transferred, was unfounded. Absent a partnership including Mary, petitioner's contention fails. Though we recognize fully that formality and writing is not necessary to partnership, we think that in this matter partnership is too much left dependent upon mere inference. No witness testified that partnership was intended. Petitioner continued to have too much to do with the partnership of which he had been a member, and had too much control over the profits thereof, as against her absence and lack of participation and his use of the partnership funds in her bank account, for him not to be regarded as having earned such partnership proceeds. We think he did, and merely allowed Mary, at his convenience, 243 to receive the income. The mere contention of transfer to Mary of an interest in $1,500 worth of machinery and the profit in some cattle, with the little support it has in the record, fails to convince us that the Commissioner's determination that he was taxable was wrong. We, therefore, conclude and hold that no error is shown in the determination of deficiency as to the income reported by Mary. The question with reference to Frances Alexander is not that of partnership, for none is claimed. It is the petitioner's contention, in effect, that he bought for her certain cattle and turned over to her the farming of certain rented lands, and that the income from such operations was that of his daughter. The respondent determined that the petitioner earned the income and argues that under the principle enunciated in Lucas v. Earl, 281 U.S. 111">281 U.S. 111, petitioner performed the services involved and is taxable on the profits therefrom. The petitioner, contra, contends, citing among other cases Blair v. Commissioner, 300 U.S. 5">300 U.S. 5, and Helvering v. Horst, 311 U.S. 112">311 U.S. 112, that Frances was the owner of the property, therefore taxable upon the income, regardless as244 to who received it. The burden is upon the petitioner, after the Commissioner's determination. The question, one of fact, is: Who earned the income? The years involved are 1943 and 1944. Frances became 15 years of age on September 21, 1943. From September 1943 until May 1945 she lived in Amarillo with Mary, except for vacations and week-end visits at home. We have studied with care the evidence adduced. The income was primarily from two sources, profits from sale of cattle, and profit from wheat raised. The wheat is only that harvested in 1944, no income from that source being involved as to 1943. We analyze the two sources of income separately. As to cattle, the petitioner in 1942 or 1943 purchased some cattle, which were branded by petitioner with a brand which was registered in the name of Frances. The petitioner prepared and filed Federal income tax returns for Frances for both 1943 and 1944. Frances signed the return for 1944, and petitioner signed her name by him to the return for 1943. The petitioner sold the cattle in both years, those sold in 1943 for $8,945 costing $4,526.70. Net income of $4,413.30 is reported on the return for 1943 but the source thereof is not indicated245 on the return, except the printed generality: "Net profit (or loss) from business or profession." No income from anything other than cattle (as proved by other evidence) is shown on the return for 1943, though petitioner testified as to Frances' farming in 1943 he believed it was, and the Hansford County Agricultural Association showed Frances as farming in 1943 two tracts totaling 216 acres. If she did, the return and petitioner's work sheet as to 1943, fail to show it. No losses on grain crops are deducted from the cattle sales, nor any expenses deducted, for 1943. No deposit was made to Frances' credit until December 30, 1944, when $4,125 was deposited, from sale, as the deposit slip shows, of 3,000 bushels of wheat. Thus, it appears that she did not receive the profits of the cattle sold in 1943. The petitioner testified that he furnished the money for the cattle, branded them and ran them on the range, also that he collected his money from other sales. Asked why the bank account was not opened for Frances until 1944, he said: "She didn't have any money * * . When I sold enough of them I got my money out and then I deposited the rest of the money to her"; also asked, as to cattle246 sales: "* * * all of this was put in your account?" he answered: "Up until I got the money I put it in the bank out of the * * "; and that he paid the expenses, through 1944. In brief, petitioner bought and sold some cattle, allegedly for Frances, but all she could or would receive was the profit, if any, and even that, as to cattle sales of 1943, she never in fact is shown to have received, for, as above seen, the first deposit (and indeed the only deposit shown) to her credit was from grain. The petitioner furnished the grain and feed for the cattle, aside from pasturage on the rented lands turned to Frances. In short, the petitioner, on the record, earned the proceeds of the sale of the cattle, and, so far as 1943 is concerned, she never even received that. Though it is shown that she helped petitioner drive cattle, the extent thereof does not appear, nor whether this was done as to the cattle claimed to be hers. No part of the cattle profits appear as earned by her. No bill of sale or other transfer of cattle to her was proven, and the record does not indicate that the cattle were purchased or sold in her name. Since the county records show that no real or personal property assessments247 appear under the name of Frances Alexander, the cattle are not shown not to have been in her name (except as to brand) at any time. She had for 1943 no expense whatever, according to the return and the meagre record adduced. It is clear that as to the income reported for Frances for 1943, petitioner was the earner, and she not even the recipient. It is to be noted that the only deduction for either 1943 or 1944 is $900 for "machine hire" in 1944, so that the failure to deposit the $4,413,30, 6 cattle sales of 1943, to Frances' account is not explained by the petitioner's contention that he paid her expenses. Reinvestment of her funds is not shown. For 1944, the return, prepared by petitioner although signed by Frances, reported net income of $4,800.57, explained as follows: Profit on sale of 25 cattle sold, $1,486.75 (cost $1,432.50, sold for $2,919.25); grain sales $4,110; agricultural program payments $103.82; gross profits $5,700.57; expenses $900 (machine hire); net farm profit $4,800.57. Analyzing then the record as to 1944, with its record248 of sale of wheat and cattle, we find petitioner buying and selling the cattle, but no deposit in Frances' name in 1944 of anything except the $4,125 from sale of 3,000 bushels of wheat; for that deposit, on December 30, 1944, was by the petitioner called the first deposit to Frances' credit, and as opening her bank account, also that prior thereto "she didn't have any money." It is possible that before the end of 1944 further money from the cattle was received by her account, but no such showing was made. On the contrary, though the evidence is not very definite, the petitioner was asked whether income from cattle sales as to Frances was put into his account, and (after intervening reference to the sale of grain and deposit in December 1944), the questioner came back to: "I am talking about the cattle sales." The answer was "Yes." We can not, on the record, find that any proceeds of cattle sales were received by Frances in 1944. On the record the only contribution to cattle production made by her was wheat pasturage furnished by the land turned to her by petitioner. Though she did some branding, nothing indicates that she branded the cattle bearing her brand. Petitioner testified on249 the contrary that he did so. Included in services rendered to the petitioner, under the testimony, was helping him work cattle and brand, but this is shown done, as the other children did, for him from 1942 on, and not for herself. We regard, therefore, the wheat pasturage as the only connection between Frances and the profit from cattle. We, therefore, examine the situation as to wheat farming by Frances. In general, Frances helped the petitioner drill wheat, for about two weeks, though on what land is not shown. She did little plowing, though of course the wheat land had to be plowed. It is evident then that she did not "furnish the labor" for the farming ascribed to her. He furnished the seed and equipment. As to harvesting, he said "We hired all that done" and adds that she paid the expense of harvesting "the first crop." Since no income from wheat farming, and no expense or loss therefrom, was reported for 1943 for her, and since, for 1944, the only deduction taken was $900 for "machine hire," which apparently referred to harvesting, and since Frances had no money, the petitioner says, until the deposit of the $4,125 from 3,000 bushels of wheat December 30, 1944, it is clear that250 she did not in fact pay the $900 expense - at least up to December 30, 1944; and no showing is made of expenses paid on December 30 or December 31. In this connection it is to be noted also that the petitioner testified that he kept records on Frances' operations, but produced only two work sheets, one each for 1943 and 1944. He had kept books he said, but, asked whether he had them, answered: "I don't know whether I have or not. I don't have them here." Summarizing this situation, as to both years and both cattle and wheat, we find that the only money shown ever reaching the bank account in the name of Frances is the $4,125 from wheat, the "first deposit" (and only one shown by the record) on December 30, 1944. Thus, it is not shown that she ever, in the taxable years or otherwise, received or even had deposited to her credit or invested for her any money from cattle. Frances did some work around the ranch, while she was at home during vacations from school, but nothing more than a ranchreared child might reasonably be expected to do, and obviously was by petitioner expected to do. What she did is not shown to result in the production of income, either from the cattle or the particular251 land here involved. She is not shown to have written a check or actually received, or spent, any of the amounts received for cattle or grain. Making a profit from either cattle or wheat entails judgment and experience. No management of cattle or management or sale of wheat, by her, is shown. The production of income was, in our view, on the facts before us, not shown to be by Frances, a child of 15-16 years of age, away at school most of the time, but by the petitioner a rancher-farmer of experience as to both cattle and wheat. He received all cattle income, which is all of the income for 1943. She did not receive any of it. He had dominion and control of most if not all of the income. Though emancipation of Frances is suggested, it is not shown, and in any event she is not shown to have earned the income. We conclude and hold that the Commissioner is not shown to have erred in including the amounts in petitioner's income. Because of disposition of other issues by agreement, Decisions will be entered under Rule 50. Footnotes*. Harley Alexander, Docket Nos. 16573, 18923, Maude Alexander, Docket Nos. 16574, 18924.↩1. These rentals paid to Mary have not been added to the petitioner's income in the years here involved, and are, therefore, not in issue.↩2. This is not the income tax report, but merely a page heading on books kept.↩3. No explanation concerning the $1,000 discrepancy. The sum of $7,250.16 and $9,694.72 is $16,944.88.↩4. Vice-president of First State Bank of Spearman.↩5. The return contains no information concerning the source of the income other than the printed matter on the return, namely: "Net profit (or loss) from business or profession (from Schedule C (2))." Schedule C (2) is not filled in.↩6. There is a $5 discrepancy between the $4,413.30 on the return and $4,418.30 on petitioner's work papers figuring the profit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620044/	Paul Berthold and Dorothy Berthold v. Commissioner.Berthold v. CommissionerDocket No. 6108-64.United States Tax CourtT.C. Memo 1967-102; 1967 Tax Ct. Memo LEXIS 160; 26 T.C.M. (CCH) 483; T.C.M. (RIA) 67102; May 9, 1967160 Paul A. Weick, Suite 518, Ohio Bldg., Akron, Ohio, for the petitioners. John P. Graham, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: Deficiencies in the income tax of petitioners for the taxable years 1957 through 1961 have been determined by respondent in the respective amounts of $6,439.26, $5,960.58, $1,697.60, $432.99, and $2,620.58. The parties have settled all issues raised by the pleadings with one exception which presents the question whether respondent has erred in treating certain advances made to petitioner Paul Berthold by Berthold Electric Company as dividends to the extent of corporate earnings and profits and as long-term capital gain to him to the extent such advances in excess of earnings and profits exceed his basis for his stockholdings in the company. Findings of Fact All stipulated facts are found accordingly. The petitioners, Paul W. Berthold (sometimes hereinafter petitioner) and Dorothy Berthold, filed a joint individual Federal income tax return for the years 1957, 1958, 1959, 1960, and 1961, using the cash method of accounting on a calendar-year basis, with the director of internal revenue at Cleveland, 161 Ohio. The Berthold Electric Company is an Ohio corporation having been incorporated on October 15, 1954. As of the time of the original issue of the stock, to date, the corporate records show that 150 shares have been issued and are outstanding. The shareholders and amounts of stock held have been and are as follows: Paul W. Berthold, 140 shares, Dorothy Berthold (wife), Linda Berthold (daughter), Bonnie Berthold (daughter), Sally Berthold (daughter), and Paul Berthold, Jr. (son), have 2 shares each. The Walberton Company is an Ohio corporation having been incorporated on May 3, 1954. The original issue of the stock, per the corporation record, was for 180 shares to Anthony Marzano, Walter F. Hay, and Paul W. Berthold, who held 60 shares each. In 1958, Paul W. Berthold acquired the 60 shares of stock owned by Walter F. Hay. In 1960, he acquired the 60 shares of stock owned by Anthony Marzano. From that time to the present, Paul W. Berthold, as owner of 180 shares, has been the sole stockholder in the Walberton Company. In 1957, 1958, and 1959, the Berthold Electric Company expended funds for the purchase of land and the construction of a building, title to which was in petitioner. 162 The amounts so expended were as follows: $16,492.36 in 1957, $36,973.38 in 1958, and $1,032.41 in 1959, totaling $54,498.18. 1Berthold Electric Company has declared dividends in respect of its stock, per its books, as follows: December 195525 cents per shareDecember 1956$1.00 per shareDecember 1957$2.00 per shareDecember 195875 cents per share1959No dividendDecember 1960$5.00 per shareDecember 196150 cents per shareDecember 196250 cents per shareDecember 196350 cents per share1964No dividend1965No dividendPetitioners maintained no individual checking accounts during the years in question, but did maintain individual savings accounts. The following is a schedule showing accounts on the books of Berthold Electric Company and indicates the balance in each account as of the dates shown. The column entitled "Receivables" pertains to an account receivable from petitioner. The column entitled "Payables" pertains to an account payable to him. The column entitled "Building Account" pertains to an account entitled163 "Building Accounts Receivable - Paul W. Berthold": Net dueNet dueBertholdBuildingDateReceivablesPayablesP.W.B.ElectricAccountDec. 311955($ 3,306.93)$ 1,318.75$ 4,625.681956( 5,602.99)1,318.756,919.7419573,997.181,318.75$ 2,678.43$16,492.361958( 12,451.86)28,526.7540,978.6153,465.7419598,562.4828,526.7519,964.2754,498.18196011,916.66011,916.66Closed out19619,956.1315,431.985,475.851962( 1,434.85)32,390.6833,825.5319630 144,469.0144,469.0119640 143,982.2743,982.2719653,531.7247,700.9644,169.24Apr. 3019667,486.3748,700.9641,214.59During the years 1956 through 1960, Berthold Electric Company maintained an account on its books entitled "Building Accounts Receivable - Paul W. Berthold." The books and records of the corporation show that on December 30, 1960, the account carried a debit balance of $54,498.18. On December 30, 1960, the books and records of the corporation show a credit164 to "Building Accounts Receivable - Paul W. Berthold" in the amount of $54,498.18, and a debit to the account entitled "Notes Receivable" in the same amount. The books and records of the Walberton Company show the assumption of the liability in an account entitled "Notes Payable." On September 15, 1960, petitioners transferred by warranty deed certain property to the Walberton Company, including the land and building referred to hereinbefore, and also including certain hotel property. The warranty deed referred to reflects no consideration other than nominal, as "for the consideration of ONE DOLLAR ($1.00) and other valuable consideration received" and is warranted as "free from all incumbrances whatsoever except taxes and assessments and restrictions of records and easements, and excepting the mortgage now existing upon the property." There was a mortgage upon the hotel property. Petitioner at no time executed any note or notes in favor of Berthold Electric Company in connection with the amounts advanced him by that company for the purchase of land and construction of the building, referred to above, nor did Berthold Electric Company at any time receive any notes receivable165 signed by the Walberton Company. The Walberton Company's tax returns for the years 1962 and 1963 show only an account payable (unidentified) in the amount of $206.94 as of May 1, 1962, and show no account payable as of the end of its fiscal year 1963 on April 30, 1963, or as of May 1, 1963, or as of April 30, 1964. The company had a deficit in earned surplus and undivided profits of $16,655.34 as of April 30, 1962, for fiscal year 1963; a deficit in earned surplus and undivided profits of $18,373.01 as of April 30, 1963; and a deficit in earned surplus and undivided profits of $20,172.57 as of April 30, 1964. It reported a loss of $3,589.05 for its fiscal year ended April 30, 1963, and a loss of $1,799.56 for its fiscal year ended April 30, 1964, on its tax returns. It also reported a loss in its tax return for 1960. No payments of interest have been paid by petitioner or by the Walberton Company to Berthold Electric Company with regard to the alleged loan by Berthold Electric Company to petitioner. The minutes of the Berthold Electric Company contain an unsigned undated sheet purporting to reflect minutes of a meeting of the directors of Berthold Electric Company held October 15, 1957, as166 follows: A meeting of Directors of the Berthold Electric Company was held with the following present: Paul W. Berthold, President Dorothy J. Berthold, Vice President Adeline Berthold, Secretary-Treasurer. It was voted that any amount the Berthold Electric Company advances Paul W. Berthold on loans is to be repayable at 4% interest from date of loan. 5% on unpaid balance. To be repayable five (5) years from January 1st, 1958. Neither Paul Berthold nor the Walberton Company has ever repaid to Berthold Electric Company any of the $54,498.15 2 in funds paid by Berthold Electric as the cost of the property and building owned by petitioner and transferred on September 15, 1960, to Walberton Company by him. Ultimate Findings of Fact The amounts advanced petitioner by Berthold Electric Company in 1957, 1958, and 1959 for construction of an office-factory building were dividends to him in the respective amounts of $16,492.36, $10,331.49, and $1,032.41. The amount so advanced to petitioner during 1958 totaled $36,973.38, of which $11,641.89 exceeds Berthold Electric Company's earnings and profit and petitioner's basis for his stock therein and167 constitutes capital gain for that year. Opinion The parties are not in dispute with respect to the amount of profit of Berthold Electric Company during any year at issue. No issue is raised with respect to petitioner's basis for his stock in that company. The sole issue is whether the advance made by the company to petitioner for the construction of a factory-office building during that period constituted loans as contended by petitioners or dividends and distributions of capital as determined by respondent. The facts here shown present a nearly classic example of the "corporate pocketbook." It is the burden of petitioners to show by a preponderance of evidence that regardless of appearances the advances made by the corporation to petitioners were other than dividends or distributions of capital as has been determined by respondent. The record discloses that petitioner was nearly the sole stockholder of the corporation, the only exception being nominal holdings of 2 shares each by members of his immediate family. Neither petitioner nor his wife maintained checking accounts. For lack of specific proof to the contrary it would appear that they had no need of checking accounts because168 it might well be that all their purchases were made through the corporation. We note the typical open account dealing between the corporation and petitioner, the lack of any corporate action formally authorizing loans to petitioner and the absence of any notes or other evidence of indebtedness between them. It is true that there is in existence minutes of a meeting of the board of directors held October 15, 1957, which indicate that - It was voted that any amount the Berthold Electric Company advances Paul W. Berthold on loans is to be repayable at 4% interest from date of loan. 5% on unpaid balance. To be repayable five (5) years from January 1st, 1958. But reliance upon such evidence to establish that the amount advanced to petitioner for the cost of construction of a factory and office was a loan is misplaced. The minutes make no specific reference to such advances. The corporation is an accrual basis taxpayer, yet it has never accrued interest upon such advances in its books of account. Although the advances had not been repaid within "five (5) years from January 1st, 1958," the record discloses no corporate action of any kind to extend the repayment date. From these facts169 we can only conclude that, petitioner being in control of the management of the corporation, neither he nor the corporation had any intention that such advances constituted loans at the time they were made. It seems inconsistent to us that petitioner had a need to borrow from the corporation in order to construct the new factory and office building when such evidence as exists tends to show that he may have had sufficient personal funds for that purpose. His advances to the corporation are shown by the record to have been rather consistent and in substantial amounts. One of the important indications of a loan is the financial inability of the borrower to carry out a specific purpose. , , affirming a Memorandum Opinion of this Court, yet we have no reason to believe from this record that petitioner was not amply able to finance the construction of this building. We have considered the statement of petitioner to the effect that he considered the building advances to be loans, but the facts or absence of facts discussed above are convincing that such expressed intention is only an170 afterthought on petitioner's part. The dividends paid by the corporation for certain years are for the most part so nominal as to carry little weight in overcoming the correctness of respondent's determination that the building advances were in reality distributions of dividends to the extent of corporate profits and distributions of capital to the extent they exceed such profits and petitioner's basis therein. Petitioner's transfer of title to the factory and office building property to his wholly owned corporation, the Walberton Company, likewise fails to convince us that the building advances were loans when made. In fact the absence of any mortgage cited as an encumbrance in the deed, whereby repayment of the advances here involved, if in truth loans, might be said to be secured, militates strongly against petitioner's position. It seems incredible to us that a corporation lending construction funds for a building would do so not only without any evidence of indebtedness representing the loaned funds, but also without a lien on the building to secure repayment at least of the principal. For lack of sufficient evidence to overcome the presumption of the correctness of respondent's171 determination and because all other issues raised by the pleadings have been settled by the parties by stipulation, we will enter our decision for respondent under Rule 50. Decision will be entered under Rule 50. Footnotes1. The parties obviously have made a mistake in addition as the amounts total $54,498.15 rather than $54,498.18↩1. During 1963 and 1964 the company closed out all accounts, both payable and receivable, into one account.↩2. Note 1, supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620045/	CHARLES E. EMMONS and LINDA T. EMMONS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEmmons v. CommissionerDocket No. 2357-82.United States Tax CourtT.C. Memo 1984-300; 1984 Tax Ct. Memo LEXIS 372; 48 T.C.M. (CCH) 275; T.C.M. (RIA) 84300; June 12, 1984. John O. Franklin, for the petitioners. Marikay Lee-Martinez, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $10,533 in petitioners' Federal income taxes for 1977. The deficiency resulted from disallowance of deductions for employee business expenses and moving expenses and disallowance of a foreign income exclusion. Respondent contends that petitioners are precluded from introducing evidence on the moving expense issue because of a deemed admission that petitioners had not satisfied the 39 weeks of full-time employment requirement for deduction of moving expenses under section 217(c)(2). 1FINDINGS OF FACT374 Petitioners were residents of Wilcox, Arizona, at the time they filed their petition herein. On or about October 16, 1978, they filed a joint individual income tax return for 1977. On or about June 11, 1979, they filed a joint amended individual income tax return for 1977. Charles E. Emmons (petitioner) is an engineer. In September 1973, he and his family moved to Saudi Arabia. Beginning in July 1975, petitioner was employed in Saudi Arabia by Al-Hajry Contracting and Trading Establishment (Al-Hajry). On a Form 2555, Exemption of Income Earned Abroad, attached to the income tax return originally filed by petitioners for 1977, petitioners claimed bona fide residence in Saudi Arabia beginning September 27, 1973, and ending May 1, 1977. On the Form 1040X, Amended U.S. Individual Income Tax Return, filed by them for 1977 and on a Form 2555 attached thereto, petitioners claimed bona fide residence in Saudi Arabia from September 1973 to September 1978. In the Stipulation of Facts filed in this case on December 7, 1983, the parties have stipulated in part as follows: 6. The Emmons family moved back to the United States to Tucson, Arizona in April, 1977. * * 7. The parties375 have agreed that Mr. Emmons is entitled to claim the foreign income exclusion in 1977 for the period running from January 1, 1977 through June 22, 1977 only. Therefore, the dates of employment shown on the Emmons' 1977 Amended Federal Income Tax Return (Form 1040X) [Jt. Exh. 2-B] are incorrect. 8. Petitioner Charles Emmons was employed in Saudi Arabia by Al-Hajry Contracting & Trading Establishment beginning in July, 1975 through June 22, 1977. Petitioners spent $13,943 in moving themselves and their household goods from Saudi Arabia to Arizona. On the original and amended returns for 1977, petitioners claimed employee business expenses of $7,122, allegedly incurred in relation to a business trip taken by petitioner to Saudi Arabia in September 1977, although they maintained no receipts or other records of those expenses. The only income reported by petitioners on their original or amended returns for 1977 was interest income, from rents (net losses) and from two limited partnerships (distributive share of losses), and amounts reported as foreign source income on the Forms 2555 attached to their returns. Neither return reported any employment income from domestic sources. 376 In a notice of deficiency issued October 30, 1981, respondent disallowed the moving expense and employee business expense deductions and the claimed foreign income exclusion. On August 24, 1983, respondent served on petitioners Respondent's First Request for Admissions, requesting, in part, admission of the following facts: 5. Substantiation including receipts for Mr. Emmons' alleged meals, lodging and airfare expenses associated with an alleged business trip taken to Saudi Arabia in September 1977 and claimed by you on your 1977 Federal Income Tax Return (Form 1040) as part of your business expenses does not exist. 6. No lodging, meal or airfare receipts exist for any alleged trips by Mr. Emmons to parts of the United States, including Tucson, Arizona, in the spring of 1977, prior to June 1977. 7. Mr. Emmons was not employed, either by someone else or by himself, in Tucson, Arizona or anywhere else for 39 weeks following his move to the United States from Saudi Arabia in June 1977. No responses to respondent's request for admissions were served or filed prior to November 29, 1983. Purported responses were filed December 1, 1983. They appear to be insufficient, 377 although the late filing precluded a motion to review the sufficiency of the responses under Rule 90(d). By notice served September 14, 1983, this case was set for trial in Phoenix, Arizona, on December 5, 1983. At the calendar call on December 5, 1983, the Court instructed the parties to meet and address problems with the Stipulation of Facts. The parties were further instructed to return on December 6, 1983, and advise the Court whether there was any reason why the admissions should be set aside and whether any prejudice would be suffered if they were set aside. When the case was recalled on December 6, 1983, respondent's counsel was present but petitioners' counsel was absent. Respondent's counsel indicated that respondent would be prejudiced if the admissions were not binding because she could not then subpoena petitioner or cross-examine him at the trial because he was not then in the country. The case was set for trial on December 7, 1983. At no time have petitioners moved for withdrawal or modification of the admissions. OPINION Petitioners have the burden of proving that the determinations set forth in the statutory notice are incorrect and that they are entitled378 to the deductions that have been disallowed. ; ; Rule 142(a). With respect to the claimed employee expenses of travel, they must satisfy the substantiation requirements of section 274(d) as well as the criteria of section 162.Petitioners admitted at trial and in their briefs that they have no records that meet the requirements of section 274(d). Thus it is not necessary to decide whether they should be relieved of the deemed admissions as to that issue. They have failed to meet their burden of proof and cannot be allowed any deduction for employee business expenses. Rule 90(c) provides that a fact set forth in a properly served request for admissions is deemed admitted if no response is filed within the time provided and in the manner described in the rule. Rule 90(e) provides as follows: (e) Effect of Admission: Any matter admitted under this Rule is conclusively established unless the Court on motion permits withdrawal or modification of the admission. Subject to any other orders made in the case by the Court, withdrawal or modification may be379 permitted when the presentation of the merits of the case will be subserved thereby, and the party who obtained the admission fails to satisfy the Court that the withdrawal or modification will prejudice him in prosecuting his case or defense on the merits. Any admission made by a party under this Rule is for the purpose of the pending action only and is not an admission by him for any other purpose, nor may it be used against him in any other proceeding. Respondent has satisfied us that he would be prejudiced by the delay, added expense, and additional effort that would be necessary to secure cross-examination of petitioner about his activities during the pertinent period if the admission were withdrawn. See . Petitioners called witnesses and offered documentary evidence at trial and attempted to show that petitioner was employed by Collins International, Ltd. (Collins), a company in which petitioners had invested over $650,000, after his return to the United States in 1977. (He has not claimed that he was self-employed for the requisite period.) Notwithstanding the absence of a motion to be relieved380 of the conclusive effect of the admission of nonemployment, we heard the evidence in order to determine fairly whether the merits of the case were being subserved. Review of all of the evidence offered by petitioners, however, convinces us that petitioners cannot carry their burden of proof that petitioner met the employment conditions of section 217. The merits of the case, therefore, would not be subserved by relieving them of the admission. Our conclusion is strengthened by the adverse inferences that we draw from the failure of petitioner to appear and testify and the unexplained failure of petitioners or their counsel to produce any corporate records of Collins directly supporting their claims that petitioner was an employee of Collins. Under section 217, 2 no deduction for moving expenses can be allowed in this case unless the move was in connection with the commencement of work by petitioner in Arizona and he was a full-time employee in Arizona for at least 39 weeks during the 12-month period immediately following his arrival there. 381 The 39-week full-time employment requirement of section 217(c) was intended to prevent individuals from taking advantage of the deduction for moving expenses on the basis of temporary jobs. ; H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 184. Thus the employment to which the move is connected must be bona fide and not merely a matter of form. Moreover, in holding that section 911(a) requires that moving expenses that otherwise satisfy the conditions for a deduction under section 217 must be allocated in part to tax exempt income earned subsequent to the move, we have said that moving expenses "to be deductible must have a definite relationship to the production of gross income. It is in those situations where the relationship does not exist that moving expenses are purely personal and nondeductible." . 3 In this case petitioners reported no income from the alleged employment of petitioner, and Mrs. Emmons testified that they never received any income from that employment. The rationale of the Hughes case would382 seem to extend, afortiori, to this situation and preclude deduction of the moving expenses even though we are not applying a statutory requirement of allocation between exempt and taxable sources of income. Further, in defining employment for purposes of section 217, we said in , that "the foundation of the employer-employee383 relationship is the concept of a mutual benefit with services being rendered at the direction of an employer in return for some sort of remuneration." The evidence here comples the conclusion that any services petitioner performed for Collins were intended to protect his investment and were not performed as a full-time employee. In addition, the evidence leaves substantial doubt as to whether Arizona was petitioner's principal place of work after the move. Glen Carter, a former employee of Collins, and Mrs. Emmons testified that petitioner spent a great deal of time during 1977 and 1978 on business of Collins. Carter testified that petitioner was an officer and director of Collins and stated his understanding that petitioner was also an employee. On cross-examination he testified in part as follows: Q * * Do you, in fact, know that he was an employee working full time for Collins International in 1977? A I don't know what a definition of what a full time employee is, I guess. I know his efforts were constantly at our disposal and were utilized. * * * Q Do you know of an employment contract with Mr. Emmons for his work with Collins International? A No. I don't384 know if I have seen one of those. Q Did you have anything to do with the hiring of Mr. Emmons? a No. Q Collins International? A No. I didn't. Q Do you know the particulars of his compensation with Collins International? A I can't testify as to his particulars. No. I can't. Q And would this include, also, 1978? You would not know in 1978, the extent of Mr. Emmons work with Collins International? A '78. During '78, I was back in the States, then, and I was working, again, with John S. Collins and Associates. However, Charlie was still active. I wasn't active with Collins International at that time but Charlie was. Q But by active, can you tell me if he was devoting his full time efforts to that Company? A No. I can't tell you whether it was full time or not. Q So, you wouldn't know the particulars of his employment with that Company in 1978, would you? A No. But, like I say, I know that he was readily available to do what had to be done and he did it. Q But he could have been working on a part time basis as the need arose he could have worked for them. Is that not true? A That could be possible. Carter also produced a copy of a letter385 dated April 8, 1977, and addressed to Pima Savings and Loan of Tucson, Arizona, purporting to certify petitioner's employment "as Overseas Liaison for operations in Saudi Arabia" effective as of April 7, 1977, at an annual salary of $40,000. The letter was signed by John S. Collins as president of Collins International, Ltd. Carter testified that John Collins died in 1979. Carter disclaimed custody of corporate records of Collins, indicating that petitioner and petitioners' counsel had previously been in possession of the corporate records. Respondent objected to receipt in evidence of the copy of the letter on the ground that no proper foundation had been laid and, further, that the letter was contrary to the deemed admission that petitioner was not employed for the requisite period following his return to the United States. The objection was sustained. Petitioners also attempted to show petitioner's employment with Collins through the testimony of an insurance agent who reviewed certain medical insurance claims for medical expenses of the Emmons' family incurred between May and November 1977. Mrs. Emmons also testified to payment of the claims. The insurance agent testified386 that the insurance appeared to be group insurance of the type provided for employees of a small business. Respondent objected to receipt of the insurance records, and the objection was sustained. The balance of the evidence consisted of general statements by Mrs. Emmons that her husband was an employee of Collins and that, as such, he made numerous trips to Saudi Arabia as indicated in a summary of his passport. She testified that: A * * we had a lot of money involved in Collins International and he needed to go over and see that everything was run properly and where his investment was going and he did work full time not on a part time basis, at any time, that I know of, that I am aware of. He worked as an oversea liaison and they do work from 10:00 to 10:00 or 9:00 to 10:00 or whatever it is, 6:00 to 10:00, and it's not a part time thing and he did not work that way, simply, because he was there for a short time. He worked there and when he came he worked on a full time basis. Mrs. Emmons also testified that petitioner worked for Linear One and Monticello Construction, other companies in which she and her husband were shareholders. Although no objection was raised387 to her testimony, it is apparent that it was based upon reports from her husband and surmise as to his activities, many of which were conducted overseas and almost all of which were outside of her presence. Her conclusion that he was an "employee" of Collins therefore need not be accepted. Nor need we give any weight to the prior representations made by petitioners or on their behalf in order to obtain group insurance or a home loan. It is not uncommon for a shareholder, creditor, officer, and director of a small corporation to secure group insurance benefits without any bona fide employee relationship to the corporation. There is no evidence that the company investigated the circumstances of the alleged employment before paying the claims. The April 1977 letter signed by Collins in relation to petitioner's loan application, even if otherwise admissible, could be given no credibility because it has been shown by other evidence to be inaccurate as to both alleged employment date and compensation. The job description of petitioner as an "Overseas Liaison" in the letter (and in the testimony) suggests that petitioner's principal place of work was not the area of his residence388 in Arizona. In summary, the evidence offered by petitioners is inadequate when taken at face value and untrustworthy when scrutinized.Petitioner makes the further, almost frivolous, argument that the moving expense deduction should not be disallowed for 1977 because, under section 217(d)(2), a deduction may be taken during 1977 if the condition of employment had not been satisfied by the time for filing the return for the taxable year but could later be satisfied. The latest date that petitioner now claims to have arrived in the United States for this purpose is June 22, 1977. Petitioners' original tax return for 1977 was not filed until October 1978. If the condition of employment had not been satisfied by the time the return was filed, it could never be satisfied. At the conclusion of trial, respondent asked to be relieved of the stipulation set forth in paragraph 7 of the Stipulation of Facts, supra, on the basis of testimony from Mrs. Emmons that petitioner's employment with Al-Hajry ended in March 1977. Mrs. Emmons' testimony has the same weaknesses for respondent's purpose as it does for petitioners' purposes. Respondent entered into the stipulation with knowledge389 of the prior inconsistent statements on the tax returns as to petitioner's period of residence and/or employment in Saudi Arabia.Respondent has not shown sufficient justification for relief from the stipulation. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue. All references to rules are to the Tax Court Rules of Practice and Procedure.↩2. Sec. 217 provides in part as follows: SEC. 217. MOVING EXPENSES. (a) Deduction Allowed.--There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work. * * (c) Conditions for Allowance.--No deduction shall be allowed under this section unless-- (1) the taxpayer's new principal place of work-- (A) is at least 35 miles farther from his former residence than was his former principal place of work, or (B) if he had no former principal place of work, is at least 35 miles from his former residence, and (2) either-- (A) during the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or (B) during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A). For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.↩3. When, in an earlier case, we ruled that section 217 moving expenses were fully deductible against gross taxable income regardless of the source of income earned subsequent to a move, we were reversed by the Court of Appeals for the Ninth Circuit, to which this case is appealable. , revg. . See also , revg. . In ,↩ we decided to abandon our original position and disallow a deduction of any portion of the moving expenses allocable to subsequently earned tax exempt income. See also .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620054/	UNITED LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. UNITED LIFE INS. CO. v. COMMISSIONERDocket No. 106059.United States Board of Tax Appeals47 B.T.A. 960; 1942 BTA LEXIS 621; October 30, 1942, Promulgated 621 Petitioner, a Florida insurance company, made additions to reserves in each year of not less than 3 percent of premiums received in that year in compliance with a Florida statute. Held:(1) Petitioner was not a life insurance company within the meaning of section 201(a) of the Revenue Acts of 1934 and 1936, because its reserves were not computed on an actuarial basis, using recognized mortality tables. Independent life & Accident Insurance Co.,47 B.T.A. 894">47 B.T.A. 894, followed. (2) Premiums received in advance and additions to reserves made by petitioner in each year are "unearned premiums" within the meaning of section 204(b)(5) of the Revenue Acts of 1934 and 1936 in that year. Walter E. Barton, Esq., for the petitioner. J. Marvin Kelley, Esq., for the respondent. LEECH961 The Commissioner determined deficiencies in petitioner's income tax liability as follows: 1935$362.0319361,735.9419371,258.80The issues to be determined are (1) whether petitioner is taxable as a life insurance company under section 201 of the Revenue Acts of 1934 and 1936 or as an insurance company other than a life622 or mutual under section 204 of those acts, and (2) if the latter, whether certain adjustments should be made in computing its gross income. FINDINGS OF FACT. The petitioner is a corporation organized in 1930 under the laws of Florida. Its home office is in Jacksonville. Its returns for the taxable years were filed with the collector for the district of Florida. The purpose of the petitioner as stated in the charter included the following: The general nature of the business to be conducted and carried on by this corporation shall be a sick and funeral benefit insurance business, and the issuance of all forms of insurance and indemnity contracts that may be permissible under the laws of the State of Florida, or wherever this corporation shall do business * * . The insurance policies issued by petitioner are on the level premium plan. The premiums are payable weekly and the policies are noncancelable by the petitioner. All of its policies contain death benefits which do not exceed $250 on any one life. Types of policies include ordinary life, life which becomes paid up in 15 years, life which becomes paid up in 20 years, and combined life, health, and accident. All623 the policies were approved by the state insurance commissioner. The reserves of petitioner were computed by taking not less than 3 percent of its premiums collected in each year and adding them to reserves of the preceding years. The reserves thus computed were less in each year than they would have been if computed upon the basis of standard mortality tables. The amount of its gross premiums, reserves, capital, surplus, and admitted assets are as follows: Year endedGross premiumsReservesCapitalSurplusAdmitted assets12/31/34$2,535.68$25,000$10,036.98$39,072.6612/31/35$82,838.905,798.7225,0008,989.5940,600.8012/31/36118,995.8512,460.6425,0004,161.0344,161.0312/31/37160,614.1217,279.0625,00011,802.3054,081.36The annual statements of petitioner containing all this data were reviewed by the Insurance Commissioner of Florida in each of the 962 years here concerned. The reserves were held for the protection of policyholders in subsequent years. The petitioner's policyholders sometimes paid their premiums in advance of when they actually became due and payable. The petitioner thus had624 on hand the following amounts at the close of the respective years, which represented premiums due in subsequent years: Dec. 31, 1934$4,003.88Dec. 31, 19354,822.86Dec. 31, 19366,953.14Dec. 31, 19376,130.48OPINION. LEECH: The principal issue is whether the reserves maintained by the petitioner are of the character required by sections 201(a) and 203(a)(2) of the Revenue Acts of 1934 and 1936, so that it may be taxed as a life insurance company. The Florida statute 1 which controlled the petitioner required it to set aside as a reserve an amount "not less than three percent of the gross collections from policyholders during the current year." 625 The petitioner contends that it complied with that provision and that this compliance is enough to bring it within the meaning of "reserves required by law" as used in the Federal revenue acts. Respondent argues that it is not sufficient and has computed its income under section 204 as insurance company other than a life or mutual. We agree with the respondent. Reserves as used in the revenue acts have a technical meaning. Compliance with a state statute is not enough. See ; . We think reserves as used in the statute mean actuarial reserves computed with reference to a standard table of mortality. ; . See ; affd., ; 626 ; 963 ; . The petitioner then takes the position, raising the alternative issue, that, if it is not a life insurance company within the meaning of the revenue acts but is taxable under section 204 as an insurance company other than life or mutual, as respondent we think properly determined, then advance premiums received on outstanding policies during the respective taxable years and additions to reserves made in those years are deductible as "unearned" premiums in computing its "earned" premiums for such years. Section 204(b)(5). 2 Respondent opposes this position generally, without giving reasons therefor. 627 Our finding of fact as to the amounts of advance premiums petitioner received in the taxable years, we think disposes of their deductibility. The advance premiums here are certainly "unearned" premiums. See ; . The petitioner increased its reserves in each year by an amount at least equal to 3 percent of its gross premiums collected in that year. This amount was added to such reserve of earlier years so that in any year the reserve aggregated an amount at least equal to 3 percent of gross premiums collected to and including those of the current year. Respondent's argument opposing the deduction of the contested additions to reserves as "unearned" premiums is apparently limited to the position that these additions exceed the reserve required by the Florida statute in that each such annual addition was computed on the basis of the gross premiums collected in each of the several taxable years instead of upon the basis of the excess of the premiums collected in such years over those collected in the respective prior years. 628 He argues, therefore, that their deduction as "unearned" premiums should be denied. The petitioner argues that the provisions of the state law are immaterial. Its contention is that the deductibility of the contested item under section 204(b)(5), supra, depends upon whether, in fact, it was an unearned premium and that this item was such. Generally, the premiums received on such policy contracts as are here involved, in each year by insurance companies, are more than 964 the actual cost of meeting the risks of those contracts and the expenses of the business, in that year. That surplus is set aside in a reserve account and helps to defray the costs of those risks in future years, increasing as the policyholders grow older. The amount of this reserve is ordinarily computed from mortality and other similar tables establishing the probable risks to the insurer as to the respective varying ages of its policyholders. Because this reserve is not used by the insurer in the tax year but is set aside for future years, it has been held to be "unearned premiums" within the meaning of section 204(b)(5), supra. 629 ;The reserve of petitioner performed the same functions as those computed upon such tables. The only difference is that the addition made by petitioner in each year was less in amount than it would have been if computed upon those tables. We think that difference is without significance here, and hold for petitioner on this issue. However, because of the fact that, in computing the taxable income of petitioner for the respective taxable years under section 204 (b)(5), we have already held that advance premiums received in each such year are deductible as "unearned premiums," the amounts of those premiums will be eliminated from the "gross premiums" upon which the additions to reserves at the end of such years are computed. There is no merit in respondent's argument that the petitioner exceeded the requirements of the state law in pyramiding these additions to its reserve each year - if that point is material here. The Florida statute, supra, is concerned with annual additions to reserves and not the aggregate of those reserves. 630 Decision will be entered under Rule 50.Footnotes. Prior to October 22, 1942, this report was approved for promulgation. ↩1. Sec. 6264. Compiled General Laws of Florida. 1927: "Percentage for reserve. - On December 31, 1925, and annually thereafter, each association, corporation or company transacting the business of sick and funeral benefit insurance in this State, shall set aside as a reserve for the protection of all such policyholders, an amount not less than three percent of the gross collections from policyholders during the current year. Associations, corporations or companies organized under the laws of this State shall maintain with the Treasurer of Florida for the protection of all policyholders of this class an amount equal to said reserve * . The State Treasurer shall require life insurance companies to set aside such reserves on life and industrial business as shall be in accordance with any accepted and recognized standards, and shall require companies writing insurance against loss by fire and other hazards, fidelity and surety bonding and indemnity coverage, to set aside the unearned portion of premiums in force, computed according to the usual methods, for the protection of their policyholders. * " ↩2. SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL. (b) DEFINITION OF INCOME, ETC. - In the case of an insurance company subject to the tax imposed by this section - * * (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. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620056/	Lewis & Taylor, Inc. v. Commissioner.Lewis & Taylor, Inc. v. CommissionerDocket No. 4605-66.United States Tax CourtT.C. Memo 1969-82; 1969 Tax Ct. Memo LEXIS 216; 28 T.C.M. (CCH) 466; T.C.M. (RIA) 69082; April 22, 1969, Filed. Eugene J. Brenner and Thomas D. Roberts, 1920 Mills Tower, San Francisco, Calif., for the petitioner. James E. Merritt, for the respondent. TANNENWALDMemorandum Findings of Fact and Opinion TANNENWALD, Judge: 1 Respondent determined a deficiency of $2,186.96 in petitioner's income tax for the taxable year ending July 31, 1960. The sole issue for our determination after a concession by petitioner is whether $7,191.87 of payments totaling $17,500 to the estate of a deceased shareholder-officer-employee, made in the taxable year ending July 31, 1962, represents deductible compensation or a cost of acquiring stock. This deduction increased petitioner's loss for the217 taxable year ending July 31, 1962, which petitioner has carried back to its taxable year ending July 31, 1960. Findings of Fact Some of the facts are stipulated and are found accordingly. Petitioner, a California corporation, maintained its principal place of business in San Francisco, California, at the time of filing the petition herein. Petitioner filed its Federal income tax returns for the period ending on July 31 of all relevant years with the district director of internal revenue, San Francisco, California. Lewis & Taylor, Inc., was formed by Edward Z. Lewis, Jr. (hereinafter Lewis) and George A. Taylor (hereinafter Taylor) in 1945 to perform cleaning maintenance services for office and other commercial buildings. Robert S. Abrons (hereinafter "Abrons") was employed by petitioner as its office manager in 1947. Until the time of his death in April 1961, 218 Abrons received the following amounts of salary and bonuses: Calendar YearSalaryBonusTotal1947$2,700.00$ 2,700.0019482,945.002,945.0019493,400.003,400.0019503,070.003,070.0019513,000.003,000.0019523,000.003,000.0019535,250.00$1,396.437,646.4319546,000.006,000.0019556,000.006,000.001956$6,100.00$ 300.00$ 6,400.0019576,800.00600.007,400.0019587,800.00397.807,197.8019597,800.00325.008,125.0019607,800.001,090.008,890.0019612,666.002,666.00 The bonuses received by Abrons were paid pursuant to a discretionary plan established by petitioner's board of directors in 1953. Abrons' successors received no more than $600 per month in gross salary, exclusive of overtime and small Christmas bonuses, during the years 1961, 1962, and 1963. Abrons was a shareholder-officer at the time of his death. At that time, he owned 50 shares of petitioner's stock which he had acquired prior to 1952. Members of the Lewis or Taylor families owned the remaining 275 shares of petitioner's stock. Petitioner's shareholders executed a trusteed stock purchase agreement219 in 1952, which provided for the purchase of the stock of a deceased shareholder by the remaining shareholders. The purchase price was to be agreed upon annually by the shareholders. The agreement provided for funding of at least a portion of the purchase price through life insurance. Petitioner and its shareholders entered into a new trusteed agreement in 1956, which provided for the purchase of the stock of a deceased shareholder at a price to be determined under a formula based upon book value, the net earnings for the period of the fiscal year preceding death, and billings to certain customers during the last preceding month-and-one-half. The purchase price was also funded at least in part by life insurance. This agreement provided in pertinent part: This Trust shall terminate automatically upon the expiration of any policies issued hereunder without value, or upon the bankruptcy or dissolution of the corporation, or by the mutual consent of the living stockholders, or upon the death of two stockholders after distribution has been made in compliance with the provisions of this agreement. 468 The term life insurance policies in effect at the time of execution of the 1956220 agreement on the lives of Edward Z. Lewis and George A. Taylor were surrendered in 1958 and 1959. Petitioner then purchased $25,000 policies from Phoenix Mutual Life Insurance Company on the lives of Lewis and Taylor, respectively, for the purpose of funding the stock purchase agreement. These policies, together with a $5,000 ordinary life policy on Abrons' life, taken out in 1951, were in effect at Abrons' death. Petitioner received payment of the proceeds of the $5,000 policy. Petitioner and its surviving shareholders executed a new agreement on June 1, 1961, which substituted the gross profit (gross sales less direct wages) of janitorial and window cleaning contracts for the three months preceding the shareholder's death for the one-and-one-half months of billing element in the formula under the 1956 agreement. The Crocker-Anglo National Bank, the executor of Abrons' estate, made a request for payment in accordance with the terms of the 1956 agreement. The purchase price of Abrons' stock under the formula set forth in that agreement equalled $22,321.50. Lewis and Taylor were of the view that the 1956 agreement had terminated because the term life insurance policies provided221 for therein had expired. Petitioner, based upon the formula of the 1961 agreement and applied as of March 31, 1961, made a written offer of $17,191.87 to Abrons' estate for the 50 shares of stock held by the decedent. This offer was accepted by the executor of Abrons' estate, subject to the approval of the Superior Court. The terms of the sale were formalized by an agreement between petitioner and the executor for the sale of the 50 shares for $17,191.87 on September 29, 1961. Subsequently, petitioner, acting on the advice of its accountant, decided to seek a modification of the agreement so that $10,000 would be paid for the shares and $7,500 as additional compensation to Abrons ostensibly for past services rendered. The executor of the estate agreed and a new written agreement providing for the sale of the shares for $10,000 was executed on December 4, 1961. The additional $7,500 was paid on December 5, 1961. In January 1962, the Superior Court, acting as a probate court, authorized the sale of securities and confirmed the December 1961 contract. The following journal entry was made in the books of the petitioner as of May 31, 1961: DebitJE 5-31-61 Treasury Stock - 50 Lewis & Taylor$17,191.87Estate of Robert S. Abrons re: Purchase of stock - 50 shares at 343.8374 per share$17,191.87Basis as follows:Capital & Surplus per balance sheet sub- mitted March 31, 1961$ 60,693.19Gross Profits for Quarter ending 3-31-61 51,053.99$111,747.1850 shares at 343.8374$ 17,191.87Above offer made to Estate222 The book value of Abrons' shares as of March 31, 1961, was $9,337.50. The estate valued the shares at $10,000 in the inventory filed with the Superior Court. Petitioner never had any policy or plan for post-mortem distributions by way of compensation to deceased employees. Ultimate Finding of Fact $7,191.87 of the $17,500 paid by petitioner to Abrons' estate was part of the purchase price of decedent's shares and did not represent additional compensation to the decedent. Opinion The sole question herein is the proper treatment of a portion of an aggregate of $17,500 paid to the estate of Robert S. Abrons, a deceased shareholder-officer-employee of petitioner. Petitioner contends that $7,500 of this amount represents deductible additional compensation to Abrons and therefore a deductible expense under section 162(a)(1). 2 Respondent asserts that 469 $7,191.87 of this latter amount was paid for the decedent's shares of stock and therefore constitutes a nondeductible capital expenditure. We agree with respondent. Petitioner constructs its argument along the following lines: (1) the 1956 agreement with223 respect to the purchase of shares of a deceased shareholder had terminated prior to Abrons' death, because of the alleged lapse of funding insurance; (2) there was therefore no obligation to purchase Abrons' shares; (3) the original 1961 agreement to pay $17,191.87 for these shares never became operative because it was not validly executed by petitioner and was not approved by the Superior Court; (4) the fair market value of the shares at Abrons' death was not in excess of $10,000; (5) as a consequence of the foregoing, the payment of the $7,500 under the modified 1961 arrangement was, in fact, as well as in form, additional compensation for services rendered by Abrons prior to his death and for which he had not been adequately compensated. We find this reasoning totally unpersuasive. In our opinion, the questions whether the 1956 agreement had vitality at Abrons' death, whether petitioner had any legal obligation to buy Abrons' shares, whether the original 1961 agreement was effective and whether the "fair market value" of those shares at Abrons' death was more or less than the amount paid are essentially irrelevant considerations. The critical question is what in fact were the224 arrangements between petitioner and Abrons' estate. The answer, in a nutshell, is that petitioner simply purchased the Abrons' shares. Petitioner's offer of $17,191.87 was calculated in terms of what it thought the shares were worth. Under these circumstances. "fair market value" in the normal sense of what a third party might have paid for the shares is immaterial. Nor does any significance attach to the fact that the formula utilized was derived from a post-death agreement to which Abrons was not a party, particularly since that formula contained no element relating to compensation for past services. Moreover, we note that there is little, if any, evidence as to the extent or value of the services rendered to petitioner by Abrons. All that we know is that he worked long hours and that he was a faithful employee. Clearly, this is insufficient to equate the self-serving statements as to motivation with the fact of compensation. Cf. Fifth Avenue Coach Lines, Inc., 31 T.C. 1080">31 T.C. 1080 (1959); McLaughlin Gormley King Co., 11 T.C. 569">11 T.C. 569 (1948); compare also William C. Atwater & Co., 10 T.C. 218">10 T.C. 218, 244 (1948). Similarly, the record herein simply does not225 bear out petitioner's contention that the $7,500 payment was related to maintenance of employee morale. There is no evidence that petitioner had any plan of post-death compensation payments; in fact, there is no indication of any other instance of any such payment. Finally, one cannot help wondering why, if the desire to compensate Abrons as an example to other employees was so important, it was not recognized at the outset when consideration was first given to purchasing the shares, rather than six months later after the tax benefit involved was discovered. Perhaps petitioner's directors were to some degree motivated by a feeling of regard for Abrons' faithful service and a sense of moral obligation stemming from his possible reliance on the continued effectiveness of the 1956 agreement. But, at most, this motivation reflected itself exclusively in the decision voluntarily to apply the 1961 formula in order to purchase Abrons' stock rather than to stand on legal rights and attempt to negotiate a better price. The December 1961 arrangements were no more than an after thought which bore no relationship to the actual situation and merely constructed a facade for a tax deduction. 226 To accept this facade, generated by a last-minute shift in signals, would be to ignore the realities herein and exalt form over substance - something petitioner itself agrees we should not do. Cf. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945); Waltham Netoco Theatres, Inc., 49 T.C. 399">49 T.C. 399 (1968), affd., 401 F. 2d 333 (C.A. 1, 1968). On the record before us, the transmutation of a portion of the purchase price into an alleged payment of additional compensation is without any substantive significance. The fact that the agreement may have effected a novation under local law does not invalidate this conclusion. We hold that the $7,191.87 in dispute was paid for the acquisition of Abrons' share and is therefore a non-deductible 470 expense under section 162(a)(1). 3Graybar Electric Co., 29 T.C. 818">29 T.C. 818 (1958), affirmed per curiam 267 F. 2d 403 (C.A. 2, 1959); Standard Asbestos Mfg. & Insulating Co., 276 F. 2d 289 (C.A. 8, 1960), affirming a Memorandum Opinion of this Court on this issue; Warren Steam Pump Co., 13 B.T.A. 721">13 B.T.A. 721 (1928). *227 Decision will be entered for the respondent. Footnotes1. This case was heard by Judge Allin H. Pierce (Recalled) who has since retired from active duty with the Court. Prior to reassignment, each party was given an opportunity to submit a motion with respect thereto but no motion was filed. The case was assigned to Judge Theodore Tannenwald, Jr., on February 5, 1969.↩2. All references are to the Internal Revenue Code of 1954.↩3. Petitioner points to the fact that respondent did not disallow the entire $7,500 payment claimed to have been made as compensation for services. The fact that respondent may not have asserted the maximum disallowance provides no sustenance to petitioner's position.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620057/	Sid Dyer v. Commissioner.Dyer v. CommissionerDocket No. 41120.United States Tax CourtT.C. Memo 1954-65; 1954 Tax Ct. Memo LEXIS 183; 13 T.C.M. (CCH) 536; T.C.M. (RIA) 54171; June 14, 1954, Filed 183 There being no evidence in support of petitioner's claim that he is entitled to credits for two dependents during the taxable years, held, that the respondent properly disallowed credits in each year for two alleged dependents under sections 25(b)(1)(D) and 25(b)(3). Robert J. Cowan, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The Commissioner determined deficiencies in income tax for 1948, 1949, and 1950, in the amounts of $869.91, $669, and $425.55, respectively. The deficiencies are the result of disallowances of various deductions in each year for lack of substantiation. By amendment to his answer, the Commissioner has made claim for increase in the deficiency for 1950, in the amount of $500.24, pursuant to section 272(e) of the Code. The Commissioner has determined in the amendment to his answer that there was realized, in 1950, recognizable long-term capital gain of $4,496.44, of which 50 per cent, $2,248.22, is includible in petitioner's income for 1950. The parties have agreed upon the amounts of allowable deductions in each year. The only question remaining for decision is whether petitioner is, in184 each year, entitled to credits for two dependents under sections 25(b)(1)(D) and 25(b)(3) of the Code. Findings of Fact The facts which have been stipulated are found accordingly. The stipulation is incorporated herein by this reference. The petitioner resides in Great Neck, Long Island, New York. Individual returns for the taxable years were filed with the collector for the twenty-first district of New York. The petitioner's reported income for 1950 should be increased by the sum of $2,248.22, which amount is his share of taxable long-term capital gain of $8,992.85, realized in 1950 upon the sale of improved real estate located in Great Neck, Long Island, New York, which was owned by petitioner and his wife, Blanche Dyer, as tenants by the entirety. The computation of the long-term capital gain is as follows: Sales price$19,500.00Adjusted basis9,463.36Gain$10,036.64Expense of sale1,043.77Long-term capital gain$ 8,992.8750 per cent recognizable4,496.431/2 taxable to petitioner$ 2,248.22The petitioner is entitled to deductions in 1948, 1949, and 1950, for various expenditures, in the total amounts of $3,806.61, $3,729.94, and $623.28, 185 respectively. The schedule attached to the stipulation setting forth the detailed items of expenditures is incorporated herein by reference. These total amounts of allowable deductions are in lieu of all deductions claimed in petitioner's individual returns and amended petition. The petitioner no longer contests the validity of the statutory notice of deficiency issued by the Commissioner which gives rise to this proceeding. Opinion The Commissioner now agrees that petitioner is entitled to deductions in the taxable years for alimony payments, interest, taxes, legal expense, contributions, and various other expenditures in the total am ounts set forth in the Findings of Fact. In his petition, the petitioner claimed, in each year, credits for two minor children, alleging that they were his dependents under sections 25(b)(1)(D) and 25(b)(3). Under this issue the petitioner has the burden of proving that in each of the taxable years, each minor child was his dependent within the definition set forth in section 25(b)(3). The petitioner failed to introduce any evidence under the dependency credit issue. Therefore, for failure of proof, the determination of the Commissioner disallowing186 the dependency credits is sustained. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620059/	James P. and Lillian V. Barnett v. Commissioner.Barnett v. CommissionerDocket No. 3898-70SC.United States Tax CourtT.C. Memo 1971-93; 1971 Tax Ct. Memo LEXIS 240; 30 T.C.M. (CCH) 375; T.C.M. (RIA) 71093; April 29, 1971, Filed James P. Barnett, pro se, R.F.D. #1, Box 157, Waterville, Me. Allen Weinberg, for the respondent. GUSSISMemorandum Opinion GUSSIS, Commissioner: Respondent determined a deficiency in the petitioners' income tax for the year 1966 in the amount of $1,066.53. James P. and Lillian V. Barnett, husband and wife, were residents of Waterville, Maine at the time the petition herein was filed. They filed their joint Federal income tax return for the year 1966 with the district director of internal revenue at Augusta, Maine. In his statutory notice of deficiency dated March 26, 1970, the respondent (1) increased the petitioners' net profit from their motel business by the amount of $5,038, (2) determined that petitioners realized longterm capital gains of $3,907 from the sale of four apartment houses, 241 (3) allowed petitioners a loss of $199 incurred by them in connection with certain rental property and (4) made several other adjustments. Respondent subsequently conceded that petitioners were entitled to additional first year depreciation in the amount of $1,949 under section 179 of the Internal Revenue Code of 1954. As a result of this concession by the respondent, the original deficiency for the year 1966 was reduced to $637.76. Respondent filed an amended answer to reflect his concession and the claim for a reduced deficiency. On November 16, 1970, petitioners filed a motion to dismiss under Rule 31(g) of the Tax Court Rules. We have considered the arguments presented by petitioners in 376 support of their motion and we believe they are without merit. Rule 31(g) provides in part that "Failure to adduce evidence in support of the material facts alleged by the party having the burden of proof and denied by his adversary, may be ground for dismissal." Petitioners apparently feel that respondent's partial concession which resulted in a reduced deficiency somehow had the effect of shifting the burden of proof to the respondent. We do not agree. Rule242 32 of the Tax Court Rules provides that "[the] burden of proof shall be upon the petitioner, except as otherwise provided by statute, and except that in respect of any new matter pleaded in his answer, it shall be upon the respondent." Respondent has not pleaded any new matter in his answer or in his amended answer. Certainly the concession made by respondent cannot be construed as new matter which would require a shift in the burden of proof. Consequently, petitioners' motion to dismiss is hereby denied. Petitioners presented no evidence whatever bearing upon the issues involved and made no effort whatever to present arguments dealing with the actual merits of the issues. In fact, petitioner James P. Barnett informed the Court at the trial that "basically, I'm basing this on 31(g), as my defense." He also stated that "we feel, although it's a little bit ambiguous to me, that under this rule, we have won our case, because they have failed to produce any evidence." Petitioner was advised by the Court that in the event petitioners' motion under Rule 31(g) was denied, it would be necessary for him to offer evidence to meet his burden of proof as to the issues before the Court. He*243 declined to do so. Respondent's determinations are presumptively correct, Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933) and the burden of proof is upon the petitioners. Rule 32 of the Tax Court Rules. Petitioners have not met their burden and, accordingly, the respondent must prevail. Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620060/	GEORGE CALDWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ZELLA B. CALDWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Caldwell v. CommissionerDocket Nos. 102546, 102547.United States Board of Tax Appeals47 B.T.A. 168; 1942 BTA LEXIS 729; June 23, 1942, Promulgated 729 1. Petitioner, an employee of Louisiana State University, entered into an arrangement with the president of the university whereby taxpayer received a certain percentage of cost of all buildings erected under his supervision. Held, as to income arising from such source, petitioner was not an employee of the state and the income was not exempt from tax. 2. Respondent's determination that certain "kickbacks" or rebates received by petitioner from contractors and materialmen were income, approved. 3. Fraud penalties approved. Roland C. Kizer, Esq., for the petitioners. Donald P. Moyers, Esq., and Homer J. Fisher, Esq., for the respondent. VAN FOSSAN 169 The respondent determined deficiencies in income taxes and penalties as follows: George Caldwell Zella B. Caldwell (Docket No. 102547)(Docket No. 102546)YearDeficiencyPenaltyYearDeficiency1935$1,382.94$691.471935$1,382.9419361,643.31884.6719361,643.3119376,526.903,737.1319376,526.9019384,960.572,480.2919384,960.57In this report petitioner George Caldwell is, for convenience, 730 sometimes referred to as the petitioner. The issues presented involve two groups of payments: (1) Those made by Louisiana State University pursuant to an arrangement between George Caldwell and its president, by the terms of which Caldwell was to receive a certain percentage based on cost of buildings erected under his supervision, petitioners contending that he was an employee of the state and that the payments so made were exempt from tax; (2) certain payments or "kickbacks" made to Caldwell by contractors and materialmen in connection with the construction of buildings for the university. There is also involved the question of fraud as to George Caldwell. Other adjustments to petitioners' income made by respondent are not put in issue. FINDINGS OF FACT. Petitioners are husband and wife, residing in Baton Rouge, Louisiana. They filed returns on the community property basis for the years 1935, 1936, 1937, and 1938 with the collector of internal revenue for the district of Louisiana. George Caldwell during the years involved was the superintendent of building at Louisiana State University. As such superintendent he received a salary in the amount of $4,500 for the731 year 1935, $5,400 for the year 1936, and $6,000 for each of the years 1937 and 1938. Respondent in his determination held this income exempt from taxation as being received by an employee of the state. Louisiana State University and Agricultural and Mechanical College (hereinafter called the university) is an instrumentality of the State of Louisiana and is governed by a board of supervisors. James Monroe Smith was, during all the years here involved, president of the university and secretary of the board of supervisors. He is now incarcerated in the Louisiana State Penitentiary. Sometime in 1936 Caldwell and Smith entered into an arrangement by the terms of which Caldwell was to receive 1 percent of the cost of all buildings erected under his supervision. At some later date 170 the percentage was changed to 2 percent. The arrangement was not authorized by the board of supervisors of the university. Smith, as secretary of the board, prepared false minutes of the board purporting to show the authorization of such arrangement. Pursuant to said arrangement petitioner received but did not report payments determined by the respondent to have been $2,420 in 1936, $8,530.62732 in 1937, and $1,365.65 in 1938. In their returns for 1938 each petitioner returned as taxable income from "salaries and other compensation for personal services" the sum of $30,065.40. The payments received by George Caldwell from funds of the Louisiana State University in 1936, 1937, and 1938 in excess of his stated salary did not constitute compensation for personal services as an officer or employee of an instrumentality of the State of Louisiana. Caldwell's work in connection with the building program at the university brought him into intimate contact with contractors and suppliers of materials for the buildings being erected. He made demands on various of these contractors that payments or "kickbacks" be made to him out of the proceeds of certain of the contracts. In some instances the contractors understood that the making of such payments was a condition to securing of the contracts. In other instances contractors would furnish Caldwell with tentative bids on the contracts and he would tell them how much should be added to the bids to cover payments to him. These "kickbacks" or rebates were, at Caldwell's express direction, always paid to him in cash, generally at733 his office on the campus of the university, and were not paid in the presence of third persons. These "kickbacks" amounted at least to the following sums: $8,254 for 1935, $19,116.79 for 1936, $46,784.90 for 1937, and $36,448.18 for 1938. In their tax returns for the year 1935 the two petitioners each returned as "other income" the sum of $12,391.05 under the caption "games of chance." For 1936 the sum of $18,223.16 was returned by each under the caption "winnings from games of chance." For 1937 each returned the sum of $48,062 under the caption "gambling." For 1938 each returned the sum of $14,922.75 under the caption "gambling." On January 12, 1940, George Caldwell was indicted in the United States District Court for the Eastern District of Louisiana, New Orleans Division, for the fraudulent evasion of income taxes for the years 1935 to 1938, inclusive, in the identical amounts of deficiencies set forth above and based upon the same tax liabilities as appear in respondent's notices of deficiencies in these proceedings. In the indictment each year was made the basis of a separate count. On February 12, 1940, George Caldwell, by counsel, entered a plea of guilty to all four734 counts of the indictment. He was sentenced 171 to a period of imprisonment of two years on each count, the sentences to run concurrently and to pay a fine of $1,000 and costs of prosecution. He was committed to the Federal penitentiary at Atlanta, Georgia. George Caldwell, above referred to, is the petitioner in Docket No. 102547. All or a part of the deficiencies due from George Caldwell for the years 1935 to 1938, inclusive, are due to fraud with intent to evade tax. OPINION. VAN FOSSAN: In the notices of deficiencies respondent increased the petitioners' income from two principal sources: (1) The arrangement between petitioner George Caldwell and James Monroe Smith, president of Louisiana State University, by reason of which Caldwell was paid 1 (later 2) percent of the cost of all buildings constructed under his supervision; and (2) rebates or "kickbacks" from contractors and materialmen. Although the respondent charges fraud and has the burden of proof on that issue, petitioners have the burden of proof as to the contested items of income. 735 ; ; certiorari denied, . Petitioners' evidence is almost exclusively directed to the first of these items, i.e., percentage payments by the university. They concede that the "kickback" payments were made, but argue on brief that these payments were reported as gambling gains. They offer no proof whatever to substantiate this claim and it is clearly not self-evident. Except for the percentage payments, the record affords no basis in fact for an argument against the correctness of respondent's determination of the deficiencies. Respondent held that petitioner George Caldwell was an employee of the state as to his salary from the university. The only question is as to the percentage payments. We can not shut our eyes to facts established by the record and ignore the background of the percentage arrangement. Thus we know of the scandalous and criminal conduct of James Monroe Smith, the president of the university. We know too of Caldwell's admittedly criminal conduct in regard to his tax accounting, and of his solicitation of rebates736 and bribe money in connection with the very work here involved. We know that the board of supervisors of the university never suthorized the payment of the percentage to petitioner and that the minutes of the board, prepared and kept by James Monroe Smith, president of the university and secretary of the board of supervisors, purporting to authorize the percentage 172 arrangement, were false. The conclusion is obvious. We are convinced that petitioner and Smith entered into a privately conceived arrangement, separate in legal standing and effect from petitioner's employment as superintendent of building, the consequence of which was the payment of the percentages of cost. We are of the further opinion that by this illegal and unauthorized arrangement petitioner and Smith connived at the defrauding of the university. The payments received by petitioner pursuant to the arrangement are not those of an employee of the state. They were not part of the salary paid petitioner as an employee of the state. We, therefore, sustain respondent in full as to all of the deficiencies. We likewise sustain the respondent in his finding of fraud. 737 , dismissed without opinion, C.C.A., 5th Cir., May 19, 1939. The proof shows that petitioner George Caldwell was indicted in the United States District Court for the Eastern District of Louisiana on charges of fraudulent evasion of income taxes, the same being the identical taxes and for the same amounts and years as appear in the notice of deficiencies. The record also shows that petitioner pleaded guilty to all four counts of the indictment and was sentenced to a fine and imprisonment and is now incarcerated in a Federal prison. As held by the Board in , this plea of guilty was an admission against interest subject to the taxpayer's right to explain the same or otherwise lessen its weight. Here no explanation was attempted and there is no other evidence to lessen the weight normally to be given such a fact. It is sufficient to sustain the charge of fraud. Moreover, the record contains other clear and convincing evidence supporting the conclusion that petitioner was guilty of fraud. The fraud penalties determined against petitioner George Caldwell are approved. 738 Decisions will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620061/	Sol Whiteman v. Commissioner.Whiteman v. CommissionerDocket No. 5258-69.United States Tax CourtT.C. Memo 1973-124; 1973 Tax Ct. Memo LEXIS 163; 32 T.C.M. (CCH) 543; T.C.M. (RIA) 73124; June 11, 1973, Filed 163 Losses: Theft: Jewelry and furs: Stamp collection: Valuation: Substantiation. - The taxpayer who suffered the theft loss of jewelry, furs and a stamp collection was denied a deduction in the one instance and was granted an increased deduction in the other. He failed to establish the value of the jewelry and furs and his actual ownership of them. On the testimony of a postmaster and a stamp dealer, however, the estimated value of the stolen stamps was substantially increased and the corresponding deduction allowed. J. Earl Epstein, 164 Fox Bldg., 1612 Market St., Philadelphia, Pa. for the petitioner. Stephen P. Cadden, for the respondent. GOFFEMemorandum Findings of Fact and Opinion GOFFE, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1966 in the amount of $16,377.59. Petitioner, in his petition, claims in an overpayment of tax in the amount of $2,309.12. The sole issue for decision is the deductibility of a casulaty loss resulting from a single theft from petitioner's home. The time and occurrence of the theft is not disputed by the respondent; the limited questions here are ownership by petitioner of some of the property stolen and substantiation of the amount of the loss. Petitioner, on his return, claimed a total deduction for the theft loss of $40,955 composed of a $35,000 loss of his postage stamp collection, a $27,381 loss of jewelry, furs, cash, and miscellaneous property, offset by casualty insurance policy proceeds of $21,326 ($500 paid petitioner for loss of the stamp collection and $20,826 paid petitioner for loss of the jewelry, furs, cash and miscellaneous property) and further offset by the $100 limitation under section 165(c) (3) of the Internal Revenue Code165 . 1 Respondent disallowed the entire loss claimed on the grounds of lack of substantiation. Petitioner claims, in his petition, that the net loss on the stamp collection should be $59,500 instead of the $34,500 he deducted on his return which creates the overpayment of tax he prayed for in his petition. Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein. Petitioner Sol Whiteman was a widower residing in Cheltenham, Pa. at the time he filed his petition herein. His daughter, Carol, was a minor and resided with petitioner. Petitioner filed his Federal income tax return for the taxable year 1966 with the district director of internal revenue at Philadelphia, Pa.Respondent contends that the portion of the loss claimed for jewelry, furs, cash and miscellaneous property is not allowable because petitioner has failed to prove he was the owner of the property stolen and further because he has failed to prove the amount of the loss. With respect to the portion of the loss claimed for the postage166 stamp collection, respondent contends the amount of the loss has not been substantiated. The jewelry, furs and miscellaneous property were owned by petitioner's wife, H. Jane Whiteman, who died intestate in June 1965. She left an estate consisting of the property mentioned and stocks and bonds. As administrator of his wife's estate, petitioner employed attorneys to represent him in the administration of the estate. At the time of the trial herein it was unclear from all the evidence introduced whether the estate was still in the process of administration or was closed and the assets distributed. Petitioner did not introduce in evidence the inventory of assets in his wife's estate or estate tax return for his wife's estate.However, he testified that he had an appraisal made of the jewelry and furs in December 1965 for insurance coverage purposes but did not introduce in evidence any appraisal report. The pleadings in the administration proceeding of his wife's estate and evidence of the appraisal are easily within the reach of petitioner and his failure to produce them leads us to conclude that such evidence would not be favorable. Wichita Terminal Elevator Co., 6 T.C. 1158">6 T.C. 1158 (1946),167 affd. 162 F.2d 513">162 F.2d 513 (C.A. 10,1947). We hold that petitioner has failed to prove the fair market value of the jewelry and furs stolen from his home and, therefore, he has not shown that he is entitled to deduct a loss from the theft of jewelry and furs. Moreover, we have serious doubt as to whether he was the owner of the property. We recognize that under the law of Pennsylvania petitioner and his minor daughter succeeded in equal shares to the property owned by Mrs. Whiteman at the time of her death (20 P.S. secs. 1.1 and 1.2) and because Mrs. Whiteman died intestate, title in such property vests in the heirs at the time of death. In re Knox's Estate, 328 Pa. 188">328 Pa. 188, 195 A. 34">195 A. 34 (1937). The daughter, Carol Whiteman, testified that she had no interest in the furs and jewelry; that she wanted her father to have them; and that she disclaimed any interest in them. We are furnished with no authority that this is a sufficient disclaimer to vest title in petitioner in the one-half of his wife's personal property going to the daughter. We were furnished with no pleadings from the probate proceedings reflecting a disclaimer by Carol and indeed we were furnished with168 no authority showing that a minor child, without the appointment of a guardian ad litem, can make a binding disclaimer in a probate proceeding. The taxpayer must prove that he was the owner of the property stolen in order to deduct the theft loss. Thomas J. Draper, 15 T.C. 135">15 T.C. 135 (1950). This he has not done. We hold that petitioner has failed to substantiate the loss he claimed for the jewelry, furs, cash and miscellaneous property because, primarily, he did not introduce evidence which was apparently readily available to substantiate his testimony. Wichita Terminal Elevator Co., supra; Secs. 1.165-7 and 1.165-8(c), Income Tax Regs.The evidence petitioner submitted to support his deduction for the loss of the stamp collection is another matter. It is true that petitioner had no inventory of the stamps which were stolen but his failure to have an inventory is not necessarily fatal to his case. The testimony of petitioner corroborated by the testimony of the local postmaster, convinces us that we must find the following facts. The theft of the postage stamp collection and the jewelry, furs, cash and miscellaneous property occurred during the evening169 of January 7, 1966 while petitioner and his family were away from home. None of the items stolen were ever recovered. Petitioner engaged in the hobby of collecting stamps since 1923. In some instances petitioner's wife purchased stamps but she took no interest in the hobby and merely purchased the stamps as petitioner's agent. Petitioner's postage stamp collection consisted solely of full sheets and plate blocks of new issues of unused United Stamps stamps. It was his practice to purchase the following numbers of sheets of new issue stamps based on the demoninations of the stamps: DenominationsNumber of SheetsUp to $1.0010$1.00 to $3.002 or 3$3.00 to $5.001 or 2Petitioner began purchasing plate blocks of new issue United States stamps in 1930. His average purchase was forty blocks per issue. Both the purchases by petitioner and those of his wife for his benefit were primarily made at United States post offices. Petitioner did not trade in the stamps he purchased but instead retained them. They were not cataloged, mounted or even retained in one location in his home, but were, instead, scattered throughout the house in various boxes. 170 The postmaster of the local post office where most of the stamps were purchased for the past ten years testified that he visited petitioner's home on several occasions prior to the theft. The postmaster, also a stamp collector, estimated petitioner's collection to be worth between $50,000 and $60,000. If anyone would be competent to estimate the worth of sheets of stamps it would be a postmaster. On his income tax return for 1966 wherein he claimed the theft loss deduction, petitioner valued the collection at $35,000 but in his petition he claimed that the value was $60,000. His increase in valuation was based upon his attempt, in preparation for trial, of reconstructing an inventory of the stamp collection and applying a price to the stamps from the Scott Stamp Catalog, a recognized standard pricing catalog. The only stamps not stolen were listed by the Federal Bureau of Investigation, who assisted in the investigation of the burglary, and consisted primarily of new plate blocks having a cost of $25. Respondent offered no proof to rebut the testimony of petitioner, the postmaster, and a stamp dealer who testified concerning the general practices of collectors of new issues171 and the magnitude of their collections. The amount of the loss deductible for theft of property is the lower of the fair market value of the property immediately prior to the theft or the adjusted basis of such property for the purpose of determining the gain or loss upon the sale or other disposition of the property. Sec. 1.165-8(c), Income Tax Regs. Since all of the postage stamps stolen were unused their fair market value must at least be equal to their basis (cost) because they could be utilized as postage. Accordingly, we need only be concerned with the cost of the stamps. We have carefully considered the testimony of petitioner and that of the disinterested witnesses; i.e., the postmaster and stamp dealer, and we carefully considered their appearance and demeanor on the witness stand. In view of their testimony and all the other evidence introduced at the trial, we conclude that the cost of petitioner's postage stamp collection at the time of the theft was $50,000. We find, therefore, that the theft loss of petitioner allowable for the taxable year 1966 is $49,375, computed as follows: Postage Stamp Collection$50,000Less stamps not stolen25$49,975Less insurance proceeds50049,475Less limitation under sec. 165(c) (3)100$49,375172 We do not consider the deduction claimed for the personal property previously owned by petitioner's wife in the computation above because we have held that petitioner did not prove the amount of the loss and did not prove he was the owner of the property at the time of the theft. Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620063/	Roy F. Wilcox v. Commissioner.Wilcox v. CommissionerDocket No. 2676.United States Tax Court1946 Tax Ct. Memo LEXIS 233; 5 T.C.M. (CCH) 412; T.C.M. (RIA) 46072; March 28, 1946233 John B. Beman, Esq., 830 Petroleum Bldg., Los Angeles, Calif., for the petitioner. Byron M. Coon, Esq., for the respondent. ARNOLD Memorandum Findings of Fact and Opinion ARNOLD, Judge: Respondent determined an income tax deficiency for 1940 of $2,069.34. The issue is whether petitioner received additional income of $3,925.75 during the taxable year. This sum is alleged to be income of petitioner's wife representing a part of her community interest in petitioner's earnings from personal services rendered in 1940. Findings of Fact Petitioner is engaged in the nursery business as a partner in the firm of Roy F. Wilcox & Company. His principal office is in Montebello, Los Angeles County, California. His income tax return for 1940 was filed with the collector for the sixth district of California. In 1919 petitioner, his wife, Frances Wilcox, and his father-in-law, Oscar Keeline, were the partners in Roy F. Wilcox & Company. In 1929 Frances Wilcox died leaving two sons her surviving. Thereafter petitioner and Keeline conducted the nursery business as equal partners. In 1934 petitioner married his present wife, Margaret Whitney Wilcox, with whom he was living throughout234 the taxable year. Petitioner had no substantial assets in 1919 other than his partnership interest which was his principal source of income during the taxable year and prior thereto. Keeline had assets other than his investment in the partnership and was not dependent at any time material hereto upon partnership assets or income. Petitioner had been the manager of the partnership business since its inception. The major responsibility for the conduct of the business rested upon him as Keeline was 82 years of age in 1940. He devoted substantially all of his time to the business. Keeline's services were largely advisory although when petitioner was away Keeline conducted the business. Petitioner and Keeline lived in their own homes on the business property. During the early years of the partnership when the business was expanding the net income averaged around $20,000 to $25,000 per year. During these years and until about 1932 petitioner withdrew $1,000 a month from the business for his own use. Keeline agreed that petitioner's services to the partnership entitled him to draw out that much more than Keeline withdrew therefrom. In or about 1932 all withdrawals by employees were reduced235 and petitioner reduced his own withdrawls to $750 per month. The partnership net income began to substantially exceed petitioner's withdrawals in 1936 and 1937. At the end of 1936 and 1940 the capital value of the partnership was about $165,000 and $235,000, respectively. In 1935 when business began to get better petitioner discussed with Keeline the matter of again withdrawing $1,000 per month. Keeline, while recognizing and approving petitioner's management of the business, felt that the withdrawals should remain at $750 and that the remaining earnings should be left in the business for the benefit of his grandsons. There has been no further discussion between petitioner and Keeline respecting a change in the amount of petitioner's withdrawals. During the period 1935 to 1940, inclusive, petitioner continued to withdraw $750 per month. Keeline made no withdrawals at any time in connection with his services to the partnership; sometimes he withdrew his distributive share of partnership net income and sometimes he added it to his investment in the partnership. A partnership agreement executed by petitioner and Keeline on December 31, 1935, which was in effect during the taxable236 year, provided in part as follows: IT IS FURTHER UNDERSTOOD AND AGREED that each of the partners shall devote to said business such time and effort as shall be mutually agreed upon, and shall receive as compensation for his services such remuneration as may be mutually agreed upon between the parties. [Italics supplied.] On his income tax return for the taxable year petitioner computed the partnership earnings attributable to his personal services and to his capital investment pursuant to the provisions of G.C.M. 9825, C.B.X-2, p. 146. This computation showed that $16,851.51, out of his total income from the partnership of $30,236.44, was attributable to his personal services and $13,384.93 was attributable to his capital investment. Petitioner reported his partnership income as $13,384.93 plus one-half of $16,851.51, or $21,810.69; his wife reported one-half of $16,851.51, or $8,425.75. Respondent determined that the $9,000 withdrawn by petitioner during the taxable year represented a reasonable compensation for his services to the partnership, one-half of which was taxable to petitioner and one-half to his wife. Accordingly he increased petitioner's income by237 $3,925.75 ($8,425.75 - $4,500), and determined the deficiency herein. The $9,000 withdrawn by petitioner during the taxable year was received as compensation for services mutually agreed upon between the partners. Opinion The question for decision is how much of the partnership income realized by petitioner during the taxable year should be attributed to his personal services. Partnership income not attributable to personal services concededly is petitioner's separate income arising from his separate property. On his income tax return for 1940 petitioner attributed $16,851.51 of his partnership income to his personal services, which, as community income, was reported one-half by him and one-half by his wife. The respondent determined that petitioner received only $9,000 for his personal services to the partnership during 1940 and that only this portion of the partnership income represented income of the community. We agree with respondent's determination. The partnership agreement provides that each of the partnerships shall receive as compensation for his services such remuneration as may be mutually agreed upon between them. At the time this agreement was executed petitioner238 was receiving $750 per month from the partnership in recognition of the services he was rendering to it. At some time during the year 1935 he had discussed with his partner the matter of increasing his withdrawals to $1,000 per month. He could not obtain Keeline's consent to the increase. His testimony shows that he has had no further discussion with Keeline on the matter. In view of the testimony and the provisions of the partnership agreement we must construe the mutual agreement between the partners to be that petitioner's compensation was $750 per month. Whether his services were reasonably worth more or less would seem to be immaterial. The mutual agreement was that he should receive $9,000 per year, and so far as we can see that is the end of the matter. Any resort to a formula, such as that in G.C.M. 9825 [X- 2 CB 146], is wholly unnecessary, where pursuant to a written contract, petitioner agreed that the compensation he was to receive for his services was to be determined by mutual agreement with his partner. We believe no useful purpose would be served by reviewing the numerous authorities cited by the parties in view of our conclusion on the ultimate*239 question of fact. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620046/	Herbert Payne and Helen Payne v. Commissioner.Payne v. CommissionerDocket No. 4035-62.United States Tax CourtT.C. Memo 1964-119; 1964 Tax Ct. Memo LEXIS 215; 23 T.C.M. (CCH) 670; T.C.M. (RIA) 64119; April 30, 1964215 Herbert Payne, pro se, 1381 Gardiner Drive, Bay Shore, N. Y. John B. Murray, Jr., and William T. Holloran, for respondent. TRAINMemorandum Findings of Fact and Opinion TRAIN, Judge: The respondent determined a deficiency in petitioners' income tax for the year 1960 and an addition to tax under section 6653(a), 1954 Code, in the amounts of $651.99 and $32.60, respectively. The issues for decision are: (1) Whether petitioner, a hairdresser, received during 1960 additional unreported income from tips; and (2) Whether petitioner is liable to an addition to tax for negligent failure to keep adequate books or records. Findings of Fact Some of the facts are stipulated and are hereby found as stipulated. The petitioners Herbert Payne and Helen Payne are husband and wife, who reside at 1381 Gardiner Drive, Bay Shore, New York. (Herbert is hereinafter referred to as "petitioner".) They have three minor children, two of whom were born prior to the close of the taxable year 1960, and a third child was born to the petitioners in April of 1963. Petitioners filed a timely joint Federal income tax return for the calendar year ended December 31, 1960, with the district216 director for the Brooklyn District of New York. They used the cash basis method of accounting and reporting for income tax purposes. The petitioner was employed in 1960 and is presently employed as an operator at R. H. Macy's Studio, a beauty salon located at Roosevelt Field, Nassau County, Long Island, New York. He received a salary of $82 per week as an operator in the studio during 1960 and received as sales commissions 25 percent of that portion of his gross sales which was in excess of twice the amount of his salary. Petitioner correctly reported as salary and commissions received from R. H. Macy's $5,793.47 for 1960. The recorded customer sales of the petitioner, which he earned on behalf of Macy's during 1960, aggregated $13,465. Petitioner reported as tips for the year 1960 the amount of $269, which represented approximately 2 percent of the gross sales earned by him as an operator in the Macy's beauty salon. During the year, he kept in a notebook entitled "Weekly Time Book" a daily record of the amount (approximate) which petitioner took in and the total tips received. He usually made these entries in the evening. The amount of tips reported on his return agreed with this217 notebook record. As a result of a pre-refund audit of the joint income tax return of the petitioner and his wife the petitioner appeared on several occasions before a tax examiner in the district director's office. Neither the examiner nor her immediate supervisor saw petitioner's daily record of tips at the time of examination. R. H. Macy's beauty salon is separated into two parts, one part, known as the "Studio", where a customer receives regular hair styling, and the "Little Shop", where a customer receives individual hair styling. Petitioner worked for five days a week, Monday through Saturday, except Wednesday, which was his day off, in the "Studio" portion of the beauty salon during the calendar year 1960. He worked a total of 245 days during the calendar year 1960. The customers who patronize the beauty salon are classified in two categories and they are known as "transient customers" and "regular customers". The "transient customers" are those who make appointments to have their hair done but they do not make a specific request that a particular operator do their hair. The "regular customers" are those who make an appointment for their hair to be done and they specifically218 request that a particular operator do their hair. Macy's list price for specific hair services for the calendar year 1960 were as follows: STUDIOLITTLE SHOPPermanent Waves$ 7.94-$50.00$12.50-$50.00First bleach of hair25.00- 35.0025.00- 35.00Regular touch-up bleach of hair10.0010.00Hair set, if any2.003.00Regular touch-up tint of hair5.505.50Hair set, if any2.003.00Frosting of hair15.00- 25.0015.00- 25.00Shampoo of hair and set2.503.50Hair cut2.003.00Petitioner has received up to a dollar as a tip for a five dollar hair style job. The number of women customers who patronized the Studio at Macy's beauty salon during the calendar year 1960 and specifically requested the services of the petitioner numbered 1,662. In addition, he served 638 other customers. The sole source of petitioners' known income during the taxable year 1960 came from petitioner Herbert Payne's salary and commissions paid to him by his employer during the taxable year 1960; income from tips, cash on hand in the bank accounts of the petitioner and his wife; and a state tax refund of $90.43. Petitioners made total deposits during219 1960 of $987.64 in their three savings bank accounts at the: Suffolk County Federal Savings; Sayville Federal Savings & Loan Association; and the Bayshore Federal Savings and Loan Association, while making two withdrawals totalling $839. Petitioners jointly maintained a regular checking account with the Security National Bank in Bayshore, New York, which contained an opening balance of $759.72 on January 13, 1960, and a closing balance of $16.73 on December 29, 1960. On November 14, 1960, petitioners opened a stock brokerage account with Edwards & Hanly, members of the New York Stock Exchange, Hempstead, New York. Petitioners purchased from Edwards & Hanly shares of P. R. Mallory stock for the sum of $414.69 during the taxable year 1960. On their return for 1960, petitioners reported support of Herbert's mother, Mrs. Clair Payne, in the amount of $1,060 during the year. Petitioner owned jointly with his mother property at 23 Fifth Avenue, Bayshore, New York. He paid during 1960 the sum of $320.50 for real estate taxes imposed on his own residential property. Petitioners owned two automobiles during the taxable year 1960, one of which was a 1959 Renault. Petitioners estimated220 that their cost of living expenses during the calendar year 1960 were $5,838.50. Opinion Respondent has increased the amount of tips reported by petitioner by $2,239, the petitioner having reported $269 of tip income on his return. Thus, respondent has determined that petitioner received a total of $2,508 from this source in 1960. Since petitioner's gross sales of his services were $13,465 in that year, respondent has determined that his tips averaged about 20 percent of his receipts, as compared to the approximately 2 percent reported by petitioner. There is no evidence of record as to how respondent arrived at the basis for his tip computation. There is no explanation of why a 20 percent factor was used rather than some other ratio. There is no evidence of business usage or practice, if any. There is no evidence of the tip receipts of other beauticians except for the testimony of petitioner's own witness, Brancaleone, which corroborated petitioner's testimony. Respondent insists that we not accept petitioner's daily record of tips as evidence. However, the record in question has every appearance of being exactly what petitioner claims it to be, namely, a daily record kept221 in 1960. It is true that respondent's examining agent and her supervisor both testified at the trial that, at the time of their examination, they had asked petitioner if he had any record of tips, and he failed to produce any. On the other hand, petitioner testified that he had proffered the book to the examining agent but that: "She said it wasn't important." Respondent would have us conclude from this apparent contradiction in evidence that petitioner's testimony that he kept the record cannot be believed. We have not so concluded. Respondent cites other aspects of petitioner's testimony at the trial or statements at the time of examination as indicating that his credibility as a witness is questionable. Without reviewing each of these instances here, suffice it to say that we do not agree. His recollection was plainly not strong. However, to mention one example, failure to be able to name the make of a second car owned in 1960 does not strike us as necessarily indicative of lack of veracity. The respondent rests heavily upon a purported substantial excess of petitioners' living expenses over known income as supporting his determination of tip income. Using an estimate of 1960222 living expenses prepared by petitioners, and adding certain other expenditures of record, respondent would have us find total expenses of $7,821.83, as follows: Petitioners' estimate$5,838.50Support payments to mother shownon return1,060.00Stock purchase414.69Excess of savings account depositsover withdrawals508.64Total$7,821.83 1Against that total, respondent would have us find reported available income during 1960 as follows: Salary and commissions$5,793.47Reported tips269.00State tax refund90.43Net checking account withdrawals742.99Total$6,895.89From the above totals, respondent would have us find an excess of expenses over reported income of $925.94. The estimate of expenses prepared by petitioners was introduced by respondent without any223 explanation of items by the petitioner. With respect to the $1,060 in support payments for the mother shown on petitioners' return, they also included $150 for the support of a dependent "Outside of Household" on their estimate of expenses. We have reduced the $1,060 by this amount to $910 to prevent duplication. Actually, respondent disallowed petitioners' claim of the mother as a dependent, an adjustment conceded by petitioners. We do not know the basis for the disallowance and particularly whether it involved the amount of support actually provided. Petitioner's testimony at the trial suggests the possibility that he had included the rental value of his share of his mother's house as part of his support. In any event, while we include $910 as a cash expense item, we consider it of doubtful accuracy. The amount added for stock purchase is correct. However, respondent's computation of transactions in the three savings accounts are incorrect. Using respondent's own exhibits, we find deposits totalling $987.64 instead of $847.64. More serious, respondent ignored a single withdrawal of $500. With these adjustments, the excess of deposits over withdrawals was $148.64 instead of $508.64. 224 Respondent's computation of known income appears correct. Therefore, with the above adjustments in the expense computations, we find an apparent excess of expenses over reported income of $415.25. Respondent has determined additional tip income of $2,239, a ten-fold increase. We do not believe it can be sustained. As we have pointed out above, respondent has offered no explanation whatsoever of how he arrived at his computation. Insofar as is disclosed by this record, the 20 percent tipping rate simply was pulled out of the air. On the record before us, we hold the respondent's determination of tip income to be arbitrary and unreasonable. Suspicious we may well be of the 2 percent rate reported by petitioner but suspicion cannot take the place of evidence. Such direct evidence as there is supports the petitioners. We hold that they did not understate tip income. In view of our decision, the addition to tax for failure to keep adequate records is likewise not sustained. Decision will be entered under Rule 50. Footnotes1. On brief, respondent states that $320.50 should also be added for real estate tax paid by petitioner on the house owned jointly with his mother. However, this amount is included in the list of estimated expenses prepared by petitioners. In any event, the total of expenses asserted by respondent, $7,821.83, does not contain a duplication of these amounts.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620047/	RICHARD VAN NEST GAMBRILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gambrill v. CommissionerDocket No. 81544.United States Board of Tax Appeals38 B.T.A. 981; 1938 BTA LEXIS 803; October 21, 1938, Promulgated 803 1. Held, that under section 113(a)(5) of the Revenue Act of 1928 the basis for determining gain or loss from the sale of securities acquired by a remainderman after the death of the life beneficiary of a testamentary trust is the fair market value of the property when distributed to the taxpayer at the termination of the trust. 2. Held, under the capital gains provisions of section 101 of the Revenue Act of 1928, that the securities in question were not "held by the taxpayer," petitioner remainderman, from the date of the death of the original grantor. Ben R. Clark, Esq., and Allin H. Pierce, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. VAN FOSSAN 981 This proceeding was brought for a redetermination of a deficiency of $11,753.40 in petitioner's income tax for the calendar year 1930. The questions presented are (1) the date to be used in fixing the basic valuation of securities which petitioner had received as remainderman of a testamentary trust after the death of the life beneficiary for the purpose of determining taxable gain or loss to petitioner on the sale thereof; and (2) the date to be used804 for the purpose of determining the period for which these securities were held by petitioner prior to their sale within the meaning of the capital net gains and losses provisions of the applicable statute. 1982 FINDINGS OF FACT. The facts were stipulated substantially as follows: Mary Van Nest died a resident of the County of New York, State of New York, on November 20, 1897, leaving a last will and testament which was duly admitted to probate by the Surrogate of the County of New York, letters testamentary being issued to Franklin W. Gilley, Giraud Foster, and Thomas Thacher as executors. The ninth article of this will reads in part as follows: NINTH: All the residue of my estate of every kind I give and devise as follows: One half thereof in equal shares to my daughters Mary Van Nest Jackson, Anna Van Nest Gambrill and Jennie Van Nest Foster, and my granddaughter, Mary Alice Van Nest absolutely. The other half thereof in four equal shares to my executors, to hold the same in trust, one share for the benefit of each of the same four persons to wit my said three daughters and my said granddaughter and to receive the805 income and pay the same to her during her life with full power to invest and reinvest in their discretion without any limitation whatsoever and at her death to transfer and deliver the same as she if leaving issue shall by will direct or in the absence of such direction, to her issue equally, or if she shall leave no issue, then to the survivors of the said four persons to wit my said three daughters and my said granddaughter, and to the issue of any of the said four persons who may have died, the issue to take the share which the parent would have taken if living. * * The executors proceeded with the administration of the estate and on or about January 4, 1898, they delivered to themselves, as trustees for Anna Van Nest Gambrill, the following securities at the following prices: 375 shares Farmers Loan & Trust Co., par value $25$76,406.25300 shares Harlem Railroad Co.48,000.00100 shares Pittsburgh & Fort Wayne Railroad16,900.00200 shares New York, N.H. & H.R.R.R36,600.00300 shares Delaware, lackawanna & Western Railroad23,250.0050 shares Rensselaer & Saratoga Railroad9,250.0075 shares Chicago & North Western Railroad, preferred12,225.00Total222,631.25806 Separate trusts were likewise set up by the trustees for each of the other three life beneficiaries named in the will of Mary Van Nest and securities of a value equal to the value of those set forth above in favor of Anna Van Nest Gambrill were delivered by the executors to themselves as trustees for Mary Van Nest Jackson, Jennie Van Nest Foster, and Mary Alice Van Nest. Anna Van Nest Gambrill, mother of petitioner and the life beneficiary of one of the trusts, died on March 23, 1928, without having 983 exercised the power of appointment conferred upon her by the ninth article of the will of Mary Van Nest. Her sole surviving issue was petitioner, Richard Van Nest Gambrill, who was born prior to the death of Mary Van Nest. Upon the death of Anna Van Nest Gambrill, the trustees of the trust for her benefit under the will of Mary Van Nest proceeded with the settlement of their accounts. One of the matters which had to be settled before the trustees could make distribution of the corpus to the petitioner as remainderman was the question of additional inheritance taxes due to the State of New York from the estate of Mary Van Nest on the remainder interest. In the original807 appraisal of the estate of Mary, Van Nest, filed for the purpose of determining the New York State inheritance tax, the appraiser reported that the value of this remainder interest was not at that time ascertainable and the collection of the inheritance tax on this remainder interest was therefore held in abeyance under the provisions of section 221, chapter 908, Laws of 1896 of the State of New York. Under this section the tax on the remainder interest would become due and payable when the person or persons beneficially entitled thereto should come into actual possession or enjoyment thereof. The tax was made a lien upon the property transferred, and the law provided that no trustee should be entitled to a final accounting unless he should produce a receipt sealed and countersigned by the Comptroller of the State of New York, or a copy thereof certified by him, unless a bond should have been filed as prescribed by law. On or about the 16th day of April 1928, the trustees by their attorney filed a petition in the Surrogate's Court for the County of New York, asking for an order modifying the original order fixing the New York State inheritance tax on the estate of Mary Van Nest, 808 and on or about May 1, 1928, an order was entered assessing a tax of $2,359.91 upon the value of the remainder interest passing to the petitioner. This tax was paid on or about May 24, 1928. Other payments made by the trustees prior to the transfer and delivery of the corpus to petitioner included fees for legal services, commissions to the trustees on receiving gain on the corpus of the trust and for paying out the corpus of the trust, payments to the executors of the estate of Anna Van Nest Gambrill for income collected after her death, fees for services in preparing Federal and state income tax returns, and payments to the trustees for commissions on income. Other transactions by the trustees after the death of the life tenant included the sale of $40,000 of New York City 4's of 1936, the sale of which was required in order to raise funds for the payment of the trustees' commissions and for the payment of the New York 984 State inheritance tax on the remainder interests passing to the petitioner. There was no judicial settlement of the accounts of the trustees, but the trustees accounted by receipt and release, the release being signed on May 22, 1928, by petitioner809 individually, and by Lewis Cass Ledyard, Jr., and petitioner as executors of the last will and testament of Anna Van Nest Gambrill. The balance of the corpus included in the trust as to which petitioner was remainderman was delivered to petitioner in accordance with the terms of the will of Mary Van Nest, on or about May 5, 1928. During the calendar year 1930 petitioner sold certain of the securities which had been delivered to him by the trustees. In computing gain or loss from the sale of these securities, petitioner used their fair market value as of May 5, 1928. These securities sold in 1930, together with the proceeds received therefor, the dates of sale and the fair market value as of May 5, 1928, are as follows: SecuritiesDate of sale - 1930ProceedsMay 5, 1928, value$2,000 Third Avenue Railroad 4/60Feb. 18$1,015.00$1,440.0054 shares United States Steel preferredFeb. 187,625.347,830.00122 shares Manhattan RailwayFeb. 204,544.627,160.7550 shares Rensselaer & Saratoga RailroadFeb. 196,898.007,275.00100 shares Pittsburgh, Fort Wayne & Chicago RailwayFeb. 2015,096.0016,400.0010 shares Chicago & Eastern Illinois Railway preferredFeb. 21400.85762.50405 shares Glen Alden CoalMay 640,380.3066,369.38405 shares Lackawanna securitiesJune 416,616.8020,067.35200 shares National City BankJune 939,022.4435,700.00Total131,599.35163,004.98810 The March 1, 1913, fair market value of the securities acquired prior to that date, or the cost, whichever is greater, and the cost to the trustees of the securities acquired after March 1, 1913, are as follows: SecuritiesAcquired by trusteesMarch 1, 1913 or cost to trustees$2,000 Third Avenue Railroad 4/60Mar. 12, 1912$1,717.5054 shares United States Steel preferredSept. 9, 19215,889.93122 shares Manhattan RailwayPrior to Mar. 1, 191315,982.0050 shares Rensselaer & Saratoga RailroadPrior to Mar. 1, 19139,025.00100 shares Pittsburgh, Fort Wayne & Chicago RailwayPrior to Mar. 1, 191316,200.0010 shares Chicago & Eastern Illinois Railway preferredPrior to Mar. 1, 1913516.14405 shares Glen Alden CoalAug. 16, 19212,025.00405 shares Lackawanna securitiesSept. 16, 19279,846.46200 shares National City BankPrior to Mar. 1, 191310,344.00Total71,546.03The fair market values of these securities as of March 23, 1928, the date of death of the life beneficiary, Anna Van Nest Gambrill, are as follows: SecuritiesAdjusted value Mar. 23, 1928$2,000 Third Avenue Railroad 4/60$1,380.0054 shares United States Steel, preferred7,830.00122 shares Manhattan Railway5,154.5050 shares Rensselaer & Saratoga Railroad7,225.00100 shares Pittsburgh, Fort Wayne & Chicago Railway16,500.0010 shares Chicago & Eastern Illinois Railway, preferred700.00405 shares Glen Alden Coal62,471.25405 shares Lackawanna securities19,398.46200 shares National City Bank31,400.00Total152,059.21811 985 In determining the period for which petitioner had held these securities, under the provisions of section 101 of the Revenue Act of 1928, petitioner used the date May 5, 1928, whereas respondent has determined that the period held should be computed, from November 20, 1897, the date of the death of Mary Van Nest, in the case of securities owned by her at the time of her death, and from the dates of purchase in the case of securities subsequently purchased by the trustees. OPINION. VAN FOSSAN: The first of two major questions presented by the case at bar, is the date to be used for the purpose of fixing the basic valuation in determining the gain or loss to petitioner on the sale of securities which he received as remainderman of a testamentary trust after the death of the life beneficiary. The second question is the date to be used in determining the period for which these same securities were held by petitioner prior to their sale, within the meaning of the capital gains provisions of the applicable revenue act. 2The securities which petitioner received as remainderman, after the death of the life beneficiary, are812 capable of being divided into two categories, the first being those securities which had come to the trustees as part of the trust res, and the second being those securities which were purchased by the trustees with trust funds, subsequent to March 1, 1913, and held by them until delivery to petitioner in 1928. The statutory provisions governing the basis for the determination of gain or loss are found in section 113 of the Revenue Act of 1928 and those here pertinent are as follows: (a) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * 986 (5) PROPERTY TRANSMITTED AT DEATH. - If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent's estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death813 of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor's death; * * * (b) Property acquired before March 1, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be: (1) the cost of such property (or, in the case of such property as is described in subsection (a)(1), (4), (5), or (12) of this section, the basis as therein provided), or (2) the fair market value of such property as of March 1, 1913, whichever is greater. In determining the fair market value of stock in a corporation814 as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date. As to the first above indicated issue, respondent urges that petitioner's interest under the testamentary trust was a vested interest under the controlling law of New York; (as to the securities which were a part of the original trust res ) that where property is bequeathed in trust, distribution by the executor of the donee's estate to the trustee constitutes the "distribution to the taxpayer" contemplated by the statute; (as to the securities which were acquired by the trustees with trust funds) that where trustees purchase property with trust funds, and later distribute the property so acquired to the taxpayer, such property is not "acquired by will or intestacy" within the meaning of the above quoted statute. Even though petitioner's interest under New York law may be a vested interest acquired at the date of testator's death, which was prior to March 1, 1913, and as such brings the matter within the purview of section 113(b), that section, by its terms, makes section 113(a)(5) controlling. The date of acquisition therefore is removed from the picture815 and the date for determining gain or loss is the date prescribed by section 113(a)(5). Counsel are agreed that the applicable provision of the subsection is the provision covering 987 "all other cases" and that the basis therefore is "the fair market value of the property at the time of the distribution to the taxpayer." Respondent concedes that , 3, 4, are all contrary to the position he takes on the first issue. These cases, togehter with , affd., , hold that the phrase "the time of distribution to the taxpayer" as used in the statute, means the time when this property was Actually delivered to or made available for the use of the taxpayer. 816 However, respondent cites , as squarely supporting his contentions, and urges that this Board reconsider the entire issue on the basis of the Jenkins case and the arguments presented in the brief in the case at bar. After a careful consideration of respondent's arguments and with due deference to the District Court for the District of Connecticut, we are constrained to adhere to our original position. Nothing is presented which would justify our recantation. We, therefore, hold that the basis to petitioner for the purpose of determining gain or loss on the sale of the securities in question is the fair market value of such securities on May 5, 1928, the date when the corpus of the trust was delivered to petitioner. This was the time of the "distribution to the taxpayer." Cf. ; . Respondent urges that the second issue, being concerned with the capital gains provisions of the statute, is not dependent upon the date used under section 113 for determining the basis for gain or loss and817 that the securities here involved have been held by petitioner, within the meaning of section 101 of the Revenue Act of 1928, since the respective dates on which they were acquired by the trust estate. In other words, that those securities which were a part of the original trust res were "held by the taxpayer" since the death of the testator, and those securities which were acquired by the trustee with trust funds were "held by the taxpayer" since the time of their purchase. Respondent relies on , which case directly severs any dependence of section 101 on section 113 for the determination of the holding period. 988 In addressing itself to the question presented in the McFeely case the Supreme Court, through Justice Roberts, declared that "held" and "acquired" were in effect synonymous, and stated: * * * In common understanding, to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then that from which to compute the duration of ownership or length of holding. Whether under local law title to personal property passes from a decedent to the legatee or818 next of kin at death subject to a withholding of possession for purposes of administration, or passes to the personal representative for the purposes of administration, - the title of the beneficiary, though derived through the executor, relating back to the date of death, - is for the present purposes immaterial. In either case, the date of acquisition, within the intent of the Revenue Act is the date of death. [Citing To determine the application of the McFeely case to the case at bar, it is necessary to consider the particular questions involved in the two cases. The McFeely case, which is really a consolidation of five cases, is concerned with the administration period between the date of death of the original holder and the date of actual acquisition by the respective taxpayers, and involves, respectively, residuary legatees, the donee of a widow who elected to take against her husband's will, and one taking under intestate laws. The Court states the question "whether property acquired from a decedent through intestacy, or a general bequest, is, within the meaning of the clause [held by the taxpayer for more819 than two years] held by the taxpayer from the date of decedent's death or from the date of distribution." The case at bar is concerned with the date of acquisition of a remainderman's interest in a trust estate after the death of the life beneficiary. This, we think, presents a distinctly different problem, one not ruled on in the cited case. For this reason we do not deem the McFeely case controlling here. As above noted, respondent contends that the securities which were originally a part of the trust estate were "held by the taxpayer" from the date of the death of the original grantor (1897), and those purchased with trust funds were held from the date of such purchase. This contention was based on , which, as above indicated, we have rejected as controlling in the case at bar. Petitioner urges that the controlling date is May 5, 1928, the date of delivery of the trust corpus to petitioner. Whether this date or that of March 23, 1928, the date of death of the life beneficiary, is the determinative date it is not necessary in this case to decide. The result is the same whichever be taken. The findings of fact establish820 that certain securities were sold prior to March 23, 1930, and that others were sold after May 5, 1930. None were sold in the interval between the two dates. 989 We hold that those securities sold in February 1930 had not been held by the taxpayer for more than two years and were, therefore, not capital assets, while those sold on May 6 and in June 1930 had been held by taxpayer for more than two years and were, therefore, capital assets. Decision will be entered under Rule 50.Footnotes1. Sec. 101, Revenue Act of 1928. ↩2. Sec. 101, Revenue Act of 1928. ↩3. Reversed on another issue, ; . ↩4. Reversed on another issue, mandate C.C.A., 2d Cir., on stipulation to abide by decision in ; . ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620048/	Oscar L. Bowman v. Commissioner. Oscar L. Bowman and Bertha Bowman v. Commissioner. Richard D. Bowman v. Commissioner. Richard D. Bowman and Dorothea Bowman v. Commissioner.Bowman v. CommissionerDocket Nos. 41809-41812.United States Tax CourtT.C. Memo 1955-14; 1955 Tax Ct. Memo LEXIS 329; 14 T.C.M. (CCH) 46; T.C.M. (RIA) 55014; January 24, 1955329 Roger P. Stokey, Esq., Allan H. W. Higgins, Esq., 84 State Street, Boston, Mass., and Frederick J. Robbins, Esq., for the petitioners. Paul J. Henry, Esq., and Joseph Landis, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined the following deficiencies: 50%DocketFraudNo.YearIncome TaxPenalty418091946$ 6,942.49$ 3,471.2541809194722,914.6211,457.31418101948776.9241810194996.804181119431,999.17999.58418111944760.00380.00418111945580.00290.00418111946831.15415.574181119471,408.27704.144181219481,767.84883.92418121949523.68261.84All fraud issues have been conceded by the Commissioner. The Commissioner also concedes there are no deficiencies in Docket No. 41811. After other concessions the remaining issues for decision are With respect to Dockets 41809 and 41810 1. Did petitioners have unreported income of $18,797.85 in 1946; of $40,659.27 in 1947; of $4,100 in 1948; and of $500 in 1949? 2. Is the deficiency for 1946 barred by the statute of limitations? With330 respect to Docket 41812 1. Did petitioners have capital gains on the sale of real property which should have been taken into account in the respective amounts of $7,011.67 in 1948 and $2,509.76 in 1949? Findings of Fact General Findings Some of the facts have been stipulated, are so found and the stipulation is included herein by reference. Oscar L. Bowman (hereafter called petitioner) and Bertha M. Bowman are husband and wife. Richard D. Bowman is their son and Dorothea Bowman is his wife. The income tax returns in question were filed with the collector of internal revenue for the district of Massachusetts. Findings with reference to Dockets 41809 and 41810 Petitioner was born in Sweden in 1878. He was married in 1906 and resides with his wife in Beverly, Massachusetts. The couple has five children born in 1906, 1909, 1910, 1912, and 1920, all of whom lived with their parents until they reached adulthood. From about 1897 until 1910 petitioner worked in grocery stores and markets in Massachusetts cities. From 1910 to 1915 he owned stores of his own and at the end of that time he sold supplies to boats of Gulf Refining Company and New England Coal and Coke Company331 at Beverly, Massachusetts. From 1915 to 1919 petitioner was a manager of a National Butchers Co. store in Salem, Massachusetts and from 1920 to 1929 he was a district manager for that company with six stores under his supervision. In 1929 he opened his own store in Salem. This store was operated in partnership with his sons Richard and Milton from 1931 to 1933, when it was incorporated. The corporation was dissolved in 1943, and since that time petitioner has operated the store as sole proprietor. Its business is that of retail provisions. He had income in each of the years 1919 through 1945 ranging from at least $2,500 to $7,600. During his boyhood petitioner learned the habit of thrift and the living habits of his family over the years have been on the frugal side. As a child petitioner received a gift of 20,000 Swedish crowns from his grandparents in Sweden which amounted to about $9,000 when turned over to him at the age of eighteen by an uncle. He later received a bequest of $5,000 from a man living in Providence, Rhode Island, who had befriended him when a boy. Together with these funds petitioner had accumulated by saving, approximately $79,000 in cash by January 1, 1946, which332 he kept in a box hidden in his home. Throughout the years in question petitioner's only source of income, aside from small amounts of dividends, was the provision business which he operated. During the years 1946 through 1949, petitioner maintained the accounts of his store under the so-called National Cash Register Company system which involves the use of two books. One book was entitled "Daily Record of Cash, Sales and Money Paid Out." This book records on a daily basis all cash paid out, all cash received, cash sales, charge sales, amounts received on accounts, charge sales returns, refunds on cash sales, and total sales. This book contains summary pages whereby all of said cash and sales transactions are summarized on a monthly basis and also on a yearly basis. The books now available start with July 22, 1946 for the year 1946 and contain a monthly summary for the entire year. The books for the years 1947 through 1949 are complete. The Section B book is entitled "Daily Record of Classified Disbursements." This book records on a daily basis all cash paid out, deposits in bank account, checks drawn, and a description of all disbursements both as to accounting classification and333 identity of the recipient of each payment. This book also contains summary pages whereby all disbursements are summarized on a monthly and a yearly basis. The books now available start with August 19, 1946 for the year 1946 and do not contain a monthly summary for the entire year. The books for the years 1947 through 1949 are complete. Petitioner's books above referred to show his total net cash and charge sales for the year 1946 to be $88,224.05, which amount was reported as total receipts of his retail provision business in his 1946 income tax return. These books show petitioner's total net cash and charge sales for the year 1947 to be $139,412.48, which amount was reported as total receipts of his retail provision business in his 1947 income tax return. Petitioner's books above referred to show his total net cash and charge sales for the year 1948 to be $140,120.80, which amount was reported as total receipts of his retail provision business in the petitioner's 1948 income tax return. The books show petitioner's total net cash and charge sales for the year 1949 to be $129,496.04, which amount was reported as total receipts of his retail provision business in the petitioner's334 1949 income tax return. In addition to the National Cash Register system books, the store maintained during all of the years in question complete cash journals, an accounts receivable ledger, checkbooks, and subsidiary invoice books. All these books and records were introduced in evidence by the petitioner. During all of the years in question all of the books of the store were kept by an experienced bookkeeper who is no relation to petitioner and who has not been employed by petitioner since 1950. All of the purchases, sales, and all receipts and disbursements of the store were accurately recorded in the books during all of the years in question. Although no inventory ledger was maintained by the store, a physical inventory was taken by petitioner at the end of each year; and such inventories were reported on the petitioner's income tax return, and were properly reflected in the computation of the income of the store for each year. The petitioner's income tax return for each year in question was prepared by a certified public accountant. The returns were prepared by the accountant on the basis of the books and records specified above which were maintained by the bookkeeper. 335 The store books were kept and income was reported on an accrual method of accounting at all times relevant to these proceedings. However, several items were not treated by petitioner on this method. They were: (1) Waste fats and bones. In the operation of the provision business waste fats and bones are the residue from meat purchased for sale. During the years in controversy certain of the proceeds from the sale of this residue was turned over to petitioner's son Richard who worked in the store. The bone income was not recorded on the books and was not deducted as an expense of the business. The amounts turned over to Richard were to some extent used to defray expenses such as gas, oil, and meals while he was engaged in driving a vehicle on store business. The amounts involved in the sale of bones and fat have been stipulated. These amounts were income of petitioner in the amounts stipulated for the respective years. Of the amounts turned over to Richard, $240 in each of the years 1946, 1947, 1948, and 1949 were proper business expenses of petitioner. (2) Meat purchases. On July 26, 1946, petitioner made two purchases of meat from Benson Bros. Corporation in the total amount336 of $13,038.90, which meat was stored by him in a warehouse in Boston, Massachusetts, until needed at the store. The meat so purchased was paid for in cash by petitioner in 1946 at the time of purchase. Petitioner later drew checks on the store to reimburse himself for the above meat purchases. The checks drawn and the amounts thereof are as follows: Charge toPayments toMerchandiseDate - 1946O. L. BowmanPurchasedSeptember$ 1,496.40$ 1,496.40October1,501.041,501.04October1,502.201,502.20October1,502.781,502.78October1,515.541,515.54November1,506.411,506.41December869.27869.27$ 9,893.64$ 9,893.641948November3,600.003,600.00Total$13,493.64$13,493.64The purchases account of the store was charged with the above purchase of meat only at the time petitioner was reimbursed for such purchase. These purchases of meat were delivered to the store in 1946. The fact that petitioner was reimbursed for $455 more than the initial purchase price, as set forth above, is explained by costs, including handling charges paid for by petitioner. (3) Cash withdrawals. During the years in question in these proceedings, 337 petitioner drew checks on the store checking account for his personal account and made cash withdrawals in the following amounts: YearAmount1946$ 6,294.5819479,762.92194810,981.2119498,597.08 All of the cash withdrawals and certain of the check payments were charged to the personal account of petitioner on the books of the store. Other check payments appear only in the checkbook and cancelled checks of the store. Those checks not charged to the account of the petitioner were paid for in full by the petitioner at the time. All checks for petitioner's benefit were either paid for by him or charged to his personal account. None of the above amounts were claimed as deductions in the computation of the business income of the store. The personal charges paid by check, which were not shown as charges to the personal account of the petitioner on the books, involved household bills paid from the store's checking account for petitioner's convenience. Petitioner had no personal checking account of his own at the time. Petitioner reimbursed the store from his own cash for all of such personal check payments so that there was no net withdrawal of funds from the338 store as a result of such check payments. Where petitioner did not reimburse the store for personal payments, they were always charged on the books to his personal account. During the taxable years petitioner made cash loans and gifts to his son Richard as follows: YearLoansGifts1946$13,250.00$7,697.44194730,000.004,217.4719483,600.00He also made a cash loan of $8,870 to his son Milton in 1947. The deficiencies for 1946 and 1947 set forth in the opening statement herein were based on a report of examination which explained the adjustments as follows: "1946 Unallowable deductions and additional income: a. Additional IncomeIncome not previously re-ported$15,000.00b. Merchandise PurchasedChecks erroneously chargedto merchandise purchased3,297.85c. FoodEstimated cost of foodused for personal con-sumption500.00Total addition to taxable in-come$18,797.85"1947 Unallowable deductions and addi-tional income: a. Additional IncomeIncome not previously re-ported$39,290.00b. Merchandise PurchasedChecks erroneously chargedto merchandise purchased869.27c. FoodEstimated cost of foodused for personal con-sumption500.00Total addition to taxableincome$40,659.27"339 The deficiencies for the years 1948 and 1949 were explained as follows: "1948 Unallowable deductions and additional income: a. Merchandise PurchasedCheck made payable toOscar L. Bowman andcharged to merchandise,but the check is depositedto the bank account ofRichard L. Bowman, sonof Oscar L. Bowman, andthe expense therefore dis-allowed$ 3,600.00b. FoodEstimated cost of foodused for personal con-sumption500.00Total addition to taxableincome$ 4,100.00"1949 Unallowable deductions and additional income: a. FoodEstimated cost of foodused for personal con-sumption$ 500.00"At the hearing of these proceedings, without amendment to the pleadings, the Commissioner abandoned the above adjustments for the taxable years and now relies on a net worth computation to sustain his determination of unreported income. The following is a comparison of the unreported income as determined in the statutory notice and as shown in the net worth statement: Total additionsUnreportedto income perincome by netstatutory noticeworth method1946$18,797.85$31,063.65194740,659.2750,945.9419484,100.00922.421949500.002,050.75340 In the taxable years net income was reported as follows: 1946$3,003.2019479,594.6819485,190.1619497,692.70The return for 1946 was timely filed. The statutory notice for 1946 was sent to petitioner on March 11, 1952. Opinion The Commissioner determined the deficiencies here in question on the basis of certain items of "unallowable deductions and additional income." At the hearing this method of determining the deficiencies was abandoned and reliance was placed on the net worth method instead. This shift in position was explained by counsel in response to a question by the Court "* * * it happens the agents did set this case up with the specific items and their reports which I can show your Honor they are corroborated by a net worth statement and on an analysis of the case it became the opinion of the Appellate Division and my opinion that the corroboration was better than their specific items, so for the purpose of trial we set it up on a net worth basis." Petitioner contends that it was improper to receive in evidence computations based on net worth and further, that if such computations are permitted to be introduced, at least the burden341 of proof is thereby shifted to the Commissioner. We do not agree with either contention. The basic issue, which is whether petitioner had unreported income and the amount thereof, remains the same in any event. No increased deficiency has been asked by the Commissioner. He has simply changed the theory of his determination. The net worth computations are based for the most part on stipulated figures. Whether they are sufficient when considered along with the prima facie correctness of the Commissioner's determination, in the face of other evidence of record, to sustain the determination is another matter. Cf. Morris Lipsitz, 21 T.C. 917">21 T.C. 917. The net worth computations were properly received in evidence and the burden of proving error in the Commissioner's determination remained with petitioner. We think petitioner has met this burden and except for certain items which will be referred to below, we think income has correctly been reported on the returns in question. It has been stipulated that aside from a small amount of dividends, petitioner's only source of income was his provision business. All of the books and records of that business, with the minor exception noted342 in our findings, are in evidence. The method of keeping books and of preparing the tax returns has been explained by qualified witnesses. No fraud is claimed, no major discrepancies in the books have been disclosed, and unless we accept unqualifiedly the net worth computations as proving unreported income, the Commissioner's determination has been successfully attacked. As stated above, most of the net worth items have been stipulated. However, petitioner assails the Commissioner's computation principally on the ground that it does not adequately account for beginning cash on hand. In this respect the net worth statement recognizes only comparatively small amounts carried in petitioner's savings accounts. Petitioner, on the other hand, testified to the accumulation of approximately $79,000 in cash through savings over his considerable lifetime of gainful employment coupled with gifts and bequests of some $14,000. On this point the question is principally one of credibility. Petitioner alone testified as to this accumulation. At the time of the hearing he was 76 years old. His testimony necessarily covered events extending over a period of approximately 50 years. We carefully observed343 his demeanor while testifying and have given extended consideration to his testimony in the light of inconsistencies claimed to have been developed on cross-examination and of the contended for improbability of his story. In our opinion, petitioner's testimony was credible and we have found as a fact that on January 1, 1945, he had saved and accumulated the cash hoard as he testified he did. If he had not, there is no other plausible explanation for the considerable amounts of cash gifts and loans which he made to his sons or the source of the more than $13,000 in cash which he advanced at one time for the purchase of meat. We are unable to believe that the provision business produced these large amounts of cash during the years in question. The recent decisions of the Supreme Court, Smith v. United States, 348 U.S. 147">348 U.S. 147; Holland v. United States, 348 U.S. 121">348 U.S. 121; United States v. Calderon, 348 U.S. 160">348 U.S. 160; and Friedberg v. United States, 348 U.S. 142">348 U.S. 142 contain extended discussions of the care which must attend the use of the net worth method of computing income in tax cases. Accepting, as we do, petitioner's testimony that he had cash on344 hand amounting to some $79,000 at the beginning of the period here involved, and after consideration of all the other evidence of record we believe the net worth computations made in this case by the Commissioner to be unreliable. From the entire record we conclude that petitioner properly reported his income for the taxable years in all respects except with reference to the amounts relating to waste bones and fat and the treatment given to the meat purchase for cash in 1946, and petitioner's reimbursement therefor in 1946 and 1948 as shown in our findings of fact. Those findings and the stipulated facts with respect to those items should enable the parties to make proper adjustments in a Rule 50 computation. On the statute of limitations issue respondent contends that the deficiency for 1946 is not barred because petitioner omitted from gross income an amount in excess of 25 per cent of the amount of gross income stated in the return. Whether this is so can be determined in the Rule 50 computation. If the computation shows he did not omit an amount in excess of 25 per centum of the gross income stated in the return the deficiency is barred by section 275(c) of the Internal Revenue345 Code of 1939. Findings of Fact - Docket 41812 On December 15, 1947, Richard D. Bowman (hereafter called petitioner) purchased adjoining properties known as 5 Palmer Street, a residence, and 173 Lafayette Street, an apartment building, in Salem, Massachusetts, for a total consideration of $55,000. The purchase and sale agreement made no allocation of the purchase price between the two parcels. The parcel at 173 Lafayette Street had been offered to petitioner shortly before December 15, 1947, for $45,000. Petitioner was told the two properties had to be sold together to "clean up" an estate and that the residence could readily be resold for $12,500. Petitioner did not want the residence property but was interested in the apartment. After purchasing both in the lump sum transaction he resold the residence property within two weeks for $12,500, paying a $500 commission. On his return, petitioner reported his cost basis for the residence property as $12,000. The Commissioner determined the cost basis of the property to be $8,866 on the relationship which the assessed valuations of each of the two properties bore to their total assessed valuation. Petitioner's cost basis for the property346 at 5 Palmer Street was $9,500. On December 1, 1947, petitioner purchased adjoining properties in Lynn, Massachusetts, known as 34 Park Street; and 6-8, 10-12, 14-16 and 20 Bennett Circle for a total unallocated consideration of $45,000. On March 2, 1948, petitioner sold the house located at 20 Bennett Circle for $9,500 with a sales' expense of $475. In his determination of deficiency the Commissioner used a cost basis for this property of $5,180. Petitioner claimed a cost basis of $9,025. Petitioner sold the house at 34 Park Street on May 10, 1949, for $13,500 with a sales' expense of $675. Petitioner claimed a cost basis of $12,444 for the property. The Commissioner determined a cost basis of $13,715. In determining the gain and loss on 20 Bennett Circle and 34 Park Street the Commissioner treated as the respective costs of the properties amounts arrived at by applying the assessed value of the five pieces of property purchased in the lump sum transaction to the lump sum purchase price. The accountant who prepared petitioner's 1948 and 1949 tax returns computed the adjusted cost of the property at 20 Bennett Circle on the basis of his opinion as to the price paid for it by petitioner, 347 based on the price for which it was sold within three months from the date of purchase. The accountant computed the adjusted cost basis of the remaining properties by applying the ratios of their assessed values to the balance of the total cost of such properties after subtracting the cost of the property at 20 Bennett Circle. In 1938 petitioner acquired a house in Wenham, Massachusetts, for $4,500 which he sold on May 21, 1949, for $11,000. In the interim between the purchase and sale improvements were made to the house consisting of insulation, stairways, porch and a fireplace. The cost of these repairs was $1,200. Petitioner's cost basis of the Wenham property was $5,700. Opinion Several of the adjustments made by the Commissioner in Docket No. 41812 have not been pressed and are treated as abandoned. The primary question left is properly to allocate the amount of the lump sum purchase price of several pieces of property among the various parcels for the purpose of determining the cost basis of the parcels resold by petitioner. With reference to the property known as 5 Palmer Street we have found the cost basis to be $9,500. This finding was made after taking into consideration348 the offer made shortly before the date of purchase for the other parcel involved in the transaction. For the other properties; i.e., 34 Park Street and 20 Bennett Circle, we approve the Commissioner's determination in the absence of anything proposed by petitioner which we could consider a better allocation than that made by the Commissioner. J. S. Cullinan, 5 B.T.A. 996">5 B.T.A. 996. Turning to the Wenham property, we have found its cost basis to be $5,700. In his determination the Commissioner allowed a credit of $591 for improvements. We think that sufficient evidence has been introduced to support an expenditure of $1,200 for the claimed improvements and have so found. The Commissioner has conceded there are no deficiencies in Docket No. 41811. Decision will be entered for the petitioner in Docket No. 41811. Decisions will be entered under Rule 50 in Docket Nos. 41809, 41810, and 41812.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620051/	DELBERT R. AND JACKIE A. STURGILL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSturgill v. CommissionerDocket No. 9269-84.United States Tax CourtT.C. Memo 1987-86; 1987 Tax Ct. Memo LEXIS 82; 53 T.C.M. (CCH) 120; T.C.M. (RIA) 87086; February 12, 1987. 82 Petitioner mined coal for a dollar amount per ton under a mining agreement with the owner of the coal in place. Held: Petitioner had no economic interest in the coal and was not entitled to a deduction for depletion. Carle E. Davis,Robert E. Draim,83 Kurt R. Magette and Gerald E. Wilson, for the petitioners. Scott Anderson and Marion B. Morton, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined deficiencies in petitioners' Federal income tax for taxable years ending December 31, 1981 and 1982 in the amounts of $1,146.04 and $51,690.16, respectively. After concessions 1, the only remaining issue in this case is whether petitioners are entitled to certain depletion deductions based on petitioners' mining activities in calendar years 1981 and 1982. FINDINGS OF FACT Petitioners Delbert R. Sturgill and Jackie A. Sturgill are husband and wife whose legal residence at the time they filed their petition herein was Wise, Virginia. Petitioners filed Federal income tax returns for calendar years 1981 and 1982 with the Internal Revenue Service Center, Memphis, 84 Tennessee. On or about November 12, 1982, petitioners filed an amended Federal income tax return for calendar year 1981, which claimed a refund in the amount of $39,403.80, with the Internal Revenue Service Center, Memphis, Tennessee. During calendar years 1981 and 1982, Delbert R. Sturgill operated a sole proprietorship under the name Sturgill Mining Company ("Sturgill Mining"). Since no items involving Jackie A. Sturgill are in controversy in this case, Delbert R. Sturgill and Sturgill Mining are hereinafter collectively referred to as "petitioner." Petitioner, an experienced coal miner, was certified by the State of Virginia as competent to operate a coal mine in accordance with good mining practices. 2Petitioner entered into a mining agreement dated November 1, 1981 (the "mining agreement") with Flat Gap Mining, Inc. ("Flat Gap"). The mining agreement provided that petitioner would85 mine coal from the Taggart seam of coal through two mine portals in Wise County, Virginia designated as "Mine A" and "Mine B" using "deep mining" methods. 3 The mining agreement was to continue until the earlier of "two years from the date of execution hereof, or, until all of the mineable and merchantable coal has been mined to exhaustion * * " The mining agreement could also be terminated by petitioner's default thereunder. Paragraph 3(a) required petitioner to deliver its "total daily production to a loading facility designated by (Flat Gap)." Flat Gap was required to deliver approximately 10,000 tons of coal a month. Paragraph 3(b), stated petitioner would be paid a price of $34 per "clean ton" for all "merchantable and marketable coal" mined pursuant to the agreement, and provided "the price per ton . . . may vary according to deviations in the market." Paragraph 3(d) provided that an amount equal to $2 per "clean ton" would be withheld from payment to petitioner and be placed "into a non interest bearing escrow account (the "escrow account") as security for the faithful compliance of (petitioner) hereunder." The mining agreement stated that Flat Gap was the "lease hold owner" 86 of the coal but was silent as to allocation of depletion allowances and economic interests in the coal in place. Petitioner and Flat Gap engineers inspected the mines and designated the areas of Mine A and Mine B that were economically feasible to mine. Both Mine A and Mine B contained Taggart coal, a metallurgical grade coal distinguished from steam coal by its high coke quantity and high BTU rating. Because of its unique characteristics, Taggart coal ordinarily brings a premium price on the open market equal to approximately $15 per ton higher than steam coal during the years in issue in this case. The coal mined in both Mine A and Mine B contained ash, an impurity which Flat Gap would "wash out" of the coal ore to produce "clean coal." Petitioner was paid by the number of "clean tons" 4 of coal delivered to Flat Gap. Petitioner delivered87 pre-washed coal to Flat Gap's tipples. Flat Gap then washed the coal ore to remove the ash and reported to petitioner, the day after petitioner delivered the coal ore to the tipple, the resulting clean tonnage. Mine A yielded coal with low ash and a low reject percentage. Mine B had more ash and a higher reject percentage than Mine A. The reject percentage of coal mined from Mine A and Mine B varied on a daily basis. The reject rate of coal mined from Mine A during the term of the mining agreement varied from 23.14 percent to 30.01 percent, while the reject rate for coal mined from Mine B varied from 32.27 percent to 49.10 percent. The average reject rate for coal mined from Mine A during the term of the mining agreement was 26.24 percent compared to 42.38 percent for coal mined from Mine B. Because of its relatively low ash content, Mine A was more profitable to mine than Mine B. To ensure that petitioner worked Mine B and not just Mine A, the mining agreement provided that $2 per clean ton, otherwise payable to petitioner, be withheld by88 Flat Gap and placed in the escrow account. 5In addition to the mining agreement, petitioner entered into a conditional89 sales agreement dated November 1, 1981 (the "purchase agreement") with Flat Gap. The purchase agreement provided that petitioner would purchase certain equipment from Flat Gap for a purchase price of $290,000, payable at the greater of: (i) $20,000 per month, or (ii) $3 per clean ton mined under the mining agreement. On May 15, 1982, petitioner made the final payment for the equipment he purchased from Flat Gap under the purchase agreement. Final payment consisted of a transfer of the money released from the escrow account ($110,130.32) plus $14,674.20 withheld by Flat Gap from payments due taxpayer for coal mined from April 16, 1982 through April 30, 1982. Neither petitioner nor Flat Gap intended at the time of entering into the mining agreement that the funds in the escrow account be used by petitioner as part of the purchase price of the equipment. Mine A and Mine B were both "panel mines." Under the United Mine Workers Association ("UMWA") rules, a panel mine must be operated by certain designated members of UMWA known as a "panel." The panel involved in Mine A and Mine B consisted of men with high seniority. As a result, petitioner incurred premium labor costs, including90 substantial fringe benefits under the panel's union contracts with petitioner. As of November 15, 1981, petitioner had delivered to Flat Gap 3,415 clean tons from Mine A and 2,397 clean tons from Mine B for a total gross price due petitioner of approximately $197,500. Due to a general collapse of the market for Taggart coal, Flat Gap was unable to sell all the coal mined by petitioner so the Mining Agreement was terminated by mutual consent under a letter agreement dated October 7, 1982. OPINION Since enactment of the Internal Revenue Code of 1913, Federal income tax law has allowed a special deduction for the depletion of wasting assets. The purpose of the deduction is to compensate the owner of the wasting asset for the part used up in production. Helvering v. Bankline Oil Co.,303 U.S. 362">303 U.S. 362, 366 (1938). In Commissioner v. Southwest Exploration Co.,350 U.S. 308">350 U.S. 308, 312 (1956), the Supreme Court stated the depletion deduction was "designed to permit a recoupment of the owner's capital investment in the minerals so that when the minerals are exhausted, the owner's capital is unimpaired." Section 611(b)(1)6 provides that where wasting assets91 are leased, the depletion deduction shall be "equitably apportioned between the lessor and lessee." Since minerals are extracted under numerous legal relationships between the owner of the minerals and the extractor, the question of who is entitled to the depletion deduction has continually been litigated in the courts. Addressing the depletion of oil deposits, in Palmer v. Bender,287 U.S. 551">287 U.S. 551 (1933), the Supreme Court held: The language of the statute (the predecessor to IRC sections 611 and 613) is broad enough to provide, at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital * . It is enough if * * he has retained the right to share in the oil produced. If so, he has an economic interest in the oil, in place, which is depleted by production. * * * [Palmer v. Bender,supra at 557.] The "economic92 interest" test established by the Supreme Court in Palmer v. Bender,supra, has been explained in section 1.611-(1)(b)(1), Income Tax Regs. That regulation provides, in relevant part, that: A person who has no capital investment in the mineral deposit * * does not possess an economic interest merely because through a contractual relationship he possesses a mere economic or pecuniary advantage derived from production. For example, an agreement between the owner of an economic interest and another entitling the latter * * * to compensation for extraction * * * does not convey a depletable economic interest. * * * The parties agree if petitioner can establish that he had an economic interest in the mineral deposits covered by the mining agreement, petitioner would be allowed depletion deductions in the amounts of $74,671.96 and $136,895.26 in calendar years 1981 and 1982, respectively. In Parsons v. Smith,359 U.S. 215">359 U.S. 215 (1959), the Supreme Court listed seven factors which indicate that a contract miner before it had no "economic interest" in the coal he mined. In Paragon Jewel Coal Co. v. Commissioner,380 U.S. 624">380 U.S. 624 (1965)93 revg. Merritt v. Commissioner,330 F.2d 161">330 F.2d 161 (4th Cir. 1964), revg. 39 T.C. 257">39 T.C. 257 (1962), the Supreme Court used those factors to develop a test to determine whether or not coal mining contracts gave contract miners any "economic interest" in coal in place. The Court listed those factors as follows: (1) that (the coal miners') investments were in their equipment, all of which was movable - not in the coal in place; (2) that their investments in equipment were recoverable through depreciation - not depletion; (3) that the contracts were completely terminable without cause on short notice; (4) that the landowners did not agree to surrender and did not actually surrender to (the contract miners) any capital interest in the coal in place; (5) that the coal at all times, even after it was mined, belonged entirely to the landowners, and that (the contract miners) could not sell or keep any of it but were required to deliver all that they mined to the landowners; (6) that (the contract miners) were not to have any part of the proceeds of the sale of the coal, but, on the contrary, they were to be paid a fixed sum for each ton mined and delivered 94 ; and (7) that (the contract miners), thus, agreed to look only to the landowners for all sums to become due them under their contracts. We view the principles established by the Supreme Court in Paragon as controlling for our purposes. Tested against the seven factors listed in Paragon, we conclude petitioner did not have an "economic interest" in the coal he mined. The first two factors of the Paragon test relate to what investments were made by the coal extractor and how those investments were recovered. Petitioner argues he made "substantial expenditures for fixed costs, such as labor, permits, licenses, and maintenance, which were recoverable if at all only through production of coal." While the evidence does support petitioner's claim that he incurred premium labor costs under the UMWA contract, the cost of labor, permits, licenses and other similar operating expenditures are not different from those incurred by the taxpayer in Paragon. The taxpayer in Paragon was required to "provide his own men, equipment, chutes, and bins, and to extend a road built by Paragon to the mine portal if necessary. All expenses of opening and operating the mine were95 borne by the contractor". 39 T.C. at 275. The "premium" petitioner paid for labor does not entitle petitioner to claim an economic interest in the coal itself. Our focus is on the nature of the expenditure, not the amount. Petitioner further argues that "petitioner's escrow payments in combination with his obligations to mine substantial quantities of merchantable and marketable coal is economically equal to a royalty payment" and infers that the "royalty payment" evidences his investment in the coal in place. In support of his argument, petitioner cites a dissent to the majority opinion in Ramey v. Commissioner,47 T.C. 363">47 T.C. 363 (1967), wherein the author of this opinion stated that a royalty paid by the contract miner to the lessee was one factor which distinguished the contract miner in that case from the situation presented in Paragon.However, the situation in Ramey is factually dissimilar to the one in the instant case. In Ramey the majority stated that the royalty, specifically provided in the mining agreement, was "in substance * * * no more than a reduction in the price which (taxpayers) would pay where the coal delivered was mined96 from its own property." 47 T.C. at 375. This author dissented to the majority's conclusion because nothing in the record supported the conclusion that the arrangement was not a true royalty. This is not true in the instant case. The contract between petitioner and Flat Gap clearly states that the purpose of the escrow account was to secure petitioner's faithful compliance with "each and every covenant, term and condition of the agreement." Petitioner and James LaForce, general manager of Flat Gap, testified that the purpose of the escrow account was to assure that petitioner mine coal from Mine A and Mine B and to protect Flat Gap in the event petitioner concentrated his mining efforts on the coal located in Mine A. The mining agreement states, and petitioner and his witness verify, the meaning and intent of the parties in establishing the escrow account. The escrow account more closely resembles a liquidated damages provision than a royalty. No where in the mining agreement, or in any testimony before this Court, has it been suggested that the purpose of the escrow account was to serve as the economic equivalent of a royalty payment. A royalty payable on coal mined97 is payable in any event -- the amount placed in escrow here was paid to petitioner for mining the coal and was payable to Flat Gap only for petitioner's failure to perform terms of the agreement -- it was not paid for either coal or the right to mine coal. The third factor cited in Paragon is whether or not the mining contract was terminable without cause or on short notice. Petitioner argues he had "an nonterminable right and obligation to mine coal in a particular area until exhaustion." Thus he distinguishes his contract from the one found in Parsons which the court found to be "completely terminable without cause on short notice." 359 U.S. at 227. The "term" of the mining agreement ended upon the earliest to occur of: two years from the date of execution; until the "mineable and merchantable coal" had been mined to exhaustion; or until the mining agreement was terminated pursuant to its terms. Besides the two-year period and mining to exhaustion, the mining agreement could only be terminated by the default of petitioner under the mining agreement. Petitioner was obligated to mine at least 10,000 clean tons of coal per month. Both Flat Gap and petitioner98 testified the parties contemplated that petitioner would mine both Mine A and Mine B to exhaustion before the end of the two-year period. Petitioner argues, therefore, the mining agreement conferred upon him the right to mine until exhaustion of the coal reserves. Petitioner's production under the mining agreement substantiates petitioner's claim that both Mine A and Mine B would have been exhausted before expiration of the two-year period. After only seven months of production, Mine A was approximately one month from exhaustion and Mine B was approximately one year from exhaustion. We conclude petitioner had an implied nonterminable right to mine coal until exhaustion. The Supreme Court has recognized that a nonterminable right to mine until exhaustion minerals in a particular area is "a very real and substantial interest" in such mineral. Lynch v. Alworth-Stephens Co.,267 U.S. 364">267 U.S. 364, 369 (1925). However, the Supreme Court stated in Helvering v. Bankline Oil Co.,303 U.S. 362">303 U.S. 362, 367 (1938) and again in Paragon that "the right to mine even to exhaustion, without more, does not constitute an economic interest under Parsons, but is a mere economic99 advantage derived from production, through a contractual relation to the owner, by one who has no capital investment in the mineral deposit." 380 U.S. at 634-635. The right of petitioner to mine coal from certain areas to exhaustion, or until the agreement was terminated by time or some other reason alone, gave petitioner no economic interest in the coal in place. The fourth factor is whether or not the landowner agreed to surrender or did actually surrender to the contract miner any capital interest in the coal in place. Petitioner argues "Section 3(b) of the mining agreement states that Flat Gap would pay petitioner 'for all merchantable and marketable coal mined hereunder . . .' this phrase and the remainder of the mining agreement indicate that Flat Gap was paying petitioner for coal and not for services." Petitioner does not state what additional language in the mining agreement supports his claim, and we cannot find any. We are to infer the above language indicates Flat Gap conferred, or at least acknowledged, petitioner's capital interest in the coal in place. Petitioner's argument is meritless. In this regard, petitioner and the contract miner in Paragon100 are indistinguishable. To hold otherwise would infer that every owner of mineral deposits necessarily confers upon the extractor a capital interest in the mineral in place. This would nullify the analysis established by the Supreme Court in Paragon, for every contract miner would have a depletable economic interest. Flat Gap did not agree to surrender and did not actually surrender to petitioner any capital interest in the coal in place. The fifth factor listed in Paragon relates to who has control over the coal both before and after it is mined. Specifically, we are required to determine whether petitioner "could not sell or keep any of (the coal) but was required to deliver all that he mined to the landowners." Petitioner does not claim he had any control over the coal before it was mined. Instead, petitioner argues that "when the metallurgical coal market collapsed, petitioner independently verified that there were no other purchasers for his coal." Apparently, we are to conclude from this argument that petitioner was not required to deliver all the coal he mined to Flat Gap but could sell the coal to third parties. Petitioner's direct testimony on this point is as101 follows: THE COURT: Weren't you required to sell all the coal that you mined back to Flat Gap? THE WITNESS: Yes, sir, to an extent, but when he (Flat Gap) got to the point that he absolutely lost all his market, it was a mutual agreement that I could take it wherever I wanted to and if I could sell it, that was fine. Under the mining agreement petitioner was required to deliver all coal mined to Flat Gap. Only when the market collapsed was petitioner allowed by "mutual agreement," to try to find a market for the coal. Although Flat Gap, in the eleventh hour, may have waived its right to require delivery to it of all coal mined by petitioner, this does not necessarily entitle petitioner to sell the coal upon terms he alone deemed appropriate. Furthermore, even if petitioner had found a market for the coal there is no indication that Flat Gap would not have required petitioner to deliver all proceeds from the sale to Flat Gap, or in the alternative, insist that Flat Gap sell the coal to the purchaser as was the customary business practice. There is insufficient evidence to conclude petitioner could have acted in any capacity other than a mere agent in a sale to a third party. 102 We find such a role, particularly one which was never fulfilled by petitioner, inadequate to conclude petitioner had an economic interest in the coal in place. The sixth and seventh factors of the Paragon test focus on whether petitioner received a "fixed sum" for the coal delivered to Flat Gap and whether petitioner looked only to Flat Gap for payment for the coal he mined under the mining agreement. The mining agreement provided that the price per ton paid to petitioner "may vary according to deviations in the market" and in fact, payments to petitioner did occasionally vary. 7 Petitioner argues that the phrase "merchantable and marketable coal" contained in the mining agreement meant that "petitioner agreed to produce and sell, and Flat Gap agreed to purchase, only coal that produced a reasonable profit for both petitioner and Flat Gap. As Flat Gap admitted at trial, petitioner had to look to the eventual sale to an ultimate customer for petitioner's return on his investment in coal in place." We disagree with petitioner's analysis of testimony given at trial. The finality of the sale at Flat Gap's tipple is evidenced by testimony given by James LaForce as follows: 103 QUESTION: * * * What happened or why did you stop selling coal to Alla-Ohio? That's the company that you were selling the export coal -- ANSWER: They went bankrupt. QUESTION: They went bankrupt so you lost that market. ANSWER: That's correct. QUESTION: When they went bankrupt, did they owe you for any of the coal which you shipped to them? ANSWER: Yes. QUESTION: Did you attempt to get -- Did some of the coal that you shipped to them come from Delbert Sturgill (petitioner)? ANSWER: Yes. QUESTION: Did you attempt to go back to Delbert Sturgill and get some money from him for that coal that wasn't paid for? ANSWER: No, because we had sold the coal and had a bad debt. We didn't see any -- QUESTION: So once Delbert Sturgill's coal went through your tipple and you washed it and you found out what the ash content was, that's when you figured out how much you owed him, is that correct? ANSWER: We figured out how much we owed him after we had analyzed the raw coal and determined the number of clean tons. QUESTION: So even before you washed it you could look at it and tell how much -- ANSWER: There was enough history there to know that the product would be what104 we wanted it to be when we washed it. QUESTION: So at that point, your liability for the payment of coal to Sturgill was fixed, right? ANSWER: That's correct. As is evident from the above testimony, Flat Gap's liability to petitioner was fixed when the coal was washed to yield its clean tonnage. At that point, petitioner was entitled to payment for all clean tonnage delivered. Petitioner had no contractual or beneficial right to seek payment for the coal or his services from any one other than Flat Gap. It is true petitioner was dependent in the long run on the market for the Taggart coal. As the market dissipated, petitioner's services were no longer required. We find this to be indistinguishable from the risk taken by any service provider that the recipient of the services might decide that the services are no longer required. Such a risk does not vest petitioner with105 an economic interest in the coal in place, but rather an economic interest in a continuing business relationship. Viewed in its best light, petitioner had a contract to mine coal, impliedly to exhaustion, for a stated price per ton which could vary with market fluctuations. But these factors alone did not give petitioner an economic interest in the coal in place which he must have to be entitled to a deduction for depletion. Petitioner had no ownership interest in the coal before it was mined, he did not own it before or after it was delivered to Flat Gap's tipple, and he had no right to, nor did he, sell the coal. Petitioner paid nothing for the coal and he received nothing directly from the sale of the coal. He was paid for his services in mining the coal and delivering it to Flat Gap's tipple and his only investment was in acquiring the equipment and paying the expenses necessary to render those services. Because petitioner lacked an economic interest in the coal he mined, he is not entitled to the depletion deductions he claimed. Decision will be entered for the respondent.Footnotes1. Petitioners concede (i) the disallowance of a deduction for supplies in the amount of $1,965.03 in calendar year 1981, (ii) a depreciation deduction in the amount of $2,387.50 in calendar year 1982, and (iii) investment tax credit in the amount of $573 in calendar year 1982.↩2. Petitioner holds a First-Class Certificate of Competency issued by the Commonwealth of Virginia's Department of Mines, Minerals and Energy. To be eligible for the certificate, petitioner had to have worked in a coal mine for five years or more and had to pass a written examination.↩3. "Deep mining" methods involve extraction of coal or other minerals found underneath the earth's surface by underground mining and removal through portals made in the surface. This method is distinguished from "strip mining" which is the removal of coal or other minerals found on or near the earth's surface by removing the overburden.↩4. The mining agreement defines clean tons as "tonnage delivered (-) [tonnage delivered times (X) (percentage of ash (+) 10%)]."↩5. The parties stipulated that "the purpose of the escrow account was to ensure that (petitioner) worked Mine B and not just Mine A." At trial, petitioner testified that the purpose of the escrow account was to provide incentive to petitioner for mining Mine A and Mine B and↩ as a punitive measure against petitioner should he default under any provision of the mining agreement. Respondent objected to this testimony stating that the stipulation, signed by petitioner, spoke for itself and could not now be controverted at trial. After consideration of the testimony of petitioner and Mr. James LaForce, "general manager" of Flat Gap at the time petitioner mined coal for Flat Gap, we find that the purpose of the escrow account was as stated in the Stipulation of Facts; to ensure petitioner worked both Mine A and Mine B. Referring to the escrow account, the agreement stated "should contractor (petitioner) perform each and every covenant, term and condition of this agreement then and in that event the escrow money shall be delivered to contractor (petitioner)."6. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩7. The evidence shows that petitioner was paid the price fixed in the mining agreement of $34 per ton for 24 of the 28 weeks he mined coal, and that petitioner received that price for more than 93 percent of the coal he mined. The price paid to petitioner did vary the final four weeks he mined coal.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620052/	Richard M. Cooper and Mary J. Cooper, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentCooper v. CommissionerDocket Nos. 2496-72, 2497-72, 2498-72, 2499-72United States Tax Court61 T.C. 599; 1974 U.S. Tax Ct. LEXIS 155; 61 T.C. No. 64; February 4, 1974, Filed 155 Decisions will be entered for the respondent. The petitioners, who were shareholders in a corporation, entered into an agreement establishing an alleged joint venture to provide additional funds to the corporation equal to its accumulated net operating loss. The alleged joint venture conducted no other activities. Held, under the circumstances, the alleged joint venture served no business purpose and shall be disregarded for tax purposes; the transaction is in reality a contribution of capital to the corporation. R. Paul Sorenson, for the petitioners.Harry Morton Asch, for the respondent. Simpson, Judge. SIMPSON599 The respondent determined the following deficiencies in the Federal income taxes of the petitioners for the year 1968:Docket No.PetitionersDeficiency2496-72Richard M. Cooper and Mary J. Cooper$ 547.842497-72Harry C. Neer and Mary Neer989.822498-72W. Albert Johnson and Lulu S. Johnson1,067.282499-72Robert D. Brown and Loretta Maye Brown1,421.42156 Certain issues have been conceded by the petitioners in docket Nos. 2497-72 and 2499-72, and the only issue remaining for decision is whether the petitioners may deduct as a loss payments made by them to an alleged joint venture established to provide additional funds to a corporation of which they were the shareholders.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners are Richard M. and Mary J. Cooper (husband and wife), Harry C. and Mary Neer (husband and wife), W. Albert and Lulu S. Johnson (husband and wife), and Robert D. and Loretta Maye Brown (husband and wife). All the petitioners were legal residents of Las Vegas, Nev., at the time the petitions were filed herein. They all filed joint Federal income tax returns for the year 1968 with the Internal Revenue Service Center, Ogden, Utah. Messrs. Cooper, Neer, Johnson, and Brown will be referred to as the petitioners.600 Each petitioner operated his own company in the food business. On September 22, 1964, the petitioners formed a corporation called the Las Vegas Cold Storage & Warehouse Co. (the corporation), of which each owned 25 percent of the stock. The corporation157 acquired two buildings located adjacent to each other, each having approximately 20,000 square feet of space. The corporation was formed in part with the idea that one day it would install cold storage facilities, and thereafter, provide storage space for the businesses of the petitioners. The petitioners' food businesses did use some of the space in the corporation's buildings for offices. However, the cold storage equipment was never installed, and the petitioners' food businesses had to use storage space in other buildings.The corporation was also formed to lease storage space to others. However, one of its buildings remained vacant for several years, and the corporation incurred successive net operating losses, which totaled $ 38,206 by the end of 1967. The corporation was, therefore, forced to secure additional funds from the petitioners in order to meet expenses, and at one point, it reported outstanding loans by shareholders of $ 23,338.41.In 1967, one of the petitioners consulted an attorney to determine whether the funds he supplied the corporation could be claimed as a deduction on his personal income tax return. Thereafter, the attorney prepared an agreement for158 the petitioners, which was executed by them and which provided:JOINT VENTURE AGREEMENTThis Agreement, made this 30th day of November, 1967, by and between ROBERT D. BROWN, RICHARD M. COOPER, W. A. JOHNSON and HARRY C. NEER,Whereas, the aforementioned parties have, prior to this date, formed a corporation entitled, LAS VEGAS COLD STORAGE & WAREHOUSE CO., which corporation operates an office building and warehouse company in which the businesses of the aforementioned parties operate from; andWhereas, it is the desire of the parties to pay to the corporation sufficient monies to cover the net operating loss of said corporation as rental payments, thereby indemnifying the corporation from any net operating loss.Now, Therefore, It Is Hereby Agreed that each of the parties set forth above shall contribute to the joint venture a sum of money equal to one-fourth (1/4th) of the net operating loss of LAS VEGAS COLD STORAGE & WAREHOUSE CO. on or before three (3) months after the loss is determined, as computed on the U.S. Corporation Income Tax Return of said corporation; andIt Is Further Agreed that said joint venture shall immediately pay to said corporation the monies paid over 159 to said joint venture, as and for additional rental payments.601 In Witness Whereof the parties hereto have set their hands the day and year herein first written.(S) Robert D. BrownRobert D. Brown(S) Richard M. CooperRichard M. Cooper(S) W. A. JohnsonW. A. Johnson(S) Harry C. NeerHarry C. NeerThe arrangement will be referred to as a "joint venture" for sake of convenience, without intending to indicate whether, as a matter of law, a joint venture was established by such agreement.On March 19, 1968, the petitioners, as shareholders of the corporation, met and adopted a resolution to dissolve the corporation within a 12-month period in accordance with a plan of complete liquidation. Thereafter, on April 29, 1968, each petitioner issued a check in the amount of $ 9,552 payable to "Vegas Warehouse-Joint Venture," and such checks were endorsed over to the order of the corporation. The joint venture did not participate in any other business transaction. By May 30, 1968, the corporation ceased operations, sold the buildings, and distributed the corporate assets to the petitioners.In its final U.S. Corporation Income Tax Return for the period ending May 30, 1968, the160 corporation reported the payments received from the joint venture as income attributable to an indemnity payment. The joint venture filed a U.S. Partnership Return of Income, on which it reported that "indemnity" was its principal product or service. It also reported a loss of $ 38,208 and indicated that the petitioners devoted no time to the joint venture.On their returns for the year 1968, the petitioners each claimed a deduction of $ 9,552 attributable to losses incurred by the joint venture, and each reported receipt of $ 18,393 as the proceeds attributable to the liquidation of the corporation.In his notices of deficiency, the respondent determined that no loss was incurred by the joint venture in the conduct of a trade or business, and that the payment was in reality a contribution of capital by the petitioners to the corporation.OPINIONThe corporation apparently needed additional funds, and the petitioners, as its shareholders, decided to supply such funds. If the additional 602 funds constituted contributions to the capital of the corporation or were loans to the corporation, the petitioners were not entitled to deduct the payments when made. However, the petitioners161 take the position that they formed a joint venture to supply additional capital to the corporation, that the joint venture incurred a loss, and that as members of the joint venture, they were entitled to deduct such loss. In the alternative, they argue that the funds were supplied the corporation as additional rent for the space occupied by them and that they are entitled to deduct such amounts as rental payments. We must decide whether, for purposes of the Federal income tax, there was a joint venture which incurred losses deductible by its members or whether the petitioners have established that they are entitled to deduct the payments as rental expenses.We have considered the arguments of both parties and the relevant evidence in the record, and on the basis of such consideration, we hold that the so-called joint venture was created for no business purpose and carried on no business activity. It was merely a device to shift a deduction from a corporation to its shareholders. Accordingly, it must be disregarded for purposes of the Federal income tax.There is no doubt that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes, or altogether162 avoid them, by means which the law permits. Gregory v. Helvering, 293 U.S. 465 (1935); United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451 (1950). A taxpayer is also free to choose any form of organization which achieves a desired business or tax result. Interior Securities Corp., 38 T.C. 330">38 T.C. 330, 338 (1962); Polak's Frutal Works, Inc., 21 T.C. 953">21 T.C. 953 (1954). However, the existence of an entity may be disregarded if it was created for no purpose other than the minimization of taxes. Moline Properties v. Commissioner, 319 U.S. 436 (1943); Higgins v. Smith, 308 U.S. 473">308 U.S. 473 (1940). For the entity to be recognized, it either must be created for a business purpose or must carry on a business activity. Gregory v. Helvering, supra;Moline Properties v. Commissioner, supra;Haas v. Commissioner, 248 F. 2d 487 (C.A. 2, 1957), remanding a Memorandum Opinion of this Court; Shaw Construction Co., 35 T.C. 1102">35 T.C. 1102 (1961),163 affd. 323 F. 2d 316 (C.A. 9, 1963); Interior Securities Corp., supra;Polak's Frutal Works, Inc., supra.In National Investors Corporation v. Hoey, 144 F. 2d 466 (C.A. 2, 1944), the issue before the court was whether a so-called sale or exchange between a corporation and sole shareholder should be recognized for tax purposes. The court disregarded the transaction and stated at pages 467-468:The gloss then put upon Higgins v. Smith, supra, was deliberate and is authoritative: it was that, whatever the purpose of organizing the corporation, "so long as that purpose is the equivalent of business activity or is followed by the carrying 603 on of business by the corporation, the corporation remains a separate taxable entity." 319 U.S. 439">319 U.S. 439 * * . That, as we understand it, is the same interpretation which was placed upon corporate reorganizations in Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 * , and which has sometimes been understood to contradict the doctrine that the motive to avoid164 taxation is never, as such, relevant. In fact it does not trench upon that doctrine; it merely declares that to be a separate jural person for purposes of taxation, a corporation must engage in some industrial, commercial, or other activity besides avoiding taxation: in other words, that the term "corporation" will be interpreted to mean a corporation which does some "business" in the ordinary meaning; and that escaping taxation is not "business" in the ordinary meaning.Similar principles are applicable to joint ventures. In connection with the definition of a "joint venture" for tax purposes, section 301.7701-3(a), Proced. & Admin. Regs., provides in part:The term "partnership" is broader in scope than the common law meaning of partnership and may include groups not commonly called partnerships. Thus, the term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not a corporation or a trust or estate within the meaning of the Internal Revenue Code of 1954. A joint undertaking merely to share expenses is not a partnership. 165 * * [Emphasis supplied.]In Haas v. Commissioner, supra, the respondent challenged the existence of a joint venture between a corporation and a taxpayer who managed the corporation which was owned by him and his family. Prior to the creation of the alleged joint venture, the corporation operated at a loss, and the taxpayer was required to advance operating funds. Under the terms of the joint venture, the taxpayer was to provide the working capital for the operation of the business, and profits were to be divided equally between him and the corporation. Losses were to be borne by the taxpayer and his wife. The Second Circuit held that the existence of a joint venture and the taxpayer's right to deduct the losses depended upon whether the agreement to shift the loss "effected any economic consequences to the business." On remand, we held that it did not, and accordingly, the joint venture was not recognized for purposes of taxation, and the taxpayer was denied a deduction. Benjamin F. Haas, 18 T.C.M. (CCH) 401">18 T.C.M. 401, 28 P-H Memo. T.C. par. 59,086 (1959). Compare Interior Securities Corp., supra,166 in which the existence of a partnership, created for valid business reasons, was recognized by the Court.The facts of this case reveal quite clearly that the so-called joint venture served no business purpose. The petitioners, as shareholders of the corporation, were called upon to furnish additional funds for the continued operation of the corporation, and the joint venture was created merely for the purpose of attempting to establish a basis for the petitioners to claim a deduction for the funds furnished by them. 604 The agreement provided that they should share equally the deficit in the funds of the corporation. It said nothing about the sharing of profits, and although the parties argued over whether there was an implied agreement to share profits, there was no reason for the agreement to deal with such matter. If the corporation had become profitable, the petitioners would have shared in such profits as its shareholders, and there is no indication in the agreement that any profits were to be shared in any other manner. Moreover, there is no indication whatsoever that the joint venture was to conduct any business, and in fact, it did not conduct any business. It167 is clear that the only purpose for the arrangement was to enable the petitioners to claim a deduction for the additional capital contributed to the corporation. An arrangement by shareholders for this purpose is not the carrying on of business within the tests established by the cases such as Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943); Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); and National Investors Corporation v. Hoey, 144 F. 2d 466 (C.A. 2, 1944). Thus, we hold that a joint venture was not created for tax purposes.The petitioners have also utterly failed to prove that they are entitled to deduct the payments as a rental expense. They have the burden of proving their right to any such deduction (Rule 142, Tax Court Rules of Practice and Procedure; Biggs v. Commissioner, 440 F. 2d 1, 4-5 (C.A. 6, 1971), affirming a Memorandum Opinion of this Court), and that burden they have failed to carry. We have no evidence as to the amount of space occupied by the petitioners' food businesses, as to whether such businesses shared the space168 equally so that they should share a rental expense equally, and as to whether the food businesses paid any other amounts as rental for the space occupied by them. Although the record contains a drawing of one of the two warehouses occupied by the food businesses of the petitioners, that drawing was not made to scale, did not purport to show the exact amount of space actually utilized by each company, and did not indicate the manner in which such space was used. Moreover, the amounts paid by the petitioners were determined by the amount of the corporation's loss, and the evidence is insufficient to indicate whether such an amount would constitute reasonable rental for space actually used. The petitioners argue that when the amount of the payment is added to the rental income received by the corporation from others and then divided by the number of months during which business was carried on and further divided by the space available for storage, the quotient amounts to the reasonable rental value per square foot of space in the warehouses owned by the corporation. However, much of the space in the buildings was not rented by the corporation, and the formula suggested by the petitioners169 has the effect of allocating the payments to 605 the unrented space which was not used by them. Finally, there is some indication that the food businesses of the petitioners may have been incorporated, and if so, any obligation for the payment of additional rent would have been a corporate obligation, not that of the individual petitioners. In view of these circumstances, we hold that the petitioners have failed to establish that they are entitled to deduct their payments as rental expenses.Decisions will be entered for the respondent. Footnotes1. Cases of the following petitioners are consolidated herewith: Harry C. Neer and Mary Neer, docket No. 2497-72; W. Albert Johnson and Lulu S. Johnson, docket No. 2498-72; Robert D. Brown and Loretta Maye Brown, docket No. 2499-72.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653898/	Filed 1/22/21 P. v. Rich CA1/3 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION THREE THE PEOPLE, Plaintiff and Respondent, A155040 v. ALBERT EARL RICH, (Alameda County Defendant and Appellant. Super. Ct. No. 17CR017756) A jury convicted defendant Albert Earl Rich of 13 felony offenses involving human trafficking for commercial sex, torture, and various sexual offenses, including rape and sodomy. The trial court sentenced him to 159 years to life in state prison. Rich appeals, contending his convictions should be reversed because the prosecutor committed prejudicial misconduct by: (1) referring to two witnesses in opening statement who ultimately did not testify at trial; and (2) improperly asking a witness whether she was afraid to testify because Rich was a gang member and whether her husband had previously arrested Rich. He further contends that remand is required to determine his ability to pay the fines and fees imposed by the trial court. Other than two sentencing modifications regarding the third and ninth counts, which the Attorney General concedes are error, we reject Rich’s contentions and affirm the judgment as modified. 1 BACKGROUND I. The Charged Offenses The Alameda County District Attorney charged Rich with human trafficking for commercial sex (Pen. Code, § 236.1, subd. (b))1 of Shante Doe between May 28, 2017, and June 5, 2017 (first count); forcible rape (§ 261, subd. (a)(2)) of Shante Doe on May 30, 2017, with enhancements for multiple victims (§§ 667.6, subd. (d), 667.61, subd. (c)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and being on felony probation (§ 1203, subd. (k)) (second count); sodomy by force (§ 286, subd. (c)(2)(A)) of Shante Doe on June 2, 2017, with enhancements for multiple victims (§§ 667.6, subd. (d), 667.61, subd. (c)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and being on felony probation (§ 1203, subd. (k)) (third count); forcible rape (§ 261, subd. (a)(2)) of Shante Doe on June 3, 2017, with enhancements for multiple victims (§§ 667.6, subd. (d), 667.61, subd. (c)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and being on felony probation (§ 1203, subd. (k)) (fourth count); human trafficking of a minor for commercial sex (§ 236.1, subd. (c)(2)) of Mia Doe between May 22, 2017, and June 5, 2017, with an enhancement for being on felony probation (§ 1203, subd. (k)) (fifth count); kidnapping in order to commit a sex crime (§ 209, subd. (b)(1)) of Mia Doe on June 4, 2017, with an enhancement for being on felony probation (§ 1203, subd. (k)) (sixth count); forcible sexual penetration of minor Mia Doe (§ 289, subd. (a)(1)(C)) on June 4, 2017, with enhancements for kidnapping to commit a sex offense (§ 667.61, subd. (e)(1)), committing torture during a sex offense (§ 667.61, subd. (d)(3)), personally inflicting great bodily injury (§ 12022.7, subd. (a)) and for doing so during a sex offense (§§ 12022.53, subd. (d), 12022.7, 12022.8), committing a sex crime 1 All further undesignated statutory references are to the Penal Code. 2 against a minor of age 14 to 17 (§ 667.61, subd. (n)), multiple victims (§§ 667.6, subd. (d), 667.61, subd. (c)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and for being on felony probation (§ 1203, subd. (k)) (seventh count); forcible sexual penetration of minor Mia Doe (§ 289, subd. (a)(1)(C)) on June 4, 2017, with enhancements for committing a sex crime against a minor of age 14 to 17 (§ 667.61, subd. (n)), multiple victims (§ 667.6, subd. (d)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and being on felony probation (§ 1203, subd. (k)) (eighth count); torture (§ 206) of Mia Doe on June 4, 2017, with an enhancement for being on felony probation (§ 1203, subd. (k)) (ninth count); human trafficking for commercial sex (§ 236.1, subd. (b)) of Tasha Doe between May 15, 2017, and May 31, 2017 (tenth count); forcible rape (§ 261, subd. (a)(2)) of Tasha Doe on May 29, 2017, with enhancements for multiple victims (§§ 667.6, subds. (c) & (d), 667.61, subd. (c)), the same victim on separate occasions (§ 667.6, subds. (c) & (d)), and being on felony probation (§ 1203, subd. (k)) (eleventh count); assault with a deadly weapon, a flatiron (§ 245, subd. (a)(1)), of Tasha Doe on May 28, 2017, with enhancements for causing great bodily injury (§ 12022.7, subd. (a)) and being on felony probation (§ 1203, subd. (k)) (twelfth count); and torture (§ 206) of Tasha Doe on May 28, 2017, with an enhancement for being on felony probation (§ 1203, subd. (k)) (thirteenth count). It was further alleged that Rich had four prior felony convictions, one of which resulted in a prior prison term (§ 667.5, subd. (b)). As originally charged, the case included two codefendants—Khalilah Barker and Sasha Coleman. Coleman was charged with pimping (§ 266h, subd. (a) [fourteenth count]). Barker was charged with human trafficking for commercial sex (§ 236.1, subd. (b)) (first and tenth counts), pimping (§ 266h, 3 subd. (a)) (fifteenth and seventeenth counts), and pandering (§ 266i, subd. (a)(2) [sixteenth and eighteenth counts]). Before trial, Barker entered a plea agreement regarding multiple charges of human trafficking and pimping. During trial, upon the People’s motion, the trial court dismissed the pimping charge against Coleman. II. The Prosecution’s Case Between May and June of 2017, Rich recruited two young women and one 17-year-old girl to work for him as sex workers.2 During this span of time, the three victims were trafficked for commercial sex, raped, sodomized, tortured, and assaulted by Rich. A. Tasha Doe is raped and burned with a flatiron. In or about May 2017, Tasha Doe moved to Oakland to work as a sex worker. Tasha had worked as a sex worker in San Diego and relocated to Oakland with her then pimp. Within a few days of working as a sex worker in Oakland, Tasha met Rich on an Internet dating site. At this point, Tasha was looking for a new place to stay and a way to return home. In their initial conversations, Tasha told Rich she needed help and was trying to return home. Rich said that he could help her, but he did not say what she would have to do in return. When Tasha first met Rich in person, they talked for a couple of hours in his car about how he would help her return home. Tasha believed that Rich would help her. At one point, Rich pulled out a gun and showed it to her. Although the gun scared Tasha, she nevertheless stayed in the car for about two more hours and eventually fell asleep. When she woke up, she was 2 Throughout this opinion we refer to “sex workers” and “sex work” in lieu of prostitutes and prostitution. 4 in a different location and Coleman and Barker were in the car with her. Tasha recognized Coleman and Barker as sex workers from the streets. Rich then drove the girls to his mother’s apartment. After Coleman and Barker went inside, Rich took Tasha to a stairwell, pulled down her pants and told her he wanted to have sex. Tasha said that she did not want to have sex, but Rich said he did not care. Rich put his penis in Tasha’s vagina for 10 to 15 minutes. Tasha was both angry and scared. Rich then brought Tasha into his mother’s apartment and told her that she would be sleeping on the floor with Barker and Coleman. The next day, Rich moved the girls to a Motel 6 where they had two rooms, one of which Tasha shared with Coleman. Within a few days, Tasha met Mia Doe on International Boulevard, also known as “the track.” Mia later went to the Motel 6 with Tasha and the other girls; Mia shared a room with Barker. From that point, Mia began working for Rich. Both Tasha and Mia experienced violence from Rich. On one occasion, Rich became angry with Mia for texting with another man. Tasha saw Rich punching Mia in the face and stomach until Mia fell off the bed and cried. After being beaten, Mia had to go out and work as a sex worker. On or about May 28, 2017, Rich became violent with Tasha after she called him a “bitch.” Rich walked out of the room and slammed the door. At first, Tasha did not know what to think and was not afraid. However, Coleman and Barker returned to the room where Tasha was sitting and plugged in a flatiron. Twenty minutes later, Rich returned to the room and yelled at Tasha. He then started hitting and punching her. Tasha was crying and apologizing for calling Rich a name, but he yelled at her to stop crying, warning her that it would only make him more angry. Rich told 5 Tasha to stop playing him and taking him for a joke. After further punching Tasha, Rich grabbed her left arm, opened the flatiron, and put it on her arm for a couple of seconds. Tasha quickly yanked her arm back from the flatiron. She was in pain; her skin was burned and bubbled. Tasha wrapped a towel around her burned arm and asked Rich for bandages. On or about May 29, 2017, Rich said he would take her to his mother’s apartment to get bandages but, instead, drove her to his mother’s apartment and raped her in the living room. Tasha’s arm still hurt and was wrapped in a towel; she felt that she had no choice, so she did not resist Rich. Rich never obtained bandages for Tasha’s burned arm. After raping her, Rich made Tasha go out and work as a sex worker. Tasha felt Rich would punish her if she left and did not make money for him as a sex worker. On or about May 30, 2017, Tasha was able to escape when she was momentarily left alone in her room at the Motel 6. While everyone was in the other room, Tasha packed up her things and walked to International Boulevard. Tasha got a ride to the hospital, where she received medical attention for her arm. When Tasha explained what had happened to her, hospital staff called the police. After talking to the police, Tasha received a bus ticket and was able to leave California. As she was leaving, Tasha received text messages from Rich saying: “ ‘[W]here are you? Did you go to the hospital?’ ” “ ‘I Won’t hurt you again, Boo.’ ” “ ‘Where you at, Boo?’ ” (Sic.) Tasha did not tell Rich her location; she did not return to California except to testify against Rich. Tasha’s arm eventually healed. At the time of trial in 2018, Tasha still had a visible scar on her arm from the flatiron incident. 6 B. Minor Mia Doe is beaten and brutally tortured while being sexually assaulted. In May 2017, 17-year-old Mia Doe came to Oakland and started working as a sex worker on International Boulevard. After a week or two, she met Barker, who said that Mia should work with her people. Barker told Mia that she worked for a nice guy who gave her half the money, protected her, and gave her a place to stay. Mia thought this sounded good, so Barker took her to meet Rich, who was nearby, sitting in his car. Mia got in the car and had a “cool” conversation with Rich, but she did not tell him her real age. Mia went back to work and gave Rich her money that night. Rich then drove Mia, along with Barker, Coleman, and Tasha, to the Motel 6, where Mia shared a room with Barker. The first violence Mia witnessed was when Rich burned Tasha with a flatiron. Rich gathered up the girls and made them watch as he burned Tasha’s arm. Mia knew that Tasha had called Rich a “bitch” and this was Tasha’s punishment. Tasha screamed and cried, which made Mia afraid of Rich. All of the girls, including Tasha, went out to work the next day. The next violence happened when Mia and Coleman were hanging out in their room. Mia was on the phone with a friend, a boy about her age, when Rich came into the room. Rich asked who Mia was talking to on the phone. When Mia said no one, Rich took her phone, called the boy and questioned him. After he hung up, Rich began forcefully hitting Mia in the face with his hands. When Mia fell down on the bed, Rich kneed her in the nose. Mia was crying, hurt, and feeling disrespected after the beating. Nevertheless, Mia went out to work as a sex worker that night. In May 2017, Mia met Shante Doe on the track. Shante initially spoke with Barker, who then brought her to meet Rich. That night, Shante went to 7 the Motel 6 with Rich, Barker, Coleman, and Mia.3 After that, Shante worked as a sex worker with Barker, Coleman, and Mia, going from the Motel 6 to the track. At some point, Rich moved Barker, Coleman, Mia, and Shante to an Americas Best Value Inn. On or about June 4, 2017, Mia stayed overnight on a date and did not come back to the track. Mia was scared and wanted to get away from Rich and Barker, so she did not respond to their phone calls and texts. At some point, Mia talked to Barker, who convinced Mia that she would not be harmed if she returned. Mia believed this was true, so she gave them her location. When Mia got in the car, Rich and Barker began to question her about where she had been. Mia said she fell asleep at a date’s house. Mia testified that she did not want to get in trouble for not answering her phone, so she lied to them and said she had gone to the hospital. When Rich asked to see proof of her hospital visit, Mia said she did not have any papers because she had not been admitted. The questions were starting to make Mia nervous. When they parked at the motel, Mia “freak[ed] out” and tried to stay in the car because she was afraid something was going to happen to her. Rich smiled and said he was not going to hurt Mia, so she got out of the car. Rich grabbed her by the back of her neck with his hand and said something like, “Let’s go.” Rich had an evil smile that made Mia think he was going to do something to her. Mia was crying as Rich walked behind her and held both her arms; there was no way she could escape. Rich brought Mia to a room where Coleman, Barker, and Shante were located. He told her to sit in a chair. He accused Mia of being with another pimp. She denied it. He told her to take off her clothes and her jewelry. Rich 3 That was the night Tasha escaped. 8 then told her to turn around. Standing behind her, Rich took a purse strap, put it around her neck, and choked her with such force that she could not breathe. He then pushed Mia onto the bed and punched her several times in the back and the head with his fists. She cried in pain, told him to stop, and asked why she was being treated that way. After Rich was done beating Mia on the bed, he put a deodorant can in Mia’s face, told everybody to look at it, and laughed. Rich then started twisting the can into Mia’s anus. Mia was screaming and yelling in pain. After Rich took the deodorant can out of Mia’s anus, he threw it in the garbage. Rich told Mia to get up and stand in the corner facing the wall. Rich took a break from beating Mia to eat some oysters. As he poured hot sauce on the oysters, he joked that they looked like Mia’s butt. Rich said he should shove the hot sauce bottle up her butt. Rich said he could not see enough blood, so he had Coleman and the other girls turn on their flashlights on their phones, had Mia spread her buttocks, and then had everybody get close to look in Mia’s anus. At some point, Rich asked if the girls thought he should stop beating Mia. Nobody responded. Rich said, “ ‘I get hard when I see this type of shit.’ ” Rich got the deodorant can out of the garbage. He then pushed Mia against the wall and put the can inside her body a second time. He tried to get the whole can inside her anus. The force lifted her onto her tiptoes. Mia was screaming; Rich was pushing the can farther than he did the first time. Blood was dripping from Mia’s anus. When Rich took the can out of Mia’s anus, there was a lot of blood on it and blood was running down Mia’s legs. Mia asked to go to the bathroom. Rich said she could go but not to close the door. Rich laughed as Mia moaned and groaned in pain. Rich told Mia to get 9 in the shower and clean herself up. Her anus was bleeding, and it hurt to wash it. Afterward, she got dressed and went to the track with the other girls. Mia had several dates that night even though it hurt to have sex. She asked one date to take her to the hospital, but he refused. She gave her money to Rich, who took her back to the motel. Mia did not feel she could go to the police or ask Barker to take her to the hospital. The next day, while Barker and Coleman were getting their nails done, Mia and Shante waited outside of the salon with Rich in his car. Unbeknownst to Mia, the police were on the way to their location after receiving a call from one of Shante’s friends that Shante was being held captive. Mia was initially detained by the police and later taken to the hospital. At the hospital, Mia was told she was “ripped” and needed surgery to repair the damage. Martin Moran, the physician assistant who examined Mia, testified that he observed injuries to Mia’s head, neck, left ear, and left jaw, as well as redness and swelling in the vaginal area; there was a bleeding tear from her anus that was 2.5 centimeters long and went through all five layers of skin. He said the neck injury was consistent with choking and strangulation. The rectal injury was the most severe he had seen in 21 years in the emergency room, and it was the first time he had to refer a sexual assault victim to surgery. Following surgery, Mia was taken from the hospital and flown back home; Mia was put into a group home for girls who had been victims of human trafficking. Mia had to wear diapers for four months after surgery; sometimes she saw blood in the diapers. She needed medication for the pain and to help with her bowel movements. 10 C. Shante Doe is raped and sodomized. In May 2017, 20-year-old Shante Doe was working as a sex worker on International Boulevard when she was approached by Barker. Barker offered her a place to sleep. Barker said her “baby daddy” was there and that he could interview Shante; Shante knew he was a pimp. Barker said he was a little crazy, but only if you upset him. Barker and Shante walked up International Boulevard to Rich’s car. Shante got in the car and had a short conversation with Rich. After talking with Rich, Shante met Coleman, Mia, and Tasha. Rich, Barker, and Shante then retrieved Shante’s belongings and brought them back to the Motel 6. Shante shared the room with Barker and Mia. The next morning, Rich was with all the girls in Barker’s room, when Shante saw Rich acting “jittery” and “paranoid.” Rich’s demeanor made Shante nervous because he was so large. Shante texted a friend to pick her up but not that day because she wanted to make some more money. Shante tried to “play it cool” by joking about being picked up. Rich told Shante she was not going to get picked up and no one was leaving him. That same afternoon, Shante, Tasha, and Mia walked together to International Boulevard to work as sex workers. Barker told Shante to give her the money after each date. Shante was always paired with somebody, usually Barker or Tasha. Shante was told to stay away from Coleman because she was “mean” and from Mia because she was “in her own world.” After a few days, Rich realized that Shante did not want to be there, so he always paired her with Barker or Coleman. Rich told Mia (through Barker) to stay away from Shante because she would try to make Mia leave. Barker was usually nearby telling the two girls to separate. Shante thought she would get in trouble with Rich if she and Mia were alone together. 11 Sometimes Shante saw Rich drive by on International Boulevard; it made her feel overwhelmed and terrified to have him watching her. The first time Rich raped Shante was on or about May 30, 2017, after she had been standing on the track with Mia and Tasha. Mia left with a date, and Tasha wanted Shante to walk away with her. Rich told Tasha to walk by herself, so Tasha walked away. Shante was scared to be with Rich because she did not know if he would be upset. Rich grabbed Shante by the back of the neck with one hand and walked her to a metal fence near his car in a parking lot. Shante told Rich she was afraid of him. Rich told her to quit playing with him and to “give him some pussy.” Shante said, “ ‘No.’ ” Rich pushed Shante and said, “ ‘You are going to do it.’ ” Shante did not feel that she could have walked away because Rich would have beaten her. Rich drove his car over and told her to get in the backseat. After she got in, he drove to the other side of the street and parked. Rich put a condom on his penis and moved to the backseat, where he began pushing the back of Shante’s neck down like she was a dog and telling her to bend over. Rich was unable to get his whole “12 inches” inside her vagina, but he got at least the tip of his penis inside. After Rich raped her, Shante went back to work as a sex worker on the track. Later that night, Shante texted Rich that she was in pain. When Shante returned to the motel, she took a shower and saw blood as she washed herself; she later had spotting. A few days later, on or about June 2, 2017, Rich ordered Shante to go with him to his mother’s apartment. He parked his car in the underground parking garage and ordered her to take off her clothes. Shante said that she did not want to have sex. Rich pulled down her pants and forced his penis into her anus. Shante told Rich that it hurt. So, he then put his penis in her vagina. After 10 or 15 minutes, he drove Shante back to the Motel 6. 12 The third rape occurred on or about June 3, 2017, after Shante had been standing on International Boulevard. Rich drove up and ordered Shante to get in his car. Shante refused. He said, “ ‘Don’t make me get out the car.’ ” (Sic.) Rich got out of the car; pushed Shante into the backseat; and said, “ ‘Just sit there.’ ” He drove to a school and parked. He got in the backseat and ripped off Shante’s underwear. Shante was not cooperating and did not want to have sex with him. Rich told her, “ ‘You will be fine. You used to it, and you just bend over and cooperate.’ ” (Sic.) Shante squirmed as he tried to put his penis in her vagina. Rich told her that if she kept moving, he was going to put his penis in her butt. He got his penis into Shante’s vagina and bit her “cheek.” Shante just lay there, resigned to the fact that there was no point in fighting him. On or about June 4, 2017, Mia stayed out all night. Rich said if he found Mia he was going to shoot her because she probably ran off and he should have somebody “beat her ass.” When Rich and Barker returned to the motel with Mia, she was shaking and crying. Rich picked up the television remote and said he should shove it up Mia’s butt, but it would not fit. Rich told Shante that she needed to get closer and watch because this is what could happen to her if she left. As Mia was trying to explain where she had been, Rich said, “ ‘Shut up, bitch,’ ” and threw the remote at Mia’s face. Rich put a condom on Shante’s deodorant spray can and told Mia to strip naked, which Mia did. Rich wrapped a sock around his hand before he beat Mia in the back and head. After Rich was done beating Mia, he put the deodorant can in Mia’s face, told everybody to look at it, and laughed. Rich then started twisting the can into Mia’s anus. Mia was screaming and yelling in pain the likes of which Shante had never heard before. Shante was covering her ears and 13 cringing. When Rich pulled the can out, there was blood on it. Shante thought Rich had stuck it too far and was going to kill Mia. Rich was laughing as he pulled the can out of Mia; he told everybody to look at it before he threw it away. After he assaulted Mia, Rich looked at Shante and asked her if she had a problem and if she also wanted to leave. Rich wanted to know why Shante looked so nervous and if she had anything to tell him. Shante said “no,” she did not have anything to tell him. Rich reminded her about a time when Barker had been rubbing his feet, and Shante said that she would never rub a man’s feet. Rich said, “ ‘Remember when you said that you never rub my feet? Well, bitch, get on your knees and rub my feet.’ ” (Sic.) Frantic and crying, Shante rubbed his feet. After the foot massage, Rich asked if the girls thought he should stop beating Mia and if she had had enough. Nobody responded. Rich got the can out of the garbage. Mia was standing in the corner facing the wall and had no place to go. Rich pushed her against the wall; said, “ ‘Don’t move’ ”; and put the can in Mia for a second time. He tried to get the whole can inside her anus and lifted her up onto her tiptoes in the process. Blood was dripping from her anus. When Rich took the can out of Mia’s butt the second time, there was a lot of blood on it and on Mia’s body. Shante did not know what was going to happen next. She did not know if Rich was finished or if he was just getting started and was going to beat Mia to death. Rich seemed to think that Mia’s leaving was connected to Shante, but Shante did not know where Mia had gone. That night, all of the girls, including Mia, got dressed and went to work on the track. Shante texted her friend Tiana to make arrangements for Tiana to come pick her up. When Tiana texted back that she was going to 14 call the police, Shante told her, “ ‘Don’t get involved. I’m going to find a way to get up out of here. Just pick me up.’ ” Sometime after texting Tiana, Shante was brought back to the motel. Shante could not sleep that night because she was afraid that Rich might kill her in her sleep. The next morning, on June 5, 2017, everyone got into Rich’s car in order for him to take Barker and Coleman to get their nails done. After dropping off Barker and Coleman at the salon, it was just Shante and Mia in the car with Rich. At some point, Rich got a phone call. During the call, Rich was looking at Shante and Mia. Shante froze, fearing that her friend had called the police. Rich asked the person on the phone to call the motel and get a description of the girl that the police were looking for. Shante overheard that the girl had piercings and tattoos. Shante knew they were talking about her as she had both piercings and tattoos. Mia, on the other hand, did not have any piercings or tattoos. Shante knew she was in serious trouble because Rich thought she had snitched on him. Shante called Tiana and put her on speakerphone in front of Rich and asked her why she called the police. Rich snatched the phone out of Shante’s hand and hung it up. Rich said that he had a place for Shante and that he knew how to treat “bitches” like her. Rich further threatened that he would “take care of” her. Shante tried to get out of the car but broke the door handle. When Rich got out to fix the door, Shante managed to break free and ran across the street to another nail shop. Shante broke into tears and told the people at the nail shop that Rich was coming for her. They got up, looked, and locked the door when they saw Rich coming across the street. Soon, Barker was outside the nail shop, shouting for the people to let Shante out. Rich and Barker kicked and banged at the door while they argued with the people in the salon. Rich threatened to shoot up the place if they did not 15 open the door. Shante was crying and stayed in the nail shop until the police arrived. Shante could see Mia outside; Shante told the officers not to arrest Mia and asked them to take her to the hospital because of what Rich had done to her the night before. D. Barker acts as Rich’s “bottom girl.” Barker was 23 years old at the time of the trial. She first became aware of who Rich was when she was 13 years old, when she was working as a sex worker for another pimp. She knew Rich was a pimp. Rich became Barker’s pimp when she was 20 years old. Initially, Barker thought Rich was a dangerous “guerilla [sic] pimp” who beat his girls, but he treated her really nicely when she was his only sex worker. She felt special. Barker thought she and Rich had a boyfriend–girlfriend relationship. After a while they talked about how it would be easier for Barker if Rich had other girls, so Barker started picking out other girls and they grew their business. When they brought in more girls, Barker became Rich’s “bottom girl.” As Rich’s bottom girl, Barker was the most trusted sex worker who handled the day-to-day operations. She coordinated the girls, collected their money, made sure they had a place to stay, watched them, and made sure everybody was safe on the streets. Barker was jealous of the other women who worked for Rich. Rich became violent with Barker when she caused another sex worker to leave him. Rich once choked Barker with his hands while she was standing on the track. After choking her, Rich took Barker to his friend’s house, wrapped an electrical cord around her neck, and started hitting and kicking her. She could not breathe, fell to the floor, and had a seizure. One night on the track, there was an argument about Rich’s visiting other women. Barker walked away from Rich to go to her mother’s house. Rich drove by Barker as she was walking and fired a bullet right past her 16 face. Rich told her to get in the car or he would not miss next time. Barker was scared and crying when she got into his car. Rich started hitting and punching her. He said, “ ‘Go ahead and try to leave.’ ” That night Rich beat Barker in the underground garage at his mother’s apartment. Barker tried to leave Rich many times, but he would catch her or sit outside her mother’s house and wait for her, and then he would beat her. Rich knew when she went to her mother’s house because she had a cell phone with a tracking application that let him know her location. Despite the beatings, Barker loved Rich and had a tattoo that said “ ‘Rich money’ ” with a stack of $100 bills; the tattoo made her feel special because Rich was claiming her as his own. Barker wanted to be Rich’s girlfriend, but it did not work out because she could not be Rich’s only girl. When Coleman came to work for Rich, Barker became jealous when she found out they were having sex. Rich again beat Barker into a seizure. Rich brought Tasha into their group to work with Barker and Coleman, even though neither wanted another girl around. A couple of days after Tasha started working with them, Mia joined their group and also began working for Rich. On or about May 28, 2017, Rich gathered Barker, Coleman, Tasha, and Mia into one room. Tasha was naked, and Rich was angrily punching her and said, “ ‘So you like to call me a bitch.’ ” Rich picked up a hot flatiron and burned Tasha’s arm with it. The skin on Tasha’s arm blistered and became raised. Barker put a towel around Tasha’s arm. Tasha did not go to the hospital, but she complained of pain in her arm when she worked that night. Sometime after Tasha was burned, Shante joined the group after meeting Barker, Coleman, Mia, and Tasha on the track. Rich drove them all back to the Motel 6, where Shante shared a bed with Mia. 17 One day at the Motel 6, Barker told Rich that Mia was texting her old pimp. Rich told Barker to get Mia’s phone and password. After Barker read the messages to Rich, he slapped Mia, phoned the man, put the call on the speakerphone, and beat Mia. After Tasha left the group, Rich moved Barker, Coleman, Mia, and Shante to the Americas Best Value Inn. On or about June 4, 2017, Mia went on a date at about 2:00 a.m. but did not return to the track or answer her phone. After Mia had been found and brought back to the motel, Rich forced Barker and the other girls to watch as he shoved the deodorant can into Mia’s anus. He said that the girls were “going to learn not to play with him.” At one point, Rich asked if everybody thought Mia had had enough, but nobody responded. Rich shoved the can in Mia’s anus again. She screamed and slid down the wall. Rich told her to get in the shower. The girls all went to the track that night and worked. The next morning, on June 5, 2017, Rich asked what they wanted to do. The girls requested that Rich take Mia to the hospital, get Shante an outfit, and take Barker and Coleman to get their nails done. Everybody got in the car. Rich dropped off Barker and Coleman at the salon. Later, the desk clerk at the motel called Barker and said not to come back to the motel because the police were there. Barker phoned Rich and told him the police were looking for a woman with facial piercings who had been kidnapped. Rich said he thought it was Mia. Barker said it was not Mia because she did not have piercings. Coleman agreed and said it was Shante. Barker came out of the nail shop and saw Shante run across the street to another nail shop. At the other nail shop, they locked the door so that Rich and Barker could not get inside. The police soon arrived. 18 While Barker was in custody, she entered into a plea agreement that required her to testify truthfully. Barker and Coleman were both in custody. After Coleman told other inmates that Barker was a snitch, they assaulted Barker. One day while at the courthouse, Rich made gunshot sounds and told Barker that he knew where her mother lived. E. Police Investigation On June 5, 2017, Oakland police officers went to the Americas Best Value Inn to investigate a report that a woman’s friend was being held against her will in a room near the washroom. The desk clerk gave officers the key to room 115, which was found to be unoccupied but contained a lot of women’s clothing. After leaving room 115 locked and secure, the officers received a second dispatch indicating that the reporting party was in a car nearby and had received text messages from her friend. The officers met the reporting party and proceeded with emergency lights and sirens to a nail shop where other officers had already detained Rich. At the time of his arrest, Rich was six feet six inches tall, weighed 320 pounds, and had $1,200 in his jeans pocket. Following a search of room 115 at the Americas Best Value Inn, police found in the trash a metal can with red streaks of apparent blood on it. Police also found a used condom and a pair of men’s jeans, size “46 by 34.” F. Human Trafficking and Commercial Sex Holly Joshi testified as an expert in commercial exploitation, sexual exploitation, pimping, pandering, and the relationships between victims and traffickers. Human trafficking means the deprivation of personal liberties by forcing another person to sell sex or engage in forced labor. A pimp typically has a “ ‘stable,’ ” a street term for a group of girls working for him as sex workers. His most trusted girl is known as “the 19 bottom,” who is entrusted with collecting the other girls’ money, enforcing the pimp’s rules, and reporting back to the pimp. “Guerilla pimps” are human traffickers who force their girls to sell sex and often kidnap them off the street, rape them, and take control of them. Guerilla pimps use violence and threats of violence to control when and what their girls eat, as well as when and if they are allowed to sleep. Sleep deprivation is a common tactic. They monitor their girls’ phones. They use guns by brandishing, shooting, and pistol-whipping. They use whatever household items are available, such as bottles, curling irons, and chairs, to punish girls who do not follow their rules. They make their other girls watch the punishment. Girls who follow the pimp’s rules may be rewarded by having the pimp’s name tattooed on their bodies as a psychological reminder that they are the pimp’s property. The guerilla pimp plays the girls against each other because he is outnumbered and needs to ensure the girls will not work against him or leave him. Victims of guerilla pimps generally do not seek help from the police because pimps tell their girls not to trust law enforcement. They are convinced they will be arrested for being sex workers. The girls also do not want to be labeled as snitches because that would have severe consequences for them. Joshi was given three hypothetical fact situations that generally described the evidence regarding Tasha Doe, Mia Doe, and Shante Doe. In her opinion, each of the three scenarios described human trafficking by a guerilla pimp. III. The Defense’s Case The defense rested without calling any witnesses. 20 DISCUSSION I. The prosecutor did not engage in prejudicial misconduct. Rich contends his convictions should be reversed because the cumulative effect of two prosecutorial errors deprived him of a fair trial. Rich argues that the prosecutor erred by referring to two witnesses during opening statement who ultimately did not testify at trial. He further contends the prosecutor improperly asked a witness questions to insinuate that Rich was a gang member and that he had been previously arrested by the witness’s husband. According to Rich, the cumulative effect of this conduct made him “appear worse in the eyes of the jury than was warranted by the evidence presented.” We disagree. A. Background 1. The Prosecutor’s Opening Statement Before trial, the court granted the prosecutor’s motion to call witnesses Tiffany Doe and Maxine Doe regarding Rich’s prior uncharged conduct. During her April 30, 2018 opening statement, the prosecutor informed the jurors of the expected testimony of her witnesses, including Tiffany Doe and Maxine Doe. The prosecutor transitioned to the expected testimony of Tiffany Doe by explaining about Rich’s branding his girls: “This is Khalilah [Barker] in custody. And when I met with her and she gave a complete statement, I asked her about brands and tattoos, and she said yes, that the defendant told her she was going to get the name Rich and money and dollar bills tattooed on her body. The only choice that she had in the matter is where on her body it went. [¶] But this is not the first time that a woman has been branded by the defendant. And this is a closer picture of the tattoo. [¶] You will hear testimony from Tiffany Doe. [¶] Before Khalilah started working for the defendant, there was a young woman between 2009 and 2010 21 who worked as a [sex worker] for the defendant. In that booking photo you see a plastic wrap on her neck because it is a fresh tattoo, and it says ‘Al’. [¶] Tiffany will tell you that, again, there was no leaving him. She had a criminal protective order that prevented him from having any contact with her. It did not make a difference.” The prosecutor also summarized the expected testimony of Maxine Doe: “You will also hear testimony from Maxine Doe, who, in November of 2014, was walking on International Boulevard trying to get back to her grandmother’s house in Richmond. She was 16 years old. And she will tell you that the defendant drove up to her and said, ‘Hey, you don’t look like you should be out here.’ [¶] She had bags of clothes with her. And she said, ‘I am just trying to get to the BART station.’ [¶] And he said, ‘Well, I will take you.’ [¶] And she said, ‘Are you a pimp?’ [¶] He says, ‘No, I’m not a pimp. You can trust me,’ and she gets into the vehicle. [¶] And as soon as she gets in, he locks the doors, and he says, ‘Of course I’m a pimp. I dare you to touch that door.’ And he motioned to his waist as though he had a gun. [¶] He then took her to an apartment and brutally raped her. After that rape, he said, ‘You know what? I have a heart. I am going to take you to International.’ And he drove her to International Boulevard and pointed out that this is what he does. He turns girls into hoes. [¶] And she begged and pled and said, ‘I’m only 16.’ [¶] And he said, ‘You don’t have a body of a 16-year-old.’ [¶] And through tears and begging and pleading, he finally allowed her to leave.” On May 9, 2018, outside of the presence of the jury, the prosecutor advised the court and defense counsel that Maxine Doe would not be appearing to testify that day as had been previously arranged. The prosecutor explained that she had met with Maxine Doe on several occasions. The prosecutor indicated that Maxine Doe was more than eight months 22 pregnant but was expected to be available to testify the following day. On May 10, without the presence of the jury, the prosecutor explained that Maxine Doe would again not be appearing in court. The prosecutor reported that Maxine Doe was having complications from her pregnancy and was taken to the hospital by ambulance on an emergency basis. The prosecutor also reported that Tiffany Doe was not being cooperative, was extremely fearful of Rich, and had not made herself available. Tiffany Doe was believed to be out of state. 2. The Prosecutor’s Questioning of Theresa Thurston On May 10, 2018, the prosecutor called Theresa Thurston. Thurston testified that she was in the nail shop when a young girl ran in, but she claimed not to remember what she told police officers about the incident. Thurston claimed that her failure to remember began before she talked to the prosecutor and before she was served with a subpoena. When asked if she expressed fear for her safety because she was testifying, she said, “No.” Thurston said the only fear she had was of being put in jail if she failed to appear. The prosecutor then asked, “Did you express fear that the defendant in this case may be involved in a gang?” Thurston said, “No.” There was no defense objection. Thurston admitted that she had refused to talk to the prosecutor’s inspector, declined to further speak with the police, and directed that all communications should go through her husband. When questioned in detail about the statement she gave to the police, she claimed not to recall anything. Thurston admitted that she initially had refused to testify and that she only agreed to do so when she learned there would be a warrant for her arrest if she did not appear in court. The prosecutor again asked Thurston if she 23 was afraid to testify. Thurston reiterated that her only fear was of getting arrested if she did not testify. The prosecutor then asked Thurston if her husband, a former Oakland police officer, had ever arrested Rich. There was an immediate defense objection, which the court sustained. The court immediately admonished the jury to disregard the last part of Thurston’s statement “regarding any prior interaction with her husband.” 3. Rich’s Motion for a Mistrial On May 10, 2018, Rich moved for a mistrial based on the prosecutor’s questioning of Thurston as well as on her reference to witnesses in her opening statement who did not testify. As to the gang question posed to Thurston, the trial court denied the motion because there had not been a timely objection. The court tentatively denied the mistrial motion on the merits but allowed defense counsel further time to file a written motion. After further briefing and argument, the trial court denied the mistrial motion. B. Applicable Law A motion for mistrial is directed to the sound discretion of the trial court and should be granted if the court is apprised of prejudice it deems incurable by admonition or instruction. (People v. Jenkins (2000) 22 Cal.4th 900, 985–986.) “ ‘Whether a particular incident is incurably prejudicial is by its nature a speculative matter, and the trial court is vested with considerable discretion in ruling on mistrial motions.’ [Citation.]” (Id. at p. 986.) “A trial court should grant a mistrial only when a party’s chances of receiving a fair trial have been irreparably damaged, and we use the deferential abuse of discretion standard to review a trial court ruling denying a mistrial. [Citation.]” (People v. Silva (2001) 25 Cal.4th 345, 372.) 24 “Unquestionably, the prosecution may in its opening statement refer to evidence which it believes will be produced. [Citation.]” (People v. Barajas (1983) 145 Cal.App.3d 804, 809.) Thus, “remarks made in an opening statement cannot be charged as misconduct unless the evidence referred to by the prosecutor ‘was “so patently inadmissible as to charge the prosecutor with knowledge that it could never be admitted.” ’ [Citation.]” (People v. Wrest (1992) 3 Cal.4th 1088, 1108; see People v. Rhinehart (1973) 9 Cal.3d 139, 154, disapproved on other grounds in People v. Bolton (1979) 23 Cal.3d 208, 213– 214.) “Even where a defendant shows prosecutorial misconduct occurred, reversal is not required unless the defendant can show he suffered prejudice. [Citation.] Error with respect to prosecutorial misconduct is evaluated under Chapman v. California (1967) 386 U.S. 18 [citations] to the extent federal constitutional rights are implicated and People v. Watson (1956) 46 Cal.2d 818 [citations] if only state law issues were involved.” (People v. Fernandez (2013) 216 Cal.App.4th 540, 564; see People v. Adanandus (2007) 157 Cal.App.4th 496, 514.) Under Chapman, prosecutorial misconduct that violates federal law is not prejudicial if the misconduct was harmless beyond a reasonable doubt. (People v. Katzenberger (2009) 178 Cal.App.4th 1260, 1268–1269; People v. Champion (2005) 134 Cal.App.4th 1440, 1453.) Under Watson, prosecutorial misconduct that violates state law is not prejudicial “ ‘unless it is reasonably probable that a result more favorable to the defendant would have been reached without the misconduct.’ ” (People v. Flores (2020) 9 Cal.5th 371, 403; see People v. Barnett (1998) 17 Cal.4th 1044, 1133 [prosecutorial misconduct is harmless “if it is not reasonably probable that a result more favorable to the defendant would have been reached in its absence”].) 25 C. Analysis 1. Opening Statement There was no prosecutorial misconduct here. First, it is quite clear from the record that at the time she made her opening statement, the prosecutor fully intended to call Maxine Doe and Tiffany Doe to testify to all of the facts mentioned in her opening statement. Before trial, the prosecutor informed the court and defense counsel of her intention to call both these witnesses. The prosecutor obtained an in limine ruling from the trial court allowing her to question Maxine Doe and Tiffany Doe. Rich does not dispute the factual accuracy of the prosecutor’s opening statement; nor does he contend that the prosecutor made reference to any evidence that would have been inadmissible if Maxine Doe and Tiffany Doe had testified. Thus, the evidence the prosecutor outlined in her opening statement was not so patently inadmissible as to charge the prosecutor with knowledge that it could never be admitted. (People v. Wrest, supra, 3 Cal.4th at p. 1108.) We also reject Rich’s argument that the prosecutor’s opening statement violated his federal constitutional rights to due process and a fair trial. Rich argues, “Regardless of the prosecutor’s intentions, the use of facts not proven by evidence in opening statement had a large effect on the jurors’ view of the actual evidence presented.” Although not cited by either party, Frazier v. Cupp (1969) 394 U.S. 731 is directly on point. There, the prosecutor’s opening statement anticipated that a former codefendant would testify against the defendant. (Id. at p. 733.) The summary of the anticipated testimony was not emphasized by the prosecutor and “took only a few minutes to recite . . . .” (Ibid.) At trial the codefendant invoked his privilege against self-incrimination and was excused as a witness. (Id. at p. 734.) The jury was instructed that the opening 26 statement was not evidence. (Id. at p. 735.) Finding neither prosecutorial misconduct nor a constitutional violation, the high court first noted that the codefendant’s statement “was not a vitally important part of the prosecution’s case” and that under those circumstances the limiting instructions given were sufficient to protect the defendant’s constitutional rights. (Ibid.) The court explained: “It may be that some remarks included in an opening or closing statement could be so prejudicial that a finding of error, or even constitutional error, would be unavoidable. But here we have no more than an objective summary of evidence which the prosecutor reasonably expected to produce. Many things might happen during the course of the trial which would prevent the presentation of all the evidence described in advance. Certainly not every variance between the advance description and the actual presentation constitutes reversible error, when a proper limiting instruction has been given. . . . [I]t does not seem at all remarkable to assume that the jury will ordinarily be able to limit its consideration to the evidence introduced during the trial.” (Id. at p. 736.) Here, as in Frazier v. Cupp, supra, 394 U.S. 371, the prosecutor’s opening statement was no more than an objective summary of the testimony she expected to receive from Tiffany Doe and Maxine Doe. The summary was not emphasized in any particular way; it took only a few minutes to recite and preceded the graphic presentation of the brutality Rich perpetrated against Tasha, Mia, and Shante. Also, the remarks concerning Tiffany Doe and Maxine Doe were not a crucial part of the prosecution’s case, particularly in light of the solid eyewitness testimony of Barker, Tasha, Mia, and Shante. Moreover, the trial court repeatedly instructed the jury that statements of counsel, including opening statements, were not evidence; that the jury had to decide the facts based solely on the evidence; and that evidence was 27 limited solely to the testimony of the witnesses and the exhibits received. In these circumstances, we see no reason to depart from the usual assumption “that the jury will ordinarily be able to limit its consideration to the evidence introduced during the trial.” (Id. at p. 736.) Accordingly, we conclude that Rich suffered no constitutional violations and no incurable prejudice arising from the prosecutor’s opening statement. 2. Questioning of Thurston We also reject Rich’s argument that the prosecutor engaged in prejudicial misconduct in her questioning of Thurston. Even assuming this issue were preserved for review, any error was harmless under state and federal standards. In this multiweek trial, with numerous victims recounting graphic acts of violence by Rich, we are hard-pressed to find resulting prejudice from two brief, albeit inflammatory, questions. The questions regarding Rich’s purported gang membership and his prior arrest by Thurston’s husband were not “so highly prejudicial that no admonition of the trial judge to disregard [them] could erase” them from the minds of the jurors. (People v. Brophy (1954) 122 Cal.App.2d 638, 652.) In denying the mistrial, the court explained that it did not give a particularized admonition regarding the gang question because defense counsel did not object when the question was asked and the court did not want to “draw attention to it all over again.” As for the question regarding Rich’s arrest by Thurston’s husband, the court ordered it stricken from the record. The court then immediately admonished the jury “to disregard the last statement of the witness regarding any prior interaction with her husband. And that’s based on the question. There was no answer by the witness.” Although not a model of clarity, the admonition adequately instructed the jury to disregard the question. The trial court repeatedly instructed the jury that statements 28 made by the attorneys are not evidence, that a question is not evidence, and not to consider questions and/or answers that had been stricken by the court. Once again, we see no reason to depart from the usual assumption that the jury understood and followed the court’s instructions. (People v. Sanchez (2001) 26 Cal.4th 834, 852; Frazier v. Cupp, supra, 394 U.S. at p. 736.) 3. Cumulative Error To the extent Rich argues that he was prejudiced by the “cumulative effect” of the prosecutor’s opening statement and questioning of Thurston, this too is without merit. This was not a close case. The extensive evidence regarding Rich’s criminal conduct was overwhelming. Contrary to his contention, we fail to see how the challenged conduct “made Rich appear worse in the eyes of the jury . . . .” The prosecutor’s reference to two witnesses who did not testify and brief questions about Rich’s possible gang involvement and prior arrest were mere drops in an ocean of evidence presented to the jury. On this record, there is simply no basis to find that the prosecutor’s conduct, whether viewed individually or cumulatively, denied Rich a fair trial. (See People v. Cuccia (2002) 97 Cal.App.4th 785, 795 [litmus test for cumulative error is whether defendant received a fair trial].) II. Ability to Pay the Fines and Fees Imposed The trial court imposed a $10,000 restitution fine (Pen. Code, § 1202.4, subd. (b)), imposed and stayed a parole revocation restitution fine of the same amount (id., § 1202.45), imposed a $250 probation investigation fee (id., § 1203.1b), imposed a $520 court operations assessment (id., § 1465.8, subd. (a)(1)), imposed a $390 criminal conviction assessment (Gov. Code, § 70373), and imposed a $300 sex offender registration fine (Pen. Code, § 290.3). The court also imposed a $300 probation revocation restitution fine (id., § 1202.44) due to the fact that Rich’s probation had been revoked in a prior 29 case.4 The court further ordered direct victim restitution (id., § 1202.4, subd. (f)) in the amount of $1,681.54. Rich argues that the case must be remanded because the trial court did not determine he had the ability to pay these fines and fees under People v. Dueñas (2019) 30 Cal.App.5th 1157. First, we will not consider any challenge to the trial court’s order with respect to direct victim restitution under section 1202.4, subdivision (f). Although Rich mentions this award in his briefing, it is unclear that he is contesting it. Courts addressing the issue “have distinguished between direct victim restitution that reimburses victims for economic losses caused by a defendant’s conduct and the restitution fine imposed to punish the defendant” and have declined to extend the rule announced in Dueñas to direct victim restitution. (People v. Belloso (2019) 42 Cal.App.5th 647, 658, fn. 8; see People v. Abrahamian (2020) 45 Cal.App.5th 314, 338; People v. Evans (2019) 39 Cal.App.5th 771, 777.) Rich’s Dueñas argument does not attempt to address this important distinction. In fact, it provides no reasoned analysis of any kind with respect to the application of Dueñas to direct victim restitution. We conclude that Rich has failed to raise the issue in a manner sufficient to warrant our appellate consideration. (See People v. Stanley (1995) 10 Cal.4th 764, 793 [where no “ ‘legal argument with citation of authorities’ ” is furnished on a particular point, “ ‘the court may treat it as waived, and pass it without consideration’ ”].) 4 Rich fails to mention this fee. Although this fee is not referenced in the sentencing minute order or in the abstract of judgment, at the sentencing hearing the trial court imposed a “$300 probation revocation restitution fine in light of the fact that probation was revoked and found to be true, . . . pursuant to . . . section 1202.44.” As discussed in part IV, post, we shall order correction of the sentencing minute order and abstract of judgment. 30 Turning to the $10,000 restitution fine at issue, section 1202.4 requires the imposition of such a fine upon conviction of a crime, unless the court “finds compelling and extraordinary reasons for not doing so . . . .” (§ 1202.4, subd. (b).) The minimum restitution fine for felony convictions is $300, and the maximum fine is $10,000. (Id., subd. (b)(1).) The statute expressly provides that “[a] defendant’s inability to pay shall not be considered a compelling and extraordinary reason not to impose a restitution fine.” (Id., subd. (c).) However, “[i]nability to pay may be considered . . . in increasing the amount of the restitution fine in excess of the minimum fine pursuant to paragraph (1) of subdivision (b).” (Ibid.) The burden of demonstrating such inability to pay lies with the defendant. (Id., subd. (d); see People v. Castellano (2019) 33 Cal.App.5th 485, 490 [“Consistent with Dueñas, a defendant must in the first instance contest in the trial court his or her ability to pay”].) Here, Rich concedes he did not object to imposition of the fines and fees. In the wake of Dueñas, courts have taken varying positions on the issue of forfeiture. For example, in People v. Johnson (2019) 35 Cal.App.5th 134, another division of this court concluded the defendant had not forfeited a “present ability to pay” challenge to a “court security fee” (Pen. Code, § 1465.8), a criminal conviction assessment (Gov. Code, § 70373), and a restitution fine of $300, stating, “There is a well-established exception to the forfeiture doctrine where a change in the law—warranting the assertion of a particular objection, where it would have been futile to object before—was not reasonably foreseeable.” (Johnson, at pp. 137–138.) The Johnson court concluded the holding in Dueñas was not reasonably foreseeable. (Ibid.; accord, People v. Castellano, supra, 33 Cal.App.5th at p. 489 [“When, as here, the defendant’s challenge on direct appeal is based on a newly announced 31 constitutional principle that could not reasonably have been anticipated at the time of trial, reviewing courts have declined to find forfeiture”].) In People v. Frandsen (2019) 33 Cal.App.5th 1126, the appellate court reached the opposite conclusion. While acknowledging the exception to forfeiture where there has been a change in the law that was not reasonably foreseeable, the Frandsen court concluded Dueñas did not represent a “dramatic and unforeseen change in the law governing assessments and restitution fines . . . [because] [s]ection 1202.4 expressly contemplates an objection based on inability to pay.” (Id. at p. 1153.) In People v. Gutierrez (2019) 35 Cal.App.5th 1027, the appellate court found “it unnecessary to address any perceived disagreement on the forfeiture issue,” explaining that both “Castellano and Johnson involved situations in which the trial court imposed the statutory minimum restitution fine.” (Id. at pp. 1032–1033.) Here, as in Gutierrez and in Frandsen, “the trial court imposed the statutory maximum restitution fine.” (Id. at p. 1033.) Under these circumstances, an objection clearly would not have been futile as trial courts are statutorily authorized to consider a defendant’s inability to pay any restitution fine above the statutory minimum. (§ 1202.4, subds. (c) & (d).) As the Gutierrez court observed, “even before Dueñas, a defendant had every incentive to object to imposition of a maximum restitution fine based on inability to pay because governing law as reflected in the statute (§ 1202.4, subd. (c)) expressly permitted such a challenge.” (People v. Gutierrez, supra, 35 Cal.App.5th at p. 1033.) 32 Accordingly, we conclude that Rich forfeited any challenge to the restitution fine.5 (See People v. Smith (2020) 46 Cal.App.5th 375, 394–395 [failure to object to imposition of maximum restitution fine on inability to pay grounds resulted in forfeiture of claim]; People v. Gutierrez, supra, 35 Cal.App.5th at pp. 1032–1033.) Moreover, several courts have held that where a defendant does not object to imposition of the maximum restitution fine on grounds of inability to pay, such failure also forfeits claims of inability to pay the lesser criminal sum imposed for other fees and assessments. (E.g., People v. Smith, supra, 46 Cal.App.5th at p. 395; People v. Gutierrez, supra, 35 Cal.App.5th at p. 1033 [“As a practical matter, if Gutierrez chose not to object to a $10,000 restitution fine based on an inability to pay, he surely would not complain on similar grounds regarding an additional $1,300 in fees”]; People v. Frandsen, supra, 33 Cal.App.5th at p. 1154 [“Given his failure to object to a $10,000 restitution fine based on inability to pay, Frandsen has not shown a basis to vacate assessments totaling $120 for inability to pay”].) We agree. Unlike the defendant in Dueñas, Rich had a statutory right to an ability to pay hearing that he did not exercise, thus forfeiting his appellate claim that such a hearing was required. Had he requested such a hearing, the same evidence relevant to his inability to pay the $10,000 restitution fine could also have established an inability to pay these smaller assessments. We thus conclude that Rich has forfeited the opportunity to raise an ability to pay challenge with respect to the other fines, fees, and assessments imposed. 5 Rich also forfeited the right to challenge the imposition of the sex offender registration fee. (§ 290.3, subd. (a).) That statute “authorizes the court to consider ability to pay, the court found he had the ability to pay, and he failed to object.” (People v. Gutierrez, supra, 35 Cal.App.5th at p. 1033, fn. 12.) 33 Rich alternatively makes the passing argument that his trial counsel was ineffective for failing to preserve the inability to pay issue on appeal. “It is particularly difficult to prevail on an appellate claim of ineffective assistance. On direct appeal, a conviction will be reversed for ineffective assistance only if (1) the record affirmatively discloses counsel had no rational tactical purpose for the challenged act or omission, (2) counsel was asked for a reason and failed to provide one, or (3) there simply could be no satisfactory explanation.” (People v. Mai (2013) 57 Cal.4th 986, 1009, italics omitted.) Rich’s claim is without merit because we cannot determine from the record why counsel failed to request a hearing on his ability to pay. It is possible that Rich did have the ability to pay the fines and fees and that counsel made a rational decision not to raise the issue. That Rich qualified for appointed counsel does not necessarily mean that he cannot afford to pay the restitution fine and other fees and assessments imposed. Moreover, his claim that he suffers from a “disabling back injury” does not suggest that he is permanently disabled to such a degree that he will be ineligible for or unable to perform any prison work assignments. Thus, in the absence of a record from which we could determine that Rich did not have the ability to pay the fines and fees imposed, Rich has failed to establish a reasonable probability that if counsel had raised the issue below he would have obtained relief. (Strickland v. Washington (1984) 466 U.S. 668, 694.) We therefore reject Rich’s ineffective assistance claim. III. Sentencing Modifications Rich contends his sentence regarding the ninth count (torture of Mia) must be stayed pursuant to section 654 because it is based on the same facts of the seventh and eighth counts (separate acts of forcible penetration of 34 Mia). The Attorney General concedes that the court erred and urges us to modify the sentence regarding the ninth count. The Attorney General also points out a sentencing error regarding the third count (sodomy of Shante), which Rich concedes requires correction. A. The Ninth Count (Torture—Mia Doe) Section 654, subdivision (a) admonishes that an act “punishable in different ways by different provisions of law shall be punished under the provision that provides for the longest potential term of imprisonment, but in no case shall the act . . . be punished under more than one provision.” “ ‘Section 654 does not preclude multiple convictions but only multiple punishments for a single act or indivisible course of conduct.’ ” (People v. Pinon (2016) 6 Cal.App.5th 956, 967, quoting People v. Miller (1977) 18 Cal.3d 873, 885.) “Whether a defendant may be subjected to multiple punishment under section 654 requires a two-step inquiry . . . . We first consider if the different crimes were completed by a ‘single physical act.’ [Citation.] If so, the defendant may not be punished more than once for that act. Only if we conclude that the case involves more than a single act . . . do we then consider whether that course of conduct reflects a single ‘ “intent and objective” ’ or multiple intents and objectives.” (People v. Corpening (2016) 2 Cal.5th 307, 311–312.) The statute prohibits separate punishment “for both torture and any of the underlying assaultive offenses upon which the prosecution relies to prove that element.” (People v. Mejia (2017) 9 Cal.App.5th 1036, 1044–1045.) Here, as the Attorney General concedes, the prosecutor relied on the same facts to support the torture conviction (§ 206) in the ninth count 35 regarding Mia Doe6 and the two convictions of forcible sexual penetration of a minor (§ 289, subd. (a)(1)(C)) in the seventh and eighth counts regarding Mia. As to the seventh count, the court imposed the upper term of 10 years, stayed that term (§ 654), and imposed a consecutive term of 25 years to life for an enhancement (§ 12022.7, subd. (a)). As to the eighth count, the court imposed the upper term of 10 years, stayed that term (§ 654), and imposed a consecutive term of 25 years to life for an enhancement (§ 667.61, subd. (m)). As to the ninth count, the court imposed a consecutive term of seven years to life. As the term imposed for the ninth count is the lesser term, it should be stayed pursuant to section 654 because it was based on the same acts with the same intent based on the two separate incidents charged in the seventh and eighth counts. Rather than remand the case to the trial court, it is appropriate under these circumstances—where there is no discretion for the trial court to exercise—for this court to simply modify the judgment by ordering that the term for the ninth count be stayed. (See People v. Alford (2010) 180 Cal.App.4th 1463, 1473; People v. Butler (1996) 43 Cal.App.4th 1224, 1248 [“Where multiple punishment has been improperly imposed, ‘ . . . the proper procedure is for the reviewing court to modify the sentence to stay imposition of the lesser term’ ”].) B. The Third Count (Sodomy—Shante Doe) The jury returned a verdict of guilty of forcible sodomy in the third count but found the enhancement allegations as to that charge “not true.” As to the third count, the court imposed the upper term of eight years, stayed that term (§ 654), and imposed a consecutive sentence of 15 years to life The flatiron torture of Tasha Doe was separately charged in the 6 thirteenth count. 36 based on the enhancement under section 667.61, subdivision (c). The sentence based on the enhancement that the jury found not true was erroneous and unauthorized under the law. (See People v. Irvin (1991) 230 Cal.App.3d 180, 190.) When an appellate court becomes aware of an unauthorized sentence, the sentence should be corrected, even if it means a more severe punishment for the defendant. (See People v. Serrato (1973) 9 Cal.3d 753, 765, disapproved on other grounds by People v. Fosselman (1983) 33 Cal.3d 572, 583, fn. 1.) Here, the 15-years-to-life enhancement for the third count was unauthorized and should be stricken. The eight-year sentence for the third count that was stayed should be imposed, and the abstract of judgment and clerk’s minutes should be corrected accordingly. (See People v. Gutierrez (1996) 48 Cal.App.4th 1894, 1896 [no purpose served in remanding for reconsideration when trial court indicated its sentencing choices].) IV. Corrections to Sentencing Minute Order and Abstract of Judgment As the Attorney General notes, at the sentencing hearing the trial court imposed a one-year term for Rich’s prior prison felony conviction (§ 667.5, subd. (b)) but did not stay that term. The sentencing minute order reflects that this term was not stayed. The abstract of judgment, however, reflects that this term was stayed. “Where there is a discrepancy between the oral pronouncement of judgment and the minute order or the abstract of judgment, the oral pronouncement controls.” (People v. Zackery (2007) 147 Cal.App.4th 380, 385; accord, People v. Mesa (1975) 14 Cal.3d 466, 471.) Here, the oral pronouncement controls over the inconsistent and incorrect sentence set forth in the abstract of judgment. Similarly, the sentencing minute order and the abstract of judgment must be corrected to accurately reflect the trial court’s 37 oral pronouncement of the “$300 probation revocation restitution fine . . . pursuant to . . .section 1202.44.” DISPOSITION The sentence is modified as to the ninth count (§ 206; torture) to stay the consecutive seven-years-to-life term pursuant to section 654. The sentence is further modified as to the third count (§ 286, subd. (c)(2)(A); forcible sodomy) to strike the 15-years-to-life enhancement (§ 667.61, subd. (c)), to strike the stay pursuant to section 654, and to impose the eight-year consecutive term. The abstract of judgment is modified to reflect that the one-year sentence for Rich’s prior prison felony conviction (§ 667.5, subd. (b)) is not stayed. The abstract of judgment and the sentencing minute order are modified to reflect the $300 probation revocation restitution fine (§ 12022.44) imposed by the trial court. The trial court is directed to prepare a corrected abstract of judgment and to correct the sentencing minute order dated June 29, 2018, in accordance with this disposition. The trial court is further directed to forward a certified copy of the corrected abstract of judgment to the Department of Corrections and Rehabilitation. In all other respects, the judgment is affirmed. 38 _________________________ Jackson, J. WE CONCUR: _________________________ Fujisaki, Acting P. J. _________________________ Petrou, J. A155040/People v. Albert Earl Rich 39	01-04-2023	01-22-2021
https://www.courtlistener.com/api/rest/v3/opinions/4620065/	Estate of Ralph B. Campbell, Deceased (Mabel W. Campbell, Administratrix), and Mabel W. Campbell, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Campbell v. CommissionerDocket Nos. 2540-68, 2831-68United States Tax Court56 T.C. 1; 1971 U.S. Tax Ct. LEXIS 157; April 6, 1971, Filed 1971 U.S. Tax Ct. LEXIS 157">157 Decisions will be entered under Rule 50. 1. Certain "service stock" was unrestricted when first acquired by promoter; it was later placed in escrow and subjected to certain restrictions. Held, gain thereafter realized by promoter upon subsequent sales of his rights in such escrowed stock was capital gain rather than ordinary income.2. Held, petitioners failed to carry burden of proving error in Commissioner's determination that an item of $ 8,217.91 represented unreported income.3. Held, in the light of a history of filing joint returns over a period of years and of the wife's reliance upon her husband in their financial affairs, that a return purporting to be the joint return of both spouses for 1964 was in fact intended to be a joint return notwithstanding that the wife's signature was not in her handwriting.4. Addition to tax for negligence determined by the Commissioner under sec. 6653(a), I.R.C. 1954, approved in the absence of evidence showing that the Commissioner erred. Charles R. Hembree, Dan E. Fowler, and Philip E. Wilson, for the petitioners.Juandell D. Glass, for the respondent. Raum, Judge. RAUM56 T.C. 1">1 The Commissioner made the following determinations of deficiencies and addition to tax in the petitioners' income tax:Addition to tax sec.YearDeficiency6653(a), I.R.C.19541963$ 4,150.77$ 207.5419648,299.091971 U.S. Tax Ct. LEXIS 157">159 56 T.C. 1">2 Four issues remain for decision: 1 (1) Whether Ralph B. Campbell realized ordinary income or capital gain from the sale of his rights in certain shares of stock in The Oaks, Inc., in 1963 and 1964; (2) whether he received unreported compensation in the amount of $ 8,217.91 in 1963 from The Oaks, Inc.; (3) whether petitioner Mabel W. Campbell filed a joint income tax return with her husband, Ralph B. Campbell, for 1964; and (4) whether petitioners are liable for the section 6653(a) addition to tax for 1963.FINDINGS OF FACTThe parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.Petitioner Mabel W. Campbell (hereinafter sometimes referred to as Mabel, or Mrs. Campbell, or petitioner) and her husband, Ralph B. Campbell (hereinafter sometimes referred to as Ralph, Campbell, or Mr. Campbell), resided at 316 Mariemont Drive, Lexington, Ky., during1971 U.S. Tax Ct. LEXIS 157">160 the taxable years 1963 and 1964. Ralph died on July 20, 1967, and Mabel was appointed administratrix of his estate. She has contined to reside at the foregoing address at least up to the time of the filing of the petitions herein.Mr. and Mrs. Campbell filed a joint Federal income tax return for 1963 with the district director of internal revenue at Louisville, Ky. They had previously filed joint returns at least for the years 1960, 1961, and 1962, and they continued to file joint returns for the years 1965 and 1966. A 1964 Federal income tax return -- in the name of "Ralph B. and Mabel W. Campbell" -- was also filed with the district director of internal revenue at Louisville. That return was signed "Ralph B & Mabel W Campbell"; no part of that signature was in Mabel's handwriting. The 1964 return purported to be a joint return. A check ("X") was placed in the box beside "Married filing joint return (even if only one had income)." Exemptions were taken for both spouses and one child. Mrs. Campbell had no separate income in 1964; however, the return claimed itemized deductions in the aggregate of $ 5,667.02, and the record fails to establish that no portion thereof was allocable1971 U.S. Tax Ct. LEXIS 157">161 to her. During the audit of the 1964 return Mrs. Campbell did not raise the issue with the examining agent that she had not signed the return. Mr. Campbell handled all of the couple's financial affairs. Accordingly, Mrs. Campbell did not participate in preparing any of the returns filed for the years 1960-66. Although she knew what she was doing when she signed the joint returns for each of the years 1960, 1961, 1962, 1963, 1965, and 1966, she did not examine any of them before signing and she knew nothing about the income tax returns. She 56 T.C. 1">3 accepted her husband's preparation of all the returns, and at least tacitly approved or acquiesced in the filing of a joint return for 1964. She intended to file a joint return with her husband for that year.At some undisclosed time prior to the fall of 1961, Mr. Campbell, who had a background in the restaurant and motel business, conceived the idea of establishing a luxury or resort-type hotel in a suburban area near Lexington, Ky. With that end in view he obtained an option in October 1961 to purchase a tract of some 20 acres of land that was thought to be suitable for that purpose. Two persons named Grissom and Pessin were associated1971 U.S. Tax Ct. LEXIS 157">162 with him in the project. With the assistance of Frank Gilliam, a Lexington lawyer, a Kentucky corporation named "The Oaks, Inc." (hereinafter sometimes referred to as The Oaks) was formed, and articles of incorporation therefor were filed by Campbell, Grissom, and Pessin as incorporators with the secretary of state of Kentucky on or about November 8, 1961. Although the articles of incorporation provided for 10,000 shares of authorized stock, no certificates evidencing shares of stock were formally issued at that time or at any other time prior to August 1, 1962, as hereinafter set forth.Grissom and Pessin's interest in the venture was terminated in May or June 1962, when they transferred all their rights therein to Campbell. Meanwhile a group of other persons began to render services in connection with the project, particularly in respect of obtaining financing therefor, and Campbell reached an understanding with them as to an "apportionment of rights" in the corporation to reflect the interest of each of these persons in the corporation for services rendered. Thereafter, on August 1, 1962, Campbell, as the "sole stockholder," held "The first meeting of the sole stockholder" 1971 U.S. Tax Ct. LEXIS 157">163 of The Oaks at Gilliam's office, and he passed a resolution providing for the issuance of 1,250 shares. Such shares were to be issued to himself and the various members of the foregoing group as follows:Number of SharesRalph B. Campbell615W. Russell Campbell125James A. Clark100Rick Wolfinbarger125G. Frank Vaughan, Jr100Frank G. Gilliam125Delio Vega60These shares represented "service" stock and were allotted for services rendered. Certificates for such shares were actually issued at that time on blank forms that had not been specially printed for The Oaks; the name of the corporation and other pertinent data were "[typed] in," and the forms were signed by Campbell and Gilliam as president and secretary, respectively. The 615 service shares received by Campbell were not reported as ordinary income in any 56 T.C. 1">4 of the returns filed for 1962, 1963, or 1964. He regarded them as being "of nominal if any value" at the time of receipt.Various attempts to obtain private financing for the venture had proved unsuccessful prior to August 1, 1962, and consideration was being given to the possibility of obtaining financing through a public issuance of stock. 1971 U.S. Tax Ct. LEXIS 157">164 It was to that end that Campbell "determined" at the foregoing "first meeting of the sole stockholder" that the number of authorized shares should be increased to 1 million, of which 400,000 would be offered to the public at $ 5 per share less a commission of $ 1 a share to two persons named Leroy Eckley and Gary Rose, with whom Campbell had been conducting negotiations in this connection.It was also determined at the foregoing August 1, 1962, meeting that when the number of authorized shares was increased, the number of shares to be issued to the persons named above would be increased proportionately (with an exception hereinafter noted) as follows:Number of sharesRalph B. Campbell61,250W. Russell Campbell12,500James A. Clark10,000Rick Wolfinbarger12,500G. Frank Vaughan, Jr10,000Frank G. Gilliam12,500Delio Vega6,000William S. Black250The exception related to the 250 shares allocated to William S. Black, which were to be "issued out of" Campbell's portion. Black was associated in the practice of law with Gilliam, and at that meeting Campbell, Black, and Gilliam were "elected" as directors.It was understood that the certificates for the original1971 U.S. Tax Ct. LEXIS 157">165 1,250 shares would be endorsed back by the shareholders and they were to receive in return at some later time certificates representing the increased number of shares to which they were to be entitled as a result of the anticipated 100-fold increase in the number of authorized shares.The first meeting of the board of directors of The Oaks was also held on August 1, 1962. The board noted and approved the action at the first stockholders meeting to increase the number of authorized shares of stock from 10,000 to 1 million and obligated the corporation to issue 125,000 of the new shares to the current stockholders. By resolution the board also authorized Campbell to pursue negotiations with Eckley and Rose concerning the public issue of 400,000 shares in The Oaks.The articles of incorporation were amended on September 11, 1962, to provide for 1 million shares of authorized stock. However, the record does not show that any new or substitute certificates of stock (reflecting the 100-for-1 split) were issued prior to December 18, 1962.56 T.C. 1">5 Also on September 11, 1962, The Oaks entered into an agreement with Eckley and Rose whereby Eckley and Rose became the exclusive agents for 1971 U.S. Tax Ct. LEXIS 157">166 the public sale of 400,000 shares of the corporation's stock for $ 5 a share at a commission of $ 1 a share.Both Campbell and Gilliam were aware that the contemplated public issue was subject to approval by the Kentucky Division of Securities, and that under section 292.380 of the Kentucky Revised Statutes (Securities), 2 the director of the Division of Securities "may require as a condition of registration by qualification * * * that * * * any security issued within the past three years, or to be issued, to a promoter for a consideration substantially different from the public offering price, or to any person for a consideration other than cash, be delivered in escrow." The statute provided further that until certain dividend requirements have been met, the securities must remain in escrow and the owners thereof are not entitled to sell or transfer them.1971 U.S. Tax Ct. LEXIS 157">167 On September 24, 1962, The Oaks filed an application with the Kentucky Division of Securities for the registration of 400,000 shares of its stock for public sale. Thereafter, on September 25, 1962, pursuant to "an order of the Director of the Division of Securities," Campbell executed an "Escrow Agreement" purporting to cover 125,000 shares of stock in The Oaks, Inc. The escrow agreement was filed with the Division of Securities on September 27, 1962. It was on a printed form which provided in part as follows:The said certificates of stock being hereby deposited with said Director in escrow to be held by him in trust for me and upon the following conditions:That he shall retain the possession of said securities and the owners of such securities shall not be entitled to sell or transfer such securities or withdraw them from escrow until all other stockholders who have paid for their stock in cash shall have been paid a dividend, or dividends aggregating not less than six (6) per cent of the initial offering price, shown to the satisfaction of the Director to have been actually earned on the investment in any common stock so held, * 56 T.C. 1">6 Under the escrow agreement the1971 U.S. Tax Ct. LEXIS 157">168 director of the Division of Securities was also given the right to vote the 125,000 shares during the time they remained in escrow. The shares were escrowed in Campbell's name and he alone executed the escrow agreement. However, the following typewritten words were inserted in the printed form: "Said shares to be held in escrow and, upon release, delivered to the persons at the addresses and in the number of shares (as per attached schedule)." The schedule referred to reflected the same shareholders and same holdings as the second list in the minutes of the August 1, 1962, stockholders meeting set forth above. Although the escrow agreement represented that the stock certificates were being contemporaneously deposited into escrow, the stock certificates were not in fact deposited at that time.An "Impounding Agreement" was executed by Campbell and Gilliam, as representatives of The Oaks, also on September 25, 1962, and accepted by the impounding agent, Citizens Union National Bank & Trust Co., Lexington, Ky., on September 27, 1962. This impounding agreement was entered into pursuant to the provisions of section 292.380, Ky. Rev. Stat. (Securities), 3 and provided for impounding1971 U.S. Tax Ct. LEXIS 157">169 part of the proceeds from the public sale of securities in order to insure completion of the undertaking.On October 3, 1962, officers of the Division of Securities notified Gilliam that a registration certificate for the public issue of stock in The Oaks had been granted on September 28, 1962. In the letter accompanying the registration certificate the following reference was made to the escrow agreement filed by Campbell:The Escrow Agreement which was notarized September 25, 1962, escrowing 125,000 shares of stock in the name of Ralph B. Campbell, to later be distributed as per attached schedule to the Escrow Agreement, names the Director of Securities as the Escrow Agent. Therefore, since you kept one copy of the Agreement and sent us one copy, this area is complied with until the service stock is issued. At the time of issuance, send the Stock Certificates to the attention of the Director of Securities and they will be escrowed in accordance with the terms of the Agreement.1971 U.S. Tax Ct. LEXIS 157">170 By this letter the Division of Securities requested that the stock certificates covered by the escrow agreement be forwarded into escrow "At the time of issuance." In this and subsequent correspondence, the Division of Securities regarded the 125,000 shares of The Oaks stock as being issued initially to Campbell and only distributed out of escrow to the other persons mentioned in the minutes of the August 1, 1962, stockholders meeting, and in the escrow agreement.The public sale of stock by Eckley and Rose did not meet expectations, and at a special meeting of the board of directors of The Oaks56 T.C. 1">7 on November 1, 1962, a resolution was adopted in which the agreement for public sale by Eckley and Rose (referred to in the resolution as the "contract with Gary Rose") was declared to be "cancelled and * * * void for all purposes," and in which it was stated that the public sale of the stock would be continued by the corporation itself through two of its directors as agents for that purpose.On December 10, 1962, the Division of Securities wrote to Gilliam reiterating its request in prior correspondence that "immediately upon issuance of the 125,000 shares of service stock to 1971 U.S. Tax Ct. LEXIS 157">171 Mr. Ralph Campbell * * we will expect such shares to be placed in escrow with this office." Gilliam had been experiencing difficulties in gathering up the original certificates issued at the stockholders meeting of August 1, 1962, so that certificates representing the increased number of shares might be issued in lieu thereof. It was not until December 18, 1962, that stock certificates representing the 125,000 shares were finally forwarded to the Division of Securities in accordance with the escrow agreement.Campbell devoted considerable time and effort to The Oaks project in 1963. He sold stock, helped manage the sales office, engaged in planning, and represented the corporation in dealings with the contractor that was working on the foundation for the building. At a meeting of the board of directors on August 8, 1963, it was agreed that Campbell "was to go on salary in the amount of $ 1,500. per month, retroactive as of June 15, 1963, and to continue until 30 days before equipment goes in."The completion of the hotel project was impeded in various respects. Although some financing had been obtained from a corporation known as Insurance Investors Trust Co. (IITC), The Oaks1971 U.S. Tax Ct. LEXIS 157">172 had insufficient funds with which to pay its bills. Substantial amounts were due to the contractor, the architect, and others. A meeting of the board of directors was held on November 27, 1963, to deal with the situation. A deputy for the Kentucky Division of Securities was present at the meeting, and he advised that unless something were done to clear up the indebtedness, he could not permit further sales of stock. It was agreed that executive authority of the corporation would be conferred on a person named Ralph Higgins, who was interested in IITC, to bring about the completion of the project. A resolution was approved at that meeting which provided, among other things, that Campbell's $ 1,500 per month salary would become subject to approval by Higgins. A readjustment of the 125,000 service shares was also agreed to at that meeting, whereby 97,300 shares were allocated to IITC. Campbell's service stock was reduced to 18,850 shares.At some undisclosed time during 1963, Campbell sold his rights in 1,000 shares of The Oaks stock (then in escrow) for $ 5,000 to a person 56 T.C. 1">8 named Tom Borders. This transaction was not reported on the 1963 tax return. The 1963 return claimed1971 U.S. Tax Ct. LEXIS 157">173 a "capital loss carryover to 1963" in the amount of $ 13,560.29. In determining the deficiency for 1963 the Commissioner has treated the $ 5,000 proceeds of the foregoing sale as ordinary income. The petitioners do not dispute that the entire $ 5,000 represents income received in 1963 but contend that it must be classified as long-term capital gain.On May 20, 1964, Campbell sold his remaining rights in the escrowed service stock to IITC for $ 40,000. A long-term capital gain of $ 33,183 reflecting this transaction was reported in the 1964 tax return. The record contains no explanation of the $ 6,817 basis that was subtracted in computing that gain, and the Commissioner does not contest the amount of the gain. However, the Commissioner has rejected the treatment of that amount as capital gain and has classified it as ordinary income in his determination of deficiency.The service stock of The Oaks, including the shares in respect of which Campbell sold his interests, remained in escrow with the Kentucky Division of Securities until at least November 29, 1967.The 1963 joint tax return filed by Mr. and Mrs. Campbell reported "Commissions" of $ 7,500 received by Campbell from The1971 U.S. Tax Ct. LEXIS 157">174 Oaks. In connection with $ 7,500 commissions thus reported a deduction of $ 902.50 was claimed for "auto expense." The return also reported an additional amount of $ 234.09 received from The Oaks on line 1, which asked for "Wages, salaries, tips, etc., and excess of allowances over business expenses." That item was also reported in the information return (Form 1099) filed by The Oaks for 1963 in a column captioned "Salaries, fees, commissions, prizes, awards, or other compensation." The Campbells' 1963 joint return did not report any income from The Oaks other than the two foregoing items. One question on the 1963 tax return inquired as follows: "Did you receive an expense allowance or reimbursement, or charge expenses to your employer?" To this question the answer "No" was checked ("X").The 1963 return failed to report $ 8,217.91 additional income received from The Oaks by Campbell in 1963.The Commissioner determined that an addition to tax should be assessed under section 6653(a), I.R.C. 1954, for underpayment of tax in 1963 "due to negligence or intentional disregard of rules and regulations." Petitioners have failed to carry their burden of proof in respect of this issue. 1971 U.S. Tax Ct. LEXIS 157">175 OPINION1. Sales of interests in service stock. -- There is no dispute between the parties that Campbell received his stock in The Oaks initially as compensation for services, and that such stock may properly be classified as "service stock." However, it is petitioners' 56 T.C. 1">9 position that such stock had only a negligible value when Campbell first became entitled to it, that it was completely unrestricted when he received it, that it became restricted only at a later time when it was placed in escrow or committed to be placed in escrow, and that the sale of his interests therein must be regarded as the sale of a long-term capital asset. The Government doesn't challenge the fact that the stock was held for more than 6 months, or that the stock otherwise qualified as a capital asset (apart from its contention that the stock was restricted when received), but it does contend that the stock was restricted when Campbell received it and that the sales of his rights to such restricted service stock resulted in the realization of ordinary income in accordance with regulations section 1.61-2(d) 41971 U.S. Tax Ct. LEXIS 157">176 and section 1.421-6(d)(2). 5 We hold for petitioners on this issue.The Government argues that Campbell first acquired an interest in the1971 U.S. Tax Ct. LEXIS 157">177 stock on December 18, 1962, when it was subject to escrow and therefore was "subject to a restriction which [had] a significant effect on its value" within the terms of the regulations. Alternatively, it contends that even if August 1, 1962, be regarded as the date of acquisition, the stock was similarly burdened by reason of the plans and expectations to go forward with a public offering of The Oaks stock that would result in like restrictions on Campbell's shares. We reject these arguments as unsound. In the first place, under Kentucky law, Campbell became a stockholder as early as November 8, 1961, when he, together with Grissom and Pessin, as incorporators, filed the articles of incorporation with the secretary of state of Kentucky. Under Kentucky law, not only is an incorporator required to subscribe to at 56 T.C. 1">10 least one share of stock at the time of incorporation, Ky. Rev. Stat. sec. 271.035, but, upon issuance of the certificate of incorporation, those persons who have subscribed for shares prior thereto "shall be shareholders in the corporation," Ky. Rev. Stat. sec. 271.065. Moreover, we have recognized that "Generally, the issuance of a certificate is not necessary1971 U.S. Tax Ct. LEXIS 157">178 to constitute one a stockholder." Wesley H. Morgan, 46 T.C. 878">46 T.C. 878, 46 T.C. 878">890. And we stated further in that case (p. 890):Also, the date of delivery of the certificate is not controlling as to the date a subscriber becomes a stockholder. The stock certificate is merely the documentary evidence of membership in a corporate organization and an attestation of the stockholder's ownership of shares of interest therein. * * See also John E. Byrne, 54 T.C. 1632">54 T.C. 1632, 54 T.C. 1632">1639. The case law in Kentucky is consistent with these views. 61971 U.S. Tax Ct. LEXIS 157">179 In our view, not only did Campbell become a stockholder as early as November 1961, but he became the sole stockholder no later than the day in May or June 1962 when Grissom and Pessin assigned all their rights in the corporation to him. It was after those assignments that Campbell negotiated the "apportionment of rights" with the persons with whom he had become associated in seeking private financing for the project. His and their rights thus became fixed prior to August 1, 1962, when the first stockholders meeting was held and when that "apportionment" was formally recognized in the corporate minutes. Moreover, the "apportionment of rights" to these other persons flowed from Campbell's complete ownership of all rights in the corporation, and resulted merely in a decrease of his rights to stock therein, all of which he became entitled to before the plan for a public issue displaced the efforts to obtain private financing. In short, we find that Campbell's rights to the 615 shares of stock (out of the original authorization of 10,000 shares) that were formally allocated to him in the minutes of the August 1, 1962, meeting had been acquired by him at an earlier date free1971 U.S. Tax Ct. LEXIS 157">180 and clear of any restrictions. In such circumstances, the entire foundation for the Government's position collapses, and we must conclude that the 1963 and 1964 sales of Campbell's rights in the stock were capital transactions that did not result in the receipt of ordinary income in accordance with the regulations relied upon by the Government.However, even if August 1, 1962, be regarded as the date when Campbell acquired his rights to the stock in question, we must still conclude that his shares were not then burdened with any restrictions. True, a public issue was then contemplated, but we cannot find that 56 T.C. 1">11 there was any commitment at that time for any such public issue. Rather the record indicates that private financing was still regarded as more desirable and would be employed, rather than public financing, if it should become available. It was only on September 11, 1962, that the contract with Eckley and Rose was executed, and it was also on that day that the articles of incorporation were amended to increase the number of authorized shares of capital stock to 1 million. Perhaps of even greater significance are the facts that the application for registration1971 U.S. Tax Ct. LEXIS 157">181 of the issue for public sale was filed as late as September 24, 1962, that the escrow agreement was executed and filed thereafter, and that the registration certificate was issued still later, on September 28, 1962. Plainly, Campbell's shares of stock were not restricted on August 1, 1962, the latest day on which, in our view, he could possibly have acquired his shares. We reject as wholly unsound the contention that he received them for the first time on December 18, 1962, when the reissued certificates, reflecting the 100-for-1 split, were sent to the Kentucky Division of Securities.2. Receipt of $ 8,217.91 unreported income from The Oaks in 1963. -- The 1963 joint return of the Campbells disclosed two items of income from The Oaks: (a) "commissions" in the amount of $ 7,500 against which a $ 902.50 deduction for "auto expense" was claimed, leaving a net of $ 6,597.50; and (b) "wages, salaries * " in the amount of $ 234.09. The Commissioner determined that in addition to the foregoing items Campbell received unreported income in the amount of $ 8,217.91 from The Oaks. The burden of proof is, of course, upon petitioners to show error in that determination, and in our1971 U.S. Tax Ct. LEXIS 157">182 judgment that burden has not been met. 7The record in respect of this item is both skimpy and murky. There was no convincing showing that Campbell1971 U.S. Tax Ct. LEXIS 157">183 did not receive any such funds from The Oaks, although petitioners seem to suggest if such funds were received they merely represented reimbursements of expenses incurred by Campbell on behalf of The Oaks. No such conclusion is reasonably possible on this record. We note not only that a $ 902.50 deduction for "auto expense" was claimed on the return, but also that the Campbells gave a "No" answer to the question "Did you receive an expense allowance or reimbursement, or charge expenses 56 T.C. 1">12 to your employer?" The testimony of Campbell's accountant, who signed the return as preparer, to the effect that the "No" box was erroneously checked by a junior in his office had a hollow ring. 8 Whether Campbell had actually incurred any such expenses, the amounts thereof or the time or times when they were incurred, or whether he in fact made the type of itemized accounting therefor to The Oaks as required by section 1.162-17(b)(1) and (4), Income Tax Regs., so as to relieve him of the duty of reporting reimbursements for the expenses -- all these remain a mystery to us on this record. We can conclude only that there has been a complete failure of proof. The Commissioner's determination1971 U.S. Tax Ct. LEXIS 157">184 must be sustained in respect of this item.3. The 1964 income tax return. -- The Commissioner determined that the 1964 income tax return signed and filed in the names of "Ralph B. and Mabel W. Campbell" was a joint return. Accordingly, he determined that petitioner Mabel W. Campbell, as well as the estate of her late husband, was liable for the deficiency in the tax computed on the basis of that return. Petitioner contends that the 1964 return was not a joint return and that therefore she is not liable for the deficiency in question. She emphasizes that she did not sign the return and urges that she did not authorize anyone to sign the return on her behalf. We uphold the Commissioner's determination.We have found that petitioner did not sign the1971 U.S. Tax Ct. LEXIS 157">185 1964 return. Nevertheless, it has long been settled that where an income tax return is intended by both spouses as a joint return, the absence of the signature of one spouse does not prevent their intention from being realized. See, e.g., Myrna S. Howell, 10 T.C. 859">10 T.C. 859, 10 T.C. 859">866, affirmed per curiam 175 F.2d 240 (C.A. 6); W. L. Kann, 18 T.C. 1032">18 T.C. 1032, 18 T.C. 1032">1045, affirmed 210 F.2d 247, 251 (C.A. 3), certiorari denied 347 U.S. 967">347 U.S. 967; Irving S. Federbush, 34 T.C. 740">34 T.C. 740, 34 T.C. 740">757, affirmed per curiam 325 F.2d 1 (C.A. 2); Gertrude Abrams, 53 T.C. 230">53 T.C. 230, 53 T.C. 230">234; O'Connor v. Commissioner, 412 F.2d 304, 309 (C.A. 2), affirming on this issue a Memorandum Opinion of this Court, certiorari denied 397 U.S. 921">397 U.S. 921.The question of the spouses' intentions is one of fact. O'Connor v. Commissioner, 412 F. 2d at 309; Federbush v. Commissioner, 325 F. 2d at 2; Joyce Primrose Lane, 26 T.C. 405">26 T.C. 405, 26 T.C. 405">408;1971 U.S. Tax Ct. LEXIS 157">186 Elsie S. Bour, 23 T.C. 237">23 T.C. 237, 23 T.C. 237">239-240. On the basis of the record before us, we conclude that the Campbells intended the 1964 return to be a joint return. We note in particular that the Campbells customarily filed a joint return for each year other than 1964 from at least 1960 through 1966. Mrs. Campbell did not examine such returns; she simply accepted her husband's 56 T.C. 1">13 preparation of the returns and signed them. Like the others, the 1964 return was filed as a joint return. The only significant difference was the absence of Mrs. Campbell's signature on the 1964 return.Viewed in this context, the absence of her signature is hardly of overriding importance. Her signature on prior and subsequent returns appears to have been little more than a formal ritual as far as she was concerned. She left the responsibility for preparation and filing of the returns to her husband. She intended the returns to be filed as he chose. We conclude that Mrs. Campbell intended the 1964 return to be filed in the same manner as was each of the others: as a joint return.Petitioner has relied primarily on Elsie Januschke, 48 T.C. 496">48 T.C. 496,1971 U.S. Tax Ct. LEXIS 157">187 and Alma Helfrich, 25 T.C. 404">25 T.C. 404. The facts of each of those cases are only superficially similar to those now before us. In neither case was there a finding that the wife customarily left the responsibility for making financial decisions to her husband or a finding that there had been a history of filing joint returns. Indeed, where there was a history of filing joint returns, it has been held that even a wife's outright refusal to sign in the particular circumstances did not preclude the return from qualifying as a joint return, Irving S. Federbush, 34 T.C. 740">34 T.C. 740, 34 T.C. 740">756-757, 34 T.C. 740">758, affirmed per curiam 325 F.2d 1 (C.A. 2): 9Sylvia did not participate in the management and operation of the Federbush Company nor, according to the testimony, in any other business transactions. Irving looked after all such matters, and when he brought papers and documents to her for signature, it was, according to her testimony, her practice to sign them, "whether they were income tax returns or any other papers." * ** * * The facts relating to the making and filing of the 1944 return are different, in that1971 U.S. Tax Ct. LEXIS 157">188 Irving signed Sylvia's name as well as his. * * * The record indicates that the 1944 return was prepared as a joint return in the same manner as the returns for other years. It so happened that when Irving presented the return to Sylvia for her signature they were experiencing some personal difficulties and she had refused to sign several other documents. She also refused to sign the return, and since the refusal was on the last day for the filing of the return, Irving signed her name to the return in her stead. There is no indication of record, even in Sylvia's own testimony, that her refusal to sign the return was because she did not wish to file a joint return or that she did not intend for it to have effect as a joint return * * Here, it has not even been suggested that petitioner refused to sign the 1964 return. Indeed, petitioner has offered no evidence whatever of a reason of any kind for not filing a joint return in 1964. Far from suggesting marital difficulties, the record indicates that after 1964 the spouses continued to live together, filing joint returns and enjoying 56 T.C. 1">14 the benefits of their economic community until Mr. Campbell's death in 1967. Compare1971 U.S. Tax Ct. LEXIS 157">189 Jack Douglas, 27 T.C. 306">27 T.C. 306, 27 T.C. 306">313, affirmed sub nom. Sullivan v. Commissioner, 256 F 2d 4 (C.A. 5).We note also that petitioner did not raise this objection with the examining agent during the audit of the 1964 return. In the context of this case, her subsequent attempt to discredit the 1964 return appears to us to be merely an afterthought. Cf. Irving S. Federbush, 34 T.C. 740">34 T.C. 755.4. Addition to tax under section 6653(a). -- The Commissioner determined that an addition to tax should be assessed under section 6653(a), I.R.C. 1971 U.S. Tax Ct. LEXIS 157">190 1954, for underpayment of tax in 1963 "due to negligence or intentional disregard of rules and regulations." The burden of proof on this issue is upon petitioners. Marcello v. Commissioner, 380 F.2d 499, 506-507 (C.A. 5); Logan Lumber Co. v. Commissioner, 365 F.2d 846, 853 (C.A. 5); Terry C. Rosano, 46 T.C. 681">46 T.C. 681, 46 T.C. 681">688; Byron H. Farwell, 35 T.C. 454">35 T.C. 454, 35 T.C. 454">473. We have found that the burden was not carried.While it is true that the failure to report the $ 5,000 received on the sale of rights to The Oaks stock did not result in any underpayment, 10 the situation is otherwise as to the $ 8,217.91 item of unreported income received from The Oaks. To be sure, we were left in the dark as to the precise nature of this item and were compelled to conclude that it represented taxable income in the absence of any satisfactory showing to the contrary. The burden nevertheless remains upon petitioners to establish error in the Commissioner's determination, and we cannot find on this record that he erred in respect of imposing the so-called negligence penalty under section1971 U.S. Tax Ct. LEXIS 157">191 6653(a) to the extent that it related to this item.Decisions will be entered under Rule 50. Footnotes1. A fifth issue relating to a nonbusiness bad debt loss has been abandoned by petitioners.↩2. Sec. 292.380 General provisions regarding registration of securities. * * (2) The director may require as a condition of registration by qualification or coordination that (a) the proceeds from the sale of the registered security be impounded until the issuer receives a specified amount or (b) any security issued within the past three years, or to be issued, to a promoter for a consideration substantially different from the public offering price, or to any person for a consideration other than cash, be delivered in escrow to him or to some other depository satisfactory to him under an escrow agreement that the owners of such securities shall not be entitled to sell or transfer such securities or to withdraw such securities from escrow until all other stockholders who have paid for their stock in cash shall have been paid a dividend or dividends aggregating not less than six percent of the initial offering price shown to the satisfaction of the director to have been actually earned on the investment in any common stock so held. The director shall not reject a depository solely because of location in another state. In case of dissolution or insolvency during the time such securities are held in escrow, the owners of such securities shall not participate in the assets until after the owners of all other securities shall have been paid in full.↩3. See fn. 2, supra↩, p. 5.4. Sec. 1.61-2 Compensation for services, including fees, commissions, and similar items.(d) Compensation paid other than in cash -- * ** * * (5) Property transferred subject to restrictions↩. Notwithstanding any other provision of this paragraph, with respect to any property, other than an option to purchase stock or property, which is transferred by an employer to an employee or independent contractor as compensation for services, and which is subject to a restriction which has a significant effect on its value, the rules of paragraph (d)(2) of § 1.421-6 shall be applied in determining the time and the amount of compensation to be included in the gross income of the employee or independent contractor. * 5. Sec. 1.421-6 Options to which section 421 does not apply.(d) Options without a readily ascertainable fair market value. * ** * * *(2)(i) If the option is exercised by the person to whom it was granted but, at the time an unconditional right to receive the property subject to the option is acquired by such person, such property is subject to a restriction which has a significant effect on its value, the employee realizes compensation at 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.↩6. Harlan National Bank v. Carbon Glow Coal Co., 289 S.W.2d 200, 202 (Ky. App.); Swaim v. Martin, 302 Ky. 381">302 Ky. 381, 302 Ky. 381">388-389, 194 S.W.2d 855, 859; In re Penfield Distilling Co., 131 F.2d 694, 698 (C.A. 6); cf. Sargent v. Whitfield & Co., 226 Ky. 754">226 Ky. 754, 226 Ky. 754">760, 11 S.W.2d 926, 929; and Charles v. Hopkins, 217 Ky. 842">217 Ky. 842, 217 Ky. 842">845, 290 S.W. 720, 721↩.7. Petitioners contend, relying upon a Memorandum Opinion of this Court, Estate of Matthew J. Nasdeo, T.C. Memo. 1968-60↩, that their burden of proving that Campbell did not receive the income determined by the Commissioner "is much less than it would be in the case of a living taxpayer with the burden of proving a positive fact." Without entering upon any discussion as to what extent, if any, the burden may be lessened, it is plain that a burden nevertheless remains, and in our judgment the evidence presented on this issue was so unsatisfactory that we cannot find that the burden has been met however much the requirements of proof might be thought to be relaxed. Moreover, there was no showing that the books and records of The Oaks were unavailable; and it is quite conceivable that they might have cast considerable illumination upon this item.8. Moreover, having answered "No" to the question concerning whether they received an "expense allowance or reimbursement," the taxpayers left blank the next question on the return: "If 'Yes,' did you submit itemized accounting of all such expenses to your employer?"↩9. The significance of a custom of permitting one spouse to make financial decisions on behalf of the other, coupled with a history of filing joint returns, was noted in Philip R. Simms, 27 T.C.M. 1570, 1573, 1578, affirmed per curiam 422 F.2d 340 (C.A. 4), and in Elizabeth J. Harris, 20 T.C.M. 1676↩, 1680.10. Since we have concluded that this item is to be classified as long-term capital gain and since there was an unused long-term capital loss carryover from a prior year that was more than sufficient to absorb this $ 5,000 gain, no underpayment of tax resulted from failure to report it.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620066/	JIM LEE WILSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilson v. CommissionerDocket No. 5512-75.United States Tax CourtT.C. Memo 1976-235; 1976 Tax Ct. Memo LEXIS 171; 35 T.C.M. 1019; T.C.M. (RIA) 760235; July 27, 1976, Filed James R. Gilreath, for the petitioner. Terrell W. Dahlman, for the respondent. QUEALYMEMORANDUM FINDINGS OF FACT AND OPINION QUEALY, Judge: Respondent determined deficiencies in the Federal income tax of petitioner for the taxable years 1972 and 1973 in the amounts of $2,167.41 and $1,670.13, respectively. The only issue for decision is whether petitioner is entitled to deduct as travel expenses under section 162(a)(2) 1 amounts expended as a result of petitioner's being away from home in the pursuit of a trade or business during 1972 and 1973. 1976 Tax Ct. Memo LEXIS 171">172 FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Jim Lee Wilson (hereinafter referred to as "petitioner") filed individual Federal income tax returns for taxable years 1972 and 1973 with the Internal Revenue Southeast Service Center at Chamblee, Georgia. At the time of the filing of the petition in this case, petitioner's residence was Kingsport, Tennessee. During 1972 and 1973, petitioner's father owned a residence in Kingsport, Tennessee. Petitioner's father had owned the residence for more than ten years at the time of trial, and the utilities were in his name. Petitioner's father had his own source of income and lived in the residence during the years in question. Petitioner worked in Kingsport from 1956 to 1970 in a permanent job with Tennessee Eastman. He left that job to sell cosmetics in the Kingsport area. During most of the period of his employment in Kingsport, petitioner lived with his parents in his father's residence. However, he lived apart from his family for a brief period in 1968 or 1969. Petitioner left Kingsport in 1971 for a temporary1976 Tax Ct. Memo LEXIS 171">173 job in Chillicothe, Ohio. He obtained the job through Midwest Technical Services, an employee placement agency. The job in Chillicothe lasted only six months. Petitioner continued to maintain a room in his father's residence in which he kept his furniture and for which he paid monthly rent. Petitioner did not abandon Kingsport as his permanent place of residence during the time he worked in Ohio. In December 1971, petitioner obtained employment with Southern Design Services, Inc. (hereinafter referred to as "Southern"), which is located in Spartanburg, South Carolina, a city over 100 miles from Kingsport. Southern is an employee placement agency which furnishes engineers, designers, draftsmen, technicians and clerical help to manufacturing companies and consulting engineers. Southern's business was to serve employers, its "clients," by placing employees with the clients on a temporary basis. Southern hired qualified draftsmen and other employees by advertising in trade magazines. Many contract workers, such as petitioner, subscribed to such magazines so as to be aware of job openings. The job applicants would send resumes to Southern, which matched the qualifications of1976 Tax Ct. Memo LEXIS 171">174 applicants with openings available. Southern would then notify the applicant with the most recent resume who met the qualifications for a job and ask him if he wanted the job. If so, he would be put on the Southern payroll and placed with the client. Southern had a policy of keeping an employee on a job for the duration of the job, once he was placed there, unless the client objected to the employee. An employee could be hired on a permanent basis by a client if the client so desired, but only after the employee had completed six months' work for Southern. The lengths of the jobs in which the employees were placed by Southern varied greatly. The average job lasted less than eight months. While the length of time an employee would expect to remain on the job was usually not known at the time the assignment was made, it was expected that the job would end within a limited period of time. On December 13, 1971, Southern placed petitioner on a job with Miller & Weaver, consulting engineers, in Birmingham, Alabama. The job lasted two weeks. On December 27, 1971, Southern placed petitioner on a job with Hoechst Fibers, Inc. (hereinafter referred to as "Hoechst"), in Spartanburg, 1976 Tax Ct. Memo LEXIS 171">175 South Carolina. Petitioner was placed in the Drafting and Design Department. He was told his job would be "temporary." Hoechst was in the process of expanding its Spartanburg facility during the years 1968 through 1974, inclusive. Hoechst had a policy of maintaining a limited number of "regular" employees, whom it hired and paid directly. During 1972 and 1973, the number of such regularly employed draftsmen in the Drafting and Design Department was 12. The regular employees were unable to handle the work load during the expansion, so Hoechst augmented the regular work force with draftsmen supplied by Southern. Southern supplied Hoechst with an average of 25 to 30 draftsmen during the period of expansion. The Southern-supplied draftsmen did the same work as the regular employees in the Drafting and Design Department. Although there was some turnover of draftsmen supplied by Southern, those who left did so of their own accord. Petitioner's work at Hoechst included drafting work in connection with the design of buildings and equipment, modification of existing facilities and product design work. Consequently, petitioner like other Southern-supplied draftsmen, could anticipate1976 Tax Ct. Memo LEXIS 171">176 employment by Hoechst for the duration of a particular project. Such projects might last as long as 18 to 24 months. Petitioner worked with Hoechst during 1972 and 1973. During the period of time petitioner worked at the Hoechst facilities in Spartanburg, he was not obliged to take any other job provided by Southern. Petitioner was considered an aboveaverage worker by Hoechst. As a result, his job was more secure than those of most other Southern employees. All of the employees supplied by Southern under contract with Hoechst were on Southern's payroll. Southern paid petitioner wages of $13,310.89 and $13,017.23 in 1972 and 1973, respectively. The wages included pay for one week's vacation per year, but no other fringe benefits were included. Southern employees did not receive all the benefits that Hoechst employees received. In addition, Southern paid petitioner per diem payments of $2,467.50 and $2,314.14 in 1972 and 1973, respectively. Petitioner included these per diem payments in his gross income for 1972 and 1973. Petitioner claimed deductions in the amounts of $8,890 and $6,750 in taxable years 1972 and 1973, respectively, as ordinary and necessary traveling1976 Tax Ct. Memo LEXIS 171">177 expenses incurred while away from home in the pursuit of a trade or business. Section 162(a)(2). Respondent disallowed the deductions on the basis that Spartanburg, South Carolina, constituted petitioner's home for tax purposes and that petitioner could not substantiate the amounts in question. At trial it was stipulated that, should the petitioner be found to be entitled to deductions for away-from-home expenses, then the amount of such expenses is $3,500 in each year. OPINION Petitioner worked for Southern, an employee placement concern, beginning in December 1971. Southern provided employees to industrial companies on a "temporary" basis. Petitioner was first placed in a job that lasted two weeks. His next job, in which he was placed by Southern with Hoechst, a chemical company, was likewise intended to be of temporary duration. However, it developed that petitioner was employed with Hoechst throughout 1972 and 1973. The location of petitioner's employment during this period was Spartanburg, South Carolina. Petitioner maintanis that during the period of his employment with Hoechst he was away from his home at Kingsport, Tennessee, on a temporary job. Consequently, 1976 Tax Ct. Memo LEXIS 171">178 petitioner deducted his expenses for meals and lodging in Spartanburg under section 162(a)(2). 2Respondent contends that petitioner may not deduct such expenses under section 162(a)(2) because (a) his employment with Hoechst was of permanent or indefinite duration and (b) even if regarded as temporary, petitioner did not have a "home" within the meaning of the statute. In our opinion, the record clearly establishes that when the petitioner was first sent to Hoechst in December 1971, his employment was to be temporary in duration. His employer of record was in the business of supplying "temporary employees." By reason of past experience, as well as the nature of the job, petitioner had no reason to believe that such employment1976 Tax Ct. Memo LEXIS 171">179 would be of permanent or indefinite duration. The fact that petitioner elected to live in a motel during this period amply confirms his understanding of the nature of the job. At the outset, therefore, petitioner meets one of the tests described in the statute. He was away from his former place of abode on a temporary job. See, e.g., . Secondly, it is our opinion that the petitioner was, in fact, away from home within the meaning of the statute while he was employed in Spartanburg, South Carolina. The fact that "home" was also the residence of his parent does not make it any less the petitioner's home. Petitioner had a room in that home, had moved his furnishings there, and had made it his home for a period of some years. Since the petitioner was unmarried it was all the home that he needed. He contributed to the support of the home and made regular visits to that home while employed in Spartanburg, South Carolina.See . In this respect, the facts are distinguishable from , cert. denied ;1976 Tax Ct. Memo LEXIS 171">180 and other cases wherein the fact that the taxpayer may have visited the home of a brother or other relative was insufficient to qualify it as the taxpayer's home within the meaning of the statute. During the course of petitioner's employment at Hoechst, it should have become apparent to him that Hoechst was continuing its expansion plans and that his services would continue to be in demand beyond the period of his initial expectations. Petitioner's services were satisfactory to Hoechst, and he was regarded as a good worker. This fact was made known to him. Further, the fact that no Southern-supplied employees were laid off at Hoechst during the period of his employment should have made petitioner aware that his job was "not the sort of employment in which termination within a short period could be foreseen." . Employment temporary at its inception may become indefinite through the passage of time or other factors. ; ; ;1976 Tax Ct. Memo LEXIS 171">181 . There is no clear line as to when the temporary job became an indefinite one. Petitioner apparently recognized that the job would be of a longer duration than the usual Southern assignment when, after he had been employed in Spartanburg for about eight months, he moved from a motel room, which he rented by the week, into a trailer home. Taking this fact into consideration, it is the opinion of the Court that the petitioner's job became one of indefinite duration not later than September 1, 1972. See ;Petitioner's traveling expenses will be allowed proportionately for the taxable year 1972. For taxable year 1973, petitioner was employed for an indefinite period. Accordingly, no traveling expenses will be allowed petitioner for 1973. Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. 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; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620067/	MARY S. PEABODY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Peabody v. CommissionerDocket No. 79907.United States Board of Tax Appeals38 B.T.A. 1086; 1938 BTA LEXIS 789; November 4, 1938, Promulgated 1938 BTA LEXIS 789">789 Common and preferred stock of the Middle West Utilities Co. was worthless at the end of 1932. Peter L. Wentz, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. MURDOCK 38 B.T.A. 1086">1086 OPINION. MURDOCK: The Commissioner determined a deficiency of $5,920.01 in the petitioner's income tax for 1932. The only issue is whether the Commissioner erred in disallowing a deduction of $31,156.15 claimed as a loss on account of the worthlessness of preferred and common stock of the Middle West Utilities Co. The facts are hereby found 38 B.T.A. 1086">1087 as stipulated. There is no question of the cost or ownership of the stock. The dispute is limited to whether the stock became worthless in 1932, as the petitioner contends, or whether it still had some value during that year. The petitioner deducted the cost of the stock as a loss on her return for 1932. The Commissioner denied the deduction, saying that "an examination of the affairs of this corporation discloses that the stock did not become completely and permanently worthless during the year 1932." The Commissioner now relies almost entirely upon the decision of the Board in the case of 1938 BTA LEXIS 789">790 . Horning was there claiming a loss on common and preferred stock of the Middle West Utilities Co. on the ground that it became worthless in 1932. Thus the issue there was identical with the issue here. The headnote and the statement of the question in the opinion indicate that the petitioner failed for lack of proof. Each case of this kind must be decided upon the evidence presented in that particular case. All of the evidence introduced in the Horning case to show worthlessness in 1932 has been introduced here, together with important additional evidence. The petitioner contends that all of this evidence now shows worthlessness of these two classes of stock in 1932. The Middle West Utilities Co. (hereafter called Middle West) was a holding company incorporated under the laws of Delaware. Its assets consisted largely of stocks and bonds of subsidiaries. The latter were engaged in supplying electric service or were holding the securities of subsidiaries which were so engaged. There was considerable pyramiding of the holdings in the group. An involuntary petition in bankruptcy was filed on April 15, 1932, in a Federal District1938 BTA LEXIS 789">791 Court in Illinois, praying that Middle West be adjudicated a bankrupt. The court on the same day appointed receivers. The receivership resulted from the inability of Middle West to finance its obligations. The bankruptcy proceedings never came to an adjudication. Middle West had controlled eight large utilities systems and two large investment companies. It lost its entire eastern subsidiary group through bankruptcy and foreclosure during 1932. That group had earned 40 percent of the entire gross income of the Middle West group. But Middle West still served 2,882 communities. The book value of the assets of Middle West as of December 31, 1932, was $623,514,849.69. The liabilities shown upon its books at that time were $62,823,604.99 less than the above amount, so that the book value of the preferred and common stock was $62,823,604.99. A committee for the holders of serial gold notes of Middle West in the amount of $40,000,000 made an appraisal of the assets and liabilities of Middle West and made a report dated November 12, 1932. This appraisal showed assets worth $13,526,879.20 and liabilities of 38 B.T.A. 1086">1088 $57,080,460.56, not including capital stock. The appraisers1938 BTA LEXIS 789">792 estimated that some of the liabilities might be eliminated and that as much as 28 percent might be received by creditors including the note holders. It did not include among the assets certain securities having a book value of $90,486,925.77. The parties to the present proceeding have stipulated facts relating to the latter assets which indicate that those assets were worth much less than $5,000,000 at the close of 1932. Quotations on Middle West securities were as follows: PeriodRange of preferredRange of commonRange of serial gold notes per $100 faceDecember 1932$0.50 -$1.75$0.125-$0.375 $5-$10.00December 30, 1932.50 - .75.1257- 7.50First week January 1933.50 - .75.125- .25 7- 7.751933.125- 3.50.125- .75Attempts were made to reorganize Middle West under section 77B of the Bankruptcy Act. An appraisal was made of its assets for that purpose, pursuant to a court order. The appraiser determined that the value of the assets on July 23, 1934, was $50,973,827 and that the liabilities exceeded the assets. The excess was over $15,000,000. A plan was finally agreed upon and was confirmed by the court on November 27, 1935. 1938 BTA LEXIS 789">793 There was a statement in the plan that the assets of Middle West were much less than its liabilities and the preferred and common stockholders had no equity in its assets. The plan provided, however, that preferred stockholders should receive one share of $5 par value stock of the new company and a warrant to purchase one additional share for each four shares of the old preferred owned. It also provided that common stockholders should receive one share of the new common and a warrant to purchase an additional share for each 100 shares of old common owned. The warrants gave the right to purchase the new share on a sliding scale beginning at $8. Although the petitioner had taken no part in the court proceedings, she received her allotment of new shares and warrants, 20.5 shares and 20.5 warrants for her 82 shares of preferred and 21.64 shares and 21.64 warrants for her 2,164 shares of common. Price ranges on November 27, 1935, were as follows: New stock$8.00 -$8.25Warrants3.25 - 3.75Old common.125- .25Old preferred2.50 - 3.00The Middle West Utilities Co. was being operated at the close of 1932, its common and preferred stock had a substantial book1938 BTA LEXIS 789">794 value at that time, the common and preferred stock was quoted on the exchange, and in the final reorganization in 1935 the common and preferred 38 B.T.A. 1086">1089 stockholders received new shares and warrants for their old stock. The evidence in the record shows beyond doubt that the book value of the stock at the close of 1932 was a wholly unreliable guide to the real value of the stock. Although the old stock was still quoted at the close of 1932, the quoted prices were so low that they would scarcely justify or support a sale of an interest as large as that of this petitioner. The common was as low as it could possibly be quoted on the exchange. The petitioner received new shares and warrants in the latter part of 1935 in exchange for her old preferred and common stock. The value of the new property received was $500 or less, whereas the cost of her old stock was in excess of $31,000. The new shares and warrants were given to the old stockholders despite the fact that those stockholders had no equity whatsoever in the assets of the old corporation. The corporation, although operating, was placed in the hands of receivers during 1932 and it lost many of its properties during that1938 BTA LEXIS 789">*795 year by bankruptcy and foreclosure, including its entire eastern subsidiary group. The appraisal of the committee for the note holders, together with the evidence as to the value of certain assets which were excluded from that appraisal, shows that the value of the assets of the company at the close of 1932 was at least $40,000,000 less than its liabilities, not counting the common and preferred stock as liabilities. As has been stated above, the present record contains important evidence which was not presented in the Horning case. For example, the evidence relating to actual value of the $90,486,925.77 book value of assets was not presented in that case and apparently the loss of the eastern group was not shown. The evidence as a whole fairly preponderates in favor of the finding which we hereby make, that this common and preferred stock was worthless at the close of 1932. Cf. . It follows that the petitioner is entitled to the deduction claimed. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620068/	THEODORE C. JACKSON AND W. R. GALLAGHER, ADMINISTRATORS OF THE ESTATE OF CHARLES B. MAXWELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Jackson v. CommissionerDocket No. 57026.United States Board of Tax Appeals32 B.T.A. 470; 1935 BTA LEXIS 944; April 23, 1935, Promulgated 1935 BTA LEXIS 944">944 1. Where an alleged donor fails to establish a clear and unmistakable intention on his part to absolutely and irrevocably divest himself of title, dominion, and control of the subject matter of alleged gifts in praesenti and fails to establish an irrevocable transfer of the dominion and control of such gifts to alleged donees so that he can exercise no further act of dominion or control over it, there is no valid gift inter vivos.2. In such a situation the transfer of corporate stock upon the books of a corporation and the issuance of new certificates in the names of such donees is insufficient in and of itself to constitute a valid gift inter vivos.3. Upon the evidence, held that respondent correctly included the profits realized upon the sale of certain stocks in such donor's taxable net income, since no gift of such stocks was accomplished. R. P. Smith, Esq., and Harold Boulton, Esq., for the petitioners. Dean P. Kimball, Esq., and E. C. Adams, Esq., for the respondent. MCMAHON 32 B.T.A. 470">471 This proceeding involves the tax liability of the estate of Charles B. Maxwell for the period January 1 to September 14, 1928, and1935 BTA LEXIS 944">945 the calendar year 1929, for which periods the respondent has determined deficiencies of $10,233.34 and $1,301.52, respectively. The deficiency for the period January to September 14, 1928, results from the inclusion by respondent in decedent's taxable income of a profit of $62,800 realized on the sale of 2,000 shares of stock of the American Re-Insurance Co., hereinafter referred to as the company. This stock had been transferred on the corporate books to decedent's nieces just prior to its sale, and the parties have joined issue upon the question of whether a completed gift was made by Maxwell to his nieces, or whether he still retained such custody and control of the stock that the profit realized on the sale constituted taxable income to him. No error is alleged with respect to the deficiency asserted for the calendar year 1929, and respondent's determination for that year is, therefore, approved. FINDINGS OF FACT. For many years prior to his death in September 1928 the decedent, Charles B. Maxwell, maintained and supported his two nieces, M. Josephine Stine, hereinafter referred to as Josephine Stine, and Dollie M. Stine, hereinafter referred to as Dollie Stine, at1935 BTA LEXIS 944">946 his home in Morrisdale, Pennsylvania. In 1923 or 1924 the decedent started sending Josephine Stine away to school. He supplied her with money, paid her tuition, bought her clothes, looked after all of her business affairs, and maintained her as his ward from 1923 until he died. During this period of time, and until August 1929, Josephine Stine was under 21 years of age. In March and April of 1928 Josephine Stine was a student at Wellesley College, but her sister, Dollie Stine, resided at the home of the decedent. On January 3, 1928, the decedent was the holder of record of 3,270 shares of common stock of the company. He was one of the original stockholders of the company, which was incorporated in 1917 under the laws of the State of Pennsylvania. Approximately one half of the stock of the company was owned by the Liberty Service Corporation, and Maxwell owned one seventh of the stock of the latter corporation. At the end of March, or on the first or second day of April 1928, the Liberty Service Corporation distributed from its treasury to its stockholders blocks of stock of the company. By this distribution Maxwell received 5,250 shares of the stock of the company in addition1935 BTA LEXIS 944">947 to his other holdings. In or about November 1927 the president of the company, Harry Boulton, who was a director and legal counsel for the Liberty Service Corporation, received an inquiry from certain New York interests 32 B.T.A. 470">472 relative to the purchase of the company's entire outstanding capital stock of 75,000 shares. For some time prior to March 30, 1928, Boulton discussed the possibilities of making this sale, the negotiations with respect thereto becoming increasingly active in February and March 1928. These early negotiations were conducted by Boulton as an individual stockholder, who believed that he had the confidence of the other stockholders. On or about March 18, 1928, the negotiations had reached such a stage that Boulton felt justified in circulating an agreement among the stockholders whereby each stockholder authorized the Liberty Service Corporation to contract for the sale and delivery of his capital stock in the company to certain specified New York interests upon the terms incorporated in the contract of sale, hereinafter substantially set forth. Except as hereinafter stated, all of the stockholders of the company signed the agreement constituting the1935 BTA LEXIS 944">948 Liberty Service Corporation his or her agent prior to the actual sale of the stock. The sale was consummated on April 16, 1928, pursuant to the contract of sale entered into on April 3, 1928. On or about March 30, 1928, Maxwell transferred on the books of the company 1,000 shares of its common stock to Dollie Stine, and another 1,000 shares to Josephine Stine. The transfer was effected by Boulton, who handed certificates standing in decedent's name to the transfer agent with instructions to transfer 1,000 shares to each of the Stine sisters. Twenty new certificates, each for 100 shares, were prepared and issued, certificates CO761 to CO770, inclusive, in favor of Dollie Stine, and certificates CO771 to CO780, inclusive, in favor of Josephine Stine. The certificates were turned over to Boulton by the transfer agent after they were issued. Neither of the Stine sisters knew of the transfer of this stock on March 30, 1928, and neither of them authorized Boulton to receive, as their agent, any stock in the company which stood in their names. Sometime in April 1928 the decedent asked Dollie Stine to sign "a small white paper", which was a power of attorney covering certificates1935 BTA LEXIS 944">949 CO761 to CO770, inclusive, and she signed it as he requested. Decedent had certain papers in his hand at the time Dollie Stine executed the power of attorney, but he offered no explanation of these papers nor did he explain why he wished her to sign the power of attorney. Dollie Stine always signed whatever her uncle told her to sign. The power of attorney executed by Dollie Stine was attached to certificate CO762, purported to cover all the certificates standing in her name, and authorized certain designated individuals, other than her uncle, "and each of them" to act as her attorney to transfer said stock. The power was undated, but bore a stamped guarantee of the signature by the Philadelphia National Bank. 32 B.T.A. 470">473 A similar power of attorney, bearing the name of Josephine Stine, was attached to certificate CO771, covering certificates CO771 to CO780, inclusive. Neither Dollie Stine nor Josephine Stine ever had physical possession or custody of the stock of the company which stood in their names on its books. The agreement circulated by Boulton authorizing the Liberty Service Corporation to sell the stock was signed by Dollie Stine, as a stockholder, at the request1935 BTA LEXIS 944">950 of her uncle, and she probably signed for her sister, Josephine Stine, who never signed it or saw the original or a copy of it. The contract covering the sale of the company's stock, entered into on April 3, 1928, provided for a total consideration of $4,500,000, or $60 per share. It was agreed that $500,000 of the consideration would be withheld by the purchasers pending liquidation of the assets of the company; and that, if the assets justified it, the additional $500,000 would be paid. The Liberty Service Corporation was authorized by the stockholders to withhold another $150,000, or $2 per share, to cover expenses, while the remainder, amounting to $51.33 per share, was to be paid to the stockholders. The total proceeds from the sale of the company's stock were deposited in the Franklin Fourth Street National Bank of Philadelphia to the credit of the Moshannon National Bank of Philipsburg. The funds were distributed by the Moshannon National Bank to those entitled thereto, and various accounts in the bank were credited according to instructions given by the treasurer of the Liberty Service Corporation, the selling agent for the stockholders. Among others the accounts1935 BTA LEXIS 944">951 of Dollie and Josephine Stine with the Moshannon National Bank each shows a credit entry under date of April 19, 1928, in the sum of $51,330, representing a portion of the proceeds from the sale of the company's stock. On or about April 21, 1928, Dollie Stine first heard of the deposit, made in her name on April 19, when the decedent asked her to draw two checks, one for $38,335 in favor of H. B. Scott, treasurer of the company, and one for $12,995 in favor of the Moshannon National Bank, of which Maxwell was president. Dollie Stine drew the checks as her uncle requested and her account at the Moshannon National Bank shows that these two checks were charged against the account under date of April 23, 1928. At or about this time Maxwell mailed Josephine Stine a check payable to the Moshannon National Bank for the sum of $51,330, requesting her to sign the check and return it by registered mail. After signing the check, Josephine Stine returned it to the decedent and her bank account shows a charge in this amount under date of April 27, 1928. 32 B.T.A. 470">474 Maxwell offered no explanation to either of his nieces regarding the purpose of the checks which he requested them to sign, 1935 BTA LEXIS 944">952 and neither of them knew what became of the funds withdrawn. Prior to the deposit and withdrawal the bank account of each of the Stine sisters had shown small balances, generally less than $100. Maxwell died intestate on or about September 14, 1928. A dispute arose between Dollie Stine and his estate as to whether she would get anything out of the estate. This dispute was settled in 1929 by giving Dollie Stine about $8,000 representing proceeds from the sale in April 1928, of the company's stock, which had been held in escrow. Settlements were made with both of the Stine sisters. The proceeds from these settlements with the Stine sisters actually came from Maxwell's estate, but the settlements involved several other disputed matters which were concluded by general settlements. The attorney for the Stine sisters had requested the executors of the estate to find a purchaser for their interests in the contingent funds held in escrow. The estate asserted no claim to the escrow funds, but it was able to find a purchaser, and the Stine sisters assigned their interests in the $500,000 fund and in the $150,000 fund to R. M. Watson of Huntington, Pennsylvania. The consideration1935 BTA LEXIS 944">953 therefor was paid first to the executors of Maxwell's estate, but was included in the general settlements which also covered claims of the Stine sisters against the estate of Maxwell's wife, who had died previous to the date of his death, a claim against an insurance firm, and other matters. On or about September 12, 1929, Dollie Stine filed in the Court of Common Pleas of Clearfield County, Pennsylvania, a bill in equity against the Moshannon National Bank, Mary Josephine Stine, Theodore Moore, guardian of the minor children of S. Blaine Stine and Kathryn Stine, and the administrators of the estate of Charles B. Maxwell, deceased, wherein she alleged that by gift from her uncle, Charles B. Maxwell, she became the owner of 1,000 shares of common capital stock of the company on or about April 2, 1928, that said stock was sold for her account on or about April 16, 1928, and that the proceeds were deposited to her credit in the Moshannon National Bank on April 19, 1928, and were used to purchase securities held by that bank. Discussions with her uncle before and after the sale of the stock whereby a trust would be created for her from the proceeds of the sale were also alleged. The1935 BTA LEXIS 944">954 bill of complaint sets forth that $50,000 of securities were purchased and that on May 10, 1928, Maxwell set up a trust of the listed securities, naming the Moshannon National Bank as trustee, but that the terms of the trust agreement were contrary to the arrangements made with Maxwell in that the trustee was directed to accumulate the income 32 B.T.A. 470">475 from the trust fund for 10 years from the date of the trust instrument. Dollie Stine asked the court to reform the trust instrument and to direct the bank to pay over to her the income earned and accrued on the trust corpus since the date of decedent's death, and to pay over to her any income thereafter derived from the trust fund. The trust instrument, which forms a part of the bill of complaint, bears date of May 10, 1928, and provides that "I Charles B. Maxwell * * * do hereby give, assign and transfer and set over unto the Moshannon National Bank * * * the following cash * * * and securities [listed] TO HAVE AND TO HOLD the said cash and securities to and for the only proper use and behalf of my niece, Dollie M. Stine * * * subject to the following conditions of the trust and limitations of the gift. * * " The trust created1935 BTA LEXIS 944">955 in Dollie Stine's favor listed securities totaling $50,000. The Josephine Stine trust deed, which was similar in other respects, listed securities of $35,000. Neither trust deed set forth any amount of cash as a part of the trust corpus. Prior to hearing on her bill of complaint, and on or about October 21, 1929, Dollie Stine amended the same, by leave of court, by striking therefrom as parties defendant the administrators of the estate of Charles B. Maxwell, deceased. By decree of court dated July 5, 1930, and entered by consent of all parties on the record, the aforesaid trust was reformed and the Moshannon National Bank, as trustee, was ordered to pay Dollie Stine the income from the trust fund from its inception on May 10, 1928, to the effective date of the decree, and thereafter until May 10, 1938. A similar decree, dated January 14, 1931, was entered by the court in a similar equitable action brought by Josephine Stine against the Moshannon National Bank, Dollie Stine, and Theodore Moore as guardian, for the reformation of the trust created covering $35,000 in securities in her favor by Maxwell under date of May 10, 1928. The respondent determined that Maxwell owned1935 BTA LEXIS 944">956 the 2,000 shares of the company's stock, sold in April of 1928, and included the resulting profit, computed as $62,800, in Maxwell's net taxable income. OPINION. MCMAHON: We are asked by petitioners to hold that Maxwell made a valid and completed gift of certain stock to his nieces prior to the sale thereof, with the result that the profit realized on the sale was income of the donees and not income of the donor, Maxwell. The amount of profit realized from the sale is not in dispute, only 32 B.T.A. 470">476 the question of ownership of the profits. If the stock belonged to Maxwell at the date of sale, respondent's determination is correct, but if Maxwell made a valid and completed gift of the stock prior to the sale thereof, so as to entirely divest himself of ownership, control, and dominion over the stock, then the profits constituted income to Maxwell's nieces, Dollie and Josephine Stine. In Adolph Weil,31 B.T.A. 899">31 B.T.A. 899, the Board set forth the essential elements of a bona fide gift inter vivos, as follows: * * * (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor1935 BTA LEXIS 944">957 to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; Edson v. Lucas, 40 Fed.(2d) 398, and authorities there cited. Cf. Allen-West Commission Co. v. Grumbles (C.C.A., 8th Cir.), 129 F. 287; Edwin J. Marshall,19 B.T.A. 1260">19 B.T.A. 1260; affd. (C.C.A., 6th Cir.), 57 Fed.(2d) 663, certiorari denied, 282 U.S. 61">282 U.S. 61. We find the same essential elements required for a valid gift intervivos under decisions of the Pennsylvania courts. Packer v. Clemson,112 A. 107; In re Kaufman's Estate,127 A. 133; In re Scanlon's Estate,169 A. 106; 1935 BTA LEXIS 944">958 Sullivan v. Hess,241 Pa. 407">241 Pa. 407; 88 A. 544. See also Cook v. Lum,55 N.J.L. 373">55 N.J.L. 373; 26 A. 803; Bauernschmidt v. Bauernschmidt,97 Md. 35">97 Md. 35; 54 A. 637, which quotes from Walsh's Appeal,122 Pa. 177">122 Pa. 177; 15 A. 470. In the last analysis the determination of the issue herein depends upon whether petitioner has established elements (3) and (4) set forth in the above quotation from the Weil case. These essentials are a clear and unmistakable intention on the part of Maxwell to absolutely and irrevocably divest himself of the title, dominion, and control of the stock, in praesenti, and the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the Stine sisters, so that Maxwell could exercise no further act of dominion or control over it. We must first determine whether there was an intent to give. The evidence in this record fails to show a clear and unmistakable intention on the part of Maxwell to absolutely and irrevocably divest himself of the title, dominion, and control of this stock. 1935 BTA LEXIS 944">959 The formal transfers of the stock on the books of the corporation, under all the facts and circumstances, were insufficient to establish a donative intent. In re Raub's Estate,286 Pa. 575">286 Pa. 575; 134 A. 451; Southern Industrial Institute v. Marsh, 15 Fed.(2d) 347; certiorari denied, 273 U.S. 747">273 U.S. 747; In re Crawford,21 N.E. 692">21 N.E. 692. The burden of proving 32 B.T.A. 470">477 an intention to make a gift is upon the petitioners, McConville v. Ingham,268 Pa. 507">268 Pa. 507; 112 A. 85, and it must be coupled with delivery, which is the manual act that executes the purpose originally formed. However, since the quantum of evidence necessary to establish a gift is less where a relationship such as that of parent and child exists, Northern Trust Co. v. Huber,274 Pa. 329">274 Pa. 329; 118 A. 217; Yeager's Estate,273 Pa. 359">273 Pa. 359; 117 A. 67, we must determine whether the evidence here is sufficient to establish such intent. Transfer and delivery of property, including corporate stock, are not conclusive upon the question of intent where change of title1935 BTA LEXIS 944">960 is involved from the standpoint of taxation; and surrounding circumstances, including subsequent acts of the taxpayer, often establish intent more clearly than parol evidence. Wishon-Watson Co. v. Commissioner, 66 Fed.(2d) 52, and Commissioner v. Dyer, 74 Fed.(2d) 685. See 286 Pa. 575">In re Raub's Estate, supra.The record contains no expressions by Maxwell to friends or his nieces showing an intent at the time of the transfer to make an outright gift to his nieces of this stock. Josephine Stine testified that her uncle told her several times that she "would be well taken care of", but we can not interpret this testimony to mean a specific intent on the part of Maxwell to give each of his nieces 1,000 shares of stock outright on or about March 30, 1928. In our view the proof establishes the absence of any such intent. It indicates that Maxwell was motivated otherwise in formally transferring the stock. Based on respondent's determination, Maxwell's net taxable income for 1928 would be increased over $62,000 by the sale of these 2,000 shares of stock, but if transferred to his nieces, and the sale was consummated with them1935 BTA LEXIS 944">961 as stockholders of record, the taxable profits from his total holdings of the company's stock might be split three ways. Maxwell was a banker, presumably conversant with the income tax laws and aware of the surtax provisions thereof. It was to his interest to eliminate profits from this sale for tax purposes. An apparent sale by his nieces would still give him control over the proceeds, because he controlled and dominated them. Furthermore, the proof is open to the inference that these purported gifts, although formally transferred on the corporate books, were merely devices to reduce the amount of Maxwell's tax liability. See Liberty Service Corporation,28 B.T.A. 1067">28 B.T.A. 1067; affirmed in Liberty Service Corporation v. Commissioner, 77 Fed.(2d) 94, which deals with the sale of similar stock owned by the Liberty Service Corporation; and also Gregory v. Helvering,293 U.S. 465">293 U.S. 465. Our attention has not been called to a case which holds that a formal transfer on the books of a corporation is sufficient, in and of 32 B.T.A. 470">478 itself, to establish an intent to make a gift inter vivos, under facts and circumstances such as1935 BTA LEXIS 944">962 are present in the instant proceeding; and we are unwilling to so hold. Yet, that is the principal basis upon which petitioners rest their case. Secondly, while it is clear that Maxwell formally transferred legal title to the stock, nevertheless, he continued to exercise control and dominion over the stock after the transfer, and over the proceeds after the sale. His actions at the time of the alleged gift are entirely inconsistent with the usual actions of a benefactor toward the recipients of his bounty. Maxwell failed to tell his nieces at any time that he had made a gift of stock to them. There is no evidence that he told his business associates of the gift. He did not let his nieces see the certificates of stock which stood in their names on the books of the corporation, nor did he turn the certificates over to them. When he requested Dollie Stine to sign a paper for him, he offered no explanation and made no other comment; all she knew about what she signed was that it was a little piece of white paper. That was the first intimation to Dollie Stine of the transfer. Josephine Stine denied all knowledge of ever signing to power of attorney. Again, when Maxwell came1935 BTA LEXIS 944">963 to Dollie Stine to withdraw the proceeds of the sale, he had an opportunity to tell her of his gift, but he made no disclosure. He requested her to sign two checks for large amounts in favor of payees he named without explaining his reasons therefor. That she did this without question, although her bank account had rarely been above $100, only serves to emphasize how completely she was controlled and dominated by her uncle and how willing she was to obey him. Throughout this whole transaction we find the Stine sisters obeying the requests of their uncle and acting as he directed. It would be unsound to hold, under these circumstances, that Maxwell ever irrevocably relinquished control and dominion over these 2,000 shares of stock. J. L. McInerney,29 B.T.A. 1">29 B.T.A. 1. The record shows that Maxwell executed two trust deeds, one for each of his nieces, transferring to the trustee therein named, the Moshannon National Bank, certain securities that he had purchased. It appears from the separate verified bills of complaint in equity, in which are incorporated copies of the trust agreements, filed against Moshannon National Bank and others by the Stine sisters, that such1935 BTA LEXIS 944">964 trusts were created and that the ultimate proceeds from the sales of the stock were used to purchase the securities which Maxwell placed in trust. These bills of complaint, hereinafter referred to, were offered in evidence by the petitioners and without objection. In our opinion, Maxwell could not create trusts in favor of his nieces out of funds that already belonged to them. By the 32 B.T.A. 470">479 very terms of the trust instruments Maxwell declared that, "I * * do hereby give, assign and transfer * * ." This declaration is entirely inconsistent with the theory of a prior complete and irrevocable relinquishment of dominion and control over the stock or the proceeds thereof. Furthermore, it may be pointed out that when Maxwell died in September 1928, he had in his possession, so far as the evidence shows, more than $16,000 of the $51,330 check signed by Josephine Stine, and $1,330 of the proceeds of the checks signed by Dollie Stine. The foregoing discussion discloses that Maxwell had no clear and unmistakable intention to make a gift, and it establishes further that there was no irrevocable transfer of the dominion and control over the stock to the donees, so that the donor1935 BTA LEXIS 944">965 could exercise no further act of dominion or control over it. Since these two essential elements of a valid gift inter vivos are missing, we can not make a finding of fact or hold that decedent made a valid and completed gift to his nieces of the stock in question. In this view, we deem it unnecessary to consider the other essential elements of a valid gift. We have not overlooked Fidelity-Philadelphia Trust Co., Executor,16 B.T.A. 1214">16 B.T.A. 1214; J. M. Walsh,18 B.T.A. 571">18 B.T.A. 571; D. B. Malernee,31 B.T.A. 662">31 B.T.A. 662; and J. M. Kessler,31 B.T.A. 849">31 B.T.A. 849. Kessler announced to a third party that he was going to make a gift to his wife and advised her of the gift by letter. She acknowledged the gift. It was agreed between them that he was to look after her interests for her. He endorsed the certificate of interest and delivered it to a fourth party with instructions that it be held for the benefit of his wife, directed that the note derived from the sale of the subject of the gift be made payable to her, and deposited in a bank to her account the proceeds derived from the payment of the note. There was no countervailing evidence1935 BTA LEXIS 944">966 upon the subject of delivery of possession and surrender of dominion. The only question presented was whether he made a gift of his interest before the sale or a gift of the proceeds after the sale; and we merely held that a gift of his interest was made before the sale. As appears from our findings, the facts and circumstances in the instant proceeding are quite different. The other three cases are even more readily distinguishable. Petitioners cite the Uniform Stock Transfer Act adopted by Pennsylvania as of January 1, 1912, Pa. Stat. 1920, secs. 5700-5723, and In re Connell's Estate,282 Pa. 561">282 Pa. 561; 128 A. 503, which interprets the same. The court there held that the provisions of this act, which prescribe that title shall pass by endorsement as of the time of 32 B.T.A. 470">480 registration of the transfer, cannot affect the rights of the parties, as between themselves, because such provisions were evidently inserted for the protection of the corporation itself, so it could safely deal with the registered owner of stock in dividend and other matters. This case and the act are of no assistance in determining whether, as between the parties, there was1935 BTA LEXIS 944">967 a gift of the stock. See 286 Pa. 575">In re Raubs' Estate, supra.Cf. Packer v. Clemson, supra.Petitioners lay stress upon the allegations contained in separate bills of complaint in equity brought by Dollie Stine and Josephine Stine against the Moshannan National Bank wherein it is alleged by each complainant, verified under oath, that she became the owner, by gift, on or about April 2, 1928, of 1,000 shares of the common capital stock of the company. The bills of complaint were brought to reform the trusts created by Maxwell in favor of the Stine sisters and by a consent decree in compromise of their claims both trusts were reformed. The question of whether 1,000 shares of the company's stock was given by Maxwell to each of his nieces was not in issue. The allegation of ownership by gift was a conclusion of law; the facts upon which this allegation was based were not pleaded or tried. It is elementary that allegations contained in pleadings are not, in a situation like this, proof of the conclusions alleged. Petitioners assert that such statements are admissions against interest; but the Stine sisters are not parties litigant herein. They were called as witnesses1935 BTA LEXIS 944">968 and such allegations could only be used for purposes of impeaching their testimony because of prior contradictory statements. Furthermore, the Stine sisters explained their prior allegations by stating that they alleged ownership of the stock because it stood in their names on the books of the corporation. It appears that the pleadings were prepared by counsel and signed by each of the Stine sisters upon his advice and in reliance thereon. In view of these explanations, the nature of the pleadings, and the settlement of the suits by consent, we are unwilling to attach as much weight to this evidence as petitioners contend for, or hold that they have been thereby impeached as witnesses. At the hearing petitioners introduced a copy of a petitioner filed by Josephine Stine's guardian in the Orphans' Court of Clearfield County, wherein her guardian made certain allegations relative to her banking relations, her rights under an insurance trust, and her rights under the $35,000 trust created by Maxwell for her. The guardian asked the court to authorize the acceptance of an offer in compromise of her claims from the administrators of Maxwell's estate, payment of which would relieve1935 BTA LEXIS 944">969 the Moshannon National Bank and the estate from any further liability to Josephine Stine. 32 B.T.A. 470">481 The court approved acceptance of the offer by the guardian, so that the allegations contained in the petition were never settled by court decision, but were disposed of by the compromise settlement. Josephine Stine never signed or verified the petition, or other papers, in that proceeding, and she has not been impeached, as a witness, by them in the instant proceeding. It may not be amiss to point out that in Edgar M. Carnrick,21 B.T.A. 12">21 B.T.A. 12, we stated: * * * Irrespective of what may be the force and effect in proceedings before the Board of Judgments of State courts upon matters of fact after a contest, cf. Charles L. Suhr,4 B.T.A. 1198">4 B.T.A. 1198; Guaranty State Bank,12 B.T.A. 543">12 B.T.A. 543, there is no doubt that a formal settlement of an executor's uncontested account is not, as against the respondent here, res adjudicata of the inventory or its valuation, nor does it alone establish a prima facie case of their correctness. [Emphasis supplied.] To similar effect, in principle, is 1935 BTA LEXIS 944">970 Fidelity & Columbia Trust Co. v. Lucas, 52 Fed.(2d) 298; reversed on other grounds at 66 Fed.(2d) 116. Cf. Edward T. Blair,31 B.T.A. 1192">31 B.T.A. 1192. Reviewed by the Board. Decision will be entered under Rule 50.MURDOCK, LEECH MURDOCK, concurring: I concur in the results reached in this case and in the closely related cases of Dollie M. Stine and M. Josephine Stine,32 B.T.A. 482">32 B.T.A. 482. If the cases were considered together, as I think they should be, instead of separately, the correctness of the results would be even more apparent. LEECH: I agree with the foregoing comment. However, in my judgment, the result reached in the majority opinion is correct - not for the reason which, among others, that opinion indicates, Maxwell could not have accomplished a completed gift of the stock to the Stine sisters since they were under his personal domination - but is correct only because he did not here intend a gift. This record apparently parently establishes, at least by implication, that the Stine sisters were merely agents for Maxwell in the sale of the stock upon which the disputed deficiency arises. 1935 BTA LEXIS 944">971 Thus, the estate of Maxwell, the principal, was the taxable recipient of the proceeds of that sale. SMITH and SEAWELL agree with the above.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620070/	THEODORE W. DUTTON and JO S. DUTTON, Petitioners v. CMMISSIONER OF INTERNAL REVENUE, RespondentDutton v. CommissionerDocket No. 4437-88United States Tax CourtT.C. Memo 1990-462; 1990 Tax Ct. Memo LEXIS 507; 60 T.C.M. 606; T.C.M. (RIA) 90462; August 28, 1990, Filed 1990 Tax Ct. Memo LEXIS 507">507 Decision will be entered for the respondent. Morton D. Rosenthal and Arthur P. Generaux, for the petitioners. James S. Yan, for the respondent. COHEN, Judge. COHENMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined a deficiency of $ 12,257 in petitioners' Federal income tax for 1982 and an addition to tax of $ 3,064 under section 6661(a). 1990 Tax Ct. Memo LEXIS 507">508 The issues for decision are (1) whether petitioners are entitled to deduct their allocable share of partnership losses resulting from research and development expenditures and (2) whether petitioners are liable for the section 6661 addition to tax. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the year in issue. FINDINGS OF FACT Some of the facts have been stipulated, and the facts set forth in the stipulations are incorporated in our findings by this reference. Petitioners resided in Upland, California, at the time the petition in this case was filed. The Formation of Techni-MaticsIn 1982, petitioners became limited partners in a limited partnership known as Techni-Matics Two, Ltd. (Techni-Matics). Jacob Y. Terner (Terner) was the general partner of Techni-Matics. Theodore W. Dutton (petitioner) had known Terner for approximately 8 years prior to petitioners' involvement in Techni-Matics. Petitioner had a prior business relationship with Terner that involved the purchase, management, and sale of apartment houses in which Terner had been an investor. Terner provided petitioner with a booklet describing1990 Tax Ct. Memo LEXIS 507">509 the computerized technology that was being developed by Michael Leighton (Leighton). That technology involved computerized commodities futures trading systems. On June 15, 1982, petitioners entered into a limited partnership agreement with Techni-Matics. That agreement provided: Purpose. The business of the Partnership is to develop, lease, own, hold, re-lease, sell or otherwise dispose of and utilize commodity trading strategies for profit, and to engage in any and all activities related or incidental thereto. * * Section 8.1. The total initial capital of the Partnership shall be $ 127,500. The capital of the Partnership shall be increased if and to the extent the Partners are required to make additional capital contributions by virtue of having executed Assumptions Agreements agreeing to become personally liable for a proportionate share of certain Partnership liabilities as set forth in Schedule A hereto. The Introduction and Summary of Proposed Partnership Activities contained in that agreement stated: There is the potential of substantial economic gain inherent with this investment, although no such gains or any gains or any return of any portion of the1990 Tax Ct. Memo LEXIS 507">510 investment can be guaranteed. If Compu-Com [Systems, Inc.] exercises its options to purchase the programs developed by the Partnership, and if Compu-Com is able to achieve the rate of growth forecast by management, there is the potential for the investor to realize gains of between ten (10) and twenty (20) times the amount of his initial capital investment over the ten year period described in the terms of purchase detailed in the "Lease" Agreement, paragraph 8. BEYOND THE POTENTIAL OF SUBSTANTIAL ECONOMIC GAIN, THE PROGRAM SHOULD PROVIDE A FIRST YEAR TAX WRITE OFF AGAINST ORDINARY INCOME OF APPROXIMATELY 400% OF THE DIRECT INVESTMENT. SUBSEQUENT EARNINGS OF THE PARTNERSHIP SHOULD BE IN THE FORM OF LONG TERM CAPITAL GAINS. EACH INVESTOR MUST RECOGNIZE THAT THIS IS A HIGH RISK INVESTMENT. THERE IS NO GUARANTEE THAT THE PROGRAMS BEING DEVELOPED BY THE PARTNERSHIP WILL EVER BE SOLD, THAT ANY OF THE REVENUE FORECASTS WILL EVER BE REALIZED, OR THAT THERE WILL BE ANY REVENUES TO THE PARTNERSHIP AT ALL. THE INVESTOR ALSO RECOGNIZES THAT HE IS PERSONALLY LIABLE ON HIS PRO RATA SHARE OF THE TEN YEAR NOTE PAYABLE TO AMLEN INVESTMENTS, LTD. AND THAT IF THERE ARE NOT SUFFICIENT REVENUES1990 Tax Ct. Memo LEXIS 507">511 TO THE PARTNERSHIP TO SERVICE AND RETIRE THIS DEBT, THE LIMITED PARTNER WILL BE REQUIRED TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS TO SERVICE AND RETIRE SAID DEBT. THE MAXIMUM LIABILITY OF EACH LIMITED PARTNER IS SPECIFIED AND LIMITED BY THE "ASSUMPTION AGREEMENT" EXECUTED BY THE LIMITED PARTNER. The Amlen NoteAmlen Investments, Ltd. (Amlen), was a Swiss corporation wholly owned by Retiga, A.G. David R. Shevitz was the president of Amlen. On June 15, 1982, Terner signed a $ 375,000 promissory note given by Techni-Matics to Amlen. The principal was payable 10 years from the date of the note, and interest was payable beginning on December 15, 1983, at 10 percent per year. In accordance with the Assumption Agreement, the partnership became liable to Amlen for the principal amount. Each limited partner assumed his or her pro rata share of that indebtedness. Petitioner's pro rata share was $ 51,000. Techni-Matics did not make an interest payment to Amlen on December 15, 1983. The Research and Development Contract with TripoliOn June 15, 1982, a research and development contract was entered into between Tripoli Research Corporation (Tripoli) and Techni-Matics. Leighton1990 Tax Ct. Memo LEXIS 507">512 was the managing head of Tripoli. The agreement provided, in relevant part, that: The Company [Tripoli] shall undertake the Research Program on behalf of the Partnership [Techni-Matics] to develop advanced and improved theories and computer programs in an attempt to predict the behavior of commodity market prices. The following language appeared under the heading "Scope of Engagement": 2.4 This Contract is explicitly for research and experimentation in an experimental or laboratory sense and all expenses paid hereunder are intended to qualify as research and experimental expenditures within the meaning of Section 174 of the Internal Revenue Code and Regulation Section 1.174-2. No expenditures will be made for the ordinary testing or inspection of materials or products for quality control or for efficiency surveys, management studies, consumer surveys, advertising or promotion, and the parties shall have no obligation to undertake any such testing or surveys. In addition, no expenditures will be made for materials, labor or other factors to acquire, construct, install, or improve property produced as a result of the research and experimentation.1990 Tax Ct. Memo LEXIS 507">513 All expenditures contemplated under this Contract are to be made solely at the order and risk of the Partnership. The following language appeared under the heading "Rights to Trading Strategies": 3.2 The President of the Company, or any other person whom he may designate shall have the sole discretion and responsibility to determine when each Trading Strategy developed under the Research Program has reached that stage of development when further development would no longer qualify as research and experimentation under Section 174 of the Internal Revenue Code and Regulation Section 1.174-2 or when such Trading Strategy is reduced to practice, whichever event shall first occur. The criteria used by the Company in making such an evaluation shall be subject to approval by tax counsel to the Partnership. Upon reaching such a conclusion as to a Strategy, the Company shall issue a written report to such effect to the Partnership, describing the Trading Strategy and the date on which such evaluation was made. The contract required a $ 125,000 cash payment upon execution of the contract and the remaining $ 375,000 on or before December 15, 1982. After signing1990 Tax Ct. Memo LEXIS 507">514 the research and development contract with Techni-Matics, Tripoli subcontracted the research and development to Comile, Inc. (Comile); M.W.L. Systems; and C.I.S. Capital Corporation. Each entity was to design a different level of the trading program. Techni-Matics made the required payments to Tripoli in the amount of $ 500,000 for two trading strategies designed at a cost of $ 250,000 each. In November 1982, Techni-Matics opened a checking account at City National Bank. A notation on the signature card indicated that Leighton could sign for funds with his signature alone. Techni-Matics initially deposited $ 125,450 into that account. On November 15, 1982, Amlen issued a check for $ 187,500 to Techni-Matics. Techni-Matics then issued a check to Tripoli for $ 312,500. Tripoli thereafter issued a check to Orion Monetary Systems, Inc. (Orion), for $ 362,500. On November 29, 1982, Amlen issued a $ 187,500 check to Techni-Matics. Techni-Matics subsequently wrote a check to Tripoli for $ 187,500. The Lease to Compu-ComOn June 15, 1982, Techni-Matics agreed to lease the strategies developed by Tripoli to Compu-Com Systems, Inc. (Compu-Com). At that time, Leighton was1990 Tax Ct. Memo LEXIS 507">515 the president of Compu-Com, and Shevitz was the assistant secretary of Compu-Com. The lease agreement provided for nominal monthly rental payments. Compu-Com leased the programs but did not make any rental payments to Techni-Matics. The lease agreement contained an option to purchase at the end of 1 year. The option terms required that Compu-Com pay Techni-Matics a down payment of $ 34,000 together with the royalty from the first through fifth fiscal years equal to 1 percent of the gross income of Compu-Com in excess of $ 700,000 per year, with a minimum guarantee of $ 67,500 per year. For years 6 through 9, Compu-Com was to pay Techni-Matics a royalty of one-half percent of the gross income per year in excess of $ 700,000, with a minimum annual guarantee of $ 67,500. Compu-Com did not exercise the option. Terner subsequently became the president of Compu-Com. The Agreement with OrionOn June 15, 1982, Techni-Matics entered into an agreement with Orion in which Orion agreed to act as agent for Techni-Matics with respect to the administration of various agreements with Tripoli and the leases to Compu-Com. Among the management functions Orion was to perform were the opening1990 Tax Ct. Memo LEXIS 507">516 of a bank account and reviewing the work of subcontractors to ensure adequate progress was being made. Kay Buchanan, Leighton's mother, operated Orion. The Legal OpinionTerner requested a legal opinion on the tax ramifications of the formation of Techni-Matics. The legal opinion provided by Hill, Farrer & Burrill, dated June 23, 1982, specifically addressed whether the partnership or the individual partners were able to deduct the amounts paid to Tripoli under section 174 as follows: Tripoli may contract with you, Mr. Leighton or one of your related entities to perform certain development work of the Trading Strategy. You have represented to us that the compensation to be paid to you, Mr. Leighton or your related entities for services rendered or for the use of computer facilities owned either by you or your controlled corporations will be reasonable and will be substantially similar to charges that could be expcted to be incurred between unrelated parties for the same or similar services or products being offered. * * The Partnership (and the Partners as to their allocable shares thereof) should be eligible under Section 174 of the Code to treat the amounts1990 Tax Ct. Memo LEXIS 507">517 paid by the Partnership to Tripoli (subject to the caveat expressed above as to reasonableness of the expenditures) pursuant to the R&D Contract as expenses which are not chargeable to capital account. That letter also specifically addressed the relationship between the entities involved in the transaction with Techni-Matics as follows: 5. Related Entities. All corporations involved in the above scenario of transactions except for Amlen and Retiga, A.G. are controlled either indirectly or directly by Mr. Leighton. 6. Multiple Partnerships. While the transactions that are contemplated herein relate only to the Partnership, you have indicated that additional partnerships will be formed to develop Trading Strategies using different trading assumptions. In fact, you have requested an opinion as to the same matters herein for such other partnerships each of which will be formed and operated upon conditions substantially the same as those herein except that each will develop its own distinct Trading Strategy and each would probably consist of different individual investors. You have represented to us that each of the Trading Strategies that these partnerships will1990 Tax Ct. Memo LEXIS 507">518 develop will, and can be, determined to be wholly, separate and distinct from the Trading Strategies developed by the other partnerships or either by Compu-Com or any of your or Mr. Leighton's other related corporations or entities. Progress ReportsOn March 10, 1983, Orion sent a letter to petitioner advising him that he would be receiving progress reports on the Techni-Matics partnership. On August 31, 1983, Orion sent petitioner a progress report. The progress report outlined the activities of the partnership and contained a separate sheet detailing the allocation of the partnership's adjusted gross income. That schedule provided a breakdown of the total accounts, allocation of income to the individual partners, and a breakdown of the profit and tax savings for each $ 8,000 unit. The progress report emphasized tax benefits as follows: The way the Advisor Program is structured provides tremendous economic potential for the "passive" Limited Partner Investors and for the working General Partner. The Advisor Program also provides significant favorable tax deductions for the Limited Partner Investors, ranging from 330% to 400% in 1983. The deductions are against ordinary1990 Tax Ct. Memo LEXIS 507">519 income and are not tax preference items. It is very likely that this same deduction will be available to the Limited Partners again in 1984 and 1985 without any additional capital investment on their part! The Sale to Fusilier Holdings, Ltd.The programs that were ultimately developed by Tripoli could not be used by Compu-Com. Terner thereafter approached Leighton with respect to the sale of the two programs. On July 26, 1984, the sale of the programs was completed to a subsidiary of Noble Group S.A. (Noble), Fusilier Holdings, Ltd. (Fusilier), for $ 440,000. Noble was affiliated with Leighton. Fusilier was a Turks and Caicos Islands corporation with offices in Nassau, Bahamas. The agreement of sale provided that the purchase price was payable in cash or a cashier's check and was to be deposited in the Techni-Matics account with a Swiss corporation, Finagest. Both Fusilier and Finagest were affiliated with Noble. Terner did not seek other buyers or consult any experts concerning the fair market value of the programs. Terner and Leighton also negotiated terms for the sale to Fusilier of nine other software systems held by partnerships of which Terner was the general1990 Tax Ct. Memo LEXIS 507">520 partner. Tax TreatmentIn 1982, Techni-Matics claimed an ordinary loss of $ 500,317. Of that amount, $ 500,000 was purportedly incurred as a research and development expense for the two computer programs relating to investment in the commodities futures market. On their 1982 Federal income tax return, Schedule E, petitioners reported a loss of $ 67,893 as their distributive share of losses sustained by Techni-Matics. Respondent disallowed that loss. OPINION Petitioners bear the burden of proof with respect to the issues in this case. Rule 142(a), Tax Court Rules of Practice and Procedure.Section 174The tax benefits purportedly to be obtained by the various limited partnerships organized by Leighton and Terner were predicated on the deductibility, under section 174, of payments to other entities controlled by Leighton and Terner. Section 174(a) provides: In General. -- A taxpayer may treat research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable to1990 Tax Ct. Memo LEXIS 507">521 capital account. The expenditures so treated shall be allowed as a deduction. For expenses to be deductible under section 174, it is not necessary that they be incurred "in carrying on" a trade or business, as required under section 162. It is necessary, however, that they be incurred "in connection with" the trade or business of the partnership. See Snow v. Commissioner, 416 U.S. 500">416 U.S. 500, 416 U.S. 500">503 (1974). In Snow, the Supreme Court held that taxpayers need not be selling or producing a product in the year in which the deduction is claimed in order to qualify for deductions under section 174. The taxpayer must, however, be engaged in a trade or business at some time. Levin v. Commissioner, 87 T.C. 698">87 T.C. 698, 87 T.C. 698">724-725 (1986), affd. 832 F.2d 403">832 F.2d 403 (7th Cir. 1987); Green v. Commissioner, 83 T.C. 667">83 T.C. 667, 83 T.C. 667">686-687 (1984). As in other cases, we must examine1990 Tax Ct. Memo LEXIS 507">522 the facts and circumstances to see whether the activity claimed to constitute a business is conducted with continuity and regularity and whether the primary purpose for engaging in the activity is for income or profit. See Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 480 U.S. 23">35 (1987); Smith v. Commissioner, 91 T.C. 733">91 T.C. 733, 91 T.C. 733">762-764 (1988), on appeal (6th & 11th Cirs., Dec. 18, 1989). Respondent contends that petitioner is not entitled to a deduction for his share of the partnership research and development expenses in this case because the partnership was not engaged in a trade or business at any time. Petitioner asserts that to require a taxpayer to be engaged in a business at some time in order to be eligible for a deduction under section 174 discriminates between successful and unsuccessful research and development. Petitioner suggests a test that requires a taxpayer to intend and be capable of entering into a trade or business at some subsequent date. Whether or not petitioner's suggested modification of the language used in prior cases is adopted, we would be required to decide whether or not the partnership had the requisite profit objective. Profit1990 Tax Ct. Memo LEXIS 507">523 ObjectiveThe existence of the requisite profit objective in a case involving a partnership is determined at the partnership level. Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 78 T.C. 471">504-505 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984); Rosenfeld v. Commissioner, 82 T.C. 105">82 T.C. 105, 82 T.C. 105">112 (1984). Thus we must look at the objective of Terner in this case. A key question is whether Terner, when acting on behalf of Techni-Matics, was businesslike in delegating responsibility to Leighton and paying $ 500,000 to Leighton for his services on behalf of Techni-Matics, particularly when Terner and Leighton were involved in at least nine other entities competing with Techni-Matics. Terner testified and described himself as an "amateur in commodities." Otherwise, he was a physician who had dealt extensively in real estate limited partnerships. He relied entirely on Leighton. All of the entities involved in the transaction with Techni-Matics were controlled by Leighton or his associates, and cash contributed by investors such as petitioner was moved from one entity1990 Tax Ct. Memo LEXIS 507">524 to another. The partners were not advised of the progress of development of the trading strategies in any formal manner. Petitioner was sent a progress report by Orion, a company operated by Leighton's mother. In explaining the function of Orion, Leighton testified: "apparently, according to the attorneys you can't take a current deduction on the cost of administrative work concerned with the design of the program. So that was broken out separately under the Orion heading." Leighton's testimony about the services he allegedly performed for Techni-Matics, which paid $ 500,000, was vague. The few documents that he produced were undated or otherwise were not shown to be related to work performed for Techni-Matics. Leighton testified that fees were derived by a process that included increasing his hourly rate used in computations from $ 225 per hour to $ 300 per hour. The services that he allegedly performed for these fees, however, were amorphous. On cross-examination, Leighton testified: A I am responsible for the development of the systems. I am the only one in the company who, it turned out, was able to conceive of and supervise the developments of the programs themselves. 1990 Tax Ct. Memo LEXIS 507">525 As I would first conceive of and denote the direction of specific program work, such as these two descriptions for the programs which were ultimately developed for Technomatics II, I would go through a process of asking the computer department for a series of computer runs which I would use as the basis for scanning to find out whether or not the reference conditions that were the basis of the program that I wanted to develop appeared relevant. After attempting unsuccessfully to specify work performed by particular employees on a list provided by petitioners, Leighton stated: A * * With respect to the design work of these programs, it would be more a function of gathering data for me and interfacing with programmers, following up schedules of program development, watching over the work schedules of the other employees so that I didn't have to do that so that my time was free for the more conceptual, esoteric elements of systems design. Leighton asserted that he was not responsible for details, such as whether Compu-Com paid rent to Techni-Matics: Q Did Compu-Com actually lease the two programs, initially? A I'm not sure that that shows here, but I believe, yes, 1990 Tax Ct. Memo LEXIS 507">526 that they did. Q And how much did Compu-Com pay to Technomatics II as rental payments? A Whatever would have been called for by the agreement. I was not a bookkeeper. I don't know. I don't know the amount that it paid. That wasn't my job. If it says a number in here, I'll be happy to look through and find the number for you, but I'm sure you already know the answer. Q Well, the problem is that there is no amount stated in the lease agreement. A That's something you should ask the attorneys about that prepared the agreements. Q Did you sign these agreement[s]? A Yes. I signed lots of things. About another employee, he testiied: Q Okay. And then on line seven, there's a name called Tanna Leighton. A Yeah? Q And what did she do? A She was my ex-wife. Q Okay. A I just put her on the -- I got permission from Noble to put her on a monthly consulting fee as a part of the divorce settlement. The foregoing quotations provide the flavor of Leighton's testimony. Leighton "guessed" that over the period of 2 years, 1981 and 1982, Tripoli had collected between $ 5 million and $ 6 million in research and development fees from the various partnerships.1990 Tax Ct. Memo LEXIS 507">527 He indicated that he was involved in seven or eight limited partnerships in 1981 and again in 1982. Even if the services would produce a profit on behalf of a single entity, petitioners have given us no reason to believe that such success could be spread over multiple partnerships. See Rose v. Commissioner, 88 T.C. 386">88 T.C. 386, 88 T.C. 386">417 (1987), affd. 868 F.2d 851">868 F.2d 851 (6th Cir. 1989); Skripak v. Commissioner, 84 T.C. 285">84 T.C. 285, 84 T.C. 285">324-325 (1985); Estate of Baron v. Commissioner, 83 T.C. 542">83 T.C. 542, 83 T.C. 542">556-558 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986). No evidence was presented that Leighton's fees were reasonable. Petitioner and Terner were apparently indifferent to the reasonableness of the fees to be paid to Leighton and entities controlled by him. The investment was presented to petitioner as a package with no opportunity for negotiation. The offering materials emphasized in bold print the tax benefits the participants hoped to obtain but did not have any information on the value of the programs or the market conditions for sale of the programs if and when they were developed. The interrelationships between entities in which1990 Tax Ct. Memo LEXIS 507">528 Leighton and Terner were involved were disclosed in the opinion letter. The opinion letter also warned that deductibility of the expenses was contingent on the reasonableness of the amounts paid for research and development. The failure of Terner or petitioner to inquire about the reasonableness of the amounts in view of the multiple warnings is unexplained and undermines their claim of profit objective. Respondent relies on Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d 724 (9th Cir. 1986), affg. a Memorandum Opinion of this Court, as authority for concluding that the dominant motive for creation of the partnership in this case was tax avoidance. In that case, a limited partnership was allegedly formed for the purpose of developing patents. The key factors leading to the conclusion that the partnership did not have a profit objective were the inflated purchase price of the patents and the lack of arm's-length dealings. Those factors are certainly persuasive in this case. Petitioner contends that Independent Elec. Supply, Inc. was an abusive tax shelter case distinguishable from this case. Petitioner argues that (1) this case involved an actual1990 Tax Ct. Memo LEXIS 507">529 payment of funds to Tripoli with the limited partners signing assumption agreements on the notes, instead of a small down payment and a large promissory note that is often present in abusive tax shelter cases; (2) this case involves a one-to-one write-off as opposed to a grossly disproportionate write-off; and (3) the actual sale of the programs demonstrates that the programs had value and that that value equaled 88 percent of the cost of the programs. Further, petitioner asserts that: Reviewing the actual economic implications of this transaction in hindsight clearly demonstrates that it was not a tax avoidance scheme from the inception. This can be demonstrated by assuming maximum tax brackets and considering the fact that the partnership wrote off $ 500,000.00 in deductions in 1982, which would have an economic benefit of $ 250,000.00. However, to obtain this benefit, the partnership had to part with $ 125,000.00 of cash and it reported the sale of the product at a taxable gain of $ 440,000.00 which, assuming again maximum tax benefits, would incur an $ 88,000.00 tax liability. Accordingly, we see the partnership has spent $ 213,000.00 in cash and taxes in order to obtain1990 Tax Ct. Memo LEXIS 507">530 a tax benefit of $ 250,000.00, leaving a net economic advantage of $ 37,000.00. * * It is totally inconceivable that the limited partner, such as petitioners would enter a pre-conceived plan such as this for a return of 7.4%. Petitioner's argument is unconvincing. There was no negotiation at the time of the sale of the programs to Fusilier, a Noble subsidiary located in the Turks and Caicos Islands. The loan from Amlen, originally due 10 years after the date of execution, was repaid from the proceeds of that sale. Shevitz, the president of Amlen, was also an assistant secretary of Compu-Com. Other programs of entities in which Terner was a general partner were also sold to Fusilier. Whether or not the sale was part of "a preconceived plan," it was not conducted at arm's length but appears to be the final arc in a circular transfer of funds. See Drobny v. Commissioner, 86 T.C. 1326">86 T.C. 1326, 86 T.C. 1326">1346 (1986). For all of the foregoing reasons, we conclude that petitioners have not proven that the Techni-Matics partnership had the requisite profit objective. They have not proven that the partnership was or would ever be in the trade or business of software leasing1990 Tax Ct. Memo LEXIS 507">531 or development, and their deductions are not allowable under section 174. Section 6661Section 6661 provides an addition to tax equal to 25 percent of the underpayment of tax attributable to a substantial understatement of income tax. Sec. 6661(a). Section 6661(b)(2)(B)(i) provides for a reduction of the amount of the understatement by that portion of the understatement that is attributable to the tax treatment of any item if there is or was substantial authority for such treatment. In tax shelter cases, the understatement is reduced if the taxpayer also shows that he reasonably believed that the tax treatment of the items in question was more likely than not the proper treatment. Section 6661(b)(2)(C)(ii) provides that a partnership is a tax shelter if the principal purpose of the partnership is the avoidance or evasion of Federal income tax. Petitioner argues that Techni-Matics did not have a principal purpose of avoidance or evasion of Federal income tax. Petitioner further argues that1990 Tax Ct. Memo LEXIS 507">532 substantial authority existed for the position taken on petitioners' return. In Antonides v. Commissioner, 91 T.C. 686">91 T.C. 686 (1988), affd. 893 F.2d 656">893 F.2d 656 (4th Cir. 1990), we set forth the following analysis to be applied in determining whether a taxpayer has substantial authority for a position: In evaluating whether a taxpayer's position regarding treatment of a particular item is supported by substantial authority, the weight of authorities in support of the taxpayer's position must be substantial in relation to the weight of authorities supporting contrary positions. Sec. 1.6661-3(b)(1), Income Tax Regs. * * * * * * The weight of the authorities for the tax treatment of an item is determined by the same analysis that a court would be expected to follow in evaluating the treatment of the item. Thus, an authority is of little relevance if it is materially distinguishable on its facts from the facts of the case at issue. Sec. 1.6661-3(b)(3), Income Tax Regs. 1990 Tax Ct. Memo LEXIS 507">533 [91 T.C. 686">91 T.C. 702-703.] Petitioner argues that he relied on the opinion of tax counsel and the authority cited in the opinion letter written by counsel that was included in the limited partnership offering materials. Respondent contends that the opinion letter provides no basis for reliance by petitioner. Respondent argues, and we agree, that the opinion letter was written on the assumption of facts that were false or without support. The authority cited in that opinion was cited as authority for a factual situation where the fees paid were reasonable and were incurred in connection with a trade or business. Therefore, even if we apply the lesser standard of substantial authority, petitioner's authority is materially distinguishable. Finally, we are not persuaded that petitioner reasonably believed that the tax treatment of the items was more likely than not the proper treatment. The opinion letter upon which petitioner claims reliance is replete with caveats and assumptions. Petitioner was advised by the opinion letter of Leighton's multiple and conflicting roles. That letter warned that any section 174 deduction was subject to the reasonableness of the amounts1990 Tax Ct. Memo LEXIS 507">534 claimed for research and development. Petitioner has not proven that the expenses claimed were reasonable or that he made any effort to find out whether they were reasonable. Petitioners are liable for the section 6661 addition to tax. In light of the foregoing, Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620071/	Noah E. and Marjorie M. Smith v. Commissioner.Smith v. CommissionerDocket No. 1325-71.United States Tax CourtT.C. Memo 1972-147; 1972 Tax Ct. Memo LEXIS 110; 31 T.C.M. 736; T.C.M. (RIA) 72147; July 5, 1972Noah Smith, pro se, 609 Lexington Way, Burlingame, Calif., David L. Gibson, for the respondent. FORRESTER1972 Tax Ct. Memo LEXIS 110">111 Memorandum Findings of Fact and Opinion FORRESTER, Judge: Respondent determined a deficiency in petitioners' income tax for the taxable year 1968 in the amount of $1,603.25. The issues remaining for decision are whether petitioners qualify for the combat pay exclusion of section 112, 1 and whether petitioners have adequately substantiated certain claimed travel expense deductions. Adjustment of a claimed medical expense deduction is dependent on our resolution of the above issues. Findings of Fact Some of the facts have been stipulated and are so found. Petitioners resided in Burlingame, California, at the time the petition herein was filed. They filed a joint Federal income tax return for the taxable year 1968 with the district director of internal revenue in San Francisco, California. The issues in this case relate solely to the activities of Noah E. Smith, and he will hereinafter be referred to as the petitioner. Throughout 1968 petitioner was a civilian noncombat airline navigator employed by Flying Tiger Line, Inc., Los Angeles, California (hereinafter referred to1972 Tax Ct. Memo LEXIS 110">112 as Flying Tiger). Flying Tiger operated the following three types of flights under military contract with the Department of Defense: (1) transportation of military cargo to Vietnam (some of which was explosive); (2) transportation of military personnel on leave from Vietnam for "rest and recreation;" and (3) transportation of military personnel between the United States and Vietnam. Flying Tiger was a member of the Civil Reserve Air Fleet program, and its aircraft and crews were consequently subject to immediate mobilization in the event of a national emergency. In 1968 Flying Tiger did not operate regularly scheduled commercial flights. During 1968 petitioner navigated Flying Tiger aircraft to and from the following airfields: Travis Air Force Base, California; Anchorage or Cold Bay, Alaska; Yokota Air Force Base, Japan; and Saigon, Danang, Camrahn Bay, Bien Hoa, and Phu Cat, all in Vietnam. Petitioner flew on flights from California to the Far East on approximately 23 separate occasions during 1968, including at least one flight each month. Each of such flights involved a two or three-hour stopover in Vietnam for loading and unloading. On several occasions the aircraft navigated1972 Tax Ct. Memo LEXIS 110">113 by petitioner came under small arms fire while flying over Vietnam. Prior to each flight to Vietnam, petitioner and other members of the crew were cleared for security and given military briefings. Each member of the crew carried an identification card which identified the bearer as a civilian noncombatant entitled to treatment equivalent to that accorded a "Captain, U.S. Army." These cards were to be used in the event of capture by hostile forces. Due to the limited scheduling and areas flown by Flying Tiger, petitioner was forced to either accept flight assignments to Vietnam or give up his job. On April 1, 1969, petitioner received a Certificate of Recognition and Appreciation from General Howell M. Estes, Jr., United States Air Force, for services rendered as a navigator on flights to and from Vietnam over the period from August 5, 1964, to December 15, 1968. At no time during 1968 was petitioner a member of any active or reserve unit of the United States Armed Forces. Also, petitioner at no time during 1968 wore a military uniform or received compensation for service as a commissioned officer or enlisted man of the Armed Forces. Petitioner's entire salary during 1968 was paid1972 Tax Ct. Memo LEXIS 110">114 by Flying Tiger. During 1968 petitioner was away from home on assignment with Flying Tiger for 142 days, and he received reimbursement for his travel expenses in the amount of $1,874, for a daily rate of approximately $13.20. Of the $13.20 daily expense allowance, Flying Tiger retained $6 and paid petitioner's hotel bill, absorbing any lodging expense exceeding $6. Thus petitioner received only $1022 for meals and other travel expenses for the 142 days, but Flying Tiger furnished its crews with cold meals during most flights. 738 Due to his irregular schedule and the changes in time zones, petitioner's eating habits varied greatly while he was out on a flight. On some days he would eat only one meal, and on others he would eat three or four meals. On his federal income tax return for 1968 petitioner claimed an exclusion of $6,000 from his income as "combat pay" within the meaning of section 112. Also, petitioner deducted $864 which he claimed represented his out-of-pocket travel expenses incurred during 1968 in excess of the per diem travel allowance paid by Flying Tiger. Respondent disallowed both items and determined a deficiency accordingly. The only record which petitioner1972 Tax Ct. Memo LEXIS 110">115 introduced to substantiate his claimed travel expenses in excess of reimbursement was a log book which he kept during 1968. The purpose of keeping the log book was to record for each flight such information as the time of departure, the trip number, the time of arrival, and the total block time. The log book contained four notations which indicate that petitioner made the following meal expenditures: on January 26, 1968, $13.45 for food in Anchorage, Alaska; on March 16, 1968, $6.75 for food in Anchorage, Alaska; on one day in September 1968, $13.20 for food in Tokyo, Japan; and on one day in August 1968, $8.60 for food in Japan. The only other substantiation offered by petitioner to support his claimed deduction for travel expenses was (1) a pair of menus from a hotel in Anchorage, Alaska, which he obtained in 1970, and (2) some receipts from Japanese restaurants which indicated meal expenditures on four different days in 1970 of $8.60, $6.00, $8.00, and $9.00. Opinion Petitioner's first claim arises under section 112 2 which permits, within certain limits, members of the Armed Forces of the United States to exclude "combat pay" from gross income. Respondent contends that petitioner1972 Tax Ct. Memo LEXIS 110">116 was not a member of the armed forces during 1968, and that he therefore cannot be allowed the section 112 exclusion. We must agree with respondent, because it is abundantly clear from the statute, the Income Tax Regulations, and the cases 3 that the benefits of section 112 are available only to actual members of the armed forces. Petitioner, by his own admission, was not a member of the armed forces during 1968, but was a civilian employee of a civilian airline. 1972 Tax Ct. Memo LEXIS 110">117 Petitioner argues that when Congress enacted section 112 it must have overlooked the plight of civilian employees like himself who work in combat areas. This is highly unlikely, especially since Congress recently extended the coverage of section 112 to include certain civilian employees while they are in a "missing status" during the Vietnam conflict. Sec. 112(d)(2). In any event, we are not the forum to which such an argument should be addressed. We can only apply the law as we find it; we cannot change the law no matter how worthy petitioner's arguments might be. Only Congress can alter the statute and afford petitioner the redress he seeks. Petitioner's second claim arises from the money which he purportedly spent in excess of the amounts he received from Flying Tiger as reimbursement for travel expenses. In 1968 petitioner received a net of $1022 to reimburse him for the travel expenses exclusive of lodging which he incurred during the 142 days he was away from home on assignment with Flying Tiger. He contends that this amount was inadequate, and that during 1968 he had to spend an additional $864 for which he is entitled to a deduction. 739 Before a taxpayer may deduct1972 Tax Ct. Memo LEXIS 110">118 travel expenses, section 274(d) 4 requires that he substantiate with adequate records or sufficient evidence corroborating his own statement (1) the amount of the expense, and (2) the time and place it was incurred. Respondent disallowed petitioner's claimed deduction on the ground that petitioner did not adequately substantiate the number of meals and the amount expended. We agree with respondent and hold that petitioner is not entitled to the claimed deduction. The only records offered by petitioner were four somewhat ambiguous notations in a log book which he kept during 1968. These notations pertain to only four of the 142 days which petitioner spent on flights, and they could not possibly satisfy petitioner's burden of proving that his1972 Tax Ct. Memo LEXIS 110">119 meal expenses exceeded his daily reimbursement. These notations seem to have been made on special occasions when petitioner spent more than usual on food. One of the notations indicates that petitioner spent less than his per diem allowance on that day. The extent to which petitioner partook of the box lunches provided by Flying Tiger is not entirely clear from the record. Moreover, petitioner testified that his eating habits varied because of his irregular hours and travel across time zones. Because of these factors there may well have been days when petitioner ate fewer meals than he otherwise would have. Finally, petitioner did not explain how he computed the amount ($864) which he seeks to deduct. In sum, the evidence introduced by petitioner simply does not substantiate that he spent the amounts claimed. The law, as duly enacted by Congress, requires such substantiation, and we must sustain respondent's disallowance. As a consequence of all of the foregoing, respondent's determination as to the claimed medical expense deduction is also sustained. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise specified.↩2. SEC. 112. CERTAIN COMBAT PAY OF MEMBERS OF THE ARMED FORCES. (a) Enlisted Personnel - Gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed Forces of the United States for any month during any part of which such member - (1) served in a combat zone during an induction period, or (2) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone during an induction period * * (b) Commissioned Officers. - Gross income does not include so much of the compensation as does not exceed $500 received for active service as a commissioned officer in the Armed Forces of the United States for any month during any part of which such officer - (1) served in a combat zone during an induction period, or (2) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone during an induction period * * * ↩3. For almost identical cases see Jay D. Reynolds, T.C. Memo. 1972-84; David D. Fagerland, T.C. Memo. 1971-134; and Lee M. Prusia, T.C. Memo. 1969-148↩.4. SEC. 274. DISALLOWANCE OF CERTAIN * * * EXPENSES. * * * (b) Substantiation Required. - No deduction shall be allowed - (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620072/	John W. Meyers, Jr., and Lorna M. Meyers, Petitioners v. Commissioner of Internal Revenue, RespondentMeyers v. CommissionerDocket No. 7445-74United States Tax Court66 T.C. 235; 1976 U.S. Tax Ct. LEXIS 114; May 10, 1976, Filed 1976 U.S. Tax Ct. LEXIS 114">114 Decision will be entered under Rule 155. Held, sod is a "natural deposit," the proceeds from the sale of which are subject to an allowance for depletion under sec. 611(a), I.R.C. 1954. Laurin W. Schutter and M. Wayne Davidson, for the petitioners.John Wendell Paul, for the respondent. Fay, Judge. FAY66 T.C. 235">236 Respondent determined deficiencies in petitioners' Federal income tax and an addition to tax as follows:Addition to taxsec. 6653(a),YearDeficiencyI.R.C. 19541970$ 17,472.4319718,201.01$ 410.051976 U.S. Tax Ct. LEXIS 114">115 Due to concessions, the sole issue for our decision is whether petitioners are entitled to claim an allowance for cost depletion of topsoil in their sod-growing operation.FINDINGS OF FACTSome of the facts have been stipulated and are so found.Petitioners John W. Meyers, Jr., and Lorna M. Meyers are husband and wife. They filed timely joint Federal income tax returns for the taxable years 1970 and 1971 with the Internal Revenue Service Center, Austin, Tex. These returns were prepared on the cash method of accounting as to petitioners' personal income and expenses and on the accrual method of accounting as to farm income and expenses. At the time of the filing of the petition herein, petitioners' place of residence was Stilwell, Kans.John W. Meyers, Jr. (hereinafter referred to as petitioner), is in the business of producing sod and farming. He has grown and sold sod for approximately 10 to 12 years, including the years in issue, using both his own land and leased land.The raising of sod necessitates seeding, fertilization, watering, mowing, rolling, and spraying for insect control, which requires approximately 2 years. Mature sod is ultimately harvested by cutting and rolling1976 U.S. Tax Ct. LEXIS 114">116 it into strips. The depth of a cut is determined by the adjustment of the harvesting machine. Each cutting of sod necessarily takes with it some of the topsoil.By the choice of an individual sod producer, a sod-removal operation may be continued on a given tract of land until all available topsoil is removed, or may be terminated so as to leave topsoil available for other uses. 1 Given petitioner's land and the manner in which sod was removed from it, petitioner would exhaust the available topsoil upon removal of 16 cuts of sod.66 T.C. 235">237 Under the circumstances of petitioner's sod-production operation, if the topsoil available on petitioner's sod-producing lands were to be exhausted, it would not be economically feasible to raise sod or grain crops and it would likewise not be economically feasible to replenish the soil by fertilization or planting. In such 1976 U.S. Tax Ct. LEXIS 114">117 a situation, the residual value of the land would be 66 percent of its former value as grain- or sod-producing land.The number of acres and total cost of each tract of land owned by petitioner during 1970 and 1971, which has been converted in part to sod production, are as follows:Name of farmTotal acresTotal land costNesselrode320.00$ 31,390Ball160.0030,000Home Place38.0312,000Warren160.0063,000On the depreciation schedules attached to the income tax returns filed for the taxable years 1970 and 1971, petitioner claimed depreciation deductions for each of the above lands for topsoil removed because of sod cutting at one-sixth of cost less salvage. Respondent disallowed the deductions claimed.Those returns also reflect the amount of sod cut as follows:Acres of sodAcres of sodName of farmremoved 1970removed 1971Nesselrode6050Ball7050Home Place15Warren6080The records of the number of acres cut, as kept by petitioner's superintendent for the years in question, have been lost. The Court allowed petitioner, through a review of his tax returns and subject to the right of respondent to verify, to testify that his1976 U.S. Tax Ct. LEXIS 114">118 recollection of the number of acres cut during each year was consistent with the amounts reflected on the returns.OPINIONThe sole issue for our decision is whether petitioner, who is engaged in the business of planting and cultivating sod for sale, is entitled to a deduction for the depletion of the topsoil removed and sold with the sod.Under section 611(a), 2 there is allowed a deduction in 66 T.C. 235">238 computing taxable income for depletion in the case of "natural deposits." This allowance is designed to permit the owner of a capital interest in an exhaustible natural resource in place to make a tax-free recovery of his depleting capital asset. Parsons v. Smith, 359 U.S. 215">359 U.S. 215 (1959). Fundamental in such an allowance is the ultimate exhaustibility of the natural resource on which depletion is claimed. See sec. 1.611-1(a)(1), Income Tax Regs.; United States v. Shurbet, 347 F.2d 103">347 F.2d 103 (5th Cir. 1965); Arthur E. Reich, 52 T.C. 700">52 T.C. 700 (1969), affd. 454 F.2d 1157">454 F.2d 1157 (9th Cir. 1972).1976 U.S. Tax Ct. LEXIS 114">119 In this case petitioner's topsoil will be exhausted in 16 cuttings. Respondent, however, contends that topsoil removed in conjunction with the sale of sod ought not to be classified as a "natural deposit." Rather, it is his position that petitioner's operations are more properly characterized as a farming activity in which there is a foreseen diminution of the capacity of the land to produce crops with each planting. Owners of farmland are specifically denied a deduction for exhaustion and wear and tear due to erosion, wind, or privation of soil nutrients; and respondent would have us treat this case similarly. See secs. 1.167(a)-6(b) and 1.612-1(b)(1), Income Tax Regs.This issue was expressly left open by us in Benedict O. Warren, Jr., 40 T.C. 991">40 T.C. 991, 40 T.C. 991">996-997 (1963). In that case, however, we did express doubt concerning the analogy between the diminution in land value resulting from the physical removal of topsoil with sod and the diminution in land value resulting from the exhaustion of soil nutrients with the planting of crops, the analogy upon which respondent relies. 3 We believe that it would be unnecessary overgeneralization to treat the cultivation1976 U.S. Tax Ct. LEXIS 114">120 and sale of sod as 66 T.C. 235">239 we would a purely farming activity and prefer to follow our earlier suggestion.It is conceded that if petitioner were engaged in the severance and sale of topsoil per se, such soil in place would be considered a "natural deposit," the proceeds from the sale of which would be subject to a cost depletion allowance. See Rev. Rul. 78, 1953-1 C.B. 18. In this regard, we can see no distinction1976 U.S. Tax Ct. LEXIS 114">121 between the sale of topsoil per se and the sale of sod. Perhaps the fundamental differences on this point originate in differing conceptions of sod. Respondent, it seems, would have us define sod as grass to which a certain amount of topsoil adheres. Webster's, on the other hand, defines sod as "the upper stratum of the soil or humus that is filled with the roots of grass or other herbs." (Webster's Third New International Dictionary (1971).) 4Since sod is by definition a combination of soil and plantlife, the loss of topsoil suffered in a sale of sod cannot be considered minimal, as respondent argues. Such a sale would involve losing more than a few incidental morsels of topsoil. In each case some topsoil is being physically removed, so that after 16 cuttings the layer of topsoil on petitioner's land would be totally exhausted. Hence, there is an actual loss of soil1976 U.S. Tax Ct. LEXIS 114">122 which results in eventual exhaustion of petitioner's capital investment in a natural resource, precisely the circumstances in which a depletion allowance was intended. 347 F.2d 103">United States v. Shurbet, supra; see also Don C. Day, 54 T.C. 1417">54 T.C. 1417, 54 T.C. 1417">1425 (1970).Respondent, after distinguishing sod from topsoil, maintains that petitioner's sod operations are in the nature of farming and therefore governed by Rev. Rul. 54-241, 1954-1 C.B. 63. In that ruling respondent determined that sod and balled nursery stock were not assets subject to a depletion allowance because, after removal of such items, it was possible to restore the productivity of the land. Thus, the farmer would instead be able to deduct the cost of land productivity maintenance as a business expense. 51976 U.S. Tax Ct. LEXIS 114">123 In Flona Corp. v. United States, 218 F. Supp. 354 (S.D. Fla. 1963), the District Court rejected the application of Rev. Rul. 54-241, supra, where the taxpayer showed that after the removal of sod, his land could not be restored "except at costs which 66 T.C. 235">240 [were] totally prohibitory." On this point Flona Corp. is indistinguishable from the facts found herein that, upon the exhaustion of topsoil, it would not be economically feasible to replenish the soil.Accordingly, despite respondent's argument to the contrary, we choose to follow our earlier inclination in Benedict O. Warren, Jr., and the reasoning of the District Court in Flona Corp. We therefore hold that the sod sold by this petitioner was a "natural deposit" subject to the depletion allowance under section 611.Decision will be entered under Rule 155. Footnotes1. Through the time of trial, petitioner has continued to use all land upon which he produced sod during the years in issue exclusively for that purpose.↩2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.Sec. 611(a) provides in part:SEC. 611. ALLOWANCE OF DEDUCTION FOR DEPLETION.(a) General Rule. -- In the case of mines, oil and gas wells, other natural deposits↩, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary or his delegate. * * [Emphasis supplied.]3. In Rev. Rul. 54-241, 1954-1 C.B. 63, respondent determined that a sod producer was not entitled to a deduction for depletion of topsoil because it was consumed in activities "incident to farming operations." However, in United States v. Shurbet, 347 F.2d 103">347 F.2d 103 (5th Cir. 1965), the court allowed a depletion deduction for a natural deposit of ground water used internally in the taxpayer's irrigation farming business. See also Dewey V. Nesmith, T.C. Memo. 1972-34↩.4. Respondent, in fact, appears to have accepted this definition. See Rev. Rul. 54-241, 1954-1 C.B. 63↩.5. In Benedict O. Warren, Jr., 40 T.C. 991">40 T.C. 991, 40 T.C. 991">996-997↩ (1963), we expressed doubt that the expense of such a "major and expensive operation like the replacement of topsoil" could be deducted.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620076/	ESTATE OF FLOYD G. PAXTON, JERRE PAXTON, EXECUTOR, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Estate of Paxton v. CommissionerDocket Nos. 4639-76, 4644-76, 4645-76, 4647-76, 4648-76.United States Tax CourtT.C. Memo 1982-464; 1982 Tax Ct. Memo LEXIS 285; 44 T.C.M. 771; T.C.M. (RIA) 82464; August 9, 1982. 1982 Tax Ct. Memo LEXIS 285">285 Floyd Paxton, the decedent of the petitioner estate invented and patented plastic closures. He licensed the patents to corporation Y which, in turn, granted its subsidiary, petitioner corporation I, non-exclusive licenses to exploit the patents. Paxton later invented and patented plastic closures with labels attached and assigned these latter patents to IDT, a family trust. IDT sold the patents to petitioner corporation Y, which then granted petitioner corporation I an exclusive license to exploit the patents. The corporation granted an exclusive license to another petitioner corporation. Held: The patents for closures with labels are not embodied in the earlier patent for closures without labels; therefore, all of the transactions among the parties are effective for tax purposes. In an earlier proceeding we held that the income of PFT trust was taxable to petitioner grantor because the grantor's son, a trustee, did not hold a substantial adverse interest. That decision was affirmed, based, in part, upon the size of the son's ownership in the trust which was not the rationale of our holding. In the instant proceeding the son owns a larger interest in the trust. Held: The doctrine 1982 Tax Ct. Memo LEXIS 285">286 of collateral estoppel does not apply because there has been a change in facts which form the basis of the opinion of the Court of Appeals. Held further: Based upon the facts presented in this proceeding the son does not hold a substantial adverse interest and the income of the PFT trust is taxable to the grantor. Individual petitioners created IDT trust, naming son as trustee. Held: Petitioner grantor's son holds a substantial adverse interest in IDT and tis income is not taxable to individual petitioners. Meade Emory,Peter M. Lind,W. C. Rutherford,Woolvin Patten,Leon C. Misterek,Richard Hunt, and Daniel Woo, for the petitioners. Kenneth McWade, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined the following deficiencies in the Federal income taxes of petitioners for the indicated taxable years: Docket No.PetitionerTaxable YearDeficiencyEnding4639-76Estate of Floyd G.Dec. 31, 1969$179,666.31Paxton, JerreDec. 31, 1970221,038.60Paxton, ExecutorDec. 31, 1971246,449.714644-76Grace D. PaxtonSame as Estate ofFloyd G. Paxton(joint returns)4645-76InternationalJune 30, 1970$179,974.44Development TrustJune 30, 197189,594.214647-76Kwik-Lok CorporationMarch 31, 1967$ 36,414.00of YakimaMarch 31, 19681,826.26March 31, 197016,532.15March 31, 197159,636.05March 31, 197253,251.724648-76Kwik-Lok CorporationMarch 31, 1970$120,413.59of IndianaMarch 31, 1971129,147.81March 31, 1972134,176.001982 Tax Ct. Memo LEXIS 285">287 After concessions, 2 these are the issues we must herein decide: (1) whether certain patents which were purportedly sold by International Development Trust to Kwik-Lok Corporation of Yakima, and then licensed by that corporation to its subsidiaries, Kwik-Lok Corporation of Indiana, were, by reason of earlier transactions, already owned by (or licensed to) such corporations; (2) whether, if such patents were not already owned by or licensed to such corporations, the amounts paid for such patents and licenses were reasonable; (3) whether, if some portion of the amounts paid to International Development Trust by Kwik-Lok Corporation of Yakima for such patents is not attributable to a reasonable purchase price, such amounts constitute taxable income received directly or indirectly by International Development Trust, a non-shareholder of Kwik-Lok Corporation of Yakima; (4) whether the petitioners, Estate 1982 Tax Ct. Memo LEXIS 285">288 of Floyd G. Paxton, Jerre Paxton, Executor, and Grace D. Paxton, are collaterally estopped from denying that they are to be treated as the owners of all or a portion of the F. G. Paxton Family organization, a trust, under the grantor trust provisions, because of our decision in Paxton v. Commissioner,57 T.C. 627">57 T.C. 627 (1972), affd. 520 F.2d 923">520 F.2d 923 (9th Cir. 1975); and (5) whether Floyd and Grace Paxton are to be treated as having been, during the taxable years involved, the owners of two trusts (International Development Trust and, assuming respondent loses on the collateral estoppel issue, F. G. Paxton Family Organization). FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference. Petitioner in docket No. 4639-76 is the Estate of Floyd G. Paxton, deceased (hereinafter Estate of Paxton). Floyd G. Paxton (hereinafter Floyd Paxton) died on December 10, 1975, and his estate was admitted to probate in the Superior Court of Yakima County, Washington. Jerre Paxton is the duly appointed, qualified and acting executor of that estate. At all relevant times, Jerre Paxton was a resident of Yakima, 1982 Tax Ct. Memo LEXIS 285">289 Washington. Floyd Paxton was one of the taxpayers named in the statutory notice of deficiency mailed to Mr. Floyd G. Paxton and Mrs. Grace D. Paxton on February 26, 1976. During the calendar years 1969, 1970 and 1971, he was married to Grace D. Paxton (hereinafter Grace Paxton). During the years just mentioned, Floyd and Grace Paxton resided in Yakima, Washington. For each of these years 1969, 1970 and 1971 they filed joint Federal income tax returns (Forms 1040 and 1040X) with the Internal Revenue Service Center, Odgen, Utah. Floyd and Grace Paxton kept their records and filed their tax returns on the calendar year basis and accounted for their income on the cash basis. Petitioner in docket No. 4644-76 is Grace D. Paxton, one of the taxpayers named in the above-referenced statutory notice of deficiency mailed to Floyd and Grace Paxton on February 26, 1976. Grace Paxton resided, when the petition herein was filed, in Yakima, Washington. The issues involved in docket Nos. 4639-76 and 4644-76 concern the joint and several liability, if any, for deficiencies in Federal income taxes of the Estate of Floyd G. Paxton and of Grace Paxton, arising out of joint Federal income tax returns 1982 Tax Ct. Memo LEXIS 285">290 filed by Floyd G. Paxton and Grace Paxton. Petitioner in docket No. 4645-76 is International Development Trust (hereinafter IDT). IDT is an inter vivos trust created and existing under the laws of the State of Washington. IDT has its principal place of business in Yakima, Washington. The managing fiduciary of IDT was at all times here pertinent, and is, Jerre Paxton, a resident of Yakima, Washington. IDT kept its records and filed its tax returns on the basis of a fiscal year ending on June 30 and accounted for its income on the cash basis. The fiduciary returns (Forms 1041) of IDT for the taxable year ending June 30, 1970 and 1971 were filed with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to IDT dated February 26, 1976, in which he determined deficiencies in income tax as set forth above. Petitioner in docket No. 4647-76 is Kwik-Lok Corporation of Yakima (hereinafter Kwik-Lok Yakima). Kwik-Lok Yakima is a corporation organized under the laws of the State of Washington. At all relevant times, Yakima, Washington, has been the principal place of business for Kiwk-Lok Yakima. At all times here pertinent, Kwik-Lok Yakima 1982 Tax Ct. Memo LEXIS 285">291 kept its books and filed its Federal income tax returns on the basis of a fiscal year ending on March 31 and accounted for its income on the accrual method. Its Federal corporate income tax returns (Forms 1120 and 1120X) for the taxable years ending March 31, 1967, 1968, 1968 amended, 1969, 1969 amended, 1970, 1970 amended, 1971, and 1972 were filed with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to Kwik-Lok Yakima dated February 26, 1976, in which he determined deficiencies in corporate income taxes as set forth above. Petitioner in docket No. 4648-76 is Kwik-Lok Corporation of Indiana (hereinafter Kwik-Lok Indiana). Kwik-Lok Indiana is a corporation organized under the laws of the State of Indiana with its principal place of business, at all relevant times, in New Haven, Indiana. At all times here pertinent, Kwik-Lok Indiana kept its books and filed its Federal income tax returns on the basis of a fiscal year ending on March 31 and accounted for its income on the accrual method. Its Federal corporate income tax returns (Forms 1120 and 1120X) for the fiscal years ending March 31, 1970, 1970 amended, 1971 and 1972 were filed 1982 Tax Ct. Memo LEXIS 285">292 with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to Kwik-Lok Indiana dated February 26, 1976, in which he determined deficiencies in corporate income taxes as set forth above. In response to each notice of deficiency heretofore described, the taxpayers to whom they were addressed filed timely petitions with this Court. F. G. Paxton Family Organization (hereinafter PFT) is an inter vivos trust created and existing under the laws of the State of Washington. At all relevant times, Yakima, Washington, has been the principal place of business for PFT. The managing fiduciary of PFT was at all times here pertinent, and is, Jerre Paxton, a resident of Yakima, Washington. PFT kept its records and filed its tax returns on the basis of a fiscal year ending June 30 and accounted for its income on the cash basis. PFT filed fiduciary returns (Forms 1041) for its fiscal years ending June 30, 1968 through June 30, 1972, with the Internal Revenue Service Center, Ogden, Utah. No statutory notices of deficiency were issued to PFT with respect to any of the aforementioned fiscal years. Floyd Paxton was born March 7, 1918, in Redlands, California, 1982 Tax Ct. Memo LEXIS 285">293 the son of Hale and Geraldine Paxton. The children of this marriage were Floyd Paxton, Allen Dent Paxton and Madeline Paxton. Floyd Paxton married Eleanor Leighy (hereinafter Eleanor Paxton) on March 7, 1936. The children of this marriage and their birth dates were: NameDate of BirthJerre PaxtonNovember 24, 1938Ted PaxtonSeptember 26, 1940Floyd G. Paxton, Jr.February 23, 1950Cheryl PaxtonMarch 14, 1952Floyd and Eleanor Paxton resided in Riverside, California, until about 1954. Prior to the period here in question, Floyd Paxton and Allen Dent Paxton organized Paxton Machines, Inc., a California corporation engaged in the business of manufacturing box-making and labeling equipment useful primarily in the packaging of fruit. Paxton Machines, Inc., also manufactured a few mechanical items, such as universal joints. This business was located in Riverside, California. This corporation's existence was terminated in about 1960. Floyd Paxton also operated Paxton Products Co., a sole proprietorship also located in Riverside, California. Floyd and Eleanor Paxton were the sole owners of Paxton Products Co., which engaged in the business of manufacturing products from paper and synthetic 1982 Tax Ct. Memo LEXIS 285">294 materials, principally plant covers and other items connected with agricultural products. Early in 1954, Floyd Paxton and Eleanor Paxton were divorced. Eleanor Paxton was awarded custody of the four children. In the divorce proceedings the assets of Paxton Products were awarded to Eleanor Paxton, who operates the business to this day. With the earnings from this business, Eleanor Paxton supported herself and the children she bore by Floyd Paxton. Jerre Paxton lived with his mother until his marriage to Nancy DeNyse Wheeler (hereinafter Nancy Paxton). In or about 1963, he and his wife moved to Yakima, Washington. Jerre Paxton never lived with Floyd and Grace Paxton. In or about 1954, Floyd Paxton moved from California to the State of Washington. In July 1954, Floyd Paxton married Grace Douglas (hereinafter Grace Paxton). Grace Paxton was born July 19, 1916. She had formerly been married to Fred Tyler Douglas. Grace had one child by her marriage to Mr. Douglas, a daughter, Diane, who was a teenager in 1954. Diane Douglas (hereinafter Diane Irwin) subsequently married Jere Irwin. Grace and Floyd Paxton had one child, a son named Ande Paxton, born December 7, 1956. After 1982 Tax Ct. Memo LEXIS 285">295 their marriage, Floyd and Grace Paxton lived in Yakima. Grace Paxton's daughter, Diane, lived with them prior to her marriage to Mr. Irwin. No children from Floyd Paxton's first marriage ever lived in the household which Floyd and Grace Paxton established. On November 12, 1954, Floyd Paxton, together with his cousin Kenneth Paxton and Kenneth's wife, Dorothy Paxton, signed Articles of Incorporation, as incorporators, for Kwik-Lok Yakima. The issued and outstanding stock of Kwik-Lok Yakima consisted of 500 shares of class A voting stock and 1,471 shares of class B nonvoting stock. At the beginning of 1965, Floyd and Grace Paxton, through original issue, stock dividends and purchase, owned all of the outstanding stock of Kwik-Lok Yakima. By March 1965, the outstanding shares of Kwik-Lok Yakima were owned as follows: RecipientClass AClass BFloyd and Grace Paxton3951,147Jerre Paxton53135Ted Paxton52135Allen Dent Paxton034Phil Crawford, et ux. (employee)020Totals5001,471On or about July 14, 1965, Jerre Paxton acquired the 34 class B shares owned by Allen Dent Paxton. Consequently, as of mid-1965, the stock of Kwik-Lok Yakima was held as follows: Class AClass BFloyd and Grace Paxton3951,147Jerre Paxton53169Ted Paxton52135Phil Crawford020Total5001,471The 1982 Tax Ct. Memo LEXIS 285">296 principal officers and directors of Kwik-Lok Yakima during the fiscal years ended March 31, 1965 through 1972 were as follows: DatesDirectorsOfficers3/31/65Floyd PaxtonPresidentFloyd PaxtontoFrancis Max BaerVice PresidentFrancis Max Baer7/6/65Donald LoudonSecretary -Jerre PaxtonTreasurerDonald LoudonAllen Paxton7/6/65Floyd PaxtonPresidentFloyd PaxtontoFrancis M. BaerVice PresidentJerre Paxton3/15/68Jerre PaxtonVice President-Canadian Op.Donald LoudonOp.L. E. PeckSecretary -TreasurerDonald Loudon3/15/68Floyd PaxtonPresidentJerre PaxtontoFrancis M. BaerVice PresidentLorne House2/31/72Jerre PaxtonVice President-Donald LoudonCanadian Op.L. E. PeckSecretary-TreasurerDonald LoudonOn April 20, 1960, Kwik-Lok Indiana was organized under the laws of the State of Indiana. Immediately after its incorporation, Kwik-Lok Indiana's issued and outstanding capital stock consisted of 150 shares of common stock. Kwik-Lok Yakima owned 149 shares and Floyd and Grace Paxton together owned one share. Some time prior to August 1967 Kwik-Lok Indiana declared stock dividends in the ratio of two shares of stock for each share outstanding. As result of this stock dividend, the issued and outstanding shares 1982 Tax Ct. Memo LEXIS 285">297 of the corporation were increased to 450, of which 447 were owned by Kwik-Lok Yakima and three were owned by Floyd and Grace Paxton. The principal officers and directors of Kwik-Lok Indiana for the fiscal years ended 31, 1970, 1971 and 1972 were as follows: DirectorsOfficersJerre PaxtonPresidentJerre PaxtonPhilip Crawford, Jr.Vice PresidentPhilip Crawford, Jr.Secretary-Mickey M. MillerTreasurerFloyd PaxtonMickey M. MillerOn October 1, 1962, Paxton Industries, Inc., was organized under the laws of the State of Washington with a capitalization consisting of five shares of $100 par value, three of which were issued to Floyd Paxton, one to Francis M. Baer and one to Donald Loudon. Prior to August 1967, Floyd Paxton acquired all the shares of Paxton Industries. In November 1966, Floyd Paxton was hospitalized for advanced arteriosclerosis. He was advised that he would require specific therapy and, probably, bypass surgery. On March 16, 1968, Floyd Paxton resigned as president of Kwik-Lok Yakima and Kwik-Lok Indiana. On March 29, 1968, he executed a consulting contract with Kwik-Lok Yakima. Patent IssuesAbout 1952 or 1953, Floyd Paxton began to make individual bag-closing devices 1982 Tax Ct. Memo LEXIS 285">298 (hereinafter "single loks") out of plastic. These single loks were used to close flexible plastic bags, especially bags made of cellophane, polyethylene and various synthetics. The single lok was a rectangular piece of plastic, with a rounded butt at one end and an aperture at the other end permitting it to be placed around the neck of a flexible bag. The device was later described in U.S. Patent No. 2,705,100, which covered a bag-closing machine described below, as a "closure of flexible sheet material structurally characterized to enable it to be readily sprung or snapped over a tightly twisted or constricted portion of the bag mouth, in a manner to be securely maintained attached to the bag yet be readily removable and replaceable indefinitely." On July 30, 1953, Floyd Paxton applied for a U.S. patent on the single lok device under application Serial No. 371,229. The application for patent was denied by the U.S. Patent Office. Sometime prior to 1954, Floyd Paxton and Allen Dent Paxton manufactured a hand-operated machine by which single loks could be fed from a hopper or magazine and used to close plastic bags without having to twist the necks of the bags. Floyd and Allen Dent 1982 Tax Ct. Memo LEXIS 285">299 Paxton applied for a patent on this machine. At the same time this patent application was filed, Floyd and Allen Dent Paxton executed an assignment of the invention to Paxton Machines, Inc. With certain claims in the application disallowed, Patent No. 2,705,100 was issued on March 29, 1955, with Floyd and Allen Dent Paxton being the inventors and Paxton Machines, Inc., being the owner. The basic claim allowed was for a V-shaped device which restricted the opening of the bag sufficiently to allow the attachment of the single lok. On December 14, 1960, Paxton Machines, Inc., assigned Patent No. 2,705,100 to Kwik-Lok Yakima. When Kwik-Lok Yakima was organized in 1954, one of its corporate purposes was the manufacturing of bag-closing devices. When in 1960 a subsidiary, Kwik-Lok Indiana, was organized, its corporate purposes included manufacturing and distributing the company's product in the eastern part of the United States. In the early 1960's, the Kwik-Lok corporations were selling primarily the unpatented single loks and hand-applied single loks with labels. The single loks were of two types: "Series A closures" which were plain single loks; and "Series B closures" which bore 1982 Tax Ct. Memo LEXIS 285">300 printed prices or other limited items of information. The single loks with labels consisted of single loks to which larger pieces of tagboard or cardboard had been glued; they also functioned as bag labels. In the early 1960's, the hand-operated machine covered by U.S. Patent No. 2,705,100 and manufactured by Kwik-Lok Yakima was designated the Type 100A machine. The Type 100A machine was semi-automatic in that, in order to apply single loks to the plastic bags, an operator was needed to insert bags manually into the machine. The Type 100A machine could apply single loks but not single loks with labels. Under optimum conditions, an operator could apply approximately twenty-five single loks per minute using the Type 100A machine. The Type 100A machine was not a significant financial success because of mechanical difficulties. Five hundred of the single loks which it applied were put on a strand and placed into a hopper or magazine on the machine. Single loks were fed out from the magazine under a gate as each lok was being applied to a bag. This arrangement rendered the Type 100A machine prone to jamming, either because of improper placement by the operator of the single loks in the 1982 Tax Ct. Memo LEXIS 285">301 hopper or because of variations in the thickness of the plastic used for the single loks. Another reason the Type 100A machine was not a significant economic success was that its operation was limited to a semi-automatic state requiring manual insertion of bags by operators. In the early 1960's, two machines competed with the Type 100A. Both of these machines could apply more single loks per minute than the Type 100A machine. J.H. Platt Co. manufactured and sold a machine capable of automatically applying the Kwik-Lok single loks; the machine was automatic in the sense that the bags to be closed could be passed through the machine and closed without a human operator. The average speed of the J.H. Platt Co. machine was forty to forty-five single lok sapplications per minute. Continental Baking Co. manufactured for its own use a machine capable of applying single loks at a rate of forty to forty-five per minute. Neither of these two competitive machines could apply Kwik-Lok's single loks with labels. In the early 1960's, around 1962-1963, a competitor of Kwik-Lok also manufactured bag-closing devices similar to the unpatented Kwik-Lok single loks. About 1960, Dana E. Keech, (herein 1982 Tax Ct. Memo LEXIS 285">302 Mr. Keech) a patent attorney whose address, in 1961, was Los Angeles, California, began handling patent work for Floyd Paxton and for the enter-prises with which Floyd Paxton was connected. Mr. Keech was born before the turn of the century. In his correspondence with Kwik-Lok Yakima or Floyd Paxton, Mr. Keech followed the general trade practice of assigning an office docket number to each invention for which he had undertaken a patent application or prosecution. During all times pertinent herein, patent lawyers in the United States customarily assigned office docket numbers or similar office coding numbers to each invention for which they had undertaken patent applications and prosecutions. Such office docket numbers were used for internal office filing purposes and also for identification of each item of correspondence or document pertaining to the particular invention. When the application or prosecution had reached a point where a U.S. application serial number had been assigned, or where a U.S. patent number had been issued for the invention by the U.S. Patent Office, the application serial number or U.S. patent number would customarily be used by the patent lawyer in addition 1982 Tax Ct. Memo LEXIS 285">303 to or in lieu of the office docket number to identify all items of correspondence and documents pertaining to the invention. The patent lawyer would customarily include in correspondence or documents a descriptive name for the invention, along with other descriptive information when needed, such as date of application, the office docket number, the application serial number or patent number. In like fashion, Kwik-Lok Yakima kept a separate file folder containing all items of correspondence and documents pertaining to each patent application or patent. Each file folder was first identified on the cover by the name of the country in which the patent application was pending and also the office docket number appearing in Mr. Keech's early correspondence pertaining to the particular patent application or patent. Later, as each became known, the description of the invention, the application serial number, and the U.S. or foreign patent number were added to the cover of the appropriate file folder. On February 27, 1961, Floyd Paxton, through Mr. Keech, applied for a U.S. patent for bag closures united in strip form end-to-end (herein end-to-end striploks) and an apparatus for making the 1982 Tax Ct. Memo LEXIS 285">304 same and for dispensing individual bag-closing devices. Mr. Keech gave this application office docket number K-1305. On March 7, 1961, the U.S. Patent Office assigned this application Serial No. 93,888. The application was amended on February 8, 1962, and again on September 19, 1962. On May 22, 1964, application Serial No. 93,888 was substantially amended, with-drawing all claims except the claims numbered 26, 27 and 28. On January 5, 1965, application Serial No. 93,888 was approved by the U.S. Patent Office and U.S. Patent No. 3,164,249 was issued showing Floyd Paxton as the inventor and owner. In the patent itself, after setting forth the specifications of such patent, are these words: The claims are: 1. In a multi-closure strip, wherein the closures each may have a bag confining mouth and a narrow opening located in a longitudinal side edge thereof and communicating with said mouth for admitting a bag neck into the latter; the structure comprising: a multiple of closures of transversely stiff, thin, sheet material comprising polystyrene or the like, arranged consecutively with their transverse edges in closely spaced relation; and web means integrally connecting with each 1982 Tax Ct. Memo LEXIS 285">305 consecutive pair of closures in frangible areas of union located between opposite ends of said web means and said closely spaced edges of said consecutive closures, said frangible areas being spaced far enough apart length-wise of said strip and being sufficiently restricted in the cross sectional dimension thereof measured transversely of said strip, that compressive forces applied in the plane of said strip from opposite directions res-pectively to said consecutive closures and through said closures to opposite ends of said web means without causing said closures to buckle, will cause the material of said strip to substantially simultaneously crack in said frangible areas of union at the opposite ends of said web means and thus separate said web means from said closures and said closures from each other. 2. In a multi-closure strip, the structure recited in claim 1, wherein the web means integrally connecting each consecutive pair of closures in said strip comprises a pair of transversely spaced webs. 3. In a multi-closure strip, the structure recited in claim 2 wherein portions of each transverse edge of a closure, lying immediately adjacent to and on opposite sides of the area 1982 Tax Ct. Memo LEXIS 285">306 of union between said edge and one of said webs, are transversely aligned and form right angles with said web. 4. In a multi-closure strip, the structure recited in claim 2, wherein the length of each of said webs, which is the distance measured lengthwise of said strip between said areas of union at the ends of said web, is substantially greater than the width of one of said areas of union which is the dimension thereof measured transversely of said strip. 5. In a multi-closure strip, the structure recited in claim 4, wherein said width of said area of union at each end of each web is approximately.039 inch, the length of said web is approximately.0625 inch and the thickness of said strip is approximately.032 inch. In early 1962, Floyd Paxton, through Mr. Keech, resubmitted an application for a U.S. patent for a method and apparatus for making bag closures united in strip form and for dispensing individual bag closures, based upon claims withdrawn from application Serial No. 93,888. Mr. Keech gave this application office docket number K-1339. The application was assigned application Serial No. 184,472 by the U.S. Patent Office. The application was amended December 11, 1963. 1982 Tax Ct. Memo LEXIS 285">307 On January 5, 1965, application Serial No. 184,472 was granted and U.S. Patent No. 3,163,970 was issued showing Floyd Paxton as the inventor and owner. In November 1963, Floyd Paxton, through Mr. Keech, applied for a U.S. patent for a multi-closure strip (united side-to-side) (herein side-to-side striploks). Mr. Keech gave this application office docket number K-1426. This application was assigned application Serial No. 325,665 by the U.S. Patent Office. This application was amended on July 7, 1964 and October 1, 1964. On January 5, 1965, application Serial No. 325,665 was granted and U.S. Patent No. 3,164,250 was issued showing Floyd Paxton as the inventor and owner. In the patent itself, after setting forth the specifications of such patent, are these words: What is claimed is: 1. A matrix in strip form for consecutively producing a series of bag closures comprisong a strip of relatively thin and stiff but springy flat sheet plastic material, said strip being weakened at regularly spaced longitudinal intervals along a transverse line normal to the side edges of said strip by means eliminating the material of said strip bordering said transverse line, with the exclusion of 1982 Tax Ct. Memo LEXIS 285">308 a pair of narrow webs located on said line, said means including a hole bordering said line and having opposite extremities located on said line, said webs being readily frangible upon the imposition of a moderate amount of traction to said strip on opposite sides of said line to separate said strip along said line, said strip having, adjacent each of said holes, an internal aperture which communicates with said hole through a narrow passageway, whereby the separation of said strip along a given line as aforesaid, converts the portion of said strip adjacent said line having said aperture into a bag closure. 2. A matrix in strip form for consecutively producing a series of bag closures as recited in claim 1, wherein said strip is coiled in such a direction that when said strip is separated along any of said transverse lines as aforesaid, as said strip is being unwound from said strip coil a closure is formed as aforesaid on the part of said strip remaining on said coil. 3. A strip of relatively thin and stiff but springy flat sheet plastic material, said strip being weakened at regularly spaced longitudinal intervals along a transverse line normal to the side edges of said strip 1982 Tax Ct. Memo LEXIS 285">309 by a hole bordering said transverse line and having opposite extremities located on said line, and by two notches, one in each of said side edges, with the apices of said notches lying in said line and spaced respectively from said extremities by two narrow webs of unbroken sheet plastic, which webs are readily frangible upon the imposition of a moderate amount of traction to said strip on opposite sides of said line to separate said strip along said line, said strip having adjacent each of said holes an internal aperture which communicates with said hole through a narrow passage, whereby the separation of said strip along a given line as aforesaid converts the portion of said strip adjacent said line having said aperture into a bag closure. The critical invention in both U.S. Patent Nos. 3,164,249 and 3,164,250 related to a particular and specific means for joining bag-closure devices in strip form. In particular, the critical feature of the claims in the two patents was the means by which the individual closures were joined together--the "web means." The file wrapper histories of the two patents show that originally the applicant asserted claims that were broad in nature and were 1982 Tax Ct. Memo LEXIS 285">310 not limited specifically to the use of web means. However, the patent examiner indicated that claims of the breadth contained in the original applications could not be allowed in light of prior art. 3 In response, the applicant substituted narrower claims that focused specifically on web means as the solution to the problem of joining bag-closing devices together in a strip form such that they could be coiled without accidentally parting, and yet could be applied and parted by the application of longitudinal force. Thereafter, the patent examiner allowed the claims as narrowed. U.S. Patent Nos. 3,164,249 and 3,164,250, pertaining to the side-to-side and end-to-end striploks, allowed essentially three elements in the claims for each of the two closure devices. The three elements related to: (1) the stiffness of the closure device material; (2) the location and shape of the bag opening; and (3) the frangible (easily breakable) web attachments, or web means, for interconnecting the closure devices. In February 1965, Floyd Paxton directed Mr. Keech to prepare applications for patents on two label-bearing closures in strip form (herein closures with 1982 Tax Ct. Memo LEXIS 285">311 labels), in the name of Floyd Paxton, as owner and inventor, without assignment to anyone including Kwik-Lok Yakima. This direction by Floyd Paxton conformed with the practice followed at Kwik-Lok Yakima with regard to patent applications. If applications covered inventions by employees of Kwik-Lok Yakima other than Floyd Paxton or inventions by employees of Kwik-Lok Yakima in collaboration with Floyd Paxton, the inventions were assigned by the inventors to Kwik-Lok Yakima at the times patent applications were made, and patents were issued on that basis. For example, this practice was followed with regard to both U.S. Patent No. 3,163,969 (relating to bag-closing devices invented by Allen D. Paxton, Floyd Paxton, and Jere Irwin, the husband of Diane Irwin) and U.S. Patent No. 3,163,972 (relating to bag-closing devices invented by Jere Irwin). If applications covered inventions made by Floyd Paxton alone, the applications were made in the name of Floyd Paxton as inventor and owner (without assignment) and patents subsequently issued showed the same. On April 15, 1965, Floyd Paxton, through Mr. Keech, applied for a patent covering a multi-closure label-bearing strip (herein side-to-side 1982 Tax Ct. Memo LEXIS 285">312 closures with labels). Mr. Keech gave this application office docket number K-1629. The application was received by the U.S. Patent Office on April 20, 1965, and was assigned application Serial No. 449,574. The application was later amended on March 28, 1966. Also on April 15, 1965, Floyd Paxton, through Mr. Keech, applied for a patent covering bag closures and individually attached labels united in strip form (herein end-to-end closures with labels). Mr. Keech gave this application office docket number K-1628. This application was received by the U.S. Patent Office on April 20, 1965, and was assigned application Serial No. 449,575. On September 6, 1966, application Serial No. 449,574 was granted and Patent No. 3,270,872, showing Floyd Paxton as inventor and owner, was issued. Also, on September 6, 1966, application Serial No. 449,575 was granted and Patent No. 3,270,873, showing Floyd Paxton as inventor and owner, was issued. The basic invention in the claims allowed by the U.S. Patent Office in both U.S. Patent Nos. 3,270,872 and 3,270,873 related to a means of attaching labels in a feathered fashion to bag-closing devices united in strip form in such a way that the strips 1982 Tax Ct. Memo LEXIS 285">313 with labels attached could be coiled, stored, and thereafter applied without any interference in the application process due to the presence of the attached large labels. The attachment of labels to striploks covered, respectively, by U.S. Patent Nos. 3,164,250 and 3,164,249 are examples of embodiments of the inventions covered by U.S. Patent Nos. 3,270,872 and 3,270,873. However, the claims of U.S. Patent Nos. 3,270,872 and 3,270,873 were not limited to the application of labels to striploks. The claims of the patents covering end-to-end and side-to-side closures with labels did not depend on the particular means of connecting bag-closure devices in strip form, were not limited by the particular web means claimed under U.S. Patent Nos. 3,164,249 and 3,164,250, and could be readily practiced on strips of bag-closure devices other than those claimed under U.S. Patent Nos. 3,164,249 and 3,164,250. The claims of U.S. Patent Nos. 3,270,872 and 3,270,873 do not coact with or improve any of the essential elements (closure stiffness, bag-grasping opening, and web means of attachment) of the claims of, or address any of the problems discussed in, U.S. Patent Nos. 3,167,249 and 3,167,250. 1982 Tax Ct. Memo LEXIS 285">314 The inventions covered by U.S. Patent Nos. 3,270,872 and 3,270,873 are not embraced by any of the claims allowed in each of U.S. Patent Nos. 3,164,250 and 3,164,249. On July 1, 1965 and May 1, 1966, Mr. Keech billed Floyd Paxton, c/o Kwik-Lok Yakima, $850 and $283, respectively, for legal services rendered in connection with obtaining U.S. Patent Nos. 3,270,872 and 3,270,873. Sometime prior to September 27, 1968, Kwik-Lok Yakima paid such bills. On that date, Kwik-Lok Yakima billed Floyd Paxton for such expenses, and on September 30, 1968, Floyd Paxton personally reimbursed the corporation for such expenses. On April 30, 1965, Floyd Paxton, as owner, and Kwik-Lok Yakima, as licensee, executed a License Agreement authorizing Kwik-Lok Yakima to exploit Patent Nos. 3,163,970, 3,164,249 and 3,164,250 for a period ending on January 5, 1982. The license was to run for the life of the patent (until January 5, 1982), with royalties being paid as follows: ROYALTY. During the term of this agreement, LICENSEE shall pay LICENSOR cash royalties as follows: 7-1/2% (seven one-half per cent) on the first $1,000,000.00 (one million dollars) of net sales by LICENSEE and its Sublicensees of devices 1982 Tax Ct. Memo LEXIS 285">315 covered by one or more of said patents during each calendar year, the first of which years is to start on May 1, 1965, and conclude April 30, 1966. 6% (six per cent) on the second $1,000,000.00 (one million dollars) of such net sales during said calendar year. 5% (five per cent) on all such net sales in excess of $2,000,000.00 (two million dollars) during said calendar year. Said royalties shall be assessed upon the gross monies paid to and received by LICENSEE and its Sublicensees by their customers and distributors in purchasing said devices, after deducting from said gross monies amounts collected to cover sales, use and excise taxes and transportation charges. The performance by LICENSEE and its Sublicensees of said patented methods shall be free from the payment of royalties. On the same day, Kwik-Lok Yakima, as primary licensee under the License Agreement executed on April 30, 1965, executed a Sublicense Agreement with Kwik-Lok Indiana for the exploitation of U.S. Patent Nos. 3,163,970, 3,164,249 and 3,164,250. The term of the sublicense extended to January 5, 1982. The term and royalty provisions of the Sublicense Agreement were identical to those of the License Agreement. 1982 Tax Ct. Memo LEXIS 285">316 Mr. Keech drafted both the License and Sublicense Agreements executed on April 30, 1965. In the License Agreement, Mr. Keech described and identified specifically three patents to be licensed for exploitation, i.e., U.S. Patent Nos. 3,164,249, 3,164,250 and 3,163,970. In the agreement as drafted, Floyd Paxton, as inventor and owner, also licensed Kwik-Lok Yakima to exploit: * * * all improvements heretofore or hereafter invented by LICENSOR and embraced by any of the claims of said patents. The words "said patents" referred to the three U.S. patents described specifically above. The agreements did not otherwise specifically describe, identify or refer to any inventions other than U.S. Patent Nos. 3,164,249, 3,164,250 and 3,163,970. Similarly, the Sublicense Agreement granted Kwik-Lok Indiana the non-exclusive right to exploit such patents and "devices covered by said patents including devices embodying any improvements invented by Floyd G. Paxton and embraced by the claims of said patents." During all times pertinent herein, it was a well-established trade practice for patent lawyers to describe and identify inventions with specificity in legal instruments licensing the right 1982 Tax Ct. Memo LEXIS 285">317 to exploit, assigning or otherwise affecting property rights in the invention. If no patent number or application serial number for a particular invention existed, the instrument would be drafted by the patent lawyer so as to identify the invention by description, date of application for the patent, internal office docket number where applicable, or other specific reference. This trade practice was followed whenever it was possible to identify specifically any invention for which a patent prosecution had been commenced. On April 30, 1965, Mr. Keech had specific means to describe and identify Floyd Paxton's two inventions covering closures with labels, later covered by U.S. Patent Nos. 3,270,872 and 3,270,873. These inventions could have been identified by office docket numbers, dates of patent application, application serial numbers or language descriptive of the invention involved. If Floyd Paxton had specifically instructed Mr. Keech to include in the April 30, 1965, License Agreement between Floyd Paxton and Kwik-Lok Yakima a right to exploit Floyd Paxton's inventions of the means of attaching labels to closures (the end-to end and side-to-side closures with labels) for which 1982 Tax Ct. Memo LEXIS 285">318 patent application had been made by Mr. Keech, then the normal practice of a patent attorney in Mr. Keech's position would have been to include in the License Agreement positive and specific reference to the two inventions, including, but not limited to, the following: (1) the titles or descriptions of the inventions for closures with lables; (2) the dates on which applications for patents on the inventions were signed; (3) the application serial numbers and the filing dates with the U.S. Patent Office; (4) if the application serial numbers were unknown, a description using the filing date and leaving blanks for the application serial numbers to be filled in at a later date; and/or (5) the office docket numbers K-1628 and K-1629. The intention of the parties to the April 30, 1965, License and Sublicense Agreements was not to include, and was to exclude, the inventions relating to end-to-end and side-to-side closures with labels to which applications Serial Nos. 449,574 and 449,575 had been assigned. Neither Kwik-Lok Yakima nor Kwik-Lok Indiana acquired any right to exploit the inventions described in U.S. Patent Nos. 3,270,872 and 3,270,873 (the end-to-end and side-to-side closures 1982 Tax Ct. Memo LEXIS 285">319 with labels) by reason of the License Agreement and the Sublicense Agreement executed on April 30, 1965. During the years 1965 through 1971, in accordance with the April 30, 1965, License Agreement, Kwik-Lok Yakima paid Floyd Paxton the following amounts of royalties: YearAmount1965$38,018.33196696,154.481967131,303.851968125,577.601969100,480.871970118,388.621971134,000.32Among the products sold which generated some of these royalties during the period from September 6, 1966 (the date the closure-with-label patents were granted), to February 21, 1969 (the date the closure-with-label patents were transferred to Kwik-Lok Yakima and licensed to Kwik-Lok Indiana), were some closures with labels attached using the process patented in U.S. Patent Nos. 3,270,872 and 3,270,873. During such period, no sales or licensing agreements were executed in connection with the use by the Kwik-Lok corporations of such patented process. In accordance with the April 30, 1965, Sublicense Agreement, Kwik-Lok Indiana accrued, and later paid to Kwik-Lok Yakima, the following amounts in the following fiscal years ended March 31: YearAmount1966$30,133.74196765,381.95196889,005.57196987,646.74197076,308.57197187,411.02197291,781.16Following 1982 Tax Ct. Memo LEXIS 285">320 an earlier income tax audit of Floyd Paxton and Grace Paxton, an agreement was reached with the Commissioner that amounts received by Floyd and Grace Paxton under the April 30, 1965, License Agreement were taxable as receipts from the sale of Patent Nos. 3,164,249 and 3,164,250. The tax treatment of these amounts is not in issue in these docketed cases. On July 12, 1968, Floyd Paxton assigned U.S. Patent Nos. 3,270,872 and 3,270,873 to IDT. The assignment was recorded with the U.S. Patent Office on April 10, 1969, after which date IDT was shown as the assignee and owner of the patents. On February 21, 1969, IDT executed a Purchase Agreement relating to Patent Nos. 3,270,872 and 3,270,873 conveying them to Kwik-Lok Yakima for $5,000,000, payable without interest in 172 monthly installments of $28,901 each, commencing April 5, 1969, plus a final payment of $29,028, due August 5, 1983. On July 23, 1970, the February 21, 1969, Purchase Agreement was amended to provide that the monthly payments by Kwik-Lok Yakima to IDT would include 4 percent simple interest on the lesser unpaid balances resulting from the inclusion of interest. On February 21, 1969, Kwik-Lok Yakima executed a License 1982 Tax Ct. Memo LEXIS 285">321 Agreement granting to Kwik-Lok Indiana an exclusive license, covering the District of Columbia and 36 eastern states, to exploit Patent Nos. 3,270,872 and 3,270,873. The consideration which Kwik-Lok Indiana agreed to pay for the license was $3,350,000 payable without interest in 172 monthly installments of $19,365 each, commencing April 5, 1969, plus a final payment of $19,220, due on August 5, 1983. On July 2, 1970, the License Agreement executed on February 21, 1969, by Kwik-Lok Yakima and Kwik-Lok Indiana was amended to provide for a revised schedule of payments by Kwik-Lok Indiana to Kwik-Lok Yakima for the right to exploit U.S. Patent Nos. 3,270,872 and 3,270,873. In accordance with the terms of the February 21, 1969, License Agreement, as amended on July 2, 1970, Kwik-Lok Indiana paid Kwik-Lok Yakima the following sums in its fiscal years ended March 31: YearAmount1970$230,6401971265,7471972277,450Under the terms of the February 21, 1969, Purchase Agreement by which Kwik-Lok Yakima acquired U.S. Patent Nos. 3,270,872 and 3,270,873, Kwik-Lok Yakima paid to IDT on the following dates the following amounts in payment of the purchase price: DateAmount9/ 8/69$57,80211/10/6986,70312/19/69115,6043/30/7086,7036/ 1/7086,70310/20/7086,70311/ 3/7086,7033/26/7186,7038/19/71173,40610/11/7128,90111/12/7128,90112/12/7128,901Kwik-Lok 1982 Tax Ct. Memo LEXIS 285">322 Yakima claimed the following amounts as amortization of the cost of U.S. Patent Nos. 3,270,872 and 3,270,873 in the fiscal years ended March 31: YearAmount1970$231,2081971346,8211972346,821The side-to-side striploks covered by U.S. Patent No. 3,164,250 were applied by a machine, manufactured by Kwik-Lok Yakima, which was first called the Model 108.1 and later the Model 1081. The Model 108.1 was the first significant and notable improvement in the Kwik-Lok product line over the Type 100A machine which applied single loks. The Model 108.1 was introduced in late 1962. The Mode 108.1 could apply side-to-side striploks automatically at speeds of up to 120 per minute. It could not apply the unpatented single loks, single loks with labels, or closures with labels (either end-to-end or side-to-side). With the introduction of the Model 108.1 Kwik-Lok continued to sell the semi-automatic Type 100A machine for a year or two. Continental Bakeries, however, ceased to manufacture its machine competitive with the Type 100A machine. Also, although J.H. Platt Co. still carried a machine competitive with the Type 100A machine, the J. H. Platt machine sold poorly because of the superiority of the 1982 Tax Ct. Memo LEXIS 285">323 Model 108.1. Around 1965, Kwik-Lok Yakima introduced and marketed a machine designated as the Model 100.2. The Model 100.2 applied the end-to-end striploks covered by U.S. Patent No. 3,164,249. The Model 100.2 was semi-automatic in that an operator was required to insert the bags in the machine. Under optimum conditions, the Model 100.2 could apply 25 to 30 end-to-end striploks per minute with one operator. The Model 100.2 could not apply single loks with labels or closures with labels (either end-to-end or side-to-side). In late 1965 or 1966, Kwik-Lok Yakima introduced and marketed a machine first designated as the Model 108.4 machine and later named the Model 1084 machine. The Model 108.4 could apply either side-to-side closures with labels covered by U.S. Patent No. 3,270,872 or side-to-side striploks covered by U.S. Patent No. 3,164,250. The Model 108.4 was fully automatic and could apply the side-to-side closures with labels at speeds up to 120 per minute. In 1967-1968, Kwik-Lok Yakima introduced and marketed a machine later designated as the Model 1006 machine, which could apply end-to-end closures with labels covered by U.S. Patent No. 3,270,873 as well as the end-to-end 1982 Tax Ct. Memo LEXIS 285">324 striploks covered by U.S. Patent No. 3,164,249. The Model 1006 was semi-automatic in that an operator was required. It could apply bag closures at speeds of up to thirty per minute. Kwik-Lok Yakima usually sold a machine designated as the Model 1082 bag tensioner along with the Model 1081 and 1084 machines. The bag tensioner is a device which flattens out the plastic bag just prior to the entry of the bag into the bag-closing head of the Model 1081 and 1084 machines. Kwik-Lok Yakima also sold a conveyor which conveyed the packaged product past the Model 1082 bag tensioner, into the bag-closing machine, and onto a take-off conveyor. The primary function of the striploks covered by U.S. Patent Nos. 3,164,249 and 3,164,250 was to close bags. The function of the closures with labels (end-to-end and side-to-side) covered by U.S. Patent Nos. 3,270,872 and 3,270,873 went beyond the physical act of closing a flexible bag and encompassed the sales, marketing, advertising, and promotion of the packaged product or of other products. Prior to the advent closures with labels, the Kwik-Lok Yakima sales department had primarily approached the production and engineering personnel of its customers. 1982 Tax Ct. Memo LEXIS 285">325 Because the function of closures with labels included marketing the packaged product or other products, Kwik-Lok Yakima began approaching its customers' marketing personnel as well. This change necessitated the hiring by Kwik-Lok Yakima of salespersons who could handle and present sales and marketing concepts rather than simply salespersons competent only to promote the bag-closing concept. To promote the marketing function of the closures with labels, Kwik-Lok Yakima designed different special label programs. For example, for the Christmas season, Kwik-Lok offered various labels with different Christmas scenes or greetings as well as labels which had cut-out line drawings of ornaments for children to color and use as Christmas tree ornaments. Also, Kwik-Lok Yakima developed, among other programs, a Valentine program, a program called "Men of the West" depicting in different labels "good guys" and "bad guys," a program called "Historic Moments in U.S. History" depicting the same, and a program called the "Funny Farm" depicting various cartoon characters. Kwik-Lok Yakima also offered animated cartoons for use in television advertising as a backup to the various label programs. 1982 Tax Ct. Memo LEXIS 285">326 In October 1967, for the first time in its history, Kwik-Lok Yakima joined the Bakers Exposition in Atlantic City to promote and sell the Model 108.4 machine and the closures with labels. At this Exposition, Kwik-Lok Yakima also marketed some special label programs such as the Christmas label programs. The exposition was helpful to Kwik-Lok Yakima in its effort to further penetrate the bakery market. The success also served to show Kwik-Lok Yakima the important appeal of the marketing function of the closure-label strips. Kwik-Lok Yakima's closures with labels also afforded packaging customers the capacity of cross-advertising, a technique by which a product different from the one sold is promoted to consumers who purchased the product packaged, or of "couponing," in which a coupon can be incorporated in or attached to the label. The closures with labels (end-to-end and side-to-side) could be designed to meet the specific sales and marketing needs of the packaging customer. The labels could give brand identification, capitalize on fad promotions, capture seasonal markets such as Christmas, Valentine's Day, or Halloween, promote special events, cross-advertise, advertise contests, 1982 Tax Ct. Memo LEXIS 285">327 attract sports fans with sports labels, function as coupons, introduce new products, and meet many other sales, marketing, advertising and promotional needs of Kwik-Lok Yakima's customers.During the pertinent periods herein, the actual and potential marketing function of closures with labels possibly enhanced the sale of the Kwik-Lok corporations' entire line of products, including closures with labels, striploks and the machines capable of applying and needed to apply both closures with labels and striploks. Their sales presentation, which emphasized the marketing, sales and promotional capabilities of the closures with labels, was expected to, and did in fact, induce some customers to choose Kwik-Lok's bag-closing system over other bag-closing machines or systems because of the customers' potential desire to use closures with labels for sales and marketing purposes, and, when not using labels, to be able to apply striploks automatically with the same machinery. In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873, it expected its possession of the right to manufacture and sell closures with labels (end-to-end and side-to-side) to increase 1982 Tax Ct. Memo LEXIS 285">328 the sales of Kwik-Lok Yakima's entire product line, including bag-closing machinery and striploks. The following chart indicates the combined sales experience of Kwik-Lok Yakima and Kwik-Lok Indiana during the years ending March 31, 1967, 1968, and 1969: StriploksClosures withCovered byLabels covered bySingle Loks andU.S. Patent Nos.U.S. Patent Nos.Fiscal YearSingle Locks with3,164,250 &3,270,872 &EndedLabels3,164,2493,270,8733/31/67$524,760.33$1,475,496.54$30,021.073/31/68475,851.011,772,917.90149,278.543/31/69424,788.761,409,003.68141,609.50Other AutomaticTotal Gross SalesSemi-AutomaticBag-Closingfor All ProductsFiscal YearType 100.2 Bag-Machines Sold by(including itemsEndedClosing MachineKwik-Lok Yakimanot listed here)3/31/67$25,577.46$503,814.10$2,561,327.073/31/6818,421.11324,399.292,742,822.073/31/6918,761.73414,796.902,515,765.44In early 1969 Kwik-Lok Yakima experienced an approximate 50 percent gross profit on sales of its bag-closing machines, bag tensioners, conveyor belts, and other machines. The five most common commercial means of plastic bag closing in the flexible packaging industry were the following: heat seal, staples, tape, wire ties, and Kwik-Lok bag-closing devices. 1982 Tax Ct. Memo LEXIS 285">329 Each of these means had one or more of the following qualities or capabilities which were commercially significant: reusability, semi-automatic application, fully automatic application, labeling capability with semi-automatic application, labeling capability with fully automatic application, metal detection compatibility, and pricing and coding capability. Metal detection compatibility is the capability of the bag-closing device to avoid triggering metal detection devices used in some food industry production lines to prevent the presence or introduction of metal into the food products being packaged. The following chart indicates the qualities or capabilities possessed by each of the five most common commercial means of plastic bag closing: Means of Plastic Bag ClosingKwik-LokBag-ClosingQualities or CapabilitiesHeat SealStaplesWire TiesTapeDevicesReusabilityxxSemi-automatic applicationxxxxxFully automatic applicationxxxxxLabeling capability withsemi-automatic application LxLabeling capability withfully automatic applicationxMetal detection compatabilityxxxPricing and coding capability* LxxOnly Kwik-Lok bag-closing devices had all the commercially significant 1982 Tax Ct. Memo LEXIS 285">330 qualities or capabilities. In early 1969, the closures with labels (end-to-end and side-to-side) covered by U.S. Patent Nos, 3,270,872 and 3,270,873 held a very strong competitive position in the bag-closing device market, a highly competitive market. This was also true of the Kwik-Lok equipment needed to apply the closures with labels in fully automatic fashion. In fact, the only competitimve product (i.e., wire ties) had limited semi-automatic labeling capability and was believed to be a "sitting duck" for the Kwik-Lok corporations' by Jerre Paxton, the president of Kwik-Lok Yakima. In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 it had a sales organization and production staff sufficient to effectively exploit the two closure-with-label patents and to establish a market position which would enable it to take full advantage of these inventions during the after the life of the patents. Prior to the acquisition of the patents, Kwik-Lok Yakima had machines capable of manufacturing the closures with labels, plant capacity to manufacture the product, means to promote and market the product, and machines which it could sell which were 1982 Tax Ct. Memo LEXIS 285">331 capable of automatically applying the closures with labels. Kwik-Lok Yakima fully expected to be able to continue to sell the closures with labels, and the related machinery, after expiration of the patents, and to take advantage of the market dominance which it expected to acquire during the lives of the patents. In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873, it expected continued growth in the flexible packaging industry, and continued and increasing demand for plastic bag-closing devices. The production of polyethylene film (used for plastic bags) in the United States had increased from 183 million pounds in 1958 to 615 million pounds in 1965 and was expected to increase to 720 million pounds in 1968. Prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 in early 1969, it expected the sales price per thousand of the closures with labels to be at least four times the sales price per thousand of the striploks. Further, Kwik-Lok expected the sales of the closures with labels to equal or exceed, quantitatively speaking, the prior sales of striploks. The following two charts set forth the approximate selling 1982 Tax Ct. Memo LEXIS 285">332 prices, costs, and gross profits experienced in early 1969 by Kwik-Lok Yakima with respect to striploks and closures with labels. As shown, the total production costs of the closures with labels approximated 29.4 percent of their gross sales price. STRIPLOKS($ per thousand) Selling Price:$0.950Production Costs: Plastic Material for Loks.300Slitting Labor.005Packaging.010Production Machine Labor.035Total Costs$0.350Gross Profits (selling price less costs):$0.600Percentage Gross Profit Margin of Selling Price: 63.2 percent Percentage Total Production Costs of Selling Price: 36.8 percent CLOSURES WITH LABELS($ per thousand) Selling Price:$4.500Production Costs: Plastic Material for Loks.300Slitting Labor.005Packaging.030Production Machine Labor.140Label.700Card Cutting.150Total Costs$1.325Gross Profits (selling price less costs):$3.175Percentage Gross Profit Margin of Selling Price: 70.6 percent Percentage Total Production Costs of Selling Price: 29.4 percent In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873, it believed that the closures with labels would be marketable in the future in two possible new markets: the chicken-tagging industry 1982 Tax Ct. Memo LEXIS 285">333 and the net bag industry. Kwik-Lok Yakima based its appraisal (in early 1969) of the value of U.S. Patent Nos. 3,270,872 and 3,270,873 on the in-house expertise of its employees who had a good knowledge of the pastic bag-closing business. Furthermore, in early 1969 Jerre Paxton, as president of Kwik-Lok Yakima, did not think that any independent researcher knew as much about the corporation's business as he did; Kwik-Lok Yakima did not, therefore, use any independent marketing research organization to product a study to determine a purchase price for the two patents. Based upon the Inwood Method 4 of ascertaining present value, and using a 15 percent interest rate, the payments which the February 21, 1976, Purchase Agreement required Kwik-Lok Yakima to make to IDT in exchange for U.S. Patent Nos. 3,270,872 and 3,270,873 had a discounted present value on February 21, 1969, of $2,006,480. The terms of the Purchase Agreement dated February 21, 1969, between IDT and Kwik-Lok Yakima conveying U.S. Patent Nos. 3,270,872 and 3,270,873 were reasonable in light of the history set forth above 1982 Tax Ct. Memo LEXIS 285">334 and the expectations which Kwik-Lok Yakima reasonable held at that time. On February 1, 1979, Kwik-Lok Yakima properly filed for its fiscal years ended March 31, 1970, 1971 and 1972, effective elections pursuant to section 243(b), Internal Revenue Code of 1954, 5 to treat dividends received by it from affiliated corporations as qualifying dividends. Grantor Trust IssuesOn August 3, 1967, Floyd Paxton, as grantor, and Lorne House and Jerre Paxton, as trustees, executed a Declaration of Trust creating PFT. The Declaration of Trust is reproduced below. DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICATHIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME OF F.G. PAXTON FAMILY ORGANIZATION THIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgment hereto attached, by and between FLOYD G. PAXTON, GRANTOR and CREATOR hereof, LORNE HOUSE and JERRE PAXTON, ACCEPTORS hereof 1982 Tax Ct. Memo LEXIS 285">335 in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting said business. THIS INDENTURE OF TRUST, made the 3rd day of August, 1967, by and between the one or more persons subscribing this agreement, parties of the first part, and Jerre H. Paxton and Lorne House, (hereinafter called the "Trustees"), parties of the second part, WITNESSETHWHEREAS, the Subscribers are deeply involved in the complex economic social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of their municipalities states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all. WHEREAS, the Subscribers intend that the functions of this Trust shall therefore to be manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all and to provide employment at the economic level required 1982 Tax Ct. Memo LEXIS 285">336 by the standard of living of this culture as it may from time to time for all employees engaged in the operation of such properties and all persons interested in such operations and the results thereof and from the gross revenues of such operations, to the extent not required for expenditure as aforesaid, to make grants and donations to education, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest. WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth: NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, each acting severally and not jointly, have and do hereby agree as follows: FIRST: The name of this Trust and other things of value constituting the Trust Estate, including 1982 Tax Ct. Memo LEXIS 285">337 all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture. SECOND: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington. THIRD: The Trustees, for themselves and their successors in trust, will accept the conveyance and assignment in trust of all of the property to be sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed, all of which property, together with any and all other property and all business projects and operations from time to time held by the Trustees is herein after referred to as the "Trust Estate," upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties, business projects and operations constituting from time to time the Trust 1982 Tax Ct. Memo LEXIS 285">338 Estate and in connection therewith said Trustees shall collectively act by virtue of the convenants herein contained as a board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, business projects, operations underway or contemplated, equities, formulae, entities, parents, copyrights, business goodwill and any and all other business desired to be engaged in by said Trustees in connection with the Trust Estate. The Trustees further agree to the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FOURTH hereof, to protect and preserve the assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according 1982 Tax Ct. Memo LEXIS 285">339 to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity thereto. FOURTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of and delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 5,000 in number and said Certificates of Interest being substantially in form hereto attached as Annex I. Said Certificates of Interest shall be nonassessable, nontaxable and negotiable and shall pass by delivery unless registered with the Secretary of the Board of Trustees and such registration 1982 Tax Ct. Memo LEXIS 285">340 noted upon any such Certificate of Interest so registered, after which no valid transfer may be made, until released from such registration by registered transfer to bearer after which any such Certificate of Interest shall again be transferable by delivery. The Secretary of the Board of Trustees shall keep as the office of the Trust books and other facilities for the registration and transfer of Certificates of Interest and upon presentation for such purpose the Secretary of the Board of Trustees shall register or cause to be registered therein and permit to be transferred thereon, under such reasonable regulations as the Secretary of the Board of Trustees may prescribe, any Certificates of Interest issued under this indenture. FIFTH: Ownership of Certificates of Interest in the Trust shall not entitle the holder thereof, whether or not registered, to any legal title in or to the Trust Estate nor to any undivided interest therein, nor any voice in the management of the Trust, nor to permit or entitle any heir or legal representative of a holder of any Certificate of Interest following his death to demand any partition or division of the property of the Trust or to any special accounting. 1982 Tax Ct. Memo LEXIS 285">341 Death, insolvency or bankruptcy of any holder of a Certificate or Certificates of Interes or the transfer of any Certificate or Certificates of Interest by sale, gift, devise or descent shall not operate as a dissolution of the Trust or in any manner affect the Trust, the operation or mode of business of the Trust or the Trust Estate. The Trustees may, in their sole discretion, at any time and from time to time, make any distribution of income from the operation of the Trust Estate and make any distribution of all or any portion of the assets comprising the Trust Estate for any reason to the holders of Certificates of Interest in the Trust and, except to the extent that the Trustees have given notice of their intention to make any distribution of income or of assets comprising any portion of the Trust Estate, the holders of Certificates of Interest shall have no right, title or interest in or to any portion of the Trus Estate or of any income generated by the Trust Estate for any purpose whatsoever. SIXTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby 1982 Tax Ct. Memo LEXIS 285">342 created. It is hereby further expressly declared that nothing herein contained shall constitute either the (a) Trustees alone, or (b) The Trustees and the agents and representatives of the Trustees when taken together, or (c) The holders alone of Certificates of Interest present or further, or (d) The holders of Certificates of Interest, present, or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees, an association or partners with any other person. It is further expressl declared that none of the Trustees, none of the agents and representative of the Trustees and none of the holders of Certificates of Interest, present or future, have or possess any beneficial interest in the propert or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder as partners or otherwise, and that the rights and duties of each such persons or groups of persons are several in accordance with the provisior hereof and not joint. No person acting as Trustee hereby shall be liable for the act or omission of any other person acting as Trustee hereunder or for the act 1982 Tax Ct. Memo LEXIS 285">343 or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust. SEVENTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, where beneficial owner of the Trust Estate, including the authority (without limiting the generality of the foregoing): A. To retain any such property temporarily or permanently; or to sell or exchange or abandon the same, at public or private sale for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and to operate as going concerns or businesses any and all such property and in connection therewith to manage in such manner as any natural person could any such business or operations and to buy, 1982 Tax Ct. Memo LEXIS 285">344 manufacture, sell and perform services in connection therewith and otherwise deal in and with such proper as the Trustees from time to time deem fit; B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreing), or undivide interest therein, including shares or interest in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any proper or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a convervative investment or of whether the same is productive or unproductive and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust Estate in common or preferred stocks and even though some 1982 Tax Ct. Memo LEXIS 285">345 or all of such stocks might be considered speculative or might have no ready market and to conduct or engage in or join with others in conducting or engaging in any business, either directly or through one or more partnerships, corporations, or other forms of business organization, or through trusts, or sell or liquidate the same. In connection with the operation or carrying on of any business or other operations of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, apparatus, appliances, products and property of every kind, nature and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develope, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge, or otherwise dispose of or encumber real and personal property of any class and 1982 Tax Ct. Memo LEXIS 285">346 description and any rights and interest therein without limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage or participate in every kind of engineering, research, scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interest or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms, and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills, factories, storehouses, buildings, roads, plants, and works of all kind and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or 1982 Tax Ct. Memo LEXIS 285">347 dependency thereof, and to adopt, apply for, obtain register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefore of the United States of America or any country and all rights connected therewith or appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or any other country, and, without in any respect limiting the generality of the foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either 1982 Tax Ct. Memo LEXIS 285">348 alone or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust and in general to carry on any lawful business necessary or incidental to the attainment to the purposes of this Trust, whether such business is similar in nature to the enumeration hereinbefore set forth or otherwise. C. To employ such persons as the Trustees may determine to act as operational officers of the businesses and operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee, individually or with whom any Trustee may be associated and to employ or deal with any firm or corporation with or in 1982 Tax Ct. Memo LEXIS 285">349 which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagement as the Trustees may from time to time determine. D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees to be made, as are contemplated by the second preamable to this Declaration of Trust. EIGHTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees to hold such office for such period of time and upon such terms and conditions as shall be determined by the Trustees as the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called and provided that notice of each such meeting and the time, place and purpose thereof shall be given at least two days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived 1982 Tax Ct. Memo LEXIS 285">350 by any Trustee by written instrument execured either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts respectively signed by the Trustees. The action of the majority of the whole number of the Trustees expressed from time to time at a meeting or in writing, with or without a meeting shall constitute the action of the Trustees and have the same effect as though taken by all. Any Trustee may, at any time, by an instrument of writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specified rights or to take specific action which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation. Any Trustee may 1982 Tax Ct. Memo LEXIS 285">351 serve as an officer, agent or representative of the Trustees in connection with any businesses or operations carried on by the Trustees in connection with the Trust Estate. Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefore. No Trustee shall be removable from office by the holders of Certificates of Interest for any reason at any time whatsoever. Any Trustee may be removed from office by any court of competent jurisdiction after the exhaustion by the person so proposed to be removed of all his legal and equitable rights and remedies, including the right of appeal. Any Trustee may also be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of 1982 Tax Ct. Memo LEXIS 285">352 the Trustees held not sooner than thirty days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal. In the event of the removal of a Trustee or the death or resignation of a Trustee or in the case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee, as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the office of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee. Each successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities and duties of his predecessor as Trustee. Notice of the selection and appointment 1982 Tax Ct. Memo LEXIS 285">353 of any net Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provisions of this indenture. No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee. The initial number of Trustees shall be Two (2) but such number may be increased, or decreased, from time to time for such practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees. The Trustees shall have and shall exercise collectively the exclusive management and control of the Trust, the Trust Estate and all business and operations constituting all or any portion of the Trust Estate. NINTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. The Trust shall be proportionately 1982 Tax Ct. Memo LEXIS 285">354 and in a prorata manner distributed to the beneficiaries. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error. TENTH: At the expiration of this Trust, or any subsequent agreement, then the Trustees, if they so desire and believe that said Trust should not be closed, may renew this agreement for a like or shorter period. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office) at least one hundred twenty (120) days prior to the expiration hereof. IN WITNESS WHEREOF, the Grantor and Creator hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their hands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of 1982 Tax Ct. Memo LEXIS 285">355 said Trust and assent to all stipulations herein as imposed and expressed. COUNTY OF YAKIMA STATE OF WASHINGTON ss. I, CITARLES MOOREHEAD, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that FLOYD G. PAXTON, Creator, and LORNE HOUSE and JERRE PAXTON, as Trustees of the F.G. PAXTON FAMILY ORGANIZATION, a Trust, personally appeared before me this day and acknowledged that they signed, sealed and delivered the above and foregoing Trust Indenture for the uses and purposes therein set forth, and that the Trustees by their signatures evidenced the acceptance of the duties, obligations and faithful performance of said Trust Indenture. F.G. PAXTON FAMILY ORGANIZATION (A TRUST) SCHEDULE A(INITIAL TRUST ASSETS) 1. Assets from Floyd and Grace Paxton: (a) 1,542 shares Kwick Lok Corp. , (Yakima) stock (395 shares Class A, and 1,147 shares Class B) (b) 35 shares Class A Kwik Lok Corp., (New Haven) stock (c) 5 shares Paxton Industries, Inc., stock (d) 125 shares Pacific Reserve Life Insurance Co., stock (e) 200 shares Landmark Engineering, Inc., stock (f) 20 shares Yakima Valley Turf Club, Inc., stock (g) 20 bonds, Yakima Valley Turff Club, Inc (h) Real 1982 Tax Ct. Memo LEXIS 285">356 and Personal Property, North 92nd Ave., Yakima (i) U.S. Patent No. 3,067,534(j) Note Receivable ($8,500.00). 2. From Jerre and Nancy Paxton: 222 shares Kwik Lok Corp. (Yakima) stock (53 shares Class A and 169 shares Class B) 3. From Ted and Sharon Paxton: 187 shares Kwik Lok Corp. (Yakima) stock (52 shares Class A and 135 shares Class B) 4. From Phil and Wanda Crawford: 20 shares Class B Kwik Lok Corp., (Yakima) stock Between September 20, 1967 and October 22, 1967, the following individuals transferred the assets described below to PFT: FLOYD AND GRACE PAXTON395 shares of class A stock of Kwik-Lok Yakima 1,147 shares of class B stock of Kwik-Lok Yakima 5 shares of capital stock of Paxton Industries, Inc. 125 shares of capital stock of Pacific Reserve Life Insurance Co. 3 shares of capital stock of Kwik-Lok Indiana 200 shares of capital stock of Landmark Engineering, Inc.20 shares of capital stock of Yakima Valley Turf Club, Inc. 20 bonds of Yakima Valley Turf Club, each in the face amount of $1,000 Real and personal property located at North 92nd Avenue, Yakima, Washington U.S. Patent No. 3,067,534Note receivable in amount of $8,500 PHILL AND WANDA CRAWFORD20 shares of class 1982 Tax Ct. Memo LEXIS 285">357 B stock of Kwik-Lok Yakima JERRE AND NANCY PAXTON53 shares of class A stock of Kwik-Lok Yakima 169 shares of class B stock of Kwik-Lok Yakima TED AND SHARON PAXTON52 shares of class A stock of Kwik-Lok Yakima 135 shares of class B stock of Kwik-Lok Yakima As a result of these transfers, by October 22, 1967, PFT held all of the issued and outstanding stock of Kwik-Lok Yakima. In exchange for the transfers described above, on September 23, 1967, identical certificates of beneficial interest for units of interest were issued as follows: Number ofPercentageHolderUnitsof TotalFloyd Paxton2,159-1/243.19 Grace Paxton2,159-1/243.19 Jerre Paxton1923.84 Nancy Paxton1923.84 Ted Paxton129-1/22.59 Sharon Paxton129-1/22.59 Phil Crawford19.038Wanda Crawford19.038 On March 18, 1971, the certificates of beneficial interest in PFT were held as follows: Number ofPercentageHolderUnitsof TotalFloyd Paxton1,250-1/225.01 Grace Paxton1,250-1/225.01 Jerre Paxton4959.90 Nancy Paxton1923.84 Ted Paxton432.58.65 Sharon Paxton129.52.59 Phil Crawford19.038Wanda Crawford19.038Floyd Paxton, Jr.3036.06 Ande Paxton3036.06 Cheryl Paxton3036.06 Diane Irwin3036.06 The trustees of PFT were as follows for the periods 1982 Tax Ct. Memo LEXIS 285">358 indicated: PeriodTrusteesAugust 1967 toOctober 1967Jerre Paxton, Lorne HouseOctober 1967 toSeptember 1969Jerre Paxton, Lorne House,Diane Irwin, Donald Tait,Donald LoudonSeptember 1969 toNovember 1969Jerre Paxton, Lorne House,Diane Irwin, Robert Glaspey,James ShraderNovember 1969 toend of periodhere involvedJerre Paxton, Lorne House,Diane Irwin, James ShraderDonald Tait and Robert Glaspey were business acquaintances of Floyd Paxton, both engaged in the publishing business in Yakima, Washington. James Shrader was a Certified Public Accountant who practiced accounting in Yaima, Washington. Neither Floyd Paxton nor Grace Paxton was ever a trustee of PFT. On August 4, 1967, Lorne House and Jerre Paxton, the original trustees of PFT, Unanimously took the following action as trustees: Jerre Paxton was appointed as First Trustee and Trust Manager to handle individually all the affairs and business of the trust estate, to make distributions of portions and proceeds and income of the trust in his sole discretion, the right to appoint his successor as First Trustee, and to preside at meetings of the Board of Trustees. No official action by the trust may be taken without his consent. On October 1982 Tax Ct. Memo LEXIS 285">359 25, 1969, the trustees of PFT, upon the advice of its attorney, purported to "correct, nunc pro tunc," the trust instrument by amending paragraph NINTH to read as follows: NINTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date.The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. Upon the dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501 (c)(3) of the Internal Revenue Code and its Regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, 1982 Tax Ct. Memo LEXIS 285">360 their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error. On April 6, 1971, the trustees of PFT authorized a distribution of $5,000 to the holders of certificates of beneficial interest in proportion to their respective holdings. On May 19, 1971, the trustees authorized a distribution of $2,000 to Jerre Paxton alone and nothing to the other holders of certificates of beneficial interest. Proposals pertaining to disbursements of funds made by Jerre Paxton were always approved by the other trustees. During the relevant periods herein, PFT, through the actions of Jerre Paxton alone, as First Trustee, made charitable donations of $5,000 to the University of Plano, Plano, Texas, and other sums to the Salvation Army and the Union Gospel Mission in Yakima, Washington. The trustees and the certificate holders in PFT believed that the certificates of beneficial interests conveyed to the holders no more interest than a mere possibility of receiving disbursements of income or corpus from PFT at the sole discretion of the trustees.On June 17, 1970, the Commissioner of Internal Revenue1982 Tax Ct. Memo LEXIS 285">361 mailed to Floyd G. Paxton and Grace D. Paxton a statutory notice of deficiency covering income taxes for the taxable year 1967 in which he determined that the grantors of PFT were taxable on the net income of PFT for the period from October 1, 1967, through December 31, 1967, because "they granted a nonadverse party a power to revoke." On February 15, 1972, this Court filed its opinion in Paxton v. Commissioner,57 T.C. 627">57 T.C. 627 (1972), in which we sustained the Commissioner's determination covered by his statutory notice of deficiency mailed June 17, 1970. On May 30, 1972, the trustees of PFT purported to "clarify" the declaration of trust of PFT. A "restatement declaration of trust" was prepared and executed by the grantor and the then trustees on May 30, 1972. It was ratified by all of the holders of certificates of beneficial interest in PFT. The May 30, 1972, declaration of trust is reproduced below. DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICATHIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME 1982 Tax Ct. Memo LEXIS 285">362 OF F. G. PAXTON FAMILY ORGANIZATIONTHIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgment hereto attached, by and between FLOYD G. PAXTON, GRANTOR and CREATOR hereof, LORNE HOUSE, JERRE PAXTON, JAMES B. SHRADER, and DIANE IRWIN, ACCEPTORS hereof in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting business. THIS INDENTURE OF TRUST, made the 30th day of May, 1972, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such persons being hereinafter called the "Subscribers"), parties of the first part, and Lorne House, Jerre Paxton, James B. Shrader and Diane Irwin (such persons being hereinafter called the "Trustees"), parties of the second part, WITNESSETH WHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the 1982 Tax Ct. Memo LEXIS 285">363 people of their municipalities, states and nation and have determined the this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries. WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest. WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth: NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, 1982 Tax Ct. Memo LEXIS 285">364 each acting severally and not jointly, have and do hereby agree as follows: FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust 1982 Tax Ct. Memo LEXIS 285">365 Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, patents, and copyrights. SECOND: The name of this Trust and other things of value constituting the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture. THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington. FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees to hereby agree to conserve and improve the Trust, to continue the operations of the property 1982 Tax Ct. Memo LEXIS 285">366 constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FIFTH hereof, to protect and preserve assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust, and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto. FIFTH: In consideration for the sale, assignment grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of the delivery of this indenture authorize, issue and deliver to the Subscribers units 1982 Tax Ct. Memo LEXIS 285">367 reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest shall be nonassessable, nontaxable and shall only be negotiable with the express prior consent of the Trustees under such regulations, if any, as shall be prescribed by the Board of Trustees. When and if authorized by the Board of Trustees but not otherwise, said Certificates of Interest shall pass by delivery. No Certificate of Interest which is registered with the Secretary of the Board of Trustees may in any other manner be transferred and any attempt to transfer any Certificate of Interest without the prior consent of the Trustees shall be null and void and of no force and effect. The Secretary of the Board of Trustees shall keep at the office of the Trust such books and other facilities for the registration and transfer of Certificates of Interest as shall be necessary for the purposes hereof, specifically including provision therein for the recordation of any consents to transfer at any time or from time to time given. Upon presentation for transfer of a Certificate 1982 Tax Ct. Memo LEXIS 285">368 of Interest, the Secretary of the Board of Trustees shall present to the Board of Trustees the request for such transfer and the Board of Trustees shall, at a meeting appropriately called, determine whether or not to permit any such transfer to be made; Board of Trustees shall have the power to determine at any such meeting whether to decline the transfer of any such Certificate of Interest, to authorize the transfer of any such Certificate of Interest, or to elect to purchase for this Trust from the then holder of the Certificate of Interest at such price as the Board of Trustees in their sole and arbitrary discretion shall determine, regardless of market values, book values or other criteria for fair value, the units represented by such Certificate of Interest and to cancel such Certificate of Interest, without any right in the holder of such Certificate of Interest, so presenting the same for transfer to receive for the units of such Certificate of Interest any amount in excess of the repurchase price declared applicable thereto by the Board of Trustees.The units represented by such Certificates of Interest acquired by the Board of Trustees pursuant to the foregoing shall be cancelled 1982 Tax Ct. Memo LEXIS 285">369 and not outstanding and shall at no time and under no circumstances ever be reissued to any person. SIXTH: No person whomsoever shall have any right or interest in any Certificate of Interest except the person named therein as the registered holder thereof. The registered holder of any Certificate of Interest shall have only the rights relating thereto which are specifically set forth herein and in the Certificate of Interest. All rights of the registered holder of any Certificate of Interest shall cease and terminate forthwith upon the death of the registered holder and the units represented by any such Certificate of Interest shall not pass by Will or by the laws of intestacy; no heir or legal representative of any deceased registered holder shall have any right of any kind whatsoever, by reason of the death of the registered holder or by the terms of any testamentary document or by the provisions of any contract or trust or other agreement entered into prior to the death of any such registered holder by such registered holder, to any interest whatsoever in this Trust or in any of the units, Certificate of Interest or any of the property or assets of the Trust, provided, however, 1982 Tax Ct. Memo LEXIS 285">370 that the Board of Trustees of the Trust may, in their sole discretion, reissue, for such consideration as the Board of Trustees may determine, the units represented by any such Certificate of Interest to such person or persons as they may determine, including any person then constituting a registered holder of a Certificate of Interest or any person not so constituting a registered holder of Certificate of Interest. In the event that a registered holder of a Certificate of Interest shall cease to have and own any portion or all of any rights he may have under any such Certificate of Interest by reason of foreclosure, insolvency or other similar creditor's proceedings, then, for all purposes hereof, any such Certificate of Interest shall be null and void and of no force, effect, or value, and the units represented by any such Certificate of Interest shall be deemed to have been acquired by purchase by this Trust and shall be cancelled and not outstanding and never reissued. No holder of any Certificate of Interest shall have any right or power whatsoever to direct or otherwise influence the Trustees in the exercise of their sole discretion. No registered holder of any Certificate 1982 Tax Ct. Memo LEXIS 285">371 of Interest shall have any right or power to alienate ownership of any Certificate of Interest or of the units represented thereby in any manner, whether by assignment, mortgage, pledge, testamentary document or otherwise, without the prior written consent of the Board of Trustees of this Trust. SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the (a) Trustees, individually or collectively, alone, or (b) The Trustees and the agents and representatives of the Trustees when taken together, or (c) The holders alone of Certificates of Interest, present or future, or (d) The holders of Certificates of Interest, present or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees, an association or partners with any other person. It is further expressly declared that none of the Trustees, none of the agents and representatives of the Trustees and none of the holders of Certificates of Interest, present 1982 Tax Ct. Memo LEXIS 285">372 or future, have or possess, in any such capacities, any beneficial interest in the property or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder, as partners or otherwise, and that rights and duties of each such persons or groups of persons are several in accordance with the provisions hereof and not joint. No person acting as Trustee hereby shall be liable for the act or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust. EIGHTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed, at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, were the beneficial owner of the Trust Estate including the authority (without limiting the generality of the foregoing): A. To retain any such property temporarily or permanently; 1982 Tax Ct. Memo LEXIS 285">373 to sell or exchange or abandon the same, at public or private sale, for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and otherwise deal in and with such property as the Trustees from time to time deem fit. B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreign), or undivided interest therein, including shares or interest in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any property or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a conservative investment or of whether the same is productive or unproductive 1982 Tax Ct. Memo LEXIS 285">374 and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust Estate in common or preferred stocks and even though some or all of such stocks might be considered speculative or might have no ready market. In connection with the operation or carrying on of any business or other operations of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service, maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, apparatus, appliances, products and property of every kind, nature and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develop, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge or otherwise dispose of or encumber real and personal property of any class and description and any rights and interest therein without 1982 Tax Ct. Memo LEXIS 285">375 limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage, or participate in every kind of engineering, research, scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interests or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms, and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills, factories, storehouses, buildings, roads, plants, and works of all kinds and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or dependency thereof, and to adopt, apply for, obtain, register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, 1982 Tax Ct. Memo LEXIS 285">376 and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefor of the United States of America or any country and all rights connected therewith of appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or of any state thereof or any other country, and, without in any respect limiting the generality of foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either along or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including 1982 Tax Ct. Memo LEXIS 285">377 the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust. C. To employ such persons as the Trustees may determine to act as operational officers of the businesses and operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee individually, or with whom any Trustee may be associated, and to employ or deal with any firm or corporation with or in which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagements as the Trustees may from time to time determine. D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees 1982 Tax Ct. Memo LEXIS 285">378 to be made, as are contemplated by the second preamble to this Declaration of Trust. NINTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees and to hold such office for such period of time and upon such terms and conditions as shall be determined by the Trustees at the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called, and provided that notice of each such meeting and the time, place and purposes thereof shall be given at least two (2) days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived by any Trustee by written instrument executed either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts 1982 Tax Ct. Memo LEXIS 285">379 respectively signed by the Trustees. The action of the majority of the whole number of Trustees expressed from time to time at a meeting or in writing with or without a meeting shall constitute the action of the Trustees and have the same effect as taken though by all. Any Trustee may, at any time, by an instrument in writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specific rights or to take specific action which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation. Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character 1982 Tax Ct. Memo LEXIS 285">380 and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefor. No Trustee shall be removable from office by the holders of Certificates of Interest for any reason at any time whatsoever. Any Trustee may be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of the Trustees held not sooner than thirty (30) days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal. Any Trustee may at any time resign his office as such or limit his powers, duties, rights and/or liabilities as such in whole or in any part at any time and from time to time for such period of limitation as such Trustee shall elect, such election to be evidenced by an instrument in writing including a minute of proceedings of the Board of Trustees reflecting such limitation. In the event of the removal of a Trustee or the death or resignation of a Trustee or in the 1982 Tax Ct. Memo LEXIS 285">381 case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee, as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the offices of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee. Each Successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities and duties of his predecessor as Trustee. Notice of the Selection and appointment of any new Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provisions of this indenture. No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee. The initial number of Trustees shall be four (4) but such number may be increased, or decreased, from time to time for such 1982 Tax Ct. Memo LEXIS 285">382 practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees. The Trustees shall have and shall exercise collectively the exclusive management and control of the trust, the Trust Estate and operations constituting all or any portion of the Trust Estate. By unanimous action, the Trustees may amend from time to time the trust document. TENTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their sole discretion, because of threatened depreciation in value, or other good and sufficient reason, liquidate the assets, distribute and close the trust at any earlier date determined by them. Upon such determination and dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501(c)(3) of the Internal Revenue Code1982 Tax Ct. Memo LEXIS 285">383 and its regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the County Auditor's office, they shall file with said Auditor a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error. ELEVENTH: At any time prior to the expiration of this Trust, by its terms or pursuant to any subsequent agreement, the Trustees may if they so desire and believe that said Trust should not be closed, renew this agreement for an additional period or periods each not to exceed twenty (20) years from date of renewal. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office in the event this Trust has been recorded) at least one hundred twenty (120) days prior to the expiration hereof. IN WITNESS WHEREOF, the Subscribers, Grantors and Assignors and the Trustees have signed, sealed and executed this Agreement all as of the day and year 1982 Tax Ct. Memo LEXIS 285">384 first above written. SUBSCRIBERS, GRANTORS & ASSIGNORS TRUSTEES IN WITNESS WHEREOF, the Grantor and Creator hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their hands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of said Trust and assent to all stipulations herein as imposed and expressed. COUNTY OF YAKIMA STATE OF WASHINGTON ss. I, Gerold W. Curtis, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that FLOYD G. PAXTON, Creator, and LORNE HOUSE, JERRE PAXTON, JAMES B. SHRADER, and DIANE IRWIN, as Trustees of the F. G. PAXTON FAMILY ORGANIZATION, a Trust, personally appeared before me this day and acknowledged that they signed, sealed and delivered the above and foregoing Trust Indenture for the uses and purposes therein set forth, and that the Trustees by their signatures evidenced the acceptance of the duties, obligations and faithful performance of said Trust Indenture. On July 8, 1975, the United States Court of Appeals for the Ninth Circuit affirmed the decision of this Court 1982 Tax Ct. Memo LEXIS 285">385 in Paxton v. Commissioner,520 F.2d 923">520 F.2d 923 (9th Cir. 1975). On July 10, 1968, Floyd G. Paxton and Grace Paxton as "Subscribers, Grantors and Assigns" and Jerre H. Paxton and Lorne House as "Trustees" executed the following declaration of trust creating IDT: INTERNATIONAL DEVELOPMENT TRUST DECLARATION OF TRUST OF Floyd G. Paxtonand Grace PaxtonTO BE ADMINISTERED BY NATURAL PERSONS HOLDING TITLE IN JOINT TENANCY WITH RIGHT OF SURVIVORSHIP AS TRUSTEES THIS INDENTURE OF TRUST, made the 10th day of July, 1968, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such person or persons being hereinafter called "Subscribers"), parties of the first part, and Lorne House and Jerre H. Paxton (hereinafter called the "Trustees"), parties of the second part. WITNESSETHWHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of 1982 Tax Ct. Memo LEXIS 285">386 their municipalities, states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries. WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest. WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth: NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, each acting severally 1982 Tax Ct. Memo LEXIS 285">387 and not jointly, have and do hereby agree as follows: FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, parents and copyrights. SECOND: The name of this Trust and other things of value constituting 1982 Tax Ct. Memo LEXIS 285">388 the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture. THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington. FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for the Certificates of Interest as contemplated in FIFTH hereof, to protect and preserve the assets constituting 1982 Tax Ct. Memo LEXIS 285">389 the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and Business transactions of the Trust and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto. FIFTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the acceptance of and delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest being 1982 Tax Ct. Memo LEXIS 285">390 substantially in form hereto attached as Annex I. Said Certificates of Interest shall be nonassessable, nontaxable and non-negotiable and shall not pass by delivery unless registered with the Secretary of the Board of Trustees and such registration noted upon any such Certificate of Interest so registered. The Secretary of the Board of Trustees shall keep at the office of the Trust books and other facilities for the registration and transfer of Certificates of Interest and upon presentation for such purpose the Secretary of the Board of Trustees shall register or cause to be registered therein and permit to be transferred thereon, under such reasonable regulations as the Secretary of the Board of Trustees may prescribe, any Certificates of Interest issued under this indenture. SIXTH: Ownership of Certificates of Interest in the Trust shall not entitle the holder thereof, whether or not registered, to any legal title in or to the Trust Estate nor to any undivided interest therein, nor any voice in the management of the Trust, nor to permit or entitle any heir or legal representative of a holder of any Certificate of Interest following his death to demand any partition or division 1982 Tax Ct. Memo LEXIS 285">391 of the property of the Trust or to any special accounting. Death, insolvency or bankruptcy of any holder of a Certificate or Certificates of Interest or the transfer of any Certificate or Certificates of Interest by sale, devise or descent shall not operate as a dissolution of the Trust or in any manner affect the Trust, the operation or mode of business of the Trust or the Trust Estate. The Trustees may, in their sole discretion, at any time and from time to time, make any distribution of income from the operation of the Trust Estate and make any distribution of all or any portion of the assets comprising the Trust Estate for any reason to any of the holders of Certificates of Interest in the Trust and, except to the extent that the Trustees have given notice of their intention to make any distribution of income or of assets comprising any portion of the Trust Estate, the holders of Certificates of Interest shall have no right, title, or interest in or to any portion of the Trust Estate or of any income generated by the Trust Estate for any purpose whatsoever. SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes 1982 Tax Ct. Memo LEXIS 285">392 a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the (a) Trustees alone, or (b) The Trustees and the agents and representatives of the Trustees when taken together, or (c) The holders alone of Certificates of Interest present or future, or (d) The holders of Certificates of Interest, present or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees, an association or partners with any other person. It is further expressly declared that none of the Trustees, none of the agents and representatives of the Trustees and none of the holders of Certificates of Interest, present or future, have or possess any beneficial interest in the property or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder, as partners or otherwise, and that the rights and duties of each such persons or groups of persons are several in accordance with the provisions hereof and not joint. No person acting as Trustee hereby shall be liable for the act 1982 Tax Ct. Memo LEXIS 285">393 or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust. EIGHTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, were beneficial owners of the Trust Estate, including the authority (without limiting the generality of the foregoing): A. To retain any such property temporarily or permanently; or to sell or exchange or abandon the same, at public or private sale, for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and to operate sa going concerns or businesses any and all such property and in connection therewith to manager in such manner as any natural person could any such business or operations and to buy, 1982 Tax Ct. Memo LEXIS 285">394 manufacture, sell and perform services in connection therewith and otherwise deal in and with such property as the Trustees from time to time deem fit, but only when necessary to affect its disposal. B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreign), or undivided interests therein, including shares or interests in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any property or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a conservative investment or of whether the same is productive or unproductive and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust 1982 Tax Ct. Memo LEXIS 285">395 Estate in common or preferred stocks and even though some or all of such stocks might be considered speculative or might have no ready market. In connection with the operation of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service, maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, aparatus, appliances, products and property of every kind, nature, and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develop, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge, or otherwise dispose of or encumber real and personal property of any class and description and any rights and interest therein without limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage or participate in every kind of engineering, research, 1982 Tax Ct. Memo LEXIS 285">396 scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interests or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills factories, storehouses, buildings, roads, plants, and works of all kinds and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or dependency thereof, and to adopt, apply for, obtain, register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, 1982 Tax Ct. Memo LEXIS 285">397 pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefor of the United States of America or any country and all rights connected therewith or appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or any other country, and, without in any respect limiting the generality of the foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either alone or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the 1982 Tax Ct. Memo LEXIS 285">398 accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust. C. To employ such persons as the Trustees may determine to act as operational officers of the operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee, individually or with whom any Trustee may be associated and to employ or deal with any firm or corporation with or in which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagement as the Trustees may from time to time determine. D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees to be made, as are contemplated by the second preamble to this Declaration of Trust. NINTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees to hold such office 1982 Tax Ct. Memo LEXIS 285">399 for such period of time and upon such terms and conditions as shall be determined by the Trustees at the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called and provided that notice of each such meeting and the time, place and purpose thereof shall be given at least two (2) days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived by any Trustee by written instrument executed either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts respectively signed by the Trustees.The action of the majority of the whole number of the Trustees expressed from time to time at a meeting or in writing, with or without a meeting shall constitute the action of the Trustees 1982 Tax Ct. Memo LEXIS 285">400 and have the same effect as though taken by all. Any Trustee may, at any time, by an instrument of writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specific rights or to take specificaction which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation. Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefore. No Trustee shall be removable from office by the holders of Certificates of Interest for any reason 1982 Tax Ct. Memo LEXIS 285">401 at any time whatsoever. Any Trustee may be removed from office by any court of competent jurisdiction after the exhaustion by the person so proposed to be removed of all his legal and equitable rights and remedies, including the right of appeal. Any Trustee may also be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of the Trustees held not sooner than thirty (30) days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal. In the event of the removal of a Trustee or the death or resignation of a Trustee or in the case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee 1982 Tax Ct. Memo LEXIS 285">402 of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the office of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee. Each successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities, and duties of his predecessor as Trustee. Notice of the selection and appointment of any new Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provision of this indenture. No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee. The initial number of Trustees shall be two (2) but such number may be increased, or decreased, from time to time for such practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees. The Trustees shall have and shall exercise collectively the exclusive management and control of the trust, the Trust Estate and operations constituting all 1982 Tax Ct. Memo LEXIS 285">403 or any portion of the Trust Estate. By unanimous action, the Trustees may amend from time to time the trust document. TENTH: This Trust shall continue for a perod of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. Upon the dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501 (c) (3) of the Internal Revenue Code and its Regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been 1982 Tax Ct. Memo LEXIS 285">404 made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error. ELEVENTH: At the expiration of this Trust, or any subsequent agreement, then the Trustees, if they so desire and believe that said Trust should not be closed, may renew this agreement for a like or shorter period. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office in the event this Trust has been recorded) at least one hundred twenty (120) days prior to the expiration hereof IN WITNESS WHEREOF, the Subscribers, Grantors and Assignors, and the Trustees have signed, sealed and executed this Agreement all as of the day and year first above written. SUBSCRIBERS, GRANTORS & ASSIGNS TRUSTEES On July 12, 1968, Floyd Paxton assigned to IDT U.S. Patent Nos. 3,270,872 and 3,270,873. The assignment was recorded in the U.S. Patent Office on April 10, 1969, after which date IDT was shown as the assignee and owner of the patents. In addition to the transfer of U.S. Patent Nos. 3,270,872 and 3,270,873, Floyd and Grace Paxton, on July 12, 1968, transferred to IDT the following assets: Australia Applications Nos. 1982 Tax Ct. Memo LEXIS 285">405 49,899/64 and 49,898/64 AustriaPatents Nos. 252,797 and 252,112 BelgiumPatents Nos. 655,008 and 654,627 Canada Patents Nos. 747,099 and 746,207Denmark Applications Nos. 4,802/64 and 4,860/64 EnglandPatents Nos. 1,040,535 and 1,038,510Finland Applications Nos. 2,043/64 and 2,100/64 FrancePatents Nos. 1,413,291 and 1,419,835Germany Applications Nos. P35, 377VII/81C and P35, 378X/3992 Great Britain Letters Patent Nos. 1,040,535 and 1,038,510Holland Applications Nos. 6,411,620 and 6,411,621 ItalyPatents Nos. 22,452 and 22,453 Japan Patents Nos. 482, 673 and 481,941 LuxembourgPatents Nos. 47,281 and 47,191 New Zealand Applications Nos. 139,529 and 139,530 NorwayPatent No. 110,506 and Application No. 154,919 Phillippines Applications Nos. 6,063 and 6,064 PortugalPatents Nos. 43,059 and 43,060 South Africa Patents Nos. 64/4,597 and 64/4,598 SpainPatents Nos. 304,808 and 305,208 SwedenPatents Nos. 217,360 and 217,361 SwitzerlandPatents Nos. 412,694 and 421,803 In exchange for such assets, IDT issued to Floyd and Grace Paxton each a certificate reflecting 50 units of beneficial ownership of IDT. On August 7, 1968, Floyd and Grace Paxton executed instruments transferring the 1982 Tax Ct. Memo LEXIS 285">406 following number of units of interest in IDT to the following persons: TransfereeNo. of UnitsJerre Paxton10Ted Paxton8Cheryl Paxton8Ande Paxton8Diane Irwin8Floyd G. Paxton, Jr.8 The trustees of IDT for the periods here involved were: July 1, 1968 toSeptember 10, 1968Jerre Paxton, Lorne HouseSeptember 10, 1968 toend of period hereinvolvedJerre Paxton, Lorne House,James Shrader, Dale Leach 1Peter Lind 2Neither Floyd G. Paxton nor Grace Paxton was ever a trustee of IDT. On July 11, 1968, Lorne House and Jerre Paxton, the original trustees of IDT, unanimously took the following action as trustees: Jerre Paxton was appointed as First Trustee and Trust Manager to handle individually all the affairs and business of the trust estate, to make distributions of portions and proceeds and income of the trust in his sole discretion, the right to appoint his successor as First Trustee, and to preside at meetings of the Board of Trustees. No official action by the trust may be taken without his consent. On January 1982 Tax Ct. Memo LEXIS 285">407 23, 1973, Floyd G. Paxton and Grace Paxton as grantors and Jerre Paxton, Lorne House, Peter Lind, Dale Leach and James B. Shrader as trustees executed a "Restatement Declaration of Trust" of IDT which is reproduced below: DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICATHIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME OF INTERNATIONAL DEVELOPMENT TRUSTTHIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgement hereto attached, by and between FLOYD G. PAXTON and GRACE PAXTON, GRANTORS and CREATORS hereof, JERRE PAXTON, LORNE HOUSE, PETER LIND, DALE LEACH, and JAMES B. SHRADER, ACCEPTORS hereof in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting business. THIS INDENTURE OF TRUST, made the 18th day of January, 1973, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such persons being hereinafter 1982 Tax Ct. Memo LEXIS 285">408 called the "Subscribers"), parties of the first part, and Jerre Paxton, Lorne House, Peter Lind, Dale Leach and James B. Shrader (such persons hereinafter called the "Trustees"), parties of the second part, WITNESSETH WHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of their municipalities, states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries. WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientitic and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, 1982 Tax Ct. Memo LEXIS 285">409 to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest. WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth: NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and Trustees, each acting severally and not jointly, have and do hereby agree as follows: FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to 1982 Tax Ct. Memo LEXIS 285">410 hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, patents, and copyrights. SECOND: The name of this Trust and other things of value constituting the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture. THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in 1982 Tax Ct. Memo LEXIS 285">411 all respects by the laws of the State of Washington. FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FIFTH hereof, to protect and preserve assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust, and, 1982 Tax Ct. Memo LEXIS 285">412 upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respect to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto. FIFTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of the delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest shall be nonassessable, nontaxable and shall only be negotiable with the express prior consent of the Trustees under such regulations, if any, as shall be prescribed by the Board of Trustees. When and if authorized by the Board of Trustees but not otherwise, said Certificates of Interest shall pass by delivery. No Certificate of Interest which is registered with the Secretary of the Board of Trustees may in any other manner 1982 Tax Ct. Memo LEXIS 285">413 be transferred and any attempt to transfer any Certificate of Interest without the prior consent of the Trustees shall be null and void and of no force and effect. The Secretary of the Board of Trustees shall keep at the office of the Trust such books and other facilities for the registration and transfer of Certificates of Interest as shall be necessary for the purposes hereof, specifically including provision therein for the recordation of any consents to transfer at any time or from time to time given. Upon presentation for transfer of a Certificate of Interest, the Secretary of the Board of Trustees shall present to the Board of Trustees the request for such transfer and the Board of Trustees shall, at a meeting appropriately called, determine whether or not to permit any such transfer to be made; Board of Trustees shall have the power to determine at any such meeting whether to decline the transfer of any such Certificate of Interest, to authorize the transfer of any such Certificate of Interest, or to elect to purchase for this Trust from the then holder of the Certificate of Interest at such price as the Board of Trustees in their sole and arbitrary discretion shall determine, 1982 Tax Ct. Memo LEXIS 285">414 regardless of market values, book values or other criteria for fair value, the units represented by such Certificate of Interest and to cancel such Certificate of Interest, without any right in the holder of such Certificate of Interest, so presenting the same for transfer to receive for the units of such Certificate of Interest any amount in excess of the repurchase price declared applicable thereto by the Board of Trustees. The units represented by such Certificates of Interest acquired by the Board of Trustees pursuant to the foregoing shall be cancelled and not outstanding and shall at no time and under no circumstances ever be reissued to any person. SIXTH: No person whomsoever shall have any right or interest in any Certificate of Interest except the person named therein as the registered holder thereof. The registered holder of any Certificate of Interest shall have only the rights relating thereto which are specifically set forth herein and in the Certificate of Interest. All rights of the registered holder of any Certificate of Interest shall cease and terminate forthwith upon the death of the registered holder and the units represented by any such Certificate of Interest 1982 Tax Ct. Memo LEXIS 285">415 shall not pass by Will or by the laws of intestacy; no heir or legal representative of any deceased registered holder shall have any right of any kind whatsoever, by reason of the death of the registered holder or by the terms of any testamentary document or by the provisions of any contract or trust or other agreement entered into prior to the death of any such registered holder by such registered holder, to any interest whatsoever in this Trust or in any of the units, Certificate of Interest or any of the property or assets of the Trust, provided, however, that the Board of Trustees of the Trust may, in their sole discretion, reissue, for such consideration as the Board of Trustees may determine, the units represented by any such Certificate of Interest to such person or persons as they may determine, including any person then constituting a registered holder of a Certificate of Interest or any person not so constituting a registered holder of Certificate of Interest. In the event that a registered holder of a Certificate of Interest shall cease to have and own any portion or all of any rights he may have under any such Certificate of Interest by reason of foreclosure, insolvency 1982 Tax Ct. Memo LEXIS 285">416 or other similar creditor's proceedings, then, for all purposes hereof, any such Certificate of Interest shall be null and void and of no force, effect, or value, and the units represented by any such Certificate of Interest shall be deemed to have been acquired by purchase by this Trust and shall be cancelled and not outstanding and never reissued. No holder of any Certificate of Interest shall have any right or power whatsoever to direct or otherwise influence the Trustees in the exercise of their sole discretion. No registered holder of any Certificate of Interest shall have any right or power to alienate ownership of any Certificate of Interest or of the units represented thereby in any manner, whether by assignment, mortgage, pledge, testamentary document or otherwise, without the prior written consent of the Board of Trustees of this Trust. SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the (a) Trustees, individually or collectively, 1982 Tax Ct. Memo LEXIS 285">417 alone, or (b) The Trustees and the agents and representatives of the Trustees when taken together, or (c) The holders alone of Certificates of Interest, present or future, or (d) The holders of Certificates of Interest, present or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees, an association or partners with any other person. It is further expressly declared that none of the Trustees, none of the agents and representatives of the Trustees and none of the holders of Certificates of Interest, present or future, have or possess, in any such capacities, any beneficial interest in the property or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder, as partners or otherwise, and that rights and duties of each such persons or groups of persons are several in accordance with the provisions hereof and not joint. No person acting as Trustee hereby shall be liable for the act or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or 1982 Tax Ct. Memo LEXIS 285">418 for anything other than his own personal breach of trust. EIGHTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed, at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, were the beneficial owner of the Trust Estate including the authority (without limiting the generality of the foregoing): A. To retain any such property temporarily or permanently; to sell or exchange or abandon the same, at public or private sale, for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and otherwise deal in and with such property as the Trustees from time to time deem fit. B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreign), or undivided interest therein, including shares or interest in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, 1982 Tax Ct. Memo LEXIS 285">419 royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any property or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a conservative investment or of whether the same is productive or unproductive and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust Estate in common or preferred stocks and even though some or all of such stocks might be considered speculative or might have no ready market.In connection with the operation or carrying on of any business or other operations of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service, maintain, repair, experiment with, 1982 Tax Ct. Memo LEXIS 285">420 hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, apparatus, appliances, products and property of every kind, nature and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develop, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge or otherwise dispose of or encumber real and personal property of any class and description and any rights and interest therein without limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage, or participate in every kind of engineering, research, scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interests or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms, and individuals, and to acquire 1982 Tax Ct. Memo LEXIS 285">421 by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills, factories, storehouses, buildings, roads, plants, and works of all kinds and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or dependency thereof, and to adopt, apply for, obtain, register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease mortgage, pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefor of the United States of America or any country and all rights connected therewith or appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, 1982 Tax Ct. Memo LEXIS 285">422 trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or of any state thereof or any other country, and, without in any respect limiting the generality of foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either along or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust. C. To employ such persons as the Trustees may determine to act as operational officers of the businesses and operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, 1982 Tax Ct. Memo LEXIS 285">423 brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee individually, or with whom any Trustee may be associated, and to employ or deal with any firm or corporation with or in which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagements as the Trustees may from time to time determine. D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees to be made, as are contemplated by the second preamble to this Declaration of Trust. NINTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees and to hold such office for such period of time and upon such terms and conditions as shall be determined by the Trustees at the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called, and provided that 1982 Tax Ct. Memo LEXIS 285">424 notice of each such meeting and the time, place and purposes thereof shall be given at least two (2) days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived by any trustee by written instrument executed either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts respectively signed by the Trustees. The action of the majority of the whole number of Trustees expressed from time to time at a meeting or in writing with or without a meeting shall constitute the action of the Trustees and have the same effect as taken though by all. Any Trustee may, at any time, by an instrument in writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specific rights or to take specific action which the Trustee so appointing, would be entitled to perform, exercise or take 1982 Tax Ct. Memo LEXIS 285">425 as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation. Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefor. No Trustee shall be removable from office by the holders of Certificates of Interest for any reason at any time whatsoever. Any Trustee may be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of the Trustees held not sooner than thirty (30) days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which 1982 Tax Ct. Memo LEXIS 285">426 notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal. Any Trustee may at any time resign his office as such or limit his powers, duties, rights and/or liabilities as such in whole or in any part at any time and from time to time for such period of limitation as such Trustee shall elect, such election to be evidenced by an instrument in writing including a minute of proceedings of the Board of Trustees reflecting such limitation. In the event of the removal of a Trustee or the death or resignation of a Trustee or in the case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee, as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the offices of Trustees in the manner hereinabove provided prior to the time that such person shall 1982 Tax Ct. Memo LEXIS 285">427 cease to be a Trustee. Each Successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities and duties of his predecessor as Trustee. Notice of the Selection and appointment of any new Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provisions of this indenture. No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee. The initial number of Trustees shall be five (5) but such number may be increased, or decreased, from time to time for such practical reasons beneficial to the Trust as the trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees. The Trustees shall have and shall exercise collectively the exclusive management and control of the trust, the Trust Estate and operations constituting all or any portion of the Trust Estate. By unanimous action, the Trustees may amend from time to time the trust document. TENTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall 1982 Tax Ct. Memo LEXIS 285">428 unanimously determine upon an earlier date. The Trustees may at their sole discretion, because of threatened depreciation in value, or other good and sufficient reason, liquidate the assets, distributes and close the trust at any earlier date determined by them.Upon such determination and dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501(c)(3) of the Internal Revenue Code and its regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the County Auditor's office, they shall file with said Auditor a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error. ELEVENTH: At any time prior to the expiration of this Trust, by its terms or 1982 Tax Ct. Memo LEXIS 285">429 pursuant to any subsequent agreement, the Trustees may if they so desire and believe that said Trust should not be closed, renew this agreement for an additional period or periods each not to exceed twenty (20) years from date of renewal. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office in the event this Trust has been recorded) at least one hundred twenty (120) days prior to the expiration hereof. IN WITNESS WHEREOF, The Subscribers, Grantors and Assignors and the Trustees have signed, sealed and executed this Agreement all as of the day and year first above written. IN WITNESS WHEREOF, the Grantors and Creators hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their hands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of said Trust and assent to all stipulations herein as imposed and expressed. COUNTY OF YAKIMASTATE OF WASHINGTONss. I, Gerald W. Curtis, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that FLOYD 1982 Tax Ct. Memo LEXIS 285">430 G. PAXTON and GRACE PAXTON, Creators, and JERRE PAXTON, LORNE HOUSE, PETER LINE, DALE LEACH and JAMES B. SHRADER, as Trustees of the INTERNATIONAL DEVELOPMENT TRUST, personally appeared before me this day and acknowledged that they signed, sealed and delivered the above the foregoing Trust Indenture for the uses and purposes therein set forth, and that the Trustees by their signatures evidenced the acceptance of the duties, obligations and faithful performance of said Trust Indenture. RESTATEMENT DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST The foregoing Restatement of Declaration of Trust was adopted by the Trust January 18, 1973, at a Special Meeting of the Board of Trustees thereof eliminating errors, correcting mistakes and making needed clarifications in order that the governing instrument of this Trust fairly and fully and clearly states the purposes and intent of the Trust. Jerre H. Paxton STATE OF WASHINGTONCOUNTY OF YAKIMAss. On this day personally appeared before me Jerre H. Paxton, to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that he signed the same as his free and voluntary act and deed, 1982 Tax Ct. Memo LEXIS 285">431 for the uses and purposes therein mentioned. Given under my hand and official seal this 22 day of January, 1973. The trustees and the certificate holders in IDT believed that the certificates of beneficial interest conveyed to the holders no more interest than a mere possibility of receiving disbursements of income or corpus from IDT at the sole discretion of the trustees. On June 14, 1971, the trustees of IDT authorized a distribution of $6,000 to the holders of certificates of beneficial interest not in proportion to their holdings, of which $1,500, the largest amount distributed, was distributed to Jerre Paxton. The following actions were initiated by Jerre Paxton as a trustee of IDT and agreed to by the other trustees: (1) the sale on February 21, 1969, to Kwik-Lok Yakima of U.S. Patent No. 3,270,872 and 3,270,873; (2) two purchases of silver bullion in 1969; (3) the purchase of lakefront property on Osoyoos Lake, Washington, in 1969; (4) two loans to Cenyak Corporation in 1970; (5) the purchase of and improvements to farm land near Willey City, Washington, in 1970; and, (6) the purchase of stock of General Birch Services Corporation in 1970. IDT owns none of the issued and 1982 Tax Ct. Memo LEXIS 285">432 outstanding stock of Kwik-Lok Yakima. In a statutory notice of deficiency mailed to Floyd G. Paxton and Grace D. Paxton on February 26, 1976, the Commissioner determined for the taxable years 1969, 1970 and 1971 that, as grantors of PFT and IDT, Floyd G. Paxton and Grace D. Paxton were taxable on portions of the net income of those trusts because they retained the power to revest in themselves title to the corpus of the trusts (or any portions thereof) as well as retaining the power to hold, apply or distribute the income of the trusts for their benefit, referring to sections 676 and 677 of the Internal Revenue Code. OPINION Patent IssuesIn January of 1965, Floyd Paxton was granted patents on end-to-end (U.S. Patent No. 3,164,249) and side-to-side (U.S. Patent No. 3,164,250) stripoks (herein sometimes referred to collectively as the stripolk patents). On April 15, 1965, he applied for patents on end-to-end and side-to-side closures with libels, which patents (respectively U.S. Patent No. 3,270,872 and U.S. Patent No. 3,270,873) (herein sometimes referred to collectively as the closure-with-label patents) were granted on September 6, 1966. On April 30, 1965, Floyd Paxton licensed 1982 Tax Ct. Memo LEXIS 285">433 the striplok patents to Kwik-Lok Yakima, along with "all improvements heretofore or hereafter invented by [Floyd Paxton] and embraced by any of the claims of said patents." On the same day, Kwik-Lok Yakima granted to Kwik-Lok Indiana a non-exclusive license to use the methods covered by such patents along with the right to exploit "devices covered by said patents including devices embodying any improvements invested by Floyd G. Paxton and embraced by any of the claims of said patents." The parties have treated the two above-quoted clauses as functionally equivalent, and we will also treat them in that fashion. In July of 1968, Floyd Paxton assigned the closure-with-label patents to IDT, a family trust. On February 21, 1969, IDT sold such patents to Kwik-Lok Yakima for $5,000,000, payable over a 172-month period ending on August 5, 1983. On the same day, Kwik-Lok Yakima granted to Kwik-Lok Indiana an exclusive license, covering the District of Columbia and thirty-six eastern states, to exploit such patents. Kwik-Lok Indiana, as consideration for such license, agreed to pay, over the same 172-month period, $3,350,000 to Kwik-Lok Yakima. The parties herein disagree as to the correct 1982 Tax Ct. Memo LEXIS 285">434 tax treatment of these transactions, concerning the closure-with-label patents. Petitioners claimed on their returns that the transfer of such patents from IDT to Kwik-Lok Yakima constituted a sale of capital assets, the recognized gain from which is taxable at capital gains rates. They contend that Kwik-Lok Yakima is entitled to amortize its cost of acquiring such patents. They also contend that the amounts paid to Kwik-Lok Yakima by Kwik-Lok Indiana under the licensing agreement of February 21, 1969, constituted ordinary royalty income to Kwik-Lok Yakima and deductible trade or business expenses to Kwik-Lok Indiana. Respondent, on the other hand, contends that the Kwik-Lok corporations received nothing in the February 1969 transactions to which they were not already entitled under the grants made in the April 1965 License and Sublicense Agreements. Based upon that conclusion, respondent would characterize Kwik-Lok Yakima's payments to IDT under the February 1969 agreement as ordinary income and would deny Kwik-Lok Yakima any amortization deductions with regard to the purported cost of acquiring the closure-with-label patents in 1969. Similarly, he would characterize Kwik-Lok 1982 Tax Ct. Memo LEXIS 285">435 Indiana's payments to Kwik-Lok Yakima under the February 1969 agreement as dividend income (though he concedes that such dividends would constitute "qualifying dividends" under section 243(b)), and he would deny that such payments support a trade or business deduction for Kwik-Lok Indiana under section 162(a) because they were not "necessary." He further contends that, even if the Kwik-Lok corporations did not acquire their rights in the closure-with-label patents prior to the February 1969 transactions, the amounts paid for such patents at that time were excessive and, therefore, that to the extent of such excess, such payments were gratuitous. In order to decide these issues, we must determine whether the closure-with-label patents, which were the subject of the February 1969 transactions which respondent contends were superfluous, constitute "improvements [of, to, or on the striplok patents] heretofore or hereafter invented by [Floyd Paxton] and embraced by any of the claims of [the stripolk] patents." We are convinced that they are not. To laymen, and even to non-patent lawyers, the phrase "improvements * * * embraced by the claims of [the striplok] patents" seems rather broad 1982 Tax Ct. Memo LEXIS 285">436 and amorphous. However, the word "claims," when used appropriately in the context of patents, is a term of art. Only by understanding the true import of the word "claims" can we intelligently identify the outer limits of the grants made in the above-quoted language in the License and Sublicense Agreements of August 1965.Robert Baynham (herein Baynham), a patent lawyer of 15 years experience and the author of 200-300 patent applications, testified on behalf of patitioners that the "claims" of a patent are intended to define the metes and bounds of the exclusive rights which the patent gives the patentee. He explained that the language of a patent can be broken down into two essential parts--the specification and the claim or claims. The specification is a description of the invention and describes one embodiment of the patented invention. The claims are the meat of the patented invention. It is through the patenting of certain claims--and not the specification or particular embodiment which the patent describes--that the patentee receives protection of clearly defined rights. The relevant statutory case authority amply supports Baynham's testimony regarding the definition of a 1982 Tax Ct. Memo LEXIS 285">437 patent "claim." For example, in Strumskis v. United States,200 Ct. Cl. 668">200 Ct. Cl. 668, 200 Ct. Cl. 668">675, 474 F.2d 623">474 F.2d 623, 474 F.2d 623">627 (1973), cert. denied 414 U.S. 1067">414 U.S. 1067 (1973), the court stated: This court has consistently maintained that the mates and bounds of an invention are defined by the claims of a patent and not its drawings or specification. In Super Products Corp. v. DP Way Corp.,546 F.2d 748">546 F.2d 748, 546 F.2d 748">756 (7th Cir. 1976), the court put it this way: "[T]he claim alone is the measure of the invention." The proper function of the claim was expressed in Wells Mfg. Corp v. Littelfuse, Inc.,547 F.2d 346">547 F.2d 346, 547 F.2d 346">351 (7th Cir. 1976): Since the claim made in the patent is the sole measure of the grant [citations omitted] a good starting point is an examination of the terms of the claim is issue. Another pertinent statement on the subject is found in Autogiro Co. of America v. United States,181 Ct. Cl. 55">181 Ct. Cl. 55, 181 Ct. Cl. 55">60, 384 F.2d 391">384 F.2d 391, 384 F.2d 391">395-396 (1967): The claims of the patent provide the concise formal definition of the invention. They are numbered paragraphs which "particularly [point] out and distinctly [claim] the subject matter which the applicant regards as his invention." 35 U.S.C. [sec.] 112. It is to these wordings that one must 1982 Tax Ct. Memo LEXIS 285">438 look to determine whether there has been infringement. Courts can neither broaden nor narrow the claims to give the patentee something different than what he has set forth. No matter how great the temptations of fairness or policy making, courts do not rework claims. They only interpret them. * * It is plain that the concept of a patent claim is legal in nature. Each patent claims certain aspects of the subject invention and provides protection with respect to those features. Since the measurement of what was transferred by the language in question in the April 1965 License and Sublicense Agreements is determined by the claims of the striplok patents, it is necessary to inquire into the scope of the claims of those patents. Petitioners introduced testimony by two experts regarding the claims of the striplok patents. Baynham, whom we referred to above, first testified that, after examining the words of the two striplok patents, he concluded that there were three distinct elements to the claims of those patents: 1) the stiffness of the material of which the striploks were made; 2) the design of the bag-receiving opening; and 3) the narrow, frangible webs connecting the closures. 1982 Tax Ct. Memo LEXIS 285">439 In the following passage of testimony, he emphasised the webbing: The third, and most important element in the claim, in my opinion, are the interconnection between the closures, which are narrow webs, in one of the patents, they're referred to as narrow web means, but they are frangible elements, so that they will break, and the intent, in the breakage, is to get a shearing which leaves the edge of each closure very smooth, so that somebody handling these does not get jagged. Petitioners' other expert witness was Professor Donald Chisum (herein Chisum), the author of a multi-volume treatise on patent law and a well-known patent law expert who was then on the University of Washington Law School faculty. In his opinion, the claims of the striplok patents were limited to the particular means claimed for joining bag closures in strip form, i.e., the frangible webs. He obtained this narrow construction of the striplok patents by analyzing the file wrapper and invoking the doctrine of file wrapper estoppel. We cannot improve upon the following definition and explanation of these terms: The file wrapper contains the entire record of the proceedings in the Patent Office from the first application 1982 Tax Ct. Memo LEXIS 285">440 papers to the issued patent. Since all express representations of the patent applicant made to induce a patent grant are in the file wrapper, this material provides an accurate charting of the patent's pre-issuance history. One use of the file wrapper is file wrapper estoppel, which is the application of familiar estoppel principles to Patent Office prosecution and patent infringement litigation. The patent applicant must convince the patent examiner that his invention meets the statutory requirements; otherwise, a patent will not be issued. When the application is rejected, the applicant will insert limitations and restrictions for the purpose of inducing the Patent Office to grant his patent. When the patent is issued, the patentee cannot disclaim these alterations and seek an interpretation that would ignore them. He cannot construe the claims narrowly before the Patent Office and later broadly before the courts. File wrapper estoppel serves two functions in claim interpretation; the applicant's statements not only define terms, but also set the barriers within which the claim's meaning must be kept. These results arise when the file wrapper discloses either what the claim 1982 Tax Ct. Memo LEXIS 285">441 covers or what it does not cover. [Autogiro Co. of America v. United States, 181 Ct. Cl. at 64-65, 348 F.2d at 398-399; footnotes omitted.] See also, Dwyer v. United States,174 Ct. Cl. 1064">174 Ct. Cl. 1064, 174 Ct. Cl. 1064">1073, 357 F.2d 978">357 F.2d 978, 357 F.2d 978">984 (1966), where the court said: It is well settled that patent claims are interpreted in light of the prosecution history, and that where the applicant has narrowed his claims in order to obtain the allowance thereof, the limitations recited or argued cannot be disregarded in an infringement action. * * As the Supreme Court said in a case involving file wrapper estoppel, the matter given up (by the amendment), "must be regarded as material, and since the amendment operates as a disclaimer of that difference it must be strictly construed against him." Exhibit Supply Co. v. Ace Patents Corp.,315 U.S. 126">315 U.S. 126, 315 U.S. 126">137 (1942). Chisum elaborated on the doctrine, explaining that it "operates to preclude a patent owner from obtaining, through subtle means of construction of claim language, a resurrection of subject matter that he, in effect, surrendered during the course of [the] proceedings to obtain the patent." He further pointed out that, "the most typical situation where file 1982 Tax Ct. Memo LEXIS 285">442 wrapper estoppel would apply is where the claims are rejected as too broad in the light of the prior art, to which the applicant responds by narrowing his claims * ." Of course, that is exactly what happened here. Both of the applications for striplok patents, especially the first one (which provided some guidance in amending the second), were substantially amended. Many claims were withdrawn, and only the narrow claim language set forth in the findings of fact ultimately survived. Thus, as a principle of construction, the doctrine of file wrapper estoppel constrains us to closely circumscribe the breadth of the claims of the striplok patents. Moreover, there is a well-established principle in the construction of agreements dealing with patent transfers: "future improvements" clauses are to be narrowly construed. To construe such provisions less than strictly is regarded as against public policy because it has the effect of tying up an individual's productive creativity. For example, note the following from White Heat Products Co. v. Thomas,266 Pa. 551">266 Pa. 551, 109 A. 685">109 A. 685, 109 A. 685">686 (1920): Where the product of an inventive mind is sought to be appropriated under an agreement to assign to 1982 Tax Ct. Memo LEXIS 285">443 another, the language of the agreement must be clear and show an unmistakeable intention that the particular matter covered by the invention of patent is within the intention of the parties * * . This principle receives regular reiteration in the case law. For example, in DeLong Corp. v. Lucas,176 F. Supp. 104, 127 (S.D.N.Y. 1959), affd. 278 F.2d 804">278 F.2d 804 (2d Cir. 1960), cert. denied 364 U.S. 833">364 U.S. 833 (1960), the court stated: The law does not look favorably upon covenants which place "a mortgage on a man's brain, to bind all its future products." Again, in Mullins Mfg. Co. v. Booth,125 F.2d 660">125 F.2d 660, 125 F.2d 660">663 (6th Cir. 1942), the principle was stated in the following manner: Courts of equity are loathe to give their aid by construction to a contract, the enforcement of which will constitute a mortgage for life on the inventor's brain, and bind all his future products. * * Judge Learned Hand put it correctly and succinctly when he wrote, in American Cone and Wafer Co. v. Consolidated Wafer Co.,247 F. 335, 336 (2d Cir. 1917), "[I]f the purpose is so broad, the language must not be so vague." Using this maxim of narrow construction, the doctrine of file wrapper estoppel, and the testimony of 1982 Tax Ct. Memo LEXIS 285">444 petitioners' two expert witnesses, we find, based upon the facts before us, that the claims of the striplok patents are those relating to the stiffness of the closure device material, the location and shape of the bag opening, and the frangible web means for interconnecting the closure devices. The critical invention to those patents is the web means. Having so decided, we must determine whether, assuming that the closure-with-label patents were "improvements" of, to, or on the stripolk patents, such improvements were "embraced by any of the claims of [the stripolk] patents." The parties agree that the word "embraced" is not a term of art. Therefore, even though Baynham and Chisum expressed opinions about whether the closure-with-label patents were embraced within the claims of the striplok patents, their opinions are not entitled to any special weight. The word "embrace," in this context, means to encircle or enclose. It is clear to us, as it was to the Baynham and Chisum witnesses, that the basic invention in the claims allowed in the closure-with-label patents was the means of attaching labels in a feathered fashion to bag-closing devices united in strip form such that the 1982 Tax Ct. Memo LEXIS 285">445 bag-closing devices could be coiled, stored and thereafter applied without any interference with the application process due to the presence of the labels. With regard to such patents, the point is that the precise nature of the strip to which the labels are attached is not critical to the nature of the invention described in the claims of the closure-with-label patents. For example, if labels were attached in a feathered fashion to strips of bag-closing devices connected by means other than the web-means method, which is in the crux of the striplok patents, presumably such attachment method would be covered by the closure-with-label patents. The basic thrust of the striplok patents is bag closing; the basic thrust of the closure-with-label patents is labeling. The claims of the closure-with-label patents do not coact with or improve any of the essential elements (closure stiffness, bag-grasping opening, and web means of connection) of the claims of the striplok patents. Thus, the invention covered by the closure-with-label patents is not embraced by, encircled within, or enclosed by any of the claims of the striplok patents. Moreover, it is not entirely certain whether the closure-with-label 1982 Tax Ct. Memo LEXIS 285">446 patents are "improvements" that would come within the granting language of the April 1965 License and Sublicense Agreements. Can it rationally be said that the closure-with-label patents "improve" the striplok patents?They in no way change or alter, let alone "improve," the basic elements of the striplok patents, i.e., the stiffness of the closures, the design of the opening, or the means of connecting the bag-closing devices. Furthermore, though it is conceded that the closure-with-label patents are an improvement on the striplok patents, it is doubtful that the former is an improvement to the latter. This distinction is not without significance, as Judge Learned Hand said in American Cone and Wafer Co. v. Consolidated Wafer Co.,supra at 336, "Every more efficient machine would be an improvement 'upon' it, in common speech, but not 'to' it." The language in the License and Sublicense Agreements is ambiguous on this point, though, if put to a choice, we would probably construe the grant to encompass only improvements "to" the striplok patents. Because of our construction and application of, and decision relating to, the "embraced by the claims, etc." limitation in such granting 1982 Tax Ct. Memo LEXIS 285">447 language, we need not wrestle with the semantical details of the term "improvements." Respondent cites, without discussion, the following cases in support of his position: Thomas Flexible Coupling Co v. Commissioner, B.T.A. Memo. 1944-190, affd. 158 F.2d 828">158 F.2d 828 (3d Cir. 1946); 6BestLock Corporation v. Commissioner,29 T.C. 389">29 T.C. 389 (1957), on rehearing 31 T.C. 1217">31 T.C. 1217 (1959); Dry Ice Corporation of America v. Josephson,43 F.2d 408">43 F.2d 408 (E.D.N.Y. 1930). Those cases are distinguishable; none of the assignments involved in them contained the limiting language "embraced by the claims * * ", the construction of which is the crux of our decision herein. The obvious intent of the participating parties to the August 1965 License and Sublicense Agreements corroborates our finding that the closure-with-label patents are not improvements embraced by the claims of the striplok patents. There are many facts which indicate such intent. One of the most compelling of these is the fact that the potential closure-with-label patents were readily identifiable on April 30, 1965. 1982 Tax Ct. Memo LEXIS 285">448 If Floyd Paxton had contemplated that the closure-with-label invention be included in the grant embodied in the License and Sublicense Agreements, they could have been, and presumably would have been, specifically identified by: (1) the titles or descriptions of the inventions for closures-with-labels; (2) the date on which applications for patents on such inventions were signed; (3) the application serial numbers and the filing dates with the U.S. Patent Office; and (4) the office docket numbers used by Mr. Keech to identify such inventions. Obviously, there was no dearth of techniques by which such inventions could have been identified if Floyd Paxton had desired to transfer them. If he had specifically instructed Mr. Keech to include in the April 30, 1965, License Agreement a right to exploit the closure-with-label inventions, surely Mr. Keech would have done so, using one or all of the above-listed identifying numbers, descriptions, or dates. We can only conclude from the omission of any specific reference to such inventions in either the License or Sublicense Agreements of April 1965 that they were not intended to be included within the transfer accomplished by such Agreements. 1982 Tax Ct. Memo LEXIS 285">449 Respondent would have us draw negative inferences from the fact that the Kwik-Lok corporations utilized the closure-with-label patents from September 6, 1966, to February 21, 1969, and paid royalties under the April 1965 Agreements based upon the total sales price of striploks with labels attached using such patented process, without actually owning the exploitation rights to such closure-with-label patents during such period. Calculating the royalty owed under the April 1965 Agreements attributable to the sale of striploks with labels attached, per the process claimed in the closure-with-label patents, based upon the full sales price received from the sales of striploks with labels attached is exactly what is required by such Agreements. The inferences that we draw from this evidence are ambivalent, and certainly do nothing to negate our construction of the plain words of the controlling documents. Finally, respondent argues that, because Floyd Paxton did not reimburse Kwik-Lok Yakima for some legal expenses incurred in the acquisition of the closure-with-label patents until September 1968, Kwik-Lok Yakima must have been the true owner of such patents. But Floyd Paxton did personally 1982 Tax Ct. Memo LEXIS 285">450 pay such expenses immediately after Kwik-Lok Yakima requested payment for such. Though petitioners offer several plausible explanations for the two-year delay in billing Floyd Paxton, we are minimally concerned with the whole scenario. We can draw no inferences from the whole fee payment course of events that comes close to upsetting our legal and factual determination that the closure-with-label patents are not "improvements * * * embraced by any of the claims of [the striplok] patents." We now turn to the second issue; i.e., the reasonableness of the payments for the closure-with-label patents. IDT sold the closure-with-label patents to Kwik-Lok Yakima on February 21, 1969, for a total of $5,000,000 payable in 172 monthly installments of $28,901 each, commencing April 5, 1969, with a final payment of $29,028 due August 5, 1983. Based on the Inwood Method of ascertaining present value, using a 15 percent interest rate, the parties agreed that the discounted present value on February 21, 1969, of the payments due pursuant to such sale was $2,006,480. Respondent determined that the closure-with-label patents were worth only $750,000 on that date and, therefore, that the excess of 1982 Tax Ct. Memo LEXIS 285">451 $2,006,480 over $750,000 constitutes taxable ordinary income, as opposed to capital gain, to the recipient of the payments, IDT.The parties make parallel arguments with regard to the License Agreement by which Kwik-Lok Yakima granted Kwik-Lok Indiana a non-exclusive right to exploit such patents in the District of Columbia and 36 eastern states. Our decision regarding this transfer depends solely upon our decision concerning the transfer from Kwik-Lok Yakima. Therefore, we must determine whether the sales price agreed to by IDT and Kwik-Lok Yakima was reasonable. We find that it was. We emphasize at the outset, because it is upon this point that respondent's valuation founders, that in determining value as of a certain date, it is obviously unsound to treat subsequent data as if it were known at that time. Ithaca Trust Co. v. United States,279 U.S. 151">279 U.S. 151 (1929). The crux of the valuation issue is what the parties to the transaction thought and expected at the time the sale of the closure-with-label patents were effected. This fundamental principle of valuation is stated as follows in National Water Main Cleaning Co. v. Commissioner,16 B.T.A. 223">16 B.T.A. 223, 16 B.T.A. 223">239 (1929): In determining value 1982 Tax Ct. Memo LEXIS 285">452 on March 1, 1913, it is obviously unsound to treat subsequent data as if they were known at that time. Ithaca Trust Co. v. United States,279 U.S. 151">279 U.S. 151. At any date the future can only affect value to the extent that it is reasonably and sensibly in contemplation. Human experience rarely follows with exactness its own expectations. We must determine "what it fairly may be believed that a purchaser in fair market conditions would have given for [the patents] in fact--not what [we] may think a purchaser would have been wise to give." New York v. Sage,239 U.S. 57">239 U.S. 57, 239 U.S. 57">61. To take subsequent earnings as disclosing prior value would ignore the obvious factor of risk inherent in commercial values.The hypothetical willing seller and buyer, who are by judicial decree always dickering for price in the light of all the facts, can not be credited with knowing what the future will yield. Otherwise the owner with a successful future would ordinarily not sell, and without it could find no buyer; and thus the entire hypothesis of a voluntary transaction is destroyed and we are left without the prescribed judicial standard. It is the inability to know the future which gives play to the judgment of 1982 Tax Ct. Memo LEXIS 285">453 risk, and this in turn contributes an element of the value arrived at. The evidence to be considered consists of the historical facts prior to March 1, 1913, and reasonable prognostications on that date. James Couzens,11 B.T.A. 1040">11 B.T.A. 1040; Van Kannel Revolving Door Co.,11 B.T.A. 1209">11 B.T.A. 1209; Oahu Sugar Co., Ltd.,13 B.T.A. 404">13 B.T.A. 404; Cuyahoga Mortgage Co.,14 B.T.A. 1">14 B.T.A. 1. With this in mind, we will examine the evidence of the value of the closure-with-label patents as of February 21, 1969. A general understanding of what the ability to fasten labels to bag-closing devices was expected to do for Kwik-Lok Yakima is crucial to any estimation of the value of the closure-with-label patents. Kwik-Lok Yakima had, at the time it acquired the closure-with-label patents, the capability of automatically applying bag-closing devices to the necks of plastic bags. This had been a long and slow developmental process--from the single, unpatented bag-closing device (single lok) to a strip of closures with sufficient frangibility to permit individual closures to be applied automatically at a rate of up to 120 per minute. The capability which Kwik-Lok possessed, as a result of holding the striplok patents, put it in 1982 Tax Ct. Memo LEXIS 285">454 a strong competitive position vis-a-vis the other closing methods on the market at that time, i.e., heat seal, staple, tape and wire tie. As shown by the following chart which Jerre Paxton prepared during his testimony, the product covered by the striplok patents was the only one which possessed all of the commercially positive characteristics of reusability, capability of being applied both automatically and semi-automatically, and compatability with metal detection devices: Means of Plastic Bag ClosingKwik-LokBag-ClosingQualities or CapabilitiesHeat SealStaplesWire TiesTapeDevicesReusabilityxxSemi-automatic applicationxxxxxFully automatic applicationxxxxxLabeling capability withsemi-automatic application* LxLabeling capability withfully automatic applicationxMetal detection compatabilityxxxPricing and coding capability* LxxDespite this preeminence, the Kwik-Lok system lacked the ability to apply closures with labels. If Kwik-Lok Yakima could acquire the capability of automatically applying closures with labels, it would have a product capability possessed by no other bag-closing device. As Jerre Paxton pointed out, the capability of being able to apply a label 1982 Tax Ct. Memo LEXIS 285">455 to a closure was extremely important insofar as net bags (which "were used overseas and starting to come into this country") were concerned. Labels were necessary because, as Jerre Paxton testified, "you can't print on a net bag, as you can on a flexible, polyethylene bag." Aside from the capability of bringing to the net bag some sort of space for a printed message (not otherwise available on a net bag), possession of the ability to attach labels in a feathered fashion to a strip of bag-closing devices would also permit the use of late-breaking information ("at the point of closing," in Jerre Paxton's words) so as to permit data and information about "specials, discounts, couponing." As Jerre Paxton pointed out, the polyethylene bag is "pre-printed." "[W]hen * * special considerations come up," a label allows a message to be attached "immediately" to the pre-printed bag "without disturbing [the] normal package design." The significant advantage which this would give to Kwik-Lok Yakima insofar as holiday specials has been demonstrated by the evidence herein. With this understanding of the importance of labeling, we can see that Kwik-Lok Yakima was justifiably optimistic about the 1982 Tax Ct. Memo LEXIS 285">456 potential profits to be gained from the use of the closure-with-label patents. Moreover, as Jerre Paxton pointed out, there was probably no better judge of the value of such patents than the officers and employees of Kwik-Lok Yakima. No one had their experience or expertise in the very market which they would be exploiting. Thus, they justifiably decided not to seek any outside appraisal of such patents at the time of the sale. Several factors pointed to a potentially enormous market for the closures with labels. The production of polyethylene film (used for plastic bags) in the United States had increased from 183 million pounds in 1958 to 613 million pounds in 1965 and was expected to increase to 720 million pounds in 1968. The ability of Kwik-Lok Yakima to provide an entire bag-closing system (striploks, closures with labels, and machine to apply both) could reasonably be expected to place it in a very strong competitive position. By the time the patents on the various items lapsed, Kwik-Lok Yakima fully expected to have established a market strength that would enable it to enjoy a competitive advantage even after the patent protection expired. Furthermore, it was fully expected 1982 Tax Ct. Memo LEXIS 285">457 that the sales of closures with labels would equal or exceed, quantitatively, the sales of striploks. With the increased demand for closures with labels indicated by these factors also came an expectation of disproportionately greater profits on the sale of such. Kwik-Lok Yakima already possessed the capacity to manufacture and market the closures with labels. More importantly, it had found, as a result of its test manufacturing and selling of closures with labels, that the gross profit (sales proceeds less costs of production) on closures with labels ($3.175 per thousand) was significantly greater than the gross profit on striploks ($ .60 per thousand). Also, Kwik-Lok Yakima reasonably expected the sales of closures with labels to lead to increases in its sales of the high-markup equipment needed to apply such closures. All of these factors point to a reasonable expectation of great returns from the purchase of the closure-with-labels patents. As an illustration of the potential value solely from the increased sales of closures with labels, petitioner provided an example similar to the following of an income projection that would have been reasonable based upon the facts and expectations 1982 Tax Ct. Memo LEXIS 285">458 existing and known on February 21, 1969. Kwik-Lok Yakima sold an aggregate number of units (1,000 individual closures comprise a unit) in its fiscal year ending March 31, 1968, of approximately 1,899,402. 7 Assuming static sales and assuming that closures with labels capture only one-fourth of that static market (both of which assumptions are very conservative given the facts and reasonable expectations at the time the closure-with-label patents were sold), Kwik-Lok Yakima could expect to sell 474,850 units of closures with labels annually. Assuming no significant additional marketing expenses, which is reasonable in light of its established marketing network, Kwik-Lok Yakima's net profit on the sale of that many striploks would have been $251,077. 8 Its net profit from the sale of the same number of closures with labels, however, would have been $1,018,996. 9 Thus, by substituting sales of closures with labels for sales of striploks, Kwik-Lok Yakima could increase its yearly bottom-line profits by $767,919 ($1,018,996 minus $251,077). Multiplying that by the agreed-upon Inwood discounting factor of 5.7855, the present value of a stream of such increased profits would have been 1982 Tax Ct. Memo LEXIS 285">459 $4,442,795, which is well in excess of the $2,006,480 present value of the payments which Kwik-Lok Yakima is required to make under the license agreement of February 21, 1969. 1982 Tax Ct. Memo LEXIS 285">460 It is true that Kwik-Lok Yakima did not actually experience economic success on a level comparable to the expectations. Based primarily on such post-transfer facts, respondent prepared a valuation report to quantify the value of the closure-with-label patents on February 1969. Engineer Revenue Agent Jerry Crawford, who is not an engineer and has had no particular experience with valuing patents, but rather has had extensive real estate appraisal experience, analyzed solely the expected royalty income stream which could be expected by the transferor IDT. He ignored the potential profits which Kwik-Lok Yakima expected to make. He further ignored any value attributable to profits derived from sales of related products or from the expected preeminent market position at the end of the patent protection periods. All in all, we find Agent Crawford's valuation report to consist mainly of valuation boilerplate. Patents are valued differently from real estate.It is respondent's failure to realize this distinction that weakens the probative value of Agent Crawford's report. We are convinced that the closure-with-label patents were reasonably valued by the parties on February 21, 1969, 1982 Tax Ct. Memo LEXIS 285">461 at $2,006,480. That being the case, the valuation given to the rights of exploitation which were the subject of the License Agreement of the same date between Kwik-Lok Yakima and Kwik-Lok Indiana was reasonable. Therefore, the transfers of closure-with-label patents on February 21, 1969, had substance and were for adequate consideration. The amounts paid to IDT are capital gain (except for the interest components thereof). Kwik-Lok Yakima may amortize all of its cost of such patents. The amounts paid to Kwik-Lok Yakima are ordinary royalty income to Kwik-Lok Yakima and deductible trade or business expenses to Kwik-Lok Indiana. Grantor Trust IssuesThe threshold question which must first be resolved as to PFT is whether the doctrine of collateral estoppel applies.Respondent amended his answers in docket Nos. 4639-76 and 4644-76 to allege that petitioners in those cases were collaterally estopped to deny that PFT was a grantor trust and its income is taxable to such petitioners as grantors because that issue has previously been litigated in this Court. This is new matter; therefore the burden of proof is upon respondent.Rule 142(a), Tax Court Rules of Practice and Procedure.On 1982 Tax Ct. Memo LEXIS 285">462 February 15, 1972, we filed our opinion in Paxton v. Commissioner, which was reported at 57 T.C. 627">57 T.C. 627 and affirmed 520 F.2d 923">520 F.2d 923 (9th Cir. 1975). The primary issue in that case (hereinafter referred to as the "first case" or the "first proceeding") was whether petitioners were taxable in the taxable year 1967 on the income earned by PFT to the extent of their interest in the trust by virtue of PFT being a grantor trust under the provisions of sections 671 through 677. The adjustment to petitioners' income in the first case was described as follows in the statutory notice of deficiency which the Commissioner mailed to them: It is determined that as grantor of the F. G. Paxton Family Trust you are taxable on the net income thereof for the period 10/1/67 to 12/31/67 because you have granted a non-adverse party a power to revoke. Your taxable income is increased by $6,413.05 represented by constructive dividends received by the Trust from the wholly owned corporation Kwik-Lok Corporation (Yakima). Prior to the creation of PFT Floyd G. Paxton and Grace D. Paxton owned 86.38 percent of Kwik-Lok Yakima and they likewise owned 86.38 percent of PFT; therefore, in the first case the Commissioner 1982 Tax Ct. Memo LEXIS 285">463 sought to tax to them only the portion of the net income of PFT represented by the portion of PFT which the Commissioner determined was owned by them. The facts in the first case were fully stipulated. We held that Jerre Paxton, son of Floyd g. Paxton and a trustee of PFT, was not an adverse party. At that time he owned 3.84 percent of the trust. "His interest in the trust, whether regarded as substantial or insignificant, would not be adversely affected by the exercise or nonexercise of the power he possesses with respect to the trust." 57 T.C. 627">57 T.C. 632. We, therefore, held that petitioners must be treated as the owners of 86.38 percent of the trust under section 676(a) and taxed with that portion of the trust income for the taxable period before the Court. We likewise held that petitioners must be treated as owners of 86.38 percent of the trust under section 677. The Court of Appeals in affirming our decision explained its holding as follows 520 F.2d 923">at page 927 of 520 F.2d: For a sole remainderman, each dollar of trust corpus revested in the grantor costs a dollar. His adversity is as strong as the grantor's advantage, so that we may fairly say his decision is beyond the grantor's 1982 Tax Ct. Memo LEXIS 285">464 control. The statute's presumption that a trustee with discretion will be amenable to the grantor's wishes has been overcome. From this paradigm of adversity we slide, however, to Jerre Paxton's 3.84%. Each dollar given away costs him less than four cents. So slim a restraint upon the power to distribute income and assets of the trust to the Paxtons is not sufficient to protect them from all tax whatsoever. Jerre Paxton is adverse not as to the entire trust but only as to his share. Treas. Reg. [sec.] 1, 672(a)-1(b). Without setting out a formula for acceptable percentages, we can affirm as not clearly erroneous the Tax Court's finding that Jerre Paxton is not an adverse party. [Fn. ref. omitted.] The statutory notices of deficiency mailed to petitioners in the instant case added the PFT income to their income for the taxable year 1971 with the following explanation: As grantor of the F. G. Paxton Family Trust, you are taxable on the net income thereof to the extent of your interest therein which is 86.38 percent in the amount of $15,382.62 for the tax year 1971 because you have retained the power to revest in yourself title of the corpus of the trust (or any portion of it) 1982 Tax Ct. Memo LEXIS 285">465 as well as retaining the power to hold, apply or distribute the income of the trust for your benefit. (See Sections 676 and 677 of the Internal Revenue Code.) The landmark case on the doctrine of collateral estoppel is Commissioner v. Sunnen,333 U.S. 591">333 U.S. 591 (1948).The Court held at pages 599-600 that collateral estoppel-- must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged. Petitioners contend that collateral estoppel is not applicable here because the facts have changed from those involved in the first proceeding and because the issues involved in the two proceedings are not identical. In the prior proceeding Jerre Paxton, the son of Floyd G. Paxton, one of the grantors, owned 3.84 percent of PFT but in the instant proceeding his interest had increased to 9.9 percent. In deciding the issue in favor of the government in the first case, as set forth above, we did not base our holding upon the size of Jerre Paxton's ownership of the trust. However, as demonstrated by the quotation above, the Court of Appeals seemed 1982 Tax Ct. Memo LEXIS 285">466 to base its affirmance of our decision on the size of Jerre Paxton's interest. In applying the rationale of 333 U.S. 591">Commissioner v. Sunnen,supra, therefore, should the test of the identity of controlling facts be applied to the holding of the trial court only or should it be applied to the holding of the court of appeals as well? Keeping in mind that an appeal in the instant case lies in the court of appeals which affirmed our holding in the first case, we conclude that the identity of controlling facts test should be applied to the first proceeding in its entirety, including the holding of the court of appeals. Accordingly, we hold that respondent has failed in his burden of establishing that the doctrine of collateral estoppel applies. In view of this holding it is not necessary for us to decide for this purpose whether "clarifications" of the trust instrument of PFT represents a change in the controlling facts nor whether the issues in the two proceedings are identical. It is, however, necessary to decide precisely the issue presented to the Court with respect to PFT. Petitioners point to the language of the statutory notices of deficiency quoted above and argue that the issue is 1982 Tax Ct. Memo LEXIS 285">467 whether petitioners grantors retained any power to revest in themselves title to the corpus of the trust or any power to hold, apply or distribute the income of PFT for their benefit. Respondent contends that the issue in the instant proceeding is no different from the issue in the prior proceeding, i.e., whether the power to revoke PFT was granted to a nonadverse party, Jerre Paxton. Petitioners further argue that the issue of whether Jerre Paxton holds a substantial interest adverse to that of the grantors of PFT is a new theory not covered by the pleadings and is inconsistent with his determination of the deficiencies citing Tauber v. Commissioner,24 T.C. 179">24 T.C. 179, 24 T.C. 179">185 (1955), and Estate of Horvath v. Commissioner,59 T.C. 551">59 T.C. 551, 59 T.C. 551">556 (1973). Respondent counters with reference to our Rule 41(b) which provides that when issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Petitioners' pretrial memorandum cast the PFT issue in broad terms but, nevertheless, emphasized the changes in the trust instrument which occurred after the first case was decided.Respondent's trial 1982 Tax Ct. Memo LEXIS 285">468 memorandum stressed the importance of Jerre Paxton's role in the trust as not being adverse. Petitioners voiced no objection to the manner in which respondent framed the PFT issue. In his opening statement counsel for petitioners described the PFT issue in terms of the first proceeding and upon questioning by the Court stated that petitioners contend that Jerre Paxton held a substantial adverse interest in PFT and, therefore, that the grantor trust provisions were inapplicable. The foregoing amply demonstrates that from the beginning of the trial counsel for petitioners understood the PFT issue to be whether Jerre Paxton held a substantial adverse interest in PFT. Such a finding renders the decisions in 24 T.C. 179">Tauber v. Commissioner,supra, and 59 T.C. 551">Estate of Horvath v. Commissioner,supra, distinguishable. Rubin v. Commissioner,56 T.C. 1155">56 T.C. 1155 (1971), affd. per curiam 460 F.2d 1216">460 F.2d 1216 (2d Cir. 1972). Accordingly, we hold that the PFT issues before the Court in this proceeding include the question of whether Jerre Paxton held an adverse interest. PFT was created by Declaration of Trust executed on August 3, 1967, with Floyd G. Paxton as creator (grantor) and Jerre H. Paxton and Lorne House as 1982 Tax Ct. Memo LEXIS 285">469 trustees. It was filed with the Auditor of Yakima County, Washington, on October 5, 1967. The grantor did not, in the trust instrument, reserve the power to alter, amend, or revoke the trust, nor was such power granted to the trustees. On October 25, 1969, the trustees of PFT, purported to "correct, nunc pro tunc," the declaration of trust of PFT by amending paragraph NINTH to provide that upon dissolution of the trust its assets would be distributed exclusively to an organization which qualified under section 501(c)(3) of the Internal Revenue Code. On May 30, 1972, a re-typed version of the Declaration of Trust of PFT was executed by Floyd G. Paxton as creator and Lorne House, Jerre Paxton, James B. Schrader and Diane Irwin as trustees. It was filed with the Auditor of Yakima County, Washington, on June 5, 1972. Attached to the declaration of trust and likewise filed with the county auditor was a document acknowledged before a notary public entitled "Restatement Declaration of Trust of This Constitutional Trust" in which Jerre Paxton stated that the Board of Trustees of PFT adopted the "Restatement of Declaration of Trust" of PFT at a special meeting on May 30, 1972, for "eliminating 1982 Tax Ct. Memo LEXIS 285">470 errors, correcting mistakes and making needed clarifications in order that the governing instrument of this Trust fairly and fully and clearly states the purposes and intent of the Trust." Petitioners make their arguments regarding PFT based upon PFT as "clarified" by the action taken by the trustees on October 25, 1969, and the "Restatement of Trust" dated May 30, 1972. Respondent bases his arguments upon the original PFT Declaration of Trust executed on August 3, 1967, and argues that the action of the trustees on October 25, 1969, and the "clarification" of May 30, 1972, were ineffective to alter the terms of the PFT Declaration of Trust. The parties agree that Floyd G. Paxton did not retain the power to amend the trust. The declaration of trust does not explicitly grant to the trustees the power to amend the trust.Paragraph NINTH of the original declaration of trust of PFT provides that upon dissolution that, "The Trust shall be proportionately and in a pro rata manner distributed to the beneficiaries." On October 25, 1969, the trustees purported to "clarify" that provision by providing that upon dissolution the trust shall be distributed exclusively to one or more charitable, 1982 Tax Ct. Memo LEXIS 285">471 religious, scientific, literary or educational organizations, as selected by the trustees, which would then qualify under the provisions of section 501(c)(3) of the Internal Revenue Code. Petitioners argue that the language which the trustees sought to change was ambiguous and the substituted language was designed to clarify the terms of the instrument to conform to the original intent of the grantor. Respondent disagrees. Petitioners contend that there are numerous "beneficiaries" of PFT; therefore, paragraph NINTH before the October 25, 1969, action of the trustees is unclear as to whom the assets should be distributed upon dissolution. The declaration of trust provides for grants and donations to educational, scientific and religious institutions and to the holders of the certificates of interest. Both the charitable organizations and the holders of the certificates of interest are, therefore, beneficiaries. The language of paragraph NINTH requiring the assets distributed upon dissolution to be pro rata and proportionate could refer only to the holders of the certificates of interest because the charitable organizations are not listed. The first preamble of the declaration 1982 Tax Ct. Memo LEXIS 285">472 of trust expresses responsibilities to friends, relatives and employees as well as charitable institutions. The holders of certificates of interest are members of the Paxton family and one employee of Kwik-Lok Indiana and his wife. Petitioners point out that paragraph FIFTH of the declaration of trust provides that "the holders of Certificates of Interest shall have no right, title or interest in or to any portion of the Trust Estate" and paragraph SIXTH provides that "[n]one of the holders of Certificates of Interest, present or future, have or possess any beneficial interest in property or assets from time to time constituting all or any portion of the Trust Estate." Such provisions appear to us to be in the nature of "spendthrift" provisions rather than provisions designed to identify the beneficiaries. Such language is frequently included in trust instruments to emphasize that the trust assets are being held in trust and the trustees in such capacity have the only interest in the assets. It is implied that the charitable organizations have no interest in the trust assets because they are not named in the declaration of trust and the trustees have sole discretion in making grants 1982 Tax Ct. Memo LEXIS 285">473 to such organizations. We conclude, therefore, that the holders of the certificates of interest are beneficiaries and the action taken by the trustees on October 25, 1969, to limit distributions in liquidation to organizations qualifying under section 501(c)(3) was not a clarification but, instead, a substantive amendment to the declaration of trust changing its terms, which they had no authority to take. Petitioners hypothesize about the forms of legal actions which various parties might institute to construe paragraph FIFTH and then conclude that the trustees have done nothing more than a court would have done in ascertaining the grantor's intent in interpreting the various provisions of the declaration of trust. The trustees cannot amend a declaration of trust when they have no power to do so even though the results of an appropriate legal action might conceivably coincide with the trustees' interpretation. We do not agree with the construction implemented by the trustees on October 25, 1969, and hold that they have attempted to amend rather than clarify and that this attempt was a nullity. On May 30, 1972, the trustees and Floyd G. Paxton executed a restatement of the declaration 1982 Tax Ct. Memo LEXIS 285">474 of trust of PFT. In this version of the declaration of trust the assets upon dissolution of the trust were to be distributed exclusively to charitable organizations. For the reasons expressed above as to the October 25, 1969, action of the trustees, we likewise hold that this change was an amendment to the declaration of trust which was beyond the power of the grantor and trustees and was, therefore, in that respect, a nullity. We agree with respondent that paragraph FIFTH of the declaration of trust of PFT which is applicable to the issues presented here is the version contained in the original declaration of trust which was executed on August 3, 1967. The May 30, 1972, version of the declaration of trust contains some other significant amendments which we hold to be ineffective. The trustees attempted to confer upon themselves the power to amend the declaration of trust. This power was never granted to them in the declaration of trust executed on August 3, 1967.In addition, when the trustees and Floyd G. Paxton adopted the restatement of the declaration of trust on May 30, 1972, they omitted the sole discretionary power of the trustees to "make any distribution of income from 1982 Tax Ct. Memo LEXIS 285">475 the operation of the Trust Estate and make any distribution of all or any portion of the assets comprising the Trust Estate for any reason to the holders of Certificates of Interest in the Trust." Because paragraph NINTH of the original declaration of trust specified that upon dissolution of the trust that its assets would be distributed proportionately and in a pro rata manner to the beneficiaries, it appears to us that interim distributions of the assets of the trust to the "holders" (plural in the original declaration of trust) would imply pro rata distributions. Otherwise, the language of paragraph NINTH requiring pro rata distribution upon liquidation could easily be circumvented by a series of partial liquidations to only one of the holders of a certificate of interest. Deleting the power to make distributions of assets of the trust to the holders contained in paragraph NINTH was a substantial change in the terms of the trust which deprived the holders of the certificates of interest to pro rata distributions of assets of the trust. Petitioners argue that Floyd G. Paxton did not retain the power to amend the trust.If not, then the May 30, 1972, amendment was made by the trustees 1982 Tax Ct. Memo LEXIS 285">476 who had no authority to amend the trust. We conclude that this change was a nullity. Petitioners point to various facts established in this proceeding which were different from those presented in the first proceeding. In the taxable year before us now, Jerre Paxton held a 9.90 percent interest in PFT. In the prior proceeding he held a 3.84 percent interest. We did not base our holding in the first proceeding upon the size of Jerre Paxton's holding in PFT and, therefore, cannot see how the change in the size of Jerre Paxton's holding should require a result different from the one we reached in the first proceeding. However, if we adopted the rationale of the Court of Appeals in the first proceeding, we would conclude that a 9.90 percent ownership was not substantial. In addition, petitioners point to the action of the trustees taken on August 4, 1967, in naming Jerre Paxton as "First Trustee," giving him sole veto power over the actions of the other trustees. Petitioners argue that such power coupled with the power to distribute all of the assets of the trust to the holders of the certificates of interest non pro rata makes his interest adverse to that of the grantor, Floyd 1982 Tax Ct. Memo LEXIS 285">477 G. Paxton. We disagree. The action by the trustees Jerre Paxton and Lorne House in naming Jerre Paxton as "First Trustee" with absolute veto power was done without any explicit authority contained in the declaration of trust. It amounted to nothing more than Lorne House's relinquishing part of his authority as a trustee. It would seem that if the trustees could grant an exclusive veto power to a single trustee without specific authority in the declaration of trust, then they could likewise withdraw such authority, and the relinquishment of powers by an acting trustee would not operate to deprive a future trustee of such power. Article FIFTH of the original declaration of trust provides that the trustees may, in their discretion, distribute any income and any or all of the assets of the trust to the holders of the certificates of interest. Petitioners argue that Jerre Paxton could distribute to himself all of the assets of the trust estate under paragraph Fifth of the declaration of trust; yet petitioners, in other parts of their argument, rely upon the May 30, 1972, version of the trust as being the governing instrument but that version contains no such provision. We find the 1982 Tax Ct. Memo LEXIS 285">478 original declaration of trust of PFT to be a very curious instrument. After considering all of the evidence in this case we conclude that the interested parties made two abortive attempts to clean it up and that the trustees' actions were mere "window dressing" to create the illusion that Jerre Paxton held an interest that was substantially adverse to that of the grantor, Floyd G. Paxton. After all of the smoke dissipates, however, we perceive the interest of Jerre Paxton in PFT to be not materially different than it was when we decided the first case. Therefore, we hold that petitioners are taxable on the income of PFT for the taxable year 1971. We turn now to the question of whether the income of IDT is taxable to the grantors. IDT was not involved in the first proceeding before us. Therefore, the doctrine of collateral estoppel is not involved in the IDT trust issue. The issue of the taxability of income from IDT to the grantors is identical with that same issue as to PFT but the similarity ends there. The issue is simply whether Jerre Paxton held a substantial interest adverse to that of the grantors. The declaration of trust of IDT differs materially from the declaration 1982 Tax Ct. Memo LEXIS 285">479 of trust of PFT. In the case of IDT the original declaration of trust granted to the trustees the unlimited power to amend the declaration of trust. The trustees had the unlimited power to distribute to any certificate holder any or all of the income or assets of the trust. Jerre Paxton was a certificate holder. On July 11, 1968, the trustees of IDT, consisting of Jerre Paxton and Lorne House, named Jerre Paxton as "First Trustee" of IDT, giving him absolute veto power over the actions of the trustees. Because the trustees of IDT were granted unlimited power to amend the declaration of trust, we hold that this veto power was valid. In short, Jerre Paxton, as trustee, had the power to distribute any or all of the income and/or assets to the grantors but he also had that same power to distribute to himself. Accordingly, if he exercised that power in favor of the grantors it deprived him of what he could distribute to himself.About the only argument which respondent offers to rebut the foregoing is that Jerre Paxton was a trustee and he could not exercise the power to amend or the power to distribute to himself except in his fiduciary capacity. We see little merit in this contention. 1982 Tax Ct. Memo LEXIS 285">480 As trustee he had the power to distribute to himself not because he was a trustee but because he held certificates of interest in the trust, as did the grantors. There is nothing novel about a trust granting a trustee to distribute to himself as beneficiary. Petitioners rely upon Huffman v. Commissioner,39 B.T.A. 880">39 B.T.A. 880 (1939), and we agree with petitioners. The power to amend the trust by Jerre Paxton as trustee can be exercised to favor Jerre Paxton as a holder of a certificate of interest. Jerre Paxton clearly held a substantial interest in IDT adverse to that of the grantors. Accordingly, the income of IDT is not taxable to the grantors. Decisions will be entered under Rule 155.Footnotes1. Cases of the following petitioners are consolidated herewith: Grace D. Paxton, docket No. 4644-76; International Development Trust, Jerre Paxton, Fiduciary, docket No. 4645-76; Kwik-Lok Corp. of Yakima, docket No. 4647-76; and Kwik-Lok Corp. of Indiana, docket No. 4648-76.↩2. On brief, respondent concedes that the two corporations herein involved made a timely, valid election to treat any dividends paid by Kwik-Lok Corp. of Indiana to Kwik-Lok Corp. of Indiana in the taxable years ending in 1970 - 1972 as "qualifying dividends" under sec. 243(b), I.R.C. 1954↩.3. Prior development or knowledge↩. Limited capability↩4. A standard formula for converting income into the present value of the right to receive such income.↩5. All section references are to the Internal Revenue Code of 1954, as amended.↩1. An employee of Kwik-Lok Yakima. ↩2. An attorney engaged in the practice of law in the State of Washington and a member of the firm retained by Kwik-Lok Yakima for some of its legal work.↩6. For an interesting follow-up, see Thomas Flexible Coupling Co. v. Commissioner,14 T.C. 802">14 T.C. 802 (1950), affd. 198 F.2d 350">198 F.2d 350↩ (3d Cir. 1952).*. Limited capability↩7. This amount was obtained by dividing the gross sales of closures with labels ($149,278.54) by the gross sales price per unit ($4.50), and adding such amount ($149,278.54/$4.50 = 33,173 units) to the amount obtained by dividing the gross sales of striploks ($1,772,917.90) by the gross sales price per unit ($ .95): $1,772,917.90/$ .95 = 1,866,229 units. ↩8. ↩Gross profit per unit.60 Times number of units474,850.00 Gross profit$284,910.00 Less Royalty payable under License Agreementof April 30, 1965 [.075 X (474,850 X salesprice of $ .95)](33,833.00)NET PROFIT$251,077.00 9. ↩Gross profit per unit$ 3.175 Times number of units474,850.000 Gross profit$1,507,649.000 Less Royalty payable under License Agreementof April 30, 1965--gross sales equal$2,136,825: (474,850 X sales price of $4.50).075 of first $1 million$75,000.060 of second $1 million60,000.050 of $136,8256,841(141,841.000)Less Royalty payable per year under February 21,1969, sale of closure-with-label patents(12 months X $28,901)(346,812.000)NET PROFIT$1,018,996.000	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620077/	MICHAEL D. FOREMAN AND KAREN FOREMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentForeman v. CommissionerDocket No. 11803-77.United States Tax CourtT.C. Memo 1983-130; 1983 Tax Ct. Memo LEXIS 650; 45 T.C.M. 957; T.C.M. (RIA) 83130; March 15, 1983. 1983 Tax Ct. Memo LEXIS 650">650 Alan R. Harter, for the petitioners. Ronald D. Dalrymple and Elizabeth A. Sullivan, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Francis J. Cantrel for the purpose of conducting the hearing and ruling 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. 11983 Tax Ct. Memo LEXIS 650">651 OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is before the Court on respondent's Motion for Summary Judgment filed on January 11, 1983, pursuant to Rule 121, Tax Court Rules of Practice and Procedure.2Respondent, in his notice of deficiency issued to petitioners on September 14, 1977 determined a deficiency in petitioners' Federal income tax for the taxable calendar years 1972 and 1973 in the respective amounts of $2,239.98 and $2,653.75. The adjustments determined by respondent in his deficiency notice are for unreported tip ("toke") income received by petitioner, Michael D. Foreman (hereinafter called petitioner) in 1972 and 1973 in the amounts of $10,258.00 and $11,353.60, respectively. Petitioners timely filed their petition on November 29, 1977 and respondent filed his answer thereto on January 19, 1978. Thus, the pleadings are closed. Respondent's motion was filed more than 30 days after the pleadings were closed. See Rules 34, 36, 38, and 121. When respondent's good faith attempts to make arrangements with petitioners' counsel for informal1983 Tax Ct. Memo LEXIS 650">652 consultations or communications proved unsuccessful, 3 he, not desiring to rest on the pleadings alone, on July 16, 1982, served a 43 paragraph Request for Admissions on petitioners' counsel. 4 Petitioners' counsel at no time served written answers upon respondent nor did he file an original of such answers with the Court. Rule 90(c). Hence, each matter contained in respondent's request for admissions is deemed admitted and conclusively established. 51983 Tax Ct. Memo LEXIS 650">653 The following findings of fact are based upon the record as a whole, the allegations of respondent's answer admitting allegations in the petition, the matters deemed admitted with respect to respondent's request for admissions, and exhibits attached to respondent's motion (which include three affidavits). FINDINGS OF FACT Petitioners resided at 7265 West Coley Avenue, Las Vegas, Nevada on the date their petition was filed. They filed joint 1972 and 1973 Federal income tax returns with the Internal Revenue Service. During 1972 and 1973 petitioner was employed as a blackjack dealer at the Sands Hotel and Casino (hereinafter sometimes referred to as "the Casino").His normal work shift constituted 8 hours per day and he was only required to work, by his employer, 5 days out of any consecutive 7 day period. His normal days off during this period were Wednesdays and Thursdays. In the course of his employment petitioner received tokes from patrons of the Casino. In accordance with house rules these tokes were routinely pooled by petitioner and other blackjack dealers, roulette dealers, and Big Wheel dealers, by placing said tokes in a common toke box before leaving the area1983 Tax Ct. Memo LEXIS 650">654 of the gaming tables on a break or at the end of a shift. The total amount so pooled was divided at the end of each 24-hour period among the dealers on duty during that 24-hour period. These pooled tokes were divided on the basis of a full share to a dealer for each 8 hour shift. Dealers generally received their share of the pooled tokes in an envelope when they returned to work at the beginning of their next shift. Under house rules some provision was made for allowing a share of the tokes for dealers who were unable to work because of illness. During 1972 and 1973 petitioner participated in and received his equal share of such pooled tokes. Petitioner, in 1972 and 1973 did not maintain a written diary, log, worksheet, or other record, made at or near the time he received tokes, which set forth the date, amount of tokes received and amounts he may have expended as gratuities to co-workers. Players (patrons) at the Casino did from time to time place bets on petitioner's behalf. Such bets remained under the control of the patron until the winnings, if any, were actually given to petitioner. The patron was free to take back the winning bet if he so desired. The Nevada State1983 Tax Ct. Memo LEXIS 650">655 Gaming Authority regards a bet made by a patron for petitioner as a wager made by and on behalf of the patron. Petitioner was forbidden from gambling or placing bets at the table he was working. Under house rules any winning bets received by petitioner were pooled and distributed. Neither petitioner nor the toke pool was required to reimburse a patron who had placed a losing bet on petitioner's behalf. In both 1972 and 1973 petitioner gambled in his individual and private capacity during his off duty time. He maintained no records which accurately reflected the date, amount of bets and amounts won and lost. Petitioner was paid a salary by his employer in both 1972 and 1973. The salary was in addition to the tokes he received in those years. In 1972 he was paid a salary for 246 8-hour shifts. He was paid for 8-hour shifts when he did not actually work, such shifts did not exceed 26 for 1972. 6 During 1973 he was paid a salary by his employer for 239 8-hour shifts, which included some shifts when he did not actually work, such shifts did not exceed 19 for 1973. 7 Petitioners reported the salary petitioner received from his employer on their 1972 and 1973 returns. 1983 Tax Ct. Memo LEXIS 650">656 Petitioner is required by law to report the toke income he receives to his employer. For 1972 and 1973 he reported to his employer that he received toke income in the respective amounts of $1,545 and $2,227. 8 The amounts so reported to his employer and reported on the 1972 and 1973 joint returns were based on estimates and not upon any written record. No additional toke income was reported on those returns. The amount of toke income received by petitioner in 1972 averaged not less than $53.65 for each 8-hour shift he actually worked and for 1973 it averaged not less than $61.73 for each 8-hour shift actually worked. Petitioner received additional toke income in 1972 and 1973 in the respective amounts of $10,258.00 and $11,353.60, which was not reported on the joint Federal income tax returns filed for those years. Petitioner does not have in his possession or under his control any documentary evidence to support the allegations in his petition that respondent's determinations are arbitrary. OPINION It is well settled that tokes are not gifts but taxable1983 Tax Ct. Memo LEXIS 650">657 income which must be included in a taxpayer's gross income. Olk v. United States,536 F.2d 876">536 F.2d 876 (9th Cir. 1976); 9Parker v. Commissioner,T.C. Memo. 1983-87; Kurimai v. Commissioner,T.C. Memo. 1983-86; Parker v. Commissioner,T.C. Memo. 1983-85; Randolph v. Commissioner,T.C. Memo. 1983-84; Owens v. Commissioner,T.C. Memo. 1983-30; Williams v. Commissioner,T.C. Memo. 1980-494. 10 It is conclusively established in this record that petitioner received unreported toke income in 1972 and 1973 in the respective amounts of $10,258.00 and $11,353.60. Petitioners' contention1983 Tax Ct. Memo LEXIS 650">658 that respondent's determinations are arbitrary is baseless. Here, petitioner kept no records which would accurately reflect the toke income which he received in 1972 and 1973. In such circumstance, the Commissioner may, in his notice of deficiency, make a determination based upon any reasonable method where a taxpayer refuses to produce his records or where those records are inadequately maintained. Holland v. United States,348 U.S. 121">348 U.S. 121 (1954); Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 301 F.2d 484">486 (5th Cir. 1962); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 65 T.C. 68">82 (1975), affd. in an unpublished opinion 559 F.2d 1207">559 F.2d 1207 (3rd Cir. 1977); Giddio v. Commissioner,54 T.C. 1530">54 T.C. 1530 (1970); Meneguzzo v. Commissioner,43 T.C. 824">43 T.C. 824 (1965). 11Respondent's determinations1983 Tax Ct. Memo LEXIS 650">659 herein are presumptively correct and the burden is on petitioners to establish that they are incorrect or arbitrary. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Avery v. Commissioner,574 F.2d 467">574 F.2d 467, 574 F.2d 467">468 (9th Cir. 1978); Rule 142(a). Petitioners here totally failed to show that those determinations are incorrect or arbitrary. Rule 121(b) provides that a motion for summary judgment shall be granted if the "pleadings * * * admissions and any other acceptable materials, together with the affidavits * * * show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. * * ". [Emphasis supplied.] Here, petitioners have refused to submit any information which contradicts respondent's factual determinations. On the basis of the pleadings, those matters deemed admitted in respondent's request for admissions, the exhibits attached to respondent's motion (which include copies of the 1972 and 1973 returns and a full copy of the notice of deficiency) and respondents' affidavits, respondent has amply demonstrated to our satisfaction that there is no genuine issue as to any material fact present1983 Tax Ct. Memo LEXIS 650">660 in this record and, thus, that respondent is entitled to a decision as a matter of law. Hence, summary judgment is a proper procedure for disposition of this case. Respondent's motion for summary judgment will be granted. An appropriate order and decision will be entered.Footnotes1. Since this is a pre-trial 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 March 2, 1983. No appearance was made by or on behalf of petitioners nor was a response to respondent's motion filed, albeit a copy thereof and a copy of respondents' affidavits together with a copy of the Court's Notice of Hearing were served on petitioners' counsel by the Court on January 13, 1983. See Rule 50(c), Tax Court Rules of Practice and Procedure.↩2. All rule references are to the Tax Court Rules of Practice and Procedure.↩3. See Odend'hal v. Commissioner,75 T.C. 400">75 T.C. 400↩ (1980); Rule 90(a). 4. The original of that request was filed with the Court on July 19, 1982. Rule 90(b). ↩5. See Freedson v. Commissioner,65 T.C. 333">65 T.C. 333, 65 T.C. 333">335 (1975), affd. 565 F.2d 954">565 F.2d 954 (5th Cir. 1978); Rules 90(c) and (e). See also McKinnon v. Commissioner,T.C. Memo. 1982-229; Knudson v. Commissioner,T.C. Memo. 1982-179; Oaks v. Commissioner,T.C. Memo. 1981-605; Wallace v. Commissioner,T.C. Memo. 1981-274; Myers v. Commissioner,T.C. Memo. 1980-549; Edelson v. Commissioner,T.C. Memo. 1979-431; Saba v. Commissioner,T.C. Memo. 1979-397; Bassett v. Commissioner,T.C. Memo. 1979-14↩.6. The 26 shifts were not included in respondent's determination of additional toke income received by petitioner in 1972. ↩7. The 19 shifts were likewise not included in respondent's determination of additional toke income received by petitioner in 1973.↩8. Said amounts were reflected on Forms W-2 issued by petitioner's employer, and were included in gross wages.↩9. We observe that venue on appeal of this case would lie in the United States Court of Appeals for the Ninth Circuit. ↩10. It has been deemed admitted that petitioners have no knowledge of any material facts which would distinguish this case from those of petitioners, similarly situated, in Williams v. Commissioner,T.C. Memo. 1980-494. See also, Foltz v. Commissioner,T.C. Memo. 1982-719 and Malone v. Commissioner,T.C. Memo. 1982-325↩.11. The method used here by respondent was clearly reasonable. See Williams v. Commissioner,supra,↩ where on facts virtually indistinguishable from those we consider herein, this Court stated--"We conclude that 'all tokes' received by petitioners, whether directly from the player or through a winning bet, are taxable gratuities".	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620078/	Ashton C. Jones, Jr. v. Commissioner. Jack R. Jones and Helen M. Jones v. Commissioner.Jones v. CommissionerDocket Nos. 110373, 110374.United States Tax Court1943 Tax Ct. Memo LEXIS 395; 1 T.C.M. 816; T.C.M. (RIA) 43141; March 22, 19431943 Tax Ct. Memo LEXIS 395">395 John C. Ristine, Esq., 920 Southern Bldg., Washington, D.C., for the petitioners. E. M. Woolf, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: These consolidated proceedings were brought for a redetermination of income tax deficiencies for the year 1939 as follows: Ashton C. Jones, Jr$261.49Jack R. Jones and Helen M. Jones28.80Determination of the issue is dependent upon whether certain real estate sold during the taxable year was held by Ashton C. and Jack R. Jones primarily for sale to customers in the ordinary course of their trade or business within the meaning of section 117(a) of the Internal Revenue Code. Findings of Fact The stipulated facts are found; facts hereinafter appearing which are not from the stipulation are facts otherwise found from the record. Jack R. Jones and Ashton C. Jones, Jr. are brothers. For convenience, they will hereafter be referred to as "petitioners." Helen M. Jones is the wife of Jack R. Jones. In 1937 petitioners entered into an oral joint venture or partnership designated as Jones and Jones. For the year in question, the partnership and the individuals kept their books and made their Federal1943 Tax Ct. Memo LEXIS 395">396 income tax returns, which were filed with the collector of internal revenue at Richmond, Virginia, on a cash basis. The property which was the original subject matter of the joint venture or partnership was improved real property located on North Wilson Boulevard in Arlington County, Virginia. Each brother contributed equal parcels of land, on each of which was a house. Jack had acquired his by a gift from his father and Ashton had purchased his from his father. The total area of these adjoining properties was 27,741 square feet. In the same year the partnership borrowed $5,000 from the First National Bank of Alexandria, Virginia, which it used to purchase an adjoining piece of property consisting of several lots and improved with a house. These three properties were rented during the period 1937 to the date of their disposition in 1939. The foregoing transactions were the only ones involving the acquisition or sale of real estate by the partnership during 1937. In 1938 the partnership acquired a two-thirds undivided interest in property on North Glebe Road in Arlington, and the partnership sold one of the houses and 10,198 square feet of the North Wilson Boulevard property. These1943 Tax Ct. Memo LEXIS 395">397 were the only transactions of the partnership involving purchase or sale of real estate in 1938. In 1939 the partnership acquired the remaining one-third interest in the Glebe Road property. This had been improved with a store which was rented in that year. In 1939 the partnership sold 3,064 square feet and 3,885 square feet of thehe North Wilson Boulevard property. The selling price of the former was $3,064, resulting in a gain of $1,871.52. The selling price of the latter was $3,885, resulting in a gain of $2,228.23. Also in 1939 the partnership acquired a lot in Lee Heights for $584.62. The foregoing were the only transactions of the partnership in 1939 involving sale or acquisition of real estate. During the years 1937 to 1939, inclusive, Jack and Ashton were full-time employees on a salary basis of the firm of Geo. H. Rucker Co. of which their father was a principal member. The partnershipdid not maintain any separate offices to conduct its transactions. In 1937 Ashton was 28 years old and Jack was 23. They both held licenses as real estate salesmen; Geo. H. Rucker Co. had a broker's license. The Geo. H. Rucker Co. was engaged in the business of real estate, loans, and insurance. 1943 Tax Ct. Memo LEXIS 395">398 Ashton and Jack devoted practically all of their working time to the Rucker Company. The partnership took but little time; its books were kept by Ashton in the evening and on Sunday afternoons. One of the three properties acquired by the partnership in 1937 was corner property and had a frontage on a proposed Fairfax Drive as well as on Wilson Boulevard. The other properties had a rear "frontage" on the proposed Fairfax Drive. The purchase of the adjoining property with the $5,000 loan in 1937 gave the partnership the entire block of property, with the exception of one corner which could not be acquired. At the time of acquisition petitioners thought that the location was a "key" one with great possibilities for future value and income production; that it was good property for a long-term investment; that Fairfax Drive would be improved, and that its improvement would result in a sharp rise in value of the properties in question; that the business area of Clarendon was moving in the direction of the property; that it was a bit too early to do so, but that they could build stores on the property and keep it for investment; that they might obtain their future financial independence1943 Tax Ct. Memo LEXIS 395">399 by renting such stores and building up the assets of the partnership. The primary purpose in acquiring the three adjoining properties in 1937 was for investment. The sale of part of the Wilson Boulevard property in 1938 was made after a broker approached petitioners. Petitioners had not actively tried to sell the property. They never made active efforts to sell any of the partnership property or discuss its sale. It was represented that stores would be built. The sale in question was in 1939 and was of parts of the Wilson Boulevard property. It was also the result of offers presented by the purchaser, and it was also represented that a store would be constructed on the property, which petitioners thought would be to their advantage. No provision covering the construction of a store was put into the contract. Petitioners were satisfied to sell without obligating the purchaser to build stores. They took his statement in good faith, knowing that the purchaser might change his mind or be prevented from building. Petitioners' reason for making the sale was the partnership's need of money to hold the rest of its property, and the above-mentioned representation that a store would be built. 1943 Tax Ct. Memo LEXIS 395">400 In 1941 the purchaser of one of the parcels built some stores on the property. No stores were built by the other purchaser. Petitioners foresaw as early as 1937 that they would probably need additional funds. They knew that they could have obtained whatever money was necessary to finance the property from their father. They were not at the point of losing the property in 1939, and they could have carried it. The partnership was motivated in selling the property sold in 1939 because of the price offered. They would have sold it from the beginning if they had been offered a sufficiently attractive price. The receipt of the offer in 1939 was not particularly surprising. The partnership in 1941 built a store on their remaining Wilson Boulevard property at a cost of about $190,000, which they leased to Sears, Roebuck for 15 years. The partnership return for 1939 shows income of $186.34 from interest and $3,457.16 from rents; and deductions for taxes, interest, repairs, depreciation, and "other deductions" aggregating $3,213.33, resulting in ordinary net income of $430.17. On their respective returns petitioners reported the gain on the sale of property in 1939 as capital gain. Respondent, 1943 Tax Ct. Memo LEXIS 395">401 in determining the deficiency, treated it as ordinary gain. Opinion The profit which petitioners derived from the sale of real estate is a capital gain within the meaning of section 117(a), Internal Revenue Code, even though they were engaged in the real estate business, if the property in question was not held primarily for sale. In the light of the record it might be difficult to hold that petitioners through their partnership were not engaged in the real estate business. They pooled their interests in a common venture with the purpose of making profits, and filed a partnership return of the income so received. In that return, the line opposite "Business or Profession" is left blank, but if it had been filled in, it is difficult to see how anything other than "Real Estate" or some similar term would properly be employed. And the testimony shows that their purpose was to build up the enterprise so that aside from any other interests it might be the source of their future financial independence. As the case is presented, however, we do not reach that question for respondent concedes in his brief that "the testimony shows that the primary purpose of petitioners in acquiring this1943 Tax Ct. Memo LEXIS 395">402 property may have been for investment." It is not clear whether the word "primary" is intended to mean "original" or "principal," but at any rate it is the word the statute employs. The sole argument on this branch of the case is that notwithstanding such a "primary purpose," there was a subsequent change in the motivation with respect to the property which was sold. We may accept the assertion that since the legislation uses the term "held," it is material to ascertain the intention governing the parties in their continued ownership, as well as in the original purchase. Richards v. Commissioner (C.C.A., 9th Cir.), 81 Fed. (2d) 369. But there is no evidence here save the sale itself which indicates a change in the attitude of the owners or their purpose in holding the property. No efforts were made at any time to sell the property or list it for sale. Its sale was not discussed. Apparently, no price was set. The initiative came from the prospective buyer, and we think it may fairly be said that, as far as the record goes, it was his intention to purchase, rather than that of petitioners to sell, which resulted in the ultimate sale. And the mere fact1943 Tax Ct. Memo LEXIS 395">403 of sale cannot be sufficient to demonstrate the purpose of the prior holding, for if this were so, there never could be a sale of a capital asset by a business enterprise. Once it is conceded that the primary purpose was to hold the property for investment, the record requires the conclusion that the situation was no different when it was sold. Cases dealing with real estate subdivisions are clearly beside the mark. E.g. Neils Schultz, 44 B.T.A. 146">44 B.T.A. 146 (appeal dismissed, per curiam (C.C.A., 9th Cir.), 123 Fed. (2d) 1020); A. R. Calvelli, 43 B.T.A. 6">43 B.T.A. 6; Julius Goodman, 40 B.T.A. 22">40 B.T.A. 22. Property involved in such activity is ordinarily held primarily for sale. The question then arises whether there is a sufficient frequency and continuity to constitute a business. In some instances that characteristic is found to be lacking and even where the primary intention to sell is inescapable, the property may yet be held to constitute a capital asset. E.g. Phipps, et al., Commissioner (C.C.A., 2nd Cir.), 54 Fed. (2d) 469. Here we have the converse1943 Tax Ct. Memo LEXIS 395">404 of that class of situation, where even though the transaction occurred in the operation of a business, the original and principal investment purpose precludes any finding that the property was held primarily for sale. Since the real estate in question falls within the statutory definition of capital assets, the profit resulting from its sale was properly reported as capital gain. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620080/	LEON E. BALDWIN and SANDRA E. BALDWIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBaldwin v. CommissionerDocket No. 548-75.United States Tax CourtT.C. Memo 1977-242; 1977 Tax Ct. Memo LEXIS 200; 36 T.C.M. 995; T.C.M. (RIA) 770242; July 27, 1977 Filed 1977 Tax Ct. Memo LEXIS 200">200 Petitioners, husband and wife, deducted the full amount of their child care expenses as an ordinary and necessary business expense. Held: Petitioners' child care expenses are only deductible under section 214, I.R.C. 1954, as amended. The limitations in section 214 are not violative of petitioners' constitutional rights under the Fifth Amendment. Leon E. Baldwin, pro se. Edward B. Simpson, for the respondent. IRWINMEMORANDUM OPINION IRWIN, Judge: Respondent determined a deficiency of $331.47 in the income tax of petitioners for the taxable year 1973. The issue for our determination is whether the $1,504.70 expended1977 Tax Ct. Memo LEXIS 200">201 by petitioners for the care of their two children outside their household is an allowable deduction under the Internal Revenue Code of 1954. 1 Respondent concedes that petitioners are entitled to deductions in part for two months. All of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners, Leon E. Baldwin and Sandra E. Baldwin, husband and wife, had their legal residence in Concord, Calif., at the time of filing their petition. During the calendar year 1973, Leon Baldwin was a social worker for the county of Contra Costa, Calif. Sandra Baldwin worked for the county of Contra Costa as an eligibility work supervisor. Petitioners reported an adjusted gross income of $21,536.87 for the year 1973 and deducted $1,504.70 for expenses incurred in the care of their two children--Lawrence, 8, and Leslie, 1. In his statutory notice of deficiency, the Commissioner disallowed in full petitioners' deduction on the ground petitioners failed to comply with the $18,0001977 Tax Ct. Memo LEXIS 200">202 income limitation of section 214(d). Petitioners contest this deficiency and, in addition, claim an overpayment of $1,215.85. The monthly child care expenses were stipulated by the parties as follows: January$130.00August$ 84.00February115.00September119.00March140.00October91.00April178.00November129.70May150.00December109.00June147.00July112.00Total$1,504.70The issue in question is whether petitioners are entitled to deduct in full the $1,504.70 expended for the care of their two children. Petitioners contend that the cost of child care which arises in households where both parents work is a business expense incurred in the course of carrying on a trade or business, and that to limit the deduction is "illegal, discriminatory, and unconstitutional." Their argument is not directed against the Internal Revenue Service's method of computation under section 214 but rather against the section's applicability. Petitioners also contend that section 214 is unconstitutional because it discriminates against women whose employment (more than their male counterparts') creates the need for child care. By denying1977 Tax Ct. Memo LEXIS 200">203 a business deduction for child care expenses, the cost of child care is an added cost of employment, thereby reducing the woman's income. Respondent argues that dependent care expenses by working individuals are not deductible as business expenses under section 162 or as expenses incurred for the production of income under section 212, but are personal expenses allowable only to the extent provided by section 214. We agree with respondent. Respondent does not address the issue whether section 214 discriminates against women. Prior to the enactment of section 214, expenses incurred for child care were nondeductible. Such expenses were considered personal and, therefore, nondeductible even where they were necessary for one to gain employment and remain employed. O'Connor v. Commissioner,6 T.C. 323">6 T.C. 323 (1946); Smith v. Commissioner,40 B.T.A. 1038">40 B.T.A. 1038 (1939). Differentiating between personal expenses and necessary business expenses is frequently one of degree rather than kind. Nammack v. Commissioner,56 T.C. 1379">56 T.C. 1379, 56 T.C. 1379">1383 (1971), affd. per curiam 459 F.2d 1045 (2d Cir. 1972), cert. denied 409 U.S. 991">409 U.S. 991 (1972);1977 Tax Ct. Memo LEXIS 200">204 and classifying expenses is within the legislative powers of Congress as to both kind and degree. New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 292 U.S. 435">440 (1934); Helvering v. Independent Life Ins. Co.,292 U.S. 371">292 U.S. 371, 292 U.S. 371">381 (1934); Child v. United States,540 F.2d 579, 588 (2d Cir. 1976); Crowe v. Commissioner,396 F.2d 766 (8th Cir. 1968). As to kind, Congress has determined that certain child care expenses qualify as personal deductions under section 214. As to degree, Congress has provided a limitation in section 214(b)(2)(B) and (d) for all taxpayers with additional limitations for those taxpayers whose annual adjusted gross income exceeds $18,000.Petitioners argue that California law (Cal. Welf. & Inst. Code, § 600 et seq. (West 1972)) compels them to provide child care while they are at work and thus transforms their child care expenses into business expenses. However, these laws were enacted for their children's health and welfare and not to promote petitioners' business. We believe the relationship between petitioners' employment and a law the purpose of which is to protect children1977 Tax Ct. Memo LEXIS 200">205 is irrelevant. The fact that such a law compels petitioners to incur child care expenses does not change the personal nature of the expenses. In Hicks v. Commissioner,47 T.C. 71">47 T.C. 71, 47 T.C. 71">75 (1966), the taxpayer sought to deduct as a business expense the cost of transportation to a selective service physical examination compelled by law. We held that the mere fact the taxpayer was inconvenienced, because his business required him to be elsewhere, did not change the personal nature of the expenditure. Further, it is not sufficient for a taxpayer to argue an expense would not have been incurred but for his engaging in a trade or business. The taxpayer must bear the burden of proving the nature of the expense is not personal or otherwise of a nondeductible nature. This petitioners have failed to show. Petitioners present only another example of expenditures made to enable a taxpayer to carry on a trade or business but which are not incurred in the conduct of that trade or business. Kroll v. Commissioner,49 T.C. 557">49 T.C. 557, 49 T.C. 557">566 (1968). Petitioners urge us to declare section 214 unconstitutional because it discriminates against women. They argue that it is1977 Tax Ct. Memo LEXIS 200">206 usually the mother's employment which necessitates child care expenses. However, petitioners have failed to prove that arbitrary or invidious discrimination exists. Moreover, section 214 does not necessarily violate working women's rights simply because it might impose a particular burden on them. As we noted in 56 T.C. 1379">Nammack v. Commissioner, supra at p. 1384: [In] view of the broad range of financial, economic, and property relationships affected by the income tax provisions of the Internal Revenue Code, and in view of the fact that men and women sometimes perform different roles in our society, it is not unusual for particular applications of those provisions to affect members of one sex more than members of the other. * Further, petitioners filed a joint income tax return for 1973. Therefore, their ineligibility to qualify for a greater deduction is mutually disadvantageous and not directed solely against Mrs. Baldwin. The equitable arguments raised by petitioners carry some merit based on pragmatic economic considerations. But the law in this area is expressly provided in section 214. Arguments urging the broadening of a tax deduction beyond1977 Tax Ct. Memo LEXIS 200">207 its plain meaning to avoid undesired results are more properly addressed to Congress than to the courts. Helvering v. Ohio Leather Co.,317 U.S. 102">317 U.S. 102, 317 U.S. 102">110 (1942). Respondent has determined that the limitation under section 214(d) is $147.36 and he, therefore, concedes that petitioner is entitled to deduct $33.28 for the months of April and May. Decision will be entered under Rule 155. Footnotes1. All statutory references hereafter refer to the Internal Revenue Code of 1954 as in effect during the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620082/	ELMER E. WILLIAMS, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Williams v. CommissionerDocket No. 10476.United States Board of Tax Appeals14 B.T.A. 1149; 1929 BTA LEXIS 2982; January 10, 1929, Promulgated 1929 BTA LEXIS 2982">2982 The Bank of Kampsville, Bank of Richwoods, and Bank of Brussels were not associations during the years 1919 and 1920 within the meaning of the Revenue Act of 1918, but were partnerships, the income of which was taxable to the persons comprising the partnerships. John K. Laird, Esq., and B. L. Jennings, Esq., for the petitioner. Alva C. Baird, Esq., for the respondent. MARQUETTE 14 B.T.A. 1149">1149 This proceeding is for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the total amount of $6,388.45, which the respondent has asserted against the petitioner as "Trustee for the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels." FINDINGS OF FACT. The petitioner is an individual residing at Hardin, Ill. During the year 1898 and until some time subsequent to 1922, he was cashier and a member of the board of directors of the Bank of Calhoun County at Hardin, and since the latter date has been vice president of that bank. 14 B.T.A. 1149">1150 The Bank of Calhoun County was organized in the year 1898 under the banking laws of the State of Illinois, with a capital stock of $25,000, divided into 250 shares1929 BTA LEXIS 2982">2983 of the par value of $100 each. Under its charter it could not legally conduct any branch banks. The nearby towns of Kampsville, Batchtown and Brussels, also located in Calhoun County, Illinois, were not considered sufficiently large to warrant the establishment of incorporated banks therein, but in order to keep other banks from securing a foothold in the community it was to the interests of the Bank of Calhoun County that these communities be provided with satisfactory banking facilities controlled by persons closely connected with the Bank of Calhoun County. Prior to the year 1908 the Bank of Calhoun County was the only banking institution in that county. The board of directors of the bank consisted of eight men. In 1907, or in the early part of 1908, Frank A. Whiteside, David D. Pierson and Stuart E. Pierson, who were members of the board of directors of the Bank of Calhoun County and who owned 64.8 per cent of its capital stock (Whiteside owning 100 shares, David D. Pierson owning 50 shares, and Stuart E. Pierson owning 32 shares) learned that outside interests were contemplating the establishment of a bank at Brussels. They thereupon determined and agreed among themselves1929 BTA LEXIS 2982">2984 to establish private banks at Kampsville, Batchtown, and Brussels. Thereupon they caused to be organized three safe-deposit companies, one in each of the towns named, and erected buildings suitable for banking quarters. Each stockholder of the safe-deposit companies was allowed to purchase an equal amount of the capital stock of the Bank of Calhoun County, and in order to permit this to be done the capital stock of the Bank of Calhoun County was increased from 250 shares of the par value of $100 each to 500 shares of the par value of $100 each. After this increase the holdings of Frank A. Whiteside were 150 shares, or 30 per cent; the holdings of David D. Pierson were 155 shares, or 31 per cent, and the holdings of Stuart E. Pierson were 52 shares, or 6.4 per cent. The principal stockholders, or controlling interests, of the three safe-deposit companies were not the same, as the purpose was to have these companies controlled by residents of the towns in which they were located. Upon the completion of the buildings by the safedeposit companies, leases were executed to individuals designated by Frank A. Whiteside. The petitioner was not designated in any way, either as lessee or1929 BTA LEXIS 2982">2985 assignee, in any of these leases. The Bank of Calhoun County then advanced $5,000 each on three notes signed by the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, and guaranteed by Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson to be used in establishing banks in the towns of Kampsville, Batchtown, and Brussels, it being understood that the 14 B.T.A. 1149">1151 makers of the notes had no legal existence. The petitioner was thereupon employed by Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson to secure cashiers and bookkeepers, receive the three $5,000 advances from the Bank of Calhoun County, occupy the buildings erected by the three safe-deposit companies, and conduct banks therein to be known respectively as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, and to act as manager thereof. There was an oral understanding from the beginning of the enterprise that the operations were under the control of Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson, and reports of the conduct and operations of the enterprises were regularly made to them, also instructions were given by them to the petitioner from time to time. At the time1929 BTA LEXIS 2982">2986 these banks were started Whiteside and the two Piersons agreed orally among themselves that the rental of the buildings, salaries, operating expenses, and the advances from the Bank of Calhoun County, were to be paid or repaid from earnings, if any, but that the earnings in excess of the amounts required for those purposes should be accumulated until such time as the three banks should be dissolved or cease doing business, and that the accumulated earnings should be distributed among the then stockholders of the Bank of Calhoun County. This plan or understanding agreed upon by Whiteside and the two Piersons was not communicated to the other stockholders of the Bank of Calhoun County. Under a constitutional provision of the State of Illinois, all private banks were compelled to cease business as such on the 31st day of December, 1920. This provision required the incorporation of State Banks to succeed the banks which from the year 1908 to the close of 1920 had been operated as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels. Thereupon the petitioner, pursuant to orders and instructions given him by Frank A. Whiteside and Stuart E. Pierson, David D. Pierson being1929 BTA LEXIS 2982">2987 then deceased, proceeded to liquidate the three banks named. The net proceeds from the liquidation, after paying all liabilities, were paid to the then stockholders of the Bank of Calhoun County, pro rata according to their holdings in that bank in December, 1920, and in the early part of 1921. These distributions comprised all of the net profits from the operations of the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels since their organization. The three banks above named were operated at all times as separate enterprises and were known to the trade and public respectively as "Bank of Kampsville," "Bank of Richwoods," and "Bank of Brussels." They issued no stock certificates or other evidences of ownership; they had no boards of directors and no officers, but were operated by the petitioner 14 B.T.A. 1149">1152 under and pursuant to directions given him by Whiteside and the Piersons. For the year 1919 the Bank of Brussels filed an income-tax return on a partnership form. It was sworn to by the assistant cashier, George Gebben. Under "Schedule C, Members' Shares of Income," the following appears: D. D. Pierson15 @ 100Stuart E. Pierson15 @ 100F. A. Whiteside15 @ 100Elmer E. Williams5 @ 1001929 BTA LEXIS 2982">2988 For the year 1920 the Bank of Kampsville, Blank of Richwoods, and Bank of Brussels, filed returns on a partnership form, sworn to by Elmer E. Williams, manager. Under "Schedule C" the following appears in each return: Elmer E. Williams, Trustee for the stockholders of the Bank of Calhoun County, Hardin, Ill., See attached statement All of net profits. The respondent, upon audit of the returns, determined that each of the banks named was an association taxable as a corporation; that they were affiliated, and that there is a deficiency in tax for the years 1919 and 1920 in the total amount of $6,388.45. OPINION. MARQUETTE: The question raised by this proceeding is, What were the nature and status of the three unincorporated banks known respectively as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels? The respondent has determined that they were associations and therefore taxable as corporations under the Revenue Act of 1918, and that they were affiliated. The petitioner contends that they were in fact partnerships composed of Whiteside and the two Piersons, and that the net profits therefrom should have been taxed as income to the members of the partnership. 1929 BTA LEXIS 2982">2989 The record is not clear as to the ground on which the respondent has asserted the tax against the petitioner. We are satisfied from the evidence that the three institutions in question were partnerships. They had no legal existence separate and apart from Whiteside and the Piersons who created them. Whiteside and the Piersons conceived and organized the enterprises, furnished the capital therefor, and were liable for the losses, if any occurred, and they were clearly entitled to retain the profits if they had so desired. All the essentials of a partnership were present. The fact that they agreed among themselves to divide the accumulated earnings at the date of dissolution among the then stockholders of the Bank of Calhoun County is not, in our opinion, of material significance. If the stockholders of the Bank of Calhoun County ever acquired any enforceable interest in the profits of the three 14 B.T.A. 1149">1153 private banks it was not until after the profits had been earned. The petitioner's contention that the three banks were partnerships must be sustained. The courts have held, however, that a business organization may be a partnership under a state law and yet be taxable1929 BTA LEXIS 2982">2990 as an association under the Revenue Acts of the United States. . We must therefore inquire whether the banks in question were associations within the meaning of the Revenue Act of 1918. An association, as that word is used in the several revenue acts, has been defined as "a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise". ; ; . The organization which founded and conducted the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, was of the simplest character and in no way resembled a corporate organization. No officers or directors were elected, no certificates or other evidences of ownership were issued, and there were present none of the indicia of an association as defined by the Supreme Court. We are therefore of opinion that the three banks were not associations and were, therefore, not taxable as corporations. From what we have said it follows1929 BTA LEXIS 2982">*2991 that the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels were partnerships composed of Whiteside and the two Piersons; that they were not taxable as corporations, and that the net profits therefrom should have been reported as income by Whiteside and the Piersons according to their respective interests in the partnership. We are unable to perceive any liability on the part of the petitioner for the tax asserted herein. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620083/	M. B. AUSTIN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.M. B. Austin Co. v. CommissionerDocket No. 14883.United States Board of Tax Appeals13 B.T.A. 867; 1928 BTA LEXIS 3174; October 9, 1928, Promulgated 1928 BTA LEXIS 3174">3174 Held, that the principal stockholders of the petitioner corporation were also partners in a partnership operating under the name of M. B. Austin & Co., and that respondent erred in consolidating into one return the net income of both the partnership and corporation for the year 1919. M. Manning Marcus, Esq., for the petitioner. Paul L. Peyton, Esq., and Hugh Brewster, Esq., for the respondent. GREEN 13 B.T.A. 867">867 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the calendar year 1919, for which the respondent determined a deficiency of $16,696.68. The entire deficiency is in controversy. The petitioner alleges that the respondent erred in including in its net income an amount of $46,896.45 representing the net income of a partnership known as M. B. Austin & Co. Should it fail in this allegation it further alleges as alternatives that it is entitled either to have its profits taxes computed in accordance with section 303 (partly personal service and partly capital) of the Revenue Act of 1918, or that it is entitled to further relief under the special assessment provisions (sections 327 and1928 BTA LEXIS 3174">3175 328) of the same Act. FINDINGS OF FACT. The petitioner is an Illinois corporation with its principal office at Chicago. It was incorporated in 1902 for the purpose of taking over that part of the business of a partnership which required the investment of capital. The partnership had been organized in 1898 by 13 B.T.A. 867">868 Merritt B. Austin and William A. Browne and had operated under the name of M. B. Austin & Co. Prior to 1898 Austin had conducted an agency business as an individual selling electrical supplies on a commission basis, which business grew to such proportions that in 1898 he took into partnership with him the said Browne. Beginning in 1894 Austin had entered into contracts with various concerns manufacturing electrical supplies to represent them and sell their goods on a strictly commission basis. The rendition of such services required practically no capital other than was necessary for ordinary office expenses. Later, however, opportunities arose to do a trading and manufacturing business in connection with the agency business. The trading and manufacturing business required the use of capital. The partners decided that it would be advisable to incorporate1928 BTA LEXIS 3174">3176 that part of the business which required the use of capital, and whereupon, on May 15, 1902, the petitioner herein was incorporated. On May 31, 1902, the two partners, Austin and Browne, executed a bill of sale in which they "granted, bargained, sold, and delivered" to the corporation - * * All the following Goods, Chattels, and Property, to-wit: All and singular the stock, merchandise, fixtures, assets, good will, credit, name, and effects of the going business conducted under the name of M. B. Austin and Company (co-partnership consisting of the said Merritt B. Austin and William A. Browne) located in Chicago, Cook County, Illinois, including the machinery, heavy and small tools, plant, equipment, manufactured and raw materials, contracts, furniture, supplies, accounts, and bills receivable, lease hold interest to the premises known as 56 and 58 West Van Buren Street in said city, together with everything else contained in said premises and in separate warehouses, and in factories, and in transit to or from said place of business, meaning hereby to cover and include all goods, chattels, property, choses in action, good will, credit, name and all other assets pertaining to1928 BTA LEXIS 3174">3177 or a part of all of the going business run by said grantors under the name and style of M. B. Austin and Company of Chicago, Illinois. It is understood and agreed that the party of the second part assumes absolutely and agrees to pay all outstanding accounts and bills payable of the old firm charged or to be charged against the said copartnership. Notwithstanding the bill of sale which was executed on May 31, 1902, the corporation did not then or thereafter acquire the sales agency commission contracts which had been acquired personally by Austin himself. The name of the corporation was originally M. B. Austin & Co. In 1918 it was changed to The M. B. Austin Co. The original stockholders of the petitioner were Austin, Browne, and one Peter Taylor. Shortly after incorporation, three others acquired some of petitioner's stock but held it for only a few years after which time it was repurchased by the petitioner. In 1918 one A. H. Friend, an employee of the petitioner, was given 25 shares of 13 B.T.A. 867">869 stock by the petitioner, together with the privilege of buying an additional 25 shares at par value. During 1919 the stockholders were as follows: SharesAustin1,000Browne700Taylor250Friend50Total2,0001928 BTA LEXIS 3174">3178 The partnership of M. B. Austin & Co., consisting of Austin and Browne, continued to exist after the petitioner was incorporated. Shortly after incorporation Taylor was given a one-eighth interest in the partnership. During 1919 the interests in the partnership of M. B. Austin & Co. were as follows: Per centAustin52 1/2Browne35Taylor12 1/2Total100From 1902 until 1918 the partnership and corporation kept their records in the same set of books. In the spring of 1918, at the time the petitioner's name was changed, separate sets of books were opened for the partnership and for the corporation. On December 1, 1919, the three partners drew up and executed a copartnership agreement a part of which is quoted as follows: This Memorandum of Agreement, Made in Triplicate this first day of December 1919 by and between Merritt B. Austin and William A. Browne, of Chicago, and Peter Taylor of California, WITNESSETH: This Memorandum is intended to confirm the original and former understanding between the parties hereto to the end that there shall be a written record of the agreement under which they have been and are working. The Parties hereto1928 BTA LEXIS 3174">3179 are a partnership, with headquarters in Chicago, engaged in the Business of Sales agents for Manufacturers, under the name of M. B. Austin & Company. They have no invested capital. They have arranged with The M. B. Austin Company to conduct the office Records detail and clerical work of this agency business for which The M. B. Austin Company is remunerated as follows: * * * It has been and still is Mutually understood and agreed between the parties hereto that the net profits arising annually out of this sales agency copartnership shall be divided as follows: To Merritt B. Austin21/40To William A. Browne14/40To Peter Taylor5/4013 B.T.A. 867">870 On March 11, 1920, the partnership filed a partnership income-tax return on Form 1065 for the calendar year 1919 in which it reported a net income of $46,896.45 which was allocated among the three partners in Schedule C of the return in the proportion set out above. On the same day the M. B. Austin Co. filed a corporation income and profits-tax return on Form 1120 for the calendar year 1919, and reported a net income of $44,984.70 and an invested capital of $174,269.18. In determining the deficiency the respondent1928 BTA LEXIS 3174">3180 added together the net income of the corporation and that of the partnership, thereby obtaining an alleged net income of the petitioner of $91,881.15 and computed the profits tax under section 328 of the Revenue Act of 1918. The net income of the petitioner for the calendar year 1919 was $44,984.70. The balance of the amount $91,881.15 determined by the respondent to be the petitioner's net income, being the amount of $46,896.45, was not the income of the petitioner but was the income of the partnership of M. B. Austin Co. OPINION. GREEN: The principal question in this proceeding is whether the majority stockholders of the petitioner continued to operate as a partnership after the petitioner was organized. The evidence is uncontradicted that they did. Both Austin and Browne testified that the only purpose of forming the corporation was to take over that part of the business which required the use of capital and that at no time did the corporation acquire the sales agency commission contracts. They further testified that the partnership in question had existed from the year 1898 and was still in existence during 1919. The agreement of copartnership executed on December 1, 1919, corroborates1928 BTA LEXIS 3174">*3181 such testimony. The respondent was, therefore, in error in consolidating the net income of the partnership and corporation into one return. The deficiency should be redetermined by excluding from the net income of $91,881.15, determined by the respondent, the amount of $46,896.45. In view of the foregoing it does not become necessary to consider the two alternatives. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620085/	CALVIN E. BODE AND FLORAMYE C. BODE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBode v. CommissionerDocket No. 17330-79.United States Tax CourtT.C. Memo 1981-300; 1981 Tax Ct. Memo LEXIS 441; 42 T.C.M. 103; T.C.M. (RIA) 81300; June 18, 1981. Calvin E. Bode and Floramye C. Bode, pro se. Paul Voelker, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7463(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with an adopts his opinion which is set forth below. 1981 Tax Ct. Memo LEXIS 441">442 OPINION OF THE SPECIAL TRIAL JUDGE DINAN, Special Trial Judge: Respondent determined a deficiency in petitioners' Federal income tax for 1977 in the amount of $ 370.72. The sole issue for decision is whether in computing "averagable income" within the meaning of sections 1301 through 1305 base period income may not be less than $ 3,200, as contended by the respondent or not less than zero as contended by the petitioners. FINDINGS OF FACT This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulations of fact and exhibits attached thereto are incorporated herein by this reference. Petitioners resided at 301 Debra Lane, Waterloo, Illinois, when they filed their petition in this case. On their 1977 joint Federal income tax return, petitioners computed their tax liability on he basis of the income averaging provisions contained in sections 1301 through 1305, attaching Schedule G of Form 1040 to their return. The computations on Schedule G were as follows: 1976197519741973Taxable income($ 1,785.55)$ 1,020.40($ 6,894.70)$ 608.84Zero bracket3,200.00 3,200.003,200.00 3,200.00amountBase poeriodincome$ 1,414.45 $ 4,220.40$ 0.00 $ 3,808.841981 Tax Ct. Memo LEXIS 441">443 The respondent agrees that petitioners' computations of base period income for the years 1973 and 1975 are correct. Respondent determined, however, that the base period income for 1974 and 1976 was $ 3,200 for each of those years. OPINION Respondent has recomputed petitioners' base period income for the years 1974 and 1976 by omitting from the computation for those years the negative figures entered on Schedule G by the petitioners and substituting in lieu thereof a zero figure. He then added to the zero figure for each of the years 1974 and 1976, and appropriate zero bracket amount of $ 3,200. Section 1301 provides: SEC. 1301. LIMITATION OF TAX. If an eligible individual has averagable income for the computation year, and if the amount of such income exceeds $ 3,000, then the tax imposed by section 1 for the computation year which is attributable to averagable income shall be 5 times the increase in tax undedr such section which would result from adding 20 percent of such income to 120 per cent of average base period income. Section 1302(b)(2) provides that the base period income for any taxable year is the taxable income for such year first increased and then1981 Tax Ct. Memo LEXIS 441">444 decreased in accordance with provisions set out in that section, which are not material to the issue herein. Section 1.1302-2(b)(1), Income Tax Regs., (adopted June 1, 1966), provides, in pertinent part, that "Base period income for any taxable year may never be less than zero." In Tebon v. Commissioner, 55 T.C. 410">55 T.C. 410 (1970), we upheld the validity of the Commissioner's regulation. The Tax Reduction and Simplification Act of 1977, Pub. L. 95-30, 91 Stat. 127, May 23, 1977, effective for taxable years beginning after 1976, substituted zero bracket amounts for the standard deduction. The zero bracket amounts (flat standard deductions) were incorporated into the tax tables and the tax schedules beginning in 1977, as income tax brackets upon which no taxes are due. Pub. L. 95-30, Title I, sec. 102(b)(15), March 23, 1977, 91 Stat. 138. Section 102(b)(15) of Pub. L. 95-30 amended section 1302(b) by adding new paragraph 1302(b)(3) which provides, in part: (3) Transitional Rule for Determining Base Period Income.--The base period -income (determined under paragraph (2)) for any taxable year beginning before January 1, 1977, shall be increased by the amount of the1981 Tax Ct. Memo LEXIS 441">445 taxpayer's zero bracket amount for the computation year. In its report on Pub. L. 95-30, the Senate Finance Committee noted that the bill's change in the definition of taxable income required adjustments in the income averaging provisions of the Code. The simplest method for making the required adjustment would be to increase pre-1977 base period taxable income, that is, for the taxable years 1973, 1974, 1975 and 1976, by the applicable zero bracket amount. Senate Report 95-66, page 58 (1977-1 C.B. 484). The transitional rule, embodied in section 1302(b)(3), therefore, would adjust the base period income in the base years prior to 1977 to account for the introduction into the tax tables and tax rate schedules, in 1977, of the zero bracket amounts. The language of section 1302(b)(3) is clear and unambiguous. The base period income is first to be determined under section 1302(b)(2). Section 1.1302-2(b)(1), Income Tax Regs. (the validity of which we upheld in 55 T.C. 410">Tebon, supra), provides that the amount so determined may never be less than zero in any taxable year. To the amount so determined, there is then to be added the appropriate zero1981 Tax Ct. Memo LEXIS 441">*446 base amount. In computing their base period income for the taxable years 1974 and 1976, petitioners failed to adjust their negative taxable income figures of ($ 6,894.70) and ($ 1,785.55) to zero to compute their base period income in accordance with section 1302(b)(2), before adding the zero base amount as required by section 1302(b)(3). Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for 1977, 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 re not applicable to this case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474163/	VASQUEZ, Judge-. This case is before the Court on a petition for redetermination of a Notice of Determination Concerning Worker Classification Under Section 7436 (notice of determination). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The issues for decision are: (1) Whether the workers1 performing services for petitioner were employees during 1992; (2) whether petitioner is entitled to “safe harbor” relief as provided by section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2763, 2885 (section 530); and (3) whether our jurisdiction to decide the proper amount of employment taxes2 provides the Court with jurisdiction to decide the proper amount of additions to tax and penalties related to employment tax arising from worker classification or section 530 treatment determinations. FINDINGS OF FACT Petitioner was a Virginia corporation that had its principal place of business in Lorton, Virginia. At the time it filed its petition, petitioner had terminated its corporate status. Prior to and during 1992, petitioner manufactured bakery products such as cookies, brownies, and cinnamon buns. Peter Ewens (Ewens) was the president, and Roger Miller (Miller) was the vice president, of petitioner. Ewens ran petitioner on a day-to-day basis and controlled petitioner’s operations. Miller was a financial adviser to petitioner. During its operation, Miller was at petitioner’s plant approximately once a month. Miller was a C.P.A. who had his own company that prepared tax returns.3 Miller prepared petitioner’s Federal corporate income tax returns for 1991 and 1992. He also signed petitioner’s Federal employment tax returns for 1992. Petitioner had several categories of workers including bakery personnel and production workers (bakery workers), cash payroll workers, route distributors/salespeople (route distributors), and outside sales workers. The bakery workers worked at petitioner’s plant. Using equipment and supplies provided by petitioner, they mixed dough and baked and packaged petitioner’s' products. Although petitioner did not set the bakery workers’ hours, each day a certain amount of production had to be completed, and the bakery workers could not leave until the production quota was met. Petitioner paid the bakery workers a fixed amount based on the amount of product they produced. Prior to 1992, petitioner treated the bakery workers as employees. In 1991, petitioner issued the bakery workers Forms W-2, Wage and Tax Statement. In 1992, 30 out of petitioner’s 37 bakery workers received Forms 1099. Of the seven who did not receive a Form 1099, only two earned less than $600.4 The cash payroll workers were a family of six or seven individuals known as “the Rusli group”. The Rusli group was not a corporation. The Rusli group worked for petitioner for a number of years prior to 1992. The Rusli group performed the same work as the bakery workers. Since 1987, pursuant to a written agreement between the Rusli group and petitioner, the Rusli group also supervised the bakery workers. In 1992, petitioner did not issue Forms 1099 to any of the cash payroll workers. The route distributors transported petitioner’s product from its plant to individuals or businesses who purchased the product. Some route distributors bought the product and resold it for a higher price; others worked on a commission basis. The route distributors drove their, own vehicles. Petitioner did not set the hours the route distributors worked. In 1991, petitioner issued at least one route distributor, Frank Barranco, a Form W-2. In 1992, petitioner did not issue Forms 1099 to any of petitioner’s 21 route distributors.5 The outside sales workers were individuals who marketed petitioner’s product. They had their own vehicles, and petitioner did not set their hours. When an outside sales worker sold a product, he was paid a commission. Petitioner had the right to hire and fire the outside, sales workers. In 1991, petitioner issued at least two outside sales workers, Terre Cone and Terry McKnight, a Form W-2. In 1992, two of petitioner’s five outside sales workers received Forms 1099. Of the three who did not receive a Form 1099, two earned less than $600. On November 4, 1991, petitioner issued a memorandum from Ewens to the staff. The memorandum stated: (1) The company had treated certain workers as employees and others as independent contractors; (2) beginning January 1, 1992, petitioner would discontinue its production function and would subcontract its entire operation to outside groups or individuals; (3) individuals who wanted to continue their association with petitioner would be required to sign a statement in which they accepted responsibility for all of their own payroll taxes; (4) individuals would be issued Forms 1099 instead of Forms W-2; and (5) employees not wishing to become independent contractors would be discharged prior to January 1, 1992. After January 1, 1992, there was no change in the activities petitioner’s workers performed (i.e., in 1992, the workers did much of the same work). The reason petitioner wanted to convert its employees to independent contractors was to protect petitioner from lawsuits6 and to have better control over the activities of its workers. Petitioner was advised by an attorney to convert the employees to independent contractors to limit petitioner’s liability. Petitioner continued directly paying its workers. Several of petitioner’s checks issued to its workers, and signed by Miller, in 1992 bear the notation “payroll”. Additionally, there was a debit slip dated July 3, 1992, for petitioner’s bank account that noted that cash was withdrawn for payroll. For 1991, petitioner reported salaries and wages of $196,433 on its Federal corporate income tax return, and it issued 51 Forms W-2 to its employees reporting total wages of $196,432.60. Petitioner also reported $81,143 of sub-contractual labor, and it issued 10 Forms 1099-misc reporting total payments of $37,930.74. For 1992, petitioner reported no salaries and wages on its Federal corporate income tax return. Petitioner reported $115,287 of subcontractual labor, and it issued 36 Forms 1099-MISC reporting total payments of $115,287.05. Petitioner filed Forms 941, Employer’s Quarterly Federal Tax Return, for the four quarters of 1992 and reported no wages subject to withholding, no withheld income tax, no Social Security tax, and no Medicare tax. Petitioner’s Form 941 for the last quarter of 1992 reported that the date final wages were paid was December 31, 1991, that it had no employees, and that it was out of business. Petitioner’s Form 940, Employer’s Annual Federal Unemployment (futa) Tax Return, for 1992 also reported no wages, that petitioner had no employees, and that it was out of business. Respondent determined that the bakery workers, cash payroll workers, route distributors, and outside sales workers were employees for employment tax purposes for 1992. Respondent further determined that petitioner was not entitled to section 530 relief for any of these workers. Respondent also determined penalties pursuant to section 6656. OPINION I. Jurisdiction Over Amounts In its petition, petitioner disputed the amounts of the employment taxes and penalties that were set forth on the schedule accompanying the notice of determination. In keeping with our decision in Henry Randolph Consulting v. Commissioner, 112 T.C. 1 (1999) (holding that we did not have jurisdiction regarding employment tax liabilities), prior to trial we granted respondent’s motion to dismiss for lack of jurisdiction as to the amounts of employment taxes and related penalties. This case was tried prior to Congress’s amendment of section 7436(a) that provided this Court with jurisdiction to decide the correct amounts of employment taxes which relate to the Secretary’s determination concerning worker classification. Community Renewal Tax Relief Act of 2000 (CRTRA), Pub. L. 106-554, sec. 314(f), 114 Stat. 2763. The amendment to section 7436 was made retroactive to the effective date (August 5, 1997) of section 7436(a). CRTRA sec. 314(g); Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1454(a), 111 Stat. 1055. The amendment providing us with jurisdiction regarding the amount of employment tax does not explicitly state whether we have jurisdiction to decide the proper amount of additions to tax and penalties related to employment tax arising from worker classification or section 530 treatment determinations. This is an issue of first impression. Section 6665(a)(2) provides that, except as otherwise provided, any reference in title 26 to a tax imposed by title 26 shall be deemed also to refer to the additions to tax, additional amoünts, and penalties provided by chapter 68 of subtitle F. The section 6656 penalty is found in chapter 68 of subtitle F and applies in the case of a failure to deposit by the date prescribed therefor “any amount of tax imposed by this title” (i.e., title 26). Section 7436(e) provides that the term “employment tax” means any tax imposed by subtitle C. Section 7436(e) does not exclude additions to tax or penalties from the definition of employment tax. Therefore, we hold that we do have jurisdiction over additions to tax and penalties found in chapter 68 of subtitle F (sections 6651 through 6751), including deciding the proper amount of such additions to tax and penalties, related to taxes imposed by subtitle C with respect to worker classification or section 530 treatment determinations. II. Employees v. Independent Contractors Respondent’s determinations are presumptively correct, and petitioner bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). This principle applies to the Commissioner’s determination that a taxpayer’s workers are employees. Boles Trucking, Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir. 1996). If an employer-employee relationship7 exists, its characterization by the parties as some other relationship is of no consequence. Sec. 31.3121(d)-1(a)(3), Employment Tax Regs. For the purposes of employment taxes, the term “employee” includes “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee”. Sec. 3121(d)(2); accord sec. 3306(i). Although the determination of employee status is to be made by common law concepts, a realistic interpretation of the term “employee” should be adopted, and doubtful questions should be resolved in favor of employment. Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 52 (5th Cir. 1990). Section 3121(d) also defines an “employee” for employment tax purposes as (1) an individual who performs services, for remuneration as a agent-driver or commission-driver engaged in distributing meat products, vegetable products, bakery products, beverages (other than milk), or laundry or dry cleaning services and (2) a traveling or city salesman, other than an agent-driver or commission-driver, engaged on a full-time basis in the solicitation on behalf of, and the transmission to, his principal of orders from wholesalers, retailers, restaurants, or other similar establishments for merchandise for resale. Sec. 3121(d)(3)(A), (D). A worker can be a “statutory employee” under section 3121(d)(3) only if he is not a common law employee under section 3121(d)(2). We therefore first must decide whether petitioner’s workers were common law employees, and if they were not, then we shall decide whether they were statutory employees. Lickliss v. Commissioner, T.C. Memo. 1994-103. A. Whether Petitioner’s Workers Were Common Law Employees This Court considers the following factors to decide whether a worker is a common law employee or an independent contractor: (1) The degree of control exercised by the principal; (2) which party invests in work facilities used by the individual; (3) the opportunity of the individual for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating. Weber v. Commissioner, 103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995). All the facts and circumstances of each case are considered, and no single factor is dispositive. Id. 1. Degree of Control The degree of control necessary to find employee status varies with the nature of the services provided by the worker. Id. at 388. To retain the requisite control over the details of an individual’s work, the principal need not stand over the individual and direct every move made by the individual; it is sufficient if he has the right to do so. Id.; see sec. 31.3401(c)-1(b), Employment Tax Regs. Similarly, the employer need not set the employee’s hours or supervise every detail of the work environment to control the employee. Gen. Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir. 1987). The fact that workers set their own hours does not necessarily make them independent contractors. Id. a. Bakery Workers and Cash Payroll Workers Petitioner controlled where the bakery workers and cash payroll workers worked, what products they used to complete their work, and how much product they had to produce. Petitioner also determined the amount they were paid. On this record, petitioner’s control of the bakery workers and cash payroll workers is consistent with an employer-employee relationship. b. Route Distributors The record does not establish that petitioner controlled to whom the route distributors sold petitioner’s product or where the product was sold. It is unclear whether petitioner or the route distributor decided how the route distributor was to be compensated (whether on a commission basis or through purchase and resale of the product at a higher price). Petitioner did not set the route distributors’ hours. On the record, this factor is not indicative of an employer-employee relationship. c. Outside Sales Workers The record does not establish that petitioner controlled to whom the outside sales workers marketed petitioner’s product or where they marketed the product. Outside sales workers could hire substitutes and assistants to perform this work. Petitioner did not set the outside sales workers’ hours. On the record, this factor is not indicative of an employer-employee relationship. 2. Investment in Facilities The fact that a worker provides his or her own tools generally indicates independent contractor status. Breaux & Daigle, Inc. v. United States, supra at 53. a. Bakery Workers and Cash Payroll Workers Petitioner supplied the facility, equipment, and goods the bakery workers and cash payroll workers used to perform their jobs. The bakery workers and cash payroll workers did not have an investment in the goods or facilities. This is indicative of an employer-employee relationship. b. Route Distributors Although some route distributors purchased petitioner’s product for resale, rather than working on commission, they returned the product they did not sell to petitioner. The route distributors, however, owned their own vehicles. On this record, we conclude that the route distributors did have an investment in facilities. c. Outside Sales Workers The outside sales workers owned their own vehicles, and any use of petitioner’s facilities was de minimis. On this record, we conclude that this factor does not weigh against treating the outside sales workers as independent contractors. 3. Opportunity for Profit or Loss The bakery workers and cash payroll workers were paid based on the amount of product produced (which petitioner determined), and the outside sales workers received a commission when they sold petitioner’s product. Some route distributors were paid a commission for product they sold. Others purchased petitioner’s product and resold it; however, they were able to return any product they did not sell. 4. Right To Discharge a. Bakery Workers and Cash Payroll Workers Pursuant to the written agreement between petitioner and the cash payroll workers, the cash payroll workers had the right to hire and supervise the bakery workers. The agreement, however, is silent with respect to whether petitioner retained the right to fire the bakery workers. Additionally, the record is silent regarding petitioner’s right to discharge the cash payroll workers. b. Route Distributors The record is silent with respect to this factor. c. Outside Sales Workers Petitioner had the right to hire and fire the outside sales workers. This is indicative of an employer-employee relationship. 5. Integral Part of Business Petitioner’s business was manufacturing baked goods. Petitioner hired the bakery workers and cash payroll workers to produce the baked goods, the route distributors to deliver the baked goods, and the outside sales workers to market the baked goods. The work performed by each category of workers was within the scope of petitioner’s regular business. 6. Permanency of the Relationship A transitory work relationship may point toward independent contractor status. Herman v. Express Sixty-Minutes Delivery Servs., Inc., 161 F.3d 299, 305 (5th Cir. 1998). If, however, the workers work in the course of the employer’s trade or business, the fact that they do not work regularly is not necessarily significant. Avis Rent A Car Sys., Inc. v. United States, 503 F.2d 423, 430 (2d Cir. 1974) (transients may be employees); Kelly v. Commissioner, T.C. Memo. 1999-140 (working for a number of employers during a tax year does not necessitate treatment as an independent contractor). In considering the permanency of the relationship, we must also consider petitioner’s right to discharge the worker, and the worker’s right to quit, at any time. a. Cash Payroll Workers The cash payroll workers began working for petitioner in 1986. The relationship between petitioner and the cash payroll workers was permanent as opposed to transitory. b. Bakery Workers At least 11 of the bakery workers worked for petitioner in 1991 and 1992. The record is silent regarding whether any of the other 37 bakery workers working for petitioner in 1992 worked for petitioner prior to 1992. On the basis of this record, we conclude that a significant number of the bakery workers had a permanent, rather than transitory, relationship with petitioner. c. Route Distributors At least two of the route distributors worked for petitioner in 1991 and 1992. The record is silent regarding whether any of the other 21 route distributors working for petitioner in 1992 worked for petitioner prior to 1992. d. Outside Sales Workers At least two of the five outside sales workers worked for petitioner in 1991 and 1992. According to Miller, petitioner had a continuing relationship with the outside sales workers. On this record, we conclude that the outside sales workers had a permanent, rather than transitory, relationship with petitioner. 7. Relationship the Parties Thought They Created a. Bakery Workers and Cash Payroll Workers According to the November 1991 memorandum issued by petitioner, starting in 1992 it would consider all workers producing its product (which included the bakery workers and cash payroll workers) independent contractors. None of the bakery workers or cash payroll workers, however, testified regarding what kind of relationship they thought they had with petitioner. b. Route Distributors Miller testified that petitioner did not consider the route distributors to be employees or independent contractors. None of the route distributors, however, testified regarding what kind of relationship they thought they had with petitioner. c. Outside Sales Miller filled out a questionnaire given to petitioner’s workers, who were also his clients, by the IRS. For the two outside sales workers who responded, Miller answered that they thought they were independent contractors. None of the outside sales workers, however, testified at trial. 8. Additional Factor Petitioner argues that the route distributors carried products of, the outside sales workers marketed products for, and the cash payroll workers had contracts with, companies other than petitioner. In Kelly v. Commissioner, supra, we held that working for a number of employers during a tax year does not necessitate treatment as an independent contractor. 9. Conclusion After considering the record as a whole, weighing all of the factors, and being cognizant that doubtful questions should be resolved in favor of employment, we conclude that the cash payroll workers, bakery workers, and outside sales workers were common law employees. Upon the basis of this record, however, we do not find the route distributors to be common law employees.8 Therefore, we must decide whether, the route distributors were statutory employees. See sec. 3121(d)(3); Lickiss v. Commissioner, T.C. Memo. 1994-103. B. Whether the Route Distributors Were Statutory Employees For the purposes of employment taxes, the term “employee” also includes individuals who perform services for remuneration as an agent-driver or commission-driver engaged in distributing bakery products. Sec. 3121(d)(3)(A). Substantially all of these services must be performed personally by such individual. Sec. 3121(d)(3) (flush language). Individuals are not included in the term “employee” under section 3121(d)(3) if they have a substantial investment in the facilities used in connection with the performance of such services (other than facilities for transportation), or if the services are in the nature of a single transaction. Id. The regulations provide that agent-drivers and commission-drivers include individuals who operate their own trucks, and serve customers designated by the person for whom they perform services and customers solicited on their own and whose compensation is a commission on their sales or the difference between the price they charge the customers and the price they pay for the product or service. Sec. 31.3121(d)-1(d)(3)(i), Employment Tax Regs. The route distributors fit within the definition of agent-driver and commission-driver provided in the Code and regulations. They each performed substantially all the distribution of bakery products for petitioner. The route distributors did not have a substantial investments in the facilities other than those used for transportation. The record does not establish that their services were in the nature of a single transaction. The route distributors served customers designated by petitioner as well as those they solicited on their own, and their compensation was either a commission on their sales or the difference between the price they charged and the price they paid for petitioner’s bakery products. Therefore, we conclude that the route distributors were statutory employees. III. Section 530 Congress enacted section 530 to alleviate what it perceived as the “overly zealous pursuit and assessment of taxes and penalties against employers who had, in good faith, misclassified their employees as independent contractors.” Boles Trucking, Inc. v. United States, 77 F.3d at 239. Thus, despite our conclusion that the cash payroll workers, bakery workers, route distributors, and outside sales workers were employees of petitioner, and that the payments to them from petitioner were wages subject to Federal employment taxes, section 530 allows petitioner relief from employment tax liability if two conditions are satisfied. Section 530(a)(1) provides in relevant part: (1) In general. — If (A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period * * , and (B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee, then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee. Section 530(a)(3) further clarifies section 530(a)(1) by providing that if the “taxpayer (or a predecessor)” treated any individual holding a “substantially similar position as an employee”, then section 530 relief is not available to the taxpayer. Sec. 530(a)(1), (3). We note that the statute does not require the individuals to be identical; rather, the analysis focuses on whether individuals were in substantially similar positions. For purposes of section 530(a)(1), a taxpayer is treated as having a reasonable basis for not treating an individual as an employee if the taxpayer’s treatment of the individual was in reasonable reliance on (1) judicial precedent, (2) published rulings, (3) technical advice with respect to .the taxpayer, (4) a letter ruling to the taxpayer, (5) a past lRS :audit of the taxpayer if the audit entailed no assessment attributable to the taxpayer’s employment tax treatment of individuals holding positions substantially similar to the position held by the individual whose status is at issue, or (6) a longstanding recognized practice of a significant segment of the industry in which the individual was engaged. Sec. 530(a)(2); Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141, 147 (2001). A taxpayer who fails to meet any of the safe havens is still entitled to relief if the taxpayer can demonstrate, in some other manner, a reasonable basis for not treating the individual as an employee. Id. at 147. A. Application of Section 530(a)(1) Prior to 1992, petitioner treated all of its production workers (cash payroll workers and bakery workers) as employees. Prior to 1992, petitioner treated at least one route distributor and at least two outside sales workers as employees. Miller testified that many of petitioner’s workers were employees in 1991. In 1992, petitioner did not file Forms 1099 for (1) seven bakery workers, (2) any of the cash payroll workers,9 (3) any of the route distributors, and (4) three outside sales workers.10 Petitioner did not demonstrate that it reasonably relied upon judicial precedent, published rulings, technical advice, a letter ruling, or a past audit. Petitioner argues that it relied on a longstanding practice in the industry in which it was engaged — “co-packing”. “Co-packing” is where a company does not produce its product itself; it hires others to produce its goods for it. Petitioner presented no evidence, however, on how the practice of co-packing related to the treatment of its workers as employees. Furthermore, petitioner did not offer any witnesses to testify about an industry practice of co-packing and the treatment of “co-packers” as independent contractors. See, e.g., Gen. Inv. Corp. v. United States, 823 F.2d at 341. Additionally, petitioner did not demonstrate, in some other manner, a reasonable basis for not treating the bakery workers, cash payroll workers, route distributors, and outside sales workers as employees. We conclude that petitioner had no reasonable basis for treating the bakery workers, cash payroll workers, route distributors,11 and outside sales workers as independent contractors.12 B. Conclusion In Erickson v. Commissioner, 172 Bankr. 900, 913 (Bankr. D. Minn. 1994), the court noted: The essence of the safe harbor provision is to grant protection to the taxpayer who has consistently treated workers as independent contractors but has not been previously challenged by the IRS. In effect, where the taxpayer’s filings have put the IRS on notice and the IRS has not acted without delay, the taxpayer must be shielded from the compounding effects of the error. In the case before us, petitioner is not in a position to receive the protections provided by Congress because petitioner did not satisfy the requirements of section 530(a)(1). We conclude that petitioner is not entitled to section 530 relief for any of its bakery workers, cash payroll workers, route distributors, or outside sales workers. To reflect the foregoing, An appropriate order will be issued. Respondent concedes that the “consultant/outside professional service workers” were not employees of petitioner. For convenience, we use the term “employment taxes” to refer to taxes under the Federal Insurance Contributions Act, ch. 736, secs. 3101-3128, 68A Stat. 415 (1954), as amended; the Federal Unemployment Tax Act, ch, 736, secs. 3301-3311, 68A Stat. 439 (1954), as amended; and income tax withholding, secs. 3401-3406. Miller also was a graduate of Brooklyn Law School; however, he never practiced law. Miller was also a former IRS auditor. Petitioner, however, did issue Forms 1099 to six bakery workers who earned less than $600. Only 5 of the 21 route distributors earned less than $600. In 1991, some of petitioner’s workers were stealing and sabotaging its products. There were walnut shells in the cookies and nails in the brownies. Consumers of petitioner’s products Had retained attorneys and were suing petitioner. Sees. 31.3121(d)-1(c)(2) and 31.3306(i)-1(b), Employment Tax Regs., define an employer-employee relationship as follows: Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. * * See also sec. 31.3401(c)-l(b), Employment Tax Regs, (using virtually identical language). Petitioner did not control the route distributors to the same degree as it controlled the bakery workers and cash payroll workers. Unlike the bakery workers and cash payroll workers, the route distributors had an investment in facilities. Unlike the outside sales workers, the record did not establish that petitioner had the right to hire and fire the route distributors. Unlike the bakery workers, cash payroll workers, and outside sales workers, the record did not establish that petitioner had a permanent relationship with the route distributors. Miller agreed with the revenue officer who testified at trial that the cash payroll workers were not a corporation. We note that only 7 of these 38 workers earned less than $600. See sec. 6041 (information returns required for payments of $600 or more); sec. 1.6041-1, Income Tax Regs. We note that Miller testified that he was aware of regulations that provided that the route distributors should be categorized as employees. We note that Miller testified that he knew that the conversion of the workers from employees to independent contractors was not done correctly and that “it would screw up the issue for payroll taxes”.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474164/	Beghe, Judge: This case is before us on petitioner’s “stand- alone” petition under section 6015(e)(1)1 for relief from joint and several liability, following respondent’s denial of relief. Intervenor is petitioner’s former spouse, who intervened under section 6015(e)(4) and Rule 325. Intervenor and respondent both contend that petitioner is not entitled to relief under either section 6015(b) or (c). We sustain respondent’s determination that petitioner is not entitled to relief under section 6015(b) but hold that petitioner is entitled to partial relief under section 6015(c). FINDINGS OF FACT Most of the facts have been stipulated and are so found. The stipulation of facts and the related exhibits are incorporated by this reference. Petitioner and intervenor both resided in California at the time their petition and request for intervention, respectively, were filed with this Court. Petitioner was born in 1962 and came to the United States from Uruguay in June 1984. Before moving to the United States, petitioner obtained the equivalent of an associate’s degree in business administration from a community college in Uruguay. Petitioner is fluent in English. Intervenor was born in 1955 and is not a college graduate. Petitioner and intervenor were married on November 30, 1984. In 1985 and 1986, petitioner and intervenor both worked at the California State capitol. Petitioner worked as a clerk for an assemblywoman, and intervenor worked for the California State senate. Petitioner and intervenor filed joint Federal income tax returns for 1985 and 1986. Sometime before 1985, intervenor was introduced through a coworker to an investment syndicator and tax preparation service known to him as Hoyt Investments. Walter J. Hoyt III and some members of his family were in the business of creating tax shelter limited partnerships for their cattle breeding operations. As part of their services, the Hoyt organization also prepared the investors’ tax returns. For a description of the Hoyt organization and its operation, see Bales v. Commissioner, T.C. Memo. 1989-568; see also River City Ranches #4, J.V. v. Commissioner, T.C. Memo. 1999-209, affd. without published opinion_F.3d_(9th Cir., Nov. 26, 2001). Intervenor attended a meeting organized by the Hoyt organization at which he decided to participate in a tax shelter limited partnership and have the Hoyt organization prepare his and petitioner’s joint Federal income tax returns. Intervenor signed all the partnership forms, gave the Hoyt organization a check for $25, and thereby became a limited partner in Shorthorn Genetic Engineering 1983-2, Ltd. (Shorthorn partnership). According to the Shorthorn partnership’s records, the partnership interest was held in the names of both petitioner and intervenor, even though petitioner had not signed any of the partnership documents. Intervenor did not have material discussions with petitioner about his decision to invest in the Shorthorn partnership tax shelter or about his decision to allow the Hoyt organization to prepare his and petitioner’s joint tax returns. Petitioner had little if any involvement with the Hoyt organization. She was new to this country, had no experience with U.S. income tax laws, and trusted intervenor to handle their tax return preparation. However, petitioner was aware that intervenor had made some financial arrangements with the Hoyt organization. Petitioner and intervenor were both wage earners who did not itemize their deductions. The tax office of W.J. Hoyt & Sons Management Co. prepared their 1985 and 1986 tax returns. Intervenor delivered his and petitioner’s financial information (consisting of the wage information from their Forms W-2, Wage and Tax Statement) to the Hoyt office. From that information, the Hoyt office prepared and mailed the final returns to petitioner and intervenor for their signatures. The joint Federal income tax return of petitioner and inter-venor for 1985 showed wages of $30,203 and Shorthorn partnership losses of $20,180. Their joint return for 1986 showed wages of $36,943 and Shorthorn partnership losses of $26,234. On the basis of the filed returns, petitioner and intervenor received income tax refunds of $3,185 for 1985 and $3,947 for 1986. Hoyt told intervenor to endorse and forward the refund checks when received to the Hoyt office so that Hoyt could calculate and deduct intervenor’s required contribution to the Shorthorn partnership. Intervenor delivered the endorsed refund checks to Hoyt.2 Intervenor had invested only $25 in the Shorthorn partnership at the time he and petitioner filed their joint 1985 Federal income tax return, in which they claimed $20,180 in tax losses from the Shorthorn partnership. As a result of the Shorthorn partnership losses, petitioner and intervenor received a tax refund for 1985 of $3,185. Intervenor signed the refund check over to the Shorthorn partnership and received back less than $500. The Shorthorn partnership kept the balance of the income tax refund as intervenor’s Shorthorn partnership capital contribution. At the time petitioner and intervenor filed their 1986 return, intervenor had invested less than $3,0003 in the Shorthorn partnership, yet claimed an additional $26,234 of Shorthorn partnership losses (together with the 1985 losses, petitioner and intervenor recognized a total of $46,414 in partnership losses). It appears that most of petitioner and intervenor’s 1986 refund was also paid to the Shorthorn partnership. Respondent examined the Shorthorn partnership’s returns and issued notices of final partnership administrative adjustment (fpaa) to the Shorthorn partnership. Walter J. Hoyt ill, as tax matters partner for the Shorthorn partnership, filed a petition with this Court, docket No. 29295-89, which was consolidated with other Hoyt partnership cases. After the partners’ stipulations in Bales v. Commissioner, supra, the tax matters partner for the Shorthorn partnership stipulated most of the issues raised by the Commissioner. The Tax Court issued an opinion affirming the Commissioner’s calculations regarding the effect of the stipulation on each of the partnerships, which is reported at Shorthorn Genetic Engineering 1982 — 2, Ltd. v. Commissioner, T.C. Memo. 1996-515. On the basis of the stipulations and opinion, a substantial portion of the Shorthorn partnership losses was disallowed. According to respondent, the losses were disallowed because, among other things, the Shorthorn partnership overstated both the number and value of animals owned by the partnership that formed the basis for the deductions. On the basis of the stipulated and decided issues at the partnership level, respondent denied a portion of the losses that were passed through to intervenor from the Shorthorn partnership for 1985 and 1986. The denial of the losses resulted in computational adjustments owing by petitioner and intervenor, which were timely assessed as deficiencies on April 13, 1998. On December 30, 1986, petitioner and intervenor filed a joint petition for summary dissolution of their marriage. In the their dissolution petition, petitioner and intervenor stated that they had no community assets or liabilities. The divorce became final in 1987. The divorce was amicable. On July 16, 1998, after respondent mailed a notice of computational adjustment to petitioner and offset two of her income tax refunds from later year returns,4 petitioner filed with respondent a Form 8857 requesting relief from joint and several liability. On February 23, 2000, respondent mailed to petitioner a determination letter denying petitioner’s request for relief from joint and several liability under both section 6015(b) and (c). The explanation accompanying the denial states: Your claim for innocent spouse has been disallowed under IRC 6015(b) & IRC 6015(c). You did not meet one of the qualifying factors required under 6015(b) and 6015(c) lack of knowledge of the understatement. On May 23, 2000, petitioner timely mailed to this Court a petition for redetermination of relief from joint and several liability on a joint return. On July 11, 2000, respondent mailed a notice to intervenor, informing him that petitioner had filed a petition with this Court requesting relief from joint and several liability and that he had a right to intervene. On September 19, 2000, intervenor filed a notice of intervention with this Court, requesting that petitioner’s petition for relief from joint and several liability be denied. ULTIMATE FINDINGS OF FACT A reasonably prudent taxpayer in the circumstances of petitioner would have known that the tax liabilities stated on the returns were erroneous or that further investigation was warranted. Petitioner had no actual knowledge of the facts resulting in the disallowance of the Shorthorn partnership losses. OPINION With certain exceptions, a husband and wife may elect to file a joint return based on their aggregate taxable income. See sec. 6013(a). After making the election to file a joint return, each of the spouses is jointly and severally liable for the entire tax due. Sec. 6013(d)(3). “One of the fundamental characteristics of joint and several liability is that the obligee * * * may proceed against the obligors separately and may obtain separate judgments against each.” Dolan v. Commissioner, 44 T.C. 420, 427 (1965). “Prior to 1971, a spouse was held strictly liable for tax deficiencies resulting from omissions and deductions attributable solely to the other spouse, even if the ‘innocent spouse’ knew nothing of the erroneous items.” Guth v. Commissioner, 897 F.2d 441, 442-443 (9th Cir. 1990), affg. T.C. Memo. 1987-522. In order to mitigate the effect of the harsh rule holding both spouses jointly and severally liable for joint return taxes in all circumstances, Congress in 1971 enacted former section 6013(e) “to bring government tax collection practices into accord with basic principles of equity and fairness.” S. Rept. 91-1537, at 2 (1970), 1971-1 C.B. 606, 607. Under the original section 6013(e) enacted in 1971, a requesting spouse was entitled to relief from joint return liability only for the nonrequesting spouse’s failure to report income. In 1984, former section 6013(e) was amended to cover any “substantial understatement of tax” whether arising from an omission of income or an erroneous deduction, exclusion, or credit. In 1998, Congress repealed former section 6013(e) and enacted section 6015. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201(a), 112 Stat. 734. Section 6015 was given retroactive effect with respect to any liability for tax remaining unpaid as of July 22, 1998. See id. sec. 3201(g)(1), 112 Stat. 740. To the extent that the relief petitioner requested relates to taxes that had not been paid as of that date,5 section 6015 is applicable. Section 6015 contains three alternative grounds for relief from joint and several liability. First, section 6015(b) provides for traditional relief from joint and several liability following the model of former section 6013(e). Second, section 6015(c) provides for an allocation of liability as if the spouses had filed separate returns. Finally, section 6015(f) provides for relief on other equitable grounds, but only if section 6015(b) and (c) does not apply.6 Issue 1. Petitioner’s Right to Section 6015(b) Relief Section 6015(b)(1) provides for relief from joint and several liability on a joint return if five elements are met: (A) a joint return has been made for a taxable year; (B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return; (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement; (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and (E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election * * * Respondent’s determination states that petitioner’s request for relief from joint and several liability is denied because petitioner failed to show her “lack of knowledge of the understatement.” While respondent’s determination appears to have focused on petitioner’s actual knowledge rather than her “reason to know”, petitioner bears the burden of proving all of the elements entitling her to relief. Mueller v. Commissioner, T.C. Memo. 2001-178; Kalinowski v. Commissioner, T.C. Memo. 2001-21 (“Petitioner carries the burden of proof as to each of these elements.”); French v. United States (In re French), 242 Bankr. 369, 377 n.5 (Bankr. N.D. Ohio 1999) (applying prior law under former section 6013(e) to determine burden of proof under section 6015). Petitioner therefore must show both that she lacked actual knowledge of the understatement and that she had no “reason to know” of the understatement. Because an appeal in this case would lie in the Court of Appeals for the Ninth Circuit, we are bound by Ninth Circuit law. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). The principal Ninth Circuit case interpreting the “not know, and had no reason to know” requirement7 in connection with an erroneous deduction is Price v. Commissioner, 887 F.2d 959, 962 (9th Cir. 1989). Charles and Patricia Price filed a joint return in which they deducted $90,000 in alleged exploration and development expenses passed through to them from a Colombian gold mining operation formed by Charles. The $90,000 deduction was taken against total income of $103,000. After making a cursory review of the tax return, Patricia noticed the large deduction and questioned Charles about the legitimacy of the deduction. Charles assured her that the deduction was proper and had been approved by the certified public accountant who prepared and signed the return. After the Commissioner disallowed the deduction and Charles and Patricia were divorced, Patricia claimed relief from joint and several liability under former section 6013(e). Following the law in omitted income cases, the Tax Court denied Patricia’s claim for relief from joint and several liability because Patricia was aware of the existence of the transaction underlying the deduction — the existence of her husband’s gold mining investment. The Court of Appeals for the Ninth Circuit reversed and granted Patricia’s request for relief from joint and several liability. The Court of Appeals held that in erroneous deduction cases, unlike omitted income cases, the requesting spouse’s mere knowledge of the existence of the transaction underlying the deduction is not enough to deny relief. In order to be denied relief, the requesting spouse must know or have reason to know “that the deduction would give rise to a substantial understatement.” Id. at 963. While ignorance of the legal or tax consequences of an item which gives rise to a deficiency is no defense, something more than mere knowledge of the transaction is required: Thus, if a spouse knows virtually all of the facts pertaining to the transaction which underlies the substantial understatement, her defense in essence is premised solely on ignorance of law. Id. In such a scenario, regardless of whether the spouse possesses knowledge of the tax consequences of the item at issue, she is considered as a matter of law to have reason to know of the substantial understatement and thereby is effectively precluded from establishing to the contrary. * * * [/d. at 964.] Where the requesting spouse lacks such pervasive knowledge of the facts of the underlying transaction, the Court of Appeals concluded that the trier of fact must determine whether the requesting spouse had sufficient knowledge of the facts to make denial of relief appropriate: A spouse has “reason to know” of the substantial understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement. * * * Factors to consider in analyzing whether the alleged innocent spotise had “reason to know” of the substantial understatement include: (1) the spouse’s level of education; (2) the spouse’s involvement in the family’s business and financial affairs; (3) the presence of expenditures that appear lavish or unusual when compared to the family’s past levels of income, standard of living, and spending patterns; and (4) the culpable spouse’s evasiveness and deceit concerning the couple’s finances. * * * [Id. at 965; citations omitted.] Even though she had limited knowledge of the facts underlying the transaction giving rise to the deduction, the Court of Appeals found, on the basis of the size of the deduction in relation to the taxpayers’ joint income, that Patricia had sufficient knowledge “such that a reasonably prudent taxpayer in her position would be led to question the legitimacy of the deduction.” Id. However, because Patricia questioned Charles about the deduction and obtained sufficient assurance that the deduction was appropriate, she satisfied her duty of inquiry. Id. Therefore, the Court of Appeals granted Patricia’s claim for relief from joint and several liability. The Court of Appeals specifically distinguished other cases in which the requesting spouse failed to question the legitimacy of the deduction: “We therefore distinguish this case from one in which the tax court denied relief to a spouse seeking relief who simply ignored a large deduction and who refused to make inquiries.” Id. In the case at hand, we are satisfied that petitioner did not have actual knowledge of the facts giving rise to the disallowance of the losses. There was conflicting testimony concerning whether petitioner had any involvement in the Shorthorn partnership. Intervenor testified that petitioner had knowledge and was involved in the decision to participate in the Shorthorn partnership. Conversely, petitioner denied that she had any involvement in or knowledge of the investment, claiming that she left the matter entirely in intervenor’s hands. Even if we accepted intervenor’s testimony as true, we would find that neither petitioner nor intervenor knew the facts that made the flowthrough losses from the partnership unallowable as deductions on their joint returns. Indeed, neither petitioner nor intervenor understood the nature of their investment or the claimed basis for their deductions. They put their trust entirely in the Hoyt organization to determine the basis for, propriety of, and amount of their deductions. Moreover, the documentary evidence supports petitioner’s contention that she had no involvement with the Shorthorn partnership. Intervenor signed all of the documents offered in evidence; petitioner signed none of them. Intervenor asserted in his intervention papers that petitioner attended a meeting with the Hoyt organization, but his actual testimony on this point was uncertain: A: As far as I know she went with me to the one and only meeting I went to. Court: As far as you know, or as far as you recall. A: As far as I recall. Petitioner denied ever attending a meeting or knowing any of the people involved in the Hoyt matter. On balance, we believe petitioner has met her burden of proving by a preponderance of the evidence that she had no involvement with the Shorthorn partnership. She clearly lacked actual knowledge of the facts giving rise to the understatement. However, petitioner had “reason to know” of the understatement. The partnership losses were simply too large in relation to petitioner and intervenor’s joint income for a reasonably prudent person with petitioner’s level of education to ignore. Petitioner and intervenor’s joint Federal income tax return for 1985 showed wages of $30,203 and Shorthorn partnership losses of $20,180 and for 1986 showed wages of $36,943 and Shorthorn partnership losses of $26,234. A reasonably prudent taxpayer would have questioned deductions of this size in relation to their income. “Tax returns setting forth large deductions, such as tax shelter losses offsetting income from other sources and substantially reducing or eliminating the couple’s tax liability, generally put a taxpayer on notice that there may be an understatement of tax liability.” Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228. Unlike the situation in Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989), where the requesting spouse questioned the deduction and received assurances regarding the propriety of the deduction, petitioner failed to make inquiries. The court in Price distinguished cases, like the one at hand, where “a spouse seeking relief * * * simply ignored a large deduction and * * * refused to make inquiries.” Id. at 966; see also Reser v. Commissioner, 112 F.3d 1258, 1267-1268 (5th Cir. 1997) (“Tax returns setting forth ‘dramatic deductions’ will generally put a reasonable taxpayer on notice that further investigation is warranted. A spouse who has a duty to inquire but fails to do so may be charged with constructive knowledge of the substantial understatement and thus precluded from obtaining innocent spouse relief.”), affg. in part and revg. in part T.C. Memo. 1995-512; Hayman v. Commissioner, supra at 1262 (no relief where requesting spouse failed to read return); Kalinowski v. Commissioner, T.C. Memo. 2001-21 (applying Price standard to section 6015 cases); Levin v. Commissioner, T.C. Memo. 1987-67 (denying relief from joint and several liability where requesting spouse failed to make inquiry). Under the circumstances, petitioner has failed to meet her burden of showing that a reasonable person in her position would not have reason to know of the understatement. Therefore, petitioner is not entitled to relief from joint and several liability under section 6015(b). Issue 2. Petitioner’s Right to Section 6015(c) Relief Respondent has also denied petitioner’s claim for relief under section 6015(c). Petitioner was eligible to make an election under section 6015(c) because she was no longer married to intervenor at the time she filed her request for relief from joint and several liability. See sec. 6015(c)(3)(A)(i)(I). Upon the satisfaction of certain conditions, section 6015(c) relieves the requesting spouse of liability for the items making up the deficiency that would have been allocable solely to the nonrequesting spouse if the spouses had filed separate tax returns for the taxable year. Sec. 6015(d)(1), (3)(A). Petitioner has the burden of proving which items would not have been allocated to her if the spouses had filed separate returns. See Culver v. Commissioner, 116 T.C. 189 (2001) (burden of proof under section 6015 normally on the taxpayer, except under section 6015(c)(3)(C) actual knowledge test). Petitioner has met her burden of establishing that the items making up the deficiency are attributable to intervenor and not to her. Petitioner established by a preponderance of the evidence that she had no involvement in the decision to invest in the Shorthorn partnership or to have the Hoyt organization prepare their joint income tax returns. She signed none of the documents for the Shorthorn partnership offered in evidence. There was no firm credible evidence that petitioner had any involvement with the Hoyt organization. Intervenor admitted that he was the one who was introduced to the Hoyt organization by a coworker. He admitted to attending an introductory Hoyt meeting and to deciding to participate in the Shorthorn partnership. He delivered his and petitioner’s tax information to the Hoyt organization to prepare their tax returns. The deduction of excessive losses from the Shorthorn' partnership is therefore attributable entirely to intervenor’s activities and his partnership interest and would have been allocated entirely to him if the spouses had filed separate returns.8 Petitioner is therefore entitled to relief under section 6015(c) from joint and several liability for the deficiency, except to the extent that one or more of the exceptions apply. Section 6015(c) contains three exceptions under which items initially attributed to the nonrequesting spouse must also be attributed to the requesting spouse. These are the “actual knowledge” exception in section 6015(c)(3)(C), the “benefit” exception in section 6015(d)(3)(B), and the “fraud” exception in section 6015(d)(3)(C). There are no facts to suggest that the “fraud” exception applies here. A. The Actual Knowledge Exception The first exception to the separate return rule' is for items initially allocable solely to the nonrequesting spouse of which the requesting spouse has actual knowledge. Sec. 6015(c)(3)(C). If petitioner had “actual knowledge * * * of any item giving rise to a deficiency (or portion thereof)” at the time she signed the return, that item must be allocated to her. See sec. 6015(c)(3)(C). Respondent claims that no relief is available to .petitioner under section 6015(c) because petitioner had “actual knowledge * * * of the items giving rise to the deficiency.” Respondent has the burden of proving by a preponderance of the evidence that petitioner, at the time of signing the returns, had actual knowledge of the items giving rise to the deficiency that otherwise would have been allocated solely to intervenor under the separate return rule. See sec. 6015(c)(3)(C) (“If the Secretary demonstrates * * * actual knowledge”); Culver v. Commissioner, supra. In King v. Commissioner, 116 T.C. 198, 203 (2001), this Court considered the standard for “actual knowledge of the item giving rise to the deficiency” applicable to erroneous deductions under section 6015(c)(3)(C). There, the taxpayer filed a joint return with her husband, Curtis Freeman, and claimed significant losses from Freeman’s cattle ranching operations. The taxpayer knew that the cattle ranch was not profitable but did not know that Freeman lacked a profit motive for engaging in the activity, which was the critical fact underlying the Commissioner’s determination that Freeman was not entitled to deduct the losses under section 183. This Court held that the taxpayer was entitled to relief under section 6015(c), even though the taxpayer was aware of the activity giving rise to the erroneous deduction (the cattle ranching activity) because she did not know the predicate facts causing the losses to be nondeductible (i.e., her husband’s lack of a profit motive): The question in this case, therefore, is not whether petitioner knew the tax consequences of a not-for-profit activity but whether she knew or believed that her former spouse was not engaged in the activity for the primary purpose of making a profit. Thus, in determining whether petitioner had actual knowledge of an improperly deducted item on the return, more is required than petitioner’s knowledge that the deduction appears on the return or that her former spouse operated an activity at a loss. Whether petitioner had the requisite knowledge is an essential fact respondent was required to establish under section 6015(c)(3)(C). Respondent failed in this regard. * * * [Id. at 205; emphasis added.] Applying the factual standard of King to the case at hand, the losses from the Shorthorn partnership would be allocated to petitioner only if she knew the factual basis for the denial of the deductions. According to respondent: the factual basis for the disallowed deduction in the Hoyt tax shelter cases generally centers on the lack of animals to sustain the deductions taken and an overvaluation of the animals that were available. * * * Respondent concedes that neither he nor Mr. Rasberry has established that petitioner had actual knowledge of the factual circumstances giving rise to the dis-allowance of the partnership losses. * * * Respondent argues that the principle of King v. Commissioner, supra, should not be extended to limited partnership investments because both spouses would often be eligible for section 6015(c) relief, since neither would have actual knowledge of the factual basis for the disallowance of the partnership losses. That is not how section 6015(c) works. Only items that are not attributable to the requesting spouse under section 6015(d) are subject to the “actual knowledge” exception in section 6015(c)(3)(C). Since the erroneous deductions here (the Shorthorn partnership losses) are attributable to intervenor’s activities and his partnership interest, he cannot avoid his liability for the deficiency by filing a request for relief under section 6015(c), even if he lacked knowledge of the facts giving rise to the deduction. It is appropriate to apply the King standard to limited partnership investments made by the nonrequesting spouse in allocating liabilities based on the “separate return” standard in section 6015(c). The “actual knowledge” test in section 6015(c)(3)(C) is an exception to the general rule under which items resulting in the deficiency are allocated as if the spouses had filed separate returns. The statute makes no distinction between active and passive investments, and we see no legal basis and no policy reason for creating a judicial distinction. Therefore, the Shorthorn partnership losses, which are attributable solely to intervenor’s activities and partnership interest, should not also be attributed to petitioner under section 6015(c)(3)(C) merely because both petitioner and intervenor, rather than just petitioner, lacked actual knowledge of the facts giving rise to the disallowance of the losses. B. The Tax Benefit Exception Section 6015(d)(3)(B) contains an exception to the general rule that items are to be attributed to the spouses in the same manner as they would have been had the spouses filed separate returns. Under this exception, items giving rise to a deficiency that are attributable to the nonrequesting spouse must also be attributed to the requesting spouse if the requesting spouse received a “tax benefit” from the items on the joint return. The legislative history explains the operation of the “tax benefit” exception: If the deficiency arises as a result of the denial of an item of deduction or credit, the amount of the deficiency allocated to the spouse to whom the item of deduction or credit is allocated is limited to the amount of income or tax allocated to such spouse that was offset by the deduction or credit. The remainder of the liability is allocated to the other spouse to reflect the fact that income or tax allocated to that spouse was originally offset by a portion of the disallowed deduction or credit. [H. Conf. Rept. 105-599, at 252 (1998), 1998-3 C.B. 747, 1006.] Both the conference committee report and the proposed regulations contain an example under which an erroneous deduction attributable to the nonrequesting spouse (in excess of the nonrequesting spouse’s separate return income) reduces the requesting spouse’s hypothetical separate return tax liability, resulting in a tax benefit to the requesting spouse. See id.; sec. 1.6015-3(d)(5) Example 6, Proposed Income Tax Regs., 66 Fed. Reg. 3900 (Jan. 17, 2001). In the case at hand, petitioner would have been required to pay tax on her share of the income reported on each joint return had she filed a separate return. Because of the erroneous Shorthorn, partnership deductions attributed to inter-venor, petitioner did not pay any taxes on her separate return share of the income. Therefore, she received a tax benefit from intervenor’s erroneous deductions that must be taken into account in determining the extent to which petitioner is entitled to relief from joint and several liability. In order to determine the relief to which petitioner is entitled, the parties must determine the proportion of the erroneous Shorthorn partnership deduction that resulted in a tax benefit to petitioner. The Shorthorn partnership deduction is first attributed to intervenor to the extent of intervenor’s separate return income. The balance of the deduction benefited petitioner by reducing petitioner’s separate return income. Petitioner is liable for the proportion of the deficiency equal to the proportion of the total Shorthorn partnership deduction which benefited her. For example, if petitioner benefited from 25 percent of the Shorthorn partnership deduction, she would be liable for 25 percent of the deficiency and entitled to relief from joint and several liability for 75 percent of the deficiency. Any amounts previously collected from petitioner and intervenor should be appropriately credited after determining petitioner’s liability for the deficiency. To give effect to the foregoing, Decision will be entered in accordance with Rule 155. Unless otherwise indicated, all section references are to the Internal Revenue’Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. It is unclear whether, and if so how (a general endorsement or a restrictive endorsement), petitioner endorsed the refund checks. According to the testimony, intervenor had invested the original $25 plus the $3,185 tax refund endorsed to the Hoyt organization, less approximately $500 of the tax refund that they received back from the Hoyt organization. According to petitioner’s testimony at trial, respondent initially offset two of her income tax refunds. One of petitioner’s tax refunds was returned to her after she filed her request for relief from joint and several liability. Respondent has retained one of her tax refunds. Petitioner stated at trial: “I am not trying to seek relief from my income during those two years. I am seeking relief for the — an investment that I had no knowledge of, and I had no idea what that was. I am not — like I said, I am not seeking relief for the income for those two years.” According to petitioner’s testimony, respondent has offset one of petitioner’s subsequent year tax refunds. Petitioner would not be entitled under sec. 6015(c) to a refund of any amount she had previously paid. Sec. 6015(g)(3). The amount she had previously paid, however, should be taken into account in determining her liability under sec. 6015(c) on a separate return basis. Petitioner did not request relief under sec. 6015(f) in her petition or in any of her other filings with this Court. Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989), arose under former sec. 6013(e) rather than under current sec. 6015(b). The same standard applies under the sec. 6015(b) knowledge test. Former sec. 6013(e)(1)(C) provided “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”. Current sec. 6015(b)(1)(C) provides “the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement”. The only meaningful change in the language was to eliminate the requirement that the understatement be “substantial”. The “did not know, and had no reason to know” language is the same in both provisions. Determinations made under sec. 6015 are made without regard to community property laws. Sec. 6015(a) (flush language). Therefore, petitioner’s potential interest in the Shorthorn partnership as a result of the community property laws is ignored for the purpose of determining whether any item giving rise to the deficiency should be attributed to her under the separate return standard.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620151/	Sam S. Brown, Petitioner, et al. 1 v. Commissioner of Internal Revenue, RespondentBrown v. CommissionerDocket Nos. 33867, 33868, 33869, 34079United States Tax Court20 T.C. 73; 1953 U.S. Tax Ct. LEXIS 195; April 14, 1953, Promulgated 1953 U.S. Tax Ct. LEXIS 195">195 Decisions will be entered under Rule 50. Deduction -- Loss -- Owner -- Estate or Beneficiaries -- Conversion of Real Property. -- Held, no conversion of real property was effected by will and residuary legatees may deduct loss on real property which they, joined by executor, sold. David B. Buerger, Esq., and Alexander Black, Jr., Esq., for the petitioners.John J. Hopkins, Esq., for the respondent. Murdock, Judge. MURDOCK 20 T.C. 73">73 The Commissioner determined deficiencies in income tax for 1946 as follows:NameAmountSam S. Brown$ 1,605.50William S. and Elizabeth M. Brown248.00Nelle Wood Hay474.00J. Homer and Jean B. McCready9,954.32The only question for decision is whether an admitted loss from the sale of real estate located at 523 Wood Street, Pittsburgh, Pennsylvania, 20 T.C. 73">74 is deductible by the petitioners, residuary beneficiaries under the will of W. S. Brown.FINDINGS OF FACT.The petitioners filed their returns for 1946 with the collector of internal revenue for the twenty-third district of Pennsylvania.William S. Brown, referred to as the decedent, a resident of Pittsburgh, Pennsylvania, died testate on September 8, 1928. 1953 U.S. Tax Ct. LEXIS 195">196 He was survived by his five children, William M., Edwin L., and three of the petitioners herein, Nelle, Jean, and Samuel. William M. died on January 10, 1937, survived by his son, William S., one of the petitioners herein. Edwin L. died on November 6, 1939, leaving one-third of his property to each of his sisters, Nelle and Jean, and one-third to Ida Cramer.The decedent, at the time of his death, owned real estate, including a property at the corner of Wood Street and Oliver Avenue in Pittsburgh, known as 523 Wood Street. He also owned all of the capital stock of W. S. Brown, Inc., a sporting goods store, tenant of the Wood Street property. The decedent and his three sons were employed by that corporation on a full-time basis.The decedent, by his will, left small amounts to three employees, $ 25,000 in trust for the education of four grandchildren, $ 13,000 in trust for his son William, and $ 13,000 outright to his other four children and made provision for the payment of his debts and for a cemetery lot and headstone. Other provisions of his will pertinent hereto are:Fifth: When my said real estate on the corner of Wood Street and Oliver Avenue aforesaid shall have been1953 U.S. Tax Ct. LEXIS 195">197 sold and the proceeds received, I give and bequeath out of the proceeds of such sale to each of my children, Nelle, Jean, Edwin L. and Samuel S., the sum of Thirty-five thousand dollars ($ 35,000.00) and to the Union Trust Company of Pittsburgh, the sum of Twenty-three thousand dollars ($ 23,000.00) to be held by it for the use and benefit of my son, William M. Brown, in accordance with the same terms and conditions set forth in paragraph Fourth of this Will.I make this difference in the amounts given to my children or for their benefit by reason of the fact that I have heretofore given to my son, William M. Brown, twelve thousand dollars ($ 12,000.00).Ninth: All the rest and residue of my estate. real, personal and mixed, I give, devise and bequeath absolutely to my four children, Nelle Wood Hay, Edwin L. Brown, Jean A. McCready and Samuel S. Brown, and to The Union Trust Company of Pittsburgh in trust for the use and benefit of my son, William M. Brown, under the same conditions and trusts set forth in paragraph Fourth of this will, share and share alike, that is to say, one fifth to each.Thirteenth: I hereby authorize and empower my executors and the survivor of them1953 U.S. Tax Ct. LEXIS 195">198 hereinafter named to bargain and sell from time to time either before or after the settlement of my personal estate any portion or all of the real estate of which I may be seised or in which I may have any interest for such prices and on 20 T.C. 73">75 such terms as to my said executors may seem best and to execute and deliver a deed or deeds therefor to the purchaser or purchasers thereof by which the same will be conveyed to the purchaser or purchasers thereof free and discharged of any trusts and without liability on the part of said purchaser or purchasers to see to the application of the purchase money provided that neither the land upon which my residence No. 5801 Aylesboro Avenue, Pittsburgh, is erected, nor the land owned by me at the corner of Wood Street and Oliver Avenue upon which is erected the building No. 523 Wood Street, shall be sold without the consent of a majority of my children then living. If at any time there shall be an equal division between my children upon the question as to the sale of either of said parcels of land, then The Union Trust Company of Pittsburgh shall decide whether or not it shall be sold and its decision shall be binding.He also provided for1953 U.S. Tax Ct. LEXIS 195">199 members of his family to occupy his residence on Aylesboro Avenue rent free and with all taxes, insurance, and repairs paid out of the residuary estate but "Until the said land and building No. 523 Wood Street, Pittsburgh, Pennsylvania, shall be sold as herein provided, I hereby authorize and empower my said executors to lease and demise the same in whole or part from time to time for such term or terms and for such rentals as they shall deem proper. The net rents received therefrom shall be applied to the payment of taxes and other charges against my residence property so long as it shall remain unsold and the residue shall be paid to" Nelle, Jean, Edwin L., Samuel S., and the trustee for William M., children of the testator. The executors named in the will were Edwin L. and The Union Trust Company.The value of the Wood Street property at the date of the death of the decedent, as agreed upon by the Commissioner and the executors for Federal estate tax purposes, was $ 330,000. The decedent, at the time of his death, owned personal property substantially in excess of his debts, funeral and administration expenses, and all specific bequests.The executors leased the Wood Street 1953 U.S. Tax Ct. LEXIS 195">200 property to the sporting goods store until 1938, and thereafter until January 26, 1946, from time to time leased a part or all of that property to other tenants. The rents from the Wood Street property over and above the taxes and expenses of that property were applied by the executors prior to 1940 to the payment of taxes, insurance, and other operating charges against the Aylesboro Avenue residence and the remainder was distributed among the decedent's children and the trustee for William M., except that nothing was available for distribution to the children after 1934.William S., Edwin L., Nelle, Jean, and Jean's husband, entered into a contract with an engineering company on January 6, 1939, for alterations to be made to the building at 523 Wood Street at a cost of $ 17,000.Nelle, Jean, Jean's husband, William S. Brown II and his wife, Ida M. Cramer, Samuel S. Brown, and The Union Trust Company of Pittsburgh, surviving executor and trustee under the will of the decedent, 20 T.C. 73">76 entered into an agreement with Alvin J. Williams in November 1945 for the sale to Williams of the property at 523 Wood Street subject to the payment by Williams of delinquent taxes totaling $ 26,417.06, 1953 U.S. Tax Ct. LEXIS 195">201 for the purchase price of $ 100,000, part of which was to be secured by a purchase money mortgage for $ 67,843.46. The same parties executed a deed dated January 26, 1946, transferring the property to Williams. The individuals gave a general warranty and The Union Trust Company agreed that it had done nothing to encumber the estate or affect title to the property. Williams gave a purchase money mortgage dated January 26, 1946, to Nelle, Jean, William S. II, Samuel S. Brown, and Ida M. Cramer.It is stipulated that "the Wood Street property was sold at a loss of at least $ 112,000" and each petitioner's share of the loss, if they are sustained in their contention, is stipulated.The Union Trust Company, as surviving executor of the decedent, at the request of the beneficiaries, filed a final account on March 29, 1946, showing the receipts and disbursements of rentals collected on the Wood Street property and the proceeds of the sale.The petitioners claimed their respective shares of the loss on their returns for 1946 but the Commissioner, in determining the deficiencies, disallowed those deductions with the explanation that the beneficiaries under the will of the decedent received1953 U.S. Tax Ct. LEXIS 195">202 interests in the Wood Street property "only in terms of money; title to the property passed to the estate and not to the beneficiaries."All facts stipulated by the parties are incorporated herein by this reference.OPINION.The parties agree that decision of this case turns entirely upon the question of whether the will of the decedent equitably converted the real property at 523 Wood Street into personalty so the title thereto was in the estate of the decedent and the loss was the loss of the estate rather than the loss of the residuary beneficiaries under the will. They also agree that that question is to be determined by interpreting the will itself under the laws of Pennsylvania to determine the intention of the testator. . They both cite and rely upon , in which the court said that:in order to work a conversion, there must be either --1st. A positive direction to sell; or2d. An absolute necessity to sell in order to execute the will; or3d. Such a blending of real and personal estate by the testator in his will as to clearly show that he intended1953 U.S. Tax Ct. LEXIS 195">203 to create a fund out of both real and personal estate, and to bequeath the said fund as money.20 T.C. 73">77 The Commissioner's argument is that the facts "fall squarely within the ambit of the second test quoted above." That is, "There is here an absolute necessity to sell in order to execute the will." There was a power but no positive direction to the executor in the will to sell the property. . There was no blending of real and personal estate by the testator in his will. Thus the determination of the Commissioner must stand or fall, as he contends, on the question of whether or not there was an absolute necessity to sell in order to execute the will.The cases cited by both parties show that conversions of this kind are not favored and will not be found except where a sale of the real estate is absolutely necessary to the execution of the will. The following quotation from , approved by the Supreme Court in ,1953 U.S. Tax Ct. LEXIS 195">204 is illustrative:It should never be overlooked that there is no real conversion. The property remains all the time in fact realty or personalty as it was, but for the purpose of the will so far as it may be necessary, and only so far, it is treated in contemplation of law as if it had been converted. Few testators have any knowledge of the doctrine or any actual intent to change the nature of their property except when and to the extent that may be required to carry out the special purpose of the will. The presumption therefore, no matter what the form of words used, is always against conversion; and even where it is required it must be kept within the limits of actual necessity.There was ample personal estate and the Commissioner, in order to show the necessity for the sale, relies principally upon the provisions in the fifth and thirteenth paragraphs of the will. He argues that the requirement of a consent of a majority of the children was merely a condition as to the time when the executor could exercise his right to sell, and an intention that the executor should sell is shown by the fact that the specific bequests out of the proceeds of the sale of the Wood Street property1953 U.S. Tax Ct. LEXIS 195">205 required a sale of that property by the executor in order to pay those bequests. The petitioners point out that in paragraph Thirteenth the decedent gave his executor power to sell the Wood Street property only with "the consent of a majority of my children then living," that was a limitation on his power to sell and was not a mere limitation on the time of sale, , and it has been held under substantially similar circumstances that such a provision does not result in a conversion. ; ; ; Cf. ; .The petitioners also argue that the purpose of paragraph Fifth was merely to make provision for the adjustment of the advancement to 20 T.C. 73">78 William M. when and if the Wood Street property was sold, and there are substantially similar1953 U.S. Tax Ct. LEXIS 195">206 cases which show that such a provision does not result in a conversion where, as here, the beneficiaries were the same persons to whom the real estate would go in equal shares were it not sold. If the beneficiaries under Fifth were not the persons to whom the property would go in equal shares if it were not sold, the sale would probably be necessary and a conversion would follow. Cf. ; . However, where, as here, the persons are the same, those persons have a choice of selling or of not selling and a sale is not necessary. The testator in the Nagle case, supra:devised all his estate to his wife, during widowhood; "at her decease it is my desire, if the majority of my children be agreed, that my executors shall sell all my real estate * * * and give unto my son John $ 500, money borrowed from him." He then directed his executors to give $ 500 to each of his seven children, out of the proceeds of his real estate, and directed the residue to be equally divided between them, in three years after receiving the $ 1953 U.S. Tax Ct. LEXIS 195">207 500. If any of the children did not make a good use of the $ 500, the executors were to keep the residue, to administer it as their necessities required.The court stated at page 264:It has also been urged upon us that, by the subsequent direction to pay a debt and legacies out of a fund arising from a sale of the realty, is necessarily given a power to sell, for the purpose of raising that fund, which there is nothing to qualify or render contingent. It would be difficult to support this proposition in face of the express provision, that a sale has only to be made in the event of the assent of those who otherwise would take the land. It may be, that where a sale is absolutely required to effectuate a well-ascertained paramount intent, that otherwise would be frustrated, the necessity will afford a controlling reason in the construction of the instrument creating the power. But there is no such overruling necessity here. As for the so-called legacies, they represent but the value of the land which, unsold, goes to the legatees.It was held in that case that no conversion was effected. The testator, in ,1953 U.S. Tax Ct. LEXIS 195">208 directed his executors to sell real estate "at any time that it may be advisable, and by the agreement of my wife and a majority of my heirs." The court, in that case, said in part:There was no active trust created and no restriction on the individual right of disposition. Neither the interest of the widow nor the advancements is any obstacle to partition; for the law makes provision for the adjustment of such matters. There is therefore no occasion for the services of the executors; and no conversion. True, there is power of sale vested in the executors; but that can only be called into life by the agreement of the widow and heirs.Cf. ;The Pennsylvania authorities have been studied in order to learn what the courts of that state have held under circumstances as similar to those here present as have been discovered. No exact parallel to the terms of the will in this case has come to light and the intent of the decedent must be determined from the provisions of his own will. 20 T.C. 73">79 The decedent had a number of ways in which he could have offset the1953 U.S. Tax Ct. LEXIS 195">209 $ 12,000 advancement to his one son and it is not clear why he provided as he did. However, the matter of that advancement could have been settled by the children without the executor selling the Wood Street property. The conclusion has been reached that the decedent did not intend to require its sale by the executor and since there was no necessity for its sale by the executor there was no conversion. That decides the only question between the parties.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: William S. Brown and Elizabeth M. Brown, Docket No. 33868; Nelle Wood Hay, Docket No. 33869; and J. Homer McCready and Jean B. McCready, Docket No. 34079.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620152/	GEORGE M. WRIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM A. MOOREHEAD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wright v. CommissionerDocket Nos. 20555, 20875.United States Board of Tax Appeals19 B.T.A. 541; 1930 BTA LEXIS 2375; April 11, 1930, Promulgated 1930 BTA LEXIS 2375">2375 The respondent's determination as to the fair market value of certain shares of stock received by the petitioners in 1920 sustained. A. C. Todd, Esq., for the petitioners. F. R. Shearer, Esq., and J. A. Lyons, Esq., for the respondent. MARQUETTE 19 B.T.A. 541">541 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1920 as follows: George M. Wright$14,530.65William A. Moorehead2,563.84FINDINGS OF FACT. The petitioners, George M. Wright and William A. Moorehead, are individuals residing respectively at Laurens, S.C., and Goldville, S. C. George M. Wright was, during the year 1920, a married man with four dependent children. The Banna Manufacturing Co. was a corporation organized under the laws of South Carolina in the year 1907, and from the date of 19 B.T.A. 541">542 its organization until some time in the year 1924 it was engaged in operating a cotton mill of 14,224 spindles located at Goldville, S.C. In the years 1919 and 1920 its outstanding capital stock was $248,300, divided into 2,483 shares of the par value1930 BTA LEXIS 2375">2376 of $100 each, and consisted of three classes of stock as follows: 1,000 shares of common stock ($100,000); 967 shares of guaranteed stock ($96,700); and 516 shares of preferred stock ($51,600). On January 1, 1920, and for some time prior thereto, the common stock of the Banna Manufacturing Co. was owned and held as follows: SharesGeorge M. Wright225G. E. Shand, Columbia, S.C225W. A. Moorehead100Ivy M. Mauldin, as Trustee, Columbia, S.C215Carolina Realty & Trust Co., Columbia, S.C10J. P. Matthews, as Trustee, Columbia, S.C225In November or December, 1919, a written contract was executed by and between S. H. McGhee as buyer, and J. P. Matthews, Ivy M. Mauldin, W. A. Moorehead, G. E. Shand and George M. Wright, as sellers. The agreement was also signed by the Carolina Realty & Trust Co. The agreement was in part as follows: 1. That the Sellers agree to sell and the Buyer agrees to buy on January 2, 1920, all of the stock of Banna Manufacturing Company at a price to be arrived at on the basis of thirty-four dollars ( $34.) per spindle for each and every spindle of the said Banna Manufacturing Company amounting to fourteen thousand two1930 BTA LEXIS 2375">2377 hundred and twenty-four (14,224) spindles, and in addition to buy and pay for all quick assets as provided in paragraph 3. 2. Previous to January 2, 1920, Sellers agree that they will distribute all quick assets of Banna Manufacturing Company except such as are necessary for the operation of the plant, which Buyer does not buy. 3. The Buyer agrees to pay for all the quick assets which he buys at invoice price, and to buy and pay for stock in process, the price of which shall be arrived at by a representative of the Buyer and a representative of the Sellers, and if these two cannot agree it is agreed that third party shall be called in whose decision shall be final and binding on both parties. * * 5. It is agreed that all of the stock of Banna Manufacturing Company shall be transferred to a holding company, and that such holding company shall be organized with a capital stock of five hundred thousand ($500,000) dollars, of which amount two hundred and fifty thousand ($250,000) dollars shall be common stock and two hundred and fifty thousand ($250,000) dollars shall be preferred stock. The two classes of stock shall have the rights and preferences hereinafter set forth, 1930 BTA LEXIS 2375">2378 which rights and preferences shall constitute a part of this agreement. The Buyer shall pay all expenses of the trustee and any disbursements it may make either as depository of the stock as herein provided, or as trustee under the agreement. * * 8. 19 B.T.A. 541">543 The Palmette Trust Company shall be the depository of the said stock and trustee under the agreement, and the Buyer agrees to deposit with said trust company all the capital stock of the Banna Manufacturing Company, and such trustee shall hold the said stock until all the agreements and terms of purchase shall have been carried out in full, after which it shall deliver the stock to the parties entitled thereto. 9. The preferred stock shall have the following rights, preferences, conditions and limitations: The holders of the preferred stock shall be entitled to receive when and as declared by the Board of Directors, from the surplus or net profits arising from the business of the corporation, cumulative dividends at the rate of but never exceeding, eight per centum (8%) per annum from and after January 1, 1920, payable semi-annually on June 30, and December 31, in each and every fiscal year, in preference and1930 BTA LEXIS 2375">2379 priority to the declaration or payment of any dividends upon the common stock. If for any dividend period a dividend at the rate of eight per centum (8%) per annum upon the par value of the preferred stock shall not be declared and paid, the deficiency shall be a charge upon the surplus and net profits arising from the business of the corporation and shall be payable, but without interest, before any dividend shall be declared or paid in respect to common stock. In the event of any liquidation or dissolution or winding up (whether voluntary or involuntary) of the corporation, the holders of the preferred stock shall be entitled to be paid one hundred ( $100) dollars per share and the unpaid dividends accrued thereon out of the capital or funds of the corporation or the proceeds thereof, before any amount shall be paid therefrom to the holders of the common stock. The holders of the preferred stock shall not be entitled to any other or further share than as above specified, in surplus, or net profits, or in the capital or funds of the corporation, either prior to or in the event of liquidation and final winding up of the company. Subject to the prior rights of holders of1930 BTA LEXIS 2375">2380 preferred stock, as above specified and limited, the holders of the common stock shall be entitled to all the assets and funds of the corporation and to all profits realized therefrom, and to all rights accruing to stockholders in said company. The preferred stock, or any part or any particular shares thereof, shall be subject to the right of the corporation, at its option, to redeem, purchase and acquire the same upon the first day of January, or the first day of July in any year after the first of January, A.D. 1920, at par, together with any dividends accrued and unpaid thereon. In case the corporation shall so elect to redeem, purchase or acquire any of the said stock and shall notify the registered holder thereof or any part thereof of its election so to do, the right of said holder of said stock or of any assignee thereof to receive dividends upon said stock subsequent to the dates specified in said notice for such redemption, purchase or acquisition, shall cease and determine. The holders of preferred stock shall have no voting power in respect to any of said stock, except as herein otherwise expressly provided, nor shall they be entitled to any notice of meetings of1930 BTA LEXIS 2375">2381 stockholders, nor shall their consent, except as otherwise provided by law, be requisite for any act of the corporation or of the stockholders: provided, however, that if in or for any fiscal year the corporation shall fail to declare and pay or set apart for payments dividends upon said preferred stock outstanding aggregating for such fiscal year eight(8%) per centum upon such stock, then the holders of said preferred stock shall be entitled to vote in any meeting held after the expiration of such fiscal year 19 B.T.A. 541">544 and while the corporation shall be in default with respect to the declaration or payment of such dividends and until all dividends accrued and unpaid upon such preferred stock shall have been declared paid or set apart for payment, and while such dividends are so in default the holders of common stock shall have no right to vote at any stockholders meeting. In the event that the debt of the Banna Manufacturing Company or its successor or successors shall exceed its quick assets then the common stock of the company shall have no vote whatever. Upon the happening of a default in dividends, or upon the debt, the holders of the preferred stock shall have the right to1930 BTA LEXIS 2375">2382 call a stockholders' meeting, elect directors from among the preferred stockholders, call a meeting of the stockholders of Banna Manufacturing Company and elect directors of Banna Manufacturing Company from among the preferred stockholders of this company. The preferred stock shall be redeemed at par and accumulated dividends five years from January 1st, 1920. * * * 11. Sellers shall swap $248,300 of stock of Banna Manufacturing Company for $248,300 of the preferred stock of the holding company and in addition sellers shall take $1,700 of the preferred stock at par and the difference over $250,000 shall be paid in cash. The owners of the common stock of Banna Manufacturing Co. did not own all of the preferred and guaranteed stock of that company, and in order to consummate the sale to McGhee, George M. Wright, on behalf of the common stockholders, bought up the outstanding preferred and guaranteed stock. The entire capial stock of Banna Manufacturing Co. was then delivered to Banna Mills, a corporation organized on the 29th day of December, 1919, under the laws of the State of South Carolina, pursuant to he agreement above set forth, and on or about January 2, 1920, the1930 BTA LEXIS 2375">2383 said sellers received from the said McGhee, or Banna Mills, $234,116 in cash and $250,000 par value of the preferred stock of the said Banna Mills. Part of the cash received was used to pay the expenses of the sale and for the guaranteed and preferred stock of the Banna Manufacturing Co., which the common stockholders purchased as above set forth, and the remainder was distributed to the common stockholders in payment, at par, for their original shares of guaranteed and preferred stock of the Banna Manufacturing Co., and for their common stockholdings at the rate of $70 per share. The preferred stock of Banna Mills was also distributed among said common stockholders in proportion to the number of shares owned by them. The petitioner George M. Wright received, on account of the 225 shares of the common stock of the Banna Manufacturing Co. owned by him, the sum of $15,750 in cash and 563 shares of the preferred stock of Banna Mills. The petitioner William A. Moorehead received, on account of the 100 shares of common stock of the Banna Manufacturing Co. owned by him, the sum of $7,000 in cash an 250 shares of the preferred stock of Banna Mills. 19 B.T.A. 541">545 Paragraph three of the1930 BTA LEXIS 2375">2384 agreement of sale was not carried out according to its terms. Instead of the "quick assets" of the Banna Manufacturing Co. being converted into cash or acquired by McGhee for cash, it was determined that the equivalent hereof would be distributed to the common stockholders of the Banna Manufacturing Co. as of December 31, 1919, in the form of dividends. To provide funds for such dividends the Banna Manufacturing Co. borrowed from banks and increased notes payable, and all the physical assets of the Banna Manufacturing Co. remained in the ownership and control of that corporation, which continued to operate as a going concern until sometime in the year 1924. The distribution of the so-called "quick assets" in the form of special dividends to the common stockholders as of December 31, 1919, amounted to a total of 138 1/2 per cent, one distribution of 75 per cent being made in 1919 and two of 60 per cent and 3 1/2 per cent, respectively, being made early in 1920. A regular dividend of 6 per cent was also paid on the common stock in 1919. The financial statement of the Banna Manufacturing Co. as of January 1, 1920, which was after the payment of the special dividend of 75 per cent1930 BTA LEXIS 2375">2385 but before the payment of the special dividends of 60 per cent and 3 1/2 per cent, was as follows: BANNA MANUFACTURING COMPANY.GOLDVILLE, S.C.CONDENSED FINANCIAL STATEMENTJanuary 1, 1920ASSETSCash on hand and in bank$29,507.81United States Liberty bonds1,000.00United States war savings stamps838.00Cotton (at 32.965?? per lb.)17,440.42Stock in process (at 39?? per lb.)29,158.35Goods unsold (at net market)15,145.92Supplies, fuel, and waste10,476.03Accounts receivable1,846.28Store (merchandise stock)4,216.16Current assets109,628.97Deferred assets:Insurance (unexpired)$827.15Office furniture and fixtures666.481,493.63111,122.60Property and plant294,750.66Total assets405,873.26 19 B.T.A. 541">546 LIABILITIESNotes payableNone.Accounts payable and wages$5,063.52Current liabilities$5,063.52Capital stock:Common$100,000.00Preferred51,600.00Guaranteed96,700.00248,300.00Profit accounts:Credit balance January 1, 1919158,020.02Operating profits for year146,884.97Interest on United States Liberty bonds820.33305,725.32Dividends paid:Common - 81%$81,000.00Preferred - 7%3,612.00Guaranteed - 7%6,769.0091,381.00Federal taxes, 191852,409.06Renewals and replacements8,326.18Loss on sale of Liberty bonds993.50Written off (worthless accounts)105.84153,215.58152,509.74Depreciation reserve account55,672.17Undivided profits96,837.57Total profits, including depreciation reserve152,509.74Total liabilities 1405,873.261930 BTA LEXIS 2375">2386 The net earnings of Banna Mills for the year 1920 were approximately $133,000. Concurrently with the sale and delivery of the capital stock of the Banna Manufacturing Co., said stock was placed in trust by the buyers for the benefit and security of the holders of the $250,000 of preferred stock of Banna Mills. In effect, this trust agreement amounted to a mortgage of the entire outstanding stock of Banna Mills in respect of said preferred stock, to permit the holders of said preferred stock, if necessary, to take over the control and management of the Banna Manufacturing Co., and to guarantee to said preferred stockholders the prompt payment of dividends and the redemption of said preferred stock at par within five years from January 1, 1920. For two or three years preceding the sale of the Banna Manufacturing Co. stock the 7 per cent dividends on the preferred and guaranteed stock were promptly paid. After the sale of said stock to S. H. McGhee and Banna Mills, the 8 per cent cumulative on the 19 B.T.A. 541">547 preferred stock of Banna Mills was promptly paid until the stock was redeemed. Said preferred stock was1930 BTA LEXIS 2375">2387 redeemed in 1924 at $95 per share. The assets of the Banna Manufacturing Co. were sold in 1924 for $415,000. The value of said assets was greater in January, 1920, than at the time of the sale in 1924. At and after January 2, 1920, the preferred stock of Banna Mills was closely held and was not listed or dealt in on any exchange. In January or February, 1920, the petitioner, George M. Wright, sold 50 shares of said preferred stock to one J. B. Wharton, who purchased the stock as an investment at $100 per share. There were no other sales or offers for sale of said preferred stock in the year 1920. The petitioners in their income-tax returns for the year 1920 did not report any profit from the sale of their common stock of the Banna Manufacturing Co. The respondent, upon audit of the returns, determined that the preferred stock of Banna Mills received by the petitioners as part of the consideration for the sale of their common stock of the Banna Manufacturing Co. had a fair market value at that time of $95 per share and he computed a profit to the petitioners on that basis. The petitioner George M. Wright was allowed a personal exemption of $2,000. OPINION. MARQUETTE: 1930 BTA LEXIS 2375">2388 The controversy in these proceedings arises from the respondent's determination that the petitioners in 1920 realized a profit from the sale of their shares of the common stock of the Banna Manufacturing Co. The amounts received by the petitioners from the sale of their preferred stock of the Banna Manufacturing Co. and as special dividends from that company are not involved. The material facts are that the petitioner Wright sold 225 shares of the common stock of the Banna Manufacturing Co. that cost him $100 per share, or $22,500, and received therefor $15,750 in cash and 563 shares of the preferred stock of Banna Mills, and that the petitioner Moorehead sold 100 shares of the common stock of the Banna Manufacturing Co. which had cost him $100 per share, or $10,000, and received therefor $7,000 in cash and 250 shares of the preferred stock of Banna Mills. The respondent has determined that the preferred stock of Banna Mills had a fair market value $95of per share when the petitioners received it and on that basis that the petitioner Wright realized a profit of $46,640 and the petitioner Moorehead a profit of $20,750. The contentions of the petitioners are: (1) That the preferred1930 BTA LEXIS 2375">2389 stock of Banna Mills which they received in the transaction was in substance a stock dividend from the Banna Manufacturing Co., or the equivalent thereof, and hence taxable in the year in which they 19 B.T.A. 541">548 disposed of it, and (2) that the stock had no fair market value; that the cash they received, which was at the rate of $70 per share, should be applied to reduce the cost of the stock sold in 1920, and that there was no taxable gain to them from the transaction until 1924, when the preferred stock of Banna Mills was retired. The first contention of the petitioners is obviously wihout merit and needs no extended discussion. The transaction by which the petitioners secured the preferred stock of Banna Mills has none of the characteristics of a dividend. However, assuming that it does constitute a dividend, it is not a stock dividend from the Banna Manufacturing Co., since i was not paid in the stock of that company. The transaction was clearly one giving rise to gain or loss within he meaning of the Revenue Act of 1918. 1930 BTA LEXIS 2375">2390 ; , affirmed by the Court of Appeals of the District of Columbia, December 2, 1929. We will, therefore, take up the petitioners' contention that the preferred stock of Banna Mills had no fair market value. At the outset of the discussion of this phase of the case it should be pointed out and borne in mind that the respondent has determined that the stock in question had a fair market value of $95 per share. The burden is upon the petitioners, and they must establish by at least a preponderance of the evidence that the stock did not have any fair market value, or that it had a fair market value other than that determind by the respondent, before we would be justified in disturbing the respondent's determination. The evidence establishes that the preferred stock of Banna Mills was closely held and that it was not traded in or listed on any exchange. The only sale of the stock in 1920, so far as we are informed, was that of ten shares by the petitioner Wright to one Wharton at $100 per share. That sale was at arms' length between a willing buyer and a willing seller, and1930 BTA LEXIS 2375">2391 Wharton purchased the stock as an investment and not because of any official or financial relationship between him and Banna Mills or between him and Wright. Aside from this transaction, the evidence presents a case of closely held stock in which there were neither offers to sell nor offers to buy, and in which there was no listing or dealing on a stock exchange. It seems to be the theory of the petitioners that absence of actual trading in the stock proves that it had no fair market value. We do not think that this contention is warranted. The fact that the owners of the stock did not wish to sell it, or did not offer it for sale, does not prove that it could not have been sold in 1920 at a price fairly commensurate with its intrinsic value. The absence of active trading in a stock does not necessarily show tack of fair market value, and under the circumstances other evidence, 19 B.T.A. 541">549 including evidence as to the intrinsic value of the assets back of the stock, should be considered in determining whether the stock had a fair market value. 1930 BTA LEXIS 2375">2392 ; ; ; ; . The evidence shows that the $250,000 of preferred stock of Banna Mills which was paid to the petitioners and the other stockholders of the Banna Manufacturing Co., was secured by all of the capital stock of the Banna Manufacturing Co., which in turn was backed by assets worth in 1920 more than $415,000. It further appears that the Banna Manufacturing Co. was prosperous in 1920 and that its operations in that year resulted in a net profit of approximately $133,000. The dividends on the preferred stock of Banna Mills were promptly paid from the time it was issued until it was retired in 1924. In the light of all the evidence we are of opinion that the petitioners have failed to show that the respondent erred in determining that the preferred stock of Banna Mills had a fair market value of $95 per share when it was received by them. The respondent's determination must, therefore, be approved. The petitioner Wright1930 BTA LEXIS 2375">2393 was during the year 1920 a married man with two dependent children, and is therefore entitled to a personal exemption of $2,800 instead of $2,000, as heretofore allowed. Judgment will be entered under Rule 50.Footnotes1. NOTE: Federal taxes, 1919 ($42,923.54), not yet booked. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620087/	Sophie Bedeian, Petitioner v. Commissioner of Internal Revenue, RespondentBedeian v. CommissionerDocket No. 6073-66United States Tax Court54 T.C. 295; 1970 U.S. Tax Ct. LEXIS 213; February 12, 1970, Filed 1970 U.S. Tax Ct. LEXIS 213">213 Decision will be entered under Rule 50. 1. Held, respondent was justified in employing the net worth increase plus nondeductible expenditures method of income reconstruction to determine the deficiencies.2. Held, further, for purposes of computing petitioner's net worth as of the end of each of the taxable years, (1) an automobile owned by petitioner and used by her only for personal purposes is included in assets at cost, unadjusted for any decrease in value, and (2) the amount of liability on a note does not include the portion of add-on obligations (i.e., discount and filing fee) remaining unpaid.3. Held, further, on the facts, petitioner's liabilities as of Dec. 31, 1962, included a $ 1,000 debt. James B. McGrath, for the petitioner.Roy S. Fischbeck, for the respondent. Featherston, Judge. FEATHERSTON54 T.C. 295">296 Respondent1970 U.S. Tax Ct. LEXIS 213">214 determined deficiencies in and additions to petitioner's income tax for 1961 and 1962 as follows:Additions to thetax, sec. 6653(a),YearDeficienciesI.R.C. 19541961$ 728.44$ 36.421962510.5425.53Petitioner has not contested the additions to the tax. The following issues are presented for decision:(1) Whether respondent was justified in employing the net worth increase plus nondeductible expenditures method of income reconstruction to determine the deficiencies.(2) Whether petitioner's net worth as of December 31, 1961 and 1962, should be adjusted to reflect the decrease in value of an automobile used only for personal purposes.(3) Whether the amount of petitioner's liability on a note as of December 31, 1962, includes the portion of add-on obligations (i.e., discount and a filing fee) remaining unpaid.(4) Whether petitioner's liabilities as of December 31, 1962, include a debt in the amount of $ 1,000 to one Lou White.FINDINGS OF FACTAt the time her petition was filed petitioner was a legal resident of Bettendorf, Iowa. She timely filed her individual income tax returns for 1961 and 1962 with the district director of internal revenue, Des1970 U.S. Tax Ct. LEXIS 213">215 Moines, Iowa.Petitioner's return for 1961 reported taxable income of $ 2,081.30, based on wages of $ 3,900, less itemized nonbusiness deductions of $ 1,218.70 and a personal exemption of $ 600. Her 1962 return disclosed taxable income of $ 223.97, based on wages of $ 1,200, rental income of $ 100, a loss of $ 170.13 from the operation of a laundromat, a longterm capital gain includable in income to the extent of $ 406.50, itemized deductions of $ 712.40, and a personal exemption of $ 600.During 1961 and 1962 petitioner was employed as manager, barmaid, and waitress at Gus's Tavern (hereinafter referred to as the 54 T.C. 295">297 tavern). Under the terms of her employment she received wages plus a percentage of the business profits. She and the owner of the business maintained a joint bank account in which deposits of business receipts were made periodically.As manager of the tavern petitioner was responsible for the preparation of original records of cash receipts and disbursements, as well as daily summary sheets. Three sets of these daily records were kept by petitioner, one set for herself and one set each for the owner and the bookkeeper. Other than a limited number of these 1970 U.S. Tax Ct. LEXIS 213">216 daily summary sheets, petitioner did not maintain any personal books or records of her wages or profits received from the tavern during 1961 and 1962.Early in 1963 petitioner's income tax returns for 1961 and 1962 were assigned to a revenue agent for examination. In response to his request for all of the books and records she used in the preparation for her returns for 1961 and 1962, petitioner produced some daily cash records of the tavern and referred the agent to the tavern's bookkeeper for other records.The agent obtained from the bookkeeper some books of original entry for daily transactions of the tavern. Examination of these records, however, disclosed the absence of ledger sheets, cash register tapes for approximately one-half of the business days, and incomplete sets of daily records. Moreover, discrepancies existed among the three sets of daily records, in that for particular days the records did not agree as to the amounts of certain expenses. The amount of the tavern profits distributed to petitioner could not be determined from the available records, and, consequently, the records could not be reconciled with the information appearing on petitioner's returns. In1970 U.S. Tax Ct. LEXIS 213">217 addition, petitioner engaged in a laundromat business from February to July 1962, and no adequate records were available from this operation. Accordingly, respondent used the net worth increase plus nondeductible expenditures method of reconstructing taxable income to determine the disputed deficiencies.It is stipulated that petitioner's personal expenditures for 1961 and 1962 were $ 4,870.76 and $ 3,691.99, respectively.At the close of 1960, 1961, and 1962 petitioner's assets included the following:ItemDec. 31, 1960Dec. 31, 1961Dec. 31, 1962Cash on hand$ 25.00$ 25.00$ 25.00 Cash deposited:Bettendorf Bank & Trust28.5554.13208.93 Oscar Mayer Credit Union180.76191.66Real estate:1906 Grant, Bettendorf13,500.0013,500.0013,500.00 Less depreciation(240.00)406 W. 8th, Davenport9,550.00Real estate contract, 406 W. 8th9,550.00 Total13,734.3123,320.7923,043.93 54 T.C. 295">298 In December 1960 petitioner purchased, at a cost of $ 6,076.50, a 1960 Cadillac automobile, which she used for personal purposes and owned at the close of the calendar years 1960, 1961, and 1962. In 1964 she sold the automobile for1970 U.S. Tax Ct. LEXIS 213">218 $ 1,700. In the net worth increase computation on which the deficiency determination was based, respondent included the automobile as an asset in the amount of $ 6,076.50 at the end of each year 1960, 1961, and 1962, without any adjustment for depreciation or other decrease in value.At the close of 1960, 1961, and 1962 petitioner's liabilities included the following:ItemDec. 31, 1960Dec. 31, 1961Dec. 31, 1962Real estate contract, 1906 Grant$ 5,937.76Bettendorf Bank & Trust:Note dated 12/5/601,595.70Real estate mortgage dated 8/2/61$ 9,825.18$ 7,964.07Liability ledger -- notes1,000.00Davenport Bank & Trust4,000.00Real estate contract, 406 W. 8th5,258.83Total7,533.4615,084.0112,964.07In addition to the foregoing liabilities, petitioner executed a promissory note on February 5, 1962, to the Bettendorf Bank & Trust Co. in the amount of $ 2,918.88, payable in 24 equal monthly installments of $ 121.62. This note included the renewal of a prior obligation of $ 2,105, an advance of $ 500, a filing fee of $ 1, and discount (interest) of $ 312.88. Petitioner made monthly payments on the note during the rest of 1962, 1970 U.S. Tax Ct. LEXIS 213">219 leaving a balance due of $ 1,702.68 at the end of that year. In computing petitioner's net worth as of December 31, 1962, respondent treated $ 1,516.63 as the amount of the liability on the note, eliminating the portion ($ 186.05) of the discount and filing fee attributable to the period subsequent to that date.Also, in 1962 petitioner borrowed $ 1,000 from Lou White, and the debt remained unpaid at the end of the year. It was repaid in 1963. In computing petitioner's net worth as of December 31, 1962, respondent did not include the $ 1,000 debt among petitioner's liabilities.Respondent's computation of petitioner's increase in net worth and understatement of adjusted gross income was as follows:Item19611962Net worth -- end of year$ 14,313.28$ 14,639.73Net worth -- beginning of year12,277.3514,313.28Net worth increase2,035.93326.45Adjustments to net worth: 1Add personal expenses paid4,870.763,691.99Adjusted gross income:As redetermined6,906.694,018.44Per return3,900.001,536.37Understatement of adjusted gross income3,006.692,482.0754 T.C. 295">299 1970 U.S. Tax Ct. LEXIS 213">220 OPINIONThe first issue is whether respondent was justified in employing the net worth increase plus nondeductible expenditures method to reconstruct petitioner's taxable income. We think he was. Since petitioner's income included a percentage of the profits of the tavern, and she maintained no adequate personal records, respondent could look beyond the Form W-2 furnished by her employer. See Barry Meneguzzo, 43 T.C. 824">43 T.C. 824, 43 T.C. 824">832 (1965). Her taxable income could be verified only by determining the amount of the tavern's profits paid to her; yet its records were incomplete and inconsistent. See Holland v. United States, 348 U.S. 121">348 U.S. 121, 348 U.S. 121">131-132 (1954); Schwarzkopf v. Commissioner, 246 F.2d 731 (C.A. 3, 1957), affirming a Memorandum Opinion of this Court. Finally, petitioner had no income from nontaxable sources during the years in question, and a probable taxable source of the unreported income -- the tavern -- existed. See 348 U.S. 121">Holland v. United States, supra at 137-138. The net worth method may properly be employed in these circumstances. Bodoglau v. Commissioner, 230 F.2d 3361970 U.S. Tax Ct. LEXIS 213">221 (C.A. 7, 1956), affirming 22 T.C. 912">22 T.C. 912 (1954); Morris Lipsitz, 21 T.C. 917">21 T.C. 917, 21 T.C. 917">931 (1954), affd. 220 F.2d 871 (C.A. 4, 1955), certiorari denied 350 U.S. 845">350 U.S. 845 (1955).Turning to the contested items in respondent's computations, there is no merit in petitioner's contention that the value of the Cadillac automobile acquired in 1960, used exclusively for nonbusiness purposes, should be reduced each year for depreciation. This argument misconceives the theory of the net worth method as a tax-measuring device. The term "net worth" in this context does not mean the economic affluence of the taxpayer, but instead means the difference, as of the end of the taxable year, between the value of his assets in terms of actual expenditures therefor and his liabilities. The reference is to the tax basis of an asset, not to its fluctuating market value. See 10 Mertens, Law of Federal Income Taxation, sec. 55.19, p. 116 (1964 ed.); Balter, Tax Fraud and Evasion 10.52-10.53 (3d ed. 1963). Thus, items such as depreciation -- which affect value but entail no current outlay -- are taken into1970 U.S. Tax Ct. LEXIS 213">222 account only if they are deductible; otherwise the "net worth increase" for each year, which is one of the components of adjusted gross income as computed by the method, would be reduced by an amount which could not be deducted in computing taxable income. 154 T.C. 295">300 Consequently, the decrease in value during 1961 and 1962 of the automobile, for which a depreciation deduction was not allowable, has no relevance in determining petitioner's taxable income. See 30 J. Taxation 378, 379 (1969). While petitioner's "net worth" from an economic standpoint was no doubt affected by deterioration of the automobile, this was not so for purposes of a net worth computation. See 348 U.S. 121">Holland v. United States, supra at 125;1970 U.S. Tax Ct. LEXIS 213">223 Schultz v. Commissioner, 278 F.2d 926, 932 (C.A. 5, 1960), remanding on other grounds 30 T.C. 256">30 T.C. 256 (1958). Lenske v. United States, 383 F.2d 20 (C.A. 9, 1967), on which petitioner relies, is distinguishable in that the property there involved was depreciable for tax purposes.The next issue involves petitioner's claim that her note payable to Bettendorf Bank & Trust Co. should be shown as a liability as of December 31, 1962, in the amount of $ 1,702.68 rather than $ 1,516.63. As disclosed by our findings, the difference in these two sums represents the unpaid part of the discount and filing fee originally included in the principal amount of the note. Here, again, the theory of the net worth method must be borne in mind. The loan made available to petitioner only the net amount of the principal sum, not including the add-on obligations. Only such net amount was reflected in newly acquired assets. Repayments on the note will absorb an equal amount of assets, and included in the repayments will be a proportionate amount of deductible interest. See John Randolph Hopkins, 15 T.C. 160">15 T.C. 160, 15 T.C. 160">181 (1950);1970 U.S. Tax Ct. LEXIS 213">*224 cf. Bayou Verret Land Co., 52 T.C. 971">52 T.C. 971, 52 T.C. 971">985-986 (1969). But until the discount or other add-on obligation is actually paid or otherwise becomes deductible, it may not be taken into account in computing petitioner's net worth. See 30 J. Taxation 378, 380 (1969).There remains the question concerning the $ 1,000 debt owed to Lou White at the close of 1962. The record relating to this item is not as complete as it might be, but we have found as a fact that petitioner borrowed the money and had not repaid it by the end of the year. Petitioner so testified, and there is no evidence to the contrary. While petitioner's testimony as to the manner in which the debt was repaid in 1963 is not consistent with the revenue agent's understanding of a May 1968 conversation with petitioner, we believe this inconsistency was due to petitioner's nervousness and lack of ability to articulate. There is no inconsistency as to the truly relevant fact -- the existence of the debt as of December 31, 1962 -- or the fact that it was ultimately repaid.Decision will be entered under Rule 50. Footnotes1. Petitioner received no income from nontaxable sources during 1961 and 1962.↩1. Alternatively, were the decline in value of a nondepreciable asset reflected in the computation of the assets, that same amount would have to be added to the "net worth increase" as a "nondeductible expenditure." The result would be the same as disregarding such diminution in value in initially computing the assets.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620088/	PAUL J. CONDIT and PATRICIA CONDIT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCondit v. CommissionerDocket No. 12067-77.United States Tax CourtT.C. Memo 1980-536; 1980 Tax Ct. Memo LEXIS 46; 41 T.C.M. 471; T.C.M. (RIA) 80536; December 4, 1980Lyle Walker, for the petitioners. Douglas R. Fortney, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined a deficiency of $ 51,054.26 in petitioners' Federal income tax for 1973. Because of concessions, the only remaining issue is whether petitioners suffered a deductible loss in 1973 when certain cotton allotments they had purchased were canceled by the Government. Findings of fact/ Some of the facts were stipulated and are found accordingly. This case was consolidated for trial only with Greaves v. Commissioner,T.C. Memo. 1980-535 (Dec. 4, 1980). At the time they filed their petition herein, petitioners Paul J. Condit and Patricia Condit, husband and1980 Tax Ct. Memo LEXIS 46">47 wife, resided in Seminole, Tex. Paul J. Condit, hereinafter "Petitioner," is a farmer. In 1973, petitioner was the owner-landlord of Three J Farms in Gaines County, Tex., on which upland cotton was grown for him by 5 tenants. During the spring of that year, petitioner purchased cotton acreage allotments for $ 57,095.10 from unrelated third parties and transferred them to Three J Farms. Based on these transferred allotments and the yield history of Three J Farms, petitioner's tenants became eligible for and received Government subsidy payments in 1973 totaling approximately $143,000. Upland cotton acreage allotments, discontinued after 1977, were part of the general scheme of the Agricultural Adjustment Act of 1938, 7 U.S.C. secs. 1281-1393 (1976). The purpose of the Agricultural Adjustment Act of 1938 is to ensure a reliable supply of cotton and other agricultural products. Under the Act, the Department of Agriculture maintains stable prices by imposing penalties limiting national production and maintains supplies by providing various forms of Federal farm subsidies. 7 U.S.C. secs. 1282, 1341 (1976). See generally Wickard v. Filburn,317 U.S. 111">317 U.S. 111 (1942);1980 Tax Ct. Memo LEXIS 46">48 Fulford v. Forman,245 F.2d 145">245 F.2d 145 (5th Cir. 1957); Smith v. Commissioner,55 T.C. 133">55 T.C. 133 (1970). Acreage allotments generally allow the holder to market agricultural products without penalty. However, acreage allotments were not necessary to sell cotton in 1973; production limitations for upland cotton have not been in effect since 1970. Secs. 601-610, Agricultural Act of 1970, Pub. L. No. 91-524, 84 Stat. 1371; Sec. 1(19), Agriculture and Consumer Protection Act of 1973, Pub. L. No. 93-86, 87 Stat. 233; Sec. 601, Food and Agriculture Act of 1977, Pub. L. No. 95-113, 91 Stat. 933. However, cotton acreage allotments were still in effect in 1973 and entitled the holder to price-support payments for growing cotton, "set-aside" (soil conservation) payments for not growing cotton, and price-support loans. See generally 55 T.C. 133">Smith v. Commissioner,supra;Rev. Rul. 74-306, 1974-2 C.B. 58. For the years 1971 through 1977, the Secretary of Agriculture determined a national base acreage allotment for upland cotton, which was then apportioned among the states. 7 U.S.C. sec. 1350(a)-(b) (1976). Within each1980 Tax Ct. Memo LEXIS 46">49 state, the ASCS "state committee" and local "county committees" of the Agricultural Stablization and Conservation Service (hereinafter "ASCS") supervised apportionment of acreage allotments to individual farms. 7 C.F.R. sec. 722.803 (1974). In general, a farm's acreage allotment was based primarily on the allotment it had received for the previous year. 7 C.F.R. secs. 722.401 to.412 (1974). However cotton acreage allotments could also be bought and sold, subject to county committee approval. 7 U.S.C. sec. 1344b(a) (1976); 7 C.F.R. secs. 722.417 to.422 (1974). In 1973, Gaines County was the largest cotton producing county in the United States. 7 C.F.R. sec. 722.467(b)(2) (1974). For most of 1973, petitioner was chairman of the Gaines County ASCS county committee. However, on November 29, 1973, Deputy Administrator Clifton E. Adams (hereinafter "Adams") of the Department of Agriculture arrived from Washington, D.C., and suspended from office the entire county committee and the Gaines County ASCS office manager for hindering an ongoing investigation into 1973 cotton acreage allotment transfers. On December 6, 1973, petitioner and some 160 other area farmers1980 Tax Ct. Memo LEXIS 46">50 received notices from Adams, acting as the Gaines County ASCS office, canceling the transferred allotments they had purchased that spring. The gist of the letters was that improper farm combinations had misrepresented the transferee farms' productivity for the purpose of obtaining Federal subsidies. The letters demanded repayment of all cotton program payments for 1973 that had already been made on the transferred allotments. In petitioner's case, he was held jointly and severally liable with his tenants for about $143,000. Around $7.5 million was involved in all. At about the same time, petitioner was also threatened with criminal prosecution. On December 19, 1973, petitioner timely filed a notice of appeal with Adams, who was still acting as the Gaines County ASCS office and county committee. However, petitioner and his attorney did not really expect that Adams would change his mind, since he had canceled the allotments in the first place. Nor did petitioner's attorney expect to reverse the cancellations on appeal to the ASCS state committee, because the Washington lawyers who were advising Adams would also be advising the state committee. The primary purpose of the appeal1980 Tax Ct. Memo LEXIS 46">51 was to help petitioner contest the demand for refund. Petitioner also hoped, by steadfastly maintaining that the transfers had been proper, to avoid any criminal liability in the matter. As things turned out, petitioner's appraisal of his chances on appeal and of Adams's intransigence were substantially correct. On January 18, 1974, prior to any action on the appeal, petitioner received from the county committee 1974 acreage allotments of zero for Three J Farms. Hearings held with Adams failed to result in reinstatement of the canceled allotments. On March 29, 1974, the county committee did offer to reinstate partially petitioner's cotton allotments under a formula based on a number of production factors. The final figures were never computed, but the formula would not have resulted in any more than a 15 percent reinstatement. Petitioner, individually and by his lawyer, refused this offer in writing, taking an all or none position that the transfers had been proper. Petitioner would have had to accept the ffer within a reasonable period of time for it to have become effective. The Government did not try to force the offer on petitioner. Subsequently, petitioner twice failed1980 Tax Ct. Memo LEXIS 46">52 to reverse Adams's decision at the Texas ASCS state committee level. On December 3, 1974, petitioner received a final letter from the state committee informing him that no further action on his appeal was possible and that the matter was considered closed. Petitioner did, however, continue to resist the Government's demands for refund. He was eventually able to settle the refund claim, and he was never prosecuted criminally. In his statutory notice, respondent disallowed petitioner's 1973 deduction of the $ 57,095.10 he had spent for upland cotton acreage allotments. OPINION In 1973, petitioner purchased upland cotton acreage allotments entitling him and his tenant-farmers to various Federal support payments. The transfers were canceled in December 1973 by a Deputy Admdinistrator of the Agricultural Stablization and Conservation Service (ASCS), Department of Agriculture. Petitioner immediately appealed the cancellations in connection with other litigation contesting demands by the Government for the refund of certain subsidy payments and potential criminal liability. By December 1974, the avenues of appeal with respect to the allotment cancellations had been exhausted. 1980 Tax Ct. Memo LEXIS 46">53 The Government's demands for refunds were settled sometime thereafter. The issue presented is whether petitioner suffered a deductible loss in 1973.Section 165(a) and (c) 1 allows individuals to deduct losses incurred in a trade or business or in a transaction entered into for profit. In this case the loss, if any, was undoubtedly incurred in petitioner's trade or business. However, to be deductible a loss must be evidenced by a closed and completed transaction. Sec. 1.165-1(b) and (d), Income Tax Regs.; United States v. White Dental Co.,274 U.S. 398">274 U.S. 398 (1927). The deduction is allowed only for uncompensated losses. Sec. 165(a). Thus, when the liability for a loss is being contested, or when there exists a claim for reimbursement, that portion of the loss which may be recovered is not deductible until the amount of the actual loss suffered is ascertainable with reasonable certainty. Sec. 1.165-1(d)(2)(i), Income Tax Regs. Legal action against an insurer or the party responsible for the loss will normally postpone deduction until the claim is1980 Tax Ct. Memo LEXIS 46">54 settled, adjudicated, or abandoned. See Lewellyn v. Elec. Reduction Co.,275 U.S. 243">275 U.S. 243 (1927); Scofield's Estate v. Commissioner,266 F.2d 154">266 F.2d 154 (6th Cir. 1959), affg. in part and revg. in part 25 T.C. 774">25 T.C. 774 (1956); Schacht v. Commissioner,47 T.C. 552">47 T.C. 552 (1967); Gale v. Commissioner,41 T.C. 269">41 T.C. 269 (1963). Litigation with respect to a loss does not, however, invariably postpone the deduction. The regulations explicitly provide: Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. * * * [Sec. 1.165-1(d)(2)(i), Income Tax Regs.] The cases also hold that pending litigation does not postpone the deduction of a loss where there is no reasonable prospect of recovery. Rainbow Inn, Inc. v. Commissioner,433 F.2d 640">433 F.2d 640 (3d Cir. 1970), revg. a Memorandum Opinion of this Court; Kugel v. Ryan,289 F.2d 329">289 F.2d 329 (2d Cir. 1961) (taxpayer's chances in litigation a question of fact; summary judgment inappropriate); Commissioner v. Highway Trailer Co.,72 F.2d 913">72 F.2d 913 (7th Cir. 1934),1980 Tax Ct. Memo LEXIS 46">55 revg. 28 B.T.A. 792">28 B.T.A. 792 (1933). Thus, the narrow factual issue to be decided herein is whether, in 1973, petitioner had any reasonable chances of reversing Deputy Administrator Adams's 1973 cancellation of the cotton allotments petitioner had purchased. Respondent argues that no deduction is allowable for any year prior to 1977 because petitioner could at any time have accepted the ASCS offer to reinstate partially the canceled allotments. With respect to 1973, respondent argues that petitioner, by appealing the cancellation, demonstrated his belief that the allotments might eventually be reinstated. Petitioner argues that he knew his appeals had no chance of success and that, accordingly, he is entitled to a deduction for 1973. We find for petitioner.Based on the entire record in this case, we are convinced that petitioner's administrative appeals had no reasonable prospect of success. The purpose of the appeals was not really to recover the $57,095.10 petitioner spent on the canceled allotments. Instead, petitioner hoped to avoid the more onerous burdens of potential criminal liability and of having to pay refunds of Federal subsidy payments totaling some $143,000. 1980 Tax Ct. Memo LEXIS 46">56 In connection with these efforts, the appeals were more than a futile gesture. On their own merits, however, the appeals were doomed from the outset. See generally Parmelee Transportation Company v. United States,173 Ct. Cl. 139">173 Ct. Cl. 139, 351 F.2d 619">351 F.2d 619 (1965). We therefore hold petitioner is entitled to the loss deduction in 1973, the year in which his cotton allotments were canceled. Whether the character of the loss suffered should be capital or ordinary was not argued on brief by either party. At trial, counsel for respondent conceded that any loss allowable in 1973 would be ordinary. Accordingly, we do not address that issue. To reflect concessions and the foregoing, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620093/	SPENCER A. SMITH AND GENEVA W. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket No. 7289-82.United States Tax CourtT.C. Memo 1984-268; 1984 Tax Ct. Memo LEXIS 405; 48 T.C.M. 135; T.C.M. (RIA) 84268; May 21, 1984. Spencer A. Smith and Geneva W. Smith, pro sese. Bonnie L. Cameron, for the respondent. GOFFEMEMORANDUM OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax for taxable years 1978 and 1979 in the amounts of $1,255 and $2,907, respectively. The only issue for decision is whether petitioners are entitled to deductions in taxable years 1978 and 1979 under section 172 1 for net operating loss carryovers from 1977. 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 found and incorporated herein by reference. Petitioners filed joint Federal income tax returns for taxable years 1974 through1984 Tax Ct. Memo LEXIS 405">408 1979, inclusive, and amended joint Federal income tax returns for taxable years 1974 and 1975 with the Internal Revenue Service in Atlanta, Georgia. Petitioners were legal residents of Ringgold, Georgia, when they filed their petition. At all relevant times, petitioner Spencer A. Smith was employed as a clerical worker while his wife, petitioner Geneva W. Smith, was a full-time accounting student. On December 7, 1977, petitioners' home was destroyed by fire and declared a total loss by their insurer's adjuster. After concessions by the parties, they have stipulated that petitioners sustained a total net casualty loss (after insurance reimbursement) in the amount of $35,881.41 as a result of the fire. Subtraction of the $100 limitation provided for in section 165(h) produces a deductible loss in the amount of $35,781.41. Petitioners made several errors when computing their net operating loss for taxable year 1977 (which resulted from the large casualty loss produced by the fire). They failed to make the modifications required by sections 172(d)(3) and (4) which disallow personal exemption and dependency deductions and limit non-trade or business deductions to the amount1984 Tax Ct. Memo LEXIS 405">409 of non-trade or business income, respectively, when computing the amount of a non-corporate taxpayer's net operating loss. They also failed to subtract their zero bracket amount of $3,200 from their itemized deductions on schedule A of their 1977 Federal income tax return. In recomputing their taxable income for taxable years 1974 and 1975, petitioners made several errors with respect to their net operating loss carryback computations. They failed to make the modifications required by section 172(b)(2)(A) which disallows personal exemption and dependency deductions in a non-corporate taxpayer's net operating loss carryback years. They also deducted all of their itemized deductions and a $3,200 zero bracket amount in computing the amount of taxable income against which their 1977 net operating loss was offset. On their joint Federal income tax returns for taxable years 1978 and 1979, petitioners deducted $7,408 and $15,281, respectively, as carryforwards of the balance of their net operating loss. The Commissioner determined that petitioners were not entitled to deduct the amounts of $7,408 and 15,281 on their joint Federal income tax returns for taxable years 1978 and 1979, 1984 Tax Ct. Memo LEXIS 405">410 respectively, as carryforwards of their 1977 net operating loss because the entire amount of said net operating loss was exhausted in computing petitioners' pre-1978 taxable income. The Commissioner's disallowance of these deductions resulted in deficiencies in petitioners' Federal income tax in the amounts of $1,255 and $2,907 in taxable years 1978 and 1979, respectively. Petitioners contend in their amended petition 2 and briefs that the Commissioner erred in his disallowance of their carryforward net operating loss deductions in taxable years 1978 and 1979 as follows: (1) their net loss resulting from the fire should be treated as a casualty loss and not as a trade or business deduction for net operating loss computations; (2) they should be allowed all of their personal exemption, dependency and itemized deductions in computing their taxable income in the year of their casualty loss, i.e., taxable year 1977, and loss carryback years, i.e., taxable years 1974 and 1975; and (3) they should be allowed to deduct all of their itemized deductions and a $3,200 zero bracket amount in computing their taxable income which their 1977 net operating loss is offset against. Respondent1984 Tax Ct. Memo LEXIS 405">411 asserts that the Commissioner's determinations are correct and were made in accordance with the Internal Revenue Code of 1954, as amended and in effect for the relevant years. In redetermining deficiencies in income in petitioners' taxable years 1978 and 1978, we have jurisdiction to consider the facts in relation to petitioners' other relevant taxable years. Sec. 6214(b). Petitioners' first allegation of error is the Commissioner's treatment of their casualty loss as a trade or business deduction for net operating loss computations. Petitioners claim that their casualty loss was personal and should be treated as such for tax purposes. Respondent contends that the Commissioner's treatment of petitioners' casualty loss as a trade or business deduction is appropriate under the Internal Revenue Code of 1954, as amended and in effect for the relevant years, and we agree. Section 1.172-3(a)(3)(iii), Income Tax Regs., governs net operating losses for non-corporate taxpayers and provides that: (iii) Casualty losses. Any deduction allowable under section 165(c)(3) for losses of property not connected1984 Tax Ct. Memo LEXIS 405">412 with a trade or business shall not be considered, for purposes of section 172(d)(4), to be a nonbusiness deduction but shall be treated as a deduction attributable to the taxpayer's trade or business. Therefore, the Commissioner's treatment of petitioners' casualty loss as a trade or business deduction for net operating loss computations is correct. Petitioners' second allegation of error is the Commissioner's disallowance of personal exemption and dependency deductions for taxable years 1974, 1975 and 1977 and his limitation of non-trade or business deductions to non-trade or business income in computing the amount of their 1977 net operating loss. Petitioners contend that they should be allowed these personal exemption and dependency deductions and all of their non-trade or business deductions for such years. Respondent asserts that the Commissioner's disallowance of these deductions for such years is appropriate under the Internal Revenue Code of 1954, as amended and in effect for the relevant years, and we agree. In Martin v. Commissioner,56 T.C. 1294">56 T.C. 1294, 56 T.C. 1294">1297 (1971), we reviewed the identical statutory provisions governing the computation of net operating1984 Tax Ct. Memo LEXIS 405">413 losses and attendant carrybacks and carryforwards and held that: section 172 lays down specific rules for computing the net operating loss deduction. Subsection (c) defines a net operating loss to mean "the excess of the deductions allowed * * * over the gross income," but the subsection further specifies that "Such excess shall be computed with the modifications specified in subsection (d)." Several modifications are required by subsection (d), including one (sec. 172(d)(3)) designed to assure that "No deduction shall be allowed under section 151 (relating to personal exemptions)," and another (sec. 172(d)(4)) to assure that, in that case of a taxpayer other than a corporation, the deductions allowable "which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business." Quite clearly, these provisions require the elimination of personal exemption and nonbusiness deductions as factors in the computation of the net operating loss. [Emphasis added.] Therefore, the Commissioner's disallowance of petitioners' personal exemption and dependency deductions and his limitation1984 Tax Ct. Memo LEXIS 405">414 of non-trade or business deductions to non-trade or business income for net operating loss computations in the relevant years is correct. Petitioners' final allegation of error is the Commissioner's zero bracket amount adjustments to their 1974, 1975 and 1977 Federal income tax returns when determining the amount of taxable income that their 1977 net operating loss is offset against. Petitioners contend that they should be permitted to deduct all of their itemized deductions and a $3,200 zero bracket amount when computing their taxable income for these years. The respondent asserts that the Commissioner's determinations of their taxable income for such years are correct and appropriate under the Internal Revenue Code of 1954, as amended and in effect for the relevant years, and we agree. Section 63, which defines taxable income, provides in relevant part that: (b) INDIVIDUALS.--For purposes of this subtitle, in the case of an individual, the term "taxable income" means adjusted gross income-- (1) reduced by the sum of-- (A) the excess itemized deductions, and (B) the deductions for personal exemptions provided by section 151, and (2) increased (in the case of1984 Tax Ct. Memo LEXIS 405">415 an individual for whom an unused zero bracket amount computation is provided by subsection (e)) by the unused zero bracket amount (if any). (c) EXCESS ITEMIZED DEDUCTIONS.--For purposes of this subtitle, the term "excess itemized deductions" means the excess (if any) of-- (1) the itemized deductions, over (2) the zero bracket amount. (d) ZERO BRACKET AMOUNT.--For purposes of this subtitle, the term "zero bracket amount" means-- (1) $3,200 in the case of-- (A) a joint return under section 6013, or * * * Therefore, it is clear that in computing petitioners' taxable income for the relevant years, their adjusted gross income is reduced by their excess itemized deductions (itemized deductions minus $3,200) instead of the sum of itemized deductions and $3,200 when computing their taxable income. Petitioners' references to examples in Internal Revenue Service publications and provisions involving taxpayers who have total itemized deductions less than the zero bracket amount are inapposite because petitioners had itemized deductions greater than the zero bracket amount in each of the relevant years. Although it is unfortunate that generalized examples contained in Internal1984 Tax Ct. Memo LEXIS 405">416 Revenue Service publications may confuse the statutorily required modifications in determining petitioners' taxable income for the relevant years, the statutes, regulations and judicial decisions and not the Internal Revenue Service publications ultimately control the computation of the amount of taxable income for the relevant years. Zimmerman v. Commissioner,71 T.C. 367">71 T.C. 367, 71 T.C. 367">371 (1978), affd. without published opinion 614 F.2d 1294">614 F.2d 1294 (2d Cir. 1979). Therefore, the Commissioner's disallowance of the additional zero bracket amount deductions claimed by petitioners in computing the amount of taxable income which their 1977 net operating loss is offset against is sustained. Finally, we must reject petitioners' claims in their briefs that they sustained a total net casualty loss in an amount greater than the amount they stipulated to. Rule 91(e) provides that: (e) BINDING EFFECT: A stipulation shall be treated, to the extent of its terms, as a conclusive admission by the parties to the stipulation, unless otherwise permitted by the Court or agreed upon by those parties. The Court will not permit a party to a stipulation to qualify, change, or contradict1984 Tax Ct. Memo LEXIS 405">417 a stipulation in whole or in part, except that it may do so where justice requires. * * * Many of petitioners' additional loss claims involve items whose value is not readily measurable, such as stress. Further, no proof of these additional claims was submitted; hence, the stipulated amount of their casualty loss is controlling. In conclusion, we have reviewed respondent's mathematical calculations and their method of computation for the relevant years and generally agree with the Commissioner's determinations that petitioners' 1977 net operating loss was exhausted in computing petitioners' pre-1978 taxable income. Accordingly, the Commissioner's determinations are sustained. Due to concessions by the parties, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954 and attendant regulations, as amended and in effect for the relevant years, and all rule references are to this Court's Rules of Practice and Procedure.↩2. Their original petition did not comply with this Court's rules.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620094/	DAVID D. SMITH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. Comm'rNo. 11109-04L; No. 11110-04L United States Tax Court124 T.C. 36; 2005 U.S. Tax Ct. LEXIS 3; 124 T.C. No. 3; February 8, 2005, Filed 2005 U.S. Tax Ct. LEXIS 3">3 Cases dismissed for lack of jurisdiction by Court's own motion. On Aug. 26, 2003, R issued to P separate Final Notices of Intent to Levy and Notice of Your Right to a Hearing with regard to his unpaid Federal income taxes for the taxable years 1985 to 1995 and for the taxable years 1996 to 1999. P submitted to respondent timely requests for a hearing under sec. 6330, I.R.C. On Mar. 3, 2004, P filed a bankruptcy petition under ch. 7 of the Bankruptcy Code. On May 25, 2004, while P's bankruptcy case remained open, R issued to P separate Notices of Determination Concerning Collection Actions for the taxable years 1985 to 1995 and the taxable years 1996 to 1999. On June 28, 2004, P filed with the Court petitions for lien or levy action challenging R's notices. R filed motions to dismiss for lack of jurisdiction on the ground the petitions were filed in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a)(8) (2000). 2005 U.S. Tax Ct. LEXIS 3">4 P filed objections to R's motions. Held: The notices of determination underlying the petitions were issued to petitioner in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a)(1) (2000), and, therefore, the Court lacks jurisdiction. Held, further, R's motions to dismiss for lack of jurisdiction shall be denied, and these cases shall be dismissed for lack of jurisdiction on the Court's own motions. Robert Alan Jones, for petitioner.Alan J. Tomsic, for respondent. Gerber, JoelGERBER124 T.C. 36">37 OPINIONGERBER, Chief Judge: These collection review cases are before the Court on respondent's motions to dismiss for lack of jurisdiction. Respondent contends that the Court lacks jurisdiction on the ground the petitions for lien or levy action were filed in violation of the automatic stay imposed under 11 U.S.C. section 362(a)(8) (2000) (the automatic stay). 1 As discussed in detail below, we conclude that we lack jurisdiction in these cases on the alternative ground that the notices of determination underlying the petitions were issued2005 U.S. Tax Ct. LEXIS 3">5 to petitioner in violation of the automatic stay imposed under 11 U.S.C. section 362(a)(1) (2000).Background 2On August 26, 2003, respondent issued to petitioner separate Final Notices of Intent to Levy and Notice of Your Right to a Hearing with regard to his unpaid Federal income taxes for the taxable years 1985 to 1995 and for the taxable years 1996 to 1999. Petitioner submitted to respondent timely requests for a hearing under section 6330.On March 3, 2004, petitioner filed a bankruptcy petition under chapter 7 of the Bankruptcy Code with2005 U.S. Tax Ct. LEXIS 3">6 the U.S. Bankruptcy Court for the District of Nevada.By letter dated April 12, 2004, Christopher Gellner (Mr. Gellner), petitioner's bankruptcy attorney, informed Appeals Officer Anthony Aguiar that petitioner had filed the above-referenced bankruptcy petition and that petitioner was not in need of, and desired to withdraw, his request for a section 6330124 T.C. 36">38 hearing. On April 14, 2004, Appeals Officer Aguiar sent to Mr. Gellner a Form 12256 (Withdrawal of Request for Collection Due Process Hearing).However, by letter dated May 5, 2004, Robert Alan Jones (Mr. Jones), petitioner's tax attorney, informed Appeals Officer Aguiar (1) That Mr. Gellner did not have the authority to represent petitioner with regard to tax matters; (2) that Mr. Jones was appointed as petitioner's attorney-in-fact for the years in issue; and (3) that, although petitioner did not want to withdraw his rights to a section 6330 hearing, the bankruptcy automatic stay barred further administrative proceedings at that time.On May 25, 2004, respondent's Office of Appeals issued to petitioner separate Notices of Determination Concerning Collection Actions for the taxable years 1985 to 1995 and for the taxable years2005 U.S. Tax Ct. LEXIS 3">7 1996 to 1999. The notices stated that respondent determined that it was appropriate to proceed with the proposed levies. On June 28, 2004, petitioner filed with the Court petitions for lien or levy action challenging respondent's notices. 3 At the time the petitions were filed, petitioner resided in Las Vegas, Nevada.On August 19, 2004, respondent filed motions to dismiss for lack of jurisdiction on the ground the petitions were filed in violation of the automatic stay. On September 16, 2004, petitioner filed objections to respondent's motions. Petitioner maintains that the Court should (1) conclude that petitioner properly invoked the Court's jurisdiction, and (2) stay any further proceedings pending the final disposition of petitioner's bankruptcy case. Petitioner did not aver that the bankruptcy court had granted relief from the automatic stay, or that the automatic stay2005 U.S. Tax Ct. LEXIS 3">8 otherwise was no longer in effect, on the date the petitions were filed.DiscussionIt is well settled that the Court's jurisdiction in a collection review case under section 6330 depends upon the issuance of a valid notice of determination and the filing of a timely petition for review. See Sarrell v. Commissioner, 117 T.C. 122">117 T.C. 122, 117 T.C. 122">125124 T.C. 36">39 (2001); Moorhous v. Commissioner, 116 T.C. 263">116 T.C. 263, 116 T.C. 263">269 (2001); see also Rule 330(b).In a recent case, Prevo v. Commissioner, 123 T.C. 21">123 T.C. 21, 123 T.C. 326">123 T.C. 326, 2004 U.S. Tax Ct. LEXIS 50">2004 U.S. Tax Ct. LEXIS 50 (2004), we granted the Commissioner's motion to dismiss for lack of jurisdiction in a collection review case on the ground the petition for lien or levy action was filed with the Court in violation of the automatic stay imposed under 11 U.S.C. section 362(a)(8) (2000).4 In 2004 U.S. Tax Ct. LEXIS 50">Prevo v. Commissioner, supra, the sequence of relevant events unfolded as follows: (1) The Commissioner issued to the taxpayer a notice of determination concerning collection actions; (2) the taxpayer filed a bankruptcy petition; and (3) the taxpayer filed with the Court a petition for lien or levy action. In granting the Commissioner's motion to dismiss for lack of jurisdiction,2005 U.S. Tax Ct. LEXIS 3">9 we noted that the taxpayer had fallen victim to a trap for the unwary in that the automatic stay that arose by operation of law upon the filing of her bankruptcy petition barred her from subsequently filing a petition with the Court. Moreover, in the absence of a tolling provision in the collection review provisions similar to that contained in section 6213(f), 5 the taxpayer lost the opportunity to contest the Commissioner's notice of determination in this Court.2005 U.S. Tax Ct. LEXIS 3">10 The facts in the present cases are materially different from those in 2004 U.S. Tax Ct. LEXIS 50">Prevo v. Commissioner, supra. As previously described, these cases developed as follows: (1) Petitioner filed a bankruptcy petition; (2) the Commissioner issued to petitioner notices of determination concerning collection actions; and (3) petitioner filed with the Court petitions for lien or levy action.Like the taxpayer in 2004 U.S. Tax Ct. LEXIS 50">Prevo v. Commissioner, supra, petitioner filed his petitions for lien or levy action with the Court after filing his bankruptcy petition and while the automatic stay imposed under 11 U.S.C. section 362(a)(8) (2000) remained in effect. The fact that respondent issued the notices of determination in question after petitioner filed his124 T.C. 36">40 bankruptcy petition presents a ground for dismissal that was not available in 2004 U.S. Tax Ct. LEXIS 50">Prevo v. Commissioner, supra. Specifically, the question arises whether respondent was barred by the automatic stay from issuing the notices of determination to petitioner in the first instance. If so, it would follow that these cases should be dismissed on the ground that the notices of determination were void or invalid. 2005 U.S. Tax Ct. LEXIS 3">11 The Court can, sua sponte, question its jurisdiction at any time. Raymond v. Commissioner, 119 T.C. 191">119 T.C. 191, 119 T.C. 191">193 (2002); Neely v. Commissioner, 115 T.C. 287">115 T.C. 287, 115 T.C. 287">290 (2000); Romann v. Commissioner, 111 T.C. 273">111 T.C. 273, 111 T.C. 273">280 (1998). Where the application of the automatic stay may act as an impediment to the Court's jurisdiction in a collection review proceeding, it is incumbent on the Court to determine the proper ground for dismissal. Cf., e. g., Pietanza v. Commissioner, 92 T.C. 729">92 T.C. 729, 92 T.C. 729">735-736 (1989) (holding that, where appropriate, the Court will dismiss on the ground that the Commissioner failed to issue a valid notice of deficiency rather than for lack of a timely filed petition), affd. without published opinion 935 F.2d 1282">935 F.2d 1282 (3rd Cir. 1991). The 92 T.C. 729">Pietanza principle is particularly compelling in the present cases inasmuch as the Court is confronted with two alternative grounds for dismissal, one of which will have the effect of denying petitioner the opportunity to obtain judicial review of respondent's notices of determination in this Court. See 2004 U.S. Tax Ct. LEXIS 50">Prevo v. Commissioner, supra.Before proceeding with our analysis, we first2005 U.S. Tax Ct. LEXIS 3">12 review the pertinent portions of the automatic stay provisions set forth in 11 U.S.C. section 362 (2000) and the collection review procedures established under sections 6320 and 6330.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 his or her assets. See H. Rept. 95-595, at 340 (1977). One key to achieving these aims is the automatic 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, 97 T.C. 544">545 (1991); Halpern v. Commissioner, 96 T.C. 895">96 T.C. 895, 96 T.C. 895">897-898 (1991).124 T.C. 36">41 The automatic stay provisions are set forth in 11 U.S.C. section 362(a) (2000), which provides in pertinent part: (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, * * operates as a stay, applicable to all entities, of -- (1) the commencement or continuation,2005 U.S. Tax Ct. LEXIS 3">13 including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; * * * * * * (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement2005 U.S. Tax Ct. LEXIS 3">14 of the case under this title; * Title 11 U.S.C. section 362(b) (2000), which establishes exceptions to the automatic stay described above, provides in pertinent part: (b) The filing of a petition under section 301, 302, or 303 of this title, * * does not operate as a stay -- * * * * * * * (9) under subsection (a), of -- (A) an audit by a governmental unit to determine tax liability; (B) the issuance to the debtor by a governmental unit of a notice of tax deficiency; (C) a demand for tax returns; or (D) the making of an assessment for any tax and issuance of a notice and demand for payment of such an assessment * * .The bankruptcy court may issue an order granting relief from the automatic stay. 11 U.S.C. sec. 362(d) (2000). Absent such an order, the automatic stay generally remains in effect until the earliest of the closing of the case, dismissal of the case, or the grant or denial of a discharge. 11 U.S.C. sec. 362(c)(2) (2000); see2005 U.S. Tax Ct. LEXIS 3">15 97 T.C. 544">Allison v. Commissioner, supra at 545; Smith v. Commissioner, 96 T.C. 10">96 T.C. 10, 96 T.C. 10">14 (1991); Neilson v. Commissioner, 94 T.C. 1">94 T.C. 1, 94 T.C. 1">8 (1990).124 T.C. 36">42 Collection Review ProceduresSection 6331(a) provides that if any person liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment, then the Secretary is authorized to collect such tax by levy upon the person's property. Section 6331(d) provides that, at least 30 days prior to enforcing collection by way of a levy on the person's property, the Secretary shall provide the person with a final notice of intent to levy, including notice of the administrative appeals available to the person.Section 6330(a) provides in pertinent part that the Secretary shall notify a person in writing of his or her right to an Appeals Office hearing regarding a final notice of intent to levy by mailing such notice by certified or registered mail to such person at his or her last known address. Section 6330(a)(2) provides that the prescribed notice shall be provided not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period. 2005 U.S. Tax Ct. LEXIS 3">16 Further, section 6330(a)(3)(B) provides that the prescribed notice shall explain that the person has the right to request an Appeals Office hearing during that 30-day period.Where the taxpayer has timely requested an Appeals Office hearing and the Appeals Office has issued a notice of determination to the taxpayer regarding a proposed levy action, section 6330(d)(1) provides that the taxpayer will have 30 days following the issuance of such notice to file a petition for review with the Tax Court or Federal District Court, as may be appropriate. See Offiler v. Commissioner, 114 T.C. 492">114 T.C. 492, 114 T.C. 492">498 (2000). Notably, there is no provision analogous to section 6213(f) in section 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 a petition.62005 U.S. Tax Ct. LEXIS 3">17 AnalysisThe automatic stay under 11 U.S.C. section 362(a)(1) (2000) bars "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, 124 T.C. 36">43 or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title". In addition, 11 U.S.C. section 362(a)(6) bars any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the bankruptcy case.We evaluate the applicability of the automatic stay provisions against the parties' specific actions in these cases. Although the record does not include transcripts of petitioner's account for the years in question, we assume that respondent entered assessments against petitioner and issued to petitioner notices and demand for payment of such assessments. When no payments were forthcoming, respondent issued to petitioner Notices of Intent to Levy and Notice of Your Right to a Hearing under section 6330. Such notices prompted petitioner to submit to respondent requests for a section 6330 hearing. Several months later, petitioner filed his bankruptcy2005 U.S. Tax Ct. LEXIS 3">18 petition. Thereafter, respondent issued to petitioner the notices of determination that led petitioner to attempt to invoke the Court's jurisdiction.Against this backdrop, we are satisfied that the issuance of the final notices of intent to levy to petitioner constituted administrative collection actions taken against petitioner (before the commencement of the bankruptcy case) within the meaning of 11 U.S.C. section 362(a)(1) (2000). Consistent with the foregoing, it follows that the issuance to petitioner of the notices of determination constituted the continuation of administrative collection actions against petitioner (after the commencement of the bankruptcy case) within the meaning of 11 U.S.C. section 362(a)(1) (2000). Our conclusion that the levy notices and notices of determination constituted actions against petitioner (as opposed to an action initiated by petitioner) is bolstered by the nature and purpose of such notices. We observe that if petitioner had failed to request an administrative hearing within 30 days of the issuance of the final notices of intent to levy, he would have waived his right to administrative and judicial2005 U.S. Tax Ct. LEXIS 3">19 review of the proposed collection actions under section 6330, and respondent normally would have been free to proceed with the proposed levies. See Kennedy v. Commissioner, 116 T.C. 255">116 T.C. 255, 116 T.C. 255">262 (2001). Giving due regard to the public policies underlying the automatic124 T.C. 36">44 stay provisions, we conclude that the issuance of the notices of determination to petitioner violated the automatic stay. 72005 U.S. Tax Ct. LEXIS 3">20 Our holding on this point is consistent with both bankruptcy caselaw and respondent's administrative guidance. See In re Parker, 279 Bankr. 596, 602-603 (Bankr. S. D. Ala. 2002) (The IRS conceded, and the bankruptcy court held, that the issuance of a final notice of intent to levy under section 6330 violated the automatic stay); In re Covington, 256 Bankr. 463, 465-466 (Bankr. D. S. C. 2000) (The bankruptcy court held that the issuance of a final notice of intent to levy under section 6330 violated the automatic stay); see also Chief Counsel Advisory 2000-18-005 (May 5, 2000) (A Final Notice of Intent to Levy issued to a debtor who had filed a bankruptcy petition violated the automatic stay and was void).Collection activity undertaken in violation of the automatic stay generally is considered void and without effect. See 9B Am. Jur. 2d, Bankruptcy, sec. 1756, at 387 (1999). Accordingly, we conclude that the notices of determination issued to petitioner are void and of no effect. Our ruling in Lunsford v. Commissioner, 117 T.C. 159">117 T.C. 159, 117 T.C. 159">165 (2001) (notice of determination issued without proper hearing held to2005 U.S. Tax Ct. LEXIS 3">*21 be valid for purposes of Tax Court jurisdiction) does not preclude that result, as it is bankruptcy law, which is extrinsic to the procedures specified in section 6330, that leads to our conclusion. Given the invalidity of the notices of determination, we shall dismiss these cases for lack of jurisdiction on the Court's own motion.To reflect the foregoing,Orders of dismissal shall be entered denying respondent's motions to dismiss for lack of jurisdiction, and these cases shall be dismissed for lack of jurisdiction on the Court's own motion.Footnotes1. Unless otherwise indicated, section references are to sections of the Internal Revenue Code, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The record establishes and/or the parties do not dispute the following background facts.↩3. The petitions arrived at the Court in an envelope bearing a timely U.S. Postal Service postmark dated June 24, 2004. See sec. 7502(a)↩.4. 11 U.S.C. sec. 362(a)(8) (2000)↩ expressly bars "the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor."5. Although 11 U.S.C. sec. 362(a)(8) (2000) bars the commencement or continuation of a proceeding before the Tax Court, by reason of sec. 6213(f) the period for filing a petition for redetermination of a deficiency with the Tax Court under sec. 6213(a) is suspended for the period during which the taxpayer is prohibited by reason of the automatic stay from filing a petition in this Court and for 60 days thereafter. See Olson v. Commissioner, 86 T.C. 1314">86 T.C. 1314, 86 T.C. 1314">1318-1319↩ (1986), and cases cited therein.6. Sec. 6330 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↩.7. Despite the express exception permitting the Commissioner to issue to a taxpayer a notice of deficiency under 11 U.S.C. sec. 362(b)(9)(B) (2000), there is no exception in 11 U.S.C. sec. 362(b) (2000) for the issuance of a notice of determination under sec. 6330. In addition, a notice of determination issued pursuant to sec. 6330 does not qualify as an audit, a request for a tax return, or an assessment or notice and demand for payment within the meaning of the applicable subparagraphs of 11 U.S.C. sec. 362(b)(9) (2000). See In re Covington, 256 Bankr. 463↩, 465-466 (Bankr. D.S.C. 2000).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620095/	John K. Beretta, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sallie Ward Beretta, Petitioner, v. Commissioner of Internal Revenue, RespondentBERETTA v. COMMISSIONERDocket Nos. 107076, 107077United States Tax Court1 T.C. 86; 1942 U.S. Tax Ct. LEXIS 33; November 20, 1942, Promulgated 1942 U.S. Tax Ct. LEXIS 33">33 Decision will be entered for respondent. 1. Petitioners were stockholders of a corporation which sold a part of its capital assets for cash and distributed the cash plus a certain amount as depreciation reserve ratably to the stockholders on each of their shares. Following the distribution the corporation amended its charter and reduced its capital stock from $ 500,000 to $ 250,000. Such reduction was put into effect by stamping on each outstanding certificate of stock that the par value was reduced from $ 100 per share to $ 50 per share. Although the corporation's business was curtailed substantially by the sale of a part of its capital assets, it had no intention to completely liquidate and cease business. Held, the distribution was not made in partial liquidation of the corporation as defined by section 115 (i), Revenue Act of 1936, because none of the corporation's shares of stock were completely canceled or redeemed and the distribution was not one of a series of distributions in complete cancelation or redemption of all or a portion of its shares of stock. Mabel I. Wilcox, 43 B. T. A. 931, followed.2. The corporation in 1922 capitalized1942 U.S. Tax Ct. LEXIS 33">34 $ 250,000 of its earned surplus and paid a stock dividend of that amount to its stockholders which was nontaxable. Held, that, notwithstanding the capitalization of this earned surplus and the payment of the stock dividend, the $ 250,000 still remained earnings available for distribution to the extent that it represented earnings and profits accumulated by the corporation after February 28, 1913. Sec. 115 (h), Revenue Act of 1936.3. The resolution which authorized the distribution in alleged partial liquidation of the corporation recited that the distribution represented the amount received from the sale of a capital asset and the reserve for depreciation applying to same. Held, for purposes of taxation a corporation can not, under the provisions of section 115, Revenue Act of 1936, distribute its depreciation reserve until after all its earnings and profits accumulated after February 28, 1913, have been distributed. John J. Cox, Esq., for the petitioners.Donald P. Moyers, Esq., for the respondent. Black, Judge. Opper, J., concurs only in the result. Murdock, J., dissenting. BLACK 1 T.C. 86">87 These consolidated proceedings involve deficiencies and claimed1942 U.S. Tax Ct. LEXIS 33">35 overpayments of income taxes for the calendar year 1937 as follows:Docket No.DeficiencyOverpaymentclaim107076$ 3,892.40$ 2,746.861070773,892.392,746.86The issue is whether certain distributions made by the Laredo Bridge Co. to shareholders during the taxable year constitute taxable dividends under section 115 of the Revenue Act of 1936, rather than distributions of capital in partial liquidation of the corporation under section 115 (i), as contended by the petitioners.Petitioners also contend in the alternative that, if The Tax Court should hold that there was no partial liquidation of the corporation under section 115 (i), it should nevertheless hold that all of the distributions in question were made from capital except $ 45,006.73 and that only the latter amount should be treated as a taxable dividend under section 115.FINDINGS OF FACT.The petitioners are husband and wife, reporting income on the community property basis. They reside in San Antonio, Texas, and filed individual income tax returns for the taxable year with the collector of internal revenue for the first district of Texas.The petitioners are stockholders of the Laredo Bridge Co., 1942 U.S. Tax Ct. LEXIS 33">36 hereinafter sometimes called the company, a corporation engaged in the operation of the American end of a toll bridge across the Rio Grande River between the city of Laredo, Texas, and the city of Nuevo Laredo, in the Republic of Mexico. Prior to about June 6, 1937, the company owned and operated the entire bridge. The amount of the petitioners' investment in the corporation's capital stock is not in dispute.The company was organized in 1902 under the laws of Texas, with a capitalization of $ 150,000, represented by 1,500 shares having a par value of $ 100 per share. At the time of its incorporation the company took over from a predecessor corporation the aforesaid toll bridge and 1 T.C. 86">88 an operating concession from the Government of Mexico, granted June 6, 1887. Among other things the concession provided:At the end of fifty years, which is the length of the present concession, the bridge and the street railways, if any have been established, shall become the property of the Government who will pay to the Company two-thirds of the value of the structure at that time in the judgment of appraisers, one for each party and a third in case of disagreement, and said Government will1942 U.S. Tax Ct. LEXIS 33">37 not recognize any previous mortgage as the Company is obligated to deliver the Bridge and its accessories free of all debt.At the times here material, the toll bridge and improvements, together with the concession from the Government of Mexico and a permit from the city of Laredo, Texas, constituted the company's main capital assets. The company's toll bridge business was highly profitable and substantial income was earned and distributed to its stockholders for every year of its existence. On March 1, 1913, the company had earned surplus in the amount of $ 34,251.34. On April 25, 1920, a fire destroyed the toll bridge and the company was required to rebuild it. It was estimated that a new bridge could be constructed for approximately $ 100,000. To protect its franchise pending reconstruction, the company immediately constructed a pontoon bridge across the river at a capital outlay of some $ 17,902.57. To raise the necessary cost of reconstruction, the corporation amended its charter and increased its capitalization from $ 150,000 to $ 250,000 and issued and sold for cash 1,000 additional shares of stock for $ 100 per share. The company completed its new bridge in February1942 U.S. Tax Ct. LEXIS 33">38 1922, at a total cost of $ 320,000 instead of its original estimate of $ 100,000. The increase in cost was caused by change of plans in the character of construction and added improvements not contemplated in the original plans. The money required for the excess over the estimated costs was procured from loans. After completion of this construction the company's balance sheet and profit and loss account, as of March 31, 1922, showed as follows:Gross earnings$ 109,183.22Operating expenses44,623.41Net income carried to surplus64,559.81AssetsProperty and franchise$ 82,952.17Reconstruction account349,502.32Equipment428.62Pontoon bridge8,951.29Investments61,000.00Cash:Laredo, Texas$ 2,423.09New York City46,065.9348,489.02551,323.42LiabilitiesCapital stock$ 250,000.00Reserve for taxes41,776.97Surplus259,546.45551,323.421 T.C. 86">89 To reflect the increased capital resulting from these improvements, the company amended its charter so as to increase its capital stock from $ 250,000 to $ 500,000, and shares from 2,500 to 5,000. The increase in capital shares was then distributed1942 U.S. Tax Ct. LEXIS 33">39 among the stockholders through a 100 percent stock dividend, the result being to increase the petitioners' holdings to a total of 878 shares. After distribution of this stock dividend, which was charged to surplus, the balance in the bridge company's surplus account amounted to approximately $ 10,000.substantially all of the proceeds of the sale to the Mexican Government expired June 6, 1937, and on that date that government took over the Mexican end of the bridge, pursuant to the terms of the concession as set out above in these findings, at the net price of $ 75,877.48, that sum being two-thirds of the appraised value of the part taken over, less a transfer tax of $ 85.20.The books of the company reflect a loss on the sale of the Mexican end of the bridge in the amount of $ 68,575.53 and the amount of this loss was deducted from the company's net operating income of $ 93,- was received by the treasurer in a settlement made July 24, 1937, available for dividend distribution. There is no issue in these proceedings as to the amount and treatment of this loss.On June 15, 1937, the board of directors of the bridge company met and, among other matters transacted, adopted a resolution1942 U.S. Tax Ct. LEXIS 33">40 directing its treasurer to distribute to the stockholders of record on June 7, 1937, substantially all of the proceeds of the sale to the Mexican Government on receipt of payment. The payment from the Mexican Government was received by the treasurer in a settlement made July 24, 1937. Thereafter on September 14, following, the board of directors met and received a lengthy report from the treasurer respecting the bridge transaction and the corporation's financial situation as a result of the settlement with the Mexican Government.Following receipt of the treasurer's report the board adopted a resolution providing as follows:Resolved, to rescind the resolution passed at the meeting of the Board on June 15, 1937, authorizing the Treasurer to distribute to stockholders of record on June 7, 1937, substantially all of the net proceeds of the sale of the Mexican end of the bridge upon receipt of payment from the Mexican Government.Resolved, that, if sufficient proxies to insure a reduction in the capital stock of the Company are received before September 30, 1937, the Treasurer be, and he hereby is authorized to distribute to stockholders of record on September 27, 1 T.C. 86">90 1937, the1942 U.S. Tax Ct. LEXIS 33">41 sum of $ 135,000.00, representing practically all of the net proceeds of the sale of the Mexican end of the bridge and the Reserve for Depreciation applying to same.Resolved, that the Secretary be, and he hereby is, instructed to call a special meeting of the Stockholders for the purpose of authorizing a reduction in the capital stock of the Company from $ 500,000.00 to $ 250,000.00 and to transact any other business in connection therewith that may be necessary; the meeting to be held at the principal office of the Company, 419 Flores Avenue, Laredo, Texas, on Tuesday, October 12, 1937, at 11:00 A. M.In accordance with the direction of the resolutions adopted at the directors' meeting of September 14, 1937, a special meeting of the stockholders was called on October 12, 1937, the minutes of which meeting read in part as follows:The Secretary submitted for the information of the stockholders the minutes of the meeting of the Board of Directors on September 14, 1937, at which a capital distribution of 27% was authorized to be made on September 30, 1937, to stockholders of record on September 27, 1937. The Secretary also submitted a condensed Balance Sheet as of September 30, 1937, 1942 U.S. Tax Ct. LEXIS 33">42 with statement of earnings and expenses for the quarter ended September 30, 1937, and statement showing changes in the Surplus Account during the period.Balance SheetSeptember 30, 1937AssetsBridge, Buildings and Equipment$ 289,337.46Franchise25,000.00Investments92,556.15Cash in Banks$ 140,541.02Less Capital distribution135,000.005,541.02$ 412,434.63LiabilitiesCapital Stock$ 500,000.00Less cash distributed to stockholders135,000.00$ 365,000.00Impairment caused by loss on sale of property inMexico, less income from operations to September30, 193750,684.36$ 314,315.64Reserve for Depreciation82,355.88Reserve for Taxes15,763.11$ 412,434.63The following resolutions were presented:Be It Resolved, that the action of the Board of Directors of Laredo Bridge Company on September 14, 1937, authorizing the Treasurer to make a capital distribution of Twenty-seven per cent on September 30, 1937, to the Stockholders of record on September 27, 1937, be, and hereby is, approved and ratified.1 T.C. 86">91 Be It Resolved, by the Stockholders of Laredo Bridge Company that the capital stock of this corporation1942 U.S. Tax Ct. LEXIS 33">43 be, and the same hereby is, decreased from Five Thousand Dollars [sic] $ 500,000.00) to Two Hundred Fifty Thousand Dollars ($ 250,000.00); and the Board of Directors of this corporation is hereby authorized and directed to execute and file with the Secretary of the State of Texas an amendment to the charter of this corporation, and to take such other action as is necessary to make such decrease in the capital stock effective.* * * The reduction of the capital stock of the Laredo Bridge Co. from $ 500,000 to $ 250,000 was accomplished by reducing the par value of the shares from $ 100 to $ 50 per share.On each outstanding certificate of the corporation's shares of stock was endorsed the following statement:Authorized capital stock decreased from $ 500,000 to $ 250,000 in accordance with resolution of stockholders at meeting held October 12, 1937, par value each share reduced from $ 100 to $ 50.This procedure followed the acceptance by the Secretary of State of Texas of the amendment to the charter, decreasing the capital stock as aforesaid.In the latter part of 1937 the petitioners received $ 23,706 of the $ 135,000 distribution heretofore described, but reported none of1942 U.S. Tax Ct. LEXIS 33">44 this amount as taxable income in their income tax returns for the calendar year 1937.During the calendar year 1937, in addition to the $ 135,000 distribution above, the Laredo Bridge Co. distributed monthly sums to its stockholders in the total amount of $ 90,000, which payments the company reported as dividends paid. Of this amount the petitioners received $ 15,804, all of which was reported by them as taxable income in their income tax returns for that year.The earned surplus of the Laredo Bridge Co. as of January 1, 1937, per books, was $ 23,145.96. The current earnings of the company for the calendar year 1937, per books, was $ 21,872.88, less a minor adjustment of $ 12.11, or a net amount as of the close of the year of $ 21,860.77. The balance sheet of the company as of December 31, 1937, as per its books, reads as follows:AssetsLiabilitiesProperty and ranchise$ 316,363.83Capital stock$ 250,000.00Investments90,906.07Capital surplus64,303.53Cash in banks6,898.58Earned surplus5,703.20Reserve for depreciation82,861.55Total414,168.48Reserve for taxes11,300.20Total414,168.48The foregoing findings of fact are made1942 U.S. Tax Ct. LEXIS 33">45 from a stipulation of facts filed at the hearing by the parties and from oral testimony at the hearings. The entire stipulation of facts is made a part of these findings and is incorporated herein by reference.1 T.C. 86">92 OPINION.The petitioners contend that the $ 135,000 and the $ 90,000 distributed to shareholders by the Laredo Bridge Co. in 1937 represented capital distributions made in "partial liquidation" of that corporation within subdivisions (c) and (i) of section 115 of the Revenue Act of 1936.Petitioners contend in the alternative that, if the Court should hold that the two distributions in question were not made in the partial liquidation of the corporation, nevertheless they were made out of capital, except to the extent of $ 45,006.73 accumulated earnings available for distribution, and that the portions of the distributions made out of capital should be applied to a reduction of the cost basis of the stock under section 115 (d) of the Revenue Act of 1936. The overpayment claims are based upon this alleged invasion of capital.At the outset we shall state that it seems perfectly clear from the facts which are in the record that if there was a partial liquidation of1942 U.S. Tax Ct. LEXIS 33">46 the corporation in 1937 within the definition contained in section 115 (i), the $ 90,000 distributed by the corporation was not a part of it. This $ 90,000 was distributed as monthly dividends on the company's outstanding shares of stock. Petitioners returned for taxation the particular amounts of this $ 90,000 which they received. Undoubtedly such distributions were taxable dividends if there were earnings accumulated after February 28, 1913, or earnings and profits of the taxable year available for distribution. As to whether there were such earnings available for distribution at the times the $ 90,000 was distributed, we shall discuss and decide later in this opinion.The pertinent provisions of section 115 of the Revenue Act of 1936 are printed in the margin. 11942 U.S. Tax Ct. LEXIS 33">47 1 T.C. 86">93 At the hearing of these proceedings the Commissioner contended that, even though the Court should hold that the reduction of the capital stock of the Laredo Bridge Co. in 1937 from $ 500,000 to $ 250,000, which reduction was put into effect by the company amending its charter and stamping on each certificate of its shares of stock that the par value of the stock was reduced from $ 100 per share to $ 50 per share, was a partial liquidation of the company under section 115 (i) of the Revenue Act of 1936, nevertheless the distributions which were made were taxable dividends in their entirety under the provisions of section 115 of the applicable revenue act.The Commissioner no longer makes that contention. We interpret his brief to concede that if there was a partial liquidation of the company as defined by section 115 (i), then the $ 135,000 which the company distributed in 1937 in alleged partial liquidation was not a taxable dividend to the stockholders. In other words, we interpret the Commissioner's present position to rest squarely upon the proposition that there was no partial liquidation of the company in 1937; that, there being none, there were taxable dividends under1942 U.S. Tax Ct. LEXIS 33">48 section 115 (a) and (b), provided there were sufficient accumulated earnings of the corporation after February 28, 1913, or earnings and profits of the taxable year, with which to pay the dividends. Respondent contends there were such accumulated earnings sufficient to pay the dividends in question, including both the $ 135,000 and the $ 90,000 distributions. The Commissioner further contends that in any event the $ 90,000 which was distributed by the corporation to its stockholders as monthly dividends represented taxable distributions. In view of the respective contentions of the parties, the first question we have to decide is whether there was a partial liquidation of the company in 1937 under the provisions of section 115 (i), printed in the margin, supra.There are many cases dealing with the subject as to whether a given distribution by a corporation is a distribution in partial liquidation of the corporation. A considerable number of these have been cited by the parties to these proceedings. We shall make no 1 T.C. 86">94 attempt to review all of them, but only those which we regard as especially pertinent to the question which we have to decide. Paul and Mertens, in 1942 U.S. Tax Ct. LEXIS 33">49 their Law of Federal Income Taxation, vol. 1, sec. 8.95, discuss the meaning of "partial liquidation" as defined by section 115 (i) and, among other things, they say:* * * The statute however, limits the kind of distributions which may for tax purposes be classified as "amounts distributed in partial liquidation". The statute recognizes only two forms of partial liquidation; first, where a distribution is made in complete cancellation or redemption of a part of the stock of a corporation, second, one of a series of distributions in complete cancellation or redemption of all or a part of the stock. Most of the difficulties encountered in this subject arise in connection with the second classification. Two principal difficulties are encountered: (1) in determining whether the distributions represent "a series of distributions" where the initial or subsequent distributions are not accompanied by a cancellation or redemption of stock, (2) in determining whether the corporation must be in liquidation in order to have a distribution in partial liquidation, as distinguished from an ordinary dividend.It is clear that the alleged partial liquidation in the instant case does1942 U.S. Tax Ct. LEXIS 33">50 not come within the second classification named by Paul and Mertens in their discussion above. There is no contention by petitioners in the instant case that the 1937 distribution in question was one of a series of distributions made in the complete and final liquidation of the Laredo Bridge Co. Even if such a contention had been made, the evidence would not support it.It is true that in 1937 the corporation parted with its ownership and title to that part of the bridge on the Mexican side of the border. However, it retained full ownership and title to that part of the bridge on the Texas side of the border and expected and intended to continue to operate that end of the bridge. It has done so and is still operating it and its business continues to be profitable.So it can not be said that in 1937 the complete liquidation of the company was under way or that the distribution in question was one of a series of distributions to be made in the complete liquidation of the company. If it could be said that such was the case, then the fact that none of the corporation's shares were canceled and retired as a result of the distribution would not be material and the method used of reducing1942 U.S. Tax Ct. LEXIS 33">51 the par value of the stock from $ 100 to $ 50 per share would be sufficient and the cases of Bynum v. Commissioner, 113 Fed. (2d) 1, and Commissioner v. Straub, 76 Fed. (2d) 388, affirming 29 B. T. A. 216, relied upon by petitioners, would be in point. But, as we have already stated, it is clear that the distribution in question was not one of a series of distributions made in pursuance of a plan to completely liquidate the corporation. Therefore, we think the two above cited cases are not in point.Petitioners argue, however, that there can be a partial liquidation of a corporation without there being an intent to completely liquidate 1 T.C. 86">95 the corporation and cease business. That, of course, is true. The court points out that fact in its decision in Commissioner v. Quackenbos, 78 Fed. (2d) 156, wherein it said:The force of the Commissioner's contention that the distribution was not a partial liquidating dividend such as is governed by section 115 (c) because the corporation was not at the time planning a cessation of business or in the process1942 U.S. Tax Ct. LEXIS 33">52 of final liquidation is hard to perceive. When subsection (c) refers to amounts distributed "in partial liquidation," it nowhere limits such distributions to payments made in the course of winding up the corporation. Moreover, Article 625 of Regulations 74 provides that: "The phrase 'amounts distributed in partial liquidation' means a distribution in complete cancellation or redemption of a part of its stocks, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock." A redemption of a part of the stock of a corporation, whether it be of all of a class such as of preferred stock, or of a part of the common stock, has no necessary relation to the winding up of the corporation.So this brings us to the question whether the first form of partial liquidation, defined in section 115 (i), is present in the instant case, we being definitely of the opinion that the second form of partial liquidation defined in the subsection is not present. The distribution of the $ 135,000 in question was not one of "a series of distributions in complete cancellation or redemption of all or a portion" of the company's stock. Was the distribution in question1942 U.S. Tax Ct. LEXIS 33">53 which the company made in 1937 made in complete cancellation or redemption of a part of its stock? On this point respondent says in his brief that "it must be recognized in the instant proceedings that there has been no cancellation of any of the company's stock, since the same number of shares are still outstanding, and there has been no redemption thereof unless it can be said that the reduction in the par value of the stock constituted such redemption."Paul and Mertens (vol. 1, supra, sec. 8.111), in discussing section 115 (g) of the statute, a subsection closely related to 115 (i), among other things, say:The statutory provisions as to distributions having the effect of a taxable dividend contemplates a distribution in "cancellation or redemption" of stock * . A mere reduction of par value is not, it would seem, a redemption or cancellation.The authors cite as authority for this statement G. C. M. 8175, C.B. IX-2, p. 134, revoking I. T. 1833, C. B. 11-2, p. 25. In the G. C. M. referred to it is stated, among other things:An opinion is requested regarding the status, for income tax purposes, of the sum of 3x dollars which the M Company1942 U.S. Tax Ct. LEXIS 33">54 distributed to its stockholders in 1928.Action providing for the distribution under consideration was taken by the stockholders in meetings held on March 6 and March 27, 1928. The corporation had outstanding at the time y shares of common stock of a par value of $ 100 a share, and coincident with the distribution the par value of the stock was reduced, first to $ 85 a share and then to $ 70 a share. * * ** * * 1 T.C. 86">96 Section 115 (g), supra, deals with the cancellation or redemption of corporate stock as ordinarily understood, i. e., to complete cancellation or redemption, and does not refer to a mere reduction in the par value of stock. Accordingly, section 115 (g) is not applicable to the distribution here under consideration. The distribution is, however, governed by section 115 (a) and section 115 (b) of the Act, * * ** * * Under sections 115 (a) and 115 (b), supra, the distribution in the instant case is taxable as a dividend to the extent of the earnings or profits on hand which were accumulated after February 28, 1913; and any portion of the distribution in excess of such earnings or profits constitutes a return of capital, and should be applied by the stockholders1942 U.S. Tax Ct. LEXIS 33">55 to reduce the cost or other basis of their stock.* * * The Treasury regulations which are applicable to the instant case are Regulations 94. Article 115 (5) of those regulations seems to be framed in harmony with the foregoing G. C. M., and reads in part as follows: * * The term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. A complete cancellation or redemption of a part of the corporate stock may be accomplished, for example, by the complete retirement of all shares of a particular preference or series, or by taking up all the old shares of a particular preference or series and issuing new shares to replace a portion thereof, or by the complete retirement of any part of the stock, whether or not pro rata among the shareholders.It seems clear from the facts in the instant case that the first two methods mentioned in the foregoing regulations are not present here. Was the third method present? Was there a complete retirement of any part of the company's stock in the 1942 U.S. Tax Ct. LEXIS 33">56 taxable year? We think not.By the distribution of $ 135,000 which the corporation made in 1937, there was no complete retirement of any part of the company's shares of stock as we understand the meaning of that term as used in section 115 (i) and the applicable regulations. The company had outstanding 5,000 shares of common stock of a par value of $ 100 per share. Upon each and every one of these shares $ 27 in cash was distributed. Coincident with this cash distribution provision was made for a reduction in capital stock from $ 500,000 to $ 250,000. This was duly and legally accomplished and thereupon each of the company's outstanding shares of stock was reduced by an endorsement thereon from a par value of $ 100 per share to $ 50 per share. Five thousand shares still remained outstanding. This, we do not think, resulted in the complete cancellation or redemption of any part of the company's shares of stock.Petitioners wish to treat the transactions in effect as if one-half of their sahres were completely canceled or redeemed, as in Lida E. Malone v. Commissioner, 128 Fed. (2d) 967. This fact is shown by the following circumstances. 1942 U.S. Tax Ct. LEXIS 33">57 Petitioners originally acquired 439 1 T.C. 86">97 shares of the company stock at a cost of $ 100 per share, making a total cost of $ 43,900. In 1922 they received a 100 percent stock dividend, which increased their number of shares to 878 shares. This stock dividend was a nontaxable stock dividend and thereupon each of petitioners' shares had a cost basis of $ 50 per share. Petitioners wish to treat the transactions involved here as if they had completely disposed of 439 shares, which had a cost basis of $ 50 per share, and as if gain or loss is to be measured by deducting this cost basis from the amount of the distributions which they received. That such is the substance of their contention we think is shown from the following quotation from one of the petitions, both of the petitions being the same in this respect:(h) In 1920 and prior thereto petitioner paid $ 21,950.00 for the stock in Laredo Bridge Company which was surrendered to the company in 1937 when the capital stock of the company was reduced from $ 500,000.00 to $ 250,000.00. Petitioner actually received in total liquidation for the stock surrendered the sum of $ 19,755.00 resulting in a loss of $ 2,195.00, 30% of said1942 U.S. Tax Ct. LEXIS 33">58 loss being $ 658.50. Petitioner failed to include this loss in his return and the Commissioner failed to credit this loss.It seems clear to us that petitioners have sustained no loss. They have not finally disposed of any of their shares. They still own 878 shares of stock in the corporation, albeit reduced in par value from $ 100 per share to $ 50 per share. These shares, under our holding that the distributions which they received in 1937 were taxable, will still retain their cost basis of $ 50 per share, or a total of $ 43,900 for the 878 shares.The precise question we have here to decide was decided by us in Mabel I. Wilcox, 43 B. T. A. 931 (now on review, C. C. A., 9th Cir.), and was decided contrary to the contention of petitioners.The petitioners endeavor to distinguish the Wilcox case from the instant case on its facts. Petitioners say in that respect in their brief:The case of Mabel I. Wilcox * * * is readily distinguished from the instant proceedings for it appeared that there was no intention to curtail the company's business operations to any material extent, but on the contrary the policy of the corporation was to expand1942 U.S. Tax Ct. LEXIS 33">59 its operations as conditions should warrant. There was absolutely no sound business reason for reducing the par value of the stock because at the time the company had sufficient surplus from which the distribution could have been made. Clearly the distribution was made for the purpose of benefiting the stockholders by means of a dividend. * The aforesaid distinctions urged by petitioners would be pertinent if we had based our decision in the Wilcox case on section 115 (g) of the statute, but we expressly stated that that section was not applicable because it was only applicable where there had been a cancellation or complete redemption of shares of the stock of the corporation. As already stated, we held in the Wilcox case that no such complete cancellation 1 T.C. 86">98 or redemption took place by a distribution in cash followed by a reduction in the par value of the shares of stock. That was the essential fact upon which we based our decision, and that fact is present in the instant case the same as it was in the Wilcox case, although under somewhat different facts and circumstances.As we have already stated, the cases of Bynum v. Commissioner, supra,1942 U.S. Tax Ct. LEXIS 33">60 and Commissioner v. Straub, supra, strongly urged and relied upon by petitioners, were cases where the court found that the corporation had determined to completely liquidate and cease business and the distributions which were in question were of a series of distributions made in complete liquidation of the corporation. Under such circumstances the court held it was a partial liquidation under section 115 (i). We have no such situation here. In making this holding, we wish to make it plain that we are not doubting that the company effectively reduced its capital stock under the laws of Texas by the method used from $ 500,000 to $ 250,000. While a reduction of a corporation's capital stock is undoubtedly a "recapitalization," it does not necessarily mean there has been a partial liquidation. What we have to decide is not whether there has been a recapitalization of the corporation, but whether what was done was a partial liquidation of the company under the precise terms of the definition of section 115 (i), and that question, for reasons already stated, we decide in the negative.Petitioners contend in the alternative that, even if we should1942 U.S. Tax Ct. LEXIS 33">61 hold that there was no partial liquidation of the corporation under section 115 (i) nevertheless none of the $ 135,000 distribution should be taxed as a dividend and only $ 45,006.37 of the $ 90,000 distribution should be taxed as a dividend, because the earnings of the company since February 28, 1913, which were available for distribution, did not exceed $ 45,006.37. Petitioners contend that all of the distributions in question, except the $ 45,006.37, were made from capital and that distributions of capital do not result in taxable income to the stockholder except as such distributions of capital exceed the cost basis of the stock. That, of course, is true under section 115 (d) of the Revenue Act if the distributions in question, except to the extent of $ 45,006.37, were made from capital and not from accumulated earnings.Petitioners' contention, however, that they were made from capital and not from earnings is primarily based upon their contention that, when in 1922 the company capitalized $ 250,000 of its earnings and paid a nontaxable stock dividend to its stockholders, such $ 250,000 became capital of the company just the same as if it had been paid in as capital and no 1942 U.S. Tax Ct. LEXIS 33">62 longer constituted accumulated earnings available for distribution as a dividend. The law is against petitioners in this contention. Subdivision (h) of section 115, supra, provides directly to 1 T.C. 86">99 the contrary, as we construe it. This particular subdivision had its beginning in the Revenue Act of 1934 and was enlarged in the Revenue Act of 1936. In the report on the Revenue Act of 1936, S. Rept. 2156, 74th Cong., 2d sess. (1939-1 (Part 2) C. B. 678, 690), the Senate Committee on Finance, in referring to section 115 (h), supra, stated:The rule, under existing law, with respect to the effect on corporate earnings or profits of a distribution which, under the applicable tax law, is a nontaxable stock dividend or a distribution of stock or securities in connection with a reorganization or other exchange, on which gain is not recognized in full, is that such earnings or profits are not diminished by such distribution. In such cases, earnings or profits remain intact and hence available for distribution as dividends by the corporation making such distribution, or by another corporation to which the earnings or profits are transferred upon such reorganization or other exchange. 1942 U.S. Tax Ct. LEXIS 33">63 This rule is stated only in part in section 115 (h) of the Revenue Act of 1934, and corresponding provisions of prior Acts, but is the rule which is applied by the Treasury Department and supported by the courts in Commissioner v. Sansome (60 Fed. (2d) 931); United States v. Kauffman, (62 Fed. (2d) 1045); Murcheson v. Comm. (76 Fed. (2d) 641). While making no change in the rule as applied under existing law, the recommended amendment is desirable in the interest of greater clarity.We, therefore, hold that in determining the amount of earnings or profits accumulated by the company after February 28, 1913, the $ 250,000 of earnings which the company capitalized in the form of a stock dividend in 1922 must be included in the computation to the extent which it represents earnings accumulated after February 28, 1913. When this is done, it seems clear that the company had on hand in 1937, when the distributions of $ 135,000 and $ 90,000 were made, sufficient earnings accumulated after February 28, 1913, to cover such distributions.Petitioners in the last place contend that included1942 U.S. Tax Ct. LEXIS 33">64 in the $ 135,000 distribution was the reserve for depreciation allotted to the Mexican end of the bridge in the amount of $ 62,028.89 and that this $ 62,028.89 is not to be considered as a distribution from earnings and profits and is not subject to tax. Petitioners cite article 115-6, Regulations 94, and Commissioner v. McKinney, 87 Fed. (2d) 811, in support of their contention.It is true, of course, that a distribution by a corporation to its stockholders of its depreciation reserve is not a taxable dividend and would be applied to a reduction in the cost basis of the stock. This is true because a depreciation reserve represents a return of capital. However, it must be borne in mind that under section 115 (b), supra, for the purposes of taxation effect, a corporation can not distribute to its stockholders its depreciation reserve as long as it has earnings and profits accumulated after February 28, 1913, sufficient to cover the distribution in question.1 T.C. 86">100 In view of the fact that, under our holding on the other points above discussed, the company had sufficient earnings accumulated after February 28, 1913, to cover both the distributions1942 U.S. Tax Ct. LEXIS 33">65 of $ 135,000 and $ 90,000, it can not be said that the company distributed to its stockholders any of its depreciation reserve, notwithstanding the recitals in the corporate resolution that part of the $ 135,000 was being distributed from the reserve for depreciation held by the company to cover the Mexican side of the bridge. See Paul and Mertens, Law of Federal Income Taxation, vol. 1, sec. 8.58. In this contention petitioners are not sustained.Decision will be entered for respondent. MURDOCK Murdock, J., dissenting: If a corporation reduces its capital stock by one-half, there is a complete cancellation or redemption of one-half of its stock, regardless of whether one-half of the stock certificates are canceled or whether the par value of each certificate is cut in two. The statute defines amounts distributed in partial liquidation as a distribution "in complete cancellation or redemption of a part of its stock." Speaking of stock in a broader sense than mere certificates, there would be the same cancellation in each case. The word "stock," as used in the statute, does not mean stock certificates, but even if it did, the stock certificates are completely canceled in1942 U.S. Tax Ct. LEXIS 33">66 part, that is, to the extent of one-half, where the par value is reduced 50 percent. Therefore, I dissent from the holding in this case that a reduction in par value, accompanied by a distribution, can not be a partial liquidation. Footnotes1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(a) Definition of Dividend. -- The term "dividend" when used in this title (except in section 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distributions made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or 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.(b) Source of Distributions. -- For the purpose of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * (c) Distributions in Liquidation. -- * * amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * (d) Other Distributions from Capital. -- If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not a dividend, then the amount of such distribution shall be applied against and reduce the adjusted basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. * * *(h) Effect on Earnings and Profits of Distributions of Stock. -- The distribution (whether before January 1, 1936, or on or after such date) to a distributee by or on behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation -- (1) if no gain to such distributee from the receipt of such stock or securities was recognized by law, or(2) if the distribution was not subject to tax in the hands of such distributee because it did not constitute income to him within the meaning of the Sixteenth Amendment to the Constitution or because exempt to him under section 115 (f) of the Revenue Act of 1934 or a corresponding provision of a prior Revenue Act.As used in this subsection the term "stock or securities" includes rights to acquire stock or securities.(i) Definition of Partial Liquidation. -- As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620098/	HAROLD L. KING and ALTA R. KING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKing v. CommissionerDocket No. 3016-77.United States Tax CourtT.C. Memo 1979-359; 1979 Tax Ct. Memo LEXIS 159; 39 T.C.M. 54; T.C.M. (RIA) 79359; September 10, 1979, Filed E. J. Ball and Kenneth R. Mourton, for the petitioners. Charles N. Woodward, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax under section 6653(b): 1/ Addition to TaxYearDeficiency(sec. 6653(b))1967$11,986.12$ 5,993.0619688,009.504,004.75196917,730.258,865.13197028,577.2814,288.64197141,778.6220,889.31The issues for decision are: 1. Whether petitioners, in preparing and filing their 1967 through 1971 joint Federal income tax returns, omitted substantial amounts of income from their farming operations and from petitioner Harold L. King's water well-drilling business. 1979 Tax Ct. Memo LEXIS 159">161 2. Whether the bar of the 3-year statute of limitations otherwise applicable for 1967, 1968, and 1969 was lifted by reason of the application of section 6501(c)(1), relating to false and fraudulent returns, or section 6501(e)(1)(A), relating to the omission of gross income in an amount in excess of 25 percent of the amount of gross income reported. 3. Whether any part of the underpayments for 1967 through 1971 (if such exist) was "due to fraud" within the meaning of section 6653(b) so as to render petitioners liable for additions to tax. FINDINGS OF FACT Petitioners Harold L. King (Harold) and Alta R. King (Alta), husband and wife, were legal residents of Everton, Arkansas, when they filed their petition. They filed joint Federal income tax returns for 1967 through 1971 with the Director, Internal Revenue Service Center, Austin, Texas. During World War II, Harold served in the United States Navy. He was able during the term of his service to save a part of his wages which he routinely sent to his parents in Arkansas. Upon his discharge in 1945, Harold returned home and began living with his parents. Shortly thereafter, Harold and his father purchased, for approximately1979 Tax Ct. Memo LEXIS 159">162 $1,800, a "cable" well-drilling rig and began contracting to drill water wells. Harold made the downpayment for the rig, approximately $400, out of the money he had saved while in the Navy. In the late 1940's, Harold took over the business. He paid his father for his share of the business with the income he earned while operating the rig. Harold and Alta were maried in 1951. In 1952 they purchased an 80-acre farm which cost them $50 per acre. Shortly thereafter, Harold and his father built a house on this land at a cost of approximately $2,000. At about that same time, Harold transferred approximately 30 acres of the land to his father. As of 1967, the remaining 50 acres and the house, after being remodeled in the 1960's, had a cost basis of $16,000.Petitioners, one of their daughters, Aleta, and their one son, Harold, Jr., lived in the house during the years in issue. Janet, petitioners' oldest daughter, lived in the house until she went away to school in 1970. Janet and Aleta were born in 1952 and 1954, respectively, and Harold, Jr., was born in 1959. Shortly after the birth of each child, petitioners opened a joint savings account in their names and the child's name1979 Tax Ct. Memo LEXIS 159">163 at the Harrison Federal Savings and Loan Association (hereinafter Harrison Federal), Harrison, Arkansas. (Hereinafter the accounts will be referred to by the child's name.) The initial deposits were in small amounts but petitioners continued to make deposits in the accounts. On March 14, 1961, Harold withdrew $150 from Janet's account and on March 25, 1961, he withdrew $300 from each of the three accounts. In 1969 petitioners transferred $5,000 from each of the accounts to certificates of deposit which were also held jointly by petitioners and the child. The total end-of-year balances and total interest earned on the three accounts for 1966 through 1971 are as follows: YearEnd-of-Year BalanceInterest Earned1966$ 8,946.340196714,226.02$ 487.48196815,354.53692.401969736.27381.7419701,311.1361.1119712,039.1783.04In addition to the accounts described above, Harold had individual bank accounts prior to his marriage to Alta and joint accounts with her during their marriage. Petitioners maintained accounts in several banks. For 1966 through 1971, the total end-of-year balances of the funds held in each bank, excluding the1979 Tax Ct. Memo LEXIS 159">164 joint accounts discussed above, were as follows: 12/31/6612/31/6712/31/68CheckingAccounts: SecurityBank $ 924.06 $ 138.23 $ (941.54)1st Nat'lBank ofHarrison409.95172.34232.78SavingsAccounts: CitizensBank,Marshall3,090.0010,592.5012,192.50SecurityBank000HarrisonFed. Svgs.& Loan40,900.0049,530.8063,818.12GuarantySvgs. &Loan20,316.7141,161.3063,482.281st Nat'lBank ofHarrison02,200.003,900.501st Nat'lBank, GreenForest04,128.004,128.0012/31/6912/31/7012/31/71CheckingAccounts: SecurityBank[2,840.18) $ (312.29) $ (2,382.95)1st Nat'lBank ofHarrison1,082.14117.54216.24SavingsAccounts: CitizensBank,Marshall13,592.5020,718.3131,385.81SecurityBank3,981.504,000.004,000.00HarrisonFed. Svgs.& Loan76,933.8299,011.72137,044.30GuarantySvgs. &Loan95,152.79108,736.71137,048.871st Nat'lBank ofHarrison4,921.507,760.007,760.001st Nat'lBank, GreenForest5,578.005,578.005,578.00Harold and Alta have lived frugally during their marriage. Alta sewed most1979 Tax Ct. Memo LEXIS 159">165 of the clothing for herself and her daughters. In addition, the children wore used clothing given to them by relatives. Very little of the family's clothing needed dry cleaning. The daughters did not go to the beauty shop and Alta went only approximately once every 3 months. Harold and Harold, Jr., visited the barber shop infrequently. During the winters of 1967, 1968 and 1969, petitioners heated their home by using a fireplace for which they cut and split firewood from their land. In June 1970, petitioners installed a central heating unit at a cost of $1,299.20. They reverted to the fireplace, however, after using the unit for only one winter. Normally, petitioners gave their children only small gifts and small amounts of money. In 1970, however, petitioners paid for a trip to Europe for their daughters, and in 1970 and 1971 they paid for part of Janet's educational expenses. Petitioners owned only one automobile at any given time. In 1953 and again in 1963 they purchased used Oldsmobiles. The 1963 automobile cost $3,250. In 1971, petitioners purchased a Chevrolet for $4,293.78. The automobiles were used approximately one-half of the time for personal purposes and the1979 Tax Ct. Memo LEXIS 159">166 remainder of the time for Harold's water well-drilling business and for the farming operation. Petitioners' home telephone was likewise used for business purposes. The family rarely dined outside the home and purchased at the grocery store very few food items for use in their home. Petitioners were able to raise the vegetables they needed on the 50-acre farm. In addition, petitioners occasionally butchered for their personal use one of the cows or calves which they raised. In 1964, petitioners purchased 160 acres of land for $2,000. In 1971 petitioners bought an additional 39 acres for their farming and cattle-raising operation. For this acreage they paid $13,000 in cash. As noted above, petitioners made occasional capital expenditures (i.e., house, house improvement, automobiles) 2/ for personal purposes. In addition, petitioners made purchases listed below, relating to their farm operations and Harold's water well-drilling business: 1979 Tax Ct. Memo LEXIS 159">167 195219531958196080 Acres$4,000.00000"Cable" DrillingRig0$4,000.0000Ford Tractor00$2,464.000Farm Building000$2,000.95"Rotary" DrillingRig0000GMC 2-Ton Truck0000Chev. 1/2-TonTruck0000Typewriter & Add-ing Machine0000160 Acres0000Dodge 2-TonTruck0000Chev. 1/2-TonTruck0000Ford 1/2-TonTruck0000Bush Hog0000Chev. 1/2-TonTruck0000Chev. 2-TonTruck0000Chev. 2-1/2-TonTruck0000Diesel Engine0000Ford 1/2-TonTruck0000Tractor0000Chev. 1/2-TonTruck000039 Acres0000Downpayment &Equipment0000Annual Outlay$4,000.00$4,000.00$2,464.00$2,000.95196219631964196680 Acres0000"Cable" DrillingRig0000Ford Tractor0000Farm Building0000"Rotary" DrillingRig$20,000.00$20,000.00$20,000.000GMC 2-Ton Truck003,900.000Chev. 1/2-TonTruck002,363.000Typewriter & Add-ing Machine00530.290160 Acres002,000.000Dodge 2-TonTruck000$3,550.00Chev. 1/2-TonTruck0000Ford 1/2-TonTruck0000Bush Hog0000Chev. 1/2-TonTruck0000Chev. 2-TonTruck0000Chev. 2-1/2-TonTruck0000Chev. 2-1/2-TonTruck0000Diesel Engine0000Ford 1/2-TonTruck0000Tractor0000Chev. 1/2-TonTruck000039 Acres0000Downpayment &Equipment0000Annual Outlay$20,000.00$20,000.00$28,793.29$3,550.001979 Tax Ct. Memo LEXIS 159">168 196719691970197180 Acres0000"Cable" DrillingRig0000Ford Tractor0000Farm Building0000"Rotary" DrillingRig0000GMC 2-Ton Truck0000Chev. 1/2-TonTruck0000Typewriter & Add-ing Machine0000160 Acres0000Dodge 2-TonTruck0000Chev. 1/2-TonTruck$1,430.00000Ford 1/2-TonTruck2,431.28000Bush Hog303.85000Chev. 1/2-TonTruck0$1,100.0000Chev. 2-TonTruck00$4,327.000Chev. 2-1/2-TonTruck006,920.000Diesel Engine004,025.500Ford 1/2-TonTruck003,677.620Tractor004,000.000Chev. 1/2-TonTruck000 1,100.0039 Acres00013,000.00Downpayment &Equipment0004,500.00Annual Outlay$4,165.13$1,100.00$22,950.12$18,600.00The "cable" drilling rig and later the "rotary" drilling rig, shown on the foregoing schedule, enabled Harold to drill annually more water wells and to drill those wells to greater depths than he was able to do with the rig he and his father used during the late 1940's. The "rotary" drilling rig was a sophisticated machine. 1979 Tax Ct. Memo LEXIS 159">169 After its purchase, petitioner was required for the first time to hire helpers. Of all the major asset purchases Harold made through 1971, the "rotary" drilling rig was the only asset he purchased on a deferred payment basis. He paid for the rig over a 3-year period, paying approximately $20,000 a year. On their 1967 through 1971 Federal income tax returns, which Alta prepared, petitioners reported the following amounts of gross income: Water WellDrillingFarmInterestTotal1967$98,150.49 $ 145.41$ 4,412.36$ 102,708.26196876,245.3845.806,057.8182,348.99196978,032.24385.179,258.8687,676.27197091.446.70765.1014,254.10106,465.90197193,492.091,237.9618,120.57112,850.62 Petitioners did not keep records of their receipts from the water well-drilling business. When she prepared their income tax returns, Alta relied primarily upon bank deposit records to determine the business' gross receipts. The Internal Revenue Service initiated an investigation of petitioners' income tax returns, and, on December 4, 1972, petitioners made the following advance payments to the Internal Revenue Service for application1979 Tax Ct. Memo LEXIS 159">170 against anticipated additional tax liabilities: YearAmount of Deposit1969$21,000197012,000197123,000On August 22, 1974, petitioners were indicted under section 7201 on four counts of willfully and knowingly attempting to evade and defeat their income tax for 1968 through 1971. On February 3, 1975, Harold pled guilty to count four of the indictment for willfully and knowingly attempting to evade and defeat his income tax for 1971. A judgment of conviction was entered on that date, and it has become final. The remaining three counts of the indictment relating to 1968, 1969, and 1970, against Harold and all four counts of the indictment against Alta were dismissed. For 1967, 1968, and 1969, petitioners executed Forms 872 (Consent Fixing Period of Limitation Upon Assessment of Income Tax), contingent on the applicability of section 6501(e), extending by agreement the period of limitations upon the assessment of tax to April 15, 1977. In the notice of deficiency dated January 14, 1977, respondent used the net worth increase plus nondeductible expenditures method to reconstruct petitioners' taxable income for 1967 through 1971. The following table1979 Tax Ct. Memo LEXIS 159">171 is the computation used by respondent in his determination of the deficiencies: 12/31/6612/31/6712/31/68Cash on HandThe Security Bank $ 924.06 $ 138.23 $ (941.54)First Nat'l Bank of Harrison409.95172.34232.78Savings AccountsCitizens Bank, Marshall3,090.0010,592.5012,192.50Security Bank000Harrison Federal SavingsLoan49,846.3463,756.8279,172.65Guaranty Savings & Loan20,316.7141,161.3063,482.28First Nat'l Bank of Harrison02,200.003,900.50First Nat'l Bank, GreenForest04,128.004,128.00Book Value - DepreciableAssets27,616.5220,034.609,264.751973 Oldsmobile3,250.003,250.003,250.001971 Chevrolet Caprice000Home and 50 Acres16,000.0016,000.0016,000.00Home Improvement - Central Air000Marion Land - 160 Acres2,000.002,000.002,000.00Land - 39 Acres000Downpayment on Equipment000Total Assets$123,453.58$163,433.79$192,681.92Liabilities000Net Worth$123,453.58$163,433.79$192,681.92Prior Year Net Worth123,453.58163,433.79Increase in Net Worth$ 39,980.21$ 29,248.13Adjustments to Net WorthPersonal Expenses8,594.2410,457.20Adjusted Gross Income asRevised$ 48,574.45$ 39,705.33Adjusted Gross IncomeReported on Return16,007.8417,782.10Omitted Income$ 32,566.61$ 21,923.231979 Tax Ct. Memo LEXIS 159">172 12/31/6912/31/7012/31/71Cash on HandThe Security Bank $ (2,840.18) $ (312.29) $ (2,382.95)First Nat'l Bank ofHarrison1,082.14117.54216.24Savings AccountsCitizens Bank, Marshall13,592.5020,718.3131,385.81Security Bank3,981.504,000.004,000.00Harrison Federal Savings& Loan92,670.09115,322.85154,083.47Guaranty Savings & Loan95,152.79108,736.71137,048.87First Nat'l Bank ofHarrison4,921.507,760.007,760.00First Nat'l Bank, GreenForest5,578.005,578.005,578.00Book Value - DepreciableAssets1,966.3919,285.8314,039.931973 Oldsmobile3,250.003,250.003,250.001971 Chevrolet Caprice004,293.78Home and 50 Acres16,000.0016,000.0016,000.00Home Improvement - CentralAir01,299.501,299.50Marion Land - 160 Acres2,000.002,000.002,000.00Land - 39 Acres0013,000.00Downpayment on Equipment004,500.00Total Assets$237,354.73$303,756.45$396,072.65Liabilities000Net Worth$237,354.73$303,756.45$396,072.65Prior Year Net Worth192,681.92237,354.73303,756.45Increase in Net Worth$ 44,672.81$ 66,401.72$ 92,316.20Adjustments to Net WorthPersonal Expenses12,421.1812,835.0112,687.73Adjusted Gross Income asRevised$ 57,093.99$ 79,236.73$105,003.93Adjusted Gross IncomeReported on Return16,391.3918,615.6422,564.39Omitted Income$ 40,702.60$ 60,621.09$ 82,439.541979 Tax Ct. Memo LEXIS 159">173 In addition, respondent determined that petitioners were liable for an addition to tax equal to 50 percent of the underpayment pursuant to section 6653(b). ULTIMATE FINDINGS OF FACT 1. Petitioners' adjusted gross income for 1967 through 1971 was as follows: Adjusted Gross IncomeYearRecomputedReportedUnreported1967$ 45,716.25$16,007.84$ 29,708.41196836,263.3717,782.1018,481.27196953,474.1716,391.3937,082.78197075,659.1018,615.6457,043.461971100,315.0322,564.3977,750.642. Petitioners' underpayments of income tax for 1967 through 1971 were "due to fraud" within the meaning of section 6653(b) 3. Petitioners' income tax returns for 1967, 1968, and 1969, were "false or fraudulent" within the meaning of section 6501(c)(1). OPINION Issue 1. Omission of IncomePetitioners do not contest the use of the net worth increase plus nondeductible expenditures method in reconstructing their net income but contend that respondent made three errors in applying the method: (1) Failure to allow petitioners credit for having, in addition to their bank accounts, currency on hand at the beginning of each year1979 Tax Ct. Memo LEXIS 159">174 in issue which they expended during that year to acquire assets listed in the foregoing schedule; (2) inclusion in petitioners' net worth of the three accounts which petitioners jointly held with their children at Harrison Federal; and (3) inclusion of excessive personal expenditures. After careful consideration of all the evidence, we have concluded that respondent erred only with respect to the personal expenditures. A. The Cash HoardPetitioners claim they had a cash hoard at the end of each year from 1966 through 1971 in the following amounts: 12/31/6612/31/6712/31/6812/31/6912/31/7012/31/71$135,000$105,000$85,000$65,000$45,000$25,000 In explaining how they were able to accumulate as of December 31, 1966, $135,000 in cash, in addition to their other assets, petitioners presented at trial an explanation that they worked hard and lived frugally. Petitioners argue that, while living at home with his parents and prior to his marriage to Alta in 1951, Harold accumulated approximately $35,000. Part of this accumulation came from his savings while in the Navy and the remainder from the water well-drilling business. Petitioners1979 Tax Ct. Memo LEXIS 159">175 maintain further that, after their marriage, by living frugally, they were able to accumulate approximately $6,500 a year, primarily from Harold's earnings from the water welldrilling business.Harold kept the alleged accumulation, which totaled approximately $150,000 by the end of 1965 and consisted mostly of $50 bills, in glass jars in a place, unknown to Alta, on a bluff located on their homeplace. Petitioners assert that Harold hoarded this money because he was afraid the banks might fail. By the mid-1960's, however, Harold's confidence in financial institutions had been restored. Petitioners contend that, for that reason and because they were concerned they might be robbed and murdered, as nearby neighbors had been, they decided to dispose of the cash hoard. They assert that they accomplished this disposition by placing all receipts from the water well-drilling business and from the farm operations into checking or savings accounts and by spending the hoard, through the years in issue, on the purchase of assets, on the maintenance of equipment, and for living expenses. After careful consideration of the entire record, we have concluded that this cash hoard testimony is1979 Tax Ct. Memo LEXIS 159">176 not credible. Petitioners' story leaves too many unanswered questions. Harold testified that he hid the hoard in glass jars on his property because he was afraid the banks would fail and that only by the mid-1960's was his concern about their stability alleviated. He was unsure, however, of how many jars he had, of how much money was kept in each jar, and of the total amount of money in the hoard. Alta testified that, although she knew of the hoard, she knew neither its amount nor the location of the hiding place. Such indefiniteness leads us to question Harold's and Alta's credibility. We find it incomprehensible that a successful businessman, such as Harold, would have no definite idea or record of the amount kept in a cash hoard. We think it also unreasonable that, in a family as close in their relationships as this one, Harold would not tell Alta even the location of the hiding place of their hoard of hard-earned money. We are also unconvinced by Harold's explanation that he maintained the alleged cash hoard because he was afraid the banks might fail. If he was indeed concerned about the banks' instability, why then did he, as he testified at trial, have personal bank1979 Tax Ct. Memo LEXIS 159">177 accounts as early as the late 1940's and why did he as early as 1953 open the first joint savings account at Harrison Federal?Petitioners did not attempt to explain this inconsistency.Also, if, as he claims his concern on this point had been alleviated by the mid-1960's, why did he not at that time deposit the hoard in his and Alta's numerous bank accounts so that he could earn interest on the money? Harold testified that he did not deposit the money because he was afraid, in light of a recent robbery and murder of a neighbor couple who were known to have a cash hoard, that the same might happen to him and Alta once it was learned that they also had a cash hoard. We do not find that explanation convincing. It would seem more likely that the murder of the neighbors would have caused petitioners immediately to deposit their hoard rather than to keep it on their property. Petitioners contend that they did not deposit their cash hoard in their bank accounts but rather used the money to buy assets, to service equipment, and to pay the family's living expenses. Comparison of the alleged annual decreases in the cash hoard with the total amount of the asset purchases, both personal and1979 Tax Ct. Memo LEXIS 159">178 business, personal expenditures, and repairs in both the water welldrilling business and the farming operation, however, does not show any correlation between the two. Petitioners argue that during 1967 their cash hoard declined $30,000.Yet during that year petitioners purchased assets for a cost of $4,165.13, had personal expenditures, as will be explained below, of $5,736.04, and incurred repair costs of $7,259.63, all of which expenditures total only $17,159.80. The discrepancy for 1968, although smaller, is still significant. The expenditures in that year totaled only $11,770.85 whereas petitioners contend their cash hoard declined by $20,000. The years 1969, 1970, and 1971 present a totally different picture. During those years the total of the asset purchases, repairs and the personal expenditures exceeded the alleged corresponding decreases in the cash hoard. Petitioners did not explain the discrepancies for any of the years in issue. Harold testified at length as to the depths of the wells he drilled and the per foot charge and the cost per foot of those wells. This evidence was intended by petitioners to prove that it would have been impossible for Harold to earn1979 Tax Ct. Memo LEXIS 159">179 the amounts required to support respondent's determination of omitted income. This testimony, and the argument based upon it, however, is not convincing. The fact is that the net worth increases and cash expenditures occurred, and we find the only explanation advanced to be incredible. B. Joint Bank AccountsAfter the birth of each of their three children, petitioners opened joint bank accounts in their names and in the name of the child at Harrison Federal. On March 14, 1961, Harold withdrew $150 from Janet's account and on March 25, 1961, he withdrew $300 from each of the accounts.In 1969, petitioners transferred $5,000 from each of the accounts to certificates of deposit also held in their names and in the name of the child. In addition, during their marriage, petitioners opened personal accounts at Harrison Federal.For 1966 through 1971, the end-of-year balances in the three joint accounts, including the $15,000 converted to certificates of deposit, and in petitioners' personal accounts at Harrison Federal were as follows: End-of-Year BalancesYearJoint AccountsPersonal AccountsTotal1966$ 8,946.34$ 40,900.00$ 49,846.34196714,226.0249,530.8063,756.82196815,354.5363,818.1279,172.6 5196915,736.2776,933.8292,670.09197016,311.1399,011.72115,322.85197117,039.17137,044.30154,083.471979 Tax Ct. Memo LEXIS 159">180 Total interest earned on the three joint accounts with the children for 1967 through 1971 was as follows: YearInterest Earned1967$487.481968692.401969381.74197061.11197183.04Petitioners contend that respondent was in error in including the entire balances of the joint accounts in their net worth. Petitioners argue that Harold, by declaring orally that the accounts were for the benefit of the children in order to provide for their education and support should he die, created under Arkansas law a parol trust in personalty for the benefit of the children. On this theory, petitioners argue the interest earned on the joint accounts during 1967 through 1971 was attributable to the children as trust beneficiaries and should be excluded from petitioners' net worth. We disagree. Harold's statement that he was holding the money in the joint accounts in trust for his three children was self-serving, uncorroborated testimony, which can be given little credence. We do not think trusts were created. We think it more likely, in the light of all the facts, that petitioners created and funded the savings accounts, intending that the money, if possible, 1979 Tax Ct. Memo LEXIS 159">181 remain available to finance the children's educations or otherwise to assist the children in getting started in their careers. At the same time, we think the money in the accounts so set aside remained available for petitioners' personal use if they later needed it. This kind of management of family resources is not uncommon and it does not rise to the level of creating a trust. Nonetheless, assuming a parol trust in favor of petitioners' children was created under Arkansas law by Harold's oral statement, see Hawkins v. Scanlon,212 Ark. 180">212 Ark. 180, 206 S.W.2d 179">206 S.W.2d 179, 206 S.W.2d 179">183 (1948); Oliver v. Oliver,182 Ark. 1025">182 Ark. 1025, 34 S.W.2d 226">34 S.W.2d 226, 34 S.W.2d 226">227 (1931), we think the interest earned on the accounts is taxable to petitioners. Petitioners were grantors of the trust and they had access to the accounts and actually withdrew $1,050 from them in March 1961. Because petitioners could use the funds in those accounts for their own purposes, section 674(a) 3/ requires us to treat petitioners as owners of the trusts, and income earned by the trusts is taxable to them under section 671. 4/ 1979 Tax Ct. Memo LEXIS 159">182 C. Personal ExpendituresIn reconstructing petitioners' taxable income for 1967 through 1971, respondent estimated petitioners' total annual personal expenditures as follows: 19671968196919701971$8,594.24$10,457.20$12,421.18$12,835.01$12,687.73 We think those estimates are excessive. As indicated in the foregoing findings, petitioners' testimony covered their personal expenditures in great detail, and the cross-examination on many items was extensive. That testimony showed that petitioners did not spend a great deal of money but lived simply and frugally. Relying primarily upon the fact that petitioners lived a simple life, as detailed in our Findings of Fact, we find that petitioners' personal expenditures for 1967 through 1971 were as follows: [SEE TABLES IN ORIGINAL] As with most fraud cases, none of the evidence presented is direct proof of fraud. It is our opinion, however, that the whole set of the circumstances, when considered together, adds up to fraud. See National City Bank of New York, Executor v. Commissioner, 35 B.T.A. 975">35 B.T.A. 975, 35 B.T.A. 975">988 (1937), affd. 98 F.2d 93">98 F.2d 93 (2d Cir. 1938). Mere1979 Tax Ct. Memo LEXIS 159">183 unexplained increases in funds held in bank accounts and in asset purchases as we found here are not sufficient standing alone to establish fraud. York v. Commissioner, 24 T.C. 742">24 T.C. 742 (1955). However, where, as here, petitioners have consistently understated their gross income on their tax returns over a period of years, and have given the Court a patently weak explanation, a strong inference of fraud attaches. See, e.g., Boschma v. Commissioner, 374 F.2d 863">374 F.2d 863 (6th Cir. 1967), affg. per curiam a Memorandum Opinion of this Court; Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 53 T.C. 96">108 (1969); Gano v. Commissioner, 19 B.T.A. 518">19 B.T.A. 518 (1930).In addition, petitioners failed to keep a record of their receipts from the water well-drilling business whereas they kept records of their expenses. Petitioners used customers' checks, prior to deposit, to purchase assets and pay expenses. This is particularly strong proof of fraud in light of the fact that, when Alta prepared petitioners' income tax returns, she relied upon bank deposit records to determine the amount of gross receipts from the water well-drilling business. Petitioners also had a1979 Tax Ct. Memo LEXIS 159">184 relatively high degree of business acumen. As an example, petitioners continually transferred their money among various bank accounts so as to earn higher interest, a factor which further weakens their cash hoard theory. Finally, petitioners attempted to explain away their unreported income by use of a cash hoard theory which, for the reasons discussed, was spurious.Respondent maintains, citing Arctic Ice Cream Co. v. Commissioner,43 T.C. 68">43 T.C. 68 (1964), that the guilty plea which Harold entered on February 3, 1975, of willfully and knowingly attempting to evade and defeat his income tax for 1971 in violation of section 7201, collaterally estopped him from denying that the underpayment of tax for that year was due to his fraud. Petitioners argue that the trial court in accepting Harold's guilty plea failed to follow Rule 11, Federal Rules of Criminal Procedure. For that reason, petitioners contend the plea was so tainted, Worcester v. United States, 370 F.2d 713">370 F.2d 713, 370 F.2d 713">716 (1st Cir. 1966), affg. in part and vacg. in part a Memorandum Opinion of this Court, that this Court should be precluded from applying collateral1979 Tax Ct. Memo LEXIS 159">185 estoppel against Harold for 1971. We need not decide that issue. In light of all the evidence, we find that at least part of the underpayment of income tax for the years 1967 through 1971 was "due to fraud" on the part of both Harold and Alta.To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.2. / Listed below are the approximate amounts of the capital expenditures: 1952195319631965House$2,000000Olds-mobile0 $90000Olds-mobile00$3,2500HomeImprove-ments000$5,000HeatingUnit0000Chevrolet0000↩196619701971House000Olds-mobile000Olds-mobile000HomeImprove-ments$5,00000HeatingUnit0$1,299.200Chevrolet00$4,293.783. / SEC. 674. POWER TO CONTROL BENEFICIAL ENJOYMENT. (a) General Rule.--The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. ↩4. / SEC. 671. TRUST INCOME, DEDUCTIONS, AND CREDITS ATTRIBUTABLE TO GRANTORS AND OTHERS AS SUBSTANTIAL OWNERS. Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620099/	E. E. CHAPMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chapman v. CommissionerDocket No. 40036.United States Board of Tax Appeals19 B.T.A. 878; 1930 BTA LEXIS 2314; May 8, 1930, Promulgated 1930 BTA LEXIS 2314">2314 In the early part of 1925 the petitioner sold certain real estate owned by him for $70,000, receiving in payment therefor $17,000 in cash and four promissory notes for $13,250 each, payable in one, two, three, and four years from date and which were secured by a first mortgage on the property sold. Later and during 1925 the petitioner, in part payment of certain other real estate purchased by him about that time, transferred at their face value the two notes having the latest maturity dates. Held that the petitioner is not entitled to report the profit realized from the sale of the property on an installment basis. Fred Van Dolsen, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. TRAMMELL19 B.T.A. 878">878 This proceeding is for the redetermination of a deficiency in income tax of $3,251.33 for 1925. The only question involved is whether the petitioner is entitled to report on the installment basis the profit received from the sale of certain real property in that year. The case was submitted on a stipulation, from which we make the following findings of fact. FINDINGS OF FACT. The petitioner, an individual, is an inhabitant1930 BTA LEXIS 2314">2315 of the State of Florida, and filed his 1925 income-tax return with the collector of internal revenue at Jacksonville, Fla. On or about August 1, 1919, he acquired certain real estate at a total cost of $22,497.50. About January 15, 1925, he sold said real estate, receiving therefor $17,000 in cash and four promissory notes dated January 15, 1925, numbered 1, 2, 3, and 4, each for the sum of $13,250, making a total sale price of cash and notes of $70,000. The notes were secured by a first mortgage on said real estate. Note, No. 1 was due and payable one year after date, or on January 15, 1926; note No. 2 was due and payable two years after date, or on January 15, 1927; note No. 3 was due and payable three years after date, or on January 15, 1928; and note 19 B.T.A. 878">879 No. 4 was due and payable four years after date, or on January 15, 1929. On January 1, 1926, all four of said notes were still outstanding and unpaid. On or about July 27, 1925, the petitioner purchased certain other real estate from one Lula B. Bradford for a consideration of $35,000, paying therefor $8,500 in cash and turning over to her at their face value the notes Nos. 3 and 4 described above. This purchase1930 BTA LEXIS 2314">2316 of real estate was a separate and distinct transaction from the sale described in the preceding paragraph and was from a different and unrelated party. The two notes, Nos. 3 and 4, were endorsed with full recourse by the petitioner and the payment of the same was guaranteed by the petitioner in case of default by the maker of the notes. The respondent has treated the entire profit of $47,502.50 from the sale of January 15, 1925, as taxable income to the petitioner for 1925, for the reason that the $17,000 in cash received by the petitioner plus the face value of the notes Nos. 3 and 4 which were exchanged by him for other property as described above exceeded 25 per cent of the sale price of the real estate sold by the petitioner. OPINION. TRAMMELL: The petitioner contends that the sale of January 15, 1925, should be treated for income-tax purposes as on the installment sale basis and that the profit on such sale taxable in 1925 is $11,536.32. He also contends that each of the notes which he transferred at their face value for other property on July 27, 1925, cost him $4,258.46 and that when he transferred them he earned a taxable profit on them of $17,983.08 for 1925 under1930 BTA LEXIS 2314">2317 the provisions of section 204 of the Revenue Act of 1926. He further contends that the second transaction did not take the first one, that is the sale of January 15, 1925, out of the provisions of section 212(d) of the Revenue Act of 1926. The taxable profit for 1925 contended for by the petitioner from the sale of the real estate on January 15, 1925, and the subsequent disposition of two of the notes received in payment therefor is $11,536.32 plus $17,983.08, or $29,519.40, instead of $47,502.50 as determined by the respondent. Section 212(d) of the Revenue Act of 1926, which is applicable to the year 1925, is as follows: Under regulations prescribed by the Commissioner with the approval of the Secretary, 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 total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or 19 B.T.A. 878">880 (2) of a sale1930 BTA LEXIS 2314">2318 or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Here a cash payment of $17,000, or slightly less than one-fourth of $70,000, the price for which the property was sold, was received at the time of the sale. For the remaining portion of the $70,000 the petitioner received four promissory notes for $13,250 each, secured by a first mortgage on the property sold. Had he continued to hold such notes at the close of his taxable year, nothing having been paid on them, he would have been entitled to report the profit from the transaction on the installment basis. See 1930 BTA LEXIS 2314">2319 ; ; and . On the other hand, if he had sold all of the notes at their face value for cash during the taxable year, he would not have been entitled to report the profit on the installment basis. , and . If the purchaser of the petitioner's property had made payments during the taxable year which in addition to the $17,000 originally received by the petitioner would have amounted to more than 25 per cent of the price at which the petitioner had sold the property, he also would not have been entitled to report the profit on the installment basis. . In the instant case, the petitioner transferred two of the notes at their face value during the taxable period for other property, namely, land. If during the taxable year the two notes had been converted into money, under the language of the statute, and in accordance with our previous decisions, the proceeds therefrom would constitute1930 BTA LEXIS 2314">2320 "initial payments" within the meaning of that term as used in section 212(d). The notes having been transferred for other property within the taxable period, the transaction is the same in effect as if they had been converted into cash, with the result that the petitioner received as initial payment more than 25 per cent as provided in section 212(d). The petitioner is therefore not entitled to have his tax computed on the installment basis. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620100/	ROUBAIX MILLS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roubaix Mills, Inc. v. CommissionerDocket No. 4628.United States Board of Tax Appeals7 B.T.A. 878; 1927 BTA LEXIS 3079; July 30, 1927, Promulgated 1927 BTA LEXIS 3079">3079 Additional compensation voted to the officers of petitioner in 1920 held not deductible from 1919 income. J. R. Little, Esq., for the petitioner. George G. Witter, Esq., for the respondent. MARQUETTE 7 B.T.A. 878">878 This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $12,495.74. Only so much of the deficiency is in controversy as arises from the disallowance by the respondent as a deduction from gross income of the amount of $18,500 paid by the petitioner to its officers as additional compensation for the year 1919. FINDINGS OF FACT. The petitioner is a New York corporation with its principal office and place of business at Clinton, Mass. It is and was during the years 1919 and 1920, engaged in manufacturing woolen cloth. All of its capital stock was, during the year 1919, owned by Benjamin F. Haas and Albert Haas in the proportion of about 65 per cent and 35 per cent, respectively. Paul E. Meissner was president and general manager of the corporation, B. F. Haas was vice president and financial manager, Albert Haas was assistant treasurer and sales manager, C. B. Speckman1927 BTA LEXIS 3079">3080 was secretary and treasurer, and Louis Haas was assistant treasurer. P. E. Meissner, B. F. Haas and Albert Haas constituted the board of directors of the corporation. Meissner resided at Clinton, Mass., and B. F. Haas and Albert Haas resided and had their place of business at New York City. 7 B.T.A. 878">879 The meetings of the board of directors of the petitioner were usually informal and were conducted about as follows: When Meissner was in New York, which was usually about once each month, Louis B. Epstein, attorney and business adviser of the corporation, would be called to the office of B. F. Haas and Albert Haas, and the affairs of the corporation would be considered and matters of policy agreed upon by the three directors and Epstein. Occasionally Epstein would have the minutes of these informal meetings recorded but that was not the usual practice. At a formal meeting of the board of directors of the corporation held at its New York office on August 8, 1919, the compensation of its officers for the year 1919 was fixed by resolutions duly adoptes as follows: The Chairman then stated that the business before the board was to provide payment for the salaries to the officers1927 BTA LEXIS 3079">3081 and managers of the corporation for the services rendered by them in the past, and to arrange for their salaries for services to be rendered in the future, and also to discuss, in a general manner, the matter of the building operations to be undertaken by this corporation. The Chairman further stated that he, both as President and General Manager of the corporation, had rendered considerable service to the corporation to date, as had also Benjamin F. Haas, as financial manager of the corporation and vice-president thereof, and also Albert Haas, assistant manager and sales manager of the corporation. That as yet no payment had been made for these services and that it was requisite that due compensation should be made to these officers and managers for the services rendered by them in the past, which have been very valuable and beneficial to the corporation, and that an arrangement be made for payment for their future services. On motion duly adopted, it was RESOLVED, that this corporation pay to Paul E. Meissner, the sum of $6,000, in payment of the services rendered by him in the past up to the 1st day of July, 1919, as president and general manager, and that for the period1927 BTA LEXIS 3079">3082 from July 1st to the end of the year 1919, his salary be fixed at the rate of $1,000 per month. Mr. Meissner, although present, took no part in the vote upon this resolution. On motion duly adopted, it was RESOLVED, that this corporation pay to Benjamin F. Hass the sum of $6,000, in payment of the services rendered by him in the past up to the first day of July, 1919, as financial manager of this corporation, and also vice-president thereof, and that for the period from July 1st to the end of the year 1919, his fixed at the rate of $1,000 per month. Mr. Benjamin F. Haas although present, took no part in the vote upon this resolution. On motion duly adopted, it was RESOLVED, that this corporation pay to Albert Haas the sum $6,000, in payment of the services rendered by him in the past up to the first day of July, 1919, as sales manager and assistant general manager of the corporation, and that for the period from July 1st to the end of the year 1919, his salary be fixed at the rate of $1,000 per month. Mr. Albert Haas, although present, took no part in the vote upon this resolution. 7 B.T.A. 878">880 On motion duly adopted, it was RESOLVED, that Louis B. Haas be appointed1927 BTA LEXIS 3079">3083 assistant treasurer of the corporation to serve in accordance with the by-laws until the next annual election, and that his compensation be fixed at the rate of $1,000. On motion duly adopted, it was RESOLVED, that this corporation pay to Louis S. Haas the sum of $500 as payment for services rendered by said Louis S. Haas for this corporation in the past. On motion duly adopted, it was RESOLVED, that the salary of Miss Bertha C. Speckman as secretary of the corporation, be fixed at $500 per year. On motion duly adopted, it was RESOLVED, that this corporation pay to Miss Bertha C. Speckman the sum of $250 in payment of the services heretofore rendered for this corporation by the said Miss Bertha C. Speckman. It was also informally agreed by the directors that in addition to the salaries of the officers formally authorized and recited in the minutes, additional compensation would be paid them for the year 1919, provided the same standard of efficiency in the operation of the mills was maintained during the period July 1, to December 31, 1919, as had been maintained during the period January 1, to January 30. At informal meetings of the board of directors held during1927 BTA LEXIS 3079">3084 the remainder of the year 1919, the matter of additional compensation for the officers was discussed and, it being shown that the operation of the mills was being maintained at the same degree of efficiency that had obtained during the first six months of the year, it was understood among the directors that additional compensation would be paid. At a formal meeting of the board of directors of the petitioner held on January 16, 1920, additional compensation for the year 1919 was voted and ordered paid by a resolution which is in part as follows: The Chairman then stated that the Board should consider the question of additional compensation to be paid for services rendered by the officials and employees of the corporation. That at a meeting of the board of directors held on August 8th last, such additional compensation had been voted up to the first day of July, and that the Board should now consider the additional payment from said date to December 31st. After due discussion, it was on motion duly adopted: RESOLVED, that this corporation pay to Paul E. Meissner the sum of $6,000, as additional payment for services rendered by him as president and general manager from July1927 BTA LEXIS 3079">3085 1st, 1919, to December 31st, 1919. (Mr. Meissner, although present, took no part of the vote on this resolution.) On motion duly adopted, it was RESOLVED, that this corporation pay to Benjamin F. Hass the sum of $6,000 as additional payment for services rendered as vice-president and financial manager from July 1st, 1919, to December 31st, 1919. (Mr. Haas, although present, took no part of the vote on this resolution.) 7 B.T.A. 878">881 On motion duly adopted, it was RESOLVED, that this corporation pay to Albert Haas the sum of $6,000, as additional payment for services rendered as Sales Manager and Treasurer from July 1st, 1919, to December 31st, 1919. (Mr. Haas although present, took no part of the vote on this resolution.) On motion duly adopted, it was RESOLVED, that this corporation pay to Louis S. Haas the sum of $500 as additional payment for services rendered as Assistant Treasurer from July 1st, 1919, to December 31st, 1919. On motion duty adopted, it was RESOLVED, that this corporation pay to Bertha C. Speckman the sum of $250.00 as additional payment for services rendered as secretary from July 1st, 1919, to December 31st, 1919. The additional compensation1927 BTA LEXIS 3079">3086 so authorized was accrued on the books of the corporation as of December, 1919, before the books of that year were closed, and it was paid to the several persons named by vouchers and checks dated January 21, 1920. The petitioner's books were kept on the accrual basis. The respondent disallowed $18,500 of the additional compensation paid to the petitioner's officers pursuant to the resolution of January 16, 1920, as a deduction from petitioner's gross income for the year 1919. OPINION. MARQUETTE: Two questions are presented by the record in this proceeding, namely, were the additional salaries for the year 1919 authorized by the petitioner's board of directors on January 16, 1920, reasonable in amount and, if so, are they proper deductions in computing the petitioner's net income for 1919? We are of the opinion that the additional salaries in question are not properly deductible in the year 1919 even if they are reasonable compensation for the services rendered by the persons to whom they were paid, and it is therefore not necessary to decide whether or not they are reasonable. The record fairly established that when the directors formally fixed the compensation of the1927 BTA LEXIS 3079">3087 petitioner's officers for the first six months of 1919 and the regular salaries for the last six months in 1919, they informally agreed or understood among themselves that if the efficiency of operations and the consequent profits were maintained for the last six months of the year at the same high level that had obtained during the first six months, extra compensation would be paid for that period. However, this appears to have been a mere understanding or agreement among the directors which had no binding effect and it did not create an obligation that could have been enforced against the petitioner. Furthermore, even if the informal agreement or understanding among the board of directors may be construed as binding on the corporation, there is no evidence that there was any agreement as to the amount of extra 7 B.T.A. 878">882 compensation that would be paid. In the , in considering when additional compensation authorized and paid under circumstances similar to that in the instant case was deductible, we said: It remains to determine in what year the deduction is to be allowed. Was the obligation incurred1927 BTA LEXIS 3079">3088 in the year when the services were rendered or was it incurred when the additional compensation was voted. Until it was voted there was nothing more than a moral obligation; there was no legal obligation which could be enforced. We must accordingly hold that the $7,000 of additional compensation, voted in 1920 for services rendered in 1919, was an obligation incurred in 1920 and is deductible in that year and not in 1919. In the , the facts were that in December, 1919, at an informal conference, the stockholders of the corporation agreed that the salaries paid in the past to two of its officers were insufficient and should be increased for 1919, but no amount was agreed upon and no formal action taken by the stockholders until 1920, when additional salaries for the two officers were authorized for the year 1919. This Board approved the determination of the Commissioner that the additional salaries were not proper deductions from the taxpayer's income for 1919. The two decisions cited were followed by the Board in the 1927 BTA LEXIS 3079">3089 . Upon the authority of the decisions in the Appeals of Van De Kamps Holland Dutch Bakers, Arter Paint & Glass Co., and , we affirm the determination of the respondent in disallowing the additional salaries in question as a deduction from petitioner's gross income for 1919. Judgment will be entered for the respondent.Considered by PHILLIPS, MILLIKEN and VAN FOSSAN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620103/	Salinas Valley Ice Company, Ltd. v. Commissioner. Monterey County Ice & Development Company v. Commissioner.Salinas Valley Ice Co. v. CommissionerDocket Nos. 106734, 106741.United States Tax Court1942 Tax Ct. Memo LEXIS 96; 1 T.C.M. 84; T.C.M. (RIA) 42595; November 9, 19421942 Tax Ct. Memo LEXIS 96">96 E. W. Gottenberg, Esq., 515 Bank of America Bldg., San Jose, Calif., and L. T. Diebels, C.P.A., for the petitioners. Arthur L. Murray, Esq., for the respondent. ARNOLD Memorandum Findings of Fact and Opinion ARNOLD, J.: These consolidated proceedings involve deficiencies in income taxes for the year 1938 in the amount of $2,577.70 in Docket No. 106734 and $962.51 in Docket No. 106741. The petitioners filed their returns for 1938 with the collector of internal revenue for the first district of California. The question involved is whether each of the petitioners is entitled to an allowance for depreciation of certain assets claimed to have been purchased in 1938 by petitioners and others as tenants in common for use in their trade or business. Findings of Fact The petitioners, both California corporations, are, and in the taxable year were, engaged at Salinas, Monterey County, California, in the business of manufacturing and selling ice principally at wholesale to packers and shippers of lettuce and other vegetables. The petitioner, Salinas Valley Ice Company, Ltd., hereinafter referred to as Salinas Co., owned ice manufacturing plants, known as Soledad Street plant No. 1 and No. 1942 Tax Ct. Memo LEXIS 96">97 2, Chualar Street plant and Gabilan Street plant. In addition to its ice business Salinas Co. in 1937 engaged in growing of lettuce and other vegetables on farms it owned and held under lease for shipment to eastern markets. It also owned packing sheds. In 1931 its ice plants erected prior to 1931 had a capacity of 286 tons daily. In 1931 it built the Chualar plant having a capacity of about 100 tons daily. This plant had a normal capacity of 25,000 tons a year. In 1936 it built the Gabilan plant having a capacity of 250 tons daily. In 1937 and 1938 the plants of Salinas Co. had an aggregate daily capacity of about 636 tons. In 1938 it had under lease the plant of Mountain Water Ice Company. The ice plant of the petitioner, Monterey County Ice & Development Company, hereinafter referred to as Monterey Co., prior to 1936 had a daily capacity of 150 tons. In 1936 it increased the capacity of its ice plant to 300 tons daily. There were other ice manufacturers in Salinas; the Union Ice Co., having a plant at the end of 1937 with a production capacity of 200 tons daily, the Growers Ice & Development Co., whose plant originally had a capacity of 150 tons daily which was increased in 19371942 Tax Ct. Memo LEXIS 96">98 to 300 tons daily, Mountain Water Ice Co., owned by Windsor Lewellyn, having a plant at the end of 1937 with a capacity of 150 tons daily, and Salinas Brewing & Ice Co. having a plant with a capacity of 150 tons daily. By the end of 1935 the production capacity of four plants then operating in Salinas aggregated 836 tons daily. In 1936 and 1937 the capacity, with the addition of two new concerns, was increased by approximately 900 tons daily. The Salinas Brewing & Ice Co., hereinafter referred to as Brewing Co., was and has been for many years engaged in the brewing of beer and also the manufacture of ice. In 1935 it produced 35,000 tons of ice; in 1936 33,000 tons; and in 1937 25,000 to 26,000 tons. In 1937 the Brewing Co. had two principal customers, one of them H. P. Garin, a grower and shipper of vegetables, then operating under receivership, purchased two-thirds to three-fourths of the ice manufactured by it. In 1938 it had a four year contract signed by Garin, acceptance of which by the Brewing Co. was withheld on account of pending negotiations for the sale of its ice plant. Based upon its previous experience the company expected to realize a profit of $20,000 in 1938 from1942 Tax Ct. Memo LEXIS 96">99 such contract. Its financial condition was not good. Its brewing business had not been operated in 1937 at a profit but its ice business was operated at a profit. It was indebted to the Monterey County Trust & Savings Bank to the extent of $60,000. The bank pressed for payment. The Brewing Co. made an application to the Reconstruction Finance Corporation for a loan which after some investigation was rejected, the president of the Brewing Co. being informed that the Corporation did not like to make a loan to a company in an industry which was overcrowded. A letter from the bank dated February 24, 1938, was received by the Brewing Co. suggesting the consummation of the sale of the ice plant at $150,000, and stating inter alia, as follows: We therefore, advise you that we shall expect you to liquidate your indebtedness to this bank in the event that such sale is not consummated. We shall expect such liquidation to be fully completed and the various obligations to us satisfied in full within thirty days from the date of the delivery to you of this letter. Under date of February 28, 1938, the Brewing Co., as party of the first part, entered into a written agreement with the petitioners1942 Tax Ct. Memo LEXIS 96">100 and Growers Ice & Development Co., a copartnership composed of Bruce Church, K. R. Nutting, E. E. Harden and T. R. Merrill, Union Ice Co., a corporation and Windsor Lewellyn, an individual doing business as Mountain Water Ice Co., as parties of the sixth part, wherein and whereby the Brewing Co. agreed to sell and the parties of the sixth part agreed to buy the "certain wholesale and retail ice business heretofore conducted by the party of the first part at the City of Salinas" together with certain equipment used in the production, manufacture and distribution of ice, and a large packing shed known as the "E. E. Harden Shed" located on the Southern Pacific Railroad Reservation, at Salinas, including any and all equipment located therein, excepting certain mentioned items, subject to an encumbrance in favor of E. E. Harden in the sum of $1,400, any and all equipment excepting all gravity rolls and desk contained in the "small packing shed", the small packing shed itself being reserved to the party of the first part, and an account known as "the H. P. Garin Company Account, and the H. P. Barin Receiver in Equity Account, excluding any sales tax thereon". The parties of the sixth part1942 Tax Ct. Memo LEXIS 96">101 agreed to pay for the "aforesaid business, equipment, and the Good Will thereof" the sum of $150,000, payable as follows: $30,000 on March 3, 1938 at noon; $25,000 on January 1, 1939; $20,000 on January 1, 1940; $15,000 on January 1, 1941; and $12,000 on each January 1 of 1942 to 1946, inclusive. The agreement further provides, inter alia, that at the request of the parties of the sixth part the party of the first part will, as long as the equipment is on its premises, manufacture ice to be used by the parties of the sixth part, for which party of the first part will receive the actual cost of such production, excluding therefrom any and all office supervision costs, plus ten percent upon the total cost price thereof; that the parties of the sixth part will remove all equipment purchased on or before the termination date of the payments to be made under the contract; and that the bill of sale evidencing the transfer to parties of the sixth part of the "Good Will and personal property" shall contain an agreement and covenant to the effect that the party of the first part will refrain from carrying on the manufacture, sale and distribution of ice, within the County of Monterey, 1942 Tax Ct. Memo LEXIS 96">102 State of California, "as long as the parties of the sixth part, or any persons deriving title to the said Good Will from them, carries on a like business in said county". Under date of March 3, 1938 the Brewing Co. as party of the first part, executed a bill of sale transferring to the petitioners and the other parties named as parties of the sixth part in the agreement of sale of February 28, 1938, as parties of the second part, certain personal property and equipment described therein - Together with all of that wholesale and retail ice business heretofore conducted by the party of the first part in the city of Salinas, County of Monterey, State of California, together with the goodwill thereof, as provided for by Section 1674 of the Civil Code of the State of California, to the effect that the said party of the first part herein agrees with the said parties of the second part that it will refrain from carrying on a similar business, to wit, wholesale and retail ice business, within the County of Monterey, or any part thereof, as long as the said parties of the second part, or any persons deriving title to the said goodwill from said parties of the second part, carries on a like1942 Tax Ct. Memo LEXIS 96">103 business in said County of Monterey. The Brewing Co. also transferred by bill of sale under the same date to the same parties the shed known as the E. E. Harden shed, subject to an encumbrance of $1,400, together with certain equipment therein and certain equipment located in the small shed adjoining. The books of account of the Brewing Co. show the cost of the equipment sold and depreciation thereon to date of sale, as follows: AcquiredAssetCostDepreciationBalance1926-1938Ice plant & equipment$109,592.84$82,073.86$27,518.981926-1931Cooling tower3,094.411,431.631,662.781937-1938Reconditioning ice equipment1,214.391,214.391931-1936Packing shed equipment9,201.964,871.284,330.681931-1936Packing shed equipment4,948.601,842.423,106.18Total$128,052.20$90,219.19$37,833.01In March 1942 the Salinas Co. had an appraisal made of the equipment purchased from the Brewing Co. The appraisal was based on reproduction cost as of 1938, which cost was depreciated to determine its fair market value as of 1938. The prices used were obtained by the appraiser from manufacturers. The appraiser attempted to ascertain the dates of1942 Tax Ct. Memo LEXIS 96">104 the acquisition by the Brewing Co. of the various equipment but no one questioned seemed to know the exact time when the equipment was installed. In the letter attached to the appraisal report it is stated in part as follows: All values shown are based upon the reproduction value of the various items in 1938 and depreciations have been taken upon the condition of the property at that time. As the machinery has been operated very little since that date the present condition corresponds very closely with its condition at that time. The value of all the equipment as of 1938 was stated in the appraisal as follows: Reproduction cost - $100,865.70, Depreciation - $9,129.85, and "Sound Value" - $91,735.85. The appraisal includes no going concern value and no appraisal of the Harden shed. In 1931 or 1932 the Salinas Valley Ice Manufacturers Association, hereinafter referred to as the Association, was organized. Its purpose was the same as any trade association, including the development and maintenance of good will and cooperation among the ice manufacturers and the promotion of the ice business as well as vegetable growing. It did not regulate the price of ice. It did not attempt to limit1942 Tax Ct. Memo LEXIS 96">105 sales but it attempted to bring about the utilization of the entire production capacity of members and their storage facilities to the end that excess production capacity or surplus ice of one member would be available to fill the needs of a member with sales in excess of its production so as to avoid importation of ice from ice manufacturers outside of the Salinas Valley. In 1938 the Association had four members consisting of the petitioners, the Union Ice Co. and the Growers Ice & Development Co. The Monterey Co. issued its check dated March 2, 1938, in the amount of $4,110, being 13.7 percent of the first installment of $30,000 under the agreement of February 28, 1938, payable to the Monterey County Bank & Trust Company, which was endorsed to the credit of the account of the Brewing Co. The Salinas Co. issued its check dated March 3, 1938 in the amount of $12,510, being 41.7 percent of the first installment payable to the bank, which also bears a similar endorsement. The Brewing Co. ice plant was not operated in 1938 and was not operated until the year 1941 when it manufactured about 6,000 tons of ice. In 1938 the Soledad and Gabilan plants were not operated to full capacity 1942 Tax Ct. Memo LEXIS 96">106 by Salinas Co. Its Chualar plant produced only 12,000 tons in that year. The plant of Mountain Water Ice Co., which was under lease to Salinas Co. was not operated in 1938. The Salinas Co. and the Monterey Co. deducted the amounts of $12,510 and $4,110 in their respective 1938 income tax returns under the item of "Other deductions authorized by law". In the return of Salinas Co. the amount paid by it was included in an item designated "Salinas Valley Ice Mfgrs. Assn.". The equipment was not included in the schedule of "FIXED ASSETS AND DEPRECIATION" attached to such return. In the return of Monterey Co. the item was included in an item designated as "Dues and assessments". The respondent disallowed the deductions. The assets purchased from the Brewing Co. by petitioners and others were not acquired for use in petitioners' trade or business. The purchase price of $150,000 was applicable to both depreciable and non-depreciable assets. Opinion The respondent determined that the amounts paid in 1938 represented the prorata share of each petitioner of the cost of eliminating competition in the Salinas area through the purchase of certain assets of the Brewing Co., and that, therefore, 1942 Tax Ct. Memo LEXIS 96">107 such amounts were not deductible as ordinary and necessary business expense under section 23 (a) (1) of the Revenue Act of 1938, or any part thereof, as depreciation allowance under section 23 (1) of the Revenue Act of 1938. The petitioners do not now claim that the entire amount paid by each in 1938 is deductible as an ordinary and necessary business expense under section 23 (a) (1) or otherwise. The petitioners now claim that they are entitled to an allowance for depreciation or amortization of the tangible assets purchased by them and others from the Brewing Co. It is claimed that the Salinas Co. acquired a 41.7 percent undivided interest and the Monterey Co. acquired a 13.7 percent undivided interest in the property purchased; that the purchase price of $150,000 covered tangible property only which would have a residual value of $10,000 on January 1, 1946, the time when the equipment purchased is to be removed from the property of the Brewing Co.; that based upon a life of 94 months (March 1938 - December 1945, both inclusive) the depreciation sustained in 1938 for the ten months period was $14,893.60, of which amount the petitioners are entitled to deduct as depreciation their1942 Tax Ct. Memo LEXIS 96">108 respective shares of 41.7 percent and 13.7 percent, or $6,210.63 and $2,040.42. Section 23 (1) permits the deduction from gross income of a "reasonable allowance for exhaustion, wear and tear of property used in the trade or business". To be entitled to any allowance for depreciation the petitioners must prove not only the amount of the depreciation allowance but also that the property was used in the trade or business. The respondent determined that the plant was purchased to eliminate competition and not for use in the trade or business of petitioners. There is no evidence showing that petitioners set up on their respective books of account the interest acquired by them as depreciable assets and they did not take depreciation thereon in their returns. The ice plant was not operated in 1938. It was not operated until 1941 and then for about three months of that year beginning in August. The notices of deficiency were mailed to the petitioners on December 31, 1940. About 6,000 tons of ice were produced in 1941 whereas the capacity of the plant was 150 tons daily. It had produced as much as 35,000 tons a year. Whether the plant was operated after 1941 the evidence fails to show. 1942 Tax Ct. Memo LEXIS 96">109 The evidence indicates that there was an over expansion in the ice manufacturing business in Salinas from 1935 to 1938 to such an extent that production to full capacity would have seriously affected the industry and might have resulted in a price war. The production capacity was doubled in Salinas from 1935 to 1938. The president of the Brewing Co. testified that its decrease in production from 1935 to 1937 was due to the expansion in production capacity in Salinas. In 1938 the Salinas Co. did not operate its Soledad plant and its Gabilan plant to full capacity. Its Chualar plant, which had a normal capacity of 25,000 tons a year, produced only 12,000 tons. The Mountain Water Ice Co., having a capacity of 150 tons daily, was under lease to Salinas Co. and was not operated during 1938. The Salinas Co. had apparently greater production capacity than its sales warranted. Its president testified that in 1939 the Brewing Co. plant was not operated because Growers Ice & Development Co. refused to take all the ice and petitioners had sufficient for their needs. He stated as a reason for the non-operation of the Brewing Co. plant in 1938 that a survey in 1938 of the acreage showed that with1942 Tax Ct. Memo LEXIS 96">110 a normal crop there would be more cars of vegetables shipped than before and hence a greater demand for ice but that there was a partial crop failure so that the ice demand for 1938 was less than in 1937 and the operation of the Brewing Co. plant was not required. However, the partial crop failure in 1938 alone does not sufficiently account for the non-operation of the Brewing Co. plant and the substantial limitation of production, as above pointed out. It appears from the record that the minute book of the Monterey Co. was examined by an internal revenue agent at the time he investigated the income tax return of that company for 1938, that, in compliance with an order, the minute book was produced at the hearing but upon examination thereof by the agent it was found that minutes of a meeting of the board of directors held February 16, 1938, was missing. The book was a looseleaf book. The agent testified that the book produced was the book he had examined and that at the time he examined it it contained the minutes of a meeting held on February 16, 1938, from which he made a memorandum and that the minutes showed that the president of the company stated at that meeting that "at present1942 Tax Ct. Memo LEXIS 96">111 there is a serious competitive situation due to overproduction" and the proposition to be considered is "whether or not it is more profitable to meet competition as it comes, or enter into an agreement and eliminate a part of the overproduction by closing down some plants." From the minutes of a meeting of the board of directors of the company held on March 7, 1938 it appears that the president stated that the "other members of the Association * * * had offered a plan whereby closing down the Mountain Water plant, as well as the brewery plant, this additional tonnage that they manufactured would fall to the Monterey County Ice and Development Co. plant", and he reported that a deal had been closed with the Brewing Co. for the purchase of its ice plant by the members of the Association for the sum of $150,000 payable during a period of nine years, of which amount Salinas Co. was to pay 41.7 percent and the Monterey Co. 13.7 percent. The agreement to purchase the Brewing Co. plant is dated February 28, 1938. In view of that evidence and the evidence showing that the Brewing Co. plant and the Mountain Water Ice Co. plant were not operated and production was reduced below normal in other1942 Tax Ct. Memo LEXIS 96">112 plants, it is reasonable to infer that the members of the Association and Mountain Water Ice Co., the plant of which was under lease to Salinas Co., decided to eliminate a part of the over-production by closing down some of the plants and that, therefore, the Brewing Co. plant was purchased for the purpose of closing down its production. Since its ice producing plant had been profitable, even though it had only one large account, the Brewing Co. would undoubtedly have continued the operation of its ice plant in 1938. To purchase the ice plant may have been the only way to close down its production. To prevail, the petitioners must show that the respondent erred in his determination that the Brewing Co. plant was purchased for the purpose of eliminating competition. This they have failed to do. The evidence in fact supports the respondent's determination. Good will or elimination of competition is not such a wasting asset as is subject to depreciation and no deduction for exhaustion or depreciation in that respect is allowable. (appeal pending C.C.A., 2nd Cir. ); ;1942 Tax Ct. Memo LEXIS 96">113 ; , affirmed as . Cf. . The petitioners cite ; ; ; and , as authority for its right to a depreciation allowance in 1938, although the Brewing Co. plant was not operated. Those cases are distinguishable on the facts. In each of such cases it was found that although the property was not in use in the taxable year, it had been acquired and held for use in a business regularly carried on by the taxpayer. The evidence adduced herein fails to show that the Brewing Co. plant was acquired for use in the1942 Tax Ct. Memo LEXIS 96">114 business of the petitioners. Furthermore, under the agreements involved, the assets sold for the sum of $150,000 included not only certain tangible property consisting of the ice manufacturing equipment and a packing shed, but also good will, together with an agreement by the Brewing Co. to refrain from carrying on a similar business in Monterey County for an indefinite period of time. Although the agreement and the bill of sale specifically mention good will as one of the assets of the Brewing Co. being transferred, the president of the Salinas Co. testified that no value was allocated to any good will of the Brewing Co. in negotiating the deal because it had no contracts for the sale of ice and the manufacture of ice was merely incidental to its business of brewing beer, and that any business it had could have been solicited and probably acquired by any ice company operating in Salinas. The Salinas Co. had an appraisal made of the equipment and ice plant sold by the Brewing Co. in March, 1942. This was introduced in evidence by petitioners and the value of the equipment stated therein is in substantial variance with that testified to by the president of the Salinas Co. The appraisal1942 Tax Ct. Memo LEXIS 96">115 shows that the appraiser testified that he placed a value of $100,865.70 on such equipment based upon the replacement or reproduction cost as of 1938. The appraiser testified that the replacement costs used in the appraisal were prices prevailing in 1938 obtained from manufacturers. The purchase price was, therefore, approximately $50,000 in excess of the price at which new equipment could have been obtained in 1938. The appraisal itself refutes petitioners' contention that the tangible assets purchased had a fair market value of $150,000 when purchased. The fair market value of the equipment according to the appraisal was $91,735.85, or approximately $59,000 less than the purchase price. The net value or undepreciated cost of the equipment, including the shed, as shown by the books of the Brewing Co., is $37,833.01. The basis for depreciation of the tangible property is cost thereof to the petitioners. This is a question of fact. The burden is upon the petitioners to establish the amount of the deduction. ; . The petitioners purchased1942 Tax Ct. Memo LEXIS 96">116 both depreciable and non-depreciable assets. In our opinion the petitioners have not sustained their burden of proof in that they have likewise failed to adduce evidence from which the portion of the $150,000 properly allocable to the depreciable assets could be determined. Reproduction or replacement value may not be used as a basis for depreciation. ; , affirmed on this point . Nor would it be proper to use the value of the assets as shown by the books of the Brewing Co. The determination of the respondent must, therefore, be approved. Decisions will be entered for the respondent. Footnotes*. , which affirmed and reversed in part BTA decision.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620104/	E. A. SIMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MARYBELLE SIMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Simpson v. CommissionerDocket Nos. 62015, 62016.United States Board of Tax Appeals28 B.T.A. 556; 1933 BTA LEXIS 1106; June 27, 1933, Promulgated 1933 BTA LEXIS 1106">1106 Compensation paid to a law firm by a municipality for legal services is subject to Federal taxation. Geo. S. Atkinson, Esq., for the petitioner. F. B. Schlosser, Esq., for the respondent. SMITH 28 B.T.A. 556">556 These proceedings, duly consolidated, are for the redetermination of deficiencies in income tax for the year 1929 as follows: Docket No.Deficiency62015$32.106201619.08The only issue is whether the Commissioner erred in including in taxable income of the petitioners, income received by E. A. Simpson "from the city of Amarillo, a municipal corporation, and a political subdivision of the State of Texas." The facts were stipulated. FINDINGS OF FACT. The petitioners are husband and wife, residents of Amarillo, Texas. During the calendar year 1929, petitioner E. A. Simpson was a member of the law firm of Underwood, Johnson, Dooley & Simpson, engaged in the general practice of law in Amarillo. On August 20, 1929, the law firm of Underwood, Johnson, Dooley & Simpson was appointed to act as corporation counsel for the city of Amarillo, which is a duly incorporated city and municipality under the laws of the State1933 BTA LEXIS 1106">1107 of Texas, having been chartered on November 18, 1913. The appointment was made at a regular meeting of the city commission, as shown by the following excerpt of the minutes of that meeting: THE FOLLOWING LETTER WAS READ: August 20th, 1929. Col. E. O. Thompson, Mayor, City of Amarillo, Amarillo, Texas. Dear Sir: Confirming our conversation and referring to our previous letter to you, we will accept the position of corporation counsel for the City of Amarillo, for a retainer of $300.00 per month, this to cover all consultations and office matters, but shall not include compensation for litigation in the various courts. 28 B.T.A. 556">557 Also, we are to be paid a reasonable fee for all services rendered in any litigation in which the City is a party, during the term of our employment. It this basis of employment is satisfactory you will please advise us. Yours very truly. UNDERWOOD, JOHNSON, DOOLEY & SIMPSON. By R. C. JOHNSON IT WAS THEN MOVED by Commissioner Stone, seconded by Commissioner Vernon and unanimously carried, that the above offer be accepted, and that Underwood, Johnson, Dooley & Simpson be appointed to act in the capacity of Corporation Counsel1933 BTA LEXIS 1106">1108 for the City. Ordinance No. 298 of the city of Amarillo, adopted in 1916, provided "FOR CITY ATTORNEY OR CORPORATION COUNSEL" and proscribed "THE POWERS AND DUTIES TO SUCH OFFICE." The ordinance authorized the discharge of the duties by "a firm of attorneys, as the Commission may elect." The term of office was "at the will of the City Manager." The compensation was to be "by salary, payable monthly, fixed by the Commission." The oath prescribed by the state constitution for county officials was prescribed for the city attorney or corporation counsel. Section 7 of the ordinance is as follows: The City Attorney or Corporation Counsel, or assistants, shall conduct all prosecutions in the Corporation Court, shall represent the City in all its litigations; shall inspect and pass upon all papers, documents, contracts and other instruments, to which the City is a party, or in which it may be interested; shall prepare or approve all proposed ordinances; shall on the request of the Commission or City Manager furnish a written opinion upon any question of law pertaining to the City Government, or involving the powers and duties of any officer, board or department, of the City Government; 1933 BTA LEXIS 1106">1109 attend all meetings of the Commission when requested and perform such other duties as the Commission or City Manager may direct. During the year 1929, none of the members of the firm of Underwood, Johnson, Dooley & Simpson took the oath of office as corporation counsel, due to an oversight, but on April 2, 1931, each member of the firm of Underwood, Johnson, Dooley & Simpson took an oath of office under the same kind of appointment as was made on August 20, 1929, as follows: I, E. A. SIMPSON, do solemnly swear that I will faithfully and impartially discharge and perform all the duties incumbent upon me as Corporation Counsel and City Attorney of the City of Amarillo, Potter County, Texas, according to the best of my skill and ability, agreeably to the constitution and laws of the United States and of this State, and the ordinances of this City; and I do further solemnly swear that, since the adoption of the constitution and of this State, I being a citizen of this State, have not fought a duel with deadly weapons, within State nor out of it, nor have I sent or accepted a challenge to fight a duel with deadly weapons, nor have I acted as second in carrying a challenge, or aided, 1933 BTA LEXIS 1106">1110 advised or assisted any person thus offending; and I furthermore solemnly swear, that I have not, directly nor indirectly, paid, offered or promised to pay, contributed nor promised to contribute, any 28 B.T.A. 556">558 money or valuable thing, or promised any public office or employment, as a reward for giving or withholding a vote at the appointment at which I was appointed. So help me God. Under the appointment as corporation counsel different members of the firm of Underwood, Johnson, Dooley & Simpson attended to the city's legal business, and they were obligated to and did give to the city's legal business as much time as was necessary. During the period from August 20, 1929, to December 31, 1929, the members of the firm of Underwood, Johnson, Dooley & Simpson devoted approximately 7 percent of their time to the affairs of the city of Amarillo. This time includes both the services rendered in cases for which fees were received and the time necessary to perform the routine duties for which the retainer was received. During the period in question, E. A. Simpson personally devoted approximately 20 percent of his time to the affairs of the city. During the year 1929, the firm1933 BTA LEXIS 1106">1111 of Underwood, Johnson, Dooley & Simpson received as compensation and fees from the city of Amarillo, under the above mentioned appointment, $3,350, and petitioner E. A. Simpson received his pro rata portion of this amount, which was $753.75. The law firm of Underwood, Johnson, Dooley & Simpson had a gross income from fees of $88,201.14, excluding the income in question, in the year 1929, and expenses of $12,970.01, including salaries of $6,795.77 paid for clerical services. OPINION. SMITH: The petitioners contend that: * * E. A. Simpson, was an employe, or an officer, of the City of Amarillo; that the compensation paid to him and his law partners was paid by the City of Amarillo in the exercise of essential governmental functions. There is no provision in the Revenue Act of 1928 comparable to section 1211 of the Revenue Act of 1926, which exempted from the tax imposed by the Revenue Act of 1924 and prior revenue acts the compensation of an officer or employee of a state or political subdivision thereof. See . The law firm of which Simpson was a member offered, and the city commission accepted the offer of, its1933 BTA LEXIS 1106">1112 services "for a retainer of $300.00 per month, this to cover all consultations and office matters, but shall not include compensation for litigation in the various courts." The term of the services of the petitioner's law firm was at the pleasure of the city commission, and although an oath of office was prescribed, none was taken by a member of the firm until April 1931. No effort has been made to show the extent to which the compensation received by the law firm related to the exercise of essential governmental functions by the city of Amarillo. The 28 B.T.A. 556">559 conduct of the city's legal business was left to the discretion of the members of the law firm. The city of Amarillo procured and retained at the pleasure of the city commission the professional services of the petitioner and his associates, paying therefor the fees charged in addition to the retainer agreed upon for routine services. We are of the opinion that the relationship of attorney and client existed between the law firm and the municipality, and that the compensation for the services rendered by the firm to the municipality is not exempt from Federal taxation. 1933 BTA LEXIS 1106">*1113 . See also ; . Reviewed by the Board. Judgment will be entered for the respondent.VAN FOSSAN concurs in the result. LANSDON dissents. ADAMS ADAMS, dissenting: I dissent from the views of the majority in this case. I believe that petitioner was engaged in an essential governmental function and that such income was properly excluded.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620105/	DONALD J. LEWIS, JR. AND BARBARA D. LEWIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLewis v. CommissionerDocket No. 20621-92United States Tax CourtT.C. Memo 1993-635; 1993 Tax Ct. Memo LEXIS 654; 66 T.C.M. 1830; December 29, 1993, Filed 1993 Tax Ct. Memo LEXIS 654">654 For petitioners: Toni Robinson, Patrick Duffany, and Joe Bavaro. For respondent: Carmino Santaniello. WOLFEWOLFEMEMORANDUM FINDINGS OF FACT AND OPINION WOLFE, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency of $ 364 in petitioners' Federal income tax for 1990. The sole issue for decision is whether Barbara D. Lewis (petitioner) properly was classified as a common law employee or was an independent contractor during 1990. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners resided in Milford, Connecticut, at the time they filed their petition. From 1985 through 1992, petitioner sold hair care products to salons for Professional Products of Connecticut, Inc. (PPCI). PPCI is a wholesale distributor 1993 Tax Ct. Memo LEXIS 654">655 of beauty supplies. Petitioner located potential customers, offered PPCI's hair care products for sale, took orders for products, monitored customers' repeat orders, and taught motivational and product knowledge classes for the customers. Petitioner also arranged for technical classes, which were taught by employees of the product manufacturers. Petitioner transmitted her customers' orders to PPCI on a daily basis. The customers made payment to PPCI, and PPCI issued biweekly compensation checks to petitioner. Petitioner was paid solely on a commission basis, without advance draw. During the year in issue, petitioner sold exclusively for PPCI and was prohibited from selling the products of PPCI's competitors. A noncompetition agreement between petitioner and PPCI provided that for 1 year after termination of her relationship with PPCI petitioner was barred from selling PPCI's competitors' products in Connecticut, except for two specific counties other than the county in which she sold for PPCI. PPCI assigned exclusive territories to all of its salespeople. Sales personnel were not permitted to sell products within any sales territory that was assigned to another sales representative1993 Tax Ct. Memo LEXIS 654">656 of PPCI. When she began working for PPCI, petitioner was assigned a territory in Fairfield County, Connecticut. During the following 7 years, petitioner worked at developing sales of PPCI products in that territory. PPCI determined who would service petitioner's sales territory while petitioner was on maternity leave. During her first maternity leave in 1990, petitioner continued to work limited hours and received commissions on sales in her territory at a rate of 4.5 percent. During her second maternity leave between November 1991 and January 1992, petitioner did not perform significant services and did not receive compensation from PPCI. When petitioner returned from maternity leave in January 1992, over her objections she was assigned a sales territory smaller than the Fairfield County territory she had serviced before her leave. Petitioner shortly resigned as a result of that reassignment. PPCI set the prices for its products and provided petitioner with price lists. Petitioner provided those price lists and other promotional literature to potential customers. Petitioner filed three principal types of written reports with PPCI. The first was a Daily Activity Report 1993 Tax Ct. Memo LEXIS 654">657 Sheet. PPCI provided a form for this report, but petitioner modified the standardized form so that she could present more information to PPCI. The report included the following information: Day of the week, name of the account, contact person, special items sold in addition to the regular weekly order, follow-up recommendations and notations, classes to be scheduled, and returns of products. Petitioner furnished the Daily Activity Report Sheet to PPCI management every work day. PPCI also obtained detailed daily information concerning petitioner's activities from the sales orders, which promptly were converted to commission reports since PPCI's records were computerized. Petitioner also filed goal sheets with PPCI. A goal sheet indicated sales of particular products which PPCI wanted its salespeople to promote. The salespeople set goals for themselves concerning sales of these specially identified products and kept PPCI apprised of the sales of these specific products through submission of the goal sheets. Petitioner also filed with PPCI technical request forms or reports, by which petitioner requested assignment of a manufacturer's representative to teach technical classes 1993 Tax Ct. Memo LEXIS 654">658 for a customer. Petitioner determined her hours of work during any particular day or week and in general selected the potential customers she would call upon. PPCI did not provide her with a list of clients to solicit at any particular time. PPCI did provide petitioner with leads, which generally were the result of telephone calls received by PPCI from salons interested in purchasing PPCI's products. PPCI would give petitioner the name and telephone number of those potential clients. Petitioner received several leads from PPCI every month. Petitioner was required to follow up on the leads provided by PPCI and always did so. Petitioner had been employed by Southern New England Beauty Supply Co., a business owned by her brother, when it was acquired by PPCI. After the change of ownership, petitioner worked for PPCI commencing in April 1985. Under these circumstances, petitioner received no training in the basics of selling beauty supplies. PPCI arranged for sales personnel to receive training or product education from manufacturers' representatives on a continual basis. In addition, petitioner regularly attended weekly sales meetings at the PPCI office. In general, all of1993 Tax Ct. Memo LEXIS 654">659 PPCI's salespeople, including petitioner, attended those meetings. She also attended sales shows at the PPCI offices and throughout Connecticut. When petitioner stayed out of town overnight for a sales show, PPCI reimbursed her for the overnight expenses. Petitioner used one room in her home as an office. Petitioner furnished the room with a desk, a chair, a telephone, bookshelves, and a calculator. The total cost of the furnishings was under $ 1,000. PPCI provided petitioner with a facsimile (fax) machine to transmit her orders to PPCI each day. The fax machine was the property of PPCI, and petitioner returned it to PPCI upon terminating her relationship with the company in 1992. PPCI did not reimburse petitioner for the cost of any of the items in her office. PPCI did not pay petitioner's monthly telephone bill. Petitioner claimed business deductions with respect to the portion of her home used as an office. Petitioner received manufacturers' literature describing particular products and their functions from PPCI. She put these handouts into plastic pages and file folders and then gave the materials to customers and potential customers. Petitioner paid for the plastic1993 Tax Ct. Memo LEXIS 654">660 pages and file folders. Occasionally petitioner gave free samples of products to customers. She purchased these samples from PPCI. She expended $ 401 on samples in 1990. To facilitate sales, petitioner sometimes would set up displays at the salons in her territory. PPCI did not order the displays or reimburse petitioner for the costs of the displays. Petitioner sold products exclusively for PPCI for 7 years. Petitioner's relationship with PPCI was terminable at the will of either party. Under pressure from PPCI, petitioner did terminate the relationship in 1992. Petitioner participated in a group health insurance plan through PPCI. Petitioner contributed $ 5 per week to this plan, which only covered petitioner, not her family members. PPCI did not provide petitioner with pension benefits, sick leave, or holiday pay. PPCI issued petitioner a Form W-2 for the 1990 taxable year reflecting remuneration paid in the amount of $ 28,061.18. PPCI withheld Federal income taxes and Social Security (FICA) taxes from petitioner's biweekly paychecks. Petitioners timely filed their 1990 joint Federal income tax return. On Schedule C of their 1990 tax return, petitioners reported net1993 Tax Ct. Memo LEXIS 654">661 income of $ 22,630, which consisted of gross receipts from the sales activities of petitioner Barbara D. Lewis for PPCI in the amount of $ 28,061 and deductions related to those activities in the amount of $ 5,431. By statutory notice respondent determined that the items that petitioners reported on Schedule C were properly reportable as wage income and unreimbursed employee expenses. The amount of the expenses is not in dispute. OPINION The issue for decision is whether petitioner, Barbara D. Lewis properly is classified as a common law employee or as an independent contractor during 1990. Petitioners contend that Barbara D. Lewis was an independent contractor and, as such, was entitled to deduct the full amount of her business expenses on Schedule C pursuant to section 162. Respondent determined that the expenses of petitioner Barbara D. Lewis related to sales of PPCI products are unreimbursed employee expenses because she was an employee of PPCI during 1990. Unreimbursed employee expenses are miscellaneous itemized deductions and only deductible to the extent they exceed 2 percent of the taxpayers' adjusted gross income. Sec. 67(a). Respondent's determinations as to petitioners' 1993 Tax Ct. Memo LEXIS 654">662 tax liability are presumed correct, and petitioners have the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933). Petitioners have not carried their burden, and we hold for respondent. Whether a taxpayer is an independent contractor or an employee is a question of fact. Professional & Executive Leasing, Inc. v. Commissioner, 89 T.C. 225">89 T.C. 225, 89 T.C. 225">232 (1987), affd. 862 F.2d 751">862 F.2d 751 (9th Cir. 1988); Simpson v. Commissioner, 64 T.C. 974">64 T.C. 974, 64 T.C. 974">984 (1975). Among the relevant factors in determining the substance of an employment relationship are the following: (1) The degree of control exercised by the principal over the details of the work; (2) the taxpayer's investment in facilities; (3) the taxpayer's opportunity for profit or loss; (4) permanency of the relationship between the parties; (5) the principal's right of discharge; (6) whether the work performed is an integral part of the principal's business; (7) what relationship the parties believe they are creating; and (8) the provision of employee benefits. NLRB v. United Ins. Co., 390 U.S. 254">390 U.S. 254, 390 U.S. 254">258 (1968);1993 Tax Ct. Memo LEXIS 654">663 United States v. Silk, 331 U.S. 704">331 U.S. 704, 331 U.S. 704">716 (1947); Aymes v. Bonelli, 980 F.2d 857">980 F.2d 857, 980 F.2d 857">860-861 (2d Cir. 1992); 64 T.C. 974">Simpson v. Commissioner, supra at 984-985; Leitch v. Commissioner, T.C. Memo. 1993-154; sec. 31.3121(d)-1(c)(2), Employment Tax Regs. (setting forth criteria for identifying common law employees). No one factor is determinative, Community for Creative Non-Violence v. Reid, 490 U.S. 730">490 U.S. 730, 490 U.S. 730">752 (1989), rather all the incidents of the relationship must be assessed and weighed. 390 U.S. 254">NLRB v. United Insurance Co., supra at 258; 331 U.S. 704">Silk v. United States, supra at 716; 64 T.C. 974">Simpson v. Commissioner, supra at 985. The factors should not be weighed equally but should be weighed according to their significance in the particular case. 980 F.2d 857">Aymes v. Bonelli, supra at 861. In the present case the facts have been established by stipulation and by the testimony of petitioner. We are not required to accept at face value a petitioner's self-serving1993 Tax Ct. Memo LEXIS 654">664 and uncorroborated testimony, particularly where other and better evidence to prove the point in question is available. Wood v. Commissioner, 338 F.2d 602">338 F.2d 602, 338 F.2d 602">605 (9th Cir. 1964), affg. 41 T.C. 593">41 T.C. 593 (1964). Here petitioner introduced no testimony by former coworkers or customers to corroborate her description of the way PPCI ran its business. Petitioner's own testimony was evasive, incomplete, and unconvincing. Her claim to independence in her work is not consistent with the record. Application of the factors usually considered in establishing the nature of the working relationship under the circumstances of this case leads to the conclusion that in 1990 petitioner was a common law employee of PPCI. 1. Degree of ControlThe alleged employer's degree of control over the details of the taxpayer's work is the most important factor in determining if a common law employment relationship exists. See Matthews v. Commissioner, 92 T.C. 351">92 T.C. 351, 92 T.C. 351">361 (1989), affd. 907 F.2d 1173">907 F.2d 1173 (D.C. Cir. 1990). In Reed v. Commissioner, 13 B.T.A. 513">13 B.T.A. 513, 13 B.T.A. 513">520 (1928),1993 Tax Ct. Memo LEXIS 654">665 revd. and remanded 34 F.2d 263">34 F.2d 263 (3d Cir. 1929), revd. per curiam 281 U.S. 699">281 U.S. 699 (1930), the Board of Tax Appeals stated: "the crucial test lies in the right of control, or lack of it, which the employer may exercise respecting the manner in which the service is to be performed and the means to be employed in its accomplishment, as well as the result to be attained." This test is still the master test of an employment relationship. 92 T.C. 351">Matthews v. Commissioner, supra at 361; Hawkins v. Commissioner, T.C. Memo. 1993-350. The employment tax regulations state this factor as follows: Generally * * * [an employer-employee] relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that1993 Tax Ct. Memo LEXIS 654">666 the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.Sec. 31.3121(d)-1(c)(2), Employment Tax Regs.All that is necessary is that the principal have the right to control the details of the salesperson's work. McGuire v. United States, 349 F.2d 644">349 F.2d 644, 349 F.2d 644">646 (9th Cir. 1965); Kiddie v. Commissioner, 69 T.C. 1055">69 T.C. 1055, 69 T.C. 1055">1058 (1978). It is not necessary for the principal actually to control the details of an employee's work. PPCI had significant rights of control over petitioner in her work. Petitioner reported all of her sales activities to PPCI on a daily basis through the Daily Activity Report Sheet. Petitioner only sold products for PPCI and was prohibited from selling competitors' products. In recent cases this Court has considered the restriction to sales of the company's products important. Contrast Johnson v. Commissioner, T.C. Memo. 1993-530, in which a salesman was prohibited from handling competitors' products and was held to be a common law employee with Butts v. Commissioner, T.C. Memo. 1993-478,1993 Tax Ct. Memo LEXIS 654">667 in which an Allstate insurance salesman, held to be an independent contractor, was permitted to sell other companies' insurance policies. In distinguishing the cases, in Johnson this Court emphasized, inter alia, the importance of the prohibition against selling competitors' products. Even after termination of her relationship with PPCI, petitioner was severely restricted in sales activities in Connecticut. For 1 year after termination, she was allowed to sell competitors' products in only two specified counties in Connecticut, and Fairfield County was not one of these. During her employment, petitioner could not sell PPCI products in any territories to which other PPCI salespeople were assigned. PPCI controlled petitioner's assignment to a sales territory. PPCI determined who would service petitioner's sales territory while petitioner was on leave of absence. PPCI provided petitioner with leads to potential clients. Petitioner was expected to follow up on these leads and she always did so. Petitioner regularly attended sales meetings and shows. PPCI reimbursed petitioner for some of her travel expenses. PPCI determined the prices at which the products would be sold. 1993 Tax Ct. Memo LEXIS 654">668 Every day petitioner submitted a report explaining to PPCI supervisors who she saw, what she sold, what was returned, what classes she suggested for that customer, and what suggestions she had for follow-up. Petitioner herself pointed out that PPCI had a further check on her daily activities through the daily order records. From these records, PPCI knew on a daily basis how many calls petitioner was making and how much she was selling. PPCI had reasonably accurate information as to how many hours petitioner worked every day. Also PPCI had data as to whether petitioner followed up on leads and whether petitioner was satisfying goals with respect to products which PPCI had told her to emphasize. Ultimately, after petitioner's second maternity leave, PPCI transferred her to a territory demanding less time than the territory she had been servicing. The fact is that PPCI had complete information about petitioner's sales activities, had the ability to control those activities, and in fact did exercise that control when management decided, correctly or incorrectly, that such exercise was in the company's interest. The record clearly indicates that petitioner worked under the direction1993 Tax Ct. Memo LEXIS 654">669 and control of PPCI -- not as an independent contractor. 2. Investment in FacilitiesPetitioner maintained office facilities in her home. The cost of furnishings for such office was, by petitioner's admission, quite modest. Maintenance of a home office alone is not a sufficient basis for a finding that petitioner was an independent contractor rather than an employee. See Harris v. Commissioner, T.C. Memo. 1977-358. 3. Opportunity For Profit or LossPetitioner paid expenses related to her PPCI sales activities for which PPCI did not reimburse her. PPCI paid petitioner based strictly on commissions. Petitioner contends that together these two factors could have resulted in petitioner's realizing a loss from her PPCI sales activities and therefore petitioner was in business for herself. Contrary to petitioner's suggestion, compensation on a commission basis is entirely consistent with an employer-employee relationship. Texas Carbonate Co. v. Phinney, 307 F.2d 289">307 F.2d 289, 307 F.2d 289">292 (5th Cir. 1962); Capital Life & Health Insurance Co. v. Bowers, 186 F.2d 943">186 F.2d 943 (4th Cir. 1951); Weatherguard Corp. v. United States, 137 Ct. Cl. 359">137 Ct. Cl. 359, 146 F. Supp. 942">146 F. Supp. 942 (1957).1993 Tax Ct. Memo LEXIS 654">670 While it is true that petitioner conceivably could have suffered some loss as the result of her PPCI sales activities, she may still be an employee under the common law test if her risk of loss is negligible. See Radovich v. Commissioner, T.C. Memo. 1954-220; Associated Bicycle Serv., Inc. v. United States, 128 Bankr. 436 (Bankr. N.D. Ind. 1990). Petitioner did not invest in a large inventory but only purchased samples for free distribution. Her cost for the samples for the entire year was only $ 401. Over 40 percent of the total amount of petitioners' claimed Schedule C business deductions was for expenses claimed with respect to the room in her own home that petitioner used for office space. This was not a cash expenditure. Petitioner's risk of loss from her sales activities for PPCI was negligible. 4. Permanency of the RelationshipBoth petitioner and PPCI had the right of cancellation but the relationship was not intended to be a temporary one entered into for a stated period or for a class of work which would naturally end within some period of time. Petitioner testified that she was hired "indefinitely". 1993 Tax Ct. Memo LEXIS 654">671 Petitioner exclusively sold PPCI products for 7 years. The length of her employment is consistent with petitioner's status as an employee of PPCI. 5. Right of DischargeThe relationship of petitioner and PPCI was terminable at the will of either party. Petitioner did terminate the relationship in 1992. Both independent contractors and employees can be terminated at will, so we accord this factor little or no weight. See Neely v. Commissioner, T.C. Memo. 1978-18. 6. Integral Part of BusinessPPCI is in the business of distributing hair care products. PPCI's sales representatives are PPCI's key connection with its customers. This factor supports a finding that petitioner was an employee of PPCI. 7. Relationship Parties Believed They Had CreatedWe have no doubt that the parties believed that an employer-employee relationship was established. PPCI treated petitioner as an employee. PPCI withheld Federal income taxes and FICA taxes from petitioner's biweekly commission checks. Moreover, petitioner did not pay any self-employment taxes for 1990. The withholding of taxes by PPCI on behalf of petitioner is consistent with a finding1993 Tax Ct. Memo LEXIS 654">672 that petitioner was an employee of PPCI. See Packard v. Commissioner, 63 T.C. 621">63 T.C. 621, 63 T.C. 621">632 (1975). Petitioners did not introduce any evidence that PPCI considered petitioner Barbara D. Lewis an independent contractor. Testimony of a representative of PPCI could have easily established PPCI's belief as to the nature of petitioner's employment relationship. Petitioners have the burden of proving respondent's determination incorrect. Rule 142(a). Failure of a party to introduce evidence which would be favorable to her gives rise to the presumption that if produced it would be unfavorable. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 6 T.C. 1158">1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). 8. Provision of Employee BenefitsPetitioner did receive some employee benefits from PPCI. She participated in the company's group health insurance plan during the entire period she sold PPCI products. She also received some commissions while she was on her first maternity leave. She continued to work a limited number of hours for particular clients during that leave. The commissions which 1993 Tax Ct. Memo LEXIS 654">673 she received during her maternity leave were based on all of the sales within her sales territory and not upon the accounts which she serviced during that time period. PPCI also paid for her overnight expenses when she stayed out of town for a sales show. Receipt of employee benefits is an important factor in determining if an employer-employee relationship exists. 63 T.C. 621">Packard v. Commissioner, supra at 632. PPCI provided petitioner with some employee benefits, so this factor supports a finding that petitioner was an employee of PPCI. In sum, the factors discussed above demonstrate that petitioner was an employee of PPCI during 1990. Because petitioner was an employee, she can only deduct expenses related to her PPCI sales activities as miscellaneous itemized deductions under section 67(a). Decision will be entered for respondent. Footnotes1. All section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620106/	APPEAL OF WADDELL COAL CO.Waddell Coal Co. v. CommissionerDocket No. 3133.United States Board of Tax Appeals3 B.T.A. 160; 1925 BTA LEXIS 2015; November 25, 1925, Decided Submitted June 13, 1925. 1925 BTA LEXIS 2015">2015 Evidence held insufficient to sustain taxpayer's claim for obsolescense of mining equipment. Don F. Reed, Esq., for the taxpayer. Lee I. Park, Esq., for the Commissioner. LITTLETON3 B.T.A. 160">160 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This is an appeal from the determination of a deficiency for the calendar year 1920 in the amount of $25,098.03, against which is offset an overassessment of $2,095.50 for the calendar year 1918. No deficiency was determined by the Commissioner for the calendar year 1919, in which year the taxpayer had a net loss of $28,559.91, which was applied against the year 1918 under section 204 of the Revenue Act of 1918. The taxpayer alleged that the Commissioner erred (1) in failing to allow as a deduction from gross income for each of the years 1918, 1919, and 1920, a proper amount for obsolescence of property upon its claim that the life of the coal mine, in the operation of which the property was used, was shorter than the physical life of the property; and (2) in basing the allowance for exhaustion, wear and tear upon the physical life of the property rather than upon the life of the coal mine. FINDINGS1925 BTA LEXIS 2015">2016 OF FACT. Taxpayer is a West Virginia corporation engaged in the business of mining and selling coal, with principal place of business at 3 B.T.A. 160">161 Philippi. At the time of its organization in July, 1917, it acquired a lease to 371 acres of coal land at Philippi, Barbour County, W. Va., theretofore granted to the Humphreys Coal Co., on August 29, 1908, for a period of 30 years, with the right of renewal under certain circumstances. This lease provides for a royalty of 10 cents a ton. The provisions pertinent to this appeal are as follows: Third. The lessee hereby covenants that he will mine the coal in the Mahoning and Freeport seams of coal, and shall also mine the coal from any and all other seams found on the demised premises, the mining of the coal from each of said seams to be carried on in such a way as to recover the greatest possible amount of coal from each and all of said seams, and in such manner that the mining on any one of the said seams shall not injure or destroy any other seam of coal, or provent the mining thereof; but the lessee shall not be obliged to mine any seam of coal which does not contain between the top and bottom of the seam a sectional height1925 BTA LEXIS 2015">2017 of thirty-six (36) inches of coal commercially valuable. All the agreements, conditions and stipulations, rents and royalties contained and retained herein shall refer to all of the said seams of coal and the coal taken therefrom. * * Sixth. The lessee covenants and agrees to prosecute his mining operations upon the demised premises actively and diligently, and in careful, skillful and workmanlike manner, according to the rules of good mining and the laws of the State of West Virginia, and to mine all the merchantable coal that can be practicably mined with profit to him and the lessors, and will leave no more available coal in pillars and supports for the mine openings and workings than may be necessary for their full security and the safety of the workmen. Seventh. If the lessee on abandoning any room, entry or other working place, shall leave any available coal standing which, in the opinion of a representative or official of the lessors, is not necessary to be left for the proper security of the mine workings, the said official or representative shall give the lessee notice thereof, with directions to remove the same; and if the lessee shall refuse to proceed to mine1925 BTA LEXIS 2015">2018 and take away said coal for the period of ten days after receiving such notice, then the lessors and lessee shall submit the question to arbitration, and each one shall appoint one arbitrator, and those two shall meet and consider said question without delay, and in case the two thus chosen cannot agree they shall appoint a third; and in case either of the parties hereto neglects to appoint an arbitrator for a period of ten days (10) after receiving notice from the other party to do so, then said other party shall nominate two and the two thus appointed shall appoint a third, and the decision and award of such arbitrators, or any of them, shall be final, conclusive and binding upon the parties hereto; and the said arbitrators, or any of them, may in their decision or award, as part thereof, decide by whom the costs of such arbitration shall be borne and paid, and the amount of such costs. * * Thirteenth. At the termination of this lease, otherwise than by forfeiture, all the improvements placed upon the demised premises by the lessee shall be valued by two disinterested appraisers, one to be chosen by each of the parties hereto, and in case of disagreement, these two to choose1925 BTA LEXIS 2015">2019 a third, and the three thus chosen shall value the said buildings and improvements, and 3 B.T.A. 160">162 the lessors shall have the privilege of purchasing the same at such valuation within thirty (30) days after notice. And if lessors shall not within thirty (30) days accept said buildings and improvements at such valuation, the lessee shall have the privilege of removing the same from said demised premises within six months from the expiration of the said thirty days; after which said demised premises shall revert to and the possession thereof revert in the lessors. Fourteenth. At the expiration of the herein mentioned term of thirty (30) years, for which this lease has been granted, the lessors shall have the right and privilege of purchasing the buildings and improvements of the lessee on said demised premises on an appraised valuation as provided for in Article 13. And if the lessors shall not within thirty (30) days after such valuation accept said improvements and pay for the same, said lessee shall, at his option, have the right to renew this lease for a period of fifteen (15) years under and subject to all the terms and stipulations hereinbefore mentioned and intended to1925 BTA LEXIS 2015">2020 be kept and performed by said lessors and lessee; and in the event lessee elect not to renew the within lease, he shall have full free and unrestricted right to remove all buildings, improvements, etc., from said leased premises within six months from the expiration of said thirty (30) days, as provided in Article 13 of this lease. It is admitted by the taxpayer that the amount allowed by the Commissioner for exhaustion, wear and tear of property was reasonable upon the basis of its physical life. DECISION. The determination of the Commissioner is approved. OPINION. LITTLETON: Taxpayer contends that, although in 1918, 1919, and 1920, its lease had 20, 19, and 18 years, respectively, to run, the life of its mine was only 7, 6, and 5 years, respectively. This contention is based upon its claim that, at the time the property was acquired in 1917, the estimated recoverable tonnage was 500,000 tons; that it mined an average of 60,000 tons a year and should, therefore, be allowed a deduction for each of the years for obsolescence of its mine equipment in addition to the amounts allowed by the Commissioner. In view of the lack of evidence going to establish the very basis1925 BTA LEXIS 2015">2021 of the taxpayer's claim, we do not find it necessary to make a decision of the question as to whether obsolescence, if any, should be measured by the life of the mine. We have no evidence of the date the property, concerning which obsolescence is claimed, was acquired, its cost, or whether its life was longer or shorter than the claimed life of the mine, or what the probable salvage value of the property would be at the end of the life of the mine. In regard to the life of the mine, it appears from the evidence that, in November, 1918, the taxpayer, in support of its claim regarding its invested capital, submitted considerable evidence to the Commissioner that 3 B.T.A. 160">163 the tonnage of coal recoverable from its mining properties was 5,000,000 tons. We are not convinced from the evidence that on the date the lease was acquired by the taxpayer there were only 500,000 tons of coal which could be profitably mined. For lack of proof of the life of the mine and of the elements necessary for the allowance of obsolescence of the mine equipment, and in view of the provisions of the lease, the determination of the Commissioner must be approved. 1925 BTA LEXIS 2015">2022 Appeal of Wigwam Amusement Co.,1 B.T.A. 335">1 B.T.A. 335; Appeal of Eimer & Amend, 2 B.T.A. 603.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620108/	GEORGE SNYDER CRILLY, FRANK LLOYD CRILLY, AND EDGAR CRILLY, EXECUTORS, ESTATE OF DANIEL F. CRILLY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Crilly v. CommissionerDocket Nos. 17210, 18747.United States Board of Tax Appeals15 B.T.A. 389; 1929 BTA LEXIS 2869; February 13, 1929, Promulgated 1929 BTA LEXIS 2869">2869 The gifts here in controversy were not made in contemplation of death within the meaning of the statute. E. Barrett Prettyman, Esq., for the petitioners. A. H. Fast, Esq., for the respondent. MORRIS 15 B.T.A. 389">389 The respondent mailed two deficiency notices to the petitioners and two petitions were filed with respect to the same deficiency. There is, however, only one proceeding before us, which is for the 15 B.T.A. 389">390 redetermination of a deficiency in estate tax of $180,203.86. We have, therefore, upon motion of counsel, consolidated the proceedings covering both sets of pleadings in order that they may be disposed of as a single proceeding. The allegations of error urged by the petitioner are: (1) That the respondent erred in his determination that the transfers of properties by the decedent prior to his death were made in contemplation thereof, and his inclusion of the value of said properties in the gross estate subject to tax; (2) That he erred in finding that any estate tax whatsoever was due since no estate tax was in effect at the date of decedent's death under Federal estate tax act; (3) That he erred in failing to find that a refund1929 BTA LEXIS 2869">2870 was due the estate in the amount of the entire tax paid. FINDINGS OF FACT. The petitioners are the duly appointed executors of the Estate of Daniel F. Crilly, deceased, who died June 19, 1921, while then at the age of 82. Crilly's career was begun as a bricklayer and thereafter he was engaged in the building contracting business, which he pursued until some time late in 1880 when he commenced building for himself only. At the time of his death, and for several years immediately preceding, he was engaged in the management and operation of properties which he owned. Crilly's sons, Frank, Edgar, and George, entered the employ of their father upon leaving college, George in 1888, Frank in or about 1890, and Edgar in 1895, and remained with him actively engaged in his business throughout the remainder of his life and devoted their entire time thereto. Frank, who superientended repairs of properties, received a salary of $75 a month when he entered his father's employ; in 1917 he was receiving $100 a month and free rent in one of his father's apartments. Edgar, who looked after the renting of properties and accounts, was paid a salary of $100 a month in the beginning, which1929 BTA LEXIS 2869">2871 in 1916 had been increased to $500 a month. George, who looked after his father's investments, originally received a salary of $10 a week, which was increased until in 1917 he received $400 a month. Crilly's three sons conducted all of the details of their father's business, but, although Crilly had retired from active participation therein 15 or 20 years prior to 1911, he thereafter acted as senior adviser and consultant and was at his office daily when in the city and in conference with his sons with respect to new buildings or improvements or major expenditures. 15 B.T.A. 389">391 Crilly had five children, the three sons just mentioned, and two daughters, Erminnine Crilly Mathews and Isabelle Crilly Butler, whose ages ranged from 43 to 50 at the time the trust hereinafter referred to was created. He lived alone, except for a man attendant and his wife, and a cook. Crilly was an exceptionally vigorous man until he contracted rheumatism in or about 1905, with which he suffered until the time of his death. In 1910, or thereabout, he underwent a prostate gland operation from which he completely recovered and was apparently in as good physical condition thereafter as before. About1929 BTA LEXIS 2869">2872 two months prior to his death he was confined to the hospital for observation because of bladder trouble and for irrigation of the bladder. At this time he remained in the hospital for about two weeks, when he was dismissed. He was 5 feet and 10 inches in heights, weighed about 170 pounds, was not fleshy but very muscular, had a rugged physique and a strong constitution. Notwithstanding his operation in or about 1910, his rheumatic trouble, which rendered him somewhat lame at times, and the trouble for which he was confined in the hospital shortly before his death, Crilly was, from 1915 until his death, in excellent health. He walked with a cane and had the use of a man attendant, who drove his automobile, assisted him in and out of the car at times, aided him in dressing and undressing, and gave him daily massages, a very light one in the morning and a general massage at night, for his rheumatism. His rheumatism did not incapacitate him, however; there was no perceptible progression in his condition during the last 10 years of his life. In clear weather and warm climate the stiffening in his joints caused by rheumatism would disappear. Due to the massages which he received, 1929 BTA LEXIS 2869">2873 he seemed to improve along toward the date of his death. He was neither chairridden, bedridden, nor confined to his home. He could and did move about freely, unassisted, and although he at times was assisted he could, and did, get in and out of his automobile and walk up and down stairs. His heart and lungs were examined by his family physician during the 10-year period immediately preceding his death and, considering his advanced age, they were found to be in good condition. Crilly died on a Sunday morning. On Saturday, the day before his death, he complained of a pain in his chest and he went to bed and his personal physician was called, who visited him twice in the morning and in the afternoon of that day. His son Edgar visited him in the evening of that day and while there, Crilly arose from his bed unassisted and sat in a chair. He and his son sat up rather late smoking cigars. After he retired for the night he called his attendant, by means of a call bell or buzzer, about 4 o'clock in the morning, 15 B.T.A. 389">392 requesting a drink of water. He and his attendant talked a few minutes and Crilly seemed to be perfectly normal. Crilly was found dead by his attendant a few1929 BTA LEXIS 2869">2874 hours thereafter, on Sunday morning. Crilly's physician diagnosed the primary cause of his death as having been caused by drinking ice water or eating ice cream which chilled his stomach, causing a pressure or irritation of the stomach, and a probable pressure upon his heart. He also found that, in addition to Crilly's chronic rheumatism, there was present senile arteriosclerosis (hardening of the arteries) commonly found in elderly people. His death certificate read "Mitral insufficiency, due to rheumatic condition, and the predisposing cause was senile arteriosclerosis." The acute gastritis caused by partaking of cold drinks magnified the other conditions causing his death. Crilly's mental condition was very good and he possessed a keen memory up to the time of his death. He was optimistic and very cheerful. He was a member of the Masonic Lodge, Chicago Real Estate Board, Chicago Association of Commerce, Union League Club, Hamilton Club, and the South Park Board, in all of which he took an active interest up to the time of his death. He was particularly interested in his clubs and frequently went there for his luncheons. He attended dinners of the Association of Commerce1929 BTA LEXIS 2869">2875 practically every Wednesday. He also attended lodge meetings and dinners. He was a hearty eater and was never on a diet. He was interested in business, politics, and other civic matters, and frequently attended baseball games and the theatre. He was interested in cards and played regularly with his family, his attendant, or his friends every Saturday night when he was in the city. He retained all of these various interests up to the time of his death. In September or October of 1918 Crilly, personally, presented a matter in which he was interested to the Board of South Park Commissioners and made a 20-minute argument in said presentation. He enjoyed riding, hunting, fishing, picnicking, and delighted greatly in playing with his grandchildren. He spent his winters in Florida and summers at his summer home at Green Lake, Wis., during the years immediately preceding his death and was planning at the time of his death to go to Green Lake for the summer of 1921. In recognition of the long and faithful services of his sons in his business, which he felt they had helped him create, and in which he really regarded them as partners, and his daughters' attentiveness to him after the1929 BTA LEXIS 2869">2876 death of their mother, it was Crilly's expressed desire to make provision for them out of his property so that he might see them enjoy it during his lifetime. This matter wad discussed six or seven years prior to 1917, when his plan was finally consummated. For family reasons of a personal nature, and because the property 15 B.T.A. 389">393 was such that it was not readily distributable, his plan was delayed. In 1916 his son Edgar consulted an attorney with respect to a plan of trust fund for the real properties to which Crilly agreed. Thereafter, on January 24, 1917, Crilly, by warranty deed, in fee simple, transferred to his five children, George Snyder Crilly, Frank Lloyd Crilly, Edgar Crilly, Erminnie Crilly Mathews, and Isabelle Crilly Butler, the following described property: Southwest corner of Chicago and Wells Street; Land leased on long term lease for $3,000 a year net$50,000.00504 South Wells Street; Land leased on long term lease for $2,500 a year45,450.00Oakland Theatre; Land leased on long term lease for $3,600.00 a year net60,000.00Southwest corner 28th Street and Wabash Avenue; Land leased on long term lease for $1,200.00 a year net20,000.00Northwest corner Wells and Lake Streets275,000.00Corner South Park Avenue and 24th Street, 22 X 147.5 irregular, vacant10,000.003841-51 South Wabash Avenue, vacant 125 feet front, vacant30,000.003235-41 South Michigan Avenue, vacated 200 feet front, vacant60,000.00Vincennes Avenue and 73rd Street19,674.003/4 interest in 2,240 acres in Michigan, located in Township 27 N, Range 5 W10,080.00Mortgages of Asher Bros30,000.00Interest334.17Knight mortgage71,858.00Interest934.151710-34 North La Salle 45 apartments226,800.001713-19 North Wells Street Stores and apartments and the building known as Lincoln Park Hall73,000.001700-18 North Wells Street Entire block, 26 apartments and 10stores142,560.001701-17 Crilly Court 40 apartments144,000.001700-4-12-16-22 Crilly Court Five one-family residences48,000.001701-19 North Park 30 apartments72,000.00Total1,389,690.321929 BTA LEXIS 2869">2877 Immediately after the above described transfer, his five children executed a declaration of trust, providing that three of their number operate and maintain the property, collect the income therefrom, and pay such income to the five parties in equal shares for life, with remainder to the descendants of the parties per stirpes, the said trust to exist until the death of the last survivor of the five parties. After having made the foregoing transfer, Crilly's son Edgar pointed out to him the fact that he had made a division of the properties for the benefit of his own children and his own children's children, but that if his own children should die their wives would not be taken care of. Crilly thereupon, on January 6, 1919, transferred 15 B.T.A. 389">394 the following personal property in five equal parts, one part to each of his five children: Libertys par value $105,200.00$105,250.00120 shares, Public Service of No. Illinois, com - at 809,600.0023 shares, Public Service of No. Illinois, Pfd - at 8 3/42,018.7545 shares, Central Trust Company of Chicago at 1807,875.00440 shares, Chicago & N.W. common at 6528,600.00480 shares, American Tel & Tel at 10550,400.001,495 shares, Peoples Gas Light Co. at 46 1/270,638.751,485 shares, Commonwealth Edison Co. at 108160,380.001,045 shares, Penn. R.R. at 33 3/434,746.25230 shares, Diamond Match Company22,540.00120 shares, Chicago & N.W. Preferred at 9911,895.00Total503,943.751929 BTA LEXIS 2869">2878 The following property was transferred by the decedent on January 2, 1919, to Edgar Crilly, in trust, for the benefit of Ethel Kennedy, the wife of his nephew: $20,000 bonds Commonwealth Edison Co. 5% - interest paid to March 1, 1921, at 83$16,6005% interest from March 1, 1921, at 83300Total16,900The following property was given by the decedent on December 25, 1920, to his granddaughter, Josephine Crilly, as a wedding present: $1,000 bonds Commonwealth Edison $830Interest, 5% at 83, from March 1, 192115Total845Crilly further transferred as gifts on the various dates stated hereinbelow the following described property, each parcel being in five equal parts, one part to each of his five children: PropertyDate of transferValue$5,000.00 bonds, Am. Tel. & Tel. 5% at 94 1/2. Interest from Feb. 1, 1921August 1, 1919$4,945.83$40,000.00 bonds, Western Electric Co. 7%, at par Interest from April 1, 1921.March 31, 192040,606.67$5,000.000 bonds Hackney Co. 6% - at par - interest from May 1, 1921June 1, 19205,040.00$25,000.00 bonds Sao Paulo 8% - due 1936 - at 97 1/2 interest from Jan. 1, 1921March 29, 192125,250.00$10,000.00 bonds Great Northern Ry. 7% at 97 - interest from Jan. 1, 1921April 28, 192110,026.67Total85,869.171929 BTA LEXIS 2869">2879 In all of the foregoing transfers of personal property the said property was actually delivered to the respective transferees on or about the dates stated and they were all absolute, unconditional and irrevocable. In none of the hereinbefore described transfers did the decedent reserve to himself a life estate or any other interest in the property, 15 B.T.A. 389">395 nor did he, in his discussions preparatory to the consummation of said transfers, mention his condition as a contributing factor. The principal property retained by Crilly, after having transferred the realty and personalty hereinabove, was a seven-story office building known as the "Crilly Building," erected on leased land of which Crilly was lessee, from which he derived an annual income of between $25,000 and $40,000. This he did in order that he might be entirely independent and because he felt that he was best qualified to negotiate further terms with the lessor of the property. Although his son Edgar handled all details of renting and operation of this building, Crilly was consulted in all matters of great importance. The petitioners in due form and season filed an estate-tax return, showing a total gross estate1929 BTA LEXIS 2869">2880 of $304,682.74, total deductions of $68,971.59, and a net estate of $235,711.15. The amount of the tax due upon the net estate shown by that return was $5,071.33, which was paid in full by the petitioners. Thereafter the respondent audited the return filed and added to the gross estate the sum of $1,997,248.24, which is the value of the property transferred by the decedent prior to his death, as hereinabove described, on the ground that said transfers were made in contemplation of death. The value of the property in question is $1,997,248.24, as determined by the respondent. OPINION. MORRIS: The first question for consideration is whether or not the respondent erred in finding that various transfers of property by the decedent prior to his death were made in contemplation of death within the meaning of section 402 of the Revenue Act of 1921. That section in so far as applicable here, provides: That 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 - * * (c) To the extent of any interest therein of which the decedent has at1929 BTA LEXIS 2869">2881 any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair 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 a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. The books are so replete with decisions in which this question has been considered and the term "contemplation of death" defined, that 15 B.T.A. 389">396 to delve into the subject here would result in repetition and duplication of effort, and in the end would serve no useful purpose. The petitioners introduced twenty-one witnesses who were intimately acquainted with the decedent at the time of his death and for a great period of years prior thereto, whose testimony convinces us that the various transfers of real1929 BTA LEXIS 2869">*2882 and personal property were not motivated "immediately and directly" by fear or expectation of impending death. See ; ; ; ; ; ; and . We are therefore of the opinion that the petitioners have clearly overcome the prima facie correctness of the respondent's findings and also the statutory presumption operating against them with respect to the transfers made within two years of the death of the decedent. The petitioners having expressly waived the second and third issues herein in the event of a favorable decision on the first issue, it is unnecessary for us to pass upon those questions. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620109/	KARL F. GOOS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGoos v. CommissionerDocket Nos. 12214-87, 12215-87United States Tax CourtT.C. Memo 1991-146; 1991 Tax Ct. Memo LEXIS 165; 61 T.C.M. 2300; T.C.M. (RIA) 91146; April 2, 1991, Filed 1991 Tax Ct. Memo LEXIS 165">165 Decision will be entered for the respondent. Karl F. Goos, pro se. Russell Stewart, for the respondent. WELLS, Judge. WELLSMEMORANDUM FINDINGS OF FACT AND OPINION In the instant consolidated cases (hereinafter referred to as the instant case), respondent determined the following deficiencies in and additions to petitioner's Federal income taxes: Addition to Tax Under Section 1YearDeficiency 6653(a) 1977$ 180,719.79$ 9,035.99 1978171,082.668,554.13197995,702.934,785.151980100,131.375,006.57After concessions, the issues remaining for us to decide are (1) whether petitioner may exclude from his income amounts which he claims were nontaxable "split dollar" premiums paid by his wholly owned corporation with respect to life insurance covering petitioner's1991 Tax Ct. Memo LEXIS 165">166 life; and (2) whether petitioner is precluded from asserting the exclusion of such premiums from his income because of a "duty of consistency" or "quasi estoppel." FINDINGS OF FACT Some of the facts have been stipulated for trial pursuant to Rule 91. The stipulations and accompanying exhibits are incorporated in this Opinion by reference. The stipulations settled all issues raised by respondent's notices of deficiency in the instant case. Petitioner resided in Orwigsburg, Pennsylvania, at the time he filed the petitions in the instant case. During the years in issue, petitioner was the president and principal executive officer of Frederick A. Potts & Co. (Potts & Co.), a corporation owned solely by petitioner. Potts & Co. was involved in the sale and export of coal and coal byproducts. In 1977, petitioner personally borrowed $ 5,000,000 from Citibank, N.A. (Citibank) and, in turn, lent the proceeds of the loan to Potts & Co. To secure the loan it received from petitioner, Potts & Co. gave petitioner a mortgage on certain real estate it owned. Petitioner assigned the mortgage to Citibank as additional collateral for the loan. During the years in issue, four whole life insurance1991 Tax Ct. Memo LEXIS 165">167 policies issued by National Home Life Assurance Company (the whole life policies) in the total approximate amount of $ 9,000,000 insuring petitioner's life were in force and owned by petitioner's spouse, Wilma Goos. As additional collateral for the Citibank loan, petitioner and his spouse assigned the whole life policies to Citibank. In his petitions, petitioner claimed that he erroneously reported as income, for the years in issue, life insurance policy premiums (hereinafter referred to as the premiums) paid by Potts & Co. in the following amounts: YearAmount of Premiums1977$ 217,920.47 1978213,112.371979222,946.22198062,853.80The premiums represented payments for life insurance covering petitioner's life. Potts & Co. paid the premiums partially by cash and partially by policy loans against the cash surrender value of the whole life policies. Potts & Co. received correspondence from Nathan S. Kolbes Associates, Inc. (Kolbes), its insurance broker, advising Potts & Co. to include the premiums on petitioner's W-2 forms as income to petitioner. For the respective taxable years in issue, petitioner received W-2 forms from Potts & Co. which included1991 Tax Ct. Memo LEXIS 165">168 the premiums as "income or other taxable compensation" to petitioner. For the years in issue, Potts & Co. deducted the premiums on its corporate tax returns. OPINION As stated above, all of the issues arising out of respondent's notice of deficiency have been settled. In his petitions, however, petitioner claims that he erroneously included in his income the premiums paid by Potts & Co. with respect to life insurance on his life. Petitioner has the burden of proving that such amounts should be excluded from his income. Rule 142(a). Petitioner contends that the premiums were paid with respect to life insurance policies that were subject to a "split dollar" arrangement between Potts & Co. and petitioner's spouse, and therefore the payment of the premiums by Potts & Co. should be excluded from his income. "Split dollar" is a term generally used to describe various arrangements between employers and employees for sharing the cost of premiums for insurance covering the employee's life. Under a split dollar arrangement, the employer is entitled to receive out of the policy proceeds the "investment element," consisting of the greater of the cash surrender value or the amount of 1991 Tax Ct. Memo LEXIS 165">169 premiums it has paid, and the employee's (or owner's) beneficiary is entitled to receive the balance, or "risk element." Johnson v. Commissioner, 74 T.C. 1316">74 T.C. 1316, 74 T.C. 1316">1322 (1980). In the instant case, respondent primarily contends that petitioner has failed to prove the existence of any split dollar arrangement. We agree. The evidence shows that Potts & Co. did not treat the payment of the premiums in issue as if they were connected with a split dollar arrangement. Petitioner received from Potts & Co. a form W-2 which included the premiums in his income as compensation. Potts & Co.'s corporate returns for the years in issue reflect a deduction for petitioner's compensation equal to the amounts shown on the W-2 forms. Kolbes advised Potts & Co. in writing each such year to include the premiums in petitioner's taxable income. Those letters made no reference to the existence of any split dollar arrangement. Petitioner, however, now contends that such treatment was in error. In order for a split dollar insurance arrangement to exist, the employer and employee must designate their respective rights to receive the policy proceeds. There are two normally accepted methods1991 Tax Ct. Memo LEXIS 165">170 of entering into such an arrangement. Under the so-called "endorsement" method, the employer is the owner, and the insurance company endorses the policy with the details of the "split" of the right to the death proceeds between the employer and the beneficiary. Under the so-called "collateral assignment" method, the owner of the policy (i.e., the insured or some other person or entity) assigns the policy to the employer as collateral for the "split" arrangement as to the death proceeds. See Sercl v. United States, 684 F.2d 597">684 F.2d 597, 684 F.2d 597">598 n.1 (8th Cir. 1982); Rev. Rul. 64-328, 1964-2 C.B. 11, 12. Under either method, on the death of the insured employee, the proceeds of the policy are split between the employer, to the extent of the investment element and the beneficiary, to the extent of the remainder. No documents evidencing an endorsement or collateral assignment of the life insurance policies for the years in issue, however, were offered at trial. Moreover, because petitioner does not claim that Potts & Co. owned the whole life policies, the existence of a split dollar arrangement cannot be established under the endorsement method. 1991 Tax Ct. Memo LEXIS 165">171 Nevertheless, petitioner attempts to show that such arrangement existed under the collateral assignment method by means of a copy of a letter attached to petitioner's brief. The letter, dated February 20, 1980, from Kolbes to Potts & Co., was not offered as evidence at trial and is therefore not a part of the record. In any case, the letter refers to a "Split Dollar Agreement Collateral Assignment Form" that apparently was to be signed at a time subsequent to the years in issue and also refers to a "new U.S. Life policy." The letter does not refer to the whole life policies issued by National Home Life Assurance Company or any other policies in effect during the years in issue. Also attached to petitioner's brief is a copy of a pleading, apparently filed during 1981 in the Montgomery County, Pennsylvania Court of Common Pleas, which asserts the existence of a "Split Dollar Agreement, Collateral Assignment" that obligated Potts & Co. to make payments of premiums on certain policies. The pleading does not refer to any time period and was not offered at trial. Petitioner explains neither the letter nor the pleading in his brief, and respondent objects to their admission as evidence. 1991 Tax Ct. Memo LEXIS 165">172 The record clearly establishes that the whole life policies were assigned to Citibank as collateral for a loan. Under that arrangement, Citibank would have had the right to receive all of the death proceeds. The form utilized to assign the life insurance to Citibank as collateral for the loan was signed by petitioner as insured and petitioner's spouse as owner and beneficiary. The form did not mention any collateral assignment and did not contain any assent by Potts & Co. to the assignment of the insurance to Citibank as collateral for the loan. Thus, under the documented arrangement during the years in issue, upon the death of petitioner, to the extent the death proceeds of insurance exceeded the outstanding balance of the Citibank loan, the bank would have had to pay such excess over to the record owner and beneficiary, petitioner's spouse. There is no documented arrangement during the years in issue under which Potts & Co. would have been entitled to any of the insurance proceeds. Petitioner offers the testimony of Murray Popkave, an employee of Kolbes during the years in issue, to prove the existence of the asserted split dollar arrangement. Mr. Popkave, however, admitted1991 Tax Ct. Memo LEXIS 165">173 that he knew little about "split dollar" life insurance arrangements during the years in issue. His assertion that a "split dollar" arrangement existed during the years in issue therefore must have been made pursuant to his current understanding of such arrangements, rather than his unaided recollections. The letters sent to Potts & Co. by Kolbes during the years in issue advising Potts & Co. to include the premiums in petitioner's W-2 forms as income were signed by Mr. Popkave and make no reference to any split dollar arrangement. Furthermore, in his testimony, Mr. Popkave gave neither the details of the asserted split dollar arrangement nor the specific years in which such an arrangement existed. It appears, from the bits of the confused record that we can piece together, that the scenario posited by respondent is the more likely one, namely, that a split dollar arrangement might have been entered into after the years in issue with respect to a policy with U.S. Life, but that during the years in issue the only assignment of life insurance that existed was the assignment to Citibank of the whole life policies issued by National Home Life Assurance Company. Considering the lack1991 Tax Ct. Memo LEXIS 165">174 of evidence in the instant case and considering petitioner's burden of proof, we are unable to conclude that a split dollar arrangement existed during the years in issue with respect to any life insurance covering petitioner's life. We therefore hold that petitioner has failed to prove that the premium payments paid by Potts & Co. with respect to insurance covering petitioner's life were improperly included in petitioner's income during the years in issue. Our holding dispenses with the need to address the issue of whether petitioner should be precluded by the doctrines of "duty of consistency" or "quasi estoppel" from asserting that the premiums were not income to petitioner. We nevertheless note that such defenses are affirmative defenses which must be, but were not, affirmatively pleaded. Arkansas Best Corp. v. Commissioner, 83 T.C. 640">83 T.C. 640, 83 T.C. 640">660 n.8 (1984), affd. in part and revd. in part on other issues 800 F.2d 215">800 F.2d 215 (8th Cir. 1986), affd. 485 U.S. 212">485 U.S. 212 (1988); Rule 39. To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620111/	RUSSELL G. OWENS, JR. and KAY H. OWENS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentOwens v. CommissionerDocket No. 1999-78.United States Tax CourtT.C. Memo 1981-193; 1981 Tax Ct. Memo LEXIS 549; 41 T.C.M. 1312; T.C.M. (RIA) 81193; April 22, 1981. Stanley G. Barr, Jr. and R. Braxton Hill, III, for the petitioners. Michael R. Moore, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined a deficiency in petitioners' income tax for 1974 in the amount of $ 15,701.58. Respondent in his answer imposed upon petitioners a $ 7,850.79 addition to tax for 1974 under section 6653(b). 1Since petitioners failed to take exception to certain items of adjustment, the issues for decision are (1) the amount petitioners are entitled to deduct during 1974 for a1981 Tax Ct. Memo LEXIS 549">551 charitable contribution of clothing and household furnishings to the Salvation Army and (2) whether petitioners are liable for the addition to tax imposed under section 6653(b) due to their alleged fraud. FINDINGS OF FACT Some of the facts have been stipulated. Except as hereinafter modified, the stipulation and the exhibits attached thereto are incorporated herein by this reference. Russell G. Owens, Jr. (hereinafter referred to as "petitioner") and Kay H. Owens are married. They resided in Virginia Beach, Virginia, at the time the petition in this case was filed. Petitioner is a dentist and during all times relevant to the issues in this case he was engaged in the practice of dentistry. Wilbert A. Klingmeyer (hereinafter referred to as "Klingmeyer") was a certified public accountant during 1973 and 1974 practicing in the Virginia Beach, Virginia, area. He had practiced as a C.P.A. for approximately 29 years when he and petitioner first became acquainted with one another in 1972. In 1973, Klingmeyer was engaged by the owners of the Sunlight Laundry, Norfolk, Virginia, to perform an audit of the corporate books of Blue Bird Laundry Corporation, the owner of Sunlight1981 Tax Ct. Memo LEXIS 549">552 Laundry, for the purpose of a proposed liquidation sale of the assets of Sunlight Laundry. During the course of Klingmeyer's audit of Blue Bird Laundry Corporation he was offered the opportunity to buy a large quantity of clothing and household furnishings which laundry-dry cleaning customers of Sunlight Laundry had failed to claim. This unclaimed property consisted of approximately two or three rooms full of racks of clothing, rugs and some other household items such as drapes. They were all freshly cleaned, in cellophane bags and included men's, women's and children's clothing. Klingmeyer contacted petitioner at some time during the early fall of 1973 and discussed with him this opportunity to buy a large amount of unclaimed clothing at a favorable price. Klingmeyer proposed that petitioner join him in this venture. Their discussions included the possibility of purchasing the clothing and other items and leaving them at Sunlight Laundry for six months or more, and then disposing of them in a bulk sale, sales through a hired outlet, sales on a retail basis or by donation to a charity. In October, 1973, Klingmeyer purchased the clothing from Sunlight Laundry for $ 503.071981 Tax Ct. Memo LEXIS 549">553 which was 15 percent of the total cleaning charges ($ 3,353.78) outstanding on the unclaimed clothing. All of the items Klingmeyer purchased remained in storage at the Sunlight Laundry premises until March, 1974. On November 7, 1973, Klingmeyer sold to petitioner 50 percent of the clothing that Klingmeyer had purchased from the Sunlight Laundry. On March 22, 1974, petitioner paid Klingmeyer $ 600.00 in respect of his purchase of the clothing on November 7, 1973. Sometime between November 7, 1973, and March 25, 1974, Klingmeyer also sold to Calvin L. Belkov (hereinafter referred to as "Dr. Belkov") 25 percent of the clothing he had purchased from the Sunlight Laundry. By March, 1974, the ownership of the items originally purchased by Klingmeyer from the Sunlight Laundry in October, 1973, was divided as follows: petitioner - 50 percent; Dr. Belkov - 25 percent; Klingmeyer - 25 percent. In March, 1974, petitioner, Klingmeyer and Dr. Belkov were informed by the Sunlight Laundry that the clothing they owned had to be removed from the Sunlight Laundry premises. After being so informed, all three men began to search for places to which the property could be moved. In late March, 1981 Tax Ct. Memo LEXIS 549">554 1974, Klingmeyer contacted the Salvation Army in Norfolk, Virginia, and met with Major James Hipps (hereinafter referred to as "Major Hipps"), who was the commanding officer of the Salvation Army in Norfolk at that time. Klingmeyer requested that the Salvation Army store the clothing in question but was informed that no such storage facilities were available. On March 25, 1974, the clothing and other items owned by petitioner, Klingmeyer and Dr. Belkov were transferred from the Sunlight Laundry facilities to the Salvation Army building in Norfolk, Virginia. All three men were aware that their property was being moved by the Salvation Army to the Salvation Army building, although Klingmeyer was the only erson dealing directly with Major Hipps at that time. The agreement between Klingmeyer and Major Hipps was that the Salvation Army would pick up the clothing, bring it to the Salvation Army building and prepare an itemized list of the property which would be sent to Klingmeyer. Klingmeyer informed petitioner about this arrangement and petitioner expressed his consent to Klingmeyer. The Salvation Army, incurring all the costs of the move, rented a truck, picked up the clothing1981 Tax Ct. Memo LEXIS 549">555 and other items at the Sunlight Laundry and transported them to their building in Norfolk, Virginia. At that time, Major Hipps signed and issued a "Receipt for Donated Goods" dated March 25, 1974, listing "R. Allen Owens, M.D." as donor and listing "Old Stock, Cleaning Charges $ 3,358.78" as the donated articles. Employees of the Salvation Army spent two days moving the articles and another three days sorting, counting and preparing an itemized list of the property. When the inventory was completed, the clothing and other items were taken to other Salvation Army facilities where they were placed for sale or distributed through the Salvation Army welfare department. On April 5, 1974, the Salvation Army sent a letter to Klingmeyer thanking him for his donation and listing all of the clothing and other items along with the Salvation Army's appraisal of the items donated. Sometime between April 5, 1974, and April 25, 1974, Klingmeyer advised Major Hipps that a significant portion of the items listed in the April 5, 1974, letter to Klingmeyer was attributable to petitioner and Dr. Belkov. On April 25, 1974, the Salvation Army issued a letter to petitioner thanking him for his donation.1981 Tax Ct. Memo LEXIS 549">556 The letter listed 50 percent of the items previously listed in the April 5, 1974, letter to Klingmeyer and stated the total appraised value of items donated by petitioner as $ 31,683.27. The Salvation Army also issued similar letters dated April 25, 1974, to Klingmeyer and Dr. Belkov listing 25 percent of the items previously listed in the April 5, 1974, letter to Klingmeyer. On May 15, 1974, the April 25, 1974, letter from the Salvation Army addressed to petitioner was taken back to the Salvation Army by petitioner and re-signed by Major Hipps in the presence of a notary public. Petitioner told Major Hipps at that time that he wanted the letter notarized in order to verify that petitioner had in fact contributed the items listed in the letter. This was the first time that Major Hipps met with or talked to petitioner. Prior to this time, Klingmeyer had handled the transaction on behalf of the three owners of the donated property. Petitioners on line 22 of Schedule A attached to their 1974 income tax return claimed a charitable contribution deduction in the amount of $ 31,683.27 for the donation involved herein, with the legend "See attached receipt of 4/27/74 from Salvation1981 Tax Ct. Memo LEXIS 549">557 Army for clothing donated - detailed in receipt." Petitioners attached to their return a copy of the April 25, 1974, letter from the Salvation Army to petitioner which itemized and appraised the donated articles, and which contained the May 15, 1974, notorized signature of Major Hipps. On August 30, 1977, at the petitioner's request, Major Hipps signed a letter prepared by his secretary and addressed to whom it may concern which stated that the donation of clothing and other items took place on May 15, 1974. On October 13, 1977, Major Hipps signed another letter prepared by his secretary and addressed to petitioner which stated that on or about April 5, 1974, Klingmeyer told Major Hipps that the Salvation Army would be entitled to some compensation for listing, storing and evaluating the articles donated and that they could use or sell some of these items. OPINION This case involves the determination of the amount petitioners may deduct as a charitable contribution during 1974. A further issue for determination is whether petitioners are liable for the 50 percent addition to tax under section 6653(b) due to fraud. On November 7, 1973, petitioner purchased a 50 percent1981 Tax Ct. Memo LEXIS 549">558 interest in a large amount of clothing and other items from Klingmeyer for $ 600.00. Klingmeyer had previously purchased the clothing and other items from the Sunlight Laundry which was in the process of liquidating. The property petitioner purchased, along with the 25 percent owned by Klingmeyer and the 25 percent owned by Dr. Belkov, remained at the Sunlight Laundry premises until March 25, 1974. At that time the property was transferred to a Salvation Army building in Norfolk, Virginia. Employees of the Salvation Army counted, sorted, appraised and prepared an itemized list of the articles of clothing and household furnishings. The itemized list was sent to Klingmeyer on April 5, 1974, in a letter thanking him for the donation. Thereafter, Klingmeyer informed the Salvation Army of petitioner's and Dr. Belkov's ownership interest in the property. The Salvation Army divided the itemized list according to each owner's interest, i.e. petitioner - 50 percent, Klingmeyer - 25 percent and Dr. Belkov - 25 percent, and sent the respective itemized portions to each of them on April 25, 1974, in letters thanking them for their donations. The appraised value, according to the Salvation1981 Tax Ct. Memo LEXIS 549">559 Army, of petitioner's portion of the donated property was $ 31,683.27. On May 15, 1974, petitioner had Major Hipps re-sign the April 25, 1974, letter before a notary public. Petitioners deducted $ 31,683.27 on their 1974 income tax return as a charitable contribution to the Salvation Army. Respondent determined that petitioners' deduction for this contribution was limited to $ 600.00 since the property was not held for more than six months by petitioners. The basic question we must decide in resolving the issue concerning the proper amount of petitioners' charitable contribution deduction is when the gift was made. The parties agree that a contribution of clothing and other items to the Salvation Army was made by petitioners during the year in issue; they disagree as to when the actual donation was made. Petitioners contend that the donation occurred on May 15, 1974, at which time petitioner alleges he decided upon his intention to make a gift and had Major Hipps re-sign an itemized list of the articles donated before a notary public. Respondent contends that the donation was made on or before April 5, 1974, at which time the property was placed beyond the dominion and control1981 Tax Ct. Memo LEXIS 549">560 of petitioner and the gift was allegedly completed. Section 170(a) allows as a deduction any charitable contribution payment of which is made within the taxable year for which it is claimed. It is beyond question that petitioners made a charitable contribution in 1974 to the Salvation Army and that the Salvation Army qualifies as a charitable organization under section 170(c)(2)(B). Ordinarily, when a charitable contribution of property other than money is made, as in the instant case, the amount of the deduction to which the donor is entitled is the fair market value of the property at the time of the donation. Section 1.170A-1(c), Income Tax Regs. However, section 170(e)(1)(A) provides that the amount of any charitable contribution of property shall (for periods after December 31, 1969) be reduced by the amount of gain which would not have been long-term capital gain if the property contributed had been sold at its fair market value at the time of the contribution. "Long-term capital gain" for the taxable year in issue was denied in section 1222(3) as gain from the sale or exchange of a capital asset held for more than six months. The clothing and other items here in issue1981 Tax Ct. Memo LEXIS 549">561 constituted a capital asset in the hands of petitioner. Thus, the date of the gift is determinative of the amount of petitioners' charitable contribution deduction. If the donation occurred at a time when petitioner held the property for more than six months, the amount of the deduction is the fair market value of the property at the time of the contribution. On the other hand, if the donation occurred when the property was held for six months or less, the amount of the deduction is limited to petitioners' cost basis in the property. Section 170(e)(1)(A), section 1.170A-4(a)(1) Income Tax Regs.Petitioner acquired his interest in the property in issue On November 7, 1973, for a price of $ 600.00. Therefore, the critical date in this case is May 7, 1974, which is six months after the date of acquisition. Ordinarily, a charitable contribution is made at the time delivery is effected. Section 1.170A-1(b) Income Tax Regs. The delivery of the property in the instant case occurred on March 25 and 26, 1974. Where the contribution is in the form of property other than money, the contribution is considered made on the date upon which the gift of the property is completed. Pauley v. United States, 459 F.2d 624">459 F.2d 624 (9th Cir. 1972).1981 Tax Ct. Memo LEXIS 549">562 To constitute a completed gift of property the subject-matter must be placed beyond the dominion and control of the donor. 459 F.2d 624">Pauley v. United States, supra; see Sandford's Estate v. Commissioner of Internal Revenue, 308 U.S. 39">308 U.S. 39 (1939); Estate of Holtz. v. Commissioner of Internal Revenue, 38 T.C. 37">38 T.C. 37 (1962). Based on the facts of this case, we are convinced that when the clothing and other items were transferred to the Salvation Army facility in Norfolk, Virginia, on March 25 and 26, 1974, petitioner relinquished dominion and control over the property so as to place it beyond recall. Indeed, the facts indicate that once the property was inventoried and appraised it was moved to other Salvation Army stores where it was placed for sale or distribution. This occurred on or before April 5, 1974. Petitioners argue, however, that Klingmeyer had no authority to donate petitioner's property to the Salvation Army, that there were conditions imposed upon the transfer of the property to the Salvation Army which had to be fulfilled before there could be a completed gift and that under Virginia law an essential element of a gift is donative1981 Tax Ct. Memo LEXIS 549">563 intent which petitioner lacked until May 15, 1974. In Virginia the three essential elements for completion of a gift are intent, delivery and acceptance. Rust v. Phillips, 208 Va. 573">208 Va. 573, 159 S.E.2d 628">159 S.E.2d 628 (1968); Taylor v. Smith, 199 Va. 871">199 Va. 871, 102 S.E.2d 160">102 S.E.2d 160 (1958). Although the presence of donative intent involves an inquiry into petitioner's subjective intentions, we will not rely solely upon petitioner's testimony but must consider all the facts and circumstances surrounding the transaction in making our determination. Major Hipps testified that when Klingmeyer contacted the Salvation Army in March, 1974, Major Hipps told him that the Salvation Army could not store such a large quantity of clothing and other articles. Both Major hipps and Klingmeyer testified that the substance of their agreement was that the Salvation Army would pick up the clothing at the Sunlight Laundry, move it to a Salvation Army building, prepare an itemized list of the property and send the list to Klingmeyer. Klingmeyer knew that once the property was itemized by the Salvation Army it would be disposed of through sales or distributions at other Salvation Army locations. 1981 Tax Ct. Memo LEXIS 549">564 Klingmeyer discussed this arrangement with petitioner who consented to it before the clothing was moved. We find that, notwithstanding petitioner's testimony to the contrary, he authorized Klingmeyer to act as his agent regarding this transaction with the Salvation Army. 2 It is a well known fact that the Salvation Army is a charitable organization. We think it is unlikely that petitioner or Klingmeyer believed that the Salvation Army would spend the time, effort and money involved in moving, itemizing and appraising the clothing and other items unless a charitable donation were intended. Indeed, Major Hipps testified that he told Klingmeyer that the Salvation Army would not take possession of the property unless it was donated. 1981 Tax Ct. Memo LEXIS 549">565 Other facts in the record also indicate that petitioner donated the property before May 7, 1974. Although petitioner did not deal directly with the Salvation Army, Klingmeyer, once petitioner consented to the Salvation Army transaction, was acting on behalf of petitioner. The only condition imposed on the transfer of the clothing was that the Salvation Army prepare an itemized list and send it to Klingmeyer. A gift given subject to the donee's compliance with certain conditions does not take effect until the donee agree to so comply and accepts the gift. Gagne v. Commissioner, 16 T.C. 498">16 T.C. 498 (1951). On April 5, 1974, the Salvation Army sent an itemized list to Klingmeyer along with a letter thanking him for the donation. Thus, on April 5, 1974, the gift was accepted and the conditions to the gift complied with. This is the date upon which the gift was completed. After being informed that petitioner and Dr. Belkov were also contributors of the property, the Salvation Army sent both of them letters, each dated April 25, 1974, itemizing the articles contributed and thanking them for their donations. Petitioner never objected to the letter or the contribution at1981 Tax Ct. Memo LEXIS 549">566 any time before May 7, 1974. When petitioner had Major Hipps re-sign the itemized list on May 15, 1974, it was only to verify the donation which had already been made. After examining the evidence in this case, we feel that petitioner has failed to satisfy his burden of proving that he lacked the intent to make a gift before May 7, 1974. We hold that petitioner made a completed gift of his property to the Salvation Army on April 5, 1974. Therefore, petitioner did not hold the property contributed for more than six months and the deduction under section 170(a) must be reduced by the amount which would not have been long-term capital gain if the property had been sold at its fair market value at the time of the contribution. Section 170(e)(1)(A). Petitioners are entitled to deduct $ 600 for their charitable contribution to the Salvation Army in 1974. The remaining issue for decision is whether any part of petitioners' underpayment of taxes was due to fraud, subjecting them to the addition to tax under section 6653(b). The respondent has the burden of proving by clear and convincing evidence that some part of the underpayment for 1974 was due to fraud.Section 7454(a); Rule1981 Tax Ct. Memo LEXIS 549">567 142(b), Tax Court Rules of Practice and Procedure. It must be demonstrated that the taxpayer intended to evade taxes which he knew or believed he owed 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 (3rd Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Webb v. Commissioner, 394 F.2d 366">394 F.2d 366 (5th Cir. 1968), affg. a Memorandum Opinion of this Court; Acker v. Commissioner, 26 T.C. 107">26 T.C. 107 (1956). The issue of fraud involves a question of fact which requires an examination of the entire record. Mensik v. Commissioner, 328 F.2d 147">328 F.2d 147 (7th Cir. 1964), affg. 37 T.C. 703">37 T.C. 703 (1962), cert. denied 379 U.S. 827">379 U.S. 827 (1964); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96 (1969). Respondent cannot rely solely on the normal presumption of correctness which attaches to his deficiency determination to satisfy his evidentiary burden on the fraud issue. There must be additional independent evidence from which fraud can be inferred. The taxpayer's failure to satisfy his burden of proof as to the incorrectness of the deficiency1981 Tax Ct. Memo LEXIS 549">568 does not establish fraud. Drieborg v. Commissioner, 225 F.2d 216">225 F.2d 216 (6th Cir. 1955), affg. in part and revg. in part a Memorandum Opinion of this Court. In the instant case, respondent alleges that petitioners claimed a charitable contribution deduction on their 1974 income tax return for clothing and other items donated to the Salvation Army to which they knew they were not entitled. Petitioners, as we have found, are entitled to a deduction for such contribution even though the proper aount of the deduction is their cost basis in the property rather than its fair market value. Section 170(e) was amended by section 201(a)(1), Tax Reform Act of 1969, Pub.L. 91-172, 83 Stat. 487, 549, to apply to contributions such as the contribution at issue here made after December 31, 1969. The 1969 amendments substantially complicated section 170(e), and we are therefore somewhat reluctantly willing to accord petitioners and benefit of doubt that they claimed a fair market value deduction on their return under the mistaken apprehension that they were entitled to such deduction. Although we have rejected their arguments concerning the date on which the gift was completed, this1981 Tax Ct. Memo LEXIS 549">569 does not necessarily mean that respondent has ultimately proved fraud by clear and convincing evidence. There is nothing, after all, fraudulent in attempting to reduce taxes by claiming a deduction honestly but erroneously believed to be legally permissible. Rogers Recreation Co. of Connecticut v. Commissioner, 103 F.2d 780">103 F.2d 780 (2nd Cir. 1939). Respondent also imposed the fraud penalty on the grounds that petitioners submitted two letters which were known to be false to agents during the audit process in an attempt to justify the deductions. Major Hipps testified at trial that both letters were prepared by his secretary, one on August 30, 1977, and the other on October 13, 1977 and that he personally signed both. Major Hipps equivocated as to his belief in the truth of some of the statements in these letters, testifying that he did not read the letters at the time he signed them. Although petitioners' attempts to support the deduction after it was claimed may be characterized as approaching the not always clear dividing line between overzealous advocacy of one's position and fraudulent conduct, we conclude that their conduct in this instance does not clearly evidence1981 Tax Ct. Memo LEXIS 549">570 fraudulent intent. We therefore hold that the respondent has failed to produce clear and convincing evidence demonstrating that part of the underpayment in tax was due to petitioners' fraud or that petitioners acted fraudulently, and that petitioners are therefore not liable for the addition to tax under section 6653(b). Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise specifically indicated.↩2. Stipulation 13 submitted by the parties states that "In late March, 1974, Mr. Klingmeyer, acting on his own behalf and as the agent of Messrs. Owens and Belkov, contacted the Salvation Army in Norfolk, Virginia, and met with Major James Hipps, who was the commanding officer of the Salvation Army in Norfolk at that time." Under Rule 91, Tax Court Rules of Practice and Procedure↩, a stipulation generally is treated as a conclusive admission by the parties of the matter stipulated, regardless of whether it involves fact or the application of law to fact. Nevertheless, petitioners argue that justice requires the Court to permit them to strike stipulation 13 because petitioners did not authorize the attorney who represented them at the initial trial of this case to make such stipulation. By Order of this Court dated May 15, 1980, the words, "acting on his own behalf and as the agent of Messrs. Owens and Belkov," was expunged from paragraph 13 of the Stipulation of Facts, and the record was reopened to permit Dr. Owens to testify regarding W.A. Klingmeyer's agency relationship with Dr. Owens and to permit respondent to introduce any additional rebuttal evidence on this issue. Accordingly, we have reached our decision in this case independently of any reliance upon stipulation 13.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620112/	Harry C. Faust v. Commissioner.Faust v. CommissionerDocket No. 86921.United States Tax CourtT.C. Memo 1961-206; 1961 Tax Ct. Memo LEXIS 143; 20 T.C.M. 1035; T.C.M. (RIA) 61206; July 13, 19611961 Tax Ct. Memo LEXIS 143">143 Held, petitioner provided more than half the support of his three minor children in the year 1955 and is entitled to dependency exemptions under the provisions of sections 151(e) and 152(a), I.R.C. 1954. Marcus M. Knotts, Esq., for the petitioner. L. Justin Goldner, Esq., for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: This proceeding involves a deficiency in Federal income tax for the year 1955 in the amount of $386. Petitioner1961 Tax Ct. Memo LEXIS 143">144 has conceded that he is not entitled to an exemption for his former wife, Anna M. Faust, for the year 1955. The sole issue remaining is whether petitioner is entitled to dependency exemptions for his three minor children for the year 1955. Findings of Fact The stipulated facts are so found and are incorporated herein by this reference. During the year 1955 petitioner was a resident of Sunbury, Pennsylvania, and filed a timely individual Federal income tax return for that year with the district director of internal revenue, Scranton, Pennsylvania. Petitioner was married to Anna M. Faust on November 7, 1942. Four children were born of this marriage: Harry Frederick (October 31, 1944), Gloria Jean (March 5, 1946), Grover Allen (May 23, 1948), and Keith Bradley, born February 28, 1956, subsequent to the year in issue. During the year 1955 petitioner was employed as a patrolman by the Sunbury Police Department at an annual salary of $2,820 payable on the first and fifteenth day of each month. His "take home" pay was approximately $94 each pay day. Prior to their separation petitioner turned his pay checks over to his wife who used them to pay the household bills and for the support1961 Tax Ct. Memo LEXIS 143">145 of the entire family including their three minor children. On June 21, 1955, petitioner was locked out of his home by Anna and thereafter lived separate and apart from his wife and children. After their separation petitioner continued to give his pay checks to his wife until and including August 1, 1955. The total amount of the pay checks which petitioner turned over to his wife from and including January 1 to August 1, 1955, was approximately $1,410. On August 30, 1955, the Court of Quarter Sessions of the County of Northumberland, Pennsylvania, entered an order, pursuant to agreement of the parties, directing petitioner to pay Anna the sum of $173.34 per month in semi-monthly payments of $86.67 beginning August 15, 1955 "for and toward the support of his wife and three minor children." Pursuant to this order and as directed therein, petitioner paid a total of $693.36 in 1955 to the Domestic Relations Office in Sunbury, Pennsylvania. Prior to their separation, petitioner and his family resided at 533 Edison Avenue. The three children - Harry, Gloria and Grover - were cared for by Anna and continued to reside with her in the same leased premises during 1955. After their separation, 1961 Tax Ct. Memo LEXIS 143">146 petitioner resided in a house located at 319 South Second Street which was owned by his parents and for which he paid no rent. He obtained his meals at his mother's or grandmother's or at restaurants which did not charge him for them. Anna filed a separate Federal income tax return (Form 1040) for the year 1955 on which she claimed exemptions for herself and three minor children and reported adjusted gross income in the total amount of $1,504.19 from the following sources: Support for household from husband$606.69 Sunbury Wire Rope Mfg. Co.897.50Income taxes in the amount of $68.40 were withheld from the salary or wages which she received from the Sunbury Wire Rope Mfg. Co. 1During 1955, 1961 Tax Ct. Memo LEXIS 143">147 pursuant to an application made May 14, 1955, Anna also received unemployment compensation benefits from the Pennsylvania Bureau of Employment Security in the amount of $27 per week for 30 consecutive weeks ending from May 27, 1955, to December 16, 1955, or a total of $810. On June 1, 1955, petitioner purchased furniture in the total amount of $766.90, payable in monthly installments of $20. Anna made payments on this furniture from money furnished by her husband as follows: June 1, 1955 $25June 16, 195550August 17, 195510September 26, 195510November 21, 195510January 4, 195610During the period of Anna's employment by the Sunbury Wire Rope Mfg. Co., $10 per week was paid for the care of her children while she was working. Petitioner's marriage to Anna was terminated by a judgment of divorce on January 12, 1961. On the income tax return filed by him for for the year 1955, in addition to exemptions for himself and wife, petitioner claimed dependency exemptions for his three minor children - Harry, Grover and Gloria. Respondent disallowed the exemptions claimed for Anna and the three minor children. As previously indicated herein, petitioner1961 Tax Ct. Memo LEXIS 143">148 concedes he is not entitled to the exemption claimed for his wife. Petitioner furnished more than one-half the support of his three minor children during the year 1955. Opinion The only question presented is whether petitioner is entitled to dependency exemptions for each of his three minor children - Harry, Gloria and Grover - for the year 1955, under the provisions of section 151(e) of the Internal Revenue Code of 1954. To be entitled to such exemptions petitioner has the burden of establishing that he furnished more than one-half of the support of said children. Section 152(a), Internal Revenue Code of 1954. The burden placed upon the petitioner in cases of this character is a difficult one, particularly where, as here, the petitioner had little or no contact with his wife or children, who were in the custody of his wife, during more than half of the year and no records are available to show precisely the amounts expended for the food, clothing, lodging, medical care, education or other expenses of the children. We recognize that the statutory test is one of cost of support rather than time of support, Bennett H. Darmer, 20 T.C. 822">20 T.C. 822,1961 Tax Ct. Memo LEXIS 143">149 and that the question is not whether he furnished more than his wife. Nevertheless, both these factors may be taken into consideration for the purpose of determining whether petitioner furnished more than one-half the total support of the children for the entire year. Cf. 20 T.C. 822">Bennett H. Darmer, supra. Here, petitioner turned over his entire earnings as a city patrolman, after payroll deductions, or about $94 semimonthly, to his wife to be used by her to pay household bills and for the support of the entire family, for a period of 7 1/2 months. These payments totaled $1,410. Petitioner did not reside with his family and therefore no part of the amount furnished by him was used for his benefit after June 21, 1955. During this same period his wife received as wages or unemployment compensation benefits the total amount of $1,153.10 ($897.50 minus $68.40 taxes, plus $324 ( $27 per week for 12 weeks)). To be sure, the record does not show what proportion of either the husband's or the wife's income was used for the support of the children. Considering their circumstances, however, it is reasonable to assume the same proportion with respect to both whether it be on a per capital1961 Tax Ct. Memo LEXIS 143">150 or some other percentage basis. It is clearly apparent, therefore, that petitioner furnished more than one-half the support of the three children during at least the first 7 1/2 months of the year. During the remaining 4 1/2 months of the year, pursuant to the support order of the Court, petitioner furnished his wife a total of $693.36 to be used for the support of herself and the three children. During this period the wife received a total of $486 ( $27 per week for 18 weeks) in unemployment compensation benefits. Again, the record does not show the proportion of the amount furnished by the husband or the proportion of the amount which the wife received as unemployment compensation benefits which was used for the support of the children. Again, however, it is reasonable to assume the same proportion with respect to each and to conclude that petitioner furnished more than one-half the support of the three children during the last 4 1/2 months of the year. The same result would be reached whether we consider the year as a whole or by periods. Notwithstanding the absence of greater detail with respect to the support furnished the children, considering all the facts and circumstances1961 Tax Ct. Memo LEXIS 143">151 shown by the record, we are satisfied, and have found as a fact, that petitioner furnished more than one-half the support of his three minor children - Harry, Gloria and Grover - during the taxable year. Accordingly, we hold that he is entitled to a dependency exemption for each of said children for the year 1955. Decision will be entered under Rule 50. Footnotes*. The difference between this amount and the amount of $693.36 which was stipulated as paid pursuant to the support order is not explained.↩1. Form W-2, which was required to be attached thereto and which presumably would show the exact amount paid Anna by her employer after all deductions, was not with the exhibit which was filed by respondent (Resp. Ex. B), nor was any copy of Form W-2 included with petitioner's return (Resp. Ex. G) filed by respondent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620114/	ARTHUR L. WAMPLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWampler v. CommissionerDocket No. 34395-87.United States Tax CourtT.C. Memo 1988-551; 1988 Tax Ct. Memo LEXIS 580; 56 T.C.M. 769; T.C.M. (RIA) 88551; December 5, 1988. Arthur L. Wampler, pro se. J. Frank Hall, Jr., for the respondent. SWIFTMEMORANDUM1988 Tax Ct. Memo LEXIS 580">581 FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined deficiencies in petitioner's Federal income tax liabilities and additions to tax for 1981 through 1984 as follows: 1 Additions to Tax Under I.R.C. Section YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)66541981$ 1,934$ 483.50 $ 96.70 $ 148.1719826,763 1,690.75338.15658.4419835,201 1,300.25260.05318.6119843,573 893.25178.65224.95This case was tried on October 20, 1988, in Little Rock, Arkansas. After settlement of some issues, the primary issue remaining for decision is whether amounts deposited into petitioner's bank account constituted taxable income without reduction or offset for additional business expenses. FINDINGS OF FACT Petitioner resided in Pine Bluff, Arkansas at the time the petition was filed. In 1980 and early 1981, 1988 Tax Ct. Memo LEXIS 580">582 petitioner was unemployed. In 1981, petitioner's brother and nephew purchased through Moro Bay Oil Co., a closely held corporation in which they each owned 50 percent of the stock, oil development and production rights (the "lease rights") on property located in southern Arkansas. The property was located on a dry river bottom. The lease rights included the right to use the five oil wells and pumping equipment already located on the property. A sixth oil well was drilled on the property and paid for with funds provided by petitioner's brother and nephew. In 1981 through 1984, petitioner's brother and nephew hired petitioner to maintain and supervise repairs on the oil pumping equipment, to monitor operation of the equipment, and to assist in all aspects of running the oil production activity. In return for his services, petitioner allegedly was to receive a one-quarter interest in the profits realized from the oil leases. Petitioner also was to be reimbursed by his brother and nephew or by Moro Bay Oil Company for all expenses he incurred in maintaining and repairing the equipment. Because petitioner's home in Pine Bluff, Arkansas, was approximately 90 miles from the oil1988 Tax Ct. Memo LEXIS 580">583 wells, petitioner would sleep most nights of each week in a small work trailer on the river-bed property on which the wells were located. The trailer in which petitioner slept was used as a tool shed. Petitioner added a cot for sleeping and a hot plate to the other sparse furnishings in the trailer. Petitioner's wife stayed at the family home in Pine Bluff, and petitioner usually would return to Pine Bluff two or three times each week. Petitioner generally checked each well twice a day. He measured the oil level in the storage tanks and opened and shut valves when necessary to direct the oil pumped out of the ground into empty storage tanks. Petitioner supervised delivery of the oil through pipelines on the property into oil transportation pipelines or into trucks for delivery to refineries. In addition, petitioner supervised all repairs to the pumping equipment, storage tanks, and pipes. When assistance was needed, petitioner hired local farmers to assist in making repairs. Petitioner also hired plumbers and well drillers and supervised their work. The oil pumping equipment on the property was old. Pipes were constantly leaking. Pumps and rods often malfunctioned. Petitioner1988 Tax Ct. Memo LEXIS 580">584 paid for the parts and labor needed to repair the equipment. Petitioner generally paid for the parts and labor in cash obtained from his checking account in El Dorado, Arkansas. When checks were used to pay repair expenses, petitioner wrote the checks on his checking account at the bank in El Dorado. In order to have funds in his checking account to cover expenses relating to the oil leases or to obtain reimbursement for such expenses already paid, petitioner periodically called his nephew and requested that his nephew send funds to petitioner's account at the bank in El Dorado. For the most part, funds were transferred into petitioner's checking account by petitioner's nephew from the business checking account of Moro Bay Oil Co. Some of the funds transferred into petitioner's checking account allegedly represented loans to petitioner by his nephew. Some of the funds in the checking account were used to pay personal expenditures of petitioner and his wife (e.g., to cover a number of the monthly mortgage payments on petitioner's home in Pine Bluff). Funds transferred into petitioner's checking account in El Dorado during the years 1981 through 1984 were as follows: YearAmount1981$ 18,340198223,300198321,937198415,9001988 Tax Ct. Memo LEXIS 580">585 Neither petitioner, his nephew, nor Moro Bay Oil Co. maintained books and records adequately to establish the specific purpose or use of the funds transferred into petitioner's checking account. Petitioner did not file a tax return for any of the years 1981 through 1984. In his notice of deficiency, respondent determined that the total funds deposited each year into petitioner's checking account represented taxable income to petitioner from the oil leases. Respondent also determined that petitioner was self employed with respect to his work relating to the oil leases and that the taxable income earned from that work should be subject to self-employment tax. Respondent also imposed additions to tax relating to petitioner's failure to pay estimated taxes and to petitioner's failure to file tax returns. Based upon settlement negotiations, respondent has treated the following portion of the funds deposited into petitioner's bank account as offset by deductible business expenses: YearBusiness Expenses1981$ 8,733.3219821,079.75 19832,200.00 19841,000.00 OPINION Petitioner claims that the funds deposited into his checking account were1988 Tax Ct. Memo LEXIS 580">586 not income, that they represented either advances or reimbursements of business expenses or loans, that no profits were realized from the oil leases, and that he owed no income tax during these years. Thus, petitioner argues that neither he, his brother, his nephew, nor Moro Bay Oil Co. made any profits from the oil leases. He also argues that during the years in issue, his tax home remained in Pine Bluff, Arkansas, and that many of the expenses he incurred while working on the oil wells and equipment (including personal meal expenses) constituted deductible business-related away-from-home travel expenses. Petitioner also contends that he incurred business expenses not related to away-from-home travel. Respondent contends that the deposits into petitioner's bank account should be regarded as taxable income to petitioner, that petitioner's tax home was at the location of his employment, and that petitioner should not be regarded as having incurred deductible away-from-home travel expenses while working at the location of the oil wells. Respondent concedes that petitioner incurred deductible business expenses which were paid out of funds deposited into petitioner's checking account,1988 Tax Ct. Memo LEXIS 580">587 but respondent contends that other than the deductions respondent has allowed by way of a partial settlement, no further business expense deductions should be allowed. Funds transferred into a taxpayer's bank account do not necessarily represent taxable income to the owner of the account. They may represent nontaxable loan proceeds. Marcella v. Commissioner,222 F.2d 878">222 F.2d 878 (8th Cir. 1955), affg. in part and remanding in part 13 T.C.M. 82; 23 P-H Memo T.C. par. 54,036 (1954). They may represent the receipt of funds solely as agent for another taxpayer. Brittingham v. Commissioner,57 T.C. 91">57 T.C. 91 (1971). They may represent a mere transfer of the taxpayer's previously taxed funds from another source. See Vena v. Commissioner,T.C. Memo. 1970-44. Where a taxpayer does not keep adequate books and records and does have a likely source of taxable income, however, respondent may use deposits into the taxpayer's bank accounts as a starting point from which taxable income may be determined. Sec. 446(b); Harbin v. Commissioner,40 T.C. 373">40 T.C. 373, 40 T.C. 373">377 (1963); see Raskin v. Commissioner,T.C. Memo. 1981-153,1988 Tax Ct. Memo LEXIS 580">588 affd. in an unpublished opinion 685 F.2d 1219">685 F.2d 1219 (8th Cir. 1982). On the evidence before us, we conclude that the total deposits into petitioner's bank account in El Dorado should be regarded as taxable income. We so hold. More difficult is the question of the amount of deductible business expenses petitioner paid with those funds. Even if we were to agree with petitioner that his tax home remained in Pine Bluff, Arkansas while he worked on the oil wells, we could not allow petitioner additional business-related away-from-home travel expenses without the substantiation required under section 274(d); sec. 1.274-5(c), Income Tax Regs. Such substantiation has not been provided, and we deny petitioner any additional business-related away-from-home travel expenses. The evidence, however, does establish that petitioner incurred significant non-travel-related expenses pertaining to his work on the oil leases. Under the authority of Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930), petitioner asks the Court to allow him significantly greater business expense deductions relating to his work on the oil leases than respondent has allowed. Petitioner and his1988 Tax Ct. Memo LEXIS 580">589 nephew testified with some credibility that no profits were realized from the oil leases in any year, that petitioner received no salary, wage, or distribution of profits, and that essentially all funds deposited into petitioner's bank account were intended to either advance or reimburse petitioner for travel and non-travel-related expenses pertaining to the business. Petitioner and his nephew also testified with some particularity concerning the nature and type of non-travel-related expenses petitioner incurred. Our ability in this case under 39 F.2d 540">Cohan v. Commissioner, supra, to estimate allowable business expenses is hampered by the lack of documentation which would support a differentiation between amounts expended by petitioner for away-from-home travel-related expenses (to which Cohan does not apply) and deductible business expenses to which an estimate is permissible. Complicating matters further is the evidence that some of the funds deposited into petitioner's bank account were used by petitioner for personal expenditures. Based on our evaluation of the evidence, under 39 F.2d 540">Cohan v. Commissioner, supra, we estimate and allow petitioner business1988 Tax Ct. Memo LEXIS 580">590 expenses deductions (not covered by section 274) for each of the years before us beyond those already allowed by respondent, as follows: Expenses Allowed1981$ 1,267 19828,920 19837,800 19847,000 Respondent computed the tax deficiency at issue herein on a separate return basis. Petitioner asks that any deficiency be computed on a joint return basis. Petitioner did not file a joint return at anytime prior to the time this case was submitted for decision. On the facts before us, this issue is controlled by our opinion in Thompson v. Commissioner, 78 T.C. 558">78 T.C. 558 (1982). The deficiency is to be determined on a separate return basis. Respondent contends that petitioner is liable for the self-employment tax with regard to the net income determined to have been received by petitioner during each year in dispute. The record is not clear as to the status of petitioner's work for Moro Bay Oil Co. If he was an independent contractor with respect to his work relating to the oil leases, income he received would be subject to self-employment tax under section 1401, as respondent contends. If petitioner1988 Tax Ct. Memo LEXIS 580">591 was an employee of Moro Bay Oil Co., income he received in regard to his work would not be subject to self-employment tax, and Moro Bay Oil Co. should have determined what portion of the funds deposited into petitioner's account represented taxable wage or salary income to petitioner, and it should have withheld employment taxes thereon. Sec. 3401. The limited authority on point is not consistent as to the employment status of individuals who maintain and repair isolated, independently owned oil wells. Cf. McAdams Drilling Co. v. United States, an unreported case ( N.D. Okla. 1962, 10 AFTR 6022, 62-2 USTC par. 9812), with Rev. Rul. 70-309, 1970-1 C.B. 199. Based on the inadequate development of the facts in this case, we find for respondent on this issue. See also Oller v. Commissioner,T.C. Memo. 1981-124. Petitioner is liable for the self-employment tax on the income determined in the instant case. The last issue concerns petitioner's liability for the additions to tax. Other than general testimony to the effect that petitioner did not believe he earned any income, we have scant evidence on this issue. We do not believe petitioner1988 Tax Ct. Memo LEXIS 580">592 intentionally attempted to evade his tax liabilities, but we cannot condone the apparent failure of petitioner to maintain adequate books and records to document the income and expenses relating to the oil leases. We sustain respondent's determination of each of the additions to tax. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as in effect during the years in issue. ↩*. 50 percent of the interest due on $ 1,934, $ 6,763, $ 5,201, and $ 3,573 for 1981, 1982, 1983, and 1984, respectively.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620115/	Robert T. Fritschle and Helen R. Fritschle, Petitioners v. Commissioner of Internal Revenue, RespondentFritschle v. CommissionerDocket No. 134-81United States Tax Court79 T.C. 152; 1982 U.S. Tax Ct. LEXIS 60; 79 T.C. No. 10; July 27, 1982, Filed 1982 U.S. Tax Ct. LEXIS 60">60 Decision will be entered under Rule 155. Petitioner-wife received payments for work done in assembling ribbons and rosettes. A large portion of that work was performed by petitioners' eight children living at home. Held, notwithstanding that part of the work was performed by the children, all such payments are included in petitioners' gross income under sec. 61, I.R.C. 1954, and that result is not changed by sec. 73, I.R.C. 1954. Held, further, petitioners are allowed an offsetting deduction for payments received by petitioner-husband as reimbursement for employee business expenses. Held, further, petitioners are entitled to a dependency exemption for their 18-year-old daughter. Charles M. Lock, for the petitioners.David G. Justl and Donald L. Wells, for the respondent. Fay, Judge. FAY79 T.C. 152">152 Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows: 79 T.C. 152">153 Addition to taxYearDeficiencysec. 6653(b) 11975$ 1,173.40$ 586.7019761,809.97904.991977200.000 1982 U.S. Tax Ct. LEXIS 60">62 After concessions, 2 the remaining issues are (1) whether payments received in 1975, 1976, and 1977 by petitioner Helen R. Fritschle for assembling ribbons and rosettes are includable in petitioners' gross income; (2) whether certain payments received in 1975 and 1976 by petitioner Robert T. Fritschle are deductible reimbursed employee expenses; (3) whether petitioners are entitled to a dependency exemption in 1977 for their 18-year-old daughter. 31982 U.S. Tax Ct. LEXIS 60">63 FINDINGS OF FACTSome of the facts are stipulated and are found accordingly.Petitioners Robert T. Fritschle and Helen R. Fritschle resided in St. Louis, Mo., when they filed their petition herein.Petitioners have 11 children. The 8 youngest children lived at home with their parents during the years in issue.Since 1956, petitioner Robert T. Fritschle (Robert) has been employed by American Gold Label Co. (AGL), a sole proprietorship owned by Elsie Walsh Fabel and engaged in the printing business. During the years in issue, Robert was general manager in charge of virtually every aspect of the business. In addition to wages of less than $ 10,000 a year, AGL paid Robert $ 1,060 and $ 1,113 in 1975 and 1976, respectively, as reimbursement for his out-of-pocket company incidental expenses such as automobile and gas costs, parts for repairs, office supplies, and postage.79 T.C. 152">154 Prior to 1970, AGL was engaged in a printing business generally limited to letterheads and stationery. Beginning in 1970, the business expanded to include more specialized types of printing which included printing on metals and cloth. Specifically, new items printed included ribbons and rosettes, much like1982 U.S. Tax Ct. LEXIS 60">64 the ribbons seen at horse and dog shows or the ribbon awarded the prize bull at the county fair. Even though AGL employed 15 people, outside help was needed to assemble the ribbons when the printing was completed. Petitioner Helen R. Fritschel (Helen) agreed with Elsie Walsh Fabel, the owner of AGL, to assemble the ribbons at home. Accordingly, in 1970, Helen, with the help of their children then living at home, began assembling ribbons and rosettes for AGL. From 1970 through 1976, this piecework was done in the basement washroom. In 1977, production was moved to the furnace room. The work involved cutting, shaping, and stapling of things like streamers, bezels, and ribbons to form the final product.All materials were furnished by AGL at no cost to Helen. When the work was completed, Helen submitted a bill and received payment accordingly. During the years in issue, Helen was paid 3 cents per ribbon and 15 cents to 25 cents per rosette. Total payments received during 1975, 1976, and 1977 were $ 9,429.74, $ 11,136.41, and $ 8,262, respectively.The children performed approximately 70 percent of all the work. Robert, the father, did not participate. The children were not1982 U.S. Tax Ct. LEXIS 60">65 employees of either Helen or AGL, nor was there any other arrangement for them to share directly in the compensation paid to Helen by AGL.Petitioners' daughter, Diana, turned 18 in 1977. She lived at home during the entire year. Diana worked at AGL for 9 months during 1977, earning wages totaling $ 3,988.15. She traveled to and from work with her father. Petitioners furnished her room, board, clothes, and transportation.Petitioners did not report the income received by Helen in 1975 and 1976 for assembling the ribbons and rosettes. In 1977, the income received by Helen was reported. 4 Petitioners 79 T.C. 152">155 did not include in gross income the reimbursed employee business expenses of Robert in 1975 and 1976. Petitioners claimed a dependency exemption for Diana in 1977.In his notice of deficiency, respondent determined petitioners1982 U.S. Tax Ct. LEXIS 60">66 must include in income all payments received by Helen for work performed in assembling the ribbons and rosettes and all payments received by Robert for reimbursed incidental business expenses. Respondent also disallowed the dependency exemption for Diana in 1977.OPINION1. Payments to Helen for Ribbons and RosettesHelen and the children assembled the ribbons and rosettes in the basement of their home. There is no question that payments received for this work are income under section 61. The issue is who is taxable on those payments. Since a portion of the compensation was attributable to work performed by their children, petitioners argue that a proportionate amount of the payments should be included in the income of the children. Respondent contends Helen was responsible for, and retained total control over, the earnings, and, therefore, the income is properly includable in her income. We find for respondent.It is axiomatic that income must be taxed to him who earns it. Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930); Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733 (1949); Burnet v. Leininger, 285 U.S. 136">285 U.S. 136 (1932);1982 U.S. Tax Ct. LEXIS 60">67 Corliss v. Bowers, 281 U.S. 376">281 U.S. 376 (1930). Moreover, it is the command of the taxpayer over the income which is the concern of the tax laws. Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 312 U.S. 579">581 (1941). Recognizing that the true earner cannot always be identified simply by pointing "to the one actually turning the spade or dribbling the ball," this Court has applied a more refined test -- that of who controls the earning of the income. Johnson v. Commissioner, 78 T.C. 882">78 T.C. 882, 78 T.C. 882">890 (1982). 5 Applying 79 T.C. 152">156 this test, it is clear that, for purposes of taxation, Helen, and not the children, was the true earner of the income attributable to the work performed on the ribbons and rosettes.1982 U.S. Tax Ct. LEXIS 60">68 Helen was solely responsible for the performance of all services. AGL contracted only with Helen, and no contract or agreement existed between AGL and any of the children. All checks were made payable to Helen, and the children received no direct payments or compensation for their work. Clearly, the compensation was made in payment purely for the services of Helen. Although the company knew the children were performing part of the work, that does not change the fact that AGL looked exclusively to Helen for performance of the services. 6 In short, Helen managed, supervised, and otherwise exercised total control over the entire operation. It was she who controlled the capacity to earn the income, and it was she who in fact received the income. It does not necessarily follow that income is taxable to the one whose personal efforts produced it. Thus, despite the fact that a portion of the amounts received can be traced to work actually performed by their children, Helen is treated as the true earner of all such income for tax purposes. Accordingly, pursuant to section 61, petitioners must include all payments received in 1975, 1976, and 1977 for assembling the ribbons and rosettes1982 U.S. Tax Ct. LEXIS 60">69 in their gross income. 71982 U.S. Tax Ct. LEXIS 60">70 79 T.C. 152">157 Nevertheless, petitioners argue section 73 mandates a result in their favor. Section 73(a) provides:SEC. 73(a). Treatment of Amounts Received. -- Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child.Petitioners argue the language and meaning of section 73 are clear, and that the amounts received by Helen with respect to the services performed by the children clearly are included in the gross income of the children. However, when viewed in light of the origin and purpose of section 73, it is apparent that section was enacted in response to a different situation and, under these facts, does not purport to tax the children on a portion of the income at issue herein.The purpose of section 73 is to provide, for Federal tax purposes, consistent treatment of compensation paid for the services of a minor child regardless of different rights conferred by State laws on parents' entitlement to such compensation. Prior to 1944, a parent was required to include in income all earnings of a minor child if, under the laws of the State where they1982 U.S. Tax Ct. LEXIS 60">71 resided, the parent had a right to those earnings. DeKorse v. Commissioner, 5 T.C. 94">5 T.C. 94, 5 T.C. 94">101 (1945), affd. per curiam 158 F.2d 801">158 F.2d 801 (6th Cir. 1946). Since parents in all States were not entitled to the earnings of their minor children and since even in those States following the common law doctrine of the parents' right to those earnings, a parent could lose such rights if the child had been emancipated, different tax results obtained depending on State law. See detailed discussion in Allen v. Commissioner, 50 T.C. 466">50 T.C. 466 (1968), affd. 410 F.2d 398">410 F.2d 398 (3d Cir. 1969). To eliminate this discrepancy in the tax treatment of the earnings of minor children, Congress, in 1944, enacted the predecessor to section 738 to provide a uniform rule that all amounts received "in respect of the services of a child" shall be included in the income of that child regardless of the fact that, under State law, the parent may be entitled to those amounts. Thus, section 73 operates to tax a minor child on income he is deemed, in the tax sense, to have earned. 79 T.C. 152">158 Section 73 does not purport1982 U.S. Tax Ct. LEXIS 60">72 to alter the broad principle of taxation that income is taxed to the earner. See Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930), and its progeny. As we have already held, Helen (the mother) is the true earner of the income, herein, for tax purposes. She contracted for and retained total control of the earning of the income.If, on the other hand, we made a finding that it was the services of the children that were being contracted for and that the children were the true earners of the income, then section 73 would tax the children on that income. Allen v. Commissioner, 50 T.C. 466">50 T.C. 466 (1968), affd. 410 F.2d 398">410 F.2d 398 (3d Cir. 1969). 91982 U.S. Tax Ct. LEXIS 60">73 This is so despite State law. 10While from a literal reading of the statute, petitioners' argument has superficial appeal, petitioners incorrectly assume the children are the true earners of the income in the first instance. However, section 73 simply does not tax a child on income until and unless he is recognized as the earner thereof. Petitioners' argument that these amounts must be included in the children's gross income because the income can be traced to services performed by the children must be rejected. Carrying this argument to its logical extreme, any parent could exclude a portion of the income received for services if his children helped him in the performance of those services. Congress surely did not intend such a result. 111982 U.S. Tax Ct. LEXIS 60">74 In summary, we find Helen the true earner of all amounts received for the ribbons and rosettes, and section 73 does not operate to include any portion of those amounts in the gross incomes of the children. Accordingly, petitioners must include 79 T.C. 152">159 in their gross income all payments received for the ribbons and rosettes.2. Payments to Robert for IncidentalsIn addition to wages, Robert received payments of $ 1,060 and $ 1,113 from AGL in 1975 and 1976, respectively. We have already found as fact that all of these amounts were paid to Robert for incidental business expenses of AGL which were paid out of his own pocket. Thus, we reject respondent's contention that these were payments for services rendered (maintenance work). We hold petitioners are entitled to a section 162 business deduction for these amounts. 121982 U.S. Tax Ct. LEXIS 60">75 3. Dependency ExemptionThe issue is whether petitioners are allowed a dependency exemption for their 18-year-old daughter Diana.Parents are entitled to an exemption for any of their children younger than 19 years old if they provide over half of that child's support. Secs. 151(e) and 152(a). Respondent claims petitioners have failed to establish they paid over half of Diana's support. Petitioners claim otherwise. We find for petitioners.Diana lived at home with her parents the entire year. She worked at her father's business, AGL, for 9 months of the year earning $ 3,988.15 at minimum wages. Not all of her earnings were spent for her own support. Petitioners furnished Diana's room and board, clothes, transportation, and living expenses. Diana received no support from other sources. Based on the record, we are convinced petitioners did in fact furnish over half of Diana's support; thus, we allow the claimed exemption.While we have disposed of the issues before us, we have really only touched the surface of this case. Respondent asserted fraud on the part of petitioners, the parents of an 79 T.C. 152">160 industrious and hardworking family of 13, none of whom has ever had1982 U.S. Tax Ct. LEXIS 60">76 a scrape with the law. First, the record shows petitioners are clear of any impropriety or bad faith. Second, it is apparent the fraud allegation had a deep and resounding effect on this family. The mere allegation of fraud can tarnish a man in the eyes of his neighbors and, more importantly, in his own eyes. We are not dealing here only with tax deficiencies and money; we are dealing with people's lives. Fraud should be asserted with discretion.This Court spent over 9 hours listening to testimony and conducting discussions with the parties in chambers. By far, the largest portion of that time was devoted to the fraud issue, and it is apparent respondent had no chance of presenting a case sufficient to carry his burden of proof. Petitioners manifested a sincere willingness to settle this case if the fraud allegation was dropped. In reality, this case should never have come before this Court. Facing an ever-increasing backlog of cases, this Court's valuable time commands a better sense of responsibility by those practicing before it. 13 The scars and wasted time are not undone by respondent's concession of the fraud issue on brief.1982 U.S. Tax Ct. LEXIS 60">77 To reflect concessions and the foregoing,Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended.↩2. Respondent conceded the fraud issue on reply brief.↩3. Also in issue is whether petitioners omitted from their 1975 gross income an amount in excess of 25 percent of the gross income stated on their 1975 Federal income tax return. If so, respondent is not barred from assessing the 1975 tax since the 6-year statute of limitations applies. See sec. 6501(e). Petitioners reported 1975 gross income of $ 9,540. Thus, in the event we find greater than $ 2,385 was omitted from petitioners' 1975 gross income, respondent will not be barred from assessing 1975 taxes. Resolution of this issue depends solely on the outcome of other issues stated above. The parties agree respondent is not barred from assessing 1976 and 1977 taxes.↩4. Since petitioners included all payments received in 1977 for this work in their 1977 Federal income tax return, they now claim an overpayment of taxes for 1977. See sec. 6512(b).↩5. Although Johnson v. Commissioner, 78 T.C. 882">78 T.C. 882 (1982), arose in the context of the taxation of a professional service corporation (a basketball player), the principles enunciated therein are universally applicable. See Vnuk v. Commissioner, 621 F.2d 1318">621 F.2d 1318, 621 F.2d 1318">1320-1321 (8th Cir. 1980), affg. a Memorandum Opinion of this Court; Ronan State Bank v. Commissioner, 62 T.C. 27">62 T.C. 27, 62 T.C. 27">35 (1974). See also Vercio v. Commissioner, 73 T.C. 1246">73 T.C. 1246, 73 T.C. 1246">1253 (1980); Wesenberg v. Commissioner, 69 T.C. 1005">69 T.C. 1005 (1978); American Savings Bank v. Commissioner, 56 T.C. 828">56 T.C. 828, 56 T.C. 828">839 (1971); Foglesong v. Commissioner, T.C. Memo. 1976-294, revd. and remanded 621 F.2d 865">621 F.2d 865 (7th Cir. 1980), decided on remand 77 T.C. 1102">77 T.C. 1102↩ (1981), appeal filed (7th Cir., Feb. 16, 1982).6. We are given no reason to believe AGL intended to contract for the services of the children. Thus, we do not place controlling significance on the fact that, under applicable State law, minors may lack capacity to enter into valid contracts. Moreover, no trustee or legal guardian was appointed on behalf of the children.↩7. In 1975, those payments totaled $ 9,429.74. Since this amount exceeds 25 percent of the gross income reported on petitioners' 1975 Federal income tax return, respondent is not barred from assessing the 1975 taxes. See note 3 supra. Moreover, petitioners have not overpaid their 1977 taxes. See note 4 supra.Petitioners make no claim for a deduction with respect to the services rendered by the children. Indeed, no such deduction would be allowable since no payments to the children were made or set aside in some way for their services actually performed. The only benefit accruing to the children was an increased budget for general family and living expenses. See Romine v. Commissioner, 25 T.C. 859">25 T.C. 859 (1956), wherein a taxpayer's expenditures on his son's behalf for clothing, insurance, and college were held to be nondeductible personal expenses and not payments for services actually rendered. Compare Hundley v. Commissioner, 48 T.C. 339">48 T.C. 339 (1967), wherein a professional baseball player, Randy Hundley, was allowed a business expense deduction for paying over to his father 50 percent of the bonus he received for signing with the San Francisco Giants. See also Roundtree v. Commissioner, T.C. Memo. 1980-117↩.8. Sec. 22(m), I.R.C. 1939↩, as amended; sec. 7, Pub. L. 315, 58 Stat. 231, 235, Individual Income Tax Act of 1944.9. In Allen v. Commissioner, 50 T.C. 466">50 T.C. 466 (1968), affd. 410 F.2d 398">410 F.2d 398 (3d Cir. 1969), sec. 73↩ was applied to tax a minor son, Richard Allen, on a $ 70,000 bonus for signing a professional baseball contract that was paid by the Philadelphia Phillies directly to his mother.10. Apparently, under the law of Missouri, a parent is entitled to the services and earnings of his child. See Franklin v. Butcher, 144 Mo. App. 660">144 Mo. App. 660, 129 S.W. 428">129 S.W. 428↩ (1910).11. The Committee reports state: "Thus, even though the contract of employment is made directly by the parent and the parent receives the compensation for the services, for the purposes of the Federal income tax, the amounts would be considered to be taxable to the child because earned by him." H. Rept. 1365, 1944 C.B. 821">1944 C.B. 821, 838; S. Rept. 885, 1944 C.B. 858">1944 C.B. 858↩, 876. Citing these reports, petitioners argue it could not be clearer that the children are taxable on the amounts in issue. This language, however, merely recognizes parents must be the contracting party when, due to their legal incapacity, minor children cannot enter into valid contracts. It must still be shown that the services of the child were being contracted for and that the children controlled the earning of the income therefrom.12. Since Robert was not required to account to his employer and, in fact, made no accounting for incidental expenses for which he was reimbursed, he does not fall within the exception to the general rule that employees are required to include reimbursements in gross income. See sec. 1.162-17(b), Income Tax Regs. Thus, the proper reporting procedure is to include the payments in gross income and run it through petitioners' income with an offsetting deduction in the same amount. The procedure utilized may make a difference when, as in this case, there is a question of whether the taxpayer omitted from gross income 25 percent of the gross income shown on the return. See notes 3 & 7 supra↩.13. We will not hesitate to call attention to an unsettling situation when the time and effort expended by the parties and this Court in litigation are totally disproportionate to any requirement of justice. See Buffalo Tool & Die Mfg. Co. v. Commissioner, 74 T.C. 441">74 T.C. 441, 74 T.C. 441">451-452 (1980); Scott v. Commissioner, T.C. Memo. 1972-109 (Tannenwald↩, J.).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620116/	Tedd N. Crow, Petitioner v. Commissioner of Internal Revenue, RespondentCrow v. CommissionerDocket No. 32439-83United States Tax Court85 T.C. 376; 1985 U.S. Tax Ct. LEXIS 42; 85 T.C. No. 21; August 26, 1985, Filed 1985 U.S. Tax Ct. LEXIS 42">42 P's motion for summary judgment that capital gain realized after expatriation is exempt from U.S. tax under the 1942 income tax treaty between United States and Canada. Held, petitioner is not taxable under sec. 877, I.R.C. 1954, notwithstanding the "saving clause" contained in the treaty. Held, further, the treaty does not preclude the United States from taxing imputed interest income under sec. 483, I.R.C. 1954. Donald F. Wood, for the petitioner.Sheri A. Wilcox, for the respondent. Cohen, Judge. COHEN85 T.C. 376">377 OPINIONThis case is before the Court on petitioner's motion for summary judgment under Rule 121, Tax Court Rules of Practice and Procedure. Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes:Additions to taxYearDeficiencyn1Sec. 6651(a) Sec. 6653(a)(1)Sec. 6653(a)(2)Sec. 66541978$ 1,657,7340$ 82,89900197978,790$ 19,6983,9400$ 19,0571980156,41039,1037,82109,9861981123,77230,9436,18919,561198271,41417,8543,57116,953The issues for decision are as 1985 U.S. Tax Ct. LEXIS 42">43 follows: (1) Whether the March 4, 1942, income tax treaty between the United States and Canada (Convention on Double Taxation, Mar. 4, 1942, United States-Canada, 56 Stat. 1399, T.S. No. 983, hereinafter referred to as the Canadian treaty) precludes the United States from taxing petitioner's capital gain income under section 877; and (2) if so, whether all of the income realized by petitioner in connection with the transactions described below is exempt from U.S. taxation under the Canadian treaty. Petitioner and respondent have either agreed to as true, or conceded solely for the purpose of our ruling on, petitioner's motion the following facts:Prior to November 1978, petitioner was a citizen and a resident of the United States. Petitioner moved to Canada on November 20, 1978, and renounced his U.S. citizenship on November 24, 1978. After the latter date, petitioner was a nonresident alien of the United States without a permanent establishment in the United States. The avoidance of United 85 T.C. 376">378 States taxes was a principal purpose of petitioner's expatriation.When petitioner moved to Canada, he owned all of the outstanding stock of a certain U.S. corporation. On December 1, 1978, petitioner 1985 U.S. Tax Ct. LEXIS 42">44 sold his entire stock interest in exchange for a $ 6,366,000 note payable over a 20-year period and providing for no interest charges as long as payments on the note were timely made.Petitioner did not report any income on any U.S. tax return with respect to the above transactions. Respondent determined that petitioner was taxable by the United States on long-term capital gain income in 1978 and on imputed interest income (under section 483) in the remaining years in issue.Issue 1. Capital GainArticle VIII of the Canadian treaty provides:Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.Petitioner contends that, under article VIII, he is exempt from U.S. tax on the gain realized upon the sale of the stock.Respondent argues that petitioner is taxable on the gain under section 877, which imposes a special tax on a nonresident alien who relinquished his U.S. citizenship to avoid taxes. 21985 U.S. Tax Ct. LEXIS 42">46 1985 U.S. Tax Ct. LEXIS 42">47 According to respondent, 1985 U.S. Tax Ct. LEXIS 42">45 the "saving clause" contained 85 T.C. 376">379 in article XVII of the Canadian treaty reserves the right of the United States to tax petitioner under section 877 notwithstanding article VIII. Article XVII provides:Notwithstanding any other provision of this Convention, the United States of America in determining the income and excess profit taxes, including all surtaxes, of its citizens or residents or corporations, may include in the basis upon which such taxes are imposed all items of income (other than income within the scope of paragraph 1 (b) of Article VI) taxable under the revenue laws of the United States of America as though this convention had not come into effect. 3Respondent does not argue that petitioner was a citizen or a resident of the United States when he realized the income in issue. Instead, respondent's position is that taken in Rev. Rul. 79-152, 1979-1 C.B. 237, which presented a situation almost identical to the present case:Although the treaty contains a * * [provision] regarding United States taxation of capital gains, such provision is subject to the treaty "saving clause" reserving the right of the United States to tax its citizens as though the treaty had not come into effect. This aspect of the saving clause is intended to preserve, with certain specific exceptions, United States taxation on the basis of citizenship, notwithstanding the limitations on United States taxation otherwise imposed by the treaty. 1985 U.S. Tax Ct. LEXIS 42">48 Taxation under section 877 is a manifestation of United States taxation on the basis of citizenship; in effect, the section imposes income tax liability, by reason of citizenship, for ten years following a tax motivated expatriation. Consequently, the income tax treaty does not exempt from United States taxation taxpayer's capital gain * * because by virtue of section 877 the taxpayer remains subject to tax as a United States citizen within the meaning of the treaty "saving clause." [Rev. Rul. 79-152, supra, 1979-1 C.B. at 237-238.]85 T.C. 376">380 Respondent thus interprets the term "citizens" in article XVII of the Canadian treaty to include former citizens who expatriated to avoid tax.The goal of treaty interpretation is "to give the specific words * * a meaning consistent with the genuine shared expectations of the contracting parties." Maximov v. United States, 299 F.2d 565">299 F.2d 565, 299 F.2d 565">568 (2d Cir. 1962), affd. 373 U.S. 49">373 U.S. 49 (1963). We must examine not only the literal language of article XVII but also its purpose, history, and context. See Kolovrat v. Oregon, 366 U.S. 187">366 U.S. 187 (1961); Cook v. United States, 288 U.S. 102">288 U.S. 102 (1933); Sullivan v. Kidd, 254 U.S. 433">254 U.S. 433 (1921).Our examination reveals that the contracting 1985 U.S. Tax Ct. LEXIS 42">49 parties had no intention to define the term "citizens" in article XVII more broadly than its literal meaning. As stated in Rev. Rul. 79-152, respondent justifies a nonliteral definition of "citizens" as reflecting the reservation in the saving clause of the right of the United States to tax on the basis of citizenship. Article XVII of the Canadian treaty, however, was intended only to preserve U.S. taxation of citizens on the basis of citizenship.The United States was historically, and continues to be, virtually unique in taxing its citizens, wherever resident, on their worldwide income, solely by reason of their citizenship. See Filler v. Commissioner, 74 T.C. 406">74 T.C. 406, 74 T.C. 406">410 (1980), 3 R. Rhodes & M. Langer, Income Taxation of Foreign Related Transactions, sec. 9.06[1][b] (1984); Hitch, "Tax-Motivated Expatriation," 39 N.Y.U. Inst. Fed. Taxation 34-1, 34-3 (1981). The United States, therefore, traditionally insisted upon maintaining the ability to tax its citizens resident in the treaty partner, as manifested by the saving clause contained in the first income tax treaty with Canada: "The provisions of this Convention shall not apply to citizens of the United States of America domiciled 1985 U.S. Tax Ct. LEXIS 42">50 or resident in Canada." Convention on Income Taxation, Dec. 30, 1936, United States-Canada, art. II, 50 Stat. 1399, T.S. No. 920 (terminated Apr. 30, 1941). See generally Filler v. Commissioner, 74 T.C. 406">74 T.C. 410; Crerar v. Commissioner, 26 T.C. 702">26 T.C. 702, 26 T.C. 702">705-706 (1956); Department of Treasury, Technical Explanation of the United States and United Kingdom Income Tax Treaty 2 (published as Treasury Department Press Release B-90 on Mar. 9, 1977) ("The saving clause is of principal importance to the United States because the United States taxes its citizens, residents, and corporations 85 T.C. 376">381 on a worldwide basis, regardless of where they reside or derive income."); Bischel, "Basic Income Tax Treaty Structures," Income Tax Treaties 1, 11 (1978).Interpretative documents published contemporaneously with the 1942 Canadian treaty indicate that the purpose of article XVII was to continue this reservation by the United States. "Article XVII makes clear that the convention leaves undisturbed the taxation by the United States of its own citizens and corporations." Letter from Acting Secretary of State Welles to President Roosevelt (Mar. 6, 1942).The convention makes no change in the United States tax liability 1985 U.S. Tax Ct. LEXIS 42">51 of American citizens and residents and domestic corporations. Under the Federal income-tax laws, such taxpayers are taxable upon their income from all sources whether derived from within or without the United States. * * * [S. Exec. Rept. 3, 77th Cong., 2d Sess. 1 (1942).]"The convention does not, except as provided in the first paragraph of article VI, affect the liability * * * of a citizen of the United States residing in Canada." Reg. sec. 7.21, 1943 C.B. 534">1943 C.B. 534. 4 As the Supreme Court stated in Kolovrat v. Oregon, 366 U.S. 187">366 U.S. 187, 366 U.S. 187">194 (1961), "While courts interpret treaties for themselves, the meaning given them by the departments of government particularly charged with their negotiation and enforcement is given great weight." We have found no indication 1985 U.S. Tax Ct. LEXIS 42">52 whatsoever that the contracting parties intended, or even contemplated, the application of article XVII to nonresident aliens of the United States. Indeed, the contemporaneous regulations issued by the Treasury Department implicitly rejected such an application of the saving clause. In describing the second paragraph of article XV, in which the United States agreed to allow a credit against U.S. income and excess profits taxes for such taxes paid to Canada, 51985 U.S. Tax Ct. LEXIS 42">54 the regulations provided:85 T.C. 376">382 Credit Against United States Tax Liability for Income Tax Paid to Canada. -- For the purpose of avoidance of double taxation, Article XV provides that, on the part of the United States, there shall be allowed against the United States income and excess profits tax liability a credit for any such taxes paid to Canada by United States citizens or domestic corporations. Such principle also applies in the case of a citizen of Canada residing in the United States. Such credit, however, is subject to the limitations provided in section 131, Internal Revenue Code (relating to the credit for foreign taxes). See sections 19.131-1 to 19.131-8, Regulations 103. The article is complementary to the provisions 1985 U.S. Tax Ct. LEXIS 42">53 of Article XVII, which provides that the United States in ascertaining the income and excess profits tax of its citizens and residents and corporations may take into the basis upon which such taxes are imposed all items of income as though the convention had not come into effect. [Reg. sec. 7.35, 1943 C.B. 541">1943 C.B. 541. Emphasis supplied.] 6Section 131 of the 1939 Code, effective when the above regulation was issued, provided no credit for nonresident aliens.Respondent argues that Canada has no reason to object to his interpretation of the saving clause because "It is implausible to believe another nation has any significant interest in negotiating benefits for United States1985 U.S. Tax Ct. LEXIS 42">55 citizens who might one day expatriate with a principal purpose of avoiding United States taxes and reside in their country." In the first paragraph of article XV, however, Canada agreed to allow its taxpayers a credit to reflect taxes paid to the United States on U.S. source income. Because an American expatriate in Canada might be entitled to a higher Canadian tax credit 85 T.C. 376">383 where section 877 applies, 71985 U.S. Tax Ct. LEXIS 42">56 Canada indeed possesses a fiscal interest in the applicability of the provision. Moreover, even if Canada has no interest in encouraging expatriation from the United States, Canada could reasonably object to the scope of section 877, which would deny treaty benefits for 10 years to expatriate Americans who acquired Canadian citizenship and residency. Finally, under respondent's interpretation of the term "citizens," the United States could, without violating the Canadian treaty, enact legislation significantly more burdensome to Canadian interests than is section 877.In light of the purpose behind the saving clause, the absence of any indication that Canada anticipated respondent's interpretation with respect to the 1942 treaty, and the potential objections of Canada thereto, we find no support for respondent's expansive reading of article XVII.it is particularly inappropriate for a court to sanction a deviation from the clear import of a solemn treaty between this Nation and a foreign sovereign, when, as here, there is no indication that application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories. * * [Maximov v. United States, 373 U.S. 49">373 U.S. 49, 373 U.S. 49">54 (1963).]See also Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176">457 U.S. 176 (1982); Rust v. Commissioner, 85 T.C. 284">85 T.C. 284 (1985).The Canadian treaty, like an act of Congress, is part of "the supreme Law of the Land." U.S. Const. art. VI, cl. 2. See Reid v. Covert, 354 U.S. 1">354 U.S. 1, 354 U.S. 1">18 (1957) (Opinion of Justice Black) and cases cited therein. Although Congress can override a treaty provision by enacting a subsequent statute (see 354 U.S. 1">Reid v. Covert, supra, and cases cited therein), respondent does not argue that 1985 U.S. Tax Ct. LEXIS 42">57 Congress intended to overrule or supersede any provision of the Canadian treaty in enacting section 877 pursuant to the Foreign Investors Tax Act of 1966, Pub. L. 89-809, sec. 103(f), 80 Stat. 1539, 1551-1552 (hereinafter referred to as FITA). Such an argument would indeed be unpersuasive in light of section 110 of FITA, which provides:SEC. 110. TREATY OBLIGATIONS.No amendment made by this title shall apply in any case where its application would be contrary to any treaty obligation of the United States. 85 T.C. 376">384 For purposes of the preceding sentence, the extension of a benefit provided by any amendment made by this title shall not be deemed to be contrary to a treaty obligation of the United States. [FITA, supra, 80 Stat. 1575.]See also secs. 894(a) and 7852(d).Respondent, instead, argues that we should construe the Canadian treaty and section 877 so as to give effect to both pronouncements. According to respondent, the purpose of section 877 is to prevent tax-motivated expatriation, and only his construction of the saving clause will effect this goal. We agree with respondent that we "must read the * * * [treaty and the statute] to give effect to each if we can do so while preserving 1985 U.S. Tax Ct. LEXIS 42">58 their sense and purpose." Watt v. Alaska, 451 U.S. 259">451 U.S. 259, 451 U.S. 259">267 (1981). See also United States v. Lee Yen Tai, 185 U.S. 213">185 U.S. 213, 185 U.S. 213">221-222 (1902). Implicit in the above rule, however, is that "A canon of construction is not a license to disregard clear expressions of * * congressional intent." Andrus v. Glover Construction Co., 446 U.S. 608">446 U.S. 608, 446 U.S. 608">619 (1980) (quoting DeCoteau v. District County Court, 420 U.S. 425">420 U.S. 425, 420 U.S. 425">447 (1975)).We note initially that respondent's interpretation is inconsistent with the literal language of section 877, which imposes a tax on a "nonresident alien individual." Sec. 877(a) and (b). Such a taxpayer could not be a citizen of the United States. Sec. 1.871-2(a), Income Tax Regs.The history and purpose of FITA, in general, and section 877, in particular, confirm that Congress rejected the interpretation urged upon us by respondent. On October 2, 1963, President Kennedy appointed a task force, chaired by Treasury Secretary Fowler, to propose methods of promoting increased foreign investment in securities of U.S. companies and increased foreign financing for U.S. businesses operating abroad. Report to the President of the United States from the Task Force on Promoting Increased 1985 U.S. Tax Ct. LEXIS 42">59 Foreign Investment and Increased Foreign Financing iii, v (Apr. 27, 1964). The task force concluded that many of the then-existing tax rules applicable to foreign investors in the United States were outmoded and deterred foreign investment in the United States. Based upon the conclusions of the task force, the Treasury Department submitted proposed legislation to Congress on March 8, 1965. Hearings on H.R. 5916 Before the House Comm. on Ways and Means, 89th Cong., 1st Sess. 25 (1965) (Statement of Secretary Fowler) (hereinafter cited as 85 T.C. 376">385 House Hearings). On that date, Chairman Mills of the Ways and Means Committee introduced H.R. 5916, a bill designed to carry out the recommendations of the Treasury Department. 111 Cong. Rec. 4393 (1965); H. Rept. 1450, 89th Cong., 2d Sess. (1966), 1966-2 C.B. 967, 970.Whereas the primary objective of the initial Treasury Department proposal was to stimulate foreign investment in the United States, the Ways and Means Committee broadened the scope of the bill to include equalizing the tax treatment accorded such investment. H. Rept. 1450, supra, 1966-2 C.B. at 970. Chairman Mills thus introduced a revised version of the bill as H.R. 11297 on 1985 U.S. Tax Ct. LEXIS 42">60 September 28, 1965, and a further revision as H.R. 13103 on February 28, 1966. 111 Cong. Rec. 25,411 (1965); 112 Cong. Rec. 4229 (1966). The Senate ultimately adopted H.R. 13103 after minor amendments (see S. Rept. 1707, 89th Cong., 2d Sess. (1966), 1966-2 C.B. 1059, 1064), and the bill was signed into law (as FITA) by the President on November 13, 1966. 8The provisions in FITA for the taxation under the Internal Revenue Code of nonresident alien individuals were substantially the same as those provisions in H.R. 5916. Compare FITA, sec. 103, 80 Stat. 1547-1555 with H.R. 5916, 89th Cong., 1st Sess., sec. 3 (1965). Prior to the enactment of FITA, the Code prescribed complex rules for the taxation of U.S. source investment income realized by nonresident aliens. Nonresident aliens engaged in a trade or business in the United States were taxed on all U.S. source income at regular, graduated rates. A nonresident alien individual not engaged in a trade or business in the United States generally was taxed on certain U.S. source investment 1985 U.S. Tax Ct. LEXIS 42">61 income at a flat 30-percent rate, if the individual realized not greater than $ 21,200 of such income. If such alien realized more than $ 21,200 of such income, however, he was taxed at regular graduated rates or at the 30-percent rate, whichever resulted in greater tax liability. Both Congress and the Treasury believed that the above system was arbitrary and unnecessarily complicated and that uniform taxation at the 30-percent rate of nonbusiness income realized 85 T.C. 376">386 by nonresident aliens would encourage foreign investment in the United States. The solution initially proposed by the Treasury and ultimately adopted by Congress generally was to tax at regular graduated rates only the income of nonresident aliens that is attributable to a trade or business in the United States. Most U.S. source investment income not so attributable would be subject to the 30-percent tax, regardless of the amount of such income and regardless of whether the individual maintained a trade or business in the United States. H. Rept. 1450, supra, 1966-2 C.B. at 978-980; S. Rept. 1707, supra, 1966-2 C.B. at 1074-1076; Department of Treasury, Explanation of H.R. 5916, reprinted in House Hearings, supra at 1985 U.S. Tax Ct. LEXIS 42">62 16-17. FITA thus codified in section 871 the now-familiar concept of income "effectively connected" with the conduct of a U.S. trade or business. FITA, sec. 103(a), 80 Stat. 1457-1458.Congress and the Treasury shared the concern, however, that the elimination of progressive taxation with respect to nonbusiness income realized by nonresident aliens might encourage some individuals to renounce their U.S. citizenship and move abroad. See H. Rept. 1450, supra, 1966-2 C.B. at 982-983; S. Rept. 1707, supra, 1966-2 C.B. at 1078-1079; Department of Treasury, Explanation of H.R. 5916, reprinted inHouse Hearings, supra at 20-21. See also Kronenberg v. Commissioner, 64 T.C. 428">64 T.C. 428 (1975). To prevent this potential abuse, Congress codified section 877, the provision here in issue, under sec. 103(f) of FITA. 9Section 877 is virtually identical, in both operative scope and language, to the Treasury Department's initial proposal embodied in section 3(d) of H.R. 5916. Indeed, the Senate restored the 10-year period of applicability for section 877, after the House had shortened the period proposed by the Treasury Department to 5 years. See 112 Cong. Rec. 26,386 (1966); Hearings on H.R. 13130 1985 U.S. Tax Ct. LEXIS 42">63 Before the Senate Comm. on Finance, 89th Cong., 2d Sess. 54 (1966). Compare FITA, sec. 103(f), 80 Stat. 1551 and H.R. 5916, 89th Cong., 1st Sess., sec. 3(d) (1965), with H.R. 13103, 89th Cong., 2d Sess. sec. 3(e) (1966).Respondent is thus generally correct in asserting that the purpose behind section 877 is to prevent tax-motivated expatriation. As respondent notes, the Treasury Department expressed 85 T.C. 376">387 this purpose in its explanation of H.R. 5916, which Chairman Mills introduced into the Congressional Record:As a result of the proposed elimination of graduated rates, * * * an American citizen who gives up his citizenship and moves to a foreign country would be able to very substantially reduce his U.S. * * * income tax [liability].While it may be doubted that there are many U.S. citizens who would be willing to give up their U.S. citizenship no matter how substantial the tax incentive, a tax incentive so great might lead some Americans to surrender their citizenship for the ultimate benefit of their families. 1985 U.S. Tax Ct. LEXIS 42">64 Thus, it seems desirable, if progressive rates are eliminated for nonresident aliens, * * that steps be taken to limit the tax advantages of alienage for our citizens.The recommended legislation accomplishes this by providing that a nonresident alien who surrendered his U.S. citizenship within the preceding 10 years shall remain subject to tax at regular U.S. rates on all income derived from U.S. sources. * * [111 Cong. Rec. 4372 (1965).]In relying upon the above language, however, respondent neglects an important qualification placed upon the general purpose of section 877. As the Treasury explanation continued only two paragraphs later, "[This] provision * * would not apply if contravened by the provisions of a tax convention with a foreign country." The explanation merely made explicit the implicit -- that under section 110 of FITA, section 877, like all FITA provisions, does not apply where its application would be inconsistent with a treaty.Moreover, as the Ways and Means Committee report on H.R. 13103 makes clear, section 110 of FITA applies to treaties in force on the date of enactment:Section 10 of the bill [section 110 of FITA] provides that, if the application of 1985 U.S. Tax Ct. LEXIS 42">65 any provision of the bill would be contrary to a treaty obligation of the United Statesin force on the date of enactment of the bill, the treaty obligation is to prevail. [H. Rept. 1450, supra, 1966-2 C.B. at 1052. Emphasis supplied.]Among all the income tax treaties in force on the date of enactment of FITA that we have reviewed, we have not found a single treaty in which the conflict with section 877 was more direct than the conflict between section 877 and article VIII of the Canadian treaty. 101985 U.S. Tax Ct. LEXIS 42">66 1985 U.S. Tax Ct. LEXIS 42">67 Each of the other treaties either 85 T.C. 376">388 contained a saving clause similar to article XVII or, less frequently, defined resident of the treaty partner so as to preserve the right of the United States to tax its citizens. None of the treaties contained specific language precluding the application of section 877 or a like statute. Thus section 110 would have no purpose with respect to section 877 if it did not prevent the application of section 877 in the present case. 111985 U.S. Tax Ct. LEXIS 42">68 Respondent argues that section 110 of FITA is only precautionary and was not intended as a response to an identified conflict between section 877 and any treaty. Respondent's argument necessarily implies, however, that Congress intended section 877 to apply in the face of all treaties in force as of the enactment of FITA. In light of the general applicability of section 110 and the contemporaneous Treasury explanation, had Congress intended such, it would have so indicated. Any doubt that we should reject respondent's implausible assertion of congressional intent is resolved by the following statement of Assistant Treasury Secretary Surrey:85 T.C. 376">389 The abandonment of the application of the progressive income tax rates to foreign individuals investing in the United States, the cut-back of other income tax provisions, and the reduction of estate tax rates would establish 1985 U.S. Tax Ct. LEXIS 42">69 a distinctly brighter tax picture in the United States for the foreigner. Indeed, the picture is such that Americans may be tempted to become "foreigners" for tax reasons. * * But to the extent possible we should not permit our tax problems with Americans to act as a bar to rational revisions in our treatment of foreigners. The proposed bill [H.R. 11297] meets this objective by keeping American expatriates still subject to full United States tax on their United States income and assets, for five years after loss of citizenship in the case of the income tax and for ten years in the case of the estate tax, where the loss of citizenship is motivated by the desire to avoid our taxes. Where such a result is contrary, however, to a tax treaty, the treaty would govern. But since our tax treaties are largely with countries whose tax systems involve rates at significant levels, an expatriate who establishes residence in those countries is not likely to be motivated by a desire to avoid United States taxes. [Remarks by Stanley S. Surrey, Assistant Secretary of the Treasury, at the Tax Institute of America Symposium (Dec. 2, 1965) 46-47 (published as Treasury Department Press Release 1985 U.S. Tax Ct. LEXIS 42">70 F-291, on Dec. 3, 1965). Emphasis supplied.]Respondent urges us to give deference to "the view of the Treasury Department" expressed in Rev. Rul. 79-152. A revenue ruling represents the view of the Commissioner, not the Treasury Department ( Browne v. Commissioner, 73 T.C. 723">73 T.C. 723, 73 T.C. 723">731 (1980) (Hall, J., concurring)), and thus is generally only "the contention of one of the parties to the litigation." Estate of Smead v. Commissioner, 78 T.C. 43">78 T.C. 43, 78 T.C. 43">47 n. 5 (1982). See Stubbs, Overbeck & Associates, Inc. v. United States, 445 F.2d 1142">445 F.2d 1142, 445 F.2d 1142">1146-1147 (5th Cir. 1971); Estate of Lang v. Commissioner, 64 T.C. 404">64 T.C. 404, 64 T.C. 404">406-407 (1975), affd. on this issue 613 F.2d 770">613 F.2d 770, 613 F.2d 770">776 (9th Cir. 1980). Because Rev. Rul. 79-152 does not constitute a consistent and long-standing administrative position with prior congressional or judicial approval, it is not entitled to any special deference in this Court. Cf. United States v. Correll, 389 U.S. 299">389 U.S. 299 (1967); Commissioner v. Stidger, 386 U.S. 287">386 U.S. 287 (1967).Even if we attributed greater authority to Rev. Rul. 79-152 than that normally due a revenue ruling, the present case would be governed by the holdings of the Supreme Court in United States v. Vogel Fertilizer Co., 455 U.S. 16">455 U.S. 16 (1982), 1985 U.S. Tax Ct. LEXIS 42">71 and Watt v. Alaska, 451 U.S. 259">451 U.S. 259 (1981). In both cases, the Supreme Court construed a statute that, like FITA, had been initially proposed and contemporaneously interpreted or applied by an agency that later reversed its position. The Supreme Court in 85 T.C. 376">390 both cases adopted the contemporaneous interpretation or application. In Vogel Fertilizer Co., the Court stated:The Treasury Department's explanations of the proposed statute are not, as the dissent in the Court of Claims suggested, a mere "admission against interest" by the Commissioner. 225 Ct. Cl. at 44, 634 F.2d at 514. The expanded definition of "brother-sister controlled group" was proposed by the Treasury Department and adopted in the same form in which it was presented. Of course, it is Congress' understanding of what it was enacting that ultimately controls. But we necessarily attach "great weight" to agency representations to Congress when the administrators "participated in drafting and directly made known their views to Congress in committee hearings." Zuber v. Allen, 396 U.S. 168">396 U.S. 168, 396 U.S. 168">192 (1969). * * [455 U.S. 16">455 U.S. at 31.]Similarly, in Watt the Court concluded:the Department of the Interior interpreted the amendments when 1985 U.S. Tax Ct. LEXIS 42">72 passed, and for 10 years thereafter, as not altering the distribution formula. The Department's contemporaneous construction carries persuasive weight. Udall v. Tallman, 380 U.S. at 16. Such attention to contemporaneous construction is particularly appropriate in these cases, because the Department first proposed the amendment. See SEC v. Sloan, 436 U.S. 103">436 U.S. 103, 436 U.S. 103">120 (1978). The Department's current interpretation, being in conflict with its initial position, is entitled to considerably less deference. See General Electric Co. v. Gilbert, 429 U.S. 125">429 U.S. 125, 429 U.S. 125">143 (1976). In these cases, we find it wholly unpersuasive. [451 U.S. 259">451 U.S. at 272-273.]Both petitioner and respondent attempt to support their respective positions based upon the current treaty policy of the United States to insist upon a saving clause specifically reserving its right to tax under section 877. This policy is exemplified by article 1(3) of the U.S. Model Income Tax Treaty 12 and the saving clauses contained in many recently negotiated treaties, including the treaty currently in effect with Canada. 131985 U.S. Tax Ct. LEXIS 42">74 Petitioner argues that the mere use of the 85 T.C. 376">391 more specific language implies that section 877 does not apply through a "general" 1985 U.S. Tax Ct. LEXIS 42">73 saving clause like article XVII of the Canadian treaty. Respondent contends that the more specific saving clauses represent language clarifications and not substantive changes in the ability of the United States to tax expatriates. After examining many recent treaties, we conclude that the current treaty practice of the United States sheds little light on the issue before us. The reports of the Senate Foreign Relations Committee and the Joint Committee on Taxation with respect to the new Canadian treaty are typical of the contemporaneous interpretations of "specific" saving clauses:Under Section 877, a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of U.S. income tax, will, in certain cases, be subject to tax for a period of 10 years following the loss of citizenship. The proposed treaty contains the standard provision found in the U.S. model and most recent treaties specifically retaining the right to tax a former U.S. citizen whose loss of citizenship had as one of its principal purposes 1985 U.S. Tax Ct. LEXIS 42">75 the avoidance of U.S. tax. This right to tax continues whether the former citizen had a principal purpose of avoiding income tax or some other tax. Even absent a specific provision the IRS takes the position that the U.S. retains the right to tax former citizens resident in the treaty partner. [S. Exec. Rept. 22, 98th Cong., 2d Sess. 47 (1984). Emphasis supplied.]Accord, Staff of Joint Comm. on Taxation, Explanation of Proposed Income Tax Treaty (and Proposed Protocols) Between the United States and Canada 54 (Comm. Print 1984). The interpretations thus carefully identify respondent's position as his own and exhibit no intention to adopt such position.Petitioner cites recent treaties containing traditional (i.e., "general") saving clauses in support of his position that the two types must possess different meanings. We note, however, that the treaty with Malta contains a general saving clause (Agreement on Income Taxes, Mar. 21, 1980, United States-Malta, art. 1(3), U.S.T. , T.I.A.S. No. 10567 (1984-2 C.B. 339)), but the Senate Foreign Relations Committee and the Joint Committee on Taxation interpreted that clause in accordance with respondent's position:85 T.C. 376">392 The treaty does 1985 U.S. Tax Ct. LEXIS 42">76 not contain the standard provision found in the U.S. model, and most recent treaties, specifically retaining the right to tax former citizens. However, the article is intended to cover former citizens to reserve the right of the U.S. to tax former citizens under section 877. This is the position of the Internal Revenue Service. See Rev. Rul. 79-152, 1979-1 C.B. 237. [S. Exec. Rept. No. 30, 97th Cong., 1st Sess. 6 (1981), 1984-2 C.B. 353; Staff of Joint Comm. on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and the Republic of Malta 9 (Comm. Print 1981).] 141985 U.S. Tax Ct. LEXIS 42">77 While these interpretations might initially appear to undermine petitioner's position herein, the Maltese treaty was signed after the promulgation of Rev. Rul. 79-152. During the negotiation of the treaty, Malta could have explicitly or implicitly consented to the application of section 877 despite the lack of a specific reservation in the saving clause. 151985 U.S. Tax Ct. LEXIS 42">78 Indeed, the explanations accompanying the treaty with Egypt (signed 5 months after the Maltese treaty, containing the traditional saving clause, and considered contemporaneously with the Maltese treaty by the Senate Foreign Relations Committee) do not indicate that the United States may apply section 877 through the saving clause. See S. Exec. Rept. 27, 97th Cong., 1st Sess. 12 (1981); Staff of Joint Comm. on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and Egypt 14 (Comm. Print 1981). In any event, treaties coming into force after the enactment of FITA may have little relevance to the issue before us, as section 110 of FITA may not apply to such treaties. See H. Rept. 1450, supra, 1966-2 C.B. at 1052. We thus conclude that the 1942 Canadian treaty, as agreed to by the contracting parties, does not allow the United States to tax former citizens under section 877. Although Congress could have provided otherwise by statute, Congress did not do 85 T.C. 376">393 so with the enactment of FITA. Respondent argues at length what Congresscould have done instead of enacting section 877. He asserts, for example, that Congress could have prescribed a 10-year waiting period before loss of citizenship would be effective or placed conditions upon expatriation. The issue before us, however, is not what Congress could have done but what it did. See Dillin v. Commissioner, 56 T.C. 228">56 T.C. 228, 56 T.C. 228">240-241 (1971).While the result reached in this case may seem undesirable on the assumed facts, we cannot let our policy preferences control our decision. Congress must weigh the potential for abuse against sound foreign policy considerations. Neither respondent through administrative action nor the Court through judicial interpretation 1985 U.S. Tax Ct. LEXIS 42">79 can substitute its judgment for that of Congress in these matters.Issue 2. Imputed InterestPetitioner argues that the entire difference between the face amount of the non-interest-bearing note and his basis in the stock exchanged therefor is exempt from U.S. taxation under article VIII of the Canadian treaty. Respondent contends that, even if section 877 is inapplicable to petitioner, petitioner is taxable on imputed interest income under section 483, although at the 15-percent rate prescribed in article XI(1). 16Where the Internal Revenue Code provides for the taxation of income, "Whatever basis there may be * * for relieving the * * * tax must be found in the words or implications of the Convention." Maximov v. United States, 373 U.S. 49">373 U.S. 49, 373 U.S. 49">51 (1963). Cf. Johansson v. United States, 336 F.2d 809">336 F.2d 809, 336 F.2d 809">811 (5th Cir. 1964); Di Portanova v. United States, 690 F.2d 169">690 F.2d 169, 690 F.2d 169">177 (Ct. Cl. 1982); Great-West Life Assur. Co. v. United States, 678 F.2d 180">678 F.2d 180, 678 F.2d 180">181-182 (Ct. Cl. 1982); Kimball v. Commissioner, 6 T.C. 535">6 T.C. 535 (1946).Article 1985 U.S. Tax Ct. LEXIS 42">80 XI(1) of the Canadian treaty provides:1. The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the 85 T.C. 376">394 other contracting State, and not having a permanent establishment in the former State, shall not exceed fifteen percent for each taxable year.Petitioner first correctly notes that income subject to article XI(1) includes interest. He then argues that the term "interest," as defined by paragraph 6(b) of the protocol executed contemporaneously with the Canadian treaty, expressly excludes imputed interest. Therefore, he asserts, the amount that respondent treats as imputed interest must be part of his gain exempted from tax under article VIII.Paragraph 6(b) of the protocol provides:(b) the term "interest," as used in this Convention, shall include income arising from interest-bearing securities, public obligations, mortgages, hypothecs, corporate bonds, loans, deposits and current accounts. [Emphasis supplied.] 17The protocol thus does not set forth an exclusive definition of "interest," nor does it expressly exclude imputed 1985 U.S. Tax Ct. LEXIS 42">81 interest from the term.More fundamentally, article XI(1) applies not only to interest but also to other types of unearned income. The regulations confirm this plain reading of article XI(1):Under the terms of the convention, * * the rate of tax * * * is reduced to 15 percent in the case of * * * [certain] individuals who are residents of Canada and in the case of * * * [certain] corporations organized under the laws of Canada, with respect to amounts received from sources within the United States as interest (except interest exempt from tax), dividends, rents, salaries, wages, premiums, compensations, remunerations, emoluments or other fixed or determinable annual or periodical gains, profits and income, other than annuities and pensions which are exempt from the tax under the convention. * * * [26 C.F.R. sec. 519.112 (1980). Emphasis supplied.] 18Thus, even if paragraph 6(b) of the protocol excluded imputed interest from "interest," article XI(1) would nevertheless apply to imputed interest, like 1985 U.S. Tax Ct. LEXIS 42">82 most other forms of unearned income. 1985 T.C. 376">395 Article VIII provides a specific exception from article XI(1) with respect to one type of unearned income -- gain from the sale or exchange of capital assets. Yet, even if we assumed that imputed interest income is somehow outside the scope of article XI(1), we find no indication, in the text of the treaty or otherwise, that article VIII would apply to such income. Petitioner apparently belives that the inapplicability of article XI(1) automatically establishes the applicability of article VIII. We see no such connection between the two provisions. The logical conclusion from petitioner's premise that article XI(1) does not apply to imputed 1985 U.S. Tax Ct. LEXIS 42">83 interest is instead that such income is taxable at the rates prescribed in the Code. See Maximov v. United States, 373 U.S. 49">373 U.S. at 51.Petitioner finally argues: "The difference in the treatment of imputed interest under the domestic laws of the United States and Canada dictates that before such interest can be taxed, the issue must be negotiated and addressed by specific treaty language." According to petitioner, only Canada and not the United States taxed imputed interest at the time the Canadian treaty came into effect, and the Canadian system provides for a subjective "facts and circumstances" analysis in contrast to the objective process of section 483. Petitioner further notes that paragraph 2 of the contemporaneous protocol and section 519.102(a) of the regulations provide, respectively, as follows:2. In the event of appreciable changes in the fiscal laws of either of the contracting States, the Governments of the two contracting States will consult together. * * Sec. 519.102 Scope of secs. 519.101 to 519.120. -- (a) The primary purposes of the convention, to be accomplished on a mutually reciprocal basis, * * [include] the application of a limited rate of taxation to certain 1985 U.S. Tax Ct. LEXIS 42">84 classes of income derived from within one of the contracting States by residents or corporations of the other contracting State * * 20From all of this, petitioner deduces: "In order for this goal of mutuality to be effected, taxation by both countries must be implemented pursuant to the express terms of the Treaty, and cannot be changed by subsequent amendments of the internal 85 T.C. 376">396 laws of one of the countries unless such change is addressed through subsequent negotiations."We need not respond in detail to every implication raised by the above argument but can dispose of the issue with a few simple principles. First and foremost, respondent's interpretation, not petitioner's, is the more faithful to the express terms of the Canadian treaty and to settled rules governing the relationship between treaties and the Internal Revenue Code. Second, even if Congress breached its duty under paragraph 2 of the protocol in enacting section 483, 21Congress can abrogate a treaty provision by subsequent statute. See Reid v. Covert, 354 U.S. 1">354 U.S. 1, 354 U.S. 1">18 (1957) (Opinion of Justice Black), and cases cited therein. Third, paragraph 2 of the protocol only mandates that the Governments 1985 U.S. Tax Ct. LEXIS 42">85 consult; a change in fiscal law does not affect the other provisions of the treaty. 22 Finally, the right of the United States to tax imputed interest at the reduced rate provided in article XI(1) is consistent with the mutuality objective expressed in section 519.102(a) of the regulations. Allowing both the United States and Canada to tax imputed interest, although under conceptually different domestic rules, does not undermine mutuality. The Canadian treaty by no means contemplates identical domestic tax systems. Cf. Maximov v. United States, 373 U.S. 49">373 U.S. at 54.ConclusionPetitioner's motion for summary judgment will be granted with respect to the first issue and will be denied with respect to the second issue. Because triable issues of fact remain,An appropriate order will be issued. Footnotes1. Amount to be computed upon assessment.↩1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue.↩2. As in effect in 1982, sec. 877 provides, in relevant part:SEC. 877. EXPATRIATION TO AVOID TAX.(a) In General. -- Every nonresident alien individual who at any time after March 8, 1965, and within the 10-year period immediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection exceeds the tax which, without regard to this section, is imposed pursuant to section 871.(b) Alternative Tax. -- A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1, 55, or 402(e)(1), except that -- (1) the gross income shall include only the gross income described in section 872(a) (as modified by subsection (c) of this section), and(2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary.* * * (c) Special Rules of Source. -- For purposes of subsection (b), the following items of gross income shall be treated as income from sources within the United States: * * * (2) Stock or debt obligations. -- Gains on the sale or exchange of stock issued by a domestic corporation * * *Minor amendments, not relevant herein, were made to sec. 877 during the years in issue. See Technical Corrections Act of 1979, Pub. L. 96-222, sec. 104(a)(1), (4)(H)(v), 94 Stat. 194, 214, 217; Revenue Act of 1978, Pub. L. 95-600, sec. 431(e)(5), 92 Stat. 2763, 2876.3. A supplementary convention signed in 1950 added the parenthetical language to art. XVII. See Supplementary Convention on Double Taxation, June 12, 1950, United States-Canada, art. I(m), 2 U.S.T. 2235, T.I.A.S. No. 2347. This language is not relevant herein.↩4. Reg. sec. 7.21 is now codified at 26 C.F.R. sec. 519.102(c) (1980). See 25 Fed. Reg. 14,021, 14,022 (1960).The regulations were issued pursuant to art. XVIII of the Canadian treaty (see 1943 C.B. 533">1943 C.B. 533), which provides in part:"The competent authorities of the two contracting States may prescribe regulations to carry into effect the present Convention within the respective States and rules with respect to the exchange of information."↩5. Art. XV provides in full:1. As far as may be in accordance with the provisions of The Income Tax Act, Canada agrees to allow as a deduction from the Dominion income and excess profits taxes on any income which was derived from sources within the United States of America and was there taxed, the appropriate amount of such taxes paid to the United States of America.2. As far as may be in accordance with the provisions of the United States Internal Revenue Code, the United States of America agrees to allow as a deduction from the income and excess profits taxes imposed by the United States of America the appropriate amount of such taxes paid to Canada.Prior to the supplementary convention signed in 1950, art. XV provided as follows:In accordance with the provisions of Section 8 of the Income War Tax Act as in effect on the day of the entry into force of this Convention, Canada agrees to allow as a deduction from the Dominion income and excess profits taxes on any income which was derived from sources within the United States of America and was there taxed, the appropriate amount of such taxes paid to the United States of America.In accordance with the provisions of Section 131 of the United States Internal Revenue Code as in effect on the day of the entry into force of this Convention, the United States of America agrees to allow as a deduction from the income and excess profits taxes imposed by the United States of America the appropriate amount of such taxes paid to Canada.See Supplementary Convention on Double Taxation, June 12, 1950, United States-Canada, art. I(1↩), 2 U.S.T. 2235, T.I.A.S. No. 2347.6. Reg. sec. 7.35 is now codified at 26 C.F.R. sec. 519.116 (1980). See 25 Fed. Reg. 14,021, 14,022↩ (1960).7. Whether and the extent to which an increased United States tax liability resulting from the application of section 877 would increase the Canadian tax credit depend upon the amount of the expatriate's Canadian tax subject to the credit.8. The Senate added tits. II through IV to Pub. L. 89-809, secs. 201-402, 80 Stat. 1575-1590 (1966), prescribing miscellaneous provisions unrelated to FITA.↩9. FITA also added analogous provisions in the estate and gift tax areas, codified at secs. 2107 and 2501(a), respectively. See FITA, secs. 108(f), 109(a), 80 Stat. 1573-1575.↩10. See Convention on Double Taxation, Oct. 25, 1956, United States-Austria, 8 U.S.T. 1699, T.I.A.S. No. 3923; Convention on Double Taxation, Oct. 28, 1948, United States-Belgium, 4 U.S.T. 1647, T.I.A.S. No. 2833; Convention on Double Taxation, May 6, 1948, United States-Denmark, 62 Stat. 1730, T.I.A.S. No. 1854; Convention on Double Taxation, Mar. 3, 1952, United States-Finland, 3 U.S.T. 4485, T.I.A.S. No. 2596; Convention on Double Taxation, Oct. 18, 1946, United States-France, 64 Stat. (3) B3, T.I.A.S. No. 1982; Convention on Double Taxation, July 22, 1954, United States-Germany, 5 U.S.T. 2768, T.I.A.S. No. 3133; Convention on Double Taxation, Feb. 20, 1950, United States-Greece, 5 U.S.T. 47, T.I.A.S. No. 2902; Convention on Double Taxation, Sept. 13, 1949, United States-Ireland, 2 U.S.T. 2303, T.I.A.S. No. 2356; Convention on Double Taxation, Mar. 30, 1955, United States-Italy, 7 U.S.T. 2999, T.I.A.S. No. 3679; Convention on Double Taxation, Apr. 16, 1954, United States-Japan, 6 U.S.T. 149, T.I.A.S. No. 3176; Convention on Income and Property Taxes, Dec. 18, 1962, United States-Luxembourg, 15 U.S.T. 2355, T.I.A.S. No. 5726; Convention on Double Taxation, Apr. 29, 1948, United States-the Netherlands, 62 Stat. 1757, T.I.A.S. No. 1855; Convention on Double Taxation, June 13, 1949, United States-Norway, 2 U.S.T. 2323, T.I.A.S. No. 2357; Convention on Double Taxation, July 1, 1957, United States-Pakistan, 10 U.S.T. 984, T.I.A.S. No. 4232; Convention on Double Taxation, Nov. 14, 1939, United States-Sweden, 54 Stat. 1759, T.S. No. 958; Convention on Double Taxation, May 24, 1951, United States-Switzerland, 2 U.S.T. 1751, T.I.A.S. No. 2316; Convention on Double Taxation, Dec. 13, 1946, United States-South Africa, 3 U.S.T. 3821, T.I.A.S. No. 2510; Convention on Double Taxation, Apr. 16, 1945, United States-United Kingdom, 60 Stat. 1377, T.I.A.S. No. 1546.11. This conclusion is consistent with the uniform opinion of the commentators who have addressed the issue. See 1 R. Rhoades & M. Langer, Income Taxation of Foreign Related Transactions sec. 2.24[1] (1984); Hitch, "Tax-Motivated Expatriation," 39 N.Y.U. Inst. Fed. Taxation 34-1, 34-28 -- 34-30 (1981); Roberts, "Is Revenue Ruling 79-152, which taxes an expatriate's gain, consistent with the Code?" 51 J. Taxation 204 (1979). See also Bissell, "The Treasury's Model Income Tax Treaty: An Analysis and Appraisal," 3 Int. Tax J. 8, 9 (1976); Langer, "The Need for Reform in the Treaty Area," in Income Tax Treaties 717, 746-748 (Bischel ed. 1978); Ness, "Federal Tax Treatment of Expatriates Entitled to Treaty Protection," 21 Tax Law. 393, 398-399 (1968); Ross, "United StatesTaxation of Aliens and Foreign Corporations: The Foreign Investors Tax Act of 1966 and Related Developments," 22 Tax L. Rev. 277, 347 (1967); Comment, " Internal Revenue Code Section 877: Expanded Purview Generates Discord in Taxation of the Tax-Motivated Expatriate," 13 Cal. West. Int. L. J. 58 (1983)↩.12. (3) Notwithstanding any provision of this Convention except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Fiscal Domicile)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. For this purpose the term "citizen" shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.↩13. The Convention on Taxes on Income and Capital, Sept. 26, 1980, United States-Canada, U.S.T. , T.I.A.S. No. (1 CCH Tax Treaties par. 1301), became effective and superseded the 1942 Canadian treaty on Aug. 16, 1984. Art. XXIX(2) of the new treaty provides:2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizens whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.14. The Treasury Department's explanation of the Maltese treaty would not suggest such a result:"Paragraph (3) contains the traditional 'saving clause' under which each Contracting State reserves the right to tax its residents, as determined under Article 4 (Fiscal Residence), and its citizens as if the Treaty had not come into effect. [Department of Treasury, Technical Explanation of the Agreement Between the United States of America and the Republic of Malta with Respect to Taxes on Income 2 (Published in Treasury Department Press Release R-367 on Sept. 24, 1981), 1984-2 C.B. 366.]"This interpretation is consistent with the typical interpretations accompanying recent treaties containing general savings clauses.15. Cf. Rosenbloom, "Current Developments in Regard to Tax Treaties," 40 N.Y.U. Inst. Fed. Taxation 31-1, 31-93 n. 247 (1982)↩ (similar conclusion with respect to Jamaican treaty prior to protocol amendment).16. The parties apparently agree that the income in issue is from sources within the United States and would thus be taxable under sec. 871(a), absent the Canadian treaty.↩17. Par. 6 of the protocol was initially numbered par. 7. See Supplementary Convention on Double Taxation, Aug. 8, 1956, United States-Canada, art. I(d), 8 U.S.T. 1619, T.I.A.S. No. 3916.↩18. Reg. sec. 519.112 was initially numbered sec. 7.31 (see 25 Fed. Reg. 14,021, 14,022↩ (1960)) and does not reflect the addition of the phrase "(other than earned income)" to art. XI(1) by the supplementary convention signed in 1956. See Supplementary Convention on Double Taxation, Aug. 8, 1956, United States-Canada, art. I(c), 8 U.S.T. 1619, T.I.A.S. No. 3916.19. The definition provided in par. 6(b) of the protocol is relevant for treaty provisions that refer specifically to "interest," such as art. XII.↩20. See supra↩ note 4.21. We make no finding concerning this issue but note that the addition of sec. 483↩ to the Code by the Revenue Act of 1964, Pub. L. 88-272, sec. 224, 78 Stat. 19, 77-79, could reasonably not be deemed an appreciable change in fiscal law.22. See supra note 21. This Court is, of course, powerless to enforce a provision such as par. 2. See Filler v. Commissioner, 74 T.C. 406">74 T.C. 406↩ (1980).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620117/	BERNARD LIGHTMAN AND BARBARA LIGHTMAN, ET AL. 1, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Lightman v. CommissionerDocket Nos. 9026-83, 9027-83, 1707-84United States Tax CourtT.C. Memo 1985-315; 1985 Tax Ct. Memo LEXIS 317; 50 T.C.M. 266; T.C.M. (RIA) 85315; June 27, 1985. 1985 Tax Ct. Memo LEXIS 317">317 Held, charitable contribution deductions for 19 paintings determined to be significantly lower than claimed by petitioners. Held further, petitioners are not liable for additions to tax for negligence. J. Harold Flannery and Norman H. Wolfe, for the petitioners. John O'Brien, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined the following deficiencies and additions to Federal income tax for the calendar year 1979: Addition to TaxPetitionersDeficiencyUnder Sec. 6653(a) 21985 Tax Ct. Memo LEXIS 317">318 Bernard and Barbara$11,185$582Lightman (Lightman)Morris and Rita10,914562Kesselman (Kesselman)Robert S. and Lorraine10,088521Kingsbury (Kingsbury)Due to concessions by respondent in docket Nos. 9026-83 and 9027-83, the two issues remaining for decision in each docket are: (1) The fair market value of 19 paintings donated to the El Paso Museum of Art in 1979; and (2) whether petitioners are liable for additions to tax under sec. 6653(a) as a consequence of claiming charitable contribution deductions based on valuation of the paintings greatly in excess of their costs. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners Lightman and Kingsbury were residents of Providence, Rhode Island when their respective petitions were filed. Petitioners Kesselman were residents of Sharon, Massachusetts when their petition was filed. During December 1978, petitioners individually purchased 19 oil paintings which they donated to the El Paso Museum of Art on December 30, 1979. On their 1979 Federal income tax returns, petitioners claimed charitable contribution deductions significantly greater than their costs. Attached to each return was an appraisal by John Aaron, a member of Appraisers Association of America, Inc. Said appraisals valued each painting in an amount equal to that claimed on the return. In the notice of deficiency issued in each case, respondent determined that petitioners' charitable contribution deductions were limited to their costs for the paintings. The following schedule sets forth the purchase prices and claimed deduction, by painting: PurchaseClaimedPriceDeductionPetitioners LightmanAutumn in N.E.$ 500$2,800Woods at Sunset5002,800Apple Trees5002,800Coastal Scene5002,800Providence Market Scene5002,800N.E. House5002,800Providence Market Scene1,0007,500$4,000$24,300Petitioners KesselmanWinter Scene$ 500$ 2,500Autumn Scene5002,500Fort Scene5002,500Sunset Scene5002,500Spring Scene5002,500Salt Marsh2,40012,500$4,900$25,000Petitioners KingsburyChurch Scene$ 500$ 2,500Cape Cod Scene5002,500Spring Scene5002,500Abstract Landscape5002,500Storm Scene5002,500Two Pumpkins2,40012,500$4,900$25,000With 1985 Tax Ct. Memo LEXIS 317">319 the exception of "Salt Marsh" and "Two Pumpkins," the above identified paintings are the work of Mabel M. Woodward (Woodward), a turn of the century American impressionist painter. The majority of these paintings are small: three are 8 X 10 inches and ten are 8.5 X 10.5 inches. Of the remaining four, one is 9 X 11 inches, two are 10 X 13 inches and one is 16 X 20 inches. Woodward's paintings have been exhibited at the National Academy and The Chicago Art Institute. Local shows of her work have been held at the Boston, Rockport and Providence Art Clubs and the Providence Water Color Club. In the 1950's, the Shein family purchased 337 Woodward paintings from her estate for $5,000. Over the next 13 years, individual Woodward paintings were sold by Helen Shein. In 1972, the Voss Galleries of Boston, Inc. (Voss Galleries) held an exhibition of Woodward's work. From 1972 through 1975, the Voss Galleries sold approximately 35 Woodward paintings individually. Voss Galleries obtained prices of $1,500 to $2,500 for small Woodward paintings and up to $7,000 for larger works. After the death of his father in 1975, Edward Shein and his mother, Helen Shein, decided to liquidate the family's 1985 Tax Ct. Memo LEXIS 317">320 remaining Woodward paintings. Edward Shein is a 19th-20th century fine arts dealer specializing in American paintings. Rather than individual sales, commencing in 1977 31985 Tax Ct. Memo LEXIS 317">321 the Sheins sought to liquidate their Woodward paintings by selling them in lots at prices significantly lower than previously obtaining by Voss Galleries. The following table reflects such bulk sales by the Sheins in 1977, 1978 and 1979: No. ofPricePaintingsPaintingPerTotalYearPurchaserin LotSizePaintingPrice1977Deal1610 X 13 $500$8,000Shatkin320 X 16 1,0003,000Shatkin810 X 14 (1)60016 X 20 (7)1,0007,6001978Kingsbury58-1/2 X 10-1/2 5002,500Kesselman58-1/2 X 10-1/2 5002,500Lightman88 X 10 (3)5009 X 11 (1)50010 X 13 (2)50016 X 20 (2)1,0005,0001979Kingsbury368 X 10 (10)N/A8-1/2 X 11 (13)N/A10 X 13 (3)N/A16 X 20 (9)N/A24 X 30 (1)N/A20,000The record does not reflect any other sales of Woodward paintings in 1977 or 1978. In 1979, the Sheins made one individual sale of a 34 X 26 inch painting for $7,000. Also in 1979, three Woodward paintings which had been purchased from the Sheins in 1977 were sold by the Brockton Art Museum as follows: 1977 Purchase1979 SalePainting SizePricePrice10 X 14$600$40016 X 201,0001,00016 X 201,000650After 1979, the record reflects only individual, as opposed to bulk, sales of Woodward paintings. In 1980, three paintings purchased in 1977 were resold for $100 to $400 less than their respective purchase prices. One large Woodward painting (28 X 24 inches) was sold by the Sheins in 1980 for $7,000. In 1981 and thereafter, individual Woodward paintings were sold or appraised for considerably higher prices than sales of comparably sized paintings sold in bulk in 1977 through 1979. Approximately 6 months prior to their donation, petitioners Kesselman lent their Woodward paintings to the El Paso Museum of Art. 4 One of these paintings, "Autumn Scene," was apparently damaged in transit to the Museum. The as yet undiscussed paintings contributed by petitioners Kesselman and Kingsbury to the El Paso Museum of Art in 1979 were the works of Karl Knaths, a 20th century American modern painter. Knaths' paintings have been or are exhibited in, among other institutions, the Corcoran Gallery of Art, the Hirshhorn Museum and Sculpture Garden, the National 1985 Tax Ct. Memo LEXIS 317">322 Collection of Fine Arts of the Smithsonian Institution in Washington, D.C., the Metropolitan Museum of Art in New York City, the Boston Museum of Fine Arts and The Philadelphia Museum of Art. Karl Knaths died in 1971 and the Shawmut Bank of Cape Cod (Bank) was appointed executor of his estate and trustee of a trust established for his wife's support with the reversion to other designated income beneficiaries. At that time, 248 of Knaths' paintings were appraised and transferred to the trust. Between 1971 and 1978, the Bank sold some of these paintings through Paul Rosenberg & Co. in New York (Rosenberg Gallery), as well as making individual sales to other bank clients. Sales through the Rosenberg Gallery during this period netted the Bank over $5,000 per painting. The Bank's private sales were made pursuant to a price structure provided by the Rosenberg Gallery so as not to underprice the Gallery's sales efforts.Prices obtained by the Bank ranged from $3,500 to $6,000 per painting. In 1978, Mrs. Knaths died and the terms of the trust altered requiring a change in the composition of the trust to assets which would produce income. Consequently, a decision was made to dispose of the 1985 Tax Ct. Memo LEXIS 317">323 approximately 100 remaining Knaths paintings. The Bank attempted to wholesale these paintings to numerous galleries but the best offer they received was approximately $1,000 per painting. In 1978, they sold the remaining paintings, in bulk, to Edward Shein for approximately $1,800 per painting. From 1978 through 1980, Edward Shein sought to resell the Knaths paintings individually at a $500 to $600 mark-up per painting. 5 In 1978, he resold four paintings for $2,400 each. 6 In 1979, he resold six paintings for $2,400 each. 7 In 1980, he resold eight paintings for $2,300 each. 8 Individual sales of Knaths paintings were also made by galleries during these years as follows: SalesYearSellerPrice1978Sotheby$3,000 1978Sotheby3,600 1979Christies2,200 1979Sotheby9,000 1979Rosenberg91985 Tax Ct. Memo LEXIS 317">324 9,900 (Resale of precedingpainting 1 mo. later)1979Rosenberg9,075 1979Sotheby$3,000-5,000 (est.)1980Sotheby4,000 1980Sotheby4,000 1980Sotheby2,575 1980Sotheby3,300 In 1981, Sotheby sold a Knaths painting entitled "Sunset-Salt Marsh" for $2,860 which was similar to the "Salt Marsh" painting donated by petitioners Kesselman to the El Paso Museum of Art in 1979. OPINION As to the deficiencies determined by respondent, the sole issue for decision relates to the amount of the deductions to which petitioners are entitled for their 1979 contributions to the El Paso Museum of Art. Section 170(a)(1) allows as a deduction any charitable contribution to an organization described in section 170(c). The parties agree that the El Paso Museum of Art is a qualified recipient under section 170(c). They further agree that the donated paintings were "capital gain property" within the meaning of section 170(b)(1)(C)(iv). Section 1.170A-1(c)(1), Income Tax Regs., provides that the amount of a charitable contribution made in property other than money shall be the fair market value of the property at the time of the contribution, reduced as provided in section 170(e)(1). Section 1.170A-1(c)(2), Income Tax Regs., 1985 Tax Ct. Memo LEXIS 317">325 defines fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts." See United States v. Cartwright,411 U.S. 546">411 U.S. 546 (1973). As reflected in petitioners' 1979 Federal income tax returns and the notices of deficiency issued by respondent, the parties take extremely divergent positions as to the fair market values of the paintings as of December 30, 1979, the donation date. To a large extent, their differing valuations reflect their respective assessments of the evidentiary weight properly accorded: (1) Prices obtained at contemporary sales of the artists' work; and (2) petitioners' costs. In valuing the donated paintings for purposes of section 170, fair market value should be computed "on the price an ultimate consumer would pay," i.e., the retail price under the circumstances herein. Goldman v. Commissioner,388 F.2d 476">388 F.2d 476, 388 F.2d 476">478 (6th Cir. 1967), affg. 46 T.C. 136">46 T.C. 136 (1966); Skripak v. Commissioner,84 T.C. 285">84 T.C. 285, 84 T.C. 285">321-322 (1985); Anselmo v. Commissioner,80 T.C. 872">80 T.C. 872, 80 T.C. 872">881-884 (1983), affd. 757 F.2d 1208">757 F.2d 1208 (11th Cir. 1985). Petitioners 1985 Tax Ct. Memo LEXIS 317">326 argue that the only relevant retail prices in this case are those obtained in what they characterize as the "orderly private market" for the work of the specific artist, i.e., private treaty or gallery sales to art collectors or museums.10 Petitioners assert that prices obtained at public auction sales should be disregarded as they represent a "disorderly market," do not reflect real value and are wholesale prices, i.e., many purchases at such sales are by art dealers for resale. We are not persuaded by petitioners' arguments and agree with respondent that auction sale prices are relevant to the determination of fair market value in this case. The controlling question is whether art auction sales represent sales to the ultimate consumer, not whether identical "consumer" prices are also available to dealers. It is clear that a significant number of auction sales are to consumers111985 Tax Ct. Memo LEXIS 317">328 and this Court has previously recognized the significance of such sales in determining the fair market value of art. Mathias v. Commissioner,50 T.C. 994">50 T.C. 994, 50 T.C. 994">999 (1968). See Estate of Smith v. Commissioner,57 T.C. 650">57 T.C. 650, 57 T.C. 650">658 n.6 (1972), affd. 510 F.2d 479">510 F.2d 479 (2d Cir. 1975); Peterson v. Commissioner,T.C. Memo. 1982-438; 1985 Tax Ct. Memo LEXIS 317">327 Farber v. Commissioner,T.C. Memo. 1974-155, affd. by unpublished opinion (2d Cir. Nov. 20, 1975). As with gallery sales, in evaluating contemporary auction sales an assessment of the variations in numerous characteristics of the specific painting, including quality, size, subject matter and condition are necessary to determine if such sales are of comparable items. Unless comparability exists, contemporary sales can provide no guidance in valuing a given work. Petitioners also argue that their purchases of the donated paintings were at "wholesale, bulk, forced or distress sale rates" and their costs are, at best, poor indicators of fair market value. Although Edward Shein described himself as a "wholesale" dealer, we conclude that petitioners' purchases were at retail prices. None of the petitioners were art dealers and nothing in the record indicates that the prices they paid to the Sheins were other than retail. To the contrary, comparable, if not identical, prices were paid to the Sheins by other retail customers. Petitioners are correct that fair market value under the instant circumstances is to be determined on an individual, rather than bulk, basis. Chiu v. Commissioner,84 T.C. 722">84 T.C. 722 (1985); 80 T.C. 872">Anselmo v. Commissioner,supra at 884. Petitioners purchased their Woodward paintings in lots, i.e., bulk and it appears that price concessions were made 1985 Tax Ct. Memo LEXIS 317">329 by the Sheins to faciliate such bulk sales. Therefore, as to the Woodward paintings, petitioners' costs are not indicative of the value of the individual paintings. In contrast, petitioners Kesselman and Kingsburg each purchased only one Knaths painting in 1978 and, therefore, could not have obtained any concession for bulk purchases. The prices they paid reflect the fair market value of these individual paintings when purchased. While the simultaneous marketing of a number of Knaths paintings in 1978, 1979 and 1980, may have acted as a depressant on the prices of individual paintings, the lower available market prices are representative of the fair market value of Knaths' work during that period, not bulk prices. 57 T.C. 650">Estate of Smith v. Commissioner,supra;Jarre v. Commissioner,64 T.C. 183">64 T.C. 183 (1975). Based on the record evidence, we also conclude that petitioners' purchases were not at forced or distress prices. The Sheins' decision to liquidate their remaining Woodward paintings does not indicate their subsequent sales were at forced or distress prices. Similarly, despite Edward Shein's testimony that he resold the Knaths' paintings "fast" to meet his bank obligations, the record 1985 Tax Ct. Memo LEXIS 317">330 reflects only 18 sales by Shein over a 3-year period. Additionally, the prices Shein obtained were consistent with prices obtained for Knaths' work at auction sales during this period. Having addressed petitioners' general arguments as to valuation, 12 we now must determine the fair market values of the donated paintings. In support of their valuation of the Woodward paintings, petitioners rely on the testimony of their expert witness, Robert C. Vose, III (Vose). Vose has extensive experience as an art dealer and appraiser of 20th century American art. More importantly, 1985 Tax Ct. Memo LEXIS 317">331 he has significant knowledge of, and extensive experience with, Woodward paintings. In fact, the Vose Gallery is recognized as the prominent gallery for Woodward's work. As the following chart reflects, Vose's valuation 131985 Tax Ct. Memo LEXIS 317">332 of the Woodward paintings were, generally, significantly lower than those claimed by petitioners on their returns and which they continue to assert should be allowed as deductions: 14Petitioners'Petitioners'Expert'sReturnVose'sDifferenceValuation asPercentagePaintingValuationValuationin Valuationsof ReturnValuationsAutumn in N.E.$2,800$1,530$1,27055%Woods at Sunset$2,8006802,12024%Apple Trees$2,8002,12567576%Coastal Scene$2,8002,12567576%Providence MarketScene$2,8002,975175106%N.E. House$2,8002.975175106%Providence MarketScene7,5005,9501,55079%Winter Scene2,5001,53097061%Autumn Scene2,5001,53097061%Fort Scene2,5001,3601,14054%Sunset Scene2,5001,3601,14054%Spring Scene2,5001,53097061%Church Scene2,5001,1901,31048%Cape Code Scene2,5001,0201,48041%Spring Scene2,5001,53097061%Abstract Landscape2,5001,1901,31048%Storm Scene2,5001,70080068% Respondent's major criticism of Vose's valuations is that, in making his appraisal, Vose relied on color photographs of the paintings rather than actually viewing them. We do not consider this a defect in his appraisal technique. Reliance on photographs is not unusual in appraising paintings. Gordon v. Commissioner,T.C. Memo. 1976-274; Posner v. Commissioner,T.C. Memo. 1976-216; Hartwell v. Commissioner,T.C. Memo. 1965-49. In fact, photographs generally serve as the basis for appraisals by the Art Advisory Panel to the Internal Revenue Service. Respondent relies on the testimony and expert report of Rudolf G. Wunderlich to support the valuations determined in the statutory notices of deficiency. Wunderlich was a dealer and appraiser of American art of the 18th, 19th and 20th centuries from 1938 until 1982. He is a leading authority on American Western paintings 1985 Tax Ct. Memo LEXIS 317">333 and bronzes, in particulart, the bronzes of Frederic Remington and Charles M. Russell. In addition to his appraisal work for museums, Wunderlich served on the Art Advisory Panel to the Internal Revenue Service for 2 years. Prior to his work on this case, Wunderlich had never appraised, purchased or sold any Woodward paintings. Respondent's valuations of the 17 Woodward paintings based on costs total $9,000 whereas Wunderlich's total valuation for these paintings is $11,500. For two paintings their valuations are identical; for two respondent's are higher (by $100 and $200) and for the remaining 13 paintings Wunderlich's valuations are higher (ranging from $50 to, in one instance, $1,500). Based on the entire record, we hold that, with one exception, the fair market values of the Woodward paintings in December 1979 are identical to Vose's appraisal valuations, as adjusted. The exception is the painting "Autumn Scene" donated by petitioners Kesselman. In 1984, when viewed by Wunderlich, this painting was damaged. No evidence as to the specific date said damage occurred was proffered. For want of definitive evidence, and based on the limited testimony of Edward Shein, we found 1985 Tax Ct. Memo LEXIS 317">334 that this painting was loaned to, and damaged during shipment to, the El Paso Museum of Art 6 months prior to petitioners Kesselmans' donation. Only Wunderlich considered the damaged condition in valuing this painting. Therefore, we hold that Wunderlich's valuation, $300, accurately reflects the fair market value of the painting "Autumn Scene" as of December 1979. Petitioners have the burden of proving respondent's determinations in the notices of deficiency are incorrect. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Petitioners offered no testimony or appraisals as to the specific fair market values of the Knaths paintings. We do not accept respondent's witness Wunderlich's valuations of $3,000 of $3,500 per painting due to his limited expertise and experience with Knaths work prior to this proceeding. Therefore, the presumption of correctness attached to respondent's initial determinations remains. Mathias v. Commissioner,50 T.C. 994">50 T.C. 997-998. Record evidence of sales of other Knaths paintings, in fact, substantiates the accuracy of respondent's determinations. Consequently, we hold that the fair market value of each of the Knaths paintings was $2,400, as determined in 1985 Tax Ct. Memo LEXIS 317">335 the notices of deficiency. Anselmo v. Commissioner,80 T.C. 872">80 T.C. 885-886. In accord with our decision as to each painting, we hold that the fair market values of the paintings donated to the El Paso Museum of Art by petitioners in 1979 are: Petitioners Lightman=$18,360Petitioners Kesselman=8,480Petitioners Kingsbury=9,030In the notices of deficiency, respondent also determined additions to tax pursuant to section 6653(a). Respondent premises this determination on the failure of any petitioner to testify that due care had been exercised in preparing the returns or to explain the gross overvaluation claims for the donated paintings on petitioners' returns. Petitioners bear the burden of disproving respondent's determination that the negligence addition is applicable. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 58 T.C. 757">791-792 (1972). We find that, on the record before us, they have carried their burden. The only fact cited by respondent as indicative of a lack of care is the valuation of the paintings donated by petitioners to the El Paso Museum of Art. Appraisals by a member of the Appraisers Association of America, Inc. supporting the charitable contribution deductions claimed by petitioners were 1985 Tax Ct. Memo LEXIS 317">336 attached to their returns. Although this appraiser was not called to testify and the appraisals have not been accorded any probative weight in our determination of fair market value, nothing in the record indicates they were not made in good faith and justifiably relied on by petitioners. Respondent cites Hanson v. Commissioner,696 F.2d 1232">696 F.2d 1232 (9th Cir. 1983), Benningfield v. Commissioner,81 T.C. 408">81 T.C. 408 (1983) and Rice v. Commissioner,T.C. Memo. 1979-294 as support for the negligence determination. Those decisions are inapplicable to this case. Nothing in the record before us indicates that petitioiners' 1979 charitable contribution deductions were part of a tax avoidance scheme that no reasonable person would have trusted. We hold, therefore, that petitioners are not liable for additions to tax pursuant to section 6653(a). To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. On grant of the joint motion at the commencement of trial, the following petitioners are consolidated for trial, briefing and opinion: Morris Kesselman and Rita Kesselman, docket No. 9027-83 and Robert S. Kingsbury and Lorraine Kingsbury, docket No. 1707-84.↩2. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.3. The record does not reflect any sales of Woodward paintings in 1975 or 1976.4. Similarly, the Lightmans donation was preceded by a loan to the Museum.↩5. Although Edward Shein testified he resold most of the approximately 100 Knaths paintings "fast," the record reflects only 18 such sales during the period 1978 through 1980. ↩6. This includes the paintings sold to petitioners Kesselman and Kingsbury. ↩7. One of these sales was to petitioners Kesselman. ↩8. Two such sales were to petitioners Lightman and three such sales were to petitioners Kesselman.↩9. This painting had been included in several major exhibitions, including ones at the Corcoran Gallery of Art and the National Academy of Design which significantly enhanced its value.10. In support of this argument, one of petitioner's expert witnesses, Jeffrey R. Brown, testified concerning "the market factors or forces that underlie or influence the prices of art works" in addition to the traditional criteria which influence prices such as quality, size, and condition of a work. While interesting, we are not persuaded that the dichotomy he proposes between orderly and disorderly markets for paintings exists. ↩11. On brief, petitioners cite a 1980 law review article (Speiller 80 Colum. L. Rev. at 229) which lends support to an estimate that 40 percent of auction sales are made to consumers rather than dealers. Similarly, respondent's expert estimated that at least 50 percent of such sales are to individuals.12. Petitioners also assert that, in valuing the donated paintings, the values at which said paintings were insured by the El Paso Museum of Art is significant as they represent an "objective estimate of the fair market value" of the paintings and an independent verification of petitioners' valuations. We disagree. Petitioners determined the amounts for which said paintings were initially insured by the museum and, therefore, said amounts have no probative value. Similarly, the insurance values placed on unidentified Woodward paintings at an unspecified time by the Brockton Art Museum are irrelevant to this case.↩13. Vose's appraisal was in terms of 1984 values rather than 1979, the year of the donations.During trial he stated such appraisals should be adjusted downward by 10-15 percent to obtain the 1979 values. Accordingly, Vose's valuations have been reduced by 15 percent. 14. Contrary to petitioner's assertions, we do not consider Vose's appraisal valuations to be "in substantial accord" with, or "significant substantiation" of, petitioners' return valuations.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620119/	FRED J. COLLINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Collins v. CommissionerDocket No. 26672.United States Board of Tax Appeals16 B.T.A. 1426; 1929 BTA LEXIS 2379; July 25, 1929, Promulgated 1929 BTA LEXIS 2379">2379 Amount of income received by the petitioner in 1922 from the transaction involved herein, determined. John E. Hughes, Esq., and William Cogger, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. MARQUETTE 16 B.T.A. 1426">1426 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1922 in the amount of $843.25. The petitioner alleges that the respondent erred in determining that the petitioner realized income in the amount of $12,500 in the year 1922 from the transaction hereinafter described. FINDINGS OF FACT. The petitioner is an individual residing at Amsterdam, N.Y.In the year 1920 the petitioner and one Hazzard formed a corporation, with an authorized capital of $125,000, for the purpose of operating an amusement park. The corporation was called the Mid-City Park Corporation. The petitioner, who was experienced in managing and conducting such enterprises, was employed by the corporation to manage its business. By the terms of his contract the petitioner was to receive in 1920 the amount of $1,600 in cash and stock in the corporation of the par value of $2,500, 1929 BTA LEXIS 2379">2380 and each year 16 B.T.A. 1426">1427 thereafter he was to receive $3,000 in cash and $5,000 par value of the corporation's capital stock until he should have thus acquired one-half of the entire capital stock of the corporation. Hazzard was to have issued to him each year the same amount of stock that was issued to the petitioner. All of the money necessary to start the enterprise was furnished by Hazzard. As part of the compensation for his services to the corporation the petitioner received in 1920, stock of the par value of $2,500; in 1921, stock of the par value of $5,000; and in 1922, stock of the par value of $5,000. In the year 1922 the petitioner and Hazzard disagreed relative to the policy of managing the Mid-City Park Corporation, and the corporation and the petitioner by agreement terminated the petitioner's contract of employment. By the terms of the settlement the petitioner received $12,500 in cash and in exchange he returned to the corporation the stock he had heretofore received. The fair market value of the capital stock of the Mid-City Park Corporation when it was received by the petitioner was equal to its par value. The petitioner in his income-tax return for1929 BTA LEXIS 2379">2381 1922 reported a gain of $12,500 from the sale of his shares of the capital stock of the Mid-City Park Corporation, and claimed a loss of $7,500 on the cancellation of his contract of employment. The respondent disallowed the deduction. OPINION. MARQUETTE: It is contended on behalf of the petitioner that he was wrongfully advised to report in his return for 1922 that he had realized a gain of $12,500 from the sale of his stock in the Mid-City Park Corporation, and had sustained a loss on the cancellation of his contract of employment, but that, although the method of reporting was erroneous, the result reached was correct, in that the petitioner's income from the transaction was only $5,000 in the year 1922. The petitioner's counsel concede that the contract of employment had no value, and that the petitioner sustained no loss on its termination. We are of opinion that the petitioner's contention is well taken and should be sustained. The evidence is clear that in 1920 and 1921 he received as part of the compensation for his services, stock of the Mid-City Park Corporation of the par value of $7,500, and we are satisfied that the stock had a fair market, or actual cash value1929 BTA LEXIS 2379">2382 at that time equal to its par value, and to that extent was income to the petitioner when he received it. He also received stock of the par value of $5,000 in 1922, and in the same year, upon cancellation of his contract of employment, he returned to the corporation all of the stock in exchange for $12,500 in cash. On the record it is evident that the petitioner's income for 1922 from this transaction was only $5,000. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620120/	JAMES J. DURKIN, JR., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Durkin v. CommissionerDocket Nos. 29548-89, 29549-89, 29550-89, 29551-89United States Tax CourtT.C. Memo 1994-6; 1994 Tax Ct. Memo LEXIS 12; 67 T.C.M. 1932; 73 A.F.T.R.2d (RIA) 421; January 10, 1994, Filed 1994 Tax Ct. Memo LEXIS 12">12 Decision will be entered under Rule 155. James J. Durkin, Jr., pro se. For respondent: Michael P. Corrado. TANNENWALDTANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined transferee liability of $ 274,261 against each of the petitioners based upon our decision in Barbara Coal Co. v. Commissioner, T.C. Memo. 1987-466, affd. without opinion 853 F.2d 916">853 F.2d 916 (3d Cir. 1988) (hereinafter the corporate taxpayer in that case will be referred to as Barbara Coal), wherein we decided that there was a deficiency in that corporation's Federal income tax of $ 378,798.79 for the fiscal year ending April 30, 1974. The decision in Barbara Coal became final on September 13, 1988, and the notices of transferee liability were mailed to petitioners on September 27, 1989. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners were residents of Dallas, Pennsylvania, at the time the petitions were filed. At all pertinent times, the shares of stock of Barbara Coal were owned as follows: James J. Durkin, Sr., 16.66 percent, Anna Jean Durkin, 16.66 percent, Edward E. Durkin, 1994 Tax Ct. Memo LEXIS 12">13 33.33 percent, James J. Durkin, Jr., 33.33 percent. Following the sale of a substantial portion of Barbara Coal's assets for $ 2 million, and the adoption of a plan of liquidation by the board of Barbara Coal on February 18, 1974, Barbara Coal distributed to petitioners a total of $ 750,000 as follows: $ 250,000 to James J. Durkin, Sr., and Anna Durkin, 2 $ 250,000 to James J. Durkin, Jr., and $ 250,000 to Edward E. Durkin. On February 10, 1975, (1) Barbara Coal and petitioners established a trust in dissolution of Barbara Coal, (2) the board and shareholders of Barbara Coal transferred all of its remaining assets to the aforementioned trust established by shareholders, and (3) the trustee made distributions to petitioner-shareholders as follows: $ 24,261.001994 Tax Ct. Memo LEXIS 12">14 to James J. Durkin, Jr., the same amount to Edward E. Durkin, $ 12,130.50 to James J. Durkin, Sr., and $ 12,130.50 to Anna Durkin. 3The trust agreement appointed James J. Durkin, Jr., as trustee for the petitioner-shareholders, provided for the distribution of the remaining assets to him and his assignment of the beneficial interest therein to petitioner-shareholders and established a procedure for the liquidation of the remaining corporate assets, satisfaction of outstanding claims and distribution of the net proceeds to petitioner-shareholders as beneficial owners. The trust agreement provided: SEVENTH: The term of this Agreement shall be for one (1) year or until full and final distribution by the TRUSTEE, 1994 Tax Ct. Memo LEXIS 12">15 whichever occurs first, subject, however, to the right of the SHAREHOLDERS to renew the term hereof by unanimous consent for additional one (1) year periods in order to allow the TRUSTEE to fully effectuate the purposes hereof.On March 15, 1977, James J. Durkin, Jr., as trustee, appointed C. E. Parente, CPA, as the attorney-in-fact for Barbara Coal before the Internal Revenue Service for the taxable periods ending April 30, 1974, and April 30, 1975. On March 3, 1977, Mr. Parente signed a Form 872, Consent Fixing Period of Limitation Upon Assessment of Income Tax, for the taxable year ending April 30, 1974, extending the period for assessment to June 30, 1978. Mr. Parente executed further Forms 872 extending that period in respect of the taxable years ending April 30, 1974, and February 18, 1975 (the short year), as follows: On January 4, 1978, to June 30, 1979; on January 15, 1979, to December 31, 1979; and on October 25, 1979, to December 31, 1980. OPINION Petitioners concede all of the elements which normally create transferee liability. See Hagaman v. Commissioner, 100 T.C. 180">100 T.C. 180, 100 T.C. 180">185-186 (1993); Gumm v. Commissioner, 93 T.C. 475">93 T.C. 475, 93 T.C. 475">480 (1989),1994 Tax Ct. Memo LEXIS 12">16 affd. without published opinion 933 F.2d 1014">933 F.2d 1014 (9th Cir. 1991). They resist liability on three grounds. First, petitioners contend that James J. Durkin, Jr., as trustee, was without authority to execute the power of attorney to Mr. Parente in March 1977. Therefore, they conclude that the periods of limitation were not extended by the Forms 872 which he executed with the result that the deficiency notice issued to Barbara Coal was untimely and consequently the period of assessment against Barbara Coal expired more than 1 year prior to the issuance of the notices of transferee liability herein. Their position is totally without merit. Whether the period of limitations had expired in respect of the notice of deficiency issued to Barbara Coal is an affirmative defense which could have been presented in the prior proceeding in this Court; it did not affect our jurisdiction over that proceeding. Badger Materials Inc. v. Commissioner, 40 T.C. 1061">40 T.C. 1061, 40 T.C. 1061">1063 (1963); see Saso v. Commissioner, 93 T.C. 730">93 T.C. 730, 93 T.C. 730">734 (1989). Such being the case and petitioners being in privity with Barbara Coal, the issue is1994 Tax Ct. Memo LEXIS 12">17 res judicata and cannot be raised in this proceeding. Estate of Egan v. Commissioner, 260 F.2d 779">260 F.2d 779 (8th Cir. 1958), affg. 28 T.C. 998">28 T.C. 998 (1957), and citing with approval Jahncke Service, Inc. v. Commissioner, 20 B.T.A. 837">20 B.T.A. 837 (1930); First National Bank v. Commissioner, 112 F.2d 260">112 F.2d 260, 112 F.2d 260">262 (7th Cir. 1940), affg. a Memorandum Opinion of this Court dated July 5, 1939; Krueger v. Commissioner, 48 T.C. 824">48 T.C. 824 (1967). Moreover, based upon the various actions of the parties herein after the creation of the liquidating trust in February 1975, we think that, in any event, James J. Durkin, Jr., had the authority to continue to carry out his responsibility as trustee under the trust instrument and Pennsylvania law to provide for the defense of respondent's claim against Barbara Coal, including the execution of the power of attorney in question. In Re Thaw's Estate, 163 Pa. Super. 484, 63 A.2d 417">63 A.2d 417 (1949); Restatement, Trusts 2d, sec. 344 comment a (1959); see also Swoboda v. United States, 258 F.2d 848">258 F.2d 848 (3d Cir. 1958),1994 Tax Ct. Memo LEXIS 12">18 affg. 156 F. Supp. 17">156 F. Supp. 17 (E.D. Pa. 1957). 4Second, petitioners argue that the notices of transferee liability were not timely. Our decision in the prior proceeding became final on September 13, 1988. The limitation for assessment against Barbara Coal was suspended at the time the notice of deficiency was issued December 9, 1980, and remained suspended until 60 days after the Tax Court decision became final. Sec. 6503(a). 5 The period of limitations for the assessment of transferee liability is 1 year after the expiration of the period of limitations against the transferor. Sec. 6901(c). Consequently, the issuance of the notices of transferee liability, on September 27, 1989, was well within the applicable time1994 Tax Ct. Memo LEXIS 12">19 period, and we so hold. Finally, petitioners contend that the liability of each petitioner is limited to his or her pro rata share of the total assets of Barbara Coal transferred. We disagree. In Estate of Harrison v. Commissioner, 16 T.C. 727">16 T.C. 727, 16 T.C. 727">731 (1951), we stated: It is well settled that a transferee is severally liable for the unpaid tax of the transferor to the extent of the assets received * * . Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589 [(1931)]. In the event that one transferee is called upon to pay more than his pro rata share of the tax, he is left to his rights of contribution from the other transferees.See also Davis v. Birdsong, 275 F.2d 113">275 F.2d 113, 275 F.2d 113">115 (5th Cir. 1960). Each petitioner is therefore liable for the full amount of the tax liability up to the amount of assets transferred to that petitioner. To reflect1994 Tax Ct. Memo LEXIS 12">20 the foregoing, Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners have been consolidated herewith: Anna J. Durkin, docket No. 29549-89; Estate of James J. Durkin, Sr., Deceased, James J. Durkin, Jr., Personal Representative, docket No. 29550-89; Edward E. Durkin, docket No. 29551-89.↩2. A distribution of $ 150,000 was made to James J. Durkin, Sr., and Anna Durkin, jointly, and $ 100,000 was distributed to James Durkin, Sr. Respondent concedes that Anna Durkin's liability as a transferee in respect of this distribution is limited to $ 150,000.↩3. Respondent so stipulated. She incorrectly assumes that Anna Durkin's liability in respect to this distribution amounts to $ 24,261. There is no evidence that this distribution was made jointly to James Durkin, Sr., and Anna Durkin in the amount of $ 24,261 as was the case with the $ 150,000 distribution.↩4. Petitioners, on brief, refer to Pennsylvania law which they assert required the written consent of the shareholders in order for the Forms 872 to be valid. They have provided us with no Pennsylvania authority for this assertion nor has our independent research revealed any.↩5. All statutory references are to the Internal Revenue Code in effect for the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620121/	PARIS G. SINGER and JANE E. SINGER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent OSCAR S. GRAY and ELEANOR L. GRAY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSinger v. CommissionerDocket Nos. 8575-72, 8576-72.United States Tax CourtT.C. Memo 1975-63; 1975 Tax Ct. Memo LEXIS 310; 34 T.C.M. 337; T.C.M. (RIA) 750063; March 18, 1975, Filed K. Martin Worthy and Michael C. Durney, for the petitioners. JON @T. Flask, for the respondent. MEMORANDUM FINDINGS OF FACT AND OPINION For the calendar year 1969 the Commissioner determined deficiencies of $80,088.84 in the income tax of petitioners Paris G. and Jane E. Singer and $70,812.50 in the income tax of petitioners Oscar S. and Eleanor L. Gray. The following issues1975 Tax Ct. Memo LEXIS 310">311 remain to be decided: (1) Whether petitioners' stock in a certain corporation became worthless in 1969; (2) whether loans from petitioners to that corporation became worthless debts in 1969; and if so, whether the losses were business or non-business bad debts in the case of petitioners Singer; and (3) whether certain legal fees paid by the Singers in 1969 are deductible or must be capitalized. FINDINGS OF FACT The parties have filed a stipulation and supplemental stipulation of facts along with exhibits which are incorporated herein by this reference. Throughout the taxable year 1969 petitioners in each case, Paris G. Singer ("Singer") and Jane E. Singer in Docket No. 8575-72, and Oscar S. ("Gray") and Eleanor L. Gray in Docket No. 8576-72, were husband and wife. Both couples filed joint income tax returns for that year. At the time they filed their petitions herein they resided in Florida. Worthless stock and bad debts. From 1964 through 1971, Singer was engaged in the active practice of law in Fort Lauderdale, Florida. Initially he was associated with three other lawyers in an expense sharing arrangement, using the firm name of Andrews, Singer, Lubbers and Kilby. In 19671975 Tax Ct. Memo LEXIS 310">312 Kilby withdrew and the remaining members formed Andrews, Singer andLubbers, a partnership, in which profits were shared equally. The partnership was, in turn, succeeded by a professional association with the same name and three participants. During the summer of 1964, Vincent Welch, a lawyer practicing in Washington, D.C., who specialized in Federal Communications Commission ("FCC") matters, suggested to Singer and Lucille Frostman, a local realtor who was one of Singer's clients and social acquaintances, that they consider establishing a UHF television station in Fort Lauderdale. Singer was attracted to this idea, in part, by the prospect of the station as a client and also by the possibility that it would enhance his influence and reputation in the community. Pursuant to a Proposal dated November 30, 1964, and signed by Singer and Frostman as organizers, 11 investors, themselves included, subscribed to shares of the stock of Broward Broadcasting Company, Inc. ("Broward"), which was incorporated in Florida on December 17, 1964, for the purpose of establishing, owning and operating the proposed television station. The initial authorized capital of Broward consisted of 140,0001975 Tax Ct. Memo LEXIS 310">313 shares of $1 par common stock, 126,000 shares of which were subscribed to by the 11 subscribers at par. Singer's share was 10 percent or 12,600 shares. Options to purchase onehalf of the remaining 14,000 shares at par were given to each of the two organizers, Singer and Frostman, and subsequently exercised. From the outset it became the practice to elect all of the stockholders to the board of directors. At this time Singer hoped that Broward's activities would generate about $30,000 each year in legal fees for his practice. The amounts actually billed, as set forth in the following table, fell short of his expectations: LEGAL FEES BILLED TO BROWARD BY SINGERAND HIS FIRMS YearAmount1965$ 605.5719661,763.4719676,883.841968 1/19,327.25196916,022.7519705,398.5050,001.38Of the total amount billed, $25,715.58 was never paid. On January 20, 1965, Broward filed its application for a construction permit for a new commercial television broadcast station with the FCC, in which it anticipated1975 Tax Ct. Memo LEXIS 310">314 that the initial capital investment of $126,000, combined with a $200,000 loan from a commercial bank and advance purchases of time by advertisers of about $200,000, would be adequate to cover the cost of the broadcast facilities, estimated to be about $329,500. It was also anticipated that in the first year of operation revenues would exceed costs by about $30,000. Broward had no network affiliation and planned to operate as an independent station. On June 10, 1965, the FCC granted Broward a construction permit for a station with call letters WSMS-TV on the condition that it accept Channel 51 instead of Channel 39 which had been tentatively assigned to the Fort Lauderdale area at the time the company applied for its permit. The higher the channel, the more technical problems and sensitivity are encountered, and there is a loss of effectiveness. Broward in fact was to encounter various technical problems in broadcasting on Channel 51 in later years. At the combined stockholders and directors meeting on December 6, 1965, Singer, who was formerly assistant secretary, was elected president of Broward. He also retained his position as chairman of the executive committee. The shareholders1975 Tax Ct. Memo LEXIS 310">315 authorized an annual salary of $4,000 for the president, but it was never paid. Mr. Welch, who became FCC counsel and business advisor to Broward, informed its management in December of 1966, that an additional $360,000 in equity capital would be needed to go forward with construction of the station. During the next nine months the directors considered raising $500,000 by offering 100,000 shares of common stock for sale. People in brokerage firms and the television industry were solicited but without success. An impediment to raising such substantial additional capital -- in excess of the capital already committed by existing stockholders -- was an FCC prohibition against the transfer of control of the television station within three years after the existing stockholders had obtained operating authority. To make possible substantial equity investment by others in the station without losing their control over it the shareholders approved a recapitalization of Broward in 1967. The original authorized common stock was doubled to 280,000 shares, and an issue of 220,000 shares of a new Class A common stock with restricted voting rights was authorized. A prospectus was prepared, as of1975 Tax Ct. Memo LEXIS 310">316 November 6, 1967, to facilitate the private placement of 100,000 shares of the Class A stock at $6 per share, in minimum units of $40,000 each. It was estimated in the prospectus that the cost of station construction, equipment and preoperating expenses would be $865,000 and that an additional $100,000 would be necessary to cover the anticipated first year's operating deficit. Efforts to sell this stock were unsuccessful. A "package deal" was thereafter authorized by the directors on March 6, 1968, in which 25,000 units consisting of one share of common stock and two shares of Class A common stock would be offered at a unit price of $10. None were sold. (By the end of March, 1968, all of the original 140,000 shares of common stock had been fully paid for and issued at $1 per share.) The prospectus was then amended effective April 29, 1968, to provide for a similar package deal in larger blocks at a slightly lower price, which was also unsuccessful. By this time the projected start-up costs had risen to $940,000 plus an additional cash reserve of $210,000 to cover initial operating expenses. By August 1, 1968, two new investors were found, who together purchased 22,500 shares of1975 Tax Ct. Memo LEXIS 310">317 common stock and 32,500 shares of Class A stock at $1 per share, while some existing stockholders increased their investments by purchasing 33,060 additional shares of common at the same price. Later in August of 1968 the remaining 84,440 shares of authorized common stock were offered to the shareholders at $2 per share. All of the shares were subscribed and paid for by the end of November, 1968. On August 23, 1968, Broward entered into a conditional sale agreement with RCA whereby the company purchased television broadcasting equipment for a total price of $660,942, with $99,134 to be paid in cash before delivery, and the balance of $561,808 to be paid over a 60-month period, plus interest at the rate of 7.36 percent per year. The interest amounted to $41,348.40 and was to be prepaid (before payment of the principal) in 12 equal monthly installments of $3,445.70. Because of Broward's small net worth, RCA demanded personal guarantees to the extent of $350,000 of the deferred purchase price. Frostman and another shareholder refused to participate in such a guarantee. To expedite the transaction, Singer personally guaranteed the entire $350,000, with the understanding, never fulfilled, 1975 Tax Ct. Memo LEXIS 310">318 that other shareholders would eventually join him in the guarantee. Among the many pieces of equipment purchased from RCA, some were used or older, less efficient models. To avoid confusion with a newly organized local radio station having a similar name, the shareholders changed Broward's name to "Gold Coast Telecasting Company, Inc." ("Gold Coast"), in October, 1968. During the same month, Lucille Frostman, who had been active in the efforts to set up the television station, resigned from the board of directors and disposed of her Gold Coast stock. Gold Coast's certified balance sheet dated October 24, 1968, reflected, as of September 30, 1968, a shareholders' equity of $396,940 with assets totalling $1,072,936.98 and aggregate liabilities of $675,996.98. The assets listed therein included preliminary operating expenses of $113,329.19 and station design and construction permit costs totalling $57,725.62, which were capitalized on the assumption that they could be amortized over five years against anticipated operating revenues. A cash flow projection, prepared by the corporation's accountants for the 12 months beginning October 1, 1968, predicted a deficit of $264,600 for the1975 Tax Ct. Memo LEXIS 310">319 12 months, assuming no payments on existing indebtedness to Singer's law firm. 2 To raise funds to cover this deficit and an estimated deficit of $20,000 per month for an additional six months the shareholders were asked to subscribe to the remaining 183,500 shares of Class A common stock at $2.10 per share. By November 15, 1968, the shares were fully subscribed, with payment to be made in 14 monthly installments. Delays in shipment of the RCA equipment, faulty design of the broadcasting tower, increases in time required for engineering tasks and studio remodeling, and the effects of a hurricane prevented the station from "going on the air" until December 6, 1968. To ascertain the impact of these difficulties, Gold Coast requested a second cash flow projection, this time for the 12 months beginning December 1, 1968. The report of the accountants dated December 15, 1968, estimated that the cash flow deficit for that period would be $380,000. To ease the immediate cash flow problem a $60,000, 60-day loan bearing interest at 6-3/4 percent was obtained from the American National Bank and Trust Company1975 Tax Ct. Memo LEXIS 310">320 of Fort Lauderdale. After commencing to broadcast Gold Coast encountered numerous difficulties touching all phases of its operations. The Fort Lauderdale News, the area's major newspaper and one of the station's prime competitors for advertising, directed its employees not to cooperate with the station. As a result the paper did not publish the station's program schedules until July or August of 1969. Nor was the station able to have its schedule published in either the Miami or Palm Beach newspapers, or T.V. Guide. Although Gold Coast operated the only television station in Broward County, that area was also served by five VHF and two UHF stations in Miami and two VHF stations in Palm Beach. A major technical problem that interferred with the station's operation was the breakdown of the multiplexer (an electronic link between the transmitter and antenna) which interrupted signal transmission until repaired. The problem was compounded by the fact that the station's studio was in Fort Lauderdale, while its antenna and transmission facilities were located some distance away in Pembroke Park. Programs were relayed from the studio to the transmitter on microwave equipment. Before the1975 Tax Ct. Memo LEXIS 310">321 FCC granted the station remote control authority to operate the transmitter from the studio, an engineer had to be kept on duty at the transmitter, with the consequence that the interruption in transmission caused by the multiplexer failure would last only about 30 minutes. But when the station later switched to remote control with the FCC's permission, the duration of these interruptions increased to as much as six hours. As a result, the station rarely achieved the minimum operating efficiency standards set by the FCC. Operating efficiency was also impaired by an initial error in installing the directional transmission antenna. Until the error was corrected, a major advertiser and some stockholders of the company could not receive the station's broadcasts in their homes. Transmission quality also suffered from occasional problems with the microwave relay between the studio and transmitter. During the first three months of 1969 air time sales totalled $57,224.25, compared to the $86,000 projected. To ease its cash problems, Gold Coast launched an economy drive in April, 1969, which included nonrenewal of its contract with a public relations firm, discontinuance of local, live1975 Tax Ct. Memo LEXIS 310">322 news, and the elimination of much of its news department. However, two new stockholders purchased a total of 4,000 shares of Class A common stock at $5 per share, and by this time petitioner Gray, a business associate and client of Singer, had subscribed to and paid for 30,000 shares of Class A stock, also at $5 per share. In April of 1969, the monthly payments due RCA were suspended. Only two interest payments totalling $6,891.40 had theretofore been made to RCA under the conditional sales contract. The refusal to make further payments was due, at least in large part, to dissatisfaction with RCA and the defective character of equipment supplied by it. No further payments were ever made. Hoping to increase air time sales a new sales agent was hired, but then fired when his high pressure tactics produced disgruntled customers. The inexperienced production and technical staff produced commercials of poor quality and made many errors. In June, 1969, Gold Coast fired the station's general manager and hired a new manager; it also employed the president and general manager of a nearby radio station as advisors. In a memorandum dated June 21, 1969, one of the new advisors criticized the1975 Tax Ct. Memo LEXIS 310">323 station's lack of staff ogranization, poor programming, weak and inefficient production department, and lack of repeat advertising business, and in a subsequent memorandum he characterized the station's output as "a pretty sad performance on the air". Nonetheless, he outlined several changes that had been implemented to improve the situation including training new technicians and securing new one-year advertising contracts. The financial health of Gold Coast worsened. In July, 1969, the $60,000, 60-day, commercial bank loan came due and was renewed only after Singer agreed to guarantee the note. On August 1, 1969, the accountants submitted an interim financial statement for the first three months of 1969 which reflected an operating loss of $184,629.83 in that period. By the end of July the loss had grown to $441,034.46. After having paid 5/14ths of the amount due under their Class A stock subscription agreements the directors (who were also the shareholders) cancelled them, in part because of the refusal of many of them to make further payments, and also because a recapitalization of Gold Coast was contemplated. During the summer of 1969 Gold Coast borrowed a total of $75,0001975 Tax Ct. Memo LEXIS 310">324 from Gray and $10,000 from Singer. These loans were unsecured and evidenced by demand notes bearing 8-1/2 percent interest. Unsuccessful attempts were made to raise additional funds by selling a fixed, "non-dilutable" 25 percent equity interest in the corporation for $500,000. In August of 1969, 2,476 shares of Class A common stock were issued to Singer's law firm as partial payment of legal fees, and 685 shares of Class A common stock were issued to the corporation's former manager as payment for office furnishing which he had supplied. On September 5, 1969, Gold Coast was recapitalized. Two million shares of 25" par value common stock were authorized, of which 431,466 were issued in exchange for all the outstanding Class A and common stock on a share for share basis. As a result, Singer received 101,729 shares of the new stock representing his total cash investment of $198,415, and Gray received 30,000 shares representing his investment of $150,000. It was hoped that the elimination of the impairment of capital achieved by reducing the par value of the outstanding stock would attract new investors. Having retained control of the FCC permit for at least three years the shareholders1975 Tax Ct. Memo LEXIS 310">325 were able in October, 1969, to offer a 51 percent controlling interest in Gold Coast for $500,000 cash plus a commitment to continue financing the operation of the station. A number of persons were solicited, but none of them responded favorably. In the fall of 1969 Singer was advised that the company's broadcasting equipment would be worth much more if sold in situ along with the FCC permit as opposed to a forced sale. The personal guarantee Singer had given RCA when the company purchased this equipment made him particularly sensitive to this asserted difference in value. Interim financial statements as of August 31, 1969, reflected an operating loss for August of $58,850.23, bringing the total for the previous eight months to $499,884.69. A balance sheet prepared by the accountants as of November 30, 1969, indicated shareholders' equity of $49,755.27. Current liabilities were shown as $435,159.88 compared to current assets of only $99,329.03, and of the $1,625,880.99 in total assets listed, $197,973.05 represented preoperating expenses and $64,751.50 station design and construction permit costs which were still being capitalized on the assumption that they could be amortized1975 Tax Ct. Memo LEXIS 310">326 over several years against future earnings. Gold Coast was not the only independent UHF station incurring substantial losses: 46 out of 48 independent UHF stations reporting financial data for 1968 to the FCC reported losses with 25 experiencing losses of $400,000 or more. For the previous year 35 out of 37 reported losses, and for the following year 43 out of 48. During the latter part of 1969 and early part of 1970 Singer continued to search for additional capital. He and Gray considered investing another $250,000 each in Gold Coast which they hoped to obtain in a proposed secondary offering of part of their stockholdings in Gray Industries, Inc., but the offering was cancelled. Nonetheless, they advanced additional sums to the company, all evidenced, as before, by unsecured, demand notes bearing 8-1/2 percent interest. By the end of 1969 they had advanced the following amounts in this manner: Paris G. SingerOscar S. Gray DateAmountDateAmount8-26-69$10,0006-11-69$ 25,00010-9-6925,0007-15-6925,00010-23-6910,0008-7-6925,00011-6-6910,00011-6 -6910,00011-20-6915,00011-20-6915,00012-4-697,50012-4-697,50012-11-695,00012-19-6910,000$107,500Total$92,5001975 Tax Ct. Memo LEXIS 310">327 In December of 1969 the station continued to operate, although at a loss. The financial picture was discouraging but Singer did not believe it was hopeless and continued, as he did throughout much of 1970, to search for additional financial assistance for Gold Coast. On or about December 12, 1969, Singer asked Welch, the station's FCC counsel, whether it would be possible for the station to go off the air without losing its permit. In January, 1970, Welch advised him that the FCC would probably grant permission to cease broadcasting for 90 days to enable the station to resolve its financial and technical difficulties. Around January 25, 1970, the board of directors decided to request such permission after giving the station's employees one week of notice. On February 3, 1970, Gold Coast wired the FCC requesting the permission, which was granted two days later. Gold Coast ceased broadcasting on February 6, 1970, and was authorized to remain off the air until May 6, 1970. The January, 1970, employee payroll of approximately $10,000 was met by voluntary loans from shareholders who made the loans because it was right after Christmas and because they wanted to see that the employees1975 Tax Ct. Memo LEXIS 310">328 were paid. Singer, however, continued to seek financial assistance while advancing additional sums to Gold Coast, $17,000 in the first two months of 1970, and in excess of $130,000 subsequent to February 28, 1970. No financial statement as of the end of 1969 was prepared for Gold Coast because of its failure to pay for earlier services rendered by its accountants, but at some time in the next few months another financial statement emerged from the offices of the accountants, ostensibly at Gold Coast's request, which reflected a deficit in shareholder equity of $80,269.59 as of February 28, 1970, as a result of the operating losses incurred by the corporation in December, January and February. In May of 1970, the directors sought and secured permission to remain off the air for another 90 days. In connection therewith Singer wrote a letter dated May 1, 1970, to the Secretary of the FCC in which he stated that "there are still pending negotiations with others respecting the refinancing of the Company", but that "as of this date no specific written proposal has been received". Around the same time three shareholders, Kelley, Wiggins and Qualmann, set up a voting trust arrangement whereby1975 Tax Ct. Memo LEXIS 310">329 they could obtain control of Gold Coast. At a shareholders' meeting on May 29, 1970, Singer resigned as president of Gold Coast on condition that the other shareholders would pay for legal counsel of his choice to represent him as a party plaintiff in any legal proceeding brought by the corporation against RCA. New directors and officers were elected. In the following July the new management caused the corporation to file a suit against RCA for $6,250,000, alleging that RCA negligently performed its duties under the conditional sales agreement and failed to properly advise the corporation with respect to the purchase and installation of the equipment. Singer was reelected president of Gold Coast in September, 1970, and promptly caused the suit to be dismissed. In the summer of 1970, the same accountants who prepared Gold Coast's earlier financial statements, prepared a new statement as of December 31, 1969, in connection with the preparation of the individual income tax returns of Singer and Gray. By this time the accountants had already advised the petitioners to claim losses on their 1969 income tax returns with respect to their investments in Gold Coast. On this statement depreciation1975 Tax Ct. Memo LEXIS 310">330 was calculated on the basis of shorter useful lives and an accelerated schedule of write-offs. Also, the preoperating expenses carried as assets subject to amortization on the earlier statements were written off. The consequence of these and other less significant changes was a deficit in shareholders' equity totalling $379,147.55. The secured creditors repossessed most of Gold Coast's assets, while the remaining unsecured assets were seized by the United States on October 12, 1970, to be applied in partial satisfaction of the corporation's liability for unpaid payroll taxes. The balance was ultimately paid by Singer as a responsible officer. Despite the fact that no other creditors were paid after Gold Coast ceased broadcasting, the corporation managed to retain possession of its FCC permit by continually requesting and receiving permission to remain off the air for additional 90-day periods. In his letter to the Secretary of the FCC dated November 2, 1970, in which he sought an additional 90-day extension from November 6, 1970, Singer stated I expect very shortly to reach mutually satisfactory agreements with RCA at which time I have, hopefully, several sources of additional1975 Tax Ct. Memo LEXIS 310">331 financing which would then permit the rehabilitation and commencement of broadcast operations of and by the company. On December 4, 1970, RCA filed suit against Gold Coast on its conditional sales agreement and against Singer on his $350,000 guarantee, in response to which a counterclaim was filed for $5.6 million in damages by Singer and Gold Coast. The dispute was initially settled by an agreement that was placed in escrow on September 14, 1971, pending necessary FCC approval. Pursuant to the agreement Singer undertook to purchase the Gold Coast equipment with modifications, which he in turn leased to a new corporation in which he had a 12 percent stock interest and to which Gold Coast assigned its FCC permit. The net cost to Singer (i.e., the difference between the cost of the equipment to him and the rentals payable to him under the lease), would have been $307,000 paid over six years; however, no payments were ever made to Singer or by Singer under the agreement. In January, 1974, the parties executed reciprocal releases. The total amount of paid-in capital paid by all the shareholders of Gold Coast was $742,725.35, and no part thereof was ever returned to any of the shareholders.1975 Tax Ct. Memo LEXIS 310">332 Neither Singer nor Gray ever received any interest or principal payments on their demand notes. At no time did Gold Coast enter into bankruptcy or receivership, nor did the shareholders or directors approve a plan of complete or partial liquidation. The failure of Gold Coast was a major contributing factor to the termination of Singer's professional association with Andrews, Singer and Kilby in July of 1971. On their 1969 joint income tax return Singer and his wife reported a long-term capital loss of $198,415 with respect to their stock in Gold Coast and a $92,500 short-term loss with respect to the advances they made to it during the latter half of 1969. The Singers later filed an amended income tax return for 1969 on which they claimed the $92,500 as a deduction against ordinary income rather than a capital loss. In his deficiency notice, the Commissioner disallowed the longterm capital loss stating that: It is determined that the amount of $198,415.00 claimed as a long-term capital loss from worthless stock in Gold Coast Telecasting Co., Inc. is not allowable because it has not been established that the stock became worthless in the taxable year 1969. With respect to the1975 Tax Ct. Memo LEXIS 310">333 $92,500 item the Commissioner determined that: [The] amount of $92,500.00, claimed as a shortterm capital loss on your original return, resulting from the transfer of funds to Gold Coast Telecasting Co., Inc. is not allowable because it has not been established that the debt became worthless in the taxable year 1969. Furthermore, if it is found that this debt was worthless in tax year 1969, it is determined that the debt was a nonbusiness bad debt rather than a business bad debt as claimed on Schedule C of your amended return since this was a personal loan and was not created in connection with your trade or business. On their 1969 joint income tax return, petitioner Gray and his wife claimed a long-term capital loss of $150,000 with respect to their stock in Gold Coast, and a short-term capital loss of $107,500 resulting from funds they advanced to it during the second half of 1969. The Commissioner disallowed these deductions in his deficiency notice, explaiming that: (a)(1) It is determined that the amount of $107,500.00 claimed as a short-term capital loss resulting from the transfer of funds to Gold Coast Telecasting Co., Inc. is not allowable because it has not been established1975 Tax Ct. Memo LEXIS 310">334 that the debt became worthless in the taxable year 1969. (a)(2) It is determined that the amount of $150,000.00 claimed as a long-term capital loss from worthless stock in Gold Coast Telecasting Co., Inc. is not allowable because it has not been established that the stock became worthless in the taxable year 1969. Legal Fees. In August of 1962, Singer owned stock in Airlift International ("Airlift"), a certified air cargo carrier (then known as Riddle Airlines), which was in dire financial straits. Hoping to turn the company around, some of Airlift's shareholders including Singer formed a stockholders' committee and elected James Franklin president of the corporation. Early in 1963, Singer was elected a director. Franklin's control over Airlift was assured by voting trust agreements pursuant to which the shares owned by two of the largest stockholders, Robert M. Hewitt, his predecessor, and William R. Price, and by General Dynamics were placed in a voting trust, with Franklin as trustee. In October, 1964, James H. Price, brother of William R. Price, and a substantial Airlift stockholder, was in need of cash and offered to sell Franklin some of his stock. An agreement was1975 Tax Ct. Memo LEXIS 310">335 reached whereby Franklin purchased from him 125,000 shares for $34,000, on the condition that he agree to place all of his stock in a voting trust with Franklin as voting trustee. At that time James H. Price owned a little more than one million of the nearly fourteen million shares of Airlift stock outstanding. Under the sale and voting trust agreements as executed, Price had the option to repurchase the 125,000 shares for the contract price plus interest. Among other things, the sale agreement also provided that Price would not appear in person or by proxy, in any capacity, at the Airlift shareholders' meeting to be held late in 1965, nor in any way interfere with or bother Airlift's management in the conduct of its affairs. Price also agreed not to file or encourage others to file any suits, stockholders', derivative or otherwise, against Airlift, its directors, officers, employees, consultants or advisers, including counsel, in connection with any aspect of Airlift's management, operation or financing. The duration of the voting trust was specified by the following provision: This [Voting Trust] Agreement is irrevocable and subject to the other terms hereof shall continue1975 Tax Ct. Memo LEXIS 310">336 in effect until one week after completion of the 1965 annual stockholders' meeting of Airlift subject to extension as provided for in that certain Agreement of even date between the parties hereto, but in no event shall this voting trust continue for longer than ten years. * * * In turn, the stock purchase agreement provided that: In the event of any default and any resultant litigation, the life of this Agreement and of the Voting Trust Agreement shall automatically extend until final resolution of said default and litigation, except that in no event shall the Voting Trust continue for longer than one (1) day less then ten (10) years from the date of execution and delivery hereof. Singer acted as Franklin's counsel during the negotiation of these agreements, and they agreed to split the 125,000 shares between them, each paying $17,000 for 62,500 shares. At that time Singer already owned 181,500 shares of Airlift and was the fifth largest stockholder, after Hewitt, the Prices and Franklin, out of about 10,000 stockholders. Under Franklin's guidance Airlift prospered. Revenues, earnings and ultimately the value of Airlift stock rose considerably. James H. Price sought at one1975 Tax Ct. Memo LEXIS 310">337 point to exercise his repurchase option, but did not when informed by Franklin that the shares would then have to go into the voting trust. Rather, on January 12, 1966, Price filed suit against Airlift and Franklin seeking to have the sale of stock and voting trust agreements set aside. In addition to the cancellation of the two agreements, the requested relief included damages, court costs and attorneys' fees, and an order directing Airlift to transfer certain shares on its books sold by Price to third parties. Franklin retained counsel at a fixed fee of 20 percent of the 125,000 Airlift shares Price sought to recover. Although not a party to the suit, Singer agreed to reimburse Franklin for one-half of these expenses. At the time the suit was filed the value of the 125,000 shares of Airlift stock had risen substantially. On September 26, 1966, the trial judge dismissed the lawsuit with prejudice and awarded the costs to the defendants. The dismissal was affirmed on appeal by the Florida District Court of Appeals in 1969. In May of 1969, pursuant to their agreement, Singer conveyed 12,500 shares of Airlift stock to Franklin, which represented one-half of the 25,000 share legal1975 Tax Ct. Memo LEXIS 310">338 fee. The fair market value of those 12,500 shares at that time was $60,937.50, which amount Singer and his wife deducted from gross income on their 1969 income tax return. In his deficiency notice the Commissioner disallowed this deduction stating that: It is determined that legal fees incurred in defending title to Airlift International stock constitute a cost of the property rather than an ordinary deduction as claimed on your amended return, and, as such, are added to the original cost to arrive at a new adjusted basis. Therefore, upon disposition of 12,500 shares of Airlift International stock you realized a long-term capital loss of $2,500.00 as computed below: Original cost of stock$ 2,500.00Legal fees incurred60,937.50Adjusted basis$63,437.50Services received for stock60,937.50Loss on exchange$ 2,500.00 In an amendment to his answer the Commissioner revised his position and asserted that the legal fees of $60,937.50 should be added to Singer's basis for all 62,500 shares involved in the litigation, and therefore, that the basis in the 12,500 shares transferred to Franklin was only $14,687.50, resulting in a capital gain of $46,250 on the1975 Tax Ct. Memo LEXIS 310">339 exchange. OPINION RAUM, Judge: This case raises the frequently litigated factual question whether stock owned by a taxpayer became worthless in a particular year, thereby entitling him to claim as a capital loss on the last day of that year his investment therein, as provided in section 165 of the Internal Revenue Code of 1954. 3 The taxpayer has the burden of proof on this issue, Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287, 326 U.S. 287">294; Mahler v. Commissioner,119 F.2d 869, 871 (C.A. 2), and to carry this burden he must establish not only that the stock had value at the beginning of the particular year, but also that by the end of the sam year, the stock had no liquidating value, and there was no "reasonable hope and expectation that it [would] become valuable at some future time". Sterling Morton,38 B.T.A. 1270">38 B.T.A. 1270, 38 B.T.A. 1270">1278, affirmed 112 F.2d 320 (C.A. 7); Charles W. Steadman, 50 T.C. 369">50 T.C. 369, 50 T.C. 369">376, affirmed 424 F.2d 1 (C.A. 6), cert. denied 400 U.S. 869">400 U.S. 869.1975 Tax Ct. Memo LEXIS 310">340 Petitioners Singer and Gray contend that their Gold Coast stock became worthless in 1969. Respondent does not dispute that the stock had value at the outset of that year, but contends that petitioners have not proven that it became totally worthless by the end of 1969. On the basis of our examination of all of the evidence presented by the parties we agree with respondent. Although we reach no conclusion as to whether the stock had liquidating value as of the end of 1969, 4 we are satisfied that petitioners have failed to prove that there was no reasonable hope or expectation of future value as of that time. Ordinarily, the absence of any reasonably expectable potential value is proven by establishing the occurrence of some identifiable event or events, such as receivership, bankruptcy, liquidation, or the cessation of business, that demonstrate to everyone having an interest in the affairs of the corporation that such hope or expectation is foreclosed. Sterling Morton,supra,38 B.T.A. 1270">38 B.T.A. 1270, 1278; Mahler v. Commissioner,supra,119 F.2d 869, 872; see Boehm v. Commissioner,supra,326 U.S. 287">326 U.S. 287, 294, and1975 Tax Ct. Memo LEXIS 310">341 United States v. S.S. White Dental Mfg. Co.,274 U.S. 398">274 U.S. 398. Here the most obvious events of this type, the termination of broadcast operations, the repossession of the secured assets, the seizure by the Federal Government of all of the remaining physical assets, and the transfer of the FCC permit, all took place after 1969. While the reluctance of third parties, including other shareholders, to invest additional funds in Gold Coast in 1969 is indicative of the enterprise's financial troubles, it does not signal the worthlessness of the corporation's stock. According to the petitioners, however, the absence of an identificable event in 1969 is no bar to their claim. They contend that this case is one of those "exceptional cases where the liabilities of a corporation are so greatly in excess of its assets and the nature of its assets and business is such that there is no reasonable hope and expectation that a continuation of the business1975 Tax Ct. Memo LEXIS 310">342 will result in any profit to its stockholders". Sterling Morton,supra,38 B.T.A. 1270">38 B.T.A. 1270, 1279; see also Charles W. Steadman,supra,50 T.C. 369">50 T.C. 369. In our view of the evidence before us, it is not sufficiently strong to classify this case as one of those "exceptional cases" referred to above. Although the matter may not be completely free from doubt, we think that the scales tip against petitioners and we have found accordingly. Notwithstanding that prospects were poor, we cannot conclude that they were so hopeless at the end of 1969 that only an "incorrigible optimist", United States v. S.S. White Dental Mfg. Co.,supra,274 U.S. 398">274 U.S. 398, 403, would regard the stock as having potential value at that time. The corporation was still broadcasting and continued to do so until February of 1970. We do not find convincing the evidence that the delay in going off the air was due to delay in receiving advice from Welch. If the matter of ceasing operations were seriously desired in December, there would appear to be no reason why the expression of his views could not have been received earlier, and certainly no evidence was presented1975 Tax Ct. Memo LEXIS 310">343 to explain why the matter was handled at such an apparently leisurely pace. The real explanation suggested by the record is that the corporation had not yet arrived at any such decision in 1969, bearing in mind that loans were being made to the corporation by petitioners as late as December of that year, and by petitioner Singer in particular as late as December 19. While the test of worthlessness is objective all pertinent factors, subjective and objective, must be considered, and in particular, "[the] taxpayer's attitude and conduct are not to be ignored." Boehm v. Commissioner,supra,326 U.S. 287">326 U.S. 287, 293. Singer was not prepared to throw in the towel at the end of 1969. After all, it must be recalled that a deficit was not unanticipated for the first year of operation. Obviously, unexpected technical problems and sales of air time lagging far behind overly optimistic projections had substantially increased the amount of this deficit, but Singer had not completely abandoned his hope that Gold Coast might be turned around, notwithstanding that the situation could hardly be described as encouraging. Indeed, he continued to advance funds to the company and1975 Tax Ct. Memo LEXIS 310">344 seek new sources of capital. We do not find credible Siger's testimony that the refusal of a Mr. Gerity in the last week of December 1969 to make an investment in the enterprise represented Singer's "last dying gasp" in his efforts to obtain additional outside financing. Rather, the record shows continued efforts in that direction by Singer during 1970. Thus, on May 1, 1970, he wrote in his letter to the Secretary of the FCC that "there are still pending negotiations with others respecting the re-financing of the Company", although noting at the same time that "as of this date no specific written proposal has been received". And in a similar letter dated November 2, 1970, he wrote that he expected "very shortly" to reach mutually satisfactory agreements with RCA "at which time I have, hopefully, several sources of additional financing which would then permit the rehabilitation and commencement of the broadcast operations of and by the company". In his testimony before us he attempted to characterize those statements as having been couched in "weasel" language. We reject any such cynical explanation. As further evidence that the Gold Coast stock had potential value as of the end1975 Tax Ct. Memo LEXIS 310">345 of 1969, we note that Singer made loans of $17,000 to the corporation during the first two months of 1970, and further loans in excess of $130,000 thereafter. And we do not accept as credible an explanation that such loans were made solely to stave off his liabilities on the $350,000 RCA guarantee, the $60,000 bank loan, and some $50,000 in payroll taxes. While this may have been a factor, and perhaps an important one, it is our judgment on the entire record that he was also interested in preserving his investment in the enterprise with the hope of realizing something in respect thereof in the long run. Therefore, we hold that respondent properly disallowed the losses that petitioners claimed they incurred in 1969 with respect to their investment in Gold Coast stock. Bad Debt Deduction.As in the case of worthless stock, to substantiate their claims to losses or deductions in 1969 with respect to the funds that they advanced to Gold Coast, petitioners must prove that events occurred prior to the beginning of 1970, which establish that there was no reasonable prospect of recovery thereafter of any part of these debts owed to them by Gold Coast. 5 Section 166; 6United States v. S.S. White Dental Mfg. Co.,supra,274 U.S. 398">274 U.S. 398;1975 Tax Ct. Memo LEXIS 310">346 W. A. Dallmeyer,14 T.C. 1282">14 T.C. 1282, 14 T.C. 1282">1291-2. Petitioners contend that on December 31, 1969, Gold Coast's liabilities exceeded its assets to such an extent as to preclude any prospect of recovery of any part of the debts owed to them. But as we have already indicated, they have failed to prove to what extent the corporation was insolvent if at all. Furthermore, "[evidence] of insolvency based on book figures does not necessarily establish the worthlessness of debts", particularly where the corporation is continuing to actively engage in its business, as Gold Coast was throughout 1969. Trinco Industries, Inc.,22 T.C. 959">22 T.C. 959, 22 T.C. 959">965. 1975 Tax Ct. Memo LEXIS 310">347 Nor should we overlook the fact that Singer and Gray did not expect immediate repayment of their debts. Although the advances were evidenced by demand notes, they were recerded as long-term liabilities on Gold Coast's books. And in light of the financial difficulties Gold Coast was experiencing in its first year of broadcasting it must have been apparent to them that the repayment of these unsecured obligations depended entirely on the prospect of future profits, the disappearance of which has not been shown to have occurred in 1969, as we have already observed. Indeed, Singer's additional advances in 1970 are somewhat inconsistent with his claim that those made in 1969 were by that time already worthless. Cf. Richard R. Riss, Sr.,56 T.C. 388">56 T.C. 388, 56 T.C. 388">410, remanded on another issue 478 F.2d 1160 (C.A. 8), affirmed sub nom Transport Mfg. & Equip. Co.,478 F.2d 731 (C.A. 8). Since petitioners have not established the total worth-lessness of these debts in 1969 we hold that respondent correctly disallowed the bad debt deductions claimed by petitioners, and we need not consider the question whether Singer's advances were created in connection1975 Tax Ct. Memo LEXIS 310">348 with his trade or business, the practice of law, thereby entitling him to a deduction from ordinary income rather than a capital loss. Legal Expenses. It is not disputed that the proper tax treatment to be afforded litigation expenses must be ascertained by reference to the underlying claim. See Woodward v. Commissioner,397 U.S. 572">397 U.S. 572; United States v. Gilmore,372 U.S. 39">372 U.S. 39; Spangler v. Commissioner,323 F.2d 913 (C.A. 9); GeorgeEisler,59 T.C. 634">59 T.C. 634; Stass Reed,55 T.C. 32">55 T.C. 32. And if the costs are incurred in defending or perfecting the taxpayer's claim to ownership of capital assets, they must be capitalized rather than deducted from ordinary income. Secs. 1.212-1(k) and 1.263(a)-2(c), Income Tax Regulations; Spangler v. Commissioner,supra, at p. 918; 59 T.C. 634">George Eisler,supra;55 T.C. 32">Stass Reed,supra.At the heart of the dispute in this case is the proper application of these principles to the litigation between James H. Price and Franklin, part of the cost of which was borne by petitioner Singer. Singer characterizes the1975 Tax Ct. Memo LEXIS 310">349 litigation as a dispute over the validity of the voting trust agreement under which Franklin obtained the right to vote all of Price's stock. Thus, argues Singer, what was at stake was the ability of the new management represented by Franklin and his allies to maintain control over Airlift and protect the prosperity the company had enjoyed since their takeover. Since the expense was, in his view, incurred to maintain or conserve the value of his Airlift stock, it should be deductible under section 212 of the Code, which allows a deduction for expenses paid " * * (2) for the management, conservation, or maintenance of property held for the production of income * * ". Respondent takes a different view of the Price-Franklin litigation. He asserts that since Price sought to rescind the two agreements with Franklin, the latter's purchase of 125,000 shares of Airlift for $34,000, which he had split with Singer, was in jeopardy. Since Franklin and Singer stood to lose title to these shares, the litigation expense was, in respondent's opinion, incurred by Singer to defend or protect title to his half of the 125,000 shares, and must be capitalized by being added to his basis in those shares. 1975 Tax Ct. Memo LEXIS 310">350 To some extent both parties are correct. Although Price did have an option under the agreements to repurchase the 125,000 shares for $34,000, that option expired on November 25, 1965, prior to his filing suit against Franklin. Therefore, by the time the litigation was under way Franklin and Singer were secure in the knowledge that they would enjoy the substantial appreciation in value of those shares unless the sale itself were rescinded, and accordingly, the cost of defending the acquisition of these shares must be capitalized. At the same time the litigation also placed in jeopardy the voting trust agreement, which Price sought to have declared invalid. By securing for Franklin voting control over a large block of shares and prohibiting Price from attempting to influence or challenge actions taken by Airlift's stockholders or management, this agreement strengthened the ability of Franklin and his associates to control Airlift, and, in their view, disarmed another dissident who might interfere with their continuing efforts to revitalize the corporation or jeopardize their past progress in this regard. An expense paid for such a purpose would fall within section 212(2), since it1975 Tax Ct. Memo LEXIS 310">351 would plainly have been incurred for the purpose of conserving or protecting the income-producing potential of the stock in question. Accordingly, to the extent that the expense in question was incurred for this purpose it was deductible under section 212(2) and need not be capitalized. In our view of the evidence before us, the attorney's fee was paid for a dual purpose: one, to defend the acquisition and ownership of the shares, and the other, to conserve the income-producing level and prospects of those shares. The portion of the fee paid for the first purpose was not deductible, but the remaining portion paid for the second purpose was deductible. However, since there was no breakdown of that fee, and since the two matters remained intertwined throughout the course of the litigation, it is necessary that we make an allocation. George Eisler,supra,59 T.C. 634">59 T.C. at p. 641. Bearing in mind that both aspects played important and substantial roles, it is our best judgment and we hereby find as a fact that one-half of the legal costs incurred by Singer is attributable to an expense that is deductible under section 212, and the other half to the defense of title to1975 Tax Ct. Memo LEXIS 310">352 his half of the 125,000 shares in dispute. The latter portion must be capitalized and added to Singer's basis in his 62,500 shares. Decision will be entered under Rule 155 in Dt. #8575-72.Decision will be entered for the respondent in Dt. #8576-72.Footnotes1. Originally, the amount billed in 1968 totalled $26,505.09, but that amount was reduced by an adjustment in January, 1969.↩2. The accountants were advised that payment of these expenses could be deferred.↩3. SEC. 165. LOSSES * * * * (g) Worthless Securities.-- (1) General Rule.--If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. * * * ↩4. We had but little confidence in the various unverified financial statements placed in evidence purporting to reflect the condition of the corporation as of November 30, 1969, December 31, 1969, and February 28, 1970.↩5. Singer contends that if the debts became wholly worthless in 1969 he is entitled to a deduction from ordinary income rather than a capital loss because the debts were not "nonbusiness debts". Deductions for partial worthlessness can be taken with respect to business related debts; however, Singer has neither claimed nor established the basis for a deduction on account of partial worthlessness. ↩6. SEC. 166. BAD DEBTS. (a) General Rule.-- (1) Wholly worthless debts.--There shall be allowed as a deduction any debt which becomes worthless within the taxable year. (2) Partially worthless debts.--When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. * * * * (d) Nonbusiness Debts.-- (1) General rule.--In the case of a taxpayer other than a corporation-- (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. (2) Nonbusiness debt defined.--For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than-- (A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620122/	GEORGE SMURRA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent HELEN SMURRA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmurra v. CommissionerDocket No. 6983-70Docket No. 6984-70United States Tax CourtT.C. Memo 1973-246; 1973 Tax Ct. Memo LEXIS 42; 32 T.C.M. 1156; T.C.M. (RIA) 73246; November 5, 1973, Filed David M. Markowitz, for the petitioners. H. Stephen Kesselman, for the respondent. STERRETT, MEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: In these consolidated cases the Commissioner determined deficiencies in the petitioners' Federal income tax and additions thereto as follows: Additions to Tax PetitionerYearDeficiencySec. 6651(a)Sec. 6653(a) George Smurra1960$292.00$73.00$14.60George Smurra1961332.0083.0016.60George Smurra1962337.0084.2516.85Helen Smurra1960909.82227.4645.49Helen Smurra1961377.0094.2518.85Helen Smurra1962457.00114.2522.85At the close of the trial of these cases, this Court granted respondent's motion to increase the proposed 2 deficiencies in Docket No. 1973 Tax Ct. Memo LEXIS 42">43 6983-70 as follows: Increase in Additions to tax PetitionerYearDeficiencySec. 6651(a)Sec. 6653(a) George Smurra1960$620.99$155.25$31.05George Smurra1961253.0063.2512.65George Smurra1962337.0084.2516.85The issues presented for our determination are as follows: (1) Whether George Smurra had unreported taxable income in the amounts of $4,280.72, $3,836.45 and $4,290.69 for the taxable years 1960, 1961 and 1962, respectively. (2) Whether Helen Smurra had unreported taxable income in the amounts of $5,368.52, $2,764.71 and $3,192.01 for the taxable years 1960, 1961 and 1962, respectively. 1FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioners George Smurra (hereinafter referred to as George) and Helen Smurra (hereinafter referred to as Helen) are husband and wife. George and Helen, during the years in issue and at the time of the filing of their separate1973 Tax Ct. Memo LEXIS 42">44 petitions herein, resided at Hollywood, Florida. 3 For the calendar years 1960, 1961 and 1962 no income tax returns were filed by either of the petitioners. Helen maintained a checking account at the Bank of Hollywood, Hollywood, Florida. Helen made deposits as follows: YearTotal Deposits 1960$1,905.0019611,600.0019621,665.00During the years 1960 through 1962, Tucker Bros., Inc., Jacksonville, Florida, held a mortgage loan from Helen on the property where the couple resided. Payments made on the mortgage totaled $790.40, $780.80 and $784.70 for the years 1960, 1961 and 1962, respectively. The Florida Power & Light Co. provided services for the petitioners' home. The company was paid for such services in the amounts of $240.00, $247.53 and $351.71 for the years 1960, 1961 and 1962, respectively. In 1960 George paid Mack Industries, Inc., Hollywood, Florida, $595.85 for services rendered. Also in 1960 a sewer lien in the amount of $252.32 in favor of the City of Hollywood, Florida, for the property held in the names of George and Helen was satisfied through payment. On March 7, 1961, George purchased a 1961 Rambler sedan from the1973 Tax Ct. Memo LEXIS 42">45 Municipal Auto Sales, Miami, Florida, and a lien was recorded upon that automobile by Universal CIT, 4 Miami, Florida, to secure a debt of $1,868.22 owed by George. During 1961 and 1962 Helen made payments through her checking account on the automobile debt in the amounts of $934.11 and $830.32, respectively. During 1961 and 1962 George had an insurance policy on the 1961 Rambler automobile with the Sorin Insurance Agency, Hollywood, Florida. During these respective years, George paid premiums of $145.63 and $164.57. Throughout the years in issue George frequently gambled in "crap" games. OPINION We must decide whether either or both of the petitioners had unreported taxable income for the calendar years 1960, 1961 and 1962. The respondent has reconstructed the income of the petitioners through use of the bank deposits - cash expenditures method. See Granat's Estate v. Commissioner, 298 F.2d 397">298 F.2d 397 (C.A. 2, 1962), affirming per curiam a memorandum decision of this Court. Petitioners have not put in issue the amount of deposits or of expenditures for any of the years here involved. Rather they have limited their defense to a claim that the source for1973 Tax Ct. Memo LEXIS 42">46 the deposits and expenditures was from nontaxable gifts. Thus we accept respondent's computation of these deposits and expenditures and will consider only the nature of the source of said funds. 5 George's testimony has not convinced us that his receipts were from nontaxable sources. George testified that he has not worked since 1950 as a result of diabetes and a heart condition. His money came from two sources, either Helen's mother or other relatives. Helen's mother lived in the couple's home and needed constant attention. In return she often gave George money to use for family expenses. Knowing that George's mother-in-law was living with him and also knowing George's health problems caused many of his relatives to send cash, through the mails, to provide additional aid. Helen and George both testified that she received money directly from George and no other source. We find George's story to be totally lacking in credibility. The petitioners were the only witnesses on their behalf. George made no effort to show any proof of a medical disability. In fact he stated that the only medical assistance he sought was from a chiropractor who also happened to be his brother-in-law. 1973 Tax Ct. Memo LEXIS 42">47 Moreover, George made no attempt to offer the testimony of any of his relatives, even though most lived in the New York City vicinity and the trial in the instant case took place there. We may therefore assume that such testimony would have been unfavorable. Hans P. Kraus, et al, 59 T.C. 681">59 T.C. 681 (1973), on appeal 6 (C.A. 2, May, 1973); Joseph F. Giddio, 54 T.C. 1530">54 T.C. 1530 (1970). As a result we give no weight to George's testimony. 54 T.C. 1530">Joseph F. Giddio, supra, at 1534. The respondent has the burden of proof in respect of the increased deficiencies made at the time of the trial. Section 6214(a), Donald C. MacDonald, 55 T.C. 840">55 T.C. 840, 55 T.C. 840">859 (1971), Rule 32, Tax Court Rules of Practice. We have already noted that the amounts of bank deposits and cash expenditures have not been disputed by George. Moreover, in admitting that he had a current source of funds, George committed himself to the explanation that such funds came in the form of gifts from relatives. We have rejected George's testimony on this score. Cf. United States v. Massei, 355 U.S. 595">355 U.S. 595 (1958); Gatling v. Commissioner, 286 F.2d 139">286 F.2d 139 (C.A. 4, 1961), affirming1973 Tax Ct. Memo LEXIS 42">48 a memorandum decision of this Court. Respondent has also shown George's gambling activities to be a "likely source" of petitioners' income during the years in issue. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954); Armes v. Commissioner, 448 F.2d 972">448 F.2d 972 (C.A. 5, 1971), reversing and remanding in part a memorandum decision of this Court. We therefore hold that George Smurra had unreported taxable income of $4,280.72, $3,836.45 and $4,290.69 for the taxable years 1960, 1961, and 1962, respectively. 7 Helen testified that she received all her income from her husband. George corroborated this. Moreover many of the cash expenditures attributed to Helen have been more appropriately considered to represent taxable income of George. We therefore hold that Helen had no taxable income during 1960, 1961 or 1962. George has made no argument to avoid the application of the additions to tax asserted by the respondent. Accordingly, they are proper. Decision will be entered for respondent in Docket No. 6983-70. Decision will be entered for petitioner in Docket No. 6984-70. Footnotes1. If such deficiencies are found, the petitioners have conceded the additions to tax are proper. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620124/	Robert C. Honodel and Claire E. Honodel, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentHonodel v. CommissionerDocket Nos. 3843-78, 3844-78, 3845-78, 4098-78, 4099-78, 4100-78, 4137-78, 4183-78, 4184-78, 4522-79United States Tax Court76 T.C. 351; 1981 U.S. Tax Ct. LEXIS 171; February 18, 1981, Filed 1981 U.S. Tax Ct. LEXIS 171">171 Decisions will be entered under Rule 155. Petitioners were limited partners in partnerships which acquired apartment complexes. The apartment complexes were depreciated on a component basis using useful lives as determined by the partnerships' respective general partners. The determination of useful lives was predicated on petitioners' desired rate of return on investment which took into consideration, inter alia, income tax effects to the investors. Further, petitioners paid nonrefundable monthly fees to a corporation for investment advice and one-shot investment fees to the corporation for services rendered in connection with the acquisition of these and other investments. Held: Petitioners' interpretation of economic useful life, which purported to give independent effect to external (to the asset) factors such as income tax considerations of the partners, is without merit. Useful life determined. Held, further: Monthly fees paid for investment counsel and advice are deductible under sec. 212(2), I.R.C. 1954. One-shot investment fees are nondeductible capital expenditures incurred in connection with the acquisition of partnership interests. Frederick S. Prince, Jr., J. Gordon Hansen, and John S. Chindlund, for the petitioners.Richard W. Kennedy, for the respondent. Sterrett, Judge. STERRETT76 T.C. 351">352 In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax:Addition toCalendartax underDocket No.PetitioneryearDeficiencysec. 6653(a)3843-78Robert C. Honodel4522-79and Claire E. Honodel1973$ 7,314.0019754,090.123844-78Lawrence E. Thatcherand Helen F. Thatcher197315,669.003845-78Ernest M. Bargmeyerand Janice L. Bargmeyer197217,991.04197314,350.454098-78Conrad J. Knowlesand Concetta Knowles19728,501.68197311,465.124099-78Glen L. Mombergerand Nanieve G. Momberger19729,872.1619739,102.704100-78R. Duncan Wallaceand Patricia F. Wallace19725,349.9719734,150.674137-78Marlan J. Haslamand Patricia L. Haslam19711,085.64$ 294.67197216,963.081,108.01197322,735.771,185.714183-78William L. Ciminoand Joyce Cimino19728,475.1819735,206.064184-78Robert D. Briggsand Joan R. Briggs19722,839.1319733,779.471981 U.S. Tax Ct. LEXIS 171">174 These cases have been consolidated for the purposes of trial, briefing, and opinion. After concessions, two issues remain for our determination: (1) What are the useful lives for depreciation purposes of the components of certain apartment projects owned by limited partnerships in which petitioners are limited partners, and (2) whether various fees paid by petitioners to Financial Management Service or its successors in interest (hereinafter FMS) are deductible under section 212 or 165(c)(2), I.R.C. 1954.76 T.C. 351">353 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 this reference.Petitioners Robert C. Honodel and Claire E. Honodel, husband and wife, resided in Missoula, Mont., at the time of the filing of the petitions herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the calendar years 1973 and 1975.Petitioners Lawrence E. Thatcher and Helen F. Thatcher, husband and wife, resided in Salt Lake City, Utah, at the time of the filing of the petition herein. They filed a joint individual income tax1981 U.S. Tax Ct. LEXIS 171">175 return with the Internal Revenue Service Center at Ogden, Utah, for the calendar year 1973.Petitioners Ernest M. Bargmeyer and Janice L. Bargmeyer, husband and wife, resided in Missoula, Mont., at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the calendar years 1972 and 1973.Petitioners Conrad J. Knowles and Concetta Knowles, husband and wife, resided in Salt Lake City, Utah, at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the calendar years 1972 and 1973.Petitioners Glenn L. Momberger and Nanieve G. Momberger, husband and wife, resided in Salt Lake City, Utah, at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the taxable years 1972 and 1973.Petitioners R. Duncan Wallace and Patricia F. Wallace, husband and wife, resided in Salt Lake City, Utah, at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal1981 U.S. Tax Ct. LEXIS 171">176 Revenue Service Center at Ogden, Utah, for the taxable years 1972 and 1973.Petitioners Marlan J. Haslam and Patricia L. Haslam, husband and wife, resided in Ogden, Utah, at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the taxable years 1971, 1972, and 1973.Petitioners William L. Cimino and Joyce Cimino, husband and wife, resided in Missoula, Mont., at the time of the filing of the 76 T.C. 351">354 petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the taxable years 1972 and 1973.Petitioners Robert D. Briggs and Joan R. Briggs, husband and wife, resided in Albuquerque, N. Mex., at the time of the filing of the petition herein. They filed joint individual income tax returns with the Internal Revenue Service Center at Ogden, Utah, for the taxable years 1972 and 1973.Petitioners Claire E. Honodel, Helen F. Thatcher, Janice L. Bargmeyer, Concetta Knowles, Nanieve G. Momberger, Patricia F. Wallace, Patricia L. Haslam, Joyce Cimino, and Joan R. Briggs are parties herein solely by virtue of having filed joint1981 U.S. Tax Ct. LEXIS 171">177 individual income tax returns with their respective husbands for the years at issue.Petitioners were limited partners in four limited partnerships. The names of the limited partnerships and the petitioners' respective percentage interests are shown in the following table:LimitedPartnershippartnersPercentageRancho FultonThatcher10Bargmeyer10Haslam10Rancho Verde ABargmeyer20Haslam20Wallace20Rancho Verde BKnowles15Momberger15Cimino15Briggs15College Gardens UtahHonodel14.69733Thatcher9.79822The relevant general partner in each partnership was Spence Clark.Rancho Fulton (hereinafter Fulton) is a Utah limited partnership which utilizes the cash method of accounting for Federal income tax purposes. Its taxable year is a calendar year. Fulton was formed for the purpose of acquiring, developing, building, and operating a 204-unit apartment complex named Rancho Fulton and located in Sacramento, Calif. On its 1973 Federal partnership income tax return, Fulton claimed a depreciation deduction of $ 224,991 on the apartment complex. Depreciation 76 T.C. 351">355 was computed on a component basis using useful lives for each component as determined1981 U.S. Tax Ct. LEXIS 171">178 by its general partners.Rancho Fulton apartment complex consists of 204 units, situated on 9.5 acres of land, at 1530 Fulton Avenue, Sacramento, Calif. The construction may be described as two-story wood frame with a pitched asbestos shingled roof. The exterior walls are stucco with a wood trim. In the Rancho Fulton apartment complex, there are 52 one-bedroom/one-bath units; 76 two-bedroom/one-bath units; 50 two-bedroom/one-and-one-half-bath units; and 26 three-bedroom/one-and-one-half-bath units. There are four groups of apartment buildings, each with its own laundry facility. In the center of the property is the office, a recreation room, and one conventional-sized pool. Approximately 1.5 open parking places per apartment are provided. The complex also includes a day care center. Each apartment has central air-conditioning and heating, a dishwasher, and a disposal. These units were ready for occupancy in 1973.Rancho Verde A is a Utah limited partnership which utilized the cash method of accounting for Federal income tax purposes. The taxable year of Rancho Verde A partnership is the calendar year. Rancho Verde B is a Utah limited partnership which also utilized the 1981 U.S. Tax Ct. LEXIS 171">179 cash method of accounting for Federal income tax purposes. The taxable year of the Rancho Verde B partnership is also the calendar year. Rancho Verde A and Rancho Verde B partnerships (hereinafter collectively called Verde) each were formed for the purpose of acquiring, developing, building, and operating one-half of a 220-unit apartment complex named Rancho Verde and located in Sacramento, Calif. Each partnership claimed depreciation on half of the apartment complex on their 1972 and 1973 Federal partnership income tax returns. Depreciation was calculated on a component basis using useful lives for each component as determined by its general partners. The resulting depreciation deductions taken for the calendar years 1972 and 1973 by Rancho Verde A were $ 98,848 and $ 219,347, respectively, and those taken by Rancho Verde B were $ 86,655 and $ 226,310, respectively.The parties have stipulated that the useful lives for depreciation purposes as determined by this Court for the components of the Rancho Fulton apartment complex also will be utilized for the Rancho Verde A and Rancho Verde B apartment complex.College Gardens Utah is a Utah limited partnership which 76 T.C. 351">356 utilizes1981 U.S. Tax Ct. LEXIS 171">180 the accrual method of accounting for Federal income tax purposes. The taxable year of the partnership is the calendar year. College Gardens II is a California limited partnership which utilizes the accrual method of accounting for Federal income tax purposes. The taxable year of the partnership is the calendar year. College Gardens Utah is a limited partner in College Gardens II, owning approximately a 98-percent interest in the capital and profits and losses therein.College Gardens II was formed for the purpose of acquiring, developing, building, and operating a 200-unit apartment project in Sacramento, Calif., under the federally subsidized assistance program implemented by section 236 of Title II of the National Housing Act (12 U.S.C. sec. 1715z-1). On its 1973 Federal partnership income tax return, College Gardens II claimed a depreciation deduction of $ 98,884 on the apartment complex computed on a component basis using useful lives for each component as determined by its general partners.There are 200 units included in the College Gardens II apartment complex. They are situated on approximately 9.6 acres of an irregular "L"-shaped1981 U.S. Tax Ct. LEXIS 171">181 parcel of land. The units are two-story wood framed structures with a plywood panel exterior. There are 80 one-bedroom/one-bath units and 120 two-bedroom/one-bath units in the project. The apartments are available for rental to anyone who qualifies to live in the subsidized low-income housing. To qualify, prospective tenants must have incomes within certain prescribed guidelines. There are 1.5 open parking spaces per apartment. Each unit also has an electric wall air-conditioner.Respondent determined in his notices of deficiency, all dated in January 1978, except in docket No. 4522-79 where the notice was dated March 6, 1979, issued to the respective petitioners, that the useful lives of the component structures of rental apartment buildings owned by the subject partnerships were understated, thereby resulting in an overstatement of depreciation expense. Accordingly, the partnership losses in the years at issue were decreased by respondent as were the petitioners' proportionate shares of such losses.During the years at issue, petitioners were clients of FMS. FMS was formed by Spence Clark in 1967 for the purpose of providing financial management, investment, and tax analysis1981 U.S. Tax Ct. LEXIS 171">182 76 T.C. 351">357 and advice to its clients. It presently has approximately 300 clients. It has been remarkably successful.In the subject years, FMS provided a full range of investment advisory services with the emphasis on real estate investments. The goal was to minimize a client's income taxes while enhancing and enlarging his estate. New clients generally were obtained through referrals from existing clients. Initially, they attended financial investment planning sessions. These planning sessions were designed (1) to familiarize the client with FMS and its various services, (2) to analyze in detail the client's existing financial position, (3) to determine the client's personal and financial objectives, and (4) to recommend an investment and financial approach in light of those objectives.Once these initial planning sessions were completed and the client agreed to commit himself to an investment program with FMS, the client's name was placed on an investment waiting list. The waiting list also stated each client's available capital and tax shelter needs. The waiting list priority was based upon the seniority or chronology of each client's investment commitment. If a client 1981 U.S. Tax Ct. LEXIS 171">183 thereafter refused to invest in investments recommended by FMS, FMS would not keep that person as a client.Each client's financial position, needs, and objectives were reviewed and updated in periodic (at least annual) planning sessions. The results of these sessions were reflected in the investment waiting list.During the years in question, acceptable investment projects came about through a long and arduous process, sometimes lasting several years. FMS developed business relationships with professional brokers who located potential real estate and other investments throughout the country and thereafter presented such investments to FMS for its analysis. If the investment was purchased by FMS, the broker was paid a finder's fee either by FMS or the seller.FMS analyzed between 30 and 50 projects in the years at issue in order to unearth the projects that it chose to recommend to petitioners. The investment research and analysis involved in evaluating these projects included: (1) Market, location, and competition analysis, (2) cost flow analysis, (3) depreciation analysis, (4) tax shelter analysis, (5) investment return analysis, and (6) legal analysis. Such evaluations involved1981 U.S. Tax Ct. LEXIS 171">184 devoting varying degrees of time and energy by FMS depending on the 76 T.C. 351">358 nature and characteristics of the individual investment opportunities. On a few occasions during the subject years, rejected projects demanded inordinate amounts of time and energy, exceeding that expended on the projects which came to fruition. Other less promising projects might have been rejected following a cursory examination.Once accepted by FMS, investment projects were recommended to petitioners according to the waiting list priority. None of the petitioners refused to invest in projects recommended to them by FMS although the option to refuse was available. Projects rejected by FMS were not presented to or discussed with clients.A client's investment in these recommended projects was generally evidenced by a limited partnership interest. Investors were required to make capital contributions to the limited partnership exclusive of the investment fees paid to FMS.During the years in issue, FMS engaged outside counsel to negotiate the acquisition of investments and to prepare the various legal and other documents necessary to consummate their purchase. Outside counsel also drafted and prepared1981 U.S. Tax Ct. LEXIS 171">185 partnership agreements and other documents necessary to create the limited partnerships, the investment vehicle generally selected by FMS to hold title to its investment projects. Further, outside counsel regularly rendered legal and tax advice to FMS on miscellaneous matters relating to accepted and rejected investments and other issues concerning its clients.Besides engaging outside assistance, FMS was also extensively involved in the acquisition phase of an accepted project. Its efforts included supervision and review of outside counsel and their work product, negotiation of terms of purchase and assistance, and participation at closing.Petitioners invested in the subject limited partnerships, created at the direction of FMS, primarily for appreciation and "tax shelter" potential. The intent of FMS and petitioners was to sell each investment project when the desired tax benefits were no longer present. At the time of purchase, FMS and petitioners expected the investment properties to sell for at least their original cost basis.The fee schedule used by FMS in the years at issue had two components: (1) An investment fee component and (2) a monthly retainer component. The 1981 U.S. Tax Ct. LEXIS 171">186 investment fee was a flat fee representing 76 T.C. 351">359 a specific percentage of the total cost of a project. A portion of this fee was charged to each of the investors in a particular project including Spence Clark and the petitioners herein. Each paid an amount that varied according to his respective ownership interest. The amount of this flat fee was arrived at by FMS based in part upon the time and effort, the degree of difficulty, and the extensiveness of the evaluation required in analyzing the purchased investment, as well as numerous other projects which were rejected prior thereto. Some of the time and effort spent by FMS and considered in the calculation of this flat fee occurred before some of the petitioners became clients of FMS.FMS also charged petitioners nonrefundable monthly retainer fees ranging from $ 300 to $ 1,500 per month. The magnitude of these monthly fees depended upon both the individual petitioner's income level and his financial planning, tax advice, and investment needs. At least with respect to one petitioner, the monthly retainer fees were waived for a particular year because he made substantial investments in projects recommended by FMS in that 1981 U.S. Tax Ct. LEXIS 171">187 year.In the years at issue, FMS did not maintain detailed records summarizing the potential investments which were analyzed, the time and effort expended on such investments, and the time and effort expended directly on each individual.The fees charged by FMS were paid in cash by each of the petitioners and were deducted on their 1971, 1972, and 1973 returns as follows:NameDescriptionAmountYearTotalHonodelInvestment fee --College Gardens, Utah$ 12,706.001973$ 12,706.00ThatcherInvestment fee -- Fulton10,000.00Investment fee --College Gardens, Utah8,472.00197318,472.00BargmeyerMonthly retainer2,800.00Investment fee -- Verde14,540.00197217,340.00Monthly retainer1,000.00Investment fee -- Fulton10,000.00197311,000.00KnowlesMonthly retainers3,500.00Investment fee -- Verde10,905.00Investment fee -- GlendaleShopping Center7,500.00197221,905.00MombergerMonthly retainers2,000.00Investment fee -- Verde10,905.00Investment fee -- GlendaleShopping Center7,500.00197220,405.00WallaceInvestment fee -- Verde14,500.00197214,500.00HaslamMonthly retainers3,000.0019713,000.00Monthly retainers5,000.00Investment fee -- Verde14,540.00197219,540.00Investment fee -- Fulton10,000.00197310,000.00CiminoMonthly retainers2,582.22Investment fee -- cattle2,000.00Investment fee -- Verde10,905.00197215,487.22BriggsInvestment fee -- Verde10,905.00Investment fee -- GlendaleShopping Center7,500.00197218,405.001981 U.S. Tax Ct. LEXIS 171">188 76 T.C. 351">360 In addition, on its 1973 Federal partnership income tax return, the College Gardens Utah partnership deducted an investment fee in the amount of $ 86,456 paid to FMS. Only $ 61,456 of this amount is at issue herein because petitioners have conceded that $ 25,000 is a nondeductible capital expenditure. The parties have stipulated that the fee paid by the partnership shall be treated as though each partner paid his ratable share of this amount directly.Respondent disallowed these deductions because petitioners allegedly failed to establish that the payments represent valid business expenses or were incurred for the management, conservation, or maintenance of property held for the production of income or in connection with the determination, collection or refund of any tax.OPINIONWe are called upon to decide, for depreciation purposes, the useful lives of various components of the Rancho Fulton, Rancho Verde, and College Gardens II apartment complexes. This issue is inherently one of fact, and the burden rests with petitioners to prove that respondent's determination of the useful lives of the various components is erroneous. Casey v. Commissioner, 38 T.C. 357">38 T.C. 357, 38 T.C. 357">38176 T.C. 351">361 (1962).1981 U.S. Tax Ct. LEXIS 171">189 The parties have agreed that the component useful lives determined by this Court for the Rancho Fulton apartment complex will also be utilized for the Rancho Verde apartment complex.Section 167 states, in pertinent part, as follows:(a) General Rule. -- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -- (1) of property used in the trade or business, or(2) of property held for the production of income.Section 1.167(a)-1(b), Income Tax Regs., states in pertinent part as follows:(b) Useful life. For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income. This period shall be determined by reference to his experience with similar property taking into account present conditions and probable future developments. Some of the factors to be considered in determining this period are (1) wear and tear and decay or decline from natural causes, (2) 1981 U.S. Tax Ct. LEXIS 171">190 the normal progress of the art, economic changes, inventions and current developments within the industry and taxpayer's trade or business, (3) the climatic and other local conditions peculiar to the taxpayer's trade or business, and (4) the taxpayer's policy as to repairs, renewals, and replacements. Salvage value is not a factor for the purpose of determining useful life. If the taxpayer's experience is inadequate, the general experience in the industry may be used until such time as the taxpayer's own experience forms an adequate basis for making the determination. * * See also Massey Motors v. United States, 364 U.S. 92">364 U.S. 92, 364 U.S. 92">96 (1960).At trial, both parties introduced into evidence detailed reports of their respective experts with respect to the depreciable useful life of each component of the subject apartment complexes. Petitioners' position, supported by their expert's testimony and reports, was presented in two parts. First, they presented a "physical useful life" study which determined the useful life of each of the components based on traditional concepts of physical obsolescence and deterioration. Petitioners then determined an "economic1981 U.S. Tax Ct. LEXIS 171">191 useful life" for each component by way of a sophisticated mathematical model, which was based on the physical useful life study. The economic useful life of each component was determined to be shorter than the physical useful life. Petitioners contend that those economic useful lives represented 76 T.C. 351">362 that period over which "the asset may reasonably be expected to be useful to the taxpayer." Therefore, petitioners reason, the "economic useful life" determined by them is the useful life for depreciation purposes in accord with the applicable regulations. We disagree, although in so doing we mean no blanket condemnation of so-called "tax shelters." Each "tax shelter" is entitled to be considered on its own merits.Petitioners' determination here of the economic useful life of each component is predicated on the theory that the useful life for depreciation purposes ends at that point in time when the investors' desired return on investment no longer appears to be obtainable. Petitioners theorize further that the anticipated rate of return on an investment includes tax benefits generated in the form of losses to be applied against income from other sources. If we take petitioners' 1981 U.S. Tax Ct. LEXIS 171">192 position to its logical conclusion, investors in different tax brackets would use different useful lives. We reject petitioners' interpretation of economic useful life as embodied in their mathematical model as totally without merit. 21981 U.S. Tax Ct. LEXIS 171">193 Our findings with respect to the useful life of each component must necessarily rely heavily on the opinions of the expert witnesses of both parties. In formulating his opinion, we note that petitioners' expert placed special emphasis on the "less than average quality of construction" of the apartment complexes under our consideration. He also considered the nature or type of tenant expected to be an occupant. The report of respondent's expert contained an evaluation of the actual useful lives experienced in the relevant geographic area based on numerous examples of comparable properties. Further, respondent's expert questioned building contractors and repairmen to find out 76 T.C. 351">363 what their general experience had been with respect to the useful lives of various components comparable to petitioners'.We find the expert witnesses of both parties to be credible and each of their useful life studies to be of great evidentiary value. In many ways, respondent's expert appeared to be more knowledgeable on general appraisal techniques. However, we were impressed by petitioners' expert's testimony with respect to the construction of the very buildings at issue. Comparables are relevant1981 U.S. Tax Ct. LEXIS 171">194 and helpful, but we must always give considerable weight to an analysis of the very property at hand. Upon independent review and reflection of the entire record and a comprehensive analysis of evidence bearing on the useful lives of the components under examination, we hold that the useful lives of the components of the Rancho Fulton and College Gardens II apartment complexes are as follows:Rancho FultonComponentUseful life(years)Basic structure45Electrical30Plumbing30Roof10Paint -- ceiling15Doors and cabinets25Furniture and fixtures8Equipment8Appliances8Heating and air-conditioning15Parking lot15Swimming pool andequipment15Floor tile15Drapes6Landscaping25Signs15Carpeting5College Gardens IIComponentUseful life(years)Basic structure40Electrical25Plumbing25Windows20Air-conditioning9Carpets6Blinds and shades6Appliances8Painting10Roof and sheet metal10Doors and interiorhardware20Site improvements15Lawn and plants25Vacuums5We next must decide whether the fees paid by petitioners to FMS are deductible under sections 212 or 165(c)(2). The primary focus of this1981 U.S. Tax Ct. LEXIS 171">195 controversy centers on the oft litigated capital versus ordinary expense dichotomy. 3 Petitioners' contention is 76 T.C. 351">364 that such fees were paid to FMS for investment and tax advice and are therefore ordinary and necessary expenses deductible under section 212. Respondent maintains that these expenditures are not deductible because they are capital in nature; that is, such expenditures were made in connection with the acquisition of a limited partnership interest.The relevant portion of section 212 allows a current deduction for certain expenditures if three requirements are met: the expenditures1981 U.S. Tax Ct. LEXIS 171">196 are (1) "ordinary and necessary," (2) "paid or incurred during the taxable year," and (3) either "for the management, conservation, or maintenance of property held for the production of income" or "in connection with the determination, collection, or refund of any tax."Fees paid for investment counsel and advice concerning existing and future or potential investments have been held to be deductible as "ordinary and necessary expenses paid or incurred by an individual during the taxable year for the production or collection of income." Mallinckrodt v. Commissioner, 2 T.C. 1128">2 T.C. 1128, 2 T.C. 1128">1148 (1943), affd. 146 F.2d 1">146 F.2d 1 (8th Cir. 1945). 4 However, expenditures that are capital in nature are not deductible under section 212 because such expenditures fail to satisfy the "ordinary and necessary" requirement of that section. Sec. 1.212-1(n), Income Tax Regs.; Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 397 U.S. 572">575 (1970), affg. 410 F.2d 313">410 F.2d 313 (8th Cir. 1969), which affd. 49 T.C. 377">49 T.C. 377 (1968).1981 U.S. Tax Ct. LEXIS 171">197 The Supreme Court in 397 U.S. 572">Woodward v. Commissioner, supra at 575-576, concisely summarized the relevant law concerning capital expenditures in the following exerpt:It has long been recognized, as a general matter, that costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of brokerage fees for the sale or purchase of securities, as explicitly provided by a longstanding Treasury regulation, Treas. Reg. on Income Tax § 1.263(a)-2(e), and as approved by this Court in Helvering v. Winmill, 305 U.S. 79">305 U.S. 79 (1938), and Spreckels v. Commissioner, 315 U.S. 626">315 U.S. 626 (1942). The Court recognized that brokers' commissions are "part of the acquisition cost of the 76 T.C. 351">365 securities," 305 U.S. 79">Helvering v. Winmill, supra at 84, and relied on the Treasury regulation, which had been approved by statutory re-enactment, to deny deductions for such commissions even to a taxpayer for whom they were a regular and recurring expense in his business of buying and selling securities. 1981 U.S. Tax Ct. LEXIS 171">198 The regulations do not specify other sorts of acquisition costs, but rather provide generally that "[the] cost of acquisition * * of * * * property having a useful life substantially beyond the taxable year" is a capital expenditure. Treas. Reg. on Income Tax § 1.263(a)-2(a). Under this general provision, the courts have held that legal, brokerage, accounting, and similar costs incurred in the acquisition or disposition of such property are capital expenditures. The law could hardly be otherwise, for such ancillary expenses incurred in acquiring or disposing of an asset are as much part of the cost of that asset as is the price paid for it.[Citation omitted; emphasis added.]Turning now to the determination of whether the fees paid by petitioners in the instant case are "ordinary and necessary" expenses for investment advice allowable under section 212 or are nondeductible capital expenses, we "look to the nature of the services performed" by the investment adviser rather than "their designation or treatment" by the taxpayer. 5Cagle v. Commissioner, 63 T.C. 86">63 T.C. 86, 63 T.C. 86">96 (1974), affd. 539 F.2d 409">539 F.2d 409 (5th Cir. 1976),1981 U.S. Tax Ct. LEXIS 171">199 and the cases cited therein. Our inquiry focuses on whether the services were performed in the process of acquisition or for investment advice. See generally 397 U.S. 572">Woodward v. Commissioner, supra at 577.1981 U.S. Tax Ct. LEXIS 171">200 The "nature of the services performed" by FMS for its clientele, including petitioners, may be summarized quite simply. In periodic planning sessions, FMS evaluated and analyzed each petitioner's personal, financial, and tax status, elicited objectives and proposed investment programs in light of those objectives. Further, FMS analyzed numerous investment opportunities presented to it by outside brokers in the process of selecting the projects under our consideration. In evaluating these investments, 76 T.C. 351">366 FMS utilized the services of outside counsel for legal and tax advice. FMS, through its agents and outside contractors, negotiated the purchase of these investments and prepared the legal documentation, including the limited partnership agreement, necessary to consummate the transaction. The potential investments that met with the approval of FMS were recommended to petitioners who had the option to invest if they so desired.The complexity, or should we say perplexity, resulting from this factual web arises because of the dual nature of FMS's function: (1) An advisory function and (2) an acquisition function. Respondent contends that the acquisition function was all encompassing1981 U.S. Tax Ct. LEXIS 171">201 in arguing as follows:the evidence shows that Clark [FMS] identifies suitable investment projects, forms limited partnerships which he then causes to purchase the projects, and finally sells the units of limited partnership to his clients at a fixed price per unit. * * * Accordingly, viewed from the end result and the manner in which the fees are charged, it appears they represent nothing more than part of the cost of acquiring partnership interests, or represent commissions for Clark's services in putting the project together. * * We disagree with respondent because he fails to focus on the "nature of the services performed" by FMS, as required in 63 T.C. 86">Cagle v. Commissioner, supra.Instead, respondent incorrectly points to the end result or consequence of such services.We find that those services provided by FMS relating to (1) periodic planning sessions and (2) the evaluation of potential investments to the extent needed to formulate an opinion regarding such investments were investment advice. In addition, those services performed by FMS in communicating its recommendations to petitioners were investment advice. Conversely, those services rendered1981 U.S. Tax Ct. LEXIS 171">202 in the "process of acquisition" including, but not limited to, negotiating the purchase and creating the investment vehicle were capital in nature. See Kimmelman v. Commissioner, 72 T.C. 294">72 T.C. 294, 72 T.C. 294">304-305 (1979); sec. 741.FMS adopted a two-tier fee schedule: (1) A monthly retainer fee and (2) an investment fee. We now must examine the nature of each of these fees to determine if they are allocable to currently deductible investment advice or to capitalizable acquisition costs. Generally, petitioners paid a monthly retainer fee whether or not they invested in a project recommended to them by FMS. Spence Clark testified that FMS "had doctor clients 76 T.C. 351">367 pay us for two or three years, without receiving an investment and they may have * * paid $ 5,000.00, $ 10,000.00, $ 20,000.00, $ 30,000.00 in fees, and still not invested." Only those clients who decided to invest in a recommended project and took advantage of FMS's acquisition function paid the investment fees. Those clients who chose not to invest and hence were not required to pay the investment fee received the exact same investment services as those who chose to invest. Conversely, petitioners1981 U.S. Tax Ct. LEXIS 171">203 could only participate in an investment if they paid the investment fee. Each petitioner voluntarily could choose to invest in the projects. Each was cognizant of the fact that a decision to invest resulted in the imposition of this investment fee. This investment fee was a cost of acquiring an interest in the limited partnership projects herein.Based upon this reasoning, we hold that the monthly retainer fees paid by petitioners are allocable to investment advice and are therefore deductible under section 212(2). Further, we find that the investment fees paid by petitioners are nondeductible capital expenditures incurred in connection with the acquisition of partnership interests and are includable in their bases. 6 See sec. 742. Our holding is consistent with that of the Court of Claims in Picker v. United States, 178 Ct. Cl. 445">178 Ct. Cl. 445, 371 F.2d 486">371 F.2d 486, 371 F.2d 486">499 (1967). In Picker, the Court of Claims found that fees were paid for a recommendation that was not utilized in the acquisition of a capital asset. The court held that such fees were paid for investment counsel and therefore were deductible under section 212(2).1981 U.S. Tax Ct. LEXIS 171">204 Petitioners also urge us to examine the relative time, effort, and cost incurred by FMS in performing its advice and acquisition functions and to allocate the one-shot investment fee to each function. Therefore, petitioners argue that the portion of the investment fee allocable to the advice function should be currently deductible. We disagree.Petitioners have the burden to justify their allocation between capital and noncapital expenditures. Rule 142(a), Tax Court Rules of Practice and Procedure. Even if we implemented 76 T.C. 351">368 petitioners' approach, which we are not inclined to do, petitioners have failed to meet their burden of proof.Petitioners' allocation scheme is based upon the opinion of Spence Clark, who has a vested interest in the outcome of this controversy. First of all, the record is conspicuously devoid of evidence supporting Mr. Clark's testimony and, therefore, it is impossible to determine if his allocation is reasonable. Secondly, Mr. Clark's definition of capital expenditures upon which his allocation is based appears to be more restrictive than that adopted by this Court herein. See also 63 T.C. 86">Cagle v. Commissioner, supra at 96-97.1981 U.S. Tax Ct. LEXIS 171">205 Thirdly, the trial record does not provide us with a sufficiently sound evidentiary handle to determine a reasonable allocation of our own under the authority of the so-called Cohan rule. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930).Moreover, we have great reservations concerning petitioners' approach which requests us to inquire not only into FMS's affairs but also into the affairs of FMS's outside counsel, a further step removed. We cannot sanction such an approach under the facts and circumstances herein presented. We find support for this view in long-standing authority holding that brokerage commissions are part of the acquisition costs of securities. Helvering v. Winmill, 305 U.S. 79">305 U.S. 79, 305 U.S. 79">84 (1938). Brokerage houses perform services for their customers other than that of acquiring securities (e.g., analyze securities and make investment recommendations to their customers). Yet, the full brokerage commission is a capital expense. We find no authority allowing a deduction for portions of a brokerage commission based upon an evaluation of the relative time and effort exerted by a broker. We refuse to adopt1981 U.S. Tax Ct. LEXIS 171">206 such an approach in the instant case.The foregoing analysis obviates the need to discuss in detail the other arguments presented by petitioners. Suffice it to say that petitioners are not allowed a loss deduction under section 165(c)(2). They have not experienced a loss in that the investment fee is included in the basis of their partnership interest and is recoverable on its sale or other disposition. In addition, no portion of the investment fee is deductible under section 212(3) as an expense paid "in connection with the determination, collection, or refund of any tax." We found the investment fee to be a nondeductible capital expenditure which, therefore, fails to meet the "ordinary and necessary" requirement of that section.76 T.C. 351">369 To reflect concessions made by the parties and the foregoing discussion,Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Lawrence E. Thatcher and Helen F. Thatcher, docket No. 3844-78; Ernest M. Bargmeyer and Janice L. Bargmeyer, docket No. 3845-78; Conrad J. Knowles and Concetta Knowles, docket No. 4098-78; Glen L. Momberger and Nanieve G. Momberger, docket No. 4099-78; R. Duncan Wallace and Patricia F. Wallace, docket No. 4100-78; Marlan J. Haslam and Patricia L. Haslam, docket No. 4137-78; William L. Cimino and Joyce Cimino, docket No. 4183-78; Robert D. Briggs and Joan R. Briggs, docket No. 4184-78; and Robert C. Honodel and Claire E. Honodel, docket No. 4522-79.↩2. Petitioners' mathematical model utilized to determine "economic useful life" is dependent on several external factors including interest rates, individual tax brackets, and tax rates. Each of the factors are subject to substantial fluctuations which are beyond the effective control of petitioners. Does this mean that economic useful life is dependent on these factors and will fluctuate as they do? The Supreme Court in Massey Motors v. United States, 364 U.S. 92">364 U.S. 92, 364 U.S. 92">97-98 (1960), could not have contemplated such an interpretation of "economic useful life." The Supreme Court focused internally on the nature of the taxpayer's business and the use of an asset therein. Petitioners focused on themselves as investors and on these external factors which are outside the realm of a business's nature. Rather, they should have focused on the nature of the partnerships' rental business and the use of the apartment complexes and their various components in that business. See, e.g., Graves v. Commissioner, 48 T.C. 7">48 T.C. 7, 48 T.C. 7">15 (1967), affd. 400 F.2d 528">400 F.2d 528↩ (9th Cir. 1968), wherein we rejected an analogous theory of economic useful life.3. We note that sec. 162(a) must be construed in pari materia with sec. 212. Case authority which has considered whether an expense is capital versus "ordinary and necessary" under one of these sections has equal applicability under the other. See United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 372 U.S. 39">49 (1963); Trust of Bingham v. Commissioner, 325 U.S. 365">325 U.S. 365, 325 U.S. 365">373-374↩ (1945).4. See also sec. 1.212-1(g), Income Tax Regs.; Abrams v. Commissioner, T.C. Memo. 1964-256; Picker v. United States, 178 Ct. Cl. 445">178 Ct. Cl. 445, 371 F.2d 486">371 F.2d 486, 371 F.2d 486">499↩ (1967).5. Petitioners urge us to apply the origin-of-the-claim test first specifically propounded by the Supreme Court in 372 U.S. 39">United States v. Gilmore, supra at 49. See Reed v. Commissioner, 55 T.C. 32">55 T.C. 32, 55 T.C. 32">39-40 (1970), and the cases cited therein. The Supreme Court in Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 397 U.S. 572">577-578↩, applied the "origin" test in holding that litigation expenses incurred in connection with appraisal proceedings had their origin in the "process of acquisition" and were therefore nondeductible capital expenditures. The Court stressed that the taxpayer's motive or purpose would not be considered. Therefore, in the case at issue herein, we follow the Supreme Court's guidance in ignoring each petitioner's "motive or purpose." We adopt an inquiry consistent with that of the Supreme Court by looking at the nature of the services performed (the origin of the fee) in determining whether such services are rendered in the process of acquisition.6. We are assuming that the cattle investment and the Glendale Shopping Center investment (see table at pp. 359-360) were in partnership form. The fees paid for these investments are therefore treated consistently with the fees paid for the apartment projects. In any case, the form of the investment will not affect our result.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620125/	Appeal of MRS. ANNE B. RICHARDSON.Richardson v. CommissionerDocket No. 427.United States Board of Tax Appeals1 B.T.A. 576; 1925 BTA LEXIS 2879; February 10, 1925, decided Submitted January 24, 1925. 1925 BTA LEXIS 2879">2879 Under Section 214(a)(6) of the Revenue Act of 1921 a deductible loss caused by storms must be of such a character that it can be definitely ascertained and measured in terms of money values. The evidence presented in this appeal held insufficient to support a deduction from gross income growing out of damage to a natural woodland caused by an ice storm. Philip S. Parker, Esq., for the taxpayer. Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. TRUSSELL 1 B.T.A. 576">577 Before STERNHAGEN, TRAMMELL, and TRUSSELL. At the hearing of this appeal there were placed in evidence depositions of Anne B. Richardson, the taxpayer, and Walter Channing, residing at Dover, Mass., and engaged in the real estate business; a revenue agent's report dated April 30, 1924, and the Commissioner's deficiency letter dated August 23, 1924, from which the Board makes the following. FINDINGS OF FACT. The taxpayer is the owner of a residential farm in that part of Needham, Mass., called Charles River Village, of 120 acres, 60 of which is woodland consisting mostly of deciduous trees, chiefly oak, and 60 acres of farming and grazing1925 BTA LEXIS 2879">2880 land, all bordering on the Charles River. She acquired this residential farm by purchase in 1907 at a cost of $47,000. About 1912 a stone residence and stone garage were erected; old buildings remodeled and a brick dairy built. The cost of these buildings amounted to $142,000. On March 1, 1913, their value was that amount, which, with the value of the land, gave the whole estate a value of $189,000. In 1915 a wooden farmhouse was moved onto the estate and remodeled at a cost of $8,000. The areas of woodland, 10 acres of which were in the immediate vicinity of the house, forming shade trees, and the balance being wilder growth, some visible from the house, added much to the beauty, attractiveness, and value of the estate for residential purposes. In November, 1921, there occurred an "ice storm." The moisture clung to the trees and their branches and by a slow freezing process covered them with a coating of ice, in some places nearly an inch thick. A high wind followed and during the night practically all of the trees were mutilated and a number destroyed. In the morning the whole woodland area presented a mutilated and desolate appearance. In making her income tax return1925 BTA LEXIS 2879">2881 for the year 1921 the taxpayer claimed a deduction from gross income in the amount of $3,000 as damages caused by the so-called ice storm. This deduction the Commissioner disallowed and determined a deficiency in tax in the sum of $510.34, from which the taxpayer brings this appeal. DECISION. The determination of the Commissioner is approved. OPINION. TRUSSELL: This appeal is based on a disallowance by the Commissioner of an alleged loss caused by storm which had been claimed 1 B.T.A. 576">578 under section 214(a)(6) of the Revenue Act of 1921, the relevant portion of which reads as follows: Losses sustained during the taxable year of property not connected with the trade or business * * if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. In support of her claim the taxpayer testified: The existence of large shade trees makes the residential property much more desirable and does not necessitate the planting of evergreens and deciduous trees. It also acts as a protection from passers-by on the roads, and without them a country place for residential purposes would be much less attractive. The1925 BTA LEXIS 2879">2882 existence of shade trees greatly enhances the value of the residence. During two continuous days of freezing, with a damp drizzle, all trees, shrubs, and even grasses, were covered with a thick coating of ice, in some cases nearly three-quarters of an inch thick, so heavily weighing the trees that practically not one shrub or tree on my property was left without mutilation. As a result of a high wind one-third of the trees in all the 60 acres of woodland was broken off, and in many cases the whole tree was felled to the ground. She also testified that the value of her estate prior to the storm was $197,000 and after the storm $194,000. The witness, Walter Channing, in his deposition qualified as an experienced dealer in real estate and as an appraiser of property values in the vicinity of the taxpayer's property, and supported the views of the taxpayer with reference to the values of her property both before and after the storm. It does not appear, however, that any effort was made by the taxpayer to make any detailed account or estimate of the damage alleged to have been caused by the storm. The taxpayer owned an estate upon which there was a natural woodland of approximately1925 BTA LEXIS 2879">2883 60 acres which added much to the beauty of the place, making it more desirable as a country residence, and after the storm many of the trees of natural growth were mutilated and some of them entirely destroyed. But there is no proof as to the quantity of the multilation and no proof of the number of trees which existed before the storm and the number existing after the storm. We may well agree with the taxpayer that immediately following the storm and for some time thereafter the natural beauty of her country residence had been marred, but the amount of the damage done, as shown in the record, is too uncertain and indefinite to form a basis for a deduction from gross income. The expense of cleaning up and removing the debris caused by the storm has been allowed and for the time being that is the only definitely known measure of damages. If the taxpayer retains the owenership of her property until nature shall have had the opportunity to reapir the woodland, she will probably suffer no other money damages. We are, therefore, of the opinion that the action of the Commissioner in disallowing the deduction must be sustained.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620126/	J. ROGERS RAINEY, JR., AND KATHLEEN L. RAINEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentRainey v. CommissionerDocket No. 15782-86.United States Tax CourtT.C. Memo 1988-314; 1988 Tax Ct. Memo LEXIS 342; 55 T.C.M. 1315; T.C.M. (RIA) 88314; July 25, 1988. V. Camp Cuthrell, III, for the petitioners. Ramon Estrada, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $ 1,973 in petitioners' Federal income taxes for 1982. The issue for determination is whether petitioners are entitled to depreciation deductions for structures located on their ranch property. FINDINGS OF FACT 1988 Tax Ct. Memo LEXIS 342">343 Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioners were residents of Corpus Christi, Texas, at the time their petition was filed. At all material times, J. Rogers Rainey, Jr. (petitioner) was a practicing certified public accountant with offices in Corpus Christi, Texas. He also performed management services for ranches and farms and arranged oil drilling ventures for his clients. Petitioner had a background in agricultural management. In about 1977, petitioners acquired approximately 3,214 acres of ranch property in McMullen County, Texas. Petitioners leased the property for grazing in 1977. The property also produced income from mineral units, sale of water, sale of gravel, and a small lease to the Navy in relation to a target site installation. After acquisition of the property, petitioners installed a prefabricated house, a water well, a water line, and a septic tank on the premises. They also renovated a house on the premises used for storage and purchased furniture for the prefabricated house. The prefabricated house was approximately 100 miles, and a 2-hour drive, from petitioners' 1988 Tax Ct. Memo LEXIS 342">344 residence. Petitioners, a consultant, and a game warden occasionally used the prefabricated house. In years other than 1982, petitioner hunted on the property. Petitioners reported net income and losses from the ranch operation as follows: 1981Loss$ 7,9951982Loss13,7901983Loss3,0531984Net Income20,4051985Net Income10,247OPINION Petitioner testified that the ranch property was held for the production of income and that structures on the property were used in that activity. Petitioners' position is "that the management of the property for profit is the property as a whole, whether it is the gravel, or the oil and gas, or the increasing the value of the property by increasing the value of the wildlife on the property, or whether it is increasing the value of the property by increasing the grazing and the general condition of the property." Without any evidence supporting his position, respondent asserts that the structures in question related to a "hunting operation" on the ranch. Respondent argues that petitioners' "hunting operation" was not a trade or a business operation in 1982, nor an activity eligible for deductions under1988 Tax Ct. Memo LEXIS 342">345 section 212. 1 Respondent asserts: 2Petitioner's own testimony was to the effect that (1) the property is not leased for hunting (Tr. p. 27), (2) the property has never been leased for hunting (Tr. p. 32), and (3) that it was not petitioner's intention to develop the land into a very "high-class hunting preserve." (Tr. p. 34) Thus, there is no sec. 212 deduction because petitioner did not intend to realize any income from the hunting operations. * * 1988 Tax Ct. Memo LEXIS 342">346 Respondent distorts petitioner's testimony to fit respondent's theory. Petitioner identified David Wolf as a consultant and the only person employed at the ranch. Wolf apparently used the prefabricated house. Cross-examination proceeded as follows: Q Okay. When you hired Mr. Wolf, was it in your mind to develop the land into a very high-class hunting preserve? A I think it would be better worded to say that I was -- to add value to the property to some extent, and make it a good piece of property for whatever purpose it was used. MR. ESTRADA: Your Honor, the response was not responsive. I would like a yes or a no. THE COURT: All right. Yes. He is entitled to an answer to his question, not to an explanation of you -- THE WITNESS: No. BY MR ESTRADA: Q To the best of your knowledge, in the area surrounding your property, are hunting rights and hunting leases a valuable portion of the total value of the land? A Yes. * * REDIRECT EXAMINATION BY CR. CUTHRELL: Q You testified that -- on cross that you did not intend to create a high-class, I think, hunting preserve on this property as a result of your hiring Mr. Wolf. Is that correct? A That1988 Tax Ct. Memo LEXIS 342">347 is affirmative. Q What were your intentions, if you had any, with regard to the game management of that property? A To protect the deer that we had, and to increase the size of them, and increase the overall character of the entire herd. Q For what reason? A It adds value to the property. It adds more enjoyment to the property. It makes it more valuable. If I were to take somebody out to hunt, to have them hunting spike bucks and doe and -- were animals of no benefit to anybody. Q Do you have an opinion, based on your experience, as to whether or not you could operate and manage this property without the prefab house and the water line and the septic tank and the furniture? A I couldn't and -- I couldn't do it, for one. And for two, I believe -- my wife owns half of it, and I am quite sure she couldn't. She has that right, I believe, as well as I. Q Are you aware of any property located in this area that is -- are you aware of any ranch property that is located in an area such as this that does not have at least minimal facilities for a home, a simple -- a structure of type to live in? A Not that I have ever seen, in my whole life. We conclude that petitioner1988 Tax Ct. Memo LEXIS 342">348 has satisfied his burden of proving that the structures related to various income-producing activities maintained on the property. Petitioners are therefore entitled to depreciation deductions in relation to those structures. Section 167(a)(2); section 212(2). Respondent's reliance on Steen v. Commissioner,61 T.C. 298">61 T.C. 298 (1973), affd. 508 F.2d 268">508 F.2d 268 (5th Cir. 1975), is misplaced. In Steen, the taxpayer had purchased farm property, including a large residence with a swimming pool, pool house, and guest house. The taxpayer argued that because the structures were on the property at the time of the purchase, they must be considered "farm buildings" and depreciable. This Court and the Court of Appeals held that the buildings were not depreciable merely because they were located on a "farm" when there was no showing that the buildings were actually used in the business of farming. By contrast, petitioner's uncontradicted and unimpeached testimony in this case was sufficient to support a finding that the property in question was used in the income-producing activities, thereby requiring respondent to come forward with countervailing evidence. Because1988 Tax Ct. Memo LEXIS 342">*349 respondent has not done so, petitioners prevail. Decision will be entered for the petitioners.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during the year in issue. ↩2. In his opening statement at trial, respondent's counsel asserted that there were two distinct operations, cattle grazing and hunting, on the property. He admitted that the cattle grazing operation was a trade or business. Respondent's Trial Memorandum stated: The petitioners have shown that they received $ 10,922.00 in gross income in 1982 consisting of income from pasturage, royalties and other. Even though they have not leased out their land for any game hunting, they have hired a consultant to do some long term planning with the hunting leases. The agent did not raise I.R.C. sec. 183↩ of whether the petitioner was engaged in a business to receive a profit. Most prospective buyers would be interested in the hunting aspect of the land because of where it is located. When the petitioners acquired the land it was in poor condition and by them overseeing the property, they have enhanced the value of the property by putting out corn and other items to feed the wild animals. Therefore, this is an expense incurred for the production or collection of income or for the management or the conversation of the property and should be allowed in full.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620127/	Appeal of ARTHUR H. INGLE.Ingle v. CommissionerDocket No. 359.United States Board of Tax Appeals1 B.T.A. 595; 1925 BTA LEXIS 2865; February 17, 1925, decided Submitted January 12, 1925. 1925 BTA LEXIS 2865">2865 The value of buildings voluntarily removed from land in preparation for the future use of such land for other business purposes, is not such a loss as is deductible from gross income under the Revenue Act of 1918, even though the plans and expectations of the taxpayer respecting the future use of the land may fail of realization. The amount of depreciation of a building which may be deducted from gross income must be determined after a consideration of all the facts respecting the character and materials of construction and the location and uses of such building. Mr. Samuel P. Hall, for the taxpayer. Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. TRUSSELL 1 B.T.A. 595">596 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL. This appeal was argued and submitted upon a stipulated statement of facts from which the Board makes the following FINDINGS OF FACT. The taxpayer is a resident of Rochester, N.Y. In 1917 he purchased two parcels of property located in Rochester, N.Y., immediately adjacent to the property upon which were situated the factory buildings of the Bridgeford Machine Tool Works, of1925 BTA LEXIS 2865">2866 which corporation he was an officer and director. These pieces of property were known as the Weaver property and the Goossen property. They, together with the property on which were situated the buildings of the Bridgeford Machine Tool Works and five other adjacent pieces of property acquired by the taxpayer at about the same time, formed a triangular tract of land of about 17 acres. The taxpayer was then and is now connected with corporations engaged in the manufacture of machine tools. The entire triangular strip of property had been acquired by the taxpayer by the early part of 1918. In February, 1918, the taxpayer purchased a parcel of property located in Rochester, N.Y., forming a part of the same triangular strip of property mentioned in the preceding paragraph, known as the Schrader property. The sum of $13,500 was paid by the taxpayer as the purchase price of the Weaver property, which purchase price was allocated as follows: Cost of land, $4,800; cost of buildings, $8,700. The structures on the Weaver property consisted of one seven-room brick and stucco dwelling, one concrete block barn, one cement block garage, one cement block building. The dwelling was valued1925 BTA LEXIS 2865">2867 at $6,000, and the other three buildings were valued at $2,700 in all. The sum of $20,000 was paid by the taxpayer as the purchase price of the Goossen property, which purchase price was allocated as follows: $11,200 to the land and $8,800 to the buildings. The structures on the Goossen property consisted of a one-story frame laundry building, a two and one-half story frame dwelling of heavy construction, a frame bank barn of heavy construction, and a one-story frame shed. The sum of $17,000 was paid by the taxpayer as the purchase price for the Schrader property, which purchase price was allocated $15,800 to the land and $1,200 to the buildings. The buildings on this property consisted of a two-story frame dwelling and a one-story frame barn. The value of all the buildings on the Weaven, Goossen, and Schrader properties, with the exception of the brick and stucco dwelling on the Weaver property, at the time the buildings were demolished in 1918, was equal to the purchase price of the buildings in 1917. In the early part of 1918 the taxpayer thought that the Ordnance Department of the United States Army would make use of the balance of the triangular strip of property1925 BTA LEXIS 2865">2868 not used by the factory buildings and would request him to build a building or buildings 1 B.T.A. 595">597 to be used for war purposes. No definite agreement was ever consummated between the taxpayer and the United States Government. The taxpayer, in the early part of 1918, sold the frame and stucco dwelling located on the Weaver property for $2,000, and demolished all of the other buildings on the Weaver, Goossen, and Schrader properties in order to clear the land. He received $100 as salvage for the demolished buildings. The buildings on the Weaver and Goossen properties were rented to tenants at the time the said properties were acquired by the taxpayer and, until a short time prior to their demolition, the tenants continued in possession. The total cost to the taxpayer of the buildings demolished was $16,500, after $400taking depreciation, and the total amount received by him for the removed and demolished buildings was $2,100, leaving a difference of $14,400. The United States Government never built, nor did it ever authorize the taxpayer to build, any structures on the property in question, nor did it use the property in any way. On December 31, 1918, the taxpayer1925 BTA LEXIS 2865">2869 owned three manufacturing buildings which were located on the same triangular strip of property heretofore mentioned and which were known as buildings A, B, and C. These buildings were leased by the taxpayer during 1918 to the Bridgeford Machine Tool Works. In his income-tax return for 1918 the taxpayer took as a deduction for depreciation upon building A the sum of $2,750, computed at the rate of 5 per cent upon a cost of $55,000. This building was an old brick-and-frame building. The revenue agent and the Commissioner have allowed this deduction of $2,750, and the item is not in question before the Board. During the years 1917 and 1918 the taxpayer built a brick and reinforced concrete addition to building A, which addition is known as building B. The cost of this building was $12,000. The taxpayer deducted in his return for 1918 the sum of $300 as depreciation upon the cost of building B at the rate of 2 1/2 per cent. The revenue agent and the Commissioner have allowed a rate of 2 per cent upon this building, and the taxpayer now accepts this rate of depreciation as determined by the revenue agent and the Commissioner, and, therefore, agrees that the Board shall determine1925 BTA LEXIS 2865">2870 that the amount of depreciation to be allowed as a deduction upon building B shall be $240, instead of $300. During the latter part of 1916 and the early part of 1917, the taxpayer built a steel, brick, frame, and concrete building, the total cost to the taxpayer of this building being $139,000. The taxpayer took as a deduction in his return for 1918 an item of $6,950 as depreciation upon building C, said amount being at the rate of 5 per cent on the cost of $139,000. The revenue agent and the Commissioner allowed $2,780 as depreciation upon said building C, computed at the rate of 2 per cent upon a cost of $139,000. The difference between the item of $6,950, deducted by the taxpayer in his return and representing depreciation at the rate of 5 per cent on building C, and an item of $2,780, representing the allowance by the Commissioner as depreciation upon building C, at the rate of 2 per cent, is the item at issue before this Board. 1 B.T.A. 595">598 The dimensions of building C are 142 feet 7 inches by 206 feet 9 inches. Said building consists of one centre bay 51 feet 3 inches by 204 feet 9 inches by 51 feet high; two side bays each 30 feet by 204 feet 9 inches by 33 feet1925 BTA LEXIS 2865">2871 6 inches high; and one side bay 28 feet 8 inches by 204 feet 9 inches by 18 feet high. Said building is of skeleton steel construction with brick walls and a composition roof upon frame construction. The foundations are of concrete and the floors are wood block upon concrete fill. The structural steel skeleton and the frame roof construction had formed a part of a building in Pittsburgh and were brought to Rochester and re-erected as a part of building C. The foundations for steel columns and brick walls are of concrete and all weights are carried by a steel skeleton, which is structurally complete. The structural steel skeleton is covered only by paint. Certain interior partitions are of wire-lath and others are of hollow-tile and all are plastered on both sides. DECISION. The deficiency in tax should be recomputed in accordance with the following opinion. Final decision will be settled upon consent or upon 10 days' notice in accordance with Rule 50. OPINION. TRUSSELL: The agreed statement of facts and the arguments of counsel present for consideration only two questions requiring the determination of the Board. They are: (1) Is the sum of $14,000, the stipulated1925 BTA LEXIS 2865">2872 value of building demolished, an allowable deduction from gross income? It appears from the agreed statement of facts that in the years 1917 and 1918 the taxpayer purchased certain tracts of land upon which there were several dwellings and other buildings, and that certain of these buildings were wrecked in the year 1918 and removed from the tracts of land. The cost of the buildings wrecked has been agreed to and is not here in question. It appears further that the taxpayer, when he purchased these lands in 1917 and 1918, and later in 1918, when he wrecked and removed these buildings, had in mind definite plans and purposes for the use of the premises purchased; that he removed the buildings voluntarily and with the expectation that the lands, after the removal of the buildings, could be used in his business in such a manner as would be productive of greater gains and profits than he could expect to realize from the use of the lands with the original buildings remaining thereon, and that when he wrecked and removed the buildings he expected to carry out other improvements and develop the properties for other uses with the expectation that such other uses would be productive of greater1925 BTA LEXIS 2865">2873 returns. After the taxpayer had completed the removal of the buildings it seems that business conditions, over which the taxpayer had no control, persuaded him to abandon for the time being his proposed plans of improving the property purchased, and that his expectation of greater gains and profits from the use of these lands still remains for future realization. While the asset value of the properties with the buildings removed may now seem to have been diminished, 1 B.T.A. 595">599 the lands remain in a condition for such improvement and use as the taxpayer may at any time determine to be advisable or profitable, and he has not realized a loss such as is intended by the taxing statute to be allowed as a deduction from gross income. We are, therefore, constrained to hold that the taxpayer's claim for a deduction from gross income in the year 1918 of the cost of these buildings wrecked and removed is not sustained. (2) Is a depreciation deduction of $6,950, claimed upon a factory building, the cost of which was $139,000, a reasonable allowance for exhaustion, wear, and tear? The agreed statement of facts shows that this building was built in 1916; that it cost $139,000 and that it1925 BTA LEXIS 2865">2874 was built for the purpose of being leased to and used by a corporation engaged in the business of manufacturing machine tools and was so leased and used during the year 1918. The taxpayer's claim for depreciation is based upon an estimated useful life of the building of 20 years, while the amount allowed by the Commissioner is based upon an estimated useful life of 50 years. From the agreed statement of facts, it appears that the general character of the building is that of one built especially for a machine tool factory in which would be installed heavy machinery, and that the skeleton steel construction of the building was made of second-hand material acquired by the taxpayer from a dismantled structure where the steel had been used for a period not disclosed by the record. It has been held by this Board that the amount allowable as depreciation on any structure must be determined after a full consideration of all the facts concerning the location, character of building, and its uses. . The taxpayer has established that this building's useful life will not exceed the period of 20 years. The Board therefore holds1925 BTA LEXIS 2865">*2875 that for the purpose of this taxpayer's income-tax return for the year 1918, the sum of $6,950 is a reasonable allowance for exhaustion, wear, and tear.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620130/	Harvey F. Johnston and Gladys Johnston v. Commissioner.Johnston v. CommissionerDocket No. 47863.United States Tax CourtT.C. Memo 1954-57; 1954 Tax Ct. Memo LEXIS 188; 13 T.C.M. 514; T.C.M. (RIA) 54163; June 9, 1954, Filed 1954 Tax Ct. Memo LEXIS 188">188 Abe R. Cohen, Esq., Law & Finance Building, Pittsburgh, Pa., for the petitioners. Philip O. North, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined deficiencies in income tax of $332.32 for 1949, $401.64 for 1950 and $549.52 for 1951, and additions under section 294(d) of $25.45 for 1950 and $44.46 for 1951. The issues for decision are whether the petitioners are entitled to larger deductions for travel, entertainment and promotion expense than the amounts allowed by the Commissioner in determining the deficiencies and whether the petitioner is entitled to a deduction for 1951 for a loss on an automobile. Findings of Fact The petitioners, husband and wife, filed joint returns for the taxable years with the collector of internal revenue for the 23rd District of Pennsylvania. Harvey, formerly employed by the Pittsburgh and Lake Erie Railroad, opened an insurance office in McKees Rocks, Pennsylvania, in 1946 and thereafter at all times material hereto sold health and accident insurance principally to employees of the P. & L.E. Railroad. Harvey travelled from McKees Rocks to various terminal points on the1954 Tax Ct. Memo LEXIS 188">189 P. & L.E. Railroad in order to contact customers and prospective customers for the insurance which he sold. He entertained customers, prospective customers and friends who helped him get in touch with prospective customers. The entertainment consisted of the purchase by Harvey of food and beverages. He drove his automobile in connection with his business and regularly incurred expenses for parking the car. The following table shows the amount deducted on the returns for travel, entertainment and promotion in connection with Harvey's business, the amount thereof allowed by the Commissioner in determining the deficiencies and the reported gross income and net profit from the business: GrossNetYearsClaimedAllowedIncomeProfit1949$2,762.09$596.96$18,681.45$5,265.5119503,097.93601.0821,393.035,292.9119512,829.55390.5021,245.616,459.49The petitioner did not maintain complete accurate records of all of his expenditures for travel, entertainment and promotion expense in connection with his business. The record does not show how much he spent in any one of the taxable years for this purpose. The closest approximation1954 Tax Ct. Memo LEXIS 188">190 permitted by this record of the ordinary and necessary expenses paid by Harvey in the operation of his business for travel, entertainment and promotion is as follows: 1949$2,00019502,10019512,200The petitioner, at sometime not shown by the record, bought an old Ford car for the use of a salesman in his business. The cost was not in excess of $160. The car was used for a few weeks after which repairs to the transmission became necessary. Martin Mixter, an employee in the shop of the P. & L.E. towed it to his home where he proposed to repair it. Mixter, at sometime thereafter not shown by the record, was called into the Army. The petitioner, having no further use for the car, never made any real effort to recover it. He claimed a deduction of $160 on his return for 1951 listed under business expense as "Theft (Auto)". The automobile was not stolen and the record does not show that the petitioner sustained any deductible loss on the automobile in 1951. Opinion MURDOCK, Judge: The principal question in this case is the amount which the petitioner is entitled to deduct in each taxable year for travel, enterainment and promotion expense in connection with1954 Tax Ct. Memo LEXIS 188">191 his business. He did not keep accurate records of his expenditures for these purposes and he did not offer in evidence any of the records which he did keep which might support the deductions which he claimed. He testified that he spent substantial amounts but it is clear from the record that he was not testifying to any specific amount from any recollection which he had in his mind at the time that he testified. There is testimony about checks but no checks or check stubs were introduced in evidence or used in connection with the testimony of a witness in the presence of the Court to sustain any figure. The evidence indicates to the satisfaction of the Court that the petitioner spent in each year substantially more than the Commissioner has allowed but there is no way from the record of determining any amount with any assurance that it would be approximately correct. Absolute certainty as to the exact amount is not essential and the Court must make "as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." . The Court has done its best to fix upon a reasonable1954 Tax Ct. Memo LEXIS 188">*192 amount to be allowed as a deduction for each of the years on the record before it, such as it is, and its efforts in this connection have been incorporated in the findings of fact. The petitioner claims a deduction in connection with a secondhand automobile but the record does not justify a finding that any deductible loss on this automobile was sustained in 1951, the only year for which the deduction is claimed. The petitioner did not say when he bought the automobile, he was vague as to the amount he paid for it, his testimony does not show that he knew how much it was worth after Mixter took it over and it is not clear from his testimony that he could not have recovered a substantial amount had he gone to the trouble to try to do something about the car after Mixter was called into the Army, whenever that may have been. There may be some automatic reduction in the additions determined by the Commissioner under section 294(d) as a result of the decision in regard to the expense items, but the record presents no other issue in that connection for decision by the Court. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620131/	RANDALL H. BORDERS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBorders v. CommissionerDocket No. 18389-93United States Tax CourtT.C. Memo 1994-626; 1994 Tax Ct. Memo LEXIS 631; 68 T.C.M. 1484; December 20, 1994, Filed 1994 Tax Ct. Memo LEXIS 631">631 Decision will be entered for respondent. Randall H. Borders, pro se. For respondent: Steven L. Walker. ARMENARMENMEMORANDUM OPINION ARMEN, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined deficiencies in, and additions to, petitioner's Federal income taxes for the years and in the amounts as follows: Additions to TaxSec.Sec.Sec.YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)1985$ 6,635$ 1,658.75$ 331.75n119862,525631.25-- --19877,3781,844.50-- --19884,5471,136.75277.35--Additions to TaxSec.Sec.Sec.Year6653(a)(1)(A)6653(a)(1)(B)6654(a)1985-- --$ 378.841986$ 126.251122.051987368.901398.481988-- --290.171994 Tax Ct. Memo LEXIS 631">632 The issues for decision are: (1) Whether petitioner failed to report income, principally wages and unemployment compensation, for each of the taxable years in issue; (2) whether petitioner is liable for an addition to tax for failure to file an income tax return under section 6651(a)(1) for each of the taxable years in issue; (3) whether petitioner is liable for an addition to tax for negligence under section 6653(a) for each of the taxable years in issue; and (4) whether petitioner is liable for an addition to tax for failure to pay estimated income tax under section 6654(a) for each of the taxable years in issue. FINDINGS OF FACT Some of the facts have been stipulated, and they are so found. Petitioner resided in Modesto, California, at the time his petition was filed with the Court. Petitioner did not file a Federal income tax return for the taxable years 1985, 1986, 1987, or 1988. By four separate statutory notices each dated May 21, 1993, respondent determined the deficiencies in income tax and the additions to tax at issue herein. The deficiency for each year was based on unreported income, principally unemployment compensation and wages, as follows: UnemploymentYear1 Compensation Wages1985$ 1,162 $ 31,88119864,001.5014,85719871,609 38,99419883,154 2 26,3111994 Tax Ct. Memo LEXIS 631">633 Respondent based her determination of unreported wages on the following information provided by third-party payors: YearThird-party PayorW-2 wages 1985Babcock & Wilcox Const. Co. $ 2,196NPS Energy Services, Inc.9,717Homer J. Olsen, Inc.19,531Lding, Inc.43731,8811986Mingus Constructors, Inc.8,543NPSES DCI6,31414,8571987Lilja Industrial Const.4,315Schneider Inc.5,185Applied Process Cooling Corp.4,053Kiewit Industrial Co.6,449Sahargun Plumbing616NPSES DCI17,033George F. Schuler, Inc.1,3431 38,9941988Mingus Pension Trust2 468Kiewit Industrial Co.4,878First Nat'l Piping Inc.6,361Ward-Schmid Co., Inc.7,121Valley Mechanical, Inc.2,637Thomas Holmquist4,8463 26,311Petitioner1994 Tax Ct. Memo LEXIS 631">634 filed a timely petition with the Court on August 23, 1993. See sec. 7502. OPINION As a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that the Commissioner's determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933). Deficiencies in Income TaxPetitioner essentially contends that he is not liable for the deficiencies in income tax determined by respondent for three reasons. As will become apparent, each of these reasons incorporates various tax protester arguments, all of which are specious. We will therefore address each one only briefly. See Crain v. Commissioner, 737 F.2d 1417">737 F.2d 1417 (5th Cir. 1984) ("We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit."), affg. per curiam an unreported Order of this Court. First, petitioner contends that the Court does not have either subject matter jurisdiction or personal jurisdiction over him, and that respondent acted outside the scope of her authority in1994 Tax Ct. Memo LEXIS 631">635 determining deficiencies in income tax against him. Petitioner's contention, however, ignores sections 6212(a) and 6213(a). Section 6212(a) authorizes the Commissioner to send a notice of deficiency to a taxpayer if the Commissioner determines that there is a deficiency in the taxpayer's income tax. See section 7701(a)(11)(B), (12)(A). In the present case, there is no dispute that respondent sent notices of deficiency to petitioner determining deficiencies in petitioner's income taxes for the years in issue. Section 6213(a) authorizes this Court to redetermine deficiencies in income tax if a timely petition is filed by a taxpayer in respect of a notice of deficiency sent to the taxpayer by the Commissioner. In the present case, petitioner himself invoked the Court's jurisdiction by filing a timely petition. Second, petitioner contends that the statutes upon which respondent relies are without any force or effect because they have not been implemented by the Code of Federal Regulations. Suffice it to say that in our system of Government, legislation is the province of the Congress. It is action by the Congress that gives statutes their force and effect. U.S. Const. art. I, 1994 Tax Ct. Memo LEXIS 631">636 secs. 1, 8. Third, petitioner contends that he received no wages during the taxable years in issue because: The definition of wages, according to the Internal Revenue Code is money paid to a federal employee by the federal government. It's a privileged situation, and I was not involved in any privileged situation, and I did not receive any money from the federal government as -- in the terms of wages during those years.Petitioner's contention is spurious. Sec. 61(a). The Court of Appeals for the Ninth Circuit has observed that "Compensation for labor or services, paid in the form of wages or salary, has been universally held by the courts of this republic to be income, subject to the income tax laws currently applicable." United States v. Romero, 640 F.2d 1014">640 F.2d 1014, 640 F.2d 1014">1016 (9th Cir. 1981). Recently this Court has remarked that "The most fundamental principle of the tax code is found in section 61(a), which provides that gross income means all income from whatever source derived, including compensation for services." Burnett v. Commissioner, T.C. Memo. 1994-475. (Emphasis added.) Because all of petitioner's1994 Tax Ct. Memo LEXIS 631">637 contentions lack merit, we sustain respondent's determination. Additions to Tax Under Section 6651(a)(1)In the case of a failure to file an income tax return within the time prescribed by law, section 6651(a)(1) imposes an addition to tax in the amount of 5 percent of the tax required to be shown on the return for each month (or part thereof) during which such failure continues, but not to exceed 25 percent in the aggregate. See sec. 301.6651-1(a)(1), Proced. & Admin. Regs. The taxpayer is not liable for the addition to tax if the failure to file is due to reasonable cause and not due to willful neglect. The taxpayer bears the burden of proof. Rule 142(a); Baldwin v. Commissioner, 84 T.C. 859">84 T.C. 859, 84 T.C. 859">870 (1985). Petitioner stipulated that he did not file an income tax return for any of the years in issue. At trial petitioner did not address the issue of reasonable cause and therefore failed to carry his burden of proof. In any event, the record suggests that petitioner willfully neglected to file returns for the years in issue. We therefore sustain respondent's determination. Additions to Tax Under Section 6653(a)For 1985, sections1994 Tax Ct. Memo LEXIS 631">638 6653(a)(1) and 6653(a)(2) impose additions to tax for negligence or disregard of rules or regulations. Under section 6653(a)(1), the addition to tax is equal to 5 percent of the underpayment; under section 6653(a)(2), the addition to tax is equal to 50 percent of the interest on that part of the underpayment which is attributable to negligence or disregard of rules or regulations. For 1986 and 1987, sections 6653(a)(1)(A) and 6653(a)(1)(B) impose additions to tax for negligence or disregard of rules or regulations. Under section 6653(a)(1)(A), the addition to tax is equal to 5 percent of the underpayment; under section 6653(a)(1)(B), the addition to tax is equal to 50 percent of the interest on that part of the underpayment which is attributable to negligence or disregard of rules or regulations. For 1988, section 6653(a)(1) imposes an addition to tax for negligence or disregard of rules or regulations. The addition to tax is equal to 5 percent of the underpayment. Section 6653(a)(3) defines the term "negligence" to include any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. This section also defines the term "disregard" to include1994 Tax Ct. Memo LEXIS 631">639 any careless, reckless, or intentional disregard. See Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985) (for purposes of section 6653(a), "negligence" is the lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances). Petitioner bears the burden of proof as to the additions to tax for negligence or disregard of rules or regulations. Rule 142(a); 85 T.C. 934">Neely v. Commissioner, supra; Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 58 T.C. 757">791 (1972). At trial petitioner did not address the issue of negligence or disregard of rules or regulations and therefore failed to carry his burden of proof. We note that the failure to file an income tax return can constitute negligence, see Emmons v. Commissioner, 92 T.C. 342">92 T.C. 342 (1989), affd. on other grounds 898 F.2d 50">898 F.2d 50 (5th Cir. 1990), and that petitioner failed to file an income tax return for any of the taxable years in issue. We therefore sustain respondent's determination. Additions to Tax Under Section 6654(a)Section 6654(a) imposes an addition 1994 Tax Ct. Memo LEXIS 631">640 to tax for failure to pay estimated income tax. This addition to tax is mandatory unless the taxpayer proves that he or she is entitled to a statutory exception. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 75 T.C. 1">20-21 (1980). Petitioner failed to suggest, much less prove, the applicability of any such exception. We therefore sustain respondent's determination. Penalty Under Section 6673(a)(1)Section 6673(a)(1) authorizes the Tax Court to impose a penalty on a taxpayer in an amount up to $ 25,000 whenever it appears to the Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay, or that the taxpayer's position in such proceeding is frivolous or groundless, or that the taxpayer unreasonably failed to pursue available administrative remedies. As the Court of Appeals for the Seventh Circuit has remarked: A petition to the Tax Court * * * is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. * * * The inquiry is objective. If a person should have known that his position is groundless, a court may and should impose sanctions.1994 Tax Ct. Memo LEXIS 631">*641 Coleman v. Commissioner, 791 F.2d 68">791 F.2d 68, 791 F.2d 68">71 (7th Cir. 1986); see Hansen v. Commissioner, 820 F.2d 1464">820 F.2d 1464, 820 F.2d 1464">1470 n.3 (9th Cir. 1987). In the present case, respondent did not request that the Court impose a penalty under section 6673(a)(1) against petitioner, and the Court has decided not to impose a penalty sua sponte. However, petitioner should be advised that the Court may not be so lenient in the future if he persists in conduct that implicates section 6673(a)(1). ConclusionTo give effect to our disposition of the disputed issues, Decision will be entered for respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50% of the interest due on the portion of the deficiency attributable to negligence.↩1. The amounts set forth in this column were also stipulated by the parties, except for the amount for the taxable year 1986. For that year, the parties stipulated that petitioner received unemployment compensation in the amount of $ 5,146. Respondent has not sought an increased deficiency for 1986. See sec. 6214(a).↩2. This amount includes $ 468 reported by a pension trust on a Form 1099-R as a taxable distribution from a retirement plan. See infra note 5.↩1. This total does not include amounts reported by third-party payors as having been paid to petitioner's former spouse, Gloria D. Roberts.↩2. This amount represents a taxable distribution from a retirement plan reported by a pension trust on a Form 1099-R.↩3. This total does not include amounts reported by third-party payors as having been paid to petitioner's former spouse, Gloria D. Roberts.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620132/	DUANE W. LARSON AND PAMELA A. LARSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLarson v. CommissionerDocket No. 44303-85United States Tax CourtT.C. Memo 1993-188; 1993 Tax Ct. Memo LEXIS 191; 65 T.C.M. 2527; April 27, 1993, Filed 1993 Tax Ct. Memo LEXIS 191">191 An appropriate order will be issued denying both parties' motions for summary judgment. Duane W. Larson and Pamela A. Larson, pro se. For respondent: Jay M. Erickson. GERBERGERBERMEMORANDUM OPINION GERBER, Judge: Respondent moved for partial summary judgment seeking to establish petitioners' understatement of income tax liabilities in the amounts asserted in a prior criminal proceeding. Petitioners, in turn, deny that respondent is entitled to partial summary judgment, and they also made a cross-motion for summary judgment regarding four aspects of this case. 11993 Tax Ct. Memo LEXIS 191">192 Respondent's motion is based solely 2 upon the doctrine of judicial estoppel as explained and followed by this Court in Huddleston v. Commissioner, 100 T.C. (1993). We hold that the circumstances of this case are not appropriate for use of judicial estoppel. During 1985, Duane W. Larson (petitioner) was indicted for violations of section 72013 for the taxable years 1978, 1979, and 1980. He pled guilty to a section 7201 violation for 1979 only. As part of the plea agreement, petitioner agreed that "As part of the plea, the * * * [petitioner] will concede the1993 Tax Ct. Memo LEXIS 191">193 accuracy of the criminal tax computations for the years 1978, 1979 and 1980 (Counts I, II and III)." On August 19, 1985, at a U.S. District Court hearing on petitioner's plea agreement with the Government, the following questions and testimony (under oath) were exchanged between petitioner and Assistant U.S. Attorney Richard E. Vosepka: MR. VOSEPKA: Do you understand that, as part of the plea, you are conceding the accuracy of our criminal tax computations -- I say "ours," the government's -- for the years 1978, '79 and '80? DEFENDANT LARSON: Yes. MR. VOSEPKA: All right. And with that, let me mention those specific figures. The government's criminal tax computations, as we would intend to prove in the trial, would show that: For the year 1978, you had at least $ 34,487.23 in tax which you owed, but which you did not declare and pay. Do you concede that that1993 Tax Ct. Memo LEXIS 191">194 is, at least, an accurate figure; at a minimum, is an accurate figure? DEFENDANT LARSON: Yes. MR. VOSEPKA: Now, for 1979, the government would contend and would seek to prove that you had a hundred fifty-eight thousand eight hundred thirty-nine dollars and ninety-seven cents in taxes which were due and owing by you, but which you did not declare or pay? * * * MR. VOSEPKA: * * * Now, with regard to 1979, the figure that I just mentioned was a hundred fifty-eight thousand eight hundred thirty-nine dollars and ninety-seven cents. Do you concede that that is at least the figure of income tax due and owing by you which you did not declare or pay for that year? DEFENDANT LARSON: Yes. MR. VOSEPKA: Now, for 1980, the figure, which the government would intend to prove, is $ 125,168.18. Do you concede that that is at least the minimum figure of tax due and owing, federal tax due and owing for the year 1980 which you did not declare and did not pay? DEFENDANT LARSON: Yes.The plea agreement also provided that petitioner reserved the right to present any information to respondent as part of settling his civil liabilities for the years under indictment. Also at that same hearing, 1993 Tax Ct. Memo LEXIS 191">195 in response to questions by the judge, petitioner testified that he did not declare as much income as he had for 1979 and that he attempted to evade or defeat his income tax for that year. The doctrine of judicial estoppel "prevents parties in subsequent judicial proceedings from asserting positions contradictory to those they previously have affirmatively persuaded a court to accept." Huddleston v. Commissioner, 100 T.C. , (1993) (slip op. at 15), and cases cited therein. Judicial estoppel focuses on the relationship between the court and a party and should be "applied with caution to avoid impinging on the truth-seeking function of the court because the doctrine precludes a contradictory position without examining the truth of either statement." (Fn. ref. omitted.) Teledyne Industries, Inc. v. NLRB, 911 F.2d 1214">911 F.2d 1214, 911 F.2d 1214">1218 (6th Cir. 1990). The doctrine of judicial estoppel, unlike collateral estoppel, is discretionary with the court because the purpose of judicial estoppel is to preserve the integrity of the courts by preventing abuse of the judicial process. See Huddleston v. Commissioner, supra at (slip op. at 15), 1993 Tax Ct. Memo LEXIS 191">196 and cases cited therein; 911 F.2d 1214">Teledyne Industries, Inc. v. NLRB, supra at 1217. We do not see the need nor do we feel compelled to employ the doctrine of judicial estoppel in the setting of this case. Here, respondent is attempting to establish petitioners' tax liability without the opportunity of trial or contradiction by petitioners. Petitioners may attempt to collaterally attack the criminal judgment and underlying proceeding. For example, petitioners assert in their cross-motion for summary judgment that the plea agreement and criminal judgment of conviction were obtained by coercion or duress. The use of judicial estoppel, if appropriate in this case, would be better employed in the face of a change of position by petitioners. In that regard, we are not certain that petitioner's responses to the assistant U.S. attorney and District Court judge would, for purposes of judicial estoppel, constitute his "position" in that proceeding. Nor do we think that there was a judicial acceptance of these responses, in the sense required to raise a judicial estoppel, since the precise amount of the underpayment was not an element of the criminal case, so1993 Tax Ct. Memo LEXIS 191">197 long as the District Court judge was satisfied that petitioner's liability for unpaid tax for 1979 was substantial. We also note that petitioner's testimony under oath may well be available to respondent for purposes of impeachment during cross-examination to deter petitioner from contradicting prior statements to the court. See Fed. R. Evid. 801(d)(1)(A). Additionally, petitioner's testimony may also constitute an admission within the meaning of rule 801(d)(2) of the Federal Rules of Evidence. Accordingly, it appears that the integrity of the judicial process can be adequately addressed by other more appropriate means during any further proceedings in this case. For these reasons, respondent's motion for partial summary judgment will be denied. Petitioners' cross-motion for summary judgment involves four separate aspects. After a review of each of the four aspects, it is clear that none of them is ripe for summary judgment. Rule 121(b) provides that a motion for summary judgment shall be granted if the pleadings and admissions show that there is no genuine issue of material fact and that a decision may be rendered as a matter of law. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 85 T.C. 527">529 (1985).1993 Tax Ct. Memo LEXIS 191">198 The moving party bears the burden of proving that there is no genuine issue of material fact. Marshall v. Commissioner, 85 T.C. 267">85 T.C. 267, 85 T.C. 267">271 (1985). The facts are viewed in a light most favorable to the nonmoving party. Jacklin v. Commissioner, 79 T.C. 340">79 T.C. 340, 79 T.C. 340">344 (1982). With these principles in mind, we discuss each of the four aspects advanced by petitioners for summary judgment. First, petitioners assert that respondent's reconstruction of their income for 1978 through 1980 by means of the net worth method is invalid for lack of an accurate starting point. This aspect involves consideration of a purely factual matter which, based upon petitioners' allegation, will involve a dispute about material facts. Summary judgment is not appropriate for this aspect. Second, petitioners make the assertion that there is "no substantive or supportive evidence for" respondent's determination of deficiencies in the notice of deficiency. In other words, petitioners argue that respondent's determination is arbitrary and capricious. Petitioners do not, in any way, explain the basis for their argument, but attack by means of a generality. 1993 Tax Ct. Memo LEXIS 191">199 The notice of deficiency (which consists of more than 40 pages, including specific schedules) contains a lengthy and highly detailed explanation of the recomputation of income by means of the net worth method. Without further explanation from petitioners, it is not possible to decide whether this is one of those rare occasions where we will look behind the notice of deficiency and require a showing by respondent. See Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324 (1974); Jackson v. Commissioner, 73 T.C. 394">73 T.C. 394, 73 T.C. 394">400-401 (1979). Accordingly, this issue is not ripe for summary judgment. The third aspect of petitioners' summary judgment cross-motion is described as "reasonable cause", and it relates to whether petitioners were fraudulent within the meaning of section 6653(b) for the 1978 and 1980 taxable years. On that issue respondent bears the burden of proof. See sec. 7454(a); Rule 142(b). Petitioners' explanation regarding that issue, at this juncture in the proceeding, is premature and not ripe for summary judgment. Finally, petitioners attempt to collaterally attack the guilty plea for the 1979 taxable year1993 Tax Ct. Memo LEXIS 191">200 in an attempt to avoid the application of collateral estoppel regarding the addition to tax under section 6653(b). Petitioners argue that the plea was not voluntarily given and, accordingly, is not effective for estoppel purposes. This position raises a material factual question which is clearly in dispute between the parties. Therefore, this aspect of petitioners' cross-motion is not ripe for summary judgment. In view of the foregoing, petitioners' cross-motion for summary judgment will also be denied. To reflect the foregoing, An appropriate order will be issued denying both parties' motions for summary judgment.Footnotes1. The four aspects concern: (1) Whether the starting point of respondent's net worth computations is accurately established; (2) whether the notice of deficiency is "naked" and respondent's determination is entitled to the presumption of correctness; (3) whether respondent can meet the burden of proving fraud by clear and convincing evidence; and (4) whether Duane W. Larson's plea of guilty for 1979 was "involuntarily coerced" and thereby inadequate to support respondent's claim of collateral estoppel.↩2. Collateral estoppel is a matter which must be affirmatively raised, and for unexpressed reasons, respondent has chosen to seek partial summary judgment relying solely upon judicial estoppel. Although we reach no conclusion here about the applicability of the doctrine of collateral estoppel regarding the 1979 or the 1978 and 1980 tax years, we do not intend to preempt or preclude the use of any affirmative defense available to the parties.↩3. Section references are to the Internal Revenue Code. Rule references are to this Court's Rules of Practice and Procedure, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620133/	MOUNTAIN STATE FORD TRUCK SALES, INC., E. P. O'MEARA, TAX MATTERS PERSON,Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMountain State Ford Truck Sales, Inc. v. CommissionerNo. 16350-95United States Tax Court112 T.C. 58; 1999 U.S. Tax Ct. LEXIS 16; 112 T.C. No. 7; March 2, 1999, Filed 1999 U.S. Tax Ct. LEXIS 16">16 Decision will be entered under Rule 155. Company M (M), a heavy truck dealer, purchased heavy truck parts and accessories (parts) from the manufacturers of those parts and sold them to its customers. M, which is required to use inventories pursuant to sec. 471, I.R.C., made elections under sec. 472, I.R.C., effective as of the close of its taxable year 1980, to apply the last-in, first-out (LIFO) method of inventory accounting (LIFO method) with respect to its parts inventory, to use the dollar-value LIFO method, to calculate the price index for its parts pool pursuant to the link-chain method, and to use the "most recent purchases method" in computing the "total current-year cost of items making up" its parts pool. In determining that current-year cost as a first step in valuing its parts inventory under the dollar-value LIFO method, M used the respective manufacturers' prices that were in effect as of the date of its physical inventory (replacement cost) for the inventoried parts that it had purchased.Respondent determined that M's method of using replacement cost in valuing its parts inventory under the LIFO method does not clearly reflect income because it is contrary to the 1999 U.S. Tax Ct. LEXIS 16">17 requirements of sec. 472, I.R.C., and the regulations thereunder and that M's ordinary income for the year at issue should be adjusted to include the amount of the so-called LIFO reserve that M had computed during the period 1980 through the year at issue.HELD: Respondent did not abuse respondent's discretion in determining that M's method of using replacement cost in valuing its parts inventory under the LIFO method does not clearly reflect income.HELD, FURTHER: Respondent did not place M on an impermissible method of inventory accounting when respondent adjusted M's ordinary income for the year at issue to include the amount of the so-called LIFO reserve that M had computed during the period 1980 through the year at issue, and consequently respondent did not abuse respondent's discretion in making that adjustment. Leslie J. Schneider, Patrick J. Smith, and William F. Garrow,for petitioner.Michael V. Cooper, for respondent. CHIECHI, JUDGE. CHIECHI112 T.C. 58">59 [1] CHIECHI, JUDGE: Respondent determined S corporation adjustments for 1991 to the ordinary income of Mountain State Ford Truck Sales, Inc. (Mountain State Ford), in the amount of $ 504,013.[2] The issues remaining for decision are:(1) 1999 U.S. Tax Ct. LEXIS 16">18 Did respondent abuse respondent's discretion in determining that Mountain State Ford's method of using replacement cost in valuing its parts inventory under the LIFO method does not clearly reflect income? We hold that respondent did not.(2) Even though we have held that respondent did not abuse respondent's discretion in making the determination described above, did respondent abuse respondent's discretion by placing Mountain State Ford on an impermissible method of inventory accounting when respondent adjusted Mountain State Ford's ordinary income for 1991 to include 112 T.C. 58">60 the amount of the so-called LIFO reserve that it had calculated during the period 1980 through 1991? We hold that respondent did not.FINDINGS OF FACT 1 [3] Some of the facts have been stipulated and are so found.[4] Mountain State Ford, which was incorporated in Delaware in 1968 and has been 1999 U.S. Tax Ct. LEXIS 16">19 an S corporation since its taxable year 1987, had its principal place of business in Denver, Colorado, at the time the petition was filed. E. P. O'Meara (Mr. O'Meara), who worked in the automobile and truck dealer industry on a part-time basis since late 1939 and on a full-time basis since January 1947, is Mountain State Ford's tax matters person.[5] In January 1968, Mr. O'Meara started operating Mountain State Ford as a heavy truck dealer under a management agreement with Ford Motor Company (Ford), which owned all of its stock. As a heavy truck dealer for Ford, Mountain State Ford carried, and maintained an inventory of, different types of heavy truck parts and accessories manufactured by Ford. It also carried different types of parts of other manufacturers, some of which were present in 1968 and others of which were added later.[6] Mr. O'Meara continued operating Mountain State Ford under the management agreement with Ford until around 1978. At that time, Mr. O'Meara, his son Eugene Peter O'Meara, Jr., and other family members completed their purchase from Ford, pursuant to the terms of that management agreement, of all of the stock of Mountain State Ford, which they began acquiring 1999 U.S. Tax Ct. LEXIS 16">20 during 1975. After having purchased all of the stock of Mountain State Ford, Mr. O'Meara and Eugene Peter O'Meara, Jr., continued to operate Mountain State Ford as a heavy truck dealer for Ford. On July 31, 1985, Mountain State Ford became a heavy truck dealer for American Isuzu Motors Inc. and began carrying its parts.[7] Eugene Peter O'Meara, Jr., has been employed by Mountain State Ford since 1974 and has served as its president since 1990. As its president, Eugene Peter O'Meara, Jr., 112 T.C. 58">61 oversaw all of the operations of Mountain State Ford, including its new and used heavy truck sales departments, parts department, service department, and lease and rental operations.[8] From its incorporation until the date in 1978 on which Ford no longer owned any stock of Mountain State Ford, only Ford employees served as members of the board of directors of Mountain State Ford. Nonetheless, Mr. O'Meara was involved in all aspects of Mountain State Ford's business since it was formed in 1968 and served at various times as Mountain State Ford's general manager, president, and chairman of its board of directors.[9] When Mountain State Ford commenced business in 1968, the accounting methods that it 1999 U.S. Tax Ct. LEXIS 16">21 adopted and the books and records that it maintained were in accordance with the Ford standard system for Ford truck dealers. That system included the way in which the parts inventory was to be maintained. Throughout the period from its incorporation until 1978 when Ford no longer owned any stock of Mountain State Ford, Ford required that Mountain State Ford retain an independent certified public accountant (C.P.A.) to conduct an annual audit, prepare its financial statements, provide an unqualified opinion for those statements, prepare its tax returns, and observe the taking of its physical inventory. During that same period, Ford required that Mountain State Ford's independent C.P.A. value Mountain State Ford's parts inventory (1) for Ford parts on the basis of "the dealer net prices as incorporated in the latest dealer price lists published by Ford" and (2) for other manufacturers' parts on the basis of "the dealer net prices as incorporated in the latest dealer price lists published by the applicable manufacturer".[10] On a daily basis, Mountain State Ford ordered and received parts from manufacturers that ranged in number from one to hundreds, sold parts to customers, and, for 1999 U.S. Tax Ct. LEXIS 16">22 reasons not disclosed by the record, received parts that were returned by certain of its customers. The price that each manufacturer charged Mountain State Ford for each of the parts that it ordered was published in a price list or price catalog (price catalog) that each such manufacturer distributed to heavy truck dealers, including Mountain State Ford. On a periodic basis, each manufacturer updated its price catalog to reflect any changes in the prices of such manufacturer's 112 T.C. 58">62 parts and distributed such updated price catalogs to Mountain State Ford and other heavy truck dealers. During the period 1980 through 1991, Ford distributed approximately four to six updated price catalogs each year.[11] The different types of parts that Mountain State Ford carried fluctuated in quantity, but usually totaled about 12,000 out of approximately 17,000 potential different types of parts. For each such type of part, Mountain State Ford could have carried as few as one unit or as many as several dozen units, each or several of which it acquired at different times and different prices and from different manufacturers. The units of different types of parts in Mountain State Ford's parts inventory turned 1999 U.S. Tax Ct. LEXIS 16">23 over at different rates. While Mountain State Ford's parts inventory generally turned over every 3 or 4 months, some units of different types of parts were in its parts inventory for more than 12 months.[12] The respective manufacturers of the different types of parts carried by Mountain State Ford assigned parts numbers (parts numbers) to those types of parts. During any year, a manufacturer could have (1) changed a part number for a type of part without altering that type of part and/or (2) added a new part number because it altered an existing type of part and/or occasionally developed a new type of part. However, from year to year, only 10 percent to 15 percent of the parts numbers for parts carried by Mountain State Ford changed. For the parts numbers that did change, Mountain State Ford could have determined the corresponding parts numbers for the year prior to the change, but did not do so.[13] While each different type of part that Mountain State Ford carried in its parts inventory was assigned a part number, in most instances each unit of a particular type of part was not identified separately from every other unit of that same type of part. However, in some instances each 1999 U.S. Tax Ct. LEXIS 16">24 unit of the same type of certain large parts, such as engines, transmissions, and rear axles, was identified not only by a part number, but also by a serial number.[14] Consistent with standard industry practice for heavy truck dealers, Mountain State Ford maintained an inventory of parts by using a computerized recordkeeping system which listed, inter alia, the quantity of units on hand of each of the different types of parts that it carried. Mountain State Ford maintained that system, which it referred to as its perpetual 112 T.C. 58">63 recordkeeping system (perpetual inventory recordkeeping system), with the assistance of a company that provided computer services (computer vendor) to businesses in the heavy truck dealer industry. The manufacturers authorized several computer vendors to assist heavy truck dealers in the valuation of those dealers' parts inventories. Prior to 1994 Mountain State Ford utilized Ford's Dealer Computer Services Division, and since 1994 it has utilized ADP, Inc., as its computer vendor. In addition to advising Mountain State Ford and other heavy truck dealers of changes in the prices of its parts through the periodic distribution of updated price catalogs, each manufacturer 1999 U.S. Tax Ct. LEXIS 16">25 provided to the computer vendors, at about the same times [sic] it distributed such catalogs, computer-ready mediums, such as magnetic tapes (computerized price update tapes), which reflected such price changes.[15] Under its perpetual inventory recordkeeping system, Mountain State Ford (1) added to its parts inventory the number of units of each type of part that were delivered and returned to it and (2) removed from its parts inventory the number of units of each type of part that it sold. When Mountain State Ford received the parts that it had ordered from a manufacturer, it also received a computer-ready medium, such as a magnetic tape (shipping tape), and packing sheets (packing sheets) that included a packing slip. The shipping tape reflected the part number of each type of part and the number of units of each such type that the manufacturer had shipped, or had intended to ship, to Mountain State Ford, but did not contain any information showing the prices that the manufacturer charged Mountain State Ford for those parts. Mountain State Ford used the shipping tape to enter into its perpetual inventory recordkeeping system the part number and the number of units of each type of 1999 U.S. Tax Ct. LEXIS 16">26 part that the manufacturer shipped, or intended to ship, to it.[16] The packing sheets that accompanied each shipment of parts to Mountain State Ford reflected the same information which appeared on the shipping tape and which Mountain State Ford entered into its perpetual inventory recordkeeping system. Mountain State Ford used the packing sheets to verify that it received the quantity of units of each type of part that was shown as shipped on such sheets and on the shipping tape. Upon delivery at Mountain State Ford's place of business of parts shipped to it, an employee in its parts 112 T.C. 58">64 department compared the packing sheets with the quantity of units of each type of part that had been delivered. If after making that comparison the employee determined that the packing sheets were inaccurate, an employee adjusted Mountain State Ford's perpetual inventory recordkeeping system to reflect the quantity of units of each type of part that had in fact been delivered to it.[17] At the end of each business day, Mountain State Ford transmitted to its computer vendor a record of the transactions that were effected on that day. The computer vendor computed a value for the quantity of units of each 1999 U.S. Tax Ct. LEXIS 16">27 type of part (1) delivered to, (2) returned to, and/or (3) sold by Mountain State Ford on each business day by using the price which the manufacturer of each such type was charging on that day and which was reflected on the computerized price update tape that each such manufacturer had provided to that vendor and in the updated price catalog that each such manufacturer had distributed to Mountain State Ford and other heavy truck dealers.[18] Mountain State Ford generally received invoices on a monthly basis from the manufacturers for the parts that those manufacturers had shipped, or had intended to ship, to it. With respect to those parts, each such invoice showed the part number of each type of part, the quantity of units of each such type, and the purchase price of each such unit. (We shall sometimes refer to the price of each unit of each type of part as shown on the invoice that the manufacturer sent to Mountain State Ford as the invoice price.)[19] Upon receipt of a manufacturer's invoice, an employee of Mountain State Ford entered the total of the invoice prices (aggregate invoice price) of all the parts, but not the invoice price of each unit of each type of part, into an account 1999 U.S. Tax Ct. LEXIS 16">28 which Mountain State Ford maintained for the parts that it purchased (purchases account). Mountain State Ford did not utilize the purchases account in maintaining its inventory. Another employee of Mountain State Ford in charge of payables verified with the parts department that Mountain State Ford had received the number of units of each type of part that was listed on each invoice, and, if so, Mountain State Ford paid the aggregate invoice price. Once Mountain State Ford paid the aggregate invoice price, it filed the invoice by manufacturer and invoice date.[20] 112 T.C. 58">65 Where (1) there was a shortage in the quantity of units of one or more types of parts that the manufacturer intended to ship to Mountain State Ford, as shown on the shipping tape and the packing sheets, (2) the manufacturer mistakenly sent Mountain State Ford an invoice which billed it for the units that it had not received, and (3) Mountain State Ford paid, for reasons not disclosed in the record, the incorrect aggregate invoice price, Mountain State Ford filed a shortage claim (shortage claim) with the manufacturer from whom it had ordered the parts. In those instances where Mountain State Ford filed a shortage claim, 1999 U.S. Tax Ct. LEXIS 16">29 the manufacturer to whom such a claim was made issued a credit to Mountain State Ford in an amount calculated by reference to the manufacturer's price in effect around the time Mountain State Ford filed the shortage claim for each unit listed in that claim. The manufacturer issued a credit in that amount regardless whether it had originally charged, and sent Mountain State Ford an invoice showing, a different invoice price for each such unit.[21] Mountain State Ford took a physical inventory in late September or early October, and in a couple of instances in early November, of each year and adjusted the balance of the quantity of the units of each type of part reflected in its perpetual inventory recordkeeping system to reflect each such quantity physically on hand. After taking the physical inventory, Mountain State Ford notified the computer vendor of each such quantity physically on hand. Consistent with standard industry practice in the heavy truck dealer industry, the computer vendor determined the value of Mountain State Ford's parts inventory as of the date of the physical inventory by computing a value for the quantity of units of each type of part physically on hand by using 1999 U.S. Tax Ct. LEXIS 16">30 the price which the manufacturer of each such type was charging as of that date and which was reflected on the computerized price update tape that each such manufacturer had provided to that vendor. (We shall refer to the prices reflected on those tapes at which the different types of parts were valued as of the date of Mountain State Ford's physical inventory as replacement cost.) The replacement cost on which Mountain State Ford valued the parts in its parts inventory as of the date of the physical inventory was not necessarily the same as the invoice prices thereof. In order to determine the value 112 T.C. 58">66 of its parts inventory at the end of each year (ending parts inventory), Mountain State Ford adjusted, in a manner not disclosed by the record, its parts inventory valued at the time of its physical inventory for any deliveries and returns of parts to it and/or sales of parts by it between that time and the end of the year. Prior to 1980, Mountain State Ford's ending parts inventory, determined as just described, was used as its ending parts inventory for both financial statement and Federal income tax (Federal tax) purposes.[22] Throughout the period from its incorporation until the 1999 U.S. Tax Ct. LEXIS 16">31 date in 1978 on which Ford no longer owned any stock of Mountain State Ford, Mountain State Ford did not use the invoice prices or the purchases account in maintaining its inventory under its perpetual inventory recordkeeping system. That was because, as discussed above, Ford required that Mountain State Ford's parts inventory be valued for Ford parts on the basis of "the dealer net prices as incorporated in the latest dealer price lists published by Ford" and for other manufacturers' parts on the basis of "the dealer net prices as incorporated in the latest dealer price lists published by the applicable manufacturer". Nor did Mountain State Ford maintain inventory records which showed the invoice price that it paid for each unit of each type of part (1) delivered and/or returned to it and added to its parts inventory and/or (2) sold by it and removed from that inventory. However, Mountain State Ford did maintain other records, such as accounts payable records and invoices, which listed the invoice price paid by Mountain State Ford for each unit of each type of part delivered to it.[23] After 1978, when Ford no longer owned any stock of Mountain State Ford, Mountain State Ford was 1999 U.S. Tax Ct. LEXIS 16">32 free to use an engagement letter in employing a C.P.A. to audit its financial statements and prepare its tax returns that was different from the letter that it had previously used when Ford owned stock of Mountain State Ford. Mountain State Ford also became free to adopt accounting methods and/or procedures that were different from those which it employed when it was owned by Ford, including its method of valuing its parts inventory on the basis of replacement cost, provided that it sought and received the consent of the Internal Revenue Service before it made a change, inter alia, in that method of valuing its parts inventory. After 1978, when Ford no 112 T.C. 58">67 longer owned any stock of Mountain State Ford, Mountain State Ford made no attempt to determine whether it could have modified its perpetual inventory recordkeeping system so that it could have used invoice prices in valuing its parts inventory. Nor did it determine whether it could have created a new inventory recordkeeping system that could have used invoice prices in that inventory valuation process. Instead, Mountain State Ford continued to use replacement cost in valuing its parts inventory because it had used that method when 1999 U.S. Tax Ct. LEXIS 16">33 Ford owned it and because that was the method used by the heavy truck dealer industry.[24] In 1978, respondent conducted an examination of Mountain State Ford's return for 1976, during which respondent requested documents with respect to Mountain State Ford's inventories for that year. As part of that examination, respondent did not propose any adjustments to Mountain State Ford's method of valuing its parts inventory.[25] From its incorporation in 1968 through 1979, Mountain State Ford accounted for its parts inventory on the basis of the lower of cost or market (LCM). Mountain State Ford submitted Form 970 (Form 970), Application to Use LIFO Inventory Method, with its 1980 return. In that form, Mountain State Ford adopted the LIFO method of valuing its parts inventory and its new heavy trucks inventory, effective as of the close of its taxable year ended December 31, 1980. It adopted the same method for both financial statement and Federal tax purposes. As pertinent here with respect to Mountain State Ford's parts inventory, 2 the Form 970 stated that Mountain State Ford intended to (1) take inventory "at actual cost regardless of market value", (2) value its parts inventory on the 1999 U.S. Tax Ct. LEXIS 16">34 dollar-value LIFO method, (3) use one pool (parts pool) for its parts inventory, (4) calculate the price index for its parts pool pursuant to the link-chain method, and (5) "determine the cost of * * * [parts] in the closing inventory in excess of those in the opening inventory" on the basis of "most recent purchases"; i.e., pursuant to the most recent purchases method under section 1.472-8(e)(2)(ii)(a), Income Tax Regs. (most recent purchases method). Mountain 112 T.C. 58">68 State Ford attached a schedule to the Form 970 which stated in pertinent part: COST SYSTEM USED FOR PARTS INVENTORY The taxpayer [Mountain State Ford) keeps detailed records of the cost of all parts in inventory. The total actual cost of all parts inventory will be divided by the number of each type of part on hand at the end of the year. In response to a request in the Form 970 to indicate the "Method used in computing LIFO value of dollar-value pools", Mountain State Ford attached a schedule which stated in pertinent part: LINK-CHAIN METHOD FOR PARTS INVENTORY The taxpayer [Mountain 1999 U.S. Tax Ct. LEXIS 16">35 State Ford] receives weekly reports from Ford Motor Company which indicate the increase in prices for a major portion of the parts inventory which is supplied to the taxpayer from Ford Motor Company. The taxpayer compares this list of prices with the actual cost of the same items in the parts inventory to develop a current year price index. * * * The index developed by this large sample is then applied to the total parts inventory. Once a yearly index is developed it will be added to prior year indices to develop a cumulative index. [26] After having elected the LIFO method, Mountain State Ford continued to use replacement cost, determined in the same manner as it had calculated it prior to that election, in valuing its ending parts inventory for financial statement and Federal tax purposes. However, Mountain State Ford used replacement cost in that valuation process as the starting point in determining its ending parts inventory under the dollar-value LIFO method; i.e., it used replacement cost in the computation of the total current-year cost of items making up its parts pool under section 1.472-8(e)(2)(ii), Income Tax Regs. (current-year cost of its parts pool). 1999 U.S. Tax Ct. LEXIS 16">36 After computing such current-year cost, Mountain State Ford computed an annual price index designed to measure the change in the cost of parts from one year to the next. That index was computed by reference to, inter alia, the respective manufacturers' prices each week for parts carried by Mountain State Ford in its parts inventory and the respective manufacturers' prices for such parts as of the end of the preceding week.[27] At the time Mountain State Ford adopted the LIFO method, it made no attempt to determine whether it could have modified its perpetual inventory recordkeeping system so that it 112 T.C. 58">69 could have used invoice prices in valuing its parts inventory. Nor did it determine whether it could have created a new inventory recordkeeping system that could have used invoice prices in that valuation process. Instead, Mountain State Ford continued to use replacement cost in valuing its parts inventory under the LIFO method because it had used that method prior to adopting the LIFO method and because that was the method used by the heavy truck dealer industry. In using replacement cost in valuing its parts inventory under the LIFO method, Mountain State Ford was not attempting to, 1999 U.S. Tax Ct. LEXIS 16">37 and did not, determine or approximate the invoice prices of the parts that it purchased.[28] On May 22, 1995, respondent issued a notice of final S corporation administrative adjustment (notice or FSAA) for 1991 to Mr. O'Meara, the tax matters person. In the notice, respondent did not terminate the elections that Mountain State Ford made in the Form 970 to value its parts inventory under the dollar-value, link-chain LIFO method and to use the most recent purchases method in determining the current-year cost of its parts pool. However, respondent determined in the notice that the cost of goods sold reported in Mountain State Ford's 1991 return should be reduced, and the ordinary income reported in that return should be increased, by $ 463,515. 3 The amount of that reduction and that increase was equal to the amount of the LIFO reserve that Mountain State Ford had calculated over the period 1980 through 1991 (LIFO reserve). The adjustment at issue in the notice thus was based on restoring to Mountain State Ford's income the amount of that LIFO reserve. In making that adjustment, respondent was unable to, and did not, recompute Mountain State Ford's non-LIFO inventory value under a method 1999 U.S. Tax Ct. LEXIS 16">38 using the invoice prices of parts inventoried or a cost other than replacement cost. That was because Mountain State Ford did not have, and did not provide to respondent, the records that were necessary in order to calculate for the period 1980 through 1991 (1) the LIFO value and the non-LIFO value of its parts inventory and (2) its LIFO reserve on the basis of invoice prices or a cost other than replacement cost. Thus, the non-LIFO value that was used to compute the amount of the adjustment at issue in the notice 112 T.C. 58">70 (i.e., the amount of the LIFO reserve that Mountain State Ford had calculated for the period 1980 through 1991) was based on replacement cost.OPINION[29] The issues presented implicate not only section 472, entitled "Last-In, First-Out Inventories", but also section 446, entitled "General Rule for Methods of Accounting", and section 471, entitled "General Rule for Inventories". Sections 446 and 471 and the regulations thereunder are the provisions that vest the Commissioner of Internal Revenue (Commissioner) with wide discretion in determining whether a method of inventory accounting should be disallowed because 1999 U.S. Tax Ct. LEXIS 16">39 it does not clearly reflect income. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 439 U.S. 522">532-533, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979); Consolidated Manufacturing, Inc. v. Commissioner, 111 T.C. 1">111 T.C. 1, 111 T.C. 1">19 (1998). The Commissioner's interpretation of the clear-reflection standard under sections 446 and 471 may not be disturbed unless it is clearly unlawful or plainly arbitrary. 439 U.S. 522">Thor Power Tool Co. v. Commissioner, supra; 111 T.C. 1">Consolidated Manufacturing, Inc. v. Commissioner, supra.The Commissioner's discretion under sections 446 and 471 is not unbridled, however. 439 U.S. 522">Thor Power Tool Co. v. Commissioner, supra at 533; 111 T.C. 1">Consolidated Manufacturing, Inc. v. Commissioner, supra.Even if a taxpayer's accounting method does not result in a clear reflection of income, the Commissioner may not change the taxpayer's accounting method to another method that also fails to reflect income clearly. Harden v. Commissioner, 223 F.2d 418">223 F.2d 418, 223 F.2d 418">421 (10th Cir. 1955), revg. 21 T.C. 781">21 T.C. 781 (1954) and affg. Harden v. Hinds, 48 A.F.T.R. (P-H) 1268">48 A.F.T.R. (P-H) 1268, 54-1 U.S. Tax Cas. (CCH) 9348 (W.D. Okla. 1954); Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500, 88 T.C. 1500">1514 (1987).[30] As framed by petitioner, the question relating to the clear-reflection-of-income 1999 U.S. Tax Ct. LEXIS 16">40 standard is whether respondent abused respondent's discretion in concluding that, in computing the LIFO value of its dollar-value parts pool under the link-chain method, 41999 U.S. Tax Ct. LEXIS 16">41 Mountain State Ford's use of replacement cost in 112 T.C. 58">71 determining the current-year cost of its parts pool pursuant to any other proper method under section 1.472-8(e)(2)(ii)(d), Income Tax Regs.51999 U.S. Tax Ct. LEXIS 16">42 (any other proper method), which petitioner claims Mountain State Ford elected in the Form 970, does not clearly reflect income. Respondent agrees with petitioner's framing of the issue relating to the clear-reflection-of-income standard except that respondent contends that Mountain State Ford elected in the Form 970 to use the most recent purchases method, and not any other proper method, in determining the current-year cost of its parts pool. 61999 U.S. Tax Ct. LEXIS 16">43 [31] In inventorying goods with respect to which a taxpayer elected the LIFO method, the taxpayer is required to (1) treat those goods remaining on hand at the end of the taxable year as being (a) those included in the opening inventory of the taxable year, in the order of acquisition and to the extent thereof, and (b) those acquired during the taxable year, sec. 472(b)(1); sec. 1.472-1(a), Income Tax Regs.; and (2) inventory them at cost, sec. 472(b)(2); sec. 1.472-2(b), Income Tax Regs.[32] 112 T.C. 58">72 There are two basic LIFO computational systems. One is based on specific goods (specific-goods LIFO method). See sec. 1.472-2, Income Tax Regs. The other is based on the dollars invested in inventory and is known as the dollar-value LIFO method. See sec. 1.472-8, Income Tax Regs.Under the specific-goods LIFO method, quantitative changes in inventory during the year are measured in terms of an appropriate unit, such as pounds, pieces, or gallons. The dollar-value LIFO method 1999 U.S. Tax Ct. LEXIS 16">44 determines increases or deceases [sic] in inventory in terms of total dollars, rather than in terms of physical units. Amity Leather Prods. Co. v. Commissioner, 82 T.C. 726">82 T.C. 726, 82 T.C. 726">732 (1984). To determine under the dollar-value LIFO method whether there has been an increase or a decrease in inventory during the year, the ending inventory is valued in terms of total dollars that are equivalent in value to the dollars used to value the beginning inventory. Id.[33] Respondent argues that the term "cost" in section 472(b)(2) and the regulation thereunder (viz., section 1.472-2(b), Income Tax Regs.) means actual cost and that, as required by section 472(b)(2), section 1.472-8(e)(2)(ii), Income Tax Regs., pertaining to the dollar-value LIFO method mandates that the determination of the current-year cost of items making up a pool be made on the basis of, or by reference to, actual cost. According to respondent, Mountain State Ford's method of using replacement cost, instead of actual cost, in determining the current-year cost of its parts pool contravenes those requirements of the Code and regulations, and consequently that method does not clearly reflect income.[34] Petitioner concedes that 1999 U.S. Tax Ct. LEXIS 16">45 if the Court were to find that Mountain State Ford's method of using replacement cost were to contravene the requirements of the provisions of the Code and the regulations upon which respondent relies, that method would not clearly reflect income. However, petitioner argues that those provisions do not require that Mountain State Ford determine the current-year cost of its parts pool by using actual cost. According to petitioner, respondent's interpretation of the term "cost" in section 472(b)(2) as meaning actual cost is wrong, and Mountain State Ford's method of using replacement cost qualifies as any other proper method under section 1.472-8(e)(2)(ii)(d), Income Tax Regs., which does not require the use of actual cost.[35] 112 T.C. 58">73 To support his argument that respondent's position about the meaning of the term "cost" in section 472(b)(2) and the regulation thereunder is wrong, petitioner asserts: With regard to the "cost" requirement in section 472(b)(2), the petitioner submits that an examination of the statute and regulations, as well as the historical development surrounding the LIFO method, makes clear that the cost requirement in section 472(b)(2) is simply the expression 1999 U.S. Tax Ct. LEXIS 16">46 of the rule that the lower of cost or market method may not be used in conjunction with the LIFO method. Accordingly, the respondent is attempting to extend the cost requirement in section 472(b)(2) far beyond its intended scope. * * * * * * * * The use of replacement costs * * * under the dollar-value LIFO method does not in any way represent a use of lower of cost or market and, accordingly, does not violate the cost requirement of section 472. [36] Even assuming arguendo, that petitioner were correct in his contention about the reason why Congress required that goods for which a taxpayer elected the LIFO method be inventoried at cost, 71999 U.S. Tax Ct. LEXIS 16">47 that contention does not address the meaning of the term "cost" in section 472(b)(2) and the regulation thereunder. Section 472(b)(2) provides: (b) method Applicable. -- In inventorying goods specified in the application described in subsection (a), the taxpayer shall: * * * * (2) Inventory them at cost * * The regulation under section 472(b)(2), section 1.472-2(b), IncomeTax Regs., provides: (b) The inventory shall be taken at cost regardless of market value. [37] Both parties rely in part on dictionary definitions of the word "cost" to support their divergent positions regarding the meaning of the term "cost" in section 472(b)(2) and the regulation thereunder. According to respondent, the commonly understood and generally accepted meaning of the word "cost", as reflected in dictionary definitions, is actual cost. According to petitioner, dictionary definitions of the word 112 T.C. 58">74 "cost" "clearly encompass replacement cost." We agree with respondent.[38] Black's Law Dictionary 345 (6th ed. 1990) defines the word "cost" to mean: "Expense; price. The sum or equivalent expended, paid or charged for something. See also Actual cost; Costs; Net cost; Rate." Merriam-Webster's Collegiate Dictionary 262 (10th ed. 1996) defines the word "cost" to include: "The amount or equivalent paid or charged 1999 U.S. Tax Ct. LEXIS 16">48 for something: price." Webster's Third New International Dictionary 515 (1993 ed.) defines the word "cost" to include: "the amount or equivalent paid or given or charged or engaged to be paid or given for anything bought or taken in barter or for service rendered". We conclude that the common and ordinary meaning of the word "cost" is actual cost or the price paid for something. 8[39] We see no reason, however, to rely in this case on dictionary definitions of the word "cost" to determine the meaning of the term "cost" in section 472(b)(2) and section 1.472-2(b), Income Tax Regs. That is because the term "cost" is defined in regulations under section 471, the "General Rule for Inventories". Application of the definition of cost in those regulations ( section 1.471-3, Income Tax Regs., entitled "Inventories at cost"), which is based on what we have concluded is the common and ordinary meaning of the word 1999 U.S. Tax Ct. LEXIS 16">49 "cost", will result in a determination of the actual cost of merchandise or goods purchased or produced during the taxable year, 9 or in certain instances an approximation of such cost determined upon a reasonable basis (reasonable approximation). 10[40] The definition of the term "cost" in section 1.471-3, Income Tax Regs., is virtually the same as the definition of the term "cost" as it appeared in the regulations promulgated under section 203 of the Revenue Act of 1918 (1918 Act), ch. 18, 40 Stat. 1060, the original predecessor of section 471, which first required certain taxpayers to use the inventory accounting 112 T.C. 58">75 method. See Regs. 45, art. 1583 (1918). The definition of the term "cost" as it appeared in the regulations under the 1918 Act was repromulgated in virtually 1999 U.S. Tax Ct. LEXIS 16">50 the same language in the regulations issued under all subsequent Federal tax provisions that continued to require certain taxpayers to use the inventory accounting method. The term "cost" in inventory tax accounting had a settled meaning when Congress first permitted certain taxpayers to elect the LIFO method, Revenue Act of 1938, ch. 289, sec. 22(d), 52 Stat. 459, 111999 U.S. Tax Ct. LEXIS 16">51 1999 U.S. Tax Ct. LEXIS 16">52 and shortly thereafter when Congress permitted all taxpayers to elect that method, Revenue Act of 1939, ch. 247, sec. 219, 53 Stat. 877. In requiring that goods for which a taxpayer adopted the LIFO method be inventoried at cost, Congress presumptively was aware of the established regulatory definition of the term "cost" in inventory tax accounting. If Congress had intended for the term "cost" in LIFO inventory tax accounting to have a meaning different from that regulatory definition, it would have so stated. It did not do so when it first enacted the LIFO provisions or at any other time thereafter. We hold that the definition of the term "cost" in section 1.471-3, Income Tax Regs., which is intended to arrive at 112 T.C. 58">76 actual cost, applies to the term "cost" in section 472(b)(2) and the regulation thereunder. 121999 U.S. Tax Ct. LEXIS 16">53 1999 U.S. Tax Ct. LEXIS 16">54 See Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152">508 U.S. 152, 508 U.S. 152">158-159, 124 L. Ed. 2d 71">124 L. Ed. 2d 71, 113 S. Ct. 2006">113 S. Ct. 2006 (1993). [41] To support his position that Mountain State Ford's method of using replacement cost to determine the current-year cost of its parts pool qualifies as any other proper method under section 1.472-8(e)(2)(ii)(d), Income Tax Regs., which in his view does not require the use of actual cost, petitioner 1999 U.S. Tax Ct. LEXIS 16">55 contends (1) that Mountain State Ford elected in the Form 970 to use any other proper method in determining that current-year cost 13 and (2) that Mountain State Ford's use of replacement cost qualifies as such a method. We disagree on both counts. Mountain State Ford did not elect in the Form 970 to use any other proper method. Instead, Mountain State Ford elected in that form to "determine the cost of * * * [parts] in the closing inventory" on the basis of "most recent purchases". On the record before us, we find that Mountain 112 T.C. 58">77 State Ford elected to determine the current-year cost of its parts pool pursuant to the most recent purchases method described in section 1.472-8(e)(2)(ii)(a), Income Tax Regs.That regulation requires such cost to be determined by "reference to the actual cost of the goods most recently purchased". Sec. 1.472-8(e)(2)(ii)(a), Income Tax Regs. Mountain State Ford did not request, and did not receive, the permission of the Commissioner to use a method different from the most recent purchases method that it elected in the Form 970. See sec. 472(e). We conclude that Mountain State Ford was precluded in determining the current-year cost of its parts pool from 1999 U.S. Tax Ct. LEXIS 16">56 using a method other than the most recent purchases method which it elected in the Form 970 that it filed with its 1980 return. [42] Even if, as petitioner contends, Mountain State Ford 1999 U.S. Tax Ct. LEXIS 16">57 had elected in the Form 970 to use any other proper method under section 1.472-8(e)(2)(ii)(d), Income Tax Regs., that method must be a proper method and must, in the opinion of the Commissioner, clearly reflect income. Respondent determined that Mountain State Ford's method of using replacement cost in determining the current-year cost of its parts pool was not a proper method and does not clearly reflect income because section 472(b)(2) requires that Mountain State Ford calculate such current-year cost by using actual cost, which in this case is the invoice prices. Petitioner contends that respondent abused respondent's discretion in making that determination. Petitioner asserts: An examination of * * [section 1.472-8(e)(2)(ii), Income Tax Regs.] indicates that whereas the earliest and latest acquisitions cost methods ( Treas. Reg. sections 1.472- 8(e)(2)(ii)(a) & (b)) are described in terms of actual cost, this term is not used in describing either the average acquisitions cost method or the so-called "other" method that * * * [Mountain State Ford] is using. Accordingly, the respondent's interpretation of the regulations imports into Treas. Reg. section 1.472-8(e)(2)(ii)(d)1999 U.S. Tax Ct. LEXIS 16">58 a requirement that does not exist in the regulations. For example, under the average acquisitions cost method described in Treas. Reg. section 1.472-8(e)(2)(ii)(c), the unit cost assigned would often not be the ACTUAL cost of ANY units; for example, where half the units acquired during the year were acquired at a cost of $ 10 and half were acquired at a cost of $ 11, the unit cost determined under the average cost method, $ 10.50, is not the ACTUAL cost of ANY units. [43] As petitioner acknowledges, the determination of the current-year cost of items making up a pool must be made (1) 112 T.C. 58">78 under the most recent purchases method under section 1.472-8(e)(2)(ii)(a), Income Tax Regs., by "reference to the actual cost of the goods most recently purchased or produced", and (2) under the earliest acquisition method under section 1.472-8(e)(2)(ii)(b), Income Tax Regs., by "reference to the actual cost of the goods purchased or produced during the taxable year in the order of acquisition". We believe that those respective regulations mandate that actual cost be used because of the requirement in section 472(b)(2) that goods with respect to which a taxpayer elected the LIFO method 1999 U.S. Tax Ct. LEXIS 16">59 be inventoried at cost; i.e., actual cost. Section 1.472-8(e)(2)(ii)(c), Income Tax Regs., requires a taxpayer electing the average unit cost method described therein to divide the aggregate cost of all the goods purchased or produced throughout the taxable year, which petitioner does not dispute, and we conclude, means the aggregate actual cost of such goods, by the total number of units so purchased or produced in order to arrive at an average unit cost. Although, as petitioner points out, application of the average unit cost method under section 1.472-8(e)(2)(ii)(c), Income Tax Regs., might not result in assigning a unit cost equal to the actual cost of any units purchased or produced during the taxable year, the determination of the current-year cost of items making up a pool under that regulation is required to be made on the basis of, or by reference to, the actual cost of all goods purchased or produced during the taxable year. That regulation thus complies with the mandate of section 472(b)(2) that actual cost be used.[44] As we have just explained, each of the methods prescribed in section 1.472-8(e)(2)(ii)(a), (b), and (c), Income Tax Regs., relating to the dollar-value 1999 U.S. Tax Ct. LEXIS 16">60 LIFO method mandates, as required by section 472(b)(2), that the determination of the current-year cost of items making up a pool be made on the basis of, or by reference to, actual cost. 141999 U.S. Tax Ct. LEXIS 16">61 1999 U.S. Tax Ct. LEXIS 16">62 We conclude that, 112 T.C. 58">79 in order for a method to qualify under section 1.472-8(e)(2)(ii)(d), Income Tax Regs., as any other proper method which clearly reflects income, the method must, as required by section 472(b)(2), determine the current-year cost of items making up a pool on the basis of, or by reference to, actual cost (or in certain instances a reasonable approximation of such cost). Assuming arguendo that Mountain State Ford had elected to use any other proper method under section 1.472-8(e)(2)(ii)(d), Income Tax Regs., in the Form 970 that it filed with its 1980 return, which we have found it did not, petitioner has not persuaded us that the method which Mountain State Ford used to determine that current-year cost, which was based on replacement cost and not actual cost, is a proper method that clearly reflects income under that regulation. 15 [45] In further support of his position that Mountain State Ford's method of using replacement cost, and not actual cost, in valuing its parts inventory under the dollar-value LIFO method is proper, petitioner asserts: ever since this Court's decision in Hutzler Brothers v. Commissioner, 8 T.C. 14">8 T.C. 14 (1947), taxpayers have been permitted to use the retail method in conjunction with the dollar-value LIFO method despite the fact that under the retail method a taxpayer does not compute the actual cost of the items in its inventories 1999 U.S. Tax Ct. LEXIS 16">63 under any of the three inventory ordering conventions. [46] We turn first to petitioner's suggestion in the foregoing excerpt from his brief that respondent is arguing in this case that it is necessary under the dollar-value, link-chain LIFO method which Mountain State Ford elected to determine the actual cost of each unit inventoried. We do not understand respondent to be taking that position. To the contrary, as section 1.472-8(e)(2)(ii), Income Tax Regs., makes clear, the requirement in section 472(b)(2) that goods for which a taxpayer 112 T.C. 58">80 elected the LIFO method be inventoried "at" cost does not mean that, in determining the current-year cost of items making up a pool, it is necessary to determine the actual cost of each unit inventoried. 16[47] Turning now to petitioner's argument about the retail method, petitioner is correct that the retail method is permitted to be used in conjunction with the dollar-value LIFO method, Hutzler Bros. Co. v. Commissioner, 8 T.C. 14">8 T.C. 14 (1947); sec. 1.472-1(k), Income Tax Regs.; sec. 1.472-8(e)(1), Income Tax Regs., and that that method "does not 1999 U.S. Tax Ct. LEXIS 16">64 compute the actual cost of the items in" a taxpayer's inventory. However, the actual cost reasonably approximated under the retail method, which is described in section 1.471-8, Income Tax Regs., satisfies the definition of the term "cost" in section 1.471-3(d), Income Tax Regs. Consequently, the requirement in section 472(b)(2) that goods for which a taxpayer elected the LIFO method be inventoried at "cost", which we have held has the same meaning accorded the term "cost" in section 1.471-3, Income Tax Regs., is satisfied by a retailer who elects the dollar-value LIFO method, determines a reasonable approximation of actual cost under the retail method, and, inter alia, complies with section 1.472-1(k), Income Tax Regs., and section 1.472-8(e)(1), Income Tax Regs. We reject petitioner's argument that the use of the retail method in conjunction with the dollar-value LIFO method means that Mountain State Ford's method of using replacement cost under the dollar-value LIFO method is permitted by section 472 and the regulations thereunder. 171999 U.S. Tax Ct. LEXIS 16">65 1999 U.S. Tax Ct. LEXIS 16">66 1999 U.S. Tax Ct. LEXIS 16">67 [48] 112 T.C. 58">81 We hold that Mountain State Ford's method of using replacement cost in determining the current-year cost of its parts pool under the dollar-value LIFO method contravenes the requirements of section 472(b)(2), section 1.472-2(b), Income Tax Regs., and section 1.472-8(e)(2)(ii), Income Tax Regs. We further hold that, consequently, that method does not clearly reflect income. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979).[49] Petitioner argues that if we were to find, as we have, that Mountain State Ford's method of using replacement cost in valuing its parts inventory under the LIFO method does not clearly reflect income, that method should nonetheless be sustained because respondent changed that method to an impermissible method which does not clearly reflect income. In support of his position, petitioner cites Dayton Hudson Corp. & Subs. v. Commissioner, 153 F.3d 660">153 F.3d 660, 153 F.3d 660">664 (8th Cir. 1998), 1999 U.S. Tax Ct. LEXIS 16">68 revg. T.C. Memo 1997-260; Harden v. Commissioner, 223 F.2d 418">223 F.2d at 421; Prabel v. Commissioner, 91 T.C. 1101">91 T.C. 1101, 91 T.C. 1101">1112 (1988), affd. 882 F.2d 820">882 F.2d 820 (3d Cir. 1989); and Golden Gate Litho v. Commissioner, T.C. Memo 1998-184. Relying on those cases, petitioner argues: The respondent is unwilling to admit the consequences of the adjustment he seeks in this case. The respondent claims he "has not replaced one impermissible method with another." The respondent in his brief refuses to admit that his adjustment changes * * [Mountain State Ford's] inventory value from a dollar-value LIFO value determined using replacement costs as current-year costs to an inventory value that is in its entirety equal to current replacement costs. At trial, however, the respondent admitted that this was the case. * * * it is internally inconsistent for the respondent to claim that a LIFO inventory value based on using replacement costs as current-year costs does not clearly reflect income 112 T.C. 58">82 while maintaining that the inventory must be adjusted to a value that is IN ITS ENTIRETY equal to current replacement costs. If the respondent were correct in his claim that the use of replacement 1999 U.S. Tax Ct. LEXIS 16">69 costs to determine current-year costs under dollar-value LIFO produces an impermissible inventory value, then an inventory value based ENTIRELY on current replacement costs would surely be even more impermissible. [50] Respondent counters that respondent has not terminated Mountain State Ford's elections to value its parts inventory under the dollar-value, link-chain LIFO method and to use the most recent purchases method in determining the current-year cost of its parts pool. According to respondent, respondent has merely required Mountain State Ford to conform to the elections that it made in the Form 970 which it filed with its 1980 tax return. Respondent states on brief: All respondent has done in this case is to determine that * * * (Mountain State Ford's) LIFO reserve was incorrectly calculated because * * * [Mountain State Ford] used replacement cost. * * * [Mountain State Ford] did not attempt to reconstruct or recalculate the corrected reserve amount or provide evidence from which an estimate could be made. Because of this, respondent was unable to determine the amount of the corrected reserve and had to restore the reserve to income. [51] We agree 1999 U.S. Tax Ct. LEXIS 16">70 with respondent. In contradistinction to the cases on which petitioner relies, in the instant case Mountain State Ford did not comply with the requirement of section 1.472-2(h), Income Tax Regs., that it maintain detailed inventory records "as will enable the district director readily to verify * * [Mountain State Ford's] inventory computations as well as * * * [its] compliance with the requirements of section 472" and the regulations thereunder. Consequently, Mountain State Ford did not have, and did not provide to respondent, the records that were necessary in order to calculate for the period 1980 through 1991 (1) the LIFO and non-LIFO value of its parts inventory and (2) its LIFO reserve on the basis of invoice prices or a cost other than replacement cost.[52] We do not understand the statements of respondent's counsel during his opening statement at trial to be a concession by respondent that respondent placed Mountain State Ford on a non-LIFO method that utilizes replacement cost, and we reject petitioner's contention to the contrary. Even if respondent's counsel had made such a concession during his opening statement at trial, we would not consider it to be a concession 112 T.C. 58">83 that 1999 U.S. Tax Ct. LEXIS 16">71 binds respondent. That is because, inter alia, any such concession would have been contrary to respondent's position as set forth in paragraph 51 of the stipulation of facts, which was made part of the record in this case immediately before the Court allowed counsel for the parties to make opening statements. The position of respondent in paragraph 51 of the stipulation of facts is totally consistent with the notice. In the notice, respondent did not terminate Mountain State Ford's elections to value its parts inventory under the dollar-value, link-chain LIFO method and to use the most recent purchases method in order to determine the current-year cost of its parts pool. 181999 U.S. Tax Ct. LEXIS 16">72 Mountain State Ford remains on those methods and cannot account for its parts inventory on any other methods without first receiving permission from the Commissioner. See sec. 472(e); sec. 1.472-5, Income Tax Regs. [53] On the record before us, we find that respondent did not place Mountain State Ford on an improper method of inventory accounting in the notice. We further find that respondent did not abuse respondent's discretion in making the adjustment at issue in the notice. Consequently, we sustain that adjustment. 19[54] To reflect the foregoing and the concessions of the parties,[55] Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, our Findings of Fact and Opinion pertain to all periods since the incorporation of Mountain State Ford to the trial in this case; all section references are to the Internal Revenue Code (Code) in effect for the year at issue; and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Mountain State Ford's election of the LIFO method with respect to its new heavy trucks inventory is not at issue in this case.↩3. The parties settled the remaining adjustments in the notice.↩4. /4/ The parties disputed at trial whether there are deficiencies in the manner in which Mountain State Ford computed the price indices under its link-chain method. However, after trial the parties entered into a second supplemental stipulation regarding those price indices. According to that stipulation, in the event that the Court were to sustain Mountain State Ford's method of using replacement cost in computing the LIFO value of its parts inventory, respondent's adjustment in the notice to Mountain State Ford's ordinary income for 1991 would be reduced from $ 463,515 to $ 53,870. That reduction would be made in that event in order to reflect the parties' agreement in the second supplemental stipulation to correct certain of the alleged deficiencies that respondent had found in Mountain State Ford's computation of the price indices under its link-chain method. The parties further agreed in that stipulation that in the event that the Court were not to permit Mountain State Ford's method of using replacement cost in computing the LIFO value of its parts inventory, respondent's adjustment in the notice to Mountain State Ford's ordinary income for 1991 would be sustained. Thus, no issue regarding the price indices calculated by Mountain State Ford under its link-chain method remains for our decision.5. Sec. 1.472-8(e)(2), Income Tax Regs., which describes the double-extension method of computing the LIFO value of a dollar-value pool, provides in pertinent part: (ii) The total current-year cost of items making up a pool may be determined -- (a) By reference to the actual cost of the goods most recently purchased or produced; (b) By reference to the actual cost of the goods purchased or produced during the taxable year in the order of acquisition; (c) By application of an average unit cost equal to the aggregate cost of all of the goods purchased or produced throughout the taxable year divided by the total number of units so purchased or produced; or (d) Pursuant to any other proper method which, in the opinion of the Commissioner, clearly reflects income. Although sec. 1.472-8, Income Tax Regs., relating to the dollar-value LIFO method does not discuss how the link-chain method that Mountain State Ford elected in the Form 970 is to be applied, the parties agree that sec. 1.472-8(e)(2)(ii), Income Tax Regs.↩, applies to the link-chain method.6. The parties and their respective experts also disagree about whether Mountain State Ford's method of using replacement cost under the LIFO method complies with generally accepted accounting principles (GAAP) and conforms as nearly as may be to the best accounting practice in Mountain State Ford's trade or business, as required by sec. 471 and the regulations thereunder. However, our resolution of the disagreement between the parties about the clear-reflection-of-income standard makes it unnecessary for us to address the parties' and their respective experts' dispute over GAAP.7. It is noteworthy that the replacement cost as of the date of Mountain State Ford's physical inventory, which it used in determining the LIFO value of its dollar-value parts pool, is analogous to "market" in inventory tax accounting. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 439 U.S. 522">534, 58 L. Ed. 2d 785">58 L. Ed. 2d 785, 99 S. Ct. 773">99 S. Ct. 773 (1979); sec. 1.471-4(a)(1), Income Tax Regs.↩8. The accounting profession generally defines the word "cost" as used in inventory accounting "as the price paid or consideration given to acquire an asset". Accounting Research Bulletin No. 43, "Restatement and Revision of Accounting Research Bulletins", ch. 4, statement 3 (June 1953).↩9. /9/ As pertinent here, sec. 1.471-3(b), Income Tax Regs.↩, defines the term "cost" in the case of merchandise purchased since the beginning of the taxable year as "the invoice price".10. Sec. 1.471-3(d), Income Tax Regs.↩, provides in pertinent part that in certain instances "costs may be approximated upon such basis as may be reasonable and in conformity with established trade practice in the particular industry."11. The regulations in effect when Congress first allowed certain taxpayers to elect the LIFO method and required that the goods with respect to which that method was elected be inventoried at cost, Regs. 94, art. 22(c)-3 (1936), defined the term "cost" for inventory accounting purposes as follows: Art. 22(c)-3. Inventories at cost. -- Cost means: (1) In the case of merchandise on hand at the beginning of the taxable year, the inventory price of such goods. (2) In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods. (3) In the case of merchandise produced by the taxpayer since the beginning of the taxable year, (a) the cost of raw materials and supplies entering into or consumed in connection with the product, (b) expenditures for direct labor, (c) indirect expenses incident to and necessary for the production of the particular article, including in such indirect expenses a reasonable proportion of management expenses, but not including any cost of selling or return on capital, whether by way of interest or profit. (4) In any industry in which the usual rules for computation of cost of production are inapplicable, costs may be approximated upon such basis as may be reasonable and in conformity with established trade practice in the particular industry. Among such cases are (a) farmers and raisers of live stock (see article 22(c)-6), (b) miners and manufacturers who by a single process or uniform series of processes derive a product of two or more kinds, sizes, or grades, the unit cost of which is substantially alike (see article 22(c)-7), and (c) retail merchants who use what is known as the "retail method" in ascertaining approximate cost (see article 22(c)-8). The definition of the term "cost" in Regs. 94, art. 22(c)-3 (1936), is virtually identical to the definition of that term in sec. 1.471-3, Income Tax Regs.↩12. our holding as to the meaning of the term "cost" in sec. 472(b)(2) and the regulation thereunder disposes of petitioner's contention that "respondent may not interpret the rules and regulations in a way that will impose unreasonable administrative burdens on taxpayers attempting to use the LIFO method or in a way that will diminish or eliminate the availability of the LIFO method to a significant group of taxpayers". Respondent has no discretion to deviate from the requirements of the Code and the regulations even if such requirements were to impose administrative burdens on Mountain State Ford. On the record before us, however, we find that petitioner has not established that respondent's position in the present case that the term "cost" in sec. 472(b)(2) means actual cost would result in the imposition of unreasonable administrative burdens on Mountain State Ford. Petitioner acknowledges that it is not impossible for Mountain State Ford to use actual cost, and not replacement cost, in valuing its parts inventory. In fact, Mr. Hommer, petitioner's expert on computerized inventory-tracking systems, admitted that the reason why there is no inventory recordkeeping system currently available in the automobile and truck dealer industry that uses actual cost in that valuation process is because there has been no demand for such a system in that industry. Moreover, when Mountain State Ford adopted the LIFO method, Mountain State Ford made no attempt to determine whether it could have modified its perpetual inventory recordkeeping system so that it could have used invoice prices, i.e., actual cost, in valuing its parts inventory. Nor did it determine whether it could have created a new inventory recordkeeping system that could have used invoice prices or actual cost in that valuation process. In fact, when questioned by this Court as to why Mountain State Ford continued to use replacement cost, and did not use invoice prices or actual cost after it elected the LIFO method as of 1980, Eugene Peter O'Meara, Jr., testified that replacement cost had been utilized by Mountain State Ford previously and that Mountain State Ford did not consider using other than replacement cost when it elected the LIFO method.13. In support of his position that Mountain State Ford elected in the Form 970 to use any other proper method, petitioner points out that Mountain State Ford "attached to the Form 970 a description of its method that clearly indicated * * [that Mountain State Ford] was basing its index of computations on Ford's latest weekly price lists for parts". We note initially that Mountain State Ford used replacement cost (viz., the prices reflected in the respective manufacturers' computerized price update tapes in effect as of the date of Mountain State Ford's physical inventory) in determining the current-year cost of its parts pool; it did not use all of the various "latest weekly price lists" to which Mountain State Ford referred in the Form 970 and which it indicated in that form it intended to use in calculating its price indices under its link-chain method. It is also noteworthy that in the Form 970 Mountain State Ford stated that it intended to take inventory "at actual cost regardless of market value".↩14. Pursuant to the requirement of sec. 472(b)(2), each of the methods prescribed in sec. 1.472-2(d)(1)(i)(a), (b), and (c), Income Tax Regs., relating to the specific-goods LIFO method also mandates that the cost of goods on hand as of the close of the taxable year with respect to which the taxpayer elected the LIFO method and which are in excess of what were on hand as of the beginning of the taxable year be determined on the basis of, or by reference to, the actual cost of certain or all of the goods purchased or produced during the taxable year, regardless of identification with specific invoices and regardless of specific cost accounting records. See sec. 1.472-2(d), Income Tax Regs.Consistent with sec. 472(b)(2), sec. 472(b)(3) and the regulations thereunder specifically require that goods with respect to which a taxpayer elected the LIFO method that are included in the opening inventory of the taxable year for which the LIFO method is first used are to be considered as having been acquired at the same time and at a unit cost determined by reference to the aggregate actual cost of such goods (i.e., by dividing such actual cost by the number of units on hand). Sec. 1.472-2(c), Income Tax Regs. The aggregate actual cost is to be determined pursuant to the inventory method used by the taxpayer under the regulations applicable to the taxable year preceding the taxable year for which the election of the LIFO method is made, with the exception that restoration is to be made with respect to any write-down to market values resulting from the pricing of former inventories. Id.15. In using replacement cost to determine current-year cost under sec. 1.472-8(e)(2)(ii), Income Tax Regs.↩, Mountain State Ford was not attempting to, and did not, determine or approximate the actual cost (i.e., the invoice prices) of the parts that it purchased. It would have been sheer happenstance if the replacement cost that Mountain State Ford used equaled or reasonably approximated such actual cost.16. Nor is it necessary to do so under the specific-goods LIFO method. See sec. 1.472-2(d), Income Tax Regs.↩17. We also reject petitioner's position that the use of the standard cost method in conjunction with the dollar-value LIFO method supports his position that Mountain State Ford's method of using replacement cost under the dollar-value LIFO method is permitted under sec. 472 and the regulations thereunder. In this regard, petitioner states: taxpayers have been consistently permitted to use the standard cost method under both the full absorption method and the uniform capitalization method, in conjunction with the dollar- value LIFO method, despite the fact that standard costs are merely a predetermined ESTIMATE of the taxpayer's actual costs. Treas. Reg. sections 1.471-11(d)(3); 1.263A-1(f)(3)(ii)(A). In advancing the foregoing argument, petitioner fails to mention that, in determining the cost of inventoried goods, a taxpayer subject to the inventory accounting method is and/or was expressly made subject by sec. 1.471-3, Income Tax Regs., to (1) sec. 1.263A-1, Income Tax Regs., on or after Jan. 1, 1994; (2) sec. 1.263A-1T, Temporary Income Tax Regs., 52 Fed. Reg. 10060 (Mar. 30, 1987), for taxable years beginning on or after Dec. 31, 1986, until Dec. 31, 1993; and (3) sec. 1.471-11, Income Tax Regs., for taxable years beginning on or before Dec. 31, 1986. All of those regulations allow or allowed the use of the standard cost method. Under that method, a taxpayer may allocate an appropriate amount of direct and indirect costs to property that such taxpayer produces through the use of preestablished standard allowances, without reference to costs actually incurred during the taxable year. See sec. 1.263A-1(f)(3)(ii)(A), Income Tax Regs. We have held that the term "cost" in sec. 472(b)(2) has the same meaning accorded to the term "cost" in sec. 1.471-3, Income Tax Regs.Sec. 472(b)(2) thus permits the use of the standard cost method in inventorying goods at cost under the LIFO method.In advancing his argument about the standard cost method, petitioner also fails to mention that the regulations in effect at different times describing the standard cost method (viz., sec. 1.263A-1(f)(3)(ii), Income Tax Regs., sec. 1.263A-1T(b)(3)(iii)(D), Temporary Income Tax Regs., 52 Fed. Reg. 10065 (Mar. 30, 1987), and sec. 1.471-11(d)(3), Income Tax Regs.) require and/or required a taxpayer to "reallocate to the goods in ending inventory a pro rata portion" of the variance between the predetermined estimate and actual cost unless such variance is not "significant" in amount. If that variance is not "significant" in amount, it does not have to be allocated to the taxpayer's goods in ending inventory unless such an allocation is made in the taxpayer's financial reports. See sec. 1.263A-1(f)(3)(ii)(B), Income Tax Regs.; sec. 1.263A-1T(b)(3)(iii)(D)(2), Temporary Income Tax Regs., supra; sec. 1.471-11(d)(3)(ii), Income Tax Regs.↩18. Pursuant to sec. 3.01(c), Rev. Proc. 79-23, 1979-1 C.B. 564, "Failure by the taxpayer to value its LIFO inventory at cost for Federal income tax purposes, for the year preceding the LIFO election, the year of the LIFO election, and all subsequent taxable years" may warrant the termination of that taxpayer's LIFO election. However, such termination is within the discretion of respondent and is not mandatory. See Consolidated Manufacturing, Inc. v. Commissioner, 111 T.C. 1">111 T.C. 1, 111 T.C. 1">38↩ (1998). In the present case, respondent chose not to exercise that discretion and did not terminate Mountain State Ford's LIFO election.19. We have considered all of the arguments and contentions of petitioner that are not addressed herein and find them to be without merit or irrelevant.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620135/	John G. Madden and Anne Madden v. Commissioner. Harry R. Freeman v. Commissioner.John G. Madden & Anne Madden v. CommissionerDocket Nos. 5075, 5076.United States Tax Court1946 Tax Ct. Memo LEXIS 143; 5 T.C.M. 559; T.C.M. (RIA) 46158; July 2, 19461946 Tax Ct. Memo LEXIS 143">143 Where law partnership agreement provided for payment of a percentage of the partnership earnings to the senior partner for a limited period, and in the event of his prior death such percentage should go to his estate for the remainder of the calendar year in which his death occurred, and thereafter, if the earnings permitted, $500 per month should be paid to his wife for a period of four years or until her prior death, held, income of the partnership, paid pursuant to such agreement, not taxable to surviving partners. James J. Waters, Esq., for the petitioners. Harlow B. King, Esq., for the respondent. LEECHMemorandum Findings of Fact and1946 Tax Ct. Memo LEXIS 143">144 Opinion LEECH, Judge: These consolidated proceedings involve deficiencies in income tax for the calendar year 1940 and the taxable period January 1, 1941 to November 30, 1941, as follows: Taxable periodDocket No.Year 19401/1/41 to 11/30/415075$2,176.97$1,586.705076322.44860.48The issues are: (1) whether a distribution of 28 per cent of the partnership profits of the law firm of Madden, Freeman and Madden, for the period June 29, 1940 to December 31, 1940, to the Estate of Terrence J. Madden, who died June 29, 1940, constitutes taxable income to the petitioners, the surviving partners, and (2) whether the amount of $5,500, claimed as a deduction by the partnership for the taxable period January 1, 1941 to November 30, 1941, representing money paid to Blanche G. Madden, widow of the deceased partner, should be added to the distributive income of petitioners. The case was submitted on oral testimony and exhibits. Findings of Fact Petitioners, John G. Madden and Anne Madden, are husband and wife. Petitioner, Harry R. Freeman, is an individual. All reside in Kansas City, Missouri. During the years 1940 and 1941, John G. Madden and Harry1946 Tax Ct. Memo LEXIS 143">145 R. Freeman (hereinafter referred to as "petitioners") were partners in the law firm of Madden, Freeman and Madden, of Kansas City, Missouri. Their respective income tax returns for the taxable periods involved were filed on the cash basis with the collector of internal revenue at Kansas City, Missouri. Terrence J. Madden, deceased, was the father of petitioner, John G. Madden. For some years the decedent engaged in the practice of law, independently, in Kansas City. In 1918 or 1919, he formed a law partnership with petitioner, Harry R. Freeman. In about 1926, John G. Madden became associated with the firm and soon thereafter the partnership of Madden, Freeman and Madden was formed. The partnership has always operated under an oral agreement. The practice of the law firm of Madden, Freeman and Madden has largely been that of trial work. In the early part of 1935, Terrence J. Madden suffered a collapse. Although he quickly recovered, it became apparent to the other partners later in that year that he was unable to carry on his activities as theretofore and the major burden of the trial work was assumed by his son, John G. Madden. During the period 1935 to 1939, the interest of the1946 Tax Ct. Memo LEXIS 143">146 decedent in the profits of the firm was 44 per cent, and that of the two other partners, 28 per cent each. Owing to his diminished activities, the decedent felt that his interest in the firm profits exceeded his contributions and he proposed a new arrangement. The proposal, in substance, was that as of January 1, 1939, Terrence J. Madden should receive 28 per cent of the net income of the law partnership for a limited period; should he die before the termination of such period such percentage of the net income of the firm should go to his estate during the remainder of the calendar year in which his death occurred and thereafter be paid to Blanche G. Madden, his wife, if she survived him and such income permitted such payment, at the rate of $500 per month for four years thereafter. Such distribution of net income was to cease in the event of her prior death. The question of capital assets was not at any time considered or discussed. The firm kept no capital account. The Federal income tax returns filed by the firm of Madden, Freeman and Madden for the years 1939, 1940 and the period January 1, 1941 to November 30, 1941, disclose gross income and deductions for depreciation on law1946 Tax Ct. Memo LEXIS 143">147 book and office equipment on a ten-year basis, as follows: YearIncomeDepreciation1939$125,567.14$738.251940102,632.99803.281/1/41 to 11/30/4190,374.73791.70Terrence J. Madden died on June 29, 1940. The net income of the firm for the period June 30, 1940 to December 31, 1940 was $26,186.76, which was distributed as follows: John G. Madden$11,522.18 or 44%Harry R. Freeman7,332.29 or 28%Estate of Terrence J. Madden7,332.29 or 28%The respondent determined that the sum of $7,332.29, paid to the Estate of Terrence J. Madden for the period June 30, 1940 to December 31, 1940 was income of the surviving partners and increased the income of John G. Madden in the sum of $5,820.75 and that of Harry R. Freeman, $1,369.58, totaling $7,190.33. The difference of $141.96 represents increase in deductions for partnership contributions. In computing partnership net income for the taxable period January 1, 1941 to November 30, 1941, a deduction representing payments to Blanche G. Madden of $500 per month was claimed by the partnership. The respondent disallowed the deduction and increased the interest of John G. Madden in the sum1946 Tax Ct. Memo LEXIS 143">148 of $3,666.67, and the interest of Harry R. Freeman in the sum of $1,833.33. The estate of Terrence J. Madden paid an estate tax upon the income distributed to the estate and to decedent's widow under a nonwaiver agreement. The respondent assessed income taxes against the estate and the widow for the amounts paid under the agreement and such taxes were paid. Consents under the Revenue Act of 1942 were duly filed, whereby the decedent's estate and the beneficiary accepted the payments under the agreement as income. Opinion The question presented is whether the respondent properly included in the income of the respective petitioners their pro rata share of all the income of the law partnership of Madden, Freeman and Madden, during the taxable periods involved. There is no material dispute as to the terms of the oral contract made between the partners of that firm which became effective January 1, 1939, which is fully set forth in our findings of fact. Terrence J. Madden died on June 29, 1940 and the terms of the agreement were fully performed. It is the position of the respondent that the partnership was dissolved by the death of the senior Madden; that the payments thereafter1946 Tax Ct. Memo LEXIS 143">149 made, pursuant to the 1939 agreement, were income of the new partnership, belonging to the petitioners, as surviving partners, which were used to purchase the interest of the decedent in the capital assets and good will. Estate of George R. Nutter, 46 B.T.A. 35">46 B.T.A. 35; affd., 131 Fed. (2d) 165; W. Frank Carter, 36 B.T.A. 60">36 B.T.A. 60. Petitioners contend that the law firm was a personal service partnership; that the 1939 agreement dealt only with the distribution of income; that there existed no good will; that the tangible assets were inconsequential and valueless for sale purposes. Bull v. United States, 295 U.S. 247">295 U.S. 247; Gussie K. Barth, 35 B.T.A. 546">35 B.T.A. 546. If the 1939 agreement can properly be interpreted as one to purchase the interest of Terrence J. Madden in the law practice carried on by the partnership at his death, the respondent properly taxed the income of the new partnership to the petitioners. 46 B.T.A. 35">Estate of George R. Nutter, supra; 36 B.T.A. 60">W. Frank Carter, supra.On the other hand, if the partners, by their agreement, intended that the partnership was to continue and they were dealing only with a distribution of1946 Tax Ct. Memo LEXIS 143">150 income and not purchasing capital assets and good will, then, under the rationale of 295 U.S. 247">Bull v. United States, supra, and the Barth case, supra, it was error to treat the entire income of the partnership in the taxable periods as the income of petitioners. While ordinarily the death of a partner puts an end to the partnership, as the respondent argues, the partners may by agreement provide otherwise. Hax v. Burnes, 98 Mo. App. 707">98 Mo. App. 707; 73 S.W. 928">73 S.W. 928; Edwards v. Thomas, 66 Mo. 468">66 Mo. 468; Bank v. Tracy, 77 Mo. 594">77 Mo. 594. We think it clear, as petitioners urge, the 1939 agreement contemplated a continuation of the partnership. They were dealing with a situation brought about by the failing health of the senior partner. The evidence discloses that when the petitioner, John G. Madden, was admitted to the firm in 1925, and later following the death of decedent's widow, Blanche G. Madden, when a new member was admitted, no account was taken of either tangible assets or good will. The evidence establishes that the partners were not dealing here with either the nominal tangible assets such as law books and office equipment or good will. At the1946 Tax Ct. Memo LEXIS 143">151 time the agreement was made in 1939, the underpreciated cost of these assets was only $2,416.51. The gross income of the firm for the year 1939 was $125,567.14. The firm was a personal service corporation. The uncontradicted and credible testimony was that capital assets were never considered, contemplated or discussed and were valueless for sale purposes. The firm kept no capital account. It appears that certain of the law books used by the firm were individually purchased by the respective partners. When partnership percentages were changed, no charge was made for capital assets. Nor do we find any evidence that good will was ever recognized as an asset. Generally, good will is not regarded as existent in professional partnerships dependent upon the personal qualities of their members. Masters v. Brooks, 132 A.D. 874; 117 N.Y.S. 585">117 N.Y.S. 585, 117 N.Y.S. 585">589; Sheldon v. Houghton, 21 Fed. Cas. 1239. Although where the partners recognize the existence of good will, and the circumstances indicate its presence, good will, in a law partnership, will be considered as an asset capable of sale and transfer. 46 B.T.A. 35">Estate of George R. Nutter, supra.Upon the1946 Tax Ct. Memo LEXIS 143">152 record here, however, we think the partners recognized that no good will existed. Cf. Howard B. Lawton, 6 T.C. 1093">6 T.C. 1093 (May 21, 1946); Re Brown, 242 N.Y. 1; 150 N.E. 581">150 N.E. 581. The respondent points to the fact that on the 1941 partnership income tax return only the names of two partners are shown and since depreciation was claimed, the petitioners asserted ownership of decedent's interest in the tangible assets. This, he claims, is inconsistent with their assertion that no tangible property was transferred or acquired. Petitioners reply that, if error was made, it was an accounting error. This seems plausible since it appears that on the return of the partnership covering the last six months of 1940, following decedent's death, the estate of decedent was listed as a partner. We do not think this circumstance justifies the inference the respondent suggests. We find upon this record that the parties were concerned only with the distribution of income which was regarded as belonging to the decedent if he had lived, and were not purchasing his interest in the partnership as of the date of his death. In the cases of 46 B.T.A. 35">Estate of George R. Nutter, supra,1946 Tax Ct. Memo LEXIS 143">*153 and 36 B.T.A. 60">W. Frank Carter, supra, deemed controlling by the respondent, the agreements involved specifically dealt with the acquisition of good will and tangible assets which, we think, distinguishes their facts from the contract in the case at bar. Since the agreement of 1939 dealt merely with the distribution of income of a continuing partnership, and was in no sense a purchase of the decedent's interest in the partnership and its tangible assets, the respondent erroneously increased the gross income of the respective petitioners by the amounts distributed, pursuant to the 1939 agreement, between the partners in the taxable periods involved. Charles F. Coates, 7 T.C. 125">7 T.C. 125 (June 13, 1946). We find it unnecessary to pass upon petitioners' alternative position that section 126 of the Internal Revenue Code, as added by section 134 of the Revenue Act of 1942, controls the situation. There being other adjustments which are not contested. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620136/	Ila B. Mann v. Commissioner.Mann v. CommissionerDocket No. 2799-62.United States Tax CourtT.C. Memo 1965-161; 1965 Tax Ct. Memo LEXIS 169; 24 T.C.M. 855; T.C.M. (RIA) 65161; June 17, 19651965 Tax Ct. Memo LEXIS 169">169 Expenses incurred by the life beneficiary of a trust, held, deductible as to certain attorney and other fees paid, but not deductible as to amounts not sufficiently substantiated nor shown to have been ordinary and necessary for and reasonably and proximately related to the production and collection of income. Selig Kaplan, 16 Court St., New York, N. Y., for the petitioner. Eugene Parker and Robert A. Trevisani, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined a deficiency in petitioner's income tax in the amount of $2,157.37 for the calendar year 1957. Petitioner assigns error in respondent's disallowance of a claimed deduction in the amount of $4,146.71 alleged to1965 Tax Ct. Memo LEXIS 169">170 represent legal fees and other expenses incurred to prevent waste of corporate earnings and increase dividend income from shares of stock held in a trust of which petitioner was the life beneficiary. Findings of Fact Petitioner, Ila B. Mann, resided at 205 West 57th Street, New York, N. Y. She filed her individual income tax return for the year 1957, with the district director of internal revenue, Upper Manhattan District, New York. Petitioner is the widow of Jacob U. Manischewitz, who died testate in April 1946. The latter's will devised and bequeathed all of his shares of stock of The B. Manischewitz Company to the Central Hanover Bank and Trust Company (hereinafter referred to as the trustee) in trust, inter alia, to pay the net income therefrom to his wife, Ila, during her lifetime. During the year 1957 the trustee held 9,442 shares of stock of The B. Manischewitz Company (hereinafter referred to as the company). The trust income distributable to petitioner was paid semiannually by the trustee's check mailed to petitioner's bank for deposit to her individual account. From 1946 to 1957 petitioner never requested nor received a trustee's annual accounting and prior to about1965 Tax Ct. Memo LEXIS 169">171 1954 petitioner never inquired of the trustee as to the business affairs of the company, which was primarily a family owned and operated company. In or about 1954 a vice president of the company told petitioner that it should be paying larger dividends. Petitioner thereupon made inquiries of the trustee's trust officer as to the affairs of the company, but received no information. She was rather patronizingly treated and, in effect, told not to meddle in the trustee's affairs. Petitioner then had a friend, who was a lawyer, call on the trust officer to discuss the operations of the company, but again he was given the brush-off and the only information he obtained was that the company's business was "in great shape." The next time petitioner took an active interest in the affairs of the company was in 1957 when a nephew, who was employed by the company, informed her that she should be receiving larger dividends. Petitioner thereupon telephoned the company's president, her stepson, for the purpose of seeking information about the company, but to no avail. In 1957 petitioner decided to engage legal counsel to discuss matters with the trustee and ascertain the facts concerning certain1965 Tax Ct. Memo LEXIS 169">172 alleged waste and mismanagement in the affairs of the company and for the purpose of protecting and increasing the dividends on the company's stock. During 1957 petitioner engaged three lawyers at different times for that purpose. The first lawyer, Lawrence Segal, had interviews and correspondence with the trustee regarding the company's affairs, but he had to withdraw from the case. The second lawyer, Allan Rubin, rendered similar services, had considerable correspondence with the trustee, and also obtained an accounting by the trustee. The third lawyer, Stanley Kaufman, rendered similar services in efforts to obtain more specific information about the business and operations of the company and he accompanied petitioner to the stockholders' meeting in Cincinnati in November 1957. Also, during 1957, petitioner engaged the services of two business investigators, Leon and Dahlberg, to obtain information as to certain distributors of the company and particularly with reference to certain members of the Manischewitz family who allegedly received salaries without actually rendering any services to the company. During 1957 petitioner paid fees for the services performed by lawyers and1965 Tax Ct. Memo LEXIS 169">173 business investigators, in the amounts as follows: Paid toFeesSegal$ 100.00Rubin666.66Kaufman1,581.35Leon250.00Dahlberg115.00$2,713.01In addition to the above-mentioned fees and during 1957, petitioner expended money for various other expenses incurred in the pursuit of her activities with respect to the company. Such expenditures included plane fare and expenses of a nephew for a trip to California for an interview with a relative, another stockholder of the company; expense for petitioner and Kaufman to attend the stockholders' meeting in Cincinnati late in 1957; entertainment of stockholders at her New York apartment and at Cincinnati; printing of letters to stockholders; services of a typist; services of her daughter to type and to interview people while petitioner was sick; and numerous long distance telephone calls to unidentified parties in connection with company matters. Petitioner has never engaged in business and did not seek to become an officer or director of the company. She was primarily interested in dividends, as life beneficiary of the trust. She had no interest in the principal of the trust and would never acquire such1965 Tax Ct. Memo LEXIS 169">174 an interest as long as the stock in the company was held. Only in the event that less than $1 per share was paid annually on The B. Manischewitz Company stock could such stock be sold by the trustee, and only in such event could petitioner ever receive any principal distribution. After petitioner engaged lawyers as above mentioned and pursued her inquiries and investigations, the dividend rate of the company was increased in 1957 by 25 cents per share. Increased dividends were paid at least for several years thereafter. Petitioner's lawyer, Kaufman, suggested the possibility of a lawsuit. A New Jersey law firm was retained and in 1958 filed a stockholders' derivative suit. Petitioner and several other stockholders were plaintiffs and the suit was brought against the company and certain corporate officers, in the Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C 1695-57. That suit sought damages, a complete accounting and examination of the books and records of the company and of the individual defendants, an accounting by the individual defendants for monies taken by them from the company, and an order restraining the individual defendants from continuing1965 Tax Ct. Memo LEXIS 169">175 the wrongs alleged in the complaint. In 1959 the said suit was dismissed pursuant to compromise and a stipulation of settlement. None of the fees paid in 1957 which petitioner seeks to deduct were in connection with that action, but perhaps some of the information developed in 1957 was used as a basis for the action in New Jersey. On her income tax return for 1957, petitioner claimed an itemized deduction in the amount of $4,146.71 as "Cost of Proxy Fight Resulting in Increased Income." In looking over and signing the return, as prepared by her accountant, petitioner did not notice the above phraseology describing the claimed deduction and as of that time was not aware of the exact meaning of the words, "proxy fight." In the statement of adjustment and explanation thereof, attached to the notice of deficiency, the claimed deduction of $4,146.71 was "disallowed for lack of substantiation, and for the further reason that the item is not deductible under any provisions of the Internal Revenue Code." We find that during 1957 petitioner expended the total sum of $2,713.01 in fees paid for the services of lawyers and business investigators which were ordinary and necessary and were1965 Tax Ct. Memo LEXIS 169">176 reasonably and proximately related to the production or collection of taxable income. We further find that certain other expenditures hereinabove referred to were not sufficiently substantiated as to the amounts paid, nor shown to have been ordinary and necessary for and reasonably and proximately related to the production or collection of taxable income. Opinion Petitioner contends that she is entitled to a deduction of the entire amount of $4,146.71 as claimed on her return for 1957, pursuant to section 212 of the Internal Revenue Code of 1954. 1 Petitioner argues that the description of the expenditures as used on her return, that is, "cost of a proxy fight," was clearly a misnomer used by her accountant because there was no effort, intent or purpose of petitioner to seek proxies to gain control of The B. Manischewitz Company or to be elected an officer or director thereof. Petitioner contends that her sole purpose in engaging the services of lawyers and others and in incurring the other expenditures was to convince the trustee that her income from the testamentary trust should be increased and to investigate the conduct of the business of the company1965 Tax Ct. Memo LEXIS 169">177 and terminate certain alleged wasteful practices, thereby increasing the dividends on shares of stock held in trust for her benefit. Further, petitioner contends that under the facts of record the total amount of $4,146.71 expended in the taxable year 1957, was "for the production or collection of income" and therefore deductible in full under section 212(1), supra. Respondent contends that none of the expenses in controversy were ordinary and necessary and, also, reasonably and proximately related to the production or collection of income to petitioner as required by section 212(1), supra, and Regs. 1.212-1(d), so as to be deductible as nontrade or business expenses. Respondent contends that petitioner incurred expenses on behalf of the corporation in connection with a stockholders' derivative suit brought in a1965 Tax Ct. Memo LEXIS 169">178 subsequent year. The record does not support this conclusion and we have made a factual determination to the contrary. Respondent does not dispute the amount claimed as paid to petitioner's lawyers and business investigators, but he does contend that the remainder of petitioner's claimed expenditures should not under any circumstances be allowed as a deduction pursuant to section 212, supra. Upon our consideration of the record herein, we have concluded and found as a fact that petitioner's expenditures in the total amount of $2,713.01 in fees paid for the services of lawyers and business investigators were not paid in connection with the subsequently filed stockholders' action and were ordinary and necessary and reasonably and proximately related to the production or collection of taxable income. Respondent does not suggest and the record does not support any motive petitioner might have had save to obtain an increase in the dividend yield from the Manischewitz stock held in trust for her benefit. Accordingly, we hold that such amount is an allowable deduction for 1957, pursuant to section 212, supra, and that respondent erred in his disallowance of such deduction. Cf. Bingham's Trust v. Commissioner of Internal Revenue, 325 U.S. 365">325 U.S. 365 (1945);1965 Tax Ct. Memo LEXIS 169">179 Mary deF. Harrison Geary, 9 T.C. 8">9 T.C. 8, 9 T.C. 8">14-15 (1947); Nancy Reynolds Bagley, 8 T.C. 130">8 T.C. 130 (1947); and Stella Elkins Tyler, 6 T.C. 135">6 T.C. 135 (1946). With respect to the remainder of petitioner's expenditures during 1957, which are briefly referred to in our findings of fact without setting forth the alleged amounts involved, we have concluded and found as a fact that petitioner has failed to sufficiently substantiate the amounts claimed to have been paid or to establish that they were ordinary and necessary for and reasonably and proximately related to the production or collection of taxable income. As to the amounts involved, petitioner relied upon her recollection and in some instances approximation. She produced no substantiation for her somewhat vague and inexact recollection. The purpose of those expenditures is indefinite. Certain expenses were for petitioner's personal attendance at a stockholders' meeting; others were either to or for relatives and appear to be remotely connected with any effort to either produce or collect income. Still others were to seek the enlistment of aid from other stockholders by urging them to attend the Cincinnati stockholders' 1965 Tax Ct. Memo LEXIS 169">180 meeting and ask the company's officers questions as to its operations. Such expenditures were personal, and petitioner has not carried her burden to establish that they were made with the purpose and reasonable expectation that income would flow directly therefrom to her. Bertie Charles Forbes, 18 T.C. 321">18 T.C. 321 (1952), affirmed 204 F.2d 777 (C.A. 2, 1953). Cf. Rev. Rul. 56-511, 1956-2 C.B. 170. We sustain respondent's disallowance of the claimed deduction with respect to such expenditures in the total amount of $1,433.70 Decision will be entered under Rule 50. Footnotes1. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620137/	PATRICK J. ABRAMS and PAULA R. ABRAMS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAbrams v. CommissionerDocket No. 5952-88United States Tax CourtT.C. Memo 1990-517; 1990 Tax Ct. Memo LEXIS 570; 60 T.C.M. 915; T.C.M. (RIA) 90517; September 27, 1990, Filed 1990 Tax Ct. Memo LEXIS 570">570 Decision will be entered for the respondent. Gregory A. Henry, for the petitioners. Kevin M. Murphy, for the respondent. WRIGHT, Judge. WRIGHTMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in and additions to tax as follows: Additions to TaxYearDeficiencySec. 6661 11982$ 6,619.00$ 1,654.7519835,890.001,472.5019843,077.00-1990 Tax Ct. Memo LEXIS 570">572 The issue for decision is whether petitioner, 2 during the years at issue, established a "tax home" in India or Angola for purposes of the section 911 foreign earned income exclusion. 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. Petitioners Patrick and Paula Abrams resided in Bradford, Pennsylvania, at the time they filed their petition. For the years in issue, petitioners filed joint Federal income tax returns. From September 1981 through November 1983, petitioner was employed by Halliburton Company (Halliburton) as a cementer on an offshore oil rig located in the territorial waters of India. From December 1983 through December 1984, petitioner performed similar services on an oil rig located within the territorial waters of Angola. While employed with Halliburton, petitioner's work schedule consisted1990 Tax Ct. Memo LEXIS 570">573 of alternating 28-day periods on and off duty. Upon completion of each 28-day work period abroad, petitioner returned to Bradford, Pennsylvania, for a 28-day rest period (excluding travel time). During taxable year 1982, petitioner generally stayed with his parents when he returned to Bradford, Pennsylvania. On occasion, petitioner would stay with a "couple" of different female acquaintances with whom he had entered relationships. On November 17, 1982, petitioner married and began sharing an apartment in Bradford with his wife, Paula Abrams. From November 1982 through August 1984, petitioner resided with his wife at their apartment in Bradford during each 28-day rest period. Petitioner shared the expense of maintaining the apartment until August 1984, when the Abrams purchased a new home in Bradford. On November 19, 1982, petitioners opened a joint bank account in Bradford. Petitioner also possessed an Ohio State driver's license throughout 1982, 1983, and 1984. During the 28-day work periods, petitioner's employer provided him with food and lodging aboard the oil rig. During 1982, petitioner spent a significant part of each work period aboard the rig but occasionally visited1990 Tax Ct. Memo LEXIS 570">574 the mainland of India. Petitioner's primary contact with the local populace on the mainland was in bars, hotels, and restaurants. During petitioner's 28-day work periods, he occasionally visited the mainland and entertained employees of the Oil and Natural Gas Commission of India (ONGC). During his free time within the 28 - day work periods, petitioner dated several Indian women and toured several Indian cities, such as Hyderabad, Bombay, Vijayawada, and Madras. Petitioner also visited countries surrounding India, such as Bangladesh and Afghanistan. During taxable year 1983, petitioner returned to the United States to reside with his wife during each 28-day rest period. Petitioners continued to maintain a bank account in Bradford, Pennsylvania, and share in the expense of maintaining an apartment. During 1983, petitioner had only limited interaction with local Indian residents as he occasionally entertained ONGC employees and toured several cities. Throughout 1982 and 1983, petitioner did not purchase a home, maintain an apartment, open a bank account, or obtain a license to drive in India. Petitioner, did, however, obtain a resident visa for tourism. Petitioner gained only1990 Tax Ct. Memo LEXIS 570">575 enough familiarity with the native language to enable him to translate a restaurant menu. In December of 1983, petitioner left the oil rig located in the territorial waters of India and began working on an offshore oil rig located near Angola. Through most of 1984, petitioner and his wife resided at their apartment in Bradford during each 28-day rest period. In August of 1984, petitioners purchased a home in Bradford. During each work period in 1984, petitioner returned to the rig located in the Angolan territorial waters. Consistent with previous work assignments, petitioner's employer provided food and lodging aboard the oil rig. While employed in Angola, petitioner did not maintain a residence or bank account, and petitioner did not obtain an Angolan driver's license. Petitioner had only limited interaction with the residents of Angola partly because political unrest made it dangerous to visit the mainland. However, petitioner did take active part in a clothing drive for the benefit of an Angolan mission. Petitioner's role in the clothing drive consisted of contacting the monsignor at his church in Bradford, requesting a contribution of clothes, collecting the clothes, and delivering1990 Tax Ct. Memo LEXIS 570">576 the clothes to the Angolan mission. During the years in issue, Halliburton paid all expenses associated with petitioner's travel between the United States and abroad. Halliburton not only provided petitioner's food and lodging while aboard the oil rig, but also paid all foreign income taxes relating to petitioner's earnings from his employment on the rig. In 1982 and 1983, petitioner listed the United States as a tax home on his Federal income tax returns. On petitioner's 1984 Federal tax return, he listed Nigeria as a tax home. Petitioner received wages from Halliburton and claimed a foreign earned income exclusion under section 911(a)(1) pursuant to the "bona fide resident" test of section 911(d)(1)(A) for the years and in the amounts set forth below: Taxable YearWagesForeign-earned Income Exclusion1982$ 25,971.00$ 25,971.00198326,690.4026,690.40198427,786.0027,786.00Petitioner concedes that he does not qualify for a foreign earned income exclusion during the years at issue under the provisions of section 911(d)(1)(B) due to the failure to meet the "physical presence test." OPINION Section 911(a)(1) allows a "qualified1990 Tax Ct. Memo LEXIS 570">577 individual" to exclude foreign earned income from gross income. Section 911(d)(1) defines a "qualified individual" as one who has a "tax home" in a foreign country and who is: (1) a citizen of the United States, and establishes to the satisfaction of the Secretary that he has been a "bona fide resident" of a foreign country for an uninterrupted period which includes an entire taxable year (bona fide residence test); or (2) a citizen or resident of the United States, and who is physically present in a foreign country for at least 330 full days during the taxable year (physical presence test). Thus, to be entitled to the foreign earned income exclusion within the context of section 911, an individual must have his "tax home" in a foreign country and satisfy either the "bona fide residence" requirement or "physical presence" requirement of section 911(d)(1). We will first consider whether petitioner's "tax home" was in a foreign country for the taxable years at issue. Petitioner bears the burden of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). For purposes of section 911, the term "tax home" is defined in section 911(d)(3), which provides as1990 Tax Ct. Memo LEXIS 570">578 follows: Tax home. -- The term "tax home" means, with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States. [Emphasis added.] Section 1.911-2(b), Income Tax Regs., elaborates on the definition of "tax home" and its relationship to the taxpayer's abode: (b) Tax home. * * * An individual shall not, however, be considered to have a tax home in a foreign country for any period for which the individual's abode is in the United States. Temporary presence of the individual in the United States does not necessarily mean that the individual's abode is in the United States during that time. Maintenance of a dwelling in the United States by an individual, whether or not the dwelling is used by the individual's spouse and dependents, does not necessarily mean that the individual's abode is in the United States. Thus, the determination of an individual's "tax home" for the purposes of the foreign earned income exclusion1990 Tax Ct. Memo LEXIS 570">579 requires the application of a general rule subject to an overriding exception. The general rule for purposes of section 162(a)(2) states that the individual's tax home is considered to be located at his regular or principal place of business. Sec. 1.911-2(b), Income Tax Regs. Section 911(d)(3) disengages the general rule in the event that an individual's "abode" is in the United States. In Bujol v. Commissioner, T.C. Memo. 1987-230, affd. without published opinion 842 F.2d 328">842 F.2d 328 (5th Cir. 1988), we considered the meaning of the word "abode" as used in section 911(b)(3) and stated: "Abode" has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Black's Law Dictionary 7 (5th ed. 1979). While an exact definition of "abode" depends upon the context in which the word is used, it clearly does not mean one's principal place of business. Thus, "abode" has a domestic rather than vocational meaning, and stands in contrast to "tax home" as defined for purposes of section 162(a)(2). [Fn. ref. omitted] 31990 Tax Ct. Memo LEXIS 570">580 Based upon petitioner's economic, familial, and personal ties to Pennsylvania, and his lack of such ties with India or Angola, we conclude that his "abode" remained in the United States. By the nature of his employment, petitioner was free to leave the rig each 28 days. He made no effort to acquire a home or maintain an apartment in either India or Angola. Rather, throughout the years at issue, petitioner returned to Pennsylvania each 28-day rest period. From November 1982 through August 1984, petitioner and his wife shared the expense of maintaining an apartment in Pennsylvania. In August 1984, petitioners purchased a home in Pennsylvania. During the years in issue, petitioner maintained a bank account in Pennsylvania and possessed a United States driver's license. During the years 1982 through 1984, petitioner clearly maintained significant ties to the United States. By contrast, during these years, petitioner had only minimal contact with India or Angola. Petitioner did not maintain a foreign bank account or possess a foreign driver's license. During 1982, petitioner's interaction with the Indian community was limited to occasionally entertaining ONGC employees and dating1990 Tax Ct. Memo LEXIS 570">581 a few Asian women. After his marriage in 1982, petitioner's involvement with the Indian community became even more insignificant in 1983. Clearly, petitioner's contacts with India were tenuous when compared with his contacts with the United States. Similarly, during 1984, petitioner's integration with the Angolan community was minimal. Petitioner suggests that he integrated into the local life by playing an active role in a clothing drive for an Angolan mission. But an act of local benevolence does not establish the type of participation in the life of the local community to render such community petitioner's abode. In fact, in his testimony concerning the clothing drive, petitioner referred to the church that provided the clothing as "our church, the Catholic Church in Bradford, Pennsylvania." Petitioner's lack of integration is also evidenced by his scant knowledge of Portuguese, the primary language of Angola. During 1984, petitioner's ties with Angola were insignificant when compared with his ties to the United States. During taxable years 1982 through 1984, petitioner's abode remained in the United States. We hold, therefore, that petitioner failed to establish a "tax1990 Tax Ct. Memo LEXIS 570">582 home" in India or Angola and is ineligible for the foreign earned income exclusion. Consequently, it is unnecessary for us to decide whether petitioner qualified as a "bona fide resident." Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. All references to petitioner in the singular are to Patrick Abrams.↩3. See also Lemay v. Commissioner, 837 F.2d 681">837 F.2d 681 (5th Cir. 1988), affg. T.C. Memo. 1987-256; Bassett v. Commissioner, T.C. Memo. 1988-218↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620138/	Doris V. Clark, Petitioner, v. Commissioner of Internal Revenue, RespondentClark v. CommissionerDocket No. 62697United States Tax Court29 T.C. 196; 1957 U.S. Tax Ct. LEXIS 46; November 13, 1957, Filed 1957 U.S. Tax Ct. LEXIS 46">46 Decision will be entered under Rule 50. Petitioner claimed a dependency credit for her mother who had partnership gross income in excess of $ 105, and other gross income of $ 499. Held, that the gross income of the partnership is gross income of the individual for the purpose of applying the gross income test; and as the mother's total gross income was in excess of $ 600, petitioner is not entitled under section 25 (b) (1) (D), I. R. C. 1939, to the dependency credit claimed. Held, further, the amount of medical expenses determined. William F. Threlkeld, Esq., for the petitioner.Conley G. Wilkerson, Esq., for the respondent. LeMire, Judge. LEMIRE 29 T.C. 196">196 This proceeding involves a deficiency in income tax of petitioner for the year 1952 in the amount of $ 343.14.The issues are: (1) Whether petitioner1957 U.S. Tax Ct. LEXIS 46">48 is entitled to a dependency credit for her mother, Clara Belle Clark; and (2) whether petitioner 29 T.C. 196">197 is entitled to a medical deduction in the claimed amount of $ 432.22. Other issues raised by the petitioner are conceded by petitioner.FINDINGS OF FACT.Certain facts have been stipulated and are so found.Petitioner is an individual residing in Williamstown, Kentucky. Her return for the year 1952 was filed with the district director of internal revenue for the district of Kentucky.During the calendar year 1952 petitioner and her mother were equal partners in a retail flower business conducted under the name of Vestland Flowers.For the year 1952, the partnership had a gross profit of more than $ 210 and an ordinary net loss of $ 1,710.03.During the year 1952, petitioner's mother received taxable income from sources other than the partnership in the amount of $ 499.In the taxable year 1952, petitioner deposited in a bank to the credit of her mother which was used for the latter's support and medical expenses the sum of $ 2,275.Petitioner on her return for 1952, claimed an exemption for her mother as a dependent and claimed the amount of $ 432.22 as a deduction for medical1957 U.S. Tax Ct. LEXIS 46">49 expense of herself and mother.In determining the deficiency the respondent disallowed the exemption claimed for the mother as a dependent, and also the claimed deduction for medical expenses.During the year 1952 petitioner contributed more than one-half the cost of the support of her mother. No other person contributed to the support of petitioner's mother.During the year 1952, the petitioner expended the amounts for the purposes stated as follows:Doctors$ 135.00Hospitalization and medical insurance premiums90.80Drugs and medicines138.40Transportation for her mother to consult specialists60.00During the year 1952, petitioner expended the sum of $ 260 for special foods for her mother, such as baby foods, special breads and butters, very tender beef, and small pieces of steak.OPINION.The respondent contends that petitioner is not entitled to a dependency credit in the taxable year because her mother had a gross income in excess of $ 600, and furthermore, that petitioner has not established that she furnished more than one-half the cost of her mother's support. Petitioner has the burden of establishing both of the statutory requirements.29 T.C. 196">198 It is stipulated1957 U.S. Tax Ct. LEXIS 46">50 that the mother was an equal partner with petitioner in the operation of a retail flower business which, in the year 1952, had a gross profit of more than $ 210, and a net operating loss of $ 1,710.03. It is also stipulated that the mother had gross income from other sources of $ 499.Petitioner contends that in applying the gross income test for purposes of the dependency credit, the mother's share of the partnership gross income may not be considered, and hence the gross income of the mother is less than $ 600. L. Glenn Switzer, 20 T.C. 759; Estate of R. L. Langer, 16 T.C. 41, affirmed per curiam 194 F.2d 288.The test for determining dependency under section 25 (b) (1) (D) of the 1939 Code is the gross income of the dependent as defined in section 22 (a). Gooch v. Commissioner, 240 F.2d 324, affirming T. C. Memo. 1955-326; John H. Gooch, 21 T.C. 481; Lena Hahn, 22 T.C. 212. While these cases do not involve a partner's share of the gross income of a partnership, 1957 U.S. Tax Ct. LEXIS 46">51 they hold that in applying the gross income test for dependency credit, gross income from business operations rather than the net income is to be used.The inquiry narrows to the question of whether in applying the gross income test for the dependency credit, a partner's share of the gross income of the partnership is to be considered as gross income of the individual under the rule adopted in the case of a business operated as a sole proprietorship.A partnership is not a taxable entity. The fact that the revenue act contains specific provisions for the filing of a partnership information return and requires that only the net income shown thereon is to be included in the partners' individual return (secs. 181-189, 1939 Code) does not, we think, require the application of a different rule. See discussion of these Code provisions and authorities cited in Charles H. Palda, 27 T.C. 445, 447, on appeal (C. A. 8).The general rule is that an individual partner is deemed to own a share interest in the gross income of the partnership. Harry Landau, 21 T.C. 414, 421.In our opinion, to conclude that the rule applied with respect1957 U.S. Tax Ct. LEXIS 46">52 to gross income of a sole proprietorship is not applicable with respect to gross income of a partnership would work a discrimination between taxpayers, a result never intended by Congress and which is to be avoided where possible.The Internal Revenue Code of 1954 indicates that it was the congressional intent that a partner's share of the gross income of the partnership is gross income of the individual within the meaning of section 22 (a) of the 1939 Code.In section 61 (a), 1954 Code, gross income is defined as:29 T.C. 196">199 Except as otherwise provided in this subtitle, gross income means income from whatever source derived including (but not limited to) the following items:* * * (13) Distributive share of partnership gross income;The legislative history makes it clear that this is not a change in the existing law but is merely declaratory of the prior law in simplified form. 1 See Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426.1957 U.S. Tax Ct. LEXIS 46">53 The case of L. Glenn Switzer, supra, which was remanded by the Court of Appeals (C. A. 9) on September 17, 1954, with directions (in accordance with the stipulation of the parties) to vacate our decisions and enter decisions for the petitioners, and Estate of R. L. Langer, supra, on which petitioner relies, involve other sections of the Code and are distinguishable. Cf. Charles H. Palda, supra;Jack Rose, 24 T.C. 755.The record shows that petitioner's mother had more than $ 600 of gross income in the taxable year 1952. Therefore, the respondent's disallowance of a dependency credit is sustained.The next question presented is whether petitioner is entitled to a deduction for medical expenses. The principal part of the claimed medical expenses were incurred on behalf of her mother. Petitioner makes no claim that the medical expenses paid on her own behalf were sufficient to qualify her for a medical deduction.Petitioner contends that she is entitled to aggregate the total medical expenses paid on her own behalf and those paid on behalf of her mother as a dependent. 1957 U.S. Tax Ct. LEXIS 46">54 Section 23 (x) of the Code provides that a taxpayer is entitled to a deduction for medical expenses of a dependent as defined in section 25 (b) (3). A mother is one of the persons included therein. To entitle a taxpayer to claim a deduction for medical expenses paid for a dependent, the gross income test is not applicable, and it is only necessary to establish that the taxpayer has furnished more than one-half the cost of the support of the dependent. The respondent has so ruled 2 and we think the ruling correctly interprets the applicable provisions of the Code.The respondent argues that petitioner has not met the support test, since she has failed to show the total cost of the mother's support. The record shows that in the taxable year involved the petitioner contributed at least $ 2,275 toward the support of her mother. No other person contributed to the mother's support. Since it appears that the mother's gross income, excluding her share of the 1957 U.S. Tax Ct. LEXIS 46">55 partnership gross profits was $ 499, we think it is apparent that petitioner furnished more 29 T.C. 196">200 than one-half the support of her mother and we have so found as a fact. E. R. Cobb, Sr., 28 T.C. 595.Petitioner is therefore entitled to include in her medical expenses the amounts paid on behalf of her mother.In the taxable year 1952, petitioner expended the aggregate amount of $ 424.20 for doctors, drugs and medicines, hospitalization and medical insurance premiums, and for the transportation of her mother to consult specialists. The cost of each of such items is set forth in our findings. In our opinion each item qualifies for deductibility as a medical expense under the provisions of section 23 (x) of the 1939 Code and the Commissioner's regulations. Regs. 118, sec. 39.23 (x)-1.Petitioner in the year 1952 also expended the sum of $ 260 for special foods for her mother, consisting of baby foods, special breads and butters, very tender beef, and small pieces of steak. The Commissioner has ruled 3 that special foods which are substitutes for foods normally consumed do not qualify as a medical expense. We think the ruling is a proper interpretation1957 U.S. Tax Ct. LEXIS 46">56 of section 23 (x), and approve the same.The amount of the deduction to which petitioner is entitled on account of medical expenses will be determined under Rule 50.Decision will be entered under Rule 50. Footnotes1. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 168.↩2. I. T. 4034, 1950-2 C. B. 28↩.3. Rev. Rul. 261, 1955-1 C. B. 307↩, 312.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620140/	George M. Hancock and Ruby Hancock, Petitioners, v. Commissioner of Internal Revenue, RespondentHancock v. CommissionerDocket No. 31146United States Tax Court18 T.C. 210; 1952 U.S. Tax Ct. LEXIS 202; May 9, 1952, Promulgated 1952 U.S. Tax Ct. LEXIS 202">202 Decision will be entered for the respondent. Under the facts, held, that petitioner George M. Hancock, and not the corporation, purchased certain stock of the corporation belonging to another, and that dividends and bonus declared on the stock so purchased constitute taxable income to petitioners. J. A. McIntosh, Esq., for the petitioners.Michael J. Clare, Esq., for the respondent. Johnson, Judge. JOHNSON 18 T.C. 210">210 Respondent determined a deficiency of $ 3,598.10 in income tax against petitioners for 1948. The issue is whether petitioners received as taxable income certain dividends in the aggregate amount of $ 10,170, and whether George M. Hancock, husband of Ruby Hancock, also received a bonus of $ 5,833.05. Petitioners filed their joint return for the taxable year with the collector of internal revenue for the first district of Ohio.FINDINGS OF FACT.The facts set forth in a stipulation of the parties are found in accordance therewith.George M. Hancock, hereinafter for convenience to be referred to as petitioner, prior to May 14, 1948, held 56 of the 113 shares of outstanding stock of Duff-Hancock Motors, Inc., an Ohio corporation, organized in August 19471952 U.S. Tax Ct. LEXIS 202">203 and engaged in the sale of new and used automobiles in Middletown, Ohio. A like number of shares was held by Buford Duff, and the remaining share was held by Jewell Winkle, Duff's daughter and the bookkeeper of the corporation.At some undisclosed time prior to May 14, 1948, Duff, who was president and a director of the corporation, expressed to petitioner a desire to retire from the business in order to reengage in the real estate business, and petitioner agreed to endeavor to make some arrangement to purchase his stock without involving a distribution of corporate earnings or surplus to himself. Petitioner and the corporation did not at that time have sufficient capital to pay cash for the stock.18 T.C. 210">211 The corporation's firm of accountants was engaged by petitioner, acting as president of the corporation, to plan a course of procedure for the acquisition of the stock of Duff and Winkle. A plan prepared by the firm, with assistance of the corporation's attorney, was accepted by petitioner and Duff without being questioned.The board of directors of the corporation held a special meeting on May 14, 1948. The minutes of the meeting, signed by Duff, as president, and petitioner, 1952 U.S. Tax Ct. LEXIS 202">204 as secretary, contained the following:The President announced that he was withdrawing from the corporation as shareholder, director and officer, that Martha Duff desires to resign as Vice President, and that Jewell Winkle was desirous of selling her share of stock but remain as a director and bookkeeper. George M. Hancock being the only remaining stockholder proposed that the board of directors authorize the corporation to loan him the money to buy up the shares owned by Buford Duff and Jewell Winkle, and provide for the repayment of the loan by the corporation to him. After discussion the following resolution, on motion of George M. Hancock and seconded by Jewell Winkle, was unanimously adopted by all directors. RESOLVED, that the corporation accept resignation of Buford Duff as President and Director and of Martha Duff as Vice President; that the treasurer be directed to loan George M. Hancock the sum of Fifteen Thousand Four Hundred Fifty-Five and No/100 Dollars ($ 15,455.00) for the sole purpose of George M. Hancock's purchasing the 56 shares of common no par value stock from Buford Duff and 1 share from Jewell Winkle, and the treasurer is authorized upon surrender of1952 U.S. Tax Ct. LEXIS 202">205 said 57 shares to issue 56 shares to George M. Hancock and 1 share to his wife Ruby Hancock; and that George M. Hancock is directed to repay the aforesaid loan as soon as possible so as not to impair the operating capital of the corporation to an appreciable extent.The corporation was solvent at that time, but was required to borrow money to make the loan directed by the resolution.Thereafter the corporation borrowed from $ 10,000 to $ 12,000 from the Commercial Credit Corporation, secured by a floor plan mortgage on the used cars of the corporation. The loan was negotiated by petitioner.On May 17, 1948, the corporation, pursuant to the resolution, loaned petitioner $ 15,455. On the same day petitioner deposited in his personal bank account the check which he had received from the corporation for the amount of the loan, and gave his personal check in the amount of $ 16,455 to Duff, in consideration of which Duff and Winkle transferred their shares of stock of the corporation to petitioner. Thereafter petitioner surrendered the certificates to the corporation and the stock was reissued, 56 shares in his name and one share in the name of his wife.At the same or another special1952 U.S. Tax Ct. LEXIS 202">206 meeting held by the board of directors of the corporation on May 14, 1948, a resolution was adopted providing that 25 per cent of the net profits of the corporation during the fiscal 18 T.C. 210">212 year ended July 31, 1948, in excess of a dividend of $ 10 per share of stock be paid to petitioner as president, treasurer and general manager. Pursuant thereto, petitioner earned a bonus of $ 5,833.05, which amount was paid to him by a credit to his personal account on the books of the corporation.At a special meeting held on July 13, 1948, the directors of the corporation approved the minutes of the previous meeting and adopted a resolution for the payment of a dividend of $ 90 a share on July 23, 1948, to stockholders of record on July 20, 1948, and authorized and directed the treasurer to pay the dividend on that day and cause proper entries to be made on the books of the corporation to record the declaration of the dividend and the payment thereof. The minutes of the meeting were signed by petitioner, as president, and by his wife, as secretary.In accordance with the provisions of the resolution, petitioner's personal account on the books of the corporation was credited with $ 10,080, 1952 U.S. Tax Ct. LEXIS 202">207 an amount representing the dividend on the 112 shares of stock outstanding in his name, and a dividend check for $ 90 was issued in favor of Ruby Hancock on the one share of stock outstanding in her name.The reason for payment of the bonus and declaration of a dividend was to enable petitioner to satisfy his debt to the corporation for the loan.In the income tax return of the corporation for the fiscal year ended July 31, 1948, filed on October 14, 1948, a deduction was claimed in the amount of $ 5,833.05 for "Officers' Bonus," which was the amount of the bonus paid to petitioner, and showed payment of the dividends totaling $ 10,170 to stockholders during the year. The capital stock was reported to be $ 11,300, consisting of 113 shares of no par value. The return contains a notation that petitioner "owns 112 shares purchased in May 1948; 1st Ohio" and was signed by petitioner as president, and Jewell Winkle as "Chief Accounting Officer."After October 14, 1948, but before December 8, 1948, Robert Keays, another accountant without previous connection with the stock transaction, concluded, after an examination of the books of the corporation, that the correct accounting procedure1952 U.S. Tax Ct. LEXIS 202">208 for carrying out the stock transaction would have been to retire the stock held by Duff, and advised petitioner that the manner in which it was carried out "was anything but good tax form." Petitioner then requested the accountant to advise him in the matter and, as a result, an amended corporate return, signed by petitioner, was filed about December 8, 1948, in which the deduction of $ 5,833.05 for the bonus paid to petitioner was eliminated and the amount of $ 90 substituted therefor under the same heading, and no amount was shown in the balance sheet for dividends paid to stockholders during the year. The balance sheet reported in 18 T.C. 210">213 the amended return listed as an asset of the corporation the amount of $ 10,755 1 for "Premium on Treasury Stock" and capital stock in the amount of $ 5,600, consisting of 56 share of no par value.1952 U.S. Tax Ct. LEXIS 202">209 The amended return reflected adjusting entries made by the accountant in the books of the corporation to show a purchase of the 57 shares of stock by the corporation and no payment of the bonus to petitioner and of the dividends. The minutes of the meetings on May 14, 1948, in which the dividends and bonus were authorized, were not amended to conform with the books, as adjusted. Counsel for the corporation informed the corporation that the filing of a copy of the amended return in the minute books would be sufficient to show that the minutes of the May 14, 1948, meetings had been corrected. The accountant who prepared the amended return and made the adjusting bookkeeping entries did not consult the corporation's previous firm of accountants or attorney in regard to the matter.The petitioners did not report the dividends paid to them in the aggregate amount of $ 10,170, or the bonus of $ 5,833.05 paid to petitioner, in their joint return for 1948. Duff reported in his income tax return that he had sold the stock for $ 16,455.The shares of stock held by Duff and Winkle prior to May 14, 1948, were never retired by the corporation. The corporation was liquidated in the spring of1952 U.S. Tax Ct. LEXIS 202">210 1951.In his determination of the deficiency, respondent included the bonus and dividends in taxable income of petitioners.OPINION.Petitioners seek to avoid tax liability on the dividends and bonus upon the general ground that the transaction as a whole was a purchase of treasury stock by the corporation. They argue that the entire arrangement was a plan worked out by the corporation's accountant for the retirement of the stock held by Duff and Winkle. Specifically, they allege that the dividends and bonus were used by the corporation to pay for the stock. There is no factual basis for the contentions of petitioners. To the contrary, the evidence establishes that there was a purchase of the stock from Duff and Winkle by petitioner, and dividend and bonus payments thereafter on the basis of ownership of the stock by petitioners.The fact that the corporation's directors, including petitioner, followed without question the plan advanced by the accountant for the acquisition of the stock does not relieve petitioner of the liability for the tax consequences of the transaction. That petitioner was aware 18 T.C. 210">214 that he, and not the corporation, was purchasing the stock is shown1952 U.S. Tax Ct. LEXIS 202">211 beyond reasonable doubt by the evidence before us.The resolution of May 14, 1948, provided in unequivocal terms for the granting of a loan to petitioner for the sole purpose of purchasing the stock held by Duff and Winkle, and for the repayment of the loan as soon as possible. The minutes, which were prepared by the corporation's counsel, were signed by petitioner and he must be charged with knowledge of the contents of the resolution even though, as he testified, he signed the minutes without reading them. Thereafter petitioner, as president of the corporation, negotiated a loan to put the corporation in funds to comply with the terms of the resolution and the amount was loaned to petitioner. The check issued to petitioner for the amount of the loan was deposited in his personal bank account, and on the same day petitioner gave to Duff his personal check for $ 16,455, which was $ 1,000 in excess of the amount borrowed from the corporation, in payment of the stock. There is no suggestion here that the excess of the consideration petitioner paid for the stock over the borrowed money did not come from personal funds of petitioner, or that petitioner regarded himself to be indebted1952 U.S. Tax Ct. LEXIS 202">212 to the corporation for the additional amount. In consideration of the payment, Duff transferred his shares to petitioner and thereafter the certificate for the stock, together with the certificate for the one share transferred by Winkle, was reissued, 56 shares to petitioner and one share to his wife.The course of action of Duff, who did not testify at the hearing, and nothing was offered to establish that he was unavailable as a witness, shows particularly in the light of the fact that he signed the resolution, that he intended to sell the stock to petitioner. Any misunderstanding petitioner might have had about the purport of the resolution, and the plan of the accountant, was cleared up before the transaction between him and Duff was consummated. To hold otherwise would require that we ignore completely the voluntary acts of petitioner. Unless changed by what occurred thereafter, delivery of the consideration and stock certificates closed the transaction for the sale of the stock by Duff and Winkle to the petitioner.As late as October 14, 1948, when the corporation's return for the fiscal year ended July 31, 1948, was filed, the transaction was treated by petitioner and the1952 U.S. Tax Ct. LEXIS 202">213 corporation as a purchase by the former. Pursuant to a resolution adopted at a meeting of the board of directors of the corporation on July 13, 1948, the minutes of which were signed by petitioner as president and by his wife as secretary, a dividend of $ 90 a share was paid. Petitioner's personal account on the corporation's books was credited with $ 10,080 on the basis of ownership of 18 T.C. 210">215 112 shares of stock and his wife received a check for $ 90 for the one share outstanding in her name. Nothing here is opposed to a conclusion that the minutes of the previous meeting, which were approved by the directors on July 13, 1948, did not relate to the meeting held on May 14, 1948, at which the loan to petitioner was authorized. The return reflected the dividend payments to stockholders, reported 113 shares of stock outstanding at the end of the year, none of which was listed as treasury stock, and claimed as a deduction the amount of $ 5,833.05 for the bonus paid to petitioner. The course of conduct thus taken is consistent with full and complete ownership by petitioner and his wife of the stock involved herein.The adjusting entries made in the corporation's books after the1952 U.S. Tax Ct. LEXIS 202">214 return was filed were nothing more, in the final analysis, than an effort to avoid tax consequences of the dividend and bonus payments by making it appear that the corporation and not petitioner purchased the stock from Duff and Winkle. While the intent of the adjusting entries was to show that the corporation purchased all of the stock, including the one share reissued to Ruby Hancock, petitioner admitted by his testimony at the hearing that the cash dividend received by her was taxable. The fact that the corporation could have purchased the stock is not controlling, for the issue must be decided upon what was done rather than by what might have been done. The corporation, which must be treated as an entity separate and distinct from petitioners, its sole stockholders, Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436, never acted to purchase the stock. Obviously, the filing of the amended return in the minute books, action not shown to have been taken under the direction of the board of directors, was not sufficient for that purpose, particularly in the light of the fact that the resolution of May 14, 1948, specifically referred to the 1952 U.S. Tax Ct. LEXIS 202">215 transaction as a purchase by petitioner and that the acquisition had been fully consummated with the seller.The accountant who made the adjusting bookkeeping entries did not discuss the matter with the corporation's attorney, or its previous accountant, and therefore did not have the benefit of their ideas on what the parties intended. That he was not interested in their views is illustrated by his concluding testimony at the hearing that:* * * George Hancock at that time was somewhat strapped for money, so he didn't want to get more expenses on his shoulders because he didn't know which way he was going at that particular time, so I was trying to help him out as best I could.In Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, the taxpayer, a corporation all of whose stock was held by two individuals, entered into an oral agreement to sell its only asset and received a payment 18 T.C. 210">216 on the purchase price. When meeting to reduce the agreement to writing, the taxpayer's attorney informed the purchaser that the sale could not be concluded because of the tax liability it would impose upon the seller. The next day the corporation declared a liquidating1952 U.S. Tax Ct. LEXIS 202">216 dividend and thereafter the sale was made by the former stockholders, as sellers. The Court held that the corporation and not the individuals sold the property and was liable for tax on any gain realized. In reaching its conclusion the Court said, among other things:* * * A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.A like question was considered in United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451. Here petitioners substituted a different buyer after the sale was fully consummated and thereby changed both the substance and the form of the transaction. The rationale of these decisions of the Supreme Court oppose such a method to minimize tax liability. There remains the question of whether the adjusting bookkeeping entries altered the right of petitioners to receive and retain the dividends and bonus.The general rule is that1952 U.S. Tax Ct. LEXIS 202">217 the declaration of a dividend creates a debtor-creditor relationship between a corporation and its stockholders, and that the directors have no power to rescind or revoke their action. Estate of Lloyd E. Crellin, 17 T.C. 781, wherein the dividends were repaid by the stockholders within the year received after revocatory action was taken by the directors, and we held that the amounts were taxable. The rule in Ohio is that the debt created by a dividend declaration is "beyond the control of both the stockholders and directors." Mitchell v. Bookwalter Wheel Co., 4 Ohio N. P. N. S. 609, affd. 75 O. S. 639. Here neither the stockholders nor the directors, as such, took any action to revoke the resolutions declaring the dividend and bonus. The dividend and bonus were credited to petitioner's personal account on the books of the corporation and served to liquidate the loan he made from the corporation to buy the stock. Thus, he not only received the amounts but used them for his own benefit in the purchase of the stock.No useful purpose would be served by a further discussion of the question. It is sufficient to say1952 U.S. Tax Ct. LEXIS 202">218 that we find no error in respondent's action in including the dividends and bonus in gross income of petitioners. Accordingly,Decision will be entered for the respondent. Footnotes1. No evidence was offered to show how the figure was computed but it appears to be the difference between the amount of $ 16,455 paid for the 57 shares and $ 5,700, a figure to represent par value of the stock.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620142/	Morris G. Underwood, Petitioner v. Commissioner of Internal Revenue, Respondent; Jackie Underwood, Petitioner v. Commissioner of Internal Revenue, RespondentUnderwood v. CommissionerDocket Nos. 2882-73, 2883-73United States Tax Court63 T.C. 468; 1975 U.S. Tax Ct. LEXIS 201; January 27, 1975, Filed 1975 U.S. Tax Ct. LEXIS 201">201 Decisions will be entered for the respondent. Petitioners husband and wife, residing in a community property State, owned all the stock of corporation A, an electing small business corporation, and corporation L. A borrowed $ 110,000 from L. Subsequently, L canceled A's debt to it, Underwood gave his $ 110,000 note to L, and A gave its $ 110,000 note to Underwood. Held, A's note to Underwood is not an "indebtedness" which increases Underwood's "adjusted basis" under sec. 1374(c)(2)(B), I.R.C. 1954, for the purpose of determining the amount of A's net operating loss petitioners may deduct for 1969. Held, further, a settlement of an income tax refund suit for a prior year does not estop respondent from denying the deductibility by petitioners of A's net operating loss for 1969. Edward R. Smith, for the petitioners.D. Derrell Davis, for the respondent. Featherston, Judge. FEATHERSTON63 T.C. 468">468 In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes for 1969 in the following amounts: 63 T.C. 468">469 PetitionerDocket No.DeficiencyMorris G. Underwood2882-73$ 4,286.24Jackie Underwood2883-734,302.42The only issue for decision is whether petitioners, on their Federal 1975 U.S. Tax Ct. LEXIS 201">202 income tax returns for 1969, properly deducted their respective shares of the net operating loss incurred by an electing small business corporation. The answer depends upon (1) whether the corporation's execution of a promissory note to petitioners gave them an "adjusted basis" in "indebtedness" within the meaning of section 1374(c)(2)(B), 1 and (2) whether respondent is estopped to contend that it did not.FINDINGS OF FACTMorris G. Underwood (hereinafter Underwood) and Jackie Underwood, husband and wife (referred to jointly hereinafter as petitioners), were residents of Lubbock, Tex., at the time they filed the petitions herein. They filed separate individual Federal income tax returns for the calendar year 1969, using the cash method of accounting. All of their income, notes, and stock here involved were community property.During all pertinent years, petitioners were the sole shareholders of Underwood's of Lubbock, Inc. (hereinafter referred to as Lubbock), a corporation engaged in the retail barbecue cafeteria business located in Lubbock, Tex.In January 1975 U.S. Tax Ct. LEXIS 201">203 1965, petitioners organized another retail barbecue cafeteria business, Underwood's of Albuquerque, Inc. (hereinafter referred to as Albuquerque). As of May 1966, Albuquerque elected to be taxed as a small business corporation under subchapter S of the Internal Revenue Code of 1954, sections 1371-1379. Petitioners became the sole shareholders of Albuquerque as of June 1, 1966, and continued to be so through April 30, 1969.Lubbock filed its income tax returns using the accrual method of accounting and a fiscal year ending August 31. Albuquerque filed its income tax returns using the accrual method of accounting and a fiscal year ending April 30.63 T.C. 468">470 For the period prior to its election to be taxed as a small business corporation, Albuquerque's tax returns reflected the following operating results:FYE Apr. 30 --Gain (or loss)19650 1966($ 82.49) As a small business corporation, Albuquerque's operations reflected the following results:FYE Apr. 30 --Gain (or loss)1967($ 4,003.05)1968(51,815.94)1969(13,054.74)1970(11,331.62) Lubbock's operations during its fiscal years ended August 31 of 1965 through 1970 consistently resulted in profits.During the period January 1965 to October 1966, 1975 U.S. Tax Ct. LEXIS 201">204 Lubbock made loans to Albuquerque totaling $ 110,000, in order to help finance the latter's operations. In return, Albuquerque executed a series of demand promissory notes to Lubbock, each bearing 6-percent interest.Interest due from Albuquerque on its notes was regularly accrued on Lubbock's books as interest income and was consistently reported as such on its income tax returns. Albuquerque's books similarly reflected accruals for interest expense incurred on the loans extended to it by Lubbock.Albuquerque made no payments of principal or interest on these notes to Lubbock until April 1968, when it paid Lubbock $ 6,980, which represented the total amount of interest which had accrued on the notes as of January 31, 1967.Ray Lawrence (hereinafter Lawrence) is and has been the C.P.A. for the Underwood interests since about 1953. Sometime prior to January 31, 1967, Lawrence discussed with Underwood the matter of anticipated losses of Albuquerque for its fiscal year ended April 30, 1967. Lawrence advised Underwood that losses in Albuquerque could well exceed Underwood's adjusted basis in that corporation's stock in the near future and that, therefore, Underwood should consider steps 1975 U.S. Tax Ct. LEXIS 201">205 which would increase his basis in Albuquerque's stock or indebtedness, thereby enabling him to deduct such losses for tax purposes.63 T.C. 468">471 At the time this discussion was held, Lubbock was not actively engaged in any expansion program for which it needed the funds previously lent to Albuquerque.As a result of the discussion between Lawrence and Underwood, the following transactions occurred: (1) Lubbock surrendered its Albuquerque notes to Albuquerque, marking them "paid" as of January 31, 1967; (2) Albuquerque issued a demand promissory note to Underwood dated January 31, 1967, in the amount of $ 110,000, bearing 6-percent interest per annum; (3) Underwood gave his personal demand note to Lubbock dated January 31, 1967, in the amount of $ 110,000, bearing 6-percent interest per annum.Thereafter, the books and records of Lubbock and Albuquerque reflected the ownership of the new notes and cancellation of the original notes in conformity with the transactions described above.Interest due on the note Underwood executed to Lubbock was regularly accrued and reported for income tax purposes by Lubbock from and after January 31, 1967. Actual payments of interest to Lubbock were made by Underwood 1975 U.S. Tax Ct. LEXIS 201">206 on April 11, 1968, December 15, 1969, and March 6, 1970. The note was paid in full on March 27, 1970.On the note Albuquerque issued to Underwood on January 31, 1967, no principal or interest had been actually paid as of April 30, 1972. 2As of April 30, 1967, petitioners' adjusted basis in Albuquerque stock was $ 13,000. On their joint Federal income tax return for 1967, petitioners claimed a combined total of $ 3,695.22 of Albuquerque's April 30, 1967, fiscal year loss of $ 4,003.05, 31975 U.S. Tax Ct. LEXIS 201">207 which left them a remaining basis of $ 9,304.78 in Albuquerque stock. On their joint Federal income tax return for 1968, petitioners 63 T.C. 468">472 claimed all of Albuquerque's losses in the amount of $ 51,815.94 for its fiscal year ended April 30, 1968.After deducting $ 9,304.78 of Albuquerque's April 30, 1968, net operating loss on their joint income tax return for 1968, petitioners' adjusted basis in Albuquerque stock was reduced to zero. Petitioners also deducted the remainder of the April 30, 1968, fiscal year net operating loss incurred by Albuquerque. The remainder of the loss deducted exceeded the $ 22,377.50 directly loaned to Albuquerque by Underwood in April 1968, thereby reducing petitioners' adjusted basis in that indebtedness to zero. The remaining $ 20,133.66 of Albuquerque's April 30, 1968, net operating loss was also fully deducted by petitioners for 1968. Petitioners' computations treated the $ 110,000 January 31, 1967, note owed by Albuquerque 1975 U.S. Tax Ct. LEXIS 201">208 to Underwood as a bona fide indebtedness of Albuquerque, serving to increase the limitation of their deductible portion of Albuquerque's net operating loss.Subsequently, petitioners' income tax returns for 1967 and 1968 were audited by respondent. The revenue agent's report was dated February 5, 1970. With respect to 1967, respondent's agent proposed to treat the January 31, 1967, note exchange as a $ 110,000 dividend from Lubbock to petitioners. For 1968, he proposed (a) to disallow $ 20,133.66 of the Albuquerque loss to petitioners on the grounds that Lubbock, and not petitioners, had, in fact, advanced the $ 110,000 to Albuquerque, and (b) to treat the repayment of $ 12,000 by Albuquerque to petitioners as taxable capital gain instead of tax-free return of capital.In conference, respondent dropped the proposed disallowance of Albuquerque's April 30, 1968, loss but maintained his positions on both the 1967 dividend receipt and the capital gain treatment for the 1968 repayments by Albuquerque on the April 9, 1968, loan extended by Underwood. 41975 U.S. Tax Ct. LEXIS 201">209 Early in 1971, as a result of the settlement conference, petitioners were assessed a tax for 1967, which they paid, on the 63 T.C. 468">473 theory that the note they received from Albuquerque for $ 110,000 on January 31, 1967, was a dividend in that amount from Lubbock. In June 1971, petitioners filed a claim for refund of the tax so assessed and paid, and in January 1972, they filed suit for refund. A pretrial order entered 1975 U.S. Tax Ct. LEXIS 201">210 by the United States District Court for the Northern District of Texas stated the opposing claims of the litigants in the following terms:The plaintiffs contend that the transfer in 1967 by Underwood's of Lubbock, Inc. (Lubbock) of its note receivable from Underwood's of Albuquerque, Inc. (Albuquerque) in the amount of $ 110,000 to plaintiffs was made in exchange for the note of plaintiffs to Lubbock in the amount of $ 110,000 and resulted in no dividend to plaintiffs in 1967.The defendant contends that the advance of the $ 110,000 note by Lubbock to plaintiffs was a distribution constituting a constructive dividend taxable to plaintiffs as ordinary income in the year 1967.No issues other than those described above were raised by the parties in the refund suit. The refund suit was settled in 1973. The amount of tax conceded by petitioners and retained by respondent amounted to approximately 10 percent of the amount in issue. In an offer of settlement, petitioners' counsel proposed an understanding that no part of the refund would be taxable to petitioners as interest (whether assessed interest or interest on overpayment). In order to implement and give sanction to this understanding, 1975 U.S. Tax Ct. LEXIS 201">211 petitioners' counsel proposed that "the fact of settlement is not to be used as evidence between the parties in any other proceeding." 5In its letter dated February 6, 1973, accepting petitioners' offer of settlement, the Government stated:This offer has been accepted on behalf of the Attorney General subject to the understanding that the Government is not precluded from pursuing the argument of disallowing the taxpayers' deductions for years subsequent to the year in suit for the losses of Underwood's of Albuquerque, Inc., a Subchapter S corporation.Judgment was entered in accordance with the settlement on April 27, 1973, and a partial refund of the tax so assessed on the alleged $ 110,000 dividend was made.On their Federal income tax returns for 1969, petitioners each deducted $ 6,527.37, their community one-half share of the net 63 T.C. 468">474 operating loss incurred by Albuquerque during its taxable fiscal year ended April 30, 1969. Petitioners deducted such losses in the belief that their combined adjusted basis in Albuquerque's indebtedness 1975 U.S. Tax Ct. LEXIS 201">212 exceeded Albuquerque's losses for that fiscal year. 6 On April 6, 1973, respondent sent statutory notices of deficiency to petitioners which determined deficiencies for the taxable year ended December 31, 1969, based on disallowances of deductions of the Albuquerque losses claimed by petitioners.OPINIONSection 1374(b)7 provides that a shareholder of a corporation which has elected to be taxed under subchapter S of the 1954 Code shall be allowed as a deduction his 1975 U.S. Tax Ct. LEXIS 201">213 portion of the corporation's net operating loss. Section 1374(c)(2)81975 U.S. Tax Ct. LEXIS 201">214 limits a 63 T.C. 468">475 shareholder's pro rata share of such corporation's net operating loss to the sum of (a) the adjusted basis of the shareholder's stock in the corporation, and (b) the adjusted basis of "any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year."1. Deductibility-of-Loss IssueWhether petitioners are entitled to deduct Albuquerque's losses for its fiscal year ended April 30, 1969, depends upon whether the 1967 exchange of papers -- Albuquerque's note to Underwood and Underwood's note to Lubbock -- created the kind of indebtedness that is referred to in section 1374(c)(2)(B). 1975 U.S. Tax Ct. LEXIS 201">215 We think it did not create that kind of indebtedness.The record is clear that Underwood advanced no funds, directly or indirectly, to Albuquerque in exchange for the note he received. Lubbock had advanced a total of $ 110,000 to Albuquerque during prior years, and Albuquerque was indebted to Lubbock for that amount. In exchange for Underwood's note obligating him to pay Lubbock the $ 110,000, Lubbock canceled Albuquerque's notes to Lubbock. Albuquerque then gave its $ 110,000 note to Underwood. But the only effect of these new notes was to shift the liabilities for the prior loans.The facts are similar, in principle, to a guaranty of the indebtedness of a subchapter S corporation. In the case of a guaranty, the guarantor promises to answer for the debt of another person, who himself remains liable for the debt. William H. Perry, 47 T.C. 159">47 T.C. 159, 47 T.C. 159">163 (1966), affd. 392 F.2d 458">392 F.2d 458, 392 F.2d 458">461 (C.A. 8, 1968); Tex. Bus. & Com. Code Ann. sec. 3.416 (1968). In a long list of cases, it has been held that basis-giving indebtedness for the purposes of section 1374(c)(2)(B) does not arise where a shareholder merely guarantees a subchapter S corporation's debt, 47 T.C. 159">William H. Perry, supra at 163; Milton T. Raynor, 50 T.C. 762">50 T.C. 762, 50 T.C. 762">770-771 (1968); 1975 U.S. Tax Ct. LEXIS 201">216 Wheat v. United States, 353 F. Supp. 720">353 F. Supp. 720, 353 F. Supp. 720">722 (S.D. Tex. 1973); Neal v. United States, 313 F. Supp. 393">313 F. Supp. 393, 313 F. Supp. 393">39663 T.C. 468">476 (C.D. Cal. 1970), or executes a surety agreement with respect to the corporation's debt. Joe E. Borg, 50 T.C. 257">50 T.C. 257, 50 T.C. 257">264-265 (1968). Only after the guarantor or surety performs on his contract of guaranty does the debtor's liability to the creditor become an indebtedness to the guarantor. Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, 352 U.S. 82">85 (1956); 47 T.C. 159">William H. Perry, supra at 164.Significantly, it is the payment by the guarantor of the guaranteed obligation that gives rise to indebtedness on the part of the debtor to the guarantor. The mere fact that the debtor defaults and thereby renders the guarantor liable is not sufficient. Similarly, the fact that Albuquerque executed a $ 110,000 note to Underwood is not sufficient to give him an adjusted basis in indebtedness within the meaning of section 1374(c)(2)(B). He had paid out nothing for that note. He had merely promised to pay the $ 110,000 to Lubbock. For the purposes of section 1374(c)(2)(B), the unpaid note was no different from the liability of a guarantor upon default by the primary obligor or from the liability for an unpaid stock 1975 U.S. Tax Ct. LEXIS 201">217 subscription. Until the guarantor or the subscriber has paid his obligation, he has made no actual investment. The adjusted basis for indebtedness referred to in section 1374(c)(2)(B) is "intended to be comparable to actual capital investment by the shareholders," 353 F. Supp. 720">Wheat v. United States, supra at 722, or, stated another way, is limited to "the actual economic outlay of the shareholder," William H. Perry, 54 T.C. 1293">54 T.C. 1293, 54 T.C. 1293">1296 (1970), affirmed per order (C.A. 8, May 12, 1971).Thus, in 50 T.C. 257">Joe E. Borg, supra at 263, this Court held that a note from a subchapter S corporation to its shareholder for unpaid salary was not a basis-giving indebtedness. Similarly, in 50 T.C. 762">Milton T. Raynor, supra at 770, we held that notes executed by the shareholders of such a corporation in favor of its creditors merely constituted additional security to such creditors, and could not, until paid, be considered to give rise to section 1374 (c)(2)(B) corporate indebtedness. Also, where a shareholder had given the subchapter S corporation his demand note in exchange for the corporation's long-term note, this Court held that the shareholder did not thereby acquire a basis in the indebtedness, stating ( William H. Perry, 54 T.C. 1293">54 T.C. 1296):The 1975 U.S. Tax Ct. LEXIS 201">218 report of the Committee on Finance of the Senate discloses the purpose of this section [1374(c)(2)(B)] as follows:63 T.C. 468">477 "The amount of the net operating loss apportioned to any shareholder pursuant to the above rule is limited under section 1374(c)(2) to the adjusted basis of the shareholder's investment in the corporation; that is, to the adjusted basis of the stock in the corporation owned by the shareholder and the adjusted basis of any indebtedness of the corporation to the shareholder. * * * [Emphasis supplied. 1958-3 C.B. 1141.]"As we construed the language employed by the Committee on Finance, it appears to us that, given its most familiar meaning, * * * the use of the word "investment" n3 reveals an intent, on the part of the committee, to limit the applicability of section 1374(c)(2)(B) to the actual economic outlay of the shareholder in question.The rule which we reach by this interpretation is no more than a restatement of the well-settled maxim which requires that "Before a deduction is allowable there must have occurred some transaction which when fully consummated left the taxpayer poorer in a material sense." [Fn. omitted.]We conclude that the signing of Underwood's note 1975 U.S. Tax Ct. LEXIS 201">219 to Lubbock and Albuquerque's note to Underwood did not give Underwood an adjusted basis in indebtedness within the meaning of section 1374(c)(2)(B).2. Estoppel IssueQuite obviously, respondent has had difficulty formulating his legal position on the tax consequences of petitioners' giving of the $ 110,000 note to Lubbock and simultaneously receiving the note in the same amount from Albuquerque. As detailed in our Findings, respondent initially took the position that the transactions resulted in petitioners' receipt of a $ 110,000 dividend from Lubbock in 1967 and collected a deficiency on that ground. Petitioners filed a refund suit in the District Court, and the suit was settled by a refund to petitioners of about 90 percent of the amount in dispute.Petitioners steadfastly maintain that respondent's constructive dividend determination as to 1967 estops him from disallowing the deductions in dispute in the instant case. We do not agree.In Morris White Fashions, Inc. v. United States, 176 F. Supp. 760">176 F. Supp. 760, 176 F. Supp. 760">764 (S.D. N.Y. 1959), where a somewhat similar argument was made, the court quoted the following classic statement of the essential elements of estoppel from Van Antwerp v. United States, 92 F.2d 871">92 F.2d 871, 92 F.2d 871">8751975 U.S. Tax Ct. LEXIS 201">220 (C.A. 9, 1937):To constitute estoppel (1) there must be false representation or wrongful misleading silence. (2) The error must originate in a statement of fact and not in an opinion or a statement of law. (3) The person claiming the benefits of 63 T.C. 468">478 estoppel must be ignorant of the true facts, and (4) be adversely affected by the acts or statements of the person against whom an estoppel is claimed.The evidence presented in this case does not show these enumerated facts.Moreover, as stated in our Findings, petitioners' offer to settle the District Court refund suit specified that "the fact of settlement is not to be used as evidence between the parties in any other proceeding." The Government's letter accepting the offer stated that acceptance was "subject to the understanding that the Government is not precluded from pursuing the argument of disallowing the taxpayers' deductions for years subsequent to the year in suit for the losses of Underwood's of Albuquerque, Inc., a Subchapter S corporation." In view of these facts, "we cannot say that petitioners were misled or actually relied upon any representation or omission of the respondent." Elizabeth Lewis Saigh, 36 T.C. 395">36 T.C. 395, 36 T.C. 395">423 (1961). 1975 U.S. Tax Ct. LEXIS 201">221 9The facts in Joseph Eichelberger & Co. v. Commissioner, 88 F.2d 874">88 F.2d 874 (C.A. 5, 1937), and United States v. Brown, 86 F.2d 798">86 F.2d 798 (C.A. 6, 1936), relied upon by petitioners, are clearly distinguishable.To reflect the foregoing conclusions,Decisions will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax year in issue, unless otherwise noted.↩2. On Apr. 9, 1968, Underwood loaned Albuquerque an additional $ 22,377.50. As of that date, Albuquerque's books reflected principal debts to Underwood in the amount of $ 132,377.50. Albuquerque repaid principal on this subsequent loan in the amounts of $ 7,000 on Oct. 14, 1968, and $ 5,000 on Dec. 12, 1968.↩3. Another shareholder, Jacqueline Underwood, owned some of the stock in Albuquerque as of the beginning of Albuquerque's fiscal year ended Apr. 30, 1967. Her stock ownership ceased June 1, 1966, at which time petitioners became the sole shareholders. Jacqueline Underwood's pro rata share of Albuquerque's net operating loss for its fiscal year ended Apr. 30, 1967, was determined to be $ 308.28. This figure, when combined with the amount of Albuquerque's fiscal 1967 loss claimed by petitioners, totals $ 4,003.50, instead of $ 4,003.05, the correct amount of loss as reflected on Albuquerque's tax return for that taxable year.4. As to the $ 12,000 loan repayments from Albuquerque, respondent determined that 67.89 percent of such repayments represented return of basis to petitioners in the amount of $ 8,146.80. The remaining amount of repayments, $ 3,853.20, was treated as capital gain and taxed accordingly. Respondent arrived at the percentage figure applied by computing the ratio existing between what petitioners contended to be their remaining basis ($ 89,866.34) in indebtedness owed to them by Albuquerque (which, for computation, included the $ 110,000 note executed Jan. 31, 1967) and the figure of $ 132,377.50 (which also included the $ 110,000 note) which petitioners contended represented the total bona fide indebtedness owed to them by Albuquerque. The computations relied upon for the settlement of this issue resulted in petitioners' purportedly being left with an adjusted basis of $ 81,719.54 in indebtedness from Albuquerque.5. Notwithstanding this provision in the offer, the evidence on which we have based these Findings of Fact was received without objection by either party.↩6. A worksheet prepared by Lawrence reflects what petitioners believed to be Underwood's basis in Albuquerque stock and indebtedness. It contains the following data:↩Underwood's AlbuquerqueCalculation of M. G. Underwood BasisActual noteNet profitBasis inbalance(loss)StockLoan4/30/67$ 110,000.00 $ 13,000.00 $ 110,000.00 Loss FYE 4/30/67($ 3,695.22)(3,695.22)Basis at 5/1/67110,000.00 9,304.78 110,000.00 Loans FYE 4/30/6822,377.50 22,377.50 Basis at 4/30/68132,377.50 9,304.78 132,377.50 Loss FYE 4/30/68(51,815.94)(9,304.78)(42,511.16)Basis at 5/1/68132,377.50 0 89,266.34 Repayment to Morris:10/14/68(7,000.00)(12,000.00)(8,146.80)12/12/68(5,000.00)Basis at 4/30/69120,377.50 0 81,719.54 Loss FYE 4/30/69(13,054.74)(13,054.74)7. SEC. 1374. CORPORATION NET OPERATING LOSS ALLOWED TO SHAREHOLDERS.(b) Allowance of Deduction. -- Each person who is a shareholder of an electing small business corporation at any time during a taxable year of the corporation in which it has a net operating loss shall be allowed as a deduction from gross income, for his taxable year in which or with which the taxable year of the corporation ends (or for the final taxable year of a shareholder who dies before the end of the corporation's taxable year), an amount equal to his portion of the corporation's net operating loss (as determined under subsection (c)).↩8. Sec. 1374(c)(2) provides as follows:(c) Determination of Shareholder's Portion. -- * * *(2) Limitation. -- A shareholder's portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of -- (A) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of the shareholder's stock in the electing small business corporation, determined as of the close of the taxable year of the corporation (or, in respect of stock sold or otherwise disposed of during such taxable year, as of the day before the day of such sale or other disposition), and(B) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation (or, if the shareholder is not a shareholder as of the close of such taxable year, as of the close of the last day in such taxable year on which the shareholder was a shareholder in the corporation).↩9. The fact that the Government retained a portion of the amount in issue in the District Court case does not show that any amount was taxed twice. Petitioners' payment of the assessment for 1967 included both tax and interest. The interest was deductible when paid, see sec. 163(a), and would have been taxable to petitioners under the tax-benefit theory when refunded, see sec. 111. Yet, petitioners' accepted proposal for the settlement of the District Court case was "on the basis of a refund of $ 65,000 in tax with the understanding that assessed interest heretofore paid will not have to be reinstated in plaintiffs' taxable income for any year and with the agreement that no part of this refund constitutes taxable interest."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620143/	MYLES SALT CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Myles Salt Co. v. CommissionerDocket No. 21200.United States Board of Tax Appeals18 B.T.A. 742; 1930 BTA LEXIS 2592; January 13, 1930, Promulgated 1930 BTA LEXIS 2592">2592 Petitioner filed a return for its fiscal year ended February 28, 1921, on May 16, 1921, which was not false or fraudulent with intent to evade tax. By reason of the change in the Revenue Act of 1921, its tax liability for the fiscal year ended February 28, 1921, was increased and under the law and regulations it was required to file a return under the provisions of that act. This it failed to do. A deficiency notice for the fiscal year ended February 28, 1921, was mailed to the petitioner on September 17, 1926. Held that the assessment and collection of the deficiency is not barred by the statute of limitations. E. Barrett Prettyman, Esq., for the petitioner. Arthur H. Murray, Esq., for the respondent. SMITH 18 B.T.A. 742">742 This proceeding is brought to determine the correctness of a deficiency asserted by the Commissioner for the fiscal year ended February 28, 1921, in the amount of $13,848.22. The petitioner contends that the assessment and collection of the deficiency are barred by the statute of limitations. The fact were stipulated. FINDINGS OF FACT. 1. The petitioner is a Louisiana corporation with its principal office at New Orleans. 1930 BTA LEXIS 2592">2593 2. The petitioner kept its books of account and filed its income and profits-tax returns on the basis of a fiscal year ended on the last day of February. 3. For the fiscal year ended February 28, 1921, the petitioner filed its income and profits-tax return on May 16, 1921, with the collector of internal revenue at New Orleans, and paid the tax therein set forth. This return disclosed a net income of $75,650.66 and it deducted in schedule D-9 the credit of $2,000 allowed by the Revenue Act of 1918. 4. The return of petitioner for the fiscal year ended February 28, 1921, set forth specifically the items of its gross income and the deductions and credits allowed by law. This return was not false or fraudulent with intent to evade taxation. 5. No other income and profits-tax return was filed by the petitioner under the provisions of the Revenue Act of 1918 for its fiscal year ended February 28, 1921, nor was any other income and profits-tax return filed by or on behalf of petitioner for such fiscal year under the provisions of the Revenue Act of 1921. 18 B.T.A. 742">743 6. Under date of September 17, 1926, respondent mailed to petitioner, under the provisions of section1930 BTA LEXIS 2592">2594 274(a) of the Revenue Act of 1926, a deficiency letter determining that there was due from the petitioner for the fiscal year ended February 28, 1921, a deficiency of $13,848.22. 7. Within 60 days after the mailing of the deficiency letter referred to above the petitioner filed its appeal with this Board for the redetermination of the deficiency set forth in the deficiency letter dated September 17, 1926. 8. The deficiency in tax set forth in said 60-day letter dated September 17, 1926, has not been assessed nor has any consent agreement for the assessment and/or collection of the above deficiency beyond the ordinary statutory period been entered into between petitioner and the Commissioner. 9. In its income and profits-tax return filed on May 16, 1921, the petitioner claimed credit of $2,000 allowed by the Revenue Act of 1918. Under the provisions of the Revenue Act of 1921 it was entitled to a credit of only $1,666.66. The change in the Revenue Act of 1921 increased the tax liability for the fiscal year involved over that imposed by the Revenue Act of 1918 and over that shown by the return filed. 10. If the deficiency and/or collection of the deficiency tax set1930 BTA LEXIS 2592">2595 forth in the deficiency letter dated September 17, 1926, is not barred by the statute of limitations, then the correct deficiency in tax of petitioner for the fiscal year ended February 28, 1921, is $13,848.22. OPINION. SMITH: The question presented by this proceeding is whether the deficiency in tax for the fiscal year ended February 28, 1921, is barred by the statute of limitations. The respondent contends that it is not by reason of the fact that the petitioner never filed the income and profits-tax return required to be filed by the Revenue Act of 1921; that therefore four years have not elapsed from the date of the filing of the required return to the date of the deficiency notice, namely, September 17, 1926. In support of this proposition the respondent cites Updike v. United States, 8 Fed.(2d) 913; certiorari denied by Supreme Court, 271 U.S. 661">271 U.S. 661; Davis Feed Co.,2 B.T.A. 616">2 B.T.A. 616; Covert Gear Co.,4 B.T.A. 1025">4 B.T.A. 1025; John Wanamaker Philadelphia,8 B.T.A. 864">8 B.T.A. 864; 1930 BTA LEXIS 2592">2596 M. Cohn & Sons Co.,9 B.T.A. 87">9 B.T.A. 87; Fred T. Ley & Co.,9 B.T.A. 749">9 B.T.A. 749; M. Brown & Co.,9 B.T.A. 753">9 B.T.A. 753; Keystone Coal & Mining Co.,10 B.T.A. 295">10 B.T.A. 295; Whitehouse Leather Products Co.,12 B.T.A. 714">12 B.T.A. 714; Louisville Veneer Mills,12 B.T.A. 1352">12 B.T.A. 1352; C. A. Lawton Co.,13 B.T.A. 8">13 B.T.A. 8. The petitioner, on the other hand, relies upon the proposition that it filed the required return on May 16, 1921, and that more than four 18 B.T.A. 742">744 years elapsed from that date to the date when the deficiency notice was mailed to it. In support of this proposition it cites 9 B.T.A. 749">Fred T. Ley & Co., supra;9 B.T.A. 753">M. Brown & Co., supra;Farmers Elevator Co.,13 B.T.A. 1079">13 B.T.A. 1079; Farmers Cooperative Co.,13 B.T.A. 1080">13 B.T.A. 1080. In 8 B.T.A. 864">John Wanamaker Philadelphia, supra, we stated; * * * The Revenue Act of 1921 clearly required all corporations having a fiscal year ending during the calendar year 1921 to file a return in accordance with the provisions of that Act. Treasury Decision 3305 inferentially relieved taxpayers who or which had filed returns for1930 BTA LEXIS 2592">2597 a fiscal year ended in 1921 under the provisions of the Revenue Act of 1918 from filing second returns under the provisions of the Revenue Act of 1921, provided such second returns would not show any additional tax payable. Treasury Decision 3310 clearly required the filing of such return where an additional tax was payable * . The decisions of the Board have been consistent with respect to this proposition. By reason of a change in the law effected by the Revenue Act of 1921, the petitioner had a greater liability for tax for the fiscal year ended February 28, 1921, than it had under the provisions of the Revenue Act of 1918. Upon its return of gross income and deductions therefrom it had a greater liability under the later act than it had under the former. It was therefore required to file a return under the provisions of the later act. This it failed to do. All of the cases relied upon by the petitioner in support of the operation of the statute of limitations and cited above involve cases where the Revenue Act of 1921 did not impose any greater tax liability than was imposed by the Revenue Act of 1918. Thus, in 1930 BTA LEXIS 2592">2598 9 B.T.A. 749">Fred T. Ley & Co., supra, we stated in the syllabus: * * * Petitioner was not liable for an additional tax for such taxable year [fiscal year ended February 28, 1921] after the enactment of the Revenue Act of 1921 by reason of any change in the law. * * * We therefore held that it was not required by the regulations of the Commissioner to file a return under the provisions of the Revenue Act of 1921. The same conditions obtained in all of the other cases cited by the petitioner. Since admittedly the petitioner had a greater tax liability under the Revenue Act of 1921 for the fiscal year ended February 28, 1921, than it had under the Revenue Act of 1918 for the same fiscal year, and since it filed no return as required by the Revenue Act of 1921 and the regulations of the Commissioner thereunder, we are of the opinion that the statute of limitations has not operated to bar the assessment and collection of the deficiency determined by the respondent in the amount of $13,848.22. Reviewed by the Board. Judgment will be entered for the respondent.TRUSSELL 18 B.T.A. 742">745 TRUSSELL, dissenting: I am unable to agree with the conclusion reached1930 BTA LEXIS 2592">2599 in the foregoing opinion that the term of the limitation has never begun to run, as petitioner was required under the rule and regulations in effect for enforcement of the provisions of the Revenue Act of 1921 to file a new return after the passage of that Act; that the return filed is not a return under the Revenue Act of 1921; and that petitioner is in the same position as if it had filed no return for the fiscal year in question. There is no evidence that the return filed on May 16, 1921, was made falsely and with intent to defraud or evade taxation. The sole question is whether a new return was required to be filed for this same period after the passage of the Act of 1921 on November 23, 1921, and which was made retroactive and applicable to all fiscal years ending in 1921, and there is no question that the deficiency letter was mailed on September 16, 1926, or five years, four months and one day after the filing of this return, that no assessment of the deficiency has been made and no waiver has been executed by petitioner. If the term of the limitation upon assessment and collection dates from the filing of this return, the four-year period provided by section 277(a)(2) 1930 BTA LEXIS 2592">2600 of the Revenue Act of 1926 has run. The Revenue Act of 1921 carries no provision directing the filing of a new return for fiscal years ending in 1921, and in respect of which returns had already been filed in that year under the prior Revenue Act, and I can see no reason for a taxpayer in such case to file a new return under the 1921 Act unless the provisions of that act created a liability for additional taxes by changing the basis for the computation of gross income or the basis for deductions in arriving at net income, and thus necessitating the furnishing of additional information to respondent without which a correct computation of tax liability could not be made under the new act. Respondent, in enforcing the provisions of the new act, by Treasury Decision 3310, provided: If any taxpayer has before November 23, 1921, filed a return for a fiscal year ending in 1921, and paid or become liable for a tax computed under the Revenue Act of 1918, and is subject to additional tax for the same period under the Revenue Act of 1921, the return covering such additional tax shall be filed at the same time as the returns of persons making returns for the fiscal year ending February 28, 1922, are1930 BTA LEXIS 2592">2601 due under the law and regulations, and payment of such additional tax is due in the same installments and at the same time as in the case of payments based on returns for the fiscal year ending February 28, 1922. If no part of the tax for the taxpayer's fiscal year was due until after November 22, 1921, the whole amount of tax due, including the tax due under the original return and the additional tax due under the new return, will be payable in the same installments and at the same times as in the case of payments based on returns for the fiscal year ending February 28, 1922. Attention is directed to the provisions of sections 214(a)(9) and 234(a)(8) of the Revenue Act of 1921. 18 B.T.A. 742">746 The wording of the foregoing Treasury Decision conveys to my mind but one meaning, this being that returns, such as the one here in question, filed for 1921 fiscal years under the Revenue Act of 1918 will, for purposes of the Revenue Act of 1921, be considered by respondent as proper returns for the period in question to the extent of the income reported and tax computed thereunder, and assessment and collection of the tax liabilities incurred and so reported will be made, and that an additional1930 BTA LEXIS 2592">2602 or amended return will be required only from those upon whom the Revenue Act of 1921 places an additional tax liability, this amended return to be made only in respect to such additional tax, which will thereupon be covered by an additional assessment and collected at the time or times at which tax payments will be due for the succeeding fiscal year. In this connection it is noted that the return here in question was filed on May 16, 1921, and that on November 22, 1921, when the Revenue Act of 1921 was approved, this petitioner had not only filed a return complying fully with the requirements of that act, but presumably assessment had been made of the tax computed thereunder and three of the four installments of such tax had been collected, and yet respondent now contends that the return filed is a nullity in so far as the Revenue Act of 1921 is concerned and that this taxpayer must be considered as having filed no return for the period in question, and the foregoing opinion reaches the same conclusion. When we examine the deficiency determined in this case it is noted that no part of it consists of taxes due under the 1921 Act and not due under the Act of 1918, with the exception1930 BTA LEXIS 2592">2603 of $33.33 which arises merely from the fact that the 1918 Act allows a specific exemption of $2,000 to all corporations which is not allowable to this particular taxpayer under the Act of 1921, its reported net income being in excess of $25,000, and two months of the fiscal year here in question falling in 1921, the exemption is accordingly only $1,666.66 instead of the full amount deducted by this petitioner. The adjustment of this item is a formal one calling for a simple computation upon the facts appearing on the face of the return filed, and I do not think that the provisions of the Act require or the provisions of the regulations announced by respondent could be reasonably construed by a taxpayer, under these circumstances, as requiring him to file a new return merely to make a formal adjustment in computation in respect to the tax shown as due on the original return where the amount of such adjustment is one subject to immediate determination on the facts and figures furnished thereby. The new return, if filed, would have been the same with merely a slight change in the computation of the tax. Can it be said that this petitioner was by the Revenue Act of 1921 required to1930 BTA LEXIS 2592">2604 file a 18 B.T.A. 742">747 new return, or could be required by an administrative regulation to file a new return, merely to recompute the tax due by that Act upon a net income which was the same under the provisions of that or the preceding act? The return filed set out all the items required by section 239 of the 1921 Act as essential to a corporate return and section 250(b) places upon the respondent, not the taxpayer, the duty of recomputing the tax in case it is incorrectly computed, by providing: As soon as practicable after the return is filed, the Commissioner shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown on the return, the installments shall be recomputed. * * The conclusion reached in the foregoing opinion, that the statute of limitations has not yet begun to run, as petitioner must be considered as never having filed a return in view of the administrative rule laid down, is, to my view, not sound. Respondent contends that his action was taken under authority granted by section 1303 of the Act authorizing him to make all needful rules or regulations for enforcement of its provisions, but this contention is in disregard1930 BTA LEXIS 2592">2605 of the well settled rule that implied authority of an executive department to extend or modify an act of Congress may not be inferred from an express authority to enforce it. United States v. 11,150 Pounds of Butter,195 F. 657. The only provision of the act in question for extension of the period provided thereby for assessment and collection of the tax is by section 250(d), the same section creating the limitation, by a "consent in writing," signed by respondent and the taxpayer, to a later determination, assessment and collection, and it is not contended that such a consent has been executed. Can it be thought that respondent can avoid the provisions of section 250(d) referred to by disregard of a return regularly filed and which complies fully with the requirements of the Act and by regulation require it to be again filed and, on failure of the taxpayer to comply with such regulation, class him as one who has failed to file a return and consequently is excepted by that section from the operation of the limitation upon assessment and collection? The Revenue Act of 1921 by its terms was made retroactive to January 1, 1921. 1930 BTA LEXIS 2592">2606 It required returns for fiscal years ending in 1921 to be made within a certain time after the close of such years and this return was made at such time; it required the returns to state items of gross income and deductions allowed by its provisions and report the net income so arrived at, and this return must be admitted to have complied fully with this requirement; it provided a specific limitation of time for assessment and colletion 18 B.T.A. 742">748 of the tax, to date from the filing of the return. Can it be said that respondent could, by an administrative regulation, wipe out the effect of the return so filed, require it to be again filed at a later date, and thus extend the time specifically provided by the Act for assessment and collection of the tax? That there is no limitation of time in enforcement by the Government of obligations due it unless specifically created by act of Congress is too well settled to require argument. United States v. Insley,130 U.S. 263">130 U.S. 263; United States v. Beebe,127 U.S. 338">127 U.S. 338; 1930 BTA LEXIS 2592">2607 United States v. Nashville, etc. R. Co.,118 U.S. 120">118 U.S. 120; Simmons v. Ogle,105 U.S. 271">105 U.S. 271. Whether or not the Congress could delegate to respondent the power to fix the date on which the limitation provided will begin to run need not be considered, for the Act itself fixes that date as the one on which the return is filed and there is nothing in the Act which can in any way be construed as granting respondent the right to directly or indirectly change that date to a later one and thus deny to this taxpayer the privilege specifically granted him by the Act. The foregoing opinion holds that the return filed had no effect - that petitioner has in law filed no return, and yet the deficiency determined shows that the return in question has been received, accepted, and audited by respondent and is the basis for the deficiency determined. The question here is not the same as that decided in the cases of Updike v. United States, 8 Fed.(2d) 913, and United States v. Updike, 32 Fed.(2d) 1. In each of those cases the taxpayer, prior to the passage of the Revenue Act of October 3, 1917, filed a return for the fiscal1930 BTA LEXIS 2592">2608 year ending June 30, 1917, and, when called upon, refused to file a new return for that period under that act, which was retroactive. In those cases the court found that the information necessary to determine the taxpayer's liability for taxes under the Act of October 3, 1917, was not furnished by the returns filed under the former act and held that under such conditions those returns did not comply with the requirements of the later act and could not be considered as returns under that act starting the running of the limitation upon assessment. In the present case that condition (sufficient information in the return to determine the tax liability under the new act), the absence of which the court in those cases held precluded the consideration of the return as a basis for the starting of the limitation, is clearly shown to exist and the reasoning of those opinions is, I think, on the facts herein proven, contrary to the conclusion reached in the majority opinion. By Title II of the Revenue Act of 1921 it is provided: SEC. 227. (a) That returns (except in the case of nonresident aliens) shall be made on or before the fifteenth day of the third month following the close 18 B.T.A. 742">749 1930 BTA LEXIS 2592">2609 of the fiscal year, or, if the return is made on the basis of the calendar year, then the return shall be made on or before the 15th day of March. * * SEC. 241. (a) That returns of corporations shall be made at same time as is provided in subdivision (a) of section 227. * * * SEC. 263. That this title shall take effect as of January 1, 1921. By these enactments Congress provided as of January 1, 1921, that returns of income for fiscal years ending in 1921 should be made within three months and 15 days following the close of such fiscal years. The return here in question was filed by petitioner subsequent to the effective date of that act and complied fully with these requirements. It is not contended that it would have been an insufficient return if filed subsequent to the passage of that act or subsequent to the date of Treasury Decision 3310 heretofore quoted. Even though it be held that the return in this case filed on May 16, 1921, could not be considered as having been filed under the Revenue Act of 1921, because such act was passed subsequent to that date, it does appear that such return was on file when that act became law, and respondent from that time forward1930 BTA LEXIS 2592">2610 had in his hands a return made under oath by this taxpayer, covering the period in question, filed at the time required by that act to be filed, and furnishing the information required by that act. The regulation of the Commissioner requiring new returns to be filed, if applicable to this taxpayer, called for a new return to be filed under the 1921 Act by May 15, 1922, and it is not questioned that the refiling of this same return would have been a full compliance with that regulation. It is true that the return filed on May 16, 1921, was not again filed with the respondent by May 15, 1922, but it does appear that upon that date no action was taken by this taxpayer to file a new return, and it appears to me that these existing conditions were sufficient to put respondent upon notice that the return on file was being then relied upon and offered by the taxpayer as the return required of him under existing law. This, coupled with the fact that the return complied with the requirements of the law and was accepted, examined, and the deficiency here in question determined thereon by the Commissioner, is, I think, sufficient to establish the fact that the petitioner had in any event, 1930 BTA LEXIS 2592">2611 as of that date, submitted the necessary return. If the term of the limitation upon assessment and collection was in effect or began to run upon that date, May 15, 1922, the four-year period for assessment and collection provided by the Act of 1921 would have elapsed prior to the determining of the deficiency here in question on September 17, 1926. I can not agree with the majority opinion that this taxpayer has never filed a return which can be considered as such under the Revenue Act of 1921, when the record shows it as submitting a 18 B.T.A. 742">750 return complying with that act and this return considered by respondent and the deficiency here appealed determined thereon. It does not appear that petitioner was ever called upon by respondent to file another return nor was action taken under section 3176 of the act in question to file a return for it as called for in the case of a taxpayer who has failed to make a return. On the other hand, we find the petitioner notified by respondent of a deficiency determined "from an audit of your income and profits tax return for the fiscal year ended February 28, 1921." Petitioner's legal obligation is one imposed by the Act and his compliance1930 BTA LEXIS 2592">2612 with its requirements entitles him to the benefits and protection of its provisions, and I think that he is entitled to have assessment and collection made within the period provided thereby and as changed by subsequent amendment, and that such period could not be extended, and his right under the Act abridged by an administrative requirement that he again comply with its provisions. That the conclusion reached by the foregoing opinion is unreasonable is, I think best illustrated by an application of it to two corporations filing returns on the same date, for 1921 fiscal years, under conditions similar to those here involved, and reporting net incomes of $25,000 and $25,001, respectively, the only difference being that one has returned one dollar on net income in excess of the other. On appeal from deficiencies determined against each after expiration of the statutory period for assessment and collection, an application of the rule laid down by the majority opinion would necessarily hold that the first corporation had filed a return under the 1921 Act but the second had filed no return; that as to the first corporation collection could not be made of the deficiency determined, 1930 BTA LEXIS 2592">*2613 but as to the second the statute of limitations did not bar assessment and collection. Such a conclusion is reached by a refinement of reasoning with which I can not agree. BLACK and SEAWELL agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620144/	Edward E. Bishop, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lillian H. Bishop, Petitioner, v. Commissioner of Internal Revenue, RespondentBishop v. CommissionerDocket Nos. 692, 3124, 693, 3123United States Tax Court4 T.C. 862; 1945 U.S. Tax Ct. LEXIS 214; February 28, 1945, Promulgated 1945 U.S. Tax Ct. LEXIS 214">214 Decisions will be entered under Rule 50. Petitioners, husband and wife, simultaneously created trusts of approximately equal value for each other for life with remainder over; each life beneficiary was given a general testamentary power of appointment of the corpus in lieu of the remainders; income was distributable at the discretion of the corporation trustee, whom the life beneficiary was given the power to change at will from time to time to any other corporate trustee; and prior to and outside the indentures, the trustee agreed with petitioners to pay the income at the request of the life beneficiary. Held, the income of each trust is taxable to the petitioner-life beneficiary under section 22 (a) of the Revenue Act of 1938 and the Internal Revenue Code. Edmond L. Jones, Esq., and James C. Rogers, Esq., for the petitioners.P. A. Bayer, Esq., for the respondent. Hill, Judge. HILL 4 T.C. 862">863 These proceedings involve proposed deficiencies in income tax as follows:NameDocket No.YearDeficiencyEdward E. Bishop6921938$ 4,119.5519393,773.0719406,626.50Do312419419,088.05Lillian H. Bishop69319384,004.5119393,986.2619406,579.03Do312319418,654.191945 U.S. Tax Ct. LEXIS 214">216 The principal issue is whether certain undistributed income received by trusts created by each of the petitioners naming the other petitioner as life beneficiary is taxable to petitioners. If our decision is based upon the proposition that the transfers in trust were not gifts, the question is raised as to whether the Tax Court has jurisdiction over the gift taxes paid by these petitioners for the year 1935. A further issue is whether certain amounts expended for statistical services are deductible from the income of petitioner Edward E. Bishop for the years 1938, 1939, and 1940.FINDINGS OF FACT.The petitioners, Edward E. Bishop and Lillian H. Bishop, are husband and wife, residents of Bradenton, Florida. For the years here involved they filed their income tax returns with the collector of internal revenue for the district of Florida. They have no children or other lineal descendants.By an irrevocable indenture of trust entered into on December 28, 1935, petitioner Edward E. Bishop transferred to the First National Bank of Tampa, Florida, as trustee, certain securities. Under this trust the entire net income was payable to petitioner Lillian H. Bishop for life in the uncontrolled1945 U.S. Tax Ct. LEXIS 214">217 discretion of the trustee. The instrument provided: "The said Trustee is expressly given complete and full discretion to determine what part, if any, of the net income of this trust it will pay over" to the beneficiary "and when it, in its uncontrolled discretion, will pay such portions" of the net income to the beneficiary. On the death of Lillian H. Bishop, the net income in certain proportions is payable in the uncontrolled discretion of the trustee to Elizabeth B. Crawford, her son, James W. Crawford, Jr., and upon the latter's death to his widow and issue, should any survive him, during the minority of the issue, with remainder to such issue in fee simple. Income not distributed to the beneficiaries was to be invested and become part of the corpus. In lieu of all these provisions 4 T.C. 862">864 for remainder after the death of Lillian H. Bishop, she was given a general testamentary power of appointment as follows:(d) Should the said Lillian H. Bishop elect so to do, she may, in her last will and testament, direct the final disposition of the corpus of this trust and undistributed net income in the hands of the Trustee from and after the date of her death, in which event the direction1945 U.S. Tax Ct. LEXIS 214">218 of the said Lillian H. Bishop in her said last will and testament shall take the place of all of the above provisions for the disposition of the corpus and income of this trust, provided for after the death of the said Lillian H. Bishop.In the event of the failure of petitioner Lillian H. Bishop to exercise the power of appointment and in the further event of the death of all the life beneficiaries without surviving issue of James W. Crawford, Jr., the grantor could call upon the trustee to pay over to him the corpus of the trust and any undistributed income free of trust. If, under such circumstances, the grantor made no demand of the payment to him of the corpus and undistributed income, the entire net income was to be used in the support of a local hospital. The instrument further provided:C. In the event that due to illness or other extraordinary circumstances the current beneficiary shall have need of more funds than are provided by the current income from this trust, then upon a proper showing of such necessity the said Trustee, in its discretion, may make available to the current beneficiary from the corpus of this trust such funds as may have been shown so to be necessary; 1945 U.S. Tax Ct. LEXIS 214">219 provided, however, that not more than 5% of the corpus of this trust shall be so distributable to said current beneficiary in any one year. The Trustee shall be at liberty to make available to such beneficiary any income that it may not have distributed to a current beneficiary should such emergency arise, whether or not such income has been invested, without taking such income as part of that portion of the corpus of this trust distributable only in any one year.The life beneficiary was given the right to change the trustee to any other corporate trustee and to make as many such changes of trustee as she might desire. Any changes in investments were to be made by the trustee only upon the approval of the life beneficiary.At the same time on December 28, 1935, petitioner Lillian H. Bishop also established a trust with the First National Bank of Tampa, Florida, as trustee. The two trust agreements were identical with the exception that the name of Edward E. Bishop appeared as the first life beneficiary in the instrument created by his wife and he was therein given the general testamentary power of appointment. There was an agreement between the petitioners and the trustee, made1945 U.S. Tax Ct. LEXIS 214">220 outside the trust instruments and before their execution, that the trustee would pay the net income of each trust to the life beneficiary on the request of the latter.The securities transferred to the trustee by Edward E. Bishop had at the time of the transfer a fair market value of $ 257,852.38. They consisted of: 4 T.C. 862">865 SharesCheeseborough Manufacturing Co114E. I. du Pont de Nemours & Co200Ohio Oil Co preferred495Standard Oil Export Corporation pfd378Standard Oil Co. of New Jersey2,500The securities transferred to the trustee by petitioner Lillian H. Bishop had at the time of the transfer a fair market value of $ 254,073.25, and consisted of the following:SharesStandard Oil Export Corporation pfd396Ohio Oil Co. preferred498Standard Oil Co. of New Jersey3,000Youngstown Sheet & Tube Co. pfd100Petitioners each filed in the year 1936 separate gift tax returns for the calendar year 1935 reporting the transfer of these shares and paid gift taxes thereon. No distributions either of income or principal have been made by the trustee under either trust agreement. The trustee filed separate fiduciary income tax returns for each trust1945 U.S. Tax Ct. LEXIS 214">221 for the years 1936 to 1941, inclusive, showing the income of each trust as being taxable to the trust and has paid income taxes accordingly, none of which has been refunded except a refund of $ 11 on the 1940 return of the Edward E. Bishop trust which resulted from a minor adjustment in the income of the trust for the year.The petitioners were married on June 6, 1914. They were a devoted couple. In their 30 years of married life there has been scarcely a day a year when they have not been together. Both at the time of their marriage and at the time of the creation of the trusts each was independently wealthy. The amounts transferred to the trusts constituted only a small part of their respective estates.Shortly after their marriage petitioners met James W. Crawford and his wife, with whom they became very friendly. In 1924 a son was born to the Crawfords. Having no children of their own, the petitioners have treated the Crawfords' son, James W. Crawford, Jr., as their own child. Petitioners' motives in setting up the trusts, in addition to any tax motives, were twofold. They wished to provide for the Crawfords' son, but they also wanted to protect each other should the remote1945 U.S. Tax Ct. LEXIS 214">222 possibility of their being in need of money arise. The trusts were a sort of insurance for each other against their making bad investments with the bulk of their wealth.Prior to creating these trusts petitioners discussed such action with each other and with their attorney and a representative of the trust company. Both trusts were executed at the same time and place.During the years 1938, 1939, and 1940 Edward E. Bishop expended $ 229, $ 229, and $ 297, respectively, for statistical services consisting 4 T.C. 862">866 of subscriptions to business services used by him in the management and conservation of his investments. In his income tax returns for 1938, 1939, and 1940 he reported as dividends received $ 65,798.59, $ 63,336.31, and $ 75,529.40, respectively. In each of those same years he paid $ 70 in accountant's fees for the making of his income tax returns and the checking of his account books solely for the purpose of making those tax returns. During those years he had no tax-exempt income.OPINION.The respondent contends that the undistributed income of these trusts was taxable to the petitioner-life beneficiaries under section 22 (a) of the Revenue Act of 1938 and the Internal1945 U.S. Tax Ct. LEXIS 214">223 Revenue Code, and also under sections 166 and 167, as reciprocal trusts.Each of the petitioners, independently wealthy so that the approximately $ 250,000 in securities conveyed in trust by each was but a small part of his or her estate, was made the first life beneficiary of the trust created by the other. Each petitioner was likewise given a general testamentary power of appointment over the corpus. The corporate trustee was given "complete and full discretion to determine what part, if any, of the net income" it would pay to the life beneficiary and "when it, in its uncontrolled discretion, will pay such portions" of the net income to the beneficiary. No criteria whatsoever were set forth in the trust instruments on which the trustee was to act. Lillian H. Bishop testified that the reason her spouse was given a life estate was because she did not want Crawford to get control of the funds should Mrs. Crawford predecease him. She testified that there was an understanding with the trustee that when Bishop requested the net income to be paid to him the trustee would so pay it, for the use of the Crawfords. Edward E. Bishop, on the other hand, was more frank, we think, in testifying1945 U.S. Tax Ct. LEXIS 214">224 at one point that one of his motives in creating the trust "was to, by the remotest stretch of the imagination that Mrs. Bishop would ever need anything, maybe that would be there." On cross-examination he testified that many of his friends had lost money through bad investments and admitted that one of his considerations in setting up the trust was that he "felt that as a very faint possibility that Mrs. Bishop signing away, or something, her own, that she would have the use of that little * * ." From this testimony we find that there was an agreement with the trustee that it would pay the net income of the trust to the life beneficiary on the request of that beneficiary and that this was not merely to be paid for the benefit of the Crawfords, but for the benefit of the life beneficiary himself. Furthermore, this view is buttressed by the fact that each life beneficiary was given the right at any time to 4 T.C. 862">867 change the trustee to any other corporate trustee. Thus, the corporate trustee was placed under the control of the life beneficiary and since there were no criteria set forth in the trust instrument as to when and what part, if any, of the trust income it should pay 1945 U.S. Tax Ct. LEXIS 214">225 to the life beneficiary there could be no breach of trust in its acceding to the wishes of the life beneficiary. Nor would the trustee have anything to go on in making its decision as to whether it should distribute or accumulate the income, other than such a request by the life beneficiary.We can view the confluence of provisions (1), that the trustee shall have complete discretion as to when and whether it shall pay the net income to the life beneficiary with no criteria or tests laid down on which it shall pass its judgment, and (2), that the life beneficiary may remove the trustee at will and appoint a new corporate trustee as often as he desires, in no other light than as being a means of bringing about the result that would be reached had the trust instrument provided that net income shall be payable by the trustee to the life beneficiary on the request of the latter. These provisions may be used to enforce what we have found to be the understanding outside of the trust instrument between the trustee and the petitioners and would serve in the place of such an understanding with a new trustee should the beneficiary ever see fit to change trustees. Since these provisions are1945 U.S. Tax Ct. LEXIS 214">226 more than they appear to be, we consider actualities only, regarding the substance rather than the form. United States v. Phellis, 257 U.S. 156">257 U.S. 156, 257 U.S. 156">168.In Richardson v. Commissioner, 121 Fed. (2d) 1, it was held that a trustee who had the power to revoke and take for himself the corpus of a long term trust created by his wife for the benefit of their children was personally taxable on the income thereof under section 22 (a), although he did not exercise his power to terminate the trust and never used any of the income for his own benefit. To like effect was Jergens v. Commissioner, 136 Fed. (2d) 497; certiorari denied, 320 U.S. 784">320 U.S. 784, where the taxpayer was not the grantor but the trustee and had the power to alter or amend the trust instrument and to withdraw the trust corpus. The court there said:In Section 22 (a) of the respective Revenue Acts here applicable, Congress intended to use the full measure of its taxing power. * * * It is the long-settled course of tax jurisprudence that such control over income warrants the imposition of the tax incidence1945 U.S. Tax Ct. LEXIS 214">227 of that income upon the person who commends its disposition whether he takes it for himself or not. 2 This principle is not to be limited in trust cases to situations where the grantor has retained controlling powers; the determinative consideration is the existence of actual dominion over the property whether it is retained or acquired. * 4 T.C. 862">868 In Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed. (2d) 1, the taxpayer was cotrustee with a trust company of a trust created by his father. The remainder of the net income after1945 U.S. Tax Ct. LEXIS 214">228 payment of $ 10,000 per year to taxpayer's wife was payable to taxpayer upon his request. All net income not so paid was to accumulate and become part of the principal. Taxpayer was given a general testamentary power of appointment over the remainder, which was to go to his wife, children, or other descendants should he fail to exercise the power. Subject to the approval of both trustees upon the request of taxpayer, the trustees might pay taxpayer during his lifetime such portion of the principal as might seem wise to the trustees to distribute to taxpayer for his benefit or that of his family. Taxpayer was given power to appoint a successor trustee. The trustees had power to terminate the trust during the lifetime of the taxpayer for any reason which would be to the interest of the estate or the beneficiaries and thereupon to transfer the assets to taxpayer. The trustees had broad powers of management. Taxpayer never exercised his right to take trust income. In holding that the income was taxable to the taxpayer, we said: * * The fact that the powers and rights are not the retained powers and rights of a grantor but were received by petitioner as beneficiary of the trust1945 U.S. Tax Ct. LEXIS 214">229 and by grant from his father makes them no less substantial. As in the Clifford case [309 U.S. 331">309 U.S. 331] the rights and powers of the petitioner in and to the trust corpus and the income therefrom did not include all of the incidents of ownership, but we think it may definitely be said that the benefits held by and belonging to petitioner, directly or indirectly, were such as to require the conclusion that he was the owner of the income here in question, within the meaning of section 22 (a) supra. * In affirming the opinion of the Tax Court, the Circuit Court of Appeals for the Eighth Circuit said:We agree with the majority of the Tax Court that implications which fairly may be drawn from the opinions of the Supreme Court in Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 281 U.S. 376">378, Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, and other cases relative to the taxability of trust income to one having command over it, justify, if they do not compel, the conclusion that the undistributed net income of the trust in suit, during the years in question, was taxable to petitioner under § 22 (a). This, because the1945 U.S. Tax Ct. LEXIS 214">230 power of petitioner to receive this trust income each year, upon request, can be regarded as the equivalent of ownership of the income for purposes of taxation. In Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 312 U.S. 579">580, the Supreme Court approved "the principle that the power to dispose of income is the equivalent of ownership of it and that the exercise of the power to procure its payment to another, whether to pay a debt or to make a gift, is within the reach of the statute taxing income 'derived from any source whatever'." It seems to us, as it did to the majority of the Tax Court, that it is the possession of power over the disposition of trust income which is of significance in determining whether, under § 22 (a), the income is taxable to the possessor of such power, and that logically it makes no difference whether the possessor is a grantor who retained the power or a beneficiary who acquired it from another. See Jergens v. Commissioner, supra, (p. 498 of 136 Fed. (2d)). Since the trust income in suit was 4 T.C. 862">869 available to petitioner upon request in each of the years involved, he had in each of those years the 1945 U.S. Tax Ct. LEXIS 214">231 "realizable" economic gain necessary to make the income taxable to him. See Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, 317 U.S. 154">168-169; 309 U.S. 331">Helvering v. Clifford, supra, (pages 336-337 of 309 U.S.); Helvering v. Gordon, 8 Cir., 87 Fed. (2d) 663, 667.The Circuit Court evidently did not rely on the taxpayer's right to revoke the trust, but rather observed that the grantor intended the taxpayer's wife and descendants to have a real interest in the income and corpus of the trust estate. The court said:* * * It is a fair assumption that the grantor contemplated that petitioner would not, during his lifetime seek to withdraw either income or principal from the trust estate unless he needed it or unless he believed that it could be used advantageously by him for the benefit of the family.In the establishment of these trusts petitioners have received from each other all the incidents of ownership that were of importance to them. Under the trust created by Edward E. Bishop, petitioner Lillian H. Bishop has the right to the net income for life should she choose to request it. She may change the trustee1945 U.S. Tax Ct. LEXIS 214">232 to any corporate trustee at will and make as many successive changes as she desires. She must be consulted on any changes in investments and, in view of her power to change the trustee, this becomes more than a mere consultative right. If in the event of "illness or other extraordinary circumstances" she should have need of more funds than are provided by the current income then the trustee may, in its discretion, pay to her up to 5 percent a year of the corpus of the trust and any part of the income not already distributed. She also has a general testamentary power of appointment over the corpus of the trust.Under the trust created by Lillian H. Bishop, petitioner Edward E. Bishop has the same powers and rights. We have here a situation where a devoted husband and wife, each independently wealthy, have reallocated their income between themselves in such a way as (1) to retain all the incidents of ownership that were of importance to them and, (2) at the same time if successful, to remove the income on $ 500,000 of their fortunes from the high tax brackets into which it would otherwise fall. All the provisions in remainder for the Crawfords are subject to revocation by each 1945 U.S. Tax Ct. LEXIS 214">233 of the petitioner-life beneficiaries and each can convey by will approximately the same amount and type of securities that he could have so conveyed before executing his trust.Each petitioner-life beneficiary has the power to have the income distributed or accumulated. During the years here involved the income was being accumulated subject to the demand of the life beneficiaries, and if not demanded during their lifetime they have the power by will to dispose of both the income and corpus. All that each petitioner lacks as to complete ownership of the fund created for him 4 T.C. 862">870 is the power to dispose of the principal during his life. But since the principal is but such a small part of the wealth of each of the petitioners and since they felt that they would only want the principal during life in an extraordinary circumstance, the giving up of that incident of ownership may not be said to preclude them from being the owners of the income under section 22 (a).We have found it unnecessary to consider the second argument of the respondent that each of these trusts was created by the petitioner-life beneficiary thereof under the doctrine of reciprocal trusts and that the income1945 U.S. Tax Ct. LEXIS 214">234 thereof was taxable to him under sections 166 and 167, supra.Since our opinion does not rest upon the proposition that the transfers in trust were not gifts, the question as to whether we have jurisdiction over the gift taxes paid for the year 1935 is not before us, but in any event that question has been answered in the negative. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418; Robert G. Elbert, 2 T.C. 892.The sums of $ 229, $ 229, and $ 297 expended by petitioner Edward E. Bishop during the years 1938, 1939, and 1940, respectively, for statistical services used by him in the management and conservation of his investments are deductible as nonbusiness expenses under section 23 (a) (2) of the Internal Revenue Code. 1 Petitioner conceded that the $ 70 spent in each of those years for accountant's fees in the making of his income tax returns is not deductible.1945 U.S. Tax Ct. LEXIS 214">235 Decisions will be entered under Rule 50. Footnotes2. Reinecke v. Northern Trust Co., 278 U.S. 339">278 U.S. 339; Corliss v. Bowers, 281 U.S. 376">281 U.S. 376; Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Clifford, 309 U.S. 331">309 U.S. 331; Helvering v. Horst, 311 U.S. 112">311 U.S. 112; Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579↩.1. Section 23 (a) (2) was added by section 121 of the Revenue Act of 1942 and was made retroactive by section 121 (d) and (e) of that act. It reads as follows:"SEC. 23. DEDUCTIONS FROM GROSS INCOME."In computing net income there shall be allowed as deductions: * * "(a) Expenses. -- * * *"(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 of property held for the production of income."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620146/	Marion A. Blake, Petitioner, v. Commissioner of Internal Revenue, Respondent. Virginia Blake, Petitioner, v. Commissioner of Internal Revenue, RespondentBlake v. CommissionerDocket Nos. 7214, 7215United States Tax Court8 T.C. 546; 1947 U.S. Tax Ct. LEXIS 257; March 19, 1947, Promulgated 1947 U.S. Tax Ct. LEXIS 257">257 Decisions will be entered under Rule 50. 1. Under the facts, held that petitioners continuously retained ownership of certain real estate from 1925 onward. Various transactions subsequent to 1925 constituted purchase money mortgage arrangements and not a loss of the property.2. Petitioners borrowed $ 125,000, secured by a first mortgage. The borrowed amount was all spent constructing buildings on the premises. Petitioners further spent $ 9,213.47 in painting and decorating the buildings after their construction. Petitioners from time to time purchased bonds on the open market at less than their face amount, which bonds were secured by the first mortgage. Petitioners retired the first mortgage indebtedness partly by payment of cash and partly by surrendering the bonds which they had purchased for less than face value. Held, petitioners' basis for depreciating the buildings is $ 125,000 plus $ 9,213.47; held, further, that the difference between the cost of the bonds to petitioners and their face value constituted income to petitioners as and when petitioners purchased the bonds.3. Proper rate of depreciation determined. V. H. Wehmeier, Esq., for the petitioners.Wesley A. Dierberger, Esq., and Frank M. Cavanaugh, Esq., for the respondent. Hill, Judge. Opper, J., dissenting. Turner, J., agrees with this dissent. HILL 8 T.C. 546">547 Respondent determined deficiencies in petitioners' income tax liabilities and added penalties as follows:PenaltyDocket No.YearDeficiency25%72141940$ 123.23$ 30.811941478.2872151940227.7456.941941484.09By answers to amended petitions filed at the hearing respondent asserted alternative increased deficiencies as follows:Docket No.YearDeficiencyPenalty72141940$ 6,913.44$ 1,669.001941237.43721519407,347.201,776.681941240.48The addition of penalties under section 291 (a), Internal Revenue Code, is not disputed. The1947 U.S. Tax Ct. LEXIS 257">259 remaining questions are (a) whether petitioners are entitled to any depreciation allowance for the taxable years and, if so, on what basis and at what rate, and (b) did petitioners realize taxable income as a result of purchases at less than face value of bonds secured by a mortgage on the property with respect to which they were mortgagors. Petitioners filed their returns with the collector of internal revenue for the Michigan district at Detroit. The cases, which were consolidated at the hearing, were submitted on oral testimony and exhibits.8 T.C. 546">548 FINDINGS OF FACT.Petitioners are husband and wife, residing in Detroit, Michigan. On August 20, 1925, petitioners, together with Charles O. Ellis and wife, purchased from John P. Vollrath certain unimproved real property in Detroit for the purpose of developing it as a housing facility. The agreed purchase price was $ 104,390. Petitioners paid Vollrath $ 6,351 of the purchase price in cash, the remaining unpaid portion thereof being secured by a second mortgage on the premises. Ellis and wife were included in the conveyance in order to secure Ellis for his anticipated services in supervising the construction of the proposed1947 U.S. Tax Ct. LEXIS 257">260 housing project.On the same date, August 20, 1925, petitioners, together with Ellis and wife, as mortgagors executed a first mortgage on the land purchased from Vollrath and on all improvements to be placed thereon. This first mortgage was in the face amount of $ 125,000 and was in favor of the United States Trust Co., later known as Equitable Trust Co., as mortgagee and trustee. Bonds in the same face amount as the first mortgage were issued and secured by such mortgage. The $ 125,000 thus obtained by petitioners was entirely expended for the construction of buildings on the property in question.The buildings constructed on the property consisted of 73 houses, all but one of which were of frame type construction; the other was a cement brick store building. All of the buildings were completed early in 1926. Shortly after construction of these buildings was completed petitioners spent $ 9,213.47 for painting and decorating from their own personal funds. Sometime between 1930 and 1934 petitioners arranged to have gas piped into the houses at a cost of approximately $ 3,900, which amount was paid from rental income derived from the property involved.Petitioners never paid Vollrath1947 U.S. Tax Ct. LEXIS 257">261 anything more than the initial cash payment of $ 6,351 on account of the purchase price of the property. At some time in 1927 Vollrath instituted foreclosure proceedings. Petitioners discussed the situation with Vollrath in an attempt to gain more time to complete their payment of the purchase price. As a result of this discussion an agreement was reached and the foreclosure proceedings were discontinued. Pursuant to this agreement petitioners, together with Ellis and wife, reconveyed the property to Vollrath by quitclaim deed dated December 13, 1927. On the same day and pursuant to the same agreement, Vollrath granted an option to petitioners, together with Ellis and wife, to purchase the property for $ 101,153 plus interest at 7 per cent from the date of such option. The option was to expire August 1, 1930. The intention of the parties in executing the quitclaim deed and option was to allow petitioners more time to arrange for payment of the remaining purchase price, which the option price was intended to represent, and at 8 T.C. 546">549 the same time obviate any foreclosure expense and delay to Vollrath in case of final default by petitioners. Petitioners remained in possession1947 U.S. Tax Ct. LEXIS 257">262 and exercised managerial control of the property at all times material hereto.The option granted by Vollrath in 1927 was never exercised by petitioners or Ellis and wife. In 1930 and sometime prior to August of that year, petitioners compensated Ellis to the latter's satisfaction for his efforts in connection with supervising the construction of the buildings on the property in question. Ellis thereupon assigned his interest in the option to petitioners. Petitioner Virginia Blake assigned her interest in the option to petitioner Marion Blake. On August 1, 1930, the expiration date of the original option, Vollrath granted to petitioner Marion Blake a new option to purchase the property, which option extended to August 1, 1935. Vollrath, the first party, extended to petitioner Marion Blake, the second party:1. * * * an option to purchase any one or more of the following described lots,* * * whenever he desires until August 1, 1935, on the following terms and conditions:(a) If the lot on which the option is to be exercised has been sold on land contract, the second party will pay to the first party one-half (1/2) of the principal balance due as of the date hereof on such1947 U.S. Tax Ct. LEXIS 257">263 land contract over and above the principal balance due on the said trust mortgage on said lot.(b) If the lot on which the option is to be exercised is hereafter sold, the second party will pay to the first party one-half (1/2) of the selling price of said lot over and above the principal balance due on the said mortgage on said lots as of the date of such sale.(c) The payment of Five Hundred ($ 500.00) Dollars to the first party of any lot not sold to any third person.Petitioner Marion Blake never exercised this option granted by Vollrath in 1930. Sometime in 1934 petitioners and Vollrath entered into a new agreement, pursuant to which Vollrath quitclaimed to petitioners a one-half interest in the property in consideration of petitioners continuing to operate and manage the property and attempting to work off the first mortgage and otherwise liquidating the property and sharing any profits therefrom equally with Vollrath. This quitclaim deed was dated October 5, 1934. No profits were realized or shared under this agreement.Sometime in 1939 petitioners offered Vollrath cash for his, Vollrath's, remaining one-half interest in the property. Before any agreement was reached on1947 U.S. Tax Ct. LEXIS 257">264 account of such offer petitioners went to Florida on a trip. During petitioners' absence in Florida Vollrath conveyed his remaining one-half interest in the property to one Johnson in satisfaction of a debt. On petitioners' return from Florida Johnson contacted them and offered to sell them the property for $ 5,000. As a result of Johnson's offer petitioners paid him $ 5,000 cash and received from him a quitclaim deed for his one-half interest in the 8 T.C. 546">550 property, which deed was dated May 3, 1939. After May 3, 1939, petitioners held full title to the property subject to the first mortgage. In 1939 the lots constituting the property in question were worth $ 3,000 each. Of this amount $ 200 represented the value of the land and $ 2,800 represented the value of the buildings thereon.From the date of the first mortgage petitioners turned over to the first mortgagee the rental income from the property and the proceeds of any sales thereof. Petitioners retained, out of such income, approximately $ 200 a month for themselves, with the consent of the first mortgagee. Petitioners lived in one of the 73 houses on the property, rent free. The first mortgage fell into default 1947 U.S. Tax Ct. LEXIS 257">265 in 1930. On May 9, 1940, the first mortgage was reorganized by a supplemental agreement entered into between petitioners, as mortgagors, and the Equitable Trust Co., as mortgagee-trustee. This supplemental agreement referred to the original first mortgage and recognized that petitioners were the full title holders of the property involved. The supplemental agreement stated that there were then bonds, secured by the mortgage, outstanding in the face amount of $ 109,000, plus interest from February 20, 1930. The supplemental agreement canceled past due interest and reduced the rate for the future and extended the maturity of the bonds to August 20, 1948. Petitioners, at the time of executing the supplemental agreement, delivered to the mortgagee for cancellation bonds in the principal face amount of $ 10,000. In other essential respects the original first mortgage agreement remained in effect insofar as not inconsistent with the supplemental agreement.From 1930 to 1942, inclusive, petitioners purchased bonds secured by the first mortgage from brokers on the open market. Petitioners purchased such bonds for the purpose of cancellation and retirement and not for the purpose of 1947 U.S. Tax Ct. LEXIS 257">266 keeping them alive for reissue. Petitioners' bond purchases may be summarized as follows:Year purchasedFaceAmountamountpaid1930$ 5,500$ 2,000.0019319,4001,980.00193218,3003,386.00193310,7001,267.001934NoneNone19354,500900.0019366,6001,410.0019373,8001,320.001938$ 9,000$ 3,285.001939600245.0019404,0001,640.0019411,6001,575.0019425,1004,051.50Total79,10023,059.50As indicated above, at the time the supplemental agreement was entered into, petitioners, as mortgagors, were indebted in the amount of $ 109,000. At the time of executing the supplemental agreement petitioners delivered to the mortgagee for cancellation bonds in the face amount of $ 10,000. During 1941 the mortgagee-trustee purchased bonds aggregating in principal face amount $ 2,700 at a cost of 8 T.C. 546">551 $ 1,514.03. From time to time petitioners delivered to the mortgagee-trustee for cancellation bonds in the total principal face amount of $ 29,700, which amount includes the $ 10,000 face amount of bonds delivered on execution of the supplemental agreement. On May 4, 1942, petitioners delivered to the mortgagee-trustee for1947 U.S. Tax Ct. LEXIS 257">267 cancellation bonds in the principal face amount of $ 49,400. On the same date petitioners paid the mortgagee-trustee $ 27,200 in cash, in addition to interest, trustee fees, and attorney fees in the respective amounts of $ 295.88, $ 823, and $ 400, which transaction completely satisfied the first mortgage indebtedness. These payments may be summarized as follows:Debt as of May 9, 1940$ 109,000Bonds surrendered by petitioners$ 79,100Bonds purchased by first mortgagee-trustee2,700Cash paid by petitioners27,200109,000Petitioners filed no income tax returns from 1935 to 1939, inclusive. Petitioners' returns for the taxable year 1940 were not filed until February 1942. Petitioners in their returns for 1940 each reported as net income from the property in question the amount of $ 1,549.98. In arriving at this figure depreciation was taken on 67 houses on a cost basis of $ 2,000 each at the rate of 5 per cent, or a total depreciation of $ 6,700, each petitioner taking one-half thereof, or $ 3,350. Petitioners' returns for 1941 were timely filed. The returns for 1941 accorded the same treatment to depreciation as was accorded it in the 1940 returns. 1947 U.S. Tax Ct. LEXIS 257">268 In arriving at the amount of "Other Income" reported as item 11 on each of petitioners' returns for 1940, the difference between the face amount and the amounts actually paid by petitioners and the mortgagee-trustee for the mortgage bonds was recognized and treated as income. Schedule L, attached to each of petitioners' returns for 1940, contains the following statement:Income from purchase of mortgage bonds of taxpayer and spouse:Principal amount$ 3,500.00Cost1,435.00Total$ 2,065.00Income to taxpayer -- 1/2 of total$ 1,032.50Income from cancellation of mortgage bonds of taxpayer and spouse out of sinking fund on 11-13-40:Principal$ 12,000.00Interest accrued 8-20-40 to 11-13-40 at 3%83.00$ 12,083.00Amounts paid by trustee for above bonds4,800.00Total$ 7,283.00Income to taxpayer -- 1/2 of total$ 3,641.508 T.C. 546">552 Schedule I, attached to petitioners' returns for 1941, in arriving at income reported as item 9 on such returns, recognized and treated as income the difference between the face amount and the amounts actually paid by petitioners and the mortgagee-trustee for bonds. These schedules presented the matter 1947 U.S. Tax Ct. LEXIS 257">269 as follows:Income from cancellation of mortgage bonds of taxpayer and spouse out of sinking fund in July, 1941:Principal amount canceled$ 9,900.00Interest accrued 2-20-41 to 7-20-41 at 3%44.50$ 9,944.50Amount paid by trustee for above bonds5,929.67Total$ 4,014.83Income to taxpayer -- 1/2 of total$ 2,006.41Income from purchase of mortgage bonds of taxpayer and spouse:Principal$ 100.00Cost75.00Total$ 25.00Income to taxpayer -- 1/2 of total$ 12.50Net other income $ 2,019.91Respondent in his notices of deficiency increased the income reported by each petitioner by the amount of $ 3,350 for each of the years 1940 and 1941. This increase resulted from a disallowance of the depreciation claimed in these years by petitioners. In explanation respondent stated:The deduction for depreciation in the amount of $ 3,350.00 claimed in connection with certain of your rental properties has been disallowed in full since it appears that your cost basis on such property was fully recovered through deduction for depreciation allowed prior to the1947 U.S. Tax Ct. LEXIS 257">270 taxable year 1940.By answers to the amended petitions respondent asserts an alternative deficiency in the event this Court determines that the principal amount due at the time of the supplemental agreement of May 9, 1940, is a part of petitioners' cost basis. The amounts of these alternative deficiency determinations have been stated above in the introductory paragraph.The buildings, 73 in number, cost petitioners $ 134,213.47, and the land cost petitioners $ 11,351. Petitioners claimed depreciation deductions on only 67 buildings for the taxable years before us.OPINION.Respondent argues that petitioners lost the property in 1927 when they quitclaimed it to Vollrath and that they then might 8 T.C. 546">553 have taken a loss for income tax purposes. Respondent further argues that petitioners reacquired one-half interest in the property in 1934 from Vollrath without the payment of any consideration in money or its equivalent and that therefore petitioners have no cost basis with respect to such one-half interest. Respondent admits that petitioners paid $ 5,000 to Johnson in 1939 for the remaining one-half interest, but claims that the record affords no basis for allocating any portion1947 U.S. Tax Ct. LEXIS 257">271 of this amount to the buildings. Respondent denies that any basis for the property in petitioners' hands arose on account of the $ 125,000 borrowed by petitioners and spent by them in constructing the buildings. Alternatively, respondent contends that if the money borrowed does in any way give rise to such basis, such basis should not exceed the actual cost to petitioners of satisfying the face amount of the indebtedness.Petitioners, on the other hand, contend that there was no loss of the property by them in 1927 or at any other time, but that they retained ownership continuously from 1925. Petitioners in this connection take the position that the quitclaim and option transactions merely constituted a form of mortgage security as to Vollrath, under which arrangement petitioners retained ownership. From this view of the facts petitioners argue that the basis of the property for depreciation purposes is $ 125,000, being the amount borrowed by them and spent in constructing the buildings, plus the $ 9,213.47 paid by them for painting and decorating the buildings. Alternatively, petitioners contend that, if it be held that they lost and reacquired the property as contended by respondent, 1947 U.S. Tax Ct. LEXIS 257">272 then, in that event, the face amount of the mortgage at the time of reacquisition plus any other considerations actually paid at the time of such reacquisition and properly allocable to the buildings constitute their basis for depreciation purposes.Realism impels us to hold that petitioners never lost their interest in the property involved from the time of its original purchase in 1925 through the taxable years before us, notwithstanding the subsequent transactions among petitioners, Vollrath, and Johnson, or the reorganization or renewal of the first mortgage.A brief statement of the history of the transactions is considered appropriate. The original purchase price as agreed upon between petitioners and Vollrath was $ 104,390, of which only $ 6,351 was paid. The property was unimproved at the time of purchase. The purchase agreement contemplated that petitioners would improve the property as a housing facility. To enable petitioners to finance such improvement, Vollrath took a mortgage on the property for the balance of the purchase price, subject to a first mortgage given by petitioners to secure a loan of $ 125,000. With the money secured on the first mortgage petitioners1947 U.S. Tax Ct. LEXIS 257">273 completed 73 houses on the property early in 1926. 8 T.C. 546">554 Petitioners also expended an additional amount of $ 9,213.47 for painting and decorating the buildings. It is obvious, we think, that Vollrath and petitioners recognized dependence on the success of the housing development for payment of both the first and second mortgages.In 1927 petitioners were in default in their payments of the purchase price. In that year Vollrath instituted foreclosure proceedings on his purchase price mortgage because of such default. Following discussions between the parties an agreement was reached whereunder Vollrath granted petitioners more time for making the purchase payments. Under this agreement the foreclosure proceedings were discontinued, petitioners and Ellis and wife gave Vollrath a quitclaim deed to the property and took an option back to purchase the property for an amount intended to approximate the unpaid balance due on the original agreement of purchase, to wit, $ 101,153. By this option the time for the payment of the price originally agreed upon was extended to August 1, 1930. Petitioners never exercised the option, but remained in possession and control of the property1947 U.S. Tax Ct. LEXIS 257">274 during the period of the option and made payments on their first mortgage indebtedness out of income and sale proceeds from the property.It is apparent from the record and the facts found that this latter arrangement did not, and was not intended to, terminate petitioners' interest in the property acquired under the original purchase agreement, but that it was made for the purpose (1) to give petitioners more time in which to make payments of the purchase price and (2) to obviate the delay and expense of foreclosure proceedings in the event of final default by petitioners.At the expiration date of the option, August 1, 1930, Vollrath gave petitioner Marion Blake a new option to purchase the property. Ellis and wife had dropped out of the picture. By this option the terms and method of payment of the purchase price were modified as set forth in our findings of fact. The expiration date of the new option was August 1, 1935. This option was not exercised, but petitioners continued in possession and control of the property and continued to make payments on their first mortgage indebtedness from the income and proceeds from the property.In 1934 Vollrath and petitioners entered into1947 U.S. Tax Ct. LEXIS 257">275 an agreement which supplanted the last option agreement above described. Under this new agreement the original purchase price was converted from a definite figure to an equal share of the profits from the development project between Vollrath and petitioners upon the liquidation thereof and after payment of the first mortgage. Pursuant to such new agreement, Vollrath quitclaimed to petitioners a one-half interest in the property under date of October 5, 1934, and petitioners were to continue to operate, manage, and liquidate the property in an attempt 8 T.C. 546">555 to pay off the first mortgage and thereafter to pay over the Vollrath one-half of the remaining profits, if any. No profits were realized under this agreement.Under the terms of this last agreement, as well as in all the recited intermediate transactions between the parties following the original purchase agreement, a continuing interest of the petitioners in the property was recognized by Vollrath.In 1939 Vollrath conveyed to one Johnson the remaining one-half of the property involved and petitioners paid Johnson $ 5,000 for a quitclaim deed to such one-half interest. Thereafter petitioners held full title to the property1947 U.S. Tax Ct. LEXIS 257">276 subject to the first mortgage.These transactions, when considered realistically and in their entirety, amount to a purchase of the land by petitioners from Vollrath and the construction of a housing project by petitioners with money borrowed by them and secured by a first mortgage on the premises. Despite the various forms into which petitioners' relationship with Vollrath was cast, the basic character of that relationship remained constant and consisted of a purchase money mortgagor-mortgagee relationship, with petitioners as the vendees and Vollrath as the vendor of the land.In this view of the transactions, petitioners, paid $ 11,351 for the land. This amount is made up of the $ 6,351 paid to Vollrath in cash in 1925 and the $ 5,000 paid by petitioners to Johnson in 1939. None of the $ 5,000 paid Johnson is attributable to the buildings, because we consider the so-called one-half interest acquired from Johnson as in the nature of a mortgage, which mortgage, despite the fact it may have in part covered the buildings, arose from and secured petitioners' indebtedness to Vollrath for the land. Petitioners do not contend otherwise.The cost to petitioners of the buildings amounts1947 U.S. Tax Ct. LEXIS 257">277 to $ 134,213.47, consisting of the amount of $ 125,000 borrowed on the first mortgage and spent in construction, and the amount of $ 9,213.47 spent for painting and decorating the buildings shortly after their construction. On brief, petitioners do not claim that the $ 3,900 spent in piping gas to the buildings should be included in depreciable basis. The amount of $ 134,213.47 represents actual cost of the buildings to petitioners and we hold that this amount constitutes petitioners' original basis for depreciation. Respondent's attempt to exclude the $ 125,000 from basis, or at least to limit the basis on account of such sum to the actual cost to petitioners of retiring their indebtedness, therefore is based on a failure to distinguish between actual cost of constructing the buildings, on the one hand, and the retirement of an indebtedness for less than par, on the other. In this connection it is significant that petitioners' indebtedness was not owing to the building contractors. 8 T.C. 546">556 The building contractors had already been paid in full. The subsequent satisfaction of this indebtedness therefore did not reduce cost, but constituted a satisfaction of indebtedness for1947 U.S. Tax Ct. LEXIS 257">278 less than par, resulting in income to petitioners, which aspect will be discussed below.The first mortgage was renewed on May 9, 1940, by agreement entered into between petitioners, the mortgagors, and the Equitable Trust Co., as mortgagee-trustee. At the time of such renewal there were outstanding bonds secured by the mortgage in the face amount of $ 109,000, plus interest from February 20, 1930. In the renewal agreement past due interest was canceled, the interest rate reduced for the future, and the time of the maturity of the bonds extended to August 20, 1948. On May 4, 1942, the mortgage was completely paid and satisfied. The payments were made by application to the mortgage debt of $ 81,800 face amount of the mortgage bonds and the payment of $ 27,200 in cash by petitioners. The mortgage bonds had been purchased from brokers on the open market at a total cost of $ 24,573.53. We hold that the difference between the purchase price and the face amount of the bonds represented income to petitioners. United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1; Helvering v. American Chicle Co., 291 U.S. 426">291 U.S. 426; Lewis F. Jacobson, 6 T.C. 1048.1947 U.S. Tax Ct. LEXIS 257">279 We further hold that such income was realized as and when petitioners bought the bonds at less than face value and not when such bonds were surrendered to the trustee for cancellation. Central Paper Co. v. Commissioner, 158 Fed. (2d) 131; TennesseeConsolidated Coal Co. v. Commissioner, 145 Fed. (2d) 631; Montana, Wyoming & Southern R. Co. v. Commissioner, 77 Fed. (2d) 1007; Garland Coal & Mining Co. v. Helvering, 75 Fed. (2d) 663; American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., 19 Fed. Supp. 234.Petitioners, in their returns, have taken depreciation on the buildings at the rate of 5 per cent. On brief petitioners contend that the rate is too high and should be 3 per cent. Respondent insists on a 5 per cent rate. We hold that 5 per cent is the proper rate of depreciation, since, in our opinion, petitioners have not furnished an adequate basis in the record for a lesser rate. It follows that petitioners are entitled to depreciation on account of the property in question for each of the1947 U.S. Tax Ct. LEXIS 257">280 taxable years 1940 and 1941 at the rate of 5 per cent on such part of petitioners' original cost basis of $ 134,213.47 as is properly allocable to the 67 buildings in respect of which petitioners took deductions for depreciation in such taxable years. The evidence of record does not enable us to determine the basis of such allocation. The parties may stipulate such basis for the computation under Rule 50; otherwise a further hearing will be necessary for the presentation of evidence as to such basis.Decisions will be entered under Rule 50. OPPER8 T.C. 546">557 Opper, J., dissenting: The present result seems to me irreconcilable in principle with Hilpert v. Commissioner (C. C. A., 5th Cir.), 151 Fed. (2d) 929. That decision, it is true, was a reversal of the Tax Court, but if we are now following the original view expressed in 4 T.C. 473, notwithstanding the reversal, I think we are at least compelled to say so. Footnotes*. This figure apparently results from mathematical error and should be $ 2,018.91.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620147/	J. I. R. HENRY, EXECUTRIX, ESTATE OF BAYARD HENRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SAMUEL F. HOUSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SALLIE H. HENRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM W. PORTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HENRY v. COMMISSIONERDocket Nos. 11807, 11832, 11833, 12734.United States Board of Tax Appeals13 B.T.A. 279; 1928 BTA LEXIS 3279; August 28, 1928, Promulgated 1928 BTA LEXIS 3279">3279 1. A taxpayer who entered into a transaction prior to March 1, 1913, by which he acquired certain rights at a certain cost, but who offers no proof of the March 1, 1913, value of the rights or of its comparison with cost has not established the basis for a loss on the final disposition of those rights in 1920 or 1921 for a certain amount. 2. The Commissioner may in his discretion reconsider any taxpayer's liability to income and profits taxes originally decided by him at any time within the period of the statute of limitations, subject only to the provisions of sections 1309 and 1312 of the Revenue Act of 1921 and corresponding sections of subsequent revenue acts as the same may be applicable. William Clarke Mason, Esq., James Craig Peacock, Esq., and William C. Alexander, Esq., for the petitioners. J. F. Greaney, Esq., and Oscar M. McPeak, Esq., for the respondent. MURDOCK 13 B.T.A. 279">279 The Commissioner determined deficiencies as follows: NameYearAmount of deficiencyBayard Henry1921$2,891.56Samuel F. Houston1920191,830.53Sallie H. Henry1921100,870.29William W. Porter19217,268.6013 B.T.A. 279">280 1928 BTA LEXIS 3279">3280 Each petitioner alleges that the Commissioner erroneously failed to allow as a deduction a loss sustained, arising out of the failure of the Real Estate Trust Co. of Philadelphia. In the case of Samuel F. Houston the loss was alleged to have been sustained in the year 1920, and in the case of each of the other petitioners the loss was alleged to have been sustained in the year 1921. In the case of William W. Porter, an additional error was alleged as follows: The Commissioner of Internal Revenue having approved ruling of the Solicitor of Internal Revenue upon a point of law under date of August 21, 1923, wherein the deduction heretofore claimed was allowed, and having made a refund to the taxpayer of the amount of the deficiency herein, is not authorized to review and annul said ruling in the absence of fraud or mistake. J. I. R. Henry, Executrix, has been substituted as the petitioner in place of Bayard Henry, deceased. The cases were consolidated. FINDINGS OF FACT. The petitioners, Samuel F. Houston, Sallie H. Henry, and William W. Porter, are individuals, residing at Philadelphia, Pa. Bayard Henry was an individual residing at Germantown, Philadelphia, Pa. He1928 BTA LEXIS 3279">3281 died on September 17, 1926, and J. I. R. Henry is the duly constituted executrix of his estate. The Real Estate Trust Co. of Philadelphia closed its doors in the year 1906, and on August 28 of that year George H. Earle, Jr., was appointed receiver for it by the Court of Common Pleas of Philadelphia County, Pennsylvania. The financial embarrassment of the Real Estate Trust Co. was brought about by the improper conduct of its affairs by its president, Frank Hipple. Hipple loaned excessive amounts to Adolph Segal and took therefor collateral which could not be easily liquidated, but which was not without value. He also wrongfully permitted Segal to withdraw certain of this collateral for the purpose of placing it as collateral for loans from other sources. The receiver for the Real Estate Trust Co. proposed a plan of reorganization for that company which included as one of its provisions the creation of a fund of $2,500,000 from subscriptions by directors of the company to guarantee a value of $3,000,000 for the Segal collateral, designated in the plan "Segal Matters." The company was to be given the $2,500,000 outright and then was to have in addition the first $3,000,000 which1928 BTA LEXIS 3279">3282 might be realized from the "Segal Matters." The subscribers were to be reimbursed, if at all, by all of the excess over $3,000,000 which might be realized from the "Segal Matters." This plan of reorganization became effective. It 13 B.T.A. 279">281 provided in part that the subscribers to the $2,500,000 fund made such subscriptions with the understanding that if from the administration of the "Segal Matters" $3,000,000 should be realized the subscribers were to receive any excess over this amount which might be realized from the same. No restrictions or time limits were placed upon the Real Estate Trust Co. in regard to its administration and final disposition of the assets included in the "Segal Matters." The Real Estate Trust Co. resumed business on November 1, 1906, and thereafter and until December 30, 1920, the "Segal Matters" were administered exclusively by it under the direction of George H. Earle, Jr., formerly receiver and thereafter president of that company. The following table shows the names of the directors of the Real Estate Trust Co. in 1906, the amount that each subscribed and paid to the guaranty fund, and the number of shares of stock in the company held by each at1928 BTA LEXIS 3279">3283 that time: NameSubscriptionNumber of sharesJohn H. Converse$1,005,000155Samuel F. Houston1 755,000512John F. Betz153,37575William A. Patton103,000150R. Dale Benson100,625230Bayard Henry92,500375(Of this sum Bayard Henry personallycontributed $42,500, $50,000 beingfurnished to him from other sources.)Edward P. Borden77,00045W. W. Porter75,000175Frank C. Roberts75,000175S. Wier Mitchell52,500553Joseph de Forest Junkin11,0004501928 BTA LEXIS 3279">3284 Sallie H. Henry was not a director, but owned 1,071 shares of stock in the company. She made her subscription upon the understanding that no personal responsibility to her was assumed by Samuel F. Houston, but that she was to look to the so-called "Segal Matters" as the source from which to realize upon her subscription. Throughout the transactions involved herein Samuel F. Houston acted as her agent. Samuel F. Houston at the time he subscribed to the guaranty fund believed that the "Segal Matters" had considerable potential value which under Earle's administration could be converted into a sufficient amount of cash to repay the subscribers the amount of their subscription with interest and possibly some profit in addition. He explained the plan of reorganization to his sister and told her of 13 B.T.A. 279">282 his beliefs in regard to the value and possibilities of the "Segal Matters." At and before the time that the petitioners herein subscribed to the guaranty fund, George H. Earle, Jr., the receiver for the Real Estate Trust Co., had had conversations with the directors in which he expressed a belief that a sufficient amount might be realized from the "Segal Matters" to repay1928 BTA LEXIS 3279">3285 to the subscribers the amount of their subscription with interest and possibly a profit. Segal had secured a loan of $1,250,000 from Gustave E. Kissel. As collateral for this loan, Segal gave certain bonds and stock which had been deposited with the Real Estate Trust Co. as collateral security for loans made by it to Segal and which had been wrongfully withdrawn from the Real Estate Trust Co. by Segal with the permission of Hipple. Included in this collateral were certain bonds and shares of stock of the Pennsylvania Sugar Refining Co. and in connection with the loan it was agreed between Kissel and Segal that until the loan was repaid, Kissel, or some one to be named by him, should have the right to select four out of seven directors of the Pennsylvania Sugar Refining Co. and that the latter's refinery should not be operated. At the time the subscriptions to the guaranty fund were made, a suit against the American Sugar Refining Co. under the Sherman Anti-Trust Act was contemplated on behalf of the Pennsylvania Sugar Refining Co. and the value of the "Segal Matters" depended to some extent upon the successful prosecution of such a suit. Such a suit was brought in the United1928 BTA LEXIS 3279">3286 States District Court for the Southern District of New York for $10,000,000 and another in the Court of Chancery in New Jersey, on the ground that Kissel, as agent for the American Sugar Refining Co., had made a contract in restraint of trade with Segal. In January, 1910, the pending litigation was compromised upon the delivery to the Real Estate Trust Co. by the American Sugar Refining Co. of certain bonds wrongfully withdrawn from the Real Estate Trust Co., among which were bonds of the Pennsylvania Sugar Refining Co. The Real Estate Trust Co. afterwards converted the latter bonds, through a foreclosure, into 7,268 shares of stock in the reorganized company, thereafter called Pennsylvania Sugar Co. This was on or before January 22, 1912. The petitioners were thoroughly familiar with the progress of the liquidation of the "Segal Matters" under the administration of the Real Estate Trust Co. Some question arose between the parties in regard to the rights under the subscription agreement including rights to interest and on May 5, 1916, a supplemental agreement was entered into. At this time and for some time prior thereto the principal 13 B.T.A. 279">283 unliquidated asset of the original1928 BTA LEXIS 3279">3287 "Segal Matters" was the 7,268 shares of stock in the Pennsylvania Sugar Co. and under the supplemental agreement it was provided that when this stock was disposed of the contributors to the guaranty fund should receive one-fourth of the proceeds. In the latter part of 1920, the parties concerned, after full investigation, concluded that the liquidation agreement had rendered its maximum of service and that the remaining Segal assets would not have any greater value during a substantial period of time in the future than they then had. Whereupon, the subscribers either individually or by their duly constituted representatives entered into separate agreements which as a group provided for complete liquidation of the "Segal Matters" by the Real Estate Trust Co. distributing one-fourth of the 7,268 shares of Pennsylvania Sugar Co. stock to the subscribers to the fund in proportion to the amount of their subscription in full satisfaction of all agreements of the parties pertaining thereto. The subscribers never received any other return on their subscriptions. Samuel F. Houston entered into such an agreement on December 30, 1920, and on that date, in accordance with the terms of1928 BTA LEXIS 3279">3288 the agreement, received 548.734 shares of Pennsylvania Sugar Co. stock. He, personally, was entitled to 222 of these shares. The remaining shares he received as agent for his sisters and others who had subscribed through him. These latter shares were later distributed to them by him, 158.61 shares being delivered to Sallie H. Henry in the early part of 1921. Bayard Henry signed an agreement with the Real Estate Trust Co. and on January 21, 1921, received as his pro rata share 37 shares of Pennsylvania Sugar Co. stock. William W. Porter signed such an agreement and on January 23, 1921, and received as his pro rata share 54 shares of Pennsylvania Sugar Co. stock. Each share of Pennsylvania Sugar Co. stock received by the petitioners at the time received had a fair market value of $150. At the end of 1920 Samuel F. Houston wrote off his books, as a loss, $271,700, computed by deducting the value of the stock which he received from $305,000, the amount of his subscription. In reporting income for 1920 he deducted this amount as a loss. In reporting his income for the year 1921 William W. Porter deducted $66,900 as a loss, computed by deducting the value of the shares1928 BTA LEXIS 3279">3289 he received from the amount of his subscription. He later paid tax under protest on his income increased by the amount of this alleged loss. He thereafter filed a claim for refund, whereupon the Commissioner advised him that the amount of the loss claimed had been allowed and enclosed a copy of a letter signed by the Solicitor 13 B.T.A. 279">284 of Internal Revenue, dated August 21, 1923, stating that the alleged loss constituted an allowable deduction. The Commissioner refunded the difference in tax to the petitioner. Thereafter, on February 3, 1925, the Commissioner sent a deficiency notice to the petitioner, in which he stated in part as follows: In a recent decision made by the Solicitor of Internal Revenue with respect to the Real Estate Trust Company transaction, it is held that no deductible loss was incurred by the directors of such company and the former ruling in your favor is revoked. Sallie H. Henry and Bayard Henry on their 1921 returns deducted as losses the difference between the amount subscribed and the value of the shares received. In the case of each petitioner the Commissioner has disallowed the deduction for the alleged loss resulting from the subscription1928 BTA LEXIS 3279">3290 to the guaranty fund. OPINION. MURDOCK: With the exception of William W. Porter, none of the petitioners herein have pointed to any particular section of the Revenue Act as authority for the deduction claimed. They all contend, however, that the transaction was entered into for profit. William W. Porter claims the deduction under section 214(a)(5) of the Revenue Act of 1921. We will discuss the case as if each petitioner were claiming a loss under this section, or, in the case of Samuel F. Houston, the corresponding section of the Revenue Act of 1918, because we can think of no other section of these Revenue Acts which would give any more support to the petitioner's contentions. These sections provide for the deduction of "Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business * * ." We need not discuss at length the question of whether or not the petitioners entered into this transaction for profit, since for another reason we can not allow the deductions which they claim. In consideration of the money subscribed and paid to the1928 BTA LEXIS 3279">3291 so-called guaranty fund, each subscriber thereto acquired certain rights which were thenceforth his property and which cost him the amount of his subscription. On March 1, 1913, each subscriber still had these same rights. If he disposed of them in 1920 or in 1921, then under section 202(a)(1) of the Revenue Act of 1918, as interpreted by the courts and by this Board, and under the express provisions of section 202(b), the loss, if any, from the disposition of those rights, the subject matter of the entire transaction, would be the difference between what was ultimately received for the rights and their cost, or March 1, 1913, value, whichever was lower. See the Acts referred to; 13 B.T.A. 279">285 ; ; ; ; ; ; and also 1928 BTA LEXIS 3279">3292 . The subscribers to the so-called guaranty fund in accordance with their agreement paid to the Real Estate Trust Co. $2,505,000 in the year 1906. This money was thenceforth the property of the Real Estate Trust Co. and the subscribers to the fund were to look solely to the excess proceeds which the Real Estate Trust Co. might subsequently realize on certain assets which were called "Segal Matters." If and when the amount realized by the Real Estate Trust Co. from the administration of these "Segal Matters" amounted to $3,000,000, any additional amount which might thereafter be realized from the further administration or disposition of these assets was to belong to the subscribers to the fund. The subscribers could at no time withdraw their subscriptions, but if a purchaser could have been found they could at any time have sold their rights under the subscription agreement. The Real Estate Trust Co. was only required to use due diligence and reasonable judgment in the administration, disposition and final liquidation of the "Segal Matters." It began to administer these assets in 1906, and it had not completed its task at the end1928 BTA LEXIS 3279">3293 of 1920. We know nothing of the amount realized by the company from any of these assets prior to December 30, 1920. The record in this case gives no basis for a conclusion that during all of this time the value of the rights which subscribers to the fund acquired in 1906 remained constant. No effort has been made to show us what the March 1, 1913, value of the rights in question were or whether indeed these rights had any value on that date. Consequently, we can not do otherwise than approve the determination of the Commissioner. In addition, in the case of Sallie H. Henry, it clearly appears that her brother Samuel F. Houston, as her agent, received her share of the Pennsylvania Sugar Co. stock in the year 1920. The mere fact that he did not deliver the shares to her in person in the year 1920 would not delay the closing of the transaction for income-tax purposes or entitle her to deduct any resulting loss in 1921 rather than in 1920. The petitioner William W. Porter has alleged an additional error as set out in our opening statement above. He admits that the decisions of this Board have been adverse to his contention, but calls our attention to the case of 1928 BTA LEXIS 3279">3294 . A careful consideration of the latter case leads us to the conclusion that the decision therein was based upon facts substantially different from those involved in the present case and that the court in deciding the Kales case indicated that it did not intend to decide 13 B.T.A. 279">*286 such a case as is now before us. A case more nearly in point is the , and following that case we hold against the petitioner. See also , and . Judgment will be entered for the respondent.Footnotes1. Samuel F. Houston, a director, subscribed $755,000 to the fund and when the plan became effective by the required consents of creditors, stockholders, and others, and the subscribers to this fund were called upon to make payment of their subscription, Houston found that a payment by him of the full amount of his subscription would necessitate a sacrifice of his securities and investments in the then existing market at considerable loss to him, and at his proposal his sisters and his mother took participating interests in his subcription. Houston actually contributed $305,000 to the fund and his sister, Sallie H. Henry, contributed $200,000 to the fund. ↩	01-04-2023	11-21-2020

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