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https://www.courtlistener.com/api/rest/v3/opinions/4620149/	JANE B. SHIVERICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Shiverick v. CommissionerDocket No. 84442.United States Board of Tax Appeals37 B.T.A. 454; 1938 BTA LEXIS 1034; March 9, 1938, Promulgated 1938 BTA LEXIS 1034">1034 The petitioner created a trust, reserving the power to revest in herself the corpus of the trust with the consent of her husband, who was named as a cotrustee. Under the trust the husband, if the settlor predeceased him, was to receive during his lifetime such portion of the net income of the trust as he demanded in writing. In addition, the trustee was authorized to pay him from the corpus of the trust such sums as it deemed necessary or proper for his support. Held, that the trust instrument created in the husband "a substantial adverse interest" to that of the grantor and the income was not taxable to petitioner under section 166 of the Revenue Act of 1932. H. A. Mihills, C.P.A., for the petitioner. S. B. Pierson, Esq., for the respondent. MELLOTT37 B.T.A. 454">454 OPINION. MELLOTT: The commissioner added $3,612.95 to the net income reported by the petitioner for the year 1933 and determined a deficiency in her income tax for said year in the amount of $190.54. The proceeding was submitted upon a stipulation of facts. We find the facts to be as stipulated but set out herein only those necessary for an understanding of the issue to be decided. 1938 BTA LEXIS 1034">1035 The petitioner, a resident of Cleveland, Ohio, on March 19, 1930, conveyed bonds and other securities, aggregating approximately a half million dollars, to the Cleveland Trust Co. as trustee. The trust instrument provided, in general, that the trustee should collect the income and pay it over to petitioner during her life. After her death and the death of her husband, the income was to be paid to her children until they attained certain ages, when the principal was to be paid over to them. The trustee was authorized and empowered to pay the settlor such amounts from the principal of the trust estate as her husband, as cotrustee, should deem to be proper for her maintenance, support, and comfort. After her decease, in the event her husband was then living, the income was to be paid to him during his life, and, while he was the recipient of income, the trustee was authorized to pay him, from the principal of the trust, such amounts as it should deem necessary or proper for his maintenance, support, and comfort. The trust was subsequently modified to include policies of insurance on the life of the husband of the settlor and residence property owned 37 B.T.A. 454">455 by them. After1938 BTA LEXIS 1034">1036 the modifications the trust instrument, in so far as pertinent to the issue to be decided, provided as follows: For the purposes of this instrument, I hereby constitute and appoint my husband, ASA SHIVERICK, as co-Trustee to serve with THE CLEVELAND TRUST COMPANY, Trustee. Upon the death, or in case of his resignation, failure or inability to act as co-Trustee hereunder, I hereby constitute myself as such co-Trustee. Upon my death or in case of my unwillingness to serve, or in event of my resignation, failure or inability to act as such co-Trustee, my son, ASA SHIVERICK, Jr., provided he has attained the age of twenty-five (25) years, or upon his attaining said age, shall become such co-Trustee. * * Before the Trustee sells, leases, exchanges or purchases any securities or property, it shall first secure the written approval thereto of the co-Trustee as hereinabove provided. * * * * * * In addition to such payments of income the Trustee is authorized and empowered to pay me from time to time from the principal of the trust estate, such sum or sums as the acting co-Trustee (if such co-Trusteebe not myself), or if there be no acting co-Trustee, other than myself, as the trustee1938 BTA LEXIS 1034">1037 hereunder may deem necessary or proper to provide for my suitable support maintenance and comfort, in event my income hereunder and from other sources be, in the judgment of such co-Trustee, or the Trustee, as the case may be, insufficient therefor. Subject to the provisions hereinbefore made and after my decease, the Trustee shall pay my husband ASA SHIVERICK from time to time, from the net income derived from the trust estate, such sum or sums as he may demand by written instrument signed by him and delivered to the Trustee. In addition to the payments hereinabove provided to be made to my said husband, the Trustee is authorized and empowered to pay him from time to time, from the principal of the trust estate, such sum or sums as it may deem necessary or proper to provide for his suitable support, maintenance and comfort, regard being had by the Trustee, however, to his income from this and other sources. If during any calendar year my said husband does not withdraw the entire net income derived from the trust estate during such year, the Trustee shall have power and authority to pay to or expend for the benefit of each of my children hereinafter named, so much of such excess1938 BTA LEXIS 1034">1038 income as it may deem necessary or proper to provide for his or her suitable support, maintenance, education and advancement in life; provided, however, that no more than one-third (1/3) of such excess shall be paid to or expended for the benefit of any such child. If less than one-third thereof is paid to or expended for the benefit of any such child, the balance of such one-third (1/3) shall be added to the principal of the share of the trust estate hereinafter created for such child's benefit. * * * I reserve the right at any time during the lifetime of my husband, ASA SHIVERICK, to revoke the settlement hereby evidenced, either in whole or in part, as well as the right to modify in any respect the terms of this settlement, provided the consent and approval of my husband be had and obtained, any such revocation or modification to be evidenced by written instrument signed by me, bearing the written approval of my husband, and delivered to the Trustee. To whatever extent this settlement shall be so revoked, the Trustee shall thereupon transfer and deliver to me such part or all of the property comprising the trust estate as may have been withdrawn under such revocation; conditioned, 1938 BTA LEXIS 1034">1039 however, upon my repaying any advances made by the Trustee, and satisfactorily indemnifying it against any liabilities incurred by it in the execution of this trust. 37 B.T.A. 454">456 In accordance with the last paragraph set out above, the petitioner withdrew certain securities from the trust during the taxable year, with the consent of her husband, and sold them at a loss of $16,324.05. The loss was deducted by her in her return of income for said year and is not in controversy. She reported as income $17,828.46, paid over to her by the trustee, said amount being all of the income of the trust except a net profit of $3,612.95 arising from the sale by the trustee of some of the securities. The trustee reported the sum of $3,612.95 as income and paid the tax thereon, amounting to $104.52. The respondent determined that the net profit arising from the sale of securities by the trustee should be added to petitioner's income, saying in his notice of deficiency: An examination of the trust agreement discloses that it provides that you, as grantor, may at any time during the lifetime of your husband revoke the settlement evidenced by the agreement, either in whole or in part, as well1938 BTA LEXIS 1034">1040 as the right to modify in any respect the terms of settlement, provided the consent and approval of your husband is obtained. It is apparent that the changing of the revenue acts relative to revocable trusts by the inclusion of "substantial adverse interest," would eliminate your husband in the case, as the trust agreement provides that he has only a life interest in the income of the trust after your death, providing he survives you. The trust agreement also provides that under certain condition portions of the corpus may be paid to the grantor without the consent of the beneficiary but as approved by your husband as co-trustee. The words quoted in the notice of deficiency, "substantial adverse interest", appear in section 166 of the Revenue Act of 1932, 1 and this is the section which respondent relies upon in taxing the profit to the petitioner rather than to the trustee. The parties apparently agree that petitioner and the trustee correctly reported the items of income (see sections 161, 162, et sequa, Revenue Act of 1932) unless the trust is a revocable one within the meaning of section 166. This question will be determined by deciding whether petitioner's husband, during1938 BTA LEXIS 1034">1041 the taxable year, had "a substantial adverse interest in the disposition of" any part of the corpus of the trust or the income therefrom, inasmuch as it is apparent that the settlor had "the power to revest in [herself as] the grantor title" to a part of the corpus in conjunction with him. The purpose of the enactment of section 166 of the Revenue Act of 1928 and corresponding sections of earlier acts (sec. 219(g), Revenue 37 B.T.A. 454">457 Acts of 1924 and 1926) was "to prevent the evasion of tax by means of trusts." 1938 BTA LEXIS 1034">1042 ; affd., . As pointed out by the Supreme Court in , the section was enacted, "To neutralize the effect of the device [of creating trusts with power of revocation] in its application to incomes." It has been upheld by the Supreme Court in , and other cases, and similar provisions of the revenue act requiring the inclusion in gross estate of property held in a revocable trust have also been approved. Cf. , . The earlier acts provided that the income of the trust should be included in computing the net income of the settlor when he "either alone or in conjunction with any person not a beneficiary in the trust" had, at any time during the taxable year the power to revest in himself title to any part of the corpus. (Sec. 166, Revenue Act of 1928.) The substance of the amendment in 1932 was to substitute for the words "any person not a beneficiary1938 BTA LEXIS 1034">1043 of the trust" the words "any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom." The purpose, as disclosed by its legislative history, was to make the evasion of taxes through the use of trusts increasingly difficult. In other words, borrowing the language used by the Supreme Court in , "to keep pace with the fertility of invention whereby taxpayers had contrived to keep the larger benefits of ownership and be relieved of the attendant burdens." The report of the Finance Committee (No. 665, 72d Cong., 1st sess., p. 34) clearly shows such intent. 21938 BTA LEXIS 1034">1044 While the purpose of the amendment is readily discernible from its legislative history, it furnishes little assistance in determining the question before us. Whether the interest of the one in conjunction with whom revestiture may be made is, or is not, "a substantial 37 B.T.A. 454">458 adverse" one is largely a question of fact, though in determining it we should consider the legal principles applicable to the interests created by the trust instrument. Cases decided under other sections of the revenue act, though not determinative, may furnish some light. Thus, in Bessie R. Jones, B.T.A. 171, where the facts were somewhat similar to those before us, it was held, following , that under sections 166 and 167 of the Revenue Act of 1928 the profit from the sale of trust assets was not taxable to the settlor-taxpayer, the trust instrument providing that she could amend, alter or revoke the trust only with the consent of trustees who were also contingent beneficiaries. The holding was premised partially upon the theory that Congress had not intended, by the use of the term "beneficiary", to include only those having vested interests1938 BTA LEXIS 1034">1045 but that the term also included those having contingent interests. In , the foster mother of two children had created a trust for their benefit, naming her husband, the foster father, as trustee and providing that the trust could be revoked or amended only with his consent. The Board held () that the husband was not a beneficiary and that the income of the trust was taxable to the settlor under section 166 of the Revenue Act of 1928. The court reversed, holding that the husband had more than "a nominal interest in the income or principal" as such term was used in a Treasury regulation defining the term "beneficiary", its view being that the husband was "very substantially benefited" because the trust made possible the maintenance of a home for him and the children, for whose support he was responsible. In , the Board reviewed the legislative history of section 219(g) of the Revenue Act of 1924 and section 166 of the Revenue Act of 1928 and concluded that, where a husband and wife had created separate trusts, each naming1938 BTA LEXIS 1034">1046 the other as beneficiary and reserving the power to revoke with the consent of the beneficiary, the income was not taxable to the grantor. For the reasons therein pointed out, the fact that the marital relationship existed, was not deemed to be material. Cf. . It can not be gainsaid that petitioner's husband had an interest in the corpus of the trust adverse to that of the settlor, not because he was a trustee (), but because he had the right, in the event the settlor predeceased him, to have the income of the trust for the remainder of his life and such part of the corpus as the trustee should deem to be necessary for his suitable support, maintenance, and comfort. Cf. ; . While his interest was contingent upon the death of his wife occurring before his decease, he might reasonably be expected to object to any change in the assets of the estate which would be inimical to his rights under the trust instrument in the1938 BTA LEXIS 1034">1047 event he outlived her. To that extent, at least, his interest was adverse. Having concluded that the husband's interest is adverse to that of the settlor, there yet remains for decision the question whether such adverse interest is "substantial." The dictionary definition of the term is at best only suggestive rather than expressive of the exact sense in which the term is used in the section under consideration. One of the definitions given in Webster's New International Dictionary of a substantial right is, "a right materially affecting those interests which a man is entitled to have preserved and protected by law; a material right." Other definitions of substantial are "material; not seeming or imaginary; not illusive; real; true; having good substance." We can not say that the husband's rights were not substantial within the above definitions or as such term is generally understood. The property placed in trust by the settlor was very "substantial" in amount - more than a half million dollars in bonds alone, half of which were Government bonds. The interest on the bonds was more than $20,000 a year. His right to receive this amount, contingent though it was, is sufficient, 1938 BTA LEXIS 1034">*1048 we think to justify us in holding that he had a substantial adverse interest. We hold, therefore, that the respondent erred in including in petitioner's income the amount in dispute. Reviewed by the Board. Judgment will be entered for the petitioner.Footnotes1. SEC. 166. REVOCABLE TRUSTS. Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. ↩2. Under the present law the income of a trust is taxable to the grantor where, at any time during the taxable year, the grantor has power to revest in himself title to any part of the corpus of the trust, either alone or in conjunction with any person not a beneficiary of the trust. In an attempt to avoid this section, the practice has been adopted by some grantors of reserving power to revest title to the trust corpus in conjunction with a beneficiary having a very minor interest or of conferring the power to revest upon a person other than a beneficiary; in such cases the grantor has substantially the same control as if he alone had power to revoke the trust. While it is, of course, yet to be established that such device accomplishes its purpose, it is considered expedient to make it clear that in any of these cases the income shall be taxed to the grantor. The house bill made the grantor of a trust taxable upon the income of any part of the corpus of the trust, where the power to revest in the grantor title to such part of the corpus was in the grantor alone or was in the grantor in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus. Your committee has extended the scope of this provision so as to include, as well, the cases where the power to revest title to any part of the corpus is held, either alone or in conjunction with the grantor, by a person not having a substantial adverse interest in such part of the corpus or in the income therefrom. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620155/	Anthony B. Cataldo and Ada W. Cataldo v. Commissioner.Cataldo v. CommissionerDocket No. 2638-68.United States Tax CourtT.C. Memo 1971-219; 1971 Tax Ct. Memo LEXIS 109; 30 T.C.M. (CCH) 934; T.C.M. (RIA) 71219; August 31, 1971, Filed. Anthony B. Cataldo, pro se, 52 Wall St; New York, N. Y. Steven B. Nagler, for the respondent. QUEALYMemorandum Findings of Fact and Opinion QUEALY, Judge: The respondent has determined a deficiency of $2,525.82 1 in the Federal income tax return filed by petitioners for the calendar year 1966. Further, he has determined an addition to tax against petitioners in the sum of $126.29 under section 6653(a). 2 Prior to trial, the parties entered into an oral argreement which disposed of many issues concerning expenses deducted by the petitioner on his return. The issues remaining for our decision are: (1) Were funds received and held by Anthony B. Cataldo110 on behalf of his clients gross income to petitioners where such funds were commingled in an account with his personal funds? (2) Did any part of certain funds received by Anthony B. Cataldo for services rendered represent reimbursements for expenses under section 162, or did such expenses claimed by petitioners constitute gross income under section 61? (3) Did petitioners realize additional gross income due to fees received for 935 services to clients but not reported on petitioners' return? (4) Are petitioners liable for the addition to the tax provided for in section 6653 (a)? Findings of Fact Petitioners Anthony B. Cataldo and Ada W. Cataldo are cash basis taxpayers who reside in Forest Hills, New York. For the calendar year 1966, they filed their joint Federal income tax return with the district director of internal revenue, New York, New York. Ada W. Cataldo is a party to this proceeding solely by virtue of having filed111 a joint Federal income tax return; consequently, Anthony B. Cataldo will hereinafter be referred to as petitioner. For many years, including the year 1966, petitioner has been a practicing attorney in the State of New York. During the year in question, petitioner, in the course of his professional practice, received many payments pursuant to legal accounts handled on behalf of clients. Upon receipt of each such payment, he claimed a percentage thereof as a fee for legal services. This fee varied, depending upon the particular account. However, on his return, in each and every case, petitioner claimed as legal fees 25% of the total amount received. In addition to the amount set aside as a legal fee, petitioner claimed a percentage of each such payment as reimbursement for expenses incurred by him in the course of the handling of the account. The remainder of such payments was held by petitioner on behalf of the client, to be paid out at a later time. These payments often took place some months after the receipt of the funds by petitioner. In three instances, funds received in 1966 were not paid out until 1967. Petitioner maintained only one checking account. In this account, he112 deposited all monies received by him. He did not distinguish between deposits made for fees from his practice and monies received on behalf of clients to which he owed a duty to account. On his income tax return for 1966, petitioner also claimed to have incurred various items of expense. Respondent, in his deficiency notice, objected to the deductibility of many of these expenses. Prior to and during trial, the parties entered into an oral agreement relating to the disputed items. The agreement provides as follows: (1) Concerning the $4,865.96 that was disallowed by respondent from a total of $8,891.87 claimed by petitioner as deductible expenses for "professional and legal fees": (a) Petitioners will not be allowed to deduct $2,259 of the $2,519 claimed as a deduction for "Atlantic Beach Club dues and expenses;" (b) Petitioners will not be allowed to deduct $628 of the $668 claimed as a deduction for "West Side Tennis Club dues and expenses;" (c) Petitioners will not be allowed to deduct the $216 claimed as a deduction for "Statler Hilton;" (d) Petitioners will be allowed to deduct the remainder of the $4,865.96. (2) Petitioners will only be allowed to deduct one-fifth113 of their home rent, instead of the one-half home rent deduction that they claimed on their return; (3) Petitioners will only be allowed to deduct one-fifth of their home utilities, as compared with the one-half home utilities deduction that they claimed on their return; (4) Petitioners will not be allowed to deduct $2,114.11 of the $2,239.48 claimed as a deduction for "Salaries and Wages;" (5) Petitioners will not be allowed to deduct $290.80 of the $1,218.69 claimed as a deduction for "stationery, etc.;" (6) Petitioners will be allowed to deduct the entire amount of the $270.35 claimed as a deduction for "contributions;" (7) The entire amount of the $122.40 claimed by petitioners as a deduction for "taxes" will be disallowed because petitioners have already taken this deduction. Opinion Except as regards the determination of a penalty tax by respondent, all the issues presented for decision concern the manner in which petitioner conducted his business as an attorney. At various times during the year in question, petitioner received payments in regard to legal matters in which he had represented clients. Each time that he received such payment, petitioner deposited114 the funds in his checking account. A part of the funds was considered by petitioner to be payments for legal services rendered to the client. Another part of such monies was considered by petitioner to be reimbursement for expenses incurred by him in handling the legal matter for the client. The remainder of the funds was held by petitioner on behalf of the respective clients. He was obligated to pay out these latter amounts. 936 Initially, the respondent argues that the amounts received by petitioner as reimbursed expenses were income to him in 1966. In response, petitioner claims that these payments were reimbursements for advances he made on behalf of clients during a period of several years, and that he had not taken deductions for these advances in previous years. However, he offers no evidence to support this contention. In fact, he did not even keep an account on his books to reflect these receivables. In the absence of any supportive evidence, we must find that the petitioner has failed to satisfy his burden of proving that he did not deduct these expenses in prior years. Therefore, we hold that any so-called "reimbursement" constituted gross income to petitioner in115 1966. Respondent also contends that petitioner has neglected to report in his return all amounts earned by him as fees from the matters which he handled as an attorney. In effect, petitioner has conceded the correctness of this contention. On his return, petitioner reported a 25% fee for each of the matters in question. However, in his testimony and in evidence submitted on his behalf at trial, petitioner admitted that these fees varied from 25% to 33 1/3%, depending upon the particular case. Therefore, we find that $427.48, the difference between the actual fees as shown by the evidence and the 25% fees claimed by petitioner on his return, is additional gross income to petitioners in 1966. Next, respondent contends that amounts which were held by petitioner on behalf of clients and which had been received in 1966 but not paid until 1967 constitute gross income to petitioners for the year 1966. He takes the position that petitioner's commingling of these funds with his own personal account gave him the opportunity to apply such funds for his own benefit. Consequently, the respondent concludes that such funds were income to petitioner when received in 1966. Respondent allowed a116 corresponding deduction for funds paid out in 1966. However, he refused to allow such deductions for funds received in 1966, but not paid out until 1967. We do not agree with respondent. It is true that petitioner held in one account all monies he received, regardless of whether such monies were his own or were held on behalf of clients. However, while this method was highly irregular, the record shows that petitioner never considered the funds held on behalf of clients to be his own. Moreover, he did not treat them as such. He held these funds, in effect, as an escrow agent. Since he did not receive the funds as income, and since he did not treat them as income, we find no basis on which to hold them as income to petitioner in 1966. The last issue concerns the determination of a penalty tax by respondent under section 6653(a). Respondent claims that the mistakes made by petitioners on their return were due to negligence or intentional disregard of the rules and regulations. Consequently, concludes respondent, they are liable for the addition in tax provided for by section 6653(a). Section 6653(a) provides: (a) NEGLIGENCE OR INTENTIONAL DISREGARD OF RULES AND REGULATIONS WITH117 RESPECT TO INCOME OR GIFT TAXES. - If any part of any underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes) is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment. This Court has consistently ruled that if any part of the underpayment is due to negligence or intentional disregard of rules and regulations, the entire amount of the underpayment is subject to the penalty. See, e.g., , affirmed (C.A. 10, 1962); . In this case, there can be no doubt but that the failure by petitioner to report all the fees earned by him as income in his return was due to negligence or intentional disregard of the rules and regulations; thus, we find that petitioner is subject to an additional tax under section 6653(a), such additional tax to be measured by the difference between the tax liability of petitioner as determined by this opinion and the*118 amount shown on his return. See In addition to determining additions to petitioner's tax liability as a result of his treatment of funds received by him in his business as an attorney, respondent determined that several of the deductions taken by petitioners on their return should be disallowed. Prior to and during trial, the parties entered into an oral agreement 937 concerning the deductibility of these items. Despite petitioner's objections to the contrary, we consider this agreement to be binding; and we will abide by its provisions. Decision will be entered under Rule 50. Footnotes1. In view of the commissioner's own figures in his explanation of the deficiency statement, the correct amount should be $2,525.80. ↩2. 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/3687664/	I begin by discussing whether this Court has jurisdiction to hear this appeal. For the reasons that follow, I find we do not. The magistrate issued his decision on October 8, 1997. The trial court approved and adopted the Magistrate's Decision via Judgment Entry filed that same day. Thereafter appellant timely filed his objections to the Magistrate's Decision. On November 7, 1997, appellant filed notice of appeal of the October 8, 1997 Judgment Entry of the trial court. Thereafter, the trial court found it did not have jurisdiction to proceed on appellant's objection due to his pending appeal but, if it did, it would overrule the objection. See, Judgment Entry dated November 17, 1997. Pursuant to Civ.R. 53(E)(4)(c), the timely filing of objections to the Magistrate's Decision operates as an automatic stay of execution of the trial court judgment adopting the Magistrate's Decision until the court disposes of the objections and either vacates, modifies, or adheres to the judgment previously entered.1 Because the trial court's entry was stayed and the trial court's work not done, I conclude the trial court's decision it did not have jurisdiction was wrong because this matter was not a final appealable order under R.C. 2505.02. Appellant's Notice of Appeal is merely a Premature Notice of Appeal under App.R. 4(C) and did not serve to divest the trial court of its jurisdiction. The fact the trial court went further and issued an advisory opinion on the merits does not create a final order, the trial court having previously, albeit erroneously, determined it did not have jurisdiction. Such advisory opinion is a nullity. Despite my opinion this Court lacks jurisdiction, I further note my disagreement with the majority's treatment of appellant's first and second assignment of error. The majority finds appellant asserted the defenses of waiver, estopped and laches solely in conjunction with the Motion for Contempt. (Majority Opinion at 4). I disagree. I find appellant's argument at Transcript pgs. 129-131, clearly raises these defenses as to his financial responsibility for the college bills. The Magistrate's Decision filed October 8, 1997, specified the matter came before the Magistrate to make a specific finding of the exact amount the appellant must pay the appellee. At the September 12, 1996 hearing, the contempt issue was resolved in appellant's favor via directed verdict but the hearing proceeded relative to appellant's motion for declaratory relief concerning his obligation to pay for college expenses under the separation agreement. As to the appellant's second assignment of error, the majority concludes "or" was intended to be used in the conjunctive rather than the disjunctive in the context of the separation agreement. I disagree. I find no ambiguity in the separation agreement. There being no ambiguity, the unambiguous disjunctive "or" cannot be rewritten by either the trial court or this Court into the conjunctive "and". JUDGE WILLIAM B. HOFFMAN. 1 The exception relative to interim orders does not apply in the case sub judice because immediate relief is not justified. For the reasons stated in the Memorandum-Opinion on file, the judgment of the Stark County Common Pleas Court is affirmed. Costs to appellant.	01-04-2023	07-06-2016
https://www.courtlistener.com/api/rest/v3/opinions/4620156/	SAMUEL D. OSTROW, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ostrow v. CommissionerDocket No. 14690.United States Board of Tax Appeals12 B.T.A. 870; 1928 BTA LEXIS 3439; June 27, 1928, Promulgated 3439 The evidence establishing that the returns filed by petitioner were not false or fraudulent, section 3176, Rev. Stats., as amended by section 1003 of the Revenue Act of 1924, was not applicable. W. A. Seifert, Esq., Maynard Teall, Esq., Charles H. English, Esq., and Walter B. Hill, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. VAN FOSSAN 870 This is a proceeding in which petitioner asks redetermination of deficiencies asseted by the respondent for the years 1919 to 1922, both inclusive, amounting to $133,180.52, to which were added fraud penalties amounting to $66,590.27. The deficiencies were computed by treating as income for the taxable years the difference in the alleged net worth of petitioner between the beginning and end of the period and prorating the result so arrived at equally to the several years. FINDINGS OF FACT. Petitioner is a native of Russia who emigrated to the United States in 1902 and became a naturalized citizen as soon as permitted under the law. Upon arrival he settled in Pittsburgh, Pa., where he worked for an uncle, Sol. Rosenblum, who was engaged in the 871 wholesale3440 liquor business. Petitioner had accumulated in Russia and brought with him to the United States the sum of $15,000, which was turned over to Rosenblum for use, he paying interest at the rate of 6 per cent. Petitioner remained in Pittsburgh three years, during which time he saved approximately $3,000. In 1905 he went to Dillonvale, Ohio, and there engaged in the wholesale and retail liquor business on his own behalf. The town of Dillonvale was located in a mining community where the population was 90 per cent foreign-born and was the only town within a radius of 20 miles where liquor could be legally sold. There were from 22 to 28 saloons in the town, of which petitioner's was much the largest, doing a business of over $600,000 in four years. At the end of 1909 the county was voted dry and petitioner was obliged to seek a new location. In the four-year period he had saved out of profits $220,000 in addition to his former savings. In 1910 petitioner went to Toledo where he engaged in similar business until sometime in 1911, when he sold his lease and closed out his stock of goods. In Toledo he added $15,000 to his savings. The Ohio Valley district centering around Steubenville3441 and East Liverpool was voted wet in 1911 and thereupon petitioner opened a chain of liquor stores located in Steubenville, East Liverpool, Wellsville, Toronto, and Dillonvale. The Steubenville store was closed by a local option election in 1913, and, due to a new Ohio law forbidding one person to own more than one saloon or liquor store, petitioner was obliged to dispose of all but one of those remaining. During the period 1911 to 1913 he had added $150,000 to his savings. In 1914 petitioner went to Erie, Pa., and there bought out the established wholesale liquor business of Joseph A. Stern & Bro., paying $60,000 cash. He continued in the business until June 30, 1919, when war-time prohibition became effective. During this time the business was financially profitable and petitioner added $85,000 to his savings. In Erie petitioner also became engaged in the wholesale tobacco business, which he continued up to 1923. This business was not profitable. He also became interested in a theatre and after 1923 in real estate and wholesale lumber. During all of the time 1902 to 1918 petitioner invested but small amounts in real estate and securities. His profits were almost exclusively3442 invested in whiskey certificates. (A whiskey certificate is a receipt of a 5-barrel denomination for whiskey stored in a bonded warehouse on which storage and tax are unpaid.) Rosenblum, the uncle, was a very large dealer in whiskey certificates and, following his example, petitioner began investing therein in 1902. Thereafter, he purchased and sold large quantities of these certificates. At the 872 end of December, 1918, petitioner owned whiskey certificates calling for 6,125 barrels of whiskey and representing an aggregate cost of $367,500. These certificates formed a bundle 6 or 7 inches high, each being for 5 barrels, and there being approximately 200 certificates to the inch. The whiskey certificates, which petitioner kept in his office safe, were used as a medium of investment of profits and not as capital in the liquor business. When a certificate was sold it was passed through the books of the liquor store, being charged to the store at cost to petitioner and "Merchandise Sales" credited with the sales price. All of the profit made by petitioner in the purchase and sale of whiskey certificates was thus reflected in petitioner's books and returned for taxation. 3443 The certificates did not otherwise appear in the books of the business but petitioner kept a certificate book, or register, giving full data as to purchase and sale. Beginning in 1919 and continuing down to the present year, petitioner has been engaged in converting the whiskey certificates into cash. The largest number were sold in 1919 and the last three in 1927. Petitioner's tax returns were checked up by Revenue Agent R. T. Griswold, as to years 1914 to 1923, and except for minor adjustments found correct. The examination of petitioner's returns for the latter years was made at petitioner's repeated request on orders from Washington. All of petitioner's books were put at the agent's disposal. In December, 1924, petitioner learned that an investigation of his tax liability was being conducted by two other agents. He notified the agents that he would furnish them all information desired and ordered his secretary to go to the place where the records were stored and bring all of them to the office. This storage room was in the basement of the theatre building where petitioner had formerly had his office. On investigation it was found that the janitor of the building had3444 thought the records and boxes of papers useless, and, on peremptory orders of the fire marshal that they be removed from the theatre building and on further orders of the manager of the building, had given them to the Volunteers of America, who had sold them to a paper mill. Inquiry at the paper mill revealed that they had been destroyed. Among other records thus lost or destroyed was the certificate book. This book was practically obsolete as by this time petitioner had disposed of nearly all his whiskey certificates and his secretary had made a separate memorandum transcript from the book of the small number remaining on hand, which memorandum petitioner carried and used in making any sales. On December 31, 1922, petitioner had a personal loan from the First National Bank of Erie, not connected with his business, of $20,000, which loan was not reflected in his balance sheet or books of 873 account. This item was not deducted by respondent in computing petitioner's net worth. OPINION. VAN FOSSAN: At the hearing petitioner related in great detail the story of the accumulation of his fortune and established the amount of his earnings in each business location. He3445 established further that his net worth in 1918 was understated by at least $367,500, which he had invested in whiskey certificates. This medium of investment was adopted shortly after he came to the United States in 1902 and was constantly followed until 1919. These certificates were solely a medium of a personal investment and were no more a part of the invested capital of his liquor business than had he invested in bank stocks or railway bonds. Being no part of his liquor business, petitioner was under no obligation to make disclosure of these personal holdings except in so far as necessary to account for profit made on sale thereof. This petitioner did by charging the certificates as sold on the books of the liquor business and crediting "Merchandise Sold" with the sales price. All profits so made on sale of whiskey certificates were thus accounted for and returned for taxation. There is no claim that petitioner failed to return the profit on sales of certificates. The deficiencies are based on the theory that petitioner apparently had accumulated unaccounted for wealth and presumptively had not paid taxes thereon. This charge is fully disproved by the evidence in the case. 3446 Petitioner has demonstrated conclusively, and in this he is corroborated by many witnesses and circumstances, that he had accumulated the larger part of his wealth through the years from 1902 to 1918 and at December 31, 1918, was possessed of at least $367,500 which did not appear in the statement of resources of the liquor business. When he disposed of these large holdings of whiskey certificates he converted the proceeds into other investments and accounted for the profit realized. Except for the profit his net worth was not thereby increased. The misconception of the respondent arose from the fact that the net worth statement of 1918 related to the liquor business and did not reflect the large personal investment in whiskey certificates, while the personal statement of 1922, after disposition of the certificates and conversion into other property, did reflect this accumulation. The evidence clearly establishes that the returns filed by petitioner were substantially accurate. It also proves that if the net worth basis were to be applied there should be added to the December 31, 1918, statement the sum of $367,500 represented by petitioner's personal investment in whiskey3447 certificates. It further shows that respondent should have included in petitioner's "Bills payable" in 874 the 1922 statement the sum of $20,000 owed by him to the First National Bank of Erie as the result of a personal loan. The above facts being in evidence, it follows that section 3176, Rev. Stats., as amended by section 1003 of the Revenue Act of 1924, was not applicable. This section is applicable only if and when a person, corporation or association fails to make and file a return or list or makes "wilfully or otherwise a false or fraudulent return or list * * ." The evidence clearly negatives any charge of fraud. Petitioner accounted for the profit made in day to day sales of whiskey certificates and returned the same for taxation. There is no word or circumstance of any consequence leading to a contrary conclusion. Petitioner, by the testimony of the person who destroyed certain old records, proved his innocence of any knowledge of the destruction or of any intention to prevent a full investigation of his business dealings. So far as proof of fraud is concerned petitioner's record is clear. The testimony of the Revenue Agent is that with certain relatively3448 minor adjustments, of which petitioner does not complain, the tax returns for the years in question were accurate and correctly reflected income. With this we agree. The taxes should be computed on the basis of the returns as adjusted. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620157/	MAJESTIC OIL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Majestic Oil Corp. v. CommissionerDocket No. 96380.United States Board of Tax Appeals42 B.T.A. 659; 1940 BTA LEXIS 969; September 3, 1940, Promulgated 969 The petitioner owned a sublease on certain oil-bearing lands near Bakersfield, California. Under an agreement entered into on March 8, 1934, a corporation was to advance money to it for the drilling of oil wells, which was to be recovered in double the amount of the advances from one-half of five-sixths of the proceeds of the sales of oil. Held, that the advances were not "income from the property" within the meaning of section 114(b) of the Revenue Act of 1934, and that upon the evidence the petitioner is not entitled to any depletion allowance for 1935. George E. H. Goodner, Esq., for the petitioner. Arthur L. Murray, Esq., for the respondent. SMITH 659 This is a proceeding for the redetermination of deficiencies of $2,661.25 and $967.73, respectively, in income and profits tax for 1935. The petitioner not only claims that it is not liable for the deficiencies determined, but that it is entitled to a refund of the taxes which have been paid for 1935. The petition, as amended to conform to the proof, alleges error on the part of the respondent as follows: (a) In arriving at net income respondent erroneously failed to allow a deduction970 for depletion, when petitioner is entitled to a depletion deduction of not less than $24,619.87. (b) In arriving at net income respondent erroneously allowed a depreciation deduction on oil well drilling equipment of only $1,008.85, when a reasonable allowance for depreciation on petitioner's drilling equipment is not less than $6,377.18. (c) In arriving at net income respondent erroneously allowed a depreciation deduction of only $4,745.97 on petitioner's interest in the San Joaquin Lease Equipment, when a reasonable deduction on such equipment is not less than $19,766.58. 660 (d) In arriving at net income respondent erroneously disallowed a loss of $8,437.86 sustained by petitioner during the year upon the abandonment of San Joaquin Well No. 2. (e) In arriving at net income respondent erroneously disallowed as a deduction for attorneys' fees the sum of $581.76. The respondent admits error with respect to the disallowance of the deduction of attorneys' fees in the amount of $581.76. FINDINGS OF FACT. 1. Petitioner is a corporation engaged in the business of producing oil, with its principal office at Los Angeles, California. Its income tax return for971 1935 was filed with the collector at Los Angeles. 2. Petitioner kept its books and rendered its tax returns upon the accrual basis. 3. Petitioner's income tax return for the calendar year 1935 was filed on April 15, 1936, and disclosed a tax liability of $1,465.50, which was paid by the petitioner in 1936. The petitioner herein was filed December 9, 1938. 4. In 1934 petitioner and the Sovereign Oil Corporation (hereinafter referred to as Sovereign), as joint venturers, subleased from the Shell Oil Co. (hereinafter referred to as Shell) the "San Joaquin lease" in the Mountain View oil field near Bakersfield, Kern County, California. The lease was taken in the name of Sovereign, and Sovereign took charge of developing and operating the property and selling the products. Petitioner and Sovereign each contributed one-half of the money needed and shared equally the expenses and income from the lease. Sovereign collected the income, paid the bills, kept the books, and rendered detailed monthly statements to petitioner. Petitioner's books were posted from those statements. Petitioner and Sovereign paid no bonus to Shell for the lease, but under the lease Shell received royalties972 and an option to purchase oil. Shell purchased all of the oil produced. 5. After the "San Joaquin lease" was acquired petitioner and Sovereign had to obtain money to develop the property. Accordingly, an agreement was entered into on March 8, 1934, with the Royalty Service Corporation, Ltd. (hereinafter referred to as Royalty), which provided that Royalty should from time to time advance certain sums of money to Sovereign and the petitioner and that Sovereign and the petitioner would repay said money to Royalty in double the amount, but only out of a certain portion of the oil, if, as, and when produced from the well or wells which were to be drilled with the funds so provided. 661 The agreement above referred to provides in part as follows: WHEREAS, Royalty desires to purchase a portion of the oil, gas and other hydrocarbon substances to be produced * ; * * 1. AGREEMENT TO BUY AND SELL - FIRST WELL: Royalty agrees to buy, and Sovereign agrees to sell, transfer and deliver unto Royalty, an undivided one-half (1/2) of five-sixths (5/6) of all of the oil, gas and other hydrocarbon substances that may be produced and saved from the Chanac and/or Santa973 Marguerta sands and/or any shallower sands, from the first well to be drilled by Sovereign on the property * * Royalty was to advance the money in periodic installments as the well was driven. Royalty also took an option (later exercised) to advance additional funds for the drilling of additional wells upon the terms above described. After Royalty should receive back from sales of oil 200 percent of the amounts advanced, the petitioner was given the option to pay Royalty $10 in cancellation of the agreement. 6. Royalty had no voice in the management and operation of the San Joaquin lease. Sovereign and the petitioner had charge of all drilling operations, pumping, selling, and collecting. 7. Payments were made to Royalty according to the aforesaid contract as the oil was produced, by delivering oil into the pipe line of Shell for account of Royalty. Monthly statements were furnished to Royalty. 8. In 1935 petitioner received the sum of $63,500 from Royalty under said contract. This amount was reported by the petitioner and treated by the respondent as taxable income of 1935. The petitioner also received the sum of $50,859.19 from regular sales of oil from the974 San Joaquin lease. Its share of royalties paid on the San Joaquin production in 1935 amounted to $24,832.38. 9. Respondent has held that the payment of $63,500 received by the petitioner from Royalty in 1935 was not "income from the property." By deducting the aforesaid royalties, and expenses of $37,376.33 borne by the petitioner, from the amount of $50,859.19 received from regular oil sales, respondent has determined that petitioner had no net income from the San Joaquin property in 1935. He therefore has allowed no depletion deduction in his determination of net income for 1935. 10. Petitioner drilled four wells upon the San Joaquin lease. The first well was drilled to the shallow sand and was completed on June 10, 1934; the second and third wells were drilled to the deepest producing sand and were completed in February 1935. At the end of 1934 petitioner was not able to estimate the amount of 662 the oil reserves in its San Joaquin lease because it was a new field and there had not been sufficient drilling to determine the extent of the oil in the various sands. By the end of 1935 the limits of the sands had been determined; the lease had been completely drilled; 975 and the oil reserves could be estimated. The total oil reserves in the San Joaquin lease at the time petitioner commenced to operate it in 1934 were 750,000 barrels. The oil produced in 1934 was 94,959 barrels and that produced in 1935 was 331,654 barrels. 11. Petitioner installed certain leasing equipment on the San Joaquin lease, consisting of derricks, tanks, pumps, fittings, lines, rods, casing, etc., which equipment cost, in 1934, $32,772.47. The additions made to such equipment in 1935 cost $19,864.54, making a total cost at the end of 1935 of $52,637.01. (This cost includes equipment at well No. 2 of $8,437.86, abandoned in 1935.) The salvage value of such lease equipment after exhaustion of the oil was 10 percent of its original cost. 12. In its 1934 return petitioner took a deduction of $747 for depreciation on equipment at well No. 1 (the only well completed in 1934). This amount was determined on the arbitrary basis of an estimated ten-year life and that amount was allowed by the respondent in his deduction. No depreciation was taken on any other lease equipment in 1934 because no other wells had been completed. 13. In 1935 petitioner, in its books and976 in its tax return, took a deduction for depreciation in the amount of $17,743.29, computing on the unit of production basis. Respondent held that there were not sufficient data available from which to compute depreciation on the unit of production basis, and allowed a deduction of $4,745.97, computed on the straight line basis. 14. Commencing with 1935, the unit of production basis is a reasonable basis for the allowance of depreciation on petitioner's San Joaquin lease equipment because nearly all of its drilling and its largest production occurred in that year and the production declined thereafter. The depreciation deduction on lease equipment to which the petitioner is entitled for 1935 is $19,762.43. 15. In 1935 petitioner owned drilling equipment consisting of boilers, pipe, engines, tools, and other movable equipment used in the drilling of oil wells, which had been purchased prior to 1931. The depreciated cost of such equipment on December 31, 1930, was $15,087.79. A reasonable rate of depreciation on the unrecovered cost of such drilling equipment is 25 percent per year. The drilling equipment on hand at December 31, 1930, was fully depreciated prior to 1935. 977 663 16. New drilling equipment was purchased by the petitioner during 1934 at a cost of $3,887.05, and during 1935 at a cost of $2,289.43. The respondent allowed depreciation of $1,008.85 on this equipment for 1935. The petitioner is entitled to a depreciation allowance of $1,257.94 for 1935 in respect of the drilling equipment purchased in 1934 and 1935. 17. Well No. 2 was completed February 1, 1935, in the Santa Marguerta sand, the deepest producing sand in the Mountain View oil field, where the San Joaquin lease was located. The well produced a total of 82,355 barrels, the last monthly production of 4,240 barrels being reported in November 1935. When this well was first brought in it produced "wet" oil and finally went to water and had to be abandoned before the end of 1935. Upon abandonment, the petitioner removed all of the lease equipment from the well except the casing and fittings. A small account of the casing might have been pulled, but it had no salvage value and was left in the well along with the rest of the casing and fittings which the California law and regulations required to be left in an abandoned well. The petitioner has not at any time since978 1935 gone back to this well and reopened it and it has not produced any oil or gas since November 1935, and petitioner has not received any income from it since that time. 18. The cost of the equipment left and abandoned in well No. 2 was $8,437.86. No depreciation had been taken or allowed upon this amount. Petitioner charged the entire amount out of its lease equipment account on December 31, 1935, and took it as a loss in that year. Respondent has disallowed the deduction. The petitioner has not been compensated for said loss by insurance or otherwise and is entitled to a deduction from income of the sum of $8,437.86 as a loss in 1935. OPINION. SMITH: 1. Depletion deduction. - In its income tax return for 1935 petitioner reported a net income of $10,531.83. This was after the deduction from gross income of a depletion deduction of $13,213.10. The respondent disallowed the deduction of the claimed depletion allowance in the determination of the deficiency and determined a net income of $29,886.41. In his deficiency notice he stated: (g) You deducted in your return depletion in an amount of $13,213.10, whereas no depletion is allowable as shown by the following979 computation: Regular oil sales$50,859.19Less payments in oil (item i herein)24,832.38Corrected oil sales$26,026.81Expenses37,376.33Net incomeNone664 Article 23(m) - 4, Regulations 86. * * (i) Royalties paid in oil, pursuant to lease agreement with Shell Oil Company, constitute allowable deductions from your gross income in the amount of $24,832.38. Section 23 of the Revenue Act of 1934 provides in part: In computing net income there shall be allowed as deductions: * * * (m) DEPLETION. - In the case of * * * oil and gas wells, * * * 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 rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * * Section 114(b) of the same revenue act provides in part: (b) BASIS FOR DEPLETION. - * * * (3) PERCENTAGE DEPLETION FOR OIL AND GAS WELLS. - In the case of oil and gas wells the allowance for depletion under section 23(m) shall be 27 1/2 per centum of the gross income from the property during the taxable year, 980 excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23(m) be less than it would be if computed without reference to this paragraph. It is the respondent's position that the $63,500 received by the petitioner from Royalty during 1935 was not "income from the property" within the meaning of section 114(b) of the Revenue Act of 1934; that the petitioner sold an economic interest in its lease with Shell to Royalty, and that under the decision of the Supreme Court in , the petitioner is not entitled to depletion in respect of the $63,500 received from the sale of such economic interest. The facts in this case are analogous to those in ; affd. (C.C.A., 5th Cir.), 981 . In 1932 the Ortiz Oil Co. entered into contracts with three individuals whereby they furnished certain sums of money to the Ortiz Oil Co. for the purchase and development of oil and gas mining leases, on condition that it "pay and account" to them for specified proportions of the mineral production "if, as and when produced, saved and sold." We held that the rights of the respective parties each constituted an economic interest in the oil production, and that the Ortiz Oil Co.'s gross income for the taxable year included only the portion of the proceeds from oil sales for which it was not required to account to the other parties; that the $154,000 which the company received from Westbrook and Thompson in payment of $350,000 oil payment 665 thereafter to be made to Westbrook and Thompson was income of the Ortiz Oil Co. for the year 1932 as sale of a part of its properties, and that if the Ortiz Oil Co. were to reduce this $154,000 it would not be by way of depletion but by way of an allocated part of the cost of the original leasehold. We said: * * Proceeds from sales of production, therefore, constituted income to Westbrook and Thompson to982 the extent of the proportion received by them, and the balance only consituted gross income to petitioner. ; ; ; . Petitioner is entitled to a deduction for depletion computed on the basis only of the income received by it as its portion of the production in the taxable year. . It is not entitled to allowance for depletion on the proceeds of the sale to Westbrook and Thompson. Cf. , which affirmed ; ; and . The petitioner attempts to distinguish the Ortiz Oil Co. case from the instant proceeding and says: * * The case [Ortiz Oil Co.] involved two contracts which the Board stated were indistinguishable as to facts and were governed by the same conclusions of law. Only parts of the contracts983 are quoted in the Board's opinion. In the Staley contract (quoted on page 661), it appears that Staley was given "an undivided one half of all oil and/or gas produced, saved and sold from the following described tract of land * * together with an undivided one half interest in and to the said oil and gas leases and leasehold estates thereupon." The quoted portions of the Westbrook and Thompson contract do not disclose that the lease was assigned to them, but since the Board stated that there was no material difference between the two contracts, it may be assumed that the unquoted part of the contract provided that the lease in this instance was also assigned to Westbrook and Thompson. But the quoted portions of the contract do provide (page 659) that the agreement to pay and account to Westbrook and Thompson "for said proportions of the production from said leases and leaseholds shall constitute covenants running with the land." Furthermore, Ortiz Oil Company bound itself to warrant and defend forever the interests "herein obligated to the amount of said oil payment" unto the said Westbrook and Thompson. Such provisions establish the intent to convey an interest984 in the land. Such covenants and warranties do not appear in petitioner's contract. The Board is of the opinion that the distinction sought to be made between the Ortiz Oil Co. case and the proceeding at bar is without substance. Cf. . There is no question in this proceeding but that the $63,500 received by the petitioner in 1935 from Royalty is taxable income of the petitioner. It was not, however, from a sale of oil. The petitioner is not entitled to depletion in respect of the economic interest in the lease sold by it. We think that the respondent did not err in excluding from "income from the property" the $63,500 here in question. With the exclusion of such amount of $63,500 the petitioner 666 had no net income for 1935 "from the property" and hence was not entitled to any depletion deduction for that year. 2. Depreciation allowance in respect of well drilling equipment. - At December 31, 1930, petitioner had on hand well drilling equipment which had an undepreciated cost of $15,087.79. This equipment was not used during the years 1931, 1932, and 1933, but was in storage. The petitioner contends985 that this well drilling equipment suffered no depreciation during those years. The testimony is to the effect, however, that there was an obsolescence of this equipment of from 5 to 10 percent per year. The parties have tipulated relative to this point as follows: * * is is agreed that the undepreciated balance or unrecovered cost of said drilling equipment as per the books as of December 31, 1930 was $15,087.79, and that a reasonable depreciation rate on that equipment was 25 percent per year. Upon the basis of this stipulation the respondent contends that the drilling equipment that was on hand at December 31, 1930, was fully depreciated prior to 1935 and that, even though the 25 percent annual rate was intended to apply only while the drilling equipment was in use, the facts show that the obsolescence deduction based upon original cost would show that the drilling equipment was fully depreciated at the end of 1934. We sustain the respondent's contention upon this point. There is no question between the parties but that the petitioner is entitled to some depreciation allowance in 1935 in respect of purchases of drilling equipment during the years 1934 and 1935. The986 respondent computed the depreciation allowance at $1,008.85. We are of the opinion, however, from the evidence, that a rate of 25 percent per year is reasonable and that the equipment purchased in 1935 should be considered as having been in use for a period of only six months. Upon this basis the correct depreciation allowance on drilling equipment for 1935 is $1,257.94. 3. Depreciation allowance in respect of San Joaquin lease equipment. - In the determination of the deficiency the respondent determined a depreciation allowance of $4,745.97 in respect of this equipment for 1935. On brief he admits that the depreciation allowance is in a greater amount. Both parties are agreed that the depreciation allowance for 1935 should be computed upon units of production. During 1935 it was determined that the total amount of recoverable oil from the San Joaquin lease was 750,000 barrels, 94,959 of which were produced in 1934 and 331,654 barrels in 1935. The total cost of lease equipment at December 31, 1934, was $52,637.01. The salvage value of the lease equipment was stipulated to be 10 percent of the original cost. As we understand the respondent's argument, 667 it987 is that a reasonable allowance for depreciation for 1935 is 331,654/750,000 of the cost of the lease equipment to be recovered through depreciation allowances. The petitioner contends, however, that the allowance should be 331,654/655,041, the denominator representing the oil reserves on January 1, 1935, and that the depreciation of $747 taken on the lease equipment in 1934 is not to be affected by the fact that in 1935, pursuant to an agreement of the parties, the depreciation allowance for 1935 and subsequent years is to be taken on units of production. We are of the opinion that the correct depreciation allowance for lease equipment for 1935 should be computed as follows: Total cost of equipment$52,637.01Less equipment in well No. 2 abandoned in 19358,437.8644,199.15Less salvage value of 10%4,419.92Net depreciable cost39,779.23Less 1934 depreciation747.0039,032.23Depreciation allowance on 1935 production 331,654/655,041 of $39,032.2319,762.43We therefore hold that a reasonable allowance for the depreciation deduction on lease equipment for 1935 is $19,762.43. 4. The final question for consideration is whether the petitioner988 is entitled to deduct from gross income of 1935 the cost of casing, etc., which was lost in well No. 2, which became valueless to the petitioner in 1935. The respondent contends that the petitioner is not entitled to the deduction of this loss for the reason that it did not in 1935 notify the California authorities that it had anandoned well No. 2 and did not comply with the California statutes, which require that in the case of the abandonment of a well it must be cemented so as to prevent the penetration of water into oil sands. In reply to this argument the petitioner points out that the loss was actually sustained by the petitioner in 1935 and that the cementing of the well as required by the California authorities would simply mean an additional investment or loss to it in the completion of the abandonment. The evidence conclusively shows that the petitioner had a loss of $8,437.86 on its equipment in well No. 2 in 1935. The well had turned to water and was valueless. We think that the loss was sustained by 668 the petitioner in 1935 and that it is a legal deduction from the gross income of that year. In our determination of the depletion allowance in respect of989 the lease equipment above we have eliminated from the total cost of lease equipment ($52,631.01) the $8,437.86 loss sustained in 1935. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620161/	IRVING S. FREEDMAN and HARRIETTE FREEDMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFreedman v. CommissionerDocket No. 7040-84.United States Tax CourtT.C. Memo 1986-257; 1986 Tax Ct. Memo LEXIS 351; 51 T.C.M. (CCH) 1264; T.C.M. (RIA) 86257; June 23, 1986. 351 Benjamin Lewis, for the petitioners. Norman A. Segal, for the respondent. WILBURMEMORANDUM OPINION WILBUR, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: YearDeficiency1971$16,170197217,103197337,07719748,949Petitioners filed a motion for partial summary judgment pursuant to Rule 121, 1 claiming that the stature of limitations bars assessment of the deficiencies determined for the years 1971, 1973, and 1974. Petitioners resided in New York, New York, when they filed their petition in this case. They timely filed joint Federal income tax returns for the taxable years 1973 and 1974. The year 1971 is at issue because of petitioners' claimed carry-back loss from 1974. Beginning on January 7, 1977, the parties executed a series of Forms 872, Consents to Extend Time to Assess Tax, which were effective to extend the statute of limitations with respect to the years in issue through December 31, 1980. On July 18, 1980, they executed a Form 872-A, which provided that the limitations352 period would be extended until: [T]he 90th * * * day after: (a) the Internal Revenue Service office considering the case receives Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, from the taxpayer(s) * * . The instructions on Form 872-T provide the following: If the tax return(s) to which this notice applies is under consideration by the Examination Division, mail this notice to the District Director of Internal Revenue having jurisdiction over the return(s), Attention: Chief, Examination Division. Respondent has conceded that on September 15, 1983, petitioners delivered a Form 872-T marked "District Director of Internal Revenue, Attn: Chief Examination Division" to "a suboffice of the District Director" located at 1501 Broadway. He asserts, however, that the actual address at which the returns were being considered by the District Director's office was 120 Church Street, and thus the Form 872-T was not received by the "office considering the case" until January 10, 1984. 2 Neither street address appeared on the form. Respondent mailed to notice of deficiency to petitioners on February 7, 1984, more than 90 days after the September 15, 1983 delivery,353 but within 90 days of January 10, 1984. The parties agree that if the Form 872-T was effectively received on September 15, 1983, then assessment of the deficiencies for 1971, 1973, and 1974 is barred by the statute of limitations. In his memorandum of law, respondent argued not only that the form was delivered to the wrong address, but also that the form should have been mailed rather than hand-delivered. But at the hearing on the motion, respondent conceded that hand-delivery to 120 Church Street would have been acceptable. Thus, we are faced with the narrow question of whether delivery of a Form 872-T marked "Attn.: Chief Examination Division" to one of several offices of the District Director for the proper district is sufficient to terminate the indefinite extension of the statute of limitations. We conclude that the term "office considering the case" appearing354 on Form 872-A refers to the Office of the District Director for the proper district, and not to the specific office building at which the return is actually being considered. Accordingly, when petitioners delivered to an office of the Manhattan District Director a Form 872-T marked for the attention of the Chief, Examination Division, they sufficiently complied with respondent's instructions. The situation here is distinguishable from a recent Memorandum Opinion of this Court, and the distinction underlines the narrowness of our holding in this case. In , we held that mailing a Form 872-T to an Internal Revenue Service Center, rather than to the District Director's office, did not satisfy the requirement of sending the form to "the Internal Revenue Service office considering the case." See also . Here, by contrast, we think that the delivery of the Form 872-T, marked for the attention of the Chief, Examination Division, to one of several offices of the District Director for Manhattan when no specific address appears in the filing instructions is sufficient notice355 to the "office" considering the case. 3Respondent further argues that petitioners should be estopped from denying that the notice of deficiency was timely because "respondent, unaware of petitioners' change in position, in good faith continued to rely on the agreement of the parties (Form 872-A) to respondent's injury and prejudice." He urges that "[t]he Court should not permit the petitioners to profit from their wrong." The fact that respondent remained unaware of petitioners' changed position after the District*356 Director's office received the form is certainly not attributable to any "wrong" on petitioners' part. Responsibility for this mishap lies somewhere within the Office of the District Director. Accordingly, we will grant petitioners' motion for partial summary judgment. An appropriate order will be issued.Footnotes1. All references to "Rules" are to the Tax Court Rules of Practice and Procedure.↩2. On January 5, 1984, petitioners' attorney telephoned the 120 Church Street office to see if a notice of deficiency had yet been mailed in response to the Form 872-T. He was asked at that time to mail a copy of the form to the Examination Division Review Staff. That copy was received on January 10, 1984.↩3. In (9th Cir., July 17, 1985), affg. per curiam an order of this Court, the Court of Appeals held that a letter, as opposed to a proper Form 872-T, sent to the District Director's office but not marked to the attention of the Examination Division, did not serve to terminate the extension of the statute of limitations because "it was not directed to the proper division and that division was never apprised of taxpayers' desire to terminate the extension." The Form 872-T at issue in the instant case was marked for the attention of the proper division, and thus we conclude that a different result is warranted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620162/	John P. White and Agnes S. White, Petitioners v. Commissioner of Internal Revenue, RespondentWhite v. CommissionerDocket No. 4281-65United States Tax Court48 T.C. 430; 1967 U.S. Tax Ct. LEXIS 81; June 26, 1967, Filed 81 Decision will be entered for the petitioners. Petitioners are husband and wife. In the fall of 1963 after assisting his wife in alighting from their family automobile, the husband accidentally slammed the door on his wife's hand. Her diamond engagement ring absorbed the full impact of the blow which broke two flanges of the setting holding the diamond in place. The diamond was dislodged and irretrievably lost in a leaf-covered gravel driveway. Diligent efforts to recover the diamond were unsuccessful. Held, the slamming of the automobile door upon the wife's ring and the resulting loss of the diamond entitle the petitioners to deduct the diamond's loss as a loss arising from "other casualty" under sec. 165(c) (3), I.R.C. 1954. John P. White, 82 pro se.Frank T. Wrenick, for the respondent. Hoyt, Judge. HOYT431 Respondent disallowed a claimed loss deduction of $ 1,200 and assessed against petitioners an income tax deficiency for the taxable year 1963 in the amount of $ 276. The sole question for our decision is whether the loss by petitioners of a diamond from petitioner Agnes' engagement ring is a casualty loss allowable under section 165(c)(3), I.R.C. 1954. 1FINDINGS OF FACTSome of the facts have been stipulated by the parties and such facts together with the stipulated exhibits are incorporated herein by this reference and adopted as our findings.Petitioners are John P. and Agnes S. White, husband and wife, who maintained their legal residence in Gates Mills, Ohio, both at the time of filing their petition herein and at trial. For the taxable year 1963, they filed their joint Federal income tax return with the district83 director of internal revenue in Cleveland, Ohio. John is a lawyer by profession and in 1963 he was employed in Cleveland by the Glidden Co.In 1950 John purchased a diamond engagement ring in Chicago, Ill., for Agnes. The diamond was a 1.38-carat stone set as a solitaire in a simple four-pronged mounting. He paid $ 1,200 for the ring at the time of purchase.The facts giving rise to the claimed casualty were described by petitioner John as "painfully simple." On a windy fall day in October of 1963, John was driving Agnes home from an afternoon of shopping. He drove into the crushed-gravel driveway of their Gates Mills, Ohio, residence and after getting out proceeded to the other side of the car, as was his custom, to assist his wife. John then opened the door at the right for Agnes while focusing his attention on one of their five young children. Agnes got out of the car from the passengers' side.After Agnes had alighted, she reached into the car again with one hand to retrieve something left on the seat. At the same time, John, unaware of his wife's action, pushed the door closed forcefully to overcome a wind which was then blowing. Before the door closed completely, John84 realized that Agnes had inserted her hand through the open door and into the car. He reached for the door in an effort to stop its closing, but, unfortunately, missed, and the door slammed on Agnes' hand. The full impact of the slammed door was absorbed by the ring. Two flanges holding the solitaire diamond in place were broken by the impact. Agnes, crying with pain, quickly withdrew her 432 injured hand, shaking it vigorously. The diamond dropped or flew out of the broken setting and has never been seen since that time.Immediately, an intensive search was launched which continued for weeks. Initially, a human chain of the five White children was formed. They combed intensively a 40-foot area of the driveway, as well as part of the adjoining lawn. Additionally, the driveway gravel in the immediate vicinity of the car was raked and put through a sieve. The search continued in a less intensive manner even after the snows came; petitioners were still hopefully looking for the stone upon occasion at the time of trial more than 3 years later. Unfortunately, all of these efforts were unsuccessful, and the diamond has never been recovered.The ring had been insured for several85 years following its purchase, but was not insured during 1963 or for some years prior thereto. The fair market value of the diamond in October of 1963 was not less than the purchase price of the ring paid by John in 1950, $ 1,200. Agnes suffered an uncompensated loss of $ 1,200 in 1963, as a direct and proximate result of the accidental slamming of the car door upon her hand and ring.In their return for 1963 petitioners claimed a deduction of $ 1,200 for the casualty loss of the diamond describing it as follows:Uninsured loss of 1.38 carat diamond from engagement ring setting caused by car door accidentally being slammed on wife's hand. Loss of gem directly the result of breakage of setting from sudden impact of car door upon ring. (Loss based upon actual appraised value of ring.)On April 12, 1965, respondent mailed a notice of deficiency to petitioners in which he determined an income tax deficiency for the year 1963 of $ 276. The deficiency was based upon an addition to income of $ 1,200 which resulted from respondent's disallowance of the $ 1,200 casualty loss petitioners had claimed for the ring. The statutory notice included the following explanation to petitioners: 86 It is determined that the loss deduction of $ 1,200.00 which you claimed on your income tax return for the taxable year ended December 31, 1963 for the loss of a diamond, is not allowable under any section of the Internal Revenue Code. Accordingly, your income is increased by that amount.At no time prior to trial did respondent contest or raise the issue of the amount of the loss or the value of the diamond lost by Agnes from her ring.OPINIONRespondent maintains that Agnes did not suffer a casualty loss within the meaning of section 165(c) (3) of the Internal Revenue Code 433 of 1954. 2 Respondent applies the familiar principle of ejusdem generis and concludes that the events which gave rise to the loss of the ring were not like or similar to a "fire, storm, [or] shipwreck" and therefore do not constitute "other casualty" under section 165(c) (3).87 Petitioners contend that the circumstances surrounding the diamond's loss place it within the "other casualty" provision of section 165(c)(3). They urge that the loss was due to chance, and occurred suddenly and unexpectedly as a result of accident. They rely primarily upon our recent opinion in William H. Carpenter, T.C. Memo. 1966-228, on appeal (C.A. 6, Apr. 3, 1967), which they regard as factually indistinguishable, and in which we allowed a casualty loss deduction for damage to an engagement ring accidentally ground up in a garbage disposal. Respondent does not attempt to distinguish Carpenter or to escape its rationale here. Instead he flatly submits it was incorrectly decided and should not be applied. He urges that the loss suffered here was nothing more or less than an ordinary, everyday, domestic, household mishap and compares it to a mythical Johnny's tearing out of the knee of his new suit on his way to church or to his mother's breaking some china as she does the evening dishes. We cannot agree that the facts here present an ordinary, common, everyday domestic loss or mishap. Agnes did not just misplace, mislay, or lose her ring. 88 If she had merely dropped it in the leaves on the gravel driveway we would be faced with that situation, but the evidence before us paints a far different picture of the casualty loss claimed here. The cases cited and relied on by respondent are inapposite.With respect to the presence of accepted and essential casualty attributes, we find little to distinguish the situation now confronting us from other cases in which loss deductions arising from "other" casualties have been allowed. The events giving rise to the undisputed loss here were sudden, unexpected, violent and not due to deliberate 434 or willfull actions by petitioners or either of them. These events involved the application of considerable destructive force to the subject ring and as an immediate, direct, and proximate result thereof Agnes lost the diamond from her solitaire. The relative presence of these characteristics has long been deemed controlling in determining whether a loss may qualify as "other casualty." See, e.g., Harry Heyn, 46 T.C. 302">46 T.C. 302 (1966); Burrell E. Davis, 34 T.C. 586 (1960), acq. 2 C.B. 4">1963-2 C.B. 4; Ray Durden, 3 T.C. 1">3 T.C. 1 (1944),89 acq. 1944 C.B. 8">1944 C.B. 8. As we observed in Harry Heyn, supra at 309, there are "numerous cases involving casualty losses, some of them difficult to reconcile with others either in result, theory, or language. We think a review of these cases would not serve any useful purpose here, since we are satisfied that on the facts before us there was plainly a casualty."Respondent urges that in order to be embraced by the term "other casualty," an occurrence must be cataclysmic in character. He relies upon Heyn, wherein we held that an earthslide constituted a casualty under section 165(c) (3). We find respondent's reliance upon Heyn for this proposition totally misplaced. In Heyn, we merely observed that the physical characteristics of the landslide in question were those normally associated with a casualty and stated that the landslide "involved a sudden and violent movement of a large mass of earth that was cataclysmic in character, and was similar in nature to a fire, storm, or shipwreck." Harry Heyn, supra at 307, 308. Nowhere in Heyn did we hold or suggest that a loss must be in the90 nature of a cataclysm to qualify as a casualty. We simply took notice that the landslide in question was cataclysmic in character. To hold that a loss must be cataclysmic in order to qualify as some "other casualty" under section 165(c)(3) would be to limit the availability of the casualty loss deduction to circumstances which are virtually catastrophic in character.We think it clear that the magnitude of the casualty is not and should not be the controlling factor in determining whether a questioned event qualifies for casualty loss deduction treatment. Such losses have long been allowed in situations which are considerably less than cataclysmic in character. For example, deductions for damage to personal automobiles where the damage results from the faulty driving of the taxpayer but is not due to his willful act qualify. I.T. 2408, VII-1 C.B. 85 (1928). Respondent's current regulations are to the same effect. Sec. 1.165-7(a)(3), Income Tax Regs.3 See also Shearer v. Anderson, 16 F. 2d 995 (C.A. 2, 1927). It would appear that very slight automobile damage, when attended by the necessary suddenness, is now routinely allowed casualty 91 loss treatment. As we specifically observed 435 in Harry Heyn, supra at 308: "Automobile accidents are perhaps the most familiar casualties today."The casualty need not be of great or near-tragic proportions in order to qualify. Indeed, it is not frivolous to point out that the very casualties expressly enumerated in the statute (fires, storms, and shipwrecks) can and do occur in minor scope and with minor resulting losses. The kitchen grease fire which escapes control and causes but little loss is no less a fire and no less a casualty for purposes of section 165(c) (3) than the metropolitan holocaust. 4 We see no reason why a different standard of scale should apply to loss occurrences which fall within the "other casualty" category; they too are deductible under the statute when the events giving rise to the loss, judged by the accepted and essential casualty characteristics, supra, 92 smack sufficiently of casualty or accident proceeding from an unknown cause or resulting in an unusual effect of a known cause. Ray Durden, 3 T.C. 1 (1944).The principle of ejusdem generis as it is presently applied does no violence to congressional intent. Its application has been consistently broadened so that wherever unexpected, accidental force is exerted on property and the taxpayer is powerless to prevent application of the force because of the suddenness thereof or some disability, the resulting direct and proximate damage causes a loss which is like or similar to losses arising from the causes specifically enumerated in section 165(c)(3). Further, mere negligence on the part of the owner-taxpayer has long been held not to necessitate the holding that an occurrence93 falls outside the ambit of "other casualty." Shearer v. Anderson, supra at 996; Harry Heyn, supra at 308. Needless to say, the taxpayer may not knowingly or willfully sit back and allow himself to be damaged in his property or willfully damage the property himself. In the instant case, while one or both of the petitioners may have acted negligently, certainly it cannot be said that either petitioner acted willfully or in a grossly negligent manner. The forceful slamming of the automobile door on a blustery fall day upon Agnes' hand and ring was clearly an unexpected accident. We hold that the resulting loss was a casualty within the meaning of the Code.On brief respondent argues with some force that our allowances of casualty loss deductions for accidents which are not of major proportion will in future make the law in this area difficult of administration. On brief, he specifically asked the following rhetorical question, among others: "Query: Is it a casualty when Johnny tears out the knee of his new suit by playing too vigorously on his way to church * * ?" We think that since 1964 the problem raised by respondent's94 hypothetical 436 question has not posed serious difficulties in the administration of section 165(c)(3). Section 208(a), Revenue Act of 1964, 78 Stat. 19, which applies to losses occurring after December 31, 1963, amended section 165(c)(3) so that a casualty is now allowed only to the extent that the amount of loss to an individual arising from each casualty exceeds $ 100. 5 This amendment should go far to allay respondent's fears over prospective application and administration of section 165(c) (3) with respect to everyday household and other losses which are less than cataclysmic in impact or scope but which meet the judicially evolved definition of "other casualty."The pertinent legislative95 committee reports on the amendment affirmatively indicate that the reason for its enactment was indeed to eliminate deductions for minor casualties incurred by taxpayers in everyday living. H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 175; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 561. The reasons for the amendment cited by both the House Committee on Ways and Means and the Senate Committee on Finance are identical and these reasons are set forth in almost identical language in both reports. The Senate report, supra, provides in pertinent part as follows at 1964-1 C.B. (Part 2) 561.(b) General reasons for provision -- Your committee agrees with the House that in the case of nonbusiness casualty and theft losses, it is appropriate in computing taxable income to allow the deduction only of those losses which * * * go beyond the average or usual losses incurred by most taxpayers in day-to-day living. In view of this, it is believed appropriate to limit the casualty loss deduction to those losses or thefts above a minimum amount. The96 minimum selected was $ 100 per casualty loss, since this corresponds approximately with the "$ 100 deductible" insurance carried by many individuals * * with respect to such losses. This means that no deduction will be allowed in the case of an ordinary "fender bending" accident or casualty, but that casualty and theft losses will continue to be deductible (over the $ 100) in those cases where they are sufficient in size to have a significant effect upon an individual's ability to pay Federal income taxes. [Emphasis added.]We think it clear from the language quoted above that Congress did not intend to change and in fact gave tacit approval to the judicially evolved definition of casualty which might frequently include the "ordinary 'fender bending' accident or casualty." The amendment to section 165(c)(3) did not take effect until after the taxable year before us and does not affect the result or our allowance of loss in this case. We do believe, however, considering the purposes for which the 437 amendment was enacted, that its passage throws light upon our decision here. Primarily, the new $ 100 minimum largely negates respondent's argument that allowance97 of the deduction in this and similar situations has opened or will open the floodgates upon him, creating a difficult administrative burden in determining the proper treatment to be accorded minor household or everyday accidents. Secondly, we think the method chosen by Congress to eliminate deduction treatment for minor losses is significant in that it did not attempt to tamper with existing statutory and judicial definitions of casualty. Rather, Congress merely decided to exclude casualties which did not result in losses exceeding $ 100; the committee reports, supra, seem expressly to recognize that many minor accidents would clearly qualify as casualties under the statute and its judicial interpretations. Automobile accidents, certainly in the "other casualty" category, were specifically mentioned. We think that the amendment's passage, in light of the language in the respective reports, supra, indicates tacit retrospective approval by Congress of judicial decisions tending to recognize that "other casualty" per se need not mean an occurrence of catastrophic, catacylsmic, calamitous, or even necessarily severe consequences to the individual affected.As we suggested 98 earlier, the question of whether or not a deductible "other casualty" has occurred is a question of fact involving the application of accepted criteria to the facts of each case. We have already made plain our conclusion that the events which occasioned the loss of Agnes' diamond meet these criteria.Respondent argues further that under the factual situation presently confronting us, even if the events which transpired constitute a casualty, the loss of the diamond did not result or arise from the casualty, which was the slamming of the door upon Agnes' hand. Respondent asserts that the diamond's loss resulted from Agnes' deliberate shaking of her injured hand. Under the facts of this case, respondent's contention is without merit. It is impossible to determine conclusively from the record whether the diamond "went flying" before or after Agnes shook her hand violently or merely dropped out after the flanges holding it in place were broken. Surely, in either event, the loss was caused by the accidental and forceful slamming of the door on the ring; Agnes' shaking of her hand in great pain was the immediate, direct proximate, and inevitable result of the forceful slamming.Finally, 99 it is appropriate to comment additionally that we are convinced after consideration of the entire record, giving due weight to 438 John's demeanor and testimony at trial, that the diamond was irrevocably and irretrievably lost during 1963.Respondent, for his part, has not urged that an identifiable event fixing the loss is lacking. He also apparently agrees that if a casualty loss was sustained, the diamond had no value after the loss. As in a theft situation, the diamond was completely removed from the enjoyment of its owner. Normally, the deduction is computed by comparing pre-casualty and post-casualty market values. Sec. 1.165-7(b), Income Tax Regs. Here respondent halfheartedly argues that even assuming arguendo that petitioners suffered a casualty loss the deduction should be disallowed because of petitioners' failure to establish the pre- and post-casualty fair market value of the diamond. We have found as a fact, however, that the ring had a fair market value of $ 1,200 immediately prior to its loss. Any slight value remaining in the simple four-prolonged solitaire mounting with two prongs broken off was de minimis and respondent does not even argue that100 any adjustment should be made because the damaged setting was also not lost. The loss suffered was therefore the amount claimed, $ 1,200.Respondent does not actually dispute petitioners' pre-casualty valuation of the diamond. He merely urges that John's testimony is not sufficient to establish value. As our findings reflect, respondent at no time prior to trial contested or disputed the amount of the loss claimed. Petitioners' statement at trial that the question of valuation had never come up as an issue at any time is undisputed. Neither the deficiency notice, the pleadings, nor any portion of the opening statements at trial mention a dispute as to value of the diamond or amount of the loss. John's testimony, his appearance and demeanor at trial and on the witness stand satisfy us that he is not inclined to exaggerate or make claims that are unfounded. His testimony as to the cost and value of the engagement ring he bought and gave to his wife is undisputed and entirely convincing. In the light of all the circumstances we have found on the evidence before us that the pre-casualty market value of the ring was $ 1,200. That is the amount of the loss which petitioners are101 entitled to claim as a casualty deduction. We believe that in situations similar to the instant case, where post-casualty appraisal is impossible or irrelevant because the subject property has been completely removed from the owner's possession and enjoyment, the post-casualty fair market value should be considered to be zero. This is the approach adopted by respondent in the highly analogous theft area. See sec. 1.165-8(c), Income Tax Regs.Decision will be entered for the petitioners. Footnotes1. All references hereinafter made will be to the Internal Revenue Code of 1954 unless otherwise indicated and specified.↩2. Sec. 165 provides in pertinent part as follows:SEC. 165. LOSSES.(a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * (c) Limitation on Losses of Individuals. -- In the case of an individual, the deduction under subsection (a) shall be limited to -- (1) losses incurred in a trade or business;(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and(3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $ 100. * *[Matter in italic↩ added by sec. 208(a), Revenue Act of 1964, 78 Stat. 19, shown for information only as it does not apply to 1963, the year before us.]3. Accord, Elwood J. Clark↩, a Memorandum Opinion of this Court dated Apr. 1, 1946.4. We are not concerned here with amount of loss. A $ 100 minimum has been part of the statute since 1964. See fn. 2, supra↩. Rather we are concerned with the definitional aspects of casualty under the statute.5. Neither party has cited this amendment nor argued what bearing, if any, its enactment should have upon our decision. However, we take judicial notice of it. We would be remiss in failing to do so because we think the enactment properly affects our decision in this case for reasons appearing in our Opinion, infra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620163/	CARRILEE A. BELL, F.K.A. CARRILEE A. MOTHERSHED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBell v. CommissionerDocket No. 21013-86.United States Tax CourtT.C. Memo 1989-107; 1989 Tax Ct. Memo LEXIS 107; 56 T.C.M. (CCH) 1467; T.C.M. (RIA) 89107; March 20, 1989. 107 Held: Petitioner is an innocent spouse with respect to the specific adjustments in the deficiency notice as to which she is found to be an innocent spouse but not as to balance of the deficiency. Julian P. Kornfeld and Michael L. Bardrick, for the petitioner. Bruce K. Meneely, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined a deficiency in the Federal income tax liability of petitioner108 and her former husband George L. Mothershed for the calendar year 1980 in the amount of $ 79,585.53 and an addition to tax under section 6653(a) in the amount of $ 3,979.28. After concessions, the only issues to be tried are whether petitioner qualifies as an innocent spouse under section 6013(e)1 with respect to one or more of three specific adjustments determined in the statutory notice, and if so whether she is thereby an innocent spouse as to the entire deficiency or only as to those specific adjustments as to which we herein determine petitioner to be an innocent spouse. The parties have stipulated that a joint return was filed as required by section 6013(e)(1)(A) and that the requirements of section 6013(e)(3) and 6013(e)(4) have been met, leaving at issue: (i) Whether an interest expense deduction of $ 90,648, which the parties agree is a grossly erroneous item, is solely a grossly erroneous item of George L. Mothershed or of both Mr. Mothershed and petitioner; (ii) whether petitioner knew or had reason to know that, in addition to said erroneous interest deduction, the return contained omissions of income in the amounts of $ 2,938.79 and $ 12,379.53, both of which109 are agreed to be grossly erroneous items of Mr. Mothershed only; and (iii) whether it is inequitable to hold petitioner liable for the substantial understatement of tax which results from the above-described three items. FINDINGS OF FACT Some of the facts have been stipulated and they are so found. At the time the petition was filed, petitioner was a resident of Oklahoma City, Oklahoma. Petitioner and George L. Mothershed were married in 1963 while both were attending college in Arizona. Petitioner was then approximately 20 years old. Petitioner majored in home economics and psychology in college; she took no courses in business, finance, accounting, or taxation. Following graduation in 1965, the couple moved to Oklahoma, where Mr. Mothershed entered law school at the University of Oklahoma from which he graduated in due course. He thereupon went to work full time for Big Chief Drilling Co. (Big Chief), an oil and gas company in which petitioner's father Jack H. Abernathy110 was a substantial shareholder. During the year 1972 Mr. Mothershed left Big Chief to become president of Post Oak Oil Co. (Post Oak). Mr. Abernathy was the controlling shareholder of Post Oak and both petitioner and her brother were minority stockholders. In 1974, as a result of a corporate reorganization, petitioner became the owner of 100 percent of the common stock of Post Oak while her father continued as a holder of preferred stock. Petitioner's father gradually withdrew from active management of Post Oak with Mr. Mothershed assuming sole responsibility for day-to-day management. Although petitioner and her father continued as members of the board of directors of Post Oak and possibly as officers, petitioner exercised no executive authority or control until Mr. Mothershed was ousted from his position with the company following the filing by petitioner of a suit for divorce in April 1981. Although petitioner's father had been engaged directly or indirectly in the oil and gas business for a substantial part of petitioner's life, until 1981 petitioner never engaged in any business activity. She had worked briefly as a marketing secretary while Mr. Mothershed was in law school. 111 Not until 1981 did petitioner begin to learn about the oil and gas business. Some oil and gas terminology was familiar to her prior thereto, although not really understood. By the time of trial, petitioner had acquired some understanding of those phases of this business in which Post Oak was engaged but she still did not understand financial statements, tax returns, or tax accounting. Petitioner's positions as an officer and director of Post Oak were essentially as a figurehead. She had neither the education nor the experience necessary to understand the corporate documents to which she was exposed or which she executed. Neither her father nor her husband undertook to remedy this inadequacy and petitioner did not then have the incentive to do so on her own. Mr. Mothershed's attitude and actions toward petitioner are consistent with an intent on his part to exclude petitioner from financial information and that is effectively what happened. During the marriage petitioner participated in "few serious discussions" with respect to business matters. Similarly, Mr. Mothershed prepared or caused independent certified public accountants to prepare all the tax returns required to112 be filed by petitioner and her former husband during their marriage. Mr. Mothershed had, and was thought by petitioner to have, a sufficient understanding of Federal tax to ensure correct income tax return preparation and to be sufficiently capable in business affairs to take care of petitioner's financial interests. With the possible exception of the 1980 return, Mr. Mothershed carefully reviewed each tax return before signing it and he had sufficient tax knowledge to insure correct tax return preparation. The tax returns were never reviewed by petitioner with her former husband or with anyone else. Instead, the tax returns were always reviewed and executed by Mr. Mothershed prior to presentation to petitioner. When presented to her, petitioner merely signed her name on the space provided. She did not have sufficient business and tax knowledge to understand or to review the returns herself. When petitioner's signature was required on a business document, the document was presented to her without a sufficient explanation to enable her to understand its contents or significance. Up to the commencement of the marital discord during the year 1980, petitioner relied upon her then113 husband to transact all business activities for the family. 2114 Petitioner utilized a single bank account into which Mr. Mothershed deposited a monthly allowance with which petitioner paid household expenses. Petitioner's monthly allowance was increased from $ 1,000 in 1972 to $ 4,000 in 1977; it was maintained at that sum thereafter. Petitioner also was furnished with various credit cards and charge accounts, the bills for which, as well as expenses of the operation of the residences occupied from time to time by petitioner and her former husband, were all paid by Mr. Mothershed. Similarly, tuition expenses for both of petitioner's children were handled by Mr. Mothershed. Petitioner never saw bank statements pertaining to bank accounts used by her former husband or received comprehensible information as to the amount or sources of his annual income. In the later years of the marriage, Mr. Mothershed operated Post Oak largely for his own personal benefit. On several occasions he transferred from it to himself valuable properties, including in 1976 an interest in an oil and gas lease on which drilling had commenced, herein referred to as the McClure well. Mr. Mothershed told petitioner in very general terms that he had transferred an interest115 in the oil and gas lease from Post Oak to himself and led petitioner to believe that, if the drilling activity resulted in a producing well, the well would be held for the joint benefit of petitioner and Mr. Mothershed. At some point thereafter petitioner became aware that the well was producing and was providing substantial funds which permitted Mr. Mothershed to increase their standard of living. Petitioner was also told by Mr. Mothershed that his share of the cost of drilling and completing the McClure well would be borrowed from Southwestern Bank & Trust Co. (Southwestern Bank), in which petitioner's father held a substantial stock interest. At her husband's request petitioner signed a guaranty agreement running to the bank. She did not know the amount of the proposed loan or that the guaranty agreement was unlimited. Mr. Mothershed's indebtedness to said bank, which resulted in the interest deduction disallowance in issue here, commenced in 1976. Prior to 1978, Mr. Mothershed and petitioner acquired a large house on a 70-acre tract of land with numerous out buildings, guest houses, and the like. Remodeling of the house commenced in 1977 or 1978 and was handled almost exclusively116 by Mr. Mothershed who financed a large part of the cost of remodeling by additional borrowings from Southwestern Bank. Petitioner periodically expressed concern at the large expenditures of funds but was assured by her former husband that his income was sufficient to defray the cost. She was never advised that in fact a large portion of the expenditures were paid by funds borrowed from said bank. In addition to being renovated, the residence was expensively furnished. Further, numerous expensive automobiles were available to petitioner and her family for their use. By the late 1970's through at least 1980 petitioner and Mr. Mothershed were living in a fashion customary for individuals with spendable income of several hundred thousand dollars per year. Mr. Mothershed's indebtedness to the bank at the time of the divorce in 1981 was substantial. He had borrowed $ 150,000 to pay his share of the cost of drilling the McClure well and a majority of the approximately $ 800,000 spent on remodeling the residence. The revenues from the McClure well were paid directly to Southwestern Bank and deposited in an account of Mr. Mothershed over which petitioner had no signature authority. 117 Between August 1981 and April 1983 the bank applied almost all of these revenues to the payment of interest and principal on this debt. In 1981 net revenues from the well were over $ 300,000 and in 1982 over $ 175,000. On November 24, 1982, the principal balance of this debt exceeded $ 1,000,000. Petitioner did not know until after the divorce proceeding was initiated that Mr. Mothershed was heavily indebted to the bank, all of which was covered by her 1976 guarantee. That information was, however, always theoretically available to petitioner through direct inquiry to the bank. It never occurred to petitioner to make inquiry of the bank. Neither did she ever inquire of her former husband or of her father as to such matters. It is at best uncertain whether Mr. Mothershed would have fully informed petitioner as to the facts had she made inquiry of him. Upon the filing of the divorce action against Mr. Mothershed, and the removal of him from operating responsibility at Post Oak, petitioner occupied the home with her children, with Mr. Mothershed required to continue to provide support for the family, until the fall of 1982 when the Oklahoma divorce court divided the marital118 assets as an incident to the divorce. The marital estate was divided substantially equally, with petitioner receiving tangible personal property, securities, and a one-half interest in the McClure well, all at a stated value of $ 756,653. Mr. Mothershed received similar assets valued at $ 750,078. The residence was sold and the proceeds applied largely to the payment of Mr. Mothershed's debt to said bank. An interest in a partnership was ordered to be sold, the proceeds applied to a note, and any excess divided between the parties. A substantial portion of the assets received by petitioner from the marital estate were sold in order to pay her debts, including attorney fees incurred during the divorce action. Mr. Mothershed's obligations to support the children were confirmed by the divorce court but he frequently failed to make the required payments. The title to the Post Oak stock was confirmed in petitioner, but she was ordered to assume and pay liabilities in excess of $ 900,000, the largest portion of which was a liability of Post Oak. Finally any cash in the hands of the conservator after paying his fees and other court-approved debts was to be divided equally. Following119 the division of the marital assets, petitioner's individual standard of living was substantially reduced from that which she enjoyed in the last few years of her marriage. Petitioner and Mr. Mothershed on October 15, 1981, filed with respondent a joint Federal income tax return for the calendar year 1980. That tax return was prepared by individuals in the Oklahoma City office of Arthur Anderson & Co. The signature of Arthur Anderson & Co. as tax return preparer is dated September 23, 1981. The signature of Mr. Mothershed is dated September 29, 1981, and the signature of petitioner is undated. Mr. Mothershed actually signed the return on October 15, 1981. He did not at that time review the return in detail. Thereafter, on the same date petitioner signed the return. On that tax return, petitioner and Mr. Mothershed claimed an itemized deduction on Schedule A for interest expense in the amount of $ 158,553, which was described on the schedule as paid to SWB & T. Those initials stand for Southwestern Bank. The interest expense disallowance in the amount of $ 90,648 constituted interest owed to Southwestern Bank by Mr. Mothershed for the year 1980 which was added to the unpaid120 principal of the indebtedness and therefore is not deemed paid for Federal income tax purposes during the year 1980. The parties stipulated that neither petitioner nor Mr. Mothershed knew at the time each of them signed the 1980 tax return that the interest deduction on the return for interest paid to Southwestern Bank included this amount of interest which had not been paid in cash. Moreover, there was nothing on the tax return itself which contained a clue to this fact; hence, a detailed examination of the return by a tax expert would not have led to discovery of this grossly erroneous item. Moreover, the statement from Southwestern Bank sent to Mr. Mothershed showing his interest obligation for the year 1980 in the amount of $ 158,553 had no breakdown between interest actually paid and interest added to principal. Petitioner neither received a copy of this statement nor saw the one furnished to her former husband. Mr. Mothershed received such a statement from the bank every year from 1976 through 1983. Payments of interest and principal were made on Mr. Mothershed's indebtedness to the bank at least in part from McClure well revenue deposited directly in one of his accounts121 with the bank. Statements showing the breakdown of interest and principal payments were given to Mr. Mothershed whenever notes were renewed or new notes executed. He had several such transactions with the bank during 1980. Consequently, Mr. Mothershed was informed during 1980 as to the amount of interest actually paid in cash and the amount added to principal and reflected in note renewals. 3 No information as to this debt and the payments thereon during 1980 was furnished to petitioner until after the 1980 return was signed. At that time she did not even know what the term "rolled in interest" meant. During the year 1980 Mr. Mothershed received a check122 in the amount of $ 2,938.79 from persons administering the estate of his deceased mother. There was no information on the check showing any breakdown between corpus and income. Mr. Mothershed assumed that the entire distribution was nontaxable corpus. Consequently, the amount of the check was omitted from the 1980 income tax return. Respondent determined in the statutory notice that the entire sum was income but respondent's counsel has stipulated that $ 1,859.12 of that check was nontaxable corpus. Petitioner does not dispute that the balance of that distribution is interest taxable to Mr. Mothershed and reportable on the 1980 joint Federal income tax return. Petitioner was aware that Mr. Mothershed was entitled to distributions from his mother's estate but she neither saw this particular check nor had any knowledge of its receipt. At the time the return was filed, neither petitioner nor Mr. Mothershed were aware that a part of the estate distribution represented taxable income which was omitted from the return. The additional compensation taxable to Mr. Mothershed in the amount of $ 12,379.53 represents in part expenditures paid by Post Oak directly or indirectly for the benefit123 of Mr. Mothershed plus depreciation on automobiles. While the particular items composing this adjustment cannot be ascertained more precisely from this record, Mr. Mothershed caused Post Oak to pay his country club dues and at least some entertainment at the club. For many years such deductions have been routinely disallowed by respondent's agents on audit. Neither at the time petitioner signed the 1980 income tax return nor prior thereto did she have any knowledge of the handling by Post Oak of such matters or that this return omitted $ 12,379.53 of compensation income taxable to Mr. Mothershed. Petitioner assumed and believed that the tax laws and regulations were being properly followed and applied in the preparation of income tax returns, including the 1980 tax return. Mr. Mothershed did not know when he signed the return that the Service would audit Post Oak for its fiscal year ending September 30, 1981, and reclassify certain of its expenses as compensation taxable to him in the amount of $ 12,379.53. The handling of employee business expenses by Post Oak accorded in general with advice received by Mr. Mothershed from Arthur Anderson. And when he signed the return, Mr. Mothershed124 may well not have recollected that Post Oak had deducted for Federal income tax purposes the precise items comprising this $ 12,379.53 adjustment. However, a man with his tax knowledge and experience must have known that some of his expenses paid by Post Oak were subject to challenge by respondent on audit. OPINION The principal issue for decision is whether petitioner qualifies as an innocent spouse under section 6013(e)4 with respect to the three specific adjustments for the year 1980 described above. 5Petitioner bears the burden of proving that she is entitled to relief under the innocent spouse provisions. Sonnenborn v. Commissioner,57 T.C. 373">57 T.C. 373, 381-383 (1971); Rule 142. This statute is, however, a remedial provision, intended by Congress to benefit taxpayers and should be so construed. The 1984 amendments confirm this Congressional intent. Estate of Cardulla v. Commissioner,T.C. Memo. 1986-307; See Borison, "A Call for Legislative and Judicial125 Liberalization," 40 Tax Lawyer 819, 825 (Summer 1987). 126 Section 6013(e)(1)(B)One of the requirements for innocent spouse relief is that the substantial understatement of tax must be attributable to grossly erroneous items of the other spouse. Sec. 6013(e)(1)(B). Respondent concedes that the omissions from income of the distribution from the trust established under the will of Mr. Mothershed's mother and of the additional compensation from Post Oak are grossly erroneous items attributable solely to Mr. Mothershed and therefore satisfy the requirement of section 6013(e)(1)(B). Respondent also concedes that the excessive deduction of interest expense is a grossly erroneous item but contends that it is attributable to both spouses. Although the parties stipulated that the interest expense was due to promissory notes executed solely by Mr. Mothershed with Southwestern Bank, respondent contends that petitioner's guarantee of the notes is sufficient to cause the attribution of this grossly erroneous item to her. In addition, respondent argues that petitioner's connection with the indebtedness is established by the fact that renovation of the marital residence was financed in part by the loan proceeds. Respondent also relies127 on the fact that the bank loans were used to fund Mr. Mothershed's interest in the McClure well and that petitioner was awarded in 1982 one-half of the McClure well as part of the property settlement. Respondent cites as authority Estate of Rogers v. Commissioner,T.C. Memo. 1979-178, and Hodges v. Commissioner,T.C. Memo 1986-67">T.C. Memo. 1986-67. Estate of Rogers and Hodges are distinguishable from the instant case. In Estate of Rogers, the spouse claiming innocent spouse status occasionally worked in her husband's grocery stores, collected rentals, and received rental income from jointly held properties. We held that she had failed to prove that the omitted income was not, in part, attributable to her efforts and investments. In Hodges, we found the wife was not entitled to innocent spouse relief because, inter alia, she and her former husband were jointly involved in the business to which a portion of the understatement of tax was attributable. In this case by contrast, the interest expense deduction is attributable to indebtedness of only Mr. Mothershed. Petitioner's secondary liability as the guarantor of Mr. Mothershed's bank indebtedness128 is only tenuously connected with the interest expense deduction. She signed the guaranty agreement in 1976 at the request of Mr. Mothershed, who told petitioner that he intended to borrow some money to finance the McClure well. She did not know that the guaranty agreement did not specify a maximum amount of indebtedness for which she was secondarily liable. She also did not know the amount actually borrowed by Mr. Mothershed in 1976 or at subsequent times. Additionally, she was not aware that the cost of renovating the house was financed by bank loans. Petitioner was not involved in deciding the amounts or dates of the bank loans or the use or application of the borrowed funds. Accordingly, the interest expense deduction with respect to the bank indebtedness is not attributable to petitioner within the meaning of section 6013(e)(1)(B). Section 6102(e)(1)(C)Respondent next contends that petitioner has failed to establish that in signing the return she had no reason to know of the substantial understatement of tax (sec. 6013(e)(1)(C)). 6 Respondent's argument with respect to constructive knowledge has two aspects: (1) that petitioner has failed to establish the circumstances129 surrounding the execution of the 1980 tax return and (2) that petitioner had both the opportunity and the obligation to ascertain the facts with respect to these three grossly erroneous items. Respondent argues that there is no explanation for the gap between September 29, the date next to Mr. Mothershed's signature, and October 15, the date on which the return was filed with respondent. Hence, respondent says petitioner has failed to establish that she had no reason to know of the understatement. Respondent also argues that petitioner's "input into the preparation of the return is unclear." The short answer to respondent's contention is that the evidence is to the contrary. Petitioner cannot recall the circumstances surrounding the signing by her of this tax return but she stated unequivocally that Mr. Mothershed's signature was on the return before she signed it. She further stated that no one reviewed the return for her, and that her possession or custody of the return was momentary, solely for the purpose130 of affixing her signature thereto. We find this testimony to be entirely credible. We have found that the return was executed on October 15, 1981, based on Mr. Mothershed's testimony to this effect. Why the date "9/29/81" appears opposite his signature is not explained. Petitioner must, therefore, have also signed the return on October 15, with no time available to review the return, had she had the capacity to do so. It is, of course, theoretically possible that during the period between September 23 and October 15, 1981, the return might have been presented by Arthur Anderson personnel to an accountant or an attorney representing petitioner for review from petitioner's standpoint. However, there is simply not one iota of evidence to support such a theory. Petitioner unequivocally testified that this was not done. Moreover, the only evidence in the record as to this tax return being in the hands of anyone other than Arthur Anderson personnel is Mr. Mothershed's testimony that the return was brought to him for signature by Mr. William L. Peterson, Jr., who at that time was acting as conservator of the marital estate. Mr. Mothershed also testified, although we are not inclined131 to credit his testimony, that Mr. Peterson was biased against him and acted in fact for the benefit of petitioner. Petitioner fully explained her connection with the 1980 income tax return. Respondent's theory has no support in this record. Her testimony stands unchallenged and she was a credible witness. 7The standard to be applied in making the determination as to constructive knowledge is whether a reasonably prudent person with the knowledge of facts possessed by the person claiming innocent spouse status should have been alerted to the possibility of a substantial understatement. Mysse v. Commissioner,57 T.C. 680">57 T.C. 680, 689-699 (1972). This is a factual inquiry. Shea v. Commissioner,780 F.2d 561">780 F.2d 561, 565 (6th Cir. 1986); Sanders v. United States,509 F.2d 162">509 F.2d 162 (5th Cir. 1975). Respondent relies132 on Shea v. Commissioner, supra; Lynch v. Commissioner,T.C. Memo 1983-173">T.C. Memo. 1983-173; and Cohen v. Commissioner,T.C. Memo. 1987-537. In Shea, we found, and the Court of Appeals agreed, that Mrs. Shea had relevant financial records available to her and was at least marginally involved in her husband's business. She also knew that he was making unauthorized withdrawals from her own bank account. Based on these and other facts, we found that a "prudent taxpayer would at least have inquired into her personal financial and tax situation, thereby discovering the omissions." Shea v. Commissioner,T.C. Memo. 1984-310, revd. on another issue 780 F.2d 561">780 F.2d 561 (6th Cir. 1986). Similarly, in Lynch, Mrs. Lynch was actively engaged in her husband's business and had sufficient factual information so that if she in fact did not have actual knowledge of the omissions of income, she had reason to know. No such situations exist in the case at bar. In Cohen, we held that Mrs. Cohen was not entitled to innocent spouse relief concerning understatement of tax attributable to disallowance of her ex-husband's partnership loss. We found133 that Mrs. Cohen, a college graduate and second-grade teacher, should have taken the time or effort to inquire about items plainly visible on the tax returns which were prepared by her ex-husband, a certified public accountant. Respondent argues that Cohen establishes as a rule of law that before signing a return a taxpayer is required in every case to make inquiry as to any possible understatement in order to satisfy the "reason to know" requirement, but respondent misconstrues the holding in that case. The constructive knowledge determination is based on the facts and circumstances of each case. The facts in Cohen are materially different from those in this case. Our conclusion in Cohen was based on its particular facts. The facts in Bouskos v. Commissioner,T.C. Memo. 1987-574, are more closely analogous to those in the case at bar. In Bouskos we noted Aggie had no business education or experience. She did not participate in any of her husband's business activities; in fact, James did not even discuss business with her. James controlled the family finances. The couple did not share a joint checking account; instead, James paid all the134 family's living expenses from his separate account, an account to which Aggie did not have access and the balance of which she did not know. Aggie was unaware of her husband's level of income during their marriage. Thus, it is clear that a reasonable person with Aggie's lack of business sophistication and lack of access to the family's financial activities could not reasonably have known of the understatements. [Bouskos v. Commissioner,T.C. Memo. 1987-574, 56 P-H Memo T.C. par. 87,574 at 87-3085, 54 T.C.M. (CCH) 1117">54 T.C.M. 1117 at 1120-1121.] Moreover, in this case even if petitioner had examined and understood the return, she could not have determined that the interest deduction was overstated, that the distribution from the estate of Mr. Mothershed's mother was omitted, and that certain costs incurred by Post Oak were compensation income taxable to Mr. Mothershed. Inquiry of Mr. Mothershed was obviously impractical on October 15, 1981. We find here as we have found in other cases that petitioner's husband effectively excluded her from knowledge of business affairs, family financial matters, and the contents of the tax returns. See, e.g., Terzian v. Commissioner,72 T.C. 1164">72 T.C. 1164, 1170-1171 (1979);135 Estate of Probinsky v. Commissioner,T.C. Memo. 1988-371; Guth v. Commissioner,T.C. Memo. 1987-522, on appeal (9th Cir. Jan. 11, 1988); Bouskos v. Commissioner,T.C. Memo. 1987-574; Estate of Cardulla v. Commissioner,T.C. Memo 1986-307">T.C. Memo. 1986-307. While petitioner enjoyed a comfortable living standard during the period 1975 through 1980, her standard of living was not lavish within the meaning of Mysse v. Commissioner,57 T.C. 680">57 T.C. 680, 699 (1972). Nothing occurred during these years which should have put petitioner on notice that she and her then husband were living beyond their means or that Mr. Mothershed would intentionally underreport his 1980 income for Federal tax purposes. We thus conclude that petitioner has carried her burden of showing that she had no reason to know of these understatements. Section 6013(e)(1)(D)Respondent argues that it is not inequitable to hold petitioner liable for the deficiency attributable to the three substantial understatements in issue. Sec. 6013(e)(1)(D). 136 Prior to amendment by section 424(a) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 801, section 6013(e)(1)(D) provided that a factor to be considered in determining the equitableness of holding a spouse liable for a deficiency in tax is whether that person significantly benefited, directly or indirectly, from the items of omitted gross income. Although no longer an express statutory factor to be considered, personal benefit from a substantial understatement is still a factor to be considered in making the equity determination. H. Rept. 98-432 (Part 2) 1501, 1502 (1984). Thus, section 1.6013-5(b), Income Tax Regs., which was promulgated prior to the 1984 Amendments, is still pertinent. Purcell v. Commissioner,86 T.C. 228">86 T.C. 228, 242 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987), cert. denied U.S. , 1290">108 S.Ct. 1290 (1988). This regulation provides, in part, that Whether it is inequitable to hold a person liable for the deficiency in tax, * * , is to be determined on the basis of all the facts137 and circumstances. In making such a determination a factor to be considered is whether the person seeking relief significantly benefited, directly or indirectly, from the items omitted from gross income. * * * [Sec. 6013-5(b), Income Tax Regs.] Normal support is not a sufficient "benefit" for purposes of determining whether it is inequitable to hold petitioner liable for the deficiency. Sec. 1.6013-5(b), Income Tax Regs.; Terzian v. Commissioner,72 T.C. at 1172. Respondent, however, argues in this case that petitioner received more than normal support in that she spent substantial amounts of money on clothing for herself and on household furnishings, received valuable jewelry as gifts, and purchased a house with her husband. We disagree with respondent. Normal support is to be measured by the circumstances of the parties. Sanders v. United States,509 F.2d 162">509 F.2d 162, 168 (5th Cir. 1975); Bouskos v. Commissioner,T.C. Memo 1987-574">T.C. Memo. 1987-574. It is not an absolute standard. In this case, we must determine what is138 to be expected of a family with net income during the years 1979, 1980, and 1981 of approximately $ 300,000 per year. We find the expenditures on clothing, the receipt of valuable jewelry, and the purchase of a house on which substantial rehabilitation was undertaken to be consistent with the financial circumstances of this family. Moreover, what we are concerned with here is solely the three items -- an excessive interest deduction of approximately $ 90,000 and the omission from income of two items aggregating approximately $ 14,000. The tax benefit from the excessive interest deduction and omitted income is not traceable to the rehabilitation of the house, which was funded with bank loans, or the other expenditures by or for petitioner. Section 1.6013-5(b), Income Tax Regs., also provides that "Evidence of direct or indirect benefit may consist of transfers of property, including transfers which may be received several years after the year in which the omitted item of income should have been included in gross income." Respondent argues that petitioner benefited139 through the division of the community estate by the divorce court. However, the properties which were allocated to petitioner in the division of the marital estate were acquired prior to 1980 and thus could not have been purchased with the omitted income or the tax benefit from the excessive interest deduction, the latter benefit having been derived in late 1981 by reason of the reduction of the 1980 income tax obligation. See Padgett v. Commissioner,T.C. Memo. 1987-130. The case of Kern v. Commissioner,T.C. Memo 1985-400">T.C. Memo. 1985-400, on which respondent relies, is simply not in point. In that case, the taxpayer failed to prove that some of the properties awarded to her in the divorce were not purchased from omitted income. The other cases relied on by respondent are not helpful to respondent. In this case, not withstanding the division of the marital estate as well as the determination of the divorce court that the Post Oak common stock was petitioner's separate property, not affected by the divorce, petitioner's standard of living was substantially reduced. She was required by the divorce court to assume liabilities of over $ 900,000, part of which140 reflected obligations of Post Oak and part an indebtedness incurred to pay fees of her divorce attorneys, litigation costs, and living expenses. Under all the circumstances of this case, based upon the entire record, we conclude that it would be inequitable to hold petitioner liable for the understatement referable to these three items. See, e.g., Terzian v. Commissioner,72 T.C. 1164">72 T.C. 1164, 1172 (1979). Respondent further argues, by analogy to McCoy v. Commissioner,57 T.C. 732">57 T.C. 732 (1972)8, that since both spouses were innocent of the facts, it is not inequitable to hold petitioner liable for the tax deficiency attributable to these three adjustments -- that this is "not the type of case that the innocent spouse provisions were intended to reach." In McCoy we said we do not think section 6013(e) was designed to abate joint and several liability where the lack of knowledge of the omitted income is predicated on mere ignorance of the legal tax consequences of transactions the facts of which are either in141 the possession of the spouse seeking relief or reasonably within his reach. * * * As we see it, the omission here resulted not from any concealment, overreaching, or any other wrongdoing on behalf of the husband, though we appreciate that the "innocent spouse" provisions do not specifically require wrongdoing to be brought into play. * * * Apparently neither the husband nor the wife knew the income tax consequences of the forgiveness of indebtedness here involved. They were in this respect both "innocent spouses" and we perceive no inequity in holding them both to joint and separate liability. [McCoy v. Commissioner,57 T.C. 732">57 T.C. 732, 734-735 (1972)]. However, respondent's reliance on McCoy is misplaced. With respect to the excessive interest deduction, Mr. Mothershed during 1980 was given by Southwestern Bank adequate information as to the amount of interest added to principal. Moreover, he certainly knew the amount of revenues generated by the McClure well each year, including 1980. We simply do not believe that an individual with the interest in business affairs which he had would not have known at least approximately how much of an increase142 in his indebtedness to the bank represented new borrowings and how much rolled-in interest. At the end of 1980, the rolled-in interest represented a substantial percentage of his debt to the bank. It also represented almost 60 percent of his 1980 interest obligation on that debt. The sum is too large to have gone unnoticed. Accordingly, even if he did not realize when signing the return that this interest deduction was excessive, he should have made certain that Arthur Anderson was given correct information and he should not have signed the return without reviewing it, as was his customary practice. The failure by Mr. Mothershed to discover and correct this excessive interest deduction was negligence. Similarly, Mr. Mothershed was aware of the fact that he was causing Post Oak to pay some of his personal expenses such as his club dues and entertainment as well as his company automobile expenses. While he may have received some comfort from Arthur Anderson, it is not clear that his tax return preparers were fully informed of the facts. Mr. Mothershed was fully informed, and with his tax expertise and experience he could or should have expected increased Post Oak compensation143 income from a tax audit. While he may not have been able to anticipate in 1981 the 1983 or 1984 audit, he was playing the "audit lottery" game. Here again Mr. Mothershed's conduct was negligent. With respect to the estate distribution we reach no such express conclusion simply because this record will not support it. It is entirely likely that Mr. Mothershed had facts in his possession which should have alerted him to inquire as to the taxability of some part of this distribution, but that does not necessarily mean that in fact he had the knowledge. The parties have stipulated that the check from the estate contained "no information as to how much was corpus and how much was income." It is further stipulated that Mr. Mothershed "believed" the check to be a distribution of corpus. However, our inability to make a finding of negligence with respect to the treatment of this small item is not material in this case for purposes of the application of section 6013(e)(1)(D). In applying the requirements of sections 6013(e)(1)(B) and (C), each item as to which a party claims to be an innocent144 spouse must be examined separately. The items together must comprise a substantial understatement but each item must be grossly erroneous. The alleged innocent party must lack knowledge (both actual and constructive) of the entire understatement, and hence of each item. But the statute provides that the test under section 6013(e)(1)(D) as to equitable considerations is based upon "all the facts and circumstances" in the record. Sec. 1.6013-5(b), Income Tax Regs. It is not necessarily affected by the particular facts pertaining to any one of the grossly erroneous items. On the basis of all of the facts and circumstances in this case, we conclude that the two spouses were not equally innocent. The equities are entirely on the side of petitioner. McCoy is not in point. Mr. Mothershed's conduct in connection with the 1980 tax return was negligent while petitioner's conduct was innocent. Thus we hold that petitioner is an innocent spouse with respect to each of these three items. Effect on Tax Liability of Innocent Spouse StatusPetitioner finally contends that she should be relieved of liability for the tax and interest attributable to145 all adjustments listed in the notice of deficiency, not just those with respect to which innocent spouse status is established. Petitioner's contention contradicts section 6013(e)(1), which provides that if four requirements are met (sec. 6013(e)(1)(A)-(D)), then the innocent spouse "shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement." (Emphasis added.) Although the legislative history does not focus on this point, we interpret the unambiguous language of section 6013(e)(1) to relieve an innocent spouse of a part of the deficiency (and interest and additions) to the extent that the spouse meets the requirements of section 6013(e) with respect to one or more specific items of income or deduction which are in issue. Where the necessary showing has been made, the spouse is entitled to relief from liability only for tax, interest, and addition attributable146 to a substantial understatement with respect to the specific item or items as to which the spouse has innocent spouse status. See Douglas v. Commissioner,86 T.C. 758">86 T.C. 758, 761 n. 3 (1986); Purcell v. Commissioner,86 T.C. at 235 n. 3. Cf. Jenkins v. Commissioner,T.C. Memo. 1988-326 (taxpayer qualified as an innocent spouse as to some, but not all, of the tax liability attributable to the omission from gross income for funds that were embezzled by taxpayer's wife). Petitioner stipulated that she is not an innocent spouse as to the farm loss in the amount of $ 21,775, a deduction for accounting fees in the amount of $ 2,900, and a recapture of investment tax credit in the amount of $ 10,877.50. Thus, petitioner is not relieved of liability with respect to that portion of the deficiency that is attributable to these items. 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, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. There is conflicting testimony in this record as to the extent to which Mr. Mothershed sought to inform petitioner as to his business activities and those of Post Oak. Petitioner testified before us. She was forthright and credible. Mr. Mothershed testified by deposition. In that deposition he affirms the bitterness of the divorce proceedings and his continuing animosity toward petitioner and her father. Since we did not observe the demeanor of Mr. Mothershed as a witness, we cannot form an accurate opinion as to his credibility. However, when his deposition, with its own internal inconsistencies, is considered in the context of the entire record, we are convinced that Mr. Mothershed exaggerated the extent to which he discussed business affairs and tax matters with his former wife. For example, Mr. Mothershed testified with respect to petitioner's review of tax returns: Q. In prior years, for instance in 1977, 1978, 1979, did Carrie review the tax returns before she signed them at all? A. She looked at them, yes. Q. Would she look at, for instance, your Schedule C? A. I doubt she knew what Schedule C is. If Mr. Mothershed had in fact reviewed income tax returns with petitioner, she would have been forced to know the purpose of a Schedule C. Thus, we have resolved conflicts in the testimony of these two witnesses by accepting petitioner's testimony as the more accurate.↩3. The parties stipulated that "At the time of signing the 1980 joint return, George L. Mothershed did not know that any part of the interest deduction claimed included any 'rolled in interest.'" In view of Mr. Mothershed's testimony that he received interest and principal statements during 1980 when notes were executed, we can only understand the stipulation to mean that when he signed the return on October 15, 1981, he did not check it to verify whether or not the interest deduction exceeded the amount paid in cash.↩4. Section 6013 provides as follows: (e) SPOUSE RELIEVED OF LIABILITY IN CERTAIN CASES. -- (1) IN GENERAL. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement, then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement. ↩5. Respondent concedes that neither petitioner nor Mr. Mothershed is liable for the addition to tax under section 6653(a)↩ for the year 1980.6. The parties stipulated that petitioner had no actual knowledge of the substantial understatement of tax attributable to the three grossly erroneous items in issue.↩7. We note in passing that respondent's trial memorandum stated that respondent would call William L. Peterson, Jr., as a witness to "testify about the preparation and execution of the 1980 return * *", but Mr. Peterson did not testify.↩8. Although not discussed by the parties, Lessinger v. Commissioner,85 T.C. 824">85 T.C. 824, 838↩ (1985), is to the same effect.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620165/	Black Dome Corporation v. Commissioner.Black Dome Corp. v. CommissionerDocket No. 7323.United States Tax Court1946 Tax Ct. Memo LEXIS 172; 5 T.C.M. (CCH) 455; T.C.M. (RIA) 46130; May 31, 1946William T. Griffith, Esq., and Henry F. Mathies, C.P.A., Room 809, 176 Broadway, New York 7, N. Y., for the petitioner. Wm. A. Schmitt, Esq., and S. V. Ekmann, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion This proceeding involves deficiencies in income taxes in the amounts of $1,398.33, and $3,077.40 for the calendar years 1941 and173 1942 respectively, and in declared value excess-profits tax for 1942 in the amount of $902.38. The question presented in whether respondent erred in disallowing certain deductions claimed by petitioner as business expenses, including net operating loss deductions sought to be carried over from prior years, on the ground that such expenses were personal, living or family expenses of petitioner's sole stockholder. Findings of Fact Petitioner is a corporation organized under the laws of the State of New York, having its principal office in New York City. The returns for the years herein involved were filed with the collector of internal revenue for the second district of New York. Petitioner was organized on December 16, 1926 by Robert Colgate, Sr. All of its authorized stock was issued, at his direction, to his five children and held by them in equal shares. The sole property owned by the petitioner during the years 1941 and 1942 consisted of two tracts of land located in Greene County, New York, near the town of Tannersville. The smaller tract comprised about 75 acres whereas the larger tract covered an area of about 6,000 acres, including about 5,000 acres of woodland and from174 500 to 1,000 acres of open land. The improvements on this property included a frame dwelling of 17 rooms and a number of other dwellings, barns, garages and out buildings. There were also two artificial lakes of about 35 and 50 acres, respectively, and about 2 1/2 to 3 miles of trout stream. This property had been acquired by Robert Colgate, Sr. in about 1910 and was transferred by him to petitioner when the latter was organized in 1926. From 1910 to 1926 the property was used for recreational purposes only by Robert Colgate, Sr. From 1926 to 1932, when he died, the property was devoted to similar use. From 1932 to February 3, 1940, the property was used only for recreational purposes by one of the then stockholders of the petitioner. In the period from 1932 to 1940, the operation of the property was the subject of discussion between Robert Colgate, son of Robert Colgate, Sr., and the other stockholders. The petitioner had no income during this period and engaged in no business activity; its shareholders were required to contribute from seven to ten thousand dollars annually for maintenance costs. On February 3, 1940, Robert Colgate purchased all of the shares of the petitioner175 held by his four brothers and sisters for a total consideration of $800. He acquired complete control of the petitioner with the intention of putting the corporation on a paying basis. After acquiring all of the stock, Colgate consulted an organization called "Woodland Management" which made a business of rendering advice on operating properties of this type profitably. Colgate made a cruise of the property with the manager of this organization and a timber expert associated with it. Woodland Management advised him to conduct timbering operations on a selective basis, cutting only trees with a diameter of 14 inches or more. On about July 31, 1940, petitioner entered into a timbering contract and timbering operations were conducted during the years 1941, 1942 and parts of 1943. Petitioner's gross receipts from these operations were $12,392.43 in 1941 and $26,383.65 in 1942. Petitioner's property was not occupied during 1940, except by the superintendent and such other employees as were normally on the premises. During the summer of 1941 the property was rented to a Mrs. Guest, who was not related to Colgate, for the sum of $1,200. The property was also rented for the summer of 1942176 to a sister of Mr. Colgate for the sum of $1,000. The property was not rented again until the summer of 1945 when it was rented for two months. A flock of 80 to 100 sheep has been maintained on the property since 1943. In 1941 an effort was made to stock one of the lakes with fish, but the project failed because of some disease which affected the fish. This project was undertaken because petitioner intended to establish a fishing club on the premises, which club was to be operated for profit and not for the recreation of petitioner's sole stockholder. The project was abandoned during the war years but it is petitioner's intention to attempt to revive it now. Mr. Colgate did not make any personal use of the property in 1941 and 1942. In the year 1941 he visited the property three times for short periods on business matters and in November of that year he spent ten days there going over the timbering operation. In March 1942 he visited the property for a few days to look it over and to make arrangements for renting it to his sister for the coming summer. Mr. Colgate was with the United States Navy in a civilian capacity during June and July of 1942 and as a commissioned officer from177 that time until September 1945. He did not visit the property again until November 1945. For the years 1939, 1940, 1941 and 1942, petitioner made the following expenditures: 1939194019411942Salaries and Wages$2,460.00$1,365.40$1,366.96$1,826.60Real Estate and Other Taxes1,921.131,834.892,121.952,188.87Telephone129.67111.05103.4878.03Electricity51.9837.3285.87135.73Accounting300.00300.00300.001,116.65Auto Expenses208.88153.0943.1695.10Dam Expenses272.00183.64Livestock88.23108.32Repairs and Supplies92.07379.78378.44383.1566.64Insurance101.101,252.48405.56858.42Miscellaneous Expenses88.37374.05145.40Depreciation1,169.061,088.322,214.163,336.24Farmhouse Operating Account83.46Painting45.00Legal Fees179.15325.00Commission120.00Fuel51.00Cleaning152.08Kitchen Utensils, Linen, etc.116.35Dues and Assessments110.00Express Charges3.35Fish for Stocking Lake235.00Compensation of Officers100.00Interest2,062.83Contributions10.00Total$6,882.49$6,645.06$8,554.64$12,832.27178 In 1941 the large dwelling house was completely refurnished and certain improvements, including four new bathrooms and new plumbing, were made at a cost of about $25,000. The expenditures were made for the purpose of facilitating the renting of petitioner's property and resulted in the increased claims for depreciation in 1941 and 1942 as compared to the earlier years. The refurnishing was necessitated by the fact that when Robert Colgate acquired all of petitioner's stock, the furnishings then in the house included many pieces which had been in the family for many years and which the various children of the elder Colgate desired to have. Shortly after Colgate acquired all of the stock, these furnishings were divided up between them. Petitioner borrowed the funds for the improvements and refurnishing from its sole stockholder and gave him its notes for the sums borrowed. Petitioner claimed a deduction of $2,062.83 for interest paid on these notes in 1942. The sum of $110 was paid in 1941 to a club known as the Onteora Club as dues and assessments. Robert Colgate, Sr., had belonged to this club, which offered various recreational facilities and which was located near petitioner's179 property. After the elder Colgate's death, the club membership was continued by his children. In 1941 the membership was continued in order to obtain good will and with the thought that it might facilitate the obtaining of memberships by petitioner's tenants. Petitioner's membership in the club did not entitle the lessees of its property to avail themselves of the facilities and privileges of the club. As set forth above, petitioner's expenditures for the year 1941 amounted to $8,554.64, which sum petitioner deducted as expenses in its return for that year. Respondent has allowed the deduction of $2,121.95 for real estate and other taxes but has disallowed the excess of the remaining expenditures, $6,432.69, over the amount of income received from the rental of the property, $1,200. The net disallowance was thus $5,232.69. In its 1941 return petitioner also deducted net operating loss carry-overs in the amounts of $5,713.43 for the year 1939 and of $2,656.51 for the year 1940. Respondent has allowed $1,921.13 of the net operating loss deduction claimed for 1939 and $1,834.89 of the sum claimed for 1940; the amounts allowed represent real estate and other taxes paid by petitioner180 in those years. Petitioner's expenses for the year 1942 amounted to $12,832.27 of which respondent allowed $2,188.87 for taxes, $100.00 for compensation of officers, $2,062.83 for interest and $10 for contributions. The respondent disallowed the excess of the other deductions, $8,470.57, over the amount of income received from the rental of the property, $1,000. The net disallowance was thus $7,470.57. In its 1942 return petitioner also claimed a net operating loss carry-over of $3,744.83 for the year 1940 which respondent disallowed on the ground that the 1940 operating loss, which had been reduced to $1,834.89 as set forth above, had been entirely used in the reduction of 1941 income. Prior to February 3, 1940, petitioner was not engaged in carrying on any trade or business. After that date and during the taxable years here involved, petitioner was engaged in carrying on a trade or business. The items expended by petitioner in 1940, 1941 and 1942 as shown on page 5 of these Findings, and which are in dispute between the parties, were ordinary and necessary business expenses with the exception of the following items: livestock, miscellaneous expenses, legal fees, commissions, 181 dues and assessments, express charges, and fish for stocking lake. Opinion KERN, Judge: Respondent contends that the petitioner was not engaged in carrying on any trade or business during the taxable years here in question within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code, the pertinent portions of which are set forth below. 1 It is respondent's position that the expenses of petitioner in 1941 and 1942, which it has disallowed, were personal, living or family expenses of petitioner's sole stockholder and as such were not deductible under section 24 (a) (1) of the Code. 2182 To determine whether the activities of a taxpayer are "carrying on a business" requires an examination of the facts in each case. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212; United States v. Pyne, 313 U.S. 127">313 U.S. 127; Margaret E. Amory, 22 B.T.A. 1398">22 B.T.A. 1398, and The Almalgamated Dental Co., Ltd., 6 T.C. 1009">6 T.C. 1009 (No. 129). From a consideration of all the evidence we are of the opinion that from the time that Robert Colgate acquired all of the stock of the petitioner on February 3, 1940, and through the taxable years here in question, petitioner was engaged in carrying on a trade or business within the meaning of section 23 (a) (1) (A) of the Code. It is clear that throughout this period petitioner's activities were directed towards the realization of profit from the operation of petitioner's property and not for the pleasure and recreation of petitioner's sole stockholder. See Marshall Field, 26 B.T.A. 116">26 B.T.A. 116, affirmed 67 Fed. (2d) 876. The fact that petitioner's property had not been operated at a profit for many years does not require a different conclusion. See Whitney v. Commissioner, 73 Fed. (2d) 589, 592; Israel O. Blake, 38 B.T.A. 1457">38 B.T.A. 1457, 1460;183 Farish v. Commissioner, 103 Fed. (2d) 63; Lillie S. Wegeforth, 42 B.T.A. 633">42 B.T.A. 633. It is also clear that prior to February 3, 1940, petitioner was not engaged in carrying on any trade or business but rather operated its property solely for the pleasure and recreation of its then stockholders. Respondent further argues that even though it be decided that petitioner was engaged in carrying on a trade or business, the expenses which petitioner seeks to deduct were not "ordinary and necessary expenses" incurred in the carrying on of trade or business. As stated by the Supreme Court in Welch v. Helvering, 290 U.S. 111">290 U.S. 111, the word "ordinary" in this context does not mean that the payments must be normal or habitual in the sense that the same taxpayer will have to make them often. In Deputy v. Dupont, 308 U.S. 488">308 U.S. 488, the Court elaborated further on this point, stating: * * Ordinary has the connotation of normal, usual, or customary. To be sure an expense may be ordinary though it happens but once in the taxpayer's lifetime * * . Yet the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved184 * * . One of the extremely relevant circumstances is the nature and scope of the particular business out of which the expense in question accrued. * * Whether an expenditure is directly related to a business and whether it is ordinary and necessary are doubtless pure questions offact in most instances. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, and Helvering v. Highland, 124 Fed. (2d) 556, 562. From the evidence here before us it appears that the greater part of petitioner's expenditures in 1940, 1941 and 1942 were "ordinary" in the sense that the term has been defined by the Supreme Court. The word "necessary" as used in the statute has been defined to mean "appropriate" and "helpful". Blackmer v. Commissioner, 70 Fed. (2d) 255; L. T. Alverson, 35 B.T.A. 482">35 B.T.A. 482, 488, and Luther Ely Smith, 3 T.C. 696">3 T.C. 696, 702. Considering the nature and scope of petitioner's business after February 3, 1940, it appears that these expenditures with certain exceptions, were "necessary". Although we are inclined to agree with respondent's argument that expenditures of some $25,000 by petitioner for improvements and new furnishings for the dwelling185 house was perhaps greater than the rental income from the property warranted, we are not disposed, on the basis of the record before us, to substitute our judgment for that of the taxpayer in determining the amount which should have reasonably been expended for these purposes, and the consequent deductions allowable on account of interest, depreciation and insurance. We are, however, of the opinion that the sum of $110 paid by petitioner in 1941 to the Onteora Club as dues and assessments was a personal expense of petitioner's sole stockholder and no part of this payment may be deducted by petitioner as an expense paid or incurred in carrying on its trade or business. Louis Boehm, 35 B.T.A. 1106">35 B.T.A. 1106, 1109. We have found certain other expenditures not to have been ordinary and necessary business expenses. This we have done either because there is no evidence whatsoever upon which we could make a contrary finding, or because the evidence which we have indicates that certain of the expenditures were of a capital nature rather than deductible business expenses. In its 1941 and 1942 returns petitioner also sought to deduct net operating loss carryovers for the years 1939 and186 1940. The pertinent provisions of the Internal Revenue Code are set forth below. 3We have already pointed out that prior to February 3, 1940 petitioner was not engaged in carrying on any trade or business and that its expenditures prior to that date were personal, family or living expenses of its stockholders, which were not allowable deductions by reason of section 24 (a) of the Code, supra. It follows that for the taxable year 1939 and for that part of 1940 prior to February 3, petitioner had no deductions allowed by Chapter 1 of the Code, except the deductions for 1939 and 1940 taxes which respondent allowed in the notice of deficiency. Therefore, except for the taxes allowed by respondent, petitioner, 187 in its 1941 and 1942 returns can not include in the computation of net operating loss carry-overs for 1939 and 1940 any part of its expenses in 1939 and any part of its expenses paid or incurred prior to February 3, 1940. Only those expenses paid or incurred after that date and found by us to have been ordinary and necessary business expenses may be included in the computation of the net operating loss carry-over for 1940. The petition in this cause alleges that, with respect to the calendar year 1941 respondent erroneously disallowed the deduction of a loss of $122.70 sustained on the sale of certain depreciable property. Inasmuch as petitioner has not pursued the point at the hearing or on brief, we must assume that petitioner has abandoned the point and we must sustain respondent's disallowance. Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. - (1) Trade or Business Expenses. - (A) In General. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, * . REGULATIONS 103: SEC. 19.23(a)-1. Business expenses. - Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except the classes of items which are deductible under sections 23 (b) to 23 (s) inclusive, and the regulations thereunder. * * REGULATIONS 111: SEC. 29.23(a)-1. Business expenses. - Business expense deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except the classes of items which are deductible under sections 23 (b) to 23 (z)↩. inclusive, and the regulations thereunder. * * * 2. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) General Rule. - In computing net income no deduction shall in any case be allowed in respect of - (1) Personal, living, or family expenses; * * * * ↩3. SEC. 23. Deductions from Gross Income. In computing net income there shall be allowed as deductions: * * * (S) Net Operating Loss Deduction. - For any taxable year beginning after December 31, 1939, the net operating loss deduction computed under section 122. * * * SEC. 122. Net Operating Loss Deduction. (a) Definition of Net Operating Loss. - As used in this section the term "net operating loss" means the excess of the deductions allowed * *.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620166/	Richard H. Fendell and Elizabeth A. Fendell, Petitioners v. Commissioner of Internal Revenue, RespondentFendell v. CommissionerDocket No. 44947-86United States Tax Court92 T.C. 708; 1989 U.S. Tax Ct. LEXIS 44; 92 T.C. No. 39; March 30, 1989. March 30, 1989, Filed 44 Decision will be entered for the respondent. Petitioner-husband was beneficiary of a trust which distributed income to him. The trust invested in two partnerships. After the periods of limitation expired with respect to the Federal fiduciary income tax returns of the trust, the Commissioner mailed a statutory notice of deficiency to petitioners in which he increased the amounts taxable to husband-beneficiary from the trust by virtue of disallowing the losses of the two partnerships claimed by the trust. Held, the expiration of the periods of limitation on assessment of additional Federal income tax against the trust does not bar assessment of additional Federal income tax against the beneficiary arising out of the disallowance of the losses of the two partnerships claimed by the trust. Held, further, the Commissioner properly increased petitioners' taxable income to reflect disallowance of the trust's losses from a partnership to the extent of the trust's capital contributions to such partnership. Ronald U. Lurie, Jean H. Maylack, and Michael H. Wetmore, for the petitioners.James A. Kutten, for the respondent. Goffe, Judge. GOFFE708 OPINION45 The Commissioner determined deficiencies in petitioners' Federal income taxes for the following taxable years:Taxable yearDeficiency1975$ 27,887197626,53419778,3931978 12,28219791,474The issues for our decision are: (1) Whether respondent is barred by the statute of limitations from adjusting petitioners' joint Federal income tax liabilities for the taxable years 1975 and 1977 by virtue of the disallowance of losses 709 claimed by a trust, which trust distributed income to petitioner-husband after the periods of limitation for each of the taxable years of the trust had expired; and (2) whether petitioners' reported income from the trust for the taxable years 1976 and 1977 should be increased to reflect the disallowance of the trust's losses from a partnership to the extent of the trust's capital contributions to such partnership.This case was submitted fully stipulated46 under Rule 122. 2 The stipulation of facts and accompanying exhibits are incorporated by this reference.Petitioners, Richard H. Fendell and Elizabeth A. Fendell, resided in St. Louis, Missouri, at the time of the filing of the petition in this case.Richard H. Fendell (sometimes referred to as petitioner or petitioner-husband) and Nancy Fendell Lurie are the children of Charles H. Fendell and Minna Fendell. Charles H. Fendell passed away on January 19, 1958. Minna Fendell passed away on June 21, 1984.The Last Will and Testament of Charles H. Fendell set up a testamentary trust consisting of the residue of his estate. The trust provided Minna Fendell with a right of encroachment and further provided for discretionary distributions for Richard H. Fendell and Nancy Fendell Lurie. Upon the death 47 of Minna Fendell, the trust property was to be divided into separate trusts for Richard H. Fendell and Nancy Fendell Lurie. Separate Federal fiduciary income tax returns were filed for the taxable years in dispute under the names of: (1) "Richard H. Fendell Trust U/W Charles H. Fendell" (the Richard H. Fendell Trust); and (2) "Nancy Fendell Lurie Trust U/W Charles H. Fendell" (the Nancy Fendell Lurie Trust) but no Federal fiduciary income tax returns were filed in the name of the Minna Fendell Trust for the taxable years 1975 through 1979.The Richard H. Fendell Trust (sometimes referred to as the trust) invested in two partnerships known as The Night Group and Forsyth Associates. On May 28, 1975, Minna Fendell executed a subscription agreement on behalf of the 710 trust and the Nancy Fendell Lurie Trust to invest in The Night Group. In accordance with the subscription agreement, the trust made cash contributions to The Night Group of $ 10,000, $ 7,509.25, and $ 7,500 on April 25, 1975, January 21, 1976, and January 28, 1977, respectively.Petitioners executed a Form 872, Consent Fixing Period of Limitations Upon Assessment of Tax for the taxable year 1975 (a Form 872 Consent), 48 and a Form 872-A, Special Consent to Extend the Time to Assess Tax (a Form 872-A Consent), for the taxable years 1975, 1976, and 1977, with respect to petitioners' joint Federal income tax returns. In addition, a Form 872-A Consent was executed with respect to the trust for the taxable years 1976 and 1978. Respondent did not secure either type of Consent with respect to the Minna Fendell Trust or the Richard H. Fendell Trust for the taxable year 1975 or 1977.The trust, on its Federal fiduciary income tax return for the taxable year 1975 claimed losses from The Night Group and from Forsyth Associates in the amount of $ 27,315 and $ 2,006, respectively. The trust, on its Federal fiduciary income tax return for the taxable year 1976 claimed losses from The Night Group in the amount of $ 51,183 and from Forsyth Associates in the amount of $ 10,000. By amendment to the 1976 Federal fiduciary income tax return, the trust reduced the loss claimed from The Night Group from $ 51,183 to $ 25,592. On its return for the taxable year 1977, the trust claimed a loss from The Night Group in the amount of $ 14,740.On their joint Federal income tax return for the taxable year 1975, petitioners49 reported a loss from the trust in the amount of $ 35,992. On their amended joint Federal income tax return for the taxable year 1976, petitioners reported income from the trust in the amount of $ 7,985 and on their return for the taxable year 1977 they reported income from the trust in the amount of $ 32,646.The Commissioner disallowed losses claimed by the trust in The Night Group in the amount of $ 27,315 and Forsyth Associates in the amount of $ 2,006 thereby decreasing the loss which petitioners reported as attributable to the trust for the taxable year 1975 from $ 35,992 to $ 6,671. For the taxable year 1976, the Commissioner disallowed losses 711 claimed by the trust in The Night Group in the amount of $ 25,592 and Forsyth Associates in the amount of $ 10,000 thereby increasing the amount of income which petitioners reported as receiving from the trust of $ 7,985 to $ 43,577. For the taxable year 1977, the Commissioner disallowed a loss taken by the trust in The Night Group in the amount of $ 14,748, thereby increasing the amount of income which petitioners reported as receiving from the trust of $ 32,646 to $ 47,394.The first issue to be decided is whether the Commissioner50 is barred by virtue of the statute of limitations from adjusting the distributable loss (1975) and distributable income (1977) of petitioners which they reported from the trust by disallowing deductions claimed by the trust on its returns.The trust claimed losses attributable to its investments in two partnerships, The Night Group and Forsyth Associates. After the respective periods of limitation on assessment expired with respect to the Federal fiduciary income tax returns of the trust, the Commissioner mailed a statutory notice of deficiency to petitioners in which he disallowed the losses claimed by the trust. This disallowance decreased the loss claimed by petitioner-husband in 1975 and increased the income taxable to petitioner-husband for 1977 as a beneficiary of the trust. Petitioners contend that the statute of limitations bars such adjustments to their returns.The parties have brought no case to our attention nor have we found one that is squarely on point. Petitioners appear to base their position upon the Subchapter S Revision Act of 1982. That Act is not applicable to the taxable years prior to December 31, 1982, and, if applicable at all, would apply only by the51 analogy between a Subchapter S corporation and a trust. Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669, 1697.Although the parties argue the analogy of a trust to a Subchapter S corporation, we find that the analogy of a trust to an estate to be more persuasive. In Haller v. Commissioner, 14 B.T.A. 488">14 B.T.A. 488 (1928), we held that the filing of Federal fiduciary income tax returns of an estate did not commence the running of the period of limitation on 712 assessment of income tax against a beneficiary of an estate who filed no returns.The parties agree that for the taxable years before the Court the trust was a complex trust. The requirements for filing income tax returns for an estate and a complex trust (except for certain exceptions which do not apply here) are similar in the Internal Revenue Code (section 6012(a)(3) and 6012(a)(4)) and are contained in the same provision in the regulation. Sec. 1.6012-3(a), Income Tax Regs.A complex trust, as well as an estate, is a separate and distinct taxpayer for Federal income tax purposes. The trust or estate reports its income, deductions, and credits on its Federal fiduciary income52 tax return, Form 1041. The beneficiary of an trust or estate reports the distributions made to the beneficiary by the trust or estate on the beneficiary's individual Federal income tax return if the beneficiary is an individual.The amount of any income tax may be assessed (except for other provisions which do not apply here) only within 3 years after the return was filed. Sec. 6501(a); sec. 301.6501(a)-1, Proced. & Admin. Regs.That being the case, the filing of a return by that taxpayer (whether estate, trust, or individual) triggers the beginning of the period of limitations on assessment of income tax against that taxpayer-entity. The trust or estate and individual beneficiary being separate taxpayers who are required to file Federal income tax returns, trigger the beginning of the periods of limitation on assessment of income tax based upon the times that the taxpayers file their returns.The period of limitation on assessment of income tax being prescribed by section 6501(a), it follows that the period of time within which the Commissioner may mail a statutory notice of deficiency under section 6212 is limited by the provisions of section 6501(a).In the instant case, the53 Commissioner mailed the statutory notice of deficiency to petitioners before the periods of limitation expired with respect to their joint Federal income tax returns. The periods of limitation of the trust for the taxable years 1975 and 1977 had, however, expired, when the statutory notice of deficiency was mailed to petitioners 713 with respect to their joint Federal income tax returns. The parties have not stipulated that a statutory notice of deficiency was mailed to the trust for its taxable years 1975 and 1977.In the statutory notice of deficiency mailed to petitioners the Commissioner determined that petitioners should have reported a smaller loss for 1975 from the trust and additional income for 1977 from the trust based upon the Commissioner's disallowance of losses which the trust claimed for its investment in The Night Group and Forsyth Associates. The Commissioner was entitled to make these adjustments. Petitioners are likewise entitled to challenge the adjustments which the Commissioner made. The Commissioner is entitled, when he examines the Federal income tax return of a beneficiary of an estate or a trust, to adjust what the beneficiary has reported or failed54 to report. It is immaterial that the periods of limitation on assessment has expired with respect to the returns filed by the estate or the trust. The statutory notice of deficiency involved here does not purport to, nor can it, adjust the Federal income tax liabilities of the trust. It is not addressed to the trust.Petitioners make public policy arguments in their briefs. Such arguments are unavailing because they are contrary to the Internal Revenue Code and regulations which we have analyzed and applied.The second issue for decision is whether petitioners' taxable income for the taxable years 1976 and 1977 must be increased to reflect the Commissioner's disallowance of the trust's losses from The Night Group to the extent of the trust's capital contributions to such partnership. Petitioners have assigned error to $ 17,500 of the $ 25,592 disallowed loss attributable to The Night Group for the taxable year 1976, and to $ 7,500 of the $ 14,740 disallowed loss attributable to The Night Group for the taxable year 1977. As a result, petitioners assign error to $ 16,818 and $ 1,982 of the deficiencies for each respective year as attributable to this adjustment.The only evidence55 in this case to support the losses claimed by the trust is the stipulation of the capital investments made by the trust in The Night Group. A capital investment is not a taxable event giving rise to a *714 deduction. There is no evidence that the investment became worthless during the taxable years that the deductions were claimed nor is there any evidence of a taxable event which would give rise to a deduction allowable to the trust. The losses claimed are, therefore, disallowed and the adjustments to petitioners' taxable income are sustained.Decision will be entered for the respondent. Footnotes1. Petitioners have not petitioned this Court to redetermine the deficiencies for the taxable years 1978 and 1979.↩2. Unless otherwise indicated, all rule numbers refer to the Rules of Practice and Procedure of this Court and all section numbers refer to the Internal Revenue Code in effect for the taxable years 1975, 1976, and 1977.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620167/	ALBERT J. HUDDLESTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHuddleston v. CommissionerDocket No. 20536-90.United States Tax CourtT.C. Memo 1994-131; 1994 Tax Ct. Memo LEXIS 139; 67 T.C.M. (CCH) 2521; March 29, 1994, Filed 139 Albert J. Huddleston, pro se. Susan Smith Canavello, for respondent. SWIFTSWIFTMEMORANDUM OPINION SWIFT, Judge: This matter is before the Court on the parties' cross-motions for summary judgment. 1The issue raised by the parties in their cross-motions for summary judgment is whether petitioner is personally liable as a fiduciary under section 6901 with respect to a $ 345,147 deficiency in the Federal estate tax of the Estate of Madeline S. Huddleston (decedent) 140 and with respect to the related $ 172,573 fraud addition to tax under section 6653(b). Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. The liability of decedent's estate for the Federal estate tax liability and the related fraud addition to tax were at issue in this Court in Estate of Madeline S. Huddleston, Deceased, Albert J. Huddleston, Personal Representative v. Commissioner, docket No. 165-88. In that case, petitioner represented decedent's estate. On March 30, 1989, a final decision in docket No. 165-88 was stipulated by petitioner and by respondent's counsel and was entered by this Court. That decision sets forth the amount of the deficiency in decedent's Federal estate tax liability (namely, $ 345,147) and the amount of the estate's liability for the related fraud addition to tax under section 6653(b) (namely, $ 172,573). That decision was not appealed. By order of February 6, 1992, we granted in part respondent's motion for partial summary judgment in this case. We concluded that the doctrine of judicial estoppel applied to preclude petitioner from141 arguing that he was not a fiduciary of decedent's estate at the time he represented decedent's estate and signed on behalf of the estate a stipulated decision in docket No. 165-88, and therefore we concluded that the amount of the estate's Federal estate tax deficiency and the applicability of the fraud addition to tax were established herein by the doctrine of res judicata (i.e., by the entry of the stipulated decision in docket No. 165-88). Huddleston v. Commissioner, 100 T.C. 17">100 T.C. 17 (1993). The operative facts in this case have already been the subject of extensive litigation in this Court, see Huddleston v. Commissioner, supra, and in petitioner's bankruptcy court proceeding which was appealed to and finalized by the U.S. Court of Appeals for the Fifth Circuit (Court of Appeals). Huddleston v. Delgiorno, 978 F.2d 711">978 F.2d 711 (5th Cir. 1992). The following is a summary of the undisputed facts. Petitioner resided in Kenner, Louisiana, at the time his petition was filed. Petitioner was the husband of decedent, who died intestate on January 17, 1981. Decedent was survived by petitioner and 142 by four minor children. On February 23, 1981, petitioner applied to the probate court of the Twenty-Fourth Judicial District Court for the Parish of Jefferson, State of Louisiana (probate court), for appointment as administrator of decedent's estate. On February 26, 1981, the probate court appointed petitioner administrator of decedent's estate and ordered petitioner to file with the probate court a descriptive list of decedent's property. Petitioner filed a sworn descriptive list of decedent's property with the probate court, but petitioner did not disclose thereon a substantial portion of decedent's property. On June 18, 1981, petitioner petitioned the probate court to close decedent's succession proceeding, to discharge his appointment as administrator of decedent's estate, and to enter a judgment of possession. Accordingly, the probate court, apparently also on June 18, 1981, discharged petitioner as administrator and entered a judgment of possession and therein recognized petitioner as decedent's surviving spouse, entitled to an undivided one-half of the community property. The judgment of possession covered all of the property listed by petitioner in the descriptive list143 and all other community property whether or not it was included in the descriptive list. Upon the probate court's entering of the judgment of possession, decedent's entire estate became available for distribution. Decedent's four children also were recognized in the probate court's judgment of possession as heirs of decedent and as entitled to decedent's undivided one-half of the community property, subject to petitioner's usufruct. 2Two days later, on June 20, 1981, petitioner remarried, which event, under Louisiana law, terminated petitioner's usufruct in the undivided one-half of decedent's property that the children had inherited. Petitioner, however, never notified his children of their interests in decedent's144 property, nor that his usufruct in that property terminated upon his remarriage on June 20, 1981. Petitioner, thereafter, continued to possess and control all of the property of decedent's estate as he had from the date of decedent's death, and petitioner failed to inform decedent's surviving children of their interests in the property. On or about October 17, 1981, petitioner signed and filed with respondent the Federal estate tax return for decedent's estate. Petitioner signed the return as decedent's personal representative. Petitioner omitted from the return the same property that he had omitted from the sworn descriptive list that he had filed with the probate court. On December 7, 1987, in the U.S. District Court for the Eastern District of Louisiana (District Court), petitioner entered a plea of nolo contendere to an indictment under section 7206(1) for willfully and fraudulently filing the estate's Federal estate tax return, which he knew did not correctly reflect the total assets of decedent's estate. In a written admission signed by petitioner and filed with the District Court in connection with petitioner's plea of nolo contendere, petitioner admitted that an addition145 to tax for fraud under section 6653(b) would be applicable to any deficiency in Federal estate tax determined to be owed by decedent's estate. On January 29, 1988, petitioner and Helen Ulrich, petitioner's second wife, voluntarily filed for bankruptcy under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Louisiana (bankruptcy court). In re Ulrich and Huddleston, Nos. 88-00415B and 88-0507B (Bankr. E.D. La.). On October 20, 1988, three of decedent's surviving children filed in the bankruptcy court a complaint against petitioner (their father) for recovery of money or property. Petitioner's youngest daughter, Alicia (then still a minor) intervened in that proceeding through a curator ad hoc. In the complaint of petitioner's children in the bankruptcy court, the children sought damages against petitioner, alleging misconduct and breach of petitioner's duties as a fiduciary of decedent's estate and as holder of a usufruct in the property interests they were to inherit from decedent, based on petitioner's wrongful conversion of their property interests in decedent's estate. On July 27, 1990, after an adversary proceeding in the bankruptcy146 court involving the allegations by decedent's children of petitioner's misconduct in the handling of the property of decedent's estate, the bankruptcy court entered a decision finding, among other things, that petitioner breached his duties as holder of a usufruct by failing to deliver to his children their share of decedent's property upon termination of his usufruct in the property and by continuing to possess and control the property while concealing from his children their ownership interests therein. The bankruptcy court further found that petitioner breached his fiduciary duties as administrator of decedent's estate and acted fraudulently by the "blatant omission" of a portion of decedent's property from the sworn descriptive list filed with the probate court and from the Federal estate tax return, and the bankruptcy court found that petitioner was "completely at fault" and was accountable for the interest and penalties owed with respect to the estate's Federal estate tax deficiency. The bankruptcy court concluded that petitioner was liable for conversion 3 of decedent's property as a result of his continued willful and intentional acts of dominion and control over the property147 of decedent's estate without informing the children of their interests therein. On August 31, 1990, respondent mailed a notice of fiduciary liability under section 6901 to petitioner with respect to petitioner's alleged liability for the Federal estate tax deficiency and the fraud addition to tax determined in the stipulated decision entered against decedent's estate in docket No. 165-88. Petitioner appealed the judgment of the bankruptcy court to the U.S. District Court for the Eastern District of Louisiana. By written opinion dated February 3, 1992, the District Court affirmed in part, modified in part, and vacated in part the judgment of the bankruptcy court. See In re Ulrich and Huddleston, No. 90-3803 (E.D. La. Feb. 3, 1992). The District148 Court affirmed the bankruptcy court's findings that petitioner breached his duties as a holder of a usufruct and his fiduciary duties as administrator of decedent's estate. The District Court found, among other things, that petitioner breached those duties by failing to pay the proper Federal estate tax due and by failing to inform the children of their interests in the property. The District Court further affirmed the bankruptcy court's finding that petitioner was liable for all damages resulting from these breaches because of his "bad faith", because of his attempt to keep the children's property, and because of his attempt to conceal the property from the children. The District Court reversed the bankruptcy court's finding that petitioner was liable for conversion, but the District Court concluded that petitioner's fiduciary liability was otherwise established. The District Court modified the bankruptcy court's judgment concerning the amount of damages owed by petitioner in order to allow petitioner credit for the $ 93,675 of estate taxes that petitioner had paid when he filed the Federal estate tax return for decedent's estate. In its decision, the District Court expressly149 affirmed the bankruptcy court's judgment that petitioner was liable for additional damages equal to the $ 172,573 fraud addition to the estate's Federal estate tax liability. The District Court treated the amount of the fraud addition to the estate's Federal estate tax liability as final, and the District Court noted that any attempt by petitioner to dispute the amount of the fraud addition would be contrary to the admission petitioner made in connection with the nolo contendere plea he entered into in the District Court. On October 27, 1992, the U.S. Court of Appeals for the Fifth Circuit, among other things, affirmed per curiam without published opinion the above decision of the District Court and summarized the unfortunate factual scenario before us, as follows -- the fact remains that in 1981 [petitioner] took possession of the entire community and acted towards the children and the entire world as if the property was entirely his -- when in fact an undivided half interest in the property of the community * * belonged to the children. [Petitioner] was a savvy lawyer and had to know better, yet he did not inform his own children of their legal rights or their property150 holdings. Moreover, as administrator of their mother's estate, usufructuary, and tutor-apparent of the estates of his minor children, it was his duty to do so. Neither did he deliver the property to his children as required when his usufruct terminated. By the time the children found out about their inheritance, much of its value had been dissipated and altered (several of the closely held companies that made up the estate had filed for bankruptcy) and was no longer available for delivery or partition. [Huddleston v. Delgiorno, 978 F.2d 711 (5th Cir. 1992) (slip op. at 8).]Further, the Court of Appeals affirmed the bankruptcy court's award of damages to the children and the District Court's modification of those damages (namely, allowing petitioner credit for the $ 93,674 estate tax payment he had made) which included the following amounts: (1) $ 172,573 for the fraud addition to tax for which the children had become liable as transferees of property from decedent's estate; (2) $ 321,660 for the loss of income on promissory notes that were the property of the community but which had not been included in the succession; and (3) $ 779,355 for 151 losses to the children's real estate and other property found by the bankruptcy court to have resulted from petitioner's improper use of their property. Huddleston v. Delgiorno, supra.Summary judgment is appropriate where the record shows that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 520 (1992), affd. F.3d (7th Cir. 1994); Marshall v. Commissioner, 85 T.C. 267">85 T.C. 267, 271 (1985); Allnutt v. Commissioner, T.C. Memo 1991-6">T.C. Memo. 1991-6, affd. without published opinion 956 F.2d 1162">956 F.2d 1162 (4th Cir. 1992). The party seeking summary judgment bears the initial responsibility to inform the court of the basis for the motion for summary judgment and to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317">477 U.S. 317, 323 (1986). Summary judgment is appropriate "after adequate time for discovery and upon motion, against a party who fails to make a showing152 sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. "Where the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the 'pleadings, depositions, answers to interrogatories, and admissions on file.'" Id. at 324 (quoting Fed. R. Civ. P. 56). The nonmoving party may not rest upon mere allegations or denials of the pleadings, but the nonmoving party's response "must set forth specific facts showing that there is a genuine issue for trial." Rule 121(d). At trial, petitioner would have the burden of proving that he was not liable as a fiduciary under 31 U.S.C. sec. 3713(b) (1982). Estate of Frost v. Commissioner, T.C. Memo. 1993-94 (citing McCourt v. Commissioner, 15 T.C. 734">15 T.C. 734 (1950)). Section 2002 requires administrators of estates to pay estate taxes, and this duty applies to the entire estate tax. Sec. 20.2002-1, Estate 153 Tax Regs. Under 31 U.S.C. sec. 3713(b) (1982), 4 an administrator who pays a "debt" due by an estate for which he acts before he satisfies and pays "claims of the Government" due from such estate, shall be personally liable to the extent of such payments. The word "debt" includes a beneficiary's distributive share of an estate, sec. 20.2002-1, Estate Tax Regs., and the phrase "claims of the Government" includes estate taxes and resulting additions to tax that are owed to the United States. Bank of the West v. Commissioner, 93 T.C. 462">93 T.C. 462, 471 (1989), and cases cited therein. Thus, if an administrator "distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the * * * distribution, for so much of the estate tax as remains due and unpaid." Sec. 20.2002-1, Estate Tax Regs. 154 Fiduciaries of estates are personally liable for debts owed to the United States only if the fiduciary knew or should have known of the existence of the debt at the time the fiduciary distributed assets of the estate. Bank of the West v. Commissioner, supra at 474; Leigh v. Commissioner, 72 T.C. 1105">72 T.C. 1105, 1109-1110 (1979); O'Sullivan v. Commissioner, T.C. Memo 1994-17">T.C. Memo. 1994-17; Estate of Frost v. Commissioner, supra. This knowledge requirement is satisfied by either actual knowledge of the United States' unpaid claim or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim. Leigh v. Commissioner, supra at 1110; Estate of Frost v. Commissioner, supra.Respondent contends that all of the factual issues necessary to find petitioner liable as a fiduciary under 31 U.S.C. sec. 3713(b), for the full amount of the estate tax deficiency and the fraud addition to tax, have already been established either 155 by this Court or by the Court of Appeals. 5 Respondent contends that the only issue remaining is the legal issue of whether these established facts support a finding that petitioner is personally liable as a fiduciary for the amounts determined by respondent in the notice of fiduciary liability. In this case, summary judgment for respondent is appropriate if the following three facts are established that would allow us to find as a matter of law that petitioner is liable, under 31 U.S.C. sec. 3713(b), as a fiduciary for the estate tax deficiency and fraud addition to tax at issue: (1) That petitioner was a fiduciary of decedent's estate; 156 (2) that petitioner, as fiduciary, distributed the estate's assets before paying a claim of the United States; and (3) that petitioner knew or should have known of the United States' claim at a time when the estate had sufficient assets to pay the claim. In our opinion in Huddleston v. Commissioner, 100 T.C. 17">100 T.C. 17 (1993), we granted respondent's motion for partial summary judgment and concluded that petitioner was judicially estopped from denying that he was a fiduciary of decedent's estate and that petitioner had the authority to file with respondent the estate's Federal estate tax return. Thus, petitioner's fiduciary status with respect to decedent's estate is established. Petitioner asserts that he did not distribute the estate's assets because the judgment of possession did not contain a description of the assets which formed the basis for respondent's determination of the estate tax deficiency. Petitioner further asserts that the finding of the Court of Appeals that petitioner converted assets of the estate precludes our finding that petitioner distributed assets of the estate within the meaning of 31 U.S.C. sec. 3713157 (b). Petitioner's assertions are without merit. Petitioner filed with the probate court a sworn descriptive list of decedent's property, but petitioner did not disclose thereon a substantial portion of decedent's property. Petitioner, on June 18, 1981, petitioned the probate court to close decedent's succession proceeding, and apparently on the same date, the probate court entered a judgment of possession at which time the assets of the estate became available for distribution. It is irrelevant which assets were included in the judgment of possession because the judgment of possession included all of the assets in which decedent had an interest whether or not the assets were included in the descriptive list filed by petitioner. The Court of Appeals found that petitioner converted all of the assets of decedent's estate to his own use, when in fact an undivided one-half interest in the community property belonged to the children. Huddleston v. Delgiorno, 978 F.2d 711">978 F.2d 711 (5th Cir. 1992). Thus, petitioner, after the judgment of possession was entered, distributed decedent's undivided one-half interest in the community property to the children at which158 time petitioner converted the assets to his own use. The fact that petitioner converted the children's interest in the estate to his own use instead of applying a portion of it to pay the estate tax hardly shields petitioner from fiduciary liability under 31 U.S.C. sec. 3713(b). There is no dispute that the unpaid estate tax and related fraud addition to tax constitute a claim owed to the United States within the meaning of 31 U.S.C. sec. 3713(b). See Bank of the West v. Commissioner, 93 T.C. 462">93 T.C. 462, 471 (1989). We find, therefore, that petitioner distributed or diverted property of the estate before paying a claim of the United States. We turn to the question of whether petitioner had knowledge or notice of the estate tax liability at the time he distributed the estate's assets and whether, at that time, the estate had sufficient assets to pay the estate tax liability. In connection with his plea of nolo contendere to an indictment under section 7206(1) for willfully and fraudulently filing the estate's Federal estate tax return, petitioner admitted that he intentionally and159 knowingly did not include all of decedent's assets in the reported gross estate. Further, the Court of Appeals affirmed the bankruptcy court's and District Court's findings that petitioner had fraudulently excluded from decedent's reported gross estate a portion of the children's one-half interest in the community assets and that petitioner was liable for the fraud addition to tax. Petitioner does not claim that he did not know that estate taxes were due on the assets he had omitted from decedent's reported gross estate. Moreover, a reasonably prudent person, and certainly an attorney such as petitioner, would know that estate taxes would be owed on assets that were improperly omitted from decedent's reported gross estate. The fact that petitioner paid estate taxes on the assets that he did include in decedent's reported gross estate is further evidence that petitioner knew that additional estate taxes were owed to the United States with respect to the assets he had omitted from decedent's reported gross estate. Based on the record in this case, we find that petitioner knew or had reason to know that estate taxes were owed to the United States at the time he distributed and converted160 all of the estate's assets to himself. Petitioner further asserts that the extent or amount of his fiduciary liability has not been established by the facts contained in the record. The extent of petitioner's fiduciary liability, however, was established by this Court's final decision in Estate of Madeline S. Huddleston, Deceased, Albert J. Huddleston, Personal Representative v. Commissioner, docket No. 165-88, which sets forth the amount of the deficiency in Federal estate tax ($ 345,147) and the amount of the estate's liability for the related fraud addition to tax ($ 172,573). There is, therefore, no dispute as to the amount of estate tax owed and as to the amount of the related fraud addition to tax. Also established in the final decision in docket No. 165-88 is the fact that the taxable estate which gave rise to the estate's tax liability was $ 1,456,279. We conclude that the total value of the estate's assets that petitioner distributed was $ 1,456,279, which value exceeded the combined total of the estate's tax deficiency and the related addition to tax for fraud determined by respondent (namely, $ 517,720). The estate, therefore, at the time petitioner distributed161 the estate's assets to himself, had sufficient assets with which to pay the estate tax deficiency and fraud addition to tax determined by respondent. Thus, the extent of petitioner's fiduciary liability has been established. The facts contained in the extensive record and proceedings in this case establish, as a matter of law, petitioner's fiduciary liability under 31 U.S.C. sec. 3713(b), and petitioner is therefore personally liable for the full amount of the estate tax deficiency and the related fraud addition to tax (namely, $ 345,147 and $ 172,573, respectively). Sec. 6901(a)(1)(B). We grant respondent's motion for summary judgment in full and deny petitioner's motion for summary judgment. An appropriate order and decision will be entered. Footnotes1. Cases of the following petitioners were consolidated herewith: Alicia St. John Huddleston, Transferee, docket No. 14693-90; Kevin D. Huddleston, Transferee, docket No. 17507-90; Lindsay M. Huddleston, Transferee, docket No. 17536-90; and Meghan H. Delgiorno, Transferee, docket No. 17547-90. By stipulated decisions entered on September 27, 1993, the transferee liabilities of Kevin D. Huddleston, Lindsay M. Huddleston, and Meghan H. Delgiorno were settled. The case of Alicia St. John Huddleston remains consolidated herewith and is still pending.↩2. La. Civ. Code Ann. art. 890↩ (West Supp. 1992). Usufruct may be defined, generally, under civil law, as the right to enjoy the property of another and to obtain all of the profit, utility, and advantages produced by the property without altering its substance. Black's Law Dictionary 1384 (5th ed. 1979).3. Under Louisiana law, conversion is defined as a "distinct act of dominion wrongfully exerted over another's property in denial of or inconsistent with the owner's rights therein." Guidry v. Rubin, 425 So. 2d 366">425 So. 2d 366, 371↩ (La. Ct. App. 1982).4. 31 U.S.C. sec. 3713(b) (1982) provides as follows: A representative of a person or an estate * * * paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.↩5. Both parties concede that the decision of the U.S. Court of Appeals for the Fifth Circuit in Huddleston v. Delgiorno, 978 F.2d 711">978 F.2d 711 (5th Cir. 1992), is binding on this Court. See Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985↩ (10th Cir. 1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620168/	THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Equitable Life Assurance Soc. v. CommissionerDocket Nos. 89294, 93805.United States Board of Tax Appeals44 B.T.A. 293; 1941 BTA LEXIS 1342; April 29, 1941, Promulgated 1342 1. During the years 1933 and 1934 the petitioner, a mutual life insurance company, maintained the following reserves: (a) additional reserve on noncancellable accident and health policies; (b) Unpaid and unresisted accident and health claims; (c) Unearned accident and health premiums; (d) Total and permanent disability benefits, active lives; (e) Total and permanent disability, disabled lives; (f) Extra reserve for additional accidental death benefits. Held, that the above reserves constitute "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934. 2. Assets held against a liability "present value of amounts not yet due on supplementary contracts not involving life contingencies", held, not to be "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934. 3. Under certain of its supplementary contracts in force during 1933 and 1934 the petitioner was required to make equal installment payments over the settlement period, which installment payments were computed so as to return to the beneficiary over the settlement period interest at a guaranteed rate of 3 percent1343 per annum. Under some such contracts such method of settlement had been elected by the insured; under others, by the beneficiary after the insured's death. Held, that the interest included in the installment payments made under options 2 and 4, where the election was made by the insured, is not a legal deduction from gross income, but where such method of settlement was elected by the beneficiary the interest is a legal deduction. Penn Mutual Life Insurance Co. v. Commissioner (C.C.A., 3d Cir.), 92 Fed.(2d) 962, followed. 4. Upon all of its supplementary contracts not involving life contingencies the petitioner paid "interest dividends" in addition to its guaranteed rate of interest, the amount of such dividends being fixed by the petitioner. Held, that the amount of such interest dividends are not legal deductions from gross income. Penn Mutual Life Insurance Co. v. Commissioner, supra, followed. 5. During the taxable years the petitioner was obligated to pay interest upon money left with it by policyholders, the deposit, together with interest, being applied on premiums falling due during the taxable years. Held,1344 that the petitioner is entitled to deduct from its gross income the interest thus paid. 6. Prior to the taxable years the petitioner erected an office building, space in which was rented. A part of the capital cost of the building ($1,651,214.92), representing contractor's fees, architect's fees, etc., was not allocated to the various component elements of the building upon which depreciation was claimed in petitioner's return. Held, that the petitioner is entitled to allowances for depreciation at the rates stipulated by the parties in respect of the $1,651,214.92 item. Campbell E. Locke, Esq., John L. Grant, Esq., and Donald M. Dunn, Esq., for the petitioner. Thomas H. Lewis, Jr., Esq., and L. A. Spalding, Jr., Esq., for the respondent. SMITH 294 OPINION. SMITH: These proceedings, consolidated for hearing, involve income tax deficiencies for 1933 and 1934 of $267,677.39 and $299,461.89, respectively. The respondent claims additional deficiencies for each of the taxable years. The questions in issue are as follows: (1) Is the petitioner entitled to a reserve deduction for its "additional reserve on non-cancellable1345 accident and health policies"? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1934 was in error.) (2) Is the petitioner entitled to a reserve deduction for a reserve called "unpaid and unresisted accident and health claims"? (3) Is the petitioner entitled to a reserve deduction for its reserve for "unearned accident and health premiums"? 295 (4) Is the petitioner entitled to a reserve deduction for its reserve called "total and permanent disability benefits, active lives" (sometimes called "extra-reserve for total permanent disability benefits")? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1933 was in error.) (5) Is the petitioner entitled to a reserve deduction for its reserve called "total and permanent disability benefits, disabled lives" (sometimes called "present-value of amounts incurred but not yet due for total and permanent disability benefits")? (6) Is the petitioner entitled to a reserve deduction for its "extra reserve for additional accidental death benefits"? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 19331346 was in error.) (7) Is the petitioner entitled to a reserve deduction for its reserve for "supplementary contracts not involving life contingencies"? (8) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for the "guaranteed" interest which, during the respective taxable years, accrued and was paid by petitioner on its supplementary contracts not involving life contingencies? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1933 and 1934 was in error. The petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.) (9) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for "guaranteed" interest which it accrued in prior years on its supplementary contracts not involving life contingencies and which was paid by the petitioner during the respective taxable years? (Petitioner appeals from the respondent's determination of deficiencies for 1933 and 1934, which were computed without allowing this deduction, but the petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.) (10) Is the petitioner entitled1347 to a deduction (as interest paid on indebtedness) for "excess interest dividends" which during the respective taxable years accrued and were paid by the petitioner on its supplementary contracts not involving life contingencies? (Petitioner appeals from the respondent's determination of deficiencies for 1933 and 1934, which were computed without allowing this deduction, but the petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.) (11) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for the amount of interest which during the respective taxable years it credited to funds which it held on demand and which (together with such funds) it applied to the payment of premiums becoming due on its policies, all in accordance with the agreements under which such funds were held? 296 (12) Is the petitioner entitled to a deduction for depreciation on the improvements on the farms which it owned during the respective taxable years? (The respondent concedes this issue and agrees that the depreciation shall be taken upon the stipulated costs of the improvements on the farms at the stipulated rates.) (13) 1348 Is the petitioner entitled to a deduction for depreciation on its home office building in respect of the architect's fees, contractor's fees, and other general costs not allocated to the various component elements of the building? These proceedings have been submitted to the Board upon a signed stipulation of facts, a supplementary stipulation of facts, and exhibits, all of which are made a part of our findings by reference. At all times material herein the petitioner was a mutual life insurance company; a corporation organized and existing under and by virtue of the laws of the State of New York, with its principal office and place of business in the Borough or Manhattan, City, County, and State of New York, and engaged in the business of issuing and selling life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and accident and health insurance contracts. From some time prior to the taxable year 1933 continuously to the present time the petitioner has been duly authorized in every state of the United States, except Texas, to transact the business of issuing life insurance and annuity contracts and has been transacting1349 that business in each of such states, except Texas, pursuant to the laws thereof. During this entire time more than 50 percentum of the petitioner's total reserve frnds have been held for the fulfillment of its life insurance and annuity contracts. For convenience of treatment the findings of fact and opinion applicable to groups of issues raised will be set forth in order. Issues 1-6.FACTS. - During 1933 and 1934 the petitioner had outstanding life insurance and annuity contracts (including contracts of combined life, health and accident insurance) and accident and health insurance policies. The six reserves covered by the first six issues in these proceedings were maintained and computed as required by the laws of the State of New York and by the rules and regulations of the insurance commissioner of that state, and also as required by the laws of other states in which the petitioner did business, and the rules and regulations of the insurance commissioners of such other states; and, as so required, the petitioner at all times held admitted assets sufficient to provide for these and for all other reserves and liabilities. 297 OPINION. - The above reserves1350 have received the consideration of the Board in the following cases: Equitable Life Assurance Society of the United States,33 B.T.A. 708">33 B.T.A. 708; Monarch Life Insurance Co,38 B.T.A. 716">38 B.T.A. 716; Pan-American Life Insurance Co.,38 B.T.A. 1430">38 B.T.A. 1430; Oregon Mutual Life Insurance Co. (Memorandum Opinion entered Jan. 4, 1939), Docket Nos. 85182 and 88299. In all the Board has held that the reserves were reserves required by law within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934. Our decision in Monarch Life Insurance Co., supra, was affirmed (C.C.A., Ist Cir.), 114 Fed.(2d) 314, in Pan-American Life Insurance Co., supra (C.C.A., 5th Cir.), 111 Fed.(2d) 366, which was in turn affirmed by the Supreme Court, 311 U.S. 272">311 U.S. 272, and in Oregon Mutual Life Unsurance Co., supra, 112 Fed.(2d) 468; affd., 311 U.S. 267">311 U.S. 267. In support of his argument that these reserve funds are not "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934, the respondent cites 1351 New World Insurance Co. v. United States,26 Fed.Supp. 444. The Supreme Court affirmed the decision of the lower court in that case, with the following comment: * * * the views expressed on the second question considered by the Court of Claims as to the right of deduction on account of insurance reserves not being an essential basis for the judgment and being contrary to Helvering v.Oregon Mutual Life Insurance Co. No. 564, decided this day. Upon the authority of the above cited cases the contentions of the petitioner that these reserves are "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934 are sustained. Issues 7, 8, 9, 10.FACTS. - The facts relating to these issues have been stipulated as follows: XXXI During and prior to the calendar year 1933 and 1934, the taxpayer issued life insurance policies which gave to the insured and in some cases to the beneficiary the right to require the taxpayer to apply the net sum due under the policy upon its maturity, in accordance with one of the optional modes of settlement set up in Stipulation Exhibit D attached hereto and made a part hereof. 1352 Options exercised under provisions 1, 2 or 4 of Stipulation Exhibit D are generally known as "Supplementary Contracts not Involving Life Contingencies" and are so referred to in these proceedings. To provide for the payment of life policies which had matured and were payable during 1933 and subsequent years under these "Supplementary Contracts not Involving Life Contingencies" the petitioner carried on its books a liability (which the petitioner contends is a reserve liability) named "Present Value of Amounts not yet Due on Supplementary 298 Contracts not Involving Life Contingencies", in the following respective amounts at the beginning and end of the calendar years 1933 and 1934: YearBeginning of YearEnd of Year1933$34,806,201$42,326,682193442,326,68253,942,995The mean of these amounts for 1933 is $38,566,441.50 of which 48% was held in respect of supplementary contracts arising from options exercised by the insured during his or her lifetime, and 52% was held in respect of supplementary contracts arising from options exercised by the beneficiaries after the policies involved had matured. The mean of these amounts for 1934 is $48,134,838.501353 of which 47% was held in respect of supplementary contracts arising from options exercised by the insured during his or her lifetime, and 53% was held in respect of supplementary contracts arising from options exercised by the beneficiaries after the policies involved had matured. This liability carried on petitioner's books was an amount which, if maintained with annual interest increments, would exactly equal petitioner's obligations under the Supplementary Contracts Not Involving Life Contingencies. The obligations arising under these option contracts were absolute obligations of the petitioner and were not in any sense contingent upon the happening of future events. For the purpose of providing for these obligations, the taxpayer was required to accumulate and maintain this liability by the statutes of the states in which it was then doing business and by the rulings of state officials made pursuant to authority conferred upon them by such statutes, and as so required the petitioner at all times held admitted assets sufficient to provide for this and all other reserves and/or liabilities. In computing the taxes involved in these proceedings, the respondent determined that1354 the liability called "Present Value of Amounts not yet Due on Supplementary Contracts not Involving Life Contingencies" and that portion of petitioner's admitted assets held to provide therefor, did not constitute a reserve fund within the meaning of the Revenue Acts of 1932 and 1934 and allowed no deduction in respect to it under section 203(a)(2) of said Revenue Acts, but did allow deductions under section 203(a)(8) of those Acts for the "guaranteed interest" paid by the petitioner on these "Supplementary Contracts not Involving Life Contingencies", which accrued during the taxable year and was paid in that year. The deduction allowed by the respondent for such "guaranteed interest" accrued and paid during the year was $1,118,594.00 for 1933 and $1,315,000.00 for the year 1934. The petitioner's liability under its Supplementary Contracts Not Involving Life Contingencies named "Present Value of Amounts Not Yet Due on Supplementary Contracts Not Involving Life Contingencies" carried on its books as stated in paragraph XXXI (of the Stipulation of Facts) was an amount which, if maintained with annual interest increments, would exactly equal petitioner's obligations under such contracts1355 in respect of amounts not yet due at the time of valuation. Of the mean of the "Present Value of Amounts Not Yet Due on Supplementary Contracts Not Involving Life Contingencies" held by the petitioner at the beginning and end of each of the taxable years, the following percentages were the 299 present values of amounts not yet due under the different options set out in Stipulation Exhibit D exercised as indicated: 19331934Option 1 exercised by insured27.52%28.20%Option 2 exercised by insured15.36%14.10%Option 4 exercised by insured5.12%4.70%Option 1 exercised by beneficiary42.99%44.52%Option 2 exercised by beneficiary6.76%6.36%Option 4 exercised by beneficiary2.25%2.12%Total100.00%100.00%XXXII Of the $1,118,594.00 allowed as a deduction for such 'guaranteed interest" paid during the year 1933, $538,984.00, was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the insured during his or her lifetime and $579,610.00 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised1356 by the beneficiaries after the policies involved had matured. Of the $1,315,000.00 allowed as a deduction for such "guaranteed interest" paid during the year 1934, $624,097.00 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the insured during his or her lifetime and $690,903.00 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the beneficiaries after the policies involved had matured. In these proceedings the respondent maintains that he erred in so far as he allowed deductions with respect to the "guaranteed interest." The term "guaranteed interest" is herein used in the same sense as it is used in the Supplementary Contracts set out in the Stipulation Exhibit D. The "guaranteed interest" which was paid by the petitioner in the year it accrued on petitioner's Supplementary Contracts Not Involving Life Contingencies, accrued and was paid as follows under the different options set out in Stipulation Exhibit D, exercised as indicated: 19331934Option 1 exercised by insured$307,007$372,894Option 2 exercised by insured173,983188,402Option 4 exercised by insured57,99462,801Option 1 exercised by beneficiary480,191583,244Option 2 exercised by beneficiary74,56480,744Option 4 exercised by beneficiary24,85526,915Total$1,118,594$1,315,0001357 XXXIII The petitioner paid "guaranteed interests" which had accrued in prior years on these supplementary contracts at the guaranteed rate of 3 per cent, in the amount of $13,432.49 in 1933 and in the amount of $14,237.50 in 1934. The respondent, in computing the taxes involved in these proceedings, allowed no deductions for these amounts of "guaranteed interest" which accrued in prior years but which were paid during the taxable years involved herein. 300 XXXIV Of the $13,432.49 disallowed as a deduction for such "guaranteed interest" paid during the year 1933, $5,238.67 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the insured during his or her lifetime and $8,193.82 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the beneficiaries after the policies involved had matured. Of the $14,237.50 disallowed as a deduction for such "guaranteed interest" paid during the year 1934, $5,552.63 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised1358 by the insured during his or her lifetime and $8,684.87 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising Out of Options which were exercised by the beneficiaries after the policies involved had matured. The "guaranteed interest" which had accrued in prior years on petitioner's Supplementary Contracts Not Involving Life Contingencies and which was paid by petitioner during the taxable years here involved, was all paid under option 1 the provisions of which are set forth in Stipulation Exhibit D. XXXV In 1933 and 1934, at the beginning of each calendar year, the petitioner by resolution of its Board of Directors declared an excess interest dividend over and above the guaranteed 3 per cent per annum with respect to the amounts helf by it under the "Supplementary Contracts not Involving Life Contingencies." The term "excess interest dividend" is herein used in the same sense as it is used in the supplementary contracts as set out in Stipulation Exhibit D attached hereto and made a part hereof. Respondent determined that such excess interest dividends did not constitute interest within the meaning of section 203(a)(8) of the Revenue Acts1359 of 1932 and 1934. XXXVI The petitioner paid excess interest dividends which accrued during the year on its "Supplementary Contracts not Involving Life Contingencies," at the rate declared for the year by its Board of Directors, in the amount of $534,887.54 in 1933 and in the amount of $545,463.93 in 1934. In computing the taxes involved in these proceedings the respondent allowed deductions under section 203(a)(8) of the Revenue Acts of 1932 and 1934, in the amounts stated in paragraphs XXXI of this stipulation, for the "guaranteed interest" which accrued on these supplementary contracts during each of the years 1933 and 1934 and which was paid in the year that it accrued, but allowed no deduction for the excess interest dividend which was paid on these contracts in each of those years. XXXVII Of the $534,887.54 of such excess interest dividends paid during the year 1933, $256,746.02 was paid with respect to Supplementary Contracts Not Involving 301 Life Contingencies Arising out of Options which were exercised by the insured during his or her lifetime and $278,141.52 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of1360 Options which were exercised by the beneficiaries after the policies involved had matured. Of the $545,463.93 of such excess interest dividends paid during the year 1934, $256,368.05 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the insured during his or her lifetime and $289,095.88 was paid with respect to Supplementary Contracts Not Involving Life Contingencies Arising out of Options which were exercised by the beneficiaries after the policies involved had matured. The petitioner's claims in these proceedings for deductions in the amount of guaranteed interest accrued in prior years and paid in 1933 and 1934, and for deductions in the amount of the excess interest dividends paid in 1933 and 1934, all as described in this and in the four preceding paragraphs, are in the alternative to its claims for reserve deductions under section 203(a)(2) of the Revenue Acts of 1932 and 1934 computed upon the amounts described in paragraph XXXI hereof, named "Present Value of Amounts not yet Due on Supplementary Contracts not Involving Life Contingencies" which the petitioner contends are "reserve funds required1361 by law" within the meaning of that section. The excess interest dividends paid by the petitioner on its Supplementary Contracts Not Involving Life Contingencies, accrued and were paid as follows under the different options set out in Stipulation Exhibit D, exercised as indicated: 19331934Option 1 exercised by insured$147,201.05$153,820.84Option 2 exercised by insured82,158.7376,910.41Option 4 exercised by insured27,386.2425,636.80Option 1 exercised by beneficiary229,930.32242,840.53Option 2 exercised by beneficiary36,158.4034,691.51Option 4 exercised by beneficiary12,052.8011,563.84Total$534,887.54$545,463.93Exhibit D referred to in the stipulation provides in material part as follows: MODES OF SETTLEMENT AT MATURITY OF POLICY. The Insured may elect to have the net sum due under this policy upon its maturity applied under one or more of the following optional modes of settlement in lieu of the lump sum provided for on the first page hereof, and in the absence of such an election by the Insured, the beneficiary, after the Unsured's death, may so elect. The beneficiary, after the Insured's death, may designate1362 (with the right to change such designation) the person to whom any amount remaining unpaid at the death of the beneficiary shall be paid if there be no such person designated by the Insured and surviving. Such election, designation or request for change shall be in writing and shall not take effect until filed with the Society at its Home Office and endorsed upon the policy or the supplementary contract, if any. 1. Deposit Option: Left on deposit with the Society at interest guaranteed at the rate of 3% per annum, with such Excess Interest Dividend as may be apportioned. 2. Instalment Option: Fixed Period. Paid in fixed number of equal annual, semi-annual, quarterly or monthly instalments as set forth in the following table. 302 3. Life Income Option: Paid in equal annual, semi-annual, quarterly or monthly instalments for five, ten or twenty years certain as may be elected and continuing during the remaining lifetime of the beneficiary as shown in the following table. 4. Instalment Option: Fixed Amount. Paid in equal annual, semi-annual, quarterly or monthly instalments of such amount as may be agreed upon until the net sum due under this policy1363 together with interest on the unpaid balances at the rate of 3% per annum, and such Excess Interest Dividends as may be apportioned, shall be exhausted, the final payment to be the balance then remaining with Society. If the interest and Excess Interest Dividend for any year shall be in excess of the instalments payable in such year, then the total amount of the instalments for the subsequent year shall be increased by the amount of such excess. Excess Interest Dividend: The foregoing Options are based upon an interest earning of 3% per annum; but if in any year the Society declares that funds held under such Options shall receive interest in excess of 3% per annum, the interest under Option 1, the amount of instalment under Option 2, the of income during the fixed period of five, ten or twenty years under Option 3 and the funds held under Option 4, shall be increased for that year by an Excess Interest Dividend as determined and apportioned by the Society. * * No option of settlement elected by the Insured hereunder can be changed nor can any payment thereunder be commuted, except by the Insured's written order filed with the Society at its Home Office.Under Options 2, 3, and1364 4, the first instalment will be due upon receipt of due proof of death. * * There is also made a part of the stipulation of facts Exhibit A with regard to an endowment policy. The options granted by this policy are similar to those contained in the ordinary life policy, Exhibit D, the only difference being that upon the maturity of the endowment policy the proceeds may be paid to the insured. The third option contained in Exhibit D provides for installment payments during the settlement period which ends with the death of the beneficiary. The instant proceeding is not concerned with supplementary contracts involving the third option. OPINION. - In its income tax returns for 1933 and 1934 the petitioner treated its supplementary contract reserves not involving life contingencies as "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934 and deducted from the gross income of each year 33/4 percent of the mean of such reserve funds at the beginning and end of the year. In the determination of the deficiencies the respondent has disallowed the deductions claimed. The petitioner contends that the supplementary contract1365 reserves are "serve funds required by law" within the meaning of the above mentioned section of the Revenue Acts of 1932 303 and 1934; in the alternative, it contends that it is at least entitled to deduct from gross income as interest paid on indebtedness all of the interest paid on such supplementary contracts during the taxable years, including the excess interest dividends. We consider first the contention of the petitioner that the supplementary contract reserves constitute "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Acts of 1932 and 1934. In Helvering v. Illinois Life Insurance Co.,299 U.S. 88">299 U.S. 88, the Supreme Court used this language: * * * Its [the life insurance company's] life insurance liability arises upon the death of the insured. Ascertainment of the reserves attributable to that liability involves consideration of the amount contributed to them out of premiums plus interest for a period estimated on the basis of mortality. * * * In Helvering v. Inter-Mountain Life Insurance Co.,294 U.S. 686">294 U.S. 686, the Supreme Court said: * * * "reserve funds" may not reasonably be deemed1366 to include values that do not directly pertain to insurance. In life insurance the reserve means the amount, accumulated by the company out of premium payments, which is attributable to and represents the value of the life insurance elements of the policy contracts. * * Life insurance matures only upon the death of the insured and the life reserve is based upon that contingency, * * * Penn Mutual Life Insurance Co.,32 B.T.A. 876">32 B.T.A. 876, involved the question of whether supplementary contract reserves were "reserve funds required by law" within the meaning of the Revenue Act of 1928. The Board said at page 880: * * * It will be seen that the Supreme Court interprets "reserve funds required by law" as meaning only the reserve funds held by a life insurance company against the contingency of death of the insured. In the instant proceeding the reserve in question represents proceeds of matured ordinary life insurance policies which were held under an agreement. These funds were not held subject to the contingency of death of the insured, since the insured had already died. Immediately after that event the petitioner had the money representing the face of1367 the policy in each instance, which was subject to the demand of the beneficiary. Any reserve thereafter carried to meet such demand in reality constituted a reserve to meet the contractual liability of the petitioner to the beneficiary, with whom it stood in the relationship of debtor and creditor. We accordingly hold that the reserve in question did not constitute "reserve funds required by law" within the meaning of section 203(a)(2) of the Revenue Act of 1928; and upon the recomputation the deduction which was allowed by the respondent will be disallowed. The petitioner argues that the question as to whether supplementary contract reserves constitute "reserve funds required by law" was before the court in Mutual Benefit Life Insurance Co. v. Herold (1912), 198 Fed. 199; that although that case was concerned with the proper construction of the words "reserve funds required by law" as used in the Corporation Excise Tax Act of 1909, nevertheless, that statute is in304 pari materia with the income tax acts beginning with 1913; and that the ruling of the court in that case is equally applicable to the instant proceeding. The petitioner further1368 points out that under all of the income tax acts beginning with 1913 through 1934 the respondent has held in his regulations that supplementary contract reserves constitute "reserve funds required by law." Thus, in article 147(d) of Regulations 33, promulgated under the provisions of the Revenue Act of 1913, and the same article in Regulations 33 (Revised), it is provided: (d) The reserve funds of insurance companies to be considered in computing the deductible net addition to reserve funds are held to include only the reinsurance reserve and the reserve for supplementary contracts required by law in the case of life insurance companies, * * In article 569 of Regulations 45, approved April 17, 1919, it is provided: * * * In the case of life insurance companies the net addition to the "reinsurance reserve" and the "reserve for supplementary contracts not involving life contingencies," and the net addition to any other reserve funds necessarily maintained for the purpose of liquidating policies at maturity, are legally deductible. * * * The same provision was contained in article 569, Regulations 45 (1920 Edition). Article 681 of Regulations 62, 65, and 69, issued under1369 the Revenue Acts of 1921, 1924, and 1926, provides: * * Generally speaking, the following will be considered reserves as contemplated by the law: Items 7, 8, 9, 10, and 11 of the liability page of the annual statement for life companies, and items 16, 17, 18, 19, and 26 of the liability page of the annual statement for miscellaneous stock companies, if a life insurance company is also transacting other kinds of insurance business, * * * Article 971 of Regulations 74 and 77, issued under the Revenue Acts of 1928 and 1932, provides in part: * * * Generally speaking, the following will be considered reserves as contemplated by the law: Items 7-11 of the liability page of the annual statement for life insurance companies, and items 16-19 and 26 of the liability page of the annual statement for miscellaneous stock companies, if a life insurance company is also transacting other kinds of insurance business. * * * From the liability page of the annual statements of life insurance companies, referred to in these regulations and used by life insurance companies for the years 1920 to 1925, inclusive, item 9, and, for the years 1926 to 1934, inclusive, item 10 read: "Present value1370 of amounts not yet due on supplementary contracts not involving life contingencies." It was not until Regulations 86 was promulgated under the provisions of the Revenue Act of 1934, approved February 11, 1935, that a change was made in the respondent's regulations relative to 305 the meaning of the phrase "reserve funds required by law" so as to exclude from such reserve funds the so-called supplementary contract reserves. In article 203(a)(2)-1 of Regulations 86 it was said that the reserve funds required by law referred to by the Revenue Act of 1934 did not include "liability on supplementary contracts not involving life contingencies." Treasury Decision 4615; Cumulative Bulletin XIV-2, p. 310, approved December 18, 1935, amended prior regulations beginning with Regulations 62, issued under the Revenue Act of 1921, to conform to the above ruling made in article 203(a)(2)-1 of Regulations 86. The petitioner argues, upon the basis of Helvering v. Reynolds Tobacco Co.,306 U.S. 110">306 U.S. 110, that Congress must be presumed to have intended the Revenue Acts of 1932 and 1934 to be interpreted as prior income tax acts were interpreted with respect to the issue1371 under consideration. But a regulation of the Commissioner which is contrary to and not consistent with the statute will be disregarded by the courts. See Morrill v. Jones,106 U.S. 466">106 U.S. 466; Robinson v. Lundrigan,227 U.S. 173">227 U.S. 173; Commissioner v. Winslow, 113 Fed.(2d) 418. The regulations and practices of administrative departments are entitled to weight and serious consideration in construing a statute, but it is for the courts to determine the meaning of a statute, and not an executive department of the Government. A Treasury regulation is merely an expression of opinion as to the meaning of the law by the official charged with its enforcement. Edwards v. Douglas,269 U.S. 204">269 U.S. 204; Weld v. Nichols, 9 Fed.(2d) 977. We think it clear that the respondent's regulations which have permitted supplementary contract reserves to be regarded as "reserve funds required by law" are contrary to the interpretation placed upon that phrase by the Supreme Court over a long period of years. A question cognate to that herein involved was before the Supreme Court in 1372 New York Life Insurance Co. v. Edwards,271 U.S. 109">271 U.S. 109. In that case the insurance company claimed that it was entitled to deduct from gross income as a net addition to reserve funds required by law an increase in its liability in respect of unreported losses. The Court stated: 4. A number of policy helders died during the calendar year, but their deaths were not reported before it terminated. The superintendent of insurance required the company to set aside a special fund to meet these unreported losses, and it claimed that this was an addition to the reserve fund required by law. We think this claim was properly rejected by the commissioner, although the courts below held otherwise. McCoach v. Insurance Co. of North America,37 S. Ct. 709">37 S.Ct. 709, 244 U.S. 585">244 U.S. 585, 61 L. Ed. 1333">61 L.Ed. 1333, and United States v. Boston Insurance Co.,46 S. Ct. 97">46 S.Ct. 97, 269 U.S. 197">269 U.S. 197, 70 L. Ed. 232">70 L.Ed. 232 (November 23, 1925), pointed out that "the net addition, if any, required by law to be made within the year to reserve funds," does not necessarily include 306 whatever a state official may so designate; that "reserve funds" has a technical meaning. 1373 It is unnecessary now to amplify what was there said. The item under consideration represented a liability and not something reserved from premiums to meet policy obligations at maturity. In our opinion the Supreme Court's interpretation of the phrase "reserve funds required by law" must be given effect. The supplementary contract reserves of petitioner represent amounts of assets retained to meet the company's liabilities upon insurance policies which had already matured. They do not represent assets held against unmatured policies. The petitioner is therefore not entitled to deduct from the gross income of each of the years 1933 and 1934 3 3/4 percent of the mean of its supplementary contract reserves not involving life contingencies. The second question for consideration on this issue is the amount of interest which the petitioner is entitled to deduct from gross income in making payments during the taxable years under its supplementary contracts not involving life contingencies. Section 230(a) of the Revenue Act of 1932 provides in material part as follows: SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES. (a) GENERAL RULE. - In the case of a life insurance company1374 the term "net income" means the gross income less - * * (8) INTEREST. - All interest paid or accrued within the taxable year on its indebtedness, except [exception not material] * * * Section 203(a) of the Revenue Act of 1934 is the same as above except that the words "or accrued" have been omitted from subdivision (8). Treasury Decision 4615, C.B. XIV-2, p. 310, approved December 18, 1935, amends article 975 of Regulations 77 and article 203(a) (8)-1 of Regulations 86, and provides: (4) If a life insurance company pays interest on the proceeds of life insurance policies left with it pursuant to the provisions of supplementary contracts, not involving life contingencies, or similar contracts, the interest so paid shall be allowed as a deduction from gross income, except that such deduction shall not be allowed in respect of interest accrued in any prior taxable year to the extent that the company has had the benefit of a deduction of 4 percent or 3 3/4 per cent, as the case may be, of the mean of the company's liability on such contracts, by the inclusion of such liability in its reserve funds. It is the contention of the petitioner that, if it is not entitled to1375 consider its supplementary contract reserves as "reserve funds required by law", it must be because such reserve funds constitute indebtedness; that, since the applicable statutes and the Commissioner's regulations provide for the deduction from gross income of all interest paid upon indebtedness, then the petitioner is entitled to deduct the full amount of the interest as shown by the stipulated 307 facts which it paid during the taxable years 1933 and 1934 pursuant to the provisions of its supplementary contracts. It points out that in Duffy v. Mutual Benefit Life Insurance Co.,272 U.S. 613">272 U.S. 613, the Supreme Court said: * * * Until the maturity of a policy, the policyholder is simply a member of the corporation, with no present enforceable right against the assets. Upon the maturity of the policy he becomes a creditor with an enforceable right. Then for the first time there is an indebtedness. See Mayer v. Attorney General,32 N.J.Eq. 815, 820-822. In the meantime, each member bears a relation to the mutual company analogous to that which a stockholder bears to the joint stock company in which he holds stock. * * * The interest1376 with which we are concerned in these proceedings was paid upon supplementary contracts under options 1, 2, and 4 of the policy above set out. Under these options petitioner obligated itself to pay interest or to include in installment settlements interest at the guaranteed rate of 3 percent per annum. It was provided, however, that: * * If in any year the Society declares that funds held under such Options shall receive interest in excess of 3% per annum, the interest under Option 1, the amount of instalment under Option 2, * * * and the funds held under Option 4, shall be increased for that year by an Excess Interest Dividend as determined and apportioned by the Society. We shall consider first the interest paid at the guaranteed rate of 3 percent per annum. On brief the respondent concedes upon the basis of Penn Mutual Life Insurance Co.,32 B.T.A. 876">32 B.T.A. 876, and Penn Mutual Life Insurance Co. v. Commissioner, 92 Fed.(2d) 962; that the petitioner is entitled to deduct from gross income the guaranteed interest paid pursuant to policy contracts under option 1. Under option 2 the petitioner obligates itself to make installment payments certain1377 over a period of years, each installment payment to include interest at the guaranteed rate of 3 percent per annum. The respondent contends that the interest included in the installment payments is not deductible from gross income. In Penn Mutual Life Insurance Co. v. Commissioner, supra, the United States Circuit Court of Appeals for the Third Circuit held that deductions would be allowed for interest included in installment payments under options exercised by beneficiaries after the death of the insured, but that no deductions would be allowed in such cases where the options had been exercised by the insured. The court said (92 Fed.(2d) at p. 967): Now dealing with the instalment settlements thus contracted for, under the Trust Certificate policy or under the Ordinary Life policy when the option has been exercised within the lifetime of the insured, we find the obligations thus created are plainly obligations of policy rather than obligations of debt. The face of the policies bears an obligation to pay in instalments and at given dates. There can be no obligation to pay, first, until the policy has matured by the death of the insured, and1378 second, until the arrival of the due dates of the 308 respective instalment payments. Such a policy matures upon the death of the insured. Upon maturity its nature changes from a policy obligation to an obligation of debt, but, before such an obligation of debt can bear interest, it must become due. When the due date arrives it will bear interest and not before. We understand the reasoning of the court to be that in a case where the insured elects the option the principal of the indebtedness on the maturity of the policy is not the face amount of the policy but the face amount of all of the installment payments to be made in settlement of the policy. Where in such case the insurance company makes an installment payment it is not paying both principal and interest, but is paying principal only. Since in such case the petitioner is not paying interest on indebtedness, it is not entitled to deduct as interest paid on indebtedness the amount of interest included in the installment payment. We therefore hold with respect to interest paid on supplementary contracts covered by option 2 that the petitioner is entitled to deduct only the amount of interest included in installment1379 payments where the beneficiary after the death of the insured or after the maturity of the policy elects the option. Under option 4 petitioner obligates itself to make: * * * equal annual, semi-annual, quarterly or monthly instalments of such amount as may be agreed upon until the net sum due under this policy together with interest on the unpaid balances at the rate of 3% per annum, and such Excess Interest Dividends as may be apportioned, shall be exhausted, the final payment to be the balance then remaining with the Society. We know of no reason why the interest included in installment payments under option 4 should be treated any differently from the interest in installment payments under option 2. The only difference between the two is that in option 4 the "amount" is fixed, whereas in option 2 the "period" is fixed. We do not think that this difference requires any different treatment so far as the deductibility of the guaranteed interest is concerned. We therefore hold, with respect to interest paid on supplementary contracts covered by option 4, that the petitioner is entitled to deduct only the amount of interest included in installment payments where the beneficiary1380 after the death of the insured or after the maturity of the policy elects the option. We next consider the question of the excess interest dividends. The facts pertaining to this question are substantially the same as the facts involved in Penn Mutual Life Insurance Co. v. Commissioner, supra, under the heading "As to the 'Additional Interest' Awarded to the Policies by the Board of Trustees and Paid Out During the Years 1926 and 1928." Under such circumstances it follows that our decision on this question must likewise be the same as in the cited case. We, therefore, sustain the respondent's determination in disallowing as interest paid on indebtedness the amounts of $534,887.54 309 for 1933 and $545,463.93 for 1934. Penn Mutual Life Insurance Co. v. Commissioner, supra.It will be noted from the except from Treasury Decision 4615, quoted above, that the respondent has held that a life insurance company may not deduct from gross income of the taxable year "interest accrued in any prior taxable year to the extent that the company has had the benefit of a deduction of 4 per cent or 3 3/4 per cent, as the case may be, of the mean1381 of the company's liability on such contracts, by the inclusion of such liability in its reserve funds." It has been stipulated that during the years 1933 and 1934 the petitioner paid guaranteed interest in the amount of $13,432.49 and $14,237.50, respectively, which interest had accrued in prior years. The respondent contends that by virtue of his regulation the petitioner may not deduct during the years 1933 and 1934 the above mentioned amounts of guaranteed interest paid. The petitioner is a life insurance company. It makes its returns on a cash receipts and disbursements basis. Under the respondent's present contention the petitioner was not entitled for years prior to 1933 to include in its "reserve funds required by law" the supplementary contract reserves. By reason of the fact that it made its returns upon such basis for years prior to 1933 the respondent undertakes to correct for 1933 and 1934 an error made in a prior year by disallowing a deduction which the petitioner is entitled to make under the taxing statutes. But mistakes made in the audit of a prior year may not be charged against a taxpayer for a succeeding year. 1382 Wobber Brothers,35 B.T.A. 890">35 B.T.A. 890; Schmidlapp v. Commissioner (C.C.A., 2d Cir.), 96 Fed.(2d) 680, 683. In Lansing McVickar,37 B.T.A. 758">37 B.T.A. 758, the Board said at page 762: "The error for 1930 may not be corrected by a deliberately erroneous computation of the tax for 1931." It will be noted from the Commissioner's regulations referred to above that no part of the interest paid on indebtedness during the taxable year is to be disallowed except "to the extent that the company has had the benefit of a deduction of 4 per cent or 3 3/4 percent, as the case may be, of the mean of the company's liability on such contracts, by the inclusion of such liability in its reserve funds." The record does not show that the petitioner had any such benefit during prior years. We are of the opinion that the contention of the respondent upon this point is without merit. Issue 11.FACTS. - During the taxable years 1933 and 1934, and prior thereto, the petitioner accepted funds from certain accident and health policyholders under an agreement with each such policyholder that it would 310 hold on demand the fund accepted from him and supplement1383 it with interest at a specified rate; that, in the event the policyholder did not demand the repayment of the fund, it would apply the fund, together with the interest supplement, in payment of premiums subsequently becoming due on the policyholder's policy; but that at any time prior to the due date of such premiums, it would, upon the policyholder's demand, repay the fund to the policyholder. These funds are not included in the amounts of unearned accident and health premiums for which the petitioner herein claims reserve deductions. The interest supplements made by the petitioner in accordance with such agreements, and applied during the year to premiums as they became due, amounted to $4,525.68 in 1933; and to $5,220.19 in 1934. The respondent in computing the taxes involved in these proceedings allowed no deduction for such interest supplements so made and applied during the taxable years herein involved, and no deduction in respect of the funds supplemented. OPINION. - If the petitioner had paid the amount of interest here in question to the policyholder there could be no question as to the right to the deduction claimed. 1384 See Pan-American Life Insurance Co.,38 B.T.A. 1430">38 B.T.A. 1430. It is the respondent's contention that, since the interest was not paid to the policyholder but was credited to him in settlement of premiums due, the amount does not constitute the payment of interest on indebtedness. In support of his position the respondent cites Illinois Life Insurance Co.,30 B.T.A. 1160">30 B.T.A. 1160, in which we held that, where a life insurance company accepted the payment of premiums in advance and granted a discount on the payment, the amount of the discount did not constitute the payment of interest upon indebtedness. This was for the reason that the insurance company was not indebted to the policyholder for anything. Those are not the facts here. The petitioner owed the policyholder interest upon a deposit of money made by him. The payment of the interest in liquidation of a liability of the policyholder to the petitioner constitutes a payment within the meaning of the income tax acts. Thus in Lynchburg Trust & Savings Bank v. Commissioner, 68 Fed.(2d) 356; certiorari denied, 1385 292 U.S. 640">292 U.S. 640, in quoting from Commissioner v. Stearns (C.C.A., 2d Cir.), 65 Fed.(2d) 371, 373, it was said: "'Credit' for practical purposes is the equivalent of 'payment'." Clearly if A owes B $10 interest upon a note and B owes A an equal amount for merchandise purchased, the credit by A to B's account of $10 is a payment of the interest by A of the $10. The situation here is parallel. The action of the respondent upon this issue is reversed. Issue 13.FACTS. - During the taxable years 1933 and 1934 petitioner owned and in part occupied its home office building located at 393 Seventh 311 Avenue, New York City. This building was constructed on a cost plus basis. Petitioner capitalized as a part of the cost of the building the architect's fee, the contractor's fee, and certain other miscellaneous general expenses incurred in the course of construction in the total amount of $1,651,214.92, not allocated to the cost of the various component elements of the building. These various component elements of the building such as steel, plumbing, elevators, etc., are depreciated at appropriate rates upon the basis of their respective costs1386 which do not include any part of the above mentioned capitalized general expenses. These capitalized general expenses consist of the following: General conditions$419,260.19Contractor's fee492,397.95Architect's fee524,861.19Home office supervisors189,729.32Own alterations24,966.27A reasonable allowance for depreciation in respect of the above building costs for each of the years 1933 and 1934 is 2 1/2 percent of the amount of these capitalized costs. OPINION. - The respondent claims that the petitioner is not entitled to depreciation in respect of the above referred to capitalized costs of $1,651,214.92 upon the ground that they represent the cost of intangibles. As we understand the respondent's position it is that they can not be allocated to the various component elements of the building, such as steel, plumbing, elevators, etc. The evidence of record shows the break-up of the above referred to costs. We do not perceive any reason why all of the capitalized costs are not a part of the cost of petitioner's building. Clearly the architect's fee and the contractor's fee are as much a part of the cost of the building as the wages paid to1387 the masons, carpenters, etc. All of these items represent a part of the cost of the building. It is immaterial that they can not be allocated to the component elements of the building subject to depreciation at different rates. The parties have stipulated that a reasonable rate for depreciation upon these capitalized costs, if they are subject to a depreciation allowance, is 2 1/2 percent. We hold that these capitalized costs are depreciable and that the petitioner is entitled to a depreciation allowance for each year at the stipulated rate. Reviewed by the Board. Decisions will be entered under Rule 50.STERNHAGEN did not participate in the consideration of or decision in this report. BLACK 312 BLACK, dissenting: I dissent from that part of the majority opinion which holds that the reserves maintained by petitioner for the ultimate payment of its obligations in respect of amounts not yet due on supplementary contracts not involving life contingencies are not reserves required by law. I think these reserves are "Reserve funds required by law," within the meaning of section 203 of the Revenue Acts of 1932 and 1934, which are applicable to these1388 proceedings. I, therefore, think that under this section petitioner is entitled, in determining its net incomeTo a deduction of 3 3/4 percent of the mean of the reserve funds in question held at the beginning and the end of the taxable years. It seems to me that these particular reserves are just as valid and essential as any that the life insurance companies are required to maintain. As said by the court in Mutual Benefit Life Insurance Co. v. Herold,198 Fed. 199; affirmed on another point, 201 Fed. 918; certiorari denied, 231 U.S. 755">231 U.S. 755, "These obligations seem to come fairly within the definitions of reserve, as above given. Nothwithstanding the policy-holder has died, there still remain unpaid under the policy certain installments not presently due, but which will mature from time to time in the future. These are as much policy obligations as they would have been if payable in one sum immediately upon the death of the insured. They have a value, and that value must be estimated, and, when estimated, adequate provision made for their payment as they mature, which can only be done by the establishment of a suitable reserve. Furthermore, 1389 such reserves are 'required by law' within the meaning of the act. As appears by the agreed statement of facts, the commissioners of insurance of all the states require the establishment of a reserve to cover the obligations of the company on such supplementary policy contracts. This fact of itself tends strongly to show that they are required by law." While it is true that Mutual Benefit Life Insurance Co. v. Herold, supra, was decided in 1912, and dealt with the Corporation Tax Act of 1909, nevertheless I think what the court said respecting reserves for the fulfillment of obligations under these supplementary contracts not involving life contingencies being "reserves required by law" is entirely appropriate to the revenue acts which are applicable in the instant proceedings. The taxable years which we have before us are the years 1933 and 1934 and the applicable regulations are Regulations 77 and Regulations 86. At the time petitioner filed its income tax return for the year 1933, the Treasury Regulations (art. 971, Regulations 77) held that the type of reserve here involved was a reserve required by law. Substantially the same provisions were contained1390 in all of the regulations issued under all of the revenue acts beginning with the Revenue Act of 1921. Shortly after the Court of Claims handed down its decision 313 in Continental Assurance Co. v. United States,8 Fed.Supp. 474, the Treasury changed its regulations and provided that certain reserves maintained by life insurance companies which had been recognized in the regulations as "reserves required by law" should no longer be so considered. One of these was a reserve maintained for supplementary contracts not involving life contingencies. In Pan-American Life Insurance Co.,38 B.T.A. 1430">38 B.T.A. 1430, we discussed in considerable detail this change in the Treasury regulations and we pointed out that there had been no corresponding change in the statute which would justify such a change in the regulations. We held that the Commissioner's changed regulations were invalid as to reserves for incurred but not yet accrued disability benefits maintained by the taxpayer insurance company, and that these reserves were reserves required by law, and that the taxpayer was entitled to deduct 3 3/4 percent of the mean of these reserves held at the1391 beginning and end of the taxable year. Our decision was affirmed by the Fifty Circuit, 111 Fed.(2d) 366, and was affirmed by the Supreme Court in Helvering v. Pan-American Life Insurance Co.,311 U.S. 372">311 U.S. 372. In that opinion and in the opinion of Helvering v. Oregon Mutual Life Insurance Co.,311 U.S. 267">311 U.S. 267, decided on the same day, the Supreme Court referred to the change in regulations made by the Commissioner referred to above and held that such change, in so far as it affected the reserves involved in those cases, was beyond the statute and was therefore invalid. While it is true that the Supreme Court's decisions in the Oregon Mutual Life Insurance Co. and the Pan-American Life Insurance Co. cases involved disability reserves and not reserves for supplementary contracts not involving life contingencies, as here involved, nevertheless I think the same fundamental reasoning which caused the Supreme Court to hold that disability reserves are reserves "required by law" would require a holding that reserves to meet an insurance company's liability under its supplementary contracts, is a reserve "required by law." I think that1392 would be particularly true as to those policies where the insured himself has directed that the deferred payment plan of settlement with the beneficiary be used. As to the reserves maintained to ultimately pay these policies improved annually by interest, the Commissioner has denied all deduction for interest because, as he says, when these options of settlements have been elected by the insured within his lifetime the obligations thus created are the obligations of the policy rather than obligations of debt. This view has been upheld by the Third Circuit in Penn Mutual Life Insurance Co. v. Commissioner, 92 Fed.(2d) 962. and by the Fifth Circuit in Pan-American Life Insurance Co., supra, and is upheld in the majority opinion in the instant case. If these decisions are correct on this point, and I think they are, then plainly the option settlements where elected by the insured in 314 his lifetime are policy obligations and reserves to insure payment of these obligations are reserves "required by law" within the meaning of the applicable statute and the majority opinion errs in disallowing a deduction of 3 3/4 percent of the mean of these reserves1393 in determining petitioner's net income for the years 1933 and 1934. It follows of course that if petitioner were allowed a deduction of 3 3/4 percent of the mean of these reserves, it would not be entitled to a deduction for interest. This, petitioner concedes. It may well be that a different rule applies to these policies where after the decedent dies the beneficiary of the policy elects to leave the proceeds with the life insurance company and take deferred settlements including interest rather than lump sum payments. As to these the majority opinion allows the deduction of guaranteed interest, following Penn Mutual Life Insurance Co.v. Commissioner Supra, and Pan-American Life Insurance Co., supra, and disallows the deduction of 3 3/4 percent of the mean of the reserves applicable to these particular supplementary contracts. As to that part of the majority opinion there may be considerable logic to support it. The strongest impediment against it would be the Commissioner's own regulations from 1921 to 1932, inclusive. But be that as it may, I do emphatically disagree as to the holding of the majority concerning the reserves maintained by petitioner to fulfill*1394 its obligations on those supplementary contracts which represent elections made by the insured during his lifetime and which both the Board and the courts have held to be policy obligations and not mere indebtedness created by choice of the beneficiary, after the death of the insured. ARUNDELL agrees with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620170/	Walter M. Ferguson, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Anne Belle Ferguson, Petitioner, v. Commissioner of Internal Revenue, RespondentFerguson v. CommissionerDocket Nos. 19386, 19380United States Tax Court14 T.C. 846; 1950 U.S. Tax Ct. LEXIS 199; May 16, 1950, Promulgated 199 Decision will be entered under Rule 50. 1. Returns -- Joint or Separate -- Election. -- Where a husband files a return reporting all of the income of a partnership in which his wife had an equal interest and she filed none, he has, in effect, elected to use a joint return and thereafter has no right to have his tax liability for that year computed upon the basis of a separate return to include only one-half of the income.2. Fraud -- Proof. -- Evidence held insufficient to prove fraud where the gross errors in the returns prepared by accountants were due to inadvertence and the adoption of the errors by the taxpayers was not shown by clear and convincing evidence to have been the equivalent of an intent to defraud.3. Failure to File Return -- Reasonable Cause -- Section 291 (a). -- No addition to the tax under section 291 (a) is proper where a return and check were made out and mailed to the collector, even though the latter has no record of actual receipt and the check was never cashed. William Rosenberger, Jr., Esq., for the petitioners.George J. LeBlanc, Esq., for the respondent. Murdock, Judge. MURDOCK847 The Commissioner determined deficiencies200 in income tax and penalties as follows:WalterAnneYearDeficiencyFraudDeficiencyFraudDelinquencypenaltypenaltypenalty1943$ 2,147.38$ 1,073.6919443,811.551,905.7819451,458.18729.09$ 2,456.75$ 1,228.38$ 614.19The parties have now agreed upon the amount of taxable net income for each year. The petitioners contest the penalties and Walter claims that the income for 1943 and 1944 should be divided equally between him and his wife on the basis of separate returns.FINDINGS OF FACT.The petitioners are husband and wife. Walter filed a return for each year with the collector of internal revenue for the district of Virginia.Walter was formerly employed as a salesman on a bakery route, but in December, 1941, he and his wife, as equal partners, opened a restaurant in Lynchburg, Virginia. They gave all of their time to the operation of the restaurant during the taxable years. Their only other sources of income during the period were two sales of residences.Walter gave such records as they had kept during 1943 to a reputable firm of certified accountants in Lynchburg early in 1944, with instructions to prepare a proper201 income tax return. The accountants asked for and received no explanation of the entries in the records. They prepared a single return, purporting to show all of the income of the business for 1943, which Walter signed and filed. The same procedure was followed for the next year. A part time bookkeeper was employed by the petitioners in 1946 and he prepared separate returns for Walter and Anne for 1945, each purporting to report one-half of the income from the restaurant. He prepared the returns from records similar to those furnished the accountants in the previous years.848 No partnership returns, Form 1065, were filed for the taxable years.The Commissioner determined the deficiencies by taking the increase in net worth and adding estimated living expenses.The following table shows the total net income reported on the returns filed by Walter and the correct amounts as now agreed to by the parties:YearReportedCorrect1943$ 2,129.60$ 9,869.0519443,833.0614,245.6119451 11,392.192 20,306.74The differences between202 the net incomes reported and the correct amounts are due chiefly to the fact that the certified public accountants and the bookkeeper who prepared the returns failed to understand the records furnished them and, as a result, inadvertently duplicated a number of items making up the total costs of goods sold and also deducted as wages the cost of meals furnished employees, which amounts were also a part of the cost of goods sold but had not been included in sales.No part of any of the deficiencies was due to fraud with intent to evade tax.Anne signed the 1945 return prepared for her by the bookkeeper and made out a check to the collector for the tax shown thereon on or before March 15, 1946. The bookkeeper then placed the return and the check in an envelope with other returns prepared by him. The envelope bore his return address, was addressed to the collector of internal revenue, Lynchburg, Virginia, and had stamps attached. The bookkeeper placed the envelope in the post office at Lynchburg on March 15, 1945. The office of the collector at Lynchburg has no record of the receipt of the return and the check has not been cashed. Any failure on the part of Anne to file the return203 was due to reasonable cause and was not due to willful neglect.OPINION.Walter argues that the tax liabilities for 1943 and 1944 should not be computed upon the basis of single annual returns, but upon the basis of separate annual returns. Unfortunately for him, he filed a single return for each year purporting to report all of the income from the partnership business rather than merely his one-half share. Anne filed no returns for those years, although one-half of the income was hers. The Commissioner has properly accepted and treated the returns filed by Walter as joint returns and has determined no penalties for Anne's failure to file returns for those 849 years. Joseph Carroro, 29 B. T. A. 646. The election thus made by the taxpayers is binding and they are not entitled to have the tax for 1943 and 1944 computed upon the basis of two separate returns for each year. John D. Biggers, 39 B. T. A. 480.The petitioners did not keep regular books of account during the taxable years, but they did have informal records from which acceptable returns could have been prepared. One of the purposes of those records 204 was to keep account of their funds going through their cash register. The accountants, and later the new bookkeeper, did not realize that there was in that portion of the record a duplication of expenditures for some goods, the cost of which was also shown separately at another place in the records. The gross income reported was not out of line, but the deductions reflected the duplications, so that the net was grossly incorrect. That was concededly not a deliberate error on the part of the persons preparing the returns, since the record shows that they were men of good repute. The same may be said of their error in twice deducting the cost of employee's meals. If those two errors had not been made the returns for all years would have been substantially correct.However, fraud could be found if the taxpayers, or either of them, had brought about those errors with the intention of defrauding the tax collector or, knowing of their existence, had failed to correct them. The evidence is clear that the petitioners, in keeping their accounts, had no intention to defraud anyone in any way. The real question is whether their adoption of and their failure to correct the erroneous returns205 innocently, if somewhat carelessly, prepared for them, was due to a fraudulent intent to avoid taxes lawfully due.Their sudden prosperity, alleged ignorance, and reliance upon others not fully informed, are inadequate excuses for their incorrect returns. They should have kept better records and they should have known that the net income reported was substantially less than their actual income from the restaurant. An investigation on their part could easily have disclosed the errors. A strong suspicion that Walter knew his income was more than he was reporting might arise from the record. But suspicion of incredible ignorance or of actual knowledge on his part is not enough. Negligence, careless indifference, or disregard of rules and regulations would not suffice. The petitioners dismissed their responsibility to file proper returns much too lightly. But the Commissioner, to support the fraud penalties, must prove by clear and convincing evidence that the taxpayers, or one of them, intended to defraud him. The evidence is not quite adequate to support that burden. It shows no act intended to defraud and, under all of the evidence, the negligent omissions to eliminate the206 duplications of deductions are not the equivalent of an intent to defraud.850 The final issue has to do with the penalty determined for the alleged failure of Anne to file a return for 1945. The Commissioner makes and could make no sound argument in the light of the evidence. It is unnecessary to decide whether there was a "filing." This would not be the first time that a collector had lost a return. Even if no return was filed, the failure was due to reasonable cause (failure of the mails) and not to willful neglect upon Anne's part, so in no event would the penalty be proper.Decision will be entered under Rule 50. Footnotes1. Walter reported one-half of this amount as his distributable share of the income.↩2. One-half to be reported by each.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620171/	THE JOURNAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Journal Co. v. CommissionerDocket No. 106877.United States Board of Tax Appeals46 B.T.A. 841; 1942 BTA LEXIS 808; April 3, 1942, Promulgated 808 1. In 1937 petitioner issued and distributed as dividends notes of a fair market value equal to the face thereof, due January 1, 1939. It claimed and was allowed a dividends paid credit in 1937 on the aggregate amount of the notes. On July 1, 1938, petitioner paid and discharged the notes and claimed a dividends paid credit under section 27(a)(4), Revenue Act of 1938. Held, the general provisions of section 27(a)(4) are limited by the specific provisions of section 27(e), and petitioner is not entitled to a dividends paid credit in the amount paid in discharge of the notes. Spokane Dry Goods Co. v. Commissioner, 125 Fed.(2d) 865. 2. Under the facts herein, held that petitioner intentionally disregarded respondent's rules and regulations within the meaning of section 293(a), Revenue Act of 1938, and imposition of the 5 percent addition is mandatory. Edmund B. Shea, Esq., and C. F. Mikkelson, Esq., for the petitioner. Jonas M. Smith, Esq., for the respondent. ARNOLD 842 OPINION. ARNOLD: This proceeding involves a deficiency in income tax for 1938 in the sum of $10,537.77. The principal issue is whether809 the petitioner is entitled to a dividends paid credit in 1938 by reason of its payment on July 1, 1938, of certain promissory notes, amounting to $440,625, issued and distributed as dividends in 1937, for which a dividends paid credit was claimed and allowed for 1937. Respondent affirmatively alleged that a part of the deficiency herein is "due to negligence, or intentional disregard of rules and regulations" within the meaning of section 293(a), Revenue Act of 1938, and asks the Board to find and determine that he is entitled to the 5 percent addition to the deficiency provided for by said section, claim for which is asserted pursuant to section 272(e), Revenue Act of 1938. The facts as stipulated are adopted as our findings of fact, the pertinent portions thereof being hereinafter summarized. Petitioner, a Wisconsin corporation, is located at Milwaukee, and is engaged in publishing a newspaper known as the Milwaukee Journal. It filed its income and excess profits tax return for 1938 in the Milwaukee collection district. On December 1, 1937, petitioner distributed to its stockholders a dividend upon its common stock consisting of promissory notes executed by the petitioner810 as maker in the aggregate principal amount of $440,625. These dividend notes became due January 1, 1939, with interest at 3 1/2 percent per annum until maturity, or until redeemed. The notes were transferable and were subject to redemption in whole or in part at any time prior to maturity at the option of the petitioner. The fair market value of the notes on December 1, 1937, was not less than $440,625. None of the notes was paid during 1937. In its Federal income and excess profits tax return for 1937 petitioner claimed a dividends paid credit which included the amount of said promissory notes, and credit accordingly was allowed by respondent in auditing the return. If no part of the $440,625 had been included in computing the dividends paid credit for 1937, petitioner's income tax liability would have been $73,457.38 in excess of the tax liability of $212,099.70 determined for that year. 843 On July 1, 1938, petitioner paid and discharged its indebtedness of $440,625 evidenced by said promissory notes. In its Federal income and excess profits tax return for 1938 petitioner treated this disbursement of $440,625 as a dividends paid credit under section 27(a)(4), 811 Revenue Act of 1938, and applied 2 1/2 percent thereof, amounting to $11,015.62, against the tax. Petitioner claimed the dividends paid credit under section 27(a)(4), supra, upon the advice of counsel that it was entitled thereto under the Revenue Act of 1938 and that the provisions of article 27(a)-3 of Regulations 101, 1 approved by the Secretary of the Treasury on February 7, 1939, were contrary to the statute and therefore unenforcible. This opinion of its counsel was received by petitioner on or about March 13, 1939, and was relied on and followed in completing and filing its income tax return for 1938. The dividends paid credit claimed on petitioner's return for 1938, for the purpose812 of deducting 2 1/2 percent thereof under section 13(c)(2)(B), Revenue Act of 1938, was computed as follows: Dividends paid:Cash$360,000.00Obligations distributed in 1938360,000.00720,000.00Amounts paid July 1, 1938, on 1937 notes440,625.00Dividends paid credit claimed on return1,160,625.00Amount deducted by petitioner pursuant to section 13(c)(2)(b)29,015.62In determining the deficiency for 1938 the respondent disallowed that part of the dividends paid credit pertaining to the item of $440,625, and determined petitioner's dividends paid credit as follows: Dividends paid:Cash$360,000Obligations distributed in 1938360,000Amount of dividends paid credit allowed720,000Amount deducted by respondent pursuant to section 13(c)(2)(B)18,000The deficiency of $10,537.77 is attributable to the foregoing adjustment. We shall consider first the question as to petitioner's right to a dividends paid credit, using the term credit herein as relating solely to the $440,625 item. Petitioner contends that it is entitled to the 844 credit under the provisions of section 27(a)(4) of the Revenue Act of 1938, independently813 of section 27(e), the pertinent portions of which are set forth in the margin.2 Respondent denied the credit because a credit in an identical amount was claimed and allowed in 1937 when the promissory notes were issued and distributed to petitioner's stockholders. Respondent points out that the allowance of a credit in 1938 would give petitioner a double credit on the same transaction, a situation not intended by the statute, and which is expressly provided against in article 27(a)-3 of Regulations 101, supra. Respondent cites and relies upon our decision in Spokane Dry Goods Co.,43 B.T.A. 793">43 B.T.A. 793. 814 Petitioner concedes that this issue is "precisely similar to that which was decided in Spokane Dry Goods Co. v. Commissioner,43 B.T.A. 793">43 B.T.A. 793", wherein the Board held that sections 27(a)(4) and 27(e) dealt with the same subject matter and that in accordance with the recognized principles of statutory construction the general provisions of 27(a)(4) must yield to the specific limitations appearing in 27(e). Petitioner denies, however, that the majority opinion of the Board is correct and asserts that the reasoning of the dissenting minority of the Board is sound and should be applied here. If the Board's decision in Spokane Dry Goods Co., supra, be judicially confirmed, petitioner concedes that respondent's regulation must be accepted as a proper interpretation of the law. Such judicial confirmation occurred on February 18, 1942, when the Circuit Court of Appeals for the Ninth Circuit affirmed the Board's opinion in Spokane Dry Goods Co. v. Commissioner, 125 Fed.(2d) 865. The court held that sections 27(a)(4) and 27(e) were related and must be considered together in order to prevent the double credit which would result if said sections815 were considered to be entirely independent of each other. The court specifically considered 845 article 27(a)-3, supra, and pointed out that Congress must be deemed to have accepted the interpretation therein set forth as it did not change the wording of "indebtedness of any kind" in amending section 27(a)(4) in 1939. Respondent's determination on this issue is therefore approved. The second issue, affirmatively raised in the answer, is whether any part of the deficiency is due to petitioner's negligence, or intentional disregard of respondent's rules and regulations as provided in section 293(a), of the Revenue Act of 1938. 3 Respondent rests his argument, not on any alleged negligence of the petitioner, but upon an alleged intentional disregard of rules and regulations. Respondent asserts that petitioner's reply admits that its officers, employees, and agents knew of the provisions of article 27(a)-3, and, since the validity of the regulation is established by the Board's decision in the Spokane case, supra, that the 5 percent addition is mandatory. Respondent contends that reliance on the advice of counsel does not exonerate petitioner's intentional disregard816 of the rules and regulations. The issue turns upon the construction of the statutory phrase "intentional disregard of rules and regulations." The stipulated facts show that petitioner was fully cognizant of the statutory provisions, section 27(a)(4) and (e), and of respondent's interpretation thereof. Petitioner sought the advice of counsel as to what it should do under the circumstances then existing. Counsel advised that petitioner was entitled to the credit provided by section 27(a)(4) and that respondent's regulation was an invalid interpretation of the statute. Petitioner then had to decide which of two opposite constructions it would follow in making and filing its return. The stipulated facts indicate that petitioner gave careful consideration to the problem before electing817 to follow the advice of counsel. Its choice was made deliberately, with full knowledge that the administrative interpretation was contrariwise. Obviously, therefore, petitioner intentionally disregarded respondent's regulation. The defense advanced is in the nature of confession and avoidance. Petitioner stipulates that it acted with knowledge but upon advice of counsel and directs attention to the division of opinion on this Board in Spokane Dry Goods Co., supra, as proof of the soundness of its action and as justification for its belief that the respondent's regulation was invalid. Be that as it may, the statute speaks in mandatory language when it states that if "any part of any deficiency 846 is due to * * intentional disregard of rules and regulations but without intent to defraud, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall be assessed, collected, and paid in the same manner as if it were a deficiency * * ." As hereinbefore demonstrated, petitioner did intentionally disregard the regulations, and, since this conclusion is inescapable under the stipulated facts, it is mandatory that the 5 percent addition818 be assessed, collected, and paid in the same manner as if it were a deficiency under section 293(a). We have examined the authorities cited without finding one dispositive of this issue. In Frank T. Heffelfinger,32 B.T.A. 1232">32 B.T.A. 1232; affirmed on another point, 87 Fed.(2d) 991, we found as a fact that there was no intentional disregard of rules and regulations. Clearly the stipulated facts are susceptible of no such ultimate finding in this proceeding. Most of the cases cited dealt with the 5 percent addition for negligence. In the few cases where "intentional disregard of rules and regulations" was considered, the opinions coupled negligence with intentional disregard, see Lucian T. Wilcox,44 B.T.A. 373">44 B.T.A. 373; Gibbs & Hudson, Inc.,35 B.T.A. 205">35 B.T.A. 205; and Oscar G. Joseph,32 B.T.A. 1192">32 B.T.A. 1192. Negligence has neither been urged nor established in this proceeding, so none of the latter cases involved comparable situations. Harsh though the conclusion may seem, the stipulated facts herein leave no recourse but to grant respondent's request for a 5 percent addition to the deficiency. Decision will be entered under819 Rule 50.Footnotes1. The pertinent provisions of said article read as follows: "Double credits are not permitted, either for the same year of for separate years. Thus, amounts which have been or may be properly taken as a credit pursuant to section 27(e) of the Act or section 27(d) of the Revenue Act of 1936 (both sections relating to dividends in obligations of the corporation) may not again be included in the dividends paid credit under section 27(a)(4) when the obligations are paid. * " ↩2. SEC. 27. CORPORATION DIVIDENDS PAID CREDIT. (a) DEFINITION IN GENERAL. - As used in this title with respect to any taxable year the term "dividends paid credit" means the sum of: * * (4) Amounts used * * * to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness. As used in this paragraph the term "indebtedness" means only an indebtedness of the corporation existing at the close of business on December 31, 1937, and evidenced by a bond, note, debenture, * * * issued by the corporation and in existence at the close of business on December 31, 1937, or * * * * * * (e) DIVIDENDS IN OBLIGATIONS OF THE CORPORATION. - If a dividend is paid in obligations of the corporation, the amount with respect thereto which shall be used in computing the basic surtax credit shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value of any such dividend paid in any taxable year of the corporation beginning after December 31, 1935, is lower than the face value, then when the obligation is redeemed by the corporation in a taxable year of the corporation beginning after December 31, 1937, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs. ↩3. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY. (a) NEGLIGENCE. - If any part of any deficiency is due to negligence, or intentional disregard of rules and regulations but without intent to defraud, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall be assessed, collected, and paid in the same manner as if it were a deficiency, except that * * *. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620172/	Daniel A. Robida v. Commissioner.Robida v. CommissionerDocket No. 4861-62.United States Tax CourtT.C. Memo 1965-86; 1965 Tax Ct. Memo LEXIS 246; 24 T.C.M. (CCH) 451; T.C.M. (RIA) 65086; April 7, 1965Daniel A. Robida, pro se, 4 Paulaneustrasse, Wiesbaden, Germany. Eugene H. Ciranni and James E. Merritt, for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined the following deficiencies in income tax of the247 petitioner and additions to tax under sections 6653(b) and 6654 of the Internal Revenue Code of 1954: Addition to TaxAddition to TaxYearDeficiencyUnder § 6653(b)Under § 66541956$ 7,235.68$3,617.84$202.6019573,718.441,859.22104.1219583,583.281,791.64100.3319599,888.974,944.49276.89196013,381.916,690.96374.6919618,751.274,375.64245.03The assertion of additions to tax under section 6653(b) has been abandoned by the Commissioner and the issues left for decision are: 1. Did petitioner report all of his taxable income for the years in question? 2. What part of petitioner's income, if any, in the taxable years was exempt from taxation under the provisions of section 911, Internal Revenue Code of 1954? 3. Did petitioner underpay his estimated taxes in each of the years 1956 to 1961 so that he is liable for additions to tax under section 6654 of the Internal Revenue Code of 1954? Findings of Fact Petitioner, Daniel A. Robida, an individual, filed income tax returns for each of the taxable years 1956 to 1961, inclusive, with248 the district director of internal revenue, Portsmouth, New Hampshire. The following schedule reflects the taxable income and income tax liability reported by the petitioner on his returns: TaxableTax Lia-YearIncomebility1956$ 889.00$ 142.241957703.00112.4819582,162.00349.6219593,592.37606.8019604,849.30886.3519616,255.821,262.11Totals$18,451.52$3,359.60 Petitioner paid in full the income tax liabilities reported on his returns. The following schedule reflects the amount of income reported by petitioner on his returns as tax exempt under the provisions of section 911 of the Internal Revenue Code of 1954: Income ReportedYearas Tax Exempt1956$ 1,900.0019571,900.0019589,000.00195919,500.00196019,900.00196124,987.00Total$77,187.00 Note: In statements attached to the 1960 and 1961 returns petitioner states he should have listed $13,400 instead of $9,000 in 1958 and $21,952 instead of $19,900 in 1960. This "tax exempt" income was reported by petitioner on his returns as having been earned income abroad as a sales promoter and instructor in the249 operation of machines under the terms of an employment agreement with Service Games Ltd. of Gotenda, Tokyo. On the return for 1961 petitioner's services under the agreement were described as "repairs of machines by soliciting, teaching and practicing the diagnosing and the manipulating of machines". Service Cames Ltd. was a manufacturer of slot machines. Petitioner never received any income for services or for any other reason from Service Games Ltd. of Gotenda, Tokyo in the taxable years. The Commissioner computed the deficiencies herein by the net worth plus nondeductible expenditure method, as follows: YearYearYearEndedEndedEndedAccountDec. 31,Dec. 31,Dec. 31,No.195519561957ASSETS: CashRochester Trust Co.,56305$ 11.24$ 0.00$ 0.00Rochester, New HampshireIndustrial City Bank,32351,128.010.000.00Worcester, MassachusettsMorthrift Plan, Sacramento,11647,390.5410,136.894,912.63CaliforniaGuardian Thrift and Loan, San2497,019.601,271.751,650.48Francisco, CaliforniaSchwabacher & Co., San771931,389.04520.40(5,308.87)Francisco, CaliforniaFireside Thrift, San31230.006,060.006,304.82Francisco, CaliforniaWest Coast Savings,72220.000.000.00Sacramento, CaliforniaMorthrift Plan, Stockton,55730.000.000.00CaliforniaTotal Cash$16,938.43$17,989.04$ 7,559.06StockCost of Stock acquired:$40,354.34$40,354.34$40,354.3419562,617.472,617.47195713,932.301958195919601961TOTAL ASSETS$57,292.77$60,960.85$64,463.17LIABILITIES: NONENET WORTH:$57,292.77$60,960.85$64,463.17INCREASE IN NET WORTH:$ 3,668.08$ 3,502.32NONDEDUCTIBLE DISBURSEMENTS: Schwabacher & Co., San$ 5.00$ 5,103.37Francisco, CaliforniaMorthrift Plan, Sacramento,$10,910.00$ 978.00CaliforniaGuardian Thrift and Loan, San$ 2,245.04$ 100.00Francisco, CaliforniaPersonal Living Expenses$ 5,000.00$ 5,000.00ADJUSTED GROSS INCOME$21,828.12$14,683.69250 YearYearYearYearEndedEndedEndedEndedDec. 31,Dec. 31,Dec. 31,Dec. 31,1958195919601961ASSETS: CashRochester Trust Co.,$ 0.00$ 0.00$ 0.00$ 0.00Rochester, New HampshireIndustrial City Bank,0.000.000.000.00Worcester, MassachusettsMorthrift Plan, Sacramento,6,468.9313,566.3814,107.5523,444.26CaliforniaGuardian Thrift and Loan, San1,734.0615,191.899,580.1810,065.22Francisco, CaliforniaSchwabacher & Co., San646.34(3,823.67)1,549.81352.92Francisco, CaliforniaFireside Thrift, San6,559.506,824.487,136.797,463.40Francisco, CaliforniaWest Coast Savings,0.000.004,045.754,229.92Sacramento, CaliforniaMorthrift Plan, Stockton,0.0021,802.9822,239.02CaliforniaTotal Cash$15,408.83$31,759.08$ 58,223.06$ 67,794.74StockCost of Stock acquired:$40,354.34$40,354.34$ 40,354.34$ 40,354.3419562,617.472,617.472,617.472,617.47195713,932.3013,932.3013,932.3013,932.3019581,217.001,217.001,217.001,217.0019595,044.005,044.005,044.001960220.00220.0019619,937.00TOTAL ASSETS$73,529.94$94,924.19$121,608.17$141,116.85LIABILITIES: NONENET WORTH:$73,529.94$94,924.19$121,608.17$141,116.85INCREASE IN NET WORTH:$ 9,066.77$21,394.25$ 26,683.98$ 19,508.68NONDEDUCTIBLE DISBURSEMENTS: Schwabacher & Co., San$ 332.91$ 32.72$ 12.23$ 18.28Francisco, CaliforniaMorthrift Plan, Sacramento,$ 0.00$ 0.00$ 500.00$ 50.00CaliforniaGuardian Thrift and Loan, San$ 0.00$ 0.00$ 0.00$ 0.00Francisco, CaliforniaPersonal Living Expenses$ 5,000.00$ 5,000.00$ 5,000.00$ 5,000.00ADJUSTED GROSS INCOME$14,399.68$26,426.97$ 32,196.21$ 24,576.96251 The petitioner has introduced no evidence which would show any error in the Commissioner's net worth computation. Petitioner was physically present in the United States from August 1956 to July of 1957. At all other times throughout the years 1956 to 1961, inclusive, petitioner was traveling in Japan, Okinawa, Formosa, Manila, France, Belgium, Germany, Spain, Morocco and Switzerland. While thus traveling petitioner did not intend to make his home abroad. He lived in hotels and ate in restaurants. He "felt that the cost of living and travel over there was rightfully attributable to my income and deductable from the income that I reported * ." During this time petitioner visited some 500 military service clubs abroad. In 1959, 1960 and 1961 petitioner paid Miss Inge Muench who was born and raised in Germany some $6,000 "for going to clubs with him." At the time she was under twenty-one years of age and most of the time she spent with petitioner was in Wiesbaden, Germany. In some unexplained way petitioner claims that he learned through contacts with employees of Service Games Ltd. of Gotenda, Tokyo how to "manipulate" the slot machines they manufactured so that he was able to252 receive income from such "manipulation." This "manipulation" was either done by himself in the service clubs he visited or by servicemen who were club members and whom he was "teaching how to diagnose these machines as well as manipulate" them. When the servicemen whom he was "teaching" to "manipulate" the machines themselves played the machines, they did so under an arrangement with petitioner that when they collected a jackpot it was divided with petitioner. The percentage of the division between petitioner and the soldier player varied. If no jackpot was collected petitioner received no payment. Petitioner engaged in forms of gambling other than playing slot machines while traveling abroad during the years in question for substantial sums of money. Whether he won or lost is not established by the evidence. The evidence does not show that petitioner received any wages, salaries or professional fees or other amounts as compensation for personal services actually rendered during the years in question from sources without the United States. Opinion This case was calendared for trial at San Francisco, California for the session of the Court beginning November 1963, but was continued253 at petitioner's request. It was recalendared for trial on the June 15, 1964 calendar, but petitioner's counsel withdrew and the case was again continued on petitioner's request. On August 6, 1964, petitioner asked that the case be calendared at the "next Tax Court calendar in San Francisco beginning about October 5, 1964 * * because any further delay increases damages being suffered by the mover * * ." This was done and the case was called for trial on October 5, 1964. Petitioner appeared pro se and though cautioned by the Court about the difficulties he might encounter in properly presenting his case without counsel, he so proceeded anyway. Issues are generally framed by the pleadings. Patten Fine Papers, Inc., 27 T.C. 772">27 T.C. 772. The only errors contained in the petition herein are two: (a) that the Commissioner failed "to credit petitioner for the income tax he reported and paid for the years 1956 through 1961 inclusive," (the Commissioner now agrees that an appropriate credit should be allowed) and (b) that the Commissioner erred in failing to credit petitioner with either a twenty thousand dollar annual exemption from income tax as an individual who qualifies for254 such exemption under section 911(a) or an unlimited exemption from the payment of income tax as a bona fide resident of a country outside the continental limits of the United States, pursuant to section 911(a)(1). The Court pointed this out to petitioner, but nevertheless allowed him to present whatever evidence he had which he thought relevant and material to his case. Accordingly, the record is longer than it should have been. Petitioner himself testified. His testimony was general in character. He produced no records or documentary evidence at all of any materiality to the issues, despite the Court's leniency. This he sought to excuse because according to his testimony "the Germans got all of those records also along with the rest of them" and, "Well, the respondent has two or three hundred photostatic records of records confiscated, taken from me by the German officials," and "my records and books were taken by the German officials that arrested me." These allegations are unsupported by the record, except for the petitioner's own testimony, and what they would have shown, had they been available, is nebulous. The taxpayer had the burden of proof, and the impossibility of proving255 a material fact does not relieve him of that burden. Interlochen Company v. Commissioner, 232 F. 2d 873. What the petitioner apparently sought to show, had evidence been adduceable, was that several of the net worth items included in the Commissioner's net worth computation were in error. Even under proper pleadings, the evidence adduced was insufficient to overcome the presumption of correctness which attaches to the Commissioner's determination, and we have so found. The next question is whether any part of the petitioner's income was exempt from taxation in the taxable years because it was exempt under section 911, I.R.C. 1954, as "earned income" received from "sources without the United States" from "wages, salaries, or professional fees," or "other amounts received as compensation for personal services actually rendered." Here again petitioner has failed to carry his burden of proving that any of his income was so exempt. Only by his own testimony has he attempted to carry his burden of proof. His testimony adds up mostly to argument that some amounts of his income received abroad were "earned" for "personal services" actually rendered. 256 But this self-serving testimony falls far short of carrying the burden which petitioner must carry in order to win his case. There is no evidence in the record which would permit us even to guess how much money was actually involved. So far as earning income for personal services is concerned, he says that he was paid for teaching soldiers how to diagnose and manipulate slot machines and that his income was thus earned from his services. Petitioner's "take" from the collection of jackpots is interesting. A portion of his testimony follows: [By respondent's counsel] Q. The only income you have derived is your manipulation of these slot machines; is that a good word? A. You might call it a good word if you want. Q. I am asking you for your word, Mr. Robida? A. Well, I don't agree with you I received income only from manipulation of the machines, but you can put it that way, too. I received most of my income from soldiers that I was teaching how to diagnose these machines as well as manipulate these machines. THE COURT: How much did you determine each one of these soldiers would pay you for your so-called services? THE WITNESS: I left it more or less up to the soldier, 257 and as a rule he left the jackpots up to me, which occurred along the rounds of showing him how to make these jackpots That was the main source of the payment. Many times they offered me advance payment. THE COURT: Do you mean if the machine did not pay off the soldier did not pay you? THE WITNESS: He lived up to his agreement. There was some soldiers that paid me in advance. As a rule, I would give the soldier's money back before very long because that's the way it worked out. I didn't take the man's money if he didn't benefit from it. THE COURT: To me that would mean your earnings from the soldiers depended on what they earned from the slot machines or what they took from the slot machines as winnings; is that right? THE WITNESS: Well, what they and I both took, yes, more or less, let's put it that way. BY MR. CIRANNI: Q. It was actually you who did the manipulating of the machines most of the time, the vast majority of the time? A. I wouldn't say that, but I had to teach them. In the first place, there is a lot of things involved to manipulating a machine. Unless someone knows what they are doing they ain't going to pick up very fast. Q. Actually, you were't able258 to teach anybody to pick up very fast, were you? A. No, I wouldn't say that. Experience counts quite a lot. What it might take one person two years to learn you might teach in five minutes, but that isn't going to let anybody succeed in it, you see. Q. So, the only successful one was you? A. I wouldn't say I was the only successful one. You probably know quite a lot to the contrary. There has been 25 or 30 different soldiers in Europe that have been notorious at beating slot machines all the way from Privates to Colonel, and it is quite a well-known fact in the Military. That's why they went out of their minds about me because they figured this way others learned from others I taught. Q. How many people did you teach? A. I taught around 100 people in six years' time, and I think I was in five hundred clubs in Europe and Africa. I think you could say for the six years' time that I have went in five hundred clubs, and I would still be welcome in about 99.5 percent of those clubs right now. I was always welcome in a great majority of them. To the Court this does not prove that the petitioner had any exempt income which could be called "earned income" under section 911 as259 wages, salaries or other amounts received for personal services actually rendered. Perhaps the petitioner and the soldiers behind whom he was standing or making suggestions to while they played the slot machines and sometimes collected jackpots and divided with petitioner, had a mutual agreement to divide the collections with petitioner, and they did so. But at most, even if we give petitioner's testimony full credence, and could determine how much money was involved, the money so collected and divided, was not "compensation for personal services actually rendered" by petitioner. It was a type of joint venture between petitioner and the soldiers - not a payment to petitioner by the soldiers for personal services which he rendered to them. Furthermore, as indicated above, there is no evidence in the record to prove, even if we were disposed to accept petitioner's argument, which we are not, how much money he received for his so-called "personal services". He has utterly failed in his proof. Though he argues that the amounts claimed on his returns as exempt are substantiated by his records, he has not produced a single record of such receipts, except the tax returns. These are not proof260 that the amounts claimed are correct. Watab Paper Co., 27 B.T.A. 488">27 B.T.A. 488, 506. On the whole, the petitioner's justification for his course of conduct is interesting but not very logical or convincing. On brief he says: What I did defeated the element of chance and gambling, it broke the spell of addiction to gambling for hundreds and hundreds of soldiers in many countries who merely heard that the slots could be beat, to say nothing of their dependents who often shared the pains and loss of gambling addiction. What I taught was unique especially because one who profits defeating the element of chance does so usually by promoting the gambling in the first place, whereas I taught soldiers to do two things with one stroke 1. Beat the game of gambling itself hence breaking addiction to it generally 2. beat the element of chance to make a profit for themselves by their skill and knowledge. The money I earned is qualified under Section 911(b) Code of 1954 as "other amounts received as compensation for personal services actually rendered, * * ". Most of petitioner's testimony and argument deals with his personal problems with German and United States officials abroad, including261 an alleged attempt on his life by an erstwhile friend who "fashioned his camping stove into an improvised flame thrower". Again, this testimony, while interesting, and, if believed, might call for sympathy, has little to do with this case. No evidence was offered to meet the issue of liability under section 6654 for failure to pay any estimated income tax in the years in question and the Commissioner is sustained in his determination of this liability. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620173/	The Carnegie Center Company, Petitioner, v. Commissioner of Internal Revenue, RespondentCarnegie Center Co. v. CommissionerDocket No. 30353United States Tax Court22 T.C. 1189; 1954 U.S. Tax Ct. LEXIS 106; September 17, 1954, Filed September 17, 1954, Filed 106 Decision will be entered under Rule 50. Deduction -- Depreciation -- Basis -- Basis of Buildings Does Not Include Separate Identifiable Cost of Acquiring Fee. -- The basis for depreciation of buildings includes no part of option prices paid for the underlying land by the petitioner which acquired the buildings at the same time by purchasing the stock of and merging into itself the corporations which owned the buildings and had long leases on the land. Richard R. Hollington, Esq., for the petitioner.James F. Kennedy, Jr., Esq., for the respondent. Murdock, Judge. Van Fossan, J., did not participate in the consideration of or decision in this report. MURDOCK 1189 OPINION.The Commissioner determined a deficiency of $ 2,304.64 in income tax for the petitioner's first fiscal year beginning November 1, 1944, and ending October 31, 1945. The petitioner does not contest any of the adjustments made by the Commissioner in determining the deficiency but contends that it is entitled to a refund based upon a larger deduction for depreciation on three buildings than was claimed on its return and increased by the Commissioner in determining the deficiency. The difference107 between the parties is whether the petitioner should use the basis used by its predecessor for depreciation on the buildings, as claimed and allowed on the return, or whether it is entitled to use a larger basis, representing either the alleged cost of the buildings to the petitioner or, in the alternative, the alleged correct basis of the predecessor. The facts have been presented by stipulations which are adopted as the findings of fact. The return was filed with the collector of internal revenue for the eighteenth district of Ohio.The Owners Investment Company, organized in 1928, acquired two 99-year leases on property in Cleveland, Ohio. The leases were renewable forever and each contained an option to purchase the fee. "Ninety-five per cent of its stockholders were also stockholders, officers and directors of the Austin Company," hereafter called Austin. Owners contracted with Austin for the construction of three office buildings on its leased property. The buildings were completed in 1930 at an approximate cost of $ 2,000,000 which "exceeded the proceeds from the first mortgage loan plus the capital invested by the stockholders and this excess of approximately $ 1,000,000108 became an obligation to The Austin Company in the form of a note later to be secured by a second mortgage on the properties." Owners became insolvent and Austin foreclosed on its second mortgage note in November 1190 1937. Austin bid $ 832,500, the only bid, and acquired the properties at the foreclosure sale, making payment by applying a part of the amount due on its note. Austin claimed and was allowed a deduction for the balance due on its note and thereafter "considered that its unadjusted basis of the property for tax purposes was $ 832,500." The fair market value of the three buildings in 1937 was $ 1,150,000. The record does not show what was done in regard to the first mortgage on the Owners property or what the amount of that debt was.Austin organized the Carnegie Medical Building Company and the Upper Carnegie Building Company late in 1938 and transferred the properties to them in exchange for all of their stock, the exchanges being nontaxable transactions under the Internal Revenue Code.The petitioner, wholly owned by The T. W. Grogan Company, was organized in July 1944 for the purpose of acquiring control of the three office buildings owned by Carnegie Medical109 and Upper Carnegie, together with the underlying and adjacent lands. The petitioner intended to use funds to be loaned by Western and Southern Life Insurance Company. The latter demanded a first mortgage secured by the fee simple title to the lands, together with the improvements. It thus became necessary to acquire title to the leased land.Austin offered on July 12, 1944, to sell to the petitioner all of the stock of Carnegie Medical and Upper Carnegie, together with three adjacent lots, for 2,500 shares of nonvoting 3 per cent $ 100 par preferred stock of the petitioner, $ 500,000 in cash, plus the book value of assets of the two subsidiaries other than real property less their liabilities. The offer also stated that the subsidiaries would give the 60-day notice, required to exercise the options to purchase the leased properties, one at $ 680,000 and the other at $ 260,000, when the petitioner had deposited $ 940,000 with a bank as escrow agent to be used to obtain the deposit of the deeds with the same escrow agent. The right to the use of the deposited funds for the payment of one option price was not to be dependent upon the payment of the option price on the other property. 110 All stock, deeds, and cash mentioned were likewise to be deposited with the escrow agent. The insurance company stated the terms upon which it would advance the funds to enable the petitioner to acquire the fee simple title to the lands on which the buildings were located. The petitioner accepted Austin's offer on August 17, 1944, except that they agreed that a commitment of the insurance company would be deposited instead of the actual cash. Austin wrote a letter as follows to the petitioner on October 24, 1944, which was accepted by the petitioner on October 26, 1944:Our letter of July 12, 1944 and your acceptance letter of August 17th, 1944, constitute an agreement between us for the acquisition by you of certain real estate owned by The Austin Company in fee simple, and all of the authorized and 1191 outstanding capital stock of Carnegie Medical Building Company and Upper Carnegie Building Company. Although that agreement contemplated that the two last named corporations would be merged with The Carnegie Center Company, there is no specific provision therein for the execution of a merger agreement by the three companies prior to the date of closing, or for the deposit111 of such agreement with the escrow agent in order that it may become effective as of the date of closing. Also, our agreement as it now stands does not specifically state what part of the total cash payable to us represents the purchase price of the real estate which we are to convey to you. The purpose of this letter is to define the understanding between us as to such matters. Upon your acceptance hereof, this letter will become effective as amending and supplementing our original agreement.(1) We will cause the present directors and shareholders of Carnegie Medical Building Company and Upper Carnegie Building Company to approve the merger of these two companies into your Company and thereupon will cause said two companies to execute a merger agreement in the form which we have discussed and agreed upon. This agreement will provide for the payment and distribution to The Austin Company, as owner of all of the stock of the two companies, of the 2,500 shares of preferred stock in your Company provided for in our original agreement and of the cash specified therein, except that for the purposes of the merger agreement the total cash payment as provided for in our original agreement112 shall be reduced by the sum of $ 67,250.00, the total purchase price of the real estate to be conveyed to you by us. Said merger agreement shall not become effective by its terms until the closing date and unless the provisions of our agreement are completely carried out.(2) The real estate owned by us and described in our original agreement shall be sold and conveyed to you by us entirely independently of any provision of said merger agreement, for the following cash considerations:East 102nd Street Property$ 6,000.00East 105th Street Property11,250.00East 107th Street Property50,000.00Total Purchase Price$ 67,250.00(3) Our deed for the aforesaid real estate shall be deposited with National City Bank as escrow agent, as provided in our original agreement but the purchase price payable to us, after tax adjustments and other deductions authorized by our agreement, shall be in addition to the cash payment provided for by the merger agreement. The total cash and property to be paid and distributed to us, however, under said merger agreement and as the purchase price of said real estate shall remain as specified in our original agreement.However, since 113 it may be impracticable to determine by the date of closing the exact amount of the "additional sum" provided for by said agreement, which is based on adjusted balance sheets of Carnegie Medical Building Company and Upper Carnegie Building Company, it is agreed that the transaction may be closed by the National City Bank as escrow agent when it has available as such "additional sum" a minimum or approximate amount to be agreed upon between us and that as soon as possible after the date of closing an adjustment will be made between us, either through the escrow agent or outside of the escrow so that the total amount paid on account of such "additional sum" will be in accordance with our original agreement.We understand that Carnegie Medical Building Company and Upper Carnegie Building Company will, by reason of the exercise of their options under their 1192 respective 99 year leases, acquire the fee simple titles to the leased properties prior to the closing date under our agreement. It is, therefore, agreed that on or prior to the closing date the fee simple estates in the leased properties shall not be considered as assets, nor shall any obligations or expenses in connection114 with the acquisition of such fee simple titles be considered as liabilities for the purpose of the balance sheet determination of such "additional sum".Carnegie Medical and Upper Carnegie gave the 60-day option notices to their lessors on August 24, 1944. An agreement of merger was executed by Carnegie Medical, Upper Carnegie, and the petitioner, and the merger was approved by the directors of the first two corporations, all on October 24, 1944. The certificate of merger was issued on October 26, 1944.The deposits with the escrow agent were made on October 24 and 27 and the transfers were made by the escrow agent on October 30, 1944. The petitioner thereby became the owner, and continued to be the owner during the taxable year, of the following assets having the following values as of November 1, 1944:Assets formerly of the merged corporations, otherthan land and buildings, less liabilities$ 150,932.59Land267,250.00Buildings1,420,000.00The escrow agent paid the option prices, paid Austin $ 500,000 in cash, including $ 67,250 for its separate real estate, and the other expenses of the transfer, including taxes.The remaining useful life of the buildings from115 November 1, 1944, was 29 years.The only outstanding stock of the petitioner when the above transaction was completed consisted of 5 shares of no par common having a stated value of $ 100 per share and 2,500 shares of $ 100 par value preferred, the latter having been issued to Austin.The Commissioner explained one of his adjustments as follows in the statement enclosed with the notice of deficiency:(e) Additional depreciation has been allowed in the amount of $ 1,711.47. This depreciation applies to capital expenditures claimed as expense by a predecessor corporation for the year 1942 and to capital expenditures included as expense on your return for the taxable year. The substituted basis of the predecessor corporation of the improvements capitalized in the year 1942 is held to be the basis for depreciation of these assets after transfer to your corporation in liquidation of the predecessor, The Carnegie Medical Building Company. Your various contentions in a claim for refund filed on December 30, 1949 that depreciation claimed on your return for the taxable year should be substantially increased, based upon a reallocation of the basis shown on your books and return for land116 and buildings has been rejected.The petitioner argues that the various steps were integral parts of an inseparable transaction whereby, in substance, if not in form, it purchased the land and buildings for a single lump sum, the total 1193 amount paid for the buildings and the land on which they stand, which must be allocated between the two in proportion to the fair market value of each, as provided in Regulations 111, section 29.23 (l)-4. The result would be to allocate as cost of the buildings a large part of the $ 940,000 paid to the owners of the land, the option prices at which they had agreed to sell their land to their lessees. The stipulated facts show, as the petitioner contends, that the petitioner successfully tried to tie together the several necessary contractual arrangements to the end that it became the absolute owner of the land and buildings. The Austin subsidiaries owned the buildings and the leases providing the options, others owned the lands, and the insurance company had money to loan. The petitioner made the necessary arrangements whereby, through the escrow agent, the Austin subsidiaries exercised their options, the insurance company advanced the117 $ 940,000 to pay the landowners and the additional amounts going to Austin, the land and the Austin subsidiaries' stock were transferred to the petitioner, the petitioner became indebted to the insurance company and gave a mortgage on the land and buildings as security for the money loaned, and the petitioner issued its preferred stock to Austin, all practically simultaneously as was necessary and intended. The petitioner also points out that each option price was in excess of the stipulated fair market value of the land alone and argues that it obviously must have acquired something more valuable than the land alone.It is not proper, however, to regard any part of the $ 940,000 as cost of the buildings since clearly that was paid, from funds borrowed by the petitioner, to the landowners solely for their title to the land, which carried with it their rights under the leases. Apparently the landowners' rights under the leases had become valuable and the petitioner was willing to pay them more than the land unleased would have been worth at the time, perhaps to avoid future payments of ground rents. Thus, the petitioner in its reply brief suggests as an alternative that a part of118 the $ 940,000 should be allocated in some way to the leases. No reason or basis for such allocation has been shown. Cf. . The main issue here is the basis for depreciation of the buildings. No part of the $ 940,000 was paid or received for the transfer of the buildings. They were owned not by the landowners, but by the Austin subsidiaries. The provisions of Regulations 111, section 29.23 (l)-4, providing, where necessary, for the allocation of a lump sum paid without segregation for more than one asset, do not apply in a case like this where the buildings were acquired from one source and the land from another owner and there is no uncertainly about the consideration paid for the land or any confusion between that and the consideration which enabled the petitioner to acquire the buildings. There is, thus, no justification for 1194 regarding any part of the $ 940,000 as a part of the depreciable base of the buildings. The result would have been the same had the lessees bought the land at the option prices.The above conclusion is fatal to the main argument of the petitioner that in one way or another a part of119 the $ 940,000 should be included in the depreciable base of the buildings. The Commissioner points out that the landowners had no depreciable interest in the buildings, argues that the petitioner acquired them in a tax-free reorganization, by absorbing into itself by merger Carnegie Medical and Upper Carnegie, as a result of which it must take the same bases for depreciation which the buildings had in the hands of the two merging corporations, citing , affd. , certiorari denied . The petitioner, as an alternative, also contends that it is entitled to use the same bases which the merging corporations were entitled to use. Both parties go back for that basis (unadjusted) to the foreclosure of the second mortgage through which Austin acquired the buildings in 1937 and agree that it was entitled to use thereafter $ 1,150,000 as its basis. They both ignore, without justification so far as the Court has been shown, the first mortgage theretofore placed upon the buildings but since evidence on that point might help but not hurt the petitioner, 120 who has the burden of proof, the Court will likewise ignore the point. The $ 1,150,000 figure is the fair market value of the buildings at the time of the foreclosure. The only argument of the Commissioner against the use of that amount as the unadjusted basis of the petitioner is that the petitioner is estopped to use it by the action of Austin in deducting for 1937 the difference between its bid price of $ 832,500 and the larger amount of the debt owed it at that time by Owners instead of reporting as gain the excess of the fair market value of the buildings over the amount of that indebtedness. Estoppel must be pleaded and proven by the party desiring to raise such a defense. ; ; , affirmed per curiam . The Commissioner has done neither. Thus, this record justifies the use by the petitioner of $ 1,150,000, reduced by allowed or allowable interim depreciation deductions, as its basis for depreciation of the buildings. The parties, apparently, 121 can agree upon the proper interim deductions and the deduction for the taxable year with that figure established as a starting point.Decision will be entered under Rule 50. 1	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620176/	Rosemarie Hofberg (Spies) v. Commissioner.Hofberg v. CommissionerDocket No. 3714-66.United States Tax CourtT.C. Memo 1968-259; 1968 Tax Ct. Memo LEXIS 39; 27 T.C.M. (CCH) 1375; T.C.M. (RIA) 68259; November 13, 1968, Filed Richard B. Newton, 40 Suite 1146 Rowan Bldg., 458 S. Spring St., Los Angeles, Calif., for the petitioner. Martin R. Simon and Michael Pargament, for the respondent. RAUMMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency in petitioner's income tax for 1964 in the amount of $15,146.81. The principal matter presently in controversy is whether petitioner is chargeable with one-half the gain realized in 1964 in respect of her community interest in 50 percent of the stock of a corporation upon its liquidation. Two other issues relating to petitioner's community interest in her former husband's salary and a part thereof classified as dividends by the Commissioner, which account for a substantial portion of the deficiency, do not appear to be in controversy any longer. 141 Findings of Fact The parties have filed stipulations of certain facts, which are incorporated herein by this reference. Petitioner, Rosemarie Hofberg (Spies) resided in Santa Barbara, or Los Angeles County, California, during the year at issue and at the time of filing the petition herein. She filed her Federal income tax return for 1964 with the district director of internal revenue in Los Angeles, California. Petitioner married Alan Hofberg (sometimes hereinafter referred to as "Alan") on May 1, 1959. They separated sometime in 1964. On August 14, 1964, they entered into a "Property Settlement Agreement," reciting that they had "agreed to separate and hereafter permanently live apart", and that petitioner had theretofore filed an action for divorce. The agreement primarily concerned marital property rights and support and maintenance. Pertinent portions of the agreement are as follows: II. HUSBAND'S SEPARATE PROPERTY: * * * In addition, husband has funds on deposit in his name in the All State Savings and Loan Association, Los Angeles Federal Savings and Loan Association and the United California Bank in the total approximate amount of $17,500.00 which amount is the sole42 and separate property of the husband. The said amount was obtained through a prior agreed upon distribution of community funds. III. WIFE'S SEPARATE PROPERTY: * * In addition, wife has funds on deposit in her name in the Security First National Bank in the approximate amount of $11,250.00 which amount is the sole and separate property of wife. The said amount was obtained through a prior agreed upon distribution of community funds. Wife also owns an interest in an escrow for the purchase of real property located in San Luis Obispo County which is the sole and separate property of the wife. IV. COMMUNITY PROPERTY: The parties hereto agree that they are now possessed of the following property which is the community property of the aforesaid marriage: * * * G. 50% of the issued and outstanding capital stock of Best and Hofberg Inc., a California Corporation. * * * VI. DIVISION OF COMMUNITY PROPERTY: * * * C. The parties acknowledged that the husband is presently in the process of liquidating and winding up all of the affairs of Best & Hofberg Inc. It is expressly agreed that upon liquidation of the said corporation husband shall convey 1376 to wife one-half of all of the43 cash and other assets he shall receive upon the final liquidation of the said corporation with the exception of any automobile he may receive in kind. With respect to said automobile, wife agrees that same may be the sole and separate property of the husband. * * X. RELEASE AND WAIVER OF RIGHTS: * * * B. Husband * * * covenants and agrees that if any claim, action or proceeding shall hereafter be brought seeking to hold her [wife] liable on account of any of his debts, liabilities, acts or omissions, he shall, at his sole expense, defend her against any such claim or demand (whether or not well-founded) and that he shall hold her free and harmless therefrom. * * * D. Each of the parties agree that any and all property acquired by either of them from and after the effective date of this instrument shall be the sole and separate property of the one that is so acquiring it; each of the parties waives any and all property rights in and to such future acquisitions hereby granted to the other, all such future acquisitions of property as the sole and separate property of the one so acquiring same from effective date of this instrument. The parties acknowledged that any money or44 property received by the husband in the liquidation of the corporation known as Best and Hofberg Inc. shall not be subject to the provisions of this sub-paragraph. On August 26, 1964, an interlocutory judgment of divorce was entered in the Superior Court of the State of California for the County of Los Angeles, entitling petitioner to a divorce from Alan one year from the date thereof. The decree incorporated the above property settlement agreement, and in addition contained the following: 9. Upon the liquidation and winding up the affairs of Best and Hofberg, Inc., a California corporation, in which plaintiff and defendant own a fifty per cent (50%) interest as their community property, defendant is ordered to pay and convey to plaintiff one-half of all of the cash and other assets that he shall receive upon the final liquidation of said corporation with the exception of any automobile he may receive in kind upon such liquidation, which automobile shall be his sole and separate property. Petitioner and Alan owned as community property 50 percent of the outstanding capital stock of Best & Hofberg, Inc. (sometimes hereinafter referred to as "Best & Hofberg" or "the corporation"), 45 a California corporation conducting a mail order business. Their cost basis in such stock was $7,500. The remaining 50 percent was owned or controlled by a person named Norman Best. The corporation sometimes did business under the names "National Address-O-Plate Co." and "Western States Claim Adjusters, Inc." Bank accounts in these two names were in fact bank accounts of Best & Hofberg. Petitioner was a director of the corporation but was not an employee. She did some work at home for the corporation, consisting of "typing mailing lists, going over ideas and talking with Mr. Hofberg, discussing ideas, promotions." At some date during the first half of 1964, not precisely fixed in the record, Alan Hofberg, Norman Best and the corporation were indicted, and sometime in mid-1964, but prior to July 1964, the shareholders and directors of the corporation elected to wind up its affairs and voluntarily dissolve. On July 24, 1964, a certificate setting forth such election was filed in the office of the Secretary of State of California, as required by California law. Distributions in liquidation in the amounts of $28,000 each had already been made to Alan Hofberg and Norman Best on June 29, 1964. 46 On September 10, 1964, the directors of the corporation, including petitioner, executed a document certifying under penalty of perjury that, inter alia, the corporation had been completely wound up and dissolved, that all known debts of the corporation actually had been paid, and that all known assets of the corporation had been distributed to the shareholders. This document was filed with the California Secretary of State on September 14, 1964. After September 10 or September 14, 1964, the corporation conducted no business and engaged in no activities other than minor bookkeeping adjustments or possibly other minor acts in connection with winding up its affairs. Alan received cash and certain assets in kind as part of the liquidation proceeds, and he assumed certain liabilities of the corporation. The cash which he thus received was in the aggregate amount of $67,326.84, and was reflected in the following six checks payable to him: 1377 Check NumberAccount drawn uponDate of checkAmountDescription on check stub1185National Address-O-Plate Co.6/29/64$28,000.00"Dist. in liquidation." 21194National Address-O-Plate Co.9/10/6413,000.00"for deposit for Corp. Tax"1196National Address-O-Plate Co.9/10/64986.55[not in evidence]1198National Address-O-Plate Co.9/10/647,000.00[None]1199National Address-O-Plate Co.9/10/646,607.26[None]12197Western States Claim Adjusters Inc.9/10/64 11,733.03[not in evidence]Total$67,326.8447 In determining the deficiency herein the Commissioner added the foregoing $67,326.84 cash to the assets in kind received by Alan 3 and subtracted corporate liabilities assumed by Alan which he determined to be in the aggregate amount of $13,388.26. From the net amount thus determined as having been received in liquidation he subtracted $7,500, the cost basis of the stock, and attributed one-half of the resulting profit or $29,585, to petitioner as her share of the gain on liquidation of the corporation. Petitioner's share of that gain was in fact $27,410 ($29,585 minus an adjustment in respect of a Cadillac automobile received by Alan as explained in the Opinion hereinafter). 48 On June 29, 1964, Alan deposited the $28,000 check listed in the above table as received as part of the liquidation proceeds from the corporation, in a savings account in his name at the Allstate Savings & Loan Association, opened on the smae day. On July 10, 1964, he withdrew $5,368.20 from the Allstate account. On July 20, 1964, he withdrew $11,146 from the account and converted these funds into a check, drawn on Allstate, payable to petitioner. On July 22, 1964, petitioner deposited the $11,146 check at the Security First National Bank in a joint savings account owned by her and Richard F. Spies, whom she subsequently married. On August 3, 1964, Alan deposited in the Allstate account a check for $2,500 received from the corporation as a salary payment. On August 4, 1964, he deposited a check for $5,000 in the account. On August 10, 1964, he withdrew $11,000 from the account and converted the funds into a check, drawn on Allstate, payable to petitioner. On August 11, 1964, petitioner deposited the $11,000 check in her joint account at the Security First National Bank. The foregoing $11,146 check and $11,000 check of July 20, 1964 and August 10, 1964, respectively, payable to petitioner, 49 represented part of her share of the proceeds of the liquidation of Best & Hofberg. The $13,000 check listed in the above table received by Alan in connection with the liquidation of the corporation was deposited by him in an account for use in discharging the corporation's tax liability. In determining the amount chargeable to petitioner in connection with the liquidation, the amount of that liability together with other corporate liabilities, of lesser amounts, assumed by Alan, was eliminated and only the net amount of the distributions (after subtracting the liabilities assumed by Alan) was used by the Commissioner as a base for determining the net amount of petitioner's one-half community interest therein. Three of the checks received by Alan in liquidation of the corporation, in the amounts of $986.55, $6,607.26, and $11,733.03, or a total of $19,326.84, were deposited on September 11, 1964, in a joint savings account in the names of Alan and petitioner which was opened on that day at the Home Savings and Loan Association of Los Angeles. No other deposits were ever made in this account, and no withdrawals were ever made until the closing of the account in April 1965, as hereinafter50 set forth. The three checks deposited in this account represented part of the proceeds of the liquidation of Best & Hofberg. As the result of a request formally made by Alan, the account was subject to the condition that no withdrawals could be made therefrom without the signatures of 1378 both Alan and petitioner, but it was the bank's practice in such circumstances to issue a check payable to both account owners if one of them insisted upon making a withdrawal. At the time this account was opened it was contemplated that petitioner and Alan would file a joint Federal income tax return for 1964 and that the funds in the account would be used to pay the taxes due thereunder. However, it was ultimately decided that Alan and petitioner would file separate returns for 1964, and on April 13, 1965, the account was completely liquidated. By that time, as a result of the accrual of interest, the balance in the account had increased to $19,851.71. That entire balance was withdrawn on April 13, 1965 by Alan and petitioner; Alan received a check in the amount of $9,925.85, and petitioner received a check in the amount of $9,925.86. During 1964, Alan received the following payments from51 the corporation designated as salary. Date PaidGross AmountJan. 2$14,000March 1213,000May 413,000July 713,000Aug. 3 4,000Total$57,000Petitioner filed a separate Federal income tax return for 1964 and in it reported no income from the liquidation of the corporation or from the $57,000 paid to Alan by the corporation as wages. In the notice of deficiency, the Commissioner determined that petitioner realized a long-term capital gain of $29,585 in 1964 from the liquidation of the corporation, which amount was not reported on her return. He further determined that she realized unreported income from wages in the amount of $25,855 and unreported dividend income of $3,345, both items representing her community one-half interest in sums paid to Alan. (These latter two items are no longer in controversy. See footnote 1, supra.) Opinion RAUM, Judge: Petitioner and her former husband, Alan Hofberg, owned as community property 50 percent of the outstanding stock of Best & Hofberg, Inc., a California corporation. There is no dispute that their cost basis in that stock was $7,500. The sole issue to be decided is what gain, if any, petitioner52 realized in 1964 as a result of the liquidation of the corporation. Section 331(a) of the 1954 Code provides that amounts distributed in complete liquidation of a corporation "shall be treated as in full payment in exchange for the stock." Accordingly, to the extent that petitioner's allocable share of the net amount received in liquidation exceeded the basis of the stock she has realized taxable gain. The Commissioner determined that the amount of such gain allocable to petitioner was $29,585. The burden of proof was upon petitioner, and except for an adjustment hereinafter explained, which reduces that amount to $27,410, we find no error in the Commissioner's determination. Petitioner presents a variety of arguments why she should not be charged with realization of income upon the liquidation of Best & Hofberg in 1964. She first asserts that there was in fact no liquidation. At the trial, there was an attempt to show that the corporation did not in fact cease doing business on September 10, 1964, as claimed in a document signed by petitioner and other directors which was filed by the corporation with the State of California. However, we found no convincing evidence to support this53 view. Petitioner argues further, on brief, that liquidation requires the complete distribution of assets to all shareholders, that the property agreement between petitioner and her former husband effected a division of the stock formerly held by them as community property, that petitioner individually never received her share of the liquidation proceeds, and that therefore there was no liquidation. Without passing on the correctness of petitioner's definition of a liquidation, we are satisfied that the property agreement did not give petitioner a separate property interest in any of the stock. Part IV (G) of the agreement explicitly recognizes the stock in Best & Hofberg as community property, and it does not undertake to divide the stock between the spouses. On the other hand, Part VI (C) of the agreement states that the parties acknowledge that Alan was "in the process of liquidating" the corporation and provides that he shall convey to petitioner one-half of all the cash and other assets received upon final liquidation, with the exception of an automobile. Part X (D) provides that property acquired by the parties subsequent to the agreement will be the separate property of the54 party 1379 receiving it, but the liquidation proceeds are specifically excepted from this provision. It is thus clear that the stock and any liquidation proceeds were to remain community property even after August 14, 1964, until the proceeds were in fact divided between the parties. The interlocutory divorce decree specifically recognized this arrangement in paragraph 9. Such an arrangement is perfectly proper under California law. It is well-settled that an interlocutory decree does not dissolve the marital relationship, but merely establishes the right of the prevailing party to receive a final decree of divorce after the expiration of one year. Cal. Civil Code, secs. 131 and 132; In re Cummings, 84 F. Supp. 65">84 F. Supp. 65 (D.C.Cal.); Paulus v. Bauder, 106 Cal. App. 2d 589">106 Cal. App. 2d 589, 235 P. 2d 422. While section 169.2 of the California Civil Code provides that property received by the husband after an interlocutory decree shall be considered his separate property, 4 nothing has been called to our attention that would preclude the spouses from continuing by agreement the community property status of any specified item of property held as such prior to an interlocutory decree. 55 Moreover, in Harrold v. Harrold, 43 Cal. 2d 77">43 Cal. 2d 77, 81, 271 P. 2d 489, 492, the court stated: "* * * When a divorce is pending the power of a husband over community property exists until the entry of a final decree. Lord v. Hough, 43 Cal. 581">43 Cal. 581; Chance v. Kobsted, 66 Cal. App. 434">66 Cal. App. 434, 437,; In re Cummings, 84 F. Supp. 65">84 F. Supp. 65, 69." And there does not appear to be any reason why this rule should be otherwise after enactment of section 169.2. The Best & Hofberg stock being community property at all times, and under Alan's control, it was perfectly proper for the corporation to distribute one-half of the liquidation proceeds to him, as we have found it did. Petitioner's contention that there was no liquidation because the56 proceeds were not properly distributed to the shareholders is without merit. Petitioner further contends that even if there were a liquidation, she never received, actually or otherwise, any liquidation proceeds. From the discussion above, it is clear that since petitioner at all times had a community one-half interest in 50 percent of the corporation's stock, she realized income immediately upon the distribution of the liquidation proceeds, whether or not she actually received her share from her former husband. When he received the proceeds, he was acting as the manager of the community property in respect of which the proceeds were paid and was therefore acting on behalf of petitioner. Both the property settlement agreement and the divorce decree explicitly recognized Alan's authority in the liquidation to receive the proceeds. Whether he was acting as petitioner's agent by virtue of the community property laws or by virtue of the property settlement agreement, we are convinced that Alan received one-half the liquidation proceeds (with the exception of the automobile) on behalf of petitioner, and that one-half of the gain so realized is taxable to her. In any event, we are satisfied57 on this record that apart from petitioner's share in the mailing list which was not included in determining her gain, petitioner in 1964 actually received from Alan her full share of the liquidation proceeds. Petitioner's contentions to the contrary are not supported by the evidence. Petitioner argues that the $28,000 check received by Alan from the corporation on June 29, 1964, was not actually a payment in liquidation and that, therefore, any checks drawn on the account into which the $28,000 was deposited and payable to petitioner could not be considered distributions of liquidation proceeds to her. The corporate records establish, and we are convinced by the evidence, that the $28,000 was indeed a distribution in liquidation. We have so found. Alan issued to petitioner two checks from the account in which the $28,000 was deposited. Petitioner admits receipt of the checks but advances various reasons why they should not be considered liquidation proceeds. Petitioner testified that Alan never told her that the checks represented liquidation proceeds but rather said the funds were received from "kickbacks" or refunds, deferred salary, or the repayment of a debt. Alan testified that58 he told petitioner the funds were from liquidation distributions. There is no evidence except petitioner's testimony that the checks represented anything other than her share of the liquidation proceeds, and we did not find her testimony convincing. 1380 Petitioner argues that the $11,146 check was referred to in the property agreement in Part III as "the approximate amount of $11,250.00" in petitioner's bank account as her separate property, that the agreement was entered before the liquidation of the corporation, and that, therefore, the $11,146 represented a division of community property rather than liquidation proceeds. The agreement, however, in no way implies that no funds had been previously distributed in liquidation. It states that Alan was "in the process of liquidating and winding up" the corporation. There is nothing inconsistent between the agreement and the conclusions that the liquidation had already begun and that some distributions had already been made. Petitioner argues that the $11,000 check was issued from Alan's account after the deposit in that account of admittedly nonliquidation funds. The point is without merit. Regardless of other deposits in that59 account, there were ample funds in the account from the corporate liquidation to support that payment, and, in any event, Alan could have used any funds in his possession, whatever their source, to pay petitioner part or all of her share of the liquidating distributions. Petitioner's final contention with regard to actual receipt concerns the three checks totalling $19,326.84 deposited in a joint account owned by petitioner and Alan. The account contained a restriction that no withdrawals could be made without both signatures. No withdrawal was in fact made until April 13, 1965. Petitioner contends that she cannot be charged with receipt of one-half of the deposit in 1964 because of the restriction on withdrawal. See sec. 1.451-2(a), Income Tax Regs. While it was Alan alone who signed the document requesting the bank to impose the restriction on withdrawal, there is no evidence that petitioner did not consent to the arrangement or that the imposition of the restriction was a condition of her receipt of the funds. The restriction was as much for her benefit as it was for Alan's, for it precluded Alan from making any withdrawals and thus diluting petitioner's60 interest in the account. The amount placed on deposit on September 11, 1964, was as much hers as it was his on that date. The fact that they consented to an arrangement whereby neither could withdraw it without the concurrence of the other does not make it any the less an actual receipt in 1964. Thus, the petitioner must be charged with having actually received her one-half of that deposit of $19,326.84 in 1964, or $9,663.42. And when this amount is added to the other two amounts which we have found were in fact received by petitioner in 1964 as her share of the liquidating distributions, namely, $11,146 and $11,000, petitioner received a total of no less than $31,809.42 in 1964 as her share of the liquidation of Best & Hofberg, a sum that more than covers the amount of gain ($27,410) that we find properly chargeable to her plus the return of her one-half share of the $7,500 basis. See infra. The final problem with respect to the liquidation income concerns the precise amount includable in petitioner's income. The net amount received by Alan must first be determined. The statutory notice of deficiency charged petitioner with gain from the liquidation in the amount of $29,585. 61 This assumed a distribution to Alan in the net amount of $66,670 from which the $7,500 basis was subtracted, leaving a total net gain of $59,170, one-half of which, or $29,585, was attributed to petitioner. However, a Form 1099L filed by the corporation, which is in evidence, reported a net distribution to Alan of $66,170.29. This form valued a 1963 Cadillac car received by Alan as part of the liquidation proceeds at $3,850. On brief, the Commissioner explained the discrepancy between the $66,670 and $66,170 figures as the result of his revaluation of the automobile from $3,850 to $4,350. The record contains no evidence as to the value of the car when distributed. We think, however, that the provisions of the property agreement and interlocutory divorce decree make the issue of the value of the car irrelevant to this case. The agreement reads in pertinent part: * * * It is expressly agreed that upon liquidation of the said corporation husband shall convey to wife one-half of all of the cash and other assets he shall receive upon the final liquidation of the said corporation with the exception of any automobile he may receive in kind. With respect to the said automobile, wife agrees62 that same may be the sole and separate property of the husband. The decree reads in pertinent part: * * defendant is ordered to pay and convey to plaintiff one-half of all of the cash and other assets that he shall receive upon the final liquidation of said corporation with the exception 1381 of any automobile he may receive in kind upon such liquidation, which automobile shall be his sole and separate property. In our view, the Commissioner's position that the value of the car (whatever it may be) should be included in the amount of liquidation proceeds to be divided between petitioner and Alan is erroneous. Both the decree and the agreement clearly provide that the car is not to be considered as part of the amount to be so divided. It is proper under California law for the parties to make such an adjustment of their community property rights. Baxter v. Baxter, 3 Cal. App. 2d 676">3 Cal. App. 2d 676, 40 P. 2d 536, cf. Cal. Civil Code secs. 159 and 160. Thus, the car, whatever its value, may not be included in determining petitioner's share of the net liquidating distributions. Accordingly, the net amount of the liquidating distributions must be scaled down to $62,320, and after*63 subtracting the $7,500 basis therefrom, there is a net gain of $54,820, of which petitioner's one-half allocable share is $27,410. Petitioner's other arguments with respect to the amount received by petitioner may be quickly disposed of. Petitioner argues that she was not credited with Alan's assumption of liabilities to any extent. It is, however, perfectly plain that the assumption of liabilities was taken into account by the Commissioner in determining the net amount of the liquidation proceeds received by Alan. Petitioner argues that Alan received property other than cash and that she did not. It is, however, clear that petitioner received enough cash to cover her share of the other property. Petitioner argues that Alan received a mailing list of which she received no part. The Commissioner, however, did not even know of the mailing list when the deficiency was determined, and, as already noted, its value was clearly not included in the amount asserted to have been received by Alan. There is no merit in any of these arguments. Decision will be entered under Rule 50. Footnotes1. No argument is presented in petitioner's brief or reply brief in respect of these two issues and, in referring to these two issues, representations were made to the Court in the Government's brief that "[the] parties have by written stipulation of facts, removed from controversy the issue of petitioners [sic] liability for additional income from wages in the amount of $25,855.00 and her liability for additional income from dividends in the amount of $3,345.00", although no such stipulation appears to have been filed with the Court. Petitioner's reply brief does not contradict these representations.↩2. This stub originally read "Dist. of Funds." The last two words are crossed out and "in liquidation" substituted.↩3. The value of the assets in kind, as determined by the Commissioner, does not clearly appear in the record, nor was any satisfactory evidence presented as to the value of such assets. However, the record shows that in addition to the assets in kind taken into account by the Commissioner, Alan received a valuable mailing list from the corporation of which the Commissioner was unaware when he determined the deficiency, but he has not since sought any increased deficiency in respect thereof, nor has he sought in any other manner to have the value thereof taken into account in respect of the total amount received in liquidation by Alan.↩4. Prior to the enactment of section 169.2 in 1959, in the absence of any provision to the contrary in a property settlement agreement or interlocutory divorce decree, property acquired by the husband after the entry of an interlocutory decree, but before a final decree, was community property. Franklin v. Franklin, 67 Cal. App. 2d 717">67 Cal. App. 2d 717, 721, 155 P.2d 637">155 P. 2d 637, 639. Cf. Ethel B. Dunn, 3 T.C. 319">3 T.C. 319, 320↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620177/	BROCKWAY GLASS COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brockway Glass Co. v. CommissionerDocket No. 100367.United States Board of Tax Appeals43 B.T.A. 267; 1941 BTA LEXIS 1524; January 9, 1941, Promulgated 1524 1. A bond indenture obligated the petitioner to reserve out of earnings $5,000 per year to discharge bonds maturing in the taxable year. This was not done in previous years, but in the taxable year petitioner received from dividends, and paid on the bonds approximately $20,000. Held, on the facts, that the Commissioner properly allowed credit under section 26(c)(2), Revenue Act of 1936, on only $5,000. 2. Held, that a capital stock tax return can not be amended after termination of filing period (William B. Scaife & Sons Co.,41 B.T.A. 278">41 B.T.A. 278, followed); held, further, section 105, Revenue Act of 1935, is not shown to be violative of the Fifth Amendment to the Constitution of the United States. Omar G. Olds, Esq., for the petitioner. William A. Schmitt, Esq., for the respondent. DISNEY267 This proceeding involves income tax of $185.31 and excess profits tax of $4,336.19, for the taxable year ended June 30, 1937; also income tax of $1,782.45 and excess profits tax of $1,908.73, for the period from July 1 to August 31, 1937. All facts have been stipulated, and are found by us as stipulated. They may, so1525 far as necessary to consideration of the issues presented, be summarized as follows: The petitioner is a corporation of the State of New York, but is authorized to do business in Pennsylvania. Federal income tax returns for the taxable years were filed with the collector of the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania. On June 15, 1927, the petitioner (then known as Brockway Machine Bottle Co.) issued first mortgage bonds in the amount of $110,000, payable $10,000 each year, beginning June 15, 1931, until June 15, 1937, when the remaining $50,000 was payable. The bond indenture provided in part: [ARTICLE II.] Item 9. The grantor will each year, until all of said bonds are paid, reserve out of its earnings and not distribute by dividend, five thousand dollars ($5,000.00) for the purpose of providing a resource sufficient to meet the payment of fifty thousand dollars ($50,000.00) of bonds last maturing. * * ARTICLE V. In case grantor shall make default hereunder, or breach any covenant in this instrument contained, whether for the payment of money or otherwise, then, and in every such case, the Trustee (a) may, and if thereunto requested1526 in writing by the holders of twenty-five (25) per centum in interest of the said bonds then outstanding, shall declare the principal of all the bonds hereby secured then outstanding to be, and the same shall thereupon become immediately due and payable, anything contained in said bonds or 268 herein to the contrary notwithstanding; (b) may enter upon and take possession of the mortgaged property, or any part thereof, collect and receive all rents, issues, income and profits therefrom and operate and conduct the business of the grantor insofar as it pertains to the property covered hereby to the same extent and in the same manner as the grantor might do; (c) may cause this mortgage to be foreclosed and the mortgaged property or any part thereof, to be sold; (d) may proceed to protect and enforce the rights of the Trustee and the bondholders hereunder, whether for specific performance of any covenant, condition or agreement herein contained, or in aid of the execution of any power herein granted or for the enforcement of any other appropriate legal or equitable remedy as may, in the opinion of counsel, be most effectual to protect and enforce the rights aforesaid. The bonds1527 were retired annually as follows: Year endedAmount retiredJune 30, 1931$10,000.00June 30, 193210,000.00June 30, 193310,000.00June 30, 1934$2,500.00June 30, 193522,000.00June 30, 193612,000.00On June 30, 1936, the petitioner had a cash balance in banks in "First Mortgage Bond Trust Accounts" of $20,339.69. This had been deposited monthly in various amounts, but the $5,000 per year had not been reserved out of earnings as required by the bond indenture. On June 30, 1936, bonds were outstanding in the amount of $43,500, due June 15, 1937. On November 6, 1936, the Exchange National Bank of Olean, New York, as trustee under said bond indenture, by letter requested petitioner to reserve out of earnings during the year ended June 30, 1937, the sum of $23,160.31, to make up the total sum needed to retire the remaining $43,500 worth of bonds on June 15, 1937. The letter from the trustee stated in part: Item nine, page eighteen, of said Trust Indenture, provides as follows: "The grantor will, each year, until all of said bonds are paid, reserve out of its earnings and not distribute by dividends, $5,000.00 for the purpose of providing1528 a resource sufficient to meet the payment of $50,000.00 of bonds last maturing." Inasmuch as you have failed to reserve $5,000.00 out of your earnings each year, as provided by the Trust Indenture, we must require that you reserve out of your earnings this year the difference between $20,339.69 the amount on hand in said bond reserve as of July 1, 1936, and $43,500.00 the full amount of bonds to be paid, or a total of $23,160.31. Please advise us that this amount of your earnings will be set aside prior to the payment of any dividends so that the bond issue can be paid in full at maturity on June 15, 1937. On November 6, 1936, the trustee's letter was discussed at a meeting of the petitioner's board of directors and motion was carried that the trustee's requirement be carried out. The sum of $23,160.31 was set aside out of petitioner's earnings during the year ended June 30, 1937, and the balance of the bonds in the sum of $43,500 was paid off on or prior to June 15, 1937. 269 On July 31, 1936, petitioner filed Form 707, 1936 return of capital stock tax, for the year ended June 30, 1936, with a declared value of $750,000. On April 3, 1937, petitioner transmitted1529 Form 707, 1936 return on capital stock tax, for the year ended June 30, 1936, with a declared value of $1,250,000, which return was subsequently returned by the Commissioner on or about June 28, 1937, advising petitioner that the said amended return was not acceptable; additional amount of the tax plus penalty and interest which was paid with said return was also returned by the Commissioner to the petitioner. Petitioner's time to file capital stock tax return for the period July 1, to August 31, 1937, was extended to September 15, 1937, by letter from the office of the collector of internal revenue, Pittsburgh, Pennsylvania, dated June 20, 1937, and on September 15, 1937, petitioner filed capital stock tax return for the year ended June 30, 1937, showing adjusted declared value of entire capital stock as $1,394,024.43, and paid tax thereon. On or about August 30, 1938, petitioner received a letter from the Commissioner advising that the original declared value of its capital stock was established at $750,000 by the return filed on July 31, 1936, and the adjusted declared value of petitioner's capital stock for the taxable year ended June 30, 1937, had been determined by the Commissioner's1530 office to be $894,024.43 instead of $1,394,024.43, and that petitioner was privileged to file claim for refund for the overpayment of the tax. OPINION. DISNEY: The parties present for consideration two question: (1) Whether the petitioner is entitled to credit, under section 26(c)(2) of the Revenue Act of 1936, 1 in the amount of $23,160.31, instead of $5,000 allowed by the Commissioner; (2) whether capital stock value declared in an original return can be increased in amended return for error alleged in the value first declared. We shall consider the issues separately, in that order. 1531 270 1. Was the petitioner entitled to credit for more than the $5,000 allowed by the respondent, under the language of the trust indenture and the terms of the above statute? The statute involves a credit; it is, therefore, to be strictly construed. Helvering v. Northwest Steel Rolling Mills, Inc.,311 U.S. 46">311 U.S. 46. Under it the petitioner is entitled to credit for an amount equal to earnings and profits of the taxable year which is required to be paid within the taxable year in discharge of a debt "to the extent that such amount has been so paid." The requirement, however, must be "by a provision of a written contract * * which provision expressly deals with the disposition of earnings and profits of the taxable year." (Italics supplied.) The petitioner contends, and the respondent denies, that above the $5,000 allowed by the Commissioner earnings and profits of the taxable year were required to be paid, and that this requirement was by a provision which expressly deals with the disposition of such earnings and profits of the year. The question seems to be one of first impression. Respondent cites no authority and petitioner1532 none, except general authority on statutory construction. The indenture provided that the petitioner would each year reserve out of earnings and not distribute by dividend $5,000 for the purpose of providing a reserve sufficient to meet the payment of $50,000 of bonds last maturing. The petitioner stresses this purpose, and argues that under section 27(a)(4) of the Revenue Act of 1938 there would be no doubt about the allowance of credit, since therein credit is given for "Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness", and that the provision of the 1938 Act simply expresses the intent which we should impute to section 26(c)(2) of the Revenue Act of 1936. We are not impressed by that argument. The language of section 27(a)(4) of the Revenue Act of 1938 is in this respect the same as in section 351(b)(2)(B) of the Revenue Act of 1936 (as amended by section 355(b) of the Revenue Act of 1937). The Act of 1936 applied to personal holding companies. Petitioner is not shown to be such. The presence of the language in section 351 of the 1936 Act indicates, 1533 we think, that only a personal holding company was given the privilege of a credit for "Amounts used or set aside to retire indebtedness" and not limited to an amount covered by a contractual provision expressly dealing with the earnings and profits of the taxable year. We think the language of the 1938 Act does not help the petitioner. We find nothing in the committee reports thereon to indicate mere clarification of the intention of section 26(c)(2) of the Revenue Act of 1936. Nor do we think that the purpose of the bond indenture to provide moneys with which to pay the last $50,000 of bonds is materially helpful here. The question is, in sum, whether 271 the contract required more than $5,000 of the earnings and profits of the taxable year to be paid on the bonds. The petitioner points out the power of the trustee to take action to protect the bondholders, and the letter it wrote demanding, in effect, the reservation from earnings of the taxable year the amount of $23,160.31, the amount for which credit is asked. It is obviously true that the trustee could have foreclosed because of the plain default of the petitioner in failing to reserve $5,000 per year out1534 of its earnings. But could it, under the indenture, have Required the petitioner to reserve more than $5,000 earnings in the taxable year? After careful consideration of the contract and the statute, we think it could not have done so. The contract, as to any one year, requires a reservation of $5,000 only. There is here involved only one year. The trustee might conceivably have enjoined the payment of dividends of $5,000 in each of the earlier years. But this was not done. We think it could not enjoin payment of dividends above $5,000 in the taxable year, any more than it could have done so in one of the earlier years. The contract, in other words, did not require reservation of earnings, by a provision expressly dealing with the disposition of earnings or profits, above $5,000 per year. No paragraph or provision of the contract, save "Item 9" - as to the $5,000 per year - can be said to deal expressly with disposition of earnings and profits. The other provisions of the bond indenture are general, such as are not unusually found, and no express control over disposition of earnings or profits is bestowed upon the trustee. The provision requiring payment of the bonds1535 in the taxable year did not expressly deal with the disposition of earnings and profits. In G.B.R. Oil Corporation,40 B.T.A. 738">40 B.T.A. 738, 744, construing the section here examined, we said: The general purpose of section 26(c)(2), it seems to us, is to give a credit where a dividend paid credit cannot be secured. In other words, the basic intent of Congress seems to have been to include in the provision only contracts which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments. * * We think the petitioner was not, by the contract here relied upon, prevented from paying dividends above $5,000 in the taxable year, and therefore not deprived of dividends paid credit. We conclude and hold that the respondent did not err in limiting credit to $5,000 under section 26(c)(2). 2. Was the petitioner bound by its declaration of value on its capital stock tax return, or may it amend the declaration as to value after time for filing has expired? The first filing was on July 31, 1936, the value declared $750,000; the second was on April 3, 1937, the declared value $1,250,000. The latter return, 1536 with additional amount of tax and penalty and interest remitted therewith, was 272 returned by the Commissioner about June 28, 1937, with the advice that the amended return was not acceptable. Petitioner's time to file capital stock tax return for the period July 1, 1937, to August 31, 1937, was extended to September 15, 1937, on June 20, 1937, and on September 15, 1937, the petitioner filed a capital stock tax return for the year ended June 30, 1937, declaring a value of $1,394,024.43 and paid the tax. About August 30, 1938, the Commissioner informed petitioner that the value was established at $750,000 by the return filed July 1, 1936, and the value for the year ended June 30, 1937, had been determined to be $894,024.43. The petitioner's contention on this issue is, in effect, that its first return was grossly erroneous, that the amended return was its first return as required by section 105 of the Revenue Act of 1935, and that the act, if applied to petitioner herein, is contrary to the Fifth Amendment to the Constitution of the United States. The principal authority relied upon is 1537 Haggar Co. v. Helvering,308 U.S. 389">308 U.S. 389. The Supreme Court in Riley Investment Co. v. Commissioner,311 U.S. 55">311 U.S. 55, involving amendment of a return with reference to depletion under section 114(b)(4) of the Revenue Act of 1934, distinguished the case from the Haggar Co. case, supra, and held that the return was not a "first return" because it was filed after the expiration of the statutory period for filing the original return. In William B. Scaife & Sons Co.,41 B.T.A. 278">41 B.T.A. 278, we pointed out that the Haggar Co. case, supra, involved and emphasized the fact of amendment of capital stock tax return prior to expiration of time for filing the return, and concluded that, since in the Scaife case the amendment was submitted after expiration of the period for filing, the valuation could not be changed. We held the same in Maine Central Transportation Co.,42 B.T.A. 350">42 B.T.A. 350, following the Scaife case. We find nothing in the present record to justify a different conclusion. The element of error in the first return was considered in the Scaife case. The contention that the statute is unconstitutional1538 has been variously rejected. The cases so holding include Allied Agents, Inc. v. United States,88 Ct.Cls. 315; 26 Fed.Supp. 98; Chicago Telephone Supply Co. v. United States,87 Ct.Cls. 425; 23 Fed.Supp. 471; certiorari denied, 305 U.S. 628">305 U.S. 628; Scaife & Sons Co. v. Driscoll, 94 Fed.(2d) 664. We conclude that the act is not shown to be unconstitutional, and that petitioner has not shown error by the Commissioner in the determination of excess profits tax liability. Decision will be entered for the respondent.Footnotes1. SEC. 26. CREDITS OF CORPORATIONS. In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax - * * * (c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS. - * * * (2) DISPOSITION OF PROFITS OF TAXABLE YEAR. - An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in dischange of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word "debt" does not include a debt incurred after April 30, 1936. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620178/	Nancy J. Johnson Bayer, Petitioner v. Commissioner of Internal Revenue, RespondentBayer v. CommissionerDocket No. 11408-89United States Tax Court98 T.C. 19; 1992 U.S. Tax Ct. LEXIS 3; 98 T.C. No. 2; January 9, 1992, Filed 3 An appropriate order will be issued. R filed a motion for reconsideration of our opinion, T.C. Memo. 1991-282, filed June 24, 1991, in which we concluded that P was entitled to reimbursement for her reasonable administrative and litigation costs under sec. 7430, I.R.C.Sec. 7430(c)(1)(B)(iii) limits the hourly rate for reimbursement of attorney's fees to $ 75 "unless the court determines that an increase in the cost of living or a special factor" justifies a higher rate. In our prior opinion, filed June 24, 1991, which followed the opinion of this Court in Cassuto v. Commissioner,93 T.C. 256">93 T.C. 256 (1989) affd. in part, revd. and remanded in part 936 F.2d 736">936 F.2d 736 (2d Cir. 1991), we concluded that cost of living adjustments (COLA's or COLA) to the $ 75 rate limitation were allowable to P and that the COLA's should be computed from Oct. 1, 1981, the effective date of the Equal Access to Justice Act (EAJA), Pub. L. 96-481, tit. II, 94 Stat. 2325-2330. Shortly thereafter, the Second Circuit reversed part of our decision in the Cassuto case, holding that the COLA's should be computed from Jan. 1, 1986, 4 the effective date of sec. 7430(c)(1)(B)(iii). Respondent immediately filed a motion for reconsideration of our opinion in this case. We have given further consideration to respondent's argument, but are unconvinced. Held, the COLA's to the $ 75 per hour attorney fee reimbursement limitation set forth in sec. 7430(c)(1)(B)(iii) should be computed from Oct. 1, 1981, the effective date of the EAJA. Thomas J. O'Rourke, for petitioner.Diane Helfgott, for respondent. Drennen, Judge. Nims, Chabot, Parker, Korner, Shields, Hamblen, Cohen, Clapp, Swift, Gerber, Wright, Wells, Ruwe, Whalen, Colvin, Halpern, and Beghe, JJ., agree with this opinion. Parr, J., did not participate in the consideration of this opinion. DRENNEN19 SUPPLEMENTAL OPINIONDrennen, Judge:This matter is before the Court on respondent's motion for reconsideration of our opinion, T.C. 20 Memo. 1991-282, pursuant to Rule 161. 1 In that opinion, filed June 24, 1991, we concluded, inter alia, that petitioner was entitled to an award of attorney's fees and litigation costs under section 7430. By order, dated June 27, 1991, the parties were directed5 to submit a computation of the attorney's fees and costs to which petitioner was entitled under section 7430.Section 7430(c)(1)(B)(iii) limits the hourly rate for attorney's fees to $ 75, with allowances for increases in the cost of living or other special factors. We have held that this rate may be adjusted for increases in the cost of living. Cassuto v. Commissioner,93 T.C. 256">93 T.C. 256, 273 (1989), affd. in part, revd. and remanded in part 936 F.2d 736">936 F.2d 736 (2d Cir. 1991). Respondent does not disagree but argues that the cost of living adjustments (COLA's or COLA) to the $ 75 per hour rate limitation should be computed from January 1, 1986, the effective date of section 7430(c)(1)(B)(iii), the COLA provision which first imposed the hourly rate limitation in Tax6 Court cases.Petitioner, on the other hand, argues that the cost of living adjustments to the $ 75 per hour rate limitation should be computed from October 1, 1981, the effective date of the Equal Access to Justice Act (EAJA), Pub. L. 96-481, tit. II, 94 Stat. 2325-2330, 28 U.S.C. sec. 2412 (1988), 5 U.S.C. sec. 504 (1982), which first provided for COLA's to attorney fee awards in non-Tax Court cases. Petitioner argues that although the EAJA does not apply to litigation in the Tax Court and section 7430(c)(1)(B)(iii) does, the circumstances under which section 7430(c)(1)(B)(iii) was enacted show that Congress intended to conform the award of attorney's fees under section 7430 to the EAJA to the maximum extent possible. In our opinion issued in this case on June 24, 1991, we concluded that the cost of living adjustments to the $ 75 rate limit on attorney's fees under section 7430 should be computed from the EAJA's enactment date, October 1, 1981, which is the same conclusion we reached in Cassuto v. Commissioner, supra at 272-273.The U.S. Court of Appeals for the Second Circuit, 7 in an opinion dated June 26, 1991, reversed our decision in Cassuto 21 v. Commissioner, supra, holding that the cost of living adjustments to the $ 75 statutory cap on attorney fee awards should be calculated from January 1, 1986, the effective date of section 7430(c)(1)(B)(iii), and remanded that case to this Court. Cassuto v. Commissioner, 936 F.2d at 744. Our opinion in petitioner's case was issued 2 days before the Second Circuit issued its opinion in Cassuto v. Commissioner, supra. In light of the Second Circuit's reversal on this issue, respondent filed a motion for reconsideration in petitioner's case. The sole issue presented in respondent's motion is what date to use in calculating COLA's to attorney fee awards under section 7430(c)(1)(B)(iii). Petitioner objected, and we took the motion under consideration.There is no dispute between the parties with respect to the facts and issues here involved. Of course, this Court will honor the mandate of the Second Circuit in the Cassuto case. Furthermore, this Court is bound to similarly decide other cases raising the same issue when those cases are squarely in point and8 their venue for appeal lies in the Second Circuit. Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). However, since petitioner has at all relevant times resided in the District of Columbia and thus venue for any appeal of her case will lie with the U.S. Court of Appeals for the District of Columbia Circuit, we are not required in her case to follow the mandate of the Second Circuit in Cassuto v. Commissioner,936 F.2d 736">936 F.2d 736 (2d Cir. 1991), affg. in part, revg. and remanding in part 93 T.C. 256">93 T.C. 256 (1989). Golsen v. Commissioner, supra at 756-757.We observe that the U.S. Court of Appeals for the District of Columbia Circuit, to which an appeal in this case would lie, has held that the baseline year for calculating COLA's to the $ 75 cap on attorney's fees provided for in the EAJA is October 1, 1981, the date on which the EAJA became effective, not 1985, when the sunset provision of the EAJA was repealed. Wilkett v. I.C.C.,844 F.2d 867">844 F.2d 867, 874-875 (D.C. Cir. 1988); Hirschey v. F.E.R.C.,777 F.2d 1">777 F.2d 1, 5 (D.C. Cir. 1985).9 However, the Court of Appeals has not yet decided the precise question raised by respondent's motion, that is, whether cost of living adjustments to the $ 75 limit provided by section 7430(c)(1)(B)(iii) should be calculated beginning October 1, 1981, the effective date of the EAJA, or January 1, 1986, the 22 effective date of section 7430(c)(1)(B)(iii), which applies to costs of litigation in the Tax Court.We also observe that the courts which have decided cases involving either of these related issues are not in agreement as to how they should be resolved. Compare Trichilo v. Secretary of Health and Human Services,823 F.2d 702">823 F.2d 702 (2d Cir. 1987) with Cassuto v. Commissioner,936 F.2d 736">936 F.2d 736, 742-743 (2d Cir. 1991), affg. in part, revg. and remanding in part 93 T.C. 256">93 T.C. 256 (1989); Bode v. United States,919 F.2d 1044">919 F.2d 1044 (5th Cir. 1990); Mattingly v. United States, 2711 F. Supp. 1535">711 F. Supp. 1535 (D. Nev. 1989), revd., vacated, and remanded 939 F.2d 816">939 F.2d 816 (9th Cir. 1991).This situation leaves the Tax Court on the horns of10 a dilemma. That is, when, as in petitioner's case, the same issue comes before it again -- which appellate court should be followed. The Tax Court's current policy of following its own convictions in such situations was first developed in Lawrence v. Commissioner,27 T.C. 713">27 T.C. 713 (1957), revd. on other grounds 258 F.2d 562">258 F.2d 562 (9th Cir. 1958). In that case we stated:One of the difficult problems which confronted the Tax Court * * * was what to do when an issue came before it again after a Court of Appeals had reversed its prior decision on that point. Clearly, it must thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure is to follow the higher court. But if still of the opinion that its original result was right, a court of national jurisdiction to avoid confusion should follow its own honest beliefs until the Supreme Court decides the point. The Tax Court early concluded that it should decide all cases as it thought right. [27 T.C. at 716-717; fn. refs. omitted.]The Lawrence doctrine is still alive 11 except, of course, in cases where a Court of Appeals has handed down a decision squarely in point and appeal from our decision lies to that Court of Appeals. Golsen v. Commissioner,54 T.C. 742">54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). 212 23 Under the Tax Court's present policy, as noted by the Fifth Circuit Court of Appeals, the Tax Court, because it has national jurisdiction, "should, except in cases geographically destined for a disapproving Circuit, follow its conviction that its original result was correct until decided otherwise by the Supreme Court." Delta Metalforming Co. v. Commissioner,632 F.2d 442">632 F.2d 442, 445 n.4 (5th Cir. 1980), affg. T.C. Memo. 1978-354. Although a series of reversals may incline the Tax Court to bow to higher authority, see Bankers Union Life Insurance Co. v. Commissioner,62 T.C. 661">62 T.C. 661, 675 (1974), the switching of positions by the Tax Court may lead to confusion or may constitute an improper performance of the Court's function. See Bradford v. Commissioner,60 T.C. 253">60 T.C. 253, 261 (1973) (Drennen, J., dissenting).In reviewing the question of what is the correct date to use for calculating COLA's to attorney's fees allowable under section 7430(c)(1)(B)(iii), we have given consideration to the reasoning of the Courts of Appeals reflected in a number of opinions. These include13 the Second Circuit's opinions in Cassuto v. Commissioner,936 F.2d 736">936 F.2d 736 (2d Cir. 1991), affg. in part, revg. and remanding in part 93 T.C. 256">93 T.C. 256 (1989), and Trichilo v. Secretary of Health and Human Services, supra; the U.S. Court of Appeals for the District of Columbia's opinions in Hirschey v. F.E.R.C., supra, and Wilkett v. I.C.C., supra; the Fifth Circuit's opinion in Bode v. United States,919 F.2d 1044">919 F.2d 1044, 1053 (5th Cir. 1990) (which arrived at the same conclusion as did the Second Circuit in Cassuto); as well as the reasoning of this Court in Cassuto v. Commissioner,93 T.C. 256">93 T.C. 256, 272-273 (1989), affd. in part, revd. and remanded in part 936 F.2d 736">936 F.2d 736 (2d Cir. 1991).With all due respect to the Courts of Appeals for the Second and Fifth Circuits, we conclude that Congress, in providing for cost of living adjustments in section 7430, intended the computation to start at the same time the COLA's were started under the EAJA, which was October 1, 14 1981. Although neither the express language of section 7430, nor that of the Tax Reform Act of 1986, which added section 7430(c)(1)(B)(iii), provides that the COLA start date should be October 1, 1981, 24 we think the circumstances under which section 7430(c)(1)(B)(iii) was enacted in 1986 supports this view.Section 7430 has its roots in the EAJA. The EAJA was enacted in 1980 and became effective for taxable years beginning in 1981. Pub. L. 96-481, tit. II, 94 Stat. 2325-2330, 28 U.S.C. sec. 2412 (1988), 5 U.S.C. sec. 504 (1982). The EAJA provided for the mandatory award of attorney's fees to prevailing parties in administrative and civil actions, including tax controversies, brought by or against the United States. It was not, however, applicable to Tax Court proceedings. There is no indication in the legislative history of the EAJA why this is so. Certainly Congress was not deliberately making a distinction between the value of legal services in the field of tax law and the value of litigation services in other fields of law. When the EAJA expired under its own provisions in 1985, attention 15 was attracted to the provision and it was effectively reenacted in that year.Prior to 1986, section 7430, which applied to Tax Court proceedings, provided a $ 25,000 ceiling on the amount of recoverable attorney's fees. However, the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(a), 100 Stat. 2085, 2572, which conformed section 7430 more closely to the EAJA, eliminated the $ 25,000 cap and substituted a $ 75 an hour limitation on attorney's fees, unless the Court determines that a higher rate is justified. See sec. 7430(c)(1)(B)(iii). Section 7430(c)(6) provides that the term "court proceeding" means "any civil action brought in a court of the United States (including the Tax Court and the United States Claims Court)." Thus, both the EAJA and section 7430, as amended, currently provide for the recovery of attorney's fees at a maximum of $ 75 per hour with justifiable cost of living adjustments.It seems clear from the mere language of the two statutes that Congress intended to equalize the attorney's fees available in tax cases under section 7430, with those available in other types of litigation under the EAJA. When drafting section 7430(c)(1)(B)(iii), Congress not only adopted16 the $ 75 figure from the existing EAJA, but it also adopted the existing COLA language contained in the EAJA. 3 In reaching our conclusion 25 that the COLA's should be indexed from 1981, we have also given consideration to the conference report of the Tax Reform Act of 1986 4 and to the statements of Senators Baucus, Grassley, and Domenici on the floor of the Senate when the Senate was considering the bill to amend section 7430. 5 These senators sponsored the provision that added section 7430(c)(1)(B)(iii) to the Internal Revenue Code, and their remarks indicate what they were trying to accomplish through that amendment. In particular, the following statement of Senator Baucus, made during an address to the Senate on November 14, 1985, provides strong support for the view that the authors of the 1986 amendment to section 7430 intended that the amount of the fee awards would be the same under the EAJA and section 7430.It stands to reason that a litigant in a tax case should not have a more difficult burden upon him to quality [sic] for costs and fees against the government, or to be limited in the amount of cost or fee awards, than any other party in a civil action17 against the federal government. [Statement of Senator Baucus, 131 Cong. Rec. S15476 (daily ed. Nov. 14, 1985) (quoting Louise L. Hill, Assistant Professor of Law, University of Toledo College of Law); emphasis added.]Finally, we have considered the general explanation of the Tax Reform Act of 1986 prepared by the Staff of the Joint Committee on Taxation, which provides the staff's interpretation18 of Congress' reason for amending section 7430 in the first place:Congress believed that the provision authorizing awards of attorney's fees should be continued but must be modified to provide greater consistency between the laws governing the attorney's fees in tax and nontax cases. Specifically, Congress believed that the Equal Access to Justice Act generally provides a more appropriate standard for awarding attorney's fees in tax as well as in nontax cases. 6 [Staff of the Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986 at 1298 (J. Comm. Print 1987).]26 However, in Cassuto v. Commissioner, supra, the Second19 Circuit, in reversing this Court on the COLA issue, stated that there was no evidence that Congress intended to predate section 7430's COLA structure to the date of the EAJA. The Second Circuit said that had that been the intent of Congress it would have been easy for Congress to make this known. Instead, according to the Second Circuit, rather than completely conforming the statutes, Congress made clear its intent to separate the award of litigation costs in the tax area from the general civil area to which the EAJA applies. See Cassuto v. Commissioner,936 F.2d at 742.We cannot find such a clear intent on the part of Congress, nor can we find any reason why Congress should have so intended. To the contrary, tax litigation in this day and age is certainly no less time consuming and requires no less specialized skills than does the "general civil area" referred to by the Second Circuit. The fact that the EAJA did not apply to Tax Court cases when it was initially enacted could not have provided Congress with a reason for differentiating between tax and general litigation. It is clear that Congress was making an effort to make similar provisions20 for fees in both tax and general litigation. 7 And, as the Court pointed out, the requirements of justification of the Government's position and exhaustion of other remedies prior to commencing litigation made it more difficult for Tax Court litigants to win fee awards under section 7430 than for other litigants seeking recovery under the EAJA.While we agree that Congress set up two separate, albeit similar, fee award systems for tax and nontax cases, we do not think that suggests that the fee awards in tax litigation should be less than fee awards in the general civil area. We also note that to limit the computation of COLA's in tax litigation at this time could establish a permanent gap between legal fees allowable in tax litigation and general litigation. Such a discrepancy simply does not comport with reality.In reaching its conclusion on this issue in Cassuto v. Commissioner, supra,21 the Second Circuit distinguished its opinion in Trichilo v. Secretary of Health and Human Services, 27 supra, which held that COLA's available under the EAJA should date from 1981 because when Congress passed the "new" EAJA in 1985, it merely repealed the 1981 EAJA's self-expiring sunset provision and left untouched section 2412(d)(2)(A) of the 1981 EAJA allowing for cost of living increases to the $ 75 cap on attorney's fees. In Cassuto, the Second Circuit stressed that Trichilo dealt specifically with the circumstances of the EAJA's 1985 "reenactment" and did not address the question of whether other statutes, such as the Internal Revenue Code, should use the EAJA's effective date of 1981 in calculating the COLA's to attorney's fees available under them.The fact that Trichilo did not specifically deal with the COLA's available under section 7430, nonetheless, does not persuade us that Congress, when amending section 7430 in 1986, did not intend to index the COLA's available under that provision back to 1981, the EAJA's effective date, so as to carry out its objective of making the attorney's fees available in tax cases brought22 under the Internal Revenue Code "conform * * more closely to the Equal Access to Justice Act." H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 801. Instead, the fact that Congress adopted both the $ 75 maximum fee rate and the exact COLA language that appeared in the original 1981 EAJA when amending section 7430 in 1986, the statements of members of Congress at the time section 7430(c)(1)(B)(iii) was being considered, as well as generally accepted tenets of statutory construction, convince us that Congress meant to equalize the litigation fee structure in tax and nontax cases, and therefore, that COLA's to the $ 75 rate awarded under section 7430 be indexed back to October 1, 1981. There is nothing in the legislative history of section 7430 to indicate the contrary.The U.S. Court of Appeals for the District of Columbia Circuit has also addressed the issue of what year should serve as the baseline date in measuring COLA's awarded under the EAJA. In Hirschey v. F.E.R.C.,777 F.2d 1">777 F.2d 1, 4 (D.C. Cir. 1985), the Court of Appeals recognized that, generally speaking, the statutory maximum on attorney's fees should be increased23 to reflect changes in the cost of living. The Court of Appeals also rejected the Government's argument that the 1985 amendment to the EAJA, which did not alter the subsection pertaining to the $ 75 rate limit and cost of living increases, compelled the 28 court to regard the $ 75 per hour amount as fully compensatory. See 28 U.S.C. 2412(d)(2)(A) (1988); Pub. L. 96-481, tit. II, 94 Stat. 2325, 2328-2329. Following its decision in Hirschey v. F.E.R.C., supra, the Court of Appeals, in Wilkett v. I.C.C.,844 F.2d 867">844 F.2d 867, 874-875 (D.C. Cir. 1988), held that the baseline date for measuring COLA's awarded under the EAJA is October 1, 1981, the date the EAJA became effective. The court rejected the Government's argument that Congress intended to form a whole new baseline year for indexing COLA's in 1985.Respondent bases his motion for reconsideration entirely on the Second Circuit's reversal of Cassuto on the issue discussed above. We believe that our conclusion on this issue in both Cassuto and this case was correct, and while we have reconsidered our conclusion in Cassuto,24 and this case, we think they were correct. Hence, we reaffirm our opinion filed in this case June 24, 1991. Consequently, respondent's motion for reconsideration is denied.An appropriate order will be issued.Nims, Chabot, Parker, Korner, Shields, Hamblen, Cohen, Clapp, Swift, Gerber, Wright, Wells, Ruwe, Whalen, Colvin, Halpern, and Beghe, JJ., agree with this opinion.Parr, J., did not participate in the consideration of this opinion. Footnotes1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1954 in effect for the years in issue.↩2. In Golsen v. Commissioner, we further stated:Section 7482(a), I.R.C. 1954, charges the Courts of Appeals with the primary responsibility for review of our decisions, and we think that where the Court of Appeals to which appeal lies has already passed upon the issue before us, efficient and harmonious judicial administration calls for us to follow the decision of that court. * * We shall remain able to foster that uniformity by giving effect to our 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.To the extent that Lawrence is inconsistent with the views expressed herein it is hereby overruled.[54 T.C. at 757-758↩; citations and fn. refs. omitted.]3. Compare Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551↩, 100 Stat. 2752 and H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 801-802, with Pub. L. 96-481, sec. 204, 94 Stat. 2327, 2329-2330.4. H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 801-802. In its report, the conference committee states that it adopted the Senate position in order to conform the attorney fee awards more closely to the Equal Access to Justice Act.↩5. 131 Cong. Rec. S10274-S10277 (daily ed. July 29, 1985); 131 Cong. Rec. S15475-S15476, S15482-S15483 (daily ed. Nov. 14, 1985).↩6. The Joint Committee explanation has been relied upon by courts in interpreting tax statutes. See Federal Power Commission v. Memphis Light, Gas & Water Division,411 U.S. 458">411 U.S. 458, 471-472 (1973); Todd v. Commissioner,89 T.C. 912">89 T.C. 912, 915 (1987), affd. 862 F.2d 540">862 F.2d 540↩ (5th Cir. 1988).7. See Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986 at 1298-1299 (J. Comm. Print 1987).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620179/	ASHTON HAMILTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hamilton v. CommissionerDocket No. 6844.United States Board of Tax Appeals7 B.T.A. 362; 1927 BTA LEXIS 3192; June 16, 1927, Promulgated 3192 Held that a transaction between a husband and his wife involving a going concern and all the assets thereof was a sale to the husband by the wife; that an annual payment made to the wife by the husband was a payment of purchase price and not a division of profits; and that the entire income of the business is taxable to the husband. Robert C. McKay, Esq., for the petitioner. F. O. Graves, Esq., for the respondent. GREEN 362 The petitioner herein seeks a redetermination of his income taxes for the calendar year 1922, for which the Commissioner determined a deficiency in the sum of $11,378.15, of which amount there is involved in this proceeding $9,698.56. The error alleged is the disallowance by the Commissioner of a deduction in the amount of $20,703.66 claimed by the petitioner to be due and owing by him to his wife by reason of a certain agreement, the substance of which, to the extent that it is disclosed by the record, is set forth below. The petitioner in his pleading, as a basis for his contention herein, asserts the following: 363 That under the laws of the Commonwealth of Massachusetts, a wife is not authorized to make3193 contracts with her husband; That under the laws of the Commonwealth of Massachusetts, the rule denying the capacity of a wife to enter into a partnership agreement with her husband is intended for the protection of her interests and does not deprive her of her share in the profits where property from her separate estate is contributed as a part of the assets of the partnership. FINDINGS OF FACT. The petitioner herein, a resident of Brockton, Mass., is the husband of Helen Wade Hamilton, who from 1907 to 1919 was the owner of a business of substantial size inherited by her from her father. The assets of the business consisted of both real and personal property. During this period the petitioner devoted his time to the business and received as compensation therefor 50 per cent of the net profits thereof. On or about January 1, 1920, the petitioner and his wife entered into an oral agreement the material provisions of which were that the wife should convey to the petitioner all the assets of the business and that in consideration therefor, the petitioner should pay his wife $100,000 in cash and $150,000 out of the profits of the business, and in addition thereto 25 per cent3194 of the profits for 1922 and succeeding years, the wife having agreed to waive her share of the profits for 1920 and 1921 in order that the petitioner might have more funds to apply upon the purchase price. The bank account theretofore carried in the name of the wife was, after the making of the agreement, carried in the name of the husband, but other than this there was no formal transfer of any part of the assets from Helen Wade Hamilton to the petitioner. The petitioner filed with the city clerk a certificate to the effect that he was the owner or proprietor of the business and carried on the business as his own, and exercised full dominion and control over all of the assets thereof. Twenty-five per cent of the net profits for the year 1922 amounted to $20,703.66. This amount was credited to the wife on the books of the company, but was not withdrawn by her during that year. OPINION. GREEN: The petitioner herein has asserted two conflicting propositions: (1) That as a matter of law his wife was precluded by statute from conveying the assets of the business to him, and (2) that if such conveyance be a valid one, the 25 per cent of the profits to be paid by him to his wife3195 is deductible as compensation, or as her proportionate share of the net earnings of the partnership. The petitioner's counsel calls to our attention, and relies upon, the following provision of chapter 209 of the General Laws of Massachusetts: 364 SECTION 2. A married woman may make contracts, oral or written, sealed or unsealed, in the same manner as if she were sole, except that she shall not be authorized hereby to make contracts with her husband. He neglected, however, to call to our attention the section of the law which reads as follows: SECTION 3. Gifts of personal property, and conveyance of real estate other than mortgages, between husband and wife, shall be valid to the same extent as if they were sole, except that no such conveyance of real estate shall have any effect, either in passing title or otherwise, until the deed describing the property to be transferred is duly acknowledged and recorded in the registry of deeds for the district where the land lies. The Supreme Judicial Court of Massachusetts had these two sections under consideration in the case of 3196 ; . In that case a husband, "intending to 'reserve the real estate away from the vicissitudes of business' and not to give his wife any beneficial interest but still to own the property if he happened to get into financial difficulties" conveyed certain real estate to his wife, the court finding that she received the conveyance for her own benefit and that of her family. Of the legal effect of the transaction, the court said: The title to the property under these circumstances vested absolutely in the wife as between herself and husband. A husband and wife cannot make contracts with each other. R.L. c. 153, § 2; St. 1912, c. 304. When either pays money or transfers or conveys property to the other, there is no presumption that it is received in trust. If a trust is alleged to exist, it must be proved. In the absence of such proof, it must be deemed that the money, property or conveyance was received with the intention, that it be applied to the use and benefit of either or both at the discretion of the recipient. 3197 ; . The court's opinion in the case just cited is ample authority for a conclusion on our part that the title to all of the personal property passed to the husband since he is in undisputed control thereof, with the knowledge and approval of the wife. Indeed, in any court of equity, she would be in a poor position to controvert the husband's title thereto since she had received a substantial consideration therefor. The opinion in that case is not authority for a conclusion on our part that complete title to the real estate has passed to the husband. It is clear, however, that he has an equitable title thereto. It must be borne in mind that the wife has appeared before us and testified that all of the assets of the business were sold by her to her husband and that she has received and is receiving compensation therefor and also that there are no creditors protesting the validity of the conveyance. Likewise, it must be borne in mind that the husband is in possession with the approval of the wife, and that by deed she 365 3198 may supply the defect of title. Under such circumstances we are not justified in holding that the husband has not purchased the property from his wife or that he is not the owner thereof. The courts of Massachusetts have in some instances set aside conveyances made under circumstances that were in part similar and have held void contracts between husband and wife. But the controversy was not between husband and wife. It was between one of them and creditors who felt themselves aggrieved by the conveyance or contract. No such circumstances exist here. There is nothing in the record to indicate the slightest dissatisfaction on the part of either the husband, the wife, or creditors. We, therefore, conclude that for the purposes of Federal taxation the husband should be considered the owner of all of the assets of the business. To us it appears that the payment to the wife of 25 per cent of the net profits of the business is in fact the payment annually of a part of the purchase price of the property. From this it follows inevitably that the 25 per cent of the net profits was income to the petitioner and that the pryment to his wife was a capital expenditure for which he is3199 entitled to no deduction. See . Judgment will be entered for the Commissioner after 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620181/	Marts, Inc. v. Commissioner.Marts, Inc. v. CommissionerDocket No. 71700.United States Tax CourtT.C. Memo 1960-127; 1960 Tax Ct. Memo LEXIS 161; 19 T.C.M. (CCH) 669; T.C.M. (RIA) 60127; June 16, 1960161 Held, that the amount of $12,750 paid by petitioner corporation to a former executive employee constituted additional compensation to such employee, rather than purchase price of shares of petitioner corporation's stock which said employee, at the time his employment was terminated, placed in escrow for subsequent retransfer to petitioner. Said amount is, accordingly, deductible by petitioner under section 162(a)(1) of the 1954 Code. Robert E. Kline, Esq., for the petitioner. Charles A. Boyce, Esq., for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: Respondent determined a deficiency in the income tax of the petitioner for its taxable fiscal year ended April 30, 1955, in the amount of $1,062.95. The sole issue for decision is whether all or any portion of the sum of $12,750, paid by the petitioner corporation in the taxable year to an individual who had formerly been one of its executive employees, represented additional compensation to such employee; or whether the same represented part of the purchase price of certain shares of petitioner's stock which such individual, at the time of his employment was terminated, placed in162 escrow for retransfer to petitioner. Findings of Fact Some of the facts were stipulated. The stipulation of facts, together with the exhibits annexed thereto, is incorporated herein by reference. Petitioner is a corporation organized under the laws of the Commonwealth of Pennsylvania, with its principal place of business at Pittsburgh, Pennsylvania. It filed a return for its fiscal year ended April 30, 1955, with the district director of internal revenue at Pittsburgh. During the year 1952, Benjamin and Joseph Levy were the officers, directors, and owners of the majority of the shares of capital stock of a group of 20 corporations, each of which corporations operated a single grocery supermarket. The 20 constituted a chain or group of stores, and the entire group is hereinafter referred to as the "Sparkle Group," such name being derived from the name "Sparkle" which was given to several stores in the group. Benjamin Levy was the president of each corporation; and Joseph Levy was the vice president and treasurer of each, as well as the general manager of the group and of the warehouse used by the group in its operations. In the early part of 1952, the Levys decided that they163 would form a new corporation which would hold all the stock of all the corporations in the Sparkle Group; and they also determined that steps should be taken to hire an executive employee who could be groomed to take over some of the general managerial duties which Joseph Levy was then performing, and thus make the Sparkle Group less of a "one man operation." Joseph Levy, in the course of his search for such an executive, was introduced to an individual named Herbert Walker. Walker was at the time employed by a large department store in Pittsburgh, as a merchandising executive, at an annual salary and bonus totaling approximately $18,000 or $19,000. Walker was not completely satisfied with his position at the department store, for the reason that it was not then possible for him to acquire any stock ownership interest in the store. In the course of his negotiations with Joseph Levy, Walker stated that he would not be interested in a position with the Sparkle Group unless provisions were made for him to acquire some of the stock of the corporation or corporations by which he would be employed. On July 15, 1952, Joseph Levy and Benjamin Levy (as the owners of the majority of the164 shares of stock of the corporations composing the Sparkle Group) and Walker entered into an employment agreement. Under the terms of such agreement Walker was to become an employee of a corporation that was to be organized for the purpose of acquiring the stock of the corporations in the Sparkle Group. The agreement further provided, in substance, as follows: "(1) The new corporation was to be authorized to issue two classes of common capital stock, Class A and Class B, each having a par value of 10 cents per share. The Class A and Class B stocks were to be equal in so far as voting rights and dividends were concerned; but, in the event of liquidation, the holders of the Class A shares were to receive the book value of their shares before any distribution should be made with respect to the Class B stock. "(2) The existing shareholders of the corporations in the Sparkle Group (i.e., Joseph and Benjamin Levy and their families) were to exchange their shares in such corporations for the Class A shares of the corporation proposed to be formed. Class B shares were to be issued to Walker at par value, in sufficient quantity to assure him a 20 percent interest in the total of the authorized165 and outstanding shares of both classes of stock. In addition, Walker was accorded the right to purchase 20 per cent of any new and additional shares which the proposed corporation might be authorized to issue, so that his 'right to twenty (20%) percent ownership in the set-up may be preserved.' "(3) Approximately 44 per cent of the Class B shares were to be issued and delivered to Walker immediately following organization of the proposed corporation; and the remaining 56 per cent of shares were to be issued to him on August 1, 1953, unless prior to such date the corporation indicated its dissatisfaction with Walker's services. In this latter event, the shares issued to Walker should be 'returned to the Company [i.e., the corporation proposed to be organized] and reimbursement of the purchase price thereof' should be made to Walker. "(4) While Walker was employed by the corporation he was not to sell, transfer or encumber the Class B shares issued to him. Upon the termination of Walker's employment, the agreement provided for disposition of the Class B shares as follows: 'you shall sell and the Company shall purchase your shares of stock at book value thereof at the time; provided, 166 however, that should the Company terminate your employment before the expiration of the probationary period [defined infra] and before the Company has elected to affirm its satisfaction, it shall pay you the greater amount of (a) book value at the time of termination of all shares which you own, or (b) the difference between the aggregate salary and compensation paid to you from commencement to termination of your employment and Eighty-five thousand ($85,000.00) dollars; said payment shall be for (1) the re-purchase by the Company at book value at the time of any shares of stock of the Company or any related Company which you own, and if there is any excess, (2) as compensation for the termination of the contract. Payment of any sums due under the foregoing provisions of this paragraph shall be made in equal monthly installments over a period of ten (10) years, together with interest on unpaid balances at the rate of four (4%) percent per annum, but in no event less than Fifteen thousand ($15,000.00) dollars per year; with the right in the Company to anticipate payment at any time. An appropriate legend of this restriction shall be endorsed upon your certificates of stock.' "(5) 167 Walker was to be employed for a period of 3 years and 5 months, beginning August 1, 1952 (or until January 1, 1956), at a minimum salary of $25,000 per year. Such period was referred to as a 'probationary period.' At or prior to the expiration of such probationary period, the corporation was to have the right to affirm its satisfaction with Walker's services, in which event the term of his employment was to be extended for a period of 5 years after January 1, 1956. Also, Walker was to be elected an officer and director of the corporation to be formed, as well as of all the corporations in the Sparkle Group." Walker entered the employ of the Sparkle Group on August 1, 1952. The proposed corporation contemplated by the above agreement was organized on February 5, 1953, with Joseph Levy and Benjamin Levy as incorporators. Said corporation was called Marts, Inc., and it is the petitioner in the instant case. At all times material, it kept its accounts and filed its income tax returns on an accrual basis. By resolution of its board of directors, the petitioner corporation assumed the obligations of the above-described employment agreement which had been entered into by its incorporators168 and Walker; and Walker thereupon became an employee of the petitioner. He was elected vice president and a director of the petitioner corporation; and he became its general manager and one of its key executives. Upon the organization of petitioner, 36,000 shares of its Class A stock were issued to the Levy interests, who turned in their shares of the corporations in the Sparkle Group in exchange therefor. Nine thousand shares of petitioner's Class B 10-cent par value common stock were authorized and issued to Walker, but he immediately endorsed back to petitioner 5,000 of such shares and retained 4,000 shares. 1 Such 4,000 shares had a book value of $3,670 at the time the same were issued. At the time Walker was issued the 4,000 shares, he was not asked to pay for such shares; however, an account receivable from him was set up on petitioner's books in the amount of $400, representing the purchase price of 4,000 shares at 10 cents per share. Walker never made any payment for such shares, nor did the petitioner ever request that he do so. The stock certificate representing said 4,000 Class B shares bore on its face a typewritten notation indicating that there were restrictions on169 the transferability of the shares represented by such certificate. At some time prior to August 1, 1953, Joseph Levy informed Walker that the petitioner and the Levy interests were not satisfied with his services, and that the additional 5,000 shares of petitioner's Class B stock would not be reissued to him. Walker was told that he could remain in petitioner's employ for a longer period if he chose to do so. Walker retained his employment with the petitioner until June 1954. Under date of July 27, 1954, a letter agreement170 was entered into by and between the petitioner corporation, Walker, Joseph Levy individually, and Joseph Levy as executor of the estate of Benjamin Levy, who had died in 1953. The pertinent parts of such agreement are as follows: "All of the parties interested have agreed that your employment shall terminate as of June 19, 1954, and all obligations of all the parties under * * * [the above-described employment agreement] shall be released, discharged and cancelled. "Calculations of the amount owing to you under the terms of the [employment] agreement [of July 15, 1952] show that there was due you the sum of $37,200.00. We have paid you on account the sum of $4,000.00, leaving a balance of $33,200.00, which we agree to pay in monthly installments of $1,250.00, with interest at 4% per annum, commencing October 1, 1954, with the right on our part to anticipate payment at any time, all of which is in accordance with the terms of the agreement. 2"We hereby release and discharge171 you from any claims that we may have arising out of the * * agreement dated July 15, 1952, and any and all liabilities thereout. "You agree to and do hereby release and discharge JOSEPH LEVY, ESTATE OF BENJAMIN LEVY, DECEASED, * * , MARTS, INC., and any and all of the subsidiaries of Marts, Inc., from any claims and liabilities arising out of the said agreement, excepting, however, the obligation to make payment of the sum of $33,200.00, which we have agreed to do. " * * "You shall deposit with Jacob A. Markel, Esquire, Certificate No. B1 of Marts, Inc., evidencing the ownership of 4,000 shares of Class B common stock, who, by this letter, is instructed to hold the same in escrow until the conditions of payment as hereinabove set forth have been fulfilled and all payments have been made, and as security therefor." Pursuant to the terms of the foregoing agreement, Walker turned over his 4,000 shares of petitioner's Class B stock to Markel, to be held by the latter in escrow pending payment in full of the $33,200 mentioned in such agreement as owing to Walker. At the time when Walker's employment with the petitioner was terminated, the book value of said 4,000 shares was $23,786. 172 None of the Class B shares of petitioner's stock has ever been sold, or offered for sale, to anyone except Walker. Walker has now been paid in full all amounts owing to him under the termination agreement of July 27, 1954. During petitioner's fiscal year ending April 30, 1955, and pursuant to said agreement, petitioner paid to Walker the sum of $12,750, plus interest of $1,030.58, or a total sum of $13,780.58. In its Federal income tax return for said taxable fiscal year, the petitioner deducted the amount of $13,780.58 as an ordinary and necessary business expense for contract termination. The respondent in his statutory notice of deficiency, determined that $12,750 of said $13,780.58 was not an allowable deduction for Federal income tax purposes. Opinion In National Clothing Co. of Rochester, 23 T.C. 944">23 T.C. 944, this Court considered an issue similar to that involved in the instant case. There a corporation had entered into agreements with three key employees, under which they purported to purchase shares of the corporation's common stock on terms and conditions which were comparable to those contained in the employment agreement in the instant case. Upon termination173 of the employment of said key employees, the corporation recovered the stock, and paid the employees amounts representing the increase in the book value of the same for the periods that their employment agreements were outstanding; and it then claimed deductions for the amounts so paid, as additional compensation. This Court sustained the corporation's position; and in its opinion, it stated in part as follows: "The contracts specifically referred to the employment of these individuals and gave the company the right to repurchase the shares upon the termination of their employment. It has been testified without contradiction that the company at all times intended to repurchase the shares pursuant to the contracts upon the termination of the employment of the individual, and they were repurchased as each individual's employment terminated. Thus the benefits were limited to the periods of employment of the employees. * * * The employees could not sell any of these shares without the consent of National and National did not intend that any of them should go into the hands of outsiders. "It seems reasonable to conclude from all of the terms of the contracts and from all other pertinent174 facts in the record that these transactions, although in form sales, were in substance not sales but rather a means of compensating these employees for the services which they were expected to render to the corporation so that it would prosper and the book value of its stock would increase, thus benefiting both employer and employee. * " This Court further stated in its opinion: "Arrangements somewhat similar to those here involved have been regarded for tax purposes as the payment of compensation rather than sales [citing several cases]." The Commissioner announced his acquiescence in this Court's decision in said case, 1 C.B. 5">1956-1 C.B. 5. We think that the issue here considered is not distinguishable in principle from the issue decided in the National Clothing Co. case. Here, the shares of stock involved were issued to Walker for a price of $400, equal to the par value thereof, notwithstanding that the book value was then $3,670; and actually Walker did not pay, nor was he ever asked to pay, even this $400 price. Also, under the employment agreement, Walker could not sell, transfer, or encumber any of the shares while he was employed by the petitioner. Throughout175 his employment, he worked only on a probationary basis, which was subject to termination by such corporation at any time. And when his employment was terminated by petitioner, he was required to take steps for retransfer of the shares back to the corporation. These facts are similar to those involved in the National Clothing Co. case, supra; and we think that the holding therein is controlling here. Moreover, it is to be observed that when in the instant case Walker's employment was terminated, the shares of stock here involved were neither immediately redeemed by, nor immediately retransferred to, the petitioner corporation; rather, under the new agreement made at said time, these shares were thereupon placed in escrow with a third party, where they were to be held until such time as the full amount of the agreed termination payment of $37,200 had been fully paid. The result of this was that title to the stock did not at that time pass to the petitioner, so as to effect a closed and completed transaction with respect to which gain or loss could then be computed. Cf. Big Lake Oil Co. v. Commissioner, (C.A. 3) 95 F. 2d 573, affirming 34 B.T.A. 1003">34 B.T.A. 1003, certiorari*176 denied 307 U.S. 638">307 U.S. 638. On the other hand, the liability of petitioner to pay that portion of the $37,200 which was designated in the employment agreement to be "compensation for the termination of the contract," accrued immediately and was not subject to any postponement. The amount so allocable to this "compensation" was $13,414 ($37,200, less stipulated book value of stock, $23,786). We think that such circumstance provides an additional reason why the payments totaling $12,750 (which are the only payments here involved) should be attributed to said immediately accrued liability for "compensation for the termination of the contract." On the basis of all the foregoing, we hold that the petitioner is entitled to deduct for its fiscal year here involved, the amount of $12,750 which it paid to Walker during said taxable year. Decision will be entered under Rule 50. Footnotes1. It will be noted that the 9,000 shares of Class B stock constituted 20 per cent of the total of 45,000 shares outstanding (36,000 shares of Class A, plus 9,000 shares of Class B). It will also be noted that the 4,000 shares which Walker retained, constituted approximately 44 per cent of the Class B shares which were, under the terms of the employment agreement above described, to be issued to him upon the organization of the petitioner. The 5,000 shares endorsed back to the petitioner by Walker constituted the remaining 56 per cent of the Class B shares which were to be issued to Walker on August 1, 1953, if his services proved acceptable to the petitioner.↩2. The above-mentioned sum of $37,200 was computed as follows: Agreed total compensation, $85,000; salary paid under employment agreement, $47,800; balance to be paid on termination, $37,200.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620182/	Marian L. Bloxom v. Commissioner. J. M. Bloxom v. Commissioner.Bloxom v. CommissionerDocket Nos. 16968, 16969.United States Tax Court1950 Tax Ct. Memo LEXIS 276; 9 T.C.M. (CCH) 104; T.C.M. (RIA) 50039; February 20, 1950C. W. Halverson, Esq., for the petitioners. Wilford H. Payne, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion These proceedings, consolidated for hearing, involve deficiencies in income tax for 1944 for Marian L. Bloxom and for J. M. Bloxom in the amounts of $3,077.96 and $2,752.96. Of the several adjustments made in the petitioners' returns by respondent, the only one contested here by petitioners is the respondent's refusal to allow the petitioners to return profits realized on277 the transfer of 17 shares of the capital stock of the Washington Fruit & Produce Company as long-term capital gains. The sole issue presented for our determination is whether respondent erred in determining that the shares of stock in the Washington Fruit & Produce Company were held for not more than six months and the profits realized upon them were short-term rather than long-term capital gains, as reported by the petitioners. Findings of Fact Some of the facts were stipulated and are so found. The stipulation filed is incorporated herein by reference. The petitioners are, and at all times material hereto have been, husband and wife residing in Yakima, Washington. They filed their separate income tax returns for 1944 on the community income basis with the collector of internal revenue for the district of Washington. The Washington Fruit & Produce Company was a Washington corporation with its principal place of business at Yakima, Washington. The total outstanding capital stock of the corporation was 100 shares of common stock. Prior to February 1, 1943, Fred B. Plath, the president and manager, owned 58 shares of stock: P. J. Lynch, the vice-president, owned 25 shares; 278 and T. S. Barnes, the secretary-treasurer, owned 17 shares. Barnes died on February 3, 1943. At the time of Barnes' death five of his 17 shares of stock had been endorsed in blank and were held by Plath as collateral security for a loan of $5,000 made to Barnes by Plath on June 29, 1942. After Barnes' death Plath and Lynch discussed the necessity of getting someone into the corporation to take Barnes' place in the operation of the company's business. To accomplish that purpose Plath proposed to J. M. Bloxom, referred to individually herein as the petitioner, that he come into the business. The petitioner had about 20 years of experience in the fruit business in Yakima Valley and had been assistant general manager and treasurer and a stockholder in the Perham Fruit Company for several years. The petitioner was interested in coming into the Washington Fruit & Produce Company but only with an understanding that he could acquire 50 per cent of the stock of the corporation. Plath and Lynch agreed that the petitioner should be allowed to purchase stock in the corporation, and some time in July or August of 1943 Lynch agreed orally with petitioner to sell him his 25 shares of stock at279 the close of the corporation's fiscal year on June 30, 1944, for the book value of the shares on that date. Bloxom came into the corporation on September 1, 1943, on a salary arrangement. Some time in September 1943 Plath offered Mrs. Barnes, the widow and executrix of T. S. Barnes, $17,000 for the 17 shares of stock held in the Barnes estate. Plath told Mrs. Barnes that the stockholders needed the stock as an inducement to a capable party to come into the corporation to take Barnes' place. Plath told Mrs. Barnes that the petitioner was the party he and Lynch had in mind to take Barnes' place. Mrs. Barnes refused to sell the 17 shares of stock at the price of $17,000, but later agreed during October 1943 to sell the stock for $20,000. On November 2, 1943, Plath and Mrs. Barnes met at the office of Mrs. Barnes' attorney and Plath paid Mrs. Barnes $20,000 for the stock. At that time Mrs. Barnes paid Plath the loan of $5,000, with interest, and assigned to him in blank the 17 shares of stock in the Washington Fruit & Produce Company. Plath did not tell Mrs. Barnes at any time that he was buying the stock for anyone other than himself. Plath retained possession of the 17 shares of280 stock purchased from Mrs. Barnes until December 30, 1943. On that date the petitioner gave Plath a check for $20,158.92, which equaled the amount Plath had paid for the stock plus 5 per cent interest from November 2 to December 30, 1943, and Plath transferred the stock certificates to the petitioner. The corporation paid no dividends to the stockholders between November 2 and December 30, 1943. The petitioner on the same day delivered the certificates to the corporation, which canceled them and issued a new stock certificate for the 17 shares in the petitioner's name. The petitioner retained this certificate of stock ownership until April 29, 1944, when it was canceled by the corporation and two new certificates were issued in lieu thereof to the petitioner and his wife for 8 1/2 shares of stock each. On February 28, 1944, the petitioner was elected treasurer of the Washington Fruit & Produce Company. He held that position continuously until the company was dissolved. On April 29, 1944, a resolution was adopted by more than two-thirds of the voting stockholders of the Washington Fruit & Produce Company for the voluntary dissolution of the corporation without benefit of court. Plath281 was appointed liquidating trustee of the corporation. A copy of the resolution for dissolution of the corporation was filed for record in the office of the county auditor of Yakima County, Washington, on April 29, 1944. An additional copy of the resolution was forwarded on April 29, 1944, to the Secretary of the State of Washington at Olympia for filing. The Secretary of State received the resolution on May 1 and on that date informed the company that upon receipt of the required filing fee the resolution would be filed. The records of the Secretary of State show that the resolution was filed in his office for official purposes on May 4, 1944. Between April 29, 1944, and June 30, 1944, substantially all of the assets of the Washington Fruit & Produce Company were transferred by Plath, the liquidating trustee, to a partnership formed for the purpose of taking over the corporate assets and operating the business. The partnership bore the same name as the corporation and consisted of the former stockholders in the corporation, who held partnership interests in proportion to their former ownership of stock in the corporation. The partnership continued its business without interruption282 on and after May 1, 1944, the date when the entire operating assets of the business were set up on the partnership books. The final income tax return of the corporation was filed by the liquidating trustee for the taxable peried from July 1, 1943, to April 29, 1944. The return of information pursuant to section 148 (d) of the Internal Revenue Code with respect to dissolution of a corporation was filed on June 24, 1944, with the Bureau of Internal Revenue by Plath and the petitioner. In that return the statements were made that the stockholders' resolution to dissolve the corporation was on April 29, 1944; that the assets of the corporation were distributed to the liquidating trustee on April 29, 1944; that the trustee transferred the assets to the partnership on May 1, 1944; and that April 29, 1944, was the final date included in the last income tax return of the corporation. All of the stockholders surrendered their stock to the corporation on April 29, 1944. No distribution was made to the former stockholders after April 29, 1944, except through the partnership. The first informative income tax return of the partnership was filed for the fiscal year beginning283 May 1, 1944, and ending April 30, 1945. The same depreciable assets formerly held by the corporation were shown in the partnership return as partnership assets and depreciation was claimed upon them for the entire year beginning May 1, 1944. The individual income tax returns of the petitioners for the year 1944 showed under schedule of gains and losses from sales or exchanges of capital assets the acquisition of 17 shares of capital stock of the Washington Fruit & Produce Company in September 1943 at a cost of $20,000, the date sold as "Corp. dissolved 4/24/49," and the gross sales price as "$46,891.13 value on dissolution." The resulting capital gain to the community amounted to $26,891.13, which was returned by the petitioners for income tax purposes as long-term capital gain. Respondent determined that the petitioners held the 17 shares of stock not more than six months so that the capital gain, as adjusted by him, was subject to tax as a short-term capital gain. The petitioner, J. M. Bloxom, acquired the 17 shares of capital stock in the Washington Fruit & Produce Company on December 30, 1943, from Fred B. Plath. The petitioners held the stock in the corporation not more than284 six months. Opinion LEMIRE, Judge: The only question presented for our determination is whether the respondent properly determined that the 17 shares of stock in the Washington Fruit & Produce Company were held by the petitioners for not more than six months and that the gain realized upon the stock is taxable in full as a short-term capital gain under the provisions of section 117 of the Internal Revenue Code. The parties disagree as to both the beginning and termination of the holding period. The prtitioners contend that the stock was purchased in October 1943 and held until the dissolution of the corporation on May 4, 1944. Respondent contends that the holding period of the stock did not begin earlier than December 30, 1943, and ended April 29, 1944, or, in any event, no later than May 4, 1944. The petitioners argue that the petitioner, J. M. Bloxom, agreed to come into the Washington Fruit & Produce Company only if he could acquire 50 per cent of the stock and that he did come into the corporation in September 1943 with the understanding that Lynch was to sell him his 25 shares of stock at the end of the corporation's fiscal year and that Plath would285 acquire the 17 shares here in question from the Barnes estate for him. Petitioners argue that by oral agreement made between petitioner, J. M. Bloxom, and Plath about the middle of October 1943 Plath undertook to buy the Barnes stock for the petitioner, using his own money for purchasing the stock and holding the stock as collateral security until such time as the petitioner could raise the money to repay Plath. While Plath had previously negotiated with Mrs. Barnes for the stock and had told her that he and Lynch needed to get someone else into the business and they would need the stock as an inducement to a competent man, he never told Mrs. Barnes that he was buying the stock for the petitioner. The petitioner's name was mentioned in the negotiations only as a reference to the man in whom Plath and Lynch were interested as a potential associate with them in the business. Mrs. Barnes understood only that Plath was buying the stock for himself. Petitioners argue that Plath bought the shares as an agent for petitioner, J. M. Bloxom, advancing the money for the purchase on the petitioner's assurance that he would repay Plath in a short time. The petitioner did pay Plath the amount286 which the stock had cost him, plus 5 per cent interest on the money for the period Plath held the stock, when he took the stock from Plath on December 30, 1943. Section 117 (a) (b) of the Internal Revenue Code defines and distinguishes shortand long-term capital gains as follows: "SEC. 117. CAPITAL GAINS AND LOSSES. "(a) Definitions. - As used in this chapter - "(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer * * ; "(2) 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 net income; "(4) Long-term capital gain. - The term 'long-term capital gain' means gain from the sale or exchange of a capital asset held for more than 6 months, if and to the extent such gain is taken into account in computing net income; "(b) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital287 gain, net capital loss, and net income: "100 per centum if the capital asset has been held for not more than 6 months; "50 per centum if the capital asset has been held for more than 6 months." To "hold" property within the meaning of section 117 of the Internal Revenue Code 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 the length of holding." McFeely v. Commissioner, 296 U.S. 102">296 U.S. 102. No one acquired the stock from Mrs. Barnes prior to November 2, 1943, when Plath paid the price agreed upon to Mrs. Barnes and received the stock certificates from her. Prior to that date of actual sale and delivery of the stock Plath and Mrs. Barnes had merely agreed upon the sale price for the stock. There is no substantial evidence that the petitioner had any right of ownership in the stock until December 30, 1943, when he paid Plath for it and took possession or control of it. The petitioner testified that he told Plath he would be willing to pay $20,000 for the stock and that he requested Plath to buy the stock for him until such time as he could pay for it288 himself. There is no evidence of any kind that Plath agreed to accept any agency for the petitioner. Between November 2, 1943, when Plath bought the stock, and December 30, 1943, when the petitioner in turn bought it from Plath, the petitioner had at most an option or contract to buy the stock from Plath when he could. A mere option or contract to buy property is not equivalent to ownership for purposes of determining the acquisition date of property within the meaning of section 117 of the Internal Revenue Code. Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496">297 U.S. 496; E. T. Weir, 10 T.C. 996">10 T.C. 996, affirmed per curiam, 173 Fed. (2d) 222. The fact that petitioner paid Plath 5 per cent interest on the money used to buy the stock for the period Plath held it does not establish that Plath had loaned the money for the purchase in view of the fact that no dividends were paid upon the stock while Plath held it. He was entitled to some return on his investment during the period he held the stock if he was not to collect dividends upon it. In the companion cases of Albert E. Dyke, 6 T.C. 1134">6 T.C. 1134, and Ethlyn L. Armstrong, 6 T.C. 1166">6 T.C. 1166,289 affirmed per curiam, 162 Fed. (2d) 199, the taxpayers had executory contracts to purchase stock, which they later purchased, paying interest upon the purchase price from the date of the purchase agreement to the date of purchase. We attributed no significance in those cases to the payment of interest on the purchase price pending actual acquisition of the stock and we do not here. We conclude, therefore, that the petitioner did not acquire the 17 shares of stock in the Washington Fruit & Produce Company before December 30, 1943. Having determined the beginning date of the holding period of the stock, we come to the question of the termination date of the period. In this case the termination of the holding period is the effective date of dissolution of the Washington Fruit & Produce Company. The Washington Fruit & Produce Company was incorporated under the laws of the State of Washington and its dissolution is controlled by the laws of that state. The corporation was voluntarily dissolved out of court by the resolution of more than two thirds of the stockholders and the appointment of a liquidating trustee under the provisions of Remington's Revised Statutes of Washington, 290 § 3803-49. 1291 Respondent argues that the dissolution of the corporation took place either April 29, 1944, the date on which the resolution was adopted, or on May 1, 1944, the date on which the succeeding partnership commenced business. The petitioners argue that the dissolution of the corporation could not become effective until May 4, 1944, the date on which the resolution was officially filed in the Office of the Secretary of State, making the liquidating trustee's appointment effective. Since the petitioners argue that the trustee's appointment and the transfer of the corporation's assets in liquidation were effective on May 1, 1944, we take that date to be the latest possible effective date of dissolution of the corporation. Having concluded that the petitioners' holding period for the stock did not begin until December 30, 1943, the date when they acquired the stock, we find it unnecessary to determine the precise date when the corporation was liquidated. Petitioners would have to have held the stock until July 1, 1944, to have held it more than six months and since the corporation was dissolved in April or May of 1944, they held it at the most less than five months. We conclude that*292 respondent was correct in determining that the gain realized by petitioners upon stock in the Washington Fruit & Produce Company was a short-term capital gain, 100 per cent of which is subject to taxation within the meaning of section 117 of the Internal Revenue Code. Decision will be entered under Rule 50. Footnotes1. § 3803-49. Voluntary dissolution, how effected. I. Voluntary proceedings for dissolution may be instituted whenever a resolution therefor is adopted by the holders of at least two-thirds of the voting power of all shareholders at a shareholders' meeting duly called for the purpose. II. The resolution may provide that the affairs of the corporation shall be wound up out of court, in which case the resolution must designate a trustee or trustees to conduct the winding up, but such appointment shall not be operative until a. duplicate copies of such resolution have been signed and acknowledged by a majority of the directors or by shareholders holding a majority of the voting power of all shareholders, and b. one of such copies has been filed for record in the office of the Secretary of State and the other copy filed in the office of the Auditor of the county in which the corporation has its registered office. III. The resolution may provide that the affairs of the corporation shall be wound up under the supervision of the court, in which case the resolution shall authorize certain directors or shareholders to sign and present a petition to the court praying that the corporation be wound up and dissolved under the supervision of the court. IV. Where a corporation is being wound up and dissolved out of court, the trustee or trustees appointed by the shareholders, or a majority of them, may by petition apply to the court to have the proceedings continued under the supervision of the court, and thereafter the proceedings shall continue as if originally instituted subject to the supervision of the court.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620184/	Kelly C. Hobbs and Celestia A. Hobbs v. Commissioner.Hobbs v. CommissionerDocket No. 92080.United States Tax CourtT.C. Memo 1964-208; 1964 Tax Ct. Memo LEXIS 129; 23 T.C.M. (CCH) 1258; T.C.M. (RIA) 64208; August 5, 1964129 Held: 1. Petitioner cannot deduct as worthless a debt which has been voluntarily forgiven. 2. A second alleged debt has not been proved worthless in the year in issue so as to support deduction. 3. There is no evidence that the first of the above debts was forgiven for a business purpose, nor any evidence that a loss as to the second alleged debt occurred during the year in issue; consequently petitioner's alternative claim of business losses is denied. 4. Petitioner's efforts to revoke his forgiving of the first of the above debts, though unsuccessful, were reasonable, and such debt was "business connected," therefore, an allocable portion of claimed attorneys' fees and court costs are allowed as deductible. Thomas R. Ward, Broadmoor Mart, Meridian, Miss., Roland J. Mestayer, Jr., and C. Scott Edmundson, Jr., for the petitioners. Robert W. Goodman and Glen W. Gilson, II, for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: Respondent has determined deficiencies in the income taxes of petitioners in the amounts of $2,272.28 and $2,940.42 for the year 1956 1 and 1959, respectively. The following issues remain to be decided: 1. Are petitioners entitled 130 to a deduction of $21,000 in 1959 on account of the alleged worthlessness of a debt owed to petitioner Kelly C. Hobbs by Gladys Martin? 2. Are petitioners entitled to a bad debt deduction in the amount of $12,000 in the year 1959 because of inability to recover advances allegedly made to Gladys Martin by petitioner Kelly C. Hobbs subsequent to May 13, 1957? 3. Did petitioners suffer deductible business losses or losses from transactions entered into for profit on account of the transactions referred to in (1) or (2) above? 4. Is the sum of $625.98 expended by petitioners in 1959 for attorneys' fees and court costs in connection with litigation against Gladys Martin deductible as an ordinary and necessary expense of doing business or as an expense for the production of income? Findings of Fact Some of the facts have been stipulated and are so found. Petitioners, husband and wife, are residents of Meridian, Mississippi. They filed their joint Federal income tax returns for the calendar years 1956 and 1959 with the district director of 131 internal revenue at Jackson, Mississippi. For several years prior to and including 1959, Kelly C. Hobbs (hereinafter referred to as petitioner) was engaged in various business activities in Meridian, Mississippi, including the purchase and sale of real estate with Gladys Martin (hereinafter sometimes referred to as Gladys) for their joint profit. Petitioner was also engaged, during the years in question, in the business of selling automobiles and automobile supplies, and in the business of cattle farming. In February 1957 petitioner made a financial statement showing a net worth of $170,500. Frequently, petitioner would advance money to Gladys for the purchase of real estate for their joint profit, and she would execute a promissory note and deed of trust. One such transaction resulted in the execution by Gladys of a note for $21,000, 2 dated May 13, 1957, and due in one year, payable to James Pigott. (Pigott, a nephew of petitioner, was made payee at the request of petitioner. Pigott had no real interest in the transaction, but served merely as a strawman for petitioner.) This note was secured by a deed of trust on real property (hereinafter referred to as the Oakdale Avenue property) 132 situated in the City of Meridian, Lauderdale County, Mississippi. Record title to the property was held by Gladys; the deed of trust was not recorded. At various times between May 13, 1957, and the beginning of November 1957, petitioner transferred to Gladys sums of money aggregating not more than $12,000 nor less than $2,000. Gladys used part of the money she received from petitioner to build a house on the Oakdale Avenue property. She lived in this house for more than a year prior to its sale in September 1959. In most instances when petitioner had lent money for any reason, he had obtained a note from the debtor. And on the numerous occasions on which he had borrowed money from banks, he had been required to sign notes. However, petitioner never obtained any written evidence of indebtedness from Gladys Martin with respect to the money he delivered to her between May 13, 1957, and November 1957. Sometime after May 13, 1957, and prior to December 3, 1957, petitioner notified Gladys 133 that he was going to return the $21,000 note and deed of trust to her. He did not indicate that he expected the note to be returned to him or altered, but led Gladys to believe he was making her a gift. Subsequently the note and deed of trust were delivered to Gladys at her home by an employee of petitioner. On December 3, 1957, Pigott, the payee of the note, filed suit against Gladys in the Chancery Court of Lauderdale County, Mississippi, seeking return of the note and deed of trust and enforcement of their terms. After joinder of petitioner as the real party in interest on the plaintiff's side, this action, numbered B-7060 on the court records, was brought to trial. The final decree, entered August 18, 1958, dismissed the complaint with prejudice. The chancellor held that the surrender of the note by petitioner constituted a "renunciation" within the meaning of section 163 of the Mississippi Code of 1942. 3134 The decree was affirmed by the Supreme Court of the State of Mississippi on June 8, 1959, in a per curiam decision reported as Pigott v. Martin, 112 So. 2d 547">112 So. 2d 547 (Miss. 1959). 4On July 7, 1958, petitioner filed a complaint in the Chancery Court of Lauderdale County, No. B-7516, against Gladys, seeking to impress a lien upon the Oakdale Avenue property. The complaint was dismissed without prejudice by order of the court filed July 16, 1959. On September 8, 1959, petitioner filed another complaint, No. B-8386, to foreclose on the same property. A decree dismissing this suit with prejudice was entered on February 24, 1960. Gladys and her husband, Troy S. Martin, Sr., had deeded this property to Rebecca M. Sandusky on September 23, 1959, for a total 135 consideration of $25,500. The proceeds were paid into escrow. After the dismissal of suit No. B-8386, the escrow agent distributed the net proceeds to Gladys. During 1959 petitioner expended the sum of $625.98 for court costs and attorneys' fees in connection with the litigation described above against Gladys Martin. During 1959 petitioner also expended $335.40 for charitable purposes. In their joint income tax return for the calendar year 1959 petitioner and his wife claimed a deduction in the amount of $33,000 5136 on account of petitioner's inability to collect the notes from Gladys Martin, and also a deduction of $625.98 for attorneys' fees in connection with the litigation. As a result, the return showed an adjusted gross income of minus $17,450.12. Petitioner carried back the reported loss to 1956 under section 172 of the 1954 Code6 and on May 31, 1960, received a refund of $2,272.28, the entire tax paid by petitioner for 1956. In his notice of deficiency respondent disallowed each of the two aforementioned deductions claimed on petitioner's 1959 return. As to the $21,000 note, he determined that: * * * if a debtor-creditor relationship ever existed, such relationship was severed by you, the creditor, thereby effecting a forgiveness and/or a gift of any amount which may have been owed. He also determined that the amount expended for attorneys' fees was not an ordinary and necessary business expense. As a result of these determinations respondent concluded that there was no net operating loss for 1959. Opinion The first issue concerns the right of petitioner to a deduction under section 166(a)(1) 7 for the worthlessness of the 137 $21,000 debt which was extinguished as a result of the litigation in the Mississippi state courts between petitioner and Gladys Martin, the debtor. Respondent disallowed the deduction on the ground that the debt was voluntarily canceled by petitioner. Petitioner claims he never intended to renounce the debt, notwithstanding the decision of the state courts. It has long been established that the voluntary cancellation by the creditor of a debt owed by a solvent debtor does not give rise to a bad debt deduction. American Felt Co. v. Burnet, 58 F. 2d 530 (C.A.D.C. 1932), affirming 18 B.T.A. 504">18 B.T.A. 504 (1929). Cf. Earl V. Perry, 22 T.C. 968">22 T.C. 968 (1954); Joseph M. Byrne, 1 B.T.A. 996">1 B.T.A. 996 (1925). "The disinclination of a creditor to force payment does not make a debt 'worthless,' as that term is used in * * [section 214(a)(7) of the Revenue Act of 1918, the predecessor of section 166(a)(1) of the 1954 Code]." G. C. Krack, 1 B.T.A. 1119">1 B.T.A. 1119, 1120 (1925). A creditor who voluntarily cancels a debt is no more entitled to a bad debt deduction 138 than one who makes a gift of the debt to a third person. Moreover, once a debt has been canceled by the voluntary act of the creditor, later unsuccessful attempts to re-establish it cannot create the right to a deduction. "[In] such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such debt." Federal Fuel Co., 3 B.T.A. 814">3 B.T.A. 814, 816 (1926). Accord, Domhoff & Joyce Co., 17 B.T.A. 1015">17 B.T.A. 1015 (1929), affd. 50 F. 2d 893 (C.A. 6, 1931). Respondent contends that the finding of the state court that petitioner had voluntarily renounced the debt is conclusive upon us. He argues that petitioner has had his day in court on the issue of voluntariness and is not entitled to relitigate the question here. We express no opinion concerning the merits of respondent's contention, because, as we view the case, there is no necessity to decide the question. Disregarding the testimony before the Chancery Court of Lauderdale County in the case of Pigott v. Martin, 112 So. 2d 547">112 So. 2d 547 (Miss. 1959), 8 the record contains very little evidence concerning the circumstances under which Gladys obtained possession of the $21,000 note. Petitioner admits that 139 he was not forced to deliver the note to Gladys. He maintains, however, that he did not at any time intend to make a gift of the debt. Rather, it is petitioner's contention that Gladys was to redraw the note to include advances made to her subsequent to May 13, 1957. The record does not support petitioner's position. Petitioner's self-serving and uncorroborated testimony at trial concerning his intentions at the time the note was delivered to Gladys is not persuasive, in view of his evasive manner on the witness stand and the directly conflicting testimony of Gladys Martin. 9 Petitioner's attempts to enforce the note by suing Gladys in the state courts are as readily explained by petitioner's later regretting his generosity as by his lacking an intention to renounce the debt at the time the note was delivered. Nor are we moved by the argument that a man with a net worth 140 of at least $100,000 (taking the view of the evidence most favorable to petitioner) would never under any circumstances make a gift of $21,000. Finally, there is nothing in the record to show that petitioner had ever previously returned a note to a debtor for the purpose of having it redrawn in a larger amount. 10 We find ourselves unable to accept petitioner's explanation 141 of his actions in returning the note to Gladys. We hold, therefore, that petitioner has failed to carry his burden of proving error in respondent's determination that petitioner voluntarily severed the debtor-creditor relationship existing between himself and Gladys Martin so as to effect a gift or forgiveness of the $21,000 debt. It follows that petitioner is not entitled to a deduction for the worthlessness of the debt. The second issue is whether petitioner is entitled to a bad debt deduction of $12,000 for alleged advances to Gladys Martin after May 13, 1957. It appears that Gladys did in fact receive some money from petitioner between May 13 and the beginning of November 1957. The evidence concerning the amount of the advances and their nature, i.e., whether gifts or loans, is not only conflicting but quite confused. Petitioner testified that he attempted to collect these advances by demanding payment from Gladys over the telephone. He also claims in his brief that the suits filed against Gladys on July 7, 1958, and September 8, 1959, in the Chancery Court of Lauderdale County were aimed at collecting these loans. Respondent argues that petitioner has failed to prove the existence 142 of a debtorcreditor relationship with respect to the advances in question. In the alternative, he contends that, even if a debt existed, it has not been shown that it became worthless during the year 1959. Without expressing an opinion on respondent's first contention, we hold that petitioner has not proven the worthlessness of the alleged debt within the taxable year before us. Petitioner does not show the debtor to have been insolvent at any time. The suit instituted against her in July 1958 was dismissed without prejudice. The suit begun in September 1959 was not dismissed with prejudice until February 1960. There is no other evidence that the debt was worthless. The third issue is presented by petitioner's alternative claim that he is entitled to a deduction for a business loss or a loss from transactions entered into for profit 11143 with respect to the $21,000 debt and the alleged $12,000 advances. Petitioner's claim is wholly without merit. In Spring City Co. v. Commissioner, 292 U.S. 182">292 U.S. 182(1934), the Supreme Court held that the provisions of the tax law allowing deductions for losses and for bad debts are mutually exclusive. "The making of the specific provision as to debts indicates that these were to be considered as a special class and that losses on debts were not to be regarded as falling under the preceding general provision." 292 U.S. at 189. See Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, 87 (1956). This rule is dispositive of the question before us. There is no evidence that petitioner had a business purpose in rendering the $21,000 debt uncollectible, as in cases like Lab Estates, Inc., 13 T.C. 811">13 T.C. 811 (1949), acq. 1 C.B. 3">1950-1 C.B. 3. Moreover, as we have already pointed out, there is no showing that the claimed $12,000 loss occurred in 1959. Finally, petitioner asserts error in respondent's denial of a deduction under section 162 12 or 212 13 for attorneys' fees in the amount of $625.98. This sum was spent 144 in connection with the various suits petitioner instituted against Gladys Martin in the Mississippi courts. The record is barren of evidence as to the purpose of the suits instituted in July 1958 and September 1959. Petitioner in his briefs asserts that they were brought to collect the advances made after May 13, 1957. These assertions are not evidence, (Tax Court Rule 31(f)) and we have no way of ascertaining the facts other than petitioner's bare statement in his brief. We have no access to the reports of the Chancery Court of Lauderdale County, Mississippi, and petitioner has failed to produce them. It follows that petitioner 145 has failed to show that expenses attributable to at least two of the suits in question were in any way related to a trade or business or to income-producing property. The other litigation involved the $21,000 note discussed at length above. If petitioner had been successful in the state courts he would have recovered on the original debt. Since the loan was related to petitioner's real estate business, expenses in collecting it would have been deductible under section 162 as ordinary and necessary business expenses. Richard Croker, Jr., 12 B.T.A. 408">12 B.T.A. 408 (1928), acq. VII-2 C.B. 10. Petitioner's failure to prevail in the state court litigation does not in and of itself preclude him from deducting his expenses in connection therewith, if he was reasonable in making them. Cf. Paul Draper, 26 T.C. 201">26 T.C. 201 (1956), acq. 2 C.B. 5">1956-2 C.B. 5; J. Raymond Dyer, 36 T.C. 456">36 T.C. 456 (1961), acq. 1 C.B. 4">1962-1 C.B. 4. We have held in an earlier part of this opinion that petitioner failed to prove error in respondent's determination that he voluntarily forgave the $21,000 debt. Nevertheless, there is no evidence that petitioner brought these suits in bad faith, or without a reasonable prospect of success. If a prudent 146 businessman would have sued in these circumstances, there is no reason to penalize failure by denying the deduction for expenses. J. Raymond Dyer, supra at 466. In effect, petitioner was trying to revoke a gift of business property made under somewhat ambiguous circumstances. The legal question involved in the state court, renunciation of a negotiable instrument by delivery to the maker, has not been litigated frequently. See Annot., 65 A.L.R. 2d 593, 623, sec. 15 (1959). A voluntary renunciation under circumstances such as are presented here is not necessarily inconsistent with a subsequent reasonable expectation of recovering the debt. We conclude that the expenditures for attorneys' fees incurred in prosecuting the action of Pigott v. Martin, 112 So. 2d 547">112 So. 2d 547 (Miss. 1959), are deductible as ordinary and necessary expenses of carrying on petitioner's real estate business. Since only a part of the claimed deduction for attorneys' fees and court costs has been proved to be allowable, it is appropriate to allocate between the deductible and nondeductible portions. Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930). The record is not clear, but we surmise that the actions which sought 147 to impress a lien on the Oakdale Avenue property never came to a formal trial. On the other hand, the suit involving the $21,000 note was not only tried, but was also appealed to the Mississippi Supreme Court. It seems likely therefore, that the major portion of the $625.98 fee and costs were spent in connection with the latter action. Weighing against petitioner because the deficiencies in proof are his responsibility we allow a deduction of $400 on this issue. In view of our decision, petitioner will no longer have a loss for 1959. He will therefore be able to get some tax benefit from his charitable contributions of $335.40. Decision will be entered under Rule 50. Footnotes1. The year 1956 is involved only because petitioners received a refund of taxes paid in that year by virtue of a net operating loss carryback from 1959.↩2. The consideration for this note included $12,000 previously advanced by petitioner and represented by a note for that amount signed by Gladys, bearing the date December 4, 1956, and payable to petitioner.↩3. Section 163 of the Mississippi Code of 1942, which is identical to section 122 of the Uniform Negotiable Instruments Act, reads as follows: Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument, before, at or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing, unless the instrument is delivered up to the person primarily liable thereon.↩4. In the stipulation and the briefs, this case is incorrectly cited as 111 So. 2d 547">111 So. 2d 547↩.5. The $33,000 deduction claimed on the return consisted of the $21,000 note, plus the $12,000 note referred to in footnote 2, supra. It has since been stipulated that the $12,000 note was in fact merged into the $21,000 note, and petitioner now admits that he is not entitled to a deduction of more than $21,000 with respect to these transactions. However, in the petition there was claimed, for the first time, an additional deduction for advances allegedly made by petitioner to Gladys Martin after May 13, 1957, the date of the $21,000 note. These advances (coincidentally totaling, according to petitioner, $12,000), along with the $21,000 note, are still in issue. 6. All statutory references are to the Internal Revenue Code of 1954 as amended.↩7. 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.↩8. The transcript of the proceedings before the chancellor is in evidence, but the parties are agreed that it was not admitted generally, and that such limited admission was proper. Accordingly, we have not utilized it in finding any of the facts of this case, except to establish the precise holding of the chancellor.↩9. Although Gladys was rather nervous on the witness stand, she appeared to be trying to tell the truth. We cannot agree with petitioner that her testimony is entitled to less weight than his. ↩10. If anything, the evidence indicates that this would be inconsistent with prior dealings between these same parties. In response to a question on cross-examination, petitioner testified as follows: A. Well, in this case with Mrs. Martin, I would get a note ever so often. I would loan her the money along until I thought it was as far as it ought to go before I got more security, and then I would ask her to renew. As we understand this testimony, petitioner had on other occasions lent money to Gladys while prior advances were outstanding. When the amounts became large, Gladys would execute a new note, not alter an existing one.↩11. SEC. 165. LOSSES. (a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; * ↩12. 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, * * ↩13. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620185/	CARL K. LIFSON, ADMINISTRATOR OF THE ESTATE OF BENJAMIN LIFSON, DECEASED, AND SOPHIE LIFSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lifson v. CommissionerDocket No. 83314.United States Board of Tax Appeals36 B.T.A. 593; 1937 BTA LEXIS 688; September 30, 1937, Promulgated 688 One on the cash basis who bought a sheriff's certificate for Minnesota real property in August 1933 and paid the 1933 taxes in 1934, may not deduct the amount as taxes paid in 1934, since such amount is by Minnesota law a lien on May 1, 1933, and is to be regarded as part of the cost of the property. George T. Altman, Esq., for the petitioners. Claude R. Marshall, Esq., for the respondent. STERNHAGEN 593 OPINION. STERNHAGEN: A deficiency of $4,607.60 in petitioners' income tax for 1934 was determined. The facts are stipulated. Sophie Lifson, who with her husband filed a joint return for 1934 on the actual receipts and disbursements basis, bought in August 1933, a sheriff's certificate of sale of certain foreclosed real property in St. Paul, Minnesota, took possession of the property in October 1933, and recorded the certificate in December 1933. The 1933 Minnesota property taxes amounted to $19,286.27, and she paid this in two equal installments on July 3, 1934, and December 8, 1934. She demands a deduction for taxes paid in 1934, and the Commissioner denies this on the ground that the payment must be treated as part of the cost of689 the property because when she acquired it the tax had already, on May 1, 1933, accrued and become a lien. The law of Minnesota is that property taxes are a lien on and after May 1 of the year to which they are applied, Mason's Minnesota Statutes, 1927, § 2191; National Bond & Security Co. v. Hopkins,96 Minn. 119">96 Minn. 119; 104 N.W. 678">104 N.W. 678; Thompson v. United States, 8 Fed.(2d) 175; 594 Merle-Smith v. Minnesota Iron Co.,195 Minn. 313">195 Minn. 313; 262 N.W. 865">262 N.W. 865, and it has been held that to one on the accrual basis the deduction is to be taken in that year, Merchants Bank Building Co. v. Helvering, 84 Fed.(2d) 478; Leamington Hotel Co.,26 B.T.A. 1004">26 B.T.A. 1004; Cloquet Co-operative Society,21 B.T.A. 744">21 B.T.A. 744. Whether to a continuing owner on the cash basis the deduction must be taken only in the year of accrual rather than the subsequent year of payment has not been considered, although the answer would seem fairly plain. But this is not such a case, for here the accrual was at a time before the acquisition of the property by the petitioner, and the question is whether690 the payment after accrual by the petitioner, who acquired the property after accrual, is to be regarded as the payment of a tax or the payment of an inherent cost of the property. If the tax were a personal liability of the owner at the time of accrual, the payment directly by the successor would not be the payment of the successor's tax but the short cut payment to the former owner and the payment by him of his tax liability. Falk Corporation v. Commissioner, 60 Fed.(2d) 204. As such, it would clearly be cost of the property and not deductible by the successor. But there is no personal liability; only a charge against the property and a lien for its enforcement, and this reasoning is not applicable. Since by state law the charge is fixed as of May 1, although not accurately calculated till later, a buyer after May 1 would take it with knowledge of the tax and would negotiate his price accordingly, either to exclude or to include the tax, or perhaps to prorate it. Cf. State v. Northwestern Telephone Exchange Co.,80 Minn. 17">80 Minn. 17; 691 82 N.W. 1090">82 N.W. 1090. Buying the sheriff's certificate, petitioner had no such choice. She bought the certificate with the burden of the accrued tax attached, and the cost of the certificate included the accrued tax. This is consistent with Helvering v. Missouri State Life Insurance Co., 78 Fed.(2d) 778; Merchants Bank Building Co. v. Helvering, supra;Leamington Hotel Co., supra;Cloquet Co-operative Society, supra.It is not at variance in theory with Theodore Plestcheeff,35 B.T.A. 508">35 B.T.A. 508 (on review, C.C.A., 9th Cir.). That case turned upon Washington statutes as construed by Washington courts to different effect from the Minnesota law here involved. The tax incidence under Washington law was held not to occur on the date analogous to May 1 in Minnesota, but on the later date when the lien became perfect and enforceable by the state. In Minnesota the lien is regarded as perfect on May 1, and the courts have held it to determine the incidence of tax on that date. The Commissioner correctly held the amount of $19,286.27 to be part of petitioners' cost and not a deduction. *692 Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620186/	LDL RESEARCH AND DEVELOPMENT II, LTD., A LIMITED PARTNERSHIP, ENSIGN MANAGEMENT GROUP, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLDL Research & Dev. II v. CommissionerDocket No. 18566-91United States Tax CourtT.C. Memo 1995-172; 1995 Tax Ct. Memo LEXIS 166; 69 T.C.M. (CCH) 2411; April 13, 1995, Filed 166 Decision will be entered for respondent. For petitioner: David C. Wright and Travis L. Bowen. For respondent: David L. Miller. SWIFTSWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent, for 1983, 1984, and 1985, mailed to Ensign Management Group, Inc. (petitioner), as tax matters partner, notices of final partnership administrative adjustment with respect to LDL Research and Development II, Ltd. (LDL). In such notices, respondent disallowed for each respective year deductions of $ 525,000, $ 194,245, and $ 391,965 claimed by LDL as research and development expenditures. The only issue for decision is whether these expenditures qualify as deductible research and development expenditures under section 174. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioner's and LDL's principal places of business were in Salt Lake City, Utah. In 1981, Larson-Davis Laboratories, Inc. (the Lab), was organized by Brian Larson (Larson) and Larry J. Davis (Davis) as a Utah corporation for the167 purposes of developing and marketing electronic testing equipment. When the Lab was first organized, Larson and Davis together owned 100 percent of the Lab's outstanding shares of stock. Both Larson and Davis had significant experience in developing and marketing electronic testing equipment. From 1976 to 1981, Larson and Davis were employed by Ivie Electronics, an electronics manufacturing company. Larson was a vice president, and he was responsible for the worldwide marketing of products developed by Ivie Electronics. Davis was a director of research and development at Ivie Electronics, and he was responsible for the successful development of more than 20 electronic products. Prior to their employment at Ivie Electronics, both Larson and Davis were employed as engineers for Hewlett-Packard Co. When the Lab was organized in 1981, Larson and Davis developed for the Lab a 5-year business plan. The 5-year business plan described generally the research to be performed, the products to be developed and manufactured, and the projected financial needs of the Lab for each of the subsequent 5 years. In 1982, Larson and Davis concluded that the Lab needed additional capital to continue168 with its 5-year business plan and to develop, under its business plan, two particular electronic devices capable of monitoring transmissions from communications equipment and vibrations in equipment (hereinafter, the words "electronic devices" refer generally to this equipment and to the related technology to be developed). Larson and Davis, therefore, undertook a search for additional capital. After almost a year, Larson and Davis came in contact with Coordinated Financial Services Financial Corp. (CFS Financial), which agreed to attempt to provide the Lab with additional capital. In November of 1983, CFS Financial organized LDL as a Utah limited partnership to raise additional capital for the Lab. The general partners of LDL were Coordinated Financial Services Properties, Inc. (CFSProperties), and Steven F. Christensen (Christensen). CFSProperties was a Utah corporation organized as a wholly owned subsidiary of CFS Financial. Christensen was a director and assistant secretary of CFSProperties and of other subsidiaries of CFS Financial. CFS Financial drafted a private placement memorandum (PPM) regarding investments in LDL, and CFS Financial provided the PPM to interested169 investors. The PPM explained that the stated purpose and business of LDL was to research and develop technology for the development of the two electronic devices. The PPM acknowledged, however, that the Lab, not LDL, would perform the research on and the development of the technology related to the electronic devices and that the Lab, not LDL, would manufacture and market any electronic devices developed with the technology. The PPM acknowledged that all of the essential activities surrounding the research, development, manufacture, and marketing of the electronic devices would be performed by the Lab. The PPM acknowledged that neither the general partners nor CFS Financial, which corporation was to be responsible for monitoring the Lab's progress, were experienced in the research, development, manufacture, and marketing of electronic devices similar to those that the Lab intended to develop. The PPM acknowledged that the Lab was to use its own sales force to market and sell the electronic devices. The PPM also acknowledged that the general partners of LDL had not performed a formal market study regarding marketability of the electronic devices. The first electronic device 170 to be developed by the Lab under the research and development agreement with LDL was referred to as a spectrum/wave analyzer and was to function as a portable device that would measure the quality and characteristics of transmissions from electronic communications systems, such as radios and satellites. The second electronic device to be developed by the Lab under the research and development agreement with LDL was referred to as a fast fourier transform analyzer and was to function as a mobile, battery-operated device that would monitor and measure movements in and vibrations of equipment and provide data useful in determining stress points and structural failures in equipment. The PPM represented generally that investors in LDL could expect to receive from their investments in LDL cash distributions and tax benefits. Cash distributions, not projected until at least 1986, were to be based on LDL's net income. According to the PPM, tax benefits would accrue to investors in LDL in the form of tax deductions relating to payments made by LDL to the Lab for research and development of the electronic devices. The PPM represented that payments to the Lab would qualify as expenditures171 for research and development of the electronic devices, that the payments would be treated as currently deductible expenses under section 174, and that the expense deductions would be passed through to the investors in LDL. The PPM indicated that LDL expected to report tax deductible losses from 1983 through 1985 and that there was no assurance that LDL would ever earn a profit. The PPM did not provide any income projections. LDL offered two types of investments to investors: (1) Individual limited partnership units at $ 4,300 per unit; and (2) nonnegotiable promissory notes in the principal amount of $ 25,000 with an annual interest rate of 14 percent. From 1983 through 1986, 350 limited partnership units and a number of promissory notes were to be sold. The total capital to be raised was $ 1,905,000, as follows: 1983 1984 1985 1986TotalLimited PartnershipUnits$ 350,000$ 560,000$ 560,000$ 35,000$ 1,505,000Promissory Notes400,000-- -- -- 400,000Total Capitalto be Raised$ 750,000$ 560,000$ 560,000$ 35,000$ 1,905,000The record does not indicate whether LDL actually raised all $ 1,905,000. According to the PPM, 172 of the $ 1,905,000 to be raised, about one-half, or $ 975,000, was to be expended for research and development of the electronic devices, and $ 25,000 was to be expended for license fees to be paid to the Lab. The remaining $ 905,000 was to be expended by LDL for legal and organizational costs, principal and interest payments on LDL's promissory notes, and salaries of the general partners. Only approximately $ 139,149, or 7 percent of the total $ 1,905,000 capital to be raised, was to be retained by LDL for cash reserves. If the income LDL earned was not sufficient to cover its principal and interest obligations under the promissory notes, each limited partner was obligated to contribute an additional $ 640 per unit to LDL. Under this provision, a total of only $ 224,000 in additional capital could be raised from the limited partners. In no other event were the limited partners of LDL obligated to contribute further capital to LDL beyond the $ 640 per partnership unit. On November 21, 1983, LDL entered into five separate supplemental agreements with the Lab regarding the research and development of the electronic devices: (1) A development license agreement; (2) a use-license173 option agreement; (3) a development agreement; (4) a cross-license option agreement; and (5) a purchase option agreement. Under the terms of the development license agreement, LDL acquired from the Lab for a fee of $ 25,000 a nonexclusive license to use in the research and development of the electronic devices the existing base technology that the Lab had already developed and that related to the two electronic devices to be developed. According to the development license agreement, LDL was only permitted to use this base technology in connection with the research and development of the two electronic devices. Sometime in 1983, LDL paid to the Lab the $ 25,000 license fee. The development license agreement was to terminate on the earlier of October 1, 1986, or the date on which a product using the technology was available for sale to the public. Under the terms of the use-license option agreement, LDL acquired from the Lab an option to acquire a nonexclusive license to use the Lab's base technology in connection with subsequent sales of the electronic devices. This option was exercisable by LDL anytime after one of the electronic devices was available for sale to the public. 174 Once this option was exercised, the use license would last perpetually, and LDL would be required to pay the Lab a 0.25-percent royalty on gross proceeds from sales of all products containing the base technology. Royalty payments from LDL to the Lab under the use-license agreement would terminate when the royalty payments thereunder to the Lab totaled $ 80,000 . Under the terms of the development agreement, the Lab, not LDL, was to perform all research and development relating to the electronic devices, and LDL agreed to pay to the Lab a fee of $ 975,000 in consideration for such research and development activity. The Lab was required to maintain adequate books and records regarding all aspects of the research and development, and the Lab was required to send to LDL monthly and quarterly reports regarding the status of the research and development. The development agreement was to terminate on the earlier of October 1, 1986, or the date on which a product using the technology was ready to be sold to the public. The development agreement was to terminate concurrently with the development license agreement. Pursuant to the development agreement, LDL paid to the Lab $ 500,000 175 in 1983, $ 350,000 in 1984, and $ 125,000 in 1985, for a total of $ 975,000. Whether LDL received monthly reports from the Lab is not established in the record. LDL did receive progress reports from the Lab but not always on a quarterly basis. Under the terms of the cross-license option agreement, if any technology was actually developed under the development agreement between the Lab and LDL, the Lab had the right or option to acquire a nonexclusive license to use the technology for approximately 1 year to manufacture and market the electronic devices. This option was exercisable by the Lab within 30 days after the earlier of October 1, 1986, or the date on which a product using the technology was available for sale to the public. If the Lab exercised this option, the Lab became obligated to pay to LDL a 12-percent royalty on gross proceeds from sales of the electronic devices. This nonexclusive license would last from the date of its exercise until the earlier of November 30, 1987, or a date 14 months after exercise of the option. Under the terms of the purchase option agreement, at termination of the above cross-license option agreement, the Lab would have the option to purchase176 all of LDL's rights and interest in the two electronic devices and the resulting technology. The stated purchase price under this purchase option agreement for the Lab to purchase LDL's rights and interest in the electronic devices was as follows: (1) A royalty of 15 percent of annual gross proceeds from sales of the electronic devices, until the Lab had paid LDL $ 6,350,000; and (2) after payment of $ 6,350,000 to LDL, the Lab (or the individual owners of the Lab) would transfer to LDL ownership of 5 percent of the shares of each class of stock in the Lab. Additionally, if the Lab ever offered its shares of stock to the public, LDL would have an option to purchase at the offering price 30 percent of the publicly offered shares of stock in the Lab. In late 1985, the general partners of LDL began to experience financial difficulties, and they withdrew as general partners. On February 27, 1986, petitioner became the new general partner of LDL. On April 17, 1986, CFS Financial filed for protection under chapter 7 of the Federal bankruptcy laws. Sometime in 1985 or 1986, the Lab developed an electronic device called a Series 3100 Real Time Analyzer (the Analyzer), which combined177 into one device the functions of the two electronic devices that were described in the PPM. In early 1986, the Lab entered into a contract with the U.S. Navy to sell to the Navy a number of the Analyzers. On April 16, 1986, LDL exercised its option under the use-license option agreement to use the Lab's base technology in the sale of the Analyzers. Other than through the Lab, however, LDL did not attempt to market the Analyzers on its own behalf or through agents or contractors. On October 1, 1986, the Lab exercised its cross-license option to manufacture and market the Analyzers. The Lab was initially successful in marketing and selling the Analyzers. By late 1988 or early 1989, however, as a result of technological advancements occurring in the industry (particularly the shift from analog to digital technology), the Analyzers became obsolete, and sales of the Analyzers declined. From 1986 through 1989, the Lab paid to LDL a total of $ 236,196 in royalties on sales of the Analyzers. The Lab did not exercise its option under the purchase option agreement to purchase either the technology relating to the Analyzer or the stated right of LDL to manufacture and market the Analyzer. 178 As indicated, under the nonexclusive license agreement, the Lab did not have the exclusive right to manufacture and market the electronic devices, and LDL, therefore, theoretically could have manufactured and marketed the electronic devices and the resulting technology developed by the Lab. LDL, however, other than through the Lab, has never manufactured or marketed any electronic devices. LDL did not have an alternate plan to manufacture and market the electronic devices if the Lab chose not to do so, and as of 1986, by the time the research and development of the electronic devices were completed, LDL did not have the financial ability to manufacture and market the electronic devices. From 1983 through 1987, LDL did not have any employees. LDL's activities with regard to the Lab and the development of the technology relating to the electronic devices were ministerial in nature and were limited to keeping the limited partners informed of the activities of the Lab regarding the electronic devices, receiving progress reports, and filing tax returns. The success of LDL was dependent on the research, development, and marketing efforts of the Lab. On its 1983, 1984, and 1985 partnership179 information tax returns, LDL used the accrual method of accounting and claimed ordinary deductions for research and development expenditures of $ 525,000, $ 194,245, and $ 391,965, respectively, relating to the electronic devices. On audit, respondent determined that LDL was not engaged in a trade or business in connection with the research and development of the electronic devices as required by section 174, and respondent disallowed the claimed deductions. OPINION Section 174(a)(1) provides as a general rule that a "taxpayer may treat research or experimental expenditures which are paid or incurred * * * during the taxable year in connection with * * * [a] trade or business as expenses which are not chargeable to [a] capital account." Under this section, expenditures incurred for research and development in connection with a trade or business are deductible as ordinary expenses in the year in which they are incurred. Section 174(a)(1) applies not only to research and development expenditures incurred directly by a taxpayer, but also to research and development expenditures incurred by another at the request of and on behalf of the taxpayer. Sec. 1.174-2(a)(2), Income Tax Regs.180 A taxpayer is entitled to an ordinary deduction for research and development expenditures even if, at the time the research and development expenditures were incurred, a taxpayer was not producing or selling a product and was not then engaged in a trade or business. Snow v. Commissioner,416 U.S. 500">416 U.S. 500, 503-504 (1974). In order to be entitled to the deduction under section 174, however, there must have been, during the year at issue, a realistic prospect that the taxpayer would eventually be engaged in such a trade or business. Diamond v. Commissioner,92 T.C. 423">92 T.C. 423, 439 (1989), affd. 930 F.2d 372">930 F.2d 372 (4th Cir. 1991); see Levin v. Commissioner,87 T.C. 698">87 T.C. 698 (1986), affd. 832 F.2d 403">832 F.2d 403 (7th Cir. 1987). Under section 174, in order to be entitled to deductions for research and development expenditures, the taxpayer must have been more than a mere passive investor. Green v. Commissioner,83 T.C. 667">83 T.C. 667, 688 (1984); Harris v. Commissioner,T.C. Memo. 1990-80, supplemented by 99 T.C. 121">99 T.C. 121 (1992),181 affd. 16 F.3d 75">16 F.3d 75 (5th Cir. 1994). To distinguish between a taxpayer who was merely a passive investor and a taxpayer who was actively engaged in a trade or business, or a taxpayer who had a realistic prospect of eventually engaging in a trade or business in connection with the research and development expenditures, all of the surrounding facts and circumstances are relevant, including the following: (1) The intentions of the parties to the agreement; (2) the amount of capital retained by the taxpayer during the research and development period; (3) the exercise of control by the taxpayer over the person or organization doing the research; (4) the business activities of the taxpayer during the year in question; and (5) the experience of the taxpayer and of the others involved. Diamond v. Commissioner, supra; Levin v. Commissioner, supra; Double Bar Chain Co. v. Commissioner,T.C. Memo. 1991-572; Harris v. Commissioner, supra.These factors can be reduced to two principal factors: (1) The objective intent of the taxpayer to engage in a trade or business in connection 182 with the research and development expenditures; and (2) the capability of the taxpayer to engage in such a trade or business. Kantor v. Commissioner,998 F.2d 1514">998 F.2d 1514 (9th Cir. 1993), affg. in part and revg. in part on another issue T.C. Memo. 1990-380; Medical Mobility Ltd. Partnership I v. Commissioner,T.C. Memo 1993-428">T.C. Memo. 1993-428. Petitioner alleges: (1) That LDL's role in directing and controlling the research, development, manufacture, and marketing of the electronic devices and of the related technology was regular and substantial; (2) that by granting to the Lab a nonexclusive license to manufacture and market the electronic devices, LDL retained some rights to manufacture and market the electronic devices; (3) that LDL had the right to receive reports from the Lab; and (4) that LDL had the right to require the Lab to spend $ 975,000 on research and development. Petitioner, therefore, argues that LDL was actively engaged in a trade or business. Petitioner also argues that, even if we conclude that during the years in issue LDL was not engaged in a trade or business, LDL had the capital, the experience, 183 and sufficient rights to eventually manufacture and market the electronic devices and, therefore, that there was a realistic prospect that LDL would eventually be engaged in a trade or business in connection with the electronic devices. Respondent argues that LDL did not exercise sufficient direction or control over the Lab for LDL itself to be regarded as being actively engaged in a trade or business in connection with the electronic devices. Respondent also argues that because LDL did not retain sufficient capital, because the general partners had no expertise or experience with regard to the manufacture and marketing of the electronic devices, and because the Lab, not LDL, was to perform all aspects of the research, development, manufacture, and marketing of the electronic devices, there was no realistic prospect that LDL would ever be engaged in a trade or business in connection with the electronic devices. The development and cross-license agreements make it clear that LDL was to exercise little direction or control over the Lab. The financial success of LDL was dependent upon the Lab's ability to improve upon the existing base technology that had been developed by the Lab. 184 The general partners of LDL had little or no experience in the research, development, manufacture, and marketing of electronic devices. The profitability of LDL was dependent upon the efforts of the Lab in developing and marketing the electronic devices, and, in that regard, LDL essentially placed total reliance upon the management and experience of Lab personnel. According to the agreements, the only significant control that LDL was permitted to exercise over the Lab was to require that the $ 975,000 paid to the Lab be used for research and development activities. The right of LDL to receive reports and the limitation on the Lab in the use of the $ 975,000 do not establish that LDL controlled or directed the Lab in the development and marketing of the electronic devices or that LDL was engaged in the trade or business of developing the electronic devices. Green v. Commissioner, supra at 690; Spellman v. Commissioner,T.C. Memo 1986-403">T.C. Memo. 1986-403, affd. 845 F.2d 148">845 F.2d 148 (7th Cir. 1988). The fact that LDL, under the various agreements, retained some limited legal rights to manufacture and market the electronic185 devices does not establish that LDL was actively engaged, or had a realistic prospect of engaging, in a trade or business. There is no evidence that LDL availed itself of the legal right it possessed on paper. Levin v. Commissioner,832 F.2d 403">832 F.2d 403 (7th Cir. 1987), affg. 87 T.C. 698">87 T.C. 698 (1986). LDL did not itself attempt to manufacture and market the electronic devices, nor did LDL attempt to license the electronic devices to anyone other than the Lab. The only activities LDL engaged in were ministerial in nature and were limited to filing tax returns, receiving status reports from the Lab, and informing investors of the status of the research, development, manufacture, and marketing of the electronic devices. These are the types of activities that are typical of an investor merely managing investments. Green v. Commissioner, supra at 688-689; Harris v. Commissioner, supra.Petitioner's witnesses testified that before LDL was formed, its general partners (CFS Properties and Christensen) prepared business plans, performed market research, and contacted experts in 186 the industry in order to determine how and for what markets the electronic devices were to be developed. These witnesses testified that the general partners of LDL used this information to instruct the Lab on how the Lab was to proceed with the research and development of the electronic devices. The testimony of petitioner's witnesses, however, was vague and contradicted the PPM in that the PPM acknowledged the inexperience of the partners of LDL and the reliance of LDL on the Lab to perform the research, development, manufacture, and marketing of the electronic devices. Petitioner did not produce any documentary evidence or other credible testimony that would indicate that the general partners of LDL exercised any significant direction or control over the Lab. In any event, the activities that the above witnesses described were not sufficient to establish that LDL was engaged, or had a realistic prospect of engaging, in a trade or business in connection with the electronic devices. These activities were typical of investors who review the economic viability of an investment before risking significant capital. Estate of Cook v. Commissioner,T.C. Memo. 1993-581.187 After LDL paid $ 975,000 to the Lab under the development agreement, and after LDL paid various organizational costs and fees, LDL had only a minimal amount of capital that it could use to manufacture and market the electronic devices. The amount of capital retained by LDL would not have been sufficient for LDL to manufacture and market the electronic devices itself. Petitioner's witnesses testified that LDL could have raised additional capital through its general partners. No credible evidence, however, was presented to demonstrate that either the general or the limited partners of LDL had the ability to raise the additional capital LDL would have needed if LDL had attempted to manufacture and market the electronic devices itself. All of the essential activities surrounding the research, development, manufacture, and marketing of the electronic devices were to be performed by the Lab. LDL did not have any employees or equipment to undertake the manufacture or the marketing of the electronic devices, and LDL did not have in place an alternate plan to manufacture and market the electronic devices if the Lab did not exercise its rights under the cross-license option agreement 188 and under the purchase option agreement. LDL became involved with the development of the electronic devices only to the extent that it provided the Lab with capital. LDL existed only to finance the Lab's development of the electronic devices and to provide investment opportunities and tax benefits to LDL's partners. In all likelihood, after development of the electronic devices, and if the marketing of the devices by the Lab was successful, LDL would earn income only by receiving royalties on sales proceeds earned by the Lab.LDL's limited retained right to manufacture and market the electronic devices does not indicate that there was a realistic prospect that LDL would ever be engaged in a trade or business in connection with the electronic devices. The existence of the nonexclusive license to manufacture and market the electronic devices indicates, at best, that there was only a mere possibility that LDL would ever be engaged in a trade or business in connection with the electronic devices. The mere possibility of engaging in a trade or business does not satisfy the requirements of section 174. Kantor v. Commissioner,998 F.2d at 1520; Spellman v. Commissioner, 845 F.2d at 150-151;189 Levin v. Commissioner,832 F.2d at 406-407. We conclude that during the years at issue, LDL was not engaged in a trade or business in connection with the electronic devices and that there was no realistic prospect that LDL would ever be engaged in a trade or business in connection with the electronic devices. LDL and its general partners lacked the intent and the capability to engage in a trade or business in connection with the electronic devices. The facts of this case are similar to the facts of Scientific Measurement Sys. I, Ltd. v. Commissioner,T.C. Memo 1991-69">T.C. Memo. 1991-69. In Scientific Measurement Sys. I, Ltd., a limited partnership entered into a research and development agreement with a research contractor. Most of the capital contributed to the partnership was either paid to the research contractor under the research and development agreement or was spent by the partnership on organizational costs. Only a minimal amount of capital was retained by the partnership for cash reserves. The general partners did not have any experience with the technology to be developed by the research contractor. The general partners190 did not direct or control the research, development, manufacture, or marketing of the technology. After the technology was developed, the limited partnership was legally entitled to manufacture and market the technology. It did not, however, engage in either of these activities. Based on the above facts, we concluded in Scientific Measurement Sys. I, Ltd. that the partnership did not intend to engage in a trade or business in connection with the technology, that the partnership lacked the capability to do so, and that there was no realistic prospect that the partnership would ever be engaged in a trade or business in connection with the technology. The U.S. Court of Appeals for the Ninth Circuit recently decided Scoggins v. Commissioner,46 F.3d 950">46 F.3d 950 (9th Cir. 1995), revg. T.C. Memo. 1991-263. The Ninth Circuit's conclusion that there was a realistic prospect that the partnership involved in that case would eventually be engaged in a trade or business was based on several facts that are distinguishable from the facts of the instant case. In Scoggins, the individual taxpayers organized and owned both a partnership191 and a research corporation to perform research on and development of equipment that could apply layers of silicon on silicon wafers. The individual taxpayers had significant experience in developing and marketing similar equipment, and they directed the research on and development of the equipment. The individual taxpayers had the ability to provide the partnership with sufficient capital to manufacture and market the equipment if the corporation did not do so. To the contrary, in the instant case, the partners of LDL did not have any prior experience with equipment similar to the electronic devices, and the partners of LDL did not direct or control the research, the development, the manufacture, or the marketing of the electronic devices. LDL and the Lab were not related in any way. In summary, the facts before us indicate that LDL did not intend to, nor did it, direct or control the research, development, manufacture, or marketing of the electronic devices. The activities that LDL (and the partners thereof) engaged in were typical of investors managing their investments and were not of the type that amount to carrying on a trade or business. We conclude that because LDL was*192 not engaged in a trade or business in connection with the electronic devices and because LDL did not have a realistic prospect of ever engaging in such trade or business, LDL is not entitled, under section 174, to the claimed deductions for research and development expenditures. Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620187/	D. Holland Wessell and Grace L. Wessell v. Commissioner.Wessell v. CommissionerDocket No. 91685.United States Tax CourtT.C. Memo 1963-11; 1963 Tax Ct. Memo LEXIS 335; 22 T.C.M. (CCH) 32; T.C.M. (RIA) 63011; January 11, 1963B. W. Turner, Esq., 157 Miracle Mile, Coral Gables, Fla., for the petitioners. Kenneth G. Anderson, Esq., for the respondent. RAUMMemorandum Findings of Fact and Opinion Respondent determined a deficiency in income tax in the amount of $371.36 for the year 1957. The sole issue is whether expenditures made by one of a group of promoters in connection with the incorporation of the University Federal Savings and Loan Association of Coral Gables, Florida, are deductible under Section 212 of the Internal Revenue Code of 1954. Findings of Fact Some of the facts have been stipulated and, as stipulated, are incorporated336 herein by reference. Petitioners, husband and wife, are residents of Coral Gables, Florida. They filed a joint Federal income tax return for the taxable year ended December 31, 1957, with the district director of internal revenue, Jacksonville, Florida. D. Holland Wessell (hereinafter referred to as Wessell) has been in the construction business for many years. He has been an officer and sole stockholder of the Wessell Construction Company (hereinafter sometimes referred to as Company) and Wessell Construction Industries, Inc. (hereinafter sometimes referred to as Industries) since the dates of their incorporation in the years 1954 and 1957, respectively. The business of both Company and Industries is the general construction of homes and apartment houses. Their principal offices are in Coral Gables, Florida, and their principal place of business is in and around South Florida. As president of these corporations, Wessell's duties include the preparation of bids for construction projects and general supervision of construction contracts obtained by them. Wessell reported salary income from Company and Industries for the taxable years 1956 and 1957 in amounts as follows: 19561957Company$650.00$13,500.00Industries900.00337 For the taxable years 1956 and 1957, Wessell reported no income from rendition of personal services on his Federal income tax returns other than salary income from Company and Industries. In 1955 Wessell joined a group of seven other persons who were applying to the Federal Home Loan Bank Board for permission to organize a new Federal savings and loan association in Coral Gables, Florida. The application filed by the organizers was approved by the Federal Home Loan Bank Board, and on January 8, 1958, it issued a charter to the University Federal Savings and Loan Association of Coral Gables, Florida (hereinafter referred to as the Association). On February 24, 1958, the Association was opened to the public for business. As a condition to obtaining the charter the organizers were required to "post" $100,000 for five years so as to protect the Association against losses during that period. Petitioner advanced $12,500 as his share of that amount. Prior to the issuance of a charter to the new association, Fred B. Hartnett and Pat Caesarano, two of the organizers, served as trustees for the purpose of gathering from the organizers funds needed for organizational expenses and making338 the necessary disbursements. The dates and amounts of the advances made by Wessell to Hartnett, as trustee, to defray organizational expenses, less the amount refunded to him by Hartnett, were as follows: DateAmountAugust 18, 1955$ 500.00December 5, 19572,000.00April 18, 1958592.94$3,092.94Less refund of March 19, 19581,848.92$1,244.02Identical amounts were collected by Hartnett and Caesarano, as trustees, from the other seven organizers and identical refunds were made to them. The expenditures were for economic research, preparation of the application to the Federal Home Loan Bank Board, traveling expenses to and from Washington, and legal expenses in connection with a hearing prior to the award of the charter, and they were all incurred in obtaining the charter from the Federal Home Loan Bank Board. At the first organization meeting of the Association after incorporation, its organizers, including Wessell, were elected to membership on its board of directors, and they have continued to be members of the board to the present time. The Association does not have shares of stock outstanding in the usual sense. By making a deposit with339 the Association petitioner became a "shareholder" along with all other depositors. Each depositor became entitled to a given number of "shares" (not exceeding 50) in proportion to his deposits, and was entitled to vote in respect of such shares at the annual shareholders' meeting. However, when opening their accounts, a majority of the depositors gave proxies without limitation as to time to members of the Association's board of directors. Although the depositors could nevertheless vote in person, the majority of them in fact did not do so; it was normal practice for the management group to vote the proxies. On or about February 24, 1958, Wessell was appointed the Association's chief appraiser and inspector and has served in that capacity since that time. For each appraisal Wessell has received a fee of approximately $6. The amounts received by Wessell from the Association for director's fees and appraisal and inspection fees since it was incorporated in 1958 were as follows: AppraisalDirector'sand Inspec-YearFeestion Fees1958$ 175.00None1959NoneNone1960625.00$3,888.0019611,100.003,600.001962 (Jan. through April1st)75.001,584.00$1,975.00$9,072.00340 Petitioner anticipates remaining as a director and appraisal officer of the Association both for the "immediate future" and the "extended future". Petitioner's contribution to the Association's organization expenses was motivated by the expectation of receiving fees from the Association as an appraiser as well as a director; he also expected that his connection with the Association would enhance his stature as a community leader and successful contractor with the result that his corporation or corporations would receive new construction contracts. Such expectations have in fact been realized. Petitioners' income tax return for 1957 claimed a deduction of $1,244.02 for "Money expended in formation of Federal Savings & Loan Assn." The Commissioner disallowed the deduction. Opinion RAUM, Judge: Although there are analogous cases furnishing some justification for the Commissioner's disallowance of the contested deduction (cf. Morton Frank, 20 T.C. 511">20 T.C. 511, 514; Dwight A. Ward, 20 T.C. 332">20 T.C. 332, 343-344, affirmed on other issues, 224 F. 2d 547 (C.A. 9); Carl Reimers Co., 19 T.C. 1235">19 T.C. 1235, 1239-1240, affirmed 211 F. 2d 66 (C. 341 A. 2); McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57; Sec. 1,212-1, Income Tax Regs.), the present case is factually closer to Cubbedge Snow, 31 T.C. 585">31 T.C. 585, which is not fairly distinguishable. 1 We accordingly follow Cubbedge Snow here and hold that the expenses incurred are deductible. The Commissioner has also raised an issue as to the amount of the deduction. The record shows that petitioner expended $2,000 in 1957, but that his net outlay (taking into account expenditures in 1955, 1957 and 1958, as reduced by the 1958 refund) was only $1,244.02, which he seeks to deduct in 1957. Conceivably petitioner might have claimed the entire $2,000 expended in 1957 as a deduction for that year, reporting the subsequent refund as income for 1958. We cannot say that the claimed deduction of an amount less than $2,000*342 for 1957 was incorrect. While the matter is not free from doubt we hold that he is entitled to the contested deduction of $1,244.02. Decision will be entered under Rule 50. Footnotes1. As ground for the deduction petitioner originally urged in substance that the expenses were intended to benefit his corporations as well as to provide him with additional income through appraiser's and director's fees. He no longer relies upon the first ground which obviously would not support the deduction. Cf. Harry Kahn, 26 T.C. 273">26 T.C. 273↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620190/	JERRY & PATRICIA A. DIXON, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDixon v. Comm'rDocket Nos. 9382-83, 10588-83, 17642-83, 17646-83, 27053-83, 4201-84, 10931-84, 15907-84, 20119-84, 28723-84, 38757-84, 38965-84, 40159-84, 22783-85, 30010-85, 30979-85, 29643-86, 35608-86, 13477-87, 479-89, 8070-90, 19464-92, 621-94, 7205-94, 9532-94, 17992-95, 17993-95, KERSTING United States Tax Court2005 U.S. Tax Ct. LEXIS 13; March 23, 2005, Decided Dixon v. Commissioner, 2003 U.S. App. LEXIS 4831">2003 U.S. App. LEXIS 4831 (9th Cir. Cal., Jan. 17, 2003)13 Renato Beghe, Judge. Renato BegheORDEROn March 14, 2005, respondent filed five motions in the above-numbered dockets, identified as follows:1. Motion to quash subpoena served upon Attorney General Alberto R. Gonzales;2. Motion to quash subpoena served upon former United States Department of Justice Tax Division Appellate Section ChiefGary R. Allen;3. Motion to quash subpoena served upon Chief Counsel Donald Korb;4. Motion to quash subpoena served upon former Chief Counsel B. John Williams; and5. Motion for protective order.Additionally, on the same date, counsel in the Tax Division in the United States Department of Justice filed two motions in the above-numbered dockets, as follows:1. Attorney General Gonzales's motion to quash subpoena;2. Gary R. Allen's motion to quash subpoena.In an order entered the next day, the Court directed Mr. Binder to prepare responses to the above aforesaid motions; the Court filed those responses on March 21, 2005.DISCUSSIONRule 147(b) provides that this Court, upon receiving a motion, may quash or modify a subpoena if it is unreasonable and oppressive. A subpoena is unreasonable14 or oppressive when it seeks evidence that is irrelevant to the issues before the Court. See Bane v. Commissioner,T.C. Memo 1971-31">T.C. Memo. 1971-31, citing Hamilton Web Co. v. Commissioner,10 B.T.A. 939">10 B.T.A. 939 (1928). Here, as in other cases, we agree with "the principal argument made by respondent in the motions to quash; viz., the testimony of the subpoenaed witnesses is irrelevant" to the Court's factual findings required by the mandate of the Court of Appeals for the Ninth Circuit. See Nis Family Trust v. Commissioner,115 T.C. 523">115 T.C. 523, 551 (2000).In these cases, the standards of relevance are derived from the opinion of the Court of Appeals in Dixon v. Commissioner,316 F.3d 1041">316 F.3d 1041 (9th Cir. 2003), as amended on March 18, 2003. Therein the Court of Appeals addressed the third version of a secret agreement that had been reached on or shortly before January 1989 by two of respondent's attorneys and counsel for John and Maydee Thompson, test case petitioners in a trial involving the validity of programs known as the Kersting tax shelters. Pursuant to the secret agreement, Mr. Thompson testified at trial on behalf of respondent, but neither15 his counsel nor respondent's counsel revealed to the Court or to the other petitioners that the Thompsons had previously settled their cases on terms substantially more favorable than those offered to the other petitioners. On December 11, 1991, the Court issued its opinion in Dixon v. Commissioner,T.C. Memo 1991-614">T.C. Memo. 1991-614, sustaining almost all of respondent's determinations that the Kersting programs in issue lacked merit for tax purposes. The Court entered decisions that were consistent with its opinion in the test cases during March 1992, and most of the other test case petitioners (but not Thompson) filed notices of appeal. Shortly thereafter, senior officials of the Internal Revenue Service and of its Office of Chief Counsel discovered the secret agreement in the Thompson case. They revealed the secret agreement to the Court in pleadings filed in June 1992. In those pleadings respondent sought to vacate this Court's entered decisions giving effect to the Thompson settlement. The Court denied respondent's motion to vacate. Several years of difficult and protracted litigation by the other Kersting investors followed, culminating in the opinion in Dixon, supra.16 There the Court of Appeals held that the secret agreement constituted "fraud on the court" regardless of whether the petitioners in the other Kersting shelter cases had been prejudiced in the presentation of their cases or in the decision of the Tax Court on the merits. The Court of Appeals accordingly directed that terms equivalent to those provided to the Thompsons be extended to "appellants and all other taxpayers properly before the Court." Id. at 1047. The Court of Appeals left to this Court's discretion "the fashioning of judgments which, to the extent possible and practicable, should put these taxpayers in the same position as provided in the Thompson Settlement." Id. n. 11.Petitioners now seek to use this Court's process to require the testimony and production of documents at the final hearing in these cases by senior officials in the executive branch of the Federal government. We decline to authorize that use, because the subpoenas will not produce evidence relevant to the resolution of the matters before us.With respect to the subpoena served upon Attorney General Gonzales, petitioners seek documents or communication dated after May 22, 1992, from the files of17 Gary R. Allen, the retired Chief of the Appellate Section of the Tax Division of the U.S. Department of Justice. Petitioners claim that "The relevance of Mr. Gonzales's testimony is that thirteen years ago the Department of Justice, in its capacity as appellate counsel for the Commissioner of Internal Revenue, and Mr. Gary R. Allen specifically, apparently advised that all taxpayers be given the terms of the Thompson settlement."With respect to the subpoena served upon Mr. Allen personally, petitioners reiterate that "The relevance of Mr. Allen's testimony is that thirteen years ago the Department of Justice, in its capacity as appellate counsel for the Commissioner of Internal Revenue, and Mr. Allen specifically, advised that all taxpayers be given the terms of the Thompson settlement."In the motions to quash the subpoenas served upon Attorney General Gonzales and Mr. Allen, respondent says "Mr. Binder wishes to question Mr. Allen about the legality, fairness, and wisdom of the Thompson settlement, matters not now at issue in determining the operative terms of the settlement." It appears to the undersigned, that respondent may have misinterpreted the subject matter of petitioners' 18 inquiry. To the undersigned, the subject matter of the testimony is more particularly directed to "wisdom, legality, and fairness" of respondent's position that the Thompson settlement is to be characterized as a 20-percent settlement plus the payment of the Thompsons' legal fees rather than as a 62-percent settlement, which defines the settlement in simple mathematical terms in accordance with its form--the reduction of the Thompsons' deficiencies from the $ 79,000, as originally determined by respondent, to the actual $ 30,000, representing a 62-percent reduction in deficiencies.In any event, the Court believes that requiring the testimony of Mr. Allen would be unnecessary and burdensome. Mr. Allen had no part in negotiating the Thompson settlement; indeed, his association with these cases only began in 1992, long after respondent's counsel had made the secret agreement. Mr. Allen's involvement came about because he was Chief of the Appellate Section of the Tax Division of the United States Department of Justice. His section had responsibility for defending respondent in the Dixon petitioners' appeals, which were pending when the secret arrangements were discovered. From documents19 already produced in discovery, it appears that, following the discovery and revelation of the secret agreement, Mr. Allen may have recommended that the pending appeals be resolved on the basis of a 65-percent reduction in the tax liabilities reflected in the decisions of this Court that had been appealed. 1 Respondent apparently refused to go along with a settlement on these terms.The mandate of the Court of Appeals requires this Court to fashion "judgments20 which, to the extent possible and practicable, should put these taxpayers in the same position as provided in the Thompson Settlement." The Thompson settlement was crafted and given effect well before the Department of Justice had any contact with it. The strategic factors which motivated Mr. Allen with respect to settling cases pending before the Court of Appeals do not equate to, and are distinct from, factors which this Court must consider in applying the mandate of the Court of Appeals. How his recommendations may appear in hindsight is irrelevant now. Mr. Allen's opinions were not and are not evidence of the scope of the Thompson settlement, and they are not relevant to the present task of this Court to determine the "position as provided in the Thompson settlement."Petitioners also urge that respondent lacks standing to object to the subpoenas served upon Justice Department personnel; petitioners urge that arguments as to the relevance of evidence sought in the subpoenas served upon the Attorney General and Mr. Allen could only have been raised, but were not, by the Justice Department attorneys who filed motions to quash on behalf of the Attorney General and Mr. Allen. We disagree. 21 Our Rule 147(b) provides that we may quash a subpoena "on motion"; the rule does not restrict its operation to motions filed on behalf of the person served with the summons. Our discussion of the relevant case law, above, demonstrates that the lack of relevance is a proper ground for quashing a subpoena of this Court. If, as is the case here, a subpoena does not purport to produce relevant evidence, we will not require respondent to hold his objections as to relevance until the parties summoned have been forced to appear. Failure to permit respondent to make such an objection in a motion to quash--especially when compliance is demanded in a proceeding before this Court--would be unreasonable and oppressive, and contrary to the provisions of our Rule 147(b).Concerning the subpoena served upon Chief Counsel Donald Korb, petitioners seek "All documents * * relating to the statement of Mr. B. John Williams to the New York State Bar Association Tax Section of January 21, 2003, concerning Dixon v. Commissioner,316 F.3d 1041">316 F.3d 1041 (9th Cir. 2003) and specifically Mr. Williams's statement that: 'We will assure that no interest is charged on deficiencies for that period of the22 appeals to the Ninth Circuit.'" With respect to the subpoena served upon Mr. Williams personally, respondent advises, "The testimony sought from Mr. Williams concern his statements to the New York State Bar Association Tax Section of January 21, 2003, concerning Dixon v. Commissioner,316 F.3d 1041">316 F.3d 1041 (9th Cir. 2003). Specifically, the testimony sought includes the basis and background of Mr. Williams's statement that: "We will assure that no interest is charged on deficiencies for the period of the appeals to the Ninth Circuit." Petitioners further contend that: "The relevance of Mr. Williams's testimony to this proceeding is that while Mr. Williams's statement concerning interest is the position taken by the Office of Chief Counsel in the present proceedings, it does not comport with the Ninth Circuit's ruling. In addition, the Tax Court has requested clarification of that court's jurisdiction with respect to interest."Petitioners do not contend that their subpoenas to Mr. Korb or to Mr. Williams will produce any factual evidence regarding the Thompson settlement. Instead they seek information regarding Mr. Williams's assertion that respondent would not collect interest23 for the period during which the cases involving the petitioner's deficiencies were before the Ninth Circuit. Mr. Williams's concession--which respondent has represented to the Court that it will honor--was not part of the "Thompson settlement". That concession was made apart from, and long after, the Thompson settlement. The facts concerning that concession are not now at issue, and hence, they are irrelevant to the task of this Court. We acknowledge that we have expressed serious concerns about our authority under the law to furnish any relief to the "taxpayers properly before the Court" by ordering any decrease in statutory interest. The question of this Court's authority to fashion relief in a manner that affects statutory interest, however, is not a factual matter, but rather a legal one. Requiring Mr. Williams to testify, or requiring the present Chief Counsel to produce papers regarding his concession, is not the proper means of addressing that legal question. The Court already has received the views, and will, solicit the further views of counsel for all sides to this dispute with respect to this legal matter, but the views of respondent's former Chief Counsel are irrelevant24 to this determination.In view of the foregoing, it isORDERED that respondent's motion to quash subpoena served upon Attorney General Alberto R. Gonzales is granted; it is furtherORDERED that respondent's motion to quash subpoena served upon former United States Department of Justice Tax Division Appellate Section ChiefGary R. Allen is granted; it is furtherORDERED that respondent's motion to quash subpoena served upon Chief Counsel Donald Korb is granted; it is furtherORDERED that respondent's motion to quash subpoena served upon former Chief Counsel B. John Williams is granted; and it is furtherORDERED that respondent's motion for protective order is granted to the extent that, without written order of the Court, the parties are not to cause service of subpoenas in the above-numbered dockets upon persons not identified in the parties' respective pretrial memoranda that have been provided to the Court pursuant to its Order dated February 9, 2005.Additionally, with respect to the motions to quash filed in these cases by counsel in the Tax Division in the United States Department of Justice, it isORDERED that Attorney General Gonzales's motion to quash subpoena is denied25 as moot. It is furtherORDERED that Gary R. Allen's motion to quash subpoena is denied as moot. It is furtherORDERED that, in addition to regular service, a copy of this order shall be served upon the following attorneys:Michael J. Martineau, Esq.On behalf of the Hon. Alberto R. GonzalesU.S. Department of JusticeTax DivisionP.O. Box 227Ben Franklin StationWashington, D.C. 20044Jason S. Zarin, Esq.On behalf of Gary R. Allen, Esq.U.S. Department of JusticeTax DivisionP.O. Box 227Ben Franklin StationWashington, D.C. 20044Renato BegheJudgeDated: Washington, D. C.March 23, 2005 Footnotes1. We observe that petitioners' contention that Mr. Allen advised that all taxpayers be given the terms of the Thompson settlement assumes the veracity of petitioners' view of the matter now being litigated. Neither this Court nor the Court of Appeals has defined the Thompson settlement in terms of a 65 (or 62) percent settlement; to the contrary, respondent maintains the at least plausible view that the Thompson settlement constituted a reduction of 20 percent in deficiencies plus reimbursement of attorney fees spent in defending the Kersting shelters.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620191/	HORACE S. CLARK AND CHARLOTTE C. CLARK, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket No. 86877.United States Board of Tax Appeals39 B.T.A. 329; 1939 BTA LEXIS 1048; February 2, 1939, Promulgated 1048 1. Tabulations of check stubs held admissible in evidence as a convenient form of presentation where there is a large number of such primary records, no question of the accuracy of the transcription is raised, and the stubs themselves are available in the hearing room for investigation or use in cross-examination by the adverse party. 2. Testimony as to complicated dates and figures from memory refreshed by reference to such check stubs in the first instance, and at the hearing by reference to such tabulations held admissible. 3. The probative value of such evidence, although somewhat doubtful, Held sufficient to establish the basis for a finding of the depreciated cost of certain properties, the evidence being uncontradicted and a loss to the taxpayer of such properties by casualty being undisputed. Peter S. Rask, Esq., and P. J. Coffey, Esq., for the petitioners. W. R. Lansford, Esq., and J. Y. Porter, Esq., for the respondent. OPPER329 This proceeding involves income tax deficiencies for the years 1933 and 1934 of $2,185.14 and $1,879.27, respectively. The two issues are whether certain casualty losses were1049 suffered in the tax years and whether the petitioner is entitled to greater depreciation on buildings than that allowed. FINDINGS OF FACT. Petitioners are husband and wife, residents of Lead, South Dakota. They filed joint income tax returns on the cash receipts and disbursements basis for 1933 and 1934 with the collector at Aberdeen, South Dakota. Where "the petitioner" is referred to in the singular, reference to Horace S. Clark is intended. From about 1890 to the present time petitioner has been acquiring real property in Lead and Deadwood, South Dakota. His only contemporaneous records of cost of the property and improvements made thereon are conveyances reciting the consideration paid, and certain canceled checks and check stubs, included among several thousand similar ones, covering chiefly expenditures for improvements. In 1933 and 1934 operations by the Homestake Mining Co. under the surface of the ground in the townsite of Lead caused a subsidence of the ground, which resulted in rendering certain of petitioners' properties uninhabitable. In 1933 petitioners lost the use of the land and buildings known as the Oasis Pool Hall and the Elks Building, and the buildings1050 were both demolished in that year. In 1934 petitioners lost the use of the land and buildings known as the Penny 330 Building, the Campbell House, the Newberry Building, the Campbell Annex, the Laundry Building, the Marohn Apartment, the Cottage Home, and the Leveque House, and these buildings were demolished in that year. The demolition work in both years was done by the Homestake Mining Co. The depreciated cost or March 1, 1913, value of these properties when lost was as follows: Cost of lot and buildingMarch 1, 1913 valueDate acquiredLotBuildingLotBuildingDepreciation on buildingDepreciated basisLost in 1933:Oasis Pool Hall19061 $13,000.00$7,000$6,000.00$3,600.00$9,400.00Elks Building1928 $8004,000.00600.004,200.00Total13,600.00Lost in 1934:Penny Lot (1920) and building19285,45014,606.292,530.5017,525.79Campbell House19244,0004,844.293,603.645,240.65Graham Lot and Newberry building1929-317,00023,914.861,291.5129,623.35Campbell Annex19111 13,120.567,5005,620.563,372.349,748.22Laundry building19081 13,538.482,95010,588.486,353.097,185.39Marohn Apartment19262001,024.70358.65866.05Cottage Home1926400100.0035.00465.00Leveque House1929100524.59104.92519.67Total71,174.121051 The value of the salvage retained by the petitioners from all of the above buildings was $20,000, which, allocated in proportion to their depreciated bases, equals $3,208.52 for the buildings lost in 1933 and $16,791.48 for those lost in 1934. The loss sustained was accordingly $13,600 less $3,208.52 in 1933 and $71,174.12 less $16,791.48 in 1934. In 1934 the Homestake Mining Co. agreed to pay petitioners $75,000 for their damages, and the petitioners conveyed, or agreed to convey, to the company all the properties concerned, with the reservation of the above mentioned salvage. Pursuant to this agreement the company paid petitioners $50,000 in 1934 and $25,000 in 1935. The loss was not otherwise compensated for. Accordingly the amount of loss not compensated for was $10,391.48 in 1933 and $54,382.64 less $50,000, or $4,382.64 in 1934. Respondent allowed petitioners depreciation for the year 1933 in the total amount of $4,078.65, of which $3,090.29 was for brick buildings and $998.36 was for frame buildings. Petitioners claim depreciation for the year 1933 in the amounts of $4,458.16 for brick buildings and $1,223.09 for frame1052 buildings. Respondent allowed petitioners depreciation for the year 1934 in the total amount of $2,783.62 in brick and frame buildings. Petitioners claim depreciation for the year 1934 in the amounts of $3,267 for brick buildings and $1,162.73 for frame buildings. 331 OPINION. OPPER: The foregoing facts have been found upon the record submitted by petitioner. The detailed figures in evidence were adduced by a combination of material taken from the petitioner's records and his memory of the transactions to which they refer. The original accounts, consisting of check vouchers and check stubs, were not introduced in evidence but were present in the courtroom and offered for examination by respondent's counsel. The testimony mentioned and memoranda prepared by petitioner and used by him at the hearing for reference were objected to by respondent at that time and their admissibility is again contested as the single issue presented in his brief. In discussing this contention it is material to recognize that it is really two questions that are involved. In the first place the nonintroduction of the check stubs themselves seems incapable of creating the possibility1053 of prejudicial error. Their examination at the time of the hearing would have involved a protracted procedure, the result of which could have been of no benefit. . The accuracy of the transcription from those stubs to the memoranda and the testimony thereof by petitioner have not at any time been questioned. See . The original records were produced and were equally as available for the examination of counsel for respondent or for his use in cross-examining petitioner as though they had been formally offered and received; and the receipt of the evidence was expressly conditioned upon such availability. This was sufficient. . See also ; ; 1054 . "A reasonable safeguard against falsification in the preparation of such statements is furnished by placing the records from which they are compiled freely at the disposal of the adverse party." Petitioner testified that he had himself made the transcripts from the original checks and stubs or, where he had not done so, had himself checked the transcript's accuracy. "When it is necessary to prove the results of voluminous facts or of the examination of many books and papers, and the examination can not be conveniently made in court, the results may be proved by the person who made the examination." , citing 1 Greenleaf's Evidence, sec. 93. We think in this respect petitioner's testimony was clearly admissible, and the use of the 332 memoranda to refresh the witness' recollection as to complicated and voluminous dates and figures was certainly not error. 1055 . That the memoranda were then admitted into the record as a convenient presentation of this evidence could have been no more prejudicial than the testimony of the witness which the memoranda did nothing more than tabulate. . Cf. The second point involved is that the witness testified to certain essential facts which were admittedly not contained in the check stubs from which the memoranda were compiled. As to these facts he purported to be testifying purely from memory, although that memory had been refreshed in the first instance by his examination of the check stubs which were contemporaneous and, at the hearing, by the memoranda prepared therefrom. Since the witness' testimony was definite that his recollection was refreshed, the testimony was admissible. 1056 . And this is so even though the memorandum from which the witness testified at the hearing was not the same as the one made contemporaneously. . Here again the admission of the memoranda was in no sense prejudicial, since they were expressly accepted only for what they were worth and consisted merely of a tabulation in written form of the testimony which, as we have seen, was properly admitted. For the foregoing reasons it is not apparent that any error, and particularly any prejudicial error, resulted from the admission of any of the controversial evidence. A very different question is presented as to the probative value of that evidence. That the witness should be able to remember, even when assisted by certain partial documentary notes, transactions and occurrences taking place many years before is somewhat difficult to assume. And of course there is the additional difficulty that the burden of satisfactory proof rested upon petitioner. Nevertheless, for what it is worth, petitioner's testimony1057 stands upon the record uncontradicted and it does not appear to be unreasonable. There is ample and undisputed evidence that petitioner and his wife were the owners of the property in question. The properties were used, as petitioner testified, for rental purposes. It can not therefore be questioned that petitioners had an investment in the property of some amount and that the value of this investment was lost. All of this is conceded in respondent's brief. In spite of the unsatisfactory nature of the proof of petitioners' cost basis it seems less unjust to permit them to obtain the benefit of the deductions claimed than to reject 333 entirely their whole contention. Unless the deductions are permitted in the present years their benefit will, as respondent admits, be lost for all time. And of course there is no basis upon which some intermediate figure, more satisfactory to respondent, can be ascertained. For these reasons, although with some reluctance, we have concluded that respondent's determination should be overruled. 1058 , and cases there cited. Regarding the salvage for which we have found a value of $20,000, petitioner testified that he "received" 20 percent of this salvage in 1934 and 80 percent in 1935, the latter year not being before us. It seems apparent that in fact he never parted with title to and the right to possession of that part of the property represented by this salvage and, therefore, that his loss was instantly diminished by this amount. We have, therefore, allocated it among the buildings lost in proportion to their depreciated bases. Thus $3,208.52 of it must be deducted from the loss suffered in 1933 and $16,791.48 in 1934. Although this is obviously an approximation, there is no other basis in the record for the allocation which it is our duty to make. See ; In determining the depreciation allowed on the buildings which were lost, which must be deducted in determining the loss allowable, no one source of evidence was complete. We have, therefore, used variously the depreciation actually allowed, that specifically admitted by petitioner1059 in his returns, and that resulting from the rates of depreciation claimed and apparently allowed in almost all of the petitioner's returns in evidence. None of these figures appear to be less (although they might possibly be more) than the depreciation properly allowable, which fulfills the requirement of the statute concerning adjustment of basis. 1 We have thus deemed it proper to approximate in certain instances the depreciation allowed rather than let the entire claim fail. As to the second issue, the claim for additional depreciation, the contention advanced by petitioner is that certain of his depreciable real property was not included in the depreciation figure appearing in his 1933 and 1934 income tax returns. Petitioner has not established that any identified pieces of property were omitted from the properties comprising the total valuation on which depreciation was claimed in his 1933 and 1934 returns. He claims a higher depreciation basis for the property as a whole than that used in his returns. Even if the evidence be said to establish such a basis, in no instance is1060 there any testimony regarding the remaining useful life of the properties at the time of acquisition or in the tax years, and in only a few instances can the amount of depreciation already allowed be ascertained. *334 Nor can these facts be deduced from other sources of evidence, since the latter are not sufficiently detailed and no correlation was attempted in the testimony. There was not even any categorical testimony of proper depreciation rates on the various types of property. The facts omitted are vital to computation of a proper depreciation allowance and, therefore, petitioner's claim on this point must fail. Regulations 77, art. 205; Regulations 86, art. 23(1)-5; . Decision will be entered under Rule 50.Footnotes1. Combined cost of lot and building. ↩1. Sec. 113(b)(1)(B), Revenue Acts of 1932 and 1934. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620192/	CONSTANCE MCCORMICK, THE DULY APPOINTED AND QUALIFIED EXECUTRIX UNDER THE LAST WILL AND TESTAMENT OF L. HAMILTON MCCORMICK, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McCormick v. CommissionerDocket No. 88951.United States Board of Tax Appeals38 B.T.A. 308; 1938 BTA LEXIS 886; August 10, 1938, Promulgated 886 Where the decedent, dying in 1934, had made a transfer in trust in 1923, when he was 63, by which about 50 percent of his estate was set aside for the benefit of his wife and three sons, in order to make them financially independent and reduce his own income taxes; held, that contemplation of death may not be inferred from these circumstances as the impelling cause of the transfer, under section 302(c), Revenue Act of 1926, especially since the only motives evident were associated with life and not with death; held, further, that where the Commissioner affirmatively pleads a new issue, the burden of proof rests upon him. J. Francis Dammann, Esq., and Stuart J. Templeton, Esq., for the petitioner. R. F. Staubly, Esq., for the respondent. KERN 308 OPINION. KERN: This proceeding arises on respondent's determination of a deficiency in Federal estate taxes of $247,200.86. Part of this deficiency has been consented to by the petitioner. Under the original determination respondent included in the gross estate only one-half of the corpus of the trust created by decedent on April 28, 1923, the portion set aside for the decedent's wife, 887 on the ground that it was a transfer intended to take effect in possession or enjoyment at or after death under section 302(c) of the Revenue Act of 1926, set out in the margin. 1 Conceding now, however, that there 309 are no grounds for such an inclusion under the Supreme Court's construction of the provision applied in ; and that the section of the 1926 Revenue Act, as amended by the Joint Resolution of March 3, 1931, can not be applied retroactively, ; respondent in his amended answer pleads affirmatively that the whole trust corpus is includable as having been transferred in contemplation of death, and in his brief relies solely on this ground. 888 The burden of proof of the issue which respondent has affirmatively raised rests, of course, upon him. ; , see page 10. The facts were stipulated, the original trust instrument, its amending instrument, and decedent's will being entered under the same stipulation, and are incorporated here by reference. We need do no more than relate those facts which are material to decision of the case. On April 28, 1923, decedent made a transfer in trust for the benefit of his wife and children, and a year and eight months later, on December 29, 1924, amended it. Its significant provisions will be set out hereinafter. The corpus consisted of property which decedent had received from his father through a spendthrift trust terminating in 1920, and had a value at the time of decedent's death of $1,118,611.45. Decedent died on February 2, 1934, at the age of seventy-four, survived by his widow, then sixty-eight, and three sons, aged forty-six, forty-five, and forty-two, respectively. At the time of the transfer decedent was sixty-three, and, in the889 words of the stipulation, * * * was in good health for a man of his years. The execution of the trust was not prompted by a condition of body or mind which would have led him to believe that death was imminent or near at hand. * * * The decedent's wife prior to April, 1923, had no independent means, and, although all his children were adults, the decedent had been in the habit of contributing substantial amounts to their support yearly. Decedent transferred certain property to his wife in trust, dividing the fund into four trusts, one-half for the benefit of his wife and one-sixth each for his three sons (art. 3), the net income from each trust being paid over to the beneficiaries or to their issue, but the amount was to be limited to specific sums if there were any outstanding encumbrances on the trust property, the balance of the income being applied in discharge of the encumbrances (art. 4). Some check was retained by the settlor in the original trust instrument over payment of part of this residue to his wife, but his power was removed by the amendment of December 29, 1924. The trust was to 310 terminate upon the death of the last survivor of the settlor and890 his beneficiaries (art. 5), but this provision was changed by the amendment of 1924 so that the death of the last survivor of the beneficiaries should terminate the trust. On termination the principal was to be distributed to the beneficiaries' heirs of the body, with a gift over to charity on default of issue. Amendment or cancellation of the trust could be effected by any four of the five persons constituting the settlor and the beneficiaries or their representatives (art. 6), but this was also altered by amendment so as to deprive the settlor of any power to amend. Other provisions are not here pertinent. The stipulation continues: The declared purposes and intentions of the decedent in making the trust agreement were: (1) to provide for his wife and his three sons independent yearly incomes, and for the purposes otherwise disclosed by the context of the trust deed; and (2) to reduce his own income taxes. Income was in fact accumulated by the trustee, the amounts being stipulated; and the Federal income taxes of the settlor were in fact materially decreased after the transfer in trust, the sums paid by the settlor and the beneficiaries both before and after the transfer891 being stipulated. Decedent by his will left certain Chicago real estate to his wife, and transferred all the residue of his estate to his wife and three sons in trust for their benefit. On these facts respondent grounds his contention that the trust transfer of 1923 was made in contemplation of death. The contention rests apparently on what is urged as a necessary inference from the facts, that decedent was sixty-three at the time of the trust transfer, and thereby parted with approximately 50 percent of his estate to the natural objects of his bounty. Certain special considerations urged by the respondent, based on provisions in the original trust indenture by which the settlor retained control over the income, are inapplicable in view of the amendment of a year and a half later by which the settlor divested himself of all power. But even if these provisions had been retained they would not affect the question in issue. There is no question of a transfer made after the effective date of the Revenue Act of 1926, and within two years of death, as to which a rebuttable presumption of contemplation of death may be raised, section 302(c). On the contrary, as we have said, respondent892 has the burden of proof, and his contention amounts to little more than that we should infer that contemplation of death was the impelling cause of the transfer from certain merely evidentiary facts, such as decedent's age, the amount of the trust fund, and the relation to him of the beneficiaries. This we can not do, and it does not require extended discussion to state the reason why. 311 In , the Supreme Court said: * * The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. Death must be "contemplated," that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * * The question, necessarily, is as to the state of mind of the donor. * * * * * * Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer. The words "in contemplation893 of death" mean that the thought of death is the impelling cause of the transfer, * . If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. * * As illustrating transfers found to be related to purposes associated with life, rather than with the distribution of property in anticipation of death, the Government mentions transfers made "for the purpose of relieving the donor of the cares of management or in order that his children may experience the responsibilities of business under his guidance and supervision." * * * These passages have become the locus classicus on the subject, and are quoted (in part) with approval by the Supreme Court in . The situation in the Wells case involved gifts by a father to his children, which the Court thought, despite the fact that the decedent was then in his seventies, were made to afford his children independence and to give them experience in the handling of money, motives associated with life and894 not with death. In the St. Louis Union Trust Co. case, supra, the Supreme Court said: * * The Circuit Court of Appeals reached the opposite conclusion. It found on the evidence that the decedent, in making the trusts, was actuated by two motives: (1) To make his children independent; (2) to avoid high surtaxes on his income; and that both of these motives were associated with life. Evidence that the decedent was in any way influenced in what he did by the thought of death, that court said, was entirely lacking. It is true that the decedent at the time of making the trusts was 76 years of age. But the evidence shows clearly that he was in excellent health, attending regularly to business, apparently was not looking forward in any way to his death * * . This beneficiaries were all past 21 years of age, and the record shows only that the grantor's objects were to make them allowances in order to get rid of the nuisance of treating them as children, make them independent so they would know what they were to get each year, and, as he had ample income of his own, to avoid the high surtax and make each of his children pay a tax on the independent income received. 895 We are unable to find anything in the record which conflicts with the statement of the court below that evidence that decedent was in any way influenced by the though of death was wholly lacking. * * * 312 The circumstances afforded by these two cases parallel to those of the instant case need no further emphasis, and citations need not be multiplied. Neither the motive of providing independent incomes for his wife and sons, nor that of reducing his income tax, cf. , indicate in any way that the decedent's thought of death was the impelling cause of the transfer. We hold, therefore, for the petitioner. Decision will be entered under Rule 50.Footnotes1. SEC. 302. The value of the gross estate of the decedent shal 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 at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620193/	ANTHENAGORAS I CHRISTIAN UNION OF THE WORLD, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAthenagoras I Christian Union of World, Inc. v. CommissionerDocket No. 18744-86X.United States Tax CourtT.C. Memo 1988-196; 1988 Tax Ct. Memo LEXIS 224; 55 T.C.M. (CCH) 781; T.C.M. (RIA) 88196; May 4, 1988. Robert Bouchlas (a director), for the petitioner. Julie M. T. Foster, for the respondent. POWELLPOWELL, Special Trial Judge:1 This case is before the Court on petitioner's petition for declaratory relief under section 7428. 2The facts are as follows: Petitioner was incorporated as a "corporation not for profit" under the laws of Florida on February 10, 1978. The articles of incorporation provide that the general nature of the corporation is "to promote226 brotherly love and Christian unity among all churches, one flock under one shepherd." Thomas BouchlasPresidentClearwater, FloridaJohn AthasVice-PresidentClearwater, FloridaJames AndersonTreasurerClearwater, FloridaRobert BouchlasSecretaryWest Palm Beach,FloridaThe directors were the same individuals. The subscribing incorporators were Peggy Parker, Barbara Nichols and Marion Parker. Their address is shown as 216 South Duval Street, Suite 208, Tallahassee, Florida. The articles could be amended by three-quarter vote of the "members." The membership was defined as "all persons hereinafter named as officers and directors and such other persons as from time-to-time may become members by volunteering his services and believing in the long term goal of the organization and pledging allegiance to the organization." [Ex. 6-F.] The directors were authorized to "provide such Bylaws for the conduct of business * * as they may deem necessary from time-to-time." The "Bylaws may be amended, altered or rescinded by a three quarters vote of the members * * ." The corporation's principal place of business was 4414 Washington Road, West Palm227 Beach, Florida 33405. This was also the address of Robert Bouchlas. On February 10, 1978, Robert Bouchlas and his wife, Lois, donated all the common stock in Eco-Tec, Inc. to petitioner. Eco-Tec was a for-profit corporation that apparently either conducted or attempted to conduct salvage operations under contract with the Bahamian government. On December 26, 1979, Robert Bouchlas executed a deed in which he purported to transfer the 4414 Washington Road property to petitioner. The deed provided that: In the Event of Disolvement or Abondonment of Corporation Full Title to revert to the LIFE ESTATE of Robert and Lois Bouchlas; Both or Singlelarly, survivorship of them * * * [thereafter, to his heirs]. [Reproduced literally.]The deed states that the property is subject to a $ 30,000 mortgage deed executed on April 20, 1978, to Katina Bouchlas. The deed also purports to restrict any alienation of the property. The Bouchlases also conveyed their automobile and a car to petitioner during 1979. The Bouchlases resided in the house throughout. They paid no rent. On their 1981 and 1982 Federal income tax return, the Bouchlases claimed deductions for charitable228 contributions based on the transfer of the Washington Road property. On July 22, 1980, petitioner filed an Application for Recognition of Exemption (Form 1023) with the Internal Revenue Service. On the application petitioner stated that its sources of income were (1) "Book Copyrights" and "Other Media Publications"; (2) "Lease holdings, marine; Bahamas Government; Treasure-Archiological Trouths"; (3) "Unsolicited Donations". (Repro. lit.) The application was incomplete and most of the application was unintelligible. On September 9, 1980, respondent wrote petitioner requesting additional information, inter alia (Ex. F): 1. A proposed budget for two years 2. A description of past, present and proposed activities 3. Copies of pamphlets and newspaper articles concerning petitioner 4. Number of members 5. Information concerning Eco-TecThe letter also informed petitioner that its organizational instrument did not provide a proper provision for the distribution of assets upon dissolution. By letter dated September 15, 1980 (Ex. GA), petitioner stated that it had no budget or income projection. With regard a description of activities, petitioner stated: "We229 are writing religious materials. Enclosed * * * Not published, only prepared to date. Evangelizing; Preaching. * * * Thru Book publication promoting Christian Unity because of World Times and Future War, which has begun. Russia will move on Israel before March, 1981." (Repro. lit.) Petitioner also enclosed, inter alia, various letters written to and from public agencies and church officials concerning a proposal to retrieve a satellite or meteorite and the ecological, political and religious concerns of Mr. Bouchlas. As to membership, petitioner stated "Six active Directors legaly to date -- All others are invited after total organizational patterns are implemented." (Repro. lit.) With regard to Eco-Tec, petitioner stated "Only its account priviously stated -- and Bahamas lease. no Eplmt." (Repro. lit.) (Ex. G-a.) Petitioner also enclosed a copy of a letter (Ex. GF) to the Secretary of State of Florida that stated: Please have the Corporation Division amend our Corporation Document to have a dissolution Clause that reads as follows: In Accordance with Article IX & VIII, as approved 3/4 vote; special meeting, By-Laws."In the event of dissolution, residual assets of230 the above organization will be turned over by the Secretary of A.C.U.W. Inc the Corporation, Robert Bouchlas, a/k/a/ HARA LAMBOS; by His hand, to the exempt organizations, which in themselves, are named now, Monastery-Churches and organization; described in sections 501 (c) (3) and 170 (c) (2) of the Internal Revenue code of 1954 as qualifying Organizations to wit: Organization - St Vincent De Paul 85% of Cash residual Bank Accounts or Computer Credit. This Only. To be given to Poor & needy; no administration. * 15% To be given to all creditors claiming indebtedness toward Corporation, or held in escrow by jurisdictional court, local Judge, to discharge any claim having come forth for any reason. Judge named by surviving Director or Directors of Corporation. If none, then to exempt Church Charitys by Judge. * Boat Donated, formerly known as "Independent"; Artifacts valuable or otherwise; writings, letters, documents, agreements, any legal papers, Books, ships furnishings or movable household goods so deemed to be given to Saint Catherines Monastery at Mount SINAI, Sinai Peninsular, Israel-Egypt, Middle East, Which will be delivered by Haralambos P. Panagakos, 231 Physically & himself (2) with aid, to this Greek Orthodox Autocephaleous, Christian Church, only unto itself at Mt. Sinai. Property now donated to be discharged as described on deed. If no named survivors as stated, Deed to St. Catherines Monastery at Mt. Sanai and no other." "WE PRAY THIS THE LORD'S WILL BE DONE". * * * [Reproduced literally.] On December 2, 1980, respondent requested the following information (Ex. I): a) Please list, in order of priority, the activities which are to be covered under tax exempt status. Include where the activity is conducted, who conducts it and how it is financed. Please keep in mind that only those activities listed will be covered should you receive tax exempt status. b) Because you were incorporated in February of 1978 please provide a schedule (list) of income received by Athengoras [sic] and expenses that it incurred. Your accounting period ends Dec, 31 so the periods you need to account for are (1) Feb. 10, 1978 - Dec. 31, 1978; and (2) January 1, 1979 - December 31, 1979. (Please be sure you specify the sources of income such as contributions funneled through Eco Tec.) If you have received funds this year, please prepare232 a schedule of those sources. c) What assets does Athengoras [sic] currently own? d) Is Athengoras [sic] retaining all royalty and copyrights of the books being published?Petitioner responded:15 a. Activities:WHO:WHERE:1. Religious Writing & Book Publications. Ed Hampson, Roubert Bouchlas.Offices. HOW: Financed by Donations, Sales on Book, Royalties and Advertizements.2. Vessel "Independent" used exclusive for Evangelizing. All Directors involved. In Florida waters primarly. Donations and contributions-Materials and Labor.3. Bahamas Expedition. Subcontracted to Exp. Unlmtd. Inc. to conduct Salvage under Lease, on Wreck Site.Indpt. Salvor finances self.pays all their own. Athenagoras ONLY Interest are Golden Madonna & Christ Statue,as well as VERIFYCATION of religious history, which will appear in Next Book -- Titled "THEOU THALASA" (GOD'S OCEAN) by Hara/Lambas-a/k/a/(Robert Bouchlas) Psydn.Name.4. Preaching Prophesy: Robert Bouchlas & All Directors, Donations.U.S.A. & Israel.5. Office-Sanctuary-4414 Washington Rd. West Palm Beach, Fla. Donations. All Directors15b. All233 of Eco-Tec inc. was priviously included & described on Page#5 Part V-Financial Data Form, original applic. Feb. 1978-80 Feb. 1980-till Dec.1980 are as follows Tru Ecotec Only:Donations to Eco-Tec Inc for Expenses to operate Office, Boat Travel & car exp.DONATIONExpedition Unlimited Inc-500.00Sam Bouchlas Landscape-1105.00Robert Bouchlas-1000.002605.00NONE (Finances Thru Athenagoras) Will Commence January 11980 with all Finances funneling Thru Athenagoras Christian Bank accounts. Will Close all Business With Eco-Tec Inc. and Let Corp. Dissolve through StateProcedures.15c. ASSETS:1974 Cadillac Pick-Up Truck Office-Retreat-Sanctuary 4414 Washington Rd. West Palm Bch. Boat 1924 Fishing boat converted for Floating CHAPEL. All Stock of Eco-Tec Inc. fla. profit corp. converted. to Function for A.C.U.W.INC. only.15d. YES All Matters of Monetary Value in ALL PROJECTS. No income to any Directors for any Projects. Only Expenses in keeping with I.R.S. CODES to E/O. [Reproduced literally.] Respondent, on March 27, 1981, wrote petitioner (Ex. L) that "the information * * submitted has not provided sufficient234 details to conclude that "petitioner meets the requirements to be exempt under section 501(c)(3). "It is, therefore, requested that you operate for a period of one year to establish a more specific program of operations." Petitioner requested a conference with the Appeals Staff. On April 3, 1981, petitioner transferred one-half the stock in Eco-Tec back to Robert Bouchlas and purported to give Mr. Bouchlas voting rights over the remaining stock. After a conference, on December 9, 1982, with the Appeals Officer, petitioner's application was returned to the District Director for forther consideration. Respondent then requested: 15. We have received your file from the Regional Appeals Officer. At the appeals conference, it was brought out that you were currently engaging in the following activities;(A) A museum;(b) A sanctuary;(c) A daily religious radio program(d) Museum display at Flagler Museum;(e) A counseling ministry;(f) Personal Evangelism;(g) A retirement home; and (h) Publication of a book entitled, "Gods Ocean". With respect to each activity listed above, please provide a narrative description as to how you are involved. 16. If you are operating235 as a church, please provide the information requested by the attached sheet entitled "Churches." 17. Please submit financial statements for the years ending Dec. 31, 1981 and 1982. This should include a statement of receipts and expenditures and balance sheets. 18. With respect to your cook "Gods Ocean", indicate who will hold the copyright and receive royalties. 19. Indicate whether the salvage operation in the Bahamas is still in effect. 20. Information in the file indicates that the Bouchlas family resides on property transferred to you by the Bouchlas family. Please describe this arrangement, whether rent is paid by you, whether it is used rent free, who is responsible for upkeep, etc.Petitioner responded: 15. a. Public display that was exhibited at Flagler museum, which is being shown to Mentally disturbed children, others for counciling purposes; Using the display as an Educational visual tool, preaching the principle aspects of the Gospel of Jesus Christ. Publically, by appointment or invitation. b. We have alters and pray with those who come in need, and seek Christian counciling . . . Usually by references, of those who have Past found refuse236 and support by our ministry of healing and deliverance. c. This has been discontinued, at this time. We are seeking support from the Moody Bible Institute for a future opportunity to air on WORMB FM 89 Boynton beach, and have appointment on Approx. Feb 7, for this purpose. (Manager Dick Florence). d. This was terminated by the Flagler Museum May 1, 1982 after the four month showing . . . (one normal agreed season). e. We one on one counsel any Christian who needs a better understanding of Holy Scripture, Himself in relationship to Christ, and the need for prayer, Healing, such as Alcoholic sickness, or attitudes the individual seeks personal prayer . . . All unsolicited, but come to us by those GOD sends, or referal of other Christians (All or any mainline Denominations,) recognized as religious Institutions of Christianity of the IRS CODES. NO OCCULT OR CULTS INVITED OR PERMITTED THRU OUR DOORS. f. Our entire thrust is designed to Evangelism. Books, Radio, Tapes, Counseling, Bible study, Retreat, Sanctuary, Museum, to Jesus Christ' KING JAMES 1979 version of the four Gospels of Matthew, Luke, Mark and John, depicting Our LORD'S Ministry to the World. 237 f. We did not engage, due to Zoneing laws a retirement home; We did however, by permission of City codes engage in opening our retreat to Christians in need to live here and aid and donate Time and Money to this Ministry. We have three Ladies now living here as such. h. Has not due Literary agent not being decided upon, at this time, been considered for publication. Will decide in future best course to pursue for best exposure to target audience, and revenues to aid our Evangelical programs. * I personally am the main thrust of involvement in all of the above because of my PERSONAL 100% commitment to do so for OUR LORD (1978). Our Other Directors are interested and do advise and aid, by time or money, or efforts, and prayers. They have other secular, religious activitys that require most of their attention, yet recognize my full time participation in activitys of this ministry, which IRS has been informed, in each and every case; yet deny this ministry NOT, when ever called upon; we never measure their contribution. 16. We are not operating as a church, only because zoneing will not permit it and we would then be in legal violation of West Palm Beach Codes. We, however, 238 conduct a weekly Bible Learning class 7:30 to 9:00 Tuesday evenings, as well as individual instruction as needed. . . . Yet we pray and are a Church as defined by Holy Scripture . . . The Body of Christ . . . " Ecclesia" . . . Assembly of Believe. 17. 1981 Financial statement enclosed . . . 1982 will not be prepared until after Feb. 10 th 1983, for preparation to file IRS Return by April 1983. 18. All Copyrights are to be Held by this NON/Profit Organization unless declared not eligible by IRS to be Tax exempt or is disolved, then all rights would be transfered to the life/estate of Robert Bouchlas, or items so specified, on file IRS as "disolutionment Claus," original minutes of Corporation. 19. The salvage operation is not in affect, nor the Bahamian lease active. However, we wish to divest ourselves entirely of all artifacts, wether valuable or nor are returning all intrinsic items to the Govt. of Bahamas for division as per their instructions, as they were on loan. We may, however, recieve donations, from others * * who may proceed with the project, making separate agreements with the Bahamiam, as Individuals, * * * who have promised239 to donate only to our cause and Non/Profit Religious activitys of Ministry. No one or Directors of our organization is a part of any future endeavor. Exception Eco Tec Inc. and Robert Bouchlas individually to protect past investments owned by them, yet donated. 20. All monies recieved for occupancys of any kind are deposited in the sole accounts of the Christian Organization as a donation to the organization, to support the Evangelical Ministry, Repairs to structure, Utilities, any cost incurred by Ministry and so specified by DEED on file in your IRS EO/EP offices. The structure has no mortgage. ALL PAY according to the projected needs as the ministry sees its needs . . . This has only begun recently but may be verified by contacting IRS West Palm Beach who has inspected Physically Sq. Ft. occupancy by all, includ- Mr. Bouchlas and Wife only, as well as others, (Wayne Jackson IRS EXAMINER Tel # 305-8334551 WPB, Fla.) Mr. Jackson gave us a clean bill of health in regards to our activity, as well as financial propietys. If so necessary Mr. & Mrs Bouchlas would move out, if so designated by IRS code. It is a convienience and Money saver to the organization to have240 a free Resident Mgr. (Mr. Bouchlas) to supervise the Retreat. We have an "OPEN" door policy for Christians in need, to remain here to be ministered to, Bring to Christ, Teach, heal, Pray for, yet must ernestly SEEK HELP, not a place to live. Utilities in the past have been paid by R. Bouchlas & Wife. [Reproduced literally.]On April 13, 1983, respondent notified petitioner (Ex. X): You were created to promote brotherly love and christian unity among all churches. This is broader than the purposes permitted by section 1.501(c)(3)-1(b)(1)(iv) of the income tax regulations. Your assets are not dedicated to an exempt purpose as required by regulations 1.501(c)(3)-1(b)(4) since they would revert to the life estate of Robert Bouchlas. The car, boat, copyrights and other assets would become the property of your Articles of Incorporation. The residence becomes the property of Robert Bouchlas as stated in the Warranty Deed. Therefore, you fail the organizational test required by regulations 1.501(c)(3)-1. You fail the operational test required by regulations 1.501(c)(3)-1 because you are operated for the private benefit of Robert Bouchlas. 241 You are providing a residence for the Bouchlas family which will revert to Robert Bouchlas upon dissolution. You have not shown that the residence is used for substantial exempt purposes other than having an altar for prayer, conducting a weekly Bible Study and a place for persons in need of a place to stay until they can find a home. You state that you are not operating as a church. You have not shown that your activities serve a public rather than a private interest as required by Regulations 1.501(c)(3)-1(d)(1)(ii). You have not shown that you are engaged primarily in activities which accomplish one or more exempt purposes as required by section 1.501(c)(3)-1(c)(1) of the regulations. On May 11, 1983, Robert Bouchlas filed a "Corrective Warranty Deed" relating to the 4414 Washington Road property. The deed provided: 3Dissolutionment of Grantee: to b St Michael' Chapel-church of the Greek Pan Orthodox Church of Canada & America for Christian religious purposes and Retreat for Christians thruout all Tribulation, Forever. This mainline Religion is under the Eclessiastical jurisdiction of the Patrichate of Alexandria and no other. Upon dissolutionment St. Michael's Chapel242 to be St. Catherine's Greek Orthodox Monestary at Mt. Sinai, Egypt. ALL OTHER ORIGINAL COVENENTS ARE RECOGNIZED AND NO VERIFIED IT GRANTOR This Corrective Warranty Deed is being recorded solely for the purpose of eliminating any reference to a life estate and eliminating and voiding the intent of the life estate as in Deed recorded in Official Record Book 3200, Page 1386, recorded Dec. 26, '979, Public Records of Palm Beach County, Florida John B. Dunkle, clerk Circuit Court. [Reproduced literally.] The St. Michael's Chapel (also called St. Michael's Chapel -- Elijah Ministry) of the Greek Pan Orthodox Church of Canada and America is a creation of Robert Bouchlas. On February 6, 1986, petitioner purportedly amended its Articles of Incorporation: We have a dissolution clause that reads as follows: 243 In Accordance with Aticle IX & VIII, as approved 3/4 vote; special meeting.By Laws."In the event of dissolution, residual assets of the above organization will be turned over by the Secretary of A.C.U.W. Inc. the corporation, Robert Bouchlas, a/k/a/ HARA LAMBOS; by His hand, to the exempt organizations, which in themselves are named now, Monastery-Churches and organizations; described in sections 501(c) (3) and 170 (c) (2) of the Internal Revenue code of 1954 as qualifying organizations to wit: Organization-St. Michael Chapel: W.P.Bch., Fl. 85% of Cash residual Bank Accounts or Computer Credit. This Only.* 15% To be given to all creditors claiming indebtedness toward Corporation, or held in escrow by jurisdictional court, local judge, to discharge any claim having come forth for any reason. Judge named by surviving Director or Directors of Corporation. If none, then yo exempt Church Charities by Judge. * Boat Donated, formerly known as "Independent"; Artifacts valuable or otherwise; writings, letters, documents, agreements, any legal papers, Books, ships furnishings or movable household goods so deemed to be given all to St. Michael Chapel W. 244 P.Bch., Fl. 33405, U.S.A. and if ever needed to Saint Catherines Monastery at Mount Sinai, Sinai Peninsular, Isreal-Egypt, Middle East, which will be delivered by Haralambos F. Panagakos, physically, One & himself, (2) with aid, to this Greek Orthodox Autocephaleous, Christian Church, only unto itself at Mtl Sinai. Property now donated to be discharged as described on new corrective warranty deed, Feb. 1, 19985. If no named survivors as stated, deed to St. Catherines Monastery at Mt. Sinai and no other." [Reproduced literally.] Petitioner requested a hearing with respondent's Regional Director of Appeals. On November 6, 1984, petitioner informed respondent that it "is not a church." * * * It is a religious educational institution, using its museum as a vehicle to propogate the purposes of the organization. The purposes of the organization are as set forth in its By-Laws, a copy of which was previously submitted. In the past, some religious activity had been carried out, however, that was discontinued in 1983. Please see enclosed copy of a resolution adopted by the Directors on October 11, 1984. b. St. Michaels Chapel - Elijah Ministry, is a church. This church245 was established on March 17, 1983. It is a separate entity and not a part of Athenagoras, although it supports the aims and goals of that organization. St. Michaels Chapel - Elijah Ministry, has applied for church affiliation with the Full Gospel Fellowship of Churches and Ministers International, which has a Fellowship group ruling. Please see enclosed copy of the St. Michaels Chapel - Elijah Ministry Declaration of congregational organization as well as a copy of application for church affiliation. The administrative record is replete with various newspaper articles about Mr. Bouchlas, correspondence and other memoranda authored by Mr. Bouchlas. The subjects of these documents range: salvage operations in the Bahamas, the religious beliefs of Mr. Bouchlas, international relations with the Soviet Union, draft of a novel written by Mr. Bouchlas. On May 6, 1986, petitioner was advised by respondent that it would not be recognized as an exempt organization because it did not meet the "organizational test" contained in section 501(c)(3) because (1) the articles of incorporation do not contain a proper dissolution provision and (2) the organization serves the interest of Mr. Bouchlas246 and his family. Respondent also concluded that petitioner had failed to establish that it satisfied the "operational" test. Petitioner filed a petition with this Court on June 9, 1986. That petition to a great extent was unintelligible. The petition was styled "Athenagoras I Christian Union of the World, Inc. and Robert Bouchlas." Respondent timely filed motions for a more definite statement and to change the caption by striking Robert Bouchlas as a petitioner. We granted both motions. Robert Bouchlas then moved to join in the proceedings and that motion was denied. On October 14, 1986, petitioner filed an amended petition. Respondent filed an answer. The administrative record was filed and briefs of the parties were submitted. OPINION Section 7428(a) provides, inter alia, that in the case of an actual controversy involving respondent's denial of recognition of an "initial qualification * * * of an organization * * * described in section 501(c)(3) which is exempt from tax under 501(a)" upon the filing of a petition the "Tax Court * * * may make a declaration with respect to247 such initial qualification * * ." In Houston Lawyer Referral Service v. Commissioner,69 T.C. 570">69 T.C. 570 (1978), we reviewed the scope of our review of respondent's action and held (supra at 573): In the final analysis, this Court's function under section 7428 is to resolve disputes as to the legal issues raised by the Internal Revenue Service's denial of an exemption ruling on the basis of uninvestigated statements of facts submitted by the taxpayer in its ruling request and related papers.Under our rules, our disposition will ordinarily be made on the administrative record, and petitioner has the burden of proof to show error in the grounds set forth in respondent's determination. Rules 217(a) and 217(c)(2)(i); Basic Bible Church v. Commissioner,74 T.C. 846">74 T.C. 846, 854-855 (1980), affd. sub nom. Granzow v. Commissioner,739 F.2d 265">739 F.2d 265 (7th Cir. 1984). 248 Section 501(a) provides that an organization described in section 501(c) shall be exempt from taxation. Section 501(c)(3), upon which the claimed exemption here is based, describes, inter alia, corporation "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes * * no part of the net earnings of which inures to the benefit of ay private shareholder * * * ." The regulations under section 501(c)(3) must be "organized and operated" for the purposes listed above and must serve "public rather than private interest," and "it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family * * * ." Sec. 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs. Thus, essentially there are two tests: petitioner must establish that it is organized and operated for exempt purposes. Bubbling Well Church of Universal Love, Inc. v. Commissioner,74 T.C. 531">74 T.C. 531, 534 (1980), affd. 670 F.2d 104">670 F.2d 104 (9th Cir. 1981). As an initial matter, it is totally unclear to249 us what type of exempt purpose petitioner claims. At first, it appears that petitioner claimed to be a religious organization; in other documents, however, petitioner rejected that characterization and indicated it was an educational institution. The amended petition states: The petitioner hereby states it is a "Religious Institution", as stated, and operates as an educational, non profit corporation, Press publishing company, and Ecclesia Christian Biblical activitys. [Reproduced literally.] While we have strong reservations concerning the nature of petitioner, we do not believe that is is necessary (or, perhaps, possible) to clarify and classify petitioner's activities. Respondent determined that petitioner was neither organized nor operated as a tax exempt organization. We do not find that respondent's determination as to these tests was incorrect. ORGANIZATION Section 1.501(c)(3)-1(b)(4), Income Tax Regs., provides: (4) Distribution of assets on dissolution. An organization is not organized exclusively for one or more exempt purposes unless250 its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, be reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. * * While we are uncertain as to the legal effect of the various purported amendments to petitioner's Articles of Incorporation, if we give effect to the last amendment, upon which petitioner relies, a substantial part of the assets of petitioner, upon dissolution, would be turned over by Robert Bouchlas to "St Michael Chapel: W.P.Bch., Fl." and "Saint Catherines Monastery at Mt. Sinai, Sinai Peninsular, Israel-Egypt, Middle East." The record contains little information concerning St. Michael Chapel. On November 5, 1984 Mr. Bouchlas wrote to respondent (Ex. AJ): b. St. Michaels251 Chapel - Elijah Ministry, is a church. This church was established on March 17, 1983. It is a separate entity and not a part of Athenagoras, although it supports the aims and goals of that organization. St. Michaels Chapel - Elijah Ministry, has applied for church affiliation with the Full Gospel Fellowship of Churches and Ministers International, which has a Fellowship group ruling. Please see enclosed copy of the St. Michaels Chapel - Elijah Ministry Declaration of congregational organization as well as a copy of application for church affiliation. [Reproduced literally.]The address for St. Michael Chapel is 4414 Washington Road, West Palm Beach, Florida. That is the same address given for petitioner and Mr. Bouchlas. All records of St. Michael Chapel appear to have been created and/or executed by Mr. Bouchlas. There is no information concerning St. Catherine's Chapel. Thus, as far as we can determine, if petitioner were dissolved, its assets would be controlled by Mr. Bouchlas without any meaningful restrictions. Respondent concluded that these entities did not satisfy the dissolution requirements of section 1.501(c)(3)-1(b)(4), Income Tax Regs.252 There is nothing in the administrative record that would lead us to a different conclusion. Compare Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1002-1003 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). OPERATIONAL TEST For our purposes here, the essence of the so-called operational test is whether petitioner serves a public rather than a private interest. Sec. 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs. We have examined the various documents submitted by petitioner that are in the administrative record. It is quite clear that petitioner was created to serve the private interest of Robert Bouchlas. Indeed, this is the only explanation for the vacillating nature of petitioner's stated activities. As the interest of Mr. Bouchlas changed, so changed the nature of petitioner's activities. These interests ranged from salvage operations in the Bahamas to international politics. While there may be some cosmic relationship between these interests and public interests, that relationship is too far attenuated to satisfy the public-interest253 requirement of section 501(c)(3). Moreover, it is quite clear that the use of petitioner's assets, primarily the house on 4414 Washington Road, inured to the benefit of Mr. Bouchlas and his wife. Decision will be entered for the respondent.Footnotes1. This case was assigned pursuant to the provisions of section 7456(d) (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rule 180 et seq. ↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, and as in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise provided. ↩3. Of passing interest, the 1979 deed provided that the remainder, after the life estates, would go to the specified heirs of Robert Bouchlas. They did not join in this deed. Also the 1979 deed provided a life estate for Mrs. Bouchlas, and she did not join in the so-called corrective deed. At some time these problems must be unraveled, but we need not do so here.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620194/	Marian Henderson Macomber v. Commissioner.Macomber v. CommissionerDocket No. 28266.United States Tax Court1951 Tax Ct. Memo LEXIS 208; 10 T.C.M. (CCH) 539; T.C.M. (RIA) 51167; June 6, 1951William M. Brinton, Esq., for the petitioner. Charles W. Nyquist, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The Commissioner has determined that Leroy Macomber, deceased, made a gift of real property to the petitioner in 1944, and that there is liability for gift tax in 1944 with respect to the gift in the amount of $12,275.49 which was not paid by Leroy Macomber or his estate, and that the petitioner is liable for the gift tax deficiency as donee and as transferee of the property under sections 1009 and 1025 of the Code. The petitioner contends that no gift of the property in question was made to her in 1944. Findings of Fact We find as facts the facts which have been stipulated. The petitioner is the widow of Leroy Macomber, hereinafter referred to as Macomber, 209 who died on December 4, 1944, in San Francisco, California. At the time of his death, he and the petitioner were separated, and the petitioner resided in Pasadena, California. The petitioner was appointed the executrix of Macomber's estate. The administration of the estate was closed in February of 1949. The petitioner and Macomber were married in 1921. They lived in California prior to 1934 when they moved to Seattle, Washington. Macomber continued to reside in Seattle in 1944. The petitioner returned to California in 1940. During the administration of Macomber's estate, the petitioner, as executrix of the estate, gave a limited power of attorney to several lawyers, one of whom, Riese, was a Seattle lawyer, who is referred to hereinafter. At some time prior to 1934, property was acquired in Contra Costa County, California, near the town of Danville for a home site, which is called hereinafter the Danville property. Title to the property was taken in the name of Macomber. The petitioner and her husband lived on the property before they moved to Seattle. After they moved away from the property, it was rented. On or about February 24, 1934, Macomber executed a "Gift Deed" conveying210 the Danville property to the petitioner. He acknowledged execution of the deed before a notary public of King County, State of Washington, on February 24, 1934. Macomber delivered the deed to the petitioner, and she placed it with her personal belongings. Later, she placed it in a safety deposit box. When she returned to California to live, she took the deed with her, and it was in her possession in 1943. However, the deed was not recorded prior to 1943. The petitioner received the rents from the Danville property, which she deposited in her own bank account and from which she paid the taxes on the property. During the period from 1940 through 1943, the domestic relations of the petitioner and Macomber were strained, and in the early part of 1943 there were discussions and negotiations about a separation of the parties and the making of a property settlement among the petitioner and her lawyer and Macomber and his lawyer. The petitioner's attorney learned that the 1934 deed conveying the Danville property had not been recorded, and he had it recorded and made the following notation thereon: "When recorded mail to Mrs. Marian H. Macomber, 1500 San Pasqual St., Pasadena 4, California. 211 " The deed was recorded on December 18, 1943, in the Official Records of Contra Costa County, Vol. 767, p. 79. As a result of the negotiations, an agreement of "separation and financial settlement" was drafted. The petitioner's lawyer desired that no question should arise about community property interests in the Danville property, and he requested that a paragraph should be included in the agreement to the effect that Macomber would give the petitioner a quitclaim deed to the Danville property which would be in the nature of a release or would serve to dispose of questions which might arise about the interests in the property. The separation agreement was executed by the petitioner and Macomber on May 18, 1944. The agreement contains the following paragraph: "The party of the second part [Macomber] will quitclaim to the party of the first part [Marian Macomber] all those pieces or parcels of land located in the County of Contra Costa, State of California, and which are particularly described in a gift deed from the party of the second part to the party of the first part, dated February 24, 1934, and recorded on December 18, 1943, in Volume 767, Page 79, Official Records of212 Contra Costa County." Macomber never gave the petitioner the quitclaim deed to the Danville property which he agreed to give to her in the separation agreement. Macomber never filed a gift tax return for the gift of the Danville property, and no gift tax on that gift was ever paid. After the administration of the estate of Leroy Macomber, deceased, which ended in February of 1949, the Seattle lawyer, Riese, executed and filed with a collector of internal revenue, on May 4, 1949, Forms 709 and 710, gift tax return and donee's information return of gifts, for the year 1944 for the estate of Leroy Macomber, in which he reported a gift on May 18, 1944, which is the date on which the separation and financial settlement agreement was executed, of the Danville property by Macomber to the petitioner, and in which he stated that the value of the property on May 18, 1944, was $60,000. Riese swore to and signed the gift tax return "Estate of Leroy Alexander Macomber, deceased, by John N. Riese, attorney in fact," and he signed the petitioner's name to the donee's information return "by John N. Riese, Agent with power of atty." The petitioner, on December 6, 1948, had executed a power213 of attorney, as executrix of the estate of her deceased husband, in which she appointed four lawyers, including Riese, as attorneys for her as executrix of the estate, but the powers which she gave to the attorneys named were limited powers "to sign, make, execute, file and prosecute before the Bureau of Internal Revenue, United States Treasury Department, all protests and claims for refund, abatement or credit or any and all excessive taxes, interest and penalties, which have heretofore been or may hereafter be unlawfully or illegally assessed against or collected from me, or said estate, by the said Treasury Department for gift taxes, interest or penalties, and to institute such proceedings at law or in equity as they deem necessary and proper for my relief; to do and perform any and all such other lawful acts as shall be deemed necessary and proper to protect my interests; * " However, the petitioner did not, apart from any understanding which Riese may have had under his interpretation of the power of attorney, request or authorize Riese to execute and file the gift tax and donee's information returns, and she did not sign either of the returns. In the notice of deficiency214 dated February 23, 1950, the respondent stated the reason for his determination as follows: "The records of this office indicate that on or about May 18, 1944, LeRoy Alexander Macomber, now deceased, transferred property to you as a gift and that the gift tax liability therefor has not been discharged. The above-mentioned amount shows your liability as a transferee of the property received by you." Ultimate Findings of Fact: Leroy Macomber gave the Danville property to the petitioner in 1934. He did not give the property to the petitioner on May 18, 1944, under the separation and financial agreement which was executed on that date, or at any other time in 1944, or under a quitclaim deed in 1944. Opinion The question is whether Leroy Macomber, deceased, made a gift of the Danville property to the petitioner during the year 1944. The respondent contends that there was a gift of the Danville property from Macomber in 1944. He relies chiefly upon the gift tax returns for 1944 which were filed by Riese in 1949, and the clause in the separation agreement of May 18, 1944, which contains the paragraph in which Macomber agreed to give a quitclaim deed of the Danville property to the215 petitioner. The petitioner contends that Macomber executed and gave her a gift deed conveying the Danville property to her in 1934. She contends, further, that she did not authorize Riese to file the gift tax returns in May of 1949 for the estate of Macomber or for herself, individually, and that he acted beyond the powers given to him under the power of attorney of December 6, 1948, so that no liability attaches to her for the unauthorized acts of an agent, to whatever extent his acts relate to the issue in this proceeding. The respondent has not made any determination of a deficiency in gift tax liability of Leroy Macomber, deceased, for any year prior to 1944. He rests his claim against the petitioner for a gift tax deficiency with respect to the transfer of the Danville property to her by Macomber solely upon his determination that the property was transferred to her in 1944 as a gift. Section 1009 of the Code provides that a tax imposed under the statute "shall be a lien upon all gifts made during the calendar year, for ten years from the time the gifts are made." Section 1009 also makes the donee of the gift personally liable for unpaid gift tax to the extent of the value216 of the gift. However, the respondent makes no contention in this proceeding that his determination of transferee liability against the petitioner is made under the provision that there is a lien on the gift property for ten years from the date of the gift; i.e., since he did not make a determination of gift tax liability of Macomber for the year 1934 or for any other year prior to 1944 with respect to the gift, he is not invoking the ten-year lien provision. Furthermore, he did not make a determination of gift tax transferee liability against the petitioner within ten years after 1934. The notice of deficiency in transferee tax liability, which gives rise to this proceeding, was mailed on February 23, 1950. Accordingly, unless it is found as a fact that Macomber conveyed the property in question to the petitioner by gift in 1944, the respondent must fail. The evidence establishes that the property in question was not conveyed by gift from Macomber to the petitioner in 1944, and that a gift deed to the property was executed by Macomber and was delivered to the petitioner in 1934. We have found those facts to be facts. The deed was not recorded in 1934, but as between the parties217 it was a valid deed. Section 1217, Civil Code of California. Furthermore, the evidence before us that the petitioner had possession of the deed in 1934 is not contradicted or impeached, and we must, therefore, recognize the legal presumption of manual delivery. Section 1055, Civil Code of California; ; . Finally, the evidence shows that the deed was recorded in 1943, and the notation which is typed on the deed that it was to be mailed to the petitioner after the recordation gives support to the petitioner's testimony that she had possession of the deed before 1944, and that evidence is not contradicted. The only circumstances upon which the respondent relies in support of his determination that the gift was made in 1944 are the paragraph in the separation agreement of May 18, 1944, which has been quoted in the findings of fact, and the gift tax returns for 1944, which were executed and filed by Riese. We must conclude, in the light of all of the evidence before us, that the clause in question whereby Macomber agreed to give the petitioner a quitclaim deed to the property meant no more than that218 he agreed to give her a release. It has been observed that "A quitclaim deed is closely related to a simple release," ; 9 Cal. Jur. 99, 204, 205, although, also, it "has come to be recognized as a distinct form of conveyance, and operates like any other to the extent of transferring whatever title or interest the grantor has, but none other." The evidence does not show that Macomber executed and gave the petitioner a quitclaim deed to the property. If he had done so, it would not have conveyed title to the property to her, because Macomber did not own the title to the property in 1944. The executing and filing of gift tax returns for 1944 by Riese in 1949 are not explained. He did not testify in this proceeding. The petitioner, on the other hand, has testified that she did not give information to Riese about the 1934 deed and that he acted, in filing returns in 1949, without her personal authorization. Since Riese used the date May 18, 1944, in each of the returns which he executed and filed in 1949, it is a reasonable assumption that he had knowledge of the separation agreement of May 18, 1944, and*219 that he acted upon his assumption that the clause therein relating to a quitclaim deed of the Danville property provided a basis for his action in executing and filing the gift tax returns in 1949. Consideration of all of the evidence compels us to conclude that the above factors on which the respondent relies do not support a finding of fact that Macomber conveyed the Danville property by gift to petitioner in 1944, and that there is no evidence to support such finding. The petitioner's evidence supports the ultimate findings of fact which we have made. Under those findings, the respondent's determination is reversed. It is recognized that in this proceeding there are some circumstances which give rise to considerable doubt. But we do not find in the record before us cause for not believing the unimpeached and uncontradicted testimony of the witnesses for the petitioner, including her own testimony. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669053/	ACCEPTED 08-21-00011-CV EIGHTH COURT OF APPEALS EL PASO, TEXAS 3/11/2021 10:44 AM ELIZABETH G. FLORES CLERK Appeal No. 08-21-00011-CV FILED IN 8th COURT OF APPEALS EL PASO, TEXAS 3/11/2021 10:44:37 AM ELIZABETH G. FLORES Clerk In the Court of Appeals For the Eighth District of Texas EI Paso, Texas Vanessa Bolanos, Mayra Bolanos, and Shelia Walton, as Next Friend of Juan Manuel Solis, Decedent The Purple Goat, LLC Appellant’s Brief Crocker Russell & Associates 2401 Callender Road, Suite 103 Mansfield, Texas 76063 Tel. (817) 482-6570 Ali Crocker Russell Texas Bar No. 24098868 Email: ali@cralawfirm.com Attorney for Appellant Page 1 of 30 IDENTITY OF PARTIES AND COUNSEL Vanessa Bolanos, Mayra Bolanos, and Shelia Walton as Next Friend of Juan Manuel Solis, Decedent, Appellant Appellant & Trial Counsel: Ali Crocker Russell Crocker Russell & Associates 2401 Callender Road, Suite 103 Mansfield, Texas 76063 Texas Bar No. 24098868 Email: ali@cralawfirm.com The Purple Goat, Appellee Appellee Counsel David Colley Fletcher, Farley, Shipman & Salinas, LLP 9201 N. Central Expressway, Ste. 600 Dallas, Texas Texas Bar No. 04583600 Email:David.colley @fletcherfarley.com Page 2 of 30 Table of Contents IDENTITY OF PARTIES & COUNSEL... 00. ee ee cnet ne tte tee nes INDEX OF AUTHORITIES... 0.00. cece cece cent een eee ene tne eee eee eee: STATEMENT OF FACTS... 0.0. ce een een een een ene ene tne eenes CERTIFICATE OF COMPLIANCE... 0.0... cec cece cee een ten ence eneees CERTIFICATE OF SERVICE... 0... ce een nent n een ene ene tee eee anes Page 3 of 30 .10 11 .13 WAS .. 18 26 1.28 128 29 ... 30 INDEX OF AUTHORITIES STATE CASES Sabre Travel Int’l v. Deutshe Lufthansa, 567 S.W.3d 725, 730 (Tex. 2019) Long v. State, 2012 Tex. App. LEXIS 6201 (Tex. App. — Austin July 25, 2012, no pet.) The Corp. of the President of the Church of Jesus Christ of Latter-Day Saints v. Doe, 2013 Tex. App. LEXIS 12543 (Tex. App. — Corpus Christi Oct. 10, 2013, no pet.) Double Diamond Del., Inc. v. Walkinshaw, 2013 Tex. App. LEXIS 12447 (Tex. App. — Dallas Oct. 7, 2013, no pet.) ADT Sec. Servc. Van Peterson Fine Jewelers, 2015 Tex. App. LEXIS 7831 (Tex. App. — Dallas July 29, 2015, no pet.) citing Gulf Coast Asphalt Co. v. Lloyd, 457 S.W.3d 539, 543-44 (Tex. App. — Houston [14 Dist.] 2015, no pet.) quoting Renee Forinash McElhaney, Toward Permissive Appeal in Texas, 29 ST. MARY’S L.J. 729, 747-49 (1998). Exxon Corp. v. Quinn, 726 S.W.2d 17, 20 (Tex. 1987).” Otis Engineering Corp. v. Clark, 668 S.W.2d 307 (Tex. 1983) Spruiell v. Schlumberger Limited, 809 S.W.2d 935 (Tex. App. — Texarkana [6" Dist.] 1991) Greenfield Energy, Inc. vy. Duprey, 252 S.W.3d 721, 733 (Tex. App. — Houston [14 Dist.] 2008, no pet.) Coleman vy. Klockner & Co. AG, 180 S.W.3d 577, 587 (Tex. App. — Houston [14 Dist.] 2005, no pet.) Page 4 of 30 Continental Airlines, Inc. v. Kiefer, 920 S.W.2d 274, 276-77 (Tex. 1996) Science Spectrum v. Martinez, 941 S.W.2d 910 (Tex. 1997) Fort Worth Osteopathic Hosp. Inc. v. Reese, 148 S.W.3d 94, 99 (Tex. 2004) LMB, Ltd. v. Moreno, 20] S.W.3d 686, 687 (Tex. 2006) Walmart Stores v. Rodriguez, 92 S.W.3d 502 (Tex. 2002) Forbes, Inc. v. Granada Biosciences, 124 §.W.3d 167, 172 (Tex. 2003) Diversicare Gen. Partner, Inc. v. Rubio, 185 S.W.3d 842, 846 (Tex. 2005) Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996) Moore y. Shoreline Ventures, Inc., 903 S.W.2d 900, 902 (Tex. App. — Beaumont 1995, no writ. ). Cassingham y. Lutheran Sunburst Health Serv., 748 S.W.2d 589, 590 (Tex. App. — San Antonio 1988, no writ) D. Houston v. Loving, 92 S.W.3d 450(Tex. 2001) Monsanto Co. v. Cornerstones Municipal Utility Dist., 865 S.W.2d 937, 939 (Tex. 1993) Geters v. Eagle Ins. Co.,834 S.W.2d 49, at 50 (Tex. 1992) Hopkins v. Spring Ind. School Dist., 736 S.W.2d 617, at 619 (Tex. 1987) In Redinger v. Living, Inc. 689 S.W.2d 415 (Tex. 1958) Greater Houston Transportation Co. v. Phillips, SO1 S.W.2d 523, 525 (Tex. 1990) Page 5 of 30 STATUTES & CODES Texas Civil Practice & Remedies Code §51.014 Texas Rules of Civil Procedure 168 Tex. Govt. Code §312.002(a) Tex. Alco. Bev. Code §2.02 Tex. Alco. Bev. Code §2.03 BLACK'S LAW DICTIONARY 357 (6th ed. 1990) BLACK'S LAW DICTIONARY 386 (6th ed. 1990) BLACK'S LAW DICTIONARY 707 (6th ed. 1990) BLACK'S LAW DICTIONARY 984 (6th ed. 1990) WEBSTER'S NEW WORLD COLLEGE DICTIONARY 357 (4th ed. 2000) Page 6 of 30 Appeal No. 08-21-00011-CV In the Court of Appeals For the Eighth District of Texas EI Paso, Texas Vanessa Bolanos, Mayra Bolanos, and Shelia Walton, as Next Friend of Juan Manuel Solis, Decedent Vv. The Purple Goat, LLC Appellant’s Brief TO THE HONORABLE JUSTICES OF THE EIGHTH COURT OF APPEALS: COMES NOW, Vanessa Bolanos, Mayra Bolanos, Shelia Walton, as Next Friend of Juan Manuel Solis, deceased, Appellant herein, and submit this brief. Appellant will be referred to as “Appellant.” Appellee, The Appellee, will be referred to as “Appellee.” References to the Clerk’s Record will be made as follow: (CR at Pg. #.). References to the Appendix will be made as follows: (Exhibit A) Appellant would respectfully show the Court as follows: Page 7 of 30 STATEMENT OF THE CASE Nature of the Case The underlying action is a wrongful death case brought by Appellants. (CR. pg. 17) In prior proceedings in the trial court, the Appellants were found to be precluded from bringing tort claims against Appellee and the remaining claim — Dram Shop provided an exclusion for Appellee. (CR. pg. 15). Course of Proceedings Appellants filed their Original Petition on September 20, 2018. (CR. Pg. 17). Appellants filed their Second Amended Petition on August 7, 2020, to add additional causes of action, negligence per se and negligent hiring, supervision, and retention. Additionally, Appellants claimed wrongful death; negligent hiring, supervision, and retention; premise liability; and added Cynthia Stephens and V.W. Stephens as parties. (CR. Pg. 209). Appellee filed its Original Answer on August 21, 2020. (CR pg. 24). Appellee filed its Special Exceptions on August 14, 2020. (CR pg. 225). At the conclusion of the Special Exceptions hearing, the trial court sustained the special exceptions and excluded common law theories of lability. (CR pg. 305). Page 8 of 30 Appellants filed their Findings of Fact and Conclusion of Law, Motion to Reconsider, then their Request for Permissive Appeal. (CR. pg. 307, 322, 373). All of which were denied by the Court. Appellants then filed their notice of appeal. Appellee filed its Motion for No-Evidence Summary Judgement on September 25, 2020. (CR pg. 341). At the conclusion of the trial court’s hearing, the court granted the motion for summary judgment. (CR. pg. 538). Appellee then filed a Motion for No-Evidence Summary Judgment on behalf of Cynthia Stephens and V.W. Stephens on October 23, 2020, and the motion was granted. (CR. pg. 418). Appellant filed Motion to Reconsider on October 6, 2020 and it was denied on October 19, 2020. Appellant filed their Finding of Facts and Conclusion of Law on September 2, 2020 and it was denied on September 3, 2020 (CR. pg. 322). The case was then severed and rendered a final judgment on Defendant V.W. Stephens and Cynthia Stephens. (CR. pg. 556). Trial Court Disposition The Order on Motion for Summary Judgment was granted on November 20, 2020. (CR. pg. 540). The case was severed on November 30, 2020 and the Order on the Motion for Summary Judgment became final. (CR. pg. 556). Page 9 of 30 ISSUES PRESENTED FOR REVIEW Issue 1: Whether the Texas DRAM SHOP exclusion under the Tex. Alco. Bev. Code §2.03 was intended to preclude employees from bringing common law civil claims against employers who sell alcohol? Issue 2: Whether an employee can sue an employer under the Texas Dram Shop Act? Issue 3: Whether the trial court erred in granting Appellee’s Motion for Summary Judgment when there was more than scintilla of evidence showing Decedent was served alcohol? Page 10 of 30 STATEMENT OF FACTS It is undisputed that Juan Manuel Solis Bolanos, (herein referred to as “Decedent’”), was employed by The Appellee’s restaurant business, The Purple Goat, as a dishwasher. Exhibit A. It is also undisputed that Decedent started his shift on or around 5:30 p.m. on August 5, 2017. Exhibit A. The Appellees and their management allowed Decedent to drink at the bar while still on the clock working his shift as a dishwasher. Francisco Soto was a regular patron of the Appellee. Mr. Soto entered The Purple Goat on or around 5:45 p.m. on August 5, 2017. Mr. Soto sat at the bar drinking for a few minutes then asked the bartender, Michael Howard to get Decedent from the kitchen to discuss a gambling debt Decedent owed him. Exhibit A. Mr. Howard walked into the kitchen and informed Decedent that someone at the bar wanted to speak with him. Decedent then sat at the bar with Mr. Soto. The two men started a conversation and Mr. Soto bought Decedent drinks. Decedent continued to sit on the bar and drink with Mr. Soto. During the conversation, the two men became angry, and Mr. Soto hit Decedent in the face causing him to fall backwards off his barstool and hit his head. Page 11 of 30 An employee of the Appellee called 911 and emergency responders arrived. At the time emergency responders arrived, Decedent was conscious and was taken to Texas Health Harris Methodist Hospital in Stephenville, Texas. Upon arrival at Texas Health Stephenville, Decedent’s blood alcohol concentration (“BAC”) was .259. Exhibit A. Due to the extent of his brain injury, he was then transferred to Texas Health Harris in Fort Worth. Exhibit A. No one from the Appellee informed his wife, Shelia Walton, that he was injured or that he was taken to the hospital. Mrs. Walton went to the Appellee on August 6, 2017 to ask where her husband was because he never returned home after his shift. The manager told Mrs. Walton she should “check the hospital.” Decedent stayed in the intensive care unit (“ICU”) for three weeks without any signs of improvement. He was then moved to hospice care and died within 24 hours. Decedent died on August 26, 2017 from the injuries he sustained at the Appellee on August 5, 2017. Exhibit A. Page 12 of 30 SUMMARY OF THE ARGUMENT The trial court erroneously granted Appellee’s summary judgment because Appellant’s claims are not barred by the Dram Shop Act’s exclusivity clause which bars common law cause of actions against commercial sellers of alcohol. ARGUMENT Introduction Appellants’ tort claims arose out of Appellee’s overserving alcohol to an employee at Appellee’s restaurant establishment. Appellants’ Texas Dram Shop claims are permissive as he was an employee of Appellee at the time of the harm. The Dram Shop Act was created to protect individuals from the ramifications of overserving or other alcohol related injuries. Appellee owed a duty to Decedent as his employer. Appellant does not fall within the exclusivity clause because he is an employee of a commercial alcohol seller. In the D. Houston case, the court found that a special relationship exists between the employer and the employee that created a duty and thus tort claims were allowed. D. Houston v. Love, 92 S.W.3d 450 (Tex. 2001). Page 13 of 30 Standard of Review Ordinarily, the order granting summary judgment must expressly dispose of all parties and all issues in the case in order for it to be a final, appealable judgment. See Continental Airlines, Inc. v. Kiefer, 920 S.W.2d 274, 276-77 (Tex. 1996). The order became final, once the case was severed leaving Purple Goat the only party and all its claims disposed of and case stilling proceeding as to the other Defendants. A summary judgment motion appeal will stand or fall on two grounds: 1) the grounds asserted in them motion; and 2) whether the evidence was sufficient to create a fact issue in reference to the grounds. See Science Spectrum v. Martinez, 941 S.W.2d 910 (Tex. 1997). The no-evidence non-movant has the initial burden to present sufficient evidence to warrant a trial. See Fort Worth Osteopathic Hosp. Inc. v. Reese, 148 S.W.3d 94, 99 (Tex. 2004). When a sufficient no-evidence motion is filed and served, the various burdens are split — the burden of production (burden to produce evidence) is placed on the non-movant, however, the burden of persuasion (burden to persuade the court that no genuine issue of facts exists) is on the movant. LMB, Ltd. v. Moreno, 201 S.W.3d 686, 687 (Tex. 2006). A court must review the summary judgment evidence in the light most favorable to the non-movant, disregarding all contrary evidence and inferences. See Walmart Stores v. Rodriguez, 92 S.W.3d 502 (Tex. 2002). If the nonmovant presents more than a scintilla of Page 14 of 30 evidence to support the challenged ground, the court should deny the motion, See Forbes, Inc. v. Granada Biosciences, 124 S.W.3d 167, 172 (Tex. 2003). The Supreme Court has stated the rule as follow: “in reviewing a summary judgment, we consider all grounds presented to the trial court and preserved on appeal in the interest of judicial economy.” Diversicare Gen. Partner, Inc. v. Rubio, 185 S.W.3d 842, 846 (Tex. 2005). The Supreme Court did not state any different rule depending on the type of summary judgment order being appealed. Id. When a trial court grants a general summary judgment and does not specify the ground on which it granted the judgment, the appellant must argue that every ground of the summary judgment motion is erroneous. See Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996). An appellant may challenge “not only arguments focusing on whether a genuine issue of material fact was raised but also is allowed to contest non- evidentiary issues such as the legal interpretation of a statute.” Moore v. Shoreline Ventures, Inc., 903 S.W.2d 900, 902 (Tex. App. — Beaumont 1995, no writ.). See also Cassingham v. Lutheran Sunburst Health Serv., 748 S.W.2d 589, 590 (Tex. App. — San Antonio 1988, no writ). Issue 1: Whether the Texas DRAM SHOP exclusion under the Tex. Alco. Bev. Code §2.03 was intended to preclude employees from bringing common law civil claims against employers who sell alcohol? Page 15 of 30 The trial court errored in granting Appellee’s summary judgment because Appellant was entitled to recover under both civil tort claims and Dram Shop. Appellee argued that section 2.03 of the Texas Dram Shop Act exclusivity clause, bars all common law causes of action against commercial sellers of alcohol. Appellant argued that Appellee owed Plaintiff a duty under its employee-employer relationship and the Dram Shop Act was not intended to make Dram Shop the exclusive remedy for employees. In the D. Houston case, the court found that a special relationship exists between the employee (an independent contractor) and employer that created a duty and thus tort claims were allowed. 92 S.W.3d 450 (Tex. 2001). D. Houston goes on to state, “the Dram Shop Act was clearly intended to pre- empt common law claims against commercial sellers of alcohol for claims that arise from the sellers’ provision of alcohol. However, we conclude that it does not bar all common law liability for any conduct by a seller toward its employee or independent contractor whenever alcohol is involved.” Id. at 453. The plaintiffs claims in D. Houston derived from defendant’s alleged failure to use reasonable care in exercising its retained control over its independent contractor’s work. Plaintiff (“Love”) in D. Houston was an independent contract working as a dancer for defendant Treasures. Id. The court found that even in an independent contractor- employer relationship a duty exists to act reasonably to retain control over its independent contractor. Id. Love did not sue Treasures as “a provider under the Dram Page 16 of 30 Shop Act. Id. Instead, she [was] suing Treasures as her employer for failing to use reasonable care in exercising retained control over her work as an independent contractor. Treasures encouraged her to drink then allowed her to leave intoxicated. Id. at 454. “Therefore, the Dram Shop Act, which “provides the exclusive cause of action for providing an alcoholic beverage to a person 18 years of age or older”, does not bar Love’s common law claims as an independent contractor against her employer.” Id. citing Tex. Alco. Bev. Code §2.03(emphasis added), Under common law of Texas, employers have a special relationship with their employees and independent contractors that creates a duty on the part of the employers. “An employer may breach a duty to its independent contractor by failing to exercise its retained control over the contractor with reasonable care.” Exxon Corp. v. Quinn, 726 S.W.2d 17, 20 (Tex. 1987).” When an employer encourages or condones excessive drinking on the job and in fact profits from an employee’s drinking, as in this case, the employer ought to be held responsible for foreseeable injuries suffered by the employee because of the resulting intoxication.” Id. at 457. Similar to Treasures condoning drinking and even encouraging drinking, Appellee condoned drinking while employees were on the clock. Appellee would profit by its employees tallying a large bar tab that was then deducted from their check. Decedent was visibly drunk as his blood alcohol level, which was tested at the hospital upon arrival, was 0.259. Exhibit A. Defendant Appellee not only allowed Decedent to Page 17 of 30 continue working while intoxicated but allowed him to continue drinking. Defendant Appellee conceded that Decedent consumed a beer at the bar while speaking with Defendant Soto. Exhibit A. Furthermore, Otis Engineering Corp. v. Clark, 668 S.W.2d 307 (Tex. 1983), established a duty owed by an employer to an incapacitated employee and that the duty by an employer to an intoxicated employee to whom the employer has served alcoholic beverages does not fall within the Alcoholic Beverage Code. See Spruiell v. Schlumberger Limited, 809 S.W.2d 935 (Tex. App. — Texarkana [6" Dist.] 1991). In Otis, an employee became intoxicated at work and was sent home. Otis at 308. His supervisor escorted him to the parking lot and told him to go home. Id. The supervisor asked if he was alright, he responded he was. Id. The supervisor let him leave and thirty minutes later the employee was involved in an accident killing two people. Id. The employee’s blood alcohol level was 0.268. Id. The Supreme Court found that by exerting control over the incapacitated employee, the employer breached a duty to prevent the employee from causing an unreasonable risk of harm to others. Id. at 311. Similar to Otis, Decedent was allowed to drink on the clock and then was sent to speak with an intoxicated patron, who requested to speak to Decedent regarding an owed debt. Exhibit A. Issue 2: Whether an emplovee can sue an employer under the Texas Dram Shop Act? Page 18 of 30 The trial court erred in granting Appellee’s summary judgment because Appellant is not excluded under the Texas Dram Shop Act, as an employee, from bringing claims against his employer, a commercial seller of alcohol. More specifically, the court erred by telling Appellant that Appellees could have their cake and eat it too. First, the trial court granted Appellee’s Special Exceptions stating that Appellant could not sue Appellee under any common law civil tort cause of action because the Texas DRAM SHOP Act exclusion applied. (CR. pg. 305). Subsequently, the trial court granted Appellees Motion for Summary Judgment where Appellees argued that Texas DRAM SHOP did not apply because there was no proof that Appellee served Decedent alcohol. Thus, the trial court found that Texas DRAM SHOP Act did not apply in this case. Appellant questions that if Texas DRAM SHOP Act does not apply in this case then by Appellee’s own arguments in their Special Exceptions, the court erred in dismissing all of Appellant’s common law civil tort causes of action as the Texas DRAM SHOP Act exclusion would also not be applicable. Moreover, the trial court erroneously applies the law to represent that commercial alcohol sellers are protected from civil liability against their employees under Texas Dram Shop Act but the case law shows that an employer has an established duty to its employees. Page 19 of 30 Under the common law of Texas, employers have a special relationship with their employees and independent contractors that creates a duty on the part of the employers. If the employer provides alcoholic beverages to its employees or independent contractors, then breaches its common law duty, the employer's breach is not governed by the Dram Shop Act because the negligent action is the breach of the duty, not the providing of alcoholic beverages. In Redinger v. Living, Inc. 689 S.W.2d 415 (Tex. 1958), the Supreme Court adopted the rule as stated in the Restatement of Torts §414: “One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care” Additionally the Court following the Comments a and c, “ This rule applies when the employer retains some control over the manner in which the independent contractor's work is performed, but does not retain the degree of control which would subject him to liability as a master. Restatement (Second) of Torts $ 414, comment a (1965). The employer's role must be more than a general right to order the work to stop or start, to inspect progress or receive reports. Id. at comment c (1965). "He may retain only the Page 20 of 30 power to direct the order in which the work shall be done, or to forbid its being done in a manner likely to be dangerous to himself or others. Such a supervisory control may not subject him to liability under the principles of Agency, but he may be liable under the rule stated in this Section unless he exercises his supervisory control with reasonable care so as to prevent the work which he has ordered to be done from causing injury to others.” Id. Redinger’s rule of liability creates a special relationship between employer and independent contractor that imposes a duty upon the employer to control the independent contractor’s conduct. Greater Houston Transportation Co. v. Phillips, 801 S.W.2d 523, 525 (Tex. 1990). Even if the case law is unclear, under Texas statutory and common law, the 99 66 ordinary meaning of the undefined terms “‘customer,” “members,” and “guests” in 2 2 Tex. Alco. Bev. Code §2.03 is to be applied. Tex. Govt. Code §312.002(a); Monsanto Co. v. Cornerstones Municipal Utility Dist., 865 S.W.2d 937, 939 (Tex. 1993)(““When the legislature has failed to define a word or term, courts will apply its ordinary meaning.”’); Geters v. Eagle Ins. Co.,834 S.W.2d 49, at 50 (Tex. 1992) (“In interpreting a statute, however, we give words their ordinary meaning.”); Hopkins v. Spring Ind. School Dist., 736 S.W.2d 617, at 619 (Tex. 1987) (“In construing a statute, if the legislature does not define a term, its ordinary Faye ai vl vu meaning will be applied.”).For the common meaning of “customer,” Black's Law Dictionary defines the term as: “One who regularly or repeatedly makes purchases of, or has business dealings with, a tradesman or business ... Ordinarily, one who has had repeated business dealing with another. A buyer, purchaser, consumer, or patron.” BLACK’'S LAW DICTIONARY 386 (6th ed. 1990). Webster's Dictionary defines “customer” as: “a person who buys, esp. one who buys from, or patronizes, an establishment regularly.” WEBSTER'S NEW WORLD COLLEGE DICTIONARY 357 (4th ed. 2000). The language in both these definitions contemplates a person who chooses to go to a tradesman or business regularly to make business purchases, or in the case of a restaurant or nightclub, to purchase food and entertainment services. A person who is at work at the business establishment and is provided alcoholic beverages by the establishment while working is not one who is choosing to regularly patronize the establishment to purchase goods or services, and thus is not a customer by the common definition supplied by Black's and Webster's. “Member,” Black's defines this term as: “One of the persons constituting a family, partnership, association, corporation, guild, court, legislature, or the like.” BLACK’S LAW DICTIONARY 984 (6th ed. 1990). Webster's Dictionary defines “member” as “a person belonging to some association, society, community, party, Page 22 of 30 etc.” WEBSTER'S NEW WORLD COLLEGE DICTIONARY 897-98 (4th ed. 2000). When employees and independent contractors are employed by a commercial seller of alcohol and are in the course and scope of working, they are persons employed by the establishment, not members of it. Further, Black's defines “guest” as: “a person who 1s received and entertained at one's home, club, etc., and who is not a regular member.” BLACK'S LAW DICTIONARY 707 (6TH ED. 1990). Webster's defines “guest” as: “1 a) a person entertained at the home of another; visitor b) a person entertained by another acting as host at a restaurant, theater, etc.; 2 any paying customer of a hotel, restaurant, etc.; 3 a nonmember receiving the hospitality of a club, institution, etc.” WEBSTER'S NEW WORLD COLLEGE DICTIONARY 631 (4th ed. 2000). Here, Decedent was employed by Appellee, which Appellee confirmed in its discovery responses. Decedent was allowed to drink on shift without consequence. Appellee was not only aware that Decedent was drunk but allowed him to continue to do so. After Soto struck Decedent he was taken to the hospital, Texas Health Stephenville. At the hospital Decedent’s blood was drawn and was at a blood alcohol level of 0.259. Exhibit A. Decedent was visibly drunk yet was still served by the bartender at Appellee. Appellee failed to reasonably exercise control over Decedent thus is negligent — as his employer - separate from its act of serving alcoholic Page 23 of 30 beverages to an employee or patrons. Appellee created the circumstance to which Decedent was able to physically be harmed. He was drinking on the clock and staff sent him to meet a drunk and/or disgruntled patron. Exhibit A. As Decedent’s employer, Appellee owed Decedent a duty of reasonable care and is liable for physical harm caused to him while under their control. Oris further defined the duty to include the duty to prevent the intoxicated employee from causing an unreasonable risk of harm to himself as well as others. Spruiell at 940. Appellee provided the alcoholic beverages to the employee; thus, itis Appellee’s act of placing the intoxicated employee into circumstances in which he presents a danger to himself or others. Id. An employer who provides alcoholic beverages to an incapacitated employee may be liable for negligence after breaching its Otis duty. In this case, Decedent was served alcohol by Appellee’s bartender who was already visibly drunk. Appellee owed Decedent a duty and breached that duty when it allowed Decedent to drink while on the clock and served him additional alcohol. Even if Decedent was drunk when he showed up to work, he should have been sent home and not allowed to work his shift. Employees and independent contractors are not named among the class of “customers, members, or guests” who are governed by the Dram Shop Act. Therefore, employers who serve alcoholic beverages to employees or independent Page 24 of 30 contractors and then breach their common law duty may be liable for negligence. Appellee encourages its employees drink on the clock, thus creating a bar tab that can be deducted out of their paycheck. The Dram Shop specifies that providers of alcoholic beverages may be liable only for the actions of a narrowly defined class of person — the providers’ “customers, members or guests who are or become intoxicated.” Tex. Alco. Bev. Code §203. Per its terms, employees and independent contractors are not identified among the class of persons intended to be governed by the Dram Shop Act. Therefore, Appellee, who serves alcoholic beverages to their employees, then breached its duty under the special relationship and is liable. Appellee breached its duty under the special relationship between employer and employee, which is not governed by the Alcoholic Beverage Code or by case law pertaining to serving alcohol. Employees and independent contractors are not received and entertained at their employer's establishment; they arrive and begin work. The employees or independent contractors may be working as entertainers, but they are entertaining in the course and scope of performing their work; they are not the ones being entertained. Also, the definition of “customer” is further illuminated in Webster's definition of “guest.” Defining a guest as “any paying customer of a hotel, restaurant, etc.” contemplates a customer as someone who makes the choice to avail himself of Page 25 of 30 the services provided by the hotel or restaurant, where he would be considered a guest as opposed to a paying customer at, for instance, a hardware store. But along 99 6e with these definitions of “customer,” “member,” and “guest,” employees and independent contractors are excluded from the class of persons governed by the Dram Shop Act by one other distinguishing factor. Even if the independent contractor or employee pays for the drinks, an employer who serves alcoholic beverages to an independent contractor or employee is still governed by their special relationship. This special relationship does not exist between a merchant and his customers, members, and guests -- to whom the Dram Shop Act applies. This lack of a special relationship with the provider of the alcoholic beverages specifically separates “customers, members, and guests” from independent contractors and employees in the application of the Dram Shop Act. Therefore, the definition supplied by petitioner applies only to 16 TAC 50 and does not apply to the Dram Shop Act, and the common definitions of “customer,” “member,” and “guest” in Black's Law Dictionary and Webster's Dictionary show that employees and independent contractors are not among the class of persons that are governed by the Dram Shop Act. Further, the lack of a special relationship between a merchant and his “customers, members, and guests” distinguishes this class of persons from independent contractors and employees in the application of the Dram Shop Act. Page 26 of 30 Issue 3: Whether the trial court erred in granting Appellee’s Motion for Summary Judgment when there was more than scintilla of evidence showing Decedent was served alcohol? The trial court abused its discretion when it erroneously granted Appellee’s Motion for Summary Judgment. During the hearing and by and through Appellant’s response to Appellee’s Motion for Summary Judgment, Appellant showed that there was more than a scintilla of evidence that Decedent was served alcohol at Appellee’s establishment. Exhibit A. Appellee’s produced V.W. Stephens statement in its response to Appellant’s Production requests stating that, “I was later advised later that Mr. Soto had purchased Manny a beer.” Exhibit A. Appellee argued there was not more than a scintilla of evidence, but Appellant showed the court disputing evidence that Appellee did in fact serve Decedent alcohol and that by Appellee’s own admission was Decedent served alcohol at the establishment. Exhibit A. The trial court abused its discretion by granting Appellee’s no evidence motion for summary judgment, when evidenced exists to support Appellant’s claims. The evidence is more than a scintilla of evidence, which overcomes the no evidence summary judgment. Page 27 of 30 PRAYER Appellant prays this court find that the trial court abused its discretion by granting the motion for summary judgment and reversing the trial court’s judgment. The trial court incorrectly applied the Dram Shop Act and Appellant prays this Court reverse the trial court’s findings. /s/ Ali Crocker Russell Ali Crocker Russell Attorney for Appellant CERTIFICATE OF COMPLIANCE I certify that this document was produced on a computer using Microsoft Word and contains 5,266 words, as determined by the computer’s software’s word counting function, which includes the entire brief for simplicity purposes. /s/ Ali Crocker Russell Ali Crocker Russell Attorney for Appellant Page 28 of 30 CERTIFICATE OF SERVICE I certify that on March 8, 2021, I served a copy of Appellant’s Brief on the parties listed below by electronic service and that the electronic transmission was reported as complete. My email address is ali@cralawfirm.com. David Collley Fletcher, Farley, Shipman & Salinas, LLP 9201 N. Central Expressway, Ste. 600 Dallas, Texas 75231 Email: David.colley @ fletcherfarley.com /s/ Ali Crocker Russell Ali Crocker Russell Attorney for Appellant Page 29 of 30 Appeal No. 08-21-00011-CV In the Court of Appeals For the Eighth District of Texas EI Paso, Texas Vanessa Bolanos, Mayra Bolanos, and Shelia Walton, as Next Friend of Juan Manuel Solis, Decedent The Purple Goat, LLC Appellant’s Appendix List of Documents 1. Appellee Production Responses 2. Medical Examiner Report 3. Appellee’s Response to Admissions Page 30 of 30 CHU.24451 CAUSE NO. CV35251 VANESSA BOLANOS, MAYRA BOLANOS, AND SHELIA WALTON AS NEXT FRIEND OF JUAN MANUEL SOLIS, DECEDENT, Plaintiffs, IN THE DISTRICT COURT ERATH COUNTY, TEXAS VS. THE PURPLE GOAT, LLC and FRANCISCO SOTO, Defendants. LR LN LN LN LN LN LN LN LN LN MN 266'# JUDICIAL DISTRICT DEFENDANT THE PURPLE GOAT, LLC’S FIRST AMENDED OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUEST FOR PRODUCTION TO DEFENDANT TO: Plaintiffs, VANESSA BOLANOS, MAYRA BOLANOS, AND SHELIA WALTON AS NEXT FRIEND OF JUAN MANUEL SOLIS, DECEDENT, by and through her attorney of record, Ms. Ali Crocker, Crocker Russell & Associates, 2401 Callender Road, Suite 103, P. O. Box 1671, Mansfield, Texas 76063. COMES NOW The Purple Goat, LLC, a Defendant in the above-entitled and numbered cause (hereinafter “Defendant”), and respectfully serves the following First Amended Objections and Responses to Plaintiffs’ First Requests for Production pursuant to Rule 196 of the TEXAS RULES OF CIVIL PROCEDURE. AMENDED OBJECTIONS AND RESPONSES TO FIRST REQUESTS FOR PRODUCTION REQUEST FOR PRODUCTION NO. 3: Any documents relating or referring to any investigation or review conducted by Defendant post incident and prior to this lawsuit regarding the occurrence made the basis of this lawsuit. RESPONSE: Responding party objects to this request on grounds that it is overbroad, vague and ambiguous, unduly burdensome, and not limited in time or scope. Further objection is made to the extent the request seeks information protected by the attorney-client or work product privilege. Without waiving objections, responding party identifies five (5) witness statements prepared on September 8, 2017 and November 10, 2017, by The Purple Goat, LLC employees prepared in response to investigation conducted by the City of Stephenville. The statements are produced as Exhibits “C” through “G.” DEFENDANT THE PURPLE GOAT, LLC’S FIRST AMENDED OBJECTIONS AND RESPONSES TO PLAINTIFFS’ FIRST REQUESTS FOR PRODUCTION - Page 1 REQUEST FOR PRODUCTION NO. 8: All written statements relating to this case made by any person. RESPONSE: Responding party objects to this request on grounds that it is overbroad, vague and ambiguous, unduly burdensome, and not limited in time or scope. Further objection is made to the extent the request seeks information protected by the attorney-client or work product privilege. Without waiving objections, responding party identifies five (5) witness statements prepared on September 8, 2017 and November 10, 2017, by The Purple Goat, LLC employees prepared in response to investigation conducted by the City of Stephenville. The statements are produced as Exhibits “C” through “G.” REQUEST FOR PRODUCTION NO. 17: Please produce copies of any statements and transcripts of any deposition or statement from any witness and employees, agents, and representatives pertaining to this incident taken prior to or after the filing of this suit, including the transcript and exhibits from any deposition taken pursuant to TRCP 202. RESPONSE: Responding party objects to this request on grounds that it is overbroad, vague and ambiguous, unduly burdensome, and not limited in time or scope. Further objection is made to the extent the request seeks information protected by the attorney-client or work product privilege. Without waiving objections, responding party identifies five (5) witness statements prepared on September 8, 2017 and November 10, 2017, by The Purple Goat, LLC employees prepared in response to investigation conducted by the City of Stephenville. The statements are produced as Exhibits “C” through “G.” REQUEST FOR PRODUCTION NO. 18: Please provide a true and correct copy of any documents and/or tangible evidence believed by you to support the theory that some act or acts of Defendant caused or contributed to causing the incident made the basis of this lawsuit. RESPONSE: Responding party objects to this request on grounds that it is overbroad, vague and ambiguous, unduly burdensome, and not limited in time or scope. Further objection is made to the extent the request seeks information protected by the attorney-client or work product privilege. Without waiving objections, responding party identifies five (5) witness statements prepared on September 8, 2017 and November 10, 2017, by The Purple Goat, LLC employees prepared in response to investigation conducted by the City of Stephenville. The statements are produced as Exhibits “C” through “G.” REQUEST FOR PRODUCTION NO. 24: All witness statements relevant to this case. RESPONSE: Responding party objects to this request on grounds that it is overbroad, vague and ambiguous, unduly burdensome, and not limited in time or scope. Further objection is made to the extent the request seeks information protected by the attorney-client or work product privilege. Without waiving objections, responding party identifies five (5) witness statements prepared on September 8, 2017 and November 10, 2017, by The Purple Goat, LLC employees prepared in response to investigation conducted by the City of Stephenville. The statements are produced as Exhibits “C” through “G.” DEFENDANT THE PURPLE GOAT, LLC’S FIRST AMENDED OBJECTIONS AND RESPONSES TO PLAINTIFFS’ FIRST REQUESTS FOR PRODUCTION - Page 2 Respectfully submitted, FLETCHER, FARLEY, SHIPMAN & SALINAS, L.L.P /s/Gerardo E. Alcantara DOUGLAS D. FLETCHER State Bar No. 07139500 Email: doug. fletcher@fletcherfarley.com GERARDO E. ALCANTARA State Bar No. 24109569 Email: jerry.alcantara@fletcherfarley.com 9201 North Central Expressway, Suite 600 Dallas, Texas 75231 (214) 987-9600 (214) 987-9866 [Fax] ATTORNEYS FOR DEFENDANT THE PURPLE GOAT, LLC CERTIFICATE OF SERVICE This is to certify that a true and correct copy of the foregoing instrument has been mailed, telecopied, electronically served or hand delivered to all attorneys of record, in compliance with Rule 21a. of the Texas Rules of Civil Procedure, on this the 15™ day of July, 2019. /s/Gerardo I. Alcantara GERARDO E. ALCANTARA DEFENDANT THE PURPLE GOAT, LLC’S FIRST AMENDED OBJECTIONS AND RESPONSES TO PLAINTIFFS’ FIRST REQUESTS FOR PRODUCTION - Page 3 \| was notified on the eight day that the Sheriff Department needed to review our Video footage of the incident. Our system retains the information for seven days. \| reviewed the video of the incident on camera myself, but it was not saved. V.W. Stephens September 8, 2017 EXHIBIT G CHU.24451 CAUSE NO. CV35251 VANESSA BOLANOS, MAYRA_ § IN THE DISTRICT COURT BOLANOS, AND SHELIA WALTONAS § NEXT FRIEND OF JUAN MANUEL § SOLIS, DECEDENT, § Plaintiffs, § ERATH COUNTY, TEXAS § VS. § § THE PURPLE GOAT, LLC and § FRANCISCO SOTO, § Defendants. § 266'4 JUDICIAL DISTRICT DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION TO: Plaintiffs, VANESSA BOLANOS, MAYRA BOLANOS, AND SHELIA WALTON AS NEXT FRIEND OF JUAN MANUEL SOLIS, DECEDENT, by and through her attorney of record, Ms. Ali Crocker, Crocker Russell & Associates, 2401 Callender Road, Suite 103, P. O. Box 1671, Mansfield, Texas 76063. COMES NOW THE PURPLE GOAT, LLC, Defendant in the above entitled and numbered cause, and in accordance with Rule 196 of the Texas Rules of Civil Procedure, serves the following Objections and Responses to Plaintiffs’ Third Request for Production. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION Page 1 Respectfully submitted, FLETCHER, FARLEY, SHIPMAN & SALINAS, L.L.P. /s/ Joseph J. Harrison DOUGLAS D. FLETCHER State Bar No. 07139500 Email: doug. fletcher @ fletcherfarley.com JOSEPH J. HARRISON State Bar No. 24083143 Email: joe.harrison @ fletcherfarley.com 9201 North Central Expressway, Suite 600 Dallas, Texas 75231 (214) 987-9600 (214) 987-9866 [Fax] ATTORNEYS FOR DEFENDANT THE PURPLE GOAT, LLC CERTIFICATE OF SERVICE This is to certify that a true and correct copy of the foregoing instrument has been mailed, telecopied, electronically served or hand delivered to all attorneys of record, in compliance with Rule 21a. of the Texas Rules of Civil Procedure, on this the 4 day of September, 2020. /s/ Joseph J. Harrison JOSEPH J. HARRISON DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION Page 2 REQUESTS FOR PRODUCTION REQUEST NO. 1. Purple Goat’s timecard or time management record for Juan Manuel Solis Bolanos for August 5, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 2. A copy of Purple Goat’s active employee list as of August 5, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 3. Purple Goat’s employee shift schedule for August 5, 2017. RESPONSE: Defendant objects to this request because “employee shift schedule” is vague and ambiguous and fails to identify with specificity a particular category of documents that would be responsive. Subject to and without waiving the foregoing objection, see Bates labeled documents produced by Defendant. REQUEST NO. 4. A copy of Purple Goat’s food and alcohol sales receipts from 3:30 p.m. — 6:30 p.m. on August 5, 2017. RESPONSE: Defendant objects to this request because it is overly broad and is not reasonably calculated to lead to the discovery of admissible evidence. REQUEST NO. 5. A copy of Juan Manuel Solis Bolanos paychecks from January 2017 to August 31, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 6. A copy of Juan Manuel Solis Bolanos’s 1099 or W-2 issued by Purple Goat for 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO.7. A copy of the TABC certification for each active employee who was employed at Purple Goat during 2017. RESPONSE: Defendant objects to this request as overly broad, not properly limited in time or scope, and not calculated to lead to the discovery of admissible evidence. REQUEST NO. 8. A copy of the Food Handlers certificate for each active employee who was employed at Purple Goat during 2017. RESPONSE: Defendant objects to this request as overly broad and not properly limited in time or scope. Defendant also objects to this request because it seeks information that is wholly irrelevant to any issue properly before the court in this action and not in dispute at this time, and it DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION Page 3 is not reasonably calculated to lead to the discovery of admissible evidence. REQUEST NO.9. =A copy of Juan Manuel Solis Bolanos Food Handlers certificate. RESPONSE: Defendant objects to this request because it seeks information that is wholly irrelevant to any issue properly before the court in this action and not in dispute at this time, and it is not reasonably calculated to lead to the discovery of admissible evidence. REQUEST NO. 10. A copy of the notice of claim Purple Goat submitted to their liquor license insurance carrier regarding the incident between the parties in this suit on August 5, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 11. A copy of the notice of claim Purple Goat submitted to their commercial insurance carrier regarding the incident between the parties in this suit on August 5, 2017. RESPONSE: Defendant objects to this request because it seeks information that is wholly irrelevant to any issue properly before the court in this action and not in dispute at this time, and it is not reasonably calculated to lead to the discovery of admissible evidence. REQUEST NO. 12. A copy of the report you submitted to TABC regarding the incident between the parties in this suit on August 5, 2017. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. If Defendant recieves a copy of the report, Defendant will supplement it. REQUEST NO. 13. A copy of food and alcohol receipts purchased by Francisco Soto, or another known alias, at Purple Goat from August 5, 2017. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 14. A copy of food and alcohol receipts purchased by Juan Manuel Solis Bolanos at Purple Goat from August 5, 2017. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 15. A copy of any disciplinary actions filed against Michael Howard. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 16. A copy of any disciplinary actions filed against Juan Manuel Solis Bolanos. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION Page 4 RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 17. A copy of the job description for a bartender at the Purple Goat as of August 5, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 18. A copy of the job description for a bus boy at the Purple Goat as of August 5, 2017. RESPONSE: Defendant objects to this request because it seeks information that is wholly irrelevant to any issue properly before the court in this action and not in dispute at this time, and it is not reasonably calculated to lead to the discovery of admissible evidence. Subject to and without waiving the foregoing objection, Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 19. A copy of the job description for a dish washer at the Purple Goat as of August 5, 2017. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 20. A copy or photograph of any sign or warning that was put up or placed at Purple Goat that waived Purple Goat’s liability after August 5, 2020. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. REQUEST NO. 21. A copy of any training materials for bartender staff that addresses serving limitations for guests. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 22. A copy of Purple Goat’s drink menu as of August 5, 2017. RESPONSE: See Bates labeled documents produced by Defendant. REQUEST NO. 23. A copy of Purple Goat’s drink menu as of August 5, 2020. RESPONSE: Defendant will supplement. REQUEST NO. 24. A copy of Juan Manuel Solis Bolanos Purple Goat employment application. RESPONSE: Defendant does not have any responsive documents in its possession, custody, or control. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFFS’ THIRD REQUEST FOR PRODUCTION Page 5 200 Feliks Gwozdz Place, Fort Worth, Texas 76104-4919 oe cou N fy . rs [yee oa Office of Chief Medical Examiner sf anes Tarrant County Medical Examiner's District toh fa Tarrant County, Texas . ar) = S ue ie (817) 920-5700_FAX (817) 920-5713 cS Autopsy Report CASE NO: 1713400 Name: SOLIS, Juan Manuel Age: 52 years Sex: Male Race: Hispanic Date and Time of Death: August 26, 2017 at 8:50 PM Place of Death: Community Hospice of Texas 1111 Summit Avenue, Fort Worth, TX 76102 Autopsy Authorized By: Statute 49.25 of Texas Criminal Code We the undersigned hereby certify that a full autopsy on the body of JUAN MANUEL SOLIS at the Tarrant County Medical Examiner's District Morgue in Fort Worth, Texas on the 28 day of August 2017, beginning at 09:30 AM, and upon investigation of the essential facts concerning the circumstances of the death and history of the case as known at this time, are of the opinion that the findings, cause and manner of death are as follows \| FINDINGS: l) Investigative findings: A. Decedent reportedly struck at bar then fell striking his head on 8/5/2017 at approximately 1800 hours Loss of consciousness reported at the time . Transported to hospital by emergency medical services at 1842 hours . Transferred to second hospital at 2139 hours Hospital diagnoses of closed head injury with loss of consciousness and laceration to back of head and lip F, Transferred to hospice unit on 8/26/2017 at 1935 hours; pronounced in hospice at 2050 hours G. Other medical history includes hepatitis C ll) Exam findings: A. Blunt force trauma of head: 1. Occipital skull fracture 2. Cerebral contusions 3. Stapled laceration of the occipital scalp 4. Scabbed abrasion of the occipital scalp 5. Status post craniotomy B. Moderate coronary artery disease C. Hepatic cirrhosis with splenomegaly moO er — Page 2 of 7 \Be- 4713400 SOLIS, Juan Manuel D. Pulmonary congestion ll) Toxicology: See attached \|CAUSE OF DEATH: BLUNT FORCE TRAUMA OF HEAD MANNER OF DEATH: HOMICIDE gt 7 - ee y, the pe PZ 2 Richard C. Fries, D.O. 7 ‘Signature Deputy Medical Examiner re C Hh nee’ ~ Nizam Peerwani, M.D. Signature / Chief Medical Examiner if ¢ ete Marc A. Krouse, M.D. Signature Chief Deputy Medical Examiner 3 oo Vd Susan Roe, M.D. Signature Deputy Medical Examiner ne in a Tasha Z. Greenberg, M.D. - "‘Siopaure Deputy Medical Examiner Page 3 of 7 \Z , 1713400 SOLIS, Juan Manuel A complete autopsy is carried out at the Tarrant County Medical Examiner's Morgue. GROSS ANATOMIC DESCRIPTION I. CLOTHING AND PERSONAL EFFECTS: The body is presented to the Morgue in a white body bag, wrapped in a white sheet and clad in a hospital gown and a disposable absorbent undergarment. I. THERAPEUTIC INTERVENTION: = Evidence of medical intervention includes a Foley catheter with 300 mL of urine in a collection bag, PICC line in the right arm, a craniotomy of the right scalp 12 inches. lll. EXTERNAL BODY DESCRIPTION: The body is that of a normally developed, Hispanic adult male weighing 181.1 pounds, measuring 67 inches in height, and appearing compatible with the stated age of 52 years. The body is cold following refrigeration. Rigor mortis is well developed in the small and large muscles. Livor mortis is mild red, posterior dependent with contact pallor and fixed with pressure. Preservation is good with no decomposition changes. Body hair distribution is that of a normal adult male. The head demonstrates evidence of traumatic injury and medical therapy (see EVIDENCE OF INJURY and THERAPEUTIC INTERVENTION). The head hair is straight, black and measures up to 3/s inch. The facial hair consists of a black mustache and beard. The eyes when initially viewed are closed. The corneae are clear. The irides are brown and there is no arcus senilis. The pupils measure 4 mm bilaterally. The conjunctivae are pink. The sclerae are nonicteric. No petechial hemorrhages are identified. The nasal skeleton and septum are intact. The ears are unremarkable. The lips and tongue are atraumatic. The teeth are natural. There is no foreign material in the external auditory canals, external nares or oral cavity. The neck shows no external evidence of injury. The trachea is midline. The chest is symmetric with normal male breasts. The abdomen is flat with no fluid wave or palpable masses. The external genitalia is that of a normal adult male with an unremarkable penis and descended testes; the perineum and anus are unremarkable. The back and buttocks are symmetric and unremarkable. ogo Page 4 of 7 As 1713400 SOLIS, Juan Manuel The extremities are normally developed and symmetric with no deformities or fractures. The fingernails are intact. The legs show no edema or venous stasis changes. The toenails are unremarkable. IV. IDENTIFYING MARKS: A. Tattoos: Chest tattoos including heart, moon, bird, leaf and woman Abdomen, “SOLIS.J” Back, fist, monster and dragon Right arm, tattoos including bird, flowers, writing, faces and snake Left arm, tattoos including faces, flowers, writing and cross Right dorsal hand, flower Left dorsal hand, cross with writing Be Se eee PE ot No scars or needle tracks are present. V. EVIDENCE OF INJURY: A. BLUNT FORCE TRAUMA OF HEAD: Left occipital skull fracture, 7.6 cm Left cerebellar contusion, 1.7 x 1 cm Inferior frontal contusion, 5 x 4.5 cm Right frontoparietal contusion, 2 x 1.5 cm Right temporal contusion, 4 x 2.cm Status post right-sided craniotomy, 12 inches Status post right-sided craniotomy side of the calvarium, 14.8 x 11.5 cm Scabbed abrasion of the occipital scalp, 1 x % inch Stapled laceration of the occipital scalp, 1-*/s inches ree POG eS ee VI. INTERNAL EXAMINATION BODY CAVITIES: A Y-shaped thoracoabdominal incision is made, the organs are examined in situ and eviscerated in the usual fashion. The subcutaneous fat is moist and yellow. The musculature of the chest and abdominal area is unremarkable. The chest wall is intact without rib, sternal or clavicular fractures. The serous body cavity membranes are smooth and glistening with no adhesions or effusions. pie Page 5 of 7 Oe aaa SOUS, Juan Manuel The pericardium shows a normal amount of serous fluid. The vertebral column shows no scoliosis or kyphosis. The left and right hemidiaphragms are in their normal location and appear grossly unremarkable. The pelvis is intact. NECK: The neck presents an intact hyoid bone as well as thyroid and cricoid cartilages. The larynx is comprised of unremarkable vocal cords and folds, appearing widely patent without foreign material, and is lined by smooth, glistening mucosa. The epiglottis shows no edema, trauma or pathologic lesions. There is no hemorrhage of the anterior musculature of the neck. The vasculature of the anterior neck is unremarkable. The trachea and cervical spine are in the midline presenting no traumatic injuries or pathologic lesions. CARDIOVASCULAR SYSTEM: The heart weighs 474 grams. The left ventricle makes up the entirety of the apex. The endocardium is smooth. The foramen ovale is closed. The myocardium is red-brown without evidence of acute or remote infarction. The free wall of the left ventricle is 1.3 cm in thickness, the interventricular septum 1.3 cm, and the right ventricle 0.3 cm. The coronary artery ostia are in the normal anatomical location. The coronary arteries show focal moderate atherosclerotic stenosis up to 50% of the left anterior descending. The left circumflex and right coronary arteries are widely patent with minimal atheromatous change. There is a right dominant circulation. The cardiac valves are unremarkable with the tricuspid, pulmonary, mitral and aortic valves showing thin delicate leaflets with no vegetations or lesions present. The aorta is unremarkable. RESPIRATORY SYSTEM: The tracheobronchia! tree contains no edema fluid, aspirated gastric contents or other foreign material and is lined by smooth, glistening mucosa. The right lung weighs 859 grams and the left 673 grams. The pleural surfaces of the lungs are smooth and glistening with minimal anthracosis. On sectioning, the lungs demonstrate moderate congestion. There are no cysts, abnormal masses or other discrete lesions identified. The pulmonary arterial system is unremarkable without thromboemboli or atherosclerosis. ‘ a : Page 6 of 7 17713400 SOLIS, Juan Manuel GASTROINTESTINAL SYSTEM: The esophagus is intact lined by smooth glistening mucosa without erosions or varices. The gastroesophageal junction is normal. The stomach shows normal rugal folds without gastritis or ulcers and is empty. The small and large bowel appear grossly unremarkable. The appendix is present and unremarkable. The pancreas has a yellow lobulated cut surface without hemorrhage, calcification, fat necrosis, pseudocysts or masses. HEPATOBILIARY SYSTEM: The liver weighs 2405 grams and has a nodular surface. On sectioning the hepatic parenchyma is tan-brown, nodular and fibrotic. No dominant masses are identified. The gallbladder is unremarkable containing 50 mL of yellow-green bile and no calculi. The mucosa is green and velvety. The extrahepatic biliary system is patent. RETICULOENDOTHELIAL (HEMATOPOIETIC) SYSTEM: The spleen is enlarged and weighs 486 grams with a gray smooth capsule. On sectioning, the parenchyma is reddish-brown and soft. Examination of the cervical, axillary, mediastinal, abdominal and inguinal lymph nodes reveals no lymphadenopathy. The examined bone marrow is red and firm without lesions. The thymus gland is involuted, appropriate for age. GENITOURINARY SYSTEM: The right and left kidneys weigh 266 grams and 252 grams, respectively. The capsules strip with ease and the cortical surfaces are smooth. On sectioning the cortex is of normal thickness, with a well-defined corticomedullary junction and unremarkable medullae. The pelves and calyces are of normal size and lined by gray glistening mucosa. There are no calculi. The ureters are of normal caliber in the retroperitoneum. The renal arteries and veins are normal. The urinary bladder is unremarkable containing no urine. The prostate gland and seminal vesicles are unremarkable. The testes are not removed. woe RIG Page 7 of 7 AV _1713400 SONS, Juan Manuel ENDOCRINE SYSTEM: The thyroid gland is of normal size and shape with a red-brown cut-surface and no lesions. Parathyroid glands are not identified. The adrenal glands have yellow cortices of normal thickness and the medullae show no lesions or hemorrhage. The pituitary gland is of normal size with no gross pathologic lesions. HEAD AND CENTRAL NERVOUS SYSTEM: A scalp incision, craniotomy, and removal of the brain are performed in the usual fashion. There is evidence of traumatic injury and medical therapy of the head including the skull and brain (see THERAPEUTIC INTERVENTION and EVIDENCE OF INJURY). The brain weighs 1475 grams. Serial sections demonsirate no evidence of underlying natural disease. Vil. IDENTIFICATION: The decedent is identified by fingerprints. SPECIMENS AND EVIDENCE COLLECTED 1: 11 mL subclavian blood, 14 mL aortic blood, 14 mL urine and 7 mL of vitreous for toxicology Representative tissue sections in formalin Fingerprints and palmprints Forensic evidence: a. Blood card b. Scalp hair c. Facial hair d. Pubic hair A, Representative photographs ge GETS EDC: 11/28/17 Dictated: 8/28/17 Transcribed: 9/8/17 Completed: 11/15/17 RCF:bb Forensic Toxicology Results Office of Chief Medical Examiner Toxicology Laboratory Service 200 Feliks Gwozdz Place Fort Worth, Texas 76104 Name: Juan Manuel Solis Case Number: 1713400 Toxicology Work Number: 1702848 Nizam Peerwani, M.D... DABFP Chief Medical Examiner Robert Johnson, PH.D., DABFT Chief Toxicologist Service Request Number: 002 Specimen Drug Result Drug Amount \| Instrument Used \| Performed By Subclavian Blood \| Ethanol NEGATIVE GC/FID K. SCOTT URINE Amphetamine ELISA NEGATIVE ELISA \| B. LANDRY _URINE Methamphetamine ELISA NEGATIVE ELISA B. LANDRY URINE \| PHC ELISA NEGATIVE ELISA _B. LANDRY URINE Opiate ELISA POSITIVE ELISA B. LANDRY \| URINE Cocaine ELISA NEGATIVE ELISA B. LANDRY \| URINE Benzodiazepine ELISA POSITIVE ELISA B. LANDRY URINE Oxycodone ELISA NEGATIVE ELISA B. LANDRY PURINE \| Fentanyl ELISA NEGATIVE ELISA \| B. LANDRY \| URINE ACID NEGATIVE GCMS C. LEWIS Subclavian Blood MORPHINE POSITIVE 174 ng/mL LCMS _ C, WHEELER \| URINE MORPHINE _ POSITIVE LCMS C. WHEELER Subclavian Blood NORDIAZEPAM POSITIVE 92 ng/mL LCMS C. WHEELER URINE \| NORDIAZEPAM POSITIVE LCMS C, WHEELER Approved By: Approved Date: _ TARRANT COUNTY MEDICAL EXAMINER’S DISTRICT SERVING TARRANT, PARKER, JOHNSON & DENTON COUNTIES Investigator’s Report CASE #: 1713400 Tarrant TYPE: Jurisdiction IDENTITY: Identified NIZAM PEERWANI, M.D. MICHAEL FLOYD CHIEF MEDICAL EXAMINER CHIEF FORENSIC DEATH INVESTIGATOR DECEASED: Juan Manuel Solis ADDRESS: 113 Tracy St., Stephenville, Texas 76401 AGE: 52 BIRTH DATE: 2/16/1965 MARITAL STATUS: Married PHONE: RACE OR COLOR: Hispanic SEX: M HEIGHT: 5' 7" WEIGHT: 181.1 Ib. SSN: MANNER OF DRESS: OCCUPATION: PLACE OF EMPLOYMENT: DATE OF DEATH: 8/26/2017 TIME OF DEATH: 20:50 PLACE OF DEATH DESCRIPTION: Hospice Inpatient Unit ADDRESS OF DEATH: 1111 Summit Ave., Fort Worth, Texas 76102 HOSPITALIZED: Yes ADMIT DATE: 8/5/2017 ADMIT TIME: 21:39 ENVIRONMENT CONDITION: controlled CHARACTERISTIC OF PREMISES: indoors DATE/TIME M.E, NOTIFIED: 8/26/2017 21:15 ARRIVED: REPORTING PERSON: Kerri Thomas, R.N. REPORTING AGENCY: Community Hospice ADDRESS: 1111 Summit Ave., Fort Worth, Texas 76102 PHONE: (817)870-9995 PRONOUNCED DEAD BY: Kerri Thomas, R.N. PRONOUNCING AGENCY: Community Hospice of Texas LAST TREATED BY: DATE/TIME OF OCCURRENCE: 8/5/2017 23:00 INJURY AT WORK: NO PLACE OF OCCURRENCE: Sports Bar LOCATION: 2025 E. Washington St., Stephenville, Texas 76401 TRAUMA RELATED: Yes WITNESSED BY: Donald Smith IDENTIFICATION TYPE: Visual DATE/TIME OF IDENTIFICATION: 8/26/2017 -Time: 19:35 IDENTIFIED BY: IDENTIFICATION STATUS: Positive ID ADDRESS: PHONE: COMMENTS: WITNESSED BY: ShaVonda Jones IDENTIFICATION TYPE: Fingerprint DATE/TIME OF IDENTIFICATION: 8/28/2017 -Time: 13:05 IDENTIFIED BY: IDENTIFICATION STATUS: Positive ID ADDRESS: PHONE: COMMENTS: Postmortem inked fingerprints collected from the remains. Antemortem fingerprints 8/14/2020 Page \| TARRANT COUNTY MEDICAL EXAMINER’S DISTRICT SERVING TARRANT, PARKER, JOHNSON & DENTON COUNTIES Investigator’s Report CASE #: 1713400 Tarrant TYPE: Jurisdiction IDENTITY: Identified NIZAM PEERWANI, M.D. MICHAEL FLOYD CHIEF MEDICAL EXAMINER CHIEF FORENSIC DEATH INVESTIGATOR obtained from the TXDPS based on the tentative identity. Subsequent comparisons resulted in the identification of the remains as: Juan Manuel Solis, H/M,02/16/1965. NEXT OF KIN NOTIFICATION DATE/TIME: 8/26/2017 20:50 NOTIFIED BY: Kerri Thomas, R.N. NOTIFYING AGENCY: Community Hospice NEXT OF KIN NAME: RELATIONSHIP: COMMENTS: ADDRESS: PHONE: BODY TO: TCME CONVEYANCE: Accucare FUNERAL HOME: TBD NAME OF RELEASING AUTHORITY: RELATIONSHIP: DISPOSITION OF PROPERTY: MEDICAL INVESTIGATOR: Donald Smith 8/14/2020 Page 2 CHU.24451 CAUSE NO. CV35251 VANESSA BOLANOS, MAYRA_ § IN THE DISTRICT COURT BOLANOS, AND SHELIA WALTONAS § NEXT FRIEND OF JUAN MANUEL § SOLIS, DECEDENT, § Plaintiffs, § ERATH COUNTY, TEXAS § VS. § § THE PURPLE GOAT, LLC and § FRANCISCO SOTO, § Defendants. § 266'4 JUDICIAL DISTRICT DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFE’S FIRST REQUESTS FOR ADMISSIONS TO: Plaintiffs, VANESSA BOLANOS, MAYRA BOLANOS, AND SHELIA WALTON AS NEXT FRIEND OF JUAN MANUEL SOLIS, DECEDENT, by and through her attorney of record, Ms. Ali Crocker, Crocker Russell & Associates, 2401 Callender Road, Suite 103, P. O. Box 1671, Mansfield, Texas 76063. COMES NOW THE PURPLE GOAT, LLC, Defendant in the above entitled and numbered cause, and in accordance with Rule 198 of the Texas Rules of Civil Procedure, serves the following Responses to Plaintiff’ s First Request for Admissions. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 1 Respectfully submitted, FLETCHER, FARLEY, SHIPMAN & SALINAS, L.L.P. /s/ Douglas D. Fletcher DOUGLAS D. FLETCHER State Bar No. 07139500 Email: doug. fletcher @ fletcherfarley.com JOSEPH J. HARRISON State Bar No. 24083143 Email: joe.harrison @ fletcherfarley.com 9201 North Central Expressway, Suite 600 Dallas, Texas 75231 (214) 987-9600 (214) 987-9866 [Fax] ATTORNEYS FOR DEFENDANT THE PURPLE GOAT, LLC CERTIFICATE OF SERVICE This is to certify that a true and correct copy of the foregoing instrument has been mailed, telecopied, electronically served or hand delivered to all attorneys of record, in compliance with Rule 21a. of the Texas Rules of Civil Procedure, on this the 21“ day of August, 2020. /s/ Douglas D. Fletcher Douglas D. Fletcher DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 2 REQUESTS FOR ADMISSIONS REQUEST NO. 1. Admit or deny on August 5, 2017 Juan Manuel Solis Bolanos was employed by Purple Goat. RESPONSE: Admitted. REQUEST NO. 2. Admit or deny on August 5, 2017 at 5:00 p.m., Juan Manuel Solis Bolanos was working his shift at the Purple Goat. RESPONSE: Admitted. REQUEST NO. 3. Admit or deny that Purple Goat employs undocumented workers. RESPONSE: Defendant objects to Request for Admission No. 3. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 4. Admit or deny Purple Goat has received one or more citations for violating Texas Alcoholic Beverage Commission policies. RESPONSE: Admitted. REQUEST NO. 5. Admit or deny that Purple Goat does not deduct taxes from all its employees pay checks. RESPONSE: Defendant objects to Request for Admission No. 5. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 6. Admit or deny Michael Howard was working as a bartender the day of the incident, August 5, 2017. RESPONSE: Admitted. REQUEST NO. 7. Admit or deny Purple Goat knew or had knowledge that Juan Manuel Solis Bolanos was an illegal resident when he was hired. RESPONSE: Defendant objects to Request for Admission No. 7. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 8. Admit or deny Purple Goat paid Juan Manuel Solis Bolanos in cash. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 3 RESPONSE: Defendant objects to Request for Admission No. 8. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO.9. Admit or deny on August 5, 2017 Juan Manuel Solis Bolanos was working at the Purple Goat as a bus boy. RESPONSE: Denied. REQUEST NO. 10. Admit or deny on August 5, 2017 Juan Manuel Solis Bolanos was working as a dish washer. RESPONSE: Admitted. REQUEST NO. 11. Admit or deny on August 5, 2017 Juan Manuel Solis Bolanos was working at the Purple Goat on the clock when the incident occurred. RESPONSE: Defendant objects to Request for Admission No. 11 on the grounds that the term “on the clock” as used in this Request is not defined. Defendant has admitted in Request Request for Admission No. 10 that Juan Manuel Solis Bolanos was working as a dishwasher on the day of the incident. REQUEST NO. 12. Admit or deny Purple Goat did not withhold taxes on Juan Manuel Solis Bolanos pay. RESPONSE: Defendant objects to Request for Admission No. 12. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 13. Admit or deny Purple Goat did not issue a 1099 to Juan Manuel Solis Bolanos. RESPONSE: Defendant objects to Request for Admission No. 13 on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 14. Admit or deny Purple Goat did not issue a W-2 to Juan Manuel Solis Bolanos. RESPONSE: Defendant objects to Request for Admission No. 14 on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 15. Admit or deny Purple Goat paid Juan Manuel Solis Bolanos hourly. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 4 RESPONSE: Defendant objects to Request for Admission No. 15 on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 16. Admit or deny Purple Goat paid Juan Manuel Solis Bolanos $7.25 an hour. RESPONSE: Defendant objects to Request for Admission No. 16 on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 17. Admit or deny Juan Manuel Solis Bolanos clocked in at 5:00 p.m. for his shift of August 5, 2017. RESPONSE: Defendant objects to Request for Admission No. 17 on the grounds that the term “clocked in” as used in this Request is not defined. Defendant has admitted in Request for Admission No. 10 that Juan Manuel Solis Bolanos was working as a dishwasher on the day of the incident. REQUEST NO. 18. Admit or deny Juan Manuel Solis Bolanos clocked in at 4:00 p.m. for his shift of August 5, 2017. RESPONSE: Defendant objects to Request for Admission No. 18 on the grounds that the term “clocked in” as used in this Request is not defined. Defendant has admitted in Request for Admission No. 10 that Juan Manuel Solis Bolanos was working as a dishwasher on the day of the incident. REQUEST NO. 19. Admit or deny Juan Manuel Solis Bolanos never received any disciplinary actions from Purple Goat. RESPONSE: Defendant objects to Request for Admission for Admission No. 19. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 20. Admit or deny Purple Goat has a system to track their employee’s work hours. RESPONSE: Defendant objects to Request for Admission No. 20. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 21. Admit or deny Purple Goat has a system that keeps their employee’s work schedules. RESPONSE: Defendant objects to Request for Admission No. 21. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 5 REQUEST NO. 22. Admit or deny that Purple Goat does not require its employees to wear non- slip shoes. RESPONSE: Defendant objects to Request for Admission No. 22. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 23. Admit or deny Purple Goat does not conduct background check on its employees. RESPONSE: Defendant objects to Request for Admission No. 23. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 24. Admit deny Purple Goat requires all employees to be TABC certified. RESPONSE: Denied. REQUEST NO. 25. Admit or deny Michael Howard was TABC certified on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 26. Admit or deny Michael Howard has one or more citations against his TABC certification as of August 31, 2017. RESPONSE: Admitted. REQUEST NO. 27. Admit or deny Purple Goat informed TABC of the incident on August 5, 2017. RESPONSE: Defendant objects to Request for Admission No. 27. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 28. Admit or deny Michael Howard is currently employed by the Purple Goat. RESPONSE: Denied. REQUEST NO. 29. Admit or deny Juan Manuel Solis Bolanos had valid food handler license as of August 5, 2017. RESPONSE: Defendant objects to Request for Admission No. 29. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 6 REQUEST NO. 30. Admit or deny that Juan Manuel Solis Bolanos had a valid TABC certification as of August 5, 2017. RESPONSE: Denied. REQUEST NO. 31. Admit or deny Francisco Soto consumed multiple alcoholic beverages at the Purple Goat on August 5, 2107. RESPONSE: Denied. REQUEST NO. 32. Admit or deny that Francisco Soto was a frequent customer of the Purple Goat as of August 5, 2017. RESPONSE: Defendant admits that Francisco Soto has been a customer at The Purple Goat on at least one occasion prior to the incident basis of suit on August 5, 2017. REQUEST NO. 33. Admit or deny Juan Manuel Solis Bolanos consumed alcohol while still on the clock. RESPONSE: Defendant objects to Request for Admission No. 33 on the grounds that the term “on the clock” as used in this Request is not defined. Subject to that objection and based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 33, and therefore would deny same. REQUEST NO. 34. Admit or deny that more than one bartender was working on August 5, 2017 at 6:00 p.m. RESPONSE: Admitted. REQUEST NO. 35. Admit or deny Michael Howard served Bolanos alcohol. RESPONSE: Denied. REQUEST NO. 36. Admit or deny Francisco Soto represented to Michael Howard was at the Purple Goat on August 5, 2017 to collect a debt from Juan Manuel Solis Bolanos. RESPONSE: Defendant objects to Request for Admission No. 36. on the grounds that the request is unintelligible, therefore Defendant denies same. REQUEST NO. 37. Admit or deny Francisco Soto asked Michael Howard to get Juan Manuel Solis Bolanos from the kitchen on August 5, 2017. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request No. 37, and therefore would deny same. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 7 REQUEST NO. 38. Admit or deny that Michael Howard went to get Juan Manuel Solis Bolanos from the kitchen to meet with Francisco Soto on August 5, 2017. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 37, and therefore would deny same. REQUEST NO. 39. Admit or deny that Purple Goat had security cameras on the premises on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 40. Admit or deny Purple Goat had cameras inside the building on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 41. Admit or deny Purple Goat had cameras on the outside of the building on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 42. Admit or deny that Purple Goat’s security camaras [sic] were working on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 43. Admit or deny Purple Goat records its security camara [sic] footage. RESPONSE: Admitted REQUEST NO. 44. Admit or deny Purple Goat had footage of the incident on August 5, 2017. RESPONSE: Defendant admits it had footage of the incident for seven days after August 5, 2017 per its camera footage retention policy. REQUEST NO. 45. Admit or deny the security camera recording of the incident was not preserved. RESPONSE: Admitted. REQUEST NO. 46. Admit or deny Purple goat was contacted by local police on August 5, 2017 regarding the incident. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 8 RESPONSE: Defendant would admit that members of the local law enforcement organization came to the premises on August 5, 2017. REQUEST NO. 47. Admit or deny one or more customers heard the incident. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request No. 47, and therefore would deny same. REQUEST NO. 48. Admit or deny one or more customers saw the incident. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 48, and therefore would deny same. REQUEST NO. 49. Admit or deny one or more employees of the Purple goat heard the incident. RESPONSE: Admitted. REQUEST NO. 50. Admit or deny one or more employees of the Purple goat saw the incident. RESPONSE: Admitted. REQUEST NO. 51. Admit or deny one or more employees of the Purple goat saw Juan Manuel Solis Bolanos consume alcohol on August 5, 2017 while he was working. RESPONSE: Denied. REQUEST NO. 52. Admit or deny one or more employees of the Purple goat had knowledge that Juan Manuel Solis Bolanos consumed alcohol on August 5, 2017 while he was working. RESPONSE: Denied. REQUEST NO. 53. Admit or deny Haylie Adams called 911 on August 5, 2017. RESPONSE: Admitted. REQUEST NO. 54. Admit or deny the police department came to the Purple Goat on August 5, 2017. RESPONSE: Defendant admits that members of the local law enforcement organization came to The Purple Goat on August 5, 2017, the date of the incident basis of suit. REQUEST NO. 55. Admit or deny there have been other altercations between a customer and an employee. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 9 RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 55, and therefore would deny same. REQUEST NO. 56. Admit or deny that there have been previous altercations between a customer and another customer at the Purple Goat. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 56, and therefore would deny same. REQUEST NO. 57. Admit or deny that there have been previous alterations between a customer and an employee at the Purple Goat. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 57, and therefore would deny same. REQUEST NO. 58. Admit or deny after the incident on August 5, 2017 Purple Goat placed signs stating Purple Goat was not liable for injuries on its premises. RESPONSE: Defendant objects to Request for Admission No. 58. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 59. Admit or deny you were aware Juan Manuel Solis Bolanos was married to Sheila Walton. RESPONSE: Denied. REQUEST NO. 60. Admit or deny Purple Goat did not notify Sheila Walton that Juan Manuel Solis Bolanos was taken to the hospital. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 60, and therefore would deny same. REQUEST NO. 61. Admit or deny that no representative of the Purple Goat called Sheila Walton after the incident on August 5, 2017. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 61, and therefore would deny same. REQUEST NO. 62. Admit or deny Sheila Walton came to Purple Goat on August 6, 2017. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 10 RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 62, and therefore would deny same. REQUEST NO. 63. Admit or deny Sheila Walton asked employees of Purple Goat where her husband was on August 6, 2017. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 63, and therefore would deny same. REQUEST NO. 64. Admit or deny as of August 5, 2017, Purple Goat had a valid and up to date commercial insurance policy. RESPONSE: Defendant would object to Request for Admission No. 64. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 65. Admit or deny on August 5, 2017 Purple Goat’s had a valid and up to date liquor insurance policy. RESPONSE: Defendant objects to Request for Admission No. 65. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 66. Admit or deny you sent the Original Petition to the commercial insurance carrier. RESPONSE: Defendant objects to Request for Admission No. 66. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 67. Admit or deny you sent the Original Petition to the liquor liability carrier. RESPONSE: Defendant objects to Request for Admission No. 67. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 68. Admit or deny you sent the Amended Petition to the commercial insurance carrier. RESPONSE: Defendant objects to Request for Admission No. 68. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 69. Admit or deny you sent the Amended Petition to the liquor liability carrier. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 11 RESPONSE: Defendant objects to Request for Admission No. 69. on the grounds of relevancy insofar as said Request for Admission is not reasonably calculated to lead to admissible evidence. REQUEST NO. 70. Admit or deny that Francisco Soto has not been indicted for charges arising out of the incident that occurred between him and Juan Manuel Solis Bolanos. RESPONSE: At this time, based upon Defendant’s reasonable inquiry, the information known or reasonably obtainable by it is insufficient to enable it to either admit or deny Request for Admission No. 70, and therefore would deny same. REQUEST NO. 71. Admit or deny that the Purple Goat gave witness statements to the Stevensville Police regarding the incident that occurred on August 5, 2017. RESPONSE: Defendant admits that it has cooperated with the appropriate law enforcement organization regarding said organization’s investigation of the incident. REQUEST NO. 72. Admit or deny that the Purple Goat did not have or employed private security workers as of August 5, 2017. RESPONSE: Denied. REQUEST NO. 73. Admit or deny that the Purple Goat is a subsidiary of another company. RESPONSE: Denied. DEFENDANT THE PURPLE GOAT, LLC’S OBJECTIONS AND RESPONSES TO PLAINTIFF’S FIRST REQUESTS FOR ADMISSIONS Page 12 Automated Certificate of eService This automated certificate of service was created by the efiling system. The filer served this document via email generated by the efiling system on the date and to the persons listed below. The rules governing certificates of service have not changed. Filers must still provide a certificate of service that complies with all applicable rules. Micala Munoz on behalf of Ali Crocker Bar No. 24098868 micala@cralawfirm.com Envelope ID: 51380495 Status as of 3/11/2021 4:03 PM MST Associated Case Party: The Purple Goat, LLC Name BarNumber \| Email TimestampSubmitted \| Status David C. Colley 4583600 david.colley@fletcherfarley.com \| 3/11/2021 10:44:37 AM \| SENT Douglas DFletcher sheila.landua@fletcherfarley.com \| 3/11/2021 10:44:37 AM \| SENT Joe J.Harrison joe.harrison@fletcherfarley.com \| 3/11/2021 10:44:37 AM \| SENT Rosa Lavin rosa.lavin@fletcherfarley.com 3/11/2021 10:44:37 AM \| SENT Associated Case Party: Vaness Bolanos Name BarNumber \| Email TimestampSubmitted \| Status Micala Munoz micala@cralawfirm.com \| 3/11/2021 10:44:37 AM \| SENT Ali Crocker ali@cralawfirm.com 3/11/2021 10:44:37 AM \| SENT Kursten King kursten@cralawfirm.com 3/11/2021 10:44:37 AM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4620253/	Crowley, Milner & Company, a Michigan Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentCrowley, Milner & Co. v. CommissionerDocket No. 8828-78United States Tax Court76 T.C. 1030; 1981 U.S. Tax Ct. LEXIS 110; June 17, 1981, Filed 110 Decision will be entered for the petitioner. Petitioner entered into an arrangement with Prudential Insurance Co. of America whereby petitioner sold a store that it was constructing to Prudential at the store's fair market value and then leased the store from Prudential for 30 years at a fair market rental. Held, the transaction was a bona fide sale rather than a like-kind exchange under sec. 1031, I.R.C. 1954, and petitioner's loss on the sale is recognizable. Leslie Co. v. Commissioner, 539 F.2d 943 (3d Cir. 1976), affg. 64 T.C. 247">64 T.C. 247 (1975), followed. Held, further, petitioner's excess basis in the property over the sales price is not amortizable over the term of the lease as a cost of obtaining the lease. Held, further, petitioner is not liable for a late filing penalty under sec. 6651(a), I.R.C. 1954. Joel J. Morris and Thomas L. Geer, for the petitioner.Thomas E. Ritter, for the respondent. Featherston, Judge. FEATHERSTON1030 Respondent determined a deficiency in the amount of $ 159,724.57 and an addition to tax under section 6651(a)1 in the amount of $ 919.61 for the tax year ended January 31, 1976. The issues for decision are:(1) Whether section 1031 applies to a sale-leaseback entered into by petitioner and Prudential Insurance Co. of America;(2) Whether the loss incurred by petitioner on the transaction should be capitalized as a cost of obtaining the lease and amortized over the term of the lease; and(3) Whether petitioner is liable for the late filing penalty under section 6651(a).1031 FINDINGS OF FACTAt the time it filed its petition, petitioner's principal place of business was located in Detroit, Mich.113 Petitioner filed its return for the taxable year ended January 31, 1976, with the Internal Revenue Service Center, Cincinnati, Ohio, on September 24, 1976. Petitioner reports its income on the accrual method of accounting.During the period in issue, petitioner operated department stores emphasizing national brand ready-to-wear merchandise. Petitioner's main store was located in Detroit. It also operated eight suburban and satellite outlets.In the early 1970's, due to the continued deterioration of downtown Detroit's retail environment and the continued unprofitability of petitioner's downtown store, petitioner began to consider closing that store. To maintain revenue and increase profitability, petitioner also began searching for a location for a new store.At the same time, the Taubman Co., a nationwide developer of major regional shopping centers, proposed to develop three new regional shopping centers for the Detroit area. The Taubman shopping centers typically were large, enclosed malls with one or more anchor stores and a number of smaller specialty shops intended to serve a large geographical area.The Taubman Co. had devised a "package" plan for developing large regional114 shopping centers. The Taubman Co. would establish a partnership or a corporation which would purchase land for the shopping center site. This partnership or corporation would, in turn, sell parcels of land to the various so-called anchor or large department store participants in the shopping center project and enter into an operating agreement with these anchor participants whereby the anchor stores would build their stores and the partnership or corporation established by Taubman would build the remainder of the shopping center complex. These major parties to the arrangement would contribute pro rata to the development of the shopping center's common elements, e.g., roadways, parking, lighting, sidewalks, etc.After investigating the malls planned by Taubman, petitioner decided that the proposed Lakeside Mall (sometimes hereinafter the mall) would meet petitioner's requirements as to timing, demographics, size, complementary anchor department stores, growth potential, and the prestige of being part of a large regional shopping center. In September 1973, petitioner began negotiating with Lakeside Center Associates (Lakeside Associates), the partnership formed to develop and operate115 the mall, 1032 to include one of petitioner's stores as an anchor store in the proposed mall. At the same time, petitioner entered into negotiations with H. F. Campbell Co. (Campbell), a major Detroit area construction firm, for the design and construction of the contemplated store at the mall.The "package" developed by Taubman required each anchor participant to purchase the land and build its own store in accordance with the unified shopping center plan. Petitioner, however, was not interested in holding or owning real estate. Instead, petitioner preferred using its limited capital for retail merchandising. With the exception of the original downtown store, all of petitioner's stores were leased rather than owned. Consequently, to comply with Taubman's requirements and to meet its own financial needs, petitioner investigated various forms of financing its Lakeside venture. Petitioner eventually concluded that a sale-leaseback with the Prudential Insurance Co. of America (Prudential) was the most attractive arrangement.After oral agreements were reached with Lakeside Associates, Campbell, and Prudential, petitioner's board of directors, on March 26, 1974, authorized116 petitioner to enter into firm written agreements with these parties. The authorization was given in the belief that the negotiation with all three parties would successfully be completed.After having reached an agreement in principle with Lakeside Associates and with Prudential, petitioner executed the Campbell contract on April 27, 1974. The contract provided that the design of the facility would be developed simultaneously with its construction, and a maximum price of $ 2,985,072 was set for the landscaping, building exterior, and walls.On May 2, 1974, petitioner entered into an operating agreement and a supplemental agreement with Lakeside Associates. The agreements provided, among other things, that petitioner would pay Lakeside Associates $ 28,000 for the land on which the store would be built, and that petitioner would contribute $ 879,411 towards common area improvements. The agreement further granted mutual easements to the parties for the common areas.Petitioner continued to negotiate with Prudential during 1974. On November 18, 1974, petitioner entered into an "Agreement of Purchase and Leaseback" with Prudential for the land and 1033 improvements to petitioner's117 property. The sales price was set at $ 4 million. Although petitioner originally expected to be able to exclude certain fixtures and improvements from the sale, Prudential insisted that they be included. After unsuccessfully trying to negotiate a higher sales price to cover the costs of the additional inclusions, petitioner eventually acceded to Prudential's demands.Petitioner and Prudential entered into a 30-year lease with four successive 5-year options to renew. The lease provided for an annual rent of $ 360,000 plus 1 percent of gross sales exceeding $ 10 million at the Lakeside Mall store. During the renewal periods, rent was increased by 1 percent of annual gross sales exceeding the average gross sales of the last 2 years of the preceding period.Petitioner and Prudential closed the sale and leaseback on September 4, 1975. During construction, additional items and changes in existing items covered by the Campbell contract increased the cost of construction to $ 3,097,150. In addition, petitioner incurred the following costs in completing the building:Guardian Electric$ 43,584.00Landscaping45,100.00Carpeting104,000.00Painting44,400.00Building permit18,499.00Outside signs25,000.00Giffels Associates7,500.00P.A. system9,098.00Alteration room equipment9,260.00Insurance3,240.00Temporary electric3,334.00Taxes4,972.00Telephone equipment1,710.00Water coolers2,072.00Safe1,579.00Off-site improvements879,000.00Land28,000.00Other costs8,958.48118 The cost to petitioner of the property transferred to Prudential totaled $ 4,336,456.48, and thus exceeded the $ 4 million sales price by $ 336,456.48.1034 On its books and records, petitioner treated the amount by which its costs exceeded the $ 4 million sales price as a cost of obtaining the Lakeside Mall leaseback and amortized the cost over 30 years. On its income tax return for the taxable year ended January 31, 1976, petitioner claimed a loss of $ 336,456.48 on the sale of the property. Respondent disallowed the claimed loss on the grounds that the sale-leaseback constituted a like-kind exchange within the meaning of section 1031. Respondent determined that the expenses in excess of the sales price should be amortized over the term of the lease.Petitioner filed its return for its taxable year ended January 31, 1976, on September 24, 1976, claiming an overpayment of $ 159,302.89. Petitioner had timely filed a request for an automatic extension until July 15, 1976. Prior to July 15, 1976, petitioner applied for an additional extension of time in which to file. This application was denied on July 22, 1976. Both extension requests were accompanied by payments of 119 $ 365,000.OPINIONSection 165(a) provides that a corporation may deduct any "loss sustained during the taxable year and not compensated for by insurance or otherwise." Section 1002 2 sets forth the general rule that the entire amount of the gain or loss realized upon the sale or exchange of property, except as otherwise provided, shall be recognized.An exception to the general rule is established by section 1031. 3 That section provides for the nonrecognition of gain or 1035 loss when property held for use in a trade or business or investment is exchanged for like-kind property which is to be held for use in the trade or business or investment. If cash or other property which does not qualify as like-kind property is included in the exchange, gain (but not loss) is recognized to the extent of the cash or other property received.120 Respondent contends that petitioner transferred the land and building to Prudential in a like-kind exchange for a 30-year renewable lease and cash. 4 Consequently, respondent reasons, under section 1031 petitioner is not entitled to currently deduct the loss realized upon the sale. Rather, respondent contends that the loss should be amortized over the term of the lease as a cost incurred to obtain the lease.Petitioner, 121 to the contrary, maintains that the property was transferred to Prudential in a sale rather than a like-kind exchange. Petitioner concludes, therefore, that the loss is deductible in the year of the transfer.The threshold issue to be decided is whether the transaction constituted a sale or an exchange. If a sale occurred, then the provisions of section 1031 do not apply. If, on the other hand, an exchange took place, then we would have to decide whether the exchange was made for like-kind property as required by section 1031.The applicable income tax regulations define an exchange as "a reciprocal transfer of property, as distinguished from a transfer of property for a money consideration only." Sec. 1.1002-1(d), Income Tax Regs. The regulations further state that nonrecognition will be accorded only if the exchange meets both the definition and "the underlying purpose for which such exchange is excepted from the general rule." Sec. 1.1002-1(b), Income Tax Regs. Thus, in order to determine whether the transfer was a sale or an exchange, we must determine whether the transfer was for cash only or whether the lease had capital value so that it was part of the consideration for122 the transfer of the property. See Leslie Co. v. Commissioner, 539 F.2d 943">539 F.2d 943, 9491036 (3d Cir. 1976), affg. 64 T.C. 247">64 T.C. 247 (1975); Jordan Marsh Co. v. Commissioner, 269 F.2d 453">269 F.2d 453, 455 (2d Cir. 1959), revg. a Memorandum Opinion of this Court on another point. Cf. Century Electric Co. v. Commissioner, 192 F.2d 155">192 F.2d 155 (8th Cir. 1951), affg. 15 T.C. 581">15 T.C. 581 (1950), cert. denied 342 U.S. 954">342 U.S. 954 (1952) (where the lease had capital value). The lease had capital value if the $ 4 million sales price was less than the property's fair market value, or if the rent to be paid was less than the fair rental rate. See Leslie Co. v. Commissioner, 539 F.2d at 949.In Leslie Co. v. Commissioner, supra, this Court faced a set of facts involving construction financed by Prudential on terms virtually identical to the facts presently before us. In that case, we found, in the light of all the evidence, that the lease entered into by the taxpayer had no capital value and that the sale-leaseback, therefore, 123 constituted a transfer for cash only rather than a like-kind exchange accompanied by "boot." Accordingly, we allowed petitioner to deduct the loss realized upon the sale in the year of the sale. We reach the same conclusion here.Respondent attempts to distinguish Leslie on the grounds that, in the case before us, the lease entered into by petitioner had capital value. Respondent contends that the $ 4 million price received by petitioner was less than the fair market value of the property, and that therefore the capital value of the leaseback equaled the amount by which the property's fair market value exceeded the sales price. As evidence to support his argument that the leasehold had a capital value, respondent points to petitioner's great interest in the property's unique features.Considerable testimony has been introduced with regard to the fair market value and fair rental of the transferred property. We think it clear that the sale and lease were negotiated in an arm's-length dealing. We are convinced by the expert testimony introduced by petitioner that the actual sales price of the building and the agreed rent were at fair market values.The lease for the 115,300-square-foot124 building calls for rental at an annual rate of $ 360,000 or about $ 3.12 per square foot, plus 1 percent of annual sales over $ 10 million. Petitioner's expert compared this rate with the average net rental of $ 2.48 per square foot paid for K-Mart stores in southeastern Michigan during 1974 and 1975. Because of the superior quality of the Lakeside Mall store, he used the K-Mart rent to set a lower limit 1037 on the fair market rental of the Lakeside store. He also consulted an authoritative publication on shopping center rents of 550 centers throughout the United States for comparison purposes. In the light of this information, he concluded that the lease called for a fair rent, not a bargain rate.Petitioner's expert used an income approach to derive the building's value. He determined that a fair rate of return for the property would be between 9 and 9 1/2 percent. Capitalizing the rent paid by petitioner at that percentage, petitioner's expert concluded that the building had a value of $ 4 million. 5 We agree with petitioner that actual construction costs do not necessarily measure fair market value, and that, here, the fair market value of the store was $ 4 million125 notwithstanding construction costs exceeding that figure by approximately $ 340,000.We recognize that the lease was desirable to petitioner due to the mall's unique features detailed in our findings of fact. Nevertheless, this does not mean, as respondent apparently contends, that the lease had greater value than the rent to be paid and thus had capital value. The factors that appealed to petitioner were considered in determining whether the negotiated rent provided by the lease was at fair market value. Thus, the fact that petitioner was interested in the lease was reflected by the fair market rental paid by petitioner. We note that the lease provided that Prudential was to receive the entire proceeds in the event of condemnation. Furthermore, the lease did not grant petitioner any greater control over the property than126 that generally held by a tenant. Therefore, the leasehold itself had no capital value. See Leslie Co. v. Commissioner, 539 F.2d at 949.The transaction also fails to meet the underlying purpose for which section 1031 excepts exchanges from the general rules. Sec. 1.1002-1(b), Income Tax Regs. One of the primary purposes for allowing the deferral of gain in a like-kind exchange is to avoid imposing a tax upon a taxpayer who, while changing his form of ownership, is continuing the nature of his investment. H. Rept. 704, 73d Cong., 2d Sess. (1934), 1939-1 C.B. (Part 2) 554, 564. Jordan Marsh Co. v. Commissioner, 269 F.2d at 455; Biggs v. Commissioner, 69 T.C. 905">69 T.C. 905, 913 (1978), affd. 632 F.2d 1171">632 F.2d 1171 (5th 1038 Cir. 1980). In Koch v. Commissioner, 71 T.C. 54">71 T.C. 54, 63-64 (1978), we explained:The basic reason for allowing nonrecognition of gain or loss on the exchange of like-kind property is that the taxpayer's economic situation after the exchange is fundamentally the same as it was before the transaction occurred. 127 "[If] the taxpayer's money is still tied up in the same kind of property as that in which it was originally invested, he is not allowed to compute and deduct his theoretical loss on the exchange, nor is he charged with a tax upon his theoretical profit." * * The rules of section 1031 apply automatically; they are not elective. * * * The underlying assumption of section 1031(a) is that the new property is substantially a continuation of the old investment still unliquidated. * * * [Citations omitted.]We do not think that an exchange of like-kind property occurred here. Petitioner's money did not continue to be "tied up" in like-kind property. Rather, consistent with its longstanding policy, petitioner cashed in its investment in the property because it preferred to use its limited working capital in its merchandising endeavors rather than to buy "bricks and mortar."We have found that the lease had no capital value. Consequently, petitioner did not swap its real property for Prudential's interest in a long-term lease, but instead received, as the sole consideration for the transfer of the property, cash in the amount of the property's fair market value. Thus, under the regulations, 128 the transaction qualifies as a sale rather than a like-kind exchange.It is true that petitioner would not have sold the property to Prudential without obtaining the leaseback. Nevertheless, the parties bargained at arm's length to arrive at a fair market sales price and rent. Furthermore, petitioner retained no rights other than those typically held by a lessee. See City Investing Co. v. Commissioner, 38 T.C. 1">38 T.C. 1, 9 (1962). Therefore, the fact that petitioner was willing to sell the property in question "only with some kind of leaseback arrangement included does not of itself detract from the reality of the sale." Leslie Co. v. Commissioner, 64 T.C. at 254; City Investing Co. v. Commissioner, supra at 9. Accordingly, the transfer was a sale, not an exchange under 1039 section 1031, and petitioner is entitled to a deduction for the loss on the sale in the tax year ended January 31, 1976. 6129 Respondent also contends that the excess cost of the property over the cash received should be capitalized as a cost of obtaining the leasehold and amortized over the term of the lease. Respondent maintains that the excess expenses were in reality a payment for the premium value of the leasehold. We have already rejected respondent's contention that the lease had capital value. Therefore, the excess expenses were not a form of payment for any supposed premium value. To the contrary, the record indicates that petitioner incurred the excess expenses to ensure the completion of the sale and the return of its invested capital. Petitioner originally expected to be able to exclude certain fixtures and improvements from the sale. Because of hard bargaining by Prudential, however, petitioner finally agreed to transfer those items at no increase in the sales price, resulting in the excess costs. Accordingly, the excess expenses were not incurred to obtain the leasehold and are not required to be amortized over the term of the lease. 7130 Section 6651(a)8 provides for a late filing penalty on the amount of tax required to be shown as due on the return. Although petitioner's return was filed after the extended deadline of July 15, 1976, petitioner had paid more than the ultimate tax owed prior to the lapse of the extension. Consequently, no tax was due upon the filing of petitioner's return, and hence petitioner is not liable for the late filing penalty.131 To reflect the foregoing,Decision will be entered for the petitioner. 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. Sec. 1002 was repealed by Pub. L. 94-455, 90 Stat. 1520, for the tax years beginning after 1976. The provision was incorporated into sec. 1001(c).↩3. SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.(a) Nonrecognition of Gain or Loss From Exchanges Solely in Kind. -- No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.(b) Gain From Exchanges Not Solely in Kind. -- If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.↩4. Respondent relies on Century Electric Co. v. Commissioner, 155">192 F.2d 155 (8th Cir. 1951), affg. 15 T.C. 581">15 T.C. 581 (1950), cert. denied 342 U.S. 954">342 U.S. 954 (1952), and sec. 1.1031(a)-1(c), Income Tax Regs., to support his determination that the real property and 30-year lease constituted like-kind property. Those regulations state in pertinent part:(c) No gain or loss is recognized if * * (2) a taxpayer who is not a dealer in real estate * * * exchanges a leasehold of a fee with 30 years or more to run for real estate * * ↩5. Petitioner's expert noted that if he had used a capitalization rate of 10 percent, the value of the building would have been around $ 3,600,000 and the disputed loss would have been greater.↩6. Because of our holding, we do not need to consider whether the real property and the 30-year lease constituted like-kind property.↩7. We recognize that petitioner amortized the loss over the lease term in its financial books. Nevertheless, book and tax treatments of transactions often differ. See Leslie Co. v. Commissioner, 64 T.C. 247">64 T.C. 247, 254↩ (1975). Thus, this by itself does not mean that the excess expenses should be amortized for tax purposes.8. SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX.(a) Addition to the Tax. -- In case of failure -- (1) to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), * * on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620254/	MARK RUSSELL STEPHENSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentStephenson v. CommissionerDocket No. 23171-86.United States Tax CourtT.C. Memo 1987-341; 1987 Tax Ct. Memo LEXIS 341; 53 T.C.M. (CCH) 1327; T.C.M. (RIA) 87341; July 13, 1987Mark Russell Stephenson, pro se. Ramon Estrada, for the respondent. POWELLMEMORANDUM FINDINGS OF FACT AND OPINION POWELL, Special Trial Judge:1 Respondent342 determined a $ 3,784 deficiency in petitioner's 1983 income tax, as well as additions to tax. Petitioner was a resident of Corpus Christi, Texas at the time he filed his petition. The issues are (1) whether petitioner understated his tip income as determined by respondent, and (2) whether petitioner is liable for additions to tax under sections 6653(a)(1) and (a)(2). 2During 1983 petitioner was employed as a bartender at the Summit Hotel in Dallas, Texas. On his 1983 return, petitioner reported wages and tip income in the amount of $ 12,300.52. Upon examination of that return, respondent determined that petitioner had additional income from tips in the amount of $ 14,691.84. This determination was based on respondent's estimate that bartenders343 in the Dallas area received an average of $ 7.14 for each hour worked. Petitioner contends that respondent's calculation of petitioner's tip income is inaccurate and that his tips averaged approximately $ 1.25 per hour. Petitioner's claims that he kept a daily record of his tip compensation on the back of his time cards, which cards were handed in to his employer. However, petitioner did not submit these cards, or any other documentation with respect to his tip compensation. Tips are includible in gross income as compensation for services rendered. Sec. 61(a); sec. 1.61-2(a)(1), Income Tax Regs; Killoran v. Commissioner,709 F.2d 31">709 F.2d 31 (9th Cir. 1983), affg. a Memorandum Opinion of this Court; Schroeder v. Commissioner,40 T.C. 30">40 T.C. 30, 33 (1963). Section 6001 and the regulations thereunder require a taxpayer receiving tip income to keep records sufficient to enable respondent to determine his correct tax liability. Petitioner did not produce any records of his tip income, and respondent is authorized under section 446 to reconstruct petitioner's income to clearly reflect such income. Meneguzzo v. Commissioner,43 T.C. 824">43 T.C. 824, 831 (1965);344 Sutherland v. Commissioner,32 T.C. 862">32 T.C. 862 (1959). Petitioner has the burden of proving that the method adopted by respondent is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). The only evidence presented by petitioner in support of his position was his own unsubstantiated, uncorroborated, self-serving testimony. Although he contended that his tips were lower than what was calculated by respondent because he sometimes worked day shifts, during which tips are usually lower, petitioner produced no records showing what shifts he was working during that time. Thus, the actual tips realized by petitioner cannot be determined in this case because petitioner failed to present any records. In the absence of such records, respondent's reconstruction of the tip income need only produce "a result which is substantially correct." Mendelson v. Commissioner,305 F.2d 519">305 F.2d 519, 523 (7th Cir. 1962), cert. denied 371 U.S. 877">371 U.S. 877 (1962). We are satisfied that respondent's determination is substantially correct. Petitioner failed to submit records of his tip income as required by section 6001 and the regulations issued thereunder, 345 and at trial he submitted no evidence to justify this failure. Accordingly, respondent's determination with respect to the negligence additions to tax under sections 6653(a)(1) and (a)(2) is sustained. Meneguzzo v. Commissioner, supra at 836. Decision will be entered for the respondent.Footnotes1. This case was assigned pursuant to the provisions of section 7456(d) (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rules 180 et seq. ↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, and as in effect during the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise provided. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620257/	Clyde Bacon, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentClyde Bacon, Inc. v. CommissionerDocket No. 4223United States Tax Court4 T.C. 1107; 1945 U.S. Tax Ct. LEXIS 191; April 9, 1945, Promulgated 191 Decision will be entered under Rule 50. 1. Petitioner issued securities, called "debenture certificates," in which it acknowledged itself indebted to the holder for the repayment of the principal at a definite due date, with interest at 6 percent, payable semiannually, with the option to defer interest payments for four years if petitioner's cash position should so warrant, but delinquency thereafter making the principal immediately due and collectible, the securities being subordinate to creditors but superior to holders of common stock, the only stock issuable under petitioner's articles of incorporation. The securities were created for proper business reasons. Held, the debenture certificates are evidences of indebtedness and interest payments thereon are deductible from gross income.2. Pursuant to a plan of reorganization, individuals transferred certain assets to petitioner, the new corporation. The old corporation, of whose stock the individuals were the owners (except a nominal share) in practically the same proportion as their ownership of the individual assets, transferred its assets, excepting minor items, to the new corporation. The new corporation then issued192 its stock and debentures to the individuals in exchange for the assets so received. Held, no gain or loss may be recognized in the transaction and hence the basis of such assets to petitioner is their stipulated cost to transferors for the purpose of computing petitioner's excess profits and declared value excess profits taxes. Sec. 112 (b) (4), I. R. C.Arthur H. Kent, Esq., and J. N. Casella, C. P. A., for the petitioner. 193 E. A. Tonjes, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 1107 The respondent determined deficiencies of $ 6,330.87, $ 2,554.25, and $ 15,539.64 in the petitioner's income tax, declared value excess profits tax, and excess profits tax liabilities, respectively, for the taxable year ending March 31, 1943.1108 The issues originally pleaded in the petition, supplemented by those raised by the respondent's amended answer, are:(1) Whether certain debentures issued by the petitioner were in fact stock or were evidences of indebtedness;(2) Whether or not the transaction whereby the petitioner acquired certain farm lands, equipment, sheep, and other property, was a transaction upon which gain or loss is recognized;(3) If the second issue is decided affirmatively, there arises the question of the fair market value of such properties at the date of acquisition, for the purpose of determining the proper amount of the petitioner's equity invested capital.FINDINGS OF FACT.Certain facts were stipulated and admitted in the pleadings. The portions thereof relevant to the issues are as follows:The petitioner is a corporation organized under the laws of Idaho194 and has its principal office at Twin Falls, Idaho. It filed its income tax return, declared value excess profits tax return, and excess profits tax return for the taxable year with the collector of internal revenue for the district of Idaho. The petitioner kept its books and prepared its returns on the accrual basis.The petitioner was incorporated March 5, 1942, with a capital stock of $ 30,000, consisting of 30,000 shares of the par value of $ 1 each. The petitioner's bylaws stated that its business was livestock, farming, and other kindred occupations, as set forth in its articles of incorporation, and also declared its capital stock was the same as that stated in those articles.The minutes of a meeting of the petitioner's board of directors held March 20, 1942, record the following:The matter of the corporation, Clyde Bacon, Inc., taking over the assets of B. and G. Land Company was then discussed, particularly the value of the assets of said B. and G. Land Company. Likewise the value of the sheep owned by T. C. Bacon, together with the camp equipment, automobiles, trucks, machinery and the like owned by the said T. C. Bacon was discussed and at the conclusion of the discussion, 195 Director Clyde R. Bacon offered the following Resolution:Whereas, T. C. Bacon is the owner and holder of 1500 shares of the capital stock of B. and G. Land Company; andWhereas, Alice C. Bacon is the owner and holder of 1499 shares of the capital stock of B. and G. Land Company, all of which said shares of capital stock are the community property of the said T. C. Bacon and Alice C. Bacon, husband and wife; andWhereas, Clyde R. Bacon is the owner and holder of 1 share of the capital stock of said B. and G. Land Company; andWhereas, The above described shares of capital stock constitute all of the authorized, issued and outstanding capital stock of said B. and G. Land Company; and1109 Whereas, The assets of said B. and G. Land Company appear to have a reasonable market value of $ 177,641.64 and accordingly the above described 3000 shares of the capital stock of said B. and G. Land Company have a reasonable and fair market value of $ 177,641.64; andWhereas, The said T. C. Bacon, Alice C. Bacon and Clyde R. Bacon, being all of the stockholders of said B. & G. Land Company desire to transfer and surrender to B. & G. Land Company all of said stock in consideration for the transfer196 to Clyde Bacon, Inc., a corporation, by said B. and G. Land Company of all of the assets of said corporation; andWhereas, T. C. Bacon is now the owner and holder of approximately 12,556 head of sheep together with sheep camp equipment, automobiles, trucks, lambing sheds, machinery and other personal property used in carrying on his farming and livestock business, together with a personal checking account in the First Security Bank of Jerome, Idaho, in the amount of $ 6,804.97, all of which said assets and property are the community assets and property of T. C. Bacon and Alice C. Bacon; andWhereas, The said T. C. Bacon and Alice C. Bacon have personally incurred considerable expense in connection with the handling of said 12,556 head of sheep and are about to receive an advance payment on the sale of the 1942 wool clip amounting to $ 12,700.00 and expect to personally retain said sum of $ 12,700.00 to reimburse them for the expenses paid by them from January 1, 1942 to March 31, 1942; andWhereas, The aggregate fair market value of the assets of said B. and G. Land Company which consist of farm and range lands, is the sum of $ 177,641.64 and the aggregate fair market value of the197 above described personal property owned by the said T. C. Bacon and Alice C. Bacon is the sum of $ 122,358.36, or a total of $ 300,000.00; andWhereas, The said T. C. Bacon and Alice C. Bacon, the owners of the above described community property and Clyde R. Bacon, the owner of the above described one share of the capital stock of said B. and G. Land Company, have heretofore offered and do now offer to cause all of the assets of the said B. and G. Land Company to be conveyed to Clyde Bacon, Inc. and do now offer to sell and convey to Clyde Bacon, Inc. the above described 12,556 head of sheep, camp equipment and other personal property herein described, except an interest in the wool on said sheep represented by an advance payment to be made on the purchase price of said wool in the amount of $ 12,700.00, in consideration of the issuance and delivery of 30,000 shares of the capital stock of Clyde Bacon, Inc. of the par value of $ 30,000.00 and its debenture certificates in the aggregate principal amount of $ 270,000.00 bearing interest at the rate of six per cent per annum, maturing April 1, 1967; andWhereas, Clyde Bacon, Inc. is willing to accept and does hereby accept said offer198 and in consideration of a transfer to it of the above described personal property and assets is willing to issue or cause to be issued and delivered all of its capital stock in the amount of $ 30,000.00 and its debenture certificates in the amount of $ 270,000.00 to the said T. C. Bacon, Alice C. Bacon, and Clyde R. Bacon in such respective amounts as shall conform to the values of the properties respectively conveyed by said persons:Now, Therefore, Be It Resolved That the Directors of Clyde Bacon, Inc. do hereby adjudge and declare that the assets of said B. and G. Land Company, together with the above described 12,556 head of sheep, less the interest in the 1942 wool crop on said sheep represented by the advance payment of $ 12,700.00, camp equipment and other personal property hereinabove described now possesses 1110 an actual value of $ 300,000.00 and that said property is necessary for the business of Clyde Bacon, Inc.; andBe It Further Resolved, That Clyde Bacon, Inc. does hereby accept the above described offer of the said T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to cause the assets of said B. and G. Land Company to be conveyed to said Clyde Bacon, Inc. and to199 sell, assign and convey to it the above described 12,556 head of sheep, less the interest in the 1942 wool crop on said sheep represented by the advance payment of $ 12,700.00, camp equipment and other personal property hereinabove described in consideration of $ 30,000.00 worth of the capital stock of Clyde Bacon, Inc. which it hereby promises and agrees to issue or cause to be issued and delivered to T. C. Bacon, Alice C. Bacon and Clyde R. Bacon, the certificates evidencing said stock to be issued and delivered by Clyde Bacon, Inc. to T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to be in the following respective amounts:1 certificate in the amount of 15,000 shares to be issued to T. C. Bacon;1 certificate in the amount of 14,900 shares to be issued to Alice C. Bacon; and1 certificate in the amount of 100 shares to be issued to Clyde R. Bacon;and in consideration of $ 270,000.00 worth of its debenture certificates bearing interest at the rate of 6 per cent per annum maturing April 1, 1967, which it hereby promises and agrees to issue or cause to be issued and delivered in the following manner:5 debenture certificates, each in the principal sum of $ 12,000.00 and 5 debenture200 certificates, each in the principal sum of $ 15,000.00 made payable to T. C. Bacon and 5 debenture certificates, each in the principal sum of $ 12,000.00 and 5 debenture certificates, each in the principal sum of $ 15,000.00 made payable to Alice C. Bacon, all of which said debenture certificates are to be the community property of the said T. C. Bacon and Alice C. Bacon.The B. & G. Land Co., hereinafter called B. & G., was organized April 2, 1928, and owned farm and range lands. On March 23, 1942, minutes of the stockholders of B. & G. record the following:T. C. Bacon, President, of the corporation then stated that he, Alice C. Bacon and Clyde R. Bacon had heretofore organized a corporation known as Clyde Bacon, Inc., with a capitalization of $ 30,000.00 for the purpose of conducting the farm and livestock business, a part of which has been conducted by B. and G. Land Company and that said Clyde Bacon, Inc. desires to acquire the farm and grazing lands now constituting the assets of this corporation. He also stated, among other things, that B. and G. Land Company owned in addition to the farm lands and grazing lands hereinabove referred to approximately 1290 bags of beans and201 a few other items of personal property of inconsequential value. A discussion of the business and affairs of B. and G. Land Company was thereupon entered into and at the conclusion of said discussion Clyde R. Bacon offered the following resolution:"Be It Resolved That B. and G. Land Company liquidate and wind up its business and affairs by paying all of its debts and obligations and by distributing a liquidating dividend in kind of said 1290 bags of beans to the stockholders of said corporation and otherwise disposing of its other assets."On the same day the minutes of another meeting of the same stockholders record the following:Minutes of the annual meeting of stockholders held April 1, 1941 were read and approved.1111 T. C. Bacon, President of the corporation, then stated that he, Alice C. Bacon and Clyde R. Bacon had heretofore and on or about the 11th day of March, 1942 organized a corporation known as "Clyde Bacon, Inc." with a capitalization of $ 30,000.00 for the purpose of conducting the farm and livestock business a part of which has been conducted by this corporation and that said Clyde Bacon, Inc. desires to acquire the farm and grazing lands now constituting202 the assets of this corporation. He further stated that the stockholders of this corporation believe it advisable to turn back and surrender to this corporation their stock in this corporation and as a consideration for the surrender of said stock to have this corporation make, execute and deliver warranty deeds to said Clyde Bacon, Inc. covering all of said farm and grazing lands. He stated that the assets of this corporation at the present time are of the reasonable market value of $ 177,641.64 and that the stockholders of this corporation desire to have issued to them stock and debentures of Clyde Bacon, Inc. for the value of said assets, and that he believed it advisable for this corporation to transfer and convey its assets to said Clyde Bacon, Inc. in order to simplify the farm and livestock business to be conducted by the said Clyde Bacon, Inc. T. C. Bacon then read to the stockholders an agreement which had been prepared by Frank L. Stephan, Attorney at Law, of Twin Falls, Idaho relative to transferring and surrendering to this corporation all capital stock of said corporation in consideration of the transfer of the assets of said corporation to said Clyde Bacon, Inc. After203 the Agreement had been read and discussed Clyde R. Bacon moved the adoption of the following Resolution:"Resolved that the proposal of T. C. Bacon, Alice C. Bacon and Clyde R. Bacon to transfer and surrender to this corporation all of the issued and outstanding capital stock of B. and G. Land Company in consideration for the transfer to Clyde Bacon, Inc. by this corporation of all of the assets of this corporation consisting of farm and range lands of the market value of $ 177,641.64 be, and the same is hereby approved.Be It Further Resolved that the Agreement, hereinafter set out, with regard thereto, which said Agreement is in words and figures as follows; to-wit:AGREEMENTWhereas, B. and G. Land Company is now and ever since April 2, 1928 has been a corporation organized and existing under and by virtue of the laws of the State of Idaho with its principal place of business at Twin Falls, Idaho, having been capitalized for the sum of $ 300,000.00 divided into 3000 shares of capital stock of the par value of $ 100.00 each share; andWhereas, The following stockholders of said B. and G. Land Company owning the number of shares set opposite each respective name, to-wit:T. C. Bacon1500 sharesAlice C. Bacon1499 sharesClyde R. Bacon1 share 204 desire to transfer and surrender to B. and G. Land Company all of said stock in consideration for the transfer to Clyde Bacon, Inc., a corporation, by this corporation of all of the assets of B. and G. Land Company; andWhereas, all of the assets of said B. and G. Land Company consist of farm and range lands of the fair market value of $ 177,641.64;Now, Therefore, This Agreement made and entered into this 23d day of March, 1942, by and between T. C. Bacon and Alice C. Bacon of Twin Falls, Idaho, and Clyde R. Bacon of Jerome, Idaho, parties of the first part, and B. and G. Land Company, a corporation organized and existing under and by virtue of the laws 1112 of the State of Idaho with its principal place of business at Twin Falls, Idaho, party of the second part, Witnesseth:That for and in consideration of the sum of $ 1.00, lawful money of the United States, by each of the parties hereto to the other in hand paid, receipt of which is hereby acknowledged and the surrender of all of the capital stock of B. and G. Land Company, a corporation by said parties of the first part to said party of the second part, it is agreed as follows:That parties of the first part hereby tender205 to and surrender back to party of the second part the capital stock of B. and G. Land Company owned by them in the following amounts: 1500 shares owned by T. C. Bacon,1499 shares owned by Alice C. Bacon, and1 share owned by Clyde R. Bacon.The party of the second part hereby acknowledges that said 3000 shares of capital stock of B. and G. Land Company have been surrendered and delivered back to party of the second part and hereby agrees to forthwith make, execute and deliver to Clyde Bacon, Inc., a corporation organized and existing under and by virtue of the laws of the State of Idaho with its principal place of business at Twin Falls, Idaho, Warranty Deeds conveying all of the farm and range lands now owned by it.In Witness Whereof, the parties of the first part have hereunto set their hands and the party of the second part has caused these presents to be executed by its proper officers first duly authorized the day and year last above written." be and the same is hereby approved as to form and the President and Secretary of this corporation are hereby authorized to execute said Agreement for and on behalf of this corporation.Be It Further Resolved that the President and206 Secretary of this corporation be and they are hereby authorized and directed to forthwith make and execute Warranty Deeds to Clyde Bacon, Inc. covering said farm and range lands subject to all taxes and assessments now a lien against said range and farm lands, and to deliver said Deeds to said Clyde Bacon, Inc. upon the return and surrender of 3000 shares of the capital stock of B. and G. Land Company to this corporation.Be It Further Resolved that after said Warranty Deeds have been made, executed and delivered the said capital stock returned and surrendered to this corporation this corporation be dissolved and that the officers and Directors of this corporation make application to the District Court of the Eleventh Judicial District of the State of Idaho, in and for the County of Twin Falls for the dissolution of B. and G. Land Company."The resolution was adopted.On March 23, 1942, the board of directors of B. & G. adopted a resolution similar to that passed by the stockholders.On or about March 24, 1942, the petitioner issued 30,000 shares of its common stock of a par value of $ 30,000 and its debenture certificates in the aggregate principal amount of $ 270,000, the common207 stock and the debentures being issued in the manner and amounts and to the persons stated in the resolutions duly adopted by the petitioner's stockholders and directors at the meetings of March 20, 1942.1113 The debenture certificates were in the following form:INCORPORATED UNDER THE LAWS OF THE STATE OF IDAHO CLYDE BACON, INC.DEBENTURE CERTIFICATEDate This Is To Certify That Clyde Bacon, Inc., hereby acknowledges itself indebted to in the sum of dollars principal payable April 1, 1967, with interest at the rate of 6 per cent per annum, payable annually on or before the 1st day of April of each year. Should the cash position of Clyde Bacon, Inc., not justify the payment of interest in cash on any interest payment date the company shall have a period of four years from the due date of the interest to make payment thereof, but the continued delinquency in the payment of interest for a period of more than four years shall make the principal of this debenture certificate immediately due and collectible. Clyde Bacon, Inc., reserves the right to pay this certificate in full on any interest payment date by paying the principal plus accrued interest, or208 it may, on any interest payment date or dates, pay any portion of the principal together with the accrued interest.In the payment of their several claims, all creditors, other than the stockholders of the corporation, shall rank superior to the holders of the debentures, but all holders of debentures shall rank pari passu with each other, and superior to the stockholders of the corporation, with respect to their shares.SecretaryPresidentSealDuring the taxable year ended March 31, 1943, there were issued and outstanding documents denominated debenture certificates of the petitioner in the aggregate amount of $ 270,000, on which the petitioner made semiannual payments of amounts accrued during such year, denominated as interest in the certificates, to the holders thereof at the rate of 6 percent per annum, in a total sum of $ 16,200. Such payments were made by the petitioner without the adoption of any resolution or other action by the petitioner's stockholders or directors authorizing them. The amount of $ 16,200 was treated as interest upon the petitioner's books and was deducted as interest from gross income in its corporation income and excess profits209 tax returns for the taxable year ended March 31, 1943.On its balance sheet of April 1, 1942, the petitioner showed its "debentures" as a liability of $ 270,000 and its "common stock" under a separate heading as a liability of $ 30,000.The transaction in which certain real estate, sheep, equipment, and other personal property were acquired by the petitioner on or about March 24, 1942, by the issuance of 30,000 shares of its capital stock and $ 270,000 of its documents denominated "debenture certificates" was treated by the parties to the said transaction as an exchange on which no gain or loss was recognized under the applicable provisions of the Internal Revenue Code.1114 On or about March 24, 1942, the petitioner issued 30,000 shares of its common stock of a par value of $ 30,000 and its documents denominated "debenture certificates" in the aggregate principal amount of $ 270,000. The common stock of the petitioner was issued to the following persons and in the following amounts: One certificate to T. C. Bacon in the amount of 15,000 shares.One certificate to Alice C. Bacon in the amount of 14,900 shares.One certificate to Clyde R. Bacon in the amount of 100 shares.210 Documents denominated debenture certificates of the petitioner were issued to the following persons and in the following amounts: Five documents denominated debenture certificates each in the amount of $ 12,000 and five documents denominated debenture certificates each in the amount of $ 15,000 to T. C. Bacon.Five documents denominated debenture certificates each in the amount of $ 12,000 and five documents denominated debenture certificates each in the amount of $ 15,000 to Alice C. Bacon.On or about March 24, 1942, the B. & G. Land Co., a corporation, pursuant to instructions from its stockholders, transferred all its assets, consisting of farm and ranch lands and improvements, farm equipment, sheep, cash in the amount of $ 25,713.60, and other personal property, directly to the petitioner. The adjusted basis of the said assets, including cash, to the transferor on the date of the transfer was $ 391,764.75. On that date the B. & G. Land Co. had accumulated earnings and profits of $ 16,240.87.On or about March 24, 1942, T. C. Bacon and Alice C. Bacon transferred certain property consisting of sheep, bucks, equipment, cash in the amount of $ 1,804.97, and other personal 211 property, to the petitioner. The adjusted basis of that property to the transferors, including cash, on the date of transfer was $ 122,358.36.The petitioner owned no inadmissible assets as defined in section 720 (a) of the Internal Revenue Code during the taxable year involved in this proceeding.On or about March 24, 1942, T. C. Bacon, Alice C. Bacon, and Clyde R. Bacon surrendered all their shares of the capital stock of the B. & G. Land Co., to wit, 1,500 shares, 1,499 shares, and 1 share, respectively, to the B. & G. Land Co. which was dissolved immediately thereafter.The record discloses the following additional facts:The 1,500 and 1,499 shares of B. & G. stock recorded as owned by T. C. Bacon and Alice C. Bacon, respectively, constituted their community property. The property transferred by them to the petitioner on or about March 24, 1942, consisted of a herd of sheep and bucks, equipment, and other personal property constituting their community property. The common stock and debentures of the petitioner issued 1115 to T. C. Bacon and Alice C. Bacon were also their community property.The debenture certificates issued by the petitioner constituted evidences of its212 indebtedness.The fair market value of all the assets acquired by the petitioner from B. & G. and T. C. Bacon and Alice C. Bacon on or about March 24, 1942, was $ 504,768.26.The basis of the property so transferred on or about March 24, 1942, in the hands of the transferors was $ 514,123.11.In his amended answer the respondent recited that in his notice of deficiency he computed petitioner's average equity invested capital on the assumption that the transaction of March 24, 1942, was one upon which no gain or loss was recognized. He then alleged that a gain or loss should be recognized on that transaction and that the property transferred thereunder had a value of no more than $ 300,000.OPINION.The first issue presents the question whether the petitioner's debenture certificates are evidences of indebtedness or of a proprietary stock interest in the corporation.It is a familiar truism in cases of this kind that no universal rule can be laid down to control a decision, but that all facts of record must be considered and given their appropriate respective weight in arriving at a correct conclusion.In Charles L. Huisking & Co., 4 T. C. 595, we set213 forth some of the factors commonly relied upon to determine the character of the security. They are: The name; maturity date, if any; dependence of annual payments on earnings; the position of the holder as a creditor of the corporation; and the right to participate in management.It is well settled that the name given to the instrument is not conclusive, but it can not be ignored. Together with other indicia, it may be persuasive. Commissioner v. Proctor Shop, Inc., 82 Fed. (2d) 792; Jewel Tea Co. v. United States, 90 Fed. (2d) 451; Kentucky River Coal Corporation, 3 B. T. A. 644; I. Unterberg & Co., 2 B. T. A. 274. Here the security is labeled "debenture certificate" and words common to an evidence of indebtedness are used throughout, such as "acknowledge itself indebted," "principal," "interest," "due date," "collectible," "acquired interest," etc. There is no question that the nomenclature employed is consonant with the terms of an evidence of indebtedness.A fixed amount to be repaid and a definite maturity date are set forth in the certificate. 214 The payments of "interest" are definitely fixed at an agreed date and are not dependent on earnings. If the "cash position" of the petitioner -- not its current earnings -- does not 1116 warrant such payment, it may defer the payment for four years, but if it is in default after four years the entire principal immediately becomes "due and collectible." Washmont Corporation v. Hendricksen, 137 Fed. (2d) 306; Commissioner v. O. P. P. Holding Corporation, 76 Fed. (2d) 11, affirming 30 B. T. A. 337.The rights of the debenture holders are subordinate to those of all creditors but are superior to those of the petitioner's stockholders "with respect to their shares." The certificates give the holder no share in the corporation's assets and no share in its net assets upon liquidation. See Commissioner v. O. P. P. Holding Corporation, supra, in which similar facts and the postponement of interest were discussed at length and held not to impair the character of the debenture bonds as evidences of indebtedness. The fact that the certificate holders215 had no voting right is not determinative, but it is persuasive. Commissioner v. H. P. Hood & Sons, Inc., 141 Fed. (2d) 467.At the formation of the corporation there was no obligation on the petitioner to issue any definite amount of stock in exchange for the assets received. It had the privilege of determining the character and amount of its securities so exchanged if they were satisfactory to the recipient. The petitioner had the right to replace the stock interest with an evidence of indebtedness, if it so desired. Commissioner v. H. P. Hood & Sons, supra.The petitioner also presented cogent and proper business reasons for creating the debenture certificates. It is not necessary to enumerate or discuss them, since the face of the instrument affords ample ground for our conclusion that the debenture certificates were evidences of indebtedness and not shares of stock. The petitioner is entitled to deduct the sum of $ 16,200 paid by it as interest on its debenture certificates during the taxable year.In the second issue the petitioner contends that the transactions in which it acquired from B. & G. and T. 216 C. Bacon and Alice C. Bacon farm lands, equipment, sheep, and other property, constituted tax-free transfers, with the result that the bases of the transferors carried over to the petitioner for excess profits tax purposes in computing its invested capital under section 718 (a) (2) of the Internal Revenue Code. In the notice of deficiency the Commissioner agreed with this view, but by amended answer injected the issue and contends the transaction was not tax-free.The petitioner argues that it obtained a portion of the property from the Bacons individually in a transfer rendered tax-free by section 112 (b) (5) and the remainder thereof from B. & G. in a reorganization, as defined by section 112 (g) (1) (D) and controlled by sections 117 (a) (7) and 112 (b) (4).1117 The transfers of property from the Bacons come precisely within the requirements of section 112 (b) (5). 1217 The assets owned by them, consisting of sheep, equipment, and other personal property, were transferred to the petitioner in exchange for an appropriate amount of its stocks and securities and immediately thereafter the Bacons were in control of the petitioner in substantially the same proportions as their interests in the transferred assets existed prior to the exchange between the corporations. The same stockholders also preserved their same respective interests in the assets through their holding of corporate stock.In Commissioner v. Gilmore's Estate, 130 Fed. (2d) 791, the purpose of the reorganization statute is well set forth as follows:The reorganization provisions were enacted to free from the imposition of an income tax purely "paper profits or losses" wherein there is no realization of gain or loss in the business sense but merely the recasting of the same interests in a different form, the tax being postponed to a future date when a more tangible gain or loss is realized.In Morley Cypress Trust, Schedule "B", 3 T. C. 84, we said:The recognized purpose and scheme of the reorganization provisions is to218 omit from tax a change in form and to postpone the tax until there is a change in substance or a realization in money.In the case at bar, it is clear that all of the actions set forth in the record related to and were integral parts of the single transaction which occurred on or about March 24, 1942. Before that event T. C. Bacon and Alice C. Bacon individually owned assets valued at over $ 122,000. They, with their son, Clyde R. Bacon, the owner of one share, owned all of the capital stock of B. & G. After the transfers of their own assets and the assets of B. & G. they, as stockholders of the petitioner, owned precisely the same property as they had owned 1118 before the transfers. Included therein were the 1,290 bags of beans, etc., which were distributed in kind to them as stockholders of B. & G. Obviously, they were in control of the petitioner corporation and owned its stock in substantially the same proportions as they owned the stock and the individual assets before the transaction. Thus the "continuity of interest" element is conspicuously present.The petitioner contends that the part B. & G. played in the reorganization plan is fully covered by the appropriate219 sections of the statute. It says, first, that both the petitioner and B. & G. were parties to the reorganization as defined in section 112 (g) (2). 2 With this we agree. It then asserts that a reorganization took place as defined in section 112 (g) (1) (D). We also agree with this view.The petitioner next contends220 that section 112 (b) (4) is applicable and controlling. The petitioner issued its stock and securities in exchange for the assets of B. & G., but did not issue them directly to the transferor corporation. The petitioner maintains that the section does not require that the stock and securities must be issued directly to the transferor, but that its terms are satisfied by the issuance to the transferor's stockholders. It states that this view is supported by the decisions in analogous cases and particularly by the language of section 112 (g) (1) (D), which, it says, contemplates the issuance either to the transferor corporation or to the stockholders.The point relating to section 112 (g) (1) (D) is well made. We see no purpose of including the italicized words in the definition of a reorganization as a transfer by a corporation of all or a part of its assets to another corporation when immediately thereafter "the transferor or its shareholders, or both," are in control of the transferor corporation, unless the issuance of the stock involved in the reorganization plan is contemplated and permitted to be made to the stockholders of the transferor, as well as to that corporation221 itself.We find no case exactly in point, but analogous cases lead to the conclusion that it matters not that stock and securities of the new corporation are issued to either the old corporation or to its stockholders, provided, of course, that all factors of the situation point to reorganization. Under circumstances that are similar to those in the instant case, the Board of Tax Appeals held in Frank Kell, 31 B.T.A. 212">31 B.T.A. 212, that upon the dissolution of corporations, procured by their stockholders, and the transfer of the corporate assets to another 1119 corporation in exchange for the stock of the latter issued to the stockholders, a nontaxable reorganization was accomplished under section 112 (b) (4) of the Revenue Act of 1928.In Morley Cypress Trust, supra, the issue was the taxability of shares in the new corporation in the hands of the stockholders of the old corporation which had transferred its assets to the new corporation. The stockholders surrendered their shares in the old corporation to it for cancellation. The question for decision was whether the acquisition of the shares of the new corporation was by distribution in liquidation222 or in a statutory reorganization. We held that a statutory reorganization occurred and that gain should not be recognized under section 112 (b) (3), Revenue Act of 1938.The facts in the case before us differ slightly from those in the Morley Cypress Trust case in that the stockholders of B. & G. agreed to procure the transfer of its assets to the petitioner in consideration of their surrender of their stock in B. & G., but the underlying principle is the same.In Raybestos-Manhattan, Inc. v. United States, 296 U.S. 60">296 U.S. 60, involving stamp taxes on transfers of title to shares of stock or the rights to receive them, the Supreme Court held that the issue of shares by the new corporation, organized to carry out a plan for the consolidation of old corporations, directly to the stockholders of the old corporations was equivalent to a transfer by the corporations to their stockholders of the right of the corporations to receive such shares. In that case also no material distinction is made between the transfer of stock to the corporation and to its stockholders, provided that the essential elements of a reorganization are present.The respondent's argument223 is that the stockholders of B. & G. "constructively received" the assets (transferred to the petitioner) as a liquidating dividend in exchange for the surrender of their B. & G. stock and that then the assets were transferred to the petitioner in exchange for its capital stock and debentures. This hypothesis does violence to the stipulated facts. It also ignores the plan of reorganization established by the record.The respondent summarily asserts that subsections (1), (2), and (4) of section 112 (b) are not applicable, demonstrates that subsections (3) and (6) are likewise inapplicable, and leaves for discussion only subsection (5). He then calls the transaction in substance a transfer of assets by the Bacons to the petitioner and asserts that the basis which the property takes in the hands of the petitioner is the fair market value of the assets on the date of transfer. However, this theory makes separate transactions of one unified plan in order to create as a new basis the fair market value of the assets at the time of the transfer, a basis which must carry over to 1120 the petitioner as the basis for computing its excess profits tax and declared value excess profits224 tax.We believe that the Commissioner's original view was correct and that the transaction of March 24, 1942, constituted a single plan of reorganization and all component parts thereof must be considered in their relation to each other. All statutory requirements relating to reorganization have been respected and followed and, as we have found, section 112 (b) (4) is applicable to the facts of record. No question has been raised that the transfer of assets by the Bacons to the petitioner is not governed by section 112 (b) (5). Therefore, there was no gain or loss on the exchange of assets of B. & G. to the Bacons individually and consequently their cost to the transferors, stipulated to be $ 514,123.11, is the basis for computing the taxes under discussion.Decision will be entered under Rule 50. Footnotes1. SEC. 112. RECOGNITION OF GAIN OR LOSS.(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.(b) Exchanges Solely in Kind. --* * * (4) Same. -- Gain of corporation. -- No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.(5) Transfer to corporation controlled by transferor. -- No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. Where the transferee assumes a liability of a transferor, or where the property of a transferor is transferred subject to a liability, then for the purpose only of determining whether the amount of stock or securities received by each of the transferors is in the proportion required by this paragraph, the amount of such liability (if under subsection (k) it is not to be considered as "other property or money") shall be considered as stock or securities received by such transferor.↩2. SEC. 112. RECOGNITION OF GAIN OR LOSS. * * (g) Definition of Reorganization. -- As used in this section (other than subsection (b) (10) and subsection (1) and in section 113 (other than subsection (a) (22)) --(1) * * (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 its shareholders or both are in control of the corporation to which the assets are transferred, * * *(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620258/	APPEAL OF MESA MILLING CO.Mesa Milling Co. v. CommissionerDocket No. 1964.United States Board of Tax Appeals2 B.T.A. 770; 1925 BTA LEXIS 2258; October 5, 1925, Decided Submitted July 14, 1925. 2258 1. Appreciation of assets, claimed by taxpayer to represent restoration of excessive amounts written off in prior years and plant additions charged in prior years to expense, held, to have been properly disallowed by the Commissioner in computing invested capital, in the absence of any proof upon which proper depreciation could be determined. 2. Commissioner's method of applying excess-profits-tax credit in computing the additional income tax of 4 per cent imposed by the Revenue Act of 1917 approved in case of taxpayer with a fiscal year including portions of 1916 and 1917. Appeal of F. J. Thompson, Inc.,1 B.T.A. 535">1 B.T.A. 535, followed. Eugene D. Williams, Esq., Willis H. Brown, and L. Rogers, C.P.A.'s, for the taxpayer. W. Frank Gibbs, Esq., for the Commissioner. PHILLIPS 770 Before GRAUPNER, TRAMMELL, and PHILLIPS. Taxpayer appeals from the determination of a deficiency of $5,105.65 in income and profits taxes for the fiscal years ended May 31, 1917, May 31, 1918, and the fiscal period from June 1 to December 31, 1918. Taxpayer alleges three errors on the part of the Commissioner: (1) In the computation of2259 taxpayer's surplus on June 1, 1916, reducing such surplus by 10 cents. This error is admitted by the Commissioner. (2) In reducing the book surplus of the company by the sum of $7,500, termed by the Commissioner "plant appreciation." This reduction was made by the Commissioner in each of the tax periods involved. (3) In computing the 4 per cent income tax for 1917 upon five-twelfths of the net income for the fiscal year after applying the credit of the excess-profits tax to the whole fiscal year's income, instead of applying the excess-profits-tax credit to five-twelfths of the net income for the fiscal year. FINDINGS OF FACT. The taxpayer is an Arizona corporation with its principal office at Mesa, and is engaged in the manufacture and sale of flour and other grain products. The books of the taxpayer for periods prior to June 1, 1910, are not in existence, or, if they are, can not be found. An inventory of the company as of May 31, 1910, appearing in the minute book of the corporation as a part of the minutes of an annual meeting of stockholders held June 8, 1910, contains the following: 771 Assets. Mill and warehouses. Carried on books as $35,300. 2260 Actual value $25,000.00. The minutes of this meeting contain the following entry: In explanation to above report, the secretary stated that while this report showed a deficit or loss of $2,435.63, that the company's business was really on a better footing now than a year ago, that vast improvements had been made on the plant and that instead of carrying the mill and warehouses at a former book value of $35,300 the present inventory shows the same valued at a more conservative cash value of $25,000. This was decided upon by the Board of Directors after due deliberation. On motion of S. J. Mansfeld, duly seconded by Leo Goldschmidt, all stockholders voting in favor thereof, the action of the Board of Directors in carrying all of the real estate and improvements at the valuation of $25,000 on the books of the company, was ratified. The value of $35,300 at which the mill and warehouses were carried on the books prior to May 31, 1910, was the same value at which they had been carried prior to 1908. Between 1908 and 1910 electric power was installed and the plant wired for electricity at a cost of not less than $2,500. The mill was remodeled and several changes made in the2261 plant to place it in better shape, at a cost of approximately $1,500. One of the warehouses was rebuilt at a cost of not less than $1,000. Between 1910 and 1914 other repairs and additions were made to the plant, the details and cost of which are not in evidence. All of these expenditures were charged to expenses and none of them capitalized on the books of the company. At a meeting of the directors of the corporation, held January 14, 1914, the following statement, as appears from the minutes of the meeting, was made by the president: That, whereas the new income tax law made it necessary for this corporation to take an inventory of its assets and liabilities on the 31st of December, 1913, to determine the profits or losses of this corporation for the year 1913, this has been done and the books of this company showed a net profit of $8,913.26 for the year 1913 which amount has been placed to the credit of capital account together with $7,500 which has been added to the value of the plant by virtue of the number of improvements made therein during the past few years which had been written off as an expense, making the working capital of the corporation now $62,497.87. The2262 sum of $7,500, so added to the value of the plant account, is the amount disallowed by the Commissioner. In computing the 1917 income subject to tax at the rate of 4 per cent, the Commissioner deducted the excess-profits tax computed for the first five months of 1917 from the net income for the entire fiscal year, and determined the amount subject to the 4 per cent income tax to be five-twelfths of the balance. Taxpayer claims that 772 amount subject to the 4 per cent tax should be determined by deducting the excess-profits tax from five-twelfths of the net income of the fiscal year. DECISION. The determination of the Commissioner is approved. OPINION. PHILLIPS: Taxpayer contends that the action of the taxpayer in placing $7,500 to the credit of its capital account in 1914 was justified and that such sum should be included in invested capital. As a basis for this it points out that in 1910 the plant was written down from $35,300 to $25,000, and this despite the expenditure of over $5,000 in improvements shown to have been made between 1908 and 1910, which had not been capitalized. Taxpayer's secretary and treasurer qualified as an expert on values and gave2263 it as his opinion that the plant was worth $35,300, and not $25,000 in 1910. If we assume this to be so, we are confronted with taxpayer's records for 1911 and 1912, which show no depreciation in those years carried into the profit and loss account, nor is there any proof that any depreciation was written off from the time of acquisition of the assets to 1917. In these circumstances we can not say that any error was committed by the Commissioner in computing invested capital when he excluded the $7,500 which had been restored by taxpayer to its plant account. In their brief, counsel for taxpayer contend that the proper depreciation to be deducted had been settled between the taxpayer and the Commissioner, but an examination of the schedules attached to the deficiency letter discloses that this applies only to the depreciation to be taken during the years involved in the tax liability, and that, in computing invested capital, the Commissioner did not change taxpayer's surplus account except to disallow the $7,500 appreciation. Taxpayer also alleges error in the method by which the Commissioner determined the amount of income subject to the 4 per cent tax imposed by the 19172264 Act. In , this question was fully considered and the conclusion reached that, in computing the 4 per cent tax imposed by the 1917 Act, the excess-profits tax was a credit to be applied against the net income for the fiscal year embraced in the return and not against the portion of the net income allocated to 1917. We have carefully reconsidered the decision in that appeal in the light of the arguments of counsel for the taxpayer. The rule laid down in the Act for the treatment of the excess-profits tax credit seems to us to be clear, and does not call upon us to interpret the congressional intention 773 for the purpose of determining that Congress meant that the credit should be treated or tax computed otherwise than as provided in the Act. An error of 10 cents in computing taxpayer's invested capital as of June 1, 1916, is admitted by the Commissioner. The Board is not disposed to correct a deficiency for so trifling an amount. De minimis non curat lex. As this will affect the amount of tax for the year ended May 31, 1917, and the recomputation of such tax will in turn affect the invested capital and2265 tax liability for the balance of the period involved, it will be necessary to recompute the deficiency. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620262/	Francis E. Tower, Petitioner, v. Commissioner of Internal Revenue, RespondentTower v. CommissionerDocket No. 1429United States Tax Court3 T.C. 396; 1944 U.S. Tax Ct. LEXIS 177; March 3, 1944, Promulgated 177 Decision will be entered for the respondent. Prior to August 30, 1937, petitioner owned all but a few shares of stock of a corporation which carried on a business of manufacturing sawmill machinery. Petitioner had been the real operator of the business for ten years. In August of 1937 he decided to dissolve the corporation and transfer the assets and business to a partnership. Five days prior to the dissolution of the corporation, and in anticipation thereof, petitioner transferred some of his stock in the corporation to his wife, and two days prior thereto a partnership agreement was executed under which the wife was to be a limited partner. Thereafter the corporation's assets were transferred to the partnership. The wife did not contribute any services to the business. The business was conducted by petitioner after the changeover to a partnership in the same way as before, except that petitioner was not paid a salary and part of the earnings were credited to a capital account in the wife's name. Held, (1) that there was no bona fide gift of stock to the wife and that she did not contribute capital to the partnership; (2) that there was not a true partnership between178 petitioner and his wife for the conduct of a business, but a partnership for tax avoidance which can not be recognized. Oscar E. Waer, Esq., and Frank E. Seidman, C. P. A., for the petitioner.Melvin S. Huffaker, Esq., for the respondent. Harron, Judge. HARRON 397 Respondent determined deficiencies of $ 599.55 and $ 2,758.18 in petitioner's income tax returns for the respective fiscal years ended July 31, 1940, and July 31, 1941. Some of the adjustments are not in controversy here. The issue is whether the amounts of $ 6,661.16 and $ 13,958.57 which were credited in the taxable years to petitioner's wife as her distributive share of the net income of an alleged partnership are taxable to petitioner. In the alternative, respondent contends that the partnership was an association taxable as a corporation.Petitioner resides in Greenville, Michigan, and filed his returns for the taxable years with the collector for the district of Michigan.FINDINGS OF FACT.The R. J. Tower Iron Works, located at Greenville, Michigan, is engaged in the manufacture and sale of sawmill machinery and wood and metal stampings. Petitioner has been actively engaged in the business179 for the past 28 years and since the death of his father, R. J. Tower, in November 1927, petitioner has assumed the responsibility of carrying on the management and operation of the business. In the taxable years the business had an average of 40 to 60 employees, gross assets of approximately $ 200,000, and an average steel inventory on hand of approximately $ 50,000. The sawmill machinery was marketed through dealers and the stampings were sold directly to manufacturers of refrigerators and stoves.On September 9, 1933, the business was incorporated under the name of "The R. J. Tower Iron Works, Inc.," hereinafter referred to as the corporation. The outstanding capital stock consisted of 500 shares of a par value of $ 100 per share, of which petitioner received 425 shares, Harvey A. Amidon received 50 shares, and H. J. Lawrance received 25 shares. The bylaws required that the directors hold stock in the corporation and the 3 stockholders were the directors. Petitioner was president, and Amidon was secretary and treasurer. Approximately 6 months after the corporation was organized, in the early part of 1934, petitioner purchased Lawrance's 25 shares of stock and Lawrance severed180 his connection with the corporation. Immediately after purchasing Lawrance's stock, petitioner made a gift of 5 shares to his wife, 398 Hazel I. Tower, who was made a director and vice president of the corporation. After the gift of 5 shares to his wife, petitioner owned 445 shares, and Amidon owned 50 shares. The ownership of the shares remained the same until August 1937.A tentative operating statement as of July 31, 1937, showed that the business of the corporation had been successful and that substantial profits had been realized in the year 1937. In July 1937, after having discussed the matter with his wife, petitioner talked with Amidon with regard to the advisability of dissolving the corporation and setting up a partnership. Amidon kept the books of the corporation under petitioner's supervision, and he had worked in the business for a long time. Amidon had no objection to the formation of a partnership and believed that the change would not create any great risk as far as he was personally concerned. Consultations in this respect were also held with petitioner's attorney and his accountant, who took care of petitioner's tax matters. They were all of the opinion181 that the formation of a partnership would result in tax savings and alleviate the necessity of filing various corporate returns. It was decided that petitioner should transfer stock of the corporation to his wife so that she would be able to contribute a substantial share of the partnership capital.On August 25, 1937, petitioner transferred to his wife 190 shares of the corporate stock owned by him. The transfer was conditional upon the wife's placing the corporate assets which the shares represented into the new partnership. The transfer was recorded on the corporate books and a new stock certificate was issued and delivered to petitioner's wife. Petitioner filed a gift tax return on March 15, 1938. He reported the 190 shares of stock transferred to his wife at a value of $ 57,114.60 and paid a gift tax of $ 213.44.The corporation was completely liquidated on August 28, 1937, and it was dissolved on August 30, 1937. On August 28, 1937, petitioner, his wife, and Amidon executed a limited partnership agreement for the purpose of carrying on the business of the corporation, and all of the assets and liabilities of the corporation were transferred to the partnership.The partnership182 agreement provided that the business would be carried on under the firm name of R. J. Tower Iron Works, for a period of 20 years, unless sooner terminated by a decision of a majority in interest of the partnership capital; that petitioner and Amidon would be general partners and petitioner's wife would be a limited partner; that petitioner's contribution to the partnership capital was $ 81,600, his wife's was $ 62,400, and Amidon's was $ 16,000; and that the partners would share profits and losses in proportion to their respective 399 contributions to capital, except that petitioner's wife was not liable for losses in excess of her capital contribution. The agreement further provided, among other things, that the general partners were to have the exclusive voice in the management and control of the business and were authorized to determine the salaries of the general partners; that if a majority of the general partners were unable to agree, a majority of the general partners in capital interest would control; that accounts of the partnership business would be rendered to the partners each year; and that the net profits for each year would be distributed at such times and in183 such manner as the general partners might determine.A certificate of limited partnership was filed with the clerk of the Circuit Court of Montcalm County on August 31, 1937. Notification of the liquidation of the corporation and the formation of the partnership was given to those banks with which the corporation had transacted business.Under the partnership agreement petitioner's share of the partnership profits and losses amounted to 51 percent; his wife's share amounted to 39 percent; and Amidon's share amounted to 10 percent. Amidon had formerly been employed by the corporation as a bookkeeper and he continued to perform similar work for the partnership. In the early part of 1938 his responsibilities and duties increased as a result of an increase in the volume of business. Petitioner and his wife were of the opinion that Amidon was entitled to a larger share in the profits and, accordingly, his share in the profits was increased from 10 percent to 25 percent on September 1, 1938. The shares of petitioner and his wife were proportionately decreased and thereafter petitioner received 42 1/2 percent of the profits and petitioner's wife received 32 1/2 percent. The redistribution184 of profits was orally agreed upon between the parties, and the original agreement and the certificate of partnership on file with the county clerk were not formally amended. It was also orally agreed that petitioner and Amidon would not withdraw any future salary for their services. The original capital contributions of the parties remained the same.Partnership accounts were maintained on an accrual basis for the fiscal year ending August 31. Capital accounts were opened on the books of the partnership, showing the amounts contributed by each party. Distributive shares of the profits of the parties were credited either to the capital account or to the drawing account of each individual party. The respective withdrawals of each party were charged to the drawing accounts. The share of profits and the aggregate net 400 withdrawals of each of the parties for the fiscal years ended August 31, 1938, August 31, 1939, and August 31, 1940, were as follows:Share of profits credited to individualcapital or drawing accountsYear endedYear endedYear ended8/31/388/31/398/31/40Francis E. Tower$ 2,658.288,374.32$ 17,947.26Harvey A. Amidon521.234,926.0610,557.21Hazel I. Tower2,032.806,403.8813,724.38185 WithdrawalsYear endedYear endedYear ended8/31/388/31/398/31/40Francis E. Tower$ 5,394.78$ 10,458.38$ 4,973.25Harvey A. Amidon938.964,410.185,183.08Hazel I. Tower4,311.662,032.805,000.00The partnership return for the fiscal year ended August 31, 1938, reported a net income of $ 15,919.85. Of this amount $ 2,273.69 was petitioner's distributive share of income, and $ 7,761.20 was paid to petitioner in salary; $ 445.82 was Amidon's distributive share, and $ 3,700.44 was paid to Amidon in salary; and $ 1,738.70 was Hazel I. Tower's distributive share.The partnership return for the fiscal year ended August 31, 1939, reported an ordinary net income of $ 20,495.87, of which $ 8,710.74 was petitioner's distributive share and was reported by petitioner in his individual return for the fiscal year ended July 31, 1940; $ 6,661.16 was Hazel I. Tower's distributive share and was reported in her individual return for the calendar year of 1939; and $ 5,123.97 was Amidon's distributive share.The partnership return for the fiscal year ended August 31, 1940, showed an ordinary net income of $ 42,949.44, of which $ 18,253.51 was petitioner's distributive186 share and was reported by him in his individual return for the fiscal year ended July 31, 1941; $ 13,958.57 was Hazel I. Tower's distributive share and was reported in her individual return for the calendar year of 1940; and $ 10,737.36 was Amidon's distributive share.Although Hazel I. Tower was vice president and a director of the corporation after the withdrawal of Lawrance, and attended the directors' and stockholders' meetings, she did not render any independent services to the corporation, nor was she actively interested or engaged in the business. In matters pertaining to the business she relied on her husband's judgment. The last return filed by the corporation, for the fiscal year ended August 31, 1937, reported compensation of $ 11,511.20 paid to petitioner for services rendered as president, and $ 5,450.44 paid to Amidon as secretary and treasurer. Petitioner's wife did not receive any salary from the corporation. She did not render any services to the partnership nor did she receive any salary.Prior to the partnership agreement, petitioner gave his wife a regular allowance of approximately $ 75 a week for household expenses. After the formation of the partnership187 and throughout the taxable 401 years petitioner continued to give his wife an allowance of $ 75 a week for household expenses and for her support, although she paid for some of her own clothes. Petitioner also paid the expenses of a daughter in college. Petitioner's wife had a savings account and a checking account, and she deposited some of the money that she withdrew from the partnership in these accounts and some of it in the form of cash in her box in a safe at home. Since the bank holiday in 1933 petitioner has kept all of his money and papers in this same safe, although he used a separate box. Both parties had the combination to the safe. During the year 1940 petitioner and his wife built and furnished a cottage at Baldwin Lake, petitioner contributing approximately $ 2,000 and his wife contributing $ 3,000. During that year petitioner's wife also repaid petitioner the sum of $ 1,403.88, which represented expenditures made by petitioner for his wife's income tax and certain other expenses. They bought a $ 100 war bond each month and each contributed one-half of the purchase price.Petitioner performed the same services for the partnership as he had previously performed188 for the corporation. He did not receive any salary from the partnership after Amidon's share in the profits was increased on September 1, 1938. The partnership carried on the same business formerly carried on by the corporation and had the same customers.The gift of 190 shares of the corporate stock of the R. J. Tower Iron Works, Inc., made by petitioner to his wife in 1937 was not valid and complete in that the wife did not gain full dominion and control over the shares. Petitioner's wife was not a bona fide partner in the business during the taxable years.OPINION.The only question for determination is whether petitioner is taxable upon his wife's distributive share of the net income of the R. J. Tower Iron Works, which was organized as a limited partnership under Michigan law. Under the partnership agreement, petitioner is a general partner and his wife is a limited partner.Petitioner contends that his wife contributed 39 percent of the assets of the former corporation to the capital of the partnership and that she is a bona fide member of the partnership, entitled to receive a fixed share of its net income, based upon her capital contribution. He argues that the source189 of her capital contribution and the fact that she rendered no services to the partnership are immaterial to the determination of the question.Respondent contends that the wife was not a bona fide member of the partnership, in that the partnership was not formed for any purpose 402 other than minimizing petitioner's tax. He points out that the wife knew nothing of the business and contributed no services to the business. His argument is that, for Federal tax purposes, the gift of corporate stock by petitioner to his wife was unreal and a sham, and wholly ineffective to relieve petitioner from tax liability on the partnership income reported by the wife.Petitioner concedes that his wife knew nothing of business matters and in that respect relied entirely upon him. He admits that she knew very little about the business of the R. J. Tower Iron Works and that she contributed no services to that company. He also admits that the change from the corporate structure to the partnership was made largely for tax purposes, and that his gift of corporate stock to his wife was made to determine her interest in the partnership.It is well settled that transactions between husband and 190 wife whereby tax is minimized are subject to rigid scrutiny, "for the temptation to escape the higher surtax brackets by an apportionment of income inside the family is a strong one." . Family arrangements resulting in the reallocation of income within the family unit should require clear and convincing evidence to support their bona fides, and the testimony of the participants in the transaction must clearly establish that the particular transaction is genuine and made in good faith. ; affd., .A careful analysis of the testimony of this proceeding leads us to the conclusion that petitioner did not make a valid gift of the corporate stock to his wife in that he did not absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift. The essential elements of a bona fide gift inter vivos are: (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 donor to absolutely191 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; , and authorities there cited. Cf. ; ; affd., ; certiorari denied, .In the light of the testimony of petitioner and his wife, the evidence indicates that petitioner did not intend making a gift of the stock; that he did not intend to divest himself of such title, dominion, and 403 control of the stock as was necessary to constitute a good and valid gift thereof, in praesenti; and that the transfer192 was not such that the entire dominion and control of the gift was in the wife.Petitioner testified that the subject of the gift to his wife was 190 shares of the corporate stock owned by him. He further testified that a certificate of this stock was delivered to his wife and that the transfer was noted on the stock record book of the corporation. He then testified that the reason for the gift was the "changeover" to the partnership and that the corporate assets were transferred directly from the corporation to the partnership. The testimony of petitioner's wife, on the other hand, was confused and at times contradictory. She first testified that the stock of the corporation was given to her with the understanding that it was going to be put back in the partnership. She then testified that the subject of the gift was not stock in the corporation, but an interest in the partnership; that no stock certificate was delivered to her, but that her interest in the business was "just credited to me on the books." Subsequently, she testified that petitioner gave her a typewritten certificate for 190 shares of the corporate stock, and that she retained the certificate for three days until193 the partnership was formed, whereupon she returned it to her husband.Under these circumstances, it is our opinion that petitioner did not relinquish control of his stock nor did petitioner's wife gain control over any of it at any time. There was no unconditional gift of the stock to her, since she could only use it in one way, namely, to place the corporate assets which the stock represented into the partnership. Petitioner never intended that his wife should have the 190 shares of stock to do with absolutely as she pleased. Upon the dissolution of the corporation, she was not free to sell or otherwise dispose of her share of the corporate assets. As a matter of fact, she never received her proportionate share of the assets, but they were all transferred directly to the partnership.We think the principle underlying the decision in ; affirmed in , is applicable to the situation here. The question in that case related to the legal effect of a gift of a $ 400,000 bank check made by a taxpayer to his wife pursuant to a plan whereby the funds194 were made the corpus of a trust and immediately loaned to the husband upon his unsecured interest-bearing note. The taxpayer paid interest on the note and claimed a deduction from income for the same on his return. The Circuit Court of Appeals held that there was no bona fide gift by the taxpayer to his wife, and said:Counsel for the petitioner asserts that the transactions above described resulted in the following legal relations: Mr. Johnson made an absolute and unconditional gift of $ 400,000 to his wife; with her own property she set up a trust having a capital of $ 400,000; the trustee loaned this sum to Mr. Johnson upon his demand 404 note bearing interest, and he paid such interest to the trustee in 1931. If such were indeed the legal relations of the parties, it would follow as of course that the taxpayer should be allowed the claimed deduction, for it is too well settled to require discussion that legal transactions cannot be upset merely because the parties have entered into them for the purpose of minimizing or avoiding taxes which might otherwise accrue. * * * Despite such purpose, the question is always whether the transaction under scrutiny is in reality what195 it appears to be in form. * But there is a fallacy in the petitioner's contention, and it lies in the premise that he made an absolute and unconditional gift of $ 400,000 to his wife, and that her money set up the funded trust. There was an agreement between them that the money he made available to her was to be used in only one way; she was to pass it to the trustee upon terms which bound the trustee to return it to him upon request. Everything was done at the same time and as part of one transaction. Not for an instant did Mr. Johnson lose control of his "gift", nor did Mrs. Johnson or the trustee have possession of it free from a duty to return it to him. * See also Guaranty Trust Co. ( ; affd., ; ; affd., ; ; affd., ; certiorari denied, ; ;196 affd., ; ; affd., ; certiorari denied, .Here, the transfer of the corporate stock by petitioner to his wife was more fanciful than actual, since there was no purpose to transfer the stock to her apart from the agreed plan that the gift would determine her interest in the partnership. The gift, however, was not an absolute and unconditional one. Its purpose and intent was not to vest absolute dominion over the shares in the wife, since she had no untrammeled freedom in their disposition and they were not subject to her own control and desires.In view of the fact that the gift of the corporate stock by petitioner to his wife was not valid and complete, it follows that she made no capital contribution to the partnership, and, since she admittedly rendered no services, it must be held that she was not a bona fide partner.It should also be noted that the dissolution of the corporation and the subsequent formation of the partnership fulfilled no business purpose other than the savings of197 tax to petitioner. The change did not add any new capital to the business. As a matter of fact, the company was long established, in good financial condition, and did not need additional capital. Since the death of petitioner's father in 1927, the business had been directed and managed solely by petitioner. In large measure, the success of the business was due to his personal efforts and ability. Under the corporate form of doing business, petitioner was president and general manager of the corporation and owned approximately 90 percent of the stock. Amidon kept the books of the company and worked under petitioner's supervision. After the partnership 405 was formed petitioner and Amidon became general partners, but petitioner still continued to control and actively direct the affairs of the company. Petitioner still owned 90 percent of the business. After the formation of the partnership, the business had the same capital, the same assets, the same liabilities, the same management, the same plant, the same customers, the same employees, and the same name. In , the Court disregarded a transfer of assets198 which was made without a business purpose and solely to reduce tax liability. In that case, the Court held that the Government may look at actualities, and, upon a determination that the form employed for doing business or carrying out the challenged tax event was unreal or a sham, it may disregard the effect of the fiction. In , the Court reiterated the same rule, holding that, while a taxpayer was free to voluntarily choose any organization for the conduct of his business, the Government was not required to acquiesce in that election if in fact that method of doing business was unreal. In , the Court, in holding that a device to break up one economic unit into two or more would not be conclusive on the Government under the income tax law, said: * * For where the head of the household has income in excess of normal needs, it may well make but little difference to him (except income-tax-wise) where portions of that income are routed -- so long as it stays in the family group.In ,199 the Court pointed out that taxation is a practical matter, dependent not upon "attenuated subtleties," but rather upon practical considerations. It was held that one vested with the right to receive income did not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another. In , the Court said: * * The dominate purpose of the revenue laws is the taxation of income to those who earn it or otherwise create the right to receive it. * * At the time the partnership was first contemplated, petitioner discussed the arrangements with his wife before consulting Amidon. Petitioner testified that Amidon did not object to the contemplated partnership, since "he wasn't in position to object because I have done quite a little for Mr. Amidon." He also testified that Amidon knew he was not taking a great risk in entering the partnership. There can be little doubt that for all practical purposes, the business of the R. J. Tower Iron Works was petitioner's business both before and after the partnership was organized. After the first year of the partnership200 neither petitioner nor Amidon drew any salary from the business, although both devoted their full time and energy to the business. The sole compensation of each was his distributive share 406 of the net income. As a result of the arrangements, petitioner's wife received a full share of the partnership income even though she contributed neither time nor service to the business. This arrangement was unusual and unreal, especially in view of her limited liability.The only record of withdrawals by the partners are for the fiscal years 1938, 1939, and 1940. During these years petitioner's wife withdrew substantial amounts from the partnership. During this period she maintained a savings account and a checking account, and the balance of the withdrawals was placed in cash in a safe maintained in her home to which petitioner had access. Respondent attempted to subpoena the records of the checking account, but was unable to do so because the wife testified that the checks were destroyed by her at the end of each year. However, the record indicates that for the taxable year 1940 she withdrew $ 5,000 from the business. Of this amount, the sum of $ 1,403.88 was paid by the wife201 to petitioner for expenditures which he had made in paying his wife's income tax and various other expenses. During that year she expended $ 3,000 toward the purchase and furnishing of a summer cottage used by her family. Petitioner contributed approximately $ 2,000 toward this purchase. Petitioner and his wife also purchased war bonds monthly, each contributing 50 percent toward the purchase price. We think that these purchases toward which the wife made substantial contributions were those usually assumed by a husband for the welfare of his family, and that the withdrawals by the wife from the partnership were merely for the reallocation of income within the family to be used for the benefit of the family.In this proceeding, petitioner's wife made no actual contribution to the capital of the partnership, contributed no services, had no voice in the conduct of the business, and received a portion of the profits, not as a partner, but only by reason of her marital relationship. See , certiorari denied, ; ;*202 certiorari denied, ; ; . Under the facts it is held that there was no real partnership between petitioner and his wife for the conduct of a business enterprise and that petitioner was the person who earned the income which was credited to the wife's account. Therefore petitioner is taxable on the income attributed to the wife. Respondent's determination is sustained.In view of the foregoing, it is unnecessary to consider respondent's alternative contention. Accordingly,Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620199/	BRENT D. AMUNDSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAmundson v. CommissionerDocket No. 10095-88United States Tax CourtT.C. Memo 1990-337; 1990 Tax Ct. Memo LEXIS 355; 60 T.C.M. (CCH) 39; T.C.M. (RIA) 90337; July 3, 1990, Filed 355 Decision will be entered under Rule 155. Brent D. Amundson, pro se. Donald R. Gilliland, for the respondent. COHEN, Judge. COHENMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies of $ 12,184 and $ 6,366 in petitioner's Federal income taxes for 356 1983 and 1984, respectively. Respondent also determined that petitioner was liable for additions to tax of $ 609.20 and $ 318.30 under section 6653(a)(1); 50 percent of the interest due on $ 12,184 and $ 6,366 under section 6653(a)(2); and $ 3,046.00 and $ 1,591.50 under section 6661, for 1983 and 1984, respectively. After concessions, the issues for decision are whether petitioner is entitled to deductions for interest and rental expenses, employee business expenses, 357 moving expenses, job hunting expenses, and miscellaneous interest, and whether petitioner is liable for the additions to tax determined by respondent. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Sunnyvale, California, at the time he filed his petition. Prior to or during 1977, petitioner's sister and her then fiance purchased a residence at 21435 Park Brook, Katy, Texas (the residence). The purchasers financed the acquisition by a loan from Home Savings Association, secured by a mortgage on the residence. When petitioner's sister and her fiance broke off their engagement, petitioner's father made a payment to the former fiance for the fiance's interest in the residence. In about March 1978, petitioner agreed with his sister that he would pay off the mortgage in exchange for a one-half interest in the residence. Petitioner resided in the residence from358 December 1977 through May 1981. Petitioner considered the residence to be his home and not an investment. He did not, however, disclose his ownership or become directly obligated to Home Savings Association because he did not wish to incur fees attendant to refinancing. In 1981, petitioner's sister married. Petitioner asked for and received from his sister a handwritten note in which she stated that petitioner was entitled to a 50-percent interest in the residence "as of March 15, 1978." On December 31, 1985, after an audit of his 1983 and 1984 tax returns had commenced, petitioner requested and received from his sister and her husband a quitclaim deed for an undivided one-half interest in the residence. The quitclaim deed, however, was not recorded. During 1983, petitioner received rental income and incurred expenses relating to the residence, and he made payments due to Home Savings Association on the mortgage. The lease on the residence during that year specified rental of $ 570 per month, the monthly payment due on the mortgage. The lessee made some payments directly to Home Savings Association. During 1984, petitioner paid $ 3,645 to Home Savings Association as the interest359 due on the mortgage on the residence. During 1983 and part of 1984, petitioner was employed as an account executive for Tymnet, Inc. While he was employed by Tymnet, Inc., petitioner was reimbursed for business-related automobile expenses. His employment with Tymnet, Inc., ended when he resigned his position in June 1984. Because the economy in Houston, Texas, was depressed, he investigated employment opportunities in Dallas, Texas, and in Colorado, New Mexico, and California. He was employed by Amistar Corporation for 2 weeks in California, but he resigned that position. He was offered a job by McDonnell-Douglas Corporation, which reimbursed him for travel expenses incurred in traveling to California and returning to Houston for personal matters. He was eventually offered employment in Japan, and he moved to Tokyo in January 1985. On his tax return for 1983, petitioner reported rental income of $ 3,855 and deducted expenses totaling $ 15,451, claiming a loss of $ 11,596 from the residence. He claimed employee business expenses of $ 8,900 for travel, $ 7,800 for meals, lodging and other "away from home" expenses, and $ 3,959 in automobile expenses, computed by applying standard360 mileage rates to a total of 16,800 miles and adding other automobile-related expenses. Petitioner reported employer reimbursement of $ 15,033 of his expenses. On his tax return for 1984, petitioner claimed moving expenses of $ 6,000, automobile expenses of $ 4,637, meals and lodging expenses of $ 4,000, interest of $ 5,745, outside sales expenses of $ 3,000, and travel expenses of $ 4,200. Respondent disallowed the deductions set forth above and made other adjustments now resolved between the parties. ULTIMATE FINDING OF FACT Petitioner acquired a one-half equitable interest in the residence when he agreed with his sister to assume her indebtedness to the lender. OPINION Petitioner has the burden of proving that respondent's determinations were erroneous. Rule 142(a); Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882 (9th Cir. 1975), affg. a Memorandum Opinion of this Court. Petitioner presented to respondent and at trial various receipts for expenses, but the receipts did not coincide with the amounts claimed on his tax returns for 1983 and 1984. He testified that he361 had estimated some of those amounts. After trial, in lieu of the brief required by the Court's order and Rule 151, he submitted additional schedules that were not based on evidence in the record and cannot be considered. Rule 143(b). In any event, the total amounts spent by petitioner cannot be determined from the record with any degree of certainty. A major item of expense claimed by petitioner, and the one for which he has reasonably complete records, is interest paid on the mortgage on the residence. Petitioner's sister, not petitioner, was liable to the original lender in relation to that mortgage. Petitioner had agreed with his sister, however, that he would make the mortgage payments and, in turn, would have a 50-percent interest in the residence. Although the documentation of the agreement between petitioner and his sister was casual and unclear, his testimony is not improbable or inherently incredible. His testimony is supported by documentary evidence that he acted as owner of the property from 1979 through the years in issue. We conclude that during 1983 and 1984 he had a 50-percent equitable interest in the property and, in effect, had assumed liability for the362 mortgage. Respondent contends that petitioner may not deduct the interest because he did not have a legal obligation to the lender, citing Golder v. Commissioner, 604 F.2d 34 (9th Cir. 1979), affg. a Memorandum Opinion of this Court, and cases in which a taxpayer was denied interest deductions on a residence belonging to a relative, e.g., Tuer v. Commissioner, T.C. Memo 1983-441">T.C. Memo. 1983-441. The cases relied on by respondent are distinguishable. In Golder v. Commissioner, supra, the taxpayers were guarantors of a debt of their corporation, which debt was also secured by the taxpayers' house. The Court of Appeals applied the general rule that, for interest to be deductible under section 163(a), the interest must be on the taxpayer's own indebtedness, not the indebtedness of another. The court discussed section 1.163-1(b), Income Tax Regs., which provides, in part, as follows: Interest paid by the taxpayer on a mortgage363 upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. * * In discussing the taxpayers' argument that section 1.163-1(b), Income Tax Regs., created an "exception" that allowed them to deduct the payments they made because of the lien on their home, the Court of Appeals stated: Reg. section 1.163-1(b) does nothing more than permit the deduction of interest in situations where the taxpayer-borrower is not personally liable on a mortgage of property which is used as security for a loan made to the taxpayer. For example, a taxpayer purchases land paying part of the purchase price in cash and the balance with a non-recourse note secured by a mortgage on the land; there, in the event of default, the creditor may look only to the property. Although the taxpayer is not directly liable on the debt -- since the creditor may look only to the pledged property for repayment -- Reg. section 1.163-1(b) permits364 the taxpayer to deduct interest payments since the default affects only the taxpayer and no one else. The taxpayer must pay the interest to avoid foreclosure of his ownership interest in the property. Thus Reg. section 1.163-1(b) does not create an "exception" to the statutory rule of section 163(a) that interest is deductible only with respect to the indebtedness of the taxpayer, but simply recognizes the economic substance of non-recourse borrowing. Reg. section 1.163-1(b) permits the taxpayer-borrower in such cases to deduct the interest on the loan even though the taxpayer is not personally liable on the loan. 1365 Respondent argues that section 1.163-1(b), Income Tax Regs.,: has been uniformly interpreted by courts to simply mean that a deduction is allowable where the taxpayer has borrowed money on a nonrecourse basis. It does not provide for a deduction for interest paid on a loan which, as in the present case, was not made to the taxpayer and from which the taxpayer did not derive the benefit of the use of the money. Golder, supra; Abdalla v. Commissioner, 647 F.2d 487">647 F.2d 487, 504 (5th Cir. 1981); Hynes v. Commissioner, 74 T.C. 1266">74 T.C. 1266, 1287-88 (1980). In the cases relied on by respondent, however, the Court found either that the taxpayer did not have an indebtedness or did not have an interest in the mortgaged property. The evidence is sufficient in this case to support our finding that petitioner had an ownership interest in the residence. Petitioner's subsequent performance of the obligations of an owner and his sister's written acknowledgement of his interest were sufficient to render petitioner's obligation to her to pay off the mortgage an enforceable interest-bearing debt to her for the amount of the mortgage366 and at the rate of interest specified in the mortgage. His payments to Home Savings Association, made directly or by causing his tenant to make rent payments, were, in effect, payments of principal and interest to his sister. Thus this case is more like Markward v. Commissioner, T.C. Memo. 1978-312; Riordan v. Commissioner, T.C. Memo. 1978-194; and New McDermott, Inc. v. Commissioner, 44 B.T.A. 1035">44 B.T.A. 1035 (1941), than the cases cited by respondent. We conclude, therefore, that petitioner is entitled to deduct the interest payments made by him on the mortgage on the residence during the years in issue. We are not persuaded, however, that petitioner is entitled to any additional deductions relating to the residence. He has not, for example, established an eligible basis for or method of depreciation. By his own testimony, he regarded the residence as his home and rented it out only to minimize the cost of maintaining it after he and his sister no longer lived there. He did not regard it as an investment. Thus, section 183(b) limits his deductions to an offset of the gross income he received from the rent. We are satisfied that367 petitioner's interest expenses and other rental expenses relating to the property at least equaled the rental reported for 1983. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). Respondent has conceded that petitioner made all of the interest payments claimed for 1984, totaling $ 3,645. Petitioner is thus entitled to deduct $ 3,855 in 1983 and $ 3,645 in 1984. We are not persuaded that petitioner is entitled to deduct business expenses, moving expenses, or job search expenses beyond those conceded by respondent. Petitioner's records and his testimony are too confused, uncertain, and ambiguous to support the deductions. From the few records that have been presented, it appears that he may have claimed duplicate deductions for the same item, secured reimbursement for some items, or claimed deductions for items that are nondeductible personal expenses under section 162. Petitioner has not shown which of his employee business expenses were not reimbursed or reimbursable by his employer. With respect to moving expenses incurred in California, he has not satisfied the requirement of section 217(c) that he be a full-time employee in the new principal place368 of work for at least 39 weeks out of the 12-month period immediately following his arrival in the new location. He has not met the substantiation requirements of section 274(d) with respect to travel, entertainment, and gift expenses that he claims. Petitioner claimed, but has not substantiated, interest on a loan from his father and on student loans. Unlike the loan from his sister, petitioner has not presented evidence that he had a valid indebtedness to his father. Petitioner did not even recall precisely the amount of the loan. With respect to the student loans, petitioner provided promissory notes and copies of certain checks reflecting payments. Although the amount of interest reflected in the payments cannot be precisely determined from the record, we conclude that petitioner is entitled to deduct $ 100 as interest on student loans in 1984. Finally, petitioner has not persuaded us that respondent's application of the additions to tax under section 6653(a) for negligence and section 6661 for substantial understatement of income taxes is erroneous. Petitioner's use of estimates and his failure to maintain adequate records justify imposition of the additions to tax under369 section 6653(a). His brief has not cited a single authority, and he otherwise has not shown any reason that the section 6661 additions to tax would not apply (assuming the recomputed deficiencies exceed 10 percent of the total tax required to be shown on the return or $ 5,000). Decision will be entered under Rule 155. Footnotes1. Taxpayers cite New McDermott, Inc.,44 B.T.A. 1035">44 B.T.A. 1035 (1941), for the proposition that they need not be the borrowers in order to deduct interest payments under I.R.C. section 163. That decision is not helpful to their case. In New McDermott, the taxpayer received property subject to a mortgage which the taxpayer did not assume until after the taxable year, so that the taxpayer was not directly liable thereon. The court held, under the predecessor regulation identical to Reg. section 1.163-1(b), that the interest paid by the taxpayer was deductible. The court reasoned as follows: "The mortgage indebtedness is a lien on the property of which petitioner is the legal owner and upon which petitioner must necessarily rely for its source of income. Petitioner's whole reason for being would be negatived if the mortgage were foreclosed and the property sold to satisfy the mortgage. Interest accrued on the mortgage is interest on petitioner's indebtedness in spite of the fact that petitioner was not primarily liable on the mortgage." Id. at 1040-41 (emphasis added). As is clear from the above quotation, unlike the present case, the indebtedness upon which interest was paid in New McDermott was considered to be the taxpayer's own indebtedness. In the instant case the indebtedness was the corporation's, and the taxpayers merely guaranteed that corporate obligation. [Emphasis in original; 604 F.2d at 36↩.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620202/	Paul J. Perlin, Petitioner v. Commissioner of Internal Revenue, Respondent; Paul J. Perlin, and Henry E. Hershey and Ellen K. Hershey, Petitioners v. Commissioner of Internal Revenue, RespondentPerlin v. CommissionerDocket Nos. 26381-82, 20634-831United States Tax Court86 T.C. 388; 1986 U.S. Tax Ct. LEXIS 141; 86 T.C. No. 25; March 19, 1986, Filed 141 Decisions will be entered under Rule 155. Ps, professional commodity dealers or persons regularly engaged in investing in regulated futures contracts, entered four commodity straddle transactions. Held, the transactions were not shams, devoid of the requisite economic substance. Held, further, the transactions satisfied the "entered into for profit" requirement of sec. 108 of the Tax Reform Act of 1984. Thomas C. Hundley, Bruce M. Reynolds, Frederic W. Hickman, Bradford L. Ferguson, Peter B. Freeman, and Michael A. Clark, for the petitioners.Theodore J. Kletnick, Cynthia J. Mattson, and Kendall C. Jones, for the respondent. Korner, Judge. Sterrett, Goffe, Nims, Whitaker, Hamblen, Cohen, Clapp, Swift, Wright, and Parr, JJ., agree with the majority opinion. Wilbur, Gerber, and Williams, JJ., did not participate in the consideration of this case. Simpson, J., dissenting. Chabot, Parker, Shields, and Jacobs, JJ., agree with this dissent. KORNER388 Respondent determined deficiencies in Federal income taxes against petitioners Paul J. Perlin, Henry E. Hershey, and Ellen K. Hershey (hereinafter collectively referred to as petitioners) as follows:Petitioner(s)Docket No.TYE Dec. 31 --DeficiencyPaul J. Perlin26381-8219782142 $ 498,16120634-83197920,39820634-831980687,033Henry E. Hershey and20634-831979152,245Ellen K. Hershey20634-831980646,979389 By amended answers filed October 1, 1984, in docket Nos. 26381-82 and 209634-83, respondent claimed additional deficiencies in unspecified amounts against petitioners pursuant to section 6621(d). 3After concessions, the issues remaining for decision are: (1) Whether petitioners' investments in certain commodity straddles for the taxable year ending December 31, 1980, were sham transactions, devoid of the requisite economic substance; (2) whether petitioners' investments in commodity straddle transactions for the taxable years ending December 31, 1978, through December 31, 1980, satisfied the entered into for profit requirement of section 108 of the Tax Reform Act of 1984 ( the act ); 4 and (3) whether petitioners are liable for additional interest pursuant to section 6621(d) for the taxable years 143 ending December 31, 1978, through December 31, 1980.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.General BackgroundAs of the dates of filing, the petitions in docket Nos. 26381-82 and 20634-83, petitioner Paul J. Perlin (Perlin) resided in Chicago, Illinois. For the calendar years 1978, 1979, and 1980, Perlin timely filed individual income tax returns, using the cash method of accounting.Petitioners Henry E. Hershey (Hershey), and Ellen K. Hershey (collectively the Hersheys), husband and wife, resided in Lexington, Kentucky, at the time the petition in docket No. 20634-83 was filed. For the calendar years 1979 and 1980, the Hersheys timely filed joint income tax returns using the cash method of accounting.Hillbrook Farm, Inc. (Hillbrook) (formerly Hilltop View Farm, Inc.) is a Kentucky corporation. During 1978, 1979, and 1980, Hillbrook was an electing small business corporation 390 pursuant to section 1372 and filed an information return for subchapter S corporations for each of such years using 144 the cash method of accounting.In 1958, at the age of 15, Perlin began working at the Chicago Board of Trade (CBOT) as a commodities clerk. In September 1964, Perlin became a member of the CBOT and began trading as a floor trader 5 in commodity futures contracts. Except for brief interruptions, Perlin was a trader from 1964 through 1983, inclusive.In January 1978, Perlin formed Hilltop View Farm, Inc. (Hilltop), contributing thoroughbred horses and a horse farm he owned in exchange for all of Hilltop's stock. Hershey was employed as an officer of Hilltop with the responsibility of running the horse farm. On March 15, 1978, Perlin sold one-half of his shares of stock in Hilltop to Hershey, in return for a note in the amount of $ 250,000. On that same date, Perlin commenced trading in commodity futures contracts on behalf of Hilltop.Although Perlin and Hershey both were employed by Hilltop, they 145 agreed that they both could have outside business interests. Hershey continued as a partner in another horse operation, Hillbrook Farm, while Perlin continued to trade commodity futures on his own behalf.During the summer of 1979, Hershey and Perlin agreed that they would both devote their full energies to the operation of Hilltop. They agreed that Perlin would trade only for Hilltop and that the Hersheys would purchase the interests of the other partners in Hillbrook Farm and would transfer their interest in the assets of Hillbrook Farm to Hilltop, as part of a recapitalization of Hilltop. As a result, Perlin liquidated any open futures positions he had in his own name at that time. On October 1, 1979, the Hersheys purchased the interests of the other partners of Hillbrook Farm. On December 21, 1979, the stock ownership of Hilltop was restructured as part of a recapitalization, and the ownership of Hilltop became as follows: Perlin - 50 percent; Henry Hershey - 37 percent; and Ellen Hershey - 13 percent. This ownership continued through 1983. At the 391 time of the recapitalization, Hilltop changed its name to Hillbrook Farm, Inc.During 1978, 1979, and 1980, Hershey's primary 146 responsibility was to manage and operate the horse operation of Hillbrook. Perlin's primary responsibility during those years was to plan and execute the trading of Hillbrook in commodity futures contracts. Ellen Hershey was not involved in the management or operation of Hillbrook during those years.The deficiencies in the instant cases relate solely to the tax consequences of four straddle transactions:NameEstablishedLiquidated1. Silver StraddleApr. 13, 1978Jan. 10, 19792. Soybean StraddleJuly 31, 1979Jan. 3, 19803. T-Bond Straddle No. 1Oct. 11, 19796147 Jan. 6, 19814. T-Bond Straddle No. 2June 26, 19806 Mar. 24, 1982The Silver Straddle was established solely on behalf of Perlin, individually. The Soybean Straddle and both U.S. Treasury Bond (T-Bond) Straddles were entered into by Perlin on behalf of Hillbrook.General Elements of Commodity Futures TradingA detailed description of commodity futures is not necessary. 7 Here we are primarily concerned with straddles and butterfly straddles. A straddle 8148 position is established by simultaneously holding a long position (a contract to buy) in one delivery month and a short position (a contract to sell) in another delivery month, with respect to the same 392 commodity.9 For example, if one buys a contract in May 1985 soybeans and sells a contract in July 1985 soybeans, he has established a straddle, long May soybeans and short July soybeans. The two separate delivery months, May and July, are called legs of the straddle.A butterfly straddle is a combination of two straddles, involving 3 contract months with at least four legs. The following diagram represents an example of a perfect butterfly:1 Long March Soybeans1 Long July Soybeans(Wing)(Wing)2 Short May Soybeans(Body)In a perfect butterfly straddle, the number of contracts involved in each wing will be one-half of the number of contracts involved in the body. A butterfly may also be imperfect. An example of an imperfect butterfly would be as follows:4 Long March Soybeans6 Long July Soybeans(Wing)(Wing)10 Short May Soybeans(Body)The profit or loss potential of a straddle or butterfly 149 straddle is not based on absolute price movements in the legs, but rather is measured by the increase or decrease in the price differential between the long and short contracts. The price movement for 1 delivery month will rarely equal the price movement of another delivery month, and this difference in magnitude of the price movements produces a net gain or loss on the straddle. This net position, which measures the profitability of the straddle, will be referred to as the straddle differential or the net equity in the straddle. As an example, a person holding the perfect butterfly discussed above, would profit, before costs, if the price of the May short soybean contracts decreased more or increased less relative to the prices of the March and July long soybean contracts.Different positions in futures contracts have different degrees of risk. An outright long or short position is much 393 more risky than a straddle position. As a general rule, a straddle which has a longer period of time between delivery months will have a greater potential for profit and loss. For example, a May-December straddle generally will have a greater profit and loss potential than a May-July straddle. Because 150 a butterfly straddle entails two opposite straddles (a long and a short), the degree of risk and profit potential in butterflies is smaller than that of an ordinary straddle. The risk is smaller still if the butterfly is perfectly balanced. As the distance between the body and the wings of a butterfly is increased, so is the profit potential and risk of loss. For example, a January, May, September butterfly will have a greater profit/loss potential than a March, May, June butterfly.A switch or rollover occurs when one leg of the straddle is closed out and is replaced by a new leg so that the straddle position is maintained. Whenever a switch occurs, tax consequences normally will result: either a realized gain or loss on the leg which is closed out. Thus, one can produce a loss for tax purposes by establishing a straddle and waiting for some movement in the price of the legs. Because the straddle trader has both a long position and a short position, fluctuation in the price of the underlying commodity typically will result in a gain in one leg and a loss in the other. The losing leg can then be closed out, recognizing the loss, and it can then be replaced with a similar position, 151 at a new but lower cost, so that the risk of the overall position remains essentially the same. The gain on the other leg, of course, will eventually have to be recognized, but this can be deferred until a later year.To reiterate, the potential net profits or losses of a straddle are measured by the price differential in the legs and, as such, are generally smaller than the gross gain or loss on any individual leg of the straddle. It follows that because it is the differential, not the separate legs, which measures the trader's net profit or loss potential, the gains and losses for tax purposes are generally larger than the trader's actual exposure to risk.Straddles and switch transactions are not used exclusively for their tax consequences. A straddle rather than an outright position may be used, for example, if the trader 394 wants to hold the position for a longer period of time, since the fluctuations in price tend to be slower in a straddle than in an outright position. A switch may be used in a butterfly straddle, for example, to widen or narrow the distance between the body and the wings and thus increase or decrease the profit potential and risk of loss.The Alleged Sham TransactionsAll 152 trades made at the CBOT must be cleared through the Chicago Board of Trade Clearing Corp. (the Clearing Corp.). Although there are rules and procedures governing the treatment of trades which fail to clear at the end of the day, no binding futures contract exists unless and until an executed trade has been cleared through the Clearing Corp. To facilitate this process, traders use trading cards to record their trades. The trading cards contain information such as the time of the trade, the broker who executed the trade, and the quantity of contracts bought and sold. After the trade is executed, the trading card is filled out by the trader, and it is submitted for the clearing process. The badge initials of the opposing trader are marked on the trading cards, and the trading participants are required to check the accuracy of the information on the trading cards after the trade is executed. A trade will not fail to clear, however, if an error is made in writing down the opposing broker's initials.During the years in issue, the majority 10 of trades in T-Bond Straddle Nos. 1 and 2 were executed by Perlin through the use of a broker. However, Perlin, himself, executed trades for T-Bond 153 Straddle Nos. 1 and 2 in the Treasury Bond Pit on the floor of the CBOT on the following days: November 11, 1980, December 9, 1980, and December 12, 1980.On November 11, 1980, a 75-contract butterfly straddle (75 long June 1981; 150 short September 1981; 75 long 395 December 1981) was purchased for T-Bond Straddle No. 1. Of the 300 contracts actually traded, 186 of these contracts (75 long June 1981; 93 short September 1981; 18 long December 1981) were traded by Albert Vose (Vose) on behalf of Perlin against various other traders. Perlin and Vose's trading cards reflect that the remaining 114 contracts (57 short September 1981; 154 57 long December 1981) were traded by Perlin with Vose. The latter trade resulted in a long-term capital loss of $ 252,937.50 and a short term capital gain of $ 735,656.25 to Hillbrook, as the result of closing out previously held opposing positions for the same delivery months.Also on November 11, 1980, a 150-contract T-Bond straddle (150 short September 1982; 150 long March 1983) was purchased for T-Bond Straddle No. 2. Perlin and Vose's trading cards reflect that this trade was executed by Perlin with Vose. This trade resulted in a short-term capital loss of $ 1,767,187.50 to Hillbrook.On December 9, 1980, there was a purchase of a 102-contract T-Bond straddle (long December 1982; short March 1983) and a sale of the same 102-contract straddle (102 short December 1982; 102 long March 1983) for T-Bond Straddle No. 1. Perlin and Vose's trading cards reflect that Perlin sold a 102-contract straddle to Scott Luttrell (Luttrell) and that Perlin bought a 102-contract straddle from Vose. Luttrell's trading card, however, indicates that Luttrell executed the 102-contract straddle directly with Vose. Both Luttrell and Perlin's trade registers 11 reflect that Luttrell made the trade 155 with Perlin, not with Vose, on behalf of Perlin. The trade produced a short-term capital gain of $ 981,750 and a short-term capital loss of $ 946,687.50 for Hillbrook.On December 12, 1980, a 50-contract T-Bond straddle (50 short March 1983; 50 long June 1983) was purchased for T-Bond Straddle No. 2. Perlin and Vose's trading cards reflect that this trade was executed by Perlin with Vose. The trade resulted in a short-term capital loss of $ 170,312.50 for Hillbrook.396 The following table summarizes the realized gains and losses from the aforementioned transactions:RealizedCharacter ofTrade dateStraddlegain/(loss)capital gain/lossNov. 11, 1980T-Bond No. 1($ 252,937.50)Long termNov. 11, 1980T-Bond No. 1735,656.25 Short termNov. 11, 1980T-Bond No. 2(1,767,187.50)Short termDec. 9, 1980T-Bond No. 2981,750.00 Short termDec. 9, 1980T-Bond No. 2(946,687.50)Short termDec. 12, 1980T-Bond No. 2(170,312.50)Short termThe Straddle TransactionsA. The Silver Straddle.In April 1978, Perlin initiated the Silver Straddle, which is 156 the straddle in issue in docket No. 26381-82. The Silver Straddle was maintained in Perlin's own account and is depicted on pages 398-399.As the table on pages 398-399 indicates, the initial configuration in the Silver Straddle was a perfect butterfly straddle. Though this configuration was later changed into more complicated configurations, throughout the life of the straddle a balanced position was maintained (i.e., the total number of long contracts exactly offset the total number of short contracts).During 1978, Perlin utilized switch transactions in the Silver Straddle to realize short-term capital losses as follows:DateAmount of lossTable referenceApr. 28, 1978($ 140,000)First transactionSept. 27, 1978(155,250)Third transactionOct. 3, 1978(111,250)Fourth transactionOct. 5, 1978(82,500)Fifth transactionOct. 6, 1978(7,360)Sixth transactionTotal(496,360)In January 1979, Perlin liquidated the Silver Straddle as follows:Long-termShort-termNetDatecapital gaincapital gain(loss)gain/(loss)Table reference1/05/79$ 696,870($ 341,250)$ 355,620Seventh transaction1/08/79183,750(45,750)138,000Eighth transaction1/10/79105,950(105,950)Ninth transaction986,570(492,950)493,620397 According 157 to the table, the net equity (i.e., the straddle differential) in the Silver Straddle based on the unrealized gain/loss in the straddle as offset by the realized gain/loss in the straddle on actual trade dates (hereinafter referred to as the net equity based on actual prices), ranged from a negative $ 12,706 on October 6, 1978, to a negative $ 249 on June 23, 1978. The net equity in the straddle based on settlement prices 12158 ranged from a positive $ 18,500 on August 3, 1978, to a negative $ 56,730 on November 14, 1989, and fluctuated by as much as $ 50,000 in a single day. The overall performance of the Silver Straddle was a loss of $ 2,740, calculated as follows:1978Short-term capital loss($ 496,360)1979Long-term capital gain986,570 1979Short-term capital loss(492,950)Overall loss(2,740)Several factors cause the straddle differential for silver futures contracts to fluctuate. These factors include the price trend of silver and the cost of carrying silver.According to general theory, if silver prices are increasing, the prices for distant delivery months should increase more than prices for nearby months. In such event, a straddle short the nearby month and long the faraway month, would result in profits. Here, spot silver prices increased from an average of $ 4.70 per ounce in December 1977, to $ 6.25 an ounce in January 1979, the month the silver straddle was liquidated. Futures prices also increased. 159 The nearest Commodity Exchange of New York (COMEX) 13160 silver contract, which closed at $ 5.29 at the end of February 1978, just before these silver trades, closed at $ 6.51 at the 398 SILVER STRADDLE 1978-1979Contracts: Long or (Short)Feb.Apr.Jun.Aug.Oct.Dec.Feb.Apr.Jun.Aug.19791979197919791979197919801980198019801978 TransactionsInitial transaction4/13/78Trade50 (100)50 Position50 (100)50 First transaction4/28/78Trade50 (50)(50)50 Position50 0 (100)0 50 Second transaction6/23/78Trade100 200 (400)200 Position50 0 (100)0 50 200 (400)200 Third transaction9/27/78Trade(25)50 (25)(150)300 (150)Position50 (25)(50)(25)(100)200 (100)200 (150)Fourth transaction10/3/78Trade(25)50 25 (50)Position(25)50 (25)0 0 (150)200 (100)200 (150)Fifth transaction10/5/78Trade(22)44 (22)Position(25)50 (25)0 0 (172)200 (56)200 (172)Sixth transaction10/6/78Trade(2)4 (2)Position(25)50 (25)0 0 (174)200 (52)200 (174)1979 TransactionsSeventh transaction1/5/79Trade174 (174)(174)174 Position(25)50 (25)0 0 0 26 (52)26 0 Eighth transaction1/8/79Trade25 (50)25 Position0 0 0 0 0 0 26 (52)26 0 Ninth transaction1/10/79Trade(26)52 (26)Position0 0 0 0 0 0 0 0 0 0 SILVER STRADDLE 1978-1979CumulativeCurrentUnrealizedbalanceGain (loss)gain (loss)Net equitylong/(short)realizedin accountin accountInitial transaction4/13/78TradePosition100-(100)N/A($ 500)($ 500)First transaction4/28/78TradePosition100-(100)($ 140,000)131,000 (9,000)Second transaction6/23/78TradePosition500-(500)(140,000)139,751 (249)Third transaction9/27/78TradePosition450-(450)(155,250)(295,250)287,124 (8,126)Fourth transaction10/3/78Trade(111,250)Position450-(450)(406,500)404,751 (1,749)Fifth transaction10/5/78TradePosition450-(450)(82,500)(489,000)484,250 (4,750)Sixth transaction10/6/78TradePosition450-(450)($ 7,360)1 (496,360)$ 483,654 ($ 12,706)Seventh transaction1/5/79TradePosition102-(102)355,620 355,620 137,875 (2,865)Eighth transaction1/8/79TradePosition52-(52)138,000 493,620 0 (2,740)Ninth transaction1/10/79TradePosition0-0 0 2 493,620N/A(2,740)400 end of December 1978, and at $ 7.09 at the end of January 1979.The carrying costs are the cost of borrowing money (i.e., interest) to take possession of the actual commodity and the cost of storing the commodity. As these costs increase, the cost of taking delivery of silver and holding it for future use also increases, producing a similar increase in the value of contracts for more distant delivery months relative to the value of contracts for more nearby months. Under general theory, a rise in interest rates will result in profits in a straddle where the straddle is short the nearby month and long the faraway month. Also, according to general theory, if interest rates fall, a trader will profit if he is long the nearby month and short the faraway month. Between April 1978 and January 1979, straddle differentials also widened because the cost-of-carry per 161 ounce per month increased due to short-term interest rates rising throughout 1978. For example, from March 1978 to January 1979, 3-month Treasury bill rates increased from approximately 6 percent to 9.3 percent.B. The Soybean StraddleOn July 31, 1979, Perlin, on behalf of Hillbrook, established the Soybean Straddle by buying three long March 1980 soybean futures contracts and selling three short May 1980 soybean futures contracts. The Soybean Straddle is depicted by the table on page 401.As the table on page 401 indicates, the initial configuration in the account was a simple straddle. On August 28, 1979, Perlin expanded the size of the Soybean Straddle by executing a 125-contract butterfly straddle which resulted in a short-term capital loss of $ 487.50. At this point in time, the Soybean Straddle was an imperfect butterfly straddle and it remained in this configuration, with slight modifications, until the straddle was liquidated on January 3, 1980. Throughout the series of transactions affecting this straddle, a balanced position was maintained.Perlin utilized day trades 14 on December 13, 1979, and December 28, 1979, to realize short-term capital losses of 401 SOYBEAN STRADDLE 1979-1980Contracts: Long or (Short)Jan. 1980Mar. 1980May 1980Jul. 19801979 TransactionsInitial transaction7/31/79Trade3 (3)Position3 (3)First transaction8/28/79Trade(25)50 (25)Position(22)47 (25)Second transaction12/13/7947 (47)Trade(47)47 Position0 (22)47 (25)Third transaction12/28/7940 (40)Trade(40)40 Position0 (22)47 (25)1980 TransactionsFourth transaction1/03/80Trade22 (47)25 Position0 0 0 0 SOYBEAN STRADDLE 1979-1980CumulativeCurrentUnrealizedbalanceGain (loss)gain (loss)Net equitylong/(short)realizedin accountin accountInitial transaction7/31/79Trade3-(3)PositionN/A$ 300$ 300 First transaction8/28/79Trade47-(47)($ 488)Position550(1,038)Second transaction12/13/79TradePosition47-(47)(94,587)(95,075)92,425(2,650)Third transaction12/28/79Trade47-(47)(30,000)Position1 (125,075)121,787(3,288)Fourth transaction1/03/80Trade0-0 121,275 Position2 121,275 N/A(3,800)162 402 $ 94,587 and $ 30,000, respectively. On January 3, 1980, the liquidation of the Soybean Straddle resulted in a short-term capital gain of $ 121,275. The net equity in the straddle based on actual prices ranged from a positive $ 300 on July 31, 1979, to a negative $ 3,800 on January 3, 1980. The net equity based on settlement prices ranged from a positive $ 5,400 on September 14, 1979, to a negative $ 4,625 on October 9, 1979, and fluctuated by as much as $ 4,000 in a single day. The overall performance of the straddle was a loss of $ 3,800 consisting of:1979Short-term capital loss($ 125,075)1980Short-term capital gain121,275 Overall loss(3,800)A variety of factors affect the straddle differential in soybean future contracts. The most important appear to be market conditions and carrying costs.During the early part of 1979 soybean prices were generally increasing. After July 1979, however, the soybean price picture changed and soybean prices moved downward. Weather in the United States was unusually favorable and, although a huge crop had been forecast 163 and was in essence already taken account of in the market, growing conditions were better than anticipated, so the bumper crop was even larger than forecast. In addition, there was also a bumper crop in Brazil, the largest producer outside the United States. Other world supplies were stable. On the demand side, there was a heavy oil seed supply relative to demand in competing oil products, such as palm oil and coconut oil. Around Christmas of 1979, the Soviet Union invaded Afghanistan and, although the grain embargo did not take place until January 1980, rumors and reports of the impending embargo did depress prices and added an additional element of uncertainty and volatility to the market. Additionally, the dollar strengthened as a result of high U.S. interest rates which caused export demand to fall, since a stronger dollar means that it costs foreigners more, in their own currency, to buy U.S. goods. The rising interest rates, due partially to a change in Federal Reserve policy on October 6, 1979, predictably increased carrying costs and thus, widened the straddle differential.403 C. T-Bond Straddle No. 1On October 11, 1979, Perlin, on behalf of Hillbrook, initiated T-Bond Straddle 164 No. 1 by establishing a 150-contract T-Bond butterfly straddle. T-Bond Straddle No. 1 is depicted by the table on pages 404-405.As the table on pages 404-405 indicates, the initial configuration in T-Bond Straddle No. 1 was a perfect butterfly straddle. Although this configuration was later changed into more complicated configurations, throughout the life of the straddle a balanced position was maintained.During 1979, switch transactions were utilized in T-Bond Straddle No. 1 to realize short-term capital losses as follows:DateAmount of lossTable referenceOct. 23, 1979($ 937,500)First transactionDec. 28, 1979(40,312)Second transactionTotal(977,812)The overall performance of T-Bond Straddle No. 1 was a loss of $ 2,094 computed as follows:1979Short-term capital loss($ 977,812)1980Short-term capital gain120,030 1980Long-term capital loss(332,812)1981Short-term capital gain714,156 1981Long-term capital gain474,344 Overall loss(2,094) The net equity in the straddle based on actual prices ranged from $ 0 on October 11, 1979, to a negative $ 43,188 on January 29, 1980. The net equity based on settlement prices ranged from a positive $ 3,937 on December 12, 1980, to a negative $ 49,970 on 165 May 29, 1980, and varied by as much as $ 20,000 in a single day.The primary considerations affecting straddle differentials in T-Bonds are changes in short-term interest rates. As the interest rates become more volatile, so do changes in the straddle differential.During the years in issue, 1979 through 1980, interest rates were volatile. For example, the yield on 3-month Treasury bills during the last quarter of 1979 was 10 percent. The rates rose to over 15 percent during the second 404 T-BOND STRADDLE NO. 1 1979-1981Contracts: Long or (Short)Mar. 1981Jun. 1981Sep. 1981Dec. 1981Mar. 19821979 TransactionsInitial transaction10/11/79Trade(150)300 (150)Position(150)300 (150)First transaction10/23/79Trade150 (300)150 Position150 (150)0 (150)150 Second transaction12/28/79Trade43 (43)Position150 (107)(43)(150)150 1980 TransactionsThird transaction1/29/802 Trade(4)2 Position148 (107)(41)(150)150 Fourth transaction2/11/80Trade(150)300 (150)Position(2)(107)259 (150)0 T-BOND STRADDLE NO. 1 1979-1981CumulativeCurrentUnrealizedbalanceGain (loss)gain (loss)Net equitylong/(short)realizedin accountin accountInitial transaction10/11/79TradePosition300-(300)N/A $ 0$ 0 First transaction10/23/79TradePosition300-(300)($ 937,000)932,812(4,688)Second transaction12/28/79Trade300-(300)(40,312)Position1166 (977,812)969,781(8,031)Third transaction1/29/80Trade298-(298)7,843 Position7,843 926,781(43,188)Fourth transaction2/11/80Trade259-(259)(1,868,093)2,806,246(31,814)Position(1,860,250)405 T-BOND STRADDLE NO. 1 1979-1981Contracts: Long or (Short)Mar. 1981Jun. 1981Sep. 1981Dec. 1981Mar. 19821979 TransactionsFifth transaction2/12/80Trade(2)(41)43 Position(4)(148)302 (150)0 Sixth transaction2/13/80Trade4 (2)(2)Position0 (150)300 (150)0 Seventh transaction2/14/801 Trade(1)Position0 (150)300 (150)0 Eighth transaction11/11/80Trade75 (150)75 Position0 (75)150 (75)0 1981 TransactionsNinth transaction1/6/81Trade75 (150)75 0 Position0 0 0 0 0 T-BOND STRADDLE NO. 1 1979-1981CumulativeCurrentUnrealizedbalanceGain (loss)gain (loss)Net equitylong/(short)realizedin accountin accountFifth transaction2/12/80Trade302-(302)0 Position($ 1,860,250)$ 2,807,590($ 30,470)Sixth transaction2/13/80Trade300-(300)(375)Position(1,860,625)2,808,033(30,407)Seventh transaction2/14/80Trade300-(300)187 2,807,030(31,220)Position(1,860,438)Eighth transaction11/11/80Trade150-(150)1,647,656Position1 212,7821,180,468(10,126)Ninth transaction1/6/81Trade0-0 1,188,500Position2167 1,188,500N/A(2,094)406 quarter of 1980, dropped below 8 percent during the third quarter of 1980, rebounded to over 15 percent during 1981 and dropped to approximately 12 percent during the first quarter of 1982.The prices of nearby futures contracts had similar fluctuations. In mid-1979, the closest maturity T-Bond contract was 92.5 percentage points or $ 92,500 for $ 100,000 face amount of bonds. Seven to eight months later, the price had fallen to 63 percentage points, or a loss of close to 30 points, ($ 30,000) per contract. Between March and June 1980, prices of nearby T-Bond contracts went from 64 to 86 percentage points, and within 6 months fell back to 64 percentage points. T-Bond futures hit a low of nearly 55 percentage points in October 1981, and fluctuated sharply for the next 9 months before rallying in mid-1982. By the fall of 1982, prices rebounded to 79 percentage points.D. T-Bond Straddle No. 2On June 26, 1980, Perlin, on behalf of Hillbrook, initiated T-Bond Straddle No. 2 by establishing a 150-contract T-Bond butterfly straddle. T-Bond Straddle 168 No. 2 is depicted by the table on pages 408-411.As the table on pages 408-411 indicates, the initial configuration in T-Bond Straddle No. 2 was a perfect butterfly straddle. Although this configuration was later changed into more complicated configurations, throughout the life of the straddle, a balanced position was maintained.During 1980, switch transactions and day trades 15 in T-Bond Straddle No. 2 were utilized to realize the following capital gains and losses:Short-term capitalType ofDategain or losstransactionTable referenceNov. 11, 1980($ 1,767,187)SwitchFirst transactionNov. 12, 198093,750 SwitchSecond transactionDec. 2, 1980(487,719)Day tradeThird transactionDec. 9, 198035,062 Day tradeFourth transactionDec. 12, 1980(170,312)SwitchFifth transactionTotal(2,296,406)The overall performance of T-Bond Straddle No. 2 was a loss of $ 28,500, computed as follows: 407 1980Short-term capital loss($ 2,296,406)1981Short-term capital loss(1,876,376)1982Short-term capital gain4,144,280 Overall loss(28,502)The net equity in the straddle based on actual prices during the years in issue ranged from $ 0 on November 11, 1980, to a negative $ 9,594 on December 9, 1980. The 169 net equity based on settlement prices ranged from $ 0 on several dates including June 30, 1980, to a negative $ 28,344 on December 23, 1980, and varied by as much as $ 5,000 in a single day.The same factors affecting the straddle differential in T-Bond Straddle No. 1 also affected the straddle differential in T-Bond Straddle No. 2.E. Day TradesDay trading occurs when a trader buys or sells an outright or a straddle position at one point during the day, and acquires an offsetting position at a later point during the day, hoping to profit from price movements occurring during the day.In performing its booking services for some of the clearing firms, the Clearing Corp. has programmed its computer to offset trades on a First-In-First-Out (FIFO) basis, so that the purchase or sale of a commodity futures contract will be matched against the oldest open position. However, with respect to day trades, the computer is programmed to match the purchase and sale on the same day, of commodity futures contracts for the same month, unless special instructions are used.For example, assume that on June 1, 1985, a trader established an open long position of 20 December 1986 corn futures at a price of 170 $ 2.56 per bushel and on June 10 he buys another 20 December 1986 corn futures at $ 2.55 per bushel and he also sells 20 December 1986 corn futures at $ 2.54 per bushel. The accounting system used by the Clearing Corp. would offset the two June 10 trades against each other so that the realized loss for June 10 would be $ 0.01 per bushel. Special instructions could be used, however, 408 T-BOND STRADDLE NO. 2 1980-1982Contracts: Long or (Short)Sep. 1982Dec. 1982Mar. 1983Jun. 1983Sep. 19831980 TransactionsInitial transaction6/26/80Trade150 (300)150 Position150 (300)150 First transaction11/11/80Trade(150)150 Position0 (300)300 Second transaction11/12/80Trade150 (150)Position150 (300)150 Third transaction12/2/80Trade24 (48)24 Trade(24)48 (24)Position150 (300)150 0 Fourth transaction12/9/80Trade102 (102)Trade(102)102 Position150 (300)150 0 Fifth transaction12/12/80Trade(50)50 Position150 (300)100 50 1981 TransactionsSixth transaction1/13/81Trade150 (300)150 Position150 (300)250 (250)150 Seventh transaction1/15/81Trade50 (50)Position150 (300)300 (300)150 Eighth transaction2/11/81Trade150 300 (150)Trade(150)(300)150 Position150 (300)300 (300)150 Ninth transaction8/5-6/81Trade150 (300)150 Trade(150)300 (150)Position150 (300)300 (300)150 Tenth transaction11/20/80Trade(144)288 (144)Position150 (300)156 (12)6 Eleventh transaction11/23/81Trade(6)12 (6)Position150(300)150 0 0 Twelfth transaction11/30/81Trade(11)22 (11)Position139 (278)139 0 0 Thirteenth transaction12/8/81Trade5 Trade(5)Position139 (278)139 0 0 1982 TransactionsFourteenth transaction3/5/82Trade(25)50 (25)Position114 (228)114 0 0 Fifteenth transaction3/23/82Trade(57)114 (57)Position57 (114)(57)0 0 Sixteenth transaction3/24/82Trade(57)114 (57)Position0 0 0 0 0 171 T-BOND STRADDLE NO. 2 1980-1982CumulativeCurrentUnrealizedbalanceGain (loss)gain (loss)Net equitylong/(short)realizedin accountin accountInitial transaction6/26/80TradePosition300-(300)N/A ($ 4,688)($ 4,688)First transaction11/11/80TradePosition300-(300)($ 1,767,187)1,767,187 0 Second transaction11/12/80TradePosition300-(300)93,750 (1,673,437)1,664,062 (9,375)Third transaction12/2/80TradeTradePosition300-(300)(487,719)(2,161,156)2,151,566 (9,594)Fourth transaction12/9/80TradeTrade35,062 Position300-(300)(2,126,094)2,116,500 (9,594)Fifth transaction12/12/80TradePosition300-(300)($ 170,312)1 (2,296,406)$ 2,288,368 ($ 8,032)Sixth transaction1/13/81TradePosition550-(550)151,562 151,562 2,125,090 (19,750)Seventh transaction1/15/81TradePosition600-(600)N/A 151,562 2,125,090 (19,750)Eighth transaction2/11/81TradeTradePosition600-(600)(1,993,156)(1,841,594)1,971,846 (21,314)Ninth transaction8/5-6/81TradeTradePosition600-(600)(2,912,469)(4,754,063)2,880,688 (31,782)Tenth transaction11/20/80TradePosition312-(312)$ 2,372,063 (2,382,000)$ 4,655,994 ($ 22,406)Eleventh transaction11/23/81TradePosition300-(300)96,937 (2,285,063)4,559,055 (22,405)Twelfth transaction11/30/81TradePosition278-(278)406,656 (1,878,407)4,152,406 (22,404)Thirteenth transaction12/8/81TradeTradePosition278-(278)2,031 2 (1,876,376)4,131,252 (41,528)Fourteenth transaction3/5/82TradePosition228-(228)924,219 924,219 3,220,064 (28,496)Fifteenth transaction3/23/82TradePosition114-(114)$ 2,107,218 (3,031,437)$ 1,112,846 ($ 28,494)Sixteenth transaction3/24/82TradePosition0-0 1,112,843 3 4,144,280 N/A (28,494)172 412 to prevent the offset of the two June 10 trades. The computer would then revert to a FIFO basis in which case the realized loss would be increased to $ 0.02 per bushel.Perlin used special instructions to prevent the accounting system from offsetting day trades in the Soybean Straddle on December 13 and 28, 1979, and in T-Bond Straddle No. 2 on December 2, 9, and 12, 1980. At the end of the trading day for each of these trades, petitioners' straddle position was the same as their position at the beginning of the trading day. The following chart shows the realized gains and losses as a result of using the special instructions as well as the results if the special instructions had not been requested:Claimed short-termShort-termcapital gain/(loss)capital gain/(loss)usingwithout usingStraddleDatespecial instructionsspecial instructionsSoybeanDec. 13, 1979$ 1,763 $ 1,763 (96,350)(2,350)SoybeanDec. 28, 1979(30,000)(500)T-Bond No. 2Dec. 2, 1980(219)(219)(487,500)0 T-Bond No. 2Dec. 9, 1980981,750 0 (946,688)0 Transaction CostsA 173 professional trader encounters three types of transaction costs. First, he pays commissions to his clearing firm. These commissions are "roundturn" fees which are charged only when a contract is offset. For example, if a trader establishes an open position of one long silver contract on March 1, 1985, which he offsets on March 3, 1985, the roundturn commission will be charged only on March 3, 1985. The commissions generally are less than $ 1 per trade roundturn or $ 0.50 per contract traded. Second, a trader pays an exchange fee to reimburse his clearing firm for the clearing fee charged the clearing firm by the Clearing Corp. This fee is minimal and usually ranges between $ 0.02 and $ 0.04 per trade. Third, if a trader uses a floor broker to execute a trade for him, the trader must pay the floor broker a brokerage fee for executing the trade. This is not a roundturn fee, is charged on each contract that is bought or 413 sold, and typically ranges between $ 0.50 and $ 2 for each contract filled by the broker. The total transaction costs for a professional trader are usually less than one tick, the minimum price movement on a futures contract. 16174 An investor generally pays substantially higher transaction costs than a professional trader. The transaction costs paid by an investor range between $ 10 and $ 90 per contract.During the years in issue, Perlin and Hillbrook cleared their trades through Eisen and Blum (E & B), a member clearing firm at the CBOT. E & B agreed with Perlin and Hillbrook that the charge for commissions would be $ 1.50 for each futures contract cleared by E & B. However, both Perlin and Hillbrook had a "cap" on the amount of commission charged so that after Perlin or Hillbrook had paid a certain amount in commissions, for example $ 25,000, additional trades would be cleared without additional charge; although once Perlin or Hillbrook reached the cap they would continue to pay a small exchange fee to E & B to reimburse E & B for its costs of clearing the trades through the Clearing Corp. This fee was between 2 and 4 cents per trade.Because the fee arrangement was structured in such a manner, it is appropriate to use an average figure to determine the commission and exchange 175 fees for each of the straddles, rather than use the actual fees paid on each trade.In 1978, Perlin paid exchange fees and commissions of $ 141.20 and traded 329 contracts for an average cost for commissions and exchange fees of $ 0.43 per contract roundturn on all his trading. Likewise, for 1978, Hillbrook paid $ 24,638 in exchange fees and commissions and traded 32,405 contracts for an average cost for exchange fees and commissions of $ 0.76 per contract roundturn. In 1979, Hillbrook paid $ 24,286 in exchange fees and commissions and traded 95,377 contracts for an average cost for exchange fees and commissions of $ 0.25 per contract roundturn. In 1980, Hillbrook paid $ 67,044 in exchange fees and commissions and traded 154,672 contracts for an 414 average cost of exchange fees and commissions of $ 0.43 per contract roundturn.The total exchange fees and commissions for the straddles in issue are shown by the following table:Averagecost ofexchangefees andTotalNo. ofcommissionsexchangeNo. ofroundturnper contractfees andStraddlecontracts 1176 trades 2Xroundturn 3177 =commissionsSilver3,0461,5230.43$ 654.89Soybean5482740.2568.50T-Bond No. 12,5901,2950.43556.85T-Bond No. 22,5001,2500.43537.50 Accordingly, the total transaction costs for each of the straddles was as follows:BrokerageExchange feesStraddlefees+and commissions=TotalSilver$ 886.50$ 654.89$ 1,541.39Soybean731.1068.50799.60T-Bond No. 13,117.00556.853,673.85T-Bond No. 21,436.25537.501,973.75OPINIONI. The first issue for decision is whether petitioners' investments in certain commodity straddles for the taxable year ending December 31, 1980, were sham transactions, devoid of the requisite economic substance.415 Respondent contends that certain trades executed in T-Bond Straddle No. 1 on November 11, 1980, and in T-Bond Straddle No. 2 on November 11, 1980, December 9, 1980, and December 12, 1980, were actually prearranged in a noncompetitive manner. As such, according to respondent, the transactions were factual shams, executed in violation of the Commodity Futures Trading Commission (CFTC) regulations and should not be recognized for Federal tax purposes. 17 Petitioners understandably contend otherwise. In support of their contention, 178 petitioners argue that the trades were in fact executed by competitive open-outcry bidding in accordance with the CFTC regulations and had valid tax consequences.Alleged transactions involving commodity futures contracts which are in fact prearranged or fictitious will not be recognized for Federal tax purposes. See Brown v. Commissioner, 85 T.C. 968">85 T.C. 968 (1985); 179 Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985); Miller v. Commissioner, 84 T.C. 827">84 T.C. 827 (1985), on appeal (10th Cir., Nov. 20, 1985); Julien v. Commissioner, 82 T.C. 492">82 T.C. 492 (1984). Respondent's determination that the underlying transactions are not bona fide is presumptively correct; and petitioners have the burden of proving otherwise. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934); Rule 142(a).The CFTC regulations contain similar restrictions. The regulations prohibit fictitious and prearranged trading at the CBOT and provide that, with limited exceptions, 18180 all trading must be executed by competitive open-outcry bidding or by another equally open and competitive method. 17 C.F.R. sec. 1.38(a) (1980). Competitive open-outcry bidding occurs when traders execute their trades through a combination 416 of both loud verbal communication and ritualistic hand signals. Because the trades are executed by open outcry, everyone trading in that particular trading pit is supposed to have the opportunity to take the trade.A careful review of the circumstances surrounding each trade leads us to the inescapable conclusion that petitioners have established that the transactions involved were in fact bona fide and not prearranged or fictitious. All of the trades cleared through the normal clearing process of the Clearing Corp. and were reported on the customary business records maintained by Perlin's clearing firm, E & B, and supplied to petitioners after each trading day. Moreover, petitioners had nothing to gain by arranging the trades in advance since the record suggests that at the time of these trades the price and quantity of the contracts involved could have been obtained on the open market.With this in mind, we now turn to the arguments raised by respondent. For purposes of convenience we will discuss each trade date separately.November 11, 1980 -- Perlin and Vose's trading cards reflect that a 57-contract straddle and a 150-contract straddle were traded between them on this date for T-Bond Straddle Nos. 1 and 2, respectively.In arguing that the above trades were fictitious, respondent relies primarily on the testimony of Pemberton 181 Shober (Shober), a trader and member of the T-Bond Pit Committee. 19 Shober testified that he was trading straddles in the straddle area of the T-Bond pit on November 11, 1980, and that he did not see Perlin execute either of these trades by open outcry. He stated that he would have remembered if Perlin had executed the trades in such a manner because Perlin did not normally trade straddles. We find this testimony to be unreliable for several reasons. Based on the estimates of traders who testified at trial, there were approximately 10 to 25 traders trading straddles in the T-Bond pit during 1980. This estimate, coupled with the huge volume of trading occurring during this period, 20 convinces us that it is unlikely that a trader 417 would remember the specifics of a trade occurring nearly 4 years before the trial. Vose testified that he could not remember these trades, and Shober testified that he could not remember any of the trades he made on that day. More importantly, although Shober testified he would have remembered any trades made by Perlin, it is interesting to note that Shober also stated 182 that he did not even know what Perlin looked like. 21183 Thus, it would have been a difficult task, indeed, for him to remember whether Perlin had executed the trades by open outcry. Shober also indicated that he never saw Perlin trade in the straddle area of the T-Bond pit during 1980, yet it is undisputed that during this period Perlin executed trades in T-Bond straddles with at least eight traders other than Vose. For these reasons we believe that the trades occurring in T-Bond Straddle No. 2 on November 11, 1980, were not prearranged or fictitious, but were in fact bona fide.December 9, 1980 -- Perlin and Vose's trading cards reflect that on this date Perlin sold a 102-contract straddle to Luttrell and that Perlin bought a 102-contract straddle from Vose. Luttrell's trading card, however, indicates that Luttrell executed the 102-contract straddle directly with Vose.Respondent contends that what actually happened was that after the Vose/Luttrell trades were executed, Vose and Perlin filled out their own trading cards to make it appear that Perlin was in the middle of the Vose/Luttrell trades.Luttrell at first testified that it was unlikely that he made a mistake in writing down Vose rather than Perlin as the opposite trader on the trading card, and that in all likelihood he executed the 102-contract straddle directly with Vose. However, neither Luttrell or Vose could remember executing this particular T-Bond straddle trade with 418 Perlin. In fact, both Luttrell and Perlin's trade registers 22 reflect that Luttrell made the trade with Perlin, not with Vose on behalf of Perlin. After he became aware that the trade cleared with Perlin, Luttrell testified that it was just 184 as likely as not that he made a mistake 23 in writing on the card. In light of the foregoing testimony, we conclude that the December 9, 1980, trade was not prearranged or fictitious.December 12, 1980 -- Perlin and Vose's trading cards reflect that a 50-contract T-Bond straddle was executed by them on this date for T-Bond Straddle No. 2.Respondent argues that Perlin normally executed trades for T-Bond Straddle Nos. 1 and 2 by using Vose as his broker. Nonetheless, every time Perlin purportedly executed a T-Bond straddle trade for himself, Vose took the other side for his own account, despite the fact that there were anywhere between 10 and 25 other traders in the T-Bond pit who could have taken the trade during the time this trade was executed. Respondent contends that this fact, in addition to the fact that no T-Bond straddle trader could ever recall seeing Perlin trade a T-Bond straddle by open outcry, confirms that this trade (as well as the trades on the two previously mentioned 185 dates) were prearranged.Respondent's argument is erroneous in several respects. As to the first part of respondent's argument, the record shows that Vose did not always take the opposing side when Perlin traded for his own account. Although Vose was the opposing broker in 78 percent of the trades executed by Perlin for T-Bond Straddle No. 2, Vose was the opposing broker for only 20 percent of the trades executed by Perlin for T-Bond Straddle No. 1. 24 Moreover, Perlin testified that the reason he traded with Vose was because Vose was an experienced trader whom he could count on to give him a fair market price. We realize that this statement is somewhat self-serving. However, we are not convinced that the frequency of the Perlin/Vose trades is indicative of prearrangement. It is also noteworthy that respondent does not 419 assert that there was anything about the terms of the straddles (price, quantity, etc.) that would suggest that they were in any way unusual.The second part of respondent's argument is also unconvincing. The brokers who testified stated to the effect that they could not recall whether Perlin had traded T-Bond straddles during 1980, not whether 186 or not he had traded T-Bond straddles by open outcry.In sum, we conclude that the transactions involved herein were in fact bona fide and not prearranged shams. 25 Since these transactions have survived the threshold issue of economic substance, they now qualify for discussion under the second issue.II. The second issue for decision is whether petitioners' investments in the commodity straddle transactions for the taxable years ending December 31, 1978, through December 31, 1980, satisfied the entered into for profit requirement of section 108 of the act.Section 108(a) of the act provides that a loss from the disposition of a position entered into before 1982 is allowable if: (1) The position forms part of a straddle, (2) the amendments made by title V of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 323 (the 1981 act) (relating to the mark-to-market provisions), do not apply to the position, and (3) the position is part of a transaction 187 entered into for profit. The parties are in agreement that the first two requirements have been satisfied; the controversy therefore centers on whether the straddles in issue were transactions entered into for profit.Section 108(b) of the act provides:For purposes of subsection (a), any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts shall be rebuttably presumed to be part of a transaction entered into for profit. [98 Stat. 630]When interpreting a statute, and especially a new statute, a court may look to legislative history for interpretative assistance. Miller v. Commissioner, 827">84 T.C. at 838 n. 20; J.C. Penney Co. v. Commissioner, 37 T.C. 1013">37 T.C. 1013, 1016-1017420 (1962), affd. 312 F.2d 65">312 F.2d 65 (2d Cir. 1962). See also Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 742, 747-748 (1984). Section 108 of the act had no precise counterpart either in the House or the Senate versions of the bill; the only legislative history available is the Conference Committee report, which in pertinent part reads as follows:In the case of commodity dealers and persons actively engaged in investing in RFCs, the provision is to be applied by presuming that the 188 position is held as part of a transaction entered into for profit unless the Internal Revenue Service establishes to the contrary. In determining whether a taxpayer is actively engaged in trading in RFCs with an intent to make a profit, a significant factor will be the extent of transaction costs. If they are sufficiently high relatively [sic] to the scope of the taxpayer's activities that there is no reasonable possibility of a profit, the presumption will be unavailable. RFCs for purposes of applying the presumption are regulated futures contracts as defined in section 1256(b) before its amendment by the bill.For purposes of the provision, the term "commodities dealer" has the same meaning as such term in the amendments by the bill providing for application [of] the self-employment income tax to such persons.[H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 1, 171 (the Committee report).]The provisions of respondent's temporary regulations relevant to the presumption in section 108 of the act provide:Q-5. Under what circumstances is the presumption considered rebutted?A-5. All the facts and circumstances of each case are to be considered in determining if the presumption 189 is rebutted. The following factors are significant in making this determination: (1) the level of transaction costs; (2) the extent to which the transaction results from trading patterns different from the taxpayer's regular patterns; and (3) the extent of straddle transactions having tax results disproportionate to economic consequences. Factors other than the ones described above may be taken into account in making the determination. Moreover, a determination is not to be made solely on the basis of the number of factors indicating that the presumption is rebutted.Q-6. Does a commodities dealer or person regularly engaged in investing in regulated futures contracts qualify for the profit presumption for all transactions?A-6. No. The presumption is only applicable to regulated futures contract transactions in property that is the subject of the person's regular trading activity. For example, a commodities dealer who regularly trades only in agricultural futures will not qualify for the presumption for a silver futures straddle transaction. For purposes of this section, the 421 term "regulated futures contracts" has the meaning given to such term by section 1256(b) of the Code as 190 in effect before the enactment of the Tax Reform Act of 1984.[Sec. 1.165-13T, Temporary Income Tax Regs.T.D. 7968, 49 Fed. Reg. 33444 (Aug. 21, 1984).]The parties do not dispute that Perlin and Hillbrook were commodities dealers or persons regularly engaged in investing in regulated futures contracts. They disagree, however, as to the validity and effect of the above-quoted regulations.The appropriate standards to be applied when testing the validity of a regulation are as follows: 26The Commissioner has broad authority to promulgate all needful regulations. Sec. 7805(a); United States v. Correll, 389 U.S. 299">389 U.S. 299, 306-307 (1967). Treasury regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 501 (1948). Regulations, as constructions of the Code by those charged with its administration, "should not be overruled except for weighty reasons." Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 750 (1969); Commissioner v. South Texas Lumber Co., supra at 501.Although regulations are entitled to considerable weight, "respondent may not usurp the authority of Congress by adding restrictions to a statute which 191 are not there." Estate of Boeshore v. Commissioner, 78 T.C. 523">78 T.C. 523, 527 (1982). See State of Washington v. Commissioner, 77 T.C. 656 (1981), affd. 692 F.2d 128">692 F.2d 128 (D.C. Cir. 1982). A regulation is not a reasonable statutory interpretation unless it harmonizes with the plain language, origin, and purpose of the statute. United States v. Vogel Fertilizer Co., 455 U.S. 16">455 U.S. 16 (1982); Durbin Paper Stock Co. v. Commissioner, 80 T.C. 252">80 T.C. 252, 257 (1983).[Miller v. Commissioner, supra at 841 (quoting Stephenson Trust v. Commissioner, 81 T.C. 283 at 287-288 (1983)).]In Miller, we held invalid Q & A-2 of the same temporary regulations involved here, without deciding the validity of Q & A-5 and Q & A-6. In so holding we stated:It is worth noting that these regulations were issued as temporary regulations because of the "need for immediate guidance." 192 That need obviously involved a number of pending cases, including this one, where respondent was engaged in litigation over straddle losses. There is at least some question whether a regulation issued to buttress respondent's 422 litigating position is entitled to any special presumption of validity. See, e.g., Chock Full O'Nuts Corp. v. United States, 453 F.2d 300">453 F.2d 300, 303 (2d Cir. 1971). [84 T.C. at 841-842]With these principles in mind we must now examine the specific regulations involved here, viz, Q & A-5 and Q & A-6 of section 1.165-13T, Temporary Income Tax Regs.Petitioners contend that Q & A-6 improperly restricts the availability of the presumption. They argue that the regulation, which limits the availability of the presumption to transactions which are the subject of the trader's regular trading activity, is contrary to the clear intent of section 108(b) of the act which states that the presumption applies to "any position held by a commodities dealer." 27 (Emphasis added.) As such, petitioners argue that the regulation must be invalidated in accordance with the following language in CWT Farms, Inc. v. Commissioner, 79 T.C. 1054">79 T.C. 1054, at 1062 (1982), affd. 755 F.2d 790">755 F.2d 790 (11th Cir. 1985):where 193 the statute is unambiguous, and there is no valid reason for adding a requirement to those the statute already provides, the commissioner may not usurp congressional authority by adding such a requirement by regulation. [Citation omitted.]Respondent contends that a review of legislative history of section 108 of the act requires us to uphold the regulation. Respondent relies on the following language in the committee report:For purposes of the provision, the term "commodities dealer" has the same meaning as such term in the amendments by the bill providing for application [of] the self-employment income tax to such persons. [98 Stat. 630]Respondent argues that the above-quoted language makes it clear that Congress intended the presumption to 194 apply in a manner consistent with the application of section 102(c)(1) of the act. Section 102(c)(1) of the act provides that gain or loss of a commodities dealer is included as "net earnings from self-employment" only if it is "gain or loss (in the normal course of the taxpayer's activity of dealing in or 423 trading section 1256 contracts) from section 1256 contracts or property related to such contracts." (Emphasis added.) Respondent argues that the emphasized language provides authority for the regular trading activity limitation imposed by Q & A-6.We believe that respondent's position is incorrect. We agree that the committee report requires us to look to section 102(c)(1) of the act; however, the committee report indicates that we are to refer to that section only to determine the meaning of the term "commodities dealer." Section 102(c)(1) of the act goes on to state "The term 'commodities dealer' means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission." The additional limitation imposed by respondent simply does not appear in the 195 definition.We think that there is merit to petitioners' position, since the statute literally applies to any position held by a commodities dealer. Nevertheless, we do not deem it necessary to invalidate this portion of the regulation since Perlin's regular trading activity was broad enough to include the straddle transactions involved herein. On the basis of the record we are satisfied that Perlin was primarily a scalper, 28 but as our findings show, he also traded a significant number of contracts in the straddle accounts and maintained positions in the accounts for substantial time periods. 29196 Thus we believe that petitioners 424 have complied with the requirements of Q & A-6 of section 1.165-13T, Temporary Income Tax Regs.30 With respect to Q & A-5, petitioners' contend that this portion of the regulation establishes invalid criteria for rebuttal of the presumption.Factor (1) -- Transaction costs.Petitioners agree that this factor is relevant; however, they feel that in light of the legislative history of section 108 of 197 the act, the transaction costs are only relevant to rebut the presumption if the costs are so high that there is no reasonable possibility of a profit.Respondent apparently argues that we should look merely to the level of the transaction costs and that the limitation imposed by petitioners is not necessary.Section 108(b) of the act does not provide us with any indication as to what factors may be used to rebut the presumption. The only guidance we have is the committee report wherein it was stated that a significant factor for determining the availability of the presumption is the extent of transaction costs and "If they are sufficiently high relatively [sic] to the scope of the taxpayer's activities that there is no reasonable possibility of a profit, the presumption will be unavailable." H. Rept. 98-861, supra at 171. The origin and the purpose of the statute, as exemplified by the above-quoted portion of the committee report, 31198 convinces us that showing that the expected transaction costs are so high that there is no reasonable possibility of any profit is a useful factor in determining whether the presumption has been rebutted.We do not believe that petitioner's expected transaction costs here precluded any reasonable possibility of profit. The transaction costs petitioners could expect to pay here 425 were minimal. For example, the total transaction costs typically paid by a trader, even if he traded through a broker (which was certainly not the norm for Perlin) ranged from approximately $ 1 to $ 3 per contract traded. These costs are insignificant in comparison with what an investor would pay (typically $ 10 to $ 90 per contract) but, more importantly, the costs are usually less than one tick, the minimum price increment for a futures contract. It follows that if the straddle position merely increased by one tick the transaction costs would be covered. As is illustrated by our findings, the market conditions and interest rates, 199 which are the primary factors affecting the straddle differential, were fairly volatile during the period in which the straddles were maintained, thus suggesting that a one tick movement was not an unlikely result. We are accordingly of the opinion that the expected transaction costs in the instant matter were not prohibitively high, so as to prevent any reasonable possibility of profit.Our conclusion concerning transaction costs is corroborated by the following table, which compares the actual transaction costs 32200 201 incurred to the range in straddle differentials:ActualRange in netRange in nettransactionequity based onequity based onStraddlecostsactual pricessettlement pricesSilver$ 1,541.39$ 12,457$ 75,230Soybean799.604,10010,025T-Bond No. 13,673.8543,18853,907T-Bond No. 21,973.759,59428,344426 The table shows that whether the straddle differential (which provides a measure of profit potential) was based on actual prices or settlement prices, it was always sufficient to cover 33 the transaction costs. Thus, it cannot be said that the actual transaction costs were so high that there was no reasonable possibility of profit.Factor (2) -- The extent to which the transaction 202 results from trading patterns different from the taxpayer's regular trading patterns.Petitioners contend that this factor is irrelevant. In support of this contention petitioners argue that members of the CBOT, such as Perlin, are entitled to trade any futures contract listed on the CBOT and many traders trade a number of different commodities, using different strategies and techniques with each commodity. Thus, the regular trading pattern becomes an elusive concept. Additionally, the argument follows, this factor is not a reliable indicator of the prospects of profit on any one transaction.Respondent, on the other hand, argues that this factor is nothing more than a consistent extension of the principles articulated in Q & A-6.We feel that a trader's regular trading pattern is not an extremely reliable indicator of whether a particular transaction was entered into for profit. We agree with petitioners that determining a trader's regular trading pattern is a difficult task, particularly for a trader such as Perlin, who utilized many different trading techniques and traded in a variety of different commodities. However, we do not feel that it is necessary to invalidate this aspect 203 of the regulation. Though the meaning of "regular trading pattern" is far from clear, we are certain that the term encompassed the straddle transactions involved herein. As we noted when discussing Q & A-6, our findings show that 427 Perlin traded a significant number of contracts in the straddle accounts and maintained positions in the accounts for substantial time periods. Thus, the use of this factor has not been helpful in rebutting the presumption in the instant matter.Factor (3) -- The extent of straddle transactions having tax results disproportionate to economic consequences.Petitioners argue that this factor is fundamentally incompatible with both the nature of straddles and the essential purpose of section 108 of the act, because virtually all straddle transactions have potential tax results that respondent considers disproportionate to their economic consequences.Respondent contends that the third factor is nothing more than a consistent adaptation of the "primary" profit motive standard of section 108 of the act. 34204 At the outset we note that the meaning of "economic consequences" is somewhat unclear. Apparently, in applying this factor, we are to compare the capital gains and losses realized in the straddles with the net overall effect when the gains and losses are offset against one another. This analysis yields the table on page 428 for the straddle transactions involved herein.As the table on page 428 indicates, the realized capital gains and losses, when compared to the net results of the straddles over the entire period appear to be disproportionate. The table also shows that petitioners were able to realize losses initially while deferring realization of gains until later years.We do not believe, however, that this factor is relevant for purposes of rebutting the presumption. Neither the language in the statute nor the legislative history even remotely suggests that this disproportionate test has any applicability here. Moreover, the origin and purpose behind section 108(b) of the act was to grant relief to persons who frequently trade in commodity markets. If we were to hold that this factor was significant, 205 then use of the presumption for straddle transactions would be virtually eliminated (a 428 OVERALL PERFORMANCE19781979Long-termShort-termLong-termShort-termgaingaingaingainStraddle(loss)(loss)(loss)(loss)Silver($ 496,360)$ 986,570($ 492,950)Soybean(125,075)T-Bond No. 1(977,812)T-Bond No. 200(496,360)986,570(1,595,837)OVERALL PERFORMANCE19801981Long-termShort-atermLong-termShort-termgaingaingaingainStraddle(loss)(loss)(loss)(loss)SilverSoybean$ 121,275 T-Bond No. 1($ 332,812)120,030 $ 474,344$ 714,156 T-Bond No. 2(2,296,406)(1,876,376)(332,812)(2,055,101)474,344(1,162,220)OVERALL PERFORMANCE1982Long-termShort-termgaingainNetStraddle(loss)(loss)totalsSilver($ 2,740)Soybean(3,800)T-Bond No. 1(2,094)T-Bond No. 20$ 4,144,280(28,502)04,144,280(37,136)429 result clearly not intended) since the very nature of a straddle is such that the gross gain or gross loss on individual straddle positions (i.e., the legs), far exceeds the net gain or loss on the straddle taken as a whole. 35206 We accordingly are of the opinion that the third factor does not provide any reasonable basis for rebutting the presumption, and that this part of respondent's temporary regulation is invalid. We must 207 also determine whether the presumption is applicable to the day trades involved herein.To reiterate, a day trade occurs when a trader buys or sells an outright or straddle position at one point during the day, and acquires an offsetting position at a later point during the day, hoping to profit from price movements occurring during the day. The Clearing Corp. has programmed its computer to automatically offset the positions acquired during the day against one another. For the day trades in issue, however, Perlin utilized special instructions to prevent the automatic offset, so that the computer would revert to the FIFO method when calculating the effects of the trade. As our findings show, use of the special instructions resulted in short-term capital gains of $ 1,763 on December 13, 1979, and $ 981,750 on December 9, 1980; and short-term capital losses of $ 96,350 on December 13, 1979, $ 30,000 on December 28, 1979, $ 487,719 on December 2, 1980, and $ 946,688 on December 9, 1980. If the special instructions had not been used, the short-term capital gains would have respectively been $ 1,763 and $ 0. The respective short-term capital losses would have been $ 2,350, $ 500, $ 208 219, $ 0 and $ 0.430 Respondent argues that the losses resulting from the day trades were artificially created and thus not allowable. 36 Petitioners, of course, take a contrary position. We note initially 209 that under the CFTC regulations, a trader is always permitted to identify the position he wishes to close out. 17 C.F.R. sec. 1.46(b)(1980). If no such identification is made, the Clearing Corp. will offset the position on a FIFO basis. As for day trades, the regulations permit the Clearing Corp., if it does not receive specific instructions from the customer, to offset trades within the same day against each other prior to application of the FIFO rule. 17 C.F.R. sec. 1.46(c)(1980). Thus, Perlin's use of special instructions was consistent with the requirements of these regulations.A useful analogy is provided in the Income Tax Regulations concerning the treatment of stock sales. Where an investor is selling stock from a portfolio held by his broker, he may identify the specific shares to be sold, or he may assume that the shares are disposed of on a FIFO basis. Sec. 1.1012-1(c)(1) to (3), Income Tax Regs. Similarly, here Perlin had elected pursuant to the CFTC regulations to use the FIFO method in determining which futures contracts were offset.Though it appears that use of the special instructions created large tax losses, we know of no authority which suggests that a seller 210 of property must sell property that would produce a gain prior to selling property that would produce a loss. Additionally, the record indicates that special instructions were also used so as to realize a profit of $ 93,750 on November 12, 1980, in T-Bond Straddle No. 2 instead of a loss of $ 1,617,187.50, which would have resulted if the instructions had not been used. We now turn to the applicability of the presumption that the day trades 431 were entered into for profit. Because petitioners' were commodity dealers or persons actively engaged in commodity futures, the presumption is available. Moreover, we do not feel that the presumption has been rebutted for the same reasons we articulated, supra, concerning the straddle transactions. As such, the day trades are presumed to have satisfied the entered into for profit requirement of section 108 of the act. 37 In sum, we hold that the presumption in section 108(b) of the Act applies to petitioners' investments in the straddle transactions for the taxable years ending December 211 31, 1978, through December 31, 1980. 38 Therefore, because the presumption was not rebutted by respondent, the transactions satisfied the entered into for profit requirement of section 108 of the act.Having decided that all of the straddle transactions for the taxable years in issue satisfied the requirements of section 108 of the act, it is unnecessary to reach the third issue concerning section 6621(d).To reflect the foregoing, as well as concessions made by both parties,Decisions will be entered under Rule 155. SIMPSONSimpson, J., dissenting: A decision in this case requires us to revisit Miller v. Commissioner, 827">84 T.C. 827 (1985), on appeal (10th Cir., Nov. 20, 1985). I remain of the view that 432 we made a mistake in Miller, and we are compounding that 212 mistake by the decision of the majority in this case.In Miller, we did not apply the presumption of section 108(b); here, we have a dealer or trader, who is entitled to that presumption. In describing the effect of the presumption, the committee report states, "the provision is to be applied by presuming that the position is held as part of a transaction entered into for profit unless the Internal Revenue Service establishes to the contrary." H. Rept. 98-861 (Conf.)(1984), 1984-3 C.B. (Vol. 2) 1, 171. Thus, even a dealer or trader is not automatically entitled to deduct his losses. There is still a question of whether the transaction was entered into for profit, but the Commissioner has the burden of proving that the dealer did not have a profit motive.The regulations provide that in determining whether a transaction was entered into for profit, one factor to be considered is "the extent of straddle transactions having tax results disproportionate to economic consequences." Sec. 1.165-13T, A-5, Temporary Income Tax Regs. Such regulation does not provide that merely because there are large tax losses, the for-profit test is failed and the losses are disallowed. The regulation merely 213 requires that the extent of tax losses and economic gains be considered in determining whether the transaction was entered into for profit.The majority concludes that since dealers and traders ordinarily have large tax losses, a test that considers such losses is invalid. However, in my view, it is altogether appropriate to examine the results of the dealer's trading to ascertain whether he, in fact, realizes any significant economic gains. I cannot believe that Congress meant to allow a deduction for losses where a dealer persistently and deliberately incurred large tax losses, and no economic gains. The economic gains need not equal the losses, but where there is a continuing history of no economic gains, and no reasonable prospect of economic gains, I am convinced that Congress did not intend to allow the use of tax losses to defer the reporting of income.In summary, I remain of the view that section 108 was not intended to alter the historic for-profit test. Under 433 section 108(b), there still must be a determination of whether the transaction was entered into for profit; that provision merely shifts to the Commissioner the burden of proving that the taxpayer lacked a profit 214 motive. Footnotes1. The instant cases were consolidated by Order of this Court on June 1, 1984.↩2. By answer filed Jan. 7, 1983, in docket No. 26381-82, respondent indicated that as a result of certain computational adjustments, the deficiency should be $ 302,412.54 rather than $ 498,161.3. All statutory references are to the Internal Revenue Code of 1954 as in effect in the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩4. Division A of the Deficit Reduction Act of 1984, 98 Stat. 494.↩5. In this opinion, we will be using the term "trader" to refer to a professional commodities trader who is a member of the CBOT. In contrast, we will use the term "investor" to refer to a person who is not a member of the CBOT, but invests in commodity futures through the use of a broker.↩6. Pursuant to sec. 509 of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 333-334, and sec. 5c. 1256-2, Temporary Income Tax Regs., T.D. 7826, 47 Fed. Reg. 38688 (Aug. 27, 1982), as amended by T.D. 7841, 47 Fed. Reg. 49391 (Oct. 27, 1982), petitioners have elected to have the mark-to-market rules of sec. 1256 apply to all straddle positions held by Hillbrook during 1981. As such, the tax consequences of the trades executed in T-Bond Straddle Nos. 1 and 2, during 1981 are not in issue. The tax consequences of the trades executed in T-Bond Straddle No. 2 during 1982 have not been placed in issue, for apparently similar reasons.7. A description of the basic terms and the mechanics of commodity futures trading can be found in Miller v. Commissioner, 84 T.C. 827">84 T.C. 827, at 828-830 (1985), on appeal (10th Cir., Nov. 20, 1985); Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, at 354-357 (1982); and Landreth v. Commissioner, T.C. Memo. 1985-413↩.8. Traders at the CBOT refer to a straddle position as a "spread." The two terms are synonymous. See Auster, "Understanding the Tax Aspects of Commodities Markets: Futures and Options," 3 J. Taxation Investments 128-129 (Winter 1986)↩. Because the Code sections addressing this area use the term "straddle" we have chosen to do the same.9. A straddle may be achieved in one of two ways: (1) By trading each leg separately (e.g., taking a long position in May 1985 soybeans and a short position in July 1985 soybeans), or (2) by taking both positions in one simultaneous transaction.↩10. The total number of trades executed in T-Bond Straddle No. 1 through Dec. 31, 1980, was 51. Thirty-five, or 69 percent, of these trades were executed using Albert Vose (Vose) as the broker. Of the 15 trades made by Perlin, 3, or 20 percent, of these were executed with Vose as the opposing broker. Thirty-six trades were executed in T-Bond Straddle No. 2 through Dec. 31, 1980. Nineteen, or 53 percent, of these trades were executed with Vose as the broker. Of the nine trades executed by Perlin, seven, or 78 percent, were traded with Vose as the opposing broker.↩11. Trade registers are printed by the Clearing Corp. each day after the close of trading and show all of the trades which were reported and cleared for that particular day.↩12. Daily settlement prices are determined by the pit committee for each commodity traded at the CBOT shortly after the market closes. The settlement prices are generally somewhere in the range of the prices traded near the close of trading. Though it would appear that the net equity figures based on settlement prices should be rejected (since they are somewhat artificial) in favor of the net equity figures based on actual prices, the settlement prices are important because they provide us with a measure of profit and loss potential. This is true because the net equity figures based on settlement prices dictate the amounts which must be deposited in or may be withdrawn from the trader's margin account at the end of each day, whether or not trades were actually executed. Therefore, fluctuations in net equity had a direct impact on petitioners' cash flow even though no gain or loss was realized for tax purposes under pre-1981 law until the contract was disposed of.13. Although the Perlin trades involved CBOT contracts, the prices of the Chicago silver futures move closely with the COMEX prices.1. Claimed on 1978 tax return as short-term capital loss.↩2. Claimed on 1979 tax return as a long-term capital gain of $ 986,570 as offset by a short-term capital loss of $ 492,950 ($ 986,570 - $ 492,950 = $ 493,620)↩14. Discussed infra↩.1. Claimed on 1979 tax return as short-term capital loss.↩2. Claimed on 1980 tax return as short-term capital gain.↩1. Claimed on 1979 tax return as short-term capital loss.1. Claimed on 1980 tax return as a long-term capital loss of $ 332,812 as offset by a short-term capital gain of $ 120,030 ($ 332,812 - $ 120,030 = $ 212,782).↩2. Claimed on 1981 tax return as a short-term capital gain of $ 714,156 and a long-term capital gain of $ 474,344 ($ 714,156 + $ 474,344 = $ 1,188,500).15. Discussed infra↩.1. Claimed on 1980 tax return as short-term capital gain.↩2. Claimed on 1981 tax return as short-term capital gain.↩3. Claimed on 1982 tax return as short-term capital gain.↩16. One tick in the value of a silver futures contract is $ 5. One tick for a soybean futures contract is $ 12.50. One tick for a T-Bond futures contract is $ 31.25.1. Because the trades occurring in 1981 are not in issue (see note 6 supra↩), these figures include only those contracts traded through and including 1980. The number of contracts for T-Bond Straddle No. 1, however, was calculated by taking the total number of Treasury Bond contracts traded in the straddle through Dec. 31, 1980 (2,290), and adding to that number an additional 300 contracts which would have been necessary to fully offset the contracts existing in the straddle on Dec. 31, 1980. Similarly, 600 contracts were added to the total number of contracts traded through Dec. 31, 1980 (1,900), in T-Bond Straddle No. 2, to reflect the number of contracts necessary to fully offset the contracts existing in that straddle on Dec. 31, 1980.2. These figures are derived by dividing the total number of contracts by two, to reflect that the commissions and exchange fees are charged on a roundturn basis. See note 1 for the explanation of the use of post-1980 transactions.↩3. In making these calculations, the figures for the average commissions and exchange fees for all of petitioners' trades (including trades involving outright positions) were used for the year that the straddle was primarily maintained. Thus, if a straddle was maintained over a small part of 1979, all of 1980, and a small part of 1981, the average cost for 1980 was used to determine the appropriate average cost figure.17. Respondent's allegations are somewhat similar to those described in United States v. Winograd, 656 F.2d 279">656 F.2d 279, 281 (7th Cir. 1981), cert. denied sub nom. Siegel v. United States, 455 U.S. 989">455 U.S. 989 (1982), affg. defendants' conviction under sec. 7206(2) of conspiring to impair the collection of income taxes by claiming losses on tax straddles in futures contracts in Mexican pesos which were not entered into through bona fide trades or open bids on an established market, but instead were prearranged uncompetitive trades done between various employees of one of the principals involved. See also Sundheimer v. Commodity Futures Trading Commission, 688 F.2d 150">688 F.2d 150 (2d Cir. 1982), cert. denied 460 U.S. 1022">460 U.S. 1022 (1983); United States v. Turkish, 623 F.2d 769">623 F.2d 769 (2d Cir. 1980), cert. denied 449 U.S. 1077">449 U.S. 1077 (1981); United States v. Siegel, 472 F. Supp. 440">472 F. Supp. 440↩ (N.D. Ill. 1979).18. Noncompetitive trades are allowed in some situations only if they are approved by the CFTC. See 17 C.F.R. sec. 1.38 (1980). However, no such trades were involved in the instant matter.19. The Pit Committee is responsible for reporting violations of the CFTC regulations.↩20. Vose, for example, testified that his trading records indicated that he traded at least 100,000 contracts during 1979, 1980, and 1981.↩21. In this regard, Shober testified as follows:Question: Have you ever heard of Paul Perlin?Answer: I've heard of him. I've never met him or spoken to him, or ever traded with him, and he was pointed out to me once, I think in the trading pit, but I still don't know what he looks like.* * * *Question: You were asked about knowing Mr. Perlin, and did I understand you to say that you didn't know what he looked like?Answer: No, I don't. He was pointed out to me once two or three years ago.Question: But you don't know what he looks like?Answer: No, that's correct.↩22. See note 11 supra↩.23. Mistakes in writing trading cards were not an uncommon occurrence. All five of the traders (including Perlin) who testified on this subject indicated that errors occurred frequently.↩24. See note 10 supra↩.25. Respondent made similar allegations with respect to trades occurring on Jan. 15, 1981, and Feb. 11, 1981. We do not find it necessary to rule on the validity of these trades, because petitioners' 1981 tax year is not in issue.↩26. Here, as in Miller v. Commissioner, 84 T.C. at 841 n. 26, and Edward L. Stephenson Trust v. Commissioner, 81 T.C. 283">81 T.C. 283 (1983), the regulations were issued pursuant to respondent's general interpretative power and as such are to be accorded less weight than legislative regulations. Estate of Boeshore v. Commissioner, 78 T.C. 523">78 T.C. 523, 527↩ n. 5 (1982). See sec. 7805.27. Sec. 108(e) of the act states that the term "straddle" has the meaning provided in sec. 1092(c) as in effect after the enactment of the 1981 Act. Sec. 1092(c)(1) defines "straddle" as "offsetting positions with respect to personal property." For this purpose, "position" is defined by sec. 1092(d)(2)(A), as in effect after the enactment of the 1981 Act, as "an interest (including a futures or forward contract or option) in personal property."↩28. Scalping occurs when a trader buys or sells an outright position at one price and tries to quickly offset it at a small increment (a tick) of appreciation. Through use of this technique the trader hopes to profit due to the large number of contracts traded. A sample of daily trading activity for Perlin for the first trading day of each month during 1980 shows that on the average, Perlin traded approximately 351 outright positions per day.↩29. The record reveals that approximately 7,784 contracts were traded in the straddle accounts during the years in issue. The straddles were maintained over the following time periods:↩StraddleEstablishedLiquidatedSilverApr. 13, 1978Jan. 10, 1979SoybeanJuly 31, 1979Feb. 11, 1980T-Bond No. 1Oct. 11, 1979Jan. 6, 1981T-Bond No. 2June 26, 1980Mar. 24, 198230. Respondent also apparently argues that pursuant to Biedenharn Realty Co., v. United States, 526 F.2d 409 (5th Cir. 1976), cert. denied 429 U.S. 819">429 U.S. 819 (1976); United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969); Smith v. Dunn, 224 F.2d 353">224 F.2d 353 (5th Cir. 1955); and Brown v. United States, 192 Ct. Cl. 203">192 Ct. Cl. 203, 426 F.2d 355">426 F.2d 355↩ (1970), petitioners' straddle trading is separable and should not be considered part of petitioners' regular trading activity. We find no merit in this argument and feel that the presumption is available here for the reasons enumerated in the text.31. Although the committee report speaks in terms of availability of the presumption rather than in terms of factors to be used in rebutting↩ the presumption, we feel that the level of transaction costs is an important factor to be used in determining whether the presumption may be rebutted since presumably a trader would not normally enter into a transaction where his transaction costs prevented any reasonable possibility of profit.32. When investing in futures contracts, investors or traders must generally buy at the offer price and sell at the bid price. Traders or investors, however, are said to "get the edge" whenever they buy at the bid price or sell at the offer price. A market order occurs when a trader or investor requests a broker to obtain the best price he can but to fill the order as fast as he can. Because the customer has requested the broker to fill the order quickly, the broker may have to give up the edge (i.e., buy at the offer or sell at the bid). According to respondent, giving up the edge is a "friction cost" and should be included in the transaction costs. Respondent argues that Perlin often gave up the edge by placing market orders and thereby incurred additional costs.We are of the opinion that the so-called friction cost is not a transaction cost, but rather, is part of the price of the underlying futures contract. It cannot be considered a fixed or predetermined expense, because it varies depending on fluctuations in the market price. An anomaly would be created if we were to hold otherwise, because if a trader was able to get the edge, the friction cost would be negative. Moreover, even if we were to agree with respondent, the record convinces us that Perlin did not customarily place market orders and we have not been provided with any accurate estimates of the friction costs involved herein.33. We realize that the net equities involved herein were primarily negative. However, commodity futures trading is referred to as a "zero sum game" which means that for every person who profits on a trade, there is a person who loses on the trade. For example, if one buys a soybean contract (the long) and his position appreciates $ 10, the seller of the contract (the short) loses $ 10. Therefore it does not matter whether the net equity is positive or negative, since every loss (negative net equity) measures a price movement that would have produced an equal gain (positive net equity) if the investor/trader had taken the other side. Whether or not the investor/trader actually has gain depends on which side of the transaction he takes, but the potential amount of the gain is the same as the potential amount of the loss. As a result, the potential amount of gain in any straddle transaction is reflected in the amount of net equity, positive or negative, during the course of the transaction.↩34. Respondent has apparently ignored our decision in Miller v. Commissioner, 827">84 T.C. at 842, where we held that sec. 108 of the act establishes a reasonable prospect of any profit standard rather than the primary profit standard urged by respondent.35. Throughout this case, respondent has urged the alleged substantial disproportion between the tax losses claimed by petitioners in the years in issue versus the net economic effect of the entire straddle transactions, taken as a whole, and respondent uses this as a justification for disallowing the losses claimed. By this same analysis, however, petitioners reported "disproportionate" gains on other legs of their straddle transactions, in amounts not much less than the reported losses, viewed in the overall. It does not appear from this record that respondent has eliminated these "disproportionate" gains from petitioners' income. Assuming, arguendo, that such gains and losses were "disproportionate" to the overall economic effects of the straddles, the results were nevertheless consistent with two fundamental rules of tax accounting: (a) That gains and losses are to be reported in the years when realized, viz, by a final sale, and (b) that income is to be reported on an annual basis. Congress may have intended to change these rules by enacting sec. 1256 of the Code, but such change was not retroactive to the years before us. Sec. 503(a), Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 327-330.36. In support of this proposition, respondent cites McWilliams v. Commissioner, 331 U.S. 694">331 U.S. 694 (1947); Higgins v. Smith, 308 U.S. 473">308 U.S. 473 (1940); Fender v. United States, 577 F.2d 934">577 F.2d 934 (5th Cir. 1978); Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001, 1018 n. 15 (1984), and Horne v. Commissioner, 5 T.C. 250">5 T.C. 250 (1945). McWilliams, Higgins and Fender involved the disallowance of losses on sales between related parties and have no application to the facts here. The footnote in Fox cited by respondent is similarly inapplicable since it dealt with an error in the clearing firm's reporting practices. In Horne, a member of the New York Coffee and Sugar Exchange purchased an additional seat on the Exchange and 8 days later sold his old seat at a loss. In disallowing the loss in Horne↩, we relied primarily on what is now sec. 1031. The parties in the instant matter did not present arguments concerning the applicability of sec. 1031, and for that reason, we have chosen not to delve into the ramifications of sec. 1031 here.37. Respondent also makes similar arguments concerning the switch transactions. We reject these arguments for the same reasons previously stated in the text.↩38. We feel that it would have been unduly burdensome to determine the applicability of the presumption using a straddle-by-straddle approach and therefore opted to discuss the presumption as applied to the straddle transactions taken as a whole and as applied to the day trades. Cf. Miller v. Commissioner, supra↩ at 843. In any event we do not believe that using a straddle-by-straddle analysis would have yielded a different result.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620203/	BLAK INVESTMENTS, KYLE W. MANROE TRUST, ROBERT AND LORI MANROE, TRUSTEES, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBLAK Invs. v. Comm'rNo. 1283-07United States Tax Court133 T.C. 431; 2009 U.S. Tax Ct. LEXIS 39; 133 T.C. No. 19; December 23, 2009, Filed39 In 2001 two partners of partnership P borrowed Treasury securities and sold them in the open market; i.e., a short sale. They contributed the short sale proceeds and the obligation to cover the short sale to P in exchange for interests in P. The two partners claimed their bases in P were increased by the short sale proceeds but not reduced by the obligation to cover the short sale. P then redeemed the two partners' interests in P. On their Federal income tax returns the two partners claimed significant losses with respect to the redemption and subsequent sale of assets received in the redemption. Neither thepartnership nor the two partners disclosed their participation in the transaction on tax returns for 2001 and 2002.Sec. 6501(c)(10), I.R.C., provides that if a taxpayer fails to disclose on a return or statement for any taxable year any information required under sec. 6011, I.R.C., with respect to a listed transaction as defined in sec. 6707A(c)(2), I.R.C., the period of limitations for assessment of any tax imposed with respect to the transaction does not expire until 1 year after the Internal Revenue Service is furnished the information so required. R argues that P and its partners 40 were required to disclose their participation in the transaction at issue under sec. 6501(c)(10), I.R.C.Petitioner argues that:(1) Because sec. 6707A, I.R.C., is incorporated into sec. 6501(c)(10), I.R.C., the effective date of sec. 6707A, I.R.C., controls and sec. 6501(c)(10), I.R.C., cannot apply to any transaction for which a return or statement was due on or before Oct. 22, 2004;(2) sec. 1.6011-4T, Temporary Income Tax Regs. (the temporary regulation), 67 Fed. Reg. 41327 (June 18, 2002), which requires disclosure of participation in listed transactions, is invalid because it violates:(a) Executive Order 12866, 3 C.F.R. 638 (1994) (Executive Order 12866);(b) the Regulatory Flexibility Act (RFA), 5 U.S.C. secs. 601-612 (1994);(c) the Administrative Procedure Act, 5 U.S.C. sec. 553(b) and (c) (1994).Held: Sec. 6501(c)(10), I.R.C., is effective for tax years with respect to which the period for assessing a deficiency did not expire before Oct. 22, 2004. The effective date of sec. 6707A, I.R.C., defining "listed transaction" and incorporated into sec. 6501(c)(10), I.R.C., has no bearing on the application of sec. 6501(c)(10), I.R.C., in this case.Held, further: the temporary regulation 41 does not violate Executive Order 12866 or the RFA.Held, further: the temporary regulation was replaced by sec. 1.6011-4, Income Tax Regs. (the final regulation), T.D. 9046, 1 C.B. 614">2003-1 C.B. 614, effective Feb. 28, 2003, and the rules of the temporary regulation were incorporated into the final regulation.Held, further: the final regulation is valid and requires disclosure of the 2001 transaction on the partnership's and the partners' 2002 returns.Held, further: The period of limitations for assessment of tax resulting from the adjustment of partnership items with respect to the transaction at issue is open for the year 2001 under sec. 6501(c)(10), I.R.C.Ernest S. Ryder, Richard V. Vermazen, and Lauren A. Rinsky, for petitioner.Donna F. Herbert and Jonathan H. Sloat, for respondent.Haines, Harry A.HARRY A. HAINES432 OPINIONHAINES, Judge: This case is before the Court on respondent's motion and petitioner's cross-motion for partial summary judgment filed pursuant to Rule 121. 1 The issues are: (1) Whether the effective date of section 6707A precludes application of section 6501(c)(10) to the transaction at issue; (2) whether the transaction at issue is a listed transaction; and (3) whether the 42 period of limitations for assessment of tax resulting from the adjustment of partnership items with respect to the transaction at issue is open for 2001 under section 6501(c)(10).BackgroundBLAK Investments (the partnership) is a California general partnership created by Robert and Lori Manroe (the Manroes). The Manroes are partners of the partnership as are two trusts created by the Manroes for the benefit of their children. The petition has been brought by Robert and Lori Manroe, as trustees of the Kyle W. Manroe Trust, tax matters partner of the partnership.I. The Transaction at IssueOn December 4, 2001, the Manroes as trustees of the Manroe Family Trust opened an account with A.G. Edwards & Sons, Inc. On December 10, 2001, the Manroes deposited $ 825,000 into the Manroe Family Trust account. On December 433 12, 2001, the Manroes, through the Manroe Family Trust Account, borrowed Treasury notes maturing on November 15, 2006, with a maturity value of $ 6,815,000. The Treasury 43 notes were then sold on the open market for $ 5,481,713; i.e., the Treasury notes were sold short. 2 Of the proceeds, $ 2,491,233 was allocated to Mr. Manroe and $ 2,990,480 was allocated to Ms. Manroe.On December 12, 2001, the Manroes contributed the short sale proceeds, the $ 825,000 previously deposited into the Manroe Family Trust account, and the obligation to cover the short sale to the partnership in exchange for a combined 95.2964-percent partnership interest. The two trusts for the children each contributed $ 20,000 in exchange for respective 2.3518-percent partnership interests.Mr. Manroe reported a $ 2,866,688 capital contribution to the partnership, of which $ 2,491,233 was proceeds from the short sale. Ms. Manroe reported a $ 3,440,025 capital contribution to the partnership, of which $ 2,990,480 was proceeds from the short sale. Neither of their contributions was reduced by the partnership's obligation to cover the short sale.On December 28, 2001, the partnership redeemed Mr. 44 Manroe's partnership interest for $ 380,988. 3 Of that amount, Mr. Manroe received $ 330,988 and 82,645 Swiss francs having a fair market value of $ 50,000. On December 28, 2001, the partnership redeemed Ms. Manroe's partnership interest for $ 457,185. That amount did not include any foreign currency.On December 31, 2001, Mr. Manroe converted his 82,645 Swiss francs into U.S. dollars in the amount of $ 45,931.On January 11, 2002, the partnership covered the short sale by purchasing treasury notes with a face value of $ 6,815,000 maturing on November 16, 2006, for $ 5,600,567.434 II. The Manroes' Position on the Tax Consequences of the TransactionThe Manroes claim that upon making their initial contributions to the partnership their total basis in their partnership interests was $ 6,306,713, equal to the total short sale proceeds of $ 5,481,713 and the $ 825,000 cash. See sec. 722. The Manroes took the position that the 45 obligation to cover the short sale was not a liability for purposes of section 752(b).Mr. Manroe claims that when the partnership redeemed his partnership interest, he recognized no gain or loss because the money distributed did not exceed his basis in the partnership. See sec. 731(a). He claims that his basis in the Swiss francs became $ 2,585,700; i.e., his total basis in the partnership interest less the cash distributed. See sec. 732(b). Mr. Manroe further claims that when he converted his Swiss francs into U.S. dollars he recognized an ordinary loss of $ 2,539,769. The purported loss was claimed on Schedule E, Supplemental Income and Loss, of the Manroes' joint 2001 Form 1040, U.S. Individual Income Tax Return. The loss was reported as being from "Culebra Trading Partners, Ltd.", although it was attributable to the transaction described above.Ms. Manroe claims that when the partnership redeemed her partnership interest, she recognized a short-term capital loss of $ 2,982,840, equal to her basis less the amount of money received. See secs. 731(a)(2), 741. The short-term capital loss was claimed on Schedule D, Capital Gains and Losses, of the Manroes' 2001 Form 1040. The claimed 46 loss offset $ 1,474,391 of short-term capital gains for 2001. The Manroes claimed a $ 458,190 carryover loss on their 2002 return. 4Neither the partnership nor the Manroes attached a disclosure statement to its or their 2001 return. They did not file a copy of a disclosure statement with respondent's Office of Tax Shelter Analysis. No material adviser provided respondent with information regarding the partnership's or the Manroes' participation in the transaction. See sec. 6112.435 III. Procedural HistoryOn October 13, 2006, respondent issued the partnership a notice of final partnership administrative adjustment (FPAA). Respondent determined that the partnership was a sham, was formed and availed of solely for the purpose of overstating the bases of partnership interests, and lacked economic substance. Respondent contends that the consequence of these determinations, if they are 47 sustained, would be the disallowance of the losses the Manroes claimed on their 2001 and 2002 joint returns and imposition of accuracy-related penalties determined at the partnership level upon the partners. See sec. 6221.The tax matters partner timely petitioned the Court for review of the FPAA, asserting among other things that the statute of limitations bars the determination of a liability with respect to partnership items or affected items for 2001. Respondent, in his answer, asserted that section 6501(c)(10) applies to the transaction because it constituted a listed transaction requiring disclosure. Petitioner denied the applicability of section 6501(c)(10) in its reply. On November 30, 2007, the Court filed respondent's motion for partial summary judgment on the statute of limitations issue. On March 10, 2008, the Court filed petitioner's cross-motion for partial summary judgment on the same issue. A hearing on the motions was held in San Diego, California.DiscussionI. The Period of Limitations for Partnerships and Their Partners GenerallyUnder the general rule set forth in section 6501(a), the Internal Revenue Service (IRS) is required to assess tax (or send a notice of deficiency) 48 within 3 years after a Federal income tax return is filed. In the case of a tax imposed on partnership items, section 6229 sets forth special rules to extend the period of limitations prescribed by section 6501 with respect to partnership items or affected items. See sec. 6501(n)(2); RhonePoulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533, 540-543 (2000). Section 6229 provides in pertinent part:436 SEC. 6229. PERIOD OF LIMITATIONS FOR MAKING ASSESSMENTS.(a) General Rule. -- Except as otherwise provided in this section, the period for assessing any tax imposed by subtitle A with respect to any person which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of --(1) the date on which the partnership return for such taxable year was filed, or(2) the last day for filing such return for such year (determined without regard to extensions).Section 6229 supplements section 6501. It is not a separate statute of limitations for assessments attributable to partnership items. AD Global Fund, LLC v. United States, 481 F.3d 1351 (Fed. Cir. 2007); Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at 545. 49 In Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at 539, the Court analyzed sections 6229 and 6501 as applicable to an FPAA. The Court stated:The Internal Revenue Code prescribes no period during which TEFRA partnership-level proceedings, which begin with the mailing of the notice of final partnership administrative adjustment, must be commenced. However, if partnership-level proceedings are commenced after the time for assessing tax against the partners has expired, the proceedings will be of no avail because the expiration of the period for assessing tax against the partners, if properly raised, will bar any assessments attributable to partnership items.Id. at 534-535; see AD Global Fund, LLC v. United States, supra; G-5 Inv. Pship. v. Commissioner, 128 T.C. 186 (2007).Under section 6229(d) the mailing of an FPAA suspends the running of both 3-year periods -- the section 6501(a) period and the section 6229(a) period. See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at 552-553. The suspension is for the period during which an action for judicial review of the FPAA may be brought (and, if an action is brought, until the decision of the 50 court has become final) and for 1 year thereafter. Sec. 6229(d).The Manroes filed their 2002 return on October 15, 2003. The FPAA was issued on October 13, 2006. Petitioner concedes that pursuant to section 6501(a) the period for assessment of tax attributable to partnership items for the Manroes' 2002 tax year was open when the FPAA was issued.437 The Manroes filed their 2001 return on October 15, 2002, more than 3 years before the issuance of the FPAA. Therefore, under the general rule of section 6501(a) the Manroes contend that the 2001 tax year has closed. However, respondent argues that the period for assessment of tax attributable to partnership items for 2001 is open under section 6501(c)(10) with respect to a listed transaction if the taxpayer has not made the requisite disclosure of his participation in the listed transaction.Neither party disputes our jurisdiction over this issue, but we shall examine it nonetheless. Section 6226 provides in pertinent part:SEC. 6226. JUDICIAL REVIEW OF FINAL PARTNERSHIP ADMINISTRATIVE ADJUSTMENTS.(c) Partners Treated as Parties. -- If an action is brought under subsection (a) or (b) with respect to a partnership for any partnership taxable year 51 --(1) each person who was a partner in such partnership at any time during such year shall be treated as a party to such action, and(2) the court having jurisdiction of such action shall allow each such person to participate in the action.(d) Partner Must Have Interest in Outcome. --(1) In order to be party to action. -- Subsection (c) shall not apply to a partner after the day on which --(A) the partnership items of such partner for the partnership taxable year became nonpartnership items by reason of 1 or more of the events described in subsection (b) of section 6231, or(B) the period within which any tax attributable to such partnership items may be assessed against that partner expired.Notwithstanding subparagraph (B), any person treated under subsection (c) as a party to an action shall be permitted to participate in such action (or file a readjustment petition under subsection (b) or paragraph (2) of this subsection) solely for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has expired with respect to such person, and the court having jurisdiction of such action shall have jurisdiction to consider such assertion.In 52 PCMG Trading Partners XX, L.P. v. Commissioner, 131 T.C. 206">131 T.C. 206, 213 n.9, 2008 U.S. Tax Ct. LEXIS 32">2008 U.S. Tax Ct. LEXIS 32, 14 (2008), the Court noted that we have the authority to determine whether partner years are open to assessment for any period in dispute. Specifically, we stated:Generally the Court's jurisdiction in a partnership proceeding is restricted to determining "partnership items". Sec. 6226(f); Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84">131 T.C. 84 (2008). However, our jurisdiction 438 over whether the period of limitations has expired as to individual partners presents an exception since the expiration of the period of limitations can depend on facts that are peculiar to the individual partners. See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533 (2000), appeal dismissed and remanded 249 F.3d 175">249 F.3d 175 (3d Cir. 2001). * * In Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra, the Court determined that section 6226 enabled the partners in a partnership action to assert that the period of limitations for assessing any tax attributable to partnership items had expired and that the Court had jurisdiction to decide whether that assertion was correct. 53 As we observed therein:Congress recognized that the periods for assessing tax against individual partners may vary from partner to partner and specifically provided that an individual partner will be permitted to participate as a party in the partnership proceeding "solely for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has expired with respect to such person". * * Id. at 546 (citing section 6226(d)(1)(B)).In Curr-Spec Partners, LP v. Commissioner, T.C. Memo 2007-289">T.C. Memo 2007-289, affd. 579 F.3d 391">579 F.3d 391 (5th Cir. 2009), the Commissioner issued an FPAA for the taxable year 1999, conceded that the assessment period for that year had expired, but argued that adjustments made in the FPAA affected three partners' net operating loss carryforwards for 2000 and 2001. The partners, in a partnership-level action, conceded that the FPAA was issued within 3 years of the time the partners filed their respective 2000 and 2001 tax returns but moved for summary judgment on the grounds that the period of limitations for assessing tax attributable to partnership items had expired. The partners further argued, on brief, that issues related to the period 54 of limitations for their 2000 and 2001 tax years were partner-level determinations that could not be made in a partnership-level proceeding. The Court rejected the partners' contentions and held that the period for assessing tax against the partners had not expired and remained suspended. Accordingly, under section 6226 and PCMG Trading Partners we have the authority to address the Manroes' contention that the period of limitations for assessing tax attributable to partnership items for 2001 has expired.439 II. The Effective Dates of Sections 6501(c)(10) and 6707AOn October 22, 2004, Congress enacted the American Jobs Creation Act of 2004 (AJCA), Pub. L. 108-357, sec. 814(a), 118 Stat. 1581, which added section 6501(c)(10) to the Code. Section 6501(c)(10) provides:(10) Listed transactions. -- If a taxpayer fails to include on any return or statement for any taxable year any information with respect to a listed transaction (as defined in section 6707A(c)(2)) which is required under section 6011 to be included with such return or statement, the time for assessment of any tax imposed by this title with respect to such transaction shall not expire before the date which is 1 year after the 55 earlier of --(A) the date on which the Secretary is furnished the information so required, or(B) the date that a material advisor meets the requirements of section 6112 with respect to a request by the Secretary under section 6112(b) relating to such transaction with respect to such taxpayer.Section 6501(c)(10) incorporates by cross-reference the definition of "listed transaction" set forth in section 6707A(c)(2), which was added to the Code by AJCA sec. 811, 118 Stat. 1575. Section 6707A(c) provides:(1) Reportable transaction. -- The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.(2) Listed transaction. -- The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.The parties dispute the effect of the incorporation of section 6707A(c)(2) in section 6501(c)(10). 56 The dispute centers on the effective date provided in the AJCA with respect to each section.We begin with a review of the principles of statutory construction. The "cardinal principle" of statutory construction requires us "to give effect, if possible, to every clause and word of a statute". United States v. Menasche, 348 U.S. 528">348 U.S. 528, 538-539, 75 S. Ct. 513">75 S. Ct. 513, 99 L. Ed. 615">99 L. Ed. 615 (1955) (internal quotation marks omitted). In applying the traditional rules of statutory construction, we assume that Congress uses language in a consistent manner, unless otherwise indicated. United States v. Olympic Radio & Television, Inc., 349 U.S. 232">349 U.S. 232, 235-236, 75 S. Ct. 733">75 S. Ct. 733, 99 L. Ed. 1024">99 L. Ed. 1024, 131 Ct. Cl. 814">131 Ct. Cl. 814, 1951 C.B. 376">1951 C.B. 376, 1 C.B. 376">1955-1 C.B. 376 (1955). The various 440 sections of the Code should be construed so that one section will explain and support and not defeat or destroy another section. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1, 13, 67 S. Ct. 1047">67 S. Ct. 1047, 91 L. Ed. 1301">91 L. Ed. 1301, 1 C.B. 97">1947-1 C.B. 97 (1947). Furthermore, "Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government." E.I. du Pont de Nemours & Co. v. Davis, 264 U.S. 456">264 U.S. 456, 462, 44 S. Ct. 364">44 S. Ct. 364, 68 L. Ed. 788">68 L. Ed. 788 (1924).AJCA sec. 814(b), 118 Stat. 1581, provides that section 6501(c)(10) is effective for tax years "with respect to which the period for assessing a deficiency did not expire before" 57 October 22, 2004. On October 22, 2004, the period for assessing a deficiency with respect to the Manroes' 2001 tax year was open under section 6501(a). 5 Therefore, if we regard as determinative the effective date provided in AJCA sec. 814(b), section 6501(c)(10) is effective for the Manroes' 2001 tax year.Section 6707A, which imposes a penalty for failure to include on a return or statement any required information with respect to reportable transactions and listed transactions, is effective for returns and statements the due date for which is after October 22, 2004, and which were not filed before that date. AJCA sec. 811(c), 118 Stat. 1577. Petitioner argues that because section 6707A applies only to returns and statements due after October 22, 2004, section 6501(c)(10) cannot apply to any transaction for which a return or statement was due on or before October 22, 2004.In support of this proposition, petitioner argues that there are two types of listed transactions: (1) Section 6707A listed transactions and 58 (2) listed transactions that predate section 6707A. Petitioner argues that section 6707A listed transactions are those for which a penalty can be assessed under section 6707A and which are subject to section 6501(c)(10). The second type of listed transactions would be those for which no penalty under section 6707A can be assessed and which are not subject to section 6501(c)(10).Nothing in the Code, the AJCA, or the legislative history indicates that Congress intended that there be two types of listed transactions in the manner petitioner suggests. Section 6707A(c) defines "listed transaction" by reference to the regulations promulgated under section 6011. Regulations under 441 section 6011 defining "listed transaction" were first published by the Department of the Treasury and the IRS in temporary and proposed form on February 28, 2000. 65 Fed. Reg. 11207 (Mar. 2, 2000). Similarly, the legislative history makes clear that the section 6707A penalty applies to reportable and listed transactions as defined in the section 6011 regulations. H. Conf. Rept. 108-755, at 582-584 (2004); see also Staff of Joint Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, at 360 (J. Comm. Print 2005). 59 In other words, section 6707A does not alter the definition of reportable transaction or listed transaction. Accordingly, we find that there are not two types of listed transactions in the manner petitioner contends.Section 6707A(c) applies to statements and returns due after October 22, 2004, while section 6501(c)(10) applies to tax years for which the period for assessing a deficiency did not expire before October 22, 2004. Because AJCA sec. 814(a) makes section 6501(c)(10) applicable for tax years for which the period of limitations remains open as of the date of enactment of the AJCA, section 6501(c)(10) may apply to transactions which are required to be disclosed on returns due well before that date and which therefore would not be subject to a section 6707A penalty if left undisclosed. For that reason, application of the effective date of section 6707A to section 6501(c)(10) would render the express effective date of section 6501(c)(10) meaningless, violating the cardinal principle of statutory construction.We also find significant that section 6707A and section 6501(c)(10) have different purposes. Section 6707A imposes a penalty. Congress intended the penalty to apply prospectively, 60 so that a taxpayer is penalized only if the return was not yet due when the AJCA was signed into law. AJCA sec. 811(c). On the other hand, section 6501(c)(10) keeps open a limitations period which had not yet expired as of the date of enactment of the AJCA if the taxpayer failed to make the required disclosure of involvement in a listed transaction on a return due before that date. The legislative history details the purpose of leaving the limitations period open.The Committee has noted that some taxpayers and their advisors have been employing dilatory tactics and failing to cooperate with the IRS in an attempt to avoid liability because of the expiration of the statute of limitations. 442 The Committee accordingly believes that it is appropriate to extend the statute of limitations for unreported listed transactions.H. Rept. 108-548 (Part 1), at 267 (2004); see also Staff of Joint Comm. on Taxation, supra at 368 (extension of period of limitations "will encourage taxpayers to provide the required disclosure and will afford the IRS additional time to discover the transaction if the taxpayer does not disclose it"). On July 23, 2004, Senator Charles Grassley, Chairman of the Committee on 61 Finance, and Senator Max Baucus, Ranking Member of the Committee on Finance, proposed that the period of limitations be extended to allow the IRS to challenge tax-avoidance transactions, specifically Son-of-BOSS transactions 6 that occurred as early as 2000. 763 Son of Boss transactions were aggressively marketed in the late 1990s and 2000 to companies and high net-worth individuals. Many of these transactions generated tax losses of between $ 10 million and $ 50 million. On August 15th, 2004, the statute of limitations for extended calendar year 2000 income tax returns will close for a significant number of non-disclosing Son of Boss investors. These investors will escape their rightful tax liability after that date. It is the view of the Chairman and Ranking Member of the Senate Finance Committee that non-disclosing Son of Boss investors should not be allowed to "run out the clock" on the statute of limitations before the IRS finds them. The IRS and Department of Treasury have been on record in opposing these transactions since 1999. The purchase of these tax shelters in the year 2000 was an act of sheer defiance and disregard for the tax laws of the United States. The Senate and House62 versions of the bill * * contain a measure that would hold open the statute of limitations on a transaction listed by the Treasury Department as a tax shelter, such as the Son of Boss transaction, but this measure only applies to taxable years that are open to audit after the * * * bill is enacted. * * * [Press Release, Senator Charles Grassley, Details of Plans to Ensure Continued "Son of Boss" Enforcement (July 23, 2004).]443 Had Congress intended section 6501(c)(10) to apply only to transactions for which a return or statement was due after October 22, 2004, it could have done so expressly. Similarly, if Congress had intended to apply the effective date of section 6707A to section 6501(c)(10), it could have done so by limiting application of section 6501(c)(10) to cases in which a taxpayer is subject to a penalty under section 6707A. Congress did not choose either of those avenues.Petitioner argues that respondent is applying section 6501(c)(10) retroactively, and if Congress had intended retroactive application, Congress would have so expressly stated. 8 Petitioner is mistaken. Section 6501(c)(10) does not reopen an assessment period that expired before its enactment. See H. Conf. Rept. 108-755, supra at 593 n.482; Staff of Joint Comm. on Taxation, supra at 369 n.663. Keeping open the period of limitations in this fashion is not impermissible 64 retroactive action. In a manner analogous to the enactment of section 6501(c)(10), section 6502(a)(1) was amended to extend the limitations period from 6 years to 10 years if the limitations period had not expired as of the date the amendment was enacted. Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11317(a)(1), (c), 104 Stat. 1388-458. In Rocanova v. United States, 955 F. Supp. 27 (S.D.N.Y. 1990), affd. 109 F.3d 127">109 F.3d 127 (2d Cir. 1997), the District Court rejected arguments that the amendment operated with impermissible retroactive effect in violation of the Due Process Clause, the Equal Protection Clause, and the Ex Post Facto Clause of the Constitution.Furthermore, petitioner's argument is similar to an argument rejected by the U.S. Court of Appeals for the Ninth Circuit, the court to which an appeal in this case would ordinarily lie. See Leslie v. Commissioner, 146 F.3d 643">146 F.3d 643, 650-652 (9th Cir. 1998), 65 affg. T.C. Memo. 1996-86. In Leslie, the Commissioner sought enhanced interest pursuant to section 6621(c) because of the taxpayers' use of a straddle transaction. In defining "tax motivated transactions" to which the enhanced-interest provision applied, section 6621(c)(3)(A)(iii) included "any straddle (as defined in section 1092(c) without 444 regard to subsection (d) or (e) of section 1092)". Section 6621 applied to interest accruing after December 31, 1984, even though the transaction giving rise to the underpayment of tax on which interest accrued was entered into before that date, while section 1092 applied to property acquired and positions established by the taxpayers after June 23, 1981. The taxpayers contended that because their transactions occurred before June 23, 1981, section 1092 did not apply to their transactions, and therefore section 6621(c)(3)(A)(iii), which incorporated the definition in section 1092, did not apply to their transactions either. Leslie v. Commissioner, supra at 651.The Court of Appeals rejected the taxpayers' "interesting but ultimately unavailing" argument, finding that the Commissioner was applying section 6621(c), and that the effective date of section 109266 was not determinative of the issue before the court as to the taxpayers' liability for increased interest. In concluding that the taxpayers' argument must fail, the court explained:Section 6621(c)(3)(A)(iii) references section 1092 for one simple reason: section 1092 contains what the drafters of section 6621 deemed to be a useful definition of "straddle." In the interest of expediency, rather than trotting out the same exact definition again, they simply cross referenced section 1092, which a prior Congress had already adopted. * * [Id.]In this case section 6501(c)(10) cross-references the definition of "listed transaction" in section 6707A, enacted by the same act of Congress. Nevertheless, the reason for the cross-reference is analogous to that in Leslie. See also Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). The definition of "listed transaction" provided in section 6707A was useful, and Congress chose to cross-reference the definition for expediency's sake with the effect that the definition in section 6707A was incorporated into section 6501(c)(10), but not its effective date. 967 445 III. Whether the Transaction at Issue Is a Listed TransactionA transaction is a listed transaction if it is substantially similar to one of the types of transactions the IRS has determined to be a tax avoidance transaction and has identified by notice, regulation, or other form of published guidance as a listed transaction. Sec. 6707A(c)(2); sec. 1.6011-4(b)(2), Income Tax Regs. On September 5, 2000, the Commissioner issued Notice 2000-44, 2 C.B. 255">2000-2 C.B. 255, which described Son-of-BOSS transactions and determined that they are listed transactions. Notice 2000-44, 2000-2 C.B. at 255, includes the following discussion of that type of transaction:These arrangements purport to give taxpayers artificially high basis in partnership interests and thereby give rise to deductible losses on disposition of those partnership interests.* * * * * * In * * [one example], a taxpayer purchases and writes options and purports to create substantial positive basis in a partnership 68 interest by transferring those option positions to a partnership. For example, a taxpayer might purchase call options for a cost of $ 1,000X and simultaneously write offsetting call options, with a slightly higher strike price but the same expiration date, for a premium of slightly less than $ 1,000X. Those option positions are then transferred to a partnership which, using additional amounts contributed to the partnership, may engage in investment activities.Under the position advanced by the promoters of this arrangement, the taxpayer claims that the basis in the taxpayer's partnership interest is increased by the cost of the purchased call options but is not reduced under section 752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the written call options. Therefore, disregarding additional amounts contributed to the partnership, transaction costs, and any income realized and expenses incurred at the partnership level, the taxpayer purports to have a basis in the partnership interest equal to the cost of the purchased call options ($ 1,000X in this example), even though the taxpayer's net economic outlay to acquire the partnership interest 69 and the value of the partnership interest are nominal or zero. On the disposition of the partnership interest, the taxpayer claims a tax loss ($ 1,000X in this example), even though the taxpayer has incurred no corresponding economic loss.There are many similarities between the transaction at issue and the one described in Notice 2000-44, supra. However, the transaction at issue did not involve the purchasing and writing of options. It involved the short sale of securities. Nevertheless, we conclude that the transaction at issue is 446 substantially similar to the one described in Notice 2000-44, supra.The regulations define the term "substantially similar" as "any transaction that is expected to obtain the same or similar types of tax benefits and that is either factually similar or based on the same or similar tax strategy." Sec. 1.6011-4T(b)(1)(i), Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002). Section 1.6011-4T(b)(1)(ii), Temporary Income Tax Regs., supra, contains the following highly pertinent example illustrating the meaning of "substantially similar" and concluding that the transaction described in Notice 2000-44, supra, and a similar transaction involving short 70 sales are substantially similar.Example 1. Notice 2000-44 * * * sets forth a listed transaction involving offsetting options transferred to a partnership where the taxpayer claims basis in the partnership for the cost of the purchased options but does not adjust basis under section 752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the options. Transactions using short sales, futures, derivatives or any other type of offsetting obligations to inflate basis in a partnership interest would be the same as or substantially similar to the transaction described in Notice 2000-44. * * * [Emphasis added.]The fundamental components of the transaction described in Notice 2000-44, supra, are the generation of funds through the creation of a liability and the contribution of the funds (or the asset purchased with such funds) and the associated liability to the partnership without adjusting the partner's basis for the liability. That is precisely what the Manroes did. They generated funds through the short sale of borrowed Treasury notes and contributed those funds and the obligation to cover the short sale to the partnership. The Manroes claimed bases 71 in their partnership interests which included the short sale proceeds but which were not reduced by the obligation to cover the short sale. They then disposed of their partnership interests and claimed more than $ 5 million of tax losses even though there was no equivalent economic loss.Accordingly, we hold that the transaction at issue was substantially similar to the transaction described in Notice 2000-44, supra, and is therefore a listed transaction.447 IV. Section 1.6011-4, Income Tax Regs.Petitioner argues that section 1.6011-4T, Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002) (the temporary regulation), which requires disclosure of participation in listed transactions, is invalid because it violates Executive Order 12866, 3 C.F.R. 638 (1994) (Executive Order 12866), and the Regulatory Flexibility Act (RFA), 5 U.S.C. secs. 601-612 (1994).Executive Order 12866 requires that the Office of Management and Budget review proposed "significant regulatory action". A regulatory assessment of the temporary regulation at issue was not conducted because the Department of the Treasury and the IRS concluded that it was not a "significant regulatory action." 67 Fed. Reg. 41327 (June 18, 2002). 72 Petitioner argues that the regulation is a significant regulatory action requiring review. Petitioner's contentions are not persuasive. Section 10 of Executive Order 12866, 3 C.F.R. at 649, states:Nothing in this Executive order shall affect any otherwise available judicial review of agency action. This Executive order is intended only to improve the internal management of the Federal Government and does not create any right or benefit, substantive or procedural, enforceable at law or equity by a party against the United States, its agencies or instrumentalities, its officers or employees, or any other person.Accordingly, petitioner has no right to challenge compliance with Executive Order 12866. See Michigan v. Thomas, 805 F.2d 176">805 F.2d 176, 187 (6th Cir. 1986); Trawler Diane Marie, Inc. v. Brown, 918 F. Supp. 921">918 F. Supp. 921, 932 (E.D.N.C. 1995), affd. without published opinion 91 F.3d 134">91 F.3d 134 (4th Cir. 1996).In certain situations, the RFA requires that an agency prepare a regulatory flexibility analysis. RFA, 5 U.S.C. secs. 603-604. However, a regulation is excepted if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Department 73 of the Treasury and the IRS made that certification in part on the basis of a finding that the time required to prepare and submit a disclosure pursuant to the temporary regulation was not expected to be lengthy. 67 Fed. Reg. 41327 (June 18, 2002). Petitioner argues that the regulation will have a significant economic impact on a substantial number of small entities. Petitioner confuses the disclosure of a tax avoidance 448 transaction with its disallowance. We are not persuaded to override the certification that the submission of a disclosure form with a return in the manner required by the temporary regulation does not have a significant economic impact on a substantial number of small entities.Petitioner also argues that the temporary regulation is invalid because it does not comply with the notice and comment requirements of the Administrative Procedure Act (APA), 5 U.S.C. sec. 553(b) and (c) (1994). Petitioner contends that if the temporary regulation is invalid, section 6501(c)(10) cannot apply to the partnership or the Manroes because they had no duty to disclose their participation in the transaction at issue. We conclude, however, that the final regulation, section 1.6011-4, Income Tax Regs., 74 validly promulgated on February 28, 2003, in T.D. 9046, 1 C.B. 614">2003-1 C.B. 614, which incorporates the rules of the temporary regulation, controls the outcome of this case.Some background will be useful. On June 14, 2002, the temporary regulation was amended in two ways that matter to this case: (1) It extended to individuals, trusts, partnerships, and S corporations the requirement to disclose listed transactions, which previously had applied only to corporate taxpayers; and (2) it provided that if a transaction becomes a reportable transaction after the taxpayer has filed the return for the first year in which the transaction affected the taxpayer's or a partner's tax liability, the disclosure statement must be filed as an attachment to the taxpayer's next-filed return (hereinafter the next-return disclosure requirement). 1075 67 Fed. Reg. 41325, 41326 (June 18, 2002).Also on June 18, 2002, notice was published and comments were sought for the final regulation section 1.6011-4, Income Tax Regs. The text of the proposed regulation was the same as the text of the temporary regulation as reissued the same day. Notice of Proposed Rulemaking by Cross-Reference 449 to Temporary Regulations, 67 Fed. Reg. 41360 (June 18, 2002). The effective date of the temporary regulation (and of the proposed regulation by cross-reference) was for "Federal income tax returns filed after February 28, 2000" except that the two amendments described above, among others, were made applicable "to any transaction entered into on or after January 1, 2001." Sec. 1.6011-4T(g), Temporary Income Tax Regs., 76 67 Fed. Reg. 41328 (June 18, 2002).On October 22, 2002, the temporary regulation was amended once again, and notice was published and comments were sought for making the temporary regulation final. 11Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations, 67 Fed. Reg. 64840 (Oct. 22, 2002). The effective date of the temporary regulation (and of the proposed regulation by cross-reference) was as follows:(h) Effective dates. This section applies to Federal income tax returns filed after February 28, 2000. However, paragraphs (a) through (g) of this section [reflecting the new amendments] apply to transactions entered into on or after January 1, 2003. The rules that apply with respect to transactions entered into on or before December 31, 2002, are contained in section 1.6011-4T in effect prior to January 1, 2003 (see 26 CFR part 1 revised as of April 1, 2002, and 28 I.R.B. 87">2002-28 I.R.B. 87 (see section 601.601(d)(2) of this chapter)).[67 Fed. Reg. 64805 (Oct. 22, 2002); emphasis added.]The final regulation, published February 77 28, 2003, reflected various amendments to the temporary regulations in response to public comments. T.D. 9046, supra. It retained a provision substantially similar to the next-return disclosure requirement of the temporary regulation. 12 The final regulation carried this effective date:(h) Effective dates. This section applies to federal income tax returns filed after February 28, 2000. However, paragraphs (a) through (g) of this section apply to transactions entered into on or after February 28, 2003. All the rules in paragraphs (a) through (g) of this section may be relied upon for transactions entered into on or after January 1, 2003, and before February 450 28, 2003. Otherwise, the rules that apply with respect to transactions entered into before February 28, 2003, are contained in section 1.6011-4T in effect prior to February 28, 2003 (see 26 CFR part 1 revised as of April 1, 2002, 28 I.R.B. 90">2002-28 I.R.B. 90, and 45 I.R.B. 818">2002-45 I.R.B. 818 (see section 601.601(d)(2) of this chapter)). [Id., 2003-1 C.B. at 622; emphasis added.]Pursuant to this provision the final regulation applies, as it says, to tax returns filed after February 28, 2000, and the rules applicable to transactions entered into before 78 January 1, 2003, are determined under the final regulation by reference to the rules of the temporary regulation.The final regulation suspended the temporary regulation as of February 28, 2003. T.D. 9046, 2003-1 C.B. at 622. 13 Consequently, the rules in the temporary regulation have continuing force and effect only by virtue of their incorporation into the final regulation. The question is whether the final regulation ran afoul of the APA by incorporating the rules of the temporary regulation by cross-referencing them. 79 The answer is clearly no. The final regulation's use of a cross-reference to incorporate the temporary regulation rules creates no more of a procedural deficiency under the APA than if the final regulation had reproduced the rules of the temporary regulation word for word.Notice 2000-44, 2 C.B. 255">2000-2 C.B. 255, published more than a year before the Manroes entered into their transaction, identified that type of transaction as a listed transaction. On June 14, 2002, the Secretary published a notice of proposed rulemaking, containing proposed regulations requiring disclosure of such a transaction; they embodied the provisions of the temporary regulation 80 issued the same day. This notice of proposed rulemaking provided notice of, among other things: (1) The disclosure requirement as applying to both corporate and noncorporate taxpayers; and (2) the next-return disclosure requirement. The Manroes' transaction first became a reportable transaction on February 28, 2003, when the final regulation was issued. As of that date, the Manroes had already filed their 2001 return but had not yet filed their 2002 return. Consequently, the final regulation, incorporating 451 the rules of the temporary regulation, required them to attach a statement to their 2002 return disclosing the listed transaction. When they filed their 2002 return on October 15, 2003 -- more than 7 months after the final regulation was issued -- they failed to include such a statement.Section 6501(c)(10) provides that if a taxpayer fails to include "on any return or statement for any taxable year" any information with respect to a listed transaction (as defined in section 6707A(c)(2)) which is required under section 6011, the time for assessing any tax "with respect to such transaction" remains open. Section 6501(c)(10) is effective for tax years with respect to which the period 81 for assessing a deficiency did not expire before October 22, 2004. As of that date, the 3-year period of limitations remained open with respect to the Manroes' 2001 return, which they filed on October 15, 2002. Consequently, because the Manroes failed to provide the required statement when they filed either their 2001 or 2002 return, the period of limitations remains open with respect to any tax in 2001 and 2002 with respect to the transaction in question.Under section 6501(c)(10), it is of no consequence that the transaction in question became a reportable transaction after the transaction had already occurred. 14 The legislative history expressly contemplated such a result. It states: "For example, if a taxpayer engaged in a transaction in 2005 that becomes a listed transaction in 2007 and the taxpayer fails to disclose such transaction in the manner required by Treasury regulations, then the transaction is subject to the extended statute of limitations." 1583 H. Conf. Rept. 108-755, 452 supra at 382. In any event, as previously discussed, the force and effect of the final regulation was entirely prospective, requiring the Manroes to disclose the transaction in a statement with their 2002 82 return, which had not yet been filed.To recapitulate, the Manroes' obligation to disclose their transaction arose upon the issuance of the final regulation. The final regulation, including its provisions incorporating the rules of the temporary regulation, was subject to notice and comment and is valid. After the issuance of the final regulation, the Manroes were required prospectively to report the listed transaction in a statement attached to their 2002 tax return. They failed to do so. Consequently, the period of limitations remains open under section 6501(c)(10) for 2001.The Court, in reaching its holding, has considered all arguments made and concludes that any arguments not mentioned above are moot, irrelevant, or without merit.To reflect the foregoing,An order will be issued granting respondent's motion for partial summary judgment and denying petitioner's cross-motion for partial summary judgment.Reviewed by the Court.COLVIN, COHEN, WELLS, VASQUEZ, GALE, THORNTON, MARVEL, GOEKE, WHERRY, KROUPA, and PARIS, JJ., 84 agree with this majority opinion.GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion.* * * * ThorntonCONCURRING OPINION OF JUDGE THORNTONTHORNTON, J., concurring: I agree with the majority opinion and write separately to address possible jurisdictional concerns.It has been suggested that in a partnership-level proceeding this Court lacks jurisdiction to consider a partner's assertion that the period of limitations has expired for assessing against that partner tax attributable to partnership items. This is because, under this view, the issue does not represent a partnership item or affirmative defense. Subsection (d)(1) of section 6226, however, expressly confirms this Court's jurisdiction to consider a partner's assertion that "the period 453 of limitations for assessing any tax attributable to partnership items has expired with respect to" the partner. In the light of this statutory provision, it matters little whether the issue might be characterized as a partnership item or an affirmative defense or something else.Some might construe subsection (d)(1) narrowly to grant this Court jurisdiction to determine which partners have an interest in the outcome of 85 the proceedings and nothing more. That is not, however, what the statute provides. In any event, to decide whether the assessment of tax attributable to partnership items is time barred for purposes of determining which partners have an interest in the outcome of the proceeding is, necessarily, to decide that issue for all purposes.The context and history of subsection (d)(1) of section 6226 are instructive. Under the general rule of subsection (c) of section 6226, each person who is a partner in a partnership "shall be treated as a party" to an action brought to review partnership adjustments and the Court "shall allow each such person to participate in the action." Subsection (d)(1) modified this general rule by providing that subsection (c) shall not apply to a partner "after the day on which" the period has expired for assessing against the partner any tax attributable to the partnership. Before the addition in 1997 of the flush language of subsection (d)(1), there was potential circularity in the interaction of subsections (c) and (d)(1): until such time as the Court might decide that the limitations period had expired, the partner was allowed to participate in the proceeding 86 pursuant to the general rule of subsection (c), but if the Court ultimately decided the limitations issue in the partner's favor, then subsection (d)(1) would have seemingly nullified ab initio the partner's participation in the proceeding. This situation gave rise to a question whether a partner had "standing" to assert that the statutory period of limitations had expired with respect to that partner. H. Rept. 105-148, at 594 (1997), 1997-4 C.B. (Vol. 1) 319, 916.To resolve this problem, in 1997 subsection (d)(1) was amended to provide that a partner "shall be permitted to participate" in the partnership proceeding "solely" for the purpose of asserting that the limitations period for assessing tax has expired with respect to that partner. Focusing on the 454 word "solely", some have suggested that the statute permits a partner to participate in the partnership proceeding by asserting the limitations bar only if that is the sole issue asserted by the partner. Nothing in the flush language of subsection (d)(1), however, alters or affects the operation of the general rule of subsection (c), which entitles a partner to participate fully in the action until such time as the Court might decide 87 that the limitations period has expired with respect to the partner -- an issue that might not be finally decided until the final appeal of such a ruling. Being uncertain of the prospects of ultimately prevailing on the limitations period issue, a partner would be well advised also to raise any alternative assertions which the partner would be entitled to raise as a participant in the action.In the light of these considerations, the word "solely" in the flush language of subsection (d)(1) cannot fairly be construed to mean that a partner is entitled to assert the limitations bar only if the partner relinquishes all alternative assertions. Rather, the statutory language confirms a partner's ability to raise on a stand-alone basis an issue that the partner otherwise would be entitled to raise in conjunction with other issues.Some seem to suggest that the Court's jurisdiction to consider a partner's assertion of a limitations bar should depend upon whether the partner asserts the issue for all the partner's affected years, in which case the Court would have jurisdiction to consider the assertion, or for fewer than all the partner's affected years, in which case the Court would lack jurisdiction. 88 Under this view, our jurisdiction would apparently be unquestioned if the Manroes had asserted the limitations bar for both tax years 2001 and 2002 but otherwise does not exist. Suffice it to say that it would be anomalous for this Court's jurisdiction to depend upon the litigating tactics of well-advised (or poorly advised) partners.In any event, even in a circumstance in which a partner asserts the limitations bar for all affected years, as everyone acknowledges a partner would be entitled to do, the Court might well decide that the limitations period had expired with respect to fewer than all of the partner's affected years. In that eventuality, the partner would remain a party to the action, but this circumstance would not disturb the Court's 455 exercise of jurisdiction in deciding that the limitations period had expired for some particular year or years.The Court's jurisdiction to consider the limitations issue in a partnership proceeding is made more evident in the context of a readjustment petition filed by a partner. The flush language of subsection (d)(1) provides that a partner may file a readjustment petition under section 6226(b) or (d)(2) solely for the purpose of asserting 89 that the period of limitations attributable to partnership items has expired with respect to the partner. If the partner filed such a readjustment petition to raise this sole assertion, that might well be the only issue presented in the action. 190 In such a case, it is not meaningful to say that the Court has jurisdiction to consider this issue only to determine whether the partner is a party to the action, since but for the partner's bringing the action, there would be no action. 2 The only conceivable purpose of the action would be to assert that the limitations period had expired for that partner. By expressly permitting the partner to raise this issue pursuant to section 6226(b), the statute thereby effectively treats it as a partnership item within the meaning of section 6226(b)(1).The same sentence of subsection (d)(1) that permits a partner to raise the limitations bar in a readjustment petition also permits, without differentiation, a partner to participate in an action brought by the tax matters partner or another eligible partner. There is no reason to think that Congress intended that a partner's ability to assert the limitations bar would be any more constrained in the latter circumstance than it would be in the former. 91 In the final analysis, it would appear that the legislature perceived that a partner's assertion of a limitations bar is so closely intertwined with the issue of whether the partner has an interest in the outcome 456 of the partnership proceeding that the partner should be allowed to raise the assertion during the proceeding without regard to whether it might otherwise be regarded as a partner-level item. That result is consistent with the general legislative objective of centralizing resolution of disputes over partnership adjustments.Moreover, we note that in the case before us the issue of whether the underlying transaction is a "listed transaction" for purposes of section 6501(c)(10) must be decided according to the nature of transactions that occurred at the partnership level and, thus, could be considered a partnership item. See sec. 6231(a)(3); sec. 301.6231(a)(3)-1, Proced. & Admin. Regs. (If the transaction was a listed transaction, the partnership was required to file a disclosure statement.) Whether the limitations period remains open may also be considered a partnership item insofar as the partnership's failure to file a disclosure statement operates to extend the limitations 92 period under section 6501(c)(10) for assessing any tax with respect to the transaction. The duty to file a disclosure statement arises with respect to every partnership that participated, directly or indirectly, in a reportable transaction. Sec. 1.6011-4T(a)(1), Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002). The partnership in this case participated directly in the transaction. The record shows that the partnership filed no disclosure statement with its 2001 or 2002 return. Consequently, the period of limitations remains open under section 6501(c)(10) for both the Manroes' 2001 and 2002 tax years. This conclusion provides an alternative basis for this Court's jurisdiction to consider the Manroes' assertion of the limitations bar in this partnership-level proceeding. 3It might be argued that the approach of the majority opinion could give rise to unexpected preclusive effects in future proceedings involving partners who could have but did not raise the issue of the limitations bar in the partnership-level 93 proceeding. Any such argument ignores well-established caselaw holding that a statute of limitations defense as pertains to a final notice of partnership adjustments should be prosecuted in the context of the partnership-level proceeding 457 rather than in a partner-level proceeding. See Crowell v. Commissioner, 102 T.C. 683">102 T.C. 683, 693 (1994); McConnell v. Commissioner, T.C. Memo 2008-167">T.C. Memo 2008-167 (and cases cited therein). 4 In any event, there should be no unanticipated preclusive effects resulting from the case before us, since the only partners directly affected by the disputed partnership adjustments are the Manroes, who have in fact asserted the limitations bar in this proceeding. 594 The majority opinion does not purport to decide possible preclusive effects arising in other circumstances in other actions.It might be suggested that entertaining partner-level assertions of a limitations bar raises the specter that partnership-level proceedings may be made more complex or time consuming by requiring the Court to decide collateral issues relating to such assertions. Without question, however, the statute requires us to decide these issues where a partner asserts the limitations bar with respect to all the partner's affected years. It is not such a great leap that the Court should also consider such issues where a partner asserts the limitations bar with respect to fewer than all affected years. After all, these issues have to be decided somewhere. Ultimately, it would serve no one's interests (and undoubtedly would surprise the parties, who have not questioned our jurisdiction) for this Court to decline to address the Manroes' assertion of the limitations bar and instead to require the parties and this or some other court to expend additional 95 time and resources addressing the issue in some future proceeding.COLVIN, COHEN, WELLS, VASQUEZ, GALE, MARVEL, HAINES, GOEKE, WHERRY, KROUPA, and PARIS, JJ., agree with this concurring opinion. * * * HalpernDISSENTING OPINION OF JUDGE HALPERN458 HALPERN, J., dissenting: In addition to the question regarding the effect of certain final and temporary regulations, this case presents a novel question: Does the Court have authority in a partnership-level proceeding to decide whether the statute of limitations bars the assessment of a resulting computational adjustment? Without the aid of any input from the parties on that question, in a few cursory paragraphs, the majority holds that we do have that authority. See majority op. pp. 11-13. Because the majority has failed to convince me that in this partnership-level proceeding we have that authority, I respectfully dissent.I. IntroductionThe Manroes began this partnership-level proceeding after respondent issued an FPAA for the partnership's 2001 year. The parties agree that, if we sustain the partnership adjustments, there will be computational adjustments to the Manroes' 2001 and 2002 taxable years. The parties also agree that the Manroes' 2002 96 year is open.The motions for partial summary judgment ask us to decide whether section 6501(a) bars the assessment of any computational adjustment for the Manroes' 2001 year. In a partnership-level proceeding, the Court has authority to decide (1) partnership items (and related penalties, additions to tax and the like), see sec. 6221; (2) affirmative defenses, see Rule 39; and (3) whether a partner is not a party because he has no interest in the outcome of the proceeding, see sec. 6226(c) and (d).The majority does not suggest that the question before us concerns either a partnership item (or related penalty, addition to tax or the like) or an affirmative defense. Rather, the majority cites section 6226(c) and (d) and three cases involving those provisions. In response to the majority, I first briefly explain why the question is not an affirmative defense in this partnership-level proceeding; second, I discuss the statute; and, third, I review the caselaw. Fourth, before addressing the effect of the majority opinion, I address Judge Thornton's three arguments that the question before us involves a partnership item. Finally, I offer my conclusion.459 II. Affirmative DefensesAn affirmative 97 defense is an "assertion of facts and arguments that, if true, will defeat the * * [cause of action], even if all the allegations * * * are true." Black's Law Dictionary 482 (9th ed. 2009). Rule 39 provides a few examples of affirmative defenses: "res judicata, collateral estoppel, estoppel, waiver, duress, fraud, and the statute of limitations." One affirmative defense to an FPAA is that the FPAA cannot affect any open partner year. See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533, 534-535 (2000) ("However, if partnership-level proceedings are commenced after the time for assessing tax against the partners has expired, the proceedings will be of no avail because the expiration of the period for assessing tax against the partners, if properly raised, will bar any assessments attributable to partnership items."); see also infra sec. IV.B.1. of this separate opinion.The Manroes have assigned error to the FPAA, yet they cannot avoid addressing its merits simply by showing that section 6501(a) bars the assessment of any computational adjustment for the Manroes' 2001 year. The reason is that the Manroes' 2002 year is open. If they do not address the merits 98 of the FPAA, we shall be compelled to enter decision clearing the way for respondent to make a computational adjustment increasing their tax liability for 2002. That is, even if section 6501(a) bars the assessment of any computational adjustment for the Manroes' 2001 year, we must reach the merits of the FPAA regardless. The argument that section 6501(a) bars the assessment of any resulting tax liability for the Manroes' 2001 year does not, therefore, constitute an affirmative defense to the FPAA. 1The Manroes are not without recourse as to that argument, however, because they may raise it as an affirmative defense in any subsequent partner-level collection action or refund suit with respect to their 2001 year. At the partner level, that argument would be an affirmative defense because, at that level, each year is a separate cause of action 460 with respect to which the partner can prevail by showing 99 the year is closed.III. Jurisdiction To Hear a Claim That a Partner Has No Interest in the Outcome of the ProceedingSection 6226 provides for the judicial review of an FPAA. If an action for review is brought, section 6226(c) provides that each person who was a partner in the partnership at any time during any partnership year addressed by the FPAA is (1) treated as a party to the action and (2) allowed to participate in the action. Subparagraph (B) of section 6226(d)(1) deprives a partner of that status and that right if he has no interest in the outcome of the proceeding; i.e., "after the day on which * * the period within which any tax attributable to * * * [the partnership items of the partner] may be assessed against that partner expired." Importantly, the sentence following subparagraph (B) of section 6226(d)(1) (the flush-language sentence) provides in pertinent part:Notwithstanding subparagraph (B), any person treated under subsection (c) as a party to an action shall be permitted to participate in such action (or file a readjustment petition * * ) solely for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has 100 expired with respect to such person, and the court having jurisdiction of such action shall have jurisdiction to consider such assertion.The flush-language sentence affirms our jurisdiction to treat a partner as a party for the limited purpose of determining that he is not otherwise a party (i.e., for determining that he lacks an interest in the outcome of the proceeding). 2 It must be read in context. Congress added it in 1997, effective for partnership years ending after August 5, 1997, as a means of "Clarifying the Tax Court's jurisdiction". H. Rept. 105-148, at 594 (1997), 1997-4 C.B. (Vol. 1) 319, 916. The House report describes the jurisdictional question as follows:For a partner * * * to be eligible to file a petition for redetermination of partnership items in any court or to participate in an existing case, the period for assessing any tax attributable to the partnership items of that partner must not have expired. Since such a partner would only be treated 461 as a party to the action if the statute of limitations with respect to them [sic] was still open, the law is unclear whether the partner would have standing to assert that the statute of limitations had expired with respect 101 to them [sic].Id.3102 The House report states that Congress intended the flush-language sentence as nothing more than a clarification of subparagraph (B) of section 6226(d)(1). As a clarification, the flush-language sentence added nothing of substance to section 6226(d)(1)(B). 4Congress added the flush-language sentence simply to address the narrow jurisdictional uncertainty identified in the House report. 5103 The flush-language sentence makes clear that the Court has jurisdiction to decide a partner's claim that he has no interest in the outcome of a partnership-level proceeding (and perhaps that no partner has any interest therein 6 ), and it permits nothing more. 7 The history of that sentence demonstrates its narrow purpose. A partner who concedes that 462 he has an interest in the outcome of 104 the proceeding is a party to it and has no recourse to section 6226(d)(1).The Manroes concede they have an interest in the outcome of this partnership-level proceeding because they concede that the partnership adjustments in dispute will affect their 2002 year, which they concede is open; i.e., they concede that "the period within which any tax attributable to * * * partnership items may be assessed" against them is still open. See sec. 6226(d)(1)(B) (emphasis added). Indeed, the Manroes do not deny that they are parties to this proceeding. Section 6226(d)(1) is therefore not relevant to the inquiry before us. 8105 106 IV. CaselawThe majority cites three cases in three short paragraphs. See majority op. pp. 12-13. I discuss all three as well as a few others.A. Cases That Reaffirm Our Authority To Determine Which Partners Are PartiesPCMG Trading Partners XX, L.P. v. Commissioner, 131 T.C. 206">131 T.C. 206, 2008 U.S. Tax Ct. LEXIS 32">2008 U.S. Tax Ct. LEXIS 32 (2008), involved five partners who filed a timely petition as a 5-percent group under section 6226(b)(1) after the tax matters partner had failed to file a petition. Id. at 208, 2008 U.S. Tax Ct. LEXIS 32 at 4. Because they were uncertain whether the Court would uphold the petition of the 5-percent group, the five partners also all filed separate petitions asserting, as the lead petition had, that under section 6226(d)(1)(B) none was a party to the 463 proceeding. Id. at 208-09, 2008 U.S. Tax Ct. LEXIS 32 at 5. PCMG107 concerned the Commissioner's motion to dismiss those five petitions (and one other). Id. at 209, 2008 U.S. Tax Ct. LEXIS 32 at 6. After establishing that the Court had jurisdiction over the petition of the 5percent group, the Court was bound by section 6226(b)(2) and (4) to dismiss all subsequent actions. Id. at 211, 2008 U.S. Tax Ct. LEXIS 32 at 11. Thus, the holding of PCMG does not concern section 6226(c) and (d) in any way relevant here.Nonetheless, the discussion in PCMG of section 6226(c) and (d) supports my analysis. The majority quotes PCMG note 9:Generally the Court's jurisdiction in a partnership proceeding is restricted to determining "partnership items". Sec. 6226(f); Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84">131 T.C. 84, 90 (2008). However, our jurisdiction over whether the period of limitations has expired as to individual partners presents an exception since the expiration of the period of limitations can depend on facts that are peculiar to the individual partners. See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533 * * . As we observed therein:"in 1997, Congress recognized that the periods for assessing tax against individual partners may vary 108 from partner to partner and specifically provided that an individual partner will be permitted to participate as a party in the partnership proceeding 'solely for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has expired with respect to such person'. See the last sentence of section 6226(d)(1)(B), added to the Code by the Taxpayer Relief Act of 1997, Pub. L. 105-34, section 1239(b), 111 Stat. 1027, effective for years ending after August 5, 1997. [Id. at 546; fn. ref. omitted.]"Id. at 213 n.9, 2008 U.S. Tax Ct. LEXIS 32 at 14-15. To restate: Partnership items are those items required to be taken into account for the partnership's taxable year to the extent that those items are more appropriately determined at the partnership level than at the partner level. Sec. 6231(a)(3). By contrast, an inquiry under section 6226(d)(1) to determine whether a partner is a party will in most circumstances depend on facts that are peculiar to the individual partner; for that reason, in most circumstances, that inquiry would seem inappropriate at the partnership level. Nonetheless, concludes PCMG note 9, section 6226(d)(1)(B) grants the Court the authority 109 to make such a partner-specific inquiry and to decide whether the period of limitations for a partner has run in the context of determining whether that partner is a party.464 Again, because the Manroes concede they are parties to this partnership-level proceeding, section 6226(d)(1) is not relevant. PCMG does not support the majority.B. Cases Concerning the Timeliness of the FPAA1. Cases in Which the FPAA Is UntimelyThe majority cites Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra, for the proposition that in a partnership-level proceeding the partners may assert that the period of limitations for assessing any tax attributable to partnership items has expired. See majority op. p. 12. That is, the majority cites Rhone-Poulenc for its recitation of the flush-language sentence in section 6226(d)(1), which permits a partner to argue that he is not a party to a partnership-level proceeding. Yet Rhone-Poulenc supports my analysis of section 6226(c) and (d). Rhone-Poulenc simply involved the special case in which every partner argues that, under section 6226(d)(1)(B), he is not a party to a partnership-level proceeding. We concluded that, if the statute of limitations 110 barred assessment of every computational adjustment resulting from every partnership adjustment, reaching the merits of the FPAA would be of "no avail". See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 534-535; cf. supra sec. II. of this separate opinion (describing the argument in Rhone-Poulenc as in effect an affirmative defense to the FPAA). Rhone-Poulenc involved an argument that no partner was a party to the partnership-level proceeding and does not support the majority.2. Cases in Which the FPAA Is TimelyThe majority cites Curr-Spec Partners, L.P. v. Commissioner, T.C. Memo. 2007-289, affd. 579 F.3d 391">579 F.3d 391 (5th Cir. 2009), but does not explain for what proposition. The reason, I imagine, is that Curr-Spec does not in fact involve an inquiry into whether any partner year was open or closed. Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007), and G-5 Inv. Pship. v. Commissioner, 186">128 T.C. 186 (2007), control Curr-Spec, and all three involve the same fact pattern. In each case, the Commissioner conceded that the statute of limitations barred assessment against any partner of any computational adjustment for the partner year corresponding 465 to the partnership 111 year for which the FPAA was issued. The taxpayers argued that, for that reason, the Commissioner could not assess any computational adjustment for any subsequent year, even though the taxpayers conceded that the subsequent years were open. The Court rejected the taxpayers' argument.Those three cases did not involve any partner-specific inquiry into the statute of limitations, however, because the parties agreed which years were open and which closed. The question, rather, was whether the FPAA was timely. The Court held that it was timely because, even assuming the FPAA had been issued for a partnership year congruent to closed partner years, if the FPAA could affect an open partner year, then the Court could reach its merits. See supra sec. II. of this separate opinion. Those three cases do not support the majority.C. Other Cases That Support My Analysis1. New Millennium Trading, L.L.C. v. CommissionerThe specific question we consider today is whether in a partnership-level proceeding a partner who concedes he is a party may argue that the statute of limitations bars the assessment of a resulting computational adjustment. The broader question might be whether in a partnership-level 112 proceeding a partner may raise a partner-specific defense. In the penalty context, we recently answered the latter question with a resounding "no". See New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. 275">131 T.C. 275, 2008 U.S. Tax Ct. LEXIS 35">2008 U.S. Tax Ct. LEXIS 35 (2008).In New Millennium Trading, the taxpayer moved for partial summary judgment, asking the Court to hold either invalid or inapplicable the regulation barring a partner from raising partner-level defenses in a partnership-level proceeding. We denied the motion in both respects, see id. at (slip op. at 2), thereby upholding section 301.6221-1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26, 1999). 9113 114 466 We began by stating unequivocally that "a partner cannot raise partner-level defenses in a TEFRA proceeding". New Millennium Trading, L.L.C. v. Commissioner, supra at 284, 2008 U.S. Tax Ct. LEXIS 35 at 18. We explained that "[t]he TEFRA structure enacted by Congress does not permit a partner to raise partner-level defenses during a partnership-level proceeding", id. at 285, 2008 U.S. Tax Ct. LEXIS 35 at 20, and we held that "sections 6221, 6230(c)(1), and 6230(c)(4), when read in conjunction, make clear that Congress intended for partners to raise partner-level defenses during a refund action after the partnership proceeding", id. at 288, 2008 U.S. Tax Ct. LEXIS 35 at 26. We concluded that "the legislative history and the definitions in section 6231(a) [make clear] that Congress did not wish the Court to decide all issues associated with a partnership in a single proceeding even if * * [the Court] has the information available 115 to do so." Id. at 290, 2008 U.S. Tax Ct. LEXIS 35 at 30.New Millennium Trading stands for a simple proposition: The character of a defense to a penalty determines whether that defense is appropriate at the partnership level or the partner level. I argue only that an analogous proposition holds for a defense based on the statute of limitations.2. Slovacek v. United StatesIn Slovacek v. United States, 36 Fed. Cl. 250">36 Fed. Cl. 250, 253-254 (1996), the taxpayers, in a partner-level proceeding, sought to disqualify a tax matters partner who had extended the partnership's period of limitations. Success on that argument 467 would have meant that, under section 6226(d)(1)(B), no partner was a party to the partnership-level proceeding.The Court of Federal Claims first asked whether section 301.6231(a)(3)-1(b), Proced. & Admin. Regs. ("Factors that affect the determination of partnership items."), encompasses the "partnership's statute of limitations". Id. at 255. The Court of Federal Claims then stated:Determining whether * * [the tax matters partner] extended the statute of limitations might be said to affect the amount, timing, and characterization of income, etc., (partnership items) at the partnership level, if only in 116 a thumbs-up or thumbs-down manner. Conversely, a statute of limitations issue applicable only to an individual partner involves questions of fact pertinent only to that partner, e.g., whether he extended the statute of limitations for his own return, see I.R.C. section 6229(b)(1)(A), or timely entered into a settlement agreement solely with respect to the partner's return, see I.R.C. section 6229(f), or participated in preparing a fraudulent partnership return, see I.R.C. section 6229(c)(1)(A).Id. The taxpayers lost because the Court of Federal Claims concluded that they made the first kind of argument:[W]hether a statute of limitations applicable to the partnership as a whole was waived so as to permit assessment of additional taxes against the partnership as a whole is an issue to be decided at the partnership level, since it affects all partners alike (to the extent of their proportionate share). * Id.10Petitioners, however, 117 have made the second kind of argument. Their statute of limitations argument, which is not an argument under section 6226(d)(1)(B) that they are not parties, involves questions of fact pertinent only to the them; i.e., whether any computational adjustment for 2001 would be timely with respect to them individually. Thus, their argument is appropriate at the partner level.D. ConclusionThe holding of no case supports the majority; moreover, my analysis of section 6226(d) is consistent with every case I have found and the majority cites. 11468 V. The Concurring OpinionJudge Thornton proposes three ways in which the Manroes' statute of limitations claim 118 might present a partnership item (which would allow us to dispose of the claim at the partnership level, see sec. 6221). The first way supports the majority's analysis of section 6226(d)(1). The second two ways provide an alternative ground for considering the Manroes' claim.A. Section 6226(d)(1) and the Flush-Language SentenceJudge Thornton apparently believes that a partner's claim made pursuant to the flush-language sentence that he has no interest in the outcome of a partnership-level proceeding necessarily involves a partnership item. Concurring op. p. 42. As indicated previously, the term "partnership item" is a term of art, defined in section 6231(a)(3) and section 301.6231(a)(3)-1, Proced. & Admin. Regs. A partner's claim made pursuant to the flush-language sentence might involve a partnership item, especially if the claim is that the period of limitations has expired for all partners for all years so that it raises an affirmative defense to the FPAA. See sec. 301.6231(a)(3)-1(b), Proced. & Admin. Regs. ("Factors that affect the determination of partnership items."); see also supra note 3; supra sec. IV.C.2. of this separate opinion (discussing the two kinds of statute of limitations 119 arguments identified in Slovacek v. United States, supra). The Manroes do not raise an affirmative defense to the FPAA and do not disclaim an interest in this proceeding. Judge Thornton has failed to show that their claim nonetheless involves a partnership item under section 6226(d)(1).B. Section 6501(c)(10) and Listed TransactionsRelying on section 6501(c)(10), Judge Thornton proposes two ways the Manroes' statute of limitations claim might present a partnership item. Judge Thornton offers his analysis relying on section 6501(c)(10) as an alternative to the majority's analysis under section 6226(d)(1). Section 6501(c)(10) extends the section 6501(a) period for assessing 469 and collecting tax if a taxpayer fails to include on his return information required with respect to listed transactions. Judge Thornton speculates that, because the partnership was involved in what is arguably a listed transaction, the question of whether that transaction is a listed transaction "could be considered a partnership item." Concurring op. p. 43. He further speculates that, "insofar as the partnership's failure to file a disclosure statement operates to extend the limitations period under section 6501(c)(10)120 for assessing any tax", the question of "[w]hether the limitations period remains open may also be considered a partnership item". Concurring op. p. 43.With respect to Judge Thornton's first conclusion, the factual inquiry necessary to determine whether a transaction is a listed transaction may indeed involve partnership items (e.g., partnership liabilities or the amount of a partner's contributions to the partnership, see sec. 301.6231(a)(3)-1(a)(1)(v), (4)(i), Proced. & Admin. Regs.), and the question itself may well present a partnership item. Nonetheless, a finding that the transaction is a listed transaction is insufficient for a finding that section 6501(c)(10) has extended the section 6501(a) period of limitations for the Manroes' 2001 year. To make that finding, we would also need to decide (1) the effective dates of sections 6501(c)(10) and 6707A and (2) the validity of section 1.6011-4T(a)(1), Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002). While those questions are purely legal, the answers are in this case irrelevant to whether the FPAA was timely (it was) and to whether the Manroes are parties (they are); the answers are pertinent only to whether, because 121 of section 6501(c)(10), the section 6501(a) period of limitations applicable to the Manroes has been extended for their 2001 year. 12 In a partnership-level proceeding, for a partner who does not deny he is a party thereto, a statute of limitations claim is not an affirmative defense. See supra secs. II. and III. of this separate opinion. Judge Thornton has failed to convince me that, nonetheless, that claim involves a partnership item within 470 the meaning of section 301.6231(a)(3)-1, Proced. & Admin. Regs.With respect to Judge Thornton's second conclusion, I am not convinced that the Manroes' statute of limitations claim is a partnership item because the partnership failed to attach a disclosure statement to its 122 return. Section 1.6011-4T(a)(1), Temporary Income Tax Regs., supra, imposes a disclosure requirement on, among others, every individual and partnership participating directly or indirectly in a reportable transaction. If a partnership and some of its partners participate in a reportable transaction, then both the partnership and those partners must disclose. (That is, I assume, the situation we have here.) The temporary regulation, however, does not explain the effects of disclosure by the partnership on the partners, or vice versa. I would be hesitant without clarification of the regulation to state either (1) that, notwithstanding a partner's disclosure, a partnership's failure to disclose could extend the partner's period of limitations or (2) that the partnership's disclosure could cure a partner's failure to disclose. I believe that, in the situation described, the partner's disclosure should be both necessary and sufficient to overcome section 6501(c)(10). Thus, the partnership's disclosure seems irrelevant. Because the partner's disclosure should always decide the issue, the issue does not present a partnership item.Judge Thornton's listed transactions speculation raises interesting 123 points. His alternative to the majority's analysis of section 6226(d)(1), however, is pertinent only to a narrow class of cases (i.e., those involving listed transactions). Moreover, like the majority, he is satisfied to decide important issues without any input from the parties. I would not do so.VI. Effect of the Majority OpinionI fear that an effect of the majority opinion is to transform a partnership-level proceeding into the exclusive venue for raising any statute of limitations defense. That is contrary to the purposes and logic of the unified audit and litigation procedures of Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648. TEFRA was intended to make certain that any question that affected partners in a partnership generally was answered once and 471 for all. See, e.g., RJT Invs. X v. Commissioner, 491 F.3d 732">491 F.3d 732, 737 (8th Cir. 2007), in which the Court of Appeals stated:TEFRA was intended, in relevant part, to prevent inconsistent and inequitable income tax treatment between various partners of the same partnership resulting from conflicting determinations of partnership level items in individual partner proceedings. Randell v. United States, 64 F.3d 101">64 F.3d 101, 103-04 (3rd Cir. 1995)124 (describing the goals of TEFRA and the problems TEFRA was intended to address) * TEFRA was also intended to make the administration of the tax laws more efficient. See H. Conf. Rept. 97-760, at 600 (1982), 2 C.B. 600">1982-2 C.B. 600, 662.The majority's interpretation furthers neither of those goals; indeed, as discussed below, it may have unintended consequences. I believe that the majority has erred because it has not considered the differences between an affirmative defense to an FPAA, a partner's claim that he is not a party to a partnership-level proceeding, and a partner's claim that section 6501(a) bars the collection of a particular computational adjustment. While hanging its hat on language in section 6226(d)(1) dealing with claims of the second sort, the majority I believe has conflated claims of the first and third sort, treating a claim of the third sort as a proper affirmative defense at the partnership level. 13 That misunderstanding of the statutory framework will almost certainly have adverse and surprising consequences.The majority's interpretation furthers neither of those goals; indeed, as discussed below, it may have unintended consequences. I believe that the majority has erred because it has not considered the differences between an affirmative defense to an FPAA, a partner's claim that he is not a party to a partnership-level proceeding, and a partner's claim that section 6501(a) bars the collection of a particular computational adjustment. While hanging its hat on language in section 6226(d)(1) dealing with claims of the second sort, the majority I believe has conflated claims of the first and third sort, treating a claim of the third sort as a proper affirmative defense at the partnership level. 13 That misunderstanding of the statutory framework will almost certainly have adverse and surprising consequences.Consider a case in which no partner plans to contest the merits of an FPAA or his status as a party, but each believes he has a partner-level 125 defense, some relying on the statute of limitations, some on another defense. I assume that if a partner with a statute of limitations defense fails to raise that defense at the partnership level, he will be deemed to have waived it. In general, a party who fails to raise a defense when he has the opportunity to do so thereby waives the defense. See, e.g., Chimblo v. Commissioner, 177 F.3d 119">177 F.3d 119, 125 (2d Cir. 1999), affg. T.C. Memo. 1997-535, in which the Court of Appeals stated:As a general matter, the statute of limitations is an affirmative defense that must be pleaded; it is not jurisdictional. SeeColumbia Bldg., Ltd. v. Commissioner, 98 T.C. 607">98 T.C. 607, 611 * * * (1992). It follows that such a defense may be waived by a party who fails to raise it at the appropriate time.472 The majority opinion seems to stand for the proposition that, although generally a partner must preserve his partner-specific defenses for a partner-level proceeding, he may -- and so must -- mount his statute of limitations defense at the partnership level, even if he disputes neither the FPAA nor that he has an interest in the outcome of the partnership-level proceeding. I doubt that Congress set such a perilous trap 126 for the unwary.VII. ConclusionIn a partnership-level proceeding, the Court has authority to decide (1) partnership items (and related penalties, additions to tax and the like), see sec. 6221, (2) affirmative defenses, see Rule 39, and (3) whether a partner is not a party because he has no interest in the outcome of the proceeding, see sec. 6226(c) and (d). In a partnership-level proceeding, if a partner is a party thereto, the question of whether the statute of limitations bars the subsequent assessment of tax for a given year is neither a partnership item nor an affirmative defense to the FPAA. The majority and Judge Thornton fail to convince me otherwise and so fail to convince me that the Court has authority in this proceeding to consider that question. 14127 Consider the problem another way: Respondent has not yet sought to collect any tax from any partner with respect to the adjustments in the FPAA. Indeed, he cannot yet do so. See sec. 6225. Thus, to answer the question these motions present is to answer a hypothetical question. Generally, when a court answers a question unnecessarily, its opinion is at best advisory.473 I would deny both motions as at this time beyond the authority of the Court. Therefore, I respectfully dissent.FOLEY and HOLMES, JJ., agree with this dissenting opinion.Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code (Code), as amended. Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.↩2. A short sale is the sale of borrowed securities, typically for cash. The short sale is closed when the short seller buys and returns identical securities to the person from whom he borrowed them.↩3. The record is inconsistent as to whether the redemption price of Mr. Manroe's interest is $ 380,988 or $ 330,988. The inconsistency has no bearing on the issues presented in these motions. For purposes of these motions, we shall assume the redemption price was $ 380,988.↩4. On Oct. 18, 2006, shortly after the issuance of the FPAA, the Manroes submitted to respondent a Form 1040X, Amended U.S. Individual Income Tax Return, for 2002. The amended return eliminated the capital loss carryover and increased the Manroes' income by $ 458,190. Respondent did not process the amended return.↩5. The Manroes' 2001 return was filed on Oct. 15, 2002, starting the running of the 3-year period of limitations under sec. 6501(a)↩, which thus remained open on Oct. 22, 2004.6. Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for "bond and option sales strategy". There are a number of different types of Son-of-BOSS transactions, but they all have in common the transfer of assets encumbered by significant liabilities to a partnership, with the goal of increasing basis in that partnership. The liabilities are usually obligations to buy securities and typically are not completely fixed at the time of transfer. The partnership treats the liabilities as uncertain and ignores them in computing basis. The objective is that the partners will have a basis in the partnership so great as to provide for large -- but not out-of-pocket -- losses on their individual tax returns. Kligfeld Holdings v. Commissioner, 128 T.C. 192">128 T.C. 192, 194↩ (2007).7. Senators Grassley and Baucus were proposing the inclusion of a provision similar to sec. 6501(c)(10)↩ in an amendment to the Jumpstart Our Business Strength (JOBS) Act, S. 1637, 108th Cong., 1st sess. (2003), the Senate version of a bill that ultimately passed as the AJCA.8. Petitioner refers to the provision as an "ex post facto clawback". The constitutional prohibition against ex post facto laws applies only to penal legislation that imposes or increases criminal punishment for conduct predating its enactment. Harisiades v. Shaughnessy, 342 U.S. 580">342 U.S. 580, 594, 72 S. Ct. 512">72 S. Ct. 512, 96 L. Ed. 586">96 L. Ed. 586↩ (1952).9. We note that sec. 6501(c)(10)is not the only place in the Code in which a cross-reference is made to the definitions of "listed transaction" and "reportable transaction" provided in sec. 6707A(c). E.g., secs. 4965(e), 6111(b), 6112(a), 6404(g), 6662A(d), 6707A(d)↩.10. In this latter regard, the temporary regulation provided:(d) Time of providing disclosure -- (1) * * * If a transaction becomes a reportable transaction (e.g., the transaction subsequently becomes one identified in published guidance as a listed transaction described in (b)(2) of this section * * ) on or after the date the taxpayer has filed the return for the first taxable year for which the transaction affected the taxpayer's or a partner's or a shareholder's Federal income tax liability, the disclosure statement must be filed as an attachment to the taxpayer's Federal income tax return next filed after the date the transaction becomes a reportable transaction (whether or not the transaction affects the taxpayer's or any partner's or shareholder's Federal income tax liability for that year). * * [67 Fed. Reg. 41328↩ (June 18, 2002).]11. This version of the temporary regulation contained new amendments that are not germane to the present discussion. See 67 Fed. Reg. 64799↩ (Oct. 22, 2002).12. The final regulation provided in par. (e)(2):(2) Special rules -- (i) Listed transactions. If a transaction becomes a listed transaction after the filing of the taxpayer's final tax return reflecting either tax consequences or a tax strategy described in the published guidance listing the transaction (or a tax benefit derived from tax consequences or a tax strategy described in the published guidance listing the transaction) and before the end of the statute of limitations period for that return, then a disclosure statement must be filed as an attachment to the taxpayer's tax return next filed after the date the transaction is listed. [T.D. 9046, 1 C.B. 614">2003-1 C.B. 614↩, 621.]13. In addition to stating that the final regulation issued on Feb. 28, 2003, superseded the temporary regulations, T.D. 9046, 2003-1 C.B. at 622↩, also summarizes the effective date of the final regulation by stating that it applies "to transactions entered into on or after Feb. 28, 2003." Clearly, this shorthand description does not alter the actual effective-date provision contained in par. (h) of the final regulation. Rather, the sense of this shorthand description is that as of Feb. 28, 2003, the final regulation replaced the temporary regulation.14. Actually, as previously discussed, the Manroes' transaction was a listed transaction under Notice 2000-44, supra, long before they entered into it. Because sec. 6501(c)(10) cross-references the definition of "listed transaction" under sec. 6707A(c)(2), which makes a listed transaction a species of "reportable transaction", the transaction became a "listed transaction" for purposes of sec. 6501(c)(10)↩ when the obligation to report it arose; i.e., no later than upon the issuance of the final regulation.15. In a footnote to this statement, the legislative history also states:If the Treasury Department lists a transaction in a year subsequent to the year in which a taxpayer entered into such transaction and the taxpayer's tax return for the year the transaction was entered into is closed by the statute of limitations prior to the date the transaction became a listed transaction, this provision does not re-open the statute of limitations with respect to such transaction for such year. However, if the purported tax benefits of the transaction are recognized over multiple tax years, the provision's extension of the statute of limitations shall apply to such tax benefits in any subsequent tax year in which the statute of limitations had not closed prior to the date the transaction became a listed transaction. [H. Conf. Rept. 108-755, at 593 n.482 (2004).]1. Sec. 6226(b) provides that if the tax matters partner (TMP) does not file a readjustment petition, certain other partners may file petitions for readjustment of the partnership items. If more than one such partner brings an action under subsec. (b), the first such action brought goes forward in the Tax Court. Sec. 6229(b)(2). If the TMP has not brought an action and an eligible partner brings the sole action under subsec. (b)↩ solely for the purpose of asserting that the limitations period had expired with respect to that partner, as permitted by the flush language of subsec. (d), there would be no other issue presented in that action.2. This analysis is complicated but not altered by the fact that pursuant to sec. 6226(d)(2), no partner may file a readjustment petition "unless such partner would (after the application of paragraph (1) of this subsection) be treated as a party to the proceeding." Except for the provision in the flush language of subsec. (d)(1), which cured the problem for all purposes, this provision would give rise to the same sort of circularity previously noted with regard to the interaction of subsecs. (c) and (d)(1)↩.3. It is true, as Judge Halpern↩ notes, that the parties have not argued this point. Dissenting op. p. 68. But then again, neither party has questioned this Court's jurisdiction.4. In collection actions brought pursuant to sec. 6330(d) the caselaw is similarly well established that the assertion of a limitations bar on assessment constitutes a challenge to the underlying liability, which is properly at issue in the collection proceeding only if the taxpayer has had no prior opportunity to dispute it. See Hoffman v. Commissioner, 119 T.C. 140">119 T.C. 140, 145 (2002); Boyd v. Commissioner, 117 T.C. 127">117 T.C. 127, 130↩ (2001).5. Apart from the Manroes, the only partners in the partnership are two trusts that the Manroes created for the benefit of their children. Because these trusts contributed only cash to the partnership, they have no basis adjustments to be adjudicated, now or later.1. Although the majority does not suggest that the sec. 6501(a)↩ question before us concerns an affirmative defense, I believe that the majority has impermissibly allowed the parties to place before the Court a partner-level affirmative defense that has no place in this partnership-level proceeding.2. A partner may, of course, plead alternatively that he has no interest in the outcome of the proceeding and that the adjustments in the FPAA are in error. See Rule 31(c)↩ ("A party may state as many separate claims or defenses as the party has regardless of consistency or the grounds on which based.").3. The disagreement in number between the relative pronoun "them" and its antecedent "partner" may indicate the committee's understanding that a partner (or group of them) might file a petition or participate not only to argue individually that no year was open to a computational adjustment but also to argue the statute of limitations as an affirmative defense; i.e., that the case should be decided in favor of the partners because the statute of limitations had run its course with respect to all partners. See Columbia Bldg., Ltd. v. Commissioner, 98 T.C. 607">98 T.C. 607, 611↩ (1992) (holding for the partners on that ground).4. If the flush-language sentence is, as the House report states, a mere clarification, then, before its addition in 1997, the Court must have had the authority to determine whether a partner was a party to a partnership-level proceeding or to consider the statute of limitations as an affirmative defense. And, indeed, the Court did. See Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533">114 T.C. 533, 535 n.4 (2000) (citing the flush-language sentence but noting that it did not apply to the partnership year before us); Columbia Bldg., Ltd. v. Commissioner, supra↩ (preceding the addition of the flush-language sentence, and holding that partners may litigate a statute of limitations defense with respect to all partners).5. Recognizing that a partner may always make alternative arguments, see supra note 2, Judge Thornton surmises that the flush-language sentence simply confirms that, if a partner wishes "to assert the limitations bar" as his sole argument, he may do so. Concurring op. p. 39. That, however, is not the point of the flush-language sentence. Rather, the flush-language sentence answered a jurisdictional question: How could a partner participate in (or commence) a partnership-level proceeding for the purpose of arguing that, because the period of limitations had run, he was not a party thereto? Generally, a statute of limitations claim is not equivalent to a claim that one is not a party to the action -- it is an affirmative defense. A partner who makes a successful sec. 6226(d)(1)(B)↩ claim, however, abjures his status as a party; the Court, for that reason, might appear to lack jurisdiction to allow him to participate at all (even for the limited purpose of establishing that he cannot participate). The flush-language sentence ensures that the Court has jurisdiction to hear a partner's claim that (in effect) the Court has no jurisdiction over him.6. See supra↩ note 3.7. A partner may wish to establish that he is not a party to lessen the risk that, in a subsequent collection action or refund suit, the Commissioner could successfully defend on the ground that the partner is estopped from challenging the partnership adjustments leading to the computational adjustments. See, e.g., Katchis v. United States, 84 AFTR 2d 5503, 99-2 USTC par. 50,744↩ (S.D.N.Y. 1999).8. That conclusion does not, as Judge Thornton believes (concurring op. p. 40), suggest an anomaly. If a partner avers that, of the years affected by partnership items, some, but not all, are closed, then he concedes he is a party. If even one year is open, then the partner has an interest in the outcome of the proceeding; he has failed to aver facts necessary to prove that he is not a party under sec. 6226(d)(1)(B). The flush-language sentence confirms our jurisdiction to determine that a partner is not a party to a partnership-level proceeding but does not go further to give us authority to consider a party's partner-specific defense. See discussion of New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. 275">131 T.C. 275, 2008 U.S. Tax Ct. LEXIS 35">2008 U.S. Tax Ct. LEXIS 35 (2008), infra sec. IV.C.1. of this separate opinion.Moreover, we need not necessarily decide the status of all a partner's years affected by partnership items even if, by averring that all those years are closed, he properly raises the question of whether he is a party to the partnership-level proceeding. Judge Thornton states: "[T]o decide whether the assessment of tax attributable to partnership items is time barred for purposes of determining which partners have an interest in the outcome of the proceeding is, necessarily, to decide that issue for all purposes." Concurring op. p. 37. If a partner argues that he is not a party under sec. 6226(d)(1)(B), the Court must search for an open year. If the Court finds no open year, then the partner is not a party; moreover, I assume collateral estoppel would prevent the Commissioner from arguing otherwise in a later action. The moment the Court finds one open year, however, the partner is a party and the inquiry is done; the Court would not need to find (and judicial restraint would counsel against finding) the status of any other year.9. Although temporary during the year at issue in New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. 275">131 T.C. 275, 2008 U.S. Tax Ct. LEXIS 35">2008 U.S. Tax Ct. LEXIS 35 (2008), sec. 301.6221-1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26, 1999), was made final and applicable to partnership taxable years beginning on or after Oct. 4, 2001.Sec. 301.6221-1(f), Proced. & Admin. Regs. Sec. 301.6221-1(c), Proced. & Admin. Regs. ("Penalties determined at partnership level."), provides:Any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item shall be determined at the partnership level. Partner-level defenses to such items can only be asserted through refund actions following assessment and payment. Assessment of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item shall be made based on partnership-level determinations. Partnership-level determinations include all the legal and factual determinations that underlie the determination of any penalty, addition to tax, or additional amount, other than partner-level defenses specified in paragraph (d) of this section.Sec. 301.6221-1(d), Proced. & Admin. Regs. ("Partner-level defenses."), provides:Partner-level defenses to any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item may not be asserted in the partnership-level proceeding, but may be asserted through separate refund actions following assessment and payment. See section 6230(c)(4). Partner-level defenses are limited to those that are personal to the partner or are dependent upon the partner's separate return and cannot be determined at the partnership level. Examples of these determinations are whether any applicable threshold underpayment of tax has been met with respect to the partner or whether the partner has met the criteria of section 6664(b) (penalties applicable only where return is filed), or section 6664(c)(1) (reasonable cause exception) subject to partnership-level determinations as to the applicability of section 6664(c)(2).10. In the end, however, the Court of Federal Claims did not rely on that analysis and held that, by signing an income tax settlement agreement, the taxpayers had waived "their legal right to a refund." Slovacek v. United States, 36 Fed. Cl. 250">36 Fed. Cl. 250, 256↩ (1996).11. Judge Thornton cites Crowell v. Commissioner, 102 T.C. 683">102 T.C. 683 (1994), and McConnell v. Commissioner, T.C. Memo 2008-167">T.C. Memo 2008-167, for the proposition that "a statute of limitations defense as pertains to a final notice of partnership adjustments should be prosecuted in the context of the partnership-level proceeding rather than in a partner-level proceeding." Concurring op. p. 44. I could not agree more. Yet, as I have argued supra in sec. II. of this separate opinion, the statute of limitations defense the Manroes present does not↩ pertain to the FPAA.12. Analogous questions would include whether they by agreement with the Commissioner extended the period of limitations for the assessment of computational adjustments pertaining only to their return, see sec. 6229(b)(1)(A), or entered into a settlement solely with respect their own return, see sec. 6229(f). Those are questions that would be pertinent only to the Manroes and so would be properly raised only at the partner level. See supra↩ sec. IV.C.2. of this separate opinion.13. See supra↩ note 1.14. Judge Thornton suggests: "It is not such a great leap that the Court should also consider * * * [a partner's assertions of a limitations bar] where a partner asserts the limitations bar with respect to fewer than all affected years." Concurring op. p. 45. It is a great leap, however, if we do not have authority to do so. As we stated in Blonien v. Commissioner, 118 T.C. 541">118 T.C. 541, 550 (2002) (quoting Saso v. Commissioner, 93 T.C. 730">93 T.C. 730, 734-735 (1989)): "'When a jurisdictional issue is raised, as well as a statute of limitations issue, we must first decide whether we have jurisdiction in the case before considering the statute of limitations defense.'" As we further stated, citing the Supreme Court as authority: "We cannot avoid the jurisdictional issue by assuming hypothetical jurisdiction and disposing of the case on the merits." Id. at 551 (citing Steel Co. v. Citizens for a Better Envt., 523 U.S. 83">523 U.S. 83, 94, 118 S. Ct. 1003">118 S. Ct. 1003, 140 L. Ed. 2d 210">140 L. Ed. 2d 210↩ (1998)).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620204/	West Seattle National Bank of Seattle, a National Banking Association in Voluntary Liquidation, Petitioner, v. Commissioner of Internal Revenue, RespondentWest Seattle Nat'l Bank v. CommissionerDocket No. 74361United States Tax Court33 T.C. 341; 1959 U.S. Tax Ct. LEXIS 32; November 27, 1959, Filed 32 Decision will be entered for the respondent. Petitioner sold its banking business as a going concern and all of its assets, including its receivables, to another bank, which also assumed its liabilities, pursuant to a plan of complete liquidation under section 337, I.R.C. 1954. Held: The balance of petitioner's reserve for bad debts at the time it sold its receivables against which the reserve had been established is taxable as ordinary income to petitioner in the year of sale. Section 337, I.R.C. 1954, does not prevent taxation of such income to the corporation. R. A. Moen, Esq., and E. S. McCord, Esq., for the petitioner.George E. Constable, Esq., and Harris J. Nuernberg, Esq., for the respondent. Drennen, Judge. DRENNEN341 OPINION.Respondent determined a deficiency in petitioner's income tax for the taxable period January 1, 1956, to May 28, 1956, in the amount of $ 6,417.58.The single issue involved is whether when petitioner sold its banking business as a going concern on January 27, 1956, and, pursuant to a preadopted plan of complete liquidation, dissolved on May 28, 1956, the balance in its reserve for bad debts at the time the assets, including receivables, were sold is taxable to it as ordinary income for the taxable period January 1, 1956, to May 28, 1956.All the facts were stipulated and the stipulation of facts is included herein by this reference.At all times material hereto, prior to the close of business on January 27, 1956, West Seattle National Bank of Seattle, sometimes 342 hereafter referred to as the Bank, was a national banking association, a body corporate, duly organized and existing34 under the laws of the United States of America, and engaged in a general banking business in Seattle, Washington. Petitioner's income tax return for the period here involved was filed with the district director of internal revenue at Tacoma, Washington.At the close of business on January 27, 1956, the Bank was carrying on its books a reserve for bad debts in the sum of $ 19,250.70. Said reserve for bad debts had been established in accordance with usual business practices and accounting methods acceptable to and approved by the Commissioner of Internal Revenue, and had been augmented from year to year.On January 27, 1956, the Bank adopted a plan of complete liquidation, pertinent parts of which are as follows: The banking business of the Bank, as a going concern, would be sold to the National Bank of Commerce of Seattle. All property, whether ledger or nonledger, and including the lease of the banking premises, the cash, bonds, notes, and all other assets in which the Bank had any right, title, or interest were to be included in the sale. In partial payment for the purchase of said assets and banking business, the National Bank of Commerce would agree to pay the liabilities 35 of the Bank, except for Federal income taxes and the liability of the Bank to the stockholders on account of their capital investment. In addition, the National Bank of Commerce was to pay the Bank the sum of $ 505,000. After the sale the Bank would voluntarily dissolve and all of its assets were to be distributed in complete liquidation within a 12-month period beginning on the date of adoption of the plan.On January 27, 1956, the Bank sold all of its property to the National Bank of Commerce of Seattle, and in payment therefor the National Bank of Commerce assumed all liabilities of the Bank and paid the Bank $ 505,000. All of the Bank's loans and receivables were transferred to the National Bank of Commerce at full face value.The plan of complete liquidation was adopted to comply with the provisions of section 337, I.R.C. 1954, so that any gain on the sale of the assets of the Bank would qualify for nonrecognition of gain or loss under that section. None of the property sold was within the definition of excluded property contained in section 337(b)(1) and (2).After the sale was completed, the only asset owned by the Bank was the $ 505,000 cash paid to it by the National Bank36 of Commerce, plus an amount equal to the Federal income tax due as computed by the Bank. The reserve for bad debts of $ 19,250.70 was retained as 343 a credit balance on the Bank's books. Partial distributions were made to the stockholders in liquidation and a final distribution was made to the stockholders on May 28, 1956.In due course the Bank filed an income tax return for the taxable period January 1, 1956, to May 28, 1956, reporting a tax due of $ 2,386. It did not include in income reported any amount as a result of the transaction whereby it sold its business and assets to the National Bank of Commerce.Upon audit of petitioner's return for the year 1956, respondent added to the Bank's ordinary income for that year the balance in the Bank's reserve for bad debts at the time its assets were sold. This adjustment was made on the theory that the amounts added to the reserve from time to time, and which made up the balance in the account, had been deducted from income when added to the account, and when the Bank disposed of its notes and accounts receivable against which the reserve had been established, there was no longer any need for the reserve, and the amount thereof37 should be restored to income in that year. Respondent's action in doing this finds full support in the decided cases unless, as petitioner claims, some provision of the Code makes this well-established principle inapplicable in the present situation. This Court and other courts have long held that any balance in a reserve for bad debts is properly to be restored to income of the year in which the need for maintaining the reserve ceases. Peabody Coal Co., 18 B.T.A. 1081">18 B.T.A. 1081, affd. 55 F. 2d 7 (C.A. 7), certiorari denied 287 U.S. 605">287 U.S. 605; North American Coal Corporation, 32 B.T.A. 535">32 B.T.A. 535, affd. 97 F. 2d 325 (C.A. 6); Geyer, Cornell & Newell, Inc., 6 T.C. 96">6 T.C. 96; O. P. Lutz, 29 T.C. 469">29 T.C. 469; Great Northern Ry. Co. v. Lynch, 292 F. 903">292 F. 903; Wichita Coca Cola Bottling Co. v. United States, 152 F. 2d 6 (C.A. 5), certiorari denied 327 U.S. 806">327 U.S. 806.But petitioner maintains that this gain, if any, on its reserve account38 must result from the sale of all its assets and inasmuch as it complied fully with all the requirements of section 337, I.R.C. 1954, the gain cannot be recognized or taxed to the corporation. Section 337(a) provides that if a corporation adopts a plan of complete liquidation after June 22, 1954, and within a 12-month period beginning on the date of the adoption of the plan distributes all its assets in complete liquidation of the corporation, then no gain or loss shall be recognized to such corporation from the sale of its property within the 12-month period. Subsections (b)(1) and (2) exclude from the nonrecognition provision certain types of assets sold or disposed of.There is no question that petitioner has complied with all the requirements of section 337, and it is conceded that the bad debt 344 reserve is not an asset of the type covered by subsections (b)(1) and (2). However, this is of no aid to petitioner with respect to the income here in question because, in our opinion, section 337 does not apply to such income.Petitioner correctly asserts that section 337 was enacted by Congress to avoid a tax at both the corporate level and the stockholder level on the gain39 resulting from a sale of the corporate assets, pursuant to a plan of complete liquidation of the corporation. See Report of House Ways and Means Committee on Internal Revenue Code of 1954, H. Rept. No. 1337, 83d Cong., 2d Sess., p. 106; also Senate Finance Committee Report on Technical Amendments Act of 1958, H. Rept. No. 1983, 85th Cong., 2d Sess., p. 29. But this section affords relief only from a double tax on the gain from a sale of assets. The income here sought to be taxed did not arise from the sale of assets. The only relation the sale of petitioner's assets had to this income is that it removed the necessity for maintaining the reserve for bad debts because petitioner no longer held receivables, the full collection of which might be doubtful. No evidence was presented that the receivables were sold for less than their full face value, and a schedule filed by petitioner in support of its tax return for the year 1956 indicates that the receivables were transferred to the purchasing bank at their full book value. So there is no evidence of a loss on the disposition of these receivables which should be charged against the bad debt reserve before it is restored to income. 40 As we stated in Geyer, Cornell & Newell, Inc., supra, a reserve for bad debts consists of entries upon books of account. It is neither an asset nor a liability. It merely offsets assets in recognition of the fact that the assets may not be collectible in full. Unlike an asset or a liability it cannot be transferred to any other entity. Recognition of this factor is found in the transaction here involved whereby petitioner sold all of its assets. It is clear from the schedule above mentioned that the reserve for bad debts was not transferred to the purchasing bank and that none of the consideration received by petitioner was attributable to the reserve for bad debts.The income here sought to be taxed not representing gain on the sale of assets pursuant to a plan of complete liquidation, section 337, I.R.C. 1954, is not applicable. Therefore, under the rule first discussed above, the balance in the reserve for bad debts at the time of the sale of petitioner's assets is taxable to petitioner as ordinary income in the year 1956.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620205/	Goddard and Goddard Company v. Commissioner.Goddard & Goddard Co. v. CommissionerDocket Nos. 19753, 21492.United States Tax Court1950 Tax Ct. Memo LEXIS 113; 9 T.C.M. (CCH) 722; T.C.M. (RIA) 50209; August 30, 1950113 Robert J. Bird, Esq., and H. A. Mihills, C.P.A., 917 Munsey Bldg., Washington, D.C., for the petitioner. A. J. Friedman, Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined deficiencies as follows: Declared valueDoc.Incomeexcess-ExcessNo.Yeartaxprofits taxprofits tax197531940$ 390.94$111.36$ 951.59194120,508.47102,185.111942152,478.07214921943105,441.0019453,312.96 The petitioner assigns as error the action of the Commissioner in disallowing a part of the deductions taken for salaries. The year 1944 is mentioned because of an alleged carry-back. The Commissioner filed an amended answer claiming increased deficiencies on the ground that he should have disallowed a larger part of the deductions claimed for salaries. Findings of Fact The petitioner is a corporation. Its returns for the periods here in question were filed with the collector of internal revenue for the district of Michigan. The petitioner was organized in 1917 by A. N. Goddard and an associate whose interest Goddard purchased in that same year. It114 has been engaged, and was engaged at all times material hereto, in designing and manufacturing metal cutting tools, most of which are furnished on special orders. These tools require a great deal of supervision, direction, inspection, and skill in their design and manufacture. The petitioner was engaged during the years 1940 to 1945 in designing and manufacturing tools for use in the war effort. Its employees increased from 149 in 1939 to a high of 490 in 1943, and the total hours worked in the plant increased from 248,203 in 1939 to a high of 1,753,848 in 1942. The number of its substantial customers and the number of purchase orders increased correspondingly. The plant went on continuous operation 24 hours, 7 days a week, at the end of 1941 and continued on that schedule until late in 1944. A majority of the common stock of the petitioner at all times material hereto was owned by A. N. Goddard, his wife, and their four children. Chester S. Goddard, a nephew of A. N. Goddard, Ernest E. Anderson, Howard Hagerty, and William H. Fritz owned about 40 per cent or less of the common stock of the petitioner during the taxable years. All, except Fritz were directors during the taxable years. 115 A. N. Goddard, C. S. Goddard, and Hagerty owned a few shares of the petitioner's preferred stock during some or all of the taxable years. The net sales of the petitioner for the period 1927 through 1939 ranged from a low of about $169,000 in 1932 to a high of about $1,225,000 in 1937. Its taxable income, before deducting compensation for its five executives, ranged during that period from a loss of about $39,000 in 1932 to a profit of about $274,000 in 1929. It did not pay any dividends on the preferred shares during four of those years and in the other years paid dividends ranging from a low of $1,336.80 in 1929 to a high of $5,076 in 1935. It did not pay dividends on its common stock during six of those years and the dividends paid in the other years ranged from a low of $4,000 in 1930 to a high of $79,150 in 1937 of which $54,700 was paid in shares of common stock in accordance with options exercised by shareholders. The following table shows similar figures for the years here involved: Taxable income beforeDividend paymentsdeducting compensationYearNet salesto five executivesPreferredCommon1940$1,463,944.25$ 298,806.19$1,464.00$16,250.0019413,758,404.321,096,784.581,759.0024,375.0019426,486,836.33 1,872,828.502,323.5632,500.0019435,634,433.99* 1,089,666.842,328.0032,500.0019443,570,376.72148,576.503,358.0028,105.0019452,732,841.60108,593.066,670.14116 The compensation paid to A. N. Goddard during the years 1927 through 1939 ranged from a low of $5,144.50 in 1933 to a high of $38,772.65 in 1929. The salaries of Hagerty, C. S. Goddard, and Anderson, which were identical for any year, ranged during that period from a low of $3,700 in 1933 to a high of $16,524.23 in 1929. Fritz's salary during that period ranged from a low of $2,500 in 1933 to a high of $10,740 in 1937. A. N. Goddard was president, Hagerty was secretary and treasurer in charge of administration, C. S. Goddard was sales manager, Anderson was works manager, and Fritz, the plant superintendent, was his principal assistant during the period involved herein. Each of those men had been with the petitioner approximately 20 years prior to 1940. They constituted the executive and managerial force of the petitioner at all times material hereto. Each was well trained and experienced in his duties with the petitioner. The Board of Directors of the petitioner adopted a resolution on February 16, 1924, providing that in addition to regular salaries, 117 additional compensation equal to a percentage of net sales would be paid from January 1, 1924, as follows: A. N. Goddard 1 1/2 per cent; Hagerty, Anderson, and C. S. Goddard 1/2 per cent each. The bonus was not paid during some years because of business conditions. Anderson submitted his resignation prior to June 1, 1939 because he felt disatisfied with the arangement under which he was employed and because of some criticism of his work. Hagerty and C. S. Goddard, who were also somewhat concerned about the existing arrangements for their employment, and A. N. Goddard felt it was important to have Anderson remain with the petitioner. He refused to return until a five-year contract of employment was offered him. The contract, dated June 1, 1939, also included Hagerty and C. S. Goddard. It provided that each was employed for a period of five years or longer, beginning June 1, 1939 at a salary equal to 1 1/2 per cent of net sales. This agreement and another relating to a minimum purchase price for their stock, should they separate from the company, were ratified by the Board of Directors on September 1, 1939. The salaries for a while were somewhat less under the new arrangement than118 they had been under the old one. The Board of Directors, at a meeting on July 15, 1940, fixed the salary of A. N. Goddard beginning July 1, 1940 at $30,000 per year, and on November 25, 1940 fixed his compensation beginning January 1, 1941 at 2 1/2 per cent of net sales. Hagerty, at some time prior to August 25, 1942, suggested that he, Anderson, and C. S. Goddard place a ceiling on the compensation due them under the contract dated June 1, 1939. Anderson and Goddard at first did not agree but later they agreed to a limitation of $60,000 per year for the duration of the war. A. N. Goddard, when he learned of this, voluntarily agreed to place a limitation of $75,000 a year on his compensation for the duration of the war. These limitations were approved at a meeting of the directors on August 25, 1942, at which it was resolved to place an appropriate rider on the contract of June 1, 1939, the change to become effective in 1942. The following table shows the total compensation paid and claimed on the returns as a deduction and the amount allowed by the Commissioner in determining the deficiencies, and also the amount allowed in the Revenue Agent's report in determining that the119 petitioner had a loss of $9,211.83 for 1944 instead of a larger loss shown on the return: 194019411942ClaimedAllowedClaimedAllowedClaimedAllowedA.N. Goddard$27,499.98$27,499.98$93,971.70$34,000.00$74,551.69$36,000.00H. Hagerty22,094.7717,500.0056,356.5820,000.0060,000.0020,000.00C.S. Goddard22,094.7717,500.0056,356.5820,000.0060,000.0020,000.00E.E. Anderson22,094.7717,500.0056,356.5820,000.0060,000.0020,000.00W.H. Fritz9,000.009,000.0020,100.0020,000.0030,000.0020,000.00194319441945ClaimedAllowedClaimedAllowedClaimedAllowedA.N. Goddard$74,551.69$36,000.00$74,551.69$36,000.00$25,150.00$25,150.00H. Hagerty60,000.0020,000.0049,172.0920,000.0032,045.8020,000.00*C.S. Goddard60,000.0060,000.0049,172.0949,172.0924,173,7724,183.77E.E. Anderson60,000.0060,000.00 24,866.2424,866.24W.H. Fritz30,000.0030,000.0027,750.0027,750.0019,000.0019,000.00The Commissioner, in120 the notice of deficiency at Docket Number 19753, explained that a part of the amount claimed as a deduction based upon compensation of officers for each of the years 1940, 1941, and 1942 had been disallowed because the deductions were excessive in amounts. He gave no explanation in his notice of deficiency at Docket No. 21492, but stated therein that careful consideration had been given to the Revenue Agent's report dated March 8, 1948 "which report is incorporated herein by reference." That report contained a schedule showing deductions claimed and amounts allowed for several officers for the years 1943 through 1946. It gave no further explanation. A reasonable allowance for salaries or other compensation for personal services actually rendered to the petitioner by A. N. Goddard, Hagerty, C. S. Goddard, Anderson and Fritz for the years 1940 through 1945, in so far as their compensation is in issue herein, were the amounts actually paid to those men during those years, with the exception that a reasonable allowance for salaries or other compensation for personal services actually rendered to the petitioner by A. N. Goddard during 1941 was $75,000. The stipulation of facts is incorporated121 herein by this reference. Opinion MURDOCK, Judge: The question herein relates to reasonable allowances for compensation of the five principal executives of the petitioner. The decision in such a case is in the nature of a jury verdrict and requires a finding of fact. A finding has been made based upon careful consideration of all of the evidence. Discussion of the reasons which prompted the Court to arrive at its conclusion is of doubtful value and no effort will be made to give a complete discussion of all of the evidence. Furthermore, it may not be inferred from the fact that some of the evidence has been discussed that the rest of it has not been carefully considered. The two Goddards, Hagerty, and Anderson, or some of them at least, apparently became embarrassed, self-conscious, or patriotic about the size of the salaries which they would receive for 1942, and the conclusion was reached that their salaries should not exceed $75,000 for A. N. Goddard and $60,000 for the other three for the duration of the war. Actually, A. N. Goddard had received $93,971.70 for 1941 and the evidence indicates that that was in excess of a reasonable allowance for salaries or other compensation122 for that year for personal services actually rendered by him either in that year alone or in that year with due regard for services previously rendered. He stated, on at least one occasion, that he thought it was too high. The conclusion has been reached that $75,000 would be a more appropriate amount to be deducted for his salary for 1941. Otherwise, little can be said for the Commissioner's case. His determinations were, so far as this record shows, arbitrary and inconsistent. He allowed $60,000 for C. S. Goddard and Anderson for 1943 but refused to allow the same amount claimed for 1942, the best year in the history of the petitioner. The sales for 1941 were higher than for 1944, yet he allowed the full amount claimed for those two men for 1944 but allowed much smaller amounts for 1941. He allowed the same deduction for the salary of those two men as he allowed for Hagerty for some years, but for 1943 and 1944 he allowed larger amounts for them than he allowed for Hagerty. All three of these men were paid equally pursuant to an employment contract entered into prior to the time when the petitioner began to feel the impulse of the war. There was no lack of bona fides in connection123 with that contract. It turned out that the compensation under the contract was substantially more than the parties had anticipated, but the evidence indicates that these three men, all of whom were extremely valuable to the petitioner and all of whom worked extra hard during these years when the business of the petitioner multiplied rapidly, were worth the amounts actually paid to them. There was no justification for the action of the Commissioner in disallowing a small amount of their compensation for 1940. Their high salaries came in the next three years, but for 1943 the Commissioner allowed the full amount claimed for Goddard and Anderson, thus recognizing that they could be worth as much as $60,000. There is testimony that their services were worth as much as $60,000. The Commissioner allowed the full amount paid Fritz for 1940, 1943, 1944, and 1945. He disallowed $100 of the amount paid in 1941 and $10,000 of the amount paid in 1942. These alone of his compensations are in controversy. The Commissioner offers no satisfactory explanation for this action and the evidence indicates that there was none. There is testimony that he was worth what was paid to him. It seems obvious124 that if Fritz was worth $30,000 in 1943 and $27,750 in 1944, he was worth $30,000 in 1942, the best year, and $20,100 rather than $20,000 in 1941. There was no reason for the petitioner to pay him more than he was worth. His stockholdings were trivial and he had no hold on the corporation except as his ability gave it to him. There is evidence that A. N. Goddard was worth as much as $75,000 to the petitioner, at least in years in which it had the business to justify the employment of such a person. He was regarded as more valuable to the petitioner than was any one of the other three top employees, yet the Commissioner has recognized that a reasonable salary for two of those employees for 1943 was $60,000 and those employees themselves thought that a reasonable salary for A. N. Goddard for any year should exceed the salary which they were to receive. Incidentally, the Commissioner called no witnesses of his own and apparently expects this Court to hold with him from statistics in regard to earnings and dividends. But whatever it is he relies upon, there is other evidence which preponderates in the petitioner's favor, except in the one instance above noted. Counsel for the Commissioner125 received permission at the hearing to file an amended answer claiming an increased deficiency and even claiming a deficiency for 1944, as to which year the Court has no jurisdiction because no deficiency was determined for that year. It is difficult, if not impossible, to find any support in the record for the contentions made in this amended answer. Certainly the Commissioner has failed to carry his burden of proof in regard to his contentions made in that amended answer. Decision will be entered under Rule 50. Footnotes. Before deducting renegotiation refund and net operating loss deduction. ↩. Before deducting renegotiation refund.↩*. Resigned August 1, 1945.↩. Resigned June 1, 1944. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620207/	LEW DAVID DAILEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDailey v. CommissionerDocket No. 31194-81.United States Tax CourtT.C. Memo 1984-89; 1984 Tax Ct. Memo LEXIS 582; 47 T.C.M. (CCH) 1150; T.C.M. (RIA) 84089; February 27, 1984. Lew David Dailey, pro se. Mark A. Pridgeon, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION583 KORNER, Judge: Respondent determined deficiencies in income tax against petitioner, together with additions to the tax, for the calendar years 1975 through 1978 as follows: Additions to taxCalendarDeficiency inunderYearIncome TaxSection 6653(b)Section 6654 11975$3,398.21$1,699.11$2,166.0019761,984.00992.0061.7819773,456.001,728.0074.7819784,117.712,058.86126.82The issues presented for our decision are: (1) Whether respondent erred in treating petitioner's wages during the above years as taxable income; (2) whether petitioner had business deductions and itemized personal deductions in the year 1976 in excess of those allowed by respondent; 2 (3) whether petitioner is liable for additions to the tax for fraud under section 6653(b); and (4) whether petitioner is liable for additions to tax for underestimation under section 6654. 584 FINDING OF FACT Some of the facts and exhibits herein were stipulated, and such facts and stipulated exhibits are incorporated herein by this reference. Petitioner was a resident of Brainerd, Minnesota, at the time he filed his petition in this case. In the year 1970, petitioner became an employee of the Northwestern Bell Telephone Company, and continued to work for that employer at least through the year 1978. For the years 1972, 1973, and 1974, at least, he reported his wages from the telephone company in joint income tax returns filed with his then wife. In the fall of 1974, however, and apparently shortly before he separated from his wife, petitioner announced to her that he did not want to pay any more Federal income taxes. At or about that time, he also told his wife's aunt that he had a system under which he would not have to pay any Federal income tax, and that even if he got caught, he would still be able to retain some of the money. On December 29, 1975, petitioner filed with the telephone company, his employer, a Form W-4E (Exemption from Withholding Certificate), in which petitioner certified under penalties of perjury that he had no income tax liability585 for 1974, and that he anticipated no such liability for 1975. A similar certificate was filed by petitioner twice for the year 1976, on May 14, 1976. On July 25, 1977, and again on December 12, 1977, petitioner filed with the telephone company Forms W-4 (Employee's Withholding Allowance Certificate), in which petitioner claimed that he was exempt from withholding taxes and also certified that he had incurred no liability for Federal income tax for the proceding year and anticipated no such liability for the current year. A similar Form W-4 was filed by petitioner with the telephone company for the year 1978 on May 11, 1978. During the above years, petitioner received the following amounts in wages from the Northwestern Bell Telephone Company: YEARWAGES1975$15,453.89197611,014.16197718,336.39197820,325.63Petitioner filed no Federal income tax returns for the years 1975 through 1978. On or about April 11, 1976, and after petitioner had filed the Form W-4E relating to his taxable year 1975, petitioner attended a political meeting in Chicago, Illinois, sponsored by a group called the Libertarian Party. One of the speakers at that meeting was586 a John Joseph Matonis, who represented himself to be a tax lawyer. He spoke on various topics, including the taxability of wages as income. After hearing the speech, petitioner arranged to have lunch with Mr. Matonis, and discussed the subject further. At that time, Mr. Matonis persuaded petitioner to purchase from him copies of what purported to be appellate briefs filed by Mr. Matonis with two Federal Courts of Appeal in two unrelated criminal tax cases, wherein, inter alia, some of the better known and thoroughly discredited "tax protester" arguments were advanced. 3587 Petitioner made no effort to check on the qualifications or credentials of Mr. Matonis as a tax attorney, and apparently made no effort to secure any other independent advice from a qualified person as to the validity of Mr. Matonis' expressed position that wages were not gross income for Federal income tax purposes. No professional relationship of lawyer and client was created between Mr. Matonis and petitioner. At the time of the Libertarian Party rally in Chicago, petitioner made a payment of $35 to the party. In the year 1976, petitioner conceived the idea of starting a new business, consisting of the video recording of musical groups or bands which could be used for advertising and promotion purposes. The record is unclear as to how far petitioner went in attempting to organize this business, but it is clear that no books and records, correspondence files, bank ledgers or any other records were maintained, and no income was earned. At least part of petitioner's underpayment of tax for each of the years 1975 through 1978, and his failure to file returns for said years, was due to fraud with the intention of evading tax.OPINION 1. Wages as Taxable Income - 588 Although the principal issue raised by petitioner in his pleadings was the question of the taxability of his wage income from the telephone company, and although he continued to maintain at trial that such wages were not taxable compensation, the issue is nowhere mentioned in petitioner's brief, and he is therefore deemed to have abandoned it. In any case, it is completely frivolous and without any merit at all. Wages are clearly taxable income under the Internal Revenue Code, section 61(a). Such taxation is clearly constitutional, Eisner v. Macomber,252 U.S. 189">252 U.S. 189 (1920); Commissioner v. Glenshaw Glass Co.,348 U.S. 426">348 U.S. 426 (1955); Funk v. Commissioner,687 F.2d 264">687 F.2d 264 (8th Cir. 1982), affg. T.C. Memo 1981-506">T.C. Memo. 1981-506; Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111 (1983), on appeal (2nd Cir., Sept. 13, 1983). The constitutional propriety of imposing the imcome tax upon wage income is so far beyond dispute that is deserves no further comment. 2. Additional Business and Personal Itemized Deductions - At trial, petitioner testified that he attempted to organize a new business in the year 1976 for589 the purpose of making video recordings of musical groups, with such recordings to to be sold for advertising and promotion purposes. In aid of this venture, petitioner testified that he purchased certain equipment, which he described as "… some specialized, portable video equipment… a special low-light, black and white camera for shooting in poor lighting conditions; a portable video unit, and video monitor and some other materials." He also admitted in his testimony, however, that he kept no books and records with respect to this venture, maintained no files or bank accounts, had no list of customers and earned no income. There is also no evidence that he ever recorded any musical group at all. On the basis of this record, we can only conclude that petitioner never even got started in carrying on this business. At most, he may have acquired some equipment with the intention of starting a business, but it is apparent to us that the business in fact never commenced. Under these circumstances, no business expense deductions would be allowable until the trade or business was actually carried on. Richmond Television Corp. v. United States,345 F.2d 901">345 F.2d 901 (4th Cir. 1965),590 vacated and remanded on other grounds, 382 U.S. 68">382 U.S. 68 (1965); Polachek v. Commissioner,22 T.C. 858">22 T.C. 858 (1954). Even if petitioner had established that his business had really commenced, and even if petitioner had established the cost of the items which he claimed to have purchased, which he did not, such items as described by petitioner were clearly items of a capital nature to be used in carrying on his video taping business. Any expenditures to acquire these items were therefore capital expenditures under section 263, for which no ordinary business deduction under section 162 would be allowable. Petitioner has established that he made a contribution to the Libertarian Party of Illinois in 1976 in the amount of $35. Such amount would appear to be deductible under section 218 as it existed in 1976 (now repealed), but, inasmuch as respondent allowed petitioner the benefit of the standard deduction under section 141 (now repealed) in recomputing petitioner's tax liability for 1976, and since such standard deduction under section 141 is larger than the claimed deduction, petitioner's itemized deduction is deemed to be included therein and no additional amount591 is therefore allowable. 3. Additions to Tax Under Section 6653(b) - Respondent determined that petitioner's failure to file returns for years 1975 through 1978 was due to fraud within the meaning of section 6653(b), and proposed the 50 percent addition to tax accordingly. Respondent has the burden of proving petitioner's fraud by clear and convincing evidence. Section 7454(a); Rule 142(b). Fraud, as used in section 6653(b), means actual intentional wrongdoing.Mitchell v. Commissioner, 118 R.2d 308 (5th Cir. 1941). The existence of fraud is a question of fact to be determined from the entire record. Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1 (1980); Stratton v. Commissioner,54 T.C. 255">54 T.C. 255 (1970). Fraud is never presumed, but rather must be established by affirmative evidence. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85 (1970). The Supreme Court has stated that an " * * affirmative willful attempt may be inferred from * * * any conduct, the likely effect of which would be to mislead or conceal." Spies v. Commissioner,317 U.S. 492">317 U.S. 492, 499 (1943). Although the mere failure to file a return, without more, is not proof592 of fraud, it may be considered in connection with other facts, Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968) and the failure to file a return can be a fraudulent act just as much as the intentional filing of a false return. Beaver v. Commissioner,supra;Acker v. Commissioner,26 T.C. 107">26 T.C. 107 (1956). Upon consideration of this record as a whole, we hold that respondent has carried his necessary burden of proof to establish fraud in each of the years in question. The record herein shows that petitioner was fully aware of the taxability of his wages and that he was required to file returns for 1975 through 1978. This is established by his proper filing of returns reporting his wages from the telephone company for the years 1972, 1973 and 1974. We have held that the consistent filing of tax protester returns on grounds which the taxpayer knows are invalid and frivolous will support respondent's burden of proof on fraud, Fuhrmann v. Commissioner,T.C. Memo 1982-255">T.C. Memo. 1982-255; Rowlee v. Commissioner,supra; and we hold that the deliberate failure to file returns which the taxpayer593 knew were required, on nothing but frivolous tax protester grounds, is equal evidence of fraud. Furthermore, a pattern of not filing income tax returns, coupled with convincing affirmative indications of a specific intent to defraud, is sufficient to satisfy respondent's burden of proof. Grosshandler v. Commissioner,supra.Such affirmative indications are present in this case in petitioner's filing of false withholding certificates for each of the years in issue. In each of those withholding certificates, as we have detailed in our findings of fact, petitioner certified that he had no liability for income tax for the preceding year and would have none in the current year. Each of those statements was false, and petitioner knew they were false.The effect of such statements when filed with petitioner's employer was to induce petitioner's employer to stop withholding income tax on petitioner's wages for the current year.We hold that these were affirmative acts of fraud. Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1007 (1982); Furhmann v. Commissioner,supra; Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304, 313 (1982); 594 Scholle v. Commissioner,T.C. Memo. 1982-267; Horne v. Commissioner,T.C. Memo 1983-362">T.C. Memo. 1983-362. In order to excuse his conduct in this case, petitioner makes two arguments: (a) Petitioner argues that he filed the withholding certificate for the year 1975 at a time when he thought he was about to be discharged from his employment, and therefore anticipated he would have no taxable income for the year. Petitioner admitted, however, that he was not fired but still did nothing to correct the erroneous withholding certificate which he had already filed with his employer. The argument requires no further comment. (b) Petitioner further argues that his actions in filing false withholding certificates and in failing to file returns for 1974 through 1978 were because he had "advice of counsel" which convinced him that his wages were not taxable income.To support this argument, petitioner points to a political speech which he heard in Chicago in April 1976, followed up by a luncheon conversation which he had with the speaker, and the purchase from him of a couple of documents full of stale and discredited tax protester arguments. Petitioner admitted that595 he made no attempt to check the credentials and qualifications of this speaker, nor did he make any attempt to seek the advice of any qualified person as to the legitimacy of the now threadbare argument that wages were not taxable income. We simply reject the idea that listening to a political speech, followed by a luncheon table conversation, constitutes "advice of counsel." We believe that petitioner knew full well that his wages were taxable income, as shown by the fact that he properly filed returns and reported such income in the years 1972 through 1974. His reliance on the speech of the alleged "tax lawyer" as being the advice of counsel is nothing more than a frivolous attempt to draw the cloak of respectibility over a course of action which petitioner had already determined to embark upon -- note that the first filing of his false withholding certificate, for the year 1975, was done some months before he ever heard that speech. We do not think that petitioner was concerned about the accuracy of the statements made by the speaker, nor whether the speaker had the necessary qualifications to give opinions on the law which should be believed. We think that petitioner simply*596 sought someone who would say what he wanted to hear, and then seized upon it. 4. Additions to the Tax Under Section 6654.Petitioner had the burden of proving error in respondent's determination that additions to tax should be imposed under section 6654(a). Hollman v. Commissioner,38 T.C. 251">38 T.C. 251, 263 (1962). Petitioner has failed to introduce any evidence indicating that respondent so erred, and did not even touch on the issue on brief. We conclude that respondent must be sustained on this issue. To reflect all the foregoing, Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect in the years in issue, and all Rule references are to the Tax Court's Rules of Practice and Procedure, except as otherwise noted.↩2. This issue was not raised by the pleadings of either party. At trial, however, it was apparent that both parties were ready and willing to try the issue, and it was done. See Rule 41(b).↩3. Such arguments included (a) that a person could validly refuse to file any income tax return at all simply by invoking the protection of the Fifth Amendment; (b) that Federal reserve notes are not legal tender; (c) that taxing compensation for services as gross income without allowing any amount for "cost of services rendered" is unconstitutional; (d) that imposing the imcome tax upon persons who are opposed to it on religious or moral grounds violates the First and Fifth Amendment↩ rights of such persons; (e) that the income tax is an unconstitutional excise tax as applied to individuals; and (f) that the false filing of a withholding certificate was not fraudulent where the individual was not subject to the income tax laws in the first place, etc., etc.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620208/	OSCAR K. EYSENBACH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Eysenbach v. CommissionerDocket No. 21107.United States Board of Tax Appeals10 B.T.A. 716; 1928 BTA LEXIS 4037; February 14, 1928, Promulgated 4037 1. Year of loss on stock of a corporation determined. 2. Loss incurred in certain mining operations held to be a "net loss" under section 204 of the Revenue Act of 1921. 3. Where taxpayer leased for the term of 99 years a plot of ground on which stood a building and where under the terms of the lease the lessee was to raze the building and erect a more costly one and where the lessee, after paying the rent for one year, forfeited his rights, and the taxpayer recovered possession in 1923 and in the same year sold the property, held, that a loss was not sustained in the year the building was razed, but that in computing the gain from the sale, the depreciated value of the old building, less one ninety-nineth of the depreciated value recovered, was a part of the cost of the property. C. H. Garnett, Esq., and E. R. Wilson, C.P.A., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. MILLIKEN 716 This proceeding involves the redetermination of a deficiency in income tax for the year 1923, in the amount of $7,515.29, plus a penalty of 25 per cent, amounting to $1,878.82. Petitioner contends that respondent committed4038 the following errors: (a) That he refused petitioner the right to deduct from gross income a loss of $27,500 on stock in the Tennessee Marble Co.; (b) that he refused petitioner the right to deduct from gross income for 1923 a loss of $67,000 on stock in the Choctaw Portland Cement Co., and in the alternative that if this loss was sustained in the year 1921, as determined by respondent, then such loss was a net loss as defined in section 204 of the Revenue Act of 1921; (c) that respondent refused to permit petitioner to deduct from gross income in 1923, a loss in certain zinc and lead mining operations sustained during the year 1921, such loss being a net loss within the meaning of section 717 204 of the Revenue Act of 1921; and (d) that respondent erred in computing the gain arising from the sale of a house and lot, in that he excluded from the cost of the property the depreciated value of a house erected thereon. At the hearing respondent confessed error as to item (a). FINDINGS OF FACT. Petitioner is an individual who resides and has his office at Tulsa, Okla. He was a stockholder, director or officer in several corporations. He, for himself, or in connection4039 with others, purchased oil, gas, zinc and lead leases and extracted and sold the minerals. The Choctaw Portland Cement Co. was a corporation. It erected its plant in 1916 and renovated and enlarged it in 1918 and 1919. Its capital stock was $1,000,000. Prior to 1920, the corporation had issued two series of bonds, aggregating about $200,000. In 1918, petitioner bought $37,500 of these bonds, which he thereafter exchanged for stock in order to permit a new bond issue. Subsequently, he purchased additional stock, for which he paid $29,500. The total cost of petitioner's stock in said corporation was $67,000. The corporation had labor troubles, which caused it to shut down its plant on November 15, 1920. It never reopened. On February 14, 1921, an involuntary petition in bankruptcy was filed against it. The corporation, in its pleading, denied the allegations of the petition. On April 13, 1922, W. D. Ege was appointed temporary receiver, and on the 25th day of July, 1922, he was elected trustee. The total indebtedness of the corporation, bonded and general, was something over $400,000. Beginning in 1922, and continuing through the summer of 1923, numerous efforts were4040 made to sell the plant or to reorganize the corporation. There was good reason to believe that any one of several of these negotiations would be successful. On one of the occasions, the sale price discussed was $1,000,000, and at another, $600,000. If a sale had been made at $1,000,000, about 60 cents on a dollar would have been paid on the stock. If a sale had been made at $600,000, the stockholders would have received about 20 cents on the dollar. In the autumn of 1923, all such attempts were abandoned and the stockholders and officers of the corporation and the creditors, who held the bonded or general indebtedness of the corporations, entered into negotiations looking to a judicial sale. At this time, the stockholders abandoned any expectation of getting any returns on the stock. The court on December 28, 1923, ordered a sale. The sale was made in February, 1924, and did not realize enough to pay the bonded indebtedness. 718 In 1916 and 1917, petitioner, in conjunction with others, purchased leases on property near Miami, Okla., granting them right to extract zinc and lead. Lead and zinc were discovered in paying quantities on a lease known as the Catholic Mission4041 Lease, and in that year petitioner entered into an agreement with his coowners to sink a shaft. He was to pay all the expenses of sinking the shaft and make other necessary improvements for the purpose of extracting the zinc and lead, and was to be repaid solely out of the proceeds of the zinc and lead mined. In sinking the shaft, he encountered water in such quantities as to render his efforts futile. In 1921, he abandoned all efforts to complete the shaft and abandoned the project. The total cost of these operations was $30,000. Petitioner exercised supervision over this operation and was on the ground often as much as twice a week. Petitioner acquired a one-third interest in a plot of ground. Subsequently, in 1913, a brick building was erected on said property, which cost $50,000, of which he paid one-third. In the latter part of 1917, petitioner and the other owners granted to Oscar W. Edwards a 99-year lease on said property, effective January 1, 1918. Under the terms of the lease, Edwards was to raze the brick building and erect a building to cost not less than $100,000. The annual rental was $18,000 per year. Edwards entered into possession on January 1, 1918, and4042 in the early part of that year razed the building. This building had a life of 30 years, and the depreciation sustained at date of razing was $8,333.33. He then proceeded with the erection of the building required by his lease. After erecting part of it, and having expended thereon between $57,000 and $58,000, he ceased operations; he paid the first year's rental, to wit, $18,000, and no more. Litigation thereupon ensued and petitioner and his coowners recovered possession in the year 1923, and in that year sold the property. On this sale respondent determined petitioner's net gain to be $80,163.01. In determining such gain, respondent excluded from the cost of the property, the cost of the brick building and determined that petitioner's loss arising from the razing of the brick building occurred in the year 1918, the year in which it was demolished. Petitioner filed no income-tax returns for the years 1921, 1922, and 1923. His failure to file these returns was occasioned by the fact that he believed that after taking into consideration his losses during said years, he had realized no net income. On May 1, 1926, the collector made out returns for petitioner for said years, 4043 and he on that date executed them under protest. There was attached to each of these returns a schedule covering all of said years. These schedules read as follows: 719 O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Schedule of gross receipts ofincome192119221923Scudder lease$25,132.44$24,618.44$14,827.42Mackey lease1,789.921,683.931,094.12Oswalt lease434.95398.50290.89Marshall lease3,681.84926.71445.30Anna Fee allotment218.55230.43171.25Sadler lease2,582.791,562.891,028.23Salaries:Robinson Packer Co10,000.0010,000.00Western Natural Gas Co3,000.003,000.003,000.00Commission on estate dealsDividends:Robinson Packer Co2,625.002,625.00Tidal Oil1,000.00130.00Exchange National Bank432.00432.00432.00Interest:Western Natural Gas Co2,000.001,500.00Hotel rent6,500.001,950.003,000.00Garage rent (hotel storerooms)11,700.0010,800.0010,800.00Oil runs to Mrs. Eysenbach174.19103.0646.52Rentals on 3 frame dwellings to Mrs. Eysenbach estimated on basis of being occupied 11/12 of time1,155.001,155.001,155.00Totals$69,801.68$60,985.96$39,045.734044 O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Schedule of Expenditures forincome tax returns192119221923Scudder Oil Lease Expense 1$16,340.36$16,466.23$9,382.81Repair & Upkeep of rental prop4,300.871,015.542,017.31Operating expenses on oil leases4,075.009,316.233,807.12Dry hole expenditures4,930.67428.505,900.73General taxes3,532.379,154.8124.65Interest5,749.042,896.594,654.78Business car expense and upkeep1,153.97759.40314.13Office and general expense1,550.60789.853,612.03Loss on lease300.00Loss on La. leases5,953.59Miami, Okla., Losses2,064.073,625.22100.00Choctaw Portland Cement Co. notes and interest paid on account of endorsement for this company3,930.394,197.085,356.47Depreciation - Schedule attached15,902.0015,902.0021,037.30Totals$69,482.93$64,851.45$56,207.33O. K. Eysenbach, 210 North Main, Tulsa, Okla. - Depreciation ScheduleAcquiredCostRate192119221923Scudder Lease Eqpt. one-half interest1920$40,400.0010%$2,020.00$2,020.00$2,020.00Marshall Lease Eqpt191720,800.0010%2,080.002,080.002,080.00Sadler Lease Eqpt191718,200.0010%1,820.001,820.001,820.00Oswalt Lease Eqpt191739,000.0010%$3,900.003,900.00688.243 Frame rental houses19148,200.005%410.00410.00410.00Brick Hotel Bldg1920133,600.002%2,672.002,672.002,672.00Hotel Furniture192030,000.0010%3,000.003,000.003,000.00Loss on Oswalt Eqpt. 14 of 17 wells or 14/17 of $39,000.00.Cost of Equipment salvaged$32,117.65Salvage estimated$4,500.6 years depr19,270.5923,770.59Loss for 1923 on equipment8,347.06Totals$15,902.00$15,902.00$21,037.304045 720 The return for 1921 reports the following income and deductions: Loss from the sale of stocks and bonds$1,325.00Gain as shown by above schedule69,801.68Total income68,476.68Deductions as shown by schedule above69,482.93Loss on Choctaw Portland Cement Co. stock67,000.00Total deductions136,482.93Loss68,006.25Petitioner, during these years, was a married man with one dependent and was entitled to personal exemption and credit for dependency of $2,900. The return for 1922 reports income as shown by schedules above, of $60,985.96, and deductions as shown by schedules above of $64,851.45, and a loss of $3,865.49. The return for 1923 reports income as shown by schedules above of $39,045.73, and deductions as shown above of $56,207.33, and a loss on these items of $17,161.60. It also shows a capital gain arising from the sale of the real estate above set forth of $80,163.01, upon which respondent computed the tax at the rate of 12 1/2 per cent, added a penalty of 25 per cent, and deducted therefrom the 25 per cent credit provided by section 1200 of the Revenue Act of 1924, leaving a tax and penalty by $9,394.10. These returns correctly4046 disclose the petitioner's gross income and deductions for the years 1921, 1922, and 1923, except as shown herein. OPINION. MILLIKEN: It is admitted by respondent that petitioner incurred a loss of $67,000 on his stock in the Choctaw Portland Cement Co. The only issue between the parties is in what year loss was sustained. Petitioner contends that the loss was sustained in the year 1923, while respondent asserts that it was sustained in the year 1921. It clearly appears from the facts found that this loss was not incurred in 1921. Although bankruptcy proceedings were begun in that year, the stockholders then hoped and had reasonable grounds to hope that they would realize something on their stock. Up to the early autumn of 1923, they were making vigorous efforts either to sell the property at private sale or to reorganize the corporation. If the contemplated sales had been effected, or if the corporation had been reorganized, the stock would not have been valueless. In the autumn of 1923, the representatives of the banks which held a large amount of the bonds of the corporation, and also some of its other indebtedness, were called in and it was then determined by all parties4047 concerned that a sale or reorganization of the corporation was an impossibility and that the court should order a judicial sale. The sale was ordered 721 by the court on December 28, 1923. Although the final terms upon which the representative of the creditors was to purchase were not agreed upon until just prior to the sale, which occurred in February, 1924, the testimony shows that it was not then contemplated that the creditors would protect the stockholders, or that it was hoped that the properties would bring a price which would accomplish more than pay the debts, if that much. The vice president of one of the creditor banks testified: Q. Do you know whether or not the directors claimed or anybody else claimed at those meetings that there would be a surplus over the debts, for the stockholders, out of this suggested plan? * * A. There was not any suggestion made that the stockholders would realize anything on the stock at any conference I was in, in the latter part of 1923. Q. That point never entered into any of these negotiations at any time? A. It was a question of trying to cover the bonds and notes. That is all we were interested in. It is4048 apparent that when the sale was ordered in December, 1923, the stockholders had no reasonable basis for hope that they would realize anything upon their stock. The optimism of the stockholders of the corporation continued through 1921 and 1922, but in the month of December, 1923, it was their well considered opinion that nothing could be recovered, which opinion is amply justified by the facts of record. On the facts as presented, we are of the opinion that petitioner sustained a deductible loss on this stock in the year 1923. For several years prior to 1923, petitioner was engaged in the business of purchasing and developing mineral leases. The majority of these leases were oil and gas leases. In this line of business, petitioner prior to and in 1921 purchased interests in the lead and zinc leases referred to in the findings of fact and proceeded to develop one of these properties. This effort failed in 1921, after petitioner had expended $30,000. The question presented is, Was this loss a "net loss" as that term is defined in section 204 of the Revenue Act of 1921? The pertinent parts of that section read: (a) That as used in this section the term "net loss" means only4049 net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: * * * (Italics ours.) It is to be noted that in order to constitute a "net loss," it is not necessary that taxpayer should sustain the loss in his principal business or vocation. The word "business" is qualified by the word 722 "any." The taxpayer is entitled to this benefit where the loss is incurred in "any trade or business regularly carried on" by him. That petitioner's activities in oil, gas, zinc and lead constitute a business seems clear. They fall within the definition of "business" given in ; 3 Am.Fed. Tax Rep. 2834, where it was said: * * It remains to consider whether these corporations are engaged in business. "Business" is a very comprehensive term and embraces everything about which4050 a person can be employed. Black's Law Dict. 158, citing . "That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit." 1 Bouvier's Law Dict. p. 273. See ; 3 Am.Fed.Tax.Rep. 2947, and ; 5 Am.Fed. Tax Rep. 5855. That petitioner "regularly carried on" the business of purchasing and developing zinc and lead leases is equally clear. It was not an isolated enterprise. His zinc and lead operations dovetailed with his other mineral operations. On this point petitioner is sustained. Petitioner did not sustain a loss in 1921 by reason of the razing of the brick building on the land which he and his coowners sold in 1923. By the terms of the lease to Edwards, the latter expressly agreed to tear down the old building and erect a much more valuable one in its stead and to pay rental at the rate of $18,000 a year. This was a mere substitution of one asset for another. 4051 The value of the old building was to be paid for in the annual rental of $18,000. If Edwards had carried out his contract the loss sustained by petitioner by reason of the destruction of the building, would have been amortized over the whole term of the lease. . Since Edwards paid only one installment of the rent, the lessors have recovered in this respect only 1/99th of the value of the building. The loss was incurred in the year in which the sale was made, to wit, 1923. This loss amounted to the depreciated value of the building when razed, less one ninety-ninth of the depreciated value recovered in the one year's rental paid. The respondent has imposed a penalty of 25 per cent by reason of the failure to file a return for the calendar year 1923. It being clearly evident from the decision here made that the petitioner realized no taxable net income for said year, there is no basis for the imposition of the penalty. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.Footnotes1. The taxpayer has a one-half interest in this property. This item represents the operating expense and one-half of the net proceeds paid to party owning other interests. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620209/	EARL FINCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFinch v. CommissionerDocket No. 11889-78.United States Tax CourtT.C. Memo 1981-233; 1981 Tax Ct. Memo LEXIS 511; 41 T.C.M. (CCH) 1470; T.C.M. (RIA) 81233; May 11, 1981. 511 Earl Finch, pro se. Marion L. Weston, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined a deficiency in petitioner's income tax for 1976 in the amount of $ 4,820 and an addition to tax under section 6653(a), I.R.C. 1954; 1 in the amount of $ 241. The issues for decision are (1) whether petitioner has substantiated rental income and expenses, itemized deductions, and personal exemptions claimed on his 1976 income tax return in excess of the amounts allowed by respondent or stipulated by the parties, and (2) whether petitioner is liable for the addition to tax for negligence under section 6653(a) for 1976. FINDINGS OF FACT Petitioner resided in New York City, N.Y., on the date the petition was filed. He resided in Coral City, Fla., at the time of the trial. Petitioner was employed by Consolidated Edison Co. in New York in 1976 and received a salary of $ 21,399.75. During 1976 petitioner was married to Diedre Hertzog, who lived in an apartment in New York with their minor child. Diedre and petitioner were512 getting a divorce but because Diedre was ill and not working petitioner lived with them part of the time and provided all of their support. During 1976, petitioner was also living with Katherine Terrell at times. Katherine was living in an apartment in New York with her two minor sons by a former marriage and a minor daughter fathered by petitioner. Katherine was not employed and petitioner provided funds for the rent and their support. In late 1974 or early 1975, petitioner purchased a house and lot in Miami, Fla., for $ 28,500. The property was mortgaged and petitioner made monthly payments on the mortgage throughout 1976 which included interest and real estate taxes. The interest and taxes included within the payments made in 1976 totaled $ 1,538.92 and $ 350.10, respectively. During 1976 petitioner installed a chain link fence on the property and had some painting and redecorating done. The property was rented during most of 1976 and petitioner received as rent during 1976, $ 200 per month for 8 month plus a security deposit. Petitioner incurred various maintenance expenses for this property in 1976. In 1976, petitioner also owned a parcel of real estate in Orlando, 513 Fla, and two automobiles, all of which were mortgaged and interest was paid thereon. Petitioner's residence in New York was broken into on several occasions in 1976 and property was stolen therefrom. There breakins were reported to the New York City Police Department. Petitioner filed an individual income tax return for 1976 which was prepared by an income tax return preparer firm based on information given them by petitioner. Reported on this return was salary income from Consolidated Edison Co. in the amount of $ 21,400, a loss of $ 3,314 on the rental property, numerous itemized deductions were claimed, and exemptions were claimed for six dependents in addition to an exemption for himself. The filing status indicated was unmarried, head of household. The total tax due was reported as $ 294 and $ 3,192 was reported as tax withheld, resulting in an overpayment of $ 2,898. In his notice of deficiency, respondent increased the rental income reported, decreased allowable rental expenses, disallowed the six dependency examptions, and disallowed in full or in part most of the itemized deductions claimed on the return. The amounts of the items in issue claimed on the return514 and the amounts allowed and disallowed by respondent in the notice of deficiency are as follows: PerPer noticeItemreturnof deficiencyIncreaseRental income$ 1,000 $ 1,980$ 980Rental expenses:AllowedDisallowedInterest1,768 Real estate taxes187 Depreciation1,384 Plumbing300 Electrician200 Cleaning supplies50 Garden supplies100 Advertising275 Door50 Total expenses4,314 9843,330Itemized expenses: Gas tax228 16761Sales tax557)799278Additional sales tax520)a(auto)Interest1,647 6141,033Contributions376 200176Casualty loss3,900 03,900Tools300 150150Uniforms and cleaning200)0350Shoes150)Total itemized7,878 1,9305,948deductionsExemptions4,500 04,500OPINION Petitioner appeared at trial representing himself and testified with respect to most of the items at issue; however, he had no records or other witnesses to support his testimony. Since it appeared that petitioner had very little idea of what he needed to prove error in respondent's determinations, the Court, with the assistance of counsel515 for respondent, questioned petitioner about each of the items in dispute and asked him for proof in support of his claims. Petitioner stated that he thought he could get documentary evidence, if given time and advised about what was needed, to support many of his claims, such as the deed to the Miami property to prove its cost, statements from his mortgagees to show the amount of interest and taxes included in his mortgage payments, receipts from painters who painted the property, reports from the New York Police Department to support his casualty loss claim, and statements from GMAC and others to whom he paid interest. Since it seemed obvious that petitioner was entitled to some of the deductions disallowed by respondent for lack of substantiation, the Court left the record open for 60 days after the trial for petitioner to provide such supporting evidence to counsel for respondent and make an effort to settle at least some of the issues. The parties were directed to report to the Court on their progress at the end of the 60 days. Respondent filed such a report advising that petitioner had failed to provide any meaningful documentation to respondent, so respondent filed a memorandum516 brief requesting the Court to approve all of the adjustments made by respondent in the notice of deficiency, except several items conceded by respondent at trial which will be mentioned later. Respondent's memorandum brief was served on petitioner and the Court has waited several weeks to receive a response from petitioner but none has been forthcoming, so the Court will do the best it can to decide the issues with what it has on hand, applying our "experience with the mainsprings of human conduct to the totality of the facts." Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278. Our conclusions with respect to the items in issue for the year 1976 are as follows. Rental income and expenses. Petitioner received rental income in the amount of $ 1,800 ($ 200 per month for 8 months plus deposit). Petitioner is entitled to deduct interest in the amount of $ 1,538.92. Respondent conceded this amount at trial. Petitioner is entitled to deduct real estate taxes in the amount of $ 187. This is approximately one-half of the taxes due for the year which accrued as of January 1, 1976, and is the amount claimed on the return.The evidence suggests that a least a part of517 the property tax for 1976 was not paid by the mortgagees until 1977. Petitioner is entitled to deduct depreciation in the amount of $ 984. This results from finding a depreciable basis of $ 24,600 in the house, depreciated on a straight-line method over 25 years. Petitioner is entitled to deduct $ 400 as other rental expenses, in lieu of the amounts claimed on the return for plumbing, electrician, cleaning, garden, advertising, and door. Itemized expenses. Petitioner is entitled to deduct $ 167 in gasoline tax, the amount allowed in the notice of deficiency. Petitioner is entitled to deduct $ 799 for general sales tax, the amount allowed in the notice of deficiency. Petitioner is entitled to deduct $ 814 as interest. This includes $ 365 paid on the mortgage on property in Orlando, Fla., $ 248 paid on the auto loan to International Harvester, both of which were allowed in the notice of deficiency, and an estimated $ 200 of interest paid on an auto loan to GMAC, there being evidence that such a loan existed. Petitioner is entitled to deduct $ 200 for contributions, the amount allowed in the notice of deficiency. Petitioner is entitled to deduct $ 400 as a518 casualty loss, there being some evidence that the burglaries did occur and that some property was stolen. Petitioner is entitled to deduct only the $ 150 allowed in the notice of deficiency for tools, uniforms, and shoes. Exemptions. Petitioner is entitled to dependency exemptions for his wife, Diedre, and their minor child living with her, in addition to his own personal exemption. Petitioner has failed to carry his burden of proving that he is entitled to exemptions for Katherine and the three children living with her. In reaching the above conclusion we have given some consideration to the fact that petitioner was first audited for the year 1976 in New York and petitioner's testimony that he provided respondent's New York office with some documentation to substantiate his claims which apparently did not reach respondent's agents in Florida. Addition to tax for negligenceRespondent determined in the notice of deficiency that at least a part of the underpayment of tax was due to negligence or intentional disregard of rules and regulations and imposed the negligence addition to tax provided for in section 6653(a). Petitioner had the burden of proving error*519 in respondent's determination. Petitioner failed to carry this burden; in fact the evidence supports respondent's determination. We find for respondent on this issue. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revnue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620210/	ERIC T. AND ANN R. MUNSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; ERIC T. MUNSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMunson v. CommissionerDocket Nos. 1526-90, 13909-90United States Tax CourtT.C. Memo 1991-377; 1991 Tax Ct. Memo LEXIS 442; 62 T.C.M. (CCH) 413; T.C.M. (RIA) 91377; August 12, 1991, Filed 442 Orders granting respondent's motions for partial summary judgment will be issued. Eric T. Munson and Ann R. Munson, pro se. Steven M. Roth, for the respondent. GERBER, Judge. GERBERMEMORANDUM OPINION Respondent has moved for partial summary judgment in these cases with respect to (1) the additions to tax for fraud under section 6653(b); 1 and (2) the question of whether the period for assessment had expired for the 1979 taxable year. The motions were filed May 20 and 23, 1991, and by an order dated May 23, 1991, petitioners were allowed until June 24, 1991, to respond or object. No response or objection was received from petitioners. We find that summary judgment is appropriate in the setting of this case. See Rule 121. The burden of proof is on respondent with respect to the additions to tax under section443 6653(b). Sec. 7454(a); Rule 142(b). If respondent carries his burden of proof regarding fraud, then the tax may be assessed at any time. Sec. 6501(c)(1). Respondent, in a notice of deficiency dated October 18, 1989, determined deficiencies in income tax and additions to tax, including additions under section 6653(b) against petitioners for their 1980 and 1981 taxable years, and under section 6653(b)(1) and (2) for the 1982 taxable year. Respondent also determined, in a notice of deficiency dated April 19, 1990, a deficiency in income tax and an addition to tax under section 6653(b) against petitioner Eric T. Munson for his 1979 taxable year. Petitioners filed petitions alleging that both notices of deficiency were in error and that the period for assessment had expired with respect to the 1979 taxable year. Thereafter, respondent filed answers to each petition and made therein various affirmative allegations in support of his determination that the additions to tax for fraud were applicable. Respondent also alleged that petitioner Eric T. Munson's conviction pursuant to a plea of guilty under section 7206(1) collaterally estops his denial of overstated deductions and omissions444 of gross income for his 1981 and 1982 taxable years. Finally, respondent alleged that petitioners' tax returns filed for the years 1979 through 1982 were fraudulent. Thus, according to respondent, the period for assessment was open at the time of the mailing of the notices of deficiency. Respondent also affirmatively alleged that an increased income tax deficiency of $ 210.00 and additions to tax under section 6653(b) of $ 105.00 are due from petitioners for their 1980 taxable year. No replies to respondent's affirmative allegations, as required under Rule 37, were filed. Respondent moved, pursuant to Rule 37(c), that the undenied affirmative allegations of his answer be deemed admitted. Respondent's motions were granted. Based upon the allegations that were deemed admitted, various facts concerning petitioners may be found in support of respondent's present motions for summary judgment. Petitioner Eric T. Munson (Mr. Munson) graduated from Alaska Methodist University in June of 1974, where he majored in accounting and obtained a bachelor of science degree in business administration. Mr. Munson also attended law school for 1 year and worked as a controller, financial manager, 445 and international finance officer for the Church of Scientology during 1974, 1975, and 1976. During 1976, Mr. Munson worked for an insurance company. From 1976 through 1978 he worked as an accountant for the city of Tampa, Florida. During 1978 and 1979, Mr. Munson was a sales representative and eventually a sales manager for an insurance company. He also worked for a different insurance company during 1980, and on October 20, 1980, began working as a "grants analyst" for the city of Portland, Oregon, resigning that position on August 1, 1984. Petitioner Ann R. Munson (Mrs. Munson) received a fine arts degree from the University of Oregon in 1977 and was employed as an employment counselor until 1979. During 1979, she attended the Insurance School of Oregon, after which she obtained an insurance agent's license. Mrs. Munson then worked as an insurance sales representative until early 1980. She returned to employment counseling and remained as such until November 1981. Thereafter, she was employed by John Hancock Mutual Life Insurance Company until the end of 1982. Mrs. Munson's responsibilities included analyzing and approving or denying standard accident and health medical446 claims for group policyholders. She also authorized claim payments and prepared letters of denial. She was responsible for annual claims of about $ 750,000 to $ 1,000,000. Mr. Munson prepared the 1979, 1980, 1981, and 1982 income tax returns, and Mrs. Munson hand-copied the 1982 return before it was filed. On their 1979 through 1982 returns petitioners claimed credits for child and dependent care expenses with the intent to evade tax. Specifically, petitioners claimed deductions and credits for Mr. Munson's son from another marriage. In fact, however, that son generally did not reside with petitioners and no expenses were paid for the child care purposes claimed. During 1982, petitioner claimed to have paid Margaret Hill $ 3,773 for the care of Mr. Munson's son of his prior marriage, as well as for petitioners' infant son, born July 18, 1982. Margaret Hill did not care for the former child, but did actually receive $ 1,100 for the care of petitioners' infant son during 1982. Petitioners made similarly false claims for child care expenses on their Oregon State returns and were audited by the State concerning their 1980 and 1981 taxable years. During that audit, petitioners447 made false statements to the State auditor. Mr. Munson claimed head of household status for 1979 and claimed that the son from his former marriage resided with him. That statement was not true. For the years 1979, 1980, 1981, and 1982, petitioners inflated their claims for medical insurance and doctor and hospital bills. For their 1980, 1981, and 1982 taxable years, petitioners claimed inflated amounts for real estate taxes, home mortgage interest, and State income taxes. State income taxes were also inflated for 1979. Each of these overstated deductions were relatively large. Petitioners failed to report their State income tax refunds on their 1980 through 1982 returns. Mr. Munson failed to report $ 9,099 in insurance commissions for 1980. Petitioners failed to report $ 175.71 in interest income in 1982 and potential gains from the transfer of real property during 1981. Mr. Munson was indicted and pled guilty to knowingly and willfully making and subscribing 1981 and 1982 Federal income tax returns with deductions he did not believe to be true and correct. The following deductions were specifically referenced in the indictment to which Mr. Munson pled guilty: Amounts Claimed Deduction19811982Child care credit$ 394$ 754Medical and dental expenses1,8584,993Interest expense10,0008,208Real estate taxes1,800630State and local taxes1,8661,410Land interest expense1,500--Short-term capital loss--6,551Long-term capital loss--8,560448 The indictment also referenced the failure to report income in the total amounts of $ 1,136.00 and $ 1,925.71 for 1981 and 1982, respectively. Respondent bears the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); . Respondent is permitted to carry his burden by means of the affirmative allegations in his answer that have been deemed admitted under Rule 37(c). . Direct evidence of fraud is not always available and we may draw reasonable inferences from the record as a whole. Ultimately, we must decide whether petitioners intended to evade tax that they knew or believed to be owing. . Petitioners in this case were college educated and both had professional business experience prior to the pertinent taxable years. Mr. Munson had an accounting background and had attended 1 year of law school. Additionally, he had professional accounting experience. Based upon respondent's allegations449 and considering Mr. Munson's plea of guilty with respect to the 1981 and 1982 taxable years, we find that petitioners' returns were fraudulent within the meaning of section 6653(b) for each of the taxable years under consideration. In reaching our holding we considered, among other items, the fact that the overstated deductions were relatively large and consistent. Petitioners, had they responded, would not have been able to claim mere negligence or mistake in the setting of this case. In some instances the deductions claimed were more than 50 times greater than the amount petitioners were entitled to. Additionally, the pattern of overstated deductions was consistent over a period of 4 years. In addition to overstating deductions, petitioners fabricated both the amounts and the factual basis for their deductions. Finally, petitioners failed to report taxable income in some or all of the taxable years under consideration. Having found that each of the returns filed for the years under consideration were fraudulent, it follows that the period for assessment is open for petitioners' 1979 taxable year. Sec. 6501(c). Additionally, petitioners are liable for the increased income*450 tax and an increased addition to tax under section 6653(b) for their 1980 taxable year, as asserted in respondent's answer. To reflect the foregoing, Orders granting respondent's motions for partial summary judgment will be issued.Footnotes1. Section references are to the Internal Revenue Code of 1954 as amended and in effect for the years under consideration. Rule references are to this Court's Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620211/	JIM K. NICHOLAS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNicholas v. CommissionerDocket No. 5111-90United States Tax CourtT.C. Memo 1991-393; 1991 Tax Ct. Memo LEXIS 458; 62 T.C.M. (CCH) 467; T.C.M. (RIA) 91393; August 12, 1991, Filed 458 Decision will be entered for the respondent. Jim K. Nicholas, pro se. Joel A. Lopata, for the respondent. GOLDBERG, Special Trial Judge. GOLDBERGMEMORANDUM OPINION This case was assigned pursuant to the provisions of section 7443A(b)(3). Unless indicated otherwise, all section references are to the Internal Revenue Code as in effect for the year in issue. Respondent determined a $ 285 deficiency in petitioner's 1987 Federal income tax. The only issue for decision is whether petitioner is entitled to a claimed exemption. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioner resided in Salt Lake City, Utah, at all times herein relevant, including when he filed his petition. Petitioner and Debbie L. Fox began living together as an unmarried couple in 1980. Ms. Fox's son by a previous marriage, Quinn L. Fox, also lived with them. On February 28, 1981, Ms. Fox gave birth to petitioner's daughter, Taya Jo Nicholas. Ms. Fox accepted an engagement ring from petitioner shortly after the birth of Taya Jo in 1981. However, because of unpleasant experiences from her previous459 marriage, Ms. Fox was reluctant to remarry at that time. Nevertheless, from that point forward most people with whom petitioner and Ms. Fox were related and socially acquainted accepted them as husband and wife for all practical purposes. Petitioner and Ms. Fox intended to marry in the future. On November 17, 1989, petitioner and Ms. Fox were married by a Justice Court Judge in Weber County, Utah. Prior to this ceremony they had never exchanged any vows of marriage, either formally or informally, to one another. Nor was their previous relationship ever recognized as a legal and valid marriage by way of any court or administrative order. During the years they lived together, including 1987, Ms. Fox was a homemaker. Petitioner provided full financial support for Ms. Fox and the two children. Petitioner filed his 1987 Federal income tax return claiming head of household filing status. On his return he claimed dependency exemptions for Taya Jo Nicholas, Quinn L. Fox, and Ms. Fox. Respondent disallowed the exemption claimed for Ms. Fox. Petitioner argues that as of the close of 1987 the relationship between he and Ms. Fox constituted a legal and valid "common law" marriage under460 Utah law. Therefore, petitioner now contends that he is entitled to an exemption for Ms. Fox as his "common law" spouse. Alternatively, petitioner argues that because he provided Ms. Fox's full support during 1987 he is entitled to an exemption for her as a dependent, as claimed on his return. Respondent contends that the relationship between petitioner and Ms. Fox was not a "common law" marriage under Utah law during 1987, and, therefore, petitioner is not entitled to an exemption for Ms. Fox as his spouse. Respondent further contends that because their relationship was in violation of Utah law, petitioner is also not entitled to an exemption for Ms. Fox as a dependent. Respondent's deficiency determination is presumed correct. Petitioner bears the burden of proving otherwise. Rule 142(a), Tax Court Rules of Practice and Procedure.Exemptions provided by section 151 are allowed as deductions in computing taxable income. Sec. 151(a). Section 151(b) allows an exemption for the taxpayer and an additional exemption for the taxpayer's spouse if a joint return is not made, the spouse does not have gross income for the year, and the spouse is not the dependent of another taxpayer. 461 Section 151(c)(1) also allows additional exemptions for dependents of the taxpayer, providing certain requirements are met. Section 152(a) defines "dependent" as certain individuals "over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer." Among those included within the definition is an "individual (other than an individual who at any time during the taxable year was the spouse * * * of the taxpayer) who, for the taxable year of the taxpayer, has as * * * [her] principal place of abode the home of the taxpayer and is a member of the taxpayer's household." However, for purposes of section 152, an "individual is not a member of the taxpayer's household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law." Sec. 152(b)(5). In Utah, any unmarried person who voluntarily engages in sexual intercourse with another is guilty of fornication. Utah Code Ann. sec. 76-7-104 (1990). In 1987, the Utah legislature enacted Utah Code Ann. section 30-1-4.5 (1989), providing: 30-1-4.5. Validity of marriage not solemnized. (1) A462 marriage which is not solemnized according to this chapter shall be legal and valid if a court or administrative order establishes that it arises out of a contract between two consenting parties who: (a) are capable of giving consent; (b) are legally capable of entering a solemnized marriage under the provisions of this chapter; (c) have cohabited; (d) mutually assume marital rights, duties, and obligations; and (e) who hold themselves out as and have acquired a uniform and general reputation as husband and wife(2) The determination or establishment of a marriage under this section must occur during the relationship described in Subsection (1), or within one year following the termination of that relationship. Evidence of a marriage recognizable under this section may be manifested in any form, and may be proved under the same general rules of evidence as facts in other cases.Prior to 1987, Utah did not recognize common-law marriages. Layton v. Layton, 777 P.2d 504">777 P.2d 504, 505 (Utah App. 1989); Mattes v. Olearain, 759 P.2d 1177">759 P.2d 1177, 1181 (Utah App. 1988), cert. denied 773 P.2d 45">773 P.2d 45 (Utah 1989). The parties agree that if463 we find the relationship between petitioner and Ms. Fox met the requirements of the above statute in 1987, then it may be recognized as a legal and valid marriage in that year. See Utah Code Ann. sec. 30-1-6(1)(c) (1989). We apply the law of the State of Utah to determine whether the relationship between petitioner and Ms. Fox was a legal and valid marriage during 1987. Neither petitioner nor respondent has furnished us with any Utah cases addressing this particular issue, and we have not been able to find such authority. Therefore, in this situation, we must determine, as best we can, what the highest court of Utah would hold on the question presented. Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456, 465, 18 L. Ed. 2d 886">18 L. Ed. 2d 886, 87 S. Ct. 1776">87 S. Ct. 1776 (1967). A relationship which satisfies the requirements of Utah Code Ann. section 30-1-4.5 (1989) is recognized as a legal and valid marriage. Such a marriage places the same legal rights, duties, and obligations upon the parties as if they had entered a solemnized marriage. See generally tit. 30, Utah Code Ann. In this case, it is clear that petitioner and Ms. Fox did not intend to be married during 1987. When asked why she and petitioner waited so long464 to marry after accepting an engagement ring in 1981, Ms. Fox replied: Because my first marriage wasn't very good, * * I didn't know if I wanted to go through the legal procedures of doing it again, because it was such a pain to go through the divorce with my first husband.This testimony leads us to believe that Ms. Fox was not ready or willing to accept the legal consequences of marriage, whether solemnized or not, before she and petitioner were married in 1989. Therefore, petitioner and Ms. Fox did not meet the requirement of subsection (d) of the Utah statute. Accordingly, we find that the relationship between petitioner and Ms. Fox during 1987 did not constitute a marriage arising "out of a contract between two consenting parties." Furthermore, despite their reputation among family and acquaintances, we have some doubt as to whether petitioner and Ms. Fox held themselves out as husband and wife, as required by subsection (d) of Utah Code Ann. section 30-1-4.5 (1989). We note that petitioner did not originally claim Ms. Fox as his spouse on his 1987 Federal income tax return. Instead, he filed his return as head of household and claimed her as a dependent. Based*465 on the foregoing, we hold that petitioner and Ms. Fox did not have a valid "common law" marriage during 1987. Therefore, petitioner is not entitled to an exemption for Ms. Fox as his spouse. Furthermore, because petitioner admits that he and Ms. Fox cohabitated, and had sexual relations, during 1987, we find their relationship to be in violation of local law. Accordingly, he is also not entitled to an exemption for Ms. Fox as a dependent. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620213/	WILLIE L. AND DOROTHY M. COULTER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCoulter v. CommissionerDocket No. 8474-81.United States Tax CourtT.C. Memo 1983-18; 1983 Tax Ct. Memo LEXIS 772; 45 T.C.M. (CCH) 504; T.C.M. (RIA) 83018; January 11, 1983. Willie L. Coulter, pro se. Sara W. Dalton, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax: Addition to TaxYearDeficiencySec. 6653(a) 11977$ 628.00$31.4019781,122.0056.101979875.5343.77At issue are (1) whether petitioners are entitled to Schedule C business expense deductions and itemized deductions in excess of the zero bracket amount; and (2) whether they are liable for the additions to tax under section 6653(a). Petitioners were residents of Thrall, Texas, at the time they filed their petition773 herein. They timely filed joint Federal income tax returns for the years 1977, 1978 and 1979. Such returns were prepared by James M. Damon of Austin, Texas, who was convicted on April 28, 1981, in the United States District Court for the Western District of Texas, Austin Division, of preparing false and fraudulent returns in violation of section 7206(2) of the Code. Mr. Damon would have taxpayers, who were wage earners, report self-employment business income and deductions on Schedule C of Form 1040 incorrectly reflection substantial business losses. During the years 1977, 1978 and 1979 Willie L. Coulter was employed by Aluminum Company of America. He was not self-employed. His wife, Dorothy Coulter, was not employed in those years. The deductions petitioners claimed on Schedule C of their Form 1040 and the itemized deductions in excess of the zero bracket amount were disallowed by respondent in his notice of deficiency. On September 22, 1982, respondent served on petitioners a Request for Admissions pursuant to Rule 90. 2 Paragraphs 6 and 7 of the request for admissions read as follows: 774 6. Petitioners are entitled to no itemized deductions for 1977, 1978, and 1979 in excess of the standard deduction. 37. Petitioners are entitled to no business expense deductions in 1977, 1978, and 1979. Petitioners have not answered any of the admissions set forth above. Thereafter, pursuant to Rule 90(c) and (e), each matter contained in respondent's request is deemed admitted for the purposes of this case. Freedson v. Commissioner,65 T.C. 333">65 T.C. 333, 335 (1975), affd. 565 F.2d 954">565 F.2d 954 (5th Cir. 1978). When this case was called for trial at San Antonio on December 6, 1982, the petitioners offered no evidence in support of the assignments of error raised in their petition. Instead, they filed a memorandum which asserted their positions, as follows: 1. Petitioners will exercise their rights under U.S. Constitution in the Bill of Rights-Fifth Amendment Plea in reference to the release of personal files and papers to verify our Form 1040. 2. Petitioners filed a correct and signed 1040 form with the Internal Revenue Service under775 the penalty of perjury. Therefore petitioner sees no further reason to verify such a document. 3. Petitioners request that Internal Revenue prove why my deductions should not be allowed through their own independent investigation of petitioners. 4. Petitioners deductions were disallowed because of our association with a tax consultant who committed fraud. Petitioners request Internal Revenue's legal reference for its decision. 5. Petitioners request that respondent prove each and every allegation to disallow our deductions on the 1040 forms submitted in the years 1977, 1978, and 1979. We reject petitioners' Fifth Amendment claim. The privilege against self-incrimination under the Fifth Amendment to the United States Constitution does not apply where the possibility of criminal prosecution is remote or unlikely, and remote or speculative possibilities of prosecution for unspecified crimes are not sufficient. Rechtzigel v. Commissioner,79 T.C. 132">79 T.C. 132 (1982), on appeal (8th Cir., Aug. 30, 1982); Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1174 (1981); Burns v. Commissioner,76 T.C. 706">76 T.C. 706 (1981); Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 637-638 (1979);776 Ryan v. Commissioner,67 T.C. 212">67 T.C. 212, 217 (1976), affd. 568 F.2d 531">568 F.2d 531, 539 (7th Cir. 1977); Roberts v. Commissioner,62 T.C. 834">62 T.C. 834, 837-838 (1974); Figueiredo v. Commissioner,54 T.C. 1508">54 T.C. 1508, 1511-1512 (1970), affd. in an unpublished order (9th Cir., March 14, 1973). Here the Court is satisfied that any possible danger of self-incrimination for a tax or nontax crime is so remote and so speculative that it cannot support a Fifth Amendment claim. We also think their Fifth Amendment claim is frivolous since respondent's counsel represented to the Court that no criminal tax prosecution of petitioners has been recommended and no such action is contemplated. 4 See Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268 (9th Cir. 1982); United States v. Johnson,577 F.2d 1304">577 F.2d 1304, 1311 (5th Cir. 1978); Watson v. Commissioner,690 F.2d 429">690 F.2d 429 (5th Cir. 1982). *777 Contrary to petitioners' contention, respondent does not have the burden of proof. His determination is presumed to be correct. Petitioners have the burden of proving that respondent's determination in regard to the deficiencies and additions to tax is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.They have introduced no evidence and they have failed to carry their burden. Therefore, we sustain respondent's determination in all respects. 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.↩2. All rule references are to the Tax Court Rules of Practice and Procedure.↩3. We note that the zero bracket amount replaced the standard deduction for the years 1977 and thereafter.↩4. After this case was submitted the petitioners filed a motion for an in-camera review of their records by the Court in their effort to justify the assertion of their Fifth Amendment privilege. The motion was denied on the authority of In re U.S. Hoffman Can Corp.,373 F.2d 622">373 F.2d 622, 628-629↩ (3d Cir. 1967).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620216/	APPEAL OF J. B. DAVIDSON.Davidson v. CommissionerDocket No. 2680.United States Board of Tax Appeals2 B.T.A. 1203; 1925 BTA LEXIS 2118; November 6, 1925, Decided Submitted June 18, 1925. 2118 George H. Schutte, C.P.A., for the taxpayer. Blount Ralls, Esq., for the Commissioner. 1203 Before STERNHAGEN, LANSDON, and LOVE. This appeal is from the determination of a deficiency in income tax for the year 1921 in the amount of $957.50. The only issue involved is whether the unextinguished useful value of parts of a building demolished in 1921 should be deducted from the taxpayer's income for that year as a loss. FINDINGS OF FACT. The taxpayer is an individual who resides in Newark, N.J., where he is engaged in practice as a dental surgeon. He began the practice of dentistry in 1907, and has continuously maintained his offices at 516 Broad Street. During the World War he served abroad with 1204 the American Expeditionary Forces as a dentist and dental surgeon. While he was absent his business in Newark was carried on under his name by various assistants. When he began the practice of dentistry, the taxpayer leased the building which he now owns from the North Reformed Church, a corporation, for a period of five years, and renewed and continued the lease at the end of each five-year period, the last term beginning March 1, 1918. 2119 Upon his return from foreign service in 1919, he found that an option to purchase the building had been taken by a real estate dealer, and that he would either have to buy the premises or remove his offices to some other location. Believing that the practice of his profession for so long in one locality had established a valuable acquaintance, reputation, and good will that would be lost in the event of his removal, the taxpayer purchased the building in 1920 for a consideration of $57,000. For various reasons the taxpayer was unable to regain the large and lucrative dental practice that he enjoyed before the war and, some time in 1920, after the purchase of the building, he decided to abandon the field of general dentistry and establish an operating hospital for use in the practice of dental surgery. This building was not suitable for the purposes that he had in mind, as it was an old three-story brick dwelling house, which could not be remodeled for use as a dental hospital without great expense. At the hearing the taxpayer testified to the work of demolition and reconstruction as follows: We employed an engineering firm by the name of Enster Brothers, who took down our*2120 stairways, every partition in the building, completely removed the front, the back wall, and reconstructed with steel, brick and stone, the front portion, the same with the rear, fixed up the second floor, between the first and the second floors, inserted new stairways and completed it and repartitioned it as per our requirements, and making it within the building requirements of the city. More particularly describing the parts demolished, the taxpayer testified that the whole building, except the foundation, roof, beams, and two side walls was torn down, and that the cost of the reconstruction was about $35,000. The taxpayer further testified that the architect in charge of the reconstruction estimated that the parts of the building demolished had an unextinguished useful value of $7,418, and that he realized $2,000 from salvage. Upon audit of the taxpayer's income-tax return for the calendar year 1921, the Commissioner disallowed as a deduction from gross income the amount of $5,418 as a loss of useful value resulting from the voluntary demolition of the building in question. DECISION. The determination of the Commissioner is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620217/	Melisa Bankston v. Commissioner.Bankston v. CommissionerDocket No. 50612.United States Tax CourtT.C. Memo 1955-163; 1955 Tax Ct. Memo LEXIS 175; 14 T.C.M. (CCH) 627; T.C.M. (RIA) 55163; June 23, 1955175 J. Edward Johnson, Esq., Life of America Building, Dallas, Tex., for the petitioner. Carswell H. Cobb, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $345.79 in income tax for 1950. The only issue is whether the petitioner should be denied a deduction of $1,000 for a non-business bad debt either because the debt was worthless from the beginning or because it still had value at the end of 1950. Findings of Fact The petitioner filed her individual income tax return for 1950 with the collector of internal revenue for the second district of Texas. The petitioner and M. W. Bankston were divorced in 1944. He became indebted to her several years later as the result of the payment by her with her own funds of an amount which, as between them, he had contracted to pay. He was in poor financial condition at the time but was employed by a corporation of which the petitioner was a stockholder, officer and employee. He and the petitioner entered into a contract on January 21, 1949, in which he acknowledged his indebtedness to the petitioner in the amount of $5,000 and agreed to repay that amount to176 her. They agreed to a method of payment in which he gave his note for $5,000 with interest at 6 per cent to the corporation and made an assignment permitting payments to be made from his wages to the petitioner until payment in full of the $5,000 debt had been made. The petitioner, through her connection with the employer, knew of the amounts earned by M. W. Bankston and decided what portion thereof should be paid to her so that the debtor would have sufficient money upon which to live. She received payments on the debt during 1949 and until June 1950 at which time M. W. Bankston left the employ of the corporation in order to avoid making further payments to the petitioner and thereafter the petitioner received no further payments on the indebtedness. The petitioner in her return for 1950 reported a non-business bad debt in the amount of $3,866.12 due her from M. W. Bankston and claimed $1,000 as an allowable deduction. The Commissioner, in determining the deficiency, disallowed the $1,000 and explained that it was not allowable in whole or in part under section 23(k) "for the reason that it has not been established that such a debt in any amount ever existed between M. W. Bankston177 and yourself, or, if a debt did exist, that it became worthless within the taxable year 1950." M. W. Bankston was indebted to the petitioner in 1949 in the amount of $5,000. The petitioner paid out in excess of $5,000 in creating the indebtedness. That indebtedness was not worthless during 1949 or at the beginning of 1950. It became worthless during 1950. Opinion MURDOCK, Judge: Counsel for the Commissioner stated at the opening of the trial of this case the grounds upon which the Commissioner would rely to defend the disallowance of the claimed deduction. He was satisfied, apparently, by the evidence thereafter introduced that some of the stated grounds were not sound and he did not mention or urge them in his briefs. He limited his argument in his main brief to the contention that the debt still had value at the end of the taxable year 1950. He filed a reply brief "to call attention to an admission made by the petitioner in her original brief" that the note "never had any value at forced sale" but value only in her hands because of the concurrent arrangements for salary deductions to be paid to her." One of the grounds mentioned in his opening statement was that the note never178 had value. He also mentioned in his reply brief a ground which is not discussed herein because it is not mentioned in his opening statement and is refuted by the evidence and findings. Decision will be made upon the issue as thus fairly presented and understood by the opposing parties. The evidence shows that the debt had value during 1949 and at the end of that year. Substantial payments were made on it during that year. Likewise, the evidence shows that the only means which the petitioner had of collecting this debt was from the earnings of M. W. Bankston while he was a co-employee with the petitioner of the corporation, and when he left that employer for the express purpose of avoiding further payments to her, she was unable to collect any more on the debt due her. The Commissioner has shown that the debtor, shortly after leaving the employment above mentioned, obtained new employment in a nearby town from a company operated by one of his sons and there earned income of $2,900 during the remainder of 1950. The record shows, however, that M. W. Bankston was insolvent. He was heavily indebted to the Federal Government which was unable to collect from him. The conclusion has been*179 reached from all of the evidence that the petitioner's debt from her former husband became worthless in 1950. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620218/	Karel Waterman, Petitioner v. Commissioner of Internal Revenue, RespondentWaterman v. CommissionerDocket No. 45258-86United States Tax Court91 T.C. 344; 1988 U.S. Tax Ct. LEXIS 112; 91 T.C. No. 28; August 24, 1988August 24, 1988, Filed 112 A timely petition was filed on Nov. 25, 1986. On Jan. 9, 1987, R's counsel moved to extend the time within which to file an answer on the ground that the administrative file and exhibits necessary to allege fraud had not yet been located. Such motion was granted. On Apr. 3, 1987, R's counsel filed an answer although the necessary file and exhibits still had not been found. On May 1, 1987, R's counsel located and obtained the files and on June 29, 1987, filed a motion for leave to file an amended answer. Held, the relevant period for evaluating R's diligence includes only the time after the petition was filed. Vermouth v. Commissioner, 88 T.C. 1488">88 T.C. 1488 (1987), followed. Held, further, since no prejudice to petitioner resulted from the delay, and since R established that he exercised reasonable diligence in locating the files, R's motion will be granted. Mark D. Pastor, for the petitioner.Glorianne Gooding, for the respondent. Clapp, Judge. CLAPP345 OPINIONThis matter is before us on respondent's motion for leave to file an amended answer. Pursuant to an order, an evidentiary hearing was held in Pasadena, California, on113 September 17, 1987.Factual BackgroundThe years in issue in the underlying case are 1959, 1963-1966, and 1968. Petitioner failed to file tax returns for any of these years. Beginning in 1970, a joint investigation into petitioner's business activities was conducted by special agents and revenue agents of the Internal Revenue Service. The revenue agent submitted a report dated October 15, 1970. Additionally, in March 1972, criminal indictments were filed against petitioner for failure to file income tax returns for the tax years 1965 and 1966. In February 1980, the Department of Justice declined to prosecute, and the indictments were dismissed by the District Court.In 1983, Revenue Agent Guy Hoppe was assigned to conduct the civil examination of the case. At the time he began the examination, Hoppe did not have in his possession the special agent's report and the exhibits that had been attached thereto. Hoppe inquired of the Criminal Investigation Division as to the whereabouts of the files and also searched for the records at the Federal Records Center in Laguna Niguel, California, but was unable to locate the files. While searching for the files at the Federal Records114 Center, Hoppe came across an employee of the U.S. attorney's office who recognized the case name and told Hoppe that the records were at the U.S. attorney's office. Hoppe thereafter obtained the records including the necessary exhibits.Hoppe initially contacted petitioner's counsel on March 23, 1983, for the purpose of arranging an initial appointment to discuss the case. Approximately 14 months later, on May 3, 1984, Hoppe had his first meeting with petitioner's counsel. The audit and examination were conducted from May 3, 1984, to May 24, 1984. At the final meeting, Hoppe discussed with petitioner's counsel different theories 346 for treating the relevant transactions as taxable events. No agreement was reached, and in August 1984, Hoppe sent the case forward as unagreed.When he closed the file, Hoppe retained the exhibit file and forwarded the remainder of the file to the reviewer. The retention of the exhibits was a departure from the normal procedure used by respondent. Hoppe personally knew the person who would be assigned to review the case, and he included in the file a note to the effect that he was holding the exhibit file. In doing this, Hoppe believed that115 his action would prevent the file from getting lost a second time. The note or memorandum stating that Hoppe had retained the exhibit file was subsequently lost or misplaced.On August 25, 1986, respondent issued a statutory notice of deficiency which included the determination of additions to tax for fraud. A timely petition was filed on November 25, 1986, and was served on respondent on December 2, 1986. On December 31, 1986, respondent's counsel, Glorianne Gooding, was assigned the case. In January 1987, respondent's counsel made written and verbal requests to the Appeals and Criminal Investigation Divisions for the administrative files. On January 9, 1987, respondent's counsel moved to extend the time within which to answer the petition from February 2, 1987, to April 2, 1987, on the ground that the administrative file, from which respondent could draft an answer, had not yet been located. That motion was not opposed by petitioner and was therefore granted on January 20, 1987.From early January to March 27, 1987, respondent's counsel made numerous attempts to locate the special agent's report and the exhibits which formed the basis for the determination of the fraud addition. 116 These efforts included contacting individual members of the Criminal Investigation Division Office who were originally responsible for the joint investigation as well as visiting the U.S. Federal Courthouse in Los Angeles on the possibility that the exhibits which formed the basis for the criminal information might still be on file with the District Court. On February 24, 1987, Criminal Investigation Division records office located two small files, neither of which included the administrative records or the exhibits needed 347 by respondent to allege fraud. On March 13, the Appeals Division located a portion of the administrative files but not the special agent's report or the exhibits. On March 25, 1987, respondent's counsel was advised by the Facilities Management Branch that a records transmittal receipt indicated that the exhibits were in storage at the Federal Records Center in Laguna Niguel. On March 27, 1987, respondent's counsel visited the Federal Records Center and, after an extensive search by the center's employees, was informed that, although internal verification of the exhibits' shipment to the storage facility existed, the exhibits were either misfiled or117 had never arrived.Since respondent's counsel had no documentary evidence supporting affirmative allegations of fraud, on April 3, 1987, respondent's counsel filed an answer to the petition which omitted affirmative allegations of civil fraud.On May 1, 1987, respondent's counsel telephoned Revenue Agent Hoppe and discovered that he had retained the necessary exhibits and was still holding them. From May 1 to June 26, 1987, respondent's counsel met with Hoppe to discuss the case and prepare an amended answer. On June 29, 1987, respondent filed a motion for leave to file an amended answer. The proposed amended answer includes affirmative allegations of fraud and also asserts an additional theory of liability which would increase the deficiency and additions to tax for fraud. On July 14, 1987, petitioner filed his opposition to respondent's motion for leave to file an amended answer.DiscussionRule 41(a), Tax Court Rules of Practice and Procedure, provides in relevant part that a pleading to which no responsive pleading is permitted may be amended at any time within 30 days after it is served if the case has not yet been placed on a trial calendar. Otherwise, the pleading 118 may be amended only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.Petitioner relies on Vermouth v. Commissioner, 88 T.C. 1488">88 T.C. 1488 (1987), and asserts that respondent's bureaucratic inertia has prejudiced petitioner; therefore, respondent 348 should be precluded from amending his answer. Petitioner points out an unexplained 3-year period between the time criminal charges were dismissed and the time he was contacted by a revenue agent to reopen the civil examination, as well as a 2-year period between the close of the examination and the issuance of the statutory notice of deficiency. Petitioner claims that these delays have created severe handicaps for him in trying to assemble evidence concerning tax events which occurred more than 20 years ago. Petitioner asserts that respondent has had the relevant information in his possession for more than 15 years and that respondent should not be allowed to correct his failure to act on this information earlier.Petitioner also claims he is prejudiced by a lack of notice with respect to the additional theory respondent would assert in119 the amended answer.Respondent argues that the relevant time period to be used in judging respondent's diligence and reasonableness is the time between the filing of the petition and the lodging of the proposed answer, not the entire time the matter has been in controversy. Respondent asserts that he exercised due diligence within this period in attempting to locate the necessary files and exhibits, and that petitioner will not be prejudiced by the delay in filing the amended answer. Furthermore, respondent disputes petitioner's claim that he did not have notice that alternative theories of liability could be pursued.We are not persuaded by petitioner's arguments that he has been prejudiced by respondent's delay in issuing the notice of deficiency. In this regard, petitioner's reliance on Vermouth v. Commissioner, supra, is misplaced. First, petitioner incorrectly states that Vermouth did not restrict the evaluation of respondent's diligence to the period of time in which District Counsel was involved. Petitioner's claim that the relevant period includes the entire time since 1969, when petitioner was first interviewed by the Internal Revenue120 Service, represents an unwarranted extension of Vermouth. In Vermouth, we concluded that respondent was deficient in exercising reasonable diligence, and in reaching that conclusion, we limited our review of respondent's actions to the period after the petition was filed.349 Since Vermouth, this Court has also decided Betz v. Commissioner, 90 T.C. 816">90 T.C. 816 (1988). There we also concluded that respondent failed to establish that he had exercised reasonable diligence to ensure that his answer was timely filed. Again, in considering the matter, we limited our review to respondent's actions in the post-petition period.To avoid any future attempts to characterize Vermouth more expansively than we intended, we now clearly state that in cases such as these where we must evaluate respondent's diligence and reasonableness, our inquiry is limited to respondent's actions, or inaction, in the period following the filing of the petition.Petitioner's argument with regard to prejudice resulting from respondent's delay in issuing a statutory notice of deficiency is not a proper basis for objecting to respondent's motion for leave to file an amended121 answer. This argument is essentially an attack on the validity of the notice of deficiency and is inappropriately raised at this time. A trial before the Tax Court is a proceeding de novo, and absent substantial evidence of unconstitutional conduct by respondent, we generally will not look behind a notice of deficiency to examine respondent's motives or procedure leading to his determination. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324 (1974).In determining whether justice requires granting respondent's motion to file an amended answer, we direct our inquiry to whether petitioner has been prejudiced by the 12-week period which lapsed between the time respondent's counsel filed her answer and the time she moved to file an amended answer. There is no evidence in the record which would support a finding that petitioner has been prejudiced by this delay.Furthermore, we conclude that the delay was not due to a failure on the part of respondent to exercise reasonable diligence. In this regard, we note that Vermouth v. Commissioner, supra, is factually distinguishable from the case at issue here. In Vermouth122 , respondent's answer was initially due October 7, 1985. On October 1, 1985, respondent's counsel telephoned the Appeals Division several times in an effort to obtain the administrative file which was necessary to draft an answer including sufficient facts to make 350 affirmative allegations of fraud. Respondent's counsel was told that the case had not yet been received. Thereupon respondent's counsel requested and received a 60-day extension of time from October 7 to December 6, 1985. On November 21, 1985, respondent's counsel again telephoned the Appeals Division to inquire as to the whereabouts of the administrative file. The Appeals Division was still unable to locate the file. On November 25, counsel wrote a memorandum to the Chief of Appeals, Los Angeles District, requesting that he make every effort to get the administrative file to respondent's counsel to enable her to make the affirmative allegations for fraud. That memorandum apparently was ignored. On November 29, respondent requested an additional 60 days in which to file the answer. The taxpayer objected to the second motion and requested that sanctions be imposed. We concluded there that respondent's failure123 to proceed expeditiously was attributable primarily to bureaucratic inertia and not to conditions beyond respondent's control.These facts are clearly distinguishable from those in the matter now before us. Here, respondent's counsel made numerous attempts to track down the necessary administrative file. This case is also distinguishable from Betz v. Commissioner, supra, where respondent filed a motion for leave to file answer out of time almost 2 years after the petition was filed. The record there revealed that an answer and certificate of service were timely prepared; however, the answer was never received by the Court, nor was a copy of the answer ever received by taxpayer's counsel. We concluded there that respondent failed to take any steps to ensure that the answer had been mailed to or received by the Court. By contrast, here respondent's counsel steadfastly pursued the matter of the missing file even after she had filed an answer.The delay here was due to Agent Hoppe's retention of the crucial file. Thus, it resulted not from a lack of reasonable diligence but rather from Hoppe's desire to avoid the very bureaucratic inertia which we 124 criticized in Vermouth. Accordingly, we conclude that respondent exercised reasonable diligence under the circumstances and that no sanction in the form of a denial of respondent's motion is warranted. 351 Furthermore, although Agent Hoppe's efforts were well-intentioned, and perhaps understandable in light of the difficulty he had encountered in locating the file, in the end, he created precisely the problem he sought to avoid.We turn now to petitioner's claim that respondent's amended answer proposes an entirely new theory of liability and would operate to prejudice petitioner because he had no notice that respondent would assert such a theory. We are not persuaded by this argument. Respondent's amended answer proposes to recharacterize a transaction to allege that petitioner received income from a sale in 1963, rather than income from the discharge of indebtedness in 1968, as was set forth in the notice of deficiency. The record reveals that a variety of theories concerning this transaction were discussed during the examination process with petitioner's counsel. Petitioner was, therefore, put on notice that the transaction and the surrounding facts were in issue. *125 In any event, respondent is entitled to assert alternative and inconsistent theories. Rule 31(c), Tax Court Rules of Practice and Procedure. Further, we note that in respect of any new matter, allegations of fraud, increases in deficiency, and affirmative defenses pleaded in his answer, the burden of proof is upon the respondent. Rule 142(a), Tax Court Rules of Practice and Procedure. For the foregoing reasons, we conclude that petitioner has failed to show that he would be prejudiced by allowing the answer to be amended.We have concluded that the delay involved here has not prejudiced petitioner and was not due to a lack of reasonable diligence on the part of respondent. Therefore, respondent's motion for leave to file an amended answer will be granted.An appropriate order will be issued.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620221/	Kathleen Murphy v. Commissioner.Murphy v. CommissionerDocket No. 6249-69.United States Tax CourtT.C. Memo 1971-175; 1971 Tax Ct. Memo LEXIS 152; 30 T.C.M. (CCH) 749; T.C.M. (RIA) 71175; July 26, 1971, Filed Allan D. Hill, for the respondent. RAUMMemorandum Opinion RAUM, Judge: The Commissioner determined the following deficiencies in petitioner's income tax for the calendar years 1966 and 1967: YearDeficiencySec. 6651(a)I.R.C. 1954Additions to TaxSec. 6653(a) I.R.C.1954Sec. 6654(a)I.R.C. 19541966$ 2,362.00$ 386.84196722,625.385,656.35$1,131.27$724.01The Court has been informed by respondent's counsel that the addition to tax under section 6654(a) was erroneously overstated to the extent of $12.54, and that the correct amount of that addition should153 be $711.47. The deficiencies were based upon the following adjustments, as explained by the Commissioner in his determination of deficiency: (a) It is determined that you realized interest income in 1966 of $3,427.10 in lieu of $125.60; and $4,145.05 in 1967 in lieu of none, as reported on your income tax returns for those years. Accordingly, your taxable income is increased $3,301.50 for 1966, and $4,145.05 for 1967, as shown below: 19661967Installment sale - Malibu property$3,301.50$3,714.18Saddle Creek Property 0.00430.87Increase in taxable income$3,301.50$4,145.05(b) It is determined that you realized long term capital gains in 1966 of $283.13, and $43,615.08 in 1967 which were not reported on your income tax returns for those years. Accordingly, your taxable income is increased $283.13 for 1966, and $43,615.08 for 1967, as shown in Exhibit A. (c) The deduction of $31,431.87 claimed on your 1966 income tax return for interest paid is allowed to the extent of $23,427.62 since you failed to establish that you are entitled to any deduction in excess of $23,427.62. It is further determined that you are allowed an interest deduction154 in 1967 of $21,346.21 which was not previously claimed by you on any income tax return for that year. Accordingly, your taxable income for 1966 is increased $8,004.25, and decreased $21,346.21 for 1967, as follows: 19661967Amount claimed per re-turn$31,431.87$ .000Amount allowed:23,427.62Dean Witter(8,743.73)Coast Bank(529.91)General Realty(9,963.29)Ventnor of Pacific- Partnership(2,109.28)Increase (decrease) in taxable income$ 8,004.25($21,346.21)(d) The deduction of $12,116.67 claimed on your 1966 income tax return for taxes paid is allowed to the extent of $866.29 since you failed to establish that you are entitled to any deduction in excess of $866.29. It is further determined that you are allowed a deduction of $5,174.04 in 1967 for taxes previously not claimed. Accordingly, your taxable income is increased $11,250.38 in 1966, and decreased $5,174.04 in 1967, as follows: 19661967Amount claimed per re- turn$12,116.67$ 0.00Amount allowed 866.29* 5,174.04Increase (decrease) in taxable income$11,250.38[5,174.04)155 (e) It is determined that you received dividend income in 1967 in the amount of $14,204.43 after the Section 116 exclusion which you failed to report on any income tax return. Accordingly, your taxable income is increased $14,204.43, computed as follows: SourceAmountBrokerage statements$10,721.43Mills Land1,333.00New York Life1,200.00Standard Oil100.00Western Pacific Gas450.00Pacific Hawaiian Products250.00Tennessee Gas 250.00Total$14,304.43Less: Dividend exclusion 100.00Increase in taxable income$14,204.43(f) It is determined that you realized income in 1967 from the Edward W. Murphy Trust No. 95-6020887 in the amount of $15,812.76 which you did not report on any income tax return for that year. Accordingly, your taxable income is increased $15,812.76. (g) It is determined that you are allowed personal exemptions in the amount of $1,200.00 for 1967 in accordance with Section 151 of the Internal Revenue Code of 1954. The additions to tax were explained by the Commissioner in the determination of deficiency as follows: Since your income tax returns for the taxable years 1966 and 1967 were not156 filed within the time prescribed by law and you have not shown that such failure to timely file your returns, was due to reasonable cause, 25 percent of the tax is added as provided by Section 6651(a) of the 1954 Internal Revenue Code. It is determined that part of the underpayment of tax for the taxable year ended December 31, 1967, is due to negligence or intentional disregard of rules and regulations. Consequently, the 5 percent addition to the tax provided by Section 6653(a) is asserted for that year. Since you underpaid your estimated tax for the taxable year ended December 31, 1967, the addition to the tax provided by Section 6654 of the Internal Revenue Code is asserted for that year. The taxpayer's allegations in the petition in their entirety are as follows: 1. Defendant requests the Court to redetermine the defendant's constitutional rights for the years 1966 and 1967, asserted in the notice from the Commissioner of Internal Revenue dated September 12, 1968, copy of which is attached. 2. Defendant's tax returns for the years here involved were filed with the Director of Internal Revenue, Los Angeles, California, and specifically stated that157 defendant did and would not waive any constitutional rights. 3. Defendant disputes manner in which the Internal Revenue Service is trying to deprive the defendant from enjoying her constitutional rights. 4. The Commissioner has alleged too many conclusions. a. All of these conclusions have been pointed out in current correspondence and previous correspondence. b. The Commissioner has attempted by the original petition to force me to become a plaintiff. (a violation of my constitutional first amendment rights.) 5. Defendant asserts the following facts to support the assignments of errors set out in paragraph 4: a. The Commissioner is attempting to coerce me under duress to acknowledge that I will accept the fine which he has imposed without a jury trial. This is a violation of my constitutional rights as they are guaranteed in Article 1 Section 9 Clause 4 of the constitution. The petitioner failed to appear on Monday, June 28, 1971, at the call of the calendar, after due notice. Thereafter, on the same day, the Court announced that this case was set for trial on Wednesday, June 30, 1971. When the case was called for trial on Wednesday, June 30, 1971, there was no apearance158 by or on behalf of the petitioner, and the Government moved orally that the case be dismissed for failure properly to prosecute. The Court stated that the motion would be granted and that judgment would be entered against the petitioner in the amounts determined by the Commissioner, as revised downward by his concession in respect of the section 6654(a) addition to tax that was noted above. The Court also indicated, and we now repeat, that the petition fails to allege any facts which, if true, would establish error in any of the adjustments or determinations made by the Commissioner in his notice of deficiency, and it is for that reason as well that Decision will be entered for the respondent in the revised amounts set forth above. 751 Footnotes*. Property taxes paid to Los Angeles County in 1967.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620223/	William E. Chandler, Jr. v. Commissioner.Chandler v. Comm'rDocket No. 3016-71.United States Tax CourtT.C. Memo 1972-193; 1972 Tax Ct. Memo LEXIS 65; 31 T.C.M. (CCH) 945; T.C.M. (RIA) 72193; September 5, 197265 William E. Chandler, Jr., pro se, 781 E. Miracle Strip Pkwy., Mary Esther, Fla.Frank Simmons and George W. Calvert, for the respondent. FEATHERSTON66 Memorandum Findings of Fact and Opinion FEATHERSTON, Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows: Additions to TaxI.R.C. of 1954YearAmountSec. 6651(a)Sec. 6653(a)1962$ 760.90$ 190.23$ 38.0519642,775.74863.92172.7819656,886.011,721.50344.3019666,340.401,585.10317.0267 The following issues are presented for decision: (1) Whether petitioner, in 1962, sustained a deductible casualty loss under section 165(a) 1 when his household goods and personal effects were destroyed by fire; (2) Whether petitioner, in 1962, sustained a business operating loss under section 165 (a) in excess of $1,400 when the merchandise and other assets of his bookstore were sold in partial satisfaction of his unpaid tax liabilities; and (3) Whether petitioner is entitled, under section 172, to an operating loss carryover from68 1962 to 1964, 1965, and 1966. Findings of Fact William E. Chandler, Jr. (hereinafter referred to as petitioner), was a legal resident of the State of Florida on May 5, 1971, the date on which his petition was filed. He did not file timely income tax returns for 1962, 1964, 1965, and 1966. 1. The Casualty Loss In 1962, petitioner and his family decided to move to California. On October 23 of that year, their household goods and personal effects were picked up by Aero Mayflower Transit Company, Inc. (sometimes hereinafter Mayflower) for shipment from Columbia, South Carolina, to San Francisco, California, via a van line truck. Enroute the truck and its contents were destroyed by fire. Within 20 to 30 days after the fire, in late November 1962, petitioner prepared a list of his goods which were destroyed and presented it to Mayflower in support of a claim for reimbursement. Mayflower responded that its liability was limited to 30 cents per pound in accordance with a tariff approved by the Interstate Commerce Commission. Under the position69 taken by Mayflower, petitioner would have recovered approximately $1,860. The destroyed property had a substantially greater value. In April of 1963, petitioner filed a negligence suit against Mayflower for damages of $75,000 ($40,000 actual and $35,000 punitive damages). At the end of the trial, which occurred in 1964 or 1965, the District Judge directed a verdict for Mayflower. Petitioner took an appeal to the Court of Appeals which affirmed the District Court's judgment as to punitive damages but remanded to the District Court the issue as to actual damages. The Appellate Court's opinion is reported as Chandler v. Aero Mayflower Transit Company, 374 F. 2d 129 (C.A. 4, 1967). After the Court of Appeals handed down its opinion, petitioner and Mayflower effected a compromise settlement of the suit, and, in 1968, petitioner received $9,000 as reimbursement for his loss. Petitioner had incurred expenses of approximately $2,700 in prosecuting his claim. 2. The Business Loss In 1959, petitioner established the June Chandler Book Store (sometimes hereinafter the store) as a sole proprietorship in Columbia, South Carolina. His general objective was to attempt70 to obtain part of the market in the State for educational and religious books, including textbooks. To promote book sales, petitioner spent a great deal of time meeting with school administrators, attending school library conventions, and talking with school officials. During the period of the operation of the store, the retail price of its books ranged from $1 to $12.95 each. The average retail price of books in the inventory in August 1962 was $6 each. The books and fixtures in the store were seized and sold in November 1962 by the Internal Revenue Service for nonpayment of taxes. At the time the store was seized, Internal Revenue Service personnel categorized and counted all of the books. At that time, the inventory consisted of 6,000 books. Petitioner owed $7,000 to publishers for books included in this inventory. After the seizure and prior to the sale, notice of the pending sale was published in a newspaper 10 to 11 days. In addition, two school districts were contacted, and each district sent a representative to the store to examine the books. The sale was held, and the highest bid for all the books and fixtures was $4,200. They were sold for this amount to the Dentsville71 Area Schools. The records of the Internal Revenue Service indicate that petitioner had the following amounts of adjusted gross income, taxable income, and income tax liability for 1959, 1960, and 1961: AdjustedTaxableIncomeYearGross IncomeIncomeTax1959$10,297.59$6,297.59$1,305.4719605,688.052,188.05441.3719616,814.223,132.80626.56Opinion Petitioner did not file timely income tax returns for 1962, 1964, 1965, and 1966, the years here in controversy, and respondent determined deficiencies and additions to tax for each of these years in the amounts set forth above. Petitioner directly challenges the correctness of respondent's determinations only for 1962, and for that year he claims adjustments only for (1) a casualty loss in connection with the destruction of his household goods and personal effects by fire, and (2) a business loss realized on the foreclosure sale of the inventory and fixtures of his bookstore. He claims the benefit of the carryover losses for the other years. 1. The Casualty Loss Section 165(a), as limited by section 165 (c)(3), allows as a deduction by an individual taxpayer "any loss sustained72 during the taxable year and not compensated for by insurance or otherwise," including a loss which arises from fire. 2 Under section 1.165-7, Income Tax Regs., the amount of the deduction for such loss is the lesser of either (1) the amount of the fair market value of the property immediately before the casualty, reduced by the fair market value of the property immediately after the casualty, or (2) the amount of the adjusted basis in the property. The deduction is, of course, reduced by any loss reimbursement received by the taxpayer. Respondent does not deny that petitioner's household goods were completely destroyed in 1962. However, respondent contends (1) that the loss was not "sustained" in that year within the meaning of section 165(a) and, if deductible, is not allowable as a deduction until 1968, when petitioner's claim against Mayflower was settled, 73 and (2) that petitioner has not established either the fair market value of his destroyed property or his basis therein. We turn first to the question whether, within the meaning of section 165(a), the loss was "sustained" in 1962, when the fire occurred, or in 1968, when the Mayflower lawsuit was settled. In this connection, section 1.165-1(d)(2)(i), Income Tax Regs., as follows, is instructive: If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. 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. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, 74 or by an abandonment of the claim. * * * In Louis Gale, 41 T.C. 269">41 T.C. 269, 273-274 (1963), this Court explained that this regulation reflected an effort to conform the Treasury Department position with the reasoning of the Court of Appeals in Scofield's Estate v. Commissioner, 266 F. 2d 154 (C.A. 6, 1959). In that case, as in the instant one, the taxpayer in one year had lost his property and in a later year had settled a lawsuit in which he sought damages to compensate him for his loss. The Court of Appeals stated (266 F. 2d at 159): Normally where a taxpayer is in good faith willing to go to the trouble and expense of instituting suit to recoup a * * * [section 165(a)] type loss, there is as a matter of fact sufficient chance of at least part recovery to justify that taxpayer in deferring the claim of a loss deduction under Section * * * [165(a)] until the litigation in question is concluded. This is not to suggest that in some cases the facts and circumstances will not show such litigation to be specious, speculative, or wholly without merit and that the taxpayer hence was not reasonable in waiting to claim the loss as a deduction. However, 75 in the absence of such circumstances, a taxpayer who feels that chance of recovery is sufficiently probable to warrant bringing a suit and prosecuting it with reasonable diligence to a conclusion is normally reasonable in waiting until the termination thereof to claim a Section * * [162(a)] deduction. See, also, Beltran v. United States, 441 F.2d 954">441 F. 2d 954, 958-959 (C.A. 7, 1971); Schweitzer v. Commissioner, 376 F.2d 30">376 F. 2d 30, 31 (C.A. 3, 1967), affirming per curiam a Memorandum Opinion of this Court; Harry J. Colish, 48 T.C. 711">48 T.C. 711, 715-718 (1967); Parmelee Transportation Company v. United States, 173 Ct. Cl. 139">173 Ct. Cl. 139, 153-157, 351 F. 2d 619, 627-629 (1965); and Commissioner v. Harwick, 184 F. 2d 835 (C.A. 5, 1950), affirming a Memorandum Opinion of this Court. In deciding whether petitioner had "a reasonable prospect of recovery" of his loss from Mayflower, we begin with the fact that petitioner had practiced law for many years, specializing in damage suit litigation. According to his testimony, he had obtained "some outstanding verdicts * * * in the state and Federal courts, some of the largest in the history of South Carolina. 76 " He was thus well qualified to evaluate his prospects, and he testified: Q. Did you at the time you filed the suit have a personal belief you were going to win? A. I had an absolutely personal belief, I mean I would have been foolish to undertake it otherwise. At the end of 1962, he was devoting all of his time to the preparation of his claim. Even though he was faced with serious financial problems at that time, he incurred expenses of approximately $2,700 in handling the litigation. That his claim was not "specious, speculative, or wholly without merit" is demonstrated by his pursuit of the appeal of the adverse District Court judgment, the Appellate Court's remand of the case for a jury trial of the actual damage claim, and, indeed, Mayflower's payment, ultimately, of $9,000 in settlement of the claim. In view of these facts and the legal principles enunciated by the above-quoted regulation and the cited court decisions, we are compelled to conclude that, within the meaning of section 165(a), petitioner's loss was not "sustained" in 1962. The closedtransaction principle reflected by the regulation may work to the advantage of the Commissioner in one case and the77 taxpayer in the next. It is designed to permit neither to select arbitrarily the year for which the deduction is to be allowed. We recognize the enormity of the catastrophe suffered by petitioner and his family in 1962, but the loss is not deductible until 1968. Although much of the testimony was directed toward establishing the fair market value of the destroyed property and petitioner's basis therein, we have concluded that we should not make findings on these matters. We do not think either party was fully prepared to present evidence on petitioner's basis in the destroyed property. Petitioner's evidence was limited to an estimate of the ratio of his basis to his estimate of the fair market value of the various items. Respondent's case on this point consisted solely of the cross-examination of petitioner. Since neither the fair market value of, nor petitioner's basis in, the destroyed property is essential to our decision, we think the cause of justice would best be served by leaving those matters to adjudication when and if petitioner's liability for 1968 is litigated. 378 2. The Business Loss In the notice of deficiency, respondent determined that petitioner realized a gain of $4,000 on the forced sale of his bookstore. At the trial, respondent conceded that this determination was erroneous and now contends that petitioner sustained a loss not in excess of $1,400. Petitioner computes his deductible loss at $48,387.86. Respondent arrives at his position through the following computation: Total number of books - 3,500Average retail price - $6.00Total retail value of all books$21,000.00Less 40% markup 8,400.00Total cost of all books$12,600.00Less unpaid judgments for books 7,000.00Petitioner's basis in the books$ 5,600.00Less amount received on the sale 4,200.00Petitioner's loss for tax purposes$ 1,400.0079 The parties agree (1) that the average retail price of the inventory was $6 per book; (2) that the retail price includes a 40-percent markup; (3) that petitioner has unpaid judgments of $7,000 against him for book purchases; and (4) that $4,200 was received by the Internal Revenue Service at the tax lien foreclosure sale. The only factual item in dispute is the number of books petitioner had on hand when the seizure was made.A revenue officer testified that he counted the books and that there were 3,500 books in the store at the time of the seizure. Ordinarily, we would give great weight to testimony of this kind. However, since the revenue officer cast his testimony in terms of a round figure, we infer that it was an estimate. The seizure occurred nearly 10 years before the date on which he testified, and he admitted that he had made no effort to locate copies of his reports or his workpapers on the foreclosure to prepare for his testimony and that he testified from memory. We are left with the impression that there is a margin for error in his recollection of the details of the sale.Petitioner claims that the records which he maintained on the operation of his business were never recovered after the bookstore was seized. He has taken three approaches in his effort to establish his basis in the inventory on hand at the time of the seizure. First, he testified that in August 1962, when he saw he was about to lose his store, he took an inventory with a view to trying to sell the business. From this inventory, he extrapolated a statement of the cost of the books on hand which he had acquired from each of the publishers with whom he did business. This statement reflects the cost figure totaling $59,587.86, referred to above, as of August 1962. Petitioner adjusts this cost figure to $48,387.86 as the measure of his loss. His computation assumes, as he testified, that acquisitions kept pace with sales between August and the foreclosure in November 1962.Second, he offered the testimony of an experienced auctioneer, appraiser, and liquidator, who had made bookstore appraisals, including one recently for the Small Business Administration, and had handled numerous book liquidation auction sales. This witness testified that books do not sell well at auction sales and ordinarily bring only 3 to 10 percent of their retail price. On this basis, the books had a retail value of an amount between $140,000 and $42,000. 4Third, petitioner testified in detail as to the dimensions of the shelf space in his bookstore, demonstrating that it was sufficient to house 18,000 to 20,000 books. Using our best judgment in the light of all the evidence, we find that petitioner had 6,000 books on hand at the time of the seizure. Cohan v. Commissioner, 39 F. 2d 540 (C.A. 2, 1930). In connection with the Rule 50 computation, the amount of petitioner's basis in the seized books will be computed accordingly. In making this computation, the undisputed adjustments to the retail value will be made in the same manner as in respondent's computation set forth above except that the $7,000 in judgments should not be eliminated from petitioner's cost basis in the books. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947); cf. Manuel D. Mayerson, 47 T.C. 340">47 T.C. 340 (1966),80 acq. 1969-2 C.B. xxiv; Marion A. Blake, 8 T.C. 546">8 T.C. 546 (1947), acq. 2 C.B. 1">1947-2 C.B. 1. 3. Loss Carryover The amount of the loss on the sale of the bookstore's assets will be used in computing the net operating loss for 1962 under section 172(c). That net operating loss is subject to carryback and carryover in the manner prescribed by section 172(b)(1) (A)(i) as follows: * * [Subject to exceptions not material to this case] a net operating loss for any taxable year ending after December 31, 1957, shall be a net operating loss carryback to each of the 3 taxable years preceding the taxable year of such loss. As to the amounts of the carryovers, section 172(b)(2) provides: * * * [Subject to exceptions not material to this case] the entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the "loss year") shall be carried to the earliest of the taxable years to which * * * such loss may be carried. The portion of the loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such81 loss may be carried. * * Our Findings set forth the stipulated amounts of petitioner's taxable income for 1959, 1960, and 1961, the three prior years to which his net operating loss must first be carried. The excess, if any, of the loss over and above such amounts as modified by section 172(b)(2) may then be carried to the years here in controversy. See Regs. sec. 1.172-5. The necessary calculations will be made in connection with the Rule 50 computation. To reflect the foregoing conclusions, Decision will be entered under Rule 50.Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the years in issue, unless otherwise noted.↩2. SEC. 165. LOSSES. * * * (c) Limitation on Losses of Individuals. -in the case of an individual, the deduction under subsection (a) shall be limited to - * * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * * *↩3. The record does not show whether an adjustment of petitioner's return for 1968 is barred. Cf. secs. 1311-1315. Such an adjustment would have to be made within the time period specified in sec. 1314(b).↩4. The accepted bid of $4,200 from the Dentsville Area Schools covered both the books and fixtures of the June Chandler Book Store. The fixtures consisted of the wall shelving, several chairs, a coffee table, and other table and chairs. Due to their doubtful value and this buyer's primary interest in purchasing the books, the fixtures have been assigned no value.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620225/	ARTHUR DEIN and BLEEMA DEIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDein v. CommissionerDocket Nos. 2657-73, 4164-73, 5838-73.United States Tax CourtT.C. Memo 1978-376; 1978 Tax Ct. Memo LEXIS 139; 37 T.C.M. (CCH) 1552; T.C.M. (RIA) 78376; September 20, 1978, Filed Arthur Dein, pro se. Barry C. Feldman, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These cases were assigned to and heard by Special Trial Judge Johnston. Pursuant to the order of the Chief Judge dated November 2, 1977, as amended, the provisions of Rule 182, Tax Court Rules of Practice and Procedure are not applicable to these cases. The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE JOHNSTON, Special Trial Judge: These cases140 were heard pursuant to the order of the Chief Judge dated November 2, 1977, as amended. Respondent determined deficiencies in petitioners' Federal income tax of $ 236.95, $ 345.91 and $ 396.50 for the years 1969, 1970 and 1971, respectively. The issues for decision are whether petitioners are entitled to deduct under section 162 1 $ 979.10, $ 1,507 and $ 1,613 for the taxable years 1969, 1970 and 1971, respectively, as employee business expenses incurred in transporting petitioner, Arthur Dein, and his tools between his residence and his places of employment. Respondent concedes that petitioners are entitled to a deduction for transportation expenses in 1969 of $ 1.20 and in 1970 of $ 2.76.FINDINGS OF FACT Some of the facts have been stipulated and those facts are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Arthur and Bleema Dein, husband and wife, resided at 159-25 71st Avenue, Queens County, New York at the time of filing their petitions in these cases and during the years in issue. They filed timely141 joint income tax returns for the taxable years 1969, 1970 and 1971 with the District Director of Internal Revenue, Brooklyn, New York. Bleema Dein is a party to these proceedings solely because she signed the joint returns.During the years 1969, 1970 and 1971 Arthur was employed as a salaried electrician by Badaracco Brothers & Company whose principal place of business was located in Hoboken, New Jersey. In his employment as an electrician, Arthur traveled by his personally owned automobile between his residence and various job sites carrying with him certain tools used in his trade. He was required to supply his own tools which weighed between 150 and 200 pounds. There were no secure storage facilities for tools at any of the job sites at which Arthur was employed in the years before the Court. Arthur performed no significant services for his employer at his residence during the years 1969 and 1971. His residence was not his place of business. Arthur's trade or business consists of the performance of services for Badaracco Brothers as an employee. 1969During the year 1969, Arthur traveled between his residence and 12 job sites located in various communities and142 places in New Jersey. The total for such trips amounted to 8,628 miles. The round trip mileage ranged between 34 and 52 miles. He traveled to such places in his personally owned automobile, a 1959 Chevrolet 4-door sedan, in which he carried his tools. The automobile was not specially modified to enable him to carry the tools. If Arthur were to travel to each of his job sites by public transportation, that is, by bus and subway, his average travel time each way would have been about 60 minutes 2 longer than his travel time by automobile without taking into consideration waiting time between buses and subway or walking time from home to bus stop and bus stop to work site. Arthur's working day in each of the years before the Court started at 8:00 a.m. On two occasions in 1969, he traveled to a second work site situated about six miles distant from the first. He returned home from the second work site. Petitioners on their income tax return for 1969143 claimed a deduction for automobile expenses as employee business expenses in the amount of $ 854.60 for 8,546 miles of business travel at 10 cents per mile plus $ 124.50 for parking fees and tolls incurred in driving to and from work. Respondent disallowed the claimed deductions. 1970During 1970, Arthur traveled between his residence and 25 job sites located in various communities and places in New Jersey. The total for such trips amounted to 11,106 miles. The round trip mileage ranged between 30 and 66 miles. He traveled to such places for part of the year by his 1959 Chevrolet and the remainder of the year by his personally owned 1970 Plymouth Duster automobile which also was not specially modified to carry the tools which he carried with him. The additional travel time which would have been required if public transportation had been used by Arthur would have been approximately the same as that which would have occurred in 1969. Petitioners on their income tax return for 1970 claimed a deduction for automobile expenses as employee business expenses in the amount of $ 1,333 for 11,106 miles of business travel at 12 cents a mile plus $ 174 for tolls incurred in driving144 to and from work. Respondent disallowed the claimed deductions. 1971During the year 1971, Arthur traveled between his residence and 16 job sites located in various communities and places in New Jersey.The total for such trips amounted to 4,838 miles. The round trip mileage ranged between 32 and 44 miles. He traveled to such places by his 1970 Plymouth Duster and carried the tools required for his trade with him in the automobile. The additional travel time required if petitioner had traveled to each of the 16 job sites by public transportation would have amounted to about 40 minutes each way without considering time to reach starting transportation, for changing modes of transportation, and to reach job sites. In 1970, Arthur traveled twice to a second job site and from one of those second job sites to a third job site. On each of these occasions petitioner returned home from the last job site. The total mileage involved in these changes of job sites was 23 miles. Petitioners on their income tax return for 1971 claimed a deduction as employee business expense the following: Depreciation $ 700.00Insurance, Licenses241.00Gas, Oil, Lubrication419.00Repairs, Tires115.00Inspection & Other3.00Parking Fees & Tolls135.00Total$ 1,613.00145 Respondent disallowed the claimed deduction. OPINION The question to be determined is whether petitioner is entitled to deduct during the taxable years as ordinary and necessary business expenses under section 162(a) the cost of travel between his residence and the various job sites at which he worked. He traveled to and from his places of employment in his personally-owned automobile in which he would carry the tools of his trade as well as other miscellaneous equipment. The tools weighed about 150 to 200 pounds. On his income tax returns for 1969, 1970 and 1971, Arthur deducted as employee business expense $ 979.10, $ 1,507 and $ 1,613, respectively, attributable to the cost of traveling between his place of residence and his places of work. A taxpayer's costs of commuting to work are personal expenses and ordinarily do not qualify as deductible expenses. Section 1.262-1(b)(5) Income Tax Regs. However, the Supreme Court has held that if a taxpayer incurs additional expense in traveling between his residence and his place of employment because of the necessity of carrying his tools to work he may deduct the additional expenses. Fausner v. Commissioner,413 U.S. 838">413 U.S. 838 (1973).146 Respondent concedes the applicability of Rev. Rul. 63-100, 1 C.B. 34">1963-1 C.B. 34, to the facts in the instant case. In order for the petitioner to deduct the costs of his transportation within the rules prescribed in Rev. Rul. 63-100, he must show that he would not have traveled to the job sites by private vehicle but for the necessity of having to transport his tools and equipment. If a taxpayer would have driven his automobile to work had he not been required to transport his tools, he would have incurred no such additional expense and nothing would be deductible. Gilberg v. Commissioner,55 T.C. 611">55 T.C. 611 (1971). Arthur contended that it was a matter of necessity for him to use his automobile in going to and from his places of employment because he was occasionally required to work at a second job site.The fact that petitioner was required to have his automobile at his job site because from time to time it was necessary to go to a different place of work does not change his daily travel between home and job site to business travel rather than commuting. Feistman v. Commissioner,63 T.C. 129">63 T.C. 129 (1974). However, even if he did not have147 to move from location to location, Arthur testified that he would "have used the car for a convenience" and that he "would not have used any other means of transportation. There does not appear to have been any means of public transportation readily available to Arthur which would have enabled him to arrive at his various places of work at the normal starting time for his trade. Nor does the record show any other practical means of commuting to and from his jobs other tan by his private vehicle. We therefore conclude that petitioner would have driven to work even if he had not been required to carry his tools and equipment in his automobile. While this conclusion requires us to sustain the respondent's disallowance of the claimed business expense, we also note that petitioner has failed to establish the amount of any additional expense incurred because of the necessity of carrying his tools to work. Petitioner agreed that carrying 150 to 200 pounds of tools would not have appreciably increased the cost of operating his automobile above that if driven without the tools. Nor has the cost of traveling by public conveyance been established in even an approximate amount. Cf. *148 Rev. Rul. 63-100, 1 C.B. 34">1963-1 C.B. 34; Fausner v. Commissioner,413 U.S. 838">413 U.S. 838, (1973) rehearing denied, 414 U.S. 882">414 U.S. 882 (1973). In accordance with the foregoing, Decisions will be entered under Rule 155 in docket Nos. 2657-73 and 4164-73.Decision will be entered for Respondent in docket No. 5838-73.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩2. The actual travel times by automobile may vary depending upon such factors as time of day, volume of traffic, weather conditions, accidents, road repairs and the like. Many of these factors also affect public transportation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620226/	Estate of Anna Lora Gilchrist, Deceased, Layland Myatt and Elizabeth Dearborn, Independent Executors, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Gilchrist v. CommissionerDocket No. 735-76United States Tax Court69 T.C. 5; 1977 U.S. Tax Ct. LEXIS 40; October 11, 1977, Filed 40 Decision will be entered under Rule 155. Decedent's husband died in 1960 and under his will after making specific bequests totaling $ 40,000, he bequeathed to his wife "the income the use and benefits with full rights to sell or transfer all the remainder of my property, both real and personal, so long as she may live, and at her death, any remainder of my estate not required for her use, shall be divided equally among" specific remaindermen. Decedent served as executrix of her husband's estate from the time of her qualification until Oct. 20, 1971, at which time she was legally declared a person of unsound mind and guardians of her person and estate as well as an administratrix of her husband's estate were appointed by a Texas probate court. Decedent remained a ward of the court until her death in 1973. Respondent in his notice of deficiency determined that decedent at date of her death had a general power of appointment under her husband's will under sec. 2041(a)(2), I.R.C. 1954. Held, decedent's power was not limited by an ascertainable standard within the meaning of sec. 2041(b)(1)(A), nor was it exercisable by decedent only in conjunction with a person having a substantially41 adverse interest under sec. 2041(b)(1)(C)(ii). Held, further, decedent, as executrix of her husband's estate, in reporting her bequest for Texas inheritance tax purposes as only a life income interest, did not effectively disclaim the remainder of her interest nor did this action judicially estop her from ever expanding upon her interest as so delimited and characterized. Held, further, the laws of Texas as existed at her death so limited the rights of the guardians appointed upon her adjudication as an incompetent that neither decedent nor her guardians possessed a general power of appointment within the meaning of sec. 2041(a)(2). Ben A. Douglas, for the petitioner.David L. Jordan, for the respondent. Sterrett, Judge. STERRETT5 Respondent determined a deficiency in the estate tax of the Estate of Anna Lora Gilchrist in the amount of $ 231,051.83. 1 Due to concessions by the parties 246 the remaining 6 issue for decision is whether the decedent held, at the time of her death, a general power of appointment, under her husband's last will and testament, over jointly held property thereby causing it to be included in her45 gross estate under section 2041, I.R.C. 1954. 3FINDINGS 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.Anna Lora Gilchrist (decedent) died testate on March 22, 1973, while a resident of Fort Worth, Tex. Layland Myatt and Elizabeth Fewell Dearborn were named independent coexecutor and coexecutrix, respectively, in decedent's will, and they duly qualified as such in Cause No. A-15516, Probate Court of Tarrant County, Tex. At the time of filing the petition herein, Layland Myatt was a resident of Fort Worth, Tex., and Elizabeth Fewell Dearborn was a resident of Alexander, Ark. The Federal estate tax return was filed with the Director, Internal Revenue Service Center, Austin, Tex., on February 27, 1974.Decedent's husband, Charlie Frank Gilchrist (hereinafter sometimes referred to as husband), died on June 25, 1960. In his last will and testament dated February 23, 1952, after making specific bequests totaling47 $ 40,000, he provided as follows:I give devise and bequeath to my beloved wife, Anna Lora Gilchrist, the income the use and benefits with full rights to sell or transferall the remainder of my property, both real and personal, so long as she may live, and at her death, any remainder of my estate not required for her use, shall be divided equally among the Estates of Jennie Gilchrist Haughawout deceased. Mrs Ida Grant Mrs Marcella Yates and Melvin Gilchrist deceased.Fifth: I hereby nominate and appoint my Beloved Wife Anna Lora Gilchrist, Independent Executrix of this my last will and Testament and direct that no Bond be required of her as such. and that the Probate Court have no control over 7 my estate other than to admit this will to Probate and approve inventory and appraisment. [Reproduced literally.]Decedent served as independent executrix of her husband's estate from the time of her qualification until October 20, 1971, at which time the Probate Court of Tarrant County, Tex., entered its order in Cause No. A-12616 adjudicating decedent to be a person of unsound mind and appointing guardians of her person and estate. 4 Shortly thereafter an order was entered in the48 husband's estate, Cause No. 30334, Probate Court of Tarrant County, Tex., removing decedent as independent executrix and appointing Ada Louise Crockett (Crockett), administratrix. Crockett was not a beneficiary under the will of Charlie Gilchrist. Decedent remained a ward of the court until her death.At the time of her husband's death decedent was 72 years of age, childless, and had no dependents. Her undivided one-half interest in the community was valued in excess of $ 500,000 and, additionally, she owned separate property. 549 On Schedule E of the Federal estate tax return petitioner reported only one-half of the jointly owned property held by decedent and the Estate of Charlie Gilchrist. Respondent in his notice of deficiency, dated November 14, 1975, determined that the decedent received a section 2041 general power of appointment under her husband's will and accordingly included the entire value of the jointly held property, instead of a one-half interest, in decedent's taxable estate.OPINIONThe sole issue for our decision is whether Mrs. Gilchrist at the date of her death had a general power of appointment within the meaning of section 2041(a)(2)651 under the terms of her husband's 8 will. Petitioner, on brief, has launched a five-prong attack on respondent's determination, to wit: (1) The power was not general as it was limited by an ascertainable standard under section 2041(b)(1)(A); 7 (2) under section 2041 (b)(1)(C)(ii)8 the power was exercisable by decedent only in conjunction with a person having a substantial interest in the property, subject to the power, which was adverse to the exercise of the power in favor of the decedent; (3) that the decedent effectively disclaimed the power50 prior to the date of her death; (4) that Mrs. Gilchrist was judicially estopped to claim more than a life income interest in the property subject to the power; and (5) the decedent did not possess a general power at the date of her death because she previously had been declared a person of unsound mind and therefore had no legal capacity to exercise any power under her husband's will. Respondent does not agree with any of petitioner's alternative arguments and will seperately scrutinize petitioner's five contentions hereinafter.52 1. The power limited by an ascertainable standard. -- Petitioner argues that, although "at first blush" the disposition provision 9 of Charlie Gilchrist's will appears to have created in his wife a general power of appointment, the use of the phrase 9 "any remainder of my estate not required for her use" should not be presumed to have been idly inserted by Mr. Gilchrist; rather its employment and placement obviously imposed some limitation upon the grant of authority preceding it. Petitioner contends that both the terms "require" and "use" have been held to impose limitations upon bequests equatable with support and maintenance and their joint employment in the will strongly suggests Mr. Gilchrist's intention to limit the scope of the power. "Require" has been interpreted to mean "need" and that need equates with maintenance according to one's station in life. Furthermore petitioner contends that the surrounding circumstances buttress this conclusion. At the time of her husband's death Mrs. Gilchrist was 72 years of age and, at date of execution of his will and at his death, she was without descendants or dependents and was financially secure. Mr. Gilchrist expected53 his relatives to be the ultimate beneficiaries of his estate and the use of the phrase "not required for her use" mandates the conclusion that the power conferred upon his wife was limited in scope to her needs of support and maintenance.Respondent contends that Mr. Gilchrist's will authorizes his wife to use corpus without expressing or designating any use or purpose. The literal reading of the phrase "not required for her use" does not state any ascertainable standard and her husband gave her the "full rights to sell or transfer all the remainder of his54 property." The dispositive clause clearly leaves to her discretion the kind and extent of the use which she required or desired. Additionally, the surrounding circumstances, as well as the terms of the will itself, clearly indicated Mr. Gilchrist's intentions. He and his wife had no children or dependents, he prepared his own will, and prior to his wife's bequest he provided cash bequests for all of his heirs. It was Mr. Gilchrist's intent that his wife receive the remainder of his estate to do with as she saw fit, the remainder, if any, to go to the heirs to whom, previously, he had provided specific bequests. By not specifically providing for any ascertainable standard limiting his wife's power to consume the property, her general power is includable in her estate at the time of her death. Lehman v. United States, 448 F.2d 1318">448 F.2d 1318 (5th Cir. 1971).We begin with the premise that whatever property interests were created under Mr. Gilchrist's will must be determined under applicable State law, in the instant case the Texas law of 10 wills. Helvering v. Stuart, 317 U.S. 154">317 U.S. 154 (1942); Morgan v. Commissioner, 309 U.S. 78">309 U.S. 78 (1940).55 However, the taxability of decedent's interest is to be determined by Federal tax law. Jenkins v. United States, 428 F.2d 538 (5th Cir. 1970), cert. denied 400 U.S. 829">400 U.S. 829 (1970); Grossman v. Campbell, 368 F.2d 206 (5th Cir. 1966); Phinney v. Kay, 275 F.2d 776">275 F.2d 776 (5th Cir. 1960). "If the practical exercise of her [Mrs. Gilchrist's] powers of disposition and control for her own benefit was not confined within limitations at least as stringent as those prescribed by Federal law, she enjoyed a general power of appointment for Federal estate tax purposes regardless of the label attached to her interest by State courts." Lehman v. United States, supra at 1319.Under Texas law the paramount concern in construing a will is the intention of the testator. Estate of Cox v. Commissioner, 59 T.C. 825">59 T.C. 825 (1973); 61 Tex. Jur.2d sec. 144. Absent an ambiguity such intention must be arrived at from the will's four corners. Atkinson v. Kettler, 372 S.W.2d 704 (Tex. Civ. App. 1963). However, if 56 the will is susceptible of different constructions, extrinsic evidence is admissible to ascertain the meaning sought to be expressed by the testator. Huffman v. Huffman, 161 Tex. 267">161 Tex. 267, 339 S.W.2d 885">339 S.W.2d 885 (1960). Although a will should be construed to give effect to every part of it and it will not be presumed the testator intended to do any useless thing ( Republic National Bank of Dallas v. Fredericks, 155 Tex. 79">155 Tex. 79, 283 S.W.2d 39">283 S.W.2d 39 (1955)), a layman who draws his own will cannot be deemed to have used words in the same sense as if they were used by an attorney. 10Bergin v. Bergin, 159 Tex. 83">159 Tex. 83, 315 S.W.2d 943">315 S.W.2d 943 (1958).With the foregoing principles in mind our inquiry, "then, is whether the testamentary language [of Mr. Gilchrist's will], 57 given a Texas-style construction, 11 acually confined * * [Mrs. Gilchrist's] authority to the 'ascertainable standard' demanded by section 2041." Lehman v. United States, supra at 1320. Mr. Gilchrist gave his wife "the income the use and benefits with full rights to sell or transfer all the remainder of my property, both 11 real and personal, so long as she may live." Thus she had the power to sell all the property and/or transfer it, i.e., to give it away. Singer v. Singer, 150 Tex. 115">150 Tex. 115, 237 S.W.2d 600">237 S.W.2d 600, 605 (1951); Lehman v. United States, an unreported case ( S.D. Tex. 1971, 27 AFTR 2d 71-1662, 1667, 71-1 USTC par. 12,744, p.86,826-86,827). Decedent had the unqualified right of disposition of all her husband's property and the rights of the remaindermen were limited to whatever estate remained at her death. It therefore appears under Texas law that she received a "defeasible fee simple absolute." Harrell v. Hickman, 147 Tex. 396">147 Tex. 396, 215 S.W.2d 876">215 S.W.2d 876 (1948), 61 Tex. Jur.2d sec. 243.58 However, if one assumes that Mrs. Gilchrist was merely a life tenant, rather than the holder of a defeasible fee simple absolute, with the restricted right to sell the property and no right to defeat the remaindermen's interests by gifting it away ( Nye v. Bradford, 44 Tex. 618">44 Tex. 618, 193 S.W.2d 165">193 S.W.2d 165 (1946)), and while the sales proceeds to the extent not consumed by decedent would pass under the will to the remaindermen ( Edds v. Mitchell, 143 Tex. 307">143 Tex. 307, 184 S.W.2d 823">184 S.W.2d 823 (1945)), "these restrictions relate to the power to convey, not to the power to consume." Lehman v. United States, 448 F.2d at 1320. In the instant case, the power of consumption is the critical element that must be scrutinized under the operation of section 2041.It is apparent from a reading of the will that the object of Mr. Gilchrist's bounty was his wife. He bequeathed to her the "income the use and benefits" of the major portion of his estate. Moreover, he appointed his wife executrix of the estate directing that no bond be required of her and that the probate court have no control over the estate59 other than to probate the will and approve inventory and appraisement. In short, Mrs. Gilchrist was given the unfettered discretion to consume estate property and it is clear that Texas courts would not limit such consumption solely to her support and maintenance. The Texas construction of this will and in particular the phrase "not required for her use" yields the result that the phraseology is not a limitation upon the rights of the wife but, to the contrary, a limitation on the rights of the remaindermen to take in the event Mrs. Gilchrist had not disposed of the remainder of the estate prior to her death. 1212 Feegles v. Slaughter, 10">182 S.W. 10 (Tex. Civ. App. 1916); Harrell v. Hickman, supra;Phinney v. Kay, supra.60 Moreover, in a similar Texas will construction case the Fifth Circuit in Lehman v. United States, supra at 1320, held that a decedent's power to consume corpus of her husband's estate whenever she found the income insufficient for her support, maintenance, comfort, and welfare "exceeded the strict limitations requisite for its immunization against Federal estate tax." We believe the power of "use and benefit" granted Mrs. Gilchrist is broader than that enumerated under the Lehman will. Mr. Gilchrist did not intend to nor did he express restrictions on his wife's power of consumption over the remainder of his estate and she possessed "an unrestricted and discretionary right * * to consume the property, governed only by her own personal assessment of her own personal needs." Lehman v. United States, supra at 1321. 1361 2. The power could be exercised only in conjunction with a person having a substantially adverse interest. -- Petitioner argues that, when Mrs. Gilchrist was removed as executrix of her husband's estate and upon qualification of Crockett as administratrix with will annexed, the exercise of any authority under Mr. Gilchrist's will required Crockett's concurrence to be legally effective. Crockett's interest as representative of Mr. Gilchrist's remaindermen was adverse to the decedent, particularly as to any attempted appropriation or consumption of corpus. Therefore under section 2041(b)(l)(C)(ii), the power conferred upon decedent was not a general power of appointment.We have previously found that Crockett was not a beneficiary under the will of Charlie Gilchrist. In construing the phrase "'substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent' as used in section 2041(b)(1)(C)(ii)" we have previously stated, and it is well settled, that such phrase "was intended at the very least to require that the third person have a present or future chance 13 to obtain a personal benefit from the property itself." 62 Estate of Towle v. Commissioner, 54 T.C. 368">54 T.C. 368, 372 (1970). Therefore in the instant case, Crockett's interest as a nonbeneficiary trustee was neither substantial nor adverse within the meaning of section 2041.3. and 4. Disclaimer and judicial estoppel. -- Petitioner contends, under this part of its argument, that Mrs. Gilchrist, as executrix of her husband's estate, prepared and submitted under oath an affidavit for inheritance tax appraisement to the comptroller of public accounts and recorded a duplicate copy with the probate court. This affidavit was acknowledged in the same manner required by Texas law for the execution and recordation of deeds, and therein Mrs. Gilchrist characterized and delimited her interest under her husband's will to a life income interest. Therefore, as Mrs. Gilchrist had not previously accepted the benefits under her husband's will, she effectively disclaimed under Texas law part of the interest bequeathed to her.Futhermore, petitioner alleges that this "sworn document" filed permanently of record with the probate court, fully and effectively estopped the decedent from ever expanding upon that interest as so delimited63 and characterized. She was bound by the construction she placed upon herself and the remainder legatees, under Mr. Gilchrist's will, could rely successfully upon such delimitation to prevent Mrs. Gilchrist from exacting anything from the properties beyond income.Respondent asserts that decedent did not effectively disclaim anything under Texas law as the affidavit for inheritance tax appraisement did not clearly show her intent to disclaim her interest or any part thereof. Tex. Civ. Stat. Ann. art. 7425c (Vernon 1960). Also, respondent submits that judicial estoppel is not applicable in the instant case; Mrs. Gilchrist alleged delineation is not binding for Federal estate tax purposes.Under Texas law "a beneficiary of a trust [or estate] who has not, by words or conduct, manifested his [or her ] acceptance of the beneficial interest, may disclaim such interest," in a clear, unequivocal, and timely manner. Aberg v. First National Bank in Dallas, 450 S.W.2d 403">450 S.W.2d 403, 407 (Tex. Civ. App. 1970). Moreover, Vernon's Tex. Ann. Civ. Stat. art. 7425c sec. 3, provides as follows:Sec. 3. A release of a power, whether partial or complete, shall be valid and 14 64 effective, with or without a consideration, when the donee thereof executes and acknowledges, in the manner required by law for execution and recordation of deeds, an instrument evidencing an intent to make the release, and delivers the instrument or causes it to be delivered, either:(A) To any person or in any manner specified for such purpose in the instrument creating the power; or(B) To any adult person, other than the donee so releasing, who may take any of the property which is subject to the power in the event of its nonexercise or to one in whose favor it may be exercised after such partial release; or(C) To any trustee or any co-trustee of the property which is subject to the power; or(D) By filing the same with the County Clerk for recordation in the Deed Records of any county in the State of Texas in which any property subject to such power is situated, or in which the donee, if in control of the property resides, or in which the trustee in control of the property resides, or in which a corporate trustee in control of the property has its principal office, or in which the instrument creating the power is probated or recorded.We note that, although section 11 of article65 7425c provides that the means for disclaimer as provided therein are not exclusive, section 13 of the same article provides that this article "shall, so far as possible, be deemed to be declaratory of the common law of the State of Texas."After careful consideration of the affidavit for inheritance tax appraisement filed by Mrs. Gilchrist, as executrix of her husband's estate, wherein on Schedule E she is listed as a beneficiary entitled to receive a life income interest with an "actual market value" of $ 100,203.83, we find such designation totally insufficient to denote any intent to renounce or disclaim the other benefits conferred thereupon. As previously stated, such renunciation must evince the beneficiary's intent to disclaim in a clear and unequivocal manner; the designation of decedent as a life income beneficiary and the reporting of Texas inheritance tax on this basis simply does not meet this test.In light of our above holding, petitioner's judicial estoppel argument is without merit. "Judicial estoppel, like all estoppel, is equitable in nature, and is designed to protect those who are misled by a change in position." Colonial Refrigerated Transportation, Inc. v. Mitchell, 403 F.2d 541">403 F.2d 541, 550 (5th Cir. 1968).66 Petitioner's contention that in any legal action between Mrs. Gilchrist and the remainder legatees, the remaindermen could rely upon Mrs. Gilchrist's delimitation to prevent her from exacting anything from the properties beyond income is frivolous, at best. Standing alone, Mrs. Gilchrist's designation under the aforenoted 15 Texas inheritance affidavit is insufficient under Texas law to evoke the doctrine of judicial estoppel. See, for example, Long v. Knox, 155 Tex. 581">155 Tex. 581, 291 S.W.2d 292">291 S.W.2d 292 (1956).5. Decedent's legal incompetency. -- Finally, we come to petitioner's argument of legal incapacity. Decedent was declared a person of unsound mind on October 20, 1971, and remained under this disability, continuously, until her death in March of 1973. Petitioner contends that whatever power vested in her prior to the declaration of incompetency was transferred to Crockett upon her appointment as administratrix of Mr. Gilchrist's estate. Citing Finley v. United States, 404 F. Supp. 200">404 F.Supp. 200 (S.D. Fla. 1975), on appeal to the Fifth Circuit, petitioner argues that decedent's legal disability precludes our finding67 that Mrs. Gilchrist possessed a general power of appointment within the meaning of section 2041(a)(2). Furthermore, although decedent was not legally incompetent at the date the power vested (in Finley, decedent lacked the legal capacity to exercise the power from the time of its devise until her death), our decision on this question should not turn on whether the recipient of the power was incompetent throughout the period of its existence but, rather, on her legal capacity at the time of death.In Finley v. United States, supra, decedent Mildred B. Whitlock died testate 2 months after her husband, Lester J. Whitlock. Under her husband's will, a trust was created for Mrs. Whitlock wherein she received the income therefrom for life and a general testamentary power of appointment over the corpus of the trust existing at the time of her death. The District Court found that decedent at all times from the devise of this power until her death was mentally incompetent, lacked the requisite testamentary capacity to execute a will or codicil, and lacked the legal capacity to exercise the general testamentary power of appointment. "This [legal incapacity68 to exercise the power] prevented her from possessing a general power of appointment within the meaning of * * section 2041(a)(2)." Finley v. United States, supra at 204.Respondent contends, on brief, that an argument similar to petitioner's was rejected by the Ninth Circuit in Fish v. United States, 432 F.2d 1278">432 F.2d 1278 (9th Cir. 1970). In Fish, decedent's husband created a trust in favor of his wife, whereby during her lifetime she had the right in any calendar year to demand payment of all or part of the net income of the trust for that year. Any income 16 not so claimed by her would be added to the corpus of the trust and upon the wife's death the corpus, including accumulated income, was to be distributed to the grandchildren of the husband. The taxpayer conceded that the decedent possessed a general power over the trust income under 2041(b)(2). 14 However taxpayer contended that the decedent was incompetent for some 7 years prior to her death (she was competent when her husband died) and her general power of appointment could not have been lawfully exercised or released by her or anyone acting in her behalf. 69 Therefore the annual expiration of her power was not a lapse and thus not a release within the meaning of section 2041(b)(2). The court held the matter of the decedent's competency to be immaterial although footnoting that decedent was never adjudicated an incompetent, and stated at page 1280:that taxability and the inclusion of the assets in a decedent's gross estate are determined by the existence of the power and by circumstances which bring its release or exercise within the ambit of Sections 2041(a)(2) or 2041(b)(2). The precise manner of exercising or releasing the power is immaterial for purposes of determining taxability. Thus it is sufficient here that the power was released by its annual expiration or lapse, and it is immaterial whether the lapse occurred through [an] [alleged] * * * failure to exercise the power or through the indifference or incompetency of the decedent. Round v. Commissioner, 332 F.2d 590 (1st Cir. 1964); Townsend v. United States, 232 F. Supp. 219">232 F. Supp. 219 (E.D. Tex. 1964).70 In Round v. Commissioner, supra, the First Circuit in affirming our decision (40 T.C. 970">40 T.C. 970 (1963)) found that the decedent established three spendthrift trusts, retaining sufficient powers as cotrustee to accumulate or distribute income and to invade and distribute corpus, to make the trusts includable in his estate under sections 2036(a) and 2038(a)(2). Decedent was never declared mentally incompetent although a conservator was appointed on his behalf. This appointment, under Massachusetts law, did not remove the possibility that decedent could have recovered and resumed his position as cotrustee. Moreover, in citing its earlier decision in Hurd v. Commissioner, 160 F.2d 610">160 F.2d 610 (1st Cir. 1947), affg. 6 T.C. 819">6 T.C. 819 (1946), the court stated at page 594:17 "The statute is not concerned with the manner in which the power is exercised, but rather with the existence of the power." So long as the power retained by the decedent still existed in his behalf the trust property was included in his estate. What is required, this court said is "some definitive act correlating71 the decedent's actual incompetence with his incapacity to serve as trustee." * * [A] legal determination of insanity was the least that was necessary if the purpose of the statute was not to be defeated. 15Initially we note that, if this case had arisen in a jurisdiction where it is possible for the court to act on behalf of decedent and substitute itself, "as nearly as may be for the incompetent, and to act upon the same motives and considerations as would have moved her," the decedent through her representatives would72 have at the time of her death a general power and, in such circumstances, courts have upheld the imposition of estate tax. City Bank Co. v McGowan, 323 U.S. 594">323 U.S. 594, 599 (1945); Hurd v. Commissioner, supra at 613. However, for the year at issue the law of Texas did not adopt the doctrine of substitution of judgment and we are unable to rest our decision on this ground. In re Guardianship of Estate of Neal, 406 S.W.2d 496 (Tex. Civ. App. 1966) affd. application for writ refused, no reversible error, 407 S.W.2d 770">407 S.W.2d 770 (Tex. 1966), 16 see also 24 A.L.R.3d 851">24 A.L.R.3d 851.We agree with respondent that section 2041 is "not concerned with the manner in which the power is exercised," Hurd v. Commissioner, supra at 612,73 but rather the existence or possession of a general power at time of death. Estate of Inman v. Commissioner, 18 T.C. 522">18 T.C. 522, 527 (1952), revd. on other grounds 203 F.2d 679">203 F.2d 679 (2d Cir. 1953). Inquiry must be made as to whether decedent possossed a general power at date of death under local law. Jenkins v. United States, 428 F.2d 538">428 F.2d 538 (5th Cir. 1970), cert. denied 400 U.S. 829">400 U.S. 829 (1970).Prior to and at date of death Mrs. Gilchrist was adjudicated legally incompetent. Therefore, she was legally deprived of whatever power she may have held. Guardians were appointed for her person and her estate. Accordingly, we must extend our analysis to ascertain the nature and extent of the power of the 18 guardians to act on behalf of the incompetent. Did a general power exist in the hands of the guardians? For the answer to this we must, as noted, revert to Texas law.For the year at issue, Texas law did not adopt the doctrine of substitution of judgment and the guardians were unable to act solely on the basis of decedent's motives and considerations as if she were, in fact, competent. 74 Their rights, powers, and duties were controlled by statute and the common law governed only when not in conflict with the provisions of the statutes. Tex. Prob. Code, Ann. sec. 32 (Vernon 1956); In re Guardianship of Estate of Neal, supra.Under the probate code of Texas, "The guardian of the person is entitled to the charge and control of the person of the ward, and the care of his support." Tex. Prob. Code Ann. sec. 229 (Vernon 1956). "The guardian of the estate of a ward is entitled to the possession and management of all properties belonging to the ward, * * * but, in the management of the estate, the guardian shall be governed by the provisions of this code. It is the duty of the guardian of the estate to take care of and manage such estate as a prudent man would manage his own property." Tex. Prob. Code Ann. sec. 230(b)(1) (Vernon 1956). This "prudent man" standard will not authorize the guardian to make gifts of the ward's estate to family members that were not in "need" even though the ward, if of sound mind, would have made the gifts. The court may not authorize the giving away or depletion of the estate but must protect and preserve 75 such estate. In re Guardianship of Estate of Neal, supra.We are aware that, to the extent the ward's annual net income exceeds $ 25,000 and that the full amount of any contribution if made will be deductible from the ward's Federal taxable gross income, the guardian may apply for, and the court may grant, permission to make a gift to a charitable organization not to exceed 20 percent of the net income of the ward's estate. Tex. Prob. Code Ann. sec. 398 (Vernon 1956). Of course the guardian of the person and estate must annually account to the court. Tex. Prob. Code Ann. sec. 399 (Vernon 1956). It seems perfectly clear that under the above laws of the State of Texas the broad power conferred upon the decedent under her husband's will was, upon her adjudication as an incompetent 1777 and the appointment of 19 guardians of her person and property, transferred in a more limited form to such guardians to exercise the power on her behalf. We have previously found that, at the time of her husband's and her death, decedent was childless and had no dependents. Moreover, reference to her Federal income tax returns for years 1971 through 1973 (the year76 of adjudication of incompetency until her death) reveals that she had no net income. 18 Hence we do not believe that the guardians, on behalf of decedent, could give away even 20 percent of the income of Mr. Gilchrist's estate. Their duties and powers, under court control and direction, were limited to protecting and preserving her estate while providing for her support and maintenance. See In re Guardianship of Estate of Neal, supra.The power conferred upon and originally possessed by decedent was no longer exercisable by her, and the power held by the guardians can be fairly labeled a power limited by an ascertainable standard within the meaning of section 2041(b)(1).To sum up, we believe that the purpose of section 2041 is not defeated in holding that, under the laws of Texas as they existed at decedent's date of death and following a legal adjudication of incompetency, neither decedent nor her guardians, on her behalf, possessed a general power of appointment within the meaning of section 2041(a)(2).Decision will be entered under Rule 155. Footnotes1. Respondent would allow additional credit for State death tax based upon the increase in value of the estate if payment is substantiated.↩2. The parties agree that the fair market value of rental property and vacant land at the date of decedent's death described, as reported on Schedule E of the estate tax return, as properties included in an offer to purchase by J.C. Llewellyn, was $ 274,206.45. Respondent concedes that his disallowance of $ 5,507 as a debt of the estate was in error and that petitioner shall be entitled to deduct accounts payable in the amount of $ 8,321 as a debt of the estate. Petitioner concedes that it is not entitled to a deduction for charitable bequests in the amount of $ 51,500 reported on Schedule N of the estate tax return. Also, the parties have stipulated that respondent's adjustment to the value of U.S. Treasury bonds from $ 40,300 to $ 99,580, on Schedule F of the return, was consequent to other adjustments proposed in the statutory notice of deficiency and further adjustment may be required as a result of this Court's decision. Such adjustments shall be made without the necessity of adducing evidence on this issue except for the filing of an amended application for redemption of treasury bonds for Federal estate tax credit (Form PO 1782). Finally, the parties agree that petitioner is entitled to deductions for attorneys' fees and other expenses incident to this action upon proper substantiation thereof.↩3. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years at issue.↩4. Elizabeth Fewell Dearborn was appointed guardian of decedent's person and Layland Myatt guardian of the estate of decedent.↩5. See n. 2 supra↩, wherein the parties have agreed that the fair market value, at date of decedent's death, of 86 parcels of rental real estate or vacant land, in which decendent had an undivided one-half interest (the other undivided one-half being subject to the provisions of her husband's will), was $ 274,206.45.6. (a) In General. -- The value of the gross estate shall include the value of all property -- (2) Powers created after October 21, 1942. -- To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under sections 2035 to 2038, inclusive. A disclaimer or renunciation of such a power of appointment shall not be deemed a release of such power. For purposes of this paragraph (2), the power of appointment shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised.↩7. (b) Definitions. -- For purposes of subsection (a) -- (1) General power of appointment. -- The term "general power of appointment" means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that -- (A) A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.↩8. (C) In the case of a power of appointment created after October 21, 1942, which is exercisable by the decedent only in conjunction with another person --* * * * (ii) If the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent -- such power shall not be deemed a general power of appointment. For the purposes of this clause a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power.↩9. "I give devise and bequeath to my beloved wife, Anna Lora Gilchrist, the income the use and benefits with full rights to sell or transferall the remainder of my property, both real and personal, so long as she may live, and at her death, any remainder of my estate not required for her use, shall be divided equally among the Estates of Jennie Gilchrist Haughawout deceased. Mrs Ida Grant Mrs Marcella Yates and Melvin Gilchrist deceased." (Reproduced literally.)↩10. Upon reading Mr. Gilchrist's one-page will it is readily apparent that it was not drafted by an attorney but by a layman, presumably, Mr. Gilchrist.↩11. We note that petitioner, on brief, aware of this proposition has argued its case under the case law of Connecticut, Indiana, Wisconsin, Ohio, and Massachusetts and we are perplexed by this action. While resort to such other local law may be relevant if Texas law is silent in the area, we have found ample Texas case law to resolve this issue and therefore find petitioner's citation of authorities inapposite.↩12. Where a will contains a provision that on a certain contingency an estate given to one person shall pass to another, the will is construed under Texas law to grant the first taker the greatest possible estate. 61 Tex. Jur.2d sec. 134.↩13. Further support for our holding is found in Peoples Trust Co. of Bergen County v. United States, 412 F.2d 1156">412 F.2d 1156 (3d Cir. 1969), wherein taxpayer similarly argued that the term "required" means "needs" and that the power to consume is limited by a duty imposed under New Jersey case law to consume only such principal as is reasonably necessary for comfortable maintenance and support. The Third Circuit found that New Jersey law did not consistently construe "require" to mean "needs," that the testator's wife was the object of his bounty, and that the wife's power to consume was not restricted within the limits of the statutory ascertainable exception. See also Phinney v. Kay, 275 F.2d 776↩ (5th Cir. 1960).14. The failure to exercise the power constituted a lapse of the power in each year that it was not exercised. Such lapse constituted a release of the power under sec. 2041(b)(2)↩ in such a way that, if it were a transfer of property owned by the decedent, the property would have been included in the gross estate under sec. 2036(a)(1).15. The District Court in Townsend v. United States, 219">232 F.Supp. 219 (E.D. Tex. 1964), relying on Hurd v. Commissioner, 160 F.2d 610">160 F.2d 610 (1st Cir. 1947), stated that if decedent "possessed the power * * * at the time of her death and prior thereto, it is immaterial, under * * * section 2041(a)(2)↩, * * * whether she was physically or mentally capable of exercising such power." Here, again, decedent had not been legally declared incompetent.16. Texas law now appears to be to the contrary. See Tex. Prob. Code Ann. sec. 230(b)↩ (Vernon 1956), as amended by Acts 1975, 64th Leg. 268, ch. 114, sec. 1, effective Apr. 30, 1975.17. This fact, that an adjudication of incompetence took place, is critical to our analysis since we are in full agreement with the thrust of n. 3 to the opinion in Fish v. United States, 432 F.2d 1278">432 F.2d 1278 (9th Cir. 1970), as follows:"We note parenthetically that if the position contended for by the taxpayer were adopted, the result would be an open invitation to contest the competency of the decedent in every similar case, since the competency of any decedent who held a similar power of appointment, and many of whom suffer mental debilitation to some degree prior to death, would be subject to the same posthumous inquiry which the taxpayer seeks here. It should be noted that the decedent was never adjudicated an incompetent prior to her death."↩18. We note such returns indicated that gains or losses from sale of estate assets and earned discount of Mrs. Gilchrist's estate were reported on Mr. Gilchrist's respective estate income tax returns.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620227/	Estate of Dave Gordon, Deceased, The Exchange National Bank of Tampa, Victor Ingram and Edward I. Cutler, Executors, and Estate of Clara W. Gordon, Deceased, The Exchange National Bank of Tampa, Victor Ingram and Edward I. Cutler, Executors, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Gordon v. CommissionerDocket No. 9307-76United States Tax Court70 T.C. 404; 1978 U.S. Tax Ct. LEXIS 106; June 6, 1978, Filed 106 Decision will be entered under Rule 155. Decedents, husband and wife, died following a murder-suicide pact. Decedent-husband's will provided that in the event that he and his wife died "under such circumstances that it is doubtful which of * * [them] died first, it shall be presumed that she survived me." His will further provided that if his wife survived him a certain portion of his property, equal to the maximum amount qualifying for the marital deduction, should pass to a trust for her benefit.Held: The estate of decedent-husband has shown, according to the language of sec. 20.2056(e)-2, Estate Tax Regs., that the order of decedents' deaths "cannot be established by proof" and, under the terms of decedent-husband's will, that "it is doubtful" as to which of them died first. Thus decedent-husband's will directs that it shall be presumed that his wife survived him, and the regulation recognizes such presumption as satisfying the survivorship requirement of sec. 2056, I.R.C. 1954. In these circumstances, decedent-husband's estate is entitled to the claimed marital deduction. Held, further, this Court is without authority to award attorneys' fees and court costs107 to petitioners. Joseph D. Edwards and Michel G. Emmanuel, for the petitioners.Gerald W. Hartley, for the respondent. Featherston, Judge. FEATHERSTON404 Respondent determined deficiencies in petitioners' estate taxes in the following amounts:Estate of Dave Gordon$ 328,795.43Estate of Clara W. Gordon179,789.28Some of the issues have been settled, and the108 issues remaining for decision are as follows:(1) Whether the Estate of Dave Gordon is entitled to a marital deduction under section 20561 for property passing to his surviving spouse.405 (2) Whether petitioners are entitled to recover the attorneys' fees and court costs incurred in this litigation.FINDINGS OF FACTPetitioners are the Estate of Dave Gordon, deceased, the Exchange National Bank of Tampa, Victor Ingram, and Edward I. Cutler, executors, and the Estate of Clara W. Gordon, deceased, the Exchange National Bank of Tampa, Victor Ingram, and Edward I. Cutler, executors. All the executors were legal residents of the State of Florida or had their principal offices in that State at the time the petition was filed in the instant case. The Estates of Dave Gordon (hereinafter also referred to as Dave's estate or petitioner's estate) and Clara 109 Gordon, acting by their duly authorized representatives, filed Federal estate tax returns with the Internal Revenue Service Center, Chamblee, Ga.Sometime between 5:30 p.m. on June 19, 1972, and 10:40 a.m. on June 20, 1972, Dave Gordon (hereinafter Dave) shot his wife, Clara W. Gordon (hereinafter Clara), either once or twice, and then shot himself. They were both found dead in Dave's office located in Tampa, Fla., at about 10:40 a.m. on June 20, 1972.The Tampa Police Department investigated the decedents' deaths and filed a report which described the death scene and the condition of the bodies as found on June 20, 1972. The report classified the decedents' deaths as a murder-suicide, and notes indicating there was a murder-suicide pact were found by investigating officers. The Office of the Medical Examiner of Hillsborough County, Fla., also prepared reports concerning the deaths of Dave and Clara. No autopsies were performed on the decedents, and each death certificate recites that the date and hour of death was "unknown."Two guns, a 38-caliber Smith & Wesson revolver and a 45-caliber Colt revolver, were found at the scene of the death of the two decedents. Dave kept the 45-caliber110 Colt revolver in his desk located in his office and had test fired it twice into a door jamp in his office on an occasion prior to June 20, 1972. On June 20, 1972, the door jamp contained six bullet marks. The other four bullet marks were made by the 38-caliber Smith & Wesson revolver at an undetermined time.Clara was shot twice. One projectile entered the upper middle left-hand side of her chest and exited the upper middle left-hand 406 side of her back. The second projectile entered her left temple and exited her right temple. Dave was shot once with the 38-caliber pistol. The projectile entered his right temple and exited from the left top and back portion of his head.At the time the police officers investigated the scene of the two deaths, the 38-caliber pistol contained one spent round under the hammer and four additional live rounds. The investigating police officers found four spent 38-caliber shell casings and two spent 38-caliber lead bullets in a trash can located in the office where the two decedents were found. Also the investigating police officers found that the 45-caliber pistol contained one spent round under the hammer and, moving clockwise, the pistol111 contained two misfires, followed by one spent round and then followed by two live rounds.At the time the bodies were found, Clara was lying on a sofa in Dave's office, and Dave was lying on the floor with his head resting on a pillow. Dave was not wearing his shoes, and the eyeglasses which he usually wore were placed on a desk in the office.After certain specific bequests, Dave's will devised and bequeathed the rest, residue, and remainder of his estate in trust to be administered pursuant to a trust agreement executed on December 30, 1953. Dave's inter vivos trust dated December 30, 1953, as amended in its entirety on February 28, 1972, provided that if Clara was living at the time of Dave's death the trust was to be divided into two shares, one designated "Marital Trust -- Trust 'A'" and the other designated "Residuary Trust -- Trust 'B.'" The marital trust share was that portion of the trust estate the value of which when added to all other qualifying property passing to Clara resulted in the maximum marital deduction being received by Dave's estate. All the remaining trust corpus was allocated to the residuary trust share in which Clara received a life estate. Article IV112 of the trust provided, in part, as follows:B. Marital Trust -- Trust "A". * 6. Simultaneous Death or Wife Not Surviving. If the Trustor and his wife shall die in a common accident or as a result of a common disaster or under such circumstances that it is doubtful which of them died first, it shall be presumed that the Trustor's wife survived the Trustor for the purposes of the establishment of Trust "A". If the Trustor's wife shall not survive the Trustor, Trust "A" shall not be established, and all of the trust estate shall be held, 407 administered and ultimately disposed of as a part of Trust "B" created under paragraph C hereinafter.Dave's will further provided in item VIII as follows:In the event that my wife and I shall perish in a common accident, or as a result of a common disaster, or under such circumstances that it is doubtful which of us died first, it shall be presumed that she survived me, and this presumption shall apply throughout this Will.Clara's will left all her household furnishings, personal effects, and tangible personal property to Dave, provided he survived her, but otherwise made no devise or bequest to him. The will also provided in113 item IX as follows:In the event my husband, DAVE GORDON, and I shall perish in a common accident or as the result of a common disaster, or under such circumstances that it is doubtful which of us died first, it shall be presumed that I survived him, and this presumption shall apply throughout this Will.On the Federal estate tax return filed for Dave's estate, a marital deduction was claimed for the property reported as passing to the marital trust for Clara pursuant to the terms of Dave's will and trust. On the Federal estate tax return filed for Clara's estate, the value of the property received from Dave's estate was reported as an asset, and a credit was claimed for a portion of the estate taxes paid by Dave's estate.In the notice of deficiency issued to Dave's estate, respondent, among other adjustments, determined that the estate was not entitled to a marital deduction "since the decedent's spouse predeceased him." In the notice of deficiency issued to Clara's estate, respondent, among other adjustments, disallowed the credit claimed by the estate for taxes paid by Dave's estate with respect to the property in which Clara had a life estate. 2 In this latter notice of deficiency, 114 respondent determined that Dave predeceased Clara and that her power of appointment in the marital deduction trust created by her predeceased husband was includable in her gross estate. 3408 OPINIONUnder section 2056, an estate is allowed a marital deduction against the gross estate in "an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate." This language imposes two requirements which are pertinent to our inquiry: first, and most important in the instant case, the decedent's115 spouse must survive him; second, the property must pass to her. The issue in the instant case boils down to whether under the terms of Dave's will, interpreted under Florida law, Clara can be deemed to have survived Dave. If so, Dave's will prescribes that a portion of his property passes to the marital trust for Clara's benefit and Dave's estate is entitled to the claimed deduction under section 2056.In a situation like the instant case where there is a dispute as to which spouse died first, section 20.2056(e)-2(e), Estate Tax Regs., defines the section 2056 survivorship requirements as follows:If the order of deaths of the decedent and his spouse cannot be established by proof, a presumption (whether supplied by local law, the decedent's will, or otherwise) that the decedent was survived by his spouse will be recognized as satisfying paragraph (b)(1) of section 20.2056(a)-1 [i.e., that the decedent was survived by his spouse] * * This regulation imposes on Dave's estate the burden of showing that the order of the deaths "cannot be established by proof." Once this showing is made, the regulation directs attention to the part of Dave's will 4 which provides that if 116 he and Clara should die "under such circumstances that it is doubtful which of * * * [them] died first," it shall be "presumed" that Clara survived him. Thus, if Dave's estate can show that "it is doubtful" which of Clara or Dave died first, then the presumption 409 supplied by Dave's will, if it is effective under State law, is recognized by the regulation as satisfying the section 2056 requirement that Clara survived him.117 The word "presumed," used in Dave's will, has many different meanings, and its meaning in each case depends upon the context in which it is used. Cloud v. State, 150 Tex. Crim. 458">150 Tex. Crim. 458, 202, S.W.2d 846, 848 (Crim. App. 1947). In some contexts, the word is used in its technical sense as a presumption which is not evidence but a rule about evidence. Perry v. Boston Elevated Ry. Co., 322 Mass. 206">322 Mass. 206, 76 N.E.2d 653">76 N.E.2d 653, 655 (1948). Such a presumption merely calls upon a party to prove his case, and the presumption disappears when evidence is introduced to overcome it. Kentucky Trust Co. v. Glenn, 217 F.2d 462">217 F.2d 462, 465 (6th Cir. 1954). In other contexts, the word "presumed" is not used in its evidentiary sense but means "deemed" or "considered." Oregon Worsted Co. v. Chambers, 217 Or. 104">217 Or. 104, 342 P.2d 108">342 P.2d 108, 111 (1959); Rice v. McCarthy, 73 Cal. App. 655">73 Cal. App. 655, 239 P. 56">239 P. 56, 58 (2d Dist. Ct. App. 1925). Stated another way, upon the proof of required preliminary facts, the conclusion to be "presumed" is made mandatory. 118 State v. Hansen, 203 N.W.2d 216">203 N.W.2d 216, 219 (Iowa 1972).We think it quite clear that Dave's will uses the word "presumed" in this latter sense. Had the word "presumed" been used in its technical evidentiary sense, Dave's estate would first be required to prove doubt as to whether Dave or Clara survived. Then, if there was any evidence that Dave did not predecease her, the presumption that he did so would disappear, and Dave's estate would have the burden of proving that he died first. It is almost inconceivable that Dave's will was intended to impose this double and, in fact, inconsistent burden on his estate -- first to prove doubt as to survivorship and then to prove that he predeceased Clara.The wills of both Dave and Clara and the amendment to the marital trust were all signed on February 28, 1972. They all contain substantially the same provision that, in case of doubt as to who died first, it shall be "presumed" that Dave died before Clara. The obvious objective in adopting these provisions was to attempt to assure that, in case their deaths occurred in a common disaster and there was doubt as to survivorship, the designated share of Dave's property119 would pass to the marital trust and Dave's estate would qualify for a marital deduction. Clearly, with this objective in mind, Dave's intention was that 410 upon a preliminary showing that "it is doubtful" whether he or Clara died first, it shall be deemed or considered or conclusively presumed that he predeceased her.The burden of proof cast upon Dave's estate by the regulation and by Dave's will are substantially the same. If Dave's estate carries its burden of showing, in the words of the regulation, that the order of deaths "cannot be established by proof," it has also established, in the words of Dave's will, that "it is doubtful" which of Clara or Dave died first.At the trial of the instant case, petitioners presented testimony from expert witnesses that it was impossible to determine definitely which of the decedents died first. Respondent's case focused on trying to recreate chronologically the events which may have taken place late on June 19, 1972, or early on June 20, 1972. From this alleged sequence of events, respondent concludes that in all probability Clara predeceased Dave. Weighing all the evidence we must side with petitioner. We find that the order120 of decedents' deaths "cannot be established by proof" and, therefore, under the terms of Dave's will, "it is doubtful" which of Clara or Dave died first.One of petitioner's experts testified, and we agree, that there is a very skimpy record from which to draw conclusions or make inferences concerning the order of decedents' deaths. The tangible evidence before this Court consists of a police report describing the bodies and the place where the bodies were found, a medical examiner's reports, and photographs taken of the bodies, the scene of the deaths, and the door jamb containing six bullet holes. Both deaths occurred several hours before the bodies were discovered. There were no witnesses to the shooting, no autopsies were performed, and the death certificates recite that the date and hour of death were "unknown."Petitioners' first expert witness, Dr. Rydell, testified that from the photographs and the information contained in the medical examiner's report pertaining to Clara he could not determine the path or trajectory of the two 38-caliber bullets through Clara's head or chest or the vital organs which were struck by the bullets. With respect to the wounds to Clara's head, 121 he stated that he had seen persons walk into an emergency room after receiving gunshot wounds to the temple. He concluded that the only precise way to determine the extent of Clara's injuries was by autopsy.411 Dr. Rydell further testified that, as between a 38-caliber gunshot wound and a 45-caliber wound, he could not, in his experience with such wounds, distinguish the amount of damage done by each. He related that the trajectory of the bullet through the body was more significant in determining damage than the caliber of bullet. With respect to the head wounds to Dave and Clara, he found that they were similar in that the bullets entered the temple region and traversed the brain. However, noting from the police report, the medical examiner's reports, and the photographs that the exit wounds were different, he could not, from the evidence available, determine the severity of the respective head wounds or whether the bullets did similar damage to Dave and Clara.Petitioners' second expert witness, Dr. Lardizabal, corroborated Dr. Rydell's testimony. With respect to Dave's head wound, he stated that the bullet obviously destroyed or affected certain vital brain centers, 122 but the mechanics of destruction of those centers could not be explained from the information available. Significantly, he concluded that "there are so many things that are not known in these two cases. That is why I cannot give an honest, accurate * * opinion as to who died first."Respondent's expert witness, Dr. Lipkovic, agreed that the external appearances of the head wounds to Dave and Clara were similar except for the points of exit of the respective bullets and that the difference in the caliber of the bullets was unimportant in reaching a determination as to the survival time of each decedent. He further agreed that the paths of the bullets were significant in determining what vital organs were damaged and that a small difference in trajectory through the head might make a difference in survival time. However, it was his opinion, disregarding the chest wound to Clara, that the head wounds were equally destructive and that Dave and Clara were immediately dead as soon as each wound was inflicted.As to the timing of the respective wounds, Dr. Lipkovic testified that the following sequence of events probably occurred and resulted in the death of the two decedents:(a) 123 Dave first inflicted a 45-caliber gunshot wound to Clara's heart.(b) Dave then attempted to inflict a 45-caliber gunshot wound to her left temple, but experienced two misfires; however, on the 412 third attempt he was successful in inflicting the 45-caliber gunshot wound to her left temple.(c) Dave then test-fired a 38-caliber Smith & Wesson pistol four times into a door jamb located in the office where he and his then dying, if not dead, wife were present.(d) Dave then removed two spent 38-caliber lead bullets from the floor and placed them in a trash can.(e) Dave then reloaded the 38-caliber pistol and placed the four spent cartridge casings in the trash can.(f) Dave then removed his eyeglasses and his shoes and lay on the floor placing his head on a cushion from the couch on which his wife was lying.(g) Dave then committed suicide by inflicting a 38-caliber gunshot wound to his head in the right temple area.Dr. Lipkovic, however, emphasized that the sequence of events was "probably" what occurred and that he could not "state anything with certainty." Assuming this sequence of events and viewing the same evidence available to petitioners' experts, respondent's expert124 concluded that in all probability, Clara died before Dave died.The experts agree that the speed of each decedent's death depends upon the actual mechanics by which each person died, but on this latter point there are much confusion and very little concrete evidence. The testimony points out that the death of either Dave or Clara may have resulted merely from loss of blood, eventually depriving the brain of needed oxygen; it may have been the result of hemorrhage putting excessive pressure on vital centers of the brain, thereby causing them to cease functioning; death may have occurred because vital brain centers were destroyed by hydrostatic pressure which built up within the cranium as the result of the gunshots; it may have resulted from a vital brain center having been destroyed by passage of the bullet, or a bone projectile created by it; or death may have occurred from other mechanical processes.Each of these processes of death requires differing lengths of time (though the difference may be only seconds) and no one can say which of the processes actually caused the death of either Dave or Clara. The actual processes of death of the two decedents may or may not have been 125 dramatically different. Accordingly, the survival time for each decedent after they were shot would be affected.413 Moreover, although at first blush Dr. Lipkovic's recreation of the sequence of events which may have taken place and resulted in decedent's deaths appears reasonable, we think that, on closer examination, his approach assumes too much and depends heavily on surmise and naked logic unsupported by a sound factual basis. On cross examination respondent's expert was, by his own admission, unsure about several aspects of the alleged timing of events, and the testimony which follows shows that even his initial assumption concerning the sequence of events may have been incorrect:Q. I believe you next testified that the first shot was in the chest of Clara Gordon?A. Yes, trying to be logical again. That's the on --Q. On --A. -- only basis I have.Q. On what facts that are in the evidence do you base that?A. Well, knowing that Clara had a shot in her chest and a shot in her head, the head shot renders a person immediately unconscious and is fairly devastating. I don't think the head shot would call for another body shot. On the other hand, a body shot would leave126 a person possibly conscious for at least a few seconds and if not conscious, moaning, gurgling, making noises, even twitching and this will prompt a person to administer coup de gras [sic].Q. Is there any evidence you can point to that there was twitching or moaning or noises?A. No, sir, I cannot.* * * Q. Then would you say that it's a guess on your part? That the chest wound was the first one?A. It is a knowledge about the behavior of people who have been shot in the heart or in the chest known from hundreds of my cases.Q. * * No fact in this case leads you to that conclusion, is that correct?A. That is correct, sir. 5From all the available evidence, we cannot tell whether Clara or Dave was in truth the survivor. In the words of section 20.2056(e)-2(e), Estate Tax Regs., the "order of deaths" of Dave and Clara127 "cannot be established by proof." In the words of Dave's will, "it is doubtful" which of them died first. This is precisely the situation which Dave foresaw when he signed his will. In such circumstances, his will directs that it shall be presumed -- deemed, considered, conclusively presumed -- that he 414 died first, and such presumption is recognized as satisfying the section 2056 requirement of survivorship. The designated portion of his property passed to the marital trust, and Dave's estate is entitled to the marital deduction.The circumstances of a tragedy like this one will never exactly parallel another, and for this reason the decision in one case cannot be decisive on a different set of facts. We note, however, that in other murder-suicide cases the courts have declined to accept speculation and questionable inferences as bases for holding that one party to such a pact survived the other. See, e.g., Belt v. Baser, 238 Ark. 644">238 Ark. 644, 383 S.W.2d 657">383 S.W.2d 657, 659 (1964) ("inferences but no legal proof"); Darby v. Schoolcraft, 125 Ind. App. 440">125 Ind. App. 440, 125 N.E.2d 812">125 N.E.2d 812, 814 (1955) ("clearly speculatory"); 128 In re Meyer's Estate, 276 App. Div. 972, 94 N.Y.S.2d 620">94 N.Y.S.2d 620, 621 (2d Dept. 1950) ("impossible to determine that the two persons died otherwise than simultaneously").Respondent contends, however, that Dave's estate had the burden of proving that Clara survived Dave because the notice of deficiency determined that "decedent's spouse predeceased him." The Commissioner's authority under section 6212 is to determine a deficiency and send notice thereof to the taxpayer. To be sure it has been said that a notice of deficiency carries with it a "presumption of correctness," and the taxpayer has the burden of proving that the deficiency is wrong. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). However, the taxpayer does not have the additional burden of disproving all factual statements made in the notice. Cf. Brainard v. Commissioner, 7 T.C. 1180">7 T.C. 1180, 1184-1185 (1946). The Commissioner, by including factual statements in the notice, cannot cast a heavier burden of proof upon petitioner than is required to show that the determined deficiency is erroneous.Petitioners in the instant case have proved129 that the deficiencies were in error to the extent of the disallowance of the marital deduction to Dave's estate. To reach this result, petitioners had to show, focusing on the language of Dave's will, that "it is doubtful" whether Dave or Clara died first. Petitioners did not have to show, as respondent argues, that Clara predeceased Dave. By reason of the regulation quoted above, the presumption in Dave's will is recognized as satisfying the section 2056 requirement that he was survived by Clara. Since Dave's estate has shown the doubt required to trigger the 415 presumption in Dave's will, the estate is entitled to the marital deduction. The Commissioner cannot characterize the issue here presented in terms more onerous than the regulation. Nor can the Commissioner by including recitals in the notice of deficiency alter the rules governing the devolution of Dave's property 6 or the circumstance in which the marital deduction is to be allowed.130 Finally, petitioners request this Court to award attorneys' fees and court costs emanating from this proceeding "in order to partially rectify the hardship caused the beneficiaries of the estates by prolonging the administration of the estates and compelling it [sic] to employ counsel to defend this action." On this point we must follow our prior decision in Key Buick Co. v. Commissioner, 68 T.C. 178">68 T.C. 178 (1977), on appeal (5th Cir., Aug. 15, 1977), and hold that this Court is without authority to award the attorneys' fees and court costs sought in the instant case.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 on the date of death of Dave Gordon and Clara W. Gordon, unless otherwise noted.↩2. On brief petitioners conceded that, if they prevail on the marital deduction issue, Clara's estate is not entitled to a credit for taxes paid by Dave's estate.↩3. The parties have stipulated that resolution of the value of the power of appointment in Clara's estate depends on this Court's determination of the marital deduction (order-of-death) issue in Dave's estate.↩4. Florida has adopted a version of the Uniform Simultaneous Death Act, Fla. Stat. sec. 736.05 (1973), in part as follows, but it does not apply in that decedent's will differs from that Act:(1) No sufficient evidence of survivorship. -- Where the title to property or the devolution thereof depends upon priority of death and there is no sufficient evidence that the persons have died otherwise than simultaneously, the property of each person shall be disposed of as if he had survived, except as provided otherwise in this law. [Emphasis supplied.]* * * *(6) Does not apply if decedent provides otherwise. -- This law shall not apply in the case of wills, living trusts, deeds or contracts of insurance wherein provision has been made for distribution of property different from the provisions of this law.↩5. The fact that the Commissioner also made a determination in the case of Clara's estate that Dave predeceased Clara confirms that, in his view, the order of their deaths was not beyond doubt.↩6. The law is settled that a testator's intention, expressed in his will, that his spouse shall be deemed the survivor in case of a common disaster will be given effect in circumstances where it is doubtful which one predeceased the other. E.g., In re Fowles' Will, 222 N.Y. 222">222 N.Y. 222, 118 N.E. 611">118 N.E. 611 (1918); In re Roland's Estate, 40 Misc. 2d 1018">40 Misc.2d 1018, 244 N.Y.S.2d 743">244 N.Y.S.2d 743 (N.Y. County Surr. Ct. 1963); In re Brew's Will, 7 App. Div.2d 364, 183 N.Y.S.2d 321">183 N.Y.S.2d 321↩ (1st Dept. 1959).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620228/	James M. Osborn and Marie-Louise Osborn, Petitioners, v. Commissioner of Internal Revenue, RespondentOsborn v. CommissionerDocket No. 1721United States Tax Court3 T.C. 603; 1944 U.S. Tax Ct. LEXIS 148; April 11, 1944, Promulgated 148 Decision will be entered under Rule 50. Amounts paid by a scholar for research assistance in his work on three publications, from none of which he expects to derive profit, the purpose of his work and expense being to increase his prestige and to improve his reputation for scholarship and learning and thus attract opportunities of positions in the field of education, held, not deductible as ordinary and necessary expenses of carrying on a trade or business. James W. Cooper, Esq., for the petitioner.James T. Haslam, Esq., for the respondent. Sternhagen, Judge. STERNHAGEN 603 A deficiency of $ 355.09 in 1940 income taxes was determined by the Commissioner. The disallowance of a deduction of $ 7,105.29, research expenses, is the only adjustment assailed.FINDINGS OF FACT.The taxpayer and his wife lived in New Haven, Connecticut, and filed a joint return in the collection district of Connecticut. The deficiency here is determined in respect of the wife, only because the return is a joint return.Osborn, a graduate of Wesleyan University, 1928, Master of Arts, Columbia, 1934, Bachelor of Literature, Oxford, 1937, is, and was in 1940, on the Yale faculty as149 an associate professor, and is engaged in literary research. He receives no compensation from the university. He gave a series of lectures at Wesleyan University, for which he 604 received $ 450. His principal occupation was scholarly research in respect of the preparation of three works: "Work in Progress in the Modern Humanities," "Dryden, Facts and Problems," and "Subject Index of British Periodicals Before 1802." This took most of his time in 1940. Of these, the first was an annual index or bibliography which was distributed without cost to the members of an organization. The second was a book published by the Columbia University Press in 1941, of which 500 copies were printed at a cost to Osborn of $ 760, and from which he did not expect a profit, and the third has not yet been printed, but Osborn expects that ultimately it may be profitable. In connection with this occupation he paid expenses for services of research and clerical assistants, stationery, index cards, printing, and similar items, amounting in 1940 in the aggregate to $ 6,661.17, as conceded by the Commissioner. Osborn's purpose in doing this work and in undertaking these expenses was to make himself150 eligible for a highly remunerative professional appointment, such as a college president, and to receive income from the publications over a period of future years. His work has resulted in inquiries for his availability for highly paid jobs. His motives in writing the books have been "by doing work of first class calibre, to gain the reputation of being a first class scholar, so that I shall be eligible for first class appointments, -- a highly remunerative appointment, -- as well as prestige." He did other work on scholarly papers, books, and pamphlets, on all of which he employed assistants.OPINION.The taxpayer, a research professor at Yale, claims the right to deduct expenses paid by him for services incident to the preparation and publication of scholarly and literary matter from which he did not, and did not expect to, derive a direct or immediate profit, but which he hoped and expected would be a means of demonstrating his ability and attainments to persons in the fields of learning and education and would thus bring him a lucrative position, perhaps as a college president. The statutory provision upon which the claimed deduction is based is section 23 (a) (1) (A), Internal151 Revenue Code, 1 which requires the allowance of deductions of expenses paid in carrying on a trade or business.605 The evidence, consisting entirely of the testimony of the taxpayer himself, shows that he was not engaged in the business 152 of writing or preparing books primarily for profit. His work on the books was his principal occupation. As a member of the Yale faculty, he received no compensation. Apparently his entire interest was not in current gain or present livelihood from his efforts, but in laying a foundation for the future. His position was similar to that of any student preparing and training himself for a profession or lifework; he builds a foundation of learning upon which his future living and earnings are to be based. The expenses incurred in preparing himself are in essence the cost of the capital structure from which his future income is to be derived. They are not ordinary and necessary expenses of carrying on a trade or business. This is not to say that they do not deserve recognition and respect -- that they are not "well and wisely spent" -- Welch v. Helvering, 290 U.S. 111">290 U.S. 111, but only that they can not be given deductibility for tax purposes in the absence of legislation, where alone deductibility can be provided.The Doggett case (65 Fed. (2d) 191) is different. The taxpayer was engaged in selling the books which he was*153 producing. No matter that his principal purpose in disseminating them was to spread their doctrine; his expenses and losses were directly connected with producing and disposing of the books, and this the court held was his business, even though it was not immediately profitable. Here the taxpayer is not incurring the expenses in the course of a business of selling the books, or of building up a business of selling the books for profit, but in the course of preparing books to demonstrate his scholastic attainments, which were to be the subject of his future exploitation. This expense is not an ordinary and necessary expense of carrying on a trade or business, and therefore it can not be deducted.Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. --(1) Trade or business expenses. --(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actully rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620229/	Edward W. Mathews, Jr., and Miriam P. Mathews v. Commissioner.Mathews v. CommissionerDocket No. 49157.United States Tax CourtT.C. Memo 1955-61; 1955 Tax Ct. Memo LEXIS 278; 14 T.C.M. (CCH) 198; T.C.M. (RIA) 55061; March 15, 1955278 From March 1949 to December 31, 1950, petitioner was employed as controller of a corporation whose offices were in Galion, Ohio. During that period, petitioner maintained a residence for his family in Lima, Ohio. On his returns for 1949 and 1950, he deducted the cost of meals and lodging incurred by him while working in Galion 5 days a week, and the cost of traveling from Galion to Lima each weekend. Respondent disallowed such deductions. Held, deductions claimed by petitioner were nondeductible personal expenditures within the meaning of section 24(a)(1) of the Internal Revenue Code of 1939. A. H. Ganger, Esq., 2461 Chester Avenue, Cleveland, Ohio, for the petitioners. Theodore E. Davis, Esq., for the respondent. RICEMemorandum279 Findings of Fact and Opinion This proceeding involves deficiencies in income tax of $387.64 and $522.14 determined against the petitioners for the years 1949 and 1950, respectively. The only issue is whether the cost of meals and lodging incurred by petitioner, Edward W. Mathews, Jr., while working in Galion, Ohio, and the cost of transportation between that city and Lima, were deductible expenditures under section 23(a)(1) of the 1939 Code. Findings of Fact Edward W. Mathews, Jr. (hereinafter referred to as the petitioner), and his wife, Miriam P. Mathews, maintained a residence at Lima, Ohio, during the years in issue and filed their income tax returns for such calendar years with the collector of internal revenue for the tenth district of Ohio. In March 1949, the North Electric Manufacturing Company (hereinafter referred to as the Company) of Galion, Ohio, arranged for a line of credit from The National City Bank of Cleveland (hereinafter referred to as the Bank). One condition under which the Bank agreed to extend credit was that the Company employ a man satisfactory to the Bank to act as controller for as long as the Company was indebted to it. Francis H. Beam, a vice-president280 of the Bank, talked with petitioner and recommended him to the Company for the position of controller. Petitioner was employed by the Company as its controller in March 1949 at a monthly salary of $1,250, on which tax was withheld. Of such sum, $250 was to compensate petitioner for the cost of meals and lodging incurred by him while working in Galion 5 days a week. Petitioner did not wish to move his residence from Lima because he did not expect his employment with the Company to be permanent. He traveled to Lima approximately every weekend during his employment with the Company in 1949 and 1950. The Company's indebtedness to the Bank was satisfied in December 1949, but petitioner's employment continued until March 1, 1951. During the course of his employment, he made trips on behalf of the Company, and incurred expenses for which he was reimbursed by it. On his income tax return for 1949, petitioner reported the full amount received from the Company ($1,250 per month). He deducted $1,865.50 for meals and lodging while working in Galion 5 days a week and for the cost of traveling between Galion and Lima each weekend. He deducted the amount of $2,176.80 for similar expenses on his281 return for 1950. The expenses so deducted by petitioner on his returns were personal in nature. Opinion RICE, Judge: Petitioner argues that the expenditures in question were "away from home" traveling expenses within the meaning of section 23(a)(1)(A), since his employment with the Company at Galion, Ohio, was only temporary. It is apparent from the facts hereinbefore set forth that such expenditures do not satisfy the requirements of the statute as explained by the Supreme Court in , rehearing denied . Petitioner has failed to show the necessary relationship between the expenditures which he deducted on his returns and the Company's business. While his employment with the Company was not permanent, it was indefinite and of sufficient duration to constitute Galion, Ohio, his post of duty. He chose to maintain his residence in Lima and was successful in bargaining with the Company for additional compensation to cover his living expenses while in Galion 5 days a week. Travel expenses, within the meaning of the statute, could arise only when petitioner was required to travel to, and remain*282 temporarily in, some other place than Galion on the Company's business. Petitioner, in fact, made such trips for the Company, incurring expenses therefor which would have been deductible had he not been reimbursed. We see no real difference in petitioner's position and that of the taxpayers in ; , and , wherein we held that expenditures similar to those in issue here were personal in nature and nondeductible. We so hold here. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620230/	EMIL PETERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Peterson v. CommissionerDocket No. 103375.United States Board of Tax Appeals45 B.T.A. 624; 1941 BTA LEXIS 1090; November 7, 1941, Promulgated 1090 1. Petitioner, a resident of the Philippine Islands from 1898 until 1924, filed income tax returns with the Philippine Government for the years 1918 to 1923, inclusive, but filed no returns to the United State Government for those years. While employed in the Philippines, petitioner was engageo in the trade of candy maker. At the request of his employer, petitioner left a portion of his salary with the employer, receiving interest thereon. Held, that respondent is not barred by the statute of limitations provided in section 250(d) of the Revenue Act of 1918 from asserting deficiencies in petitioner's income tax for the years 1918, 1919, and 1920, since section 250(d) of the Revenue Act of 1921 is the applicable statute; held, further, that petitioner is subject to income tax imposed by the Revenue Act of 1918. Lawrence v. Wardell,273 Fed. 405, followed. 2. Held, that the interest received by petitioner from undrawn salary was not income derived from the active conduct of a trade or business within the meaning of section 262 of the Revenue Act of 1921; held, further, that petitioner is not entitled to the exemptive provisions of section1091 262 and was under a duty to file returns for the years 1921, 1922, and 1923 and pay a tax on net income for those years; held, further, that the years 1921, 1922, and 1923 are not barred by section 250(d) of the Revenue Act of 1921. 3. Held, that because of failure of petitioner to file returns for the years 1921, 1922, and 1923, imposition of the 25 percent penalty is mandatory. Reeves Aylmore, Esq., and Thomas U. Fowler, Esq., for the petitioner. B. H. Neblett, Esq., for the respondent. HILL624 Respondent determined the following deficiencies and penalties in petitioner's income tax: YearDeficiency25% penalty1918$348.571919123.081920786.441921$98.79$24.701922171.3142.831923281.5470.39The first issue is whether or not petitioner is liable for Federal income tax for the years 1918, 1919, and 1920. The second issue is whether petitioner is liable for Federal income tax for the years 1921, 1922, and 1923. The third issue is whether respondent erred in asserting a 25 percent penalty against petitioner with respect to each of the years 1921, 1922, and 1923 for failure to1092 file returns in those years. 625 FINDINGS OF FACT. Petitioner is a citizen of the United States and resides in Seattle, Washington. During all the taxable years petitioner was an unmarried individual. During the Spanish-American War petitioner enlisted at Tacoma, Washington, with the regiment known as the "First Washington Regiment" and was sent to the Philippine Islands in 1898. Prior to his enlistment petitioner resided in Seattle, Washington. After cessation of the war, petitioner remained in Manila and went into business for himself. About 3 1/2 months later petitioner was employed by B. A. Clark, a candy manufacturer, in the capacity of candy maker at a salary of approximately 300 pesos a month. Petitioner continued to work for that firm or its successors until 1924. From the date of his discharge from the Army until 1924, petitioner remained a resident of the Philippine Islands. Petitioner became a half owner in a hotel there and derived profit in 1918 and 1920 from operation of the hotel. In 1920 the hotel was sold. All of petitioner's income in the taxable years was derived from sources within the Philippine Islands. Petitioner filed returns with1093 the Philippine Government for the years 1918 to 1923, inclusive. He filed no other income tax returns for those years. Petitioner's income during the years 1918 to 1923, inclusive, as disclosed by his returns made to the Philippine Government was as follows (in Philippine pesos): YearSalary andIncome fromDividendsInterestOther incomeTotal grosswagesbusinessIncome1918[] 4,800[] 5,640.25[] 1,620[] 347.00[] 12,407.2519195,8001,8001,317.198,917.1919204,8007,800.002,1601,201.281 [] 15,00030,961.2819214,8002,1602,318.009,278.0019225,8001,8002,682.8010,282.8019236,0006,1202,603.2214,723.22Petitioner also received interest from Liberty bond investment in the sum of 92 pesos in each of the years 1922 and 1923, which sums are not included in the above schedule. The interest items appearing in the above schedule include interest on unpaid salary of petitioner, which petitioner's employer had requested him to leave with the employer until a later date. The notice of deficiency relating to each of the1094 taxable years was sent to petitioner under date of March 22, 1940. The deficiencies were determined by respondent by converting the net income in Philippine pesos reported by petitioner in his returns to the Philippine Government into dollars at the rate of exchange prevailing in 626 the taxable years. Under date of March 18, 1949, petitioner paid under protest the deficiencies determined for the taxable years 1918 to 1923, inclusive. OPINION. HILL: The first issue concerns the liability of petitioner for income taxes for the years 1918, 1919, and 1920. Petitioner contends that respondent is barred by limitation from asserting deficiencies as to the years 1918, 1919, and 1920, maintaining that the applicable statute of limitations is contained in section 250(d) of the Revenue Act of 1918. 1 That section provides that except in the case of a false or fraudulent return the tax must be determined and assessed within five years from the date the return was due or made. Therefore, petitioner claims, the statute began to run with respect to each of the years 1918, 1919, and 1920 on the date the respective returns were due to be filed. Respondent argues that the statute1095 of limitations applicable is section 250(d) of the Revenue Act of 1921. 21096 Petitioner's contention might have validity if the applicable statute were section 250(d) of the Revenue Act of 1918. The applicable statute, however, is section 250(d) of the Revenue Act of 1921, which provides that with rewpect to income taxes imposed under prior acts the tax should be determined and assessed within five years after the return was filed; provided that in the case of a false or fraudulent return with intent to evade tax or "failure to file a required return," the tax might be determined, assessed and collected and a suit or proceeding for collection begun at any time after it becomes due. 627 We have previously considered the question of the applicability of section 250(d) of the Revenue Act of 1918 to taxes imposed by the Revenue Act of 1918 where no return was filed. ; . In the Heyl case we applied section 276(a) of the Revenue Act of 1934 (which is similar to section 250(d) of the Revenue Act of 1921) to hold that the statute never began to run. In the Price case we held that no statute of limitations became effective as to the year 19181097 where the required return was not filed, applying section 277(a)(3) (a)(3) of the Revenue Act of 1926 which provides "the amount of income * * * taxes imposed by * * * the Revenue Act of 1918 * * * shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period." The 1921 Act is specifically applicable to income taxes imposed under prior acts. We see no constitutional objection to such application. Accordingly, we hold that the statute of limitations never began to run with respect to petitioner's Federal income tax for the years 1918, 1919, and 1920. Petitioner next maintains that the Revenue Act of 1918 was not in force with respect to citizens of the United States residing in the Philippines in either of the years 1918, 1919, and 1920. He maintains that since section 1400(b) of the Revenue Act of 1918 3 provided that the Revenue Act of 1916 as amended should remain in force for assessment and collection of income tax in the Philippine Islands, the Revenue Act of 1916 as amended and not the Revenue Act of 1918 controls as to the taxable years 1918, 1098 1919, and 1920. He also relies on article 1131 of respondent's Regulations 45, which states: "the Revenue Act of 1918 is not in force in Porto Rico and the Philippine Islands. See also section 1400 of the statute." Respondent argues that petitioner is taxable under the Revenue Act of 1918, placing his reliance on the case of . In , the Circuit Court of Appeals for the Ninth Circuit held that a citizen of the United States residing in the Philippines in 1918 was subject to tax under the Revenue Act of 1918 despite the provisions of section 1400 of the Revenue Act of 1918. The court stated: In the repealing clauses of the act of 1918, as quoted in the statement of the case, the act of 1916, as amended by the act of 1917, in force in the Philippines, 628 was continued in force, except as might be otherwise1099 provided by the local Legislature. As a general statute of the United States there was clear repeal, but as to the Philippines the act of 1916 was kept alive, as direct legislation by Congress with respect to the local affairs of the island, and not as a general statute of the United States. A citizen of the United States residing in the Philippines becomes subject to the Income Tax Law under the act of 1918. By section 261, supra, of that act, the tax shall be levied, collected, and paid in accordance with the act of 1916, as amended, returns to be made and taxes to be paid under title I of the act by "every individual who is a citizen or resident" of the island; the local Legislature having power as already defined. The citizen of the United States residing in the island is in much the same position as is a citizen of a state, where there is a state income tax. The fact of residence in the Philippines avails him no more than would the fact of residence in a state. * * We are of the opinion that the Lawrence case was correctly decided and that United States citizens residents of the Philippines in 1918, 1919, and 1920 were subject to the taxes imposed by the Revenue1100 Act of 1918. It should be noted that article 1131 of respondent's Regulations 45, upon which petitioner relies, is immediately followed by a provision in article 1132 of the same regulations which states that a citizen of the United States residing in the Philippine Islands is taxable in both the United States and the Philippines. Thus, respondent's regulations under the Revenue Act of 1918 interpreted the Revenue Act of 1916 to be applicable to residents in the Philippines in 1918 solely as a local revenue act. Respondent is sustained on this issue. The second question for our determination is whether or not petitioner is taxable in the years 1921, 1922, and 1923 under the provisions of the Revenue Act of 1921. Petitioner contends that he was not required to file his return and was not taxable under the Revenue Act of 1921, since he had no gross income from sources within the United States and was exempt from tax on income from sources within the Philippines by virtue of section 262(a) of the Revenue Act of 1921. 41101 Both parties agree that the 80 percent requirement relating to income from sources within a possession of the United States has 629 been satisfied. Disposition of this issue hinges on our resolution of the parties' different interpretations of the provision requiring at least 40 percent of the taxpayer's gross income for the three-year period immediately preceding the close of the taxable year to be derived from the active conduct of a trade or business within a possession of the United States. Respondent concedes that petitioner's wages and salary for all taxable years were derived from active conduct of a trade or business. Petitioner concedes that the dividends received in the taxable years were not derived from the conduct of a business. The controversy concerns items of interest which petitioner contends were derived from the active conduct of his business, while respondent argues that they are in the same category as dividends. We are of the opinion that the interest items were not derived from the active conduct of a trade or business. While the interest items relate to interest on unpaid salary, it can not be said that such interest is derived from petitioner's1102 business as a candy maker. There has been no proof that petitioner was in the business of loaning money and we are unable to make such a finding. Excluding interest from gross income derived from the active conduct of a trade or business, the gross income of petitioner from the conduct of a trade or business in the three-year period immediately preceding the close of each of the taxable years 1921, 1922, and 1923 was less than 50 percent of the total gross income received by petitioner in those periods. The statute of limitations with regard to the years 1921, 1922, and 1923 has not run because of petitioner's failure to file returns of tax under the 1921 Act. Section 250(d). Accordingly, we hold for respondent on this issue. The final issue concerns the 25 percent penalties which respondent has asserted against petitioner for the years 1921, 1922, and 1923 for failure to file returns in those years. Since petitioner has not shown that he came within the exemptive provisions of section 262 of the Revenue Act of 1921, the total gross income of petitioner is gross income for purposes of the income tax and for determining the necessity of filing returns. Section 223(a) of the1103 Revenue Act of 1921 provides that returns should be filed by individuals having net incomes in excess of their personal exemptions. Since petitioner's net income in each of the years 1921, 1922, and 1923 was in excess of his personal exemption, he was under a duty to file returns for those years. His returns to the Philippine Government were not the returns contemplated by the 1921 Act. Because of petitioner's failure to file the required returns imposition of the 25 percent penalty is mandatory. . Decision will be entered for the respondent.Footnotes1. Sale of hotel. ↩1. (d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return shall be determined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due. ↩2. (d) The amount of income, excess-profits, or war-profits taxes due under any return made under this Act for the taxable year 1921 or succeeding taxable years shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts, or under section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, or of any taxes due under section 38 of such Act of August 5, 1909, shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or proceedings begun at the time of the passage of this Act: * * provided further, That in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, and collected, and a suit or proceeding for the collection of such amount may be begun, at any time after it becomes due: * * * * * * ↩3. Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their respective legislatures. ↩4. SEC. 262(a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States - (1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and * * * (3) If, in the case of such citizens, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620231/	Leonard J. and Virginia Jenard v. Commissioner.Jenard v. CommissionerDocket No. 74346.United States Tax CourtT.C. Memo 1961-70; 1961 Tax Ct. Memo LEXIS 278; 20 T.C.M. (CCH) 346; T.C.M. (RIA) 61070; March 15, 1961278 Held, petitioner's deductible loss resulting from a fire to his residence cannot exceed the cost of repairs that restored the property to its condition before the fire, less fire insurance recovery. Eustace T. Pliakas, Esq., Hospital Trust Bldg., Providence, R.I., for the petitioners. J. Frost Walker, Jr., Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined a deficiency in the petitioners' income tax for 1955 in the amount of $5,362.77. The only issue is the amount of the casualty loss deductible by petitioners in 1955 as a result of the damage to their residence by fire. Findings of Fact Some of the facts279 have been stipulated and they are hereby incorporated by this reference. Leonard J. and Virginia Jenard, husband and wife, are residents of Pawtucket, Rhode Island. They filed a joint income tax return for 1955 with the district director of internal revenue for the district of Rhode Island. Leonard will hereinafter be called the petitioner. On December 21, 1955 the petitioner's residence was damaged by fire. Following the fire the petitioner engaged Alphage Ferland & Sons, Inc. to rebuild their residence and paid it $23,782.47. It is stipulated that the repairs and rebuilding made by Alphage Ferland & Sons, Inc. for $23,782.47 restored the building in question to its condition immediately before the casualty. When the fire occurred, the petitioner had in force and effect insurance coverage in the amount of $50,000 pertaining to the residence alone. The amount of insurance recovery obtained by petitioner through his policy of insurance was $18,377.40. The adjusted basis of the petitioner's residence (built in 1948) immediately prior to the fire was greater than the sustained loss. In their joint income tax return for 1955 the petitioner and his wife claimed a casualty loss280 in the amount of $12,459.32, stating that their residence was substantially destroyed by fire. Respondent disallowed the entire casualty loss deduction in the amount of $12,459.32, with the explanation that the petitioner failed to establish "that the alleged loss was not compensated for by insurance or otherwise within the meaning of Section 165 of the Internal Revenue Code of 1954." It was stipulated that the casualty loss deduction of $12,459.32 claimed by the petitioner in the 1955 income tax return consisted of (1) loss of residence by fire, $9,275.81; and (2) loss of personal effects by fire, $3,183.51, and it is also stipulated that petitioner does not contest respondent's disallowance of $3,183.51 claimed as a loss of personal effects. But in an amendment to his petition the petitioner alleges that he incurred a casualty loss caused by fire to his residence in the amount of $13,622.70, 1 rather than $9,275.81. Respondent concedes that petitioner is entitled to a casualty loss deduction of $5,405.07 for the year 1955. Opinion281 The measure of a casualty loss under section 165(c)(3) of the Internal Revenue Code of 1954 on nonbusiness property is the difference between the fair market value of the property immediately before and immediately after the casualty, but not in excess of the adjusted basis of the property, and diminished by any compensation derived from insurance or otherwise. Helvering v. Owens, 305 U.S. 468">305 U.S. 468. Petitioner contends that the fair market value of his residence immediately before and after the fire was $62,000 and $30,000, respectively. From the purported loss of $32,000 he then subtracts $18,377.40, which is the amount of the insurance recovery, and he claims the balance, or $13,622.60 as a casualty loss. It is stipulated: Following the fire the petitioners engaged Alphage Ferland & Sons, Inc. to rebuild their residence and paid Alphage Ferland & Sons, Inc. the sum of $23,782.47. The repairs and rebuilding made by Alphage Ferland & Sons, Inc. for $23,782.47 restored the building in question to its condition immediately before the casualty. Respondent now allows petitioner's casualty loss in the sum of $5,405.07, which represents the excess282 of petitioner's cost over insurance of repairs and rebuilding to restore the building to its condition immediately before the fire. Sec. 1.165-7(a)(2)(ii), Income Tax Regs., provides that the "cost of repairs to the property damaged is acceptable as evidence of the loss of value * ." From the above, it is seen petitioner is contending he suffered a loss by reason of the fire which was $8,217.53 more than the cost of restoring the house to the condition it was in before the fire. Petitioner argues a burned building suffers a loss in market value, over and above the cost of restoring it to its condition before the fire; that a loss of value results because a prospective buyer in the market for a house would, upon learning of the fire, fear that there may have been latent structural weaknesses caused by the fire which were not repaired; and, therefore, the very occurrence of the fire serves to decrease the fair market value in an amount in excess of repair costs. It is true, as petitioner argues, the loss is measured by the fair market value before and after the fire and the Commissioner's regulations (Sec. 1.165-7(a)(2)(ii)) as to repair costs is no283 more than a rule of evidence. But here the stipulation establishes complete restoration as a verity. We must assume no latent structural weaknesses did, in fact, remain. Nevertheless, petitioner and his expert witness say it must also be assumed the fear that latent structural weaknesses remain, will be present in the minds of prospective buyers, which will drive the price of the house down. Since the parties have stipulated in effect there were no latent defects, such fears would be groundless. Ascertaining the fair market value before and after the fire is merely the tool used for measuring the extent of the casualty loss. When the property suffers a repairable loss, the loss is measured by the difference between the fair market value immediately before the fire and the fair market value immediately after the fire in its partially damaged state. Obviously the fair market value of such property in its damaged state amounts to no more than an estimate or determination of what it will cost to repair the damage and restore it to its former condition and subtracting that sum from the fair market value before the fire. Here that sum is stipulated and now allowed as the extent of petitioner's*284 casualty loss. He is not entitled to more because the property must bear the stigma of having once been damaged by fire, and this fact alone might make prospective future purchasers wary of buying. Fair market value is determined by elements of value that inhere in the property and not the groundless fears of prospective buyers. A complete answer to petitioner's contention is found in that portion of the statute excluding losses covered by insurance. Clearly a taxpayer whose casualty damaged property is restored to its prior condition by insurance funds, suffers no deductible loss under the statute. And yet the full force of petitioner's argument here would mean that if he had insurance coverage that paid the entire repair bill for restoring the property to its former state, in the sum of $23,782.47, he would still have a casualty loss in the sum of $8,217.53. That the statute intended no deduction for a fully insured casualty loss is too clear for argument. We hold that the amount of petitioner's deductible casualty loss in 1955 resulting from the fire to his residence is $5,405.07. Decision will be entered under Rule 50. Footnotes1. There is no explanation of the slight discrepancy between $13,622.70 and the figure petitioner uses in his brief.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620232/	UNITED TITLE INSURANCE CO., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentUnited Title Ins. Co. v. CommissionerDocket No. 10408-83.United States Tax CourtT.C. Memo 1988-38; 1988 Tax Ct. Memo LEXIS 39; 55 T.C.M. (CCH) 34; T.C.M. (RIA) 88038; February 4, 1988. W. Gerald Thornton and David D. Dahl, for the petitioner. Frank E. McDaniel and Alan I. Weinberg, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent determined deficiencies in petitioner's Federal corporate income taxes and section 6653(a) 1 negligence additions thereto as follows: Section 6653(a)YearDeficiencyAddition1977$ 13,738$ 687197842,2752,114197932,5291,62641 After concessions, 2 the issues for decision are: (1) Whether petitioner's expenses for three out-of-state trips for board of directors meetings and a fourth trip for a planning conference are ordinary and necessary business expenses within the meaning of section 162; (2) If so, whether petitioner has satisfied the requirements of section 274 for the trips; (3) Whether petitioner has satisfied the requirements of section 274 for activities related to an in-state board meeting; (4) Whether petitioner can deduct certain amounts paid to its majority shareholder as legal and investment counseling fees; and (5) Whether petitioner is liable for the section 6653(a) negligence additions. 42 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, the first supplemental stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference. Petitioner is a North Carolina corporation with its principal place of business in Raleigh, North Carolina. Petitioner filed its Federal corporate income tax returns (Forms 1120) for the years in issue with the Internal Revenue Service Center in Memphis, Tennessee. Petitioner was incorporated on January 30, 1975. Since its incorporation, petitioner has maintained only one corporate office, which at all times pertinent hereto has been in Raleigh, North Carolina. Petitioner is a real estate title insurance company doing business solely within the State of North Carolina, and principally in the eastern part of North Carolina. The North Carolina Real Estate Title Insurance IndustryIn most North Carolina real estate transactions (residential and commercial) where the purchaser finances the acquisition, the lender requires the purchaser to obtain real estate title insurance. A title insurance company cannot insure a title until an attorney licensed43 to practice law in North Carolina has examined the public records and rendered an opinion 3 on the title. See N.C. Gen. Stat. sec. 58-132(a) (1982). The opinion may not be rendered by an employee of the title insurance company. See N.C. Gen. Stat. sec. 58-132(a) (1982). Thus, in the ordinary course of a real estate transaction, an attorney is designated to examine the public records and render an opinion on this title. In a residential transaction, the lender, after approving the loan, sends closing instructions to a real estate attorney. In such instructions the lender usually designates the title insurance company to which the attorney is to44 deliver the title opinion so that insurance may be obtained. The lender often designates a title insurance company with which it is affiliated. The lender's choice may also be influenced by the realtor or by the developer. If the attorney prefers to use a different title insurance company, he can request the lender's permission to do so, but such a request is seldom made. In other instances, the attorney is free to send his title opinion to the title insurance company of his choice. The purchaser of a residential property generally plays no role in deciding which title insurance company will issue the policy. In a commercial transaction, the attorney usually picks the title insurance company. An attorney chooses a particular title insurance company because of the company's expertise, the quality of service provided, and the attorney's relationship with the company -- in other words the company with which the attorney likes doing business. When a title insurance company receives an application for insurance and the accompanying title opinion, it reviews the opinion to assess insurability against adverse claims. Claims can arise from information in the title opinion or from45 patent or latent defects in the title. A title insurance policy insures the ownership of the property subject to the specific exceptions enumerated in the policy and also subject to the standard exclusions that are the boilerplate language of the policy. 4 In determining whether to insure a title and whether any exceptions should be inserted in the policy, the title insurance company relies upon the title opinion. The opinion reflects the attorney's search of the public records regarding the ownership of an encumbrances on the property. A title insurance company has no control over how the attorney conducts his search of the public records or whether the attorney has someone else, such as a paralegal, actually perform the search. A title insurance company cannot afford to double-check the attorney's opinion by searching the records itself. Thus, in making their underwriting decisions, title insurance companies are almost wholly dependent upon the attorneys for whom they accept title opinions. 46 Because of their dependence on attorneys, most North Carolina title insurance companies maintain an "approved attorneys list," a list of attorneys from whom the company will accept insurance applications and accompanying title opinions. Before placing an attorney on their approved attorneys list, some companies require the attorney to fill out an application form giving information about the attorney's background and experience. The companies usually try to verify the information by contacting other companies for which the attorney claims to be approved and attorneys listed as references. Some title insurance companies rely primarily on information from other attorneys. When title insurance companies solicit business from an attorney, they also solicit the names of other attorneys who do real estate work. When such a company receives an insurance application from an attorney not on its approved attorneys list, the company checks with other attorneys about the applying attorney's reputation. Some companies are liberal with their approved attorneys list; other companies are more restrictive. Petitioner is quite restrictive and selective in placing an attorney on its approved47 attorneys list. The North Carolina real estate title insurance business is highly competitive. Each title insurance company vies for the referral of business primarily from real estate attorneys, but also from lenders, realtors, and developers. The market is particularly competitive because all title insurance companies are selling essentially the same product -- standard American Land Title Association title insurance policies. In addition, their rate structures are essentially identical. The only way a title insurance company can effectively differentiate its product is by demonstrating the company's financial soundness and by providing the best service possible. During the years in issue, North Carolina title insurance companies used a number of marketing techniques to solicit business from real estate attorneys. Many companies had their employees take attorneys to lunch, dinner, and sporting events such as local college football and basketball games. Some title insurance companies had their employees call on attorneys at their offices, but this was not particularly effective because it disturbed busy attorneys during their working hours. A number of companies sponsored48 cocktail parties at regular bar association meetings and educational seminars that were open to all members of the bar. Many title insurance companies advertised in state and local bar association publications. Companies also provided attorneys with pens, rulers, notepads, and calendars bearing the company's name. Some title insurance companies gave small Christmas presents to attorneys who sent them substantial business. The gifts, usually jars of jelly or preserves, pickles, or oranges, were of nominal value. Finally, some companies sponsored luncheons, informational brochures or newsletters, and courier services for attorneys and others in the real estate industry. In general, these practices may stimulate business and goodwill, provide a form of advertising, and facilitate the company's need to provide services to attorneys and other real estate professionals. Petitioner's BackgroundPetitioner was organized on January 30, 1975, by give individuals, including Charles L. Hinton III (Hinton), Walter R. Davis (Davis), 5 and Herbert L. Toms, Jr. (Toms). Of the 60,000 authorized and issued shares of petitioner's stock, Davis and Hinton originally acquired 21,000 shares49 each, and Toms acquired 12,000 shares. Hugh Cannon (Cannon) and Richard G. Singer (Singer) were also original shareholders of petitioner, but the record does not indicate how many shares each of them owned. By mid-1977, Hinton had purchased the stock of Cannon and Singer and had acquired other shares so that he owned 75 percent of petitioner's stock. By December 8, 1978, Hinton had acquired Davis' stock and had become petitioner's sole shareholder. On December 26, 1978, Hinton transferred 10,000 shares to his mother, Mrs. Rebecca M. Davis, thereby reducing his holdings to about 83 percent. During the years in issue, petitioner had betweeen 11 and 14 members on its board of directors. Of these directors, only Davis, Hinton, Toms, and Singer were inside directors, having at sometime during the years in issue an interest in petitioner as a shareholder, officer, or employee. The remaining directors were independent outside directors who were practicing real estate attorneys in eastern North Carolina. 50 6 During the years in issue, all of petitioner's outside directors referred business to petitioner. At the first meeting of petitioner's initial incorporators, held on February 13, 1975, Toms was elected president and general counsel and his compensation was set at $ 40,000 per year. Hinton was elected secretary and treasurer. No compensation was set for any other officer or employee, except that the board resolved to reimburse the officers for reasonable expenses incurred in furtherance of petitioner's business. During the years in issue, Toms and Hinton remained in their respective positions, and Davis was chairman of the board. Toms, petitioner's president and general counsel, was graduated from the University of North Carolina School of Law in 1958. He practiced law in Raleigh, North Carolina until 1966. From 1966 until petitioner's organization51 in 1975, Toms served as president and general counsel for two of petitioner's competitors. Toms bears primary responsibility for petitioner's underwriting decisions. During the years in issue, Toms and two secretaries were petitioner's only full-time employees. Toms compensation for the years 1977 to 1979 was $ 42,800, $ 52,125, and $ 64,100, respectively. Petitioner was one of about 21 companies that issued title insurance in North Carolina during the years in issue. A number of these companies issued very little title insurance measured by premium volume. In terms of both assets and premium volume, petitioner was substantially smaller than most of its primary competitors. Because of petitioner's relatively limited capital, Toms adopted a conservative underwriting philosophy to minimize petitioner's risk of loss from adverse claims under its policies. For the three years in issue, petitioner incurred total losses of only $ 700, which compares very favorably with its competitors' losses. Like other title insurance companies, petitioner relied on attorneys' title opinions in issuing its policies. Because of this necessary reliance, petitioner and its competitors want to52 know about an attorney's practice philosophy and procedure, education, and real estate knowledge. Toms believes that the only way to truly learn these things is to get to know the attorney. Because of its conservative underwriting philosophy, petitioner is quite selective in the attorneys, lenders, developers, and realtors with whom it does business. Petitioner's decision to place an attorney on its approved attorneys list is based on all the information it can obtain about the attorney and his practice philosophy and procedure, education, and real estate knowledge. In addition to being a new and relatively small company during the years before the Court, petitioner operated under other competitive disadvantages. Many of petitioner's competitors were affiliated with or controlled by national title insurance companies, or major North Carolina lenders and law firms, which provided business to the competitors. Because of its competitive disadvantages, petitioner did not use many of the customary marketing techniques used by other title insurance companies. Toms thought such techniques were too broad and general in scope. Instead, petitioner focused its efforts on establishing53 and maintaining close business relationships with selected real estate attorneys and other real estate professionals who could refer business to petitioner. Petitioner also wanted to educate those selected individuals about petitioner's conservative underwriting philosophy, petitioner's dependence on attorney's title opinions, and particular problems petitioner encountered in underwriting titles. 7In pursuance of these marketing and educational purposes, petitioner sponsored seminars on current topics for real estate attorneys and others in the field. Petitioner advertised the seminars throughout the state and they were open to all members of the bar. Some of the seminars were held the day after a meeting of petitioner's54 board. On at least two such occasions, petitioner hosted cocktail and dinner parties after its board meeting so that its directors could meet the seminar speakers. Petitioner also published a legal news bulletin about current developments in the North Carolina real estate industry. In addition to its seminars and and bulletin, petitioner entertained real estate attorneys, lenders, developers, and realtors during the years in issue. Petitioner took these individuals to college basketball and football games, out to dinner or for drinks, and on yachting excursions, and hosted cocktail and dinner parties, golf outings, and dances. The deductibility of the expenses petitioner incurred for these activities is not at issue in this case. In addition to these activities, petitioner incurred other travel and entertainment expenses that are at issue. Petitioner's Out-of-State TripsBoard Meeting Trips in GeneralDuring the years before the Court petitioner sponsored three out-of-state board meetings. 8 The board meetings were held in New Orleans, Louisiana, Las Vegas, Nevada, and Dorado Beach, Puerto Rico. Petitioner took on these trips its directors and other selected55 North Carolina real estate attorneys, developers, realtors, bankers, and lenders, and their spouses or friends. 9 Petitioner's real estate guests were the "cream of the crop" of the eastern North Carolina real estate industry. The number of persons varied from 40 on the Puerto Rico trip to 93 on the New Orleans trip. See nn.8,9, supra.The trips followed a common four-day pattern. The group spent most of the first day traveling from the Raleigh-Durham area to the destination. Petitioner always provided a continental56 breakfast at the Raleigh-Durham airport before departure. On the morning of the second day, petitioner held a board meeting that its directors and real estate guests attended. At the board meeting, petitioner's officers and directors conducted general corporate business, including receiving operational reports from Toms and financial reports from Hinton, adding attorneys to petitioner's approved attorneys list, and electing officers. The formal corporate business led to broader discussions of topics of interest to both petitioner and its real estate guests who actively participated in such discussions. These topics included petitioner's conservative underwriting philosophy and the ramifications thereof, its approved attorneys list, particular policies petitioner had issued and the underlying transactions, and many technical problems encountered in the real estate businesses and practices of petitioner and its real estate guests. These business discussions continued and carried over into informal conversations among petitioner's directors and real estate guests during meals and other activities that took place on the trip. The record does not establish that the spouses and friends57 and other non-real estate guests participated in any of these business discussions or activities; their role was purely social. After the board meeting, petitioner's directors and real estate guests had the rest of the second day and the third day at leisure. The group spent most of the fourth day returning to the Raleigh-Durham area. In addition to the board meeting, petitioner hosted other activities of a social nature during the trips. Petitioner sponsored the out-of-state board meetings for a number of business reasons and derived a number of benefits from them. The out-of-state board meetings enabled Toms and petitioner's directors to learn about the philosophy, procedures, and expertise of the real estate guests. Toms used this knowledge in his underwriting decisions and petitioner's directors used it in considering attorneys for petitioner's approved attorneys list. Petitioner explained to its real estate guests its particular underwriting philosophy and what petitioner expected from attorneys with whom it dealt. During the board meetings, petitioner revealed confidential information about its operations and financial soundness to its real estate guests so they could58 be confident that petitioner, although a newcomer to the industry, stood solidly behind its insurance policies. At the board meetings, petitioner received input from its real estate guests on a variety of topics including petitioner's approved attorneys list, petitioner's conservative underwriting philosophy, and a number of technical problems as well. Petitioner's directors and real estate guests also discussed recent developments in the industry. Petitioner demonstrated to its real estate guests that although it was a young company its management was experienced and capable of handling any problem encountered. During these out-of-state trips, petitioner's real estate guests established working relationships with Toms such that they felt comfortable contacting Toms about title problems they encountered in their real estate businesses and practices. Petitioner's real estate guests also learned how to handle various problems and met other real estate professionals they could call on for advice. The out-of-state board meetings allowed petitioner to advertise its services and expertise to a select group of real estate professionals who were critical to its success or failure and59 to do so more effectively than by other means of advertising. Finally, petitioner learned of potential sources of new business. Petitioner's real estate guests were experienced real estate attorneys, businessmen, and lenders whose opinions petitioner valued. Petitioner selected these guests because it thought they would appreciate petitioner's conservative philosophy and method of operation, and therefore would be more willing to do business with petitioner and otherwise contribute to petitioner's development. Petitioner's real estate guests were engaged in demanding businesses and legal practices. Petitioner believed that holding the board meetings out-of-state was necessary to ensure that the individuals it wanted to attend would do so. Holding the meetings at resort locations on four-day trips increased the willingness of petitioner's real estate guests to attend because it forced them to make plans in advance and set aside time for the trips and got them away from the daily demands upon their time. Petitioner invited the spouses because petitioner believed that too was necessary to insure good attendance. The fact that their spouses were invited made attendance more60 attractive to some of petitioner's real estate guests, but was not a determinative factor. Real estate guests would have attended even if their spouses had not been invited. Petitioner's real estate guests attended because they were pleased to be invited on such nice trips and felt honored to be included in a select group of such well-respected members of the North Carolina real estate industry. After the trips, petitioner received letters from some of its directors and real estate guests in regard to the trips. The relationship between petitioner's principals and petitioner's real estate guests was essentially a business or professional relationship. Invitations to these out-of-state board meetings did not involve reciprocal social entertainment among personal friends, and most of petitioner's guests never entertained Toms or Hinton on similar trips or at any other social activities. Many of petitioner's directors and real estate guests had referred business to petitioner before the trips, and petitioner hoped they would continue to make such referrals after the trips. Petitioner's directors and real estate guests did not refer all of their title insurance business to petitioner. 61 Petitioner's directors and real estate guests referred business to petitioner because of the relationships they established with petitioner's officers and because of petitioner's efficiency and competence in handling title insurance policies. However, there is no evidence that the referrals were in any way a quid pro quo for the invitations to the out-of-state board meetings. There is no evidence that any of petitioner's competitors hosted similar out-of-state board meetings during the years in issue. However, real estate attorneys have asked petitioner's competitors when they were going to sponsor such trips. Since the years in issue, at least one competitor has begun to offer overseas trips to its insurance agents.New Orleans -- May 26-29, 1977During the period Thursday, May 26, 1977, through Sunday, May 29, 1977, petitioner sponsored a trip to New Orleans, Louisiana, during which it held its regular board meeting. Petitioner took 93 people on this trip: 10 directors, 24 real estate attorneys, 7 developers or realtors, 5 lenders, and 47 other persons including an airline representative, a tour guide, and spouses or friends. Petitioner held its board meeting commencing62 at 10:00 a.m., on Friday, May 27, 1977. In attendance were petitioner's directors and its real estate guests. In addition to the board meeting, petitioner sponsored other activities during the trip. Petitioner provided its directors and guests with sight-seeing brochures. Petitioner's guests went on various sightseeing tours they paid for themselves. In addition, small groups went out to dinner together. Toms took a couple of small groups to dinner. During these dinners, Toms and his guests discussed business problems petitioner encountered and recent case law developments. Toms also learned about the guests' real estate practice philosophy and other matters important to petitioner. Petitioner also maintained a hospitality room, a large room containing tables, sofas, and chairs, as well as a small self-service bar with snacks. The room was open 24 hours and was a common gathering place for petitioner's directors and real estate guests. Petitioner's directors and real estate guests gathered there and discussed cases they had worked on or problems they shared in their real estate practices. On Sunday, May 29, just before the group left New Orleans, petitioner hosted a luncheon63 for its directors and all other guests. At the end of the luncheon, Toms gave a brief speech and petitioner's guests thanked him for a wonderful trip. Petitioner paid the round-trip airfare for all 93 of its directors and guests and for bus service between the New Orleans airport and the hotel. Petitioner also paid for the rooms and room charges of its directors and for two of its other guests and their spouses. Petitioner paid double room rates of $ 55.75 (including tax) per night for ten rooms, a single room rate of $ 44.94 (including tax) per night for one single room, and a $ 278.20 (including tax) per night suite rate for a suite shared by the Hintons and the Singers. Petitioner incurred or reimbursed Toms and Hinton a total of $ 17,173.08 for the following expenses related to the New Orleans trip: ExpenseAmountRound-trip airfare$ 10,947.74Bus service692.10Rooms2,638.62Room charges 494.47Luncheon1,290.18Baggage225.00Board meeting room rentaland refreshments130.87Continental breakfast atairport196.35Hospitality room supplies134.06Dinners for Toms and guests256.40Sightseeing brochures67.78Air prizes *50.00Tips and miscellaneous49.51Total$ 17,173.0864 Las Vegas - May 19-22, 1978During the period Friday, May 19, 1978, through Monday, May 22, 1978, petitioner sponsored a trip to Las Vegas, Nevada for its board meeting. Petitioner took 62 people on this trip: 9 directors, 13 real estate attorneys, 5 developers and realtors, 4 lenders, and 31 spouses and friends. Petitioner paid the round-trip airfare for these 62 persons. On the evening of Friday, May 19, petitioner hosted a dinner for its directors and guests at the Sultan's Table restaurant. At 10:00 a.m. on Saturday, May 20, petitioner held its regular board meeting. Present at the meeting were petitioner's directors and real estate guests. On Sunday, May 21, petitioner took its guests on a sight-seeing tour of Hoover Dam. That evening, petitioner paid for its directors and guests to attend a dinner show at the Casino de Paris. In addition, petitioner65 paid for the hotel rooms, room charges, and golf green and cart fees at the Dunes Hotel and Country Club for its directors and guests. Petitioner paid for 30 double rooms at $ 40.78 (including tax and an automatic telephone charge) per night and for 2 single rooms at the same rate. Petitioner incurred or reimbursed Toms, Hinton, or Davis a total of $ 28,829.25 for the following expenses related to the Las Vegas trip: ExpenseAmountRound-trip airfare$ 14,613.60Separate airfare for Hinton298.00Continental breakfast at airport123.71Rooms3,952.66Room charges 173.22Dinner at Sultan's Table4,000.00Board meeting refreshments50.54Hoover Dam tour (transportation only)736.00Casino de Paris dinner showand beverages 2,072.52Golf green and cart fees172.00Souvenir gifts 2,042.00Reimbursements to Hinton formiscellaneous meals, tips,and travel expenses250.00Baggage and miscellaneous tips332.00Miscellaneous reimbursementsto Toms13.00$ 28,829.2566 Puerto Rico -- February 11-14, 1979During the period Sunday, February 11, 1979, through Wednesday, February 14, 1979, petitioner hosted a trip to Dorado Beach, Puerto Rico for its board meeting. Petitioner took 40 individuals on the trip: 8 directors, 10 real estate attorneys, 1 developer, 2 lenders, and 19 spouses. At 10:00 a.m., on Monday, February 12, petitioner held its board meeting which was attended by its directors and real estate guests. At 8:30 p.m. on Monday, petitioner hosted a dinner for its directors and guests at the Su Casa Restaurant. Petitioner sponsored no other events for its directors and guests during the trip. However, petitioner's directors and guests at their own expense played golf, went to casinos and the beach, and went on various sight-seeing excursions while they were in Puerto Rico. Petitioner paid $ 145 per night for double rooms and $ 125 per night for single rooms for its directors and guests on the Puerto Rico trip. Petitioner incurred or reimbursed Toms a total of $ 21,058.12 for the following expenses relating to the Puerto Rico trip: ExpenseAmountRound-trip airfare$ 6,931.00Continental breakfast at airport78.54Drink chits during flights326.00Transportation between San Juanairport and hotel445.00Rooms and room charges 13,106.83Hotel charges for bellman service80.00Miscellaneous tips and parking90.75Total$ 21,058.1267 Planning Conference - Key West - March 12-15, 1978During the period Sunday, March 12, 1978, through Wednesday, March 15, 1978, petitioner sponsored a trip to Islamorada, Florida, an island resort located off the southeast coast of Florida near Key West, Florida (the Key West trip), for a corporate planning conference. Petitioner invited 11 individuals on the trip, six directors and five real estate attorneys. No spouses68 were invited. Before the trip, Toms sent letters to the invitees requesting them to suggest topics to be discussed during the trip in addition to the topics he had in mind. On Monday and Tuesday morning, petitioner held planning conference meetings at which petitioner's directors and real estate guests discussed a variety of topics concerning petitioner's business. Petitioner held the planning conference because petitioner's underwriting philosophy had in that period been criticized as too restrictive or too conservative. Toms sought to question the directors and real estate guests about their views of petitioner's underlying philosophy and procedures. Toms found the meetings informative and he used this information in subsequently guiding petitioner's operations. Petitioner's directors and real estate guests also discussed a number of changes then taking place in the North Carolina real estate industry. In addition to attending these meetings, petitioner's directors and real estate guests played golf and/or tennis. Some of them also drove down to Key West and went to a famous bar called "Sloppy Joe's." Petitioner incurred or reimbursed Toms a total of $ 7,256.74 for the69 following expenses relating to the Key West planning conference: ExpenseAmountRound-trip airfare $ 3,096.00Car rental353.38Hotel rooms 2,870.40Meals and beverages at hotel662.07Hotel phone charges3.53Hotel tennis and golf fees108.16Liquor92.37Miscellaneous meals, tipsand transportation for Toms36.83Total$ 7,256.74Raleigh Board Meeting - October 6-9, 1977On Friday, 70 October 7, 1977, petitioner held a special board meeting at the Velvet Cloak Inn in Raleigh, North Carolina. Petitioner sponsored a number of social functions before and after the meeting. On Thursday, October 6, 1977, petitioner hosted a golf outing at the Carolina Country Club in Raleigh. Twelve people played golf; Toms, two other directors, a North Carolina Supreme Court justice, and eight attorneys from eastern North Carolina. Petitioner incurred or reimbursed Toms a total of $ 225.34 for expenses related to the golf outing. 10At 10:30 a.m. on Friday, October 7, 1977, petitioner held its board meeting. All of its directors were present. There is no evidence that anyone other than the officers and directors attended the meeting. At the meeting, the board conducted regular corporate business, discussed the development of new business, and reviewed petitioner's marketing efforts. That evening petitioner hosted a cocktail-buffet party at71 Toms' home. Petitioner invited its directors and 27 other people to the party. Petitioner incurred or reimbursed Toms a total of $ 627.81 for expenses related to the cocktail-buffet party. 11On Saturday, October 8, 1977, petitioner took its directors, 13 real estate people, and their spouses to a University of North Carolina -- Wake Forest University football game in Chapel Hill, North Carolina. Petitioner incurred expenses for tickets ($ 353.50) and transportation to the game ($ 135), totaling $ 488.50. In addition to the expenses described above, petitioner incurred expenses totaling $ 706.30 at the Velvet Cloak Inn for accommodations and meals for two of its directors and other unidentified individuals during the period of October 6-9, 1977. 1272 Petitioner thus incurred total expenses in the amount of $ 2,047.68 in connection with the activities it hosted during the period October 6-9, 1977. Toms felt that the social activities and meals petitioner hosted before and after its October 7, 1977, board meeting gave him and petitioner's directors an opportunity to learn about the guests, their knowledge of real estate, their philosophy of doing real estate business, and the procedures they followed in searching titles. There is no evidence of any business discussions during these social events. Legal and Investment Counseling FeesFrom petitioner's incorporation on January 30, 1975, through 1979, the last year in issue, Hinton (petitioner's treasurer, secretary, and majority shareholder) provided legal and investment counseling services to petitioner. Hinton had received his law degree from the University of North Carolina School of Law in 1973. Since that time, Hinton has continually practiced real estate law in Raleigh, North Carolina. In his practice, Hinton has searched hundreds of titles, and usually handles or supervises about 400 house closings each year. Hinton has also represented major developers in land73 acquisitions, housing developments, and large construction and development loans. In addition, Hinton has dealt with every major lender in North Carolina and has represented many savings and loan institutions and mortgage bankers. In the ordinary course of its business from 1975 to 1979, petitioner needed outside legal counsel. Although Toms, petitioner's general counsel, was knowledgeable about title insurance underwriting, he was not knowledgeable about real estate law generally. Hinton provided outside legal services in regard to real estate law to petitioner from 1975 through 1979 on a daily basis. Hinton answered legal questions arising from petitioner's underwriting, established legal guidelines and company policies regarding frequently encountered legal issues and problems, kept Toms abreast of relevant changes in the real estate law, and reviewed and analyzed claims. Hinton sometimes also "covered" for Toms when Toms was out of petitioner's office, and helped Toms edit petitioner's real estate bulletin. Because petitioner was a new company with limited assets and an uncertain future, petitioner did not compensate Hinton for his legal services during 1975 and 1976. 74 During 1977, 1978, and 1979, petitioner paid Hinton or his law firm $ 10,000, $ 24,000, and $ 26,000, respectively, for legal services rendered. The amounts for 1978 and 1979 were suggested by Toms based on a monthly retainer of approximately $ 2,000 per month. In suggesting this figure Toms considered his prior experience with retainers in private practice, how much time Hinton spent on petitioner's legal matters, and his own preference for a retainer rather than hourly billing. Both Toms and Hinton considered this amount reasonable. Hinton did not keep an accurate record of the time he spent providing legal services to petitioner or to most of his other clients because petitioner paid him a set monthly retainer and most of Hinton's other clients paid fixed fees for his legal work. Hinton did maintain accurate time records for the limited work he billed by the hour. For most of his legal work, however, Hinton just tried to keep a rough estimate of his time so he had a general idea of what he was working on. During the period from 1975 to 1979, petitioner did not have in-house investment management capabilities. Investments are not within Toms' experience or expertise. 75 From petitioner's incorporation in 1975 through 1979, Hinton also provided investment counseling services to petitioner. North Carolina's law imposes on title insurance companies various capital, surplus, investment, and deposit requirements. See N.C. Gen. Stat. secs. 58-132(b), 58-79.1 (1982). As petitioner's investment manager, Hinton had to satisfy these legal requirements and maintain the safety and relative liquidity of petitioner's funds while maximizing the return on petitioner's investments. Hinton was solely responsible for investing petitioner's funds. He monitored petitioner's savings and checking account balances daily and if the checking account balance was high, he would move funds to an interest-bearing account. Hinton tracked interest rates on commercial paper, certificates of deposit, treasury bills, and banker's acceptances as well as the prime, Federal discount, and Federal funds rates. In addition, Hinton reviewed information from a number of stockbrokers and subscribed to many business publications such as the Wall Street Journal, Barrons, Forbes, and Forbes Business Week. Hinton also maintained business relationships with a number of stockbrokers. 1376 In the period 1975 through 1979, petitioner held77 investment assets totaling between $ 753,180 and $ 1,007,860. Hinton kept most of petitioner's assets in cash equivalents such as certificates of deposit, commercial paper, repurchase agreements, and Treasury bills. Most of these obligations had 30-day maturity dates. Thus, many of petitioner's investments were maturing every 30 days, requiring Hinton to make new investment decisions. He frequently checked rates offered by various institutions and moved petitioner's funds accordingly. Hinton reviewed investment materials and made investment decisions both at his office during regular business hours and at his home in the evenings. During the years 1975, 1976, and 1977, petitioner did not compensate Hinton for his investment counseling services. Petitioner paid Hinton $ 36,000 during 1978, and $ 30,500 during 1979 for investment counseling services. In setting these fees, Hinton considered the large number of transactions necessitated by petitioner's investment goals, the percentage (of assets) fees other investment advisors charged, and the fact that he had discretionary control over petitioner's portfolio and the potential liability that goes with such discretionary control. 78 Toms considered these amounts reasonable because investments were not his field and if Hinton had not managed petitioner's investments, petitioner would have had to hire someone else to do it. Hinton did not base his fees on an hourly rate and he did not maintain time records for his work. During 1978, Hinton kept a rough estimate of time he spent on petitioner's legal and investment affairs on a desk calendar he kept at his office. He also wrote down appointments and maturity dates for petitioner's investments on the calendar. He did not take the calendar home or otherwise keep track of the time he spent on petitioner's business during nonbusiness hours. Hinton has never served as an investment counselor or advisor for any person or firm other than petitioner. Hinton's undergraduate degree was in history. Shortly after graduating from law school, Hinton attended the Young Executive Institute, a non-degree, "mini-M.B.A." program at the University of North Carolina's business school. This program was the only formal training Hinton received in business or investments. During 1975 through 1979, petitioner, following Hinton's investment counseling, earned investment income79 in the following amounts: InvestmentYearIncome1975$ 40,084.56197644,462.10197747,699.56197873,944.01197989,216.45In 1978 petitioner paid $ 60,000 in dividends to its shareholders (Hinton and his mother). Two of petitioner's competitors retain outside legal counsel. They pay their outside counsel on a per hour basis and receive statements for services rendered. A third competitor has a law firm on a retainer of $ 150 per month for general corporate matters. If that company requires additional work such as the drafting of a lease or a profit-sharing plan, it must pay for those services in addition to the retainer. One of petitioner's competitors retains a related corporation to manage its investment portfolio of about $ 10 million in assets. This competitor pays the related corporation an annual fee of $ 6,700 for investment advice plus brokerage charges for purchases and sales. These competitors are not small new companies such as petitioner is. On its Federal income tax returns for the years in issue, petitioner claimed deductions as indicated: Item197719781979Travel and entertainment$ 33,182.75$ 48,636.28 $ 12,349.04Advertising7,697.2610,408.958,008.37Planning conference- 21,268.37Total$ 40,880.01$ 59,045.23$ 41,625.78Legal and auditing$ 12,545.00$ 27,224.00$ 27,342.50Investment counseling- 36,000.0030,500.00Total$ 12,545.00$ 63,224.00$ 57,842.5080 In a statutory notice of deficiency dated February 25, 1983, respondent reduced petitioner's claimed deductions by the following amounts: ItemAmount of reduction197719781979Travel, entertainment,advertising, and conference$ 25,882$ 43,308$ 25,514Legal, auditing, andinvestment counseling-45,61142,950In other words, respondent allowed only $ 14,998, $ 15,737, and $ 16,201 for 1977, 1978, and 1979, respectively, for travel, entertainment, advertising, and conference expense and allowed only $ 17,613 and $ 14,893 for 1978 and 1979, respectively, for legal, auditing, and investment counseling expense. Respondent also determined section 6653(a) additions for each year. OPINION I. Out-of-State Board Meetings and ConferenceThe first two issues in this case involve the deductibility of petitioner's expenses for three out-of-state board meetings and an out-of-state planning conference. Petitioner is a North Carolina real estate title insurance company organized in81 1975. During 1977 through 1979, the years before the Court, petitioner was not only a newcomer to the business, it was substantially smaller than most of its principal competitors. The North Carolina real estate title insurance industry is intensely competitive. Because of its competitive disadvantages, petitioner focused its marketing efforts on establishing and maintaining close business relationships with carefully selected real estate attorneys and other real estate professionals who could directly refer business to petitioner. Petitioner also sought to educate these individuals about, among other things, petitioner's conservative underwriting philosophy and restrictive practices. See n.7, supra.During the years in issue, petitioner held three out-of-state board meetings and an out-of-state planning conference. Petitioner invited selected eastern North Carolina real estate attorneys, developers, realtors, and lenders on these four trips. Spouses and friends were also invited on the board meeting trips. Respondent argues that petitioner's trip expenses were not ordinary and necessary within the meaning of section 162, and that petitioner has not satisfied the requirements82 of section 274 for the expenses. A. Ordinary and Necessary ExpensesSection 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Whether an expense is ordinary and necessary is a question of fact. Commissioner v. Heininger,320 U.S. 467">320 U.S. 467, 475 (1943); Walliser v. Commissioner,72 T.C. 433">72 T.C. 433, 437 (1979). Each case turns on its own particular facts. Commissioner v. Heininger, supra,320 U.S. at 473. Although this issue necessitates a facts and circumstances inquiry and is a peculiarly factual matter, respondent seems to try to impose a legal test on the Court. Respondent argues that petitioner's expenses for the out-of-state board meetings and conferences were not "ordinary" within the meaning of section 162(a), relying on the following language from Deputy v. du Pont,308 U.S. 488">308 U.S. 488, 495 (1940): 14Ordinary has the connotation of normal, usual, or customary. To be sure, an expense may be ordinary though it happen but once in the taxpayer's lifetime. Cf. Kornhauser v. United States, supra. Yet the transaction83 which gives rise to it must be of common or frequent occurrence in the type of business involved. Welch v. Helvering, supra, 114. Respondent says the trips were not transactions "of common or frequency occurrence in the type of business involved" because "no other title company in the history of North Carolina had ever engaged in the practice of offering resort trips to real estate attorneys and others." Respondent chooses to focus on what he calls "resort trips" and to close his eyes to the business meetings and conferences that occurred at those locations, which will be discussed below. Respondent's84 argument is based on a sweeping generalization that is not really borne out by the record, but which would not necessarily be determinative even if the factual predicate existed. In making his argument, respondent relies on general testimony by representatives of three competing companies stating that they did not sponsor similar trips and that they knew of no title insurance company other than petitioner that did. This testimony does not establish, and we decline to find as a fact, that "no other title company in the history of North Carolina" engaged in this practice. No witness claimed such all encompassing knowledge. Moreover, since the years in issue, at least one competitor has offered overseas trips to its insurance agents. Again it is a matter of whether one labels petitioner's "practice" as "offering resort trips" or as holding out-of-state board meetings and conferences. Out-of-state business meetings and conferences are not unknown in the business world. Moreover, even if petitioner were the only North Carolina title insurance company to hold out-of-state board meetings and planning conferences, that in itself would not mean the expenses were not ordinary within85 the meaning of section 162(a). "[O]ne should not be penalized taxwise for his business ingenuity in utilizing advertising techniques which do not conform to the practices of one whom he is naturally trying to surpass in profits." Poletti v. Commissioner,330 F.2d 818">330 F.2d 818, 822 (8th Cir. 1964). In any event, we reject respondent's attempt to convert the above-quoted language from Deputy v. du Pont into a narrow legal test of what constitutes an "ordinary" expense. Respondent, ignoring that this issue requires a facts and circumstances inquiry, tried and argued this case as if there existed some simple talismanic definition of the term ordinary, which the Court must apply by rote. The Supreme Court, in Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933), long ago disabused us of such a simplistic notion. Discussing the concept of "ordinary" expense, Justice Cardoza cogently explained the problem facing the fact finder: One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle. [290 U.S. at 115.]86 Respondent's effort to transmute the Deputy v. du Pont language into such a "ready touchstone" is misdirected. Instead we must consider the record as a whole to make our determination. The record is clear that petitioner and its competitors routinely entertained real estate attorneys and others in the field. Petitioner, as a very small and new company, focused its marketing efforts even more narrowly and invited "the cream of the crop" of the eastern North Carolina real estate industry to three out-of-state board meetings and an out-of-state planning conference. Petitioner's selected real estate guests actively participated in the board meetings and the planning conference. These trips served petitioner's marketing and other business purposes at that point in its young corporate life. Entertaining attorneys and other real estate professionals was necessary in the North Carolina title insurance business because they were the principal source of business referrals and such activities were actively engaged in by petitioner's competitors. In Deputy v. du Pont,supra, the problem was that the expenditures did not arise out of the taxpayer's trade or87 business. Here the expenditures for petitioner's out-of-state board meetings and planning conference clearly arose out of its conduct of its trade or business. Contrary to respondent's arguments, this case does not fall within the fact pattern of Walliser v. Commissioner,72 T.C. 433">72 T.C. 433 (1979), which involved an admitted vacation trip. See n. 8, supra. Respondent contends that petitioner's trip expenses were primarily for social or goodwill purposes and thus not ordinary because petitioner had long-term relationships with its guests. Respondent emphasizes that a few of the guests were past or present law partners of Hinton (petitioner's secretary, treasurer, and majority shareholder) and that petitioner had entertained them on other occasions and/or received business from many other guests. Because of the obvious danger of abuse in the case of a small closely held corporation, such as petitioner, we must carefully scrutinize such travel and entertainment expenditures. Here, however, the facts simply do not demonstrate that the trips were primarily social functions. Petitioner has clearly established that the out-of-state board meetings and planning conference88 served a number of bona fide business purposes. Responodent further argues that the trip expenses were not ordinary because the trips were rewards for the referral of business, 15 citing Car-Ron Asphalt Paving Co. v. Commissioner,758 F.2d 1132">758 F.2d 1132 (6th Cir. 1985), affd. a Memorandum Opinion of this Court. Compared Raymond Bertolini Trucking Co. v. Commissioner,736 F.2d 1120">736 F.2d 1120 (6th Cir. 1984), revg. a Memorandum Opinion of this Court. Respondent devotes many pages on brief discussing how agreements whereby attorneys would refer business to petitioner in exchange for trips like the ones in issue could injure the real estate industry and result in the kind of "graft and corruption" condemned in Car-Ron Asphalt Paving Co. Commissioner,supra,758 F.2d at 1134. Respondent engaged in baseless speculation.16 There is no evidence and no offer of proof to show that petitioner ever received business from anyone with the understanding that he or she would in return be invited to an out-of-state board meeting or planning conference, or that petitioner engaged in any conduct contrary to any law or public policy. Even if there were some89 indication of any such practices as respondent tries to conjure up, respondent's own regulations provide that "A deduction for an expense paid or incurred after December 30, 1969, which would otherwise be allowable under section 162 shall not be denied on the grounds that allowance of such deduction would frustrate a sharply defined public policy." Sec. 1.162-1(a), Income Tax Regs. See Commissioner v. Tellier,383 U.S. at 687, 690-695 (1966); Raymond Bertolino Trucking Co. v. Commissioner,supra,736 F.2d at 1125. We do not read Car-Ron Asphalt Paving Co. v. Commissioner,supra, as holding otherwise.17 Based on the record as a whole, we conclude that petitioner's trip expenses, except as specifically noted below, were ordinary expenses. 90 Respondent argues that the trip expenses were not "necessary" because "all other companies found alternative and acceptable methods of competition and business practices." Respondent has not cited and we have not found any authority stating that expenses are necessary only if everyone else in the industry incurs them. The word "necessary" as used in section 162(a) imposes only the minimal requirement that an expense be appropriate and helpful to the development of the taxpayer's business. Commissioner v. Tellier,supra,383 U.S. at 689; Welch v. Helvering,supra,290 U.S. at 113; NCNB Corp. v. United States,651 F.2d 942">651 F.2d 942, 948, n.9 (4th Cir. 1981). Petitioner has amply demonstrated that the trip expenses were appropriate and helpful and therefore "necessary" to its title insurance business. Based on the record as a whole, we find as a fact that petitioner's trip expenses, except as specifically otherwise noted below, were both "ordinary and necessary" as that term is used in section 162(a). Respondent argues that even if the board meeting trip expenses for petitioner's directors and real estate guests were ordinary and91 necessary, the expenses for the airline representative, tour guide, and spouses and friends were not, because there was no business purpose for their attendance. Here we agree. Section 1.162-2(c), Income Tax Regs., provides that where a spouse is included on a business trip, the spouse's expenses are not deductible unless the spouse's presence serves a bona fide business purpose, and performance of incidental services is insufficient. Meridian Wood Products Co. v. United States,725 F.2d 1183">725 F.2d 1183, 1190 (9th Cir. 1984). The spouse must provide substantial services directly and primarily related to the business. Weatherford v. United States,418 F.2d 895">418 F.2d 895, 897 (9th Cir. 1969). Compare United States v. Disney,413 F.2d 783">413 F.2d 783 (9th Cir. 1969), and Bank of Stockton v. Commissioner,T.C. Memo. 1977-24, where the facts showed a business purpose for the spouses' attendance and showed that the spouses performed substantial services for the business. Here, no explanation is offered as to the presence of the airline representative and tour guides. Petitioner argues that inviting the spouses and friends served a business purpose92 because it was necessary to get the real estate guests to attend. We do not agree. Our witness testified that he would have attended even if his wife had not been invited. More importantly, petitioner did not invite spouse to the Key West planning conference and was still able to attract the real estate guests it invited. Finally, there is no evidence that the spouses or friends provided any services whatsoever related to petitioner's business. Their presence and their activities were purely social. Thus, trip expenses attributable to the spouses and friends are not deductible under section 162(a). 18 Petitioner demonstrated no business purpose for the attendance of the airline representative, tour guide, and their spouses on the New Orleans trip. Expenses attributable to them are likewise not deductible. See n.18, supra.In sum, the93 reasonable trip expenses attributable to petitioner's officers, directors, and real estate guests were ordinary and necessary business expenses and therefore deductible under section 162(a). B. Section 274(a)19Section 274(a)(1)(A) disallows deductions for entertainment expenses otherwise allowable under section 162 unless the taxpayer establishes that the entertainment activity was either (1) "directly related to" the active conduct of the taxpayers trade or business, or (2) in the case of entertainment directly preceding or following a substantial and bona fide business discussion "associated with" the active conduct of the taxpayer's trade or business. Section 1.274-2(c)(3), Income Tax Regs., sets forth the general requirements for the directly related test. 20Section 1.274-2(c)(3)(i), Income Tax Regs., requires that the taxpayer have more than94 a general expectation of deriving some income or other specific trade business benefit other than the goodwill of the persons entertained.Walliser v. Commissioner,supra,72 T.C. at 441. Respondent argues that petitioner incurred the trip expenses primarily for either social purposes or goodwill and therefore does not satisfy this requirement. Respondent says the trips were to desirable locations and that petitioner's officers, directors, and real estate guests had ample time to enjoy the pleasurable distractions available to them during the trips. These facts do not prove that the trips were primarily for social or goodwill purposes. 95 As discussed more fully below, petitioner held bona fide business meetings on each trip -- formal board meetings during three trips and a corporate planning conference during the fourth trip. The real estate guests participated in these meetings carried over into conversations among petitioner's officers, directors, and real estate guests during meals and other activities that took place during the trips. Also, as discussed more fully below, petitioner has established the business purposes for and business benefits from the trip. Petitioner has also satisfactorily explained the location and length of the trips. Petitioner's real estate guests were engaged in demanding businesses and legal practices. Holding the meetings at resort locations on four-day trips increased the willingness of petitioner's guests to attend because it forced them to make plans in advance and set aside time for the trips. Petitioner believed the out-of-state locations were necessary to insure that the real estate guests would attend and petitioner would achieve its business purposes for the trips. Petitioner's real estate guests attended because they were pleased to be invited on such nice trips and felt96 honored to be included in such a select group of well-respected members of the North Carolina real estate industry. Respondent also contends that many of the guests were invited on more than one trip and had long-term relationships with petitioner. That does not show that the trips were primarily for social or goodwill purposes. Petitioner held the out-of-state board meetings for a variety of business reasons and achieved a number of business benefits from them. The out-of-state meetings enabled Toms and petitioner's directors to learn about the philosophy, procedures, and expertise of petitioner's attorney-guests. Toms used this knowledge in his underwriting decisions and petitioner's directors used it in considering attorneys for petitioner's approved attorneys list. Petitioner explained to its real estate guests petitioner's underwriting philosophy and what petitioner expects from attorneys with whom it deals. During the board meetings, petitioner revealed confidential information about its operations and financial soundness to its real estate guests so they could be confident that petitioner, although a newcomer to the industry, stood solidly behind its insurance policies. 97 At the meetings, petitioner received input from its real estate guests on a variety of topics, including petitioner's approved attorneys list, petitioner's conservative underwriting philosophy, and a number of technical topics as well. Petitioner's directors and real estate guests also discussed recent developments in the industry. Petitioner demonstrated to its guests that although it was a young company, its management was experienced and capable of handling any problem encountered. During the trips, petitioner's real estate guests established working relationships with Toms such that they felt comfortable contacting Toms about title problems they encountered in their real estate businesses and practices. Petitioner's guests also learned how to handle various problems and met other attorneys they could call on for advice. The trips allowed petitioner to advertise its services and expertise more effectively than other means of advertising. Finally, petitioner learned of potential sources of new business. Petitioner held the out-of-state planning conference in direct response to criticism that petitioner's underwriting philosophy was too restrictive and too conservative. Toms98 sought to question petitioner's directors and real estate guests about their views of petitioner's philosophy. Toms found the meetings informative and used this information in subsequently guiding petitioner's operations. Petitioner's directors and real estate guests also discussed a number of topics of important to petitioner. These facts show that petitioner held the out-of-state meetings to obtain specific business benefits. Thus, petitioner had more than a general expectation of deriving (and derived) business benefits other than just the goodwill of its real estate guests. Section 1.274-2(c)(3)(ii), Income Tax Regs., requires that during the entertainment period the taxpayer must actively engage in a business meeting or other business transaction to obtain the income or other specific business benefits sought. Respondent suggests that the evidence does not sufficiently establish that formal business meetings took place during the trips. We disagree. The parties stipulated into the record minutes from the New Orleans and Las Vegas board meetings. Respondent suggests that these minutes do not adequately substantiate that formal business meetings took place. Respondent99 highlights a host of what he views as deficiencies in the minutes. Respondent's arguments are simply unavailing. The minutes reflect meetings wherein petitioner's officers and board of directors conducted regular corporate business which led to discussion in which petitioner's real estate guests participated. There is nothing in the record casting a shadow on the authenticity of the minutes. Moreover, the record is replete with evidence such as confirmations of meeting room arrangements, hotel statements showing charges for meeting rooms and refreshments for coffee breaks during the meetings, and trip itineraries, as well as voluminous testimony establishing that formal board meetings took place during the New Orleans, Las Vegas, and Puerto Rico trips. Although petitioner could not locate the minutes from the board meeting during the Puerto Rico trip, the trip itinerary, confirmation of the meeting room arrangements, and the sworn testimony indicate that it was similar to the board meetings on the other trips. While it is not clear precisely how long the meetings lasted, the minutes from the New Orleans and Las Vegas meetings show that the meetings were of substantial length. 100 The planning conference meetings during the Key West trip were likewise formal business meetings. Petitioner prepared a formal agenda of topics to be discussed each day. The meetings were of substantial length to cover all of the topics on the agenda. In short, we are satisfied and find as a fact that petitioner actively engaged in formal, prearranged business meetings during the out-of-state trips. We think this fact provides a crucial distinction between this case and those cited by respondent. See Berkley Machine Works & Foundry Co. v. Commissioner,623 F.2d 298">623 F.2d 298 (4th Cir. 1980); Hippodrome Oldsmobile, Inc. v. United States,474 F.2d 959">474 F.2d 959 (6th Cir. 1973); Walliser v. Commissioner,72 T.C. 433">72 T.C. 433 (1979); St. Petersburg Bank & Trust Co. v. United States,362 F. Supp. 674">362 F. Supp. 674 (M.D. Fla. 1973), affd. without published opinion 503 F.2d 1402">503 F.2d 1402 (5th Cir. 1974). All of those cases involved trips, pleasure boat excursions, or other social outings during which the taxpayers' representatives informally mingled among the guests and discussed business during otherwise purely social functions. Here, in contrast, petitioner's101 officers, directors, and real estate guests met in a hotel conference room 21 and conducted formal board meetings which were expanded to include discussions in which the real estate guests participated. The informal, general "shop talk" involved in the cited cases falls far short of the formal business conducted during the out-of-state meetings in this case. In conclusion, contrary to respondent's arguments, we conclude that the trip expenses attributable to petitioner's directors, officers, and real estate guests were directly related to the active conduct of petitioner's business. 22102 C. Section 274(d)Section 274(d) disallows entertainment expenses unless the taxpayer substantiates by adequate records or sufficient evidence corroborating his own statement (1) the amount of the expense, (2) the time and place of the entertainment, (3) the business purpose of the expense, and (4) the business relationship between the taxpayer and the person entertained. 23Berkley Machine Works & Foundry Co. v. Commissioner,supra,623 F.2d at 906. These requirements are, of course, fleshed out in the requirements. See sec. 1.274-5, Income Tax Regs.103 Adequate records consist of an account book, diary, statement of expense, or similar record and documentary evidence which, in combination, are sufficient to establish the expense elements. Sec. 1.274-5(c)(2)(i), Income Tax Regs.; Berkley Machine Works & Foundry v. Commissioner,supra,623 F.2d at 906. If the taxpayer attempts to substantiate the expense element by his own statement, it must contain specific information in detail as to each element, and the corroborative evidence must be sufficient to establish the element. Sec. 1.274-5(c)(3), Income Tax Regs.; Berkley Machine Works & Foundry v. Commissioner,supra,623 F.2d at 906. Corroborative evidence of business purpose may be circumstantial. Sec. 1.274-5(c)(3), Income Tax Regs.Respondent argues that petitioner has failed to establish the business purpose of the trips because "[t]he meetings, if they occurred at all, were not clearly defined and prearranged, but appear to be an afterthought to the entire trip." On the record before us, we simply cannot and do not agree. Attached to the minutes of the New Orleans and Las Vegas meetings are standard notices of the meetings addressed104 to the board members and dated at least a week in advance of the meetings. Attached to the notices are affidavits certifying that the notices were mailed to the directors. Moreover, the minutes themselves reflect discussions of petitioner's operations and financial situation, and other matters such as petitioner's approved attorneys list, which obviously required preparation by Toms and Hinton before the meetings. Although petitioner could not locate the minutes from the Puerto Rico meeting, the record contains a letter from Toms to the Puerto Rico hotel that included a "Function Sheet" on which Toms specified the date, time, type of room required, and other requirements for the meeting. Almost one month before the Key West trip, Toms sent letters to the guests requesting ideas for topics to be placed on the agenda for the planning conference. Petitioner prepared a formal agenda of items to be discussed each day during the planning conference. Considering this contemporaneous documentary evidence, most of which respondent stipulated into evidence, we fail to see how respondent can continue to argue that the meetings did not occur or were "afterthoughts" to the trips. In any event, 105 we reject respondent's argument as without factual basis. Petitioner has clearly established the business purposes of its out-of-state board meetings and planning conference as required by section 274(d). We have previously discussed petitioner's business purposes for and business benefits from those out-of-state board meetings and planning conference. These purposes and benefits were specifically testified to by Toms and corroborated by board meeting minutes, the planning conference agenda, and the testimony of numerous witnesses. We think petitioner has satisfied the substantiation requirements of section 274(d). Compare Berkley Machine Works & Foundry Co. v. Commissioner,supra,623 F.2d at 906-907. II. Raleigh Board MeetingOn Friday, October 7, 1977, petitioner held a board meeting in Raleigh, North Carolina. In the four-day period from October 6-9, 1977, petitioner hosted a golf outing and a cocktail-buffet party, took a group to a college football game, and paid the weekend hotel bills for two of its directors and other unidentified individuals. Respondent agues that petitioner failed to substantiate the business purpose for these social106 events as required by section 274(d). In this instance, we agree. Petitioner's social functions during this four-day period differ qualitatively and quantitatively from petitioner's out-of-state meetings. The business meetings were the focal point of the out-of-state trips. Petitioner's real estate guests attended and actively participated in those out-of-state meetings. The meeting discussions carried over into the remainder of those trips. In contrast, there is not evidence that anyone other than petitioner's own officers and directors attended the Raleigh board meeting. Thus, the business purposes evidenced by the meeting do not carry over to the surrounding social events, and the purported business purposes of these social events must be independently substantiated. The only evidence regarding the business purpose of the social events was Toms' testimony. He testified generally that the social events gave him and petitioner's directors an opportunity to learn about the guests' knowledge of and philosophy towards real estate. Petitioner offered no corroborative evidence. Moreover, there is no evidence of any business discussions actually taking place during any of these107 social functions. Toms' general testimony, standing alone, does not satisfy the substantiation requirement of section 274(d). Secs. 1.274-5(b)(3)(iv), 1.274-5(c)(3), Income Tax Regs.; Berkley Machine Works & Foundry Co. v. Commissioner,supra,623 F.2d at 906-907. Thus, petitioner's expenses incurred for the social events surrounding the Raleigh board meeting are not properly deductible. 24III. Legal and Investment Counseling FeesFrom 1975, when petitioner was incorporated, through 1979, Hinton, petitioner's majority shareholder, provided both legal and investment counseling services to petitioner. During 1975 and 1976, petitioner108 did not compensate Hinton for his legal services. During 1977, 1978, and 1979, petitioner paid Hinton $ 10,000, $ 24,000, and $ 26,000, respectively, for legal services. Petitioner did not compensate Hinton for his investment counseling services until 1978, when petitioner paid Hinton $ 36,000. Petitioner also paid Hinton $ 30,500 for investment counseling services during 1979. Respondent disallowed a large portion of the deductions for fees paid during 1978 and 1979 because respondent did not consider these amounts ordinary and necessary within the meaning of section 162(a). Section 162(a)(1) allows as a deduction all ordinary and necessary business expenses, including a reasonable allowance for compensation for personal services actually rendered. To be deductible, compensation must be reasonable in amount and paid purely for personal services. Sec. 1.162-7(a), Income Tax Regs. The form or method of fixing the amount of compensation does not determine its deductibility. Sec. 1.162-7(b)(2), Income Tax Regs.Whether payments are compensation for services rendered and are reasonable in amount are questions of fact to be decided based on the particular facts and circumstances109 of each case. Levenson & Klein, Inc. v. Commissioner,67 T.C. 694">67 T.C. 694, 711 (1977), and cases cited therein. Petitioner bears the burden of proof. Botany Worsted Mills v. United States,278 U.S. 282">278 U.S. 282 (1929); Rule 142(a). When a case involves a closely held corporation, we must closely scrutinize all the facts to determine the reasonableness of the compensation. Miles-Conley Co. v. Commissioner,173 F.2d 958">173 F.2d 958, 960 (4th Cir. 1949), affg. 10 T.C. 754">10 T.C. 754 (1948); Levenson & Klein, Inc. v. Commissioner,supra,67 T.C. at 711. There are a number of factors we must consider: the payee's qualifications, the nature, extent and scope of his work, the size and complexities of the business, a comparison of compensation paid with the corporation's gross and net income, the prevailing general economic conditions, the prevailing rates of compensation paid by comparable companies for comparable work, the taxpayer's general compensation policy, and in the case of small corporations with a limited number of employees, the compensation paid to the particular individual in prior years. However, no single factor is decisive. 110 Mayson Mfg. Co. v. Commissioner,178 F.2d 115">178 F.2d 115, 119 (6th Cir. 1949); Levenson & Klein, Inc. v. Commissioner,supra,67 T.C. at 711-712. Respondent argues that petitioner has not adequately proven that Hinton in fact provided legal and investment counseling services to petitioner and the amount of time Hinton spent providing these services. We disagree. We found both Hinton and Toms to be forthright and credible witnesses and their testimony to be wholly worthy of belief. Moreover, petitioner offered into evidence a copy of Hinton's 1978 desk calendar, which indicated that Hinton had spent time on petitioner's legal and/or investment matters virtually every business day that year. In addition, respondent did not disallow any portion of the deduction petitioner claimed for the $ 10,000 in legal fees paid to Hinton during 1977. Consequently, we reject respondent's argument, and based upon the testimony of Hinton and Toms, we find that Hinton provided substantial legal and investment counseling services to petitioner each year from 1975 through 1979. Hinton provided legal services to petitioner on a daily basis. Petitioner constantly needed111 outside legal counsel because other than two secretaries, Toms was petitioner's only full-time employee. Tom's experience or expertise was in insurance underwriting and not in general real estate law. In making underwriting and other decisions, Toms needed legal advice from someone, such as Hinton, who had an intimate knowledge of real estate law. The record establishes the complex and involved nature of the legal services Hinton rendered to petitioner. Investments were also not within Toms' experience or expertise, and petitioner therefore needed someone to manage its assets. There were complex legal requirements to satisfy in managing petitioner's assets. This work required Hinton's daily attention to maximize petitioner's investment income. Respondent also argues that petitioner's payments to Hinton were excessive compared to payments made by comparable companies for similar services. The problem with respondent's broad argument is a lack of factual support. His comparisons are woefully inadequate. Two of petitioner's competitors retain outside legal counsel only on a per hour basis. This does not prove that the monthly retainer petitioner paid Hinton was unreasonable. 112 Another competitor has a law firm on a $ 150 per month retainer. This retainer covers only general corporate matters, and that competitor pays separately for any other legal work it requires. The record does not show what that competitor's total legal fees amount to. Another competitor with an investment portfolio of about $ 10 million in assets pays an annual fee of $ 6,700 for investment advice plus brokerage charges for purchases and sales. However, the investment advisor is owned by the same corporation as the competitor, and we cannot find that the fee thus charged is determined at arm's length. Because respondent's comparisons are inadequate, his broad argument is unavailing. Respondent also argues that petitioner's payments to Hinton were disproportionately large for his qualifications. We disagree. The record establishes that Hinton was reasonably qualified to render legal advice on real estate matters to a title insurance company. Hinton had no formal business education other than attending the Young Executive Institute, a non-degree, "mini-M.B.A." program at the University of North Carolina's business school. However, because he was petitioner's majority shareholder, 113 Hinton obviously desired to maximize the safety and profitability of petitioner's investment portfolio. He therefore could be expected to, and did, educate himself to whatever degree necessary to ensure that his investment decisions would achieve those goals. The record shows that he was successful in doing that. Respondent next contends that the disallowed portions of petitioner's payments to Hinton were constructive dividends, because as petitioner's income increased so did its payments to Hinton. Respondent argues that where a controlling shareholder experiences a sharp increase in compensation with no correlative change in the amount of character of services provided, the taxpayer must product persuasive evidence to justify the increase, citing Heil Beauty Supplies v. Commissioner,199 F.2d 193">199 F.2d 193 (8th Cir. 1952). 25 Respondent also explains that the investment counseling fees petitioner paid Hinton during 1978 and 1979 were between 40 and 50 percent of petitioner's investment income during those years. Petitioner responds by pointing out that petitioner was not114 incorporated until 1975 and was organized with the minimum capitalization required for title insurance companies. Petitioner needed to build up its reserves, and during 1975 and 1976 petitioner did not compensate Hinton for his services. In 1977, petitioner paid Hinton $ 10,000 in legal fees. Petitioner points out that it was not until 1978 and 1979, when it had built up sufficient reserves and enjoyed increased premium and investment income, that petitioner could afford to and did adequately compensate Hinton for the legal and investment counseling services he had provided to petitioner. The fact that petitioner did not compensate Hinton for his services until it could afford to does not convince us that the payments to Hinton were necessarily constructive dividends or unreasonable in amount. Petitioner's actions were entirely reasonable and largely explain the relationship between increases in petitioner's income and the payments to Hinton. It is clear that we must consider the compensation petitioner paid Hinton in past years in determining the reasonableness of the payments in issue. Mayson Mfg. Co. v. Commissioner,supra,178 F.2d at 119. Moreover, 115 say compensation petitioner paid Hinton during the years in issue for past services is deductible in the year paid. Lucas v. Ox Fibre Brush Co.,281 U.S. 115">281 U.S. 115, 119-121 (1930). During 1975 and 1976 petitioner did not compensate Hinton for his legal services. Petitioner paid Hinton $ 10,000 for legal services in 1977, which respondent did not disallow. During 1978 and 1979 petitioner paid Hinton $ 24,000 and $ 26,000, respectively, for legal services, or a total of $ 50,000. This amount spread out over 1975, 1976, 1978, and 1979, is only $ 12,500 per year, a figure fairly close to the $ 10,000 petitioner paid Hinton in 1977, which respondent allowed. Petitioner paid Hinton $ 36,000 and $ 30,500 during 1978 and 1979, respectively, or a total of $ 66,500, for investment counseling. This total spread out over 1975 through 1979 is some $ 13,300 per year. Because Hinton provided essentially the same legal and investment counseling services from 1975 through 1979, but was not paid for them until the latter years, we think it reasonable to infer that at least some of the compensation paid during the later years was for services rendered in the earlier years. The last116 factor we consider is that in 1978 petitioner paid Hinton and his mother dividends totaling $ 60,000. For the years 1977 to 1979, Hinton was engaged in the full-time practice of law in the real estate field, receiving from $ 30,000 to $ 50,000 a year from his practice. During those same years, he was paid a total of $ 126,500 for his part-time legal and investment counseling services to petitioner. During that same period, Toms, who was petitioner's president and general counsel and who worked full-time running petitioner's day-to-day operations, was paid only $ 159,025. Over a three-year period that would average out to $ 53,008 per year for Toms compared to $ 42,133 per year for Hinton. This comparison with his salary from his own full-time law practice and with Toms' salary suggests that some portion of United Title's payments to Hinton may have been disguised dividends being paid to the majority stockholder. However, since Toms was compensated in 1975 and 1976 and Hinton was not, Hinton's payments should be averaged out over a five-year period which would amount to $ 25,300 per year, which is more reasonable but perhaps still a little high for his part-time services. 26117 Based on all the facts and circumstances, we conclude that petitioner is entitled to deduct $ 43,500 of the total $ 60,000 in legal and investment counseling fees it paid Hinton during 1978, and $ 46,500 of the total $ 56,500 in legal and investment counseling fees it paid Hinton during 1979. That still adds up to total payments of $ 100,000 to Hinton in 1977, 1978 and 1979, but it averages out to $ 20,000 per year over a five-year period, which we conclude is reasonable for the services he actually rendered over that time span. 27IV. Negligence AdditionThe final issue is whether petitioner is liable for the negligence addition. Section 6653(a) imposes an addition to the118 tax if any part of an underpayment is due to negligence or intentional disregard of rules and regulations. This case involved hotly contested and rather close factual issues, many of which we have decided in petitioner's favor, others we have decided in respondent's favor. We do not agree with respondent's contention that petitioner failed to maintain adequate books and records. A finding of negligence or intentional disregard of rules and regulations is unwarranted in this case. Thus, petitioner is not liable for the section 6653(a) addition in any year. To reflect the foregoing holdings and the parties' concessions, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in question, and all "Rule" references are to the Tax Court Rules of Practice and Procedure. ↩2. Petitioner conceded the nondeductibility of salary expenses in the amount of $ 4,255 for 1977, and club dues in the amount of $ 800 for 1978. The parties have settled other entertainment expense issues, but have not favored the Court with the details of the settlement. Respondent's adjustments to petitioner's charitable contributions deductions are automatic and therefore dependent upon the issues settled by the parties and those to be decided by the Court. The parties shall reflect the settled issues and the automatic adjustments in their Rule 155 computations. ↩3. North Carolina law requires an "opinion." N.C. Gen. Stat. sec. 58-132↩(a) (1982). However, throughout the trial and in the briefs the parties and witnesses use the phrases "title opinion," "report on title," "certificate of title," and similar phrases interchangeably. There is a debate among North Carolina real estate attorneys as to whether a document containing title information submitted to a title insurance company is an opinion or a report, but in either event these documents contain essentially the same information. 4. There are four types of title insurance policies: a lender's policy, two types of owner's policies, and a construction loan policy. In North Carolina, a lender's policy insures the deed of trust securing the loan. ↩5. At that time, Davis was married to Hinton's mother, Rebecca M. Davis. Respondent characterizes Mr. Davis as Hinton's "father-in-law," a term rarely used for a stepfather. ↩6. Respondent on brief characterizes these independent outside directors as "honorary board members," a meaningless term which respondent seems to use in a pejorative sense. There is nothing in the record to suggest that these outside directors did not fully perform their duties as members of petitioner's board of directors. ↩7. For example, petitioner has communicated to these attorneys that it will not issue a policy if the title opinion is "tacked." An opinion is tacked when an attorney obtains a prior title insurance policy on the property and just updates the opinion by checking the public records only from the effective date of the prior policy forward. As far as Toms knows, petitioner is the only North Carolina title insurance company that refuses to accept tacked opinions. ↩8. Respondent argues that these were just vacation trips and that no board meetings were actually held. Based on the record as a whole, the Court is satisfied that board meetings were held and that substantial corporate business was conducted during each of the trips. As will be discussed below, the Court is also satisfied that these trips, at least as to the directors and real estate guests, accomplished other bona fide business purposes in the particular competitive environment in which petitioner was operating in these early years of its corporate existence. ↩9. An airline representative, a tour guide, and their spouses also went on the New Orleans trips. ↩. Most of the room charges were restaurant charges by one of the directors, which petitioner paid along with other miscellaneous room charges such as long distance telephone calls by other directors. ** Apparently, these were prizes for some type of contest petitioner held during the flight to or from New Orleans.↩. Generally the room charges petitioner paid were for its directors, the real estate guests paying their own room charges. Some of the guests even paid the automatic phone charge of $ .50 per day which is actually part of the room rental. * The dinners were $ 1,547.60 which included $ 1,474.36 for the 62 directors and guests, plus $ 73.24 for four persons who were "no shows." The record does not explain who these persons were or why they were invited. *** The expenditure was for silver trays as souvenirs for the directors and guests. The actual cost was $ 628 (40 trays at $ 15.70 each) but petitioner also paid another $ 700 and $ 714 for silver trays.↩. The record contains no breakdown of this amount. This figure obviously includes items other than rooms because 19 rooms at $ 145 per night for three nights = $ 8,265 and two rooms at $ 125 per night for three nights = $ 750, for a total of $ 9,015. The remaining $ 4,091.83 is unexplained. There is an indication that there was a room tax and certain automatic gratuities for maid service, and that there was no charge for banquets or meeting rooms. However, those amounts would not account for the $ 4,091.83. There is a further indication that petitioner paid certain meal and drink charges (but not room service charges), but the record does not disclose the amount nor whether it was for the directors and real estate guests or for all the guests.↩. Petitioner paid for 12 flights at $ 258 per flight. The invoice lists the individuals for whom flights were paid, including Fred Carmichael, who did not attend the planning conference. Thus, only $ 2,838 properly pertains to the Key West Planning Conference. Petitioner also claimed another $ 1,050 for transportation expense, but there is no evidence in the record to link that expenditure to this planning conference. ** This figure includes the amounts set forth on the Cheeca Lodge invoice as totals for the individuals and the amounts listed under "Master Folio." The hotel rooms figure of $ 2,870.40 is the sum of the total for the individuals ($ 2,605.20) plus the amount for "Room" under "Master Folio" ($ 265.20). ↩10. The breakdown is as follows: ↩ExpenseAmountGolf balls and prizes$ 122.74Green fees (8 golfers x $ 6)48.00Food and drinks at thecountry club54.60Total$ 225.3411. The breakdown is as follows: ↩ExpenseAmountCaterer$ 276.00Liquor and mixes265.11Bartender and maid53.00Napkins, candles, nuts, etc.33.70Total$ 627.8112. There is no evidence as to who occupied the rooms and why. One charge for 42 box lunches on October 8, 1977, suggests that the expenditure was related to the college football game that day. The only item that may be related to the board meeting is a luncheon check for 10 people on October 7, 1977, in the amount of $ 78.29, but even that item is not free of doubt. The Court cannot determine if some portions of the hotel charges related to a meeting room for the board meeting. ↩13. A statement Hinton sent petitioner during 1978 for investment counseling services rendered itemizes those services as follows: * * * selection and monitoring of investments including purchase of certificates of deposit, commercial paper, money market certificates, stocks and bonds, treasury bill money market certificates, savings deposits; monitoring checking and savings accounts (daily), broker accounts, safety deposit box, interest income, statutory deposit, maturity dates of all investments and deposits; phone conferences and personal conferences with brokers, bankers and savings and loan personnel re investments; review and update company investment files; review and conference with company auditor and president re tax returns and Department of Insurance reports and filings; collecting and investing dividends and interest as maturing; analysis of investments, both potential and actual and stock market, housing market and general economy as they affect company financial positions; reporting on company financial position to management, board of directors and shareholders; overall responsibility for all of the above * * * ↩*. Respondent's notice of deficiency listed this figure as $ 12,439, and the total for 1979 as $ 41,715 instead of $ 41,625.78.↩14. We note that the courts, including the Supreme Court, also say that the purpose of the term ordinary in section 162(a) is to distinguish between capital expenditures and current expenses. See Commissioner v. Tellier,383 U.S. 687">383 U.S. 687, 689-690 (1966); Welch v. Helvering,290 U.S. 111">290 U.S. 111, 113-116 (1933); Raymond Bertolini Trucking Co. v. Commissioner,736 F.2d 1120">736 F.2d 1120, 1122-1125 (6th Cir. 1984); NCNB Corp. v. United States,651 F.2d 942">651 F.2d 942, 948↩ (4th Cir. 1981). Respondent does not discuss these cases.15. Respondent's argument is made despite the Court's rulings on petitioner's motion to strike certain material contained in respondent's trial memorandum, petitioner's objection to raising a new issue and/or amendment of answer, and respondent's motion to amend the pleadings to conform to the evidence. Two days after the calendar call and two days before the trial in this case was scheduled to commence, respondent filed his trial memorandum. In the memorandum, respondent for the first time raised the issue of whether petitioner had violated the provisions of the Real Estate Settlement Procedures Act of 1974 (RESPA), Pub. L. 93-533, 88 Stat. 1724, 12 U.S.C. sec. 2607(a), and N.C. Gen. Stat. sec. 58-135.1 (1982). RESPA makes it a crime punishable by imprisonment and a fine, or both, "to accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." 12 U.S.C. sec. 2607(a)↩. Neither the federal nor state authorities violated these statutes. After a hearing on the matter, the Court granted petitioner's trial memorandum and stated that the Court would not receive any evidence on the issue. This was clearly a new issue requiring additional and different evidence on the eve of trial would have been prejudicial to petitioner, Court's clear rulings, respondent's counsel nonetheless sought to introduce evidence of discussions about the statutes at the audit level and moved to amend his pleadings. The Court refused to hear the testimony and denied the motion. However, the Court permitted respondent to make an offer of proof, and he offered to provide that during the audit the revenue agent discussed the possibility that the trips constituted violations of RESPA. However, this matter having been discussed during audit, there is no excuse whatsoever for respondent to have waited until two days before trial to try to raise the issue. The Court is satisfied that the matter was properly excluded. 16. Ignoring the Court's orders excluding this issue, respondent's counsel persisted in trying to resurrect this old canard in this oblique fashion on brief. Therefore, the Court feels constrained to address the issue briefly and to note that the offer of proof (see n.15, supra↩) made by respondent satisfies the Court that respondent could not have carried his burden or proof on this new matter in any event. Respondent's innuendos and insinuating remarks on brief ("a form of bribery," "borders on being illegal," etc.) are wholly unwarranted. 17. In Car-Ron Asphalt Paving Co. v. Commissioner,758 F.2d 1132">758 F.2d 1132 (6th Cir. 1985), affd. T.C. Memo. 1983-548, the Tax Court had found as a fact that the legal bribes or kickbacks were not "necessary," and the Sixth Circuit, while acknowledging the Raymond Bertolini Trucking Co. opinion of another panel of the Sixth Circuit, held that finding of fact was not clearly erroneous. The majority opinion went on to say: The United States Courts should never construe general language in tax statutes in a manner which rewards graft and corruption, albeit graft and corruption in private business. Such a construction burdens the economy unnecessarily and tends to promote dishonesty generally and specifically in commerce. [758 F.2d at 1134.]This is the language respondent seized upon in its ordinary and necessary arguments here. While the sentiments expressed are noble ones, we respectfully point out that is not the basis for the Sixth Circuit's affirmance on our Memorandum Opinion. ↩18. In their Rule 155 computations, the parties shall eliminate all expenses for airfare, meals, entertainment, and incidentals for those persons. However, as to the room expenses, the parties shall eliminate only the difference, if any, between the single room rates and the double room rates as room expenses attributable to spouses. ↩19. Because of our holding that the trip expenses for the tour guide, airline representative, and spouses and friends are not deductible under section 162, our consideration of section 274 is limited to whether it disallows the otherwise allowable expenses for petitioner's officers, directors, and real estate guests. ↩20. The regulations generally adopt the language of the legislative history for section 274. See H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 3 C.B. 405">1962-3 C.B. 405, 424-425. See generally, Berkeley Machine Works & Foundry Co. v. Commissioner,623 F.2d 898">623 F.2d 898, 902-903 (4th Cir. 1980); Walliser v. Commissioner,72 T.C. 433">72 T.C. 433, 439-442 (1979); St. Petersburg Bank & Trust Co. v. United States,362 F. Supp. 674">362 F. Supp. 674, 677-679 (M.D. Fla. 1973), affd. without published opinion 503 F.2d 1402">503 F.2d 1402↩ (5th Cir. 1974). 21. On the Key West trip, petitioner arranged to have the living room of a villa set up to accommodate the two-day meetings. ↩22. Because of our holding, we need not address petitioner's alternative arguments that its trip expenses satisfy the "associated with" test of section 274(a)(1)(A) and that at least certain of the expenses are not subject to the limits of section 274(a) because they fall within the exceptions then provided by section 274(e)(1) for business meals under circumstances conductive to business discussions and section 274(e)(6) for expenses directly related to business meetings of taxpayer's directors. We think that on this record petitioner clearly would satisfy the alternative "associated with" test. ↩23. Respondent appears to concede all of these requirements for the out-of-state meetings except the business purpose item. If respondent does not so concede, it is clear from our findings of fact that the other requirements have been fully satisfied with the following minor exceptions. The $ 2,042 for silver trays for souvenirs for the Las Vegas trip is unreasonable in amount, appearing to be duplicate payments by petitioner; only the one $ 628 amount is properly substantiated. The expenditure for "no shows" at the dinner show in Las Vegas clearly related to persons other than the 62 invited guests, and that amount of $ 73.24 is not properly substantiated as an expense for this out-of-state board meeting. For the Puerto Rico trip, an amount of $ 4,091.83 of the hotel charges of $ 13,106.83 was unexplained, and therefore not properly substantiated. The airfare paid for a 12th person who did not attend the Key West planning conference is not allowable so the $ 3,096 should be reduced by $ 258, and only $ 2,838 is allowable. ↩24. While the expenses of the board meeting itself would be deductible without regard to section 274 requirements, unfortunately petitioner failed to establish the nature and amount of such expenses. Since section 274 would not apply to the Raleigh board meeting as much, the Court could apply the Cohan rule, but there is simply no basis in the record for making any approximation and to permit recovery would be sheer "unguided largesse." Williams v. United States,245 F.2d 559">245 F.2d 559, 560↩ (5th Cir. 1957). 25. Respondent also cites Laputka v. Commissioner,T.C. Memo. 1981-730↩. 26. Toms' salary was initially set at $ 40,000 per year, and if he was paid that amount in 1975 and 1976, his total compensation over the five-year period would have been $ 239,025 or an average of $ 47,805 per year. ↩27. The reasonableness of any payments in any later year will depend on the reasonableness for services actually rendered in that future year, petitioner having now adequately compensated Hinton for the early years when he performed services with little or no compensation. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620236/	EDWARD E. RIECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rieck v. CommissionerDocket No. 95885.United States Board of Tax Appeals41 B.T.A. 457; 1940 BTA LEXIS 1180; February 27, 1940, Promulgated 1180 Petitioner created a trust and transferred to the trustees irrevocably several policies of insurance on his life and certain securities. The trustees were empowered to pay out of the trust income the premiums on the insurance policies and to distribute annually the balance of the trust income to petitioner's wife and children, the named beneficiaries of the trust. There being insufficient funds in the trust to pay some of the premiums when they became due in 1936, funds were advanced to the trustees by the beneficiaries for that purpose. At the end of the taxable year the trustees distributed the remaining net income of the trust for that year, without accounting for the amounts advanced by the beneficiaries. Held, that under the provisions of section 167(a)(3) of the Revenue Act of 1936 the petitioner is taxable on so much of the net income of the trust as was used or might have been used to pay the premiums on policies of insurance on his life; held, further, that as so applied the statute is not unconstitutional, Burnet v. Wells,289 U.S. 670">289 U.S. 670; held, further, that, since the trustees were empowered and directed to pay the premiums on the insurance1181 policies out of the trust income, the trust income, to the extent of the amount of the premiums, is income that might have been used for that purpose. W. A. Seifert, Esq., W. W. Booth, Esq., and A. G. Wallerstedt, C.C.A., for the petitioner. Orris Bennett, Esq., for the respondent. SMITH 457 OPINION. SMITH: This proceeding involves an income tax deficiency of $17,018.15 for the year 1936. The contested portion of the deficiency 458 results from the addition to petitioner's reported income of $36,438.75 representing that part of the income of a life insurance trust established by the petitioner in 1932 that was used in 1936 to pay the premiums on policies of insurance on petitioner's life. The proceeding was submitted on a written stipulation of facts, which we adopt as our findings of fact herein. Briefly stated, the facts essential to a consideration of the questions in issue are as follows: On May 21, 1932, the petitioner executed an agreement designated "LIFE INSURANCE TRUST", by which he transferred in trust to three named trustees a number of policies of insurance on his life, amounting in the aggregate to over $700,000, 1182 and certain securities. The insurance policies and the securities were transferred to the trustees irrevocably so as to vest title thereto in them and to divest the insured of all incidences of ownership therein. Under the provisions of the trust instrument the trustees, during the lifetime of the insured, were to pay the premiums on the policies out of the "net income" from the securities held by them and distribute any surplus net income annually to the insured's wife and four children, who were named as beneficiaries. The trust instrument further provided that: * * in case the net income and surplus income shall at any time be insufficient to pay all of said premiums, then the Insured may pay same, and otherwise the Trustees, in their distretion, may convert any of said securities into cash, or may borrow upon said policies, from one of the Trustees or elsewhere, or may exercise any option for the application of loan provisions to the payment of premiums. * * * The proceeds of the policies when received by the trustees likewise were to be distributed to the beneficiaries. The trust was to continue until the death of the last survivor of the named beneficiaries, when1183 the income and corpus were to be distributed to the settlor's heirs at law. At January 1, 1936, the trust had cash on hand in the amount of $9,281.51. During the taxable year 1936 it received dividends of $40,000 and paid out taxes for the year 1935 in the amount of $1,772.50, trustees' commissions in the amount of $1,200, and premiums on policies of insurance on petitioner's life in the total amount of $36,438.75. When some of the premiums on the insurance policies and the 1935 taxes became due in 1936 the trust did not have sufficient funds to pay them. In June 1936 and again in August of that year, it called upon the beneficiaries to furnish the funds required for those purposes, which they did, advancing to the trust out of their individual estates a total of $12,035.74, each contributing in proportion to his interest in the trust. 459 On December 18, 1936, the trustees distributed to the several beneficiaries a total of $21,906. Following is a tabulated statement of the turst's receipts and disbursements during the year 1936: ReceiptsDisbursementsCash January 1, 1936$9,281.51Taxes paid$1,722.50Dividends40,000.00Commissions paid1,200.00Advances by beneficiaries12,035.74Premiums paid36,438.75Distributed21,906.00Total61,317.25Total61,317.251184 The beneficiaries of the trust reported the amounts distributed to them by the trustees in 1936 in their individual income tax returns for that year. None of the income of the trust was reported by the petitioner in his income tax return. In a prior proceeding brought by this petitioner for the redetermination of a deficiency for 1932, the Board determined in a memorandum opinion entered June 30, 1936, that the petitioner was taxable in 1932 on the amount of the net income of the trust here under consideration which was used in that year to pay premiums on policies of insurance on petitioner's life. Final decision was entered August 21, 1936, determining a deficiency of $3,173.50. On September 10, 1936, the petitioner filed a motion to reopen the case, which was granted, and amended his petition to set forth a claim for the deduction of a loss not claimed in the original petition. Upon reconsideration the Board determined in , that there was an overpayment of petitioner's tax for 1932 in the amount of $2,057.98, of which $1,669.92 was paid within two years before the filing of the petition, within the meaning of section 504(a) 1185 of the Revenue Act of 1934. The Board stated in its published report that: * * * In this motion to reopen and amend the petition, petitioner did not contest the correctness of the Board's holding on the only point covered by the memorandum opinion. He concedes that the Board's holding on that point is correct and that issue is no longer before us. * * * On appeal to the United States Circuit Court of Appeals for the Third Circuit, brought by the Commissioner, the Board was reversed on its holding that the amount of $1,669.92 was paid by the petitioner within two years before the petition was filed. . The petitioner's contentions in this proceeding are, first, that he is not taxable in 1936 on any part of the income of the trust for that year, and, second, that in any event he is taxable on only $16,256.87 of such income, since that amount only was actually used by the trustees to pay the premiums on policies of insurance on his life. 460 The pertinent provisions of the statute are found in section 167(a)(3) of the Revenue Act of 1936, which reads as follows: SEC. 167. INCOME FOR BENEFIT OF GRANTOR. 1186 (a) Where any part of the income of a trust - * * * (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o), relating to the so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor. The first question is the same as that decided by the Board in its memorandum opinion of June 30, 1936, involving the year 1932. Our ruling there was that under section 167(a)(3) of the Revenue Act of 1932, which is identical with section 167(a)(3) of the Revenue Act of 1936, the petitioner was taxable in 1932 on that portion of the income of the trust - the same trust now under consideration - that was used to pay premiums on the insurance policies taken out on petitioner's life. We held that the balance of the net income of the trust which was distributable to the beneficiaries was not to be included1187 in petitioner's income. Our determination there was based squarely upon . The Supreme Court held in that case that under the provisions of section 219(h) of the Revenue Acts of 1924 and 1926, which are identical with the statutory provisions here applicable, the settlor was taxable on so much of the income of several insurance trusts as was used to pay the premiums on policies of insurance on his life, and that so construed the statute was not unconstitutional. The respondent contends that in this proceeding the question of the petitioner's liability for tax on that portion of the trust income which was used to pay the premiums on policies of insurance on petitioner's life is res adjudicata by reason of the Board's memorandum opinion of June 30, 1936, which was not affected by the Board's later opinion published at , or by the court in its reversal of that case. Regardless of the question of res adjudicata, however, we are still of the opinion, as previously expressed, that the question here presented falls squarely under the Supreme Court's rulign in 1188 , both as to the applicability of the statute and its constitutionality. See also . We hold, therefore, that the petitioner as settlor of the trust is taxable on so much of the trust income as was applied or might have been applied 461 to the payment of premiums on policies of insurance upon the petitioner's life. We are of the opinion, further, that within the intendment of section 167(a)(3), supra, all of the premiums paid on the policies of insurance on petitioner's life which were held by the trust in 1936 either were paid or might have been paid out of the income of the trust. The net income of the trust for the entire year amounted to $37,027.50 after the payment of taxes and trustees' commissions, while the premiums paid on the insurance policies amounted to only $36,438.75. Petitioner makes the contention that only $16,256.87 of the trust income is taxable to him since that is the amount of such income that was actually applied to the payment of the insurance premiums, the balance of such premiums having been paid with the funds contributed by the beneficiaries1189 out of their own estates. The contention is without merit. The funds contributed by the beneficiaries for the payment of premiums on insurance policies are properly to be regarded as loans or advances to the trust which were to be returned to them when the trust received its dividends for that year. The trust instrument expressly empowered the trustees to borrow funds for the purpose of paying the premiums on the insurance policies. It did not authorize the trustees to accept contributions for that purpose from the beneficiaries. It was clearly the petitioner's intention in creating the trust that the premiums should be paid out of the trust income, and the trustees were so directed. The balance of the trust income was distributable to the beneficiaries "annually." The amount of the trust's distributable income necessarily must be determined on an annual accounting basis. See , affirming . Otherwise, the purpose of the settlor of the trust as well as the purpose of the statute might be wholly defeated by the simple expedient of the trust borrowing money each year to pay all of the insurance1190 premiums, thereby relieving the settlor of tax liability on such amounts under section 167(a)(3), and at the end of the year distributing all of its income to the beneficiaries and claiming a deduction of such distributions under section 162(b). In , one of the cases relied upon by the petitioner, we held that the settlor of a trust was not taxable under section 167(a)(3) on distributable trust income that was used by the beneficiary to pay premiums on policies of insurance on the settlor's life, which policies were owned entirely by the beneficiary. The distinguishing feature of that case, which differentiates it from both Burnet v. Wells, supar, and the instant case, is that there was no provision in the trust instrument for the payment of the insurance premiums out of the income of the trust and no restriction was imposed on the beneficiary's use of the distributable income of the 462 trust. This distinction was aptly pointed out in the concurring opinion by Murdock and Opper to which other members agreed. Also, in the concurring opinion the cases of *1191 , and , were distinguished on the same grounds. We are of the opinion that the net income of the trust for 1936 is taxable to the petitioner to the extent of the amount of the premiums on policies of insurance on his lifr which were paid or were payable by the trustees during that taxable year, regardless of the source of the funds from which the premiums were actually paid. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620237/	APPEAL OF THE ANTHRACITE TRUST CO., ADMINISTRATOR, ESTATE OF JOHN JOSEPH BROWN, DECEASED.Anthracite Trust Co. v. CommissionerDocket No. 4947.United States Board of Tax Appeals3 B.T.A. 486; 1926 BTA LEXIS 2643; January 28, 1926, Decided Submitted December 12, 1925. 2643 L. E. Renard, Esq., for the taxpayer. Frank T. Horner, Esq., for the Commissioner. 486 Before LITTLETON, SMITH, and TRUSSELL. This is an appeal from the determination of a deficiency of $3,888.78 in estate tax, of which $2,622.50 is in controversy. The tax in controversy arises from the action of the Commissioner in increasing the value of 250 shares of stock of the Pittston Coal Mining Co., owned by the decedent at the time of his death, from $230 a share, as now claimed by the administrator, to $500 a share. FINDINGS OF FACT. The Anthracite Trust Co. is the qualified and acting administrator of the estate of John Joseph Brown, deceased. At the time of his 487 death the decedent was the owner of 250 shares of the capital stock of the Pittston Coal Mining Co., located near Scranton, Pa., the remaining 750 shares of said stock being owned by M. W. O'Boyle. The stock had always been closely held, and was not listed on any exchange; it was not quoted by any local brokers, and there had been no sales thereof prior to the decedent's death on March 20, 1923. Soon after the decedent's death the administrator asked for bids from local brokers2644 and others for the stock, but it did not receive what it regarded as a substantial bid until January, 1924, when a bid of $110 a share was received. The administrator thereupon caused an investigation to be made to determine the fairness of the offer of $110 a share, and was furnished a balance sheet by the Pittston Coal Mining Co., showing the stock to have a value of $110 a share, whereupon the offer of the persons in control of the Pittston Coal Mining Co. to purchase 150 shares at $110 a share was accepted by the administrator, the remaining 100 shares being sold to the heirs of the decedent at $110 a share. On April 30, 1924, the administrator came into possession of facts indicating that the information furnished it concerning the value of the stock of the Pittston Coal Mining Co. was incorrect, and took steps to have the purchasers of the stock pay an additional amount per share for the stock, based upon a correct statement of the assets and liabilities, as shown by the books on March 20, 1923, as follows: ASSETS.Cash$89,290.89Due from Pittston Coal Sales Co134,335.57Due from M. W. O'Boyle44,090.22Automatic Telephone Co. bonds60,000.00Liberty bonds121,800.00Machinery and equipment69,141.32Total518,658.00LIABILITIES.Bills payable$30,833.33Capital100,000.00Surplus387,824.67Total518,658.002645 As a result the purchasers of the 150 shares and the 100 shares, at $110 a share, paid to the administrator in January, 1925, an additional sum of $120 a share. On May 2, 1925, the purchaser of 100 shares of the stock from the administrator sold the same for $230 488 a share. The net profits of the Pittston Coal Mining Co. for the years 1918 to 1923, inclusive, were as follows: 1918$55,070.04191996,604.161920142,914.32192175,455.081922 (when there was a strike for 6 months of the year)34,036.951923118,207.77As of March 20, 1923, the Pittston Coal Mining Co. had almost exhausted its recoverable coal. The administrator filed an estate-tax return on March 13, 1924, and included the 250 shares of stock of the Pittston Coal Mining Co. at a valuation of $27,500, or $110 a share. The Commissioner fixed its value at $500 a share. The value of the 250 shares of stock at the time of the decedent's death was $400 a share. DECISION. The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620240/	JOHN W. SINGLETON, a/k/a JOHN WESTLY, a/k/a JOHN SINKLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSingleton v. CommissionerDocket No. 9680-74.United States Tax CourtT.C. Memo 1978-255; 1978 Tax Ct. Memo LEXIS 258; 37 T.C.M. (CCH) 1106; T.C.M. (RIA) 78255; July 11, 1978, Filed Laurence Goldfein,Ira Tilzer and Richard Levine, for the petitioner. Michael K. Phalin, for the respondent. GOFFEMEMORANDUM OPINION GOFFE, Judge: This matter is before us because of the parties' disagreement of computations pursuant to Rule 155, Tax Court Rules of Practice and Procedure. A brief history of the instant case will, from a chronological point of view, place the issues now before us in proper focus. After this case was set for trial on the merits and after an evidentiary hearing was scheduled on whether petitioner's constitutional rights guaranteed under the Fourth and Fifth Amendments of the U.S. Constitution were violated, petitioner was indicted for income tax evasion for one of the four taxable years pending before us. Subsequent to petitioner's indictment,259 an evidentiary hearing was held, the findings of fact and opinion of which are set forth in Singleton v. Commissioner,65 T.C. 1123">65 T.C. 1123 (1976), which was filed March 18, 1976. Respondent moved for a protective order under Rule 103(a)(1)(2) and (4) to suspend all further proceedings pending the final disposition of the criminal indictment. We denied respondent's motion. In addition, we held that the Commissioner's determination in his statutory notice of deficiency was not based upon constitutionally tainted evidence. We further held that the manner in which the special agents of the Commissioner conducted the initial interview of petitioner did not violate his rights guaranteed under the Fifth and Sixth Amendments to the U.S. Constitution. A trial on the merits followed the evidentiary hearing wherein we decided that: (1) petitioner understated his taxable income for the years 1969, 1970, 1971 and 1972 in the respective amounts of $ 36,067.05, $ 18,565.60, $ 12,798.02 and $ 49,105.15; and (2) at least a part of the underpayment of income tax in each of the taxable years 1969, 1970, 1971 and 1972 was due to fraud on the part of petitioner. Our findings of fact and260 opinion on the merits was filed April 5, 1977 in Singleton v. Commissioner,T.C. Memo 1977-98">T.C. Memo 1977-98 and a decision is to be entered under Rule 155. Following our opinion on the merits, respondent submitted his Rule 155 computation to which petitioner objects. The issues for our decision in the instant matter are: (1) whether respondent is entitled to credit money, seized pursuant to a jeopardy assessment, to interest which was not included in the jeopardy assessment, rather than to the unpaid assessed liabilities for tax and penalty which were assessed as a jeopardy assessment; and (2) whether respondent's computation credits petitioner's accounts with payments on the incorrect dates and thereby increases petitioner's liability for interest. All of the facts relevant to the issues in the instant matter have been stipulated in a supplemental stipulation of facts. The supplemental stipulation of facts and attached exhibits are incorporated herein by this reference. Respondent assessed the following deficiencies in tax and fraud penalties against petitioner on August 9, 1974, pursuant to section 6861, Internal Revenue Code of 1954 (jeopardy261 assessment): 1Additions to Tax TaxableSec. 6653(b), YearDeficiencyI.R.C. 1954Total1969$ 20,554.10$ 10,277.05$ 30,831.15197011,478.445,739.2217,217.6619716,624.073,312.049,936.11197256,999.5628,499.7885,499.34Totals$ 95,656.17$ 47,828.09$ 143,484.26Respondent then served on petitioner on August 12, 1974, a notice and demand for the above amounts by leaving a written notice and demand at petitioner's residence located at Englewood, New Jersey. At the same time respondent levied upon petitioner's bank accounts as follows: Bank Name and LocationAmount of LevyCitizens National BankEnglewood, New Jersey$ 21,996.88Carver Federal S & LNew York, New York22,565.66Northern Valley Englewood S & LEnglewood, New Jersey21,457.32Bowery Savings BankNew York, New York22,217.66Bronx Savings BankBronx, New York22,698.94TOTAL$ 110,936.46On the following day, August 13, 1974, respondent levied upon petitioner's bank account at South Carolina National Bank, St. Matthews, South Carolina, 262 in the amount of $ 5,142.35, making the entire amount levied upon pursuant to the jeopardy assessment $ 116,078.81. Mr. Victor Godfrey was the revenue officer assigned by respondent to collect the amounts assessed, as described above, against petitioner. Pursuant to respondent's levies Mr. Godfrey received a check from Midatlantic National Bank/Citizens, formerly known as Citizens National Bank. The check was dated August 12, 1974, and in the amount of $ 21,996.88. Following receipt of this check, Mr. Godfrey allocated these funds to petitioner's accounts as of August 12, 1974, as follows: AmountTaxable AllocatedYear$ 17,217.6619704,761.221971$ 21,978.88 On August 16, 1974, Mr. Godfrey received a check dated August 14, 1974, from Northern ValleyEnglewood S & L in the amount of $ 21,457.32. He allocated these funds to petitioner's accounts as of August 16, 1974, as follows: Amount AllocatedTaxable Year$ 5,174.89197116,282.431969$ 21,457.32On August 21, 1974, Mr. Godfrey received a check dated August 19, 1974, from Eastern Savings263 Bank, formerly known as Bronx Savings Bank, in the amount of $ 22,698.94. He allocated these funds to petitioner's account as of August 21, 1974, in the following manner: Amount AllocatedTaxable Year$ 19,921.6819692,295.591970481.671971$ 22,698.94On August 28, 1974, Mr. Godfrey received a check dated August 27, 1974, from Carver Federal S & L in the amount of $ 22,565.66. He allocated these funds to petitioner's accounts as of August 28, 1974, in the following manner: Amount AllocatedTaxable Year$ 447.97197122,117.691972$ 22,565.66On August 29, 1974, Mr. Godfrey received two checks both dated August 12, 1974, from South Carolina National Bank in the respective amounts of $ 3,199.25 and $ 1,943.10. He allocated these funds to petitioner's account, as of August 29, 1974, for petitioner's taxable year of 1972. Mr. Godfrey received these two checks from Mr. Sam Johnson who was a revenue officer of respondent at Orangeburg, South Carolina. Mr. Johnson had received these checks from the bank on August 13, 1974. On August 27, 1974, respondent received a check dated August 26, 1974, from Bowery Savings Bank in264 the amount of $ 22,217.66. These funds were credited to the taxable year 1972 as of August 27, 1974. The following schedule summarizes respondent's allocation of the $ 116,078.81 collected during August 1974 pursuant to the jeopardy assessment. TaxableAmountAmount Assessed byExcess Amount YearCreditedJeopardy AssessmentCredited1969$ 36,204.11$ 30,831.15$ 5,372.96197019,513.2517,217.662,295.59197110,865.759,936.11929.64197249,477.7085,499.340Total$ 116,078.81 $ 143,484.26$ 8,598.19During the same time, August 1974, Mr. Godfrey calculated the accrued interest on the liabilities jeopardy assessed on August 9, 1974, for the taxable years 1969 through 1971. He allocated the money which was collected by levy to the taxable years 1969 through 1971 in amounts sufficient to cover the total amount assessed pursuant to the jeopardy assessment plus the accrued interest he calculated, thereby reducing the Excess Amount Credited as shown in the above265 table. This resulted in petitioner's accounts for the taxable years 1969, 1970 and 1971 being credited for accrued interest in the respective amounts of $ 5,324.23, $ 2,287.16 and $ 920.03. The actual assessment of the above amounts of accrued interest took place on June 16, 1975, by way of a "computer generated assessment" evidenced by an assessment certificate (Form 23 C). On November 29, 1976, respondent partially abated the jeopardy assessment against petitioner for the taxable year 1972. The prior jeopardy assessment in the amount of $ 56,999.56 (deficiency in tax) and $ 28,499.78 (section 6653(b) penalty) was abated to $ 24,499.56 and $ 12,249.78 respectively. The $ 49,477.70 previously credited to petitioner's account was reallocated as follows: Amount of ReallocationAmount Applied to:$ 24,299.56Abated deficiency12,249.78Additions under sec. 6653(b)2,048.63Accrued interest10,679.73Refund to petitioner$ 49,277.70 In addition, on November 29, 1976, respondent266 assessed accrued interest ($ 2,048.63) with respect to the taxable year 1972. Respondent did not notify petitioner that any of the funds ($ 116,078.81) collected during August 1974 had been applied to accrued interest rather than to liabilities assessed pursuant to the jeopardy assessment. On December 23, 1976, respondent met with counsel for petitioner and informed counsel that a portion of the $ 116,078.81 collected had been applied to accrued interest. Prior to this meeting petitioner had given no instructions to respondent as to the manner of disposition of the $ 116,078.81 collected during August 1974. Petitioner contends that respondent was totally without authority to allocate any of the amounts seized to cover unassessed accrued interest for the taxable years 1969 through 1971 when there was an unpaid balance due for assessed taxes and penalties for the taxable year 1972. In addition, petitioner takes the position that he is entitled to have his accounts for the taxable years in issue credited with payments as of the respective dates that notices of levy were served rather than as of the date respondent received such payments, thereby stopping the accrual of interest. 267 The threshold question for our consideration is whether we have jurisdiction of the matter before us. While neither respondent nor petitioner specifically raised the question of jurisdiction on brief, respondent did raise the question at the hearing and it is incumbent upon us to consider this point. Newsom v. Commissioner,22 T.C. 225">22 T.C. 225 (1954), affd. per curiam on other grounds 219 F.2d 444">219 F.2d 444 (5th Cir. 1955). The general rule is that we do not have jurisdiction over matters concerning interest. Hudgins v. Commissioner,55 T.C. 534">55 T.C. 534 (1970); Estate of Shedd v. Commissioner,37 T.C. 394">37 T.C. 394 (1961), affd. 320 F.2d 638">320 F.2d 638 (9th Cir. 1963); Chapman v. Commissioner,14 T.C. 943">14 T.C. 943 (1950), affd. per curiam 191 F.2d 816">191 F.2d 816 (9th Cir. 1951); Commissioner v. Estate of Kilpatrick,140 F.2d 887">140 F.2d 887 (6th Cir. 1944), affg. a Memorandum Opinion of this Court. However, with respect to matters concerning a jeopardy assessment an exception to this rule is set forth in section 6861(c) which in part provides: the Tax Court shall have jurisdiction to redetermine the entire amount of the deficiency268 and of all amounts assessed atthesametime in connection [with a jeopardy assement]. * * [Emphasis added.] Even though section 6861(c) gives this Court jurisdiction over matters concerning interesty its scope is limited. We have jurisdiction to determine the amount of interest only when it is assessed pursuant to a jeopardy assessment. Riss & Co. v. Commissioner,45 T.C. 230">45 T.C. 230 (1965). The facts in the instant case demonstrate that petitioner does not come within the exception provided in section 6861(c). The matters relating to the accrued interest on the assessed deficiencies for the taxable years 1969, 1970 and 1971 were not assessed under a jeopardy assessment. The jeopardy assessment included only assessments of tax and fraud penalties. Accordingly, we do not have jurisdiction over matters which concern interest in the instant case. Papa v. Commissioner,55 T.C. 1140">55 T.C. 1140 (1971), disposing of a supplemental issue in Papa v. Commissioner,T.C. Memo 1970-90">T.C. Memo 1970-90, revd. on other issues 464 F.2d 150">464 F.2d 150 (2d Cir. 1972). We would like to point out that the substantive matters presented in the instant case269 should have been resolved by the parties administratively, and while we are sympathetic with petitioner's plight we are compelled to uphold respondent's computation which relates to our determination in Singleton v. Commissioner,T.C. Memo 1977-98">T.C. Memo 1977-98. Due to our holding on the question of jurisdiction, we cannot address ourselves to the other issues presented. Decision will be entered in accordance with the computation submitted by respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended.↩. In addition Mr. Godfrey allocated the balance ( $ 18) to lien fees.↩. This figure includes the lien fee in the amount of $ 18 which Mr. Godfrey applied pursuant to his allocation of funds to various taxable years of petitioner.↩. The total figure reflected in the supplemental stipulation of facts indicates an amount of $ 49,477.70. We are unable to determine from the record this $ 200 discrepancy.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620242/	ISIDORE B. DOCKWEILER AND THOMAS A. J. DOCKWEILER, AS EXECUTORS OF AND TRUSTEES UNDER THE LAST WILL AND TESTAMENT OF GEORGE S. WILSON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dockweiler v. CommissionerDocket No. 50828.United States Board of Tax Appeals30 B.T.A. 1136; 1934 BTA LEXIS 1224; June 29, 1934, Promulgated 1224 Where a husband and wife, residents of California, more than six months prior to his death executed an agreement whereby each relinquished to the other all interest in the other's estate, present or future, and where the husband, in his will executed over six months prior to his death, made gifts to charities in excess of one third of his estate, held, that the separation agreement was a waiver of the restriction contained in the proviso to section 1313 of the Civil Code of California. Isidore B. Dockweiler and Thomas A. J. Dockweiler, pro se. M. B. Leming, Esq., for the respondent. MARQUETTE 1137 OPINION. MARQUETTE: The respondent has determined a deficiency in estate tax of $2,677.69, all of which is in controversy, and which results from his action in reducing the deductions permitted by section 303(a)(3) of the Revenue Act of 1926 from $279,698.47 to $92,035.06. The petitioners assert that this action is erroneous. Other errors as to deductions are alleged, but these have been settled by a stipulation of facts on which this proceeding is submitted, and which is made a part of this report. The material facts of the stipulation1225 are that George S. Wilson, hereinafter referred to as the testator, died testate on May 3, 1927, a resident of the County of Los Angeles, California. His will, which was executed April 23, 1926, was, by order of the Superior Court of the State of California in and for the County of Los Angeles, admitted to probate May 31, 1927. The petitioner are his qualified executors. The testator left surviving him no parent, child, or grandchild, but did leave surviving him, his wife, Katherine R. Wilson, whom he married on April 2, 1907. Since November 1912 the testator and his wife have lived separate and apart. On April 2, 1926, the testator, as party of the first part, and his wife, as party of the second part, entered into a written agreement, the provisions of which, after reciting that the parties were married, that they had lived separate and apart since November 26, 1912, that there was no issue of their marriage, that the second party had been contemplating the commencement of an action against the first party for separate maintenance, that "each of the parties hereto is desirous of determining for both the present and future their respective property rights and their respective1226 financial obligations toward one another," that the second party was the owner of separate property of the estimated value of $50,000, that the first party was the owner of separate real and personal property described in the agreement, and that there was no community property, provided: FIRST: In full and complete satisfaction of all financial claims and monetary demands and property claims and property rights of every name, kind, nature and character whatsoever that the said Katherine R. Wilson, said second party hereto, as wife, or as widow, or otherwise, has had or now has or might hereafter have against the said George S. Wilson, said first party hereto, or against the estate of said George S. Wilson, in the event of his death hereafter, after, as heir-at-law or otherwise, and in consideration of all other covenants and agreements in this agreement contained and on the part of the said Katherine R. Wilson to be kept and performed, the said George S. Wilson does hereby promise, covenant and agree, on behalf of himself and his estate, and his heirs, devisees, legatees, executors, administrators and assigns, to pay to the said Katherine R. Wilson, for the support and maintenance1227 of herself, and as her sole and separate property, the sum of Two Hundred and 1138 Fifty Dollars ($250.00) per month, in lawful money of the United States, commencing as of the date of October 1st, 1925, and to continue during the natural life of said Katherine R. Wilson, and whether they remain married or should hereafter for any cause be divorced, said payments to be made by said first party to said second party on the first day of each and every month hereafter by depositing to the credit of said Katherine R. Wilson the said sum of $250.00 per month on the first day of each and every month hereafter at Guaranty Office of the Security Trust & Savings Bank, 655 South Spring Street, Los Angeles, California, and to insure the payment of said monthly sum to said second party during the term of her natural life and beyond the period of the death of said first party, in the event he should die first, the said first party does hereby agree immediately to execute, in the manner provided by law, a will, under and by virtue of the terms of which said first party shall provide the payment to said second party of said $250.00 per month for and during her natural life, and which monthly1228 payments shall take precedence of any and all other bequests and devises in such will contained, and shall receive first attention in matter of payment. * * * * * SECOND: All of the property of the said Katherine R. Wilson, both real and personal, now held by her or which shall hereafter be acquired by her in any manner whatsoever, shall be and remain her sole and separate property, free from any and all rights or claims of the said George S. Wilson, with full power to her to sell, convey, transfer, assign, mortgage, pledge, lease or deal with the same as if she were single. And the said George S. Wilson will, from time to time, but only in such manner, as not to create any personal liability on his part, execute any and all such deeds, conveyance, mortgages, pledges, leases and papers as may be necessary or proper to enable her to so sell, convey, transfer, assign, mortgage, pledge, lease or deal with her said property as she chooses. And said George S. Wilson does hereby waive and surrender any and all right, in the event of the death of said Katherine R. Wilson, to act as the administrator of her estate, or to inherit any of her property as husband, or otherwise, and1229 said George S. Wilson does hereby agree to never hereafter make any claim upon or against said Katherine R. Wilson or upon or against any of the property of said Katherine R. Wilson, either as surviving husband or otherwise, or upon or against her estate, and said Katherine R. Wilson shall have the uncontested right and privilege to dispose of any and all of her property by will, deed, or otherwise, as she sees fit, and on her death, in the lifetime of said George S. Wilson, all her separate estate, and all of her estate, whether real or personal, which she shall not have disposed of in her lifetime or by will, shall, subject to her debts and engagements, go and belong to the person or persons who would have become entitled thereto if the said George S. Wilson had died in the lifetime of said Katherine R. Wilson; and if the said Katherine R. Wilson shall die in the lifetime of the said George S. Wilson, he shall, without contest of any kind, permit her will to be proved, or administration upon her estate to be taken out by the person or persons who would have been entitled to do so had he, the said George S. Wilson, died in her lifetime. THIRD: All of the property of the said George1230 S. Wilson, both real and personal, now held by him, or which shall hereafter be acquired by him in any manner whatsoever, shall be and remain his sole and separate property, free from any and all rights and claims, except only as herein provided, of the said Katherine R. Wilson, with full power to him to sell, convey, transfer, 1139 assign, mortgage, pledge, lease or deal with the same as if he were single. And the said Katherine R. Wilson will, from time to time (but only in such manner as not to create any personal liability on her part), execute any and all such deeds, conveyances, mortgages, pledges, leases and papers as may be necessary or proper to enable him to so sell, convey, transfer, assign, mortgage, pledge, lease or deal with his said property as he chooses. And the said Katherine R. Wilson, contemporaneously with the execution hereof, hereby agrees to properly execute and deliver to said George S. Wilson quitclaim deeds to all of said real property belonging to him and hereinbefore described. And the said Katherine R. Wilson does hereby waive and surrender any and all right, in the event of the death of said George S. Wilson, to act as the administrator of1231 his estate, or to inherit any of his property as wife or otherwise, and said Katherine R. Wilson does hereby agree to never hereafter make any claim for support or maintenance or alimony, counsel fees or costs in any action for divorce or separate maintenance or otherwise or at all, upon or against said George S. Wilson, or upon or against any of the property of said George S. Wilson, either as surviving wife or otherwise, or upon or against his estate, except as to and for said Two Hundred and Fifty Dollars ($250.00) monthly payment herein provided for her during her natural life, and said George S. Wilson shall have the uncontested right and privilege to dispose of any and all of his property except such as has been placed in trust as security hereunder by will, deed or otherwise, as he sees fit, except that in such will he shall provide for and secure to said Katherine R. Wilson the said monthly payment of $250.00 for each and every month during her natural life, and on his death, in the lifetime of said Katherine R. Wilson, all his separate estate, and all of his estate, whether real or personal, which he shall not have disposed of in his lifetime, or by will, shall, subject to1232 his debts and engagements, and in particular to the payment of said $250.00 per month to said Katherine R. Wilson, go and belong to the person or persons wo would have become entitled thereto if the said Katherine R. Wilson had died in the lifetime of said George S. Wilson; and if the said George S. Wilson shall die in the lifetime of the said Katherine R. Wilson, she shall, without contest of any kind, permit his will to be proved, or administration upon his estate to be taken out by the person or persons designated in such will as the executors thereof, or by the person or persons who would have been entitled to do so had she, the said Katherine R. Wilson, died in his lifetime. * * All the payments provided in the agreement were made by the testator in his lifetime, and after his death by the petitioners as his executors. In his will the testator, after bequeathing to relatives sums amounting to $3,000 and to charities sums amounting to $13,500, devised and bequeathed the residue of his estate in trust to the same persons whom he nominated as his executors in trust, to manage and control and to pay to his widow, Katherine R. Wilson, $250 per month so long as she lived, 1233 and to pay to a cousin $100 a month during his lifetime, the remaining income to be divided among certain charities. At the death of the survivor of the two beneficiaries the trust is to cease and the corpus is to be divided among the same charities 1140 who received the income. In April 1928 the petitioners, as executors, filed their estate tax return in which they reported a gross estate of $387,014.82 and took deductions in the amount of $335,421.69 and claimed the specified exemption of $100,000, leaving no net estate tax. The deductions included charitable bequests and devises in the amount of $279,698.47. The respondent accepted the return, but reduced the charitable deductions to $92,035.06. He made no other changes. The respondent, on brief, states that all the institutions named in the will fall within section 303(a)(3) of the Revenue Act of 1926. Neither Katherine R. Wilson nor any other person has objected to the will or to the order of probate. On December 7, 1931, the petitioners filed in said Superior Court their second and final account and report as executors. On January 19, 1932, there was filed in the court report of the inheritance appraiser which1234 was approved February 1, 1932, and which determined that the bequests and devises to charities were exempt from the inheritance tax of California. On February 27, 1932, the court entered its order of settlement and final distribution. No appeal from that order has been taken. The letters testamentary to the petitioners have not been revoked. The respondent insists that under section 1313 of the Civil Code of California1 the devises and bequests to the charities are valid only to the extent of one third of the testator's estate. The petitioners concede that this would be true but for the agreement between testator and his wife of April 2, 1926. They insist that by this agreement the testator's wife, the only person alive who fell within the last proviso to the section, has waived the restriction contained therein. Whether the agreement operated as a waiver is the only question before us. 1235 It is clear that if no parent, wife, child, or grandchild had survived the testator he could have devised and bequeathed any part or 1141 all of his estate to charities, provided his will had been executed six months prior to his death. ; . In California, as elsewhere, the policy of equity is to favor charities. . Section 1313 does not disclose a different conception. Thus it was said in ; : Now, as to such legislative intent: There is no limitation under the laws of this state, except as prescribed by section 1313, upon the right of a person to dispose of his property in favor of charitable purposes. He may by gift in his lifetime devote all his property thereto. He has a legal right to do so. He may with equal legal right dispose by will of all his property in favor of charities provided he leaves no heirs at law. It is only when he leaves such heirs that his power of disposition by will is restricted. But this is not by reason of any public1236 policy of this state against dispositions in favor of charity. In fact, the state has no such public policy. It is well settled here that dispositions to charity are looked upon with favor, and the courts will uphold all such gifts whether made by a donor in his lifetime or by a testator, when it can be done consistently with the rules of law. The theory of section 1313 is not to prevent charities from receiving testamentary gifts of property. It is not a mortmain statute; not an expression of a policy of the state against the accumulation of vast properties or the centralization of wealth in mortu manu. It was not designed to operate upon the capacity of corporations or institutions or individuals to take charitable testamentary gifts, but solely as a limitation on the power of a testator to make them when he had legal heirs. The purpose of the section was remedial; to prevent what was deemed a wrong and injustice to those who should naturally be the recipients of the bounty of a testator - his heirs at law. It was not enacted for the public good or as a matter of state polity, but for the benefit exclusively of those named in it - the heirs at law - and as a protection against1237 hasty and improvident gifts to charity by a testator of his entire estate to the exclusion of those who in the judgment of the Legislature had a better claim to his bounty. * * To bring this home, it is only necessary to point out that here the only person who could have benefited by the restriction was the testator's wife, who had the right to waive it. Did the agreement of April 2, 1926, accomplish this result? We think that this agreement was valid. No one contends otherwise. Sections 158, 159, and 160 of the Civil Code of California. ; ; ; . The main purpose of the agreement was to settle for the present and for the future all the property rights and financial obligations of the parties to one another. To this end the testator confirmed to his wife all her property as her separate property, and she likewise confirmed to him his property. He agreed to pay her $250 a month during her lifetime. All this was done in full and complete satisfaction of all claims and demands which she, as wife, widow. 1142 or otherwise1238 might then or thereafter have against him, or against his estate in the event of his death in her lifetime, as heir at law or otherwise. She agreed that, subject to his debts and the payments of $250the a month to her, on his death in her lifetime his estate should go to the persons who would have been entitled thereto if she had died in his lifetime, and, further, that she would without contest permit his will to be proved. It thus appears that under the agreement the only right which his wife had against the testator was to the monthly payments of $250 during her life. With the exception of this right she was a stranger to his estate after the execution of the agreement. It remains to apply the last proviso to section 1313, which was enacted in 1919, to these facts. No California case in point has been to us and we have been unable to find one. We must therefore decide this case as a new proposition. The question should be approached in the light of certain accepted rules of statutory construction. Thus, in , the court said: A thing may be within the letter of a statute and not within its meaning, and within its meaning, 1239 though not within its letter. The intention of the lawmaker is the law. * * In , the Court laid down the following rule: All laws are to be given a sensible construction; and a literal application of a statute, which would lead to absurd consequences, should be avoided whenever a reasonable application can be given to it, consistent with the regislative purpose. See , and cases there cited. * * * To the same effect see . The agreement of April 2, 1926, falls within the letter of the proviso in that it was executed over six months before the testator's death and, in our opinion, it falls within its spirit in that it divested the testator's wife of all interest in his estate except her annuity, and this in no way conflicted with the gifts to charity. Any further formal waiver would have been a futile gesture. She had nothing to waive. The law does not require the doing of that which is unnecessary. Such a construction would result in an absurdity. *1240 In our opinion the agreement of April 2, 1926, was effective as a waiver of the restriction in the proviso to section 1313. , relied upon by respondent, is not in point. There, at the time of the testator's death the bequests were void. Here, we have held them to be valid. Reviewed by the Board. Judgment will be entered under Rule 50.Footnotes1. § 1313. Restriction on Devise for Charitable Uses; Exceptions.↩ No estate, real or personal, shall be bequeathed or devised to any charitable or benevolent society or corporation, or to any person or persons in trust for charitable uses, except the same be done by will duly executed at least thirty days before the decease of the testator; and if so made at least thirty days prior to such death, such devise or legacy and each of them shall be valid; provided, that no such devise or bequest shall collectively exceed one-third of the estate of the testator, leaving legal heirs, and in such case a pro rata deduction from such devises or bequests shall be made so as to reduce the aggregate thereof to one-third of such estate; and all dispositions of property made contrary hereto shall be void, and go to the residuary legatee (and) devisee, next of kin, or heirs, according to law; and provided, further, that bequests and devises to the state, (or to any municipality, county, or political subdivision within the state), or to any state institution, or for the use or benefit of the state or any state institution, or to any educational institution which is exempt from taxation under section one a of article thirteen of the constitution of the State of California, or for the use or benefit or any such educational institution, are excepted from the restrictions of this section; provided, however, that nothing in this section contained shall apply to bequests or devises made by will executed at least six months prior to the death of a testator who leaves no parent, husband, wife, child, or grandchild, or when all of such heirs shall have by writing, executed at least six months prior to his death, waived the restriction contained herein.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620243/	B. M. MARCUS ESTATE, Gladys L. Marcus, Leon J. Marcus, Richard E. Marcus and Robert M. Diggs, Executors, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Marcus Estate v. CommissionerDocket Nos. 8577-72 & 8578-72United States Tax CourtT.C. Memo 1975-9; 1975 Tax Ct. Memo LEXIS 360; 34 T.C.M. (CCH) 38; T.C.M. (RIA) 750009; January 15, 1975, Filed. Robert M. Diggs, for the petitioner. Louis J. Zeller, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent has determined a deficiency in the Federal income taxes of the Estate of B. M. Marcus in the amount of $20,474.05 for the year 1967 or alternatively in the amount of $22,009.60 for the361 year 1968. We are asked to decide if in either of the aforesaid years the Estate of B. M. Marcus recognized forgiveness of indebtedness income under section 61(a) (12), Internal Revenue Code of 1954, as amended. 1FINDINGS OF FACT The petitioner herein is the Estate of B. M. Marcus (decedent), who died a resident of Olean, New York, on September 29, 1967. On November 27, 1967, the decedent's will was admitted to probate and letters testamentary were issued to his executors by order of the Surrogate of Cattaraugus County (New York). The principal office of the decedent's executors was in Olean, New York, when the petition herein was filed. No Federal income tax return was filed by the petitioner for either 1967 or 1968. Certain facts have been stipulated. We incorporate herein the stipulation of facts and the exhibits appended thereto. Olean Improvement Company (Improvement), a New York corporation, owned the building in which the family of H. W. Marcus operated the Olean House hotel. 2 H. W. Marcus, the father of the decedent, acquired the 1,150362 shares of Improvement stock outstanding in 1912. The corporation was to remain under the control of the Marcus family until its dissolution in 1971. As of April 6, 1929, H. W. Marcus ceased to have an interest in Improvement, having distributed his shares equally among his five children in a series of gifts. When one of the children of H. W. Marcus died in 1940, the interests of the four survivors, among them the decedent, were increased by the holdings of the dead child. In 1954 the decedent further increased his holdings by purchasing several shares from his sister. On February 14, 1961, the decedent made a gift to his three children of the 292 shares which he had acquired by reason of the events recounted above. On July 19, 1962, he transferred to his son, Richard E. Marcus (Richard), an additional 77 1/8 shares which he had purchased from his sister and her daughter. In March, 1965, the decedent's brother, Mendell V. Marcus, gave him another ten shares which the decedent surrendered to Improvement on May 6, 1967, in satisfaction of an outstanding obligation. From time363 to time while it was under the control of the Marcus family, Improvement disbursed funds to the decedent, made charitable contributions in his name and paid premiums on policies insuring his life. It was not the decedent's practice either to pay interest on these amounts or to execute notes in acknowledgment of an obligation to reimburse Improvement for them; but Improvement did debit these disbursements to a loan account styled "111 - B. M. Marcus," and the decedent did not include these amounts in his gross income when computing his Federal income tax liability. 3In 1960 the books of Improvement were audited by an agent of the respondent. In the course of the audit he came across Account No. 111 and after an investigation concluded that the disbursements debited to the account were in fact distributions made with respect to the decedent's Improvement shares. The decedent maintained to the contrary that the disbursements were loans which he was unable to repay; but he later agreed to pay the deficiencies which the agent determined to be owing for the years 1957 through 1959. 364 The decedent paid Improvement the amounts debited to Account No. 111 for the year 1960 and when Improvement advanced him $200 a month from January 1963 through June 1964 decedent acknowledged an obligation to repay these amounts (which he discharged prior to his death), together with 5-1/4 percent interest, by executing two promissory notes. After the assessments had been made against the decedent for the years 1957 through 1959, he, together with his accountant, had entertained the notion of reducing the pre-1957 debit balance in Account No. 111 by various methods, among them repayment. 4 But finding none of the available alternatives satisfactory, the decedent resolved that the account should in no event be balanced by action of Improvement's board of directors lest he realize income in consequence of such action. Thus at the time of the decedent's death, Account No. 111 still showed a sizeable debit balance. Nevertheless, Improvement made no attempt to recover any amounts from the decedent's estate; and had it done so, the decedent's executors would have availed themselves of the protection afforded by the statute of limitations. 365 The decedent died indebted to the Exchange National Bank of Olean (Exchange National) to the extent of $17,737.67. His estate incurred funeral and administration expenses in the amount of $2,435.23. His gross estate included, interalia, the following assets: AssetValue at date of deathCash and Receivables$11,678.29Insurance Policies1. Policy No. 398199,Equitable Life Ins. Co.of Iowa, payable toGladys L. Marcus andExchange National1,015.642. Policy No. 727,516,Provident Mut. Life Ins. Co.of Phil., payable to ExchangeNational5,092.713. Prudential Ins. Co. ofAmerica policy, payable toGladys L. Marcus2,500.00Stock1. 109 shares, StandardOil Co. of Ca.6,601.312. 105 shares, Texaco, Inc.8,367.19Total$35,255.14The estate also included 12 1/2 shares of stock (a 25 percent interest) in Olean House, Incorporated. In applying to the Surrogate of Cattaraugus County for a determination of the tax owing on the decedent's estate under Article 26 of the Tax Law (New York), the executors valued these shares at $1,000 each. Several years prior to decedent's death, Olean House, Incorporated, began to suffer a serious366 decline in business. Late in 1970 Improvement sold the building which had housed the hotel to a purchaser who proceeded to convert the upper floors into apartments for the elderly. For several months thereafter, Olean House, Incorporated, leased the building's restaurant and bar facilities; but an attempt to operate them proved unremunerative. Consequently, in 1971 the members of the Marcus family sold the fifty shares of Olean House, Incorporated, outstanding for one dollar per share. 5By timely statutory notice dated October 12, 1972, respondent determined a deficiency in the Federal income tax of the decedent's estate for either 1967 or 1968. OPINION The respondent contends that the amounts debited to Account No. 111 with respect to the years preceding 1957 represented loans which Improvement had made to the decedent; and that the petitioner's obligation to repay such of those loans as were still outstanding at the time of the decedent's death, was forgiven by Improvement in 1967 or 1968. The petitioner contends that the decedent and his estate were at no time under an obligation to pay Improvement the amounts debited to Account No. 111. Alternatively367 the petitioner contends that if such an obligation did ever exist, it terminated prior to 1967 or 1968. The record discloses that the decedent executed no promissory notes payable to Improvement, covering the amounts in issue; and that he neither was charged interest on those amounts nor made a systematic effort to repay them. However, in computing his Federal income tax, the decedent did not include those amounts in his gross income; and they were carried as receivables on Improvement's books. As the petitioner bears the burden of proving its contentions, we hold that the debit balance in Account No. 111 as of December 31, 1956, did represent an obligation of the decedent, still outstanding at the time of his death, Cohen v. Commissioner,77 F.2d 184">77 F.2d 184 (C.A. 6, 1935), affirming Orders of the Board of Tax Appeals; Wiese v. Commissioner,93 F.2d 921">93 F.2d 921 (C.A. 8, 1938), affirming 35 B.T.A. 701">35 B.T.A. 701 (1937), certiorari denied 304 U.S. 562">304 U.S. 562 (1938); Shephard v. Commissioner,340 F.2d 27">340 F.2d 27 (C.A. 6, 1965), affirming per curiam a Memorandum Opinion of this Court, certiorari denied 382 U.S. 813">382 U.S. 813 (1965).368 The forgiveness of an indebtedness is deemed to have occurred when it becomes reasonable to assume that the debt will probably never be paid, Bear Manufacturing 1974); Fidelity-Philadelphia Trust Co.,23 T.C. 527">23 T.C. 527 (1954). The record herein discloses that while he lived, the decedent was determined that Improvement not appear to have forgiven its claims against him; that after his death, the decedent's executors did not intend to satisfy such claims as Improvement may have had against him; and that Improvement's management did not intend to enforce these claims against the petitioner. We therefore hold the petitioner's obligations to Improvement to have terminated as a practical matter at the time of the decedent's death in 1967. It remains for us to determine the amount of income realized by the petitioner upon the forgiveness of its indebtedness to Improvement. As a threshold matter we must ascertain the fair market value on the date of the decedent's death of the assets included in his estate. Bearing upon this matter is a controversy as to the value of the petitioner's369 12 1/2 shares of stock in Olean House, Incorporated. In petitioning the Surrogate of Cattaraugus County to determine the tax owing on the decedent's estate under Article 26 of the Tax Law (New York), the executors valued these shares at $12,500. This valuation is not binding upon the petitioner in this proceeding, Hegra Note Corp. v. Commissioner,387 F.2d 515">387 F.2d 515 (C.A. 5, 1967), affirming a Memorandum Opinion of this Court. We cannot agree with the respondent that this valuation was correct. Giving due consideration to the decline in business which Olean House, Incorporated, was then experiencing, we hold these 12 1/2 shares to have been worth a total of $1,250 and the decedent's gross estate to have been worth $36,505.14. The amount of the debt forgiven was $87,351.76, that amount being the debit balance in Account No. 111 on December 31, 1956. As the petitioner's total liabilities clearly exceeded the value of its assets prior to the forgiveness of its indebtedness to Improvement, it can have realized income on the forgiveness of that indebtedness only to the extent that the fair market value of its assets exceeded its total liabilities immediately following370 the forgiveness, Haden Co. v. Commissioner,118 F.2d 285">118 F.2d 285 (C.A.5, 1941) affirming Memorandum Opinion of the Board of Tax Appeals, certiorari denied 314 U.S. 622">314 U.S. 622 (1941); Lakeland Grocery Co.,36 B.T.A. 289">36 B.T.A. 289 (1937). In determining that excess, assets exempt from the claims of creditors under state law are not to be included among the assets of the estate, Rufus S. Cole,42 B.T.A. 1110">42 B.T.A. 1110 (1940). Accordingly, we hold that policies of insurance on the life of the decedent are not to be included among the assets of the estate insofar as the proceeds of those policies were made payable by specific designation to Gladys L. Marcus.6371 Decision will be entered under Rule 155 in Docket No. 8577-72. Decision will be entered for the petitioners in Docket No. 8578-72. Footnotes1. All section references are to the provisions of the Internal Revenue Code of 1954, as amended.↩2. The Marcus family operated the hotel through a corporate entity styled Olean House, Incorporated.↩3. Credit entries to Account No. 111 bespeak no systematic effort on the part of the decedent to repay these advances. Indeed, the only credit entries made from 1946 through 1959 record Improvement's receipt of dividends on policies insuring the decedent's life.↩4. As of December 31, 1956, Account No. 111 showed a debit balance of $87,351.76.↩5. See section 6501(a).↩6. Insurance Law of New York, Section 1661. If any policy of insurance has been or shall be effected by any person on his own life in favor of a third person beneficiary, or made payable, by assignment, change of beneficiary or otherwise, to a third person, such third person beneficiary, assignee or payee shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person effecting the insurance. If any policy of insurance has been or shall be effected by any person upon the life of another person in favor of the person effecting the same or made payable, by assignment, change of beneficiary or otherwise, to such person, the latter shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person insured; * * Section 166-a. Payment of proceeds Where the proceeds of a policy of life insurance hereafter delivered or issued for delivery in this state or payable according to its terms to two or more beneficiaries without designation in the policy or by endorsement thereof of the respective interests of such beneficiaries, the proceeds shall be paid to such beneficiaries in equal portions. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620244/	LEADER FEDERAL SAVINGS AND LOAN ASSOCIATION OF MEMPHIS AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLeader Federal Sav. & Loan Ass'n v. CommissionerDocket Nos. 44110-86, 44490-86United States Tax CourtT.C. Memo 1991-334; 1991 Tax Ct. Memo LEXIS 385; 62 T.C.M. (CCH) 201; T.C.M. (RIA) 91334; July 22, 1991, Filed 385 An appropriate Order will be issued and decisions will be entered under Rule 155. Richard L. Bacon, for the petitioner. Nancy B. Romano, for the respondent. WELLS, Judge. WELLSMEMORANDUM OPINION The instant consolidated cases (hereinafter, the instant case) are before us on the parties' cross-motions for summary judgment pursuant to Rule 121. 1 Respondent determined the following deficiencies in petitioner's Federal income tax: YearDeficiency1967$ 5,7851970271,73219771,415,92119782,734,79019791,838,0811980405,593After deciding the other issues in the instant case in an opinion rendered on July 3, 1989, T.C. Memo 1989-321">T.C. Memo 1989-321, the remaining issue that must be decided in this Opinion is whether certain portions of section 1.593-6A(b) (5)(vi) and (vii), Income Tax Regs., are valid. For certain financial institutions, including petitioner, during the years in issue, the deduction for addition to bad debt reserve is generally equal to a percentage of the financial institution's taxable income. The challenged portions of the regulation require that taxable income reflect any net operating loss carrybacks before the deduction386 for addition to bad debt reserve is calculated.Summary judgment is appropriate where there is no genuine issue as to any material fact and a decision may be rendered as a matter of law. Rule 121. No dispute exists with respect to any material question of fact. Accordingly, summary judgment is appropriate with respect to the issue remaining in the instant case. Petitioner had its principal place of business in Memphis, Tennessee, when it filed its petitions. During the years in issue, petitioner deducted additions to a reserve for bad debts. Petitioner calculated those amounts by using the "percentage of taxable income method" set forth in section 593(b) (2)(A). For those years, section 166(c) permitted taxpayers to deduct a "reasonable addition" to bad debt reserve, in lieu of specific debts as they387 became worthless. Section 593(b) defined the term "reasonable addition" for certain financial institutions, including petitioner. Under that subsection, the deduction for addition to reserve with respect to "qualifying real property loans" (generally those loans secured by improved real property (section 593(d)) was subject to various limits, one of which was set forth in section 593(b)(2)(A). That provision limited the deduction to "the applicable percentage of the taxable income" for the year. 2388 Central to resolution of the instant case is the interplay between NOL carrybacks and the deduction for addition to bad debt reserve calculated under the percentage of taxable income method. Respondent relies on subsections (vi) and (vii) of section 1.593-6A(b) (5), Income Tax Regs. The provisions generally require that taxable income reflect any NOL carrybacks before the deduction for addition to bad debt reserve is calculated. Specifically, the pertinent portions of the regulation provide as follows: (5) Computation of taxable income. For purposes of * * [calculating the deduction for addition to bad debt reserve under the percentage of taxable income method], taxable income is computed-- * (vi) For taxable years beginning before January 1, 1978, without regard to any deduction the amount of which is computed upon, or may be subject to a limitation computed upon, the amount of taxable income, and without regard to any net operating loss carryback to such year from a taxable year beginning before January 1, 1979. (For purposes of this subparagraph, a net operating loss deduction under section 172 is not a deduction the amount of which may be subject to a limitation389 computed upon the amount of taxable income.) (vii) For taxable years beginning after December 31, 1977, by taking into account any deduction the amount of which is computed upon, or may be subject to a limitation computed upon, the amount of taxable income, and any other deduction or loss allowed under subtitle A of the Code, such as any deduction allowable under section 172 or any loss allowable under section 1212(a), unless otherwise provided in this subparagraph.For taxable years beginning after December 31, 1977, subdivision (vii) expressly requires that taxable income reflect the section 172(a) deduction prior to calculating the deduction for addition to bad debt reserve. For taxable years beginning before January 1, 1978, subdivision (vi) requires, by negative implication, that taxable income reflect NOL carrybacks from years beginning after December 31, 1978, prior to calculating the deduction. As originally promulgated on May 17, 1978, the ordering rule was to affect only taxable years beginning after December 31, 1977. T.D. 7549, 1 C.B. 185">1978-1 C.B. 185, 186. Proposed amendments to the regulation would have required retroactive use390 of the ordering rule for NOLs occurring after 1977 (43 Fed. Reg. 60964 (1978)), but the regulation was amended on May 30, 1979, to have retroactive effect only for NOLs occurring after 1978. T.D. 7626, 2 C.B. 239">1979-2 C.B. 239, 240. Petitioner contends that the foregoing provisions are invalid and that it should be permitted to use the ordering rule in effect prior to publication of the regulation containing the challenged provision on May 17, 1978. The ordering rule proposed by petitioner requires calculation of the deduction for addition to bad debt reserve before any NOL carrybacks are reflected in the calculation of taxable income. The only issue presented in the instant case was addressed by this Court in Pacific First Federal Savings Bank v. Commissioner, 94 T.C. 101">94 T.C. 101 (1990), on appeal F.2d (9th Cir. 1991). Pacific First Federal was followed in Peoples Federal Savings & Loan Association v. Commissioner, T.C. Memo 1990-129">T.C. Memo 1990-129. Peoples Federal was appealed to the Sixth Circuit on August 17, 1990. The instant case is also appealable to the Sixth Circuit. In Pacific First Federal391 , we held that the reversal of the ordering rule by the Secretary violated Congressional intent and was therefore an invalid exercise of the Secretary's rule-making authority. Respondent asks that we reconsider our holding in Pacific First Federal, which we decline to do. We will not repeat here our reasons for reaching that conclusion. Our holding in Pacific First Federal that the challenged provisions of section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., are invalid disposes of the only issue in the instant case. We therefore grant summary judgment in favor of petitioner. 3To reflect the foregoing and our prior opinion, Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. During relevant times, the portions of section 593 pertinent to the instant case provided as follows: (b) Addition to Reserves for Bad Debts. -- (1) In general. --For purposes of section 166(c), the reasonable addition for the taxable year to the reserve for bad debts * * * shall be an amount equal to the sum of-- * * * (B) the amount determined by the taxpayer to be a reasonable addition to the reserve for losses on qualifying real property loans, but such amount shall not exceed the amount determined under paragraph (2), (3), or (4), whichever amount is the largest, * * * (2) Percentage of taxable income method.-- (A)In general.-- * * * the amount determined under this paragraph for the taxable year shall be an amount equal to the applicable percentage of the taxable income for such year (determined under the following table): ↩For a taxable yearThe applicable percentagebeginning in --under this paragraph shall be--197154 percent197251 percent197349 percent197447 percent197545 percent197643 percent197742 percent197841 percent1979 or thereafter40 percent3. The parties have agreed on the specific computations which will result from this Court's decision with respect to the issue presented in this Opinion.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620246/	Estate of William Bernstein, Deceased, Edward Bernstein, Executor, and Selma Bernstein, Petitioners, v. Commissioner of Internal Revenue, RespondentBernstein v. CommissionerDocket No. 41976United States Tax Court22 T.C. 1364; 1954 U.S. Tax Ct. LEXIS 87; 22 T.C. No. 169; September 30, 1954, Filed September 30, 1954, Filed 87 Decision will be entered under Rule 50. Bonds on which interest had accrued but remained unpaid were exchanged in 1949, pursuant to a plan of reorganization, for new bonds of equal face amount, plus capital stock, "non-interest bearing interest certificates," and cash. Held:1. The receipt of the cash and interest certificates did not constitute the receipt of interest income.2. The interest certificates were "securities" within the meaning of section 112 (b) (3) of the Internal Revenue Code of 1939 and were not "other property or money" under section 112 (c) (1). Sidney Gelfand88 , for the petitioners.Donald J. Fortman, Esq., for the respondent. Baar, Judge. BAAR1364 OPINION.The Commissioner determined a deficiency in income tax of William Bernstein and his wife, Selma Bernstein, for the year 1949 in the amount of $ 103.84 with respect to items not here involved. No error has been alleged except the failure of the Commissioner to exclude from income certain interest which was reported as taxable. The petitioners contend that they are entitled to a refund of approximately $ 4,500 on this ground.William Bernstein died subsequent to the filing of the petition herein, and by order of this Court dated May 6, 1953, the executor of his estate, Edward Bernstein, was substituted as a petitioner.The major question presented for decision is whether so-called "non-interest bearing interest certificates" and cash received in 1949 upon an exchange of bonds in a reorganization should be considered interest income to the extent of the unpaid interest accrued subsequent to the date of purchase of the bonds, or whether such certificates and cash should be taxable only to the extent provided by sections 112 (b) (3) and 112 (c) (1) of the Internal Revenue 89 Code of 1939. A subsidiary question is whether such certificates were "securities" within the meaning of section 112 (b) (3) or "other property" under section 112 (c) (1).1365 All of the facts have been stipulated and are found accordingly.The petitioners were, on August 1, 1949, the owners of $ 130,000 face value of the 5 per cent general mortgage bonds of the Central Railroad Company of New Jersey, due July 1, 1987. On August 1, 1949, a change in the capital structure of the railroad company which, according to the stipulation of the parties, constituted a reorganization within the meaning of section 112 (g) (1) (E) of the 1939 Code, became binding on all security holders.At that time there was accrued and unpaid interest due upon the bonds both for periods prior to the various dates of purchase by the petitioners and for periods subsequent thereto. In 1949 the bonds were surrendered pursuant to the plan of reorganization and the petitioners received in exchange therefor the following:For each $ 1,000 bondsurrenderedTotalReceivedNumberFace or parNumberFace or parvaluevalue(a) 3 1/4 per cent general mortgagebonds, due July 1, 19871$ 1,000130$ 130,000(b) Shares of class A capital stock($ 50 par value)420052026,000"Plus for interest" from January 1,1944, to June 30, 1949:(c) Non-interest bearing interestcertificates122513029,250(d) Cash506,500$ 1,475$ 191,75090 The parties have stipulated that "the use of the words 'plus for interest' shall not be deemed to be an admission as to the taxability of items (c) and (d) as interest income," and that items (c) and (d) could not have been received separately and apart from items (a) and (b), but all items were received as a part of a unitary plan of reorganization.On the date of receipt the fair market value of each $ 225 non-interest bearing interest certificate was $ 115.875 and the aggregate fair market value of the certificates received by the petitioners was $ 15,063.75.The total of $ 21,563.75 received by the petitioner in cash and fair market value of interest certificates represented $ 12,234.78 of interest accrued prior to the purchases by the petitioners and $ 9,328.97 of interest accrued subsequent thereto.The petitioners reported the amount of $ 9,328.97 as interest income on their calendar year 1949 joint Federal income tax return filed with the collector of internal revenue for the third district of New York. They now allege that the Commissioner was in error in failing to exclude this amount from the taxable income reported on their return, and ask this Court to determine an overpayment91 of tax on that ground.1366 Respondent contends that the cash and the fair market value of the interest certificates constitute ordinary interest income, to the extent that they represent interest accrued subsequent to the dates of purchase of the bonds by the petitioners. He points out that under the plan of reorganization the cash and the interest certificates were set apart to satisfy the unpaid interest on the bonds which were surrendered, that the certificates themselves were designated as interest certificates and that the cash and the face amount of such certificates received by the petitioners were equal to the amount of the unpaid interest on the bonds surrendered by them.In Carman v. Commissioner, (C. A. 2, 1951) 189 F. 2d 363, affirming on this issue 13 T. C. 1029, the taxpayer held first mortgage bonds of Western Pacific Railroad Company purchased at a time when the interest thereon had been in default for several years. These bonds were exchanged, pursuant to a reorganization of the railroad company under section 77 of the Bankruptcy Act, for the following securities: New income bonds, preferred92 stock, common stock designated by the plan as being for unpaid interest, and cash as adjustment payments for the delay in the consummation of the reorganization plan.The Commissioner contended that the fair market value of the common stock constituted ordinary income to the extent that it was attributable to interest which had accrued but had remained unpaid on the old bonds subsequent to their purchase by the taxpayer. It was held, however, that the claim for unpaid interest was not severable from the principal debt and that each bond together with the interest due on it constituted a "security" within the meaning of section 112 (b) (3) of the Code. It was therefore held that the common stock was received not as interest income but merely as part of the consideration received in exchange for the old bonds surrendered pursuant to a plan of reorganization. The Court of Appeals for the Second Circuit stated (189 F. 2d at pp. 364-365):The argument is that the claim for accrued interest was severable from the claim for the principal of the old bonds and is not a "security" exchanged for stock pursuant to a plan of reorganization. The contention is ingenious93 but unsound. The bondholder had a single claim for principal and interest; the bonds and their coupons were "securities" as defined in section 23 (k) of the Code, 26 U. S. C. A. § 23 (k). The exchange of these securities for new bonds, preferred stock and common stock meets precisely the conditions prescribed in § 112 (b) (3). Had the plan of reorganization contained no explanation of how the amount of the new securities was arrived at, unquestionably no gain or loss would be recognized. We cannot believe that Congress intended the applicability of section 112 (b) (3) to depend on whether the proponents of the plan chanced to explain the reasons which induced them to propose the exchange. * * *1367 A similar holding was made by this Court in Morris Shanis, 19 T. C. 641 (1953), affirmed on other grounds (C. A. 3, 1954) 213 F. 2d 151, wherein we declined to reconsider our decision in the Carman case.In view of the foregoing authority, there would seem to be no merit to the respondent's argument that the claim for interest must be considered apart from the principal debt. However, 94 the respondent attempts to distinguish the Carman and Shanis cases from the one at bar on the ground that in the cited cases the taxpayers received common stock or other securities in payment of their claims for accrued bond interest, whereas herein the petitioners received cash and interest certificates which the respondent argues were not securities. He urges that the certificates did not represent an interest in the enterprise, as would bonds, stocks, or other securities, but constituted in fact the payment of interest -- current payment to the extent of their fair market value and deferred payment as to the remainder of their face amount.We do not consider this to be a valid ground of distinction. The decisive question is whether or not the cash and interest certificates were received in an exchange of securities pursuant to a plan of reorganization. If they were, such cash or other property as might have been received in addition to the stock or securities governed by section 112 (b) (3) would be taxable only under the provisions of section 112 (c) (1) and not as interest income.We can not agree with the respondent's contention that only the new bonds and the stock95 were received in exchange for the old bonds, and that the cash and the interest certificates were separately received as payment of the accrued interest. According to the stipulation of the parties and in conformity with the nature of the reorganization, the exchange was a single integrated transaction and the interest certificates and cash could not have been received except upon the exchange of the old bonds. It is not material that the unpaid interest obligation is mentioned as the reason why the cash and interest certificates are included in the consideration for the exchange.The parties have stipulated and we have found that the change of capital structure of the Central Railroad Company of New Jersey constituted a reorganization within the meaning of section 112 (g) (1) (E) of the 1939 Code. There is no question that under the previously cited decisions the bonds surrendered by the petitioners, including the claims for accrued interest, constituted securities within the meaning of section 112 (b) (3). If the interest certificates received by the petitioners were also "securities" within the meaning of that section, then no gain or loss would be recognized except to 1368 96 the extent of the cash. If the interest certificates were not securities within the meaning of section 112 (b) (3), then such certificates and the cash were "other property or money" and were taxable under the provisions of section 112 (c) (1).We therefore hold that the receipt by the petitioners of non-interest bearing interest certificates and cash in settlement of their claims for unpaid interest on bonds surrendered in a tax-free exchange did not result in the receipt of interest income.This conclusion is in accord with the recent decision in Dunbar v.United States, (E. D. Mo., Aug. 4, 1953). The taxpayer in that case exchanged bonds of the St. Louis-San Francisco Railway Company on which interest was in default for new securities and cash pursuant to the same plan of reorganization under section 77 of the Bankruptcy Act which was involved in the Shanis case, supra. The cash distribution was designated in the consummation order and in the final decree of the District Court as allocable to interest accrued and unpaid for the years 1934 to 1936, during which time the taxpayer owned some of the bonds surrendered in the exchange. The plan made no allocation 97 of the new securities received as between the principal and the balance of interest due on the old bonds. It was held on the authority of the Carman and Shanis cases that no part of the new securities constituted taxable income and that the cash received was taxable only as capital gain and not as ordinary income.If the receipt of cash in settlement of claims for accrued and unpaid interest upon bonds surrendered pursuant to a plan of reorganization is not to be regarded as the receipt of ordinary interest income, then a fortiori, the receipt of a mere obligation to pay a sum in settlement of outstanding claims for interest, however such obligation be designated, cannot be deemed the receipt of interest income. See also Mary B. Thurlow v.United States, (N. D. Ala., July 1, 1954); Oscar G. Thurlow v.United States, (N. D. Ala., July 1, 1954); Grey v.United States, (D. Utah, Dec. 14, 1953).The question remains, however, whether the interest certificates are "securities" within the meaning of section 112 (b) (3) or "other property" under the provisions of section 112 (c) (1). Respondent has taken the position that they are not securities. The98 certificates recite that they are part of an issue limited in aggregate principal amount to $ 10,739,925 and secured by an indenture of mortgage or deed of trust dated July 1, 1887, as supplemented and amended by 6 supplemental indentures, the last of which was dated July 1, 1949. The certificates further recite that they are payable "out of certain portions of available net income," as provided in the indenture.The certificates also state that the indenture, as supplemented, provided for the issuance and the securing of general mortgage bonds of 1369 the company, unlimited in aggregate principal amount. Upon any distribution of proceeds of sale of the mortgaged and pledged property, payment of the interest certificates was subordinated to the prior payment in full of the principal and interest on any such bonds. The company reserved the right to redeem the interest certificates in whole or in part at any time.We have recently had occasion in Camp Wolters Enterprises, Inc., 22 T. C. 737, to consider the definition of the term "securities" as used in section 112 (b) (5) transactions. We there held that the words "stocks or securities" have99 the same meaning when used in section 112 (b) (5) as they do when used in sections 112 (b) (3) and 112 (b) (4). After noting the authorities on the point, we stated:The test as to whether notes are securities is not a mechanical determination of the time period of the note. Though time is an important factor, the controlling consideration is an over-all evaluation of the nature of the debt, degree of participation and continuing interest in the business, the extent of proprietary interest compared with the similarity of the note to a cash payment, the purpose of the advances, etc. It is not necessary for the debt obligation to be the equivalent of stock since section 112 (b) (5) specifically includes both "stock" and "securities."In the Camp Wolters case 89 nonnegotiable unsecured installment notes were received in exchange for certain contract and restoration rights. These interest bearing notes became due between the fifth and ninth years after issuance, but no payment whatsoever could be made on them until a certain bank loan or any renewal, extension, or refinancing of such loan had been completely liquidated. In concluding that these notes were "securities" we stated:100 It seems clear that the noteholders were assuming a substantial risk of petitioner's enterprise, and on the date of issuance were inextricably and indefinitely tied up with the success of the venture, in some respects similar to stockholders. As a matter of fact, all 89 notes were redeemed within 2 years, but we must examine the notes as of the date of issuance. * * See also Globe-News Publishing Co., 3 T. C. 1199 (1944), wherein we held that dividend scrip issued in satisfaction of accrued and accumulated dividends on preferred stock pursuant to a plan of recapitalization were securities.Upon examining the terms of the interest certificates in the instant case in the light of the test laid down in the Camp Wolters case, we note that the certificates cannot be considered short-term obligations since their payment is conditioned upon the availability of net income. While the certificates were issued in partial satisfaction of a current obligation to pay accrued interest, they represented merely a means of deferring the payment of such obligation until funds were obtained, as an integral part of a unitary plan to reorganize the capital structure101 of the corporation. Since the certificates were payable only *1370 out of net income and were subordinate to the payment of the principal and interest on general mortgage bonds, which might be issued in unlimited amount, they were clearly not the equivalent of or even similar to a cash payment. Indeed, the interest certificate holders, just as the noteholders in the Camp Wolters case, were "inextricably and indefinitely tied up with the success of the venture" and were subjected to a substantial risk of the enterprise.We therefore hold that the non-interest bearing interest certificates received by the petitioners upon the reorganization of the Central Railroad Company of New Jersey were "securities" within the meaning of section 112 (b) (3) of the 1939 Code and that no gain or loss was recognizable with respect to their receipt.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620247/	LEE LIVE STOCK COMMISSION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lee Live Stock Comm'n Co. v. CommissionerDocket No. 280.United States Board of Tax Appeals7 B.T.A. 532; 1927 BTA LEXIS 3162; June 24, 1927, Promulgated 3162 1. Upon the evidence held that the petitioner is entitled to classification as a personal service corporation. 2. Salaries may not be deducted as expense unless paid or incurred or accrued. 3. Deduction claimed for an alleged bad debt disallowed in absence of proof of worthlessness. 4. Claim for special assessment not considered, the petitioner having been held entitled to classification as a personal service corporation. Anan Raymond, Esq., for the petitioner. John D. Foley, Esq., and L. C. Mitchell, Esq., for the respondent. GREEN 532 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the calendar years 1918 and 1919, for which the Commissioner determined deficiencies in the sums of $2,951.78 and $1,308.49, respectively. The petition alleges three errors on the part of the Commissioner: (1) The denial to the petitioner of classification as a personal service corporation; (2) the disallowance of deductions from income of salaries admittedly neither paid nor authorized during the taxable years; and (3) the disallowance for deduction of an alleged bad debt. In addition3163 to the isues thus raised, the petitioner contends that it is entitled to special assessment, the claim to which has not been heretofore asserted. FINDINGS OF FACT. The petitioner, a corporation, is one of 57 or 58 members of the Omaha Live Stock Exchange, a voluntary association organized to regulate and facilitate the sale of live stock at the stock yards at South Omaha, Nebr. All members of the association adhere to and are bound by the rules of the exchange and in general all transact their business in the same way. Some of the member organizations are partnerships and some are corporations. The rules of the exchange are equally applicable to corporations and partnerships. 533 All firms are what are known as live stock commission firms, and all of them, including the petitioner herein, buy and sell live stock strictly on a commission basis, having themselves no interest whatever in the live stock so bought or sold, their only remuneration or gain as the result of the transactions in which they participate being the commissions earned in their capacity as agents for the owners or purchasers. It is provided in the rules of the exchange that payments for cattle3164 sold or purchased must be made on the day of sale or purchase if the transaction is consummated before 2 o'clock of that day. If the sale is made after 2 o'clock, the payment is deferred automatically until the following day. In such instances the member organizations frequently advance to the seller of the live stock, by their own check, the amount due him less commissions and other charges incident to the sale. Such amounts so advanced are paid to the firm making the advances not later than the day following the sale, all sales being on the basis of "spot cash," and the 24-hour delay in the case of sales made after 2 o'clock is due only to the rule of the exchange made for its protection in the conduct of its clearing house through which all purchases and sales are cleared and handled. The stock of the petitioner consisted of shares of the total par value of $7,250. The names of the stockholders, office held by each, and the par value of the stock, are as follows: Thomas B. Lee, president$2,000B. B. Blanchard, secretary1,000Arthur D. Smith, treasurer4,250Lee, the president, was a resident of Kansas City, Mo. He owned an interest in four or five3165 firms engaged in the same business in other cities. During the fall of each year he would spend approximately two months in Omaha, actively participating in the business of the petitioner. It was his practice to make some four or five trips to Omaha during each year to consult with the other stockholders, advise them with reference to the conduct of the business, and familiarize himself with the condition of the business and the market at Omaha. He devoted a considerable amount of time to the other organizations mentioned. It was his practice each year to travel over the country calling upon prospective purchasers and sellers in an effort to induce them to ship their live stock to, or purchase their live stock from, one of the organizations in which he was interested. It frequently happened that live stock consigned to one of these organizations would, because of market conditions, be diverted from the organization to which it was shipped and sold by another of the group operating in a city where the market conditions were more 534 favorable. So far as the record discloses, no one of the various organizations in which Lee was interested received a preference over the3166 others. It was the practice of the other members of the petitioner corporation to make three or four trips to Kansas City for the purpose of consulting with Lee, procuring his advice, and determining upon the business policy of the petitioner. Both Smith and Blanchard resided at Omaha and devoted their entire time and efforts to the business of the petitioner. For both of the taxable years the petitioner filed its returns as a personal service corporation. Attached to the return for the year 1919 were the following schedules: A-3: Commissions on sale of livestock$49,498.95A-5: Interest on partners' drawings1,386.68A-13:Insurance174.49Auto up-keep119.36Light18.62Stable324.00Entertaining440.55Professional60.00Rent941.10Ass'n. dues119.10Auto Insurance204.42Adv. & Stationery347.99Trade Journals1,493.31Postage, Tel. & Phone1,105.65Miscellaneous327.26Traveling945.07Exchange857.45Pay Roll20,557.9628,036.33A-14:Thomas B. Lee, Kansas City, Mo., Partial Time500.00Arthur D. Smith, Omaha, Nebr., Entire Time6,500.00Burt B. Blanchard, Omaha, Nebr., Entire Time6,500.0013,500.00A-18: Loss on commissions1,345.14A-19:Depreciation on Autos - Ford, $490.00, 11 1/2 mos., 25%117.00Dodge, $1,170.00, 1 yr., 25%267.75Ford, $635.55, 3 mos., 25%39.72424.473167 Dec. 31, 1918Dec. 31, 1919E. Cash$535.42$3,196.06Accounts Rec. Trade13,150.7223,667.82Officers24,582.2237,730.58Employees1,223.011,034.70Notes Rec45,104.7837,179.64Memberships6,850.006,850.00Liberty Bonds3,000.006,220.00As-Sar-Ben Stock125.0094,446.15116,003.80Bank Over-draft12,946.415,887.81Acct's Payable, Trade5,779.951,439.27Officers35,884.4844,521.01Employees1,031.14Capital Stock7,250.007,250.00Surplus8,240.5214,395.37Notes Payable23,196.2742,510.34Interest accrued117.3894,446.15116,003.80F. Surplus:Balance at beginning8,240.52Profit for year6,154.8514,395.37535 The balance sheet above set forth indicates that the corporation loaned to various individuals substantial amounts of money, and this action by it is one of the reasons assigned by the Commissioner for his disallowance of the claim for classification as a personal service corporation. The petitioner herein had no money of its own to loan. The loans which appear upon the books of the corporation were loans of money belonging to Arthur D. Smith, the treasurer, and3168 his mother, Henrietta I. Smith. These loans were made through the corporation and accounts thereof kept on its books as a matter of convenience and accommodation to Smith and his mother. The corporation over a period of ten years derived a total income from this source of something under $1,200. This amount accumulated as the result of small differences which arose through the making of loans and was permitted by Smith to pass to the credit of the corporation as a compensation for the services of the corporation in providing bookkeeping facilities, etc. Sometimes Smith found that he was not possessed of sufficient funds to make the loans which he desired and the note of the petitioner endorsed by Smith or his mother was given to the banks in order to secure the additional amounts needed by him, and the credit of the corporation was thus pledged as security for the moneys thus procured for Smith and his mother. The petitioner corporation did not follow the practice of many similar commission houses, of making loans to its patrons, the only loans appearing on its books being those made for and on behalf of Smith and his mother. 536 The success of a commission house3169 depends to a very large extent upon the individual members thereof each of whom possesses a large number of friends and acquaintances who transact their business with the organization by reason of their friendship for the members and their confidence in the ability and integrity of all the members. The contact of the organization with its patrons is entirely through the members who act in the capacity of agent for the purchaser or seller. During the years in question the petitioner employed three salesmen who were constantly in the yards assisting the members in making the sales or purchases, and who, in the absence of the member, took charge of and handled the business in the yards. Each of these salesmen had friends and acquaintances and each attracted to the petitioner a small amount of business. In some instances the petitioner, in common with other like organizations, assisted the purchasers of cattle in borrowing sufficient money to make the purchase. This assistance was rendered either by arranging for banks to loan the money directly to the purchaser or by a similar arrangement with the endorsement of the petitioner upon the notes. The notes in every instance where3170 the petitioner's name was endorsed thereon, were secured by a chattel mortgage upon the cattle purchased and the feed which would be required until they were ready for resale. No profit accrued to the petitioner by reason of these financing operations, its only source of income being from commissions and the small amount derived from the service rendered to Smith and his mother. The salaries authorized and paid to members during the years in question were as follows: Thomas B. Lee:1918 $5001919500Arthur D. Smith:19185,00019196,500E. B. Blanchard:19185,00019196,500In the cases of Smith and Blanchard, the salaries would have been increased had it not been for the belief that the petitioner was entitled to classification as a personal service corporation. Each of these men could have, during the years in question, commanded a salary of $10,000 per year measured by the scale of salaries paid to like organizations for similar services. No salaries were authorized in excess of the amounts paid. In November of 1919, one Allison, a cattle shipper and a customer of the petitioner, drew a draft upon the petitioner for the sum of 537 3171 $5,800. The petitioner, believing that Allison had shipped cattle for sale on the Omaha market, honored the draft. Allison had shipped no cattle, and when later one of the representatives of the petitioner called upon him at his home at Hay Springs, Nebr., it was found that the money which he had thus procured had been paid to the bank in that town in satisfaction of his indebtedness to the bank. In May of 1920, Allison executed and delivered to the petitioner a chattel mortgage upon certain live stock and a second mortgage upon 480 acres of land in western Nebraska. The petitioner, in its return for 1919, made no claim for a deduction on account of this transaction with Allison. Some time during the fall or winter of 1920, approximately $200 was realized upon the sale of the cattle covered by the chattel mortgage. In 1924 the second mortgage was sold for $100. During 1919 and subsequent years, Allison was in very straitened financial circumstances. We are unable to ascertain what property he had other than that covered by the mortgages, or whether there was any reasonable prospect of collecting the remainder of the indebtedness. OPINION. GREEN: The respondent opposes3172 the classification of the petitioner as a personal service corporation upon two grounds: First, that capital was a material income-producing factor; and, second, that one of the principal stockholders, namely, Lee, was not regularly engaged in the active conduct of the affairs of the corporation. After a careful examination of all the evidence we are unable to find that the petitioner derived any material amount of income from the use of capital. It does appear that Smith and his mother used the corporation extensively in the conduct of their private loan business. It likewise appears that in some instances they used the credit of the corporation in the furtherance of their private business. But, inasmuch as the corporation derived no profit from the loan business of the Smiths for the use of the corporate credit in that connection, we perceive no reason therein for disallowing the classification. The second objection raised by the Commissioner would seem to have in it some merit. Lee owned approximately 27 per cent of the stock, and by virtue of such ownership must be held to be one of the principal stockholders. We can not from the record determine what proportion of his time3173 Lee devoted to the petitioner corporation. In fact it would appear that an accurate determination of such proportion was well-nigh impossible inasmuch as Lee's activities seemed at all times to be directed towards the building up of all of the businesses in which he was interested, each of which was the commission house and each of which was likely 538 to receive shipments of live stock from those with whom Lee came in contact. Except when Lee was actually participating in the buying and selling of live stock for one of the other houses at the yards in the city where the house was located, it would seem that he was working for the interest of all, and inasmuch as his activities were constantly producing results for the petitioner as well as the other commission houses, and inasmuch as his efforts were at all times, in part at least, directed towards the upbuilding of the petitioner's business, we are unable to hold that he was not regularly engaged in the active conduct of the affairs of the petitioner corporation, and we therefore conclude that the petitioner is entitled to be classified as a personal service corporation. 3174 The respondent, both in his brief and in his argument, cited the case of , in support of his contention that the petitioner was not a personal service corporation. The facts in that case are to be distinguished from the facts in this case in some material respects. In that case the court found that the plaintiff did not render a personal service. Our conclusion, based of course on the record in this proceeding, is just the contrary. There the plaintiff purchased live stock for its customers with its own funds and shipped the live stock to the purchaser, attaching a sight draft for the purchase price to the bill of lading. The petitioner here extended credit to no one except the Smiths, and as the record shows, it earned a negligible income from this source. The court in the Hubbard-Ragsdale case, supra, based its opinion principally upon a set of facts the parallel of which is not found in this case. It is true that when the petitioner sold cattle (and such sales were all for "spot cash"), it, the same day, gave to the seller its check for the sale price, less commissions, when in some instances, if the3175 sale was made after 2 p.m., it would not collect the purchase price until the next day. We do not regard this as such a use of capital as would warrant us in denying to the petitioner the classification as a personal service corporation. The respondent's contention in this regard was that the loans, above referred to, indicated that capital was a material income-producing factor. The second allegation of error relates to the disallowance of certain deductions from income to which it is claimed the petitioner is entitled by reason of the fact that the salaries paid by it were smaller than those paid to officers of other corporations rendering a like service and smaller than the petitioner's officers might have obtained from other corporations as compensation for similar services. It is admitted that no such salaries were authorized or paid, and there is no provision of the statute which permits the 539 deduction of salaries which are neither paid nor incurred, nor accrued. There seems to be little merit in the petitioner's contention that it is entitled to a deduction in the year 1919 of the amount which it paid out to Allison. The statute requires that the debt be*3176 ascertained to be worthless and charged off within the taxable year. The record is entirely silent as to a charge off, and which it does appear that Allison was in straitened financial circumstances, we can not conclude therefrom that the debt was worthless. The petitioner, even as late as 1924, made a collection on this account and there is nothing to indicate that at some time in the future the unpaid balance may not be recovered. The fourth issue arises out of petitioner's claim that it is entitled to special assessment, and it is unnecessary to give consideration thereto since we have concluded that the petitioner is entitled to classification as a personal service corporation. Judgment will be entered after 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620248/	ALBERT M. VAN HUFF AND JUDITH A. VAN HUFF, 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentVan Huff v. CommissionerDocket No. 8911-79.United States Tax CourtT.C. Memo 1981-30; 1981 Tax Ct. Memo LEXIS 714; 41 T.C.M. (CCH) 764; T.C.M. (RIA) 81030; January 27, 1981. 714 Held: Lodging furnished to petitioner while he was employed as an equipment engineer on the Alaska pipeline project was not on the business premises of the employer. Accordingly, the value of the lodging is not excludable from gross income under section 119. Albert M. Van Huff, pro se. Michael McMahon, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: 1976$ 3,33919772,504Due to concessions, the sole issue remaining for our determination is whether the value of lodging facilities715 furnished to petitioner Albert M. Van Huff is properly excludable from petitioners' gross income 2 under section 119. 3FINDINGS OF FACT Some of the facts have been stipulated and are so found. These facts together with the exhibits attached thereto are incorporated herein by this reference. Petitioners Albert M. Van Huff and Judith A. Van Huff, husband and wife, were residents of Anchorage, Alaska at the time they filed their petition herein. Federal income tax returns for 1976 and 1977 were filed by petitioners with the Internal Revenue Service Center, Ogden, Utah. During the years in issue, petitioner Albert M. Van Huff (hereinafter petitioner) was employed as a senior rotating equipment engineer by Alyeska Pipeline Service Company (hereinafter716 Alyeska). Alyeska, as agent for major oil companies, undertook management of the construction of a Trans-Alaska pipeline which was to span an 800 mile distance running from the point of a major oil discovery in Prodhoe Bay to Valdez, Alaska. Construction on the pipeline commenced in 1967 but environmental considerations halted its progress in 1968. After the Arab Oil Embargo of 1973 construction of the Trans-Alaska pipeline was continued. The southern terminal of the pipeline was located at Valdez, Alaska and Alyeska sought to employ qualified engineers for that site. It was in March of 1976 that petitioner gained employment with Alyeska. Prior to construction of the pipeline, Valdez, Alaska was a town with a population of approximately 1,000 whose industry included mainly fishing. With the development of the pipeline at hand, Alyeska faced a serious shortage of adequate housing for its employees. Therefore, Alyeska evolved a housing plan to accommodate its employees in the Valdez area. Alyeska built 30 permanent type houses and erected 170 modular-type houses in the area. It also leased all the available motel rooms in Valdez for employee use. Consequently, the city717 of Valdez experienced tremendous economic growth along with an increase in its population. Upon petitioner's acceptance of employment with Alyeska, he was informed by the company as to where his living quarters in Valdez would be. Petitioner did not inquire about other accommodations as he was sure that his employment was contingent upon acceptance of Alyeska's housing policy. Moreover, the scarcity of housing and sewer and electrical facilities coupled with the severity of snow conditions made it impractical for petitioner to haul a trailer through Valdez on an independent search for housing. The lack of adequate housing in highlighted by the fact that petitioner's employment commencement date was delayed until the house he was to occupy was completed. The basic geographical structure of the Alyeska operation in the Valdez area was as follows: 1. The Valdez pipeline terminal was located south of Port Valdez Bay. This was the southern terminal of the entire Trans-Alaska pipeline. 2. There were at least one-half dozen personnel locations most of which were located either north or northeast of the terminal site. Those locations north of the site were situated north of718 Port Valdez Bay directly across the Bay from the terminal site. It was in this northern region that petitioner's residence was located. The northeast region, known as Sheep Creek Camp was some 23 miles from the city of Valdez. 3. There were several warehousing and other storage equipment areas. First, a housing area warehouse was located within the northern residential subdivision. Second, there were numerous dock warehouses, laydown areas and rail and pipe yards located on the northern shore of Port Valdez Bay, all of which were used to supply the construction site. These storage areas were situated either directly south of petitioner's residential region or somewhat to its eastern side. 4. There were barge offloading areas where necessary supplies were delivered. Several such sites were situated on the northern shore of the Bay and one offloading area was maintained on the southern shore contiguous to the Valdez terminal site. 5. Alyeska employed the services of numerous trucking companies throughout the Valdez area for ground transportation and sought some of its supplies from local vendors. As noted, the pipeline terminal site at Valdez was located on the southern719 side of Port Valdez Bay. The erection of family housing in the terminal area was implausible due to the mountainous terrain which surrounded the limited area of leveled terrain upon which the terminal was built. Petitioner's chief employment responsibility was the inspection of numerous pieces of rotating equipment including compressors, pumps, turbines and mixers, which were installed at the terminal. The performance of this duty took place at the terminal. Some of those who worked on the pipeline were also responsible for the proper administration of the areas in which construction employees resided. Such administration duties included: 1. the receipt of modular homes; 2. dealing with insurance claims arising from damage to modular homes occurring on barges or trucks; 3. attention to certain inefficiencies in housing design; 4. supervision of purchase orders for residential furniture; 5. supervision over construction and maintenance of sewer and electrical systems; 6. monitoring of snow removal and road grading equipment; 7. submission of fuel usage reports for the housing area; 8. equipment rental; 9. moving of personal belongings of those who lived720 in the housing area; and 10. supervision of warehouses in the residential area which were maintained for the express purpose of supporting Alyeska's housing area. Petitioner's residence at the time of his employment with Alyeska was in the city of Valdez. The owner of the residence had built a number of homes on various lots within the city pursuant to an agreement with Alyeska, that Alyeska would lease the premises on a term basis for pipeline employees. The house in which petitioner lived was located on one of two series of blocks upon which other residences stood. The two series of blocks were parallel to each other and each consisted of approximately eight streets of residential housing.The two series of blocks were separated by a strip of park property. Petitioner's duties as engineer were performed almost exclusively at the terminal. Petitioner prepared one report and was on 24-hour call at his residence. Petitioner's residence was located on the northern side of Port Valdez Bay. The terminal was erected on the southern side of the Bay and was a 3-mile distance across the water from petitioner's residence. The automotive route, which necessarily involved roadway721 driving encircling the Bay, traversed a distance of 12 miles. Petitioner was assigned a company vehicle to transport himself and other pipeline employees to the terminal. Alyeska, in administering its payroll, included the value of petitioner's lodging in petitioner's wages and withheld taxes on the value of the lodging. On his returns for 1976 and 1977 petitioner, after including the value of his Valdez living quarters in gross income, deducted $ 5,360 and $ 6,365 respectively as employee business expenses representing the value of lodging provided by his employer. In his notices of deficiency dated March 30, 1979 and August 14, 1979 respondent disallowed these deductions in their entirety. OPINION Section 119 4 provides that the value of lodging furnished by an employer to his employee is excludable from the employee's gross income if three conditions are met: (1) the lodging is furnished for the employer's convenience; (2) the employee's acceptance of the lodging is required as a condition of employment, and (3) the lodging is located on the business premises of the employer. Section 1.119-1(b), Income Tax Regs.; Benninghoff v. Commissioner,71 T.C. 216">71 T.C. 216, 218 (1978),722 affd. 614 F.2d 398">614 F.2d 398 (5th Cir. 1980). Petitioner seeks to exclude from gross income the value of lodging provided in him in Valdez, Alaska by his employer, Alyeska Pipeline Service Company. We have no doubt that such lodging was furnished mainly for the convenience and benefit of Alyeska. This conclusion is supported by our findings which point to the lack of adequate housing in the Valdez area. 723 See Olkjer v. Commissioner,32 T.C. 464">32 T.C. 464, 468 (1959) (employee of government contractor entitled to exclude the value of meals and lodging provided by his employer at a job site in Greenland where the only facilities available were those that the employer provided). Alyeska went to great lengths to erect both permanent type houses and modular homes. In addition it rented all the available motel space in Valdez in order to house its employees. It is thus apparent that adequate housing was a crucial element in Alyeska's campaign to attract competent engineers. It is also evident that the location of the housing, only 12 miles away from the terminal site, served the convenience of the employer. Additionally, we believe that petitioner was required to accept such lodging as a condition of his employment. As noted, housing in Valdez was scarce as were sewer and electrical facilities. Transportation was sometimes inhibited by the accumulation of snow. In its residential areas, Alyeska provided a supervised program of snow removal to facilitate the orderly conduct of business. Thus, it is certain that, by any objective standard, petitioner was required to accept724 the lodging he was furnished in order to realize the proper performance of his duties and as such it is axiomatic that such acceptance of lodging was a condition of employment. Section 1.119-1(b), Income Tax Reg.; McDonald v. Commissioner,66 T.C. 223">66 T.C. 223, 231 (1976) (even where there is no express requirement that lodging be accepted the condition of employment criterion may be satisfied where an analysis of the facts reveals that as a practical matter the occupancy of the lodging is necessary in order for the employee to properly perform his assigned duties); see Heyward v. Commissioner,36 T.C. 739">36 T.C. 739, 744 (1961), affd. per curiam 301 F.2d 307">301 F.2d 307 (4th Cir. 1962). The parties direct most of their energies to addressing the business premises requirement enunciated in section 119. Respondent argues that whatever the extent of Alyeska's activities north of Port Valdez Bay, petitioner's residence was not on the business premises of Alyeska as petitioner performed almost no work at his residence. Petitioner asserts that the construction of the Trans-Alaska pipeline was such an immense project, that it must be understood as encompassing the entire725 Valdez region so as to be properly perceived. So viewed, it is argued that the entire city of Valdez was the business premises of Alyeska. "Business premises" within the context of section 119 has been defined as either living quarters that constitute an integral part of the business property or premises on which the company carries on some of its business activities. Benninghoff v. Commissioner,supra, at 220; Dole v. Commissioner,43 T.C. 697">43 T.C. 697 (1965), affd. per curiam 351 F.2d 308">351 F.2d 308 (1st Cir. 1965). The extent or boundaries of the business premises in each case is a factual question whose resolution follows a consideration of the employee's duties as well as the nature of the employer's business. Lindeman v. Commissioner,60 T.C. 609">60 T.C. 609 (1973). Accordingly, the section 119 exclusion is available where lodging is furnished at a place where the employee performs a significant portion of his duties or on the premises where the employer conducts a significant portion of its business. Commissioner v. Anderson,371 F.2d 59">371 F.2d 59 (6th Cir. 1966), revg. 42 T.C. 410">42 T.C. 410 (1964), cert denied 387 U.S. 906">387 U.S. 906 (1967);726 McDonald v. Commissioner,supra.We believe that respondent must prevail on this issue. The duties performed by petitioner at his residence consisted of the evolution of one written report. Additionally, he was on 24-hour call. These facts necessitate our finding that petitioner did not perform a significant portion of his duties at his residence. See Benninghoff v. Commissioner,supra, at 216. In fact petitioner readily admits that his main employment duty, the inspection of rotating equipment, was executed at the terminal site. We are thus hardpressed to find that petitioner performed a significant part of his duties at his residence. Petitioner contends that by virtue of the vastness of the pipeline project, the employer's business premises must be understood as encompassing the entire city of Valdez. While we are impressed with petitioner's presentation in support of this assertion, we believe that petitioner's position represents an overly broad view of the term "business premises" as used in section 119. That term involves a consideration of the nature of the employer's business and the place where the employer conducts a significant727 portion of such business. Commissioner v. Anderson,supra;Lindeman v. Commissioner,supra.Alyeska's business was the construction of a pipeline. The primary situs for the business in the Valdez area was at the pipeline terminal and at docks and yards where necessary construction material was received. While it is clear that the establishment of living quarters throughout the city was a necessary ingredient in Alyeska's search for competent personnel, we view the maintenance of these housing facilities as ancillary to the main business purpose of Alyeska rather than constituting a significant portion of its business. In short, Alyeska's business premises were at the terminal and at material receiving points but not at employees' residences where no significant pipeline business was conducted. Petitioner's sweeping view that the entire city of Valdez constituted Alyeska's business premises is untenable. While there can be no doubt, as petitioner most adequately displays, that the city of Valdez experienced a tremendous economic and population "boom" attributable to pipeline construction, it is a far leap to conclude on the basis of such728 growth, that the entire city of Valdez constituted the business premises of Alyeska. In Benninghoff v. Commissioner,supra, we held that the value of lodging and utilities furnished to a policeman employed by the Canal Zone government was not excludable from gross income under section 119. The taxpayer was furnished with lodging in the Canal Zone and vigorously contended that the entire Canal Zone was the business premises of the government employer. Our rejection of the taxpayer's claim was premised on the notion that the "business premises" test requires an integral relationship between the lodging and the business activities of the employer and since no significant employer activities occurred at the taxpayer's residence the exclusion sought by the taxpayer was denied.Similarly, in the instant case petitioner performed no significant employer activities at his residence. While certain Alyeska employees were responsible for maintenance and supervision of residential areas, as already noted, Alyeska's housing policy was evolved in order to support and further its main business goal and was not in and of itself a significant business activity. Moreover, 729 there is no evidence in the record that supervisory personnel spent significant portions of time attending to housing supervision nor is there any concrete basis upon which we may find that such supervision, even if significant, was conducted at employee residences.Petitioner maintains that a narrow interpretation of "business premises" is unwarranted and representative of an obsession with words. He cites Commissioner v. Anderson,supra (dissenting opinion), as authority for his assertion. 5 While we note that petitioner points to the minority view of the Sixth Circuit we stress the following portion of the majority opinion: 730 Examples, of course, can be given where "near" is so nearly equivalent to "on" as to indicate an absurdity in distinguishing between the two. However, this case does not present such as absurdity. Moreover, there is an element of arbitrariness in the drawing of every line. The drawing of not otherwise unreasonable tax lines is a legitimate function of Congress. When Congress drew this line so as to require that the meals be furnished or the lodging be provided "on the business premises of the employer", it is not the proper function of a court to disregard that line and substitute a line of its own choosing. supra at 67. Generally, statutory language providing for exclusions from gross income should be read narrowly so as to prevent abuse. Lindeman v. Commissioner,supra at 614. Undoubtedly the existence of such a rule of construction, on occasion, works to the disadvantage of certain taxpayers. Yet we are constrained to follow that rule to effect its overall purpose. Furthermore, we, as well as the Sixth Circuit, recognize that in the proper instances it is an absurdity to distinguish between the location of the lodging and the business of731 the employer. In those instances we opt for logic rather than an overly narrow view in reaching the conclusion that the proferred lodging was on the business premises of the employer. It is but a commonsense approach to the application of the rule of a narrow construction. Lindeman v. Commissioner,supra at 614. Such was the case in Giesinger v. Commissioner,66 T.C. 6">66 T.C. 6 (1976) (apartment located in same building where corporate employer operated restaurant and cocktail lounges and provided catering and room services was found to be on business premises of employer) and in Lindeman v. Commissioner,supra (leased lots used for employee and hotel guest parking and for the erection of housing furnished to hotel's general manager were on the business premises of the employer even though the lots were situated across the street from the hotel). However, in the instant case, we simply do not believe that application of a narrow construction yields an illogical result. Petitioner's residence was located within a series of residential streets and we find no absurdity in distinguishing that area from the business premises of*732 Alyeska. Admittedly, Alyeska's establishment of lodging facilities at the terminal was implausible owing to the mountainous terrain. Yet, we are unaware of any method by which we may allow this geographical obstacle to affect our notion of the term business premises. Accordingly, we cannot extend Alyeska's business premises from the terminal site to petitioner's residence at which no significant employee duties were performed and no significant employer business was conducted. To reflect the foregoing and concessions, Decision will be entered under Rule 155. Footnotes1. This case was consolidated for trial with David E. and Jill L. Sunday, docket No. 7876-79S and William D. and Sandra A. Hubbell, docket No. 16703-79S.↩2. Petitioners included the value of the lodging in gross income and then deducted an equivalent amount as an employee business expense. The parties have correctly pinpointed the issue as arising under section 119, an exclusion section, and we direct our attention to the applicability of this exclusion. ↩3. All statutory references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue.↩4. SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE EMPLOYER. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if-- (1) in the case of meals, the meals are furnished on the business premises of the employer, or (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment. In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.↩5. The Sixth Circuit's majority opinion in Anderson reversed our holding in that case. The taxpayer was a motel manager who was provided with employer-owned lodging two blocks from the motel. We held that such employer-owned lodging which housed an employee who is required to be available on 24-hour call for management of the employer's business is on the business premises of the employer. While Anderson is clearly distinguishable from the case herein, we note that the continued vitality of our decision in that case is questionable. See Dole v. Commissioner,351 F.2d 308">351 F.2d 308 (1st Cir. 1965), affg. 43 T.C. 697">43 T.C. 697 (1965) (on the basis of the concurring opinion of Raum, J.); Lindeman v. Commissioner,60 T.C. 609">60 T.C. 609↩ (1973) (concurring opinion).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620251/	Capital Warehouse Co., Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCapital Warehouse Co. v. CommissionerDocket No. 12178United States Tax Court9 T.C. 966; 1947 U.S. Tax Ct. LEXIS 31; November 24, 1947, Promulgated 31 Decision will be entered under Rule 50. Respondent's determination that a public warehouse company keeping its books and filing its returns on the accrual basis could not, during the first two years of its existence, exclude from its income that portion thereof which the company set aside in a reserve account as its contractual liability to remove goods from its warehouse at the end of the storage period, held to be justified by section 41, I. R. C.J. S. Delehanty, Esq., and Dennis D. Daly, Esq., for the petitioner.T. A. Steele, Jr., Esq., for the respondent. Harlan, Judge. HARLAN 966 The respondent determined the following deficiencies for the taxable years of the petitioner ended May 31, 1943 and 1944: 967 DeclaredYearIncome taxvalue excessExcessprofits taxprofits tax5-31-43$ 27.00$ 282.81$ 19,870.025-31-4470.41681.7518,828.5632 The sole question presented is whether the respondent erred in his determination that a public warehouse company, keeping its books and filing its returns on the accrual basis, could not during the first two years of its existence exclude from its income that portion thereof which the company set aside in a reserve account as its contractual liability to remove goods from its warehouse at the end of the storage period.FINDINGS OF FACT.The petitioner was organized on June 10, 1942, and the taxable years involved are the first two fiscal years of its existence. Petitioner, engaged in the public warehouse business in St. Paul, Minnesota, keeps its books and records and files its Federal income tax returns on the accrual basis, and uses a fiscal year ending May 31. Its returns for the taxable years were filed with the collector of internal revenue for the district of Minnesota.Petitioner's business is limited to the warehousing of dry merchandise, most of which is received in carload lots. It does not include the warehousing of household goods, cold storage products, or unsacked grain. At the time of the receipt of merchandise for storage, petitioner's customers, designated depositors, 33 were required to pay, in a single amount, a charge in accordance with the terms of various contracts. That portion of this charge made for receiving, stowing and redelivering stored merchandise was designated the "handling charge." It covered the cost of moving the goods into the warehouse from the freight cars, the cost of outbound movement or loading the goods from the warehouse back into cars, and such incidental charges as workmen's compensation, unemployment compensation, public liability insurance, and all pay roll charges attributable to touch labor. It also included cost of paper work and clerical work, depreciation on handling equipment, cost of power in elevation, and other items directly attributable to the movement of merchandise. The handling charge did not take into consideration any general overhead charge of the operation of the warehouse or any profits, such items being recorded in other accounts kept by the taxpayer. The handling charges were entered by the taxpayer in a separate ledger account known as "handling revenue," but the actual money realized therefrom was mingled with the taxpayer's general funds.968 At some time during the fiscal year ended34 May 31, 1943, petitioner set up on its books an account designated "Reserve for Handling Out." This is a liability account, the balance of which is eventually reflected on petitioner's balance sheet, and it was set up for the purpose of recording petitioner's liability for the redelivery of goods in storage. At the end of the fiscal year ended May 31, 1943, petitioner took an inventory of stored merchandise and adjusted its "Reserve for Handling Out" account. As a result of this adjustment the reserve was increased sufficiently so that 69 per cent of the revenue received by petitioner for handling charges during the year allocable to the stored merchandise included in said inventory was included in the reserve account. In selecting the figure of 69 per cent as the percentage of the handling revenue necessary to satisfy its liability for handling out merchandise in storage, petitioner was influenced by two factors. The first was its understanding that experience within the industry had shown that 60 per cent of the handling revenue was required to take care of the cost of handling out merchandise in storage, and the second represented its estimate that 9 per cent (15 per cent of35 sixty) would be required to take care of an anticipated increase in labor costs. The allocation of 40 per cent of handling charges for handling in and 60 per cent for handling out was made by other warehouse concerns because merchandise came into their warehouses in carload lots and left in less than carload lots, thus requiring a greater expenditure for handling out than for handling in. However, the merchandise stored by petitioner, later developments disclose, was shipped out in carload lots.The transfers from petitioner's "Handling Revenue" account to its "Reserve for Handling Out" account were effected by debits to the first mentioned account, before any amount of its handling revenue was recorded as a credit in its profit and loss account, and by credits to the reserve account. The net amount removed from the "Handling Revenue" account and credited to the "Reserve for Handling Out" account during the fiscal year ended May 31, 1943, was $ 24,450.49. This procedure was again followed in the fiscal year ended May 31, 1944, when petitioner allocated an additional $ 2,994.42 to the "Reserve for Handling Out" account, and its books at the end of that year reflected a credit balance36 in that account of $ 27,444.91. During the fiscal year ended May 31, 1945, $ 1,612.20 was removed from petitioner's "Reserve for Handling Out" account and transferred to its handling revenue account by a corresponding credit entry, and during the fiscal year ended May 31, 1946, a similar removal and transfer of $ 14,908.06 was made by petitioner. The removals were occasioned by the fact that there were more funds in the reserve account at the end of each of the two years last mentioned than were necessary to move out the goods that were in petitioner's warehouse at the end of those years.969 In his notice of deficiency, the respondent determined that the $ 24,450.49 placed in the reserve in the taxable year ended May 31, 1943, and the $ 2,994.42 placed in the reserve in the taxable year ended May 31, 1944, did not represent deferred income for the respective taxable years and that said amounts should be included in gross income.OPINION.The sole issue for decision concerns the correctness of the respondent's determination that the petitioner may not exclude from its income for the taxable years the amounts transferred to its "Reserve for Handling Out" account.Section 4137 of the Internal Revenue Code provides that net income shall be computed upon the basis of the taxpayer's annual accounting period in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.In Security Flour Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281, the Supreme Court said:The rationale of the system is this: "It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation."This legal principle has often been stated and applied. The uniform result has been denial both to government and to taxpayer of the privilege of allocating income or outgo to a year other than the year of actual receipt or payment, or, applying the accrual38 basis, the year in which the right to receive, or the obligation to pay, has become final and definite in amount.The petitioner keeps its books on the accrual basis. It contends that it should be permitted to defer the inclusion of that part of its handling revenue transferred to its reserve for handling out in each of the taxable years because the amounts so transferred represented a definite and fixed liability to its depositors, or customers, to remove the goods from the warehouse in a subsequent year at no additional cost to such depositors. The only case cited in support of this contention is a memorandum decision of this Court wherein we held that a taxpayer on the accrual basis which, pursuant to a procedure long established and unquestioned, had deducted from gross income as an expense the actual calculated cost of labor to be performed, might continue to take such a deduction in the taxable year involved. Here we have no question of a deduction from gross income in conformity with a long established practice. Our question is whether a corporation during the first two 970 years of its existence may exclude from its income a substantial portion of its gross handling39 revenue for each of those years.Cases in which taxpayers on the accrual basis have attempted to defer the reporting of income until a year subsequent to that in which the right to receive it became definite and certain are quite numerous and the facts of some of those cases, hereinafter mentioned, do not differ materially from those here involved.In Your Health Club, Inc., 4 T.C. 385">4 T. C. 385, the taxpayer on the accrual basis received cash and accrued amounts within the taxable years under contracts obligating it to perform services extending beyond the taxable year. This Court held that the entire amount constituted income in the year when received or accrued, notwithstanding the fact that a part of the income was earned in the following year.In South Tacoma Motor Co., 3 T. C. 411, a taxpayer on the accrual basis attempted to defer certain amounts received from the sale of coupon books which entitled the purchaser thereof to services which might be called for and performed after the year of sale, and reported as gross income only that part of the proceeds allocable to the services it performed during the taxable year. The40 taxpayer justified its deferment of income by contending that "the nature of the contract is such that petitioner will have to perform many of the services required by the contract subsequent to the taxable year in which the coupon book was sold." This Court held that the entire amount received from the sale of the coupon books was income for the taxable year in which received.In South Dade Farms, Inc., 138 Fed. (2d) 818, a taxpayer on the accrual basis collected $ 18,911.76 in cash as advance payments of rentals of farm lands for the next crop year. It credited this sum to an account styled "deposits for future rent," and when leases were signed in the succeeding fiscal year the sum was credited to "rental income." The taxpayer contended that its method of bookkeeping, in that it accounted for income in the fiscal year it was actually earned and deducted therefrom such expenses as were incurred in the earning thereof, reflected its actual net earnings more clearly than would any other method. The Circuit Court for the Fifth Circuit said:The difficulty of this position is that section 41, supra, required that the method of accounting should clearly41 reflect income, not net earnings. In Brown v. Helvering [291 U.S. 193">291 U.S. 193], where the taxpayer was on the accrual basis, it was held that money received without restriction upon its use and disposition by the recipient was income in the year received, even though it was received before it was earned and some portion of it might have to be refunded in the future.Since the advance rentals were income when received in the fiscal year ending in June, 1937, and since the taxpayer's bookkeeping method for reporting income did not take cognizance thereof, it is apparent that the method of accounting of the taxpayer did not clearly reflect its income. The Tax Court so held, and its decision is affirmed.971 The Sixth Circuit Court of Appeals in Schram v. United States, 118 Fed. (2d) 541, discussed the prerogatives of the respondent under section 41 of the code in the following terms: * * This is an administrative problem left by the statute to be determined "in the opinion of the Commissioner." Lucas v. Structural Steel Co., 281 U.S. 264">281 U.S. 264, 50 S. Ct. 263">50 S. Ct. 263, 74 L. Ed. 848">74 L. Ed. 848.*42 That official has a broad administrative discretion in determining the question and it is beyond the power of the courts to overturn his decision unless the evidence clearly shows that he has abused his discretion. The taxpayer has failed to carry the burden of showing that the Commissioner acted arbitrarily upon any fair view of the facts. See Williamsport Wire Rope Co. v. United States, 277 U.S. 551">277 U.S. 551, 562, 48 S. Ct. 587">48 S. Ct. 587, 72 L. Ed. 985">72 L. Ed. 985; Heiner v. Diamond Alkali Co., 288 U.S. 502">288 U.S. 502, 507, 53 S. Ct. 413">53 S. Ct. 413, 77 L. Ed. 921">77 L. Ed. 921; Wells v. Moore, 6 Cir., 94 F. 2d. 108, 111.Upon the authority of these cases, we hold that the respondent correctly determined that the amounts of petitioner's handling revenue which it set aside in its "Reserve for Handling Out" account during the taxable years must be treated as part of its gross income for those years.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474311/	OPINION. ARNOLD, Judge: As the result of a decree of the Superior Court of Fulton County, Georgia, entered December 17, 1936, in a partition proceeding, William H. Kiser, owner of an undivided half interest in the property, was allotted property with a valuation in excess of his half share. Of the part he was allotted in excess of this half interest, the respondent determined that William received $54,186.06 representing interest due him from his deceased brother’s estate and $33,489.48 as commissions or fees earned as executor and trustee of his brother’s estate and included those amounts in his income as income received in 1936. Petitioners contend that William H. Kiser did not receive either interest or commissions in 1936, as determined by respondent. In 1893 William and John inherited in equal shares the properties left by their father. The properties were not divided, but were kept together and managed as a joint business until 1936. John died in 1919, having drawn considerably more than William and leaving debts which William paid from proceeds of the properties. John’s will named William as executor and provided a monthly income for his widow until her death or remarriage and payments for the benefit of his adopted daughter, the estate to go to William or his heirs upon the death or remarriage of John’s widow. William paid these bequests from the income of the properties until 1936. He then found it necessary to ask for partition of the properties in order to borrow on his share and settle his own debts. The proceeding involved .an accounting as between the brothers. As the amounts withdrawn by John, or paid on his account, were in excess of the amounts withdrawn by William, the court offset the excess against John’s half share of the common property and decreed that, as of 1919, John’s estate had a 21.58 per cent interest and William a 78.42 per cent interest in the property. In the computation wherein 21.58 per cent was allotted to John’s estate and 78.42 per cent to William, the court excluded any amount as interest on John’s withdrawals. If the $54,186.06 which respondent in his determination •taxed to William as interest received had been taken into consideration in fixing the relative shares of John and William in the common property, John’s share would have been but 17.42 per cent, while William’s share would have been 82.58 per cent. Thus it is clear from the evidence on which the decree was based, and the evidence submitted in the present proceeding, that the property William received did not include an allowance for interest. Although the Superior Court found that William was entitled to receive $33,489.48 as commissions for his services as executor and trustee of John’s estate, William expressly waived any claim thereto and the court gave effect to his waiver by allotting him no property on account of the commissions. William was entitled to receive 78.42 per cent of the net value of the common property, less the income since 1919 allocable to John’s estate and not theretofore paid to John’s beneficiaries of $37,922.19. The properties allotted him were of the value of $595,550. Had commissions been paid he would have received property in excess of that amount to the extent of the commissions. William had the privilege of renouncing his right to such commissions. See Estate of George Rice, 7 T. C. 223; acquiescence, 1946-2 C.B. 4. The Superior Court did not allow interest to William on John’s overdrafts and did not provide for the payment of commissions to William in any form. The evidence submitted before us, aside from the decree itself, convinces us that William, in receiving property in excess of his half share, did not receive interest or commissions. We find that respondent erred in determining that William H. Kiser received interest and commissions in 1936. Since other uncontested adjustments are involved, Decision will be entered wider Bule 50. Reviewed by the Court.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474282/	oriNiON. Hill, Judge-. Petitioner claims the right under section 812 (b) (3), Internal Revenue Code, to deduct the amount of $14,518 which it paid to decedent’s first husband in full settlement of any claim which he might have had against her estate as a result of the agreement which is set forth in part in our findings. Respondent claims that the amount in question is not deductible by petitioner because the only rights which the “husband relinquished under the agreement were marital rights and that the only marital right he possessed in property was his right of curtesy.” He adds that “it is well settled that claims founded upon contracts releasing marital rights in a spouse’s property or estate are not deductible.” Sec. 812 (b) (3), I. R. C.; Meyer's Estate v. Commissioner, 110 Fed. (2d) 367; Estate of Eben B. Phillips, 36 B. T. A. 752. Petitioner’s contention that the amount involved is deductible is based upon the agreement mentioned above, and its argument that that agreement was supported by adequate and full consideration may be summarized in its own words as follows: The husband of the decedent in relinquishing to his former wife all his rights, custody, control and guardianship of their son, released a valuable and inherent right which he possessed, in and to the earnings of their son. * * * Before petitioner may take a deduction for the amount involved under section 812 (b) (3) it must show that the agreement in question was contracted for an adequate and full consideration in money or money’s worth. There is nothing in the record before us to show the value of any earnings of the son, or that he was capable of any earnings, or that he ever had any earnings which decedent might have claimed under the agreement in question. Hence, so far as the record is concerned, there may have been no value received by decedent in respect of this part of the agreement, except the mere right to any earnings of the son. However, we do not believe that that right, which has not been shown to be of any ascertainable value in money or money’s worth, should be considered full and adequate consideration within the meaning of section 812 (b) (3) of the code. As pointed out by the Supreme Court in Taft v. Commissioner, 304 U. S. 351, it was the evident purpose of Congress, in its successive changes of the provision of the code involved, to narrow the class of deductible claims. So in this case it was incumbent upon the petitioner to show not only that the agreement was supported by some consideration, or fair consideration, as was required by a previous wording of the section involved,1 but full and adequate consideration in money or money’s worth. Petitioner having failed to present any evidence whatever on the subject of the value of that consideration, we can not say that the disallowance was erroneous. Petitioner invokes no other portion of that agreement in support of its contention. But even if it had, we could not sustain its position on the evidence before us, for it is apparent that the only other rights which were relinquished were of the nature which section 812 (b) (3) clearly provides “shall not be considered to any extent a consideration ‘in money or money’s worth.’ ” It follows that respondent’s determination must be sustained. Reviewed by the Court. Decision will be entered under Rule 50. See sec. 303 (a) (1), Revenue Act of 1924.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620280/	Raymond Robinson and Lillie H. Robinson, Petitioners v. Commissioner of Internal Revenue, RespondentRobinson v. CommissionerDocket No. 5597-67United States Tax Court54 T.C. 772; 1970 U.S. Tax Ct. LEXIS 163; April 15, 1970, Filed 163 Decision will be entered for the respondent. On Jan. 10, 1964, the petitioner sold his business under a contract providing for payments in installments without interest. At that time, the transaction met all the requirements of sec. 453(b) of the Internal Revenue Code of 1954 for the reporting of the gain on the installment method. On Feb. 26, 1964, Congress enacted sec. 483 of the Code which provided that, for purposes of the Code, where no interest payments are specified with respect to certain installment payments, a part of each installment payment shall be treated as interest. It was provided that sec. 483 should apply to payments made after Dec. 31, 1963, on account of sales occurring after June 30, 1963. Held, that sec. 483 retroactively applies to the petitioner's transaction with the result that the payment received by the petitioner in the taxable year of sale exceeded 30 percent of the selling price as reduced by unstated interest, and that, therefore, the petitioner was not entitled to report the gain upon the sale on the instalment method provided by sec. 453(b). E. L. Cullum, for the petitioners.F. Timothy Nicholls, for the respondent. Atkins, Judge. ATKINS772 The respondent determined a deficiency of $ 4,878.75 in income tax for the taxable year 1964. The only issue presented is whether the petitioner is entitled to report the gain upon the sale of his167 insurance agency in 1964 upon the installment method under section 453(b) of the Internal Revenue Code of 1954.FINDINGS OF FACTSome of the facts have been stipulated and the stipulations are in corporated herein by this reference.773 The petitioners, husband and wife, filed a timely joint Federal income tax return for the taxable year 1964, and on November 22, 1967, filed an amended return for that year, with the district director of internal revenue, Little Rock, Ark.At the time of the filing of the petition herein the legal residence of the petitioners was Little Rock, Ark. Since the petitioner Lillie H. Robinson is a party herein only because of having filed a joint return, the petitioner Raymond Robinson will hereinafter be referred to as the petitioner.About September 1963 American Fidelity Assurance Co. (hereinafter referred to as American Fidelity) made a proposal to the petitioner to purchase from him his insurance agency, known as Robinson Insurance Agency of Little Rock, Ark. In October 1963 the petitioner consulted representatives of the Internal Revenue Service in Oklahoma City with respect to the requirements for reporting gain on the sale on the installment168 method and was advised that the sale could be reported on the installment method if the payments received in the year of sale did not exceed 30 percent of the selling price. The reporting of the gain on the installment method was a determining factor as to whether petitioner would sell the agency at that time. The petitioner then contacted his income tax adviser and together, on December 3, 1963, they met with the representatives of American Fidelity for the purpose of working out the details of the sale. At that time the selling price was agreed upon and it was further agreed that payments should be made in installments over a period of 5 years, and that the downpayment should not exceed 29 percent of the selling price in order to qualify the transaction as an installment sale for tax purposes. The petitioner instructed the accountant for the purchaser to draw up a contract upon that basis.On January 10, 1964, the petitioner and American Fidelity entered into a written agreement whereby the petitioner agreed to sell and American Fidelity agreed to purchase the goodwill (value as a going-business concern) of the petitioner's insurance agency for $ 73,187.23. It was further agreed169 that $ 21,187.23 of the selling price should be paid on January 10, 1964, and that the balance of $ 52,000 should be paid in installments of $ 13,000 per year beginning January 10, 1965, and payable on the 10th day of January of each year thereafter until paid, without interest.Pursuant to the terms of the above contract, the petitioner received from American Fidelity on January 10, 1964, the amount of $ 21,187.23, and thereafter received the installment payments in accordance with the contract until the full amount of the stated purchase price was paid.As of January 10, 1964, the contract entered into between the petitioner and American Fidelity met all the conditions and qualifications 774 set forth in section 453(b) of the Internal Revenue Code of 1954 for reporting gain upon the installment method.On February 26, 1964, Congress enacted section 224 of the Revenue Act of 1964 (Pub. L. 88-272), which amended part III of subchapter E of chapter 1 of the Internal Revenue Code of 1954 by adding section 483. 1170 In their original 1964 joint Federal income tax return the petitioners treated the above sale as an installment sale and reported for that year taxable gain of $ 6,717.41 from the sale. Such gain was computed as follows:$ 73,187.23 Stated contract selling price-26,779.49 Cost of goodwill sold46,407.74 Total gain on sale63.41%Ratio of total gain to selling price21,187.23 Downpayment received in 1964X.6341 Ratio13,434.82 Capital gain realized in 1964-6,717.41 One-half6,717.41 Reported capital gain for 1964775 In the notice of deficiency the respondent applied section 483 to the above sale and computed unstated interest of $ 5,969.47 on the deferred payments. 2 The respondent then deducted this imputed interest from the stated sale price of $ 73,187.23, leaving a recomputed or adjusted sale price of $ 67,217.76. The respondent then determined that the downpayment of $ 21,187.23 was in excess of 30 percent of the adjusted selling price and therefore held that the petitioner was not entitled to employ the installment sales provisions of section 453(b) of the Internal Revenue Code of 1954. This portion of his computation was as follows: 171 Total selling price, per contract$ 73,187.23Less: Unstated interest5,969.47Adjusted selling price67,217.76Downpayment in 196421,187.2330% of $ 67,217.7620,165.33Excess received in 1964 over 30% of adjusted selling price1,021.90Accordingly, the respondent determined that in the taxable year 1964 the petitioner had income from the sale as follows:Stated selling price$ 73,187.23Less: Unstated interest5,969.47Adjusted selling price67,217.76Basis of goodwill sold26,779.49Total gain40,438.27Less: Long-term capital gain deduction20,219.14Taxable gain on sale20,219.13Gain reported on your return ($ 13,434.82 at 50%)6,717.41Increase in taxable income13,501.72172 In their amended income tax return for the taxable year 1964 which was filed on November 22, 1967, the petitioners continued to claim the right to report the gain from the sale upon the installment method. 776 However, they reported for that year capital gain of $ 12,746.26 resulting from the sale, instead of the $ 13,434.82 reported on their original return. This difference resulted from the petitioners' reducing their gain upon the sale by reducing the contract price by unstated interest in the amount of $ 5,969.47.OPINIONOn January 10, 1964, the petitioner sold his business on the installment plan. The terms of the sale complied in all respects with the requirements of section 453(b) of the Internal Revenue Code of 1954, 3 relating to the reporting of gain on the installment method. The payments to be received in the taxable year of sale did not exceed 30 percent of the stated selling price. However, the contract of sale provided that no interest should be paid on the deferred payments.173 On February 26, 1964, Congress enacted section 224(a) of the Revenue Act of 1964, which added section 483 (set forth hereinabove in fn. 1) to the Internal Revenue Code of 1954. Section 483 provides, with exceptions not here material, that where property which qualifies for capital gains treatment is sold on the installment basis and part of the payments are due more than 1 year from the date of the sale, and either no interest payments or interest payments below the rate provided by Treasury regulations are specified, a part of each payment due after the first 6 months from the date of the sale shall be treated as interest. Section 224(d) of the Revenue Act of 1964 4174 provides that the provisions of section 483 shall apply to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant 777 to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. 5On March 25, 1964, the Internal Revenue Service issued T.I.R. 557, which contains the following:The new section 483 provides that, with certain exceptions and limitations, where property which is a capital asset or section 1231 property is sold on the installment basis and part of the payments are due more than one year from the date of the sale or exchange and either no interest payments or interest payments below a rate provided by Treasury regulations are specified, a part of each payment due after the first six months is to be treated as an interest payment rather than as part of the sales price. * * The provisions of section 483 apply to payments made after December 31, 1963, on account 175 of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963.Internal Revenue stated that, for purposes of determining, under section 453(b)(2), whether payments received prior to January 1, 1964, in the taxable year of sale exceed 30 percent of the selling price of the property, the provisions of section 483 would have no effect.By T.D. 6873 (approved Jan. 17, 1966), 1 C.B. 101">1966-1 C.B. 101, the Treasury Department promulgated regulations under section 483 of the Code, 6177 taking the position that any unstated interest shall constitute 778 interest for all purposes of the Code, and accordingly revised the regulations under section 453 of the Code 7 to provide that any unstated interest should not be included as a part of the selling price of the property. As a consequence, in the instant case, the respondent reduced the stated selling price by the amount of unstated interest which resulted in the determination that the payment received in the year of sale exceeded 30 percent of the selling176 price as so reduced.It is the petitioner's position that since he sold his business prior to the enactment of section 483 and at that time complied fully with the provisions of section 453(b) of the Code, the respondent was in error in retroactively applying section 483 to deprive him of the right to return the gain upon the sale on the installment method under section 453(b).While the petitioner apparently does not raise the issue, except as to retroactivity, of the applicability of section 483 to section 453, inherent in the issue presented is the question of the scope of section 483, and specifically the question of whether it applies178 in the determination of the selling price under section 453(b)(2). We think that it does. Section 483 itself provides that its provisions are to apply for purpose of this title (the Internal Revenue title), and the committee reports state that part of each payment to which section 483 applies is to be treated as interest for all purposes of the Code. 8179 In regulations promulgated under sections 483 and 453 the respondent has taken the 779 position that a contract under which there is total unstated interest shall be treated as if such interest were actually provided for in the contract, that any unstated interest shall not be included as a part of the selling price for purposes of section 453(b)(2), and that the application of section 483 may therefore affect eligibility to use of the installment method of accounting. 9 In view of the express language of the statute and the accompanying committee reports, we cannot conclude that in so providing such regulations are unreasonable. See Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496.In support of his contention that section 483 should not be applied retroactively to deny him the benefit of section 453, petitioner points out that neither section 224 of the Revenue Act of 1964 nor H. Rept. No. 749 specifically mentions a retroactive application of section 483 to section 453, and he argues that generally a statute is not to be construed to operate retroactively unless such appears clearly to be the legislative intent. 10 Since, as held above, Congress intended section 483 to apply to section 453(b)(2), and since Congress expressly provided in section 224(d) of the Revenue Act of 1964 that the provisions of section 483 shall apply to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, we think it must be concluded that Congress intended section 483 to apply retroactively to section 453(b)(2). In this connection we note that in the hearings before the Senate Finance Committee it was urged that the effective date provided for in section 224(d) be changed to preclude a retroactive application of 180 section 483. See Hearings before the Senate Finance Committee on H.R. 8363, 88th Cong., 1st Sess., pp. 2086 and 2170. Also, in such hearings concern was expressed that the application of section 483 could deny taxpayers the right to use the installment method of reporting gain. See pages 1423 and 1432 of the above hearings. Nevertheless, the only exception made to the specified retroactive application of section 483 was in regard to sales or exchanges made pursuant to binding written contracts (including irrevocable written options) entered into prior to July 1, 1963. See pages 593-594 of the above hearings. In view of the above, we consider the cases cited by the petitioner inapposite. 11181 780 The petitioner points out that the respondent in T.I.R. 557 (which was subsequently incorporated in section 1.483-2(a)(2) of the regulations) excluded sales or exchanges entered into after June 30, 1963, but prior to January 1, 1964, from the effect of applying section 483 to recompute the selling price for purpose of the 30-percent limitation of section 453(b)(2), 12 and presents the alternative argument that in so doing the respondent abused his discretion by discriminating between taxpayers similarly situated. He states that taxpayers, such as himself, who entered into installment sales between January 1, 1964, and the date of the enactment of section 483, February 26, 1964, were in essentially the same position as taxpayers who had entered into installment sales between June 30, 1963, and December 31, 1963. Petitioner apparently is of the opinion that the respondent had the authority to limit the retroactive effect of section 483 and that he abused such authority by not completely limiting the retroactive effect of the section, insofar as its applicability to section 453 is concerned. However, as heretofore pointed out, Congress expressly provided the extent to which182 section 483 is to apply retroactively. It seems to us that the respondent was not granted the power, in his discretion, to limit its retroactive application. See Manhattan General Equipment Co. v. Commissioner, 297 U.S. 129">297 U.S. 129. We must therefore conclude that the respondent did not err in retroactively applying the provisions of section 483 to the petitioner's installment sale.The petitioner also contends in the alternative that if the selling price for purposes of section 453(b)(2) is to be reduced by the unstated interest then we should find that the downpayment in excess of 29 percent of such reduced selling price did not constitute downpayment, citing Lewis M. Ludlow, 36 T.C. 102">36 T.C. 102. That case, however, is clearly183 distinguishable. There the parties intended that less than 30 percent of the selling price be received in the year of sale. However, because of a mistaken calculation, the contract provided for a payment in the year of sale of an amount in excess of 30 percent and petitioners actually received such amount. The mistake was discovered and the petitioners in the taxable year of the sale sent to the purchaser the amount in excess of 29 percent of the selling price, although such excess amount was not actually received by the purchaser until the first day of the following year. Under these particular circumstances it was held that the payment received by the petitioners during the year of sale did not exceed 30 percent of the selling price. In the instant case there was no mistake as to the amount of payment to be received and actually received by the petitioner in 1964.781 Although the retroactive application of section 483 to the petitioner's installment sale works a harsh result, and while we are not insensitive to the petitioner's plight, it is our conclusion, in view of all the foregoing, that we cannot afford the petitioner any relief.Decision will be entered for the184 respondent. Footnotes1. Sec. 483 of the Code provides in part as follows:INTEREST ON CERTAIN DEFERRED PAYMENTS.(a) Amount Constituting Interest. -- For purposes of this title, in the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment to which this section applies which bears the same ratio to the amount of such payment as the total unstated interest under such contract bears to the total of the payments to which this section applies which are due under such contract.(b) Total Unstated Interest. -- For purposes of this section, the term "total unstated interest" means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of -- (1) the sum of the payments to which this section applies which are due under the contract, over(2) the sum of the present values of such payments and the present values of any interest payments due under the contract.For purposes of paragraph (2), the present value of a payment shall be determined, as of the date of the sale or exchange, by discounting such payment at the rate, and in the manner, provided in regulations prescribed by the Secretary or his delegate. Such regulations shall provide for discounting on the basis of 6-month brackets and shall provide that the present value of any interest payment due not more than 6 months after the date of the sale or exchange is an amount equal to 100 percent of such payment.(c) Payments to Which Section Applies. -- (1) In general -- Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract -- (A) under which some or all of the payments are due more than one year after the date of such sale or exchange, and(B) under which, using a rate provided by regulations prescribed by the Secretary or his delegate for purposes of this subparagraph, there is total unstated interest.Any rate prescribed for determining whether there is total unstated interest for purposes of subparagraph (B) shall be at least one percentage point lower than the rate prescribed for purposes of subsection (b)(2).(2) Treatment of evidence of indebtedness. -- For purposes of this section, an evidence of indebtedness of the purchaser given in consideration for the sale or exchange of property shall not be considered a payment, and any payment due under such evidence of indebtedness shall be treated as due under the contract for the sale or exchange.↩2. The respondent's computation of the unstated interest was as follows:↩PaymentsMonthsValue $ at 5%AnnualPresent valuedeferredsimple interestpaymentyearly paymentsDownpayment00.$ 21,187.23$ 21,187.231st installment120.9518113,000.0012,373.532d installment240.9059513,000.0011,777.353d installment360.8623013,000.0011,209.904th installment480.8207513,000.0010,669.7573,187.2367,217.76Difference -- Unstated interest $ 5,969.473. Sec. 453(b) of the Code provides in part as follows:(b) Sales of Realty and Casual Sales of Personalty. -- (1) General rule. -- Income from -- (A) a sale or other disposition of real property, or(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $ 1,000,may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a).(2) Limitation. -- Paragraph (1) shall apply -- (A) In the case of a sale or other disposition during a taxable year beginning after December 31, 1953 (whether or not such taxable year ends after the date of enactment of this title), only if in the taxable year of the sale or other disposition -- (i) there are no payments, or(ii) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price.↩4. Sec. 224(d) of the Revenue Act of 1964 provides as follows:(d) Effective Date. -- The amendments made by subsection (a) * * shall apply to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. * * ↩5. The original proposal of the Treasury Department presented on Feb. 6, 1963, at hearings before the House Ways and Means Committee on the President's 1963 Tax Message was that the proposal subsequently enacted as sec. 483↩ should apply to contracts entered into after Feb. 6, 1963. See Hearings before the House Ways and Means Committee on the President's 1963 Tax Message, 88th Cong., 1st Sess., p. 156.6. Sec. 1.483-2, Income Tax Regs., provides in part:Treatment as interest for purposes of Code; exceptions and limitations to application of section 483. -- (a)Treatment as interest for purposes of Code -- (1) Effect on income, deductions, basis, etc. -- (i) In general. Generally, a contract under which there is total unstated interest (within the meaning of section 483(a)) shall be treated as if such interest were actually provided for in the contract, and such unstated interest shall constitute interest for all purposes of the Code. Thus, for example, except as provided in paragraph (b)(1) of this section, in the case of a sale of property, total unstated interest shall not be treated as part of the selling price of such property. * * *(2) Other effects of treating portion of sales price as unstated interest. This subparagraph sets forth some illustrations of the effects of treating a portion of the sales price as unstated interest. These illustrations are not all-inclusive. The treatment as unstated interest under section 483 of a portion of a payment which would otherwise be treated as part of the sales price may have the effect of increasing the amount of a nondeductible loss because of the application of section 165(c) (relating to limitation on losses of individuals) or of an unallowable deduction because of section 267 (relating to losses, expenses, and interest with respect to transactions between related taxpayers), or of changing the character of gains and losses or increasing the amount of an allowable loss under section 1231 (relating to property used in the trade or business). Such treatment may affect eligibility to use of the installment method of accounting under section 453(b)(2) (relating to limitation on installment method), except that section 483 shall have no effect in determining whether payments received prior to January 1, 1964, in the taxable year of sale exceed 30 percent of the selling price of the property. Furthermore, the application of section 483 may affect the treatment of a stock option under part II, subchapter D, chapter 1 of the Code, except that section 483 shall have no effect in determining whether options granted prior to January 1, 1965, meet the requirements of section 422(b)(4), 423(b)(6), 424(b)(1), or 424(c). Amounts treated as unstated interest under section 483 may, if otherwise qualified under section 266 (relating to carrying charges), be charged to the capital account. The treatment of any portion of voting stock as interest under section 483↩ will not prevent an otherwise eligible acquisition from qualifying as a reorganization under section 368(a)(1) (relating to definitions of corporate reorganizations), although the payment of cash or property other than voting stock will prevent certain acquisitions from so qualifying. See section 368(a)(1)(B) and (C) and the regulations thereunder for rules relating to the extent to which voting stock must be exchanged by the acquiring corporation in certain reorganizations. Unstated interest shall be treated as interest for purposes of applying the source rules contained in section 861(a)(1) (relating to income from sources within the United States) and section 862(a)(1) (relating to income from sources without the United States), and for purposes of computing the amount of personal holding company income under section 543 (relating to personal holding company income) and section 1372(e)(5) (relating to election by a small business corporation). [Emphasis supplied.]7. Sec. 1.453-1(b)(2), Income Tax Regs., as amended, provides as follows:(2) For purposes of section 453, any total unstated interest (as defined in section 483(b)) under a contract for the sale or exchange of property, payments on account of which are subject to the application of section 483, shall not be included as a part of the selling price or the total contract price. For rules relating to payments received prior to January 1, 1964, see Paragraph (a)(2) of section 1.483-2↩.8. H. Rept. No. 749, 88th Cong., 1st Sess., p. A84, provides in part as follows:"Section 483(a) provides the general rule that part of each payment (under a contract for the sale or exchange of property) to which section 483 applies is to be treated as interest for all purposes of the code." (Emphasis supplied.)See also S. Rept. No. 830, 88th Cong., 2nd Sess., p. 245, which incorporates the above language by reference.↩9. See fns. 6 and 7.↩10. Petitioner cites Twenty Per Cent Cases, 87 U.S. 179">87 U.S. 179; Chew Heong v. United States, 112 U.S. 536">112 U.S. 536; Fullerton-Krueger Lumber Co. v. Northern Pacific Railway Co., 266 U.S. 435">266 U.S. 435; and Kress v. United States, 159 F. Supp. 338">159 F. Supp. 338↩.11. In regard to the Kress case, we further note that the taxpayer there was invited and encouraged by specific tax legislation to pursue a course of conduct over a period of years in order to obtain a particular tax benefit (the right to an unlimited deduction for charitable contributions), and it was held in that situation that Congress did not intend that a retroactive statute should deprive him of such benefit. Here the petitioner was not so invited or encouraged by any tax legislation to enter into an installment sale contract which did not provide for interest on the deferred payments. Accordingly, there is here no such ground as was present in Kress↩ for concluding that Congress did not intend a retroactive application in the petitioner's situation.12. On brief, the respondent apparently agrees that the effect of T.I.R. 557 and sec. 1.483-2(a)(2) of the regulations was to limit the retroactive effect of sec. 483, insofar as sec. 453↩ is concerned, to sales occurring after Dec. 31, 1963.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620284/	The Denver & Rio Grande Western Railroad Co., Petitioner, v. Commissioner of Internal Revenue, RespondentDenver & R. G. W. R. Co. v. CommissionerDocket No. 78861United States Tax Court38 T.C. 557; 1962 U.S. Tax Ct. LEXIS 106; August 3, 1962, Filed 106 Decision will be entered under Rule 50. 1. Prior to 1954 the petitioner's agreements with its employees provided that if an employee had rendered a specified number of days of service in one year he would be entitled during the following year to a vacation with pay, or pay in lieu thereof, but that no allowance would be due if, prior to the taking of the vacation, his employment should be terminated, except by retirement. Effective with the year 1954 the petitioner's contracts with its employees were amended to provide that if an employee should die before taking his vacation the allowance would be paid to his surviving wife or minor dependent children, if any. Held, that the petitioner, which employs the accrual method of accounting, is not entitled to accrue and deduct vacation pay for the taxable years 1954 and 1955 based upon the qualifying services rendered in those years, but is entitled to deduct only the vacation allowances actually paid in those years.2. Pursuant to the order of the court in a bankruptcy proceeding, the petitioner, successor to the debtor corporation, was required to reimburse the trustee under a bond indenture for amounts representing costs of107 foreclosing on certain stock which was not a part of the debtor's property. Held, that such amounts are not deductible as ordinary and necessary expenses paid or incurred by the petitioner in carrying on its business.3. In 1955, the petitioner made a contribution to a program, the purpose of which was to gain support for and to influence the passage of legislation authorizing the construction of a dam near petitioner's railroad line. Held, that such contribution was made for lobbying purposes, for the promotion of legislation, and for carrying on propaganda related to the promotion of such legislation, and is not deductible as an ordinary and necessary business expense.4. In 1955, the petitioner transferred a retired narrow gage locomotive to the Gunnison Pioneer Association pursuant to an understanding reached among the petitioner, the Pioneer Association, and the City of Gunnison, Colorado, that the locomotive should be placed in a Gunnison city park on display to the general public as a historical exhibit. Held, that the petitioner is entitled to a charitable deduction in the amount of $ 6,000 on account of the transfer of the locomotive, as a contribution for 108 the use of the City of Gunnison for exclusively public purposes. Stanley Worth, Esq., and Jules G. Korner III, Esq., for the petitioner.Richard J. Shipley, Esq., for the respondent. Atkins, Judge. ATKINS558 The respondent determined deficiencies in income tax for the taxable years 1954 and 1955 in the respective amounts of $ 324.210.78 and $ 34,195.07.By stipulation the petitioner has waived certain of its allegations of error and the respondent has conceded certain errors in his determinations. The issues remaining for decision are whether the respondent erred in (1) disallowing as deductions for the years 1954 and 1955 the amounts claimed by the petitioner as accruals of vacation allowances and allowing only the amounts actually paid in those years, (2) disallowing as a deduction for 1954 as an ordinary and necessary business expense the amount of $ 300,000 required by order of a bankruptcy court to be paid to certain bondholders111 in reimbursement of trustee fees, and other costs incurred in a foreclosure proceeding, and disallowing as a deduction for 1955 as ordinary and necessary business expense the amount of $ 927.92, representing an amount paid to the trustee under the bond issue for distributing to the bondholders a 559 portion of the above amount of $ 300,000, (3) disallowing for 1955 as an ordinary and necessary business expense, a contribution of $ 1,000 for the purpose of obtaining legislation authorizing construction of a dam, and (4) disallowing as a deduction for 1955 the value of a retired narrow gage locomotive claimed to have been transferred for the use of the City of Gunnison, Colorado.FINDINGS OF FACT.Some of the facts are stipulated and the stipulations are incorporated herein by this reference.The petitioner is a Delaware corporation operating a common carrier by rail principally in Colorado and Utah, with principal office and place of business at Denver, Colorado. Its income tax returns were filed with the district director of internal revenue for the district of Colorado.The petitioner has at all material times kept its books on an accrual method of accounting in accordance112 with the requirements of the Interstate Commerce Commission.The petitioner has had agreements, through labor unions, with its nonoperating employees since 1942 and with its operating employees since 1949, under which each employee was entitled to an annual vacation of a specified number of workdays with pay, or pay in lieu thereof, provided the employee had rendered service of a specified number of days in the preceding calendar year. The number of days of vacation to which an employee was entitled varied with the number of years the employee had worked for the company.Such agreements provided that vacations might be taken from January 1 to December 31, and that due regard, consistent with requirements of service to the public, should be given to the desires and preferences of the employees in seniority order when fixing the dates for their vacations. While the manner of computing the amount of such vacation pay varied, in general it was to be based upon the rate of compensation existing during the vacation or immediately prior to the taking of the vacation or pay in lieu thereof (in the case of operating employees the vacation allowance was to be a specified fraction of the compensation113 earned during the calendar year preceding the year in which the vacation was to be taken, but in no event less than an amount computed at the rate of pay for the last service rendered).Up to the end of the year 1953 these agreements provided that no vacation with pay, or payment in lieu thereof, would be due an employee whose employment had terminated, other than by retirement under the Railroad Retirement Act, prior to the taking of his vacation (in the case of operating employees the provision is "prior to the scheduled vacation").560 By agreements dated August 21, 1954, in the case of the nonoperating employees, and August 17, 1954, in the case of the operating employees, both agreements being effective as of January 1, 1954, the original vacation agreements were amended. It was provided that if a nonoperating employee who had performed the necessary qualifying service in the year prior to the year of his death, or in the year of his death, should die before receiving his vacation or payment in lieu thereof, payment of the allowance for such vacation would be made to his surviving widow, or if none, then on behalf of dependent minor children, if any. It was provided that114 if an operating employee who had performed the necessary qualifying service in the year prior to the year of his death should die before receiving his vacation or payment in lieu thereof, payment should be made to his widow. 1 The amending agreements also provided, effective with the year 1954, for an additional week of vacation each year with pay, or pay in lieu thereof, in the case of qualifying employees who had had 15 years' service and who had rendered a specified number of days of service in the preceding year and prior years.115 Prior to the year 1954, notwithstanding that the petitioner employed an accrual method of accounting, the amounts paid to its employees by reason of vacations were taken as deductions from gross income both in its books and in its income tax returns for the years in which such payments were made, no provisions for accruing such allowances being made either in its books or in its returns, by reason of the uncertainties in its contracts with its employees as to the employees' rights to such vacations.The petitioner in its 1954 accounts set up in December 1954 an accrual for vacation allowances in the amount of $ 1,529,738.61 by a charge to an account "P & L Miscellaneous Debits" and a credit to an account "Other Unadjusted Credits." Such accrual was in addition to the amounts actually paid petitioner's employees during the year 1954 as vacation allowances which were deducted as operating expenses in petitioner's books. This accrual was based, at least in part, upon the actual vacation pay allowances paid in 1954.The petitioner keeps records which show, among other things, payments of vacation pay where employees have died. Such records include 561 the names of employees who116 have died and left either a widow or children, and the names of those whose allowances were forfeited because the employee was not survived by a wife or dependent minor children. It kept such records in 1954 and 1955, but such records for those years have been destroyed with the permission of the Interstate Commerce Commission. The earliest records which the petitioner now has showing vacation payments and forfeitures due to death are for the year 1957. In that year there were five cases in which the vacation benefits were forfeited for the reason that there was not left a widow or children. There was no change between the years 1954 and 1955 and the year 1957 in the vacation pay agreements between the petitioner and its employees. The total number of petitioner's employees was 6,010 in 1954, 6,047 in 1955, and 5,871 in 1957.In its income tax return for the taxable year 1954 the petitioner claimed as a deduction from gross income the amount actually paid as vacation allowances during that year and also the amount of the above accrual of $ 1,529,738.61. In the return this amount was set forth in two items, namely, $ 1,265,055.10 as "Estimated Vacation Allowances -- 2 Weeks," 117 and $ 264,683.51 as "Estimated Vacation Allowances -- 3rd Week 1939 I.R.C." By reason of the elimination of section 462 from the Internal Revenue Code of 1954, the petitioner filed Form No. 2175, the effect of which was to eliminate from the deduction claimed in its 1954 return all of the above accrual except the amount of $ 264,683.51 which was computed to be that portion of the accrual which related to the third week of vacation allowance to which certain qualifying employees were for the first time entitled effective January 1, 1954.The petitioner in its books and accounts for the calendar year 1955 charged its operating expenses with accrued vacation allowances earned in that year and payable the following year in the estimated amount of $ 1,449,063.77, based upon its actual payments on that account during the year 1955, and deducted such amount from its gross income in its income tax return for the taxable year 1955. 2 Since the actual payments in 1955 by reason of vacation allowances ($ 1,449,063.77) were less than the amount accrued in December 1954 ($ 1,529,738.61), the difference of $ 80,674.84 was charged to an account "Accrued Accounts Payable" and credited to an account118 "P & L Miscellaneous Credits" by journal entry of December 1955. Upon instructions from the Interstate Commerce Commission the accrual which, in the journal entry of December 1954, was credited to the account "Other Unadjusted Credits" was changed to the above account "Accrued Accounts Payable" during the year 1955.562 In the notice of deficiency the respondent denied the petitioner the right to make any accrual for vacation allowances during either of the taxable years 1954 or 1955, allowing as a deduction only the amounts actually paid in those years. In such notice the respondent stated with respect to the disallowance for the taxable year 1954:It is held that the deduction for vacation pay allowances is $ 1,265,055.10 instead of $ 1,529,738.61 as used in your computation of 1954 income. The difference between these119 amounts or $ 264,683.51 is denied as a deduction.With respect to the disallowance for the taxable year 1955, he stated:It is held that the deduction for vacation pay allowance is overstated in the amount of $ 70,204.71. Income is adjusted by eliminating this amount as an income tax deduction.Reimbursement of Costs of Foreclosure on Utah Fuel Co. Stock.In 1935 the Denver & Rio Grande Western Railroad Co. filed a petition with the United States District Court for the District of Colorado for a reorganization under the terms of section 77 of the Bankruptcy Act. The proceedings resulted in a plan of reorganization which was confirmed by the court in 1944, and on April 10, 1947, the court entered a consummation order and final decree. 3120 At the time it went into receivership the railroad had outstanding the following bond issues:1. Rio Grande Western Railway Company first consolidated mortgage bonds.2. Refunding and improvement mortgage bonds.3. General mortgage bonds.All these bonds were secured by mortgages and liens upon the debtor's assets, with priority in the order named. They were also secured by a lien upon all the 100,000 outstanding shares of capital stock of the Utah Fuel Co. Such stock was not a part of the debtor's estate, title to such stock and the equity of redemption therein being owned by the Missouri Pacific Railroad and the Western Pacific Railroad, which at that time were the debtor's two stockholders.563 The decree of April 10, 1947, declared all three bond issues, and all indentures and agreements supplemental or amendatory thereto, null and void, satisfied, canceled, and released, except insofar as they constituted liens on the Utah Fuel Co. stock, and it was provided that the decree neither affected nor purported to affect those liens. The trustees of the bondholders were authorized and directed to continue to act in that capacity with respect to the Utah Fuel Co. stock, subject121 to the terms and conditions of their respective mortgages.Paragraph 7 of such decree authorized and directed the reorganized company (the petitioner herein) to pay the reasonable and necessary expenses of the reorganization committee in carrying out and putting into effect the plan of reorganization, and other expenses and costs of the administration of the proceedings, including allowances of fees or compensation for services and reimbursement of expenses incurred in connection with the proceedings or the plan by or on behalf of the parties to the proceedings. Such decree provided in part:(7) * * * For the purposes of this paragraph (7), all compensation for services rendered and all expenses incurred by the trustees now acting under the mortgages referred to in paragraphs (16) and (18) of this order which would have been secured, respectively, by the liens of such mortgages, if such mortgages had not been satisfied, cancelled, and released by, or pursuant to, this order, shall be deemed to be expenses incurred in connection with these proceedings or the Plan.* * * (19) In confirmation of the termination of the aforesaid mortgages and the respective liens thereof to the extent122 specified in paragraph (18) of this order, the trustees now acting under said mortgages are hereby authorized and directed, severally and respectively, to execute and deliver instruments of satisfaction and release * * . Whether executed before or after the Closing Time, each such satisfaction and release shall be effective as of the Closing Time, and as of that time each of said trustees shall, except with respect to the Utah Fuel Company stock referred to in paragraph (18) of this order, be discharged as a trustee and relieved of all of its obligations, liabilities, responsibilities, and duties with respect to the particular mortgage, and all indentures and agreements supplemental thereto, under which it is acting as trustee, but with respect to said Utah Fuel Company stock said trustees shall continue to act as trustees under and subject to the terms and conditions of their respective mortgages, except as otherwise specifically directed in this order, the trustees under each of the aforesaid mortgages are further authorized and directed to transfer, convey, and deliver or release to the Reorganized Company all shares of stock (other than said stock of the Utah Fuel Company), 123 evidences of indebtedness and other securities, all money, credits, choses in action, and all other property, rights, and interests of every kind or description held or claimed by them as trustees as aforesaid, and to execute and deliver upon the request of the Reorganization Committee or the Reorganized Company any additional conveyances, bills of sale, assignments, or other instruments that may be necessary or proper to accomplish and evidence the satisfaction, release, and cancellation of their respective mortgages and any indentures and agreements supplemental thereto to the extent specified in paragraph (18) of this order. The said trustees are directed to execute their respective releases and other instruments as aforesaid and to 564 surrender property as aforesaid now held by them as trustees under their respective mortgages, for the sole and express purpose of remising, releasing, conveying, and quitclaiming whatever interest such trustees have as trustees under their respective mortgages and indentures supplemental or amendatory thereto, other than their respective interests in or claims to said stock of the Utah Fuel Company * . The Reorganized Company shall pay124 to each of said trustees reasonable compensation for services rendered and reimbursement for expenses incurred by it, including attorney's fees, in securing an adjudication of its interests or claims, if any, as trustees, in and to said stock of the Utah Fuel Company, in such amount as may hereafter be approved and allowed by this Court.* * * (50) The Court hereby reserves jurisdiction to allow fees or compensation for services and reimbursement for expenses heretofore or hereafter rendered or incurred in connection with these proceedings or the Plan * Subsequent to the entry of the consummation order and final decree, and in performance of its trust duties, the trustee of the first consolidated mortgage bonds instituted, on May 15, 1947, a proceeding in the Supreme Court of the State of New York to establish and enforce the lien of its bondholders in the Utah Fuel Co. stock. Also in pursuance of their trust duties, the trustees of the refunding and improvement mortgage bonds and of the general mortgage bonds appeared in such suit and asserted the liens of their bond issues in such Utah Fuel Co. stock. The petitioner was not a party to the New York State court proceeding. 125 In the proceeding in the Supreme Court of the State of New York the senior lien of the first consolidated mortgage bonds was fixed at $ 6 million and the lien of the refunding and improvement mortgage bonds was fixed at a sum in excess of $ 16 million. In that proceeding the stock of Utah Fuel Co. was sold for $ 6,800,000. The Supreme Court of New York ordered that the expenses of litigation, $ 414,384.30 (consisting of trustees' fees and expenses, fees of counsel to the trustees and reimbursement of expenses, compensation for services of certain intervening bondholders and reimbursement of their expenses, and referees' fees) be paid out of the proceeds from the sale of the stock prior to distribution. Of this amount, $ 395,884.30 was directed by the State court to be paid out of the $ 800,000 portion of the proceeds which otherwise would have been available for distribution among the holders of the refunding and improvement mortgage bonds, and the balance of $ 18,500 was directed to be paid from the proceeds of the sale which would otherwise have gone to the holders of the first consolidated mortgage bonds. Distribution was then made of the remainder of the proceeds.Thereafter126 on July 7, 1952, Goldman, Sachs & Co., holder of $ 3,999,000 face amount of the refunding and improvement mortgage bonds, filed a petition in the bankruptcy proceeding in the United States District Court of Colorado. In reliance upon the provisions 565 of the consummation order and final decree of April 10, 1947, particularly the above-quoted paragraphs 7, 19, and 50, Goldman, Sachs & Co. requested the court to determine that the expenses incurred by the holders of the refunding and improvement mortgage bonds in the amount of $ 395,884.30 were just and reasonable and to direct that the reorganized company pay to such holders their expenses so incurred in that amount. In its petition Goldman, Sachs & Co. alleged that the trust indentures of the various bond issues provided that the debtor should pay the reasonable compensation for all services rendered by the trustees of the bond issues in the execution of their trust duties, that among such trust duties of the trustees was the duty to sell the stock of Utah Fuel Co. in the event of default by the debtor in payment of the bond issues, and that under the trust indentures the expenses of such trustees in the performance of their127 trust duties were made a lien upon the mortgaged property which included the property of the debtor and the stock of the Utah Fuel Co.The petitioner filed its answer to the above petition in the District Court of Colorado on September 4, 1952, praying that the petition be dismissed. Therein it denied that the services and expenses in the New York litigation relative to the Utah Fuel Co. stock were rendered or incurred in connection with the proceedings and plan of reorganization of the debtor.In a Memorandum Opinion and Order filed on September 30, 1953, the District Court denied the prayer of the petitioner for an order denying and dismissing the petition and ordered that the matter be set down for further hearing upon the motion. Therein the court stated:Surely it cannot be said that when this Court had jurisdiction over the debtor corporation, the reorganized company, the indentured trustees, the bondholders and the administration of the respective trusts and mortgages, it is prohibited from determining whether the reorganized company or the bondholders shall bear the costs and expenses and fees which are incidental to a determination of the latter's rights in and to the128 security, simply because it does not have jurisdiction over the security itself. The security and its disposition is one thing. The duty of determining who shall, in the final analysis, bear the reasonable costs of the New York litigation which, truly enough, concerned that security, is quite another. This Court has not in the past and will not now adjudicate with respect to the former; but heretofore it expressly assumed the latter by entering the order here in concern and certainly retains jurisdiction to enforce that order and prevent it from becoming a nullity.* * * Finally, it must be borne in mind that the Consummation Order and Final Decree provided that this Court, as distinguished from any other tribunal, should determine, approve and allow the reasonable amount of the costs and fees and expenses of what, in effect, was and has herein been referred to as the New York litigation. In view of this, the amount of recovery, if any, is of course not fixed by the sums which the New York Court deemed fit to award. Proper evidence has still to be offered on the basis of which this Court can make its 566 own independent determination concerning the reasonable value of129 the various services rendered and of the reasonable costs and expenses incurred.The petitioner appealed to the United States Court of Appeals for the Tenth Circuit from the Memorandum Opinion and Order of the District Court, and under date of April 29, 1954, such court filed its opinion affirming the judgment of the District Court stating in part:The plan which was accepted and approved in this case required the reorganized company to pay the fees and expenses of the trustees, including attorney fees, in establishing their interests and claims to collateral security which was pledged for their benefit. * * It appears to us that it was the purpose of the plan and the consummation order to relieve the trustees, and through them, the bondholders, of the expenses of foreclosure and to place this burden upon the reorganized company. When the consummation order and final decree was entered there was no objection, and it became final. * * The consummation order made the Rio Grande primarily liable for the costs and expenses in question. The New York court required the trustees to pay them under the terms of the mortgage indentures. They were paid from funds which were held by130 the trustees for the benefit of the bondholders and which would have been distributed to the bondholders if the Rio Grande had complied with the terms of the consummation order. * * * The consummation order provides that the Rio Grande shall pay only reasonable compensation for the services of the trustees and expenses incurred by them including attorney's fees, in securing an adjudication of the interests and claims of the trustees. Any other expenditures or charges against the fund are not the responsibility of the reorganized company.On December 30, 1954, the District Court entered its Findings of Fact, Conclusions of Law, and Decree. The parties waived all rights to file motions and to further appeal. The court found in part as follows:3. * * * the respective Trust Indentures securing said three bond issues provided that the debtor railroad should pay the reasonable compensation and expenses for all services rendered by the trustees under said Trust Indentures in the execution of their trust duties;4. That included in the duties of said trustees was the obligation to sell the stock of the Utah Fuel Company in the event of the default of the debtor in the payment of bond131 issues and to apply the proceeds of such sale to the satisfaction of said bond issues in the order of their priority of lien; * * 13. That pursuant to the stipulation of the parties hereto and in pursuance of paragraph (19) of the Consummation order and Decree herein of April 10, 1947, this court finds that the sum of $ 300,000 is reasonable compensation for services rendered and reimbursement for expenses incurred, including attorneys' fees in securing an adjudication of their interests or claims as Trustees in and to the stock of the Utah Fuel Company in connection with the foreclosure proceedings in New York referred to and the sale of the Utah Fuel Company stock and disposition of its proceeds;In its Conclusions of Law the court stated in part:1. That under the Consummation Order and Decree of this Court entered April 10, 1947, (paragraph (19)) the Reorganized Company was required to pay to 567 each of the trustees referred to herein reasonable compensation for its services rendered and reimbursement for expenses incurred by it, including attorneys' fees, in securing an adjudication of its interests or claims, if any, as trustees in and to said stock of the Utah132 Fuel Company in such amount as approved and allowed by this Court.2. That as a result of the proceedings in the Supreme Court of the State of New York the holders and owners of the Refunding and Improvement Mortgage Bonds have paid and discharged an obligation which in equity and good conscience ought to have been paid by the Reorganized Company pursuant to the Consummation Decree of this Court and that to the extent of the sum of $ 300,000 said holders and owners of said bonds are entitled to reimbursement from said Reorganized Company therefor. * * 4. That the attorneys' fees for petitioner herein, in the amount of $ 40,000 are a proper charge upon and should be paid out of the fund hereinafter directed to be paid by the Reorganized Railroad Company before any distribution to bondholders.It was ordered that the petitioner pay the sum of $ 300,000, of which $ 40,000 was ordered to be paid to the attorneys for Goldman, Sachs & Co. for services in the proceeding in the United States District Court, and $ 260,000 was ordered to be paid to the trustee of the refunding and improvement mortgage bonds for distribution to the bondholders. Payment was duly made by the petitioner. 133 The petitioner deducted the amount of $ 300,000 as an accrued liability in its income tax return for the taxable year 1954. The respondent in the notice of deficiency disallowed the claimed deduction in full with the following statement: "It is held that litigation expense of $ 300,000 is not an allowable deduction for income tax purposes."In its decision of December 30, 1954, the District Court provided that the petitioner should pay, in addition to the $ 300,000 above referred to, the fees and expenses of the trustee of the refunding and improvement mortgage bonds in making distribution of the $ 260,000 to the bondholders and receiving and canceling the bonds. During the year 1955 the petitioner paid an amount of $ 927.92 pursuant to this provision of the District Court decree. In its income tax return for the taxable year 1955 it deducted such sum of $ 927.92. In the notice of deficiency the respondent disallowed the claimed deduction with the following statement: "It is held that litigation expenses of $ 927.92 is not an allowable deduction for income tax purposes."Contribution of $ 1,000.Early in 1955, George P. Backman, the executive secretary of the Chamber of Commerce134 of Salt Lake City, Utah, solicited a contribution from petitioner for a program to promote the construction of a proposed dam, commonly known as the Echo Park Dam, on the northern 568 part of the common border between Utah and Colorado. 4 On or about February 15, 1955, petitioner transmitted to Backman a check for $ 1,000 payable to the Chamber of Commerce of Salt Lake City. This money was not used by the chamber of commerce, but was placed in a special bank account entitled "Executive Committee of the Colorado River Development Association" for the use of Backman and George D. Clyde, the then director of the Utah Water & Power Board and Commissioner of Interstate Streams, in connection with the above-described program.135 The Echo Park project was part of an overall proposed Federal plan for development of the water resources of the upper Colorado River basin and authorization for its construction was contained in several bills pending before Congress in 1955, to wit: H.R. 270, H.R. 2836, H.R. 3383, H.R. 3384, H.R. 4488, and S. 500. Hearings on these bills were held by the Subcommittee on Irrigation and Reclamation of the Committee on Interior and Insular Affairs of both the House of Representatives and the Senate during February, March, and April 1955.Interests of the lower Colorado River basin initially opposed the entire upper Colorado River basin project. Subsequently, when opponents of the overall project apparently were unable to sustain their objection, opposition was directed against specific individual projects included in the overall project. Opposition to the Echo Park dam project was especially strong in view of the fact that the project necessitated flooding an area which included at least a part of the Dinosaur National Monument and Park. Many naturalist, wildlife, and similar organizations opposed the Echo Park project and succeeded in creating considerable publicity adverse to 136 the project.Due to the importance of the proposed Echo Park dam as a means of providing water for the principal industrial and agricultural portions of the State of Utah, Backman and Clyde undertook on their own a program to counteract the unfavorable publicity against the Echo Park dam project. In order to carry out this program, they solicited contributions, first from interested State, county, and local authorities and then from the principal business enterprises in the area. The contributions received, including petitioner's $ 1,000, were expended in general, to counteract the adverse publicity against the 569 project and to gain support for the passage of Federal legislation authorizing the Echo Park dam project. 5 The contributions were spent principally for traveling expenses of witnesses who appeared before congressional committees in Washington, D.C., and some of whom directly contacted Congressmen, traveling expenses of various persons who contacted interested individuals and groups throughout the country, the cost of printing an article for a national magazine and several brochures, and salaries of clerical and stenographic help.137 The petitioner was interested in the Echo Park dam project because it expected to profit by transporting construction materials, especially cement, to the railhead nearest to the dam. In addition, petitioner was considering the possibility of building a rail line into the area surrounding the project site in order to provide service in connection with the development of phosphates and other mineral resources which would be made possible by the electric power which would be brought into the area by the project. Petitioner also anticipated increased freight traffic from the production of agricultural crops in new areas opened to irrigation by the Echo Park project.Petitioner deducted the $ 1,000 contribution in its income tax return for the taxable year 1955 as a miscellaneous operation expense. In the notice of deficiency, the respondent disallowed the deduction on the ground that it was not considered to be an ordinary and necessary business expense.The contribution of $ 1,000 was made by petitioner for lobbying purposes, for the promotion of legislation, and for carrying on propaganda related to the promotion of legislation.Contribution of Locomotive.In the year 1955 the138 petitioner retired from service a narrow gage locomotive, No. 268, which had been in service for 73 years. It was rich in historic tradition and had been used for most of its years of service in the petitioner's railroad division that had included Gunnison, Colorado.Members of the Gunnison Pioneer Association, some of whom were former railroad people, and officials and other citizens of the city of Gunnison had expressed the desire to obtain the locomotive and place it on display as a reminder of the past glory of Gunnison as a railroad center. The petitioner, the Pioneer Association, and the City of Gunnison, therefore, reached an understanding that petitioner would donate this locomotive to the Pioneer Association, which would assume the responsibility for its maintenance and care, and that the locomotive would be placed on city property for public display.570 In accordance with the agreement the locomotive was turned over to the Pioneer Association. No formal deed of gift, bill of sale, or similar instrument of conveyance was executed. The locomotive was placed in a city park of the city of Gunnison on display to the general public as a historical exhibit. The petitioner139 had in the past donated locomotives to communities which had not maintained them in a manner to reflect credit on the railroad or the community where they were displayed. When the proposal of Gunnison was received by the petitioner it sought to find a way to avoid the situation which had arisen in the past, and this was the reason for the transfer of locomotive No. 268 to the Gunnison Pioneer Association.The locomotive has remained on display in the Gunnison City Park at all times since 1955, except for a part of the year 1959 when petitioner borrowed it from the Pioneer Association and the City of Gunnison for the purpose of exhibiting it at the Denver Centennial Exhibition in Denver, Colorado.In its income tax return for the taxable year 1955, the petitioner claimed a deduction of $ 8,000 as a charitable contribution by reason of the donation of locomotive No. 268. The respondent disallowed this contribution as a deduction for income tax purposes. The parties are agreed that in the event that it is held that the conveyance of locomotive No. 268 constitutes a charitable contribution, the amount to be allowed as a deduction by reason thereof is $ 6,000.The transfer by the petitioner140 of locomotive No. 268 to the Gunnison Pioneer Association in the taxable year 1955 was a contribution for the use of the City of Gunnison, Colorado, for exclusively public purposes.OPINION.The petitioner contends that for the taxable year 1954 it is entitled to deduct an amount of $ 1,529,738.61 as a proper accrual of vacation allowances earned by its employees in that year, but payable in the next year, and that it is also entitled to deduct for 1954 the amount which it actually paid out in that year as vacation allowances which had been earned in the prior year. It contends that for the taxable year 1955 it is entitled to accrue and deduct vacation pay on the basis of services rendered in that year and that the respondent erred in limiting the deductible amount to the amount actually paid in that year, $ 1,449,063.77. 6 Its position is that prior to the amendments 571 made in its contracts with its employees, effective in 1954, there was such uncertainty as to its liability to make payments that such allowances did not accrue until the year of payment, but that commencing with 1954 the uncertainties as to payment were lessened to the extent that it was proper to accrue141 vacation allowances earned.142 The respondent, in determining the deficiencies involved, disallowed all amounts claimed as accruals of vacation allowances in both years and instead allowed only the amounts actually paid. He contends that neither before nor after the 1954 amendments were the vacation allowances properly accruable in the years the services were rendered.Under the contracts as they existed up to the end of 1953, no vacation with pay, or payment in lieu thereof, would be due an employee whose employment had terminated, other than by retirement under the Railroad Retirement Act, prior to the taking of his vacation. Thus, whether or not the petitioner would be required to pay a vacation allowance to a particular employee who had rendered the qualifying service in a particular year depended upon continued employment of such employee at the time of the scheduled vacation, except in the case of retirement. After the amendments, made effective for the year 1954, substantially the same condition prevailed except that it was provided that if a qualified operating employee died before taking his vacation the allowance would be paid to his widow, and that if a nonoperating employee died payment would be 143 made to his surviving widow, or if none, then on behalf of any dependent minor children. While these changes in the contracts no doubt had the effect of lessening the probability of forfeitures of vacation allowances, there still remained no provision for payment in the event an employee should die without surviving wife or minor dependent children. And it still remained true that if, before taking his vacation, an employee's employment should terminate, except for retirement, no vacation with pay, or payment in lieu thereof, would be due the employee.Section 446 of the Internal Revenue Code of 1954 provides that taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. Section 461 of the Code provides that the amount of any deduction or credit shall be taken for the taxable year which is the 572 proper taxable year under the method of accounting used in computing taxable income. Here the petitioner kept its books and filed its income tax returns upon an accrual method of accounting. Under such method the deduction of an item depends upon whether all the events have occurred which144 determine the liability of the taxpayer to pay it; a liability does not accrue as long as it remains contingent. United States v. Anderson, 269 U.S. 422">269 U.S. 422, and Brown v. Helvering, 291 U.S. 193">291 U.S. 193. The fact that the percentage of items which will be paid can be estimated with reasonable accuracy is not sufficient to support accruals. The individual items must represent fixed liabilities. Brown v. Helvering, supra, and Commissioner v. Milwaukee & Suburban Transport Corporation, 367 U.S. 906">367 U.S. 906, which reversed 283 F.2d 279">283 F. 2d 279, which in turn had reversed a Memorandum Opinion of this Court.In Tennessee Consolidated Coal Co., 15 T.C. 424">15 T.C. 424, appeal dismissed (C.A. 6), the taxpayer had an agreement with a labor union which provided that each mine worker with a record of 12 months' continuous employment immediately preceding June 1 of any year should be entitled to a specified vacation allowance on that date. In that case, in holding that the allowances were not accruable prior to the date specified for145 payment, we stated in part:The contract, providing for vacation payments, specifically states that certain requirements must be met before the petitioner is required to make payments. As to any particular miner, as we interpret the contract, he (the miner) has not established any right to any part of his vacation pay until he has completely complied with every part of the contract. The circumstances in the Continental Tie & Lumber Co. case are different from those of the case at bar, in that there all had been done that could have been done to establish liability; all that remained to be done was to calculate the liability, but in the instant case vital facts remained to be determined, i.e., how many of the miners, if any, would qualify for vacation payments on the date of the proposed payment, and how much it would be. As we understand the contract, every miner who collects the vacation payments must, individually, measure up to specified standards.The possible occurrence of a condition subsequent to the creation of a liability is not grounds for denying the accrual of the liability at the time of its creation. United States v. Boston & Providence R.R. Corporation, 37 Fed. (2d) 670;146 The Boston American League Baseball Club, 3 B.T.A. 149">3 B.T.A. 149. Liability for payment in the instant case depended on a condition precedent, i.e., whether or not the miners, individually, were working for the company on the date required in the contract and had complied with the requirements contained therein. "The accruability test of a debt is not certainty of payment, but rather certainty of its liability * * ." Trans-California Oil Co., Ltd., 37 B.T.A. 119">37 B.T.A. 119, 127. The petitioner's liability for the vacation payments here in question did not become certain until the arrival of the date specified in the contracts. * In Texaco-Cities Service Pipe Line Co. v. United States, (Ct. Cl.) 170 F. Supp. 644">170 F. Supp. 644, there was involved a vacation allowance agreement which, prior to 1945, provided that an employee would lose the right to vacation pay, which he otherwise would receive, if he voluntarily 573 resigned, was discharged for cause, failed to take his vacation before retirement, or died before taking his vacation. The court there held that until all the conditions were met by a particular 147 employee there was no liability which would warrant taking a deduction on an accrual basis. The agreement involved in that case was amended, effective for the year 1945, to provide that an employee was entitled to a vacation allowance notwithstanding that his service might be terminated due to permanent layoff, voluntary resignation, involuntary resignation due to sickness, or discharge, except for dishonesty. It was further provided that the estate of an employee who died should be paid the allowance. It was held that under the contract as amended the taxpayer was entitled to deduct accrued vacation allowances earned in 1945. The result was that for 1945 the taxpayer was permitted to deduct both the amounts paid in that year, which had been earned in the prior year, as well as the amounts earned in that year.It will be seen that the original agreement in the above case was essentially the same as the original agreements involved in the instant case. On the other hand, the amended agreement in that case was vastly different from the amended agreements in the present case. There all contingency had been removed and an unqualified liability arose in the year of the rendition of148 the qualifying service. In the instant case, even under the amended agreements, no unqualified liability arose during the year of the rendition of the qualifying service.Under the circumstances we are constrained to the view that even after the 1954 amendments to the agreements there remained such contingency as to preclude the accrual of vacation pay in the years in which the services were rendered. We conclude, therefore, that the respondent correctly determined that the petitioner was entitled to deduct from gross income of the taxable years 1954 and 1955 only the amounts of vacation allowances actually paid in those years. 7 In view of our conclusion it is unnecessary to consider the respondent's alternative contention that the accrual and deduction of such allowances in the year of rendition of the qualifying service would amount 574 to a change of accounting method requiring the consent of the respondent under section 446(e) of the 1954 Code and section 1.446-1(e)(2) of the Income Tax Regulations promulgated thereunder.149 We have carefully considered the petitioner's contention that I.T. 3956, 1 C.B. 78">1949-1 C.B. 78, supports its position that it was entitled to accrue in 1954 and 1955 vacation allowances based on services rendered in those years (and also its claim that it is entitled to deduct in 1954 the payments actually made, on the ground that prior to the 1954 amendments to the employment agreements there was a substantial condition precedent to its liability whereas afterwards there was not). The petitioner points out that although the respondent issued Rev. Rul. 54-608, 2 C.B. 8">1954-2 C.B. 8, revoking I.T. 3956, such revenue ruling was specifically made nonapplicable to taxable years ending before June 30, 1955, and that further rulings and section 97 of the Technical Amendments Act of 1958, as amended by section 2, Pub. L. 86-496 (June 8, 1960), further extended its nonapplicability to taxable years ending prior to January 1, 1963. Section 97 as amended provides:SEC. 97. DEDUCTIBILITY OF ACCRUED VACATION PAY.Deduction under section 162 of the Internal Revenue Code of 1954 for accrued vacation pay, computed in accordance with the150 method of accounting consistently followed by the taxpayer in arriving at such deduction, shall not be denied for any taxable year ending before January 1, 1963, solely by reason of the fact that (1) the liability for the vacation pay to a specific person has not been clearly established, or (2) the amount of the liability to each individual is not capable of computation with reasonable accuracy, if at the time of the accrual the employee in respect of whom the vacation pay is accrued has performed the qualifying service necessary under a plan or policy, (communicated to the employee before the beginning of the vacation year) which provides for vacations with pay to qualified employees. [Emphasis supplied.]I.T. 3956, which was continued in effect for certain purposes throughout and beyond the taxable years here involved, provided that vacation allowances are properly accruable as of the end of the years in which qualifying services are rendered, and that accrual should be made for both prior and future years. However, in such ruling it was also provided that an accrual basis taxpayer might accrue and deduct vacation pay for the year in which paid if that had been its consistent151 practice, and if there was a substantial condition to actual payment, such as being in the employ of the employer at the time of the scheduled vacation. In Rev. Rul. 54-608 the respondent relied in part upon Tennessee Consolidated Coal Co., supra, and E. H. Sheldon & Co. v. Commissioner, (C.A. 6) 214 F.2d 655">214 F. 2d 655, affirming in part 19 T.C. 481">19 T.C. 481, in revoking I.T. 3956 and holding that no accrual of vacation pay can take place until the fact of liability to a specific person has been clearly established and the amount of the liability to each individual is capable of computation with reasonable accuracy. While Rev. Rul. 54-608 does not specifically so state, it seems obvious that 575 the postponement of its applicability related only to those taxpayers who had theretofore chosen, pursuant to I.T. 3956, to accrue vacation pay in the year in which the qualifying services were rendered, and that it was not intended to continue I.T. 3956 in effect to permit taxpayers who were properly deducting vacation pay in152 the year paid to accrue such pay contrary to the principles of Rev. Rul. 54-608. 8153 Section 3791(b) of the 1939 Code and section 7805(b) of the 1954 Code authorize limitation of only the retroactive effect of a ruling or regulation. Furthermore, it is clear from the legislative history of section 97 of the Technical Amendments Act of 1958 that such section did not purport to lay down a general rule for the accrual of vacation pay, but that it merely provides that deduction for accrued vacation pay shall not be denied solely by reason of the fact that liability therefor to a specific person has not been clearly established and the liability to each individual is not capable of computation with reasonable accuracy, if the taxpayer has consistently applied the principles of I.T. 3956 and deducted vacation pay in the year the qualifying services were rendered. 9154 The petitioner in the instant case did not, pursuant to I.T. 3956, adopt the practice of accruing vacation pay at the close of the taxable year in which the qualifying service was rendered. It had, since the vacation pay agreements were executed, consistently deducted the vacation pay in the year paid. It was not until December 1954 that the petitioner first set up an accrual for vacation pay in the year in which the qualifying service was rendered, and then such action was apparently not based on I.T. 3956 but upon section 462 of the Internal Revenue Code of 1954 (subsequently repealed), which provided for the deduction of a reasonable addition to a reserve for estimated expenses. Accordingly we see no basis for concluding that petitioner has any right, based upon a reliance upon I.T. 3956, to accrue and deduct in 1954 and 1955 vacation pay based upon services rendered in those years. And, as pointed out hereinabove, we are of the opinion 576 that it is not otherwise entitled to so accrue the vacation pay since in the years of rendition of qualifying service there remained substantial conditions precedent to the existence of a liability on the part of the petitioner to 155 pay it.Upon the issue of accrual of vacation pay we hold for the respondent.Reimbursement of Costs of Foreclosure on Utah Fuel Co. Stock.The petitioner contends that the amounts of $ 300,000 and $ 927.92 which it claimed as deductions for 1954 and 1955, respectively, representing reimbursements of trustee fees, attorney fees, and other costs of the foreclosure on the Utah Fuel Co. stock, constitute proper deductions under section 162 of the Internal Revenue Code of 1954. That section provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.The petitioner points out that the original mortgage indentures imposed a liability upon the debtor to make reimbursement of any costs of foreclosure on the Utah Fuel Co. stock. It contends that the bankruptcy court did not extinguish this liability but, rather, continued it; that the liability, therefore, did not originate in the bankruptcy court's order; and that hence the expenditure cannot be considered as a reorganization cost. It further contends that from its standpoint these expenditures were not of a capital nature, 156 that it 577 derived no benefit therefrom, and that if the respondent's position should be approved the result would be that the trustee's fees and expenses, which are normally deductible, could never be deducted by either the petitioner or its predecessor.The respondent contends that such amounts are not ordinary and necessary expenses paid or incurred by the petitioner in carrying on its trade or business; that, on the contrary, the obligation to pay these amounts was one which the petitioner, as the reorganized company, was required to assume under the plan of reorganization; and that it was a cost of the reorganization and hence a nondeductible capital expenditure.Whether and to what extent deductions shall be allowed depends upon legislative grace. Only if there is clear provision therefor can any particular deduction be allowed. A taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms. New Colonial Co. v. Helvering, 292 U.S. 435">292 U.S. 435. Not all necessary expenditures are deductible as ordinary and necessary business expenses. Many necessary payments are charges against capital157 and not deductible. Welch v. Helvering, 290 U.S. 111">290 U.S. 111.It is well established by decisions of this and other courts that expenditures relating to a recapitalization or reorganization of a corporation are not ordinary and necessary business expenses within the meaning of the statute. Motion Picture Capital Corp. v. Commissioner, (C.A. 2) 80 F.2d 872">80 F. 2d 872; Skenandoa Rayon Corp. v. Commissioner, (C.A. 2) 122 F. 2d 268, affirming 42 B.T.A. 1287">42 B.T.A. 1287, certiorari denied 314 U.S. 696">314 U.S. 696; Missouri-Kansas Pipe Line Co. v. Commissioner, (C.A. 3) 148 F.2d 460">148 F. 2d 460, affirming a Memorandum Opinion of this Court; Bush Terminal Buildings Co. v. Commissioner, (C.A. 2) 204 F.2d 575">204 F. 2d 575, affirming 17 T.C. 485">17 T.C. 485, certiorari denied 346 U.S. 856">346 U.S. 856; Bush Terminal Buildings Co., 7 T.C. 793">7 T.C. 793; Odorono Co., 26 B.T.A. 1355">26 B.T.A. 1355; Richard H. Survaunt, 5 T.C. 665">5 T.C. 665, affd. 158 (C.A. 8) 162 F. 2d 753; Denver & Salt Lake Railway Co., 24 T.C. 709">24 T.C. 709, petition for review dismissed (C.A. 10); and International Building Co. v. United States, (E.D. Mo.) 97 F. Supp. 595">97 F. Supp. 595, affirmed on this issue (C.A. 8) 199 F. 2d 12, reversed on another issue 345 U.S. 502">345 U.S. 502. The cases generally hold that such expenditures are not "ordinary" in the conduct of business within the meaning of the statute. And we have held that an expenditure may not be deductible as a business expense even though the expenditure did not result in the acquisition of an asset the cost of which may be recovered by deductions for exhaustion thereof. Bush Terminal Buildings Co., supra, and cases cited therein.The petitioner contends that the above cases are not applicable under the circumstances of this case. It likens this case to United States v. Minneapolis & St. Louis Railway Co., (C.A. 8) 260 F. 2d 663. The respondent contends that the case which most closely resembles the 578 instant 159 case is International Building Co. v. United States, supra, and that such case requires a decision in his favor.In United States v. Minneapolis & St. Louis Railway Co., supra, the taxpayer had acquired on December 1, 1943, all the assets and liabilities of a predecessor corporation in a sale under a foreclosure decree and plan of reorganization pursuant to a receivership of the predecessor. Under the foreclosure decree the taxpayer was required to assume and discharge all contracts made by the receiver. In 1942 railway labor organizations had served notice on railroads, including the predecessor corporation, demanding an increase in the wages of employees effective October 25, 1942. At December 1, 1943, no proposals had been accepted which gave rise to a liability of taxpayer's predecessor. It was not until January 17, 1944, after the Government took control of the railroads, that an agreement was reached giving the employees a wage increase retroactive to February 1, 1943. The taxpayer in its taxable year 1944 paid the retroactive wage increases for the period February 1, 1943, to November 30, 1943, which 160 was the period prior to its taking over of the assets of the predecessor. Both the predecessor and the taxpayer made returns on an accrual method of accounting. The District Court held that the payment of the retroactive wage increase was properly deductible by the taxpayer in 1944. In so holding it found that the taxpayer had not agreed, as a cost of the predecessor's assets, to discharge any such liability, and that indeed no obligation had arisen while the predecessor held the assets.The Court of Appeals for the Eighth Circuit affirmed the decision of the lower court, rejecting the Government's claim that the amount expended should be treated for tax purposes as part of the cost of acquiring the assets of the predecessor and hence a capital expenditure. The court pointed out that when in 1944 the wage dispute was settled the obligation assumed and paid by the railroads in that year became business expenses of that year. It concluded that the act of the taxpayer in agreeing to the wage settlement in 1944 created the liability to pay the retroactive wages, that the taxpayer was therefore paying its own debt and not any debt of the predecessor company or the receiver, and that161 the payment was a deductible expense of doing business in that year.In International Building Co. v. United States, supra, an action had been instituted in 1941 for the foreclosure of $ 300,000 first mortgage bonds on the taxpayer's property. The taxpayer thereupon filed a petition in a United States District Court for a reorganization under the Bankruptcy Act in order to protect the property from foreclosure, and a reorganization was effectuated. The bankruptcy court allowed an amount of $ 6,360 as attorney fees to the attorneys for the bondholders, the attorney for the indenture trustee, and the indenture 579 trustee. The taxpayer claimed the amount of $ 6,360 as a deduction in its income tax return for the year 1944. The court held that the expenditure was not deductible, citing, among other cases, Skenandoa Rayon Corp. v. Commissioner, supra.Upon a careful consideration of the contentions of the parties in the light of the facts involved, we are of the opinion that the position of the respondent is the correct one.It is true that under the original indentures any expenses of foreclosure on the Utah162 Fuel Co. stock were to be borne by the debtor, and apparently were a lien upon its property; that the bankruptcy court did not discharge the obligation of the bonds insofar as they were a charge upon the Utah Fuel Co. stock; and that the foreclosure was effected in a separate proceeding in the Supreme Court of New York. However, as we read the bankruptcy court's consummation order and final decree, the debtor was discharged from all its debts and liabilities and its property was vested in the petitioner as the reorganized company free and clear of all claims, including any lien which might exist thereon for the payment of any foreclosure expenses with respect to the Utah Fuel Co. stock. In its order the bankruptcy court specifically provided that all compensation for services rendered and all expenses incurred by the trustees which would have been secured by the liens of the mortgages, if such mortgages had not been released, should be deemed to be expenses incurred in connection with the bankruptcy proceeding or the plan of reorganization. It specifically provided that the reorganized company should pay the trustees reasonable compensation for services rendered and reimbursement163 for expenses incurred, including attorney fees in adjudicating their claims, as trustees, against the stock of the Utah Fuel Co. It reserved jurisdiction to allow fees or compensation for services rendered and reimbursement for expenses theretofore or thereafter rendered or incurred in connection with the bankruptcy proceeding or the plan of reorganization. It reserved the right to determine, and did determine, what portion of the fees awarded by the Supreme Court of New York constituted reasonable fees for purposes of fixing the liability of the petitioner.It thus seems clear that the bankruptcy court did not continue as a liability of the petitioner the original liability of the debtor under the mortgage indentures to pay the costs of foreclosure on the Utah Fuel Co. stock, but imposed the liability upon the petitioner as an expense in connection with the bankruptcy or the plan of reorganization. In this connection it is to be noted that the Court of Appeals pointed out that it was the purpose of the reorganization plan, which was accepted and approved, and of the consummation order and final decree, to relieve the trustees, and through them, the bondholders, of the foreclosure164 expense and to make the reorganized company, the petitioner, 580 primarily liable therefor. Also in this connection it is to be noted that in R. F. C. v. Denver & R. G. W. R. Co., 328 U.S. 495">328 U.S. 495, which involved this same bankruptcy reorganization, the Supreme Court pointed out that it was explicit in the reorganization plan that the trustee obtain the release of the equities in the Utah Fuel Co. stock.In view of the foregoing, it seems to us that the foreclosure proceeding and the consequent liability of the petitioner for the costs thereof were so inextricably involved in the overall plan of reorganization that the amounts in question must be considered as costs of the reorganization, imposed upon the petitioner by the bankruptcy court. The liability for such foreclosure costs was not undertaken by the act of the petitioner as an ordinary expense in carrying on its business, as were the expenditures in the Minneapolis & St. Louis Railway Co. case. Rather, this was a cost of the reorganization by which the petitioner obtained the business and which, in the final analysis, served to reduce the amount of property or funds which it obtained165 in the reorganization, as did all other amounts which it was required to assume and pay.Even if we were to concur in the view of the petitioner that the bankruptcy court did not extinguish the original liability on the part of the debtor to reimburse the costs of foreclosure on the Utah Fuel Co. stock, but continued such liability and caused the petitioner to assume it, we think there would still be no ground for holding that the petitioner is entitled to deduct, as ordinary and necessary expenses incurred by it in carrying on its business, the amounts which it was required to pay. As a prerequisite to a conclusion that the liability was paid or incurred by the petitioner as an incident to its business, it would have to be concluded that the petitioner was the same entity, after the reorganization, as the debtor prior thereto. The petitioner does not contend that this was so, and we think that the petitioner must be considered as a different entity from the debtor, despite the fact that it, as the reorganized corporation, utilized the charter of the debtor. The evidence before us does not include the terms of the charter before and after the reorganization, but such evidence as166 we have indicates that there were substantial modifications in the charter made in accordance with the requirements of the reorganization plan. Apparently the equity interest in the corporation was completely changed, and furthermore the petitioner apparently did not assume all the debts of the old corporation. See Willingham v. United States, (C.A. 5) 289 F. 2d 283, certiorari denied 368 U.S. 828">368 U.S. 828, in which it was held, for purposes of the net operating loss carryover provisions, that a corporation emerging from a bankruptcy reorganization, even though there was uninterrupted corporate existence under the State charter, was a completely different corporate person and a new business enterprise, since it had entirely new stock ownership 581 with an entirely new corporate structure and its debts had been wiped out by the adoption of the plan of reorganization.Furthermore, section 381(c)(16) of the Internal Revenue Code of 1954 sets forth the circumstances under which a corporation acquiring assets of another corporation and assuming an obligation of the transferor corporation shall be entitled to a deduction when 167 it pays or accrues the item. Section 381, by its terms, applies only to tax-free transfers in connection with the types of reorganizations described in section 368(a)(1) of the Code. The reorganization here involved was not such a reorganization. It was a railroad reorganization in a proceeding under section 77 of the Bankruptcy Act. Section 373 of the Internal Revenue Code of 1954, which deals with such railroad reorganizations, does not provide for nonrecognition of gain upon the transfer of property in such a reorganization, but merely for nonrecognition of loss. We think it must be concluded that since section 381 specifies the particular situations in which an acquiring corporation is entitled to deduct items paid as a result of the assumption of obligations of the transferor corporation, other situations such as that involved here were intended not to give rise to a deduction by the acquiring corporation. This view is fortified by the congressional committee reports with respect to section 381, which indicate that in view of the uncertainty and frequently contradictory existing courtmade law, the purpose in enacting section 381 was to set forth definite provisions for the168 future, based upon economic realities rather than upon the legal form of the reorganization. See H. Rept. No. 1337, 83d Cong., 2d Sess., p. 41, and S. Rept. No. 1622, 83d Cong., 2d Sess., p. 52. And in the Summary of the New Provisions of the Internal Revenue Code of 1954, prepared by the staff of the Joint Committee on Internal Revenue Taxation, it is specifically stated with respect to the provisions of section 381 that "Carryovers do not apply to acquisitions of corporate assets in the case of other reorganizations * * ." See also sec. 1.381(a)-1(b), Income Tax Regs.The petitioner contends that in any event $ 40,000, representing the amount which the bankruptcy court ordered to be paid to the attorneys for the principal bondholder for services in the bankruptcy court in connection with the claim of the bondholders for reimbursement, should be considered as a deductible expense.It is the petitioner's position that normally attorneys' fees incurred in litigation in the course of business constitute business expenses. However, the petitioner's argument overlooks the fact that this $ 40,000 was merely a portion of the $ 300,000 awarded by the bankruptcy court as reimbursement169 of costs of the foreclosure on the Utah Fuel Co. stock. The $ 40,000 did not represent the payment by the petitioner of attorney fees, as such, within the rule contemplated by the petitioner. 582 It is our conclusion that no part of the $ 300,000 constituted an ordinary and necessary business expense of the petitioner.For the reasons stated above with respect to the $ 300,000 item, we also conclude that the petitioner is not entitled to deduct the amount of $ 927.92 which it paid in 1955 in reimbursement of the trustee's cost of distribution.We hold that the respondent did not err in disallowing the respective amounts of $ 300,000 and $ 927.92 claimed by the petitioner as deductions for the taxable years 1954 and 1955.Contribution of $ 1,000.Petitioner contends that the $ 1,000 contribution paid to the Salt Lake City Chamber of Commerce for the use of Backman and Clyde in their program to promote the construction of the Echo Park dam is deductible as an ordinary and necessary business expense under section 162(a) of the Internal Revenue Code of 1954. The respondent contends that this contribution was made for the promotion of legislation and for lobbying purposes 170 and therefore is not deductible because it falls within the scope of section 1.162-15(c) of the Income Tax Regulations.10 The quoted provision of that regulation was promulgated on December 28, 1959, T.D. 6435, 1 C.B. 79">1960-1 C.B. 79, and is applicable to all years covered by the 1954 Code. During the interim before its promulgation, the corresponding, but less detailed, regulations under the 1939 Code were continued in effect by T.D. 6091, 2 C.B. 47">1954-2 C.B. 47, and were applicable to section 162(a) of the 1954 Code. In Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326">314 U.S. 326, and in Cammarano v. United States, 358 U.S. 498">358 U.S. 498, the Supreme Court approved the similar provisions of the corresponding regulations under the 1939 Code and prior revenue acts, even though they were not specifically incorporated under the business expense section. See Alex H. Washburn, 33 T.C. 1003">33 T.C. 1003, affd. (C.A. 8) 283 F.2d 839">283 F. 2d 839, certiorari denied 365 U.S. 844">365 U.S. 844.171 583 We think there can be no question, under the facts shown, that the contribution of $ 1,000 was for the purpose of lobbying or for the promotion of legislation which was necessary as a prerequisite to the authorization of the Echo Park project, or for carrying on propaganda related to the promotion of such legislation. The petitioner was aware of the purposes to which the fund was to be put. As pointed out in our Findings of Fact, the money was used for the purpose of gaining support for the passage of Federal legislation through the payment of expenses of witnesses who appeared before congressional committees, some of whom directly contacted Congressmen, the payment of expenses of persons who contacted individuals and groups throughout the country, and the payment of costs of printing articles and brochures. In his testimony Backman conceded that the whole purpose of the program was to remove opposition to the project and to gain support for and influence the passage of legislation authorizing the project. The fact that the petitioner could reasonably expect some financial benefits from the construction of the dam does not alter the conclusions reached above. See sec. 172 1.162-15(c)(1) of the regulations, and Cammarano v. United States, supra.Nor is the question of deductibility affected by such considerations as whether the proposed legislation might be considered in the public interest, as intimated by the petitioner on brief.The respondent did not err in disallowing the claimed deduction of $ 1,000.Contribution of Locomotive.The petitioner contends that the contribution of the narrow gage locomotive to the Gunnison Pioneer Association is deductible under section 170 of the Internal Revenue Code of 195411173 as a charitable contribution for the use of the City of Gunnison. 12 Respondent contends that the contribution of the locomotive is not deductible because it was not made "for the use of" the City of Gunnison.The words "for the use of," as used in section 170(c) of the Code, are intended to convey a meaning similar to that of "in trust for." John Danz, 18 T.C. 454">18 T.C. 454, affd. (C.A. 9) 231 F.2d 673">231 F. 2d 673, certiorari denied 352 U.S. 828">352 U.S. 828; Muzaffer ErSelcuk, 30 T.C. 962">30 T.C. 962. The donee or trust 584 to which the contribution is made does not need to qualify as an exempt organization, so long as the contribution is "for the use of" an organization, entity, or charity qualifying under section 170(c). See John Danz, supra.The trust may be created orally. See Pierce Estates, Inc., 3 T.C. 875">3 T.C. 875.The City of Gunnison is clearly an entity described in section 170(c)(1). However, the respondent contends that the proof does not establish that the petitioner transferred the locomotive to the Pioneer Association174 in trust for the City of Gunnison. On the contrary, he contends that the evidence indicates that there was merely a transfer to the association and that there was then an agreement between the association and the city for the display of the locomotive in the city park. Such contention is apparently based on a letter addressed on May 6, 1958, to the petitioner by the city clerk of Gunnison and the president of the association in which it is stated that the locomotive was donated to the Pioneer Association and that when the donation was made there were no restrictions placed on the donation by the petitioner. The evidence does not show why the city and the association wrote this letter. However, the same letter also recognizes that when the donation was made in 1955 the city was a party to the agreement, as well as the petitioner and the Pioneer Association. In addition, Carlton T. Sills, who had been in the public relations department of the petitioner at the time of the donation, testified that the people of Gunnison wanted this particular locomotive as a reminder of Gunnison's past glory as a railroad center, that the city agreed to put the locomotive on display in its public175 park, and that the Pioneer Association was a party because its members agreed that they would assume the responsibility of taking care of the locomotive. He testified in effect that it was the purpose of the petitioner, and the understanding reached, that the locomotive was to be displayed at a place where it would be to the benefit of the Gunnison community and to the public generally. The locomotive was actually placed in a city park and has since remained there on public display except for the period in 1959 when the petitioner borrowed it for exhibit for the Denver Centennial Exhibition. Sills testified that in order for the petitioner to borrow the engine it was necessary to obtain the joint concurrence of the City of Gunnison and the Pioneer Association.Based upon the evidence as a whole, we are satisfied that the agreement in 1955 among the petitioner, the Pioneer Association, and the City of Gunnison created a trust relationship whereby the association held the locomotive in trust for the use of the City of Gunnison for exclusively public purposes. We think that under the agreement the association would be precluded from disposing of the locomotive or using it for any176 other purpose.585 We hold that the petitioner is entitled to a deduction for the taxable year 1955 in the amount of $ 6,000 on account of the contribution of the locomotive.Decision will be entered under Rule 50. Footnotes1. The amending agreement of August 21, 1954, with respect to nonoperating employees, also contained certain provisions with respect to how to compute days of service and continuous service for vacation qualifying purposes. For example, days on which an employee did not render service because of sickness or injury were to be included, to an extent specified; and time spent in the Armed Forces was to be included under certain circumstances. It was also provided that if an employee who had rendered qualifying service in a year should be laid off, but return the next year and perform a specified amount of service, he should be entitled to a vacation in the year of return. (The original agreement in 1949 with respect to operating employees had contained certain provisions with respect to the manner of computing days of service and continuous service for vacation qualifying purposes in cases of absence on account of illness and in cases of discharge and reinstatement of employees.)↩2. It appears from item 30 of a schedule attached to the return for 1955 that the petitioner also deducted as vacation pay, in addition to the stipulated amount, a net amount of $ 70,204.71.↩3. By a prior order of the court on March 6, 1947, the court approved the determination of the reorganization committee that the reorganized company under the plan of reorganization should be the existing company, a Delaware corporation, with its certificate of incorporation amended in accordance with the provisions of the plan. The reorganization committee had made application for, and had received, an order of the Interstate Commerce Commission approving the transfer of the debtor's property to the reorganized company, the assumption of certain obligations and liabilities by the reorganized company, certain mergers and transfers, and the issuance of certain securities by the reorganized company as contemplated by the plan of reorganization. The final decree of the District Court on April 10, 1947, provided that as of April 11, 1947, all the business and affairs of the debtor and all right, title, and interest in the debtor's property should vest in and become the absolute property of the reorganized company, free and clear of all rights, claims, interests, liens, and encumbrances of the creditors of the debtor and of the holders of shares of capital stock of the debtor, that the debtor should thereupon be released and discharged from all its debts and liabilities, and that the reorganized company and its property should also be free and clear of all such rights, claims, interests, liens, encumbrances, debts, obligations, and liabilities, except as otherwise provided in the order.↩4. In his letter of solicitation addressed to the petitioner, Backman stated in part:"Following up our discussion of some weeks ago with respect to the Rio Grande helping us with our Grass Roots program on Echo Park, we would certainly appreciate receiving your contribution to such an undertaking inasmuch as the funds which I have obtained from some of our fine local organizations are practically used up. * * "As you are aware, the formal hearing will be held in Washington before the Senate Committee on February 28 and the House Committee on March 9, so I will really need some money to take care of special people who have agreed to appear but whose expenses cannot be covered by the State."↩5. At the time of the trial, the Echo Park dam project had not been authorized by Congress but Backman's group was still working for the passage of authorizing legislation by Congress.↩6. The respondent allowed as a deduction for 1955 an amount of $ 1,449,063.77, albeit as the amount actually paid in 1955, whereas the petitioner contends for the deduction of this item as an accrual based upon services rendered in 1955. The petitioner also alleges that the respondent erred in disallowing as vacation pay an amount of $ 70,204.71 for 1955. As pointed out in the Findings of Fact, item 30 of a schedule attached to the return for 1955 indicates that petitioner deducted as vacation pay an amount of $ 70,204.71, in addition to the amount of $ 1,449,063.77 stipulated as the amount charged in that year as accrued vacation allowances earned in that year. There is no direct evidence explaining this amount. However, in the petition it is stated to be an under-accrual of vacation pay for the taxable year 1954. On the other hand, the stipulated facts show that the overall amount accrued as vacation pay by the petitioner for 1954 exceeded the actual payments made in 1955 by an amount of $ 80,674.84, and that the petitioner in 1955 made a credit in that amount to "P & L Miscellaneous Credits" account. From the schedule referred to above it appears that the amount actually paid in 1955 on account of third week vacation allowances earned in 1954 was $ 334,888.22, whereas, as we have found, the amount accrued by the petitioner in 1954 on account of third week vacation allowances was $ 264,683.51. The difference between these two figures is $ 70,204.71. It therefore seems that the $ 70,204.71 represents the amount by which the petitioner allegedly under-accrued the third week↩ vacation allowances in 1954.7. We have carefully considered the case of Masonite Corp. v. Fly, ( S.D.Miss., Apr. 4, 1961, 7 A.F.T.R. 2d 1146↩, 61-1U.S.T.C. par. 9355), cited by petitioner, but consider it distinguishable. That case involved an agreement under which employees who had been employed for 1 year prior to January 1, 1945, were eligible for a vacation with pay sometime between May 1, 1945, and August 31, 1945. The contract also provided that employees absent from work due to illness, accident, temporary lack of work, or other causes beyond their control would not become ineligible for their vacations, but that no vacation or vacation pay would be allowed any employee after his resignation or discharge. It was there held that the rendition of the qualifying service created a liability and that the labor contract did not require employment on May 1, 1945, as a condition precedent to the creation of a liability. This was based on a decision of the Supreme Court of Mississippi, the State in which the contracts were executed and the employees worked. It was therefore held that the provision that no employee should be eligible for vacation pay after his resignation or discharge was not a condition precedent to liability, but was a condition subsequent which had no effect upon the right of accrual. As stated hereinabove, we think, based on the cases cited, that in the instant case the conditions were conditions precedent to the creation of a liability on the part of the petitioner.8. Thus, in Rev. Rul. 58-340, 2 C.B. 174">1958-2 C.B. 174, it is stated:"Taxpayers employing the accrual method of accounting, who under I.T. 3956, C.B. 1949-1, 78, chose to continue to accrue and deduct vacation pay for the year in which paid must continue on that basis until they adopt completely vested vacation pay plans which meet the requirements of Revenue Ruling 54-608, C.B. 1954-2, 8. Accrual-method taxpayers who have been deducting vacation pay on a paid basis and who adopt completely vested vacation pay plans may deduct, in the taxable year in which they adopt such a plan, payments made during such taxable year under the old plan as well as vacation pay accrued at the end of such taxable year under the new vested plan. The extension of the effective date of Revenue Ruling 54-608, by Revenue Ruling 57-325, C.B. 1957-2, 302, merely operates to permit those taxpayers, who were properly accruing vacation pay under I.T. 3956, to continue on that basis and to permit them sufficient time to adopt a plan meeting the requirements of Revenue Ruling 54-608↩."9. Senate Report No. 1983, 85th Cong., 2d Sess. (pp. 111, 112, 250, and 251), states:"In Revenue Ruling 54-608 (C.B. 1954-2, 8) the Internal Revenue Service reconsidered its previous rulings [including I.T. 3956] on vacation pay. This ruling held that no accrual of vacation pay could occur until the fate of liability with respect to specific employees was clearly established and the amount of the liability to each individual employee was capable of computation with reasonable accuracy. This ruling was initially made applicable to taxable years ending on or after June 30, 1955. It was then thought that taxpayers accruing vacation pay under plans which did not meet the requirements of the strict accrual rules set forth in this ruling would utilize section 462 of the 1954 Code. This section of the Code, however, has been repealed and the Treasury Department in a series of actions has continued to postpone the effective date of Revenue Ruling 54-608 until January 1, 1959 (the last postponement was made in Rev. Rul. 57-325, IRB 1957-27, 11, July 8, 1957). The Treasury Department recently announced in Revenue Ruling 58-340, Internal Revenue Bulletin 1958-28, page 19, that the postponement of the effective date of Revenue Ruling 54-608 applies only to those taxpayers who were properly accruing vacation pay under I.T. 3956. * "Your committee has concluded that more time is required for study before Revenue Ruling 54-608 is made applicable to those taxpayers who were properly accruing vacation pay under I.T. 3956. Therefore, your committee has extended for 2 more years the period in which Revenue Ruling 54-608 is to be inapplicable with respect to such taxpayers. Thus, in section 102 the bill provides that in respect of such taxpayers deductions for accrued vacation pay are not to be denied for any taxable year ending before January 1, 1961, solely by reason of the fact that the liability for the vacation pay to a specific person has not been clearly established or that the amount of the liability to each individual is not capable of computation with reasonable accuracy. * * "This section shall not apply unless the accrual for vacation pay is computed in accordance with the method of accounting consistently followed by the taxpayer in arriving at such deduction. This section is intended to apply only to those accrual method taxpayers who applied the principles of I.T. 3956 to deduct vacation pay in the year accrued, and who, since the publication ofRevenue Ruling 54-608, have continued to compute the deduction in such manner. However, this section is not intended to limit or increase the deduction for vacation pay that would otherwise be allowable to those accrual method taxpayers who under I.T. 3956, have consistently computed the deduction for vacation pay in the year paid."(Emphasis supplied.)↩10. Section 1.162-15(c) of the regulations provides, in part, as follows:(1) Expenditures for lobbying purposes, for the promotion or defeat of legislation, for political campaign purposes (including the support of or opposition to any candidate for public office), or for carrying on propaganda (including advertising) related to any of the foregoing purposes are not deductible from gross income. For example, the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation is not deductible as a business expense, even though the legislation may directly affect the taxpayer's business. * ** * * (3) Expenditures for the promotion or defeat of legislation include, but shall not be limited to, expenditures for the purpose of attempting to -- (i) Influence members of a legislative body directly or indirectly, by urging or encouraging the public to contact such members for the purpose of proposing, supporting, or opposing legislation, or(ii) Influence the public to approve or reject a measure in a referendum, initiative, vote on a constitutional amendment, or similar procedure.↩11. Section 170 provides, in pertinent part, as follows:(a) Allowance of Deduction. -- (1) General rule. -- There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. * ** * * *(c) Charitable Contribution Defined. -- For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of -- (1) A State, a Territory, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.↩12. Petitioner does not contend that the Pioneer Association, the actual donee, is an organization described in section 170(c)↩ of the Code.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620285/	The Branerton Corporation, Petitioner v. Commissioner of Internal Revenue, Respondent; Jack Lindner and Anne Lindner, Petitioners v. Commissioner of Internal Revenue, RespondentBranerton Corp. v. CommissionerDocket Nos. 5040-73, 5042-73United States Tax Court61 T.C. 691; 1974 U.S. Tax Ct. LEXIS 148; 61 T.C. No. 73; March 5, 1974, Filed 148 Rule 70(a)(1), Tax Court Rules of Practice and Procedure. -- More than 30 days after joinder of issue, but prior to any informal consultation or communication between the parties, petitioners served written interrogatories (pursuant to Rule 71) upon respondent. Respondent filed (pursuant to Rule 103) a motion for a protective order. Held, a protective order will be granted for a reasonable period of time with direction that the parties attempt to attain the objectives of discovery through informal consultation or communication before utilizing the procedures provided by the rules. Stephen L. Packard, for the petitioners.D. Ronald Morello and Barry D. Gordon, for the respondent. Dawson, Judge. DAWSON691 OPINIONThis matter is before the Court on respondent's motion for a protective order, pursuant to Rule 103(a)(2), Tax Court Rules of Practice and Procedure, that respondent at this time need not answer written interrogatories served upon him by petitioners in these cases. Oral arguments on the motion were heard on February 20, 1974, and, in addition, a written statement in opposition to respondent's motion was filed by the petitioners. 149 The sequence of events in these cases may be highlighted as follows: The statutory notices of deficiencies were mailed to the respective petitioners on April 20, 1973. As to the corporate petitioner, the adjustments relate to (1) additions to a reserve for bad debts, (2) travel, entertainment, and miscellaneous expenses, (3) taxes, and (4) depreciation. As to the individual petitioners, the adjustments relate to (1) charitable contributions, (2) entertainment expenses, (3) dividend income, and (4) medical expenses. Petitions in both cases were filed on July 2, 1973, and, after an extension of time for answering, respondent filed his answers on September 26, 1973. This Court's new Rules of Practice and Procedure became effective January 1, 1974. The next day petitioners' counsel served on respondent rather detailed and extensive written interrogatories pursuant to Rule 71. On January 11, 1974, respondent filed his motion for a protective order. The cases have not yet been scheduled for trial.692 Petitioners' counsel has never requested an informal conference with respondent's counsel in these cases, although respondent's counsel states that he is willing to have such 150 discussions at any mutually convenient time. Consequently, in seeking a protective order, respondent specifically cites the second sentence of Rule 70(a)(1) which provides: "However, the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules."It is plain that this provision in Rule 70(a)(1)means exactly what it says. The discovery procedures should be used only after the parties have made reasonable informal efforts to obtain needed information voluntarily. For many years the bedrock of Tax Court practice has been the stipulation process, now embodied in Rule 91. Essential to that process is the voluntary exchange of necessary facts, documents, and other data between the parties as an aid to the more expeditious trial of cases as well as for settlement purposes. 1 The recently adopted discovery procedures were not intended in any way to weaken the stipulation process. See Rule 91(a)(2).151 Contrary to petitioners' assertion that there is no "practical and substantial reason" for granting a protective order in these circumstances, we find good cause for doing so. Petitioners have failed to comply with the letter and spirit of the discovery rules. The attempted use of written interrogatories at this stage of the proceedings sharply conflicts with the intent and purpose of Rule 70(a)(1) and constitutes an abuse of the Court's procedures.Accordingly, we conclude that respondent's motion for a protective order should be granted and he is relieved from taking any action with respect to these written interrogatories. The parties will be directed to have informal conferences during the next 90 days for the purpose of making good faith efforts to exchange facts, documents, and other information. Since the cases have not been scheduled for trial, there is sufficient time for the parties to confer and try informally to secure the evidence before resorting to formal discovery procedures. If such process does not meet the needs of the parties, they may then proceed with discovery to the extent permitted by the rules.An appropriate order will be entered. Footnotes1. Part of the explanatory note to Rule 91 (60 T.C. 1118">60 T.C. 1118) states that --"The stipulation process is more flexible, based on conference and negotiation between parties, adaptable to statements on matters in varying degrees of dispute, susceptible of defining and narrowing areas of dispute, and offering an active medium for settlement."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620286/	Estate of Jane C. Dunlop, Deceased, Margaret E. Dunlop, Executrix v. Commissioner. Margaret E. Dunlop v. Commissioner. Stuart K. Dunlop v. Commissioner. Alexander C. Dunlop v. Commissioner. Donald C. Dunlop v. Commissioner. Ker Donald Dunlop v. Commissioner.Estate of Jane C. Dunlop v. CommissionerDocket Nos. 6853, 7246, 7247, 7248, 7249, 7250.United States Tax Court1947 Tax Ct. Memo LEXIS 298; 6 T.C.M. (CCH) 159; T.C.M. (RIA) 47040; February 20, 1947Guy Chase, Esq., E-1512 First National Bank Bldg., St. Paul 1, Minn., for the petitioners. Maurice S. Bush, Esq., for the respondent. DISNEYMemorandum Opinion DISNEY, Judge: These procedings were consolidated for hearing and involve transferee liability in the amount of $3,357.61 for income tax of the estate of Ker D. Dunlop, deceased, for the year 1941. The issue is whether the estate is taxable on the amount of $14,580 received as dividends on stock. The evidence consists of a stipulation of facts and exhibits introduced at the hearing. The agreed facts are adopted by references as our findings of fact. [The Facts] The petitioners (Jane C. Dunlop died July 19, 1946, after filing a petition) were the heirs-at-law of Ker D. Dunlop, who died299 intestate on May 6, 1939, a resident of Minnesota. The assets of the estate of the decedent included 2,044 shares of stock of the St. Paul Union Stockyards Co., of which 100 shares were distributed to petitioner Stuart K. Dunlop in April 1941 as an advancement. On about July 26, 1941, the estate of the decedent received a dividend of $14,580 on 1,944 shares of stock still outstanding in the name of the decedent. On August 19, 1941, in accordance with an agreement of the heirs, the stock was distributed to the heirs in agreed proportions. The final account of the administrators of the estate of the decedent was filed on May 21, 1941. On August 18, 1941, a supplemental account, including transactions from May 21, 1941, to and including July 19, 1941, was filed. The dividend of $14,580 was not included in the accountings. No other accountings were filed by the administrators of the estate. The probate court allowed the final account and only supplement thereto, and filed its final decree of distribution of the estate, on August 18, 1941. The decree recites that the "estate has been fully administered"; that certain advancements had been made; that "the residue of said estate" before300 payment of such advances and inheritance taxes and interest, consisted of personal property in the amount or value of $64,577.57, as listed therein, and that the property set forth therein and all other estate of the decedent in the State of Minnesota, subject to any lawful disposition theretofore made, "is hereby assigned to and vested in" specified persons in designated proportions. On September 11 and 17, 1941, the administrators distributed the dividend of $14,580 to the heirs in specified proportions. The remaining cash in the hands of the administrators was distributed to the heirs on November 3, 1941. On November 19, 1941, the heirs acknowledged receipt of the residual estate of the decedent and consented to the discharge of the administrators. The administrators were finally discharged by the probate court on November 24, 1941. The fiduciary income tax return filed by the administrators for 1941 did not include the dividend of $14,580 in computing the taxable income of the estate. The portion thereof received by each of the petitioners from the administrators was included in the taxable income he or she reported in returns filed with the collector at St. Paul, Minnesota, 301 for the year 1941. In his determination of the deficiencies involved herein, the respondent held that the dividend of $14,580 constituted income of the estate of the decedent for the year 1941 and that no part thereof was deductible for income tax purposes. The petitioners admit transferee liability and are not contesting the action of the respondent in including the dividend in the income of the estate. The parties differ only on whether the dividend is allowable as a deduction under the provisions of section 162(c) of the Revenue Act of 1938. 1 The contention of respondent is that the dividend was received by the heirs as corpus under the law of Minnesota after the completion of administration of the estate, and as the receipt of such an inheritance is exempt from tax under the provisions of section 22(b) (3), 2 it is nondeductible under section 162(c), the general purpose of the latter section being to tax estate income either to the estate or the beneficiaries thereof, under the doctrine of . He says that the statutes of Minnesota make no provision for assignment of income of estates, they being limited to assignment of the302 estate to the persons entitled thereto by decree entered after settlement and allowance of the accounts of the representative. The contention of the petitioners is, in general, that the dividends were paid out as income in the year in which they were received. 303 The question is not a new one. It has been held that where current income of an estate is distributed along with corpus in a final settlement under a will, the portion representing income is part of the legacy, not a distribution of income, as such, and therefore not taxable income to the legatees in the year of its receipt. ; ; ; . See ; affirmed . We see no reason to depart from the rule here because the decedent died intestate. The petitioners have not called our attention to any state statute entitling heirs to income, as such, of an estate either during the course of administration or upon final distribution. Here only a final decree of distribution was entered by the probate court upon settlement of the estate and such decree made no segregation of income and corpus. The amount involved herein was not included in the accountings of the administrators and304 was not specifically assigned by the court, it being included in the residuary estate as "all other estate of the decedent in the State of Minnesota." The dividend was an increment to corpus and was commingled with principal in the final distribution. Under the circumstances we do not think the result is any different than it would have been if petitioners had received the distributions by way of a bequest. Though the heirs did receive the amounts involved during the year, such receipt was not of income as such. . In our opinion, though of course the amounts were received by the estate, within the text of the first portion of section 162(c), they were not "properly paid or credited" to the heirs, within the intendment of the latter part of that section, not being paid or credited as income. Accordingly, Decisions will be entered for the respondent. Footnotes1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩2. SEC. 22. GROSS INCOME. * (b) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: * *(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620287/	DONALD V. CROWELL AND JOANNE CURRIE-CROWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCrowell v. CommissionerDocket No. 364-93United States Tax Court102 T.C. 683; 1994 U.S. Tax Ct. LEXIS 33; 102 T.C. No. 29; April 28, 1994, Filed 33 Ps were partners in a partnership, Wind 2, that is subject to the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. On Sept. 13, 1991, R mailed a notice of final partnership administrative adjustment (FPAA) for the 1983 and 1984 taxable years to the tax matters partner. On Oct. 13, 1991, R mailed a copy of the FPAA for the 1983 taxable year to Ps. No petition for readjustment was filed with respect to the FPAA for either 1983 or 1984. After the time for filing such a petition expired, R assessed deficiencies in Ps' Federal income taxes for taxable years 1983 and 1984, "computational adjustments", based on the partnership adjustments. See sec. 6231(a)(6), I.R.C. Thereafter, on Oct. 8, 1992, R mailed Ps a notice of deficiency for "affected items", determining additions to tax pursuant to secs. 6653(a)(1)(A) and (B) and 6659(a), I.R.C., with respect to the 1983 deficiency. On Jan. 6, 1993, Ps filed a petition for redetermination with respect to the affected items deficiency notice in addition to the 1983 and 1984 deficiencies (and interest) attributable to their share of Wind 2 partnership items for 1983 and 1984. On Mar. 1, 1993, 34 and Mar. 8, 1993, R filed two motions each seeking to dismiss for lack of jurisdiction and to strike a portion of the petition insofar as it attempts to put the 1983 and 1984 deficiencies into issue. R argues that the deficiencies fall outside of the Court's jurisdiction because they arise from computational adjustments. On Mar. 15, 1993, and Mar. 22, 1993, Ps filed objections to R's motion to dismiss and to strike. Ps argue that they were denied due process throughout the Wind 2 partnership proceedings because they did not receive the FPAA for 1983 until October 1992. In addition, they are contesting the deficiency (and interest) attributable to their share of Wind 2 partnership adjustments for 1984. Pursuant to the Court's order, R filed a response and supplemental response to Ps' objections. Ps then filed a supplement to their prior objection, asserting that the FPAA's for 1983 and 1984 were mailed beyond the applicable limitations period. Held. I. R's Motion to dismiss for Lack of Jurisdiction and To Strike (With Respect to the 1983 Taxable Year)1. Ps in this proceeding may challenge the validity of the affected items notice of deficiency on the ground that R failed to properly notify the partner of the underlying partnership proceeding. However, under these facts, R properly notified Ps of the partnership adjustments as required by sec. 6223(a), I.R.C. Actual receipt35 of an FPAA is not required so long as R mails the FPAA to the correct address. Therefore, the affected items notice is valid, and we will grant R's motion to dismiss for lack of jurisdiction and to strike filed Mar. 1, 1993. 2. Ps are not entitled to a redetermination of the deficiency resulting from adjustments to the Wind 2 partnership return for the 1983 taxable year to the extent those adjustments are attributable to partnership items. Our jurisdiction is limited to a redetermination of Ps' liability for affected items; i.e., the additions to tax set forth in the affected items deficiency notice. II. R's Motion to dismiss for Lack of Jurisdiction and to Strike (with respect to the 1984 taxable year)Because the parties agree that R did not issue Ps an affected items deficiency notice for the 1984 taxable year relating to their investment in Wind 2, a prerequisite to our jurisdiction over the 1984 taxable year is lacking. Thus, we will grant R's motion to dismiss for lack of jurisdiction and to strike filed Mar. 8, 1993. Donald V. Crowell and Joanne Currie-Crowell, pro sese. For respondent: Steven M. Roth and David A. Winsten. DAWSONDAWSONOPINION DAWSON, 36 Judge: This case was assigned to Chief Special Trial Judge Peter J. Panuthos pursuant to section 7443A(b)(4) and Rules 180, 181, and 183. 1 This Court agrees with and adopts the opinion of the Chief Special Trial Judge which is set forth below. OPINION OF THE CHIEF SPECIAL TRIAL JUDGE PANUTHOS, Chief Special Trial Judge: This matter is before the Court on respondent's motions, one filed on March 1, 1993, and the other on March 8, 1993, each seeking to dismiss for lack of jurisdiction and to strike a portion of the petition. The issues to be decided involve the scope of this Court's jurisdiction in a so-called affected items proceeding. One of the central issues is whether the Court has jurisdiction to consider the validity of a deficiency notice for affected items on the ground that petitioners were not properly37 notified of the underlying partnership level proceedings. BackgroundDonald V. Crowell and Joanne Currie-Crowell (petitioners) were partners in a partnership known as Wind 2 during the 1983 and 1984 taxable years. The Schedule K-1 filed with the partnership's 1983 return lists petitioners' address as 4122 Oak Hollow Rd., Calabasas, California 91302 (the Calabasas address). 2 In October 1989, petitioners moved to 2920 Salmon River, Westlake Village, California 91362 (Westlake Village address). Petitioners separated in August 1990. At that time, Mr. Crowell moved to 300 Rolling Oaks Dr., #146, Thousand Oaks, California 91361, while Mrs. Crowell continued to reside at the Westlake Village address. Petitioners listed the Westlake Village address on their Federal income tax returns for the years 1989, 1990, and 1991. On October 5, 1987, respondent38 mailed petitioners a notice of the beginning of an examination of the Wind 2 partnership return for the 1983 taxable year. The notice was mailed to petitioners at the Calabasas address. On September 13, 1991, respondent mailed a notice of final partnership administrative adjustment (FPAA) covering the years 1983 and 1984 to the tax matters partner for Wind 2. On October 16, 1991, respondent mailed a copy of the FPAA for the 1983 taxable year to petitioners at the Westlake Village address. Respondent asserts that a copy of the FPAA for the 1984 taxable year was mailed to petitioners at the Westlake Village address on the same date although respondent has not been able to produce a copy of the FPAA itself. 3 No petition for readjustment was filed with respect to the FPAA for either 1983 or 1984. On October 8, 1992, respondent mailed petitioners a notice of deficiency for affected items for the39 1983 taxable year determining additions to tax for negligence under section 6653(a)(1)(A) in the amount of $ 229.25 and section 6653(a)(1)(B) in the amount of 50 percent of the interest due on $ 4,585, as well as an addition to tax for valuation overstatement under section 6659(a) in the amount of $ 1,375.50. The additions to tax are affected items in that they were determined by respondent with reference to a deficiency purportedly owing from petitioners as a result of adjustments to partnership items appearing on Wind 2's 1983 partnership return. The affected items deficiency notice was mailed to petitioners at the Westlake Village address. Respondent did not mail petitioners an affected items deficiency notice for the 1984 taxable year. Respondent assessed deficiencies against petitioners reflecting their share of adjustments to Wind 2's partnership items for 1983 and 1984 on November 2, 1992, and November 9, 1992, respectively. On January 6, 1993, petitioners filed a petition for redetermination with respect to the affected items deficiency notice listing their current address as the Westlake Village address. The petition attempts to place in dispute not only the additions40 to tax listed in the affected items deficiency notice for 1983 but also the deficiency (and interest) attributable to petitioners' share of Wind 2 partnership items for the years 1983 and 1984. The petition includes the following allegations: 4. The determination of the tax, penalties and interest set forth in the said notice of deficiency are being contested on the following basis: (a) The investigation of WIND 2 was conducted by the Respondent in a willfully negligent manner. (b) The respondent did violate the Privacy Act of 1974 while conducting said investigation. (c) For the tax year 1984, the Petitioners have already received a Final Adjustment Notice and paid the required tax, penalty and interest. Respondent is placing the Petitioners in double jeopardy.The petition includes an allegation that petitioners did not receive the FPAA covering the 1983 taxable year until October 1992. As indicated, respondent filed a motion to dismiss for lack of jurisdiction and to strike on March 1, 1993. Respondent asserts that this Court's jurisdiction is limited to the items set forth in the affected items deficiency notice for the 1983 taxable year. Respondent further asserts41 that petitioners have improperly attempted to contest the deficiency arising from adjustments to partnership items for Wind 2's 1983 taxable year -- a deficiency that respondent asserts was properly assessed when no petition for readjustment was filed with respect to the FPAA for 1983. Respondent filed a second motion to dismiss for lack of jurisdiction and to strike on March 8, 1993. Respondent asserts that petitioners were not issued an affected items deficiency notice relating to their investment in Wind 2 for the 1984 taxable year, and, therefore, there is no basis for this Court to exercise jurisdiction over 1984. Further, in response to petitioners' allegation that they have already paid additional tax, penalty, and interest for the 1984 taxable year, respondent provided evidence that petitioners were mailed an affected items deficiency notice setting forth additions to tax stemming from petitioners' investment in another partnership known as Sunbelt Energy on February 28, 1986. However, petitioners executed a consent to assessment with respect to the February 28, 1986, notice, on April 27, 1986. On March 15, 1993, petitioners filed an objection to respondent's motion to42 dismiss for lack of jurisdiction and to strike pertaining to the 1983 taxable year. Significantly, petitioners' objection includes an allegation that they were denied due process throughout the Wind 2 partnership proceedings because they did not receive the FPAA for 1983 until October 1992. On March 22, 1993, petitioners filed an objection to respondent's motion to dismiss for lack of jurisdiction and to strike pertaining to the 1984 taxable year. It is evident from petitioners' objection that they are attempting to contest the deficiency (and interest) attributable to petitioners' share of Wind 2 partnership adjustments for the 1984 taxable year. Respondent was directed to file a response to petitioners' objections attaching thereto copies of the FPAA's purportedly mailed to petitioners on October 16, 1991, for the Wind 2 partnership. Respondent filed a response to the Court's order attaching thereto a copy of the FPAA for 1983. In a supplemental response, respondent advised the Court she did not have a copy of the FPAA for 1984. However, respondent did provide the Court with a copy of a certified mail list that respondent asserted should serve as "proof" that the FPAA was43 indeed mailed to petitioners as alleged. Petitioners filed a supplement to their prior objections in which they asserted that the FPAA's for 1983 and 1984 were mailed beyond the applicable limitations period. In short, petitioners attempt to raise an issue whether certain consents extending the applicable period of limitations for the Wind 2 partnership are valid. A hearing regarding this matter was held in Los Angeles, California. Both parties appeared at the hearing and presented argument on respondent's motions to dismiss. During the course of the hearing, the Court indicated that petitioners should be permitted to question the validity of the affected items deficiency notice for 1983 on the ground that respondent failed to provide petitioners with proper notice of the underlying Wind 2 partnership proceedings. In reply, respondent stated that the Court lacks jurisdiction to consider the partnership level proceedings when a case is before the Court on a petition for redetermination from an affected items deficiency notice. Respondent also suggested that the affected items notice would be valid notwithstanding procedural irregularities in the partnership level proceedings. 44 DiscussionThe tax treatment of any partnership item generally is determined at the partnership level pursuant to the unified audit and litigation procedures set forth in sections 6221 through 6231. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648. The TEFRA procedures apply with respect to all taxable years of a partnership beginning after September 3, 1982. Sparks v. Commissioner, 87 T.C. 1279">87 T.C. 1279, 1284 (1986); Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783, 789 n.4 (1986). Partnership items include each partner's proportionate share of the partnership's aggregate items of income, gain, loss, deduction, or credit. Sec. 6231(a)(3); sec. 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs. Affected items are defined under section 6231(a)(5) as any item to the extent such item is affected by a partnership item. White v. Commissioner, 95 T.C. 209">95 T.C. 209, 211 (1990). The first type of affected item is a computational adjustment made to record the change in a partner's tax liability resulting from adjustments reflecting the proper treatment of partnership45 items. Sec. 6231(a)(6); White v. Commissioner, supra.Once partnership level proceedings are completed, respondent is permitted to assess a computational adjustment against a partner without issuing a deficiency notice. Sec. 6230(a)(1). The second type of affected item requires a partner level determination. N.C.F. Energy Partners v. Commissioner, 89 T.C. 741">89 T.C. 741, 744 (1987). Section 6230(a)(2)(A)(i) provides that the normal deficiency procedures apply to those affected items which require partner level determinations. The additions to tax for negligence and valuation overstatement are affected items requiring factual determinations at the individual partner level. N.C.F. Energy Partners v. Commissioner, supra at 745. It is well settled that we lack jurisdiction to consider partnership items in an affected items proceeding. Saso v. Commissioner, 93 T.C. 730">93 T.C. 730 (1989). I. Respondent's Motion to dismiss for Lack of Jurisdiction and To Strike (With Respect to the 1983 Taxable Year)On March 1, 1993, respondent filed a motion to dismiss for lack46 of jurisdiction and to strike those allegations set forth in the petition that pertain to petitioners' liability for partnership items for the 1983 taxable year. We note at the outset that there is no question that the deficiency and interest that petitioners seek to place in dispute with respect to the 1983 taxable year reflect "computational adjustments" under section 6231(a)(6); i.e., changes in petitioners' tax liability reflecting the proper treatment of Wind 2 partnership items. Because such items are not subject to the normal deficiency procedures, we ordinarily would grant respondent's motion to dismiss for lack of jurisdiction and to strike consistent with cases such as Sasa v. Commissioner, supra.4 Unlike the taxpayers in Saso, however, petitioners contend that respondent failed to properly notify them of the partnership proceedings covering the 1983 taxable year as required by section 6223(a). With respect to the instant proceeding, petitioners question whether there can be a valid affected items deficiency notice if respondent failed to provide the taxpayer with proper notice of the underlying partnership level proceedings.47 For all practical purposes, petitioners' objection is tantamount to (and in the interest of judicial economy will be treated as) a motion to dismiss this case for lack of jurisdiction on the ground that the affected items notice is invalid. 5 As indicated, respondent takes the position that the validity of an affected items notice is not dependent upon proof that respondent provided the taxpayer with the notice required by section 6223(a) in the underlying TEFRA partnership proceeding. Respondent contends that we need only focus on whether the affected items notice was issued within the 1-year suspension period provided in section 6229(d). We disagree. 48 Section 6223(a) generally provides that respondent shall mail to each partner notice of the beginning of an administrative proceeding at the partnership level with respect to a partnership item, as well as notice of the final partnership administrative adjustment resulting from any such proceeding. It is the mailing of the FPAA that triggers the time periods for filing a petition for readjustment of the partnership items by either the tax matters partner or a notice partner under section 6226(a) and (b). Notably, section 6223(e)(2) provides that respondent's failure to provide notice of partnership level proceedings to a partner may result in that partner's share of partnership items being treated as nonpartnership items. 6 See sec. 6231(b)(1)(D). 49 Contrary to respondent's position, we hold that under these circumstances petitioners may raise an issue respecting the validity of an affected items deficiency notice in an affected items proceeding on the ground that respondent failed to properly notify the partner of the underlying partnership proceedings. Specifically, petitioners allege that they did not receive proper notice of the Wind 2 partnership proceedings. Further, no petition for readjustment was filed with respect to the FPAA, nor have the parties indicated that a settlement was offered to Wind 2 partners. Assuming petitioners' allegation is true, and in the absence of an election by petitioners to accept the FPAA adjustments, the flush language (last sentence) of section 6223(e)(2) provides that petitioners' share of Wind 2 partnership items will be treated as nonpartnership items. Obviously, if petitioners' share of Wind 2 partnership items for 1983 is required to be treated as a nonpartnership item, the basis for (and validity of) the affected items deficiency notice for 1983 is in question. Stated another way, we fail to see how respondent can issue a valid affected items deficiency notice to a partner if 50 that partner's share of partnership items is entitled to nonpartnership item treatment under section 6223(e). Where the validity of an affected items notice is questioned in this manner, respondent must be prepared to demonstrate that she complied with the notice requirements set forth in section 6223(a). In addition to the foregoing, we find practical support for our decision to resolve whether respondent complied with section 6223(a) in this affected items proceeding. Petitioners allege that they did not receive the FPAA covering Wind 2's 1983 taxable year, and, thus, as a practical matter they were unable to file a timely petition for readjustment as notice partners under section 6226(b)(1). Under the circumstances, this is the best (and perhaps only) forum in which petitioners can contest the notice issue. Turning now to the question of the validity of the FPAA for 1983, we look first to the specific provisions governing the mailing of partnership notices. For purposes of issuing the notices specified in section 6223(a), including an FPAA, respondent is required to use the names, addresses, and profits interests shown on the partnership return for the year at issue as modified51 by "additional information furnished to him by the tax matters partner or any other person in accordance with regulations prescribed by the Secretary." Sec. 6223(c)(1) and (2). Further, section 301.6223(c)-1T(f), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (Mar. 5, 1987), provides in pertinent part: (f) Service may use other information. In addition to the information on the partnership return * * the Service may use other information in its possession (for example, a change in address reflected on a partner's return) in administering subchapter C of chapter 63 of the Code. However, the Service is not obligated to search its records for information not expressly furnished under this section.As is the case with a statutory notice of deficiency, the validity of a properly mailed FPAA is not contingent upon actual receipt by either the tax matters partner or a notice partner. See, e.g., Yusko v. Commissioner, 89 T.C. 806">89 T.C. 806, 810 (1987). Bearing section 301.6223(c)-1T(f), Temporary Proced. & Admin. Regs., supra, in mind, it is evident that respondent properly notified petitioners of the Wind 2 partnership52 proceedings for the 1983 taxable year. In the normal course, respondent could have satisfied the TEFRA notice requirements by mailing a copy of the FPAA for 1983 to petitioners at the Calabasas address -- the address listed for petitioners on Wind 2's 1983 partnership return. Sec. 6223(c)(1). However, at the time respondent was preparing the FPAA, she reviewed petitioners' individual income tax returns and learned that petitioners were residing at the Westlake Village address. Based on this information, respondent mailed the FPAA to the Westlake Village address in a good faith effort to notify petitioners of the Wind 2 partnership adjustments. Section 6223(a) requires nothing more of respondent. Petitioners also seek to attack the validity of the affected items notice on the ground that the statute of limitations expired prior to the mailing of the FPAA covering Wind 2's 1983 taxable year. In contrast to our decision to examine whether respondent furnished petitioners with proper notice of the Wind 2 partnership proceedings, we do not view this affected items proceeding as an appropriate forum for deciding whether that notice was provided within the period of limitations. 53 As explained above, the sufficiency of the FPAA covering 1983 affects our jurisdiction in the instant case to the extent that it is directly related to the validity of the affected items deficiency notice. On the other hand, petitioners' assertion of the bar of the statute of limitations does not affect our jurisdiction but is merely an affirmative defense. See Columbia Building, Ltd. v. Commissioner, 98 T.C. 607">98 T.C. 607, 611-612 (1992). We conclude that the statute of limitations defense as it pertains to the FPAA for 1983 should have been prosecuted within the context of a partnership level proceeding and is not properly before us in this proceeding. See Genesis Oil & Gas, Ltd. v. Commissioner, 93 T.C. 562">93 T.C. 562, 565 (1989). Similarly, we do not have the authority to consider petitioners' allegation that respondent's agent violated the Privacy Act of 1974, Pub. L. 93-579, 88 Stat. 1896 (the Privacy Act), during the examination stage of the case. The exclusive remedy for individuals seeking redress for a violation of the Privacy Act is a civil action in Federal District Court pursuant to 5 U.S.C. section 552a54 (g)(1) (1988). Moreover, section 7852(e), added to the Internal Revenue Code under the Tax Reform Act of 1976, Pub. L. 94-455, sec. 1202(g), 90 Stat. 1688, expressly provides that 5 U.S.C. section 552a(g) shall not be applied directly or indirectly to the determination of liability of any person for any tax. In light of our conclusion that the affected items notice is valid, and consistent with Saso v. Commissioner, 93 T.C. 730 (1989), we will grant respondent's motion to dismiss for lack of jurisdiction and to strike filed March 1, 1993. Petitioners simply are not entitled to a redetermination of the deficiency resulting from adjustments to the Wind 2 partnership return for the 1983 taxable year to the extent those adjustments are attributable to partnership items. Our jurisdiction is limited to a redetermination of petitioners' liability for affected items; i.e, the additions to tax set forth in the affected items deficiency notice. II. Respondent's Motion to dismiss for Lack of Jurisdiction and To Strike (With Respect to the 1984 Taxable Year)On March 8, 1993, respondent filed a motion to dismiss for 55 lack of jurisdiction and to strike the allegations set forth in the petition that pertain to petitioners' liability for the 1984 taxable year. The parties agree that respondent did not issue an affected items deficiency notice to petitioners for the 1984 taxable year. Nonetheless, petitioners assert that we should assume jurisdiction due to respondent's negligence in conducting the Wind 2 audit. This Court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice of deficiency and a timely filed petition. Rule 13(a), (c); Monge v. Commissioner, 93 T.C. 22">93 T.C. 22, 27 (1989); Normac, Inc. v. Commissioner, 90 T.C. 142">90 T.C. 142, 147 (1988). Section 6212(a) expressly authorizes respondent, after determining a deficiency, to send a notice of deficiency to the taxpayer by certified or registered mail. The taxpayer, in turn, has 90 days from the date the notice of deficiency is mailed to file a petition in this Court for a redetermination of the deficiency. Sec. 6213(a). The record in the instant case shows that on February 28, 1986, respondent mailed petitioners an affected items deficiency notice for the 198456 taxable year relating to their investment in a partnership known as Sunbelt Energy. On April 27, 1986, petitioners executed a consent to assessment with respect to the February 28, 1986, notice. Consequently, this notice does not provide a basis for the Court to exercise jurisdiction over the 1984 taxable year. The record further shows that respondent mailed an FPAA covering the 1984 taxable year to the tax matters partner for Wind 2 on September 13, 1991. While a question remains whether respondent mailed petitioners a copy of that FPAA, the parties agree that respondent did not issue petitioners an affected items deficiency notice for the 1984 taxable year relating to their investment in Wind 2. In the absence of an affected items deficiency notice, it follows that a prerequisite to our jurisdiction over the 1984 taxable year is lacking. Consequently, we will grant respondent's motion to dismiss for lack of jurisdiction and to strike filed March 8, 1993. To reflect the foregoing, An appropriate order will be issued. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The record does not include the Schedule K-1 filed with the partnership's 1984 return; thus, we do not know what address was listed for petitioners for that year.↩3. The record contains a certified mailing list dated Oct. 16, 1993, indicating that an FPAA was mailed to petitioners.↩4. In Saso v. Commissioner, 93 T.C. 730">93 T.C. 730, 734↩ (1989), we granted the Commissioner's motion to dismiss and to strike after specifically finding that the Commissioner properly issued notices of final partnership administrative adjustment to both the tax matters partner and the taxpayers/partners before us in that case.5. In Bradley v. Commissioner, 100 T.C. 367">100 T.C. 367, 370-371 (1993), the taxpayer made the same argument under nearly identical circumstances. However, we did not address the issue due to the taxpayer's abandonment of the point on brief. On the other hand, we did consider and reject the taxpayer's argument that the affected items deficiency notice was invalid because the Commissioner did not furnish him with a "notice of computational adjustment". Id.↩ at 372.6. Sec. 6223(e) provides in pertinent part: SEC. 6223(e) Effect of Secretary's Failure To Provide Notice. -- (1) Application of subsection. -- (A) In general. -- This subsection applies where the Secretary has failed to mail any notice specified in subsection (a) to a partner entitled to such notice within the period specified in subsection (d). * * (2) Proceedings finished. -- In any case to which this subsection applies, if at the time the Secretary mails the partner notice of the proceeding -- (A) the period within which a petition for review of a final partnership administrative adjustment under section 6226 may be filed has expired and no such petition has been filed, or (B) the decision of a court in an action begun by such a petition has become final,the partner may elect to have such adjustment, such decision, or a settlement agreement * * * with respect to the partnership taxable year to which the adjustment relates apply to such partner. If the partner does not make an election under the preceding sentence, the partnership items of the partner for the partnership taxable year to which the proceeding relates shall be treated as nonpartnership items.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620289/	J. C. HUNT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hunt v. CommissionerDocket No. 19888.United States Board of Tax Appeals15 B.T.A. 1388; 1929 BTA LEXIS 2666; April 12, 1929, Promulgated 2666 A Texas corporation was dissolved June 13, 1919. The statutes of that State continued the existence of the corporation for a period of three years and gave the trustees of the corporation authority for that period to settle the affairs of the corporation, and also provided that the corporate existence might be longer continued by the appointment of a receiver. No receiver was appointed. More than three years after the dissolution of the corporation, the former president of the corporation, who had also been one of its trustees, signed a consent on behalf of the dissolved corporation purporting to extend the period of limitation for assessment and collection of any tax found to be due by the corporation. Held, that such former officer of the corporation was without authority to act beyond the three-year period; that the consent executed by him for the corporation was invalid and did not suspend the running of the statute of limitation. Held, further, that inasmuch as the deficiency was not assessed against the corporation within five years from the date the return was filed, and the notice of the Commissioner's determination that petitioner was liable for the deficiency2667 of the corporation as a transferee of its assets, was not mailed within one year after the expiration of the period of limitation for assessment of the tax against the corporation, the petitioner is not liable for the deficiency. Harry C. Weeks, Esq., for the petitioner. Bruce A. Low, Esq., for the respondent. LOVE 1388 The Commissioner has proposed an assessment against petitioner in the amount of $5,177.29, covering his liability as transferee of the assets of the Burkburnett Refining Co., Wichita Falls, Tex., for unpaid income and profits taxes claimed to be owing by that corporation for the fiscal year ended March 31, 1919, in an equal amount. The petitioner assigns four errors on the part of the respondent, as follows: (a) In determining that he had the constitutional right to establish, adjudicate, or enforce any liability against the transferee of the assets of a corporation for taxes claimed to be due by said corporation. (b) In holding and determining that the period within which income and excess-profits taxes for the fiscal year ended March 31, 1919, could be assessed against the Burkburnett Refining Co. had not expired at2668 the time the assessment herein involved was made. (c) In holding and determining that the alleged waiver executed in the name of the Burkburnett Refining Co. on or about June 23, 1924, was effective to extend the period within which an assessment of additional taxes could be made against such taxpayer. 1389 (d) In the calculation of the net income of the Burkburnett Refining Co. for the fiscal year ended March 31, 1919, in that he disallowed as a deductible loss the sum of $43,500, representing the cost of refinery equipment bought and paid for by said company, which was never delivered and the delivery of which could not be enforced. For the purposes of this opinion it will be necessary to consider only the admitted facts with reference to petitioner's assignment of errors in (b) and (c) above. FINDINGS OF FACT. The petitioner is a resident of Wichita Falls, Tex. The liability in controversy is the entire amount asserted against the petitioner as transferee of the assets of the Burkburnett Refining Co., hereinafter referred to as the Refining Company, for unpaid income and profits taxes in the sum of $5,177.29, assessed against that corporation for the fiscal2669 year ended March 31, 1919. The refining Company was a Texas corporation organized in 1917, with an authorized capital stock of $300,000. Petitioner was a stockholder in the Refining Company, a director of it, and from the latter part of 1918, or the early part of 1919, until its dissolution, he was its president. June 13, 1921, all the stockholders of the Refining Company filed with the Secretary of State, of Texas, all in due compliance with law, an agreement and consent in writing that said corporation be dissolved, and the Secretary of State on the same date issued a certificate of dissolution as follows: I, S. L. Staples, Secretary of State, of the State of Texas, Do HEREBY CERTIFY, that J. C. Hunt, President, G. D. Rigsby, Secretary and G. D. Rigsby, Treasurer of Burkburnett Refining Company, a corporation duly and legally incorporated under the laws of the State of Texas, with its principal office at Wichita Falls, Wichita County, Texas, have this day filed in this Department an agreement and consent in writing of all the stockholders of said Corporation, consenting and agreeing that said Corporation be dissolved, together with a list of officers and directors of said2670 Corporation, with the postoffice address and place of residence of each, said President, Secretary and Treasurer certifying that said consent to dissolution was the true and correct action of the stockholders. I further certify that by reason of said action of the stockholders of said Burkburnett Refining Company, said Corporation is dissolved. On June 23, 1924, three years and ten days thereafter, the following income and profits-tax waiver for the year ended March 31, 1919, was signed on the part of the taxpayer by "J. C. Hunt, President," and attested by "Parker Simison, Asst. Secretary." Simison was not and had never been a director of the corporation. 1390 BURKBURNETT REFINING CO. Waiver for year ended March 31, 1919 WICHITA FALLS, TEXAS, June 23, 1924.INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Burkburnett Refining Company of Burkburnett, Texas, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Burkburnett2671 Refining Company for the year ended March 31, 1919, under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the staturory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. BURKBURNETT REFINING COMPANY, Taxpayer.(CORPORATE SEAL.) By J. C. HUNT, President.D. H. BLAIR, Commissioner.Attest: PARKER SIMISON, Asst. Secretary.If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. No seal was affixed2672 to the waiver. Thereafter, on March 11, 1925, a somewhat similar waiver extending the time limit for assessment to December 31, 1925, as appears below, was signed for the year ended March 31, 1919, by the same individuals acting in the same official capacities. MARCH 11, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to March 1, 1921) In pursuance of the provisions of existing Internal Revenue Laws Burkburnett Refining Company, a taxpayer of Wichita Falls, Texas, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year(s) March 31, 1919 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date 1391 and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or2673 (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. BURKBURNETT REFINING COMPANY, Taxpayer.By J. C. HUNT, President.D. H. BLAIR, Commissioner.Company long since out of business & corporate seal lost. Attest: PARKER SIMISON, Asst. Secretary.If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. The Refining Company's income-tax return for the fiscal year ended March 31, 1919, was filed August 2, 1919. The assessment of the additional income and profits taxes alleged to be due from the corporation for that fiscal year was made on the June, 1925, list. On August 6, 1926, the Commissioner mailed petitioner a notice by registered mail of his determination that petitioner was liable under section 280 of the Revenue Act of 1926 for the tax of the corporation. 2674 OPINION. LOVE: We are of the opinion that the waiver executed on behalf of the Refining Company, a Texas corporation, by the former president and attested by the former assistant secretary, which corporation was legally dissolved more than three years before the waiver was signed, is invalid and ineffectual to suspend the running of the statute of limitation, and that the proposed assessment against the petitioner as transferee is barred. Chapter 8, Title 32, of the Revised Civil Statutes of Texas, 1925, provides: ART. 1388. Liquidation by officers. Upon the dissolution of a corporation, unless a receiver is appointed by some court of competent jurisdiction, the president, and directors or managers of the affairs of the corporation at the time of its dissolution shall be trustees of the creditors and stockholders of such corporation, with power to settle the affairs, collect the outstanding debts, and divide the moneys and other property among the stockholders after paying the debts due and owing by such corporation at the time of its dissolution, as far as such money and property will enable them after paying all just and reasonable expenses; and for this purpose they2675 may in the name of such corporation, sell, convey and transfer all real and personal property belonging to such company, collect all debts, compromise controversies, maintain or defend judicial proceedings, and exercise full power and authority of said company over such assets and property. Said trustees shall be severally responsible to 1392 the creditors and stockholders of such corporation to the extent of its property and effects that shall have come into their hands. (Vernon's Revised Civil Statutes, 1925, Vol. 3, pp. 244, 245.) ART. 1389. Extension of existence. The existence of every corporation may be continued for three years after its dissolution from whatever cause, for the purpose of enabling those charged with the duty, to settle up its affairs. In case a receiver is appointed by a court for this purpose, the existence of such corporation may be continued by the court so long as in its discretion it is necessary to suitably settle the affairs of such corporation. (Id. pp. 247, 248.) We give little weight to the contention of the petitioner that the waiver is void because executed only by Hunt and not by all seven of those who had been directors and, 2676 subsequently, under the law, trustees of the corporation. In signing the waiver, Hunt did not hold himself out as one of the trustees for the corporation. He signed as "President" and, by presumption, as one of its directors. In , the court said: When the president and secretary of the board of directors act, and it is not shown that the other directors protested or objected, the presumption may be indulged that they acquiesced. See also . No such protest or objection is shown in the case under consideration. In fact, it appears that so far as they may have been consulted at all, they concurred, or at least failed to object. The petitioner upon the witness stand was asked in direct examination: Q. Did you or didn't you consult your fellow directors? A. I do not know whether I did or not. If I had I would not have consulted over one or two if I consulted any. In view of this, the presumption of acquiescence, if such acquiescence were necessary, is strong, and were there no other considerations we might be inclined to support the2677 contention of the respondent upon this issue, even though the petitioner executed the waiver upon his own initiative and without consulting any of his former fellow directors. But those other considerations are, in our opinion, of much greater weight. The Texas statutes provide that the existence of any corporation may be continued for three years after its dissolution from whatever cause, for the purpose of enabling those charged with the duty to settle up its affairs, but there is no statutory provision for the continued existence of the corporation for any purpose whatever beyond the three-year period unless a receiver be appointed by the court for the purpose of such settlement. In every other case and under all other circumstances, it appears, we think, that the corporation is dead, at least so far as its power and therefore necessarily the power of its trustees to originate new acts or enter into new 1393 agreements of any kind is concerned. It has been so held by the courts of Texas and of other States as well, and we have found nothing to the contrary where the circumstances were as they are here. Counsel for the respondent in this case invokes the doctrine2678 of estoppel and argues that since this very footnote provides that the waiver "must be signed by such officer or officers of the corporation as are empowered under the laws of the state in which the corporation is located to sign for the corporation," the Commissioner was warranted in assuming that the waiver of June 23, 1924, was a valid document. In view of the obvious defect in the instrument, we can not concur that he was so warranted. The waiver of March 11, 1925, extending the time for assessment until December 31, 1925, not only lacks the corporate seal as required, but bears the notation: "Company long since out of business & corporate seal lost." A company may be "long since out of business" and still maintain its corporate existence, but we think that in view of the declaration that it had been long out of business and that this was the second waiver received without a seal, the Commissioner, if he were not before, was then certainly on notice of an irregularity of some kind that required immediate investigation. Such a timely investigation would inevitably have disclosed the situation, which on this point, at least, might have been saved. In any event, there is nothing2679 to indicate that the Commissioner did not know that the corporation had been legally dissolved or that he was in any wise misled by any representations of petitioner. In , the court said: It is well settled that at common law and in the federal jurisdiction a corporation which has been dissolved is as if it did not exist, and the result of the dissolution can not be distinguished from the death of a natural person in its effect (citing authorities). It follows therefore that, as the death of the natural person abates all pending litigation to which such a person is a party, dissolution of a corporation at common law, abates all litigation in which the corporation is appearing either as plaintiff or defendant. To allow actions to continue would be to continue the existence of the corporation pro hac vice. But corporations exist for specific purposes, and only by legislative act, so that if the life of the corporation is to continue even only for litigating purposes, it is necessary that there should be some statutory authority for the prolongation. 2680 At the time the consent here involved was executed, the life of the Refining Company had completely expired, and under the three-year limitation statute of the State there remained in the trustees no authority to execute a valid consent. Cf. , in which we held that a proceeding for and on behalf of a wholly dissolved corporation could not be prosecuted before this Board. 1394 We are of the opinion that the waiver signed by Hunt was invalid and therefore did not suspend the running of the statute of limitations for assessment and collection of the tax of the corporation. The statute of limitations expired in August, 1924; the tax was not assessed until June, 1925. The notice of the Commissioner's determination of petitioner's liability for the deficiency in the tax of the corporation was mailed to him August 6, 1926, more than one year after the expiration of the time for assessment against the taxpayer corporation. In view of this decision it is not necessary to pass upon the remaining issues raised by the petitioner. Reviewed by the Board. Judgment will be entered holding the deficiency here in controversy*2681 barred by the statute of limitations.PHILLIPS, SMITH, and ARUNDELL dissent on the ground that the petitioner has, by his acts, estopped himself to deny that the waiver was valid to extend the statute.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620290/	RICHARD TUFFLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. G. F. TUFFLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. S. G. TUFFLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Tuffli v. CommissionerDocket Nos. 17042, 17043, 17045.United States Board of Tax Appeals13 B.T.A. 1255; 1928 BTA LEXIS 3083; October 26, 1928, Promulgated 3083 Held, that the evidence does not sustain the petitioners' allegation that certain securities were transferred by gift by each of them to their respective wives. A. F. Schaetzle, Esq., for the petitioners. L. A. Luce, Esq., for the respondent. LANSDON 1255 The respondent asserts deficiencies in income and surtaxes for the years 1920 and 1921 against the several petitioners in the following respective amounts: Richard Tuffli, $542.98 and $752.67; G. F. Tuffli, $115.45 and $110.49; S. G. Tuffli, $292.70 and $190.16. The only issue here is whether each of the petitioners effected a valid transfer of certain securities to his wife and, as a consequence, whether in each case the income of such securities was taxable to the alleged donee. At the hearing counsel for the parties stipulated that the three proceedings should be consolidated for hearing and decision. FINDINGS OF FACT. In the taxable years each of the petitioners was a resident of the State of Missouri. Together they owned all the stock of Tuffli Brothers, a Missouri corporation, engaged in the pig iron and coke business. As profits accumulated from the operations the corporation3084 made investments in farm mortgages and notes secured by such mortgages. Each of the petitioners purchased substantial amounts of such securities from the corporation. The parties agree that all the securities here involved were negotiable commercial paper. At some date not disclosed by the record but either prior to or within the taxable years, each of the petitioners in the presence of all the others and of the wives of all three told his wife that he was 1256 giving her all the farm mortgages that he owned. There was no manual delivery of such mortgage by any of the alleged donors to his wife. All the securities in question were deposited in a safety deposit box used by the corporation. The key to such box was kept in the office of the corporation and could have been used at any time by any one of the alleged donors or donees. As interest accrued on the various farm mortgages here involved it was collected by the corporation, but the record fails to disclose the further disposition thereof. For each of the taxable years each husband and wife made a separate income-tax return. Each of the wives included in her income the interest on the securities alleged to have3085 been received by her as a gift from her husband. Upon audit of such returns the Commissioner, in each case, added the income so reported by the wife to the income reported by the husband and determined the deficiencies here in controversy. OPINION. LANSDON: The only question here is whether the petitioners completed the gift to their wives by the securities in question in such manner as to pass the title to the respective wives of both the principal and income of the property alleged to have been transferred. It is elementary that the essential elements of a gift are an intention to give, a transfer of title or delivery and an acceptance by the donee. It is stipulated that the securities here involved were negotiable commercial paper. The Uniform Negotiable Instruments Act, adopted by all the States of our Republic, provides that "A negotiable instrument may be transferred by mere delivery either actual or constructive." It is conceded that in the instant case there was no manual or actual delivery. It remains therefore, for us to determine whether there was a constructive delivery sufficient, other elements of a gift being present, to transfer ownership from the several3086 petitioners to their respective waives. The only evidence to support the petitioners' theory of delivery is that the securities in question were placed in a safe-deposit box that was used by the corporation of which alleged donors were stockholders and that the key to such box was kept in the office of the corporation and was accessible at all times to all the alleged donors and donees. This is not sufficient to accomplish transfer of ownership of the securities. In our opinion in , we said: It is essential to the validity of a gift that there be a distinct delivery of property so as to show that the donor has relinquished all dominion over it. 1257 The donor went as far in this case as he could have gone, unless he had secured the appointment of a guardian or trustee to manage the property of his daughters. In these proceedings there is not the slightest evidence that the alleged donors relinquished all or any dominion over the property in question. Each of them had access to the box in which the securities were kept and, so far as the record shows, each had the right to sell the securities at any time without consultation3087 with his wife or permission from her. In deciding a very similar controversy in ; affd. , the court said: The only question that arises in this case is whether certain bonds that belonged to Edwin Prince in his lifetime were disposed of by him by gift to his wife. It is claimed by the plaintiffs in this action, T. W. Chambers and Lockey T. Chambers, his wife (who was the wife of Edwin Prince, and after his death intermarried with T. W. Chambers), that during the lifetime of Edwin Prince he gave to her certain bonds, set out in the bill, in a safe deposit at Cincinnati. The executors and heirs of Edwin Prince contest this claim, and deny that the bonds were ever disposed of by Edwin Prince, in any manner or form, in his lifetime, and claim that they belong to the estate of Edwin Prince, to be disposed of by his executor. This is a question of a gift inter vivos. A gift of this character has been defined to be "an immediate, voluntary, and gratuitous transfer of personal property by one to another." To make this gift valid, it is essential that the transfer of the property be duly executed, for the3088 reason that, there being no consideration passing between the donor and donee, no action will lie to enforce it. A gift of this character must go into immediate and absolute effect. To make it complete, there must be an actual delivery of the subject-matter of the gift, so far as the same is capable of delivery; and, in the absence of a delivery of that character, the title to the property does not pass from the donor to the donee. Chancellor Kent says in his work (2 Comm. p. 438) that the "necessity of delivery has been maintained in every period of the English law. * . The donor must part, not only with possession, but with dominion and control, of the property." An intention to give it is not a gift, and, so long as a gift is incomplete, a court of equity will not enforce and give effect to it. This position of Chancellor Kent is sustained by a long list of authorities in this Country. Our courts seem to hold that gifts both inter vivos and causa mortis should be so complete as to deprive the donor of the future control and dominion of the property, and that in order to make same valid, it is necessary for the donee to take and retain possession until the donor's3089 death; for, if the donor once regains possession of the gift, it becomes nugatory. I have given this case much thought and reflection, and, applying the principles of law just announced, I cannot reach the conclusion that the plaintiffs in this action are entitled to relief. The evidence of various witnesses that Edwin Prince intended to give the bonds in question is not in itself sufficient. There must have been upon his part an actual delivery of the bonds to his wife in his lifetime, and she must have reduced them to possession. The evidence shows that these bonds were in a safe deposit at Cincinnati; and while she had one of the keys to the box and went there at various times with Prince, her deceased husband, in his lifetime, to clip the coupons and aided and assisted him in doing so, yet there is no evidence which tends to establish 1258 the fact that she ever had supreme control over them, or exercised dominion over them independent of her husband. He placed these bonds in the same place that they were found after his death, and it must be inferred from all the evidence in this case that he, being somewhat advanced in life, took her with him on his various3090 trips to Cincinnati for the purpose of having her take care of him and assist him in his business. Declarations upon his part, in the presence of various persons, that he intended to do something for her, or to give the bonds to her, are of themselves insufficient. A promise or a declaration unexecuted in the lifetime of the donor is insufficient to pass title to any property concerning which a decedent may have made an actual promise. I deem it unnecessary to go into an analysis of all the evidence in this case, but, looking at it in the light of what it tends to prove, I am forced to the conclusion that there is no evidence that justifies the court in decreeing the title and the possession of the bonds to the plaintiffs in this cause. For the reasons assigned, I am of opinion that the bill should be dismissed. (Italics supplied.) Some weight is ascribed to the fact that the wives had access to the key of the box in which the securities were kept, although there is no evidence that either of them ever actually used it for any purpose. In *3091 ; , the court said: Delivery of a key of a trunk containing valuable articles, such as money and government bonds, which are capable of being taken into the hand is not a valid delivery of such article. We are of the opinion that the petitioners have failed to prove either actual or constructive delivery. This is indispensable. ; ; . Having reached the conclusion that there was no delivery sufficient to pass title to the securities, it is not necessary for us to determine whether any gift was ever intended by the alleged donors or whether there was acceptance by the wives. Decision in each proceeding will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620291/	Lyle W. Mader and Twylah F. Mader v. Commissioner.Mader v. CommissionerDocket No. 1346-65.United States Tax CourtT.C. Memo 1966-176; 1966 Tax Ct. Memo LEXIS 108; 25 T.C.M. (CCH) 917; T.C.M. (RIA) 66176; July 28, 1966108 In November 1960 petitioners purchased a used automobile that had been driven about 6,400 miles. About 2 years later, in December 1962, while returning from Florida, the motor overheated. For approximately 2 months thereafter petitioner Lyle W. Mader drove the car to and from work, a distance of about 8 miles one way. About March 3, 1963, he had the car repaired at a net cost to him of $561.80. At that time the speedometer registered 42,262 miles. Held, petitioners are not entitled to deduct for the taxable year 1962 the cost of repairs as a "casualty" loss under section 165(c)(3), I.R.C. 1954. Lyle W. Mader, pro se, 17115 Old Baltimore Rd., Olney, Md. Dennis R. Powell, for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion ARUNDELL, Judge: Respondent determined a deficiency in income tax for the calendar year 1962 in the amount of $168.34. The only issue is whether the respondent erred in disallowing an alleged "casualty" loss of $561.80 deducted by petitioners on their 1962 joint income tax return. Findings of Fact Some of the facts were stipulated and such facts are incorporated herein by reference. Petitioners are husband and wife with residence at all times material hereto at 17115 Old Baltimore Road, Olney, Md. They filed their joint Federal income tax return for the taxable year 1962 with the district director of Maryland. During November 1960 petitioners purchased a 1960 model Mercedes-Benz automobile at a cost of $2,450. At the time the said automobile was purchased, it had approximately 6,400 miles registered on the speedometer. Sometime in December 1962 petitioner Lyle W. 110 Mader, hereinafter referred to as petitioner, was returning from a trip to Florida when an unusual noise came from the automobile motor, the temperature indicator went off scale, and petitioner was obliged to stop the car, while out in the country. After a short stop, and after the noise from the motor had subsided petitioner proceeded to the next town where he added water and oil to the car. Thereafter, the car "seemed to behave pretty well" so petitioner drove on to his home. Shortly thereafter petitioner took the car to McNey-Motors, Inc., in Bethesda, Md., and told them there was something wrong with the car and asked that they give it a certain "cycle check" that is scheduled for automobiles of this make. The check was performed and petitioner was informed that one cylinder of the motor had no pressure and that petitioner would have to have some repair work on it sooner or later but that it would not be necessary to have it done immediately. Petitioner then drove the car to and from work, which was a distance of about 8 miles one way. Petitioner's occupation is that of a physicist in electronics engineering. About two months later, in March 1963, petitioner took the car to McNey-Motors111 at their Washington, D.C., shop, and had it repaired at a net cost to him of $561.80. At that time, March 3, 1963, the automobile speedometer registered 42,262 miles. The mechanic who did the repair work found that the pressure oil valve stuck so that the oil did not go to a particular cylinder; that the key or pin that fastens the piston into the system came out and scored the cylinder walls; that the pin gouged a large hole in the wall and then apparently went back in place, and that as long as the pin stayed in place there was no trouble except that there was no pressure for that particular cylinder. The mechanic who did the repair work could not understand how the damage could occur, so he consulted with the Mercedes-Benz representatives and they agreed that the situation was unusual; that it should not have occurred; and further agreed to pay one-half of the cost of the damaged parts. At no time could petitioner recall having had any external force invade the engine of the automobile. Among the itemized deductions claimed by petitioners on their 1962 Federal income tax return was "Casualty losses (See attached sheet) $561.80." The attached sheet gave as an "Explanation" 112 for the claimed deduction the following: Motor damage - cause unknown $561.80 In December 1962, something occurred in the motor of my car. It made a terrible sound and over heated. This only lasted a few minutes and then got better. I took the car to the garage and they said one cylinder was bad and had no compression. They thought that a piston had a hole in it. They estimated a cost of from $600.00 to $700.00 for repairs. I could not afford to have it fixed then but did have it repaired in March. When repairs were made the mechanic said that it appeared that the pin holding the piston to the piston rod had worked out and rubbed against the side of the cylinder and then worked back into place. The car was just out of warranty period but the motor company paid 50% on parts cost. A copy of the repair bill is attached. A summary of the said repair bill, which was stipulated is as follows: New Parts: 6 items$341.108 items36.66$377.76Outside repairs (4 items)69.28Labor: R & R Engine & Overhaul Complete180.00Recondition Cyl Head60.00Ck & Repair Fuel System36.00Oil3.00Tax6.31$732.35Paid by motor company (50% of$341.10)170.55Paid by petitioner$561.80113 The respondent disallowed the claimed deduction with this explanation: The claimed loss is disallowed since you have failed to substantiate the amount of the alleged loss or that the loss was the result of a casualty. Progressive deterioration does not constitute a casualty. Ultimate Facts Petitioners did not sustain a deductible casualty loss in the taxable year 1962 within the meaning of section 165(c)(3), Internal Revenue Code of 1954, by reason of the damage to the motor of their Mercedes-Benz automobile. Opinion Petitioners contend they are entitled to deduct $561.80 as a casualty loss in the calendar year 1962 under section 165(c)(3) of the Internal Revenue Code of 1954. 1 We do not think the entire amount would be deductible in any event, but we need not explore this phase of the case for we do not believe, and have so found as an ultimate fact, that petitioners did not sustain a "casualty" loss by reason of the damage to the motor of their automobile. 114 In Ray Durden, 3 T.C. 1">3 T.C. 1, we had occasion to consider the meaning of the term "casualty" as used in the various income tax statutes. In our opinion in that case, among other things, we said: Under the doctrine of ejusdem generis, it is necessary to define the word "casualty" in connection with the words "fires, storms, shipwreck" immediately preceding it. "Casualty" has been variously defined, including "an undesigned, sudden and unexpected event" - Webster's New International Dictonary; also as "an event due to some sudden, unexpected or unusual cause" - Matheson v. Commissioner, 54 Fed. (2d) 537. The term "casualty" "excludes the progressive deterioration of property through a steadily operating cause." Fay v. Helvering, 120 Fed. (2d) 253; also, "an accident or casualty proceeds from an unknown cause or is an unusual effect of a known cause. Either may be said to occur by chance and unexpectedly." Chicago, St. Louis & New Orleans Railroad Co. v. Pullman Southern Car Co., 139 U.S. 79">139 U.S. 79. * * * However, it has been held, under section115 23(e)(3), that an automobile wreck may be a casualty in closest analogy to shipwreck. Shearer v. Anderson, 16 Fed. (2d) 995, and Regulations 103, section 19.23(e)-1, approves as a deductible item loss occasioned by damage to an automobile and resulting from the faulty driving of the taxpayer or another operating the automobile, or from the faulty driving of another automobile colliding with it. In Anderson v. Commissioner, 81 Fed. (2d) 457, it is held, under section 23(e)(3), that losses arising from ordinary highway mishaps may be deducted even though caused by the negligence of the taxpayer. * * the prime element is that of suddenness as opposed to some gradually increasing result. * * * The measure of damages is the difference between the value of the properties immediately preceding the casualty and the value immediately thereafter. * * * In a more recent case, Clinton H. Mitchell, 42 T.C. 953">42 T.C. 953, the taxpayer claimed as casualty losses "expense due to several tire blowouts." In denying the claim, we said (pp. 971-972): It is well established that the term "casualty" as used in the statute means "an accident, a mishap, some sudden invasion116 by a hostile agency; it excludes the progressive deterioration of property through a steadily operating cause." Fay v. Helvering, (C.A. 2) 120 F.2d 253">120 F. 2d 253. See also United States v. Rogers, (C.A. 9) 120 F. 2d 244; Matheson v. Commissioner, (C.A. 2) 54 F. 2d 537; Leslie C. Dodge, 25 T.C. 1022">25 T.C. 1022; and Rudolf Lewis Hoppe, 42 T.C. 820">42 T.C. 820. The only evidence presented by the petitioner on this issue is his testimony to the effect that due to moving a heavy trailer hurriedly across the country he incurred expenses which he charged to casualties, which included some expense due to several tire blowouts. In his original return he indicated that the tire blowouts were due to overloading the trailer. Accordingly, it does not appear that any loss resulting from tire blowouts was occasioned by any accident, or invasion of any hostile agency. In addition, insofar as appears from the record any such loss may have resulted from the progressive deterioration of the tires. * * In the instant case petitioners' car had not been involved in any accident or collision of any kind. Petitioner, when asked on cross-examination if he recalled117 "striking anything or having any outside force in any manner strike the engine", answered "No. There was nothing." It seems to us that what occurred in December 1962 when petitioner was returning from Florida is no different from the motor trouble many people have after they have driven their cars as long as the instant automobile had been driven. The car was two years old when petitioners acquired it and at that time it had been driven approximately 6,400 miles. At the time the repairs were made in March 1963, which was a little over 2 months after the trouble developed, the speedometer registered 42,262 miles so, since petitioner was then only driving the car to and from work, a distance of about 16 miles a day, the car must have been driven over 40,000 miles at the time of the alleged casualty. Under these circumstances, it is difficult to say that the trouble petitioner experienced while returning from Florida in December 1962 was not due to progressive deterioration rather than to a sudden external force. See Fay v. Helvering, 120 F. 2d 253 (C.A. 2, 1941), affirming 42 B.T.A. 206">42 B.T.A. 206, wherein the court said the word "casualty" "denotes an accident, a mishap, 118 some sudden invasion by a hostile agency; it excludes the progressive deterioration of property through a steadily operating cause." Accordingly, it is our conclusion that the breakdown of the motor in petitioners' automobile did not constitute a "casualty" loss within the meaning of section 165(c)(3), supra. Decision will be entered for the respondent. Footnotes1. SEC. 165. LOSSES. "(a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * "(c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - * "(3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * *"↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620293/	Barbara M. Bailey, Petitioner v. Commissioner of Internal Revenue, Respondent; C. P. Bailey and Barbara M. Bailey, Petitioners v. Commissioner of Internal Revenue, RespondentBailey v. CommissionerDocket Nos. 2299-67, 2300-67United States Tax Court52 T.C. 115; 1969 U.S. Tax Ct. LEXIS 150; April 21, 1969, Filed 150 Decisions will be entered under Rule 50. T, a bank employee, embezzled bank funds by crediting her brother's account with deposits he never made. While T never intended to spend the embezzled funds for her own personal needs, she beneficially enjoyed this income and, in effect, treated it as her own when she placed it at her brother's disposal. Held, the embezzled funds are taxable income to T. Geiger's Estate v. Commissioner, 352 F. 2d 221, affirming a Memorandum Opinion of this Court, followed. Robert O. Rogers, for the petitioners.J. Patrick McElroy, for the respondent. Tietjens, Judge. TIETJENS115 The Commissioner determined deficiencies in and additions to the income tax of the petitioners in these consolidated proceedings as follows:1 Addition toPetitionerTaxableDeficiencytax, sec.Year6653(a),I.R.C. 1954Barbara M. Bailey, docket No. 2299-671963$ 1,260.29$ 63.01196217,271.50863.58C. P. Bailey and Barbara M. Bailey,docket No. 2300-671964200.14151 Due to concessions by the parties, the only issue that remains for decision is whether petitioner Barbara M. Bailey received taxable income in 1962 and 1963 in the form of funds she embezzled from her employer. The petitioners have conceded they are liable for the additions to their tax under section 6653(a) for negligence to the extent of any deficiencies that we may determine.116 FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.Petitioners Barbara M. Bailey and C. P. Bailey (hereinafter referred to as Barbara and C. P., respectively) are husband and wife. They filed their joint income tax return for 1962 and Barbara filed her individual income tax return for 1963 with the district director of internal revenue, Jacksonville, Fla. Barbara and C. P. resided in West Palm Beach, Fla., at the time they filed their petitions herein.During 1962 and the early months of 1963, Barbara was employed in the returns department of the St. Lucie County Bank (hereinafter referred to as the bank), in Fort Pierce, Fla., in a capacity which gave her access to the records 152 of that bank. Ray Melton (hereinafter referred to as Melton), Barbara's brother, visited Barbara in her home on January 22, 1962. Melton, who had a checking account at the bank, told Barbara he needed money to cover several outstanding checks drawn on his account and to meet his current living expenses. Melton, who was married and had eight children, was unemployed. He had recently returned from Virginia where he had been a land salesman. He told Barbara that the land company in Virginia owed him commissions of between $ 7,000 and $ 10,000 which he expected to receive momentarily. Barbara explained to Melton that she would credit his account with a deposit of $ 3,000 even though he did not deposit such an amount. She did this the next day. Melton knew the circumstances surrounding this credit to his account and he consented to this arrangement. He advised Barbara the money would be repaid upon his receipt of the land commissions.Soon thereafter, Melton contacted Barbara again. He told her there was a second mortgage on his house that was past due; that this mortgage was held by one of the men he had worked for in Virginia; and that the commissions due him would not be released153 until the mortgage was satisfied. Following these discussions, on February 1, 1962, Barbara caused the making of a second fictitious deposit to Melton's account in the amount of $ 3,600, which moneys were used by Melton to satisfy the second mortgage.Later, after he obtained a job in Cape Coral as a land salesman, Melton approached Barbara about a land deal. He told her they could make sufficient moneys from this deal to cover the deposits of embezzled funds to his account. By this time, Barbara knew the Virginia land commissions were not coming through and that something had to be done to replace the moneys taken from the bank. 117 Accordingly, she agreed with Melton to make further deposits to cover withdrawals on the so-called land deal.During 1962 and 1963, Barbara caused the making of a number of fictitious deposits to Melton's account with the bank to cover checks drawn by him that would otherwise be dishonored for insufficient funds. During these periods, Melton would call Barbara, or tell her in person, about the larger checks that were coming through so that she could arrange to make funds available for honoring the checks. However, he would not advise her as154 to the smaller checks he had drawn. Barbara believed that the amounts withdrawn by Melton in this manner were used in the land deal or to cover his personal living expenses.In addition to these deposits to Melton's account, Barbara caused the making of similar deposits to the account of Thelma Melton, Melton's wife, to cover checks drawn by her that would otherwise be dishonored for insufficient funds.Barbara also caused the making of fictitious deposits to the joint account she maintained with C. P. at the bank. These deposits covered expenditures Barbara had made in making good certain of Melton's checks which had been presented and which were not covered by sufficient funds. Barbara would sometimes cash her own paycheck or her husband's paycheck which had been given to her for deposit, and use the proceeds to make good Melton's checks. Subsequently, when she was able to do so, she would make fictitious deposits to the account maintained by her and C. P. to replace the paychecks that had not been deposited.All of the fictitious deposits heretofore described were charged by Barbara, by means of false bookkeeping entries, to other accounts in the bank which she knew to be dormant. 155 The amount of the fictitious deposits made in each of the years 1962 and 1963, and the accounts to which they were erroneously credited were as follows:19621963Ray Melton, special acct$ 33,740$ 5,650Thelma Melton2,025C. P. and Barbara5,40041,1655,650At all times, Melton had knowledge of the source of the funds being used to cover the checks drawn by him. All of these funds were misappropriated from the bank by Barbara either directly for Melton's use, or to reimburse Barbara for the amounts of her own money which she had used to make good Melton's bad checks.On January 22, 1963, the bank discovered the above-described activities and terminated Barbara's employment. Subsequently, Barbara 118 and Melton were separately convicted of conspiring to commit offenses to violate 18 U.S.C. secs. 656 and 1005.The petitioners concede that the funds wrongfully misappropriated constitute taxable income; they do not concede that such income is properly taxable to Barbara. No part of the wrongfully misappropriated funds were included as income in C. P. and Barbara's joint Federal income tax return for the taxable year156 1962 or in Barbara's individual income tax return for the taxable year 1963. The Commissioner determined that Barbara and C. P. received in 1962 taxable income of $ 41,165 which they failed to report in their joint return and that Barbara received $ 5,650 in 1963 which she failed to report in her individual return for that year.OPINIONThe petitioners concede the embezzled funds -- $ 41,165 in 1962 and $ 5,650 in 1963 -- constitute taxable income in those years, i.e., at the time the fictitious deposits were made. They contend, however, that these funds are properly chargeable as income to Melton, Barbara's brother, who spent these funds and not to Barbara who embezzled them. We disagree.As we understand the facts, Melton approached Barbara and asked her either to loan or give him sufficient money to cover certain outstanding checks and to pay temporarily the living expenses of his large family at a time when he was down on his luck. Barbara, induced through considerations of blood relationship or sympathy, agreed to help him. For whatever reason, instead of advancing her own money, she decided to advance money she knew she could embezzle from her employer in the form of fictitious157 deposits to Melton's account. Melton knew of the source of the money that was being made available to him and consented to this arrangement. He did not, however, participate in any way in the actual embezzlement of any of these funds. Barbara acted alone and of her own volition in that undertaking.As the creator of the income, Barbara chose to place it at Melton's disposal. The character of all the transactions is typified in the instances where Barbara used the proceeds from her own paychecks to make good Melton's bad checks and then reimbursed herself by means of fictitious deposits to her own account. These transactions bear the trappings of a gift or personal loan on her part followed by embezzlement of funds which she converted to her own use. While the fictitious deposits to Melton's and Thelma's accounts differ in form from the above-described transaction, we think in substance they are identical, i.e., gifts by her of funds representing money she embezzled from the bank. We see no reason nor do the parties ask us to distinguish between 119 the above-described types of transactions. In all the transactions, Barbara exercised complete dominion and control over158 the embezzled funds. She beneficially enjoyed this income and, in effect, treated it as her own when she chose to place it at her brother's disposal.Barbara's exercise of control over these funds is sufficient for them to constitute income to her. Helvering v. Horst, 311 U.S. 112 (1940). In Geiger's Estate v. Commissioner, 352 F. 2d 221 (C.A. 8, 1965), affirming a Memorandum Opinion of this Court, involving similar facts, the taxpayer argued that the embezzled funds flowed directly from the bank to the depositor-beneficiaries of the fictitious deposits and did not pass through the embezzler's hands. The court replied, at pages 231-232:That may be one way to describe it. Another, equally valid, is that the funds came to * * * [the embezzler] and were passed out or made available by her to the beneficiaries. These beneficiaries were the objects of * * * [the embezzler's] bounty, not the bank's. She was the force and the fulcrum which made those benefits possible. She assumed unto herself actual command over the funds. This is enough. Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 378, 50 S. Ct. 336">50 S.Ct. 336, 74 L.Ed 916 (1930).159 We are not sympathetic with the claim that, because she may not have used the funds for personal needs, she is not to be taxed. She enjoyed benefits of a kind which obviously must have loomed large in her mind and have been important to her -- status as the beneficiary donor to good causes and favored acquaintances, a reputation as an available friend in need, the acquisition, with respect to a "loan", of the resulting obligation to her, and the like. Helvering v. Horst, supra, pp. 116-117 * *The petitioners seek to distinguish Geiger's Estate v. Commissioner, supra, on the ground that the beneficiaries of the fictitious deposits in that case, unlike Melton, were unaware of the nature of the deposits to their accounts. We do not find this difference material.We hold that the embezzled funds are taxable to petitioners.Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620295/	ESTATE OF HANS E. ROTHPLETZ, DECEASED, MICHAEL E. ROTHPLETZ, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Rothpletz v. CommissionerDocket No. 38934-84.United States Tax CourtT.C. Memo 1987-310; 1987 Tax Ct. Memo LEXIS 310; 53 T.C.M. (CCH) 1214; T.C.M. (RIA) 87310; June 24, 1987. 310 Held, Real property owned by a decedent who died in 1980 failed to qualify for special use valuation under sec. 2032A, I.R.C. 1954, because the estate tax return in which the election was made was not timely filed. Held further, reliance upon an attorney to prepare and file the estate tax return does not constitute reasonable cause for failure to timely file the return within the meaning of sec. 6651(a)(1), I.R.C. 1954. Francis E. Pisani II, for the petitioner. Joy M. Miyasaki, for the respondent. STERRETTMEMORANDUM OPINION STERRETT, Chief Judge: By notice of deficiency issued on October 9, 1984, respondent determined a deficiency in the amount of $63,691.20 in the Federal estate tax of the Estate of Hans E. Rothpletz and an addition to tax pursuant to section 6651(a)(1)1 in the amount of $14,600.57. The issues presented for our decision are (1) whether special use valuation under section 2032A may be elected on the untimely filed Federal estate tax return of a decedent who died in 1980, and (2) whether the executors' reliance upon an attorney to prepare and file the Federal estate tax return constitutes reasonable cause for late filing within the meaning of section 6651(a)(1). 311 This case was submitted with all facts fully stipulated pursuant to Rule 122. Those facts as stipulated by the parties are so found. The stipulation of facts and related exhibits are incorporated herein by this reference. Hans E. Rothpletz (hereinafter decedent) died on October 15, 1980. The executors of decedent's estate are Sonia R. Alley and Michael E. Rothpletz. At the time the petition was filed, Mr. Rothpletz resided in Lebanon, New Jersey. Pursuant to section 6075(a), the Federal estate tax return for decedent's estate was to be filed no later than July 15, 1981, 2312 9 months after decedent's death. No request for an extension of time to file the return was ever filed with respondent. The return was mailed to respondent on October 14, 1981 and was received by respondent on October 19, 1981. Thus, the return was filed untimely. Based on the filed return, on December 7, 1981, respondent assessed estate tax in the amount of $4,161.76 and an addition to tax under section 6651(a)(1) of $832.35. The estate tax was paid on October 19, 1981, with the filing of the return, and the addition to tax was paid on August 11, 1983. On the untimely filed return, the executors sought to elect the special use valuation provisions of section 2032A to value the following three items: (1) Decedent's stock in Hill and Dale Farms, Inc. was valued at $404,915. 3313 (2) Real property known as Block 51, Lot 71 in Tewksbury Township, New Jersey was valued at $200. (3) Real property known as Block 36, Lot 1 in Tewksbury Township, New Jersey was valued at $1,100. In the notice of deficiency, respondent determined that the executors could not elect special use valuation under section 2032A because the estate tax return was not timely filed. The parties agree that, if the executors' election to use the special use valuation is valid, the following special use values will apply: (1) Decedent's stock in Hill and Dale Farms, Inc. -- $552,552.40, (2) Block 51, Lot 71 in Tewksbury Township, New Jersey -- $200, and (3) Block 36, Lot 1 in Tewksbury Township, New Jersey -- $1,100. The parties further agree that, if the executors' election to use the special use valuation is invalid, the following fair market values on decedent's 314 date of death will apply: (1) Decedent's stock in Hill and Dale Farms, Inc. -- $797,677.52, (2) Block 51, Lot 71 in Tewksbury Township, New Jersey -- $80,000, and (3) Block 36, Lot 1 in Tewskbury Township, New Jersey -- $41,400. The executors retained Francis E. Pisani, II to serve as attorney for the estate. The executors relied on Mr. Pisani to prepare and file the Federal estate tax return for the decedent's estate. The executors' failure to file the return timely was due to their reliance on Mr. Pisani. We must first decide whether the estate is entitled to value certain real property under the special use provisions of section 2032A even though the election for special use valuation was not made on a timely filed Federal estate tax return.4Under section 2032A the executor of an estate is permitted to elect, for Federal estate tax purposes, an alternative method of valuing qualified real property used as a farm or in a trade or business other than farming. If the various requirements of the statute are met, the qualified real property is valued based upon its actual ("special") family farm or small business use rather than upon its highest and best use, as would normally be 315 the case under general valuation principles. 5 See generally Estate of Gunland v. Commissioner, 88 T.C. (filed June 4, 1987) (slip op. at 4); Estate of Coon v. Commissioner,81 T.C. 602">81 T.C. 602, 607-608 (1983); Estate of Cowser v. Commissioner,80 T.C. 783">80 T.C. 783, 785 (1983), affd. 736 F.2d 1168">736 F.2d 1168 (7th Cir. 1984); sec. 20.2032A-3, Estate Tax Regs. The purpose of the statutory requirements is to assure the continued use of the property for family farming or other small business purposes by reducing the estate tax burden upon such qualified property and restricting the benefits of the statute to a limited class of persons. Estate of Gardner v. Commissioner,82 T.C. 989">82 T.C. 989, 993 (1984). In this case, the only issue under section 2032A is whether the executors' election of special use valuation is valid where the decedent died on October 15, 1980 and the election 316 was made on a late filed estate tax return. As of the date of decedent's death, section 2032A(d)(1) provided as follows: (1) Election. -- The election under this section shall be made not later than the time prescribed by section 6075(a) for filing the return of tax imposed by section 2001 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe. [Emphasis added. 6317 ] Section 20.2032A-8(a)(3), Estate Tax Regs., also provided as follows: Time and manner of making election. An election under this section is made by attaching to a timely filed estate tax return the agreement described in paragraph (c)(1) of this section * . [Emphasis added.] We have held previously that, in accordance with the literal language of the statute, a timely filed return is mandatory and that there is no "reasonable cause" exception for an untimely filed return. Estate of Gardner v. Commissioner,supra at 992. 7 The estate tax return herein 318 was due to be filed no later than July 15, 1981, 9 months after decedent's death. It was specifically stipulated by the parties that a request for an extension of time to file the return was never filed. The return was not mailed until October 14, 1981, and was not received by respondent until October 19, 1981. Therefore, we hold that petitioner is not entitled to the benefits of the special use valuation provisions of section 2032A. The final issue for our decision is whether petitioner's reliance upon an attorney to prepare and file the Federal estate tax return constitutes "reasonable cause" within the meaning of section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax for the late filing of a return and provides in relevant part as follows: (a) Addition to the Tax. -- In case of failure -- (1) to file any return * * * on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required 319 to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate * . In the instant case, the decedent died on October 15, 1980 and we have noted that the Federal estate tax return was due to be filed by July 15, 1981. Sec. 6075(a). We have further noted that the return was mailed on October 14, 1981 and was received by respondent on October 19, 1981. 8320 The parties agree that the return was not timely filed and that the only reason for the late filing was that the executors relied upon an attorney to prepare and file the return. 9This situation is clearly controlled by the recent decision of the United States Supreme Court in United States v. Boyle,469 U.S. 241">469 U.S. 241 (1985). In that case the Court unanimously held that the executor's duty to file an estate tax return is nondelegable and stated: Congress has placed the burden of prompt filing on the executor, not on some agent or employee of the executor. The duty is fixed and clear; Congress intended to place upon the taxpayer an obligation to ascertain the statutory deadline, and then to meet that deadline, except in a very narrow range of situations. Engaging an attorney to assist 321 in the probate proceedings is plainly an exercise of the "ordinary business care and prudence" prescribed by the regulations * * but that does not provide an answer to the question we face here. To say that it was "reasonable" for the executor to assume that the attorney would comply with the statute may resolve the matter as between them, but not with respect to the executor's obligations under the statute. Congress has charged the executor with an unambiguous, precisely defined duty to file the return within nine months; extensions are granted fairly routinely. That the attorney, as the executor's agent, was expected to attend to the matter does not relieve the principal of his duty to comply with the statute. [Emphasis in original. 469 U.S. at 249-250.] Accordingly, we hold that petitioner's reliance on its attorney to file the Federal estate tax return herein does not constitute "reasonable cause" and petitioner is therefore liable for the addition to tax under section 6651(a)(1). See also Estate of Brandon v. Commissioner,86 T.C. 327">86 T.C. 327, 338-339 (1986). To reflect the foregoing, An appropriate order and decision under Rule 155 will be entered.10322 Footnotes. By order of the Chief Judge this case was reassigned from Judge Lawrence A. Wright↩ for decision and opinion. 1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect as of the date of decedent's death. All rule references are to the Tax Court Rules of Practice and Procedure.↩2. Although the parties stipulated that the estate tax return was due to be filed July 15, 1980 (a date 3 months prior to decedent's death), we assume this was a typographical error.3. However, a portion of the property owned by the corporation was not "qualified real property" as defined in section 2032A(b) and therefore did not qualify for special use valuation. The value of decedent's stock in the corporation, using the special use valuation to value only the "qualified real property" owned by the corporation, was $552,552.40. On or about November 1983 the executors consented to the assessment and collection of a deficiency in estate tax of $33,084.89 based in part on the increase in the value of decedent's stock in the corporation from $404,915 to $552,552.40 and also consented to the assessment and collection of an addition to tax under sec. 6651(a)(1)↩ of $4,754.65. These amounts were assessed on March 26, 1984. The executors elected to pay the deficiency in estate tax of $33,084.99 as provided by sec. 6166.4. Despite the Court's granting of several extensions of time, petitioner failed to file a brief herein. ↩5. For Federal estate tax purposes, the value of property includable in a decedent's gross estate is generally its fair market value as of the date of death or the alternate valuation date. Secs. 2031, 2032; sec. 20.2031-1(b), Estate Tax Regs.↩6. Sec. 421(j)(3) of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. No. 97-34, 95 Stat. 172, 313, amended sec. 2032(A)(d)(1) to allow the election for special use valuation to be made on the first estate tax return, whether or not the return is filed timely. However, as provided in sec. 421(k)(1) of ERTA, 95 Stat. 313, this amendment applies only to estates of decedents dying after Dec. 31, 1981. This Court has noted that this amendment applies only to estates of decedents dying after said date. See, e.g., Estate of Williams v. Commissioner,T.C. Memo. 1984-178; Estate of Young v. Commissioner,T.C. Memo. 1983-686. In addition, the transitional rules under sec. 421(k)(5) of ERTA, 95 Stat. 314, do not extend the election period in this case. The transitional rules would have extended the election period in this case only if ERTA's retroactive amendments to sec. 2032A rendered the estate eligible to make the election and if the Federal estate tax return had been timely filed. In other words, Congress gave those estates which qualified for the first time under the amendment a reasonable time in which to make the election. The amendment did not, however, reopen the election period for an estate that qualified under the older, more restrictive, requirements but had failed to make a timely election. Estate of McCoy v. Commissioner,809 F.2d 333">809 F.2d 333, 338 (6th Cir. 1987), affg. T.C. Memo. 1985-509↩.7. See also Estate of Williams v. Commissioner,T.C. Memo. 1984-178; Estate of Boyd v. Commissioner,T.C. Memo. 1983-316↩.8. We agree with respondent that for purposes of computing the addition to tax under sec. 6651(a)(1), the date the return was received by respondent, Oct. 19, 1981, should be treated as the date of filing the return. The timely mailing equals timely filing rule of sec. 7502 applies only if the postmark date falls on or before the prescribed date for filing. Here there is no evidence as to the postmark date. However, because the stipulated date of mailing the return, Oct. 14, 1981, is subsequent to the due date of the return, the special rules of sec. 7502 are inapplicable and the return is considered to have been filed on Oct. 19, 1981, the stipulated date of receipt by respondent. See Miller v. United States,784 F.2d 728">784 F.2d 728, 730-731 (6th Cir. 1986); Kahle v. Commissioner,↩ 88 T.C. (filed April 28, 1987).9. There is no evidence that the executors were ill or incompetent or that they relied on the advice of an attorney that an estate tax return need not be filed. See, e.g., Estate of Paxton v. Commissioner,86 T.C. 785">86 T.C. 785, 819-820↩ (1986).10. The payment of estate taxes has been deferred pursuant to sec. 6166. Therefore, in order to allow the executors the right to claim the interest accruing on the installment payments as an expense of administration under sec. 2053, the entry of our decision herein will be postponed until the final installment of tax is due or paid, whichever occurs earlier. See Estate of Bailly v. Commissioner,81 T.C. 246">81 T.C. 246 (1983), modified 81 T.C. 949">81 T.C. 949 (1983); Estate of Hoover v. Commissioner,T.C. Memo. 1985-183↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620296/	MATTHEW R. AND JILL WHITE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWhite v. CommissionerDocket No. 26101-89United States Tax CourtT.C. Memo 1991-552; 1991 Tax Ct. Memo LEXIS 600; 62 T.C.M. (CCH) 1181; T.C.M. (RIA) 91552; November 5, 1991, Filed 600 Decision will be entered under Rule 155. L. S. McCullough, Jr. and Craig F. McCullough, for the petitioners. Joel A. Lopata, for the respondent. KORNER, Judge. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION By statutory notice dated August 2, 1989, respondent determined the following deficiencies in and additions to petitioners' Federal income tax: Additions to TaxYearDeficiencySec. 6651(a)(1) 1Sec. 66611982$ 22,017$ 2,827$ 5,504198362,618 -- 15,655198424,075 -- 6,019198634,927 -- 8,732Following concessions, 2 the issues for our decision are: (1) Whether respondent is precluded from assessing a deficiency against petitioners without first conducting a partnership level audit; (2) whether respondent erred in determining that amounts paid by601 a partnership as construction costs on a home represented cash distributions to petitioners pursuant to section 731(a); (3) whether the statute of limitations bars respondent from assessing a deficiency for tax years 1982 or 1984; (4) whether respondent erred in determining that petitioners are liable for additions to tax for substantial understatement of income tax liability for each of the years at issue; and (5) whether respondent erred in determining that petitioners are liable for an addition to tax for failure to timely file their 1982 tax return. 602 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners Matthew R. and Jill White, husband and wife, resided in Salt Lake City, Utah, when they filed their petition herein. Petitioners timely filed joint Federal income tax returns for calendar years 1983, 1984, and 1986. Their 1982 joint tax return was filed on October 20, 1983, which was beyond the due date of the return plus any extensions. In 1979, petitioners purchased a parcel of undeveloped real property located at 5136 Haven Lane 3 in Salt Lake City. Legal title to the property was held by a trust, but for purposes of this case, the parties have stipulated that the trust should be disregarded and that petitioners should be treated as jointly owning any interest in the property held by the trust. On February603 19, 1981, the M & J Investment Company (the partnership) 4 was formed as a limited partnership pursuant to the laws of the State of Utah. Petitioners were the general partners and each held a 5-percent interest in this family partnership. Through Jeffery Thomas as custodian under the Utah Gifts to Minors Act, petitioners' four children were the limited partners and together held the other 90-percent interest. The partnership was initially capitalized with $ 26,000. Both business and personal assets were subsequently acquired by the partnership, either directly or through contributions made by petitioners. The partnership started operations sometime in 1982, and its assets ultimately included a small stock transfer agency, securities, boats, a family cabin, and snowmobiles. In 1982, construction was begun on a residential home and other improvements upon the vacant Haven Lane property. Construction took several years and the604 total cost of the home, including the cost of the real property, was in excess of $ 850,000. Approximately 59 percent of the construction costs were paid by the partnership while the remaining costs were paid by petitioners directly. The partnership paid its part of the construction costs directly to the various contractors. On or about August 5, 1983, petitioners borrowed $ 300,000 from Zions First National Bank (the bank) to finance a portion of the construction costs paid by them. To secure that loan, petitioners, in their individual capacities, granted the bank a security interest in the entire Haven Lane property by trust deed. As a result, the bank understood that it had a first mortgage on the property. Petitioners, in refinancing the mortgage, executed two further trust deeds in favor of the bank on November 19, 1987, and August 30, 1989. Both of these trust deeds were also executed by petitioners in their individual capacities. 5605 In December 1983, a warranty deed was prepared which purported to convey an interest in the property from petitioners to the partnership. The deed was executed; but it contained no legal description of the property, was not acknowledged, and was not recorded. In December 1989, a quitclaim deed was prepared which conveyed a 59-percent interest in the property to the partnership. On its 1982 partnership return, the partnership reported that its assets included an investment in real estate of $ 120,221. The parties agree that this figure represents the amount paid by the partnership in 1982 on construction costs. The partnership's 1983 and 1984 original returns did not report the partnership as owning any real estate. Instead, certain amounts were reported as distributions to petitioners, and the parties agree that the amount of the distribution for 1983 also includes the $ 120,221 expended in 1982. The partnership's amended 1983 and 1984 returns, as well as its 1985 and 1986 returns, all filed after respondent's audit began, reflect that the partnership's assets included real estate assets in the amounts expended as construction costs during those years. In amending the 1983606 and 1984 returns, the partnership reported that it distributed the same amounts as reported in the original return, but reported that there were contributions to capital in those years equal to the construction costs reported as distributed. Petitioners and their children moved into the home in 1983 and lived there throughout the remaining years at issue. No lease agreement existed between petitioners and the partnership, and no rent payments were ever made to the partnership. Petitioners deducted in full the amounts paid as real estate taxes on their 1982 through 1986 individual tax returns. Respondent determined that the amounts expended by the partnership as construction costs were not expended to acquire a partnership asset. Rather, he determined that those amounts constituted cash distributions to petitioners pursuant to section 731(a), resulting in unreported capital gains in the following amounts: 6YearAmount1982$ 48,3981983120,352198447,172198678,567Apparently due to mathematical errors in the partnership's determination of petitioners' bases in the partnership, the parties now stipulate that if the amounts paid by the partnership as construction607 costs are determined to be taxable under section 731(a), the following distributions will result in the following unreported capital gains: Unreported CapitalYearDistributionGain1982$ 109,718$ 43,8871983157,83363,1331984137,59055,0361986212,66585,066Respondent also determined that petitioners were liable for additions to tax for substantial understatement of income tax liability for each of the years at issue under section 6661, and for failure to timely file their 1982 tax return under section 6651(a)(1). OPINION 1. Applicability of TEFRAThe first issue for decision is whether respondent is barred from assessing a tax against petitioners in the absence of partnership level proceedings. 608 Sections 6221 through 6233 provide for unified partnership level audit and litigation procedures. Unless otherwise excepted, the tax treatment of any partnership item is determined at the partnership level. Sec. 6221. Petitioners claim that since respondent has not conducted a partnership level audit, he is precluded from adjusting items reported consistently by them on their individual tax returns. Respondent, on the other hand, argues that the partnership is excepted from the unified procedures because it is a "small partnership" as defined in section 6231(a)(1)(B), and no election was made to have the unified procedures apply. See sec. 6231(a)(1)(B)(ii). 7609 To fall within the small partnership exception, the partnership must have, inter alia, 10 or fewer partners each of whom is a natural person or an estate. Sec. 6231(a)(1)(B)(i)(I). Consequently, the exception is not applicable if any partner in a partnership is a "pass-thru partner" other than an estate. Sec. 301.6231(a)(1)-1T(a)(2), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6789 (Mar. 5, 1987). A "pass-thru partner" is defined as "a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership with respect to which proceedings under this subchapter are conducted." Sec. 6231(a)(9) (emphasis added). In the instant matter, the partnership agreement was executed by petitioners, as general partners, and by Jeffery Thomas "as Custodian under the Utah Gift to Minors Act for" each of petitioners' children, as limited partners. At issue, then, is whether the definition of a "pass-thru partner" encompasses a custodian. Utah law provides that the children are indefeasibly vested with legal title in their limited partnership interests. Utah Code Ann. sec. 75-5-603(1) (1978). Thus, 610 the children were partners while the custodian was not. Sec. 6231(a)(2). In contrast, each person specifically defined as a "pass-thru partner" in section 6231(a)(9) would hold legal title to the partnership interest. We believe this distinction is determinative and excepts a custodian from the definition of a "pass-thru partner." We hold that the partnership in the instant matter falls within the small partnership exception to the unified audit and litigation procedures. See sec. 6231(a)(1)(B). Since petitioners presented no evidence that an election was made to have the unified procedures apply to any of the years before us, we reject their argument that respondent is prohibited from making an assessment without first auditing the partnership. See sec. 6231(a)(1)(B)(ii); Rule 142(a). 2. Section 731(a) Distributions?The second issue for decision is whether respondent erred in determining that the amounts paid by the partnership as construction costs on the Haven Lane property constituted cash distributions to petitioners which generated capital gains pursuant to section 731(a). Respondent's determination in his notice of deficiency is presumed correct and petitioners611 bear the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933). Initially, petitioners claim that the partnership acquired an undivided interest in the property when it paid 59 percent of the construction costs. Although title to the property was in their names, petitioners testified that they intended for the partnership to acquire this interest. In support, they cite Utah law and the partnership agreement, which both permitted record title to partnership property to be held in a general partner's name. We disagree with petitioners' contentions. Prior to construction, the property was held by petitioners alone. Petitioners do not claim the partnership acquired merely an interest in the improvements; they claim it acquired a 59-percent interest in the entire property. Consequently, petitioners had to relinquish part of their beneficial interest in the property in order for the partnership to acquire its alleged interest. 8Utah Code Ann. sec. 57-1-1(3) (1990) (generally, real property includes improvements thereon). The circumstantial evidence in this case, however, indicates that petitioners considered the entire property 612 a personal asset rather than an asset owned in part by them and in part by the partnership. On three separate occasions, petitioners, in their individual capacities (or as trustees), executed trust deeds purporting to transfer a security interest in the entire property to the bank in order to obtain (or refinance) a personal loan. They also deducted the full amounts paid as real estate taxes on their individual tax returns. Further, if the partnership had in fact provided them with housing, petitioners did not pay rent to the partnership for the use of that property, nor did they include in income the monetary equivalent of the benefit they would have received. 9613 Petitioners disagree with the above analysis and cite Utah law which presumes, unless the contrary intention appears, that property acquired with partnership funds is partnership property. See Utah Code Ann. sec. 48-1-5 (1989). Petitioners' argument, however, assumes that someone, presumably the partnership, "acquired" a legal interest in the property when the partnership paid construction costs. As noted above, the only way the partnership could have acquired property was if petitioners had relinquished an interest in the property. They have not persuaded us they did so. Rule 142(a). Petitioners next argue that even if the payments of construction costs were distributions by the partnership to petitioners, the distributions would not be taxable under section 731(a) because they were not distributions of money. Petitioners claim that since the partnership paid the construction costs directly to the contractors, rather than to petitioners, they were nontaxable distributions. Section 731(a)(1), in part, provides: In the case of a distribution by a partnership to a partner -- (1) gain shall not be recognized to such partner, except to the extent that any money distributed614 exceeds the adjusted basis of such partner's interest * * [Emphasis added.]As noted above, the partnership did not obtain an interest in the property. Thus, the only distributions made by the partnership in this case were of money. If petitioners are arguing that a partner must actually receive cash for a distribution to be taxable, their argument finds no support in the statute. On the contrary, section 731(a)(1) contemplates constructive money distributions. See, e.g., sec. 752(b) (reduction in partner's liabilities by reason of a partnership's assumption of those liabilities is a cash distribution). Petitioners have failed to persuade us that respondent erred in determining that the cash payments made on their behalf were taxable distributions under section 731(a). Respondent's determination of unreported capital gains for each of the years at issue, as adjusted by stipulation, is therefore sustained. 3. Statute of LimitationsThe third issue is whether the statute of limitations prevents respondent from making an assessment for tax years 1982 and 1984. 10 Generally, respondent must make an assessment within 3 years after the date on which a taxpayer files615 his return. Sec. 6501(a). However, for purposes of an income tax return, section 6501(e)(1)(A) provides, inter alia, that: If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. For purposes of this subparagraph -- * * (ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.Respondent bears the burden of showing that the extended statute of limitations applies, Reis v. Commissioner, 1 T.C. 9">1 T.C. 9, 13 (1942),616 affd. 142 F.2d 900">142 F.2d 900 (6th Cir. 1944), but the statute "must receive strict construction in [his] favor." E. I. Dupont de Nemours & Co. v. Davis, 264 U.S. 456">264 U.S. 456, 462, 68 L. Ed. 788">68 L. Ed. 788, 44 S. Ct. 364">44 S. Ct. 364 (1924); Thoburn v. Commissioner, 95 T.C. 132">95 T.C. 132, 146-147 (1990). Initially, we consider whether petitioners' 1982 and 1984 returns omitted in excess of 25 percent of the amounts of gross income stated in those returns. Respondent argues that the full amount of the distributions from the partnership to petitioners must be considered when determining the amount of gross income omitted from a return. Petitioners contend that only 40 percent of the distributions, the amount of unreported capital gains, should be considered when making this determination. Petitioners' contention is without merit. The computation under section 6501(e) requires consideration of the full 100 percent they received as capital gains. Burbage v. Commissioner, 82 T.C. 546">82 T.C. 546, 558 (1984), affd. 774 F.2d 644">774 F.2d 644 (4th Cir. 1985); Roschuni v. Commissioner, 44 T.C. 80">44 T.C. 80, 83 (1965). Gross income includes the entire amount received by a taxpayer as capital617 gains. Sec. 61. Section 1202(a) merely provides a deduction from gross income of 60 percent of net capital gains. The unreported income in each of the years 1982 and 1984 was more than 25 percent of the reported gross income. We next consider respondent's claim that petitioners' returns did not provide adequate disclosure of the omitted distributions. See sec. 6501(e)(1)(A)(ii). Petitioners argue that sufficient disclosure was provided when their individual returns are read in conjunction with the partnership's returns. Whether a taxpayer's returns have provided adequate disclosure for purposes of section 6501(e) is a question of fact. Rutland v. Commissioner, 89 T.C. 1137">89 T.C. 1137, 1152 (1987). In making this finding, partnership returns are considered together with individual returns and are treated as part of them. Rose v. Commissioner, 24 T.C. 755">24 T.C. 755, 769 (1955). Adequate disclosure is not provided where "the return on its face provides no clue to the existence of the omitted item." Colony, Inc. v. Commissioner, 357 U.S. 28">357 U.S. 28, 36, 2 L. Ed. 2d 1119">2 L. Ed. 2d 1119, 78 S. Ct. 1033">78 S. Ct. 1033 (1958), revg. 244 F.2d 75">244 F.2d 75 (6th Cir. 1957), affg. 26 T.C. 30">26 T.C. 30 (1956).618 It means providing more than "simply a 'clue' which would be sufficient to intrigue a Sherlock Holmes," but does not rise to the level of requiring "a detailed revelation of each and every underlying fact." George Edward Quick Trust v. Commissioner, 54 T.C. 1336">54 T.C. 1336, 1347 (1970), affd. 444 F.2d 90">444 F.2d 90 (8th Cir. 1971). The partnership's 1982 tax return reported that it had real estate investment assets of $ 120,221, while its original 1984 return did not report any real estate assets. As reported in 1982, it appeared that the partnership acquired real estate assets from a third party. However, if petitioners had truly intended for the partnership to own an interest in the property in the manner claimed, their individual returns should have reflected income from the free use of that property. Further, the partnership would have reported a deduction for part of the real estate taxes paid, since petitioner husband testified that the partnership paid part of those taxes. In fact, petitioners' 1982 and 1984 joint returns did not disclose any distributions to them with respect to the property. Based on the facts and circumstances, we hold that petitioners' 619 1982 and 1984 returns did not provide sufficient notice for purposes of section 6501(e)(1)(A)(ii) because those returns failed to disclose the omitted items. We therefore hold that respondent is not barred by the statute of limitations from making an assessment for 1982 or 1984. 4. Section 6661 Additions to TaxThe next issue for decision is whether petitioners are liable for additions to tax for substantial understatement of income tax pursuant to section 6661(a). An understatement is substantial if it exceeds the greater of $ 5,000 or 10 percent of the amount required to be shown on the return. Sec. 6661(b)(1)(A). The amount of the understatement is reduced by the portion of the understatement attributable to an item for which the taxpayer is able to show that there is substantial authority for the tax position taken, or attributable to an item for which the taxpayer adequately disclosed the relevant facts affecting the item's tax treatment in the return or in a statement attached to the return. Sec. 6661(b)(2)(B). Petitioners bear the burden of proof with respect to this issue. Rule 142(a). For the same reasons noted in supra issue 3, with respect to section620 6501(e), petitioners have failed to persuade us that they made adequate disclosure for purposes of section 6661. Furthermore, they have failed to persuade us that they had substantial authority for the positions they took with regard to the distributions. We agree with petitioners' allegations that the partnership "could" hold property, even in a general partner's name. However, we are not persuaded that petitioners had substantial authority for the position they took when the evidence so clearly shows that the partnership did not so hold the property at issue. Respondent's determination of additions to tax pursuant to section 6661 for each of the years at issue is sustained. 5. Failure To FileThe final issue is whether petitioners are liable for an addition to tax pursuant to section 6651(a)(1) for failing to timely file their 1982 tax return. Section 6651(a)(1) is not applicable if the untimely filing was due to reasonable cause and not willful neglect. Petitioners bear the burden of proof as to this issue. Rule 142(a). At trial, petitioner husband testified that the return was filed late because petitioners' accountant had been unable to accumulate all the information621 necessary to file the return. No explanation was given concerning why the information could not have been accumulated earlier, or why no attempt was apparently made to secure an extension of time for filing. Petitioners have failed to persuade us that they had "reasonable" cause for not filing their return on time. Rule 142(a). We therefore sustain respondent's determination on this issue. Due to concessions by the parties, Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. Apparently due to errors in reporting petitioners' bases in a partnership, discovered subsequent to the issuance of the statutory notice, the parties stipulate that a Rule 155 computation will be required regardless of the outcome of this Opinion. Additionally, in their petition, petitioners claimed that respondent's determination was arbitrary. However, they did not address this issue on brief; we therefore deem it abandoned. Wilcox v. Commissioner, 848 F.2d 1007">848 F.2d 1007, 1008↩ n. 2 (9th Cir. 1988), affg. a Memorandum Opinion of this Court.3. The record also refers to this property as 5136 Cottonwood Lane; the parties stipulate that this is the same parcel of property.↩4. The partnership is also referred to in the record as the J & M Investment Company.↩5. These two deeds were actually executed by petitioners in their capacity as trustees of the trust, but see supra↩ regarding the ownership of the property by petitioners.6. Respondent's determination resulted in downward adjustments in petitioners' bases in the partnership. Consequently, respondent also determined that cash distributions not involved in the building of the house, which petitioners had reported to be nontaxable, were in fact taxable.↩7. Sec. 6231(a)(1), in part, provides: (B) EXCEPTION FOR SMALL PARTNERSHIPS. -- (i) In General. -- The term "partnership" shall not include any partnership if -- (I) such partnership has 10 or fewer partners each of whom is a natural person (other than a nonresident alien) or an estate, and (II) each partner's share of each partnership item is the same as his share of every other item. For purposes of the preceding sentence, a husband and wife (and their estates) shall be treated as 1 partner. (ii) Election To Have Subchapter Apply. -- A partnership (within the meaning of subparagraph (A)) may for any taxable year elect to have clause (i) not apply. Such election shall apply for such taxable year and all subsequent taxable years unless revoked with the consent of the Secretary.↩8. Both parties cite the Utah statute of frauds and claim that the 1983 warranty deed supports their argument concerning whether the partnership acquired an interest in the property. However, the Utah statute of frauds does not prevent a party from proving the true nature of an agreement when that is at issue, rather than enforceability. Colonial Leasing Co. v. Larsen Bros. Construction, 731 P.2d 483">731 P.2d 483↩ (Utah 1986). In addition, as we have found, the deed was neither acknowledged or recorded, and contained no description of the property. It was of questionable legal efficacy to convey title. 9. Petitioners argue that no rent was paid because all the partners benefitted from the arrangement. They fail to explain, however, how petitioners' children could have benefitted if partnership income was used to discharge their parents' support obligation to provide housing. That would obviously give rise to taxable income attributable to petitioners. Cf. Helvering v. Stokes, 296 U.S. 551">296 U.S. 551, 80 L. Ed. 389">80 L. Ed. 389, 56 S. Ct. 308">56 S. Ct. 308↩ (1935).10. The statute of limitations for 1983 was extended by agreement.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620300/	ROBERT J. RECIO AND LINDA BAILEY-RECIO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentRecio v. CommissionerDocket No. 29628-89United States Tax CourtT.C. Memo 1991-215; 1991 Tax Ct. Memo LEXIS 238; 61 T.C.M. (CCH) 2626; T.C.M. (RIA) 91215; May 16, 1991, Filed 238 Decision will be entered for the respondent. Robert J. Recio and Linda Bailey-Recio, pro se. Carmino J. Santaniello, for the respondent. POWELL, Special Trial Judge. POWELLMEMORANDUM OPINION This case was assigned and heard pursuant to section 7443A(b)(3) and Rule 180 et seq. 1Respondent determined a deficiency in petitioners' joint Federal income tax for 1985 in the amount of $ 2,093. Following a concession by petitioners, the issue for decision is whether petitioners may defer the recognition of gain realized on the sale of their principal residence under section 1033. Petitioners resided in Brookfield, Connecticut, at the time they filed their petition in this case. The case was submitted to the Court on a full stipulation of facts. On July 1, 1982, petitioners acquired their principal residence located at 4239 Pine Tree Road, Monroe, Connecticut (Monroe property), for the purchase price of $ 67,000. Petitioners financed the acquisition of the property through a mortgage in the amount of $ 60,300 from the People's Saving Bank-Bridgeport. On April 8, 1982, petitioner Robert J. Recio obtained a Master Card through Westport Bank. On June 30, 1982, petitioners borrowed $ 8,000 from the Westport Bank and Trust Company (Westport Bank). This was an unsecured demand loan with interest payable at an annual rate of 17 percent. Subsequently, petitioners and the Westport Bank informally agreed that the loan would not be called while monthly payments were current. On November 26, 1982, petitioner Robert J. Recio borrowed $ 7,000 from Westport Bank to finance the purchase of a 1969 Porsche automobile. In September of 1984, Westport Bank made demand for immediate payment of all outstanding obligations under the Demand Unsecured Note, Promissory Loan and Security Agreement, and Master Card Agreement. Although petitioners were not in arrears under the Demand Unsecured Note, payments under the Promissory Loan and Master Card Agreement were slightly past due at that time. Petitioners were in the process240 of refinancing their indebtedness at the People's Saving Bank at the time Westport Bank made its demand for payment. By October of 1984, petitioners' total debt to Westport Bank exceeded $ 14,000. On October 17, 1984, Westport Bank commenced legal proceedings against petitioners to recover the unpaid amounts by obtaining a prejudgment attachment in the Monroe property. Westport Bank also informed petitioners that it would foreclosure against the Monroe property if petitioners did not make immediate steps to sell the property. On November 2, 1984, the Superior Court granted the application by Westport Bank for prejudgment remedy. As a result of Westport Bank's collection activities, petitioners were unable to refinance their indebtedness to Westport Bank. Westport Bank never actually commenced foreclosure proceedings. On March 6, 1985, petitioners, under the threat of foreclosure by Westport Bank, sold the Monroe property for the sales price of $ 90,000. Petitioners used a portion of the proceeds to satisfy their liability of $ 14,504 to the Westport Bank. On April 26, 1985, petitioners purchased a new home at 25 Tel Road, Bennington, Vermont for the purchase price of $ 63,990. 241 Petitioners used a portion the proceeds from the sale of the Monroe property for the down payment on the new residence. On Form 2119 attached to their 1985 return, petitioners reported a gain on the sale of the Monroe property in the amount of $ 4,985.41, which they alleged to be deferred under section 1033 as an involuntary conversion. By notice of deficiency dated September 19, 1989, respondent determined petitioners recognized a taxable gain on the sale of the Monroe property in the amount of $ 6,425. Section 1033(a) provides that if property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, no gain or loss shall be recognized. Petitioners' first argument is that the prejudgment attachment by Westport Bank constitutes a "seizure" of the property within the meaning of section 1033 and therefore the gain can be deferred under section 1033. The Court notes that neither party has cited a definition of "seizure" in the legislative history of section 1033 or its predecessors. 242 Likewise, the Court's research has not uncovered any legislative guidance on this issue. The Court, however, notes that the term "seizure," as used in the context of section 1033, is generally used as a synonym for "condemnation," i.e., a public taking. See Wheeler v. Commissioner, 58 T.C. 459 (1972); Weil Inc. v. Commissioner, 150 F.2d 950 (2d Cir. 1945); Rev. Rul. 54-594, 2 C.B. 10">1954-2 C.B. 10. Here, the action was taken by a private party and thus would not be a seizure as generally used in this context. Petitioners rely upon Pinsky v. Duncan, 898 F.2d 852">898 F.2d 852 (2d Cir. 1990), as support for their position that a prejudgment attachment is a seizure. In Pinsky v. Duncan, supra, the United States Court of Appeals for the Second Circuit addressed the issue whether Connecticut's Prejudgment Remedy Statute, Conn. Gen. Stat. sec. 52- 278e(a) (1), violated the due process clause of the 14th amendment. The Court first described a prejudgment attachment as "an extraordinary prejudgment remedy that enables a plaintiff to secure a contingent lien on defendant's property at the inception 243 of a lawsuit." Pinsky v. Duncan, supra at 853. The Court then stated that "although an attachment of real estate does not deprive the landowner of the use and possession of his property, and thus does not amount to a 'seizure' in the literal sense, it nevertheless has a significant impact on the owner's ability to exercise the full scope of his property rights." Pinsky v. Duncan, supra at 854. The Court further noted that "Given a particularly unlucky set of circumstances, even a temporary attachment can lead to foreclosure proceedings against the homeowner." Pinsky v. Duncan, supra at 856Petitioners argue that, based upon this language, a prejudgment attachment constitutes a 'seizure' within the meaning of section 1033. We disagree. The Second Circuit explicitly stated that an attachment of real estate is not a seizure but is, rather, a restriction on the owner's ability to exercise the full scope of his property rights. Section 1033 operates only if a "seizure" has occurred; a restriction on the owner's ability to exercise the full scope of his property rights is not sufficient to invoke section 1033. It is well 244 established that a foreclosure or a threat of foreclosure is not an involuntary conversion within the meaning of section 1033. Cooperative Publishing Co. v. Commissioner, 115 F.2d 1017">115 F.2d 1017 (9th Cir. 1940), revq. on other grounds, 466">40 B.T.A. 466 (1939). 2 It follows that if the actual foreclosure on property is not a seizure within the meaning of section 1033, a lesser restriction on the property rights of the owner which only may lead to foreclosure is not a seizure.Petitioners' second argument is that the repayment of a loan is not income to the borrower and, therefore, they did not realize income when they repaid their loans. While petitioners' argument may be correct, it is non sequitur here. Respondent based his determination on petitioner's gain resulting from the sale of the house, not on the repayment of the loans. Gain on the sale of property245 is income to the seller. Secs. 61(a)(3) and 1001. The fact that the funds were used to repay a loan is, in this case, irrelevant. Petitioners' final argument is that respondent is estopped from rejecting petitioners' claim that the gain on the sale of the house can be deferred under section 1033. Petitioners assert that had respondent informed them that their claim under section 1033 would be denied, they would have increased their investment in their new home. This would have enabled them to defer their gain under section 1034, which allows taxpayers to rollover their gain on the sale of their principal residence. It is well established that the estoppel doctrine should be applied against respondent with the utmost caution and restraint. Schuster v. Commissioner, 312 F.2d 311">312 F.2d 311 (9th Cir. 1962); Boulez v. Commissioner, 76 T.C. 209">76 T.C. 209, 214-215 (1981), affd. 258 U.S. App. D.C. 90">258 U.S. App. D.C. 90, 810 F.2d 209">810 F.2d 209 (D.C. Cir. 1987); Estate of Emerson v. Commissioner, 67 T.C. 612">67 T.C. 612, 617 (1977); Hudock v. Commissioner, 65 T.C. 351">65 T.C. 351 (1975). The essential elements of estoppel are (1) there must be a false representation or wrongful misleading246 silence; (2) the error must originate in a statement of fact and not in an opinion or statement of law; (3) the person claiming the benefits of estoppel must be ignorant of the true facts; and (4) he must be adversely affected by the acts or statements of the person against whom an estoppel is claimed. Lignos v. Commissioner, 439 F.2d 1365">439 F.2d 1365, 1368 (2d Cir. 1971); Estate of Emerson v. Commissioner, supra at 617-618. Petitioners have not satisfied a single element of their claim to equitable estoppel. First, petitioners' statement that respondent's silence was wrongful and misleading is conclusory. While respondent did not question petitioners' claim for two years, his silence was neither wrongful nor misleading. The Court perceives no deceit in respondent's silence. Second, equitable estoppel applies only if one party misrepresents facts to the other party. Whether section 1033 applies to a given set of facts is an issue of law, not an issue of fact. Accordingly, respondent could not have made a factual misrepresentation to petitioners and the second element is not satisfied. Third, petitioners were not ignorant of the true facts of the247 case. On the contrary, the facts of this case were uniquely in the hands of petitioners. Respondent did not have access to these facts until after the audit. Thus, the third element is not satisfied. Fourth, petitioners have not shown that they were adversely affected by respondent's silence. The Court will not speculate as to what petitioners would have done had respondent challenged the claimed deferral earlier. Thus, the fourth element is not satisfied. Based on the foregoing, we sustain respondent's determination in this case. Accordingly,Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code, as amended and as in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Johnson v. Commissioner, T.C. Memo 1983-46">T.C. Memo 1983-46; Woolf v. Commissioner, T.C. Memo 1981-286">T.C. Memo 1981-286↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620301/	WILLIAM G. WOHNER and BONNIE J. WOHNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. MARLIN K. KITTLE and MYRTLE J. KITTLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Wohner v. CommissionerDocket Nos. 5498-71, 6154-71.United States Tax CourtT.C. Memo 1972-237; 1972 Tax Ct. Memo LEXIS 20; 31 T.C.M. (CCH) 1166; T.C.M. (RIA) 72237; November 28, 1972, Filed Gilbert Hale Nutt, for the petitioners in docket No. 5498-71. Marlin K. Kittle, pro se. Philip G. 21 Owens, for the respondent. BRUCE MEMORANDUM FINDINGS OF FACT AND OPINION BRUCE, Judge: Respondent determined a deficiency in the 1968 income tax of petitioners William G. Wohner and Bonnie J. Wohner in the amount of $347.60. Respondent also determined a deficiency in the 1968 income tax of Marlin K. Kittle and Myrtle J. Kittle in the amount of $330.07. These two cases were consolidated on a joint motion by all of the parties because of their common questions. The question we decide is whether the Wohners or the Kittles are entitled to three dependency exemption deductions. FINDINGS OF FACT Some of the facts have been stipulated and the stipulations of facts, together with the exhibits attached thereto, are incorporated by reference. Petitioners William G. and Bonnie J. Wohner were, during the taxable year involved, husband and wife. They filed a joint income tax return for the year 1968 with the district director of internal revenue, Louisville, Kentucky. They kept their records and prepared their income tax return on the cash basis of accounting. At the time their petition in this proceeding was filed, the Wohners resided in Pewee Valley, Kentucky. Petitioners22 Marlin K. and Myrtle J. Kittle were also, during 1968, husband and wife. They filed a joint income tax return for the year 1968 with the district director of internal revenue, Louisville, Kentucky. They kept their records and prepared their income tax return on the cash basis of accounting. At the time their petition was filed, the Kittles resided in Louisville, Kentucky. Prior to 1962, William Wohner and Myrtle Kittle had been married. While married, they had three children: Annette, James, and Ester. The couple divorced in 1962. Under the terms of the divorce decree, Myrtle received custody of the children. The decree, however, was silent as to who was entitled to the dependency exemptions. During 1968, the three children lived with the Kittles. On December 31, 1968, the ages of Annette, James, and Ester were 10, 8, and 7, respectively. Pursuant to the terms of the divorce agreement, William Wohner was required to make child support payments of $30 per week to the Jefferson County Juvenile Court. During 1968, Wohner paid $1,410 to the juvenile court for support of the children. Also, he paid Blue Cross and Blue Shield medical insurance premiums of $40.28 per child during23 that year. During the taxable year, Annette spent three weeks in the home of William Wohner's mother. Wohner gave his mother $30 with which to buy clothes for Annette. Marlin and Myrtle Kittle submitted Form 2038, 1 dated March 27, 1970, to the district director's office. In Form 2038, the Kittles allege that the support for the children for 1968 was as follows: EsterAnnetteJamesFood & Lodging$ 936$ 936$ 936Clothing400350400Education 105105105Total support$1,441$1,391$1,441Furnished by others 470470470Furnished by tax- payers $1,071$ 921* $1,071The funds available to the Kittles in 1968 consisted only of Marlin's income and the support payments received from the Wohners. Myrtle Kittle had no income, and the couple obtained no loans, used no savings, or otherwise acquired any money. Both petitioners William and Bonnie Wohner and petitioners Marlin and Myrtle Kittle claimed the same three children24 as dependents on their respective 1968 income tax returns. Respondent denied dependency exemption deductions for the three children to both the Wohners and the Kittles. OPINION The only question presented is whether the Wohners or the Kittles are entitled to the three dependency exemption deductions. Section 152(e) 2 provides that in the case of a child of divorced parents, the parent having custody of the child is, in general, entitled to the dependency exemption. There are two statutory exceptions to the general rule, and the one which pertains to this case is section 152(e)(2)(B), which provides that the parent not having custody shall be entitled to the exemption if: 25 The requirements of section 152(e)(1) are met in this case. The Wohners have established that they provided more than $1,200 for the support of the three children. Thus the Wohners are entitled to the dependency exemptions unless the Kittles "clearly establish" that they provided more for the support of the children than did the Wohners. In , affd. (C.A. 5, 1971), we construed "clearly establish" as requiring the custodial parent to show by a clear preponderance of the evidence that he provided a greater amount of support than the noncustodial parent. A clear preponderance means something positive and explicit as opposed to ambiguous and equivocal. Id. The evidence produced by the Wohners to establish that they had provided more than $1,200 for the support of the children in 1968 was precise and credible. William Wohner submitted photostatic copies of cancelled checks in the amount of $1,410 paid to juvenile court during 1968 for support of the children. In addition, the Blue Cross and Blue Shield Company verified that medical insurance premiums of $40.28 per child for 1968 had been paid. We find credible26 the Wohners' testimony that they paid William Wohner's mother $30 to buy clothes for Annette during the child's visit with her grandmother. Thus we find that during 1968, the Wohners provided support for Annette, James, and Ester in the respective amounts of $540.28, $510.28, and $510.28. In contrast to our view of the evidence produced by the Wohners, we find the evidence presented by the Kittles to be vague, ambiguous, and confusing. In Form 2038, submitted by the Kittles to the district director's office, the contribution of the Wohners was understated in that the medical insurance payments were not considered. Also, we conclude that the alleged contribution by the Kittles was overstated. While the information contained in the form is not determinative in this proceeding, it is entitled to some weight. And we believe that it is coincident with the inaccurate testimony presented by the Kittles at trial. In testifying to their total household expenses and to the specific expenditures for the children, the Kittles could offer only estimates. They produced no documents or records tending to support those estimates. In some instances their estimates consisted merely of a wide range27 of possible expenditures. While this Court has always been mindful of the difficulty of precisely establishing the amount of support, the vague estimations offered by the Kittles exceed the permissible tolerance. In evaluating the testimony of the Kittles, we have compared their claimed expenditures with the funds available to the family. Only Marlin Kittle had an income, and his salary was $5,735. From this salary was withheld $436 in Federal income taxes, $121.91 in state and local income taxes, and approximately $252.34 in Social Security payments. This left an amount of $4,924.75. When the $1,410 in support payments is added, the Kittles had $6,334.75 in disposable money. As previously found, the Kittles had no other source of funds. According to the testimony of the Kittles, the following expenditures were made: 3 $1,104 for rent, $418 for utilities, $2,860 for food, $480 for car payments, $250 for clothes for Myrtle Kittle, $572 for Marlin Kittle's commuting expenses, $200 for teeth (dentures) for Myrtle Kittle, approximately $400 in payments on a Chapter XIII Wage Earner's Plan, $315 for the children's educational expenses, and $1,150 for clothes for the children. In addition, 28 the Kittles' 1968 income tax return indicates expenditures of $100 for medical insurance, $50 for drugs, and $25 for charity. The total of the alleged expenditures is $7,924. Thus even without considering entertainment expense or possible payments for such items as car or life insurance, the Kittles' claimed expenditures exceed their available funds by $1,589.25. We are constrained to conclude that the Kittles' estimates are inaccurate and inflated. These chimerical estimates are not entitled to much weight. Certainly they do not approach a showing by a clear preponderance of the evidence that the Kittles have provided most of the support for the children. In view of the economic realities, we believe that the Kittles spent no more than $1,104 for rent, $380 for utilities, $2,340 for food, $255 for the children's education, and $300 for the children's clothes. Even allocating one-fifth of the household expenditures to each child, dividing the particular expenses for the children evenly, and including the $40.28 medical insurance premium, the Kittles utilized no more than29 $990.08 in total support for each child. Since we have found that the Wohners contributed $540.28, $510.28, and $510.28 of the total support for Annette, James, and Ester, respectively, the Kittles have not clearly established that they provided more for the support of the children than did the Wohners. Accordingly, the Wohners are entitled to the three dependency exemption deductions for 1968. Decision will be entered for the petitioners in docket No. 5498-71. Decision will be entered for the respondent in docket No. 6154-71. Footnotes1. Department of the Treasury - Internal Revenue Service Form 2038, Information to Support Exemption Claimed for Dependent on Federal Income Tax Return. ↩*. Note error - amount should be $971.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended. Section 152(e) provides, in part: (e) Support Test in Case of Child of Divorced Parents, Et Cetera.-- (1) General rule.--If-- (A) a child (as defined in section 151(e)(3)) receives over half of his support during the calendar year from his parents who are divorced or legally separated under a decree of divorce or separate maintenance, or who are separated under a written separation agreement, and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, such child shall be treated, for purposes of subsection (a), as receiving over half of his support during the calendar year from the parent having custody for a greater portion of the calendar year unless he is treated, under the provisions of paragraph (2), as having received over half of his support for such year from the other parent (referred to in this subsection as the parent not having custody). (2) Special rule.--The child of parents described in paragraph (1) shall be treated as having received over half of his support during the calendar year from the parent not having custody if-- (A)(i) the decree of divorce or of separate maintenance, or a written agreement between the parents applicable to the taxable year beginning in such calendar year, provides that the parent not having custody shall be entitled to any deduction allowable under section 151 for such child, and (ii) such parent not having custody provides at least $600 for the support of such child during the calendar year, or (B)(i)the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody. For purposes of this paragraph, amounts expended for the support of a child or children shall be treated as received from the parent not having custody to the extent that such parent provided amounts for such support. (B)(i) the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody.↩3. Where the estimate consisted only of a possible range of expenditure, we have used a median figure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620302/	CURTIS H. THACKER and BETTY L. THACKER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentThacker v. CommissionerDocket No. 2605-77.United States Tax CourtT.C. Memo 1979-231; 1979 Tax Ct. Memo LEXIS 295; 38 T.C.M. (CCH) 923; T.C.M. (RIA) 79231; June 12, 1979, Filed 295 Held, petitioner's employment as an electrician in the construction of a power plant was not temporary and, therefore, he is not entitled to deduct under sec. 162(a), I.R.C. 1954, automobile expenses incurred in 1974 for traveling daily between his residence and place of employment. McCallister v. Commissioner,70 T.C. 505">70 T.C. 505 (1978). William M. Frazier and Leon K. Oxley, for the petitioners. Joel V. Williamson, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a deficiency of $981.67 in petitioners' 1974 Federal income tax. The sole issue is whether under section 162(a)1 petitioners are entitled to deduct automobile expenses incurred by petitioner296 Curtis H. Thacker in traveling between his residence and his place of employment each working day. FINDINGS OF FACT All of the facts have been stipulated and are found accordingly. Curtis H. (hereinafter petitioner) and Betty L. Thacker resided in Waverly, Ohio, when they filed their 1974 joint Federal income tax return with the Internal Revenue Service Center, Cincinnati, Ohio, and when they filed their petition in this case. Petitioner is an electrician and a member of both the Building and Trade Council American Federation of Labor and Union Local No. 932 Electricians Union (hereinafter union local), at Cosgay, Oregon. He obtains employment on a job-by-job basis through his union local. On April 16, 1973, petitioner started working on the General Gavin Electric Power Plant in Cheshire, Ohio (hereinafter Gavin Power Plant). He was employed by Delta Electric and T. F. Jackson, Inc., White Plains, New York, a subcontractor on the construction of the Gavin Power Plant. This employment was obtained through petitioner's unionlocal. Construction of the297 Gavin Power Plant was initiated in the spring of 1971. This construction called for the installation of two major generators which would be used to produce electricity. At the initiation of the construction, it was projected the first generator would be operational by October 20, 1974. The second generator was projected to be operational by July 6, 1975. Both generators were made operational by the projected dates. The Gavin Power Plant was operational after the installation and completion of its first generator unit on October 20, 1974. The Gavin Power Plant became fully operational after the installation and completion of its second generator unit on July 6, 1975. The Gavin Power Plant is owned by Ohio Electrct, which is a subsidiary of Ohio Power Co., which in turn is a subsidiary of American Electric Power Co. The Gavin Power Plant produces electrical power for a seven state ara in the Midwest.Petitioner was employed continuously at the Gavin Power Plant for approximately twenty-two months from April 16, 1973 through February 21, 1975. Petitioner traveled daily by automobile to his place of employment at the Gavin Power Plant, Cheshire, Ohio, from his Waverly, Ohio, 298 residence during the period April 16, 1973 through February 21, 1975. He returned to his Waverly, Ohio, residence after the completion of each day's work at the Gavin Power Plant. His travel from his Waverly, Ohio, residence to Cheshire, Ohio, and return involved travel of 72 miles one way and 144 miles round trip. On petitioner's 1974 income tax return, he claimed employee business expenses of $4,350 relating to his daily travel to and from the Gavin Power Plant job site. In the notice of deficiency, respondent disallowed the deduction of the expense on the grounds that it had not been established the expense claimed was an ordinary and necessary business expense or was expended for the purpose designated. The parties now agree, however, that substantiation of the expense is not at issue. ULTIMATE FINDING OF FACT Petitioner's employment at Cheshire, Ohio, in 1974, was not temporary. OPINION This case arises as a result of respondent's disallowance of Gavin Power Plant employees' deductions for automobile expenses incurred in making daily round trips between their residences and the Gavin Power Plant job site in Cheshire, Ohio. This Court has held that the daily transportation*299 expenses incurred by three individuals working at the Gavin Power Plant job site were nondeductible because the petitioners in those cases were employed on jobs of indefinite duration. McCallister v. Commissioner,70 T.C. 505">70 T.C. 505 (1978); Harrison v. Commissioner,T.C. Memo. 1978-241; Hensley v. Commissioner,T.C. Memo 1978-242">T.C. Memo. 1978-242. The analysis of the law in McCallister, and the application of the law to the facts in that case apply with equal force here. As in McCallister, petitioner had been working at the Gavin Power Plant approximately nine months at the beginning of the taxable year for which respondent disallowed his transportation expense deductions. 2 There is no meaningful distinction in the facts of these cases. We find McCallister v. Commissioner,supra, controlling and hold for respondent. Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Also, as in McCallister v. Commissioner,70 T.C. 505">70 T.C. 505↩ (1978), respondent did not disallow the transportation expenses petitioner deducted on his return for the year (1973) his employment at the Gavin Power Plant commenced.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620303/	WILLIAM J. McCORKLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcCorkle v. Comm'rNo. 1433-03L United States Tax Court124 T.C. 56; 2005 U.S. Tax Ct. LEXIS 5; 124 T.C. No. 5; February 24, 2005, Filed 5 Respondent's motion for summary judgment granted. Petitioner's motion for summary judgment denied. R's Appeals Office determined that R was warranted in filing a notice of Federal tax lien (NFTL) against P with respect to his 1996 Federal income tax liability. P assigns error on the grounds that R erroneously refunded his $ 2 million remittance for 1996 to the U.S. Marshals Service pursuant to a forfeiture order issued under 18 U.S.C. sec. 982 (2000) by the District Court in an unrelated, non-tax criminal case. R and P have both moved for summary judgment. 1. Held: R was dutybound to comply with the forfeiture order, which is not subject to collateral attack in this court. 2. Held, further, R had no duty to defend against the forfeiture order. 3. Held, further, the Appeals Office did not err in determining that R was warranted in filing the NFTL; therefore, R's motion for summary judgment will be granted and P's will be denied. William J. McCorkle, pro se.Pamela L. Mable, for respondent. 6 Halpern, James S.HALPERN57 OPINIONHALPERN, Judge: This case is before the Court to review a determination made by respondent's Appeals Office (Appeals) that respondent was warranted in filing a notice of Federal tax lien (the notice of Federal tax lien or NFTL) against petitioner with respect to his Federal income tax liability for 1996 (1996 tax liability). We review that determination pursuant to sections 6320(c) and 6330(d)(1). 1 Petitioner assigns error to Appeals' determination on the grounds that Appeals erred in determining that a $ 2 million remittance made by petitioner to the Internal Revenue Service (IRS) on or about May 16, 1997 (the $ 2 million remittance), did not satisfy the 1996 tax liability. Appeals determined that the $ 2 million remittance did not satisfy the 1996 tax liability because that amount had been refunded to the U.S. Marshals Service (Marshals Service) pursuant to an order of the court in a non-tax criminal case involving petitioner. The order specified that the $ 2 million was subject to criminal forfeiture pursuant to 18 U.S.C. sec. 982 (2000). There being little dispute as to the underlying facts, the parties have7 each moved for summary judgment (together, the motions).Rule 121 provides for summary judgment. Summary judgment may be granted with respect to all or any part of the legal issues in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(a) and (b).We are satisfied that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. For the reasons that follow, we shall grant58 respondent's motion for summary judgment and deny petitioner's.BackgroundIntroductionWe draw the following facts from the pleadings, requests for admissions (together with any objections8 or responses thereto), the motions, memoranda in support of the motions, responses to the motions, other documents filed with the Court, and reports of the Court of Appeals for the Eleventh Circuit concerning criminal proceedings involving petitioner and others; viz United States v. McCorkle, 321 F.3d 1292">321 F.3d 1292 (11th Cir. 2003), and United States v. Venske, 296 F.3d 1284">296 F.3d 1284 (11th Cir. 2002). Principally, we rely on the Statement of the Facts contained in respondent's Memorandum of Authorities in Support of Respondent's Cross-Motion for Summary Judgment and Response to Petitioner's Motion for Summary Judgment. Respondent describes the facts so stated as being undisputed, and it appears that petitioner agrees.29 For purposes of disposing of the motions, we find the following facts to be true. 3ResidenceAt the time the petition was filed, petitioner was an inmate at the Federal Correctional Institution, Jesup, Georgia.The $ 2 Million RemittancePetitioner failed to file an income tax return for 1996, although he requested (the request) and received an extension of time, until August 15, 1997, to do so. No payment of tax accompanied the request, and the request recites that no income tax is owed for 1996. When, subsequently, petitioner made the $ 2 million remittance (on or about May 16, 1997), he indicated that it was for his 1996 tax year, and respondent applied it to petitioner's account for 1996. The $ 2 million59 remittance was not accompanied by a tax return. Petitioner made the $ 2 million remittance on or about May 9, 1997, shortly after Federal agents had seized petitioner's property and documents.The Criminal CasePetitioner was one of several defendants in the multicount criminal case styled United States v. McCorkle, Criminal Docket No. 98-CR-52-All (M. D. Fla.) (sometimes, the criminal case). On March 19, 1998, a10 superseding indictment was brought against petitioner (among others), which included numerous counts involving fraud and money laundering. The money-laundering counts were brought pursuant to 18 U.S.C. secs. 1956 and 1957, and the superseding indictment charged that petitioner had laundered and conspired to launder telemarketing fraud proceeds from July 26, 1996, through July 2, 1997.The superseding indictment also contained a forfeiture count alleging that any proceeds that petitioner obtained from fraud and money laundering were forfeitable to the United States pursuant to 18 U.S.C. sec. 982(a)(1). Petitioner and his wife had deposited $ 7 million in laundered proceeds into the Royal Bank of Canada Trust Company, in the Cayman Islands. Of that $ 7 million, $ 2 million was used to make the $ 2 million remittance, and $ 2 million was transferred to a legal trust fund established to pay the legal fees of petitioner's (and his wife's) criminal defense attorneys, including F. Lee Bailey, which $ 2 million was later transferred by Mr. Bailey to himself and others.On November 4, 1998, a jury convicted petitioner (among others) of executing11 a telemarketing scheme in violation of 18 U.S.C. secs. 1341 (mail fraud) and 1343 (wire fraud), of conspiring to launder the proceeds of the scheme in violation of 18 U.S.C. sec. 1956(h), and of laundering those proceeds in violation of 18 U.S.C. secs. 1956(a)(2)(B) and 1957(a). On November 5, 1998, the United States District Court for the Middle District of Florida (the District Court) submitted the criminal forfeiture count to the jury, which returned a special verdict finding that certain real and personal property, including numerous bank accounts, was subject to forfeiture. As part of its determination, the jury concluded that, because it was60 traceable to petitioner's criminal acts, the $ 2 million remittance was subject to forfeiture. The jury also concluded that the $ 2 million petitioner had transferred to the legal trust fund established to pay his criminal attorneys, including Mr. Bailey, was forfeitable, since it was also traceable to petitioner's criminal acts. On December 16, 1998, pursuant to the jury's determination on the forfeiture count, the District Court entered a forfeiture order (the forfeiture12 order), requiring forfeiture of, among other things, the $ 2 million remittance.Petitioner was sentenced on January 25, 1999. Petitioner appealed his conviction and sentence to the Court of Appeals for the Eleventh Circuit, which affirmed the conviction but vacated petitioner's sentence and remanded the case to the District Court for resentencing. See United States v. Venske, 296 F.3d 1284">296 F.3d 1284 (11th Cir. 2002).4 The Court of Appeals left intact the forfeiture aspects of the case. United States v. McCorkle, 321 F.3d at 1294 n. 1.Pursuant to the forfeiture order, on or about February 1, 1999, the Marshals Service sought to recover from respondent the $ 2 million remittance.13 On or about February 18, 1999, respondent complied with the forfeiture order and returned $ 2 million to the Marshals Service by making a manual refund and issuing a check made payable to the Marshals Service (the refund).Respondent's ExaminationIn 1999, after petitioner's conviction for the offenses described above, respondent commenced an examination of petitioner's Federal income tax liability for 1996. That examination resulted in the issuance of a notice of deficiency for 1996, determining a deficiency in tax of $ 905,315 and various additions to tax and penalties. Petitioner did not petition the Tax Court with respect to the notice of deficiency. On October 9, 2000, respondent assessed an income tax deficiency of $ 905,315, an estimated tax penalty of $ 48,186, a miscellaneous penalty of $ 656,353, a failure to pay penalty of $ 9,053, and interest of $ 234,073.61 Notice of Federal Tax LienOn or about April 18, 2002, respondent filed the notice of Federal tax lien with the County Comptroller of Orange County, Florida, showing "Unpaid Balance of Assessment" for 1996 in the amount of $ 1,852,980. On April 24, 2002, respondent issued to petitioner Letter 3172, Notice of Federal14 Tax Lien Filing and Your Right to a Hearing Under I. R. C. 6320.Collection Due Process HearingOn May 3, 2002, petitioner timely requested a hearing under section 6320 (collection due process hearing). In that request, petitioner opposed the filing of the NFTL and noted the $ 2 million remittance, which, he argued, had satisfied his 1996 tax liability. Because petitioner was incarcerated, the Appeals Office accorded petitioner the collection due process hearing by way of an exchange of correspondence. During the course of the hearing, a settlement officer conducting the hearing for the Appeals Office learned of the forfeiture order and respondent's disposition of the $ 2 million remittance.On January 10, 2003, the Appeals Office sent to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) denying petitioner any relief. The notice of determination contained a summary of the Appeals Office's determination, which was further detailed in an attachment authored by the settlement officer. In support of sustaining the filing of the NFTL, the settlement officer determined that the $ 2 million remittance had been15 subject to a criminal forfeiture proceeding and that petitioner was not entitled to rely on those funds to satisfy the 1996 tax liability. The settlement officer also determined that the filing of the NFTL was appropriate and no circumstances existed to either release or withdraw it. He further determined that petitioner had admitted to his inability to pay the liability, but petitioner had failed to request any collection alternatives or to provide any information from which collection alternatives could be considered. The settlement officer sustained the filing of the NFTL.62 The Amended PetitionPetitioner filed a petition and an amended petition. In the amended petition, petitioner states that, for 1996: "[He] paid $ 2,000,000.00 estimated tax payment to the IRS, but never did actually file a return." He adds: "The Department of the Treasury in a manual refund check refunded this $ 2,000,000.00 to the U.S. Marshal's service pursuant to a court order for forfeiture." He claims: "This refund based upon the court order of forfeiture is in error." He explains: "At the time of payment of the $ 2,000,000.00[,] no forfeiture order was in place by the U.S. Courts." Therefore, he concludes, 16 no tax lien is appropriate, since, once he paid his tax for 1996, the IRS was without authority to "unpay" it and demand that he pay it again.DiscussionI. LawA. Collection ProcedureSection 6321 imposes a lien for unpaid Federal taxes. Section 6323 provides that the lien imposed by section 6321 is not valid against certain persons until notice of the lien (the NFTL) is filed in accordance with rules provided. Section 6320(a) provides that, after the Commissioner has filed the NFTL, the Commissioner must notify the taxpayer of the fact of the filing and, among other things, the taxpayer's right to request a hearing. If the taxpayer requests a hearing, the hearing is to be conducted by Appeals, and the Appeals officer conducting the hearing must verify that the requirements of any applicable law or administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The taxpayer requesting the hearing may raise "any relevant issue" relating to the unpaid tax or the Commissioner's collection action. Sec. 6330(c)(2)(A). The taxpayer "may also raise at the hearing challenges to the existence or amount of the underlying tax liability" if the taxpayer did not receive any statutory notice17 of deficiency for, or did not otherwise have an opportunity to dispute, such tax liability. Sec. 6330(c)(2)(B).Following the hearing, the Appeals officer must determine whether the collection action is to proceed, taking into63 account the verification the Appeals officer has made, the issues raised by the taxpayer at the hearing, and whether the collection action "balances the need for the efficient collection of taxes with the legitimate concern of the * * * [taxpayer] that any collection action be no more intrusive than necessary." Sec. 6330(c)(3)(C). We have jurisdiction to review such determinations where we have jurisdiction over the type of tax involved in the case. Sec. 6330(d)(1)(A); see Iannone v. Commissioner, 122 T.C. 287">122 T.C. 287, 290 (2004). Where the underlying tax liability is properly at issue, the taxpayer is entitled to a de novo hearing in this court. E.g., Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 181-182 (2000). Where the underlying tax liability is not properly at issue, we review the determination for abuse of discretion. Id. at 182. When faced with questions of law, as we are here (determining whether petitioner may challenge the forfeiture18 order and whether respondent was obligated to defend against it), the standard of review makes no difference. Whether characterized as a review for abuse of discretion or as a consideration "de novo" (of a question of law), we must reject erroneous views of the law. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384">496 U.S. 384, 110 L. Ed. 2d 359">110 L. Ed. 2d 359, 110 S. Ct. 2447">110 S. Ct. 2447 (1990); Abrams v. Interco, Inc., 719 F.2d 23">719 F.2d 23, 28 (2d Cir. 1983) (stating that it is not inconsistent with the discretion standard for an appellate court to decline to honor a purported exercise of discretion which was infected by an error of law); Swanson v. Commissioner, 121 T.C. 111">121 T.C. 111, 119 (2003).B. Criminal ForfeitureTitle 18 U.S.C. sec. 982, is entitled "Criminal forfeiture", and it governs forfeiture in cases involving convictions for money laundering. In pertinent part, 18 U.S.C. sec. 982(a)(1) provides:Sec. 982 Criminal Forfeiture. (a)(1) The court, in imposing sentence on a person convicted of an offense in violation of * * [18 U.S.C. secs. 1956 or 1957] shall order that the person forfeit to the United States any property, real or19 personal, involved in such offense, or any property traceable to such property.The seizure of property forfeited under 18 U.S.C. sec. 982(a)(1) and any judicial proceeding relating to the forfeiture are governed by 21 U.S.C. sec. 853 (2000) (except subsection (d) 64 thereof). 18 U.S.C. sec. 982(b)(1). Title 21, U.S.C. sec. 853(c), addresses third party transfers and provides as follows:Sec. 853(c). Third party transfers. All right, title, and interest in property described in * * * [18 U.S.C. sec. 982] vests in the United States upon the commission of the act giving rise to forfeiture under * * * [18 U.S.C. sec. 982]. Any such property that is subsequently transferred to a person other than the defendant may be the subject of a special verdict of forfeiture and thereafter shall be ordered forfeited to the United States, unless the transferee establishes in a hearing pursuant to subsection (n) of this section that he is a bona fide purchaser for value of such property who20 at the time of purchase was reasonably without cause to believe that the property was subject to forfeiture under this section.Title 21 U.S.C. sec. 853(n)(1), provides that, following the entry of an order of forfeiture, the United States shall give notice of the order, and section 853(n)(2) thereof provides that any person, "other than the defendant", asserting a legal interest in the property ordered to be forfeited, has 30 days to petition the court for a hearing to adjudicate the validity of his alleged interest. Following the District Court's disposition of any petitions filed under 21 U.S.C. sec. 853(n)(2), or, if none are filed, after the close of the period for filing such petitions, 21 U.S.C. sec. 853(n)(7) provides "the United States shall have clear title to property that is the subject of the order of forfeiture and may warrant good title to any subsequent purchaser or transferee."II. Arguments of the PartiesThe essence of petitioner's argument is that he satisfied the 1996 tax liability with the $ 2 million remittance before he forfeited to the United States his ownership rights in21 the laundered funds (the source of the $ 2 million remittance). Petitioner believes that the rights of the United States under the forfeiture statute did not ripen until (1) he was convicted, (2) the jury rendered a special verdict of forfeiture, and (3) the District Court entered the forfeiture order. Moreover, petitioner argues that, since respondent was a bona fide purchaser for value reasonably without cause to believe the $ 2 million remittance was subject to forfeiture, he could have defended against the forfeiture order and, because he failed65 to do so, should be barred from trying to collect the 1996 tax liability.Respondent counters that, on account of his criminal conviction, petitioner cannot challenge the validity of the forfeiture order or respondent's compliance with it. Respondent also argues that, since, at the time he received notice of the forfeiture order, he had not assessed petitioner's 1996 income tax liability, he had no standing to make a claim as a bona fide purchaser for value.III. AnalysisA. IntroductionThe jury in the criminal case returned a special verdict of forfeiture with respect to the $ 2 million remittance. In returning the special verdict,22 the jury necessarily found that petitioner had transferred $ 2 million of laundered proceeds to the IRS. Cf. United States v. McCorkle, 321 F.3d at 1294 n. 2. Thereafter, the District Court entered the forfeiture order, the United States presumably notified respondent of the order, and, since respondent failed to petition the court for a hearing to adjudicate his rights in the laundered proceeds, the United States gained clear title to the $ 2 million remittance, which the Marshals Service collected. See 21 U.S.C. sec. 853(c), (n)(1), (2), (7). The forfeiture order has neither been vacated by the District Court, nor has the court's decision to issue it been reversed. Therefore, respondent, like this court, must respect it. Moreover, respondent had no duty to challenge it.B. Petitioner Cannot Challenge the Forfeiture OrderPetitioner errs in his understanding of that portion of 21 U.S.C. sec. 853(c) that embodies what is known as the "relation- back doctrine", according to which title of the United States to forfeited property "relates back" to the time of commission of the illegal act underlying the forfeiture. In pertinent23 part, 21 U.S.C. sec. 853(c) provides: "All right, title, and interest in [the forfeited] property * * vests in the United States upon the commission of the act giving rise to forfeiture". Contrary to petitioner's belief, therefore, the date on which the District Court orders the forfeiture is not the date on which the rights of the United States arise. It is true66 that, until the order of forfeiture is entered, the United States has no right to seize the forfeited property, see 21 U.S.C. sec. 853(g), but, upon entry of the order, the forfeiture relates back to the date of the criminal act giving rise to the forfeiture. See, e.g., Caplin & Drysdale v. United States, 491 U.S. 617">491 U.S. 617, 627, 105 L. Ed. 2d 528">105 L. Ed. 2d 528, 109 S. Ct. 2646">109 S. Ct. 2646, 109 S. Ct. 2667">109 S. Ct. 2667 (1989). Neither petitioner's nor our understanding of 21 U.S.C. sec. 853(c) is of moment, however, since we, as well as respondent, must respect the forfeiture order and have no warrant to reject it. The rule is clear: "[I]t is for the court of first instance to determine the question of the validity of the law, and until its decision is reversed for error by orderly review, either by itself or by a higher court, its orders24 based on its decision are to be respected." Celotex Corp. v. Edwards, 514 U.S. 300">514 U.S. 300, 313, 131 L. Ed. 2d 403">131 L. Ed. 2d 403, 115 S. Ct. 1493">115 S. Ct. 1493 (1995) (quotation marks and citation omitted).When, on or about February 18, 1999, respondent complied with the forfeiture order, the order had neither been vacated nor had the decision to issue it been reversed. Barring his challenging the order under 21 U.S.C. sec. 853(c), respondent was dutybound to comply. Since he did not challenge it, and was under no obligation to do so (see infra), he committed no error in complying with the order. Subsequently, the Court of Appeals for the Eleventh Circuit vacated petitioner's sentence and remanded the case for resentencing but left the forfeiture order intact, and the forfeiture order is not subject to collateral attack in this court. See Celotex Corp. v. Edwards, supra.We fail to see how Appeals abused its discretion in determining not to give petitioner credit for funds received from petitioner (the $ 2 million remittance) that respondent was forced to disgorge to the Marshals Service pursuant to an order that he was bound to obey. C. Respondent's Failure To Defend Against the Forfeiture25 OrderPetitioner concedes that respondent failed to defend against the forfeiture order pursuant to a hearing authorized by 21 U.S.C. sec. 853(n)(2). Nevertheless, petitioner argues that, when respondent received the $ 2 million remittance, respondent was reasonably without cause to believe that the remittance was subject to forfeiture. Therefore, petitioner continues, since the remittance was received in payment of67 petitioner's tax debt, respondent could have successfully defended against the forfeiture order as a bona fide purchaser for value. See 21 U.S.C. sec. 853(c), (n)(6)(B). 526 Because respondent remained silent when he could have spoken up, petitioner argues that respondent should be barred from collecting the 1996 tax liability (in petitioner's words, "a second time"). Respondent answers that he could not have defended against the forfeiture order since, when he received notice of it, he was without standing to make a claim as a third party with a legal interest in the $ 2 million remittance. 6We need not decide whether respondent had standing to make a claim pursuant to 21 U.S.C. sec. 853(c), (n)(6)(B). Neither need we decide whether a person receiving a payment in discharge of a liability qualifies as a "purchaser" within the meaning of 21 U.S.C. sec. 853(c), (n)(6)(B). 7 We need not decide those questions because, even if we were to answer both questions27 in the affirmative, petitioner cannot show that respondent was obligated to defend against the forfeiture order, and he has failed to show the elements necessary to raise successfully equitable estoppel as a defense to respondent's efforts to collect the 1996 tax liability.28 Title 21, U.S.C. sec. 853(n)(2), provides that any person, "other than the defendant," asserting a legal interest in property that has been ordered forfeited "may" petition the District 68 Court for a hearing to adjudicate the validity of his alleged interest in the property. A third party, therefore, has a right, not a duty, to petition the District Court, 8 and it is his interest, not the defendant's, that is to be determined. Indeed, the defendant has no interest in the forfeited property and is prohibited even from petitioning the court. Petitioner has failed to suggest any other statutory provision that would obligate respondent to defend against the forfeiture order and makes no claim that respondent was under a contractual obligation to do so. Therefore, we find that respondent had no duty to defend against the forfeiture order.29 Equitable estoppel is a judicial doctrine that precludes a party from denying that party's own acts or representations that induce another to act to his or her detriment. E.g., Graff v. Commissioner, 74 T.C. 743">74 T.C. 743, 761 (1980), affd. 673 F.2d 784">673 F.2d 784 (5th Cir. 1982). It is to be applied against the Commissioner only with utmost caution and restraint. E.g., Hofstetter v. Commissioner, 98 T.C. 695">98 T.C. 695, 700 (1992). The essential elements of estoppel are: (1) There must be a false representation or wrongful misleading silence; (2) the error must be in a statement of fact and not in an opinion or a statement of law; (3) the person claiming the benefits of estoppel must be ignorant of the true facts; and (4) he must be adversely affected by the acts or statements of the person against whom estoppel is claimed. E.g., Estate of Emerson v. Commissioner, 67 T.C. 612">67 T.C. 612, 617-618 (1977); see also Tefel v. Reno, 180 F.3d 1286">180 F.3d 1286, 1302 (11th Cir. 1999). "Where an allegation of estoppel raises factual questions on which reasonable minds might disagree, the questions must be resolved at trial by the trier of fact. * * However, where the facts are30 not in dispute or are beyond dispute, the existence of estoppel is a question of law." J.C. Wyckoff & Assoc., Inc. v. Standard Fire Ins. Co., 936 F.2d 1474">936 F.2d 1474, 1493 (6th Cir. 1991). See generally 28 Am. Jur. 2d, Estoppel and Waiver, sec. 188 (2000). Since there is no dispute here as to the relevant facts, we treat petitioner's claim of estoppel as raising only a question of law, which we may dispose of with only brief discussion.69 Respondent made no false statement to petitioner, nor did respondent's silence (if we can call his failure to petition silence) mislead petitioner. Moreover, petitioner was not ignorant of the forfeiture order, and petitioner has failed to show that respondent had any duty to assist petitioner in mitigating his losses with respect to his criminal offenses. These are critical defects in petitioner's estoppel defense.Respondent's failure to petition the District Court does not bar him from collecting the 1996 tax liability.IV. ConclusionWe have concluded that, to the extent petitioner's claim constitutes a collateral attack on the forfeiture order, it must be denied, and, further, respondent is not barred*31 from collecting the 1996 tax liability on account of his failure to petition the District Court. Appeals did not err in determining that respondent was warranted in filing the notice of Federal tax lien. Therefore, as stated, respondent, not petitioner, is entitled to summary judgment in his favor.To reflect the foregoing,An appropriate order and decision granting respondent's motion for summary judgment, denying petitioner's, and deciding for respondent will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. In Petitioner's Response in Opposition to Respondent's Cross-Motion for Summary Judgment and Response to Petitioner's Motion for Summary Judgment, petitioner describes respondent's statement of facts as being merely incomplete: "Not all of the undisputed facts are set forth in Respondent's Memorandum of authorities".↩3. All dollar amounts have been rounded to the nearest dollar.↩4. After remand, the District Court conducted another sentencing hearing on Sept. 11, 2003, and made certain findings. The District Court then adopted and imposed its original sentence against petitioner. Petitioner has appealed his resentencing to the Court of Appeals for the Eleventh Circuit, which appeal is pending.↩5. We note that this argument implicitly acknowledges the relation-back doctrine, since it assumes a transfer of property to a third party after ownership of the property vests in the United States. See 21 U.S.C. sec. 853(c)↩.6. Respondent claims that, in order for a tax debt to arise to permit him to have any rights against the taxpayer and the taxpayer's property, he must first make an assessment of the tax and then make a demand for payment. In support of that claim, respondent points to secs. 6201 through 6203, 6321, 6322; secs. 301.6201-1 and 301.6203-1, Proced. & Admin. Regs.; and Capuano v. United States, 955 F.2d 1427">955 F.2d 1427, 1432 (11th Cir. 1992). Here, respondent states, assessment and demand followed by more than a year his compliance with the forfeiture order. Petitioner's position is that, pursuant to sec. 6151↩, his tax debt for 1996 arose on Apr. 15, 1997, when payment thereof was due.7. It is not settled whether, in using the term "bona fide purchaser for value" in 21 U.S.C. secs. 853(c) and (n)(6)(B) (emphasis added), Congress intended the term "purchaser" to operate as a limitation on the class of persons that, having engaged in arm's-length transactions with the defendant, is entitled to protection of its interests. The Court of Appeals for the Fourth Circuit has determined that Congress did not intend such a limitation. United States v. Reckmeyer, 836 F.2d 200">836 F.2d 200, 208 (4th Cir. 1987) (" If the term 'purchaser' were so construed, a car dealer who sold a car to a later convicted defendant without knowledge of the potential forfeitability of the defendant's assets could have the payment he received for the car forfeited while a person who purchased otherwise forfeitable stock from the defendant would be protected."). Other Courts of Appeals have not interpreted 21 U.S.C. sec. 853(n)(6)(B) so liberally. See, e.g., United States v. BCCI Holdings (Luxembourg), S. A., 310 U.S. App. D.C. 268">310 U.S. App. D.C. 268, 46 F.3d 1185">46 F.3d 1185, 1191-1192↩ (D. C. Cir. 1995). We shall await an appropriate opportunity to address the issue.8. Nor has the Internal Revenue Service a duty to collect a tax assessment from specific property in which it has a lien rather than permitting the property to be forfeited. Raulerson v. United States, 786 F.2d 1090">786 F.2d 1090, 1092-1093↩ (11th Cir. 1986).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620305/	FURNITURE FINANCE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Furniture Finance Corp. v. CommissionerDocket No. 104891.United States Board of Tax Appeals46 B.T.A. 240; 1942 BTA LEXIS 890; February 3, 1942, Promulgated 890 1. A corporation the shares of which are owned by two individuals and the income of which is derived from rent of its building to a partnership composed of the two shareholders, held a personal holding company, the income being personal holding company income. 2. The failure to file a personal holding company surtax return held without reasonable cause and to support penalty. S. J. Graham, Esq., and H. A. Hollopeter, C.P.A., for the petitioner. Alva C. Baird, Esq., for the respondent. STERNHAGEN 240 OPINION. STERNHAGEN: The Commissioner determined a deficiency for 1937 of $3,162.80 in personal holding company surtax, and a penalty of $790.70 for failure to file a personal holding company surtax return. 241 The facts are stipulated and the stipulation is hereby adopted as the findings of fact. The petitioner was organized on or about February 19, 1936, under the laws of Oregon, and its return was filed in Portland, Oregon. Its shares were owned by David Light and Harry W. Zavin. Its income for the taxable year was derived from rent of a building which it owned and leased to a copartnership of light and Zavin. 891 By section 354(a)(2), Revenue Act of 1936, as amended by Revenue Act of 1937, each of the two partners shall be considered as owning the stock owned by his partner. As a result, more than 50 percent in value of petitioner's outstanding stock is owned, directly or indirectly, by or for two individuals, as covered by section 352(a)(2), and the petitioner is a "personal holding company." Since all of petitioner's income is rent received from the partnership for the use of petitioner's property, and each partner is deemed to own all the outstanding stock, such rent is "personal holding company income" under section 353(f). The determination of deficiency is sustained. Petitioner's argument as to the intended scope of the personal holding company surtax title is answered in ; dismissed, C.C.A., 2d cir. The petitioner failed, without reasonable cause, to file a personal holding company return, and it is therefore liable for the penalty imposed by section 291, Revenue Act of 1936. *892 . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620306/	William Collins, Sr. v. CommissionerCollins v. CommissionerDocket No. 16063.United States Tax Court1948 Tax Ct. Memo LEXIS 41; 7 T.C.M. (CCH) 830; T.C.M. (RIA) 48241; November 15, 194841 Prior to October 9, 1942, petitioner and two of his sons owned all of the outstanding stock of a corporation engaged in the business of building roads. On October 9, 1942, petitioner made a gift of $4,000 to each of five of his children. On the same date the petitioner, his two sons, and the five other children formed a partnership which purchased the assets of the prior corporation and assumed all of its liabilities. The five children, who were made "limited partners" under this agreement, purchased their interests with the $4,000 gifts received by them from the petitioner. The partnership did not continue the road building business of the corporation but leased the equipment and machinery to other companies, collected the rent, and distributed the income therefrom to the various partners. Held, the partnership composed of petitioner and his children constituted a bona fide partnership and the income distributed to the five children who acquired their interests by virtue of the gift to each of $4,000 by their father cannot be taxed to him under the doctrine of Tower v. Commissioner [327 U.S. 280">327 U.S. 280,], and Lusthaus v. Commissioner [327 U.S. 293">327 U.S. 293,]. 42 Philip B. Vogel, Esq., 20 1/2 Broadway, Fargo, N.D., for the petitioner. Jackson L. Boughner, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion This proceeding involves a deficiency in income and victory tax for the calendar year 1943 in the amount of $11,774.32. The single issue involved is whether the petitioner's income for 1943 may properly be increased by such amounts as represent partnership income distributed to five of his children in that year. The partnership interests of the children were originally acquired by virtue of a $4,000 gift made to each of them by the petitioner. Findings of Fact William Collins, Sr., hereinafter referred to as the petitioner, is a resident of Fargo, North Dakota, and has been engaged in the road contracting business for the past 25 years. His income and victory tax return for the calendar year 1943 was filed with the collector of internal revenue for the district of North Dakota. William Collins and Sons, Inc., a North Dakota corporation, was organized on March 29, 1939. This corporation was engaged in the business of building roads. It was authorized to issue 500 shares of common stock of the43 par value of $100 per share. The original stock of this corporation was held and owned by the following named persons in the following proportions: William Collins, Sr.255 shares (51%)Leo F. Collins195 shares (39%)William R. Collins50 shares (10%)During September 1942, petitioner advised his seven children that he desired to form a partnership in which he, Leo F. Collins and William R. Collins would be general partners and his remaining five children, Kenneth J. Collins, Margaret M. Collins, Florence V. Collins, Kathryn Wallum, and Marion C. Walsh would be special partners. Prior to October 9, 1942, petitioner obtained $20,000 out of moneys due him from the corporation. This money was deposited by petitioner in his personal account. On October 9, 1942, petitioner delivered to each of the children, Margaret, Marion, Kenneth, Kathryn, and Florence a check in the amount of $4,000. On October 9, 1942, the petitioner, Leo F. Collins, William R. Collins, Marion C. Walsh, Kathryn Wallum, Florence V. Collins, Margaret M. Collins, and Kenneth J. Collins entered into a partnership agreement. The capital of the partnership was to be $100,000. Thirty-one thousand44 dollars was contributed by the petitioner, $39,000 by Leo F. Collins, $10,000 by William R. Collins, and $4,000 by each of petitioner's other five children. The $4,000 contributions were made by endorsement of the $4,000 checks received that same day as gifts from the petitioner. Each of these checks was endorsed as payable to the order of the partnership which was designated as "William Collins & Company". Each gift of $4,000 made by the petitioner to the five children was a bona fide gift and was not conditioned upon its reinvestment in the new partnership. The former corporation, William Collins and Sons, Inc., sold and delivered all of its assets to the partnership and the partnership in turn assumed all of the liabilities of the corporation. The partnership agreement contained the following provisions pertinent to the issue herein: * * "2. William Collins, William R. Collins and Leo F. Collins shall be general partners and Marion C. Walsh, Kathryn Wallum, Margaret M. Collins, Florence V. Collins and Kenneth J. Collins shall be special or limited partners. * "8. The special partners shall not take part in the management of the business or transact any business45 for the partnership, and shall have no power to sign or bind the firm. * * "11. None of the special partners shall during the continuance of this partnership be entitled to draw out any profits or receive back any part of his or her share of the capital, until the termination of the partnership, without the approval of the general partners, or a majority thereof. "12. The profits of the partnership shall be divided and credited on the books to each partner at the end of each calendar year, pro rata according to the interest which each partner has in the partnership capital. "13. Losses suffered or incurred in the conduct of the business of the partnership shall be borne by all parties hereto in the same proportion in which they are entitled to share in the profits of the partnership, as provided in Paragraph 12 hereof; provided, however, that no limited partner shall in any event be liable for, or subject to any loss whatsoever beyond the amount contributed by him as aforesaid to the capital of the partnership; and provided, further, that no limited partner shall be personally liable for any debts, engagements or losses of the partnership in any event, or to any extent46 whatsoever." * * The interests of Leo F. Collins and William R. Collins, Jr., in the partnership were identical with the percentage of stock they owned in the predecessor corporation, 39 per cent and 10 per cent respectively. Under the terms of the partnership agreement, petitioner had a 31 per cent interest and Kenneth, Margaret, Florence, Kathryn, and Marion each had 4 per cent which, when added to petitioner's interest, totaled 51 per cent. This was the same percentage of the stock of the predecessor corporation which was owned by the petitioner. None of the recipients of the $4,000 gifts made by petitioner were members of his household at the time of the gifts. They were all emancipated and of age on October 9, 1942. Mrs. William Collins, Sr., was not a member of the partnership. From October 9, 1942, to December 31, 1943, the sole business of the partnership was the renting and the sale of its machinery and equipment. The outbreak of war brought a halt to road building in the area in which the corporation operated. Because of the war emergency, the states quit the building of highways and many of petitioner's employees left his employ to join the armed services. Petitioner47 was approximately 65 years of age at this time. Some time prior to October 9, 1942, petitioner commenced negotiations with the Wunderlick Construction Company which desired to rent petitioner's equipment for use in Costa Rica. On or about November 1st, the partnership and the Wunderlick Company concluded such an agreement. The road building machinery and equipment were shipped to Long Beach, California, where it remained for the next three months. The contract was cancelled by Wunderlick in February 1943 when it was unable to secure shipping space to move the equipment to Costa Rica. The equipment was then returned to Fargo, North Dakota, by Wunderlick. On or about April 1, 1943, the equipment was rented to the McGeary Brothers for use in constructing an airport at Alexandria, Minnesota. McGeary Brothers returns the equipment to the partnership in October 1943, and shortly thereafter it was sold to Morris Knutson of Boise, Idaho. On February 3, 1943, Leo F. Collins died and his wife was substituted for him, as a partner. On September 15, 1943, her interest was acquired by the partnership, increasing the interest of the remaining partners proportionately. Of the five children48 who received gifts of $4,000 each, only Florence V. Collins and Kenneth J. Collins had been active in the business of the company. Florence had worked for the company for four years prior to 1942. She acted as bookkeeper or office manager. In October 1942, she went to Costa Rica where she remained for the next two years. Kenneth operated a tractor for the business when he was 15 or 16. Later he became a foreman and when he finished school in 1941, he became a superintendent for the company. Kenneth was also active after the formation of the partnership. From April to October 1943, he looked after the partnership's machinery which was being used during that period by the McGeary Brothers in Alexandria, Minnesota. No part of the partnership income during 1943 which was distributable in respect to the interests of petitioner's five children was used or was available for use by the petitioner. In 1943, Florence Collins withdrew practically her entire interest in the capital of the company. In 1944, William Collins, Jr., withdrew $7,000 or $8,000 of his interest in the partnership and invested the money in an oil business in Bemidji, Minnesota. At this time petitioner made a gift49 of $4,000 to William as the latter had not received such a gift in October 1942. In the deficiency notice, respondent included in the taxable income of petitioner for 1943 that portion of the partnership profits allocated to his five children who were special partners. It has been stipulated herein that in the notice of deficiency respondent erroneously allowed the petitioner a loss of $275 as a deduction from gross income for the year 1943 and that to correct this error the income of petitioner for 1943, as shown by the notice of deficiency, should be increased by $137.50 and the victory tax net income for 1943 should be increased by $275. These adjustments result in an increased deficiency of $123.47, claim for which was made by respondent under the provisions of section 272 (e) of the Internal Revenue Code. It has also been stipulated that in the event this Court determines that petitioner's share of the partnership income during 1943 is less than that determined by the respondent, then petitioner's share of the net loss of said business for 1942, and of the net long-term capital losses and contributions for the year 1943 should be correspondingly reduced. 50 Opinion ARUNDELL, Judge: The sole issue presented is whether the respondent is correct in determining that partnership income allocated in 1943 to the five limited partners is properly taxable to their father under the principles enunciated by the Supreme Court in the companion cases Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. The rationale of the Tower and Lusthaus decisions was succinctly stated by this Court in Isaac Blumberg, 11 T.C. (No. 80) wherein the Court said: "The test in determining the bona fide character of a family partnership is to ascertain whether the partners really and truly intended to join together for the purpose of carrying on a business and sharing in its profits, or whether the partnership was a mere sham utilized solely for the purpose of reducing a taxpayer's true tax liability by a pretended distribution of income." In the application of such a test, the familiar elements which have been consistently referred to as indicative of good faith must not be mechanically weighed without regard for the factual background from which they have been removed. In the Tower case, the Court found51 that the sole purpose of the petitioner in changing his business from the corporate form to a partnership was to acquire the resulting tax advantages and that it was undertaken upon the advice of tax counsel. No material change or interruption was reflected in the operation of the business. The Supreme Court said, "By the simple expedient of drawing up papers, single tax earnings cannot be divided into two tax units and surtaxes cannot be thus avoided." Petitioner claims that the reason for the formation of the partnership in the present case was that he thought it would be a simple method of dividing among these five children his interest in the road building equipment then owned by the corporation. The equipment constituted his principal asset. He was approximately 65 years of age at the time of the gifts and as the equipment was being rented to another company for use in Central America, there was a possibility that it would never be used again by petitioner for road building purposes. Whether or not this was the specific motive in forming the partnership is of little moment to our determination in this case as the record contains no evidence which indicates that the petitioner52 was prompted by tax considerations in providing five of his children with the funds by which they acquired their partnership interests. The facts also clearly show that the partnership income distributable to the petitioner's children was not made available to be used by the petitioner for the same business or family purposes as his income from the corporation. In the Tower case, the Court pointed out that Mrs. Tower used her share of the business income to purchase what a man usually buys for his wife. Petitioner's wife was not a partner and all of his children who were made partners under this agreement were of age at the time of the gift. Cf. Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. We have also found that petitioner made a bona fide gift in praesenti of $4,000 to each of the five children on October 9, 1942. It is quite natural that he hoped and he probably had been assured that each would invest the money so received in the contemplated partnership. This desire and understanding on his part did not, in our opinion, render the gift conditional. Petitioner's testimony that he regarded the money so distributed as gifts is substantiated by his donation of a similar amount53 to a son, William R. Collins, upon the latter's withdrawal of most of his capital from the partnership in 1944. It is also significant that Florence was permitted in 1943 to withdraw practically her entire capital from the company. On the facts of this case, we cannot agree with the respondent that the partnership agreement constituted merely a reallocation of the petitioner's income within the family group. Respondent states that the issue is "who earned the income?" He argues that the five children "contributed no capital, no management, no vital services" and submits that for this reason this case is "another example of a family partnership similar to those in the Tower and Lusthaus cases, supra." With this we cannot agree. The fact that petitioner's children contributed no management and no vital services would warrant great weight if there had been any services which the partners could have rendered the partnership in the present case. However, we cannot require nor consider an element ordinarily of great significance where the facts of the case demonstrate that its fulfillment was impossible. That situations exist where such a factor is disregarded in the application of54 the Tower doctrine was recognized in T. W. Rosborough, 8 T.C. 136">8 T.C. 136, wherein this Court observed: "The important point is that personal services did not contribute in any way to the production of the organization's income." The partnership under consideration was not formed to continue the business of the corporation which was engaged in the business of building roads but merely to hold title to the rented machinery and equipment, to collect the rent therefrom and to distribute the income derived to the respective parties. Cf. Beasley v. Allen, 61 Fed. Supp. 929, aff'd., 157 Fed. (2d) 970. It appears to us that the restrictions placed upon the children by the partnership agreement were entirely reasonable and consistent with their status as limited partners. The privilege of conducting business under such an arrangement cannot be denied these persons simply because they are the children of one of the general partners. Upon the facts of this case, we are of the opinion that the partnership, composed of the petitioner and his children, constituted a bona fide partnership and that the income distributable to the five children who acquired their55 interests by virtue of the gift to each of $4,000 by their father cannot be taxed to him under the doctrine of Commissioer v. Tower, supra, or Lusthaus v. Commissioner, supra. To permit the adjustments stipulated by the parties herein, Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620307/	ALI A. TALEBI and SANDRA TALEBI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; CAHIT PALANTEKIN and AYTEN PALANTEKIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTalebi v. CommissionerDocket Nos. 11095-83, 14538-83.United States Tax CourtT.C. Memo 1985-180; 1985 Tax Ct. Memo LEXIS 450; 49 T.C.M. (CCH) 1230; T.C.M. (RIA) 85180; April 15, 1985. Ronald W. Gabriel and Charles M. Steines, for the petitioners. Nancy Herbert and Robert J. Kastl, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: In docket No. 11095-83, respondent determined a deficiency of $20,183 in the Federal income taxes of petitioners Talebi for the taxable year 1979. In docket No. 14538-83, respondent determined deficiencies of $20,258 and $11,189 in the Federal income taxes of petitioners Palantekin for the taxable years 1979 and 1980, respectively. In dispute is the value of certain451 gemstones donated by petitioners to the Carnegie Museum of Natural History. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulation is incorporated herein by this reference. Petitioners were residents of Columbus, Ohio, at the time they filed their petitions herein. They timely filed joint Federal income tax returns for the years in issue with the Cincinnati Service Center, Covington, Kentucky. On December 15, 1978, Cahit Palantekin and Ali Talebi (petitioners) purchased a kunzite stone weighing between 585 and 590 carats from Joseph M. Zaccaria of Pittsburgh, Pennsylvania, for the sum of $21,943. Each petitioner paid $10,971 for a one-half interest in the stone. The purchase price was paid in installments of $2,000 paid Docember 18, 1978; $9,000 paid on or about May 22, 1979; and $10,943 paid thereafter. Prior to December 1979, the kunzite was loaned to the Carnegie Museum of Natural History (Carnegie Museum). By letter dated December 28, 1979, the kunzite was donated by petitioners to the Carnegie Museum. On their tax returns for 1979, petitioners each claimed a charitable contribution deduction in the amount of $46,812 for donation of the kunzite452 to the Carnegie Museum. On December 26, 1979, petitioner Palantekin purchased a 190.70 carat blue topaz stone from Charles L. Key of Sarasota, Florida, for the sum of $5,677.60. On August 8, 1980, the topaz was delivered to the Carnegie Museum. By letter dated December 29, 1980, petitioner Palantekin donated the topaz to the Carnegie Museum. On their joint Federal income tax return for 1980, petitioners Palantekin claimed a deduction in the amount of $26,698 for the donation of the topaz to the Carnegie Museum. Respondent determined that the allowable deductions for the donations made by petitioners to the Carnegie Museum were limited to the cost of the items donated. Petitioners are by occupation physicians and have no demonstrated experience in dealing in gemstones. In May 1984, William W. Pinch (Pinch) appraised the kunzite and the topaz. He appraised the kunzite at a value of $49,700 and the topaz at a value of $15,200 on the respective donation dates. Pinch is a collector of mineral specimens and the owner and curator of the Pinch Mineralogical Museum, which contains approximately 16,000 mineral specimens. 1 He has been engaged in the field since 1947 and is sufficiently453 knowledgeable to be regarded as an expert in mineralogy. He is not, however, formally trained in gemology or appraisal techniques. From 1979 to the time of trial, Pinch was employed by Investment Rarities to buy gemstones and train employees who would be selling gemstones over the telephone. Investment Rarities sold gemstones to the public for a standard markup of 25 percent. The language on Pinch's appraisal reports defining fair market value was drafted by petitioners' counsel, and the reports were prepared in the office of petitioners' counsel. Pinch's examination of the specimens appraised by him was done very rapidly at the Carnegie Museum because the Museum would not ship the stones to him. He did not confirm the actual weights of the items. In April 1984, Elly Rosen (Rosen), respondent's expert, appraised the kunzite at a value of $18,408 and the topaz at a value of $2,212.12 as of the respective dates of donation. Rosen is a gemological appraisal consultant454 and a Graduate Gemologist of the Gemological Institute of America. The latter title was earned by completion of proficiency examinations and a 2-year course of instruction on diamonds, colored stones, and gem identification. He is a senior member of the American Society of Appraisers, Certified in gems and jewelry upon completion of an examination on appraisal ethics, appraisal theory, and gems and jewelry. He teaches courses in the appraisal of gems and jewelry, including appraisal ethics, research techniques, identification and authentication procedures, terminology, and report writing. He is a member of various other professional societies. During the years 1978 to 1980, he performed in excess of 100 appraisals encompassing approximately 1,000 items. Rosen had extensive experience specifically in appraising kunzites and topaz. He carefully examined the items he was appraising, using recognized standards of grading and description. The value of topaz depends in substantial part on the color of the stone. Rosen's color discrimination was tested and found to be superior in May 1984. Pinch did not dispute Rosen's physical description of the items appraised. Pinch had not had455 his color vision tested for several years. The markets used by Rosen in making his appraisal, i.e., the collector market for the kunzite and the manufacturing retail jewelry store market for the topaz, were the most common markets for sale of the items in issue. While Pinch identified alternative likely ultimate consumers of the items valued, his opinion as to the value did not vary based on the potential consumer. ULTIMATE FINDING OF FACT The fair market value of the items donated to the Carnegie Museum of Natural History was, on the respective donation dates, the cost of those items to petitioners, to wit, § 21,943 for the kunzite and $5,677.60 for the topaz. OPINION Petitioners have the burden of proving that they are entitled to the deductions that they claim. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435 (1934); Rule 142(a), Tax Court Rules of Practice and Procedure. There is no dispute here that donations were in fact made to a qualified donee under section 170(c). 2 To determine the allowable deduction, however, we must determine the fair market value of the donated property, to wit,456 "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 reasonable knowledge of relevant facts." Section 1.170A-1(c)(2), Income Tax Regs.Although opinion evidence is obviously admissible and relevant on the question of value, we must weight such evidence in light of the demonstrated qualifications of the expert and all other evidence of value. Anderson v. Commissioner,250 F.2d 242">250 F.2d 242, 249 (5th Cir. 1957), affg. a Memorandum Opinion of this Court. We are not bound by the opinion of any expert witness when that opinion is contrary to our own judgment. Barry v. United States,501 F.2d 578">501 F.2d 578 (6th Cir. 1974); Kreis' Estate v. Commissioner,227 F.2d 753">227 F.2d 753, 755 (6th Cir. 1955); Tripp v. Commissioner,337 F.2d 432">337 F.2d 432 (7th Cir. 1964), affg. a Memorandum Opinion of this Court. We may embrace or reject expert testimony, whichever, in our best judgment, is appropriate. 457 Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282 (1938); Silverman v. Commissioner,538 F.2d 927">538 F.2d 927, 933 (2d Cir. 1976), affg. a Memorandum Opinion of this Court. In this case we reject the testimony of Pinch because of his limited relevant experience with the items in issue, the absence of objective facts supporting his opinion, his failure to consider the cost of the items in question, and the inherent lack of credibility of his conclusions that the fair market values of the items in question on the respective donation dates were 226 percent of the cost of the kunzite and 268 percent of the cost of the topaz to petitioners approximately 1 year earlier. Notwithstanding fair market value language inserted into his reports by petitioners' counsel, Pinch's testimony seemed to be applying another standard. He merely agreed with petitioner's counsel that the prices that he testified to were not uncommon. Under these circumstances, we might merely conclude that petitioners have failed to satisfy their burden of proof. See Anselmo v. Commissioner,80 T.C. 872">80 T.C. 872, 885-886 (1983). In this case, however, we have what has been described as458 the most reliable evidence of value, to wit, sales of the same property within a short period of time prior to the valuation date. In another context, the Court of Appeals for the Sixth Circuit, the court to which this case is appealable, has recently stated that "[i]n determining the fair market value of property, little evidence could be more probative than the direct sale of the property in question." Estate of Kaplin v. Commissioner,748 F.2d 1109">748 F.2d 1109, 1111 (6th Cir. 1984), revg. a Memorandum Opinion of this Court. In a case involving facts similar to those before us here, but where respondent did not produce expert testimony contradicting that of petitioners, the Court of Appeals in Tripp v. Commissioner,supra, explained: The petitioner contends that inasmuch as the respondent offered no expert testimony the testimony of petitioner's expert witnesses should have been heeded and their opinions accepted by the Tax Court as determinative of the December 1955 value of the jewelry and that it was clearly erroneous for that court to reject their valuations. But the record discloses that the opinion testimony of these witnesses was almost wholly subjective459 in character. And, opinion evidence which does not appear to be based upon disclosed facts is of little or no value. Balaban & Katz Corp. v. Commissioner, 7 Cir., 30 F.2d 807">30 F.2d 807, 808. Petitioner's witnesses failed to support their conclusions as to value with facts of convincing probative value. The Tax Court was not, under the circumstances, obliged to accept as sound the opinion of the taxpayer's experts. Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282, 295, 58 S. Ct. 932">58 S.Ct. 932, 82 L. Ed. 1346">82 L.Ed. 1346; Dayton P. & Co. v. Public Utilities Commission, 292 U.S. 290">292 U.S. 290, 299, 54 S. Ct. 647">54 S.Ct. 647, 78 L. Ed. 1267">78 L.Ed. 1267. In the absence of any convincing reason forming a basis for the opinions expressed we are of the view that the Tax Court was fully justified in concluding that the cost of the jewelry to the petitioner in 1953 was the best evidence of its fair market value in December of 1955, the date of the gift. Cost, here, was cogent evidence of value. Cf. Guggenheim v. Rasquin, 312 U.S. 254">312 U.S. 254, 258, 61 S. Ct. 507">61 S.Ct. 507, 85 L. Ed. 813">85 L.Ed. 813; Gessell v. Commissioner, 7 Cir., 41 F.2d 20">41 F.2d 20, 22. There is no substantial evidence that any situation arose or development occurred460 in the interim which increased the value of the collection. [Tripp v. Commissioner,337 F.2d at 434-435.] 3See also Chiu v. Commissioner, 85 T.C. (April 15, 1985).Respondent has not requested an increased deficiency in this case. Respondent's expert, who is well qualified in appraising the items in question, testified that the fair market values at the times of donation were less than the cost of the items. There is no other evidence in this case, however, that the cost paid by petitioners was not fair market value in the applicable market or otherwise was not reliable. Because appraisal techniques and opinion testimony are necessarily inexact, we conclude that cost*461 is the most reliable evidence in this case. Decisions will be entered for the respondent.Footnotes1. The parties stipulated that testimony establishing the general qualifications of the experts in Chiu v. Commissioner,↩ 85 T.C. (April 15, 1985), would be incorporated into the record in this case.2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩3. In our Memorandum Opinion, we stated: Where sales of property to be valued have been made at or about a crucial date, they are preferred as evidence of value rather than opinion. Andrews v. Commissioner,38 F.2d 55">38 F.2d 55 (C.A. 2, 1930), affirming 13 B.T.A. 651">13 B.T.A. 651 (1928); John J. Flynn,35 B.T.A. 1064">35 B.T.A. 1064 (1937). [Tripp v. Commissioner,T.C. Memo. 1963-244, 22 TCM 1225↩ at 1231, 32 P-H Memo par. 63,244 at 63-1398.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620308/	SUNSHINE CLOAK & SUIT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sunshine Cloak & Suit Co. v. CommissionerDocket No. 11810.United States Board of Tax Appeals16 B.T.A. 540; 1929 BTA LEXIS 2558; May 14, 1929, Promulgated 2558 Where the principal stockholder of a close corporation, pursuant to an intention to make a contribution to corporate surplus, instructed his bookkeeper to transfer a portion of the sum credited to his personal account to such surplus, and such order was executed, held, the amount so transferred was allowable as invested capital. George Beneman, Esq., and Irving Loeser, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. SIEFKIN540 This is a proceeding for the redetermination of a deficiency in income and profits taxes for a fiscal year ended November 30, 1918, in the amount of $20,047.39. Two issues are presented - (1) whether an item of $190,000, known as the C. K. Sunshine-Exchange Account, should be included in the petitioner's invested capital for the year in question (and, incident to that issue, whether the respondent erred in allowing the petitioner a deduction for interest thereon), and (2) whether assessment and collection of the deficiency are barred by the statute of limitations. The second issue was presented to the Bord and decided adversely to the petitioner in our decision reported at 10 B.T.A. 971">10 B.T.A. 971.2559 FINDINGS OF FACT. The petitioner is an Ohio corporation with its principal office and place of business at Cleveland. It was incorporated in 1899 and took over a business of manufacturing women's clothing theretofore conducted by C. K. Sunshine, who succeeded a partnership established in 1893. The corporation originally had, and still has, outstanding stock of the par value of $50,000, divided into 500 shares having a par value of $100 each. Sunshine became the principal stockholder with approximately 340 shares, the remainder being held in relatively 541 small blocks by old employees of the business or by relatives who were associated with him in the enterprise. The stock has always been closely held and practically all shares were owned by Sunshine or his relatives. At the time the alleged contribution to surplus took place, petitioner held 225 of the 500 shares outstanding, the remainder (excepting 75 shares held by an old employee) being held by his relatives. During the year in question Sunshine was the president of petitioner corporation, as he had been from the beginning. He, apparently, conducted the business much as if it were his individual business2560 without regard to corporate formalities. The petitioner had, from an early date, carried on its books an account termed "C. K. Sunshine Exchange Account." This recorded income of C. K. Sunshine from sources outside the petitioner's affairs, as well as income from petitioner in the form of interest, dividends and salary. Against such accounts were debits showing withdrawals made by him from time to time. This account at one time amounted to approximately $400,000 and was available for use by petitioner, Sunshine having always arranged for needed finances. About the year 1911 Sunshine built a building costing about $170,000 for petitioner's use out of funds from this account, which building is still owned by Sunshine and is still occupied by petitioner. The business prospered until 1911, when heavy losses were sustained. By 1916 prices had increased until it was thought necessary that petitioner have a larger capital available for credit purposes. No formally recorded corporate action was taken, but $190,000 of the amount credited to Sunshine in the "Exchange Account" was, at his instruction, set up by his nephew, a stockholder, who was then the bookkeeper, in an account captioned: 2561 NameSurplus Acct.AddressC. K. SunshineBelow this caption was the entry of $190,000 dated December 1, 1916. The "Exchange Account" was not terminated at that time but was continued and still exists. In the latter part of 1916 the bookkeeper severed his connection with the business and went west for his health. The bookkeeper who was employed in his stead considered the above entry an improper one to show the $190,000 as surplus of the petitioner. He so stated to Sunshine and was instructed by him to make whatever entries he thought proper to show the $190,000 simply as surplus, as Sunshine wanted to contribute that sum to petitioner's capital. Accordingly, he noted on the sheet containing the account the word "trans." under date of November 30, the date the books were closed, 542 and under date of December 1, 1917, he opened up a new account captioned: NameSurplusAddressUnder such caption in the "date" column was written December 1, 1917, and under the column "credits" was entered $190,000. Thereafter, if not after the opening of the account so transferred, the $190,000 was included in the surplus of petitioner corporation2562 in making financial statements to petitioner's bank or factors, and was so included by petitioner in making out its stock tax return for the year in question. It was kept separate on the books from the general surplus account. Sunshine has never claimed the $190,000 and holds no notes or other evidence of indebtedness concerning it. No stock has been issued therefor as Sunshine preferred for credit purposes to have a small stock capitalization and a large surplus rather than a large stock capitalization with no substantial surplus. It had long been the practice of petitioner to credit the stockholder's account with 6 per cent on their capital stock before it was considered any earnings had resulted or dividends were declared. After the $190,000 transfer to surplus, and during the year in question, interest on the $190,000 at 6 per cent was credited to Sunshine's "Exchange Account," as well as like credits being entered to the accounts of the several stockholders on the stock account of $50,000. Six per cent interest was also paid on the "Exchange Account." There was a general or earned surplus, but no such charge was made against income in respect to such surplus. The respondent2563 adjusted taxable income to include the interest deduction taken on account of the $50,000 stock capitalization, but allowed the interest deduction amounting to $11,400 on the $190,000 account, and excluded that amount from invested capital. It is stipulated that the amounts used by respondent for the prewar period in computing invested capital are correct. It is also agreed that, if the $190,000 in question is allowable as invested capital, the $11,400 deduction claimed and allowed should be restored to income. OPINION. SIEFKIN: The petitioner renews his motion for judgment on the ground that the statute of limitations interposes a bar to the deficiency asserted in view of the numerous decisions involving questions of the statute of limitations since our decision, Sunshine Cloak & Suit Co.,10 B.T.A. 971">10 B.T.A. 971, denying that motion. Petitioner cites and relies on Joy Floral Co. v. Commissioner, 29 Fed.(2d) 865. We do not think that decision in point. Nor have we been able to find any other decision in conflict with the result of our former holding on the point. The motion is again denied. 543 Turning to the merits of the case, *2564 we find the petitioner's contention persuasive. Sunshine testified that he intended to contribute the $190,000 to the capital of the corporation and gave instruction to that effect. The bookkeeping acts, as well as the bookkeeper's testimony, not only confirm the testimony, but show his instructions were carried out. The only questionable fact is the credit to Sunshine's personal (Exchange Account) account of interest thereon, which, taken by itself, would indicate the sum to be borrowed money. Such indication, however, is negatived by the undisputed showing that a like interest credit was made on behalf of all stockholders on capital invested in stock of petitioner. This long established, though erroneous, practice of crediting interest on capital paid in adequately explains the one fact which tends to defeat the petitioner's contention. The exclusion of $190,000 from invested capital was error. The interest deducted thereon will be restored to income. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620310/	Joseph J. Clement v. Commissioner.Clement v. CommissionerDocket No. 769-71.United States Tax CourtT.C. Memo 1972-184; 1972 Tax Ct. Memo LEXIS 73; 31 T.C.M. (CCH) 903; T.C.M. (RIA) 72184; August 23, 1972, Filed Tried in Atlanta, Ga. Joseph J. Clement, pro se, 9883 Roswell Rd., Atlanta, Ga. 74 Dudley W. Taylor, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined deficiencies in the income tax liability of petitioner for the taxable years 1967 and 1968 in the respective amounts of $412.66 and $3,130.19. The issues for resolution are (1) whether amounts paid by petitioner to his former wife pursuant to a divorce decree qualify as periodic payments under section 71(a) (1) of the Internal Revenue Code of 19541 and are, therefore, deductible by petitioner under section 215 and (2) whether amounts paid by petitioner to his attorney as legal fees are deductible by petitioner under section 212. 904 Findings of Fact Some of the facts have been stipulated; they are so found and are incorporated herein by this reference. Petitioner was a resident of Atlanta, Georgia, during the taxable years 1967 and 1968 and at the time of the filing of the petition herein. Petitioner filed his Federal income tax returns for the taxable years 1967 and 1968 with the Southeast Service Center, Chamblee, Georgia. 75 Petitioner and Mary Anne Iggulden (Mary) were married in 1962. The marriage was the second for both parties. The marriage was not a happy one, and the ensuing marital discord adversely affected petitioner's business activities. Petitioner and Mary were divorced by a decree of the Superior Court of Fulton County, Georgia, dated October 20, 1967. The divorce decree provided, in pertinent part, as follows: On timely motion of counsel for the defendant made after the jury retired, for an award by the Court of attorneys' fees and expenses of litigation, the Court heard evidence and arguments with respect thereto, pro and con, and ordered prior to the jury's return of its verdict that the plaintiff pay to the defendant a total of ONE THOUSAND SIX HUNDRED FIFTY ($1,650.00) DOLLARS as attorneys' fees and expenses of litigation. The jury by its verdict granted to the defendant the lump sum of FIVE THOUSAND ($5,000.00) DOLLARS and the Court orders and decrees that the total amount of SIX THOUSAND SIX HUNDRED FIFTY ($6,650.00) DOLLARS due the defendant under the verdict of the jury and the Court's award of One Thousand Six Hundred Fifty ($1,650.00) Dollars to the defendant as attorneys' 76 fees and expenses of litigation be paid by the plaintiff to the defendant at the rate of THREE HUNDRED THIRTY TWO AND 50/100 ($332.50) DOLLARS per month on the first day of each month beginning November 1, 1967 and continuing on the first day of each month thereafter until the full amount of Six Thousand Six Hundred Fifty ($6,650.00) Dollars has been paid by plaintiff to the defendant. The divorce decree contained no express provision for the payment of support in the nature of alimony. Petitioner paid Mary amounts totalling $665 and $3,990 in 1967 and 1968, respectively. These amounts comprised two monthly payments of $332.50 each in 1967 and 12 monthly payments of $332.50 each in 1968. Approximately 25 percent of each monthly payment of $332.50 is attributable to petitioner's payment of the legal expenses incurred by Mary in the divorce proceeding. The remaining 75 percent of each monthly payment is attributable to the $5,000 lump sum awarded to Mary by the jury in the divorce proceeding. Petitioner paid his attorney the amounts of $639.25 and $1,200 in 1967 and 1968, respectively, for his services in representing petitioner in connection with the divorce proceeding. In his77 returns for the taxable years 1967 and 1968, petitioner claimed an alimony deduction under section 215 for the amounts paid to Mary and a deduction under section 212 for the amounts paid to his attorney. Respondent in his notice of deficiency disallowed the claimed deductions and increased petitioner's taxable income to reflect the disallowance of these deductions. Opinion The first issue is whether petitioner's payments in 1967 and 1968 to his former wife are periodic payments in discharge of a legal obligation which is imposed on or incurred by the husband because of the marital or family relationship. If so, these payments are includable in the wife's income under section 712 and are deductible by the husband under section 215. 3 Petitioner contends that the payments comply with the requirements of sections 71 and 215. Respondent contends that the payments constitute a lump sum property settlement and are, therefore, not deductible by the petitioner. 78 905 In discussing this issue, we must first analyze the two component elements of each monthly payment of $332.50. Approximately 25 percent of each monthly payment is attributable to petitioner's payment of the legal expenses incurred by Mary in the divorce proceeding. The remaining 75 percent of each monthly payment is attributable to the $5,000 lump sum awarded to Mary by the jury in the divorce proceeding. It is well established that expenses are personal in nature if they arise as a product of the taxpayer's personal or family life and are, therefore, nondeductible. See section 262. It is also clear that the deductibility or nondeductibility of legal expenses incurred in a a divorce proceeding is contingent upon the origin of the expense, that is, legal expenses incurred in a divorce proceeding are deductible only if the taxpayer can establish that the legal expenses had their origin in the taxpayer's profit-seeking business activities and not in the divorce itself. United States v. Gilmore, 372 U.S. 39">372 U.S. 39 (1963); United States v. Patrick, 372 U.S. 53">372 U.S. 53 (1963); and William F. Wallace, Sr., 56 T.C. 624">56 T.C. 624 (1971). Petitioner can deduct his79 payment of Mary's legal expenses incurred in the divorce proceeding only if these expenses originated in petitioner's profit-seeking business activities. Although it is apparent that petitioner's marital discord adversely affected his business operations, these consequences are irrelevant. See United States v. Gilmore, supra, and United States v. Patrick, supra.The conclusion remains that the divorce itself is the origin of Mary's legal expenses. Therefore, since Mary's legal expenses have a personal origin, we hold accordingly that the 25 percent of each monthly payment attributable to the payment of Mary's legal fees incurred in the divorce is not deductible by petitioner under the Gilmore and Patrick rationale. See David R. Pulliam, 39 T.C. 883">39 T.C. 883, 885 (1963), affd. 329 F. 2d 97 (C.A. 10, 1964), certiorari denied 379 U.S. 836">379 U.S. 836 (1964). The determination of whether the remaining 75 percent of each monthly payment in fact represents alimony or a property settlement is not controlled by the existence or nonexistence of descriptive labels in the divorce decree. Instead, this determination results from a close examination80 of the facts in each specific case. See Ann Hairston Ryker, 33 T.C. 924">33 T.C. 924 (1960); Ernest H. Mills, 54 T.C. 608">54 T.C. 608 (1970), affd. 442 F. 2d 1149 (C.A. 10, 1971); Lewis B. Jackson,jr., 54 T.C. 125">54 T.C. 125 (1970); and Enid P. Mirsky, 56 T.C. 664">56 T.C. 664 (1971). Therefore, the fact that the term "alimony" was not expressly referred to in the divorce decree is not per se prejudicial to petitioner. However, this Court cannot ignore that petitioner has the burden of proving that the payments constituted alimony under section 71 and are accordingly deductible under section 215. See Enid P. Mirsky, supra, at 677, and Brantley L. Watkins, 53 T.C. 349">53 T.C. 349 359 (1969). Petitioner has introduced no evidence that would support his contention that the payments constituted support in the nature of alimony. 4 Thus, since petitioner has not satisfied his burden of proof with respect to this issue, we conclude that petitioner is not entitled to a deduction under section 215 for the taxable years 1967 and 1968 for the 75 percent of each monthly payment attributable to the amount awarded in the divorce proceeding. 81 With respect to the second issue, the previous discussion of United States v. Gilmore, supra, and United States v. Patrick, supra, is again relevant. The origin of petitioner's own legal expenses is the divorce and not his business activities. Therefore, we conclude that petitioner's own legal expenses incurred in the divorce proceeding are not deductible, and that the Commissioner properly disallowed the claimed deductions in the taxable years 1967 and 1968 pertaining to petitioner's own legal expenses. See David R. Pulliam, supra, at 885. Decision will be entered for the respondent. 906 Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. SEC. 71(a) General Rule. - (1) Decree of divorce or separate maintenance. - If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation. ↩3. SEC. 215(a) General Rule. - In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. No deduction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682↩, the amount thereof is not includible in the husband's gross income.4. Sec. 1.71-1(d) (3) (i), Income Tax Regs., provides that payments to be paid over a period of 10 years or less may be considered periodic payments if such payments satisfy two conditions: (a) Such payments are subject to any one or more of the contingencies of death of either spouse, remarriage of the wife, or change in the economic status of either spouse, and (b) Such payments are in the nature of alimony or an allowance for support. Petitioner has presented no evidence to establish that this regulation is applicable in the instant case. In fact, the divorce decree contains no express provision for the contingencies described in sec. 1.71-1(d) (3) (i) (a). In addition, we found no authority under Georgia state law that would permit application of these contingencies in the absence of express provision for them in the divorce decree. See, e. g., davis v. Welch, 220 Ga. 515">220 Ga. 515, 140 S.E. 2d 199 (1965). Accordingly, we find that sec. 1.71-1(d)(3)(i)↩ is not applicable in the instant case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620315/	ROBERT P. BROOKS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrooks v. CommissionerDocket No. 2074-65.United States Tax CourtT.C. Memo 1984-332; 1984 Tax Ct. Memo LEXIS 340; 48 T.C.M. (CCH) 397; T.C.M. (RIA) 840332; June 28, 1984. Hans A. Nathan, for the petitioner. Evelyn Small, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: This case was assigned to Special Trial Judge Peter J. Panuthos for the purpose of considering and ruling on respondent's Motion for Judgment on the Pleadings pursuant to Delegation Order No. 8 of this Court, 81 T.C. XXV (1983). The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE PANUTHOS, Special Trial Judge: This case is before the Court on respondent's Motion for Judgment on the Pleadings, filed April 30, 1984, pursuant341 to Rule 120, 1 on the ground that the United States District Court, Central District of California, entered a judgment which is resjudicata with respect to the deficiencies and additions to tax determined by respondent. Memoranda have been submitted by the parties and a hearing was held on May 30, 1984. On January 18, 1965, respondent made jeopardy assessments pursuant to the provisions of section 6861(a) 2 of deficiencies and additions to tax as follows: Additions to TaxYearDeficienciesSec.6653(b)InterestTotal1958$ 188,899.88$ 94,449.94$ 65,263.61$ 348,613.431959$1,639,912.56$ 819,956.28$ 468,183.80$2,928,052.641960$2,007,527.31$1,003,786.16$ 452,693.80$3,464,052.271961$2,667,227.05$1,333,613.53$ 441,407.81$4,442,248.39Total$6,503,611.80$3,251,805.91$1,427,549.02$11,182,966.73On January 25, 1965, the United States instituted proceedings under the provisions of section 7403 in the United342 States District Court for the Central District of California to enforce collection of the deficiencies and additions to tax which had been assessed pursuant to the jeopardy assessment. On March 18, 1965, respondent issued a notice of deficiency to petitioner with respect to the taxable years 1958 through 1961. In said notice respondent determined deficiencies and additions to tax as follows: Additions to TaxYearDeficiencySec.6653(b)1958$ 204,525.50$ 102,262.751959$1,641,461.92$ 820,730.961960$1,963,540.43$ 981,770.221961$2,749,461.93$1,375,239.89Total$6,558,989.78$3,280,003.82On April 14, 1965, petitioner timely filed a petition with this Court. At the time of filing his petition, petitioner resided in Vancouver, British Columbia, Canada. On September 23, 1968, respondent timely filed his answer in this proceeding. 3 On April 10, 1970, petitioner timely filed his reply to respondent's answer. 4343 On July 23, 1976, the United States District Court, Central District, California, filed an opinion and entered a judgment after a trial on the merits of the Government's action to foreclose Federal tax liens in the matter of United States v. Stonehill,420 F. Supp. 46">420 F. Supp. 46 (C.D. Cal. 1976). The judgment entered by the United States District Court for the Central District of California, on October 15, 1980 5, determined that there was due from petitioner taxes, additions to tax, and interest for the taxable years 1958 through 1961 in the amount of $8,667,658.29. The findings of the United States District Court reflect the following breakdown: Additionto TaxDeficiencyAccruedYearDeficiencySec.6653(b)InterestInterestTotal19581959$ 690,883.13$345,441.57$197,242.40$ 911,158.30$2,144,725.401960$ 873,673.11$436,836.56$197,007.30$1,152,228.51$2,659,745.481961$1,202,469.56$601,234.78$199,000.48$1,585,855.26$3,588,560.08GrandTotal 1$8,393,030.96344 The judgment was affirmed as to petitioner by the United States Court of Appeals for the Ninth Circuit on April 8, 1983. 6United States v. Stonehill,702 F.2d 1288">702 F.2d 1288 (9th Cir. 1983), cert. denied 465 U.S. (1984). On April 6, 1984, respondent filed his supplemental answer, pleading the above facts and concluding that the determination of petitioner's income tax liability and the additions thereto under section 6653(b) for the taxable years 1958 through 1961 are resjudicata with respect to proceedings before this Court. In his reply filed on April 18, 1984, petitioner essentially admits the factual allegations of respondent's supplemental answer, however, he concludes that resjudicata is not applicable. In determining whether or not the doctrine of resjudicata is applicable we look to the landmark case of Commissioner v. Sunnen,333 U.S. 591">333 U.S. 591 (1948). In discussing this concept, the Supreme Court stated as follows at p. 597: It is first necessary to understand something of the recognized maning and scope345 of resjudicata, a doctrine judicial in origin. The general rule of resjudicata applies to repetitious suits involving the same cause of action. It rests upon consideration of economy of judicial time and public policy favoring the establishment of certainty in legal relations. The rule provides that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound "not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." * * The judgment puts annend to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud or some other factor invalidating the judgment.[Citations omitted; 333 U.S. at 597.] In applying the concept of resjudicata to the field of Federal income tax, the Supreme Court further stated as follows: These same concepts are applicable in the federal income tax field.Income taxes are levied on an annual basis. Each year is the origin346 of a new liability and of a separate cause of action.Thus if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is resjudicata as to any subsequent proceeding involving the same claim and the same tax year. But if the later proceeding is concerned with a similar or unlike claim relating to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. * * [333 U.S. at 598.] Robert P. Brooks, petitioner herein, is the person who was a defendant in the foreclosure proceeding in the United States District Court for the Central District of California. The respondent is a party in privity with the United States of America, the prosecuting party in the aforementioned district court proceeding. Amos v. Commissioner,43 T.C. 50">43 T.C. 50, 52 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965). The same causes of action which are at issue here, petitioner's income tax liability and additions thereto for the taxable years 1958 through 1961, were in issue in the district347 court proceeding. Each taxable year is an origin of a separate liability, and each taxable year is also the origin of a separate cause of action. Commissioner v. Sunnen,supra.See also Shaheen v. Commissioner,62 T.C. 359">62 T.C. 359 (1974). As argued by respondent in his memorandum, this case is governed by our holding in Shaheen v. Commissioner,supra. In that case the United States made a jeopardy assessment and filed suit in the United States District Court to enforce collection of the jeopardy assessment. A petition was filed by the taxpayer in the United States Tax Court. The district court entered a default judgment against the taxpayer for failure to appear at a pretrial conference and a judgment was entered determining Federal income taxes and additions due from the taxpayer. No appeal was taken from the judgment. When the matter came for hearing in the United States Tax Court, the Commissioner filed a Motion for Judgment on the Pleadings on the theory that the district court judgment was resjudicata with respect to the tax years in issue. We agreed with the Commissioner in that case. Utilizing the criteria set348 forth in Commissioner v. Sunnen,supra, we determined that all of the elements of resjudicata were present. The facts in this case even more strongly support application of the rule of resjudicata in that rather than having a default judgment in the district court, we have here a judgment based on the merits which was appealed to the Ninth Circuit and affirmed. Certiorari having been denied, every avenue of appeal has been exhausted with respect to that proceeding. Accordingly, we believe the case of Shaheen v. Commissioner,supra, is controlling here, and for all of the reasons set forth in that opinion respondent's Motion for Judgement on the Pleadings should be granted. In his memorandum and also in argument, petitioner made a feeble attempt to argue that the doctrine of resjudicata should not apply. Some of his arguments are essentially the same as those he made before the district court and the court of appeals regarding the net worth computations that were never placed in evidence in that case. See United States v. Stonehill,702 F.2d 1288">702 F.2d 1288, 1296 (9th Cir. 1983). Petitioner suggests that349 respondent has abandoned his original position and therefore is not entitled to the presumption of correctness. Petitioner points to the fact that the district court made adjustments to the respondent's net worth statement which effectively reduced the assessments by approximately 60 percent. Petitioner ultimately contends that the case before this Court involves a different cause of action than that brought before the United States District Court. Having carefully reviewed the record before us including the opinion of the Court of Appeals for the Ninth Circuit, we are satisfied that petitioner's arguments have no merit. Petitioner has not convinced us that we should not apply the holding of Shaheen v. Commissioner,supra, to this case. Moreover, in his reply filed April 10, 1970, in paragraph 9 thereof, petitioner's counsel states as follows: In further reply to the answer of respondent herein, petitioner avers that the issues herein are presently being litigated between the parties in the United States District Court for the Central District of California, pending as United States v. Harry Stonehill, et al, Civil Action No. 65-127-HW, which court, 350 under applicable law and by stipulation of the parties binding upon the respondent, has full jurisdiction to determine said issues and that pending such determination all proceedings herein should be stayed. This case has been continued by the Court upon numerous requests by petitioner. The representations by petitioner's counsel were that the action in the district court would resolve the issues before this Court. In his motion to continue filed with the Court on January 10, 1978 (after the opinion in the United States District Court was filed), petitioner stated as follows: 4. Docket No. 1574-65 and 2074-65 involved the same issues as are under adjudication in the District Court, and the decision of the Court will be resjudicata as to these two cases. Petitioner made this allegation again in other status reports as well as other motions to continue this matter. After the United States Supreme Court denied certiorari, respondent forwarded a stipulated decision to petitioner reflecting the judgment of the United States District Court. Counsel for petitioner's response was "I'm not authorized to sign the decision documents * * ." Petitioner's objections to the351 motion for judgment on the pleadings have no merit.We note that the petition in this case was filed in 1965. Thus, this proceeding has been docketed with this Court for 19 years. We will not participate in prolonging this litigation any further. For reasons set forth herein, respondent's motion for judgment on the pleadings is granted. An appropriate order and decision will be entered.Footnotes1. All rule references are to the Tax Court Rules of Practice and Procedure.↩2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. Respondent's various requests for an extension of time for filing of answer were granted by the Court. The basis for requests for extension was that the files necessary for preparation of the answer were with the Department of Justice for purposes of maintaining the suit in the United States District Court in California. ↩4. Petitioner's requests for extension of time to file a reply were also granted by this Court.↩5. We note that in his supplemental answer filed on Apr. 6, 1984, respondent alleges that the United States District Court for the Central District of California entered a judgment on Oct. 15, 1980, which was based upon a finding filed on Feb. 5, 1979. In his reply filed on Apr. 18, 1984, petitioner admits that a judgment was entered on Oct. 15, 1980. Petitioner, however, alleges that the finding of the district court was filed on Feb. 5, 1970. While we do not understand the reason for the discrepancy in these dates, the Court takes judicial notice of the opinion filed on July 23, 1976, in the United States District Court for the Central District of California reported at 420 F. Supp. 46">420 F. Supp. 46↩. 1. We note that the total here is something less than that set forth as the judgment entered on Oct. 15, 1980. We assume the difference in these figures is attributable to the fact that the breakdown accrues interest through Jan. 31, 1979, while the judgment contains interest accrued through a later date.↩6. The United States Court of Appeals reversed in part, with respect to an issue not relevant herein.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620316/	John E. Simanek v. Commissioner.Simanek v. CommissionerDocket No. 84540.United States Tax CourtT.C. Memo 1961-200; 1961 Tax Ct. Memo LEXIS 155; 20 T.C.M. (CCH) 996; T.C.M. (RIA) 61200; June 30, 1961John E. Simanek, 120 Cabrini Blvd., New York, N. Y., pro se. David E. Crabtree, Esq., for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined a deficiency in income tax of the petitioner for the calendar year 1957 in the amount of $287. The sole issue for decision is whether petitioner is entitled to a deduction as an ordinary and necessary business expense in 1957 in the amount of $1,450 or any part thereof for expenses of a European trip which he took over the period November 26, 1956 through January 5, 1957. Findings of Fact Petitioner is an individual now residing at 159-34 Riverside Drive, New York, New York. 156 He filed his individual income tax return for the calendar year 1957 with the district director of internal revenue at Scranton, Pennsylvania. Petitioner is a free lance shoe designer and his business is obtained by applying to shoe manufacturers and showing them what he can do in styling. All of his income in 1957 was received for work in designing shoes. It is the custom for persons engaged in the business of shoe designing to go to Italy and France occasionally for the purpose of developing new ideas for designs. It is necessary for a free lance designer to have original ideas in order to obtain work. One New York shoe manufacturer suggested to petitioner in 1956 that he take a European trip in order that such fact might be published in connection with his shoe designs. Petitioner left the United States for Europe via Pan American World Airways on November 26, 1956, and returned by the same means on January 5, 1957. Petitioner purchased his Pan American Airways ticket on November 7, 1956, for $830.40, which he paid in full by check in 1956 prior to his departure for Europe on November 26. Petitioner was born in Germany and has relatives living in the southwest portion of that157 country. He also has an uncle who lives in Vienna. Petitioner went from Idlewild, New York, first to Lisbon and then to Madrid. From Madrid he went to Rome and from Rome to Istanbul, Athens, Vienna, Frankfort, and finally to Paris for the last 2 weeks of his trip before his return to New York on January 5, 1957. The first work in connection with shoe designing that petitioner did on his trip was in Rome where he spent a week doing sketching for new designs. He did no work in connection with shoe designing in Istanbul or Athens, but in Vienna, where petitioner stayed for 2 or 3 days with his uncle, he did visit an advertising agency which did his advertising in New York. In Frankfort, he visited a concern which publishes designs for him. During his 2 weeks' stay in Paris, he visited some shoe manufacturers and did sketches for new lines. In addition to the $830.40 spent by petitioner for his airline ticket, he spent in cash $620 during his European trip. All of this amount, except his daily expenses in Paris from January 1 to January 5, 1957, was spent by petitioner during the year 1956. Petitioner stayed at the Hotel Francis in Paris. His hotel room was $10 a day. Petitioner spent158 $20 a day during the time he was in Paris for hotel, meals, and taxi fares. Petitioner claimed as a deduction on his 1957 tax return, under the designation "Business Trip to Italy", the amount of $1,450. Respondent disallowed this claimed deduction with the following explanation: The deduction of $1,450.00 claimed for expenses incurred on an alleged business trip to Italy has been disallowed because a bona fide business purpose for the trip has not been shown. The cost of the portion of petitioner's trip which consisted of going to Rome and Paris constituted an ordinary and necessary business expense deductible in 1957 to the extent of the amount thereof paid by petitioner during that year. The amount paid by petitioner as expenses of his trip during the year 1957 was $80. Opinion The record is unequivocal that the major portion of petitioner's expenses for this European trip was paid by him in 1956. Petitioner makes no contention nor is there any evidence showing that he used any basis of accounting other than cash receipts and disbursements. A cash-basis taxpayer is generally entitled to deductions for ordinary and necessary business expenses only in the year in which such159 amounts are paid. Petitioner has shown no facts which would entitle him to deduct in 1957 amounts actually paid in 1956 for costs of his European trip, even to the extent that such amounts constituted ordinary and necessary business expenses. Cf. Watkins Salt Co., 1 T.C. 125">1 T.C. 125, 128 (1942). For this reason it is unnecessary to determine what portion of petitioner's expenses paid in 1956 constituted ordinary and necessary business expenses. In Paris, petitioner stayed at the Hotel Francis where he paid $10 a day for his hotel room. He testified that his daily expenses in Paris including his hotel room would be between $20 and $30 a day. Petitioner testified that some of his expenses in Paris were actually paid by him during the period January 1 through January 5, 1957. He was unable to estimate accurately how much he spent during this time but stated that at most it would be about $100. Considering the fact that petitioner returned to Idlewild on January 5, 1957, he probably would have paid expenses for only 4 days in Paris during the year 1957 unless part of his hotel bill for the last week of 1956 was paid in 1957. Petitioner has not shown what portion of his hotel bill*160 for his stay in Paris was paid in 1957. Apparently, from petitioner's testimony, the costs of his meals and taxi fares were paid in cash as they were incurred. Upon consideration of all the evidence and weighing heavily against petitioner of his lack of precise proof, we have determined that petitioner paid expenses in the amount of $80 during the year 1957 while in Paris engaged in activities directly related to his business. We hold the amount of $80 to be deductible as an ordinary and necessary business expense by petitioner in 1957 under the provisions of section 162(a)(2) of the Internal Revenue Code of 1954. Ralph E. Duncan, 30 T.C. 386">30 T.C. 386 (1958). Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620317/	BARRETT-CROFOOT INVESTMENTS, INC., f.k.a. BARRETT-CROFOOT, INC., AND BARRETT-CROFOOT CATTLE, INC., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBarrett-Crofoot Invs. v. CommissionerDocket No. 3015-91United States Tax CourtT.C. Memo 1994-59; 1994 Tax Ct. Memo LEXIS 60; 67 T.C.M. (CCH) 2166; February 15, 1994, Filed 60 An appropriate order will be issued denying petitioners' motion for partial summary judgment. For petitioners: William D. Elliott and William H. Hornberger. For respondent: John S. Repsis, George E. Gasper, and William O. Henck. SCOTT SCOTT MEMORANDUM OPINION SCOTT, Judge: This matter is before the Court on petitioners' Motion for Partial Summary Judgment (the motion), filed April 27, 1993, pursuant to Rule 121. 1Respondent determined deficiencies in petitioners' income tax for the fiscal years ending June 30, 1986, June 30, 1987, and June 30, 1988, in the amounts of $ 16,560, $ 1,624,220, and $ 1,091,033, respectively. The issue for decision is whether according to the doctrine of collateral estoppel, the doctrine of judicial estoppel, or the doctrine of res judicata respondent is estopped from denying that a corporation61 to which petitioners made loans in 1987 and 1988 obtained those loans by misrepresentation without an intent to repay. The facts presented below are assumed based on the pleadings and other pertinent materials in the record. Rule 121(b). They are stated solely for purposes of deciding the motion. Fed. R. Civ. P. 52(a); see also Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 520 (1992). Some of the facts have been stipulated and are found accordingly. At the time of the filing of the petition in this case, petitioners' principal place of business was located in Hereford, Texas. At all times relevant to the present case, petitioner Barrett-Crofoot Cattle, Inc. (BCCI), was a wholly owned subsidiary of petitioner Barrett-Crofoot Investments, Inc. (BCII). BCII is engaged in the custom cattle feeding business. BCCI is also involved in the cattle business. Petitioners timely filed their consolidated Federal income tax returns for the tax years ending June 30, 1986 (the 1986 return), June 30, 1987 (the 1987 return), and June 30, 1988 (the 1988 return). In early 1980, BCII began to do business with Mr. Jim Kassahn and Mr. Kassahn's wholly owned corporation, 62 J.P. Family, Inc. (J.P.). BCII and Mr. Kassahn executed a partnership agreement creating the B-C & K Cattle Co., also referred to as Barrett Crofoot and Kassahn (B-C & K). According to the partnership agreement, the profits and losses of B-C & K were to be split equally between BCII and Mr. Kassahn. During the years in issue, B-C & K was engaged in the business of purchasing, feeding, processing, hedging, and selling cattle, other livestock, feed, agricultural supplies, and animal supplies. Sometime after the formation of B-C & K, Mr. Kassahn's interest in B-C & K was transferred to J.P. On October 29, 1986, B-C & K executed a promissory note payable to BCII for amounts advanced by BCII to B-C & K, up to $ 30 million. This note was signed by Mr. Ed Barrett as president of BCII and by Mr. Kassahn. As security for the note, B-C & K gave to BCII a security interest in all of B-C & K's cattle. The entire principal amount of the original note was due and payable on June 30, 1987. On June 30, 1987, the note was renewed and the principal amount of the note was increased to $ 40 million. This second note was signed only by Ed Barrett as President of BCII and was due and payable 63 on June 30, 1988. On June 30, 1988, B-C & K dissolved. On the date of dissolution, B-C & K was indebted to BCII and J.P.'s share of this debt was $ 9,712,685.48 (the $ 9,712,685.48 debt). Around June 11, 1987, J.P. borrowed $ 4,450,000 from BCII (the $ 4,450,000 debt) and executed a note evidencing the debt (the $ 4,450,000 note). 2 As part of the security for the $ 4,450,000 note, on June 18, 1987, Mr. Kassahn, as president of J.P., executed an Assignment of Partnership Interest, which assigned J.P.'s interest in B-C & K to BCII. Around the 64 end of August 1987, J.P. voluntarily filed a petition under chapter 11 of the Bankruptcy Code, 11 U.S.C., in the United States Bankruptcy Court for the Northern District of Texas. Mr. Walter O'Cheskey was appointed trustee for J.P. Claims against the bankrupt estate were made according to 11 U.S.C. section 501 (1984). BCII filed a claim for $ 79,886,502.21 based on loans made to J.P. which had not been repaid. On December 21, 1987, respondent filed a claim of at least $ 1,680,891. This claim appears to be for taxes owed by J.P. for the fiscal year ending August 31, 1986. In May 1988, Mr. O'Cheskey, as trustee, filed a motion with the bankruptcy court objecting to respondent's determination and requesting that the amount of tax owed be determined by the bankruptcy court. Respondent had an audit of J.P.'s books conducted which resulted in the determination of deficiencies for tax years ending August 31, 1981, 1982, 1983, 1984, 1985, 1986, 1987, and 1988. For the tax year ending August 31, 1987, the audit determined that there should be included in J.P's income amounts borrowed by J.P. that respondent determined were received by misrepresentations. 65 The following debts were the ones respondent included in J.P.'s taxable income: Holder of the noteAmount of debtFirst National Bank Amarillo$ 12,803,094 Hale County State Bank Plainview1,490,488 Barrett-Crofoot, Inc.4,450,000 Republic Bank Lubbock393,934 First State Bank of Bovina488,795 Furrs Group3,400,000 Furrs Group(100,000)Total 22,926,311 This list includes the $ 4,450,000 debt, but does not include the $ 9,712,685.48 debt. On May 17, 1989, J.P. filed its Federal income tax return for the year ending August 31, 1988. On Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness), J.P. reported $ 20,404,215 of cancellation of indebtedness income which was excluded from income as part of a title 11 case. Instead, J.P. reduced its tax attributes in accordance with section 108(b)(1). On July 12, 1989, a hearing was held by the bankruptcy court for consideration of the motion for determination of amount of tax due (the bankruptcy hearing). The following persons made appearances at the bankruptcy hearing: (1) Mr. John C. Sims, representing the trustee; (2) Mr. Kent Anderson, representing the Department of Justice, Tax Division; 66 and (3) Ms. Arlene Sandifer, representing Jim and Paula Kassahn. According to exhibits introduced at the bankruptcy hearing that summarized the results of the audit of J.P.'s books, respondent's agent had made the following determination as to J.P.'s tax liability as of July 12, 1989: Tax dueTYE August 31(refund) 1981($ 27,771) 19820 1983(44,296)1984(401,853)1985(1,680,891)19860 19872,151,383 198814,621 After interest and additions to tax were added to the above amounts, it was respondent's position that J.P. was due a $ 82,774 refund from respondent. Mr. Kennel Castle, the revenue agent who conducted the audit of J.P., testified at the bankruptcy hearing as follows: The main adjustment in this audit relates to loans that were received by J.P. Family, Inc., which our proposal is that those loans are to be considered as income. They were received from misrepresentation, and our position is that those loans were not paid back, and at the end of the 8708 year those were the amounts.Upon being questioned about this again later, Mr. Castle further reiterated that respondent's position was that the loans were received by misrepresentation67 and that they were to be included in income because J.P. did not intend to repay the loans. Mr. Sims, the trustee's representative, later stated: Your Honor, for the court's information, we first contested those matters, but based on the law that we read and furnished to us by the Internal Revenue, there are many decisions in the Fifth Circuit and now the tax courts that hold that if they don't intend to pay it back when they borrow the money then it's income for that year that they borrowed it, and that's why we have not -- I think the case law is against us on that issue, and I wanted the court to know that because that is obviously a large sum of money.Subsequently, Mr. Sims declared that the trustee agreed that $ 82,774 should be returned to the estate. Mr. O'Cheskey testified that one of the main issues to be decided by the bankruptcy court in the tax determination proceeding was J.P.'s "intent to repay loans". At the close of the bankruptcy hearing, the judge stated an examination of J.P.'s taxes for 1981 through 1988 had been made and not contested by the trustee and that: No other party of interest has come forward with evidence or objection that would 68 place a case of controversy of the issue or an issue of examination. * * When it comes to adjudication, the court still must have a case of controversy, and there simply has not been a case of controversy presented over this examination.The court entered an order in which it was stated that "The Director of Internal Revenue has notified the Trustee that the amount of refund due is $ 82,774.00". The court then "DETERMINED, that the amount due to the Debtor J.P.'s FAMILY, INC. for taxes incurred during the period set out above is $ 82,774.00". This amount was ordered paid and the debtor discharged of income tax liabilities for the years 1981 through 1988. Neither Mr. Kassahn nor Mr. Ed Barrett was called as a witness in the bankruptcy court. Mr. Kassahn in a deposition taken under oath testified that it was his intent as the sole owner of J.P. that J.P. repay the loans. On its consolidated Federal income tax returns for tax years ending June 30, 1987, and June 30, 1988, petitioners claimed the following bad debt deductions: Tax year endingJune 30 in whichPrincipaldeduction takenDebtoramount of debt1987Jim Kassahn $ 80,798.041987J.P.4,450,000.001987Jim Kassahn 1 939,826.841988J.P.9,712,685.4869 For the tax years ending June 30, 1987, and June 30, 1988, petitioners also claimed deductions of $ 61,368.65 3 and $ 37,218.60, respectively, of accrued interest owed to it but that it now considered a bad debt. On November 15, 1990, respondent mailed a notice of deficiency to petitioners determining their taxable income for the 1986 tax year, the 1987 tax year, and the 1988 tax year. One of the adjustments made to petitioners' income as reported was the disallowance of the claimed bad debt deductions for the 1987 tax year and the 1988 tax year. Specifically, respondent disallowed the following amounts claimed as bad debt deductions: Description19871988Bad debts -- principal amount$ 5,470,625$ 9,712,685Bad debts -- accrued Interest1 143,64237,219Total $ 5,614,267$ 9,749,90470 Respondent explained that the disallowance of the claimed bad debt deduction was based on the failure of petitioners to show that the debts became worthless in the year the deduction was claimed. In their petition, petitioners alleged that the amount claimed as a bad debt deduction should be allowed as a theft loss since the loans were obtained by misrepresentation and without an intent to repay. In their motion for partial summary judgment, petitioners allege that respondent is estopped to deny that they sustained a theft loss because of the position the Government took in the bankruptcy case of J.P. However, petitioners' argument goes merely to the obtaining of the loans through misrepresentation and without intent to repay and not to whether under Texas law the misrepresentation and lack of intent to repay were sufficient to constitute theft. We will, therefore, deal here only with the facts petitioners contend respondent is estopped to deny. Petitioners argue in support of their motion that according to the doctrine of collateral estoppel, the doctrine of judicial estoppel, or the doctrine of res judicata, respondent is estopped from denying the following facts: 1. BCII71 extended a loan to J.P. in the amount of $ 1,250,000; 2. BCII extended a loan to J.P. in the amount of $ 3,200,000; 3. The funds represented by the $ 1,250,000 debt were obtained through misrepresentation; 4. The funds represented by the $ 3,200,000 debt were obtained through misrepresentation; 5. The funds represented by the $ 9,712,685.48 debt were obtained through misrepresentation; 6. J.P. did not intend to repay the $ 1,250,000 debt; 7. J.P. did not intend to repay the $ 3,200,000 debt; and 8. J.P. did not intend to repay the $ 9,712,685.48 debt. (These facts are collectively referred to as the estoppel facts.) Based on the record in this case, we conclude that petitioners have failed to show that respondent is estopped to deny these facts. The record does not show that the $ 9,712,685.48 debt was involved in J.P.'s bankruptcy case. The record also fails to show that the issue of whether the loans to J.P. involved in its bankruptcy case were obtained by misrepresentation without an intent to repay was litigated in the bankruptcy case. Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials of phantom factual issues. 72 Northern Ind. Pub. Serv. Co. & Subs. v. Commissioner, 101 T.C. , (1993) (slip op. at 3) (citing Shiosaki v. Commissioner, 61 T.C. 861">61 T.C. 861, 862 (1974)). Because the granting of summary judgment decides an issue against a party without a trial, it is granted cautiously and sparingly, and only after carefully ascertaining that the moving party has met all the requirements for summary judgment. Associated Press v. United States, 326 U.S. 1">326 U.S. 1, 6 (1945); Espinoza v. Commissioner, 78 T.C. 412">78 T.C. 412, 416 (1982). Under Rule 121(b), summary judgment is appropriate "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." See Kroh v. Commissioner, 98 T.C. 383">98 T.C. 383, 389 (1992). Summary judgment will not be used to resolve disagreements over factual issues. Northern Ind. Pub. Serv. Co. & Subs. v. Commissioner, supra at (slip op. at 3); Shiosaki v. Commissioner, supra.73 A summary judgment will be denied if there is any reasonable doubt as to the facts in issue. Hoeme v. Commissioner, 63 T.C. 18">63 T.C. 18, 20 (1974) (citing 6 Moore, Federal Practice, par. 56.02[10], at 2045 (2d ed. 1948)). Factual inferences are viewed in the light most favorable to the party opposing the motion. Blanton v. Commissioner, 94 T.C. 491">94 T.C. 491, 494 (1990). The moving party bears the burden of proving that there is no genuine issue of fact. Id. However, the party opposing summary judgment cannot rest upon mere allegations or denials set forth in that party's pleadings, but must set forth specific facts showing that there is a genuine issue for trial. Rule 121(d); Marshall v. Commissioner, 85 T.C. 267">85 T.C. 267, 271 (1985). The doctrine of collateral estoppel, or issue preclusion, is used to preclude a party and its privies from relitigating issues actually and necessarily litigated and decided in a final prior judgment by a court of competent jurisdiction. It applies to issues of fact, issues of law, and mixed issues of fact and law. Meier v. Commissioner, 91 T.C. 273">91 T.C. 273, 282-283 (1988).74 This Court has used the following three-pronged test for determining the application of collateral estoppel: First, whether the issues presented in the subsequent litigation are in substance the same as those in the first case; second, whether controlling facts or legal principles have changed significantly since the first judgment; and third, whether other special circumstances warrant an exception to the normal rules of preclusion. * * * [Meier v. Commissioner, 91 T.C. 273">91 T.C. 273, 283 (1988) (citing Montana v. United States, 440 U.S. 147">440 U.S. 147, 155 (1979)).]In order for collateral estoppel to apply to an issue, the parties must have litigated the issue and a final judgment must have been rendered by a court of competent jurisdiction. Blanton v. Commissioner, supra at 495-496; Peck v. Commissioner, 90 T.C. 162">90 T.C. 162, 166 (1988), affd. 904 F.2d 525">904 F.2d 525 (9th Cir. 1990). Also, the nonmoving party must have had a full and fair opportunity to litigate the issue in the prior proceeding. Hudson v. Commissioner, 100 T.C. 590">100 T.C. 590, 593 (1993).75 A judgment of the bankruptcy court deciding the amount of tax liability owed is a final judgment. Florida Peach Corp. v. Commissioner, 90 T.C. 678">90 T.C. 678, 682-683 (1988). The parties to litigation in which collateral estoppel is sought ordinarily must be parties to the prior litigation or their privies. Gammill v. Commissioner, 62 T.C. 607">62 T.C. 607, 614 (1974); see also Kroh v. Commissioner, supra at 400. Collateral estoppel may not be invoked against the Government by one who was not a party to the prior proceeding. United States v. Mendoza, 464 U.S. 154">464 U.S. 154 (1984); Black Constr. Corp. v. INS, 746 F.2d 503">746 F.2d 503, 504 (9th Cir. 1984); McQuade v. Commissioner, 84 T.C. 137">84 T.C. 137, 144-145 (1985). The record of the bankruptcy court's proceeding does not show that the estoppel facts were either litigated in or actually decided by the bankruptcy court. The record establishes only that the bankruptcy court had a hearing to determine the tax liability of J.P., the debts were discussed and did have an impact on the tax liability of76 J.P., and the court determined J.P.'s tax liability based on the agreement of the parties. At the conclusion of the hearing, the Judge stated that there was no case or controversy. The order of the bankruptcy court determined J.P.'s tax liability as the amount agreed to by the parties. Nothing in the record establishes that the bankruptcy court decided that the debts were obtained through misrepresentation or that J.P. never intended to repay the debts. The only determination made by the bankruptcy court was the amount of J.P.'s tax liability, and the record shows that this determination was made because of the agreement of the parties and not as the result of a litigated issue. For collateral estoppel to apply, the issues sought to be precluded must have been actually determined in the prior proceeding. Montana v. United States, 440 U.S. 147">440 U.S. 147, 153, 155 (1979). That has not happened in the present case. Therefore, we hold that the doctrine of collateral estoppel does not apply. The doctrine of res judicata, or claim preclusion, precludes a party to a suit and its privies from again litigating a cause of action on which a final judgment has been77 entered on the merits by a court of competent jurisdiction. Meier v. Commissioner, 91 T.C. 273">91 T.C. 273, 282 (1988). In order for res judicata to apply, the moving party must show that: (1) The cause of action in the prior case is the same cause of action as in the instant case, (2) petitioner qualifies as a party or a privy of a party in the prior case, and (3) there was a final judgment on the merits in the prior case. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 597 (1948); Kroh v. Commissioner, 98 T.C. at 398-399. The cause of action in the present case is not the same as the cause of action involved in J.P.'s bankruptcy proceeding. See Kroh v. Commissioner, supra at 399-400, where we held that a determination by a bankruptcy court of the husband's tax liability on a jointly filed tax return was a different cause of action than the determination of the wife's tax liability. Furthermore, as stated above, nothing in the record establishes that the bankruptcy court decided that the debts were obtained through misrepresentation or that J.P. never intended to repay the 78 debts. Therefore, we reject petitioners' res judicata arguments. The doctrine of judicial estoppel is an equitable doctrine which focuses on the relationship between a party and the courts, as distinguished from equitable estoppel, which focuses primarily on the relationship between the parties. In particular, judicial estoppel prevents a party from successfully asserting a position before a court which that court accepts and asserting a completely contradictory position before the same or another court merely because it is now in that party's interest to do so. Huddleston v. Commissioner, 100 T.C. 17">100 T.C. 17, 26 (1993). Judicial estoppel, unlike collateral estoppel, does not require privity of the parties or detrimental reliance by the party seeking to invoke it. Id. We have recently held that judicial estoppel is available to use in appropriate cases. Id. at 28. However, it is to be applied with caution. Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214">911 F.2d 1214, 1218 (6th Cir. 1990). Judicial estoppel requires acceptance by a court of the prior position. Huddleston v. Commissioner, supra at 26.79 This means that the court must have adopted the position either as a preliminary matter or as part of a final disposition. Teledyne Indus., Inc. v. NLRB, supra at 1218. In the present case, petitioners have failed to establish precisely respondent's position in the bankruptcy case. The record shows that the factual basis of respondent's position was not the basis of the order of the bankruptcy court. Rather, the bankruptcy court approved an agreement of the parties as to J.P.'s tax liability. Petitioner BCII had a claim in the bankruptcy proceeding and could have contested the Trustee's agreement to J.P.'s tax liability but did not. Petitioner's claim was based on J.P.'s indebtedness to it. There were no admissions by respondent or findings of fact by the bankruptcy court and judicial estoppel cannot apply without such. Id. at 1219. Here there was apparently agreement of the parties as to the tax liability of J.P. and that agreement was accepted by the bankruptcy court, with the specific statement that no "adjudication" was being made since the court had no "case of controversy". There is no showing that the 80 examining agent's reason for the determination was accepted. Therefore, we hold that judicial estoppel does not apply in this case. In Teledyne Indus., Inc. v. NLRB, supra at 1219, the Court of Appeals for the Sixth Circuit stated: Teledyne relies on our decision in Reynolds v. Commissioner of Internal Revenue, 861 F.2d 469">861 F.2d 469 (6th Cir. 1988), to assert judicial estoppel, but the differences between this case and Reynolds actually illustrate why judicial estoppel does not apply to the Board. Unlike Reynolds, the agreed orders in this case contain no admissions or findings of law or fact. In Reynolds, the issue was whether the petitioner or the petitioner's former spouse was liable for the tax on a certain capital gain. Id. at 470. The Commissioner of Internal Revenue admitted in a bankruptcy court-approved stipulation in the first case against the wife, that the wife was liable for the tax, implicitly exonerating the husband. Id. at 471-72. In this case, the Board and the Union negotiated settlement stipulations in which Wheeler and Stidham81 did not admit that they had engaged in any misconduct under the Act. Judicial estoppel cannot apply without some decision or admission in the district court's agreed orders as to whether Stidham and Wheeler actually engaged in the alleged misconduct. NLRB v. Markle Mfg. Co., 623 F.2d 1122">623 F.2d 1122, 1126-27 (5th Cir. 1980). [6] In addition, the stipulation in Reynolds was approved by a bankruptcy court in a bankruptcy proceeding, where the court had a duty to ensure that the agreement was fair and equitable, unlike an ordinary civil case. Reynolds, 861 F.2d at 473; see also id. at 475 (Kennedy, J., dissenting) (arguing that even a settlement approved in bankruptcy court would not constitute judicial acceptance). * Here the facts are comparable to those in Teledyne, Indus., Inc. v. NLRB, supra, rather than those in Reynolds v. Commissioner, 861 F.2d 469 (6th Cir. 1988), revg. T.C. Memo. 1987-261, except that the prior order in this case was of a bankruptcy court. However, the basis of the distinction82 of a bankruptcy proceeding from an "ordinary civil case" made in Reynolds v. Commissioner, supra at 473, is that the approval by the bankruptcy court of a settlement which "approves a payment from the bankrupt estate" based on a party's assertion of a given position amounts to "judicial acceptance" of the position asserted. Here, a payment was made to the estate and, also here, there was no stipulation, written settlement agreement, or statement of position by the Government aside from an audit and testimony by a revenue agent. This stands in contrast to Reynolds, where the parties' stipulation, which was approved by the bankruptcy court, incorporated a schedule setting forth the "agreed income" of Mrs. Reynolds. In the instant case, the statements by and the order of the bankruptcy judge clearly show that he made no "adjudication", but rather merely accepted an agreement of the parties to which no creditor objected after being afforded ample opportunity to do so. This is clearly a distinction of this case from Reynolds v. Commissioner, supra, in which the Court of Appeals considered that the bankruptcy court made83 an adjudication. We also point out that in Reynolds v. Commissioner, supra, the Court stressed the consideration of equities in determining judicial estoppel and concluded it was inequitable to tax the same capital gain to both husband and wife. There are no such equitable considerations in the instant case, since petitioners in this case have made and are prosecuting a claim in the bankruptcy court to recover loans made to J.P. which they argue the Government is estopped by judicial estoppel to contend were loans. In our view the opinion of the Court of Appeals in Reynolds v. Commissioner, supra, is clearly distinguishable from the instant case. However, it should be pointed out that an appeal in this case would be to the Court of Appeals for the Fifth Circuit absent agreement of the parties to the contrary. Based upon our conclusion that neither collateral estoppel, res judicata, nor judicial estoppel applies in this case, we hold that petitioners have failed to prove they are entitled to partial summary judgment as requested in this case. Since we have concluded that respondent is not estopped to deny the "estoppel84 facts" because there was no adjudication by the bankruptcy court with respect to J.P.'s tax liability, but rather a settlement of the parties, it is unnecessary to discuss the other issues raised by respondent such as petitioner's privity to the parties in the bankruptcy case. An appropriate order will be issued denying petitioners' motion for partial summary judgment. Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩2. We will also refer to the $ 4,450,000 debt as the $ 1,250,000 debt and the $ 3,200,000 debt. This is because $ 1,250,000 of the proceeds from the $ 4,450,000 debt was distributed by check to Mr. Kassahn, while the remaining $ 3,200,000 was distributed to him by a bank transfer. Yet, both the $ 1,250,000 debt and the $ 3,200,000 debt are evidenced by the $ 4,450,000 note. Also, the $ 4,450,000 debt and the $ 9,712,685.48 debt are collectively referred to as the debts.↩1. Petitioners stated in their petition that this amount should have been $ 700,000.↩3. Petitioners alleged in their petition that this amount should have been $ 40,533.↩1. There is no explanation of the difference in this amount and the $ 61,368.65 deducted by petitioners as an accrued interest deduction.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620319/	J. ASHTON WRAY, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWray v. CommissionerDocket No. 14462-92United States Tax CourtT.C. Memo 1993-525; 1993 Tax Ct. Memo LEXIS 537; 66 T.C.M. (CCH) 1289; November 16, 1993, Filed 537 Decision will be entered for respondent. For petitioner: William J. Dougherty, Jr.For respondent: Richard F. Stein. KORNERKORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: By notice of deficiency dated April 2, 1992, respondent determined the following deficiencies in and additions to petitioner's Federal income tax for the years 1980 through 1986: Additions to Tax YearDeficiencySec.Sec.Sec.Sec. 66616651(a)6653(a)(1) a6653(a)(2) a1980$ 30,397.00$ 7,599$ 1,520b-- 198125,148.006,2871,257b-- 198242,690.5010,6732,135b$ 10,673198328,067.507,0171,403b7,017198437,730.009,4331,887b9,433198552,724.0013,1812,636b13,181198669,331.0017,3333,467b17,333a Sec. 6653(a)(1)(A) and (B) for 1986.b 50 percent of the interest due on the deficiencies.After concessions, 1 the issues for decision are: (1) Whether petitioner was engaged in the trade or business of seeking out and promoting new business opportunities so that his interest deductions are ordinary and necessary business expenses and not merely deductible as investment interest, with its538 corresponding limitations; and (2) whether petitioner is liable for the section 6661 addition to tax due to a substantial understatement of tax. Unless otherwise indicated, statutory references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts are stipulated and are so found. The stipulation of facts and 539 attached exhibits are incorporated by this reference. Petitioner's place of residence was Newport News, Virginia, on June 29, 1992, the date the petition was filed in this case. Petitioner, John Ashton Wray, Jr., was admitted to the Virginia and Federal bars in 1970. During the years in issue, he practiced as a trial attorney under the professional corporation of J. Ashton Wray, P.C., and was also its sole shareholder and an employee. The record does not indicate whether petitioner filed Forms 1120 or 1120S for this corporation for the years in issue. Petitioner attached to each of his Forms 1040 for the years in issue a separate Schedule C, indicating the pursuit of a second business activity, that of brokerage or finance investment. Projects or ventures petitioner pursued outside his legal practice will be discussed separately for ease of discussion. The funding of these ventures will be described first. Investment AccountPetitioner maintained an investment account into which he deposited funds loaned to him from various individuals, allegedly to invest for them. Petitioner testified that investors would come to him because of his reputation as an organizer and financier540 of businesses, an entrepreneur, and a pursuer of a number of business interests. These individuals, whom we prefer to call payees, would allegedly be interested in petitioner's projects and would offer funds in return for an above-market rate of interest, funds that allowed petitioner to pursue his projects. These payees would write petitioner a check and, in turn, petitioner would execute and sign as maker a preprinted promissory note for the amount of the check. Petitioner offered interest rates (stated or inferred) ranging from a low of 7.5 percent to a high of 50 percent with the majority of payees receiving a 25- or 30-percent rate. Most notes indicated that the parties could agree to one or more extensions of the time for payment. Although the notes stated that they were payable on demand, the maturity dates were typically 3 years from execution. Petitioner encouraged note holders to extend their due dates by offering the same or higher rate of interest. If these payees found the offered rate acceptable, petitioner added another 3 years to the maturity date of the original note. Most payees would roll over at least some part of their principal in this manner. If the541 payees wanted the principal amount due, petitioner issued a check drawn on this same investment account. Should funds be insufficient, petitioner would draw funds out of his law account to meet the obligation. Petitioner testified that he used this one account to pay for business expenses, interest and principal expenses to payees, travel, and to pursue projects, as well as to pay salary or "guaranteed" payments to Edward F. Brown (Brown), petitioner's associate. Petitioner became acquainted with Brown in connection with an unsuccessful venture during the 1970s and began to advance Brown moneys to travel to Saudi Arabia, with the understanding that should Brown make contacts and identify opportunities that interested petitioner from a business standpoint, then petitioner would continue to advance Brown moneys. Petitioner's interest in Saudi Arabia grew out of a desire to become involved with some of the richest clients in the world in the hope of developing a lucrative legal relationship. Through Brown, petitioner was introduced to Sheik Hamid Al-Harbi (Hamid) and his brother, Sheik Misfer Suliman Al-Harbi (Misfer). A number of potential projects developed out of these relationships, 542 but only two occurred during the years in issue. Caterpillar Imports Into Saudi ArabiaUpon hearing that the Saudi Government intended to build a Trans-Peninsula Railroad, petitioner became interested in importing and selling Caterpillar 966C front-end loaders there. Petitioner made a number of trips to Saudi Arabia to speak with Hamid and Misfer regarding the importing and selling of these machines. At the time, the family of Ziad was the sole distributor of Caterpillar brand products in Saudi Arabia, but through petitioner's investigations (which included the checking of Ziad's showroom prices), petitioner felt he could be much more competitive and earn a significant return. Hamid's and Misfer's critical role was to include soliciting and dealing directly with potential buyers for contracts of sale, as petitioner felt direct solicitations by foreigners would not succeed in Saudi Arabia. To pursue this idea, petitioner prepared and mailed articles of incorporation on December 8, 1978, to the Virginia State Corporation Commission, incorporating Tri-Con Development, Inc. The principal parties involved were petitioner, Brown, and Hamid; however, the capacity in which they543 were involved remains unknown. Between September 1978 and November 1979, these parties investigated the cost of Caterpillars, and towards this purpose petitioner, Brown, Hamid, and Misfer traveled to Caterpillar distributorships in Edmonton and Toronto, Canada. Ultimately, three machines were purchased. Petitioner believed there would be no problem selling 100 machines in Saudi Arabia; however, this venture soured when the Saudi Government eliminated the Trans-Peninsula Railroad project from its budget in favor of building schools. As a result, potential buyers backed out, causing petitioner to panic and fly to Jeddah, begging Hamid to locate buyers for the three Caterpillars purchased. Eventually buyers were found, but the last sale became very labored and took place in the summer of 1981, approximately 6 months after the first sale. Petitioner admits he did not report the meager $ 1,171 he earned from these three sales. Petitioner claimed he benefited in terms of the introductions he received through Hamid and Misfer to industry contacts in Saudi Arabia. Arabian Eurasia Management Consulting Organization (AEMCO)During 1979, petitioner perceived Saudi Arabia as a 544 Third World country in terms of its advertising; Jeddah had but one high rise building, and people were still living in tents; there was no radio or billboards, and the Government controlled television. AEMCO, a subsidiary of the Misfer Suliman Al-Harbi Establishment, was to be the solution, and its purpose was to import computer equipment and software to create a computerized database of available products from which potential purchasers could contact sellers. This venture was ultimately unsuccessful, and petitioner again did not bill for any legal fees or receive any monetary gain from the undisclosed services he performed. However, of greatest importance to petitioner was the fact that his picture appeared as legal counsel to Misfer in an advertising brochure that was produced for this venture. Consequently, petitioner believed this breakthrough would mean that he would become a legal consultant to the very wealthy. Brown was also listed in this same advertising brochure as the financial adviser to Misfer. SiniatOn February 11, 1980, petitioner and Brown formed the corporation of Brown and Wray, Inc., for the purpose of providing consulting work in the form of legal545 and investment counseling for a project known as Siniat. The purpose of the project was to secure a $ 30 million contract for the cleaning of the Jeddah airport; however, the corporation was unsuccessful in obtaining the contract when its representative did not show up for a scheduled appointment. Brown and Wray, Inc., received no monetary compensation for its undefined involvement. Gloria Manufacturing Co. and Successors (Gloria)Petitioner was involved with Gloria and its successors (below) for the years 1983 through 1986. Gloria, an established clothing manufacturer in Newport News, Virginia, was owned by Walter and Gloria Goodman. When Gloria could not obtain traditional financing from a bank due to its extensive credit problems, it turned to petitioner because of his reputation for raising needed cash. Petitioner began to pay weekly salaries for Gloria's 200 to 400 tailors. When payment came due for interest on the alleged loans petitioner provided, Mrs. Goodman continuously indicated that she lacked sufficient funds for salaries or some other pressing need. Petitioner allowed Gloria to extend payments due him. Although risky, petitioner continued this arrangement546 because Gloria had shown him a very lucrative lease it had won from the city of Newport News, dated June 23, 1981, and Gloria promised that if Gloria's successor in interest (Michael's or Solomon's) became profitable, petitioner would receive a one-third share of the unoccupied portion of the leasehold as consideration for the financing and consulting services he was providing. This lease allowed Gloria to occupy an old Sears building at 2700 Huntington Avenue in Newport News, Virginia, for what was believed to be a "sweetheart deal". The 50 cents a square foot seemed extraordinarily low when priced against comparable lease values of $ 4 to $ 7 a square foot. Gloria's manufacturing would utilize merely 50 percent of the available space, and the remaining 50 percent was available for other pursuits. Gloria held out the promised one-third interest (15 percent of the total square footage) as a carrot for petitioner to continue supplying funds. The lease term was 15 years with a renewal option for an additional 25 years. Petitioner also was told that this Sears building was in close proximity to an interstate connection and as soon as a planned bridge was completed, traffic would547 virtually spill out onto its doorsteps. This bridge, however, was not actually completed until 1991 or 1992. Michael's Closet (Michael's)As concessions for this "sweet deal", the city insisted that there be new management, as well as renovations due to problems that it had previously experienced with Gloria and the Goodmans. Gloria continued to hold the lease, but prior to March 1, 1984, Michael's became the manufacturing operator. Another impetus for petitioner to continue loaning money to Gloria and its successors was Michael's success in gaining a contract to manufacture Cabbage Patch Dolls (a popular children's toy at the time) and clothing for a French designer named Jean Claude. Also, there was talk of the Government's building a regional distribution center near Fort Eustis in Newport News. Someone proposed that if Michael's was sold to a minority-owned firm (Solomon's) as defined by the Small Business Administration, it could qualify for section 8(a) 2 status, which would give the firm a unique competitive advantage because of access to Government loans and, more importantly, valuable Government set-aside contracts on the manufacture of uniforms, cots, and all548 the things that the Government needed. Not surprisingly, Brown, who from the record appears to be black, was presented as the needed minority. Solomon's Array, Inc. (Solomon's)Petitioner assisted Brown in drafting the petition for section 8(a) status. A minority person must own at least 51 percent 3 of the firm to qualify. Petitioner and Brown agreed that petitioner would receive a minority stock interest, as well as a similar profits interest (somewhere in the neighborhood of a 60/40 split), in Solomon's. Petitioner incorporated Solomon's and became its secretary, but (despite his agreement with Brown) not a shareholder, and Brown became its president and sole shareholder. Due to Brown's lack of experience regarding the manufacture of clothing, as well as his lack of financial resources, he was required549 to execute a management agreement in conjunction with the contract of sale before the principals would allow him to purchase Michael's. Under this agreement, Mr. Goodman would supervise the daily activities of Solomon's for a period of 6 years or until two-thirds of the principal on the purchase price had been paid, as he had the necessary experience and contacts in the garment industry. Thereafter, on March 1, 1984, Michael's entered into the contract to sell its business (drafted by petitioner) as a going concern to Solomon's for $ 3,750,000. The agreement required $ 10 down with $ 500,000 due in 12 months and a $ 3,250,000 note payable in installments of $ 325,000 per year to begin in 24 months, with interest waived for the first 2 years. The contract for sale included a provision whereby Michael's could regain the lease of the Sears premises and its stock in the event Solomon's defaulted on the note. It appears that Solomon's did default, as a document dated550 March 7, 1985, was prepared by petitioner, which indicated that Solomon's and Michael's agreed to mutually rescind the above contract of sale. Petitioner performed the following services for Gloria and its successor organizations. He prepared necessary documents, such as articles of incorporation, contracts of sale, and the management agreement, as well as Brown's petition for section 8(a) status. Petitioner also represented these organizations in different capacities and among several parties such as the Internal Revenue Service (IRS), city officials and owners of Michael's, and union representatives in negotiations for Solomon's. Every day throughout this period petitioner alleged he was at the plant, at least to give a 1-hour daily progress report on where Gloria and its successors stood with the union, the IRS, the city, and updates on the progress Gloria was making in bill paying. Petitioner never billed Gloria or its successors in interest for his legal services as he felt he would gain a one-third interest in the unused leasehold of Sears from the Goodmans. Petitioner also never included any interest income from Gloria and its successors on his tax returns for the years551 involved. Petitioner states he never received any benefit from the promised leasehold interest from Gloria or Michael's, and we do not know if he ever received any payments towards the principal amount of the loans he made. Petitioner filed individual income tax returns for the years 1979 through 1983 in March 1986. He filed married, filing separate income tax returns, for the years 1984, 1985, and 1986 on January 12, 1987, April 25, 1988, and December 9, 1988, respectively. All returns were filed untimely. Pursuant to section 6501(c)(4), respondent secured four Forms 872, Consent to Extend the Time to Assess Tax, from petitioner, which properly allowed respondent to extend the normal 3-year period for assessment. For each of the years in issue, petitioner reported the following types of income and (losses) on Forms 1040: InterestCapital Sch. C Sch. EYearWagesIncomeGainBusiness RentalPartnership1980$ 98,916$ 3,6680 $ (80,278)$ (11,732)0 1981104,3101,7440 (83,678)(13,483)0 1982109,8341,316$ 2,400(166,170)(11,712)0 1983101,9713340 (82,712)(10,539)0 1984112,6156470 (206,686)(5,581)$ 543 1985149,4123310 (335,618)(13,253)871 1986160,49134618,432(432,829)(5,819)(139)552 On page 1 of each Form 1040 petitioner filed for the years 1980 through 1985, he described his occupation as "attorney" and included the above wages from J. Ashton Wray, Jr., Professional Corp. Petitioner, with each Form 1040, included one Schedule C, Profit or (Loss) From Business or Profession, for every year in issue. On each Schedule C, petitioner designated a business activity apart from his wage as "Brokerage", and the service he provided as "Finance Investment". Petitioner assigned the activity a code #5751, which described the activity as security broker or investment services. Petitioner did not report a dollar of income on any of these Schedules C for any year in issue. The following chart illustrates that significant operating losses from petitioner's alleged Schedule C activity were generated solely by petitioner's claimed travel and entertainment and interest expenses paid to investors: Interest PaidTotal Schedule C YearTravel & Ent.to Investors Loss1980$ 21,478$ 58,800($ 80,278)198114,21169,467(83,678)198218,178147,992(166,170)19836,25976,453(82,712)198415,294191,392(206,686)19852,057333,561(335,618)19860 432,829(432,829)$ 77,477$ 1,310,494$ (1,387,971)553 As noted, petitioner has conceded the deductions for travel and entertainment. However, the recharacterization by respondent of the above interest deductions is the principal dispute in this case. 4As far as this Court can tell, for all 554 the years in issue, petitioner shows a mere $ 2 in Federal tax owing on his Form 1040 for the year 1985 due to an investment credit recapture. OPINION I. Investment or "Trade or Business" Interest ExpensePrior to 1969, taxpayers could effectively insulate salaries and other income from tax by incurring substantial interest expenses on funds borrowed to acquire investment assets which generated little or no investment income. The Code at that time allowed an unlimited itemized deduction for all interest paid or accrued during a tax year, irrespective of character. Sec. 163; H. Rept. 91-413 (1969), 3 C.B. 200">1969-3 C.B. 200, 245-246. As a result, Congress added section 163(d) as part of the Tax Reform Act of 1969, Pub. L. 91-172, sec. 221, 83 Stat. 487, 574, limiting interest deductions on funds borrowed to acquire or carry investment assets. Cf. Lenz v. Commissioner, 101 T.C. (1993); Beyer v. Commissioner, 916 F.2d 153">916 F.2d 153 (4th Cir. 1990), revg. 92 T.C. 1304">92 T.C. 1304 (1989). However, the interest on funds borrowed in connection with a "trade or business" was not so limited. Sec. 163(a), (d); H. 555 Rept 91-413, supra, 1969-3 C.B. at 246. The Code and regulations do not define "trade or business" but leave this inherently factual analysis for the courts to determine based upon the facts in each individual case. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212, 215-217 (1941). Petitioner, however, bears the burden of proving he was engaged in a trade or business. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). What is petitioner's trade or business? Petitioner contends: (1) From 1975 through 1980, he was engaged through a partnership with Brown in the trade or business of seeking out business opportunities which petitioner could then promote, and from 1983 through 1986, he was engaged similarly but individually in promoting Gloria and its successors; or alternatively (2) petitioner throughout the years in issue regularly, continuously, and extensively engaged in activities directed at pursuing the discovery and promotion of new ventures, which rose to the level of a trade or business separate and apart from his law practice. While it is true that the trade or business test must be applied556 at the partnership level, and a partner may be individually engaged in a trade or business by reason of his participation in a partnership, petitioner herein has not proven that he was a member of a partnership that included Brown; to the contrary, petitioner stipulated that he and Brown formed the corporation of Brown and Wray, Inc., on February 11, 1980, and that petitioner also formed, with Brown and Hamid, Tri-Con Development, Inc., on December 8, 1978. Sec. 761(b); see Goodwin v. Commissioner, 75 T.C. 424">75 T.C. 424, 437-438 (1980), affd. without published opinion 691 F.2d 490">691 F.2d 490 (3d Cir. 1982). The general test for determining the validity of partnerships for income tax purposes is whether the parties in good faith and acting with a business purpose intended to join together in the present conduct of an enterprise, considering facts which are reflective of intent. Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, 742 (1949). A sharing of profits is required. Podell v. Commissioner, 55 T.C. 429">55 T.C. 429, 431 (1970). This record is devoid of information indicating any such agreement 557 between Brown and petitioner. Also, it is notable that Brown was not called as a witness. The fact that petitioner offered to pay for Brown's flights to Saudi Arabia in return for information on business opportunities is insufficient. A joint undertaking merely to share expenses does not create a partnership. Sec. 1.761-1(a), Income Tax Regs. It is apparent that some sort of relationship existed between petitioner and Brown, but it remains a mystery what that relationship was; therefore, quite simply, petitioner has not meet his burden on this question. Having disposed of petitioner's contention that he was engaged in a partnership with Brown and simultaneously eliminating the second half of that argument, we turn to whether petitioner's activities during the years in issue, and apart from his law practice, rise to that narrow plane of engaging in the separate trade or business of promoting new business ventures. To be engaged in a trade or business, a taxpayer must be involved in the activity with continuity and regularity; also, the taxpayer's primary purpose for engaging in the activity must be for income or profit, and his activities cannot be sporadic, diversionary, or 558 in the nature of a hobby. Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987). The Supreme Court in Whipple v. Commissioner, 373 U.S. 193 (1963), requires an additional hurdle peculiar to the trade or business of promoting: income received directly for a taxpayer's services such as fees or commissions. Since investing is not a trade or business, when the only return a taxpayer receives for his service to a corporation is that of an investor, he has not satisfied his burden of demonstrating that he is engaged in a trade or business. Income received indirectly through a corporation in the form of dividends or enhancement in value of an investment is not sufficient. Developing corporations as going concerns with the immediate purpose of selling the corporations to customers in the ordinary course at a profit is required. Whipple v. Commissioner, supra at 203. It is this early resale that makes the profits directly received for services relate to a trade or business, for the longer an interest is held, the more profit becomes attributable to the successful operation of the corporate559 business, and the return becomes that of an investor. Deely v. Commissioner, 73 T.C. 1081">73 T.C. 1081, 1093 (1980). The difficulty of meeting this standard is illustrated by the Supreme Court's following statement: "If full-time service to one corporation does not alone amount to a trade or business, which it does not, it is difficult to understand how the same service to many corporations would suffice." Whipple v. Commissioner, supra at 202. It is clear that the Supreme Court places great emphasis on the nature of the income a taxpayer receives or expects to receive. Townshend v. United States, 181 Ct. Cl. 635">181 Ct. Cl. 635, 384 F.2d 1008">384 F.2d 1008, 1012 (1967). For the years in issue, cumulatively or standing alone, petitioner herein involved himself neither regularly nor continuously in his investment endeavors, and in no instance did petitioner seek any fees as compensation for the services he performed. For the years 1981 and 1982, petitioner appears to have pursued no promotional opportunities, and during the period 1983 to 1986, petitioner intermittently performed services for Gloria which, at560 most, amounted to a mere 1-hour daily progress report. This does not even approach the nearly 60-80 hours that the taxpayer in Commissioner v. Groetzinger, supra at 24, spent per week wagering, or the full-time effort the taxpayer in Biernbaum v. Commissioner, T.C. Memo 1963-210">T.C. Memo. 1963-210, expended in promoting and developing shopping centers. Petitioner misplaces his reliance in Biernbaum, as that taxpayer's level of activity far exceeded petitioner's involvement herein. The taxpayer, a promoter of shopping centers over the course of 6 years, became extensively involved in 14 different centers. With each project, the taxpayer followed similar procedures. He would select a suitable site, obtain options for land, or make other arrangements to acquire a site. He sought investors to provide funds for acquisition and construction, or borrowed funds himself. In some cases, he prepared a brochure to describe the project to possible investors or tenants. He solicited tenants and secured leases. He obtained building permits, arranged for zoning, and negotiated financing. Usually before construction began, a corporation561 was organized to build and operate the center. He supervised construction after these preliminary arrangements were made, and as the investors advanced funds, the taxpayer transferred the option or land to the center, assigned the leases, and would have the corporation execute a mortgage. He was usually an officer and a director, which allowed him to act for the corporation, but he drew no salary. The investors received stock. Unlike petitioner, the taxpayer's ventures in Biernbaum were frequent and within the narrow and specialized field of promoting solely shopping centers rather than being random attempts to turn a profit. Biernbaum v. Commissioner, supra.As far as this Court can tell, aside from Gloria, petitioner was involved in only two projects during the years in issue. Petitioner's level of involvement in Siniat was not described but would have been minimal at best, and most of the activity required for the Caterpillar venture occurred prior to the years in issue. Petitioner here also never reported a dollar of income for any venture he pursued on any Schedule C for the years in issue, and he received no Forms K-1 from either562 Tri-Con, Inc., or Brown and Wray, Inc., or from the partnership petitioner alleged existed between him and Brown. Petitioner admitted receiving, but did not report, the meager sum of $ 1,171 from the three Caterpillar sales. Not unlike Cheh v. Commissioner, T.C. Memo 1992-658">T.C. Memo. 1992-658, it is this Court's belief that petitioner's primary desire was not to earn a profit or to make a living but to develop trust which would possibly lead to more involvement and legal referrals from the sheiks in Saudi Arabia. Promises and hopes are the common thread running through petitioner's tale: the hope of hitching his wagon to a sheik and becoming legal counsel to the rich and famous. Similarly, in Nichols v. Commissioner, 29 T.C. 1140">29 T.C. 1140, 1147 (1958), the taxpayer had some indefinite, generalized hope that future profit might develop in the wake of the loans he had made to a corporation of which he was a shareholder, but the vagueness of the arrangements, the lack of any definite understanding or agreement, and the failure to condition the loans upon some ascertainable requirement combined to paint a picture which fell short of, and was inconsistent563 with, the view that the funds the taxpayer therein invested were related to any trade or business in which the taxpayer was involved. This Court cannot even determine that petitioner herein received or expected a return similar to that of an investor, much less determine that petitioner was pursuing income as compensation for his services. Petitioner never affirmatively negotiated a fee or billed for any services performed, and he never obtained guarantees or commitments on any promised returns. Nothing in writing appears in evidence. It appears petitioner risked much in terms of funds or capital invested in these ventures. He signed as maker and was personally liable for paying the generous rates of interest he offered his payees. Petitioner offered an effective rate of 40 percent to payees on the funds he invested in Gloria, yet petitioner was allegedly never paid interest from Gloria on the alleged loans, and it is unclear whether any principal sums were repaid. It seems more likely that these sums were considered capital contributions as there is no evidence of any notes receivable from Gloria. Petitioner continued providing funds to Gloria to ensure the corporation would564 continue in existence, when its true profit potential could be realized. Thus, his success became increasingly tied to that of Gloria. These loans or contributions were made to Gloria for no other purpose than to protect or enhance petitioner's investment. Cf. Millsap v. Commissioner, 46 T.C. 751">46 T.C. 751, 757 (1966), affd. 387 F.2d 420">387 F.2d 420 (8th Cir. 1968). We do not believe that petitioner's payees were interested in the success of his projects but only in the rates of return they would receive for the use of their money. The record does not disclose that petitioner ever promised or delivered anything of value to the lenders on the funds he borrowed, other than the interest which he paid. While we agree with petitioner's assertion that he would have to make a spectacular return to pay back his payees' loans, this assertion without more does not prove that he would have earned such a return and, in fact, leads this Court not only to question petitioner's activities but also his judgment in making these types of loans. 5 Unlike Biernbaum v. Commissioner, supra, where the investors independently decided565 whether to proceed with a center, petitioner herein controlled the destination of funds he paid out, and he directed those funds into the particular ventures he was interested in pursuing through the investment account he maintained for such purpose. Neither the promised interest in the unused Gloria leasehold nor the promised equity and profits interest from Solomon's materialized for petitioner, and petitioner has not explained why or proven to us that either of these promises would have provided a return unlike that which an investor would receive. It is also very significant that petitioner was not dependent on his promoting or lending activities for a living due to his substantial source of income as a trial attorney, as indicated by the fact that his wages566 for the years in issue increased every year from $ 98,916 in 1980 to $ 160,491 by 1986. Also, not unlike the taxpayer in Houston v. Commissioner, T.C. Memo 1989-175">T.C. Memo. 1989-175, petitioner brought nothing but his negotiating and legal skills as well as his capital to Gloria and other projects. He had no experience in the clothing industry or any of the businesses he endeavored to promote, and he relied on Gloria's existing personnel to run the day-to-day operations as he continued working full time as an attorney. Petitioner's activities carry attributes of investment and bear no resemblance to fees or compensation for services. Also, petitioner was very successful in avoiding taxes throughout the years in issue in the precise manner which Congress specifically sought to prevent when it enacted section 163(d). Whatever petitioner's activities, he fails all the tests required for achieving the carrying on of any secondary trade or business, including that of promoting new businesses. Respondent's recharacterization will stand. II. Net Operating LossesDue to our sustaining respondent, as above, petitioner did not sustain the claimed net operating567 losses under section 172 for the years in issue; therefore, there are no carryovers except to the extent that these recharacterized interest deductions create investment interest carryovers under section 163(d)(2). III. Additions to Tax Under Section 6661The final issue we address is the section 6661(a) 6 addition to tax, which imposes a 25-percent addition on underpayments assessed after October 21, 1986, for returns due prior to January 1, 1990. Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002, 100 Stat 1874, 1951; Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498, 503 (1988); Vessio v. Commissioner, T.C. Memo 1990-565">T.C. Memo. 1990-565. A taxpayer has "substantially understated" his income tax for a particular year if the amount of understatement exceeds the greater of $ 5,000 or 10 percent of the tax required to be shown on taxpayer's return. Sec. 6661(b)(1)(A). Due to petitioner's concessions and our conclusion that petitioner was not engaged in a separate trade or business apart from his law practice for any of the years in issue, the resulting understatement far exceeds these threshold amounts for this addition568 of tax to apply. An understatement can, however, be reduced where a taxpayer has adequately disclosed the relevant facts on his return, or in a statement attached thereto, or if there is substantial authority for the taxpayer's treatment of any item. Sec. 6661(b)(2)(A)(i) and (ii). A taxpayer who merely lists the amount and nature of an expense on the proper tax form has not provided a disclosure sufficient to enable respondent to identify the potential issue involved unless an applicable revenue procedure specifically provides that disclosure can be satisfied for an item simply by following the applicable forms and publications. Accardo v. Commissioner, 94 T.C. 96">94 T.C. 96, 101 (1990),569 affd. 942 F.2d 444">942 F.2d 444 (7th Cir. 1991). Rev. Proc. 87-48, 2 C.B. 645">1987-2 C.B. 645, specifically requires additional disclosure for amounts claimed under section 163(d), preferably by filing Form 4952, Investment Interest Expense Deduction. Petitioner herein has not filed Form 4952, Form 8275, or attached a statement to his returns identifying the interest expense in a manner that would reasonably apprise respondent of the nature of the potential controversy concerning his tax treatment; therefore, petitioner did not adequately disclose facts relevant to his Schedule C claimed business interest deductions sufficient to fall within this safe haven. Sec. 1.6661-4(b), Income Tax Regs.Whether a taxpayer has substantial authority for a position he has taken on a return is determined by engaging in the same analysis a court would be expected to follow in evaluating the tax treatment of the item at issue. Sec. 1.6661-3(b)(3), Income Tax Regs. The weight of authorities in support of the taxpayer's position must be substantial compared to the weight of authorities contrary to his position. Sec. 1.6661-3(b)(1), Income Tax Regs.570 Substantial authority is determined at the time the return containing the item is filed or on the last day of the tax year to which it relates. Sec. 1.6661-3(b)(4)(iii), Income Tax Regs. Petitioner herein filed all returns well beyond 1963, when the Supreme Court in Whipple v. Commissioner, 373 U.S. at 193, added additional hurdles peculiar to the trade or business of promoting, and well after Biernbaum v. Commissioner, T.C. Memo 1963-210">T.C. Memo. 1963-210, which was decided by this Court directly on the heels of Whipple v. Commissioner, supra, and whose holding should have put petitioner on notice regarding the level of activity required for any trade or business, particularly that of promoting. Petitioner's activities herein did not meet any of the required standards for a trade or business. Petitioner has engaged in activities neither continuously nor regularly but has done so very sporadically and in a capacity that is not entirely clear. Also, petitioner has not endeavored to sell his ventures in the ordinary course so as to compensate petitioner for services performed. Petitioner was satisfied*571 with merely the future hope of reward, a return not unlike that of an investor. The weight of authorities is substantially contrary to petitioner's position; therefore, petitioner has not reduced this addition to tax under either safe haven of section 6661. Decision will be entered for respondent. Footnotes1. Respondent disallowed all petitioner's claimed travel and entertainment expenses; petitioner concedes these deductions due to both a lack of substantiation and the fact that these expenses were attributable to another taxpayer; namely, Brown and Wray, Inc.Respondent increased petitioner's income from 1982 by $ 16,127 in unreported income. Petitioner concedes that $ 15,346 was received from R & J Associates and $ 781 from Saxon Oil, but was not reported. To the extent that a deficiency is determined in this case, petitioner also concedes secs. 6651(a) and 6653(a) additions to tax.↩2. Sec. 8(a) was added to the Small Business Act of 1953, by the Small Business Act of 1958, Pub. L. 85-536, 72 Stat. 384, and is presently 15 U.S.C. sec. 637(a) (1988)↩.3. As provided by 13 C.F.R. sec. 124.103 (1993)↩.4. In addition, respondent recharacterized an additional $ 44,220 in interest expenses as investment interest which petitioner claimed on two different schedules attached to his Form 1040. The Schedule A category labeled "other interest" to various banks was recharacterized for all years except 1981, and Schedule E interest expenses claimed in connection with three of petitioner's rental properties were recharacterized by respondent for the years 1980 and 1981. Petitioner presented no evidence disputing these determinations at trial; therefore, without more, petitioner has not met his burden of proof regarding the recharacterization of these expenses, and they will not be further discussed. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111↩ (1933).5. We refer petitioner to the Va. Code of Responsibility, pt. 6, sec. II (1983); particularly, disciplinary rules DR 5-104: limiting business relations with a client, and DR 9-102-103: preserving the identity of client funds and record-keeping requirements.↩6. Sec. 6661 was enacted with the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 323, 96 Stat. 324, 613, and is effective for returns due after 1982. The Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 6662, 103 Stat. 2106, 2395, lowered the rate from 25 percent to 20 percent and incorporated former sec. 6661 within current sec. 6662(d).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620353/	ALEXANDER COUNTY NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ALEXANDER COUNTY SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Alexander County Nat'l Bank v. CommissionerDocket Nos. 12075, 12616.United States Board of Tax Appeals12 B.T.A. 1238; 1928 BTA LEXIS 3383; July 9, 1928, Promulgated 3383 Notes canceled and surrendered in 1920 held to be proper deductions from gross income in that year. David S. Lansden, Esq., for the petitioner. J. E. Marshall, Esq., for the respondent. SIEFKIN1238 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies for the year 1920 in the amount of $593.38 in Docket No. 12075, and for the year 1920 in the amount of $3,060.85 in Docket No. 12616. The errors alleged are in adding to net income of the Alexander County National Bank and Alexander County Savings Bank the respective sums of $6,000 and $8,500, said sums having been taken as deductions from gross income of the petitioners as bad debts. FINDINGS OF FACT. The Alexander County National Bank is a corporation organized under the laws of the United States with its principal office at Cairo, Ill. The Alexander County Savings Bank is a corporation organized under the laws of Illinois with its principal office at Cairo. The Alexander County National Bank, in its income and profits-tax return for 1920, deducted from gross income the sum 1239 of $6,000 on account of a cancellation3384 of indebtedness in that amount due the bank from the Patier Dry Goods Co. The respondent disallowed the deduction, increased the net income by $6,000, and the deficiency in question in part resulted. Similarly, the Alexander County Savings Bank deducted $8,500 on its return, and respondent disallowed it and determined the deficiency in question. The Patier Dry Goods Co., an Illinois corporation, was organized several years prior to 1920 with a capital stock of $10,000 by C. A. Patier, a merchant and a director and stockholder in both the petitioners, in an attempt to save notes or claims amounting to several thousand dollars which the petitioners had against the Samuel White Dry Goods Co. Patier gave the Alexander County Savings Bank, at the time the Patier Dry Goods Co. was organized, a note for $10,000, and he put up as collateral all except two or three of the shares of the capital stock of the Patier Dry Goods Co. The transaction between Patier and the Savings Bank was not intended as a loan. Patier was acting in the interest of the Savings Bank, and it was hoped that the debt of the White Dry Goods Co. to the bank taken over by the Patier Company might be paid. The hope3385 was not realized for the Patier Dry Goods Co. lost money from the start. By 1920 the business was in a desperate state and five men who were directors of the two petitioner banks agreed to each put up $2,000 to make up $10,000 to take over the stock of the Patier Dry Goods Co. E. A. Buder, acting for himself and four other persons, Neff, Gallaghan, Forkter, and Lansden, made the following proposition to the two petitioners: CAIRO, ILLINOIS, June 29, 1920ALEXANDER COUNTY NATIONAL BANK and ALEXANDER COUNTY SAVINGS BANK, Cairo, Illinois.GENTLEMEN: I will pay $10,000 for the stock of the Patier Dry Goods Company held by the Alexander County Savings Bank for the note of C. O. Patier, provided you will surrender said note to me and will cancel and surrender other notes given to you by said Patier Dry Goods Company to the amount of $14,500. Very truly yours, (Signed) E. A. BUDER. The petitioners accepted the proposition and $10,000 was paid to the Alexander County Savings Bank, which turned over to Buder the stock of the Patier Dry Goods Co. and the $10,000 note of Patier, and canceled and surrendered to Buder $8,500 of other notes owing from the Patier Dry3386 Goods Co. to the Savings Bank. The National Bank canceled and surrendered to Buder $6,000 of notes owing to it from the Patier Dry Goods Co. The amounts of $8,500 and $6,000 were charged off on the books of the petitioners in 1920 as losses. 1240 Prior to that time none of the five men represented by Buder had any interest in the Samuel White Dry Goods Co. or its successor, the Patier Dry Goods Co. The indebtedness canceled by the two banks was only part of the total indebtedness, about $33,000 remaining. It was hoped by the new stockholders of the Patier Dry Goods Co. and by the petitioners that with new management and less of a financial load to carry the Patier Dry Goods Co. would be successful and that the petitioners would eventually recover the remainder of the amounts owing from the Dry Goods Co., and that the five individuals ultimately would recover the $10,000 they had invested. Those hopes were not realized; the business of the Patier Dry Goods Co. continued to be unsuccessful and was liquidated. The petitioners realized only a portion of their remaining indebtedness and the individuals received nothing for their stock. The two petitioner banks were closely3387 related by stock ownership and as to business transactions. OPINION. SIEFKIN: This proceeding is an example of the phrase "throwing good money after bad." The banks had become substantial creditors of the Samuel White Dry Goods Co. and were instrumental in organizing the Patier Dry Goods Co. to solve the financial difficulties of the first company. The management of the Patier Company was inefficient, if not dishonest, and the banks became more heavily involved than before. In 1920 five men, directors of the banks, thought they saw a chance to salvage a part of the indebtedness to the banks and perhaps make some money individually by taking over the management of the Dry Goods Company by each putting in $2,000 for the stock of the Dry Goods Company on condition that the banks together reduce the notes of the Dry Goods Company by $14,500. This was done and, the new management being inefficient though honest, the banks lost most of the remaining indebtedness due from the Dry Goods Company and each of the five men lost $2,000. When the petitioners canceled and surrendered the notes in 1920, the possibility of recovery of those amounts was gone forever. The petitioners were3388 not stockholders of the Dry Goods Company but were creditors only, and in a reduced amount. It is easy to conceive the impulses which moved the petitioners to consent to the cancellation of the notes. It was hoped that with this management of the Dry Goods Company and by taking a present loss, the remainder of the indebtedness might be paid in full. That the hopes were not realized only shows the fallibility of human judgment. The fact that the amounts were charged off the books as losses but claimed 1241 on the returns as bad debts, does not prevent their allowance in this proceeding as losses, since the allegations of the petitioners are sufficiently broad. We conclude that the amounts of $8,500 and $6,000 should be allowed as deductions from gross income for the year 1920 to the Savings Bank, and the National Bank, respectively. In all other respects, the deficiencies asserted not being put in issue by the pleadings, the determination of the respondent is approved. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620354/	RONALD L. FLORENCE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFlorence v. CommissionerDocket No. 13327-78.United States Tax CourtT.C. Memo 1981-305; 1981 Tax Ct. Memo LEXIS 425; 42 T.C.M. (CCH) 119; T.C.M. (RIA) 81305; June 22, 1981. Ronald L. Florence, pro se. Leo A. Reinikka, Jr., and Dianne Crosby, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Darrell D. Hallett pursuant to section 7456(c), Internal Revenue Code of 1954, 1 and Rules 180 and 181 of the Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. 426 OPINION OF THE SPECIAL TRIAL JUDGE HALLETT, Special Trial Judge: Respondent determined deficiencies in petitioner's Federal income tax of $ 74 for 1975 and $ 1,382 for 1976, and an addition to tax under section 6653(a) for 1976 in the amount of $ 69.10. The issues for decision are (1) What was the amount of tokes received by petitioner during the years 1975 and 1976 in connection with petitioner's employment as a "21" dealer at the MGM Grand casino (hereinafter referred to as MGM or MGM Grand) in Las Vegas; and (2) whether petitioner is liable for the section 6653(a) addition to tax for 1976. This case was tried with 12 other cases which were consolidated for purposes of trial only and which involve similar issues. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner Ronald L. Florence was a resident of Las Vegas, Nevada, at the time the petition was filed. He worked as a "21" dealer at the Las Vegas MGM Grand casino during the calendar years 1975 and 1976. He worked approximately 72 hours during the year 1975, and 2,058 hours during 1976. These hours included regular, overtime, and sick pay hours. Petitioner normally427 worked an eighthour shift. The MGM Grand is located on the corner of the Las Vegas Strip. It is adjacent to Caesar's Palace, the Dunes, and the Flamingo Hilton Hotel. During the years in question, the MGM casino was almost as large as a football field. It had 930 slot machines, 10 crap tables, 6 roulette wheels, 2 baccarat tables, 3 big six wheels, and a 200-seat keno lounge with closed-circuit TV to other areas. The casino also had a 16-table poker parlor and 4 casino bars. In addition, the casino had 60 "21" tables, each with a seven-player capacity. Approximately 200 dealers were employed during a 24-hour shift to service these tables (not all tables would be in operation at any particular time). Approximately 80 percent of the "21" tables in operation had a $ 2 minimum betting limit. Other tables had higher limits, such as $ 5 and $ 25. Petitioner and the other "21" dealers spent their shifts, except for brief relief periods, playing "21" as the dealers with patrons of the casino. There was a constant turnover of patrons during each shift. The number of players at a table varied throughout the shifts, depending upon such things as the time of day or night, the428 season of the year, and the relationship to the beginning or ending of a show being held at the MGM Grand. Some patrons, but by no means all or necessarily even a majority, left a tip, which is referred to in the industry as a "toke", for the dealer during or at the completion of the patron's play. Tokes were received either directly from the patron in the form of cash or chips, or they were received as a consequence of a winning bet placed for the dealer by the player. Tokes received as a consequence of a winning bet resulted from the player's stating when the bet was placed that the winnings, if any, were "for the dealer." If the bet was lost, then the dealer got nothing. If the bet was won, he usually, but not always, received the winnings. The "21" dealers were required to place all of the tokes received by them in a box kept near the tables. These boxes containing the tokes were periodically picked up by a designated individual and taken to a central place in the casino. The total tokes collected during each 24-hour shift were counted by designated dealers serving as an informal group referred to as the "toke committee." The toke committee obtained a dealer sign-in sheet,429 which each dealer working during the shift was required to sign, and determined by reference to that sheet the number of dealers working during the shift. Committee members divided the total number of tokes equally among all of the dealers, except that each dealer working overtime received an additional one-eighth share for each hour of overtime worked, and members of the committee would often receive an extra $ 5 or $ 10 per day for their work on the committee. The result of the count and distribution normally was written on the back of the sign-in sheet and was provided to an employee working in the casino cage. This employee checked the count of the total tokes, resolved any discrepancies, and placed each dealer's determined share in an envelope. The dealers would then pick up the envelope at the main bank cashier's window and sign a payroll sheet signifying receipt of the tokes. Tokes were always whole dollar amounts, i.e., no small change was ever included in the envelopes. The records reflecting the daily determination and distribution of tokes for the years 1975 and 1976 were requested by respondent's agents by summonses served upon responsible MGM officials. The records430 were not available at the time the summonses were served. The records were destroyed by an MGM employee as a matter of convenience shortly after the daily distribution was made. On February 11, 1975, an opinion was issued by the United States District Court for the District of Nevada in Olk v. United States, 388 F. Supp. 1108">388 F. Supp. 1108 (D. Nev. 1975), which held that tokes received by casino dealers were nontaxable gifts for Federal income tax purposes. This opinion was well publicized and well known among the casino employees in the State of Nevada. The decision was appealed to the United States Court of Appeals for the Ninth Circuit. By opinion issued on June 1, 1976, Olk v. United States, 536 F.2d 876">536 F.2d 876 (9th Cir.1976), the Court of Appeals reversed the District Court had held that tokes are taxable income to dealers. Plaintiff's motion for rehearing in the Olk case was denied by the Ninth Circuit on July 14, 1976, and certiorari was denied by the Supreme Court of the United States, 429 U.S. 920">429 U.S. 920 (1976). In 1977, respondent's agents in the State of Nevada undertook a project to determine the toke income of MGM "21" dealers for the years431 1975 and 1976. In this respect, respondent's agent Joe Page, the project coordinator, arranged for approximately 300 returns covering the years 1975 and 1976 and involving individuals who were dealers at the MGM Grand during those years to be selected for examination. Of the 300 returns, approximately 30 were selected for detailed analysis. Mr. Page made some effort to obtain information from the taxpayers involved and from available public records concerning the income and expenditures of the individuals in this group. After some analysis of public records information and personally meeting with approximately 23 or 24 of the group, Mr. Page concluded that he could "complete" a detailed financial analysis of six out of the group. This detailed financial analysis consisted of what is commonly referred to as a "source and applications of funds analysis." Source and applications of funds analyses considered complete by Mr. Page related to three of the petitioners in the cases consolidated with this case for trial, Mr. Keen, Mr. Chappell, and Mr. Kozloff, and to three other taxpayers whose cases were not involved in these consolidated proceedings. However, the results of the source432 and applications of funds analyses with respect to two of the non-petitioning taxpayers, as well as Mr. Page's worksheets concerning these two taxpayers, were admitted into evidence with deletions to protect the confidentiality and identity of these taxpayers. These taxpayers are referred to in the record as taxpayer "F" and taxpayer "A". 3In connection with the source and applications of funds analyses for the five dealers referred to above, the total hours worked by each dealer during the433 year 1975 were adjusted by a reduction of 5 percent to allow for shifts for which the dealer may have been paid a salary but received no tips because of sick leave or lack of business, and to allow for possible error in the records of the MGM Grand. For the year 1976, respondent made an additional 10 percent reduction in hours to account for the culinary strike that year and a change in the employer's method of accounting for holidays worked. The resulting figure, divided by eight, is referred to as "adjusted shifts." Respondent determined the total sources of funds and the total applications of funds for each of the five taxpayers for the year 1975. The excess of total applications of funds over total sources of funds for each dealer was determined by respondent to represent the dealer's taxable tokes for the year 1975. That figure, divided by the number of the dealer's adjusted shifts for the year, produced respondent's determination as to the tokes received per adjusted shift. The following is a summary of respondent's determination in this regard: UnaccountedAdjustedRate Per AdjustedTaxpayerFunds (Tokes)ShiftsShiftsKozloff$ 14,888.68252.58$ 58.95Chappell10,150.52248.4240.86Keen10,518.83265.2939.65"F"6,601.47261.0125.29"A"9,376.58254.6036.83434 Based upon the results of the source and applications of funds analyses and other information respondent determined that petitioner and all other MGM dealers whose returns were examined for the years 1975 and 1976 received tokes for these years totaling $ 44 per adjusted shift. Petitioner Ronald Florence kept no record of his toke income during the years 1975 and 1976. Petitioner declared no tokes to the employer, MGM Grand, during 1975 and 1976. No amount of tokes was reported on his 1975 return. Petitioner reported total tokes of $ 6,225 on his 1976 return, which amounts to a rate of $ 25.41 per adjusted shift. Petitioner's adjusted shifts for 1975 and 1976, determined by making the reductions to total shifts referred to above, are 8.55 and 245.01, respectively. Respondent's source and applications of funds analysis for Mr. Keen included as an application of funds $ 3,389.68 for food. This figure was an estimate by respondent based upon the United States Bureau of Labor Statistics estimates as to the national average cost of food for a family of three individuals. (Mr. Keen is married and has one child). This figure must be adjusted, however, to reflect the fact that435 Mr. Keen, unlike the "average" breadwinner presumably included in the Bureau of Labor Statistics estimate, was provided two meals per shift by his employer at no cost. A reasonable adjustment for this item is $ 5 per shift or $ 1,395. Respondent also included as an application of funds in Mr. Keen's analysis an item for "entertainment" of $ 886.42. This figure too was based upon the Bureau of Labor Statistics estimate. However, respondent included in Mr. Keen's applications of funds checks totaling $ 633.45 which were paid by Mr. Keen to Western Airlines in connection with vacations taken during 1975. To this extent, respondent's determination involves a duplication, and the applications of funds determined by respondent should be reduced by $ 663.45. Likewise, respondent based Mr. Keen's automobile expenses on estimates, and arrived at a figure of $ 1,212.78. However, included in numerous checks used by respondent in determining the total applications of funds for Mr. Keen was $ 743.12 in checks representing automobile expenses. A further adjustment should be made to Mr. Keen's source and applications of funds by reducing applications of funds by $ 743.12 to accounts for this436 item. Mr. Keen testified that he had $ 3,000 cash on hand at the beginning of 1975, and that this "cash hoard" was used to purchase a therapy spa, the cost of which was included in respondent's application of funds. The evidence does not establish, however, that Mr. Keen's "cash hoard" was any more or less at the end of 1975 than it was at the beginning of 1975. Adjusting respondent's source and applications of funds analysis for Mr. Keen for food, entertainment, and automobile expenses, as referred to above, results in an adjusted shift toke rate of $ 31.07. 4Respondent's source and applications of funds for Mr. Chappell must also be adjusted based upon the evidence adduced at trial. In this regard, the evidence establishes that Mr. Chappell received a veteran's disability pension of $ 80 per month, totaling $ 960 for the year 1975. This amount was not included by respondent as a source of funds of Mr. Chappell. Mr. chappell testified at trial that he believed he and his wife received cash gifts from his mother during 1975 totaling $ 3,000. However, a supplemental stipulation and Mr. 437 Chappell's mother's Federal gift tax returns disclose that there were substantial cash gifts to Mr. Chappell and his wife during 1976, but no gifts during 1975. Adjustment of Mr. Chappell's source and applications of funds analysis for the disability pension results in an indicated toke rate per adjusted shift for Mr. Chappell of $ 36.99. Respondent's source and applications of funds analysis for Mr. Kozloff should be adjusted with respect to total sources to reflect an addition of at least $ 3,400 for cash on hand as of January 1, 1975. This sum represents a January 3, 1975, currency deposit to a bank account of Mr. Kozloff as well as two other extraordinary currency deposits made by Mr. Kozloff in April 1975. Mr. Kozloff's source and applications of funds analysis, as determined by the respondent, should be further adjusted by at least $ 1,329 because the Bureau of Labor Statistics estimate for food expenditures used by respondent does not reflect that Mr. Kozloff, like Mr. Keen, was provided two free meals per shift by his employer. These two adjustments to respondent's source and applications of funds analysis result in an indicated toke rate per shift of $ 40.22 for Mr438 Kozloff. The source and applications of funds analysis for taxpayer "F" includes as an application of funds for food and entertainmen entertainment only actual check or documented cash expenditures by the taxpayer during the year. No amounts have been estimated for these amounts or other expenditures. The source and applications of funds analysis for taxpayer "A" includes an estimate for food based upon the Bureau of Labor Statistics figures. Therefore, the same adjustment as was made in the cases of Mr. Keen and Mr. Kozloff to reflect the fact that taxpayer "A" did not expend money for two of his three meals during working days is necessary. This adjustment amounts to a reduction in applications of funds in the amount of $ 1,272.50, which results in a revised indicated rate of tokes per adjusted shift of $ 31.78 for taxpayer "A". Mr. Frank Martins was a "21" dealer at the MGM Grand during the years 1975 and 1976. For the year 1976, he reported tokes on his 1976 return amounting to $ 40 per day. Mr. Martins kept no records as to his actual tips for the year 1976, and the amount he reported on his 1976 return was based upon an estimate made at the time the return was prepared. 439 Mr. Martins' accountant advised him in connection with the preparation of the 1976 return to report tokes of $ 40 per day. ULTIMATE FINDING OF FACT Petitioner's toke income for the years 1975 and 1976 was $ 32 per adjusted shift. OPINION The issue for decision here is purely a factual one, namely, what was the amount of tokes received by petitioner during 1975 and 1976. In view of the Ninth Circuit's decision in Olk v. United States, 536 F.2d 876">536 F.2d 876 (9th Cir. 1976), there is now no question that tokes are taxable income. 5440 Several material facts are undisputed. Petitioner actually received tokes throughout the tax years 1975 and 1976. He kept no contemporaneous records reflecting the amount of these tokes, nor were records maintained and preserved by petitioner's employer, MGM Grand, showing the actual amount of tokes distributed to petitioner and the other "21" dealers. In these circumstance, there is no question that the respondent can resort to indirect methods of proof to reconstruct the amount of petitioner's unreported income. Mendelson v. Commissoner, 305 F.2d 519">305 F.2d 519 (7th Cir. 1962), affg. a Memorandum Opinion of this Court, cert. denied 371 U.S. 877">371 U.S. 877 (1962); see section 446(b). Further, the source and applications of funds method of income reconstruction has long been accepted by this Court. Vassallo v. Commissioner, 23 T.C. 656">23 T.C. 656 (1955). The method is based on the assumption that the amount by which the taxpayer's application of funds during a period exceeds his known sources of funds for the same period is taxable income. Of course, just as in any case involving an indirect method of proof, it is open to petitioner to point out areas or specific441 instances in which the method used by the respondent failed to reflect true income. See Meneguzzo v. Commissioner, 43 T.C. 824">43 T.C. 824 (1965). In particular, the respondent's source and applications of funds analysis should be adjusted where evidence is submitted showing that it does not reflect as sources of income nontaxable items, such as funds accumulated at the beginning of the year, and used during the year, and/or amounts included as applications of funds which do not truly reflect expenditures made by a taxpayer during the year. Petitioner contends, however, that the evidence concerning the source and applications of funds analyses of other taxpayers cannot be used as a basis to reconstruct petitioner's toke income. We disagree. There is clearly an element of commonality among petitioner and the other MGM "21" dealers who worked on a full-time basis during the years in question which makes evidence as to toke income received by one dealer relevant in determining the income received by others. This is so because the evidence is clear that tokes were, throughout both tax years in question, distributed evenly among all the dealers working during a 24-hour shift.442 Accordingly, there is not the likelihood that each dealer's daily tokes would vary substantially, depending upon such things as the location of a dealer's table assignment, the 8-hour period during which the dealer worked within a 24-hour shift, and the whim of the individual player the dealer happened to draw.In addition, this petitioner and others involved in the cases consolidated with petitioner's case for trial did not contend or testify that the total tokes received for the full year 1975 and 1976 varied significantly among individual dealers, because of different days on and off duty. Indeed, the evidence is vurtually undisputed that whatever the toke income of petitioner should be, the amount should be substantially the same for the other dealers. This being the case, the evidence as to toke income received by other dealers, consisting of the source of applications of funds analyses of those individuals, is relevant and was properly utilized by the respondent in determining petitioner's toke income. In theory, a source and applications of funds analysis should show precisely the amount of a taxpayer's unreported income.In fact, since it is almost always necessarily based443 upon estimates and assumptions, it is at best a reasonable indication of the amount of unreported income. In these cases the source and applications of funds analyses do no more than indicate a range within which the average amount of toke income should lie. In this respect, resondent's calculations for the five individuals, unadjusted for items in controversy, show the range from a low of $ 25.29 to a high of $ 58.95. This is so even though the evidence is virtually uncontradicted that these individuals should have approximately the same toke income for the year 1975. Because of these factors, we believe that undue emphasis should not be placed upon the results of any one particular source and applications of funds analysis. We have adjusted each individual analysis for items we believe clearly warrant adjustment. After making these adjustments, the analyses indicate the following: TaxpayerRateKozloff$ 40.22Chappell$ 36.99Keen$ 31.07"F"$ 25.29"A"$ 31.78In arriving at our conclusion as to the appropriate rate for petitioner, we have considered both the range of rates indicated by the five analyses and the relative weight which should444 be afforded each individual analysis. For example, we believe the analysis of Mr. Kozloff should be afforded relatively less weight than that of the other individuals, because of the considerable uncertainty that exists in determining the amount of increase or decrease in cash accumulations by Mr. Kozloff during the year, as well as in determining his cash expenditures. Further, we reject respondent's argument on brief that the analyses regarding taxpayers "F" and "A" should be afforded "little weight," apparently on the grounds these two individuals were not called to testify at trial. We find this argument somewhat surprising in view of the fact that the results of respondent's source and applications of funds analyses regarding these two taxpayers, as well as Mr. Page's detailed workpapers supporting the results, were introduced into evidence by respondent over petitioner's objection.We overruled petitioner's objection to the admission of these analyses based upon Rule 803(8), Federal Rules of Evidence, which permits admission of a government investigative report, even though it constitutes hearsay, unless the Court finds the report lacks "trustworthiness".445 Respondent not only vouched for the trustworthiness of the reports regarding taxpayers "F" and "A", but introduced no evidence regarding adjustments, if any, that should be made to Mr. Page's computations for these taxpayers. We have also considered the testimony of Mr. Martins, who was a "21" dealer throughout the year and who voluntarily reported toke income based upon $ 40 per shift. However, we do not believe that his testimony alone warrants a finding that petitioner's toke income for the year 1976 was at least $ 40 per shift. We must consider that Mr. Martins, like petitioner, kept no contemporaneous records of his income during the year 1976, and he based the amount reported solely upon an estimate arrived at between him and his accountant. Simply because the estimate favors the respondent's determination in this case more than it does petitioner's contention does not mean it should be accepted as any better evidence than it is, namely, an estimate.Finally, we have considered respondent's determination and our opinion upholding that determination with respect to the toke income of dealers at the Las Vegas Hilton for the years 1972 and 1973. See Williams v. Commissioner, T.C. Memo. 1980-494.446 Because respondent determined the same rate per shift ($ 44) for the dealers involved in this case and for the dealers in the Williams case, and based the determination in this case at least in part upon the determination with respect to the Hilton dealers, particular emphasis at trial was placed by the parties upon a comparison of the Hilton and the MGM Grand. The evidence in this case establishes that the average amount of tokes received by the dealers at the Hilton was greater than that received by the dealers at the MGM Grand. This is because the MGM Grand has a substantially higher percentage of "low stake" tables than does the Hilton, and has significantly more tables and more dealers who share in the toke pool than the Hilton does. Likewise, respondent relied upon the determination of dealer's toke income in the Golden Nugget for the years 1972 and 1973, which was upheld by our opinion in Hannifin v. Commissioner, T.C. Memo. 1980-482. It should be noted that respondent's determination and our opinion in Hannifin were based upon actual contemporaneous records of toke income for the years involved (covering approximately six months of each year). The447 determined toke income involving the dealers in the Golden Nugget ranged from $ 17 to $ 21. However, the evidence in this case establishes that the toke income of the Golden Nugget dealers was less than that of MGM Grand dealers, largely because of the differences in clientele and betting practices. We have considered the petitioner's toke income for each year 1975 and 1976. We conclude that the evidence in this case establishes that the amount of toke income did not significantly vary between these two years. Considering the evidence as a whole, we conclude and have found as an ultimate fact that petitioner's toke income was $ 32 per adjusted shift. Respondent asserted the addition to tax provided by section 6653(a) for the year 1976, but not for 1975. Respondent's failure to assert the addition to tax for 1975 recognizes the uncertainty in the law that existed during that year as a result of the decision in Olk v. United States, 388 F. Supp. 1108">388 F.Supp. 1108 (D. Nev. 1975). We believe substantially the same uncertainty existed during 1976 and this uncertainty warrants the conclusion that petitioner was not negligent nor did he intentionally disregard the rules and*448 regulations. We recognize that generally the substantial under-reporting of tip income, where the taxpayer has kept no records or failed to produce accurate records, has been held to justify the imposition of the addition to tax. See, e.g., Zibilich v. Commissioner, T.C. Memo 1972-92">T.C. Memo. 1972-92. However, the unique circumstances of this case show that during much of the tax year in question the petitioner may have in good faith believed that the law did not require him to report tokes for tax purposes. Therefore, although the uncertainty was resolved by the time the 1976 return was due to be filed, there is justifiable reason for failing to have records upon which to base the amount reported on that return. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. 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.3. Respondent offered into evidence the conclusions regarding Mr. Page's source and applications of funds analysis of the sixth taxpayer, referred to as taxpayer "E". The detailed workpapers concerning the support for the final figures used by Mr. Page were unavailable at the time of trial, such that neither the petitioners nor the Court could determine the treatment of such matters as cash on hand and living expenses, which, as subsequently discussed herein, require adjustments to Mr. Page's figures for the other source and applications of funds analyses. Accordingly, the Court concluded that the "bottom line figures" with respect to taxpayer "E" should not be admitted into evidence.↩4. This figure also reflects the addition of reported tips to un-reported tips.↩5. There was some contention at trial that to the extent tokes were received as a result of a winning be placed by the player, they constitute gambling winnings and can be offset by gambling losses. However, there was no evidence submitted as to what portion of the tokes received were the result of a bet placed by the player, and what portion were simply cash or chips left by the player on the table. Moreover, for the reasons fully discussed in our opinion in Williams v. Commissioner, T.C. Memo. 1980-494↩, which involved the identical argument, we conclude that all tokes received by the dealers are taxable gratuities.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620355/	A. L. GUMP, FORMERLY EXECUTOR OF THE LAST WILL AND TESTAMENT OF BENJAMIN H. LICHTENSTEIN, DECEASED, MABEL GUMP, FRANCES DAVIS (FORMERLY FRANCES LICHTENSTEIN) AND MILTON LATHAM, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gump v. CommissionerDocket No. 34532.United States Board of Tax Appeals21 B.T.A. 606; 1930 BTA LEXIS 1824; December 10, 1930, Promulgated 1824 1. The time within which an additional assessment of estate tax made prior to June 2, 1924, may be collected is not extended by section 311 of the Revenue Act of 1926 even though a deficiency notice on account thereof is mailed pursuant to the Revenue Act of 1926. 2. An additional assessment of estate tax on account of a return filed on December 11, 1920, was made in August, 1922, but not collected, a claim in abatement being filed. A part of such additional assessment was paid in February, 1926, when the collection thereof was barred. Held that the payment made in February, 1926, constitutes an overpayment within the meaning of section 607 of the Revenue Act of 1928. F. E. Youngman, Esq., for the petitioners. Frank T. Horner, Esq., for the respondent. SEAWELL607 This proceeding involves a deficiency in estate tax as determined by the Commissioner in the amount of $16,286.18 on account of the death of Benjamin H. Lichtenstein, who died on December 12, 1919. The two principal questions presented are (1) whether the interest of the surviving spouse in community property under the laws of California should be included in the gross1825 estate of the decedent for the estate-tax purposes and (2) whether the collection of the deficiency proposed is barred by the statute of limitations. The facts were stipulated. FINDINGS OF FACT. Benjamin H. Lichtenstein died testate on December 12, 1919, being at the time of his death a resident of San Rafael, Marin County, Calif. A. L. Gump, one of the petitioners herein, is a resident of San Francisco, Calif., and was formerly executor of the last will and testament of Benjamin H. Lichtenstein. On January 9, 1920, A. L. Gump and Frances Davis formerly Frances Lichtenstein), two of the petitioners herein, were duly appointed executors of the last will and testament of Benjamin H. Lichtenstein and duly qualified. On or about June 6, 1921, Frances Davis resigned as one of the aforesaid executors and thereafter and until August 3, 1926, A. L. Gump was the sole duly appointed, qualified and acting executor of the last will and testament of Benjamin H. Lichtenstein. On August 3, 1926, A. L. Gump was finally discharged as such executor, but no notice in writing was ever given to the Commissioner under the provisions of section 317 of the Revenue Act of 1926 of such discharge. 1826 Mabel Gump, Frances Davis and Milton Latham, three of the petitioners above named, were and are the residuary legatees named in the last will and testament of Benjamin H. Lichtenstein. Frances Davis (formerly Frances Lichtenstein) was married to Benjamin H. Lichtenstein in the year 1891, and thereafter and until the death of Benjamin H. Lichtenstein they lived together continuously. At the date of the death of Benjamin H. Lichtenstein property of a total value of $578,424.28 had been accumulated by the 608 decedent and his wife which, under the laws of the State of California, was community property. On December 11, 1920, an estate-tax return was filed with the collector of internal revenue for the first district of California by A. L. Gump and Frances Lichtenstein (now Frances Davis) as executors on behalf of the estate of Benjamin H. Lichtenstein. In determining the value of the gross estate of Benjamin H. Lichtenstein for estate-tax purposes the executors excluded from the value of said gross estate shown in the return the value of the widow's one-half interest in the community property. On February 9, 1921, the executors paid the estate tax shown on the return1827 to be due in the amount of $8,279.26. An audit of the estate-tax return was made by the Commissioner on or about August 11, 1922, as a result of which certain adjustments were made to the value of assets shown and deductions claimed in the estate-tax return and the value of the widow's one-half interest in the community was included in the value of the gross estate. As a result of these adjustments in the value of the gross and net estates of Benjamin H. Lichtenstein, including the widow's interest in the community property, the Commissioner determined the total estate-tax liability to be $30,028.05. During the month of August, 1922, the Commissioner, pursuant to his letter of August 11, 1922, assessed against the estate of Benjamin H. Lichtenstein an additional estate tax of $21,748.79. Thereafter, on or about September 23, 1922, a claim was filed with the collector of internal revenue for the first district of California by A. L. Gump as executor of the estate, for abatement of the full amount of the said additional estate-tax assessment of $21,748.79. As one ground of the claim for abatement the executor contended that the one-half interest of the widow in the community property1828 should not be included in gross estate. By letter of January 7, 1926, the Commissioner advised petitioner A. L. Gump, as executor, of his consideration of the said claim in abatement, concluding such letter with the following statements: As a result of the prior audit, additional tax was assessed in the amount of $21,748.79. In accordance with the above, it is now determined that this assessment is excessive in the sum of $16,286.18. Therefore, your claim for abatement of $21,748.29 will be prepared for allowance in the sum of $16,286.18 and is rejected as to $5,462.61. Such portion of the additional tax, if any, as remains unsatisfied, should be paid to the Collector of Internal Revenue, without further delay, together with interest thereon, at the rate of ten per centum per annum from the expiration of thirty days from notice and demand by the Collector, including such time as is necessary for the remittance to reach the office of the Collector. On February 12, 1926, petitioner A. L. Gump, as executor, paid to the collector of internal revenue at San Francisco, Calif., the sum 609 of $6,658.48 representing $5,462.61 principal of tax and $1,195.87 interest, pursuant1829 to the respondent's letter of January 7, 1926. By letter dated December 8, 1927, the Commissioner notified petitioner A. L. Gump, as executor, that the claim for abatement of $21,748.79 had been reconsidered and the estate-tax liability of the estate of Benjamin H. Lichtenstein redetermined by including in the gross estate the entire value of all community property, and that the claim for abatement was rejected as to the entire amount. The aforementioned letter was directed to "A. L. Gump, Executor, Estate of Benjamin H. Lichtenstein," and read in part as follows: This office desires to refer to letter dated January 7, 1926, in which it was shown that the total tax due from the above-named estate was $13,741.87. In view of the decision of the United States Supreme Court in the case of United States vs. Robbins, 269 U.S. 315">269 U.S. 315, decided January 4, 1926, and an opinion of the Attorney General of the United States issued under date of June 24, 1926 (Treasury Decision 3891), your claim for abatement is now reconsidered and the tax redetermined by including in the gross estate the entire value of all the Community property. * * In view of the foregoing, the claim1830 for abatement of $21,748.79 is now rejected in its entirety. Pursuant to Section 318 of the Revenue Act of 1926, notice of deficiency amounting to $16,286.18 in estate tax with respect to the Estate of Benjamin H. Lichtenstein is hereby given with a view to the collection thereof. At all times prior to May 8, 1926, petitioner A. L. Gump had in his possession assets of the estate of Benjamin H. Lichtenstein sufficient to pay the additional estate tax of $21,718.79. On or about May 8, 1926, petitioner A. L. Gump distributed to the residuary legatees of the estate of Benjamin H. Lichtenstein all of the residue and remainder of property of the estate then in his possession. The said A. L. Gump relied upon the letter of the Commissioner dated January 7, 1926, and particularly the statement therein contained that said claim in abatement would be prepared for allowance in the sum of $16,286.18, and solely by reason of such reliance the balance of said tax, namely, the sum of $6,658.48 (which includes interest as aforesaid), was paid and the estate was finally closed and distributed. Solely by reason of such reliance as aforesaid, said A. L. Gump paid and delivered to the residuary1831 legatees, namely, Mabel Gump, Frances Davis, and Milton Latham, all of the rest, residue and remainder of the property of the estate of Benjamin H. Lichtenstein, deceased, then in his possession. Petitioner A. L. Gump has not had since May 8, 1926, and does not now have in his possession any of the assets of the estate of Benjamin H. Lichtenstein. The books and records of the collector of internal revenue for the first district of California show an outstanding unpaid balance of 610 estate tax against the estate of Benjamin H. Lichtenstein in the amount of $16,286.18, which is the unpaid balance of the additional assessment of $21,748.79 heretofore referred to as made in August, 1922. OPINION. SEAWELL: The petition which gave rise to this proceeding was filed by the individuals shown as petitioners in the caption of this case, though the deficiency notice was directed to "A. L. Gump, Executor, Estate of Benjamin H. Lichtenstein." While A. L. Gump had been discharged as executor prior to the filing of the petition, no notice of such discharge was given to the Commissioner as provided in section 317 of the Revenue Act of 1926 and therefore the deficiency notice was1832 properly directed to him in the capacity indicated above. Our jurisdiction is accordingly confined to the petition on the part of A. L. Gump in his capacity as executor (hereinafter referred to as "petitioner"), and the individuals who signed the petitioner as residuary legatees may not be considered as parties to this proceeding, and the proceeding as to them is dismissed. The petitioner admits that the question as to the inclusion in the gross estate of the decedent of the value of the widow's interest in community property in California for estate-tax purposes has heretofore been decided by the Board (Griffith Henshaw, Executor,12 B.T.A. 1441">12 B.T.A. 1441) and that such decision has been upheld by the Circuit Court of Appeals for the Ninth Circuit (Henshaw v. Commissioner, 31 Fed.(2d) 946; certiorari denied, Henshaw v. Lucas, Commissioner of Internal Revenue,280 U.S. 565">280 U.S. 565), but insists that such action is contrary to the statute. The contentions now advanced by the petitioner have already been considered by the Board and we are not convinced that incorrect conclusions have been reached with respect thereto. 1833 In connection with the next issue as to whether the collection of the deficiency is barred by the statute of limitations, a question was raised as to whether the entire deficiency had been abated prior to the issuance of the deficiency notice which gave rise to this proceeding, but we find it unnecessary to discuss this question for the reason that we are of the opinion that in any event the collection of the deficiency is barred. The decedent's death occurred on December 12, 1919, and on December 11, 1920, the estate-tax return was filed. The Revenue Act of 1921 provides that any tax due under such return shall be assessed within four years after such tax became due (section 1322) and that no suit or proceeding for the collection of such tax shall be begun after the expiration of five years from the time such tax was due (section 1320). The foregoing provisions 611 were superseded by section 1009 of the Revenue Act of 1924, but the statutory periods for assessment and collection were not changed. In August, 1922, or within the four-year period for making assessments, the deficiency with which we are concerned was assessed, but not collected, a claim in abatement being1834 filed. No action was taken prior to the issuance of the deficiency notice to extend the time for collection. Our question is whether the collection of the deficiency was barred when the deficiency notice was mailed on December 8, 1927. We are unable to distinguish the situation here presented from that before the court in Russell v. United States,278 U.S. 181">278 U.S. 181, where it was held that the collection of a similar outstanding assessment was barred from collection. We can see no merit in the commissioner's contention that the Russell case is not applicable for the income tax, whereas the case at bar deals with an estate tax, since income tax Whereas the case at bar deals with an estate tax, since the provisions which the court there held insufficient to prevent the running of the statute (section 278(d) and (e) of the Revenue Act of 1924) are similar to the corresponding provisions for estate-tax purposes (section 311(b) and (c) of the Revenue Act of 1924). Nor do we regard it as material that the deficiency notice was mailed in accordance with the provisions of section 318(d) of the Revenue Act of 1926 instead of under the corresponding provision of the1835 Revenue Act of 1924. The case of D. E. Wheeler,16 B.T.A. 96">16 B.T.A. 96, involved a similar situation where the notice was mailed after the passage of the Revenue Act of 1926, and we held the collection barred. When the Revenue Act of 1926 was passed the collection of the assessment in question was barred (Russell v. United States, supra ) and we do not understand that section 311(b) and (c) of such act was intended to make valid the collection of assessments which were then barred. The effect of the Commissioner's argument is to say that such section would operate to revive barred collections, whereas it is expressly provided that this section shall not "authorize the assessment of a tax or the collection thereof by distraint or by proceeding in court (1) if at the time of the enactment of this Act such assessment, distraint or proceeding was barred by the statutory period of limitation properly applicable thereto." In view of the foregoing, we are of the opinion that the collection of the deficiency is barred. The further contention is made by the petitioner that the Board should find an overpayment of tax in the amount of $6,658.48 on account of1836 the payment of that amount when the collection thereof was barred. As shown in our findings, an additional assessment was made in August, 1922, in the amount of $21,748.79, and on September 23, 1922, a claim in abatement was filed for the full amount. 612 On January 7, 1926, the Commissioner advised the petitioner that the claim in abatement would be prepared for allowance in the sum of $16,286.18 and was rejected as to $5,462.61. Shortly after receipt of the foregoing communication, or on February 12, 1926, the petitioner paid the rejected portion of the claim, together with interest in the amount of $1,195.87, or $6,658.48. Since the return under which the foregoing assessment was made was filed in 1920 and since the stautory period for the collection of any tax due thereunder was five years, the collection made in 1926 was erroneously made and therefore constitutes an overpayment within the meaning of section 607 of the Revenue Act of 1928. Cf. Morris Metcalf,16 B.T.A. 881">16 B.T.A. 881, and J. B. Dortch,19 B.T.A. 159">19 B.T.A. 159. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020

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