Split (1)

train · 657k rows

url stringlengths 56 59	text stringlengths 3 913k	downloaded_timestamp stringclasses 1 value	created_timestamp stringlengths 10 10
https://www.courtlistener.com/api/rest/v3/opinions/4620356/	HERMAN GESSNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gessner v. CommissionerDocket No. 77506.United States Board of Tax Appeals32 B.T.A. 1258; 1935 BTA LEXIS 829; August 23, 1935, Promulgated 829 During the taxable year 1931 the petitioner and his wife, residents of Michigan, received income from property owned in fee simple as tenants by the entireties. Held, that the petitioner is liable to tax upon only one half of the income received from such property. William J. Murray, Esq., for the petitioner. T. G. Histon, Esq., for the respondent. SMITH 1259 OPINION. SMITH: This is a proceeding for the redetermination of a deficiency in income tax for 1931 of $424.90. The point in issue is whether the petitioner is liable for income tax upon all of the income from property held by himself and his wife as tenants by the entireties or is liable for income tax upon only one half of such income. The facts were stipulated as follows: 1. Petitioner was during the taxable year 1931 living with his wife, Anna Gessner, and both spouses elected to file and did file separate income tax returns for that year. 2. Petitioner and his wife owned, in fee simple, as tenants by the entireties, certain real estate known and described as: "Lots 9 and 10 of Block 32; West 100 feet of Block 38; West half of lot 10, east 45 feet of lot 11, and830 entire lot 12 of block 75 of the original plat of the village (now City) of Escanaba, Michigan." And hereinafter known as: Store building - Fair Store, Store building - Kinney Store, Store building - Kresge Store. 3. The gross rental income of the aforementioned properties amounted to $21,600 for the year 1931. 4. The petitioner included in his separate return for the year 1931 one-half of such rentals as follows: Name of StoreGrossDepreciationInsurance Net Income Income ReportedStore Building, Fair Store$6,000.00$825.00$256.87$4,918.13Store Building, Kinney Store1,500.0065.001,435.00Store Building, Kresge Store3,300.00685.752,614.25$10,800.00$8,967.385. Petitioner's wife reported on her separate return for the year 1931 one-half of such rentals as follows: Name of StoreGrossDepreciationInsurance Net Income Income ReportedStore Building, Fair Store$6,000.00$825.00$256.87$4,918.13Store Building, Kinney Store1,500.0065.0037.501,397.50Store Building, Kresge Store3,300.00685.752,614.25$10,800.00$8,929.88831 6. The Commissioner, in his notice of deficiency has added to petitioner's income the sum of $8,929.88, representing the portion of the aforesaid rentals returned by petitioner's wife less the expense deducted therefrom upon her return. The respondent contends that the entire amount of income from realty held by husband and wife as tenants by the entireties in the State of Michigan is taxable to the husband. 1260 In , affirming , it was held that where husband and wife sold on "land contract" real estate held by them as tenants by the entirety under the laws of Michigan, interest payments on deferred installments under such contract received by them in 1928-1929 were taxable one half to the husband and one half to the wife. In the course of its opinion the court stated: In a previous consideration of Act 212 (), we expressed the view that it in effect created an estate by the entirety in "all bonds, certificates of stock, mortgages, promissory notes, debentures, or other evidences of indebtedness, hereafter made payable to persons832 who are husband and wife." While decision did not require an interpretation of the act, the view there expressed reinforces our present conclusion. It having been apparently conceded both before the Board and here that if the Board's interpretation of Act 212 was erroneous, and if the income here involved was derived from an estate by the entirety, it was all taxable as the income of the respondent, we announced an opinion on January 8, 1934, setting aside the Board's decision. This was on the ground that one of the incidents of an estate by entirety under Michigan law is that the husband has control of the property and the right to receive and dispose of income therefrom, citing . We are now convinced by a study of the Michigan cases discussed in the brief supporting the petition for rehearing, and in the brief of amicus curiae, submitted to us at our request, that the rule apparently announced in Morrill v. Morrill is no longer the law of Michigan, if ever it was. 833 ; ; ; . It is clearly the holding of these cases that payments due upon a contract for the sale of land held by husband and wife as tenants by the entireties cannot be reached in garnishment by the husband's creditors, that rent from property so held is not subject to garnishment by creditors of the husband, and that the rents, profits, or income of such property is not subject to process under a judgment creditor's bill in equity at the instance of the husband's creditors. The holding by the entireties in Michigan is therefore entirely analogous to the community holding involved in , and income therefrom is not taxable to the husband alone. Cooley v. Commissioner, Fed.2d (C.C.A. 1), decided Jan. 31, 1935, being based on a rule of property in Massachusetts does not persuade us to the contrary. It follows834 that even though the Board applied an erroneous construction of the Michigan statute, its decision is right. Our former opinion is therefore withdrawn, and the order of the Board of Tax Appeals is sustained. We are of opinion that the decision of the court in the above cited case is dispositive of the issue herein presented. The petitioner is not liable for income tax for 1931 upon $8,929.88 representing a portion of the rentals from the entirety property returned by petitioner's wife less the expense deducted therefrom upon her return. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620357/	CHARLES A. DODGE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDodge v. CommissionerDocket No. 9572-80.United States Tax CourtT.C. Memo 1983-431; 1983 Tax Ct. Memo LEXIS 360; 46 T.C.M. (CCH) 842; T.C.M. (RIA) 83431; July 25, 1983. Joseph W. Weigel, for petitioner. Joseph T. Chalhoub, and Edward J. Roepsch, for respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Chief Judge: This case was assigned to Special Trial Judge Randolph F. Caldwell, Jr. for hearing on respondent's motion for summary judgment, filed on October 29, 1982. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set out herein below. OPINION OF THE SPECIAL TRIAL JUDGE CALDWELL, Special Trial Judge: Respondent determined deficiencies in petitioner's income tax and additions to tax for years and in amounts as follows: Additions to TaxYearDeficiencysec. 6651 (a) 1sec. 6653 (a)sec. 6654 (a)1973$333.14$83.29$16.661974692.61173.1534.6319756,580.381,645.09329.01$282.76The facts found are based upon the deemed admissions contained in respondent's request for admissions, filed August 30, 1982. 2362 FINDINGS OF FACT Petitioner is an individual who, at the time his petition in this case was filed, resided at Route 2, Mosinee, Wisconsin. The notice of deficiency for the taxable years 1973, 1974, and 1975, upon which this case is based, was mailed to petitioner on March 19, 1980. Petitioner is a cash basis taxpayer for Federal income tax purposes. During 1973, 1974, and 1975, petitioner did not maintain books and records of his income-producing activities. During the audit of petitioner's 1973, 1974, and 1975 tax liabilities, petitioner did not furnish to the agents of respondent any documents, books, or records. During 1973, 1974, and 1975, petitioner received taxable income from commissions, speaking engagements, and the sale of "tax-protestor" materials. Taxable Year 1973During 1973, petitioner earned and received the following commissions as a self-employed independent contractor: Bankers Mutual Life Ins. Co.$ 677.50Wisconsin National Life Ins. Co.1,871.83Reliable Life & Casualty Co.171.19Total$2,720.52Petitioner was entitled to one exemption and the standard deduction for 1973. Petitioner's correct income, income363 tax liability, self-employment tax liability, and the statutory deficiency for 1973 are as follows: Income$2,720.52Income Tax$ 195.00Self-employment Tax138.14Total tax liability$ 333.14Less: ReportedDeficiency$ 333.14Taxable Year 1974On July 13, 1974, petitioner received a check in the amount of $363.22 from Robert M. O'Dell of Hayward, Wisconsin, which was endorsed by petitioner in 1974. The proceeds from the check were used for petitioner's nondeductible personal expenses and were not deposited in a bank account. The check was received by petitioner in payment for services rendered by petitioner or for materials sold by petitioner. Petitioner received taxable income in 1974 in the amount of $363.22 as the result of the receipt of the check. On May 29, 1974, petitioner received a check in the amount of $60 from Mosinee Research Corporation of Mosinee, Wisconsin, which was endorsed by petitioner in 1974. The proceeds from the check were used for petitioner's nondeductible personal expenses and were deposited in a bank account. The check was received by petitioner in payment for services rendered by petitioner or for materials sold364 by petitioner. Petitioner received taxable income in 1974 in the amount of $60 as the result of the receipt of the check. On January 4, 1974, petitioner opened a checking account at the Auburndale State Bank, Hewitt Branch, in Auburndale, Wisconsin, under the name of the "Little Peoples Tax Advisory Committee." Petitioner deposited in the account in 1974 and 1975 checks issued to petitioner in payment for the sale of "tax-protestor" materials or speaking engagements. These deposits made to the account in 1974 and 1975 were taxable income to petitioner. The amount of the 1974 deposits, the cash withdrawals from deposits, the checks issued for business expenses, and taxable income represented by deposits to the account are as follows: Deposits$5,387.65Cash withdrawals738.79Total$6,126.44Less: Business expensechecks3,843.92Balance, taxableincome$2,282.52The cash withdrawn was used by petitioner for nondeductible personal expenses and was not deposited in a bank account. On October 9, 1974, petitioner opened a bank account at the Bank of Eureka Springs, in Eureka Springs, Arkansas, under the name of "Americans for Constitutional Government365 and Law." Petitioner deposited in this account in 1974 and 1975 checks issued to petitioner in payment for the sale of "tax-protestor" materials or speaking engagements. These deposits made to the account in 1974 and 1975 were taxable income to petitioner. The amounts of the 1974 deposits, the nontaxable V.A. checks, the checks for business expenses, and the taxable income represented by deposits to the account are as follows: Deposits$3,859.50Less: Business expense checks$2,629.30V.A. checks118.002,747.30Balance, taxable income$1,112.20Petitioner was entitled to one exemption and the standard deduction for 1974. Petitioner's correct income, income tax liability, self-employment tax, tax liability, and the statutory deficiency for 1974 are as follows: Income: O'Dell$ 363.22Mosinee Research Corp.60.00Auburndale/Hewitt Bank2,282.52Bank of Eureka Springs1,112.20Total income$3,817.94Income Tax$ 391.00Self-employment tax301.61Total tax liability$ 692.61Less: ReportedDeficiency$ 692.61Taxable Year 1975The amounts of taxable cash withdrawals and checks written on the account at the366 Bank of Eureka Springs are as follows: Taxable cash withdrawals$6,834.04Personal checks1,937.92Taxable income$8,771.96The cash withdrawn was used by petitioner for nondeductible personal expenses and was not deposited in a bank account. On April 3, 1975, petitioner opened a checking account at the Intercity State Bank in Schofield, Wisconsin, under the name of "Little Peoples Tax Advisory Committee." In 1975, petitioner deposited to the account checks issued to petitioner in payment for the sale of "tax-protestor" materials or speaking engagements. These deposits were taxable income to petitioner. The amounts of the 1975 deposits, the cash withdrawn by petitioner from checks deposited to the account, the business expense checks, and the taxable income represented by the deposits to the account are as follows: Deposits$10,215.10Cash withdrawals1,750.00Total$11,965.10Less: Business expensechecks6,941.62Balance, taxable income$ 5,023.48The cash withdrawn by petitioner from the checks deposited to the account was used by petitioner for nondeductible personal expenses and was not deposited in a bank account. The 1975367 deposits, deductible business expense checks, and taxable income represented by the deposits to petitioner's checking account at the above-mentioned Auburndale State Bank, Hewitt Branch are as follows: Taxable depositsMarch 13, 1975$575.00April 10, 19758.64$583.64Less: Business expensechecks77.24Taxable income$506.40In 1975, petitioner deposited in his checking account at the Auburndale State Bank, Schofield Branch, under the name of the "Little Peoples Tax Advisory Committee," the following taxable receipts: DateAmountMarch 18$1,078.75March 212,500.00April 91,000.00April 192,350.00Total$6,928.75The foregoing deposits were checks issued to petitioner in 1975 in payment for speaking engagements or "tax-protestor" materials. The 1975 deposits, cash withdrawals, business expense checks, and taxable income represented by the deposits are as follows: Deposits$6,928.75Cash withdrawals2,290.00Total$9,218.75Less: Business expensechecks2,745.07Balance, taxable income$6,473.68The cash withdrawn by petitioner from the checks deposited to the account was used by petitioner368 for nondeductible personal expenses and was not deposited in a bank account. Petitioner was entitled to one exemption and the standard deduction for 1975. Petitioner's correct taxable income, income tax liability, self-employment tax liability, and statutory income tax deficiency for 1975 are as follows: Income: Bank of Eureka Springs$ 8,771.96Intercity State Bank5,023.48Auburndale/Hewitt Bank506.40Auburndale/Schofield Bank6,473.68Total$20,775.52Less: Exemption$750.00Standard deduction1,300.002,050.00Balance, taxable income$18,725.52Income tax liability$ 5,496.48Less: Personal exemption credit30.00Balance$ 5,466.48Self-employment tax liability1,113.90Total tax liability$ 6,580.38ReportedDeficiency$ 6,580.38During 1974 and 1975, petitioner did not deposit into the bank accounts described above the proceeds from any gift, bequest, devise, loan, or other non-taxable source not already taken into consideration herein. Petitioner's failure to file a Federal income tax return for 1973, 1974, and 1975 was without reasonable cause. Petitioner did not make any estimated tax payments369 with respect to his 1975 income tax liabilities. Part of petitioner's underpayments of tax for 1973, 1974, and 1975 was due to petitioner's negligence or intentional disregard of rules and regulations. OPINION Respondent has filed a motion for summary judgment that petitioner is liable for deficiencies and additions to tax under sections 6651(a), 6653(a), and 6654(a). Turning first to the deficiencies, the amounts of petitioner's correct taxable income and the deficiency for each of the years have been found as facts, and those facts are predicated upon the matters in respondent's request for admissions, which have been deemed admitted. Those amounts are the same as determined by respondent in the notice of deficiency. Accordingly, petitioner is liable for the deficiencies, as determined by respondent, for each of the years 1973, 1974, and 1975. The next item to be considered is whether petitioner is liable for the addition to tax under section 6651(a) for each of the years. That section provides for imposition of an addition to tax for failure to timely file a return unless such failure is due to reasonable cause and not due to willful neglect. Section 6012(a) provides, 370 in pertinent part, that every individual having for taxable years beginning before 1979 gross income of $750 or more was required to file a return. As the facts show, petitioner had gross income in excess of $750 for each of the years, but he did not file a return for any of those years. It has been found as a fact, supported by a deemed admission, that petitioner's failure was without reasonable cause. Considering the further fact of petitioner's "tax-protestor" activities, petitioner's failure would have been found to be without reasonable cause even if there had been no deemed admission.Accordingly, respondent should be sustained on this issue.The third issue is whether petitioner is liable for an addition to tax under section 6653(a). That section provides for the imposition of an addition to tax for an underpayment of tax which is due to negligence or intentional disregard of rules and regulations. Here again, it stands admitted that the underpayment for each year was due to negligence or intentional disregard of rules and regulations, and here again there can be no doubt, even absent such an admission, that the underpayments were due, at the very least, to such negligence371 or intentional disregard. Respondent should be sustained on this issue. The final issue is whether petitioner is liable for the mandatory addition to tax under section 6654(a) for 1975. That section provides for an imposition of an addition to tax for underpayment of estimated tax, except under the circumstances described in section 6654(d) -- none of which are present in the instant case. It stands admitted that petitioner did not make any payments of estimated tax with respect to his 1975 income tax liabilities, and accordingly, respondent should be sustained on this issue. There being no genuine issue as to any material fact and respondent being clearly entitled to prevail on every issue as a matter of law, his motion for summary judgment should be granted and a decision entered in his favor for the deficiencies and additions to tax determined by him. It is deemed appropriate to warn petitioner that if he should bring another case of the same stripe as the present one, the Court would be disposed to award damages against him under section 6673. An appropriate order and decision will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Petitioner filed no response to the request for admissions. Respondent filed the subject motion for summary judgment on October 29, 1982, which was calendared for hearing on December 1, 1982. On November 29, 1982, petitioner filed a motion for enlargement of time to respond to the request for admissions. That motion was denied by order dated May 3, 1983 (accompanied by a memorandum sur order), wherein petitioner was given 45 days (until June 17, 1983) to file a motion under this Court's Rule 90(e) for modification or withdrawal of admissions. Petitioner has not filed such a motion, and the matters embraced in respondent's request for admissions continue to stand therfore deemed admitted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620361/	ROOSEVELT WALLACE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWallace v. Comm'rNo. 4637-03 United States Tax Court128 T.C. 132; 2007 U.S. Tax Ct. LEXIS 11; 128 T.C. No. 11; April 16, 2007, Filed 11 P participated in a compensated work therapy program administered by the U.S. Department of Veterans Affairs (VA) and, on account thereof, received a distribution of $ 16,393 from the VA Special Therapeutic and Rehabilitation Activities Fund. R increased P's gross income by that amount on the ground that the distribution is a payment for services. P claims that the distribution is a tax-exempt veterans' benefit pursuant to I.R.C. sec. 139(a)(3) and 38 U.S.C. sec. 5301 (2000).Held: The distribution is a tax-exempt veterans' benefit. Thomas Stylianos, Jr., for petitioner.Nina P. Ching, for respondent. Halpern, James S.JAMES S. HALPERN132 OPINIONHALPERN, Judge: Respondent determined a deficiency of $ 2,460 in petitioner's 2000 Federal income tax. The sole issue for decision is whether $ 16,393 received by petitioner during 2000 in connection with his participation in a work therapy program administered by the U.S. Department of Veterans Affairs (VA) is includable in his gross income for 2000. We hold that it is not.Unless otherwise stated, all section references are to the Internal Revenue Code in effect for 2000. 12 BACKGROUNDIntroductionThis case was submitted for decision without trial pursuant to Rule 122, Tax Court Rules of Practice and Procedure. Facts stipulated by the parties are so found. The stipulation 133 of facts filed by the parties, with attached exhibits, is included herein by this reference.ResidenceAt the time the petition was filed, petitioner resided in Lowell, Massachusetts.Participation in Compensated Work TherapyDuring 2000, pursuant to a physician's prescription, petitioner participated in (and completed) a VA-administered therapeutic and rehabilitative work program. As part of his participation in that program, petitioner undertook compensated work therapy. As part of that therapy, he was assigned to the Veterans Construction Team. As a team member, he worked in the facilities department of Middlesex Community College, in Lowell, Massachusetts. His work included sweeping floors and moving offices. During 2000, petitioner received from the VA $ 16,393 for services he provided as a part of his compensated work therapy.The Compensated Work Therapy ProgramThe VA administers therapeutic and rehabilitative activities under its Compensated Work Therapy (CWT) program13 (sometimes just the program). Many aspects of the program are described in a staff manual, the CWT Veterans Employment Resources Staff Program Manual (the manual), prepared by staff at Edith Nourse Rogers Memorial Veterans Medical Center, Bedford, Massachusetts. The following description of the program is drawn from the manual.The program provides assistance to veterans unable to work and support themselves. Many of the veterans in the program have histories of one or more conditions such as psychiatric illness, substance abuse, and homelessness. Under the program, the VA provides a range of vocational rehabilitation services, with the degree of structure and level of support provided to the participating veteran geared to his or her needs. The goal of the program is to assist participants in attaining independence and vocational functioning as they return to the work environment.The most structure and support is provided to participants at lower levels of psychosocial functioning, such as participants 134 experiencing chronic physical or psychiatric disabilities that prevent them from sustaining regular employment. Those participants are given work within a workshop or other hospital-based14 setting and work between 4 and 30 hours a week at simple tasks.Participants capable of working outside of a hospital, in community settings, such as Federal agencies and private businesses, but not prepared to take on full-time employment, or struggling with frequent substance abuse relapses, participate in a day labor pool, where work appropriate to the participants' levels of commitment and ability is provided.Participants able to commit to continuous full-time community- based employment, and who demonstrate appropriate work ethics and behavior, can be assigned to a range of activities, such as administrative support, data entry, landscaping, accounting, and construction. A participant at this level interested in, or with experience in, the construction trades, may be assigned to the Veterans Construction Team. Members of the Veterans Construction Team are assigned to construction projects both inside and outside the VA hospital system.Participants capable of transitioning to competitive employment are provided individual placement and support services that are necessary to obtain and keep competitively obtained employment.The manual provides the following summary about15 what is therapeutic about compensated work therapy: "In sum, the social system that is inherent in the work-setting[] can be a major restorative feature that fosters the development of the relationships, work ethics, and skills needed to function optimally in society."38 U.S.C. Section 1718 (2000)The parties agree that, during 2000, the CWT program was operated pursuant to 38 U.S.C. section 1718 (2000) (when discussed, rather than cited, "section 1718", with all references to the year 2000). Title 38 of the United States Code (title 38) is concerned with veterans' benefits. Section 1718 is entitled "Therapeutic and rehabilitative activities". Among other things, section 1718 authorizes the Secretary to enter into 135 contracts with third parties to provide therapeutic work for patients in VA health care facilities. 38 U.S.C. sec. 1718(b)(1) and (2). Section 1718(c)(1) establishes a fund, the "Department of Veterans Affairs Special Therapeutic and Rehabilitation Activities Fund" (VA Special Therapeutic and Rehabilitation Activities Fund), from which distributions are to be made to patients for therapeutic work, "at16 rates not less than the wage rates specified in the Fair Labor Standards Act (29 U.S.C. 201 et seq.) and the regulations prescribed thereunder for work of similar character." 38 U.S.C. sec. 1718(c)(2).Section 1718(g)(3) provides that, for purposes of 38 U.S.C. chapter 15, a distribution to a patient from the VA Special Therapeutic and Rehabilitation Activities Fund is to be considered a donation from a public or private relief or welfare organization. 117 The complete text of section 1718 is set forth in an appendix to this report.The Notice of DeficiencyThe principal adjustment giving rise to the deficiency determined by respondent is his addition of $ 16,393 to the amount of gross income reported by petitioner for 2000. That adjustment is explained as reflecting information reported by the VA to the Internal Revenue Service (IRS) on an IRS Form 1099-MISC.DISCUSSIONI. IntroductionThe starting point in determining a taxpayer's Federal income tax liability for any taxable year is the computation of gross income. The term "gross income" is defined in section 61. Compensation for services is includable in gross income unless excluded by law. See sec. 61(a)(1); sec. 1.61-2(a)(1), Income Tax Regs. The parties have stipulated (and we have found accordingly) that, during 2000, petitioner received 136 $ 16,393 for his services provided under a VA CWT program. Petitioner argues that the receipt is excluded by law from his gross income because it constitutes payment of a tax-exempt veterans' benefit. Respondent disagrees, arguing that it constitutes compensation for petitioner's services.II. Bases of Parties' 18 ArgumentsA. Petitioner's ArgumentPetitioner relies on 38 U.S.C. section 5301(a) (2000). As stated, title 38 is concerned with veterans' benefits. Section 5301 thereof is entitled "Nonassignability and exempt status of benefits". In pertinent part, 38 U.S.C. section 5301(a) (2000) provides: "Payments of benefits due or to become due under any law administered by the Secretary [of Veterans Affairs] * * made to, or on account of, a beneficiary shall be exempt from taxation". That exemption is cross-referenced in the Internal Revenue Code, section 139(a)(3), as an exemption from income with respect to veterans' benefits.Petitioner also relies on Rev. Rul. 72-605, 2 C.B. 35">1972-2 C.B. 35, wherein the Commissioner ruled with respect to the almost identical language in a predecessor version of 38 U.S.C. section 5301 (2000): "[P]ayments of benefits under any law administered by the Veterans' Administration are excludable from the gross income of a recipient under section 61 of the Code."B. Respondent's ArgumentRespondent does not dispute that petitioner participated in the CWT program19 for therapeutic reasons, or that, because he participated in the program, he received a distribution of $ 16,393 from of the VA Special Therapeutic and Rehabilitation Fund. Respondent argues that petitioner overstates his case when he argues that money is a benefit and, by that fact alone, is exempt from taxation to petitioner under the general exemption for veterans' benefits found in section 5301 of title 38. Respondent adds: "The monies paid to the petitioner for his participation in the program are unlike those payments made to taxpayers under legislatively-provided-social-welfare-benefit programs, which are excludable from gross income."In support of that argument, respondent refers us to a set of his revenue rulings exemplifying payments excludable from 137 gross income not pursuant to the provision of any statute but pursuant to the Commissioner's policy to exclude from income most Government benefits and other welfare payments. That set of revenue rulings comprises Rev. Rul. 63-136, 2 C.B. 19">1963-2 C.B. 19 (benefit payments made to individuals undergoing employment training or retraining under certain Federal acts dealing with unemployment and underemployment), Rev. Rul. 57-102, 1 C.B. 26">1957-1 C.B. 26 (payments to the blind), Rev. Rul. 74-74, 1 C.B. 18">1974-1 C.B. 18 (awards to crime victims and their dependents), Rev. Rul. 74-205, 1 C.B. 21">1974-1 C.B. 21 (replacement housing payments to aid displaced individuals and their families), Rev. Rul. 75-271, 2 C.B. 23">1975-2 C.B. 2320 (assistance payments to lower income families enabling them to acquire homes), and Rev. Rul. 98-19, 1 C.B. 840">1998-1 C.B. 840 (relocation payments made to flood victims).Respondent distinguishes the payments addressed in those rulings from distributions made under the CWT program on the ground that a recipient must work in order to receive a distribution in the latter case. That, argues respondent, places the payment squarely within the definition of income found in section 61 and section 1.61-2(a)(1), Income Tax Regs.Respondent also relies on Rev. Rul. 65-18, 1 C.B. 32">1965-1 C.B. 32. That ruling addresses the inclusion in income of remuneration a patient or member receives for the work he performs for the Veterans' Administration under 38 U.S.C. section 618 (Supp. V, 1962), a predecessor provision to section 1718. 2 It holds that the receipt is a payment for services rendered even though it is intended for therapeutic or rehabilitative purposes, and, because it is a payment for services, it is included in the recipient's gross income.21 III. DiscussionA. ExemptionWe are faced with a question of statutory construction. While section 61(a) states that the term "gross income" means "all income from whatever source derived", and 138 specifically includes within that meaning "[c]ompensation for services", section 139(a)(3) exempts "[b]enefits under laws administered by the Veterans' Administration", and directs us to 38 U.S.C. section 5301 (2000). 3 If the distribution petitioner received does in fact constitute a "benefit" payable under a law administered by the VA, then, by law, it is excludable from petitioner's gross income as a tax-exempt veterans' benefit. Because the parties are in agreement that: (1) petitioner participated in the CWT program, a veterans' program administered by the VA, and, on account thereof, (2) he received a distribution from the VA Special Therapeutic and Rehabilitation Activities Fund established pursuant to section 1718(c)(1) (sometimes, simply, the distribution), we are left only to determine whether the distribution constitutes a veterans' "benefit" within the meaning 38 U.S.C. section 5301(a) (2000). 22 B. Principles of Statutory ConstructionAs a general matter, if the language of a statute is unambiguous on its face, we apply the statute in accordance with its terms, without resort to extrinsic interpretive aids such as legislative history. E.g., Garber Indus. Holding Co. v. Commissioner, 124 T.C. 1">124 T.C. 1 (2005), affd. 435 F.3d 555">435 F.3d 555 (5th Cir. 2006). Accordingly, our initial inquiry is whether the language of 38 U.S.C. section 5301(a) is so plain as to permit only one reasonable interpretation insofar as the question presented in this case is concerned. See, e.g., Robinson v. Shell Oil Co., 519 U.S. 337">519 U.S. 337, 340, 117 S. Ct. 843">117 S. Ct. 843, 136 L. Ed. 2d 808">136 L. Ed. 2d 808 (1997). That threshold determination must be made with reference to the context in which such language appears. Id. at 341.We also keep in mind that, when interpreting statutes relating to veterans, Federal veterans' benefit statutes are to be liberally construed for the benefit of a returning veteran, see Coffy v. Republic Steel Corp., 447 U.S. 191">447 U.S. 191, 196, 100 S. Ct. 2100">100 S. Ct. 2100, 65 L. Ed. 2d 53">65 L. Ed. 2d 53 (1980), and any interpretive doubt is to be resolved in the veteran's favor, e.g., Natl. Org. of Veterans' Advocates, Inc. v. Secy. of VA, 330 F.3d 1345">330 F.3d 1345, 1350 (Fed. Cir. 2003),23 so long as that interpretation does not override the clear meaning of a 139 particular provision, e.g., Disabled Am. Veterans v. Gober, 234 F.3d 682">234 F.3d 682, 692 (Fed. Cir. 2000).C. Language of 38 U.S.C. Section 5301(a) (2000)With limited exceptions, section 5301(a) of title 38 (2000) exempts from taxation benefit payments made pursuant to any law administered by the VA. One exception (inapplicable here) is that "the exemption * * * as to taxation [shall not] extend to any property purchased in part or wholly out of such payments." Id. A second exception (also inapplicable here) exposes payments of veterans' benefits to levy for unpaid Federal taxes. 38 U.S.C. sec. 5301(d). There are no other exceptions to the exemption from taxation, and title 38 (2000) contains no definition of the term "benefit" particular to the exemption. The text of 38 U.S.C. section 5301(a) (2000) is set forth in the margin. 424 Since there is nothing on the face of 38 U.S.C. section 5301(a) (2000) that indicates that Congress intended the term "benefit" to have anything other than a common meaning, we consider dictionary definitions of the term to inform ourselves of the definition that Congress may have had in mind. Excluding meanings that are obviously inappropriate (e.g., "an entertainment or social event"), Webster's Third New International Dictionary defines the term "benefit" as (1) "something that guards, aids, or promotes well being" or "useful aid", and (2) "PAYMENT, GIFT, as a : financial help in time of sickness, old age, or unemployment * * c : a cash payment or service provided for under an annuity, pension plan, or 140 insurance policy". Webster's Third New International Dictionary 204 (2002).The relevant definitions in The American Heritage Dictionary of the English Language are similar, but with some variation in the second case, viz: "(2) A payment made or an entitlement available in accordance with a wage agreement, an insurance policy, or a public assistance program." The American Heritage Dictionary of the English Language 168 (4th ed. 2000).Both Merriam-Webster's25 Collegiate Dictionary and Merriam- Webster's Online Dictionary include the following definition: "a service (as health insurance) or right (as to take vacation time) provided by an employer in addition to wages or salary". Merriam- Webster's Collegiate Dictionary 114 (11th ed. 2003) and Merriam- Webster's Online Dictionary, http://aolsvc.merriamwebster.aol.com/mwwod-aol.htm (last visited Feb. 26, 2007).Those definitions are instructive. We conclude the following: The term "benefit" is commonly understood to include things both tangible and intangible. Independence and vocational functioning are among the intangible benefits intended for participants in the CWT program. Although the term "benefit" is not synonymous with the term "payment", many payments are benefits, including payments that constitute items of gross income, e.g., fringe benefits, pensions and annuities. See sec. 61(a)(1) (fringe benefits), (9) (annuities), (11) (pensions). Whether payments for services are considered benefits appears an open question, though at least The American Heritage Dictionary of the English Language supports that view. Dictionary definitions of the term "benefit" do not allow us to eliminate26 from the meaning of the term "payments received in connection with the performance of services" (as respondent implicitly argues). We next look to see whether Congress understood the term "benefit" to include a payment of the sort at issue here.D. ContextWhile the titles of statutes and statutory headings cannot limit the plain meaning of statutory text, they are of some use for interpretative purposes when they shed some light on 141 ambiguous words or phrases. Bhd. of R.R. Trainmen v. B&O R.R. Co., 331 U.S. 519">331 U.S. 519, 528-529, 67 S. Ct. 1387">67 S. Ct. 1387, 91 L. Ed. 1646">91 L. Ed. 1646 (1947).Title 38 (2000) is entitled "VETERANS' BENEFITS". Section 1718 falls within the following subdivisions of title 38: part II, "GENERAL BENEFITS"; chapter 17, "HOSPITAL, NURSING HOME, DOMICILIARY, AND MEDICAL CARE"; and subchapter II, "HOSPITAL, NURSING HOME, OR DOMICILIARY CARE AND MEDICAL TREATMENT". As stated, section 1718 is entitled "Therapeutic and rehabilitative activities". As pertinent to the statutory hierarchy, section 1718 therapeutic work programs clearly fall within the ambit of medical benefits (medical care and medical treatment) provided to veterans. Distributions from the VA Special Therapeutic and Rehabilitation Activities Fund27 are nestled within a series of provisions dealing with benefits. There is a canon of construction, noscitur a sociis (Latin: "it is known by its associates"), holding that the meaning of an unclear word or phrase should be determined by the words immediately surrounding it. Black's Law Dictionary 1087 (8th ed. 2004); see also, e.g., Jarecki v. G.D. Searle & Co., 367 U.S. 303">367 U.S. 303, 307, 81 S. Ct. 1579">81 S. Ct. 1579, 6 L. Ed. 2d 859">6 L. Ed. 2d 859, 2 C.B. 254">1961-2 C.B. 254 (1961). While Congress has failed to tell us whether distributions from the VA Special Therapeutic and Rehabilitation Activities Fund are to be considered benefits, the placement of section 1718 in the midst of so many benefit provisions supports the inference that such distributions are to be considered benefits. Contextually, the distributions are benefits.E. History of 38 U.S.C. Section 5301(a)The history of a statute may be helpful in resolving ambiguities therein. E.g., Anderson v. Commissioner, 123 T.C. 219">123 T.C. 219, 233 (2004), affd. 137 Fed. Appx. 373">137 Fed. Appx. 373 (1st Cir. 2005).Section 5301 (2000) of title 38 both limits the assignability of veterans' benefits and exempts those benefits from taxation. While the provision has deep roots, 5 its legislative28 history is 142 sparse. What history there is recognizes two purposes: to "'avoid the possibility of the Veterans' Administration * * being placed in the position of a collection agency'" and to "'prevent the deprivation and depletion of the means of subsistence of veterans dependent upon these benefits as the main source of their income.'" Rose v. Rose, 481 U.S. 619">481 U.S. 619, 630, 107 S. Ct. 2029">107 S. Ct. 2029, 95 L. Ed. 2d 599">95 L. Ed. 2d 599 (1987) (addressing the assignability limitations of the provision and quoting S. Rept. 94-1243, at 147-148 (1976), reprinted in 1976 U.S.C.C.A.N. 5241, 5369, 5370). While the second of those purposes is somewhat helpful to petitioner, we do not believe that the legislative history of 38 U.S.C. section 5301 (2000) resolves the question before us. 29 We proceed to consider what we can determine about section 1718. In comparison to the legislative history of 38 U.S.C. section 5301 (2000), the legislative history of section 1718 is abundant.F. History of Section 17181. Public Law 87-574In 1991, 38 U.S.C. section 1718 was redesignated as such by Department of Veterans Affairs Codification Act, Pub. L. 102-83, section 5(a), 105 Stat. 406">105 Stat. 406 (1991). Prior to its redesignation, the section was 38 U.S.C. section 618.Section 618 was added to title 38 by Act of Aug. 6, 1962, Pub. L. 87-574, section 2(1), 76 Stat. 308">76 Stat. 308. As so added, 38 U.S.C. section 618 is set forth in the margin. 6 In pertinent part, it authorizes the Administrator of the VA to utilize the services of patients in VA hospitals for "therapeutic and rehabilitative purposes at nominal remuneration", but without giving them status as employees of the United States. 30 143 S. Rept. 1693, 87th Cong., 2d Sess. (1962), reprinted at 1962 U.S.C.C.A.N. 2101, is the report of the Committee on Labor and Welfare that accompanied H.R. 8992, 87th Cong., 2d Sess. (1962), which, when enacted, became Pub. L. 87-574, and added 38 U.S.C. section 618. The report states that the bill (H.R. 8992) was suggested and formally transmitted to the Congress by the VA. S. Rept. 1693, supra. The report further states that the bill relates entirely to certain administrative provisions affecting the Department of Medicine and Surgery of the VA, and it describes the provision that would become 38 U.S.C. section 618 (Supp. V, 1962) as "specifically [authorizing] the use of the services of patients and members in Veterans' Administration hospitals and domiciliaries, for therapeutic and rehabilitative purposes, without conferring an employment status." Id.A communication from J.S. Gleason, Jr., Administrator of the VA, transmitting to the Senate a draft of a bill that became H.R. 8992, is contained in the report. Id. In pertinent part, Administrator Gleason states:There is an inconsistency between Federal employee status, 31 with its statutory and regulatory requirements, and the basic concept of the member-employment program as a means toward the medical, psychological, and social rehabilitation of the veteran. This inconsistency is highlighted by the fact that participants in the program are not eligible for such Federal employment benefits as retirement, insurance, or unemployment compensation, and yet they have been held to come within the purview of certain other statutory employee programs.The proposed amendment would avoid confusion and controversy which has sometimes arisen in connection with the application to such persons of various statutes, regulations, or bills relating to Federal employees. It would enable the Veterans' Administration to prescribe the conditions and benefits which will best serve the therapeutic and rehabilitative objectives of the program.S. Rept. 1693, supra, 1962 U.S.C.C.A.N. at 2103 (emphasis added).2. Veterans Omnibus Health Care Act of 1976Veterans Omnibus Health Care Act of 1976, Pub. L. 94-581, section 105(a)(3), 90 Stat. 2845">90 Stat. 2845, added to section 618 of title 38 provisions substantially the same as those in subsections (b) through (e) of section 1718. 32 S. Rept. 94-1206 (Part I) (1976), reprinted in 1976 U.S.C.C.A.N. 6355, is a portion of the report of the Committee on Veterans' Affairs that accompanied S. 2908, 94th Cong., 2d Sess. (1976), which, 144 substantially in the form of H.R. 2735, 94th Cong., 2d Sess. (1976), was enacted as Pub. L. 94-581.The report states that among the purposes of S. 2908 is the clarification of the VA's authority to enter into arrangements with private industry and nonprofit corporations to supply work projects for patient workers and to establish a revolving fund to receive and disburse funds in connection with such work. S. Rept. 94-1206 (Part I), supra at 57, 1976 U.S.C.C.A.N. at 6357. The report refers to such work as being part of the VA's compensated work-therapy program and describes that program as being carried out under the VA's medical care authority and having existed in some form in the VA since the late 1930s. Id. at 113, 1976 U.S.C.C.A.N. at 6405. The report distinguishes the CWT program from the incentive therapy (IT) program then authorized in 38 U.S.C. section 618 (in 2000, substantially, section 1718(a)). The report distinguishes the two programs not on therapeutic33 and rehabilitative grounds but on the grounds that patients participating in the IT program are paid from appropriated funds and generally perform tasks of a custodial or clerical nature at administration health care facilities. Id.The report describes the operation of the CWT program as follows: "VA patients perform work on the projects as a medically therapeutic activity, and are supervised by VA medical personnel. Participating patients are paid from the proceeds of the contract." Id. Appended to the report is a report of the VA requested by the Committee on Veterans' Affairs on medical bills pending before the committee. That report (the VA report) contains a section-by-section analysis of S. 2908, supra. The VA Report explains in some detail the goals and value of the VA's therapeutic and rehabilitative work programs as medical treatment:The value of compensated work programs as a therapeutic modality is widely acknowledged. They provide therapeutic (psychosocial and/or physical) rehabilitation of the participant. Participation induces motivation, heightens self-esteem and breaks institutional patterns through the use of remunerative work with the expectation of either34 increasing the participant's potential for adjustment to the community, or preventing regression from present functional level. It reinforces through the use of well-established motivational principles ('rewards'), modifications or development of attitudes, habits, skills, and behaviors necessary to attain or maintain a maximum level of social and psychological adjustment.S. Rept. 94-1206 (Part I), supra at 181, 1976 U.S.C.C.A.N. at 6472.145 3. Veterans' Benefits Improvement and Health-Care Authorization Act of 1986Veterans' Benefits Improvement and Health-Care Authorization Act of 1986, Pub. L. 99-576, section 205, 100 Stat. 3256">100 Stat. 3256, amended 38 U.S.C. section 618 in response to a concern among veterans that payments for participation in incentive therapy and CWT programs were considered as income in determining eligibility for, or monthly rates of, non-service-connected disability pensions paid under chapter 15 of title 38. See Senate/House Explanatory Statement of the Proposed Compromise Agreement on H.R. 5299, The Proposed Veterans' Benefits Improvement and Health Care Authorization Act of 1986, 132 Cong. Rec. 29451, 29453 (Oct. 8, 1986). The amendments35 identified funds received by individuals as a result of their participation in therapeutic or rehabilitative activities carried out under 38 U.S.C. section 618 as "distributions" (in substitution for the terms "payments", "wages", or "remuneration") and provided that, for purposes of chapter 15 of title 38, those distributions be considered donations from public or private relief organizations, which, for purposes of former section 503(a)(1) of title 38, are not considered income for pension purposes. Id. Those amendments survive in section 1718.4. DiscussionOur examination of the history of section 1718 convinces us that, while the VA expects a participant in the CWT program to work, and in exchange for that work agrees to pay him a sum of money, the point of the exchange is not to effect a market-driven exchange of labor for value. Indeed, a VA staff manual describing the CWT program describes it as providing assistance to veterans unable to work and support themselves. The manual further states that many of the veterans in the program have histories of one or more conditions such as psychiatric illness, substance abuse, and homelessness. We need no authority36 for the proposition that an employer does not normally engage an individual to work in order to provide him with therapy or to rehabilitate him. That, however, is the point of the VA's work therapy programs, as the VA Administrator, J.S. Gleason, Jr., is quoted above as stating: "[T]he basic concept of the member-employment 146 program [is] as a means toward the medical, psychological, and social rehabilitation of the veteran". S. Rept. 1693, supra. That point was understood in 1976 by the Committee on Veterans Affairs, which, as set forth above, in reporting favorably on S. 2908 (which established a statutory basis for the CWT program), stated: "VA patients perform work on the projects as a medically therapeutic activity, and are supervised by VA medical personnel." The VA report, appended to the committee's report, describes the compensatory aspect of the CWT program as "[reinforcing] through the use of well-established motivational principles ('rewards'), modifications or development of attitudes, habits, skills, and behaviors necessary to attain or maintain a maximum level of social or psychological adjustment." S. Rept. 94-1206 (Part I), supra at 181, 1976 U.S.C.C.A.N. at 6472. 37 We believe that, over the years, Congress has understood that the principal benefits to participants in VA therapeutic work programs are medical and not pecuniary. It is reasonable to assume that that understanding played a role in Congress's 1986 decision to recast payments made to participants in VA therapeutic work programs as "distributions" (and not "payments", "wages", or "remuneration") and to provide that those distributions not be considered income for certain pension purposes. See discussion of Veterans' Benefits Improvement and Health-Care Authorization Act of 1986 supra in section III.F.3. of this report.While petitioner was compensated with a distribution from the VA Special Therapeutic and Rehabilitation Activities Fund for the services he rendered, we are inclined to conclude that distributions of that class are not simply payments for services rendered. There is a welfare (noncompensatory) aspect to them that inclines us to classify them as benefits along with other payments, such as education, training, and subsistence allowances (including work-study allowances, see 38 U.S.C. sec. 3537), that are tax-exempt on account of 38 U.S.C. section 5301(a) (2000).38 7 Before we reach a final conclusion, however, we look to additional interpretative guidance available to us. 147 G. VA Op. Gen. Couns. Prec. 64-90, 1990 VAOPGCPREC LEXIS 1653The VA is the agency charged with the interpretation and administration of laws pertaining to veterans' benefits. The general counsel of the VA may issue a written legal opinion (a General Counsel Precedent Opinion) involving veterans' benefits under laws administered by the VA that is conclusive as to all VA officials and employees with respect to the matter at issue. 8VA Op. Gen. Couns. Prec. 64-90, 1990 VAOPGCPREC LEXIS 1653, 1990 WL 605252">1990 WL 605252 (the opinion), addresses the appropriateness of paying directly to incompetent patients for whom guardians have been appointed the nominal remuneration to which the patients are entitled for participating in therapeutic and rehabilitative programs39 established pursuant to 38 U.S.C. section 618 (the predecessor of section 1718). The opinion concludes that such direct payments are appropriate. In reaching that conclusion, the opinion considers the legislative history of the Act of Aug. 6, 1962, Pub. L. 87-574, section 2(1), 76 Stat. 308">76 Stat. 308, adding 38 U.S.C. section 618 ("legislation * * * sponsored and enacted at the request of the VA"). The opinion states:The words "nominal remuneration" as used in the statute are interpreted to mean a token grant of money in the nature of a "gratuity" or an "award," in an amount to be determined administratively, payable by the VA to the patient or member as a part of the expense of the therapeutic and rehabilitation program, as distinguished from "salary or wages" or "earnings" or an additional monetary "benefit" to the veteran. The language of section 618 makes it abundantly clear that payments thereunder are not intended as a consideration for the services rendered but rather as an inducement to selected patients and members to enter into activities which will assist them in regaining self-reliance and aid in their return to normal life. In other40 words, such payments are merely one more "tool" available to the professional personnel of DM & S for use in the treatment 148 of patients and members. Payments under section 618 are an expense for medical care and are chargeable to appropriations for the medical care program. They do not fall within the category of benefits otherwise payable to a guardian.VA Op. Gen. Couns. Prec. 64-90, 1990 VAOPGCPREC LEXIS 1653, supra (emphasis added). 41 Veterans Omnibus Health Care Act of 1976, Pub. L. 94-581, section 105(a)(3), 90 Stat. 2845">90 Stat. 2845, replaced the provision calling for the payment of nominal remuneration with one calling for payments at rates not less than specified in the Fair Labor Standards Act of 1938 (29 U.S.C. section 201, et seq.). We have found no indication that, by that change, Congress intended to change the nature of the payment as a gratuity or award, and, indeed, in the ruling, the VA General Counsel took no notice of that change in 1990.The VA General Counsel's convictions that patients are not being recompensed for services and the payments to them are an expense for medical care reinforces our conclusion that distributions from the VA Special Therapeutic and Rehabilitation Activities Fund are not merely payments for services rendered.H. Respondent's ArgumentsRespondent distinguishes payments made to taxpayers under legislatively-provided-social-welfare-benefit programs (which respondent has ruled are excludable from income) from distributions from the VA Special Therapeutic and Rehabilitation Fund on the ground that a recipient must work in order to receive a distribution in the42 later case. Payments for work, argues respondent, are squarely within the definition of gross income found in section 61 and section 1.61-2(a)(1), Income Tax Regs.While it is true that the definition of gross income includes payments for work, see sec. 61(a)(1), respondent's argument ignores the introductory language of section 61(a)(1): "Except as otherwise provided in this subtitle". Indeed, section 61(a)(11) includes pensions as an item of gross income. Section 139(a)(3), however, directs us to 38 U.S.C. section 5301 for an exemption for benefits under laws administered by the VA. Respondent has acknowledged that veterans' pensions are excludable from gross income as a veterans' benefit. Rev. Rul. 72-605, 2 C.B. 35">1972-2 C.B. 35. The fact that a distribution from the VA Special Therapeutic and Rehabilitation Fund 149 may fit the description of an item normally classified as an item of gross income does not necessarily mean that the distribution is an item of gross income for which no exemption is afforded by section 139(a)(3) and 38 U.S.C. section 5301 (2000).Respondent relies specifically on Rev. Rul. 65-18, 1 C.B. 32">1965-1 C.B. 32,43 which addresses the inclusion in income of remuneration a patient or member receives for the work he performs for the VA under 38 U.S.C. section 618 (Supp. V, 1962), a predecessor provision to section 1718. It holds that the receipt is a payment for services rendered even though it is intended for therapeutic or rehabilitative services, and, because it is a payment for services, it is included in the recipient's gross income. Revenue rulings are generally not accorded deference by the Court. E.g., McLaulin v. Commissioner, 115 T.C. 255">115 T.C. 255, 263 (2000), affd. 276 F.3d 1269">276 F.3d 1269 (11th Cir. 2001). We may, however, take a revenue ruling into account where we judge the underlying rationale to be sound. Id. We do not judge that to be the case here.Rev. Rul. 65-18, supra, appears to have been issued in response to the addition of section 618 to title 38 by the Act of Aug. 6, 1962, section 2(1), 76 Stat. 308">76 Stat. 308 (discussed supra in section III.F.1 of this report). The ruling acknowledges Congress's purpose, as set out in S. Rept. 1693, 87th Cong., 2d Sess. (1962), of avoiding confusion and controversy with respect to the Federal employee status44 of patients participating in a therapeutic program and states that the law enables the VA to prescribe the "conditions and benefits" that will best serve the therapeutic and rehabilitative objectives of the program. Rev. Rul. 65-18, 1965-1 C.B. at 33. The ruling gives no consideration to the question of whether the remuneration in question constitutes an exempt veterans' benefit within the meaning of the applicable predecessors of section 139(a)(3) and 38 U.S.C. section 5301(a) (2000); i.e., section 122(a)(4) (1965) of the Internal Revenue Code of 1954 and 38 U.S.C. section 3101 (1964), respectively. Indeed, there is no mention of those provisions or of respondent's acknowledgment of the blanket exemption from taxation of all veterans' benefits contained in Mim. 4411, XV-1 C.B. 497 (1936) (superseded and reacknowledged in Rev. Rul. 72-605, 2 C.B. 35">1972-2 C.B. 35). Lacking any consideration of the exemption for 150 veterans' benefits, the analysis of the ruling is neither complete nor persuasive.Finally, respondent argues that, since Congress has amended what is now 38 U.S.C. section 1718 numerous times45 since the Commissioner issued Rev. Rul. 65-18, supra, it must have approved of the conclusion the Commissioner there reached. A revenue ruling incorporating a long-standing administrative practice sanctioned by the Congress or the Courts may acquire the force of law. Am. Campaign Acad. v. Commissioner, 92 T.C. 1053">92 T.C. 1053, 1070 (1989). Nevertheless, we reject respondent's argument for the reasons expressed in Ashland Oil, Inc. v. Commissioner, 95 T.C. 348">95 T.C. 348, 363 (1990):Respondent has not, however, shown that Congress has been even aware of this administrative interpretation, which has not been litigated in a reported decision and has been cited in only a smattering of private letter rulings. Without affirmative indications of congressional awareness and consideration, we decline to cloak this revenue ruling with the aura of legislative approval. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426, 431, 75 S. Ct. 473">75 S. Ct. 473, 99 L. Ed. 483">99 L. Ed. 483, 1 C.B. 207">1955-1 C.B. 207 (1955); Interstate Drop Forge Co. v. Commissioner, 326 F.2d 743">326 F.2d 743, 746 (7th Cir. 1964), affg. a Memorandum Opinion of this Court; Sims v. United States, 252 F.2d 434">252 F.2d 434, 438-439 (4th Cir. 1958), affd. 359 U.S. 108">359 U.S. 108, 79 S. Ct. 641">79 S. Ct. 641, 3 L. Ed. 2d 667">3 L. Ed. 2d 667, 1 C.B. 636">1959-1 C.B. 636 (1959).46 I. ConclusionTaking into account the liberal construction that we are to apply in construing veterans' benefit statutes and the extrinsic sources that we have considered, we conclude that the distribution in question, a distribution from the VA Special Therapeutic and Rehabilitation Activities Fund, constitutes the payment of a benefit within the meaning of 38 U.S.C. section 5301(a) (2000).Distributions from VA Special Therapeutic and Rehabilitation Activities Fund do not resemble common labor for value exchanges. In our statement of the background of this case, we noted that petitioner participated in the CWT program pursuant to a prescription from a physician. We set forth provisions of the staff manual governing the program providing that (1) the program provides assistance to veterans unable to work and support themselves; (2) many of the veterans in the program have histories of one or more of psychiatric illness, substance abuse, and homelessness; and (3) the goal of the program is to assist participants 151 in attaining independence and vocational functioning as they return to the work environment. Indeed, section 1718 is included in title 38, among47 the provisions for medical benefits. Moreover, the history of section 1718 and the analysis contained in VA Op. Gen. Couns. Prec. 64-90, 1990 VAOPGCPREC LEXIS 1653, supra, convince us that both Congress and the VA understood that distributions from the fund were not a quid pro quo for labor. In VA Op. Gen. Couns. Prec. 64-90, 1990 VAOPGCPREC LEXIS 1653, supra, the general counsel classifies distributions from the fund as an expense for medical care, chargeable to appropriations for the VA medical care program. Distributions from the fund constitute payments of benefits. Because the distribution here in question constitutes a veterans' benefit payable under a law administered by the VA, it is exempt from taxation under section 38 U.S.C. section 5301(a) (2000) and section 139(a)(3).IV. ConclusionTo reflect the foregoing,Decision will be entered for petitioner.APPENDIX38 U.S.C. Section 1718 (2000):Section 1718. Therapeutic and rehabilitative activities(a) In providing rehabilitative services under this chapter, the Secretary, upon the recommendation of the Under Secretary for Health, may use the services of patients and members in Department health48 care facilities for therapeutic and rehabilitative purposes. Such patients and members shall not under these circumstances be held or considered as employees of the United States for any purpose. The Secretary shall prescribe the conditions for the use of such services.(b)(1) In furnishing rehabilitative services under this chapter, the Secretary, upon the recommendation of the Under Secretary for Health, may enter into a contract or other arrangement with any appropriate source (whether or not an element of the Department of Veterans Affairs or of any other Federal entity) to provide for therapeutic work for patients and members in Department health care facilities.(2) Notwithstanding any other provision of law, the Secretary may also furnish rehabilitative services under this subsection through contractual arrangements with nonprofit entities to provide for such therapeutic work for such patients. The Secretary shall establish appropriate fiscal, accounting, management, recordkeeping, and reporting requirements with respect 152 to the activities of any such nonprofit entity in connection with such contractual arrangements.(c)(1) There is hereby established in the Treasury of the49 United States a revolving fund known as the Department of Veterans Affairs Special Therapeutic and Rehabilitation Activities Fund (hereinafter in this section referred to as the "fund") for the purpose of furnishing rehabilitative services authorized in subsection (b) of this section. Such amounts of the fund as the Secretary may determine to be necessary to establish and maintain operating accounts for the various rehabilitative services activities may be deposited in checking accounts in other depositaries selected or established by the Secretary.(2) All funds received by the Department under contractual arrangements made under subsection (b) of this section, or by nonprofit entities described in paragraph (2) of such subsection, shall be deposited in or credited to the fund, and the Secretary shall distribute out of the fund moneys to participants at rates not less than the wage rates specified in the Fair Labor Standards Act (29 U.S.C. 201 et seq.) and regulations prescribed thereunder for work of similar character.(3) The Under Secretary for Health shall prepare, for inclusion in the annual report submitted to Congress under section 529 of this title, 50 a description of the scope and achievements of activities carried out under this section (including pertinent data regarding productivity and rates of distribution) during the prior twelve months and an estimate of the needs of the program of therapeutic and rehabilitation activities to be carried out under this section for the ensuing fiscal year.(d) In providing rehabilitative services under this chapter, the Secretary shall take appropriate action to make it possible for the patient to take maximum advantage of any benefits to which such patient is entitled under chapter 31, 34, or 35 of this title, and, if the patient is still receiving treatment of a prolonged nature under this chapter, the provision of rehabilitative services under this chapter shall be continued during, and coordinated with, the pursuit of education and training under such chapter 31, 34, or 35.(e) The Secretary shall prescribe regulations to ensure that the priorities set forth in section 1705 of this title shall be applied, insofar as practicable, to participation in therapeutic and rehabilitation activities carried out under this section.(f)(1) The Secretary may not consider any of the matters stated51 in paragraph (2) as a basis for the denial or discontinuance of a rating of total disability for purposes of compensation or pension based on the veteran's inability to secure or follow a substantially gainful occupation as a result of disability.(2) Paragraph (1) applies to the following:(A) A veteran's participation in an activity carried out under this section.(B) A veteran's receipt of a distribution as a result of participation in an activity carried out under this section.(C) A veteran's participation in a program of rehabilitative services that (i) is provided as part of the veteran's care furnished by a State home and 153 (ii) is approved by the Secretary as conforming appropriately to standards for activities carried out under this section.(D) A veteran's receipt of payment as a result of participation in a program described in subparagraph (C).(3) A distribution of funds made under this section and a payment made to a veteran under a program of rehabilitative services described in paragraph (2)(C) shall be considered for the purposes of chapter 15 of this title to be a donation from a public or private relief or welfare organization.*52 Footnotes1. Tit. 38 U.S.C. ch. 15 (2000) is concerned with certain pension benefits of veterans and their survivors. Some of those pension benefits are reduced by the recipient's annual income. See, e.g., 38 U.S.C. secs. 1521(b) (veteran's annual income), 1541(b) (surviving spouse's annual income). Tit. 38 U.S.C. sec. 1503(a) describes how "annual income" is determined for purposes of those limitations. Paragraph (1)↩ thereof provides that "donations from public or private relief or welfare organizations" are excluded in determining annual income.2. The Veterans' Administration was redesignated the Department of Veterans Affairs by the Department of Veterans Affairs Act, Pub. L. 100-527, sec. 2, 102 Stat. 2635">102 Stat. 2635↩ (1988). We shall use the initials "VA" to refer both to the Veterans' Administration and the Department of Veterans Affairs, the referent being determined by context.3. We assume that Congress's failure to amend sec. 139(a)(3)↩ to redesignate the Veterans' Administration the Department of Veterans Affairs is an oversight that is of no significance to this case.4. Sec. 5301(a) of title 38 (2000) reads in full:Sec. 5301. Nonassignability and exempt status of benefits(a) Payments of benefits due or to become due under any law administered by the Secretary shall not be assignable except to the extent specifically authorized by law, and such payments made to, or on account of, a beneficiary shall be exempt from taxation, shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary. The preceding sentence shall not apply to claims of the United States arising under such laws nor shall the exemption therein contained as to taxation extend to any property purchased in part or wholly out of such payments. The provisions of this section shall not be construed to prohibit the assignment of insurance otherwise authorized under chapter 19 of this title, or of servicemen's indemnity. For the purposes of this subsection, in any case where a payee of an educational assistance allowance has designated the address of an attorney-in-fact as the payee's address for the purpose of receiving a benefit check and has also executed a power of attorney giving the attorney-in-fact authority to negotiate such benefit check, such action shall be deemed to be an assignment and is prohibited.↩5. The tax exemption for VA benefits originated as an amendment to the Bureau of War Risk Insurance Act, which, beginning in 1917, provided certain benefits for members of the Armed Forces. See Act of Oct. 6, 1917, ch. 105, sec. 311, 40 Stat. 408">40 Stat. 408. The initial amendment, which provided an exemption from tax for certain death and disability benefits, was later enlarged to include all allotments and family allowances, compensation, and insurance payable under the Act. See Act of June 25, 1918, ch. 104, sec. 2, 40 Stat. 609">40 Stat. 609. That exemption subsequently became sec. 22 of the World War Veterans' Act, 1924, ch. 320, 43 Stat. 607, 613, which consolidated several different veterans' benefits laws into a single statute. Ch. 320, sec. 22, 43 Stat. 613">43 Stat. 613, however, was repealed in 1935, and in its place Congress enacted a new statute providing a broad tax exemption for benefits payable "under any of the laws relating to veterans." See Act of Aug. 12, 1935, ch. 510, sec. 3, 49 Stat. 609">49 Stat. 609. That provision was codified in 38 U.S.C. sec. 3101(a) (1958), the predecessor statute to 38 U.S.C. sec. 5301(a)(1) (2000). See Manocchio v. Commissioner, 78 T.C. 989">78 T.C. 989, 996 (1982) (setting forth the history of the exemption through its appearance in 38 U.S.C. sec. 3101(a) (1958)), affd. 710 F.2d 1400">710 F.2d 1400↩ (9th Cir. 1983).6. 38 U.S.C. sec. 618 (Supp. V, 1962) provides:Sec. 618. Therapeutic and rehabilitative activitiesThe Administrator, upon the recommendation of the Chief Medical Director, may utilize the services of patients and members in Veterans' Administration hospitals and domiciliaries for therapeutic and rehabilitative purposes, at nominal remuneration, and such patients and members shall not under these circumstances be held or considered as employees of the United States for any purpose. The Administrator shall prescribe the condition for the utilization of such services.↩7. In IRS Pub. 525, Taxable and Nontaxable Income 14 (2006), the Service includes among a description of nontaxable veterans' benefits "[e]ducation, training, and subsistence allowances".↩8. See 38 C.F.R. sec. 14.507(b), providing:A written legal opinion of the General Counsel involving veterans' benefits under laws administered by the Department of Veterans Affairs which, in the judgment of the General Counsel or the Deputy General Counsel acting as or for the General Counsel, necessitates regulatory change, interprets a statute or regulation as a matter of first impression, clarifies or modifies a prior opinion, or is otherwise of significance beyond the matter at issue, may be designated a "precedent opinion" for purposes of such benefits. Written legal opinions designated as precedent opinions under this section shall be considered by Department of Veterans Affairs to be subject to the provisions of 5 U.S.C. 552(a)(1)↩. An opinion designated as a precedent opinion is binding on Department officials and employees in subsequent matters involving a legal issue decided in the precedent opinion, unless there has been a material change in a controlling statute or regulation or the opinion has been overruled or modified by a subsequent precedent opinion or judicial decision.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/2357881/	472 A.2d 904 (1984) Charles P. LUCAS v. MAINE COMMISSION OF PHARMACY. Supreme Judicial Court of Maine. Argued November 23, 1983. Decided February 17, 1984. 905 Bowie & Parker, Paulette P. Parker (orally), Portland, for plaintiff. James E. Tierney, Atty. Gen., Linda M. Pistner, Asst. Atty. Gen. (orally), Augusta, for defendant. Before McKUSICK, C.J., and NICHOLS, ROBERTS, VIOLETTE, GLASSMAN and SCOLNIK, JJ. McKUSICK, Chief Justice. Charles Lucas, a registered pharmacist in Massachusetts, applied to the Maine Commission of Pharmacy[1] ("Commission") for registration to practice his profession in Maine under the reciprocity provision of 32 M.R.S.A. § 2902 (Supp.1983-1984).[2] By the 906 terms of that section, reciprocal registration in Maine is available to Massachusetts pharmacists only if "such other state shall require a degree of competency equal to that required of applicants of this State." The Commission found that Massachusetts did not require as high a degree of competency for original applicants as does Maine, and for that reason, denied Lucas's application. Lucas sought direct judicial review in the Superior Court (Kennebec County), which affirmed. On his appeal to this court, we also in effect affirm the Commission's decision. From 1968 to 1973 Lucas attended the Hampden College of Pharmacy, located in Willimanset, Massachusetts, from which he received a Bachelor of Science degree in pharmacy. The Hampden College of Pharmacy is not accredited by the American Council on Pharmaceutical Education (ACOPE). After a satisfactory performance on national and state pharmacy examinations, Lucas in 1973 was registered to practice pharmacy in Massachusetts,[3] and since that time he has worked as a pharmacist in a drug store and a hospital in that state. In 1976 Lucas enrolled in a graduate therapeutics program at the Massachusetts College of Pharmacy, which conferred its Master of Pharmacy degree upon him in 1980. Although ACOPE has accredited the bachelor's program at the Massachusetts College of Pharmacy, ACOPE has not accredited any masters programs there or elsewhere. Following Lucas's filing on December 2, 1981, of his application for reciprocal registration in Maine, the Commission held a public hearing on April 6, 1982. On October 12, 1982, the Commission issued an extensive opinion in letter form denying Lucas's application. That opinion construed section 2902 to require any applicant for original licensure in Maine to hold a degree of Bachelor of Science in Pharmacy from an institution accredited by ACOPE. Since Massachusetts had licensed Lucas as a pharmacist, even though he did not have a bachelor's degree from an ACOPE-accredited school, the Commission concluded that "the State of Massachusetts [does not] require `a degree of competency equal to that required of applicants in this State' as required by § 2902." (Emphasis in original) The Commission also determined that Lucas's graduate degree from the Massachusetts College of Pharmacy is not relevant to the determination of whether your licensure in . . . Massachusetts required a degree of competency equal to that required of applicants in Maine for the following reasons: a. Although the Massachusetts College of Pharmacy Bachelor degree programs are both accredited by the American Council on Pharmaceutical Education and approved by the [Maine] Commission of Pharmacy, graduate degree programs are neither accredited by the American Council nor approved by the Commission. b. The educational qualifications required of Maine applicants under § 2902 relate solely to Bachelor degrees and not to graduate degrees. c. Successful completion of a masters' degree program does not ensure a degree of competency equal to that of a Bachelor's degree from an accredited 907 and approved school of pharmacy. Such a Bachelor's degree program is designed to ensure general competency in the profession of pharmacy whereas a masters' degree program is designed to add to that basic general competency and may be specialized in nature. Pursuant to the Administrative Procedure Act, 5 M.R.S.A. §§ 11001-11008 (1979 & Supp.1983-1984), and Rules of Civil Procedure, Lucas sought Superior Court review of the Commission's action. He argued that the Commission misinterpreted the educational background required for reciprocal registration under section 2902 and that the legislature had unconstitutionally delegated to ACOPE the task of accrediting pharmacy schools. On April 26, 1983, the Superior Court denied Lucas's appeal, rejecting both his statutory and his constitutional arguments. I. Construction and Application of Reciprocity Provisions of Section 2902 On appeal to this court Lucas first argues that his registration as a Massachusetts pharmacist satisfies the requirements for reciprocal registration under section 2902. He challenges the Commission's finding that since Massachusetts licensed him even though he did not have a bachelor's degree from an accredited pharmacy school, that state does not "require a degree of competency equal to that required of applicants of this State." Lucas attacks the Commission's implicit holding that section 2902 requires any applicant for reciprocal licensure to hold a bachelor's degree from an accredited school. An administrative agency's interpretation of a statute administered by it is entitled to "great deference." See Maine Human Rights Commission v. Local 1361, AFL-CIO, 383 A.2d 369, 378 (Me.1978). The Commission's construction of the reciprocal registration provisions of section 2902 will be upheld unless that section plainly compels a contrary result. Underlying the Commission's construction of the reciprocal registration provision is the Commission's consistent construction of the balance of section 2902 to require an applicant for original licensure in Maine to have a bachelor's degree in pharmacy from a school accredited by ACOPE. That strikes us as not only a reasonable interpretation, but also the most likely one, when the fourth and the last sentences of section 2902 are read together. The last sentence requires every original applicant to have a bachelor's degree in pharmacy and the fourth sentence requires him to have graduated from an ACOPE-accredited school. See n. 2 above. The language and purpose of section 2902 support, rather than contradict, the Commission's construction of Maine's educational requirement for original registration. The second step in reaching the Commission's construction of the reciprocal registration provision is its decision that another state that for its original licensure does not require a bachelor's degree from an accredited pharmacy school does not, within the terms of section 2902, "require a degree of competency equal to that required of [original] applicants" in Maine. Massachusetts is such a state because, as we know from the facts of the case at bar, the bachelor graduates of at least one in-state pharmacy school that is unaccredited (i.e., Hampden College of Pharmacy) qualify there to be registered as pharmacists. We cannot say that the Commission was unreasonable in deciding that this difference demonstrates that Massachusetts is satisfied with a lower degree of competency for original applicants than is Maine. Although the reference in section 2902 to "degree of competency" includes more than educational attainments, the Commission was warranted in using educational requirements as one critical measure to compare the competency required for original pharmacist registration in Maine and Massachusetts. See Liggett Co. v. Baldridge, 278 U.S. 105, 114-15, 49 S. Ct. 57, 60, 73 L. Ed. 204 (1928) (Holmes, J., dissenting), quoted with approval in North Dakota State Board of Pharmacy v. 908 Snyder's Drug Stores, Inc., 414 U.S. 156, 166, 94 S. Ct. 407, 414, 38 L. Ed. 2d 379 (1973); Dent v. West Virginia, 129 U.S. 114, 122-23, 9 S. Ct. 231, 233-34, 32 L. Ed. 623 (1889). In Ditullio v. State Board of Examiners of Psychologists, 387 A.2d 757 (Me.1978), this court upheld the constitutionality of a statutory requirement that any psychologist seeking either original or reciprocal licensure in Maine must possess a doctoral degree in psychology or a closely allied field. The Commission of Pharmacy had ample reason to believe that accreditation provides sufficient guarantees of higher educational quality to justify the conclusion that a state licensing graduates of unaccredited pharmacy schools applies a lower standard of competency than does Maine. The Supreme Court has said that "the fact that an applicant . . . holds a diploma from a reputable dental college has a direct and substantial relation to his qualification to practice dentistry." Graves v. Minnesota, 272 U.S. 425, 428, 47 S. Ct. 122, 123, 71 L. Ed. 331 (1926). Paying appropriate deference to the administrative tribunal that is charged with administering section 2902, we find no basis upon which a court may reject its construction of the provision for reciprocal registration of pharmacists. Lucas misconceives the requirements of section 2902 in arguing that his graduate degree and other experience give him the equivalent of the degree of competency required of original Maine applicants. Section 2902 speaks not in terms of a specific applicant's qualifications but, rather, in terms of the minimum standards imposed upon all applicants by the state in which he obtained his original licensure. The fact that Lucas's own personal qualifications may in fact exceed the minimum required for registration in Massachusetts is of no avail. The Commission went further than was required by section 2902 and considered Lucas's own qualifications, despite the fact that he was registered in a state with less demanding requirements for entry to the profession. The Commission, whose expertise on matters of pharmaceutical education far exceeds that of members of the judiciary, determined that a specialized graduate program is no substitute for the general education offered by a bachelor's program in pharmacology. We find nothing arbitrary or unreasonable in the Commission's conclusion that Lucas's successful completion of a specialized graduate program in therapeutics did not make up for any deficiencies that might exist in his undergraduate education in the broad principles of pharmacy in general. As interpreted by the Commission, Maine's statutory requirement of a bachelor's degree from an accredited pharmacy school is the method the legislature has chosen to assure that all applicants for registration, both original and by reciprocity, have a comprehensive grounding in the basics of the profession. We reject appellant Lucas's argument that the Commission incorrectly read the legislative mandate given it by section 2902. II. Constitutionality of Section 2902 Lucas also argues that, if section 2902 requires that all pharmacy applicants possess a bachelor's degree from a school accredited by ACOPE, that statutory provision is void as an unconstitutional delegation of a legislative function to ACOPE, a private organization. The constitutional prohibition against delegation of legislative power is grounded in our state constitution.[4]See Me. Const. art. III, § 1; art. IV, § 1.[5] Lucas sees as an unconstitutional defect 909 the absence in section 2902 of any legislatively imposed standards by which ACOPE is to accredit pharmacy schools. See Superintending School Committee of Bangor v. Bangor Education Association, 433 A.2d 383 (Me.1981). Section 2902, as all other statutes, is "presumed to be constitutional and the burden of proof is on the party who asserts an infirmity." Union Mutual Life Ins. Co. v. Emerson, 345 A.2d 504, 507 (Me.1975). Lucas fails to persuade us that Maine's requirement of a bachelor's degree from a pharmacy school accredited by ACOPE suffers from any constitutional infirmity. Professional licensing statutes similar to section 2902 are commonplace both in Maine and in other jurisdictions. State legislatures almost routinely look to national accrediting agencies to identify those institutions, wherever located, that provide a competent education to qualify their graduates for the practice of a profession.[6] A constitutional attack based on the nondelegation doctrine has almost never been successfully launched against a licensing statute requiring graduation from a nationally accredited professional school. The rationale behind the many court decisions rejecting the "unlawful delegation" argument blends reasoned principle with pragmatic considerations. We accept that same blend as decisive in sustaining the validity of section 2902. First, we consider the reasoned principle. Courts have long recognized that a fact or event that has a significance independent of a legislative act may be incorporated by reference into a statute without running afoul of the nondelegation doctrine. Professor Davis has written that "statutes whose operation depends upon private action which is taken for purposes which are independent of the statute" usually pass constitutional muster. 1 K. Davis, Administrative Law Treatise § 3.12, at 196 (2d ed. 1978). The American Council on Pharmaceutical Education (ACOPE) was established in 1932,[7] has been recognized (first in 1952 and continuously since) by the United States Commissioner of Education as the sole national accrediting agency in pharmacy for purposes of various federal programs,[8] and was first referred to in the Maine pharmacist licensing statute in 1959.[9] It currently has accredited some 72 pharmacy schools, located in 43 states, the District of Columbia, and Puerto Rico. American Council on Pharmaceutical Education, Colleges and Schools of Pharmacy (pamph. July 1, 1983). ACOPE identifies pharmacy schools for many purposes independent of the use the Maine legislature has elected to make of its determinations. In the first place, ACOPE accreditation provides standards of quality professional education that the administration and faculty of pharmacy schools can work to achieve and maintain. ACOPE's essential purpose "is to provide a professional judgment of the quality of the educational program and to encourage continued 910 improvement thereof." The American Council on Pharmaceutical Education, Accreditation Manual 1-1 (7th ed. 1983). As schools strive for accreditation, ACOPE will have assisted the "advancement and improvement of pharmaceutical education. . . ." Id. at II-A-1. Standards for accreditation are not stagnant, and ACOPE will raise those standards in response to developments in pharmacology. Id. at II-B-1. To remain accredited a school must keep up with changes in the field of pharmaceutical education. The best professional educators strive to achieve and maintain standards of excellence for their own sake. National accrediting agencies help them in appropriately setting, and then in objectively measuring their institution's progress in meeting, those professional standards. On a practical plane, the stamp of approval given a professional school by its national accrediting agency undoubtedly has considerable significance to the school in attracting high-grade faculty, able students, and generous donors. In addition to providing a performance goal for schools seeking accreditation, ACOPE standards also operate as a scholarly statement on the status of professional education in the field of pharmacology. As persons vitally concerned with pharmaceutical education convene and work through ACOPE, they "formulate the educational, scientific, and professional principles and standards" of the discipline. Id. at II-A-1. Like the work of the legal profession's American Law Institute, whose Restatements help define the state of the law and shape its future, the scholarly debate involved in setting ACOPE standards furthers the search for excellence in pharmaceutical education. Furthermore, activities of the federal government give independent significance to the accreditation work of ACOPE. Section 253 of the Veterans' Readjustment Assistance Act of 1952, 66 Stat. 663 (1952) (current version at 38 U.S.C. § 1775 (1976 & Supp. V 1981)), required the Commissioner of Education to publish a list of nationally recognized accrediting agencies and associations which he determines to be reliable authority as to the quality of training offered by an educational institution. Id. The first list published pursuant to this statutory directive includes ACOPE as one such reliable accrediting agency. See 17 Fed.Reg. 8929, 8930 (1952).[10] ACOPE was put on that list, and has stayed there, only by complying with strict standards, imposed by the now Secretary of Education, governing qualifications and selection of personnel, adequacy of funding, public participation in the adoption of accreditation standards, and complaint review and appeal procedures. Id.; 47 Fed.Reg. 25563 (1982) (codified at 34 C.F.R., part 603, subpart A (1982)). The Secretary of Education's recognition of ACOPE signifies that it has gained acceptance of its criteria, methods of evaluation, and decisions by educational institutions, practitioners, licensing bodies and employers throughout the United States. 17 Fed.Reg. at 8930. Throughout the periodic republication of this list, ACOPE has remained nationally recognized as an accrediting agency, up to and including the current version of this list. See 47 Fed.Reg. 25563 (1982). From the start in 1952 ACOPE has been the only accrediting agency that has been so recognized for pharmacy schools. The federal list of nationally recognized accrediting agencies serves to identify approved or accredited schools for the purposes of several financial grant programs. Many educational benefits under the G.I. bill, see 38 U.S.C. § 1775, are restricted to the study of academic courses that have 911 been accredited and approved by agencies such as ACOPE. Eligibility for a variety of Public Health Service grants is limited to accredited institutions. See 42 U.S.C. § 293a (1976 & Supp. V 1981). These grants are available to public or nonprofit schools offering degrees in a broad range of health fields, including pharmacology. Finally, aid provided by the Department of Education to institutions of higher education is restricted to such institutions as are accredited by one of the nationally recognized accrediting agencies. See 20 U.S.C. § 403 (1976 & Supp. V 1981). Still another function of ACOPE accreditation, independent of its use in Maine, is to govern or guide the licensure of pharmacists in many other states. The Committee on the Pharmaceutical Survey anticipated that ACOPE accreditation would serve the needs of many states in their regulation of pharmacists. See Committee on the Pharmaceutical Survey (1946-1949), General Report 11 (1950) (quoted in Accreditation Manual at II-A-1). A review of the laws of other states demonstrates that Maine is far from alone in attaching significance to the fact that an applicant has graduated from an ACOPE-accredited school.[11] These aspects of independent significance inhering in ACOPE accreditation nationally clearly distinguish the section 2902 incorporation by reference from an invalid delegation to a private entity of the power to make law by a "deliberate act intended to encompass that very result."[12] Jaffe, Law Making by Private Groups, 51 Harv.L.Rev. 201, 231 (1936). Nothing in our state constitution prevents the legislature from availing itself of the independent work of organizations such as ACOPE. Second, pragmatic considerations join the "independent significance" principle in supporting the constitutionality of section 2902. A single small state such as Maine does not have available the resources to conduct an ongoing accreditation program for the many hundreds of professional schools whose graduates may seek licensing in Maine. Furthermore, even if Maine were to devote the immense resources required to do the job on its own, our state would end up with a sui generis educational requirement for pharmacists and other health professionals. That result would run counter to the nationwide uniformity of educational standards that best serves both consumers and professionals in our highly mobile society. Such pragmatic considerations have been influential with other courts. Because "the Legislature is not made up of pharmacists," Levine v. Hamilton, 66 So. 2d 266, 267 (Fla.1953), it must avail itself of the work of institutions outside of the legislature. Due to its complexity, the "[r]egulation of drugs demands particular regard for practical considerations." State v. Kellogg, 98 912 Idaho 541, 543, 568 P.2d 514, 516 (1977). Recognizing the inherent difficulties of strict legislative control of pharmacology, the Idaho Supreme Court noted that "[w]ith a single exception, every court which has passed upon the delegation question, across a wide range of drug-related statutes, has sustained the legislature's action." Id., 98 Idaho at 544, 568 P.2d at 517. See also Burger v. Richards, 380 P.2d 687 (Okl.1963) (upholding delegation of duty to develop and apply state pharmacy examination). In State v. Wakeen, 263 Wis. 401, 57 N.W.2d 364 (1953), the court upheld a statute criminalizing the sale of drugs by persons other than registered pharmacists against a challenge that the statute delegated to the United States Pharmacopeia Convention the task of defining the term "drugs." The court explained: In the present case we have a complete act of the legislature which was not, at the time of its passage, dependent on the act of any other person or organization, but provided for the inclusion of articles discovered in the future with the advancement of science. It should not be held void because it provides for the inclusion of new discoveries, if approved by persons most eminent in the profession who are most interested in maintaining the highest standards known or to be known to science. This is not a case of the delegation of legislative powers. The publications referred to in the statute are not published in response to any delegation of power, legislative or otherwise, by the statute. The compendia are published independently of the statute and not in response to it. Id., 263 Wis. at 411, 57 N.W.2d at 369. Requirements that health professionals possess a degree from an accredited school have been upheld against challenge on the basis of the nondelegation doctrine,[13]State v. Hynds, 61 Ariz. 281, 148 P.2d 1000 (1944) (podiatry), and against other constitutional attack. E.g., Graves v. Minnesota, 272 U.S. 425, 47 S. Ct. 122, 71 L. Ed. 331 (1926) (dental); State v. Canova, 123 So. 2d 672 (Fla. 1960) (pharmacy); State v. Kellogg, 102 Idaho 628, 636 P.2d 750 (1981) (medical). Similar pragmatic considerations have led many courts to find nothing unconstitutional in requirements that applicants for admission to the bar have graduated from a law school accredited by the American Bar Association.[14] Distinguishing such a requirement from an unconstitutional delegation, *913 the Minnesota Supreme Court approved the rational decision to follow the standards of educational excellence developed by the Section of Legal Education and Admissions to the Bar of the American Bar Association. . . . We have neither the time, the staff, nor the expertise to make an individual determination as to whether the 173 ABA-accredited law schools or the increasing number of unaccredited law schools across the country meet and maintain those standards. We have chosen, therefore, to rely on the ABA accrediting process, in which we have confidence, and to require ABA accreditation of those law schools whose graduates will become our practicing lawyers. Petition of Busch, 313 N.W.2d 419, 421 (Minn.1981). See also Florida Board of Bar Examiners; In re Hale, 433 So. 2d 969, 972 (Fla.1983); Appeal of Murphy, 482 Pa. 43, 393 A.2d 369 (1978), app. dismissed, 440 U.S. 901, 99 S. Ct. 1204, 59 L. Ed. 2d 449 (1979). As Justice Samuel J. Roberts has written: The resources of this Court and its Board of Law Examiners are neither sufficient nor suited to the task of "accrediting any particular law school," let alone the 170 approved law schools in this country. . . . To accredit law schools in ad hoc proceedings would place intolerable burdens upon this court, would yield results far less reliable than those of the A.B.A., and would invite challenges as to the quality of ad hoc determination. Appeal of Kartorie, 486 Pa. 500, 504-05, 406 A.2d 746, 748 (1979) (Roberts, J., concurring). In conclusion, we find no violation of either the governing statute or the Maine Constitution in the Maine Commission of Pharmacy's denial of reciprocity registration to a pharmacist licensed by Massachusetts, a state that for its original licensure does not require a bachelor's degree from an ACOPE-accredited school. The entry is: Judgment affirmed. All concurring. NOTES [1] The statutory name of defendant Commission is "Board of Commissioners of the Profession of Pharmacy," which is variously referred to in the pertinent statutes as the "board" and the "commissioners." See 32 M.R.S.A. § 2851 (Supp.1983-1984). [2] 32 M.R.S.A. § 2902 prescribes the registration requirements in Maine to be met by both applicants for original licensure and applicants for registration by reciprocity. The requirements for original licensure are prescribed in section 2902 as follows, so far as here pertinent: Every person not already registered, entering upon the practice of pharmacy, upon the payment of a fee of $100 to the secretary of said board, except as otherwise provided, shall be examined by said commissioners and shall present to them satisfactory evidence that he had been graduated from some regularly incorporated college of pharmacy and has been employed in a pharmacy for at least one year, and is competent for the practice of pharmacy. Such employment in a pharmacy may be accumulated during the years at the college of pharmacy. The commissioners may give him a certificate of the fact and that he is authorized to engage in the business of a pharmacy, and such certificate must be signed by at least 3 members of the board. No such certificate shall be issued unless the applicant is at least 18 years of age, of good moral character, a citizen of the United States and a graduate of a school or college of pharmacy or a department of pharmacy of a university, accredited by the American Council on Pharmaceutical Education, and shall file proof satisfactory to the board, substantiated by proper affidavits, of sufficient service and experience in a retail pharmacy under the supervision of a registered or licensed pharmacist; and shall pass an examination by said board. . . . All applicants for original licensure must possess a degree in pharmacy that is the Bachelor of Science in Pharmacy, Bachelor of Pharmacy or Bachelor of Arts in Pharmacy. The requirement for registration by reciprocity is prescribed in the sixth sentence of section 2902, which reads as follows: The board may, in its discretion, grant certificates of registration to such persons as shall make the payment of a fee of $150 to the secretary of the board and shall furnish with their application satisfactory proof that they have been registered in some other state, provided such other state shall require a degree of competency equal to that required of applicants in this State. [3] The next year Lucas also qualified as a registered pharmacist in Florida, but he has now abandoned any claim that his Florida registration entitles him to reciprocity in Maine. [4] The organization and distribution of governmental power among the "branches of a state government does not present an issue of federal constitutional law." Highland Farms Dairy, Inc. v. Agnew, 300 U.S. 608, 612, 57 S. Ct. 549, 551, 81 L. Ed. 835 (1937). See Potter v. New Jersey Supreme Court, 403 F. Supp. 1036, 1039 (D.N.J.1975), aff'd, 546 F.2d 418 (3d Cir.1976). [5] Me. Const. art. III, § 1 provides: The powers of this government shall be divided into three distinct departments, the legislative, executive and judicial. Me. Const. art. IV, § 1 provides in part: The legislative power shall be vested in two distinct branches, a House of Representatives, and a Senate . . . . [6] For example, in Maine, in addition to 32 M.R. S.A. § 2851 (pharmacists), each of the following professional licensing statutes requires, as a condition for practice in Maine, graduation from an educational institution approved by an accrediting agency or association serving that profession nationwide: 32 M.R.S.A. § 551 (Supp.1983-1984) (chiropractors); 32 M.R.S.A. § 2571 (Supp.1983-1984) (osteopathic physicians); 32 M.R.S.A. § 3114-A (Supp.1983-1984) (physical therapists); 32 M.R.S.A. § 3271 (Supp.1983-1984) (medical doctors); 32 M.R. S.A. § 3651 (Supp.1983-1984) (podiatrists); 32 M.R.S.A. § 4861 (1978 & Supp.1983-1984) (veterinarians); 32 M.R.S.A. § 7053 (Supp. 1983-1984) (certified and registered social workers). [7] The American Council on Pharmaceutical Education, Accreditation Manual 1-1 (7th ed. 1983). [8] See detailed discussion below. [9] See P.L.1959, ch. 234, § 3, amending the predecessor of 32 M.R.S.A. § 2902 to require graduation from an ACOPE-accredited pharmacy school for licensure in Maine. [10] The chronology of governmental acts involved here further demonstrates the independent significance of ACOPE accreditation. The 1952 list published by the Commissioner of Education for veterans legislation predates Maine's reliance on ACOPE accreditation for licensure by some seven years. See P.L.1959, ch. 234, § 3, first requiring graduation from an ACOPE-accredited pharmacy school for an applicant for licensure as pharmacist in Maine. [11] See, e.g., D.C.Code Ann. § 2-2005 (1981); Hawaii Rev.Stat. § 461-5 (1976); N.H.Rev. Stat.Ann. § 318:18 (Supp.1981); Pa.Stat.Ann. tit. 63, § 390-3 (Purdon 1968); R.I.Gen.Laws § 5-19-10 (1976). Other statutes require graduation from a school accredited by ACOPE and approved by that state's pharmacy board. See e.g., Ind.Code Ann. § 25-26-18-11 (Supp. 1983); Mont.Code Ann. § 37-7-302 (1983); Neb.Rev.Stat. § 71-1,145 (Supp.1983); Nev. Rev.Stat. § 639.120 (1983); Utah Code Ann. § 58-17-2 (Supp.1983). Maryland requires graduation from a school accredited by ACOPE or approved by its board of pharmacy. See Md. [Health Occ.] Code Ann. § 12-302 (1981). Ohio uses ACOPE standards as a minimum requirement for pharmacy schools whose graduates may be approved for licensure in that state. See Ohio Rev.Code Ann. § 4729.08 (Page 1977). [12] The difference pointed out by Professor Jaffe distinguishes the case at bar from Boston Milk Producers, Inc. v. Halperin, 446 A.2d 33 (Me.1982), where we held that an increased milk tax that would go into effect only upon the majority vote of certified Maine milk producers violated the constitutional prohibition on the legislature's "in any manner, suspend[ing] or surrender[ing] the power of taxation." There, the invalidity arose from the fact that the vote by the private group of milk producers had no significance independent of deciding whether the new tax would go into effect. See id. at 39. In contrast, the ACOPE accreditation of schools of pharmacy has aspects of significance far beyond, both in function and geography, the Maine legislature's reliance upon it for registering pharmacists in this state. [13] Gumbhir v. Kansas State Board of Pharmacy, 228 Kan. 579, 618 P.2d 837 (1980), is distinguishable on its facts, since the applicant there was the graduate of a foreign pharmacy school that was located beyond the geographical operating sphere of ACOPE. We disagree with whatever suggestion Gumbhir may contain to the effect that the nondelegation doctrine would be violated by applying the ACOPE-accreditation requirement to Mr. Lucas, who graduated from an unaccredited pharmacy school in Massachusetts. [14] See Brown v. Board of Bar Examiners, 623 F.2d 605 (9th Cir.1980); Lombardi v. Tauro, 470 F.2d 798 (1st Cir.1972), cert. denied, 412 U.S. 919, 93 S. Ct. 2734, 37 L. Ed. 2d 145 (1973); Hackin v. Lockwood, 361 F.2d 499 (9th Cir.); cert. denied, 385 U.S. 960, 87 S. Ct. 396, 17 L. Ed. 2d 305 (1966); Louis v. Supreme Court of Nevada, 490 F. Supp. 1174 (D.Nev.1980); Moore v. Supreme Court of South Carolina, 447 F. Supp. 527 (D.S.C.), aff'd, 577 F.2d 735 (4th Cir.), cert. denied, 439 U.S. 984, 99 S. Ct. 574, 58 L. Ed. 2d 655 (1978); Ostroff v. New Jersey Supreme Court, 415 F. Supp. 326, 327 (D.N.J. 1976); Potter v. New Jersey Supreme Court, 403 F. Supp. 1036 (D.N.J.1975); aff'd, 546 F.2d 418 (3d Cir.1976); Application of Urie, 617 P.2d 505 (Alaska 1980); In re Stephenson, 511 P.2d 136 (Alaska 1973), modified on other grounds, Avery v. Board of Governors, 576 P.2d 488 (Alaska 1978); Rosenthal v. State Bar Examining Comm., 116 Conn. 409, 165 A. 211 (1933); Florida Board of Bar Examiners; In re Hale, 433 So. 2d 969 (Fla.1983); Petition of Busch, 313 N.W.2d 419 (Minn.1981); Hansen v. Minnesota Board of Bar Examiners, 275 N.W.2d 790 (1978), app. dismissed, 441 U.S. 938, 99 S. Ct. 2154, 60 L. Ed. 2d 1040 (1979); Ralston v. Turner, 141 Neb. 556, 4 N.W.2d 302 (1942); Application of Nort, 96 Nev. 85, 605 P.2d 627 (1980); Petition of Batten, 83 Nev. 265, 428 P.2d 195 (1967); Henington v. State Board of Bar Examiners, 60 N.M. 393, 291 P.2d 1108 (1956); Appeal of Kartorie, 486 Pa. 500, 406 A.2d 746 (1979); Appeal of Murphy, 482 Pa. 43, 393 A.2d 369 (1978), cert. denied, 440 U.S. 901, 99 S. Ct. 1204, 59 L. Ed. 2d 449 (1979); Application of Schatz, 80 Wash.2d 604, 497 P.2d 153 (1972).	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4537469/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:07 AM CDT - 648 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 Herchel H. Huff, appellee, v. Doug Brown, sheriff of Furnas County, appellant. ___ N.W.2d ___ Filed April 23, 2020. No. S-19-271. 1. Judgments: Appeal and Error. In a bench trial of a law action, the trial court’s factual findings have the effect of a jury verdict, and an appellate court will not disturb those findings unless they are clearly erroneous. 2. Mandamus. Whether to grant a writ of mandamus is within the trial court’s discretion. 3. Public Officers and Employees: Records. The duty, if any, to provide public records stays with the office of the records’ custodian and is transferred to a new holder of the office. 4. Mandamus: Proof. A party seeking a writ of mandamus under Neb. Rev. Stat. § 84-712.03 (Cum. Supp. 2018) has the burden to satisfy three elements: (1) The requesting party is a citizen of the state or other person interested in the examination of the public records, (2) the docu- ment sought is a public record as defined by Neb. Rev. Stat. § 84-712.01 (Reissue 2014), and (3) the requesting party has been denied access to the public record as guaranteed by Neb. Rev. Stat. § 84-712 (Reissue 2014). 5. ____: ____. If the public body holding the record wishes to oppose the issuance of a writ of mandamus, the public body must show, by clear and conclusive evidence, that the public record at issue is exempt from the disclosure requirement under one of the exceptions provided by Neb. Rev. Stat. § 84-712.05 (Cum. Supp. 2018) or Neb. Rev. Stat. § 84-712.08 (Reissue 2014). 6. Mandamus: Words and Phrases. Mandamus is a law action and is defined as an extraordinary remedy, not a writ of right, issued to compel the performance of a purely ministerial act or duty, imposed by law upon an inferior tribunal, corporation, board, or person, where (1) the relator has a clear right to the relief sought, (2) there is a corresponding - 649 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 clear duty existing on the part of the respondent to perform the act, and (3) there is no other plain and adequate remedy available in the ordinary court of law. 7. Mandamus: Proof. Under Neb. Rev. Stat. § 84-712.03(1)(a) (Cum. Supp. 2018), the requesting party’s initial responsibility includes demon- strating that the requested record is a public record that he or she has a clear right to access under the public records statutes and that the public body or custodian against whom mandamus is sought has a clear duty to provide such public records. Appeal from the District Court for Furnas County: James E. Doyle IV, Judge. Affirmed in part, and in part reversed and remanded. Melodie T. Bellamy, Special Counsel for Furnas County, and Morgan R. Farquhar, Furnas County Attorney, for appellant. Herchel H. Huff, pro se. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, and Papik, JJ. Miller-Lerman, J. NATURE OF CASE Doug Brown, the sheriff of Furnas County, appeals the order of the district court for Furnas County, Nebraska, which granted in part a writ of mandamus requiring him to provide records to Herchel H. Huff pursuant to the public records statutes. Brown argues, inter alia, that the court erred when it substituted him as a party for the prior sheriff, when it granted the writ based solely on Huff’s affidavit, when it granted the writ despite Huff’s failure to respond to the prior sheriff’s response which required Huff to deposit fees before certain records would be produced, and when it waived fees that were authorized by statute. We conclude that although the district court did not err when it substituted Brown’s name for that of the former sheriff, the court erred when it determined that Huff had shown that Brown had a clear duty to provide the records requested. We - 650 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 therefore affirm in part the order to the extent it denied Huff’s petition but reverse in part the order to the extent it granted the writ of mandamus. STATEMENT OF FACTS On September 23, 2018, Huff sent to then Furnas County sheriff Kurt Kapperman a 4-page letter which included 15 numbered paragraphs of requests for public records. Huff is an inmate serving sentences for convictions including motor vehi- cle homicide. The documents requested by Huff included, inter alia, records relating to the investigation of charges against him, criminal history records of jurors who had convicted him, criminal history records of and fees and expenses paid to witnesses and prosecuting attorneys in his trial, information regarding the salaries paid to the sheriff, and records relating to the impoundment of his vehicle. Kapperman responded in writing to Huff’s requests on October 2, 2018. Kapperman stated that “no responsive records exist[ed]” as to 14 of the 15 paragraphs of requests. The remaining paragraph, denominated as “request 3,” included requests for jail records, including medical records, maintained pursuant to Neb. Rev. Stat. § 47-204 (Reissue 2010). In request 3, Huff requested his own jail records as well as records for certain jurors from his trial that he asserted had been “con- victed [of] or cited for DWI.” In his response, Kapperman stated with respect to the request for jail records relating to jurors that “no responsive records exist, and the request seeks protected medical information.” With respect to the request for Huff’s jail records, Kapperman estimated that “the inspection and copying of records would cost approximately $750.00” and stated that he therefore required “a deposit of $750.00 before fulfilling such a request.” Kapperman cited Neb. Rev. Stat. § 84-712(3)(f) (Reissue 2014) as authority for requiring the deposit. On October 15, 2018, Huff filed a petition for writ of man- damus under Neb. Rev. Stat. § 25-2156 (Reissue 2016) and - 651 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 the public records statutes, Neb. Rev. Stat. § 84-712 et seq. (Reissue 2014 & Cum. Supp. 2018). Huff named “Sheriff Kurt Kapperman” as the defendant in the petition. Huff sought an “order compelling . . . Kapperman to release all requested documents per the [public records] statutes.” Kapperman filed an answer on January 21, 2019, in which he generally denied the allegations in Huff’s petition. Kapperman also asserted that Huff had failed to state a claim against him upon which relief could be granted, because Brown had been sworn into office on January 3 and Kapperman was no longer sheriff. On January 30, 2019, the court held a telephonic hearing. The court first took up and overruled Huff’s motion to dis- qualify the judge. The court then turned to the petition for a writ of mandamus. The court referred to an affidavit of Huff dated November 13, 2018, which had been offered into evi- dence by Huff and marked as exhibit 3. It generally asserted that Huff had requested documents from Kapperman, that the documents were public records subject to disclosure, and that Kapperman had failed to comply with Huff’s request and was refusing to release records, in violation of the public records statutes. Kapperman objected to exhibit 3 “on the basis that [he had not] had an opportunity to cross-examine” Huff regarding statements in the affidavit. The court overruled Kapperman’s objection and admitted exhibit 3 into evidence. Neither Huff nor Kapperman offered additional evidence, and the court heard argument by both parties. In addition to arguing that he could not comply with Huff’s request because he was no longer the sheriff of Furnas County, Kapperman argued that Huff was barred from proceeding with his claim because Huff had failed to timely respond to Kapperman’s response of October 2, 2018, in violation of § 84-712(4), which requires a deposit before Kapperman would provide the requested records that were in his possession. On February 14, 2019, the district court filed an order in which it granted in part and denied in part Huff’s petition for a writ of mandamus. The court addressed Kapperman’s argument - 652 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 that Huff failed to state a claim against Kapperman because he was no longer the Furnas County sheriff. The court stated that the fact that Kapperman was no longer the sheriff was “of no consequence” because the petition was directed at the office of the sheriff, not at the specific individual occupying the office at any given time. Accordingly, the court permitted Huff “to substitute . . . Brown, the current Furnas County Sheriff[,] in the caption of the case in place of Kapperman.” Turning to the merits of Huff’s request, the court stated that the sheriff’s response that he had “no responsive records” to most of Huff’s requests was “not sufficient.” The court cited Nebraska precedent which it read to provide that the refer- ence in § 84-712.01(1) to public records “of or belonging to” a public custodian “should be construed liberally to include documents or records that a public body is entitled to possess, regardless of whether the public body actually has posses- sion of the documents.” Based on that reading of precedent, the court reviewed Huff’s specific requests and categorized them into three general groups: (1) records the sheriff was not required to produce, (2) records the sheriff appeared to be entitled to possess, and (3) records the sheriff appeared not to be entitled to possess. The court included in the first category—records the sher- iff was not required to produce—medical records related to persons other than Huff and a report of the names of all county officials. In his request 3, Huff requested, inter alia, jail records, including medical records, for certain jurors in his trial. The court determined that medical records relat- ing to persons other than Huff were exempt from production under § 84-712.05(2). In another request, Huff requested records maintained pursuant to Neb. Rev. Stat. § 23-1306 (Reissue 2012) regarding “all the county officers with their official signatures and seals of their respective offices.” The court noted that § 23-1306 gave the county clerk the duty to maintain such records regarding county officers. The court determined that the sheriff might be entitled to possess such - 653 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 records with regard to his own office, and it therefore included records regarding the office of sheriff in the second category, discussed below. However, the court concluded that with regard to records regarding other county officials, the sheriff did not have a duty to respond. The court therefore denied in part Huff’s petition for mandamus, because it pertained to the requests for medical records of others and information regard- ing other county officers. The court generally granted mandamus as to Huff’s remain- ing requests and set forth different requirements as to each request depending on how certain the court was that the sher- iff was entitled to possess the requested record. The requests were generally denominated as records the court presumed the sheriff was entitled to possess or records the court thought the sheriff might not be entitled to possess. This categorization was consistent with the second and third categories identi- fied above. Regarding records it presumed the sheriff was entitled to possess, the court ordered the sheriff to conduct a due and dili- gent investigation to determine whether such records existed and, if so, to provide them to Huff. If after a due and diligent investigation the sheriff determined he was not entitled to pos- sess the records, the sheriff would be granted the opportunity to rebut the presumption by affidavit evidence. Such affidavit would need to include the facts necessary to support the sher- iff’s determination, as well as the identity and location of any other custodian of records that the sheriff believed was entitled to possess the records. Regarding records the court thought the sheriff might not be entitled to possess, the court ordered the sheriff to con- duct a due and diligent investigation to determine whether such records existed and, if so, to provide them to Huff. If the records were no longer available, the sheriff would be required to explain in writing why such records were no longer available. If the sheriff determined his office was not entitled to possess the records, the sheriff needed to report - 654 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 facts supporting such determination and identify any other public custodian the sheriff believed was entitled to possess the records. In its order, the court also addressed the requirement that Huff deposit a fee before the sheriff would provide Huff’s jail records, which the sheriff had determined he could provide. The court stated that § 84-712(3)(b) and (f) authorizes a pub- lic records custodian to charge a fee that “‘shall not exceed the actual added cost of making the copies available’” and to require a deposit if the cost is estimated to exceed $50. The court concluded that “[t]his provision authorized the deposit requested by the sheriff.” The court noted, however, that Huff was indigent and had been permitted to proceed in forma pau- peris in this action. The court acknowledged that neither the public records statutes nor the in forma pauperis statutes explicitly supported a waiver of the fees chargeable under § 84-712. Nevertheless, the court determined that in enacting the public records stat- utes, “the [L]egislature intended to make all public records readily available to the public,” and the court “infer[red that] the [L]egislature intended to avoid the imposition of copying expenses as [a] means to avoid the obligation to produce pub- lic records.” The court noted that as an inmate, Huff did not have the ability to examine public records in situ, and that therefore, his only access to records would be by obtaining copies; the court further noted that as a prisoner, Huff had little financial resources to pay the costs. Therefore, in order to fulfill what it determined to be the Legislature’s intent and the court’s author- ity under § 84-712.03(2) “to grant such other equitable relief as may be proper,” the court determined that fees were subject to waiver in an appropriate circumstance. The court determined that Huff’s requests were not frivolous, and it therefore con- cluded that the fees associated with his requests were subject to waiver and should in fact be waived. The court applied this holding to both the $750 deposit that the sheriff had required - 655 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 and any fees that might be chargeable in connection with the additional production of records ordered by the court. In conclusion, the court ordered that the sheriff would have 30 days from the date of the order to conduct the investigations and inquiries required, to deliver to Huff the records required by this order or state under oath he is not entitled to possess such records and the identity and location of any custodian of the public body he believes is entitled to possess such records and to contemporaneously file with the court a report of his responses to the requests and his responses to this writ. Brown appeals the order of the district court. ASSIGNMENTS OF ERROR Brown claims, renumbered and restated, that the court erred when it (1) substituted Brown for Kapperman as the defendant; (2) found that the sheriff had a duty to provide certain records even after Huff failed to pay a fee or timely respond as required under § 84-712(4); (3) received exhibit 3 into evidence and ordered a writ of mandamus without admitting any other evi- dence; (4) ordered the sheriff (a) to provide records without the payment of an authorized fee, (b) to provide records that were not in his possession, and (c) to conduct an investigation and to report on other requested records by identifying and locating the custodian of such records; and (5) waived fees and costs authorized under § 84-712 and ordered the sheriff to produce records without the payment of such fees and costs. STANDARDS OF REVIEW [1,2] Mandamus is a law action, and it is an extraordi- nary remedy, not a writ of right. Aksamit Resource Mgmt. v. Nebraska Pub. Power Dist., 299 Neb. 114, 907 N.W.2d 301 (2018). In a bench trial of a law action, the trial court’s fac- tual findings have the effect of a jury verdict, and we will not disturb those findings unless they are clearly erroneous. Id. Whether to grant a writ of mandamus is within the trial court’s discretion. Id. - 656 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 ANALYSIS Petition for Writ of Mandamus and Request for Public Records Were Directed at Person Holding Office of Sheriff, and Therefore, Court Did Not Err When It Allowed Substitution of Brown’s Name for Kapperman’s. Brown first claims that the district court erred when it substituted his name as sheriff for that of Kapperman as the defendant in this action. We determine that the district court fairly interpreted Huff’s records request and petition for a writ of mandamus as being directed at the office of the Furnas County sheriff as the custodian of public records and that therefore, the court did not err when it allowed the caption for this action to be updated to reflect the name of the current holder of that office. The district court noted that “Huff’s request for the produc- tion of public records was directed to the office of the sheriff of Furnas County . . . not to the individual who occupied the office at the time of the delivery of the request.” We agree with the district court’s interpretation of the request and of Huff’s petition for a writ of mandamus as seeking compliance with that request by the sheriff. A request under the public records statutes is directed to the custodian of the records being sought, and although a request is made to the specific person holding the position of custodian, in substance it is inherently directed at the holder of the office that acts as the custodian of the records. [3] We note that Neb. Rev. Stat. § 23-1709 (Reissue 2012) provides in relevant part that “[w]hen a sheriff goes out of office he or she shall deliver to his or her successor all books and papers pertaining to the office . . . .” We read the require- ment under § 23-1709 that a sheriff leaving office deliver “all books and papers” to his or her successor to include public records for which the sheriff is custodian. We further note that with regard to the naming of parties to an action, Neb. Rev. Stat. § 25-322 (Reissue 2016) provides in relevant part: - 657 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 An action does not abate by . . . the transfer of any interest therein during its pendency, if the cause of action survives or continues. . . . In case of [a] transfer of inter- est, the action may be continued in the name of the origi- nal party or the court may allow the person to whom the transfer is made to be substituted in the action. Reading these statutes together, we determine that Huff’s action for mandamus to enforce his public records request directed to the holder of the office of sheriff did not abate as a result of the transfer of public records of the sheriff’s office from Kapperman as custodian to Brown as custodian. The duty, if any, to provide public records stays with the office of the records’ custodian and is transferred to the new holder of the office. We therefore conclude that the district court did not err when it allowed the substitution of Brown’s name for Kapperman’s name as custodian of the public records at issue in this action. In Order for Court to Issue Mandamus, Huff Needed to Show That Sheriff Had Clear Duty to Provide Requested Records. The remaining issues on appeal deal with Huff’s requests for public records and whether he was entitled to a writ of manda- mus requiring the sheriff to provide the requested records. We therefore review standards relating to mandamus in the context of a public records request. [4,5] A person denied access to a public record may file for speedy relief by a writ of mandamus under § 84-712.03. Aksamit Resource Mgmt. v. Neb. Pub. Power Dist., 299 Neb. 114, 907 N.W.2d 301 (2018). We have stated that a party seek- ing a writ of mandamus under § 84-712.03 has the burden to satisfy three elements: (1) The requesting party is a citizen of the state or other person interested in the examination of the public records, (2) the document sought is a public record as defined by § 84-712.01, and (3) the requesting party has been denied access to the public record as guaranteed by § 84-712. - 658 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 Aksamit Resource Mgmt., supra. Where a suit is filed under § 84-712.03, the Legislature has imposed upon the public body the burden to “‘sustain its action.’” Aksamit Resource Mgmt., 299 Neb. at 123, 907 N.W.2d at 308. If the public body holding the record wishes to oppose the issuance of a writ of mandamus, the public body must show, by clear and conclusive evidence, that the public record at issue is exempt from the disclosure requirement under one of the exceptions provided by § 84-712.05 or § 84-712.08. See Aksamit Resource Mgmt., supra. In the present case, the only documents that the sheriff asserted were exempt from disclosure under a statutory excep- tion were medical records that the sheriff asserted to be exempt under § 84-712.05(2). The court agreed that such records were exempt from disclosure, and it therefore denied mandamus as to those records. Huff did not appeal or cross-appeal to assign error to the court’s denial of mandamus regarding these records; therefore, the court’s denial of mandamus as to those records is affirmed and whether the records are exempt from disclosure is not at issue in this appeal. The issues on appeal involve records for which the court granted a writ of mandamus. In his response to Huff’s request, Kapperman did not assert, and Brown does not argue on appeal, that these records were exempt from disclosure pursu- ant to a statutory exception. Instead, in his response to Huff’s request, Kapperman either (1) asserted that no responsive records existed or (2) acknowledged that the records existed but required the deposit of a fee before the records would be provided. The standard set forth above placing a burden on the public body to show by clear and convincing evidence that a record is exempt does not apply when the public body’s reason for denying a records request is not that the record is exempt from disclosure under a statutory exception. Instead, we have acknowledged: Requiring the public body to demonstrate that an exception applies to the disclosure of a particular public - 659 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 record does not, however, change the fact that it is the initial responsibility of the relator to demonstrate that the record in question is a public record within the meaning of § 84-712.01. Under § 84-712.03, a writ may be sought by “[a]ny person denied any rights granted by sections 84-712 to 84-712.03 . . . .” In order to establish stand- ing and jurisdiction, therefore, it must be shown that the party seeking mandamus has been denied rights under § 84-712. A necessary component of this showing is that the party was seeking a record that is a “public record” within the meaning of § 84-712.01. State ex rel. Neb. Health Care Assn. v. Dept. of Health, 255 Neb. 784, 789-90, 587 N.W.2d 100, 105 (1998). [6,7] The requesting party’s initial responsibility to demon- strate a prima facie claim for a writ of mandamus requiring release of public records must be understood in the context of general requirements for mandamus. Mandamus is a law action and is defined as an extraordinary remedy, not a writ of right, issued to compel the performance of a purely ministerial act or duty, imposed by law upon an inferior tribunal, corporation, board, or person, where (1) the relator has a clear right to the relief sought, (2) there is a corresponding clear duty existing on the part of the respondent to perform the act, and (3) there is no other plain and adequate remedy available in the ordinary court of law. State ex rel. Rhiley v. Nebraska State Patrol, 301 Neb. 241, 917 N.W.2d 903 (2018). Therefore, under § 84-712.03(1)(a), the requesting party’s initial responsibility includes demonstrating that the requested record is a public record that he or she has a clear right to access under the public records statutes and that the public body or custodian against whom mandamus is sought has a clear duty to provide such public records. As noted above, the district court denied mandamus with regard to medical records the sheriff asserted were exempt from disclosure. The court also denied mandamus with regard to records regarding county officials other than the county - 660 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 sheriff. Because Huff does not appeal or cross-appeal that rul- ing, the denial of mandamus as to those records is affirmed. With Regard to Records for Which Sheriff Required a Deposit of Fees, Huff Failed to Show He Timely Responded to the Request and Therefore Failed to Show the Sheriff Had a Clear Duty to Provide Such Records. As we have indicated above, the remaining issues on appeal relate to records with respect to which the court granted man- damus and that the sheriff asserts he has no duty to provide either because no such record existed or because the records existed but Huff did not timely respond to the sheriff’s request for a deposit of fees before the records would be provided. We first address the records that in his response Kapperman acknowledged were in his possession but for which he required a deposit of fees before the request could be fulfilled. We determine that because Huff did not timely respond as required under § 84-712(4), the sheriff did not have a clear duty to pro- vide the records and the court erred when it granted mandamus as to these records. In his response to Huff’s request, Kapperman asserted that most of the requested records did not exist but he acknowl- edged that jail records relating to Huff as sought in request 3 existed and were public records that could be provided to Huff. However, Kapperman estimated that “the inspection and copying of records would cost approximately $750.00,” and he therefore required from Huff “a deposit of $750.00 before fulfilling such a request.” We note that § 84-712(3)(b) provides in part that “the custodian of a public record may charge a fee for providing copies of such public record . . . , which fee shall not exceed the actual added cost of making the copies avail- able.” Also, § 84-712(3)(f), which was cited by Kapperman in his response, provides that “[i]f copies requested in accordance with . . . this section are estimated by the custodian of such public records to cost more than fifty dollars, the custodian - 661 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 may require the requester to furnish a deposit prior to fulfilling such request.” Brown claims on appeal that the district court erred when it found that the sheriff had a duty to provide these records even after Huff failed to respond to Kapperman’s request for a deposit before providing the records. Brown cites § 84-712(4), which provides in relevant part that after the custodian has provided to the requester an estimate of the expected cost of the copies: The requester shall have ten business days to review the estimated costs, including any special service charge, and request the custodian to fulfill the original request, negoti- ate with the custodian to narrow or simplify the request, or withdraw the request. If the requester does not respond to the custodian within ten business days, the custodian shall not proceed to fulfill the request. Kapperman’s response to Huff’s request was dated October 2, 2018. Huff does not assert, and there is nothing in the record that indicates, that within 10 business days thereafter, Huff either requested Kapperman to fulfill the original request, attempted to negotiate with Kapperman to narrow or simplify the request, or withdrew his request. Instead, on October 15, Huff filed a petition for a writ of mandamus in the district court. Brown argues that because Huff did not respond within 10 business days in one of the ways set forth in § 84-712(4), and because the statute provides that in such circumstance, “the custodian shall not proceed to fulfill the request,” the sher- iff no longer had a duty to fulfill the request. We agree with the sheriff. Huff attached to his petition copies of his request and Kapperman’s response. Huff did not assert in his petition that he had responded within 10 business days to Kapperman’s request for a deposit of fees; nor did he attach a copy of any such response. The only additional evidence Huff offered at the hearing was his affidavit, in which he made no asser- tion that he had timely responded. Without a response, under - 662 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 § 84-712(4), Kapperman was no longer under a duty to fulfill the request for jail records. Therefore, we determine that with respect to these records, Huff failed his initial responsibility to demonstrate that he had been denied access to the public record as guaranteed by § 84-712, because he failed to demonstrate that the sheriff had a clear duty under § 84-712 to fulfill the request. See Russell v. Clarke, 15 Neb. Ct. App. 221, 724 N.W.2d 840 (2006) (affirming denial of petition for writ of mandamus where evidence established that there were no public records maintained by custodian other than those of which copies were provided or of which custodian offered to provide copies upon payment of reasonable expense of copying, and requester failed to adduce evidence to contrary). We note in connection with this request that in his petition, Huff asserted that Kapperman was “charging [an] amount more than what it would cost to copy these records.” However, Huff did not assert a factual basis to support his claim of unreason- ableness; nor did he present evidence to show that the $750 requested by Kapperman exceeded the reasonable expense of copying. There was no showing indicating the volume of docu- ments requested and therefore no way to determine whether $750 was a reasonable cost, and in addition, the district court made no finding that the requested fee was excessive or unrea- sonable. Instead, in its order, the court stated that § 84-712(3)(f) “authorized the deposit requested by the sheriff.” Although the court thereafter determined that the fee should be waived, such determination was based on Huff’s inability to pay rather than the reasonableness of the fee. Because the sheriff has been relieved of his duty, if any, to provide records encompassed by request 3, we do not comment on the court’s ruling that the fees provided for in § 84-712(3)(f) can be waived. Compare 5 U.S.C. § 552(a)(4)(A) (2018) (providing for statutory waiver of fee). On the record before the district court, Huff did not show a clear duty on the part of the sheriff as custodian of the jail records to provide the records which the sheriff offered to - 663 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 provide upon a deposit of fees. We therefore conclude that the court abused its discretion when it granted mandamus as to those records. Huff Failed to Demonstrate That Sheriff Had a Clear Duty to Provide Records That Sheriff Asserted Did Not Exist. Regarding the majority of the records requested by Huff, the sheriff responded that no responsive records existed. The district court granted mandamus with regard to those requests encompassed by this response under the reasoning that such records were records “‘of or belonging to’” the sheriff because the sheriff was “‘entitled to possess’” the records. We deter- mine that the court misapplied this court’s precedent in reach- ing that conclusion, and we conclude that Huff failed to establish as a prima face case that the requested records were records that the sheriff had a clear duty to provide. The record from the district court does not contain evidence to support a finding that the sheriff was the custodian of the requested records. As noted above, Huff attached to his peti- tion Kapperman’s response in which Kapperman asserted that as to most of Huff’s requests, “no responsive records exist.” In his pleadings and in his affidavit, Huff made generalized allegations that Kapperman was withholding records and not fulfilling his duty. But there was no other evidence to establish that the sheriff was the custodian of the requested records. In its order, the court does not explicitly find that the sheriff was being untruthful and that the requested records were actually in his possession. Instead, the court reasoned that the sheriff was required to provide the records to Huff because the sher- iff was “‘entitled to possess’” the records. For purposes of the public records statutes, § 84-712.01(1) defines “public records” to “include all records and documents, regardless of physical form, of or belonging to this state, any county, city, village, political subdivision, or tax-supported district in this state, or any agency, branch, department, board, - 664 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 bureau, commission, council, subunit, or committee of any of the foregoing.” In its order in this case, the district court cited Evertson v. City of Kimball, 278 Neb. 1, 9, 767 N.W.2d 751, 759 (2009), in which we stated that this definition “does not require a citizen to show that a public body has actual pos- session of a requested record” and we liberally construed the “‘of or belonging to’” language of § 84-712.01(1) to include “any documents or records that a public body is entitled to pos- sess—regardless of whether the public body takes possession.” We stated that “[t]he public’s right of access should not depend on where the requested records are physically located.” Id. The district court in its order interpreted Evertson “to require the custodian who receives a public records request to examine each of the requests to determine whether, as a custodian in the public body to which the request is directed, he or she is ‘entitled to possess the document’ requested.” The court then categorized the records requested by Huff as those that the sheriff “presumptively appears to be entitled to possess” and those “which it appears the sheriff may not be entitled to pos- sess.” As to each category, the court required the sheriff to investigate whether he was entitled to possess the requested documents and either provide the documents, explain why he could not possess them, or identify any other custodian the sheriff believed to be entitled to possess the records. We determine that the district court read Evertson too broadly. In Evertson, the city’s mayor had commissioned an investigation by a private entity and two citizens requested from the city a written report that was in the possession of the private entity. Although we ultimately concluded that the record was exempt from production based on a statutory excep- tion, as a preliminary step we determined that the report was a “public record” under § 84-712.01 even though the city had declined to take possession. In reaching that conclusion, we set forth the language relied on by the district court to the effect that public records include documents the public body is entitled to possess. - 665 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 However, Evertson must be understood in the context of a request for documents in the possession of a private entity. In Evertson, we set forth tests for determining whether records in the possession of a private party are public records sub- ject to disclosure, and such tests generally focused on the public body’s delegation to a private entity of its authority to perform a government function and the preparation of the records as part of such delegation of authority. Thus, it was in the context involving the public body’s access to documents in the possession of a private entity that the “entitled to pos- sess” language in Evertson, 278 Neb. at 9, 767 N.W.2d at 759, emerged. In the present case, Huff did not assert, and there is no indi- cation from the record, that any of the documents requested by Huff were in the possession of a private entity to whom the sheriff had delegated authority to perform a function of the sheriff’s office. The court made general findings that the requested records were records that the sheriff appeared to be entitled to possess; however, the court made no indication whether it thought that, contrary to the response that no respon- sive records existed, the records were actually in the sheriff’s possession or whether it thought the sheriff could obtain the records from some other unspecified custodian pursuant to some unspecified authority. Huff presented no evidence to con- tradict the sheriff’s response or to establish that the sheriff was the custodian of the requested records. The sheriff argued at the hearing that the records at issue were “not items that are kept by the sheriff’s department” and that instead, the custodians of certain requested records may have been other county officers such as the county attorney or the county clerk. Therefore, it is possible the court may have determined that the sheriff was “entitled to possess” such records in the performance of his duties because the sheriff could request the other county officers to provide the records. See Evertson v. City of Kimball, 278 Neb. 1, 9, 767 N.W.2d 751, 759 (2009). But we do not think that Evertson should - 666 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 be extended to apply to records normally in the possession of other governmental custodians. Although the sheriff may be able to request records from another county office, it does not mean they are records “of or belonging to” the sheriff; instead, they are records “of or belonging to” the other county office. See § 84-712.01. The public records statutes are directed to “the custodian” of a requested public record, see § 84-712, and the duties imposed thereunder on a specific custodian relate only to the public records of which that specific office or person is the custodian. A specific custodian only has a clear duty under the public records statutes to provide the public records of which he or she is custodian. It is the obligation of the person requesting a record to determine the proper custodian and to make a request of that person or office. The record of proceedings in this case is that in his response, the sheriff asserted that as to most of Huff’s requests, no responsive records existed. The only evidence presented by Huff was his affidavit in which he made general allegations that the sheriff failed to comply with his requests. But there is no evidence to support a showing that the sheriff was in fact custodian of any of the records at issue, and therefore, Huff failed to make a prima facie showing that the sheriff had a clear duty under the public records statutes to provide the records. Although other county officers may have been custo- dians of the requested records, the public records statutes did not impose a duty on the sheriff to obtain those records on Huff’s behalf. For completeness, we note that in another request subse- quent to request 3, Huff sought the criminal history records of various individuals such as jurors and attorneys. Neb. Rev. Stat. § 29-3520 (Reissue 2016) provides in part that “[c]omplete criminal history record information maintained by a criminal justice agency shall be a public record open to inspection and copying by any person during normal busi- ness hours and at such other times as may be established by - 667 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 the agency maintaining the record.” Further, Neb. Rev. Stat. § 29-3522 (Reissue 2016) states that if the requested criminal justice history record is not in the custody or control of the person to whom the request is made, such person shall notify the requester and state the agency, if known, which has custody or control of the record in question. In this case, the sheriff responded to this request by asserting “no responsive records exist.” With respect to Huff’s request for criminal histories, we read this response as being both that the sheriff did not have custody of such records and that the sheriff was not aware of any requested criminal histories that were in the custody and control of another agency. Although on this record as a whole, the sheriff has broadly addressed the concerns reflected in §§ 29-3520 and 29-3522, the better practice going forward when responding to a request for criminal history record infor- mation is an initial twofold response containing both an answer to whether the responder has custody and control of the infor- mation sought and, if not, which agency, if known, has custody or control of the record in question or an explicit statement that the responder is not aware of any criminal history in the custody of another agency. We further note, with respect to Huff’s requests for docu- ments other than criminal histories, that the public records statutes do not include a requirement similar to that in § 29-3522 for a custodian to inform the requester of another agency that has custody or control of the record requested. Therefore, to the extent the district court’s mandamus ordered the sheriff to provide such information with regard to records other than criminal histories, the sheriff had no clear duty to do so. We conclude that the district court abused its discretion when it granted the writ of mandamus as to the records for which the sheriff has responded that no responsive records exist. Because we conclude that Huff did not establish a prima facie case that he was denied public records that the sheriff had a clear duty to provide, we reverse the portions of the - 668 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports HUFF v. BROWN Cite as 305 Neb. 648 order granting mandamus. We therefore need not consider Brown’s remaining assignments of error. CONCLUSION We conclude that the district court did not err when it allowed Brown’s name to be substituted for Kapperman’s, because the present action was directed to the office of the sheriff of Furnas County. With regard to the merits of Huff’s petition for a writ of mandamus, to the extent the district court denied Huff’s petition in part, we affirm such denial. To the extent the district court granted the remainder of Huff’s petition and issued mandamus, we conclude that Huff failed to demonstrate a prima facie case that he had been denied a request for public records that the sheriff had a clear duty to provide under § 84-712. We therefore reverse the order to the extent the court granted mandamus, and we remand the matter with directions to the district court to deny Huff’s petition for a writ of mandamus in its entirety. Affirmed in part, and in part reversed and remanded. Freudenberg, J., not participating.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537470/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:07 AM CDT - 527 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 State of Nebraska, appellee, v. Patrick W. Schroeder, appellant. ___ N.W.2d ___ Filed April 17, 2020. No. S-18-582. 1. Sentences: Death Penalty: Appeal and Error. In a capital sentenc- ing proceeding, the Nebraska Supreme Court conducts an independent review of the record to determine if the evidence is sufficient to support imposition of the death penalty. 2. Sentences: Aggravating and Mitigating Circumstances: Appeal and Error. When reviewing the sufficiency of the evidence to sustain the trier of fact’s finding of an aggravating circumstance, the relevant ques- tion for the Nebraska Supreme Court is whether, after viewing the evi- dence in the light most favorable to the State, any rational trier of fact could have found the essential elements of the aggravating circumstance beyond a reasonable doubt. 3. ____: ____: ____. A sentencing panel’s determination of the existence or nonexistence of a mitigating circumstance is subject to de novo review by the Nebraska Supreme Court. 4. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Appeal and Error. In reviewing a sentence of death, the Nebraska Supreme Court conducts a de novo review of the record to determine whether the aggravating and mitigating circumstances support the imposition of the death penalty. 5. Rules of Evidence. In proceedings where the Nebraska Evidence Rules apply, the admissibility of evidence is controlled by the Nebraska Evidence Rules; judicial discretion is involved only when the rules make discretion a factor in determining admissibility. 6. Constitutional Law: Statutes: Appeal and Error. The constitutionality of a statute presents a question of law, which an appellate court indepen- dently reviews. 7. Sentences: Death Penalty: Homicide: Aggravating and Mitigating Circumstances: Appeal and Error. Under Nebraska law, the death - 528 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 penalty is imposed for a conviction of murder in the first degree only in those instances when the aggravating circumstances existing in connec- tion with the crime outweigh the mitigating circumstances. 8. Trial: Rebuttal Evidence. Rebuttal evidence is confined to new mat- ters first introduced by the opposing party and limited to that which explains, disproves, or counteracts the opposing party’s evidence. 9. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Evidence. In a death penalty case, a sentencing panel has the discretion to hear evidence to address potential mitigating circumstances regardless of whether the defendant presents evidence on that issue. 10. Sentences: Evidence. A sentencing court has broad discretion as to the source and type of evidence and information which may be used in determining the kind and extent of the punishment to be imposed, and evidence may be presented as to any matter that the court deems relevant to the sentence. 11. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Evidence. In a death penalty case, a sentencing panel may permit the State to present evidence to contradict potential mitigators even though a defendant failed to present affirmative evidence. 12. Sentences: Death Penalty: Homicide. A sentencing order in a death penalty case must specify the factors the sentencing panel relied upon in reaching its decision and focus on the individual circumstances of each homicide and each defendant. 13. Constitutional Law: Sentences: Death Penalty: Aggravating and Mitigating Circumstances. The U.S. Constitution does not require the sentencing judge or judges to make specific written findings in death penalty cases with regard to nonstatutory mitigating factors. 14. Sentences: Aggravating and Mitigating Circumstances: Appeal and Error. The Nebraska Supreme Court will not fault a sentencing panel for failing to discuss a nonstatutory mitigating circumstance that it was not specifically asked to consider. 15. Death Penalty: Aggravating and Mitigating Circumstances. During the consideration of statutory mitigating factors in a death penalty case, the mere identification of a history of incarceration, without more, is insufficient to allege unusual pressures or influences or establish extreme mental or emotional disturbance. 16. Sentences: Homicide: Aggravating and Mitigating Circumstances: Judgments: Juries: Presentence Reports. When an offender has been convicted of first degree murder and waives the right to a jury determi- nation of an alleged aggravating circumstance, the court must order a presentence investigation of the offender and the panel must consider a written report of such investigation in its sentencing determination. - 529 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 17. Presentence Reports. A presentence investigation and report shall include, when available, any submitted victim statements and an analy- sis of the circumstances attending the commission of the crime and the offender’s history of delinquency or criminality, physical and mental condition, family situation and background, economic status, education, occupation, and personal habits. 18. Presentence Reports: Probation and Parole. A presentence investiga- tion and report may include any matters the probation officer deems relevant or the court directs to be included. 19. Constitutional Law: Criminal Law: Sentences: Right to Counsel. An accused has a state and federal constitutional right to be represented by an attorney in all critical stages of a criminal prosecution which can lead to a sentence of confinement. 20. Right to Counsel: Waiver. A defendant may waive the right to counsel so long as the waiver is made knowingly, voluntarily, and intelligently. 21. Constitutional Law: Right to Counsel. The same constitutional provi- sions that provide a defendant the right to counsel also guarantee the right of the accused to represent himself or herself. 22. Attorney and Client. The right to self-representation plainly encom- passes certain specific rights of the defendant to have his voice heard, including that the pro se defendant must be allowed to control the orga- nization and content of his own defense. 23. Sentences: Death Penalty: Attorney and Client: Aggravating and Mitigating Circumstances: Evidence: Waiver. Control of the orga- nization and content of a defense may include a waiver of the right to present mitigating evidence during sentencing in a death penalty case. 24. Criminal Law: Sentences: Death Penalty: Appeal and Error. Because a death sentence is different from any other criminal penalty and no sys- tem based on human judgment is infallible, the Nebraska Supreme Court has taken, and should continue to take, the extra step to ensure fairness and accuracy with the imposition of the death penalty. 25. Criminal Law: Statutes. Penal statutes are to be strictly construed in favor of the defendant. 26. Sentences: Evidence: Presentence Reports. Even if the State presents evidence in favor of a specific sentence and the defendant declines to present contrary evidence, a court receives and must consider indepen- dent information from a presentence investigation report. 27. Sentences: Death Penalty: Evidence: Presentence Reports. In a death penalty case, a sentencing panel is required to review a presentence investigation report and determine whether it contradicts the State’s evi- dence of aggravating factors and whether any mitigating circumstances exist, including specifically delineated statutory mitigators. - 530 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 28. Death Penalty: Aggravating and Mitigating Circumstances: Proof. While the State must prove aggravating circumstances beyond a rea- sonable doubt in a death penalty case, there is no burden of proof with regard to mitigating circumstances. 29. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Judgments. Once a sentencing panel in a death penalty case makes its determinations about the existence of aggravating and mitigat- ing circumstances, the panel is then required to undertake a proportion- ality review. 30. Criminal Law: Sentences: Death Penalty: Words and Phrases. A pro- portionality review in a death penalty case looks at whether the sentence of death is excessive or disproportionate to the penalty imposed in simi- lar cases, considering both the crime and the defendant. Proportionality review is not constitutionally mandated. 31. Sentences: Death Penalty: Statutes: Appeal and Error. The propor- tionality review in a death penalty case exists in Nebraska by virtue of statutes which direct the Nebraska Supreme Court to conduct a propor- tionality review in each appeal in which a death sentence is imposed. 32. Sentences: Death Penalty. A court’s proportionality review spans all previous cases in which a sentence of death is imposed and is not depen- dent on which cases are put forward by the parties. 33. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Judgments: Juries. Even when a jury determines the existence of an aggravating circumstance, a sentencing panel is required to put in writing its consideration of whether the determined aggravating circum- stance justifies the imposition of a sentence of death, whether mitigating circumstances exist, and whether a sentence of death would be excessive or disproportionate to penalties imposed in similar cases. 34. ____: ____: ____: ____: ____. A sentencing panel’s order imposing a sentence of death where a jury has determined the existence of an aggravating circumstance must specifically refer to the aggravating and mitigating circumstances weighed in the determination of the panel. 35. Sentences: Death Penalty: Statutes. Nebraska’s capital sentencing scheme provides additional statutory steps and considerations to ensure fairness and accuracy, and these safeguards exist regardless of a defend ant’s strategy at the penalty phase. 36. Sentences: Death Penalty. Due to Nebraska’s statutory capital sentenc- ing scheme, a defendant cannot “choose” the death penalty. 37. Courts: Sentences: Death Penalty. A sentencing decision in a death penalty case rests with the court alone. 38. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Evidence: Presentence Reports. In order to sentence a - 531 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 defendant to death, the statutory scheme requires that a sentencing panel consider not only evidence and argument presented by the parties but also an independently compiled presentence investigation report to determine whether the alleged aggravating circumstance exists, deter- mine whether any mitigating factors are present which would weigh against the imposition of the death penalty, and conduct a proportional- ity review weighing the aggravating and mitigating factors and compar- ing the facts to previous cases where the death penalty was imposed. 39. Trial: Parties. A defendant is entitled to present a defense and is guar- anteed the right to choose the objectives for that defense. 40. Attorney and Client. A self-represented defendant must be allowed to control the organization and content of his own defense. 41. Constitutional Law: Right to Counsel: Sentences: Aggravating and Mitigating Circumstances: Evidence: Waiver. When a defend ant waives counsel and the presentation of mitigating evidence, the appointment of an advocate to present evidence and argue against the imposition of a sentence overrides that defendant’s constitutional right to control the organization and content of his or her own defense dur- ing sentencing. 42. Right to Counsel: Waiver. A criminal defendant has the right to waive counsel and present his or her own defense. 43. Sentences: Death Penalty: Right to Counsel: Evidence: Waiver. In a death penalty case, a defendant’s right to waive counsel and present his or her own defense includes the right of the defendant to elect not to present additional evidence or argument during the penalty proceedings. 44. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Appeal and Error. In reviewing a sentence of death, the Nebraska Supreme Court conducts a de novo review of the record to determine whether the aggravating and mitigating circumstances support the imposition of the death penalty. 45. ____: ____: ____: ____. In reviewing a sentence of death, the Nebraska Supreme Court considers whether the aggravating circumstances justify imposition of a sentence of death and whether any mitigating circum- stances found to exist approach or exceed the weight given to the aggra- vating circumstances. 46. ____: ____: ____: ____. The Nebraska Supreme Court is required, upon appeal, to determine the propriety of a death sentence by conducting a proportionality review, comparing the aggravating and mitigating cir- cumstances with those present in other cases in which a court imposed the death penalty. 47. Sentences: Death Penalty. The purpose of a proportionality review in a death penalty case is to ensure that the sentences imposed in a case are - 532 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 no greater than those imposed in other cases with the same or similar circumstances. 48. Sentences: Death Penalty: Aggravating and Mitigating Circum stances: Appeal and Error. The Nebraska Supreme Court’s propor- tionality review looks only to other cases in which the death penalty has been imposed and requires the court to compare the aggravating and mitigating circumstances of the case on appeal with those present in those other cases. 49. Death Penalty. A proportionality review in a death penalty case does not require that a court “color match” cases precisely. 50. Sentences: Death Penalty. The question when conducting a propor- tionality review in a death penalty case is simply whether the cases being compared are sufficiently similar, considering both the crime and the defendant, to provide the court with a useful frame of reference for evaluating the sentence in the instant case. 51. Sentences: Death Penalty: Aggravating and Mitigating Circum stances. One aggravating circumstance may be sufficient under Nebraska’s statutory system for the imposition of the death penalty. 52. ____: ____: ____. In a proportionality review, the evaluation of whether the death penalty should be imposed in a specific case is not a mere counting process of “X” number of aggravating circumstances and “Y” number of mitigating circumstances and, instead, asks whether the reviewed cases are sufficiently similar to provide a useful reference for that evaluation. Appeal from the District Court for Johnson County: Vicky L. Johnson, Judge. Affirmed. Sarah P. Newell, of Nebraska Commission on Public Advocacy, for appellant. Douglas J. Peterson, Attorney General, and James D. Smith, Solicitor General, for appellee. Christopher L. Eickholt, of Eickholt Law, L.L.C., Cassandra Stubbs, of American Civil Liberties Union Foundation, and Amy A. Miller, of ACLU of Nebraska Foundation, for amicus curiae ACLU and ACLU of Nebraska. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, and Papik, JJ., and Moore, Chief Judge. - 533 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Funke, J. Patrick W. Schroeder appeals his sentence of death for first degree murder of Terry Berry, Jr. This is a mandatory direct appeal pursuant to Neb. Rev. Stat. § 29-2525 (Cum. Supp. 2018) and article I, § 23, of the Nebraska Constitution. Schroeder waived counsel, pled guilty without a plea agree- ment, waived the right to a jury on the issue of aggravating factors, declined to present evidence of aggravating or mitigat- ing factors, and declined to cooperate for the preparation of the presentence investigation report. On appeal, Schroeder was appointed counsel and now con- tends that the sentencing panel erred in allowing the State to introduce evidence to refute unpresented mitigating evidence, failing to consider and weigh mitigating evidence from the presentence investigation report, failing to request documenta- tion from the Department of Correctional Services (DCS) of Schroeder’s time in custody for mitigation purposes, sentenc- ing Schroeder to death with insufficient safeguards to prevent arbitrary results, and finding Schroeder should be sentenced to death after balancing the aggravating evidence and mitigating evidence. For the reasons set forth herein, we affirm. BACKGROUND Factual Background At the time of the events leading to Schroeder’s instant conviction, Schroeder was incarcerated at Tecumseh State Correctional Institution (TSCI). This incarceration was pur- suant to a 2007 conviction for the first degree murder of Kenneth Albers in which Schroeder was sentenced to life imprisonment. In March 2017, while housed in a cell intended for one occupant, Schroeder was asked if he would consider a room- mate due to overcrowding. Schroeder agreed but wanted a roommate with whom he was compatible. Prison officials assigned Berry to Schroeder’s cell. Schroeder did not consider Berry to be compatible with him and told prison officials that he did not want Berry as a cellmate. Schroeder did not know - 534 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Berry personally before the assignment but knew of Berry as “‘a loudmouth, a punk.’” Berry was 22 years old and convicted of second degree forgery and a confined person violation. Berry was due for release approximately 2 weeks after his assignment to Schroeder’s cell. Schroeder had described Berry as a constant talker with extremely poor hygiene. During their shared confinement, Schroeder would urge Berry to be quieter and clean up after himself. Schroeder alleged that he had told prison staff that placing Berry with him would be an unworkable, bad arrange- ment. Schroeder described that prison staff who came by his cell would acknowledge the poor fit and even joke that it was surprising Schroeder had not killed Berry yet. By April 13, 2017, Schroeder decided to himself that “‘[s]omething was gonna happen’” if Berry was not moved. On April 15, 2017, Berry was watching “UFC” on televi- sion in the cell and, as Schroeder explained, Berry “‘would not shut up.’” Schroeder instructed Berry to move his chair to face the television with his back to Schroeder. Schroeder proceeded to put Berry in a chokehold and locked his hands. He continued to choke Berry for about 5 minutes until his arms got tired and then took a nearby towel, wrapped it around Berry’s neck, and continued to choke him for about 5 more minutes. At that point, Schroeder let up on the towel, believ- ing Berry was dead. Schroeder claimed he then tried to push the call button in his cell to alert staff to Berry’s condition. Around 30 minutes later, Schroeder alerted a passing guard that Berry was on the floor by asking, “‘How do you deal with a dead body in a cell?’” The guard believed Schroeder was joking until Schroeder picked up and dropped Berry’s leg. Schroeder has stated that he summoned the guard not for Berry’s benefit, but because he wanted Berry’s body removed from the cell. Berry was transported to a medical facility. On April 19, 2017, Berry died, having been declared brain dead. A search of the cell revealed a torn “kite,” a form inmates use to com- municate with prison staff, dated April 13, 2017, and located in - 535 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 the trash. The discarded kite stated that prison staff had to get Berry out of the cell before he got hurt. Procedural Background Pursuant to these events, Schroeder was charged in April 2017 with first degree murder and use of a weapon to commit a felony. Within an information filed in June, the State submit- ted a notice of aggravation alleging Schroeder had been con- victed of another murder, been convicted of a crime involving the use or threat of violence to the person, or had a substantial prior history of serious assaultive or terrorizing criminal activ ity. 1 Schroeder was appointed counsel and entered a plea of not guilty. A hearing was held following Schroeder’s subsequent request to dismiss counsel and represent himself. The court granted Schroeder’s motion and discharged his counsel but also appointed that same counsel to act in a standby role. Representing himself, Schroeder withdrew a pending motion to quash and requested leave to withdraw his prior plea of not guilty. The court granted Schroeder leave to withdraw his prior plea and rearraigned him. Thereafter, Schroeder pled guilty to both counts and the court found him guilty of those charges beyond a reasonable doubt. Presentence Investigation Report The court ordered a presentence investigation report. Schroeder declined to answer questions or participate in its preparation. However, the current report did attach the 2007 presentence investigation report from Schroeder’s earlier con- victions, which supplies more background information. According to the report, Schroeder was born in June 1977. Schroeder’s biological father abandoned his family when Schroeder was an infant. Schroeder’s mother and stepfather raised him in his early years. Schroeder described his stepfather as an alcoholic. Schroeder’s mother and stepfather separated 1 See Neb. Rev. Stat. § 29-2523(1)(a) (Cum. Supp. 2018). - 536 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 when Schroeder was 9 years old, and Schroeder moved with his mother to Kearney, Nebraska. Schroeder has not had con- tact with his stepfather since he was 12 years old. Schroeder has two older brothers but, at the time of the 2007 report, was not close to either of them. While Schroeder’s biological father did take him in for a brief period of time when he was 12 years old, Schroeder was removed and sent to a juvenile facility because his father caught him smoking marijuana. Schroeder denied being abused or neglected and described his childhood as “‘typical.’” Schroeder has a history of “placement in foster care and group home situations including a number of run- aways.” At one point as a teenager, Schroeder was placed with his grandparents for a period of time. Schroeder was married in 1998 and has one child from that marriage, but the couple has since divorced. At the time of the 2007 report, Schroeder described that the child was adopted by his ex-wife’s present husband and that Schroeder has no contact with the child. Schroeder remarried in 2003, and his wife had three children from prior relationships. However, Schroeder said in the 2007 report that while the couple was then together, he expected the situation to change under the circumstances. The presentence investigation report provides that Schroeder has an eighth grade education. Before he was incarcerated in 2007, he had been employed in various farmwork and con- struction jobs. Schroeder reported that he first used alcohol when he was 13 years old and that he experimented with marijuana and cocaine when he was 15 years old. Schroeder also admitted he had used methamphetamine on a daily basis for approximately 3 to 4 months, with the last use in 2003. While Schroeder denied receiving treatment, previous prison records indicated he was placed in substance abuse programming in 1991. Schroeder asserted that from April 2005 until his 2006 arrest, he was “‘hooked on opiates’” and was taking between 500 and 800 pills per month, some of which were prescribed and some of which were not. - 537 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 The report explained that in 1985, Schroeder was first charged with criminal mischief in juvenile court when he was 12 years old. Between 1987 and 1992, Schroeder was also charged in juvenile court with aiding and abetting, escape, theft, minor in possession of alcohol, and theft by exercis- ing control. He was ordered to serve probation as well as being placed in the Youth Rehabilitation and Treatment Center in Kearney. Since reaching the age of majority, in addition to his 2007 convictions, Schroeder has been convicted of bank robbery, forgery, escape, theft, assault, driving under suspension, con- tributing to the delinquency of a child, driving under the influence, and issuing bad checks. He has been sentenced to multiple terms of incarceration and terms of supervision. He has had two of his terms of probation revoked and completed others unsatisfactorily. Sentencing Proceedings A scheduling hearing was held in August 2017. Schroeder waived his right to a jury for a determination of the aggrava- tion allegation. The court accepted this waiver after making inquiry and finding, beyond a reasonable doubt, that Schroeder was competent and that his decision was made freely, volun- tarily, knowingly, and intelligently. Thereafter, a three-judge panel was convened for a sentencing hearing on Schroeder’s first degree murder conviction. On the aggravation allegation, the State presented evidence of Schroeder’s 2007 conviction for Albers’ murder. A ser- geant with the Nebraska State Patrol testified that he was the lead investigator for that case. His testimony and a video of his interview with Schroeder described that Albers was a 75-year-old farmer who had previously employed Schroeder. Believing Albers had several thousand dollars in cash at his residence, Schroeder had driven to Albers’ house, rung the doorbell, entered the home, and awakened Albers. Schroeder demanded money, threatened Albers, and hit him in the head with a nightstick. Albers recognized Schroeder during this - 538 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 exchange and called him by name. Schroeder forced Albers to open a lockbox in which Schroeder believed the cash was kept, after which Schroeder took Albers outside to an adjacent shop. At the shop, Albers turned toward Schroeder, attempting to defend himself. Schroeder struck Albers with the nightstick four or five times. With Albers on the floor, Schroeder dragged him out of the shop, tied him up with battery cables, and placed him in the back of Albers’ pickup. Schroeder then drove Albers, who was still alive, to an abandoned well on the prop- erty and dumped him into it. Schroeder explained to the ser- geant that he had made the decision to kill Albers a few days before the robbery. The doctor who performed the autopsy on Albers testified that the cause of Albers’ death was blunt force trauma to his head. Schroeder declined to cross-examine the State’s witnesses, present rebuttal evidence, or argue against the State’s claim on the aggravation allegation. As to mitigating factors, Schroeder again declined to pre sent any evidence or argument. However, the State requested, and the court granted, permission to present evidence to negate possible statutory mitigating circumstances. Here, the State presented evidence related to Berry’s murder. Investigator Stacie Lundgren of the Nebraska State Patrol testified to her interview with Schroeder where he described how and why he killed Berry. This interview was also described in the pre- sentence investigation report. The doctor who performed the autopsy of Berry opined that the cause of death was compres- sional asphyxia, a form of strangulation where the structures of the neck are compressed. Cpl. Steve Wilder explained that he was the correctional officer whom Schroeder flagged down to remove Berry after Schroeder had choked him. Cpl. Joseph Eppens testified he had moved Schroeder from his cell follow- ing the incident. Eppens explained that Schroeder told him he had previously informed correctional staff he did not want a cellmate and that he joked, “[T]his is what happens when we watch UFC.” Finally, a TSCI employee testified that he had notarized a writing in which Schroeder stated: - 539 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 My name is Patrick Schroeder. I’m 40 years old and I killed Terry Berry on April 15[,] 2017[.] I killed Berry because I wanted to, I knew I was going to kill him the moment staff put him in my cell on April 10[,] 2017. . . . I’m writing this statement to inform the court that if given another life term I will kill again and we will be right back in court doing this all over again. The court allowed the parties to make arguments. Schroeder declined. On the aggravation allegation, the State noted that it provided a certified copy of Schroeder’s previous murder conviction and testimony concerning the events leading to that conviction. As to mitigating circumstances, the State stated, in part: [T]he State has offered evidence considering the statutory mitigating circumstances, and the purpose of the evidence was to affirmatively show that there were no statutory mitigators that exist in this case. The circumstances to be considered for mitigation include whether or not the defendant acted under unusual pressure or influence. I want to emphasize the word “unusual.” His justification[s] for his actions are more of a nuisance than they are unusual pressure. It was displeasure or disagreement with a roommate and how the roommate either talked too much or his hygiene wasn’t appropriate for . . . Schroeder’s standards, and I don’t think that constitutes unusual pressure or influence. He’s not under the . . . dominion of another. . . . Schroeder acted by himself, and I would say he probably was the boss in the cell. There is no undue influence of extreme mental or emo- tional disturbance. . . . Schroeder was clear thinking, and by the evidence that’s been presented, his thought process started almost immediately upon . . . Berry becoming his cellmate. And in his written statement, that is really clear. And even in his interview with the investigator, he - 540 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 started thinking about this several days before it actu- ally happened. So he wasn’t under any influence of extreme mental or emotional disturbance. This was a thought process delib- erate and pretty cold blooded. .... The evidence shows that he was the sole person com- mitting this crime. There is no accomplice. And his par- ticipation is the . . . death-causing participation. The State would argue that . . . Berry’s habits as described by [Schroeder do] not make him a participant [in the incident]. .... [Schroeder] was a prisoner at the institution. No evi- dence of impairment. The only evidence is that he’s clear- headed, he’s thinking, and he planned. Order of Sentence In the panel’s order of sentence, the panel found the State proved the aggravation allegation beyond a reasonable doubt, citing Schroeder’s previous conviction and the testimony describing the events leading to that conviction. The panel also addressed possible statutory mitigating cir- cumstances, noting, “The State was allowed to present evi- dence that is probative of the non-existence of statutory or non- statutory mitigating circumstances, and did so[, and Schroeder] was allowed to present evidence that is probative of the exis- tence of a statutory or non-statutory mitigating circumstance[, but] chose not to . . . .” After analyzing each of the mitigating grounds defined by § 29-2523(2) and giving Schroeder the benefit of all inferences, the panel did not find there were any statutory mitigating circumstances. The panel addressed various nonstatutory mitigating factors. The panel found two of these factors existed and weighed in Schroeder’s favor, including that Schroeder’s guilty plea spared Berry’s family the trauma of a trial and the State the expense of - 541 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 a trial and that Schroeder’s childhood and family were dysfunc- tional. While finding three other factors did not exist, the panel noted the following: Schroeder is not well educated, but there is no evidence of a borderline intellect or diminished cogni- tive ability and he clearly knows right from wrong; Schroeder takes medication for depression, but there is nothing to suggest that this depression contributed to his actions and there is no evidence that his psychiatric or psychological history rises to the level of a mitigating circumstance; and the record does not suggest Schroeder has generally been a problem to officials during his confinement, but this prior conduct does not rise to the level of a mitigating factor. The panel acknowledged that Schroeder apparently “expressly welcomes a death sentence” but explained this was not considered and that “[i]t is the law, and not [Schroeder’s] wishes, that compels this Panel’s ulti- mate conclusion.” The panel concluded that the two nonstatutory mitigating circumstances were given little weight because these two fac- tors did not approach or exceed the weight given to the aggra- vating circumstance. The panel then conducted a proportional- ity review and found that a sentence of death is not excessive or disproportionate to the penalty imposed in similar cases. Based upon all of the above, the panel sentenced Schroeder to death. ASSIGNMENTS OF ERROR Schroeder assigns, restated, that the sentencing court erred in (1) allowing the State to introduce evidence to rebut unpre- sented mitigating evidence, (2) failing to consider and prop- erly weigh mitigating evidence from the presentence inves- tigation report, (3) failing to request DCS documentation of Schroeder’s time in custody for mitigation purposes, (4) sen- tencing Schroeder to death with insufficient safeguards to prevent arbitrary results, and (5) sentencing Schroeder to death after balancing the aggravating evidence and mitigating evi- dence and conducting the proportionality review. - 542 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 STANDARD OF REVIEW [1] In a capital sentencing proceeding, this court conducts an independent review of the record to determine if the evidence is sufficient to support imposition of the death penalty. 2 [2-4] When reviewing the sufficiency of the evidence to sustain the trier of fact’s finding of an aggravating circum- stance, the relevant question for this court is whether, after viewing the evidence in the light most favorable to the State, any rational trier of fact could have found the essential ele- ments of the aggravating circumstance beyond a reasonable doubt. 3 The sentencing panel’s determination of the existence or nonexistence of a mitigating circumstance is subject to de novo review by this court. 4 In reviewing a sentence of death, the Nebraska Supreme Court conducts a de novo review of the record to determine whether the aggravating and mitigating circumstances support the imposition of the death penalty. 5 [5] In proceedings where the Nebraska Evidence Rules apply, the admissibility of evidence is controlled by the Nebraska Evidence Rules; judicial discretion is involved only when the rules make discretion a factor in determining admissibility. 6 [6] The constitutionality of a statute presents a question of law, which an appellate court independently reviews. 7 ANALYSIS Rebuttal of Mitigating Circumstances [7] Under Nebraska law, the death penalty is imposed for a conviction of murder in the first degree only in those 2 State v. Jenkins, 303 Neb. 676, 931 N.W.2d 851 (2019). 3 State v. Torres, 283 Neb. 142, 812 N.W.2d 213 (2012). 4 Jenkins, supra note 2. 5 Id. 6 Torres, supra note 3. 7 Jenkins, supra note 2. - 543 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 instances when the aggravating circumstances existing in connection with the crime outweigh the mitigating circum stances. 8 When, as here, a defendant waives the right to a jury determination of alleged aggravating circumstances, the process for a sentencing panel to consider, find, and weigh the applicable aggravating and mitigating circumstances is set out by Neb. Rev. Stat. § 29-2521(2) (Cum. Supp. 2018). Section 29-2521(2) states: In the sentencing determination proceeding before a panel of judges when the right to a jury determination of the alleged aggravating circumstances has been waived, the panel shall . . . hold a hearing. At such hearing, evidence may be presented as to any matter that the presiding judge deems relevant to sentence and shall include matters relating to the aggravating circumstances alleged in the information, to any of the mitigating circumstances set forth in section 29-2523, and to sentence excessiveness or disproportionality. The Nebraska Evidence Rules shall apply to evidence relating to aggravating circumstances. Each aggravating circumstance shall be proved beyond a reasonable doubt. Any evidence at the sentencing deter- mination proceeding which the presiding judge deems to have probative value may be received. The state and the defendant or his or her counsel shall be permitted to pre sent argument for or against sentence of death. The mitigating circumstances required to be considered under § 29-2521 and set forth in § 29-2523(2) include: (a) The offender has no significant history of prior criminal activity; (b) The offender acted under unusual pressures or influences or under the domination of another person; (c) The crime was committed while the offender was under the influence of extreme mental or emotional disturbance; (d) The age of the defendant at the time of the crime; 8 Neb. Rev. Stat. § 29-2519 (Cum. Supp. 2018). - 544 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 (e) The offender was an accomplice in the crime com- mitted by another person and his or her participation was relatively minor; (f) The victim was a participant in the defendant’s con- duct or consented to the act; or (g) At the time of the crime, the capacity of the defend ant to appreciate the wrongfulness of his or her conduct or to conform his or her conduct to the requirements of law was impaired as a result of mental illness, mental defect, or intoxication. [8] Schroeder initially claims that the sentencing panel erred by allowing the State to present evidence to rebut the statutory mitigating circumstances even though Schroeder did not offer any evidence on mitigation. In making this claim, Schroeder cites the proposition that rebuttal evidence is confined to new matters first introduced by the opposing party and limited to that which explains, disproves, or counteracts the opposing party’s evidence. 9 [9-11] Contrary to Schroeder’s assertions under this assign- ment, a sentencing panel has the discretion to hear evidence to address potential mitigating circumstances regardless of whether the defendant presents evidence on that issue. As quoted above, § 29-2521(2) allows a sentencing panel to receive “[a]ny evidence” at the sentencing proceeding which the presiding judge deems to have probative value relevant to the sentence including to any of the statutory mitigating circumstances. 10 A sentencing court has broad discretion as to the source and type of evidence and information which may be used in determining the kind and extent of the punishment to be imposed, and evidence may be presented as to any mat- ter that the court deems relevant to the sentence. 11 Although § 29-2521(2) dictates that the Nebraska Rules of Evidence 9 See State v. Sandoval, 280 Neb. 309, 788 N.W.2d 172 (2010). See, also, State v. Molina, 271 Neb. 488, 713 N.W.2d 412 (2006). 10 See Jenkins, supra note 2. 11 Id. - 545 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 apply when determining the aggravating circumstances alleged by the information, it contains no such requirement for con- sideration of mitigating circumstances. Because a sentencing panel is required to consider and weigh any mitigating cir- cumstances in imposing a sentence of death, the introduction of evidence of the existence or nonexistence of these potential mitigators has probative value to the sentence. Thus, the panel could permit the State to present evidence to contradict poten- tial mitigators even though Schroder failed to present affirma- tive evidence. Schroeder argues the State’s evidence purported to rebut the statutory mitigating circumstances was actually offered to support uncharged aggravating circumstances. Specifically, Schroeder alleges the State’s evidence was offered to show the nonstatutory aggravating circumstance of future dangerous- ness and “both prongs” 12 of § 29-2523(1)(d), which provides a statutory aggravator when a murder was especially heinous, atrocious, or cruel or manifested exceptional depravity by ordi- nary standards of morality and intelligence. During the portion of the hearing devoted to mitigating circumstances, the State’s evidence related to Berry’s murder. Lundgren testified about her interview with Schroeder where he described how and why he killed Berry. This same interview was also described in the presentence investigation report. The doctor who performed the autopsy on Berry explained that Berry was killed by strangulation. Wilder explained the events surrounding his discovery of Berry’s murder and Schroeder’s reaction. Eppens explained that Schroeder told him he had pre- viously informed correctional staff he did not want a cellmate and joked, while Eppens was moving him following the dis- covery of Berry’s unconscious body, “[T]his is what happens when we watch UFC.” Additionally, through the testimony of a TSCI employee, the State introduced a notarized writing in which Schroeder confessed, explained his reasons for killing Berry, and stated he would kill again if given another life term. 12 Brief for appellant at 28. - 546 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 This evidence surrounding Berry’s murder was relevant to the statutory mitigating circumstances the panel was required to consider. The mitigating circumstances listed under § 29-2523(2) involve, in part, circumstances surrounding the underlying crime. These circumstances include pressure or influences which may have weighed on the defendant, poten- tial influence on the defendant of extreme mental or emotional disturbance at the time of the offense, potential victim partici- pation or consent to the act, the defendant’s capacity to appre- ciate the wrongfulness of the act at the time of the offense, and any mental illness, defect, or intoxication which may have contributed to the offense. 13 The State’s evidence informed the panel’s analysis and was relevant to consideration of these mitigators; and, as explained above, the panel had discretion to hear this evidence. Schroeder fails to allege that the introduction of this evi- dence influenced the panel’s finding of the existence of the charged aggravator—namely that Schroeder had been convicted of another murder, been convicted of a crime involving the use or threat of violence to the person, or had a substantial prior history of serious assaultive or terrorizing criminal activity. 14 It is undisputed that Schroeder had previously been convicted of the murder of Albers and was incarcerated for that crime at the time of Berry’s killing. Schroeder does not challenge the pre- sentation of evidence related to this aggravating circumstance for failing to comply with the Nebraska Evidence Rules. 15 The panel had discretion to hear any evidence relevant to sentencing, the panel was required to consider mitigating cir- cumstances even though Schroeder failed to allege or present evidence in support of them, and the evidence presented by the State was relevant to the panel’s review of these mitigators. As such, the panel did not err in allowing the State to present evidence on the existence of mitigating circumstances. 13 § 29-2523(2). 14 § 29-2523(1)(a). 15 See § 29-2521(2). - 547 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Weighing of Mitigating Circumstances Schroeder next assigns the panel failed to properly con- sider mitigating information contained within the presentence investigation report and available from the State’s evidence. Schroeder claims proper consideration of this evidence would have led the panel to find additional statutory and nonstatutory mitigating circumstances. [12] As explained, § 29-2521 requires a sentencing panel to consider mitigating circumstances. Neb. Rev. Stat. § 29-2522 (Cum. Supp. 2018) describes the weighing of the aggravat- ing and mitigating circumstances in imposing a sentence of death and requires that the determination be in writing and refer to the aggravating and mitigating circumstances weighed. Accordingly, the sentencing order must specify the factors it relied upon in reaching its decision and focus on the individual circumstances of each homicide and each defendant. 16 We first address Schroeder’s claims that the panel should have applied additional nonstatutory mitigating evidence, including (1) that the State had ulterior motives for pursu- ing the death penalty to avoid and detract from potential civil liability for failing to protect Berry, (2) that Schroeder was institutionalized from consistent incarceration, and (3) that Schroeder had used money elicited from his murder of Albers to provide clothes and food for his family. [13,14] The U.S. Constitution does not require the sen- tencing judge or judges to make specific written findings with regard to nonstatutory mitigating factors. 17 In State v. Jenkins, 18 we addressed an assignment of a sentencing panel failing to address nonstatutory mitigators and explained that 16 State v. Dunster, 262 Neb. 329, 631 N.W.2d 879 (2001). 17 State v. Bjorklund, 258 Neb. 432, 604 N.W.2d 169 (2000), abrogated on other grounds, State v. Mata, 275 Neb. 1, 745 N.W.2d 229 (2008). Accord State v. Reeves, 234 Neb. 711, 453 N.W.2d 359, cert. granted and judgment vacated 498 U.S. 964, 111 S. Ct. 425, 112 L. Ed. 2d 409 (1990). 18 Jenkins, supra note 2. - 548 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 we will not fault the panel for failing to discuss a nonstatu- tory mitigating circumstance that it was not specifically asked to consider. Additionally, the underlying facts Schroeder uses as sup- port for these nonstatutory mitigators are included in the presentence investigation report which the panel explained it considered in determining his sentence. The panel also specifi- cally acknowledged many of these facts in its sentencing order. On the allegation that the State had ulterior motives due to potential liability, the panel explained the cell Schroeder and Berry shared was intended for a single inmate, Berry was set for release 2 weeks after moving in with Schroeder, Schroeder was serving a life sentence for Albers’ murder, and Schroeder warned that issues might arise if he were incompatible with whoever was assigned as his roommate. As to institutional- ization, the panel described Schroeder’s current incarceration for Albers’ murder and noted his dysfunctional childhood and that “[h]e was involved in the juvenile court at a young age.” Finally, on the use of money he attained from Albers’ murder, the panel described that he took several thousand dollars from Albers after leaving him for dead and “drove around the area, paying off bills and making purchases.” It is clear the panel considered and weighed these facts even though it did not state a finding that they led to the specific nonstatutory mitigating circumstances Schroeder presently claims. Because the panel was not required to make specific writ- ten findings on the application of nonstatutory mitigating fac- tors, and taking into account the panel’s consideration of the facts Schroeder alleges support these factors, Schroeder’s claims involving the nonstatutory mitigators do not demon- strate reversible error. We next turn to Schroeder’s claim that the panel failed in its analysis of statutory mitigating circumstances. Of the statutory mitigating factors, Schroeder claims the panel should have determined the following applied: Schroeder acted under unusual pressures or influences or under the domination - 549 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 of another person, 19 Berry’s murder was committed while Schroeder was under the influence of extreme mental or emo- tional disturbance, 20 and Berry was a participant in Schroeder’s conduct or consented to the act. 21 For Schroeder’s claims that he was under unusual pressures or influences and extreme mental or emotional disturbance, he first alleges the panel failed to acknowledge his efforts to get Berry removed as a cellmate and his incompatibility with Berry. He supports this allegation by referencing the panel’s determination that Schroeder had calculated Berry’s murder for several days and chose no method of obviating his annoyance. Schroeder further quoted the panel’s explanation that finding the kite in the trash “suggests a premeditative and depraved mentality” in that Schroeder “did not ask that [Berry] be moved” and in that Schroeder “did not tell the guards that . . . Berry was in mortal danger if he were not moved.” Schroeder contends this determination and the findings supporting it are contradicted by the evidence. Specifically, Schroeder points to the summaries of his interviews with Lundgren, included in the presentence investigation report, wherein he told Lundgren that he had “‘told all of the staff’” that he did not want Berry as a cellmate, that he told staff members he was not compatible with Berry when they assigned him to Schroeder’s cell, that a TSCI caseworker had tried to get the assignment switched prior to Berry’s moving in, and that corrections officers would laugh at the arrangement and joke they were surprised Schroeder had not killed Berry yet. Schroeder also points to Lundgren’s case synopsis noting that the TSCI caseworker Schroeder described in his interview explained that she did have concerns prior to Berry’s moving into the cell based on a “‘gut feeling’” that the arrangement would be “‘a bad idea’” but that she was unsuccessful in get- ting it switched. 19 See § 29-2523(2)(b). 20 See § 29-2523(2)(c). 21 See § 29-2523(2)(f). - 550 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 However, the panel’s statements that Schroeder did not ask for Berry to be moved and did not warn that Berry was in mortal danger are not contradicted by Lundgren’s summaries. Lundgren’s summary of Schroeder’s interview only described Schroeder’s assertions that he told staff prior to Berry’s mov- ing in that he did not want Berry as a cellmate and was incompatible with him. Lundgren’s summary did not describe that Schroeder asserted he continued these complaints after the move was made and did not allege he made any actual requests for Berry to be moved. Moreover, there is nothing in Schroeder’s description of his interactions with TSCI officials where he indicated Berry was in mortal danger if they con- tinued to share the cell. While Schroeder alleged corrections officers would joke they were surprised he had not killed Berry yet, such statements do not imply that Schroeder requested that Berry be moved or that they believed or had reason to believe that Berry was actually in mortal danger. Similarly, while the TSCI caseworker attempted to get Berry’s assignment to Schroeder’s cell switched prior to his move, there is nothing indicating that she was doing so at Schroeder’s request or that her “‘gut feeling’” was based upon a belief such an arrange- ment might lead to Berry’s death. The panel reviewed the presentence investigation report and Lundgren’s summaries prior to determining whether there were mitigating circumstances. The panel’s findings that Schroeder did not request Berry’s removal from his cell and did not warn officials of potential danger to Berry is uncontradicted by the report. Instead, the report shows that Schroeder acted with premeditation and depravity in that Schroeder explained he had made up his mind to kill Berry days before he did so and in that he made no real attempts to avoid this result, even having made the decision to discard the kite which could have helped avoid the killing. Schroeder’s explanations in his interview that he killed Berry because he was unclean and annoying do not rise to the level of accounts of unusual pressure or influence or extreme - 551 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 mental or emotional disturbance. Nothing in the record indi- cates that Schroeder continually sought Berry’s removal from the cell or that any such requests were unheeded by TSCI staff. Schroeder references the effect incarceration can have on inmates in support of his unusual pressures or influences and extreme mental or emotional disturbance claims. Schroeder cites to several articles, while acknowledging he did not pro- vide them to the court because he did not present any evidence, which discuss the effects of institutionalization and incarcera- tion in solitary confinement on an inmate’s mental health as well as articles and reports of security and staffing issues at TSCI and DCS. [15] We have previously addressed the effect incarceration and, specifically, isolated confinement can have on individu- als. In Jenkins, we analyzed the application of a nonstatutory mitigating factor of solitary confinement and quoted the under- standing that “‘[y]ears on end of near-total isolation exact a terrible price.’” 22 However, we also noted that prison officials must have discretion to decide that in some instances, tem- porary solitary confinement is a useful or necessary means to impose discipline and to protect prison employees and other inmates. 23 Because of the defendant’s own extensive and vio- lent actions in that case, the prison officials needed to have some recourse to deal with such an inmate, and we found that it was reasonable in not rewarding such behavior by consider- ing the resulting confinement as a mitigating factor. 24 For the same reasons, the mere identification of a history of incar- ceration, without more, is insufficient to allege unusual pres- sures or influences or establish extreme mental or emotional 22 Jenkins, supra note 2, 303 Neb. at 727, 931 N.W.2d at 888, quoting Davis v. Ayala, 576 U.S. 257, 135 S. Ct. 2187, 192 L. Ed. 2d 323 (2015) (Kennedy, J., concurring). 23 Jenkins, supra note 2. 24 Id. - 552 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 disturbance. Schroeder’s incarceration was due to his own actions, including, most recently, his murder of Albers. Contrary to Schroeder’s assertions and as discussed in our analysis of Schroeder’s claims of the nonstatutory mitigat- ing factors of institutionalization and the State’s alleged ulte- rior motive to avoid possible litigation, the underlying facts of Schroeder’s claims were acknowledged and weighed by the court. In its order, the panel acknowledged that the cell Schroeder and Berry shared was intended for a single inmate, Berry was set for release 2 weeks after moving in with Schroeder, Schroeder was serving a life sentence for Albers’ murder, and Schroeder had a history of incarceration includ- ing his history within the juvenile court system and his current sentence for Albers’ murder. The panel reasonably found that on their own, these facts and the reality of the effect incarcera- tion can have on individuals were insufficient to establish that Schroeder acted under unusual pressures or influences or was under extreme mental or emotional disturbance. Under our de novo review, we reach the same conclusion. Schroeder’s remaining claim, that the panel erred in fail- ing to find Berry was a participant in Schroeder’s conduct or consented to the act, is without merit. Schroeder supports this proposition by noting, “Berry complied with Schroeder’s request that he turn the chair around and face away from Schroeder after Schroeder expressed extreme annoyance with his behavior.” 25 However, Berry’s facing away from Schroeder does not indicate participation or consent to his murder. Schroeder expressed frustration and requested Berry to turn away from him. How Berry would have understood this as Schroeder’s asking for aid in his strangulation and not as a method to avoid conflict is unclear. Schroeder offers no further argument to support this mitigating circumstance, and we agree with the panel’s finding that there was no evidence establishing this mitigating factor. 25 Brief for appellant at 40. - 553 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Duty to Request DCS Chapter 83 Custody Reports Schroeder claims the panel had a duty to request additional records of Schroeder’s incarceration from DCS. These records are required to be kept by DCS under Neb. Rev. Stat. § 83-178 (Reissue 2014) and include records concerning Schroeder’s background, conduct, associations, and family relationships; records regarding Schroeder’s “Central Monitoring,” 26 which may be relevant to the propriety of his placement with Berry; and any medical or mental health records. [16-18] When an offender has been convicted of first degree murder and waives the right to a jury determination of an alleged aggravating circumstance, the court must order a pre- sentence investigation of the offender and the panel must consider a written report of such investigation in its sentenc- ing determination. 27 The presentence investigation and report shall include, when available, any submitted victim statements and an analysis of the circumstances attending the commis- sion of the crime and the offender’s history of delinquency or criminality, physical and mental condition, family situation and background, economic status, education, occupation, and per- sonal habits. 28 The investigation and report may also include any other matters the probation officer deems relevant or the court directs to be included. 29 In this case, the court ordered a presentence investigation and report, a report was prepared, and the panel considered it during its sentence determination. Schroeder does not allege this report failed to analyze and present any of the areas required by § 29-2261(3). Instead, Schroeder claims the court had a duty to request the presentence investigation report to include specific incarceration records. Schroeder relies on State 26 Id. at 42. 27 § 29-2521(2) and Neb. Rev. Stat. § 29-2261(1) (Reissue 2016). 28 § 29-2261(3). 29 Id. - 554 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 v. Dunster 30 for this claim that the panel should have requested additional documents. In that case, the defendant was sentenced to death after pleading guilty to first degree murder. 31 Prior to sentencing, the district court instructed the probation officer conducting the presentence investigation to include information in the possession of DCS as part of the report. 32 The court explained that access to this information was restricted by law and that it would not be released to the public except upon written order. 33 On appeal, the defendant assigned the district court’s consider- ation of this information, which included confidential mental health information provided by DCS, as reversible error. 34 However, we found the district court had given adequate notice to the defendant of its intent to consider such evidence to sat- isfy his due process rights. 35 Additionally, when the bill of exceptions was completed in that case, the DCS records were not included. As a result, we determined that in our de novo review, we could request and consider the additional documents just as the district court had requested and considered them. 36 In reaching this determina- tion, we noted that our request of these documents did not indicate in advance how we would rule on appeal but merely followed our statutory requirements for review and honored the intent of the Legislature to provide “‘the most scrupulous stan- dards of fairness and uniformity’” in reviewing the imposition of a sentence of death. 37 30 Dunster, supra note 16. 31 Id. 32 Id. 33 Id. 34 Id. 35 Id. 36 Id. 37 Id. at 372, 631 N.W.2d at 913. - 555 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Dunster neither explicitly nor implicitly required a lower court to receive and review documents of a defendant’s prior incarceration. Instead, it only evaluated the process of a district court seeking to consider specific documents during a sentenc- ing proceeding and our ability to review the same information upon which the lower court relied. 38 Accordingly, Dunster did not add further requirements for the preparation of a presen- tence investigation report under § 29-2261(3). Because the district court complied with its duties under § 29-2261(1) in requesting the presentence investigation and report, because the presentence report included the requisite analysis of the § 29-2261(3) elements, and because there is no requirement that a sentencing court must request access to spe- cific § 83-178 DCS records, the district court did not err by not requesting that the DCS records be included in the presentence investigation report. Sufficiency of Safeguards to Prevent Arbitrary Results Schroeder claims Nebraska’s death penalty is unconstitu- tional as applied to him under the 8th and 14th Amendments to the U.S. Constitution and article I, §§ 3, 9, and 15, of the Nebraska Constitution. Schroeder argues that insufficient safeguards exist to prevent arbitrary results when, as here, a defendant waives his right to counsel and refuses to introduce mitigating or proportionality evidence or argument. [19,20] An accused has a state and federal constitutional right to be represented by an attorney in all critical stages of a criminal prosecution which can lead to a sentence of confine- ment. 39 However, a defendant may waive this right to counsel 38 Dunster, supra note 16. 39 See, U.S. Const. amends. VI and XIV; Neb. Const. art. I, § 11; Scott v. Illinois, 440 U.S. 367, 99 S. Ct. 1158, 59 L. Ed. 2d 383 (1979); Argersinger v. Hamlin, 407 U.S. 25, 92 S. Ct. 2006, 32 L. Ed. 2d 530 (1972); Jenkins, supra note 2; State v. Wilson, 252 Neb. 637, 564 N.W.2d 241 (1997); State v. Dean, 246 Neb. 869, 523 N.W.2d 681 (1994), overruled on other grounds, State v. Burlison, 255 Neb. 190, 583 N.W.2d 31 (1998). - 556 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 so long as the waiver is made knowingly, voluntarily, and intelligently. 40 [21-23] The same constitutional provisions that provide a defendant the right to counsel also guarantee the right of the accused to represent himself or herself. 41 This right to self-representation plainly encompasses certain specific rights of the defendant to have his voice heard, including that the pro se defendant must be allowed to control the organiza- tion and content of his own defense. 42 We have previously explained that such control may include a waiver of the right to present mitigating evidence during sentencing in a death penalty case. 43 Schroeder does not challenge the validity of his waiver of counsel for the penalty phase or his election not to present miti- gating evidence or proportionality argument. Instead, Schroeder argues that the exercise of the right to self-representation and, derived therefrom, the right to waive the presentation of evidence and argument conflicted with the constitutional restrictions against cruel and unusual punishment. Specifically, Schroeder addresses the effect such waivers have on the pro- portionality review by the sentencing panel. To establish the cruelty and unusualness of such punishment, Schroeder notes first that the proportionality requirement under Neb. Rev. Stat. §§ 29-2521.01 to 29-2521.04 (Cum. Supp. 2018) only requires the sentencing panel to review those cases in which the death penalty was imposed. Schroeder also asserts propor- tionality review is further limited depending on whether jury determinations in the reviewed cases were waived because, 40 Jenkins, supra note 2; State v. Hessler, 274 Neb. 478, 741 N.W.2d 406 (2007). 41 Faretta v. California, 422 U.S. 806, 95 S. Ct. 2525, 45 L. Ed. 2d 562 (1975); Jenkins, supra note 2; Wilson, supra note 39; State v. Green, 238 Neb. 328, 470 N.W.2d 736 (1991). 42 McKaskle v. Wiggins, 465 U.S. 168, 104 S. Ct. 944, 79 L. Ed. 2d 122 (1984); Dunster, supra note 16; Wilson, supra note 39. 43 Dunster, supra note 16. - 557 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 when they are waived, a sentencing panel is required to issue written findings of fact as to any proven aggravating circum- stances, but when there is no waiver, the jury does not issue such analysis. Schroeer argues that when a defendant waives counsel and refuses to meaningfully participate, the record on which the panel makes its proportionality determination is lim- ited to what it requests and the State presents, which has the potential to be limited and biased in favor of the imposition of a death sentence. [24,25] Because a death sentence is different from any other criminal penalty 44 and no system based on human judg- ment is infallible, we have taken, and should continue to take, the extra step to ensure fairness and accuracy with the imposition of the death penalty. 45 Taking this into account, the Legislature has enacted a statutory scheme to provide additional safeguards, 46 and in interpreting these statutes, we have followed the fundamental principle of statutory construc- tion that penal statutes are to be strictly construed in favor of the defendant. 47 [26] Part of this statutory scheme, as explained, requires a court to order a presentence investigation report. 48 The sentenc- ing panel must consider this report in reaching its sentence. Thus, contrary to Schroeder’s argument, even if the State pre sents evidence in favor of a specific sentence and the defendant declines to present contrary evidence, the court receives and must consider independent information from the report. [27,28] In a death penalty case, the sentencing panel is required to review this report and determine whether it contra- dicts the State’s evidence of aggravating factors and whether any mitigating circumstances exist, including specifically 44 State v. Hochstein and Anderson, 262 Neb. 311, 632 N.W.2d 273 (2001). 45 Id. 46 Neb. Rev. Stat. §§ 29-2519 to 29-2546 (Cum. Supp. 2018). 47 Hochstein and Anderson, supra note 44. 48 §§ 29-2261(1) and 29-2521(2). - 558 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 delineated statutory mitigators. 49 While the State must prove the aggravating circumstances beyond a reasonable doubt, 50 there is no burden of proof with regard to mitigating circumstances. 51 Accordingly, the panel’s evaluation of the independently com- piled presentence investigation report and any evidence the defendant chooses to introduce is under the less restrictive mitigation standard and provides another safeguard to ensure fairness and accuracy in a death penalty determination. [29-32] Once the panel makes its determinations about the existence of aggravating and mitigating circumstances, the panel is then required to undertake a proportionality review. This review looks at whether the sentence of death is excessive or disproportionate to the penalty imposed in similar cases, considering both the crime and the defendant. 52 Proportionality review is not constitutionally mandated. 53 It exists in Nebraska by virtue of §§ 29-2521.01 to 29-2521.04, which direct this court to conduct a proportionality review in each appeal in which a death sentence is imposed. 54 A court’s proportionality review spans all previous cases in which a sentence of death is imposed and is not dependent on which cases are put forward by the parties. 55 Schroeder takes issue with proportionality review requiring a panel to compare only those cases in which the death penalty was imposed. 56 Instead, Schroeder argues the statutory scheme explicitly requires review of all homicide cases regardless of the resulting sentence. 49 §§ 29-2521 to 29-2523. 50 Torres, supra note 3. 51 State v. Vela, 279 Neb. 94, 777 N.W.2d 266 (2010); State v. Victor, 235 Neb. 770, 457 N.W.2d 431 (1990). 52 § 29-2522(3). 53 State v. Gales, 269 Neb. 443, 694 N.W.2d 124 (2005). 54 Id. 55 See id. 56 See State v. Palmer, 224 Neb. 282, 399 N.W.2d 706 (1986), overruled on other grounds, State v. Chambers, 233 Neb. 235, 444 N.W.2d 667 (1989). - 559 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 It is unclear how Schroeder is arguing this fits under his assignment alleging unconstitutionality in the interplay of his waiver of counsel and election not to present evidence or argument with Nebraska’s capital sentencing scheme. The introduction of further evidence or whether or not Schroeder was represented by counsel does not affect what previous cases the panel was required to consider. In any case, we decline Schroeder’s invitation to overrule our decision in State v. Palmer 57 which interpreted §§ 29-2521.01 to 29-2521.04 to only require review of previous cases in which the death pen- alty was imposed. Additionally, we are unconvinced by Schroeder’s claim that the proportionality review is unconstitutionally flawed due to having less analysis of the reviewed cases in which a jury determines the existence of the aggravating circumstance than of the reviewed cases in which a sentencing panel makes the determination. Again, it is unclear how Schroeder relates this alleged flaw to this assignment. If Schroeder is claiming that waiver of counsel and lack of argument would prohibit the panel from taking into account that previous aggravation deter- minations were decided by juries, this information would be apparent from the previous opinions and would be able to be considered by the panel independently of whether the defend ant or an advocate explained such difference to the panel. [33,34] Moreover, even when a jury determines the exis- tence of an aggravating circumstance, a sentencing panel is required to put in writing its consideration of (1) whether the determined aggravating circumstance justifies the imposition of a sentence of death, (2) whether mitigating circumstances exist, and (3) whether a sentence of death would be excessive or disproportionate to penalties imposed in similar cases. 58 This writing must specifically refer to the aggravating and mitigat- ing circumstances weighed in the determination of the panel. 59 57 Id. See, also, State v. Gales, supra note 53. 58 § 29-2522. 59 Id. - 560 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 As such, the basis of Schroeder’s argument that cases where a jury determines the existence of aggravating circumstances provide insufficient information for comparison in a propor- tionality review is without merit. [35-38] Considering all of the above, Nebraska’s capital sentencing scheme provides additional statutory steps and con- siderations to ensure fairness and accuracy, and these safe- guards exist regardless of a defendant’s strategy at the pen- alty phase. Due to this statutory scheme, a defendant cannot “choose” the death penalty. The sentencing decision rests with the court alone. 60 In order to exercise this authority, the statutory scheme requires that a sentencing panel consider not only evidence and argument presented by the parties but also an independently compiled presentence investigation report to determine whether the alleged aggravating circumstance exists, determine whether any mitigating factors are present which would weigh against the imposition of the death penalty, and conduct a proportionality review weighing the aggravating and mitigating factors and comparing the facts to previous cases where the death penalty was imposed. 61 These considerations exist and are weighed regardless of the evidence presented by the parties or their arguments. [39,40] A defendant is entitled to present a defense and is guaranteed the right to choose the objectives for that defense. 62 As previously stated, the self-represented defendant must be allowed to control the organization and content of his own defense. 63 However, Schroeder suggests that in a death pen- alty case, the substantial nature of the proceedings requires an advocate in opposition to a sentence of death irrespective of the defendant’s chosen objective. To this end, he suggests §§ 29-2519 to 29-2546 implicitly require the appointment of a 60 Dunster, supra note 16. 61 See Torres, supra note 3. 62 McCoy v. Louisiana, ___ U.S. ___, 138 S. Ct. 1500, 200 L. Ed. 2d 821 (2018); Jenkins, supra note 2. 63 Dunster, supra note 16. - 561 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 guardian ad litem to present evidence and argument as to why the death penalty should not be imposed. [41] This suggestion is similar to that addressed in Dunster. 64 The defendant therein had waived trial counsel for the penalty stage and chose not to present any mitigating evidence. On appeal, he claimed the court should have appointed “amicus counsel” to advocate against the imposition of the death pen- alty by presenting evidence and “‘argu[ing] for life,’” which is identical to the role Schroeder now envisions for an appointed guardian ad litem. 65 As noted in Dunster, when a defendant waives counsel and the presentation of mitigating evidence, the appointment of an advocate to present evidence and argue against the imposition of a sentence overrides that defendant’s constitutional right to control the organization and content of his or her own defense during sentencing. [42,43] A criminal defendant has the right to waive counsel and present his or her own defense. 66 In a death penalty case, this includes the right of the defendant to elect not to present additional evidence or argument during the penalty proceed- ings. Even if a defendant makes such waiver and election, the Legislature has enacted safeguards to ensure fairness and accu- racy in the resulting sentence. As explained above, these safe- guards apply regardless of the defense strategy an individual defendant implements. Therefore, Schroeder’s assignment that Nebraska’s capital sentencing scheme is unconstitutional due to insufficient safeguards to prevent arbitrary results when a defendant waives counsel and elects not to present evidence or argument fails. Excessiveness and Proportionality Review [44,45] In reviewing a sentence of death, we conduct a de novo review of the record to determine whether the 64 Id. 65 Id. at 361, 631 N.W.2d at 906. 66 See Dunster, supra note 16. - 562 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 aggravating and mitigating circumstances support the imposi- tion of the death penalty. 67 In so doing, we consider whether the aggravating circumstances justify imposition of a sentence of death and whether any mitigating circumstances found to exist approach or exceed the weight given to the aggravat- ing circumstances. 68 We first note Schroeder does not contest the factual basis for the § 29-2523(1)(a) aggravation allegation that Schroeder was convicted of Albers’ murder. It is undisputed that in 2006, Schroeder murdered Albers, who was at the time Schroeder’s 75-year-old previous employer. It is also undisputed that Albers was robbed and that Schroeder had made the decision to kill Albers days before the robbery. Schroeder threatened and beat Albers, tied him up, threw him in the back of a pickup, and dumped him in an abandoned well, leaving him for dead. Based upon our de novo review, we determine this murder conviction, which was proved beyond a reasonable doubt at the sentencing hearing, is sufficient as an aggravating circumstance under § 29-2523(1)(a) to justify the imposition of the death penalty. In coordination with our analysis con- cerning the panel’s mitigating circumstance findings, we also agree with the panel’s determination that the applicable statu- tory and nonstatutory circumstances apparent from the record do not approach or exceed the aggravating circumstance in this case. [46-48] In addition, we are required, upon appeal, to deter- mine the propriety of a death sentence by conducting a propor- tionality review, comparing the aggravating and mitigating cir- cumstances with those present in other cases in which a court imposed the death penalty. 69 The purpose of this review is to ensure that the sentences imposed in this case are no greater than those imposed in other cases with the same or similar 67 Torres, supra note 3. 68 Id. 69 Id. - 563 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 circumstances. 70 Our proportionality review looks only to other cases in which the death penalty has been imposed and requires us to compare the aggravating and mitigating circumstances of the case on appeal with those present in those other cases. 71 In this case, we have reviewed our relevant decisions on direct appeal from other cases in which the death penalty was imposed. 72 Like the sentencing panel, we find Dunster particularly pertinent to our review. 73 The defendant therein was convicted of murdering his cellmate by strangling him with an electrical cord. 74 The defendant had previously been convicted of the earlier murder of a woman while attempting to collect a debt from her husband, and he had confessed to a different murder of another inmate while incarcerated for the first murder. 75 At the penalty phase, the State alleged a single aggravating circumstance of § 29-2523(1)(a) and presented evidence of the two previous killings. 76 After the trial court sentenced the defendant to death, we affirmed. 77 Such factual basis is similar to that in the instant case. As did the defendant in Dunster, Schroeder murdered his cellmate by strangulation. Schroeder’s previous murder of Albers was also pursuant to a plan to take money from his victim. 70 See id. 71 Id. 72 See, e.g., Jenkins, supra note 2; Torres, supra note 3; State v. Ellis, 281 Neb. 571, 799 N.W.2d 267 (2011); Hessler, supra note 40; Dunster, supra note 16; State v. Lotter, 255 Neb. 456, 586 N.W.2d 591 (1998), modified on denial of rehearing 255 Neb. 889, 587 N.W.2d 673 (1999); State v. Williams, 253 Neb. 111, 568 N.W.2d 246 (1997); State v. Ryan, 233 Neb. 74, 444 N.W.2d 610 (1989); State v. Joubert, 224 Neb. 411, 399 N.W.2d 237 (1986); State v. Otey, 205 Neb. 90, 287 N.W.2d 36 (1979). 73 Dunster, supra note 16. 74 Id. 75 Id. 76 Id. 77 Id. - 564 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 Schroeder attempts to differentiate his case from Dunster by emphasizing that while only one aggravating circumstance was alleged in Dunster, the allegation therein concerned two previous murders. Additionally, Schroeder argues those underlying murders were committed with more serious facts, including that there was suspected sexual assault of one of the victims. First, it is not evident that the underlying murders in Dunster included any more or less serious facts surrounding their execution. Schroeder threatened, beat, and robbed Albers and threw him bound and alive into a well to die. The murders the defendant in Dunster committed involved binding, beating, killing, and possible sexual assault. In both cases, the defend ants acted with violence toward the persons. [49,50] Additionally, while there were two underlying mur- ders in Dunster, this does not mean Dunster cannot be used in a proportionality review. A proportionality review does not require that a court “color match” cases precisely. 78 It would be virtually impossible to find two murder cases which are the same in all respects. 79 Instead, the question is simply whether the cases being compared are sufficiently similar, considering both the crime and the defendant, to provide the court with a useful frame of reference for evaluating the sentence in this case. 80 As the factual connections show, Dunster is sufficiently similar for purposes of evaluating proportionality. [51-53] Along the same lines, Schroeder attempts to distin- guish his case from others cited by the sentencing panel and reviewed on appeal by noting that the majority of those cases had multiple aggravating factors. However, we have established that one aggravating circumstance may be sufficient under our statutory system for the imposition of the death penalty. 81 In 78 Ellis, supra note 72. 79 Id. 80 Id. 81 Dunster, supra note 16. - 565 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SCHROEDER Cite as 305 Neb. 527 our proportionality review, the evaluation of whether the death penalty should be imposed in a specific case is not a mere counting process of “X” number of aggravating circumstances and “Y” number of mitigating circumstances and, instead, asks whether the reviewed cases are sufficiently similar to provide a useful reference for that evaluation. 82 Thus, even though other cases may involve additional or different aggravating circumstances, they may still be sufficiently similar to provide such reference. Having reviewed our previous cases which have affirmed the imposition of a death penalty and compared the aggra- vating and mitigating circumstances present in those cases, we are persuaded that the sentence imposed in this case is not greater than those imposed in other cases with the same or similar circumstances. Accordingly, we affirm Schroeder’s death sentence. CONCLUSION In consideration of all of the above, Schroeder’s conviction and sentence for first degree murder are affirmed. Affirmed. Freudenberg, J., not participating. 82 See, Ellis, supra note 72; Dunster, supra note 16.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537477/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:08 AM CDT - 441 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 State of Nebraska, appellee, v. Jose A. Valdez, appellant. ___ N.W.2d ___ Filed April 3, 2020. No. S-19-475. 1. Judgments: Appeal and Error. When dispositive issues on appeal present questions of law, an appellate court has an obligation to reach an independent conclusion irrespective of the decision of the court below. 2. Prior Convictions: Motor Vehicles: Homicide: Sentences: Evidence. Evidence of a prior conviction must be introduced in order to enhance a sentence for motor vehicle homicide. 3. Sentences. A sentence is illegal when it is not authorized by the judg- ment of conviction or when it is greater or less than the permissible statutory penalty for the crime. 4. Prior Convictions: Evidence: Appeal and Error. Where an appel- late court determines that the evidence was insufficient to establish a qualifying prior conviction, the appellate court’s determination does not act as an acquittal or preclude a trial court from receiving additional evidence of a qualifying prior conviction. 5. Waiver: Words and Phrases. A waiver is the voluntary and intentional relinquishment of a known right, privilege, or claim, and may be dem- onstrated by or inferred from a person’s conduct. 6. Waiver: Estoppel. To establish a waiver of a legal right, there must be a clear, unequivocal, and decisive act of a party showing such a purpose, or acts amounting to an estoppel on his or her part. Appeal from the District Court for Madison County: Mark A. Johnson, Judge. Sentence vacated, and cause remanded with direction. Matthew A. Headley, Madison County Public Defender, for appellant. - 442 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 Douglas J. Peterson, Attorney General, and Nathan A. Liss for appellee. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, and Papik, JJ. Funke, J. Jose A. Valdez appeals his conviction and sentence from the district court for Madison County. Valdez pled guilty to enhanced motor vehicle homicide, a Class II felony. The court accepted Valdez’ guilty plea, subject to enhancement, which the parties agreed to address at the time of sentencing. At the sentencing hearing, the issue of enhancement was not addressed and no evidence was adduced on the matter, but the court treated the offense as enhanced and sentenced Valdez to a period of 24 to 25 years’ imprisonment and revoked his driver’s license for 15 years. Valdez argues that the district court erred in failing to receive evidence of a prior conviction, as required to sub- ject him to enhancement penalties under Neb. Rev. Stat. § 28-306(3)(c) (Reissue 2016). Valdez contends that the sen- tence should be vacated and the matter remanded to the district court for resentencing as a Class IIA felony. The State agrees that the district court erred in failing to hold an enhancement hearing, but claims that the appropriate remedy is to remand for a new enhancement and sentencing hearing. We remand the cause with direction for a new enhancement and sentenc- ing hearing. BACKGROUND On the evening of December 8, 2017, in Norfolk, Nebraska, Valdez attended a holiday gathering where he consumed alco- hol to the point that his ability to operate a vehicle became appreciably diminished. He left the party and drove east on a highway until he attempted to turn left at an intersection. Valdez turned left and crashed into the driver’s side of a vehi- cle traveling west in the outside lane of the highway. - 443 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 Upon arrival, officers observed Valdez sitting in the pas- senger seat of his vehicle, which had extensive front-end dam- age and sat off the roadway. An officer spoke with Valdez and observed that he was slurring his words, that his eyes were bloodshot and watery, and that he had alcohol on his breath. Valdez admitted to drinking earlier. Another vehicle was located in the intersection which had its driver’s side ripped open. The driver of the second vehicle was unresponsive at the scene. She was taken to a hospital and died from her injuries approximately 1 week later. Valdez was transported to the emergency room of a Norfolk hospital. A police officer with the Norfolk Police Department had Valdez’ blood drawn pursuant to a search warrant. Valdez had a blood alcohol content of .223 of a gram of alcohol per 100 milliliters of blood. Valdez was charged with motor vehicle homicide. The State alleged that Valdez was operating the motor vehicle in viola- tion of Neb. Rev. Stat. § 60-6,196 (Reissue 2010) or Neb. Rev. Stat. § 60-6,197.06 (Cum. Supp. 2016) and that Valdez had a prior conviction of § 60-6,196 or § 60-6,197.06, which would enhance the charge to a Class II felony. Valdez pled guilty to the offense, and in exchange for his plea, the State agreed to recommend a maximum sentence of 25 years’ imprisonment and not pursue additional charges or restitution. The district court accepted Valdez’ plea and found him guilty subject to an enhancement hearing. The parties agreed to take up the issue of enhancement at sentencing, and the court set the matter for a sentencing hearing. During sentencing, the court considered the offense to be enhanced to a Class II felony and sentenced Valdez to a period of 24 to 25 years’ imprisonment, with 1 day of credit for time served, and revoked his driver’s license for 15 years. However, although in its comments the court referred to the fact that Valdez has two prior convictions for driving under the influence (DUI), the court did not receive any evidence regarding the prior convictions and the parties did not address enhancement prior to the court’s pronouncement of sentence. - 444 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 ASSIGNMENTS OF ERROR Valdez assigns that the district court erred in (1) finding him guilty of motor vehicle homicide, a Class II felony, absent proof of enhancement and (2) imposing an excessive sentence. Valdez also argues that his trial counsel was ineffective for failing to (3) file a motion to suppress the blood test results, (4) file a motion for recusal of the trial court, (5) object to evi- dence introduced by the State at sentencing, and (6) make an effective argument at sentencing. STANDARD OF REVIEW [1] When dispositive issues on appeal present questions of law, an appellate court has an obligation to reach an indepen- dent conclusion irrespective of the decision of the court below. 1 ANALYSIS The issue in this case is whether upon remand the trial court may conduct a new enhancement hearing. Valdez argues that his current sentence is invalid, because the court did not receive any evidence on the issue of enhancement, and that based on the State’s failure to present evidence, the court should have found him guilty of a Class IIA felony and sen- tenced him accordingly. He requests that we remand with instructions for resentencing on the reduced charge. The State agrees that remand is required but claims that pursuant to State v. Oceguera, 2 the appropriate remedy is to remand for a new enhancement and sentencing hearing. A person commits motor vehicle homicide when he or she causes the death of another unintentionally while engaged in the operation of a motor vehicle in violation of the law of the State of Nebraska or in violation of any city or village ordi- nance. 3 Pursuant to § 28-306(3)(b), if the proximate cause of the death of another is the operation of a motor vehicle in vio- lation of § 60-6,196 (DUI) or § 60-6,197.06 (operating motor 1 State v. Oceguera, 281 Neb. 717, 798 N.W.2d 392 (2011). 2 Id. 3 § 28-306(1). - 445 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 vehicle during revocation period), motor vehicle homicide is a Class IIA felony. Pursuant to § 28-306(3)(c), if the proximate cause of the death of another is the operation of a motor vehicle in violation of § 60-6,196 or § 60-6,197.06 and the defend ant has a prior conviction for a violation of § 60-6,196 or § 60-6,197.06, motor vehicle homicide is a Class II felony. In a proceeding to enhance a punishment because of prior convictions, the State has the burden to prove such prior con- victions. 4 Usually, the State will prove a defendant’s prior convictions by introducing certified copies of the prior con- victions or transcripts of the prior judgments. 5 The existence of a prior conviction and the identity of the accused as the person convicted may be shown by any competent evidence, including the oral testimony of the accused and duly authen- ticated records maintained by the courts or penal and custo- dial authorities. 6 [2] We find that enhancement of a motor vehicle homicide sentence is analogous to habitual criminal enhancement and enhancement of a DUI sentence. In each of these contexts, the Legislature has provided for the use of prior convictions to enhance a sentence. 7 Under § 60-6,197.02(2), the prosecu- tor is required to present as evidence for purposes of sentence enhancement a court-certified or authenticated copy of the defendant’s prior conviction, which shall be prima facie evi- dence of such prior conviction. Under § 60-6,197.02(3), the court shall, as part of the judgment of conviction, make a find- ing on the record as to the number of the convicted person’s prior convictions. The convicted person shall be given the opportunity to review the record of his or her prior convic- tions, bring mitigating facts to the attention of the court prior 4 State v. Thomas, 268 Neb. 570, 685 N.W.2d 69 (2004); State v. Ristau, 245 Neb. 52, 511 N.W.2d 83 (1994). 5 Ristau, supra note 4. 6 Thomas, supra note 4. 7 See, § 28-306(3)(c); Neb. Rev. Stat. § 29-2221(2) (Reissue 2016); Neb. Rev. Stat. § 60-6,197.02(2) (Cum. Supp. 2018). - 446 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 to sentencing, and make objections on the record regarding the validity of such prior convictions. 8 We conclude that just as in the context of habitual criminal and DUI sentence enhance- ments, evidence of a prior conviction must be introduced in order to enhance a sentence for motor vehicle homicide. 9 [3] The State charged Valdez with motor vehicle homicide, a Class II felony under § 28-306(3)(c). A Class II felony is punishable by 1 to 50 years’ imprisonment. 10 Valdez claims that his offense was improperly enhanced to a Class II felony, because the State introduced no evidence of a prior convic- tion under § 60-6,196 or 60-6,197.06. He claims that without such evidence, the court could have found him guilty only of a Class IIA felony under § 28-306(3)(b). A Class IIA felony is punishable by 0 to 20 years’ imprisonment. 11 A sentence is illegal when it is not authorized by the judgment of conviction or when it is greater or less than the permissible statutory pen- alty for the crime. 12 It is undisputed that the trial court did not receive evidence necessary to subject Valdez to the enhanced penalties under § 28-306(3)(c) and that Valdez’ sentence to a period of 24 to 25 years’ imprisonment exceeds the statutory limits for a Class IIA felony. Therefore, Valdez’ sentence is illegal and must be vacated. The only question that remains is the appropriate remedy for the State’s failure to adduce evidence of a prior convic- tion. Under our precedent, we have consistently remanded for a new enhancement hearing when the State has failed to produce sufficient evidence of the requisite prior convictions for enhancement purposes. 13 While we have not previously 8 § 60-6,197.02(3). 9 See Oceguera, supra note 1. 10 Neb. Rev. Stat. § 28-105(1) (Reissue 2016). 11 Id. 12 State v. Kantaras, 294 Neb. 960, 885 N.W.2d 558 (2016). 13 See, State v. Bruckner, 287 Neb. 280, 842 N.W.2d 597 (2014); Oceguera, supra note 1; State v. Hall, 268 Neb. 91, 679 N.W.2d 760 (2004); State v. Nelson, 262 Neb. 896, 636 N.W.2d 620 (2001); Ristau, supra note 4. - 447 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 addressed this issue in the context of motor vehicle homicide, we have found in the context of habitual criminal enhancement and enhancement of a DUI sentence that the appropriate rem- edy is to remand for another enhancement hearing. 14 In Oceguera, the State failed to present sufficient evidence of three valid prior DUI convictions to support a conviction for a fourth offense and we remanded for a new enhancement hearing. 15 In doing so, we recognized that neither our prior case law nor any federal constitutional law prohibits a new enhancement hearing. 16 An enhanced sentence imposed on a persistent offender is not viewed as either a new jeopardy or an additional penalty for the earlier crimes, but as a stiffened penalty for the latest crime, which is considered to be an aggra- vated offense because it is a repetitive one. 17 The U.S. Supreme Court has said that except in capital cases, a failure of proof at an enhancement hearing is not analogous to an acquittal, and that such a failure of proof does not trigger double jeopardy protections. 18 Following U.S. Supreme Court precedent, numerous state appellate courts have held that double jeopardy protections do not apply to sentence enhancement hearings and do not prevent the presentation of evidence of a prior conviction at a new enhancement hearing on remand. 19 14 See, Oceguera, supra note 1; Nelson, supra note 13. 15 Oceguera, supra note 1. 16 Id. (relying on Monge v. California, 524 U.S. 721, 118 S. Ct. 2246, 141 L. Ed. 2d 615 (1998)). 17 Gryger v. Burke, 334 U.S. 728, 68 S. Ct. 1256, 92 L. Ed. 1683 (1948). 18 Monge, supra note 16. 19 See, Scott v. State, 454 Md. 146, 164 A.3d 177 (2017); State v. Salas, 2017 NMCA 057, 400 P.3d 251 (2017); People v. Porter, 348 P.3d 922 (Colo. 2015); State v. Collins, 985 So. 2d 985 (Fla. 2008); State v. Eggleston, 164 Wash. 2d 61, 187 P.3d 233 (2008); Com. v. Wilson, 594 Pa. 106, 934 A.2d 1191 (2007); Jaramillo v. State, 823 N.E.2d 1187 (Ind. 2005); State v. McLellan, 149 N.H. 237, 817 A.2d 309 (2003); Nelson, supra note 13; Bell v. State, 994 S.W.2d 173 (Tex. Crim. App. 1999); People v. Levin, 157 Ill. 2d 138, 623 N.E.2d 317, 191 Ill. Dec. 72 (1993). - 448 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 Even though Valdez has not raised a double jeopardy argu- ment, we are guided by the U.S. Supreme Court’s decision in Monge v. California, 20 which addressed a factual and pro- cedural context similar to that presented in this case. Monge interpreted California’s “‘three-strikes’” law, which enhances a defendant’s sentence based on a previous conviction for a “serious felony.” 21 At the enhancement hearing, the State alleged that the defendant had been convicted for assault with a deadly weapon, but failed to support its allegation with any substantive evidence. Nonetheless, the court enhanced the defendant’s sentence. On appeal, the U.S. Supreme Court held that insufficient evidence is not a bar to retrial of a defendant’s enhanced status. 22 [4] The Supreme Court of Pennsylvania has similarly con- cluded that the prosecution is permitted to present enhance- ment evidence at a sentencing hearing on remand after the original sentence is vacated due to insufficient evidence on the issue of enhancement. 23 The court reasoned that once the original sentence is vacated, the sentence is rendered a nullity and the trial court may treat the case anew for evidentiary pur- poses. 24 Where an appellate court determines that the evidence was insufficient to establish a qualifying prior conviction, the appellate court’s determination does not act as an acquittal or preclude a trial court from receiving additional evidence of a qualifying prior conviction. 25 [5,6] At oral argument before this court, Valdez contended that by failing to adduce evidence of enhancement at the origi- nal sentencing hearing, the State waived the issue of enhance- ment. A waiver is the voluntary and intentional relinquishment of a known right, privilege, or claim, and may be demonstrated 20 Monge, supra note 16. 21 Id., 524 U.S. at 724. 22 See, id.; Salas, supra note 19. 23 Wilson, supra note 19. 24 Id. 25 Scott, supra note 19. - 449 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 by or inferred from a person’s conduct. 26 A voluntary waiver, knowingly and intelligently made, must affirmatively appear from the record. 27 To establish a waiver of a legal right, there must be a clear, unequivocal, and decisive act of a party show- ing such a purpose, or acts amounting to an estoppel on his or her part. 28 Further, the waiving party must have full knowledge of all material facts. 29 We find no evidence in our record that the State intended to forgo enhancing Valdez’ sentence. The State’s charging deci- sion, as evidenced by the State’s complaint filed in January 2018, was to prosecute Valdez for motor vehicle homicide under § 28-306(3)(c), a Class II felony. At the plea hearing, the State alleged as part of its factual basis that Valdez had a prior conviction that would subject him to enhancement. Valdez then entered a plea of guilty to the enhanced charge, a Class II felony, and the court accepted the plea subject to an enhance- ment hearing, and then scheduled that enhancement be taken up at sentencing per agreement of the parties. The record indicates the court failed to recognize that enhancement had not been addressed. At the enhancement and sentencing hearing, the court opened by stating that “[t]his matter comes on for sentencing today for the crime of motor vehicle homicide, a Class II felony.” The court proceeded directly to sentencing, possibly due to the fact that four wit- nesses were present to provide testimony on the issue of sentencing. In its closing comments articulating its reasons for Valdez’ sentence, the court referenced Valdez’ two prior convictions for DUI. For Valdez’ waiver argument to apply, he must show that at some point, the State intended to prosecute him for a Class IIA felony. Here, the State has never wavered from its position to prosecute Valdez for a Class II felony. Moreover, Valdez’ 26 State v. Qualls, 284 Neb. 929, 824 N.W.2d 362 (2012). 27 Id. 28 Nelssen v. Ritchie, 304 Neb. 346, 934 N.W.2d 377 (2019). 29 Id. - 450 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. VALDEZ Cite as 305 Neb. 441 waiver argument arises in a context in which he has pled guilty to a Class II felony, in exchange for the State’s agreeing to recommend a maximum sentence of 25 years’ imprisonment, with no pursuit of additional charges or restitution. Were we to accept Valdez’ argument that he be resentenced on a Class IIA felony, that would raise questions regarding the validity of the plea agreement, yet Valdez has not expressed a desire to alter the plea agreement. Therefore, we reject Valdez’ waiver argument. We vacate Valdez’ sentence and remand the cause with directions for another enhancement and sentencing hearing. Because of the disposition of this assignment of error, we need not address the remainder of Valdez’ assignments of error. CONCLUSION The district court erred when it enhanced Valdez’ sentence for motor vehicle homicide absent evidence of a prior convic- tion. We vacate Valdez’ sentence and remand the cause with direction for another enhancement and sentencing hearing. Sentence vacated, and cause remanded with direction. Freudenberg, J., not participating.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620322/	ROBERT L. CAMPBELL, JR. AND LINDA G. CAMPBELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCampbell v. CommissionerDocket No. 2897-90United States Tax CourtT.C. Memo 1992-66; 1992 Tax Ct. Memo LEXIS 71; 63 T.C.M. (CCH) 1979; T.C.M. (RIA) 92066; February 3, 1992, Filed 71 Decision will be entered under Rule 155. Robert L. Campbell, pro se. Richard L. Hunn, for respondent. BUCKLEYBUCKLEYMEMORANDUM OPINION BUCKLEY, Special Trial Judge: This case was heard pursuant to section 7443A(b) and Rules 180, 181, and 182. 1Respondent by two notices of deficiency determined deficiencies in and additions to petitioners' 1986 and 1987 Federal income tax as follows: Additions To TaxYearDeficiencySec. 6653(a)(1)(A)Sec. 6653(a)(1)(B)1986$ 3,885.00--19872,463.38$ 123.1750% of the interestdue on the deficiency. After concessions, 2 the issues for decision are whether petitioners are entitled to deduct: (1) A claimed bad debt deduction for 1986; (2) interest expense for 1986 in an amount greater than allowed by respondent; (3) charitable contributions for both 1986 and 1987 in 72 amounts greater than allowed by respondent; (4) claimed work clothes expense for both 1986 and 1987; and (5) for 1987, a portion of the purchase price of a Triumph TR6 automobile. Lastly, we must also decide whether, for the 1987 tax year, petitioners are subject to the addition to tax for negligence. Some of the facts have been stipulated and are so found. The stipulation and accompanying exhibits are incorporated herein by reference. Petitioners filed their 1986 and 1987 tax returns jointly as husband and wife. At the time petitioners petitioned this Court they resided at La Marque, Texas. For convenience we address the facts and law for each issue separately. Petitioners bear the burden of proof as to each. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Only petitioner husband appeared for 73 the trial of this matter, and hereafter reference to petitioner in the singular is to Robert L. Campbell. Bad debt deduction. Sometime in 1983 petitioner's brother, Stephen, who was experiencing financial and marital difficulties, asked petitioner if he could borrow money. Petitioner gave his brother about $ 4,800 and advised him that he could take 3 years to repay it. The situation was handled informally; they did not execute a note evidencing a loan, nor did they establish a plan of installment repayments, nor did they discuss the payment of interest. Shortly thereafter, Stephen was divorced from his wife, and his whereabouts were often unknown to petitioner. Occasionally, Stephen contacted petitioner by telephone. The amount advanced by petitioner to Stephen had not been repaid as of the time of trial. On their 1986 tax return petitioners claimed a bad debt deduction in the amount of $ 2,500 for the unrepaid amount advanced to petitioner's brother. (Petitioner provided no explanation as to why the entire $ 4,800 was not claimed.) Respondent disallowed the deduction in the statutory notice of deficiency. Any debt which becomes worthless during the taxable year is deductible. 74 Sec. 166(a). A worthless nonbusiness debt is treated as a short-term capital loss. Sec. 166(d)(1). A nonbusiness debt is one that is not created, acquired, or incurred in connection with a trade or business. Sec. 166(d)(2). To establish entitlement to the deduction for a bad debt, petitioners must show that a bona fide debt was created between petitioner and his brother, and that the debt became worthless during the 1986 tax year. Andrew v. Commissioner, 54 T.C. 239">54 T.C. 239, 244-245 (1970). Advances to relatives are subject to close scrutiny and are presumed gifts. Estate of Reynolds v. Commissioner, 55 T.C. 172">55 T.C. 172, 201 (1970); Andrew v. Commissioner, supra at 245. The evidence in this case fails to establish that a bona fide debt was created. The purported loan is not evidenced by a promissory note. No specific repayment terms were established, and no interest payments were required. Moreover, petitioner brought no corroborating witnesses to trial; we have only his testimony that the amount advanced to his brother constituted a bona fide loan. We have serious doubts about petitioner's actual expectancy of repayment. 75 Assuming arguendo that a bona fide debt was created, petitioners have not shown that the debt became worthless in 1986, the year they deducted it. On their 1986 return petitioners indicated that the purported 3-year loan was due in December of 1986. Petitioner admitted at trial that he made no attempt to collect the debt, but argued it was uncollectible as his brother could not be readily located. We disagree. The record suggests that the loan was not delinquent as of the end of 1986, and no evidence exists indicating that the debtor repudiated his obligation to repay. We sustain respondent's disallowance of the bad debt expense deduction. Interest expense. On their 1986 tax return, petitioners claimed as a miscellaneous itemized deduction interest expense totaling $ 13,300 of which respondent allowed $ 9,667. Petitioners contend they should be allowed an additional amount for interest expense. The question is one of substantiation. At trial petitioner produced substantiation for credit card interest incurred for 1986 on various accounts totaling $ 946.81. This amount is not included in the interest expense figure allowed by respondent in the notice of deficiency, 76 and petitioners are therefore entitled to deduct this additional amount as interest expense for 1986. Charitable contributions. Petitioners regularly made cash contributions to their church utilizing envelopes supplied by the church and deposited in a collection basket at weekly services. At the end of each year petitioners received a letter of thanks from the church accompanied by a receipt indicating the amount they contributed for the year. In addition, petitioners made noncash donations of used clothing to the Salvation Army in 1986 and 1987. Petitioners claimed cash contributions to their church in the amounts of $ 650 and $ 890 for 1986 and 1987, respectively. Respondent disallowed these amounts for lack of substantiation. Much of petitioner's testimony respecting church contributions was credible. Because the yearly receipts sent by the church were no longer in petitioners' possession, petitioner phoned the church on the day before trial to request verification of contributions made in 1986 and 1987. In response he was told that for 1987 the information was readily available from computerized records; however, for 1986 a manual search was required. Due to the shortness77 of time, petitioner was unable to produce substantiation of cash contributions for 1986, but was able to produce a computerized summary of petitioners' contributions to the church for 1987 totaling $ 789. Petitioners are entitled to deduct this amount for 1987. As to 1986 alleged contributions, we are mindful that petitioners had ample opportunity prior to the time of trial to secure the 1986 information from their church. Indeed the audit report was dated August 25, 1989, and they knew from that date that there was a question about this contribution. Petitioners have failed to sustain their burden on this issue. Petitioners also claimed noncash contributions of clothing to the Salvation Army in the amounts of $ 4,869 for 1986 and $ 4,340 for 1987. Respondent disallowed all but $ 285 and $ 1,865 of the amounts claimed in each respective year. Petitioner testified inconsistently and unconvincingly about the quantity, age, and condition of clothing items donated. Some of the testimony was simply not worthy of belief. On this record we hold that petitioners have not met their burden of proof regarding the value of noncash contributions. They are entitled to deduct only the 78 amounts allowed by respondent in the notice of deficiency. Work clothing. During 1986 and 1987 petitioner worked as a plastics technician for a chemical company. His job required that he work with a number of caustic chemicals. The company did not require employees to wear a uniform. On the job, petitioner wore denim shirts and trousers, and protective leather boots with steel toes. For both 1986 and 1987 petitioner claimed a miscellaneous itemized deduction in the amount of $ 250 for work clothing purchases and laundering expenses. Respondent disallowed the amounts claimed. While section 262 provides that personal expenses are generally not deductible, section 162 authorizes the deduction of ordinary and necessary business expenses. The deductibility of petitioner's work clothing expenses is a question of fact requiring that we reconcile the provisions of these two Code sections. See, e.g., Hynes v. Commissioner, 74 T.C. 1266">74 T.C. 1266, 1289 (1980). On this record we find that the denim clothing worn to work by petitioner was suitable for ordinary wear and was not required by his employer. We have consistently held that the expense of purchasing and laundering79 such clothing is a personal expense and not deductible. Barone v. Commissioner, 85 T.C. 462">85 T.C. 462, 469 (1985), affd. by unpublished opinion 807 F.2d 177">807 F.2d 177 (9th Cir. 1986); Donnelly v. Commissioner, 28 T.C. 1278">28 T.C. 1278, 1280 (1957), affd. 262 F.2d 411">262 F.2d 411 (2d Cir. 1959); Egner v. Commissioner, T.C. Memo. 1984-473; Hynes v. Commissioner, supra at 1290; Busking v. Commissioner, T.C. Memo 1978-415">T.C. Memo. 1978-415. Petitioners are not entitled to deduct expenses relating to the purchase and laundering of petitioner's denim work clothing. On the other hand, the leather steel-toe work boots worn by petitioner were not adaptable to personal use and were necessary for petitioner's safety and protection. We have held expenses for this type of clothing deductible. See Kozera v. Commissioner, T.C. Memo. 1986-604; Jeffers v. Commissioner, T.C. Memo. 1986-285; Boback v. Commissioner, T.C. Memo. 1983-198. Petitioner did not provide receipts or other substantiation for the cost of his work boots, but he testified credibly that he wore80 out two pairs a year. We estimate under Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930), that petitioners incurred deductible expenses of $ 100 in each year. The Triumph TR6 automobile. In August of 1986 petitioner purchased a 1972 Triumph TR6 automobile for $ 4,200. Petitioner made a down payment of approximately 20 percent of the purchase price and financed the balance over 36 months. On Schedule C attached to petitioners' 1987 tax return, petitioner reported a $ 2,500 business expense deduction for the "Purchase of [a] '72 Triumph TR6". The principal business listed at the top of the Schedule C is "Auto Refurbishing". The vehicle was destroyed in an automobile accident in 1988 while still owned by petitioner. Respondent disallowed the claimed deduction. Petitioner testified that he acquired the TR6 for the purpose of refurbishing it and reselling it at a profit. Even if we were to accept this testimony as truthful, under the facts of this case we can conceive of no Code section under which the purchase of the automobile would be deductible for either of the 2 years before the Court. Petitioner as much as admitted at trial that he incorrectly*81 claimed the deduction. We sustain respondent on this issue. Additions to tax. Respondent determined that for the 1987 tax year petitioners are liable for additions to tax for negligence under section 6653(a)(1). Negligence under section 6653(a)(1) is lack of due care, or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Respondent's determination that petitioners' underpayment of tax was due to negligence is "presumptively correct and must stand unless the taxpayer can establish that he was not negligent." Hall v. Commissioner, 729 F.2d 632">729 F.2d 632, 635 (9th Cir. 1984), affg. a Memorandum Opinion of this Court. Petitioners failed to exercise ordinary care. On their 1987 return they overstated charitable contributions and claimed deductions which plainly were not allowable. We hold that the entire deficiency for the 1987 tax year is attributable to negligence. To reflect the foregoing and concessions. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the years at issue; all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioners concede they are not entitled to deduct the cost of legal services claimed for 1987 in the amount of $ 2,250, and that they failed to report $ 185 of dividend income for 1987.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620323/	Milton F. Priester and Robbie Priester, Petitioners, v. Commissioner of Internal Revenue, RespondentPriester v. CommissionerDocket No. 88419United States Tax Court38 T.C. 316; 1962 U.S. Tax Ct. LEXIS 128; May 29, 1962, Filed 128 Decision will be entered under Rule 50. A corporation which had only two stockholders, and in which the petitioner held the minority stock interest, purchased or redeemed all the shares of its majority stockholder at a price of $ 113,000, then canceled such shares -- whereupon the petitioner became the sole remaining stockholder. Held, that the corporation's payment of said sum of $ 113,000 to its majority stockholder in complete redemption of all his shares, did not cause petitioner to become chargeable with a constructive distribution of a taxable dividend to him of the same amount. Held, further, that the corporation's payment of $ 1,608.33 expenses for legal and accounting services and for interest on a bank loan, in connection with its redemption of its majority stockholder's shares, did not cause petitioner to become chargeable with constructive receipt of "compensation" of said amount. W. Stuart McCloy, Esq., for the petitioners.Michael P. McLeod, Esq., for the respondent. Pierce, Judge. Tietjens, J., dissenting. Opper and Forrester, JJ., agree with this dissent. PIERCE 316 The respondent determined a deficiency in the income tax of petitioners for the calendar year 1957, 129 in the amount of $ 75,518.29.The issues for decision are:Where a corporation which had only two stockholders, and in which the petitioner held the minority stock interest, purchased or redeemed all the shares of its majority stockholder for a price of $ 113,000, and then canceled such shares, did this transaction --(1) Cause petitioner to become chargeable with a constructive distribution of a "dividend" to him of $ 113,000 -- being the same amount 317 which the corporation paid to its majority stockholder in complete redemption of all the latter's shares?(2) Cause petitioner to become chargeable with constructive receipt of "compensation" of $ 1,608.33 -- being the amount which the corporation paid for certain legal, accounting, and interest expenses in connection with its redemption of the shares of its majority stockholder?All other issues raised by the pleadings have been settled by stipulation of the parties. Effect will be given to such settlements in the computation to be made herein under Rule 50.FINDINGS OF FACT.Most of the facts have been stipulated. The written and oral stipulations of facts, and all exhibits identified therein, are incorporated herein by reference.The petitioners, 130 Milton F. Priester and Robbie Priester, are husband and wife, residing in Memphis, Tennessee. They filed a joint income tax return for the taxable year involved, with the district director of internal revenue at Nashville, Tennessee. Said return was filed in accordance with the cash receipts and disbursements method of accounting.On about April 1, 1947, petitioner Milton F. Priester (herein called the petitioner) and his older brother, Clift L. Priester, organized a corporation named Priester Machinery Company, Inc., to take over the operation of a business which they had theretofore carried on as partners, of selling and servicing heavy roadbuilding machinery and equipment. The corporation issued in exchange for the assets of the prior partnership, 1,000 shares of common capital stock having no-par value, of which 666 shares were issued to Clift and 334 shares were issued to petitioner. No other or additional shares were thereafter issued. The original officers and directors of the corporation were: Clift, president and treasurer; petitioner, vice president; and James Wingard, secretary. These same three individuals, together with Clift's wife and petitioner's wife, comprised 131 the board of directors. The business was successful.In October 1948, Clift suffered a cerebral hemorrhage which disabled him; and the responsibility of the business then fell upon petitioner, as vice president. Clift died on February 2, 1950. Thereupon Clift's widow, Marjorie Priester (hereinafter called Marjorie), became the succeeding owner of the 666 shares of the corporation's stock which Clift had owned. She had no prior business experience, but nevertheless she attempted to control the affairs and policies of the business; and this created management and personnel problems within the corporation. In 1951, she caused a new board of directors 318 to be installed, consisting of herself, her attorney, E. L. Williamson, and petitioner. Also at about this same time, the following new officers were elected: Petitioner, president; and Marjorie, vice president, treasurer, and secretary.On July 1, 1952, petitioner bought from Marjorie, 165 of her shares of stock in the corporation; and these shares were then transferred of record on the corporation's books, and a new stock certificate therefor was issued to and in the name of petitioner. The price which petitioner paid Marjorie for 132 those shares was $ 131.80 per share (a total of $ 21,748.65) -- which price reflected the net worth of the stock per books, as of March 31, 1951. Immediately thereafter, the total issued and outstanding shares of the corporation were owned and held as follows: 501 shares by Marjorie; and 499 shares by petitioner.About 7 months later, on February 28, 1953, petitioner and Marjorie executed three written agreements (hereinafter called the agreements of February 28, 1953), under which petitioner agreed to purchase from Marjorie all her remaining shares of stock of the corporation, consisting of the above-mentioned 501 shares. 1 The purchase agreement provided in substance, that petitioner would buy all of Marjorie's said shares at the price of $ 200 per share (total purchase price of $ 100,200), payable as follows: $ 200 in cash, upon execution of the agreement; $ 30,000 in cash, on or before May 1, 1957; and $ 35,000 in cash, on or before May 1 of each of the years 1958 and 1959. Each of said installment payments (other than the first $ 200 downpayment) was evidenced by a promissory note executed by petitioner and made payable to Marjorie; and each installment was to bear interest 133 at 6 percent per annum. Also, under the terms of the above-mentioned escrow agreement, all the promissory notes and all of petitioner's and Marjorie's shares of stock were placed in escrow with a local bank; and it was agreed that in the event petitioner defaulted in the payment of any installment, all remaining unpaid installments would become due immediately, and the escrow agent could then sell petitioner's deposited shares, either to Marjorie or to any third party. During 1956, which was approximately 1 year prior to the due date of the first installment payment under said purchase agreement, petitioner realized that he would be financially unable to meet the same; and he realized also that, if he defaulted in meeting this installment, all the balance of the price would become due immediately, and that all his shares 134 in the corporation would become subject to foreclosure and sale by the escrow agent. Petitioner thereupon contacted his bank in an 319 attempt to borrow funds with which to pay the oncoming installment; but the bank refused to make him any loan, for the reason that he had practically no assets other than his investment in the corporation, and that all his stock therein had already been pledged under said escrow agreement. Petitioner and his attorney then contacted Marjorie and her attorney, with a view to having her modify the terms of the purchase agreement, or to have her make some arrangement with the corporation for it to redeem her stock; but both Marjorie and her attorney refused to comply with such suggestions. They insisted that the only way in which petitioner might obtain relief from his contractual obligations, would be for her to receive a cashier's check for $ 100,000, being the full unpaid balance of the purchase price. They said it would make no difference to them, whether such amount was paid by petitioner or by someone else.In this situation, petitioner began a search for some investor who might be willing to purchase all of Marjorie's interest in the corporation, 135 and thereby eliminate his contractual arrangement with her. In this search for such an investor, he procured the assistance of William Barclay, a certified public accountant who was a local official for one of the national accounting firms which had theretofore made certain audits for the Priester Machinery Company.Early in February 1957, Barclay contacted a man named Max Pinkerton, who he thought might be interested in buying Marjorie's stock. Pinkerton was prominent in the lumber industry; and Barclay had performed some accounting services for him, but petitioner had never met him. Since about 1946, Pinkerton had been associated with the Pinkerton Lumber Corporation, the North Memphis Lumber Company, and the Gates Lumber Company -- all of which carried on operations in the Memphis area. He had been engaged to represent the United States Government in matters relating to the lumber industry in Russia. Also, he had banking connections with two Memphis banks; and he had, on one occasion, obtained a loan of $ 400,000 from one of these banks.Pinkerton had confidence in the judgment of Barclay, who acquainted him with the affairs of the Priester Machinery Company and suggested that 136 he might find the purchase of Marjorie's shareholdings to be a good investment. Pinkerton at first demurred; but later, he told Barclay that he would be willing to purchase all of Marjorie's 501 shares for the amount of $ 100,000 which she was demanding, if he could be assured that after acquiring such stock the corporation would within a period of from 6 months to a year thereafter, purchase or redeem the stock from him at a price of $ 113,000 -- so as to enable him to derive a capital gain from the transaction. He further insisted that, since such a purchase would give him only a 51-percent interest in the 320 corporation, he would have to receive the personal guarantee of petitioner who was the minority stockholder, that such redemption would be effected. Barclay thereupon communicated the terms of such proposal to petitioner, who agreed to the same.Thereafter, on April 1, 1957, a meeting was held at the main office of the Union Planters National Bank in Memphis, for the purpose of effecting Pinkerton's purchase of Marjorie's 501 shares. The persons there present were: Petitioner and his attorney; Marjorie and her attorney; Pinkerton; Barclay; and one of the officers of said bank. 137 At this meeting, petitioner met Pinkerton for the first time. Thereupon, at said meeting and pursuant to arrangements theretofore made by the attorneys for the parties, the following transactions took place:1. Pinkerton borrowed from said bank the sum of $ 100,000, by executing and delivering to the bank his 6-percent promissory note for the same amount, which was made payable to the order of the bank on October 2, 1957. The bank then prepared a cashier's check for $ 100,000, made payable to the order of Marjorie; but it continued to hold the same pending completion of the other transactions hereinafter mentioned.2. Petitioner then assigned to Pinkerton, all his rights and interest in the above-mentioned purchase agreement that he had executed with Marjorie on February 28, 1953, under which Marjorie had agreed to sell all her 501 shares of stock in the Priester Machinery Company, and under which agreement there was an unpaid balance on the purchase price of $ 100,000. Pinkerton thereupon exercised this agreement in accordance with its terms; and caused the above-mentioned $ 100,000 cashier's check to be delivered to Marjorie, in full payment for all her 501 shares of stock in the 138 corporation.The fair market value of the stock at that time was $ 200 per share.3. At this point, Marjorie executed and delivered to petitioner a written release and discharge from all his obligations under their agreement of February 28, 1953; and she also acknowledged in said instrument, the termination and satisfaction of their above-mentioned purchase agreement. Also, at this time, Marjorie gave written authorization to the escrowee which was holding the shares of both petitioner and herself, to release the same from the escrow.4. Marjorie thereupon endorsed and delivered to Pinkerton, in consideration for his said payment to her of the $ 100,000, her certificate for all her above-mentioned 501 shares of capital stock of the Priester Machinery Company. These shares were transferred to Pinkerton on the records of the corporation; and at the same time, a new certificate for 501 shares was issued in the name of Max Pinkerton and delivered to him.Marjorie then executed her written resignation as an officer and 321 director of the corporation; and on the same instrument, her attorney likewise executed his resignation as a director -- both effective immediately.Immediately following said 139 events, the issued and outstanding shares of the capital stock of Priester Machinery Company were owned and held as follows: 501 shares by Pinkerton, and 499 shares by petitioner.5. Pinkerton, as the holder of said 501 shares, then executed and delivered to the Priester Machinery Company a written option, entitling said corporation to buy from him at any time after 6 months and before 1 year from April 1, 1957, all of Pinkerton's said 501 shares of stock at a price of $ 113,000. Appended to said option was a written guarantee executed by petitioner in favor of Pinkerton, to the effect that the corporation (of which petitioner was the minority stockholder) would exercise said option on October 3, 1957; and petitioner pledged to Pinkerton his own 499 shares of the stock, as collateral security for such guarantee.6. Pinkerton then delivered to the Union Planters Bank, as collateral security for his above-mentioned $ 100,000 promissory note, the following: (1) All the issued and outstanding shares of capital stock of the Priester Machinery Company -- including both Pinkerton's 501 shares and also the 499 shares of petitioner which had been pledged as collateral security for said guarantee 140 agreement; (2) 20 shares of another stock owned by petitioner; (3) the above-mentioned option granted by Pinkerton to the corporation, entitling the latter to buy his shares, together with the attached guarantee of petitioner that such option would be exercised; and (4) an assignment by Pinkerton to the bank of both said option and said guarantee agreement, together with a power of attorney authorizing the bank to enforce each of these instruments and to receive any amounts which might thereafter become payable under the same.Shortly after the conclusion of the above transactions, Pinkerton and an attorney named Stuart McCloy were elected as directors of the Priester Machinery Company to succeed Marjorie and her attorney, Williamson, who had resigned, and petitioner continued to serve as the third director. Also at the same time, the following persons were elected as officers: Petitioner, president and treasurer; and Christine Chapman, vice president and secretary.Thereafter, on April 8, 1957, the board of directors of the Priester Machinery Company adopted a resolution that Pinkerton be notified that the corporation elected to exercise the above-mentioned option to purchase all 141 of Pinkerton's 501 shares of the corporation's capital stock; and that such purchase would be effected on October 3, 1957. Accordingly, on this same date, the corporation sent a letter to Pinkerton, 322 notifying him of the corporation's intention to exercise said option, and to purchase all his 501 shares of the corporation's stock at the price of $ 113,000, on October 3, 1957; and it also sent a copy of said letter to the Union Planters Bank.Subsequently and shortly prior to said date set for exercise of said option, the corporation informed Pinkerton that it would require additional time within which to raise the funds for its purchase of his stock pursuant to the option. Thereupon, Pinkerton and the corporation mutually agreed that the time for closing the purchase should be extended to November 1, 1957; and at the same time, the corporation made a related agreement that it would pay any additional interest on Pinkerton's $ 100,000 note at the bank, which would accrue as the result of extending the maturity of said note to November 1, 1957.Thereafter, on October 15, 1957, Priester Machinery Company made arrangements with a bank, under which it borrowed $ 150,000. The purpose of 142 this loan was to provide the corporation with $ 113,000 for use in purchasing Pinkerton's 501 shares in accordance with the option agreement; and also to provide it with approximately $ 37,000 for use in its business operations.On October 16, 1957, the corporation purchased or redeemed all of Pinkerton's said 501 shares of its capital stock, by paying to Pinkerton the sum of $ 113,000 pursuant to said option agreement; and thereafter, it canceled all of said shares. Petitioner thereby became the sole remaining stockholder.Pinkerton used $ 100,000 of the amount which the corporation so paid him to pay and discharge his above-mentioned bank loan of said amount; and he retained the balance of the corporation's payment for his own use.The corporation incurred the following expenses in connection with its purchase or redemption of Pinkerton's said stock: $ 1,375 for attorneys' and accountants' services; and $ 233.33 paid by it to the Union Planters National Bank pursuant to its above-mentioned arrangement with Pinkerton, to cover additional interest on the latter's $ 100,000 bank note, which had accrued by reason of the postponement of the closing date for exercising the option.The corporation, 143 both at the time it paid said amount of $ 113,000 to Pinkerton and also at the close of its fiscal year involved, had earnings and profits in excess of the amount of said payment.The respondent, in his notice of deficiency herein, determined: (1) That petitioner was chargeable in the taxable year with a constructive distribution of a "dividend" to him of $ 113,000 -- being the amount which the Priester Machinery Company had paid to Pinkerton in purchase or redemption of all the latter's shares of said corporation; and (2) that petitioner also was chargeable in said year 323 with a constructive receipt of "compensation" from said corporation, in the amount of $ 1,608.33 -- being the total of the above-mentioned expenses which the corporation had incurred for attorneys' and accountants' fees and for interest, in connection with its redemption of Pinkerton's shares of stock.ULTIMATE FACTS.None of the $ 113,000 which the Priester Machinery Company paid to Pinkerton in purchase or redemption of all the latter's 501 shares of stock in the corporation, was distributed to or received either directly or indirectly by petitioner.Said corporation, at no time during the year 1957, distributed or 144 paid any amount to petitioner in purchase or redemption of any stock or any other equity interest that he had in said corporation; and also, it did not during said year, pay or discharge any indebtedness or any other financial obligation of petitioner.Pinkerton, in purchasing from Marjorie and selling to the Priester Machinery Company the 501 shares of stock here involved, acted solely on his own behalf, as an investor in such stock; and in none of the above-mentioned transactions was he an agent or representative of any other person.The above-mentioned expenses which the corporation incurred in connection with its purchase or redemption of Pinkerton's stock, were not incurred at petitioner's request, or on petitioner's behalf, or for petitioner's financial benefit.OPINION.I.The first and principal question here presented is whether the payment of $ 113,000 by the Priester Machinery Company to Max Pinkerton, in purchase or redemption of all the latter's shares of stock in said corporation, caused petitioner to become chargeable with a distribution of a taxable "dividend" to him of the same amount.In considering this question, we look first to the relevant provisions of the 1954 Code 145 which, so far as here material, are set forth in the margin. 2146 147 It will be observed from these statutory provisions, that 324 section 316(a) defines a "dividend" to be a distribution made by a corporation to its shareholders out of its earnings and profits; and it follows that, unless a distribution that is sought to be taxed to a particular stockholder was either made to him or for his financial benefit, it may not be regarded as either a "dividend" or the legal equivalent of a "dividend" to such stockholder.1. The respondent's position appears, in substance, to be this. First, he points to the undisputed facts that petitioner had, on February 28, 1953, entered into a stock purchase agreement with Marjorie, under which he obligated himself to buy her 501 shares of stock in the Priester Machinery Company for the price of $ 100,200; and that this obligation was still in force on April 1, 1957, with petitioner then owing an unpaid balance of $ 100,000 which he was financially unable to meet and which Marjorie refused to release. Secondly, he advances the legal proposition, which is likewise undisputed, that if the Priester corporation had then employed its earned surplus to discharge said obligation of petitioner to Marjorie, without receiving adequate consideration therefor from petitioner, such action of the corporation would have effected a constructive distribution of a taxable dividend to petitioner, under the principle of Wall v. United States, 164 F. 2d 462 (C.A. 4). And finally, based on these two undisputed premises, respondent then makes the disputed conclusion that said principle of the 148 Wall case is here applicable -- because (as he asserts) Pinkerton was merely a "straw man," and also because (as he further asserts) it was the corporation which actually discharged said obligation of petitioner to Marjorie by paying the latter the $ 100,000 balance of the purchase price of the stock through Pinkerton and the Union Planters Bank as mere intermediaries.Whether Pinkerton actually was a mere "straw man," and whether it actually was the corporation which discharged petitioner's stock 325 purchase obligation to Marjorie, are questions of fact, which must be resolved from a consideration and weighing of all the evidence. After having considered and weighed all the testimony and other evidence, we are convinced that such contentions of the respondent are unsound, in that they are both unsupported by and contrary to the substantive evidence.We are satisfied on the basis of the evidence, that Pinkerton actually did purchase Marjorie's 501 shares of stock on April 1, 1957, as his own investment; and that in such transaction, he was not acting as a "straw man" for anyone. He was a responsible businessman who had never met petitioner, and who was then associated with three lumber 149 companies in the Memphis area -- one of which bore his name; he had banking connections with two Memphis banks, where he had a substantial line of credit; and he had been selected by the United States Government to represent it in matters pertaining to the lumber industry abroad. The suggestion that he might make a profitable investment in the Priester Machinery Company by purchasing Marjorie's shares, came to him from witness Barclay, who was a local official for one of the national accounting firms, and in whose judgment Pinkerton had confidence. Pinkerton testified -- and we believe both credibly and convincingly -- that he decided to purchase Marjorie's stock at Barclay's suggestion, solely with a view to deriving capital gain therefrom; that he did not however wish to retain such investment for a period of more than 6 months to 1 year; and that, in order that he might be assured of such result, he had demanded and procured a collateralized guarantee from petitioner (the minority stockholder) that if he did purchase such shares, he as the majority stockholder would thereafter be able to have the same redeemed from him by the corporation within said period. The effect of Pinkerton's 150 obtaining such guarantee from petitioner was that, if the corporation did not thereafter redeem the shares from him within the specified period, either because it might not be able to raise the money for such purpose, or because petitioner (as the minority stockholder) might refuse to cooperate with him (the majority stockholder) in authorizing such redemption, then Pinkerton could foreclose on the collateral for said guarantee so as to protect himself from loss, and make himself the sole stockholder of the corporation. We are satisfied that Pinkerton's true intention in entering into the transaction was, as he unequivocally testified, to obtain a short-term investment in the corporation at minimum risk, from which he could reasonably expect to thereafter derive a capital gain.Moreover, both the testimony and the documentary evidence of record establish that, at the meeting of all the interested parties and their attorneys which was held at the bank on April 1, 1957, Marjorie 326 actually did sell and transfer to Pinkerton all her 501 shares of stock, in consideration for the cashier's check for $ 100,000 which Pinkerton at that time obtained through his loan from his bank and delivered 151 to her; that Marjorie thereupon actually did release and discharge petitioner from all his obligations under the above-mentioned stock purchase agreement of February 28, 1953, and also acknowledged in said written release that said agreement was terminated and satisfied; and that Marjorie and her attorney then resigned as directors and officers of the corporation, and thereupon completely terminated all of Marjorie's interest in and connection with the corporation.The evidence further establishes that all the 501 shares of the corporation which Marjorie had owned prior to said transaction on April 1, were actually transferred to Pinkerton upon the records of the corporation; that Pinkerton, the petitioner, and an attorney named McCloy, then became the new directors of the corporation; and that thereafter until October 16, 1957, when all of said 501 shares were redeemed, Pinkerton personally owned and controlled the majority interest in the corporation.Moreover, as we have heretofore found as a fact, petitioner did not receive either directly or indirectly, any of the amount which the corporation paid to Pinkerton in redemption of his shares; and since petitioner's prior obligation 152 to Marjorie had theretofore been wholly terminated and discharged on April 1, it follows that such obligation of petitioner was not, and could not have been, discharged by the corporation's subsequent payment to Pinkerton on October 16. Also, since the transactions of April 1 were solely between individuals -- that is between Marjorie, Pinkerton, and the petitioner -- and since the corporation did not at that time make any distribution to any stockholder, it is obvious that the payment of the $ 100,000 by Pinkerton to Marjorie, could not possibly qualify as a distribution of a taxable "dividend" to anyone, within the meaning of the above-cited section 316 of the 1954 Code.2. Notwithstanding our above conclusions, that the petitioner did not receive any of the amount which the corporation paid to Pinkerton in complete redemption of the latter's shares, and that the corporation did not discharge any financial obligation of the petitioner, a question still remains as to whether petitioner may nevertheless be charged with a constructive receipt of a "dividend," by reason of the facts: (1) That petitioner did, during the time that he was the minority stockholder of the corporation, guarantee 153 and vote for the redemption of Pinkerton's shares; and (2) that as the result of such redemption, petitioner was benefited indirectly, by becoming the sole remaining stockholder, and possibly by an appreciation in the value of his shares due to such undivided ownership of the company.327 A question of similar import was recently considered by the Third Circuit and also by the Ninth Circuit of the Courts of Appeals, respectively; and each of these courts answered such question in the negative. Niederkrome v. Commissioner, 266 F. 2d 238 (C.A. 9), reversing a Memorandum Opinion of this Court; and Holsey v. Commissioner, 258 F. 2d 865 (C.A. 3), reversing 28 T.C. 962">28 T.C. 962.In the Niederkrome case, five individuals desired to acquire all the stock of a corporation. Since their available funds were insufficient to enable them to buy more than about half of such stock, they arranged for a sixth person to purchase the remaining shares with borrowed funds which they assisted him to obtain; and the corporation thereafter redeemed all the shares so purchased by said sixth person -- with the result that the original five participants became the sole remaining stockholders. This Court, in deciding the 154 case, held that the five remaining stockholders were chargeable with a constructive distribution of a taxable "dividend" to the extent of the amount which the corporation had paid to the sixth individual in redemption of his shares; but, on appeal, the Ninth Circuit not only reversed our decision on procedural grounds, but also indicated that, in its view, there was not a constructive distribution of a "dividend" to anyone. The Ninth Circuit stated in its opinion, in part, as follows:But these [procedural] errors seem to have deflected the Tax Court from the real question in the case. It seems to have been the rationale of that body that, if it were proved that Bentson [the sixth person] was acting on the suggestion of the other stockholders and not as an independent investor, taxpayers are liable. * * The Tax Court addressed itself, on account of the erroneous approach above pointed out, to a hypothetical demonstration of collusion between Bentson and the other stockholders of the purchasing group.The real question is whether the taxpayers received any financial or economic benefits as a result of the redemption of the stock of Bentson. * It can be argued that taxpayers got 155 full control of the corporation. But should this circumstance, standing alone, be considered an economic or financial advantage? * * ** * * It is apparently held recently that there must be some real financial or economic value to the remaining stockholders in the redemption of the holdings of another before a tax is due from the former. Holsey v. Commissioner, 3 Cir., 258 F. 2d 865. [n9] Schmitt v. Commissioner, 3 Cir., 208 F. 2d 819 [reversing 20 T.C. 352">20 T.C. 352]. * The shares of stock in this corporation apparently became immensely more valuable in the hands of the selling stockholders. However, when they sold, they were subject to tax on whatever profit they realized thereon. During the years when this surplus was accumulated, the corporation itself was subject to income tax. Some fact must be found which justifies subjecting taxpayers to a further imposition.328 The Tax Court concluded this transaction was not carried on at arm's length. But that formula is deceptive. The statute sets up no such test unless it results in an actual receipt of money or a constructive receipt of financial or economic advantage. [Footnote omitted.]The Holsey case involved a situation wherein the 156 taxpayer who was one of two equal stockholders of a corporation, obtained an option to buy the shares of the other stockholder; and he then assigned such option to the corporation which redeemed all of the other stockholder's shares -- thereby causing the taxpayer to become the sole remaining stockholder. This Court held that the redemption caused the taxpayer to become chargeable with a taxable dividend; but the Court of Appeals for the Third Circuit reversed our decision -- stating in part as follows:The question presented for decision in this case is whether the Tax Court erred in holding that the payment by the Holsey Company of $ 80,000 to the Greenville Company for the purchase from that company of its stock in the Holsey Company was essentially equivalent to the distribution of a taxable dividend to the taxpayer, the remaining stockholder of the Holsey Company. * ** * * It will be observed that section 115(a) [of the 1939 Code, which is cognate to section 316 of the 1954 Code] defines a dividend as a distribution made by a corporation "to its shareholders." Accordingly unless a distribution which is sought to be taxed to a stockholder as a dividend is made to him or for 157 his benefit it may not be regarded as either a dividend or the legal equivalent of a dividend. Here the distribution was made to the Greenville Company [the other stockholder], not to the taxpayer. This the Government, of course, concedes but urges that it was made for the benefit of the taxpayer. * * It is, of course, true that the taxpayer was benefited indirectly by the distribution. The value of his own stock was increased, since the redemption was for less than book value, and he became sole stockholder. But these benefits operated only to increase the value of the taxpayer's stock holdings; they could not give rise to taxable income within the meaning of the Sixteenth Amendment until the corporation makes a distribution to the taxpayer or his stock is sold. Eisner v. Macomber, 1920, 252 U.S. 189">252 U.S. 189, 40 S. Ct. 189">40 S. Ct. 189, 64 L. Ed. 521">64 L. Ed. 521; Schmitt v. Commissioner of Internal Revenue, 3 Cir., 1954, 208 F. 2d 819 [reversing 20 T.C. 352">20 T.C. 352]. In the latter case in a somewhat similar connection this court said (at page 821):"During these years when Wolverine was buying its own shares it, of course, was subject to income tax as a corporation. Mrs. Green was subject to tax on whatever profit she 158 made by the sale of these shares to the corporation. But what happened to warrant imposing a tax upon Schmitt and Lehren? If one owns a piece of real estate and, because of its favorable location in a city, the land becomes increasingly valuable over a period of years, the owner is not subject to income taxation upon the annual increase in value. In the same way, if a man owns shares in a corporation which gradually become more valuable through the years he is not taxed because of the increase in value even though he is richer at the end of each year than he was at the end of the year before. If he disposes of that which has increased, of course he must pay tax upon his profit. All of this is hornbook law of taxation; nobody denies it."329 We think that the principle thus stated is equally applicable here. Indeed the Tax Court itself has so held in essentially similar cases. S. K. Ames, Inc. v. Commissioner, 1942, 46 B.T.A. 1020">46 B.T.A. 1020; Fred F. Fischer v. Commissioner, 1947, 6 T.C.M. (CCH) 520">6 T.C.M. 520.On October 30, 1958, the Commissioner announced in T.I.R. 109, Internal Revenue Bulletin 1958-43, that the Internal Revenue Service will follow the Court of Appeals' decision in the Holsey case; and later 159 he incorporated this announcement in Revenue Ruling 58-614, 2 C.B. 920">1958-2 C.B. 920. Also the Court of Appeals' decision in the Holsey case was thereafter approved and followed by the Internal Revenue Service in Revenue Ruling 59-286, 2 C.B. 103">1959-2 C.B. 103-105. See also Stout v. Commissioner, 273 F. 2d 345, 351-352 (C.A. 4), reversing on another point a Memorandum Opinion of this Court, in which the Fourth Circuit cited with approval both the Third Circuit's decision in the Holsey case, and also the above-mentioned announcement of the Internal Revenue Service. See also to the same effect, Ward v. Rountree, 154">193 F. Supp. 154 (M.D. Tenn.).After examining all the above-mentioned authorities, we have concluded that the opinions of the Courts of Appeals for the Third and Ninth Circuits in the above-mentioned Holsey and Niederkrome cases are correct; and that the principles set forth in the above quotations therefrom should be followed and given effect in the present case. Cf. John A. Decker, 32 T.C. 326">32 T.C. 326, affirmed per curiam 286 F. 2d 427 (C.A. 6).We decide the first issue in favor of the petitioners.II.As regards the second issue, the respondent has stated on brief that the decision on this will be 160 governed by our decision on the first issue; and with this we agree. Moreover, we have hereinbefore found as a fact that the expenses of $ 1,608.33 which the Priester corporation incurred in connection with its purchase or redemption of Pinkerton's stock, were not incurred either at petitioner's request, or on petitioner's behalf, or for petitioner's financial benefit.We decide this issue also in favor of the petitioners.Decision will be entered under Rule 50. TIETJENSTietjens, J., dissenting: I respectfully dissent. As I view the transactions described in the findings of fact, the petitioner here was obligated to Marjorie to purchase her stock. He was financially unable to carry out this agreement and unless some other arrangement could be worked out he was faced with the prospect of losing all his 330 own shares in the corporation. Pinkerton stepped into the breach, but only for a short time and then only after first being assured that the corporation had the necessary funds and would use them to make him whole and provide him with a profit. When the smoke cleared away, petitioner's obligation to Marjorie had been satisfied, by use of the corporate surplus; Pinkerton was out 161 of the picture, by prearrangement; and petitioner was sole owner of the corporation. Thus viewed, petitioner certainly received financial and economic benefits measured by the corporate funds used to relieve him of his obligation to Marjorie, despite the interposition of Pinkerton. The net effect was a taxable dividend to petitioner. Wall v. United States, 164 F. 2d 462; Flanagan v. Helvering, 116 F. 2d 937. Footnotes1. These three written agreements included: (1) A purchase agreement for the above-mentioned shares; (2) an escrow agreement, through which the obligations of the purchase were secured; and (3) a related agreement to the effect that, if Marjorie should elect to have the corporation redeem her said 501 shares covered by the agreement, petitioner would consent to such plan.↩2. SEC. 316. DIVIDEND DEFINED.(a) General Rule. -- For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders -- (1) out of its earnings and profits accumulated after February 28, 1913, or(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. * SEC. 317. OTHER DEFINITIONS.(b) Redemption of Stock. -- For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.(a) General Rule. -- If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.(b) Redemptions Treated as Exchanges. -- (1) Redemptions not equivalent to dividends. -- Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.(2) Substantially disproportionate redemption of stock. -- (A) In General. -- Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder. * * *(3) Termination of shareholder's interest. -- Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.(4) Stock issued by railroad corporations in certain reorganizations. -- [Not here relevant.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620324/	J. Reuel and Dorothy Campbell v. Commissioner.Campbell v. CommissionerDocket No. 4550-62.United States Tax CourtT.C. Memo 1965-54; 1965 Tax Ct. Memo LEXIS 274; 24 T.C.M. (CCH) 304; T.C.M. (RIA) 65054; March 18, 1965Jesse J. Maynard, Leonhardt Bldg., Oklahoma City, Okla., for the petitioners. Bruce Hallmark, for the respondent. FAYMemorandum Opinion FAY, Judge: Respondent determined deficiencies in petitioners' income tax liability for 1959 in the amount of $725.04. The issue for decision is whether petitioners are entitled to deductions for legal fees of $2,000 and $712.50 paid in 1959. All of the facts have been stipulated by the parties and are found accordingly. Petitioners J. Reuel Campbell and Dorothy Campbell are husband and wife residing in Oklahoma City, Oklahoma. They filed their joint Federal income tax return for the year 1959 with the district director of internal revenue, Oklahoma City, Oklahoma. During the taxable year 1959, 275 J. Reuel Campbell (hereinafter referred to as petitioner) was self-employed as a druggist operating two retail drug stores in Oklahoma City. On October 10, 1958, a letter was sent from regional counsel, Internal Revenue Service, advising petitioner's attorney, John E. Marshall, that the files in his client's case had been forwarded to the Department of Justice. The purpose of transmission was for further consideration of regional counsel's recommendation that criminal proceedings be instituted against petitioner for willful evasion of his and his wife's income taxes for the taxable years 1952, 1953 and 1954. By letter dated October 24, 1958, Elden McFarland, an attorney in Washington, D.C., informed petitioner that he would attempt to confer with the Department of Justice in an effort to defend petitioner against the institution of criminal prosecution. The letter contained a proposed fee arrangement which stated that McFarland would require a retainer of $1,000 payable on or before November 6, 1958, together with a contingent fee of $1,000 for each count (or year) with respect to which no indictment was returned. During November 1958 McFarland represented petitioner before the276 Department of Justice in conferences and in filing of argument with respect to the criminal charges recommended by the Internal Revenue Service for the taxable years 1952, 1953, and 1954. For these services petitioner paid McFarland $1,000 on November 5, 1958, in accordance with the terms of the proposed fee arrangement. McFarland's efforts were unsuccessful and no contingent fee was paid. On December 12, 1958, the Department of Justice forwarded petitioner's case to the United States Attorney for the Western District of Oklahoma with instructions that criminal charges be instituted against petitioner for willful evasion of his and his wife's income taxes for the years 1952, 1953, and 1954. In a letter dated January 5, 1959, McFarland offered to represent petitioner in the trial of the criminal case and proposed a fee arrangement. McFarland requested that petitioner sign the letter and return a copy if the suggested fee arrangement were acceptable. Petitioner did not execute the letter. On January 9, 1959, petitioner appeared before a judge of the United States District Court for the Western District of Oklahoma. Petitioner was represented by T. F. McIntyre, an Oklahoma City277 attorney. During the proceedings on January 9, 1959, the United States filed with the District Court a document entitled "Summary of Findings in the Case of United States v. J. Reuel Campbell." On the same day petitioner filed an instrument by which he waived indictment and consented to the proceedings to be by information. The United States thereupon filed an information charging petitioner with three counts of willfully and knowingly attempting to evade and defeat a large part of the income tax due and owing by him and his wife by filing and causing to be filed a false and fraudulent income tax return for each of the years 1952, 1953, and 1954. Petitioner entered a plea of nolo contendere to Count one of the information (1952). The United States Attorney objected to the acceptance of such plea. However, upon acceptance of petitioner's plea, the United States Attorney advised the Court that when sentence was pronounced on such plea he would, in order to avoid the necessity and expenses of trial, move for dismissal of Counts two and three of the information relating to the taxable years 1953 and 1954, respectively. On February 20, 1959, when petitioner again appeared before the278 Court, he was represented by his Oklahoma City attorneys, McIntyre and Frank Hensley. The Court entered judgment finding petitioner guilty on his plea of nolo contendere to Count one of the information. Petitioner was sentenced to pay a fine of $5,000. On the United States' motion, Counts two and three of the information were dismissed. Petitioner paid the following attorneys' fees: On April 1, 1959, $2,000 to McFarland; and on January 29, 1959, $1,068.75 to McIntyre. These fees were incurred altogether in connection with the criminal prosecution, and no part thereof was attributable to petitioner's civil tax liability. In their return for the taxable year 1959 the petitioners claimed as deductions the amounts of $2,000 and $712.50 as legal expenses relating to the dismissal of the two criminal charges for the years 1953 and 1954. In his determination of deficiencies for 1959, respondent disallowed the claimed deductions covering the payment of legal fees made to McIntyre and McFarland. Petitioner takes the position that (1) legal expenses incurred in the successful defense of a criminal tax case are deductible and (2) dismissal of two criminal charges against him for the calendar279 years 1953 and 1954 constitutes a successful defense. Therefore, he argues, his legal expenses pertaining to those two dismissed charges should be allowed as deductions under section 212(3) of the Internal Revenue Code of 1954. 1 Petitioner concedes the proposition that expenses incurred in the unsuccessful defense of a criminal tax case are not deductible. Moreover, he did not claim such expenses in his return. 2With respect to280 the legal fee paid to McIntyre, petitioner argues that two-thirds of the total fee should be allowed as a deduction since two of the three charges against petitioner were dismissed. In this case, the two criminal charges against petitioners were dismissed upon the motion of the United States Attorney in order to avoid the expense and necessity of going to trial. Petitioner pleaded nolo contendere and was sentenced upon a third charge. However, we do not find it necessary to decide whether, upon such facts, dismissal of one or more charges and conviction upon another charge constitute a successful defense permitting deduction of a portion of legal costs. Petitioner here failed to show any reasonable basis upon which any portion of the fee paid to McIntyre can be allocated between the three counts. Petitioner has failed to introduce any evidence showing that (1) McIntyre would have charged any less had petitioner been indicted on fewer charges or (2) McIntyre's fee was any greater because two counts were dismissed. Therefore, we sustain respondent with respect to the fee paid to McIntyre. Petitioner claims that the entire $2,000 paid to McFarland on April 1, 1959, should be allowed281 as a deduction. He claims (1) that this fee was incurred in the successful defense of criminal charges against petitioner for the calendar years 1953 and 1954 and (2) that payment of the fee resulted in the two criminal charges being dismissed. The evidence does not support this contention. As far as can be determined, the two charges were dismissed solely upon the initiative of the United States Attorney. Therefore, the entire fee paid to McFarland is clearly not deductible. Respondent contends that this fee was paid for McFarland's attempts before the Department of Justice to defend petitioner against institution of criminal prosecution. The record shows, however, that petitioner paid McFarland $1,000 for those services on November 5, 1958, in full accordance with a fee arrangement proposed by McFarland in a letter dated October 24, 1958. Since petitioner paid McFarland the amount specified in that letter within the time required, we find no reason to believe that petitioner subsequently paid McFarland any other amounts for the same services. Although the $2,000 fee paid to McFarland on April 1, 1959, was incurred in connection with the criminal prosecution and no part thereof282 was attributable to petitioner's civil tax liability, there is nothing in the record to identify the particular purpose for which this expense was incurred. We may only assume that it arose generally in connection with the criminal prosecution. Hence, it falls in the same category as the fee paid to McIntyre and the problems of allocation are indistinguishable. Upon a review of the record before us, the evidence does not reveal any reasonable basis for allocation between the three charges of any portion of the $2,000 fee paid to McFarland on April 1, 1959. Thus, the respondent did not err in disallowing a deduction for this fee. Decision will be entered for the respondent. Footnotes1. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - * * *(3) in connection with the determination, collection, or refund of any tax. ↩2. Since petitioner maintains only that legal expenses incurred in the successful defense of a criminal tax case are deductible, the question of deductibility of legal expenses incurred in an unsuccessful defense is not before us. Therefore, we do not find it necessary to consider the Second Circuit's opinion in Tellier v. Commissioner, 342 F. 2d 690↩ (C.A. 2, 1965), reversing on this issue a Memorandum Opinion of this Court.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620327/	Appeal of JOSEPH EMSHEIMER INSURANCE AGENCY.Joseph Emsheimer Ins. Agency v. CommissionerDocket No. 1036.United States Board of Tax Appeals1 B.T.A. 649; 1925 BTA LEXIS 2826; February 28, 1925, decided Submitted February 15, 1925. 2826 The taxpayer operates a general insurance agency. A large part of its income for 1919 and 1920 consisted of commissions received by it upon policies written by subagents. Stockholders owning 48 per cent of the shares of capital stock were not regularly engaged in the active conduct of the business. Evidence held not to warrant classification as a personal service corporation for 1919 and 1920. J. Robert Sherrod and Harry Friedman, Esqs., for the taxpayer. E. C. Lake, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. SMITH 650 Before GRAUPNER, LANSDON, LITTLETON, and SMITH. This is an appeal from the action of the Commissioner in denying the taxpayer a personal service classification for the years 1919 and 1920. From the oral and documentary evidence the Board makes the following FINDINGS OF FACT. 1. The taxpayer was incorporated under the laws of the state of West Virginia June 3, 1911. 2. During the years 1919 and 1920 the taxpayer represented ten insurance companies as local agent in the city of Wheeling, West Virginia, soliciting various kinds of insurance, for which it was paid an average2827 commission of from 20 to 30 per cent of the premiums collected. 3. During the same years the taxpayer also represented two insurance companies as general agent for the district, including Wheeling and certain contiguous parts of West Virginia, Ohio, and Pennsylvania. As such agent it did not represent the insured but represented the two insurance companies, and the services it rendered were of a dual nature: (a) As general agent it appointed or recommended for appointment throughout the said district certain local agents and the officers of the taxpayer visited such local agents at frequent intervals in the interests of the companies by which they were employed, and (b) the other duty performed as general agent for its principals consisted of passing upon the desirability of the risk before the policy was forwarded to the insurance companies. The local agents were required to report all business written for these two insurance companies through the office of the taxpayer, so that the latter might pass upon the risk and, if it deemed advisable, reject the same and cancel the policy. For both the activities mentioned under (a) and (b) above, the taxpayer was allowed a so-called2828 overwriting commission averaging approximately 7 per cent. The local agents were required to remit to their principals through the taxpayer, and the latter deducted its commissions from the premiums and remitted the balance to the companies. The taxpayer guaranteed the collection of the premiums upon the policies written by the local agents. During the years 1919 and 1920 approximately forty local agents were under contract with the taxpayer. The gross income earned by the taxpayer from this source was approximately 35 per cent of the total gross income. 4. The outstanding capital stock of the taxpayer was $25,000, divided into 250 shares, par value of each share $100, all of which was issued for the good will of the agency which had been in existence for many years prior to 1911. During the years 1919 and 1920 the shares of stock of the taxpayer were owned as follows: Names.Shares.Gabe S. Emsheimer125Charles S. Schlesinger5A. W. Emsheimer20Cora S. Emsheimer30Bella E. Schlesinger20Jennie E. Beekman30Hattie E. Levy20Total250651 Gabe S. Emsheimer was president, and Charles S. Schlesinger was secretary and treasurer2829 of the corporation during the years 1919 and 1920, and devoted their entire time to the business of the taxpayer. A. W. Emsheimer had retired from business and received no salary or commissions from the taxpayer during these years. He did, however, devote some time to the soliciting of business for the taxpayer. The last four named stockholders holding 40 per cent of the stock of the corporation were in no sense regularly or actively engaged in the conduct of the corporation's business. 5. The income of the taxpayer for the year 1919 amounted to $36,703.01, of which amount $22,449.28 was from commissions on local business, $13,405.65 from overwriting commissions, and $848.08 from brokers. 6. The taxpayer employed no solicitors in connection with its business as local agent in Wheeling, except one Milton J. Schlesinger, a member of the family who owned no stock. His duties consisted principally of collecting premiums and delivering policies for which he was paid a salary of $1,500 for 1919. He also solicited some insurance business for which he was allowed a commission by the taxpayer of $745.22. The taxpayer received gross income of approximately $1,200 from his activities. 2830 7. The ledger surplus account, balanced as of the beginning and end of each taxable year, was as follows: January 1, 1919$5,478.79December 31, 19196,779.46December 31, 192010,982.638. The taxpayer was required to render to the insurance companies which it represented as agent a monthly "account-current" schedule or report on premiums written by it. The practice with respect to this business varied, the remittances being made 45, 60, or 90 days after the close of the month in which the premiums were written. At the end of each year, in order to facilitate the preparation of certain reports by the insurance companies, it was customary to remit all premiums written prior to November 1, and it usually became necessary for the taxpayer to borrow amounts estimated at between $1,000 and $1,500 from the bank in order to make such remittances and to enable it to declare the usual semiannual dividend. The insurance companies extended credit to the insureds in respect to payment of premiums over a period covering 45, 60, and 90 days after the end of the month in which the premiums were written. If the taxpayer extended credit in excess of that allowed by2831 their principals, the insurance companies, and the account later proved uncollectible, the policies would be cancelled "flat" as to that part 652 of the premium which had been consumed during such 45, 60, or 90 day period, but the taxpayer would stand the loss of the portion of the premium consumed after such period. In exceptional cases a longer credit was granted by the taxpayer to the insured in which to pay the premium charged upon the policy. Losses from bad debts resulting from such transactions were rare. The taxpayer sustained no such losses through business obtained by its subagents since all such agents were bonded. DECISION. The determination of the Commissioner is approved. OPINION. SMITH: What constitutes a "personal service corporation" within the meaning of the Revenue Act of 1918 is set forth in section 200 of that act. Two of the requisites of such a corporation are that its income shall be (1) "ascribed primarily to the activities of the principal owners or stockholders," and (2) that such principal owners or stockholders shall be "regularly engaged in the active conduct of the affairs of the corporation." We are of the opinion that a large2832 part of the income of the taxpayer, in excess of 33 1/3 per cent of the total, is not ascribable primarily to the activities of the principal owners or stockholders. The corporation represents two insurance companies as general agent and it receives a commission upon the business written by the subagents. Of course, the officers of the taxpayer performed certain duties in connection with such business but the taxpayer receives a percentage of the total commissions paid by the insurance companies in respect of that business, and the income of the taxpayer from such business is large or small depending upon the activities of the subagents. With respect to such business the income of the taxpayer is ascribable primarily to the activities of the subagents. It is also to be noted that the holders of 40 per cent of the stock of the taxpayer are clearly not regularly engaged in the active conduct of the business, and we are not convinced from the evidence before us that Mr. A. W. Emsheimer, holding 8 per cent of the stock, can be regarded as being regularly engaged in the active conduct of the affairs of the taxpayer. Only two of the stockholders, Gabe S. Emsheimer and Charles*2833 S. Schlesinger, holding 52 per cent of the stock of the corporation, may be so regarded. As we have pointed out in the , the case of each taxpayer claiming to be a personal service corporation must be decided upon the facts in the particular case. Considering all of the facts before us with respect to the taxpayer's business for 1919 and 1920, we think that the taxpayer does not qualify as a personal service corporation for those years.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620329/	Estate of Robert R. Gannon, Deceased, The First National Bank of Montgomery, Alabama, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentGannon v. CommissionerDocket No. 39358United States Tax Court21 T.C. 1073; 1954 U.S. Tax Ct. LEXIS 254; March 31, 1954, Promulgated 254 Decision will be entered under Rule 50. 1. Partnership agreement provided that, upon the death of a partner, surviving partners had the right to liquidate the partnership or, in the alternative, the option to purchase decedent's interest therein at an amount fixed annually by supplementary agreement of the partners. The price was fixed in the supplementary agreement as of January 1, 1947. Decedent died on October 4, 1947. Decedent's share of substantial profits of the partnership for period from January 1, 1947, to October 4, 1947, was not taken into consideration in determining price fixed by the supplementary agreement, and no part of such profits was claimed by or paid to decedent's estate. Held:(a) In determining value of decedent's interest in partnership, respondent was not bound by price fixed in supplement to partnership agreement; and(b) Decedent's share of profits of partnership from date upon which option price was fixed to date of decedent's death is to be included in determining value of decedent's interest in partnership for estate tax purposes.2. Held, upon the facts, that decedent's interest in the partnership had no goodwill value.3. Total of amounts255 paid out of partnership funds and charged to decedent's personal withdrawal account, subsequently repaid to the partnership out of the assets of his estate, held, deductible as a debt in determining net estate.4. Held, upon the facts, that value of automobile titled in name of decedent's wife at the time of his death was not includible in decedent's gross estate. William S. Pritchard, Esq., and Winston B. McCall, Esq., for the petitioner.R. B. Wallace, Esq., for the respondent. Fisher, Judge. FISHER1074 Respondent determined a deficiency in estate tax in the amount of $ 22,551.11. The statement attached to the deficiency letter made adjustments in gross estate and deductions by:(a) Increasing the value of decedent's partnership interest from $ 41,339.35 to $ 111,346.14;(b) Decreasing accrued salary from $ 33.32 to $ 0.00 (because accrued salary had been included in the increase in value of the partnership interest);(c) Including in gross estate the amount of $ 1,800 representing the value of an automobile;(d) Decreasing from $ 17,425.27 to $ 0.00 the amount257 of debt claimed as a deduction;(e) Increasing the deduction for administration expenses as follows:ItemReturnedDeterminedCourt costs-0-$ 3.25Transfer taxes-0-3.43Appraisal fees-0-12.50The parties stipulated that additional costs and expenses incurred by the executor in administering the estate, including the costs and expenses incurred in connection with this proceeding, will be allowed as additional deductions in proceedings under Rules 50 and 51.FINDINGS OF FACT.Robert R. Gannon died testate on October 4, 1947, at the age of 58. At the time of his death, he was a resident of Montgomery, Alabama. The First National Bank of Montgomery, Montgomery, Alabama, was duly appointed executor of Gannon's estate. An estate tax return was filed by the executor of the Gannon estate with the collector of internal revenue for the district of Alabama. The executor elected to value the property included in the gross estate under section 811 (j) of the Internal Revenue Code.Valuation of Partnership Interest.At the time of his death, decedent and his two brothers, John F. Gannon and Carter N. Gannon, were partners, each owning a one-third 1075 interest258 in the partnership known as J. W. Gannon and Company.Under date of January 1, 1936, the three brothers entered into a partnership agreement which provided, in part, as follows:Section 3. The capital investment of each of said partners is $ 10,000.00. Each partner owns one third of the partnership assets. The capital of the partnership and the respective capital investment of each of the partners shall not be increased or decreased without the consent of all the partners.Section 4. Until otherwise unanimously agreed, and as long as the profits of the business permit, the monthly salary of each of the partners for services rendered to the partnership shall be as follows:Robert R. Gannon$ 250.00Carter N. Gannon225.00John F. Gannon225.00Section 5. The net profit after payment of salaries shall be divided equally between the partners at such intervals as may be agreed upon by unanimous consent of the partners.Section 6. Any undrawn salary or profit of any partner shall remain as such and shall not increase the capital holding of such partner.* * * Section 8. The partnership shall continue until dissolved by mutual agreement or by any one of the partners who may259 do so upon sixty days notice thereof in writing to the other partner.Section 9. (a) The death of any one of the partners shall not terminate the partnership insofar as the survivors are concerned, and such death shall not empower the estate or any representative of the deceased partner to require the liquidation of the partnership or the winding up of its affairs, and the survivors shall at their option either continue the operation of the business until such time as said survivors mutually agree to discontinue or said survivors may cease business and liquidate the partnership assets and pay one third of the proceeds of the liquidation to the estate of the deceased partner.(b) Should the survivors elect to continue the business the management thereof shall vest solely in the surviving partners and the estate or other representative of the estate of the deceased partner shall have no right to take any part in the management of the business but shall at all reasonable times have access to and the right to inspect the books of the business.(c) Should the survivors elect to continue the business the value of the interest of the deceased partner in the business shall be ascertained 260 as follows: The partners shall, on or about the first of each year, agree in advance on the net value of the partnership assets and the value of the interest of the estate of any partner who shall die during that calendar year shall be one third of said net value. It is accordingly agreed that the net value of the partnership assets for the current calendar year 1936 is $ 47,402.47, and should any one of the partners die during the current year 1936 the value of his share in the partnership assets shall be one third of that amount. Should the partners fail to agree in advance on the net value of the partnership assets, then the value thereof shall be agreed upon by the survivors and the estate of the deceased partner if they can reach an agreement, but if they are unable to agree then the said value shall be submitted to competent and disinterested appraisers, of whom the survivors shall select one, and the said estate shall select one and if the two so selected cannot agree then they shall select a third and 1076 the finding of the majority shall govern. In determining the said value, the value of the goodwill of the business shall not be included.(d) When the value 261 of the interest of the deceased partner has become ascertained as hereinabove provided said interest shall be paid off or liquidated as follows: (1) If there is any group or partnership insurance obtained for the purpose of liquidating the interest of the deceased partner then the proceeds of such insurance shall be so used, except that if the funds derived from said insurance are insufficient to liquidate the interest of said deceased then the balance shall be paid as hereinafter provided, but if the funds derived from said insurance are more than sufficient to liquidate the interest of said deceased then excess shall belong to the surviving partners clear of any claim of the estate of the deceased partner. Prior to the death of any of the partners all such group or partnership insurance or other insurance on the life of any partner, the premiums on which are paid out of partnership funds shall name the partnership J. W. Gannon and Company as the beneficiary and shall not name any individual of the firm as beneficiary and all such insurance shall be the property of the partnership. (2) If there be no life or group insurance, or should the proceeds thereof be insufficient, the interest262 of the deceased partner shall be paid off or liquidated in cash immediately if the surplus of the partnership will permit, in the sound opinion of the survivors, without handicap to the business, otherwise it shall be paid in three annual installments, payable one third thirty days after the date of death of said partner, one third one year after the date of the said death, and one third two years after the date of said death. Said installments shall not bear interest. All amounts so paid in liquidating the interest of a deceased partner shall be paid with partnership funds and there shall be no obligation on the part of the survivors to so pay out of their personal assets.(e) Upon the death of any partner and until the estate of the deceased partner shall have been fully liquidated the monthly salaries drawn by each of the surviving partners shall not exceed the salary each was drawing immediately prior to the death of said partner.* * * Section 10. During the existence of the partnership the unanimous assent of all partners shall be necessary for any affirmative action except dissolution and winding up of the affairs of the partnership as herein provided.Section 11. No partner263 shall sell, pledge or in any way encumber his interest in the partnership without the written consent of the other partners, but each of the partners may by will or by the laws of descent and distribution pass his interest in the partnership to his estate or such legatees as he may see fit, subject, however, to the provisions of this agreement and particularly Section 9 hereof.Section 12. No partner shall obligate the partnership in any way without the consent of the other partners. No partner shall individually endorse or become surety or guarantor for any third party without the consent of the other two partners.Each year, as provided in section 9 (c) of the partnership agreement, the partners executed a supplement to the agreement setting forth the net value for the current year, which was the purchase price of a deceased partner's interest in the event a surviving partner elected the option to purchase.The supplementary agreement for the calendar year 1947 signed by all of the partners on January 31, 1947, was as follows:1077 Pursuant to Section 9 (c) of Partnership Agreement of the parties of Jan. 1, 1936, it is mutually agreed that the net values of the partnership264 assets of the J. W. Gannon and Company, at the close of books January 1, 1947, is $ 124,018.05.The investment account of R. R. Gannon is $ 41,339.35.The investment account of C. N. Gannon is $ 41,339.35.The investment account of John F. Gannon is $ 41,339.35.(The investment accounts were reduced as of January 1, 1947 by personal withdrawal of each partner in the amount of $ 29,569.06. See General Journal Entry of Jan. 1st, 1947.)The reduction in investment accounts referred to in the supplementary agreement of January 31, 1947, was accomplished before the agreed valuation was determined.In his will the decedent referred to the partnership agreement and provided as follows:The trustee shall proceed to collect the value of my share in the business of J. W. Gannon and Company according to the partnership agreement now existing between Carter N. Gannon, John F. Gannon, and myself, which said partnership agreement is annexed to this will and made a part hereof, and the trustee is hereby specifically directed to abide by the terms of such partnership agreement. * * The surviving partners elected to purchase decedent's interest in J. W. Gannon and Company265 in accordance with section 9 (c) of the partnership agreement and the supplemental agreement thereto for the sum of $ 41,339.35, and pursuant to the will of decedent, the partnership agreement, and the supplemental agreement, the executor sold the decedent's interest in J. W. Gannon and Company to John F. Gannon and Carter N. Gannon for that price.Decedent's will contains no bequests to his brothers. All of its provisions are for the benefit of his wife and children.The partnership was engaged in the business of selling automobile supplies as a jobber or wholesaler. These supplies included automobile supplies, maintenance supplies, garage repair equipment, supplies for making seat covers, and automotive paint. The partnership had no patents, exclusive franchise, or exclusive right to purchase its products which put it in a different competitive position from other competitors or others that might go into that type of business.There were six places of business engaged in the same or similar type of business as J. W. Gannon and Company in the city of Montgomery during the years 1947-1948. Their trade territory covered that part of Alabama south of the line from Siluria, Alabama, 266 and that part of Florida bordering on Alabama. In addition to the six competitors in Montgomery, there were many other competitors adjacent to Montgomery selling in the same competitive territory.Decedent was the oldest of the brothers. The work was pretty well divided, except that he was regarded as sales manager. He handled the larger jobs and called on the principal customers.1078 The sales made by the partnership were attributable largely to personal contacts by the partners and to the personality of, and good feeling toward, the salesmen in the trade territory. The partnership did no extensive advertising at any time. The average sales of the partnership monthly for 1947 were around $ 32,000. In 1948 (after the death of Robert R. Gannon) the average monthly sales dropped approximately 25 per cent.The net earnings of the partnership (before deducting the partners' salaries provided for in the agreement) for the period from January 1, 1947, to October 4, 1947, were $ 61,861.70. The total salaries of the partners for the same period were $ 6,393.32, and the net earnings after salaries for the same period were $ 55,468.38. The value of decedent's share in said profits267 was $ 18,489.46, to which should be added his accrued and unpaid salary in the amount of $ 33.32 or a total of $ 18,522.78.The partnership did not carry on its books as an asset any item of goodwill.We find, upon consideration of all of the facts, that decedent's interest in the partnership had no goodwill value.Petitioner included in the estate tax return here in issue, as item 4, under "Other Miscellaneous Property," the amount of $ 33.32 as accrued salary. Respondent reduced the item to $ 0.00, but added $ 33.32 to his determination of the value of decedent's partnership interest. The inclusion of this item in gross estate is not contested, and we have followed respondent in including it as a part of the value of decedent's partnership interest.We find, as ultimate facts, that, as of the applicable valuation date,(a) The value of decedent's interest in the partnership known as J. W. Gannon and Company was $ 59,922.13; and(b) that the value so found consists of the sum of $ 41,339.35 (the agreed price provided for in the agreement dated January 31, 1947) and $ 18,522.78 (representing decedent's share of the net earnings of the partnership, after salaries, for the period 268 from January 1, 1947, to October 4, 1947).Withdrawals From Partnership by Decedent.The partnership, J. W. Gannon and Company, filed on March 26, 1948, in the Probate Court of Montgomery County, Alabama, a claim against the estate of Robert R. Gannon, claiming that the amount of $ 17,425.27 was due the partnership on the basis of a partnership book record of withdrawals by decedent for the period January 1, 1947, to October 4, 1947. The claim was paid by the executor out of the assets of the estate, and was deducted as a debt of the decedent on the estate tax return filed by the executor. The books of the business 1079 showed the indebtedness to be owing at the time of decedent's death. The amount was not shown on the books as a withdrawal of earnings, and was not charged to decedent's investment account. It was shown separately as a debit balance in his personal withdrawal account. The account consisted of 125 to 150 different personal items paid for his account. The claim was paid by the executor by deducting the amount of $ 17,425.27 from the purchase price paid for Robert R. Gannon's partnership interest. We find as an ultimate fact that, as a result of said withdrawals, 269 decedent was, at the time of his death, indebted to the partnership in the amount of $ 17,425.27, and that the debt was in fact paid out of his estate by his executor by allowance of credit as above set forth.Ownership of Automobile.Respondent has added the sum of $ 1,800 to decedent's gross estate representing the value of a 1947 Chevrolet sedan, acquired May 7, 1947, holding that decedent "had such an interest" therein "as to require inclusion of its value" in gross estate under the provisions of Internal Revenue Code section 811 (a).The invoice for the automobile shows that it was "Sold to Mrs. Lucy N. Gannon." Title was transferred from R. R. Gannon to her name on May 20, 1947. A license was issued in her name. The automobile that was traded in on the purchase of the Chevrolet was registered in her name at the time of the trade-in. John F. Gannon testified that he handled the purchase of the automobile and that it was owned by Mrs. Gannon. We find as a fact that the automobile in question was the property of Mrs. Lucy N. Gannon at the time of her husband's death.OPINION.I. Valuation of Decedent's Interest in Partnership.A. Agreed Valuation in Supplemental Partnership270 Agreement Not Binding on Respondent.Petitioner included the sum of $ 41,339.35 in decedent's Federal estate tax return as the value of decedent's interest in the partnership, J. W. Gannon and Company. Section 9 (a) of the partnership agreement provided that upon the death of one of the partners, the surviving partners had the right either to continue the operation of the business or to liquidate it. The agreement further provided that if the survivors elected to continue the business, the value of decedent's interest was to be ascertained on the basis of an agreement of the partners, entered into in advance, on or about the first day of each year, 1080 shortly after the figures of the previous year became available. The amount so fixed was intended to be binding upon the surviving partners and the estate of the deceased partner, in the event of the death of a partner during the year, irrespective of the actual date of death during the year in question. The partners made it a practice each year from 1936 to 1947, inclusive, to file a supplemental statement fixing the agreed value for the particular year. The value for 1947 (the year of decedent's death) was determined271 to be $ 41,339.35 as of January 1, 1947. The supplemental agreement was signed by all of the partners on January 31, 1947. The date of decedent's death was October 4, 1947.Under the terms of the partnership agreement, the surviving partners had the option to purchase decedent's interest at the price agreed upon in the supplemental agreement, or to liquidate the partnership. The first alternative was selected, and the surviving partners gave appropriate notice to decedent's executor. Transfer of decedent's interest to the surviving partners was duly made, and the agreed price was paid to decedent's executor subject to a deduction not here material.The partnership agreement contained no provisions for fixing the value of a partner's interest for the purpose of a lifetime transfer, and had no optional provisions for lifetime transfers. The agreement provided that the partnership should continue until dissolved by mutual agreement, or by any one of the partners upon 60 days' written notice to the other partners.The value of a partner's interest as of January 1, 1947, was not determinative in fact of the value of such interest on October 4, 1947.Respondent urges that upon the 272 foregoing facts, the agreed valuation of decedent's partnership interest as of January 1, 1947, was not binding for Federal estate tax purposes. We sustain respondent's contention in this respect upon the authority of Estate of George Marshall Trammell, 18 T.C. 662">18 T. C. 662, 668.While petitioner does not concede the correctness of our view as expressed above, he does not assert a contrary view in his brief. His argument, and the authorities offered in support of his contentions, are rather directed to the proposition that the value agreed upon by the partners was in fact the fair market value of decedent's interest in the partnership, and that such value is not to be increased for Federal estate tax purposes by any amount attributable to goodwill.B. Decedent's Interest in Partnership Had No Goodwill Value.Having determined that respondent is correct in his contention that the value fixed in the supplemental partnership agreement is not 1081 binding upon respondent for Federal estate tax purposes, we now examine the issue of whether or not any additional value is to be attributed to goodwill. In this respect we advert to the following:No item 273 of goodwill was set up on the books of the company. The testimony of one of the surviving partners was to the effect that the partners were of the opinion that there was no goodwill value. The business of the partnership was that of a jobber selling general auto supplies to retailers by personal and direct solicitation. The partnership did no substantial advertising. It had not patents or trade-marks, and had no exclusive agency or selling rights for the sale of any of its merchandise. It faced substantial competition from numerous organizations handling the same lines and carrying on business in the same way. Except for the services of employees, including salesmen, who received compensation for their services as such, the sales and ultimate earnings of the partnership were attributable to some extent to return on investment, but otherwise, and in the main, to the personal efforts and services of the partners, including direct contacts with customers by the partners. The partners were brothers, the deceased partner being the eldest. Decedent had maintained contacts with the larger customers, and had handled the larger accounts. He was also, in a sense, the sales manager. 274 Counsel for respondent conceded at the trial that there was no issue of good faith in the fixing by agreement of the value of decedent's interest in the partnership.Respondent, in urging the existence of a substantial goodwill value, refers to the substantial earnings of the partnership and urges that such earnings were not affected by the absence of one of the partners (who was away in the armed service for 21 months beginning in January 1943) or the fact that decedent had not been as active in the business in 1947 as he had been in previous years. Respondent does not mention (although he does not deny) that the sales of the partnership fell off 25 per cent in the year following decedent's death. Respondent also relies upon the use of a formula based upon principles set forth in A. R. M. 34, 2 C. B. 31, 32. We will discuss the formula at a subsequent point in our opinion, but we feel that the convenience of continuity of discussion makes it desirable at this point to refer to our opinion in Estate of Henry A. Maddock, 16 T. C. 324, 329-331. The facts involved in the Maddock case parallel so closely, in principle, the275 facts of the instant case that we quote in extenso the analysis and views expressed by Judge Arundell in that case as follows (p. 329):Respondent attributes the greater value he has determined to the good will of Maddock and Company which he claims resulted from "such factors as longevity, established name, established products, and stability of customers," and submits that such good will was evidenced by its record of high earnings.The factors cited by respondent are all recognized elements of good will which, although intangible in nature, constitute a business asset which cannot be disregarded 1082 in determining the actual worth of a business. * * However, in fixing the value of good will of a business, it is equally important to recognize that good will exists as a valuable asset only as an integral part of a going business and cannot be sold, donated, or devised apart from the going business in which it was developed and to which it is thereafter inseparably attached. * * Thus, where a dispute as to the fair market value of a business interest revolves around the existence and the value of good will, it is necessary to determine whether the business possessed276 good will of any appreciable value and whether the nature of the business and the circumstances surrounding its ownership and operation were such that whatever good will it may have possessed could have survived the transfer of all or a fractional part of the going business.We are satisfied * * * that Maddock and Company possessed little if any good will of any appreciable value * * .The business of Maddock and Company was not unique. The partnership had no patents or trademarks, and with the exception of one minor item of marine paint, held no exclusive agency contracts. It manufactured none of the products it sold and the same nationally known brands were available to its customers at approximately 15 other like dealers in the Philadelphia area. Its advertising program was exceedingly modest in relation to its volume of sales and its retail or counter sales to the general public constituted but a very minor part of its business. * * the success of the partnership business was dependent to a large extent upon the ability and experience of its salesmen who had been employed in the business on an average of 30 years. The partnership held no employment contracts with its salesmen277 and at no time did it have any practical means of insuring the continuance of their services. Moreover, it appears from the testimony of various witnesses that both partners were active in the day-to-day operation of the business, and that of the two partners, the decedent was more widely known and enjoyed the reputation of being the dominant partner. It was certain that upon the death or withdrawal of either partner, the business would be deprived of his business ability and any good will attributable to his presence therein.Respondent based his determination of the existence and the value of good will primarily upon the partnership's record of high earnings. In Estate of Leopold Kaffie, 44 B. T. A. 843, wherein the same issue was presented and the same formulae for the valuation of good will were employed by the respondent, we emphasized that it does not necessarily follow from the fact that a business enjoys large earnings that it possesses any appreciable good will. We pointed out that "the large earnings may be due to the efforts of the partners, to the exercise of business judgment, or to fortuitous circumstances in no wise related to good278 will." In our opinion, such factors were chiefly responsible for the success enjoyed by Maddock and Company. Moreover, we think it is of particular significance that in determining the value of the decedent's interest herein, respondent selected a 10-year period of earnings from 1938 to 1947, inclusive, which period embraced 7 years of abnormally high business activity resulting from the demands of war production and postwar reconversion to consumer goods.We now turn to a consideration of the significance, if any, of the principles of A. R. M. 34, 2 C. B. 31, 32 as reflecting upon the question of goodwill value in the instant case.It is obvious that a formula does not of itself create goodwill value. On the other hand a formula may, in a proper case, be of great value in the solution of the difficult problem of determining goodwill value. 1083 The advantage of the use of a formula, however, presupposes that it is sound in principle and that it is applied to proper primary premises of fact applicable to the special circumstances in relation to which it is used.The respondent offered as his only witness the internal revenue agent who investigated279 the Federal estate tax return here in question. No effort was made to establish that the agent was qualified to express an opinion as to goodwill value. Respondent's counsel twice stated that he was not asking the witness to express an opinion, but was merely asking him to state the manner in which he had calculated the value of the partnership as a whole, and the goodwill value which was included as one of the elements of his valuation. The Judge presiding in the case stated several times that he did not understand that the witness was offered as a qualified valuation expert, and counsel for respondent made no objection to these statements. Respondent apparently produced the witness solely to explain the calculations which went into the determination of valuation set forth in the deficiency notice, which mentioned unexplained lump-sum valuation figures. Respondent's brief appears to assume that the principles of A. R. M. 34 are self-operative, and that the premises upon which its application is based may be assumed.We are, of course, mindful of the fact that the burden of proof is upon petitioner, but we are faced with the task of determining the probative value, if any, of280 the affirmative testimony of the witness.We need go no further than to mention that one of the significant factors on which the calculation of the witness was based was the assumption that the total average fair compensation for the services of the partners was $ 8,400. The witness took these figures from the partnership agreement. The most casual examination of the record discloses that the amounts provided for in the agreement for "salaries" were merely nominal, and had no relationship whatever to the fair value of the services of the partners or fair compensation therefor. A proper assessment of fair compensation or of the appropriate amount of the earnings of the partnership to be attributed to the services of the partners is an essential requirement for the application of the formula. We find that this factor was grossly underestimated by the agent, and that the possible usefulness of the formula dissolves with such underestimation. We have already expressed our opinion that the earnings of the partnership were attributable to return on investment and the activities of the partners, compensation to salesmen and other employees having been deducted in determining average281 earnings which constituted likewise a factor in the application of the formula. We add that in considering our attribution of earnings to the services of the partners we were not influenced by the opinion testimony of the accountant who appeared as a witness for petitioner.1084 We find on the basis of the foregoing that the testimony of the internal revenue agent had no probative force in respect of valuation issues.We conclude, upon our own analysis of the facts, and upon the authority of Estate of Henry A. Maddock, supra, that decedent's interest in the partnership had no goodwill value.C. Decedent's Share of Partnership Profits From Agreed Valuation Date to Date of Death Included in Valuation of Partnership Interest.Decedent's one-third interest in the net profits of the partnership, after salaries, from January 1, 1947, to October 4, 1947, was $ 18,522.78. We conclude that the value of decedent's interest in the partnership must be increased to reflect this amount. We realize that decedent's executor and the surviving partners construed the partnership agreement to the effect that decedent's estate was entitled to no part of these282 profits, and it appears that no part thereof was paid to decedent or decedent's estate.We are not called upon to resolve any issue between decedent's executor and the surviving partners on the question of whether or not decedent's estate should have received any share of the profits. We have already held that the agreed valuation of decedent's partnership interest was not binding upon respondent. We again call attention to the fact that the agreed valuation was as of January 1, 1947, and not as of October 4.In order to aid us in our consideration of the valuation issue, petitioner's counsel attached to his brief as exhibit B an opinion of counsel addressed to the trust department of the First National Bank of Montgomery, Alabama. In reviewing the issue before us, we think it appropriate to quote one sentence of the opinion as follows:My information is that the partners had established a custom of declaring net profits under Section 5 only on December 31 of a given year and that no demand for a determination at any other time was made at any period during 1947 by any of the partners, though apparently under the language of Paragraph 5 net profits might have been declared283 at any time upon unanimous consent. [Italics supplied.]The opinion does not consider whether the surviving partners could have refused, unreasonably, to determine and pay over to decedent his share of profits had he made appropriate demand as of October 4, 1947.We call attention to the following possibilities under the partnership agreement:(a) If the surviving partners had elected to liquidate the partnership upon decedent's death, his estate would have received one-third of the proceeds of liquidation, including profits (section 9 (a)).1085 (b) The same rights would have accrued to decedent in the event of dissolution of the partnership during his lifetime, whether by mutual agreement or upon notice by any of the partners (section 8).(c) While decedent could not have sold his partnership interest during his lifetime without the consent of the other partners (section 11), his power to cause a dissolution might well have induced the other partners to buy his interest, or consent to its sale, had he desired to sell it. The remaining partners might have welcomed the opportunity to purchase his interest during his lifetime, if he had been willing to dispose of it.We have284 no doubt that if decedent had been a "willing seller" of his partnership interest on October 4, 1947, he would have insisted that his share of the profits be included in the selling price and that a "willing buyer" would have had no reasonable objection to his proposal.We have noted the fact that petitioner elected the optional valuation date for the purpose of valuing decedent's interest in the partnership. It is clear that petitioner's election cannot affect the amount to be attributed to decedent's share of the earnings upon the facts in this case. In this respect, we need merely cite the material provisions of Regulations 105, section 81.11 as follows:In valuing the gross estate under the optional valuation method, all of the property interests existing at the date of death which are a part of the gross estate as determined under the subsections of section 811, as amended, constitute the property to be valued as of one year after the date of the decedent's death, or as of the date of decedent's death, or as of some intermediate date. Such property is hereinafter referred to as "included property". "Included property" as of the date of the decedent's death remains "included285 property" for the purpose of valuing the gross estate under the optional valuation method even though it is changed in form during the optional valuation period by being actually received, or disposed of, in whole or in part, by the estate. * * We hold, on the basis of the foregoing discussion, that the amount of $ 18,522.78, representing decedent's share of the partnership net earnings after salaries for the period from January 1, 1947, to October 4, 1947, must be added to the agreed valuation in determining the value of decedent's interest in the partnership for Federal estate tax purposes as of the agreed valuation date. The sum of $ 33.32, representing decedent's accrued salary, has been included in our valuation. Petitioner does not contest the inclusion of the latter amount in gross estate.II. Withdrawals From Partnership by Decedent.We have already found as a fact that decedent was indebted to the partnership at the time of his death in the amount of $ 17,425.27 on the basis of certain withdrawals; that claim for the above amount was filed in decedent's estate; and that the indebtedness was paid by deducting 1086 the amount of the debt from the agreed value of decedent's286 interest in the partnership. It is clear that the debt was one properly allowed under the laws of the State of Alabama, and, assuming the correctness of our finding that the amount in fact represented a debt, respondent does not dispute the proposition that, under ordinary circumstances, the item would be deductible under the provisions of Internal Revenue Code section 812 (b).Respondent's contention is set forth in his brief as follows:The Commissioner in his determination of the assets of J. W. Gannon and Company, and decedent's interest therein, took into account the $ 17,425.27 withdrawn by decedent; therefore, to allow the deduction under schedule K of the estate tax return would amount to a duplication of deductions.Respondent's further reasoning appears to be to the effect that, if the value of decedent's interest in the profits of the partnership from January 1, 1947, to October 4, 1947, is not added to the value of decedent's interest in the partnership, the total of withdrawals by decedent during the same period should not be allowable as a debt. It is only in relation to this reasoning that we find any possible basis for the contention that the allowance of the debt287 would amount to a duplication of deductions.Since we have increased the value of decedent's interest by the amount of his share of partnership earnings for the above period, we assume that we have eliminated, in practical effect, the suggested duplication with which respondent is concerned.III. Ownership of Automobile.Our finding that the 1947 Chevrolet sedan (included in gross estate by respondent at a value of $ 1,800) was in fact owned by decedent's wife at the time of his death is sufficient for us to hold that the item is not includible in gross estate under the provisions of Internal Revenue Code section 811 (a) in the light of the limited issue raised by respondent. Respondent admits that the record title was in the name of the wife, but asserts that the automobile was a "family" car and that decedent had such an interest therein as to require the inclusion of its value in gross estate. Respondent did not assert in his deficiency notice, or in the brief filed on his behalf, that this small item was the subject of a transfer in contemplation of death.We find upon the record that petitioner has met the burden of proof by affirmative evidence that the automobile was owned288 by decedent's wife at the time of his death, and that the record does not support respondent's contention that decedent had such an interest in the automobile (which interest is not described by respondent) which would require the inclusion of the value thereof in gross estate.Since the issue of contemplation of death is nowhere suggested we find no reason to discuss it.1087 The parties have stipulated that the additional costs and expenses incurred by the executor in administering the estate, including the costs and expenses incurred in this proceeding, will be allowed as additional deductions under Rules 50 and 51.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620331/	THE RARITAN COMPANY OF DELAWARE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE MIDDLESEX COMPANY OF DELAWARE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Raritan Co. of Delaware v. CommissionerDocket Nos. 106869, 106870, 108554, 108555.United States Board of Tax Appeals47 B.T.A. 857; 1942 BTA LEXIS 638; October 8, 1942, Promulgated 638 An individual borrowed a substantial sum from a bank and used it in the purchase of stock. Thereafter he organized a personal holding company under the laws of Delaware and transferred to it shares. other than those purchased with the borrowed funds, in exchange for its capital stock. Shortly thereafter a corporation was organized under the laws of Newfoundland. It acquired from the Delaware corporation the shares owned by it in exchange for most (all but three) of the shares of its capital stock. The Newfoundland corporation then purchased from the individual the stock which he had purchased with the borrowed funds and he liquidated his indebtedness to the bank. The Newfoundland corporation borrowed the amount from the same bank and pledged stock as collateral. On January 1, 1934, the balance due on the note amounted to $423,000. In December of 1936 the Delaware corporation dissolved the Newfoundland corporation and assumed the balance due on the note, amounting to $230,000. This amount was paid by it during 1937, 1938, and 1939 and it claimed deductions in computing its net income subject to surtax on the theory that the amounts were paid "to retire indebtedness * * incurred639 prior to January 1, 1934." Held that the deductions were properly disallowed. Sun Pipe Line Co. v. Commissioner, 126 Fed.(2d) 888, distinguished and found to be inapplicable. Paul F. Myers, Esq., and Martin W. Meyer, Esq., for the petitioners. Charles Oliphant, Esq., for the respondent. MELLOTT858 OPINION MELLOTT: These proceedings, duly consolidated for hearing involve deficiencies in personal holding company surtax as follows: PetitionerDocket No.YearDeficiency1068701937$1,105.48Raritan Co1085551938975.00do1939151,355.9510686919371,200.28Middlesex Co1085541938975.00do1939148,718.98The entire amount of each deficiency is in controversy. Docket No. 106870 and 108555 (Raritan Co.) arise out of the same basic facts. Docket Nos. 106869 and 108554 (Middlesex Co.) arise out of a partly separate but wholly parallel set of facts which, except for details as to names, dates, amounts, etc., are substantially identical with those in Docket Nos. 106870 and 108555. The facts found to be as stipulated. The sole issue in each proceeding640 is whether payments made in 1937, 1938, and 1939 under the circumstances hereinafter related are deductible under the provisions of section 355 of the Revenue Act of 1936, as amended, section 405 of the Revenue Act of 1938, and section 504 of the Internal Revenue Code, which were in effect for the years 1937, 1938, and 1939, respectively, and provided in identical terms for the following additional deduction in computing the net income subject to the personal holding company surtax: "(b) Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind incurred prior to January 1, 1934 * ." The 859 facts hereinafter set out are taken principally from the stipulation filed in the first mentioned proceeding, involving the Raritan Co. Petitioners are corporations organized under the laws of Delaware. Each has its principal office in New Brunswick, New Jersey, and each filed personal holding company returns, for the three taxable years in issue, with the collector of internal revenue at Newark, New Jersey. The notices of deficiency were mailed in Docket Nos. 106869 and 106870 on January 17, 1941, and in the other proceedings on June 18, 1941. Johnson641 & Johnson, a corporation organized under the laws of New Jersey, is a large and internationally known manufacturer of medical, surgical, and hospital supplies which for many years has directly or through subsidiaries operated plants in New Hampshire, Massachusetts, New Jersey, Illinois, and Georgia, in England, Australia, Canada, South Africa, Northern Ireland, and other parts of the British Empire. Since 1927 it has been actively controlled and managed by Robert Wood Johnson and J. Seward Johnson, who are now chairman of the board and vice president, respectively, and who acquired their control in the manner hereinafter described. Johnson & Johnson was founded as a partnership in 1886 and incorporated in 1887 by the father of Robert Wood and J. Seward and his brother, James W. Johnson. The father of the two boys died in 1910. In 1927, when the two sons of the deceased co-founder together held slightly less than one-half of the common stock (which is the only stock which has ever had voting power), certain differences with respect to management policies arose between them and James W. Johnson, the surviving co-founder. The latter thereupon agreed to sell part of his common stock642 to each of his nephews so that they would then jointly own substantial control of the business. Under the above agreement J. Seward Johnson in 1927 purchased from his uncle 1,667 shares of common stock of Johnson & Johnson, paying therefor in cash $541,710, which amount he in turn borrowed from the Chase National Bank of New York City. Through a stock dividend in 1931 this block of stock was increased to 4,167 shares. Five years having passed with no reduction in the loan, a plan was formulated in 1932 whereby all, or most, of the substantial dividends regularly paid on Johnson & Johnson stock could be made available, and they were in fact used, to curtail the bank loan, with the result that by 1939 the loan had been entirely liquidated by funds thus derived from Johnson & Johnson dividends. The plan called for the organization of a series of two corporations on the theory that if one held the stock of the other the latter would not be subject to any tax under section 104 of the Revenue Act of 1928 or corresponding provisions of subsequent acts. Thus on or about March 31, 1932, the petitioner "The Raritan Company of Delaware, 860 Inc." (hereinafter referred to as643 Delaware) was organized under the laws of that state and its entire capital stock of 500 shares was issued to J. Seward Johnson in exchange for 30,000 shares of the common stock of Johnson & Johnson. Shortly thereafter there was organized under the laws of Newfoundland "The Raritan Company, Limited" (hereinafter referred to as Newfoundland), and it acquired from Delaware the aforesaid 30,000 shares of common stock of Johnson & Johnson in exchange for all but three shares of its own common stock. The reasons which led to the selection of Newfoundland for the incorporation of the second corporation were the large interests of Johnson & Johnson throughout the British Empire and confidence in the economic stability of that Empire as well as the tax saving. At about the same time Newfoundland purchased from J. Seward Johnson an additional 4,167 shares of common stock of Johnson & Johnson, paying therefor in cash $541,710, with which he in turn paid off the entire amount of his loan at the Chase National Bank. This was the same block of stock which he had bought in 1927 from his uncle at the same price. In order to make this purchase Newfoundland borrowed from the Chase National Bank644 $541,710. This indebtedness was evidenced by Newfoundland's interest-bearing demand note for that amount dated May 19, 1932, which was at all times amply secured by collateral. A true copy of this note is incorporated in the stipulation of the parties. It was retained by the bank as evidence of the indebtedness until the final payment in 1939 of the balance then due thereon in the amount of $203,500, at which time it was surrendered to Delaware. The following notations were made on the note from time to time by the bank in due course of business to record the intervening payments on account of reduction of principal: DatePaidBalance7/26/32$30,0004/6/3313,7103/3/3475,0009/13/3455,000$368,00011/9/3543,000325,0002/24/36$25,000$300,0008/7/3630,000270,00012/10/3640,000230,0003/2/3725,000205,00012/21/381,500203,500The payments from 7/26/32 to 12/10/36, inclusive, were made by Newfoundland, but the payments on 3/2/37 and 12/31/38 and the above mentioned final payment in 1939 were made by Delaware under the circumstances hereinafter set out. In December of 1936 Newfoundland was completely liquidated and645 dissolved in accordance with the provisions of section 112(b)(6) of the Revenue Act of 1936 and with the prior consent of the Commissioner of Internal Revenue, formally granted under section 112(i) of the Revenue Act of 1936, that the exchange thereby effected was 861 not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes. The liquidator of Newfoundland transferred to Delaware as sole stockholder (outside of the three qualifying shares which were liquidated by the payment of $20 each, being the same amount which had been paid in for such shares) all of the assets of Newfoundland, subject to the indebtedness on the note at the Chase National Bank. which at that time had been reduced to $230,000. The assets so transferred consisted solely of Johnson & Johnson common stock and a small amount of cash, which assets thereupon became the sole assets of Delaware. It has been stipulated that the final decision on the above facts in Docket No. 106870 shall be controlling with respect to the corresponding issues in Docket Nos. 106869, 108554, and 108555. The petitioner corporation in Docket Nos. 106869 and 108554 was the counterpart646 of Delaware with respect to a similar sequence of facts arising out of a similar purchase of Johnson & Johnson stock in 1927 by Robert Wood Johnson. Respondent determined that no credit could be allowed to the Delaware corporations since the payments made by them were on indebtedness assumed upon the liquidation of the Newfoundland companies on or about December 31, 1936; in other words, that the amounts were not "set aside to pay or to retire indebtedness * * * incurred prior to January 1, 1934 * * ." Petitioner contends (and hereinafter reference will be made only to Raritan, the Delaware corporation) that Sun Pipe Line Co. v. Commissioner, 126 Fed.(2d) 888, affirming Sun Pipe Lind Co.,42 B.T.A. 1413">42 B.T.A. 1413, and Piermont Corporation,43 B.T.A. 770">43 B.T.A. 770, are controlling and require that the claimed deduction be allowed. It argues that the same conclusion is also justified upon other grounds, which will be stated more fully by us later in connection with the consideration of them. In the Sun Pipe Line Co. case the taxpayer had issued, in 1930, bonds aggregating three and a half million dollars. Subsequent to January 1, 1934, it647 retired these bonds with the proceeds of a larger issue, the new bonds being sold to parties other than the holders of the first mentioned bonds. In the taxable year it redeemed the bonds last issued and deducted the maount under the statute applicable here. In the Piermont Corporation case the taxpayer, being indebted prior to January 1, 1934, to a bank, thereafter replaced the obligation with twenty-year debentures. At the end of the year 1934 and again at the end of the year 1935, $50,000 was set aside in a sinking fund for the retirement of the bonds and these amounts were deducted under the same statute. The Board concluded in each case that the taxpayer was entitled to the claimed deduction and the court affirmed. The essence of the Commissioner's 862 theory under which the claimed deductions had been disallowed was that the personalities of the obligees had changed. We deemed that to be immaterial. The court agreed that this was so, pointing out that " * * it is the contract, not the parties who are bound by it, that matters. The term [indebtedness] has been defined as an obligation to pay or perform * * * and is synonymous with owing. * * * Nowhere do648 the cases stress to whom." Petitioner construes the first portion of the quotation as implying that it is equally unimportant by whom the indebtedness is owing; but manifestly such construction is erroneous. The cited cases are therefore not determinative of the present controversy. Petitioner argues that in the instant proceeding there was a mere "technical" change whereby it, on dissolution of its wholly owned subsidiary, "was found to be standing in the shoes of the subsidiary"; that the equity in the subsidiary's assets to which it succeeded was not substantially different from the equity which it had before the dissolution; that a substantial part of the subsidiary's assets was posted as collateral for, and thus doubly subject to, the indebtedness; that through its control of the subsidiary petitioner could have redeemed or obtained possession of the collateral just as easily before as after the dissolution; and that there was no actual change of any sort, after January 1, 1934, "other than in the technical respect just noted." At the threshold petitioner is confronted with an extant opinion of this Board holding directly contrary to its present contention. In 649 Samuel Goldwyn, Inc., Ltd.,43 B.T.A. 1086">43 B.T.A. 1086, 1089, it was said: * * * The concept of indebtedness is inextricably associated with a particular obligor - an obligor that here must occupy such legal status prior to a certain date. * * * We think the conclusion inescapable from the statutory language that the indebtedness must have been incurred prior to January 1, 1934, by the taxpayer, i. e., the personal holding company. The statutory language and the use of a critical date would otherwise be devoid of meaning. * * * Petitioner, pointing out that under the facts in the cited case the taxpayer was not in existence at the time the indebtedness was created and that the notes upon which the payments were made had not even been issued prior to the taxpayer's incorporation on May 18, 1934, argues that the above language is mere dicta and should not be considered controlling in the instant proceeding. It also requests that the paragraph be reconsidered "because the thoughts there expressed are much too broadly stated even as dicta." In that connection it points out that a secured debt, e. g., might continue for years if the interest is paid and that650 one who pays the debt for the purpose of relieving his property of the lien against it is not necessarily a debtor. The question has been reconsidered and, whether it was necessary or 863 not that all of the quoted language be used in the cited case, the Board is of the opinion that it correctly enunciates the principle which must be applied in the instant proceeding. 1 Therefore, unless the indebtedness in issue was "incurred" by petitioner prior to January 1, 1934, it is not entitled to the claimed deduction. This brings us, then, to the other contentions made by petitioner. It is true that under the reorganization provisions of the revenue act petitioner, owning all of the stock of its subsidiary, could at any time take to itself as a distribution in complete liquidation, all of its subsidiary's property without making itself liable for tax. It is also true that the651 basis for determining gain or loss upon a subsequent sale would be the basis in the hands of the subsidiary. (Sec. 113(a)(15), Revenue Act of 1936.) It does not follow, however, as petitioner contends, that, from the standpoint of the revenue acts, petitioner is to be considered as owning at all times an "equity in the collateral [owned by the subsidiary] which secured the indebtedness here in question," Petitioner refrains from suggesting that the corporate entity of the Newfoundland corporation should be ignored; and it is obvious that as much reason exists for ignoring both corporate entities as for ignoring one. "A taxpayer is free to adopt such organization of his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages." Higgins v. Smith,308 U.S. 473">308 U.S. 473. Nor is it particularly important whether the corporation was set up for the purpose of avoiding tax or that respondent, in earlier years, may have endeavored to apply section 102 or 104 on the theory that a corporation had been "formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders." Cf. 652 Mead Corporation v. Commissioner, 116 Fed.(2d) 187. The fact remains that petitioner and its sole stockholder selected the method of doing business and apparently deliberately chose to have petitioner's subsidiary, rather than it, incur the indebtedness. Having done so, the burdens as well as the benefits must be accepted. Petitioner, citing Bank of Indian Territory v. Eckles,19 Okla. 159">19 Okla. 159; 91 Pac. 695, in which the words "contracted" and "incurred" are distinguished, contends that the latter, as used in the statute now under consideration, merely means that the indebtedness must have been "brought on," "occasioned," or "caused" prior to January 1, 1934. It argues, therefore, that the clause "indebtedness incurred prior to January 1, 1934," should not be limited by construction so as to "apply only where it was a particular corporation or taxpayer that technically 864 entered into a certain contractual obligation prior to that date." We do not agree. The word "incurred," as the court points out in the cited case, "is defined as to become liable or subject to; to render liable or subject to." Petitioner, under the presently653 stipulated facts, did not "become liable or subject to" the indebtedness until December, 1936. It apparently recognized that this was so; for in the resolution which it adopted for the liquidation of its subsidiary it was stated: That all of the other property [except the $60 paid in cash in redemption of the 3 shares of stock] * * * be set over in kind to * * * [petitioner] subject to the payment of all indebtedness due and owing by * * * [Newfoundland] foundland] which * * * [petitioner] assumes and agrees to pay, in complete cancellation and redemptionOf the said 497 shares held by it. The liquidator assigned the Johnson & Johnson shares to petitioner, referring to the fact that they were deposited "with the Chase National Bank * * * as collateral security for the payment of a promissory note dated May 19, 1932 - on which there is now due the sum of * * * $230,000 and accrued interest which * * * [petitioner] hereby assumes and agrees to pay * * ." When this occurred, and not before, the indebtedness was "incurred" by petitioner. Other suggestions urged upon us by petitioner are not wholly unsound, but seem to be more or less immaterial. It is no doubt true654 that the selection of Newfoundland for the incorporation of one of the links in the corporate chain was dictated by business reasons and, as the parties have stipulated, because of "confidence in the economic stability of the [British] Empire." There is also no reason to apply the rationale of Gregory v. Helvering,293 U.S. 465">293 U.S. 465, or to hold that there was a complete novation. Whether petitioner had, or had not, entered into a contract with the bank, specifically assuming and agreeing to pay the note, is likewise without significance here. As stated at the outset, our question is whether the indebtedness was incurred by Raritan, the Delaware corporation, prior to January 1, 1934. It is apparent we have concluded this question must be answered in the negative. This disposes of the only issue and requires a holding, which is now made, that the respondent committed no error in determining the deficiency in Docket No. 106870. It follows that the deficiencies in the other proceeding must also be sustained. Decision will be entered for the respondent in each of the four proceedings.Footnotes1. Art. 351-4. Regulations 94, as amended by T.D. 4777, 2 C.B. 197">1937-2 C.B. 197↩; art. 405-2. Regulations 101, and sec. 19.504-2, Regulations 103, provide that "The indebtedness must have been incurred (or, if incurred by assumption, assumed) by the taxpayer prior to January 1, 1934, * * *.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620332/	Zimco Electric Supply Company v. Commissioner. J. B. Zimmerman, Jr., and Faye Zimmerman v. Commissioner.Zimco Electric Supply Co. v. CommissionerDocket Nos. 3729-67 and 3730-67.United States Tax CourtT.C. Memo 1971-215; 1971 Tax Ct. Memo LEXIS 120; 30 T.C.M. (CCH) 878; T.C.M. (RIA) 71215; August 25, 1971, Filed 120 Held, petitioner-corporation was not reasonably entitled to a bad debt deduction for its fiscal year ended October 31, 1964, in excess of that addition necessary to increase its reserve for bad debts to 4.5 percent of its total accounts and notes receivable. Held, further, petitioner-corporation has not proved respondent's disallowance of alleged entertainment and sales expense erroneous. Held, further, as a result of the disallowance of these entertainment expenses, individual petitioners received constructive dividends as determined by respondent. 879 Held, further, individual petitioners did not receive dividend income of $9,023.54 in 1964 in connection with the issuance to them of a promissory note. Held, further, individual petitioners received interest income in the amounts of $476.88 and $883.37 in 1964 and 1965, respectively, the years in which the interest was credited and made unqualifiedly available to them. Brooks L. Harman, American Bk. of CommerceBldg., Odessa, Tex., for the petitioners. David E. Gaston, for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The Commissioner determined the following deficiencies in income tax: TaxableYear ClosedDocket No.Petitioner(s)as ofDeficiency3729-67Zimco Electric Supply Company10-31-64$2,675.8910-31-6585.503730-67J. B. Zimmerman, Jr., and Faye12-31-643,200.97Zimmerman12-31-65816.95Due 121 to certain concessions, the issues remaining for decision are as follows: Docket No. 3729-67 1. Whether Zimco Electric Supply Company was reasonably entitled to a bad debt deduction for its fiscal year ended October 31, 1964, in excess of that addition required to increase its reserve for bad debts to 4.5 percent of its total accounts and notes receivable. 2. Whether respondent properly disallowed certain club dues and entertainment expenses in the amounts of $567.67 and $516.51 which petitioner-corporation claimed as deductions for its fiscal years ended October 31, 1964, and October 31, 1965, respectively. Docket No. 3730-67 3. Whether the individual petitioners received dividend income from Zimco Electric Supply Company in the amounts of $535.67 and $486.51 for the calendar years 1964 and 1965, respectively, as a result of the payment by petitioner-corporation of some of their personal nondeductible living expenses (club dues and expenses). 4. Whether the individual petitioners received dividend income from petitioner-corporation in 1964 in the amount of $9,023.54 in the form of a promissory note from Zimco Electric Supply Company to petitioner J. B. Zimmerman, Jr. 5. Whether 122 the individual petitioners received $476.88 and $883.37 of interest income in the taxable years 1964 and 1965, respectively. Findings of Fact General The parties stipulated some facts. These stipulations and the exhibits attached thereto are incorporated herein by this reference. J. B. Zimmerman, Jr. (hereinafter referred to as petitioner or J. B.) and his wife Faye Zimmerman (hereinafter Faye) timely filed joint Federal income tax returns for the taxable years 1964 and 1965 with the district director of internal revenue in Dallas, Tex. They were residing in Odessa, Tex., as of the date their petition was filed. Petitioner Zimco Electric Supply Company (hereinafter Zimco or petitioner-corporation) which was incorporated in Texas on November 18, 1955, also timely filed corporate income tax returns for its fiscal years ended October 31, 1964, and October 31, 1965, with the district director in Dallas. Its principal office was located in Odessa, Tex., as of the date its petition was filed. Zimco was primarily a wholesale electrical distributor, although it also engaged in electrical contracting work during the earlier years of its existence. J. B. was president, operating manager, and 123 one of the three directors of Zimco from its inception through the years at issue. As president he was one of petitioner-corporation's two officers, and he alone was given authority to draw checks against Zimco's accounts in the First National Bank of Odessa, Tex. Faye was not employed by Zimco during the years before us. 880 Throughout the period January 2, 1962, through October 31, 1965, J. B. owned 50 percent of the 6,000 shares outstanding of Zimco which had elected on November 1, 1958, to be taxed as a small business corporation under the provisions of subchapter S of the Internal Revenue Code of 1954. This election was terminated during the fiscal year ended October 31, 1964, by reason of the failure of Sheldon Mixson to file a timely consent after having received from his father, James T. Mixson, 100 shares of Zimco stock on July 31, 1964. Reserve for Bad Debts Petitioner-corporation, an accrual-basis taxpayer, used the reserve method of deduction for bad debts from the time of its incorporation through the years at issue. Its reserve for these years was consistently computed as 10 percent of year-end total accounts receivable and it consistently filed a statement with its 124 tax returns as required by the regulations under section 166 of the Internal Revenue Code of 1954. 1 The following is a schedule of Zimco's year-end totals for the fiscal years 1958 through 1966, as reflected in its books and records: Accounts Re-Portion ofceivable ac-AmountsReserveAccountstually chargedadded toforReceivableFiscaloff andReserveBad Debtin excessagainstYear EndedNotesAccountsReserveAccountBalanceof 90 daysAccount10-31-58$88,825.88$1,420.04$2,841.38$8,822.5910-31-591,250.95122,458.654,250.547,673.8212,245.8719,645.9410- 31-609,398.5592,050.684,714.891,674.099,205.0727,201.0610-31-619,387.74132,961.363,800.247,891.3113,296.1425,358.4510-31-629,387.74111,523.505,909.173,765.3811,152.3525,566.9610-31-637,387.74111,508.387,433.507,431.9911,150.842 10-31-637,387.74137,341.472,899.675,482.9813,734.1528,879.263 10-31-657,409.29135,970.942,035.481,898.9213,597.5930,833.4310-31-66122,371.604 9,923.528,563.0912,237.16Zimco's 125 actual average bad debt ratio for the period of six fiscal years ending October 31, 1964, was 4.123 percent of the total accounts and notes receivable for that period computed as follows: (Average Total Accounts and Notes Receivable Charged off as Bad Debts - 11-1-58 through 10-31-64 5,168.00 / (Average Total Accounts andnotes Receivable - 11-1-58 through 10-31-64) 125,340.75 = 4.123 (actual average bad debt ratio - 11-1-58 through 10-31-64) In contrast, the average bad debt ratio of Zimco over the same six-year period when computed on the basis of average total accounts receivable as compared with average total accounts receivable charged off yearly against the reserve for bad debts is 4.098 percent. 5On the basis of the above two percentage figures, respondent arrived at a 4.5 percent factor which he used in computing the additions to bad debts allowable to Zimco for the years involved herein. Zimco claimed a deduction in the amount of $7,482.98 for "bad debts" on its tax return for the fiscal year ended October 31, 1964. Respondent disallowed 126 this deduction and determined by use of a 4.5 percent factor that petitioner-corporation was entitled to deduct no more than $261.64 for "bad debts" in that year. 6 881 Zimco had computed its bad debt deduction for the years involved as follows: 1964Ten percent of total corporate accounts$13,734.15receivable at 10-31-64Corporate reserve for bad debts as of 11-1-63$11,150.84Less accounts receivable charged off during2,899.67fiscal 1964 against reserve for bad debtsReserve for bad debts at 10-31-64 prior to8,251.17computing fiscal 1964 additionAddition to reserve for bad debts in order to$ 5,482.98increase reserve to 10 percent, or $13,734.15, oftotal accounts receivableAdd loans receivable deducted in fiscal 1964 as2,000.00bad debtsDeduction for "bad debts" per return for year$ 7,482.98ended 10-31-641965Ten percent of total corporate accounts$13,597.59receivable at 10-31-65Corporate reserve for bad debts as of 11-1-64$13,734.15Less accounts receivable charged off during$ 2,035.48fiscal 1965 against reserve for bad debtsReserve for bad debts at 10-31-65 prior to$11,698.67computing fiscal 1965 additionAddition to reserve for bad debts in order to$ 1,898.92increase reserve to 10 percent, or $13,597.59, oftotal accountsreceivableAdd loans receivable deducted in fiscal 19652,000.00asbad debtsDeduction for "bad debts" per return for year$ 3,898.92ended 10-31-65127 Respondent, on the other hand, determined that a maximum reserve for bad debts maintained at a balance equal to 4.5 percent, instead of 10 percent, of the total outstanding accounts and notes receivable would be reasonable. He made this determination in light of Zimco's past experience and in accordance therewith computed its allowable deduction for "bad debts" as follows: Balance 10-31-64Accounts receivable$137,341.47Notes receivable7,387.74Total$144,729.21Experience factor as determined4.5%Corrected reserve$6,512.81Reserve balance November 1, 1963$11,150.84Charge-offs during yearn7 4,899.67Tentative reserve balance before6,251.17allowable additionBad Debt reserve addition and allowable$ 261.64deduction* * Balance 10-31-65Accounts receivable$138,203.93Notes receivable5,387.74Total$143,591.67Experience factor as determined4.5%Corrected reserve$ 6,461.63Reserve balanceNovember 1, 1964$6,512.81Charge-offs during year7 4,035.48Tentative reserve balance before2,477.33allowable additionBad Debt reserve addition and allowable$ 3,984.30deduction 882 Entertainment Expenses During the period October 128 1963 through 1965, a membership account was maintained with the Odessa Country Club (hereinafter sometimes referred to as the Club) in the name of "J. B. Zimmerman, Jr., Zimco Electric Supply Co." The club facilities were used a total of 14 days during fiscal and calander year 1964. They were used 20 days during fiscal year 1965 or 19 days during calendar year 1965. Payment for the use of the Club was on a charge basis. No cash expenditures were allowed. All chits in connection with the aforementioned uses of the Club were signed by either J.B., his wife Faye, or their son Roger, who was approximately 11 or 12 years old at that time. Over half of the total number of chits in each of the years at issue were signed by Faye or Roger and covered such items as french fries, cokes, pepsis, hamburgers, coffee, tea, swimming guests, and other similar personal items. Petitioner-corporation regularly received monthly itemized statements, as well as individual chits, from the Club which indicated charges for the aforementioned uses of the Club during the month in question, as well as charges for club dues and assessments. It paid charges totaling $567.68 8 and $516.51 9 for the fiscal years ended 129 October 31, 1964, and October 31, 1965, respectively, and claimed deductions therefor as entertainment and sales expenses. Respondent disallowed these deductions in full on the ground that they were not allowable under sections 162 and 274. Moreover, he determined that the disallowed entertainment deductions constituted dividend income to the individual petitioners for the corresponding calendar tax years 1964 and 1965. Sometime in the early part of 1966, internal revenue agent Robert L. Thomas reviewed the Odessa Country Club monthly statements and the individual tabs which pertained to the period October 1963 through October 1965. At that time, there were no notations on the face of these documents to indicate whether the expenditures were personal or for business. However, when these items were introduced into evidence at trial, there were some notations thereon such as "El Paso Products Bill Reagan & family," "Brown Elect. Glenn Brown & family," and "West 130 Tex. Elect. * * * Reynolds & wife." Some of these tabs on which there were notations were signed by Faye, not by J. B. Promissory Note Dated January 4, 1964 Zimco had made a practice during its corporate history of borrowing from its stockholders. The amount of a loan usually corresponded to a stockholder's share of the previously taxed undistributed income. These loans were evidenced by negotiable promissory notes bearing six percent annual interest. Zimco reported subchapter S income to J. B. for its fiscal year ended October 31, 1963, in the amount of $9,062.38. The full amount of $9,062.38, including an investment credit of $38.84, was reported by him as subchapter S income on the joint Federal income tax return filed by him and his wife for calendar year 1963. On January 4, 1964, petitioner-corporation issued a one-year negotiable promissory note to J. B. in the amount of $9,023.54, with six percent interest per year from the date thereof. Zimco's analysis account of J. B.'s undistributed earnings indicated an amount of $9,062.38 owing to him as of October 31, 1963. This account was balanced out to $9,023.54 as of the same date by a charge of $38.84 representing the tax credit. 131 As of October 31, 1964, the amount of $9,213.75, composed of the aforementioned $9,023.54 balance plus a $190.21 restoration of investment tax credit as of that date, was transferred to the petitioner-corporation's analysis account of notes payable to J. B. and was listed therein as "transfer undistributed surplus." On November 1, 1965, Zimco executed a one-year negotiable promissory note to J. B. in the amount of $14,899.23. This note was composed of the following: 883 Balance of note for fiscal year ended October 31, 1962$ 7,732.98Plus:October 31, 1964, accrual of interest$476.88October 31, 1964, investment credit restoration190.21October 31, 1963, balance of J. B.'s undistributed9,023.549,690.63earnings account (renewal of note dated Jan. 4, 1964)$17,423.61Less:October 31, 1964, credit to J. B.'s accountsreceivablefor December 31, 1963, and August 31, 1964, paymentsby Zimco to Internal Revenue Service on behalf ofJ. B.$2,047.50January 31, 1965, payment of October 31, 1964, accrued476.882,524.38interest$14,899.23 The following are balance sheets of petitioner-corporation, as given on its tax returns, for the years at issue: ItemFY 10-31-64FY 10-31-65AssetsCash$36,626.82$31,334.66Notes and Accounts ReceivableLess: Reserve for Bad Debts130,995.06129,994.08Inventories96,088.25142,943.69Prepaid Expenses2,453.643,345.34Buildings and other fixed depreciable assetsLess: Accumulated amortization and depreciation22,386.8013,154.39Land (net of any amortization)800.00800.00Other assets590.76590.76Total Assets$289.941.33$322,162.92Liabilities and Capital Accounts payable$131,053.60$151,279.39Mortgages, notes, and bonds payable in less than 124,205.0420,119.55yearAccrued Bonuses13,532.0015,050.00Loans from Stockholders (undistributed earnings)31,758.9135,379.24Mortgages, notes, and bonds payable in 1 year or3,998.25moreFederal income tax4,642.774,546.98Capital Stock: common stock60,000.0010132 80,000.00Earned surplus and undivided profits20,750:7615,787.76Total liabilities and capital$289,941.33$322,162.92 Respondent determined that the promissory note for $9,023.54 payable to J. B. and dated January 4, 1964, constituted a dividend to him in 1964 in the face amount thereof. Interest Income The Zimco analysis account of notes payable to J. B. indicated the accrual of interest as of October 31, 1964, and October 31, 1965, in the amounts of $476.88 and $883.37, respectively. These respective amounts were added to the balances then outstanding in this account and were paid on January 31, 1965, and December 31, 1966, respectively. The individual petitioners reported interest income from petitioner-corporation only in the years it was actually paid to them. They reported interest income from Zimco in the amounts of $210 and $476.88 for the years 1964 and 1965, respectively. Respondent determined that the aforementioned amounts of accrued interest constituted income for the year in which each amount was accrued, rather than for the year it was paid, on the ground that the accrued interest was constructively received in the year it was credited to J. B. and made available to him. J. B. exercised considerable control over the affairs of petitioner-corporation. 133 Book entries of Zimco indicate that it paid certain personal obligations of petitioner, such as his Federal income tax liabilities. 884 Opinion Reserve for Bad Debts Petitioner-corporation, in using the reserve method of deduction for bad debts from its inception through the years at issue, consistently computed its reserve for these years as 10 percent of year-end total accounts receiveable. Respondent deterthat Zimco was not reasonably entitled to a bad debt deduction for its fiscal year ended October 31, 1964, 11 in excess of that addition necessary to increase its reserve for bad debts to 4.5 percent of its total accounts and notes receiveable. Petitioner-corporation argues that its computation of the bad debt reserves and additions thereto was reasonable. We hasten to point out that it is not sufficient for Zimco to prove its method reasonable. It must also demonstrate that respondent acted unreasonably in disallowing the additions for the years involved, and, therefore, abused the discretion given to him by section 166(c).12135 Massachusetts Business Development Corp., 52 T.C. 946">52 T.C. 946 (1969); 134 Roanoke Vending Exchange, Inc., 40 T.C. 735">40 T.C. 735 (1963); Maverick-Clarke Litho Co., 11 T.C. 1087">11 T.C. 1087 (1948), affd. 180 F. 2d 587 (C.A. 5, 1950); and Ehlen v. United States, 323 F. 2d 535 (Ct. Cl. 1963). See also Petaluma Co-Operative Creamery, 52 T.C. 457">52 T.C. 457 (1969), and Samuel Swartz, 42 T.C. 859">42 T.C. 859 (1964). Moreover, "the burden of proof on a taxpayer regarding the respondent's determinations is greater than the usual burden which faces the taxpayer who seeks to overcome the presumption of correctness which attaches to respondent's ordinary notice of deficiency." Roanoke Vending Exchange, Inc., supra, at 741. See also S.W. Coe & Co. v. Dallman, 216 F. 2d 566 (C.A. 7, 1954); Massachusetts Business Development Corp., supra; R. Gsell & Co., Inc., 34 T.C. 41">34 T.C. 41 (1960), reversed on other grounds [61-2 294 F. 2d 321 (C.A. 2, 1961); Platt Trailer Co., 23 T.C. 1065">23 T.C. 1065 (1955); Ehlen v. United States, supra; and Paramount Finance Company v. United States, 304 F. 2d 460 (Ct. Cl. 1962).The purpose of a reserve for bad debts is not to acquire protection against the contingency of excessive losses in subsequent years. Massachusetts Business Development Corp., supra.See also S.W. Coe & Co. v. Dallman, supra, and Citrus Motors Ontario, Inc. v. United States, 249 F. Supp. 425">249 F. Supp. 425 (S.D.Cal., 1965). Itsfunction, rather, is to absorb those expected future losses that are attributable to current transactions. Roanoke Vending Exchange, Inc., supra; Ira Handelman, 36 T.C. 560">36 T.C. 560 (1961); and Ehlen v. United States, supra. Petitioner-corporation appears to have lost sight of the intended purpose of its bad debt reserves by stating on brief that "it wouldn't take but one bankrupt contractor to wipe out the reserve at any time." The contingency that a contractor may become bankrupt in the future is not to be protected by section 166(c), unless there are circumstances which make it reasonable to expect that this will occur. Here, we have no evidence whatsoever indicating that any of the contractors with which Zimco dealt could be expected to become bankrupt. Instead, we only have petitioner-corporation's bare assertions of such a possibility. Furthermore, the record 136 is void of any evidence showing that any one account receiveable was large enough to "wipe out" the bad debt reserve. On brief, petitioner-corporation states that as its total accounts receivable increased its reserve was consistently maintained at 10 percent thereof. First of all, it is noteworthy that Zimco's accounts receivable did not increase consistently over the fiscal period 1959 through 1965. Furthermore, on the record before us, we see little virtue in the consistency which petitioner-corporation applauds because it appears to have resulted in unreasonable additions to the bad debt reserves during the years in question. In the instant case, respondent used Zimco's bad debt history and determined that its reasonable reserve for bad debts during the years at issue was a percentage of its total notes and accounts receivable no greater than its average percentage of bad debts over the previous six-year period. Specifically, respondent arrived at a 4.123 percent average ratio of Zimco's bad debts 885 to total accounts and notes receivable for a six-year period ending October 31, 1964. The average bad debt ratio to total accounts receivable for the same period was computed by respondent 137 to be 4.098 percent. It was, therefore, determined by respondent that petitioner-corporation is reasonably entitled to use a 4.5 percent factor in computing its reserve and the addition thereto for each of the years involved. Although we have previously approved of such a method in Black Motor Co. 41 B.T.A. 300">41 B.T.A. 300 (1940), we also noted therein that a taxpayer's bad debt history is not the sole criterion which could be used in computing a reasonable bad debt reserve. However, we will sustain the use of such a method by respondent where the reserves computed thereby are not proved unreasonable. See Black Motor Co., supra; Ehlen v. United States, supra. Petitioner-corporation has not in any way attempted to illustrate the unreasonableness of the determination made by respondent. Instead, the record indicates that respondent acted reasonably because Zimco's bad debt experience during the years in question in fact turned out to be no greater than that allowed for by respondent. Zimco has not introduced evidence which would render its bad debt history meaningless in determining its bad debt reserves for the years involved. There is no indication whatsoever in the record of serious economic 138 depression affecting the electrical supply industry. Furthermore, we have no proof that there was a change in Zimco's business activities nor that there were certain accounts or notes which probably would not be collectible. In summary, petitioner-corporation did not prove the existence of specific doubtful accounts or notes that would require reserves greater than those permitted by respondent. Mill Factors Corporation, 14 T.C. 1366">14 T.C. 1366 (1950); Maverick-Clarke Litho Co., supra. Therefore, we hold that respondent's determination must be sustained since petitioner-corporation did not establish to our satisfaction that it was unreasonable. One further note is in order. Zimco insists that its reserves are reasonable. As we have previously indicated, a finding that a taxpayer's method of computing his bad debt reserve is reasonable is not sufficient to disturb respondent's determination unless the taxpayer can prove that respondent acted unreasonably and hence abused his discretion. On the record herein, not only has petitioner-corporation failed to show that respondent abused his discretion, but it did not convince us that its method was reasonable. Over the seven-year period ending October 139 31, 1965, the actual accounts receivable charged off in each year, except fiscal year ended October 31, 1960, constituted less than 50 percent of the available bad debt reserve. Without further clarifying evidence with respect thereto, this fact indicates to us that Zimco's reserves were unreasonably large. Petitioner-corporation points out on brief that its bad debt reserve balance was "drastically reduced" by reason of the fact that $9,923.52 was charged against the reserve account in its fiscal year ended October 31, 1966. We observe that this was the first time Zimco had charged off notes receivable against its reserve for bad debts. Previously, in each of the fiscal years 1964 and 1965, it had specifically deducted as bad debts $2,000 in notes receivable. The fact that Zimco charged off all its notes receivable in fiscal year 1966, without any justification in the record for such action, does not persuade us to conclude that Zimco needed the additions to its reserve which it claimed in fiscal years 1964 and 1965. Furthermore, the record is void as to whether the factors which resulted in a greater amount of notes and accounts being charged off in fiscal year 1966 were either traceable 140 to or known to exist during the years at issue. In summary, there are too many unknown factors relating to this abnormally large charge-off to warrant attaching great importance to it in weighing petitioner-corporation's assertions with respect to the additions claimed for the years at issue. See Roanoke Vending Exchange, Inc., supra.Entertainment Expenses Zimco paid $567.67 and $516.51 in fiscal years ended October 31, 1964, and October 31, 1965, respectively, in connection with the use of the Odessa Country Club. It deducted these amounts on its respective tax returns for those years as entertainment and sales expenses. Respondent disallowed these deductions in full as not allowable under sections 162 and 274. He additionally determined that the disallowed entertainment deductions constituted dividend income to the individual petitioners for their taxable years 1964 and 1965. 886 We must sustain respondent on this issue. Notations such as "El Paso Products Bill Reagan & family" and "Brown Elect. Glenn Brown & family" were jotted down on some individual tabs from the club. These notations were not made at the time of the expenditure, but were made sometime during the period 1966 141 to 1969. J.B. had first testified that he believed that these notations were on the individual tabs at the time they were paid by Zimco. He subsequently retracted his statement and testified that he could not definitely state that the notations were present at the time of payment. The only key we have as to the relationship to Zimco of those individuals and the others indicated on the chits is the testimony of J.B. that petitioner-corporation obtained the business of customers like West Texas Electrical Company and El Paso Products Company as a result of the membership in the Odessa Country Club. J.B. did not testify as to each use of the club during the years in question. His recollection appears at best hazy. We have found as a fact that the notations were not put on the tabs until after the respondent's audit was commenced. J.B. testified that he was the one who wrote them on the chits. Yet the earliest date that he could have done so was in 1966, one to two years subsequent to the actual dates of the entertaining. We, therefore, accord very little weight to those notations and to J.B.'s testimony with respect thereto. In light of the record on this issue, we are not justified in 142 assuming that each individual tab upon which was jotted down the names of Zimco's customers represented a business expenditure. In summary, we remain unpersuaded as to the "business" 13 entertaining which Zimco engaged in during the years at issue. Moreover, Zimco failed to meet both the substantive requirements of section 274(a), 14143 144 and the substantiation requirements of section 274(d). 14 With respect to the club dues, on the record herein, petitioner-corporation has not established that the club was used primarily in furtherance of its business nor that the expenditures at the club were directly related to the active conduct of its trade or business. Section 274 (a)(1)(B). In connection with the deductibility of the individual expenditures at the club, Zimco has failed to prove that each item was directly related to or associated with the active conduct of its trade or business. Section 274(a)(1)(A). Furthermore, petitioner-corporation did not substantiate by adequate records or by sufficient evidence corroborating its own statement all four elements required by section 274(d). In particular, the identity of the persons entertained, the business purpose of the expense, and the business relationship of the persons entertained and using the club were not substantiated 887 because of the unreliability of the notations on the chits and of J.B.'s testimony in connection therewith. We hold accordingly that 145 respondent properly disallowed the entertainment and sales expenses in each of the years involved. Any expenditure made by a corporation for the personal benefit of its stockholders may result in the receipt by them of constructive dividends. John L. Ashby, 50 T.C. 409">50 T.C. 409 (1968). See also Eugene A. Mohr, 45 T.C. 600">45 T.C. 600 (1966). The individual petitioners have failed to establish that the individual expenditures and the dues paid to the Odessa Country Club were not for their benefit. Indeed, the record supports respondent's determination and reveals that over half of the total number of chits in each of the years at issue were signed by Faye or Roger, the individual petitioners' son. These tabs were for personal items such as food and beverage. Accordingly, respondent's determination that the individual petitioners received constructive dividends totaling $535.67 and $486.51 in calendar years 1964 and 1965, respectively, is sustained. Promissory Note Dated January 4, 1964 As of November 1, 1963, petitioner-corporation was no longer entitled to the status of a small business corporation under subchapter S of the Internal Revenue Code of 1954 because a new stockholder failed to consent to such 146 status. On January 4, 1964, Zimco executed a one-year negotiable promissory note in the amount of $9,023.54, payable to J.B. with six percent interest per year from date of issue. Respondent determined that J.B. received a taxable dividend in the face amount of this note. The individual petitioners argue that the note was merely evidence of a loan made by J.B. to Zimco on October 31, 1963. As we understand their position, they contend that there was some type of constructive distribution to J.B. on that date of his share of the corporate earnings which were taxable 15147 to him by reason of the subchapter S provisions of the Code. On the same date, according to petitioners, J.B. made a loan to petitioner-corporation in the same amount. They further assert that the subsequent issuance of a note by Zimco on January 4, 1964, merely evidenced the indebtedness incurred as of October 31, 1963. They explain away Zimco book entries made on October 31, 1964, reflecting a transfer of $9,213.75 16 from J.B.'s undistributed earnings account to his notes payable account as "house-cleaning" entries. Respondent, on the other hand, contends that the issuance of the promissory note to J.B. constituted a distribution out of Zimco's earnings and profits and is thus taxable to him as a dividend in the face amount thereof. We hold that J.B. did not receive a dividend of $9,023.54 in 1964. Petitioner-corporation had a history of borrowing money from its stockholders, as is revealed from the corporate records and corporate minutes. 17 These indicated that the undistributed earnings of the corporation attributable to the shareholders were the source of the loans and interest-bearing notes were issued in the amounts the stockholders loaned the corporation in each instance. In particular, the minutes of the board of directors' meeting of December 5, 1963, state: It was proposed and agreed that the Board representing 100% of the stock of the corporation as individual stockholder 148 would continue to lend the corporation undistributed earnings at 6% per annum and * * * [would] execute notes to evidence such loans. The parties agree that a note dated January 4, 1964, and bearing interest from that date was issued to J.B. in the amount of $9,023.54, which was his share of the undistributed earnings for the year ended October 31, 1963. We conclude from an examination of the facts and circumstances before us that J.B. nade a bona fide loan to Zimco of $9,023.54. Having found that J.B. made a bona fide loan to petitioner-corporation, it logically follows that there must have been a distribution to him, albeit constructive, of money in an amount equal to the amount of the loan, viz, the face amount of the 888 note. It is as if there were a distribution to J.B., followed by an immediate loan back to Zimco. In fact, petitioner argues that this is what occurred on October 31, 1963. Despite the fact that the note was not issued until January 4, 1964, and that interest did not begin to run until that date, we find from an examination of the record as a whole that J. B. loaned Zimco as of October 31, 1963, the amount of earnings attributable to him. Therefore, the note dated 149 January 4, 1964, was merely evidence of that indebtedness. The constructive distribution of $9,023.54 to J.B. constituted a distribution of previously taxed income. Interest Income Petitioner-corporation accrued interest in the amounts of $476.88 and $883.37 on October 31, 1964, and October 31, 1965, respectively, on the balances then outstanding in its liability account "Notes Payable Officer J.B. Zimmerman." It paid these respective amounts to petitioner in 1965 and 1966, and he reported the interest as income in the year of payment rather than the year of accrual. Respondent determined that the interest was unqualifiedly made available to petitioner in the year of accrual, and that he, therefore, constructively received $476.88 and $883.37 in interest income in 1964 and 1965, respectively. We agree with respondent. Petitioner was president of Zimco during the years at issue, and as such, he exercised control over the conduct of its business. He alone was given the authority to draw checks against petitioner-corporation's bank accounts at the First National Bank of Odessa, Tex. Furthermore, book entries of petitioner-corporation reveal that Zimco paid certain personal obligations 150 of petitioner. The amount of these payments was then credited against and reduced the balance of the notes payable to J.B. Thus, it is apparent that petitioner could have had Zimco pay the accrued interest directly to himself or use it to pay some of his personal obligations instead. On the record herein, we are convinced that once the interest in question was credited to J.B.'s notes payable account, he had the right to and could have drawn upon it any time thereafter. See section 1.451-2(a), Income Tax Regs. We feel Elmer J. Benes, 42 T.C. 358">42 T.C. 358 (1964), affd. 355 F. 2d 929 (C.A. 6, 1966), is analogous to the instant case. In the Benes case, we held that the taxpayer constructively received salary from a corporation, of which he was the president and controlling stockholder, in the year the salary was credited to his account. We pointed to such facts as the authority of the taxpayer as president of the company to write checks on its bank accounts and to the ample cash position of the company in the year at issue. Certainly, there is no question here that Zimco did not have adequate cash to pay the interest accrued. The control 18 and power of petitioner over petitioner-corporation 151 is also manifest from the record. These facts, when coupled with Zimco's history of paying personal obligations of J.B., lead us to conclude, and we so hold, that petitioner constructively received $476.88 of interest income in 1964 and $883.37 of interest income in 1965. See Young Door Co., Eastern Division, 40 T.C. 890">40 T.C. 890 (1963); Platt Trailer Co., 23 T.C. 1065">23 T.C. 1065 (1955); and James J. Cooney, 18 T.C. 883">18 T.C. 883 (1952). Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 in effect during the years in question. ↩2. $2,000 notes receivable additionally considered as bad debt. ↩3. $2,000 notes receivable additionally considered as bad debt. ↩4. Includes $6,878.48 notes receivable.↩5. This average bad debt rate was arrived at by dividing the average total accounts receivable charged off by the average total accounts receivable.↩6. Respondent also used the 4.5 percent factor in fiscal year ended October 31, 1965. However, this resulted in an increase in the bad debt reserve addition and a corresponding decrease in Zimco's taxable income for that year.↩7. This amount includes $2,000 in notes receivable that were additionally deducted as bad debts.↩8. Of this total amount, $370 represented club dues and the remainder was for individual charges. ↩9. Club dues totaling $386 were included in this total. The remaining portion of the claimed deduction constituted individual charges.↩10. Increase in capital stock account was due to stock dividend.11. See footnote 6, supra, as to the bad debt reserve addition for fiscal year ended October 31, 1965.↩12. SEC. 166. BAD DEBTS. * * (c) Reserve for Bad Debts. - In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary or his delegate) a deduction for a reasonable addition to a reserve for bad debts.13. Our use of this word refers to expenditures for purposes considered ordinary and necessary within the meaning of sections 162 and 212.↩14. SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. (a) Entertainment, Amusement, or Recreation. - (1) In general. - No deduction otherwise allowable under this chapter shall be allowed for any item - (A) Activity. - With respect to an activity which is of a type generally considered to constitute entertainment, * * * unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion * * , that such item was associated with, the active conduct of the taxpayer's trade or business, or (B) Facility. - With respect to a facility used in connection with an activity referred to in subparagraph (A), unless the taxpayer establishes that the facility was used primarly for the furtherance of the taxpayer's trade or business and that the item was directly related to the active conduct of such trade or business, and such deduction shall in no event exceed the portion of such item directly related to, or, in the case of an item described in subparagraph (A) directly preceding or following a substantial and bona fide business discussion * * the portion of such item associated with, the active conduct of the taxpayer's trade or business. * * ** * * (d) Substantiation Required. - No deduction shall be allowed - * * * (2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, * * * * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense * * , (B) the time and place of the travel, entertainment * , (C) the business purpose of the expense * , and (D) the business relationship to the taxpayer of persons entertained, * . The Secretary or his delegate may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations.15. The full amount of $9,062.38, with a $38.84 investment tax credit, was reported and paid by J.B. and his wife as Subchapter S income on their tax return for 1963. 16. This amount includes restoration of an investment credit of $190.21 as of that date.↩17. Respondent concedes in his reply brief that petitioner-corporation "did on occasion receive loans from its shareholders * * [that] were * * * evidenced by notes * * *."↩18. We are aware that petitioner owned 50 percent of the stock of Zimco, while the taxpayer in the Benes case owned 99.4 percent of the stock in the corporation involved in that case. However, we do not feel on the record herein that 50.1 percent stock ownership is required to indicate the considerable control petitioner exercised over Zimco.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620333/	BERTRAM S. PRIMOFF, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPrimoff v. CommissionerDocket No. 27859-83.United States Tax CourtT.C. Memo 1985-562; 1985 Tax Ct. Memo LEXIS 66; 50 T.C.M. (CCH) 1413; T.C.M. (RIA) 85562; November 18, 1985. Bertram S. Primoff, pro se. Steven Lang and Robert B. Marino, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined a deficiency of $4,274 in petitioner's Federal income tax for the calendar year 1981. The sole issue is the deductibility of various claimed business expenses. FINDINGS OF FACT Some of the facts are stipulated and are so found. Petitioner resided in Ardsley, New York at the time he filed his petition herein. As of the taxable year in issue, petitioner had practiced67 accounting for over 40 years and had been a certified public accountant for over 30 years. During 1981, petitioner was a partner in the accounting firm of Primoff & Company located in New York City. The deficiency herein results from the disallowance of the entire amount of miscellaneous expenses deducted by petitioner on Schedule A of his 1981 return and expenses deducted on Schedule E where he reported his income from Primoff & Company. Miscellaneous Deductions: Cab Fares$ 920.00 Parking and Tolls600.00 Dues, PublicationsSeminars650.00 Auto Expense3,000.00 Telephone1,200.00 $6,370.00 Less reinbursement(1,200.00)$5,170.00 Total$5,170.00Partnership Expenses: Auto Rental$ 874.00 Entertainment5,283.00 Gifts224.00 $6,381.00 Allowed per Notice ofDeficiency(3,500.00)Total$2,881.00 $2,881.00Total Disallowance$8,051.00OPINION The burden of proof is on petitioner. ; Rule 142(a). 1As the record herein shows, the Court encountered great68 difficulty, due principally to petitioner's lack of cooperation and his totally inadequate preparation and presentation of his case. In particular, petitioner presented the Court with numerous checks, and credit card bills which he coupled only with the most general and unconvincing testimony. He has compounded his lack of proper presentation by failing to file a brief despite the fact that he responded affirmatively when the Court asked him if he wanted to file one and was reminded of his failure timely to file his brief by way of a letter from the Clerk of the Court dated August 29, 1985. Moreover, he had an obligation to assist the Court by organizing the material presented at trial. Cf. . Petitioner was the sole witness at trial. It is crystal clear that, insofar as the "entertainment" and "gift" items of "partnership expenses," he has failed to meet the substantiation requirements of section 274(d), 2 even if the conditions of section 162 were otherwise satisfied. ; ; ,*69 affd. by Court order (5th Cir. June 20, 1985). In respect of the other items, we have great difficulty in pinpointing any expense which we can say, with complete conviction, that petitioner is entitled to deduct. However, based upon our examination of the material submitted at trial (albeit without the benefit of any organized presentation by petitioner) and given the nature of petitioner's business, we are satisfied that petitioner had $500 of deductible expenses principally for cab fares, telephone and a seminar. See . Other than this amount, we hold that petitioner has failed to carry his burden of proof--a consequence which stems from our bearing heavily upon petitioner who has nobody to blame but himself for his predicament. . To reflect our decision herein, Decision will be entered under Rule 155.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, and in effect during the taxable year at issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620334/	BYRON K. ANDERSON and CAROLYN ANDERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; BYRON K. ANDERSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAnderson v. CommissionerDocket Nos. 8890-80, 19981-80.United States Tax CourtT.C. Memo 1982-576; 1982 Tax Ct. Memo LEXIS 169; 44 T.C.M. (CCH) 1305; T.C.M. (RIA) 82576; September 30, 1982. Stephen R. Illingworth, for the petitioners. J. Anthony Hoefer, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, 170 Judge: Respondent determined deficiencies in petitioners' Federal income taxes in the amounts of $347.17, $306, and $438 for the taxable years 1976, 1977, and 1978, respectively. Concessions having been made, the sole issue remaining for decision is whether petitioners are entitled to deduct expenses of an office in the home under Section 280A. 1FINDINGS OF FACT Some of the facts have been stipulated by the parties and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference. Petitioners in docket No. 8890-80 are Byron K. Anderson and Carolyn Anderson, who were formerly husband and wife. Petitioner in docket No. 19981-80 is Byron K. Anderson. At the time they filed their petitions in these cases, petitioner Byron K. Anderson resided in Funk, Nebraska, and petitioner Carolyn Anderson resided in Holdrege, Nebraska. Petitioners filed their joint Federal income171 tax returns for 1976 and 1977 with the Internal Revenue Service Center, Ogden, Utah. Petitioner Byron K. Anderson filed his individual income tax return for 1978 with the Internal Revenue Service Center, Ogden, Utah. All of these returns for all three years were prepared using the cash method of accounting. Petitioner Byron K. Anderson (hereinafter petitioner) is a nurse-anesthetist practicing at several hospitals in the south central area of Nebraska. At all times relevant to this case, he lived in either a house or an apartment located in Holdrege, Nebraska, where he maintained a home office. Because of the nature of his practice, petitioner did not see patients outside of the hospital setting. He rendered professional anesthesia services to patients in various hospitals. The bulk of his professional practice was centered in three hospitals: Phelps Memorial Health Center in Holdrege (Phelps); the Harlan County Hospital in Alma, Nebraska (Harlan); and Franklin County Memorial Hospital in Franklin, Nebraska (Franklin). Alma is about 25 miles from Holdrege, and Franklin is approximately 50 miles south of Holdrege. As between these three hospitals, petitioner performed the majority172 of his services at Phelps, located in the same city where he maintained his residence. None of these hospitals provided any office space for petitioner. 2 During the years before the Court, petitioner was not an employee of any of the hospitals in which he practiced. During 1977 and 1978, petitioner was a member of a professional service corporation called Midstate Anesthesia, P.C. (Midstate), located in Kearney, Nebraska, about 30 miles from Holdrege. For 1976 petitioner had reported all of his income from the practice of anesthesiology, along with income from the Messbarger and Brown partnership, on a Schedule C, Profit or (Loss) from Business or Trade. For 1977 and 1978, petitioner reported173 all of his income from the practice of anesthesiology as wages, salaries, tips, and other employee compensation. Midstate issued Forms W-2, Wage and Tax Statements, for 1977 and 1978, and those W-2's included all of petitioner's professional income as an anesthetist for those years. For 1977 petitioner claimed his home office deductions on Schedule E relating to income from the partnership of Messbarger and Brown, and for 1978 petitioner claimed his home office deductions on Form 2106, Employee Business Expenses. Good Samaritan Hospital in Kearney, Nebraska (Good Samaritan) provided office space to Midstate, which was available for petitioner's use. The office that Good Samaritan provided for the members of Midstate was furnished with at least a desk, a file cabinet, and a conference table. The other seven members of the professional corporation used this office as they needed it. Petitioner was not provided any individual office space at Good Samaritan apart from that provided to Midstate. Since petitioner rarely performed anesthesia services at Good Samaritan, and since the traveling distance between Kearney, Nebraska, and Holdrege, Nebraska was 30 miles, petitioner did not174 choose to use the office space provided for Midstate. The record does not establish that petitioner's use of his home office was for the convenience of Midstate. Petitioner owned 80 acres of farm land in Phelps County, Nebraska, located 12 miles from Holdrege. Petitioner's Phelps County land was farmed by a tenant, who also farmed several additional parcels that he rented from other people. Petitioner's revenues and losses from the Phelps County farm land 3 were as follows: 175 Net Farm RentalYearsGross ReceiptsExpensesProfit (or Loss)1976$9,258.24$7,798.34$1,459.9019778,986.0010,056.00(1,070.00)19784,874.009,698.00(4,824.00)Petitioner also owned 40 acres of land in Brown County, Nebraska, approximately 165 miles from Holdrege. The Brosn County land had a creek running through it and was primarily recreational, and not used for raising crops. See footnote 3. During 1976 and 1977, petitioner resided with his then wife, Carolyn Anderson, in a house at 1138 Maberly Street, Holdrege, Nebraska. That house had been designed and built with space for an office. In 1976 and 1977, the "office" room in the home was furnished with a desk, chair, lamp, copy machine, adding machine, typewriter, office stationery, professional stationery, file cabinet, waste paper basket, and book shelves for petitioner's professional library. In 1978, having separated from his wife, petitioner resided in a two bedroom apartment, one of which was used as his office. When petitioner moved into the apartment, his furnishings from the "office" room at the family residence were moved into the second bedroom for use there176 as his office. For convenience each room will be referred to as petitioner's "home office" for the respective tax years involved. During these years, petitioner used his home office to record his anesthesia services as rendered at the various hospitals and to bill the hospitals each month for those professional services. The hospitals billed the patients for petitioner's professional services along with other medical services and then remitted petitioner's share to him. As is the case with most anesthetists, petitioner did not see patients in his home office or in any other office. He saw patients at the hospital only, usually for the first time the day before the operation and then the day of the operation and during the post-operative period. In addition to recording his services and billing the various hospitals for those services, petitioner also used the home office for professional reading relating to his anesthesia practice. Petitioner also used his home office in connection with his Phelps County farm property. Petitioner used the office to pay bills relating to the farm, to keep records and files relating to the farm, and to talk occasionally with his tenant on177 the telephone regarding operation of the farm. The record does not establish the extent to which the home office was used for such purposes. In all years involved, petitioner's home office was never furnished to accommodate overnight guests, nor was it ever so used. Petitioner may have used his home office on occasion for personal purposes, such as writing a letter or a personal check, but the predominant uses of his home office related to his anesthesia practice and his tenant farm property. Any personal use of the office was minimal. In the tax returns for the years in question, petitioner claimed deductions for the cost of maintaining his home office. In his notices of deficiencies dated March 11 and August 21, 1980, respondent disallowed those claimed deductions. There is no dispute as to the amounts involved, but respondent disputes the deductibility of any amount. OPINION The issue for decision is whether petitioner is entitled to deduct home office expenses under section 280A. Petitioner argues, first, that his principal place of business as a practicing nurse-anesthetist is his home office and, second, that his principal place of business for his second business178 of farm management is his home office. Respondent argues, first, that petitioner's principal place of business is one or more of the hospitals in which he practices anesthesia, not his home office, and, second, that petitioner's activities in managing his farm are not sufficiently systematic, regular and continuous to constitute a separate trade or business. We agree with respondent and hold that petitioner may not deduct the claimed home office expenses. Section 280A lays down the general rule that expenses with respect to the use of a taxpayer's residence are not deductible. Sec. 280A(a). To this general rule of nondeductibility, section 280A(c) creates three narrow exceptions, exceptions intended to state "definitive rules" for the deductibility of expenses attributable to the business use of a taxpayer's residence. S. Rept. No. 94-938 (1976), 1976-3 C.B. (Vol. 3) 182, 185. Petitioner relies on only the first exception, the principal place of business exception, and under the facts of record that is the only exception that could be applicable to this case. In addition179 to establishing that his home office was his principal place of business within the meaning of section 280A(c)(1)(A), petitioner must also satisfy the general requirements of section 280A(c)(1) by establishing that he used his home office "exclusively" and "on a regular basis" for his trade or business and if he was an employee he must establish that such exclusive use was for the convenience of his employer. 4180 Here petitioner must show that his home office was his principal place of business. Sec. 280A(c)(1)(A). A taxpayer may have only one principal place of business for a particular trade or business. Drucker v. Commissioner, 79 T.C. (filed September 30, 1982) at 14 of Slip Opinion; Green v. Commissioner,78 T.C. 428">78 T.C. 428, 433 (1982); Jackson v. Commissioner,76 T.C. 696">76 T.C. 696, 700 (1981); Baie v. Commissioner,74 T.C. 105">74 T.C. 105, 109 (1980); Curphey v. Commissioner,73 T.C. 766">73 T.C. 766 (1980), on appeal (9th Cir. Nov. 24, 1980). 5 The test applied by this Court is whether the home office is the "focal" point of a taxpayer's activities in his particular trade or business, and this test is a factual one, depending upon the facts and circumstances of each case. Drucker v. Commissioner,supra at 14 of Slip Opinion; Green v. Commissioner,supra at 433; Jackson v. Commissioner,supra at 700; Baie v. Commissioner,supra at 109. 181 Petitioner argues that his home office constituted the focal point of his trade or business as a practicing nurse-anesthetist. He reasons that the key element of his practice was the function of recording and accounting for services rendered to patients and billing the hospitals for such services, which petitioner did from his home office. Underlying this argument is petitioner's assertion that it was the accounting and billing for his services that generated his income. We are not persuaded. Petitioner was a nurse-anesthetist, not a bookkeeper or an accountant. 6 The services that petitioner was engaged to perform were to administer anesthesia to patients before surgery and to care for the patients immediately after surgery as they came out from anesthesia. It was these services for which petitioner was compensated and which consequently generated his income. Those services were performed at the various hospitals in which he practiced, not at his home office. 182 In the case of a true independent contractor or independent professional performing services for a large number of clients, customers or patients in a large number of places, it may well be that such a taxpayer's home office may be the focal point of his trade or business, being the place where he spends the greater part of his time (when compared to other possible focal points) in coordinating his business activities. 7 However, the facts of this case do not pose such a situation. 183 Petitioner testified that the bulk of his professional services were rendered at the three hospitals: Phelps Memorial, Harlan County, and Franklin County. And, of those three, petitioner also testified that most of his time was spent at Phelps Memorial in Holdrege. The record does not show how much time petitioner spent at Phelps in comparison with the time he spent at his home office. While the relative time at each location is not conclusive, it is a highly persuasive factor. Drucker v. Commissioner,supra at 14 of Slip Opinion; Green v. Commissioner,supra at 433; Jackson v. Commissioner,supra at 700. 8 Petitioner failed to introduce any evidence on this issue. Petitioner's use of his home office for his professional library and professional reading is relevant, but is not sufficient to carry his burden of persuasion. Rule 142(a). Petitioner also argues that his home office was both a medical and a business necessity. 9 We sympathize with petitioner's184 predicament, but we, as he, must deal with the statute as Congress wrote it. The fact that certain work relating to his anesthesia practice, such as recordkeeping, billing, and professional reading, had to be performed at his home is not determinative. Necessity alone does not render petitioner's home office his principal place of business. 10 Accordingly, upon this record we must conclude that petitioner's home office was not his principal place of business in his practice as a nurse-anesthetist. 185 Because we hold that petitioner's office was not his principal place of business as a nurse-anesthetist, we need not address the other issues involved--whether he was an employee of his professional corporation, Midstate Anesthesia; if so, whether his use of his home office was for the convenience of his employer; and whether his home office was used "exclusively on a regular basis" in his anesthesia practice. Alternatively, petitioner argues that his home office expenses are deductible because they were incurred in a second trade or business, namely, the management of his tenant farm property. This Court recognizes that a taxpayer may have more than one trade or business and consequently more than one principal place of business. Curphey v. Commissioner,73 T.C. at 776-777. Furthermore, Congress has now amended section 280A(c)(1)(A) to ratify and to make retroactive this Court's holding in Curphey. See footnote 4 and Green v. Commissioner,supra at 431, n. 3. That amendment, made retroactive, applies to this case. See Footnote 4 above. Consequently, 186 even though petitioner's use of his home office in his professional practice as a nurse-anesthetist will not support a deduction, he may be entitled to a deduction based on another trade or business, if the requirements of section 280A(c)(1) are otherwise met. Petitioner argues that his management of the farm in Phelps County constituted a second trade or business, conducted principally from his home office. Respondent does not dispute that petitioner's home office was the principal place from which petitioner managed his farm property but disputes petitioner's threshold contention that his farm activities constituted a second trade or business. The central issue here, then, is whether petitioner's management of his farm property constituted a second trade or business for purposes of section 280A. The test is whether a taxpayer's activities are sufficiently regular, systematic, and continuous to justify a conclusion that petitioner's activities constitute a trade or business. Curphey v. Commissioner,73 T.C. at 775. Whether this regular, systematic, and continuous187 test stems from the statutory requirement of a "trade or business" or the statutory requirement of a "regular" use is unimportant since the test is the same. See sec. 280A(c). Both statutory requirements enforce Congress' manifest intention that "[e]xpenses attributable to incidental or occasional trade or business use of an exclusive portion of a dwelling unit would not be deductible." S. Rept. No. 94-938 (1976), 1976-3 C.B. (Vol. 3), 182 at 186-187. Neither Curphey nor any of the cases cited therein stand for the proposition that ownership and management of a single piece of real property for the production of income constitutes a trade or business as a matter of law for the purposes of section 280A. Instead, Curphey emphasizes that while rental of a single piece of real property may constitute a trade or business for the purposes of section 280A, "the issue is ultimately one of fact." 73 T.C. at 772, 775. Curphey also emphasizes that one of the key factors is the scope and extent of the taxpayer's ownership and the management activities. *188 We find that the petitioner has failed to satisfy his burden of persuasion on this issue. See Rule 142(a). While personally farming 80 acres would undoubtedly constitute a trade or business, petitioner had relieved himself of virtually all of the day-to-day responsibilities of farming by employing a tenant farmer. Petitioner testified in vague generalities about using his home office to pay bills, to store records, and occasionally to talk to his tenant on the telephone, but his testimony does not establish that his activities were sufficiently regular, systematic, and continuous as to place him in the business of farm management. Since petitioner is not entitled to the home office expense deduction under section 280A for any of the years, Decisions will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in question, unless otherwise noted. Unless otherwise indicated, any reference to "Rules" is to the Tax Court Rules of Practice and Procedure.↩2. Petitioner also testified that he was on emergency call for other Nebraska hospitals in Callaway, Lexington, Cozad, Minden, and Oxford, but it is not clear whether he actually performed services at all of those hospitals during the years involved in this case. Any services that petitioner actually performed at those hospitals were minimal in comparison to the services he performed at Phelps, Harlan, and Franklin. None of those hospitals provided petitioner with office space.↩3. There is some confusion in the record about the two different parcels of land owned by petitioner. Apparently, the 80 acres was actively farmed by a tenant and the 40 acres was recreational land and was not farmed. However, the Form 4835, Farm Rental Income and Expenses, for 1976 listed both the 80 acres in Phelps County and the 40 acres in Brown County. The Form 4835 for 1977 listed the 40 acres in Brown County. The Form 4835 for 1978 did not list acreage but merely identified the farm as being located in Brown County, Nebraska. In view of our disposition of the case, it is unnecessary to resolve this seeming conflict. We assume that petitioner deducted expenses in connection with the Phelps County land, which would be farm business expenses, rather than expenses in connection with the Brown County acreage, which would be personal and non-deductible (except for taxes and interest which would be deductible in any event but as Schedule A itemized deductions from adjusted gross income rather than as business expense deductions above the line).↩4. Section 280A, as retroactively amended by Pub. L. 97-119, § 113(c), reads in pertinent part: SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS USE OF HOME, RENTAL OF VACATION HOMES, ETC. (a) General Rule.--Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. (c) Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use.(1) Certain Business Use.--Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis-- (A) [as] the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. (5) Limitation on Deductions.--In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of-- (A) the gross income derived from such use for the taxable year, over (B) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used. Pub. L. 97-119, Sec. 113(c), 95 Stat. 1635, 1641. Prior to amendment, subsection (c)(1)(A) read, "[A]s the taxpayer's principal place of business." The amendment was made retroactive for tax years beginning after December 31, 1975, except that, for tax years after that date and before January 1, 1980, the amendment applies "only to taxable years for which, on the date of the enactment of this Act, the making of a refund, or the assessment of a deficiency, was not barred by law or any rule of law." Sec. 113(e). Here, the Commissioner's notices of deficiency for the years 1976, 1977, and 1978 tolled the statute of limitations as to those years. Sec. 6503(a)(1). Thus, those years are still open, and the 1981 amendment applies to this case.↩5. See also Roth v. Commissioner,T.C. Memo. 1981-699; Aab v. Commissioner,T.C. Memo. 1981-620↩.6. It is quite possible that for 1977 and 1978, petitioner was in the business of being an employee of his professional services corporation rather than an independent contractor nurse-anesthetist. If the hospitals were not the focal point of petitioner's practice as a nurse-anesthetist as an employee, his principal place of business would then seem to have been the headquarters of Midstate Anesthesia is Kearney, Nebraska, not petitioner's home office. See Drucker v. Commissioner, 79 T.C. (filed September 30, 1982) at 14 of Slip Opinion. If petitioner was an employee during those years, there is no evidence in the record to establish that his use of his home office was for the convenience of his employer. Sec. 280A(c)(1); Hynes v. Commissioner,74 T.C. 1266">74 T.C. 1266, 1297↩ (1980).7. The use of such a home office for other professional activities such as professional reading or business correspondence would be another factor to consider. Examples might be the independent contractor musician or an artist using a home studio. See and compare the majority opinion in Drucker v. Commissioner, 79 T.C. (filed September 30, 1982). Furthermore, it may well be that the conduct of the taxpayer's trade or business may be sufficiently diffused among a number of places, including the taxpayer's residence, that there may be no "principal place of business" within the meaning of section 280A. Drucker v. Commissioner,↩ 79 T.C. (filed September 30, 1982) (Tannenward, C.J., concurring).8. See also Roth v. Commissioner,T.C. Memo. 1981-699↩.9. Petitioner testified that his home office contributed materially to patient welfare because of the savings in time in locating and contacting him. We are not persuaded that having one less telephone number for hospitals to call so significantly contributed to patient welfare as to justify a conclusion that petitioner's home office was the focal point of his professional practice. Moreover, petitioner also testified that he joined Midstate Anesthesia in order to have more free time, and presumably membership in that professional group ameliorated his problem of emergency calls. ↩10. See Aab v. Commissioner,T.C. Memo 1981-620">T.C. Memo. 1981-620; Weightman v. Commissioner,T.C. Memo. 1981-301; Kastin v. Commissioner,T.C. Memo. 1980-341↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620335/	J. H. England, Petitioner, v. Commissioner of Internal Revenue, RespondentEngland v. CommissionerDocket No. 69416United States Tax Court37 T.C. 1150; 1962 U.S. Tax Ct. LEXIS 167; March 27, 1962, Filed 167 Decision will be entered under Rule 50. Held, that petitioner's payment of $ 15,800 to his former wife pursuant to the provisions of a written lease between them, constituted rental for his use and occupancy of certain farming lands which he had conveyed to said former wife in a property settlement incident to their divorce; and that said amount is deductible by him as a business expense. James Powers, Esq., for the petitioner.James Q. Smith, Esq., for the respondent. Pierce, Judge. PIERCE 1150 The respondent determined a deficiency of $ 6,393.19 in the income tax of petitioner for the calendar year 1954. The sole issue for decision is, whether the amount of $ 15,800 which petitioner paid to his former wife as "rental," pursuant to the terms of a written lease covering certain farm property, is deductible by him as an expense of his farming operations; or whether said amount constituted in reality, part of a property settlement between them incident to their divorce -- and hence is not deductible.The parties have stipulated that, in any event, petitioner is entitled to deduct in the taxable year, a net operating loss carryback from the subsequent year 168 1956. Effect will be given to such stipulation in the recomputation to be made herein under Rule 50.1151 FINDINGS OF FACT.Some of the facts were stipulated. The stipulation of facts, and the exhibits identified therein, are incorporated herein by reference.The petitioner, J. H. England, resides in Florence, Arizona. He filed a Federal income tax return for the calendar year 1954, with the district director of internal revenue at Phoenix. Throughout the taxable year and for 20 years prior thereto, petitioner was in the business of raising cotton.Petitioner and Ruby M. England were married in 1931. In February 1954, Ruby filed an action for divorce against petitioner in the Superior Court for Pinal County, Arizona; and she therein requested the court to make an equitable division of the community property which she and petitioner owned. One portion of this property which Ruby desired to have set over and conveyed to her in the settlement, was a parcel whereon the family residence was situate, hereinafter called "home place." The home place consisted of about 700 acres, of which 316 acres were covered by an "allotment" from the United States Department of Agriculture permitting169 cotton to be grown thereon.Petitioner had planted cotton on the aforesaid 316 acres during the month of January 1954, which was prior to the time when Ruby filed her divorce action. Petitioner desired to take the crop to maturity, and Ruby was agreeable that he do so. Accordingly, Ruby proposed in a letter written by her attorney on March 4, 1954, that she be given complete title to the home place in the property settlement; and she agreed that if this were done, she would then lease the farm area of said property to petitioner for the remainder of the year 1954, at a rental of $ 15,800. The amount of this rental was computed on the basis of $ 50 per acre for the 316 acres covered by the above-mentioned cotton allotment; and, since the lease was to cover a period of only about 9 months, and the crop had already been planted on the premises by petitioner, said $ 15,800 was a fair and reasonable rental. Petitioner, acting through his attorney, agreed to Ruby's proposal.On April 10, 1954, petitioner and Ruby entered into a property settlement agreement which provided in part as follows:FIRST: First Party [petitioner] agrees to and does hereby convey to Second Party [Ruby], free170 and clear of liens and encumbrances, save and except real property taxes for the year 1954, assumed by Second Party, as and for her sole and separate property and estate, the following described real property, together with each and every, all and singular the improvements thereon situate in the County of Pinal, State of Arizona, as follows, to-wit: [There was then set forth a legal description of the entire home place here involved.]Immediately thereafter, Ruby, acting as the owner of said property, executed a lease to the petitioner covering the farm area thereof on which the cotton was planted, for a period extending to January 1, 1152 1955. Petitioner agreed that in consideration for such leasing of the premises, he would pay Ruby "as rent for the same" the sum of $ 15,800 in cash, maintain the property in good condition, pay all charges and assessments for irrigation water, and participate in all Government farm programs for the demised premises.Also, in preparing the above lease agreement, Ruby acting as the contemplated landlord of the property covered by the lease, executed a landlord's waiver of any objection to petitioner, as lessee, mortgaging his interest in the171 cotton crop on the demised premises, in order that petitioner might obtain the cash for the agreed rental. And after so obtaining this cash, petitioner paid the same to Ruby by check which carried endorsements both on the face and on the back thereof, that such payment was "Rent in Full on 700 acre farm for 1954." Ruby then accepted said check, and endorsed the same for payment by the bank, immediately under said restrictive statement; and she thereupon received payment of the amount of said check.Immediately following the execution of all the foregoing agreements, the court entered its judgment and decree of divorce; and it incorporated as a part thereof a copy of the above-mentioned property settlement in which complete title to the home place was given to Ruby.The petitioner, in his Federal income tax return for the year 1954, claimed a deduction for the $ 15,800 rental which he had so paid to Ruby, as a business expense on his farming operations. The respondent, in his notice of deficiency, disallowed this deduction on the ground that said payment was merely a part of the property settlement. However, at or about the same time, respondent also issued a notice of deficiency172 to Ruby in which he took the inconsistent position that the same payment constituted rental income to her pursuant to the terms of the above-mentioned lease agreement.OPINION.We think there is no merit to the position which the respondent has taken in this case (inconsistent with the position which he took in the case of Ruby) that the payment of $ 15,800 here involved did not constitute rental under the parties' lease agreement, but was merely a cash payment incident to the divorce settlement. Adoption of such contention of respondent would require us to adopt a position inconsistent with the written provisions of the settlement agreement, the lease, the landlord's waiver, and also the restrictive provisions of the check under which the payment was made by petitioner and received by Ruby. As we have heretofore found as a fact, the settlement agreement provided for the conveyance to Ruby of the complete title to the home place with all improvements thereon, free and clear 1153 of all liens and encumbrances. The lease agreement was then executed by Ruby in her capacity as the owner of such property; and it imposed legal obligations upon the petitioner, not only for the payment173 of the specified rent, but also for the maintenance of the property and payment of charges and assessments for irrigation privileges. Ruby also executed a landlord's waiver, in order to enable petitioner to borrow money from a third party, on the crop which was growing on the demised premises. And she thereafter accepted the cash payment in question by endorsing the check therefor, immediately under the statement endorsed thereon that such payment was in satisfaction of the "rent" due.It is true that Ruby in her testimony at the trial herein attempted to repudiate the legal effect of all the above instruments, by taking the position that her intention in executing the same was not to rent the property, but merely to receive the disputed $ 15,800 as part of her property settlement incident to the divorce. Such position is in conflict with that of the petitioner in his testimony; and it also is in conflict with the terms of the settlement agreement itself, which the court incorporated and approved in its judgment and decree.We resolve this conflict of testimony in favor of the petitioner. All of the instruments in question were carefully prepared by counsel for the parties; and174 in our view the terms of such written instruments should be accepted as being more persuasive of the true intent of the parties, than is Ruby's self-serving statement that she had contrary intentions.We decide the issue in favor of the petitioner, and hold that petitioner's said payment of $ 15,800 is deductible by him as a business expense of the taxable year involved.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620338/	ESTATE OF MILTON SALIT, Deceased, ELLIN S. RIND, Executrix, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Salit v. CommissionerDocket No. 5837-78.United States Tax CourtT.C. Memo 1982-554; 1982 Tax Ct. Memo LEXIS 188; 44 T.C.M. (CCH) 1205; T.C.M. (RIA) 82554; September 23, 1982. William Slivka, for the petitioners. Robert J. Alter, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND189 OPINION TANNENWALD, Chief Judge: Respondent determined a deficiency of $64,365 in petitioner's Federal estate tax. After concessions by the petitioner, the issues remaining for our decision are: (1) whether the death benefits paid by the New York City Teachers' Retirement System qualify for exclusion from decedent's gross estate under section 2039(c); 1 (2) whether petitioner is entitled to a credit for tax on prior transfer under section 2013. 2190 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated by this reference. Petitioner is the Estate of Milton Salit, represented by its executrix, Ellin S. Rind (Ms. Rind). 3 At the time she filed the petition in this case, Ms. Rind resided in New Rochelle, N.Y. On June 5, 1969, Milton Salit (decedent) executed an irrevocable inter vivos trust agreement between himself as grantor and Ms. Rind, his only child, as trustee. Decedent retained no right to alter or amend the trust instrument. The agreement contained the following provision: 3. DISPOSITIVE PROVISION. The Trustee shall hold and dispose of the trust estate as follows: The Trustee shall hold, manage and control the property comprising the trust estate, collect the income therefrom, and out of same, shall pay all taxes and other incidental expenses of the trust, including his own commissions as hereinafter provided, and shall pay or apply the net income derived therefrom and shall distribute or apply the principal thereof, as follows: (1) During the life of HELEN G. 191 SALIT, wife of the Grantor, to pay to or apply to her benefit, quarter-annually, all of the net income of the trust, so long as she shall live. (a) The Trustee is authorized to invade the principal of the Trust up to the amount of FIVE THOUSAND ($5,000.00) DOLLARS in any one year, non-cumulative, for any purpose whatsoever, in the sole discretion of HELEN G. SALIT. The Trustee is further authorized to invade the principal of the trust, in her sole discretion, in any amount for the support, maintenance, comfort and general welfare of HELEN G. SALIT. (2) Upon the death of HELEN G. SALIT, the trust estate shall terminate and the corpus and undistributed income of said trust shall be paid over to ELLIN JANE RIND, daughter of the Grantor, but if she is not alive at said time, the corpus and undistributed income of the said trust shall be paid over, it equal shares, to the issue of ELLIN JANE RIND. Pursuant to the terms of the trust agreement, on June 5, 1969, $100 was deposited in a savings account with People's Bank for Savings of New Rochelle (People's Bank). The decedent transferred no other assets to the trust prior to his death. Decedent was a longtime employee of the192 New York City Board of Education and a member of the City of New York Teachers' Retirement System (Retirement System). On April 13, 1971, decedent filed a designation of beneficiary form with the Retirement System designating as beneficiary of all benefits in the event of his death before attaining eligibility or thereafter, his wife, Helen G. Salit, if living, or otherwise his daughter, Ellin Jane Rind. Decedent had wished to make the inter vivos trust the beneficiary but was advised that under then existing law the beneficiary under the Retirement System had to be an individual rather than a trust. The Administrative Code of the City of New York was subsequently amended to permit a participant in the Retirement System to designate the trustee of an inter vivos trust as a beneficiary of death benefits. On May 2, 1972, decedent filed a new designation form with the Retirement System designating Ellin Jane Rind, trustee of the inter vivos trust dated June 5, 1969, as the sole beneficiary of all death benefits due by reason of his death. Decedent could not make this designation prior to May 2, 1972, although the enabling legislation was in effect prior to that date, because of193 the delay in the preparation of the necessary forms by the Retirement System. Decedent retired from the Retirement System effective as of November 9, 1972. On November 15, 1972, decedent received a letter from the Retirement System requesting that he refile the beneficiary designation on a newly revised form. Decedent did so on November 17, 1972. On April 9, 1973, decedent duly executed another revised beneficiary designation form, entitled "Selection of Trustee of An Inter Vivos Trust As Beneficiary of Benefits Under Option One," designating Ellin Jane Rind, trustee, as beneficiary. Under the rules governing the System, decedent retained, until his death, the right to revoke the beneficiary designation of the inter vivos trust by naming an individual beneficiary or beneficiaries. The last beneficiary designation superseded any and all previous designations. Decedent's wife, Helen G. Salit, predeceased decedent on August 3, 1973. Decedent died testate on April 10, 1974. His Last Will and Testament, dated December 8, 1971, was duly admitted to probate by the Surrogate's Court of West-chester County, N.Y. His will contained the following provision: FOURTH: (A) I give to194 my wife, HELEN G. SALIT, if she survive me, an amount equal to fifty (50%) percent of the value of my adjusted gross estate as determined for Federal estate tax purposes * . (B) I devise and bequeath all the rest, residue and remainder of the property owned by me at my death to the Trustee under a certain irrevocable Trust Agreement dated June 5th, 1969, executed by me as Grantor and ELLIN JANE RIND, as Trustee. Said devise and bequest shall be added to the principal of the Trust Fund therein established as an integral part thereof, to be held, administered and distributed by the Trustee in accordance with all the terms and provisions of the said agreement. Decedent's will provided for no alternative disposition of his estate. At the date of decedent's death, the Retirement System met the qualification requirements prescribed by section 401(a). On March 29, 1975, Ms. Rind filed a Claimant's Statement with the Retirement System in a dual capacity, executing Part B of the Statement in her individual name as the designated beneficiary and executing Part C of the statement as the trustee of an inter vivos trust. On or about June 13, 1975, the Retirement System made a payment195 to Ellin Jane Rind as trustee of an inter vivos trust in the amount of $212,143.48, which payment she deposited in a trust account with People's Bank. OPINION The first issue for our determination is whether the payment made upon decedent's death by the Retirement System was receivable by the executrix of decedent's estate. If so, the total payment of $212,143.48 is includable in decedent's gross estate. Section 2039(a), (c). 4 If the proceeds were receivable by any beneficiary other than the executrix, the parties agree that $33,816.52 is includable in decedent's gross estate as attributable to contributions made by decedent plus the increment thereon. See section 2039(c). 196 The creation of legal interests and rights in property is governed by state law. Schottenstein v. Commissioner,75 T.C. 451">75 T.C. 451, 462 (1980). Petitioner and respondent agree that the determination of who is entitled to receive the Retirement System proceeds is to be made under New York law. The parties also agree that the decedent's designation of Ms. Rind, in her capacity as trustee of an inter vivos trust, as beneficiary of the proceeds was in accordance with New York law. See N.Y. Est. Powers & Trusts Law sec. 13-3.3 (McKinney Supp. 1981-1982). 5 However, the parties disagree as to the effect subsequent events had on such designation. Respondent contends: (1) the inter vivos trust terminated on August 3, 1973, upon the death of decedent's wife; (2) upon such termination, the trustee's designation as beneficiary failed and the Retirement System proceeds became payable to decedent's estate. Retitioner argues apparently in the alternative: (1) the trust survived until decedent's death; (2) even if the trust terminated upon the death of decedent's wife, by the terms of the trust agreement and by operation of law, the right to receive the197 death benefits passed to Ms. Rind as remainderman of the trust; (3) in any event, the payment to the trustee was in accordance with the New York statutory scheme in respect of the designation of an inter vivos trustee as beneficiary of the Retirement System proceeds. 198 We hold that decedent's designation of the trustee as beneficiary of the proceeds remained valid and that the proceeds were properly payable to Ms. Rind as trustee irrespective of when the trust terminated for other purposes (i.e., in respect of the distribution of the trust corpus and the "pour-over" provision of decedent's will). 6As we have indicated previously, it is undisputed that decedent properly designated as beneficiary of the Retirement System proceeds a "[t]rustee under a trust agreement * * in existence at the date of such designation, and identified in such designation." See section 13-3.3(a)(1). It is also uncontroverted that, although decedent retained until his death the right to revoke such beneficiary designation, he never exercised that right. 7 In fact, each time the Retirement System revised its forms, the decedent designated as beneficiary Ms. Rind in her capacity as trustee under the trust agreement dated June 5, 1969. New York law provides that when a trustee has been properly designated as the beneficiary of death benefits,199 "such proceeds shall be paid to such trustee."Section 13-3.3(a)(1) (emphasis added). Contrary to respondent's assertions, the statute provides no exception to this general rule for trusts which, for other purposes, may have terminated. Respondent emphasizes that section 13-3.3 provides that "such proceeds shall be paid to such trustee and be held and disposed of in accordance with the terms of such trust agreement * * including any amendments thereto, as they appear in writing on the date of the death of the insured, employee or participant." (Emphasis added by respondent.) We fail to see how this statutory language supports respondent's position. The underscored language was added to the statute merely to clarify the effect of amendments made to a trust agreement, i.e., written amendments to a trust instrument200 are to be given effect by the trustee in holding and distributing the proceeds. See P. Rohan, Supplementary Practice Commentary to N.Y. Est. Powers & Trusts Law sec. 13-3.3 (McKinney Supp. 1981-1982). In the instant case, decedent retained no power to revoke, alter, or amend the trust; the trust agreement which existed as the date of the decedent's death and in accordance with which the proceeds were to be distributed was the same trust agreement which decedent originally executed. Thus, the above-emphasized language has no bearing on this case. Respondent also directs our attention to subsection (b) of section 13-3.3, which provides that if no qualified trustee claims the proceeds within a specified time, such proceeds shall be paid to decedent's personal representative unless decedent's agreement with the payor provides otherwise. Again, we do not believe that this subsection lends support to respondent's position. Subsection (b) merely provides for the distribution of proceeds which are not claimed by a "qualified trustee"; it sheds no light on the question of who is such a "qualified trustee." Indeed, it seems apparent from the structure of section201 13-3.3 that this provision, relating to a "qualified trustee," was directed to testamentary trustees where court action, i.e., admission of the will to probate and qualification as trustee thereunder, is required. 8 In any event, in respect of an inter vivos trust, we believe that a trustee who satisfies the criteria of section 13-3.3(a)(1) -- a trustee under an inter vivos agreement in existence at the date of such designation -- is a "qualified trustee." Ms. Rind, as trustee, met the criteria of subsection (a)(1) and made her claim as trustee. Accordingly, because the proceeds were claimed by a qualified trustee within the specified time period, section 13-3.3(b) is inapplicable. When originally enacted, section 13-3.3 was viewed as a compromise "pour-over" statute. See S. Hoffman, Practice Commentary to N.Y. Est. Powers & Trusts Law sec. 13-3.3 (McKinney 1967). After the enactment of section 13-3.3, the New York Legislature passed a general pour-over statute, 202 see N.Y. Est. Powers & Trusts Law sec. 3-3.7 (McKinney 1981), 9 which provides in relevant part: (a) A testator may by will dispose of or appoint all or any part of his estate to a trustee of a trust, the terms of which are evidenced by a written instrument executed by the testator * * provided that such trust instrument is executed and acknowledged by the parties thereto in the manner required by the laws of this state for the recording of a conveyance of real property, prior to or contemporaneously with the execution of the will, and such trust instrument is identified in such will. (e) A revocation or termination of the trust before the death of the testator shall cause the disposition or appointment to fail, unless the testator has made an alternative disposition. If we were dealing here with a pour-over provision of a will, it appears that the termination of the trust prior to decedent's death would cause the disposition to fail. See section 3-3.7(e). However, at issue here is the designation of a beneficiary of203 contractual benefits governed by section 13-3.3, and not the provisions of a will. Hence, section 3-3.7 simply does not apply herein. Moreover, it is significant that there is no provision similar to section 3.3-7(e) in section 13-3.3. The absence of such a provision further supports our conclusion that, regardless of whether the trust "terminated" for other purposes, the death benefit proceeds remained payable to Ms. Rind as trustee. If the legislature had wanted to provide that the termination of the trust prior to its receipt of the benefits would cause the beneficiary designation to fail, it is clear they knew how to say so. See section 3-3.7(e). Instead, the legislature provided that if the benefits were made payable to a trustee in a manner prescribed by section 13-3.3"such proceeds shall be paid to such trustee."Section 13-3.3(a)(1) (emphasis added). In sum, for the reasons indicated above, we agree with petitioner that the death benefit proceeds were properly payable to Ms. Rind as trustee of the inter vivos trust. 10204 The second issue relates to petitioner's claim of a credit in the amount of $375 for tax on a prior transfer under section 2013. The alleged prior transfer is a life estate of decedent in a nonmarital deduction trust under his wife's will. We see no need to belabor this issue, because, on the record before us, petitioner has utterly failed to carry its burden of proof. Rule 142(a). With the exception of the computations of the credit on decedent's estate tax return, petitioner has failed to submit any evidence that a tax was paid by the estate of decedent's wife and, if so, what portion of the estate tax was attributable to the life estate. The estate tax return of decedent's wife is not included in the record, nor is her Last Will and Testament. As to the value of the life estate, petitioner contends only that it is to be computed "as of the date of the transferor's death on the basis of recognized valuation principles." But the record itself lacks sufficient probative evidence to enable us to undertake the calculation of any such value. In view of the foregoing, respondent's determination as to the credit under section 2013 is sustained. Decision will be entered under205 Rule 155.Footnotes. This case was tried before Judge Sheldon V. Ekman, who died before deciding the case. By order, the case was reassigned to Judge Theodore Tannenwald, Jr.↩, for disposition. 1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. On breif, petitioner acknowledges that if we determine that the exclusion provisions of section 2039(c) are applicable to the pension proceeds, no exclusion should be allowed for that part of the value of the death benefits attributable to contributions made by decedent (and the increment thereon) and further acknowledges this amount to be $33,816.52.↩3. Ms. Rind is also known as Ellin Jane Rind.↩4. Section 2039 provides: (a) General. -- The gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after March 3, 1931 (other than as insurance under policies on the life of the decedent), if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death. (c) Exemption of Annuities Under Certain Trusts and Plans. -- Notwithstanding the provisons of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment (other than an amount described in subsection (f)) receivable by any beneficiary (other than the executor) under -- (1) An employees' trust (or under a contract purchased by an employees' trust) forming part of a pension, stock bonus, or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of termination of the plan is earlier, met the requirements of section 401(a); If such amounts payable after the death of the decedent under a plan described in paragraph (1) * * * are attributable to any extent to payments or contributions made by the decedent, no exclusion shall be allowed for that part of the value of such amounts in the proportion that the total payments or contributions made by the decedent bears to the total payments or contributions made. * * ↩5. Section 13-3.3 provides in pertinent part: (a) The proceeds of thrift, savings, pension, retirement, death benefit, stock bonus and profitsharing plans, systems or trusts, of life, group life, industrial life or accident and health insurance policies and of annuity, endowment and supplemental insurance contracts (hereinafter referred to as "proceeds") may be made payable to a trustee designated as beneficiary in the manner prescribed by this section and named as: (1) Trustee under a trust agreement or declaration of trust in existence at the date of such designation, and identified in such designation, and such proceeds shall be paid to such trustee and be held and disposed of in accordance with the terms of such trust agreement or declaration of trust, including any amendments thereto, as they appear in writing on the date of the death of the insured, employee or participant. It shall not be necessary to the validity of any such trust agreement or declaration of trust that it have a trust corpus other than the right of the trustee as beneficiary to receive such proceeds. (2) Trustee of a trust to be established by will, and upon qualification and issuance of letters of trusteeship such proceeds shall be payable to the trustee to be held and disposed of in accordance with the terms of such will as a testamentary trust. A designation which in substance names as such beneficiary the trustee under the will of the insured, employee or participant, shall be taken to refer to the will of such person actually admitted to probate, whether executed before or after the making of such designation. (b) If no qualified trustee claims such proceeds from the insurer or other payor within eighteen months after the death of the insured, employee or participant, or if satisfactory evidence is furnished to the insurer or other payor within such period showing that there is or will be no trustee to receive such proceeds, such proceeds shall be paid by the insurer or other payor to the personal representative or assigns of the insured, employee or participant, unless otherwise provided by agreement with the insurer of other payor during the lifetime of the insured employee or participant. Although section 13-3.3 was not enacted in its present form (as quoted above) until 1976, "[t]his section shall be construed as declaring the law as it existed prior to its enactment and not as modifying it." N.Y. E.P.T.L. section 13-3.3 (McKinney Supp. 1981-1982). All future references to section 13-3.3 will be to N.Y. E.P.T.L. section 13-3.3↩ (McKinney Supp. 1981-1982).6. As a consequence, we find it unnecessary ot resolve the issue of "termination" or the related evidentiary questions.↩7. Decedent's retained power to revoke the beneficiary of the Retirement System benefits does not provide a basis for inclusion in the gross estate because of the "notwithstanding" clause of section 2039(c), and, in any event, respondent has not argued otherwise. See Rev. Rul. 70-211, 1 C.B. 190">1970-1 C.B. 190; Rev. Rul. 67-371, 2 C.B. 329">1967-2 C.B. 329↩.8. Section 13-3.3(a)(2), dealing with a testamentary trustee, uses the word "qualification," while section 13-3.3(a)(1), dealing with inter vivos rights, does not. See n. 5 supra.↩9. All future references to section 3-3.7 will be to N.Y. E.P.T.L. section 3-3.7↩ (McKinney 1981).10. Petitioner argues that section 13-3.2 supports its position that the proceeds were payable to Ms. Rind as trustee. N.Y. E.P.T.L. section 13-3.2 (McKinney 1967) provides: (a) If a person is entitled to receive (1) payment in money, securities or other property under a pension, retirement, death benefit, stock bonus or profit-sharing plan, system or trust * * the rights of persons so entitled or designated and the ownership of money, securities or other property thereby received shall not be impaired or defeated by any statute or rule of law governing the transfer of property by will, gift, or intestacy. (b) Paragraph (a) applies although a designation is revocable or subject to change by the person who makes it, and although the money, securities or other property receivable thereunder are not yet payable at the time the designation is made or are subject to withdrawal, collection or assignment by the person making the designation. (c) A person entitled to receive payment includes: (3) Any person entitled to receive payment by reason of a payee or beneficiary designation described in this section. Because we hold for petitioner on the basis of section 13-3.3↩, it is unnecessary for us to address petitioner's argument in respect of section 13-3.2.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620341/	CHARLIE MARTIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMartin v. CommissionerDocket No. 16420-83.United States Tax CourtT.C. Memo 1986-499; 1986 Tax Ct. Memo LEXIS 112; 52 T.C.M. (CCH) 728; T.C.M. (RIA) 86499; September 30, 1986. Joe Alfred Izen, Jr., for the petitioner. David W. Johnson, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: In the notice of deficiency, respondent determined deficiencies in and additions to petitioner's income taxes as follows: Additions to TaxYearDeficiencySection 6653(b) 1Section 66541978$17,415.26$8,707.63$556.5119793,945.361,972.68164.4819803,999.581,999.79255.1019814,807.632,403.82368.71113 In an amended answer, respondent sought to increase and to decrease the deficiencies and additions to tax to the following amounts: Additions to TaxYearDeficiencySection 6653(b)Section 66541978$17,691.35$8,845.68$564.78197911,843.955,921.98496.4719808,611.264,305.63549.2319813,826.631,913.31227.46The issues are: (1) whether petitioner received unreported taxable income as determined by respondent; (2) whether petitioner is liable in each year for additions to tax for fraud under section 6653(b), or in the alternative, is liable for each year for additions to tax under section 6651(a) for failing to file timely income tax returns, and additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a) for 1978, 1979 and 1980 and section 6653(a)(1) and (2) for 1981; and (3) whether petitioner is liable for the addition to tax under section 6654. 114 FINDINGS OF FACT Respondent's proposed stipulation of facts was deemed stipulated pursuant to Rule 91(f) and the facts set forth therein are so found. The stipulation and attached exhibits are incorporated herein by reference. Petitioner resided in LaPorte, Texas, at the time his petition was filed in this case. He did not file income tax returns for 1978 through 1981. During these years and for several years prior thereto, petitioner was engaged in the contracting business as a sole proprietor. During the years in dispute petitioner deposited most of the receipts from the contracting business in two bank accounts. He opened one in January 1978 at the Bayshore National Bank in LaPorte in the name "C & M Foundation and Roofing Contractor." He opened the other in 1977 or 1978 at the First City Bank of LaPorte in the name "Universal Church of Adoration." Petitioner was the only signatory on each account and used the funds deposited in the accounts to pay expenses of the contracting business as well as his personal expenses. The Universal2 Church of Adoration (the "Church of Adoration") was purportedly "organized" by petitioner in 1977 or 1978. At that time petitioner opened115 the bank account in the name of the church and purportedly transferred to the church all of the other assets theretofore used by him in the contracting business. At the same time he also changed the name of the business from Charlie Martin Construction Company to C & M Foundation and Roofing Contractor and quitclaimed two parcels of real property to the church. In addition, in December 1977 petitioner transferred his truck to the Order of Plato, another church purportedly "established" by petitioner. With the exception of activity in the bank account and the recording of the quitclaim deeds petitioner took no action with respect to the Universal Church of Adoration. The transfer of the truck title was the only transaction involving the Order of Plato. In September 1980, petitioner executed under penalties of perjury and submitted to respondent a Form 433-AB, Statement of Financial Condition and Other Information, in connection with deficiencies assessed against petitioner for the years 1973 through 1975. On the Form 433-AB, petitioner represented that he was retired, had no income, and had116 no bank accounts, vehicles, real property, or other assets. By using the records of Bayshore National Bank on the account in the name of C & M Foundation and Roofing Contractor and the records of First City Bank on the account in the name of Universal Church of Adoration as well as business records maintained by petitioner, respondent determined that petitioner had unreported taxable income of $45,922.99 for 1978, $34,555.21 for 1979, $26,468.22 for 1980, and $12,451.98 for 1981. 3OPINION Unreported IncomeOn brief petitioner conceded that the stipulated facts support the deficiencies claimed by respondent in the amended answer and we so hold. Additions to Tax for Fraud, or in the Alternative, for Failure to File and/or NegligenceRespondent contends that petitioner is liable for the addition to tax for fraud under section 6653(b) for each of the years 1978 through 1981. On this issue respondent has the burden of proving by clear and convincing117 evidence that some part of an underpayment for each year was due to fraud. Section 7454(a); Rule 142(b). The burden is met if it is shown by such evidence that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of the taxes. , cert. denied ; , affg. a Memorandum Opinion of this Court; . The presence or absence of fraud is a question of fact to be determined from the entire record. , affd. without published opinion . Fraud is never presumed but must be established by affirmative evidence. . It may, however, be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available and his entire course of conduct may be examined in order to determine whether the fraudulent118 intent is present. ; . Respondent contends that petitioner's intent to evade taxes is clearly and convincingly evidenced by the following acts: (1) petitioner's failure to file income tax returns for 1978 through 1981 after filing proper returns in prior years; (2) petitioner's attempts to conceal income through the use of nominee bank accounts; and (3) petitioner's attempts to conceal assets by the transfers to the Church of Adoration and the Order of Plato and by the false statements on the Form 433-AB. At trial petitioner attempted to justify his acts by claiming that an attorney named Overstreet persuaded him to set up the churches and to transfer his assets to them. In addition, petitioner was allegedly told by Overstreet that neither he nor the Church of Adoration would be taxed on the earnings from the construction business. Petitioner also claimed that he was not fully aware of what he was doing during the years in issue because his wife had recently been murdered and he was extremely depressed and upset by her death and the investigation119 and trial which followed. However, petitioner's explanation is refuted by other evidence in the record. First, it is undisputed that petitioner continued to operate the business in the same manner as he did before the purported churches came into existence. Secondly, petitioner continued to treat the funds generated by the business and deposited in the accounts as if they were his own, using them to pay for such personal items as clothes and medical expenses. Thirdly, in spite of his wife's death petitioner was cognizant enough of what he was doing to keep a detailed record of the business. Finally, petitioner admitted that one of the reasons for transferring the assets to the churches was to make the assets judgment-proof which admission tends to establish that petitioner did not actually believe that the transfers to the churches would relieve him of his tax liability. We, therefore, agree with respondent that petitioner's acts constitute clear and convincing evidence of his fraudulent intent. 4120 Additions to Tax for Estimated Tax PaymentsThe addition to tax under section 6654 is mandatory in the absence of one or more of the exceptions set forth in the section. , remanded on another issue ; . Since petitioner offered no evidence on this issue, respondent's determination is sustained. Decision will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided.↩2. Not associated with Universal Life Church of Modesto or any of its affiliates.↩3. To arrive at these figures respondent added together the taxable bank deposits and taxable receipts not deposited in a bank and then subtracted therefrom the business expenses and petitioner's personal exemption.↩4. Consequently, we need not address the alternative issues of whether petitioner is liable for the additions to tax under sections 6653(a) and 6651(a)(1) and (2).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620342/	JOSEPH N. AND PATRICIA L. TANNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTanner v. CommissionerDocket No. 13690-91United States Tax CourtT.C. Memo 1993-537; 1993 Tax Ct. Memo LEXIS 545; 66 T.C.M. (CCH) 1359; November 18, 1993, Filed 545 Decision will be entered for respondent, except for the additions to tax under Section 6653(b) with respect to petitioner Patricia L. Tanner. Joseph N. and Patricia L. Tanner, pro se. For respondent: Mark E. Menacker. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows: Additions to Tax Sec.Sec.Sec. YearDeficiency6653(b)(1)6653(b)(2)6661 1985$ 7,324$ 3,6621$ 1,831Additions to Tax Sec.Sec.Sec.YearDeficiency6653(b)(1)(A)6653(b)(1)(B)66611986$ 39,893$ 28,7941$ 9,598198735,19426,39628,799Additions to Tax Sec.Sec.PetitionerYearDeficiency6653(b)(1)6661Joseph N. Tanner1988$ 20,000$ 15,000$ 5,000Patricia L. Tanner198814,76811,0763,692Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, 546 and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners failed to appear for trial and did not comply with the Court's Orders compelling discovery or with the Standing Pre-Trial Order. Respondent presented evidence that petitioner Joseph N. Tanner was liable for the addition to tax for fraud. After trial, respondent conceded that petitioner Patricia L. Tanner was not liable for the addition to tax for fraud. FINDINGS OF FACT At the time the petition was filed, petitioners resided in Hemet, California. Petitioner Joseph N. Tanner (petitioner) received a Bachelor of Business Administration degree in accounting from the University of Texas. During the years in issue, petitioner performed duties as an accountant. During 1985 and 1986, he prepared tax returns for others. Petitioner was first employed by David Garthwaite (Garthwaite) on November 2, 1979, and continued in Garthwaite's employ during the years in issue. Garthwaite formed Sunair Aluminum Corporation (Sunair) during 1985. Garthwaite employed petitioner as an accountant for Sunair. Petitioner's duties included the preparation of Sunair checks for signature by authorized personnel, 547 including Garthwaite, Garthwaite's son, and Donald Wells (Wells). Without Garthwaite's knowledge or consent, petitioner caused his own name and signature to be added to the signature card maintained for one of the bank accounts in the name of Sunair. During 1985, petitioner commenced a scheme to embezzle funds from Sunair, which was accomplished in part by issuing checks to a nonexistent company called Superior Products Company and in part by issuing checks to pay petitioner's personal credit card liabilities. In this manner, petitioner concealed unauthorized payments that he was making and converting to his own use. During 1985 and 1986, petitioner signed and negotiated checks on the Sunair bank account in the total amounts of $ 21,887 and $ 93,169, respectively. Proceeds of those checks were converted by petitioner to his own use. During 1987 and 1988, petitioner signed his name or forged the name of Wells on checks that totaled $ 98,588 and $ 106,532, respectively. Proceeds of those checks were converted by petitioner to his own use. Because petitioner was responsible for reconciling the bank statements of Sunair, he avoided discovery of his Sunair checking account activity548 until late 1988. On November 7, 1988, Garthwaite discovered a suspicious check that petitioner had signed with the name of Wells. Petitioner Patricia L. Tanner then returned to Sunair the amount of the last unauthorized check. None of the amounts received by petitioner from negotiation of the unauthorized checks was reported on petitioners' tax returns for the years in issue. During the audit by the Internal Revenue Service and through the course of this proceeding, petitioner did not deny taking the money that respondent had determined to be unreported income. Petitioner contended that the money was taken because Garthwaite had misappropriated compensation due to petitioner as "pension profits". By reason of his education and experience, petitioner knew that he had taxable income in the amounts of the checks negotiated by him and proceeds converted to his own use. Petitioners' failure to report that income resulted in an underpayment of petitioners' taxes for the each of the years in issue. That underpayment was due to fraud on the part of petitioner Joseph N. Tanner. OPINION By reason of their failure to appear for trial, to present evidence as to which they have the burden549 of proof, or otherwise properly to prosecute this case, the amount of the deficiencies and the additions to tax under section 6661 are decided against petitioners. Rules 123(a) and (b), 142(a), 149. Respondent, however, bears the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). The addition to tax for fraud is a civil sanction intended to safeguard the revenue and to reimburse the Government for the heavy expense of investigation and for the loss resulting from a taxpayer's fraud. . Respondent has the burden of proving, by clear and convincing evidence, an underpayment and that some part of the underpayment was due to fraud. See sec. 6653(b)(1). This burden is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes that are due. Fraud may be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Respondent has proven a pattern550 of unreported income over a period of 4 years and steps taken by petitioner to conceal that income. Based on petitioner's background, he must have known that such income was taxable. Even petitioner's explanation, that he was merely taking money to which he was entitled because of Garthwaite's prior defalcations, does not justify a conclusion that the income would not have to be reported and subjected to Federal income tax. Respondent has thus presented clear and convincing evidence of fraud as to petitioner Joseph N. Tanner. To reflect the foregoing and respondent's concession, Decision will be entered for respondent, except for the additions to tax under section 6653(b) with respect to petitioner Patricia L. Tanner. Footnotes1. 50 percent of the statutory interest on $ 7,324.↩1. 50 percent of the statutory interest on $ 38,392.↩2. 50 percent of the statutory interest on $ 35,194.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620343/	PETER G. SIMPSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSimpson v. CommissionerDocket No. 16967-91United States Tax CourtT.C. Memo 1992-543; 1992 Tax Ct. Memo LEXIS 566; 64 T.C.M. (CCH) 742; September 15, 1992, Filed 566 For Peter G. Simpson, pro se. For Respondent: Robert M. Finkel. SWIFTSWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: This matter is before us on respondent's motion to dismiss for failure to state a claim for relief with respect to 1985, 1986, 1987, and 1988, and on respondent's motion to dismiss for lack of jurisdiction with respect to 1985, 1986, 1987, and 1989. Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows: Additions to TaxSec.Sec.Sec.Sec.YearDeficiency6651(a)(1)6653(a)(1)(A)6653(a)(1)(B)6653(a)(1)1985$ 6,431$ 1,577$ ----$ 32219865,5221,015276--19876,2841,218314--19888,3881,704----419Sec.Sec.Year6653(a)(2)6654(a)1985$ 358 1986__179 1987____ 1988__424 FINDINGS OF FACT On April 25, 1990, respondent mailed notices of deficiency567 to petitioner for 1985, 1986, and 1987. On April 30, 1991, respondent issued a notice of deficiency to petitioner for 1988. Respondent has not determined a deficiency in petitioner's 1989 Federal income tax. On July 26, 1991, petitioner filed a petition in this case that did not comply with the rules of the Tax Court with respect to the form and content of a proper petition. On July 31, 1991, petitioner was ordered by the Court to amend his petition in order to comply with Rule 34(b), which amended petition was filed on September 30, 1991. 1Petitioner's amended petition makes no factual claims of error in respondent's determinations of petitioner's Federal income tax liability for 1985, 1986, 1987, 1988, and 1989; rather, petitioner claims only that he has made attempts to make payments on his tax liabilities. We568 ordered petitioner to file a second amended petition, which petitioner failed to do. On November 1, 1991, petitioner's case was set for a hearing on respondent's motion to dismiss for failure to state a claim for relief. Petitioner failed to appear. Petitioner also failed to obey this Court's order to file a response to respondent's motion to dismiss for lack of jurisdiction. OPINION For a taxpayer to maintain an action in this Court, there must be both a valid notice of deficiency and a timely filed petition. Secs. 6212, 6213; Rules 13(a), 13(c). Taxpayers residing within the United States have 90 days in which to file a petition with the Court, otherwise the Court has no jurisdiction to hear their disputes. Sec. 6213(a); , affd. without published opinion . Respondent's notices of deficiency with respect to petitioner's Federal income tax liability for 1985, 1986, and 1987 were mailed to petitioner on April 25, 1990. The statutory period for filing a petition in this Court with respect to these years expired on July 24, 1990 (90 days after April 25, 1990). Thus, 569 the Court lacks jurisdiction over petitioner's petition, filed on July 26, 1991, with respect to respondent's determinations of deficiency and additions to tax against petitioner for 1985, 1986, and 1987. Sec. 6213(a). No statutory notice of deficiency has been mailed to petitioner with respect to petitioner's Federal income tax liability for 1989. We, therefore, have no jurisdiction over petitioner's claim involving that year. Rule 13(a). Petitioner's petition, however, was timely filed with regard to respondent's determination of petitioner's Federal income tax liability for 1988, and respondent does not claim otherwise. Respondent, however, claims that under Rule 34(b)(4) petitioner's initial and amended petition with regard to 1988 fail to allege any assignment of error in respondent's determination. We agree. Petitioner does not make a single allegation of error with regard to respondent's determination of petitioner's 1988 Federal income tax liability. In , we stated: Any citizen may resort to the courts whenever he or she in good faith and with a colorable claim desires to challenge * * [respondent's] 570 determination; but that does not mean that a citizen may resort to the courts merely to vent his or her anger and attempt symbolically to throw a wrench at the system. * * Because petitioner has not raised any assignment of error regarding respondent's determination of his 1988 Federal income tax liability, we will grant respondent's motion to dismiss as to 1988. An appropriate order will be entered. Footnotes*. 50 percent of the interest due on the portion of the underpayment due to negligence.↩1. 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 in effect for the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620344/	G. WILDY GIBBS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SALLIE GIBBS MILLIKEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gibbs v. CommissionerDocket No. 31329, 31330.United States Board of Tax Appeals28 B.T.A. 18; 1933 BTA LEXIS 1199; May 4, 1933, Promulgated 1199 Where a transfer of property is made by a mother in trust for her children for a consideration, less than the fair market value at the date thereof, the difference between such value and the actual consideration passed must be regarded as a gift and the basis for computing profit realized in subsequent sale of such property by the beneficiaries is the fair market value of the property at the date of the acquisition by the trustee. J. M. McMillin, Esq., for the petitioners. Shelby S. Faulkner, Esq., and R. B. Cannon, Esq., for the respondent. LANSDON 19 The respondent has determined deficiencies in income tax for the year 1920 in the respective amounts of $34,314.22 and $34,413.96. Two questions are submitted for the consideration of the Board: (1) Whether an instrument creating a trust in certain real estate evidenced a gift to the petitioners here, measured by the difference between the fair market value of the property and the consideration passing to the trustor or a sale with such consideration as the sale price; and (2) the fair market value of the property when the trust instrument was executed. The two proceedings have been consolidated1200 for hearing and report. FINDINGS OF FACT. The petitioners are individuals residing at Dallas, Texas. On February 18, 1918, their mother, Sallie A. Gibbs, transferred a certain parcel of real estate in Dallas to one W. A. Kemp as trustee for them. In the taxable year such property was sold for a net sale price of $413,237.78, which was distributed to them in equal parts. The property in question was located in the business district of Dallas, with frontage on St. Paul, Elm, and Live Oak Streets and Pacific Avenue, and contained approximately 25,000 square feet. At the date of transfer it was encumbered by mortgages in the amount of $215,652.50. The trust instrument provided that the mortgages should be assumed by the trustee and that each of the petitioners, from the date thereof, should pay $50 per month to the trustor during the remainder of her life. She was then about 60 years old and died one year after the transfer. The parties agree that the value of the annuity provided for in the instrument was $12,353.40, based on the age of the trustor at that time. In their income tax return for the year 1920 the petitioners reported no profit from the sale of the property. 1201 Upon audit of such returns the respondent held that the trust instrument evidenced a sale by the trustor to the two petitioners and that the cost to them was $216,852.50, made up of the amount of the encumbrance plus the payments in cash in the amount of $1,200 made to the trustor and determined the deficiencies here in controversy. At the date of its transfer to the trustee the property was all improved with a series of one and two story buildings, one of which was used for a hotel. Such buildings were all occupied by tenants and the rents realized therefrom approximated $15,000 annually. On such date the fair market values of the land and improvements were $382,131.60 and $30,000, respectively. 20 OPINION. LANSDON: The petitioners contend that the transfer of property to them evidenced by the trust instrument was a sale only to the extent of the encumbrance and the then present worth of the annuity to their mother and that the remaining value was a gift. If their view is correct the basis for computing the gain which they realized from the sale in the taxable year is the fair market value of the property at the date it was acquired, which they contend was at1202 least equal to the amount which they received. The respondent's position is that the property was worth no more than the mortgage and the annuity and that the transaction was an outright sale. If this view is correct the basis for computing gain from the sale in the taxable year is the amount of the nortgages plus the annuity actually paid before that time or a total of $216,852.50. A transfer of property may involve both a gift and a sale. In , where the petitioner bought 80 acres of land from his mother-in-law for $200 an acre, it was stipulated that the land had a fair market value $300of per acre at date of sale. The Board held that the difference between the fair market value of the land at date of the transaction and the cost paid was a gift and that the basis for computing the gain realized in a later sale was the fair market value of the land at the date it was acquired by the son. In , where there was a somewhat similar controversy over the transfer of shares of stock at less than their fair market value, the court held that "the surplus value of the stock1203 over the actual price paid for the shares must be taken into consideration in determining the capital base and that such base is to be fixed at the true market value at the time the stock was acquired." We think these cases are controlling here. The true basis for determining the gain resulting from the sale in 1920 is the fair market value of the property in question at date of transfer to the trustee in 1918. Fair market value is a matter of fact to be determined by evidence. In support of their contention the petitioners introduced an appraisal certificate issued by the Dallas Real Estate Board which fixes the value of the land involved at $382,131.60 as of February 18, 1918. This appraisal was made by the business property appraisal committee of such board, two of whom were present and testified at the hearing. Each of such appraisers said that all elements affecting the value of business real estate in that section of 21 the city were carefully considered by the committee and that such elements included sales of similar property, location, the fact that the land was a corner with frontage on four streets, the growth of the business district, the normal increase1204 in the value of property and other material considerations. Each witness had been many years in the real estate business in Dallas. One dealt almost exclusively in such property and either he or members of his family owned property in the same neighborhood. In rebuttal the respondent introduced one witness who is also a member of the Dallas Real Estate Board. After a careful consideration of the evidence of value adduced by the parties, we conclude that the land in question had a fair market value at February 18, 1918, in the amount of $382,131.60. No witness for either party placed any definite figure of value on the improvements that were on the land at the date of the transfer to the trust. Petitioners' counsel claims a value of at least $75,000, which he bases on the rentals being received at the time of the transfer. Counsel for the respondent contends that the improvements had no value at date of the transfer since the income therefrom was less than the carrying charges of the property, which were made up of interest on the mortgage indebtedness, taxes, repairs and insurance. He argues that the entire value of the land could be made a profitable investment only by1205 the removal of the improvements and the erection of buildings with rental capacity sufficient to make the ownership of the property profitable. It may well be that on valuable business real estate cheap or temporary improvements inadequate to produce income commensurate with the value of the land, in some circumstances, may be a liability. This would be true, however, only if the owners proposed to raze or remove existing structures and erect others with sufficient rental capacity to yield an adequate return on the combined value of the land and cost of the new buildings. It would not be true if the owners, as was the fact here, held the entire property as an investment from which it was hoped to realize profits by sale. In such a situation the very substantial rentals received for the use of the improvements were a material contribution to the carrying charges and we think probative evidence of some market value. For these reasons, based on the income realized therefrom we have found that the improvements in question had a fair market value of $30,000. Reviewed by the Board. Decision will be entered under Rule 50.STERNHAGEN, MURDOCK, and MCMAHON dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620345/	Dupuy G. Warrick and Violette G. Warrick, husband and wife v. Commissioner.Dupuy v. CommissionerDocket No. 15275.United States Tax Court1948 Tax Ct. Memo LEXIS 155; 7 T.C.M. (CCH) 398; T.C.M. (RIA) 48120; June 25, 1948155 Petitioner, an attorney, represented certain stockholders and creditors of a company in receivership for which the court, in December, 1936, awarded him a fee of $125,000. This fee was received by him in 1940. Prior to the award, petitioner's services covered a period of less than five years. Subsequent to the award, other services were performed. Held, under the facts and circumstances, petitioner's services subsequent to 1936 were not rendered in earning the fee allowed by the court, and section 107, Internal Revenue Code, may not be applied in computing the tax for 1940 attributable to the fee. Albert F. Hillix, Esq., and John E. Park, Esq., Bryant Bldg., Kansas City, Mo., for the petitioners. Harlow B. King, Esq., and Gene W. Reardon, Esq., for the respondent. ARNOLD Memorandum156 Findings of Fact and Opinion The respondent determined a deficiency in income tax of the petitioners for the year 1940 in the amount of $38,972.03. The sole issue is whether section 107 of the Internal Revenue Code may be applied in computing the petitioners' tax attributable to a fee of $125,000 received by Dupuy G. Warrick in 1940 for legal services. A stipulation of facts, documentary evidence and oral testimony were submitted from which we make the following Findings of Fact Dupuy G. Warrick, hereinafter referred to as the petitioner, and Violette G. Warrick are husband and wife. They reside in Kansas Ctiy, Missouri. They filed a joint income tax return for the calendar year 1940, prepared on the cash receipts and disbursements basis, with the collector of internal revenue at Kansas City, Missouri. In January 1932 petitioner was employed by Frank P. Parish, then president of Missouri-Kansas Pipe Line Company, to assist him and certain stockholders and creditors of the company in the prosecution of certain claims against Columbia Gas & Electric Corporation and its subsidiary, Columbia Oil & Gasoline Corporation, for violation of the anti-trust laws. 157 The Missouri-Kansas Pipe Line Company, hereinafter referred to as Mokan, was a holding company. Its principal assets consisted of various stocks, bonds, and unsecured claims. The Panhandle Corporation, a wholly owned subsidiary of Mokan, owned certain notes and one-half of the outstanding capital stock of Panhandle Eastern Pipe Line Company, hereinafter referred to as Panhandle Eastern. The Columbia Gas and Electric Corporation and Columbia Oil & Gasoline Corporation, hereinafter referred to as the Columbia companies, owned the other one-half of Panhandle Eastern's outstanding stock. Mokan's indirect ownership of Panhandle Eastern represented a $13,000,000 or $14,000,000 investment. Panhandle Eastern possessed large and valuable natural gas properties in the Panhandle of Texas and it also was the owner of a 250-mile pipe line used to transport the gas to the Illinois-Indiana State line. There had been a struggle between the Columbia companies and Mokan over the policies to be pursued by the management of Panhandle Eastern, which management was under the control of the Columbia companies. As a result, the bonds and notes of Panhandle Eastern were in default, and it was in need158 of expansion of its facilities for the distribution of its natural gas supply. Mokan, failing to realize income upon its investment in Panhandle Eastern, became insolvent and was in danger of losing its entire investment in Panhandle Eastern. Consequently, Mokan was forced into receivership and it was placed under the jurisdiction of a Court of Chancery in the State of Delaware. Receivers were appointed March 18, 1932. Certain notes of Mokan being in default, foreclosure proceedings were instituted resulting in the loss by the receivership estate, during the early part of the year 1933, of three-eighths of Mokan's one-half ownership of Panhandle Eastern. Thereupon, the receivers asserted a claim for damages against the Columbia companies, based upon the latters' purported violation of the antitrust laws of the United States in connection with its control over Panhandle Eastern. The receivers carried on negotiations with the Columbia companies which resulted in an offer by the Columbia companies, about April 1934, of about $300,000 to the receivers in settlement of Mokan's asserted claims for damages. The receivers recommended acceptance of the offer. The petitioner, as counsel159 for certain independent stockholders, and New York counsel, representing a New York stockholders' committee, strenuously and successfully opposed the acceptance of such offer. The Chancery Court duly rejected the $300,000 proposal of settlement. Thereafter, in 1935, the receivers filed a suit for damages against the Columbia companies in New York under the anti-trust laws of the United States. The receivers were represented by New York counsel in this litigation. Also, the United States instituted a criminal anti-trust suit against the Columbia companies to enjoin and restrain their control over Panhandle Eastern. The petitioner, as counsel for certain stockholders of Mokan, had been exploring settlement possibilities with the Columbia companies, and in 1935 and 1936, actively negotiated with the Columbia companies. The activities of petitioner resulted in another proposal of settlement on January 31, 1936. The receivers rejected this offer of settlement. Thereupon, the petitioner succeeded in causing the Columbia companies to resubmit its latter proposal of settlement to the receivers, and then the petitioner, on March 9, 1936, brought the matter of acceptance of the settlement160 offer directly before the Chancery Court by filing an appropriate petition. The terms of the settlement were modified and improved upon by the receivers and by counsel representing the New York stockholders committee, and thereafter the Chancery Court on April 29, 1936, authorized and directed the receivers to accept the Columbia offer of settlement as modified. Pursuant to the terms of the settlement agreement, the receivers, inter alia, cancelled their claims against the Columbia companies, and in consideration therefor the Columbia companies caused the said three-eights of the capital stock of Panhandle Eastern to be restored to Mokan and paid the receivership estate $300,000 in cash. This settlement converted the receivership estate from an insolvent condition into one of solvency where it now possessed net assets of some $12,000,000. Under the terms of the settlement agreement, Panhandle Eastern was to issue 160,000 additional shares of common stock for necessary additional financing and the receivers were to distribute to the common and Class B stockholders of Mokan warrants evidencing rights to subscribe for one-half of such issue. One of the factors that induced the Columbia161 companies to enter into the foregoing settlement agreement was the procurement in August 1935, by petitioner and Frank Parish, a stockholder and former president of Mokan, of a profitable contract for Panhandle Eastern to supply its available natural gas to the City of Detroit. This contract promised to solve the marketing problem for the available Panhandle Eastern gas and thus eliminate a cause of the controversy that had existed between Mokan and the Columbia companies. Provision was made in the settlement agreement for the financing of an extension of Panhandle Eastern pipe line in order to enable it to supply its natural gas to the City of Detroit. The petitioner's services in negotiating this contract were engaged by one Walter Beckjord, vice-president and general manager of Columbia Gas & Electric Company. A fee of $125,000 was paid to petitioner and Parish for the services rendered in procuring the Detroit contract, the petitioner receiving $37,500 thereof during the year 1936, $25,000 from the MichiganGas Transmission Company, a corporation wholly owned by Columbia and which owned a line connecting Panhandle Eastern's line with Detroit, and $12,500 from Panhandle Eastern. 162 In 1937 the receivers paid all claims allowed by the Chancellor with the exception of the allowance to petitioner. The receivers opposed, contested, and withheld payment of the Chancellor's allowance of compensation and expenses to petitioner on the ground, among others, that petitioner had been in fact representing the Columbia companies in the settlement negotiations. Litigation ensued over the question of payment of the Chancery Court's allowance to petitioner. On April 1, 1940, the Supreme Court of Delaware confirmed the Chancellor's allowance of petitioner's claim and ordered the receivers to make payment. In accordance therewith, the receivers, in December 1940, paid petitioner the sum of $125,000 and the expense allowance of $7,883.14. Petitioner, between January and September 1937, purchased some Mokan stock. Under the terms of the settlement, 80,000 shares of a new issue of Panhandle Eastern stock were to be offered the stockholders of Mokan at $25 per share and thereafter were to be taken up by Columbia Oil & Gasoline Corporation to the extent not purchased by Mokan's stockholders. The stock had a market value of some $50 to $60 per share. The receivers did not immediately163 comply with the provision requiring issuance of the warrants to Mokan's stockholders and one Maguire instituted a suit in 1937 to modify the terms of the settlement to permit Mokan to distribute the stock rights instead of a direct distribution to its stockholders. Petitioner appeared in court and successfully opposed this modification. Later, on an ex parte order, the warrants were turned over to the company and its new officers instead of the stockholders, and in June 1938 petitioner resorted to the court to set aside the ex parte order and regain control of the warrants for distribution by the receivers in accordance with the original order. Litigation in this connection was had in 1938 and 1939, and petitioner was sustained. Petitioner performed services in preparing a plan for distribution of the warrants in 1939. The warrants were distributed to the stockholders in September or October of 1939. Petitioner, as a stockholder, received his allocable share thereof. The opinion of the Chancellor of the Court of Chancery of the State of Delaware filed in the receivership proceeding on December 18, 1936, states, in part: "The following opinion was filed by the Chancellor in disposing164 of petitions for allowances for compensation for services claimed to have been rendered and expenses to have been incurred in connection with the receivership of Missouri-Kansas Pipe Line Company. "THE CHANCELLOR: Receivers were appointed by this court for Missouri-Kansas Pipe Line Company, hereinafter referred to as Mokan, on March 16, 1932, on the ground of insolvency, under paragraph 3883 of the Revised Code of 1915. * $ "The order approving the settlement directed that all persons asserting any right to compensation for services and expenses in connection with the receivership should file their claims on or before a designated day. * " * * On January 31, 1936, a settlement of the same controversies with the Columbia companies which the receivers' negotiations of May 23, 1934, had attempted to adjust, was negotiated by Dupuy G. Warrick. This settlement, after certain improvements in its terms were secured by the receivers, was authorized by the court after notice to all parties interested. Instead of yielding to the estate a total of securities in the estimated value of three hundred thousand dollars, as did the receivers' negotiations, the new settlement165 yielded securities of an estimated value of twelve million dollars plus and three hundred thousand dollars in cash. In view of this situation, it is clear that those parties in interest who incurred expense in successfully opposing the settlement negotiated by the receivers, may be very properly described as having done so in the course of preserving the common fund for the benefit of all who were interested therein. Reimbursement should be allowed for that expense. The third major problem of receivership was whether or not the settlement which was negotiated by Warrick and submitted to the receivers on January 31, 1936, with the improving modifications which they secured, should be authorized. After due hearing it was authorized by order of this court on April 29, 1936. * "With respect to the third factor, viz., the negotiation of the Detroit contract, no one is claiming compensation on account of that. As a matter of fact it has already been paid for in the amount of one hundred and twenty-five thousand dollars by the Columbia companies. * "24. Dupuy G. Warrick, attorney for Parish and others, petitions for an allowance of two hundred and fifty thousand dollars166 as compensation and $7,883.14 as expenses. This claim is based on Warrick's services in negotiating the settlement with the Columbia companies in 1936. The solicitors for the receivers contend that as the settlement which was finally approved was not the one Warrick negotiated, it cannot be said that Warrick negotiated any settlement that the court should recognize. This is thoroughly technical. The settlement which was finally approved was the Warrick settlement with some improving modifications which the receivers succeeded in having added to it. The substance of the settlement was the result of Warrick's work. There may have finally been a settlement negotiated by some one if Warrick had never busied himself in behalf of the stockholders. It has been said by some one in the course of these proceedings that events had so shaped the Mokan-Columbia situation that a settlement was inevitably bound to emerge in due time. Perhaps so. Such things however are not self-creative. Someone must bring them forth. No one other than Warrick addressed his efforts to the culminating task. While others were standing by, Warrick was active. He accomplished the result. He is entitled to substantial167 compensation. I shall allow him one hundred and twenty-five thousand dollars as compensation and expenses as asked for in the sum of $7,883.14." The fee of $125,000 received by petitioner in 1940 was paid him for services rendered during a period of less than five calendar years. Opinion ARNOLD, Judge: The petitioner received in 1940 a fee of $125,00 for legal services performed over a period of some years prior thereto and in filing his return for 1940 computed his tax attributable to that fee in accordance with section 107 of the Internal Revenue Code. 1 The respondent determined that section 107 was not applicable, and contends: (1) that the period from the beginning to the completion of the services was less than five years; and (2) that the petitioner received in 1940 less than 95 per cent of the total compensation for the services. The petitioner, to prevail, must disprove both points. 168 The petitioner contends that the period from the beginning to the completion of the services was five calendar years or more, as the services began in January 1932 and were not completed until 1940; that, although the fee was awarded in 1936 for services previously performed, the petitioner's continued services in 1937 and later were necessary to the earning of the fee because the receivers did not comply with the order of the court directing them to carry out the settlement and petitioner had to take legal steps to enforce compliance, and that until the receivers did carry out the terms as directed by the court his work was incomplete and his contract with his clients was unfulfilled. The issue on this point is whether the fee received in 1940 was compensation solely for the services petitioner rendered prior to 1937 or was in any part compensation for services performed after the awarding and before the collection of the fee. The decision depends entirely upon the facts. Petitioner's claim filed in the receivership proceeding for allowance of compensation, was, as the court observed, "based on Warrick's services in negotiating the settlement with the Columbia companies." The169 court took notice that "the substance of the settlement was the result of Warrick's work", and that he was entitled to substantial compensation. Compensation was allowed for these services because they benefited the receivership estate, converting it from an insolvent condition into one having net assets worth several millions of dollars. These services began early in 1932 and ended about April 1936 when the negotiated settlement was approved by the court. This was a period of less than five years. Some of petitioner's activities in 1937 and later years had to do with effecting collection of the fee, rather than in earning it. He found it necessary to take the issue of payment to the Supreme Court of Delaware before he could force the receivers to pay him. These activities were in his own interest and were not for the benefit of the estate in receivership. The issue depends upon the status of the services performed in 1937, 1938 and 1939 which were directed to resisting attempts to modify the approved settlement and to requiring the distribution to the stockholders of Mokan of the warrants entitling them to subscribe to a new issue of Panhandle Eastern stock. An important circumstance170 to be considered in resolving this issue is that petitioner had acquired some stock of Mokan after the settlement was approved and before these later services were performed. He was in a position to know the true worth of Mokan stock and had found an opportunity to acquire some shares. The warrants to subscribe at $25 to stock having a market value of $50 or $60 had a substantial value to him as a stockholder of Mokan and it was of great concern to him that the settlement be carried out as negotiated in order that he might realize upon his investment to the fullest extent. After he had forced compliance with the terms of the settlement he exercised his rights by purchasing Panhandle Eastern stock. The services performed in enforcing the terms did not bring assets into the receivership estate, as did the services for which the award of compensation was made. Had he not acted to enforce the terms of the settlement, the consequence would be that he might be deprived of some of his rights as a stockholder of Mokan. Undoubtedly other stockholders benefited from his action, but under the circumstances it is reasonable to believe that he acted primarily to assert his own rights rather than171 to carry out any duty he may have considered that he owed to other stockholders. Furthermore, petitioner's action in this matter had nothing to do with "negotiating the settlement with the Columbia companies," the service for which the compensation was allowed. It does not appear that the Columbia companies had failed to carry out the terms agreed upon. Certain of Mokan's stockholders were attempting to have the terms changed and the receivers did not at first carry them out. Petitioner's services in opposing these stockholders and the receivers were not within the scope of services for which the compensation had been allowed and was ultimately paid. Had petitioner refrained from performing the later services he would still have been entitled to collect the fee awarded for negotiating the settlement. We conclude that the compensation was received for services covering a period of less than five years and, therefore, section 107 may not be applied in computing the petitioners' tax for 1940 attributable to the compensation. In view of this conclusion it is not necessary to decide whether the payment of $125,000 in 1940 was at least 95 per cent of the total compensation for the services. 172 Decision will be entered for the respondent. Footnotes1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF FIVE YEARS OR MORE. In the case of compensation (a) received, for personal services rendered by an individual in his individual capacity, or as a member of a partnership, and covering a period of five calendar years or more from the beginning to the completion of such service, (b) paid (or not less than 95 per centum of which is paid) only on completion of such services, and (c) required to be included in gross income of such individual for any taxable year beginning after December 31, 1938, the tax attributable to such compensation shall not be greater than the aggregate of the taxes attributable to such compensation had it been received in equal portions in each of the years included in such period.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620347/	Harold O. Wales and Dorothy Wales, Petitioners v. Commissioner of Internal Revenue, RespondentWales v. CommissionerDocket No. 3617-65United States Tax Court50 T.C. 399; 1968 U.S. Tax Ct. LEXIS 118; May 29, 1968, Filed 118 Decision will be entered in accordance with the foregoing opinion. The filing of a statement of intent to dissolve in compliance with Colorado statutes by the sole corporate shareholders was tantamount to the adoption of a plan of liquidation by the corporation within the meaning of sec. 333, I.R.C. 1954. Therefore, the attempted elections of the shareholders under said sec. 333 (which they now seek to avoid) were out of time and ineffective. Shull v. Commissioner, 291 F. 2d 680 (C.A. 4, 1961), reversing Frank T. Shull, 34 T.C. 533">34 T.C. 533 (1960), followed. Murray F. Hardesty, for the petitioners.Edward E. Pigg, for the respondent. Forrester, Judge. Drennen, J., concurs in the result. FORRESTER399 Respondent has determined deficiencies in petitioners' income tax returns for the calendar years 1960 and 1961 in the following amounts:YearDeficiency1960$ 5,244.30196133,621.60Only the year 1961 is now before us, as petitioners have conceded all issues relating to 1960 and have deposited the entire amount determined with respondent.Some concessions have been made as to 1961, and the only question now remaining is whether petitioners have shown their election to liquidate their wholly owned 119 corporation under section 333 1 of the Internal Revenue Code to be invalid. It is stipulated that in the event respondent's position is sustained on this issue, the deficiency for the taxable year 1961 will be as determined by respondent for that year. In the event petitioners' position is sustained, it is stipulated that the deficiency will be $ 9,493.09.FINDINGS OF FACTSome of the facts have been stipulated and are so found.The petitioners, Harold and Dorothy Wales, are husband and wife who, at all relevant times, have resided at Cheyenne Wells, Colo.400 The petitioners, individually and jointly, have held all of the outstanding stock of the Harmack Grain Co. (hereinafter sometimes referred to as Harmack) at all relevant times. This company was engaged in the grain-storage and grain-merchandising business and as of May 23, 1960, it elected to be taxed as a small business corporation under subchapter S of the Internal Revenue Code (secs. 1371-1378).On November 18, 1960, the petitioners filed an instrument dated November 15, 1960, with the State of Colorado. It bears the 120 caption "Voluntary Dissolution of Harmack Grain Co. By Consent of Shareholders" and is identified in the stipulation as "A statement of intent to dissolve." It is reproduced below:VOLUNTARY DISSOLUTION OF HARMACK GRAIN CO. BY CONSENT OF SHAREHOLDERSKnow All Men By These Presents That we, H. O. Wales and Dorothy Wales, being all of the shareholders of Harmack Grain Co. of Cheyenne Wells, Colorado, hereby and by these presents make our statement of intent to dissolve the said corporation and set forth the following information.a. The name of the corporation is Harmack Grain Co.b. The names and respective addresses of its officers are H. O. Wales, President, Cheyenne Wells, Colorado; Dorothy Wales, Secretary-Treasurer, Cheyenne Wells, Colorado.c. The names and respective addresses of the directors are H. O. Wales, Cheyenne Wells, Colorado; and Dorothy Wales, Cheyenne Wells, Colorado.d. The said H. O. Wales and Dorothy Wales, being all of the shareholders of the said corporation, by the execution of this instrument, hereby consent to the voluntary dissolution of the said corporation.In Witness Whereof, we have affixed our hands hereto this 15th day of November, 1960.(S) H. O. WalesH. 121 O. Wales,(S) Dorothy WalesDorothy Wales,Shareholders.Harmack Grain Co.By (S) H. O. Wales,President.Attest:(S) Dorothy Wales,SecretarySTATE OF COLORADOCOUNTY OF CHEYENNEss.I, Dorothy Wales, Secretary of Harmack Grain Co., being first duly sworn upon oath, depose and say that the above and foregoing instrument is true.(S) Dorothy WalesSubscribed and sworn to before me this 15th day of November, 1960.My commission expires February 23, 1964.(S) John J. Vandemoer, Jr.,Notary Public401 Pursuant to this instrument, petitioners filed the following articles of dissolution with the Department of State of Colorado on February 16, 1961:ARTICLES OF DISSOLUTION OF HARMACK GRAIN COMPANYPursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Dissolution for the purpose of dissolving the corporation.FIRST: The name of the corporation is Harmack Grain Company, Cheyenne Wells, ColoradoSECOND: A statement of intent to dissolve the corporation was filed in the office of the Secretary of State of the State of Colorado on November 18, 1960.THIRD: All debts, obligations and liabilities of the corporation have been paid and discharged, or adequate 122 provision has been made therefor.FOURTH: All remaining property and assets of the corporation have been distributed among its shareholders, in accordance with their respective rights and interests.FIFTH: There are no suits pending against the corporation in any court in respect of which adequate provision has not been made for the satisfaction of any judgment, order or decree which may be entered against it.Dated February, 1961Harmack Grain Company (Note 1)By (S) H. O. Wales, Its president. (Note 2) and (S) Dorothy Wales, Its secretarySTATE OF COLORADOCOUNTY OF CHEYENNEss.I, John J. Vandemoer Jr., a notary public, do hereby certify that on this -- day of February, 1961, personally appeared before me, H. O. Wales, who, being by me first duly sworn, declared that he is the President of Harmack Grain Company that he signed the foregoing document as President of the corporation, and that the statements contained therein are true.In Witness Whereof I have hereunto set my hand and seal this 16th day of February, A.D. 1961.My commission expires February 23, 1964(S) John J. Vandemoer, Jr.,Notary Public.Notes: 1. Exact corporate name of the corporation making the statement.2. Signatures and 123 titles of the officers signing for the corporation.On March 3, 1961, the secretary of state of the State of Colorado issued the following certificate of dissolution of the Harmack Grain Co.:STATE OF COLORADODepartment of StateCertificate of DissolutionI, GEORGE J. BAKER,Secretary of State of the State of Colorado, hereby certify that duplicate originals of Articles of Dissolution of Harmack Grain Company duly signed and verified pursuant to the provisions of the Colorado Corporation Act, have been received in this office and are found to conform to law.402 Accordingly the undersigned, as such Secretary of State, and by virtue of the authority vested in me by law, hereby issues this Certificate of Dissolution and attaches hereto a duplicate original of the Articles of Dissolution.Dated this Third day of March A.D. 1961.(S) Geo. J. Baker,Secretary of State.By F. J. Serafini,Deputy.On March 17, 1961, Form 966 was mailed to the district director of internal revenue in Denver on behalf of Harmack by Harold Wales. The form is titled "Return of Information Under Section 6043 of the Internal Revenue Code of 1954 to be Filed by Corporations within 30 Days After Adoption of Resolution or Plan 124 of Dissolution, or Complete or Partial Liquidation." The form recited that Harmack corporation had adopted a plan of "dissolution, or complete or partial liquidation" as of February 16, 1961. Attached to this form were two Forms 964 signed by Harold Wales and Dorothy Wales respectively, which forms recited that the person signing same elected to have each and every share of capital stock in Harmack taxed in accordance with section 333 of the Internal Revenue Code. The forms recited that all property owned by the corporation was to be transferred in the month of March 1961. These documents were received by the district director on March 20, 1961.On Harmack's income tax return for the fiscal year ended April 30, 1961, there was a footnote reciting that the stockholders elected to liquidate under section 333 of the Internal Revenue Code of 1954. Attached to the return was the following document:Special Meeting of the Stockholders of Harmack Grain Company Cheyenne Wells, ColoradoA special meeting of the stockholders of Harmack Grain Company was held in Cheyenne Wells, Colorado, upon due notice and call, on the 16th day of February, 1961, for the purpose of adopting a plan of liquidation 125 of said corporation.All stockholders being present in person, namely Dorothy Wales and H. O. Wales, representing 850 shares of stock, the meeting having been called to order by the President, the minutes of the previous meeting having been read and approved, upon motion duly made, seconded and unanimously carried, the resolution was adopted:"Whereas the Harmack Grain Company is in the process of being dissolved as a Corporation, andWhereas a plan of liquidation should be adopted for the distribution of the assets of said Corporation, now therefore,Be it Resolved that the following plan of liquidation be and the same is hereby adopted and approved, to-wit:1. All of the assets of the Corporation shall be assigned, transferred and conveyed to the stockholders of said Corporation jointly, each to own an undivided 403 interest therein in the proportion that his or her stock bears to the total amount of stock issued and outstanding.2. Said distribution shall be made within 20 days of the date of the adoption of this resolution in exchange for the stock owned by such stockholders, which stock shall be surrendered to the Secretary of the Corporation and cancelled forthwith."There being no further 126 business to come before the meeting, upon motion duly made and seconded, same was adjourned.(S) Dorothy WalesSecretaryThe undersigned hereby waive any and all notice of the above meeting and hereby consent to and approve the action taken as set forth above.Witness our hands this 16th day of February, 1961.(S) H. O. WalesH. O. Wales, Sockholder, (representing 400 shares)(S) Dorothy WalesDorothy Wales, Stockholder, (representing 30 shares)(S) H. O. Wales and Dorothy WalesH. O. and Dorothy Wales (representing 420 shares)On their joint income tax return for the calendar year 1961 petitioners reported as long-term capital gain amounts received by them which resulted from the liquidation distributions from Harmack. In his statutory notice of deficiency, respondent determined that such amounts were ordinary income (dividends) to the petitioners under section 333(e) of the Internal Revenue Code.ULTIMATE FINDING OF FACTPetitioners failed in their attempt to become "Qualified Electing Shareholders" of Harmack Grain Co. under the provisions of section 333(c) and (d) of the Internal Revenue Code.OPINIONThis case presents the narrow factual question whether Harmack's plan of liquidation was adopted 127 on February 16, 1961, as contended by respondent, or on November 18, 1960, as is contended by petitioners. This depends upon the narrow combined question of law and fact as to whether the November 1960 activities of Harmack amounted to the adoption of a "plan of liquidation."Section 333(c) and (d) of the Code provides that in order to become a "qualified electing shareholder," a shareholder must file his written election within 30 days after the date of adoption of "the plan of liquidation."Neither party contests that in the instant case the petitioners' attempted elections on Forms 964 were timely if February 16, 1961, is 404 the date of the adoption of the plan, but were out of time if the plan was adopted on November 18, 1960.Petitioners urge other and alternative grounds for avoidance of their attempted elections which we need not, and do not consider.In this case it is apparent that petitioners misconceived the meaning and effect of a liquidation of their wholly owned corporation under the provisions of Code section 333. 2129 130 On their joint income tax return for 1961 they showed their liquidation distributions from Harmack as long-term capital gains in contravention to the requirements 128 of section 333(e)(1). Respondent's determination treated the requisite portion of such distributions as dividends under that section. Petitioners now realize that their attempted elections were to their disadvantage and seek to avoid them.The instant case presents an essentially identical question as was presented to us in Frank T. Shull, 34 T.C. 533">34 T.C. 533 (1960), reversed and remanded 291 F.2d. 680 (C.A. 4, 1961). In Shull the taxpayers, sole 405 owners of a corporation, filed a consent to dissolution with the Virginia State Corporation Commission on March 27, 1952. Subsequently they filed an election to be taxed under section 112(b)(7) of the 1939 Code (now section 333), and stated that they had formally adopted a plan of liquidation on March 31, 1952. The election was filed within 30 days of March 31, but more than 30 days after March 27. Subsequently, the taxpayers realized that their election was 131 to their disadvantage and contended that their election was invalid, because they had actually adopted a plan of liquidation on March 27.As in the instant case, the Commissioner contended that their election did conform to the requirements of (now) section 333.When the issue was presented to us, we found that no plan of liquidation was adopted when the shareholder consents to dissolution were obtained because the consents were "no more than a unanimous vote to accomplish dissolution," and a vote to dissolve was not the equivalent of an adoption of a plan of liquidation. Our holding in Shull amounted in effect to a requirement that the "plan of liquidation" specified in the statute be a completely detailed and definitive plan.There is no definition of the term "plan of liquidation" in section 333. The term appears in a number of other sections in both the 1939 and 1954 Codes, but none of them affords a definition of the term. Cf. sections 337, 332, and 346 of the 1954 Code and 112(b)(6), 112(b)(7), and (prior to its amendment in 1942) 115(c) of the 1939 Code.Since deciding Shull we have departed from the views expressed therein. In Mountain Water Co. of La Crescenta, 35 T.C. 418">35 T.C. 418 (1960), 132 we said (pp. 426-427):We think it is clear from the evidence in this case that a plan of liquidation was adopted by petitioner on April 25, 1955, when the directors decided to accept the condemnation award without appeal and in fact accepted a check for the net amount thereof. Prior to that date the directors had recognized the probability that all the operating assets of the company would be taken by the county water district and the purpose for existence of the company would cease; and it is apparent that the consensus of opinion was that if the condemnation was successful, the proceeds from the involuntary sale should be distributed in liquidation. But in view of the reluctance of the stockholders to sell without a fight, no final decision was made until the meeting of April 25, 1955. When the decision to accept the award was made at that meeting, the plan of liquidation was put into effect even though no formal resolution of liquidation or dissolution was adopted. Obtaining the consent of the stockholders to dissolve the company and the subsequent adoption of a resolution of dissolution at the directors meeting on June 7, 1955, [the date contended for by respondent] was only 133 one of the formal steps taken in carrying out the plan of liquidation. * * [Emphasis supplied.]Similarly, in Alameda Realty Corporation, 42 T.C. 273 (1964), we said (p. 281):Raymond and Irma (the sole stockholders and directors of Alameda) decided to accept the offer and take the money received by Alameda from the sale of the building for their own use. The facts show that this decision was made on or 406 shortly prior to October 6, 1955, when Alameda entered into the contract to sell the Finance Building. The facts further show that the Finance Building was Alameda's only operating asset. After Alameda sold the Finance Building, its only asset other than debts due it by Raymond and Irma, was money and Raymond and Irma withdrew this money for their personal use as they planned to do when they agreed to have Alameda sell the building. These facts show a plan of liquidation and distribution of assets. * Thus in these two cases we have held: (1) That the acceptance of a condemnation award coupled with a "consensus of opinion" to liquidate, and (2) that the sale of the only operating asset of a corporation, were each sufficient to evidence the adoption of a "plan of liquidation." 134 Certainly neither case is factually as strong as is the case where the corporation's shareholders have taken action to come under a State statute committing the company to liquidation under a plan therein set forth.Prior to Shull we had held repeatedly that no formal plan of liquidation was necessary. John R. Roach, 4 T.C. 1255">4 T.C. 1255 (1945); Service Co. v. Commissioner, 165 F.2d 75 (C.A. 8, 1948), affirming a Memorandum Opinion of this Court; International Investment Corporation, 11 T.C. 678">11 T.C. 678 (1948), affd. 175 F.2d 772">175 F.2d 772 (C.A. 3, 1949).In reversing us in Shull, 291 F.2d 680">291 F.2d 680 (C.A. 4, 1961), the circuit court held that when written consents to dissolution were signed and filed by the shareholders, a written plan of liquidation was effectively adopted. That court pointed out that under the Code of Virginia, upon filing a written consent to dissolution by the shareholders of a corporation, a certificate of dissolution was caused to be issued and the corporation was officially dissolved. Thereafter the corporation had a limited existence for the purpose of settling the corporate affairs, selling and conveying its property, and dividing its assets among its stockholders in final liquidation. In 135 addition, by statute, the business of the corporation could no longer be continued.Under those circumstances, the court found that the corporation in that case was clearly in a status of liquidation under a plan of liquidation. The shareholders had "stripped from the corporation its old clothes and placed upon it the shroud of liquidation. Since they had acted deliberately, they would hardly be heard to say they had no plan to do what they had done."In holding the plan to be one envisioned by Congress in enacting (now) section 333, the court pointed out at pages 682-683:There is nothing in § 112(b)(7) [now 333] which requires that a plan of liquidation must be in writing or in any particular form.Paragraph (A) n5 [now (a)] simply provides that if liquidation occurs within one calendar month, the distribution in complete liquidation will result in limited recognition of gain to electing shareholders with respect to the shares they own at the time of the adoption of the plan of liquidation.407 Paragraph (D) n6 [now (d)] provides that the election must be filed within thirty days after the adoption of the plan of liquidation, but nowhere does § 112 (b)(7) [now 333] purport to declare how 136 a plan of liquidation is to be adopted or how its adoption is to be evidenced.Paragraph (C) [now (c)] does provide that the election of an individual shall be ineffective unless stockholders having not less than eighty per cent of the total combined voting value of all classes of stock entitled to vote on the adoption of the plan of liquidation make similar elections, but this conditional limitation upon the right of stockholders to make an election does not import into Paragraph (A) a requirement that the plan shall have been adopted at an open stockholders' meeting called for that purpose or suggest that the unanimous written consent of all stockholders to a plan of liquidation is not an effective adoption of the plan within the meaning of § 112(b)(7).It appears, therefore, that when the two stockholders who owned the entire outstanding stock of the corporation signed and filed their written consent to its dissolution under the provisions of Virginia's laws a written plan of liquidation was effectively adopted. The Certificate of Dissolution, which then issued, and Virginia's statutes fully authorized the directors to do everything necessary to accomplish the liquidation of the 137 corporation without further action by the stockholders.[Footnotes omitted.]In conclusion the court stated at pages 684-685:Unquestionably, whether a plan of liquidation has or has not been adopted is a question of fact ordinarily for the Tax Court. When the stockholders acted deliberately, however, and had gone so far in the actual execution of a plan of liquidation as to dissolve the corporation and terminate its existence for all purposes other than liquidation, we find no escape from the conclusion that a plan of liquidation had been adopted. If subsequently, the stockholders in a formal way declared their intention to do what they already had done, the declaration was of no controlling significance.In the instant case, petitioners entered into an agreement to dissolve their wholly owned corporation and filed the agreement with the State of Colorado. Thereafter they complied with the Colorado statutes providing for dissolution and eventually received a certificate of dissolution from the State.Under Colorado law, Colo. Rev. Stat. Ann. secs. 31-34-5 and 31-34-6 (Supp. 1960), a corporation filing a statement of intent to dissolve was required to cease normal business operations, 138 proceed to wind up its affairs, and distribute all assets to its shareholders after making provision for its obligations. These provisions are substantially identical to the provisions of the Virginia statute which controlled Shull. The relevant provisions of the Colorado statute in effect during 1960 and 1961 are reproduced below:31-34-5. Procedure after filing of statement of intent to dissolve. -- (1) After the filing by the secretary of state of a statement of intent to dissolve the corporation shall immediately cause notice thereof to be mailed to each known creditor of the corporation.(2) The corporation shall proceed to collect its assets, convey and dispose of such of its properties as are not to be distributed in kind to its shareholders, 408 pay, satisfy, and discharge its liabilities and obligations and do all other acts required to liquidate its business and affairs, and, after paying or adequately providing for the payment of all its obligations, distribute the remainder of its assets, either in cash or in kind, among its shareholders according to their respective rights and interests.* * * 31-34-6. Effect of statement of intent to dissolve. -- Upon the filing by the 139 secretary of state of a statement of intent to dissolve, whether by consent of shareholders or by act of the corporation, the corporation shall cease to carry on its business, except in so far as may be necessary for the winding up thereof, but its corporate existence shall continue until a certificate of dissolution has been issued by the secretary of state or until a decree dissolving the corporation has been entered by a district court of the county in which the registered office or principal place of business of the corporation is situate as in this code provided.[Emphasis supplied.]When petitioners' statement was filed with the State of Colorado those portions of the Colorado statutes which we have emphasized not only set forth the manner of liquidation but prohibited the corporation from all other activity. When the petitioners, as sole shareholders, filed their intent to dissolve, they affirmatively committed themselves to follow those provisions. And we find, as the Fourth Circuit found in Shull, that that type of commitment was sufficient to constitute the adoption of a plan of liquidation.Certainly under the reasoning of the decided cases, there would have been no doubt 140 that a plan of liquidation existed had the statement of intent to dissolve stated a course of liquidation identical to the Colorado statutes. The fact that the statutory provisions bound the petitioners by operation of law at the time of filing, rather than through formal adoption by them of a compatible plan, does not change the fact that the petitioners agreed to carry out liquidations in a specified manner.We note further that section 333(a)(1) merely requires that the liquidation be in pursuance of a plan of liquidation -- nothing more. Such language is in contrast to that in section 332(b)(3), which refers to liquidation of subsidiaries, where the provision requires a "plan of liquidation under which the transfer of all the property under the liquidation is to be completed within 3 years from the close of the taxable year during which is made the first of the series of distributions under the plan." It seems clear that had Congress wished the plan of liquidation to be as explicit in section 333 as in 332(b)(3), it would have used language as explicit as that in 332(b)(3).Under the Colorado statutes, dissolution is delayed until a final distribution is made, while in Virginia141 it occurs immediately after filing a consent to dissolve. However, this distinction does not alter the fact that in both States, when the respective declarations of intent to dissolve are filed, there is shown an intent to proceed to liquidate a corporation in a prescribed manner. In each State the duties of the 409 directors of a corporation to effect the final distribution of a corporation's assets are substantially identical.Therefore, we recognize the identity between this case and Shull, and follow the Court of Appeals therein.Having found that a plan of liquidation was adopted on November 18, 1960, we find that no election to liquidate under section 333 was timely filed within 30 days of that time; thus petitioners' election to liquidate under that section was invalid. We therefore adopt the stipulation of the parties that petitioners' tax liability for 1961 is $ 9,493.09 and in that amount.Decision will be entered in accordance with the foregoing opinion. Footnotes1. Except where otherwise noted, references to the Internal Revenue Code refer to the Internal Revenue Code of 1954.↩2. SEC. 333. ELECTION AS TO RECOGNITION OF GAIN IN CERTAIN LIQUIDATIONS.(a) General Rule. -- In the case of property distributed in complete liquidation of a domestic corporation (other than a collapsible corporation to which section 341(a) applies), if -- (1) the liquidation is made in pursuance of a plan of liquidation adopted on or after June 22, 1954, and(2) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within some one calendar month,then in the case of each qualified electing shareholder (as defined in subsection (c)) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subsections (e) and (f). * * (c) Qualified Electing Shareholders. -- For purposes of this section, the term "qualified electing shareholder" means a shareholder (other than an excluded corporation) of any class of stock (whether or not entitled to vote on the adoption of the plan of liquidation) who is a shareholder at the time of the adoption of such plan, and whose written election to have the benefits of subsection (a) has been made and filed in accordance with subsection (d), but -- * * (d) Making and Filing of Elections. -- The written elections referred to in subsection (c) must be made and filed in such manner as to be not in contravention of regulations prescribed by the Secretary or his delegate. The filing must be within 30 days after the date of the adoption of the plan of liquidation.(e) Noncorporate Shareholders. -- In the case of a qualified electing shareholder other than a corporation -- (1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under subsection (a)(2), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is completed; and(2) there shall be recognized, and treated as short-term or long-term capital gain, as the case may be, so much of the remainder of the gain as is not in excess of the amount by which the value of that portion of the assets received by him which consists of money, or of stock or securities acquired by the corporation after December 31, 1953, exceeds his ratable share of such earnings and profits.(f) Corporate Shareholders. -- * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620348/	Thomas R. Reyburn v. Commissioner. Clyde A. Vandivort and Julia S. Vandivort v. Commissioner. Clyde A. Vandivort v. Commissioner.Reyburn v. CommissionerDocket Nos. 7385, 7386 and 7387United States Tax Court1946 Tax Ct. Memo LEXIS 124; 5 T.C.M. (CCH) 680; T.C.M. (RIA) 46187; July 31, 1946124 1. In 1936, petitioners Reyburn and Vandivort and two other individuals purchased several thousand acres of farm lands and buildings in Missouri. Title was taken in the name of Vandivort, who, on the same day, executed a trust instrument, creating the Cape Trust, and declaring that he held the properties in trust for all four individuals who were issued beneficial certificates. During the years 1936 to 1940, Vandivort managed the farm lands and sold some of them and distributed the proceeds to the holders of the beneficial certificates. In 1940, the trust was terminated and Vandivort assigned title to the remaining lands and buildings to the then holders of the beneficial certificates, individually, as tenants in common. Upon the evidence, held, the Cape Trust was an association taxable as a corporation and the holders of the beneficial certificates realized long-term capital gains upon the liquidation of the trust in 1940. 2. In 1941, petitioners sold some of the lands and buildings they had received from the liquidation of the trust in 1940. Held, the holding period of the assets received in the 1940 liquidation commenced to run from the date of the liquidation and that the gains125 on such sales were short-term capital gains. 3. Upon the evidence, held, petitioner Vandivort was entitled to deduct a certain amount as a bad debt in the year 1940 rather than in the year 1941. 4. Upon the evidence, held, the respondent's determination relative to several other minor issues is approved. Thomas R. Reyburn, Esq., 407 North Eighth St., St. Louis, Mo., for the petitioners. Harlow B. King, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion These proceedings, duly consolidated, involve deficiencies in income tax for the calendar years 1940 and 1941, in amounts as follows: Docket No.194019417385$1,055.78$452.317386566.20738769.85In Docket No. 7386, petitioners Clyde A. and Julia S. Vandivort are husband and wife. They filed a joint return for the year 1941. Hereafter, we will for convenience sometimes refer only to the husband as petitioner. The issues resulting from the several assignments of error are as follows: 1. Did the respondent err in holding that petitioners Reyburn and Vandivort realized long-term gains of $6,061.20 and $3,030.59, respectively, upon liquidation of126 the Cape Trust on August 22, 1940? 2. Did the respondent err in holding that Reyburn and Vandivort realized short-term capital gains of $2,453.46 and $1,226.73, respectively, upon the sale of certain farm lands in 1941 by a partnership of which they were partners, which was formed upon the liquidation of the Cape Trust? 3. Did the respondent err in holding that Clyde A. and Julia S. Vandivort were not entitled to deduct in their joint return for the year 1941 as a "bad debt" an amount of $1,457.50 but that Vandivort was entitled to deduct the said amount as a bad debt in his return for the year 1940? 4. Did the respondent err in holding that Reyburn realized additional income of $3,105.24 from the partnership of the Cape Trust in the year 1941? 5. Did the respondent err in holding that Vandivort realized additional income of $14.35 and $360.79 from the partnership of the Cape Trust in the years 1940 and 1941, respectively? 6. Did the respondent err in holding that Reyburn was entitled to eliminate from taxable income in the year 1941 an item of $4,706.85 returned as a long-term capital gain? 7. Did the respondent err in holding that Vandivort realized additional income127 of $399.60 from a farm in the year 1940? In Docket No. 7385, the respondent also made some minor adjustments to Reyburn's income as reported in his returns for the years 1940 and 1941, which adjustments have not been contested. Findings of Fact Petitioner, Thomas R. Reyburn, is an individual with his residence at St. Louis, Missouri. He filed his returns on the cash basis for the calendar years 1940 and 1941 with the collector for the first district of Missouri. Petitioners, Clyde A. and Julia S. Vandivort, are individuals with their residence at Cape Giradeau, Missouri. They, as husband and wife, filed a joint return for the calendar year 1941 and Clyde A. Vandivort filed a separate return for the calendar year 1940 with the collector for the first district of Missouri. These returns were filed on the cash basis. On March 13, 1936, Ralph A. Zimmer, acting as a straw purchaser for Reyburn and Festus J. Wade, Jr., both of St. Louis, Missouri, and Vandivort and C. L. Harrison, both of Cape Girardeau, Missouri, purchased from one Charles F. Winters, a straw man acting for the First National Bank in St. Louis, nine tracts of farming land aggregating approximately 4,219 acres, 128 all located in Scott County, Missouri, about 20 miles south of Cape Girardeau. The First National Bank had foreclosed on the properties under a mortgage held by it and was attempting to sell the properties. The purchase price was $40,000. One-half of the purchase price was paid in cash and the balance by a purchase money mortgage. Reyburn and Wade, Jr., each furnished $6,666.67 and Harrison and Vandivort each furnished $3,333.33 of the necessary cash payment of $20,000. Zimmer took title to the property on March 13, 1936 and on the same date he conveyed all the property subject to the mortgage and notes to Vandivort, who, on the same day, executed a trust instrument the material provisions of which are as follows: KNOW ALL MEN BY THESE PRESENTS: That I, Clyde A. Vandivort, of Cape Girardeau, Missouri, the grantee named in a certain warranty deed from Ralph A. Zimmer dated the 13th day of March, 1936, by which deed there are conveyed to me certain land and buildings situate in the County of Scott, State of Missouri, to wit: [Here follows a description of 16 separate tracts totaling 4,219.46 acres.] For a further description of these properties, reference is made herein to the129 aforesaid deed from Ralph A. Zimmer, and I hereby declare that I will, and my heirs and successors shall, hold said granted properties, and all other funds and property at any time transferred to and received by me as the trustee herein for the purposes, with the powers and subject to the provisions hereof, for the benefit of the cestui que trust (who shall be beneficiaries only without partnership, associate or any other relationship whatsoever inter sese), and upon the trust following, namely: 1. In trust to convert the same into money, at the request or with the consent of all of the record holders of the beneficial certificates hereinafter referred to, and distribute the net proceeds therefrom among the persons at the time of such conversion holding and owning beneficial interests herein, as evidenced by the beneficial certificates issued by the trustee, as hereinafter provided; it being, however, expressly understood and agreed that such conversion may be deferred or postponed, except that the same shall not be postponed beyond the end of twenty-one (21) years from the date hereof. During such postponement, and until such conversion, the interest of the cestui que trust shall130 be considered, for purposes of transmission and otherwise, as personal property, and shall not be negotiable, but only assignable, and subject to the terms of this agreement and the terms set out in the certificates. 2. In trust pending final conversion and distribution of the property, to manage and control the same, the trustee having for such purposes and for all purposes of sale, lease, mortgage, exchange, improvement, repair, and development, and any and all arrangements, contracts and dispositions of trust property, or any part thereof, all and as full discretionary powers and authority as the trustee would have if the trustee were the sole and absolute beneficial owner thereof in fee simple, subject to the one qualification that in exercising the powers of sale or mortgage or exchange, or leases for a term in excess of two (2) years, the trustee shall, prior thereto, secure the written consent of all of the record holders of the beneficial certificates hereinafter referred to. * 3. In trust to collect, receive, and receipt for all rents and income from the property, and semi-annually or oftener, at the convenience of the trustee, to distribute such portion thereof131 as in the opinion of the trustee, concurred in by the record holders of all of the beneficial certificates, may be determined to be fairly distributable net income to and among the several cestui que trusts according to their respective fractional interests. 4. This trust is declared in favor of and for the benefit of C. L. Harrison and Clyde A. Vandivort, both of Cape Girardeau, Missouri, each for a one-sixth (1/6) interest, and Festus J. Wade, Jr. and Thomas R. Reyburn, both of St. Louis, Missouri, each for a one-third (1/3) interest, to whom the trustee shall issue proper beneficial certificates signed by the trustee for the interests above indicated, and which certificates and all others which may be hereafter issued in exchange or substitution therefor shall be deemed parts hereof. The certificates shall not be transferred on the records of the trustee except (1) with the written consent, filed with the trustee, of the record holders of the remaining beneficial certificates, or (2) to the executors or administrators of a deceased record holder, or (3) pursuant to an order of distribution of a court of competent jurisdiction in the event of the death or disability of a record132 holder. Nothing in this instrument contained shall preclude a record holder from assigning, by separate written instrument, an interest in a certificate, but no trustee herein or other record holder shall be required to take any notice of such assignment, and the trustee and record holders may act in all matters as though such assignment had not been made. No such assignee shall be entitled to become a record holder except with the written consent, filed with the trustee, of all record holders. The name in which the certificate stands upon the books of the trustee shall be conclusive evidence between the trustee and any record holder or party claiming any interest in a beneficial certificate of the ownersip of the certificate, and it shall not be the duty of the trustee upon transferring such certificates or paying dividends or making disbursements of any other nature or for any other purposes, or at any time, to inquire in any way into the relations between assignor and assignee, or pledgor and pledgee, of beneficial certificates. A statement in writing signed and acknowledged by the trustee and purported record holders of a majority in interest of beneficial certificates, duly133 recorded with the Recorder of Deeds for Scott County, Missouri, may always be relled upon as to who constitutes the record holders of beneficial certificates and their respective interests therein and in this trust as of the date designated in such statement, and shall be conclusive evidence in favor of all persons dealing in good faith with the trustee. The beneficial certificates shall with appropriate insertions, be in substantially the following form, to wit: This is to certify that is the owner of an undivided beneficial interest in and to all of the lands and other assets held by Clyde A. Vandivort, as trustee, under trust instrument dated the day of , 1935, recorded in Book , Page , of the Recorder of Deeds of Scott County, Missouri. This certificate is non-negotiable and may only be transferred or assigned in accordance with the terms of said trust instrument, to which reference is hereby made for the rights of the holder, and to which instrument this certificate is subject. The holder hereof, in accepting this certificate, agrees to all of the terms of said trust instrument and agrees to be bound thereby. Dated at Cape Girardeau, Missouri, this day of , 19 . Trustee. 134 5. The trustee shall at all times keep full and proper books of account and of the record holders of certificates. No trustee shall be obligated to give bond or have any liability except for his own gross negligence or bad faith. 6. The trustee shall not be entitled to any compensation hereunder, except such as may be agreed upon in writing by the trustee with the holders of all of the beneficial interests. 7. Any trustee hereunder may resign by written instrument duly acknowledged and recorded with the Recorder of Deeds for Scott County, Missouri. Any trustee hereinder may be removed at any time by written instrument signed and duly acknowledged by the holders of a majority in amount of the beneficial interests herein and recorded with the Recorder of Deeds for Scott County, Missouri. Any vacancy in the office of trustee, however occasioned, shall be filled by written instrument similarly signed, acknowledged, and recorded as in the case of removal of a trustee. The resignation, removal, or appointment of a trustee shall, respectively, be effective upon the recording of the proper instrument provided for in paragraph 7. 8. The provisions of this indenture may be modified at135 any time by an instrument in writing and acknowledged by the then trustee, assented to in writing by the holders of all of the beneficial interests herein, and recorded with the Recorder of Deeds for Scott County, Missouri. 9. The title of this trust shall for conveience be in the Cape Trust, and the term "trustee" shall include the original trustee and all successor trustees. "Record Holder" shall mean the holder of a beneficial certificate as disclosed by the records of the trustee. 10. At the end of twenty-one (21) years from the date hereof (unless this trust shall prior thereto be lawfully terminated), all of the property of every kind then held hereunder shall be sold by the trustee and equitable distribution made of the net proceeds among the record holders. The consent of holders of beneficial certificates to such sale shall not be required. As a condition precedent to any distribution, the trustee may require the presentation of a beneficial certificate for suitable endorsement of distribution thereon. IN WITNESS WHEREOF, I have hereunto affixed my signature this 16th day of March, 1936. The above trust instrument was duly signed by Vandivort and also by his wife to136 release all marital and statutory rights in and to the property which she might have. The instrument was also duly recorded. The trust thus created will sometimes hereinafter be referred to as the "Cape Trust". In accordance with the terms of the trust indenture beneficial certificates were issued by the trustee to those who had contributed to the trust fund. The original record holders of beneficial certificates and the interests acquired by each follows: Interest AcquiredReyburn1/3Wade, Jr.1/3Harrison1/6Vandivort1/6On or about June 22, 1937, Wade, Jr. sold one-fourth of his interest in the Cape Trust to Vandivort, one-fourth to Harrison, and one-half to Reyburn. The sale was in the amount of $13,000 contributed by the purchasers in proportion to the interests acquired. As a result of this sale the record holders of beneficial certificates and the interests owned by each were as follows: Reyburn1/2Vandivort1/4Harrison1/4On August 22, 1940, the trust indenture of March 13, 1936 was terminated by Vandivort as trustee who assigned title to the remaining lands by warranty deed to the record holders of beneficial certificates137 with a one-half interest to Reyburn, one-fourth interest to Vandivort, and one-fourth interest to Harrison, individually, as tenants in common. Early in 1936, advances in the form of loans were made to the trustee by the holders of beneficial certificates to provide him with funds to purchase seed and make repairs. Later, other advances were made, which were used by the trustee to purchase cattle. The farms were leased under written contracts to tenants selected by the trustee upon a share-crop basis. The operating results of the Cape Trust for the calendar years 1936 to 1940, inclusive, were as follows: 19361937193819391940Income: Farm Produce8,356.5710,535.005,619.448,520.4812,402.76Cotton Futures529.07A.A.A. Benefits1,683.36Total Income8,356.5712,747.435,619.448,520.4812,402.76Expense: Crop Production1,397.282,150.301,713.29905.544,005.77Salary4,200.004,200.004,200.001,800.001,800.00Maintenance1,212.613,603.21247.172,283.281,157.90Legal499.8617.40463.75Insurance34.6046.60235.91205.15105.74Miscellaneous203.1830.15385.25338.8146.62Interest1,200.001,200.001,058.321,137.501,471.04Taxes2,777.862,488.501,849.143,031.212,179.74Depreciation725.00725.00750.00997.23947.46Automobile Expense367.36486.92Total Expense12,250.3914,461.1610,439.0811,529.8312,201.19Profit or (Loss)(3,893.82)(1,713.73)(4,819.64)(3,009.35)201.57138 The fair market value of the total net assets of the Cape Trust as of the date of liquidation on August 22, 1940 was as follows: Assets: Cash$ 336.08Notes of tenants5,200.00Cattle7,599.88Farm buildings (Depreciation Value)10,680.01Farm lands (3,898.82 acres at $15per A)58,482.30Automobiles834.00Total$83,132.27Liabilities: Mortgage$33,000.00Accounts Payable887.50Total33,887.50Net assets$49,244.77In 1936, the holders of beneficial certificates executed a written contract with the trustee by which he received an annual salary of $4,200 for the years 1936, 1937 and 1938 in consideration of his services in the management of the trust property. In 1939, another written contract was executed under which the trustee received an annual salary of $1,800 plus a percentage of the net profits, if any, derived from the operation of the trust property. The trustee was also provided with an automobile in order to facilitate his management operations. During the existence of the Cape Trust from March 1936 to August 22, 1940 Federal fiduciary tax returns were filed by the trustee. For the period August 23, 1940 to December 31, 1940 and139 for each year thereafter Federal partnership returns have been filed. The returns of each petitioner for the taxable year ended December 31, 1940 were examined by respondent who increased the taxable income of Reyburn in the amount of $6,061.20 and Vandivort $3,030.59. This increase was the result of respondent's determination that upon the termination of the Cape Trust on August 22, 1940 each petitioner received a long-term capital gain based upon the value of the assets of the trust upon their transfer August 22, 1940. In a statement attached to the deficiency notice sent to Reyburn the respondent explained the increase in income of $6,061.20, as follows: (a) Taxable income is increased $6,061.20, representing long-term capital gain realized from liquidation of the Cape Trust (an association), computed as follows: Fair market value of assets receivedin liquidation$24,622.39Cost of your beneficial interest ex-changed for said assets12,500.00Recognized gain$12,122.39Returnable$ 6,061.20ReportedNoneAdjustment$ 6,061.20The cost of Reyburn's beneficial interest was $13,166.67 ($6,666.67 paid at inception of Cape Trust and $6,500 paid140 to Wade, Jr.) instead of $12,500. In a statement attached to the deficiency notice sent to Vandivort the respondent explained the increase in income of $3,030.59, as follows: (a) Taxable income is increased $3,030.59, representing long-term capital gain realized from liquidation of Cape Trust (an association), computed as follows: Fair market value of assets receivedin liquidation$12,311.19Cost of your beneficial interest ex-changed for said assets6,250.00Recognized gain$ 6,061.19Returnable$ 3,030.59ReturnedNoneAdjustment$ 3,030.59The cost of Vandivort's beneficial interest was $6,583.33 ($3,333.33 paid at inception of Cape Trust and $3,250 paid to Wade, Jr.) instead of $6,250. In 1941, the partnership sold 1,028 acres of the 3,898.82 acres it had acquired from the Cape Trust on August 22, 1940. The respondent determined a short-term capital gain on these sales as follows: Sale PriceShort-termAcreslessCapitalsoldCommissionsCostGain80$ 1,344.55$ 1,200$ 144.551803,519.552,700819.553206,960.004,8002,160.00781,651.411,170481.413706,851.415,5501,301.411,028$20,326.9215,420$4,906.92141 In 1941, the partnership sold the buildings on the above mentioned 1,028 acres of land that were sold. The respondent determined a gain of $147.74 on such sales as follows: Sale PriceCostBldgs. onless Com-less De-Tract soldmissionspreciationGain80 Acre$ 395.45$ 375.00$ 20.45180 Acre395.45375.0020.45320 Acre1,040.00975.0065.0078 Acre454.59492.59(38.00)370 Acre1,204.841,125.0079.841,028$3,490.33$3,342.59$147.74For the taxable year ended December 31, 1941, the partnership return as filed shows an ordinary loss of $810.19 and a long-term capital gain of $9,413.71, which gain represents the profit realized by the partnership from the sale of a part of the farm land received by the beneficial certificate holders of the Cape Trust upon its termination in 1940. Said gain was computed by petitioners on the basis of a holding period dating from organization of the Cape Trust in 1936 and by using as the basis of the lands sold their cost in 1936. Upon examination of the returns of each partner, respondent determined that the 1941 sales resulted in a short-term capital gain of $4,906.92 as set forth in142 the second preceding paragraph and computed said gain by using as a basis of the property sold its fair market value ( $15 per acre) when distributed to the holders of the trust's beneficial certificates on August 22, 1940. Accordingly, taxable income of the petitioners was increased by their distributive share of the short-term capital gain of $4,906.92 as follows: Reyburn, one-half interest$2,453.46Vandivort, one-fourth interest1,226.73In 1929, Vandivort together with Harrison loaned $2,915 to one S. B. Hunter receiving therefor a note dated July 5, 1929, due two years from date payable to C. A. Vandivort and Company, a partnership consisting of Vandivort and Harrison. Judgment on the note was entered against Hunter on March 18, 1940, and a levy was made but no assets were found. Vandivort claimed one-half of the note as a bad debt on his 1941 tax return and also claimed it again on his 1943 return. Respondent disallowed the deduction in 1941 but allowed it in the year 1940. Prior to the suit on the note the debtor had made no payments of principal or interest and had informed Harrison that he had no property or money or means of securing the same for the143 purpose of making payment of the principal or interest thereon. Opinion BLACK, Judge: The issues have been previously stated. We will consider them in their regular order. Issue 1. The solution to the question here presented depends upon whether the Cape Trust was a pure trust, taxable as such, or whether it was in substance an association taxable as a corporation. See section 3797(a)(3) of the Internal Revenue Code1 and sections 19.3797-1-2 and 3 of Regulations 103. In determining whether the Cape Trust is a pure trust or an association taxable as a corporation we must, as we did in Wabash Oil & Gas Association, 6 T.C. 542">6 T.C. 542, examine the facts in connection with "the now well settled criteria laid down by the Supreme Court" in Morrissey et al. v. Commissioner, 296 U.S. 344">296 U.S. 344; Swanson et al. v. Commissioner, 296 U.S. 362">296 U.S. 362; Helvering v. Coleman-Gilbert Associates, 296 U.S. 369">296 U.S. 369, and Helvering v. Combs et al., 296 U.S. 365">296 U.S. 365. "In the leading Morrissey case the Court said that, in order to be taxable as an association, the trust must have been created as a joint enterprise for the carrying on of144 a business and sharing the profits; and that in form of organization it must resemble a corporation." J. W. Wells Lumber Co. Trust A, 44 B.T.A. 551">44 B.T.A. 551, 556. We think that an examination of the trust instrument set out in our findings, together with the other facts found from the evidence introduced, shows that the Cape Trust was created as a joint enterprise for the carrying on of a business and sharing the profits. Originally four individuals furnished a total of $20,000 which was used to pay half of the purchase price of 4,219.46 acres of farm land. Title to the land, subject to a purchase money mortgage and notes for the other half of the purchase price, was taken in the name of one of the individuals, who on the same day executed the trust instrument in question. In this instrument Vandivort declared that he held the properties as trustee for the benefit of the beneficiaries who were to145 receive beneficial certificates as representing their proper interest in the trust. Under paragraph 1 Vandivort was to convert the properties into money and distribute the net proceeds among the holders of the beneficial certificates. This did not have to be done at once but could be deferred or postponed for a period of 21 years, during which period under paragraph 2 Vandivort was to manage and control the properties with as full discretionary powers and authority as he would have if he were the sole and absolute beneficial owner thereof in fee simple, subject to the one qualification "that in exercising the powers of sale or mortgage or exchange, or leases for a term in excess of two (2) years, the trustee, shall, prior thereto, secure the written consent of all of the record holders of the beneficial certificates * * ." Under paragraph 3 Vandivort was to collect, receive, and receipt for all rents and income from the properties and semiannually or oftener make a distribution to the holders of the beneficial certificates. The evidence shows that during the time the Cape Trust was in existence Vandivort made numerous contracts and leases with share-croppers, bought and sold cattle, 146 speculated in cotton futures, borrowed money from the holders of beneficial certificates at various times for the purpose of purchasing cattle and feed and to make necessary repairs, and also elected to receive A.A.A. benefits under that program. Vandivort received compensation for his services in the management of the trust properties. All of this we think clearly shows that the trust was created as a joint enterprise for the carrying on of a business and sharing the profits. We will next consider whether in form of organization the Cape Trust resembled a corporation. In this connection the Supreme Court in the Morrissey case said: What, then, are the salient features of a trust - when created and maintained as a medium for the carrying on of a business enterprice and sharing its gains - which may be regarded as making it analogous to a corporate organization? The Supreme Court in answering the above question recognized five salient features of a corporation which have been summarized by the Fifth Circuit in Commissioner v. Rector & Davidson, 111 Fed. (2d) 332, as follows: * * * They are (1) title to the property held by the entity, (2) centralized management, 147 (3) continuity uninterrupted by deaths among the beneficial owners, (4) transfer of interest without affecting the continuity of the enterprise, and (5) limitation of the personal liability of participants. The Cape Trust possessed all of these features except perhaps the last, namely, limitation of the personal liability of participants. The absence of this one feature, however, does not necessarily preclude the trust from recembling a corporation for "it is resemblance and not identity" that controls. Morrissey v. Commissioner, supra.In Bert et al. v. Helvering, 92 Fed. (2d) 491, the court in considering this specific point said: * * The only element not clearly present in this case is limitation of liability. * * * This distinction is stressed by petitioner. * * * While, therefore, it is true that the Supreme Court in all four cases in 296 U.S. mentions limitations of liability as one of the characteristics of the trusts declared in those cases to be associations under the law, and while in this case the right of the beneficiaries or the trustee to limitation of liability may perhaps be challenged, as to which we need express no opinion, 148 we think this is not the vital and conclusive factor under the terms of the tax act, or that the Supreme Court intended in its four opinions to make it an indispensable element in cases of this sort. Indeed, if each of the elements named by the Supreme Court in the Morrissey case be considered as essential, the whole would make as complete a corporate form as would be true under a charter of incorporation. The only missing link would be the charter itself. We think the real test is whether the enterprise more nearly resembles in general form and mode of procedure a corporation * . We think the facts as set out in our findings show that the Cape Trust more nearly resembled in general form and mode of procedure a corporation than it did a pure trust. We have not overlooked the provision in the trust instrument whereby Vandivort declared that he held the said granted properties "for the benefit of the cestui que trust (who shall be beneficiaries only without partnership, associate or any other relationship whatsoever inter sese) * ." We think the other salient features referred to above and what was actually done as set out in our findings speak louder than this single provision149 in the trust instrument. As the court said in Commissioner v. City Nat. Bank & Trust Co. et al., 142 Fed (2d) 771, "The character of this trust cannot be determined from a single sentence, paragraph or declaration, but must be gleaned from a consideration of the entire instrument." Petitioners in their brief in contending that the Cape Trust was a pure trust cite and rely upon the decisions of White v. Hornblower et al., 27 Fed. (2d) 777; Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43; Commissioner v. Atherton et al., Commissioner v. Morriss Realty Co. Trust No. 2 et al., 68 Fed. (2d) 648; Girard Trust Co., Trustee, 34 B.T.A. 1066">34 B.T.A. 1066; A. A. Lewis & Co. et al., v. Commissioner, 301 U.S. 385">301 U.S. 385; Helvering v. Washburn, 99 Fed. (2d) 478; and Commissioner v. Rector & Davidson, supra. The first four cases cited were decided prior to the Morrissey case and of course were decided without the benefit of the four Supreme Court cases in 296 U.S. The facts in the remaining cases are materially different from the facts in the instant proceedings. In Girard Trust Co., the trust there was engaged150 in the liquidation of an estate rather than in business for profit. In A. A. Lewis & Co., the Supreme Court distinguished that case from the Morrissey case by saying: The arrangement here answers the foregoing description of an ordinary trust - that is, it was created in virtue of a declaration by which a designated piece of real property was conveyed to the trustee on specified trusts, for the benefit of definitely named persons, one of whom was the grantor of the land and the other an agent of the grantor for the sole purpose of subdividing and selling the land. The agent was designated by name, and his powers definitely fixed in advance of their exercise. He possessed no authority beyond that expressly delegated by his principal. The trust was adopted merely as a convenient means of making effective the sales of the agent under the contract. The duties of the trustee were purely ministerial, with no power to control, direct, or participate in, the conduct of the selling enterprise contemplated by the contract. There is to be found in the operation of the business no essential characteristic of corporate control - nothing analogous to a board of directors or shareholders, no exemption151 from personal liability, no issue of transferrable certificates of interest. There is simply the common relation of principal and agent, coupled with the collateral incidents of an ordinary trust. * * * The trust in Helvering v. Washburn was held to be a "liquidating trust" where it was formed for the purpose of liquidation as soon as circumstances would permit and the carrying on of business was only as an incident necessary for the preservation of the trust property. It did not have the salient features mentioned in the Morrissey case, which features were also lacking in the "syndicate" or "joint venture" involved in the Rector & Davidson case. We hold, therefore, that the Cape Trust was an association taxable as a corporation. It follows that the respondent was correct in principle in holding that petitioners Reyburn and Vandivort realized long-term gains upon liquidation of the Cape Trust on August 22, 1940. Sherman et al. v. Commissioner, 146 Fed. (2d) 219. The respondent concedes in his brief that this gain should be recomputed by using the cost of Reyburn's and Vandivort's beneficial interests of $13,166.67 and $6,583.33, respectively, which costs we have set152 out in our findings. Issue 2. Both parties agree that our solution to the question here presented depends upon our holding under the first issue. Having held that the Cape Trust is an association taxable as a corporation, it follows that the holding period of the assets received on the liquidation commences to run from August 22, 1940 and that the gain made in 1941 from the sale of capital assets received in such liquidation would come within the definition of "short-term capital gain" as that term is defined in section 117(a)(2) of the Internal Revenue Code. The respondent's determination on this issue is sustained. Issue 3. Petitioner Vandivort no longer contends that he and his wife are entitled to deduct in their joint return for the year 1941 as a "bad debt" the amount of $1,457.50. Vandivort now contends that the said amount should be allowed as a bad debt deduction in his return for 1943. The respondent has allowed petitioner a deduction as a bad debt in his 1940 return of the amount of $1,457.50 on account of the Hunter note. The record does not show that the respondent has erred in this respect. We, therefore, approve the respondent's determination153 as to this issue. Issue 4. As shown in the statement attached to the deficiency notice to Reyburn this adjustment to Reyburn's income for 1941 of $3,105.24 is the result of two adjustments made by the respondent in the partnership return for the calendar year 1941 as follows: Gain on sale of farm buildings$ 147.74Excessive salaries disallowed6,062.75Total$6,210.49Reyburn's one-half interest$3,105.24The manner in which the respondent arrived at the gain of $147.74 is set out in our findings. In view of our holding on Issue 1, it follows that the respondent's adjustment as to this item of $147.74 was proper. No evidence was offered in connection with the salary adjustment. We, therefore, approve the respondent's determination as to this issue. Issue 5. As to the $14.35 item, the statement attached to the deficiency notice explains the adjustment as follows: (c) This adjustment represents your distributive share of income of the Cape Trust, a partnership, of Cape Girardeau, Missouri, for the period from August 23 to December 31, 1940. No evidence was offered in connection with this item. As to the $360.79 item, the statement attached to the154 deficiency notice shows that this adjustment is the result of the same two adjustments made by the respondent in the partnership return for the calendar year 1941 referred to under Issue 4 above. It follows that we must also approve the respondent's determination as to this issue. Issue 6. In the statement attached to the deficiency notice the respondent explains the adjustment here at issue as follows: (d) This adjustment is to eliminate from taxable income the item of $4,706.85 returned as a long-term capital gain representing your distributive share of long-term capital gain realized by the Cape Trust, a partnership, from the sale of lands under item (b). It is held that the resulting gain is taxable as a short-term capital gain. Therefore, the amount returned as a long-term capital gain is eliminated. This adjustment automatically followed from the respondent's determinations referred to-under Issue 1 and 2. Since we have approved those determinations in principle, there is no reason to disturb the adjustment here involved. Issue 7. No evidence was offered as to this issue. We, therefore, affirm the respondent's determination that Vandivort realized additional income155 of $399.60 from a farm in the year 1940. Decisions will be entered under Rule 50. Footnotes1. SEC. 3797. DEFINITIONS. (a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof - * * *(3) Corporation. - The term "corporation" includes associations, joint-stock companies, and insurance companies.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620350/	IVAN A. BIDWELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBidwell v. CommissionerDocket No. 28290-82.United States Tax CourtT.C. Memo 1985-164; 1985 Tax Ct. Memo LEXIS 471; 49 T.C.M. (CCH) 1132; T.C.M. (RIA) 85164; April 2, 1985. 471 Petitioner filed an altered Form 1040 on which he categorizes his wages as "Non-taxable receipts." Held, wages are subject to tax and damages are awarded to the United States. Ivan A. Bidwell, pro se. Mark E. Rizik, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: This case is before the Court on respondent's Motion for Summary Judgment filed pursuant to Rule 121. 1 Petitioner filed a response to the instant Motion. At the hearing on the Motion for Summary Judgment said Motion was taken under advisement. For convenience our Findings of Fact and Opinion are combined. Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1981 in the amount of $7,914.00. The petition alleges that the Commissioner erred in finding petitioner's wages to be taxable income. 2 The petition also contains other frivolous or meritless contentions. 3 In the Answer, respondent denied the petition allegations and requested that the full deficiency 472 set forth in the statutory notice be approved. We must first decide whether any genuine issue of material fact exists to prevent our summary adjudication of the legal issues in controversy. Rule 121.If summary judgment is warranted, we must then decide whether wages earned by petitioner in 1981 are includable in his gross income for that year and whether, on the Court's own motion, an award of damages pursuant to section 6673 473 should be made. 4Certain facts are not disputed. The undisputed documents supplied by respondent in an affidavit with exhibits filed in connection with the Motion 5474 and the undisputed facts in the pleadings constitute the facts used for the purposes of this decision. Rule 121(b). Petitioner resided in Detroit, Michigan, when the petition was filed in this case. During the 1981 taxable year, petitioner was employed by North-West Designing Service Inc. and S.W.E. Inc. and received wages totaling $31,287.80. Petitioner submitted to the Internal Revenue Service as his 1981 return an official Treasury Form 1040 which had been changed by inserting on line 23 "Non-taxable receipts." In two places in the left margin of this "form" the word "Income" is replaced by "Receipts." On lines 8a, 11, 18 and 20 the word "income" is replaced by "gain" and on line 21 the word "income" is deleted. Two memoranda were attached to petitioner's purported 1981 return, one of which was styled "FORM--NON-TAXABLE RECEIPTS: ." 6On his purported 1981 return, petitioner inserted the amount of $31,287.80 as "Wages, salaries, tips, etc." and attached Forms 475 W-2 reflecting this amount. Petitioner subtracted the identical amount under the heading "Non-taxable receipts." The net effect of these offsetting entries was to create a zero tax liability. Since one of his employers had withheld against the amounts paid petitioner during 1981, petitioner claimed a refund of $2,084.77. The threshold issue is whether a motion for summary judgment is appropriate in this case. We conclude that it is. Rule 121. The summary judgment procedure is availavle even though there is a dispute under the pleadings if it is shown through materials in the record outside the pleadings that no genuine issue of material fact exists. 7 In passing upon such a motion, the factual materials presented "must be viewed in the light most favorable to the party opposing the motion." ; . Since respondent is the movant, he has the burden of proving 476 there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. There is no dispute between the parties as a factual matter that petitioner received wages during 1981 in the amount of $31,287.80 as reflected on the Forms W-2 which he received from his employers. The only justiciable error that petitioner alleges is that such amount is not taxable, a legal issue. Petitioner does not question and thereby concedes the authenticity of respondent's evidence attached as exhibits to the submitted affidavit. The pleadings, summary judgment motion, affidavit, and exhibits establish that there is no genuine issue as to any material fact, and we find that a decision may be rendered as a matter of law. The burden of proof is upon petitioner with respect to the deficiency set forth in the statutory notice. ; Rule 142(a). Petitioner's frivolous contention that his wages are not taxable has been considered and rejected by this Court in numerous prior cases and merits no further discussion. Section 61; ; ; . 477 8We now consider, on our own motion, whether damages should be awarded under section 6673 for instituting this proceeding primarily for delay. Petitioner's conduct from the filing of his petition has demonstrated that his principal purpose has been to abuse the resources of this Court in order to delay the inevitable time of reckoning with respondent. For that reason, we award damages to the United States under section 6673 in the amount of $500. We also warn petitioner that we are authorized to impose damages in an 478 amount not in excess of $5,000. 9 Petitioner should bear that fact in mind in connection with any further proceeding which he may institute in this Court. An appropriate Order and Decision will be entered.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. Petitioner also argued that wages he received in 1980 were nontaxable in a second case (docket No. 29401-82) instituted 18 days after the petition in this case was filed. A Memorandum Sur Order dated Dec. 17, 1984 and Order and Decision entered Dec. 19, 1984 in that case held petitioner liable for the determined deficiency and additions to tax pursuant to sections 6651(a)(1) and 6653(a) and awarded damages pursuant to section 6673. ↩3. For example, petitioner is not entitled to court costs and disbursements which he requests. , affd. without published opinion ; , affd. per curiam , cert. denied .↩4. Although Respondent's Memorandum of Law in support of the instant Motion requests an award of damages pursuant to section 6673, such damages are not requested in the Motion for Summary Judgment or in the Answer.↩5. In conjunction with the Motion for Summary Judgment, respondent filed Respondent's Memorandum of Law, an affidavit of Mark E. Rizik, respondent's counsel, who has custody and control over the Commissioner of Internal Revenue's administrative files, and a number of exhibits. These exhibits include: A copy of the statutory notice sent to petitioner for the 1981 tax year; copies of Forms W-2 issued to petitioner for 1981; a copy of petitioner's purported "return" for 1981; and a copy of a Form CSC 8-255-A letter from respondent to petitioner dated July 23, 1982. Additionally, an affidavit of Marjorie A. Wyman, respondent's employee in charge of the Illegal Tax Protestor Team at the Cincinnati Service Center for the Central Region of the Internal Revenue Service, was filed on Feb. 16, 1984.6. This is one of the 23 cases set on this Court's March 5, 1984 trial calendar involving tampered Forms 1040 and referred to in , on appeal 6th Cir. Sept. 24, 1984.↩7. Such outside materials may consist of affidavits, interrogatories, admissions, documents, or other materials which demonstrate the absence of such an issue of fact despite the pleadings. See Note to Rule 121(a), .↩8. For the reasons set forth in , on appeal 6th Cir. Sept. 24, 1984, we also find that the purported "return" filed by petitioner was not a return for purposes of sections 6011, 6012, 6072, and 6651(a)(1). However, respondent did not assert an addition to tax pursuant to section 6651(a)(1) in the Notice of Deficiency, Answer or Motion for Summary Judgment. Nor did respondent assert an addition to tax pursuant to section 6653(a) stating that said addition was not sought "because of an error in he handling of this case's administrative file." Therefore, additions to tax pursuant to these sections are not issues before the Court.↩9. Section 292 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 574, and sec. 160, Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 696, increased the amount of damages that may be awarded under section 6673 from $500 to $5,000 for proceedings commenced after December 31, 1982. Section 160 of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 696, further amended section 6673 to provide for damages up to,5,000 in proceedings pending in this Court after November 15, 1984.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620351/	SYLVIA SHIFMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentShifman v. CommissionerDocket No. 26132-86.United States Tax CourtT.C. Memo 1987-347; 1987 Tax Ct. Memo LEXIS 347; 53 T.C.M. (CCH) 1337; T.C.M. (RIA) 87347; July 20, 1987. Nancy Bateman, for the petitioner. Patricia Delzotti, for the respondent. POWELLMEMORANDUM FINDINGS OF FACT AND OPINION POWELL, Special Trial Judge:1 The underlying substantive tax issues in this case were conceded by respondent. The case is before this Court on petitioner's motion for litigation costs pursuant to section 7430 and Rule 231. 2The issues for decision are (1) whether petitioner is a "prevailing party" and, if so, (2) whether petitioner has exhausted her administrative remedies available to her within the Internal Revenue Service. The case involves petitioner's tax year for 1983. On November 5, 1985, the Brookhaven Service Center sent petitioner a notice of proposed disallowance, 349 indicating a discrepancy in the amount of annuity income reported on her 1983 income tax return and the amount reported to the Service by the payor. Petitioner's son, as petitioner's attorney-in-fact, responded to the 30-day letter by letter dated December 9, 1985. Petitioner subsequently received a postcard from respondent's service center, acknowledging receipt of petitioner's letter and stating that the information submitted was being considered. Respondent made no further communication with petitioner until May 28, 1986, when a notice of deficiency was issued. The statute of limitations for assessment of a deficiency on petitioner's 1983 return would not have expired until April 15, 1987. Petitioner filed a timely petition with this Court on July 7, 1986, at which time she was a resident of Westfield, New Jersey. On September 2, 1986, the case was formally assigned to an appeals officer. After reviewing the case file and petition, the appeals officer contracted petitioner's attorney on September 9, 1986, and orally conceded the deficiency. A decision document indicating a zero deficiency was mailed to petitioner's attorney on September 18, 1986. Petitioner, however, 350 refused to execute that decision document and filed a motion for costs and attorney's fees. The parties have stipulated that there is neither a deficiency due from, nor overpayment due to petitioner, for the 1983 year. Section 7430 3 authorizes the award of reasonable litigation costs to a petitioner who prevails in a tax controversy with the United States. In order to be entitled to an award of litigation costs, petitioner (1) must exhaust all administrative remedies available to her within the Internal Revenue Service, and (2) must satisfy the statutory definition of a "prevailing party." Petitioner will be considered to be a prevailing party only if she can establish that she has substantially prevailed with respect to the amount in controversy 4 and that the position of the United States was not substantially justified. Sec. 7430 (c)(2). 351 We first address whether the governmental action in question falls within the definition of "position of the United States." Section 7430(c)(4)(A) states that the term "position of the United States" includes the position taken by the United States in the civil proceeding. This Court has held under section 7430, prior to the 1986 amendment, where the same language was operative, that we look at the reasonableness of the Government's position based upon the facts and circumstances surrounding the post-petition litigation, and the fact that respondent eventually loses or concedes the case is not dispositive. 5, vacated and remanded on another issue . 6352 Petitioner argues that our interpretation of the term "civil proceedings" in section 7430 in Baker does not have continuing vitality after the 1986 amendment. See . We disagree. While, as discussed infra, the 1986 amendment did expand the focus of examining the position of the United States, it did so by a specific expansion of the term "position" and did not expand the definition of a "civil proceeding." Compare section 7430(c)(4), 1986 ed. with section 7430(c)(2)(A)(i), 1982 ed. Indeed, as we understand the legislative history of section 1551 of the 1986 Act, Congress adopted the Baker construction. The 1986 amendment has its genesis in section 1315 of H.R. 3838. Section 1315(b) added a provision that allowed the courts to "assess a portion of such costs against any Internal Revenue Service employee * * * if the court determines that such proceeding resulted from any arbitrary or capricious act of such employee." The House Report explained (H. Rept. 99-426 (1986), 1986-3 C.B. (Vol. 2) 840)): It is the intention of the committee that this provision apply to IRS attorneys, 353 as well as non-attorneys. Thus, all employees of the Office of Chief Counsel of the IRS, such as those in the tax litigation function, are subject to this provision. This provision applies to them because they are responsible to the Chief Counsel of the IRS. * The Senate version of H.R. 3838 was considerably different. See section 541. It omitted personal liability on the part of employees and would have amended (sec. 541(d)) section 7430(c) by adding: (4) POSITION OF THE UNITED STATES. -- The term "position of the United States" includes -- (A) the position taken by the United States in a civil proceeding and (B) the administrative action or inaction by the United States upon which such proceeding is based.The Report of the Finance Committee simply states that "the 'substantially justified' standard is applicable to prelitigation actions or inaction of Government agents as well as the litigation position of the Government." S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 199. If either provision has been adopted, it is arguable that there would be a basis for petitioner's position. That is not the case. Section 1551(e) of the 1986 Act, Pub. L. 354 99-514, 100 Stat. 2753, amended section 7430(c) by adding: (4) POSITION OF THE UNITED STATES. -- The term "position of the United States" includes -- (A) the position taken by the United States in a civil proceeding and (B) the administrative action or inaction by the District Counsel of the Internal Revenue Service (and all subsequent administrative action or inaction) upon which such proceeding is based.The Conference Report states that "In addition to providing for attorney's fees with respect to litigation expenses, the conference agreement also provides that attorney's fees may be awarded with respect to the administrative action or inaction by the District Counsel of the IRS (and all subsequent administrative actions or inactions) upon which the proceeding is based." H.R. Rept. 99-841 (Conf.), at II-802. The explanation of the Joint Committee Staff states that "[p]relitigation actions or inaction by the IRS prior to the involvement of District Counsel are not eligible as components of any attorney's fees award." Staff of Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 1300 (Comm. Print 1986) (emphasis added). Thus, we believe355 that the legislative history of the 1986 amendment makes it clear that the rule enunciated in Baker v. Commissioner applies, except in those situations where there has been some involvement by District Counsel prior to the filing of the petition. Since respondent conceded the case within two months after the petition was filed, we conclude that respondent's position vis-a-vis the civil proceeding was reasonable. See ; . Furthermore, District Counsel was not involved with the prelitigation administrative action in this case, and we need not pursue that matter further. Under the language of section 7430(c)(4), the issuance of the statutory notice of deficiency and the underlying administrative action in this case do not constitute "a position of the United States" and thus are not subject to scrutiny under the "not substantially justified" standard. Accordingly, we find that petitioner is not a "prevailing party" within the meaning of section 7430(c)(2), and thus not entitled to recover her litigation costs. 7356 An appropriate decision will be entered.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 year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise provided. ↩3. Section 7430 became effective for cases begun after February 28, 1983. The section was amended by section 1551 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2752, which amendments apply to amounts paid after September 30, 1986 in proceedings commenced after December 31, 1985. Sinnce this case commenced July 7th, 1986, the issue is subject to the provisions of section 7430 as modified by the Tax Reform Act of 1986. ↩4. Respondent has agreed that petitioner substantially prevailed with respect to the amount in controversy. ↩5. Under the prior version of section 7430, the taxpayer had to show that the position of the Government was "unreasonable." Although the statute now requires that a taxpayer establish that the Government's position was not substantially justified, this Court has previously held that the test of whether a Government action is "substantially justified" is essentially one of reasonableness. See , vacated and remanded on another issue . ↩6. The Third Circuit, to which this case is appealable, has not ruled on this issue, and we follow our decision in , affd. , cert. denied . See also ; ; . Compare , revg. a Memorandum Opinion of this Court; . ↩7. Since we find that petitioner has not met the statutory requirements of section 7430 (c)(2), we need not reach and discuss whether she has exhausted her administrative remedies. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620352/	Lois W. Poinier, as Transferee of Helen Wodell Halbach, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentPoinier v. CommissionerDocket Nos. 23881-81, 23882-81, 23883-81United States Tax Court96 T.C. 1; 1991 U.S. Tax Ct. LEXIS 1; 96 T.C. No. 1; January 7, 1991, Filed 1 On motion by Ps to reduce the amount of a surety bond filed in respect of the appeal of our decisions entered in accordance with our opinion in Poinier v. Commissioner, 86 T.C. 478 (1986), affd. in part and revd. in part 858 F.2d 917">858 F.2d 917 (3d Cir. 1988), held:1. This Court has jurisdiction to reduce the amount of the bond even though decisions in the above-docketed cases have become final.2. The surety bond is reduced by payments made subsequent to the filing of the bond and in respect of a refund due petitioner W. Page Wodell but not in respect of other amounts claimed by Ps.3. Under the circumstances herein, Ps in docket Nos. 23881-81 and 23882-81 remain liable on the bond in the reduced amount even though this may result in payments to R in excess of their liability as donee-transferees.4. The letter of credit securing the bond is deemed reduced by the same amount.5. The Court does not have jurisdiction to order the release of any assets pledged as security for such letter of credit. Geoffrey J. O'Connor, for the petitioners.Leslie J. Spiegel, for the respondent. Tannenwald, Judge. TANNENWALD2 OPINION2 This case is again before us on a motion by petitioners to release and modify the surety bond secured by a letter of credit filed by petitioners pursuant to our opinion in Poinier v. Commissioner, 90 T.C. 63">90 T.C. 63 (1988), in connection with their appeal from our decisions in Poinier v. Commissioner, 86 T.C. 478 (1986), entered in all three dockets on August 24, 1987. Our decision in docket No. 23883-81 was affirmed and our decisions in docket Nos. 23881-81 and 23882-81 were affirmed in part and reversed in part by the U.S. Court of Appeals for the Third Circuit on September 30, 1988 (858 F.2d 917">858 F.2d 917). New decisions were entered by this Court on August 11, 1989, in docket Nos. 23881-81 and 23882-81 pursuant to the opinion and mandate of the Court of Appeals. The substantive issue involved in the foregoing proceedings was the liability of petitioner Estate of Helen Wodell Halbach for gift tax, resulting from a disclaimer executed by the decedent in 1970, and that of the other two petitioners as donee-transferees.23 The bond involved herein was fixed at $ 5,544,993.86 pursuant to our opinion in 90 T.C. 63">90 T.C. 63. That amount adopted the calculation offered by respondent which used the gift tax deficiency of the Estate of Helen Wodell Halbach found by the Court in the amount of $ 4,881,386.52 as a starting point, subtracted therefrom prior payments in the aggregate amount of $ 1,788,822.70 that had been made in respect of the liability represented by the deficiency and $ 320,066.89 representing an estate tax overpayment resulting from our decision in docket No. 7099-76, Estate of Halbach v. Commissioner, 71 T.C. 141 (1978), and T.C. Memo 1980-309">T.C. Memo. 1980-309, and multiplied by 2 the resulting unpaid deficiency in the amount of $ 2,772,496.93. The amount so fixed ($ 5,544,993.86) was far less than the amount of the gift tax deficiency plus interest since April 15, 1971, representing the liability of the Estate of Helen Wodell Halbach, and reflected the limitation on the maximum amount established by section 74853 which provides in pertinent part:3 SEC. 7485(a). Upon Notice of Appeal. -- Notwithstanding any provision4 of law imposing restrictions on the assessment and collection of deficiencies, the review under section 7483 shall not operate as a stay of assessment or collection of any portion of the amount of the deficiency determined by the Tax Court unless a notice of appeal in respect of such portion is duly filed by the taxpayer, and then only if the taxpayer -- (1) on or before the time his notice of appeal is filed has filed with the Tax Court a bond in a sum fixed by the Tax Court not exceeding double the amount of the portion of the deficiency in respect of which the notice of appeal is filed, and with surety approved by the Tax Court, conditioned upon the payment of the deficiency as finally determined, together with any interest, additional amounts, or additions to the tax provided for by law, or(2) has filed a jeopardy bond under the income or estate tax laws.If as a result of a waiver of the restrictions on the assessment and collection of a deficiency any part of the amount determined by the Tax Court is paid after the filing of the appeal bond, such bond shall, at the request of the taxpayer, be proportionately reduced.[Emphasis added.]5 The liability of each of the donee-transferees in respect of the deficiency plus interest thereon since April 15, 1971, was limited as a result of the decision of the Court of Appeals for the Third Circuit, Poinier v. Commissioner, 858 F.2d 917">858 F.2d 917, to $ 5,225,311.71. The parties are in agreement that all payments relieve each party of liability pro tanto.The bond is a single document signed by each of the petitioners in which they bind themselves to pay respondent $ 5,544,993.86. The bond provides that the obligation shall be voided if petitioners "shall pay the deficiency as finally determined together with any interest provided by law," but is silent as to whether the obligation is joint or several or both. The bond further provides that in the event of notice that the letter of credit will not be renewed, petitioners "waive all restrictions on assessment and collection of the taxes, interest, additional amounts or additions to tax involved in this case and, in any event, such restrictions are waived from and after November 30, 1990."The bond is secured by a letter of credit in the amount of $ 5,544,993.86 which was issued by the Summit Trust Co. (the bank) of Chatham, New Jersey, 6 and which specifies an original expiration date of January 31, 1989, automatically renewable, in the absence of notice to the contrary, for 1-year periods with an ultimate expiration date of January 4 31, 1991. Pertinent provisions of the letter of credit are as follows:We [the bank] hereby establish our Irrevocable Letter of Credit No. 3573 in favor of the Internal Revenue Service ("IRS"), Washington, D. C. for account of Lois W. Poinier, W. Page Wodell, and the Estate of Helen Halbach, Deceased, Lois W. Poinier, Executrix. * * If the taxpayers shall otherwise pay the entire deficiency as finally determined, together with any interest, additional amounts or additions provided by law, this Letter of Credit shall be void.Since the issuance of the bond, $ 2,952,036.26 has been paid on account of the gift tax liability plus interest, of which it appears that $ 600,000 was paid in January 1989 and the balance of approximately $ 2.3 million after the decisions herein became final. Petitioners claim that the amount of the bond should be reduced at least to this extent and also further reduced by the amount of income tax refunds due petitioner Lois W. Poinier totaling $ 565,385, 7 and by an income tax refund of $ 468,507 due petitioner W. Page Wodell, all of which refunds have been administratively approved. Additionally, petitioners claim that of the payments that have been made, $ 2,416,436.26 has been paid on account of the unpaid deficiency of $ 2,772,496.93, exclusive of interest, see supra p. 2; therefore, they assert that the bond should be reduced to $ 712,121.34 ($ 2,772,496.93 less $ 2,416,436.26 times 2). Petitioners further assert that petitioner Lois W. Poinier has paid respondent another $ 60,000. Petitioners also refer to other sums which they claim should be an offset, e.g., interest on the aforesaid refund of $ 468,507, which petitioners claim would offset the remaining $ 1,217,015 of the donee-transferee liability of petitioner W. Page Wodell. Petitioners concede, however, that there is "currently due and unpaid from Mr. Wodell a substantial late payment penalty [addition to tax]." 48 There appears to be no dispute between the parties that the full $ 5,225,311.71 transferee liability of petitioner Lois W. Poinier has been paid and that all but $ 1,685,522 of 5 transferee liability of petitioner W. Page Wodell has been paid.Petitioners' motion seeks (1) the release of petitioner Lois W. Poinier from the surety bond and of her assets held by the bank as security for its letter of credit, and (2) the reduction of the bond and the letter of credit to $ 1,217,015 for the remaining petitioners, this amount representing the $ 1,685,522 which respondent claims as being unpaid by W. Page Wodell less the aforesaid refund of $ 468,507 or, alternatively, reduction of the present amount of $ 5,544,993.86 by the $ 2,952,036.26 which respondent concedes has been paid since the filing of the bond and the issuance of the letter of credit. Respondent opposes any reduction in the amount of the bond or the amount of the letter of credit on the ground that the remaining liability of petitioner Estate of Helen Wodell Halbach exceeds the presently outstanding amount of the bond and letter of credit. As will subsequently appear, we do not fully agree with the position of either9 party.We deal first with respondent's assertion that we are without power to reduce the amount of the bond because (1) when the $ 600,000 was paid in January 1989, no waiver of the restrictions on assessment and collection was in existence and therefore the provision for reduction of the bond, contained in section 7485(a), see supra p. 3, does not apply since that provision comes into play only in respect of payments made as a result of such a waiver, and (2) in respect of the further payments aggregating $ 2,352,036.26, the same reasoning as to the nonexistence of a waiver applies and, additionally, since the decision of this Court has become final, we do not have jurisdiction to reduce the bond. Respondent's position is totally lacking in merit. To say that a waiver is necessary before a payment can be taken into account ignores the obvious fact that the payment itself constitutes a waiver as to that payment and makes the existence of a waiver document irrelevant. 5 As far as our losing jurisdiction over the bond after our decisions become final is concerned, if respondent's assertion were correct, the effect would be to read the reduction 6 provision out of section10 7485(a), since taxpayers normally make payments after a decision becomes final, and it is the absence of such payments which brings the bond into play. Indeed, respondent's position logically would produce the incongruous result of precluding us from releasing bonds after such post-final decision payments fully discharge a taxpayer's obligation -- a procedure which the Court has traditionally and routinely followed. See, e.g., Estate of Schneider v. Commissioner, 93 T.C. 568">93 T.C. 568 (1989). The cases cited by respondent, which stand for the proposition that we lack jurisdiction to reopen our decisions which have become final in the absence of fraud on the Court, simply have no application to the issue before us. We conclude that we have the power to reduce the bond, at least to the extent of the $ 2,952,036.26 in payments that have been made.We now turn to11 the question whether the amount of the bond should be further reduced. In this respect, petitioners first assert that the amount of the bond should be further reduced by $ 1,033,892 representing the refunds which appear to have been administratively approved for petitioners Lois W. Poinier and W. Page Wodell.Before addressing petitioners' assertion, we will deal with the extent of the liability of each petitioner on the bond. Petitioners assert that, because petitioner Lois W. Poinier has fully satisfied her donee-transferee liability and because petitioner W. Page Wodell has satisfied all but $ 1,217,015 of his donee-transferee liability ($ 1,685,522 minus $ 468,507) and since, according to petitioners, the Estate of Helen Wodell Halbach is insolvent, 6 petitioner Lois W. Poinier should be released entirely from her liability on the bond and her assets pledged as security for the letter of credit should likewise be released. Petitioners further assert that the bond of the other two petitioners should be reduced to the aforesaid amount of $ 1,217,015. Petitioners claim that, otherwise, the donee-transferees will be exposed to liability in excess of their liabilities in such 12 capacity. We disagree.Initially, we note that the insolvency of the Estate of Helen Wodell Halbach is irrelevant. The fact that such 7 insolvency, if it in fact exists, 7 might add to the liability of the other two petitioners is not an excuse to limit the ability of respondent to collect on the bond. Indeed, such a condition creates the situation for which the bond is designed to afford protection to respondent. More importantly, while the bond does not expressly state the precise nature of the obligation thereunder of each of the petitioners, see supra p. 3, we think it clear from the language of the bond and the accompanying letter of credit that the bond created a single obligation of $ 5,544,993.86 in respect of which each petitioner undertook a liability up to that amount to the extent that the deficiency plus interest due from petitioner Estate of Helen Wodell Halbach was not paid. Such being the case, we13 are not disposed to relieve petitioner Lois W. Poinier of liability for any reduced amount of the bond or to limit such liability on the part of petitioner W. Page Wodell to the unpaid portion of his donee-transferee liability. If these two petitioners had wished to limit their liability to the amount of their obligation as donee-transferees, they could have done so by filing separate bonds instead of a single bond -- a procedure which presumably would have increased the total bonded amount and the accompanying letters of credit and imposed an additional cost on them.In the context of the foregoing analysis, we turn to the question of whether, and to what extent, the amount of the bond should be reduced by the claims for refund which have been administratively approved, which no longer need to be reported to the Joint Committee on Taxation under section 6405 8 and in respect of which respondent14 states that he is aware of no other claims for additional taxes which might be asserted as offsets to such refunds (see our prior opinion, 90 T.C. at 64-65). On December 21, 1990, the Court issued an order which provided as follows:8 ORDERED: That on or before December 31, 1990, petitioners shall file with the Court, or notify the Court in writing of its reasons for not filing, a document addressed to respondent and executed by each petitioner in the above-docketed cases or by their duly authorized representative for handling their claims for refund (in which case proof of such authorization shall be attached) permitting respondent to apply the principal amount of said refunds, and the interest thereon to the extent that petitioners deem appropriate, in an amount determined by a final decision in this proceeding, provided that the aggregate amount so applied shall not exceed the difference between the original amount of the surety bond, i.e., $ 5,544,993.86, and the amount of payments since the issuance of the bond which may be determined in this proceeding to be a proper reduction in said original amount. Petitioners may include in such document15 any further qualifications that they deem appropriate.On December 27, 1990, petitioners responded to this order by means of a letter in which petitioners Lois W. Poinier and W. Page Wodell authorized the application of such refunds as a payment "as part of the liability determined against [her, him] as transferee in a final decision in Docket No. [23881-81, 23882-81]" (emphasis added). In light of this limitation, it seems clear that no such application can be made of the refunds due petitioner Lois W. Poinier since her liability as transferee has been satisfied and the application of such refunds to the liabilities of petitioner16 W. Page Wodell and/or petitioner Estate of Helen Wodell Halbach is not included in the authorization. Consequently, we conclude that the bond should not be reduced by the amount of refunds due petitioner Lois W. Poinier.In respect of petitioner W. Page Wodell, the application of the refund of $ 468,507 to him is authorized. Consequently, and in light of the agreement of the parties that all payments relieve each party pro tanto, see supra p. 3, we conclude that the amount of the bond should be further reduced by $ 468,507, representing the principal amount of the refund due petitioner W. Page Wodell. We do not include any amount of interest in such reduction because the parties disagree as to the amount, if any, of such interest. 9 We expressly do not pass upon the allocation of such refund (or, for that matter, any other payments that have been made on account of petitioners' liabilities) as between the principal and interest on the gift tax deficiency, 9 since our only concern herein is with the amount of the bond.17 Finally, we reject petitioners' position that the amount of the bond be reduced to $ 712,121.34. See supra p. 4. Petitioners' calculations do not adequately take into account the unpaid interest on the gift tax deficiency. The effect of petitioners' calculations is to reduce the amount of the bond by $ 2 for every $ 1 paid. We are not persuaded that Congress intended so to reduce the protection afforded respondent by the bond. We are satisfied that the use of the word "proportionately" in section 7485 was intended to provide for a dollar-for-dollar reduction in the amount of the bond by the amount paid.In sum, we conclude that petitioners' motion should be granted to the extent that the amount of the bond should be reduced from $ 5,544,993.86 to $ 2,124,450.60 10 in order to reflect the payments of $ 2,952,036.26 that have been made since the issuance of the bond and the $ 468,507 refund to petitioner W. Page Wodell and that the amount of the letter of credit be deemed reduced to the same figure, to wit, $ 2,124,450.60. 11 Otherwise, petitioners' motion will be denied. As to petitioners' request that we order the release of the assets of petitioner Lois W. Poinier, now18 pledged as security for the letter of credit, this is a matter over which the Court has no jurisdiction and must be arranged between petitioners and the bank.In reaching our conclusion, we are not unmindful of the fact that the purpose of section 7485 is to provide adequate security to respondent in order to enable him to collect the amounts finally determined to be due. See 90 T.C. at 64. This objective becomes difficult to achieve when the "double amount" limitation in that section is less than the amounts which may become due -- a situation that existed herein at the time the bond was issued and has occasionally occurred19 in the past, see, e.g., Estate of Kahn v. Commissioner, 60 T.C. 964">60 T.C. 964, 966 (1973). Indeed, it may occur more frequently today because of the higher interest rates and 10 the increasing number of cases involving audits and litigation extending over a number of years. 12 But the fact that respondent may not be able to obtain the full protection he seeks does not justify failing to reduce the bond in accordance with the mandate of section 7485(a). 13 See supra p 3.*20 An appropriate order will be issued. Footnotes1. Cases of the following petitioners are consolidated herewith: W. Page Wodell, as transferee of Helen Wodell Halbach, docket No. 23882-81; and Estate of Helen Wodell Halbach, Deceased, Lois Wodell Poinier, Executrix, docket No. 23883-81.↩2. The disclaimer was also involved in prior proceedings in this Court in respect of estate tax liability of the Estate of Helen Wodell Halbach. Estate of Halbach v. Commissioner, 71 T.C. 141 (1978), and T.C. Memo 1980-309">T.C. Memo 1980-309↩ (docket No. 7099-76).3. All statutory references are to the Internal Revenue Code as amended.↩4. According to respondent, the amount of such addition is now approximately $ 67,420.↩5. We also note that, by the express terms of the bond, the restrictions on assessment and collection were waived as of Nov. 30, 1990.↩6. Petitioners' motion papers contain an analysis of the financial position of the estate.↩7. We have serious reservations whether we should, in any event, conduct what would amount to an accounting of the estate.↩8. Sec. 6405 was amended by sec. 11834(a) of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388-560, to increase to $ 1 million the limit above which refunds must be reported to the Joint Committee, effective in respect of refunds reported after the effective date of enactment, i.e., Nov. 5, 1990. The refunds involved herein were not reported prior to that date.↩9. Similarly, we do not deal with the question of interest on the refunds due petitioner Lois W. Poinier where the same disagreement exists.↩10. This amount will be sufficient to cover not only the remaining liability of petitioner W. Page Wodell for the gift tax deficiency as donee-transferee but also any late payment liability, see supra↩ p. 4 and note 4.11. The order issued pursuant to this opinion will provide for the furnishing to the Court of a substitute letter of credit in the reduced amount.↩12. We note that the rate of interest on the gift tax deficiency herein ranged from 6 percent per annum for periods prior to July 1, 1975, to 20 percent per annum for the period Feb. 1, 1982, to Dec. 31, 1982, and from 9 percent to 16 percent per annum after Dec. 31, 1982, and is presently 11 percent. Since 1982, interest is compounded daily. Sec. 6622.↩13. The authorization to respondent to apply the refund to petitioner W. Page Wodell in payment of his liability arising out of this proceeding which has been filed with the Court will be held by the Court as additional collateral security in accordance with the views expressed in our prior opinion. Poinier v. Commissioner, 90 T.C. 63">90 T.C. 63, 65↩ n.5 (1988).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653901/	NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Electronically Filed Intermediate Court of Appeals CAAP-XX-XXXXXXX 22-JAN-2021 09:31 AM Dkt. 403 MO NOS. CAAP-XX-XXXXXXX and CAAP-XX-XXXXXXX IN THE INTERMEDIATE COURT OF APPEALS OF THE STATE OF HAWAI#I CAAP-XX-XXXXXXX RONALD GIT SUM AU, Plaintiff-Appellant, v. THE ASSOCIATION OF APARTMENT OWNERS OF THE ROYAL IOLANI; HAWAIIANA MANAGEMENT COMPANY, LTD.; R. LAREE McGUIRE, Defendants-Appellees, and JOHN DOE DEFENDANTS 1-10; DOE CORPORATIONS OR ENTITIES 1–10, Defendants APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CIVIL NO. 15-1-2152) AND CAAP-XX-XXXXXXX RONALD GIT SUM AU, Plaintiff-Appellant, v. THE ASSOCIATION OF APARTMENT OWNERS OF THE ROYAL IOLANI; HAWAIIANA MANAGEMENT COMPANY, LTD.; R. LAREE McGUIRE, Defendants-Appellees, and JOHN DOE DEFENDANTS 1-10; DOE CORPORATIONS OR ENTITIES 1–10, Defendants APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CIVIL NO. 15-1-2152) MEMORANDUM OPINION (By: Ginoza, Chief Judge, Leonard and Wadsworth, JJ.) Plaintiff-Appellant Ronald Git Sum Au (Au), self-represented, appeals from the May 23, 2016 Judgment, entered NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER by the Circuit Court of the First Circuit (Circuit Court),1 in favor of Defendants-Appellees R. Laree McGuire (McGuire), Association of Apartment Owners of Royal Iolani (AOAO Royal Iolani), and Hawaiiana Management Company, Ltd. (Hawaiiana). Au also challenges the Circuit Court's: (1) February 16, 2016 Order Granting [McGuire's] Motion to Dismiss Filed December 7, 2015, and Joinder by [AOAO Royal Iolani] and [Hawaiiana] in Motion to Dismiss Filed December 7, 2015, Filed January 6, 2016, and Denying [Au's] Motion for Partial Summary Judgment Against [AOAO Royal Iolani], [Hawaiiana], and [McGuire] Filed December 23, 2015 (Order Granting MTD & Denying MPSJ); (2) May 19, 2016 Order Denying [Au's] Motion to Stay or Cancel the Public Auction on March 24, 2016 Pending Appeal to the Intermediate Court of Appeals Filed on February 24, 2016 (Order Denying Motion to Stay); (3) May 19, 2016 Order Denying [Au's] Motion for Reconsideration of Order Granting [McGuire's] Motion to Dismiss Filed December 7, 2015, and Joinder by [AOAO Royal Iolani] and [Hawaiiana] (Order Denying Reconsideration of Order Granting MTD & Denying MPSJ); (4) September 23, 2016 Order Denying [Au's] [Hawaii Rules of Civil Procedure (HRCP)] Rule 60(b)(1)(2)(3)(4) Motion to Vacate and Set Aside the February 16, 2016, Order Granting [McGuire's] Motion to Dismiss Filed December 7, 2015, and Joinder by [AOAO Royal Iolani] and [Hawaiiana] in Motion to Dismiss Filed December 7, 2015, Filed January 6, 2016, and the Judgment Filed on May 23, 2016 (Order Denying Motion to Vacate); and (5) September 23, 2016 Order Denying [Au's] July 27, 2016 1 The Honorable Rhonda A. Nishimura presided. 2 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Filed Motion for Reconsideration of the Order Denying [Au's] HRCP Rule 60(b)(1)(2)(3)(4) Motion to Vacate and Set Aside the February 16, 2016, Order Granting [McGuire's] Motion to Dismiss Filed December 7, 2015, and Joinder by [AOAO Royal Iolani] and [Hawaiiana] in Motion to Dismiss Filed December 7, 2015, Filed January 6, 2016, and the Judgment Filed on May 23, 2016 (Order Denying Reconsideration of Order Denying Motion to Vacate). I. BACKGROUND Au was the owner of Unit 3906 at the Royal Iolani condominium (Unit 3906).2 In 2013, Au reportedly fell behind on payments of maintenance fees. On October 1, 2013, AOAO Royal Iolani filed a notice of lien against Au's unit. On January 21, 2014, AOAO Royal Iolani filed, in Land Court, a Notice of Default and Intention to Foreclose (2014 NDIF), which stated, inter alia, that the AOAO intended to conduct a non-judicial foreclosure if the default was not cured. On August 12, 2014, McGuire,3 as counsel for AOAO Royal Iolani, sent Au a letter responding to Au's request for a payment plan, and detailing the terms and conditions of a plan to bring Au's account current and release the lien and the 2014 NDIF. The letter provided, inter alia, that as of August 12, 2014, the amount of Au's delinquency was as follows: 2 Au was also the owner of Unit 3908. 3 McGuire was retained as counsel for AOAO Royal Iolani for legal matters pertaining to collection of fees owed to AOAO Royal Iolani by Au. 3 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Maintenance Fees $ 9,977.87 Return Check Fee $ 60.00 Late Fees $ 125.00 Prior Attorney Fees $12,203.25 Attorney Fees $ 2,484.29 ----------- Total due as of August 12, 2014 $24,850.41[4] The terms of the AOAO's payment plan provided: "Late fees will continue to be assessed so long as a balance remains outstanding." The proposed plan also provided: If a payment is missed and/or any of the terms of the agreement are not fully complied with, this Agreement will be immediately rendered null and void and the Association will be immediately entitled to pursue all remedies to secure payment of the debt, including proceeding with legal action against your unit. Au apparently entered into the payment plan agreement on August 12, 2014 (August 2014 Payment Plan), but asserts that he did so under coercion, duress, and threat of a non-judicial foreclosure. On August 22, 2014, AOAO Royal Iolani recorded a release of the 2014 NDIF. McGuire and AOAO Royal Iolani argue that Au eventually defaulted on the August 2014 Payment Plan. On July 13, 2015, AOAO Royal Iolani filed, in Land Court, a second Notice of Default and Intention to Foreclose (2015 NDIF), which again stated, inter alia, that the AOAO intended to conduct a non-judicial foreclosure if the default was not cured. AOAO Royal Iolani declined Au's subsequent request to enter into a new payment plan agreement. On November 9, 2015, Au filed a Complaint for Declaratory and Injunctive Relief; Restraining Order; Specific Performance (Complaint) asserting claims for equitable relief and 4 The letter noted that this total did not include the fees and costs associated with releasing the lien and the 2014 NDIF. Inclusive of those costs and fees, the total cost to bring Au's account current and to release the lien and the 2014 NDIF was approximately $26,134.18. 4 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER damages against AOAO Royal Iolani, Hawaiiana, and McGuire: (1) declaratory relief that, inter alia, the 2015 NDIF is void and unenforceable (Count I); (2) specific performance of Au's August 7, 2015 proposed payment plan (Count II); (3) injunctive relief against judicial or non-judicial foreclosure on Unit 3906 (Count III); (4) fraud and concealment, primarily with respect to the Defendants' assertions or omissions as to the allocation of Au's payments to the AOAO, and the assessments against him for allegedly excessive attorneys' fees paid to McGuire, which Au contends resulted in his account being deemed delinquent (Count IV); (5) negligence (Count V); (6) slander of title (Count VI); (7) due process, equal protection, and unconstitutional taking of Au's property (Count VII); and (8) unfair and deceptive practices under Hawaii Revised Statutes (HRS) Chapter 480 (Count VIII). On December 7, 2015, McGuire filed a motion to dismiss Au's Complaint (MTD) for failure to state a claim against McGuire, pursuant to HRCP Rule 12(b)(6). McGuire argued that Count I should be dismissed as to her because, inter alia, she is not a party to the payment plan or the NDIF, and therefore should be dismissed from any claim regarding their enforcement. McGuire similarly argued, inter alia, that Count II seeks no relief against her. With respect to Count III, McGuire argued that AOAO Royal Iolani was entitled to foreclose against Unit 3906 and noted that she is the AOAO's attorney, and not the party foreclosing on the unit. With respect to Count IV, McGuire argued that the AOAO's allocation of payments is irrelevant and that Au was in default regardless of how his payments were 5 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER allocated because he never reimbursed the AOAO for McGuire's attorneys' fees. McGuire argued that, as the AOAO's attorney, she owed no legal duty to Au, and therefore, the negligence claim in Count V should be dismissed as against her.5 With respect to Count VI, McGuire argued that, as the attorney for AOAO Royal Iolani, she had an absolute litigation privilege in filing the second NDIF. Similarly, with respect to Count VII, McGuire argued that Au's constitutional challenge to the statutes pertaining to the power of sale foreclosure process does not state a claim for relief against her. Regarding Count VIII, McGuire argued that with respect to her, Au's HRS Chapter 480 claim should be dismissed because Au did not purchase any goods, services or make any investments with her; McGuire also contended that she was not a debt collector within the meaning of HRS Chapter 480D because Au's debt is owing to the AOAO, not her. AOAO Royal Iolani and Hawaiiana filed a joinder to the MTD. Without discussion or supporting authority, the joinder submitted that the MTD should be granted in favor of McGuire and should also be granted in favor of the joining parties. On December 23, 2015, Au filed a motion for partial summary judgment (MPSJ), contending that the undisputed evidence entitled him to relief. Au attached a declaration and several exhibits as evidence to support his assertions that: McGuire overcharged and double-billed attorneys' fees; AOAO Royal Iolani 5 With respect to Count V, McGuire noted that "Au has already lost this issue" in a related lawsuit filed by Au and pending in the United States District Court for the District of Hawaii ( U.S. District Court), Civ No. 1:14-cv-00271-SOM-BMK (Federal Case). McGuire attached as an exhibit a December 9, 2014 Order Granting Defendant R. Laree McGuire's Motion for Summary Judgment (Federal Order Granting McGuire SJ) from the Federal Case. 6 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER and Hawaiiana negligently paid McGuire's unreasonable attorneys' fees without questioning them; and, Au's payments were applied to attorneys' fees before being applied to maintenance fees, improperly giving retroactive effect to a priority of payment policy adopted by AOAO Royal Iolani on June 8, 2015. The exhibits included, inter alia: the August 12, 2014 letter from McGuire, on behalf of AOAO Royal Iolani, to Au offering the payment plan agreement; a portion of the transcript of the deposition of Ralph N. Ahles (Ahles), an Account Executive at Hawaiiana, from the Federal Case (Federal Ahles Deposition), in which Ahles testified that payments were first applied to outstanding legal fees before being applied to other outstanding charges, fines, and maintenance fees; letters from McGuire to Au, dated December 13, 2013, and December 18, 2013, that provided Au's maintenance payment history since April 2011 and itemizations of "prior attorneys' fees" and "attorney's fees" assessed to Au, and referenced a Priority of Payments Policy in which payments received were applied to other fees, including legal fees, before being applied to outstanding maintenance fees; a document titled "Resolution to Adopt a Revised Priority of Payment Policy" executed by AOAO Royal Iolani on June 8, 2015; and invoices from McGuire's law firm, addressed to AOAO Royal Iolani, for legal services and costs incurred in connection with Au's Units 3906 and 3908. On January 6, 2016, Au filed a memorandum in opposition to the MTD, requesting that the Circuit Court consider his MPSJ in determining whether the Complaint was sufficiently pleaded 7 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER under HRCP Rule 8(a)(2) or, alternatively, allow him leave to amend the Complaint if the court was inclined to grant the MTD. Au asked the court to incorporate by reference his MPSJ, and the exhibits attached thereto, and argued that the material facts stated in the Complaint were established by those submissions. With respect to his claims against McGuire, Au argued – with little distinction between his various claims – that his claims against her arose out of McGuire's overcharging, double-billing, and receipt of attorneys' fees at the expense of his payments going first to his monthly maintenance account. He argued, inter alia, that McGuire had various duties to the AOAO Board, and was designated to deal with him, as an AOAO member, and that the policy authorizing payment of legal fees ahead of other charges was adopted effective May 1, 2015, contrary to McGuire's representation that it had been in effect since 2009. With respect to AOAO Royal Iolani and Hawaiiana, Au argued that they provided no factual or legal arguments that would entitle them to relief through joinder to McGuire's motion. Finally, Au requested that, if the court found the Complaint to be in any way infirm, he be granted leave to amend it. On January 7, 2016, McGuire filed a memorandum in opposition to Au's MPSJ, arguing, inter alia, that Au's motion should be denied for the same reasons hers should be granted. McGuire argued that Au's factual assertions regarding the application of his payments were incorrect, submitting a declaration of counsel and pointing to Au's exhibits. McGuire attached as an exhibit a portion of her deposition from the 8 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Federal Case (Federal McGuire Deposition) [JROA doc 7 at 230-44], wherein McGuire stated that any payment received by AOAO Royal Iolani from Au during the time in question was first applied to any fines owed, then to late fees, then to maintenance fees, and then to attorneys' fees, pursuant to AOAO Royal Iolani's bylaws and the 2003 house rules, which were in effect at the time. On the same day, AOAO Royal Iolani and Hawaiiana also filed a memorandum in opposition to Au's MPSJ. AOAO Royal Iolani and Hawaiiana argued that many of Au's assertions were erroneous and unsupported by the evidence. AOAO Royal Iolani and Hawaiiana also maintained that Au's Complaint was "a rehashing of the Complaint that he previously filed" in the Federal Case, which was pending a settlement, which involved the parties' arbitrating the amounts due, and "awaiting" dismissal. AOAO Royal Iolani and Hawaiiana attached two declarations and various exhibits to their memorandum, including: a declaration of Ahles, stating that payments made by owners prior to May 2015 were allocated first to fines, then to late fees, then to maintenance fees, then to attorneys' fees, and that any prior testimony he gave stating otherwise was a mistake on his part; a January 4, 2016 "Findings and Recommendation to Dismiss Case Pursuant to the Parties' Settlement Agreement" (Federal F&R to Dismiss), issued by a magistrate in the Federal Case; a portion of the transcript of the Federal McGuire Deposition; the April 25, 2014 Complaint filed by Au in the Federal Case (Federal Complaint); and the "Resolution to Adopt a Revised Priority of Payment Policy" executed by AOAO Royal Iolani on June 8, 2015. 9 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER On January 11, 2016, Au filed a reply in support of the MPSJ, to which he attached as exhibits the following documents from the Federal Case: a portion of the transcript of the Federal Ahles Deposition reflecting that counsel for both parties encouraged Ahles to subsequently review his deposition testimony for any mistakes; a portion of the Federal McGuire Deposition reflecting her testimony that the statement in a letter she sent to Au that provided that "any payments, including maintenance fee payments received by the association, will be applied first to legal fees and late fees, and the remainder would then be applied to maintenance fees due and owing," was an error; a motion to compel arbitration filed by Au on September 23, 2015; and a portion of the document list from the proceedings. On January 12, 2016, McGuire filed a reply in support of the MTD, reasserting her arguments in the MTD and contending that leave to amend the Complaint would be futile. On the same day, AOAO Royal Iolani and Hawaiiana also filed a reply in support of their joinder to the MTD, adding substantive arguments to what had been a bare assertion that they were entitled to the same relief as McGuire. In support of an argument that they did not apply Au's payments in the order he asserts, and that Au himself had evidence showing such, AOAO Royal Iolani and Hawaiiana submitted an Owner History Report for Unit 3906, for the time period between September 2009 and April 2015, accompanied by a declaration of Roy Mendaro (Mendaro), the senior accountant for Hawaiiana, attesting to the manner in which Au's payments were applied and attesting that the attached Owner 10 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER History Report was generated based on payment information maintained by Hawaiiana in the ordinary course of business. AOAO Royal Iolani and Hawaiiana also submitted a declaration of Phillip A. Li, counsel for AOAO Royal Iolani and Hawaiiana, filed in the Federal Case on April 3, 2015, along with corresponding exhibits. They also submitted an Owner History Report for Unit 3906 for the time period between September 2009 and May 2014, submitted by Au himself in a filing in the Federal Case on August 4, 2014. On January 15, 2016, Au filed a supplemental memorandum in support of the MPSJ and in opposition to the MTD, setting forth his purported accounting of the payments made on his account for Unit 3906 through May 2015. Au asserted that he had paid a total of $22,443.52, while the payment plan required total payment of $24,850.41, but that the amount he paid satisfied the payment plan because the balance between the amount he paid and the total amount required under the payment plan should be disallowed as based on improper prior attorneys' fees. On the same day, the Circuit Court held a hearing on the MTD and the MPSJ. The Circuit Court treated the MTD as a motion for summary judgment and granted the motion in favor of McGuire, AOAO Royal Iolani, and Hawaiiana. The Circuit Court denied Au's MPSJ. On February 10, 2016, Au filed a motion for reconsideration of the Order Granting MTD & Denying MPSJ (Motion 11 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER for Reconsideration of Order Granting MTD & Denying MPSJ),6 citing HRCP Rule 59(e). McGuire, AOAO Royal Iolani, and Hawaiiana opposed the motion. On February 16, 2016, the Circuit Court entered its Order Granting MTD & Denying MPSJ, holding as follows: 1. At the request of Plaintiff, Defendant McGuire's Motion to Dismiss was treated as a Motion for Summary Judgment and the Court heard oral argument on both the Motion to Dismiss and the Motion for Partial Summary Judgment and had before it the motions and documents submitted by Plaintiff and the Defendants. 2. Plaintiff's Motion for Partial Summary Judgment is denied in its entirety as to all Defendants as this Court finds that Plaintiff has failed to meet the standard for granting summary judgment under Rule 56 of the Hawaii Rules of Civil Procedure. 3. Defendant McGuire's Motion to Dismiss and Joinder by Defendants [AOAO Royal Iolani] and [Hawaiiana] is treated as a Motion for Summary Judgment at the request of Plaintiff and the Court finds that Defendants have established that there exists no genuine issue of material fact upon which Plaintiff's Complaint can be sustained and accordingly the Court grants summary judgment in favor of Defendants McGuire, [AOAO Royal Iolani] and [Hawaiiana] as to all claims set forth in the Complaint. On February 24, 2016, Au filed a motion to stay or cancel the public auction pending appeal (Motion to Stay). McGuire, AOAO Royal Iolani, and Hawaiiana opposed the Motion to Stay. On May 19, 2016, the Circuit Court entered its Order Denying Motion to Stay and its Order Denying Reconsideration of Order Granting MTD & Denying MPSJ. On May 23, 2016, the Circuit Court entered Judgment in favor of McGuire, AOAO Royal Iolani, and Hawaiiana. On June 14, 2016, Au filed a motion to vacate and set aside the Order Granting MTD & Denying MPSJ and the Judgment 6 The Circuit Court had not yet entered its written Order Granting MTD & Denying MPSJ at the time Au filed his Motion for Reconsideration of Order Granting MTD & Denying MPSJ. 12 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER (Motion to Vacate) pursuant to HRCP Rule 60(b). Au asserted that he discovered that Ocwen Loan Servicing, LLC (Ocwen), the loan servicer for Au's mortgagee, Wells Fargo Bank N.A. (Wells Fargo), in connection with both Units 3906 and 3908, had made a payment on March 18, 2014, to AOAO Royal Iolani in the amount of $11,888.60 (Ocwen Payment) in order to prevent foreclosure on Unit 3906. However, AOAO Royal Iolani applied the payment to Au's outstanding balance on Unit 3908. Au argued that AOAO Royal Iolani, Hawaiiana, and McGuire knew or should have known that the check was meant to be applied to Unit 3906. Au further asserted that the delinquency that was the subject of the 2014 NDIF was fully satisfied by both Au's payments and the Ocwen Payment. Au attached a copy of the cancelled check as an exhibit to the Motion to Vacate. The check reflects the amount of $11,888.60 payable to AOAO Royal Iolani but does not contain any notation as to what unit the payment should be applied. Au asserted that he had not previously known about the Ocwen Payment and that the check was therefore newly discovered evidence warranting relief from the judgment entered against him pursuant to HRCP Rule 60(b). Au also argued that McGuire, AOAO Royal Iolani, and Hawaiiana fraudulently concealed the Ocwen Payment and induced him into entering the payment plan agreement. McGuire, AOAO Royal Iolani, and Hawaiiana opposed the Motion to Vacate. On June 15, 2016, Au filed a notice of appeal from the Judgment and its underlying orders in CAAP-XX-XXXXXXX. 13 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER On July 6, 2016, the Circuit Court held a hearing on the Motion to Vacate. The Circuit Court orally denied the Motion to Vacate. On July 27, 2016, Au filed a motion for reconsideration of the Order Denying Motion to Vacate (Motion for Reconsideration of Order Denying Motion to Vacate),7 purportedly pursuant to HRCP Rule 59(e). In his motion, Au argued that the Circuit Court "inadvertently overlook[ed] or disregard[ed] the fraud, misrepresentation or other misconduct of the Defendants" and essentially reasserted the same arguments made in his Motion to Vacate. AOAO Royal Iolani and Hawaiiana filed an opposition to the motion, to which McGuire filed a joinder. On September 23, 2016, the Circuit Court entered the Order Denying Motion to Vacate and the Order Denying Reconsideration of Order Denying Motion to Vacate. On October 5, 2016, Au filed a notice of appeal in CAAP-XX-XXXXXXX from the Order Denying Motion to Vacate and the Order Denying Reconsideration of Order Denying Motion to Vacate. On November 3, 2016, CAAP-XX-XXXXXXX and CAAP-XX-XXXXXXX were consolidated under CAAP-XX-XXXXXXX by order of this court.8 II. POINTS OF ERROR Au raises five points of error on appeal, contending that the Circuit Court erred in: (1) converting McGuire's MTD to 7 The Circuit Court had not yet entered its written Order Denying Motion to Vacate at the time Au filed his Motion for Reconsideration of Order Denying Motion to Vacate. 8 On August 27, 2019, McGuire filed herein a Motion for Leave to File a Supplemental Brief Addressing Land Court Order. On August 31, 2019, Au filed a Motion to Dismiss. On February 25, 2020, Au filed a Motion to Withdraw Appeal and to Remand to the First Circuit Court on Liability and Damages Pursuant to the Order of the Land Court of the First Circuit State of Hawaii on April 5, 2019. 14 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER a MSJ and dismissing the Complaint; (2) denying Au's motion to stay the non-judicial foreclosure sale of March 24, 2016; (3) entering the Order Denying Motion to Vacate; (4) granting McGuire's MTD as a motion for summary judgment, along with AOAO Royal Iolani's joinder thereto; and (5) denying relief from its prior orders after the discovery of the Ocwen Payment. III. APPLICABLE STANDARD OF REVIEW The appellate court reviews "the circuit court's grant or denial of summary judgment de novo." Querubin v. Thronas, 107 Hawai#i 48, 56, 109 P.3d 689, 697 (2005) (citations omitted). The Hawai#i Supreme Court has often articulated that summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. A fact is material if proof of that fact would have the effect of establishing or refuting one of the essential elements of a cause of action or defense asserted by the parties. The evidence must be viewed in the light most favorable to the non-moving party. In other words, we must view all of the evidence and the inferences drawn therefrom in the light most favorable to the party opposing the motion. Id. IV. DISCUSSION A. Point of Error with No Discernible Argument As a preliminary matter, we note that Au failed to provide any discernible argument in support of his point of error regarding the Order Denying Motion to Stay. We therefore decline to address any alleged error regarding this order. Kakinami v. Kakinami, 127 Hawai#i 126, 144 n.16, 276 P.3d 695, 713 n.16 (2012) (citing In re Guardianship of Carlsmith, 113 Hawai#i 236, 246, 151 P.3d 717, 727 (2007) (noting that this court may 15 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER "disregard a particular contention if the appellant makes no discernible argument in support of that position")). B. McGuire's MTD Au challenges the Circuit Court's decision to treat McGuire's MTD as a motion for summary judgment. Generally, an HRCP Rule "12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted shall be treated as a Rule 56, HRCP, motion for summary judgment when 'matters outside the pleading' are presented to and not excluded by the court in making its decision on the motion." Rosa v. CWJ Contractors, Ltd., 4 Haw. App. 210, 214, 664 P.2d 745, 749 (1983). McGuire's MTD sought dismissal for failure to state a claim pursuant to HRCP Rule 12(b)(6). Au then filed an MPSJ pursuant to HRCP Rule 56, attaching as exhibits letters, invoices, and other documents that were not in the pleadings. In his memorandum in opposition to the MTD, Au referenced arguments and exhibits contained in his MPSJ, and incorporated them by reference. McGuire, AOAO Royal Iolani, and Hawaiiana then requested that the MTD be treated as a motion for summary judgment because Au, by referencing the documents attached to his MPSJ, had incorporated material outside the pleadings in his opposition. At the hearing on the MTD, it appears the Circuit Court considered the evidence submitted for both the MTD and the MPSJ together in addressing both motions. The Circuit Court did not expressly state that it was excluding matters outside the 16 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER pleadings in making its decision on the MTD. See HRCP Rule 12(b). Au did not object to the court's consideration of matters outside the pleadings or to the consideration of the MTD as a motion for summary judgment. Under such circumstances, the Circuit Court did not err in treating the MTD as a summary judgment motion. Nevertheless, in the MTD, McGuire primarily argued that the claims against her should be dismissed because she was not a party to the dispute, but rather acting as the attorney for one of the parties, which is a fact not in dispute. The appellate court reviews a trial court's grant or denial of summary judgment de novo. Anastasi v. Fid. Nat'l Title Ins. Co., 137 Hawai#i 104, 112, 366 P.3d 160, 168 (2016). Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. A fact is material if proof of that fact would have the effect of establishing or refuting one of the essential elements of a cause of action or defense asserted by the parties. The evidence must be viewed in the light most favorable to the non-moving party. In other words, we must view all of the evidence and inferences drawn therefrom in the light most favorable to the party opposing the motion. Ralston v. Yim, 129 Hawai#i 46, 55-56, 292 P.3d 1276, 1285-86 (2013) (brackets omitted) (quoting First Ins. Co. of Hawai#i v. A & B Props., Inc., 126 Hawai#i 406, 413-14, 271 P.3d 1165, 1172-73 (2012)). On a motion for summary judgment where the non-movant bears the burden of proof at trial, the movant has the initial burden of either (1) presenting evidence negating an element of the non-movant's claim, or (2) demonstrating that the non-movant will be unable to carry its burden of proof at trial. Id. at 60, 292 P.3d at 1290. Only upon the movant's satisfaction of its initial burden of production does the burden shift to the 17 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER non-movant to respond to the motion for summary judgment and demonstrate specific facts that present a genuine issue for trial. French v. Hawaii Pizza Hut, Inc., 105 Hawai#i 462, 470, 99 P.3d 1046, 1054 (2004). The issue before us, more specifically, is a defendant's HRCP Rule 12(b)(6) motion to dismiss that has been converted into a motion for summary judgment because the plaintiff's memorandum in response incorporated by reference his own motion for partial summary judgment and exhibits attached thereto, which were outside the pleadings and not excluded by the trial court. This court recently held that when a defendant files an HRCP Rule 12(b)(6) motion to dismiss, and the plaintiff converts the motion into one for summary judgment by introducing matters outside the pleadings that are not excluded by the trial court, the moving defendant could argue that (a) the plaintiff's evidence is inadmissible, (b) even if the plaintiff's evidence were admissible, the facts established are not material and the defendant is still entitled to judgment as a matter of law, and/or (c) even if the plaintiff's evidence were admissible and material, the facts are controverted (by a declaration or other evidence submitted with the defendant's reply memorandum). Pursuing option (c) would, of course, result in a denial of the defendant's own motion on the grounds that there were genuine issues of material fact. Andrade v. Cty. of Hawai#i, 145 Hawai#i 265, 270, 451 P.3d 1, 6 (App. 2019). Here, we address in turn each count of the Complaint, as alleged against McGuire, and the Circuit Court's conclusion in the Order Granting MTD and Denying MPSJ that there is no genuine issue of material fact, and McGuire is entitled to judgment as a matter of law on all counts. 18 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER 1. Count I (Declaratory Relief) In Count I, Au seeks declaratory and/or other relief with respect to the August 2014 Payment Plan and the 2015 NDIF, which Au submits is void and unenforceable. However, it is undisputed that McGuire was acting as the AOAO's attorney in transmitting the payment plan for AOAO Royal Iolani and is not a party to that agreement. Likewise, the 2015 NDIF was signed by McGuire on behalf of her law firm, as attorney-in-fact for AOAO Royal Iolani, and it gave notice with respect to obligations owed to the AOAO, not McGuire. We conclude that no relief can be granted against McGuire on Count I and the Circuit Court did not err in granting summary judgment on this claim. 2. Count II (Specific Performance) In Count II, Au seeks specific performance of the payment plan he purportedly submitted to McGuire and AOAO Royal Iolani on or about August 7, 2015, after he received the 2015 NDIF, and "dismissal" of or other relief with respect to the 2015 NDIF. As noted with respect to Count I, the 2015 NDIF was signed by McGuire acting for AOAO Royal Iolani, and gave notice with respect to obligations owed to the AOAO, not McGuire. Likewise, Au's plan proposed payment to the AOAO, not McGuire. We conclude that no relief can be granted against McGuire on Count II, and the Circuit Court did not err in granting summary judgment on this claim. 3. Count III (Injunctive Relief) In Count III, Au seeks an injunction or restraining order to enjoin any foreclosure, judicial or non-judicial, 19 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER pending the court's determination on the Complaint. We again conclude that no relief can be granted against McGuire on Count III, as any such action by McGuire would be on behalf of AOAO Iolani Royal, and the Circuit Court did not err in granting summary judgment on this claim. 4. Count IV (Fraud and Concealment) In Count IV, as to McGuire, Au alleges fraud and concealment principally based on the following: (1) McGuire received attorneys' fees in excess of the limitation on the recovery of attorney's fees imposed by HRS § 607-14 (2016); (2) McGuire improperly received payment for "prior" attorneys' fees; (3) McGuire applied Au's payments to outstanding attorneys' fees before his other outstanding fees, in the absence of a policy that authorized such priority of payment; (4) McGuire sent Au correspondence indicating that Au's payments were being applied pursuant to a Priority of Payment Policy that had not in fact been adopted by AOAO Royal Iolani; (5) in responding to Au's proposed payment plan, McGuire intentionally sent mail to an address at which Au does not receive mail; (6) McGuire declined Au's reasonable proposed payment plan; and (7) McGuire filed the 2015 NDIF even though the amounts claimed to be due under the 2015 NDIF were invalid. In the MTD, McGuire argued that it was irrelevant how AOAO Royal Iolani allocated Au's payments within his delinquent account because he never reimbursed the AOAO for McGuire's fees. It has been recognized that an attorney can be held liable to an adverse party for fraud. See, e.g., Buscher v. 20 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Boning, 114 Hawai#i 202, 220 n.13, 159 P.3d 814, 832 n.13 (2007) (citing Kahala Royal Corp. v. Goodsill Anderson Quinn & Stifel, 113 Hawai#i 251, 268-69, 151 P.3d 732, 749-50 (2012); Matsuura v. E.I. duPont de Nemours & Co., 102 Hawai#i 149, 162, 73 P.3d 687, 700 (2003); and Giuliani v. Chuck, 1 Haw. App. 379, 383-84, 620 P.2d 733, 736-37 (1980)). "A claim for fraud involves 'a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.'" Seki ex rel. Louie v. Haw. Gov't Emps. Ass'n, AFSCME Local No. 152, 133 Hawai#i 385, 407 n.33, 328 P.3d 394, 416 n.33 (2014) (quoting Fisher v. Grove Farm Co., 123 Hawai#i 82, 116, 230 P.3d 382, 416 (2009)). The elements of fraud are: "(1) false representations were made by defendants, (2) with knowledge of their falsity (or without knowledge of their truth or falsity), (3) in contemplation of plaintiff's reliance upon these false representations, and (4) plaintiff did rely upon them." Shoppe v. Gucci America, Inc., 94 Hawai#i 368, 386, 14 P.3d 1049, 1067 (2000) (quoting TSA Int'l Ltd. v. Shimizu Corp., 92 Hawai#i 243, 251, 990 P.2d 713, 725 (1999)). "To be actionable, the alleged false representation must relate to a past or existing material fact. . . . Where misrepresentations are made to form the basis of relief, they must be shown to have been made with respect to a material fact which was actually false[.]" Id. (quoting TSA Intern. Ltd., 92 Hawai#i at 255-56, 990 P.2d at 725-26) (emphasis deleted). We recognize that McGuire's attorneys' fees charged to AOAO Royal Iolani were allegedly incurred in relation to Au's 21 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER alleged default and the non-judicial foreclosure of Unit 3906. AOAO Royal Iolani is entitled to recover from Au the reasonable attorneys' fees it paid to McGuire, pursuant to HRS § 514B-157(a) (2018).9 McGuire's billing and collection of reasonable attorneys' fees from AOAO Royal Iolani cannot be a basis for Au to raise a fraud claim against McGuire. Moreover, to the extent that Au asserts on appeal that McGuire received an improper amount of attorney's fees, in the Complaint, he does not assert any misrepresentation or concealment of a material fact by McGuire in this regard in support of his fraud claim against her. Au's allegations that McGuire knowingly made false statements in her communications with Au, upon which he relied on to his detriment, however, are permissible bases for a fraud claim. Specifically, Au asserted that McGuire falsely stated that Au's payments were applied in accordance with a priority of payment policy which had not yet been adopted by AOAO Royal Iolani. Au also asserted that McGuire falsely stated that Au had not fully paid the amount due under the payment plan agreement. McGuire has not attempted to rebut Au's assertions, but rather focuses her response on arguing that Au's alleged default trumps 9 HRS § 514B-157(a) provides, in relevant part: (a) All costs and expenses, including reasonable attorneys' fees, incurred by or on behalf of the association for: (1) Collecting any delinquent assessments against any owner's unit; (2) Foreclosing any lien thereon; or (3) Enforcing any provision of the declaration, bylaws, house rules, and this chapter, or the rules of the real estate commission; against an owner, occupant, tenant, employee of an owner, or any other person who may in any manner use the property, shall be promptly paid on demand to the association by such person or persons[.] 22 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER any misrepresentation claim he may bring. We conclude that genuine issues of material fact remain and the Circuit Court erred in granting summary judgment in favor of McGuire on Au's fraud and concealment claim in Count IV. 5. Count V (Negligence) With respect to McGuire, in Count V, Au alleges that, as the attorney for AOAO Royal Iolani, McGuire "has a fiduciary responsibility in the performance of legal duties and responsibilities." Au further alleges that McGuire knew that Hawaiiana had been paying her attorneys' fees on Au's common maintenance account for "several years" prior to adoption of a Priority of Payment Policy allowing those fees to be paid in advance of common maintenance, which resulted in Au's common maintenance payments becoming delinquent. Au alleges that this conduct constitutes negligence and that, as a result, he sustained damages in the form of, inter alia, late charges and interest. As noted above, McGuire primarily argued in the MTD that, as AOAO Royal Iolani's attorney, she owed no duty to Au with respect to the application of payments, and therefore, Au's negligence claim against her fails as a matter of law. The supreme court has held that, generally, "absent special circumstances, attorneys owe no duty of care to non-clients." Hungate v. Law Office of David B. Rosen, 139 Hawai#i 394, 405, 391 P.3d 1, 12 (2017) (citing Buscher, 114 Hawai#i at 220, 159 P.3d at 832). To impose a duty upon an attorney in favor of an adversary of the attorney's client would 23 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER pose an "unacceptable conflict of interest." Id. (quoting Buscher, 114 Hawai#i at 220, 159 P.3d at 832). However, an attorney may be held liable to a non-client for wrongful conduct that exceeds the scope of legitimate representation. Special cases in which the supreme court has recognized an actionable duty owed by an attorney to a non-client include those involving fraudulent conduct, Buscher, 114 Hawai#i at 220 n.13, 159 P.3d at 832 n.13 (citing Kahala Royal Corp., 113 Hawai#i at 268-69, 151 P.3d at 749-50; Matsuura, 102 Hawai#i at 162, 73 P.3d at 700; and Giuliani, 1 Haw. App. at 383-84, 620 P.2d at 736-37), or those involving non-client beneficiaries in the estate planning context, Blair v. Ing, 95 Hawai#i 247, 260-63, 21 P.3d 452, 465-68 (2001). Here, as discussed above, we conclude that certain aspects of Au's fraud claim survive summary judgment. However, Au has not identified any other special circumstances, or any other legal authority, imposing a duty upon McGuire based upon the facts alleged in the Complaint, and we find none. Accordingly, we conclude that the Circuit Court did not err in granting summary judgment in favor of McGuire on the negligence claim in Count V. 6. Count VI (Slander of Title) In Count VI, Au alleges that the recordation of the 2015 NDIF in the Bureau of Conveyances constitutes a slander of his title as owner of Unit 3906. McGuire argued in the MTD that she filed the 2015 NDIF as the attorney for AOAO Royal Iolani, that pursuant to this court's decision in Isobe v. Sakatani, 127 24 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Hawai#i 368, 383, 279 P.3d 33, 48 (App. 2012), she has an absolute privilege, and therefore, Au's slander of title claim should be dismissed as against her. McGuire made no other argument in the MTD with respect to Count VI and makes no other argument and cites no other authority on appeal. "To avail himself [or herself] of the absolute privilege, an attorney has the burden of proving the following essential elements: (1) that the defamatory statements were made in the course of a judicial proceeding, and (2) that the statements were related, material, and pertinent to that proceeding." McCarthy v. Yempuku, 5 Haw. App. 45, 48-49, 678 P.2d 11, 14 (1984) (emphasis added). In Isobe, 127 Hawai#i at 383, 279 P.3d at 48, we held that an attorney's filing of Notices of Pendency of Action (NOPAs) in conjunction with a judicial foreclosure action satisfied the McCarthy requirements and that the absolute litigation privilege therefore applied to bar a slander of title claim against the attorney. Here, Au alleged that McGuire committed slander of title by filing the 2015 NDIF in conjuction with the non-judicial foreclosure proceedings against Au. Non-judicial foreclosures, by their very nature, are not judicial proceedings. Our decision in Isobe recognized an absolute litigation privilege only with respect to the filing of a NOPA related to judicial foreclosure proceedings. As McGuire cited no other authority and made no other argument supporting the dismissal of Count VI as a matter of law, we conclude that 25 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER the Circuit Court erred in granting summary judgment on this claim.10 7. Count VII (Constitutional Claims) In Count VII, Au challenges the constitutionality of the statutes requiring an apartment owner to pay in full all assessed amounts in order to contest the amounts assessed against him or her. McGuire, in her individual capacity, has no interest related to the amounts assessed by AOAO Royal Iolani, which underlie Au's constitutional claim and Au has not otherwise alleged any facts to establish that McGuire was a proper party to this claim. We therefore conclude that no relief can be granted against McGuire on Count VII and the Circuit Court did not err in granting summary judgment in favor of McGuire on this claim. 8. Count VIII (Unfair and deceptive acts or practices (UDAP)) In Count VIII, Au asserts that he is entitled to relief against McGuire pursuant to HRS Section [sic] 480 and 480D. It appears that Au's reference to HRS Section 480 is intended to assert a claim under HRS § 480-2, Hawaii's UDAP statute. In the MTD, McGuire argued that neither HRS § 480-2 nor HRS § 480D et seq. provides for a cause of action against her in this case. In Hungate, a case arising out of a non-judicial foreclosure, the supreme court declined to recognize a mortgagor's UDAP claim under HRS § 480-2 against the mortgagee's attorney, explaining, inter alia, that "in foreclosure actions an 10 We do not decide whether McGuire might be entitled to judgment as a matter of law on Count VI based on other arguments or grounds not raised or addressed by either party, in the Circuit Court proceedings or on appeal. 26 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER attorney's justifiable concern with being sued by the opposing party for UDAP could compromise the attorney's ability to zealously represent his or her client." 139 Hawai#i at 413, 391 P.3d at 20. Au makes no argument distinguishing Hungate and we conclude that it is applicable to Au's HRS Chapter 480 claim against McGuire in this case. Accordingly, the Circuit Court did not err in dismissing Au's claim for relief on this ground. HRS Chapter 480D covers "collection activities by debt collectors in collecting consumer debts." HRS § 480D-1 (2008); see HRS § 480D-3 (2008) (listing practices prohibited for debt collectors to engage in while collecting a consumer debt). McGuire asserts that she was not a "debt collector" within the meaning of HRS chapter 480D and that the chapter's provisions therefore do not apply to her. See HRS § 480D-1 ("This chapter is intended to cover collection activities by debt collectors in collecting consumer debts."). HRS § 480D-2 (2008) defines a "debt collector" as "any person who is not a collection agency regulated pursuant to chapter 443B, and who in the regular course of business collects or attempts to collect consumer debts owed or due or asserted to be owed or due to the collector." (Emphasis added). As the attorney for AOAO Royal Iolani, McGuire recorded the 2015 NDIF to collect a debt owed to AOAO Royal Iolani. McGuire was not attempting to collect a debt owed, or asserted to be owed, to herself. See HRS § 480D-2. Au has not alleged or shown that Au owed a debt to McGuire. Thus, no genuine issue of material fact exists and, assuming Count VIII could be construed as making a claim pursuant to HRS Chapter 27 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER 480D, Au has failed to state a claim upon which relief can be granted against McGuire under HRS Chapter 480D. For these reasons, we conclude that the Circuit Court did not err in granting summary judgment in favor of McGuire on Count VIII. C. AOAO Royal Iolani's and Hawaiiana's Joinder to McGuire's MTD AOAO Royal Iolani and Hawaiiana joined in McGuire's MTD, stating: "For the reasons that Defendant McGuire's Motion to Dismiss should be granted in favor of Defendant McGuire, the Motion to Dismiss should also be granted in favor of [AOAO Royal Iolani and Hawaiiana]." However, McGuire sought dismissal of Au's claims as alleged against her. The arguments set forth by McGuire in support of the MTD – principally that McGuire could not be held liable for conduct undertaken in her capacity as AOAO Royal Iolani's attorney – do not apply to AOAO Royal Iolani or Hawaiiana. In the Joinder, AOAO Royal Iolani and Hawaiiana made no attempt to explain how McGuire's arguments were applicable to Au's claims against them. Therefore, there was no basis for the Circuit Court to conclude that they were entitled to dismissal on the same grounds as McGuire. In the absence of a separate motion to dismiss, with arguments pertaining specifically to AOAO Royal Iolani and Hawaiiana, summary dismissal of the claims against these parties solely based on a joinder to McGuire's arguments was improper. On appeal, AOAO Royal Iolani and Hawaiiana submit that the U.S. District Court has since entered judgment in the Federal Case, dismissing the Federal Case pursuant to a settlement 28 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER agreement, with certain issues submitted to arbitration. AOAO Royal Iolani and Hawaiiana ask this court to take judicial notice of the Federal Case but did not expressly raise any res judicata or collateral estoppel argument in the Circuit Court or on appeal. We further note that it appears that the subject of the Federal Case was the 2014 NDIF while the subject of the instant matter is the 2015 NDIF. It is unclear that AOAO Royal Iolani and Hawaiiana could rely on the proceedings in the Federal Case to support dismissal of the claims against them in this case. Notwithstanding AOAO Royal Iolani and Hawaiiana's arguments regarding the Federal Case, we conclude that the Circuit Court erred in entering summary judgment in their favor based on the Joinder to McGuire's MTD and this case must be remanded to the Circuit Court for further proceedings. D. Au's MPSJ Au's MPSJ requested summary judgment on all claims except for the constitutional claim. Specifically, Au asserted: McGuire double-billed and overcharged AOAO Royal Iolani for attorneys' fees while AOAO Royal Iolani and Hawaiiana paid the fees without questioning their veracity; Au's payments were applied pursuant to a priority of payment policy that had not yet been adopted by AOAO Royal Iolani, resulting in Au being overcharged late fees, delinquent fees, and interest; McGuire's attorneys' fees are in the nature of assumpsit and therefore subject to a cap pursuant to HRS § 607-14; and Au has fully paid his obligation under the payment plan. In one instance, Au characterized the evidence supporting one of his assertions as 29 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER "undisputed," but Au ultimately concluded the MPSJ by arguing that his allegations are supported by "succinct, clear and convincing evidence," which is not the appropriate standard for summary judgment. See HRCP Rule 56(c) (summary judgment is appropriate if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."). As for Au's contention regarding McGuire's attorneys' fees, Au submitted invoices from McGuire's law firm, addressed to AOAO Royal Iolani, for legal services and costs incurred in connection with Au's Units 3906 and 3908. As Au points out, the invoices show line items that appear to be duplicates. McGuire responded, however, that the charges were in fact separated between the two units that Au owned. Thus, there is conflicting evidence, or the evidence is subject to more than one interpretation, and a genuine issue of material fact remains. As for Au's assertion regarding the application of his payments according to a priority of payment policy, Au submitted evidence in the form of a portion of the transcript of the Federal Ahles Deposition. Ahles had testified: When you make a payment, whether it's with a coupon or by personal check, on your delinquency or your delinquent account, we take that check and we deposit it, and we first pay off your legal fee then late charges. And whatever balance is left, we pay the portion to your maintenance fee. Au also submitted two letters from McGuire to Au, dated December 13, 2013, and December 18, 2013. In both letters, McGuire stated that Au's payments were first applied to legal fees, fines, and late fees prior to maintenance fees, in accordance with a 30 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER priority of payment policy. In opposition to the MPSJ, AOAO Royal Iolani and Hawaiiana submitted a declaration of Ahles dated January 7, 2016, stating, inter alia: 4. The Royal Iolani Priority of Payment Policy in place before May, 2015, allocated payments made by owners in the following order: a. Fines b. Late fees c. Maintenance fees d. Attorneys' fees 5. Only after all other amounts were paid from an owner's payments, was any leftover balance applied to pay attorneys' fees accrued by that owner. . . . . 8. I have examined the House Rules that were in effect at the time of my deposition in Plaintiff's earlier case, and as stated therein, attorneys' fees are not paid before other amounts. 9. I have also confirmed with Hawaiiana Management's accounting department that attorneys' fees were not assessed from Plaintiff's payments prior to May, 2015 before all other payments were accounted for from any payments that Plaintiff made. . . . . 13. If I stated in my deposition that Royal Iolani's attorneys' fees were paid before maintenance fees, my statement was erroneous and resulted from the fact that a number of my other projects had priority of payment provisions that did allow attorneys' fees to be paid first. The conflicting evidence, including evidence that McGuire made certain representations in her letter to Au about the priority of payments, gives rise to a genuine issue of material fact precluding summary judgment. As to Au's contention that McGuire's attorneys' fees were in the nature of assumpsit and therefore subject to a cap pursuant to HRS § 607-14, AOAO Royal Iolani and Hawaiiana countered that AOAO Royal Iolani's claims for attorneys' fees were not in the nature of assumpsit but were instead based on HRS § 514B-157(a) and therefore not subject to the cap imposed by HRS 31 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER § 607-14. Aside from a conclusory statement, Au did not set forth any evidence or argument demonstrating that there is no genuine dispute of material fact and that he is entitled to judgment on this claim as a matter of law. We conclude that the Circuit Court did not err in concluding that Au is not entitled to summary judgment on this issue. Au argued that he fully paid off his obligations under the payment plan agreement and that the 2015 NDIF therefore should not have been filed. In so arguing, however, Au noted that he did not pay the "prior attorneys' fees" portion of the payment plan agreement because it was improper. In response, AOAO Royal Iolani and Hawaiiana pointed to the proceedings of the Federal Case, in which the parties agreed to arbitrate the dispute over the amount owed to AOAO Royal Iolani under the payment plan agreement. The factual dispute over the validity of the attorneys' fees appears to have been ongoing at the time of Au's motion, and therefore Au was not entitled to judgment in his favor as a matter of law on this issue. Accordingly, because genuine issues of material fact remain, Au failed to meet his burden for summary judgment. The Circuit Court did not abuse its discretion in denying Au's MPSJ. E. Au's Other Motions Au contends that he was entitled to relief from, inter alia, the Order Granting MTD and Denying MPSJ based on his discovery of the Ocwen Payment. However, upon review, this newly discovered evidence provides no new grounds for Au's claims against McGuire on Counts I, II, III, V, VII and VIII of the 32 NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER Complaint, the claims against McGuire that we have concluded were properly dismissed on summary judgment. On remand, Au is free to argue the relevance and weight of this evidence with respect to the claims that we have concluded were not subject to summary judgment. IV. CONCLUSION Based on the foregoing, we vacate the Circuit Court's May 23, 2016 Judgment and remand this matter to the Circuit Court for further proceedings consistent with this Memorandum Opinion. All motions pending in this appeal are denied. DATED: Honolulu, Hawai#i, January 22, 2021. On the briefs: /s/ Lisa M. Ginoza Ronald G.S. Au, Chief Judge Plaintiff-Appellant, Pro Se. /s/ Katherine G. Leonard Phillip A. Li, Associate Judge (Li & Tsukazaki), for Defendant-Appellee /s/ Clyde J. Wadsworth THE ASSOCIATION OF APARTMENT Associate Judge OWNERS OF THE ROYAL IOLANI and HAWAIIANA MANAGEMENT COMPANY, LTD. Calvin E. Young, David J. Hoftiezer, (Goodsill Anderson Quinn & Stifel), for Defendant-Appellee R. LAREE McGUIRE. 33	01-04-2023	01-22-2021
https://www.courtlistener.com/api/rest/v3/opinions/4562784/	IN THE SUPREME COURT OF THE STATE OF IDAHO Docket No. 46665 JAMES HARVEY HAIRSTON, ) ) Boise, May 2020 Term Petitioner-Appellant, ) v. ) Opinion Filed: September 3, 2020 ) STATE OF IDAHO, ) Melanie Gagnepain, Clerk ) Respondent. ) SUBSTITUTE OPINION. THE ) COURT’S PRIOR OPINION DATED JULY 6, 2020 IS HEREBY WITHDRAWN. Appeal from the District Court of the Sixth Judicial District of the State of Idaho, Bannock County. Robert C. Naftz, District Judge. The district court’s dismissal of Hairston’s petition for post-conviction relief is affirmed. Federal Public Defender Services of Idaho, Boise, attorneys for Appellant. Jonah Horwitz argued. Lawrence G. Wasden, Idaho Attorney General, Boise, attorney for Respondent. Lamont Anderson argued. _______________________________ BEVAN, Justice I. NATURE OF THE CASE This is a successive claim for post-conviction relief in a capital case. James Hairston was sentenced to death after a jury convicted him of two counts of first-degree murder in connection with the deaths of William and Dalma Fuhriman. Hairston was about nineteen and a half when he killed the Fuhrimans. In this, his fourth post-conviction petition, Hairston argues his sentence is unconstitutional because: (1) he was under the age of twenty-one at the time of the offense; and (2) the trial court failed to give adequate consideration to the mitigating factors that must be considered with youthful defendants. The district court dismissed Hairston’s first claim after holding that he failed to show that evolving standards of decency prohibited imposing the death penalty for offenders between the ages of eighteen and twenty-one. The court dismissed Hairston’s second claim after finding that there was no basis to extend the special sentencing 1 considerations that have been specifically limited to juvenile defendants under eighteen to those under twenty-one. We affirm. II. FACTUAL AND PROCEDURAL BACKGROUND This Court summarized the facts leading to Hairston’s conviction in State v. Hairston, 133 Idaho 496, 988 P.2d 1170 (1999) (Hairston I): On January 6, 1996, Hairston and a companion, Richard Klipfel, were driving from Grand Junction, Colorado, to Spokane, Washington. They stopped at the Fuhrimans’ ranch because they had run out of money and could not continue their journey. The Fuhrimans invited Hairston and Klipfel into their home and offered to help them find jobs. While Mr. Fuhriman was sitting at a kitchen table looking at a phone book, Hairston shot him in the head and then shot Mrs. Fuhriman. Hairston and Klipfel took $30 in cash, credit cards, and some personal property from the Fuhrimans’ home and continued their journey. Hairston and Klipfel pawned some of the Fuhrimans’ property. They purchased several items with the credit cards including toy remote control cars, tires, food, gas, and lodging. They also attempted to purchase a Harley Davidson motorcycle and $2500 worth of snowboarding equipment, but the credit card was rejected. Hairston and Klipfel were apprehended together near Clarkston, Washington, three days after the murders. 133 Idaho at 500–01, 988 P.2d at 1174–75. On September 6, 1996, a jury found Hairston guilty of two counts of first-degree murder and one count of robbery. Id. at 501, 988 P.2d at 1175. The district court imposed a death sentence for each of the two murders and life in prison for the robbery. Id. Hairston was just over nineteen and a half years old at the time of the murders. 1. Prior claims for post-conviction relief In 1996, Hairston brought his first petition for post-conviction relief, which was denied. Hairston appealed his conviction and the district court’s denial of his post-conviction petition to the Idaho Supreme Court. In 1999, this Court affirmed the district court’s denial of post- conviction relief and upheld Hairston’s convictions and death sentences on direct appeal. Hairston I, 133 Idaho at 518–19, 988 P.2d at 1192–93. In 2000, Hairston filed a federal habeas corpus petition, which the U.S. district court dismissed. Hairston v. Blades, No. 1:00-CV-00303-BLW, 2011 WL 1219267, at 32 (D. Idaho Mar. 30, 2011). In 2018, the Ninth Circuit vacated the district court’s order and remanded for the court to apply Martinez v. Ryan, 566 U.S. 1 (2012), to Hairston’s claim that his trial counsel was ineffective in investigating and presenting mitigation evidence at sentencing. Hairston v. Ramirez, 746 F. App’x 633, 634 (9th Cir. 2018). 2 In 2001, Hairston filed a second petition for post-conviction relief in state court, alleging that he had been deprived of his constitutional right to the effective assistance of counsel on direct appeal and that he had been denied adequate resources during the sentencing hearing and the first post-conviction proceeding. In 2002, Hairston filed a third petition for post-conviction relief, alleging that his death sentence was unconstitutional under Ring v. Arizona, 536, U.S. 584 (2002), which concluded statutory aggravating factors must be found by a jury, rather than the court. Hairston v. State, 144 Idaho 51, 54, 156 P.3d 552, 555 (2007) (Hairston II). The district court dismissed both petitions as untimely under Idaho Code section 19-2719. Id. In a consolidated appeal, this Court held that Hairston failed to raise his claims in a timely manner, thus, the consolidated appeals were dismissed. Id. at 59, 156 P.3d at 560. The United States Supreme Court vacated and remanded Hairston II because of Danforth v. Minnesota, 552 U.S. 264 (2008), but only as to the Ring claim. Hairston v. Idaho, 552 U.S. 1227 (2008). The district court dismissed Hairston’s claim seeking to vacate his death sentence. Hairston’s case was consolidated with several others for appeal, and this Court affirmed the district court after concluding Ring is not retroactive. Rhoades et al. v. State, 149 Idaho 130, 140, 233 P.3d 61, 71 (2010). 2. Current claim for post-conviction relief On March 16, 2018, Hairston filed a fourth post-conviction petition, contending: (1) it is unconstitutional to execute someone who was under the age of twenty-one at the time of the offense; and (2) the trial court failed to give adequate consideration to the mitigating factors that must be considered with youthful defendants. The State filed an answer alleging, among other affirmative defenses, that Hairston’s petition was barred by the statute of limitations in Idaho Code section 19-4902(a). Later, the State moved for summary dismissal under Idaho Code section 19-4906(c). Hairston later filed an amended petition for post-conviction relief, which raised the same claims, but included additional evidentiary support for his assertion that the Idaho trial courts had evolved beyond the practice of sentencing late-adolescent defendants to death. In part, Hairston submitted an affidavit from Laurence Steinberg, Ph.D., an expert in adolescent development, who concluded that the new, emerging medical and scientific consensus across the country is that defendants between the ages of eighteen and twenty-one are just as deserving of constitutional protection from the death penalty as those defendants eighteen and younger. 3 Hairston alleged that the basis for his petition arose from American Bar Association (ABA) Resolution 111, adopted by its House of Delegates on February 5, 2018, which “urges each jurisdiction that imposes capital punishment to prohibit the imposition of a death sentence on or execution of any individual who was [twenty-one] years old or younger at the time of the offense.” The district court took judicial notice of Hairston’s exhibits. After answering Hairston’s amended petition, the State again moved for summary dismissal under Idaho Code section 19-4906(c). The State argued Hairston’s claims were time- barred and that the authority he relied on was inapplicable to his claims because it only applied to juvenile defendants and Hairston was nineteen at the time of his crimes. On December 17, 2018, the district court entered an order denying post-conviction relief. The court declined to dismiss Hairston’s petition on the grounds that it was untimely, but ultimately dismissed his claims on the merits. The district court dismissed Hairston’s first claim after concluding he failed to show that his death sentence diverged from national and Idaho evolving standards of decency. The court dismissed Hairston’s second claim after finding that there was no basis to extend the special sentencing considerations that have been specifically limited to juvenile defendants under eighteen to those under twenty-one. Hairston filed a timely notice of appeal to this Court. III. ISSUES ON APPEAL 1. Is Hairston’s successive petition for post-conviction relief time-barred? 2. Is Hairston’s death sentence unconstitutional because he was under twenty-one at the time of the offense? 3. Is Hairston’s sentence unconstitutional because the district court failed to give proper consideration to the mitigating factors associated with his youth? IV. STANDARD OF REVIEW The constitutionality of Idaho’s capital sentencing scheme is a question of law over which this Court exercises free review. Rhoades v. State, 149 Idaho 130, 132, 233 P.3d 61, 63 (2010). Idaho Code section 19-4906 authorizes summary disposition of an application for post- conviction relief, either pursuant to motion of a party or upon the court’s own initiative. Summary dismissal is permissible only when the applicant’s evidence has raised no genuine issue of material fact which, if resolved in the applicant’s favor, would entitle the applicant to the requested relief. Cole v. State, 135 Idaho 107, 110, 15 P.3d 820, 823 (2000) (internal citation omitted). Thus, “[s]ummary dismissal sought under the UPCPA [Uniform Post-Conviction 4 Procedure Act] is the procedural equivalent of a motion for summary judgment.” Charboneau v. State, 140 Idaho 789, 792, 102 P.3d 1108, 1111 (2004). In determining whether a motion for summary dismissal is properly granted, a court must review the facts in a light most favorable to the petitioner, and determine whether they would entitle petitioner to relief if accepted as true. Ferrier v. State, 135 Idaho 797, 799, 25 P.3d 110, 112 (2001) (internal citation omitted). “A court is required to accept the petitioner’s unrebutted allegations as true, but need not accept the petitioner’s conclusions.” Id. V. ANALYSIS A. The State failed to adequately argue Hairston’s successive post-conviction petition was time-barred below; thus, its argument that Hairston’s petition is untimely will not be considered on appeal. Idaho Code section 19-2719 sets forth discrete post-conviction procedures that govern all capital cases. Capital post-conviction proceedings, like non-capital post-conviction proceedings, which are governed by the UPCPA, Idaho Code sections 19-4901–4911, are civil in nature and except for discovery matters are governed by the Idaho Rules of Civil Procedure. I.C.R. 39(b); I.C. § 19-4907(a). Idaho Rule of Civil Procedure 8(c)(1)(Q) provides that the statute of limitations is an affirmative defense which must be “affirmatively state[d]” in a party’s answer. “[T]he time bar of the statute of limitations is an affirmative defense that may be waived if it is not pleaded by the defendant.” Cole v. State, 135 Idaho 107, 110, 15 P.3d 820, 823 (2000) (internal citation omitted). The narrow and demanding statute of limitations set forth in Idaho Code section 19- 2719(3) and (5) require that “[a] petitioner bringing a successive petition for post-conviction relief has a heightened burden and must make a prima facie showing that issues raised in that petition fit within the narrow exception provided by the statute.” Pizzuto v. State, 127 Idaho 469, 471, 903 P.2d 58, 60 (1995) (Pizzuto II). We have held that the narrow exception requires successive post-conviction petitions be filed within a “reasonable time,” which is forty-two days after the petitioner knew or reasonably should have known of the claim, unless the petitioner shows that there were extraordinary circumstances that prevented him or her from filing the claim within that time period. In that event, it still must be filed within a reasonable time after the claim was known or knowable. Pizzuto v. State, 146 Idaho 720, 727, 202 P.3d 642, 649 (2008) (Pizzuto V). The State argues on appeal that Hairston’s amended successive petition is untimely under Idaho Code section 19- 5 2719(5) and this authority. The State asserts generally that Hairston’s claims were known or reasonably could have been known when he filed his first post-conviction petition. The difficulty for the State in raising this argument now is that the statute of limitations argument it makes on appeal was asserted only in passing before the district court during oral argument. No pleading filed by the State included section 19-2719 as a bar to Hairston’s petition. In fact, the State raised the inapt general statute of limitations set forth in Idaho Code section 19- 4902(a), rather than the specific statute of limitations that is applicable to post-conviction actions in capital cases. Beyond that, when moving for summary dismissal below, the extent of the State’s timeliness argument was that Hairston’s “claims and allegations are moot and should be procedurally foreclosed as [Hairston’s] application for post-conviction relief is time barred, is a successive petition, and contains claims that were or could have been raised in previous proceedings.” In making these generic statements, the State failed to cite to the specific statute governing post-conviction procedures in capital cases, nor did it offer any support for its conclusory claims. In its response memorandum, the State was required to state its defense “with particularity[, including] the grounds for the relief sought [and] the number of the applicable civil rule.” I.R.C.P. 7(b)(1)(B). In the same vein, the State made no specific argument below that the newly discovered issues raised by Hairston were known or reasonably should have been known outside the limited forty-two-day time limit for raising those successive post-conviction claims. We thus affirm the district court’s determination that the State’s cursory statements and lack of specific argument did not provide sufficient notice for summary disposition under Idaho Code section 19-4906(c). We therefore reach the merits of Hairston’s argument on appeal. B. Hairston’s death sentence is constitutional. Hairston’s primary argument is that the constitutional prohibition against executing juvenile defendants under the age of eighteen announced in Roper v. Simmons, 543 U.S. 551 (2005), should be extended to defendants who were under the age of twenty-one when they committed their crimes. In Roper, the U.S. Supreme Court extended the previous prohibition against executing juveniles under the age of sixteen set forth in Thompson v. Oklahoma, 487 U.S. 815 (1988), to include juvenile offenders under the age of eighteen. The foundation for the 6 Court’s analysis, and for ours today, is grounded in the Eighth Amendment 1 – and by principles the U.S. Supreme Court articulated for the first time in 1958 in Trop v. Dulles, 356 U.S. 86 (1958). The Court there recognized that “the [Eighth] Amendment must draw its meaning from the evolving standards of decency that mark the progress of a maturing society.” Id. at 101 (emphasis added). This standard has continued to inform the Supreme Court as it limited the death penalty for juveniles in Thompson and Roper, as well as in more recent cases of Graham v. Florida, 560 U.S. 48 (2010) (holding that the Eighth Amendment prohibits imposition of life without parole sentence on juvenile offender who did not commit homicide) and Miller v. Alabama, 567 U.S. 460 (2012) (holding that mandatory life imprisonment without parole for those under the age of 18 at the time of their crimes violates the Eighth Amendment’s prohibition on cruel and unusual punishment). Hairston argues that evolving standards of decency support his claim that the death penalty is unconstitutional when imposed against an individual who is under twenty-one years of age at the time of his crime. His arguments rely upon information from several fronts. First, he relies heavily upon a report of Dr. Steinberg, which argues that there is a new emerging consensus that many aspects of psychological and neurobiological immaturity characteristic of early adolescents and middle adolescents are also characteristics of late adolescents aged nineteen and twenty. Hairston also claims that his sentence is inconsistent with evolving standards of decency, both nationally and in Idaho, which show that imposition of the death penalty for adolescent offenders is disfavored. In addition, Hairston cites to the American Bar Association House of Delegate’s recently passed Resolution 111, which advocates “each jurisdiction that imposes capital punishment to prohibit the imposition of a death sentence on or execution of any individual who was 21 years old or younger at the time of the offense.” The Resolution, like Dr. Steinberg, advocates that the brains of those under twenty-one are so immature that all individuals under twenty-one are undeserving of death sentences. Hairston adds that there are also emerging national, international, and state trends against the imposition of the death penalty on defendants who were under the age of twenty-one at the time of their offense. Hairston cites jurisdictions that have abolished the death penalty altogether, 1 “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” U.S.Const., Amend. VIII 7 suspended executions through moratoria, and those that no longer impose or carry out capital sentences for offenders under twenty-one. Hairston also highlights several non-criminal statutes that he claims support the idea that those under twenty-one do not have enough maturity to be treated as adults. Beyond national statistics, Hairston also cites some international developments to contend there is a strong trend against the death penalty worldwide, which is by definition a trend against the execution of defendants in late adolescence as well. In addition, Hairston asserts there is Idaho-specific evidence that defendants who were under twenty-one at the time of their crime should not be sentenced to death. Specifically, since the time Hairston received his sentence, apparently no other defendant under twenty-one has received the death penalty, while eleven defendants over the age of twenty were sentenced to death. Hairston argues this results from decisions by several different actors, including prosecutors, judges, and juries, that all reflect the sentiments of Idaho citizens opposing the death penalty for late-adolescents. While we are not blind to the national and international trends, and even those Idaho- centric cases which arguably show that offenders who were under the age of twenty-one at the time of the offense are rarely given the death penalty, Hairston has provided no evidence that a consensus exists among those states that continue to exercise the death penalty about this issue. We have recognized “absent some legislative or executive action, a determination by this Court that Idaho’s death penalty statute is unconstitutional based on evolving standards of decency and public opinion is unsupported.” State v. Abdullah, 158 Idaho 386, 456, 348 P.3d 1, 71 (2015). We continue to follow this view. Hairston has not cited to any legislative enactments or executive action since Roper that have made executing nineteen and twenty-year-olds as a class by themselves unconstitutional. 2 We have in the past, and we continue to subscribe to the views of legislative bodies as the basis for determining a national consensus; and no such consensus exists among those states that still regard the death penalty itself as a valid form of punishment. Nor has Hairston cited to any case of meaningful precedential value that has extended Roper as he advocates we should do here. 3 2 We recognize some states have adopted statutes or executive branch moratoria against the death penalty in all its forms since 2005 when Roper was decided. 3 Hairston referenced a trial court decision out of Kentucky, Commonwealth v. Bredhold, 2017 WL 8792559 (Ky. Cir. Ct. Aug. 01, 2017), which declared Kentucky’s death penalty statute unconstitutional as applied to those under 8 Indeed, there are none. See, e.g., People v. Harris, 120 N.E.3d 900, 914 (Ill. 2018) (noting that courts have repeatedly rejected claims to extend Roper and its progeny to offenders over the age of 18). Like the Illinois Supreme Court, “[w]e agree with those decisions . . . that, for sentencing purposes, the age of 18 marks the present line between juveniles and adults.” Id. Most importantly, we believe that the Supreme Court of the United States has definitively spoken on this issue. Idaho courts have traditionally tracked the U.S. Supreme Court’s Eighth Amendment jurisprudence. State v. Draper, 151 Idaho 576, 599, 261 P.3d 853, 876 (2011). In Roper, the Court held that eighteen years is “the age at which the line for death eligibility ought to rest.” 543 U.S. at 574. In the fifteen years since that time, the Supreme Court has not seen fit to recognize that a national consensus exists sufficient to move the line to twenty-one years. Neither do we. We understand that this view is not without its detractors in academia, the American Bar Association, and other circles opposed to capital punishment. We also acknowledge, as has the Supreme Court, the problem with drawing the line at the age of 18 years as a “categorical rule”: Drawing the line at 18 years of age is subject, of course, to the objections always raised against categorical rules. The qualities that distinguish juveniles from adults do not disappear when an individual turns 18. By the same token, some under 18 have already attained a level of maturity some adults will never reach. For the reasons we have discussed, however, a line must be drawn. The plurality opinion in Thompson drew the line at 16. In the intervening years the Thompson plurality’s conclusion that offenders under 16 may not be executed has not been challenged. The logic of Thompson extends to those who are under 18. The age of 18 is the point where society draws the line for many purposes between childhood and adulthood. It is, we conclude, the age at which the line for death eligibility ought to rest. Id. (Emphasis added). Since Roper was decided, the Supreme Court has continued to identify 18 years as the critical age for purposes of Eighth Amendment jurisprudence. See Miller v. Alabama, 567 U.S. 460, 465 (2012) (prohibiting mandatory sentences of life without parole for homicide offenders who committed their crimes before the age of eighteen); see also Graham v. Florida, 560 U.S. 48, 74–75 (2010) (prohibiting sentences of life without parole for nonhomicide offenders who twenty-one. Id. at 1. However, the Kentucky Supreme Court subsequently vacated that decision. Commonwealth v. Bredhold, 599 S.W.3d 409, 423 (Ky. 2020). 9 committed their crimes before the age of eighteen). We have done likewise. See State v. Shanahan, 165 Idaho 343, 445 P.3d 152, cert. denied, 140 S. Ct. 545 (2019) (sentence of indeterminate life with 35-years fixed does not violate the Eighth Amendment under Miller’s rationale). Because the Supreme Court of the United States has not determined that the age of eligibility for capital punishment should be moved, we will continue to adhere to Roper. Thus, we hold that Hairston’s death sentence is constitutional. Although we have rejected a categorical exception for those under twenty-one who have been sentenced to death, Hairston asks this Court to vacate his death sentence based on his personal lack of maturity at the time of the murders. In support, Hairston cites to Dr. Steinberg’s report, which analyzed his conduct before, during and after the offense and concludes it demonstrated the hallmarks of adolescence and significant immaturity. However, in drawing the line at eighteen the Supreme Court recognized “qualities that distinguish juveniles from adults do not disappear when an individual turns 18.” 543 U.S. at 574. Hairston has failed to present any legal authority to show the immaturity he exhibited as an adult provides him special immunity from the bright-line rule excluding juveniles from the death penalty who were under the age of eighteen at the time of the capital offense. Therefore, we affirm the district court’s rejection of Hairston’s request for a special exemption from the categorical rule. Finally, Hairston asks this Court to remand the case because the district court applied an incorrect legal standard in evaluating his claim. Hairston claims the district court erred by employing “a presumption in favor of the State,” under which the court was “obligated to seek an interpretation” that foreclosed the aggrieved party’s claims and only granted relief “in clear cases.” Hairston also asserts that based on the vast body of uncontested evidence proving the merits of his first claim, he is entitled to relief as a matter of law. Hairston’s arguments are unconvincing. While “a court is required to accept the petitioner’s unrebutted allegations as true,” it “need not accept the petitioner’s conclusions.” Ferrier v. State, 135 Idaho 797, 799, 25 P.3d 110, 112 (2001). The district court appropriately analyzed the facts presented and came to its own conclusion as to the lack of a consensus in support of abolishing the death penalty for those under the age 21 years based on evolving standards of decency. Further, even if the district court applied the incorrect standard to reach this conclusion, remand is unnecessary because we have reviewed the constitutional issues decided today under an independent, de novo standard of 10 review. State v. Sepulveda, 161 Idaho 79, 82, 383 P.3d 1249, 1252 (2016) (quoting Draper, 151 Idaho at 598, 261 P.3d at 875). We likewise reject Hairston’s request to remand the case for an evidentiary hearing. Hairston argues that if we accept all of his allegations as true and draw all inferences liberally in his favor, he has presented extensive information to suggest there is a consensus against executing adolescents, which warrants an evidentiary hearing. Hairston’s argument ignores the fact that the Court must “express its own independent determination” about what categories of defendants are shielded from the death penalty by the evolving standards of decency. Hall v. Florida, 572 U.S. 701, 710 (2014). This is a question of law, which is suitable for disposition on the pleadings and the facts in the record. Matthews v. State, 113 Idaho 83, 85, 741, P.2d 370, 372 (1987) (citing Smith v. State, 94 Idaho 469, 491 P.2d 733 (1971)). As we held above, we continue to follow the Supreme Court’s holding in Roper, that 18 years is the minimum age for a person against whom the death penalty may be imposed. C. Hairston had no right to consideration of the special sentencing factors applicable to juvenile offenders under the age of eighteen because he was nineteen at the time of his offense. As a second basis for relief, Hairston argues that because of his age he was constitutionally entitled to probing consideration of the features associated with youthfulness before he received his punishment. In support of his argument, Hairston relies on case law that has been specifically limited to adolescent offenders under the age of eighteen. Mainly, Hairston relies on Montgomery v. Louisiana, 136 S. Ct. 718 (2016), in which the U.S. Supreme Court set forth specific factors the judge must consider when sentencing juvenile offenders under 18 years of age to life without parole. Hairston acknowledges that Montgomery concerned offenders under the age of 18 at the time of their offense, but reiterates his argument that the 18-year-old cutoff for capital cases is no longer consistent with evolving standards of decency. We have already rejected this claim on the merits. Hairston was 19 at the time of his offense, thus, the sentencing factors specifically applicable to defendants under the age of 18 at the time of their offense do not apply to Hairston’s case. VI. CONCLUSION We affirm the district court’s dismissal of Hairston’s petition for post-conviction relief. Chief Justice BURDICK and Justices BRODY, STEGNER and MOELLER, CONCUR. 11	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620362/	The Aetna-Standard Engineering Company, Petitioner, v. Commissioner of Internal Revenue, RespondentAetna-Standard Engineering Co. v. CommissionerDocket No. 20163United States Tax Court15 T.C. 284; 1950 U.S. Tax Ct. LEXIS 88; September 25, 1950, Promulgated 88 Decision will be entered under Rule 50. 1. Petitioner employed a manufacturer's representative to aid it in securing government contracts and the representative performed this service as well as many other services after the contracts were secured. Held, the commissions paid to the manufacturers' representative were ordinary and necessary business expenses and constituted reasonable compensation for the services performed, under section 23 (a), I. R. C.2. Petitioner employed an accrual method of accounting under which it accrued income on contracts as it became entitled to receive payment therefor. Performance of the contracts regularly did not exceed 12 months. Petitioner recorded income from two Government contracts which provided for delivery of gun carriages at regular intervals and immediate payment therefor by the Government on a similar accrual basis. Held, petitioner is not entitled to report the income from the Government contracts on a percentage of completion basis, under section 736 (b), I. R. C.3. Petitioner scrapped or sold for their salvage value assets which it had been depreciating on a composite group basis because they were unusable in connection89 with war contracts or in the way of additions to or rearrangements of petitioner's plant necessary to perform the contracts. Held, the loss sustained by petitioner because of the abnormal retirement of the assets before the expiration of their useful life is deductible from gross income, under section 23 (f), I. R. C.Aaron Holman, Esq., and I. Newton Brozan, Esq., for the petitioner.Lawrence R. Bloomenthal, Esq., for the respondent. Harron, Judge. HARRON 285 The Commissioner determined a deficiency for the fiscal year ended June 30, 1941, of $ 24,757.18 in petitioner's income tax liability, and deficiencies for the fiscal period ended November 30, 1941, of $ 6,810.31 in petitioner's declared value excess profits tax liability and $ 95,353.41 in petitioner's excess profits tax liability.The issues for decision are (1) whether commissions paid by petitioner91 to a manufacturer's agent were ordinary and necessary expenses; (2) whether petitioner was entitled to report income from government contracts on a percentage of completion basis; and (3) whether the loss sustained by petitioner in the retirement of assets which were being depreciated on a composite group basis is deductible from petitioner's gross income.Various other adjustments in petitioner's income which were made by respondent are no longer contested.Petitioner filed its returns for the periods involved herein with the collector for the eighteenth district of Ohio.The evidence in this proceeding consists of a stipulation of facts, testimony, and various exhibits from which we make the followingFINDINGS OF FACT.The facts which have been stipulated are found as stipulated, and the stipulation is incorporated herein by this reference.Petitioner is a corporation, organized in 1926 under the laws of Ohio, with its principal office at Youngstown, Ohio. Its principal business is the designing of and manufacture of heavy machinery. Petitioner does not produce or sell standardized machinery or equipment, but builds specialized products to particular specifications on a job order92 basis.Petitioner keeps its books and reports its income on an accrual basis. The tax periods involved in this proceeding are the fiscal year July 1, 1940, to June 30, 1941, and the fiscal period July 1, 1941, to November 30, 1941.Issue 1. -- Although petitioner had a good plant and engineering staff, it was in bad financial condition early in 1940. At that time, the Government was beginning to enter into extensive contracts for the production of war material. Petitioner decided to attempt to obtain some of this work, and Ernest E. Swartswelter, who was executive 286 vice-president of petitioner at this time, went to Washington, D. C., where he conferred with Thomas Y. Milburn.Milburn, who had been a consulting engineer since 1915, was personally acquainted with many of the regular officers of the Army and the Navy. In 1940 Milburn organized the firm of Milburn & Brady, Inc., in association with Maurice K. Brady, who was a metallurgical engineer, and the son-in-law of a former chief of the Navy Bureau of Supplies and Accounts. Milburn & Brady, Inc., was in the business of acting as the representative of manufacturing firms which desired to obtain contracts from the93 Government for the manufacture of needed equipment.On May 3, 1940, petitioner entered into an agreement with Milburn & Brady, Inc., which provided that petitioner would pay a 5 per cent commission to Milburn & Brady, Inc., on any business which that firm might obtain for petitioner from the War or Navy Departments. The agreement provided that it could be terminated by either party upon the expiration of two years.Milburn made arrangements for repesentatives of petitioner to see representatives of various governmental agencies which were contemplating the purchase of equipment which petitioner might be able to produce. Unless the government officials were first convinced of a manufacturer's ability to perform a contract, they would not invite him to submit a bid on the contract. Milburn therefore arranged for representatives of the Army and Navy Ordnance and Quartermaster Departments to visit petitioner's plant in order to examine its engineering department and plant facilities.On May 31, 1940, petitioner received an invitation to submit competitive bids on two contracts for the manufacture of 37 mm. gun carriages for the United States Army. Petitioner consulted with Milburn94 & Brady, Inc., regarding the preparation of the bids, which were then filed by Milburn & Brady, Inc., at the Watertown Arsenal in Massachusetts. Milburn attended the opening of bids at the Watertown Arsenal on behalf of petitioner. Two other manufacturers, both on the Eastern Seaboard, submitted lower bids than petitioner. Milburn conferred with officials of the Army Ordnance Department and submitted information to them which indicated that the lowest bidder was not qualified to perform the contract. He also wrote a letter to them which suggested that since petitioner's plant was less vulnerable to possible enemy attack, at least part of the contracts should be allocated to it, in conformity with a statement previously made by the President.On June 30, 1940, petitioner was notified by the Army that its bid for the manufacture of 391 37 mm. gun carriages at a unit price of $ 8,445.37, or a total price of $ 3,302,139.67, had been accepted.On July 1, 1940, petitioner and Milburn & Brady, Inc., agreed to a 287 modification of their contract. The agreement reduced the commissions payable to the latter from 5 per cent to 2 1/2 per cent and provided that the contract should 95 be terminable at the will of either party upon the expiration of 2 years. Milburn & Brady, Inc., also agreed to reduce the commission to which it was entitled on the 37 mm. gun contracts to 1 1/2 per cent of the gross amount payable, provided that the contracts called for the production by petitioner of more than 600 gun mounts.On July 12, 1940, petitioner submitted a second bid for the production of 37 mm. gun carriages. On August 2, 1940, petitioner was notified by the Army that its bid for the manufacture of an additional 236 37 mm. gun carriages at a unit price of $ 6,652.54, or a total price of $ 1,703,050.24 had been accepted.After the two contracts had been entered into between petitioner and the Government, Milburn & Brady, Inc., continued to perform many services for petitioner. It represented petitioner in obtaining an advance payment of $ 750,000 from the Government for working capital and additional facilities; it handled negotiations with the War Department whereby the filing of a security bond which petitioner was having difficulty obtaining was waived; it obtained priorities for materials needed by petitioner in the manufacture of the gun carriages; it arranged 96 with the War Department for changes in the specifications called for by the contracts; it secured subcontractors to manufacture parts for petitioner which it needed under the government contracts.Milburn & Brady, Inc., also represented various other manufacturers in Washington, D. C., for whom they rendered services similar to those performed for petitioner. The average commission which it received for these services was from 1 1/4 per cent to 1 1/2 per cent of the gross contract price.In December 1940, Milburn requested that petitioner pay the commissions due his firm plus an advance against commissions payable in 1941. Milburn agreed to reduce the commissions due if immediate payment was made. Petitioner agreed to do this, and Milburn gave a cashier's check for $ 2,000 to Swartswelter who turned it over to petitioner. During the fiscal year ended June 30, 1941, petitioner paid commissions totaling $ 12,921.42 to Milburn & Brady, Inc.On June 27, 1941, petitioner terminated its contract with Milburn & Brady, Inc. In view of the termination of the contract before two years had elapsed, Milburn & Brady, Inc., agreed to reduce the commissions due it by $ 6,500. During the fiscal97 period ended November 30, 1941, petitioner paid commissions totaling $ 46,574.82 to Milburn & Brady, Inc.Petitioner did not employ Milburn & Brady, Inc., unduly to influence government officials to grant petitioner any preference in connection 288 with government contracts, nor did Milburn & Brady, Inc., use any such influence.The payment by petitioner to Milburn & Brady, Inc., of $ 12,921.42 during the fiscal year ended June 30, 1941, and $ 46,574.82 during the fiscal period ended November 30, 1941, were ordinary and necessary expenses to petitioner. The respective amounts paid were reasonable compensation for the services performed by Milburn & Brady, Inc.Issue 2. -- The accounting method regularly employed by petitioner prior to and during the fiscal periods involved in this proceeding was as follows: Petitioner used an accrual method of accounting in which it included in sales the advance billings to customers of incomplete contracts. Each month the amount of costs and expenses incurred on each contract plus the estimated percentage of profit to be realized thereon was charged to the customer in accordance with the contract, and the sales income account credited98 with that amount. The amount of such billings was accrued on petitioner's books and reflected in net taxable income for the respective accounting period.The standard form of contract, used by petitioner in about 80 per cent of its business, provided that on the tenth day of each month the customer would be billed for the costs of all work done on the contract in the previous month plus the percentage of profit thereon which petitioner estimated would be made on the job. The amount billed to the customer was payable by it on the twentieth day of each month under the contract.This method of billing and receiving payment was not followed in connection with the two contracts for the production of 37 mm. gun carriages entered into by petitioner with the United States Government. The contract of June 28, 1940, originally provided for the production of 391 gun carriages, at an original cost to the Government of $ 8,445.37 for each gun carriage, including spare parts. This amount was varied slightly from time to time according to changes made by the Government in specifications and delivery points. All work was to be done in strict accordance with the specifications and drawings furnished99 by the Ordnance Department. It was provided that deliveries of 5 units were to be made during the fifth month after the signing of the contract, 26 units during the sixth month, and 30 units per month thereafter until the end of the eighteenth month.The contract originally provided for payment by the Government as follows: (a) An advance payment of 30 per cent of the total contract price, which was made by the Government to petitioner; (b) a payment of 60 per cent of the contract price of each gun carriage upon delivery; and (c) payment of the remaining 10 per cent upon proof testing and final acceptance of each gun carriage by the Government. A supplemental contract entered into between the parties 289 on August 30, 1941, provided that the Government would make payment of the entire unpaid balance of 70 per cent upon delivery of each gun carriage, without waiting for final inspection.A second contract for the production of 256 37 mm. gun carriages was entered into between petitioner and the Government on August 30, 1940. This contract provided for delivery of 42 units per month for 5 months, beginning with the nineteenth month from the date of the contract, and the delivery100 of 46 units during the twenty-fourth month. Under the contract, the Government was to pay 90 per cent of the contract price per gun carriage upon delivery and the remaining 10 per cent upon proof testing and final acceptance by the Government.Pursuant to supplemental agreements with the Government, petitioner was advanced $ 1,500,000 to be used "as a revolving fund for carrying out the purposes of the principal contracts." Under these agreements, the advance payments were to be liquidated by the application against the advance payments of 30 per cent of the contract price of each gun carriage delivered.On July 1, 1940, petitioner began engineering the tools and jigs required for the performance of the contracts. Actual labor on the raw materials necessary for the production of the gun carriages was begun in December 1940, and the first shipment on the contract of June 28, 1940, was made by petitioner on March 22, 1941. The last shipment under this contract was made on December 16, 1941. Shipment of the gun mounts called for by the second contract with the Government was begun by petitioner on December 17, 1942.The method used by petitioner in accounting for its income from 101 the Government contracts was as follows: As each gun carriage was delivered to the Government the sales income account was credited and the Government's account was charged with the contract price of the unit. The cost of sales was determined from the cost records kept by petitioner and that amount was charged to the expense account. At the end of the period, petitioner's books reflected as gross profit the difference between the sales price of each gun carriage delivered during the period and the cost of producing the gun mount.Petitioner made deliveries of the gun carriages as follows:1941March4April10May36June52July48August40September60October60November60December601942January60February55March39April43May20Petitioner recorded on its books the income from the manufacture 290 and delivery of 370 gun carriages during the periods in question as follows:AverageNumberunitFiscal periodof unitsSalessellingshippedpriceFiscal year endedJune 30, 1941102$ 861,427.74$ 8,445.37Fiscal period endedNov. 30, 19412682,253,405.408,408.23Per centAverageGrossgross profitCost ofunitprofitto cost ofFiscal periodsalescostsalesFiscal year endedJune 30, 1941$ 556,193.85$ 5,452.88$ 305,233.8954.879Fiscal period endedNov. 30, 19411,528,738.715,704.25724,666.6947.403102 All of this income was accrued under the contract of June 28, 1940. No income on the contract of August 30, 1940, was accrued during the periods in question since deliveries of the gun carriages called for by that contract and payment therefor were not begun until December 17, 1941.On June 30, 1941, petitioner had on hand an inventory of $ 350,141 allocated to the contract of June 28, 1940, and an inventory of $ 90,220.98 allocated to the contract of August 30, 1940, and its subcontractors had on hand inventory in process in the amount of $ 165,142.45 which was allocated to the first contract, and $ 159,594.82 allocated to the second contract. On November 30, 1940, petitioner had on hand an inventory of $ 76,921.99 allocated to the contract of June 28, 1940, and an inventory of $ 338,424.89 allocated to the contract of August 30, 1940, and its subcontractors had on hand inventory in process in the amount of $ 6,262.21 allocated to the first contract, and $ 185,700 allocated to the second contract.During the fiscal year ended June 30, 1941, and the fiscal period ended November 30, 1941, petitioner derived no income from contracts with customers other than the Government which required103 more than 12 months to perform. With the exception of one contract entered into in 1937, petitioner received no income prior to the fiscal periods in question from contracts which required more than 12 months to perform.Petitioner received compensation from the Government for the 37 mm. gun carriages which it produced and accrued its income therefrom within 12 months from the time the production of each gun carriage was begun.The accounting method used by petitioner to report its income on the government contracts was in accordance with the regular method employed in keeping its books. The accounting method used to report the income from the government contracts clearly reflected such income.Issue 3. -- Petitioner computed depreciation on its buildings, machinery and equipment, and furnaces, stacks, and ovens on a composite 291 group basis. Upon securing the government contracts for the manufacture of 37 mm. gun carriages, petitioner scrapped or sold assets which it had been so depreciating either because they were unusable in connection with these contracts or because they were in the way of additions to or rearrangements of petitioner's plant necessary to perform104 the contracts. These assets, which petitioner had been using in its business and which were still in good physical condition, were as follows:Rate ofCost basisdepreciationBldgs. acquired in 1927 (forge shop, patternbuilding, oil house, crane runway, sheds,garage, and gate house)$ 17,621.332.000%Bldgs. acquired in 1938 (scrap baling cage)1,704.183.125Machinery and equipment acquired in1927 (lathes and other machines)27,605.233.433Machinery and equipment acquired in1938 (press and melting furnace)3,187.824.000Core ovens acquired in 19275,854.784.480Totals$ 55,973.63AccumulateddepreciationSale priceallowedor salvageor allowableBldgs. acquired in 1927 (forge shop, patternbuilding, oil house, crane runway sheds,garage, and gate house)$ 4,874.78$ 30.00Bldgs. acquired in 1938 (scrap baling cage)133.150Machinery and equipment acquired in1927 (lathes and other machines13,106.6212,400.00Machinery and equipment acquired in1938 (press and melting furnace)191.271,700.00Core ovens acquired in 19273,642.980Totals$ 21,948.80$ 14,130.00LossBldgs. acquired in 1927 (forge shop, patternbuilding, oil house, crane runway, sheds,garage, and gate house)$ 12,716.55Bldgs. acquired in 1938 (scrap baling cage)1,571.03Machinery and equipment acquired in1927 (lathes and other machines)2,098.90Machinery and equipment acquired in1938 (press and melting furnace)1,296.35Core ovens acquired in 19272,211.80Totals$ 19,894.83105 The forge shop, pattern building, shed, garage, gate house and scrap baling cage were torn down and replaced with new structures elsewhere on petitioner's property; the oil house and crane runway were torn down and not replaced; the lathes and other machines were sold because they could not be used on the government contracts and new machinery was bought specifically for the government contracts; the press and melting furnace were torn down and rebuilt in another part of the plant; and the furnaces, ovens and stacks were torn down and rebuilt out of new materials in another section of the plant.The assets listed above were prematurely disposed of by petitioner because of the unforeseen abandonment of peacetime operations and the conversion of its plant to the manufacture of equipment for the United States Army. Retirement of these assets for this reason was not contemplated or provided for in the composite rates employed by petitioner in their depreciation.OPINION.Issue 1. -- During the fiscal year ended June 30, 1941, and the fiscal period ended November 30, 1941, petitioner paid commissions totaling $ 59,496.24 to Milburn & Brady, Inc., a manufacturer's agent. Respondent106 contends that the commissions paid are not deductible from petitioner's income because they did not constitute ordinary and necessary business expenses within the meaning of section 23 (a) of the Internal Revenue Code. He alleges that the 292 commissions paid by petitioner were for services performed by Milburn & Brady, Inc., in unduly influencing government officials to award defense contracts to petitioner, and that the deduction of such expenses would be against public policy.If petitioner made payments to Milburn & Brady, Inc., for services performed in unduly influencing government officials to award contracts to petitioner, the payments so made would be against public policy and therefore not deductible from income. Harden Mortgage Loan Co. v. Commissioner, 137 Fed. (2d) 282, certiorari denied, 320 U.S. 791">320 U.S. 791; T. G. Nicholson, 38 B. T. A. 190; Easton Tractor & Equipment Co., 35 B. T. A. 189. However, there is no evidence in this proceeding that Milburn & Brady, Inc., exercised personal influence with any government representative to obtain the contracts107 which gave rise to its compensation. The services performed for petitioner by Milburn & Brady, Inc., were proper. The use of manufacturer's representatives to give assistance in soliciting business is a common practice among business concerns dealing with the Government. And petitioner was under no obligation to use the services of a manufacturer's representative who was unfriendly with the government officials with whom he had to deal. The contracts were awarded to petitioner after the submission of competitive bids. The situation here is the same as in Alexandria Gravel Co. v. Commissioner, 95 Fed. (2d) 615, reversing 35 B. T. A. 323, in which it was held under similar facts that an agent's commissions were deductible. In the Alexandria Gravel Co. case, the contracts involved were let on competitive bids and the Court said: "There was really small opportunity for the use of influence, if possessed." In addition, Milburn & Brady, Inc., continued to perform many services for petitioner after the contracts were secured, such as obtaining priorities, securing subcontractors, and obtaining the approval of the Government108 of changes in specifications. The compensation which petitioner paid to Milburn & Brady, Inc., was in part for these services, which respondent does not contend were improper.The commissions paid by petitioner for the many services performed by Milburn & Brady, Inc., were ordinary and necessary business expenses, and their deduction is not against public policy.Respondent argues further that even if the commissions were paid for the performance of services which were not contrary to public policy, the payments made exceeded reasonable compensation for the services performed. We do not agree with this contention. Petitioner has shown that the commissions paid were reasonable compensation to Milburn & Brady, Inc., for its services to petitioner.Petitioner was in bad financial condition before it retained Milburn & Brady, Inc., to aid it in securing business. It had a well-equipped 293 plant and good personnel but few manufacturing contracts. Milburn & Brady, Inc., materially helped petitioner to obtain two large government contracts, of which petitioner was in great need. The evidence discloses that Milburn & Brady, Inc., obtained information for petitioner which enabled109 it to submit bids on the gun carriage contracts involved herein. It aided in the preparation of these bids and represented petitioner at their formal filing at the Watertown Arsenal. After the bids were submitted, Milburn & Brady, Inc., gave information to officials of the Army Ordnance Department which helped petitioner to receive the contracts.Nor did the services of Milburn & Brady, Inc., stop once the contracts were awarded. It represented petitioner in obtaining an advance payment of $ 750,000 from the Government for working capital and additional facilities; it handled negotiations with the Army whereby the filing of a security bond which petitioner was having difficulty obtaining was waived; it obtained priorities for materials needed by petitioner; it arranged with the War Department for changes in the specifications called for by the contracts; it secured subcontractors to manufacture parts for petitioner which it needed under the government contracts.The compensation paid by petitioner for the many services performed by Milburn & Brady, Inc., was less than 1 1/2 per cent of the compensation received by petitioner for the performance of the contracts which were secured110 through the efforts of Milburn & Brady, Inc. The only relationship between petitioner and Milburn or Brady was that of employer and employee. Neither Milburn nor Brady was an officer, stockholder, or director of petitioner, or related to anyone who was. The commissions paid by petitioner were comparable to those paid by other manufacturers for the same type and extent of services as were performed by Milburn & Brady, Inc.It is held that the total commissions paid by petitioner to Milburn & Brady, Inc., were reasonable compensation for the services performed.Issue 2. -- The question under this issue is whether petitioner is entitled to report income from the government contracts for the production of gun carriages on a percentage of completion basis. Originally, petitioner reported its income from the government contracts on an accrual basis, under which it reported gross income and deducted expenses as each gun carriage was completed, delivered to the Army, and the right to receive payment therefor accrued. Subsequently, petitioner filed amended returns under which it reported its income from the government contracts on the basis of the percentage of the contract completed111 in each period and filed claims for refunds with the collector of internal revenue for the eighteenth district of Ohio. If petitioner is entitled to report the income on a percentage of completion 294 basis rather than on the accrual basis which it originally employed, the total income to be reported over the period of the contracts will not be changed. However, the allocation of the income among the different fiscal periods will be materially affected, with a consequent change in the excess profits tax payable by petitioner.Petitioner contends that it is entitled to report the income from the government contracts on a percentage of completion basis on the ground (1) that the government contracts were long term contracts within the meaning of sections 736 (b)1112 and 721 (a) (2) (B) 2 of the Internal Revenue Code, and (2) in the alternative, that it regularly kept its books on a percentage of completion basis and that the method which it used to record on its books the income from the government contracts conflicted with this method. We do not agree with either contention.Under section 736 (b) or section 721 (a) (2) (B) which it supplanted, if it is abnormal for a taxpayer to receive income from contracts the performance of which requires more than 12 months, it may elect to report the income from such contracts on the basis of the percentage of the contract completed in each period rather than all in the period in which the contract was completed. The question under either section 736 (b) or section 721 (a) (2) (B) is the same.Petitioner contends that the two government 113 contracts were long term contracts which entitles it to the benefit of the relief provisions of section 736 (b). It argues that the contracts were not performed until the last gun mount contracted for had been delivered. However, the clear purpose of section 736 (b), as disclosed by its congressional history, was "to provide relief to taxpayers reporting income from long term contracts [i. e., contracts whose performance requires more than 12 months] upon the completed contract method of accounting." 295 (Emphasis added.) Sen. Rep. No. 1631, 77th Cong., 2d Sess. (1942), p. 208. The report continues:Such income is bunched in the year in which it is reported and unless it is spread out over the period of the contract under which the work has been performed a distorted picture of the taxpayer's true earnings for such year is presented. Since only one excess profits credit would be allowed in computing adjusted excess profits net income for such year, whereas several excess profits credits would have been utilized if the income from the contract were returned in the years during which the work was being done, an inordinate excess profits tax would be collected from such114 taxpayer upon such income. Your committee has therefore provided that if it is abnormal for the taxpayer to derive income from contracts the performance of which requires more than 12 months * * such taxpayer may elect for excess profits tax purposes, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, to compute in its return for such taxable year its income from such contracts upon the percentage of completion method of accounting. When once made this election shall be irrevocable and shall apply to all other contracts, past, present, or future, the performance of which requires more than 12 months. The net income of the taxpayer for each year prior to that with respect to which such election was made, including the base period years of the taxpayer, shall be adjusted for excess profits tax purposes to conform to this election. Income from contracts the performance of which requires more than 12 months shall not be considered abnormal income under section 721.The method used by petitioner in reporting income from the government contracts, which it is seeking to change to the percentage of completion basis, was not the completed115 contract method which section 736 (b) is designed to relieve. Under the accrual method employed by petitioner, it reported gross income and deducted expenses on the government contracts as each gun carriage was completed, delivered to the Army, and the right to receive payment therefor accrued. It did not wait until the last gun mount had been completed and delivered to report income and deduct expenses as it would do if it had been using the completed contract method. Jud Plumbing & Heating, Inc., 5 T. C. 127, affd., 153 Fed. (2d) 681; Regs. 111, section 29.42-4. Under the accounting method used by petitioner, there was no practical inability to determine in any one taxable period the profit earned on the gun carriages delivered in that period.The contracts between petitioner and the Government were not the type of contract envisaged by section 736 (b). Each of the contracts was a divisible contract, providing for successive deliveries of gun carriages by petitioner and payments therefor by the Government. Williston, Treatise on the Law of Contracts, section 861 (Rev. ed. 1936); Uniform Sales Act, section 76. By the116 terms of the agreements, the price was apportioned against the performance so that when an apportioned part of the performance had been rendered, a debt for that part immediately arose. Brightwater Paper Co. v. Monadnock Paper Mills, 68 Fed. Supp. 714, affd., 161 Fed. (2d) 869. 296 The income from the contracts was spread out over the period of the contracts, not bunched in the respective period in which the last gun mount under each contract was delivered. The method used by petitioner in recording income from the government contracts as the right to receive payment accrued clearly reflected its income and, as will be shown infra, was in conformity with the normal method of accounting regularly employed by petitioner.Petitioner is not entitled under either section 736 (b) or section 721 (a) (2) (B) to report its income from the government contracts on a percentage of completion basis.Petitioner contends further that it regularly employed a percentage of completion method in keeping its books, and that the method which it used to report income from the two government contracts conflicted with this method. 117 We do not agree.Section 41 of the Internal Revenue Code provides that taxable net income shall be computed on the basis of the taxpayer's annual accounting period in accordance with the method of accounting regularly employed in keeping its books. If income is derived from long term contracts which cover a period in excess of one year from the date of execution of the contract to the date on which the contract is completed, the taxpayer may elect to report such income on a percentage of completion basis instead of reporting it all in the year in which the contract is completed and final payment received. Regulations 111, section 29.42-4, regulations similar to which were approved in Hegeman-Harris Co. v. United States, 23 Fed. Supp. 450; Bent v. Commissioner, 56 Fed. (2d) 99, affirming 19 B. T. A. 1356; Alfred E. Badgley, 21 B. T. A. 1055, affd., 59 Fed. (2d) 203.However, unless we should hold that the government contracts in question were of that nature, petitioner never derived income from long term contracts with the exception118 of one contract entered into in 1937. Since its contracts were not long term contracts, it was not entitled to report income on a percentage of completion basis. Under the standard form of contract used by petitioner in 80 per cent of its business, petitioner was entitled to receive payment of part of the contract price each month on the basis of work completed. Petitioner reported its income from these contracts on an accrual basis. Maloney v. Hammond, 176 Fed. (2d) 780. And being on an accrual basis, it reported income as it became entitled to receive payment for that part of the contract which was completed. Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182.Petitioner reported its income from the government contracts on a similar accrual basis. As it delivered the gun carriages and became entitled to receive payment for them, it reported its income from the completion of that part of the contract. The only difference between 297 the method followed by petitioner in accounting for income from its regular contracts and the method followed in accounting for income from the government contracts 119 was in the way that the payment to which petitioner was entitled was computed. In both instances, however, the payments were computed under the provisions of the contracts which provided for such payments to be made. Since petitioner was entitled to regular payments under both its ordinary contracts and the government contracts, in each instance, as the right to receive payments accrued, it recorded the amounts due in its books.The method used by petitioner to report its income from the government contracts clearly reflected income and was in conformity with the method of accounting which it regularly employed. Its income from the government contracts was reported in the periods in which the income was determined. Petitioner is not entitled to report the income from such contracts on a percentage of completion basis. Section 41 of the Internal Revenue Code; cf. Maloney v. Hammond, supra.Issue 3. -- Petitioner computed depreciation on its buildings, machinery and equipment, and furnaces, stacks, and ovens on a composite group basis. Under this method of depreciation, a group of items is, for convenience, dealt with as one. In determining120 the fractional coefficient to be used in the depreciation of the group as a whole, it is assumed that all the items will continue in the group during their entire expectancy. Regulations 111, section 29.23 (e)-3, provides for the deduction of a loss upon the retirement of individual assets of the group as follows:If the depreciable assets of a taxpayer consist of more than one item and depreciation, whether in respect of items or groups of items, is based upon the average lives of such assets, losses claimed on the normal retirement of such assets are not allowable, inasmuch as the use of an average rate contemplates a normal retirement of assets both before and after the average life has been reached and there is, therefore, no possibility of ascertaining any actual loss under such circumstances until all assets contained in the group have been retired. In order to account properly for such retirement the entire cost or other basis of assets retired, adjusted for salvage, will be charged to the depreciation reserve account, which will enable the full cost or other basis of the property to be recovered.In cases in which depreciable property is disposed of due to causes other than121 exhaustion, wear and tear, and normal obsolescence, such as casualty, obsolescence other than normal, or sale, a deduction for the difference between the basis of the property (adjusted as provided in section 113 (b) and sections 29.113 (a) (14)-1, and 29.113 (b) (1)-1 to 29.113 (b) (3)-2, inclusive) and its salvage value and/or amount realized upon its disposition may be allowed subject to the limitations provided in the Internal Revenue Code upon deductions for losses, but only if it is clearly evident that such disposition was not contemplated in the rate of depreciation. * * The reason for the disallowance of the loss at the time of a normal298 retirement is that the premature retirement of one asset in the group will probably be offset by the service of another asset in the group for a longer period than estimated. Thus, until all the items in the group have lived out their normal lives, there is no basis for the computation of any loss. United States Industrial Alcohol Co., 42 B. T. A. 1323, 1377; see, also, Kester, Advanced Accounting (4th ed. 1946), pp. 289-90.The parties are in agreement that petitioner sustained a loss of122 $ 19,894.84 upon the retirement of assets during the fiscal year ended June 30, 1941. The only question for decision is whether the loss resulted from the normal retirement of the assets or from an abnormal disposition which was not contemplated in the depreciation rates.The evidence shows that petitioner scrapped or sold for their salvage value the assets in question either because they were unusable in connection with the government contracts or because they were in the way of additions to or rearrangements of petitioner's plant necessary to perform the defense contracts. Some of these assets were sold for their salvage value; some were torn down and not replaced; and some were torn down and rebuilt out of new materials in another section of the plant. The premature disposition of the assets in question because of the conversion of petitioner's plant from peacetime production to war production did not constitute normal retirement of the assets. Nor could the rates used to depreciate the groups as a whole have contemplated the abnormal retirement of the assets from such an unanticipated cause. The necessity for and the actual scrapping of the assets prior to the termination123 of their normal useful life was the direct cause of petitioner's loss. See Industrial Cotton Mills Co., 43 B. T. A. 107; United States Industrial Alcohol Co., supra, at p. 1379.Allowance of this loss will not result in a double deduction in any year as respondent seems to fear. Upon the allowance of the loss deduction for these assets, the cost basis thereof is eliminated from the asset accounts and the depreciation reserve is reduced by the amount of depreciation already taken. The base to which the composite group depreciation rate is applied will thereby be reduced by the cost basis of the assets abnormally retired. See Illinois Pipe Line Co., 37 B. T. A. 1070, 1081.It is held that the loss sustained by petitioner in the abnormal retirement of assets which were being depreciated on a composite group basis is deductible from gross income.Decision will be entered under Rule 50. Footnotes1. Sec. 736.(b) Election on Long-Term Contracts. -- In the case of any taxpayer computing income from contracts the performance of which requires more than 12 months, if it is abnormal for the taxpayer to derive income of such class, * * * it may elect, in its return for such taxable year for the purposes of this subchapter, or in the case of a taxable year the return for which was filed prior to the date of the enactment of the Revenue Act of 1942, within 6 months after the date of the enactment of such Act, to compute, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, such income upon the percentage of completion method of accounting. Such election shall be made in accordance with such regulations and shall be irrevocable when once made and shall apply to all other contracts, past, present, or future, the performance of which required or requires more than 12 months. * * ↩2. Sec. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD.(a) Definitions. -- For the purposes of this section --(1) Abnormal Income. -- The term "abnormal income" means income of any class includible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, * (2) Separate Classes of Income. -- Each of the following subparagraphs shall be held to describe a separate class of income: * * *(B) Income constituting an amount payable under a contract the performance of which required more than 12 months;↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620363/	Estate of Joseph G. Taracido, Deceased, by United States Trust Company, Charles C. Lehing and Irwin P. Underweiser, Executors, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Taracido v. CommissionerDocket No. 1071-74United States Tax Court72 T.C. 1014; 1979 U.S. Tax Ct. LEXIS 64; September 10, 1979, Filed 64 Decision will be entered for the respondent. Decedent's wholly owned corporation, engaged in the international insurance business, sought to treat a payment received in settlement of a lawsuit as gain from the sale or exchange of a capital asset. Held, such amount was paid for the corporation's right to receive present and future commission income as lost profits and is fully includable in gross income pursuant to sec. 61, I.R.C. 1954. Jay H. Landau and Beatrice K. Underweiser, for the petitioners.Ronald E. Friedman65 , for the respondent. Forrester, Judge. FORRESTER1015 Respondent has determined that petitioners are liable as transferees of the assets of Taracido & Co., Inc. (hereinafter TCI), for a Federal income tax deficiency of $ 68,384.75 for the taxable year ended February 28, 1969. The only issue remaining for our decision is whether an amount received by petitioners in settlement of a lawsuit constitutes gain from the sale or exchange of a capital asset pursuant to section 1001 1 and section 1221.FINDINGS OF FACTSome of the facts have been stipulated and are so found.TCI is a corporation organized under the laws of the State of New York on December 11, 1959. TCI filed its Federal income tax return for the fiscal year in issue with the Internal Revenue Service Center at New York, N.Y. Upon the death of its sole shareholder, Joseph Taracido (hereinafter Joseph or decedent), all of the stock of TCI passed to his66 estate and became an asset thereof. The executors of his estate, United States Trust Co., Charles C. Lehing, and Irwin P. Underweiser (hereinafter petitioners), each executed transferee liability agreements. At the time the petition herein was filed, petitioner United States Trust Co. had its principal office and place of business at New York, N.Y.Joseph began his insurance career as an agent and upon his graduation from law school was employed by the United States Life Insurance Co. He occupied the position of superintendent of agencies with that company until 1961 and developed its international agency force. In 1961, the then president of Illinois Mid-Continent Insurance Co. (hereinafter IMC), who was formerly 1016 a senior vice president of United States Life Insurance Co., hired Joseph to develop an international agency force for IMC.Two years earlier, Joseph had established TCI for the purpose of engaging in the insurance business. Its role was that of a manager and broker in the international insurance field. As its president and sole stockholder, Joseph obtained qualified individuals to serve as agents with respect to the sale of insurance in areas of Europe, 67 Central and South America, Mexico, the Caribbean, and the Far East.On April 8, 1964, TCI entered into a management agreement with IMC, effective January 1, 1965, wherein IMC agreed to grant TCI exclusive representation for a 10-year period to December 31, 1974, for the sale of its insurance in Hawaii, Alaska, Puerto Rico, and all other areas outside the continental United States. TCI, as international manager for IMC's sales force, received a 10-percent to 25-percent override on any new business written by IMC's overseas agents.In early 1965, National Western Life Insurance Co. (hereinafter NW) became interested in acquiring IMC and, pursuant to a proxy fight, was able to obtain the necessary votes to merge with IMC. NW staged the merger for the purpose of expanding its agency sales force and acquiring the business which that force had produced.Since IMC was now merged into NW, TCI entered into a new management agreement with NW dated June 9, 1965, under which TCI was again designated as manager and exclusive representative of the successor corporation, NW, in all areas outside the continental United States. Pursuant to that agreement, Joseph was given the title of Executive68 Vice President of International Operations for NW with a salary of $ 1 per year and the option to purchase 40,000 shares of NW stock under the employee stock option plan. In addition, the management agreement set forth the following terms:Second:(A) The Manager shall procure insurance agents and insurance brokers and through said agencies transmit to the Company applications for all forms of insurance policies written by the Company; shall deliver policies, contracts, notices, premium receipts and other papers sent to him for that purpose; shall collect and pay over to the Company all moneys payable to it as authorized by the Company; all of which shall be subject to the terms and conditions contained herein.(B) The Company will not alter, substitute, or amend as presently used by 1017 the Company and Soliciting Agent Agreement or General Agent Agreement or Amendment thereto without at least ninety (90) days written notice to Manager.(C) The Manager will manage and supervise all phases of the Company operation in said designated territory.(D) The Manager will execute all standard Company agency forms, on behalf of the Company as its Attorney in Fact.* * * Fourth: The69 exclusive representation of the Company by the Manager will continue only provided that the Manager causes to be written and placed in force with Company during the first calendar year hereof annual premiums paid and in force of at least $ 500,000, during the second calendar year hereof annual premiums paid and in force of at least $ 750,000 and during the third calendar year hereof and each year thereafter causes to be written and placed in force annual premiums of at least $ 1,000,000 or more, or for any period less than one full calendar year the pro rata portion thereof for each such period, respectively.Fifth:(A) The Company will pay to the Manager compensation on the business written and produced by it of (a) one hundred ten per cent (110%) of the first year premiums received by it on ordinary life policies so produced such time as until $ 350,000 commissions have been paid to the Manager; (b) thereafter Manager shall receive ninety-five per cent (95%) of the additional first year premiums received by Company on ordinary life policies so produced. The above commissions will be comprised of and paid as follows:1. The commission payable to individual writing agent as determined70 by his contract with Company.2. The commission payable to General Agents appointed by the Manager as determined by their contracts.3. Override commissions payable to the Manager of 25% under (a) above, and 10% under (b) above.4. The above schedule of payment will revert automatically to the original basis of computation at the end of each calendar year from the inception date of this Agreement or for any period less than one full calendar year the pro rata portion thereof for each period respectively.(B) The Company will pay to the Manager two and one-half per cent (2 1/2%) of all renewal premiums received by Company on all business so produced by the Manager in the territory assigned to it herein. This renewal commission shall be paid only for the first two (2) years renewal. Thereafter, the Company shall pay the Manager a Service Fee of two per cent (2%) of the premiums received by Company for the renewal of the policies after the tenth year as long as said business produced by it is in full force and effect on the books of the Company, including the business produced in the territory defined above, but Manager shall receive such 2% renewal commission only if such is not being71 paid to the individual writing agent.* * * Eleventh: The Manager will be paid by the Company a Management Fee of 1018 $ 2,000 per month for a period of the first twelve (12) months from the inception date of this Agreement.Twelfth: The Company covenants and agrees that it will establish an advertising budget for the Manager of $ 2,500 for the first year of this Agreement and $ 2,500 for the second year of this Agreement.* * * Fifteenth: This Agreement may be terminated by either party hereto upon giving one (1) year's written notice.Subsequent to the execution of the management agreement with NW, new commission contracts were executed between the overseas general and soliciting agents and NW, since each agent's authority to write insurance originated only from NW. Approximately 90 percent of TCI's annual income resulted from commission overrides generated by the sale of NW insurance policies through the overseas agency force.TCI was not licensed to write any form of insurance coverage. Its primary function was that of an international agency force manager under contract with NW. In addition to its management function, TCI coordinated the payment of premiums through72 an arbitrage procedure, occasioned by the blocked currency policies of several foreign countries. TCI used arbitrage procedures, in conjunction with New York banks, to enable the overseas policyholders the convenience of paying their premiums in their native currencies and then converting such currencies into U.S. dollars.To furnish this service to NW, all insurance applications and premiums were sent directly to TCI from the overseas agents. The applications were then forwarded to NW's underwriting department and, if accepted, it would issue the policies and send them to TCI for distribution to NW's agents and policyholders.The management and currency functions of TCI, prior to its president's death in 1967, were performed by a staff of four persons. As one of these individuals, Joseph was actively involved in the supervision of the agency force which comprised approximately 200 overseas agents. He traveled extensively throughout the regions of the Caribbean, Central and South America, Mexico, and the Far East, in an effort to cull and develop qualified life insurance agents to sell policies issued by NW.Because of Joseph's experience in the international insurance market, 73 TCI was also able to expand its operations by rendering professional services to a number of countries in Europe and 1019 South America. Such services included, inter alia, advising domestic insurance companies on transacting business in foreign countries, and representing the insurance ministries of Venezuela and Panama on insurance problems while offering assistance to such countries in the drafting of their respective insurance laws.On September 2, 1967, Joseph died. Decedent's brother, Stephen Taracido (hereinafter Stephen), who had managed the Puerto Rican branch office of TCI, returned to New York to operate and preside over the TCI home office. On October 13, 1967, approximately 6 weeks after the death of TCI's president, NW canceled its management agreement with TCI, effective 1 year hence, pursuant to paragraph 15 of the agreement. NW informed the overseas agents of this fact and advised them that they should send all insurance applications directly to NW and that they were now eligible to participate in certain company-sponsored incentive programs.On or about January 22, 1968, NW informed TCI that it was halting the payment of commission overrides to TCI until74 an audit could be performed because NW believed that it had paid TCI commissions in excess of the agreed contract rate. Since over 90 percent of TCI's income was generated from commission overrides, this immediate reduction in revenue caused Stephen to curtail his customary visits to the overseas agency force. In October 1968, Stephen was instructed by petitioners to close the TCI offices because of a lack of income.Petitioners, as executors of decedent's estate and sole shareholders of TCI, initiated a legal action against NW in March 1968. The complaint set forth the following pertinent grounds for the action:AS AND FOR A FIRST CAUSE OF ACTION: * * 3. The causes of action alleged herein arose out of the transaction of business by defendant within the State of New York and the commission by defendant of tortious acts causing injury to plaintiff within this state with knowledge that the said acts would have consequences within this state. Defendant derives substantial revenue from interstate and international commerce. * * 20. If the acts of defendant, as stated hereinabove, are permitted to continue, plaintiff will suffer permanent and irreparable injury and its entire75 business will be destroyed.1020 21. Unless restrained, as requested herein, defendant will continue its illegal acts and practices and further its attempts to destroy plaintiff's business by capturing the fruits of plaintiff's efforts. * * AS AND FOR A SECOND CAUSE OF ACTION: * * 24. All of the acts and practices, as set forth herein, constitute a breach of the Agreement between plaintiff and defendant.25. By reason of all of the foregoing, plaintiff has suffered damages in the sum of not less than $ 1,000,000.00 and is entitled separately to punitive damages in the sum of $ 1,000,000.00.AS AND FOR A THIRD CAUSE OF ACTION: * * 27. The acts committed by said defendant were wilfully, intentionally and maliciously committed with the intention of interfering with the carrying on of plaintiff's business and affecting its goodwill, credit and reputation and diminishing its profits and said acts have caused great injury to plaintiff.28. By reason of the foregoing facts, plaintiff has suffered damages of not less than $ 1,000,000, and is separately entitled to punitive damages in the amount of $ 1,000,000.AS AND FOR A FOURTH CAUSE OF ACTION: * * 30. Prior to commencement76 of this action, plaintiff duly demanded of defendant that it account for its acts and that it pay over to plaintiff the amounts due it, but defendant has failed and refused to do so, and has not rendered any accounting for the money and value received and retained by it in violation of its obligation to plaintiff, nor paid over to plaintiff such amounts as were received and retained by it.After NW filed its responsive pleading, TCI's counsel moved for a preliminary injunction which was denied. Counsel also moved for a partial summary judgment with respect to commissions in the amount of $ 76,338.08, conceded by NW as due TCI as of July 31, 1968, which was granted on September 20, 1968. Subsequent to this judgment, settlement negotiations ensued between the parties and an agreement to compromise the suit was reached on December 30, 1968. Said agreement provided for payment by NW to TCI of a total consideration of $ 220,000. This amount was specified in the agreement as follows:(1) The party of the second part will pay to TARACIDO & COMPANY, INCORPORATED on or before December 31, 1968 the sum of Seventy Six Thousand Three Hundred Thirty Eight and 08/100 ($ 76,338.08) Dollars. 77 (2) The party of the second part will further pay to TARACIDO & COMPANY, INCORPORATED the sum of One Hundred Forty Three 1021 Thousand Six Hundred Sixty One and 92/100 ($ 143,661.92) Dollars, one half thereof to be paid on July 1, 1969 and the remaining one half on January 5, 1970.This $ 220,000 settlement figure was a result of extensive computations and negotiations by the parties to the pending litigation. Such negotiations began on November 20, 1968, when NW tendered two checks to TCI in the respective amounts of $ 76,338.08 and $ 53,481.50. These checks were returned to NW by TCI on November 22, 1968, because TCI computed that it was entitled to commissions in excess of $ 250,000. NW thereupon amended its offer to settle the litigation by offering $ 215,000 which, after further negotiations, was raised to $ 220,000. 2 However, while NW and TCI had each developed computations to support the commission arrearage, they had no discussions or computations regarding the manner of apportioning the $ 220,000 settlement proceeds.78 Pursuant to the settlement agreement, TCI received $ 76,338.08 from NW on December 31, 1968. The remaining $ 143,661.92 was received by decedent's estate from NW, in two equal installments of $ 71,830.96, on the respective dates of July 1, 1969, and January 5, 1970. On February 28, 1969, a special meeting of the shareholders was held dissolving TCI and distributing its net assets to its shareholders.TCI reported $ 76,338.08 of the $ 220,000 settlement amount as ordinary income on its corporate income tax return for the calendar year ended December 31, 1968. The final return of TCI for the short period from January 1, 1969, to February 28, 1969, indicates no recognition of the $ 143,661.92 settlement amount due TCI. 3In his statutory notice of deficiency, 79 respondent determined that TCI had additional taxable income for inclusion in its final 1022 return in the amount of $ 143,661.92. Respondent found that TCI, as a cash basis taxpayer, did not clearly reflect income for the short taxable period from January 1, 1969, through February 28, 1969, by its failure to include the settlement amount of $ 143,661.92 in income. 4 He further determined that said amount was not received from the sale or exchange of a capital asset but, rather, was received as ordinary income from the termination of TCI's insurance agency contract with NW and the general release of all rights to commissions actually due and future renewal commissions.OPINIONRespondent argues that the $ 143,661.92 amount paid by NW in settlement of the lawsuit brought by TCI represented a payment for the relinquishment of TCI's rights to receive present and future commission80 income due under the management agreement terminated by NW. Petitioners, on the other hand, contend that TCI had substantial goodwill as an international insurance broker and managing agent and that it had a proprietary interest in its foreign agency sales force which NW destroyed. The parties are in agreement that the proper test to be applied in cases of this kind is that the tax character of the settlement proceeds is determined by the nature of the claims involved and the basis of the recovery. Lyeth v. Hoey, 305 U.S. 188">305 U.S. 188 (1938); Freeman v. Commissioner, 33 T.C. 323">33 T.C. 323 (1959); Booker v. Commissioner, 27 T.C. 932">27 T.C. 932 (1957); Megargel v. Commissioner, 3 T.C. 238">3 T.C. 238 (1944); Raytheon Production Corp. v. Commissioner, 1 T.C. 952">1 T.C. 952 (1943), affd. 144 F.2d 110">144 F.2d 110 (1st Cir. 1944), cert. denied 323 U.S. 779">323 U.S. 779 (1944).Petitioners brought suit to recover $ 2 million in compensatory damages and $ 2 million in punitive damages based upon grounds of breach of contract and intentional interference with81 TCI's business. The breach of contract action was founded on the withholding of commissions allegedly due TCI. The intentional interference of business tort action was based upon, inter alia, the instruction by NW to the foreign agency force that such agents should deal directly with NW, thereby diminishing TCI's profits.1023 It is well settled that if the nature of the claim settled represents damages for lost profits, it is taxable as ordinary income. Freeman v. Commissioner, 33 T.C. 323">33 T.C. 323, 327 (1959); Raytheon Production Corp. v. Commissioner, 1 T.C. 952">1 T.C. 952 (1943); affd. 144 F.2d 110">144 F.2d 110 (1st Cir. 1944); Armstrong Knitting Mills v. Commissioner, 19 B.T.A. 318">19 B.T.A. 318 (1930). However, if the nature of the claim settled is received as the replacement of capital destroyed or the sale or exchange of a capital asset, then it is a nontaxable return of capital or taxable as capital gains, respectively. Bresler v. Commissioner, 65 T.C. 182">65 T.C. 182 (1975); Sager Glove Corp. v. Commissioner, 36 T.C. 1173">36 T.C. 1173 (1961), affd. 311 F.2d 210">311 F.2d 210 (7th Cir. 1962),82 cert. denied 373 U.S. 910">373 U.S. 910 (1963); Estate of Carter v. Commissioner, 35 T.C. 326">35 T.C. 326 (1960), affd. 298 F.2d 192">298 F.2d 192 (8th Cir. 1962), cert. denied 370 U.S. 910">370 U.S. 910 (1962); Reid v. Commissioner, 26 T.C. 622">26 T.C. 622, 633 (1956); Goldsmith v. Commissioner, 22 T.C. 1137 (1954).In the instant case, the only practical issue before us is whether petitioners have established that any part of the $ 143,661.92 settlement amount is either a return of capital 5 or entitled to capital gains treatment. If the complaint stated only the breach of contract action for lost commissions then our path would be easy since the nature of the claim settled would clearly represent only damages for lost profits and be taxable as ordinary income. State Fish Corp. v. Commissioner, 48 T.C. 465">48 T.C. 465, 472-473 (1967). However, the complaint also refers quite generally to interference with the carrying on of TCI's business affecting its goodwill, credit, and reputation.83 Petitioners maintain that TCI had intangible capital assets consisting of its goodwill and foreign agency force. There is nothing in the record, however, which persuades us that there had been a capital loss or destruction of a capital asset. To the contrary, the record does show that TCI was the mere alter ego of decedent. The management contract which was executed between TCI and NW was, in substance, a management contract between decedent and NW. This is evidenced by the fact that decedent received, as part of the agreement, a perfunctory title, 1024 de minimis compensation, and enrollment in NW's employee stock option plan.It is also equally clear from the testimony offered at trial that decedent was the sine qua non of TCI's success. He was a seasoned international insurance consultant who apparently had an outstanding ability at organizing and developing overseas agency forces. Indeed, TCI had a staff of only four individuals, including decedent, and its future success as a corporate entity was inextricably tied to decedent's ability, experience, and qualifications.The facts of this case establish that any value which TCI may have had at the time of settlement, 84 in addition to its tangible assets, was due to the personal ability, business acquaintanceship, and other individualistic characteristics of decedent. Such personal qualities do not constitute goodwill as an item of property. MacDonald v. Commissioner, 3 T.C. 720">3 T.C. 720, 727 (1944).This is not the case of an individual selling insurance. Decedent sold no policies. Nor was TCI licensed to do so. The cases to which petitioners refer this Court deal with insurance agencies that sell insurance and the sale of these agencies to third parties. Such cases are inapposite to the facts at hand. Ordinarily when an insurance agent sells his business, including all its records, we have found that the amount received on the sale was from the sale of a capital asset and the gain realized was capital gain. Kenney v. Commissioner, 37 T.C. 1161">37 T.C. 1161 (1962).Furthermore, in the case of a true insurance business, a major intangible asset sought to be acquired by the prospective buyers is the insurance expiration records. 6 See Johnson v. Commissioner, 53 T.C. 414">53 T.C. 414 (1969). NW maintained and retained such records. 85 The only records which TCI maintained were those dealing with the foreign agency force which amounted to one large Rolodex file consisting of approximately 200 cards. Therefore, neither TCI nor decedent was an insurance agent but, rather, decedent 1025 through his solely owned corporation acted as a manager of insurance agents.86 Petitioners' other arrow similarly misses its mark when they argue that TCI had a proprietary interest in the foreign agency sales force. This argument approaches the chimerical when one considers that the general and soliciting agents executed new commission agreements with NW after the merger of IMC and NW. In addition, NW had the final approval on all insurance applications, and furthermore, the foreign agents were agents of NW -- not TCI -- since the former was the insurer and the latter the manager. A close analysis of the facts discloses that if any party can be said to have had a proprietary interest in the foreign sales force, it was NW and not its managing agent TCI.It is a basic tenet of Federal tax law that tax consequences should turn on the substance of a transaction rather than on its form. Gregory v. Helvering, 293 U.S. 465 (1935). The reality of the situation hereunder is that decedent obtained an employment contract (via his closely held corporation) with NW for the primary purpose of managing its foreign agency force. It is clear from the record that NW viewed the management contract with TCI as an employment contract, in substance, 87 with decedent. If the contract is viewed as an employment contract, with the payment of commissions as the source of such personal service compensation, then the settlement amount must be treated as ordinary income. Cf. F. W. Jessop v. Commissioner, 16 T.C. 491">16 T.C. 491 (1951).When all the preceding facts are measured against the standard formulated by the Supreme Court, that the nature and basis of the action show the nature and character of the consideration received upon compromise, we think that what petitioners received in settlement of their claims for breach of contract and intentional interference of TCI's business must be held to be ordinary income. What petitioners were suing for were lost profits, whether from loss of commissions, under the breach of contract action, or whether from loss of profits -- about 90 percent of which were derived from the management contract with NW -- under the intentional interference of business tort action. What petitioners received when they compromised the suit must be held to have been impressed with that same ordinary income character.While we cannot accept the allocation of the settlement 1026 proceeds88 offered by petitioners ($ 76,338.08 ordinary income and $ 143,661.92 as return of capital), we may exercise our judgment to make an allocation if the record furnishes us a basis for making an allocation to petitioners' advantage. Petitioners have the burden of proving what portion, if any, of a settlement is entitled to capital gains treatment. See Sager Glove Corp. v. Commissioner, 36 T.C. 1173">36 T.C. 1173, 1180 (1961); Estate of Carter v. Commissioner, 35 T.C. 326">35 T.C. 326, 333 (1960); Freeman v. Commissioner, 33 T.C. 323">33 T.C. 323, 328 (1959).To carry such burden, petitioners rely upon the allocation of damages alleged in the complaint and argue that the rule of apportionment set forth in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), adheres in this case. The Cohan rule, enunciated in Cohan v. Commissioner, supra, deals with the deduction of unsubstantiated business expenses for a taxpayer who demonstrated to the satisfaction of the Court that some business expenses were incurred. We are at a loss to see how this rule applies in the instant case. 89 While in some cases we have used our best judgment in allocating a portion of settlement proceeds for capital gains treatment, 7 nonetheless, such judgment must be based upon evidence in the record and not upon a rule of convenience drawn by petitioners.We find a paucity of evidence in the record concerning the actual basis of the settlement. The testimony offered by petitioners regarding the appraised valuation of TCI in the abortive sales attempt had apparently little, if any, bearing on the settlement amount. In contrast, the testimony of NW's president indicated that the value of TCI was equivalent to the value of future renewal commissions or approximately $ 207,000, which is rather close to the90 actual settlement figure agreed upon by the parties of $ 220,000.Since the record does not afford any other basis upon which we can make an allocation to petitioners' advantage, we hold that the entire sum received in settlement of petitioners' claims, i.e., $ 143,661.92, represents a recovery for the relinquishment of TCI's right to receive present and future commission income as *1027 lost profits and is taxable to petitioners in full as ordinary income under section 61.Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩2. Shortly after decedent's death, petitioners made a valuation of TCI for purposes of selling it to a New York insurance agency.Two alternative methods were employed in determining the appraised value of TCI. One method used a formula based on 150 percent of earned commissions plus book value, and the other method employed a formula based on 6 times 1 year's net income plus book value.Under the former method, TCI had an appraised value of $ 301,800, and pursuant to the latter method, it had an appraised value of $ 311,600. Upon notification of NW's cancellation of its management contract with TCI, the prospective buyer terminated all purchase negotiations with TCI. The appraised valuation of TCI had little, if any, impact on the settlement amount of $ 220,000.↩3. The $ 143,661.92 settlement amount was also excluded from the estate's income tax return. However, this sum did find its way into the computation of decedent's estate tax since respondent increased the valuation of decedent's interest in TCI to reflect such amount.↩4. We note that petitioners are not contesting respondent's determination that the final period return of TCI did not clearly reflect income.↩5. Petitioners argue on brief that if the settlement amount is determined by this Court to be compensation for the conversion or destruction of capital assets (e.g., goodwill), then no capital gains tax is due since the amount received by TCI or its shareholders is no greater than the basis of the assets destroyed. This return of capital question is never reached, however, if we find that the settlement proceeds are not entitled to capital gains treatment.↩6. These are the records of an insurance firm, including copies of the insurance policies, showing the names of the insured, the amount and nature of the income coverage, the location of the risk, the policy expiration date, the premium, and other data concerning insurance carried by the client.Their importance as intangible assets was aptly noted under Marsh & McLennan, Inc. v. Commissioner, 51 T.C. 56">51 T.C. 56, 58 (1968), affd. 420 F.2d 667">420 F.2d 667 (3d Cir. 1969):"Such insurance expirations aid in obtaining renewals of the business of the acquired broker's accounts by supplying information pertinent to the insurance needs of the accounts and permitting it an advantage over competitors for the business by furnishing it an entree to the insured which would not otherwise be available."↩7. See, e.g., Levens v. Commissioner, 20 P-H Memo T.C. par. 51,330, 10 T.C.M. (CCH) 1083">10 T.C.M. 1083↩ (1951) (wherein arbitration award proceeds were allocated one-half as ordinary income and one-half as capital gain based upon this Court's best judgment under the evidence in the record).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620365/	ESTATE OF ROSSMAN R. SAWYER, DECEASED, NORTHERN INDIANA BANK AND TRUST COMPANY, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Sawyer v. CommissionerDocket No. 42775-85.United States Tax CourtT.C. Memo 1988-132; 1988 Tax Ct. Memo LEXIS 160; 55 T.C.M. (CCH) 492; T.C.M. (RIA) 88132; March 28, 1988; As amended March 28, 1988 Joel Yonover, for the petitioner. James S. Stanis, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $ 79,204.55 in petitioner's Federal estate tax. After concessions, the issue for decision is whether petitioner is entitled to a marital deduction attributable to decedent's marital trust. Resolution of this issue turns on whether parol evidence proffered by petitioner is admissible for purposes of construing the trust instrument, and if so, whether the instrument should be construed so as to permit funding of the marital trust. FINDINGS OF FACT Some of the facts in this case are stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Rossman R. Sawyer (decedent died December 13, 1981, a resident of Valparaiso, Indiana. Decedent was survived by his wife Beulah162 Sawyer (Mrs. Sawyer) and no children. Pursuant to decedent's will, the Porter County (Indiana) Superior Court appointed as executor the Northern Indiana Bank and Trust Company (the Bank or Executor) on January 12, 1982. In November 1976 decedent and Mrs Sawyer consulted James Sullivan (Sullivan), a Valparaiso attorney, regarding the planning of their estate. At that time decedent owned a 160-acre farm (the farm) in Newton County, Indiana. He inherited the farm from his brother, who died intestate in 1973 without a widow or children. The farm had been owned by members of decedent's family for almost 100 years. After the initial consultation, Sullivan's office prepared and sent to decedent drafts of a will and trust instrument, which decedent read and rejected. Sullivan's office redrafted the will and trust instrument, and on January 5, 1977, decedent executed the revised instruments. The will provided in relevant part as follows: ITEM IAll expenses of administering my estate and all estate, inheritance transfer, legacy or succession taxes, or death duties, which may be assessed or imposed with respect to my estate, or any part thereof, wheresoever situated, whether163 or not passing under my Will, including the taxable value of all policies of insurance on my life and of all transfers, powers, rights or interests includible in my estate for the purposes of such taxes and duties, shall be paid out of my residuary estate as an expense of administration and without apportionment, and shall not be prorated or charged against any of the other gifts in this Will or against property not passing under this will. ITEM III bequeath all my personal and household effects and the like not effectively disposed of otherwise, such as clothing, furniture, furnishings, silver, books, pictures, automobiles (including policies of insurance thereon, if feasible) to my wife, Beulah L. Sawyer * * . ITEM IIII devise and bequeath all my residuary estate, being all property, real or personal, wherever situated, in which I may have any interest at the time of my death, not otherwise effectively disposed of, to the Trustee under the Trust Agreement dated the 5th day of January, 1977, between me as Grantor, and the Northern Indiana Bank and Trust Company of Valparaiso, Indiana, as Trustee, to be added to and commingled with the trust property of that trust164 and held and distributed, in whole or in part, as if it had been a part thereof immediately before my death, in accordance with the provisions of that Agreement and any amendments made to it pursuant to its terms before my death. It is my intention that my farm, * * * be distributed to the said Trustee, pursuant to this item. I, therefore, direct my Executor to so distribute my farm and not to sell it. The trust instrument, pursuant to which decedent was grantor and the Bank was trustee, provided in relevant part as follows: ARTICLE II* * * 3. Notwithstanding anything herein to the contrary, so long as the GRANTORR is able to act, the GRANTOR shall have sole responsibility with respect to the retention and management of any real estate held by the TRUSTEE, including its maintenance, occupancy and insurance and the payment of taxes on it, and the TRUSTEE shall deal with the real estate only to the extent that the GRANTOR directs in writing. No TRUSTEE shall be accountable for any loss sustained by reason of any action taken or omitted pursuant to the provisions of this paragraph, and no person dealing with the TRUSTEE need inquire whether or not the provisions of the165 paragraph have been complied with. * * ARTICLE VOn the death of the GRANTOR, if the GRANTOR'S wife survives the GRANTOR, the TRUSTEE shall place the GRANTOR'S farm, * * * in a separate trust to be known as Trust A, to be held and disposed of with any other assets allocated to Trust A, upon the following terms: 1. During the period, if any, when the GRANTOR'S wife survives the GRANTOR, the TRUSTEE shall use the net income from Trust A for the health, welfare and support of the GRANTOR'S wife. * * * In addition, the TRUSTEE is also authorized to use such sums from the principal of Trust A for said purposes as it deems in the best interests of the beneficiary. * * * 2. Upon the death of the GRANTOR'S wife after the GRANTOR'S death, the TRUSTEE shall distribute the GRANTOR'S farm to the GRANTOR'S cousin, Ray Corbett, if he is living at that time, and if he is not then living, to his descendants, per stirpes. If Trust A contains assets other than the GRANTOR'S farm at the time of the GRANTOR'S death, upon the death of the GRANTOR'S wife, the Trustee shall distribute such other assets to the Lutheran University Association, an Indiana corporation, for the uses of Valparaiso166 University, Valparaiso, Indiana. 3. Notwithstanding anything herein to the contrary, the GRANTOR directs the TRUSTEE to retain title to the GRANTOR'S farm so that it will be available for distribution to Ray Corbett pursuant to the terms of this Article. * * ARTICLE VIOn the death of the GRANTOR, if the GRANTOR'S wife survives the GRANTOR, the TRUSTEE shall set aside as a separate Trust, to be known as "Trust B," an amount equal to the maximum estate tax material deduction allowable on determining the Federal estate tax on the GRANTOR'S estate for Federal estate tax purposes, less the value for Federal estate tax purposes of all other items which pass or have passed to the GRANTOR'S wife, other than the trust property, but only to such extent that such items are included in the GRANTOR'S gross estate and are allowable as a marital deduction for Federal estate tax purposes. In making the computations necessary to determine the amount of said TRUST B, the final determination for Federal estate tax purposes shall control. Any additional assets held by the TRUSTEE pursuant to this trust shall be allocated to Trust A, hereunder, and held and distributed pursuant to the167 terms of Trust A. The GRANTOR understands that assets held by the TRUSTEE may be insufficient to fund Trust B fully pursuant to the foregoing paragraph if the GRANTOR'S farm is held in Trust A. In that event, the amount described in the preceding paragraph shall be reduced such that the GRANTOR'S farm is held in Trust A and the remainder of the trust assets are held as Trust B. On January 14, 1977, Mr. Sawyer conveyed the farm's legal title to Northern Indiana Bank to be held by the trust. As a result of Mr. Sawyer's death, joint tenancy property totaling $ 61,755.79 passed by operation of law to Mrs. Sawyer as the surviving joint tenant. Mrs. Sawyer also elected to receive a surviving spouse's allowance of $ 8,500 and received life insurance proceeds of $ 3,179.73. On January 14, 1982, Mr. Sawyer's will was admitted to probate. Assets totaling in value $ 216,569 became subject to administration in the probate proceedings and were disposed of under the terms of Mr. Sawyer's will. The probate inventory did not include any interest in the farm or trust. Prior to filing petitioner's Federal estate tax return, Executor determined that, under the express terms of the trust168 instrument and will, the value of residuary assets pouring into Trust B (the marital trust) would not be sufficient to produce the maximum marital deduction, i.e., 50 percent of the value of the adjusted gross estate. In order to achieve this result, however, Executor created a liability against Trust A (or the nonmarital trust), which held the farm, to the marital trust, thereby adjusting the values of the trusts. On September 13, 1982, Executor filed a Federal estate tax return on behalf of petitioner. Executor amended the return on November 2, 1982. As amended, the return reported an adjusted gross estate of $ 556,231 and a marital deduction of 50 percent of the adjusted gross estate, or $ 278,116. As of the time of trial, the sum of expensed of administration, debts, and death taxes, including all amounts previously paid and all additional expenses and taxes which were to be paid and all additional expenses and taxes which were to be paid as a result of examinations of the Federal estate tax return and Indiana inheritance tax return, exceeded the value of the assets administered in the probate proceedings. As of the date of trial, no Indiana court had construed or interpreted169 the terms of the will or trust or ruled upon its validity. In his notice of deficiency, respondent reduced petitioner's marital deduction to $ 73, 435.52, representing the total value of joint tenancy property, surviving spouse's allowance, and life insurance proceeds passing to Mrs. Sawyer as a result of decedent's death. OPINION Section 20561 allows a Federal estate tax "marital deduction" from a decedent's gross estate for the value of property interests passing from the decedent to the surviving spouse. Section 2056(c) provided an upper dollar limit to the marital deduction of (i) $ 250,000 or (ii) 50 percent of the value of the adjusted gross estate, whichever is larger. For purposes of computing the marital deduction, the valuation of property passing to the surviving spouse is to be made as of the time of the decedent's death. Section 20.2056(b)-4(a), Estate Tax Regs.; Estate of Reid v. Commissioner T.C. (Feb. 22, 1988). The dispute in this case170 principally concerns whether decedent's trust instrument should be reformed or otherwise interpreted in light of parol evidence so as to afford petitioner, by the funding of decedent's marital trust, a resulting marital deduction. Petitioner argues that it is entitled to the maximum marital deduction on three alternative grounds. First, petitioner argues that decedent executed the trust instrument with the paramount intent to achieve the maximum marital deduction, not to pass title to the farm to a collateral relative. It asserts that the trust instrument, however, is "ambiguous" in this respect. Petitioner contends that parol evidence is both admissible and demonstrative as to decedent's intent to achieve the maximum marital deduction. Petitioner seeks to prove decedent's intent by testimony of the draftsman of the instrument and of the surviving spouse. petitioner further contends that, in light of the Bank's authority under the trust instrument to invade the principal of the nonmarital trust for Mrs. Sawyer's benefit, the Bank may properly create a liability, or equitable charge, between the nonmarital and marital trusts in order to effectuate decedent's intent. Second, petitioner171 argues that decedent executed the trust instrument with the intention of creating a land trust 2 and that insofar as this intention is not clear it is attributable to ambiguous drafting or scrivener's error. Again, petitioner asserts that parol evidence is admissible and demonstrative of decedent's intent to create a land trust, and that the trust should be construed to this effect. The evidence proffered by petitioner consists of the testimony of the draftsman and the conduct of the trustee. Petitioner asserts that, under land trust law, decedent's beneficial interest in the trust constituted personal property which passed through his residuary estate; thus, the beneficial interest absorbed administrative expenses and death taxes that were payable out of the residuary estate and freed residuary marital property to pour into the marital trust. Petitioner asserts that if we determine that decedent failed to create a land trust, the deed by which decedent transferred the farm must also fail because decedent intended to create a land trust. In this event the farm would have passed through decedent's residuary estate, thereby absorbing administrative expenses and taxes. 172 Third, petitioner argues that, if the proffered parol evidence is inadmissible, the intent of decedent can still be determined by reading the will and trust instrument together, which interpretation, by normal rules of construction, would require application of the maximum marital deduction with a concomitant equitable charge against the nonmarital trust. Respondent argues that petitioner is not entitled to any marital deduction emanating from the marital trust because the value of the residuary assets was entirely absorbed by payment of administrative expenses and death taxes; thus, the value of residuary assets pouring into the marital trust is zero. Respondent further argues that the trust instrument clearly and unambiguously provided (1) that achievement of the maximum marital deduction was subject to decedent's overriding intent to preserve the unencumbered title to the farm, thus precluding use of the equitable charge for purposes of funding the marital trust; and (2) the trust created by decedent was a standard inter vivos trust, not a land trust, and as such decedent's interest in the trust passed nonprobate rather than under the will's residuary clause. Thus, respondent173 argues that the parol evidence proffered by petitioner is inadmissible for purposes of construing or interpreting the trust instrument. In Estate of Craft v. Commissioner,68 T.C. 249">68 T.C. 249 (1977), affd. per curiam 608 F.2d 240">608 F.2d 240 (5th Cir. 1979), we examined the two approaches this Court has taken in applying the parol evidence rule. In that decision we concluded that the application of the rule differs according to the nature of the inquiry. In numerous cases, particularly where we are concerned with the proper allocation (or character) of amounts paid under a contract, we have applied the "third-party to the instrument" rule. Thus, because the Commissioner was not a party to the instrument, neither he nor the taxpayer may rely on the rule to exclude extrinsic evidence offered by the other. Estate of Craft v. Commissioner,68 T.C. at 260, and cases cited therein. However, in instances where we must make a state law determination as to the existence and extent of legal rights and interests created by a written instrument, particularly in cases174 involving the construction of the terms of a will or trust, we look to that state's parol evidence rule in deciding whether or not to exclude extrinsic evidence concerning those rights and interests. Estate of Craft v. Commissioner,68 T.C. at 263. Here, we are concerned with the existence and extent of property interests passing to Mrs. Sawyer in the form of marital property held in trust. Therefore, we must look to Indiana law in deciding whether or not to exclude the extrinsic evidence proffered by petitioner. Under Indiana law the intention of the settlor generally governs the construction and interpretation of trust instruments. Hauck v. Second National Bank of Richmond,153 Ind. App. 245">153 Ind. App. 245, 286 N.E.2d 852">286 N.E.2d 852, 861 (1972). In ascertaining this intent, Indiana courts have adopted the so-called "four corners" rule; that is, the intention of the settlor must be determined within the four corners of the instrument unless the provisions of that instrument are ambiguous. The logical extension of this rule of construction is Indiana's parol evidence rule, which175 provides that "extrinsic evidence is inadmissible to expand, vary or explain the instrument unless there has been a showing of fraud, mistake, ambiguity, illegality, duress, or undue influence." Turnpaugh v. Wolf,482 N.E.2d 506">482 N.E.2d 506, 508 (Ind. App. 1985); Hauck v. Second National Bank of Richmond,286 N.E.2d at 861. A written instrument is ambiguous if it is reasonably susceptible of different constructions. Conversely, if a written instrument is so worded that it can be given a certain or definite meaning or interpretation, it is not ambiguous. Even where an apparent ambiguity exists, if it can be reconciled from a reasonable interpretation of the instrument, extrinsic evidence should not be admitted. Hauck v. Second National Bank of Richmond,286 N.E.2d at 861. In interpreting the terms of a dispositive instrument, specific language controls that of a general nature. See, e.g., Porter v. Union Trust Co. of Indianapolis,182 Ind. 637">182 Ind. 637, 108 N.E. 117">108 N.E. 117 (1915) (relating to wills). We reject petitioner's assertion that the176 trust instrument is reasonably susceptible of an interpretation that achievement of the maximum marital deduction, i.e., 50 percent of the adjusted gross estate, was decedent's paramount intent. Although the trust instrument was drafted to permit optimal use of the marital deduction to the extent marital property was available, the second paragraph of Article VI gives priority to the decedent's intent that the farm be distributed to Ray Corbett, as specifically stated in Article V, paragraph 3. The trust instrument provides that the farm was to be allocated to the nonmarital trust, even though this might result in an underfunded marital deduction. The language is not "legalese" likely to be overlooked by decedent, who had read and rejected prior drafts of the will and trust instrument. Rather, it indicates that decedent understood this possibility and nonetheless authorized the possible underfunding. Because the trust instrument is not ambiguous, we cannot consider extrinsic evidence that would vary the terms of the trust. In this case petitioner seeks to directly contradict the trust instrument -- a prohibited use of parol evidence in virtually all jurisdictions. See, e. 177 g., Scott, Law of Trusts, sec. 38 (3d ed. 1967). The Bank's creation of an equitable charge against the farm or nonmarital trust is not required by the terms of the trust and in this case amounts to a post-mortem effort to fund the trust instrument and will together. Nothing in the will contradicts the express language of the trust with respect to the farm. We need not discuss the merits of petitioner's argument that the trust instrument is ambiguous with regard to the type of trust it creates and that in light of parol evidence it should be interpreted as creating a land trust. Even if we characterized the trust as a land trust, the critical issue before us -- the issue of whether decedent's beneficial interest in the land trust constituted a residuary asset under the will, so as to absorb administrative expenses and death taxes -- remains unproved. A beneficial interest in a land trust may pass probate or nonprobate, depending upon the devolution provisions, or lack thereof, of the trust agreement. Kenoe, Land Trust Practice secs. 3.8, 6.49 (1974). Although petitioner asserts that under178 Indiana law decedent's beneficial interest would, as personal property, constitute a residuary asset under his will, petitioner provides no legal authority or analysis in support of this assertion. Finally, petitioner does not explain why the beneficial interest was not inventoried as personal property in the estate's probate proceedings. For the foregoing reasons, we agree with respondent that, for purposes of determining petitioner's marital deduction, the value of marital property allocable to decedent's marital trust from the residuary estate is zero, and petitioner is not entitled to fund the marital trust by an equitable charge. Thus, petitioner is not entitled to any marital deduction attributable to the marital trust. We have carefully considered the other arguments of each party and conclude that they are either unpersuasive or unnecessary for resolution of the issues of this case. [Text Deleted by Court Emendation] Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code as amended and in effect at the date of decedent's death. ↩2. Indiana authorizes land trusts by statute. See Ind. Code secs. 30-4-2-9, 30-4-2-13, 30-4-2-14 (1972). For land trust law generally, see Robinson v. Chicago National Bank,32 Ill. App. 2d 55">32 Ill. App.2d 55, 58, 176 N.E.2d 659">176 N.E.2d 659, 661↩ (1961); Kenoe, Land Trust Practice sec. 1.3 (1974); Garrett, Land Trusts, 1955 University of Illinois Law Forum 655.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620367/	H. BENJAMIN MARKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ISAAC MARKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Marks v. CommissionerDocket Nos. 10806, and 10875.United States Board of Tax Appeals7 B.T.A. 895; 1927 BTA LEXIS 3086; July 30, 1927, Promulgated 3086 Bonuses were credited upon the books of a corporation to its principal stockholders, the petitioners, but were not actually paid to them during the taxable year. Held, that the petitioners did not receive the bonuses during the taxable year and they are not liable to income tax upon them. Lawrence A. Baker, Esq., John V. Coffield, Esq., and Leroy Sanders, Esq., for the petitioners. D. D. Shepard, Esq., for the respondent. SMITH 896 These proceedings were heretofore consolidated for hearing by appropriate order. The taxes in controversy are income taxes for the year 1920 in the respective amounts of $1,433.23 and $9,104.83. It is alleged by each petitioner that the Commissioner has erroneously included in income for the year 1920 an amount representing a bonus credited to him upon the books of the corporation of which he was an officer and a principal stockholder, but which he did not actually receive during the taxable year. FINDINGS OF FACT. The petitioners are individuals residing at Indianapolis, Ind. During the year 1920 they were officers and the principal stockholders of the General Engineering Co., a corporation engaged3087 in the business of dismantling Camp Bowie, near Fort Worth, Tex. They had organized the corporation for that purpose during the year 1919. They each held 498 of the 1,000 shares of stock of the company, and their brother-in-law, one Louis Sakowitz, held 2 shares. The remaining 2 shares were not issued. The contract for dismantling the camp was obtained from the Government by bid at a cost of $66,000. This money was all furnished by Isaac Marks and H. Benjamin Marks, a large portion being borrowed for the purpose. During the year 1920 Isaac Marks, president and general manager, and H. Benjamin Marks, vice president of the company, the petitioners herein, received salaries in the amounts of $12,000 and $5,000 respectively. The corporation kept its books and accounts upon a fiscal year basis ending June 30. At the close of the fiscal year ended June 30, 1920, it credited certain amounts as bonuses to the personal accounts of its officers and employees, totaling $82,000. The salaries paid and the bonuses credited, were as follows: NameSalaryBonusTotalH. B. Marks$10,000$5,000$15,000Isaac Marks12,00028,00040,000Louis Sakowitz6,0006,00012,000T. Moynahan12,00033,00045,000D. S. Rosenberg10,00010,00020,000Total50,00082,000132,0003088 Moynahan and Rosenberg owned no shares of stock of the General Engineering Co. The net income of the corporation for the fiscal year ended June 30, 1920, after the deduction of the bonuses 897 credited, was $100,595.97. No part of the bonuses credited to the petitioners upon the books of the corporation during the year 1920 was paid to them during the year. The balance sheets set up by the company at June 30, 1920, and at June 30, 1921, showed the following assets and liabilities: Balance SheetsJune 30, 1920June 30, 1921ASSETSCash$2,336.59$11,787.22Accounts receivable55,331.9740,638.99Notes receivable28,000.0030,833.24Personal accounts5,297.2016,625.26Installment contracts outstanding76,954.59144,602.05Merchandise inventory3,125.40350.00United States Liberty bonds3,312.563,612.56Land and buildings159,989.36100,483.56Autos and trucks1,964.66982.33Furniture and fixtures197.68300.26Linens113.9875.98Total assets336,623.99350,291.45LIABILITIESAccounts payable2,700.00Accounts payable, personal75,519.8568,078.37Notes payable27,254.0053,255.19Vendors' liens discounted7,500.0014,250.00Unrealized gross profits27,054.1758,425.21Capital stock96,000.0096,000.00Surplus100,595.9760,282.68Total liabilities336,623.99350,291.453089 The item "notes receivable," as above shown, represents promissory notes given to the corporation in part payment for houses which it had constructed, partly from the material reclaimed from the camp, upon nearby building lots which it had purchased. This building venture was undertaken in cooperation with certain civic organizations of Forth Worth as a means of providing much needed additional housing facilities to meet the rapid growth of the city. The item "installment contracts outstanding" represents the amounts due from purchasers of these houses on the unpaid balance of the purchase price. The item "land and buildings" represents property which had been thus acquired by the corporation and which was being held for sale. In making its contract with the United States Government for the dismantling of the Army camp, the petitioners on behalf of the corporation assumed full liability for any and all claims and demands 898 for damages that might be made against the Government in respect of the use and occupancy by the Government of the land comprising the camp site. The camp occupied a tract of about 1,400 acres, a part of which had been previously subdivided and3090 sold for building lots. The ownership of the land was, therefore, widely scattered and the liability in respect of the number of claims that might be made was proportionately large. The company deemed it advisable to maintain a reserve sufficient to offset this liability. The petitioners kept no individual books of account. They made their income-tax returns for the year 1920 upon a cash receipts and disbursements basis and did not report as income any amounts credited to them as bonuses upon the books of the company. OPINION. SMITH: The sole issue raised in these appeals was whether certain amounts credited to the petitioners upon the books of the General Engineering Co. during the year 1920 were received by them during that year so as to constitute a part of their taxable income for the year. The respondent, relying upon the decision of the Board in the , has held that the petitioners are liable to income tax in respect of bonuses credited to their accounts upon the corporation's books, upon the ground that they were "constructively" received by them. In the Brander appeal we stated with reference to "constructive" *3091 receipt: This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his Bonda fide selection of this method by "construing" that to be received of which in truth he has not had the use and enjoyment. It does not appear that the General Engineering Co. had on hand at any time during the year 1920 sufficient cash, or assets which might be readily converted into cash, to pay the bonuses credited to its officers and employees on June 30, 1920. On that date it had on hand cash in the amount of $2,336.59 and Liberty bonds in the amount of $3,312.56. It had other assets consisting of accounts receivable, notes receivable, installment contracts outstanding, land and buildings and other lesser items. It can not be said that the petitioners had the use and enjoyment of such assets during the year 1920. Judgment will be entered on 15 days' notice, under Rule 50.Considered by LITTLETON and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620368/	HENRY B. AMES AND DORTHA S. AMES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAmes v. CommissionerDocket No. 32613-83.United States Tax CourtT.C. Memo 1985-443; 1985 Tax Ct. Memo LEXIS 189; 50 T.C.M. (CCH) 891; T.C.M. (RIA) 85443; August 22, 1985. Edward G. Lavery, for the petitioners. Rebecca W. Wolfe, for the respondent. DINANMEMORANDUM OPINION DINAN, Special Trial Judge: This case was assigned to Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7456(c) and (d) 1 and General Order No. 8, 81 T.C. XXIII (1983). 190 This matter is before the Court on respondent's motion for partial summary judgment pursuant to Rule 121, Tax Court Rules of Practice and Procedure.2Respondent determined deficiencies in petitioners' Federal income tax for the years 1980 and 1981 in the amounts of $1,343 and $1,554, respectively. The principal adjustment to petitioners' Federal income tax returns for the years in issue was the disallowance of a claimed partnership loss in the amount of $3,995 for each year on the ground, inter alia, that the method of accounting used by the partnership did not properly and correctly reflect income, and created a distortion of income. The legal issue presented is whether the Commissioner abused his discretion in disallowing the claimed interest deductions. The facts are not in dispute. Petitioners were residents of Ogden, Utah, when they filed their petition in this case. On December 30, 1980, petitioners formed a partnership known as Ames and Ames (the partnership) for191 the purpose of purchasing real estate; each owns a 50 percent interest in the partnership. On the same date, December 30, 1980, petitioner H. Boyd Ames executed a real estate contract on behalf of the partnership with WRK Enterprizes, a Utah partnership, for the purchase of one time share unit in Kilburn Vacation Homeshare properties located near Park City, Utah. One time share unit is equivalent to one day's use of a vacation home each year. The average rent for one day in a Kilburn Vacation Home was $120 in 1980. Under the terms of the contract, the purchase price of the time share unit purchased by petitioners was $2,775. That amount included the purchaser's share of furniture and personal property in the unit. The purchase price was to be paid as follows: $650 as a cash down payment and the balance of $2,125 to be paid at the rate of $465 per year for a period of 10 years beginning on December 31, 1980, with the entire balance of principal and accrued interest due and payable on or before December 31, 2009. The $465 payments were to be applied first to the payment of interest and second to the reduction of principal. Beginning on December 31, 1980, and through December 31, 1993, interest192 accrues on the unpaid balance of the purchase price at the rate of 188 percent per year ($3,395). Beginning on December 31, 1994, and for the remainder of the term of the contract, interest will accrue on the unpaid balance of the purchase price at the rate of 47 percent per year ($998.75). Under the terms of the contract, interest is not earned or accrued on unpaid interest. 3 A final balloon payment is to be paid by the purchaser on December 31, 2009, in the amount of $69,475. The terms of the contract provide that there shall be no personal liability for payment of the debt incurred as a result of a purchase. Upon default by a purchaser, the sole remedy retained by the seller is the right to foreclose on the property. The unpaid balance of principal and interest, therefore, is a nonrecourse indebtedness secured by the time share unit. The seller assumed that the time share unit would appreciate at an annual rate of 11.75 percent for 30 years and that its value would equal the purchase price and the interest accrued thereon in 2009. Ames and Ames filed U.S.193 Partnership Returns of Income (Forms 1065) for the years 1980 and 1981 upon which the accrual method of accounting was elected. The partnership reported no income from the one day time share unit in 1980 and 1981; it claimed an interest deduction of $3,995 in each of those years. Petitioners claimed a distributive loss from the partnership in the amount of $3,995 on their Federal income tax return for each of the years 1980 and 1981. In his brief, respondent informs us that the partnership's method of allocating greater interest expense to the initial years of the term of the note is similar to the Rule of 78's. In their brief, petitioners obligingly accept respondent's characterization of the partnership's method of accounting as being similar to the Rule of 78's and then submit a lengthy legal argument defending the partnership's use of that method of accounting. Respondent's reference to the Rule of 78's in the context of this case is patently erroneous. Under the Rule of 78's, the amount of interest allocable to each payment period over the term of the loan is determined by multiplying the total interest payable by a fraction the numerator of which is the number of payment194 periods remaining in the term of the loan at the time of the calculation (including the period for which the calculation is made) and the denominator of which is the sum of the digits of the term of the loan. In this case, the total interest payable on the unpaid balance of the purchase price, based upon an annual interest rate of 16.75 percent, is $10,678.12 ($2,125 X 16.75% X 30 years). The denominator of the fraction determined in accordance with the Rule of 78's is 465. See James Brothers Coal Co. v. Commissioner,41 T.C. 917">41 T.C. 917 919 (1964). The following table, applying the Rule of 78's to the facts in this case, illustrates the amounts of principal and interest that would be payable over the term of the note (the amounts stated are rounded off to two decimal points): YearPrincipalInterestTotal1$137.09$688.91$826.002132.52665.94798.463127.95642.98770.934123.38620.01743.395118.81597.05715.866114.24574.09688.337109.67551.12660.798105.10528.16633.269100.53505.20605.731095.96482.23578.191191.39459.27550.661286.82436.31523.131382.25413.34495.591477.68390.38468.061573.11367.41440.521668.54344.45412.991763.97321.49385.461859.40298.52357.921954.83275.56330.392050.26252.60302.862145.69229.63275.322241.12206.67247.792336.55183.70220.252431.98160.74192.722527.41137.78165.192622.84114.81137.652718.2791.85110.122813.7068.8982.59299.1345.9255.05304.5622.9627.52Totals$2,124.75$10,677.97$12,802.72195 The following table, prepared by the sellers of the time share unit in issue, illustrates the amounts of interest accruable by the partnership over the term of its contract with WRK Enterprizes: VACATION HOMEONE DAY PURCHASE Home Value$2,775.00FurnishingsIncludedPurchase Price2,775.00Down Payment- 650.00Balance Due$2,125.00AccruedInterestInterest12/31 ofNoteRate of NotePeriodsYearInterestPaymentBalanceBalance11980$4,000$465$5,660188.2%219814,0004659,19570.7%319824,00046512,73043.5%419834,00046516,26531.4%519844,00046519,80024.8%619854,00046523,33520.2%719864,00046526,87017.1%819874,00046530,40514.8%919884,00046534,94013.1%1019894,00046537,47511.4%1119904,000041,47510.6%1219914,000045,4759.6%1319924,000049,4758.7%1419934,000053,4758.0%1519941,000054,4757.4%1619951,000055,4751.8%1719961,000056,4751.8%1819971,000057,4751.7%1919981,000058,4751.7%2019991,000059,4751.7%2120001,000060,4751.6%2220011,000061,4751.6%2320021,000062,4751.6%2420031,000063,4751.6%2520041,000064,4751.5%2620051,000065,4751.5%2720061,000066,4751.5%2820071,000067,4751.5%2920081,000068,4751.4%3020091,000069,4751.4%APR = 16.75%196 It is demonstrably clear that the foregoing table, which purports to allow the partnership an accrual of interest in the total amount of $72,000 over a thirty year period on an indebtedness of $2,125 is not even remotely germane to the Rule of 78's. We have frequently addressed ourselves to the discretion granted respondent in matters of accounting methods by section 446(b) and have consistently held that he has broad powers in determining whether accounting methods used by a taxpayer clearly reflect income. In Brooks-Massey Dodge, Inc. v. Commissioner,60 T.C. 884">60 T.C. 884, 890-891 (1973) we said: At the outset, it is important to point out that section 446(b) gives respondent broad discretion in matters of accounting methods. Schlude v. Commissioner,372 U.S. 128">372 U.S. 128, 136 (1963); American Automobile Association v. United States,367 U.S. 687">367 U.S. 687 (1961); Mooney Aircraft, Inc. v. United States,420 F.2d 400">420 F.2d 400 (C.A. 5, 1969). * * Thus, respondent's determinations made pursuant to his authority under section 446(b) bear a presumption of correctness which stands unless petitioner is able to prove them clearly erroneous or arbitrary. 197 * * (Footnote reference omitted.) In the recent case of Surtronics, Inc. v. Commissioner,T.C. Memo. 1985-277 (filed June 11, 1985), we held as follows: For income tax purposes, the general rule with respect to a taxpayer's method of accounting is that his taxable income shall be computed using the method of accounting regularly used to keep his books and compute his income. Section 446(a). However, section 446(b) provides that if the method of accounting used by a taxpayer does not clearly reflect his taxable income, respondent may compute such income by using a method which in the opinion of respondent does clearly reflect the taxpayer's income. The authority vested in respondent under section 446(b) is very broad and in matters of accounting he has wide latitude to change the method of accounting so as to clearly reflect income. See Thor Power Tool Co. v. Commissioner,439 U.S. 522">439 U.S. 522, 532 (1979); Commissioner v. Hansen,360 U.S. 446">360 U.S. 446, 467 (1959). Furthermore, respondent's determination under section 446(b) is presumptively correct and must be upheld unless the taxpayer can prove that it is clearly erroneous or arbitrary. 198 Lucas v. Kansas City Structural Street Co.,281 U.S. 264">281 U.S. 264, 271 (1930); Brooks-Massey Dodge, Inc. v. Commissioner,60 T.C. 884">60 T.C. 884, 891 (1973). Respondent's first argument in support of the disallowance of the claimed interest deductions is that the partnership's method of allocating greater interest expense to the initial years of the term of the note, similar to the Rule of 78's, is not an allowable method since it results in a material distortion of income; his second argument is that the use of the accrual method of accounting by the partnership does not clearly reflect income, because the deduction of the accrued but unpaid interest results in a material distortion of income. Although we have rejected respondent's representation that the method of accounting used by the partnership to compute the amount of the interest deductions claimed by it for the years in issue is in any way similar to the Rule of 78's, his determination that the method used by the partnership to determine the amount of the deductions claimed materially distorts income is presumptively correct and must be upheld unless the taxpayers can prove that it is clearly erroneous or199 arbitrary. Surtronics, Inc. v. Commissioner,supra. This they have failed to do. Since we previously have set forth at length our reasons for finding that the Rule of 78's has no relevance to this case, we need not address ourselves to petitioners' argument pertaining to the Rule. We have searched the record in vain to find any information which would indicate the financial or tax method of accounting used by the partnership to determine the amount of the interest expenses claimed by it for each of the years in issue. Petitioners have completely failed to carry their heavy burden of proving that the partnership's accounting method clearly reflected income. See Reco Industries, Inc. v. Commissioner,83 T.C. 912">83 T.C. 912, 920 (1984). The only evidence in this record indicating how the amounts of the interest claimed by the partnership were determined is contained in the agreement between the partnership and WRK Enterprizes, dated December 30, 1980, in which it was arbitrarily determined that interest would accrue at the rate of 188 percent per year on the unpaid balance of the purchase price ($2,125) for the first 14 years of the term of the loan and*200 47 percent per year for the last 16 years of the terms of the loan. We know of no financial or tax method of accounting that would justify the use of such figures. Accordingly, we will grant respondent's motion for partial summary judgment on this issue. The deficiencies determined for the years 1980 and 1981 are still in issue and must be disposed of by trial or otherwise. Because we have found that respondent did not abuse his discretion in disallowing the $3,995 claimed as an interest deduction by petitioners in each of the years in issue, we need not address ourselves to the question of whether the partnership may use the accrual method of accounting to compute its interest deductions. We will defer the resolution of that issue to another day. An appropriate order will be issued.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during 1980 and 1981.↩2. All Rule references are to the Tax Court Rules of Practice and Procedure.↩3. The sellers represented to the purchasers that the annual percentage rate of the loan was 16.75 percent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620369/	ESTATE OF OGDEN D. DOOLEY, DECEASED, WILLIE JO DOOLEY, EXECUTRIX, AND WILLIE JO DOOLEY, SURVIVING WIFE, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Estate of Dooley v. CommissionerDocket Nos. 11131-88, 23026-88, 23027-88United States Tax CourtT.C. Memo 1992-557; 1992 Tax Ct. Memo LEXIS 577; 64 T.C.M. (CCH) 824; September 22, 1992, Filed 577 Respondent (R) determined over $ 8 million of deficiencies in, and additions to, the income, estate, and gift taxes of petitioners -- Mrs. Dooley and the estate of her deceased husband. Prior to trial, R conceded most of the factual issues and settled the three cases for a total of $ 143,787 in gift tax. Petitioners (Ps) moved for an award of litigation costs pursuant to sec. 7430, I.R.C. 1954, arguing, inter alia, that R was not substantially justified in adhering to her litigating positions on the substantive tax issues. Held: Given the complex and convoluted nature of these cases, R was substantially justified in taking protective positions until the ownership and devolvement of the property being valued was clear and petitioners had submitted the necessary documentation to prove their contentions in each case. Held, further: Ps failed to exhaust the administrative remedies available to them with the IRS, a prerequisite to an award of litigation costs. Sec. 7430(b)(1). Held: Ps' motion for litigation costs is denied. For Petitioners: Elwood Cluck. For Respondent: James W. Lessis. DRENNENDRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge578 : This matter is before the Court on petitioners' motion for an award of litigation costs and attorney's fees pursuant to section 74302 and Rule 231. By three separate notices of deficiency, 3 respondent determined deficiencies in, and additions to, petitioners' income, gift, and estate tax as follows: Docket No. 11131-88 Estate of Ogden D. Dooley, Deceased, Willie Jo Dooley, Executrix, and Willie Jo Dooley, Surviving WifeIncome TaxIncome TaxAdditions to TaxYearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)1981$ 977,147.67$ 48,857.381579 Docket No. 23026-88 Estate of Ogden D. Dooley, Deceased, Willie Jo Dooley, Co-Executrix and C.J. Bitter, Co-executorPrimary PositionEstate TaxDate ofEstate TaxAddition to TaxDeathDeficiencySec. 666012/16/84$ 4,782,813$ 1,434,844Alternative PositionGift TaxAdditions to TaxGift TaxSec.Sec.Sec.YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)12/31/8357,383$ 14,346$ 2,869112/31/84$ 2,117,660$ 529,415$ 105,8831Estate TaxDate ofEstate TaxAddition to TaxDeathDeficiencySec. 666012/16/84$ 297,492$ 50,537Docket No. 23027-88, Willie580 Jo DooleyGift TaxAddition to TaxYearDeficiencySec. 6651(a)(1)12/31/86$ 850,449$ 212,612On May 24, 1988, a petition was filed in docket No. 11131-88, and on September 9, 1988, petitions were filed in docket Nos. 23026-88 and 23027-88. Respondent filed answers to all of the petitions, and on April 25, 1989, these three cases were consolidated. On May 3, 1991, the parties filed a Stipulation of Settled Issues (hereinafter stipulated settlement) in which they agreed that there were no deficiencies in, or additions to, petitioners' income, gift, or estate taxes as determined, with the exception of $ 143,787 owed by petitioners in gift tax for 1984. Following the settlement, petitioners filed a motion for litigation costs and attorney's fees pursuant to section 7430 and Rule 231. As the parties have settled their disputes with respect to all of the tax deficiencies and additions to tax determined by respondent in these cases, the issues before us pertain only to whether petitioners qualify as the "prevailing party" entitled to an award of reasonable litigation costs under section 7430, and if so, what costs are reasonable. Respondent concedes that petitioners581 have met one of the prerequisites for an award of litigation costs under section 7430 in that they have substantially prevailed with respect to the amounts in controversy or the most significant issue or set of issues presented. Sec. 7430(c)(2)(A)(ii)(I) and (II). 4 Thus, the remaining issues for decision are: (1) Whether respondent's positions in these cases were substantially justified as required by section 7430(c)(2)(A)(i); (2) whether petitioners meet the net worth requirements for an award of litigation costs as required by section 7430(c)(2)(A)(iii); (3) whether petitioners have exhausted their administrative remedies as required by section 7430(b)(1); (4) whether petitioners have unreasonably protracted the proceedings in these cases within the meaning of section 7430(b)(4), and (5) whether the costs claimed by petitioners are reasonable as required by section 7430(c)(1). 582 FINDINGS OF FACT The following facts are based on the entire record, including the affidavits and exhibits submitted by the parties with respect to this motion for litigation costs, the parties' pleadings, their stipulated settlement, their other motions and supporting documents, as well as our prior opinion, Estate of Bartberger v. Commissioner, T.C. Memo 1988-21">T.C. Memo. 1988-21. Ogden D. Dooley (hereinafter either decedent or Dooley) was born in 1906 in Kinney County, Texas, where he resided and maintained his domicile his entire life until he died on December 16, 1984. Decedent was married three times. His first marriage, to Arlene Butler in 1932, produced three children, Patricia, Carole, and Diane, who, at the time of decedent's death, were known as Patricia Dooley Smith, Carole Dooley Kirby, and Diane Dooley Elrod. All three daughters survived decedent. Decedent was divorced from his first wife in about 1938 or 1939. Decedent next married Gladys Fulcher, who died in 1970. No children were born to, or adopted by, the couple. On September 18, 1971, decedent married Willie Jo Bitter (hereinafter either Willie Jo or Mrs. Dooley), the widow of Clarence A. 583 Bitter. Willie Jo had one son by that previous marriage, Clarence J. Bitter (hereinafter C.J. Bitter), and three grandchildren, James Clarence Bitter, David Frederick Bitter, and Elizabeth Bitter Heiligmann. No children were born to, or adopted by, decedent and Willie Jo after their marriage to each other. During their marriage, Willie Jo and decedent lived on a large cattle ranch near Bracketville, Texas (hereinafter Petersen Ranch), where Willie Jo continues to reside. Their marriage continued without interruption until decedent's death. In 1928, Bracketville was the only town in Kinney County, Texas, a ranching community of approximately 1,800 people located near the Mexican border in West Texas. The primary occupation of the community was ranching, and the biggest business in town was Petersen and Company. Petersen and Company was a partnership that owned and conducted a general mercantile business, the motto of which was "supplies from the cradle to the grave". N.P. Petersen owned two of the four partnership shares; R.C. Ballantyne and Adolph A. Bitter (Willie Jo's former father-in-law) each owned one share. N.P. Petersen also owned the Petersen Ranch, which was a 19,300-acre584 cattle ranch located 7 miles northeast of Bracketville. In 1927, there were no improvements on the ranch except for a fence which ran along a portion of the perimeter. In 1931, N.P. Petersen, being dissatisfied with the operation of the ranch, fired his ranch manager and hired decedent, then known as O.D. "Buster" Dooley, as the new ranch manager. Decedent made many improvements to the Petersen Ranch and operated it as a cattle ranch from 1931 until his death in 1984. In 1935, decedent went to the Petersen and Company office to discuss the ranching business with N.P. Petersen. Present at the meeting, besides Petersen and decedent, were Clarence Bitter, the bookkeeper and general manager of Petersen and Company; Willie Jo, who at that time was married to Clarence Bitter; and R.C. Ballantyne, N.P. Petersen's business partner and adviser. At the meeting, N.P. Petersen told decedent that he approved of the way he was managing the ranch and offered to form a joint venture with decedent for its operation. Under the offer, which decedent orally accepted, decedent was to stop taking a salary and pay half of the operating costs of the ranch and receive half of any profits. If Mr. and585 Mrs. Petersen and their daughter had sufficient funds during their lives, the Petersen Ranch would become decedent's on the death of the Petersens' daughter, Martha (hereinafter Martha or Mrs. Bartberger), who was the Petersens' only child. When the meeting concluded, Petersen and decedent shook hands but the terms of their oral agreement were never reduced to writing. Estate of Bartberger v. Commissioner, T.C. Memo 1988-21">T.C. Memo. 1988-21; see also Estate of Dooley v. Frost National Bank, Appeal No. 04-86-00436-CV (Tex. Ct. App.-San Antonio, October 28, 1987). From 1936 until Martha Bartberger's death in 1981, decedent resided at, and had exclusive possession of, the Petersen Ranch as ranch manager. He made many improvements to the property including a stone ranch house, two tenant houses, equipment and feed storage buildings, branch roads, fencing, and wells. Decedent and N.P. Petersen paid for these improvements jointly, pursuant to the terms of their 1935 oral agreement. In 1949, N.P. Petersen died and devised the Petersen Ranch to his daughter, Martha Bartberger. Estate of Bartberger v. Commissioner, supra.In 1950, 586 decedent, Martha Bartberger, A.E. Bartberger (Martha's husband), and Martin Petersen (Martha's cousin) entered into a partnership doing business as Petersen Ranch Company. The partnership's purpose was to operate the Petersen Ranch and raise and sell livestock on the ranch. The term of the partnership was 5 years, renewable upon the agreement of the parties. The written partnership agreement was signed by Dooley and recited that Mrs. Bartberger, as the fee simple owner of the Petersen Ranch acreage, would pay real estate taxes but that the partnership would pay taxes on livestock and company property. By separate agreement, Mrs. Bartberger leased the grazing rights on the 19,300 acres comprising the Petersen Ranch to the partnership. During the life of the partnership, decedent had custody and control of the partnership property as ranch manager, and Mrs. Bartberger held title to the real estate and bore the cost of all permanent improvements. The partnership continued until 1962 when Petersen Ranch, Inc., was formed. The partnership was terminated and the corporation succeeded to the partnership's operation of the ranching business. In 1963, Mrs. Bartberger conveyed 12,426.11587 acres of the Petersen Ranch to Martin and June Petersen for life, remainder to the Episcopal Church Corporation of West Texas. Between 1950 and 1981, without decedent's express consent or objection, Mrs. Bartberger executed leases of the oil, gas, and mineral rights in the Petersen Ranch property. On March 31, 1981, shortly before her death, Amoco Production Company paid $ 7,309.85 to Mrs. Bartberger for delay rentals for the period April 14, 1981, through April 13, 1982, pursuant to an oil, gas, and mineral lease executed by Mrs. Bartberger. Consideration for these leases was paid to Mrs. Bartberger's personal account. From 1962 until her death in 1981, Mrs. Bartberger leased the grazing rights on 7,346.97 acres of the Petersen Ranch property to Petersen Ranch, Inc. On December 29, 1980, decedent, acting on behalf of Petersen Ranch, Inc., paid $ 18,367.42 to Mrs. Bartberger under the terms of the grazing lease for the period January 1, 1981, through December 31, 1981. In 1979, decedent wanted to make additions and improvements to the ranch house on the Petersen Ranch. He did not, however, want to improve the house until he had received assurances that he would be the owner588 of the real estate after Martha Bartberger died. Dooley and Willie Jo visited Mrs. Bartberger in her nursing home in San Antonio. They discussed the improvements and additions to the ranch house and Mrs. Bartberger's intentions with respect to the real estate she was then leasing to Petersen Ranch, Inc. Mrs. Bartberger said: "Ogden, you are the only son I have ever had, and you have no worries about the ranch." Mrs. Bartberger died testate on April 10, 1981. Since Mrs. Bartberger had outlived her husband and had no children, she devised the real estate leased to the Petersen Ranch to Dooley, the Bart Ranch to Else Inge Sights, and the residue of her estate to her cousin, Martin Petersen. The expenses and Federal estate taxes of her estate were to be paid out of the residuary estate. However, if the residue was insufficient to pay those expenses, her will stated that the balance was to be borne by Dooley and Sights in proportion to the value of their specific devises as determined for estate tax purposes. Mrs. Bartberger's executor was fully authorized to take possession, lease, mortgage, sell, exchange, or otherwise dispose of any part of her estate, including the Petersen589 Ranch real estate, for the purpose of discharging any indebtedness of the estate. Mrs. Bartberger's estate filed an estate tax return on which the real estate leased to the Petersen Ranch was valued at $ 1,000, on the ground that Dooley, the sole possessor of the Petersen Ranch, claimed that he was the true owner of the ranch pursuant to his 1935 oral agreement with N.P. Petersen. Dooley and Willie Jo jointly filed a Federal income tax return for 1981 in which they made no disclosure whatsoever with respect to whether the value of the Petersen ranch was includable in their 1981 income or excludable as a bequest under section 102(a). In March 1982, Dooley filed a lawsuit against the independent executor of the Bartberger estate, Frost National Bank of San Antonio, in the 63rd District Court, Kinney County, Texas. At issue was whether the 7,346.97 acres leased to the Petersen Ranch became Dooley's property pursuant to the devise in Mrs. Bartberger's will, and was thus a probate asset of her estate, or pursuant to the alleged 1935 oral contract between Dooley and N.P. Petersen, and was thus a nonprobate asset. In that case, Dooley asserted that he owned the Petersen Ranch pursuant590 to the 1935 contract in order to prevent the executor from taking possession of the real estate leased to the ranch during the Bartberger estate's administration, and to recover the unearned portion of the grazing lease payment he had made to Mrs. Bartberger on behalf of Petersen Ranch, Inc., as well as the unearned portions of the oil, gas, and mineral leases she had executed. The district court held that title and ownership of the real estate leased to the Petersen Ranch vested in Dooley under Mrs. Bartberger's will, not under any prior contract, and that Mrs. Bartberger's estate owned the real estate leased to the Petersen Ranch, including all the delay rentals received from leases on the ranch. On October 28, 1987, almost 3 years after decedent's death, the district court's decision was affirmed in an unpublished opinion by the Texas Court of Appeals for the Fourth Supreme Judicial District in San Antonio, Texas. Similarly, on January 19, 1988, shortly before the issuance of the deficiency notice in docket No. 11131-88, this Court issued an opinion in Estate of Bartberger v. Commissioner, T.C. Memo. 1988-21, in which we held that Dooley acquired591 both equitable and legal title to the Petersen Ranch pursuant to the specific devise in Mrs. Bartberger's will, not pursuant to any prior contract, and therefore since Mrs. Bartberger owned the ranch at the moment of her death, the ranch was includable in her estate at its fair market value pursuant to section 2033. Due to complications involving the closing of the Bartberger estate and the computation by the parties in that case under Rule 155, a final decision in Estate of Bartberger v. Commissioner, supra, has not been entered to date. Thus, our holding in that case might still be appealed. 5592 Decedent executed a revocable trust dated September 14, 1983, that purports to convey, inter alia, the Petersen Ranch, the San Jose Ranch, the Mountain Ranch, and the O.D. Dooley Farm (otherwise known as the Pinto Creek Farm) into trust. The trust instrument names Willie Jo Dooley as the trustee and decedent as the trust's sole beneficiary. The revocable trust instrument was recorded in Kinney County, Texas, on May 1, 1984. On December 16, 1983, decedent organized a corporation named O.D. Dooley Ranches, Inc., and conveyed to the corporation the surface estates of the four ranches 6 described as follows: San Jose Ranch7,999.59 acresMcMullen County, TexasPetersen Ranch7,346.97 acresKinney County, TexasMountain Ranch2,768.19 acresKinney County, TexasO.D. Dooley Farm456.00 acresKinney County, Texas18,570.75 acresIn exchange for his conveyance of the surface estates in the four properties to the corporation, all of the stock of O.D. Dooley Ranches, Inc., was initially issued to Ogden Dooley as follows: 10,000 shares class A preferred$ 1.00 par value10,000 shares class B preferred$ 100.00 par value10,000 shares common stockWithout par value593 Decedent subsequently transferred all of his 10,000 shares of common stock to his relatives. On December 25, 1983, decedent transferred a total of 528 shares of common stock to his stepson and his stepgrandchildren as follows: Date ofShares of CommonRecipientTransferStockof SharesTransferred12/25/83132C.J. Bitter(stepson)12/25/83132James C. Bitter(stepgrandchild)12/25/83132David F. Bitter(stepgrandchild)12/25/83132Elizabeth BitterHeiligmann(stepgrandchild)TOTAL 528On January 2, 1984, decedent transferred a total of 9,472 shares of common stock to his wife, stepson, and stepgrandchildren as follows: Date ofShares of CommonRecipientTransferStockof SharesTransferred1/2/84133C.J. Bitter(stepson)1/2/841,576James C. Bitter(step-grandchild)1/2/841,576David F. Bitter(step-grandchild)1/2/841,576Elizabeth BitterHeiligmann(step-grandchild)1/2/844,611Willie Jo Dooley(wife)TOTAL 9,472594 Dooley died testate on December 16, 1984, survived by his widow, Willie Jo Dooley; his stepson, C. J. Bitter; his stepgrandchildren, James C. Bitter, David F. Bitter, and Elizabeth Bitter Heiligmann; and his three daughters by his prior marriage, Patricia Dooley Smith, Carole Dooley Kirby, and Diane Dooley Elrod. Dooley left two wills, one dated August 7, 1979 (1979 will), and the other dated June 21, 1983 (1983 will). Both documents had been signed by Dooley and at least two witnesses. In the 1979 will, Dooley had purportedly bequeathed $ 10,000 to Carole Kirby; $ 10,000 to Pedro Salas and Albinina Salas Castillo to share jointly; and the San Jose Ranch to Patricia Bennet 7 and Diane Elrod, subject to two separate obligations -- first, to pay $ 125,000 to Willie Jo Dooley, and second, to pay half of the first $ 1,250,000 of decedent's debts, funeral and administrative expenses, and death taxes, if decedent gained possession of the Petersen Ranch. The rest and residue of decedent's estate was bequeathed to his wife, Willie Jo. 595 In the 1983 will, decedent purportedly bequeathed $ 25,000 to his daughter, Carole Kirby; $ 500,000 to be divided equally between his two other daughters, Patricia Bennet and Diane Elrod; and $ 10,000 to Pedro Salas and Albinina Salas Castillo, to share jointly. According to the 1983 will, these general legacies were to be free of reductions for decedent's debts, funeral and administration expenses, and any State and Federal taxes that are imposed by reason of death. Decedent bequeathed the residue of his estate to his wife, Willie Jo. The 1983 will further designated Willie Jo Dooley and Clarence Bitter as the independent executors of the estate. On December 20, 1984, Willie Jo and Clarence Bitter offered the 1983 will for probate in County Court, Kinney County, Texas. However, decedent's three daughters, Carole, Patricia, and Diane, contested the validity of the 1983 will on grounds that their father was suffering from Alzheimer's Disease and other disabling mental ailments and, consequently, was of unsound mind, lacked testamentary capacity, and was acting under the undue influence of Willie Jo at the time he executed the will. 8596 According to the daughters' amended petition, Willie Jo, with the assistance of the family's attorney, Elwood Cluck, was "devising a scheme and conspiracy to trick and defraud the decedent by converting virtually all of the assets of his Estate and more particularly the 8,000 acre San Jose Ranch located in McMullen County, Texas." At the same time, the daughters sought to have the 1979 will probated as the valid last will and testament of decedent. These proceedings, initiated by the daughters, were transferred to the 63rd Judicial District Court of Kinney County, Texas. In January 1985, the daughters filed a second suit in the district court contesting the validity of decedent's December 16, 1983 deed and conveyance of the surface estates in his four ranches to O.D. Dooley Ranches, Inc., on grounds that decedent had lacked contractual capacity and was acting under the undue influence of Willie Jo at the time he executed the deed. 9597 The daughters' will and deed contests were settled by two separate, written agreements. On May 15, 1986, Willie Jo Dooley and the Willie Jo Dooley family, entered into an agreement with Patricia Smith and Carole Kirby whereby Willie Jo Dooley executed and delivered a $ 1 million note to Carole and Patricia in consideration of their agreement to withdraw their opposition to the 1983 will's probate and to further relinquish, transfer, and assign to Willie Jo all of their rights, title, interest, and estates of inheritance in decedent's estate. On May 16, 1986, Willie Jo Dooley and C.J. Bitter, individually and as executors, entered into a second agreement with Diane Elrod whereby Willie Jo Dooley conveyed the south part of the San Jose Ranch to Diane in consideration of a $ 1 million note executed by Diane and her promise to withdraw her opposition to the 1983 will's probate and to relinquish, transfer, and assign all of her rights, title, interest, and estate of inheritance in decedent's estate to Willie Jo. The net effect of the two settlement agreements was to transfer property equivalent in value to the south portion of the San Jose Ranch to the three daughters of Ogden Dooley. 598 Shortly after the settlement agreements were executed, the daughters' lawsuits against decedent's estate contesting the validity of decedent's 1983 will and his conveyance of the ranches to the corporation were nonsuited and dismissed. On July 21, 1986, the 1983 will was admitted to probate as the last will and testament of decedent. On August 27, 1986, Mrs. Dooley and C.J. Bitter were appointed independent co-executors of decedent's estate, replacing Henry Dalrymple, who had been serving as the estate's temporary administrator since his appointment in April 1985 by the 63rd Judicial District Court in Kinney County, Texas. On September 16, 1985 -- prior to settlement of the daughters' claims against the estate and the admission of the 1983 will to probate -- the executors of Dooley's estate, Mrs. Dooley and C. J. Bitter, filed Form 706, United States Estate Tax Return. The return, however, was substantially incomplete when it was filed. In the tax computation section of the return, 17 of the 23 lines were marked "undetermined", including those lines calling for valuation figures for the total gross estate, the adjusted taxable gifts, and the total allowable deductions. In addition, 599 the following property values were undetermined on the return: the value of the class A and class B preferred stock in O.D. Dooley Ranches, Inc., reported on Schedule B as separate property of the decedent; the value of the common stock in O.D. Dooley Ranches, Inc., reported on Schedule G as being transferred by decedent to his relatives in 1983 and 1984; the value of three claims by decedent against the executor of the Estate of Martha Bartberger for various lease payments and performance of a real estate contract; and the value of miscellaneous property reported on Schedule M as passing to Mrs. Dooley in her capacity as decedent's surviving spouse. Although the total amount of the marital deduction was undetermined on the estate tax return, the estate's entitlement to the marital deduction was expressly claimed at the bottom of Schedule M. Finally, on line 23 of the computation section, petitioners claimed that no estate tax was due. Several documents were filed contemporaneously with the incomplete return. These included Form 4768, Application for Extension of Time to File U.S. Estate Tax Return and/or Pay Estate Tax, and two other documents respectively entitled "Statement600 of Facts and Protective Elections" and "Application for Determination of Estate Taxes and Discharge of Executor Fiduciary from Personal Liability". Form 4768 was dated September 9, 1985, and was signed by Mrs. Dooley as the designated executor. In the form, Mrs. Dooley claimed that the return had been timely filed 10 but requested an extension date to September 16, 1986, within which to pay the estate tax since the amount of tax due was still undetermined. In the Statement of Facts and Protective Elections, Mrs. Dooley claimed that due to four pending lawsuits involving real property of the estate, including the two suits filed by Carole Kirby, it was impossible to determine "the exact nature and extent and value of the assets comprising the Estate of Ogden D. Dooley." Accordingly, Mrs. Dooley reserved the right to amend the estate tax return to conform to the ultimate determination601 of ownership and value of the property, as well as the amount of the estate's debts and administration expenses as finally adjudicated in the estate's four pending lawsuits. Mrs. Dooley made a protective election, in accordance with section 20.2032A-8(b), Estate Tax Regs., to value certain qualified real property of the estate, in particular the San Jose Ranch, the Mountain Ranch, the Dooley Farm, and the Petersen Ranch, according to its approximate actual use pursuant to section 2032A rather than its fair market value on the applicable valuation date. Mrs. Dooley further stated that if the Secretary found that such real property qualified for such special use valuation, she would file an amended return, 11 any additional information, and the Notice of Election as required by section 20.2032A-8, Estate Tax Regs. Mrs. Dooley also applied for a 12-month extension of time to pay the estate tax determined to be due, pursuant to section 6161, and she protectively602 elected to further defer the payment of any estate tax deficiency attributable to decedent's interest in a closely held business, pursuant to section 6166. Finally, Mrs. Dooley filed a written request, pursuant to section 2204, that the Secretary determine the amount of any estate tax due and that the designated executors and certain fiduciaries of the decedent be discharged from personal liability once they paid the amount of tax initially determined to be due. The Commissioner initiated an audit of the estate tax return in February 1986. On June 16, 1987, the Commissioner sent petitioners a report of the audit in which the Commissioner asserted a total of $ 8,885,943 in estate tax, gift tax, and additions to tax against the Estate of Ogden D. Dooley and Mrs. Dooley, in her capacities as both the executor and the surviving spouse. Shortly after receiving the audit report, petitioners notified the I.R.S. that they could not accept the findings of the examining agent and requested that a statutory notice of deficiency be immediately issued so that they could file a petition seeking a redetermination of the alleged gift and estate tax deficiencies. In 1988, respondent sent petitioners603 three separate notices of deficiency which became the subjects of docket Nos. 11131-88, 23026-88, and 23027-88 after the cases were commenced in this Court. The three cases have since been consolidated. However, for convenience and clarity, the remaining procedural facts and the parties' particular contentions regarding each case will, henceforth, be separately addressed. Respondent's Position in Docket No. 11131-88The first deficiency notice, dated February 26, 1988, was issued to Ogden D. Dooley, Deceased, and Willie Jo Dooley, in her capacity as the surviving spouse. In the notice, respondent determined a deficiency of $ 977,147.67 in the 1981 income tax of Ogden and Willie Jo Dooley, and additions to tax under sections 6653(a)(1) and (2) for negligence and intentional disregard of the rules and regulations. In respondent's explanation of adjustments attached to the notice, she stated that the Dooleys had, among other errors, failed to report $ 1,873,500 in gross income for 1981 based on her apparent determination that the Dooleys had received the Petersen Ranch as compensation for services pursuant to the 1935 oral contract. Thus, according to respondent's explanation604 of the adjustment, the fair market value of the Petersen Ranch, $ 1,873,500, was includable in the Dooley's gross income in 1981, the year it was received. In their petition filed in docket No. 11131-88, Willie Jo and her husband's estate generally disputed the entire deficiency and the additions to tax as determined by respondent in the deficiency notice. In particular, petitioners alleged that respondent had erroneously determined that "Decedent had received income in the amount of $ 1,873,500 based on the fair market value of the property received for the 1981 tax year." However, petitioners did not, either in their petition or in their reply, specifically allege that they had received the Petersen Ranch as an inheritance under Mrs. Bartberger's will excludable from income under section 102(a). Nor did they mention the opinions of the Texas appeals court or the Tax Court, both of which had just recently held that Dooley had received the ranch as an excludable inheritance. On March 26, 1990, petitioners filed a motion for summary judgment in docket No. 11131-88 seeking a determination by this Court that there were no deficiencies in, or additions to, their 1981 income tax because605 decedent received the Petersen Ranch as an inheritance pursuant to the specific devise in Mrs. Bartberger's will. In her objection to petitioners' summary judgment motion, respondent acknowledged that, 1 month prior to the issuance of the deficiency notice in docket No. 11131-88, this Court held in Estate of Bartberger v. Commissioner, T.C. Memo. 1988-21, that the Petersen Ranch passed to Dooley by devise and was therefore includable in the Bartberger estate for estate tax purposes at its fair market value. Estate of Bartberger v. Commissioner, supra. Respondent argued, however, that until a final decision is entered in the Estate of Bartberger case to that effect and the time for an appeal has passed, she was justified in taking a position consistent with the taxpayer in Estate of Bartberger v. Commissioner, supra, specifically, that Dooley received the Petersen Ranch pursuant to the 1935 oral contract. On June 15, 1990, we denied petitioners' summary judgment motion in docket No. 11131-88 without a hearing or an opinion. In the parties' stipulated settlement of these cases, 606 they agreed that decedent received the 7346.97 acres of ranch land comprising the Petersen Ranch as an inheritance and that it was thus excluded from petitioners' income for 1981 under section 102. By reason of their settlement on this issue, the parties further stipulated that there were no deficiencies in Ogden and Willie Jo Dooley's 1981 income tax nor any additions to tax due under sections 6653(a)(1) and (2) as determined by respondent in the deficiency notice. Respondent's Position in Docket No. 23026-88On June 9, 1988, respondent issued a deficiency notice to the Estate of Ogden Dooley, in which she took two alternative positions. In her primary position, respondent determined an estate tax deficiency of $ 4,782,813 and an addition to tax under section 6660 of $ 1,434,844 for understating the value of the estate's assets on the estate tax return. In the explanation of her "primary position" adjustments attached to the deficiency notice, respondent determined that most of the value of O.D. Dooley Ranches, Inc., was contained in the 20,000 shares of preferred stock that decedent owned when he died, and which therefore was included in the gross estate, pursuant to 607 section 2033. In this regard, respondent determined that the fair market value of the 10,000 shares of class A preferred was $ 9 million on the date of death, or $ 900 per share, and that the fair market value of the 10,000 shares of class B preferred stock was $ 1 million on the date of death, or $ 100 per share. The values for both the class A preferred and the class B preferred were undetermined on the return. Alternatively, respondent determined that most of the value of O.D. Dooley Ranches, Inc., resided in the common stock given to decedent's relatives, rather than the preferred stock held by decedent, resulting in the following deficiencies in gift tax, estate tax, and additions to tax: Estate TaxAddition to TaxDateDeficiencySec. 666012/16/84$ 297,492$ 50,537Additions to TaxGiftSec.Sec.Sec.YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)12/31/83$ 57,383$ 14,346$ 2,869112/31/84$ 2,117,660$ 529,415$ 105,8831608 In the explanation of her alternative adjustments and valuations, respondent determined that, on the date of decedent's death, decedent's 10,000 shares of class A preferred had a fair market value of $ 10,000, or $ 1 per share, and decedent's 10,000 shares of class B preferred had a fair market value of $ 1 million or $ 100 per share. Respondent further determined, as part of her alternative position, that the value of the 528 shares of common stock that decedent gave to his stepson and his three stepgrandchildren on December 25, 1983, was $ 475,200 on the date of the gift, or $ 900 per share, resulting in a taxable gift of $ 435,200 after excluding $ 40,000 from the transfer. Respondent determined that the value of the remaining 9,472 shares of common stock that decedent had given to Mrs. Dooley, his stepson, and his three stepgrandchildren on January 2, 1984, was $ 8,524,800 on the date of the gift, or $ 900 per share, resulting in a taxable gift of $ 4,334,900, after subtracting the marital deduction and excluding $ 50,000 from the transfer. No gift tax returns were filed with respect to decedent's 1983 and 1984 gifts of the common stock to his relatives. As a result, respondent609 determined additions to tax for failure to file returns under section 6651(a)(1) and for negligence under section 6653(a)(1) and (2). Respondent made the following determinations in both her primary and alternative positions. First, respondent determined that the respective fair market values of decedent's interest in three pending lawsuits against Frost National Bank in its capacity as executor of the Bartberger estate were $ 7,310, $ 13,827, and $ 1,000 on the date of death. These three claims were listed as miscellaneous property items of the gross estate on Schedule F of the return, but their values were left undetermined. Second, respondent determined that the estate was only entitled to deduct $ 150,000 of the $ 424,000 deduction the estate had claimed for attorney's fees. Third, respondent disallowed the estate's deduction of $ 496,156 for administration expenses in its entirety. Fourth, respondent determined that the debts of decedent were only $ 5,156 rather than $ 1,363,391 as claimed by the estate on the return, and therefore the estate's deduction for decedent's debts was disallowed to the extent of $ 1,358,235. Fifth, the estate's claim to a $ 499,992 credit for610 tax on prior transfers under section 2013 was disallowed in its entirety. Finally, respondent did not allow the estate a marital deduction in any amount. Petitioners never filed an amended estate tax return. In their petition in docket No. 23026-88, petitioners disputed all of the estate tax, gift tax, and additions to tax determined by respondent. In particular, petitioners affirmatively asserted that the total fair market value of the class A preferred stock issued by O.D. Dooley Ranches, Inc., did not exceed $ 10,000 on the date of death; that the total fair market value of the class B preferred stock did not exceed $ 500,000 on the date of death; and that the fair market values of the three lawsuits asserted by decedent against the Estate of Bartberger for delay rentals and title to the Petersen Ranch pursuant to a 1935 oral contract were $ 1 each on the date of death. Petitioners also asserted that on October 27, 1986, the probate court in Kinney County, Texas, approved of, and ordered decedent's estate to pay $ 27,000 to Henry Dalrymple for his services as the temporary administrator, $ 500,000 to Brite, Drought, Bobbit & Halter, Attorneys at Law, for its legal services; 611 and $ 150,000 to Elwood Cluck for his legal services. In her answer, filed November 7, 1988, respondent conceded that she had erred with respect to her disallowance of the estate's deduction of $ 367,886, under section 2053, for supplies, insurance, feed lot charges, and other miscellaneous expenses paid by Henry Dalrymple, the temporary administrator of the estate. Respondent also conceded that she had improperly disallowed the estate's deduction of interest incurred in connection with its determination and payment of any deficiency in inheritance taxes. With regard to the rest of petitioners' assertions in their petition, respondent denied all of them either outright or for lack of sufficient knowledge or information. On January 6, 1989, an informal meeting was held between respondent's counsel and petitioners' counsel in Austin, Texas. In a letter dated January 12, 1989, respondent thanked petitioners' counsel for the opportunity to meet and invited him to further review respondent's files to obtain any information helpful for the disposition of the cases. Respondent also offered petitioners' counsel the opportunity to copy substantial portions of the files of the three cases612 in her possession. In the letter, respondent stated that formal discovery at that time was unnecessary and premature since informal and cooperative exchanges of information and documents could be made. No further contact appears to have been made by petitioners' counsel to respondent until April of 1989. On April 20, 1989, petitioners filed a motion to compel 12 respondent to furnish a statement, complying with section 7517, 13 explaining her valuation of the three classes of corporate stock of O.D. Dooley Ranches, Inc. In addition, on May 5, 1989, petitioners filed a 51-page document, pursuant to Rule 90, requesting admissions. 613 In response to petitioners' motion to compel, request for admissions, and other requests by petitioners for interrogatories, respondent filed a motion for a protective order. In her motion, respondent argued she need not comply with petitioners' motion for statements because section 7517 only provides a remedy at the administrative stage and that this Court's discovery rules supersede the application of section 7517 once a case in this Court has commenced. Respondent further argued that petitioners had not complied with the letter or spirit of Rule 70 regarding this Court's informal discovery procedures. Shortly after respondent filed her motion for a protective order, petitioners withdrew their request for admissions. On June 5, 1989, a hearing was held in Washington, D.C., on respondent's motion for a protective order. At the conclusion of the hearing, petitioners agreed to withdraw their motions to compel statements and respondent agreed to withdraw her motion for a protective order. Despite her contention that she need not comply with petitioners' request for valuation statements, respondent, on June 26, 1989, filed a detailed summary of her position regarding the valuation614 of the common and preferred stock of O.D. Dooley Ranches, Inc. In her valuation summary, respondent chose to use the net asset method of valuing the corporate stock, based on her conclusion that O.D. Dooley Ranches, Inc., was not an operating, income-producing venture, but rather a real estate holding company with no apparent business purpose other than estate planning. Thus, it was respondent's position that the net value of O.D. Dooley Ranches, Inc., was equal to the overall value of the surface estates of the four ranches that were owned by the corporation. In valuing the four ranches, respondent relied primarily on two property appraisals by Suttle & Associates, the results of which, according to respondent, valued the four ranches at $ 8,081,000 in December 1983, and at $ 8,184,000 in December 1984. Respondent did not apply any general discount from net asset value for lack of marketability for the corporation as a whole. According to respondent, "it was a simple matter to remove the assets from the corporation, with no adverse tax effects, and there were no special factors (such as a business dependent upon a dominant stockholder) that would tend to justify a general discount615 from asset value." In estimating the values of the four ranches, respondent took into account the clouds on the titles to the four ranches created by decedent's purported prior conveyance of the properties to a revocable trust and his daughters' allegations concerning decedent's lack of competence in effectively conveying the four ranches to the corporation. However, respondent concluded that such clouds on the titles had little effect on the ranches' values for purposes of valuing the gross estate. Respondent's reasoning was that any successful claim to ownership on behalf of the trust, of which decedent was the beneficiary, would inure to the estate, and any successful claim that decedent was not competent to convey property to the corporation would likewise benefit the estate. In allocating the total value of the corporation between the three classes of stock, respondent took the position that any discount applicable to the nonvoting common stock for lack of control, as urged by petitioners, was balanced by two premiums; one control premium which respondent applied to the class A preferred stock since they were voting shares, and another premium which respondent applied to 616 the class A and class B preferred stock since decedent's ownership of those shares gave him a residual claim to the corporation's clouded titles to the underlying real estate. After delineating her computations in her valuation summary, respondent concluded that the 10,000 shares of common stock on the two gift dates in December 1983 and January 1984 had a value of $ 3,485,000 or $ 348.50 per share. Respondent admitted that the 10,000 shares of class A preferred and the 10,000 shares of class B preferred shares were worth only their par values of $ 10,000 and $ 1 million when they were liquidated. However, respondent took the position that on the date of decedent's death, the value of the preferred shares was more than their par value due to the applicability of the control premium and the premium for the residual claims, the sum of which respondent valued at $ 4,923,000. In her valuation summary, respondent emphasized that the figures she arrived at were very close to the actual values ascribed to the various classes of stock by the shareholders in allocating the real estate proceeds of the liquidation of O.D. Dooley Ranches, Inc. Petitioners hired two stock valuation experts617 to appraise the corporation's common stock as of December 25, 1983, and January 2, 1984, the dates on which decedent gave all the issued shares of common stock to his relatives. One appraiser, Clark Munroe & Associates, appraised the value of the common stock as of both gift dates at $ 27.17 per share. Petitioners' other appraiser, T.F. Woodley & Co., Inc., appraised the value of the common stock as of both gift dates at $ 17.50 per share. However, petitioners did not apprise respondent either of their initial position on the value of the common stock or of the results of the two expert appraisals until sometime after June 30, 1990, the date petitioners procured a written appraisal report by Clark Munroe & Associates. Petitioners did not apprise respondent of the results of the appraisal by T.F. Woodley & Co., Inc., which was undated, until less than a month before the trial of these cases was scheduled to begin on October 15, 1990. At the time respondent filed her valuation summary, she stated that she had not yet commissioned an expert appraisal of any of the corporate stock of O.D. Dooley Ranches, Inc. Subsequently, respondent hired an expert appraiser, Marshall Stevens, 618 who valued the common stock at $ 340.15 per share as of the two gift dates. In the parties' stipulated settlement, they agreed that the value of the common stock was $ 150 per share as of both gift dates. Their agreed valuation of the common stock resulted in their stipulation that there were no gift tax deficiencies for 1983, there was a gift tax deficiency of $ 143,787 for 1984, and there were no additions to tax under sections 6651(a)(1) and 6653(a)(1) and (2) for either 1983 or 1984, as initially determined by respondent in the deficiency notice. Petitioners and respondent further agreed in the stipulated settlement that the value of the 10,000 shares of class A preferred did not exceed $ 10,000 on the date of decedent's death, and that the value of the 10,000 shares of the class B preferred did not exceed $ 400,000 on the date of decedent's death. The parties further stipulated, based on their agreed valuations of the class A and class B preferred stock, that the total gross estate of decedent did not exceed the deductions allowable under sections 2053, 2054, and 2056. As a result of their agreed valuations of the preferred stock, the parties stipulated that there were no619 deficiencies in petitioners' estate tax, nor were there any additions to tax due from petitioners under section 6660. Respondent's Position in Docket No. 23027-88On June 9, 1988, respondent issued a separate deficiency notice to Mrs. Dooley in her individual capacity. In it, respondent determined a deficiency of $ 850,449 in gift tax for 1986, and an addition to tax under section 6651(a)(1) in the amount of $ 212,612 for failure to file a 1986 gift tax return or pay tax. Throughout the pretrial proceedings in these cases, respondent stated that her position in docket No. 23027-88 was taken in response to petitioners' argument that the south half of the San Jose Ranch qualified as property subject to the estate tax marital deduction under section 2056, regardless of the fact that Mrs. Dooley and her family ended up giving that property to decedent's three daughters in settlement of the will and deed contests. Respondent maintained that the south half of the San Jose Ranch was clearly given to the daughters in exchange for their relinquishment of all their inheritance rights to decedent's property and their agreement to terminate their claims against the estate. Therefore, 620 according to respondent, such property could not qualify for the marital deduction since it did not technically "pass" from decedent to his surviving spouse within the meaning of section 2056, especially in light of section 20.2056(e)-2(d)(1), Estate Tax Regs., which states that "If as a result of a controversy involving the decedent's will, or involving any bequest or devise thereunder, his surviving spouse assigns or surrenders a property interest in settlement of the controversy, the interest so assigned or surrendered is not considered as having 'passed from the decedent to his surviving spouse.'" Petitioners argued that due to an in terrorem clause in the 1983 will the daughters had no inheritance rights to exchange for the south half of the San Jose Ranch, and therefore, the property vested in Mrs. Dooley before she gave it to the daughters in a separate transaction. Respondent, in the notice of deficiency in docket No. 23027-88 thus took the position, viewing the Dooley family's transactions separately as urged by the estate, that there was a gift by the surviving spouse to the three daughters at the time of the settlement of the will contest, and therefore gift tax liability621 for the fair market value of the gift on the part of Mrs. Dooley for 1986. After the estate abandoned its position that the daughters' settlement property was subject to the marital deduction in decedent's estate in docket No. 23026-88, respondent immediately abandoned her postion in connection with the surviving spouse's gift tax liability in docket No. 23027-88. Thus, in their stipulated settlement, the parties agreed that there were no deficiencies in Mrs. Dooley's 1986 gift tax, nor additions to tax owed by her under section 6651 for failure to file a 1986 gift tax return. After petitioners filed their stipulated settlement (in which respondent conceded all the tax deficiencies and additions to tax that she had initially asserted in the three deficiency notices, with the exception of $ 143,787 owed by the estate in 1984 gift taxes), stipulated decisions reflecting the parties' settlement were entered on October 23, 1990, without opinion. No trial was held. On January 22, 1991, petitioners filed their motion for litigation costs and attorney's fees under section 7430, which is the motion presently before us. As a result of petitioners' motion, this Court vacated its stipulated622 decisions under Rule 162 14 and ordered that respondent file a response to petitioners' motion for litigation costs. In their motion, petitioners contend that they are entitled to the following attorney's fees and litigation costs: Total Fee orAttorney or ItemHoursCost ClaimedElwood Cluck$ 150,000(attorney)Kevin P. Kennedy$ 3,650(attorney)James L. Drought$ 52,500(attorney)Clark Munroe$ 13,765and Associatespocket expenses118(appraiser)T.F. Woodley & Co.valuation$ 7,075services(appraiser)travel expenses140Miscellaneous$ 1,019Expenses$ 1,019TOTAL AMOUNT CLAIMED$ 228,267With their motion for litigation costs, petitioners filed a detailed affidavit which they claim adequately sets forth the nature and amount 623 of each item paid or incurred for which an award is sought, as required by Rule 231(d). In addition, petitioners submitted the affidavit of Willie Jo Dooley, dated November 17, 1990, in which she asserts that petitioners meet the net worth requirements of section 7430(c)(2)(A)(iii) in that her net worth "did not exceed $ 2,000,000" and the estate's net worth "did not exceed $ 7,000,000" at the time each of the petitions was filed in these cases. OPINION Section 7430(a) provides, generally, that a taxpayer who has substantially prevailed in a civil tax proceeding may be awarded reasonable litigation costs incurred in such proceeding. In order to be entitled to an award of litigation costs, the taxpayer must show that he was the "prevailing party" by establishing (1) that the position of the United States in the civil proceeding was not substantially justified, sec. 7430(c)(2)(A)(i); (2) that the taxpayer substantially prevailed in the proceeding with respect to either the amount in controversy or the primary issues presented, sec. 7430(c)(2)(A)(ii); and (3) that, at the commencement of the proceeding, the taxpayer met the net worth requirements specified in section 7430(c)(2)(A)(iii). 624 In addition, litigation costs will not be awarded unless the taxpayer can demonstrate that he exhausted the administrative remedies available to him with the Internal Revenue Service, sec. 7430(b)(1); that the taxpayer did not unreasonably protract any portion of the proceedings for which litigation costs would otherwise be awarded, sec. 7430(b)(4); and that the amount of costs claimed is reasonable, sec. 7430(c)(1). These are conjunctive requirements which must all be met in order for an award to be made to petitioners. Sher v. Commissioner, 89 T.C. 79 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988); Minahan v. Commissioner, 88 T.C. 492">88 T.C. 492, 497 (1987). Petitioners have the burden of proof as to each requirement. Rule 232(e); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Gantner v. Commissioner, 92 T.C. 192">92 T.C. 192, 197 (1989), affd. 905 F.2d 241">905 F.2d 241 (8th Cir. 1990). Respondent concedes that, based on the parties' settlement agreement, petitioners have substantially prevailed with respect to the amounts in controversy in all625 three cases. However, respondent contends that petitioners are nonetheless not entitled to litigation costs because they have not shown that they meet the other requirements of section 7430. For the reasons stated below, we conclude that petitioners have failed to prove that the positions of respondent were not substantially justified. Accordingly, as petitioners have failed to meet one of the prerequisites to their qualification as the "prevailing party" within the meaning of section 7430(c)(2)(A), we hold that they are not entitled to an award for litigation costs and attorney's fees. Whether respondent's positions were substantially justified or not turns on a finding of reasonableness, based on all the facts and circumstances, as well as legal precedents relating to the case. 15Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685">94 T.C. 685, 694-695 (1990); Sher v. Commissioner, supra at 84; DeVenney v. Commissioner, 85 T.C. 927">85 T.C. 927, 930 (1985). 626 The legislative history of section 7430 provides additional guidelines for determining whether respondent's conduct was substantially justified. Other factors the committee believes might be taken into account in making this determination include, (1) whether the government used the costs and expenses of litigation against its position to extract concessions from the taxpayer that were not justified under the circumstances of the case, (2) whether the government pursued the litigation against the taxpayer for purposes of harassment or embarrassment, or out of political motivation, and (3) such other factors as the court finds relevant. * * * * [H. Rept. 97-404, at 12 (1981).] Section 7430(c)(4) defines the "position of the United States" to include: (A) the position taken by the United States in the civil proceeding, and (B) any administrative action or inaction by the District Counsel of the Internal Revenue Service (and all subsequent administrative action or inaction) upon which such proceeding is based. 16627 Thus, under the statute, our application of the substantially justified standard to administrative actions or inactions prior to the institution of a proceeding is limited to the period beginning with the point at which district counsel has become involved. From the record, it appears that respondent's district counsel first became involved when he was preparing answers to the petitions that were filed in these cases. Therefore, we consider respondent's position in each case from the date the petition was filed in the particular case until the cases were all simultaneously settled on January 14, 1991. In their motion for litigation costs, petitioners place particular emphasis on the fact that respondent initially determined deficiencies in income tax, gift tax, estate tax, and additions to tax, totaling well over $ 8 million, but ultimately settled the three cases for a deficiency of only $ 143,000 in gift tax for 1984. We agree with petitioners that, at first blush, the huge dollar amount of respondent's concessions casts doubt on the reasonableness of her litigating positions in these cases. However, the fact that respondent eventually loses or concedes the case is not628 sufficient to establish that her positions were unreasonable. Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 767 (1989); Vanderpol v. Commissioner, 91 T.C. 367">91 T.C. 367, 370 (1988); Wasie v. Commissioner, 86 T.C. 962">86 T.C. 962, 968-969 (1986); Baker v. Commissioner, 83 T.C. 822">83 T.C. 822, 828-829 (1984), vacated and remanded on other grounds 787 F.2d 637">787 F.2d 637 (D.C. Cir. 1986). Moreover, the deficiency notices were issued prior to the time district counsel became involved and thus the positions taken in the notices themselves are not directly relevant to the determination of whether respondent was substantially justified within the meaning of section 7430. We have reviewed and summarized the events leading up to the filing of the parties' pleadings only "to determine whether respondent acted reasonably in pursuing the litigation" in the light of what she knew at the time the litigation commenced. Rutana v. Commissioner, 88 T.C. 1329">88 T.C. 1329, 1332 (1987) (citing Don Casey Co. v. Commissioner, 87 T.C. 847">87 T.C. 847, 862 (1986)); Sher v. Commissioner, 89 T.C. at 85;629 see also Tinsley v. Commissioner, T.C. Memo. 1992-195. Given the sheer complexity of the facts and the convoluted nature of these cases, we are inclined to find that respondent's litigating positions and the amount of time she took to concede them was reasonable. We note that even petitioners' attorney, Mr. Cluck, at the hearing held on June 5, 1989, characterized these cases as having a "long, tortuous" factual background. Whenever there is a factual determination with respect to a tax return, respondent is not obliged to concede the case until the necessary documentation is received to prove the taxpayer's contentions and claims. Sokol v. Commissioner, supra at 765 n. 10; see also Johnson v. Commissioner, T.C. Memo. 1991-447; Spirtis v. Commissioner, T.C. Memo 1985-44">T.C. Memo. 1985-44. Certainly, in the instant cases, respondent was faced with making a number of difficult factual determinations, each of which had some significant legal and tax implications. Initially, respondent had to do this without the benefit of knowing petitioners' positions on such issues as630 how decedent acquired the Petersen Ranch, the valuation of the corporation's real estate assets, what factors might qualify the real estate assets of the corporation for special use valuation methods, the proper valuation of the stock of decedent's closely held corporation and the allocation of that value among the various classes of stock, and the nature, values, and amounts corresponding to many other property transfers of decedent and his estate. Under these circumstances, it would be illogical for respondent to make blind concessions rather than continuing her factual investigation of these legally intertwined cases. We find that respondent was reasonable both in the amount of time she took to investigate these cases and in taking protective litigating positions until the point that petitioners had apprised her of their specific claims and provided her with the necessary documentation to support them. See and compare Harrison v. Commissioner, 854 F.2d 263 (7th Cir. 1988), affg. T.C. Memo. 1987-52 (concession some 6 months after answer filed, after respondent had an opportunity to verify information, held reasonable); 631 Ashburn v. United States, 740 F.2d 843">740 F.2d 843 (11th Cir. 1984) (11-month delay in conceding case not unreasonable); Wickert v. Commissioner, 842 F.2d 1005">842 F.2d 1005 (8th Cir. 1988), affg. T.C. Memo. 1986-277 (concession 10 days after filing of answer, although it took several months to draft the stipulation of settlement, held to be reasonable). Even upon closer scrutiny, we believe that respondent was substantially justified in the specific positions she took in each of these three cases once petitioners had informed her of their positions. First, in determining whether respondent was substantially justified with respect to her argument in docket No. 11131-88, that decedent realized gross income in 1981 when he received the Petersen Ranch from Martha Bartberger, we find that a number facts weigh in respondent's favor. In petitioners' joint Federal income tax return for 1981, they made no disclosure whatsoever as to how they acquired ownership of Petersen Ranch. There was no indication on the return that Dooley had received it in 1981 as an inheritance under Mrs. Bartberger's will, excludable from gross632 income under section 102, or whether Dooley had received it as compensation from her for his past services as ranch manager pursuant to the 1935 oral contract with her father, making it gross income in 1981 for tax purposes. We have previously held that a purported bequest is not subject to the exclusion under section 102(a) when such bequest is made in recognition of, and in compensation for, past services. Wolder v. Commissioner, 58 T.C. 974">58 T.C. 974 (1972), affd. in part, revd. in part and remanded 493 F.2d 608">493 F.2d 608 (2d Cir. 1974); see also Miller v. Commissioner, T.C. Memo 1987-271">T.C. Memo. 1987-271. Under the facts known to respondent at the time she sent the deficiency notice, and especially in light of Dooley's claims during life, it was reasonable for respondent to argue that decedent received the Petersen Farm as compensation for his past services to N.P. Petersen and his daughter, Mrs. Bartberger. We observe that prior to the issuance of the deficiency notice, the Texas appeals court had issued a decision and the Tax Court had issued an opinion (although no final decision), holding that Dooley acquired the Petersen633 Ranch as an inheritance from Mrs. Bartberger and not pursuant to the 1935 contract. See Estate of Bartberger v. Commissioner, T.C. Memo. 1988-21. Even in light of this authority, we find that respondent was reasonable in initially holding out and taking a protective position in the instant case. According to respondent, she wanted to delay making any concessions until this Court had issued its final decision in Estate of Bartberger v. Commissioner, supra, and the time frame for a possible appeal of its holding had passed so as to avoid a possible "whipsaw" litigating situation on appeal. Although a final decision in Estate of Bartberger had not been issued prior to settlement of the instant cases, respondent went ahead and conceded her position in docket No. 11131-88 based on the "perceived strength" of her contrary position in Estate of Bartberger and because the issues in petitioners' two other consolidated cases were settled. Under these facts, we find that respondent acted reasonably and that the litigating position she took in this particular case, docket No. 11131-88, was substantially justified. 634 Secondly, we find that the primary and secondary litigating positions respondent took in docket No. 23026-88 against decedent's estate were reasonable. We place weight on the fact that the estate tax return filed by petitioners was substantially incomplete when it was filed. On the return, petitioners did not assign values to many of the properties in question, such as the four ranches and the corporate stock, but instead claimed those values were "undetermined". Petitioners apparently never filed an amended return. Thus, respondent did not have the benefit of petitioners' initial stance on the key item subject to the valuation dispute, the common and preferred stock in O.D. Dooley Ranches, Inc., until sometime after June 30, 1990, the date of the Clark Monroe & Associates appraisal which was procured by petitioners. Furthermore, we are persuaded that respondent was justified in using the net worth method of valuing the common and preferred stock of O.D. Dooley Ranches, Inc., in establishing her own valuation position in this case. Decedent's closely held corporation appeared to be a real estate holding company; it had no apparent business purpose, other than for estate planning. 635 Therefore, respondent was reasonable in choosing to measure the value of the corporation's underlying real estate assets -- the four ranches -- in order to best estimate the value of the preferred stock held by decedent at death and the value of the common stock he gave away during life. See, e.g., Estate of Oman v. Commissioner, T.C. Memo. 1987-71. One month before these cases were set for trial, petitioners informed respondent of their final valuation position on the corporate stock by delivering to respondent's counsel the undated stock appraisal report completed for petitioners by T.F. Woodley & Co. Inc. The parties were able to settle these cases within 1 month after petitioners apprised respondent of their final position on the operative issue, the valuation of the common and preferred stock of the closely held corporation. Under these facts alone, respondent was reasonable in holding out until she had received petitioners' final stance on the ownership and valuation of the stock and the necessary documentation to substantiate those values. Finally, we are convinced that respondent was justified in taking a protective position in docket No. 636 23027-88 due to petitioners' inconsistent position regarding the estate's entitlement to the marital deduction in docket No. 23026-88. In docket No. 23026-88, decedent's estate argued that the value of the south half of the San Jose Ranch qualified for the marital deduction under section 2056 in that it did not "pass" directly from decedent to his daughters, as it appeared to under the family settlement of the will contest, but rather "passed" to, and vested in, Mrs. Dooley under decedent's will, and was subsequently transferred in a separate transaction to the three daughters. Willie Jo Dooley, however, did not file a gift tax return with respect to her transfer of the San Jose Ranch property to the daughters. Being faced with petitioners' position in docket No. 23026-88 that Mrs. Dooley's transfer of the San Jose ranch was not given in exchange for the daughters' agreement to give up their inheritance rights, respondent logically concluded that the transfer must then be a gift, unsupported by any consideration, resulting in gift tax liability on the part of Willie Jo for 1986. We observe that respondent immediately conceded this protective position once the estate abandoned637 its position in docket No. 23026-88 that the ranch property transferred to the daughters was subject to the marital deduction. Again, respondent acted reasonably under the circumstances. In light of the manner in which these cases evolved and viewing the record as a whole, we conclude that respondent's positions were justified. While respondent might have taken greater care in preparing the deficiency notices and providing explanations for the huge tax deficiencies in the first instance, the complexity and size of the particular litigation projects are not to be overlooked. From the point that the petitions were filed until the parties' stipulated settlement agreement was reached, all of respondent's activities were devoted to investigating the facts of these related and legally intertwined cases, making reasonable verification of petitioners' claims, and preparing and executing the documents necessary to determine and settle the disputed issues. In the absence of any indication that respondent pursued these matters for any reason other than to prevail in the litigation, we cannot say that respondent acted unreasonably. Vanderpol v. Commissioner, 91 T.C. at 370.638 Accordingly, we hold that petitioners are not a "prevailing party" within the meaning of section 7430(c)(2)(A), entitled to an award of reasonable litigation costs. Petitioners have also failed to convince us that they exhausted the administrative remedies available to them with the IRS as required by section 7430(b)(1). Upon receiving the Commissioner's first examination report of the estate tax return in which respondent first proposed deficiencies in all three cases, petitioners did not file a protest or pursue an administrative appeal. They did not even make much of an effort to arrange conferences with the Service's examining agent. Rather, they requested by certified letter that deficiency notices be issued. We have found that respondent's litigating positions in these cases were substantially justified and further, that petitioners have failed to show that they exhausted their administrative remedies. Secs. 7430(c)(2)(A)(i), 7430(b)(1). Accordingly, we hold that petitioners are not a "prevailing party" entitled to an award of litigation costs and attorney's fees under section 7430. Petitioners' motion will639 be denied. To reflect the foregoing, Appropriate orders and decisions will be entered. Footnotes1. Cases of the following petitioners are consolidated herewith: Estate of Ogden D. Dooley, Deceased, Willie Jo Dooley, Co-executrix and C.J. Bitter, Co-Executor, docket No. 23026-88 and Willie Jo Dooley, docket No. 23027-88.↩2. 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.↩3. Respondent issued the first deficiency notice to petitioners on Feb. 26, 1988, in docket No. 11131-88. The deficiency notices in docket Nos. 23026-88 and 23027-88 were both issued on June 9, 1988.↩1. 50 percent of the interest computed on that portion of the underpayment attributable to negligence.↩1. 50 percent of the interest computed on that portion of the underpayment attributable to negligence.↩4. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec. 6239, 102 Stat. 3743, redesignated the provisions of sec. 7430(c)(2)(A), as applicable herein, as sec. 7430(c)(4)(A) for proceedings commenced after Nov. 10, 1988. We note that the proceedings in all three of the instant cases were commenced before↩ Nov. 10, 1988, and so the redesignation does not apply.5. We note that petitioners' attorney in the instant cases, Elwood Cluck, also performed legal services for decedent with respect to his suit against the executor of the Bartberger estate in the Texas district court (Dooley v. Frost National Bank, No. 2371 (63rd Judicial Dist., Kinney County, Tex., July 2, 1986) for which he charged fees of $ 119,000. Mr. Cluck also performed services for the Bartberger estate in its Tax Court litigation in Estate of Bartberger v. Commissioner, T.C. Memo. 1988-21↩, for which he charged fees of $ 70,000. In both of those cases, Mr. Cluck argued, contrary to petitioners' litigating position in the instant case (docket No. 11131-88), that Dooley had received the Petersen ranch pursuant to the 1935 oral contract and not as an inheritance excluded from gross income under sec. 102(a).6. Although the O.D. Dooley Farm is not by name a "ranch", for convenience, we will refer to it as such for purposes of deciding this motion.↩7. "Bennet" is the surname that Patricia Dooley acquired in a marriage that ended prior to decedent's death. At the time of her father's death and the settlement of the daughters' will contest, Patricia's full name was Patricia Dooley Smith.↩8. The action to contest the validity and probate of decedent's 1983 will was first initiated by Carole Dooley Kirby and soon joined by decedent's two other daughters, Diane Dooley Elrod and Patricia Dooley Smith.↩9. This suit was also initiated by Carole Kirby and soon joined by decedent's two other daughters.↩10. In this case, the estate tax return was due to be filed on Sept. 16, 1985, 9 months after the date of decedent's death. Sec. 6075(a).↩11. Apparently, no amended estate tax return was ever filed.↩1. 50 percent of the interest due on the portion of the underpayment attributable to negligence.↩12. Petitioners' motion to compel was the second of three such motions filed by petitioners under sec. 7517. In the first motion, petitioners sought a statement from respondent explaining how she determined the value of the Petersen Ranch, which is the subject of the dispute in docket No. 11131-88. In petitioners' third motion to compel, they requested respondent to provide a statement explaining her valuation of the San Jose Ranch, the Petersen Ranch, the O.D. Dooley Farm, the Mountain Ranch, and a certain right-of-way easement which had been executed by a Clifton Belcher, as grantor, in favor of decedent, as grantee, for road purposes. ↩13. Sec. 7517 provides as follows: (a) General Rule. -- If the Secretary makes a determination or a proposed determination of the value of an item of property for purposes of the tax imposed under chapter 11, 12, or 13, he shall furnish, on the written request of the executor, donor, or the person required to make the return of the tax imposed * * a written statement containing the material required by subsection (b). Such statement shall be furnished not later than 45 days after the later of the date of such request or the date of such determination or proposed determination. (b) Contents of Statement. -- A statement required to be furnished under subsection (a) with respect to the values of an item of property shall -- (1) explain the basis on which the valuation was determined or proposed, (2) set forth any computation used in arriving at such value, and (3) contain a copy of any expert appraisal made by or for the Secretary. (c) Effect of Statement. -- Except to the extent otherwise provided by law, the value determined or proposed by the Secretary with respect to which a statement is furnished under this section, and the method used in arriving at such value, shall not be binding on the Secretary.↩14. Sec. 7430(e)↩ provides that an order granting or denying an award for reasonable litigation costs shall be incorporated as part of the decision and shall be subject to appeal in the same manner as the decision.15. The Tax Reform Act of 1986 changed the language describing the position of the United States from "unreasonable" to "not substantially justified", effective for civil tax actions or proceedings commenced after Dec. 31, 1985. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(d)(1), 100 Stat. 2085, 2752. However, this and other courts have held that the "substantially justified" standard is not a departure from the previous reasonableness standard. Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 763-764 n.7 (1989); Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 84 (1987), affd. 861 F.2d 131">861 F.2d 131↩ (5th Cir. 1988), and cases cited therein.16. Sec. 7430(c)(4) was added by amendment to sec. 7430 in 1986 in an effort by Congress to resolve a split among the Federal Courts of Appeals as to whether the "position of the United States" includes only its litigation position after a petition is filed or both its pre-litigation and litigation positions. Sher v. Commissioner, supra.Sec. 7430(c)(4) applies to any amounts paid after Sept. 30, 1986, in proceedings commenced after Dec. 31, 1985. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(e), 100 Stat. 2753. We note that prior to the enactment of sec. 7430(c)(4), the U.S. Court of Appeals for the Fifth Circuit, to which the instant cases are appealable, interpreted sec. 7430 to allow an examination of both prelitigation and litigation positions, and stated that a position of respondent that forces a taxpayer to file a suit is to be examined. Powell v. Commissioner, 791 F.2d 385">791 F.2d 385, 391 (5th Cir. 1986) (remanding case to Tax Court for determination as to whether respondent's position that caused the taxpayer to file suit was reasonable). However, sec. 7430(c)(4), rather than the Fifth Circuit's holding in Powell v. Commissioner, supra↩, applies to these cases, given the effective date of the statute as stated above.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620371/	THE CARLING HOLDING COMPANY, NOW DISSOLVED, BY THOMAS M. JOHNSON, JOHN W. MARTIN, AND J. C. BRADFORD, TRUSTEES TO SETTLE ITS AFFAIRS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carling Holding Co. v. CommissionerDocket Nos. 86776, 87378, 88616.United States Board of Tax Appeals41 B.T.A. 493; 1940 BTA LEXIS 1175; March 1, 1940, Promulgated 1175 Petitioner was formed by a bondholders' committee, with the committeemen as its only stockholders, to hold title to property in process of foreclosure. Held, on the facts, petitioner was a mere conduit or agent for the bondholders, and rentals received by it and spent largely upon taxes and foreclosure expense did no constitute income to petitioner. John W. Townsend, Esq., and M. H. Barnes, C.P.A., for the petitioner. L. W. Creason, Esq., and A. H. Monacelli, Esq., for the respondent. DISNEY493 These proceedings, duly consolidated, involve income and excess profits taxes as follows: Docket No.Taxable yearIncome taxExcess profits taxTotal867761934$2,939.67$443.973,383.648737819334,045.871,471.235,517.108861619353,510.19705.314,215.50The questions presented are whether certain amounts received by petitioner constituted income taxable to it, or whether it was a mere conduit, agent, or trustee; and, in the alternative, whether petitioner, if taxable upon said receipts, is entitled to depreciation claimed upon the property producing the receipts and to deduction of1176 taxes, paid or accrued, operating expenses, and interest. We make the following findings of fact. FINDINGS OF FACT. 1. In 1925-1926 the Applebrook Hotel co. (hereinafter called Applebrook) built at Jacksonville, Florida, a hotel, known at that time as the Hotel Carling, later known as the Hotel Roosevelt. The 494 contractor who built the hotel was paid $876,410. This did not include interest, bond discount, or amortization, or other financing costs. The hotel property, exclusive of furniture and fixtures, was carried on the books of Applebrook at a total cost of $1,424,023.87, allocated $387,000 to land and $1,037,023.87 to improvements. As a part of the financing, $1,000,000 par value 7 percent bonds were issued on September 1, 1925, to the Florida National Bank of Jacksonville, Florida, as trustee, and secured by first mortgage on the hotel, fixtures, and furniture. After completion the hotel was leased to a company which operated it until default in 1931, at which time Applebrook took over the assets of the company, including furnishings installed by it. 2. On September 1, 1931, Applebrook defaulted on its bond issue, which had by payment been reduced1177 to $928,000, the default being failure to pay 1930 taxes, to pay bond interest due September 1, 1931, and to make sinking fund payments for retirement purposes. 3. On October 1, 1931, a protective agreement was entered into between bondholders depositing Applebrook bonds in certain banks as depositaries, and three men called the "Bondholders Protective Committee" (hereinafter called the committee). The agreement made the committee the agents and trustees for the depositing bondholders. It provided in part that removal of members of the committee might be by vote of the bondholders; that deposit of bonds constituted assignment of title thereto to the committee as the owner thereof, to be held subject to an express trust, without limitation except the duty of the committee to do whatever in its uncontrolled opinion was calculated to promote and protect the depositors' interest; that the committee had power to sell, transfer, or exchange the bonds deposited, to request or direct the trustee to foreclose, to take possession of, operate, or lease the mortgaged property, to cause the property to be sold at foreclosure or otherwise; to consent to adjournment of sale, to bid in the property1178 at sale, to apply the bonds in satisfaction of any bid, to take and hold properties purchased by it, either in its own name or as a committee: * * * or in the names of persons or corporations by it chosen for the purposes of this agreement, or in its discretion with all convenient speed to cause to be organized a corporation or corporations to take and hold such property, * * * and with full power to determine finally the form of the articles of association and charter of such new company or companies, the character and provisions of its or their securities and the rights to be enjoyed by the holders thereof, * * * and upon the adoption or approval of a plan and agreement of reorganization by the Committee, such property or the securities and shares representing the same then in the hands of the Committee shall be disposed of thereunder by the Committee or managers named in such plan, in the manner therein provided; to request or oppose the appointment of a receiver of the mortgaged property; * * * to arrange for the operation of said mortgaged 495 property or any part thereof and to take such action or proceedings as it may deem, in its uncontrolled discretion, advisable1179 at any time in the interest of the depositors. It was also provided: The Committee may from time to time, in its discretion, make advancements or contributions for the operation of the property to the Trustee or Trustees under said mortgage, or to the Owners or any successor, or subsequent owner of its property, or to any Receiver or Receivers or to any Trustee or Trustees in bankruptcy of the Owners or to any agent or agents operating the property of the Owners on behalf of any such Receiver or Trustee, * * * and may enter into any agreements to guarantee or indemnify any person against any expenses, obligations or liability incurred by such person at the instance of the Committee or in the operation of the property, all of which shall be a charge on the bonds deposited hereunder. * * * Fifteenth - If and whenever the Committee shall have adopted a plan of reorganization of said Owners or mortgaged property, it shall deposit the same with the Depositary, with copies thereof for distribution to the depositors, and notice of such adoption and deposit shall be mailed to each depositor at his postoffice address registered with the Depositary. * * * By December 31, 1933, $732,5001180 in bonds had been deposited, by December 31, 1934, $734,500, by December 31, 1935, $837,400, and by December 31, 1936, $909,000. 4. The hotel had been erected upon property one-half of which was owned by Applebrook and upon the other one-half of which Applebrook held a 99-year lease, carrying ground rents. During 1932 Applebrook was 60 to 90 days late in making payment of ground rents. Nonpayment of taxes was ground for default under the lease, and the owner of the leased ground notified the trustee under the mortgage that there was default for nonpayment of taxes. 5. About May 1932 the Florida National Bank of Jacksonville, as trustee, instituted in a Circuit Court in Florida foreclosure proceedings upon the mortgage securing the bonds. The bondholders' protective committee requested the trustee to proceed. 6. On November 3, 1932, decree of foreclosure was entered. 7. The property was advertised for sale in December 1932 and January 1933, but the sale was postponed for lack of a satisfactory bidder. 8. Throughout this time Applebrook had been operating the hotel under an agreement to apply all net earnings to payment of past due taxes. There were, due to depressed1181 conditions, practically no net earnings, but some past due personalty taxes had been paid by Applebrook, insurance had been maintained, and monthly ground rent payments made. Applebrook had been cooperating with the bondholders; protective committee. In January 1933 the committee, though contemplating buying the property at foreclosure, was faced with the fact that it could not complete foreclosure, for to do so required about 496 $75,000 for taxes, trustee's fees, and fees for attorneys for the trustee. The banking crisis was developing, and a buyer at a satisfactory price could not be found. After negotiations the committee told Applebrook that the committee would have to have a receiver appointed to get the income from the property for the bondholders, or that if Applebrook would deed the property the committee could get the income in that way. 9. On February 4, 1933, at a meeting of the directors of the petitioner, the Carling Holding Co. (hereinafter called Carling), the proposition of taking a deed from Applebrook and leasing to the Carling Operating Co. (hereinafter called the operating company) was discussed. Announcement was made that the deed was offered1182 in consideration of the granting by Carling of a two-year lease to the operating company, that the property was worth only a fraction of the encumbrance, but the advantage to Carling would be a substantial annual income, and that it was hoped that by the expiration of the two-year lease the corporation could clear up a part of the outstanding liens, and be in a position to close the foreclosure by sale and master's deed. The proposition was adopted, and the president and secretary were authorized to take title and possession of the property, and to made the lease to the operating company. 10. On February 9, 1933, Applebrook executed and delivered a deed to Carling, a corporation organized by the bondholders' protective committee to hold title because the committee did not wish title to be in three individual names. Carling had been organized on February 2, 1933, with 50 shares of no par common stock, and was to have a capital of $500. The certificate of incorporation, dated February 1, 1933, shows the original subscribers to stock as F. B. James, H. B. Fozzard, and Z. Whitnell, but the $500 capital was never paid in, and the only stock certificate issued, being No. 1, dated1183 February 4, 1933, for 50 shares, was issued to John W. Martin, James B. Hill, and Thomas M. Johnson, who were the bondholders' protective committee. It was signed by Martin as president and Johnson as secretary. The stock was endorsed in blank by the three members of the committee, who were the sole stockholders and directors of Carling Holding Co., and deposited with the Citizens & Southern National Bank, which was the depositary for the bondholders. This deposit was made because the committee felt that it was simply acting for the bondholders and as the committee, and that any security should be held by the depositary for the bondholders. The deed from Applebrook to Carling recited as consideration $10 and other valuable considerations, but the $10 was not paid. It recited that the conveyance was subject to all taxes, and to the foreclosure decree of November 2, 1932. The only consideration for the deed was the agreement by the committee to lease the property 497 for two years to the operating company, a company organized by the major stockholders of Applebrook, and some others. The committee agreed further that, if it was necessary to lease the property again at the1184 end of two years, the operating company would be given the refusal on the same terms, or any better lease offer which the committee might receive from others; also that if the committee decided to sell the property for the bondholders and received a satisfactory offer, the operating company should have opportunity to equal or better such offer. It was understood between the committee and the trustee for the bondholders that Carling would use any receipts to pay back taxes. 11. On February 9, 1933, the day of the execution of the deed by Applebrook to Carling, a lease was executed between Carling and the operating company, under which the hotel was operated until December 1, 1934, at which time another lease was executed to the same company, which continued to operate the hotel until default by it on its terms, in August 1935. The operating company by the terms of the lease agreed to pay $20,000 per year plus 25 percent of room rentals over from $100,000 to $120,000, and 33 1/3 percent above $120,000, and to pay all taxes, repairs, insurance premiums, and ground rents. Provision was recited as to the option to lease, or purchase, on any terms others might offer acceptable to1185 Carling, as hereinabove stated. The second lease, beginning December 31, 1934, provided a minimum rental of $30,000 per year and one-third of room rentals above $120,000, and provision for option to purchase at any offer from others acceptable to Carling. The leases were recited to be subject to the decree of foreclosure and possible sale thereunder. 12. The committee on March 1, 1933, reported the situation to the bondholders by circular letter or report. The report, after reciting the agreement for deed and lease, as hereinabove set forth, in part says: * * * In the event the Committee decides to sell the property for the bondholders and receives a satisfactory offer, the Operating Company is to have an opportunity to equal or better such an offer. All of the funds received under this lease are to be used in paying the past due taxes, Trustee's fee, Trustee Attorney's fee and to rebuild the Sinking Fund in the hands of the Trustee. * * * The Committee of course, unless prevented by conditions beyond its control, hopes to effect a satisfactory sale or reorganization of the property and securities before the two year period is up, and will in either case submit the matter1186 to the bondholders before they take action. We feel the course we have adopted is the wisest and most economical one for the bondholders. If we had been able to borrow the $75,000.00 to complete foreclosure sale, it would have been necessary to give a first mortgage on the property as security and to pledge all income for the payment of the loan. This would have resulted in no income being available for the bondholders for four or five years. 498 Under our present plan, there is hope of being able to work it out so that some income may be available for distribution to the bondholders in the third year unless a satisfactory sale or reorganization is effected before that time. * * * In conclusion, it was essential that some arrangement be made so that current taxes be cared for and funds realized for the payment of back taxes and other prior claims. Efforts were made in every direction and the plan outlined above was the best that the Committee could do at this time. 13. On May 15, 1934, a circular report was made to the bondholders by the committee, reciting in part, after referring to the report of March 1, 1933: We stated at that time $13,500 had been paid1187 under the lease. Up to this time we have received $46,500 including the payment already reported to you. These funds have been used to pay the following: Then follows a list of taxes and expenses paid, totaling $45,942.05, including: Taxes and corporate expenses Carling Holding Company$836.40Rogers and Towers, attorneys for Trustee, and Florida National Bank, Trustee, part payment foreclosure fees3,900.00 * * We have received $46,500, and expect to receive next week $3,000 which will substantially reduce the arrearage in the lease. This will be applied on the ree due Rogers and Towers as demand has been made for the immediate payment of this fee in full. A similar report was made to the bondholders July 12, 1934, containing the following: "The property is leased to the Carling Operating Company for $20,000.00 annually net to the Bondholders." On August 17, 1934, another report was made to the effect that the bondholders had voted not to accept an offer of which the report of July 12, 1934, had given notice, and stating in part: * * * Unless a substantially higher offer is received in the future, the Committee understands it will be useless to submit1188 it to the bondholders and will concentrate its efforts on paying up the taxes, etc., looking toward a reorganization of the property for the bondholders. * * The Committee will continue to handle the property in the manner it considers to the ultimate best interest of the bondholders. 14. On August 4, 1934, the bondholders' protective committee, upon the signatures of its three members, upon a 90-day promissory note, with $740,500 Carling Hotel Co. bonds as collateral, borrowed $12,500 from the Citizens & Southern National Bank. The money was turned over to Carling, and was repaid on November 8, 1934, from receipts from the lease after partial payments. Aside from this money and rents received, Carling had no income. It never held any property other than the hotel, its furniture, fixtures, and equipment. It paid only one salary, $50 per month to the secretary. Its operating expenses consisted of telephone expenses, traveling expenses, and 499 expenses of attorneys for Carling and for the committee in the amount of $5,500. 15. After default by the operating company under the terms of its lease in August 1935, the committee requested the trustee to advertise1189 the property for sale under the foreclosure decree. A sale set for early in October 1935 was advertised in September, and just before the sale day, Applebrook and the operating company both filed bankruptcy proceedings under section 77-B of the Bankruptcy Act. A few days later a member of the committee was appointed by the court as trustee to manage the property, and qualified October 18, 1935. Several plans of reorganization were presented, which the bondholders declined to accept and the proceedings were dismissed on June 20, 1936, by the Federal court. A member of the committee was then, on July 1, 1936, appointed receiver in the foreclosure proceedings in the state court. 16. Applebrook filed in the foreclosure action a petition for cancellation of the decree of foreclosure. Answer was filed thereto. The petition was denied by order of July 28, 1936. In the order the court in part found and recited: It is thereupon ordered, adjudged and decreed as follows: i. That the deed from Applebrook Hotel Company to Carling Holding Company dated Feb. 9, 1933, is a conveyance of the equity of redemption and not merely a mortgage or supplemental mortgage. Upon the same day, 1190 the same court, in an order on a petition filed by the receiver to show cause, also held: 1. That Carling Holding Company, a corporation, referred to in said petition, is a creature of the Bondholders Protective Committee and that said Bondholders Protective Committee is a party to this suit and subject to the jurisdiction of this court. 17. On August 3, 1936, the hotel property was sold under the foreclosure decree, and was bid in by a member of the committee, in behalf of the committee. The bid was assigned to the North Florida Hotel Co., a corporation which had been organized on August 10, 1936, by the committee to take title to the property. It issued all of its stock to the committee for the benefit of the depositing bondholders. At that time the committee represented about 98 percent of the bondholders. The bonds deposited were surrendered in part payment of the purchase price upon foreclosure sale. As to those bondholders who had not deposited, a pro rata share of the sale price of the property was deposited with a special master for payment to them upon presentation of their bonds. 18. Petitioner was dissolved and a certificate of dissolution issued November 19, 1936. 1191 Its board of directors acted as trustees to settle its affairs under the law of Florida, and on its behalf in this proceeding. 500 Petitioner never declared or paid any dividends, or paid any money to the bondholders. At the time of hearing herein on February 24, 1939, petitioner's trustees owned nothing except a small bank deposit of approximately $31. 19. All receipts by the petitioner were deposited to its credit in the Citizens & Southern National Bank of Savannah, Georgia, and were paid out for taxes, foreclosure costs, including attorneys' fees, and a small amount for the expenses of the committee and organization expenses of Carling, as follows: 193319341935RECEIPTS: Account rent and taxes$30,000.00$33,700.00$37,192.39Account loan12,500.00Total30,000.0046,200.0037,192.39DISBURSEMENTS: Taxes for 1930, 1931, and 193224,186.27Taxes for 1930 and 19322,279.13Taxes for 193314,128.34Taxes for 193415,776.37Interest on 1932 taxes220.11Interest on loan124.75Repayment of loan12,500.00Salaries500.00700.00600.00Miscellaneous expenses4.33112.03901.18Expenses of protective committee66.30264.481,676.05Attorney's fee relating to acquiring title30.50Attorneys' fees relating to litigation2,000.00Organization expenses140.93Payment of items constituting liens under foreclosure decree4,832.6215,987.82Total29,760.6546,316.6620,955.601192 20. The only books of account maintained by the petitioner were a check book and stubs, a bank deposit book, and bank statements. It did not keep a ledger, journal, or cash book. The company was simply keeping an account of cash received and cash paid out. The Federal income tax returns were prepared by public accountants and filed for 1933, 1934, and 1935. In each the questions propounded as to "Basis of Return" were left blank, as follows: Is this return made on the basis of cash receipts and disbursements? If not, describe fully what other basis or method was used in computing net income. No balance sheet was attached to any return. The respondent in the deficiency notice for 1933 denied that the return was upon the accrual basis. No statement in that regard is made in the deficiency notices for 1934 and 1935. No permission from the Commissioner to change the basis of accounting is shown. One item, that of taxes, in 1933 was accrued. Work sheets attached to a copy of the 1933 return show the $10,532.40 taxes claimed as deduction to be an accrued item. The amount is incorrect, the proper amount accruable from February 9, 1933, the date of acquisition of the property1193 by petitioner, being 501 $14,128.34. The work sheet from which the 1934 return was prepared is captioned "Receipts and Disbursements." Some items were accrued and some were not in 1934 and 1935. The accounts and returns were neither upon a basis of accrual nor a cash basis. OPINION. DISNEY: The deficiencies in question are due, chiefly, to respondent's disallowance for each year of claimed depreciation deductions, on the ground that petitioner did not own a hotel in respect of which the depreciation was claimed. The respondent denied petitioner the right to deduct from gross income for the year 1933 accrued real estate taxes, because its books were not kept, in the opinion of the respondent, on the accrual basis. For the year 1935 respondent denied petitioner the right to a deduction for interest accrued under a foreclosure decree, constituting a lien on hotel property, asserting that petitioner did not assume liability for the interest. In each proceeding an amended petition was filed, wherein petitioner claimed that respondent erred in holding that it was taxable upon the moneys received or receivable by it in respect of rent for the hotel property, and, in the1194 alternative, claims that, if so taxable, respondent erred in failing to allow it deductions for depreciation, for interest on the foreclosure decree constituting a lien against the property, for accrued taxes on the property, and for some operating expenses in amounts set forth in the respective petitions. Obviously the first question for consideration is whether petitioner was taxable upon the moneys involved. They were received from the operation of a hotel. Petitioner contends that respondent's view, when denying claim for depreciation, that it did not own the hotel, is a confession that the income from the hotel was not that of petitioner. We think such conclusion does not follow. Petitioner obviously might have income from property not owned by it, such as under some sort of contractual arrangement. On the other hand, the respondent is, we think, likewise in error in his contention that because petitioner is admittedly a corporate entity it follows that it is taxable upon the moneys received. Corporate entity in fact, that is, incorporation in due form of law, has often appeared in cases where the entity was ignored for tax purposes, e.g., 1195 ; ; and the very recent decision in . We must therefore ascertain whether the situation here presented requires recognition, or disregard, of corporate entity. In general, corporate entity is and must be respected. "Only in cases where there are exceptional circumstances may the separate entity of the corporation be disregarded and the courts look through form to the 502 substance." , citing , and other cases. Is this such an exceptional case? In sum, we have here a default upon nearly $1,000,000 in bonds issued by a hotel company; the formation of a hondholders' protective committee of three; inability of the committee to raise about $75,000 necessary for taxes, attorneys' fees, trustee's fees and other expenses before foreclosure could be completed and title obtained for the bondholders; demand by the committee upon the hotel company for either1196 a receiver or title to the property in order that the income could be utilized to cut down the money required and eventually permit foreclosure; acquiescence by the hotel company in a transfer of title provided an operating lease be given to a company formed by the hotel people; disinclination of the committee to having title in their individual names; the formation of petitioner with the three members of the committee as sole stockholders with no capital paid in; a small amount of stock issued in one certificate and deposited with the bank serving as bond depositary; the passage of title to petitioner and an operating lease to those interested in the hotel company; financial assistance rendered petitioner by the committee and use of the major part of all receipts of petitioner to the discharge of taxes and expenses of the committee in the foreclosure, such as attorneys' and trustee's fees; the default of the operating company after about one and one-half years; the completion of foreclosure purchase of the property with bonds by the committee through a member; assignment of bid to a corporation formed to take title and to issue its stock in exchange for bondholders' rights; and the1197 dissolution of petitioner. In 112 , a corporation was duly organized with powers not dissimilar to those of petitioner, to hold title to real estate for an investment trust because of the absence from the country of the principal person concerned. As herein, the issuance of a small amount of stock was apparently perfunctory. Though there was no definite agreement that the corporation was agent or trustee for the real owner, the investment trust, the court held the corporation to be a mere conduit of profit made on resale, and not taxable thereon. The court pointed out that if the contest had been between the corporation and the investment trust, instead of a tax question, no court would have permitted the corporation to retain from the investment trust the property or the profits. So here we think it is wholly obvious that if the petitioner, with its three stockholder-directors the same as the three members of the bondholders' protective committee, had by some good fortune, such as discovery of oil upon the hotel grounds, been able to sell the property for $2,000,000, for example, sufficient1198 to discharge the bonds of about $1,000,000, the three committeemen, as the petitioner corporation, could 503 not have contended that the $1,000,000 surplus above debts belonged to petitioner and to them as its stockholders. The former hotel company owner was held by the local court having jurisdiction to have no further interest, its contention that its deed was by way of further security being denied. Such a profit as above supposed would therefore belong either to the bondholders whose committee had formed petitioner, or to petitioner, with the members of such committee as its stockholders. To hold the latter would be a travesty upon the law of agency or trusteeship; yet the example serves to emphasize the fact that the committee, and the petitioner corporation set up by it, was the servant of the bondholders. The local court in Florida, though apparently the committee was not a formal party to the foreclosure litigation, held that petitioner was a "creature of the Bondholders Protective Committee and that said Bondholders Protective Committee is a party to this suit and subject to the jurisdiction of this court." That the petitioner corporation was hardly more than a1199 formality is indicated also by the fact that the three incorporators seem to disappear, receive no stock, and are immediately supplanted by the committee, the members of which receive stock certificate No. 1 and deposit it with the bond depositary. Though not holding that we are bound by the decision of the local court above mentioned, we think its pronouncement is enlightening in the situation. The petitioner corporation was in truth very plainly a mere creature of the bondholders' protective committee. Had some stranger hotel company, perhaps already organized and operating elsewhere, taken a deed to the hotel property under agreement to apply rents upon taxes, etc., as did petitioner, the situation would patently have involved no status of agency or trust, and the stranger company would have been entitled to any profits made. But that reflection only serves to show a different situation, and a different result, here. In , a corporation was formed to hold title to property, because a title insurance company feared disastrous results of any publicity upon the fact that it had taken a great1200 loss upon loans made upon the property through fraud of the mortgagors and others. The court called the corporation "a vehicle wherewith it [the executive committee, and officers of the insurance company mortgagee] should acquire and deal with the said properties for the insurance company", pointed out that the 14 shares of stock in the corporation were all, except a qualifying share, held by stockholders of the insurance company, that the stock was deposited with the insurance company (much as was to small amount of stock in petitioner herein deposited with the bondholders' depositary bank) and later transferred to the insurance company, that the insurance company provided money needed by the corporation (as was done by petitioner herein to the extent of 504 $12,500), that separate books were kept for the corporation, and that there was no thought in the minds of the stockholders of the corporation to profit by their holdings in the company. Herein, the petitioner's three stockholder-committeemen deposited the single certificate of stock issued to all with the bond depositary, because they "felt that anything in the way of security, and so forth, should be held by the1201 depositary for the Bondholders." In the cited case the Board had recognized the corporate entity and its receipts as income to it. The court said that "It is difficult to reconcile this decision with the facts that gave rise to the birth of the Belhall Company [the corporation]" and pointed out that the insurance company-mortgagee, to prevent disaster, had incorporated the company "in which no third party had any stock or interest"; that substance and not form should govern; that no purpose of evading tax appeared; that the case presented the "peculiar circumstances" mentioned by ; and that, while in form there were two entities, in substance there was but one enterprise. The situation of the bondholders here is in no essential particular different from the mortgageholder insurance company in the North Jersey Title Insurance Co. case, supra.Other cases presenting strongly analogous situations which need not be analyzed are , and 1202 ; also, ; . Each case on the question rests peculiarly upon its own facts. We do not in this respect find helpful , where unusual circumstances justifying disregard of corporate entity were negatived rather than demonstrated; and in , the corporation, sought to be considered as the same entity as a partnership, had business and earnings in which the partnership in nowise participated. Other facts, not considered necessary of discussion, contribute to our conclusion that we have here a markedly peculiar situation requiring placing this proceeding in that category of decisions where corporate entity is subordinated to substance. We therefore conclude and hold that the sums received by petitioner and involved herein were received by it as a mere conduit or agent, and do not comprise income to petitioner. In the light of this conclusion, it is unnecessary to pass upon the alternative1203 questions presented. However, it is plain that the formation of petitioner and transfer of its stock to the committee did not effect a reorganization. The bondholders did not surrender anything to petitioner. On the contrary, they retained their bonds, purchased the property at the foreclosure sale with them, and apparently participated in a reorganization, since after the foreclosure sale it appears, though the evidence is incomplete, that a new 505 corporation, the North Florida Hotel Co., was formed on August 10, 1936, to take title to the property, and issued all its stock to the committee for the benefit of the depositing bondholders. It thus appears that there was no reorganization at any earlier date. Reviewed by the Board. Decision of no deficiency will be entered.STERNHAGEN STERNHAGEN, dissenting: This decision is a strange anomaly. The petitioner is recognized as a taxpayer who may file a petition based upon a deficiency notice arising from its own return, but it may not be required to pay the tax upon its properly computed income. Why not? It was voluntarily conceived and organized and no doubt paid taxes to the state. It owned property, *1204 collected rents, and later conveyed the property. These facts denote vitality as a landlord; why not as a taxpayer? See People ex rel. Waclark Realty Co. v. Williams,198 N.Y. 54">198 N.Y. 54; 91 N.E. 266">91 N.E. 266. To characterize the corporation as a conduit or an agency or an instrument does not affect its status under the tax law, for every corporation is essentially that. The significant question under the revenue act is whether the corporation has income for the year. If there is income, the United States taxes it and the Board can offer no sanctuary. MELLOTT and OPPER agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620373/	Alfons B. Landa v. Commissioner. Marjorie M. Astin v. Commissioner.Landa v. CommissionerDocket Nos. 26018, 26027.United States Tax Court1952 Tax Ct. Memo LEXIS 243; 11 T.C.M. (CCH) 420; T.C.M. (RIA) 52119; April 25, 1952243 Raymond N. Beebe, Esq., 815 15th St., N.W., Washington, D.C., and Raymond C. Cushwa, Esq., for the petitioner in Docket No. 26018. Meredith M. Daubin, Esq., for the petitioner in Docket No. 26027. E. M. Woolf, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined deficiencies in income tax of $669.42 and $4,970.50 for the years 1943 and 1944, respectively, in Docket No. 26018 (petitioner Alfons B. Landa) and $154.51 in income tax for 1943 in Docket No. 26027 (petitioner Marjorie M. Astin). Computation of tax for 1943 in Docket No. 26018 involves the year 1942 under the Current Tax Payment Act of 1943. The sole issue remaining in controversy in Docket No. 26018 after concessions by the parties in that proceeding, and the single question presented for decision in Docket No. 26027 is whether a portion of payments by a husband to his divorced wife was on account of the principal of an indebtedness, or constituted alimony deductible by the husband in Docket No. 26018 and taxable to the divorced wife in Docket No. 26027, under sections 23(u) and 22(k) of the Internal Revenue Code, respectively. 244 The proceedings have been consolidated. Findings of Fact Petitioner Alfons B. Landa, hereinafter called Landa, and petitioner Marjorie M. Astin, hereinafter called Astin, filed their individual income tax returns for the years involved with the collector of internal revenue for the district of Maryland. They are residents of Washington, D.C. Landa is an attorney practicing in the District of Columbia. In June 1930 Landa and Astin were married. On December 1, 1937, they separated. Between December 1, 1937, and December 1, 1941, Landa paid $300 per month to Astin for her support, plus additional amounts aggregating approximately $25 per month for incidental expenses such as medical bills and the upkeep of an automobile. On December 1, 1941, at which time Landa was 44 years of age, he and Astin entered into three agreements, respectively entitled "Agreement Pendente Lite," "Separation Agreement," and "Note Agreement." The three instruments were executed simultaneously. The notation "(L.S.)" appears after each signature of the parties, all signatures being acknowledged before a notary public. The law firm of Alvord & Alvord represented Astin in the preparation of the agreements. 245 The "Agreement Pendente Lite" stated that Landa and Astin had separated; that Astin had grounds for divorce by reason of the long separation; that she had declared her intention to establish a permanent residence in Florida where she would seek a divorce; and that Landa desired to make provision for her separate maintenance and support pendente lite. The instrument provided that Landa would pay to Astin $700 in cash, immediately upon execution of the agreement, which was to be used to pay Astin's debts. Astin agreed that she would not thereafter contract any debts for which Landa would become liable. Landa agreed that he would pay Astin's transportation expenses from Washington, D.C., to the place selected by her for a Florida residence; that he would pay reasonable expenses incurred in obtaining a divorce; and that he would further pay $85 per week to Astin during her first 13 weeks of residence in Florida, which would be in addition to all sums otherwise provided for under any agreement between the parties. The "Separation Agreement" stated that Landa and Astin had separated and had failed at all attempts at reconciliation; that they desired to enter into an agreement under which246 they might continue to live separately and under which provision would be made for Astin's maintenance; that all personal property then in possession of Astin was her sole and separate property; and that Landa had theretofore been indebted to Astin in the sum of $30,000 and they desired to settle forever all property rights growing out of their marriage relationship. The agreement provided that neither would endeavor to compel restoration of conjugal rights. It provided that during Landa's life, but only so long as Astin remain unmarried, he would pay to her the sum of $150 per month, payments to begin on the date of execution of the agreement and to be made thereafter on the first day of each month. The agreement further provided that each party released all rights then existing or which might thereafter exist, by reason of their marriage, in any property then owned or thereafter acquired by the other party. Each party waived all rights to share in any property to which the other party might become entitled under the laws of the District of Columbia, all rights of dower or courtesy, and any right to any distributive share of any property of the other party or any right of election247 to take against any last will and testament of the other party. The agreement was to continue in full force and effect and to be binding whether the marriage continued or was dissolved. The "Note Agreement" stated that Landa was indebted to Astin "in the sum of $30,000, which indebtedness was incurred after their marriage and while they were living together as husband and wife * ." The instrument stated that they had separated and contemplated termination of their marital relationship; that in the event the marriage was dissolved, Landa desired to provide for Astin's security by giving evidence of that indebtedness; and that both parties desired Alvord & Alvord to act as custodian of the evidence of indebtedness and to assist in execution of the covenants. The instrument provided that in the event that a final decree of divorce were issued to Astin, Landa agreed to execute and deliver to Alvord & Alvord his promissory note to Astin's order in the sum of $30,000, the note to contain the terms and conditions set forth in the promissory note attached to the agreement. The note was to bear the same date as the date of the final decree of divorce, and the first monthly payment of principal248 and interest was to be due and payable on the 15th day of the first month following the date of execution. Delivery of the note was to be made by Landa to Alvord & Alvord within ten days after the final decree of divorce. Alvord & Alvord were to accept delivery on Astin's behalf and to hold the note for the protection of the interests of both parties until it was paid in full. The instrument further provided that in the event of Astin's death before the principal and interest should have been paid in full, Alvord & Alvord should cancel the note and deliver it to Landa. In the event of Astin's remarriage, Landa agreed that he would pay to her, upon 30 days' written notice from her or from Alvord & Alvord, the sum of $5,000 in cash, which should be in addition to all other payments otherwise provided for under that or any other agreement between the parties. The following was the unsigned "Promissory Note" attached to the above agreement: "PROMISSORY NOTE "$30,000 Washington, D.C. 1942 "FOR VALUE RECEIVED, I, ALFONS B. LANDA, promise to pay to the order of MARJORIE MONDELL LANDA, the sum of THIRTY THOUSAND DOLLARS ($30,000) with interest at the rate of 6% per annum on said principal249 sum, or so much thereof as may from time to time remain unpaid. "Principal and interest payable at the Hamilton National Bank, 14th and G Streets, N.W., Washington, D.C., in monthly installments of TWO HUNDRED DOLLARS ($200.00) each, commencing on the fifteenth day of , 1942, and continuing on the fifteenth day of each month thereafter until paid; each installment, when so paid, to be applied first to the payment of interest accrued on the unpaid principal sum, and the residue thereof to be credited to said principal sum. "And it is agreed that if default be made in the payment of any one of the aforesaid installments of principal or interest when and as the same shall become due and payable, then and in that event, the unpaid balance of the principal sum shall, at the option of the holder hereof, at once become due and payable, anything hereinabove contained to the contrary notwithstanding. "This note is non-negotiable, and shall be void in the event of the death of the payee, the said MARJORIE MONDELL LANDA, before payment in full of principal and interest has been made. "Alfons B. Landa" A letter dated December 8, 1941, was sent by Landa to Astin. Its purpose was to prevent250 a reduction in payments to Astin during the period after execution of the above agreements and prior to the grant of a divorce decree. The letter concluded by requesting Astin to indicate her acceptance if the proposal was agreeable to her. Her name was written in under the legend "Accepted." The following is the substance of the letter: "Dear Marjorie: "In order to remove an ambiguity in the Note Agreement and in order to avoid an unintended result, I propose to begin the payments upon the Note as of December 15, 1941, to be applied in the same manner as if the Note were dated December 15, 1941. These payments, however, will cease after the payment due April 15, 1942 if the final decree of divorce has not been issued and if I am convinced that you do not intend faithfully to prosecute the proceedings for a final decree of divorce." * * On April 18, 1942, a final decree of absolute divorce was granted to Astin, as plaintiff, from Landa, as defendant, by the circuit court of the Fifteenth Judicial Circuit of Florida in Palm Beach County. The decree confirmed and approved a special master's report of testimony and findings. That report had found that the Court had jurisdiction251 of the subject matter and parties; that the plaintiff had been a resident of Florida for more than 90 days; that defendant had filed an answer and was represented by counsel; that no children had been born in marriage; that the plaintiff and defendant had made a property settlement and the plaintiff was not requesting suit money or alimony; and that the defendant had been guilty of desertion for one year. The report recommended that a divorce decree be granted. On an undisclosed date Landa executed the instrument entitled "Promissory Note" which had been attached to the "Note Agreement." During each of the years 1942, 1943, and 1944 Landa made payments to Astin as provided in the "Separation Agreement," and in the "Note Agreement." Landa's 1942 tax return deducted the sum of $2,973.33 as alimony, and his returns for 1943 and 1944 deducted the amount of $4,200 in each year as alimony. Respondent's notice of deficiency to Landa determined that the amounts of $573.33, $600, and $696.24 were not deductible for the years 1942, 1943, and 1944, respectively, since they represented payments of principal on the note, the remainder of the above amounts claimed as deductions by Landa being252 allowed by respondent partly as alimony and partly as interest on the note. Astin reported, in her income tax return for 1943, alimony in the amount of $1,800 and interest in the amount of $1,800. Respondent's notice of deficiency to Astin determined that she had understated her income by $600, having received alimony in that year of $4,200. The amounts in controversy of $573.33, $600, and $696.24 paid by Landa to Astin under the "Note Agreement" during the years 1942, 1943, and 1944, respectively, constituted repayments of the principal of an indebtedness. Opinion We are again confronted with an adversary proceeding where two taxpayers have conflicting interests but the revenue seeks to collect from but one. See Fisher v. Commissioner (C.A. 2), 59 Fed. (2d) 192; Ruth W. Collins, 14 T.C. 301">14 T.C. 301; Robert Wood Johnson, 10 T.C. 647">10 T.C. 647. There is perhaps some added interest here for by the process of consolidation the actual adverse parties are engaged in the same litigation. Petitioner Landa who was formerly the husband of petitioner Astin insists that an agreement drawn in terms of the repayment of an indebtedness with interest was in reality253 no more than provision for alimony or support money. See, e.g., Estate of Mildred K. Hyde, 42 B.T.A. 738">42 B.T.A. 738. Out of total annual payments by Landa to Astin of $4,200, only about $600 for each year is in controversy. Certain sums are agreed by all concerned to have been true alimony; and a part of the money paid under the agreement in dispute, referred to as the "Note Agreement," is conceded to be taxable to Astin and deductible by Landa, whether treated as alimony on the one hand or as interest on the other. Landa, of course, contends that the $600 in issue was also alimony and thus deductible by him, while it is Astin's position that under the agreement this was a repayment of principal and consequently not taxable to her. Respondent, assuming in effect the position of a stakeholder, has protected himself by taking inconsistent positions in opposition to that maintained by each of the taxpayers in their respective proceedings. Both parties being before us, and having arrived at their agreement in what we may safely suppose was an arms-length dealing, we start with the assumption that the agreement was in fact what it purported to be and that the recitals contained in it254 are statements of the true facts. It would take internal evidence of some weight to lead us to the opposite conclusion. In fact, such indications generally support the assumption. In the first place, the payments both of principal and interest would be continued beyond Astin's remarriage, although obviously the husband's obligation of support did not extend so far. In the second place, the parties at the same time entered into an agreement for additional payments which were expressly referred to as alimony. And in the third place, these payments as contrasted with those in the so-called note agreement were expressly limited to cease at Astin's remarriage. There was, it is true, testimony on behalf of Landa designed to show that in the negotiations leading to the execution of the note agreement its ultimate terms were conceived for purposes inconsistent with the repayment of a loan and as additional protection to Astin in securing her support from Landa. Whether this evidence was properly admitted might be an interesting question to which, however, we are not now required to give an answer. In the light of the agreement itself and the circumstances of its execution, we prefer to rely255 on the contents of a written document rather than to ascribe probative weight to oral testimony contradicting it. Decision will be entered under Rule 50 in Docket No. 26018. Decision will be entered for the petitioner in Docket No. 26027.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620374/	Peter F. Mitchell Corp. v. Commissioner.Peter F. Mitchell Corp. v. CommissionerDocket No. 634-66.United States Tax CourtT.C. Memo 1968-209; 1968 Tax Ct. Memo LEXIS 88; 27 T.C.M. (CCH) 1030; T.C.M. (RIA) 68209; September 23, 1968. Filed 88 Petitioner adopted a profit-sharing plan limited to its salaried employees. Its other regular employees are paid wages at hourly rates underunion agreements, and some are covered by the pension plans of two labor unions. Petitioner has only three salaried employees, two of whom are highly paid and are officers and shareholders, and the other one is a bookkeeper-secretary. Held, upon the facts, that the Commissioner did not err in holding that the plan covering salaried employees is not a qualified plan under section 401(a), 1954 Code, because in operation the plan discriminates in favor of officers, shareholders, and highly paid individuals, and, consequently, petitioner's contributions to the plan are not allowable deductions. Ed & Jim Fleitz, Inc. [Dec. 28,974], 50 T.C. 384">50 T.C. 384, followed. Richard S. Pastore for the petitioner. Charles M. Costenbader and Irving Bell, for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent determined a deficiency in income tax in the amount of $3,148.10 for the fiscal year ended March 31, 1964. Some of the respondent's determinations are not contested. The only issue is whether the petitioner is entitled to a deduction for its contributions to its deferred profit-sharing plan which covers only its salaried employees. The respondent determined that the plan is not qualified under section 401(a) of the 1954 Code. The question is whether the plan in operation discriminates in favor of employees who91 are officers, shareholders, or highly compensated employees. Findings of Fact Some of the facts are stipulated. The stipulated facts are so found, and are incorporated herein by reference. The Peter F. Mitchell Corporation, a Connecticut corporation, has its principal office in Riverside, Conn. It filed its income come tax return for the fiscal year ended March 31, 1964, with the district director of internal revenue at Hartford, Conn. It keeps its accounts and reports its income on the basis of a fiscal year ending on March 31, and on an accrual method of accounting. Petitioner was organized on October 1, 1962; it is engaged in the business of heavy construction, site preparation, excavation, road work, paving, and a general contracting business. Peter F. Mitchell is its president, and Salvatore Pannone is its vice president and secretary. Mitchell is Pannone's uncle. Mitchell and Pannone own all of petitioner's capital stock, each one owning 50 percent thereof. During its fiscal year ended March 31, 1964, petitioner employed 40 employees, of whom 37 were regular employees who are paid wages on an hourly basis, and three were salaried employees. In the taxable fiscal year92 petitioner had only three employees who were paid on the basis of a fixed annual salary, namely, Mitchell, Pannone, and a bookkeeper-secretary, Julia Sanna. Mitchell and Pannone were paid same salary, $35,000, each. Julia's annual salary was $4,925. During the taxable year, the salaries of Mitchell and Panone were paid and accrued as follows: Petitioner paid $24,050 to each one, and accrued in the salaries payable accounts the balance, $10,950. Thus, in the taxable year the two offcders were paid in cash salaries totaling $48,100, and the accrued balances were $21,900. During the taxable year, Julia worked part-time for another corporation which reimbursed petitioner $1,890 for Julia's work. Julia worked the balance of the fiscal year for petitioner. Although Julia's annual salary was $4,925, the actual net amount thereof which petitioner paid her in the taxable year was $3,035 after receiving the reimbursement of $1,890 from the other corporation. Of the 37 regular employees, a few were part-time employees; 26 were members of labor unions having pension plans to which petitioner paid contributions; and 11 were not members of those labor unions, and with respect to them petitioner93 did not make any payments to any pension plan. Petitioner has collective bargaining agreements with two unions, Local 478 of the socalled Operators' Union, and Local 56 of the so-called Laborers' Union. Out of all of petitioner's 37 regular employees, paid on an hourly basis, 11 were members of the Operators' Union during the taxable year, and 15 were members of the Laborers' Union. Out of the 37 hourly-wage employees, 15 worked for petitioner for only a small part of the fiscal taxable year, less than 6 months. Of these 15 employees, nine were not members of either the Operators' or the Laborers' unions, and petitioner paid them wages of from $32 to $576. Of the remaining six employees, one was a member of the Operators' Union, receiving wages of $468; and five were members of the Laborers' Union, and they received wages of from $179.76 up to $1,326.58. Taking into account the above facts relating to 15 employees who worked for petitioner less than 3 months (out of 37 hourlypaid employees) there were 22 employees who worked for petitioner more than 3 months of the fiscal year in question, and of the 22 there were 15 who worked 12 months, and seven who worked less than 12 months. 94 Also, out of those 22 employees, two were not members of either of the above-named unions, and their total wages were $5,251.09 and $4,517. 1032 Of the remaining 20 employees, who worked 12 months, or less, but more than 3 months, 10 belonged to the Operators' Union and 10 belonged to the Laborers' Union. The total wages paid to the 10 employees belonging to the Operators' Union were in the range of from $1,733.58 to $9,972.33, as follows, and for them petitioner made payments to the pension fund of that union as set forth below: 11 10 Members of the Operators' UnionEmployeeTotal wagesPension fundpay'ts.1$ 9,972.33$ 162.7027,720.15153.6038,488.72159.6042,305.6048.8051,733.5850.4062,939.7578.4074,035.5280.0884,598.00112.0094,720.7584.0010 4,558.3792.00Total$51,072.77$1,021.58The following sets forth the wages paid to the 10 employees who were members of the Laborers' Union, and the amount petitioner paid to that union's pension fund for them: 11 10 Members of the Laborers' UnionEmployeeTotal wagesPension fundpay'ts.1$ 4,870.64$ 200.1624,396.11170.0834,930.72200.8044,280.76190.8856,008.41228.7263,710.72172.1674,819.62202.6485,436.69222.5692,723.28129.6810 3,581.50152.08Total$44,758.45$1,869.7695 On March 31, 1964, the effective date, petitioner executed an agreement entitled, "Profit-Sharing Trust Agreement." Under this agreement, petitioner established a deferred profit-sharing plan for all of its salaried employees, Mitchell, Pannone, and Julia. None of them were members of a union. This plan consists of and incorporates a profit-sharing trust of which Mitchell, Pannone, and Richard Pastore are the trustees. The agreement is incorporated herein by reference. On March 31, 1964, the petitioner paid, or accrued, a liability of $11,238.75 to, and with respect to, the profit-sharing plan and trust for the accounts of the three participants under the plan: Peter F. Mitchell$ 5,250.00Salvatore B. Pannone5,250.00Julia Sanna 738.75Total$11,238.75The above amounts paid and accrued for the accounts of Mi The above amounts paid and accrued for the accounts of Mitchell and Pannone represented 15 percent of their annual salaries. The sum of $738.75 paid and accrued for Julia's account was based on the rate of her annual salary, $4,925, and was 15 percent thereof. But the net amount paid to her was $3,035 (after petitioner was reimbursed $1,890 for96 her services to another corporation), and 15 percent of $3,035 amounts to $455.25. Thus, 15 percent of the net sum of the salaries paid and accrued by petitioner to the three salaried employees amounts to $10,955.25. The petitioner's profit-sharing plan provides, inter alia, as follows: (1) Employees covered by the plan are persons regularly employed on a salaried basis, excluding persons customarily employed for not more than 30 hours in any one week, or for not more than 9 months in any calendar year. (2) Each employee who is not a member of a labor union which provides for pension or retirement benefits paid by the employer, shall be eligible to become a participant in the Mitchell Corporation plan on the first participation date which occurs on or after attaining the age of 25 years, and completing 3 entire years of continuous employment, or upon becoming 30 years of age, and completing 1 entire year of continuous employment. (3) Mitchell Corporation shall pay to the trustees of the plan for each fiscal year a contribution determined by the profits of the corporation for the fiscal year, namely: no amount on the first $2,000 of profits; but if the profits exceed $2,000, then97 the contribution shall be 20 percent of the first $10,000 of profits above $2,000; 40 percent of the next $30,000 of profits; and 60 percent of the balance of profits above $30,000. The board of directors may vote, prior to the end of any fiscal year, to contribute for that year, a different percentage or amount of net income, or to make no contribution for the current fiscal year. (4) It is provided in the agreement that if for any taxable year the employer shall contribute to the trust an amount less than 15 percent of the total compensation otherwise paid or accrued to all participants, the amount by which the contribution was less than such 15 percent may be carried forward and deducted when paid in succeeding taxable years in order 1033 of time; and that if for any taxable year the employer shall contribute to the trust an amount in excess of 15 percent of the compensation of the participants, such amount shall be held unallocated by the trustees and carried forward to succeeding taxable years. (5) The agreement provides that the employer's initial contribution shall be $800. (6) The employer's contributions shall be invested by the trustees, as provided in the agreement, 98 including the purchase of insurance, for the benefit of the trust, on the lives of any employee whose death could result in a reduction of the employer's profits. (7) The employer's contributions to the trust shall be irrevocable. However, the employer retains an option to terminate the trust. (8) The plan defines normal retirement date as the date of the anniversary after the employee's participation in the plan nearest to his 65th birthday. If he was over 55 years old when he first came under the plan, the normal retirement date is the 10th anniversary after the date of entry under the plan, or the date nearest his 70th birthday, if the time for retirement is earlier than 70 years of age. (9) The plan provides retirement benefits for a retired, participating employee. (10) Contributions to the plan are made only by the employer. (11) A participant may continue to work as an employee beyond his normal retirement date with the employer's consent. When the participant retires and ceases to be an employee, upon reaching the retirement date, or after, he shall receive retirement benefits based on his account under the plan and trust. The benefits include disability and death benefits. 99 If the participant ceases to be an employee for reasons other than retirement, disability, or death, he is entitled to receive as a severance benefit a stated percentage of the amount credited to his account under the plan, the percentage being based upon the number of years of his participation under the plan of from 2 to 11 years or more, but no severance benefit will be paid if the participation was for less than 2 years. If the participation has been for 11 years, or more, the severance benefit will equal 100 percent of the amount credited to the employee's account. The petitioner filed Form 2950, "Statement in Support of Deduction for Payments to an Employees' Pension Profit-Sharing Stock Bonus Trust or Annuity Plan," with the district director of internal revenue at Hartford, Conn., on October 22, 1964. The district director denied approval of petitioner's profit-sharing plan for its salaried, nonunion employees. He held that the plan did not qualify as a qualified plan under section 401(a)(3)(B) because, in the director's opinion, the employee coverage under the plan was discriminatory in favor of the highly paid supervisory employees who are officers and shareholders of petitioner. 100 On review, the district director's ruling was upheld by the Commissioner who determined that the contributions to the plan discriminated in favor of the prohibited group. Ultimate Finding of Fact The respondent did not err in determining that petitioner's deferred profit-sharing plan, covering only its salaried employees, in its operation discriminates in favor of employees who are officer-shareholders and are highly compensated. Opinion The petitioner claims a deduction of $11,238.75 for its contribution in the taxable year to its deferred profit-sharing trust for its salaried employees. Petitioner contends that the plan is a qualified plan under section 401(a), 1954 Code; that it satisfies the nondiscriminatory requirements of sections 401(a)(3) and 401(a)(4); and that the amount of the claimed deduction is the correct amount, 15 percent of compensation, under section 404(a)(3)(A). The respondent disallowed the deduction on the ground that petitioner had failed to establish that the salaried employees' profitsharing plan, in operation, does not discriminate in favor of the prohibited class of employees. Section 401(a)(5) provides in part that a classification set up101 by the employer "shall not be considered discriminatory within the meaning of paragraph (3)(B) or (4) merely because it excludes employees the whole of whose remuneration constitutes 'wages' * * ' or merely because it is limited to salaried or clerical employees." This statutory provision is one part of the whole scheme of section 401(a) and the related statutory provisions, and it represents one of several guidelines. Consideration has been given to the pertinent parts of section 401(a)(5). Section 401(a)(3)(B) gives the Secretary or his delegate authorization to determine whether a trust and plan is, or is not, "discriminatory in favor of employees who are officers, shareholders, persons whose 1034 principal duties consist in supervising the work of other employees, or highly compensated employees." One aspect of the issue to be decided is whether the respondent's determination, that the petitioner's plan for its salaried employees is discriminatory in favor of the covered employees, is an arbitrary one and represents an abuse of discretion under the statute. Petitioner contends that the respondent's refusal to determine that the petitioner's plan is a qualified plan under102 section 401(a) is "a clear abuse of discretion." The question whether discrimination exists in respect of a plan and trust is a question of fact which first must be determined by the Commissioner, and his determination should not be set aside unless it is found to be arbitrary or an abuse of discretion. See Ed & Jim Fleitz, Inc., 50 T.C. 384">50 T.C. 384, 390. However, under the facts of this case it cannot be said that the respondent's determination of discrimination was arbitrary when the following facts are taken into account. Out of 25 regular employees employed for all or most of the 12 months, only three were covered by petitioner's plan for its salaried employees, and of those three employees, two were in the prohibited group, i.e., two were officers, shareholders, and highly paid individuals in comparison with the regular, hourly-paid employees. In the Fleitz case, supra, pp. 389-391, we stated the following: We agree with respondent. The law permits the salaried-only classification but the committee reports make it clear that the classification is not to be used if its effect is to discriminate in favor of the prohibited group. The fact that petitioner's business needs103 are such that it needs no more than three nonunion salaried employees, plus a permanent work force of union laborers, is of little consequence and certainly is not conclusive. The plain meaning of the statute is that a classication which is limited to salaried employees might or might not be discriminatory, depending upon who the salaried employees are. If the salaried employees and the prohibited group are the same then it seems quite likely that the plan in operation would be considered discriminatory in favor of the prohibited group. When the salaried employees group includes the prohibited group, plus one or two other salaried employees, discrimination in favor of the prohibited group might still result. Rev. Rul. 66-14, 1 C.B. 75">1966-1 C.B. 75. When the salaried employees group includes the prohibited group and many more employees it might well be that no discrimination exists. See Ryan School Retirement Trust, 24 T.C. 127">24 T.C. 127, where there were 110 rank and file employees and 5 officers eligible to participate. * * * There is some suggestion in petitioner's brief that its classification should have been approved because of the language of section 401(a)(5) where104 it is stated: A classification shall not be considered discriminatory within the meaning of paragraph (3)(B) or (4) * * merely because it is limited to salaried or clerical employees. * * * All that this statute means is that a salaried-only classification will not be considered discriminatory per se. The quoted statute does not render such a classification nondiscriminatory. The plan must meet the requirement that there be no discrimination in coverage in favor of the prohibited group even though the salaried-only classification is used. * * * In the case of Duguid & Sons, Inc. v. United States ( N.D.N.Y. 1967, 20 A.F.T.R. 2d 5725), the court had the same issue as is present here with much the same fact situation. There the coverage in a construction company's plan was restricted to "any person regularly employed * * * in an executive, administrative or clerical capacity." In effect, the classification resulted in covering the taxpayer's two officers and its one supervisor out of a permanent work force of around nine employees. In holding the Commissioner's determination that the plan was discriminatory was not arbitrary or an abuse of discretion, the court stated: 105 The hard, cold facts involved here are undisputed, and I so find them, that the three employees covered by the plan were the two owners and managers of the Company and its one Supervisor. It is true, as the government concedes, that by the statute and regulations a plan may cover salaried employees only, and there is no requirement to cover the entire labor force, but in this setting there is sufficient, I think, to base adverse decision upon the portion of the statute that bars approval if the plan favors officers, shareholders and persons whose principal duties consist in supervising the work of other employees, or are highly compensated employees. * * We hold the Commissioner's determination, that the trust was discriminatory in operation in favor of the prohibited group set forth in section 401(a)(3)(B), 1035 is not shown to be arbitrary or an abuse of discretion on his part. We conclude that the trust was not qualified under section 401(a) or exempt from tax under section 501(a). Consequently, petitioners' contributions to the trust were not deductible under section 404(a)(3). See Armanco Productions, Inc., 49 T.C. 174">49 T.C. 174 (1967). * * * The above quoted reasoning106 of this Court in the Fleitz case, supra, applies with equal force to the instant case, and the same conclusion and holding are made under the facts of this case. Section 401(a)(5) provides in pertinent part that a classification shall not be considered discriminatory within the meaning of section 401(a)(3)(B) merely because it is limited to salaried or clerical employees. Section 401(a)(5) sets out certain classifications of employees which will not in themselves be considered discriminatory. But that section does not stand alone and it must be considered in conjunction with section 401(a)(3)(B). See secs. 1.401-3(d) and (e) of the Income Tax Regs. This position, one of long standing, originated in the Revenue Act of 1942, which inserted paragraph 5 into section 165(a) of the 1939 Code. See sec. 401(a)(5), 1954 Code, the corresponding provision. See S. Rept. No. 1631, 77th Cong., 2d Sess., 2 C.B. 504">1942-2 C.B. 504, 606. See also Rev. Rul. 66-13 and 66-14, 1 C.B. 73">1966-1 C.B. 73 and 75. Congress enacted the provisions of section 401 (a)(4) "In order to insure that stock bonuses, pension, or profit-sharing plans are operated for the welfare of employees in general, and107 to prevent the trust device from being used for the benefit of the shareholders, officials, or highly paid employees." H. Rept. No. 2333, 77th Cong., 2d Sess., 2 C.B. 372">1942-2 C.B. 372, 450. Petitioner's profit-sharing plan covers its two shareholders who are its president, and vice president and secretary. Each one is highly paid, $35,000 a year, in comparison with the average annual wages paid to the hourly-paid employees. The profit-sharing plan also covers one other employee, Julia, whose rate of annual salary was $4,925. But the inclusion of that one employee whose annual salary was commensurate with the annual wages of several of the hourly-paid employees does not help petitioner under all of the facts. It is concluded that the petitioner has failed to establish an absence of discrimination under its profit-sharing plan, and has failed to establish that the Commissioner's determination was arbitrary or an abuse of discretion. It is held that the respondent's determination was not arbitrary or an abuse of discretion; that the profit-sharing trust is not qualified under section 401(a), or exempt from tax under section 501(a); and that petitioner's contributions to the trust*108 are not deductible under section 404(a) (3). Respondent's determination is sustained. We do not reach a second question in this case, due to our holding under the main question, about the amount of petitioner's contributions to the plan, which would be deductible if the plan were held to be a qualified plan, $11,238.75, or $10,955.25. We need not consider that question. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620376/	JOE EDWARD SAMMONS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSammons v. CommissionerDocket Nos. 6287-80, 16439-80.United States Tax CourtT.C. Memo 1984-414; 1984 Tax Ct. Memo LEXIS 259; 48 T.C.M. (CCH) 771; T.C.M. (RIA) 84414; August 6, 1984; As Amended August 7, 1984 JOHN Kennedy Lynch and Richard S. Lynch, for the petitioner. Frank R. DeSantis, for the respondent. HAMBLENMEMORANDUM FINDINGS OF FACT AND OPINION HAMBLEN, Judge: Respondent determined the following deficiencies in, 260 and additions to, petitioner's Federal income taxes: Additions to TaxYearDeficiencySec. 6653(b) 11969$10,661.40$5,330.7019708,013.794,006.9019714,741.352,370.6819725,549.172,274.5919733,368.411,684.21The issues for decision re: (1) whether a sworn statement and a set of index cards submitted as evidence by respondent are admissible under the hearsay exceptions to the Federal Rules of Evidence; (2) whether petitioner understated his adjusted gross income for the taxable years in issue; (3) whether respondent properly imposed additions to tax for fraud under section 6653(b); and (4) whether the statute of limitations bars the assessment and collection of any deficiency for the taxable year 1973. Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Sandusky, Ohio, 261 when he filed his petitions in these cases. Petitioner served in the U.S. Army from November 1944 until August 1946, and spent a portion of his service overseas. Petitioner married in 1950. At the time of his marriage, petitioner had $7,000.00 in his savings account, which he subsequently augmented by regular deposits from his earnings. Petitioner derived income from his ownership of the El Dorado Motel. He purchased the property on which this hotel was constructed in 1959 and, from 1959 through 1961, he had built a one-story cement block structure containing twelve one-room efficiency living units thereon. In 1962, petitioner purchased a liquor license for $10,000.00 and constructed an additional one-story building on the property. This building was used as a bar, and it also contained 14 living units. To finance the license and construction, petitioner secured a $27,000.00 mortgage against the property. In 1969, petitioner received $33,000.00 in insurance proceeds to retire the balance of the $27,000.00 loan. From 1964 through 1968, petitioner added two more buildings to the El Dorado, each containing 12 living units. He completed development by adding a 16-unit building, 262 bringing the total number of living units to 66. Petitioner added a laundromat to the El Dorado in 1965, financed by a $10,000.00 loan which was paid off in 1969. The laundromat contained 24 washers, 10 dryers, and a soap dispensing machine, all of which were coin operated. The machines were used on a constant basis. Petitioner's Federal income tax returns for the years 1965 through 1968 showed no tax liability. The El Dorado operated more as a rooming house than as a motel. Rooms were rented by the week or month, and not on a daily basis. Although some residents were transients, many stayed on a permanent basis. Petitioner employed individuals in the office of the El Dorado to assist in the collection of rent. When a tenant paid the rent, a receipt was provided from a receipt book. The rentals were regularly collected from the office by petitioner. The bound book of rental receipt stubs was turned over to petitioner with all stubs attached. Petitioner maintained no overall records of his business expenses. For return preparation, petitioner provided his accountant with miscellaneous expense receipts, including nondeductible items. During the years in issue, petitioner263 provided his accountant with a small box containing rental receipt stubs that he had removed from the bound receipt books. Petitioner did not give his accountant all the receipt stubs originally contained in the bound books. For example, in 1973 one tenant committed suicide in his room, and another died in a fire in his room. However, the receipts given to the accountant did not include stubs reflecting the rental payments made regularly by these men. Petitioner also failed to disclose to his accountant interest income earned during the years in issue. Based on the information supplied to him by petitioner, the only years for which the accountant reported laundromat income were 1970 and 1971. In 1972, one of petitioner's employees, Elsie Young ("Young"), began keeping a record of the names of all tenants and their rental history on index cards. Petitioner encouraged Young to maintain these index card records, and he instructed subsequent employees to maintain these records. One of petitioner's former tenants, Ora Short ("Short"), took a set of index cards containing information concerning some of petitioner's 1973 tenants from a trash can in which petitioner had thrown them. 264 Short gave these cards to respondent's special agent during investigation of petitioner. Petitioner had accounts at four banks. He made an initial deposit of $8,582.53 in one account. Petitioner made deposits totalling: YearAmount1969$24,422197029,751197120,803From 1969 through 1971, petitioner made regular deposits in his accounts. Until late 1970, petitioner made weekly deposits ranging in amount from several hundred to over a thousand dollars. Beginning in November 1970, petitioner made one or two deposits per month of approximately $1,000 per deposit. In June, July, August, and September of 1971 petitioner made one deposit per month of $3,500, $3,000, $4,000, and $3,500, respectively. In 1972, petitioner withdraw in cash all of his savings, which totaled $77,100. He put this amount, together with other cash and buried it. In 1974, petitioner dug up the box and discovered that the cash had deteriorated due to moisture. In April 1974, petitioner presented mutilated currency to the U.S. Treasury Department, and received a check for $98,795. For the years 1970, 1972, and 1973, petitioner reported no tax liability on his Federal income265 tax returns. In 1972, petitioner filed amended returns to reduce his previously reported 1969 and 1971 tax liabilities to zero. In 1976, petitioner was indicated for criminal tax evasion for the years 1969 through 1972 under section 7201. After a jury trial, petitioner was found guilty and sentenced to five years imprisonment, with probation after serving six months, and a $10,000 fine. In denying petitioner's motion for release pending appeal, the U.S. District Court, for the Northern District of Ohio, stated in a Memorandum and Order: The jury verdict upon which defendant's conviction is founded is not supported merely by substantial evidence upon the record as a whole. The evidence of defendant's guilt presented at trial was overwhelming. The defendant's testimony shows that he is without any legal or moral scruples insofar as accumulating money is concerned, although he has never previously been called upon to pay the penalty for his lawlessness. He certainly testified falsely in at least one portion of his testimony, and thus was probably guilty of perjury. There is no doubt that he caused at least one witness to testify falsely under oath. There is no reason why so266 coldly calculating a law violator should be allowed to remain at liberty. 2In a written sworn statement given to respondent in 1975, Ruth Scroggy ("Scroggy"), a former employee of petitioner, stated that petitioner offered her money to testify falsely at the criminal trial. Scroggy died prior to the trial of the instant case, and respondent offered her written statement into evidence. Respondent determined the 1969 through 1972 deficiencies based on the net worth analysis. The 1973 deficiency was determined by specific items of income. Petitioner challenges respondent's net worth computation alleging he maintained a large cash hoard. He asserts that the increases in his net worth were the result of infusions of cash from this hoard. Petitioner argues that by gambling and selling souvenirs and rations, he accumulated over $177,000 in the 1940's while overseas for a year and a half in the U.S. Army. According to petitioner, this hoard consisted entirely of U.S. currency in $50 and $100 bills. Petitioner's267 ex-wife did not see and had no knowledge of the alleged hoard. She never observed petitioner with more than $500.00 in cash. Additionally, petitioner claims to have received secret gifts from his father-in-law totalling $15,000. These gifts allegedly were made without the knowledge of petitioner's ex-wife. None of the state of Ohio personal property tax returns filed by petitioner for the years 1969 through 1972 included an entry for cash on hand. Petitioner asserts that respondent's specific item analysis is also incorrect. He alleges that the rental receipts provided to his accountant and used in preparing his return accurately reflected the total rental receipts received by him in 1973. Furthermore, petitioner argues that the sworn statement of Scroggy and the index cards supplied to respondent by Short are inadmissible hearsay under the Federal Rules of Evidence. Respondent admits that the contents of the documents are hearsay, but argues that they are admissible under Rules 804(b)(5) and 803(6) of Federal Rules of Evidence.Rule 801(c) of Federal Rules of Evidence defines hearsay as "a statement, other268 than one made by the declarant while testifying at trial, offered in evidence to prove the truth of the matter asserted." Rule 804(b)(5) of Federal Rules of Evidence provides that a hearsay statement that possesses sufficient circumstantial guarantees of trustworthiness may be admitted. The rule expresses a preference for admitting hearsay evidence over an otherwise complete loss of the evidence. 3Rule 803(6) of Federal Rules of Evidence provides for admission of hearsay if the evidence in question consists of records maintained in the normal course of business. In the instant case, respondent offered the Scroggy statement for two purposes. First, the statement was offered as impeachment evidence, attacking the credibility of petitioner, and as such it is admissible. Rule 608(a) of Federal Rules of Evidence. Second, it was offered as substantive evidence demonstrating the fraudulent intent of petitioner. We need not rule on whether the statement is admissible for this purpose, although269 we believe it is, because the trial testimony, the stipulated facts, and the other documentary evidence provide an overwhelming case against petitioner. As to the cards, the testimony of Young established that the index cards were maintained in the normal course of business. The cards were maintained by employees under petitioner's direction and control. Petitioner was aware that these records were kept and he encouraged his employees to maintain them. Thus, the index cards are admissible under Rule 803(6) of Federal Rules of Evidence.When a taxpayer fails to maintain adequate books or records, respondent may recompute the taxpayer's tax liability by using either the net worth method or the specific item method of reconstructing income. Under the net worth method, income is computed by determining the excess of assets at cost over liabilities at the beginning and end of each year. The difference between the two figures represents the increase in net worth. This increase is then adjusted by adding nondeductible expenditures, including living expenses, and by subtracting any nontaxable income items, such as gifts or loans. See Holland v. United States,348 U.S. 121">348 U.S. 121 (1954);270 United States v. Giacalone,574 F.2d 328">574 F.2d 328 (6th Cir. 1978), cert. denied 439 U.S. 834">439 U.S. 834 (1978); Curtis v. Commissioner,623 F.2d 1047">623 F.2d 1047 (5th Cir. 1980), affg. in part and remanding in part a Memorandum Opinion of this Court. For the years 1969 through 1972, petitioner challenges only one item in respondent's net worth computation-- cash on hand. Petitioner alleges that he had a large cash hoard at the beginning of the net worth period. Petitioner seeks to account for his increases in net worth from 1969 through 1972 by showing that he possessed a cash hoard dating back to the mid-1940's, on which he drew during the years in issue. This allegation, supported only by petitioner's self-serving testimony, falls far short of overcoming respondent's clear and convincing evidence. Petitioner, citing Grace Bros., Inc. v. Commissioner,173 F.2d 170">173 F.2d 170 (9th Cir. 1949), contends that his "uncontradicted" evidence must be followed. However, not only was petitioner's own testimony contradictory, but respondent impeached or contradicted petitioner's evidence. Moreover, it is within the province of this Court to determine the extent271 to which the testimony of petitioner is believable. 4Shahadi v. Commissioner,266 F.2d 495">266 F.2d 495 (3rd Cir. 1959), cert. denied 361 U.S. 874">361 U.S. 874 (1959), affg. 29 T.C. 1157">29 T.C. 1157 (1958). Petitioner's story is unbelievable, and we reject his testimony. He claims to have accumulated over $177,000 in fifty and hundred dollar bills during the year and a half he served in the U.S. Army. Additionally, he claims to have received $15,000 in gifts from his father-in-law. These alleged gifts were so secret that petitioner's ex-wife was unaware of them. She never saw petitioner with more than $500.00 cash. Petitioner's activities tell a different story. Petitioner received loans to finance his building projects, and invested in the construction of commercial property that generated income for him. Additionally, he used insurance proceeds, not cash from a hoard, to pay off one of his mortgages. Petitioner's ex-wife never knew of any cash hoard. Further, petitioner did not report the cash on his state personal property tax returns. Petitioner's attempt to create a buttress for his272 story by burying cash withdrawn from his banks is belated and unconvincing. The approximately $20,000.00 supplement which petitioner buried with the $77,000.00 savings he withdrew from the bank clearly was derived from petitioner's 1972 unreported income. For the taxable year 1973, respondent determined that petitioner understated his income based on the records kept by petitioner's employees. Petitioner's only response is to insist that the receipt stubs provided by him to his accountant properly reflected total rental receipts. The record, however, does not support petitioner's position. The note cards, kept by petitioner in the regular course of business, show petitioner received more rental income than he reported. Petitioner had no explanation of the fact that numerous rental receipts of permanent tenants were missing from the stubs given the accountant. Receipts for two men who died while living at the El Dorado were not provided for return preparation. Moreover, petitioner could not adequately explain why the stubs were removed from their bound books prior to being presented to the accountant. Petitioner's positions that he maintained a cash hoard and that the receipts273 provided the accountant accurately reflected his gross rental receipts are clearly untenable. The next issue for decision is whether respondent's determination of fraud should be sustained. We find that the evidence provided by respondent shows that petitioner fraudulently evaded tax in the years at issue. Section 6653(b) provides for an addition to tax of 50 percent of the underpayment if any part of the underpayment is due to fraud. Respondent has the burden of proving, by clear and convincing evidence, that some part of the underpayment for each year was due to fraud. Sec. 7454(a); Rule 142(b). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion, 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). To establish fraud, respondent must show that the taxpayer filed his return with the specific intent to evade tax believed to be owing. Wilson v. Commissioner,76 T.C. 623">76 T.C. 623, 634 (1981). The consistent understatement of substantial amounts of income over several years is strong evidence of fraud. Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 487 (5th Cir. 1962);274 Vannaman v. Commissioner,54 T.C. 1011">54 T.C. 1011, 1018 (1970). Conduct calculated to mislead or conceal is indicative of fraud ( Spies v. United States,317 U.S. 492">317 U.S. 492, 498 (1943); Gajewski v. Commissioner,supra); and the failure to keep adequate records is indicative of an attempt to defraud. Papineau v. Commissioner,28 T.C. 54">28 T.C. 54 (1957). Petitioner was found guilty of attempting to evade his income taxes for the years 1969 through 1972. He is, therefore, estopped from denying fraud as to those years. Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96 (1969). For the taxable year 1973, we find petitioner's underpayment of taxes was due to fraud. Petitioner established a pattern of underreporting income in prior years. Furthermore, he failed to report interest income and receipts from his laundromat in 1973. Petitioner maintained inadequate records and failed to provide his accountant with the bound receipt books. Petitioner lacks credibility since he attempted to bribe one former employee to give false testimony and caused at least one individual to commit perjury at the criminal trial. In addition, petitioner275 presented this Court with an incredible tale. His testimony was contradictory, contrived, and unbelievable. We agree with the District Court's statement that petitioner is a "coldly calculating * * * law violator." On the basis of our consideration, we find that respondent has clearly and convincingly demonstrated fraud for the years in issue for purposes of section 6653(b). The imposition of the additions to tax for fraud in this case are incumbent and appropriate. We have considered petitioner's other arguments and find them unpersuasive. Finally, we must consider whether the statute of limitations bars the assessment or collection of any deficiency for the taxable year 1973. Section 6501(a) provides a three-year statute of limitations. However, under section 6501(c)(1) when a return is false and fraudulent, the statute of limitations does not bar the assessment or collection of the deficiency at any time. In the instant case, we have found petitioner's 1973 return to be fraudulent. Thus, the statute of limitations does not bar the assessment or collection of the deficiency for that year. Based on the foregoing, Decisions will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioner objected to the admission of the Memorandum and Order. However, we ruled that the document is clearly admissible as a public record. Federal Rule 803(8)↩.3. See Estate of Glass v. Commissioner,T.C. Memo. 1981-191↩.4. See Whipple v. Commissioner,T.C. Memo. 1981-213↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620377/	Central Arizona Ranching Company v. Commissioner. Farmers Investment Company v. Commissioner.Central Arizona Ranching Co. v. CommissionerDocket Nos. 76565, 76575.United States Tax CourtT.C. Memo 1964-217; 1964 Tax Ct. Memo LEXIS 123; 23 T.C.M. (CCH) 1304; T.C.M. (RIA) 64217; August 17, 1964123 Held, Farmers Investment Company did not incur any loss within the meaning of section 23(f), I.R.C. of 1939, as a result of the flooding of its property in 1952. Held, further, petitioners are not entitled to amortization of the State land leases and/or Federal land leases held by them, since it was not established that such leases were of a limited duration which could be estimated with reasonable accuracy within the meaning of section 23(1), I.R.C. of 1939, and section 167, I.R.C. of 1954. Erwin Lampe, 886 S. Bronson Ave., Los Angeles, Calif., for the petitioners. Edward H. Boyle, for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: Respondent determined the following deficiencies in petitioners' income tax: PetitionerDocket No.YearDeficiencyFarmers Investment Company765751952$37,834.14195315,470.2919544,960.1419558,343.70Fiscal YearEndedCentral Arizona Ranching Company765652/28/55$ 3,137.842/29/564,612.98 Farmers Investment Company claims an overpayment of its income tax in 1954 and 1955 in the respective amounts of $3,654.31 and $4,908.57. Central Arizona Ranching Company claims an overpayment of its income tax in the fiscal years ended February 124 28, 1955 and February 29, 1956 in the respective amounts of $1,115.91 and $1,485.70. The issues in these consolidated cases are (1) whether Farmers Investment Company is entitled to a loss deduction in 1952 due to flooding of its property, and (2) whether petitioners are entitled to amortize the cost of certain State and Federal leases and permits over the years here involved. Findings of Fact Some of the facts were stipulated and they are so found. It has also been stipulated in Docket No. 76575 (Farmers Investment Company) that "[for] purposes of background in this case the parties agreed that the Tax Court's findings of fact in the case of [J. G. Boswell Co., 34 T.C. 539">34 T.C. 539, affd. 302 F. 2d 682] * * * shall be adopted as a part of the record in this case." Farmers Investment Company (hereinafter called Farmers) was organized under the laws of the State of California in 1947. Its principal office was at Tucson, Arizona, where all of its books and records are located. Farmers filed its corporation income tax returns for the years 1952 through 1955 with the district director of internal revenue, Los Angeles, California. Central Arizona Ranching Company (hereinafter called Central) 125 was incorporated in 1953 under the laws of the State of Arizona. Central is a wholly-owned subsidiary of Farmers. Central's principal office is in Tucson, Arizona. Central filed its corporation income tax returns for its fiscal years ended February 28, 1955 and February 29, 1956 with the district director of internal revenue, Phoenix, Arizona. Farmers is engaged in the business of farming, while the principal business activity of Central is owning real estate. In 1947 Farmers acquired 480 acres of land in the Tulare Lake Area in Reclamation District No. 749, Kings County, California. The property included a protective levee and in 1947 and 1948 Reclamation District No. 749 levee improvement charges were capitalized so that after 1948 Farmers' total basis in this property was $43,007.42. The Tulare Lake property was protected by levees from possible flooding from ordinary rain or a sudden increase in runoffs from the mountains. In June 1952 heavy rains and a heavy runoff from the mountains broke the levee covering the entire area with eight to nine feet of water and silt. By February 1953 the flooded area in District No. 749, including Farmers' property, had been drained. The costs 126 incurred by Farmers in repairing the broken levees and in draining the land were charged to expense. Farmers' property was again under cultivation in 1953 and in later years. After 1953 the property was capable of producing crops equal to those grown prior to the flood in 1952. Soil from Farmer's property was used in order to build up the levees after the 1952 flood. As a result, the size of the borrow pits 1 was increased, and there was a corresponding decrease in the acreage on Farmers' property that was available for farming. Prior to 1952 the acreage on Farmers' property that was available for farming was about 463 acres; subsequent to 1952 the tillable acreage was 446 acres. Farmers itself did not farm its Tulare Lake property but leased the property to others for farming purposes. The farm was planted entirely in barley from 1947 through 1951. From 1949 through 1952 the farm had been leased to R. A. Rowan and Company, which 127 also conducted farming operations on adjacent property. Farmers had no summer irrigation water supply essential to the growing of cotton. R. A. Rowan and Company obtained such a supply and, in 1952, planted about 150 acres of cotton on the Farmers' property. The cotton crop was destroyed by the 1952 flood. In 1953 R. A. Rowan and Company again leased the Farmers' property and in that year about 446 acres of the farm were planted in cotton. In the years 1954 through 1956 Farmers leased its Tulare Lake property to another lessee. In January 1957 R. A. Rowan and Company purchased the Tulare Lake property of approximately 480 acres from Farmers for $192,000. At that time the property had a cotton allotment of 99.7 acres. R. A. Rowan and Company then continued to plant this property in cotton and small grains. Cotton allotments, or limitations on acreage, were imposed by the Federal Government in 1950 and then again in 1954 and subsequent years. The allotment in 1954 was imposed on a "crop land" basis, which was a system of computation without any relationship to the number of acres previously planted in cotton. In 1955 the allotment was computed on a "history" basis, i.e., the allowance 128 was based on the number of acres in cotton in prior years. In 1950 Farmers purchased property near Eloy, Arizona for $581,649.61. The purchase price included a growing crop of cotton, wells, equipment, improvements, fee land, a long-term lease on fee land expiring February 1, 1954, and two long-term agriculatural leases from the State of Arizona expiring June 30, 1956 and June 30, 1957. The purchase price was allocated among the various assets, and the amounts allocated to the Arizona leases were as follows: $153,565.85 to the lease expiring June 30, 1956, and $13,607.10 to the lease expiring June 30, 1957. In April 1949 the area around Eloy, Arizona, including Farmers' fee and leasehold properties, had been declared a critical water area. After Farmers purchased the Eloy property in 1950, Farmers drilled six new wells to augment the water supply. The cotton allotment and the amount actually planted on the Eloy property in the years 1954 through 1959 were as follows: Acreage actuallyYearCotton Allotmentplanted19541,908.7 acres1,908.7 acres19551,667.0 acres1,629.9 acres19561,595.9 acres1,595.5 acres19571,714.3 acres1,200.0 acres 19581,705.3 acres1,705.3 acres19591,506.3 acres1,497.4 acres129 The State of Arizona leases expiring June 30, 1956 and June 30, 1957 were renewed for a 10-year period beginning July 31, 1956. The Eloy property, including these leases, was sold by Farmers in December 1961 for $1,142,690, and the said leases were transferred to the buyer after the written consent of the State Land Commissioner as required in the leases. In 1960 Farmers purchased a farm in Arizona identified as the Picacho property. This property, which was about 10 miles distant from the Eloy property, consisted of 1,440 acres of fee land and 160 acres in State of Arizona agricultural leases and carried a cotton allotment of 359.8 acres. The principal business activity of Central was owning real estate and its only income for its fiscal years 1955 and 1956 was rental income in the respective amounts of $30,000 and $45,000. In 1954 Central purchased four ranches near Wickenburg, Arizona. The purchase included 82,947 acres of State of Arizona land grazing leases capitalized at $151,937.11, 17,110 acres of Federal land grazing leases capitalized at $8,910 and 35,520 acres of Federal land grazing 130 permits capitalized at $10,004. On July 1, 1955 the State of Arizona land grazing leases were combined into one new 10-year grazing lease. Central acquired the State of Arizona grazing leases with the intention of locating water and then requesting the State of Arizona to reclassify the leases from grazing to agricultural. During the years before us Central was successful in having a portion of its State of Arizona acreage so reclassified. The lessee of a State of Arizona land lease, whether grazing or agricultural, has a preferred right to renew the lease at the end of the term, and when a grazing lease is reclassified as an agricultural lease, the lessee under the grazing lease has a preferential right to the new agricultural lease. The Federal government owns substantial land in the State of Arizona, and at times there are exchanges of parcels of land between the State and the Federal government. Over the past 10 or 15 years the major part of such exchanges have been made at the request of lessees holding State leases. When the State acquires land from the Federal government subject to permit or lease, the State grants to the former holder of the Federal permit or lease a preference 131 to continue leasing the same land. At times the Arizona State Land Department sells land at public auctions, and if the land is subject to a lease the lessee is entitled to remain on the property until the term of the lease expires. A buyer must pay the former lessee for the appraised value of any improvements. Generally, a lessee who has developed the land and placed improvements there is the successful bidder at the public auctions of State lands. The Taylor Grazing Act of June 28, 1934 is the basic legislative authority governing the management and protection of the vacant public lands of the United States. Federal licenses or permits under Section 3 of The Taylor Grazing Act are granted on the basis of the ownership of water or water rights. Section 3 of that Act, as amended to February 1, 1962, provides that permits shall be for a period of not more than 10 years. Federal leases under Section 15 of The Taylor Grazing Act are granted on the basis of ownership of contiguous lands, and they are issued for a period of not more than 10 years. A lessee or permittee who continues to own the base properties (water rights or contiguous lands) has a preference right to renew both Section 132 3 licenses or permits and Section 15 leases. Central had leases or permits under both Sections 3 and 15 of The Taylor Grazing Act. Central's Section 3 permits expired in 1963 and at the time of trial was operating on an annual license, although it had a preference right to renew its permits as long as it continued to own the base properties. Central's Section 15 leases were renewed in September 1963 for a 10-year period. In its income tax return for 1952 Farmers claimed a casualty loss of $43,007.42, its entire basis in the Tulare Lake property, as a result of the flood. Respondent disallowed the deduction in full on the ground that "it has not been established that any loss or damage was incurred or sustained." In its income tax returns for 1952 and 1953 Farmers claimed a deduction of $29,750.56 in each year as amortization of the cost of the State of Arizona land leases in connection with its Eloy, Arizona property. The amortization was computed on the basis of spreading the cost allocated to such State leases over the period from 1950 (the year in which Farmers purchased the Eloy property) to the expiration dates of such State leases, i.e., June 30, 1956 and June 30, 1957. In its 133 income tax returns for 1954 and 1955 Farmers claimed an amortization of the State land leases in the amount of $15,045.57 in each year, computed on the basis of a settlement reached with the Appellate Division with respect to the years 1950 and 1951. Respondent disallowed the amortization deductions claimed by Farmers in connection with its State of Arizona land leases in each of the years 1952 through 1955. Central computed amortization at the rate of 9 percent (approximately equivalent to a term of 11 years). In its corporation income tax return for its fiscal year ended February 28, 1955, Central claimed an amortization deduction of $9,316.45 on its State of Arizona land leases and $1,143.01 on its Federal land leases and permits. The amortization claimed for Central's fiscal year ended February 29, 1956 was $13,674.34 for its State of Arizona land leases and $1,702.26 for its Federal leases and permits. Respondent disallowed the amortization deductions claimed by Central in each of its fiscal years 1955 and 1956. Opinion The first issue is Farmer's claimed loss deduction under section 23(f), Internal Revenue Code of 1939. 2134 To support its claim for a loss deduction in 1952 of $43,007.42 (Farmers' entire basis in the flooded property), Farmers argues that the 1952 flood caused a reduction of 50 acres in cotton "history" for its Tulare Lake farm, and that "[this] restriction as to planting continued up to the time of the sale of the property in 1957 and reduced the sales price by at least $50,000.00 so that the injury was permanent as far as * * [Farmers] is concerned." Farmers also makes some sort of an argument that after the flood it rebuilt the protective levees with soil from the farm and that, as a result, the usable acreage of the farm was reduced by about 17 acres, and that the loss of this farm acreage is a deductible loss resulting from the flood in 1952. 3In J. G. Boswell Co., 34 T.C. 539">34 T.C. 539, 135 affd. 302 F. 2d 682, we denied a casualty loss deduction claimed by the taxpayer in 1952 for flood damage to farms in the same region here involved. It has been stipulated that the findings of fact in the Boswell case are to be adopted as a part of the record in this case. We are of the opinion that our decision in that case is also controlling here on petitioners' claim of loss deduction based on possible future reduction of cotton acreage. Farmers relies upon its loss of cotton "history" to support the loss claim of $43,007.42. But the taxpayer in the Boswell case also relied, unsuccessfuly, on the argument that a part of the permanent damage or injury caused by the flood was the reduction in its cotton "history." We held that, as of the end of 1952, any damage caused by a possible future diminution of cotton "history" was "at best speculative," and that consequently there was no loss in 1952 evidenced by a closed and completed transaction within the meaning of section 23(f) of the Internal Revenue Code of 1939. In its opinion affirming the Tax Court, the Court of Appeals for the Ninth Circuit stated, in part, as follows: The speculative nature of the claim is made clear by the 136 fact that crop limitations on a "cotton history" basis were imposed in 1950 and not again until 1955. Also by the fact that the limitations imposed in 1954 had no relation to the history of cotton grown on the land. In other words, as of the taxable years in question, petitioner was not reasonably certain in fact, either when the growth of cotton would again be restricted or if the history of cotton grown would be a basis for that restriction. The year in which such controls were again imposed would also have an effect upon the amount of the loss to be claimed, a factor which petitioner failed to consider. Such speculation cannot, in our view, be the basis for a Section 23(f) capital loss deduction. * * * Farmers attempt to distinguish the Boswell case by pointing out that the taxpayer in the Boswell case did not plant any cotton in 1952 on the flooded farms but that 150 acres of Farmers' land was actually planted in cotton which was later destroyed by the flood. Such a distinction is without any legal significance for the purpose of establishing a loss in 1952 under section 23(f) of the Internal Revenue Code of 1939. The essential fact is that, as of the end of 1952, it was pure speculation 137 that the Federal government would in some future year again impose a crop limitation on a cotton "history" basis. Nor is there any merit in Farmers' contention that, as a result of the 1952 flood, it was compelled to rebuild the protective levees with soil taken from its property, and that this caused a reduction of about 17 acres in farmable acreage which was a loss within the meaning of section 23(f) of the Internal Revenue Code of 1939. 4Farmers states that the loss of 17 acres of tillable land resulted from the flood because additional dirt was taken from the borrow pits in order to rebuild the levees. This evidence would not establish a loss resulting from the flood. The record indicates that such pits serve the purpose of catching surplus water, and their continued existence is necessary for the proper farming of the land. It thus appears that the borrow pits, as well as the rebuilt levees, are essential to the use of Farmers' land for productive purposes. They are in the nature of improvements 138 contributing to the value of the whole property. To establish a loss under section 23(f) of the Internal Revenue Code of 1939, Farmers must show that, as a result of the flood, it incurred damage or destruction of property. Citizens Bank of Weston, 28 T.C. 717">28 T.C. 717, affd. 252 F.2d 425">252 F. 2d 425. It is stipulated here that after 1953 when the flood waters were pumped off and the levees rebuilt "the property was capable of producing crops equal to those grown prior to the flood in 1952." The tillable acreage which Farmers claims to have lost was merely acreage used for an improvement to property which Farmers continued to own. 5We find, and so hold, that Farmers is not entitled to a loss deduction in any amount in 1952 within the meaning of section 23(f) of the Internal Revenue Code of 1939. The next issue is whether Farmers and Central are entitled to any amortization deductions in the years before us in connection with certain State of Arizona land leases (agricultural and grazing) and Federal grazing leases or permits. Farmers acquired two State agricultural leases in 139 1950 in connection with the Elroy, Arizona property and seeks to amortize the cost ($167,172.95) over the remaining term of the leases, i.e., June 30, 1956 and June 30, 1957. Central acquired State grazing leases and Federal grazing leases and permits in connection with its purchase of four ranches in 1954 near Wickenburg, Arizona. In 1955 the State grazing leases were combined into one new 10-year grazing lease. The Federal grazing lease (Section 15 of The Taylor Grazing Act) was for a period of 10 years from September 1953 and it was renewed for another 10-year period in 1963. The Federal grazing permit (Section 3 of The Taylor Grazing Act) was also for a 10-year period ending in 1963, and it appears that at the time of trial Central was operating under an annual license in connection with the land owned by the permit. Central amortized both its State and Federal leases and permits at the rate of 9 percent, or over a term of approximately 11 years. Section 23(1) of the Internal Revenue Code of 1939 and section 167 of the Internal Revenue Code of 1954 allow as a deduction a reasonable allowance for the exhaustion of property used in a taxpayer's trade or business. The regulations 140 under these sections (Regs. 118, sec. 39.23(1)-3 and sec. 1.167(a)-3, Income Tax Regs.) are substantially the same. Section 1.167(a)-3, Income Tax Regs., provides that "[if] an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance." We do not believe that the various leases, licenses and permits acquired by Farmers and Central under the State or Federal statutes are shown to be intangible assets useful "for only a limited period, the length of which can be estimated with reasonable accuracy." A paramount consideration is that, both under the State of Arizona and the Federal statutes, lessees with grazing or agricultural rights are granted preference rights of renewal. Sections 37-290 and 37-291 of the Arizona Revised Statutes explicitly give a lessee of State land a preferred right to renew the lease, even where the land is reclassified from grazing to agricultural use. 6142 143 General rules and regulations under the State statute (Rules 15, 29 and 31) provide detailed 141 guidelines for allowing this preferred right of renewal. Louis Duncan, the Arizona State Land Commissioner, testified that to his knowledge no one had successfully taken away a lease from a State lessee who had met certain conditions and who desired to renew the lease. These conditions are generally within the control of the lessee, such as (a) he must be a resident of the State of Arizona, and (b) he must use the land for the purpose the lease was granted. Similarly, The Taylor Grazing Act and the grazing regulations for the National Land Reserve provide that licensees and permittees of Federal land are given preferred rights of renewal. Riley Foreman, Chief of the Division of Ranch and Forestry, Bureau of Land Management, United States Department of the Interior (for the State of Arizona), testified that as long as a lessee continued to own certain basic properties (water rights for permits or licenses under Section 3 of The Taylor Grazing Act or contiguous land for leases under Section 15) he had a preferred right of renewal. In V. P. Shufflebarger, 24 T.C. 980">24 T.C. 980, we held that a taxpayer was not entitled to amortize under section 23(1) of the Internal Revenue Code of 1939 certain grazing permits issued by the Forest Service of the United States Department of Agriculture. Preference rights were given to holders 144 of such grazing permits, and we found that the life of a grazing preference was "not delimited by the term of the current grazing permit, but is of indefinite duration and continues until canceled or revoked." We also indicated that the "grounds for cancellation or revocation are wholly contingent and may never happen, and some are wholly within the control of the preference holder." We believe that case is controlling here, both as to the State of Arizona leases and the Federal leases, licenses and permits. The statutes and regulations involved, both Federal and State, and the experience evidence of the operation of these statutes and regulations indicate that the preference rights granted to Farmers and/or Central under the State and Federal statutes are of indefinite duration. Many of the arguments made here by the petitioners were fully answered in the Shufflebarger case. It cannot be said under this record that from general experience or other factors it is reasonably certain that either the State leases (grazing and agricultural) or the Federal leases, licenses or permits were of a limited duration which could be estimated with reasonable accuracy within the meaning of section 23(1) of the Internal Revenue Code of 1939145 and section 167 of the Internal Revenue Code of 1954. We find, and so hold, that Farmers is not entitled to an amortization deduction for its State of Arizona land leases during the years here involved, and that Central is not entitled to an amortization deduction for its State of Arizona land leases and Federal leases, licenses or permits during the years here involved. Decisions will be entered under Rule 50. Footnotes1. Borrow pits are depressions in the land left after the removal of soil which is used to build up levees and irrigation ditches. Such pits serve the purpose of catching surplus water, whether from floods or irrigation, thereby keeping water off productive land.↩. 500 additional acres were diverted to soil bank, i.e., Farmers was paid for not planting.↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * *(f) Losses by Corporations. - In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.↩3. Farmers contends on brief that the measure of the 17-acre loss would be based on a fair market value of $400 per acre, or a total of $6,800, or in the alternative, would be limited to Farmers' basis of $93.08 per acre, or $1,582.↩4. Farmers was allowed deductions for its expenditures incurred in rebuilding the levees, as well as its expenses for pumping off the flood waters, re-leveling, and repairing irrigation facilities.↩5. Farmers sold its Tulare Lake property, which it had acquired in 1947 for a little more than $40,000, in 1957 for $192,000.↩6. § 37-290. Cancellation of lease by reclassification of lands; preferred right to lease reclassified land; refund or advance rental payments A. Upon reclassification of state lands, whether upon application for reclassification or upon initiation by the commissioner, notice of the decision shall be served upon all interested parties of record in the department. If no appeal from the reclassification is taken as provided for by law, or if the decision of the commissioner is upheld on appeal, any lease upon the land reclassified shall be automatically cancelled, and the land offered for lease in the same manner as if it had not been previously leased. B. A lessee, or an applicant for renewal of a lease at the time of the notice of the reclassification shall have a preferred right to lease the reclassified land at the reappraised rental there-of for a term not longer than ten years as determined by the department. C. Upon cancellation of the lease of reclassified lands, if the land as reclassified is leased to a person other than the existing lessee or applicant for a renewal lease, the unused pro rata of an advance rental payment made by the existing lessee shall be refunded to such lessee, and the lessee shall be protected in improvements on the land owned by the lessee in the same manner as provided in § 37-293. § 37-291. Preferred rights to renewal of lease; exceptions A. Upon application to the state land department not less than thirty nor more than sixty days prior to the expiration of a lease of state lands, the lessee, if he is a bona fide resident of the state, shall have a preferred right to renewal, bearing even date with the expiration of the old lease, for a term not longer than ten years, as determined by the department, at a reappraised rental. B. The preferred right of renewal shall not extend to a lessee who has not substantially complied with the terms of his lease or who has not placed the land to the use prescribed in the lease during the term thereof or within the time prescribed therein, unless for good cause the failure to perform was given written authorization by the department. If the department determines the continued leasing of the land not in the best interest of the state, the lease shall not be renewed.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620381/	J. Meredith Siple and Delia W. Siple, Petitioners v. Commissioner of Internal Revenue, RespondentSiple v. CommissionerDocket No. 5323-67United States Tax Court54 T.C. 1; 1970 U.S. Tax Ct. LEXIS 233; January 14, 1970, Filed 233 Decision will be entered for the respondent. In implementation of an agreement with a corporation and its majority stockholder to purchase stock in the corporation and otherwise to help it financially, petitioners furnished collateral so that the corporation could borrow from the bank with no personal liability on the part of petitioners. The corporation suffered financial reverses and, as part of an agreement severing all business relations with the corporation and its majority stockholder, petitioners waived or released any rights they had, or might subsequently acquire, against either of them. Petitioners subsequently paid the bank the amounts of the indebtedness in order to redeem their pledged collateral. Held, petitioners' payments to the bank are part of the cost of acquisition of their stock in the corporation and deduction of amounts thereof is subject to the limitations of sec. 165(f). Bruce R. Bailey, for the petitioners.Richard G. Daly, for the respondent. Tannenwald, Judge. Drennen, J., concurs in the result. Sterrett, J., dissenting. Withey, Forrester, Scott, and Featherston, JJ., agree with this dissent. TANNENWALD1 OPINIONThe respondent determined deficiencies 234 in the petitioners' income tax for the calendar years 1960, 1963, and 1964 in the respective amounts of $ 35,435.63, $ 343.25, and $ 16,262.54. All of the facts have been stipulated by the parties and accordingly the proceeding was submitted under Rule 30 of the Court's Rules of Practice.At the time of filing their petition, J. Meredith Siple and Delia W. Siple, husband and wife, were residents of Glendale, Calif. Their joint Federal income tax returns for the calendar years 1960, 1963, and 1964 were prepared and filed on the cash receipts and disbursements method of accounting with the district director of internal revenue at Los Angeles, Calif.2 For a number of years prior to 1957, Willis O. Mizner and Ruth E. Mizner owned and operated a general grocery market at King's Beach, Calif. On April 23, 1957, the Mizners caused to be organized a Nevada corporation known as the King's Beach Stop & Shop Market, Inc. (hereinafter referred to as King's Beach), with an authorized capitalization of 200,000 shares of $ 1 par value common stock. The Mizners transferred all of their accounts receivable, accounts payable, and inventory to the corporation in exchange for 4,000 of these shares.The 235 Mizners, noting that the economy of the Reno-Tahoe area was prospering, decided to diversify and expand the business of King's Beach. From projections furnished by the Brunswick Corp., they determined that a bowling alley and restaurant would be profitable. They therefore decided to construct a 12-lane facility adjacent to their market. This location was desirable because the Mizners held a long-term ground lease on several lots adjoining the market. The Mizners decided to use King's Beach as the corporate entity through which to carry out this project. A projected pro forma financial statement reflecting the proposed venture as of April 30, 1959, was used by King's Beach.Since King's Beach had limited funds and borrowing power, it was necessary for the corporation to secure additional financing. The Mizners approached petitioners concerning a possible advance to the corporation.After an extended period of discussion it was orally agreed that petitioners would purchase a number of shares from King's Beach for $ 100,000 and would advance an additional $ 50,000 to the corporation. It was also agreed that petitioners would attempt to induce the Reno branch of the First National 236 Bank of Nevada (hereinafter referred to as the bank) to advance to King's Beach a sum not to exceed $ 200,000. It was contemplated that petitioners would pledge certain securities as collateral for the loan.The oral agreement was reduced to writing by the Mizners' attorney, upon whom petitioners relied since they had no attorney of their own. The written agreement was signed by Willis O. Mizner for King's Beach and by both Mizners and petitioners in their individual capacities on October 22, 1959, and is hereinafter referred to as the agreement of October 22, 1959.The agreement provided in pertinent part:1. The Third Parties [petitioners] agree they will make arrangements with the First National Bank of Nevada, First & Virginia Branch, Reno, Nevada, by depositing with said bank securities owned by the Third Parties whereby said First National Bank * * * will lend to the Third Parties for the use and benefit of First Party [King's Beach] from time to time, not to exceed the sum of $ 200,000.00; said advancements to be made by said bank only upon the written 3 request of Willis O. Mizner, as president of the First Party, and upon receiving the duly executed promissory notes of First 237 Party evidencing each of said advancements, which said notes shall be made payable to the Third Parties.The agreement further provided that the money was to be used by King's Beach for various purposes in connection with the proposed expansion. The Mizners were to deliver their 4,000 shares of King's Beach stock, duly endorsed, to the petitioners "for the purpose of securing the notes to be given by * * * [King's Beach] to [petitioners] * * * covering advances made by the First National Bank of Nevada." As long as such advances were outstanding, the petitioners had the sole right to vote the Mizners' stock.In addition, the agreement went on to state that, within 30 days after King's Beach notified petitioners that the building was completed, the petitioners would purchase 2,562 shares of the authorized but unissued stock of King's Beach from the corporation for $ 100,000. The money was to "be used to pay off all or a portion of indebtedness of First Party [King's Beach] to First National Bank of Nevada and to the Third Parties [petitioners] resulting from money advanced to the First Party by said First National Bank."The agreement also contained an option, exercisable by petitioners 238 for 1 year after the date of purchase of the 2,562 shares, to purchase an additional 1,281 shares for $ 50,000. This money was to be used in the same fashion as the $ 100,000.Following the portion of the agreement detailing the stock purchase and the option arrangements, it is stated:6. First Party [King's Beach] agrees that while the arrangements by the * * [petitioners] with the First National Bank of Nevada make the * * * [petitioners] primarily liable to said bank for all advancements made by it to the First Party, that such advancements are solely for the use and benefit of First Party and that the First Party will fully repay the same to said bank and/or to the Third Parties, together with all interest or other charges thereon.On the same day that the above agreement was signed, October 22, 1959, petitioners and King's Beach executed a bank form entitled "Pledge Agreement for Lent Collateral" which contained two distinct agreements. The first agreement was signed by the Mizners for King's Beach. Beneath the Mizners' signatures followed a second agreement which commenced:For and in Consideration of any financial accomodation given or to be given or continued to KING'S BEACH 239 STOP & SHOP MARKET, INC., hereinafter called the "Debtor", by THE FIRST NATIONAL BANK OF NEVADA, * * the undersigned does hereby assign, transfer to and deposit with the Bank all property this day delivered by the undersigned or the Debtor to the Bank * * The final sentence of the agreement states that it is not to be construed to make "the undersigned a guarantor or surety of the indebtedness 4 of said debtor" and is followed by the signature of the petitioners. In accordance with the agreement, petitioners pledged Minnesota Mining & Manufacturing stock which had at all material times a fair market value in excess of the outstanding debt.Also on October 22, 1959, the bank agreed to advance the sum of $ 200,000 to King's Beach. This obligation of King's Beach was evidenced by a note payable to the bank for $ 200,000 with 5 1/4-percent-per-annum interest. The note was signed by the Mizners in their capacities as officers of King's Beach.At no time did King's Beach or the Mizners give the petitioners any notes, nor did the Mizners transfer any of their King's Beach stock to petitioners as security for petitioners' agreement to pledge securities to the bank. The petitioners acquiesced 240 in this variation from their agreement with King's Beach and the Mizners.By June of 1960 the building had been erected at a cost exceeding $ 300,000 instead of the $ 200,000 initially estimated. These additional costs were due to design changes, one of which expanded the number of bowling lanes from 12 to 16.On June 17, 1960, 1 petitioners, the Mizners, and King's Beach entered into a "Supplementary Agreement," which due to the additional costs of construction amended the original agreement between petitioners, the Mizners, and King's Beach to provide that the $ 100,000 paid by petitioners to purchase 2,562 shares of King's Beach stock would be applied toward payment in full of all cafe and bar conditional sales contracts in a sum not exceeding $ 40,000; $ 25,000 would be used for the balance of the construction contract, and the remainder and not less than $ 35,000, would be used "in partial payment of the present indebtedness of * * [King's Beach]" to the bank.Due to the increased costs and to lack of revenue, 241 King's Beach renewed its note with the bank (the original due date had been April 22, 1960) and obtained further advances culminating in two final notes in the total principal sum of $ 295,000. All of the notes were made payable to the bank and were signed by the Mizners for King's Beach. The two final notes were in amounts of $ 275,000 due May 20, 1963, and $ 20,000 due September 30, 1963. All of these notes were secured by the collateral pledged by petitioners to the bank, with the knowledge of the petitioners.As a result of unforeseen circumstances, the operations of King's Beach proved unprofitable. Although the Mizners remained optimistic about eventual success, the petitioners were convinced that the venture had failed and that there was no chance of recouping their stock investment.5 The petitioners desired to avoid further liability, while the Mizners wanted to repurchase petitioners' stock so that they could approach other, more optimistic, business associates. Therefore, on May 23, 1963, a document entitled "Agreement and Bill of Sale" was executed. This document (hereinafter referred to as the agreement of May 23, 1963) provided as follows:AGREEMENT AND BILL OF SALEThis 242 Agreement, made this 23rd day of May, 1963, by and between WILLIS O. MIZNER, President of the KINGS BEACH STOP & SHOP MARKET, a Nevada Corporation, party of the first part, and J. MEREDITH SIPLE, party of the second part,WITNESSETH:Whereas, party of the second part is presently a stockholder of the Kings Beach Stop & Shop Market, and,Whereas, party of the second part has made loans to the Kings Beach Stop & Shop Market for maintenance and operations, and for the construction of a building to house a bowling alley, andWhereas, party of the first part has pledged his stock to party of the second part for the performance of the payment of the Kings Beach Bowl building, and,Whereas, said Stop & Shop Market is heavily indebted and may be forced to file a petition in bankruptcy, and,Whereas, party of the first part desires to purchase all of the right, title, and interest of party of the second part in and to all assets, accounts, fixtures, and causes of action now possessed or hereafter acquired by said Kings Beach Stop & Shop Market, or by party of the second part against said King's Beach Stop & Shop Market, or against party of the second [sic] part,Now Therefore, in consideration of 243 the foregoing and the hereinafter contained convenants and agreements, party of the second part does hereby sell, assign, transfer, set over, and convey unto party of the first part all of the right, title and interest of party of the second part in or to any of the assets, common stock, accounts, reserves, inventories, causes of action, or any other form of assets presently owned by party of the second part or hereafter acquired by party of the second part, against party of the first part or the Kings Beach Stop & Shop Market, a Nevada corporation, for the sum of Thirty Thousand Dollars, payable as follows:1. Ten Thousand Dollars ($ 10,000.00) cash, upon execution of this agreement, the receipt of which is hereby acknowledged;2. A promissory note in the amount of Twenty Thousand Dollars ($ 20,000.00), payable Five Thousand Dollars ($ 5,000.00) per year, commencing on the first day of June, 1964, and on the first day of June of each and every year thereafter until the full amount thereof has been paid, together with interest in the amount of five percent (5%) per annum on all balances remaining due and unpaid.In Witness Whereof, the parties hereto have executed this agreement the day 244 and year first above written.Kings Beach Stop & Shop Market,A Nevada CorporationBy: (S) W. O. MiznerWillis O. Mizner, President(S) J. Meredith SipleJ. Meredith Siple(S) Delia W. Siple6 Pursuant to the agreement, petitioners received $ 10,000 in cash and a note for $ 20,000 signed by Willis O. Mizner in his personal capacity only. King's Beach did not sign or endorse this note. No payments were ever made on this note.King's Beach failed to satisfy its obligations to the bank, and, by letters dated June 5 and June 10, 1963, the bank made demand on petitioner J. Meredith Siple for payment of the indebtedness of, first, $ 275,000, and, then, $ 295,000, respectively, plus accrued interest. Both letters state substantially the same thing -- that, since the bank is unable to collect the amount from King's Beach, "Demand is made upon you in accordance with the indemnity agreement you signed on October 22, 1959."In order to avoid a sale of the pledged stock by the bank, petitioner J. Meredith Siple acknowledged the bank's demand and sent a check for $ 130,000 on June 10, 1963. Although petitioners had no personal liability on the King's Beach indebtedness, they executed a note to the bank 245 evidencing their arrangements for payment of the balance due from King's Beach. The bank accepted this note in lieu of exercising its rights under the pledge agreement. On June 19, 1963, the bank returned 3,500 shares of the petitioners' Minnesota Mining & Manufacturing Co. stock which it no longer needed as security for the outstanding indebtedness. The bank did, however, retain 5,000 shares. In addition the bank assigned, without recourse, the two final notes of King's Beach. These evidenced total indebtedness of $ 295,000.On December 9, 1963, petitioners made a further payment of $ 20,000 and petitioner J. Meredith Siple executed a new note for $ 145,000. This note was paid in 1964. The petitioners have not received any reimbursement for any of the foregoing payments.The petitioners deducted the payments of $ 150,000 in 1963 and $ 145,000 in 1964 as losses incurred in a transaction entered into for profit pursuant to the provisions of section 165(c)(2). 2 In 1964, petitioners made application for a tentative carryback adjustment, which was allowed, producing an overassessment of $ 35,435.63 for petitioners' 1960 income taxes. This amount was refunded. Thereafter, respondent 246 issued the deficiency notice involved herein, in which he treated the claimed losses as capital losses and disallowed the claimed deductions from ordinary income for 1963 and 1964 with the concomitant disallowance of the carryback to 1960. In 1959, when petitioners determined to extend financial assistance to King's Beach, they did so in three ways: (a) They purchased a substantial equity position in King's Beach for $ 100,000; (b) they made a direct loan of $ 50,000 to King's Beach; and (c) they agreed, in 7 the event of default, to indemnify the First National Bank for its advances to King's Beach but only to the extent of the realizable proceeds from the sale of Minnesota Mining & Manufacturing stock which they pledged as collateral for those advances. The October 22, 1959, agreement, which set forth the arrangements with respect to such financial assistance, specifically provided:6. First Party [King's Beach] agrees that while the arrangements by the * * [petitioners] with the First National Bank of Nevada make the * * * [petitioners] primarily liable to said bank for all advancements made by it to the First 247 Party, that such advancements are solely for the use and benefit of First Party and that the First party will fully repay the same to said bank and/or to the Third Parties [petitioners], together with all interest or other charges thereon. [Emphasis added.]Thus, it is clear that initially there was a direct promise of reimbursement by King's Beach. Such a promise to pay money clearly would have constituted a debt obligation if it had still been extant at the time petitioners' collateral had been sold or, as is the case herein, petitioners made the payments of $ 295,000 in order to release their collateral. See Barnhart-Morrow Consolidated, 47 B.T.A. 590">47 B.T.A. 590, 599-600 (1942); Ambrose D. Henry, 8 B.T.A. 1089">8 B.T.A. 1089, 1097 (1927). Under such circumstances, Putnam v. Commissioner, 352 U.S. 82 (1956), would have controlled petitioners' deduction.The problem presented herein stems from the effect to be given to the agreement and bill of sale dated May 23, 1963, with respect to whatever claim petitioners may have had against King's Beach arising out of the possible use of petitioners' collateral in liquidating the indebtedness of King's Beach to the bank. Initially, we note that the parties have treated 248 this agreement as reflecting a relinquishment to King's Beach of any such claim by petitioners. While this treatment is subject to question, 3249 we consider it appropriate to dispose of the case on this mutually accepted foundation.8 In large measure, the arguments of the parties have focused upon whether a "debt" arose in favor of the petitioners against King's Beach at the time of the payments by petitioners to the bank in 1963 and 1964. Such arguments have delved deeply into the law of suretyship and the purported differences between the rights of a guarantor and an indemnitor -- differences which are at best obscure. Compare Restatement, Security, secs. 82250 and 104 (1941); Restatement, Restitution, sec. 76 (1937); 41 Am. Jur. 2d 687-690. In our view, it is unnecessary to analyze the nuances which inhere in such differences and the impact thereof on the Federal income tax consequences of the transactions involved herein. We will assume for the purposes of decision that a "debt" did not arise in favor of petitioners. As a consequence, we need not deal with the question whether a "debt" must arise at the time of payment in order for Putnam v. Commissioner, supra, to apply. We note, however, that Putnam merely held that if there was an indebtedness at the time of payment, the right to a deduction was controlled by section 166. The Supreme Court did not deal with the situation where the claimed losses stemmed from a transaction which, had it been implemented in its original form, would have given rise to a "debt" or with the further question of the effect to be given to a subsequent relinquishment in advance of a claim for such "debt." 4251 But passing the "debt" issue does not dispose of this case. We still must determine whether the losses resulting from petitioners' payments to the bank were incurred in a "transaction entered into for profit" within the meaning of section 165(c)(2) without regard to the capital loss limitation of section 165(f). 5252 In essence, petitioners contend that the pledge arrangement with the bank and the financial consequences thereof to petitioners should be treated separately from their investment in King's Beach and that, therefore, the limitation of section 165(f) is necessarily inapplicable. We think this is an unacceptably simplistic approach to situations such as are involved herein. As has been stated in United States v. Keeler, 308 F. 2d 424, 434 (C.A. 9, 1962), the determination as to whether section 165(f) applies to a loss incurred in a "transaction entered into for profit" is to be made "with reference not to hard and fast rules, but to the facts developed in each particular case."The entire framework of the transactions involved herein was capital in nature. The pledge of collateral, which ultimately caused the 9 payments now claimed as losses, was part and parcel of petitioners' purchase of stock in, and their direct loan to, King's Beach. They subsequently disposed of their stock, the direct debt of King's Beach to them, and their contingent future claim for reimbursement from King's Beach in a transaction which concededly was capital in nature.Petitioners ultimately made payment in full6 of the indebtedness of King's Beach secured by the collateral and the payment was made to the creditor bank and not to a third party. Since, by virtue of the May 23, 1963, agreement, petitioners no longer had any claim for reimbursement, the extinguishment of the potential indebtedness was clearly designed to improve the financial condition of King's Beach. Indeed, this seems to have been one of the purposes which motivated Mizner in making such agreement. These elements lend support to the "capital" characterization of the transaction, 253 even though the payments by petitioners may not have constituted a "contribution to capital" in the strict sense of that term. (Cf. Santa Anita Consolidated, Inc., 50 T.C. 536">50 T.C. 536, 554-555 (1968), and D.J. Condit, 40 T.C. 24 (1963), affd. 333 F. 2d 585 (C.A. 10, 1964).) In any event, the inescapable fact is that petitioners' payments were made in implementation of an undertaking given by them at the time and as a condition of their investment in King's Beach. Consequently, it can be said that, in a very real sense, the initial pledge of collateral and the requirement of potential future financial outlay which it embodied were in substance a part of the cost of petitioners' stock. 7Granted that several 254 of the cases relied upon by petitioners contain broad language which seems to support their position, each case is clearly distinguishable on its facts. In Hoffman v. United States, 266 F. Supp. 884">266 F. Supp. 884 (D. Ore. 1967), and Eugene H. Rietzke, 40 T.C. 443 (1963), the undertaking to the creditors which gave rise to the payments in question was that of a shareholder who was also the principal salaried officer of the debtor. More importantly, the undertaking was given subsequent to, and independently of, the acquisition of the original investment by the taxpayer. Under such circumstances, it would have been difficult to hold that the payments were part of the cost of acquisition of that investment. 8 The same situation obtained in J. J. Shea, 36 T.C. 577 (1961), affirmed per curiam 327 F. 2d 100210 (C.A. 5, 1964), in addition to which the payment therein was not made to the creditor and did not reduce the primary indebtedness -- in fact, it was made to a third person in consideration of the assumption of the taxpayer's share of the guaranty. In D. J. Condit, 40 T.C. 24">40 T.C. 24 (1963), affd. 333 F. 2d 585 (C.A. 10, 1964), the loss in question arose out of a settlement between two partners or joint 255 venturers. Cf. Harry Horner, 35 T.C. 231">35 T.C. 231 (1960). In Ansley v. Commissioner, 217 F. 2d 252 (C.A. 3, 1954), the taxpayer was paid separately for the use of his collateral so that it can be said that the pledge itself separately constituted a "transaction entered into for profit." Cf. J. J. Shea, 36 T.C. at 581. It is also doubtful whether the decision retains its vitality in light of Putnam v. Commissioner, supra.But cf. Stahl v. United States, 294 F. Supp. 243">294 F. Supp. 243 (D.D.C. 1969).The essential fallacy in petitioners' position stems from their assumption that if the bad debt provisions of section 166 do not apply, their payments in connection with their pledge must necessarily be considered as entitling them to ordinary loss deductions because their investment in King's Beach was obviously made with the hope and expectation of profit. While the existence of a profit motive is obviously a necessary element, it is not in and of itself a ticket for an ordinary loss deduction under section 165(c)(2)256 without regard to section 165(f). The nature of the payments giving rise to the claimed losses must still be viewed in the context of the transaction as a whole. United States v. Keeler, supra.We are satisfied that, in the instant case, the arrangements from start to finish were the embodiment of a capital transaction. As the Supreme Court observed in Putnam v. Commissioner, 352 U.S. at 92-93:We may consider Putnam's case in the light of these revealed purposes. His venture into the publishing field was an investment apart from his law practice. The loss he sustained when his stock became worthless, as well as the losses from the worthlessness of the loans he made directly to the corporation, would receive capital loss treatment; the 1939 Code so provides as to nonbusiness losses both from worthless stock investments and from loans to a corporation, whether or not the loans are evidenced by a security. n20 It is clearly a "fairer reflection" of Putnam's 1948 taxable income to treat the instant loss similarly. There is no real or economic difference between the loss of an investment made in the form of a direct loan to a corporation and one made indirectly in the form of a guaranteed 257 bank loan. The tax consequences should in all reason be the same, and are accomplished by § 23(k)(4). n21 * * * [Footnotes omitted.]We hold that the losses which the petitioners ultimately suffered by implementing their pledge are capital losses. Cf. Estate of McGlothlin v. Commissioner, 370 F. 2d 729 (C.A. 5, 1967), affirming 44 T.C. 611">44 T.C. 611 (1965); United States v. Keeler, supra;Estate of James M. Shannonhouse, 21 T.C. 422">21 T.C. 422 (1953). Compare Arrowsmith v. Commissioner, 344 U.S. 6 (1952). The fact that petitioners' expenditures followed 11 rather than preceded the disposition of their stock does not militate against this result. Cf. Arrowsmith v. Commissioner, supra;Estate of James M. Shannonhouse, supra.Compare also the treatment of payments by a purchaser of property in exchange for a private annuity. Rev. Rul. 55-119, 1 C.B. 352">1955-1 C.B. 352, approved by this Court in John C. W. Dix, 46 T.C. 796">46 T.C. 796 (1966), affirmed on another issue 392 F. 2d 313 (C.A. 4, 1968).Decision will be entered for the respondent. STERRETTSterrett, J., dissenting: Petitioner Meredith Siple paid the First National Bank of Nevada $ 150,000 in 1963 and $ 145,000 in 1964 and deducted said payments as ordinary losses 258 on his tax returns for those years. We must consider why such payments were made to determine whether this asserted tax treatment was correct.The payments were made after the bank stated in writing to petitioner that "Demand is made upon you in accordance with the indemnity agreement you signed on October 22, 1959." Pursuant solely to this demand the payments in question were made.It then becomes appropriate to consider why petitioners entered into the October 22, 1959, indemnification agreement which caused the payments. Cf. Arrowsmith v. Commissioner, 344 U.S. 6 (1952). Petitioners' participation in the aforenoted October 22, 1959, agreement was the direct result of their contract of the same date with the Mizners pursuant to which they agreed to invest in King's Beach. They agreed to make a substantial equity commitment, which through the exercise of certain options could have amounted to a 49-percent interest, and to make a $ 50,000 direct loan to King's Beach. Any losses suffered by petitioners through these investments were, of course, capital in nature. Secs. 165(f) and 166(d).In this same agreement with the Mizners the petitioners further agreed to post collateral for 259 a bank loan to King's Beach. They did supply such collateral and a loan was made. As stated above, some 4 and 5 years later petitioners were required to make good under the indemnification agreement.The reasonable interpretation of the petitioners' agreement with the Mizners would seem to be that the petitioners desired to limit their capital investment in King's Beach to the equity and direct loan commitments which were specifically spelled out. If they had intended to make a further capital investment in King's Beach through the use of collateral, it would have been a simple matter for them to have borrowed the money themselves, thus incurring personal liability, and 12 to have then reloaned the money to the corporation. By eschewing this obvious possibility, they were limiting their capital investment. It does not seem to me to be a fair reading of the Mizner-Siple agreement to conclude that the Mizners required the Siples to agree to post the collateral as a prerequisite to the purchase of stock. Certainly there is nothing outside the agreement to support such a conclusion.A reasonable assumption then is that, through the means of supplying collateral for a corporate loan, they 260 sought to enhance their prospects for a profitable investment. If this be so, they are entitled to an ordinary loss arising from a transaction entered into for profit under the provisions of section 165(c)(2), and I would so hold.This simplistic 1 approach to the problem finds much support in decisions of this Court. In J. J. Shea, 36 T.C. 577">36 T.C. 577, 582 (1961), affirmed per curiam 327 F. 2d 1002 (C.A. 5, 1964), we said the following with respect to that petitioner's purpose in entering into a guaranty: 2261 When the petitioner entered into the guaranty here involved, the business of the subsidiaries of Rupe, Inc., was being developed and expanded, and in entering into the guaranty the petitioner had reason to believe that the corporations' use of the funds provided by the guaranty would enhance the value of his stock in Rupe, Inc. * * * [Italics supplied.]There the petitioner was seeking to realize a profit on only a 10-percent equity interest.In Marjorie Fleming Lloyd-Smith, 40 B.T.A. 214">40 B.T.A. 214, 222 (1939), affd. 116 F. 2d 642 (C.A. 2, 1941), certiorari denied 313 U.S. 588">313 U.S. 588 (1941), we reached the same result with respect to the payment under a guaranty by the beneficial owner of a 37 1/2 percent. Therein we said:the stock had become worthless by the close of 1932. The payments in connection with the guaranty were not made until 1933. Obviously, when petitioner thus made them, it was not with the idea of protecting or adding to her stock investment in the company. These expenditures occurred for the sole purpose of reducing her liability under the guaranty. As such, they are deductible as losses on a transaction entered into for profit. * * * [Italics supplied.]It will be recalled that at the time of the payments to the bank the Siples held no interest of any kind in King's Beach, so this decision seems particularly in point. 3262 Eugene H. Rietzke, 443">40 T.C. 443 (1963), is a further example of our finding of a profit-making motive to the guaranty by a shareholder (45-percent interest) of the indebtedness of his corporation.13 Significantly the majority opinion cites no cases in direct support of its holding that a capital transaction was involved. Instead it seeks, on what are in my judgment invalid grounds, to distinguish two of the foregoing cases and makes no mention of the third. The precedent value of these decisions is seriously undermined. The majority stresses the fact that in Rietzke and Shea the guaranties were subsequent to, and independent of, the acquisition of the original investment by the taxpayer. Thus, the clear implication is that these holdings may no longer be cited with any confidence to justify a section 165(c)(2) loss where it is claimed with respect to a loss that occurred at the same time as an original investment. The majority's 263 approach to the problem is indicated in its statement that "Under such circumstances, it would have been difficult to hold the payments were part of the cost of acquisition of that investment." All outlays made at the outset are now likely to be lumped together. It would seem to be unduly restricting congressional intent in enacting the forerunner of section 165(c)(2).Further, I do not find decisions of other courts such as Ansley v. Commissioner, 217 F. 2d 252 (C.A. 3, 1954), and Hoffman v. United States, 266 F. Supp. 884">266 F. Supp. 884 (D. Oreg. 1967), distinguishable as does the majority.I agree with the majority that the "debt" issue, see Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956), may be passed over, and note as my reasons that (1) an indemnitor who makes good a loss is not subrogated to the rights of the indemnitee, see Howell v. Commissioner, 69 F. 2d 447 (C.A. 8, 1934), (2) the May 23, 1963, agreement cut off whatever right the petitioners had against King's Beach by virtue of the 1959 agreement which right would have to be founded upon a breach of contract as distinguished from an action on a debt, and (3) Nevada case law concerning subrogation as set forth in Stephens v. McCormack, 50 Nev. 383 (1928).It 264 follows from the foregoing discussion that I respectfully dissent from the majority opinion. Footnotes1. The stipulation of facts gives this date as June 7, 1960. This is, however, apparently a typographical error because the supplementary agreement is dated June 17, 1960.↩2. All references are to the Internal Revenue Code of 1954, as amended.↩3. The agreement refers to King's Beach separately from the "party of the first part" and the "party of the second part," which are described in the beginning as Mizner and Siple. The operative provisions state that "party of the second part [Siple] does hereby sell, assign, transfer, set over, and convey unto party of the first part [Mizner] all of the right, title and interest of party of the second part in or to any * * * causes of action * * * presently owned by party of the second part or hereafter acquired by party of the second part, against party of the first part or the King's Beach Stop & Shop Market." Taking this language at face, it appears to be a sale to Mizner of stock, the direct indebtedness of $ 50,000, and the contingent claim for reimbursement in the event of payment to the bank by petitioners. Neither the fact that Mizner is described in the preamble as the president of King's Beach nor that he signed the agreement in this capacity requires a contrary conclusion. Indeed, the fact that $ 20,000 of the amount received by petitioners was represented by the note of Mizner personally counteracts the significance of the references to him in his official capacity in the agreement and, for aught that appears, Mizner could also personally have paid the $ 10,000 cash. In view of the foregoing, it can be argued that the transaction involved the sale or exchange of capital assets, since there appears to be no basis for finding that either the stock, the note, or the contingent claim constituted noncapital assets. The capital nature of the transaction would carry over and control the nature of the subsequent payment of $ 295,000 to the bank by petitioners. Cf. Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6↩ (1952).4. The concurring opinion in Bert W. Martin, 52 T.C. 140">52 T.C. 140, 147 (1969), on appeal (C.A. 9, July 2, 1969), merely reserved our position in cases where neither an actual nor potential indebtedness ever existed.5. Because of the large amount of reported capital gains in the years in question, the distinction between short-term and long-term capital loss is immaterial. Cf. secs. 1211(b), 1212, and 1222.6. Since we have abjured the "debt" issue involved herein, we need not concern ourselves with the intricacies of partial payments stemming from the fact that the payments herein were divided between 2 taxable years. Compare Eugene H. Rietzke, 40 T.C. 443↩ (1963).7. Since $ 50,000 cash was clearly full consideration for the direct loan to King's Beach in that amount, any expenditure attributable to the implementation of the pledge should properly be considered part of the basis of the stock.↩8. The same is also true with respect to our decision in Frank B. Ingersoll, 7 T.C. 34">7 T.C. 34↩ (1946), where we emphasized the business relationship which existed between the taxpayer and the creditor.1. It was once said that "Some cases task the anxious diligence of a court, not by their difficulty, but their simplicity." Wells v. Savannah, 87 Ga. 397">87 Ga. 397, 398↩ (1891).2. Despite the fact that this term surely has more capital overtones than the term "indemnification." See Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82↩ (1956).3. The majority gives footnote attention of the agreement of May 23, 1963, between the Siples and Mizner, president of King's Beach, which completely terminated the Siples' interest in King's Beach, and to a suggestion that the agreement resulted in a capital transaction. The suggestion that the Arrowsmith↩ doctrine then requires that the subsequent payment of $ 295,000 also be accorded capital treatment is, in my view, ill-founded for that payment was not in any sense an outgrowth of the May 23, 1963, agreement.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620383/	ROBERT HENRY GRIFFIN, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGriffin v. CommissionerDocket No. 16166-79.United States Tax CourtT.C. Memo 1982-628; 1982 Tax Ct. Memo LEXIS 114; 44 T.C.M. (CCH) 1526; T.C.M. (RIA) 82628; October 27, 1982. William R. McCants, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: This matter is before us on respondent's motion for summary judgment filed on January 4, 1982, based upon an attached request for admissions which had been served on petitioner in open court on October 13, 1981, but to which petitioner had not responded. There was no appearance at the hearing on respondent's motion on behalf of petitioner. In accordance with Rule 90(c), Tax Court Rules of Practice and Procedure, the matters set forth in respondent's115 request for admissions are deemed admitted. Based on the pleadings and the admissions of petitioner, we find the following facts. Respondent determined a deficiency in petitioner's income tax for the calendaryyear 1978 in the amount of $59,068.70 and additions to tax under section 6651(a)(1) 1 and section 6654, in the amounts of $14,767.18 and $680, respectively. The basis for the determination of deficiency was that petitioner received $130,000 of income from cash he was given in consideration for 1,000 pounds of marijuana. Petitioner did not furnish the marijuana to the individuals who gave him the $130,000, but absconded with that amount of cash. Respondent determined that the $130,000 was income to petitioner and that this was self-employment income, $17,700 of which was subject to self-employment tax at the rate of 8.1 percent. Petitioner resided in Orange Park, Florida, at the time of the filing of his petition in this case. Petitioner did not file a Federal income tax return for the calendar year 1978 within the116 time prescribed by law, and as of October 13, 1981, had not filed a Federal income tax return for the year 1978. Petitioner's failure to file a Federal income tax return for the calendar year 1978 was not due to reasonable cause. In a transaction which took place during the calendar year 1978, petitioner agreed to sell certain parties 1,000 pounds of marijuana for $130,000. During the transaction petitioner stole $130,000 in currency and did not deliver any marijuana. In entering into the transaction resulting in the theft of $130,000, petitioner acted on his own behalf and was self-employed. Petitioner had no deductible business expenses or nonbusiness itemized deductions for the taxable year 1978, which were not allowed by respondent in the notice of deficiency determining a deficiency in his tax for the year 1978. Petitioner received taxable theft income of $130,000 in 1978. Petitioner failed to pay any estimated tax for the taxable year ending December 31, 1978, although he was liable to do so. The facts deemed admitted by petitioner in this case establish that petitioner had taxable income as determined by respondent in his notice of deficiency and that this income*117 was self-employment income. They also establish that petitioner failed to timely file his Federal income tax return for the calendar year 1978 without reasonable cause and failed to pay estimated tax which he was liable to pay. The facts established in this record sustain respondent's determination of the deficiency in tax and the additions to tax as set forth in the notice of deficiency to petitioner. Accordingly, respondent's motion for summary judgment will be granted. An appropriate order and decision will be entered.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620384/	PHILIP ALAN AND KAYLEEN MAE BOICE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBoice v. CommissionerDocket No. 7174-91United States Tax CourtT.C. Memo 1993-498; 1993 Tax Ct. Memo LEXIS 510; 66 T.C.M. (CCH) 1166; October 28, 1993, Filed 510 Decision will be entered under Rule 155. Philip Alan Boice, pro se. For respondent: Michael Lloyd. PETERSONPETERSONMEMORANDUM OPINION PETERSON, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined a deficiency in petitioners' Federal income tax for their taxable year 1987 in the amount of $ 956. After a concession by petitioners, the sole issue for decision is whether petitioners are entitled to claimed deductions for expenses petitioner Philip Alan Boice incurred while traveling between his personal residence and various locations in the Black Hills National Forest. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioners resided in Spearfish, South Dakota, at the time their petition was filed. During the year in issue petitioner Philip Alan Boice (Mr. Boice) worked as a professional "faller" 511 or "cutter" (an individual whose occupation is to cut down trees) in and around the Black Hills National Forest (Black Hills). Mr. Boice was a subcontractor cutter during the year in issue, which means that he worked for contractors who owned the right to remove timber from certain parcels of land, colloquially referred to in the industry as "sales". During the year in issue Mr. Boice worked as a cutter on eight different sales, for three different contractors. Within each different sale, Mr. Boice cut trees in many different locations. Mr. Boice was paid by the contractors based on either the tonnage of trees he cleared or the length (per thousand-board feet) of trees he felled. The distance from Mr. Boice's home to the various cutting sites he worked at within the Black Hills during the year in issue ranged from 15 to 70 miles each way. In rendering his services, Mr. Boice furnished his own truck, fuel, and trade tools. Mr. Boice's trade tools included a fire shovel, safety chaps, gasoline jugs, a tool belt, a safety helmet, wedging axe, various shovels, tire chains, a hammer, motor oil, three chain saws, a saw repair tool box, jumper cables, various small tools, funnels, 512 and a hydraulic jack. Mr. Boice carried most of his trade tools with him in his truck when he went to his cutting sites, but he maintained a workshop adjacent to his home where he stored, maintained and repaired his equipment. Mr. Boice spent approximately 3 hours per week in his workshop, and his workshop premises were absolutely essential to his business. Mr. Boice could not have maintained or repaired his cutting equipment without the use of his workshop. Mr. Boice has been a professional cutter since 1973, and has a fine reputation in his field. During the year in issue he received work from contractors who called him at home, or from contractors he phoned from his home after seeing notices posted at a saw shop, or through word of mouth contacts. Mr. Boice also maintained a logo advertising his services on the bug screen of his truck. On the Schedule C attached to their Federal income tax return filed for the year in issue, petitioners claimed a deduction in the amount of $ 5,149 for travel incurred by Mr. Boice in his trade or business as a cutter. Respondent disallowed $ 3,173 of the claimed deduction on the ground that that portion of the travel expense was incurred 513 for Mr. Boice's travel back and forth between petitioners' personal residence and the various cutting sites he worked at in the Black Hills during the year in issue, and therefore constituted nondeductible commuting expenses. Petitioners contend they are entitled to deduct the full amount of their reported travel expenses because they constitute ordinary and necessary business expenses incurred by Mr. Boice in carrying on his trade or business as a cutter. Deductions are a matter of legislative grace and petitioners bear the burden of proving their entitlement to their claimed deduction in issue. . Based on the facts of this case we agree with petitioners. It is well established that expenses incurred in commuting between a personal residence and a place of business are generally nondeductible personal expenses. . However, if a taxpayer's home is his principal place of business, a deduction is permitted for the cost of travel between the home and other business locations, including the taxpayer's first job514 site. ; see , affd. without published opinion . As a test for determining the deductibility of such travel, we look to see whether the taxpayer's use of his home "is so central to his business that trips from his home to his other places of business are in the nature of normal and deductible business travel". (fn. ref. omitted); . We have previously examined the precise issue in this case on facts essentially indistinguishable from this case. In Walker the taxpayer also was a cutter subcontractor who worked in the Black Hills and traveled back and forth on a daily basis from his personal residence to various locations in the Black Hills to cut timber; also required use of a truck and carried with him in his515 truck the tools of his trade; also maintained a workshop adjacent to his home where he stored, maintained, and repaired his working equipment; and also obtained cutting assignments using his home as his base of operation. Based on the record in Walker we concluded that the taxpayer's workshop and surrounding premises (i.e., his personal residence) comprised his principal place of business, and allowed the taxpayer to deduct the expenses he incurred for traveling between his personal residence and his cutting sites in the Black Hills. We reached this conclusion after finding that the taxpayer used the workshop and surrounding premises to perform "every business function necessary to his business of cutting timber except for the actual cutting of the trees", and that the "workshop was absolutely essential to his business". . In making this finding, we compared the importance of any of the many locations on which the taxpayer cut timber with the significance of his workshop where he performed all of the other necessary functions of his business besides actual cutting. See also ,*516 affd. without published opinion . After due consideration we find that there are no essential facts in the instant case distinguishable from those presented in Walker, and no legal arguments presented by respondent in the instant case which were not addressed and rejected in Walker. On the basis of our reasoning in , we conclude that during the year in issue, Mr. Boice's principal place of business for his trade or business as a cutter was his workshop and surrounding premises (i.e., his personal residence), and hold that petitioners are entitled to deduct the full amount of their claimed expenses for Mr. Boice's business travel during the year in issue. To reflect petitioners' concession, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620386/	BLAIRS CONSULTING SERVICES, LTD., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBlairs Consulting Services, Ltd. v. CommissionerDocket No. 15011-91United States Tax CourtT.C. Memo 1992-399; 1992 Tax Ct. Memo LEXIS 421; 64 T.C.M. (CCH) 161; July 15, 1992, Filed 421 An appropriate order denying petitioner's motion for more definite statements will be issued. WOLFEWOLFEMEMORANDUM OPINION WOLFE, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 183. 1This matter is before the Court on petitioner's Motion for More Definite Statements, filed December 6, 1991, and respondent's Notice of Objection, filed December 26, 1991. Respondent determined deficiencies in petitioner's 1988 and 1989 Federal income taxes as follows: YearDeficiencySec. 6653(b)1988$ 207,772.551989245,592.64$ 184,194.48Additons to TaxYearSec. 6653(b)(1)(A)Sec. 6653(b)(1)(B)Sec. 6661(a)1988$ 155,829.411$ 51,943.14198961,398.16 422 Respondent computed the deficiencies based upon the determination that petitioner realized unreported taxable income. Respondent also disallowed certain business expenses and a contribution deduction due to lack of substantiation. Petitioner is a corporation with its principal office in the City, County, and State of New York. Respondent contends in paragraph 7 of her answer that petitioner operated as a brothel, and was owned solely by Lori Geller-Warshaw (Geller-Warshaw) during the 1988 tax year, and owned by Geller-Warshaw and her associated, Danielle Galiana during the 1989 tax year. Respondent contends that as part of petitioner's illegal activities, petitioner conducted a large scale prostitution business that provided petitioner with large amounts of gross receipts which were paid out to the shareholders as constructive dividends or other income. These gross receipts were not reported on the returns of Blairs or the personal returns of the shareholders. Respondent also alleges that during the years in issue, Career Counseling Enterprises (Career) also was a brothel and that all the stock of Career was owned by Geller-Warshaw who subsequently recorded them on the books423 and records and tax returns of Blairs. Respondent contends that during the years in issue, the shareholders skimmed substantial amounts of cash from petitioner which amounts represent either constructive dividends from petitioner or other income. Respondent further contends that petitioner fraudulently, and with the intent to evade tax, omitted income from its Federal income tax returns for the years at issue. In paragraph 7 of the answer, respondent specifies the amounts of Blairs' gross receipts and the amounts of its unreported income for the years in issue and also the amounts of cash which Blairs' stockholders skimmed from it and which was not reported on their tax returns.Rule 51(a) provides that a party may move for a more definite statement before interposing a responsive pleading: "If a pleading to which a responsive pleading is permitted or required is so vague or ambiguous that a party cannot reasonably be required to frame a responsive pleading, * ." Petitioner complains about paragraph 7 of respondent's answer, arguing that it fails to comply with Rule 36 concerning the form and content of the answer. Petitioner contends that throughout paragraph 7 of the answer, 424 respondent pleaded conclusions instead of facts and did not attempt to disclose or explain how the amount of unreported income was determined. Specifically, petitioner cites the following as examples of this contention: (1) Respondent refers to "large amounts of gross receipts which were paid out to the shareholders as constructive dividends"; (2) respondent states that "The bulk of gross receipts was retained by the shareholders and neither deposited in the respective corporate bank accounts nor reflected on the respective corporations' income tax returns"; (3) respondent states "Lori Geller-Warshaw received cash from Blairs in the amounts of $ 531,451 and $ 513,195.50, respectively, which were not reported on her joint income tax returns for said years"; and (4) respondent does not disclose the method used to determine the amounts of omitted income. Respondent's allegations in paragraph 7 of the answer are neither vague nor ambiguous. In considering and denying a similar request for a more definite statement in , this Court set forth the "basic standard" to be used in determining whether a pleading should be425 made more definite: This standard is expressed in Rule 31(a) which provides that the "purpose of the pleadings is to give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions." Paragraph 7 of respondent's answer, to which petitioner's motion is directed, clearly satisfies the "basic standard" set forth in Rule 31(a). Paragraph 7 in its entirety gives "fair notice of the matter in controversy" and respondent's position with respect to fraud. See Rule 36(b) sets out the required form and content of an answer. It provides that the "answer shall contain a clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof." The "ground" upon which respondent relies and as to which she bears the burden of proof is the addition to tax for fraud. Respondent's statement of the ground is clear and the facts in support thereof are set forth sufficiently for petitioner to frame its responsive reply. A motion under Rule 51(a) is not the proper procedure to be utilized to obtain the information426 sought by petitioner. . See also , explicitly stating that a motion for a more definite statement under Rule 51(a) "is not to be used merely to obtain a statement of the Commissioner's grounds or the facts or theories upon which he relies." Petitioner will have an opportunity to request the information it seeks from respondent under the discovery rules of this Court. However, we express no opinion here as to what extent, if any, petitioner would be entitled to obtain discovery of this information. An appropriate order denying petitioner's motion for more definite statements will be issued. Footnotes1. All section references are to the Internal Revenue Code in effect for the tax years in issue, except as otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the interest due on the portion of the deficiency attributable to fraud.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620387/	Vander Poel, Francis & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentVander Poel, Francis & Co. v. CommissionerDocket No. 9119United States Tax Court8 T.C. 407; 1947 U.S. Tax Ct. LEXIS 271; February 25, 1947, Promulgated 271 Decision will be entered for the respondent. The petitioner is a corporate taxpayer which keeps its books and files its income tax return on the cash basis. In 1942 it voted certain salaries to its two principal officers and stockholders which it duly credited to their accounts, unconditionally. The two officers drew during the year certain portions of these salaries and the balance they left to their credit with petitioner. They could have drawn the balance of these salaries if they had elected to do so. The Commissioner has allowed as a deduction for petitioner the portions of the salaries actually paid during the taxable year and has disallowed the balance on the ground that petitioner is on the cash basis and is entitled to deduct only the amounts of the salaries which were actually paid. Held, the Commissioner is sustained following Martinus & Sons v. Commissioner, 116 Fed. (2d) 732, affirming B. T. A. memorandum opinion. Earl D. Deremer, Esq., for the petitioner.Walt Mandry, Esq., for the respondent. Black, Judge. Arundell, J., dissenting. Tyson, J., agrees with this dissent. BLACK 407 OPINION.The Commissioner has determined a deficiency of $ 791.55 in petitioner's income tax for the year 1942 and a deficiency of $ 7,883.98 in its excess profits tax for the same year.In the deficiency notice the Commissioner made three adjustments to the net income of petitioner273 as reported on its return for the year 1942. The only one of these adjustments which petitioner contests is the disallowance of part of the deduction which petitioner claimed for officers' salaries paid. The amount which the Commissioner disallowed 408 was $ 11,781.51 and the reason for this disallowance is explained in the deficiency notice as follows:(a) It is held that as the corporation reports its income and deductions on the basis of cash receipts and disbursements, a deduction is not allowable for the portion of officers' salaries not actually paid within the year.Accordingly, the amount of $ 11,781.51 is disallowed.The petitioner by an appropriate assignment of error contests the above adjustment.The facts are stipulated and we adopt them as our findings of fact. They may be summarized as follows:The petitioner is a corporation, organized under the laws of the State of New York, with its principal office in New York City. It filed its Federal income and declared value excess profits tax return for the calendar year 1942 with the collector of internal revenue for the second district of New York. It maintained double entry books of account, which it kept on the274 cash receipts and disbursements basis. Its Federal income tax returns for the calendar year 1942 and for previous years were filed on the same basis.S. Oakley Vander Poel was the elected and acting president of the petitioner for the full year 1942. On February 25, 1942, his salary was established by the board of directors at $ 20,000 per year and on September 3, 1942, an additional salary of $ 4,000 was voted by the board of directors. James W. Francis was the elected and acting vice president and treasurer of the petitioner for the full year 1942. On February 25, 1942, his salary was established by the board of directors at $ 11,000 per year and on September 3, 1942, an additional salary of $ 2,200 was voted by the directors. These salaries were voted without restriction as to time or manner of payment. The petitioner on its books credited these salaries of $ 24,000 and $ 13,200 to the accounts of the respective officers and charged such amounts to the salary accounts as expenses of the petitioner. The accounts of the two officers involved, as stated in the books of account, are summarized as follows:S. Oakley Vander PoelJames W. FrancisDebitCreditDebitCreditBalance, Jan. 1, 1942$ 278.11$ 2,989.93Miscellaneous credits during year161.40$ 3,817.78Salary credit24,000.0013,200.00Charges during year$ 13,817.3411,601.15Total 13,817.3424,439.5114,591.0817,017.78Balance December 31, 194210,622.172,426.70275 409 The disallowance of officers' salaries was determined as follows:CreditsDebitsDifferenceS. Oakley Vander Poel$ 24,000.00$ 13,817.34$ 10,182.66James W. Francis13,200.0011,601.151,598.85Total 37,200.0025,418.4911,781.51The petitioner, in its return for 1942, claimed as a deduction for officers' salaries the sum of $ 37,200. The Commissioner disallowed officers' salaries to the extent of $ 11,781.51. The correctness of this disallowance is the only issue in this case. The Commissioner does not question the reasonableness of the amounts of these salaries.S. Oakley Vander Poel and James W. Francis, in their individual Federal income tax returns for the year 1942, reported on the basis of cash receipts and disbursements and included in such returns as income their respective salaries as credited to their accounts, as follows: S. Oakley Vander Poel, $ 24,000; James W. Francis, $ 13,200.S. Oakley Vander Poel and James W. Francis at all times during the year 1942 were authorized jointly to sign checks on all bank accounts of petitioner and were authorized to draw checks to the order of either. The bank balances of the petitioner 276 at the end of the year 1942 were in excess of $ 100,000.The fair value of the current assets of the petitioner was at all times during the year 1942 in excess of current liabilities (including any credit balance due officers) and likewise the fair value of its total assets was always in excess of the total liabilities. The following is a record of the stockholdings of the petitioner as of December 31, 1942:S. Oakley Vander Poel2,250 sharesJames W. Francis1,238 sharesRene A. Carreau282 sharesFrederick Ott282 sharesDavid Webster282 sharesThere is but one issue involved in this proceeding, and that is whether petitioner, a corporation which kept its books and made its income tax returns on the cash basis, is entitled to deduct the full amount of the salaries regularly and duly voted to its two officers, Vander Poel and Francis, and unconditionally credited to their respective accounts, notwithstanding it did not actually pay the full amount of these salaries in cash or other property during 1942.The Commissioner in his determination of the deficiencies has allowed as a deduction for petitioner all the cash which these two officers drew in 1942, but has disallowed277 the $ 11,781.51 which they did not draw but which was unconditionally credited to their respective accounts. The contention of petitioner is that it unconditionally 410 credited the full amount of these salaries to the two officers in 1942; that they could have drawn the entire amounts due them at any time they wished; that their failure to do so was the voluntary act of their own; that unquestionably each was taxable on his entire 1942 salary under the doctrine of constructive receipt; and that each did actually return his full salary for taxation and pay income tax thereon. "Therefore," says petitioner, "the doctrine of constructive payment should be applied under the above facts and petitioner should be allowed to deduct the full amount of these salaries instead of the portions which the Commissioner has allowed."The Commissioner, on his part, makes no contention that the salaries voted to these two officers were not reasonable in amount and bona fide in every respect, but he takes the position that petitioner was on the cash basis and is entitled to deduct only the amounts which it actually paid in 1942 on these salaries in cash or other property and that it can not deduct, 278 under the doctrine of "constructive payment," the amounts which were not paid in 1942 but were credited to the two officers' accounts. Respondent concedes that the doctrine of "constructive receipt" has had frequent application, but not so the doctrine of "constructive payment," and that the "constructive receipt" cases are not controlling. We think the weight of authority supports respondent.In , which is one of the early cases dealing with the doctrine of "constructive receipt" and has been cited often, we said that the doctrine of constructive receipt "is not to be applied lightly, but only in situations where it is clearly justifiable." Since the Brander decision, the doctrine of "constructive receipt" has been applied often, as a study of the many decisions on that subject disclose. But not so the doctrine of "constructive payment." This fact may seem illogical. We took note of this apparent discrepancy between the two situations in , a case involving the question as to whether the corporate taxpayer was entitled to a "dividends paid credit" 279 under section 27, Revenue Act of 1936. In holding against the taxpayer we said:Even if we assume in petitioner's favor, however, that the Commissioner should have taxed to the shareholders the dividends as constructively received in 1936, it does not follow as a matter of law, however inevitable the conclusion of the syllogism would be in logic, that within the meaning of section 27 the dividends should be considered "paid" in the earlier year by the corporation. See . The asymmetry of the taxing statutes has been the subject of frequent comment by the courts. See . However desirable it may be thought on logical grounds that constructive receipt by the stockholders should imply its correlative, constructive payment by the corporation, see Paul and Mertens, 1 Law of Federal Income Taxation, 1939 Supp., § 32A-24; we are not at liberty on that account to construe the section before us in a way that would obviously 411 pervert the intent of Congress that actual payments should be made by the corporation to justify the deduction280 of the dividend claimed.In , affirming B. T. A. memorandum opinion, the court held that the corporate taxpayer which prepared its income tax returns on the cash basis was entitled to deduct salaries of corporate officers only to the extent that the salaries were actually paid and was not entitled to deduct as a "business expense" the salaries which were authorized but were not paid during the tax year. In so holding the Circuit Court, among other things, said:Petitioner argues that the salaries authorized ought to be treated as having been constructively paid. The Commissioner concedes that there are circumstances in which a taxpayer, although on a cash basis, is entitled to treat money not actually paid out as though it had been so paid. But without discussion of special situations of that sort, it is enough to say that there is nothing here to support the notion of constructive payment. The authorities petitioner cites do not sustain its argument.The court then in a footnote points out that the taxpayer in the Martinus case relied upon, as its principal authorities, ,281 and .The petitioner argues in its brief that the facts in the instant case distinguish it from the Martinus case. It is true that an examination of the facts in the Martinus case discloses that there was not "constructive receipt," as that term is described in the Treasury regulations, by the two officers of the corporation to whom the salaries had been voted during the taxable year. There was also no "constructive receipt," as we understand the term, by the husband in , to which we shall presently refer. If it were the law that "constructive payment" is a necessary corollary to "constructive receipt," then undoubtedly the instant case could be distinguished from the Martinus case and the Noble case. It is perfectly clear from the facts in the instant case that there was "constructive receipt" by Vander Poel and Francis of the salaries voted to them by petitioner in 1942. They properly returned these salaries for taxation on their 1942 returns under the doctrine of "constructive receipt." But the weight of authority as 282 we interpret the authorities is against the doctrine that "constructive payment" is a necessary corollary of "constructive receipt." Mertens, in his Law of Federal Income Taxation, vol. 2, sec. 10.18, says:Constructive Payments as Deductions. Under the doctrine of constructive receipt a taxpayer on the cash basis is taxed upon income which he has not as yet actually received. Logically it would seem that where the payee is held to have constructively received an item as income, the payor should be entitled to deduct the same item as constructively paid, but the statute rather than logic 412 is the controlling force in tax cases and so it is not surprising to find such reasoning often rejected. The difference is that the statute is presumed to reach and tax all income, and the doctrine of constructive receipt is an aid to that end. It must be remembered that the doctrine of constructive receipt is designed to effect a realistic concept of realization of income and to prevent abuses. Deductions, on the other hand, are a matter of legislative grace, and the terms of the statute permitting the particular deduction must be fully met without the aid of assumptions. "What may283 be income to the one may not be a deductible payment by the other." A review of the cases indicates that the courts will seldom support a doctrine of constructive payment in the sense in which it is used in this chapter, i. e., to determine when an item has been paid rather than who has paid it.* * * In the case of the Central Hanover Bank & Trust Co. v.United States, decided by the U. S. District Court of the Southern District of New York on December 27, 1935, and reported in (but apparently not reported in Federal Supplement), the court, in our opinion, succinctly and correctly expressed the applicable principle of law in these words:When the books of the taxpayer are kept on a cash receipts and disbursements basis, the return must be made out on such basis and all credits and disbursements included in such return must be taken as of the date of the actual payment to or by the taxpayer. This is the essence of the cash basis method and is in contrast with the accrual basis method which accrues the taxpayer's credits and charges. [9 Am. Fed. Tax Rep. 1413];284 [5 Am. Fed. Tax Rep. 6008]; [7 Am. Fed. Tax. Rep. 9338].If in any of our decisions, memorandum opinions or otherwise, we have said anything to the contrary of the above holdings, we think it is against the weight of authority and should not be followed. Therefore, following , and other cases above cited, we sustain the Commissioner. See also our recent decision in , in which among other things, we said:* * * No payment was made in 1942 by petitioner to her husband for his services; but the payment for services rendered in that year was made in 1943. Likewise the payment for 1943 services was not made until February 1944. It is argued that the custom was that petitioner's husband prepare all checks for her signature and that had he seen fit to do so, he could have received payment of the full amount285 of the salary at the close of each year for which the service was rendered. Thus it is said to follow that petitioner constructively paid and her husband constructively received payment of the salary for 1942 and 1943 at the close of each of those years. The fact remains, however, these checks were not prepared, signed, or delivered until after the close of those respective years. Accordingly, there was no such payment or receipt in either case until after the close of the year. ; ; ; .413 Cf. , affirming .Both parties in their briefs cite and discuss several cases which deal with deductions under section 24 (c) of the code. The instant case is not a section 24 (c) case, therefore, we have not discussed in this report 286 these section 24 (c) cases which have been cited. We have examined them, however, and do not believe that any of them are contrary to what we have held above.Decision will be entered for the respondent. ARUNDELLArundell, J., dissenting: The majority do not question the fact that the salaries in dispute were constructively received by the corporate officers. On the contrary, I take it that all will agree that the salaries were constructively received. They were unconditionally credited to the individual accounts of the officers pursuant to a formal vote by the board of directors; they were voted without restrictions as to the time or manner of payment; and the officers were authorized to draw checks on all the corporation's bank accounts to their own order. That the corporation was able to pay is shown by the fact that its total assets were in excess of its total liabilities throughout the year, and the cash on deposit in banks was greatly in excess of the amounts due the officers. The officers themselves reported their full salaries as income for the taxable year in question. Thus, it appears beyond cavil that the full amounts of the salaries were unconditionally available287 to the corporate officers for the taking. Therefore, under Regulations 111, sections 29.42-2 and 29.42-3, and under such decisions as John A. Brander, 3 B. T. A. 231; Jacobus v. United States, 9 Fed. Supp. 41; John I. Chipley, 25 B. T. A. 1103, and many others, a clearer case of constructive receipt would be difficult to imagine.It seems to me that neither legally, economically, nor logically can there ever be a constructive receipt without a concomitant constructive payment. Whether or not a constructive payment is within the word "paid" as used in a particular statute or section of the code is a different question. For example, we have recently said that a constructive payment will not satisfy the term "paid" in section 24 (c) (1) of the code, relating to deductions for unpaid expenses and interest. See ; cf. ; affd., . (However, at least one Circuit Court has held to the contrary, ,288 and even this Court in a number of memorandum opinions has at least intimated to the contrary.) So, also, it has been said that a constructive payment will not satisfy the term "paid" in section 27, relating to the "dividends paid credit" of corporations. ; ; but see .Sections 24 (c) and 27, however, are statutes having a special and limited purpose and spring from a background having to do with tax evasion or avoidance. And so, while a constructive payment may not satisfy these particular statutes because of their special purpose, decisions so holding or intimating are not very good precedents for determining whether a constructive payment is within the terms of a statute having broad and general applicability. Moreover, I think it noteworthy that in the Miller, Lake, Cox, and Sanford cases, cited in the preceding paragraph, it was found that there was no constructive receipt by the payees in the taxable year of the payors, the taxpayers. 289 The case primarily relied upon by the majority, , in my opinion, affords little support for the conclusion reached. It seems to me that case and this one are alike only in that in each the taxpayer-corporation and the officers whose salaries were in question were both on a cash basis of accounting. From that point on the similarity ceases, as is shown by the following quotation from our memorandum opinion in the Martinus case:Briefly, our determination is chiefly based on the following grounds: That the petitioner kept its records and filed its income tax returns on the basis of cash receipts and disbursements; that the salaries it was agreed the officers, in 1935, were entitled to were never set aside to or for them, never credited to them by petitioner on its records, and, in our opinion, were never actually nor constructively received by them in 1935, except in the specific amounts allowed them as deductions by the respondent; that the salaries to which the officers were entitled were not available to them, so that "at any time" during 1935 they might have drawn on petitioner for the290 amounts and received the same; that their salaries were not always and "at any time" available to them, so as to constitute payment, actual or constructive. [Italics mine.]It is apparent, therefore, that in the Martinus case there was not a constructive receipt by the corporate officers, and it was so held. Of course, if there was no constructive receipt there could be no constructive payment. For that reason I think that neither factually nor in principle does the Martinus case aid the view taken by the majority here.We do not have here a case involving the application or construction of a special statute such as section 24 (c) or section 27, and I think the majority opinion recognizes this fact. Rather, it is a question involving interpretation of statutes of general applicability to all taxpayers, sections 42 and 43 of the code, relating respectively to the period in which items of gross income are taxable and the period in which deductions and credits are taken. For a cash basis taxpayer, section 42 prescribes the general rule that items of gross income shall 415 be included in the gross income for the taxable year in which "received" by the taxpayer, *291 and section 43 provides that deductions shall be taken for the taxable year in which "paid." The doctrine of constructive receipt has been engrafted upon the term "received" in section 42 on the theory that where one on a cash basis can receive income for the asking, it is tantamount to or the equivalent of receipt.Here we have a situation in which the taxpayer-corporation and its officers are on the same basis of accounting, i. e., the cash receipts and disbursements basis. That which is an item of gross income to the payees is an item of deductible expense to the payor. The respondent does not contend here that the salaries were excessive or unreasonable. In these circumstances, the ultimate question, as I see it, is why, if the facts are such as to amount to a receipt of taxable income by the payees, they do not also amount to a payment by the payor. I think they do.For the reasons stated I respectfully dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620388/	WILLAMETTE INDUSTRIES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWillamette Industries, Inc. v. CommissionerDocket Nos. 13440-78, 16313-79, 21473-81United States Tax CourtT.C. Memo 1991-389; 1991 Tax Ct. Memo LEXIS 454; 62 T.C.M. (CCH) 451; T.C.M. (RIA) 91389; August 12, 1991, Filed 454 Petitioner's motion for reconsideration will be denied. Charles P. Duffy and Philip N. Jones, for the petitioner. Alan Summers, Robert F. Geraghty, Wendy S. Pearson, and Randall E. Heath, for the respondent. DRENNEN, Judge. DRENNENSECOND SUPPLEMENTAL MEMORANDUM OPINION These cases were originally assigned to Special Trial Judge Hu S. Vandervort pursuant to section 7456(d) (redesignated section 7443A(b) by section 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755), and Rules 180, 181, and 183. 1 On September 22, 1987, the Court filed its opinion in these cases, T.C. Memo 1987-479">T.C. Memo 1987-479, and provided that decisions would be entered under Rule 155. The parties were unable to agree to the correct tax liability. The cases were subsequently assigned to Special Trial Judge Carleton D. Powell pursuant to section 7443A for hearing under Rule 155. On July 5, 1990, the Court filed its supplemental memorandum opinion, T.C. Memo 1990-339">T.C. Memo 1990-339 and again provided that decisions would be entered under Rule 155. Petitioner subsequently filed a motion for reconsideration of the so-called logging road costs issue on455 July 23, 1990. A hearing was held on November 7, 1990, on the logging road costs issue and another issue unresolved between the parties pertaining to the Rule 155 computations. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. SECOND SUPPLEMENTAL MEMORANDUM OPINION OF THE SPECIAL TRIAL JUDGE POWELL, Special Trial Judge: At issue in these cases, generally, is the fair market value of timber eligible for treatment under section 631(a) for taxable years 1974 to 1977. Specifically, here, we must decide, in computing the fair market value of the timber, whether: (1) The cost of constructing the logging roads is to be included in or excluded from such value; and (2) the adjustment for growth of the timber is to end on the cut date or on the valuation date. Petitioner, an456 Oregon corporation engaged in logging and related activities, harvested the timber in Oregon, Louisiana, and Arkansas. For convenience, reference to Louisiana timber also includes timber harvested in both Louisiana and Arkansas. Section 631(a) 2 provides that a taxpayer may elect to treat the cutting of timber as though it were a hypothetical sale or exchange of that timber and, therefore, a taxable event. Before enactment of the predecessor of section 631(a) (section 117(k) of the 1939 Internal Revenue Code), the entire gain realized from timber cut by a taxpayer was taxed as ordinary income. Consequently, a taxpayer electing section 631(a) treatment converts what would otherwise be ordinary income into capital gain on the cutting of eligible timber. 457 The capital gain or loss under section 631(a) is an amount equal to the fair market value of the timber as of the first day of the taxable year in which the timber is cut, less the taxpayer's adjusted basis for depletion of the timber. The fair market value of the cut timber then becomes the new basis of the timber for all purposes in the hands of the taxpayer. The resulting gain or loss qualifies for section 1231 capital gain or ordinary loss treatment, provided the required holding period is met. 1. Logging Road Costs AdjustmentUnder the terms of U.S. Forest Service (USFS) contracts, the successful bidder is required to build certain logging roads on USFS lands to USFS specifications. The bidder acquires no ownership interest in the roads, which become the property of the USFS. In return, the purchaser is given a credit against the purchase price of the timber (purchaser road credit). The amount of the purchaser road credit is equal to the USFS's estimate of the expected road costs and is known to the bidders at the time their bids are placed. The actual road costs incurred by the purchaser may be higher or lower than the purchaser road credits. During the years 458 in suit, the purchaser road credits generally were 10 to 20 percent less than the actual costs incurred by petitioner to construct the roads. Petitioner amortized the cost of constructing the roads, pursuant to Revenue Ruling 71-354, 2 C.B. 246">1971-2 C.B. 246, in an amount allocable to the percentage of the timber removed each year. The amortization deduction for the road construction costs is not at issue in this case. In our original opinion, T.C. Memo 1987-479">T.C. Memo 1987-479, we held that the value of standing timber does not include the cost of constructing roads. We directed the parties to use the Cascade Appraisal Services (CAS) data base of comparable sales (i.e., the average indicated values) 3 as the starting point in the Rule 155 computation. A dispute between the parties arose regarding each party's interpretation of the Court's ruling that the value of standing timber does not include the cost of constructing roads. Respondent argued that the road construction costs must be subtracted from CAS' average indicated values while petitioner argued that the road construction costs should not be subtracted. In the Supplemental Memorandum Opinion, 1990 Tax Ct. Memo LEXIS 546">1990 Tax Ct. Memo LEXIS 546, T.C. Memo 1990-339">T.C. Memo 1990-339, 60 T.C.M. (CCH) 48">60 T.C.M. (CCH) 48, 52, T.C.M. (RIA) 90339 at 1616,459 we held that the indicated market value of each subject timber sale should be reduced by the road construction costs reflected in the logging cost data portion of CAS's data analysis sheets. Petitioner subsequently filed its motion for reconsideration requesting the Court to reconsider our ruling on the issue of logging road costs to take into account the fact that on January 1 of each year all of the necessary roads were in place on the subject timber but none of the roads were then in place on the comparable timber sales. 460 Petitioner argues that, in its present form, the Supplemental Memorandum Opinion effectively ignores section 1.611-3(f)(1), 4 Income Tax Regs. According to petitioner, section 1.611-3(f)(1)(iii), Income Tax Regs., mandates that the presence or absence of roads be considered in determining value. 461 Petitioner further contends that CAS added the logging road construction costs to the logging costs of the comparable USFS timber because the comparable timber was offered for sale without roads in place. The purchaser of the timber, therefore, would be required to construct the roads on the comparable timber sales. All of the logging roads were in place before the valuation date, however, for the subject timber. Thus, petitioner argues, no increase in logging costs for the subject timber was necessary since a hypothetical purchaser would not have to incur road construction costs had he purchased the subject timber on the valuation date. Consequently, petitioner contends, the different treatment accorded the subject timber and the comparable timber by CAS is not inconsistent since it is based on the facts known to exist as of the valuation date. Respondent agrees that a tract of timber is worth more with the roads in place. Respondent argues, however, that two separate assets are involved: the standing timber and the roads. He contends that the road costs are separately depreciated or amortized and, therefore, should not be included in determining the value of the standing462 timber. Respondent maintains that the adjustment for road construction costs should be the difference between the estimated cost of constructing the roads for the subject timber and the estimated cost of constructing the roads for the comparable timber. Respondent argues that if it were otherwise petitioner would get an ordinary income deduction for amortizing the roads and then an additional deduction for including those costs in the capital gains. Thus, the gist of respondent's position is that petitioner's method of adjusting for road construction costs is the practical equivalent of a double deduction. Petitioner contends that there is no double deduction. According to petitioner, depreciation or amortization of an asset does not affect the fair market value of the asset. Petitioner argues that the issue here is the timber's fair market value, not its basis. The determination of fair market value must take into account the accessibility of the timber, petitioner contends; therefore, the estimated cost of constructing the logging roads must be included in determining the timber's fair market value. Petitioner relies for its position on the regulations under sections 611463 (see supra note 4) and 631; 5Revenue Ruling 71-354, supra; Private Letter Ruling 8549006 (September 3, 1985); 6 and the legislative history of the relevant statutes. According to petitioner, in determining the fair market value of the cut timber as of January 1 of the particular year, the regulations and revenue ruling require that accessibility of the timber must be evaluated as of that day. Petitioner claims that Priv. Ltr. Rul. 8549006 states respondent's position that USFS comparable sale data should be adjusted to reflect the absence of roads for purposes of sec. 631(a). 464 According to petitioner, furthermore, the legislative history pertaining to section 272(a) of Pub. L. 591 (the Internal Revenue Code of 1954), 68A Stat., shows that Congress did not intend that road costs would reduce the gain. Respondent disagrees, arguing instead that the letter ruling, the revenue ruling, and the legislative history indicate that the cost of the roads is not included in determining what is paid for the timber. Respondent contends that the revenue ruling and the regulations under section 611 are consistent with the Court's holding that roads are a separate asset and that the cost of the roads should not be added to the fair market value of the timber for purposes of section 631(a); i.e., under section 631(a) the value of the timber should not include the enhanced value attributable to the construction of roads. A fundamental tax principle is that a taxpayer cannot receive a double deduction or claim a double credit for the same item. See United States v. Skelly Oil Co., 394 U.S. 678">394 U.S. 678, 684, 22 L. Ed. 2d 642">22 L. Ed. 2d 642, 89 S. Ct. 1379">89 S. Ct. 1379 (1969); Charles Ilfeld Co. v. Hernandez, 292 U.S. 62">292 U.S. 62, 68, 78 L. Ed. 1127">78 L. Ed. 1127, 54 S. Ct. 596">54 S. Ct. 596 (1934); United States v. Ludey, 274 U.S. 295">274 U.S. 295, 71 L. Ed. 1054">71 L. Ed. 1054, 47 S. Ct. 608">47 S. Ct. 608 (1927); United Telecommunications, Inc. v. Commissioner, 589 F.2d 1383 (10th Cir. 1978),465 affg. 65 T.C. 278">65 T.C. 278 (1975), supplemented by 67 T.C. 760">67 T.C. 760 (1977); O'Brien v. Commissioner, 771 F.2d 476">771 F.2d 476 (10th Cir. 1985), affg. on this issue and remanding on other issues 79 T.C. 776">79 T.C. 776 (1982); Rome I, Ltd. v. Commissioner, 96 T.C. 697 (1991); The Cleveland Electric Illuminating Co. v. United States, 6 Cl. Ct. 711">6 Cl. Ct. 711 (1984). As the Supreme Court has stated, "the Code should not be interpreted to allow 'the practical equivalent of double deduction,' absent a clear declaration of intent by Congress." United States v. Skelly Oil Co., 394 U.S. at 684. (Citations omitted.) Thus, whenever interpretation of a provision of the Internal Revenue Code or the Regulations thereunder is involved, unless the statute clearly requires otherwise, courts must interpret the provision in a manner which will not result in a double deduction or credit since "In the absence of a provision * * * definitely requiring it, a purpose so opposed to precedent and equality of treatment * * * will not be attributed to lawmakers." Charles Ilfeld Co. v. Hernandez, 292 U.S. at 68.466 The legislative history upon which petitioner relies pertains to text in the new section 272 7 and amendments to section 117(k) of the 1939 Code under which certain administrative and other expenses, 8 incurred in the taxable year in which the timber is cut, in connection with the holding and quantity measurement of timber, were to be disallowed as expenses and added to the adjusted depletion basis of the timber cut, thereby reducing capital gain. H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. No. 591) (the Internal Revenue Code of 1954), 83d Cong., 2d Sess. 60 (1954). These provisions were never enacted. H. Rept. No. 2543 (Statement of Managers) to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 33, 53 (1954). 467 Petitioner, citing H. Rept. No. 1337, supra at 60, recognizes that the unenacted provisions did not pertain to road construction costs or other expenses relating to the actual harvesting of the timber, which would continue to be deductible as business expenses. Nevertheless, petitioner would have the Court extrapolate from Congress' refusal to enact those provisions a congressional intent not to add logging road costs to basis, and, thus, not to reduce the amount of capital gain either under the proposed legislation or otherwise. Petitioner's legislative history analysis states too much. Our review of the legislative history pertaining to section 117(k) of the 1939 Code, as well as sections 272 and 631 of the 1954 Code, convinces us that Congress never focused on the fact pattern presented in the instant case. Section 117(k) of the 1939 Code was added by section 127 of the Revenue Act of 1943, ch. 63, tit. I, 58 Stat. 46. The summary explanation for Congress' action is set forth as follows (S. Rept. No. 627, 78th Cong., 1st Sess., to accompany H.R. 3687 (1943), 1944 C.B. 973">1944 C.B. 973, 993): TIMBER RELIEF. Your committee is of the opinion that various timber owners468 are seriously handicapped under the Federal income and excess profits tax laws. The law discriminates against taxpayers who dispose of timber by cutting it as compared with those who sell timber outright. The income realized from the cutting of timber is now taxed as ordinary income at full income and excess profits tax rates and not at capital gain rates. In short, if the taxpayer cuts his own timber he loses the benefit of the capital gain rate which applies when he sells the same timber outright to another. Similarly, owners who sell their timber on a so-called cutting contract under which the owner retains an economic interest in the property are held to have leased their property and are therefore not accorded under present law capital-gains treatment of any increase in value realized over the depletion basis. In order to remedy this situation, it is proposed to amend the existing law as follows: If the taxpayer so elects upon his return, the cutting of timber during the year by the taxpayer who owns or has a contract right to cut such timber is treated as a sale or exchange of the timber cut during the year and such cut timber is considered property used in a trade or 469 business of the taxpayer for the purpose of section 117(j) of the Internal Revenue Code provided the taxpayer has owned such timber or held such contract right for a period of more than six months prior to the beginning of such year. Where such an election is made, gain or loss to the taxpayer is recognized in an amount equal to the difference between the adjusted basis for depletion of such timber in the hands of the taxpayer and the fair market value of such timber. The fair market value is determined as of the first day of the taxable year in which the timber is cut.The understanding of certain Senators serving on the Finance Committee as to the purpose of section 117(k) is set forth in the following colloquy during the Senate discussions on the Presidential veto of the 1943 tax bill (the veto subsequently was overridden), 90 Cong. Rec. 1950, 1965 (1944): Mr. BARKLEY [Majority Leader]. If I may, I should like to ask the Senator another question. The bill which the President has just vetoed provides that the owner of the timber who himself cuts it and markets it is allowed the same tax privilege that someone else would be allowed if he bought the timber and himself sawed470 it and marketed it? Mr. GEORGE [Chairman, Finance Committee]. Yes; that is essentially true, because any purchaser of the timber who immediately cuts it, of course, recovers the full amount he paid for the timber before he begins to have a net taxable income. Mr. BARKLEY. And a company which is in the lumber business, buying timber year by year, and sawing it year by year, of course, accounts for any profit as an annual income. It seems to me that is an entirely different proposition from that of a man who has over a period of a half a century developed a forest or a tract of timber, and then either decides to sell it as an entirety, or to cut it and market it himself. If he sells it he gets a capital gain, but if he cuts it and markets it piece by piece or by the thousand feet, under the present law he is taxed on income and not as a capital gain. Mr. GEORGE. The Senator correctly states the case. * * Mr. TAFT. Would the Senator from Georgia comment on the statement "This would encourage reforestation"? Is it not true that the more profitable the lumber industry is the more reforestation would be encouraged? Is not the amendment designed to encourage reforestation? 471 Mr. GEORGE. Unquestionably it is so designed. * * This is what it would permit: If one owns a thousand acres of timbered land, with hardwood and softwood, and timber of all sizes and ages scattered throughout the thousand acres, he may take his mill onto the land, and he may by selective cutting continue his timber operations or lumbering operations with respect to that land through a long period of time; * * * He is not only induced to reforest, to replant as he cuts the timber, but he is enabled to do it because he is not required to take it all off at once. All the amendment would do would be to give to the owner the right to treat his income from his timber -- not from his operations, not from his profits on this lumber sold -- but from his timber, as a capital gain. * * * Mr. BARKLEY. * * * The President refers to the lumber industry as being permitted to treat income from the cutting of timber as a capital gain rather than as annual income, and cites that provision of the bill as a loophole in favor of special privilege. * * * The person who buys, cuts, and markets the timber pays taxes on an annual income basis, because he is in that business; and in order to arrive472 at his income for that year upon his operation in that or any other field, he is allowed to deduct the costs originally, together with the expenses of operation, to arrive at the net income upon which he will pay a tax. But if the owner of that same land and that same timber, instead of selling it to another, moves a sawmill upon it and cuts it himself and sells it himself in the market, he is taxed upon it as income for that year. In other words, if he sells it outright to another, he is taxed in one way. If he cuts it himself, he is taxed in another way. * * I did not vote for [the timber amendment] in order to create a fantastic or imaginary loophole to allow someone to escape taxes. I voted for it as an act of justice to those who grow timber over a period of a generation, or half a century, and who are entitled to just treatment, no matter in what manner they dispose of the timber.Thus, section 117(k) of the 1939 Code was enacted to put owners of timber and timber cutting contracts who elected to cut their own timber and market it on a parity with someone who merely purchased the timber, sawed, and marketed it. There is no indication, however, that Congress intended473 to give the owners of timber and timber cutting contracts more of a benefit than what was provided to someone who purchased the timber. In 1951, Congress extended the benefits of section 117(k) to certain recipients of coal royalties. Sec. 325(b) of the Revenue Act of 1951, ch. 521, tit. III, 65 Stat. 501. Section 631(a) of H.R. 8300 continued the treatment pertaining to the cutting of timber provided by section 117(k) of the 1939 Code (except as to three aspects unrelated to the issue here). Joint Comm. on Internal Revenue Taxation, 83d Cong., 2d Sess., Summary of the New Provisions of the Internal Revenue Code of 1954 (H.R. 8300) 90-91 (1955). As we discussed earlier, certain provisions in the proposed section 272 of H.R. 8300, as passed by the House, would have required certain administrative and other expenses incurred in connection with the holding and quantity measurement of timber to be added to the adjusted depletion basis of the timber cut for the purpose of determining the gain or loss to be realized on account of the cutting of the timber. See supra notes 7 and 8; S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. 337 (1954). The474 Ways and Means Committee Report explains the rationale for the pertinent proposed provisions as follows, H. Rept. No. 1337, supra, at 59-60: There has been uncertainty as to the tax treatment of expenses incurred in connection with the capital gains arising from such timber or coal royalties. In some cases the taxpayer may have no income except capital gains, and the right to deduct business expenses from ordinary income is of no avail to him. Your committee has adopted a provision identifying the expenses in connection with the sales [of timber], * * * which are proper offsets against capital gain and which are properly applicable against ordinary income. * * * In the year of cutting timber, the expenses incurred in connection with the holding and quantity measurement of the timber are to be added to the adjusted basis and will reduce the amount of the capital gain. Only that portion of these expenses which is allocable to the timber actually cut may be added to the adjusted basis. However, expenses incurred in actually cutting timber will continue to be deductible as business expenses. Expenditures of a timber or coal owner attributable to making and administering475 the contract under which the disposition of the coal or timber occurs and expenditures necessary to preserve the economic interest retained under the contract, will also be added to the adjusted basis of the coal or timber in computing capital gain or loss. The expenses which serve to reduce the amount of these capital gains are not to be deductible in computing ordinary taxable income.In the detailed analysis of section 272, the report further indicates, H. Rept. No. 1337, supra at A68: It is intended that only that portion of such expenditures [administrative and other expenses incurred in connection with the holding and quantity measurement of the timber cut] allocable to the timber cut will be disallowed as a deduction. The remainder of such expenditures shall be treated as if section 631(a) were not applicable, and as under present law, may be deducted from other income as a business deduction, or depending upon the application of section 266 to the expenditure, may be capitalized at the election of the taxpayer.The detailed analysis of section 631(a) further makes clear that the expenses disallowed by proposed section 272 do not include those expenses 476 directly related to the actual cutting of the timber which "continue to be deductible as business expenses, without regard to the basis or value of the timber cut." H. Rept. No. 1337, supra at A190. The House report and certain testimony before the Senate Finance Committee indicate that the provisions added by the proposed section 272 were meant to help certain individuals who did not have ordinary income against which to charge the subject expenses. 9 Hearings on H.R. 8300 (Pub. L. No. 591) Before the Committee on Finance, 83d. Cong., 2d Sess. 186, 2201, 2226 (1954) (hereinafter sometimes referred to as the Finance Committee Hearings). 477 The Senate Finance and Conference Committee reports are silent as to the reasons these provisions were eliminated from sections 272 and 631 as enacted. See S. Rept. No. 1622, supra at 337-339; H. Rept. No. 2543, supra at 53-54. The Finance Committee Hearings suggest numerous reasons why these provisions were eliminated, none of which indicates an intent to provide a double tax benefit. See e.g., Finance Committee Hearings, supra at 183-186, 989-990, 1315-1316, 2227. Thus, nothing in the legislative history of section 117(k) of the 1939 Code or section 631 of the 1954 Code indicates that Congress clearly intended to provide the practical equivalent of a double deduction. When the statute is silent, the presumption is against a double tax benefit. See Rome I, Ltd. v. Commissioner, 96 T.C. at 706; O'Brien v. Commissioner, 79 T.C. 776 at 788. As for the regulations and rulings cited by petitioner, our mandate is to interpret them in a manner to preclude the allowance of a double benefit unless Congress clearly declares an intent to provide one. Charles Ilfeld Co. v. Hernandez, 292 U.S. at 68. In reviewing the478 cited regulations and the rulings, we could find nothing in them which requires that the costs of constructing the roads be included in the fair market value of the standing timber in these circumstances. Hence, our decision that the value of the standing timber does not include the road construction costs in these circumstances is not contrary to the regulations and prevents a double tax benefit. Petitioner contends that there is no double deduction here but cites no cases in support of its position. We also could find no case directly on point with this issue. 10 We have, however, adjusted the basis of qualified investment property for purposes of the investment tax credit in order to avoid a double credit. See, e.g., O'Brien v. Commissioner, supra at 776; Zuanich v. Commissioner, 77 T.C. 428">77 T.C. 428 (1981); United Telecommunications, Inc. v. Commissioner, supra at 278. The same rationale applies here. 479 Under section 631(a), the fair market value of the cut timber becomes the new basis of the timber for all purposes for which the cost is a necessary factor. By increasing the fair market value of the standing timber by the road construction costs, petitioner reduces the amount of ordinary income upon which the tax is computed when the timber is marketed. In addition, petitioner deducts separately through amortization the cost of constructing the roads, further reducing its ordinary income. This is the practical equivalent of a double deduction which is not permitted absent a clear declaration on the part of Congress to allow it. We could find no such clear declaration. Moreover, we find no specific provision in sections 1.611-3(f)(1) or 1.631-1(d)(2), Income Tax Regs., or elsewhere in the regulations or in the Code, which would require or permit the treatment of the road construction costs propounded by petitioner. See Wyman-Gordon Co. v. Commissioner, 89 T.C. 207">89 T.C. 207 (1987). Consequently, we hold that, in determining the fair market value of the standing timber, the road construction costs must be eliminated. 11480 2. Growth AdjustmentThe USFS timber in Louisiana generally grows at a rate of 7 percent per year. USFS contracts in Louisiana are cut out on a compartment or unit basis. The bid price for a unit or compartment on a USFS tract is based on the volume determined from the cruise date (approximately 6 to 9 months before the bid date); therefore, the growth inures to the benefit of the purchaser. In our original opinion we stated that, for section 631(a) purposes, comparable sales of USFS timber should be adjusted for the growth which took place between the cruise date and the valuation date. Subsequently, in a hearing held on September 7, 1988, we expressed our belief that the growth adjustment should account for the growth between the cruise date and the cut date. At this hearing, however, petitioner argued that if the comparable timber is adjusted for growth to the cut date, the subject timber also should be adjusted for growth to that date. We decided to take the issue under advisement pending additional briefing. In the Supplemental Memorandum Opinion we held that a 7-1/2-month adjustment period for growth between the cruise date and the actual sales date was a fair 481 time period. T.C. Memo 1990-339">T.C. Memo 1990-339, 1990 Tax Ct. Memo LEXIS 546">1990 Tax Ct. Memo LEXIS 546, 60 T.C.M. (CCH) 48">60 T.C.M. (CCH) 48, 52, T.C.M. (RIA) P90339 at 1616. Subsequently, at the hearing held on November 7, 1990, the parties advised the Court that they could not agree on a mutual interpretation of our holding as to the end of the growth adjustment period. Respondent, by combining our discussion of the Southern Pine Growth Factor and Southern Cut-out Schedule, interprets the supplemental opinion to require the growth adjustment period to end on the cut date of the timber. Petitioner, on the other hand, interprets the opinion to require the growth adjustment period to end on the valuation date. Petitioner, citing portions of the findings of fact in our original Memorandum Opinion, argues that the sole purpose of the growth adjustment is to adjust the volume of timber for the comparable USFS sales to take into account the delay that occurs between the date the USFS timber is cruised and the date it is sold at public auction. Petitioner further argues that section 1.631-1(d)(2), Income Tax Regs., see supra note 5, requires the valuation to be made based on the condition of the timber on the valuation date, 482 not on the cruise date, or the bid date, or the harvest date, or any other date. According to petitioner, ending the growth adjustment period on the valuation date is consistent with section 1.631-1(d)(2), Income Tax Regs., and the original intent of the growth adjustment. Petitioner contends, in the alternative, that if the comparable timber is adjusted for growth to the cut date then the subject timber also should be adjusted for growth to the cut date. Respondent argues on the other hand that, when the bids on the comparable timber are formulated, the bidders take into consideration the estimated volume of timber on the cut date, not on the bid date. Therefore, the adjustment must be made to the date the timber is cut to take into account what the bidders are bidding for. Respondent argues that the subject timber should not be adjusted similarly to the cut date since the subject timber's volume already represents that volume. Respondent cites no authority for his position. In our research on this issue we also found no cases which address this issue. We believe, however, that petitioner has the better argument. The theory behind the various adjustments to the comparable483 sales is to put the comparable timber and the subject timber on the same basis. See Buse v. Commissioner, 71 T.C. 1129">71 T.C. 1129, 1136 (1979). Under the scheme of section 631(a), the timber cut during a taxable period is treated as if it were sold or exchanged on the first day of that period and the valuation is made as of that date. We can find no compelling justification under the statutory scheme for allowing a growth adjustment beyond that valuation date. Consequently, we hold that the period for the adjustment for the Southern pine growth is to run from the cruise date to the valuation date. To reflect the foregoing, Petitioner's motion for reconsideration will be denied. Footnotes1. All section references are to the Internal Revenue Code, as in effect for the years in issue, unless otherwise noted. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Sec. 631(a), as in effect for the years in issue, provides as follows: SEC. 631. GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON ORE.(a) Election to Consider Cutting as Sale or Exchange. -- If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 6 months [more than 9 months for 1977] before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. * ↩3. In deriving its average indicated values for USFS comparable sales, CAS started with the so-called high bid, which includes the estimated road construction costs. It then subtracted from the high bid the purchaser road credits for merchantable and per acre material to arrive at the so-called statistical high bid (stat high bid). CAS then made a quality adjustment. Next CAS made a logging cost adjustment. The first step CAS took in making the logging cost adjustment was to determine the logging costs of the USFS comparable sale. The total logging costs of the USFS comparable were then compared to the total logging costs for a specific subject area. Where the total logging costs of the USFS comparable timber exceeded the total logging costs for the subject timber, CAS increased the indicated market value of the subject timber by the difference. Thus, for the years in suit CAS added in the cost of constructing roads to derive the total logging cost of the USFS comparable timber but did not include the cost of constructing roads to derive the total logging cost of the subject timber.↩4. Sec. 1.611-3(f)(1), Income Tax Regs., provides as follows: 1.611-3. Rules applicable to timber. * * (f) Determination of fair market value of timber property. (1) If the fair market value of the property at a specified date is the basis for depletion deductions, such value shall be determined, subject to approval or revision by the district director upon audit, by the owner of the property in the light of the most reliable and accurate information available with reference to the condition of the property as it existed at that date, regardless of all subsequent changes, such as changes in surrounding circumstances, and methods of exploitation, in degree of utilization, etc. Such factors as the following will be given due consideration: (i) Character and quality of the timber as determined by species, age, size, condition, etc.; (ii) The quantity of timber per acre, the total quantity under consideration, and the location of the timber in question with reference to other timber; (iii) Accessibility of the timber (location with reference to distance from a common carrier, the topography and other features of the ground upon which the timber stands and over which it must be transported in process of exploitation, the probable cost of exploitation and the climate and the state of industrial development of the locality; and (iv) The freight rates by common carrier to important markets.↩5. Sec. 1.631-1(d), Income Tax Regs., provides in pertinent part as follows: Sec. 1.631-1 Election to consider cutting as sale or exchange. * * * (d) Computation of gain or loss under the election. * * * (2) The fair market value of the timber as of the first day of the taxable year in which such timber is cut shall be determined, subject to approval or revision by the district director upon examination of the taxpayer's return, by the taxpayer in the light of the most reliable and accurate information available with reference to the condition of the property as it existed at that date, regardless of all subsequent changes, such as changes in surrounding circumstances, methods of exploitation, degree of utilization, etc. The value sought will be the selling price, assuming a transfer between a willing seller and a willing buyer as of that particular day. Due consideration will be given to the factors and the principles involved in the determination of the fair market value of timber as described in the regulations under section 611. (3) The fair market value as of the beginning of the taxable year of the standing timber cut during the year shall be considered to be the cost of such timber, in lieu of the actual cost or other basis of such timber, for all purposes for which such cost is a necessary factor. * * * ↩6. Respondent's rulings do not have the effect of law but merely represent the Commissioner's position with respect to a specific factual situation. Rome I, Ltd. v. Commissioner, 96 T.C. 697">96 T.C. 697, 702 (1991); Tandy Corp. v. Commissioner, 92 T.C. 1165">92 T.C. 1165, 1170 (1989). Private letter rulings are not precedent but have been consulted solely for purposes of considering respondent's administrative practices. Sec. 6110(j)(3); Rowan Cos. v. United States, 452 U.S. 247">452 U.S. 247, 261 n. 17, 68 L. Ed. 2d 814">68 L. Ed. 2d 814, 101 S. Ct. 2288">101 S. Ct. 2288 (1981); First Chicago Corp. v. Commissioner, 96 T.C. 421">96 T.C. 421, 443 (1991). According to petitioner, Priv. Ltr. Rul. 8549006 shows that respondent is taking an inconsistent position here. The applicable text of Priv. Ltr. Rul. 8549006 (September 3, 1985) cited by petitioner is as follows: The prices bid for the right to cut U.S. Forest Service timber include an amount specified as necessary to construct the required access roads on National Forest lands to use in harvesting the timber. The purchaser is subsequently granted "purchaser credit" for such road costs. In essence, the total amount of the bid reflects the value of the timber as if the roads necessary for removal were already in place. In order to properly use U.S. Forest Service timber disposal data, as well as data on any timber disposition, as indicators of value, adjustments must be made in the data to reflect differences between such timber and the timber under appraisement that have a material effect on value. Accessibility is one of the factors to be taken into account in valuing timber. Section 1.611-3(f)(1)↩ of the regulations. To the extent there is a significant difference between the accessibility of the timber being valued and of the timber in a U.S. Forest Service disposal, the U.S. Forest data should be adjusted accordingly.7. Sec. 272 of H.R. 8300 (the Internal Revenue Code of 1954) as originally passed by the House provided as follows: SEC. 272. CUTTING OF TIMBER AND DISPOSAL OF COAL OR TIMBER. (a) Where the cutting of timber by a taxpayer is considered a sale or exchange under section 631(a), no deduction shall be allowed for administrative and other expenses, incurred in the taxable year such timber is cut, in connection with the holding and quantity measurement of such timber. (b) Where the disposal of coal or timber by the taxpayer is covered by section 631(b), no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract. This subsection shall not apply to any taxable year during which there is no production, or income, under the contract. ↩8. These expenses included "ad valorem taxes imposed by State or local authorities, costs of fire protection (including patrolling, signposting, building of firebreaks, costs of communication facilities necessary to such fire patrolling, equipment necessary for fire prevention or control, development of water facilities for fire fighting), insurance costs of all kinds relating to the property (not including liability insurance), costs incurred in administering a timber lease (including costs of bookkeeping and technical supervision), costs of timber measurement (including surveying), and interest on loans attributable to the timber." H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess. A67-68 (1954).↩9. The following analysis best describes the purported genesis for the section 272 provisions: ANALYSIS OF PROVISIONS OF H.R. 8300 APPLICABLE TO TIMBER OWNERS 1. Description of provisions of H.R. 8300H.R. 8300 contains provisions designed to afford tax relief to owners of coal (secs. 272 and 631). These sections, which amend section 117(k) of the present code, relate to timber as well as coal. Although adopted to benefit coal owners, they seriously (and, we believe, inadvertently) penalize timber owners. Under the present code, persons receiving capital gains are entitled to determine their tax under the so-called alternative computation. Under this computation, the taxpayer may deduct ordinary expenses only from ordinary income. Apparently most coal lessors have no ordinary income, and the amendments to section 117(k) of the present code were requested to permit these taxpayers to deduct their expenses from capital gains. Timber owners have ordinary income against which to deduct their ordinary expenses. Consequently, they have never asked for, and do not want, the special-tax [sic] treatment desired by the coal lessors. Furthermore, the new provisions discriminate against timber owners in that no other taxpayers are required to deduct ordinary expenses from capital gains. [Hearings on H.R. 8300 (Pub. L. No. 591) Before the Committee on Finance, 83d Cong., 2d Sess. 2226 (1954).]↩10. The result in Estate of Joslyn v. Commissioner, 500 F.2d 382">500 F.2d 382 (9th Cir. 1974), revg. and remanding 57 T.C. 722">57 T.C. 722 (1972), is not controlling here since in Joslyn↩ the brokerage expenses did not involve a separately depreciable asset while the road construction costs involved here do.11. Cf. sec. 1.1016-6(a), Income Tax Regs., which provides: Sec. 1.1016-6. Other applicable rules. (a) Adjustments must always be made to eliminate double deductions or their equivalent. Thus, in the case of the stock of a subsidiary company, the basis thereof must be properly adjusted for the amount of the subsidiary company's losses for the years in which consolidated returns were made.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620389/	FRANK W. STAMOS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentStamos v. CommissionerDocket No. 19382-93United States Tax CourtT.C. Memo 1994-478; 1994 Tax Ct. Memo LEXIS 486; 68 T.C.M. (CCH) 819; October 3, 1994, Filed 486 Frank W. Stamos, pro se. For respondent: Alan S. Beinhorn. GOLDBERGGOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge: This case was heard pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. 1 This case is before the Court on respondent's motion to dismiss for failure to state a claim upon which relief can be granted filed pursuant to Rule 40. Petitioner resided in Lodi, California, at the time he filed his petition. On June 9, 1993, respondent mailed petitioner a notice of deficiency in which she determined the following deficiencies and additions to tax: Additions to TaxTaxable YearDeficiencySec. 6651(a)(1)Sec. 6654(a)1987$ 3,435$ 863$ 18119883,65691422819893,80195025219903,88497125219914,0161,004222On September 8, 1993, this Court received and filed petitioner's487 petition. On October 25, 1993, respondent filed a motion to dismiss for failure to state a claim under Rule 40, and requested therein that the United States be awarded damages under section 6673. Petitioner did not file a notice of objection. By an Order dated October 28, 1993, this Court directed petitioner to file an amended petition, stating specific allegations of error in the notice of deficiency and a separate statement of facts, on or before November 15, 1993. In addition, this Court set a hearing for respondent's motion for December 6, 1993. Petitioner filed his amended petition on November 15, 1993, and a hearing was held in accordance with the above Order. Respondent asserts that this case should be dismissed for failure to state a claim because petitioner failed to allege in his petition any justiciable error, and merely asserts frivolous protester type arguments. Petitioner's arguments include: (1) Criticisms of respondent's authority to file substitute tax returns under section 6020, and to issue notices of deficiency; (2) procedural errors in respondent's failing to grant an interview prior to trial; (3) misapplication of sections 6651 and 6654 to petitioner; 488 and (4) wrongful taxation of "home source income". Rule 40 provides that a party may file a motion to dismiss for failure to state a claim upon which relief can be granted. We may dismiss a petition when it appears beyond doubt that the taxpayer can prove no set of facts to support his claim that would entitle him to relief. Under Rule 34(b)(4) and (5), a petition must contain: (1) "Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency"; and (2) "Clear and concise lettered statements of the facts on which petitioner bases the assignments of error". Moreover, any issues not raised in the assignment of error shall be deemed conceded. Rule 34(b)(4); Jarvis v. Commissioner, 78 T.C. 646">78 T.C. 646 (1982). Petitioner made analogous arguments to those raised here in Stamos v. Commissioner, 95 T.C. 624">95 T.C. 624 (1990), affd. without published opinion 956 F.2d 1168">956 F.2d 1168 (9th Cir. 1992), and Stamos v. Commissioner, T.C. Memo 1990-624">T.C. Memo. 1990-624. 2 In those cases, the above arguments were considered489 and rejected. Rather than restating our prior opinions, we repeat the words of the Fifth Circuit in Crain v. Commissioner, 737 F.2d 1417">737 F.2d 1417, 1417 (5th Cir. 1984): "We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit." 490 Because petitioner failed to assert any specific assignments of error relating to respondent's determinations, all issues raised in the notice of deficiency are deemed conceded. As such, petitioner has failed to state a claim upon which relief can be granted. Respondent's motion to dismiss will be granted. The final matter we consider is whether we should award a penalty to the United States under section 6673. Section 6673, as amended by the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7731(a), 103 Stat. 2106, 2400, provides, in pertinent part: (1) PROCEDURES INSTITUTED PRIMARILY FOR DELAY, ETC. -- Whenever it appears to the Tax Court that -- (A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (B) the taxpayer's position in such proceeding is frivolous or groundless, or * * the Tax Court, in its decision, may require the taxpayer to pay the United States a penalty not in excess of $ 25,000.The record in this case establishes that petitioner had no interest in disputing either the deficiencies or the additions to tax determined by respondent. Furthermore, it is clear that petitioner instituted *491 this action to delay the assessment and collection of tax rightfully due. Petitioner has raised only the tired, discredited arguments which are characterized as tax protester rhetoric. A petition to the Tax Court is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. Coleman v. Commissioner, 791 F.2d 68">791 F.2d 68, 71 (7th Cir. 1986). Petitioner has not filed a tax return since 1981, and appears intent on litigating each and every notice of deficiency he receives with the same arguments. Based upon the established law, petitioner's arguments are groundless. Petitioners with genuine controversies were delayed while we considered this case. Accordingly, we will require petitioner to pay a penalty to the United States in the amount of $ 7,500. Coulter v. Commissioner, 82 T.C. 580">82 T.C. 580 (1984); Abrams v. Commissioner, 82 T.C. 403 (1984). To reflect the foregoing, An appropriate order of dismissal and decision will be entered. Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioner also pursued his tax protester arguments before the Court of Appeals for the Ninth Circuit in Stamos v. United States, 900 F.2d 263">900 F.2d 263 (9th Cir. 1990). In that case, he appealed the District Court's denial of his motion to quash a summons issued pursuant to 26 U.S.C. sec. 7602 (1988)↩, and its award of attorneys' fees, on the grounds that such a summons may only be issued in connection with a tax liability involving alcohol, tobacco, firearms or explosives. The Court of Appeals for the Ninth Circuit affirmed the District Court's decision, and awarded double costs and $ 500 in fees for the appeal.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620391/	CLEMENT FOERSTEL AND MARY FOERSTEL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFoerstel v. CommissionerDocket No. 686-84.United States Tax CourtT.C. Memo 1987-546; 1987 Tax Ct. Memo LEXIS 538; 54 T.C.M. (CCH) 982; T.C.M. (RIA) 87546; October 27, 1987. John E. Crooks, for the petitioners (at trial only). John O. Kent, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows: Additions to TaxI.R.C.Tax year EndedDeficiencySection 6653(a) 112-31-78$ 11,114.12$ 555.71 12-31-7913,029.79651.49 12-31-8022,727.581,136.38 12-31-8124,435.75 * 1,221.79 In an amendment to his answer, respondent claims additional539 interest under section 6621(c) on the ground that petitioners entered into a sham transaction identical to the sham transaction described in Moore v. Commissioner,85 T.C. 72">85 T.C. 72 (1985). Petitioners have now conceded the deficiencies but dispute the additions to tax and additional interest. FINDINGS OF FACT Some of the facts have been stipulated,and the stipulated facts are incorporated in our findings by this reference. Petitioners were residents of Van Nuys, California, at the time their petition was filed. On or about December 28, 1978, petitioners paid $ 8,000 to Professional Escrow Service, Inc., in relation to a gem distributorship program referred to as "Orion USA." On their tax return for 1978, petitioners claimed a deduction of $ 32,000 as "Sec 1253 Trademark Transfer." Petitioners did not report any sales or other expenses relating to that activity for 1978. On or shortly after November 2, 1979, petitioners received a letter from Earl Martinson, Inc., containing the following statements: My company is the exclusive sales agent for a Territorial Distributorship Program involving Diamonds, Colored Precious Gems, Fine Gold Jewelry, and other products. 540 This program is similar to the Orion Program. However, it offers a much broader base of potential activity. Tax benefits may be greater and profits higher. Gem-Mart Consultants, Inc. is a corporation that functions to render merchandising assistance to Territorial Distibutors. It is also qualified to assist in your existing Orion Territorial Distributorship. Keep it in mind that your deduction was based upon a business expense; it is important that a legitimate business activity be maintained. Your giving instructions to Gem-Mart Consultants, Inc. and retaining the ultimate decision-making power will put you in business and keep you there. I am sending you a manual titled "Summary of a Tax-Sheltered Opportunity". Included in this summary is a specimen contract that may be entered into between Territorial Distributor and Gem-Mart Consultants, Inc. After reviewing the material, please feel free to call me. In order to further acquaint the Orion Licensees with the new concept of Territorial Distribution of Diamonds, Colored Precious Gems and Fine Gold Jewelry, we have scheduled two meetings, one for Saturday, November 10, 1979, and one for Saturday, November 17, 1979, at541 10:00 A.M. at the 9th Floor, 15250 Ventura Blvd., Sherman Oaks, California. We urge all of you to attend for the benefits of your tax-sheltered business. You can learn ways and means of supporting the tax shelter end of your business and other valuable information. On or about December 10, 1979, petitioners purportedly became territorial distributors of United States Distributor, Inc., executing "Contract Documents" identical to those described in Moore v. Commissioner, supra, and in Bowman v. Commissioner, T.C. Memo. 1987- , filed this date. The contract documents consisted of a 36-page (lettered and numbered) Tax Opinion Letter by Somers & Altenbach and a 13-page Terrritorial Distributorship Agreement with form exhibits A through G. The Tax Opinion Letter contained various warnings to the prospective distributor of potential attacks by the Internal Revenue Service on the deductibility of amounts relating to the distributorships. The opinion warned, among other things, of certain criteria adopted by the Internal Revenue Service for auditing perceived "abusive tax shelters." The opinion stated: E. In the present case, as in any leveraged542 tax shelter, one or more of such criteria is likely to be present. If so, as in the case of any other leveraged tax shelter, acquisition of a Territorial Distributorship may be regarded by the Service as an "abusive" tax shelter and, therefore, the likelihood that the purchaser's tax return will be subject to audit may be increased. F. Therefore, multiple write-off programs are suspect, and those who buy them are well advised to determine the risks after independent advice from competent lawyers and accountants. * * * 4. Business Merits of the TransactionThe Territorial Distributor will have a right to sell the Product within a specific area. Whether the right is pursued with sufficient diligence is a matter of money, intention and attention to duty. This is true of any business proposition and those matters are beyond the ken of this writer. However, it is assumed herein that bad business ideas must fail and good business ideas may succeed, and whether the buyer of a Territorial Distributorship herein described makes money or loses money is up to him and the buying public.The opinion analyzed in detail the purported tax benefits from the transaction on the543 assumption that each territorial distributor adopted the accrual method of accounting for his distributorship. The Territorial Distributorship Agreement identified United States Distributor, Inc., as "distributor"; American Gold & Diamond Corporation as "importer"; and described various types of "product of importer." The agreement provided: 4. IMPORTER has delegated to DISTRIBUTOR the exclusive right to distribute worldwide one hundred (100%) percent of its PRODUCT as is described in Paragraph 3 hereof for a period of fifty years beginning with July 1, 1979. 5. DISTRIBUTOR will not compete with any TERRITORIAL DISTRIBUTOR and agrees that all of the PRODUCT to which it is entitled pursuant to Paragraph 4 will be made available exclusively to TERRITORIAL DISTRIBUTORS. 6. DISTRIBUTOR hereby transfers to TERRITORIAL DISTRIBUTOR and exclusive TERRITORIAL DISTRIBUTORSHIP permitting TERRITORIAL DISTRIBUTOR to engage in the business activity as set forth herein within the Specified Territory, including the right to distribute the PRODUCT to retail and wholesale outlets within the Specified Territory. 7. TERRITORIAL DISTRIBUTOR is entitled, along with all other TERRITORIAL DISTRIBUTORS544 within the United States, to purchase the entire supply of the PRODUCT of IMPORTER on a pro rata basis with all other TERRITORIAL DISTRIBUTORS.After various statements about the importer and its product, the agreement provided: B. DISTRIBUTOR warrants that: In the event TERRITORIAL DISTRIBUTOR adopts the accrual method of accounting for the business covered by this TERRITORIAL DISTRIBUTORSHIP AGREEMENT, DISTRIBUTOR will supply at its expense a defense of the tax treatment of TERRITORIAL DISTRIBUTOR projected in the Tax Opinion Letter. Such support will include representation of the Internal Revenue Service level upon the issuance of a 30-day letter from the Internal Revenue Service (IRS Form 950(DO) or its equivalent), and defense in the United States Tax Court and the United States Court of Appeals.The agreement then set forth various percentages of stated Estimated Market Retail Price of each of the categories of product to be provided to the territorial distributors but did not contain any references to quantities of product to be sold at any price. The agreement further provided in pertinent part: 16. TERRITORIAL DISTRIBUTOR agrees to make prepayments to DISTRIBUTOR545 on all Principal Sum Annual Installment Promissory Notes delivered from TERRITORIAL DISTRIBUTOR to DISTRIBUTOR pursuant to this TERRITORIAL DISTRIBUTORSHIP AGREEMENT. Said prepayments will be in the amount of ten (10%) percent of the total cost of TERRITORIAL DISTRIBUTOR for all PRODUCT purchased from IMPORTER pursuant to Paragraph 14. A TERRITORIAL DISTRIBUTOR will be instructed by DISTRIBUTOR as to the method of payment to be utilized with reference to this prepayment requirement. All prepayments received will be applied to Promissory Notes, whether Recourse or Non-Recourse in chronological order. This prepayment requirement will terminate on December 31, 2004. * * 20. The term of the TERRITORIAL DISTRIBUTORSHIP will be 35 years commencing on the date of this agreement. 21. The TERRITORIAL DISTRIBUTORSHIP will include the Territory described in Exhibit D. 22. TERRITORIAL DISTRIBUTOR is authorized to appoint agents and dealers within the Territory. 23. In consideration of the Territorial Distributorship transferred herein, TERRITORIAL DISTRIBUTOR shall pay to DISTRIBUTOR a Principal Sum a set forth in Exhibit A, Part I, and purchase PRODUCT from IMPORTER as546 set forth in Exhibit A, Part II.Exhibit A to the Territorial Distributorship Agreement provided in part as follows: PART I PRINCIPAL SUMIn consideration of the TERRITORIAL DISTRIBUTORSHIP acquired herein, TERRITORIAL DISTRIBUTOR agrees to pay as a Principal Sum the amount set forth in Exhibit D. Said Principal Sum will be paid to DISTRIBUTOR in Annual Installments as follows: (1) One-Twelfth of the Principal Sum on the execution of this Agreement consisting of the Recourse Note set forth in Exhibit E. (2) On or before December 1, 1980, and continuing for an additional 10 years thereafter on December 1 each of said years, TERRITORIAL DISTRIBUTOR will deliver to DISTRIBUTOR: (A) cash in the amount of one-twelfth of the Principal Sum, or (B) a Non-Recourse Note in the amount of one-twelfth of the Principal Sum in the form set forth in Exhibit C, or (C) a Recourse Note in the amount of one-twelfth of the Principal Sum in the form set forth in Exhibit B, or (D) a COMBINATION OF CASH, an Exhibit C Non-Recourse Note, and an Exhibit B Recourse Note, aggregating one-twelfth of the Principal Sum. PART III MINIMUM PRODUCT PURCHASE REQUIREMENTIn consideration547 of the TERRITORIAL DISTRIBUTORSHIP transferred herein, TERRITORIAL DISTRIBUTOR agrees to purchase a MINIMUM OF PRODUCT from IMPORTER for cash. A. In 1979, TERRITORIAL DISTRIBUTOR must purchase for cash Product C or D (Colored Precious Gems) having an aggregate appraised Estimated Market Retail Price of not less than twenty-five (25) percent of the Principal Sum Annual Installment, or, in the alternative: B. TERRITORIAL DISTRIBUTOR may purchase Product C or D (Colored Precious Gems) having an aggregate Estimated Market Retail Price of not less than $ 5,000 and Product A (Diamonds) for the difference between the minimum cash purchase provided for in Paragraph A and the cost of Product C or D multiplied by 2.5. C. With reference to the Minimum Product Purchase Requirement only, the price for Product C or D (Colored Precious Gems), will be one hundred (100%) percent of its Estimated Market Retail Price. With reference to the Alternative Minimum Product Purchase Requirement including Product A (Diamonds) and Product C or D, the price for Product A will be fifty eight (58%) percent of its Estimated Market Retail Price.Exhibit B was a form of recourse promissory note548 providing for payment of "the balance of the principal indicated below in 5 equal annual installments plus accrued interest commencing on December 31, 2004." Exhibit C was a form of nonrecourse promissory note, also payable in 5 equal annual installments plus accrued interest commencing on December 31, 2004, secured by a Security Agreement. Exhibits B and C contained instructions to "(Zerox for use in years beginning 1980)." Exhibit D was a work sheet entitled "Independent Contractors Instructions and Work Sheet" containing the following instructions: 1. The basis of the Territorial Distributorship is an exclusive territory. The pricing is based upon the particular territory selected, the number of jewelry outlets inside the exclusive territory, additional jewelry outlets within the United States, and an area within or close by a foreign city. 2. Exclusive territories are selected only by UNITED STATES DISTRIBUTOR, INC. from its office in CARSON CITY, NEVADA. 3. When you offer the program, your prospect indicates PREFERENCES only, and he must understand that his preferences may no longer be available. 4. In each case, complete this work sheet before completing the549 TERRITORIAL DISTRIBUTORSHIP AGREEMENT. 5. In each case, fill in ten zip codes within the State of residence, five Cities outside the State of residence, and five foreign Cities, all in the order of preference of your prospect. 6. When the Contract Documents and this Work Sheet are received by UNITED STATES DISTRIBUTOR, INC. the exclusive territory will be selected according to the preferences indicated, if possible. Otherwise the selection will be made according to availability.Exhibit E was a form of recourse promissory note to be used in 1979. Exhibit F was an acknowledgment to be signed by the territorial distributor as follows: The undersigned acknowledges that he has either read or has had available to him for reading all of the "TERRITORIAL DISTRIBUTORSHIP CONTRACT DOCUMENTS" which consist of a SUMMARY OF BUSINESS OPPORTUNITY, a TAX OPINION LETTER, and a TERRITORIAL DISTRIBUTORSHIP AGREEMENT. Signatures on this page relate to the entire TERRITORIAL DISTRIBUTORSHIP AGREEMENT, including the SECURITY AGREEMENT, and to EXHIBITS A, B, C, D, E, F, and G, and the signatures signify that the signer has read and understands the entire TERRITORIAL DISTRIBUTORSHIP AGREEMENT, 550 including the EXHIBITS attached thereto. In the event the Territorial Distributor makes no choice of total Territory, or that the Territory chosen is not available, DISTRIBUTOR is authorized to designate a Territory for him.Exhibit G was a form of receipt for payment to independent contractor and instructions to Earl Martinson, Inc., Representative, as follows: You have two copies of the TERRITORIAL DISTRIBUTORSHIP CONTRACT DOCUMENTS with the same number. Exhibits D, E, F and G in each Manual must be filled out and fully executed. One of the Manuals is to be given to the TERRITORIAL DISTRIBUTOR, and the other is to be mailed to Professional Escrow Service, Inc. After acceptance by DISTRIBUTOR and IMPORTER, an executed copy of Exhibit F will be mailed to the TERRITORIAL DISTRIBUTOR for insertion in the copy of the Contract Documents retained by the TERRITORIAL DISTRIBUTOR. Robert F. Bowman, taxpayer in T.C. Memo. 1987-545 executed a receipt for payment to independent contractor in the form of Exhibit G, supra, and completed the "Exhibit D Work Sheet Independent Contractors Instructions and Work Sheet" used in this transaction. By those documents, petitioners551 purportedly agreed to pay $ 480,000 over 12 years for a territorial distributorship. By letter dated March 18, 1980, Professional Escrow Service, Inc., transmitted to petitioners a copy of "Exhibit D, which reflects the territories that have been assigned to your jewelry outlets." Those territories were zip code 91411, Van Nuys, California; 63125, St. Louis, Missouri; Bracciano, Italy (population 7,681); and Terni, Italy (population 75,873). On their tax return for 1979, petitioners deducted $ 40,000 as "Sec 1253 Trademark Transfer Distributorship Fee." They reported no other income or expenses relating to the purported activity. On or about December 27, 1980, petitioners executed an additional set of "Contract Documents" identical to those described in Moore v. Commissioner, supra, and Bowman v. Commissioner, supra. On their tax return for 1980, petitioners claimed a deduction of $ 48,000 as "Distrib Fee." They did not report any other income or expenses relating to the activity. On their tax return for 1981, petitioners deducted $ 60,000 as a "Distribution Fee." They reported, in relation to sales of gems and jewelry, gross receipts of $ 52,793, 552 costs of goods sold of $ 62,571, commissions and postage of $ 2,646, and a net loss of $ 72,424. In the statutory notice of deficiency, respondent disallowed the trademark transfer or distribution fees claimed for each year. Respondent also increased income in 1978 by $ 600 and decreased income in 1979 by $ 996 in relation to an activity referred to as "Moniteau coal." OPINION On the basis of our decision in Moore v. Commissioner, supra, petitioners have conceded the deficiencies in this case. They contend, however, that they should be excused from the additions to tax for negligence under section 6653(a) because they relied on the tax opinion set forth in the "Contract Documents" that they signed. They have the burden of proof with respect to the additions to tax under section 6653(a) determined in the statutory notice. With respect to the additional interest asserted for the first time by amendment to the answer, respondent has the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure.The parties stipulated to various documents, including the "Contract Documents" executed in 1979 and 1980 that established that the purported distributorships553 are identical to those found to be a sham in Moore v. Commissioner, supra, and in Bowman v. Commissioner, supra, tried and filed on the same dates as this case. As in Moore and Bowman, totally absent from the record is any evidence of sales made by petitioners within their purported territories. The evidence stipulated, therefore, establishes that the deductions claimed on petitioners' 1979, 1980, and 1981 tax returns for distributorship fees are attributable to one or more sham transactions for purposes of section 6621(c)(3)(A)(v). Thus the deficiencies attributable to disallowance of the distributorship fees in each year are subject to additional interest from December 31, 1984. See DeMartino v. Commissioner,88 T.C. 583">88 T.C. 583, 589 (1987). See also Patin v. Commissioner,88 T.C. 1086">88 T.C. 1086, 1127-1129 (1987). The $ 32,000 deduction claimed for 1978 related to a gem distributorship known as Orion USA rather than United States Distributor, Inc. The evidence includes a letter from Earl Martinson, Inc., representing that United States Distributor, Inc., is "similar to the Orion Program." The reporting of the Orion USA554 activity on petitioners' tax return for 1978 was the same as the reporting of petitioners' United States Distributor, Inc., activities in later years. Petitioners have conceded the deficiencies for all years, expressly because of our decision in Moore v. Commissioner, supra. We conclude, therefore, that Orion USA was also a sham and that the deficiency attributable thereto is also subject to interest under section 6621(c)(3)(A)(v). We have no information, however, about the activity known as "Moniteau coal." Respondent has not met his burden of proof to that extent. 2 The portion of the deficiency for 1978 attributable to that transaction does not bear interest under section 6621(c). With respect to the additions to tax under section 6653(a), petitioner Clement Foerstel testified at trial that he relied on the tax opinion that was part of the United States Distributor, Inc., contract documents. As we held in Bowman v. Commissioner, supra, such explanation is not adequate to avoid the additions to tax for negligence. 555 The language of the tax opinion warned prospective investors that they should seek independent counsel. They are not entitled to rely on professional advice unless the professional has been advised of the specific facts of their case. Both the tax opinion and the letter received by petitioners in this case from Earl Martinson, Inc., emphasized the importance of actually conducting a business in order to assure the deductions. For the first 3 years in issue here, petitioners reported no sales from the activity. The sales reported on their 1981 return have not been shown to be related to the purported exclusive territories. The substantial tax deductions that they claimed, at some multiple of their cash investment, were simply too good to be true. As the Court of Appeals for the Ninth Circuit has stated in another tax-avoidance context, "no reasonable person would have trusted this scheme to work." Hanson v. Commissioner,696 F.2d 1232">696 F.2d 1232, 1234 (9th Cir. 1983). The additions to tax for negligence are therefore sustained. To allow for computations necessitated by our conclusions as to the applicability of section 6621(c) in 1978, Decision will be entered under556 Rule 155.Footnotes1. Except as otherwise noted, all section references are to the Internal Revenue Code as amended and in effect during the years in issue. plus 50 percent of the interest due on an underpayment of $ 24,535.75.↩2. We recognize that respondent believed that the case was totally settled and was surprised when trial was necessary. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620392/	SANFORD L. and SANDRA M. ABRAMS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAbrams v. CommissionerDocket No. 6159-78.United States Tax CourtT.C. Memo 1981-355; 1981 Tax Ct. Memo LEXIS 389; 42 T.C.M. (CCH) 355; T.C.M. (RIA) 81355; July 9, 1981Sanford L. Abrams, pro se. Stanley H. Smith, Jr. and Mark W. Nickerson, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent390 determined a deficiency in petitioners' Federal income tax for the year 1975 in the amount of $ 1,421.52. The sole issue for decision is whether petitioners sustained an ordinary loss or a capital loss upon the voluntary reconveyance of real property, encumbered by a nonrecourse purchase money mortgage, to their mortgagee/sellers without any monetary consideration. FINDINGS OF FACT All of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference. Petitioners Sanford L. Abrams and Sandra M. Abrams resided in Marietta, Georgia, at the time they filed their petition in this case. They timely filed a joint Federal income tax return for 1975 with the Internal Revenue Service Center at Chamblee, Georgia. Petitioner Sandra M. Abrams is a party to this proceeding solely because she filed a joint return with her husband, and the term petitioner will hereinafter refer to Sanford L. Abrams. Petitioner has worked as a tax practitioner since 1962 and is presently employed as a Certified Public Accountant and the partner-in-charge of the tax department of the Atlanta, Georgia, office391 of Alexander Grant and Company, C.P.A.'s. On or before September 29, 1973, petitioner, Julian D. Nealy, William F. Law, Jr., and R. Park Ellis (hereinafter buyers or co-tenants) agreed to purchase certain real estate and executed an "Agreement among Tenants in Common" (hereinafter agreement) setting forth the exclusive rights, duties, and responsibilities among themselves with respect to their proposed purchase. During all relevant times herein, Julian D. Nealy was an attorney specializing in commercial real estate law with a major Atlanta law firm; William F. Law, Jr., was an officer of a real estate mortgage servicing firm in Atlanta; and R. Park Ellis was a licensed real estate broker. On September 29, 1973, petitioner and his co-tenants purchased through Ellis two tracts of approximately 57.77 acres of unimproved or undeveloped real estate (hereinafter property) located in North Fulton County, Georgia, from the executors of the estate of Wade McCurry, Sr. (hereinafter sellers). The co-tenants purchased the property as an investment and entitled their investment venture "Old Bull Pen Associates" or "Old Bull Pen Road Associates." Petitioner held his interest in the property392 as a capital asset. The total purchase price, as stated in the closing agreement, was $ 150,202. However, the sellers paid $ 211.03 of that amount as their share of the 1973 property taxes. The co-tenants paid $ 149,990.97 with a cash down payment of $ 22,319.27 and a purchase money mortgage for the balance of $ 127,671.70. The mortgage was evidenced by a secured note and a purchase money security deed on the property, both executed by Ellis. According to the terms of the note and deed, the debt was secured only by the property and not by the personal liability of petitioner or any of his co-tenants. Pursuant to the agreement, each buyer contributed at the time of the purchase $ 6,450 to cover his share of the down payment, property taxes, intangible tax, insurance, transfer tax, closing costs, and other costs pertaining to the purchase and holding of the property. Also pursuant to the agreement, Ellis executed a limited warranty deed to petitioner, Nealy, and Law, conveying to each his respective 25 percent undivided interest in the property. Although the agreement among the co-tenants required each buyer to execute a purchase money note and security deed in the face amount393 of $ 127,671.70, this was never done. The note executed by Ellis called for annual payments of interest only for the first eight years (until 1981) at the rate of seven percent beginning September 29, 1974, and annual payments of principal and interest for the next seven years (until 1988) of $ 22,576.58 commencing September 29, 1982. By the end of 1974, the co-tenants had paid the first interest payment of $ 8,937.02 on September 29, 1974, and, of course, had paid no principal. The buyers made no improvements to the property while they held title to it and claimed no depreciation deductions with respect to it. By the end of 1974 and during 1975, the real estate market in and around the Atlanta, Georgia area suffered a downturn. On December 11, 1974, Ellis, acting on behalf of the co-tenants, wrote to Wade McCurry, Jr., (hereinafter McCurry), the principal executor handling the sale of the property, requesting that the two tracts contained in the 57.77 acres be split and covered by two separate security deeds and two separate notes in order to facilitate the sale of either parcel by itself. The buyers renewed their request in two subsequent letters to the sellers' attorney, 394 Mallory C. Atkinson, Jr., coming up with a specific proposal to that effect in May 1975. On June 9, 1975, however, the sellers rejected the buyers' proposal due to the fear that the buyers might sell the more valuable front tract of the property and then, because they had no personal liability, simply walk away from the less valuable rear tract. In a letter to McCurry dated September 15, 1975, Ellis stated that the buyers were not in a position to make the interest payment due on September 29, 1975, and requested that the sellers waive the 1975 interest payment in return for the buyers' continuing to hold the property and paying the 1975 real estate taxes due in the amount of $ 480.45. By September 15, 1975, both the buyers and the sellers believed that the value of the 57.77 acres was less than the outstanding mortgage. The sellers rejected Ellis' request to waive the 1975 interest payment, and the buyers did not tender payment of the interest on September 29, 1975. On October 9, 1975, the sellers, through their attorney Atkinson, gave formal notice of default to Ellis by certified mail, return receipt requested, as required by the promissory note and the security deed. Ellis395 forwarded the sellers' notice of default to his co-tenants by a memorandum dated October 15, 1975, pointing out that the 30-day notice period would expire on November 13, 1975, and that the co-tenants would then be subject to foreclosure. On November 4, 1975, Ellis called Atkinson and reaffirmed that if the sellers would not waive the 1975 interest payment, the buyers would have to remain in default. McCurry called Ellis that same date and offered to waive all but $ 4,000 of the 1975 interest due if the buyers would also pay the 1975 property taxes. After a discussion on or about November 10, 1975, the buyers rejected the sellers' offer and decided that they would not continue to own the property or continue with the purchase agreement. On learning that the buyers did not intend to continue the purchase, Atkinson concluded that they were also not going to pay the past due property taxes for 1975. Atkinson thus forwarded the tax bills to McCurry for payment, and McCurry paid the taxes on December 3, 1975. On receipt of notices of past due taxes dated December 1, 1975, and pursuant to the advice of petitioner, Ellis also paid the 1975 taxes and interest, in the total amount of396 $ 486.79, by check dated December 8, 1975. Thereafter, the office of the Fulton County Tax Commissioner notified the buyers in letters dated December 10 and 16, 1975, that the 1975 property taxes had already been paid on December 3, 1975. Prior to November 25, 1975, Nealy discussed with Atkinson the buyers' decision to "walk away from the deal." None of the buyers wished to have their names mentioned in any advertisement for a foreclosure action, and Atkinson did not want to come to Atlanta from his offices in Macon for any foreclosure proceedings. On December 9, 1975, the buyers, relying in part on petitioner's advice from a tax standpoint, reconveyed the property to the sellers by deed. Nealy modified the deed that Atkinson had prepared by deleting references to bargained and sold and consideration, and by adding the following language at the end of the property description: "This conveyance constitutes an abandonment of the described property by the grantors and is not a sale or exchange." The sellers did not object to these recitations being included in the deed as long as they were getting their property back. After Nealy obtained the signatures of his co-tenants, he mailed397 the executed deed to Atkinson for recording and delivery to the sellers, thereby cancelling the sale, indebtedness and the entire transaction. The buyers received no monetary consideration from the sellers in return for the reconveyance, unless the sellers' payment of the 1975 property taxes can be considered as such. At the time of the conveyance, there had been no foreclosure action or threat thereof by the sellers, except the sending of the formal notice of default. At the time of the default on September 29, 1975, and continuing until the sellers received the reconveyance from the buyers, it was the intent and desire of the sellers to regain title to the 57.77 acres in the most practical and efficient manner possible for the sellers (which could include foreclosure) if the 1975 interest was not paid or if other satisfactory arrangements were not made. If the buyers had not offered to reconvey the property, the sellers would have requested them to do so and if the buyers had not complied with such a request, the sellers would have undertaken foreclosure proceedings by January of 1976. On their 1975 tax return, petitioners claimed an ordinary loss under section 165(a) and398 (c)(2) 1 in the amount of $ 6,378.12 as an abandonment loss due to the reconveyance. The parties have since stipulated that the proper amount of petitioners' loss is $ 6,266.99. 2 Respondent, however, has determined that petitioners' loss resulted from the sale or exchange of a capital asset and was thus a long term capital loss under section 165(f), 1211, and 1212. OPINION Sections 165(a) and (c)(2) 3 allow a deduction from ordinary income for losses incurred in transactions399 entered into for profit. However, section 165(f) 4 limits this allowance by providing that losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212. The parties have stipulated that petitioners' interest in the mortgaged property was a capital asset. Therefore, the only question is whether petitioners' reconveyance of the property to the mortgagee was a "sale or exchange." Petitioners argue that their voluntary reconveyance of the property to the mortgagee was an abandonment and did not constitute a sale or exchange, since (1) the transaction400 was not equivalent to a foreclosure sale, and (2) they received no consideration from the extinguishment of their nonrecourse indebtedness. This Court has already rejected those arguments in Freeland v. Commissioner, 74 T.C. 970">74 T.C. 970 (1980) and Arkin v. Commissioner, 76 T.C. (June 25, 1981). 5In Freeland v. Commissioner, supra, at 982-983, we held that: petitioner's voluntary reconveyance of the property to the mortgagee for no monetary consideration (boot) was a sale within the meaning of sections 1211 and 1212 of the Code, even though petitioner had no personal obligation on the mortgage debt, the fair market value of the property at the time of the reconveyance was less than the unpaid balance due on the mortgage debt, and petitioner had received no tax benefits in the form of depreciation deductions with respect to the property while he held it. We concluded there, as we must in this case, that the taxpayer's loss was401 a capital loss, not an ordinary loss. If anything, the facts in this case are even stronger than those in Freeland. Here the payment by the sellers of the 1975 property taxes that were past due on the property might well constitute "boot" or consideration received by the buyers. See 74 T.C. at 981. The facts also clearly show that if the buyers had not voluntarily reconveyed the property, the sellers would have taken steps, including foreclosure proceedings, to get the land back. On its facts, this case is perhaps closer to the traditional foreclosure situation in Helvering v. Hammel, 311 U.S. 504">311 U.S. 504 (1941) than to the voluntary abandonment situation in Freeland. In any event, our opinion in Freeland is dispositive of this case. Petitioners' loss was a capital loss subject to the limitations in sections 1211 and 1212. Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year here involved. ↩2. The computation of this amount is set out at length in paragraph 12 of the stipulation. The Court permitted the parties to file supplemental briefs to consider the Court's opinion in Freeland v. Commissioner, 74 T.C. 970">74 T.C. 970↩ (1980). In his supplemental brief, respondent took the opportunity to argue that the evidence of record showed petitioner's loss was only $ 6,099.88 and to come up with new computations in support of that figure. The Court will disregard this argument and rely upon the loss figure stipulated by the parties.3. 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-- (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and ↩4. (f) Capital Losses↩.--Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in section 1211 and 1212.5. See also Hope v. Commissioner, T.C. Memo 1981-324">T.C. Memo. 1981-324; De Gennaro v. Commissioner, T.C. Memo 1980-486">T.C. Memo. 1980-486; and LaPort v. Commissioner, T.C. Memo. 1980-355↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620394/	GERALDINE G. HALL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHall v. CommissionerDocket No. 6743-79.United States Tax CourtT.C. Memo 1980-419; 1980 Tax Ct. Memo LEXIS 176; 40 T.C.M. (CCH) 1349; T.C.M. (RIA) 80419; September 22, 1980, Filed 176 Petitioner was married and domiciled in Louisiana. She filed her income tax return as "married filing separately." Held: Under Louisiana community property law, petitioner is required to report one-half of the total income of the marital community and is entitled to one-half of the total allowable deductions and credits. Geraldine G. Hall, pro se. Joseph R. Goeke, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1976 in the amount of $1,321.00 and asserted an addition to tax in the amount of $30.39 under section 6651(a), I.R.C. of 1954, for failure to file a timely return without reasonable cause. After post-trial reexamination of items in dispute and concessions by the parties, the amount of deficiency in issue is $969.00 against which an increase in withholding credits of $762.75 results in an underpayment of $207.25. Respondent now concedes that petitioner is not liable for the addition to tax. Therefore, the issues remaining for decision are: (1) whether, 178 under Louisiana community property laws, petitioner must compute gross income based upon one-half of the total community income received by her husband and her in 1976, and (2) whether petitioner is entitled to itemized deductions in excess of the amount allowed by respondent. FINDINGS OF FACT Petitioner resided in Baton Rouge, Louisiana at the time the petition herein was filed. She filed her Federal income tax return as "married filing separately" for the calendar year 1976 with the Internal Revenue Service Center at Austin, Texas. Respondent has offered into evidence the 1976 tax returns of petitioner and Mr. Claudius A. Hall. Petitioner does not contend that the returns are not those of her husband and her. We therefore find that the returns submitted were those of petitioner and her husband. Such returns are incorporated herein by this reference. Petitioner was married to Claudius A. Hall under the laws of Louisiana throughout 1976. They were not legally separated or divorced at any time during 1976 and resided together with their children. Petitioner and her husband divided the responsibility for paying household expenses. For instance, petitioner's husband paid179 the rent and utility bills while petitioner paid for food and other necessities for herself and the children. During the year in issue, petitioner earned $11,454.14 as a teacher at Southern University, Baton Rouge, Louisiana. Claudius A. Hall earned a total of $19,600 from the following sources: Point Coupee Parish School Board$12,306Pinkerton, Inc.7,264Interest30$19,600Claudius A. Hall held two jobs during 1976. He normally would drive to his teaching job in the morning and return to his home in the afternoon for a total distance of about 60 miles. On days when he worked as a night watchman at a local bank, Mr. Hall normally would make a brief stop at his home, and then would drive about 10 miles to his job. At the end of the evening, he would drive the same distance back to his home. OPINION The first issue for our consideration is whether petitioner is liable for tax on one-half of all of the community income during the year in issue. It is well settled under Louisiana law that the earnings of each party to a marriage during the term of the marriage, are community property. Louisiana Civil Code Arts. 2334, 2402. 180 1 The nature of the community interest was described in Phillips v. Phillips,160 La. 813">160 La. 813, 825-826, 107 So. 584">107 So. 584, 588 (1926), as follows: The wife's half interest in the community property is not a mere expectancy during the marriage; it is not transmitted to her by or in consequence of a dissolution of the community. The title for half of the community property is vested in the wife the moment it is acquired by the community or by the spouses jointly, even though it be acquired in the name of only one of them. Therefore, under Louisiana law, a wife owns a vested one-half interest in the community, and she has "the obligation, not merely the right, 181 to report half the community income" on her separate income tax return. United States v. Mitchell,403 U.S. 190">403 U.S. 190, 196 (1971); United States v. Malcolm,282 U.S. 792">282 U.S. 792, 794 (1931). Petitioner argues that because she had no control over her husband's earnings, expenditures or encumbrances, she should not be taxed on one-half of her husband's income. While it is true that the Louisiana Civil Code places the husband at the head of the marital partnership, 2 the wife's interest in community property is vested immediately on acquisition and is equal to her husband's interest on dissolution. The wife's ownership rights cannot be defeated by the husband's powers of management because her rights are protected by Louisiana law. For example, while a husband can sell community property without his wife's consent, a wife has the right to sue her husband or his heirs for alienation of community property made in fraud. Louisiana Civil Code Art. 2404. Alternatively, a wife may demand an accounting for the husband's separate enrichment from community property. Creech v. Capital Mack, Inc.,287 So. 2d 497">287 So.2d 497, 508 (La. 1973). See also Succession of Wiener,203 La. 649">203 La. 649, 665-669, 14 So. 2d 475">14 So.2d 475, 480-482 (1943).182 Because Federal tax liability follows ownership as determined by state law, United States v. Mitchell,supra at 197, and is not determined by looking at which spouse controls the property, we hold that each spouse must report one-half of the community income.While petitioner must report one-half of the community income, she claims that she is also entitled to a theft loss deduction under section 165(c)(3) for the portion of her husband's earnings to which she had a legal ownership claim but to which her husband never gave her possession. Petitioner relies on the interpretation of Louisiana property law and Federal tax law as set forth by Judge Wisdom in Bagur v. Commissioner,603 F.2d 491">603 F.2d 491, 501-503 (5th Cir. 1979), to afford her a measure of relief. In Bagur, parties to the marriage were living separate and apart. The husband appropriated183 community property for his own use. The wife had no knowledge of the amount of her husband's income or the uses to which it was put. She had absolutely no control over his income and derived no benefit therefrom. The Circuit Court held that it could not find that the husband was a thief because of the Louisiana "head and master" provision, see n. 2, supra, but that the theft loss deduction was controlled by Federal tax law. A theft loss required a showing of an intent to deprive a wife permanently of her share of community income. This could be inferred from "a husband's wanton appropriation of community assets in pursuit of his own pleasure or needs." Bagur v. Commissioner,supra at 502. In the instant case, petitioner does not dispute that she was married to Claudius A. Hall throughout the year in question. Unlike the situation in Bagur v. Commissioner,supra, the record herein shows that petitioner and her husband shared a single residence and divided the costs of maintaining the household. Even if it is true that petitioner had no knowledge of her husband's earnings or outside expenditures, it cannot be said that she did not184 enjoy the fruits of his earnings--one-half of which she owned under Louisiana community property law. Furthermore, she has not shown that Mr. Hall wantonly appropriated community assets for his personal pleasure. While we sympathize with the picture of the unhappy marital situation painted by petitioner, we are forced to conclude that petitioner's contention is without merit. Petitioner is not entitled to take a deduction for theft loss in the amount of her husband's income that she is required to report. Petitioner asserts that to find her liable for tax on the portion of community income earned by her husband would be unfair because she had no access to her husband's records of income or deductions at the time she was preparing her return. These facts, even if true, would relate to whether petitioner acted reasonably under the additions to tax provisions and not to the legal issue of ownership of income. Respondent, however, has conceded the issue of any addition to tax under section 6651(a) for failure to file a timely return, and no other addition is in issue. We therefore find petitioner's argument inapposite here. Finally, petitioner argues that economic and social185 patterns have changed since the enactment of community property laws. More wives are working in the business world and are serving as the "breadwinner" of the family. Such changes have accentuated the potential for inequities in the Louisiana system that makes the husband the "head and master" of the community. Again, however, we are bound by a long line of Supreme Court decisions and by the principle established in Golsen v. Commissioner,445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. den. 404 U.S. 940">404 U.S. 940 (1971), to hold that "ownership velnon is a sufficient and constitutional basis for imposing federal tax liability." Bagur v. Commissioner,supra at 500. See also Poe v. Seaborn,282 U.S. 101">282 U.S. 101, 109-110 (1930). Although changes in property laws may be appropriate to keep pace with social developments, it is the role of the state legislatures to make such changes. As the Supreme Court stated in United States v. Mitchell,supra at 205, "It must be conceded that these cases are 'hard' cases and [are] exceedingly unfortunate * . * * The law, however, is clear. The taxes were due. * * * The186 'fault,' if fault there be, * * flows from the settled principles of the community property system." We will not declare the Louisiana community property system or the automatic male mastership of the legal community in Louisiana unconstitutional when the United States Supreme Court since at least the year 1900 has been presented with similar factual settings and has failed to so act. Hansen v. Commissioner,T.C.Memo. 1977-163. While petitioner is responsible for one-half of the total community income, she is also entitled to one-half of the deductions and credits that are allowable to the community. Johnson v. Commissioner,72 T.C. 340">72 T.C. 340, 347 (1979). Petitioner has the burden to put forth evidence to support each deduction or credit claimed. Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioner was given the opportunity to substantiate her deductions before trial, at trial, and after trial. Her husband's return was audited and he was given the opportunity to substantiate his deductions. In addition, in the interest of fairness, petitioner was given the chance after trial to submit proof with respect to deductions disallowed on187 Mr. Hall's return. Based upon evidence produced at that time, respondent conceded additional deductions. The only deductions upon which evidence was presented but still disallowed by respondent were as follows: AmountPurposeCheck to YMCA$100.00Family membershipFee paid to Guaranty Bank6.00Overdraft fee on Claudius Hall'sand Trustchecking accountCheck to Claudius A. Hall10.00Part-payment for usher'sto Usher's Board-Mt. ZionuniformCost of daily newspaper23.40Subscription We note that only the deductibility of these items and not the amount thereof is in issue. Petitioner claims that the $100 paid to the YMCA was a charitable contribution. Respondent concedes that a separate $15 payment in excess of the $100 annual membership dues is deductible as a charitable contribution under section 170, but asserts that the $100 dues was a personal expense and is therefore not deductible. At trial, petitioner testified that she paid the $100 as dues. When she realized that no one in the family would use the facilities, she did not attempt to get the dues refunded. Rather, she claimed that she left the money as a contribution to the188 YMCA, but received no acknowledgement receipt. Where dues paid to a charitable organization are reasonably commensurate with the value of benefits associated with such membership, no portion of the dues is deductibel as a charitable contribution. The mere fact that petitioner and her family chose not to use the facilities of the YMCA does not permit her to take a charitable deduction. In our opinion, petitioner has failed to prove that the dues payment was in reality a contribution, and was not made in return for the quid pro quo of the right to use the facilities and programs of the YMCA. With respect to the fee paid on overdraft checks by Mr. Hall, the payments are not interest payments. They are in the nature of a service charge for the handling and returning of checks. Such fees on a personal checking account are personal expenses and hence nondeductible. Section 262. Similarly, Mr. Hall's $10 payment to the Usher's Board-Mt. Zion Baptist Church was not part of the Halls' charitable contribution to the church. The payment was for uniforms that Mr. Hall wore as a church usher, and therefore was a personal expense. Section 262. The cost of the daily newspaper was also189 a personal expense. It was not an ordinary and necessary expense of either petitioner's or Mr. Hall's job. Therefore, it is not deductible as a business expense under section 162. Finally, Mr. Hall claimed on his return a deduction of $994 for travel expenses. On audit, respondent allowed only $448.50. The only relevant evidence put forth at trial related to Mr. Hall's commuting expenses. It is well accepted that commuting expenses are not deductible. We therefore sustain respondent's determination that Mr. Hall was entitled to $448.50 as a deduction for travel expense. Accordingly, petitioner is allowed one-half of that amount as a deduction in computing her adjusted gross income. See section 62(2)(c). Decision will be entered under Rule 155.Footnotes1. For instance, with respect to the marital community, the Louisiana Code provides: * * This partnership or community consists of the profits of all the effects of which the husband has the administration and enjoyment, either of right or in fact, of the produce of the reciprocal industry and labor of both husband and wife, and of the estate which they may acquire during the marriage, either by donations made jointly to them both, or by purchase, or in any other similar way * * *. La. Civ. Code Art. 2402↩.2. See La. Civil Code Art. 2404↩, which states in part that "[the] husband is the head and master of the partnership or community of gains; he administers its effects, disposes of the revenues which they produce, and may alienate them by an onerous title, without the consent and permission of his wife."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620395/	JAMES D. STEELE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSteele v. CommissionerDocket No. 32768-85United States Tax CourtT.C. Memo 1986-410; 1986 Tax Ct. Memo LEXIS 200; 52 T.C.M. (CCH) 357; T.C.M. (RIA) 86410; September 2, 1986. James D. Steele, pro se. Roslyn G. Taylor, for the respondent. GOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge:201 This case was heard pursuant to the provisions of section 7456(d)(3) of the Internal Revenue Code of 1954 and Rules 180, 181, and 182 of the Tax Court Rules of Practice and Procedure.1Respondent determined deficiencies in petitioner's Federal income tax and additions to tax for the taxable years 1978 to 1982, inclusive, as follows: 19781979198019811982Income Tax$5,030.00$5,549.00$6,855.00$7,461.00$4,643.00Additions to TaxSection 6651(a)101.00576.00913.751,534.25636.75Section 6653(a)251.50277.45342.75Section 6653(a)(1)373.05232.15Section 6653(a)(2) *Section 6654(a)61.00183.00445.00199.00The issues for our decision are (1) whether petitioner is liable for income taxes on the income shown in the notice of deficiency, (2) whether petitioner202 is liable for additions to tax under sections 6651(a), 6653(a), and 6654(a), and whether we should award damage pursuant to section 6673. Petitioner resided in Augusta, Georgia, at the time his petition was filed. Most of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated by reference. For the taxable year 1978, petitioner filed a Form 1040, U.S. Individual Tax Return, which he signed. The only information contained on the form was his name and address. The blocks marked for social security number, occupation, filing status, and exemptions, were marked "object self incrimination" [sic]. Lines 8, 9, 10C, 11 through 27, 30, 32, 36, 38 through 45, 48 through 53, and 55 through 61 of the Form 1040, were also marked "object self incrimination" [sic]. At the top of the form the following was printed, "I offer to amend or refile this return exactly as you wish it, if you please show me how to do so without waiving my Constitutional rights". By letter dated August 28, 1979, mailed registered mail, return receipt requested, the Director of the Western Region Internal Revenue Service Center informed petitioner that203 the Form 1040 received from him for the 1978 tax year was not acceptable as an income tax return because it did not supply information required by law, and did not comply with Internal Revenue Code requirements. For each of the taxable years 1979, 1980, and 1981, petitioner signed and filed a Form 1040, U.S. Individual Income Tax Return, exactly in the same manner as the 1978 Form 1040. For the taxable year 1982, petitioner filed and signed a Form 1040A, U.S. Individual Income Tax Return, exactly in the same manner as in all the previous years at issue, except without the notation printed at the top of the forms for 1978 through 1981. On August 10, 1983, the Director of the Western Region, Internal Revenue Service Center, mailed another registered letter to petitioner informing him that the Form 1040A received from him for the 1982 tax year did not contain information required by law and that it did not comply with certain Internal Revenue Code requirements. In his notice of deficiency, respondent determined that petitioner failed to report wages which petitioner received for tax years 1978 through 1982 in the amounts and from the sources listed below: YearEmployerAmount1978Howard P. Foley Co.$2,565.00Tennessee Valley Authority8,940.00Fischbach and Moore, Inc.1,306.00Watson-Flagg Electric Co., Inc.4,112.00Bechtel Power Corp.5,971.00Total$22,894.001979Code Electric Corp.$10,559.00Bechtel Power Corp.14,407.00Total$24,966.001980Code Electric Corp.$28,059.00Bechtel Power Corp.257.00Total$28,316.001981Code Electric Corp.$ 785.00Bechtel Power Corp.15,731.00Dynalectric Co. of New York13,578.00$30,094.001982Bechtel Power Corp.$ 7,982.00Dynalectric Co. of Nevada4,773.00Nevada Employment SecurityDepartment3,808.00Simmons Electric Corp.1,438.00Jensen Electric, Inc.5,886.00Total$23,887.00204 Petitioner does not dispute that he received income from the above listed sources during the years in issue. However, he contends that (1) he is denied due process of law by not being afforded a right to a jury trial guaranteed by the Seventh Amendment to the Constitution and (2) he will be forced to waive his right against self-incrimination provided by the Fifth Amendment to the Constitution if he is required to supply information requested on Forms 1040 and 1040A and to testify at trial. At the trial of this case, counsel for respondent stated that there is no pending criminal prosecution against petitioner, nor is one contemplated. Petitioner bases his objections to complying with the Internal Revenue laws upon long rejected arguments frequently asserted by tax protesters. We will now address them. Petitioner has not been wrongfully denied a jury trial. The Seventh Amendment does not apply to suits against the United States, because there was no common law action against the sovereign. McElrath v. United States,102 U.S. 426">102 U.S. 426, 440 (1880). Thus, it has repeatedly been held that there is no constitutional right to a jury trial in the Tax Court. Phillips v. Commissioner,283 U.S. 589">283 U.S. 589, 599 n. 9 (1931);205 McCoy v. Commissioner,696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983), affg. 76 T.C. 1027">76 T.C. 1027 (1981); Lonsdale v. Commissioner,661 F.2d 71">661 F.2d 71, 72 (5th Cir. 1981), affg. a Memorandum Opinion of this Court; Dorl v. Commissioner,507 F.2d 406">507 F.2d 406 (2d Cir. 1974), affg. 57 T.C. 720">57 T.C. 720 (1972); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1115 (1983). To invoke the Fifth Amendment privilege, petitioner must be faced with substantial hazards of self-incrimination that are real and appreciable, and must have reasonable cause to apprehend such danger. Edwards v. Commissioner,680 F.2d 1268">680 F.2d 1268, 1270 (9th Cir. 1982), affg. per curiam an unreported decision of this Court; United States v. Neff,615 F.2d 1235">615 F.2d 1235, 1239 (9th Cir. 1980), cert. denied 447 U.S. 925">447 U.S. 925 (1980). A tax return form which contains no information from which income tax liability can be calculated but merely has assertions of the privilege against self-incrimination does not constitute a tax return within the meaning of the Internal Revenue laws. United States v. Neff,supra at 1238. In order for a document206 to constitute a tax return of a taxpayer, four criteria must be satisfied. First, it must contain sufficient data from which respondent can compute and assess the taxpayer's liability; second, it must purport to be a return; third, it must represent an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. Beard v. Commissioner,82 T.C. 766">82 T.C. 766, 777 (1984), affd. per curiam 793 F.2d 139">793 F.2d 139 (6th Cir. 1986). Clearly, the Forms 1040 and 1040A filed by petitioner were not income tax returns under the statute. The requirement that citizens file a yearly income tax return does not, of itself, violate their privilege against self-incrimination. This conclusion is implicit from the Supreme Court holding in United States v. Sullivan,274 U.S. 259">274 U.S. 259 (1927), that the privilege does not justify an outright refusal to file any tax return at all. United States v. Neff,supra at 1235. We find that there were no substantial hazards of self-incrimination that were real and appreciable and that confronted petitioner at the time he filed his207 Forms 1040 and 1040A, or when this case was called for trial. Therefore, he cannot hide behind the privilege against self-incrimination in his refusal to testify or file Forms 1040 and 1040A that comply with Internal Revenue Code requirements. Respondent's determination of the income tax deficiencies is presumptively correct and the burden of proof is upon petitioner to show that respondent's determination is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioner's Fifth Amendment privilege against self-incrimination does not relieve petitioner of his burden of proof under our Rule 142(a), particularly where, as here, we have concluded that his Fifth Amendment claim is without merit. Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 637-638 (1979); see Roberts v. Commissioner,62 T.C. 834">62 T.C. 834 (1974). See also Rockwell v. Commissioner,512 F.2d 882">512 F.2d 882 (9th Cir. 1975), cert. denied 423 U.S. 1015">423 U.S. 1015 (1975). Petitioner admitted that he received income from all of the sources shown in the notice of deficiency and has offered no evidence to show that any of the amounts contained therein are incorrect.208 Accordingly, we sustain respondent's determination. Respondent also determined that petitioner was liable for additions to tax under section 6651(a)(1) for failure to file income tax returns. Petitioner has stipulated and we have found that the Forms 1040 filed for tax years 1978 through 1981, and the Form 1040A filed for tax year 1982, were not income tax returns as contemplated under the Internal Revenue Code. Petitioner was required to file returns for all years at issue. See sec. 6012; sec. 1.6012-1, Income Tax Regs. Further, petitioner presented no evidence excusing himself from those requirements other than his Fifth Amendment argument which we have found to be without merit. Accordingly, we find that he is liable for the additions to tax under section 6651(a). Thompson v. Commissioner,78 T.C. 558">78 T.C. 558, 562-563 (1982). Respondent also determined that petitioner was liable under section 6653(a) for additions to tax for negligence and intentional disregard of the rules and regulations. This determination will be upheld unless petitioner shows that the underpayments of tax were not due to negligence or intentional disregard of the rules and regulations. McGahen v. Commissioner,76 T.C. 468">76 T.C. 468, 484 (1981),209 affd. without published opinion 720 F.2d 664">720 F.2d 664 (3d Cir. 1983). Again, petitioner's sole argument is that he is protected by the Fifth Amendment, which we reject. Consequently, we find for respondent on this issue. Finally, we must decide whether to award damages to the United States under section 6673. This Court may award damages of up to $5,000 whenever the taxpayer institutes or maintains proceedings before us primarily for delay or the taxpayer asserts a frivolous or groundless position in such proceedings. We find that petitioner's contentions are frivolous and groundless in light of the cases cited above (and numerous others considering these same arguments), and in light of our admonition to him during a pretrial conference where we explained why his arguments lacked merit. We are satisfied that petitioner has instituted this proceeding primarily for delay. Abrams v. Commissioner,82 T.C. 403">82 T.C. 403 (1984); Sydnes v. Commissioner,74 T.C. 864">74 T.C. 864, 870-873 (1980), affd. 647 F.2d 813">647 F.2d 813 (8th Cir. 1981). Accordingly, we award $5,000 of damages to the United States. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50% of interest due on underpayment of $6,137.00 ** 50% of interest due on underpayment of $2,547.00↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620397/	JACK WHITELEY AND ALMA H. WHITELEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWhiteley v. CommissionerDocket No. 27456-89United States Tax CourtT.C. Memo 1991-297; 1991 Tax Ct. Memo LEXIS 343; 62 T.C.M. (CCH) 56; T.C.M. (RIA) 91297; July 3, 1991, Filed 343 Jack and Alma H. Whiteley, pro se. Jay M. Erickson, for the respondent. COUVILLION, Special Trial Judge. COUVILLIONMEMORANDUM FINDINGS OF FACT AND OPINION This case is before the Court on a motion for litigation costs under section 7430 1 and Rule 231. Neither party requested a hearing, and the Court concludes that a hearing is not necessary for the proper consideration and disposition of this motion. Rule 232(a)(3). FINDINGS OF FACT Respondent examined petitioners' 1986 Federal income tax return and issued a notice of proposed changes dated June 5, 1989. The proposed changes were based upon information returns (Forms 1099) showing interest paid to petitioners during 1986, as reported by payors, totaling $ 20,760. Petitioners' tax return only reported $ 14,463 in interest income for 344 1986. Respondent mailed a notice of deficiency to petitioners dated October 5, 1989, determining a deficiency of $ 977 in petitioners' 1986 Federal income tax and additions to tax under section 6653(a)(1)(A) and (B), respectively, of $ 49 and 50 percent of the interest payable under section 6601 with respect to the portion of the underpayment attributable to negligence. Petitioners filed their petition with this Court on November 14, 1989. When the petition was filed, petitioners were residents of Missoula, Montana. Respondent's answer was filed January 19, 1990. On January 23, 1990, and January 30, 1990, counsel for respondent received letters from two banks indicating that the discrepancy in the interest income reported by the payors and petitioners was due to a duplication of amounts on Forms 1099. These letters were provided to respondent's counsel by petitioners' representative, Robert G. Steele, CPA. Counsel for respondent then referred the case to the Appeals Office of the Internal Revenue Service and a settlement conference was scheduled and attended on behalf of petitioners by their representative. Petitioners and respondent stipulated in October 1990 that no additional345 taxes or additions to tax were due, and a decision reflecting the stipulation of the parties was entered by this Court on December 7, 1990. Thereafter, petitioners submitted to the Court documents entitled "Demand For Fees And Costs" and "Amendment To Demand For Fees And Costs," which were filed, respectively, as a "Motion For Litigation Costs" and an "Amendment To Motion For Litigation Costs" by order of this Court dated March 5, 1991. The Decision entered December 7, 1990, was vacated and the decision document filed as a Stipulation of Settlement to permit consideration of petitioners' motion for litigation costs. Petitioners contend that documentation sufficient to establish the discrepancy between their tax return and the payors' Forms 1099 was given to the Internal Revenue Service before the statutory notice of deficiency was issued. Respondent counters that this information was not provided until after the answer in this case had been filed. As noted later, this factual issue is of no significance in considering the merits of petitioners' motion. Petitioners next contend that the settlement conference with the Appeals Office was not necessary because the information given346 to respondent's counsel in January 1990 was sufficient to establish their case. In support of their contention, petitioners note that, at the settlement conference, the appeals officer agreed to settle the case in petitioners' favor without requiring any additional documentation and came to the settlement conference with already prepared decision documents whereby respondent conceded the case. Thus, petitioners argue they are entitled to administrative and litigation costs because (1) the notice of deficiency should not have been issued because information sufficient to establish that their return properly reported all interest income had been presented to the Internal Revenue Service prior thereto; and (2) after the petition was filed, the case could have been settled by mail without the necessity of petitioners' representative preparing for and attending an appellate conference when the appeals officer for respondent agreed to concede the case based solely on the information submitted to respondent's counsel in January 1990, shortly after respondent's answer had been filed in this case. OPINION A taxpayer who substantially prevails in an administrative or court proceeding may347 be awarded a judgment for reasonable administrative and litigation costs incurred in such proceeding. Section 7430(a)(1) and (2). To be entitled to such an award, the taxpayer must be the "prevailing party," and must have "exhausted the administrative remedies available to such party within the Internal Revenue Service." Section 7430(a) and (b)(1). Respondent does not contend that petitioners did not exhaust administrative remedies available to them within the Internal Revenue Service. Accordingly, the issue for decision is whether petitioners are the prevailing party. A taxpayer is considered the prevailing party only if it is established that: (1) the position of the United States in the proceeding was not substantially justified; (2) the taxpayer has substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented; and (3) the taxpayer had net worth not in excess of 2 million dollars at the time the proceeding was commenced. Section 7430(c)(4)(A). Respondent concedes that petitioners have satisfied the second and third requirements above but contends that the first requirement has not been satisfied. 348 Accordingly, the issue is whether "the position of the United States in the proceeding was not substantially justified." In deciding this issue, the Court must first identify the point in time at which the United States is considered to have taken a position and then decide whether the position taken from that point forward was not substantially justified. Under section 7430(c)(7), the term "position of the United States" means: (A) the position taken by the United States in a judicial proceeding * * * and (B) the position taken in an administrative proceeding * * * as of the earlier of -- (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.No notice of decision of the Appeals Office of the Internal Revenue Service was received by petitioners prior to the date of the notice of deficiency. Therefore, the United States is considered to have taken a position on October 25, 1989, the date the notice of deficiency was issued by respondent. It is from that date forward the Court must decide whether respondent's position was not substantially justified. 349 Whether respondent's position was not substantially justified turns on a finding of reasonableness, based on all the facts and circumstances, as well as the legal precedents relating to the case. , affd. . The Court must consider the basis for respondent's legal position and the manner in which the position was maintained. . The fact that respondent eventually loses or concedes the case does not establish an unreasonable position. . The reasonableness of respondent's position and conduct necessarily requires considering what respondent knew at the time. Cf. ; . Petitioner has the burden of establishing that respondent's position was unreasonable. Rule 232(e). In this case, the reasonableness of respondent's position turns upon when the facts became known to respondent that the payors' reports of petitioners' 350 1986 interest income were erroneous, and whether respondent acted reasonably with respect thereto once this information became known to respondent. Although petitioners allege that information sufficient to establish their position was provided to the Internal Revenue Service prior to the date of the notice of deficiency, under section 7430(c)(7), it is respondent's actions after that date that are relevant to deciding the issue of whether respondent's position was substantially justified. Respondent admits that information establishing that respondent's position was in error was provided to respondent's counsel in January 1990, shortly after respondent's answer was filed in this case. Petitioners contend that, after respondent's counsel obtained the necessary information, respondent unreasonably delayed settlement of the case by referring the matter to the Appeals Office, where their representative was required to spend unnecessary time in preparation for and attending a settlement conference. The Court concludes that respondent's actions in referring the matter to the Appeals Office for consideration of the documentary evidence submitted by petitioners, and the subsequent setting*351 of a settlement conference by the Appeals Officer at which the case was promptly conceded, were not unreasonable. On this record, petitioners have not established that the position of the United States was not substantially justified. The notice of deficiency was issued based upon Forms 1099 filed with respondent by payors which identified petitioners as recipients of interest income which was not reported on their tax return. Respondent did not err in interpreting the Forms 1099 filed with the Internal Revenue Service. The banks, not respondent, made the error. Under section 7430(c)(7) and the facts of this case, respondent's conduct is reviewed beginning with the date the notice of deficiency was issued. Upon consideration of the evidence presented by petitioners, after respondent's answer was filed, establishing that the banks erred in filing the Forms 1099, respondent conceded the case. The Court holds, therefore, that respondent's position in this case was substantially justified. Petitioners' motion for litigation costs will be denied. An appropriate order and decision will be entered.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620398/	Allegheny County Auto Mart, Inc. v. Commissioner.Allegheny County Auto Mart, Inc. v. CommissionerDocket No. 38166.United States Tax Court1953 Tax Ct. Memo LEXIS 286; 12 T.C.M. (CCH) 427; T.C.M. (RIA) 53140; April 21, 1953Samuel M. Rosenzweig, Esq., 1401 Law and Finance Building, Pittsburgh, Pa., for the petitioner. Edward L. Cobb, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $6,996.01 in income tax of the petitioner for 1948. The287 only issue is whether the Commissioner erred in disallowing an alleged loss of $14,000 on the disposition of the property at 5860 Baum Boulevard. Findings of Fact The petitioner, a Pennsylvania corporation, filed its return for 1948 with the collector of internal revenue for the Twenty-third District of Pennsylvania. The petitioner was incorporated on March 17, 1947 to engage in the retail used car business. Weisman and two others each owned one-third of its stock. It started in business in the spring of 1947 on a property at 5316 Liberty Avenue, Pittsburgh, which it leased on March 1, 1947 for one year and two months at a rental of $200 a month. The property was improved with a three-story brick building and a two-story garage in the rear. The size of the lot is not shown. The lease contained a provision that it could be terminated upon 60 days' notice. The lessor notified the petitioner on July 7, 1947 that the property had been sold. The new owners demanded a new lease and such a lease was entered into on September 10, 1947 for a period of seven and two-thirds months at a rental of $350 a month. That lease also contained a provision that it could be terminated upon 60 days' 288 notice. The property was again sold and the petitioner entered into a new lease with a new owner on January 1, 1948 for a period of one year at a rental of $500 a month. That lease also contained a provision that it could be terminated upon 60 days' notice. The record does not show how long the petitioner continued to occupy that property. The business of the petitioner had increased beyond the original expectations of its stockholders and it began in June 1947 to look for a suitable location which it could buy and on which it could conduct its business. It engaged a real estate broker to find it a suitable used car lot on Baum Boulevard. The real estate agent found a property and a special meeting of the board of directors of the petitioner was held on June 5, 1947 to authorize the purchase of it for a price not to exceed $23,500. The deal fell through due to no fault of the petitioner or the real estate agent. The board of directors of the petitioner held another special meeting on September 15, 1947, the minutes of which include the following: "Moved, that the President and Secretary are authorized and directed to enter into an agreement of purchase for all that certain289 real estate known and numbered as 5864 Baum Boulevard, PittsburghPennsylvania, at a price not to exceed $24,000, and to execute all necessary agreements, mortgages, documents, bonds, and all necessary papers to effectuate said purchase. "Moved, that the President and Secretary are herewith authorized and directed to sign the necessary purchase agreements for that property known as those certain lots or pieces of ground situate in the Eighth Ward of the City of Pittsburgh, Pennsylvania, being parts of Lots No. 78, all of Lots No. 79, 80 and 81, in the Mellon's Plan of Baum Grove Property, being approximately 170 feet on Baum Boulevard and a depth of 115 feet to Commerce Way, at a price not to exceed $50,000, and for this purpose to execute all the necessary bonds, mortgages, agreements, and other documents necessary for the purchase thereof. "Moved, that the President and Secretary are herewith authorized and directed to negotiate, effectuate and complete the sale of property at No. 5864 Baum Boulevard, at a proper price, after purchase of the above 170 foot property is made, and for this purpose to exercise all necessary deeds, documents and other papers requisite thereto." 290 The property referred to in the above minutes as No. 5864 Baum Boulevard is also known as 5860 Baum Boulevard and hereafter will be referred to by the latter number. The other property referred to in the minutes is known as 5820 Baum Boulevard. It was practically a vacant lot. Weisman learned in September 1947 that the property at 5860 Baum Boulevard could be purchased and he negotiated with Norbert Stern, one of the owners of that property, in October 1947 as a result of which the petitioner entered into an agreement dated October 27, 1947 with the owners to buy the property for $24,000, $5,000 payable upon execution of the agreement and $19,000 upon the delivery of the deed. The property was then leased to someone not shown by the record, but the lease contained a provision that it could be terminated upon notice of 60 days. The property had a frontage of about 40 feet on Baum Boulevard and a depth of about 115 feet. An old one-story brick and frame building in poor condition was on the property. The property was too small and otherwise not well suited to the petitioner's business. Weisman negotiated with Meyer Marcus for the purchase of the property known as 5820 Baum Boulevard291 and the petitioner entered into an agreement with Marcus dated November 7, 1947 for the purchase of that property for $50,000 on or before January 10, 1948, $5,000 payable on signing the agreement, $27,000 upon delivery of a deed and the balance represented by mortgages for $18,000 to be assumed by the purchaser. The petitioner on that same day entered into an agreement with Marcus for the sale to him of the property at 5860 Baum Boulevard on or before January 10, 1948 for $10,000. Marcus wanted that property for his own wholesale used car business and after he acquired it, he improved it and used it in that business. Marcus would not have entered into the agreement to sell his property at 5820 Baum Boulevard if he had not been able at the same time to enter into the other agreement to purchase the other property. The property at 5820 Baum Boulevard was suitable for the petitioner's business. The petitioner wanted to conduct its business on that property and when it acquired the lot, it improved the property and used it in its business. The real estate agent had negotiated with Marcus at intervals in the fall of 1947 for the purchase of the property at 5820 Baum Boulevard for the292 petitioner. Weisman had advised the real estate agent that the petitioner would be willing to pay as much as $65,000 for the lot but the agent was first to offer $57,500 and then $60,000 and the building at 5860 Baum Boulevard to be given in part payment of $24,000. The agent was continuing with his negotiations when one day he learned from Marcus that the transaction had been consummated by the signing of an agreement. The owners of 5860 Baum Boulevard executed a deed dated January 2, 1948 conveying that property to the petitioner in accordance with the agreement of October 27, 1947. The petitioner conveyed that property to Marcus by a deed delivered January 7, 1948. Marcus conveyed the property at 5820 Baum Boulevard to the petitioner by a deed dated January 7, 1948 in accordance with the agreement of November 7, 1947. The petitioner assumed mortgages for $18,000 as part of the consideration for that property. The petitioner never occupied the property at 5860 Baum Boulevard. The following table shows information in regard to various properties fronting on Baum Boulevard: ASSESSED VALUESALES1947Baum Blvd.FrontageLandBuildingTotalPriceDate5840-42(40feet)$16,800.00$12,200.00$29,000.00$36,057.202/17/475844-50(80feet)$32,000.00$ 7,000.00$39,000.00$42,074.003/11/475852-58(80feet)$31,000.00$13,900.00$44,900.00$55,036.004/29/475860-62(40feet)$16,000.00$ 2,500.00$18,500.00$24,000.0010/27/47($10,000.00)11/ 7/475864-66(40feet)$16,000.00$ 5,000.00$21,500.00$28,467.003/18/475870-80(90feet)$39,000.00$17,000.00$56,000.00$60,667.004/16/475820(170feet)$59,500.00$59,500.00($50,000.00)11/ 7/47293 NOTE: Prices indicated in brackets are the ones which respondent does not accept as being the actual independent prices at which the properties would sell in 1947. Marcus purchased the property at 5820 Baum Boulevard on April 18, 1947 for $45,333. The properties, 5852 through 5862 Baum Boulevard, mentioned above, were purchased on December 14, 1946 for $62,020.16. The petitioner, in its return for 1948, claimed a loss of $14,000 on the sale of the property at 5860 Baum Boulevard. The Commissioner, in determining the deficiency, disallowed that loss and explained "It is determined that the exchange of property at 5860 Baum Boulevard for the property at 5820 Baum Boulevard in 1948 did not result in a loss since you held the property for productive use in your trade or business. Therefore, the amount of $14,000.00 claimed as a deduction in your income tax return is disallowed." Opinion MURDOCK, Judge: The Commissioner argues that the transfer of 5820 to the petitioner and the transfer of 5860 to Marcus were inseparable, the latter a condition of the former, and must be regarded as but parts of a single transaction for income tax purposes. The facts fully support that contention. 294 He does not claim that that transaction comes within section 112 (b) (1) but reasons that 5860 was exchanged for 5820 in that transaction, the two properties were of like kind for productive use in the petitioner's business, and no loss on 5860 is recognized because section 112 (e) as it relates to subsection(b) (1) applies. Section 112 (e) is entitled "Loss from Exchanges Not Solely in Kind" and provides in part that if an exchange would be within subsection(b) (1), except that the property received in exchange consists not only of property permitted by (b) (1) to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. The provision of subsection (b) (1) relied upon is that no gain or loss shall be recognized if property held for productive use in its business is exchanged by a taxpayer solely for property of a like kind to be held for productive use in its business. One weakness in this argument may be, as the petitioner contends, that the petitioner never for a moment held the property at 5860 for productive use in its business since its transfer of that property to Marcus was without lapse295 of time after the transfer of the property to it and that course had been agreed upon before the petitioner acquired 5860. But however that may be, there is another fatal defect in the argument. Section 112 (e) was intended to apply only where the receipt of "other property or money" by the taxpayer made (b) (1) inapplicable. It is apparent that this petitioner received no "other property or money" within the meaning of (e) if the transfers between the petitioner and Marcus are regarded as but parts of an integral whole. The $10,000 cash due to the petitioner from Marcus on the transfer of 5860 was more than offset by the $32,000 cash owed by the petitioner to Marcus for 5820. Marcus received "money" but the petitioner did not in the final analysis. The petitioner came out of the deal with only the 5820 property and the argument of the Commissioner that section 112 (e) applies is unsound. The petitioner argues that there was no connection between its purchase of 5860 and the later transactions involving 5860 and 5820. It says it was forced, by the uncertainties and difficulties encountered in leasing the Liberty Avenue property, to buy 5860 Baum Boulevard to be sure of a place, in296 this case a poor one, in which to conduct its business and it was willing to unload that property at a loss of $14,000 after it later found it could buy, and entered into a binding agreement to buy, the wholly suitable lot at 5820 for $50,000. That argument, regardless of factual support, is beside the point. 5860 was not sold in a separate transaction resulting in a loss of $14,000 deductible under sections 23 (f) or 117. The disposition of 5860 and the acquisition of 5820 were parts of a single inseparable deal in which the petitioner transferred 5860 as a part of the consideration for 5820. $10,000 was not the amount realized by the petitioner from the disposition of 5860. Marcus would not transfer 5820 to the petitioner for the stated amount of $50,000 unless the petitioner transferred 5860 to him for the stated amount of $10,000. The reality and the effect of the transaction for income tax purposes was that the two properties changed hands and the petitioner paid Marcus "boot" of $40,000, part of which was represented by the mortgages for $18,000. Thus, the petitioner acquired 5820 for net cash of $22,000, a property which cost it $24,000 and the assumption of mortgage debts of*297 $18,000. It has not shown that it sustained any loss on the disposition of 5860 or that it is entitled to deduct any such loss. There would not be even an economic loss if, as there is some evidence to indicate, 5820 was worth $64,000. The petitioner must be regarded as having gotten its money's worth for 5860 when it transferred it in the deal for 5820. Cf. . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620400/	HOME JUICE COMPANY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHome Juice Co. v. CommissionerDocket No. 701-76.United States Tax CourtT.C. Memo 1977-386; 1977 Tax Ct. Memo LEXIS 58; 36 T.C.M. (CCH) 1566; T.C.M. (RIA) 770386; November 3, 1977, Filed Joel L. Miller and William E. Rattner, for the petitioner. James F. Kidd, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in the amounts of $52,391.23 and $27,669.35 in petitioner's Federal income taxes for 1971 and 1972, respectively. The issues in controversy are: 1. Whether petitioner recognized income under section 61(a)1/ in the form of purchase rebates of $109,148.44 and $59,260.30 paid to its sole shareholder during 1971 and 1972, respectively. 2. If it is required to include in income the purchase rebate payments, whether petitioner is entitled to an offsetting deduction under section 162(a), as compensation for services, or under section 1253(d)(1), as a result of the transfer, sale, or other disposition of certain distribution agreements. FINDINGS OF FACT Petitioner Home Juice Company, Inc. (hereinafter petitioner), was incorporated under the laws of the State of Wisconsin on or60 about November 26, 1962. When its petition was filed, petitioner's principal office was located in Kenosha, Wisconsin. Petitioner filed its Federal income tax returns for 1971 and 1972 with the Internal Revenue Service Center, Kansas City, Missouri. During 1954, Milton Hess (hereinafter Hess), as a sole proprietor, started selling bottled juices in the Waukegan, Illinois area. Hess bought the bottled juices from Home Juice Company (hereinafter Chicago), a corporation based in Chicago, Illinois, and resold them in territories designated by Chicago. His work included the promotion of product interest and the development of wholesale distributorships within the territory. During the ensuing years prior to 1960, Hess, by his personal efforts, expanded his business from a single territory around Waukegan, Illinois, to territories in Wisconsin, Minnesota, Indiana, Ohio, and Kentucky. This expansion was due largely to the efficient manner in which Hess organized and operated his business. Hess made all his juice purchases from Chicago. Within each territory Hess designated a branch manager who, along with Hess, was responsible for finding and maintaining buyers for the juice61 products, collection of the payments received for these products, maintaining records thereon, and organizing and directing the work of a group of routemen who delivered the products to the buyers. These routemen owned their own trucks. Neither the branch managers nor the routemen were salaried employees of Hess. Their earnings were measured by commissions on their sales. During the late 1950's, after establishing this system in each of his territories, Hess visited the areas periodically to insure that the operations were running smoothly and to deliver to the routemen the juice products which he had purchased from Chicago. In order to increase sales, Hess helped the branch managers and routemen get established. He also occasionally sponsored incentive programs. By 1960, sales had increased to the extent that Hess was purchasing 15,000 jugs (i.e., half-gallons) a week from Chicago. Hess was considered Chicago's "No. 1" customer from the late 1950's to the time of petitioner's formation. On or about June 1, 1960, Hess entered into three distribution agreements with Chicago which formalized the pre-existing relationship between the parties. These agreements established62 the areas in which Hess had exclusive distributorships for Chicago's juice products. The agreements also required Hess to diligently service customers in each sales territory, refrain from selling non-Chicago products, maintain trucks and storage facilities, keep route lists, and sell in strict compliance with Chicago's price list. In addition, the agreements forbade Hess, upon terminating his connection with Chicago, from competing with its products for a stated period of time and gave Chicago the right of first refusal on any sale of Hess' interest in the route lists. If the right was not exercised, Chicago still had to approve any purchaser. Chicago had similar contracts with other distributors. The distribution agreements signed by Hess on June 1, 1960, provided that they were personal contracts between Hess and Chicago. Chicago would have stepped in and performed needed services if there had been a physical, legal or other disability on Hess' part. The contracts ran for an initial term of 5 years and were subject to renewal. By an agreement dated March 5, 1965, between Chicago and Hess, under a "Temporary Arrangement" the distribution agreements were extended for 6 months, 63 i.e., until November 30, 1965. By successive extensions, the agreements were amended to fix a termination date of June 1, 1968. On that date, the formal agreement expired, but Chicago and Hess and petitioner continued to conduct their business on the same terms until October 1, 1972. By a separate agreement dated June 1, 1960, between Hess and Chicago, Hess obligated himself to devote his full time to the development of sales in the exclusive territories covered by the three distribution agreements. He agreed not to expand such territories or to request additional territory for the distribution of Chicago's products until his total weekly sales volume reached 17,000 half-gallon bottles of juice averaged over 4 consecutive weeks. Paragraphs 2, 3, 4, and 6 of this separate agreement are as follows: 2. Hess agrees that he will not during the term of this Agreement and any renewals hereof and for a period of one (1) year after the termination of this Agreement sell or attempt to sell or employ others to sell or attempt to sell either directly or indirectly any products similar or competitive to the products of the Company, regardless of package sizes or types, to any customer64 or customers at wholesale or retail within that territory described as extending 400 miles in any direction from the city limits of Chicago, Illinois. 3. This agreement shall not in any way affect, amend, change, or modify any distribution agreement entered into between the parties hereto contemporaneously herewith or at any other time. 4. Recognizing the combined present and future potential volume of the Hess distributorships presently granted, and those which might be granted in the future, and further recognizing the fact that such distributorships are operating many miles from the Company's Melrose Park plant, which necessitates long hauls and special handling of the Company's products, the Company agrees to the following freight allowances and quantity discounts on its products: (a) Company's present wholesale price structure contemplates purchases at the highest rate of 5,000-2 quart bottles per week. The Company herewith agrees to give Hess an additional discount from the Company 5,000 bottle price in the amount of one cent (1") per 2-quart bottle for all purchases from 10,000 to and including 14,999 bottles per week, and a discount in the amount of two cents (2") 65 per 2-quart bottle for all purchases in excess of 14,999 bottles per week. To qualify for this discount, the purchases by Hess are to be averaged over the last consecutive 4-week period. (b) The Company's present prices are quoted as delivered and the Company will allow a special freight allowance to Hess in the amount of six cents (6") per half-gallon bottle provided Hess shall accept billing f.o.b. Company dock on all such purchases and arrange and pay for his own pickup and delivery.Such pickup and delivery shall relate to all purchases, but the freight allowance shall apply only to the half-gallon bottles. (c) After Hess has reached a combined total of 20,000 bottles per week, the Company agrees to review the discounts herein set forth, taking into consideration any savings which may have resulted to the Company by reason of the added Hess volume. * * 6. This Agreement is personal with Milton Hess in the same manner that the distributorship agreements with him relate, and it shall not be assignable without the express written permission of the Company. The agreement further provided that it was to become effective on June 1, 1960, and "continue to be effective66 and operative for so long as any one of the three Distribution Agreements executed contemporaneously herewith shall be effective and operative and for any periods of renewal thereof." Although this separate agreement refers to a "discount" for quantity purchases and a freight allowance, in practice Chicago charged Hess the full price for the juice products he purchased and made cash rebate payments to him in the amounts of the prescribed discounts and allowances. During this period, Chicago had similar agreements with other distributors. However, in the case of those distributors with less reliable credit ratings, Chicago allowed purchase discounts and allowances rather than cash rebates. In November 1962, petitioner was incorporated as a means of eliminating Hess' personal liability on tort claims arising from the operation of the business. At their first meeting held on December 14, 1962, petitioner's board of directors adopted the following resolution: WHEREAS Milton Hess has heretofore conducted a business under the name of HOME JUICE COMPANY and has offered to sell the equipment, delivery customers and good will of said business to the corporation at book value of $30,461.94. 67 AND WHEREAS it appears to the directors that said property is necessary for the purpose of this corporation and that the same has a fair value of $30,461.94, NOW, THEREFORE, it is hereby resolved that the officers of this corporation be and they are hereby authorized and directed to acquire the properties set forth in exhibit A annexed hereto, together with all of the records relative to the distributor list set forth in exhibit B attached hereto, and upon the receipt of the same, to issue to Milton Hess, capital stock in the sum of $30,461.94. The properties set forth in exhibit A, referred to in this resolution, include an automobile, four trucks, and 14 trailers. The three distribution agreements and the additional separate agreement were not included in the list of property formally assigned or transferred to petitioner.The distributors listed on exhibit B, referred to in the resolution, were Hess' principal customers at the time of petitioner's incorporation. Hess' attorney, Charles J. Richards, recommended that the three distribution agreements and separate agreement not be transferred to the corporation because of their personal nature. Also, it was his opinion that68 under Wisconsin law creditors could execute and levy on the unassignable contract rights of a debtor. Retaining the three distribution agreements and the separate agreement of June 1, 1960, in Hess' name thus would insulate them from the claims of petitioner's creditors. Consequently, the agreements were not transferred to petitioner. In 1962, when petitioner was incorporated, Hess was purchasing from Chicago between 30 and 40 thousand half-gallons of juice per week. At that time, a distributorship with that volume of sales, based on $10 per half-gallon, would have been valued at between $300,000 and $400,000. Although the three distribution agreements were not formally transferred to petitioner when it was incorporated, nonetheless petitioner, rather than Hess, there-after became the actual purchaser and seller of the juice products. Petitioner performed the obligations formally imposed upon Hess by the distribution agreements in carrying on its buying, hauling, delivery, and sales activities. Further, as required by the agreements, petitioner diligently serviced customers, refrained from selling non-Chicago products, and maintained its delivery trucks, storage facilities, 69 and route lists as Hess had done prior to petitioner's incorporation. In the early 1960's, the nature of Hess' business had changed in one respect. Rather than selling to numerous small purchasers in each of his territories, he began to sell to subdistributors who in turn serviced the small customers. After its incorporation, petitioner continued this policy. After petitioner's incorporation in November 1962, Chicago continued for nearly 10 years to make "rebate" payments to Hess. The amounts of such payments, as provided in the separate agreement of June 1, 1960, were based on petitioner's juice purchases from Chicago. In October 1972, Chicago's president asked Hess to agree to forego any payments directly to him. Hess so agreed, and the rebates ceased. However, Chicago reduced the price charged petitioner for the juice products by an amount equal to the payments previously made to Hess. This change was made in connection with the installation of a computer bookkeeping system. Commencing in 1960 and continuing through 1972, Hess reported as income on his tax returns all the rebate payments he received each year from Chicago. Petitioner did not report any part of such70 payments on its income tax returns. After petitioner was incorporated, Hess served as its president and director, and he continued to work in the same manner as he did prior to petitioner's incorporation, especially in the area of working to increase sales. However, petitioner hired people to assist Hess in his activities. During 1971 and 1972, petitioner employed, in addition to Hess, three semi-truck drivers, a bookkeeper, a secretary, and Joseph Vlahovic, the dispatcher-vice president. In addition to his responsibility of maintaining the dispatching lists, Vlahovic also occasionally visited customers. Hess continued, however, to make the majority of these calls. Although petitioner reimbursed Hess for most of his expenses resulting from these trips, Hess at times paid the costs of sales incentive activities.From 1963 to 1972, Hess' salary from petitioner was as follows: YearAnnual Salary1963$ 019645,309.2619657,900.0019667,800.0019677,800.00196812,480.00196914,310.00197014,040.00197116,200.00197237,600.00 The large increase in 1972 was due to the fact that the rebates from Chicago stopped in that year. From 196271 until 1972, petitioner did not claim deductions on its Federal income tax returns for the rebate payments as compensation to Hess, nor did it accrue or otherwise record them in any manner on its books and records. Petitioner's 1971 and 1972 Federal income tax returns disclosed the following: Gross ProfitNet YearSalesFrom SalesIncome1971$1,702,451.54$304,314.96$18,232.621972$1,491,942.18$300,902.45$ 8,622.03In the notice of deficiency, respondent determined that purchase rebates of $109,148.44 and $59,260.30, received by Hess from Chicago in 1971 and 1972, respectively, constituted income to petitioner under section 61(a). The resulting deficiencies were computed by including these amounts in petitioner's taxable income for those years. OPINION 1. Taxability of Rebates to PetitionerRespondent contends that petitioner earned the income represented by Chicago's payments to Hess and that such income is, therefore, taxable to petitioner under section 61. 2/ Petitioner maintains that Hess, not petitioner, earned the payments he received from Chicago. Petitioner argues that such payments represented (1) compensation72 for Hess' services predating petitioner's incorporation, (2) compensation for his services in continuing to solicit and service distributorships in the territories assigned to him in the distribution agreements, and (3) consideration for the covenant not to compete contained in the separate agreement of June 1, 1960. We think respondent has the better side of the argument. The basic legal principle to be applied here, as enunciated in the time-honored case of Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930), is that income is taxable to the person who earns it. While that principle is easy to state, it is often difficult to apply to a given set of facts. Its application is particularly difficult in73 a situation like this one where an individual for a period of years has performed sales services, received compensation therefor, and unquestionably realized income but then creates a corporation and continues to perform the same services and to receive the same type of payments. In that situation, the earner-of-the-income test requires a decision as to whether the individual performs his services in an individual capacity or as a corporate officer. Reaching that decision requires a careful consideration of all the facts. Ballentine Motor Co. v. Commissioner,321 F.2d 796">321 F.2d 796, 798 (4th Cir. 1963), affg. 39 T.C. 348">39 T.C. 348 (1962); American Savings Bank v. Commissioner,56 T.C. 828">56 T.C. 828, 839 (1971). We think the payments Hess received from Chicago during 1971 and 1972 were income earned by petitioner. It is true that Hess, when he created petitioner, did not formally assign the distribution agreements to petitioner. However, petitioner was permitted to, and did, buy juices from Chicago on the terms prescribed in the three distribution agreements and the separate agreement of June 1, 1960. 3/ Moreover, petitioner discharged the obligations74 assumed by Hess in the distribution agreements. It developed and serviced its assigned territories and its customers. It purchased, stored, sold, and delivered the juices. It maintained a route list of its customers. To carry out the obligations it discharged under the distribution agreements, petitioner employed personnel, including Hess, and incurred expenses. In every real and practical sense, when petitioner was organized, it stepped into Hess' shoes in the operation of the distributorships. 475 Significantly, the disputed payments Hess received from Chicago were derived directly from the business conducted by petitioner, that of buying and selling juice. See Ballentine Motor Co. v. Commissioner,supra;United Dressed Beef Co. v. Commissioner,23 T.C. 879">23 T.C. 879, 885-886 (1955). While it is stipulated that Hess and Chicago referred to the payments here in dispute as "rebates," the separate agreement of June 1, 1960, does not so describe them. It refers to such payments as "discounts," allowed on the basis of the quantity of the purchases, and as a "special freight allowance," made in recognition of the fact that the "distributorships are operating many miles from the Company's [Chicago's] Melrose Park plant, which necessitates long hauls and special handling of the Company's [Chicago's] products." In 1971 and 1972, the years here in dispute, petitioner, not Hess, made the purchases which triggered the quantity discounts. Similarly, petitioner, not Hess, bore the expense of the extraordinary long hauls and special handling of the juices which caused Chicago to grant the special freight allowances. Hess, in his individual capacity, did76 nothing to earn either. Thus, petitioner earned the discounts and the special freight allowances and is taxable on them. We do not think the evidence will fairly support a finding, as argued by petitioner, that Hess received the payments reflecting these discounts and allowances as compensation for Hess' services to Chicago predating petitioner's incorporation. While Hess began doing business with Chicago in 1954, there is no evidence to show that Chicago owed him any discounts or special freight allowances for the period prior to the signing of the June 1, 1960, separate agreement.That agreement, as we read it, is prospective only. The quantity discounts and special freight allowances were to be measured exclusively by Hess' purchases after that date.Chicago made the contract to obtain future benefits to itself through increased sales and not to compensate Hess for past services. Nor is there any real basis for holding that Chicago made the payments to Hess to compensate him for his continuing efforts to increase sales. True, as petitioner's sales grew Chicago's payments to Hess, measured by the quantity discounts and special freight allowances, increased. But Hess was employed77 and paid by petitioner. His services after petitioner was organized were performed as its president, not in his individual capacity. According to schedule E attached to petitioner's 1972 Federal income tax return, 5/ Hess was paid a salary of $37,600 for his services as president of the corporation, and he devoted his "full" time to petitioner's business. Significantly, Hess' salary was increased from $16,200 in 1971 to the higher 1972 figure when, in October 1972, the Chicago payments ceased. Hess' income-producing activity is not severable from his position as a corporate officer. See American Savings Bank v. Commissioner,56 T.C. at 842; Moke Epstein, Inc. v. Commissioner,29 T.C. 1005">29 T.C. 1005, 1011 (1958). The fact that he incurred incidental personal expenses in sponsoring occasional sales incentive programs does not alter this conclusion. 78 In United Dressed Beef Co. v. Commissioner,supra, officers and owners of all the stock of a corporation, engaged in slaughtering cattle and hogs during World War II, received overceiling payments for meat and did not turn such payments into the corporation. They argued that the payments were made to them in their individual capacities. Holding the overceiling collections were income to the corporation, this Court said (supra at 885-886): The meat sold was owned by the corporation and the amounts collected were measure by the pounds of meat sold to customers of the corporation. * * * These amounts do not resemble tips to a minor employee, for no additional services were rendered as consideration for them and the responsible officers of the corporation directed these collections. On these facts we have found that the overceiling collections were made by the corporation. * * * Similarly, in the instant case, Hess owned all the stock of petitioner. The payments representing quantity discounts and special freight allowances which he received from Chicago were measured by petitioner's purchases from Chicago. Hess was employed by and served as petitioner's79 full-time president and performed no services for Chicago to earn the payments.We think Chicago's payments to Hess were income earned by petitioner. It is true that the June 1, 1960, separate agreement contained the covenant not to compete quoted in our Findings, but we find no merit in petitioner's contention that the payments reflecting the quantity discounts and special freight allowances were consideration for that covenant. The June 1, 1960, separate agreement shows otherwise. One of the introductory clauses recites that "the Company desires to establish additional quantity discounts for the substantially increased volume from the combined Hess operations," and this language shows the purpose of those discounts.As quoted in our Findings, the agreement recites that the special freight allowances were to be granted because Hess' "distributorships are operating many miles from the Company's [Chicago's] Melrose Park plant." Moreover, the distribution agreements contained far more severe noncompetition covenants 6/ than the June 1, 1960, separate agreement. No identifiable portion of Chicago's payments to Hess can be attributed to the covenant not to compete. Baldarelli v. Commissioner,61 T.C. 44">61 T.C. 44, 51-52 (1973);80 Rich Hill Insurance Agency, Inc. v. Commissioner,58 T.C. 610">58 T.C. 610, 618 (1972); Miller v. Commissioner,56 T.C. 636">56 T.C. 636, 651 (1971); Johnson v. Commissioner,53 T.C. 414">53 T.C. 414, 425 (1969); Howard Construction, Inc. v. Commissioner,43 T.C. 343">43 T.C. 343, 355-356 (1964). 81 2.Offsetting Deduction IssueSection 162(a)(1) allows a deduction for all the ordinary and necessary expenses paid or incurred in carrying on a trade or business, including a reasonable allowance for salaries or other compensation for services actually rendered. Alternatively, petitioner argues that, if Chicago's so-called rebate payments are taxable to it, an offsetting deduction is allowable under section 162(a)(1) as a compensation expense. We agree. The classification of a payment as compensation or as, in the instant case, a constructive dividend, depends upon the purpose for which the payment was made. In the words of section 1.162-7(a), Income Tax Regs.: "The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services." Regardless of the label given a payment, it may be found to be compensation if that was so intended. Compare Commissioner v. Multnomah Operating Co.,248 F.2d 661">248 F.2d 661, 663 (9th Cir. 1957), affg. a Memorandum Opinion of this Court, with J. J. Kirk, Inc. v. Commissioner,34 T.C. 130">34 T.C. 130, 139-140 (1960).82 Paula Construction Co. v. Commissioner,58 T.C. 1055">58 T.C. 1055 (1972), affd. per curiam 474 F.2d 1345">474 F.2d 1345 (5th Cir. 1973), on which respondent relies, does not hold that the label given a payment is controlling. Rather the opinion repeatedly emphasizes the intention in making the payments. The instant case is complicated by the fact that Hess was not only the recipient of the payments but was also petitioner's sole shareholder and executive officer. Moreover, Chicago made the payments to him rather than to petitioner, and there was no occasion or opportunity for petitioner on its books and records to label the payments as compensation. Throughout this controversy petitioner has maintained that the payments were made to Hess to compensate him for his services to Chicago. While we have rejected that contention, we think the payments were compensation for services to petitioner even though petitioner did not so treat them on its books and records. We think the trial record shows that Hess received part of the Chicago payments in lieu of compensation he otherwise would have been paid by petitioner. His annual salary payments, detailed in our Findings, were83 comparatively quite low. When Chicago ceased making payments directly to him in October 1972, petitioner increased Hess' salary from the level of $16,200 in 1971 to $37,600. Section 162(a), however, as noted above, limits the allowable deduction to "reasonable" compensation, and we must decide whether all or only a part of the claimed deduction is allowable. Petitioner points to Hess's testimony that his accountant advised him petitioner could pay Hess a sum equal to the rebates he would no longer be receiving from Chicago. But that testimony is hearsay insofar as it purports to relate to the reasonableness of the compensation. The record shows that Hess was an effective salesman and promoter. He had been in the juice distribution business since 1954. He had established good relationships with petitioner's network of customers. He worked long hours, devoting all his time to petitioner's business. Yet the magnitude of the earnings of the business is not sufficient to justify the compensation expense deduction petitioner claims.Total sales of $1,702,451.54 in 1971 and $1,491,942.1884 in 1972 produced gross profits from sales of $304,314.96 and $300,902.45, respectively. The net incomes for the two years were in the respective amounts of $18,232.62 and $8,622.03. Under our holding that Chicago's payments to Hess were taxable to petitioner, these gross profits from sales and net income figures will be increased by $109,148.44 in 1971 and $59,260.30 in 1972. From those amounts would have to be subtracted any additional compensation deduction. On consideration of all the evidence, we find that reasonable compensation for Hess was $60,000 each year, and petitioner is entitled to deductions in that amount. 7/ To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.2. /SEC. 61.GROSS INCOME DEFINED. (a) General Definition.--Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: * * (2) Gross income derived from business; * *↩3. /↩ There is testimony that petitioner, rather than Hess, bought the juice only to avoid the necessity for complying with Interstate Commerce Commission regulations which otherwise would have applied. While this testimony is not convincing, we need not evaluate it insofar as it refers to the reason for the arrangement. The undisputed fact is that petitioner did buy the juice from Chicago. 4. Petitioner is correct in its position that under Wisconsin law the person for whom the services are performed under a personal service contract must agree to any assignment thereof. United Contractors, Inc. v. Cantrall,42 Wis. 2d 464">42 Wis.2d 464, 167 N.W.2d 220">167 N.W.2d 220, 222 (1969); Tullgren v. School District No. 1,6 Wis. 2d 481">6 Wis.2d 481, 95 N.W.2d 386">95 N.W.2d 386, 388-389 (1959). While Hess made no formal assignments of his agreements with Chicago, petitioner assumed the obligations imposed on Hess under the agreements and purchased and distributed Chicago's products. Chicago's knowing acceptance of the benefits of this arrangement reflects its acquiescence in the informal assignment of the fruits of such agreements. Chatham Shipping Co. v. Fertex Steamship Corp.,352 F.2d 291">352 F.2d 291, 294 (2d Cir. 1965); Paxson v. Commissioner,144 F.2d 772">144 F.2d 772, 775 (3d Cir. 1944), revg. 2 T.C. 819">2 T.C. 819↩ (1943).5. /↩ For some reason not explained in the record, a schedule E is not attached to petitioner's 1971 Federal income tax return as stipulated in evidence. However, there is no evidence in the record indicating that Hess' duties as petitioner's president or the amount of time he devoted to performing those duties were any different in 1971 than in 1972. Nor is there any evidence indicating his duties changed after November 1972, when Chicago ceased making payments to Hess and began allowing discounts and making freight allowances as contemplated by the June 1, 1960, separate agreement.6. / The noncompetition covenants contained in the distribution agreements are as follows: Upon termination of this Agreement for any reason or cause, whether voluntary or involuntary, Distributor agrees to surrender his current customer route lists to the Company and such lists shall thereafter be and become the sole property of the Company. In addition thereto, the Distributor agrees that during the term hereof or after any termination, he will not sell or attempt to sell or employ others to sell or to attempt to sell, either directly or indirectly, any product similar or competitive to the products of the Company, regardless of package sizes or types within a period of nine (9) consecutive months immediately following any termination either to any of the customers on any of the Distributor's route list or lists during the three (3)-month period preceding such termination or to anyone within the exclusive territory herein granted and as such territory may have been modified under Section 1 hereinabove, also for a period of nine (9) months following such termination. The Distributor further agrees that he will not disclose to any person any information concerning the number, locations or name of any customer serviced on his routes during the three (3)-month period preceding any termination either by himself or his employees or agents also for a period of nine (9) consecutive months following such termination date.↩7. / Petitioner also makes the alternative argument that the Chicago payments were deductible pursuant to sec. 1253(d)(1)↩ as amounts paid on a "transfer, sale, or other disposition" of the distribution agreements. We find no merit in this argument. While the agreements may have been informally transferred to petitioner as a contribution of capital, they were not sold to it.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620402/	Bernie N. Sarfaty, Petitioner v. Commissioner. Sadie S. Sarfaty, Petitioner v. Commissioner.Sarfaty v. CommissionerDocket Nos. 4210-62, 4896-62.United States Tax CourtT.C. Memo 1964-28; 1964 Tax Ct. Memo LEXIS 308; 23 T.C.M. (CCH) 147; T.C.M. (RIA) 64028; February 5, 1964Bernie N. Sarfaty, pro se, 1363 1/2 N. Ridgewood Place, Los Angeles, Calif., in Docket No. 4210-62. Marion Malone, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined a deficiency in income tax for the calendar year 1960 for each of the petitioners, Bernie N. Sarfaty and Sadie S. Sarfaty, in the respective amounts of $378 and $386.79. The proceedings were consolidated. The sole issue presented by the pleadings is whether petitioner Bernie N. Sarfaty or petitioner Sadie S. Sarfaty is entitled to claim a dependency exemption for their son, Michael, for the year 1960. Findings309 of Fact The stipulated facts are so found and are incorporated herein by this reference. Bernie N. Sarfaty, hereinafter referred to as Bernie, resides in Los Angeles, California. He filed a separate income tax return for 1960 with the district director of internal revenue at Los Angeles, California, and reported a gross income of $3,938.39. Sadie Sarfaty, hereinafter referred to as Sadie, resides in North Hollywood, California, and for the year 1960 filed her separate income tax return with the district director of internal revenue at Los Angeles, California, and reported a gross income of $6,194.62. On their respective returns Bernie and Sadie each claimed a dependency exemption for their 8-year-old son, Michael. During 1958 Bernie and Sadie were divorced. At the time of the divorce a court order was entered which awarded custody of Michael to Sadie and required Bernie to pay for the support of Michael. During 1960 Michael resided with his mother in a 6-room single family residence in North Hollywood, California. The persons who resided in the house during 1960 were Sadie, Michael, and Sadie's other 2 sons, Benjamin and Robert Loveless. The house had 3 bedrooms; one of310 which was occupied by Sadie, one by Michael, and one was shared by Benjamin and Robert. The fair rental value of the house, including utilities and gardening expenses, was $105 per month. During the calendar year 1960, Bernie furnished support for Michael as follows: Total payments to Sadie pursuant tocourt order$400.002 U.S. savings bonds37.50Weekly visitation expenses156.00Medical insurance payments24.00Presents15.00Total support of Michael furnishedby Bernie$632.50The gross support of Michael furnished by Sadie for 1960 (before reduction in amount of $400 paid to her by Bernie and allowed to him) was as follows: Apportionment of fair rental value ofhouse$ 315.00Food416.00Child care expenses150.00Medical care69.00Clothes100.00Bicycle and skates39.00Movie money and allowance49.40Vacation trips30.00School supplies25.00House cleaning and cleaning supplies208.00$1,401.40Less cash paid by Bernie to Sadiefor Michael's support400.00Net support to Michael furnished bySadie$1,001.40The total support furnished Michael during 1960 was $1,633.90. Of the total support furnished311 Michael in 1960 more than one half was furnished by Sadie. Opinion The issue presented to us is whether one of the petitioners furnished more than one half of the support of their son, Michael, in 1960 and is therefore entitled to claim him as an exemption. Section 151 of the Internal Revenue Code of 1954 provides that an exemption of $600 will be allowed a taxpayer for each dependent (as defined in section 152) who is a child of the taxpayer and who has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins. It has been stipulated that Michael was 8 years of age in 1960. Section 152 defines the term "dependent" to mean one "over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer * ." As is often the case in proceedings of this character, neither petitioner kept any records of his contributions or expenditures, and the testimony was predicated on memory and estimates. However, both parties impressed us as being truthful and reliable and as a result we have for the most part accepted their respective estimates. In determining312 the fair rental value of the house in which Michael resided, we have taken into account the estimates of both Bernie and Sadie in arriving at our figure. 1 In view of the fact that we have allowed the rental value of the property as an item of support, we have not included in the support furnished by Sadie any amounts attributable to utilities and gardening expenses since the rental value usually reflects the furnishing of such items. On the basis of our findings of fact, we hold that more than one half of Michael's support was received from Sadie in 1960. Decision will be entered for the respondent in Docket No. 4210-62. Decision will be entered under Rule 50 in Docket No. 4896-62. Footnotes1. Bernie testified that the fair rental value of the house was $85 per month. Sadie testified that the fair rental value was $125 per month.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620403/	Heinz Molsen, Jr., and Christina T. Molsen, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentMolsen v. CommissionerDocket Nos. 22699-82, 22700-82, 22701-82, 22702-82United States Tax Court85 T.C. 485; 1985 U.S. Tax Ct. LEXIS 36; 85 T.C. No. 28; September 26, 1985, Filed 36 Decisions will be entered for the petitioners. M, a cotton merchant, employs the accrual method of accounting and reports its income on a calendar year basis. Some of the cotton is purchased by M through on-call contracts, under which cotton is delivered to M and a provisional price is paid to the seller, but the purchase price remains open until the seller exercises his call right, fixing the price. The purchase price is tied to the market price of cotton futures prevailing at the time the seller calls the contract. In accordance with generally accepted accounting principles and industry-wide practice, M has consistently accounted for its cost of goods sold by valuing ending cotton inventory at market and by bringing its unfixed, delivered, on-call purchases to market at yearend through an accrual to the cost of purchases of an amount determined as if such contracts were called at the end of the year. Held:1. M's method of accounting for such purchases clearly reflects its income; the Commissioner abused his discretion under sec. 446(b), I.R.C. 1954, in determining that M may include only the provisional prices paid for the cotton during the year and that M may not bring37 the on-call contracts to market.2. The Tax Court is not empowered to award costs or attorneys' fees under the Equal Access to Justice Act ( McQuiston v. Commissioner, 78 T.C. 807">78 T.C. 807 (1982), affd. without published opinion 711 F.2d 1064">711 F.2d 1064 (9th Cir. 1983), followed), and Ps are not entitled to an award of such costs or fees under sec. 7430, I.R.C. 1954, because they commenced these cases before the effective date of sec. 7430. Robert W. Ryan, Jr., and Paul E. Pesek, for the petitioners. William B. Lowrance, for the respondent. Simpson, Judge. SIMPSON485 The Commissioner determined deficiencies in the petitioners' Federal income taxes for 1977 as follows: 486 Docket No.PetitionerDeficiency22699-82Heinz Molsen, Jr.,$ 243,048and Christina T. Molsen22700-82Frederick G. Molsen243,048and Jayne F. Molsen22701-82Peter F. Kandel243,047and Barbara M. Kandel22702-82Elizabeth Molsen40,483The issues for decision are: (1) Whether the Commissioner abused his discretion under section 446(b) of the Internal Revenue Code of 19542 in determining that a cotton merchant that values its ending inventory at market may not accrue an estimated liability at yearend for cotton purchased under on-call contracts40 where the cotton has been delivered but the price has not yet been fixed, and (2) whether the petitioners are entitled to an award of costs and attorneys' fees.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.All of the petitioners maintained their legal residences in Dallas, Texas, at the time they filed their petitions in these consolidated cases. All filed their Federal income tax returns for 1977 with the Internal Revenue Service Center, Austin, Texas. All filed their petitions in this Court on September 10, 1982.H. Molsen & Co., Inc. (Molsen & Co. or the company), is a cotton merchant engaged in the business of buying and selling cotton throughout the world. Originally formed as a partnership in 1928, Molsen & Co. was incorporated under the laws of the State of Texas in 1966. It has maintained its principal place of business in Dallas, Texas, since41 its incorporation. During 1977, Molsen & Co. was an electing subchapter S corporation for Federal income tax purposes, and its outstanding shares of stock were owned as follows: 487 ShareholderNumber of sharesHeinz Molsen, Jr2,250Frederick G. Molsen2,250Barbara M. Kandel2,250Elizabeth Molsen375Heinz Molsen, Jr., Frederick G. Molsen, Barbara M. Kandel, and Elizabeth Molsen will sometimes be referred to as the petitioners.As a cotton merchant, Molsen & Co. purchases cotton from farmers, ginners, and other merchants and then resells the cotton to domestic and foreign textile mills and, occasionally, to other merchants. Cotton is planted between March and June and is harvested from late July to January. The traditional cotton crop year, or season, runs from August 1 to July 31, but cotton merchants buy and sell cotton throughout the year.There are two basic methods of purchasing cotton: the "spot purchase" and the "forward purchase." In a spot purchase, the cotton is available for immediate delivery to the buyer. In a forward purchase, the seller contracts to deliver the cotton to the buyer at a specified future date.Both spot purchases and forward42 purchases can be made at either "fixed" or "on call" prices. In a fixed price contract, the price per pound of cotton is established or "fixed" on the day the agreement is entered into by buyer and seller. In an on-call contract, the price remains open or "on call" until the seller exercises a call right granted by the contract. The purchase price is ultimately determined by a formula tied to the market price of cotton: the contract price is a specified number of "points" 3 above or below the futures price for the base quality cotton 444 traded on the New York Cotton Exchange for a particular month for future delivery. Such price is then adjusted to reflect any difference in quality between base quality cotton and the cotton actually delivered under the contract. Cotton is traded on the futures market for the months of March, May, July, October, and December. The seller may exercise the call right at any time between the execution of the contract and the day preceding the first 488 "notice day" of the designated call month. The first notice day generally falls on about the fifth day preceding the first day of the call month. For example, on December 8, 1977, Molsen & 43 Co. entered into an on-call purchase contract which provided for a contract price of "850 points off 5 July 1978, futures price at time of seller's fixation." Under the contract, the seller had until about June 25, 1978, to call and fix the price, and he would receive a price per pound of 8.5 cents less than the July futures price on the day he exercised the call. If the seller failed to exercise the call, the price would be determined by reference to the futures settlement price at the close of the last day before the first notice day of a July 1978 futures contract. In a large purchase, Molsen & Co. might permit the seller to call the price in increments of 100 bales per call, with the result that the price of the entire contract would not be fixed until the seller made several calls or the first notice day arrived. Cotton bought on call and delivered to the cotton merchant may be resold by the merchant long before the original seller fixes the price and receives payment in final settlement of the contract.In most on-call cotton purchases, the price is a specified number of points off (below) the futures market price. All of the Molsen & Co. on-call purchase contracts at issue here provided for a price off the price of July 1978 futures. The exact price terms of on-call cotton purchase contracts are influenced by a competitive marketplace. Molsen & Co. bases the price terms of its on-call purchase contracts on the difference between the spot price and the futures price existing at the time it enters into the contract. The "spot price" of cotton is the price at which cotton can be purchased for cash in the open market for immediate delivery. The difference on any given day between the spot price of cotton and the futures price for cotton traded on the New York Cotton Exchange for a particular month is called the "basis." For example, if on December 1, 1977, the spot price of cotton was 4545 cents per pound and the market price for July 1978 futures was 50 cents per pound, the basis would have been 5 cents (500 points). The basis fluctuates over time but not to the 489 same extent as the futures price, which may fluctuate by as much as 2 cents per pound in a single day. By looking to the basis existing at the time it enters into an on-call contract, Molsen & Co. determines the price terms of the contract; in our example, the price formula would be 500 points off July 1978 futures.Under an on-call purchase contract, the cotton merchant may or may not agree to make a provisional payment, or advance, to the seller upon delivery of the cotton, with the balance (if any) to be paid when the seller fixes the price. Delivery is made by transferring a negotiable warehouse receipt for each bale of cotton sold. The transfer of the warehouse receipts also effects the transfer of legal title to the cotton. The amount of the provisional payment is determined in different ways depending on where the cotton is purchased: in some areas of the country, farmers demand a provisional payment bearing some relation to the amount that they would receive if they pledged their cotton46 in return for an agricultural loan from the Federal Government; in other areas, farmers request a provisional payment determined under a formula tied to the futures market. If the seller receives a provisional payment, he is paid any balance due him when he fixes the price.The on-call purchase contract has been used since the 1930s. It arose in response to the introduction of a Federal Government price-support program for cotton farmers under which the Secretary of Agriculture establishes loan values for cotton based on the grade, staple, and micronaire of the cotton. The base quality cotton for the Government loan program is the same as the base quality cotton traded on the New York Cotton Exchange. The Government loan program affords the farmer the opportunity to pledge his cotton to the Government in return for the receipt of the Government loan value for such cotton, thereby creating a floor or minimum price for the cotton. For the next 10 months (in some cases, 18 months), the farmer has the right to redeem his cotton from the Government by paying back the loan value received, plus the accrued carrying charges for interest, storage, and insurance. If he redeems the cotton, 47 the farmer is free to sell it on the open market at the then-prevailing market price. If he fails to redeem the cotton, the farmer has, in effect, sold his cotton to 490 the Government at a price equaling its loan value. Thus, participation in the Government loan program guarantees the farmer a minimum price while allowing him to wait 10 or 18 months for a rise in the market value of his cotton which would enable him to get a higher price. In the past, during periods in which the spot price of cotton has approximated the loan value of such cotton, farmers tended to participate in the Government loan program in hopes of a rise in the market. As farmers pledged their cotton under the loan program, it became difficult for cotton merchants and textile mills to buy cotton. Therefore, to secure themselves a supply of inventory, they instituted the on-call purchase contract. The on-call purchase contract is more advantageous to farmers than the Government loan program because it permits farmers to secure the full benefit of a market rise without having to pay any carrying charges.As a general rule, farmers sell their cotton under on-call contracts when the spot, or market, price48 of cotton is close to its Government loan value. Conversely, when the spot price of cotton is high, well above its loan value, farmers tend to want to "lock in" the high price through a fixed price contract. From the end of World War II up to about 1970, and particularly during the 1960s, the Government maintained cotton loan values (and thus cotton prices) at a very high level. Large cotton surpluses developed as farmers began, in effect, to grow cotton for the loan. The spot price of cotton stayed at the loan level, and the cotton export market dried up. On-call purchases were infrequent because it was unlikely that the futures price of cotton would rise above the loan level. In the early 1970s, the Federal Government began an extensive program to dispose of its surplus, to cut back on cotton acreage, and to move toward a free market system. As the surpluses disappeared, the cotton markets moved away from the support prices, and with the increasing risk of market fluctuations, the futures market became more active and the number of on-call purchases and sales became significant. In 1977 and at the time of trial, use of the on-call purchase contract was a common, accepted, 49 and industry-wide practice.Cotton merchants, including Molsen & Co., may engage in hedging transactions with respect to their fixed price purchases and fixed price sales. Fixed price contracts may be 491 hedged by entering into an offsetting transaction in the cotton futures market. Thus, if a cotton merchant purchases 100 bales of cotton at a fixed price, the merchant would sell one contract (which consists of 100 bales) on the cotton exchange for future delivery. Cotton merchants do not hedge unfixed, on-call purchases.Molsen & Co. has always reported its income on a calendar year basis for Federal income tax purposes. It uses a fiscal year ending July 31 for financial reporting purposes. Technically, Molsen & Co. employs a hybrid method of accounting: the day-to-day operations of the company are recorded on a cash basis, but at yearend, adjusting entries are made to all material accounts (such as accounts receivable, accounts payable, and purchases) to effectively place the company on an accrual basis for income tax purposes.Molsen & Co. uses inventories and computes its cost of goods sold by adding the year's cotton purchases to opening inventory -- thereby indicating50 the total cost of goods available for sale -- and then subtracting ending inventory. The ending inventory consists of sold and unsold cotton to which the company has title at yearend. The company values its ending inventory at "market": inventory under a sales order (i.e., sold but not yet delivered) is valued at the contract sale price less certain (unspecified) charges; unsold inventory is valued at its current market value, determined by reference to several factors, including daily spot price quotations published by the Department of Agriculture and the price of futures contracts traded on the New York Cotton Exchange. The market value so determined may be higher or lower than the actual cost of the cotton inventory. A year's ending inventory figure is used as the opening inventory figure in the following year.Cotton purchases are accounted for at cost under an accrual method: during the course of the year, the purchases account is debited by the amounts paid under fixed price contracts, advanced as provisional payments under delivered, on-call contracts, and paid in final settlement of delivered, on-call contracts that have been fixed by the end of the year; at yearend, 51 in the event of a rising market, Molsen & Co. accrues an additional amount to the purchases account (by debiting purchases and crediting accounts payable) to account for the additional money potentially due to sellers under delivered, 492 on-call purchase contracts that have not yet been fixed. 6 Cotton merchants sometimes refer to this accrual calculation as bringing the unfixed, delivered, on-call purchases "to market," but in fact, the purchase obligations are not accrued at the yearend market (or spot) value of the purchased cotton. Rather, the amount of the accrual is determined in accordance with the price terms of each unfixed, delivered, on-call purchase contract, in light of the market price on December 31 of futures of the designated call months: generally, Molsen & Co. calculates the amount that it owes under the contracts (without regard to amounts previously advanced as provisional payments) as if the sellers had elected to call and fix the prices on December 31, and then accrues the difference between such amount and the provisional payments. 7 Although the accrual technically does not peg the cost of unfixed, delivered, on-call purchases at the yearend market52 value of cotton, we may hereinafter refer to the accrual as bringing such purchases "to market" for brevity's sake and because the purchase cost as accrued is tied to the yearend market price of futures.Molsen & Co. reverses the yearend accruals for unfixed, 53 delivered, on-call purchases shortly after the start of the following year by debiting accounts payable and crediting the purchases account. Reversing the accrual entries prevents the duplication in the following year of the previously accrued cost of such purchases. When each seller actually fixes the price of his cotton, Molsen & Co. pays the difference between the called price and the amount provisionally advanced, and it debits the purchases account and credits the cash account for the additional amount paid.Molsen & Co. has always valued its inventory at market. Likewise, the company has always accrued a liability to its purchases account at yearend for the unpaid balance (if any) due under unfixed, delivered, on-call purchase contracts. These adjustments are made for financial accounting purposes 493 as well as for tax accounting purposes. However, due to the fact that the cotton season ends on July 31 of each year, Molsen & Co.'s inventory is much lower at the close of its fiscal year on July 31. Furthermore, the company rarely has any unfixed, delivered, on-call purchases at the close of its fiscal year because it typically ends the season with on-call purchases54 based on July futures; in only a few, isolated instances has cotton been delivered and sold to Molsen & Co. on-call in one season based on October futures, which falls in the next season. Consequently, no adjustment is usually necessary in the preparation of the company's financial statements to accrue amounts potentially owing on unfixed, delivered, on-call purchases. None of the company's delivered, on-call purchases remained unfixed on July 31, 1978.Molsen & Co.'s method of accounting for its cost of goods sold conforms to generally accepted accounting principles and to longstanding industry-wide practice. Most, if not all, cotton merchants value their yearend inventories at market for financial and tax accounting purposes, and this practice has been explicitly recognized and permitted by the Commissioner since 1926. Likewise, most, if not all, cotton merchants bring their unfixed, delivered, on-call purchases to market if they have any at the end of their fiscal or taxable years. Unlike Molsen & Co., many cotton merchants, either before or since 1977, have adopted identical years for tax and financial reporting purposes and have selected years corresponding more closely 55 to the traditional cotton season -- for example, years ending on May 31, June 30, July 31, or August 31. Such merchants rarely have unfixed, delivered, on-call purchases to bring to market at the end of their taxable years. However, such purchases are brought to market on interim financial statements prepared during the course of the year for company use or to secure bank financing.Cotton merchants sell cotton on-call in addition to buying cotton on-call. An on-call sale operates much like an on-call purchase; all particulars of the transaction are fixed with the exception of the price, which remains "on-call." The price is a negotiated number of points on or off the price of a futures contract for a call month traded on the New York Cotton Exchange. In an on-call sale, unlike an on-call purchase, the buyer (typically a textile mill) has the call, which may be 494 exercised anytime between the execution of the contract and the first notice day of the call month. Some cotton merchants receive a provisional payment and ship the cotton to the buyer before the price has been fixed. Where the price of cotton sold and delivered on-call has not been fixed by yearend, cotton merchants56 bring the sale "to market" at the close of the year by accruing the amount that would be due it if the buyer had elected to call the price on the last day of the year. Molsen & Co. engages in on-call sales, but does not, as a rule, ship cotton to a buyer before the buyer has fixed the price. Consequently, Molsen & Co. normally has no unfixed, delivered, on-call sales contracts at yearend; in the event that the company does, it brings such sales to market in the same manner as it brings its on-call purchases to market. Apparently, Molsen & Co. and other cotton merchants do not accrue unfixed, on-call sales at yearend where the cotton has not yet been shipped; but, since the merchants have title to such cotton at the end of the year, it is included in ending inventory at its market value. 857 In 1977, Molsen & Co. purchased 1,199,915 bales of cotton, of which 1,060,990 were purchased in the United States. On December 31, 1977, the price of 37,706 bales bought on-call and delivered to the company remained unfixed. Such on-call purchases are divisible into two groups: the Texas contracts, totaling 17,021 bales, and the Memphis territory 9 contracts, totaling 20,685 bales. Each of the Texas and Memphis territory contracts provided for a price of a specified number of points off July 1978 futures, with adjustments for grade, staple, and micronaire, and each of the contracts provided for a provisional payment. Under a Texas contract, the provisional payment equaled the Government loan value of the cotton less a 50 point "invoicing and outturn charge," and constituted a guaranteed minimum price for the cotton. The Texas farmer was therefore guaranteed the cotton's loan value in the event of a subsequent decline in the futures market. Under some of the Memphis territory contracts, the provisional payment was 495 40 cents per pound regardless of the actual loan value of the delivered cotton, whereas under the remaining contracts, the provisional payment equaled the58 Government loan value. Except for two contracts, the provisional payment advanced under a Memphis territory contract was not a guaranteed minimum price.Molsen & Co. filed a Small Business Corporation Income Tax Return for the calendar year 1977 on which it reported gross sales, cost of goods sold, and gross profit from sales as follows:Gross sales$ 325,894,477Less: Returns and allowances2,296,266323,598,211Less: Cost of goods sold317,078,994Gross profit from sales6,519,217The company reported total income of $ 6,772,017, and after subtracting deductions totaling $ 5,356,303, reported taxable income of $ 1,415,714.The company's cost of goods sold, as reported on its 1977 return, was computed as follows:Beginning inventory$ 104,323,282Plus:Purchases251,095,008355,418,290Plus:Freight8,149,007Compress charges and controlling fees6,042,641Interest and exchange4,292,541Insurance on cotton824,411Purchase commissions268,681Customs and duties48,579375,044,150Less:Ending inventory57,965,156Cost of cotton sold317,078,99459 In computing the value of its ending inventory, Molsen & Co. valued unsold inventory at its market value on December 31, 1977, and sold-but-undelivered inventory at its sales price. The price of cotton and cotton futures was rising at the end of 1977. By December 31, 1977, the price of July 1978 futures for base quality cotton had risen to 55.40 cents per pound. To bring unfixed, delivered, on-call purchases to market on December 31, 1977, Molsen & Co. accrued an additional $ 1,099,464.58 to its purchases account, consisting of $ 189,324.58 that would have been due under the Texas contracts and $ 910,140 that 496 would have been due under the Memphis territory contracts had the sellers under such contracts fixed their prices on December 31. The additional $ 1,099,464.58 was then included in the purchases figure to increase the company's cost of goods sold by such amount and to reduce its gross profit and taxable income by such amount.Molsen & Co. employed different methods to calculate the amounts potentially due under the Texas and Memphis territory contracts. In computing the accrual for the Texas contracts, the company first determined that the weighted average of 60 the different buying bases (the number of points off July 1978 futures) provided in the Texas contracts was 853 points, or 8.53 cents, per pound. The company then deducted 8.53 cents from 55.40 cents, the December 31, 1977, price of July 1978 futures, to arrive at a price of 46.87 cents per pound for base quality cotton. The difference between 46.87 cents and the loan value of base quality cotton in Texas, 44.60 cents per pound, was 2.27 cents. By multiplying 2.27 cents by 8,340,290 pounds (the approximate weight of 17,021 bales of Texas cotton), 10 the company arrived at $ 189,324.58 as the amount that it would have owed in addition to the previously advanced provisional payments if the Texas contracts had been called on December 31, 1977. To compute the accrual for the Memphis territory contracts, the company separately determined the amount per pound potentially due under each contract by subtracting the provisional payment actually advanced from the price on December 31, 1977, as determined in accordance with the contract. The average amount due was 880 points, or 8.8 cents, per pound. By multiplying 8.8 cents by 10,342,500 pounds (the approximate weight of 20,685 bales 61 of Memphis territory cotton), 11 the company determined that it would have owed $ 910,140 more if the sellers had fixed their prices on December 31, 1977.All of the sellers under the Texas and Memphis territory contracts exercised their call rights and fixed their prices by June 23, 1978; Molsen & Co. paid approximately $ 1,839,633.70 in 1978 in final settlement of the Texas and Memphis territory contracts.497 The petitioners reported their distributive shares of Molsen & Co.'s reported taxable income on their Federal income tax returns for 1977. In his notices of deficiency, the Commissioner determined that Molsen & Co. could not bring its unfixed, delivered, on-call purchases to market on December 31, 1977, by accruing $ 1,099,465 to purchases in computing its cost of goods sold, because, on December 31, 1977, such purchase contracts were open-ended contracts under which 62 Molsen & Co. had only a contingent liability for additional costs. The Commissioner therefore limited purchases to the $ 249,995,543 actually paid by Molsen & Co. in 1977 and increased the company's taxable income by $ 1,099,465. There is no evidence that the Commissioner changed the company's method of valuing opening and ending inventories at market.OPINIONSection 446 provides that taxable income shall be computed under the method of accounting regularly used by the taxpayer in computing his income and keeping his books, but if no method has been regularly used by the taxpayer or if "the method used does not clearly reflect income," the computation shall be made under such method as, in the opinion of the Commissioner, does clearly reflect income. The term "method of accounting" includes not only the taxpayer's overall method but also the accounting treatment of any item. Sec. 1.446-1(a)(1), Income Tax Regs. Molsen & Co., a cotton merchant, accounts for its taxable income on an accrual basis and employs a taxable year ending December 31. In accordance with generally accepted accounting principles and industry-wide practice, the company has historically and consistently accounted63 for its cost of goods sold by valuing ending cotton inventory at market and accruing to the cost of purchases the additional amount that would be payable by it under its unfixed, delivered, on-call purchase contracts were the cost of such purchases fixed on December 31. Since 1926, the Commissioner has expressly permitted cotton merchants and other dealers in commodities to value their ending inventories at market value even though market value may exceed the inventories' actual cost. See Rev. Rul. 74-227, 1 C.B. 119">1974-1 C.B. 119, which updated, restated, and superseded S.M. 5693, V-2 C.B. 20 (1926). However, the Commissioner has recently ruled that 498 cotton merchants may not include the additional amounts (if any) payable under on-call purchase contracts in the cost of cotton purchases unless the cotton producers have called the prices during the taxable year. Rev. Rul. 81-298, 2 C.B. 114">1981-2 C.B. 114. 12 The primary issue for decision is therefore whether Molsen & Co.'s method of accounting for its unfixed, delivered, on-call purchases clearly reflects its income so that the Commissioner was arbitrary64 and abused his discretion in determining that the company's method should be changed.Section 446 vests the Commissioner with wide discretion in determining whether a particular method of accounting clearly reflects income, and a heavy burden is imposed upon the taxpayer to overcome a determination by the Commissioner in this area. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 532 (1979); United States v. Catto, 384 U.S. 102">384 U.S. 102, 114 (1966); Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446, 467 (1959); Lucas v. Structural Steel Co., 281 U.S. 264">281 U.S. 264, 271 (1930). However, it is a well-established principle that the Commissioner cannot require a taxpayer to change from an accounting method which clearly65 reflects income because the Commissioner considers an alternate method to more clearly reflect income. See, e.g., St. James Sugar Co-op, Inc. v. United States, 643 F.2d 1219">643 F.2d 1219 (5th Cir. 1981); Bay State Gas Co. v. Commissioner, 75 T.C. 410">75 T.C. 410, 417 (1980), affd. 689 F.2d 1">689 F.2d 1 (1st Cir. 1982); Auburn Packing Co. v. Commissioner, 60 T.C. 794">60 T.C. 794, 798-800 (1973); Garth v. Commissioner, 56 T.C. 610">56 T.C. 610, 618 (1971).Gross income, in a merchandising business, means total sales less cost of goods sold (the gross profit from sales), plus any income from investments and from incidental or outside operations and sources. Sec. 1.61-3, Income Tax Regs.; Form 1120. The cost of goods sold during a year is determined by subtracting inventory on hand at the end of the year from the total inventory on hand at the beginning of the year and the cost of purchases. Schedule A, Form 1120. The use of inventories is a key feature of the accrual method of accounting. Inventories are intended to insure a clear reflection of the year's income by matching sales during the66 taxable year with the purchase costs attributable to those sales; costs attributable to inventory remaining on hand at the end of the year are 499 not expensed in the year incurred, but are, in effect, deferred until the year in which such inventory is sold. See Photo-Sonics, Inc. v. Commissioner, 357 F.2d 656">357 F.2d 656, 657-658 (9th Cir. 1966), affg. 42 T.C. 926">42 T.C. 926 (1964); All- Steel Equipment Inc. v. Commissioner, 54 T.C. 1749">54 T.C. 1749, 1751 (1970), affd. per curiam on this issue 467 F.2d 1184">467 F.2d 1184 (7th Cir. 1972). Where inventories are employed, purchases and sales must be computed on the accrual method (unless another method is authorized by the Commissioner) in order to avoid the distortion of income. Sec. 1.446-1(c)(2), Income Tax Regs.; Stoller v. United States, 162 Ct. Cl. 839">162 Ct. Cl. 839, 845, 320 F.2d 340">320 F.2d 340, 343 (1963).Inventories are most commonly valued at either (1) cost or (2) the lower of cost or market. Sec. 1.471-2(c), Income Tax Regs. Use of the latter method accelerates the recognition of unrealized losses on the inventory: where the67 market value of the inventory on hand at yearend has fallen below its original cost, the decline is recognized as a loss for income tax purposes even though the inventory has not been sold during the year. St. James Sugar Co-op, Inc. v. United States, supra at 1226; D. Loveman & Son Export Corp. v. Commissioner, 34 T.C. 776">34 T.C. 776, 798 (1960), affd. 296 F.2d 732">296 F.2d 732 (6th Cir. 1961). The lower of cost or market method, expressly approved by the regulations, is a recognized exception to the principle of annual accounting that only closed transactions occurring during the taxable year may be reflected on the year's tax return. St. James Sugar Co-op, Inc. v. United States, supra.Molsen & Co.'s method of valuing ending inventory at market, whether higher or lower than cost, results in the recognition of unrealized gains as well as unrealized losses on the inventory. Valuation at market is the longstanding practice of cotton merchants. Expressly authorized for dealers in securities by section 1.471-5 of the regulations, such method was originally approved for cotton merchants68 and other dealers in commodities in S.M. 5693, supra, and was reapproved in Rev. Rul. 74-227, supra. The method was approved on the basis of a brief submitted on behalf of cotton merchants and made a part of A.R.M. 135, 5 C.B. 67, 69 (1921), wherein it was explained:The bales bought by the cotton merchant from day to day at different prices during the course of a season consist of every known grade of cotton. * * The identity of the individual bale is not retained, and the cost of the 500 individual bale is not kept by the cotton merchant and can not be, owing to concentration of all cotton bought and continued additions and shipments from the whole lot, but the value of the cotton on hand can always be determined because of the market quotations and the fact that the commodity is liquid and immediately convertible into cash.At the close of the year, either fiscal or calendar, the cotton merchant takes an inventory of the cotton on hand. This cotton consists of bales purchased from the first day of the season to the last and represents a wide difference in price paid. The universal practice 69 has been to inventory at market, because that tells the real value of his commodity; further, because the identity of the bale and the matter of cost can not be determined, hence it is impossible to take it other than at the market price.The Commissioner therefore recognized that valuation of cotton inventory at market conforms to the industry-wide practice of many years and to the best accounting practice in the trade and is the only practical method of arriving at a true and correct reflection of the cotton merchant's income. Rev. Rul. 74-227, supra; S.M. 5693, supra.By bringing its unfixed, delivered, on-call purchase contracts to market at the end of its taxable year, Molsen & Co. reduces the size of the gain or loss recognized as a result of its inventory valuation method. The spot (market) price and the futures price of cotton tend to move in tandem. Thus, in a rising market, as the market value of the inventory increases, Molsen & Co.'s potential liability under its unfixed, on-call purchase contracts increases. The accrual to purchases of such liability increases the cost of goods sold and thereby reduces the gross income70 of the company. In a falling market, Molsen & Co.'s potential liability under its unfixed, on-call contracts declines as the market value of the cotton inventory declines. If the market price were to fall below the amount which Molsen & Co. advanced as a provisional payment under its unfixed, on-call purchases, the amount potentially receivable by the company from the sellers (assuming, as under most of the Memphis territory contracts, that the provisional payment was not a guaranteed minimum price) would be offset against the loss recognized on the inventory. At the end of 1977, the market and futures prices of cotton were rising, and Molsen & Co. accrued $ 1,099,464.58 to the cost of purchases as the amount that it would have owed on December 31 had the sellers under the Memphis territory and Texas contracts, which were unfixed, called their prices on that day. As it 501 turned out, the market continued to rise, and Molsen & Co. eventually paid about $ 1,839,633.70 in 1978 in final settlement of the contracts.The Commissioner contends that purchases are an expense subject to the "all events" test of sections 1.446-1(c)(1)(ii) and 1.461-1(a)(2) of the regulations, which71 govern the timing of deductions under the accrual method. Applying such test to the unfixed, delivered, on-call purchase contracts involved here, the Commissioner argues that the provisional payments advanced in 1977 are includable in purchases but that no yearend accrual may be made for the estimated additional amounts due under the contracts because Molsen & Co.'s liability for such additional amounts was contingent until the time that the sellers actually called the price. The petitioners, on the other hand, contend that the Commissioner acted arbitrarily and abused his discretion in disallowing the yearend accrual for the unfixed, on-call purchases because such accrual conformed to industry-wide practice and to generally accepted accounting principles, was consistently applied year after year, and, most importantly, was necessary in order to clearly reflect the company's income. The petitioners present a variety of arguments, but their basic position is that the Commissioner, having recognized the need of cotton merchants for, and the practice of, valuing ending inventory at market, was arbitrary in rejecting their companion practice of bringing unfixed, delivered, on-call 72 purchases to market; to value their inventories at market in any event and to deny them the opportunity to bring their purchase costs to market results, they maintain, in a substantial distortion of income.As stated above, if a taxpayer uses inventories, purchases must be accounted for under the accrual method in order to accurately reflect the cost of goods sold during the year. Sec. 1.446-1(c)(2), Income Tax Regs. The all events test relied upon by the Commissioner has long been a cornerstone of the accrual method of accounting for Federal income tax purposes. See, e.g., Brown v. Helvering, 291 U.S. 193">291 U.S. 193 (1934); Lucas v. American Code Co., 280 U.S. 445 (1930); United States v. Anderson, 269 U.S. 422 (1926). The regulations describe the accrual method as follows:Generally, under an accrual method, income is to be included for the taxable year when all the events have occurred which fix the right to receive such 502 income and the amount thereof can be determined with reasonable accuracy. Under such a method, deductions are allowable for the taxable year in which all the events73 have occurred which establish the fact of the liability giving rise to such deduction and the amount thereof can be determined with reasonable accuracy. * * * [Sec. 1.446-1(c)(1)(ii), Income Tax Regs.]This description of the accrual method is repeated in the regulations under section 451, insofar as it pertains to the accrual of income, and in the regulations under section 461, insofar as it pertains to the accrual of deductible expenses.In our view, the Commissioner's reliance, in part, on section 1.461-1(a)(2) of the regulations is misplaced. Although purchases are an "expense" in the colloquial sense, it is well settled that they are not a "deduction" within the meaning of section 461 and that they are not subject to the rules governing deductions under such section. Purchases are taken into account in computing the cost of goods sold, which is an offset, or exclusion, employed in the computation of gross profit and gross income ( section 1.61-3(a), Income Tax Regs.); whereas, throughout the Code, the term "deduction" is used to refer to amounts subtracted from gross income to arrive at taxable income. Curtis Gallery & Library, Inc. v. United States, 388 F.2d 358">388 F.2d 358, 361 (9th Cir. 1967);74 B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422">65 T.C. 422, 428-432 (1975), affd. per curiam 584 F.2d 53">584 F.2d 53 (5th Cir. 1978), and cases cited therein; National Home Products, Inc. v. Commissioner, 71 T.C. 501">71 T.C. 501 (1979).Such distinction was recognized in Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477">69 T.C. 477 (1977), affd. 630 F.2d 670">630 F.2d 670 (9th Cir. 1980). In that case, the taxpayer, in violation of State law, made sales of liquor and wine to selected customers at posted prices with the understanding that such customers would receive a credit to be used for future purchases or an additional bottle of each case purchased. As the additional bottles were delivered, their cost was charged to the cost of goods sold. Section 162(c)(2) disallows a deduction for an "illegal bribe, illegal kickback, or other illegal payment" otherwise deductible under section 162(a). However, we held that such limitation was not applicable because the cost of the additional bottles was a part of the cost of goods sold. 69 T.C. at 484-486. See also 75 Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707">26 T.C. 707 (1956). Similarly, in National Home Products, Inc. v. Commissioner, supra, we determined that casualty losses of 503 inventories are not deductions subject to the "reasonable prospect of recovery test" contained in section 1.165-1(d)(2)(i) of the regulations, which determines the year of deductibility of casualty losses under section 165. The Commissioner had argued that it would be inconsistent to allow inventory losses to be reflected in the cost of goods sold for a year at the end of which there was a reasonable prospect of recovery of such losses while other losses would be disallowed under similar circumstances. We disagreed, stating that "This is simply recognition of the fact that use of inventories in computing gross income for both book and tax purposes is unique and warrants use of different rules to correctly reflect income." 1371 T.C. at 530.76 The Commissioner has, in his regulations, also recognized that in some industries, the all events test is not to be applied in determining the costs of inventories. For example, section 1.471-6, Income Tax Regs., permits livestock raisers and farmers to value livestock inventory under the "unit-livestock-price method." Such method permits the livestock raiser to estimate the cost of the animals in inventory through a classification system based on the age and kind of the animal "so that the unit prices assigned to the several classes will reasonably account for the normal costs incurred in producing the animals within such classes." Sec. 1.471-6(e), Income Tax Regs. Once established, the unit prices and classifications selected by the livestock breeder must be consistently applied in all subsequent taxable years in the valuation of the livestock inventories. Sec. 1.471-6(f), Income Tax Regs. We have recognized that use of the unit-livestock-price method "is at best an approximation," but that it serves "a useful purpose in that it greatly eases the bookkeeping burden on many taxpayers without an inordinate sacrifice in accuracy." Auburn Packing Co. v. Commissioner, 60 T.C. at 801.77 504 Similarly, section 1.471-8 of the regulations permits retail merchants to employ the "retail method" of inventory accounting. Under the retail method, the retail value of the inventory on hand at the close of the year is reduced by a mark-on percentage to arrive at the approximate cost of such inventory. The mark-on percentage (which is an average computed in accordance with the regulations) reflects the amount added to cost to cover selling and other expenses and profit margin. Sec. 1.471-8(a), Income Tax Regs. Although the cost assigned to any particular inventory under the retail method is merely an approximation, it is an accepted and popular method because it is simpler than other methods, particularly for the larger retailer. See R. Hoffman & H. Gunders, Inventories 325-326 (2d ed. 1970).Both the unit-livestock-price method and the retail method are sanctioned because the practical accounting problems encountered by those in the livestock raising and retail industries have been recognized. Both methods entail some degree of estimation which will ultimately affect the computation of cost of goods sold and, thus, income. However, if consistently applied, such78 methods result in a clear reflection of income.Here, the unique accounting needs and practices of the cotton merchants have similarly led to a deviation from the general rules governing the valuation of inventories and the calculation of income. The Commissioner has made no attempt to show how such practices fail to clearly reflect Molsen & Co.'s income. Of course, the recognition of Molsen & Co.'s liabilities for its unfixed, on-call purchases involves some degree of approximation, but the degree of such approximation and the contingency of the liabilities are no greater than the degree of approximation and the contingency attached to the recognition of unrealized income because of the inventory's increased value.The facts of this case present a persuasive example of why the all events test should not always be applied in determining the costs of inventory. Generally, income is not taxable until it is realized, and it is not realized until it has been received and the offsetting expenses have been paid or incurred. However, the practice of valuing the inventories of a cotton merchant at market can result in the taxation of unrealized income. For 505 example, if a merchant79 purchases a pound of cotton for a fixed price of 45 cents, and if that cotton is in his inventory at the end of the year and has a value of 50 cents at that time, he is taxable on 5 cents of unrealized income. In that situation, although the income is unrealized, the merchant does actually stand to make a gain, but if he purchased such cotton under an on-call contract and advanced 45 cents as a provisional payment, he does not, in fact, stand to make such gain. It is utterly unrealistic to treat his cost as merely the 45 cents; if the law recognizes that the cotton has a value of 50 cents, the law must also recognize that its cost is more than 45 cents. Since the value of the inventory is not based upon actual cost, but reflects the market value of the products, it would be paradoxical to apply the all events test and require the merchant to compute the cost of his inventory on the basis of his actual expenditures. The observations of Judge Opper in Pacific Grape Products Co. v. Commissioner, 17 T.C. 1097">17 T.C. 1097, 1110 (1952) (Opper, J., dissenting), revd. 219 F.2d 862">219 F.2d 862 (9th Cir. 1955), are particularly apposite here:The practice80 of disapproving consistent accounting systems of long standing seems to me to be exceeding all reasonable bounds. * * * Methods of keeping records do not spring in glittering perfection from some unchangeable natural law but are devised to aid business men in maintaining sometimes intricate accounts. If reasonably adapted to that use they should not be condemned for some abstruse legal reason, but only when they fail to reflect income. * * The Commissioner relies heavily on the Supreme Court's decision in Thor Power Tool Co. v. Commissioner, supra, giving him broad authority to determine the accounting methods to be used by taxpayers, but the facts of that case were significantly different. There, the taxpayer sought to writedown its "excess" inventory to what it estimated to be its net realizable value, even though the taxpayer continued to hold such inventory for sale at original prices. The Court determined that because the taxpayer provided no objective evidence of the reduced value of the excess inventory, the writedown was plainly inconsistent with the regulations, and the Commissioner properly disallowed it. 439 U.S. at 538.81 The Court considered that the taxpayer was, in effect, claiming a loss which it had not sustained, because the inventory was still available and had not been discarded. 439 U.S. at 545. Here, the 506 Commissioner is attempting to tax Molsen & Co. on income that it has not received. The Commissioner would recognize the increase in the value of the inventory, but he refuses to recognize the increase in the company's liabilities. In Thor, the Supreme Court found that there was a distortion in income when the taxpayer attempted to claim a loss not sustained; here, there would be a distortion of income if we adopted the Commissioner's position and taxed Molsen & Co. on income computed without taking into consideration the costs attributable to it.In the final analysis, whether Molsen & Co.'s method of accounting for its unfixed, delivered, on-call purchases clearly reflects income is a question of fact. St. James Sugar Co-op, Inc. v. United States, 643 F.2d at 1223; Madison Gas & Electric Co. v. Commissioner, 72 T.C. 521">72 T.C. 521, 555 (1979), affd. 633 F.2d 512">633 F.2d 512 (7th Cir. 1980).82 Based on the facts here present, we conclude that Molsen & Co.'s method clearly reflects its income and that the Commissioner was arbitrary and abused his discretion in seeking to change it.The petitioners' position is strengthened by the following facts: (1) That Molsen & Co. used its method of accounting consistently in each of the years of its existence (see Madison Gas & Electric Co. v. Commissioner, 72 T.C. at 556; Auburn Packing Co. v. Commissioner, 60 T.C. at 799; Sam W. Emerson Co. v. Commissioner, 37 T.C. 1063">37 T.C. 1063, 1068 (1962)); (2) that its method conforms to an industry-wide practice of very long standing (see sec. 1.446-1(a)(2), Income Tax Regs.; Garth v. Commissioner, 56 T.C. at 619); and (3) that its method conforms to the best accounting practice in the industry (see Commissioner v. Idaho Power Co., 418 U.S. 1">418 U.S. 1, 14-15 (1974), but see Thor Power Tool Co. v. Commissioner, supra). In addition, although Molsen & Co.'s accrual to purchases may not have met the all events test, on December 31, 83 1977, it was more than likely that the liabilities would become definitely fixed within a matter of months and that the liabilities would approximate the amount of the accrual. The market and the futures prices of cotton had risen by the end of the year, and while the market and the response thereto of the cotton sellers could not be predicted with complete accuracy, it was reasonable to assume that, in the event of a subsequent decline in the 507 market, most of the sellers would call their contracts before their prices declined to the level of their provisional payments.Moreover, the Commissioner's proposed treatment of unfixed, delivered, on-call purchases is inconsistent with his treatment of hedging transactions entered into by cotton merchants. A cotton merchant may hedge fixed price purchases and fixed price sales by entering into offsetting positions in the futures market. Hedging reduces the merchant's risk in the event of fluctuations in the market price of cotton. Hedging almost always involves taking a straddle position. As a result, the cotton merchant will normally make money on the actual cotton and lose money on the futures, or profit on the futures and84 lose (or receive less profit) on the actual cotton. See generally Willingham, "More than You Ever Wanted to Know About Hedging," 3 Agricultural L. J. 100-114 (1981-82). Gains and losses on hedging transactions receive ordinary income (or loss) treatment. See Stewart Silk Corp. v. Commissioner, 9 T.C. 174">9 T.C. 174 (1947), and cases cited therein.Since 1921, the Commissioner has expressly permitted cotton merchants, in determining gross income, to take into account gains and losses at the end of the taxable year based upon the market value of the open futures contracts to which they are parties as hedges against actual spot or cash transactions. A.R.M. 135, 5 C.B. 67 (1921), which is updated, restated, and superseded by Rev. Rul. 74-223, 1 C.B. 23">1974-1 C.B. 23. The practice of bringing open futures contracts that are hedges to market at yearend is a part of the cotton merchants' larger accounting practice of bringing all elements of income to market at yearend:In the keeping of books in the cotton business, it has been the custom, existing over a period of approximately 100 years, for the cotton85 merchants to take into consideration at market his forward sales, purchases, and hedges, and if they show a profit, that is added to the season's business. If on the other hand, they show a loss, it is deducted from the season's business. His real profit, or loss, is hereby determined for the year. This system of bookkeeping is the only accurate and correct system that has been devised that truly reflects the net profit or loss of any given year's business, either fiscal or calendar. * * * [Rev. Rul. 74-223, supra, 1974-1 C.B. at 24.]In permitting cotton merchants to bring their hedges to market at the end of the year, the Commissioner acknowledged 508 that such practice was an exception to the "closed transaction" doctrine. A.R.M. 135, supra, 5 C.B. at 67.In our opinion, an on-call purchase contract appears to function in much the same way as a hedge. For example, assume that a cotton merchant purchases 100 bales of cotton at a fixed price of 50 cents per pound, and at the same time, hedges the purchase by entering into a futures contract to deliver86 100 bales of cotton at 55 cents per pound at a specified future date, for a combined theoretical profit of 5 cents on the actual and the futures transactions. In the event of a rise in the cotton market, the merchant's profit on the sale of the cotton will normally be offset by a loss on the closeout of the futures transaction. (Assuming that the market and futures prices move exactly in tandem, the merchant's 5 cents per pound profit is preserved.) In the event of a fall in the market, the loss on the sale of the cotton will be offset by the gain on the futures. An on-call purchase contract works in an analogous fashion. A rise in the market causes the company to recognize a profit on the sale of the cotton or an unrealized gain on the valuation of the cotton if it remains in inventory, but such profit or gain is offset in part by the accompanying increased liability for purchase cost under the on-call contract. Conversely, in a falling market, assuming that the provisional payment is not a guaranteed minimum price, the loss on the sale or inventory valuation of the cotton is offset by the company's reduced liability for purchase cost. We can perceive of no good reason why 87 the Commissioner should allow cotton merchants to bring their hedging transactions to market at yearend and yet refuse to permit those same merchants to bring their unfixed, delivered, on-call purchases to market at yearend. Both practices are obviously a part of the cotton merchants' larger practice "of bringing all elements to market price at the end of the taxable year, which has been in use for a long period of years and which conforms to the best accounting practices in the trade, [and] is recognized as the only practical method of arriving at a true and correct result of the operations." Rev. Rul. 74-223, supra, 1974-1 C.B. at 24; see Rev. Rul. 74-227, 1974-1 C.B. at 121.The petitioners also point out that the Commissioner's proposed treatment of on-call purchases is inconsistent with the cotton merchants' practice of bringing unfixed, delivered, 509 on-call sales to market at the end of the year. 14 The Commissioner has taken no position with respect to such practice, but it is clearly another facet of the cotton merchants' general practice88 of bringing all open transactions to market. Some cotton merchants testified to their understandable concern that the Commissioner's approach to on-call purchases will distort the merchants' income if on-call sales are still to be brought to market: as the futures price of cotton changes, the merchants' on-call sales revenues increase or decrease inversely to the increase or decrease in the merchants' liabilities for on-call purchases; thus, if only on-call sales are brought to market, income will be overstated in a rising market and understated in a falling market. This is but another example of how the Commissioner's proposed change in the merchants' long-standing practice of accounting for on-call purchases will result in a distortion of their income. By altering a single aspect of the merchants' overall method of accounting for income, the Commissioner would change a method that clearly reflects income to one that does not.89 Finally, the Commissioner has suggested that Molsen & Co.'s need to make a yearend accrual for unfixed, delivered, on-call purchases would not have arisen had the company adopted a taxable year based on its fiscal year and the cotton season. It is true that many cotton merchants usually have no delivered, on-call purchases remaining unfixed at the close of their taxable years because they have adopted years ending nearer the end of the cotton season on July 31. However, some cotton merchants testified that on-call purchases are occasionally based on October futures and that, consequently, it is possible for such purchases to be unfixed on July 31. Furthermore, there is absolutely no evidence that Molsen & Co. is attempting to manipulate its tax liability by employing a taxable year based on the calendar year. The company has employed its December 31 tax year since its founding as a partnership over 50 years ago. Conceivably, a calendar year was adopted to conform to the taxable years of the partners of the closely held business.510 The second issue for decision is whether the petitioners are entitled to an award of costs and attorneys' fees. This Court is without authority90 to award costs or attorneys' fees unless specifically authorized to do so by act of Congress. See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240">421 U.S. 240 (1975); Sharon v. Commissioner, 66 T.C. 515">66 T.C. 515 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978). The petitioners contend that they are entitled to costs and attorneys' fees pursuant to 28 U.S.C. section 2412 (1982 ed.), as amended by the Equal Access to Justice Act, Pub. L. 96-481, title II, sec. 204(a), 94 Stat. 2327 (effective Oct. 1, 1981). 1591 By virtue of 28 U.S.C. section 451 (1981 ed.), 16section 2412 of tit. 28 applies only to courts established under article III of the United States Constitution, that is, courts "the judges of which are entitled to hold office during good behavior." McQuiston v. Commissioner, 78 T.C. 807">78 T.C. 807, 811 (1982), affd. without published opinion 711 F.2d 1064">711 F.2d 1064 (9th Cir. 1983); Sharon v. Commissioner, 511 66 T.C. at 534. It does not apply to the Tax Court, an article I court, whose judges serve for a term of 15 years after taking office. Secs. 7441, 7443(e); Bowen v. Commissioner, 706 F.2d 1087">706 F.2d 1087 (11th Cir. 1983), affg. per curiam 78 T.C. 55">78 T.C. 55 (1982); McQuiston v. Commissioner, 78 T.C. at 811. Therefore, we have no authority to grant costs or attorneys' fees to the petitioners under section 2412 of title 28. We observe that taxpayers prevailing in the Tax Court may now recover reasonable litigation costs, including attorneys' fees, pursuant to section 7430 of the Code, 17 but such92 section is only applicable to proceedings commenced after February 28, 1983, and before January 1, 1986. Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 292(a), (e), 96 Stat. 572, 574 (1982). A case is commenced in this Court by the filing of a petition. Rule 20(a), Tax Court Rules of Practice and Procedure. Since the petitioners filed their petitions in these cases on September 10, 1982, we are unable to award them costs or attorneys' fees under section 7430.93 Decisions will be entered for the petitioners. Footnotes1. Cases of the following petitioners are consolidated herewith: Frederick G. Molsen and Jayne F. Molsen, docket No. 22700-82; Peter F. Kandel and Barbara M. Kandel, docket No. 22701-82; and Elizabeth Molsen, docket No. 22702-82.↩. Brief amicus curiae was filed by Neil P. Gillen, vice president and general counsel of the American Cotton Shippers Association.↩2. All statutory references are to the Internal Revenue Code of 1954 as in effect during 1977, unless otherwise indicated.↩3. A "point" is one/one-hundredth of a cent.↩4. The term "base quality cotton" refers to the type of cotton traded on the New York Cotton Exchange: strict low middling 1-1/16 inch staple length with a micronaire of 3.5 through 4.9.↩5. A price "off" a futures month refers to a price the specified number of points below the futures price. A price "on" a futures month refers to a price the specified number of points above the futures price.↩6. In the event that the cotton market falls by yearend to the point where the provisional payment exceeds the amount due the seller under an unfixed, delivered, on-call purchase contract on Dec. 31, and assuming that the provisional payment is not a guaranteed minimum price, Molsen & Co. would, theoretically, credit the purchases account and debit accounts receivable by the amount of such difference due it by the seller. However, there is no evidence that Molsen & Co. has ever experienced this situation.↩7. As will be discussed in the text, infra↩, Molsen & Co. calculated the accrual in slightly different ways for the two groups of its delivered, on-call purchases that were unfixed on Dec. 31, 1977, and employed certain average figures in its computations.8. It is not clear from the record whether cotton merchants treat such cotton as "sold" cotton (sold but undelivered) that is valued at its sales price or as "unsold" cotton that is valued at its market value. If such cotton is viewed as sold, it is presumably necessary to determine its sales price as if the price was fixed on the last day of the year -- just as the merchants calculate the accrual to sales for unfixed, delivered, on-call sales.↩9. The Memphis territory includes the States of Tennessee, Arkansas, Louisiana, Mississippi, and Missouri.↩10. A bale of Texas cotton weighs approximately 490 pounds.↩11. A bale of Memphis territory cotton weighs approximately 500 pounds.↩12. The Commissioner issued Rev. Rul. 81-298, 2 C.B. 114">1981-2 C.B. 114↩, in response to his investigation of Molsen & Co.'s method of accounting for its on-call purchase contracts.13. In ABKCO Industries, Inc. v. Commissioner, 56 T.C. 1083">56 T.C. 1083 (1971), affd. 482 F.2d 150">482 F.2d 150 (3d Cir. 1973), we applied sec. 461 and the regulations thereunder to bar the taxpayer's accrual of a contingent liability for royalties as a cost of inventory. However, in that case, we did not explicitly address the issue of whether sec. 461 is applicable to an inventoriable cost; apparently, the application of such section was presumed by both parties to the case. ABKCO is distinguishable from the present case for two reasons: First, the taxpayer's liability for the royalties which it sought to accrue and the amount thereof were much more speculative than the accruals of Molsen & Co.; and second, there is no evidence that the taxpayer in ABKCO↩ valued its ending inventory at market.14. Although Molsen & Co. rarely has unfixed, delivered, on-call sales at the close of its taxable year (because the company, as a rule, requires its buyers to call the price before it will deliver the cotton), several other cotton merchants testified that their firms have delivered, on-call sales remaining unfixed at yearend that are brought to market for tax purposes.↩15. Sec. 2412 of tit. 28, as in effect when the petitioners commenced these cases, provided in pertinent part as follows:Sec. 2412. Costs and Fees(a) Except as otherwise specifically provided by statute, a judgment for costs, as enumerated in section 1920 of this title, but not including the fees and expenses of attorneys, may be awarded to the prevailing party in any civil action brought by or against the United States or any agency and any official of the United States acting in his or her official capacity in any court having jurisdiction of such action. A judgment for costs when taxed against the United States shall, in an amount established by statute, court rule, or order, be limited to reimbursing in whole or in part the prevailing party for the costs incurred by such party in the litigation.(b) Unless expressly prohibited by statute, a court may award reasonable fees and expenses of attorneys, in addition to the costs which may be awarded pursuant to subsection (a), to the prevailing party in any civil action brought by or against the United States or any agency and any official of the United States acting in his or her official capacity in any court having jurisdiction of such action. The United States shall be liable for such fees and expenses to the same extent that any other party would be liable under the common law or under the terms of any statute which specifically provides for such an award. * * *(d)(1)(A) Except as otherwise specifically provided by statute, a court shall award to a prevailing party other than the United States fees and other expenses, in addition to any costs awarded pursuant to subsection (a), incurred by that party in any civil action (other than cases sounding in tort) brought by or against the United States in any court having jurisdiction of that action, unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.↩16. Sec. 451 of tit. 28 provides in pertinent part as follows:Sec. 451. DefinitionsAs used in this title:The term "court of the United States" includes the Supreme Court of the United States, courts of appeals, district courts constituted by chapter 5 of this title, including the Court of Claims, the Court of Customs and Patent Appeals, Court of International Trade and any court created by Act of Congress the judges of which are entitled to hold office during good behavior.↩17. Sec. 7430 provides in pertinent part as follows:SEC. 7430(a). In General. -- In the case of any civil proceeding which is -- (1) brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, and(2) brought in a court of the United States (including the Tax Court and the United States Claims Court),↩the prevailing party may be awarded a judgment for reasonable litigation costs incurred in such proceeding.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620405/	Norman W. Meyers v. Commissioner.Meyers v. CommissionerDocket No. 3151-67.United States Tax CourtT.C. Memo 1968-289; 1968 Tax Ct. Memo LEXIS 11; 27 T.C.M. (CCH) 1535; T.C.M. (RIA) 68289; December 18, 1968, Filed 11 Norman W. Meyers, pro se, 30 S. Carlisle St., Allentown, Pa. Edward L. Newberger, for the respondent. FEATHERSTONMemorandum Findings of Fact and Opinion FEATHERSTON, Judge: Respondent determined deficiencies in petitioner's Federal income tax, and additions to tax under section 6653(a), 1 for the taxable years 1962 and 1963 as follows: YearDeficiencyAddition to Tax1962$8,842.51$442.1319633,123.72156.19The issues for decision are: (1) Whether petitioner realized income in 1962 as a result of the forgiveness of indebtedness of $15,000 to one John Parenti; (2) Whether petitioner incorrectly set forth on his Federal income tax returns the opening and closing inventory for 1962, and the opening inventory for 1963; (3) Whether petitioner understated gross receipts from his business in 1962 and 1963; 1536 (4) Whether certain expenses deducted by petitioner from his reported business income in 1962 and 1963 were personal expenses and, if so, in what amounts; (5) Whether $2,770.10 received by petitioner in 1963 from the Lehigh County Prothonotary constituted taxable income or partial repayment 12 of a loan made by petitioner; and (6) Whether additions to tax for negligence under section 6653(a) were correctly determined for 1962 and 1963. These issues, all factual in nature, arise mainly from adjustments proposed by respondent's agent following an examination of petitioner's returns for 1962 and 1963. Upon the failure of petitioner to furnish requested data to substantiate his treatment of the disputed items, a notice of deficiency was issued adopting most, if not all, of the proposed adjustments. Our problem, principally, is to decide whether the evidence presented at the trial is sufficient to refute respondent's determinations. General Findings of Fact Petitioner Norman W. Meyers was a legal resident of Allentown, Pennsylvania, when his petition was filed. He filed Federal income tax returns for the taxable years 1962 and 1963 with the district director of internal revenue at Philadelphia, Pennsylvania. Issue 1: Forgiveness of Indcbtedness Findings of Fact For several years prior to 1962 petitioner was employed as a salesman by John Parenti, who owned and operated Market Motors, a used car business in Allentown, Pennsylvania. Since Parenti, a close family friend, was unable 13 in 1962 to renew his lease on the business premises occupied by Market Motors, he transferred the assets of the business to petitioner on July 10, 1962. These assets consisted of the office furniture and six automobiles, most of which were in need of repair. Simultaneously with the transfer of these assets, title to a Cessna Model 172 airplane, which cost $10,800 in 1960 and was registered in the name of Market Motors, was also transferred to petitioner. Under date of July 10, 1962, petitioner signed a "Bill of Sale" which recited that the assets of Market Motors, including only the "used cars * , office furniture, furnishings and any other improvements," were to be transferred to him in consideration of $15,000. No payments were made under this sales contract in 1962. Respondent determined that petitioner acquired the assets of Market Motors for $15,000 in 1962. Respondent allocated part of the "purchase price" to the six automobiles and office furniture and the balance to the airplane. Respondent further determined that the petitioner's $15,000 debt arising from the "purchase" was forgiven by Parenti in 1962 with the result that petitioner realized taxable income in that amount. 14 Petitioner had no communication, written or oral, with Parenti in 1962 regarding the forgiveness of any indebtedness that may have arisen as a result of the acquisition of Market Motors' assets. If any such indebtedness did arise in 1962, it was not forgiven in that year. Opinion Petitioner's principal contention is that Parenti made him a gift of the Market Motors assets, consisting mainly of the six old automobiles needing repair, and that he, petitioner, had bought and paid for the airplane in 1960, taking title thereto in the name of Market Motors to avoid paying the Pennsylvania sales tax at that time. To substantiate his purchase of the airplane for his own account in 1960, petitioner introduced a receipt for payment of the purchase price, dated April 25, 1960, which indicated that he was the payor. He testified that he signed the "Bill of Sale" transferring the Market Motors assets at Parenti's request for the latter's "books." Without passing on the merits of petitioner's contention that the $15,000 sales contract was without substance, we hold that in any event, no forgiveness of indebtedness to Parenti occurred in 1962. Cf. sec. 1.61-12, Income Tax Regs. Petitioner testified, 15 truthfully we believe, that he had no communication, oral or written, with Parenti in 1962 relating to the forgiveness of any such indebtedness. There is no evidence of record to the contrary, and respondent suggests no reason why Parenti would exact a debt obligation of $15,000 from petitioner in July 1962 and then forgive the debt before the end of the year. We do not think Parenti did so. 1537 Issue 2: Inventory Findings of Fact In his Federal income tax return for 1962 petitioner claimed an opening inventory (as of July 10, 1962, the date of his acquisition of the business) of $20,000.58. Respondent's agent examined petitioner's inventory ledger sheets and determined that on the basis of cost of the automobiles to Parenti (the former owner of Market Motors) the opening inventory should have been $4,155.63: 1953Pontiac$ 156.921957Oldsmobile295.001951Dodge95.001956Plymouth721.201955Ford587.511959Lincoln 2,300.00$4,155.63Petitioner agreed at the trial that the July 10, 1962, inventory was overstated in his return. Petitioner's records disclosed purchases of inventory in 1962 of $12,203, but he did not report any such expenditures in his 1962 return. Respondent allowed petitioner 16 credit for purchases in 1962 in the amount of $12,203. The closing inventory for 1962 was determined by respondent to be $8,064.12 rather than the $7,955.71 shown on the return. Respondent's determinations are reflected in the following adjustment: Overstatement of opening in- ventory2 $15,844.85Understatement of closing in- ventory 108.41$15,953.26Offsetting this adjustment is the allowance by respondent of $12,203 for inventory purchases in 1962. For 1963 the opening inventory was adjusted by respondent to reflect the closing inventory as of December 31, 1962. The adjustment of $108.41 reduced the petitioner's income by that amount in 1963. Opinion Petitioner conceded that he overstated his opening inventory in 1962 but offered no substantial evidence from which we could compute a more accurate figure than respondent's determinations. Petitioner argues that respondent's determinations are inaccurate, but his vague testimony and his cross-examination of the revenue agent with respect to the July 10, 1962, values of the automobiles acquired from Parenti appear 17 to have been directed toward establishing even lower values than those determined by respondent. We sustain respondent's determinations as to opening and closing inventory for both years. Issue 3: Gross Receipts Findings of Fact Respondent's agent found that the books and records maintained by petitioner were incomplete and inadequate. Petitioner did not employ a bookkeeper or accountant but used check stubs as records and attempted to utilize as models the work sheets of the accountant whom Parenti had employed for Market Motors. The agent, therefore, reconstructed petitioner's gross receipts for 1962 and 1963 by means of bank deposits analyses, as follows: 3[Table of Bank Deposits on Page 1538.] As noted above, the revenue agent's determination of gross deposits for 1962 was adjusted to account for the deposit of a loan of $11,000 from Parenti. He did not make adjustments for two other deposits which did not represent business income: $1,000 deposited on July 19, 1962, and $1,000 deposited on July 30, 1962. The July 19 deposit represented funds advanced to petitioner by Parenti to pay bills that arose 18 from Market Motors when it was owned by Parenti - employment tax, city income tax, and the like. The deposit on July 30 came from petitioner's savings and was used to purchase the first addition to his inventory. These sums were deposited prior to petitioner's making any sales as owner of the business. The agent concluded that the personal expenses paid by business checks did not include any amounts for food or clothing for petitioner or his mother, who received 60 percent of her support from petitioner. He decided that $1,200 a year was a reasonable estimate of these expenditures. Since petitioner had no net receipts from any source other than Market Motors, the agent therefore concluded that the expenditures for food and clothing were paid for by cash withdrawals from Market Motors, and accordingly added $1,200 per year to petitioner's gross business receipts. However, the amount of cash withdrawn from the business receipts to purchase food and 1539 clothing totaled only $600 in 1962 rather than $1,200 as determined by respondent's agent. The $11,200 addition to gross receipts for 1963, designated as "Capital Items Purchased (Alpine Furniture and Fixtures)," represented a purchase 19 by petitioner at a sheriff's sale on February 11, 1963. Alpine Villa, Inc., had leased premises in Allentown for the operation of a restaurant. In 1962, it became delinquent in the payment of its rent and taxes. The lessor gave notice of the termination of the lease effective December 31, 1962, and on January 29, 1963, obtained a judgment for the delinquent rent and taxes. On February 11, 1963, some of Alpine Villa, Inc.'s assets were sold to satisfy the judgment, and petitioner bid them in at the sheriff's sale for $11,200, paying the full amount in cash. However, petitioner did not act in his own behalf, but only as nominee for another; the cash paid belonged to his principal, not to him. Accordingly, the $11,200 did not represent gross receipts of petitioner's operations in 1963 and was not, otherwise, taxable income to him. Bank Deposits Analysis 1962(1) Deposits$30,723.12Less: Deposit of Loan from John Parenti 11,000.00Net Deposits Resulting from Business$19,723.12(2) Total Business Expenses per 1962 Return, adjusted upward for inventory expenditures not shown on return$15,196.35(3) Computation of Business Checks for Year Opening Balance0Add: Deposits $30,723.12Total$30,723.12Less: Closing Balance 175.89Total Checks Written20 $29,547.23Less: Repayment of Parenti loan 10,000.00Difference $19,547.23Less: Business Expenses (Above) 15,196.35Personal Living Expenses Paid by Business Checks* $ 4,350.88* $ 4,350.88(4) Total Business Expenses Paid by CashNone(5) Add: Estimated Living Expenses Paid By Cash Withdrawals from Business $ 1,200.00(6) Gross Receipts as Determined$20,923.12Less: Gross Receipts as Shown by 1962 Return 14,187.00Understatement of Income 1962 $ 6, 736.12 Bank Deposits Analysis 1963(1) Deposits$30,259.21Less: Nontaxable Cash Deposits(A) Repayment of Loans to 3d Parties$ 2,590.00(B) Proceeds Received from Sheriff's Office1,666.66 4,256.66Net Deposits Resulting from Business$26,002.55(2) Total Business Expenses per 1963 Return$28,175.22(3) Computation of Business Checks for Year Opening Balance$ 175.89Add: Deposits 30,259.21Total$30,435.10Less: Closing Balance 263.83Total Checks Written$30,171.37Less: Non-Business Checks (A) Loans to 3d Parties$ 2,590.00(B) Personal Living Expenses Paid by Business Checks (as determined from canceled checks) 3,339.33Total Business Expenses Paid by Checks$24,242.04(4) Total Business Expenses (Above)28,175.22Less: Paid by Checks24,242.04Total Business Expenses Paid by Cash$ 3,933.18(5) Add:(A) Capital Items Purchased (Alpine Furniture and Fixtures)$11,200.000(B) Estimated Living Expenses Paid by Cash Withdrawals from Business1,200.00 $12,400.00Total Expenditures$42,335.73Less: Nontaxable Cash Used to Pay Expenses (auto purchased out of escrow account - Fogelsville Nat'l.) 321.74(6) Gross Receipts as Determined$42,013.99Less: Gross Receipts as Shown by 1963 Return $26,320.00Understatement of Income 1963 $15,693.99Opinion 21 Petitioner has shown three errors in the revenue agent's analysis of his gross receipts from Market Motors; otherwise, the analysis is sustained for both years. First, petitioner has shown that adjustments should have been made by the agent for two bank deposits: one in the amount of $1,000 on July 19, 1962, and the other for an equal amount on July 30, 1962. The $1,000 deposited on July 19, 1962, was given to petitioner by Parenti to cover certain liabilities relating to the period when the latter owned the business. Indeed, check stubs confirm that petitioner made payments covering liabilities for such period. The other deposit represented moneys invested in the business by petitioner from past savings. Our findings as to these two deposits are corroborated by the agent's admission that both of them preceded any sales by petitioner after taking over the business. Second, the agent's addition to the 1962 gross receipts of $1,200 for personal expenses paid with cash withdrawals from the business is excessive. Petitioner admits that most of his expenditures for food for himself and his mother were made by cash and that $1,200 a year is a reasonable estimate of such expenditures. We 22 note, however, that petitioner did not acquire the Market Motors business until July 10, 1962. We cannot assume, as did the agent, that the cash withdrawals used to pay personal expenses during 1962, when petitioner owned the business only for approximately onehalf of the year, equaled the withdrawals made for that purpose during 1963, when petitioner owned the business for the full year. The cash used for personal expenses prior to July 10, 1962, must have come from sources other than the receipts from Market Motors. Accordingly, the gross receipts for 1962 should be reduced by one-half of the $1,200 amount determined by the agent, $600, to adjust for this excessive charge for living costs. Third, careful weighing of all the evidence convinces us that the $11,200 cash paid in at the sheriff's sale did not belong to petitioner. The parties agree that petitioner had no source of income in 1962 and 1963 other than the struggling second-hand automobile business; indeed, this is the premise on which respondent proceeded in determining that petitioner's gross business receipts were the source of his personal living expenses. Respondent's agent was able to trace each automobile purchase 23 and sale on petitioner's records, confusing and inadequate though they may have been. The only sale omitted from these records was one made to petitioner's brother on November 9, 1963. These facts render it highly unlikely that the $11,200 was derived from petitioner's business operations in 1963. Moreover, respondent offered no evidence to refute petitioner's testimony that the $11,200 did not represent business receipts but belonged to another for whom petitioner was acting in bidding in the furniture and fixtures. Petitioner explained, truthfully we believe, that he served as nominee (or "straw man") for an individual who owned a brewery and, for this reason, could not have legally acquired the liquor license used by Alpine Villa, Inc., in the operation of the restaurant. While the record is obviously not as complete as it might have been, we think it sufficient to show that the $11,200 was not income to petitioner in 1963. In summary, we hold that petitioner's gross receipts from Market Motors as determined by respondent should be reduced by $2,000 of non-income deposits in 1962; by $600 of personal expenses paid by cash from sources other than the business in 1962; and by the 24 $11,200 paid in at the sheriff's sale of Alpine Villa, Inc.'s furniture and fixtures in 1963. Issue 4: Disallowed Expenses Findings of Fact Petitioner claimed deductions in his returns for 1962 and 1963 for the cost of 1540 telephone service and electricity furnished at his residence, hangar storage for an airplane, and gas and oil for his automobile. The home telephone and electricity expenses were not separately itemized on petitioner's returns but were included in the claimed expenses of Market Motors for similar items; the car expenses were included in his business expenses under the heading of gas, oil, and road delivery costs. The cost of renting the hangar was listed as storage rental. Respondent determined that the abovementioned expenses were personal and accordingly disallowed the deductions claimed for them in the following amounts: 19621963Home Telephone$ 48.00$106.04Home Electricity53.85105.09Hangar Storage230.80280.00Gas and Oil[for personal automobile] 162.00158.25Total$494.65$649.38Petitioner has failed to show that these disallowed items were deductible business expenses. Opinion As to all of these disputed deductions, petitioner failed to show that the expenditures 25 were ordinary and necessary business expenses within the meaning of section 162. Although petitioner did use his residence to some extent for business purposes, as evidenced by the fact that he made and received some business telephone calls there, he did not show the extent of his business use of his home or any other basis for allocating his home expenses between business and personal use. Similarly, he offered no evidence at all regarding his use of the airplane and the automobile for business purposes during the taxable years before us. In view of this complete failure of proof, we must sustain respondent's disallowance of the claimed deductions. Issue 5: Lehigh County Prothonotary Payment Findings of Fact Petitioner loaned $4,500 to Alpine Villa, Inc. (hereinafter "Alpine"), on March 1, 1961. On the same date the president and secretary of Alpine issued to petitioner a six-month, 6-percent demand note in the amount of $4,500; this note was reflected in Alpine's books and records. Alpine later became insolvent, and following a sheriff's liquidation sale petitioner received $2,770.10 from the Lehigh County Prothonotary in 1963. The $2,770.10 received by petitioner represented partial 26 repayment of the loan petitioner made to Alpine in March 1961. Respondent determined that there should be included in petitioner's taxable income for 1963 the $2,770.10 which he received from the Lehigh County Prothonotary. Opinion Petitioner testified unequivocally that he loaned $4,500 to Alpine on March 1, 1961, and that the $2,770.10 received from the Prothonotary in 1963 was his share of the proceeds from the liquidation of Alpine's assets in an insolvency proceeding. Petitioner buttressed his testimony by introducing a note, dated March 1, 1961, and signed by the president and secretary of Alpine, together with evidence that the liability on the note was reflected in the books and records of Alpine. Respondent offered no evidence to establish that the $2,770.10 was taxable income except some vague testimony of an alleged admission by petitioner that he made no loan to Alpine. We are convinced from our careful consideration of the entire record on this issue that the $2,770.10 received by petitioner in 1963 was not taxable income but represented partial repayment of a loan made by petitioner to Alpine in 1961. 427 Issue 6: Addition to Tax for Negligence Findings of Fact Petitioner did not maintain formal books and records of his operation of Market Motors but kept stubs, with notations thereon, of checks drawn on his business bank account and maintained work sheets on which he recorded purchases and sales of automobiles. His bank account, maintained with the First National Bank of Allentown, Pennsylvania, was used for the payment of personal, as well as business, expenses. The check stubs did not reflect cash withdrawals from the business to cover his expenditures for food and clothing. Nor did the check stubs clearly differentiate between checks drawn to pay home and office utility bills with the result that deductions were 1541 erroneously claimed on his 1962 and 1963 returns for personal as well as business utility expenses. (See Issue 4 above.) Petitioner's 1962 return substantially overstated opening inventory and did not reflect any inventory purchases during the year. (See Issue 2 above.) Petitioner's records did not show the sale of an automobile 28 in 1963 to his brother, Carl Meyers, for $2,719.63. Petitioner's underpayments of income taxes for 1962 and 1963 were attributable to his negligence in keeping his business records and preparing his returns. Respondent determined that petitioner was liable, pursuant to section 6653(a), for an addition to tax in the amount of $442.13 for 1962 and $156.19 for 1963 for negligence or intentional disregard of rules and regulations. Opinion To avoid the addition to tax under section 6653(a), 529 petitioner must show that no part of any underpayment of income taxes was due to his negligence or intentional disregard of respondent's rules and regulations in making out his tax return. Marcello v. Commissioner, 380 F. 2d 494, 505-507 (C.A. 5, 1967), affirming in part a Memorandum Opinion of this Court; Byron H. Farwell, 35 T.C. 454">35 T.C. 454, 473 (1960). Petitioner has completely failed to carry his burden of proof on this issue. Petitioner's records were wholly inadequate for a business generating sales of some $30,000 per annum and incurring commensurate expenses. As a direct result of his failure to keep adequate records, his returns for both 1962 and 1963 were inaccurate in several respects: (1) The opening inventory shown on his 1962 return was excessive; (2) cash withdrawals from the business to pay personal expenses were claimed as deductions; (3) expenditures for home utilities were claimed as deductions; and (4) the proceeds of the sale of the automobile to his brother in 1963 were omitted. See Thomas J. Avery, 11 B.T.A. 958">11 B.T.A. 958, 962 (1928). These inaccuracies in petitioner's records, resulting in underpayments, are affirmative evidence of negligence on the part of petitioner in making his returns for 1962 and 1963. See Barry Meneguzzo, 43 T.C. 824">43 T.C. 824 (1965). The addition to tax under section 6653(a) is sustained for both years, 1962 and 1963. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. This was the figure contained in the statutory notice; however, the difference between $20,000.58 and $4,155.63 is $15,844.95.↩3. The explanations accompanying some entries in the analyses have been expanded.↩. These are the figures contained in the agent's analysis; each should be increased $1,000.4. Petitioner does not allege or otherwise claim that he is entitled to a nonbusiness bad debt loss for the unpaid portion of this indebtedness. See sec. 166(d). Accordingly, we do not here consider this question.5. SEC. 6653. FAILURE TO PAY TAX. (a) Negligence or Intentional Disregard of Rules and Regulations With 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.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620408/	Fannie Hirshon Trust U/A Charles Hirshon, Walter Hirshon and Henry Siegbert, Trustees v. Commissioner.Fannie Hirshon Trust U/ v. CommissionerDocket No. 35013.United States Tax Court1953 Tax Ct. Memo LEXIS 311; 12 T.C.M. (CCH) 364; T.C.M. (RIA) 53106; April 3, 1953311 A corporation having total earnings or profits available for dividends of $5,674,586.32 distributed to its shareholders cash in the amount of $2,113,722.03 with stock having a cost basis of $3,199,950 and a fair market value on the date of the distribution of $8,983,407.75. Held, the distributions were taxable as dividends only to the extent of earnings and profits available for dividends, Section 115 (a) of the Code, and the appreciation in value of the property distributed does not serve to increase the corporation's "earnings or profits." Held, further, to the extent that the fair market value of the property distributed is not covered by the earnings or profits the excess is used to reduce the basis of the stock of the shareholder-distributees under Section 115 (d) and such excess is not taxable to the shareholders under Section 22(a) of the Internal Revenue Code. John P. Allison, Esq., for the petitioners. Arthur Nims, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion The respondent has determined a deficency of $1,963.10 in the income tax liability of the petitioner for the taxable year ended December 31, 1947. The312 petitioner contests the entire deficiency which is based on the determination that certain corporate distributions to the petitioner in 1947 in cash and property were taxable in full rather than only to the extent that the fair market value of the distributions was covered by earnings and profits of the corporation. Findings of Fact All of the facts are stipulated and are found accordingly. Charles Hirshon, Walter Hirshon and Henry Siegbert are the duly qualified and acting trustees of a trust created by an indenture dated December 31, 1917, between Charles Hirschhorn (later known as Charles Hirshon) as settlor and Fred Hirschhorn Isidore Levy as trustees. The petitioner filed its Federal fiduciary income tax return for the calendar year 1947 with the collector of internal revenue, second district of New York. From January 1 to March 13, 1947, the petitioner owned and held 1,615 shares of capital stock of Southern Natural Gas Company, hereinafter referred to as Southern, and from March 13 to and including December 31, 1947, it owned and held 1,610 shares of the capital stock of Southern. Southern is a Delaware corporation with its principal offices in Birmingham, Alabama. 313 Southern was organized under the laws of Delaware on October 30, 1935, and acquired, as of January 1, 1936, the business and properties of a predecessor company named Southern Natural Gas Corporation, pursuant to section 77B of the Bankruptcy Act. Southern operates an interestate natural gas pipeline system, extending from gas fields in Texas, Louisiana and Mississippi to its principal markets in Mississippi, Alabama and Georgia. As of December 31, 1946, Southern's capitalization consisted of long-term debt in the amount of $22,500,000 and 1,409,212 shares of common stock of the par value of $7.50 each. Its earned surplus, according to the books, as of December 31, 1946, was $14,106,850.03. The net income for the year 1947, according to the books, was $3,226,156.79, and the book earned surplus at the end of the year 1947, including net adjustments to earned surplus and before deducting dividends on the common stock was $17,669,983.23. The petitioner received from Southern cash distributions on the 12th days of March, June, September and December, 1947, at the rate of 37 1/2" per share, which distributions aggregated $2,416.87. On July 28, 1947, petitioner received from Southern314 a distribution of 1,610 shares of common stock of Southern Production Company, Inc. On July 28, 1947, the fair market value of the shares of stock of Southern Production Company, Inc., was $6.375 per share. The dividend of shares of stock of Southern Production Company, Inc., was declared by the board of directors of Southern at a meeting of the board duly called and held on June 15, 1947, by resolutions reading as follows: "RESOLVED, that a dividend be and the same hereby is declared in kind of one share of stock of Southern Production Company, Inc., a corporation of the State of Delaware, for each share of stock of Southern Natural Gas Company issued and outstanding, such dividend to be deliverable on July 28, 1947, to stockholders of record of Southern Natural Gas Company at the close of business on July 3, 1947; and further "RESOLVED, that the proper officers of the Company be and they hereby are authorized to charge the cost to the Company of the stock of Southern Production Company, Inc. (i.e., the sum of $3,200,000.) to earned surplus on the books of account of the Company." In the Federal fiduciary income tax return filed for 1947, the petitioner included the distributions315 received from Southern as taxable income to the extent of $6,112.64, of which $1,519.85 was treated as distributable income taxable to Fannie Hirshon, beneficiary of the trust, and hence not taxable to the trust. The balance of the $6,112.64 was treated as income taxable to the trust. The respondent determined that the petitioner understated its income in the amount of $6,567.98 and that the entire amount of the distributions received from Southern in 1947 constituted taxable income. The fair market value of the total distributions received by the petitioner from Southern in 1947 is in the amount of $12,680.62. The total distributions made by Southern to its stockholders in 1947 amounted to $2,113,722.03 in cash, and 1,409,162 shares of the common stock of Southern Production Co., Inc. The Southern Production Co., stock had an adjusted basis in the hands of the distributing corporation of $3,199,950, and a fair market value at the time of distribution of $8,983,407.75. For the year 1947, on the books, Southern charged earned surplus with $2,113,722.03, representing the cash distributed as dividends during that year and $3,199,663.55, representing cost to Southern of the shares316 of the stock distributed to stockholders as a dividend. The book earned surplus of Southern on December 31, 1947, after making such deductions, was $12,356,597.65. The earnings and profits of Southern for the year 1947 were $2,936,819.51. The accumulated earnings and profits of Southern as of January 1, 1947, were $2,737,766.81, or a total of earnings and profits available in 1947 for dividends of $5,674,586.32. The cost to the petitioner of the 1,610 shares of capital stock of Southern was in excess of $13,000. The parties agree that any amount which shall be finally determined to be includible in the gross income of petitioner for the year 1947 by reason of the distributions received in that year from Southern shall be treated as taxzble to the trust and shall not be treated as distributable income of the trust, with the exception of the sum of $1,519.85 reported in the 1947 fiduciary return. Opinion ARUNDELL, Judge: The issues in the instant case and the corporate distributions from which they arose are identical with the issues and the corporate distributions in our recent decisions in Estate of Ida S. Godley, 19 T.C. 1082">19 T.C. 1082 (March 19, 1953). On the authority*317 of that case, we hold that the fair market value of the distributed property is taxable as a dividend to the extent of the earnings or profits (without increase as a result of appreciation in value over cost of the property distributed) of the distributing corporation; and that to the extent that the earnings or profits are insufficient to cover a charge equal to the fair market value of the distribution, the petitioner has received a distribution in excess of earnings or profits and the amount of this excess is applied to reduce the basis at which the petitioner held the stock in the distributing corporation and any excess over the basis is taxable to it as capital gain under the provisions of section 115 (d), Internal Revenue Code. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620410/	Robert F. and Elizabeth M. Doerge v. Commissioner.Doerge v. CommissionerDocket No. 31357.United States Tax Court1952 Tax Ct. Memo LEXIS 222; 11 T.C.M. (CCH) 475; T.C.M. (RIA) 52140; May 14, 1952222 Payments to a graduate student under the terms of a fellowship, held, not to be a gift but to constitute taxable income. Paul M. Newton, Esq., for the petitioners, and J. Marvin Kelley, Esq., for the respondent. VAN FOSSAN Memorandum Opinion VAN FOSSAN, Judge: The respondent determined a deficiency of $41.26 in petitioners' income tax for 1949. By amended answer, the respondent claims an increased deficiency in a total amount of $91.96. By reply, petitioners admitted the mathematical accuracy of the deficiency claimed by amended answer but claim an over-payment of $50.70. The case was submitted on the pleadings and a stipulation of all of the facts. Petitioners did not file a brief. The stipulation is as follows: Petitioners are individuals who were husband and wife during all of the calendar year 1949, with principal residence at 2803 Cherry Lane, Austin, Texas. Their joint income tax return for that year was prepared on the basis of cash receipts and disbursements and was timely filed with the collector of internal revenue for the first district of Texas. Petitioner Robert F. Doerge was graduated from the University of Minnesota, Minneapolis, Minnesota, 223 in 1943, with the degree of Bachelor of Science. Beginning in 1945 and up to June, 1948, he engaged intermittently in graduate study at the University of Minnesota under fellowships established by the Minnesota Pharmaceutical Association, Lederle Laboratories, Inc., and Eli Lilly and Company, the latter having been awarded him for the school year 1947-1948. Under these fellowships, research was required to be performed by the recipient, and the subject matter of the research to be performed by petitioner Robert F. Doerge was determined in 1945 at the time of receipt of his first fellowship. All research done under each of the fellowships was devoted to the original objective. The research under the Eli Lilly and Company fellowship of 1947-1948 consisted of synthesizing and testing pharmacologically certain dithiobarbituric acid derivatives. In 1948, petitioner Robert F. Doerge was awarded by the University of Minnesota one of the Samuel W. Melendy Memorial Fellowships available for the school year 1948-1949, amounting in total to $1,000, which was to be paid in semi-monthly installments of $50 each. Pursuant thereto, and in addition to the salaries earned by both petitioners which224 were properly reported on their joint return, petitioner Robert F. Doerge received from the University of Minnesota in the calendar year 1949 a total of $600, representing the semi-monthly payments during the first six months of the calendar year, from which no income tax was withheld by the University of Minnesota. The research performed by petitioner Robert F. Doerge under the Melendy Fellowship was a continuation of that performed under the Eli Lilly and Company Fellowship and was in furtherance of the general objective set in 1945. The work was done at the University of Minnesota and was in partial fulfillment of the requirements for the degree of Doctor of Philosophy. The Samuel W. Melendy Fellowship fund was established by the will of Mrs. Samuel W. Melendy, who died prior to 1943. The will provided, in part, as follows: "3. The residue of said income to be used for scholarships to be known as 'The Samuel W. Melendy Memorial Scholarships.' The scholarships shall have a fixed value and an objective to be attained by the student. Both the value and the objective shall be named by a committee that shall include the faculty of the College of Pharmacy." The Melendy Fellowship225 is described in the bulletin issued by the University of Minnesota as follows: "Not more than three $1,000 fellowships without exemption from tuition, will be offered annually through this fund. The major study must be pharmaceutical chemistry or pharmacognosy and full time must be devoted to graduate study and research." A resolution adopted by the Board of Regents of the University of Minnesota on February 19, 1943, outlined the policy of the institution in regard to patents. The resolution provided, in part: "Now, Therefore, the Regents of the University of Minnesota in an effort to promote such research for the advancement of science and the economic and social welfare of the people, indicates its willingness to undertake such research in cooperation with outside persons and organizations within the limitations of its staff and facilities under the following general conditions: "1. That unless otherwise provided in the agreement patents shall be controlled by the University. "2. That the University will be willing to consider the granting of a non-exclusive license (shop rights) to the cooperative person or organization which provides funds for the direct and operating226 overhead costs of the research. "3. That if the research undertaken by the University is a continuation of research already initiated by the cooperating person or organization, if the research results of the University require further development work for commercial application, or if for other reasons the public interest can thus be better served, the University will be willing to consider an exclusive license for a limited period (5 to 7 years of the 17-year patent life) or even for the life of the patent where it is clear that the public interest will be served, provided the University receives full reimbursement for all costs and a reasonable royalty with a minimum annual amount of such royalties guaranteed to insure that the patent is used by the licensee." Upon the completion of the work a thesis was written by petitioner Robert F. Doerge covering the research. There were no restrictions on the publication of the results of the research and no one was entitled to advance copies of the results prior to publication. Because no product or process which was deemed to be of commercial value resulted from the research, no patents were applied for or issued covering same. The227 facts in this case, the legal questions that might be advanced, and the arguments that are, or might be, made are strikingly similar to those appearing in Ephraim and Libby K. Banks, 17 T.C. 1386">17 T.C. 1386 (promulgated February 28, 1952). The court therein decided that the payments made under the fellowship there in controversy constituted taxable income. We make the same ruling here. The Commissioner having duly made claim for an increased deficiency as required by law, is entitled to a judgment for $91.96. Clearly the monthly payments under the fellowship were made for valuable consideration moving to the grantor. They did not constitute gifts, either from the point of the grantor or the recipient (petitioner). The fellowship required full time services by the grantee. There was a fixed and stated objective of the research. The permission to the graduate student to make use of the results of the research was an incidental and non-controlling fact in the relationship under the contract of employment. It is to be remembered that the income tax laws are enacted to raise revenue and that they should be broadly construed to that end. Congress has used its powers under the Sixteenth*228 Amendment to the Constitution in full measure. Helvering v. Stuart, 317 U.S. 154">317 U.S. 154. Exclusions and exemptions are exceptional and should be construed with restraint in the light of the general policy. $ Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28, Helvering v. American Dental Company, 318 U.S. 322">318 U.S. 322; see, also, Herbert Stein, 14 T.C. 494">14 T.C. 494. The situation in Pauline C. Washburn, 5 T.C. 1333">5 T.C. 1333, is totally different and that case is no authority in the present instance. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620412/	M. K. GRAHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MRS. M. K. GRAHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Graham v. CommissionerDocket Nos. 33695, 33696.United States Board of Tax Appeals23 B.T.A. 144; 1931 BTA LEXIS 1922; May 11, 1931, Promulgated 1922 The respondent's determination of the amounts allowable as deductions for depletion approved. C. R. McAtee, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent. TRAMMELL 144 OPINION. TRAMMELL: These proceedings are for the redetermination of deficiencies in income tax for 1922 of $5,061.81 against M. K. Graham and $4,046.69 against Mrs. M. K. Graham. The only matter in controversy is the correctness of the respondent's action in determining the amounts of the deductions allowable on a community property basis to the petitioners on account of depletion. Graham is the owner of royalty interests in certain Texas oil lands, part of which will be referred to as the Graham Farm and the other part as the English Lease. Discoveries of oil were made on part of the Graham Farm in 1920, on other parts in 1921, and on another part in 1922. A discovery was made on the English Lease in 1922. In October, 1921, the petitioners submitted to the respondent a Form O for the purpose of establishing depletion allowances based on discovery value on those areas of the Graham Farm in which discoveries had been made up to that time. This1923 Form O was based on production up to September 15, 1921, and all other available information, and showed Graham's interest in the oil reserves as 311,735 barrels and as having a value of $664,530. On the basis of the information contained in this Form O the respondent accepted the amount of the oil reserves shown therein and determined their value as $370,684.75. He computed the depletion allowances to which the petitioners were entitled for the years 1920, 1921, and 1923 accordingly and determined deficiencies in tax which were paid by the petitioners. In 1926, while the respondent had their tax liability for 1922 under consideration, the petitioners filed a supplemental Form O which they claimed corrected errors in the original Form O. The supplemental Form O covered all the discovery areas of the Graham Farm, including the areas covered in the original Form O as wall as the 1922 discovery area. With respect to the 1920 and 1921 discovery 145 areas the supplemental Form O, in addition to being based on production prior to the filing of the original Form O, was based on the alleged actual production of these areas subsequent to the period covered by the original Form1924 O on alleged proper prices of oil and on alleged proper hazard rates. In the supplemental Form O Graham's interest in the oil reserve in the 1920 and 1921 discovery areas is shown as 300,579 barrels and as having a value of $563,895. His interest in the 1922 discovery area is shown as 14,538 barrels and as having a value of $22,159. At some undisclosed date the petitioners filed a supplemented Form O on the English Lease, in which Graham's interest in the oil reserve in that area was shown as 8,128 barrels and as having a value of $10,961. While the record is not clear as to the amount of the deductions for depletion taken by the petitioners in their returns for 1922, the supplemental Forms O, which they contend correctly represent the depletion allowances to which they are entitled, show depletion of $129,927.68 as having been sustained with respect to the areas on the Graham Farm and $1,726.04 with respect to the English Lease. In determining the deficiencies here involved the respondent allowed the petitioners depletion deductions of $85,927.59, of which $84,846.71 represented depletion of Graham's interest in the oil reserve in the Graham Farm and $1,080.88 represented1925 depletion of his interest in the reserve in the English Lease. In determining the depletion allowance with respect to the Graham Farm the respondent accepted the reserve and the valuation of the 1922 discovery area as shown in the supplemental Form O, but refused to reconsider the valuations of the 1920 and 1921 discovery areas, on the ground that such reconsideration was barred to the petitioners under article 207 of Regulations 62. The respondent has made a determination of the depletion allowances to which the petitioners are entitled for the year 1922. It is presumed to be correct until shown to be erroneous. The petitioners contend that he erred in making the determination. The burden of establishing the contention is upon the petitioners. Section 214(a)(10) of the Revenue Act of 1921 provides that in determining the depletion allowance in the case of discovery such allowance shall be based upon the fair market value of the property at the date of discovery or within thirty days thereafter. In our opinion the statute contemplates that the market value shall be determined upon the basis of facts known at the date of discovery or within thirty days thereafter or which1926 might be reasonably anticipated on such date or during such period. The petitioners are here seeking to have the valuation shown in the supplemental Form O for the 1920 and 1921 discovery areas on the Graham Farm accepted as the basis for determining depletion allowances 146 thereon for 1922. These valuations are based very largely on alleged actual production of the areas during the years intervening between the filing of the original and of the supplemental Forms O. While actual production during the intervening period may be used in checking or corroborating the original valuation, ; , it may not be used as a basis for computing a new valuation to supplant the original based on facts then known or reasonably anticipated. ; . There are also certain differences in the rates of discount and hazard risk and deferment used by the petitioners in their original and supplemental reports and that used by the respondent in determining the value of the 1920 and1927 1921 discovery areas. The petitioners used higher discount rates in their supplemental Form O than they used in the original, and the respondent has used higher rates than were used in either of the Forms O. As we are unable to determine from the evidence the proper rate to be used, we can not find the rates used by the respondent to be erroneous. In the original Form O Graham's interest in the oil reserve in the 1920 and 1921 discovery areas is shown as 311,735 barrels, whereas in the supplemental it is shown as 300,579 barrels, or a reduction of 11,156 barrels. Since this revised reserve was computed in part on production subsequent to the taxable year, the respondent is not shown to have erred in refusing to accept it in determining depletion allowances for 1922. ;The petitioners not having shown the respondent's determination of the amount of the reserves in the 1920 and 1921 discovery areas or his determination of the value thereof to be erroneous, or that his computation of the depletion allowances based thereon is incorrect, the depletion allowances determined by him are1928 approved. As only the supplemental Form O on the English Lease was put in evidence, we do not know wherein it differs from the original. The respondent, however, accepted the amount of the oil reserve shown in the supplemental Form O, but increased the discount rate. He determined the value of Graham's interest in this property to be $10,058.40 instead of $10,961 as shown in the supplemental Form O. As the difference between the valuation determined by the respondent and that computed by the petitioners appears to result from the difference in the discount rate used, and as the evidence submitted with respect to this property does not show what would be a proper rate of discount, the respondent's determination as to the value of this property and as to the depletion allowable thereon is approved. 147 Regardless of article 207, Regulations 62, in a proceeding before the Board the burden is on the petitioner to show that what the Commissioner has done is erroneous. This burden is not met by a showing of the filing with the Commissioner of amended forms. The question before us is what is the correct depletion allowance, and we are not concerned with the filing of forms1929 in the Commissioner's office. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620417/	Marvin Earl Hart v. Commissioner.Hart v. CommissionerDocket No. 3036-67.United States Tax CourtT.C. Memo 1968-130; 1968 Tax Ct. Memo LEXIS 170; 27 T.C.M. (CCH) 628; T.C.M. (RIA) 68130; June 26, 1968, Filed Marvin Earl Hart, pro se, 1745 N. Gardner St., Los Angeles, Calif. Brice A. Tondre, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax for the calendar years 1961, 1963, 1964, and 1965 in the amounts of $533.72, $437, $275, and $521, respectively; additions to tax under section 6653(a), I.R.C. 1954, for the calendar years 1963, 1964, and 1965 in the amounts of $21.85, $13.75, and $26.05, respectively; and an addition to tax under section 6651(a), I.R.C. 1954, for the171 calendar year 1965 in the amount of $130.25. The deficiency determined for the calendar year 1961 resulted from respondent's 629 disallowance of petitioner's claims for net operating loss carrybacks to the year 1961 from the years 1963 and 1964, which claims had been tentatively allowed. The issues for decision are: (1) Whether petitioner received unreported income for the calendar years 1963, 1964, and 1965, and (2) whether petitioner is entitled to dependency credit exemptions for his two minor children for the calendar years 1963, 1964, and 1965. Findings of Fact Some of the facts were orally stipulated at the trial and are found accordingly. Petitioner is an individual who at the time the petition in this case was filed resided in Los Angeles, California. He filed individual Federal income tax returns for the calendar years 1961, 1963 and 1964 with the district director of internal revenue at Los Angeles, California. Petitioner has a degree in mechanical engineering and during the calendar year 1961 was employed by three different employers and received compensation with income tax withheld from his various employers in the amounts shown below: EmployerWagesFederal incometax withheldMilman Company$4,864.02$836.56Chase Consulting Com- pany1,249.63197.34Romar Engineering Com- pany592.5086.80172 In 1962 petitioner became unemployed and on August 12 of that year applied for unemployment insurance. Petitioner was sent a notice that he was entitled to receive unemployment insurance at a weekly rate of $41 until a total award of $922 had been exhausted. This notice stated that for the quarter ended June 1961 petitioner had received total wages of $227.50 from the Chase Consulting Company, that for the quarter ended September 1961 he had received total wages from Chase Consulting Company of $1,022.13, and that for the quarter ended December 1961 he had received total wages of $592.50 from Romar Engineering Company. This notice indicated that petitioner had received no wages for the quarter ended March 31, 1962. On January 17, 1958, petitioner opened a savings account with the United Savings and Loan Association. He had a balance in this account as of April 7, 1961, of $2,956.02. The only deposit which he made to this account after December 31, 1960, was a deposit on January 10, 1962, of $241. On April 8, 1961, petitioner opened a savings account with American Savings and Loan Association with the deposit of a check in the amount of $2,000. On August 9, 1961, petitioner made173 a deposit of $1,000 in cash to this account. No other deposits were made to this account. On April 10, 1961, petitioner opened a savings account at the California Federal Savings Association with the deposit of a check in the amount of $1,137.83. This was the only deposit which petitioner made to this account. On January 4, 1963, petitioner withdrew the entire balance in his United Savings and Loan Association account and received a check in the amount of $3,400 and cash in the amount of $56.88. On January 4, 1963, petitioner withdrew the entire balance in his American Savings and Loan Association account, and received a check in the amount of $3,200 and cash of $11.10. On January 11, 1963, petitioner withdrew the total balance from his California Federal Savings Association account, receiving a check in the amount of $1,175 and cash in the amount of $3.40. On January 11, 1963, petitioner opened a savings account in the Gibraltar Savings and Loan Association with a deposit of $7,775. On February 8, 1963, and March 8, 1963, he made withdrawals from this account in the amounts of $75 and $125, respectively, and on April 5, 1963, he withdrew the balance of $7,655.80 in the account, 174 there having been interest credited to the account as of the end of March 1963 of $80.80. On April 9, 1963, petitioner opened an account in the Los Angeles Federal Savings and Loan Association with a deposit of $7,400. During the remainder of the year 1963, petitioner made withdrawals from his account at the Los Angeles Federal Savings and Loan Association in a total amount of $1,024, the total withdrawals consisting of five separate withdrawals, one in each of the months August through December of 1963. During the year 1964 petitioner made total withdrawals from his savings account at the Los Angeles Federal Savings and Loan Association in the amount of $2,192.54, the total withdrawals being composed of one withdrawal in each month of the year except the month of June when two withdrawals were made. During the year 1965 petitioner made 630 total withdrawals from his savings account at the Los Angeles Federal Savings and Loan Association in the amount of $2,207.05. He made 10 withdrawals from this account in 1965, one in each month of the year, except the months of March and June. On June 8, 1965, petitioner made a $300 deposit to his account at the Los Angeles Federal Savings175 and Loan Association. This $300 came from a check in the total amount of $472.91 which petitioner received as a refund of income tax paid for the year 1961 on the basis of the tentative allowance of a net operating loss carryback to that year from the year 1964. Petitioner kept the remaining $172.91 in cash at the time he made the deposit. In each of the years 1963 and 1964 petitioner received a disability pension from the Veterans Administration in the amount of $696 and in the year 1965 petitioner received a disability pension from the Veterans Administration in the amount of $698. During the year 1963 petitioner received unemployment compensation of $645 which was composed of $184 which remained unpaid as of the beginning of 1963 on the maximum award of $922 which was shown on the unemployment insurance notice with respect to his claim made on August 12, 1962, and $461 from an extension of his unemployment compensation to which he was entitled under California law. During the calendar year 1963 petitioner worked for one week for Sass-Widders Corporation and received total wages in the amount of $320 from which was withheld F.I.C.A. employee tax in the amount of $11.24 and176 Federal income tax of $50.70, leaving a net amount received by petitioner of $258.06. In 1963 petitioner received a refund of 1962 income tax withheld in the amount of $74.40, and in 1964 petitioner received a refund of $50.70 of income tax which had been withheld on his $320 wages in 1963. In 1964 petitioner received $70.75 with interest thereon of $1.17 as a refund of income tax for the year 1961 on the basis of the tentative allowance of a net operating loss carryback from the calendar year 1963 to the calendar year 1961. The totals of the items of funds available to petitioner as heretofore listed are $3,224.64 for the year 1963, $3,011.16 for the year 1964, and $3,077.96 for the year 1965. Petitioner was able to account for no other sources of funds available to him during the years 1963, 1964, and 1965, except for a refund of a telephone deposit of $50 with interest received in 1964, which deposit he had made in 1963, and approximately $500 in cash, which amount he had accumulated in earlier years and had on hand as of January 1, 1963. On July 1, 1963, petitioner opened a business as a consulting engineer which he operated under the name of "Academy of Consulting Engineers177 and Scientists" from his apartment in Los Angeles. Petitioner held himself out as operating a consulting service under this name to render services as a mechanical engineer. Petitioner would look in the newspapers and in engineering publications for names of firms which might be in need of the services of a mechanical engineer. He would drive in his automobile to various locations to determine the type of business such firms operated and the type of mechanical engineering services they might need. Petitioner upon his return to his apartment from these trips would write a letter to some of the businesses he had observed offering his services as a consulting engineer. For the calendar year 1963 petitioner had the following expenses in connection with his business: Depreciation on typewriter purchased prior to January 1, 1963$ 30.00Los Angeles business tax19.20Rent of business property 1460.00Miscellaneous business expenses:Telephone service$ 31.52Automobile mileage307.50Reference books and pub- lications27.40Office supplies and postage 10.00376.42Total business expenses $885.62178 The amount claimed by petitioner as automobile mileage was arrived at by multiplying the 3,075 miles which he drove for business purposes by 10 cents a mile. As of January 1, 1963, petitioner had a 1958 Chevrolet which he had purchased for cash in 1958. This was the only automobile petitioner owned and the one he drove for business purposes. In 1964 petitioner incurred total business expenses in the operation of his consulting business of $2,629.94 which consisted of 631 depreciation on the typewriter of $24, Los Angeles business tax of $19.20, rent on business property of $920 (two-thirds of the $1,380 rent on petitioner's apartment), other business expenses totaling $1,666.74 which were composed of telephone service of $66.74, automobile expense of $1,500, publications of $50, and office supplies of $50. Petitioner had a telephone throughout the years here in issue, and from January 1, 1963 through June of 1963 paid at the rate of $4.75 a month for his telephone service. As of July 1, 1963, he converted his service to a business service and was required to make a deposit of $50 in connection with converting the telephone to a business telephone and pay a higher monthly rate. 179 Petitioner's automobile expense for the year 1964 of $1,500 was computed on the basis of 15,000 miles of business driving at 10 cents a mile. Petitioner discontinued his business as a consulting engineer toward the end of 1964. Petitioner averaged 15.6 miles per gallon of gasoline in driving his automobile and he purchased gasoline during the years here in issue at 28 cents a gallon. Petitioner did his own repairs on his automobile and purchased only the parts needed for such repairs. Petitioner bought insurance on his automobile and paid a state license fee on his automobile. During the years 1963, 1964 and 1965 petitioner's total expenditures for oil, gas, insurance, license fees and repairs for his automobile were in the amounts of $147.15, $415, and $161.50, respectively. Petitioner's total expenditures during the years 1963, 1964 and 1965 for telephone service including his service for business purposes were the respective amounts of $62.02, $66.74, and $57. The business expenses of petitioner which we have found are the expenses he listed on his income tax returns, which respondent at the trial stipulated as being business expenses incurred by petitioner during the years180 1963 and 1964. Petitioner filed amended returns claiming additional business expenses for each of the years 1963 and 1964, the primary basis for the increase being treating his entire apartment rent as a business expense and claiming a deduction for depreciation on his automobile in addition to the automobile expense on a mileage basis. Petitioner estimated that in 1963 and 1964 he expended approximately $3 per week for groceries or a total of $156 for each of these years and that in 1965 he expended $208 for groceries. Petitioner estimated that he did not expend over $24 a year for laundry and hair cuts. Petitioner did his own laundry at a laundromat where the charge was 25 cents for a load of laundry and he got hair cuts from a barber on an average of every 6 weeks to 2 months. He would go to a nonunion barber whose charge was less than the charge in a union shop. In each of the years 1963, 1964, and 1965 petitioner paid $1,200 to his former wife for the support of their two minor children. Petitioner filed his income tax return for the year 1961 on a form 1040A. On this return petitioner reported the wages and withholdings we have set forth in our findings, and claimed dependency181 credit exemptions for his two children. For the year 1963 petitioner filed his income tax return on form 1040. The only receipts reported by petitioner for the year 1963 were wages of $320 and interest of $255.86. Petitioner reported a business loss of $885.62 and net loss of $309.76. He reported no receipts from his consulting business. He claimed three personal exemptions. Petitioner filed a claim for a net operating loss carryback in the amount of $309.76 from the year 1963 to the year 1961 which was tentatively allowed. For the year 1964 the only income which petitioner reported was $275.25 of interest income. He claimed a business loss of $2,354.69 which was the difference in his reported interest income and the $2,629.94 of business expenses claimed in connection with his consulting business. Petitioner reported no receipts from his consulting business for 1964. On his income tax return for 1964 petitioner listed three personal exemptions, one for himself and two for his minor children. Petitioner filed a claim for a net operating loss carryback from the year 1964 to the year 1961 in the amount of $2,354.69 which claim was tentatively allowed by respondent. Respondent in his182 notice of deficiency computed petitioner's 1961 income on the basis of the adjusted gross income of $6,706.15 disclosed on his return with a standard deduction of $670.62 and three exemptions totaling $1,800, leaving taxable income of $4,305.53 with a tax of $901.23 which was the amount of tax shown by petitioner on his return. Respondent in the notice of deficiency stated that a tentative allowance of $533.72 had been made for loss carrybacks claimed in 1964 and 1965 (apparently based on carryback losses in 1963 and 1964) and determined a deficiency of $533.72 for the year 1961 because of 632 disallowance of the loss carryback deductions previously tentatively allowed. Respondent in his notice of deficiency determined that petitioner had unreported income of $3,396.06 for the year 1963. From this amount there was subtracted a $309.76 loss shown on petitioner's return to arrive at adjusted gross income as corrected of $3,086.30. Based on $3,086.30 respondent computed the deficiency which he determined for the year 1963 of $437 by allowing petitioner a personal exemption but no dependency credit exemptions for his two children. Respondent in his notice of deficiency determined183 that petitioner had unreported income of $4,889.24 for the year 1964 from which was subtracted the $2,354.69 loss shown on petitioner's 1964 return leaving adjusted gross income of $2,534.55 on the basis of which respondent computed the deficiency in petitioner's income tax allowing petitioner a personal exemption and no dependency credit exemptions for his two children. For the year 1965 respondent determined that petitioner had unreported income of $4,137.03 and computed his income tax liability and determined the deficiency on the basis of adjusted gross income of $4,137.03 allowing petitioner one personal exemption and no exemptions for his two daughters. Respondent gave the following explanation for the adjustments he made to petitioner's income. It has been determined that you realized taxable ordinary income during the taxable years ended December 31, 1963, December 31, 1964, and December 31, 1965 in the amounts of $3,396.06, $4,889.24 and $4,137.03, respectively, which you failed to report on your income tax returns for those years. Respondent explained his disallowance of petitioner's two claimed dependency credit exemptions with the statement that petitioner had failed184 to establish that his two daughters qualified as his dependents under section 151 of the Internal Revenue Code. Opinion It is petitioner's position in this case that he had no unreported taxable income for any of the years here in issue. Although the notices of deficiency did not disclose respondent's basis for determining the amounts of unreported income shown for the years 1963, 1964, and 1965, at the trial respondent's counsel stated that the amounts of unreported income as shown in the statutory notice of deficiency were arrived at by the "application of reconstruction of income principles under the source and application of funds." Respondent's counsel gave the further explanation that respondent had to the best of his ability determined that expenditures and deposits by petitioner were greater than sources of funds that respondent was able to find. The issue here is purely factual. Petitioner has shown clearly that the deposit of funds made on January 11, 1963 came from withdrawals from previous accounts and that the deposit of funds on April 9, 1963, came from a withdrawal from the account to which a deposit was made on January 11, 1963. Therefore, 185 petitioner has accounted entirely for the two large deposits he made to savings accounts as being from funds accumulated prior to January 1, 1963. At respondent's request petitioner produced the pass books of his various savings accounts. The only other deposit of funds made by petitioner during the years here in issue was shown to have come from a refund of his 1961 income tax. The total expenditures made by petitioner for rent and child support in each of the years here in issue is $2,580. Petitioner stated that the rent he paid for his apartment included all utility charges except his telephone. When the amount of $2,580 is subtracted from the funds available to petitioner to expend in each of the years here in issue which funds were primarily from sources which caused them not to represent taxable income, there remains for petitioner's other expenditures $643.84 in 1963, $484.89 in 1964, and $497.96 in 1965. Respondent has not questioned petitioner's claimed business expense deductions. The largest business expense deduction other than rent is automobile expense which respondent concedes petitioner may deduct on the basis of 10 cents a mile. This automobile expense creates186 a deduction in an amount substantially greater than petitioner's actual expenditures in the years here in issue in operating his automobile. Petitioner made no payments on his automobile in the years here in issue since he had previously purchased it for cash and his only repair costs were for parts since he did the work of repair himself. Petitioner estimated the actual cost of operating his automobile in each of the years here in 633 issue and we have found these amounts of $147.15, $415, and $161.50 for the years 1963, 1964, and 1965 to represent petitioner's actual out-of-pocket costs of operating his automobile in each of these years. If we accept petitioner's own estimate of his expenditures, the total amounts he expended in addition to child support and rent were $493.77 in 1963, $790.94 in 1964, and $450.50 in 1965. Accepting this estimate of expenses there would remain for other incidental expenses not listed by petitioner over $150 of the receipts accounted for by petitioner in 1963, there would be a deficit of approximately $306 in 1964, and there would remain an excess of approximately $47 in 1965. Although petitioner's estimate of his expenditures for groceries187 and personal expenses are small in comparison to estimates of similar expenditures which appear in many of our opinions involving questions of whether taxpayers are entitled to exemptions for dependents, we conclude from observing petitioner at the trial that these estimates are within a reasonable range of the amounts he spent for these items. The only funds which petitioner testified he had available not substantiated by documentary evidence produced at the trial, was cash of $500 as of the beginning of 1963. Considering the fact that petitioner had made a cash deposit to his savings account of $1,000 in 1961, we believe his testimony with respect to the $500 of cash he had at the beginning of 1963. When the $500 is added to petitioner's other sources of funds, petitioner's total available funds for the years 1963 through 1965 exceed his estimated expenditures by $391.48. For the year 1961 petitioner's income after income taxes was approximately $5,530. If his social security tax is deducted from his 1961 income after taxes there would remain approximately $5,000 of cash available to petitioner for expenditures and savings for the year 1961. Petitioner on August 9, 1961, made a188 cash deposit of $1,000 and at the beginning of 1962 made another cash deposit of $241. On April 10, 1961, petitioner deposited a check in the amount of $1,137.83 in the California Federal Savings Association. If no part of this check came from petitioner's 1961 earnings but all of the $1,241 was from such earnings, petitioner's total expenditures in 1961 could not have exceeded $4,759. If any portion of the April 10, 1961, deposit came from receipts which petitioner had in 1961, his funds available for expenditures in 1961 would be even less than $4,759. The amount of petitioner's savings in 1961, a year during which his receipts are not questioned, supports petitioner's estimates of his expenditures for living costs. Petitioner stated unequivocally that even though he tried to obtain business as a consultant, he obtained no such business and had no receipts from that or any other undisclosed source during the years 1963, 1964, and 1965. He produced the passbooks of his Building and Loan Associations savings accounts to establish his deposits and withdrawals and documentary evidence to support much of his other testimony. Even though petitioner produced such substantial evidence189 in support of his testimony, respondent produced no evidence of any source of income which petitioner might have had. If petitioner had any income from his consulting business which he did not report, it would appear that respondent could have produced evidence of at least one client who made some payment to petitioner during one of the years here in issue. Respondent conceded that petitioner was in a consulting business and that he did incur business expenses in the amounts shown on his original returns. While the lack of any receipts would bear on the question of whether petitioner actually was in a business or whether he did incur business expenses, respondent concedes both of these factors. Petitioner filed amended returns in which he greatly increased the deductions he claimed for business expenses, primarily by claiming the entire rent on his apartment as a business expense and depreciation on his automobile in addition to car expense for the use of his automobile in his business computed on the basis of 10 cents a mile. Respondent did not concede the expenses claimed on the amended return and petitioner failed to prove any amount of business expense in excess of the amounts190 conceded by respondent. Petitioner has totally failed to establish that he is entitled to dependency credit exemptions for his two children for 1963, 1964, and 1965. He produced no evidence as to the cost of support of his two daughters, merely showing that he furnished $1,200 a year for their support. The losses as claimed for the years 1963 and 1964 on the original returns which formed the basis of the net operating loss carry-back claims, did not result from any deduction for dependency exemptions and it was on the basis of losses shown on petitioner's original returns for the years 1963 and 1964 that the tentative 634 carryback allowances were made. Petitioner had no taxable income in 1965. Therefore, there is no deficiency in any of the years here in issue even though we conclude that petitioner has failed to show that he is entitled to the dependency credit exemptions. Since as a result of our opinion there will be no deficiency, and since absent any deficiency, there is no addition to tax. Decision will be entered for petitioner. Footnotes1. This represents a portion of the rent of $1,380 paid by petitioner on the apartment in which he resided. Petitioner computed the amount by assuming business usage of the apartment to be two-thirds of its total usage, and since he did not commence this business until July 1, he determined that one-half of the two-thirds amount was business usage for 1963.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620418/	J. D. Amend, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eva Amend, Petitioner, v. Commissioner of Internal Revenue, RespondentAmend v. CommissionerDocket Nos. 18860, 18861United States Tax Court13 T.C. 178; 1949 U.S. Tax Ct. LEXIS 113; August 8, 1949, Promulgated 113 Decisions will be entered under Rule 50. Petitioner J. D. Amend is a wheat farmer and his custom since 1942 has been to sell his wheat in the year when produced, for delivery and payment in January of the following year. He followed this practice in the years 1944 and 1946 and received payment for his 1944 wheat in January 1945 and payment for his 1946 wheat in January 1947. Petitioners were on the cash basis and returned the amounts received for taxation in the year when received. The Commissioner has applied the doctrine of constructive receipt on the ground that petitioner could have sold his wheat for cash to the same buyers in the years when the contracts of sale were made and he contends that the deferring of payment to the following year was at petitioner's own request. Held, that the contracts of sale were bona fide arm's-length transactions and petitioner had no legal right to demand and receive payment for his wheat until in January of the year following the contract of sale and the doctrine of constructive receipt is not applicable. Dorothy Ann Kinney, Esq., and Walter G. Russell, C. P. A., for the petitioners.Allen T. Akin, Esq., for the respondent. Black, Judge. BLACK 179 Docket No. 18860, J. D. Amend, petitioner, involves deficiencies in income tax of $ 15,389.03 for the year 1944 and $ 4,034.68 for the year 1946.Docket No. 18861, Eva Amend, petitioner, involves deficiencies in income tax of $ 8,716.23 for 1944 and $ 2,237.55 for 1946.Upon audit of petitioner J. D. Amend's 1944, 1945, and 1946 income tax returns, the Commissioner adjusted income for the years 1944 to 1946, inclusive, with the following explanation in the notice of deficiency:For the year 1944 --(a) Profit from business has been increased by * * * (2) the inclusion in 1944 income of wheat sales credited to your account on August 25, 1944 and which you reported as 1945 income because you received and cashed the check therefor in January 1945 -- $ 40,164.08.For the year 1945 --(a) Profit on a sale of grain in 115 1945 was reported by you in 1946 instead of in 1945 because the check on the sale was not deposited until January 3, 1946. Since the amount was constructively received in 1945, the profit is included in 1945 income. Amount $ 7,721.59.(b) The profit on the sale of wheat constructively received in 1944 is here eliminated from 1945 income. See Schedule 3-A (a) (2). Amount $ 40,164.08.For the year 1946 --Wheat sales in 1946 reported in 1947 (when check cashed) are held to have been reportable in 1946 when the proceeds were constructively received.Amount$ 17,774.28Less: Sales in 1945 reported in 19467,721.59Net adjustment on wheat$ 10,052.69Similar adjustments were made with respect to the returns of Eva Amend, she and her husband having filed their returns on the community property basis.Petitioners contest the foregoing adjustments for 1944 and 1946 by appropriate assignments of error. The year 1945 is not before us because the Commissioner determined an overassessment of $ 2,672.64 as to J. D. Amend and an overassessment of $ 2,842.64 as to Eva Amend.180 FINDINGS OF FACT.The petitioners are individuals who reside in Amarillo, Texas. J. D. Amend will116 sometimes hereinafter be referred to as the petitioner.The income tax returns of the petitioners for the periods here involved were filed with the collector for the second district of Texas. All items of income in dispute, with the exception of that arising in January 1944 and prior periods, constituted community income of the petitioners, who were married June 17, 1944. Petitioners employed the cash basis method of accounting and filed their returns on that basis.From 1942 to 1946, inclusive, petitioner, a wheat farmer, annually contracted to sell a portion of his wheat in one year for delivery and payment in January of the subsequent year. The first transaction in which petitioner or his attorney in fact, Paul B. Higgs, contracted to sell wheat for January delivery and payment originated in December 1942 with the Burrus Mill & Elevator Co. in Amarillo, Texas, sometimes hereinafter referred to as Burrus. A check in payment for the wheat in the amount of $ 17,012.13 was issued to petitioner on January 15, 1943. The second transaction in which petitioner contracted to sell wheat for January delivery and payment originated in December 1943 with the Barnett Grain Co. of Amarillo, 117 Texas. A check in payment for the wheat in the amount of $ 12,775.30 was issued to petitioner on January 31, 1944. The third transaction in which petitioner or his attorney in fact contracted to sell wheat for January delivery and payment originated on August 2, 1944, with the Burrus Panhandle Elevator Co. in Amarillo, Texas. A check in payment for the wheat in the amount of $ 40,164.08 was issued to petitioner on January 17, 1945. The fourth transaction in which petitioner contracted to sell wheat and other grains for January delivery and payment originated in 1945 with the Coffee-Davis Grain Co. of Amarillo, Texas. A check in payment for the wheat and other grains in the amount of $ 7,721.59 was issued to petitioner on January 2, 1946. The fifth transaction in which petitioner contracted to sell wheat for January delivery and payment originated in 1946 with the Coffee-Davis Grain Co. of Amarillo, Texas. A check in payment for the wheat in the amount of $ 17,774.28 was issued to petitioner on January 4, 1947.At the time the contract was made in each of the five transactions, the purchaser either had the grains in storage or received them prior to January 1, pursuant to a 118 contemporaneous agreement as to shipping date. Under the terms of the contract made in each of the five transactions, petitioner was to receive his money for the wheat in January of the year following the contract of sale. The contracts of sale in 181 each year were oral. These contracts were bona fide arm's-length transactions between the seller and the buyer.Petitioner did not attempt to obtain payment, nor was it represented to him or his attorney in fact that he could obtain payment, prior to January of the following year under the contract made in each of the five transactions. The parties traded upon a "flat price" in each of the above five transactions, without any agreement for payment of storage.The price of wheat for January delivery was determined by agreement between the parties. A price is not posted for January delivery in the grain business as the grain exchanges do not provide January as a delivery month on future contracts.On or about August 2, 1944, Higgs, attorney in fact for petitioner, offered to sell petitioner's 1944 wheat, which consisted of approximately 30,000 bushels, for January delivery and payment to Porter Holmes, the manager of the Burrus119 Panhandle Elevator Co. in Amarillo, Texas. Higgs and Holmes agreed upon a price for the wheat which did not include any provision for storage in that it approximated the market price for wheat on August 2, 1944. The transaction was the only one of its type that the Amarillo office of Burrus handled in 1944. Since the transaction was unusual, Holmes called an official of the company in Dallas, Texas, and secured authority to buy the wheat upon the terms agreed upon between him and Higgs. The Dallas official approved the transaction. A confirmation letter dated August 2, 1944, was issued on the transaction by Burrus to petitioner. The confirmation specified the number of bushels, the price based on top grade, time of shipment, routing, and discounts. The confirmation was not treated by Burrus as intended to reflect all the terms of the oral contract. In the grain business the actual contract is generally oral. The time of shipment specified in the confirmation letter referred only to the date it should be transferred to the physical possession of Burrus and not to the technical delivery or closing date.After the wheat was received and graded an amount of $ 40,164.08 was entered120 on Burrus' books as a credit to petitioner's account and a charge to purchases was made of the same amount. The credit on the books of Burrus to petitioner's account was not intended to reflect that he was immediately entitled to receive his money. The practice of Burrus generally was to issue a check to the seller within a few days after a credit was made. This procedure was followed with respect to a straight sale of wheat which was sold by petitioner, as the agent of Marshall Cator, on August 5, 1944. Cator was paid immediately for his wheat because it was sold outright to Burrus at that time for immediate delivery.182 As heretofore stated, petitioner J. S. Amend was not paid for his 30,000 bushels of wheat which he sold to Burrus in August 1944 until January 17, 1945, because by agreement between the parties he was not to be paid for such wheat until some time in that month.OPINION.We have two taxable years before us for decision, 1944 and 1946. The year 1945 is not before us because the Commissioner has determined an overassessment as to each petitioner for that year.In each of the taxable years there is one common issue and that is whether the doctrine of constructive121 receipt should be applied to certain payments which petitioner received from the sale of his wheat. There is no controversy as to the amounts which petitioner received or as to the time when he actually received them. Petitioners, being on the cash basis, returned these amounts as part of their gross income in the years when petitioner actually received them. As heretofore explained, the Commissioner has refused to accept petitioner's treatment of the payments and has applied the doctrine of constructive receipt and determined that such amounts were income of the prior years. Other adjustments were made in the determination of the deficiencies, but these are not contested.In applying the doctrine of constructive receipt, the Commissioner relies upon Regulations 111, section 29.42-2, printed in the margin. 1In Loose v. United States, 74 Fed. (2d) 147, the rule providing for the taxation of income constructively received is stated as follows:* * * the strongest reason for holding constructive receipt of income to be within the statute is that for taxation purposes income is received or realized when it is made subject to the will and control122 of the taxpayer and can be, except for his own action or inaction, reduced to actual possession. So viewed, it makes no difference why the taxpayer did not reduce to actual possession. The matter is in no wise dependent upon what he does or upon what he fails to do. It depends solely upon the existence of a situation where the income is fully available to him. * *123 Respondent, in his brief, relies upon the Loose case, from which the above quotation is taken, and several other cases which deal with the doctrine of constructive receipt. Needless to say, each of those cases 183 depends upon its own facts. In the Loose case, for example, interest coupons had matured prior to the decedent's death. The decedent had not presented them for payment because of his physical condition. It was held that, even though the decedent had not cashed them, the interest coupons represented income to him in the year when they matured, under the doctrine of constructive receipt.It seems clear to us that the facts in the instant case do not bring it within the doctrine of Loose v. United States, supra, and the other cases cited by respondent dealing with constructive receipt.In discussing the situation which we have in the instant case, we turn our attention first to the contract of sale which petitioner made of his 1944 wheat crop to Burrus. The testimony was that 1944 was a bumper wheat crop year and that petitioner produced and harvested about 30,000 bushels, some of which was lying out on the ground and some124 of which was stored on the farm. Petitioner, through his attorney in fact, Paul Higgs, sold this wheat to Burrus for January 1945 delivery at $ 1.57 per bushel. It was the understanding that petitioner would ship his wheat to Burrus at once and that Burrus would pay him for it in January of the following year. The contract was carried out. Some time during the month of August 1944, after August 2, petitioner shipped the 30,000 bushels to Burrus. Burrus received it, put it in its elevator, and paid petitioner for it by check dated January 17, 1945.Respondent's contention seems to be based primarily on the fact that petitioner could have sold Burrus the wheat at the same price for immediate cash payment in August 1944 and that although he did not do so, he should be treated in the same manner as if he had and the doctrine of constructive receipt should be applied to the payments received. We do not think the doctrine of constructive receipt goes that far. Porter Holmes, who was the manager of the Burrus Panhandle Elevator in Amarillo at the time of the 1944 transaction, testified at the hearing. He testified that it was the usual custom of Burrus to pay cash for wheat soon 125 after it was delivered and that the transaction between Burrus and petitioner for January 1945 delivery and settlement was unusual and that he telephoned the manager at Dallas, Texas, for authority to make the deal that way and secured such authority and the deal was made. He testified that when Burrus' check for $ 40,164.08 was mailed to petitioner January 17, 1945, it was done in pursuance of the contract. So far as we can see from the evidence, petitioner had no legal right to demand and receive his money from the sale of his 1944 wheat until in January 1945. Both petitioner and Burrus understood that to be the contract. Such is the substance of the testimony of both petitioner, who was the seller of the wheat, and Holmes, who acted for the buyer. Such also is the testimony of 184 Paul Higgs, who represented the seller in the negotiations for the sale. During 1944 all that petitioner had in the way of a promise to pay was Burrus' oral promise to pay him for the wheat in January 1945. Burrus was a well known and responsible grain dealer and petitioner testified that he had not the slightest doubt that he would receive his money in January 1945, as had been agreed upon126 in the contract. Such a situation, however, does not bring into play the doctrine of constructive receipt. See Bedell v. Commissioner, 30 Fed. (2d) 622, wherein the court said:While, therefore, we do not think that the case is like a promise to pay in the future for a title which passes at the time of contract, we would not be understood as holding by implication that even in that case the profit is to be reckoned as of the time of sale. If a company sells out its plant for a negotiable bond issue payable in the future, the profit may be determined by the present market value of the bonds. But if land or a chattel is sold, and title passes merely upon a promise to pay money at some future date, to speak of the promise as property exchanged for the title appears to us a strained use of language, when calculating profits under the income tax. * * * it is absurd to speak of a promise to pay in the future as having a "market value," fair or unfair. * * The doctrine that a cash basis taxpayer can not be deemed to have realized income at the time a promise to pay in the future is made was reiterated by the Circuit Court of Appeals for the Eighth127 Circuit in the more recent case of Perry v. Commissioner, 152 Fed. (2d) 183. In that case it was stated:These cases seem to be predicated upon the fact that in a contract of sale of property containing a promise to pay in the future, but not accompanied by notes or other unqualified obligations to pay a definite sum on a day certain, the obligation to pay and the obligation to pass title both being in the future, there is an element of uncertainty in the transaction and the promise has no "market value", fair or unfair. This theory is supported by the decision of the Supreme Court in Lucas v. North Texas Co. * * The Commissioner in the instant case is not contending that Burrus' contract to pay petitioner for his wheat in January 1945 had a fair market value equal to the agreed purchase price of the wheat when the contract was made in August 1944. What he is contending is that petitioner had the unqualified right to receive his money for the wheat in 1944; that all he had to do to receive his money was to ask for it; and that, therefore, the doctrine of constructive receipt applies as defined in section 29.42-2, Regulations 111.For128 reasons already stated, we do not think the Commissioner's determination to this effect can be sustained. If petitioner had begun this method of selling his wheat in 1944, when he had a bumper crop, there might be reason to doubt the bona fides of the contract, but what we have said about the 1944 transaction between Burrus and petitioner is based upon the finding that the contract between Burrus 185 and petitioner was bona fide in all respects, though it was initiated by petitioner, and each party was equally bound by its terms. Petitioner did not begin this method of selling his wheat in 1944 -- he began it in 1942 and continued it through 1946. No doubt his taxes were more in some years and less in others than they would have been if petitioner had sold and delivered his wheat for cash in the year when it was produced. To illustrate this we need only point out that under the method which petitioner used he reported income in 1945 upon which he paid a tax of $ 2,672.64. His wife Eva also reported income and paid a tax of about the same amount. By treating petitioner's proceeds from the sale of his 1944 wheat as constructively received in 1944, the Commissioner determined129 overassessments as to each petitioner for 1945 and deficiencies against each petitioner for 1944.Petitioner was asked at the hearing why he adopted the manner of selling his wheat which has been detailed in our findings of fact. His answer was as follows:Well, that had been my practice, to handle that wheat that way since 1942 and I have handled my wheat that way, '42, '43, '44, '45, '46, '47 and into 1948. It is still my practice to do that and there have been some years in that interval that I would certainly have paid less income had I handled it the other way, but that is a semi-arid country and we are uncertain about our wheat crops and our expenses are always pretty well set and we know they are going to be high and we need for our own protection to carry part of this wheat forward.* * * As I have already explained, it's been a matter of making my income more uniform and even; about five of those years had it all been set back and sold in the year that it was supposed to have been sold in, my income tax would have been less and in the other two it would have been more. I merely emphasize that to show the consistency of my policy and not as a matter of paying any tax. 130 Whether the reasons advanced by petitioner in his testimony quoted above are good or bad as a business policy, we do not undertake to decide. The question we think we have to decide is whether the contracts detailed in our findings of fact were bona fide arm's-length transactions and whether under them the petitioner had the unqualified right to receive the money for his wheat in the year when the contracts were made and whether petitioner's failure to receive his money was of his own volition. Our conclusion, as already stated, is that the contracts were bona fide arm's-length transactions and petitioner did not have the right to demand the money for his wheat until in January of the year following its sale. This being true, we do not think the doctrine of constructive receipt applies. See Howard Veit, first point decided, 8 T.C. 809">8 T. C. 809.Petitioner, in each of the years before us, returned as a part of his gross income the checks which he actually received in payment for his wheat. This being so, we think he complied with the income tax 186 laws governing a taxpayer who keeps his accounts and makes his returns on the cash basis.We have discussed131 in detail above only the sale which petitioner made of his wheat to Burrus in August 1944. The sale of his 1945 and 1946 wheat was made to Coffee-Davis Grain Co. under substantially the same circumstances as the sale to Burrus and it need not be separately discussed. For the sale of his 1946 wheat, petitioner received a check for $ 17,774.28, dated January 4, 1947, from the Coffee-Davis Grain Co. Petitioners returned the amount of that check in their 1947 income tax returns. It is this latter check that the Commissioner put back in petitioners' 1946 income under the doctrine of constructive receipt. For the same reasons that we have held that the Commissioner erred in applying the doctrine of constructive receipt to the payment which petitioner received from Burrus in 1945, we hold that he erred in applying the doctrine of constructive receipt to the check for $ 17,774.28 which petitioner received from Coffee-Davis Co. in January 1947.Decisions will be entered under Rule 50. Footnotes1. Sec. 29.42-2↩. Income Not Reduced to Possession. -- Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620419/	ALUMINUM PRODUCTS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Aluminum Products Co. v. CommissionerDocket No. 16150.United States Board of Tax Appeals24 B.T.A. 420; 1931 BTA LEXIS 1648; October 22, 1931, Promulgated 1648 An amount expended by the petitioner in settlement of a controversy between it and a competitor as to which of them had the prior use of a trade-mark and as a result of which the petitioner acquired certain merchandise and other assets of the competitor, together with the competitor's promise immediately to discontinue the use of the trade-mark, held to be an expenditure of capital nature and as such not an allowable deduction from gross income. Henry W. Wales, Esq., for the petitioner. John E. Marshall, Esq., for the respondent. TRAMMELL 420 This proceeding is for the redetermination of a deficiency in income and profits taxes of $31,400.07 for 1920. The only matter in controversy 421 is the deductibility of an amount of $12,212.40 representing expenditures made in 1921 in connection with the settlement of a controversy as to who had the prior right to the use of a trade-mark which was being used by the petitioner and a competitor. FINDINGS OF FACT. The petitioner is an Illinois corporation with its principal office at LaGrange. In June, 1917, the petitioner filed an application in the United States Patent Office for1649 registration of the trade-mark "Lifetime," for aluminum kitchen cooking utensils, stating that it had continuously used in its business since April, 1915, the trade-mark proposed for registration. On June 25, 1918, the trade-mark was duly registered in the Patent Office and the petitioner was issued a certificate of registration, which, by its terms, was to remain in force for 20 years unless sooner terminated by law and which may be renewed for a like period from time to time upon application. William H. Doty of Boston, Mass., was engaged in selling aluminum ware through a canvassing organization, going directly to the consumer. Doty had a considerable business. He bought his aluminum ware from the Aluminum Goods Manufacturing Company, a manufacturer of aluminum ware, with its principal office at Manitowoc, Wis. On the wares purchased by Doty from that company, the company stamped the name "Lifetime." The name "Lifetime" had not been registered in the Patent Office by Doty or anyone else except the petitioner. The petitioner distributed its product through stores. A conflict developed between the petitioner and Doty in the distribution of merchandise through the two competitive1650 lines having similar trademarks. In the spring of 1920 a controversy arose between them as to their respective rights to the use of the name "Lifetime," and continued into the fall of that year. Doty claimed that he had prior right to the use of the name "Lifetime" and through his attorney threatened to institute legal proceedings against the petitioner. Attorneys for the petitioner were impressed by Doty's claim and in a conference between the stockholders of the petitioner and its attorneys it was decided to settle the controversy without litigation. In 1920 Walter Luttringhaus was the manager of the Chicago sales office of the Aluminum Goods Manufacturing Company, from which Doty purchased aluminum ware. He knew of the controversy existing between Doty and the petitioner and was acquainted with Doty and W. A. Hastings, who was the secretary and general manager of the petitioner. Luttringhaus had suggested to Doty and Hastings that they attempt to settle the controversy by agreement, if possible, 422 and to that end arranged for a conference between them to be held in his office during the latter part of November, 1920. Doty, Hastings and Luttringhaus were present1651 at the conference. The directors of the petitioner had instructed Hastings to negotiate a settlement of the controversy, with the limitation that such settlement should not involve the payment by the petitioner of an amount in excess of $15,000. At the conference terms of settlement of the controversy were discussed and an agreement was reached between the parties as to the terms of such settlement. The terms of the settlement were: That in consideration of Doty's discontinuing the use of the word "Lifetime" in his literature and advertising matter and on his cooking utensils the petitioner would pay him $5,000; that the petitioner would reimburse him for the expense he would incur in replacing literature and advertising matter destroyed; and that the petitioner would take over at cost whatever aluminum merchandise he had on hand, in transit and under order from the Aluminum Goods Manufacturing Company bearing the trade-mark "Lifetime." No written agreement was entered into at that time, but a short memorandum covering the points involved was dictated by Luttringhaus to his stenographer. No cash payment was made at the time. The total amount of money that would pass to Doty1652 under the terms of the settlement was not agreed upon at that time, since that was dependent upon the quantity of merchandise, literature and advertising matter involved. It was necessary that an inventory of these items be taken in order to determine the quantity of them. The petitioner kept its books on the accrual basis. In December, 1920, during the closing of its books for the year, it credited Doty with the amount of $15,000 and charged miscellaneous administration expense with the same amount. Thereafter the petitioner, by Hastings, its secretary, and Doty executed an instrument providing as followd: THIS AGREEMENT made and entered into this eighth day of January, 1921, by and between the Aluminum Products Company of La Grange, Illinois, and William H. Doty, of Boston, Mass., doing business as the Lifetime Aluminum Co.IN CONSIDERATION of the fulfillment of the premises made below by the Aluminum Products Co., William H. Doty agrees to immediately discontinue the use of the word "LIFETIME" on aluminum cooking utensils. In consideration of the above promise made by William H. Doty, the Aluminum Products Co. agrees to pay on Monday, January tenth 1921, the sum of1653 Five Thousand Dollars ($5,000.00) in cash, and further agrees to pay William H. Doty the actual cost of replacing all printed matter, electrotypes, half tones, dies, and all other material bearing the word "LIFETIME". The Aluminum Products Co. agrees to pay William H. Doty the cost of the above, emmediately upon receipt of the above printed matter, electrotypes, etc. In the event that the prices at which William H. Doty bills the above printed matter, electrotypes, half tones, etc., to the Aluminum Products Co., are not satisfactory to the Aluminum Products 423 Co., then the Aluminum Products Co. and William H. Doty hereby agree to allow Mr. W. Luttringhaus of Chicago, Illinois, to place a price on same, which the Aluminum Products Co. agrees to pay and William H. Doty agrees to accept. The ALUMINUM PRODUCTS CO. agrees to purchase from William H. Doty the entire stock of aluminum cooking utensils bearing the trade-mark "LIFETIME" that William H. Doty now has on hand in Boston, and that which is in transit, said price to be based on the actual selling prices as quoted today to William H. Doty by the Aluminum Goods Mfg. Co. of Manitowoc, Wisconsin. Said shipment of goods1654 to be made immediately f.o.b. Boston, Mass., and payment for same to be made within ten days after receipt of shipment by the Aluminum Products Co. The ALUMINUM PRODUCTS CO. further agrees to accept and pay the Aluminum Goods Mfg. Co. of Manitowoc, Wis., at today's billing prices to William H. Doty, all aluminum cooking utensils manufactured and in process of manufacture imprinted with the word "LIFETIME". Said goods to be shipped f.o.b. Manitowoc, Wis.Payments aggregating $12,212.40 were made by the petitioner to Doty as follows: January 10, 1921, cash $5,000; February 18, 1921, cash, $3,200; May 16, 1921, cash $1,000 and trade acceptances in the amount of $3,012.40. The various amounts were paid on receipt by the petitioner of invoices from Doty covering merchandise, stationery and supplies. The difference between the amount of $15,000 credited by the petitioner to Doty in 1920 and the $12,212.40 actually paid in 1921 was taken into income and returned by the petitioner as a part of its income for 1921. The aluminum ware taken over from Doty was disposed of in various ways, through trade channels, a jobber or second-hand dealer or disassembled and the aluminum melted1655 and recast. The dies, while being kept by the petitioner, were not used by it in its business. The advertising matter that was taken over was destroyed. The petitioner did not take over any part of Doty's organization nor any part of his sales forces. In determining the deficiency here involved the respondent refused to allow as a deduction for 1920, the taxable year before, us, the amount of $15,000 credited to Doty on the petitioner's books in December, 1920, but held that the entire amount was an allowable deduction for 1921. OPINION. TRAMMELL: The petitioner contends that it is entitled to a deduction in 1920 as a business expense incurred in that year the amount of $12,212.40 paid by it to Doty in 1921 in connection with the settlement of the controversy between them. The respondent contends that the amount constituted a capital expenditure and, even if an expense, was not accruable until 1921. We will first consider the question as to whether the amount constituted a business expense or a capital expenditure. 424 For the payment of the $12,212.40 the petitioner acquired (1) the promise of Doty to discontinue the use of the word "Lifetime" on aluminum1656 cooking utensils, (2) all literature and advertising material that Doty had containing the word "Lifetime," as well as certain electrotypes and dies, (3) Doty's entire stock on hand, as well as in transit, of aluminum cooking utensils bearing the trade-mark "Lifetime," and (4) all the aluminum cooking utensils imprinted with the word "Lifetime" manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company under orders from Doty. Doty was selling, through a canvassing organization, aluminum ware bearing the trade-mark of "Lifetime." The petitioner had registered in the United States Patent Office the trade-mark "Lifetime" and was selling, through retail dealers, aluminum ware manufactured by it and bearing the trade-mark "Lifetime." As the retail dealers did not have any canvassing organization expenses, they were able to sell the petitioner's products cheaper than they were being sold by Doty through his organization. This brought the interests of the petitioner and Doty in direct conflict. Doty claimed prior use of the trade-mark "Lifetime," insisting that he had been using it prior to the time the petitioner began its use. He also threatened to institute1657 legal proceedings against the petitioner. Doty's contention as to prior use was not without basis and the petitioner's attorneys were so impressed with the claim that it was decided in a conference between them and the petitioner's stockholders to dispose of the matter by settlement, as was done. By obtaining the promise of Doty to discontinue the use of the word "Lifetime" on aluminum cooking utensils the petitioner acquired the right to the unmolested use, so far as Doty was concerned, of the trade-mark "Lifetime" on the aluminum ware manufactured by it. Doty, by abandoning the use of this trade-mark, would no longer be in a position to claim any rights under it, and as for the sale of goods bearing the trade-mark the field was left entirely to the petitioner. Doty was permanently eliminated from the field so far as the use of the trade-mark "Lifetime" was involved. These constituted rights of a substantial value, the benefits from which would be available to the petitioner not only throughout the remaining 20-year period for which the trade-mark was registered, but to any renewal thereof. The acquisition of these rights by the petitioner constituted the perfection of its1658 right to the free use of the trade-mark without interference of any kind from Doty. With respect to the aluminum ware that Doty had on hand and that in transit, the language used by the parties in the agreement 425 indicates that the petitioner was purchasing such merchandise from Doty. Payment for this merchandise and that manufactured or under manufacture by the Aluminum Goods Manufacturing Company on orders from Doty was to be made on the basis of that company's selling or billing prices to Doty. With respect to the aluminum ware manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company on orders from Doty, the petitioner appears to have stepped into Doty's shoes so to speak, and so far as the record shows, with the acquiescence of the Aluminum Goods Manufacturing Company. The record does not show when the aluminum ware acquired in connection with the settlement with Doty was actually received by the petitioner or when disposed of by it. There is nothing in the record to indicate that any of it was received or disposed of by the petitioner during the year 1920. We are of the opinion that, with the possible exception of the literature1659 and advertising matter containing the word "Lifetime" and the electrotypes and dies, the petitioner acquired valuable rights as well as merchandise in return for the expenditure of the $12,212.40. No attempt was made by the petitioner to show what part of the amount involved represented payment for the advertising matter and the electrotypes and dies. In fact, no attempt was made by the petitioner to allocate the $12,212.40 to the various items of property acquired. Inasmuch as the $12,212.40 was expended by the petitioner in the acquisition of assets, the unmolested use of its trade-mark, the perfection of its rights therein and the elimination of competition, the amount constituted an expenditure of a capital nature and as such was not an allowable deduction for 1920. Cf. ; ; . Since the amount in controversy constituted an expenditure of a capital nature, we are not concerned as to when it might have been accrued if it were an expense deduction. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620420/	MORRIS & CUMMINGS DREDGING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Morris & Cummings Dredging Co. v. CommissionerDocket No. 9596.United States Board of Tax Appeals10 B.T.A. 351; 1928 BTA LEXIS 4125; January 28, 1928, Promulgated 4125 1. Value at March 1, 1913, of certain assets owned by the petitioner at that date and the remaining useful life thereof determined for purposes of computing annual depreciation deduction from gross income for each of the taxable years. 2. Cost and useful life of certain assets acquired by petitioner subsequent to March 1, 1913, determined for the purpose of computing annual depreciation deduction from gross income for each of the taxable years. 3. Original cost of certain real and personal property owned by the petitioner determined for the purpose of computing statutory invested capital of the petitioner in each of the taxable years. 4. Evidence not sufficient to support petitioner's request for determination of the tax liability for the taxable years under the provisions of section 328 of the Revenue Act of 1918. 5. Petitioner's contention that collection of taxes for the year 1918 is barred by statute of limitations not established by the evidence. 6. Respondent properly reduced petitioner's invested capital in each of the taxable years by the deduction of income and profits taxes due for each of the several prior years. John M. Enright, Esq., for4126 the petitioner. J. E. Marshall, Esq., for the respondent. LANSDON 351 In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1918, 1919, and 1920, for which the Commissioner has determined deficiencies of $23,836.98, $29,422.98, and $80,337.08, respectively. The petitioner alleges error on the part of the Commissioner (1) in failing to allow adequate deductions for depreciation and obsolescence of plant and equipment, based on a value at March 1, 1913, or subsequent cost; (2) in failing to adjust surplus correctly in determining invested capital; (3) in failing to compute the tax under the provision of sections 327 and 328 of the Revenue Act of 1918; (4) in endeavoring to assess and collect taxes for the year 1918, after the statute of limitations had rendered such taxes uncollectible; and (5) in reducing invested capital by deducting income and profits taxes due for each of the prior years. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of New York, with principal offices in New York City. Its capital stock had a par value of $125,000. On December 15, 1973, the4127 petitioner entered into an agreement to purchase a certain tract of land in the City of Bayonne, N.J., on 352 the banks of the Hudson River, from James Baker, for a price of $50,000, which agreement was carried out by a deed from James Baker to August T. Morris as trustee on December 15, and a deed from August T. Morris to the petitioner dated June 18, 1880. This tract is known as the Pamrapo property. In 1874 the petitioner applied to the State of New Jersey and thereafter received a lease on lands under water in front of its lands purchased from James Baker, and extending into the river 3,200 feet, whereby it was granted the right to fill in such area with solid fill and to build piers to a further distance of 500 feet. This lease also granted the right to the petitioner to additional land under water when and if any extensions of the exterior line for solid fill were made by the State. Such an extension was made in 1889, extending the line 2,492.27 feet beyond the previous line for solid fill and extending the line for piers a distance of 2,402.19 feet further. On May 9, 1875, the petitioner entered into an agreement with William Currie and Robert T. Currie, who4128 owned the lands adjoining the Pamrapo tract on the north, by the terms of which it agreed to erect certain bulkheads and to fill in the land between such bulkheads and the shore. In consideration therefor it was to receive an undivided one-half interest in the filled-in property and adjoining shore land. Provision was also made for partitioning the lands involved into two tracts, whereby it would receive the tract immediately adjoining the Pamrapo tract on the northeast and having a width of 300 feet. This was corrected to 251 feet by agreement of 1885. The Curries were to furnish canal boats or other suitable obstruction from the southeasternmost point of the property to the northwesternmost point. August 1, 1879, the petitioner entered into agreement with the Point Breeze Ferry & Improvement Co., which was owned by William Currie and Robert T. Currie, to fill in the land immediately adjoining the Currie land on the northeast, having a width to 721 feet and a length of 3,110.4 feet on the southwest and a length of 2,918.68 feet on the northeast. In payment for such services it was to receive a deed either to the southwest half of these lands or to the northeastern half of4129 the Currie lands covered by the agreement of 1875. Under the terms of the agreement it was also required to pay one-half of the expense and annual charges for obtaining a lease on the land under water and to dig a ditch along the northeastern line of the property and a bank to prevent the overflow of filling to the adjoining property. The petitioner began the operation of building the necessary bulkheads and filling in the specified areas in accordance with these agreements and a subsequent agreement modifying and correcting the previous agreements. Before the work was completed some disagreement 353 arose which resulted in suit in the Court of Chancery of New Jersey between the parties. This suit was settled out of court by an agreement dated February 25, 1896. By this agreement the petitioner acquired all the rights to the Currie tract immediately adjoining the Pamrapo tract on the northeast for a width of 427 feet at the original bulkhead line and released all of its right, title, and interest in and to the balance of the land covered by the agreements with the Curries and the Point Breeze Ferry & Improvement Co. It also was to pay certain amounts representing its4130 share of rentals, interest, etc., on the leasehold, from 1882 to 1896. The quantity of filled-in land thus acquired and covered by the lease was 34,989 acres, less an area approximately 100 feet by 1,000 feet contained in the slipway. This tract was referred to as the Point Breeze property. By acquiring the riparian land the petitioner also acquired the right to fill in the extension of its property for 2,450.95 feet beyond the original bulkhead line and to extend piers to a point 2,161.78 feet beyond the extended bulkhead line. The area covered by the extension for solid fill was 22,140 acres, and the area allowed for piers was 19.562 acres. The cost of the Pamrapo property was $207,485.72 and the value of the Point Breeze property on the date acquired was $337,000. The petitioner was engaged in the business of dredging. In this business it acquired and used dredges, scows, barges and tugs, which were referred to as its plant. Its operations began about 1874 but the books of account for the period 1874 to 1896 were lost or destroyed. The earliest available books were opened in 1896, and the plant balance appears therein at December 31, 1897, at a figure of $287,507.06. 4131 This balance corresponds to the balance shown by entries on sheets attached to a letter addressed to Daniel J. Leary, dated June 14, 1898, and identified as a correct copy of the accounts contained in the books of the petitioner prior to 1896. This document shows that an appraisal was made in 1892 of 27 scows, 2 tugs, and 6 dredges, and entered on the books in lieu of any previous entries. Included in this appraisal were scows 37, 38, 39, and 40, which were carried in the appraisal at actual cost as indicated by cost entries in the copy of the accounts for the years 1890, 1891, and 1892. The appraised values were as follows: 354 Scow No.:2$1,00031,000490051,00072508250182,500192,50020$2,500212,500222,500232,500281,000292,000302,000312,00032$2,000335,500345,500355,500365,5003711,500388,750398,7504010,350Tugs:Decatur$8,000Greenville4,000Dredge No.:18,00034,00068,00098,000104,000119,000Of these vessels the only ones remaining during the years under review were scows Nos. 11 (No. 31 in appraisal), 18, 19,4132 20, 22, 23, 29, 33, 34, 35, 37, 39, and 40.The appraised value of these vessels together with other capital items entered at cost made a total of $145,500 as an opening entry for 1892. Subsequent additions increased the account to $389,386.37 by December 31, 1917. Deductions were made as follows: Plant account$389,386.37Deductions:Apr. 30, 1893, 20% on $145,500$29,100.00Apr. 30, 1894, 20% on $193,507.8538,701.57Apr. 30, 1894, dredge No. 1 destroyed by fire4,800.00Oct. 5, 1894, sale of engine and tug Sylvia750.00Aug. 31, 1895, sale of bucket No. 75700.00Oct. 21, 1895, sale of tug Whitbeck600.00Oct. 24, 1895, sale of old windlass100.00Dec. 31, 1896, 5% on $239,915.8511,995.79Dec. 31, 1897, 5% on $302,639.0115,131.95101,879.31Plant balance287,507.06This amount of $287,507.06 appears in the 1896 ledger as the plant balance at December 31, 1897. On December 30, 1905, the property account of petitioner was as follows: Pamrapo property$276,789.62Point Breeze property281,877.89Greenville property209,893.27Plant A & B229,897.71Plant D163,755.97On that4133 date these amounts were charged to profit and loss and new entries made as follows: Bayonne (Pamrapo and Point Breeze) property$10,000Greenville property30,000Plant201,200This constituted a starting point for the computation of invested capital by the respondent. The records of the petitioner disclose the dates of purchase and the cost of certain items of plant still in possession of the petitioner 355 during the years 1918, 1919, and 1920. These items, together with the lives remaining after acquisition, are as follows: Date acquiredCostRemaining life, yearsScows Nos. - 371890$11,500.00353918918,750.003640189210,350.00354118939,750.003542189511,000.003243189411,000.003445189411,000.00344618973247189723,031.65324818983249189830,000.003250190522,034.203051190521,932.963052305319143054191466,979.3530Dredges Nos. - 12189367,357.85335189794,356.50301189839,981.783171903 and 19041 166,732.3331Tug Taylor191660,000.0013 1/34134 In determining invested capital the petitioner is entitled to the sum of the above amounts, less depreciation sustained to the taxable year, based upon the lives indicated. On March 1, 1913, the petitioner owned 8 dredges, 31 scows, 1 motor boat, and 1 derrick barge. The values at March 1, 1913, of these vessels as a basis for depreciation and the remaining lives are as follows: Scow No.ValueLife, years11 $90012189001219900122090012229001223900122990012331,50012341,50012351,50012375,50012394,00014404,80014414,90014426,18015436,0001545$6,35315468,07516478,07516489,56317499,563175020,167225120,167225220,16722W & C 2W & C 3W & C 719,09015W & C AmericaW & C SavannahW & C BostonMb. ScampDerrick bargeDredge No.Value March 1, 1913Remaining life, years1$30,00016230,000141130,00022550,000157$44,000221240,00013630,00015America50,00022Acquisitions subsequent to 1913 and the remaining lives are as follow: PropertyDate acquiredCostRemaining life, yearsScows 53 and 541914$66,979.3530Tug Taylor191660,000.0013 1/34135 356 On December 8, 1924, an agreement entitled "Income and Profits Tax Waiver" was entered into by the petitioner and the Commissioner, by the terms of which the statutory periods of assessment and collection of taxes for the years 1918 and 1919 were extended one year. On February 17, 1925, another agreement entitled "Income and Profits Tax Waiver" between the same parties was entered into, by the terms of which the statutory period of limitation for the assessment of taxes for the year 1918 was extended to December 31, 1925. On October 7, 1925, the Commissioner sent the petitioner notice of a deficiency of $23,836.98 for the year 1918. During the year 1920 the petitioner operated its plant to capacity. The total earnings for 1920 and prior years, and the repairs for 1920 and 1919 were as follow: RepairsYearTotal earningsAmountPer cent of earnings1920$1,269,918.00$227,342.2217.91919932,914.40118,747.8412.71918667,018.251917963,912.101916467,143.931915417,885.411914539,819.19OPINION. LANSDON: One of the chief difficulties encountered in redetermining the tax liability of petitioner is due4136 to the fact that the current books did not reflect the total cost of assets acquired by petitioner, resulting in part from an arbitrary write-off, about 1905, of some $1,000,000. The books reflecting the cost of assets and the write-down were lost at the time of the Commissioner's examination and were found only after the deficiency herein asserted had been determined. The books and records for 1896 and subsequent years were presented at the hearing, together with copies of accounts from 1890 to 1896. On the basis of these new records the petitioner seeks to restore to the capital account the proper entries. The first of these entries is that representing the cost of the Pamrapo property. This property represented the purchase of certain shore lands in Jersey City for $50,000, and the subsequent acquisition of a lease of land under water in front of such property and the cost of filling in such land to a point above the water level. The account in respect to this property stood on the books at January 1, 1896, at an amount of $272,644.02. Of this amount $65,158.30 consisted of interest on notes and mortgages and rental paid to the State, leaving a net cost of $207,485.72. 4137 The petitioner alleges that even this amount did not adequately express the entire cost of the 357 property, and in support of such contention introduced the testimony of a witness who submitted an estimate of the cost of building the cribwork, the trestle for handling the fill, the cost of handling material, and the cost of construction and equipment of the hoister, amounting to a total of $217,720.93, which, if added to the cost of the shore land of $50,000, would result in total estimated cost of $267,720.93. We have examined the retrospective appraisal of the cost of filling this property and are of the opinion that it represented nothing more than a very rough estimate without value except insofar as it tends to confirm the cost as shown by the books at January 1, 1896, less the interest and rentals. We are, therefore, of the opinion that the amount of $207,485.72 may be accepted as representing the cost of the Pamrapo property to the petitioner and should be restored to invested capital. The second property, known as the Point Breeze property, was acquired under an agreement whereby petitioner was required to fill in certain lands under water and after the work4138 was completed to receive one-half of such lands in payment for the services thus rendered. The books of account showed merely the costs to the petitioner of doing such work and were carried on the books at January 1, 1896, in an amount of $260,440.59. Petitioner maintains that it is entitled to include in its earned surplus an amount in excess of such sum and equal to the fair market value of the property acquired on the date of such acquisition. Petitioner undertook to perform certain services in the way of building crib work, trestles and filling in the property and in consideration for such services it was to receive payment in the form of real estate and property covered by lease. Since this was a transaction which normally would have resulted in the computation of a profit or loss to the petitioner, we believe that the petitioner's contention is well founded - that it should be entitled to set up as cost of the property thus acquired its fair market value on the date of payment. In support of the value of such property petitioner introduced a witness who was thoroughly familiar with riverside frontages and developments and who, after an examination of all the transactions4139 in the neighborhood, placed a value of $350,000 upon this property. It also introduced testimony of witness Snell, who made a retrospective appraisal of the cost of filling in the lands under the agreement which the Curries and the Point Breeze Ferry & Improvement Co., which amounted to some $313,000. The testimony of expert witness Gaddis, who placed a value of $350,000 upon this property, was predicated upon an area of 79.71 acres. The testimony introduced indicates that the petitioner 358 acquired only 76.691 acres. Gaddis stated that if the acreage which he adopted was incorrect the total value of $350,000 should be reduced pro rata to arrive at the correct value. This amount we have determined to be $337,000. We are therefore of the opinion that the value of the Point Breeze property on the date acquired was $337,000, which amount should be restored to the property account on the books of petitioner in lieu of the amount of $10,000, at which this property and the Pamrapo property were carried in the accounts. A somewhat similar situation is encountered in the plant account. In December, 1905, the plant account stood on the books of petitioner at approximately4140 $393,000. This amount was arbitrarily written down at that time to $201,200, and constituted the gasis for the plant account in the current books. Petitioner now seeks to restore the amounts written off in 1905 and also excessive depreciation charged off in 1893 and 1894. As stated in the findings of fact, the opening entries for the plant account in 1896, were based upon an appraisal of the scows and dredges then owned by the petitioner. Petitioner has no records to show the cost of any of the items contained in the appraisal except scows Nos. 37, 38, 39, and 40. A large number of the scows and all of the tugs and dredges contained in that appraisal were either lost, destroyed, or parted with prior to the taxable years and therefore could not enter into the computation of invested capital. From the books of account and the records submitted the actual cost of certain of the scows and dredges is ascertainable. Petitioner is entitled to restore costs of such items to the plant account in lieu of the amount of $201,200, at which they were carried on the books in 1905, and all of such costs, together with subsequent costs of equipment, should be considered in computing4141 invested capital for the taxable years involved and a depreciation reserve should be set up, based upon the total expected life of each item and the life expired up to the taxable year. The petitioner alleges error in that respondent has failed to compute its tax liability under the provisions of sections 327 and 328 of the Revenue Act of 1918. It does not appear, however, that prior to the hearing of this proceeding it ever made any application for such relief, and that such application was denied. Nor is it clear whether this issue is presented as an alternative contention or as a primary allegation of error. In any event, we are of the opinion that our findings of fact and decision remove any abnormalities prejudicial to the petitioner, and special assessment is denied. On March 1, 1913, petitioner owned various scows and dredges which it claimed were in serviceable condition. It is asking for a value at March 1, 1913, of this property for the purpose of depreciation. 359 In support of its claim it presented the testimony of Leary, who is an officer in the company, and Seely, who was qualified as an expert on the valuation of this type of water equipment. Leary4142 placed a value on each of the scows and dredges in question, which he testified represented the cost of a new piece of property on March 1, 1913. Seely assigned certain values to the various scows based apparently entirely upon the capacity or size of the scow without regard to its age or physical condition. This is made apparent by the fact that he testified that 15 of these scows were lying sunk on or near the property at the time of his inspection. There is a considerable difference between the values assigned to these scows by the appraisal of 1892 and the cost of the scows as shown by the records, as compared with the appraisal of Leary and Seely, and there is considerable difference between the appraisals of Leary and Seely in respect to about 15 of the scows in question. It is not clear as to what basis Seely used in arriving at his values. At one point in his testimony he said the starting point was the cost new of such scows. From a comparison between the actual cost of scows as shown by the books of petitioner and the values assigned to such scows at March 1, 1913, by Seely, it would appear that, for the most part, the values assigned by Seely represented reconstructive4143 cost new. After a consideration of the 1892 appraisal, costs as shown by the records, and the values assigned to the scows by Leary and Seely, we arrived at the March 1, 1913, values as set forth in the findings of fact. The testimony relating to the value of dredges was somewhat different. Seely had occasion to go aboard and examine one of the dredges, No. 7, in 1912 for the purpose of arriving at a value for certain clients of his who wished to purchase the dredge. He also went aboard the dredge America in 1926, in order to estimate its value for the purpose of purchase by outside parties. He also visited, in 1927 certain other of the dredges and placed a value thereon as of March 1, 1913. After a comparison between the testimony of Leary and Seely and the cost of such dredges as are of record, we arrived at the values set forth in the findings of fact. Petitioner is entitled to a deduction for each of the years in question, based upon the March 1, 1913, value and the life remaining as of that date. Subsequent to March 1, 1913, the petitioner acquired by purchase scows Nos. 53 and 54. The witness testified that these scows cost approximately $36,000 each. 4144 However, petitioner's books show that the only additions to capital account in the year 1914 amounted to $66,979.35. Therefore, this amount should be assigned as the cost of scows Nos. 53 and 54, and depreciated on the basis of a 30-year life. In 1916 petitioner purchased a seagoing tug, named Taylor, for $60,000. It utilized this tug for hauling its scows out into the bay 360 for approximately 3 years, at which time it appeared that the tug was not sufficiently sturdy for that type of work and thereafter it was utilized for harbor work exclusively. In September, 1924, this tug was burned and was a total loss. Petitioner, however, recovered insurance to the amount of $25,000. In the report of the casualty the Morris & Cummings Dredging Co., by R. H. Ballou, superintendent, estimated the value of the vessel at $35,000. Petitioner claims that the reasonable life of the tug Taylor on the date of the purchase in 1916 was 7 years and desires to write off one-seventh of the cost thereof each year. During the years 1916, 1917, 1918, 1919, and 1920, petitioner wrote off depreciation on its books in an amount of $4,500 a year, which is a rate of 7 1/2 per4145 cent. In view of the fact that the petitioner during the years 1916 to 1920 considered that the reasonable life of the tug was 13 1/3 years, and since it was able to insure this tug in 1924 for $25,000 and estimated its value on that date at $35,000, we fail to see any justification for allowing a rate in excess of that taken by petitioner during the years in question. We are therefore of the opinion that petitioner is entitled to a depreciation rate of 7 1/2 per cent for the years 1918, 1919, and 1920, based upon a cost of the tug Taylor of $60,000. The petitioner also claims that for the year 1920 it should be allowed extraordinary depreciation on account of the fact that it operated its plant at capacity during that year and did not have time to make adequate repairs. This contention is not sustained by its records, which show that during the year 1920 the repairs amounted to 17.9 per cent of the total earnings, while for the year 1919 they amounted to only 12.7 per cent. Furthermore, it does not appear to us that the use of petitioner's plant at capacity resulted in any additional depreciation upon the hulls of the vessels used. Since testimony has been introduced4146 to show that depreciation is greater if the plant remains idle and on the surface than when in constant use, and since under normal conditions excessive use of plant and equipment merely results in additional wear and tear on the machinery with very little, if any, additional wear upon the hulls of the vessels, we are of the opinion that petitioner has failed to show that it is entitled to depreciation for the year 1920 in excess of the normal rates determined. Petitioner alleges that the deficiency for 1918 is barred by the statute of limitations. The only evidence submitted in respect to this issue consisted of two waivers, one of which was dated December 8, 1924, and the second February 17, 1925, and also a certain receipt for payment of taxes, dated June 11, 1924, a certificate of overassessment dated May 13, 1924, and an assessment list of February, 1924. Nothing was submitted to show the date when the return was filed. However, even assuming that the return was filed more than five years 361 prior to December 8, 1924, we are of the opinion that on account of the waivers filed the statute had been extended to December, 1925, and that the Commissioner was therefore4147 not barred by statute in asserting a deficiency as of October, 1925, at which time the 60-day letter was mailed to petitioner. The circumstances in this case have previously been passed upon in the case of . Petitioner also alleges that the Commissioner was not justified in reducing invested capital during each of the years in question by deducting income and profits taxes due for each of the prior years. Nothing has been submitted in support of this claim other than the 60-day letter above referred to. An examination of this letter does not disclose that any deduction of the character indicated has been erroneously made. Judgment will be entered on 15 days' notice, under Rule 50.Footnotes1. This amount may include the cost of scow No. 52. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620422/	BALL, BALL AND BROSAMER, INC. AND BALL AND BROSAMER, J.V., A JOINT VENTURE, BALL, BALL AND BROSAMER, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBall, Ball & Brosamer, Inc. v. CommissionerDocket No. 3553-87United States Tax CourtT.C. Memo 1990-454; 1990 Tax Ct. Memo LEXIS 498; 60 T.C.M. (CCH) 587; T.C.M. (RIA) 90454; August 22, 1990, Filed 498 Decision will be entered for the petitioner. Fielding H. Lane and Mary Eileen Butler, for the petitioner. James W. Clark, for the respondent. KORNER, Judge. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION In his Final Partnership Administrative Adjustment, respondent determined that the partnership failed to include $ 3,391,053 in gross income attributable to the completion of a long-term contract in 1983. The sole issue to be decided is whether Job 553, a heavy construction job, was completed for Federal income tax purposes under the completed contract method of accounting in 1983 or 1984. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached are incorporated by this reference. Ball, Ball499 & Brosamer, Inc. is the tax matters partner of Ball, Ball & Brosamer, Inc. and Ball & Brosamer, J.V., the partnership. The tax matters partner had its principal place of business in Alamo, California, at the time the petition was filed. The partnership used the calendar year as its annual accounting period and elected to report the income from its long-term contracts pursuant to the completed contract method of accounting. The partnership commenced business in January, 1981, and was engaged in heavy construction work, particularly for government agencies. Job 553, whose completion is the subject of this opinion, was performed pursuant to a contract between the partnership and the United States Department of the Army, Corps of Engineers. The contract was part of a $ 500 million project for the construction of a space shuttle complex at Vandenberg Air Force Base. This complex included, among other things, a space shuttle launch facility, a space shuttle maintenance check out facility, and a space shuttle mate/de-mate facility. As part of the overall project, the partnership's specific contractual obligations were as follows:Removal of existing bituminous runway pavement and500 replacement with concrete pavement; concrete runway extension overruns and shoulders; airfield lighting and NAVAIDS; regulator building; drainage; utility relocation; laser tracking system; and other appurtenant work; towway (V-80 partial); apron (V-19); all on North Vandenberg Air Force Base, California. Funding for the construction of the space shuttle complex was provided by a number of different appropriations authorized by Congress for the different facilities or aspects of the project. As part of the Government's management of the construction of the space shuttle complex, the Government "packaged" the various types or items of work required for construction of the different space shuttle facilities into contracts to provide efficient work units, using parts of the different Congressional appropriations to fund the work included within each contract. This packaging was done based on the Government's determination of how best to accomplish the desired work, how best to minimize disruptions, and how best to obtain the most competitive or best price for the work. The partnership bid all of the work in the contract as a unit for an initial contract price of $ 19,976,745. The501 partnership determined the bid prices for the various items of work included in the contract by spreading the contract price or total costs for performance of the contract as a whole, including mobilization, equipment, and other costs. During the course of the partnership's work on the contract, 57 written modifications to the contract were issued reflecting various changes in the work ordered by the contracting officer, which increased the total consideration that was received by the partnership to $ 22,152,866.50. Payments were based upon estimates, approved by the Contracting Officer, of the partnership's progress on the job. The performance report for the period ending December 31, 1983, reflected that all elements of the contract were approximately 100 percent complete. Construction of all elements of the shuttle facility at Vandenberg Air Force Base was not projected to be completed until 1985, although the contract between the partnership and the Government required the partnership to complete the contract by September 10, 1983, before change orders. Part of the partnership's contractual obligations was to build an additional 7,000 feet of concrete runway, plus extensions502 and overruns; in addition, the partnership was to remove 6,000 of the existing 8,000 feet of runway and rebuild it with concrete. Petitioner initially built the new runway, leaving the old one open for aircraft usage. After the new runway was completed, the petitioner then closed, removed, and rebuilt the old section. The entire 15,000 foot runway was sufficiently completed for use by aircraft for landing and takeoff by the summer of 1983. The Air Force took beneficial occupancy of the runway, apron, and appurtenant facilities in September 1983, and placed them in regular service at that time. As part of the contract, the partnership was required to relocate Tangair Road on Vandenberg Air Force Base because the old road came too close to a space shuttle check-out facility, which was deemed to be a possibly hazardous facility. The work on Tangair Road was initially completed in 1982, and the road was heavily traveled. Problems became apparent with the new road as it began to deteriorate, and it was closed in 1983 so that petitioner could perform additional work. Tangair Road was reopened in May 1983, after petitioner made modifications. Even after the additional work, questions503 were again raised as to whether Tangair Road conformed with the contract. Discussions as to its conformance continued until 1984 and ended after petitioner agreed to increase the thickness of a portion of Tangair Road, at no cost to the Government. This work was completed in the summer of 1984. As of the end of 1983, the partnership had also not yet completed the removal of existing curbing in an apron area near the mate/de-mate facility and the paving in that area to provide adequate room to allow a 747 jet to turn around. In addition, the partnership also had not installed shields on the runway lights, provided for a remote switch to operate a generator from the tower, or painted numbers on power poles near the runway. The Government requested at the end of 1983 that petitioner submit a proposal to flush epoxy the center line touchdown zone cover plates, within the runway concrete pavement. Petitioner eventually submitted a proposal, which was rejected in 1984 on the grounds that it was too expensive. The partnership received a letter from Edward M. Grigsby, a representative of the Contracting Office, stating that the Government considered the project completed and accepted504 in March 1984. OPINION The partnership reported its income from long-term contracts, including Job 553, under the completed contract method of accounting allowed by section 1.451-3, 1 Income Tax Regs. Under that method, income derived from long-term contracts is calculated and reported in the year in which the contract is completed. As provided in section 1.451-3(b)(2), "completion" means: (2) Completion -- (i) Final completion and acceptance -- (A) General rule. Except as otherwise provided in this paragraph (b)(2), * * a long-term contract shall not be considered "completed" until final completion and acceptance have occurred. Nevertheless, a taxpayer may not delay the completion of a contract for the principal purpose of deferring Federal income tax. (B) Completion determined on basis of all505 facts and circumstances. Final completion and acceptance of a contract for Federal income tax purposes is determined from an analysis of all the relevant facts and circumstances, including the manner in which the parties to the contract deal with each other and with the subject matter of the contract, the physical condition and state of readiness of the subject matter of the contract, and the nature of any work or costs remaining to be performed or incurred on the contract. In considering the manner in which the parties deal with the subject matter of the contract, any use of the primary subject matter of the contract by the purchaser (except for testing purposes that produce no gross revenue, cost savings, or other substantial benefits for the purchaser) will be considered. Petitioner argues that final completion and acceptance did not occur until the work that was done in 1984 was finished and that the Government did not formally accept the partnership's work until 1984. The contract, in petitioner's words, constituted a single, nonseverable contract, and the work remaining to be performed on the contract after 1983 was not severable from the balance of the contract. Petitioner506 claims that under the final completion and acceptance standard set forth in section 1.451-3, final completion of the contract -- not just substantial completion -- must have occurred. Petitioner cites E. E. Black, Ltd. v. Alsup, 211 F.2d 879 (9th Cir. 1954), in which the taxpayer contracted to construct a housing project. The contract provided for final payment when the construction was completed and accepted by the client. The client withheld $ 533.50 until the contractor installed thermostat units for the fire alarm system in the project's community building, which were not installed until the next tax year. In holding for the taxpayer, the Court of Appeals for the Ninth Circuit held that the contract was not completed until every last part of the job was completed. Petitioner also claims that acceptance by the owner of the completed work must also have occurred. Petitioner cites Thompson-King-Tate, Inc. v. United States, 296 F.2d 290">296 F.2d 290 (6th Cir. 1961), in which a taxpayer's income derived from work on a housing project was not included in gross income until the year in which it was finally accepted by the housing authority. While we agree that507 these earlier cases support petitioner's contention that Job 553 should not be considered completed until tax year 1984, our ability to rely on them for their definition of final completion and acceptance may be constrained by the modification of that term by regulation promulgated pursuant to the Tax Equity and Fiscal Responsibility Act of 1982, (TEFRA), Pub. L. 97-248, 97th Cong., 96 Stat. 324. Section 229 of TEFRA specifically provides that, "The Secretary of the Treasury shall modify the income tax regulations relating to accounting for long-term contracts to -- (1) clarify the time at which a contract is to be considered completed." The purpose of this legislation was to cause the regulations to be amended to "prevent unreasonable deferral of recognition of income by reason of contract provisions that are merely incidental to the contract obligation for construction, installation, or manufacturing." H. Rept. 97-760 (Conf.) 549 (1982), 2 C.B. 600">1982-2 C.B. 600, 637-639. The modified regulations, in section 1.451-3(b), Income Tax Regs., apply with respect to taxable years ending after December 31, 1982. The amended regulation, in section (b)(2)(i)(C) thereof, further seeks508 to illustrate the definition of final completion and acceptance through the familiar use of examples: (C) Examples. The principles of paragraph (b)(2)(i) of this section are illustrated by the following examples: Example (1). In 1982, A, a calendar year contractor, contracts with B to construct a building. The initial completion date specified in the contract is October 1984. In November 1984, the building is completed in every respect necessary for the use for which the building is intended. Later in November 1984, B occupies the building and notifies A that certain minor deficiencies should be corrected. A agrees to correct the deficiencies. Under these circumstances, the contract is considered completed for Federal income tax purposes in A's taxable year ending December 31, 1984, without regard to when A corrects the deficiencies. The contract is considered completed because the parties have dealt with each other and with the subject matter of the contract in a manner that indicates that final completion and acceptance have occurred. Example (2). Assume the same facts as in example 1, except that there are no deficiencies in the building that require correction or509 repair. In addition, assume that the contract between A and B provides that none of the retainage under the contract may be released to A until A obtains an architect's certificate that the building has been completed according to the specifications of the contract. A obtains this certificate in February, 1985. Under these circumstances, the contract is considered completed for Federal income tax purposes in A's taxable year ending December 31, 1984, without regard to when A obtains the required architect's certificate, and without regard to when the retainage is released to A, because the parties have dealt with each other and with the subject matter of the contract in a manner that indicates that final completion and acceptance have occurred. Example (3). In 1982, X, a calendar year taxpayer who manufacturers industrial machinery, contracts with F to build and install one large item of industrial machinery to be delivered in August 1983 and to be installed and tested by X in F's factory. The contract provides that the machinery will be accepted by F when the tests performed by X demonstrate that the machinery will perform within certain environmental standards required by510 a government agency, regardless of whether an operating permit has been obtained. Because of technical problems the machinery is not ready for delivery until December 1983. F accepts delivery of the machinery in December 1983 subject to installation and testing to determine if the assembled machinery meets the environmental standards. The machinery is installed and tested during December 1983 through February 1984, and F accepts the machinery in February 1984. An operating permit required to operate the machinery under the environmental standards is issued by the governmental agency in February, 1985. Under these circumstances final completion and acceptance of the machinery for Federal income tax purposes occurs in February, 1984. Example (4). In 1983, D, a calendar year taxpayer, contracts with E to construct a shopping center and related parking areas. The shopping center is completed in October 1985. In December 1985, the shopping center and three-fourths of the parking area are opened to the general public. At that time, the entire parking area of the shopping center has been graded and three-fourths has been paved, but the final asphalt coating has not been laid due511 to general weather conditions. Under these circumstances, the contract to construct the shopping center and parking area is considered completed for Federal income tax purposes in December 1985, because the shopping center and a major portion of the parking area were ready to be used and were used at that time. The regulations concerning the completed contract method and the definition of the "completed" contract were amended pursuant to legislative mandate in 1982 as the Congress sought to end abuses in completed contract accounting. Congress directed the Treasury to promulgate regulations, supra, which considered the substance of the contract, not the mere form. The above examples, while not exhaustive, make the point that the existence of deficiencies that must be corrected in a subsequent year or the receipt of a certificate of approval does not necessarily affect the status of a job otherwise complete. The record here is clear that additional work was necessary in 1984 relating to Job 553. Although the work required to correct deficiencies in Tangair Road should not serve to extend the completion date of the contract until 1984, we are convinced that work contemplated512 in the contract had not been completed in 1983. Work performed in 1984 by the partnership in the instant case consisted of the following: putting numbers on power poles, placing shields on the runway lights, correcting defects arising with Tangair Road, removal and replacement of a curb, additional paving to provide turn-around space for a large jet, and the correction of problems relating to the remote switching capability of a generator that served as a back-up power source to the regular electrical power source for operation of the runway lights. It is obvious that the above work that the partnership and its subcontractors performed after 1983 was necessary for completion of the contract that the partnership and the Government entered into; failure of the partnership to complete such work would have put it in breach of the contract. Furthermore, the Government's acceptance of the job in March 1984 illustrates that the partnership needed to perform work in 1984 simply to complete their side of the bargain, and the Government viewed it as important. See sec. 1.451-3(b)(2)(i)(B), Income Tax Regs., quoted supra. Completion of the contract occurred when the client, the Government, *513 formally accepted the partnership's work, which was completed in 1984. As the regulation requires, "completion" is determined on the basis of all facts and circumstances. We note that the parties had originally contemplated a formal contract completion date of September 10, 1983. We also observe that the Government took occupancy of the runway and appurtenant facilities in August 1983, at which time the facilities were operational. However, the existence of meaningful work performed in 1984 that was integral to the contract convinces us that final completion and acceptance occurred in 1984, not 1983. Decision will be entered for the petitioner.Footnotes1. All statutory references are to the Internal Revenue Code, as in effect for the year in issue, and all rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620424/	MICHAEL HARDEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHarden v. CommissionerDocket No. 11038-89United States Tax CourtT.C. Memo 1991-454; 1991 Tax Ct. Memo LEXIS 503; 62 T.C.M. (CCH) 756; T.C.M. (RIA) 91454; September 18, 1991, Filed 503 Decision will be entered under Rule 155. Howard J. Glicksman, for the petitioner. Robert A. Varra, for the respondent. SCOTT, Judge. SCOTT MEMORANDUM OPINION Respondent determined deficiencies in petitioner's Federal income tax and additions to tax for the calendar years 1984 and 1985 in the following amounts: Additions to TaxSec. Sec. Sec.Sec. YearDeficiency6653(a)(1) 16653(a)(2)6651(a)(1)6661 1984$ 13,229$ 1,07250% of interest$ 2,021$ 3,307due on $ 2,2451985$ 17,860$ 89350% of interest--$ 4,465due on $ 16,408Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision whether an amount of $ 25,000 paid by petitioner in 1984 to a person who had filed a complaint against504 him with the police department in return for her agreement to drop the complaint and keep the matter confidential is deductible as a professional development expense. All of the facts have been stipulated and are found accordingly. Petitioner, who resided in Aurora, Colorado, at the time he filed his petition in this case, filed Federal income tax returns for the calendar years 1984 and 1985 with the Internal Revenue Service, Ogden, Utah. During 1984 petitioner was employed full time by the Denver Broncos Football Club (the Club) as a professional football player. He was a starting defensive back and one of the co-captains for the Club. During 1984 petitioner and the Club began negotiating new terms and extensions of petitioner's employment contract. Petitioner had a personal relationship with Ms. Michelle Moore prior to and during 1984. In late August or early September 1984, petitioner and Ms. Moore had an argument. A few days after the argument, petitioner went to Ms. Moore's home to attempt to make amends, but he was unsuccessful. The day after his visit to Ms. Moore's home, petitioner was informed by the Club and the Denver Police Department that Ms. Moore had filed 505 a criminal complaint against him for sexual assault. The complaint alleged that the sexual assault had occurred during petitioner's visit to Ms. Moore's home. At the time the complaint was filed petitioner was involved in contract negotiations with the Club. After learning of the criminal complaint, the Club informed petitioner that, if the matter became public knowledge, he would not be retained as an employee of the Club and they would terminate his services through either a trade or release. Petitioner authorized his counsel to contact Ms. Moore's counsel and effectuate a monetary settlement in consideration of Ms. Moore's not pursuing the criminal complaint. On September 6, 1984, after petitioner reached a verbal settlement with Ms. Moore, petitioner and the Club executed provisions of petitioner's employment contract for the period February 1, 1984, through February 1, 1989. On September 17, 1984, petitioner and Ms. Moore executed a settlement in which petitioner paid Ms. Moore $ 25,000 in exchange for her withdrawing her criminal complaint and keeping the matter confidential. The settlement agreement recited that disputes had arisen between petitioner and Ms. Moore, that506 Ms. Moore had claimed through her attorney an assault on her person by petitioner, that prosecution of this claim in either a civil or criminal form would result in irreparable damage to petitioner's image and reputation and directly affect his continued employment, and that the parties desired to amicably resolve their disputes. Based on these recitals, Ms. Moore acknowledged that she was aware that prosecution of the causes of action would do irreparable harm to petitioner's reputation as a professional football player and directly threaten his continued employment, and petitioner agreed that in order to protect his professional reputation and continued employment he would pay Ms. Moore $ 25,000 for alleged damages for personal injuries. Ms. Moore, in consideration for the payment, agreed to take any and all necessary steps to cease any criminal investigation which she commenced by filing a complaint with the Denver Police Department and to advise the District Attorney's office of her desire not to prosecute the suit. The agreement contained mutual releases and Ms. Moore's agreement to keep all the circumstances giving rise to the agreement confidential. Petitioner deducted 507 the $ 25,000 paid to Ms. Moore on his 1984 Federal income tax return as a professional development expense. Respondent disallowed the claimed deduction because it had not been adequately substantiated as to amount or deductibility. To be deductible pursuant to section 162(a), an expense must be ordinary, necessary, and paid in carrying on a taxpayer's trade or business. No deduction is allowed for personal, living, or family expenses. Sec. 262. To be deductible pursuant to section 212(1), an expense must be ordinary, necessary, and paid for the production or collection of income. The criteria for determining deductibility pursuant to section 212(1) are generally the same as for section 162(a), except for the trade or business requirement. Iowa Southern Utilities Co. v. Commissioner, 333 F.2d 382">333 F.2d 382, 385-386 (8th Cir. 1964); Rodney v. Commissioner, 53 T.C. 287">53 T.C. 287, 320 (1969). To be considered an expense of carrying on a taxpayer's trade or business, the expense involved must be one that has a business origin. What must be determined is the -- origin and character of the claim with respect to which an expense was incurred, rather than its508 potential consequences upon the fortunes of the taxpayer * * United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 49, 9 L. Ed. 2d 570">9 L. Ed. 2d 570, 83 S. Ct. 623">83 S. Ct. 623 (1963). The Supreme Court also noted that characterization of the expense "does not depend on the consequences that might result to a taxpayer's income-producing property from a failure to defeat the claim." United States v. Gilmore, supra at 48. Petitioner argues that his primary motivation in making the payment to Ms. Moore was to protect his professional and public reputation and that the origin of the expense was the threat by the Club that he would not be retained in his employment. In support of his argument, petitioner contends that the payment was made, not because Ms. Moore had filed a criminal complaint, but because the Club threatened to terminate his employment if criminal charges were filed. He concludes that, but for the threat by the Club, he would not have made the payment to Ms. Moore. Respondent argues that the origin of the payment was the personal relationship between Ms. Moore and petitioner and the subsequently filed complaint. He concludes that the payment was not paid in carrying on petitioner's trade509 or business. Petitioner confuses the origin of the complaint with its consequences. The reason for the payment to Ms. Moore and the origin of the criminal complaint are two separate concepts, with only the latter being relevant to the disposition of this case. The threat of the Club to terminate petitioner's employment was a consequence that may have affected his income-producing activities, but the potential criminal charges and the criminal complaint arose from a personal relationship of petitioner. Accordingly, the origin of the expense was his personal relationship with Ms. Moore and her subsequent filing of the criminal complaint. Based on these facts, we find that the expense was not paid in carrying on his trade or business. This finding is supported by and analogous to United States v. Gilmore, supra, where the issue before the Supreme Court was the deductibility of a husband's legal expenses in a divorce proceeding. The expenses were attributable to resistance of his wife's claim to certain assets asserted by her to be community property. In the proceedings she claimed that the retained earnings of three corporations which operated under franchises510 were community property which, if proved, might give her control of the corporations, and she also charged her husband with marital infidelity which, if proved, might cause cancellation of the dealer franchises from which he received the majority of his income. In finding that the expenses were not deductible, the Supreme Court rejected a test that looked to the consequences of the litigation, the loss of income-producing property. It did not consider the taxpayer's motives or purposes in undertaking defense of the litigation, but rather examined the origin and character of the claim against the taxpayer. It concluded that the claim arose out of the personal relationship of marriage. Similarly, under the facts before the Court, the threat of loss of income-producing employment with the Club might have been a consequence of Ms. Moore's charges against petitioner becoming public. Petitioner's motives for eliminating the possibility of the threat are not relevant. Rather, the origin and character of the complaint against petitioner is dispositive. Petitioner argues that the holding of Jenkins v. Commissioner, T.C. Memo 1983-667">T.C. Memo 1983-667, supports his contention. His511 reliance on that case is misplaced. In that case the issue before this Court was whether a payment on behalf of a corporation was a capital contribution or was an expense of the taxpayer's business. Since we agree with respondent's disallowance of the claimed $ 25,000 deduction on the basis that it was a personal expense and not a business expense or an expense for production of income, we need not consider respondent's other arguments in support of his disallowance of the claimed deduction. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory 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.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537490/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:08 AM CDT - 249 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 State of Nebraska, appellee, v. Jonathan J. Sierra, appellant. ___ N.W.2d ___ Filed March 13, 2020. No. S-19-180. 1. Appeal and Error. An appellate court may, at its option, notice plain error. 2. Right to Counsel: Appeal and Error. An appellate court reviews the trial court’s decision on a motion to withdraw as counsel for an abuse of discretion. 3. Pretrial Procedure: Appeal and Error. Trial courts have broad dis- cretion with respect to sanctions involving discovery procedures, and their rulings thereon will not be reversed in the absence of an abuse of discretion. 4. Administrative Law: Statutes: Appeal and Error. The meaning and interpretation of statutes and regulations are questions of law for which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below. 5. Effectiveness of Counsel: Appeal and Error. Appellate review of a claim of ineffective assistance of counsel is a mixed question of law and fact. When reviewing a claim of ineffective assistance of counsel, an appellate court reviews the factual findings of the lower court for clear error. With regard to the questions of counsel’s performance or prejudice to the defendant as part of the two-pronged test articulated in Strickland v. Washington, 466 U.S. 668, 104 S. Ct. 2052, 80 L. Ed. 2d 674 (1984), an appellate court reviews such legal determinations independently of the lower court’s decision. 6. ____: ____. In reviewing claims of ineffective assistance of counsel on direct appeal, an appellate court decides only whether the undisputed facts contained within the record are sufficient to conclusively deter- mine whether counsel did or did not provide effective assistance and whether the defendant was or was not prejudiced by counsel’s alleged deficient performance. - 250 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 7. Constitutional Law: Double Jeopardy. The protection granted by the Nebraska Constitution against double jeopardy is coextensive to the protection granted by the U.S. Constitution. 8. Theft. Where a theft involves items taken from multiple owners at the same time and in the same place, such theft constitutes a single offense. 9. Appeal and Error: Words and Phrases. Plain error exists where there is an error, plainly evident from the record but not complained of at trial, which prejudicially affects a substantial right of a litigant and is of such a nature that to leave it uncorrected would cause a miscarriage of justice or result in damage to the integrity, reputation, and fairness of the judicial process. 10. Effectiveness of Counsel: Appeal and Error. When a defendant’s trial counsel is different from his or her counsel on direct appeal, the defend ant must raise on direct appeal any issue of trial counsel’s ineffective performance which is known to the defendant or is apparent from the record, in order to preserve such claim. 11. ____: ____. Once issues of trial counsel’s ineffective performance are properly raised, the appellate court will determine whether the record on appeal is sufficient to review the merits of the ineffective perform ance claims. 12. Effectiveness of Counsel: Records: Appeal and Error. The fact that an ineffective assistance of counsel claim is raised on direct appeal does not necessarily mean that it can be resolved. This is because the trial record reviewed on appeal is generally devoted to issues of guilt or innocence and does not usually address issues of counsel’s performance. The determining factor is whether the record is sufficient to adequately review the question. 13. Trial: Effectiveness of Counsel: Evidence: Appeal and Error. An ineffective assistance of counsel claim will not be addressed on direct appeal if it requires an evidentiary hearing. 14. Effectiveness of Counsel: Proof. To show deficient performance, a defendant must show that counsel’s performance did not equal that of a lawyer with ordinary training and skill in criminal law. 15. ____: ____. To show prejudice, the defendant must demonstrate a rea- sonable probability that but for counsel’s deficient performance, the result of the proceeding would have been different. 16. Rules of Evidence: Words and Phrases. In the context of Neb. Rev. Stat. § 27-403 (Reissue 2016), unfair prejudice means an undue tend ency to suggest a decision based on an improper basis. Unfair prejudice speaks to the capacity of some concededly relevant evidence to lure the fact finder into declaring guilt on a ground different from proof specific to the offense charged, commonly on an emotional basis. - 251 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 17. Jury Instructions: Testimony: Appeal and Error. A defendant is clearly entitled to a cautionary instruction on the weight and credibility to be given to the testimony of an alleged accomplice, and the failure to give such an instruction, when requested, is reversible error. 18. Jury Instructions: Evidence: Witnesses: Testimony. Whenever a judge decides that the evidence supports a conclusion that a witness is an accomplice and the defendant requests a cautionary instruction, the instruction is appropriate and should be given. This is because any alleged accomplice testimony should be examined more closely by the trier of fact for any possible motive that the accomplice might have to testify falsely. 19. Effectiveness of Counsel: Rules of the Supreme Court: Trial: Records. When recordation of parts of a trial is not made mandatory by the rules, the failure to require recordation cannot be said, ipso facto, to constitute negligence or inadequacy of counsel. Appeal from the District Court for York County: James C. Stecker, Judge. Affirmed in part, and in part vacated. Lisa M. Meyer, of Fillman Law Offices, L.L.C., for appellant. Douglas J. Peterson, Attorney General, and Austin N. Relph for appellee. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ. Freudenberg, J. I. NATURE OF CASE Jonathan J. Sierra was convicted of burglary, conspiracy to commit burglary, and several counts of theft involving a truck, a trailer, and several tools from a garage. Sierra’s accomplice, Jonathan Mally, entered into a plea agreement with the State and testified against Sierra. The majority of Sierra’s claims in this direct appeal are ineffective assistance of counsel claims. Sierra also claims that his court-appointed trial counsel had a personal conflict of interest because she was being investigated for and was charged with theft during her representation of Sierra. Finally, Sierra asserts that he was charged with separate theft charges in violation of the Double Jeopardy Clause of the U.S. Constitution. - 252 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 II. BACKGROUND In December 2017, the State filed an eight-count complaint against Sierra alleging that Sierra was involved in the theft of a truck and trailer which he then used to assist in the theft of automotive tools from a mechanic’s garage in York, Nebraska. The complaint was based on an incident which occurred in the early morning of October 15, 2017, when a window of Extreme Automotive in York was broken and tools were stolen from the premises. The tools belonged, separately, to a co-owner of the garage business and his two employees. The co-owner, Andrew Wilkinson, notified the officer investigating the break-in, Sgt. Michael Hanke, that his checkbook and debit card had also been stolen. Sierra was charged with eight counts: (1) burglary; (2) con- spiracy to commit burglary; (3) three counts of theft by unlaw- ful taking ($5,000 or more), which were related to the tools taken; (4) theft by unlawful taking ($5,000 or more) for steal- ing the truck; (5) theft by unlawful taking (less than $1,500 to $5,000) for stealing the trailer; and (6) criminal mischief (less than $500). Upon Sierra’s request, the court appointed an attorney to represent him in this matter. During preparation for trial, Sierra became frustrated with the lack of action on his attorney’s part and requested that she withdraw. Sierra’s attorney moved to withdraw. At the hearing on the motion, Sierra’s attorney indicated that there was a breakdown of the attorney-client relationship. Sierra told the judge that he had stopped speak- ing with his attorney and that he tried to have his fiance and mother talk with his attorney in his stead. Sierra claims that he spoke with his attorney only twice prior to the hearing. The court denied the motion. The court adopted the parties’ reciprocal discovery agree- ment and set a deadline of March 5, 2018, or “as soon as it becomes reasonably discovered, but not less than ten days before trial.” Approximately 4 months after the reciprocal discovery deadlines and 5 days before trial, Sierra’s attorney - 253 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 filed, for the first time, a witness list identifying five witnesses that the defense intended to call. The State responded by fil- ing a motion in limine to preclude undisclosed witnesses, alibi defense, and undisclosed exhibits. In the alternative, the State asked for a 30-day continuance. At the hearing to consider the motion, the State pointed out that Sierra had failed to comply with the deadline for reciprocal discovery and the 30-day deadline for notice of alibi defense and had filed the witness list less than 10 days before trial. Sierra’s attorney responded that all of the witnesses were known to the State from its reports and that one witness was on the State’s list, but Sierra’s attorney did not provide any reason for not complying with the reciprocal discovery order. Similarly, Sierra’s attorney also did not provide a reason for failing to comply with the statutory notice requirements for an alibi defense. Rather, she asked the judge to waive the notice requirement in the interest of justice. The district court sus- tained the State’s motion in limine. As a result, Sierra was able to call only one of the five listed witnesses and was precluded from pursuing his alibi defense. At trial, Hanke’s testimony provided a general timeline of the investigation. Hanke testified that after Wilkinson called the York police about the break-in, police reviewed surveil- lance videos taken from businesses in the area. The videos revealed that two individuals stole a truck from the garage parking lot and then drove to a nearby pizza restaurant, where they stole a trailer before returning to the garage. Thirty min- utes later, the truck and trailer left the garage. Wilkinson’s bank notified him on October 15, 2017, that someone had attempted to use the stolen debit card at a Walmart store in Norfolk, Nebraska. Wilkinson notified law enforcement of the bank’s report. Hanke used that informa- tion to get pictures taken from the Norfolk Walmart’s secu- rity cameras, which depicted two individuals using the stolen debit card. Hanke testified that, based on information received from the Butler County Sheriff’s Department, the investigators - 254 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 eventually identified both of the individuals in the photographs as Mally and Sierra. A Walmart store in York provided photographs of two indi- viduals to law enforcement, after the individuals were suspected of shoplifting on the morning of October 15, 2017. Maggie Wolfe, an asset protection associate for the York Walmart, and Hanke presented identification testimony related to the photo- graphs taken from the Walmarts in York and Norfolk. Wolfe provided the authentication for exhibit 1, a collection of pho- tographs taken from the York Walmart on the morning of the burglary. During direct examination, Wolfe positively identi- fied Sierra as being depicted in the photographs taken from the York Walmart. On cross-examination, Wolfe admitted that her identification of Sierra came after she read about the investiga- tion in the newspaper. Hanke testified that a cell phone traceable to Sierra “pinged off [of]” a cell tower in York around the time that Mally’s testi- mony placed them both in York. Hanke testified that cell phone records placed Sierra’s cell phone within 20 miles of York on the day of the burglary. Sierra’s attorney did not object to Hanke’s testimony about the content of the cell phone records, and the records themselves are not in evidence. Evidence recovered from the search of Sierra’s home was admitted based on the testimony provided by Hanke. According to Hanke’s testimony at trial, based on the Butler County, Nebraska, sheriff’s identification of Sierra in the photographs taken from the York Walmart and pursuant to a clause in Sierra’s probation order, police searched Sierra’s residence, where they found a majority of the tools taken from Extreme Automotive. The sheriff who identified Sierra in the photo- graphs did not testify at trial. The law enforcement officers who conducted the search did not testify at trial, and the proba- tion order is not in the record. Hanke testified that the stolen truck was recovered after being abandoned on the road north of the York Walmart. The stolen trailer was recovered after being abandoned on the road - 255 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 near Genoa, Nebraska. Sierra’s attorney made no objections to these portions of Hanke’s testimony. Hanke testified that dur- ing his first interview of Sierra, Sierra claimed he had never been to York, denied all involvement in the burglary, and said that he possessed the tools because he had purchased them from Mally. Sierra’s attorney cross-examined Hanke about the story Sierra gave to the York police as to how the tools ended up in his possession. Hanke testified that during his first interview, Sierra denied ever being in York, and that Sierra claimed he had purchased the tools. Hanke testified that during a sec- ond interview with Sierra, Sierra admitted to being in York. Sierra’s attorney did not object to Hanke’s testimony regarding either interview. Mally was arrested in Columbus, Nebraska, for an unrelated incident. A search revealed that Mally had on his person and in his vehicle several of the tools and financial items taken from Extreme Automotive. A warrant was executed for Mally’s residence, where several more items from Extreme Automotive were found. Mally subsequently entered into a plea agreement with the State and testified against Sierra. Mally testified as Sierra’s accomplice and provided a gen- eral timeline for the events on October 15, 2017, similar to that set forth by Hanke. Mally testified that he helped Sierra commit the burglary and theft at Extreme Automotive because Sierra needed mechanics tools. Mally asserted that the various pictures taken at both Walmart locations accurately depicted Sierra and him at those locations. Mally also testified that he was receiving benefits from the State concerning various charges in exchange for his cooperation. Evidence concerning the value of the tools was presented through various sources at trial. Several of the exhibits entered into evidence by the State display tools that were recovered from the search of Mally’s residence. During the presentation of evidence recovered from Mally’s residence, Sierra’s attorney made several objections, some of which were sustained. There - 256 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 was also evidence of financial items, including checkbooks and a debit card, that were recovered in Mally’s possession and testimony by Mally that Sierra attempted to use the stolen debit card to buy items. Mally denied the existence of any arrange- ment with Sierra to buy the tools. Sierra’s attorney elected to forgo the creation of a record of the voir dire, closing arguments, and jury instructions. The jury instructions that were given are preserved in the transcript. A jury found Sierra guilty on all counts except the charge of criminal mischief. At some point after the trial, Sierra’s attorney was charged with theft by unlawful taking ($5,000 or more) in an unre- lated case. Sierra requested new counsel, and the request was granted before sentencing. Sierra was sentenced to 16 to 20 years’ imprisonment on each of the Class IIA felonies and 1 to 2 years’ imprisonment on the Class IV felony, with orders for the sentences to run concurrently. Sierra appeals. III. ASSIGNMENTS OF ERROR Three errors Sierra assigns, which are not ineffective assist ance of counsel claims, assert that the court erred by (1) deny- ing Sierra’s attorney’s motion to withdraw, (2) granting the State’s motion in limine, and (3) sentencing Sierra on multiple charges of theft by unlawful taking, in violation of the Double Jeopardy Clause of the U.S. Constitution. Sierra also assigns 14 ineffective assistance of counsel claims. Sierra first asserts that his attorney was “per se inef- fective” for failing “to maintain her law license and appropri- ate moral standing.” In his argument, Sierra elaborates that his attorney had a personal conflict of interest such that she failed to act in Sierra’s best interests because her focus was torn between her own pending legal actions and represent- ing Sierra. Sierra also assigns that his attorney was deficient by fail- ing to (1) comply with discovery; (2) serve notice of Sierra’s alibi; (3) move for a continuance at the hearing on the motion - 257 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 in limine; (4) call Sierra’s fiance as a witness for the defense; (5) depose Sierra’s brother, mother, and fiance, as well as two potential alibi witnesses, prior to trial; (6) communicate with Sierra to prepare for trial; (7) assert a double jeopardy claim; (8) move to suppress identification evidence and evidence found from the search of Sierra’s home; (9) file a motion in limine to exclude evidence discovered at Mally’s home; (10) object to identification evidence during trial; (11) object to “proffer interview” statements admitted in evidence during trial; (12) maintain a sufficient record; and (13) request a jury instruction on accomplice testimony. IV. STANDARD OF REVIEW [1] An appellate court may, at its option, notice plain error. 1 [2] We review the trial court’s decision on a motion to with- draw as counsel for an abuse of discretion. 2 [3] Trial courts have broad discretion with respect to sanc- tions involving discovery procedures, and their rulings thereon will not be reversed in the absence of an abuse of discretion. 3 [4] The meaning and interpretation of statutes and regula- tions are questions of law for which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below. 4 [5] Appellate review of a claim of ineffective assistance of counsel is a mixed question of law and fact. 5 When review- ing a claim of ineffective assistance of counsel, an appellate court reviews the factual findings of the lower court for clear error. 6 With regard to the questions of counsel’s performance or prejudice to the defendant as part of the two-pronged test 1 Mays v. Midnite Dreams, 300 Neb. 485, 915 N.W.2d 71 (2018). 2 State v. McGuire, 286 Neb. 494, 837 N.W.2d 767 (2013). 3 State v. Hatfield, 304 Neb. 66, 933 N.W.2d 78 (2019). 4 In re Application No. OP-0003, 303 Neb. 872, 932 N.W.2d 653 (2019). 5 State v. Chairez, 302 Neb. 731, 924 N.W.2d 725 (2019). 6 Id. - 258 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 articulated in Strickland v. Washington, 7 an appellate court reviews such legal determinations independently of the lower court’s decision. 8 [6] In reviewing claims of ineffective assistance of counsel on direct appeal, an appellate court decides only whether the undisputed facts contained within the record are sufficient to conclusively determine whether counsel did or did not provide effective assistance and whether the defendant was or was not prejudiced by counsel’s alleged deficient performance. 9 V. ANALYSIS 1. Double Jeopardy [7] We first address Sierra’s claim that he was charged with three counts of theft related to the tools taken from Extreme Automotive, in violation of the Double Jeopardy Clauses of the Nebraska and U.S. Constitutions. The protection granted by the Nebraska Constitution against double jeopardy is coexten- sive to the protection granted by the U.S. Constitution. 10 Both clauses are designed to protect against three distinct abuses: (1) a second prosecution for the same offense after acquittal, (2) a second prosecution for the same offense after conviction, and (3) multiple punishments for the same offense. 11 [8] Though we have never been presented with a situation where the multiple items belonged to multiple people, we have held that an act of theft involving multiple items of property stolen simultaneously at the same place constitutes one offense, in which the value of the individual stolen items may be con- sidered collectively for the aggregate or total value of the prop- erty stolen to determine the grade of the theft offense under 7 Strickland v. Washington, 466 U.S. 668, 104 S. Ct. 2052, 80 L. Ed. 2d 674 (1984). 8 State v. Chairez, supra note 5. 9 Id. 10 See State v. Miner, 273 Neb. 837, 733 N.W.2d 891 (2007). 11 See State v. Winkler, 266 Neb. 155, 663 N.W.2d 102 (2003). - 259 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 Neb. Rev. Stat. § 28-518 (Reissue 2016). 12 Moreover, the crim- inal code forbids the amounts taken pursuant to one scheme or course of conduct from being aggregated into more than one offense. 13 This principle of considering theft of multiple items as one offense has been applied by a majority of jurisdictions, even when the property taken has more than one owner. 14 And we likewise hold that where a theft involves items taken from multiple owners at the same time and in the same place, such theft constitutes a single offense. Where the defendant is charged with and punished for mul- tiple offenses based on each stolen item taken simultaneously from the same place, the defendant is subjected to multiple punishments for the same offense, in violation of the prohibi- tion against double jeopardy. 15 The State concedes that Sierra was improperly charged, convicted, and punished in violation of the Double Jeopardy Clauses of the Nebraska and U.S. Constitutions. We accordingly find that charging and convicting Sierra with three separate offenses for theft by unlawful taking ($5,000 or more), each a Class IIA felony, violated the Double Jeopardy Clauses of the Nebraska and U.S. Constitutions and constituted plain error. [9] Plain error exists where there is an error, plainly evident from the record but not complained of at trial, which prejudi- cially affects a substantial right of a litigant and is of such a nature that to leave it uncorrected would cause a miscarriage of justice or result in damage to the integrity, reputation, and fair- ness of the judicial process. 16 Allowing three convictions for the same offense is a clear violation of both the Nebraska and 12 See State v. Garza, 241 Neb. 256, 487 N.W.2d 551 (1992). 13 § 28-518(7). 14 See, State v. White, 348 Md. 179, 702 A.2d 1263 (1997); People v. Dist. Ct., 192 Colo. 355, 559 P.2d 1106 (1977). See, also, Annot., 37 A.L.R. 3d 1407 (1971). 15 See State v. Miner, supra note 10. 16 Mays v. Midnite Dreams, supra note 1. - 260 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 U.S. Constitutions. Left uncorrected, this error would be a vio- lation of Sierra’s fundamental rights and damage the integrity of the judicial process. 17 The appropriate remedy for this plain error is to vacate two of the three convictions and sentences for theft by unlawful taking ($5,000 or more) that are based on the theft of the tools from Extreme Automotive. 18 2. Exclusion of Witnesses We next address Sierra’s assignments of error concerning the court’s exclusion of defense witnesses who were not disclosed by his attorney until 5 days before trial. Sierra asserts that these witnesses would have provided alibi testimony and information attacking the credibility of Mally. (a) State’s Motion in Limine We find no merit to Sierra’s contention that the district court erred by granting the State’s motion in limine to exclude late- disclosed defense witnesses. A discovery stipulation was agreed to on February 12, 2018, which designated a deadline to provide all discovery informa- tion by March 5 or “as soon as it becomes reasonably discov- ered, but not less than ten days before trial.” At the hearing on the motion in limine, Sierra’s attorney’s only stated reason for not complying with the order was that the individuals the defense intended to call were named in the State’s reports and one was also included in the witness list attached to the State’s information filed in this matter. Neb. Rev. Stat. § 29-1912 (Reissue 2016) describes the types of information that are discoverable. Neb. Rev. Stat. § 29-1916 (Reissue 2016) provides the court discretion to grant reciprocal discovery. Neb. Rev. Stat. § 29-1919 (Reissue 2016) specifies that when a party has failed to comply with 17 See Benton v. Maryland, 395 U.S. 784, 89 S. Ct. 2056, 23 L. Ed. 2d 707 (1969). 18 See State v. Miner, supra note 10. See, also, State v. McHenry, 250 Neb. 614, 550 N.W.2d 364 (1996). - 261 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 the discovery statutes, the court may (1) order such party to permit the discovery or inspection of materials not previously disclosed, (2) grant a continuance, (3) prohibit the party from calling a witness not disclosed or introducing in evidence the material not disclosed, or (4) enter such other order as it deems just under the circumstances. In the present case, the court prohibited Sierra from calling a witness or introducing evidence that had not been disclosed pursuant to the court’s discovery order. Nevertheless, Sierra argues that our holding in State v. Woods 19 relieved him of the burden to disclose witnesses because he did not request a witness list from the State. In Woods, we held that Neb. Rev. Stat. § 29-1927 (Reissue 2016) does not require disclosure of alibi witnesses and that § 29-1916 (reciprocal discovery) applies only when the defend ant requests “‘comparable items or information’” from the State. 20 However, the situation in Woods differs from the pres- ent case in two important ways. First, in Woods, the State waived the notice requirement for an alibi defense and so the issue on appeal was whether § 29-1919 required the filing of a witness list. Here, the State did not waive notice and filed a motion in limine to keep the alibi defense evidence from being admitted. Second, all of the witnesses in Woods were to be used to present alibi information. Sierra concedes that at least two of the witnesses excluded by the State’s motion in limine were intended to offer evidence impeaching Mally’s testimony and not an alibi defense. Thus, our holding in Woods does not shield Sierra from the trial court’s sanctions for failing to file a witness list. The court considered Sierra’s attorney’s failure to comply with the discovery order and applied an authorized remedy under § 29-1919. 19 See State v. Woods, 255 Neb. 755, 587 N.W.2d 122 (1998). 20 See id. at 767, 587 N.W.2d at 130 (quoting § 29-1916). - 262 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 We likewise find no merit to Sierra’s alternative argument that the use of the definite article in § 29-1919(3), giving the trial court discretion to prohibit a party from calling “a wit- ness,” limits the court’s remedy to excluding only one undis- closed witness. Sierra’s reading of § 29-1919 disregards our rules for construction and the interchangeability of singular and plural words. Neb. Rev. Stat. § 49-802 (Reissue 2010) specifies as follows: Unless such construction would be inconsistent with the manifest intent of the Legislature, rules for construc- tion of the statutes of Nebraska hereafter enacted shall be as follows: .... (6) Singular words may extend and be applied to sev- eral persons or things as well as to one person or thing. (7) Plural words may extend and be applied to one per- son or thing as well as to several persons or things. Under the plain meaning of § 29-1919, if a party fails to comply with discovery and give notice of an intent to call a witness, the court may prohibit that witness from being called. Nothing in § 29-1919 suggests that the remedy cannot be extended to prohibiting multiple witnesses. Lastly, Sierra contends that the court’s order granting the State’s motion in limine violated his constitutional right under the Sixth Amendment to have process to compel the attendance of witnesses on his behalf. The U.S. Supreme Court has estab- lished that the Sixth Amendment does not provide an absolute right to call witnesses; rather, the defendant’s right is weighed against the concerns of the state to have a fair and efficient administration of justice. 21 We have considered the same con- cerns when determining whether other discovery sanctions violate the Nebraska Constitution. 22 Sierra does not have an 21 Taylor v. Illinois, 484 U.S. 400, 108 S. Ct. 646, 98 L. Ed. 2d 798 (1988). 22 See, State v. Henderson, 289 Neb. 271, 854 N.W.2d 616 (2014); State v. McMillion, 23 Neb. Ct. App. 687, 875 N.W.2d 877 (2016). - 263 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 absolute right to present witnesses and evidence. The State’s interest in protecting itself against an 11th-hour defense is merely one component of the broader public interest in a full and truthful disclosure of critical facts. 23 We find that the trial court did not abuse its discretion in granting the State’s motion in limine. Further, we conclude that the court’s ruling granting the State’s motion in limine did not violate Sierra’s constitutional rights under the Sixth Amendment. (b) Failure to Depose Witnesses, File Witness List, and Serve Notice of Alibi [10] In the alternative to Sierra’s challenge to the court’s rul- ing granting the State’s motion in limine, Sierra asserts that his attorney’s ineffective assistance of counsel led to that ruling. Sierra has new counsel on direct appeal. When a defendant’s trial counsel is different from his or her counsel on direct appeal, the defendant must raise on direct appeal any issue of trial counsel’s ineffective performance which is known to the defendant or is apparent from the record, in order to preserve such claim. 24 [11-13] Once such issues are properly raised, the appellate court will determine whether the record on appeal is sufficient to review the merits of the ineffective performance claims. 25 We have said that the fact that an ineffective assistance of counsel claim is raised on direct appeal does not necessarily mean that it can be resolved. 26 This is because the trial record reviewed on appeal is generally “‘“devoted to issues of guilt or innocence”’” and does not usually address issues of counsel’s performance. 27 The determining factor is whether the record is 23 See Taylor v. Illinois, supra note 21. 24 State v. Chairez, supra note 5. 25 Id. 26 Id. 27 Id. at 736, 924 N.W.2d at 730. - 264 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 sufficient to adequately review the question. 28 An ineffective assistance of counsel claim will not be addressed on direct appeal if it requires an evidentiary hearing. 29 [14,15] To show deficient performance, a defendant must show that counsel’s performance did not equal that of a law- yer with ordinary training and skill in criminal law. 30 To show prejudice, the defendant must demonstrate a reasonable prob- ability that but for counsel’s deficient performance, the result of the proceeding would have been different. 31 We cannot determine on the appellate record whether the witnesses the court prohibited from testifying would have in fact supported Sierra’s alibi defense and impeached Mally’s testimony. Without such information, we can determine neither deficiency nor prejudice. We find that the record is insufficient for us to address this claim on direct appeal. Sierra argues that his attorney’s “agreement” not to call his fiance was an additional act of ineffective assistance of counsel, separate from her failure to timely disclose defense witnesses. 32 We find it indistinguishable from the claim of ineffective assistance based on the failure to comply with the reciprocal discovery order. Based on the record, it appears Sierra’s attorney’s comments that Sierra characterizes as an “agreement” were merely a concession of the facts that the name of Sierra’s fiance did not appear in the State’s reports and that his attorney’s failure to file a separate witness list had precluded her from calling his fiance as a witness. Such com- ments were mere observations of undisputed facts and cannot constitute deficient performance. If the deficient performance occurred, it was in the failure to timely file the witness list, not the acknowledgment of the result of doing so. 28 State v. Chairez, supra note 5. 29 Id. 30 Id. 31 Id. 32 Brief for appellant at 35. - 265 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 (c) Failure to Request Continuance at Hearing on State’s Motion in Limine We find no merit to Sierra’s assertion that his attorney was ineffective for failing to request a continuance at the hearing on the State’s motion in limine. During the course of the hearing, the State had already raised the possibility of a continuance, as § 29-1919 lists a continuance as a possible remedy for an untimely witness list. The trial court was fully informed of the option to order a continuance and declined to do so. Sierra’s attorney was not deficient for failing to bring an optional remedy to the court’s attention that had already been raised moments earlier by the State. 3. Lack of Communication With Sierra’s Attorney We turn next to Sierra’s assertions relating to his attorney’s more generalized failure to communicate with Sierra while preparing for trial. (a) Motion to Withdraw First, we find no merit to Sierra’s assertion that the district court abused its discretion in denying his attorney’s motion to withdraw. Appointed counsel must remain with an indigent accused unless one of the following occurs: (1) The accused knowingly, voluntarily, and intelligently waives the right to counsel and chooses to proceed pro se; (2) appointed counsel is incompetent; or (3) the accused chooses to retain private counsel. 33 We review the trial court’s decision on a motion to withdraw as counsel for an abuse of discretion. 34 Sierra argues that the district court had an obligation to make a thorough inquiry concerning his attorney’s lack of preparation for the trial and that the court would have realized, through further inquiry, that trial counsel was incompetent. 33 State v. McGuire, supra note 2. 34 Id. - 266 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 However, the record indicates that the court investigated and addressed all of the specific examples of incompetency alleged by Sierra at the time of the hearing. At the hearing on the motion to withdraw, Sierra’s attorney indicated that the reason for the motion was a breakdown of the attorney- client relationship. Sierra indicated at the hearing that he had stopped speaking with his attorney and had tried to have his fiance and mother talk with her instead. Sierra’s attor- ney explained that she did not respond to calls by Sierra’s fiance and mother, because doing so would violate attorney- client privilege. The court heard each of Sierra’s complaints and determined they did not warrant the withdrawal of counsel. The facts demonstrated at the hearing do not indicate the district court abused its discretion in concluding that under the evidence presented, Sierra’s attorney was representing Sierra compe- tently. Therefore, we find no merit to Sierra’s assignment that the trial court erred in overruling his attorney’s motion to withdraw. (b) Ineffective Assistance Relatedly, Sierra raises on direct appeal that the break- down in communication with his attorney constituted inef- fective assistance of counsel. Sierra asserts that he met with his attorney only twice before trial. Sierra claims he pro- vided his attorney with information and names of potential witnesses at the first meeting. Sierra contends that at the second meeting, she took a personal call and then was in a hurry to leave. Sierra describes that he had more informa- tion that he was attempting to provide his attorney concern- ing his defense and that she did not consider that informa- tion because she was distracted during their second meeting. We find that the record is insufficient for us to address this claim on direct appeal. The nature and extent of meetings in preparation for trial between Sierra and his attorney are not in the record. - 267 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 4. Evidence of Tools Found in Sierra’s and Mally’s Possession We next address Sierra’s claims that various acts of defi- cient conduct by his attorney led to the admission at trial of prejudicial evidence of his and Mally’s possession of the sto- len tools. (a) Failure to Move to Suppress Search of Sierra’s Residence Sierra first argues that his attorney was ineffective by fail- ing to move to suppress all of the evidence obtained from the search of Sierra’s residence, on the ground that he did not consent to the search. The record indicates that Sierra’s home was searched without a warrant pursuant to a clause in his probation order. We have held that certain probation orders may contain conditions authorizing warrantless searches under specific circumstances when such orders comply with consti- tutional requirements and contribute to the rehabilitation of the offender. 35 Because the probation order and evidence of Sierra’s consent to the order are not in the record, we cannot determine whether failure to file the motion to suppress was deficient or prejudicial. We find that the record is insufficient for us to address this claim on direct appeal. (b) Failure to Move to Suppress Tools Found in Mally’s Possession as Unfairly Prejudicial Second, Sierra argues that evidence related to tools found in Mally’s possession was inadmissible under Neb. Rev. Stat. § 27-403 (Reissue 2016) and that his attorney was ineffec- tive in failing to object to the evidence on this ground. Sierra provides a specific list of exhibits and portions of testimony which reflect the fact that stolen tools were found in Mally’s possession and which Sierra asserts his attorney should have 35 See, U.S. v. Brown, 346 F.3d 808 (8th Cir. 2003); State v. Morgan, 206 Neb. 818, 295 N.W.2d 285 (1980). - 268 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 objected to as unfairly prejudicial under § 27-403. Sierra con- cedes that she objected to several of the exhibits in question as lacking foundation or as irrelevant under Neb. Rev. Stat. § 27-402 (Reissue 2016). In fact, the court sustained some of her objections to similar evidence. [16] To show prejudice under Strickland, it must be shown that a motion under § 27-403 should have resulted in the evi- dence in question’s being ruled inadmissible and that, without such evidence, there is a reasonable probability of a different outcome in the trial. 36 In the context of § 27-403, unfair preju- dice means an undue tendency to suggest a decision based on an improper basis. 37 Unfair prejudice speaks to the capacity of some concededly relevant evidence to lure the fact finder into declaring guilt on a ground different from proof specific to the offense charged, commonly on an emotional basis. 38 When the State is prosecuting an individual for conspiracy to commit burglary, items found in the possession of a cocon- spirator are undoubtedly relevant to the crime charged. In fact, Sierra does not challenge on appeal the fact that the district court overruled his attorney’s relevancy objections to the evidence. Sierra makes the conclusory statement that admitting evi- dence of the tools found in Mally’s possession made it more difficult for the jury to weigh Sierra’s defense, but Sierra fails to articulate how this evidence could lead a jury to convict Sierra for an incorrect reason. Sierra’s defense was that he did not take part in the burglary, but bought the tools found in his possession from Mally. The fact that Mally had stolen tools in his home, which Sierra did not “purchase,” is not inconsistent with this defense. It is not deficient con- duct to fail to object on grounds that are likely to properly be overruled. 36 See, Strickland v. Washington, supra note 7; State v. Chairez, supra note 5. 37 State v. Hernandez, 299 Neb. 896, 911 N.W.2d 524 (2018). 38 Id. - 269 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 We find no merit to Sierra’s contention that his attorney was ineffective for failing to object on § 27-403 grounds to evi- dence that stolen tools were found in Mally’s possession. 5. Failure to Object to Identification Evidence Sierra asserts that his attorney was also ineffective by fail- ing to make the appropriate motions or objections concerning several pieces of identification evidence adduced during the testimony of Wolfe and Hanke. Sierra contends that his attor- ney was ineffective by failing to make hearsay, foundation, and Confrontation Clause objections, presumably to each part of the testimony and each exhibit specified. We find that Sierra has failed to sufficiently assign and argue any claim related to his attorney’s failure to object on Confrontation Clause grounds. The protections afforded by the Confrontation Clauses of the Nebraska and U.S. Constitutions overlap with the purposes and policies of the rules on hearsay. The Nebraska Evidence Rules provide that hearsay is generally inadmissible except as provided by these rules, by other rules adopted by the statutes of the State, or by the discovery rules of the Nebraska Supreme Court. 39 Where testimonial state- ments are at issue, the Confrontation Clause and the Nebraska Constitution demand that hearsay statements be admitted at trial only if the declarant is unavailable and there has been a prior opportunity for cross-examination; if the statements are nontestimonial, then no further Confrontation Clause analysis is required. 40 While Sierra provides annotations to several large swaths of Wolfe’s and Hanke’s testimony, he fails to describe with any specificity even a single statement by either Wolfe or Hanke that he alleges to be testimonial. We will not scour the record to determine which portions of their testimony, or what portion 39 Neb. Rev. Stat. § 27-802 (Reissue 2016). See, also, Neb. Rev. Stat. §§ 27-801 through 27-806 (Reissue 2016). 40 See State v. Sorensen, 283 Neb. 932, 814 N.W.2d 371 (2012). - 270 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 of the exhibits annotated to, Sierra contends were objectionable on Confrontation Clause grounds. We find that Sierra has failed to sufficiently argue his attorney’s deficient conduct as to the alleged failure to make Confrontation Clause objections. 41 An ineffective assistance of counsel claim is raised on direct appeal when allegations of deficient performance are made with enough particularity for (1) an appellate court to make a determination of whether the claim can be decided upon the trial record and (2) a district court later reviewing a petition for postconviction relief to be able to recognize whether the claim was brought before the appellate court. 42 A claim insufficiently stated is no different than a claim not stated at all. 43 (a) Photographic Exhibits and Identification Statements We next consider Sierra’s contention that his attorney should have raised both foundation and hearsay objections to portions of Wolfe’s and Hanke’s testimony identifying Sierra and Mally as the individuals depicted in the photographs contained in exhibits 1 and 23. Exhibit 1 consists of photographs provided by Wolfe to law enforcement after Mally was suspected of shoplifting from the York Walmart. During Wolfe’s testimony, the State authenticated, picture by picture, each photograph contained in exhibit 1. Exhibit 1 was received into evidence after the court overruled Sierra’s attorney’s foundation objec- tion. Exhibit 23 was entered into evidence based on the tes- timony provided by Mally. Sierra does not assign error to the admission of exhibits 1 and 23. The photographs in exhibit 1 depict a person exiting the York Walmart with Mally and then that person and Mally get- ting into separate vehicles in the parking lot. Wolfe identified 41 See State v. Mora, 298 Neb. 185, 903 N.W.2d 244 (2017). 42 Id. 43 Id. - 271 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 the second individual as Sierra. Sierra argues that his attorney was ineffective for failing to move to strike Wolfe’s identifica- tion of Sierra after evidence was adduced on cross-examination that Wolfe identified Sierra based on reading his name in the newspaper after the incident. We do not have sufficient evi- dence on the record to determine deficiency or prejudice. We find that the record is insufficient to determine this claim on direct appeal. Similarly, we find the record is insufficient to determine Sierra’s assertion that his attorney was ineffective for failing to object on foundation and hearsay grounds to Hanke’s identifi- cation of Sierra in the photographs contained in exhibits 1 and 23. Hanke admitted that he did not personally identify Sierra as the second person depicted in the photographs. Rather, Hanke testified that he received information from the Butler County sheriff identifying the second person in the photographs in exhibit 1 as Sierra. Hanke also testified that the photographs taken from the Norfolk Walmart, exhibit 23, depicted Sierra and Mally. Although Hanke lacked personal knowledge and his state- ment relaying information from the Butler County sheriff was inadmissible hearsay, 44 we do not have information in the record concerning Sierra’s attorney’s trial strategy. Furthermore, we do not know what theories of prejudice Sierra is alleging relat- ing to this claim because an appellant is only required to allege deficient conduct on direct appeal. 45 Accordingly, we find the record is insufficient to resolve this claim on direct appeal. (b) Testimony About Search of Sierra’s Residence, Location of Trailer, and Cell Phone Records Sierra asserts that his attorney missed objections to three other portions of Hanke’s testimony on foundation and hearsay 44 See §§ 27-801 and 27-803(23). 45 See, State v. Abdullah, 289 Neb. 123, 853 N.W.2d 858 (2014); State v. Filholm, 287 Neb. 763, 848 N.W.2d 571 (2014). - 272 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 grounds. Sierra contends that had she made the proper objec- tions, the court would have sustained the objections, which would have prevented the admission of several pieces of preju- dicial evidence, unless the State called the proper witnesses to adduce the evidence. Sierra identifies the testimony at issue as statements about the location of the recovered trailer, tes- timony related to the search of his residence, and cell phone location data retrieved from a search warrant. Sierra argues that assuming the State would not have called additional wit- nesses to present such evidence, if Sierra’s attorney had made objections that would have been sustained, there would have been a void in the circumstantial evidence significant enough to raise a reasonable doubt as to whether he committed the crimes charged. (i) Trailer Hanke testified as to the location of the trailer without specifying who recovered the trailer and whether he had per- sonal knowledge of its recovery. We cannot determine whether either a hearsay or a foundation objection would have had merit without knowing whether Hanke had personal knowl- edge of the trailer’s recovery. That information is not in the trial record. Without being able to determine whether either objection had merit, we cannot determine on direct appeal whether Sierra’s attorney’s failure to object was deficient and whether Sierra was prejudiced by deficient conduct. Thus, we find the record is insufficient to resolve this claim on direct appeal. (ii) Tools Found in Sierra’s Residence Evidence of the physical tools and photographs of tools recovered from Sierra’s residence were admitted based upon Hanke’s testimony despite the fact that Hanke did not take part in the search of Sierra’s residence. Sierra argues that his attorney was ineffective for failing to object on foundation and hearsay grounds to this evidence, found in exhibits 3 and 14. However, she objected to the admission of exhibit 3. - 273 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 Exhibit 3 was a series of photographs of items taken from Extreme Automotive and recovered during the search of Sierra’s residence. Sierra’s attorney objected to exhibit 3 on foundation and, after a clarification from the State, made a second objec- tion on relevancy that was overruled. Sierra does not assign error to the trial court’s rulings on any of these objections. Sierra’s attorney did not object to exhibit 14. The record does not reveal any grounds that would have warranted an objection to exhibit 14. The record demonstrates Sierra’s attorney repeat- edly made the appropriate hearsay and foundation objections to the evidence at issue. Thus, we find no deficient conduct by her related to Hanke’s testimony about items recovered from the search of Sierra’s residence. (iii) Cell Phone Records Hanke was the sole source for the content of the cell phone records. Hanke testified that he obtained a search warrant for the records and that those records indicated Sierra was in York on October 15, 2017. Neither the warrant nor the records are in evidence, and no cell phone company represetnative testified as to the authenticity of the records provided. Sierra’s attorney made no objections to this testimony, and Sierra asserts that this constituted ineffective assistance of counsel. Hanke’s testimony about the contents of the cell phone records very well may have violated evidence rules for foun- dation and hearsay. 46 Although Sierra’s attorney’s failure to object on these grounds may qualify as deficient conduct, we cannot make that determination without information about her trial strategy, which is not contained in the appellate record. Moreover, we decline to speculate on direct appeal about whether the State would have called additional witnesses to authenticate the records if she had made the objections and they had been sustained. Thus, we find the record is insuffi- cient to resolve this claim on direct appeal. 46 See § 27-802 and Neb. Rev. Stat. § 27-901 (Reissue 2016). - 274 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 6. Failure to Object to “Proffer Interview” Evidence Sierra contends that his attorney was also ineffective for failing to object to Hanke’s testimony about Sierra’s statements made during a “proffer interview.” Hanke testified to a second interview that occurred with Sierra where Sierra admitted to being in York. No information appears in the record about the nature of this second interview. The term “proffer interview” is one way of describing interviews that occur in order to arrive at a negotiated plea in exchange for a defendant’s cooperation; this is also referred to as “plea negotiations” 47 or, in federal cases, as “‘cooperation-immunity agreements.’” 48 Typically, “proffer interviews” involve some sort of agree- ment. The interpretation of such an agreement is governed by general contract principles, and an alleged violation by the State of the agreement implicates the due process rights of the defendant. 49 The record does not contain any information about any alleged agreements between the State and Sierra prior to the interview. Thus, the record is insufficient to deter- mine this claim on direct appeal. 7. Failure to Request Accomplice Jury Instruction Having addressed all of Sierra’s arguments concerning the evidence adduced at trial, we now turn to the jury instruc- tions. Sierra argues his attorney was ineffective because she failed to request a cautionary jury instruction on accomplice testimony. Sierra claims that she should have requested an instruction, patterned from NJI2d Crim 5.6, which would have read: “There has been testimony from . . . Mally, a claimed accomplice of [Sierra]. You should closely examine his 47 See State v. McGee, 282 Neb. 387, 395, 803 N.W.2d 497, 505 (2011). 48 See United States v. Brown, 801 F.2d 352, 354 (8th Cir. 1986). 49 See State v. Wacker, 268 Neb. 787, 688 N.W.2d 357 (2004). - 275 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 testimony for any possible motive he might have to tes- tify falsely. You should hesitate to convict [Sierra] if you decide that . . . Mally testified falsely about an important matter and that there is no other evidence to support his testimony. In any event, you should convict [Sierra] only if the evidence satisfies you beyond a reasonable doubt of his guilt.” 50 Whether Sierra’s attorney was deficient for not requesting an instruction on accomplice testimony depends in part on whether such an instruction was warranted. [17,18] A defendant is clearly entitled to a cautionary instruction on the weight and credibility to be given to the tes- timony of an alleged accomplice, and the failure to give such an instruction, when requested, is reversible error. 51 We have held that whenever a judge decides that the evidence supports a conclusion that a witness is an accomplice and the defendant requests a cautionary instruction, the instruction is appropriate and should be given. 52 This is because any alleged accomplice testimony should be examined more closely by the trier of fact for any possible motive that the accomplice might have to tes- tify falsely. 53 There is evidence on the record to indicate Mally was an accomplice. Sierra’s attorney adduced evidence on cross- examination of the benefits he was receiving from the State in exchange for his testimony, and Mally’s plea deal was entered into evidence. If she had requested a cautionary instruction on accomplice testimony, the instruction should have been given. It is unclear on the trial record why Sierra’s attorney did not request such an instruction, but we cannot say on the record before us that the failure to request a cautionary instruction 50 Brief for appellant at 45. 51 See State v. Sellers, 279 Neb. 220, 777 N.W.2d 779 (2010). 52 See id. 53 Id. - 276 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 on accomplice testimony was deficient and prejudicial under Strickland. 54 Thus, we find that the record is insufficient for us to address this claim on direct appeal. 8. Failure to Maintain Adequate Record Sierra generally contends that his attorney was ineffective for not maintaining a record of certain portions of the trial. This contention rests on the idea that there could have been potential due process violations during these parts of the trial. The portions that went unrecorded included voir dire, clos- ing arguments, and the reading of the instructions to the jury. Without a sufficient record, Sierra argues that he is foreclosed from assigning such violations as errors on appeal. Sierra does not elaborate on what the alleged violations were, except as to the error related to the accomplice jury instruction dis- cussed above. We have long held that both parties can waive the creation of the record for nonevidentiary proceedings. 55 The burden to create the trial record is on the trial court; however, this burden only extends to the evidence offered at trial and other evidentiary proceedings, and it may be waived for noneviden- tiary proceedings. 56 None of the proceedings omitted from the record involved the presentation of evidence at trial. [19] Raising a claim of ineffective assistance based on the mere conjecture that something inappropriate may have occurred during these proceedings is not enough. Sierra was present during each part of the trial, including those portions not on the record. Thus, he has knowledge of what occurred and was free to assign on appeal any specific claims of defi- ciency by his attorney during the proceedings not on the 54 See Strickland v. Washington, supra note 7. 55 See Gerdes v. Klindt’s, Inc., 247 Neb. 138, 525 N.W.2d 219 (1995). 56 See, id.; Lockenour v. Sculley, 8 Neb. Ct. App. 254, 592 N.W.2d 161 (1999). See, also, Neb. Ct. R. App. P. § 2-105(A)(2) (rev. 2018). - 277 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 record. When recordation of parts of a trial is not made man- datory by the rules, the failure to request recordation cannot be said, ipso facto, to constitute negligence or inadequacy of counsel. 57 When the defendant was present but does not allege what specific deficient conduct was not recorded, the defendant fails to allege with sufficient specificity how trial counsel was deficient by simply alleging that counsel waived creation of a trial record for nonevidentiary proceedings. 58 Other than the allegation relating to the accomplice jury instruction, Sierra has not assigned any specific allegations of deficient conduct; nor has he made any specific arguments, related to voir dire or closing arguments. We do not address those claims alleging simply that the failure to create a trial record, in itself, constituted ineffective assistance. Sierra has alleged specifically deficient conduct pertaining to the jury instructions. However, the assignment of ineffec- tive assistance is unrelated to the reading of the jury instruc- tions. Rather, Sierra alleges the deficient conduct was in the failure to request that the giving of the jury instructions be recorded. Counsel is not required to request a record of the reading of the jury instructions, because instructions to the jury, whether given or refused, when filed in a cause, are a part of the record and need not be embodied in the bill of exceptions. 59 Thus, an ineffective assistance claim asserting deficient conduct based on a failure to request that a record be made of the reading of the jury instructions would need to specifically allege that trial counsel was deficient in conduct during the reading of the jury instructions. Sierra has failed to specify deficient conduct by his trial counsel during the reading of the jury instructions. We find this claim to be without merit. 57 State v. Jones, 246 Neb. 673, 522 N.W.2d 414 (1994). 58 See, State v. Alarcon-Chavez, 295 Neb. 1014, 893 N.W.2d 706 (2017); State v. Jones, supra note 57. 59 See Bennett v. McDonald, 52 Neb. 278, 72 N.W. 268 (1897). - 278 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports STATE v. SIERRA Cite as 305 Neb. 249 9. Failure to Maintain Law License and Appropriate Moral Standing Lastly, Sierra claims that his attorney’s failure to maintain her law license and the investigation into her criminal conduct rendered his attorney per se ineffective. There is no evidence in the record concerning Sierra’s attorney’s personal conduct or any potential conflict of interest. At the original sentenc- ing hearing, she made a motion to withdraw, it was granted, and the trial court gave a newly appointed public defender additional time to prepare for sentencing. No further details are provided. We find that the record is insufficient for us to address this claim on direct appeal. VI. CONCLUSION For the foregoing reasons, we vacate Sierra’s convictions and sentences pursuant to counts III and IV of the State’s amended information, which each asserted a separate offense of theft by unlawful taking ($5,000 or more). Furthermore, we find that the district court did not abuse its discretion in deny- ing the motion to withdraw and in granting the State’s motion in limine. We find the claims of ineffective assistance of coun- sel for agreeing not to call Sierra’s fiance as a witness, failure to request a continuance, failure to exclude evidence found in Mally’s possession, and failure to object to Hanke’s testimony about evidence found at Sierra’s residence to be without merit. We find the claim of ineffective assistance of counsel for fail- ure to maintain a sufficient record of voir dire, closing argu- ments, and jury instructions to be insufficiently stated. We find the record is insufficient to address the remaining ineffective assistance of counsel claims on direct appeal. Affirmed in part, and in part vacated.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474346/	OPINION. Aknold, Judge: Petitioner filed delinquent excess profits tax returns for 1943 and 1944. Respondent determined a 25 per cent penalty under section 291, Internal Revenue Code, as to each year for failure to file timely returns. Petitioner contends that its failure was “due to reasonable cause and not due to willful neglect” within the meaning of section 291. The burden of establishing reasonable cause is on the taxpayer. Girard Investment Co. v. Commissioner, 122 Fed. (2d) 843. That a taxpayer believes no return is required is itself insufficent to show that the failure to file was due to reasonable cause. P. Dougherty & Co., 5 T. C. 791; affd., 159 Fed. (2d) 269; Genesee Valley Gas Co., 11 T. C. 184 (on appeal, App. D. C.). In Fairfax Mutual Wood Products Co., 5 T. C. 1279, acquiescence 1946-1 C. B. 2, the officers of a corporation refrained from filing an excess profits tax return on the advice of the local collector’s office. The president of the taxpayer fully discussed the matter with the local collector and his subordinates and, on their advice, attached to the return a statement explaining the absence of an excess profits tax return on the ground that the corporation was considered a personal service corporation. We concluded that the corporation did not willfully neglect to file the return and the imposition of the penalty was not justified. In Tarbox Corporation, 6 T. C. 35, we sustained the imposition of the penalty for failure to file a personal holding company return for 1941 where it appeared that the tax returns were prepared by an accountant who was only briefly informed of the corporate structure and did not discuss the matter with the sole stockholder and his attorney. Also in Hermax Co., 11 T. C. 442, we sustained the penalty where the accountant was not shown to be familiar with Federal tax law. In the present case the president and sole stockholder left the petitioner’s tax matters entirely to Hancock, who kept the books and prepared the returns. The record does not show that in his inquiry at the office of the collector in March 1941 Hancock gave such information to the person from whom the inquiry was made as would enable that person properly to advise him with respect to the necessity for filing excess profits tax returns, or that such person was there for the purpose of advising taxpayers or had such knowledge of petitioner’s business as would enable him to give reliable advice. So far as the record shows, he may have talked to a file clerk or some subordinate employee of the collector’s office whose duties were in no way connected with advising taxpayers. He did not get the name of the person with whom he talked and did not discuss with Block the result of the interview. Furthermore, the inquiry was with respect to the year 1940, while the taxable years are 1943 and 1944. The taxpayer’s income tax return for 1944 stated that an excess profits tax return was being filed for such year and showed the amount of excess profits net income for the purpose of determining the necessity for filing an excess profits tax return. Hancock had no explanation for these entries. This is not a case in which the taxpayer’s officers, after consideration of all the circumstances and in reliance upon competent advice based upon a complete disclosure of the facts, came to the conclusion that the corporation was not subject to excess profits tax for 1943 and 1944. Taxpayers deliberately omitting to file returns must use reasonable care to ascertain that no return is necessary. We think the petitioner did not use such care. A convincing illustration of this is the failure of petitioner’s officers in March 1946, when they learned that an excess profits tax return was required for 1945, to take warning that the requirement might also apply as to 1943 and 1944 and to make inquiry then as to petitioner’s liability for those years. Respondent did not err in determining the penalties. Reviewed by the Court. Decision will be entered for the respondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620454/	HARRIS L. WOOD and HARRIETT E. WOOD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWood v. CommissionerDocket No. 7173-73United States Tax CourtT.C. Memo 1975-189; 1975 Tax Ct. Memo LEXIS 182; 34 T.C.M. (CCH) 817; T.C.M. (RIA) 750189; June 17, 1975, Filed Harry H. Perdue, Jr., for the petitioners. Roy S. Fischbeck, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACTS AND OPINION STERRETT, Judge: The respondent determined a deficiency in petitioners' federal income tax for the taxable year 1969 in the amount of $124,242. Of the several issues raised by the respondent during his audit of the petitioners' tax return two basic issues remain to be decided. The first issue is whether a portion of the $967,652 payment to petitioner Harris L. Wood in a transaction, purporting to be a sale of stock, in fact constituted consideration paid to petitioner for the cancellation of employment184 contracts which cancellation was a condition to the purported sale. The second issue is whether the petitioners were engaged in the trade or business of farming and cattle-raising thereby entitling them to deduct the loss incurred in connection with that activity; or, if the petitioners were so engaged, whether they are entitled to deduct all of the expenses incurred in connection with their loss as claimed on their tax return for 1969. FINDINGS OF FACT Some of the facts are stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated by this reference. Petitioners, Harris L. Wood (hereinafter petitioner) and Harriett E. Wood, are husband and wife who resided in East Point, Georgia, at the time of the filing of their petition herein. Petitioners filed a joint federal income tax return for the taxable year 1969 with the internal revenue service southeast service center at Chamblee, Georgia. At all times relevant to the case at bar TSI, Inc., formerly Teachers Securities Investment Company (hereinafter TSI), was a life insurance and real estate holding company, and Teachers National Life Insurance Co., Inc. (hereinafter185 TNLI), a subsidiary of TSI, was a corporation organized as an insurance company. Both companies were organized under the laws of Kentucky with their principal business offices in Louisville, Kentucky. Petitioner was the founder and president of both TSI and TNLI. Also at all times relevant to the case at bar American Pyramid Companies, Inc. (hereinafter American) was a life insurance and real estate holding company organized and operated under the laws of Kentucky with its principal business office located in Louisville, Kentucky. In February, 1964 petitioner entered into an employment contract with TNLI for a term of 10 years which was later extended for an additional 10 years. Under the contract petitioner's salary was $25,000 per year plus a percentage of the gross first year premiums and a percentage of the gross renewal year premiums. The commissions paid under this provision amounted to $23,172, $22,100.38 and $8,311.23 for 1967, 1968, and the first five months of 1969, respectively. The contract also provided: * * * * Section 6. It is mutually understood and agreed between the parties hereto that this contract may be terminated by either party by the giving of ninety186 (90) days written notice to the other, subject, however, to the following conditions: a. If this contract be terminated by Company for any cause, other than a violation of its terms and conditions, Company will pay to Employee the commissions provided for in subsection B of Section 2 for a period of five (5) years following termination, but in no event for a period beyond the term of this contract. b. If this contract be terminated by Employee, Company will pay to Employee the commissions provided for in subsection B of Section 2 for a period of three (3) years following termination, but in no event for a period beyond the term of this contract. * * * * In October 1966 petitioner entered into an employment contract with TSI for a term of 20 years. Petitioner's salary under this contract was $25,000 per year. The contract also had similar termination clauses as those quoted above, except that if TSI terminated the contract it was required to make the compensation payments for the remaining term of the contract. Early in 1969, petitioner was approached by George T. Breathitt (hereinafter Breathitt) who asked petitioner if he was interested in selling his interest in TSI187 and TNLI. At this time petitioner owned 241,913 shares of stock in TSI, and an additional 3,900 shares were owned by petitioner's family. These shares represented approximately a 15 percent interest in TSI. Breathitt introduced petitioner to Robert T. Shaw (hereinafter Shaw) who was president of American. Negotiations between these men followed and on April 15, 1969, a formal proposal encompassing various actions was made to petitioner by American. American proposed to purchase authorized, but unissued, shares of common stock of TSI for assets, and to have TSI purchase all of the outstanding common stock of Christian FoundationLife Insurance Company (hereinafter Christian) and merge it into TNLI. Since petitioner's interest in TSI would be diluted if these proposals were put into effect, American also proposed to purchase all his stock in TSI for $2.75 per share, to settle the existing employment contracts for $300,000 payable over a 12 year period, and to retain petitioner as a part-time employee on a consulting basis for $30,000 per year for 12 years. Petitioner signed a statement agreeing in principle to this proposal subject to receiving a legal opinion from his attorneys with188 respect to its legality. Subsequent negotiations were conducted between petitioner's attorneys and American. Petitioner kept abreast of developments through his attorneys. Although the matter of petitioner's employment contracts was discussed, at no time did the parties mutually agree that he should receive any consideration for the termination of these agreements. Following these discussions American made a second offer to petitioner and TSI. In it they proposed: 1. That five (5) representatives of American Pyramid be elected to the Board of Directors of TSI; and 2. That American Pyramid purchase all of the shares of TSI owned by Mr. Harris Wood for $4.00 per share; and 3. That Mr. Harris Wood resign as a director, officer and employee of TSI and of all of TSI's affiliated and/or subsidiary companies; and 4. That Mr. Harris Wood forfeit and release TSI and TSI's affiliated and/or subsidiary companies from any and all contractual obligations arising under any contracts and agreements between Mr. Wood and such companies. 5. That American Pyramid sell and TSI buy all of the outstanding stock of Christian FoundationLife Insurance Company for consideration consisting of189 a $1,000,000 promissory note from TSI to American Pyramid and the issuance by TSI to American Pyramid of approximately 575,000 shares of the authorized but unissued common stock of TSI, the exact number to be identical to certain values arrived at by Mr. Wolf, an actuary representing TSI. The foregoing proposals supersede all prior proposals made by American Pyramid to TSI. In connection with the fifth part of the above offer, TSI requested a firm of consulting actuaries to value Christian. After a review of Christian's financial data, TSI was advised that $2,310,000 was a fair price for the purpose of negotiating the acquisition of Christian. An agreement was written covering the sale of petitioner's stock to American, and it served as the basic document when this transaction was closed on May 28, 1969. At the closing there was no disagreement with respect to the purchase price, but there was an attempt by American to have petitioner accept a portion of the purchase price over a period of time. There was no discussion with respect to how the purchase price was to be allocated. After the transaction occurred a report was filed with the Securities and Exchange Commission by190 those now in control of TSI which indicated that a portion of the purchase price had been allocated to petitioner's employment contracts. In TSI's notice of its annual meeting of shareholders that was held in 1970, the purchase of petitioner's shares by American was described with approximately $307,000 being allocated to petitioner's employment contracts. In June, 1969 petitioner purchased a 295 acre farm in Shorter, Alabama. In July, 1969 he purchased 50 head of cattle, and in late 1969 he acquired 24 head of Charolais cattle. Before entering into this activity petitioner had no prior farming or cattle raising experience. This activity was operated as a sole proprietorship until it was incorporated under the name of Woodhaven Charolais Ranch, Inc. in February, 1970. In October, 1970 petitioner organized Trans-World Charolais, Inc. in an attempt to sell stock of this corporation to the public. The attempt was only minimally successful. At first the operation was run by petitioner and his son, but in January, 1970 a ranch manager, experienced in raising Charolais cattle, was hired. Petitioner spent 90 percent of his time running this operation and lived both on the farm and in191 town. Petitioner incurred various expenses in connection with this activity and reported a net loss of $57,207 on his tax return for 1969. In September, 1969 petitioner leased from W. J. Sorrell approximately 3,689 acres of pasture land in Macon County, Alabama. Under the terms of the lease the first rental payment of $15,200 was due October 1, 1969, and covered the period from October 1, 1969, through December 31, 1970. Thereafter rent of $12,200 was due in January 1 of each year until the lease terminated on December 31, 1975. Petitioner paid the $15,200 rental payment and deducted it as a business expense on his 1969 tax return. In December, 1969 petitioner purchased farm equipment which he elected to depreciate over an eight year life. Petitioner did not claim depreciation under section 167, Internal Revenue Code of 19541 for 1969, but he did claim additional first-year depreciation in the amount of $973 under section 179. Petitioner realized $967,652 (241,913 shares at $4 per share) on the sale of his TSI stock. His basis in these shares was $347,288 and he reported192 the $620,364 difference as long-term capital gain. Respondent determined that of the amount realized $665,260 (241,913 shares at $2.75 per share) was for petitioner's stock and $302,392 represented "consideration for the waiver of your rights under employment contracts with [TSI] and [TNLI] * * and is taxable as ordinary income." Respondent accordingly decreased petitioner's long-term capital gain and increased his ordinary income. Respondent also disallowed the $57,207 claimed as a net farm loss determining that it was neither incurred in connection with petitioner's trade or business nor incurred for the production or collection of income during the taxable year, and that rather such expenditures should be added to petitioner's cost basis in his common stock of Woodhaven Charolais Ranches, Inc. Alternatively respondent made adjustments to petitioner's reported farm loss and determined that it should be $43,565.85. Respondent determined that $12,000 of the $15,200 paid as rent in October, 1969 was prepaid rent and was not deductible in 1969, and that petitioner was not entitled to the additional first-year depreciation of $973 claimed on the farm equipment purchased in December, 193 1969. Petitioner has not contested any of the other adjustments respondent made with respect to petitioner's claimed farm loss. OPINION The case at bar presents two basic issues for our determination. The first issue is whether a portion of the amount received by petitioner in the transaction with American qualifies as ordinary income because it was received as consideration for the release of his employment contracts. The second issue is whether the petitioner was engaged in the trade or business of farming and cattleraising entitling him to deduct the loss incurred in connection with that activity; or, if petitioner was so engaged, whether he is entitled to deduct the full rental payment made in 1969 and to the additional first-year depreciation claimed on the farm equipment purchased in December, 1969 under the provisions of sections 162(a) (3) and 179, respectively. Petitioner received $967,652 (241,913 shares at $4.00 per share) on the sale of his TSI stock. As part of this transaction petitioner released TSI and TNLI from the employment contracts he had with each company. Respondent's position is that $302,392 of the amount realized, in fact, represents consideration for194 the release of valuable employment contract rights and as such represents ordinary income to petitioner. Petitioner contends that the transaction was consummated after negotiations between the parties and that the resulting agreement, which does not include any allocation of the purchase price, reflects the true intentions of the parties. When the terms of an agreement result from deliberate negotiations this Court is not prone to give it a different interpretation. However, when the agreement neither conforms to the business or economic realities of the situation nor is the product of conflicting tax interests, we believe it is appropriate for this Court to examine the surrounding circumstances and make our own determination. See Ragland Investment Co.,52 T.C. 867">52 T.C. 867, 879, affd. 435 F.2d 118">435 F.2d 118 (6th Cir. 1970). See also Balthrope v. Commissioner,356 F.2d 28">356 F.2d 28 (5th Cir. 1966), affirming a Memorandum Opinion of this Court. In the early part of 1969 petitioner was introduced to Shaw, the president of American, for the purpose of negotiating the195 transfer of control of TSI to American through the acquisition of authorized but unissued shares of TSI and petitioner's stock interest in TSI. This first round of negotiations resulted in an offer by American to pay petitioner $2.75 per share for his 241,913 shares, or $665,260, to cause TSI to pay petitioner $300,000 payable over 12 years, for the release of his employment contracts, and $30,000 per year for 12 years for part-time consulting services for a total face value purchase price of $1,325,260. Petitioner noted his agreement in writing with this offer in principle subject to a legal opinion from his attorneys. At this point a second round of negotiations was conducted that culminated in a second offer from American to purchase petitioner's stock for $4.00 per share, or $967,652, with petitioner releasing his employment contract rights. An additional but integral part of the offer was for TSI to acquire all of the outstanding stock of Christian, a life insurance company owned by American, for a $1,000,000 promissory note and 575,000 shares of authorized but unissued shares of TSI. The approximate fair market value of Christian's stock was $2,310,000. The record makes it196 clear that both parties considered the employment contracts to be valuable and enforceable. American first offered to have petitioner paid for the release of these rights, and then expressly conditioned the second offer on petitioner releasing his rights in these contracts. Shaw also testified that the cancellation of these employment contracts was an integral aspect of the entire transaction. Petitioner testified that, if TSI or TNLI did not perform according to the contract terms, he would have taken appropriate action. Petitioner points to the negotiations that led to the transaction during which there was never an agreement that petitioner should receive any consideration for the release of his employment contract rights. However, we believe that even though the parties did not agree on this matter that does not mean that the employment contracts had no value. In an analogous situation this Court in Harry A. Kinney,58 T.C. 1038">58 T.C. 1038 (1972), found that the parties failed to allocate a portion of the consideration to a covenant not to compete because they could not agree on an appropriate amount. The Court concluded that in this situation "the absence of the allocation197 does not indicate that they considered the covenant to have no value." Harry A. Kinney,supra at 1043. One reason for the lack of agreement was American's lack of concern with the actual allocation of the purchase price. Petitioner, whose employment contracts were with TSI and TNLI, never performed any services for American. Consequently, American would not be entitled to a compensation expense deduction under section 162(a) (1) if any part of the purchase price had been allocated to the employment contracts. See section 1.162-7(a), Income Tax Regs.Furthermore, the concurrent acquisition of Christian by TSI indicates that the TSI stock was worth approximately $2.75 per share. Reducing Christian's fair market value by the face value of the promissory note leaves $1,310,000 in value for the 575,000 shares of TSI, which is approximately $2.28 per share. 2After careful consideration of the record we are convinced that despite the final agreement, petitioner's198 employment contracts were enforceable and valuable obligations and that respondent's allocation of $302,392 appropriately reflects the economic realities encompassing the transaction between petitioner and American. Viewing the transaction in this manner petitioner received $302,392 in consideration for the relinquishment of his employment contract rights and this amount represents ordinary income. Victor H. Heyn,39 T.C. 719">39 T.C. 719 (1963). 1 Mertens, Law of Federal Income Taxation, sec. 6A.11 p. 67 (1974 Rev.). Respondent's determination with respect to this issue must be upheld. The second issue is whether the petitioner was engaged in the trade or business of farming and cattleraising entitling him to deduct those expenses incurred in connection with that activity. This question is basically factual and its resolution depends on whether petitioner's dominant motivation was to make a profit. Godfrey v. Commissioner,335 F.2d 82">335 F.2d 82 (6th Cir. 1964), affirming a Memorandum Opinion of this Court; Hirsch v. Commissioner,315 F.2d 731">315 F.2d 731 (9th Cir. 1963), affirming a Memorandum Opinion of this Court; section 1.162-12(a), Income Tax Regs.199 The burden of proof is on the petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). After closing the transaction with American petitioner purchased farm acreage and cattle, and later leased additional pasture land. Petitioner lived on the farm and in town and approximately 90 percent of his time was spent running the farm. His son also actively participated in the operation. Petitioner on his tax return for 1969 claimed various expenses, many of which the respondent does not contest in his alternative position, which appear to be the everyday expenses incurred in a farming and cattleraising activity. Petitioner also reported some income recognized from the sale of cattle during the year. Petitioner operated as a sole proprietorship throughout 1969, with the incorporation not occurring until February, 1970, and his major attempt to sell stock to the public not occurring until October, 1970. We believe petitioner has met his burden and is entitled to deduct the loss incurred in connection with this activity. Having made this threshhold determination of profitmaking intent we now must turn to respondent's alternative determination. Respondent made several adjustments200 to petitioner's claimed loss of $57,207, finally determining that the loss should be $43,565.85. Petitioner has contested two of these adjustments. Under the terms of the lease by which petitioner acquired the use of the additional pasture land, petitioner was required to make a $15,200 rental payment in October, 1969 which covered the period from October 1, 1969 through December 31, 1970. Thereafter rental payments of $12,200 were due on January 1 of each year until the lease terminated on December 31, 1975. Respondent disallowed $12,000 of the $15,200 rental expense deducted by petitioner in 1969 determining that it was a rental expense to be incurred in 1970 and could only be deducted in that year. Petitioner argues that under the terms of the lease the $15,200 was required to be paid in 1969 and that it should be deductible in that year. However, this Court has held in University Properties, Inc.,45 T.C. 416">45 T.C. 416, 421 (1966), affd. 378 F.2d 83">378 F.2d 83 (9th Cir. 1967), that: It is well settled that advance rentals or the cost of acquiring a leasehold interest is201 a capital expenditure, recoverable through amoitization over the remaining life of the lease. [Citations omitted.] Rentals may be deducted as such only for the year or years to which they are applied. If they are paid for the continued use of the property beyond the years in which paid they are not deductible in full in the year paid but must be deducted ratably over the years during which the property is so used. [Emphasis supplied.] To the same effect, Norman Baker Smith,51 T.C. 429">51 T.C. 429, 440 (1968). Petitioner's reliance on analogous situations is of no help in this patchwork area of prepaid items. See Mann v. Commissioner,483 F.2d 673">483 F.2d 673, 676 (8th Cir. 1973), reversing a Memorandum Opinion of this Court. Respondent's determination with respect to this issue must be upheld. In December, 1969 petitioner purchased farm equipment including a mower, baler, rake, and a stock trailergooseneck. Petitioner did not claim normal depreciation under section 167, but did claim additional first-year depreciation under section 169, in the amount of $973. Section202 179(a) provides that: SEC. 179. ADDITIONAL FIRST-YEAR DEPRECIATION ALLOWANCE FOR SMALL BUSINESS. (a) General Rule.--In the case of section 179 property, the term "reasonable allowance" as used in section 167(a) may, at the election of the taxpayer, include an allowance, for the first taxable year for which a deduction is allowable under section 167 to the taxpayer with respect to such property, of 20 percent of the cost of such property. Under section 1.167(a)-10(b), Income Tax Regs., the period for depreciation begins when the asset is placed in service. The evidence in the record discloses that this farm equipment was purchased in mid and late December, 1969. However, there is no indication as to when this equipment was placed in service. Petitioner has not met his burden with respect to this issue and respondent's determination must be upheld. Decision will be entered under Rule 155.Footnotes1. All Code references are to the Internal Revenue Code of 1954, as amended.↩2. If the face value of the note is reduced approximately $271,000 to reflect a possible fair market value, the value of the TSI shares would be increased to approximately $2.75 per share.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620455/	ADDISON H. GIBSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gibson v. CommissionerDocket No. 75500.United States Board of Tax Appeals32 B.T.A. 836; 1935 BTA LEXIS 879; June 28, 1935, Promulgated 879 The petitioner was the sole stockholder of the G corporation, which owned all of the preferred and two thirds of the common stock of the Z corporation. The remaining one third of the common stock of Z was owned by D. The petitioner and D were indebted to Z. The petitioner was solvent and able to pay the debt, and D was insolvent. Z also was insolvent and its only liability, with minor exceptions, was an account payable to G in an amount substantially in excess of the value of its assets. Z canceled the indebtedness of the petitioner and D. Held, that the amount of the indebtedness of the petitioner which was canceled constituted income of the petitioner at the time of cancellation, and, under the circumstances of this particular case, the cancellation had the effect of the payment of an ordinary dividend by G to the petitioner. Earl F. Reed, Esq., for the petitioner. C. A. Ray, Esq., and G. W. Brooks, Esq., for the respondent. MURDOCK 836 The Commissioner determined a deficiency in the petitioner's income tax for the year 1931 in the amount of $4,085.09. The only issue in the case is whether or not the Commissioner erred in880 including $21,204.75 in the petitioner's income for 1931. FINDINGS OF FACT. The petitioner is an individual. His address was Tulsa, Oklahoma, at the time he filed his income tax return for the calendar year 1931. He owned during 1931 all of the outstanding stock of the Galvez Oil Corporation (hereinafter referred to as Galvez). Galvez at that time owned all of the outstanding preferred stock and two thirds of the outstanding common stock of the Gibson-Zahniser Oil Corporation (hereinafter referred to as Zahniser). The remaining one third of the common stock of Zahniser was owned by J. H. Dickson. The outstanding capital stock of Zahniser consisted of 2,500 shares of preferred stock, each share having a par value of $100, and 1,000 shares of common stock of no par value. The total amount of the common stock was carried on the books of Zahniser at $2 in the year 1931. The petitioner was the president of Zahniser and was also a director in 1931. One share of the common stock of Zahniser, which belonged to Galvez, stood in the petitioner's name merely for the purpose of qualifying him as an officer and director of Zahniser. The petitioner devoted very little of his881 time to the affairs of Zahniser and drew no salary from that corporation. The active management of Zahniser was in the hands of Dickson. He was vice president, 837 general manager, and a director of Zahniser. John F. James, the petitioner's private secretary, was secretary of Zahniser and one of its directors. The other two directors of Zahniser were a stenographer for the corporation and the wife of Dickson. Four of the five directors held only qualifying shares, Dickson being the only one of the five who owned his shares. Zahniser carried an account on its books in the name of the petitioner. The account began in 1923, contained debit and credit entries for each year from 1923 to 1931 inclusive, except that there were no credit entries for 1929 or 1930, and showed a debit balance at the end of 1931 in the amount of $21,204.75. Zahniser carried a similar account in the name of Dickson which showed a debit balance at the end of 1931 of $47,082.60. Dickson became hopelessly insolvent in 1929 or 1930 and was forever after unable to pay his debt to Zahniser. The petitioner was solvent and able to pay his debt to Zahniser. The following resolution, proposed by James, 882 was adopted at a meeting of the board of directors of Zahniser on December 30, 1931, at which all of the directors were present: RESOLVED that the indebtedness of Addison H. Gibson and J. H. Dickson to this company as of December 31, 1931, be hereby cancelled, the company taking this action merely to benefit the said debtors and without any consideration cancelling the said debts. Zahniser had accounts payable at the end of 1931 amounting to $144,225.28 of which $143,609.82 was owed to Galvez. The value of the assets of Zahniser at that time was substantially less than the amount of its accounts payable. Galvez had a surplus at that time in excess of $21,204.75, after due allowance for the partial worthlessness of the debt due from Zahniser. The Commissioner added to the petitioner's income, as reported on his return, $21,204.75 as dividends from Galvez. He made the following explanation in the statement accompanying the notice of deficiency: The forgiveness of your indebtedness by the Gibson-Zahniser Oil Corporation had the same effect as a liquidating dividend or return of capital from the Gibson-Zahniser Oil Corporation to the Galvez Oil Company, followed by a distribution883 of a similar amount to you as the sole stockholder of the Galvez Oil Company from its accumulated earnings. The amount forgiven is, therefore, taxable as a dividend. OPINION. MURDOCK: It will not make any difference in the determination of the deficiency in this particular case whether the item in controversy is taxable to the petitioner as ordinary income or whether it is taxable to him as a dividend. The reason for this is that in no event will any of the petitioner's income be subject to normal tax. The real issue in the case is, therefore, whether or not all, or any part, of 838 the $21,204.75 is income to the petitioner for the year 1931. If the amount is income to the petitioner either on the theory suggested by the Commissioner or on any other theory, the determination of the Commissioner must be approved. ; affd., ; . There is little, if any, dispute between the parties as to the facts. The Commissioner does not contend that the forgiveness of the indebtedness was compensation for services rendered by the petitioner to884 Zahniser, nor does he contend that it represents a dividend distributed by Zahniser to the petitioner as one of the stockholders of Zahniser. The fact is that the petitioner was not a stockholder of Zahniser and Zahniser, being insolvent, was in no position to declare an ordinary dividend. Neither was the forgiveness a gift from Zahniser to the petitioner. Cf. . If the directors of a corporation attempt to give away its assets, their action is ultra vires. ; certiorari denied, . The explanation given by James for the resolution which he prepared was: Well, Mr. Dickson was hopelessly insolvent, and I saw no use in carrying an insolvent account on the books of a liquidating concern, and I said, as we were going to write-off Dickson's indebtedness, I thought at the same time we should write off Mr. Gibson's. The real reason why Zahniser forgave the indebtedness due it from the petitioner is found in the petitioner's relation to Galvez and the relation of Galvez to Zahnizer. The petitioner owned all of the stock of Galvez, and the amount885 which Zahnizer owed Galvez was far more than the value of all of the assets of Zahnizer. Galvez alone suffered in exact proportion to the benefit which the petitioner received from the forgiveness. Galvez was the only creditor or stockholder which had any reason to complain of the action of the board of directors of Zahniser in forgiving the indebtedness which the petitioner was fully able to pay. The sum of $21,204.75 had been received by the petitioner and used for his own purposes. The receipt of that sum by him was never reflected in any of his income tax returns. The money represented a loan to him until December 30, 1931, but when his indebtedness was forgiven on December 30, 1931, he was enriched at that time in the amount of $21,204.75. He was solvent. The amount became income to him at that time. Cf. ; petition to review dismissed, . Then, for the first time, had he reason to report it as income. It seems clear that on one theory or another he became liable for tax on that amount as part of his income for 1931. If this were not so, the circumstances disclose a fairly easy method886 of avoiding or, at least, of substantially reducing tax liability. 839 There may be room for differences of opinion as to the precise theory upon which this item is income to the petitioner. The Commissioner's theory is that the amount represents a dividend to the petitioner from Galvez. The parties are agreed that Galvez had sufficient surplus with which to pay a dividend of $21,204.75. The Commissioner was probably incorrect in stating that the forgiveness had the effect of a liquidating dividend or return of capital from Zahniser to Galvez, since it probably should be treated as a partial payment of the debt due from Zahniser to Galvez. Under such circumstances Galvez, as creditor, would come before Galvez, as a stockholder. However, it is not important to decide whether the forgiveness had the effect of a liquidating dividend or whether it had the effect of a partial payment of the debt due from Zahniser to Galvez, since either theory would support the Commissioner's contention that the petitioner in effect received an ordinary dividend from Galvez. It is true that in fact Galvez never declared any dividend to the petitioner in the amount in controversy and took*887 no active part in the matter whatever. However, its silence is important. Its failure to object to the forgiveness of the petitioner's debt by Zahniser is an indication that it consented to have the petitioner benefit in its place. The petitioner argues that since the statute of limitations had run against the major portion of the debt, the forgiveness of that portion did not represent income to him. He cited no authority for his statement that the statute of limitations had run against a portion of the debt. This was an entire active open account. The statute of limitations had not run as to a part of it, as the petitioner contends. Furthermore, even if it had run, it did not extinguish the liability. Cf. . We are unable to say that the Commissioner erred in taxing the $21,204.75 to the petitioner as a dividend to him from his wholly owned corporation, Galvez. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620456/	DANIEL CECERE and JOAN CECERE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCecere v. CommissionerDocket No. 5827-72United States Tax CourtT.C. Memo 1975-371; 1975 Tax Ct. Memo LEXIS 2; 34 T.C.M. (CCH) 1593; T.C.M. (RIA) 750371; December 31, 1975, filed F. X. McCormick, for the petitioners. John J. O'Toole and Marwin A. Batt, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax and additions to tax for the fraud penalty (section 6653(b)) as follows: Additions YearDeficiencyto Tax1967$11,595.86$5,797.93196812,142.586,071.29 The issues to be decided are: (1) Whether Petitioner Daniel Cecere, as a partner, received interest income of $29,900 and $27,941 in the taxable years 1967 and 1968, respectively, which he failed to report as income. (2) Whether the failure to report such interest income was due to fraud within the meaning of section 6653(b)4 of the Code. 1(3) Whether assessment of additional tax for the taxable year 1967 is barred by operation of the statute of limitations. (4) Whether the income tax return for 1967 was a joint return of petitioners. (5) Whether Petitioner Joan Cecere is relieved from liability for tax and fraud penalty for the taxable years 1967 and 1968 by operation of section 6013(e) of the Code. (6) Whether petitioners are entitled to a bad debt deduction in the taxable year 1968. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and exhibits are incorporated by this reference. At the time of filing their petition, Joan Cecere resided in West Orange, New Jersey, and Daniel Cecere was an inmate at the Federal Penitentiary, Atlanta, Georgia. Petitioners Daniel and Joan Cecere were husband and wife during the years in question. A Federal income tax return in the name of Daniel and Joan Cecere, for the taxable year 1967, and a joint Federal income tax return for the taxable year 1968 were filed with the District Director of Internal Revenue, Newark, New Jersey. The5 1967 return was filed in the name of Daniel and Joan Cecere. In addition to income and deductions reported by Daniel Cecere, all income and deductions of Joan Cecere are reported on the 1967 return but it was not signed by Joan Cecere. On January 28, 1970, Petitioner Daniel Cecere and Angelo DeCarlo were convicted in the United States District Court for the District of New Jersey for violations of 18 U.S.C. sections 892 and 894. Those sections provide criminal penalties for extortionate extensions of credit and for collections of credit by extortionate means. Cecere and DeCarlo, together with Joseph Polverino and Peter Landesco, were charged with extortionate credit operations as to loans made to Louis Saperstein. Petitioner Daniel Cecere and his partners lent money to Saperstein in 1967 and 1968 and Saperstein paid interest to them in those years at the rate of 1-1/2 percent per week, or $1,725 per week. As of September 13, 1968, Saperstein owed Cecere and his partners $145,000. On that date, the partners gave Saperstein 3 months to repay the principal of the loan and they raised the interest to $2,000 per week. On November 14, 1968, Saperstein delivered6 $30,000 to Cecere. On November 21, 1968, at 11:30 A.M., Lenny Banks, an employee of Saperstein, delivered $2,000 to Cecere following a demand from Cecere to Saperstein that such payment must be made on that day. Petitioner Joan Cecere had no knowledge of the loan transactions between Saperstein and Cecere and his partners. Nevertheless, both Petitioners Daniel and Joan Cecere knew in 1967 and 1968 that interest received constitutes taxable income in the year of receipt. On or about November 21, 1968, Saperstein wrote two letters to the Federal Bureau of Investigation. The letters pleaded for the protection of the Federal Bureau of Investigation. Saperstein died on November 26, 1968. Petitioner Joan Cecere was the principal stockholder of the Berkeley Bar during 1967 and 1968. The other stockholders were Alexander Cecere and a Mr. Aquino. Joan Cecere received salary income for both years from Berkeley Bar which was reported on the 1967 Federal income tax return and the 1968 joint Federal income tax return but she performed no services for Berkeley Bar during 1967 and 1968 and only visited the bar 2 or 3 times during the years in question. Nevertheless, she directed Mr. Aquino, 7 the manager, to deposit each days receipts to a designated bank account. A Mr. Rocco Noschese was employed to clean the bar and kitchen at the Berkeley Bar commencing in 1966 and continuing through 1967 and 1968. He worked seven days each week from 6:30 A.M. until 12:30 P.M. when the manager arrived to open the bar for business. In November 1968, Lenny Banks came to the bar to meet Ray DeCarlo and after waiting for some time he handed an envelope to Noschese and directed him to deliver it to DeCarlo when he arrived. Noschese complied by delivery of the envelope on the same day without examination of its contents. Thereafter, Banks made similar weekly deliveries of the envelopes and DeCarlo picked them up on the same dates they were delivered by Banks to Noschese. DeCarlo did not exhibit the contents of the envelopes to Noschese but on one occasion Noschese heard DeCarlo counting the contents. In November 1968, the deliveries of envelopes by Banks ceased. The return for 1967 did not bear the signature of Joan Cecere. In the caption block which provides, "First name and initial (If joint return, use first names and middle initials of both)" the names "Daniel and Joan" appear. The8 social security numbers of both appear on the return. Both spouses are claimed as exemptions and all of their children are claimed as dependents. Form W-2 reporting the income of Joan Cecere from the Berkeley Bar and the tax withheld was attached to the return. The rental income reported was received from property jointly owned by Daniel and Joan Cecere. Joan Cecere knew that her income from the Berkeley Bar was taxable and she filed no separate return for 1967. Joan Cecere filed joint returns with Daniel Cecere for the taxable years 1968, 1969 and 1970, all of which she signed. They relied upon an accountant to prepare their Federal income tax returns. The 1967 income tax return discloses the following sources and amounts of gross income and net income: SourcesGross IncomeNet IncomeBerkeley Bar (Joan Cecere)$10,400.00$10,400.00One Hour Martinizing19,354.007,400.00Mortgage interest460.32460.32Income from rent3,420.001,476.52TOTAL$33,634.32$19,736.84On their joint return for the taxable year 1968, petitioners reported gross income of $22,271.80. The Commissioner, in his statutory notice of deficiency mailed April 4, 1972, determined9 that petitioners received and failed to report interest income on indebtedness from Louis Saperstein in the amount of $29,900 (one-third of $89,700) and $27,941 (one-third of $83,825) for the taxable years 1967 and 1968, respectively. He further determined that the failure to report such income was fraudulent. Other adjustments made by the Commissioner have been conceded by the parties. In their reply, petitioners claim that they are entitled to a bad debt deduction in the taxable year 1968 due to the worthlessness of the Saperstein debt. ULTIMATE FINDINGS OF FACT 1. Petitioner Daniel Cecere received interest income in the taxable years 1967 and 1968 in the amounts of $29,900 and $27,941 which he failed to report on his Federal income tax returns for those years with the intent to evade tax within the meaning of section 6653(b) of the Internal Revenue Code. 2. Petitioners Daniel Cecere and Joan Cecere filed a joint Federal income tax return for the taxable year 1967. 3. Petitioner Joan Cecere is not an "innocent spouse" with respect to the Federal income tax returns for the taxable years 1967 and 1968 within the meaning of section 6013(e) of the Code. 10 4. Petitioners sustained no loss from partial or complete worthlessness of a debt from Louis Saperstein. OPINION The adjustments made by the Commissioner in his statutory notice of deficiency which give rise to the issues presented consist of unreported interest income received from Louis Saperstein in 1967 and 1968. The Commissioner determined that Petitioner Daniel Cecere, as a one-third partner, received $29,900 in 1967 and $27,941 in 1968 of such income and his failure to report it on his income tax returns was coupled with the intent to evade tax. Respondent concedes that Petitioner Joan Cecere possessed no such fraudulent intent. Assessment of additional tax for 1967 is barred unless the Commissioner can establish fraud or an omission of income in excess of 25 percent of the income reported. Assessment of additional tax for 1968 is not barred by the statute of limitations. Petitioners contend that the return for 1967 was not a joint return because it was not signed by Joan Cecere and that Joan Cecere is not liable for the deficiencies in tax or fraud penalty for 1967 or 1968 because she qualified as an "innocent spouse" under the provisions of section 6013(e). In order11 to find any deficiency in tax or penalty for 1967 against either petitioner, respondent must prove fraud or a 25 percent omission from income. The issue of fraud is one of fact to be determined upon a consideration of the entire record. William G. Stratton,54 T.C. 255">54 T.C. 255 (1970). The burden of proving fraud under section 6653(b) is upon respondent. Sec. 7454, Internal Revenue Code of 1954. Fraud is never presumed. It must be affirmatively established by clear and convincing evidence. Anson Beaver,55 T.C. 85">55 T.C. 85 (1970); Rule 142, Tax Court Rules of Practice and Procedure.Direct evidence of fraudulent intent is seldom available and whether it exists must be determined from the conduct of the taxpayer and the surrounding circumstances. The Commissioner, in order to prove fraud, must show that Daniel Cecere received and failed to report income with the intent to evade tax. Daniel Cecere, in his reply to respondent's answer filed herein, admitted lending money to Saperstein in 1967 and 1968 and admitted receiving weekly payments from Saperstein but alleged that the payments were principal, not interest. The respondent candidly admits12 in his brief that the only record of the loan transaction is contained in two handwritten letters which Saperstein wrote to the Federal Bureau of Investigation on November 21, 1968, shortly before he died. The letters were admitted in the criminal trial against Cecere, DeCarlo and Polverino for the limited purpose of showing the state of mind of Saperstein and the Court of Appeals held that the trial court did not err in admitting one of the letters for such a limited purpose. United States v. DeCarlo,458 F.2d 358">458 F.2d 358 (3d Cir. 1972). The letters were not admitted in the criminal trial to prove the truth of the statements contained in the letters. In the trial before us, the respondent offered the letters to prove the terms of the loan from Cecere to Saperstein and petitioners objected on the grounds that such letters were hearsay. Respondent countered with the argument that they were declarations against interest by reason of acknowledging the existence of a debt and thus were admissible under that exception to the hearsay rule. We admitted the letters in evidence for the limited purpose of showing the details of the loans between Saperstein and Cecere, including any13 repayments of the loans. The complete letters are as follows: Federal Bureau of Investigation, Newark, NJ November 21, 1968 Gentlemen: I am writing you, maybe others can be helped by my plight. To date, I am indebted to Ray )Gyp) DeCarlo, Joe Polverino (known as Joe the Indian) and Daniel Cecere (known as Red Cecere), the total due these three is $115,000 on which I was charged and paid 1-1/2% interest per week, amounting to $1725 per week; the amount of $1725 was delivered weekly to Red Cecere at the Berkeley Bar. On September 13, 1968 I was severely beaten at a place in the rear of Weiland's Restaurant, Route 22, DeCarlo's headquarters--I was then told and given 3 months until December 13, 1968 to pay the entire accumulated amount of $115,000--the interest was then raised to $2000 per week which was delivered to Cecere every Thursday at the Berkeley Bar in Orange, N.J. This was delivered by Lenny Banks, my employee. On Nov. 14, 1968 I cashed 2 checks totaling $31,100 at Essex County State Bank and personally delivered to Cecere $30,000--under threat of death--Cecere, DeCarlo & Polverino also stated many times my wife and son would be maimed or killed-- Please protect my14 family--I am sure they mean to carry out this threat-- Last night from my home, I called DeCarlo at the Harbor Island Spa in Florida, and pleaded for time but to no avail, over the phone DeCarlo stated unless further monies was [sic] paid the threats would be carried out-- Today, Lenny Banks delivered to Cecere $2000 at 11:30 am--Cecere called by phone while I was in Staten Island & I had to send this money today. [signed] Louis B. Saperstein Federal Bureau of Investigation, Newark, NJ November 21, 1968 Gentlemen: This is another Shylock deal with Ray (Gyp) DeCarlo and Peter Landesco (owner of the Living Room -- East Orange). On this accumulated loan the balance now due is $105,000 on which I was paying $1575 per week interest, the rate being 1-1/2% per week. Ray DeCarlo & Peter Landesco were partners in this deal--besides the $1575 per week, I had to pay Ray DeCarlo $300 per week protection--when I was given the severe beating 9/12/68 the interest was reduced to $1000 per week plus $300 per week protection, making a total of $1300 per week. This was delivered to Landesco every Thursday by employee Lenny Banks at the Living Room, Orange, N.J. (Today Lenny Banks delivered15 $1300 to Landesco plus $2000 to Cecere). The total I was paying these 4, namely DeCarlo, Landesco, Cecere and Polverino was $3300 per week interest and protection. The $115,000 and the $105,000 accumulated amounts total $220,000--less $30,000 paid to Cecere, interest remains at $2000 per week for Cecere-- Landesco & DeCarlo on their loans have been receiving interest for 5 years--plus protection of $300 per week. Cecere, DeCarlo & Polverino have been receiving interest for 2 years-- I am enclosing a memo in Landesco [sic] handwriting on a loan of $10,000 [signed] Louis B. Saperstein The admissibility at the time of trial was decided without applying the Federal Rules of Evidence because Public Law 93-12, 87 Statutes 9, provided that the rules would not be effective until approved by Congress and the trial was held before Congress adopted the rules. Although the Federal Rules of Evidence are now law and apply to all proceedings pending in the Tax Court, by their terms they are not applicable if not feasible or they would work injustice. Because they were not applicable at the time of trial and the admissibility of evidence was ruled upon without applying such rules, we decline16 to apply them now in this case. Neither party argues that the Federal Rules of Evidence apply. The admissibility of evidence in the Tax Court is governed by the rules of evidence applicable to trials without a jury in the District of Columbia. Sec. 7453, Internal Revenue Code; Rule 143(a), Tax Court Rules of Practice and Procedure.The leading case applying the declaration against interest exception to the hearsay rule in the District of Columbia is Gichner v. Antonio Troiano Tile and Marble Co.,410 F.2d 238">410 F.2d 238 (D.C. Cir. 1968). In that case, the Court described a declaration against interest as a traditional exception to the hearsay rule, well-recognized in the District of Columbia and it set forth the requirements as follows at page 241: The requirements for a statement coming within this exception were clearly stated in Johnson v. Sleizer,268 Minn. 421">268 Minn. 421, 129 N.W.2d 761">129 N.W. 2d 761, 763 (1946). The court noted that such declarations are admissible when they 'concern a matter of which the declarant was personally cognizant, were against his pecuniary and proprietary interest, and were made with no probable motive to falsify.' The17 Johnson court went on to detail a fourth requirement--that the declarant be unavailable to testify at trial. Petitioners do not deny that Saperstein was unavailable nor that he had personal knowledge of the matters contained in the letters. They base their objections on admissibility on the grounds that the matters to which the declarations relate are not in issue in our proceeding and that the Saperstein letters do not possess sufficient trustworthiness. Petitioners ask us to apply the declaration against interest too strictly. "The clearest example of a declaration against pecuniary interest is an acknowledgment that the declarant is indebted." McCormick, Law of Evidence, sec. 277 (2d ed. E. Cleary 1972). If the acknowledgment of the existence of a debt were admissible as a declaration against interest only in actions between the parties to the debt, or parties in privity to them, it would restrict admissibility to admissions of parties. Declarations against interest and admissions of parties are separate and distinct exceptions to the hearsay rule. McCormick, Law of Evidence, sec. 262 (2d ed. E. Cleary 1972). We recognize that petitioners concede the existence of a debt18 from Saperstein to Cecere but the terms or repayment of the debt cannot otherwise be proved. The terms and payments on the debt are of paramount importance in this case and the Saperstein letters are obviously vitally related to such facts. Petitioners' objections as to the lack of trust-worthiness of the Saperstein letters characterizes them as "squeal letters" to the Federal Bureau of Investigation and petitioners argue that they are self-serving because they accuse Daniel Cecere of illegal acts. Trustworthiness is technically not the test in the District of Columbia. The test is whether the declarant made the statement with no probable motive to falsify. Gichner v. Antonio Triano Tile and Marble Co.,supra.The motive to falsify or misrepresent is described as follows in 5 Wigmore, Evidence, sec. 1464 (Chadbourn rev. 1974): It has sometimes been said, loosely and in analogy to some other hearsay exceptions, that there must be no motive to misrepresent-- this being put as an additional requirement. But there is no such additional requirement. The real object of this mode of statement is to furnish a test for a not uncommon situation--the situation19 in which, along with the disserving interest, there is also a more or less palpable interest to be served by the fact. The real question is: Shall we attempt to strike a balance between the two opposing interests and admit the statement only if on the whole the disserving interest preponderates in probable influence? Or shall we regard the disserving interest as sufficient to admit, and leave the other merely to affect the credit of the statement? The former alternative has been generally followed by the courts. * * * [Fn. ref. omitted.] [5 Wigmore at 338] We conclude that under either test described by Wigmore there was little motive on the part of Saperstein to misrepresent the terms and repayment of the loan. Daniel Cecere admits the loan and receipt of weekly payments. The specificity with which Saperstein describes the debt convinces us that he did not misrepresent the terms or repayments of the debt. Saperstein's letters were admitted in the criminal trial of Cecere and DeCarlo, so petitioners obviously could expect them to be offered in the instant case. If Daniel Cecere desired to dispute the statements made in the letters, he had ample opportunity to do so. On June 13, 1973, we20 granted petitioners' motion for continuance and a change of place of trial from Newark, New Jersey, to Atlanta, Georgia, to enable Petitioner Daniel Cecere to testify in this trial. On September 27, 1973, we granted petitioners' motion to change the place of trial from Atlanta to Newark on the grounds that petitioners did not intend to rely on the testimony of Petitioner Daniel Cecere. In the pleadings herein, "Petitioner Daniel Cecere admits the loan to Louis B. Saperstein, but denies that the weekly payments received constituted income, alleging that said payments constituted repayment of the loan." In petitioners' opening brief, "Petitioner Daniel Cecere admits that he participated in a joint venture whereby monies were loaned to a certain Louis Saperstein." To allow the declarations against interest of Saperstein wherein he admits the debt and its terms and repayment but exclude the remaining contents of the letters is not unlike admitting in evidence admissions of the petitioner but excluding self-serving statements. The Court of Appeals for the Fifth Circuit approved, with the following language, our holding in such a situation in Stein v. Commissioner,322 F.2d 78">322 F.2d 78, 82 (5th Cir. 1963),21 affg. a Memorandum Opinion of this Court: It was not error for the Tax Court to accept the entries in Stein's notebooks that showed daily net gambling winnings and fail to give credence to the entries in said notebooks that showed daily net losses. The entries showing daily net gambling winnings were in the nature of declarations against interest while the entries showing daily net losses were in the nature of self serving declarations. * * * Accordingly, we reaffirm our holding at the time of trial as to the admissibility of the Saperstein letters for a limited purpose and we have found the following as facts from such letters: (1) As of November 21, 1968, Saperstein was indebted $115,000 to Ray DeCarlo, Joe Polverino and Daniel Cecere; (2) He paid interest at the rate of 1-1/2 percent per week or $1,725 per week; (3) That amount was delivered weekly to Cecere at the Berkeley Bar by Saperstein's employee, Lenny Banks; (4) On September 13, 1968, the lenders gave Saperstein 3 months to pay off the loan and raised the interest to $2,000 per week; (5) On November 14, 1968, Saperstein delivered $30,000 to Cecere; (6) Lenny Banks delivered $2,000 to Cecere on November 21, 1968, at22 11:30 a.m. after Cecere called Saperstein and demanded that payment on that day; (7) Saperstein paid interest to Cecere, DeCarlo and Polverino for two years prior to November 21, 1968. The statements in Saperstein's letters are corroborated to a great extent by the testimony of a Mr. Rocco Noschese who worked at the Berkeley Bar. Noschese testified that he was employed as a cleanup man beginning in 1966 and continued in such employment through 1968. He arrived for work at 6:30 a.m. each day and worked until 12:30 p.m. when the manager arrived to open the bar for business. In November 1968, a Mr. Lenny Banks came to the bar to meet Ray DeCarlo and after waiting for some time he handed an envelope to Noschese and directed him to deliver it to DeCarlo when he arrived. Noschese complied by delivery of the envelope without examination of its contents. Thereafter, Banks made similar weekly deliveries of the envelopes and DeCarlo picked them up on the same dates they were delivered by Banks to Noschese. DeCarlo did not exhibit the contents of the envelopes to Noschese but on one occasion Noschese heard DeCarlo counting the contents. In November 1968, the deliveries of envelopes by Banks23 ceased. Althouth Saperstein recited in his letters that the payments were delivered by Banks to Cecere and Noschese testified that Banks always gave the envelopes to him for DeCarlo and never gave them to Cecere, there is no dispute that Cecere and DeCarlo were partners in the loan to Saperstein and Saperstein would, therefore, consider a payment to DeCarlo as a payment to Cecere. The fact that Noschese only began receiving envelopes in September 1968 does not disprove Saperstein's statement in his letters that payments were made in 1967. The mode or place of payment likely was changed or the payments were made when Noschese was not on duty. Cecere's admission of receiving weekly payments in the pleadings supports a finding of payments received in 1967. Petitioners, in their reply, claim a bad debt deduction for the year 1968 by reason of the worthlessness of the Saperstein note due to Saperstein's death but they never alleged or attempted to prove the unpaid balance of the debt at Saperstein's death. If petitioners were serious about the bad debt deduction, they would have attempted to prove the amount of the unpaid balance and Petitioner Daniel Cecere was in a position to offer24 such proof. Petitioners have the burden of proving the bad debt and their failure to offer such proof leads to the conclusion that the proof, if offered, would be unfavorable. Wichita Terminal Elevator Co.,6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947); Samuel Pollock,47 T.C. 92">47 T.C. 92, 108 (1966), affd. 392 F.2d 409">392 F.2d 409 (5th Cir. 1968); Stoumen v. Commissioner,208 F.2d 903">208 F.2d 903 (3d Cir. 1953), affg. a Memorandum Opinion of this Court. "The production of weak evidence when strong is available can lead only to the conclusion that the strong would have been adverse. Clifton v. United States,4 How. 242">4 How. 242, 247. Silence then becomes evidence of the most convincing character." Interstate Circuit v. United States,306 U.S. 208">306 U.S. 208, 226 (1939). After considering the entire record, we are convinced that Petitioner Daniel Cecere received interest income from Louis B. Saperstein in each of the taxable years 1967 and 1968 which he failed to report on his income tax returns for those years and such failure was with the intent to evade tax. Our finding of fraud for the taxable year25 1967 extends the period of limitations on assessment of additional tax for that year indefinitely. Sec. 6501(c), I.R.C. 1954. Assessment of additional tax for the taxable year 1967 is, therefore, not barred by the running of the period of limitations on assessment. Petitioners contend that the return for 1967, not signed by Petitioner Joan Cecere, was not a joint return and they also contend that Joan Cecere qualifies as an "innocent spouse" under section 6013(e) of the Code and is, therefore, not liable for the deficiencies in tax or fraud penalty for 1967 or 1968. The two contentions are inconsistent. In order to qualify as an "innocent spouse" the return must be a joint return. Sec. 6013(e)(1)(A), I.R.C. 1954. Mary Lou Galliher,62 T.C. 760">62 T.C. 760 (1974), affd. in unpublished opinion (5th Cir., Apr. 24, 1975). The only element missing from the 1967 return which would conclusively establish that the return was joint was the signature of Joan Cecere. The return bore both names in the caption block which designates the return to be a joint return for married persons. Both spouses were claimed as exemptions and all children were claimed as dependents. Joan Cecere's26 income from the Berkeley Bar was reported on the return and the form W-2 reporting her earnings and withholding tax from her earnings was attached. Income and expenses from rental property jointly owned were included on the return. She testified that she knew such earnings represented taxable income. She did not testify that she filed a separate return for that year. She did not testify that she had ever filed a separate return. She filed a joint return with her husband, Daniel Cecere, for 1968, 1969 and 1970, all of which she signed. She and her husband customarily relied upon an accountant to prepare the income tax returns. An income tax return need not be signed by both spouses to constitute a joint return if the spouses intend it to be a joint return. W. L. Kann,18 T.C. 1032">18 T.C. 1032, 1044 (1952), affd. 210 F.2d 247">210 F.2d 247 (3d Cir. 1953), cert. denied 347 U.S. 967">347 U.S. 967 (1954). Whether the parties intend it to be a joint return is a question of fact. Although it is not conclusive, the inclusion in the return of income and deductions of the wife has been regarded as a factor supporting the conclusion that the return was the joint return of the husband and27 wife. Irving S. Federbush,34 T.C. 740">34 T.C. 740, 756 (1960), affd. per curiam 325 F.2d 1">325 F.2d 1 (2d Cir. 1963). We conclude from all the facts that Joan Cecere intended that the 1967 return be a joint return with her husband, Daniel Cecere. Estate of Ralph B. Campbell,56 T.C. 1">56 T.C. 1 (1971). We believe Joan Cecere's failure to sign the return was an oversight and raising the issue for the first time at trial was an after-thought. Petitioners cite no cases in either of their briefs to support their position. Having held that the return for 1967 was joint, we must decide whether Joan Cecere qualifies as an "innocent spouse" under section 6013(e). To qualify as an "innocent spouse" Joan Cecere must satisfy three criteria. She must establish (1) that she filed a joint return from which income attributable to her husband and in excess of 25 percent of the gross income stated in the return was omitted; (2) that she neither knew nor had reason to know of the omission; and (3) that under all the facts and circumstances (including whether she benefited significantly from the omitted income), it would be inequitable to hold her liable for the tax on the omitted28 income and the fraud penalty. Mary Lou Galliher,supra.We have found that there were omissions of interest income from the returns for 1967 and 1968 in the respective amounts of $29,900 and $27,941. These amounts exceed 25 percent of the gross income reported for those years. Respondent, in his opening brief, argues that petitioners have failed to prove the 25 percent omission for 1968 but does not explain wherein the proof is faulty. It is clear to us from viewing the entire record that petitioners have proved a 25 percent omission for the taxable year 1968. We believe the testimony of Joan Cecere that she did not know of the omission of income. We believe that she had no knowledge of her husband's loan activities with Saperstein. Based upon her testimony as to her activities in the taxable years 1967 and 1968, including the standard of living enjoyed by petitioners, we conclude that Joan Cecere had no reason to suspect or know of the omission. Her testimony was forthright and unchallenged. Respondent's argument as to her knowledge or suspicion of the omission is weak and unconvincing. We hold, therefore, that Joan Cecere has satisfied the second requirement29 of qualifying as an "innocent spouse." The final requirement is that Joan Cecere did not benefit significantly from the omission of income so it would be inequitable to hold her liable for the tax and fraud penalty. Petitioners have failed to show that she did not benefit significantly, instead they merely argue that money used as a down payment to purchase "Silver Bay real estate" could be assumed to have come from an accumulation from prior years. The burden of proof is on petitioners to establish that it came from accumulations if they hope to prevail. Petitioners argue that the property was purchased by them as tenants by the entirety and payments were made on the loan in 1967 and 1968. Petitioners argue further that if Joan Cecere predeceases Daniel Cecere her interest will terminate. Such an argument is absurd. Obviously, the converse is true: if Daniel Cecere predeceases Joan Cecere, she takes all. Petitioners failed to establish how substantial the Silver Bay property is. Although there was testimony as to its acquisition and the payments made on the loan, neither petitioners nor respondent has requested us to find any facts relating to that property. Our rules provide*30 that the parties shall propose findings of fact in the form of numbered statements referring to the record to support such request. Rule 151(e), Tax Court Rules of Practice and Procedure. Petitioners did not comply with the rule and petitioners have the burden of proof. We decline to ferret out the facts to prove petitioners' contention that Joan Cecere did not benefit substantially fromthe omission. We do not, therefore, find any facts relating to the acquisition of the Silver Bay property. Accordingly, we hold that petitioners have failed to prove that Joan Cecere qualifies under the third requirement of section 6013(e) and it follows that she is not relieved from liability as an "innocent spouse." There is no merit to petitioners' claim for a bad debt deduction in 1968 by reason of the death of Saperstein. As explained above, the record is devoid of evidence of the unpaid balance. Moreover, there is no evidence of the lack of collectibility. Petitioners have failed to sustain their burden of proof and no deduction is allowable. Decision will be entered under Rule 155.Footnotes1. All Code section references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620457/	Jacques Spira v. Commissioner. Maurice Hymans v. Commissioner. Arnold Spira v. Commissioner. Joseph Hymans v. Commissioner.Spira v. CommissionerDocket Nos. 12990, 12991, 12992, 12993.United States Tax Court1948 Tax Ct. Memo LEXIS 160; 7 T.C.M. (CCH) 371; T.C.M. (RIA) 48110; June 18, 1948160 Harry Kwestel, Esq., 261 Broadway, New York, N. Y., for the petitioners. Whitfield J. Collins, Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined deficiencies in the income taxes of the petitioners for 1943, in the following amounts: 12990Jacques Spira$1,197.3812991Maurice Hymans1,214.5212992Arnold Spira1,205.4012993Joseph Hymans1,193.44 The sole issue is whether the Commissioner erred in holding that the entire net income of Spira & Hymans, a partnership, was taxable to the petitioners rather than to the petitioners and their wives in accordance with their partnership agreement. Findings of Fact The petitioners filed their income tax returns for the calendar year 1943 with the collector of internal revenue for the second district of New York. The petitioners are engaged in the diamond business. Joseph Hymans and Arnold Spira started the business in Antwerp, Belgium, in 1921. They later formed a partnership with their sons, Maurice Hymans and Jacques Spira. All of the petitioners resided in Belgium and were married there. They and their wives were subject to the community161 property system as established by the Belgian Civil Code. Community property, in the absence of an antenuptial agreement, included all the assets of both spouses except certain realty acquired after marriage. Each wife had a vested porperty right in the assets of the community equal to that of her husband. He was the sole manager of the property, but he had to act so as to protect her interest. Joseph Hymans and his wife were married in 1906. They made no antenuptial agreement. The other three petitioners entered into antenuptial agreements which limited community property to the assets acquired after marriage. Arnold Spira and his wife were married in 1907. His net worth was about $2,000 at the time of the marriage. Jacques Spira married Florence in 1934. His net worth at the time of the marriage was about $7,500. His interest in the firm was increased to 25 per cent after his marriage. Maurice and Suzanne Hymans were married in 1935. He was a partner in the firm and had an interest of 25 per cent at the time of his marriage. His net worth then was about $10,000. The partnership business in Antwerp was terminated by the German invasion in September 1939. The value of the firm's162 assets at that time was between $700,000 and $750,000. Jacques and Maurice withdrew diamonds valued at about $65,000 which they gave to Florence for safekeeping, because she was an American citizen and under the protection of the American Consul. Joseph, Maurice and Jacques had arrived in New York by December 1940. Arnold arrived in January 1941. Joseph brought with him diamonds valued at about $185,000. Florence brought the diamonds which Jacques and Maurice had given to her. Virtually no other assets of the firm were salvaged from Belgium. The firm had $64,262.45 on deposit with the Guaranty Trust Company of New York. The petitioners entered into business in New York in 1940 by forming a corporation. The corporation was dissolved on July 31, 1942. The petitioners then formed a general partnership. The assets of the corporation were transferred to the partnership. The petitioners were equal partners. None of the wives waived their rights to community property. They wanted to know whether their rights under community property were protected in New York as they had been in Belgium. Florence asked that her capital be placed under her own name. The matter was discussed with the163 petitioners early in 1943. The petitioners decided to form a limited partnership with their wives as a result of those conversations. The petitioners told their accountant that they wanted to put $25,000 in their wives' names. He advised them to give checks of $25,000 to their wives, and that was done by withdrawing the money from the business. Each of the wives then contributed $25,000 to the limited partnership which was formed on May 1, 1943. The accountant had not been advised that the wives were claiming interests in the business because of their rights under community property. The petitioners, acting on the accountant's advice, filed gift tax returns with respect to the checks for $25,000. However, the checks were intended as transfers of part of the wives' interests to their respective names, and not as gifts. The petitioners and their wives signed a limited partnership agreement on May 1, 1943. The agreement provided in part that the petitioners were general partners; their wives were limited partners; each of the wives contributed $25,000 in cash; and the share of each wife in the profits was 10 per cent of the annual net profits in excess of $20,000. There was no164 provision for the wives to receive property other than cash in return for their contributions. The assets of the limited partnership in May 1943, were about $391,000. The firm made profits of over $35,000 during the remainder of 1943. $2,249.19 was credited to the account of each wife as her share in the profits under the partnership agreement. None of the wives performed any services for the partnership. Opinion MURDOCK, Judge: The petitioners are Belgians who were driven out of business in Antwerp by the German invasion in the fall of 1939. They all eventually escaped to this country and set up a new business in New York. Their wives, in Belgium, held vested interests in their property as members of a marital community. The wives, after learning that the law in New York was different from that in Belgium, asked that their ownership of a part of the assets being used by the husbands be recognized. That was accomplished by making them limited partners in a partnership. The arrangement was fair and proper. They each contributed capital at least in the amount stated. It was essential to the business. There is no reason for failing to recognize them as limited partners in accordance165 with their agreement. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620460/	ESTATE OF HARRY W. HAHN, DECEASED, HARRY W. HAHN, JR., AND ARTHUR H. HAHN, SURVIVING EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hahn v. CommissionerDocket No. 90310.United States Board of Tax Appeals38 B.T.A. 3; 1938 BTA LEXIS 927; July 8, 1938, Promulgated 927 The amount receivable on life insurance policies on the life of a decedent and payable to his wife may not be included in the decedent's gross estate under section 302(g) of the Revenue Act of 1926, where the policies were taken out by and for the benefit of and were owned by a corporation in which the decedent was a stockholder, officer, and director. Theodore D. Peyser, Esq., for the petitioners. Eugene Smith, Esq., for the respondent. MURDOCK 3 The Commissioner determined a deficiency of $8,847.84 in estate tax. The sole issue for decision is whether the Commissioner erred in including in the gross estate $50,000 representing the proceeds of two policies of insurance on the life of the decedent. FINDINGS OF FACT. The decedent was one of several brothers who managed a retail store in the city of Washington, D.C. The store was owned by a corporation known as William Hahn & Co. The stock of the corporation was closely held by members of the Hahn family. The principal stockholders were the decedent and his brothers Edwin and Gilbert Hahn. They were also directors and the principal officers of the corporation. The corporation decided928 in 1927 to take out policies of life insurance upon the lives of these officers. Insurance was taken in the amount of $50,000 on the life of each. The policies were taken out by the corporation. The corporation paid all premiums on the policies. It had exclusive possession of the policies. The insured was not permitted to borrow on the policies or to surrender them for cash. The purpose in taking out the insurance was to assure each family of enough to live on in case any of the officers died. A substantial part of the income of each was from his salary as an 6 officer of William Hahn & Co.The corporation took this means of avoiding embarrassing demands which might otherwise be made for dividends by members of the family of any officer who might die. The policies were payable either to the family or estate of the insured, as the assured might direct. He could not otherwise change beneficiaries. Two policies on the life of the decedent were in effect at the time of his death. They resulted from conversions of the original policies taken out as above described and were substitutes for those original policies. Each was for $25,000. The original beneficiary was929 the insured's executors or administrators, but the beneficiaries had been changed to the insured's wife, if living, otherwise, his two children. The wife was living and received the proceeds of the policies. The policies did not indicate on their face that the insured was in any way restricted in the use of the policies or that he was not the absolute owner of them. The Commissioner included the amount of the proceeds in the decedent's gross estate under section 302(g) of the Revenue Act of 1926. OPINION. MURDOCK: Section 302(g) of the Revenue Act of 1926 includes in the gross estate "the excess over $40,000 of the amount receivable by all other beneficiaries [than the executor] as insurance under policies taken out by the decedent upon his own life." That provision does not cover these policies, since they were not taken out by the decedent. Furthermore, he did not own the policies and actually had none of the indicia of ownership such as possession, power to pledge, or power to surrender. He had a limited power to name and change the beneficiary, but that was only with the approval of the owner, William Hahn & Co. The Commissioner erred in including the value of these930 policies in the decedent's gross estate. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620462/	Bernard Resnik and Beverly Resnik, Petitioners v. Commissioner of Internal Revenue, RespondentResnik v. CommissionerDocket No. 8610-73United States Tax Court66 T.C. 74; 1976 U.S. Tax Ct. LEXIS 128; April 12, 1976, Filed 128 Decision will be entered for the respondent. A limited partnership, of which petitioner-husband was a limited partner, on the beginning and ending day of its initial taxable year (being a 1-day taxable year) prepaid interest for 4 years and 3 months hence. The partnership reported no income and no other deductions for such 1-day taxable year. Petitioner-husband's share of the partnership loss created by the prepaid interest deduction was claimed by petitioners on their joint return which the Commissioner disallowed under sec. 446(b), I.R.C. 1954, on the grounds that the prepaid interest deduction materially distorted the income of the partnership. Held: The Commissioner did not abuse the authority granted to him in sec. 446(b) by disallowing the deduction for prepaid interest claimed by the partnership in order to clearly reflect income of the partnership. Andrew A. Sandor, 62 T.C. 469">62 T.C. 469 (1974), followed. Disallowance of the prepaid interest deduction claimed by the partnership eliminates the partnership loss and the share thereof claimed by petitioners. Because of the distortion of partnership income caused by the prepaid interest deduction, 129 it is not necessary to decide whether, under different circumstances, a determination should be made as to whether the prepaid interest claimed by the partnership results in a distortion of the income of one or more of the partners. Lawrence M. Schulner, for the petitioners.Robert E. Casey, for the respondent. Goffe, Judge. GOFFE75 OPINIONThe Commissioner determined a deficiency in the Federal income tax of petitioners for the taxable year 1969 in the amount of $ 15,135.30. The sole issue for decision is whether petitioners are entitled to deduct their claimed distributive share of a partnership131 loss produced by the prepayment of interest by the partnership for a period in excess of 4 years.All of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein and adopted as our findings. The case has been submitted under Rule 122 of the Tax Court's Rules of Practice and Procedure.Petitioners Bernard and Beverly Resnik, husband and wife, resided in Chicago, Ill., at the time of the filing of their petition. They filed a joint Federal income tax return for the taxable year 1969 with the Internal Revenue Service.During the taxable year 1969, petitioner Bernard Resnik (hereinafter referred to as petitioner) was a limited partner in the San Jose Co., an Illinois limited partnership. The San Jose Co. was one of 30 related limited partnerships associated with Capital Concepts Corp., a California corporation, in a 1969 real estate transaction. At all times material herein, Lawrence M. Schulner, Alvin B. Glatt, and N. C. Van Berkel were, respectively, president, vice president, and manager of Canadian Operations of Capital Concepts. The San Jose Co. and 29 related partnerships were formed on December 31, 1969, in either Illinois132 (16), California (13), or Canada (1). Schulner was the general partner of the 13 partnerships formed in California. Glatt was the general partner of the 16 partnerships formed in Illinois, including the San Jose Co., Van Berkel was the general partner for the partnership formed in Canada.During 1969 Capital Concepts entered into certain purchase agreements with the owners of improved real properties situated in Texas. The Texas properties consisted of eight apartment complexes containing a total of 892 units. These real estate transactions involved the sale of the Texas properties to Capital Concepts and then, simultaneously therewith, the sale of all or substantially all of the same Texas properties from Capital Concepts to the 30 related partnerships. The escrow "closing date" for these simultaneous sales was on December 31, 1969. The simultaneous transactions between Capital Concepts and 76 each of the 30 related partnerships were identical in most material respects.In accordance with the terms of the several sales agreements, all or substantially all of the money that was paid by the 30 related partnerships to Capital Concepts on December 31, 1969, was characterized133 and treated as "prepaid interest" and totaled the sum of approximately $ 3,257,330. The San Jose Co. purchased a 3.333 percent undivided interest in the Texas properties from Capital Concepts for a total consideration of $ 296,080. The terms of the sale required, inter alia, payment by the San Jose Co. to Capital Concepts as follows:(a) $ 10,000 downpayment (to be applied to principal);(b) The execution of a promissory note, secured by a deed of trust, in the amount of $ 286,080 and bearing interest at the rate of 9.62 percent per annum, with payments of $ 2,083.34 per month until paid in full; and,(c) A $ 115,000 payment of prepaid interest, representing interest for a period of approximately 4 years and 3 months.The San Jose Co. was formed with one general partner and nine limited partners. The total capital contribution of the nine limited partners was $ 125,000. The general partner made no capital contribution. The petitioner's capital contribution was $ 40,000, which represented a 32-percent interest in the San Jose Co. Pursuant to the agreement of sale of an undivided interest in the Texas properties from Capital Concepts to the San Jose Co., the San Jose Co. paid 134 to Capital Concepts $ 115,000 as a prepaid interest payment for an approximate period of 4 years and 3 months. This $ 115,000 payment was made on December 31, 1969, which was the day the partnership commenced business and was the first and last day of its initial taxable year. The interest was paid solely out of the capital contributed by the limited partners.On the partnership return of income (Form 1065) filed for the initial taxable year, beginning and ending on December 31, 1969, the San Jose Co. reported an ordinary loss of $ 115,000. The ordinary loss consisted entirely of the prepaid interest expense deduction claimed on the same return. This was the only expense incurred or paid by the San Jose Co. for its initial taxable year beginning and ending on December 31, 1969. The interest expense deduction of $ 115,000 represented the December 31, 77 1969, payment of the San Jose Co. to Capital Concepts of prepaid interest for an approximate period of 4 years and 3 months.The San Jose Co. employed the cash receipts and disbursements method of accounting in the computation of its taxable income and in maintaining its books and records.On the 1969 joint Federal income 135 tax return of petitioners they claimed a $ 36,800 deduction representing petitioner's distributive share of the $ 115,000 partnership loss of the San Jose Co. for the taxable year ended December 31, 1969. Petitioners' capital investment in the partnership was $ 40,000. On their joint Federal income tax return for 1969, petitioners reported $ 20,836 adjusted gross income and $ 10,426 taxable income. The Commissioner, in his statutory notice of deficiency, disallowed the loss of $ 36,800 and determined --that the prepaid interest deducted by the San Jose Co. partnership for the year ended Dec. 31, 1969, represented interest for a period extending more than 12 months beyond the taxable year of payment, therefore, materially distorting income. The deduction taken by the San Jose Co. partnership has been disallowed. On your return for year ended Dec. 31, 1969 you deducted $ 36,800.00 as your share of the loss from San Jose Co. partnership. Since the prepaid interest deducted by that partnership has been disallowed and the partnership loss is eliminated, the deduction taken by you is disallowed.Petitioners assert that they are entitled to deduct their entire distributive share 136 of the San Jose Co. partnership loss. The loss is due solely to the prepayment of interest for 4 years and 3 months, paid on the only day of the partnership's initial taxable year which began and ended on December 31, 1969. Petitioner's assertion is based on three alternative grounds: (1) The San Jose Co. partnership's taxable income was not materially distorted by the interest payment; (2) even if the partnership's taxable income was materially distorted, petitioner's income was not materially distorted; and (3) disallowance of the interest expense and resulting loss would result in an inaccurate reflection of petitioners' income because they report their income and claim their deductions on the cash receipts and disbursements method of accounting. Petitioners rely on John D. Fackler, 39 B.T.A. 395">39 B.T.A. 395 (1939); Court Holding Co., 2 T.C. 531 (1943), revd. and remanded 143 F.2d 823">143 F.2d 823 (5th Cir. 1944), revd. 324 U.S. 331">324 U.S. 331 (1945); L. Lee Stanton, 34 T.C. 1">34 T.C. 1 (1960), to support their contention that prepaid interest is deductible and that a denial of137 the deduction would improperly place taxpayer on the accrual 78 method of accounting as to that item on their return while leaving them on the cash method of accounting as to the other items on the return. Respondent contends that the prepaid interest should be disallowed because it results in a material distortion of both the partnership income and petitioners' taxable income.Section 163(a) provides that "There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness." The $ 115,000 payment is concededly interest and respondent has not challenged the characterization of the payments as being anything other than interest. Compare Kenneth D. LaCroix, 61 T.C. 471 (1974); Norman Titcher, 57 T.C. 315 (1971). Section 446(b) vests broad discretion in the Commissioner to insure that petitioner's method of accounting and "computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income." Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446 (1959); Fort Howard Paper Co., 49 T.C. 275 (1967);138 Photo-Sonics, Inc., 42 T.C. 926 (1964), affd. 357 F.2d 656">357 F.2d 656 (9th Cir. 1966). Respondent has used the authority granted him under section 446(b) in making his determination that San Jose's method of accounting for the $ 115,000 in prepaid interest materially distorts the income of the partnership. Respondent's powers are not limited to a rejection of only an overall method of accounting but, instead, he may direct his corrective powers to the treatment of an individual item of income or expense. Sec. 1.446-1(a), Income Tax Regs.; Peoples Bank & Trust Co., 50 T.C. 750">50 T.C. 750 (1968), affd. 415 F.2d 1341">415 F.2d 1341 (7th Cir. 1969). Respondent's determination will generally not be overturned by the courts in the absence of evidence that he has abused his discretionary powers, Schram v. United States, 118 F.2d 541">118 F.2d 541 (6th Cir. 1941); Michael Drazen, 34 T.C. 1070 (1960), and petitioner bears a heavy burden in establishing that abuse. Fort Howard Paper Co., supra;Photo-Sonics, Inc., supra.139 First, we must decide whether we should examine the partnership, the partner, or both to see if the prepaid interest deduction has distorted income. There is a longstanding difference in philosophy as to whether a partnership is an entity or an aggregate of its members. The Supreme Court most recently explained the concepts as follows in United States v. Basye, 410 U.S. 441">410 U.S. 441, 448 (1973):79 Section 703 of the Internal Revenue Code of 1954, insofar as pertinent here, prescribes that "[the] taxable income of a partnership shall be computed in the same manner as in the case of an individual." 26 U.S.C. Sec. 703(a). Thus, while the partnership itself pays no taxes, 26 U.S.C. Sec. 701, it must report the income it generates and such income must be calculated in largely the same manner as an individual computes his personal income. For this purpose, then, the partnership is regarded as an independently recognizable entity apart from the aggregate of its partners. Once its income is ascertained and reported, its existence may be disregarded since each partner must pay tax on a140 portion of the total income as if the partnership were merely an agent or conduit through which the income passed.The Commissioner disallowed the prepaid interest deduction of the partnership, the San Jose Co., under the discretion granted him by section 446(b) of the Code which provides:(b) Exceptions. -- If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income.The language of section 446(b) quoted above refers to the computation of taxable income which, when considered in light of the language of the Supreme Court in United States v. Basye, supra, leads to the conclusion that at least some inquiry as to whether income is clearly reflected must be made at the partnership level.The computation of taxable income at the partnership level takes into account all items of income and all deductible items in their original state. After the taxable income is computed certain items do not lose their identity when passed through to the partners; 141 i.e., capital gains and losses, section 1231 gains and losses, charitable contributions, dividends, taxes paid to foreign countries. Sec. 702, I.R.C. 1954. The primary purpose behind this provision is that the treatment of such items on each of the partner's returns would differ because of his receipt of identical items outside the partnership which may be offset against the partnership items or because limitations are imposed on the total amount of such deductions allowable in a single taxable year.Interest is not one of the items of partnership income that retains its identity when passed through to the partner unless it would result in an income tax liability of the partner different than if not reported by the partner separately; i.e., the effect on the retirement income credit. Sec. 1.702-1(a)(8)(ii), Income Tax 80 Regs. Here, no interest deduction was passed through to petitioner-partner. Petitioners claimed their share of the partnership loss; they did not claim a deduction for interest.Section 446(b) of the Code is aimed at preventing the distortion of income. The causes for distortion include, primarily, improper accounting methods, improper accounting periods, 142 failure to use inventories, unusual income or expense items extending over more than one accounting period, and the timing of income and expense items outside the proper accounting period. Petitioner has cited no case, nor have we found any, which focuses attention on the accounting method or accounting period at the partner level instead of the partnership level. The partnership accounting period may or may not be the same as that of all of the partners. Sec. 706(b), I.R.C. 1954. The accounting method adopted by the partnership is separate and distinct from that of the partners. Because distortion of income under section 446(b) is so closely identified with accounting methods and accounting periods and the case law on accounting methods and accounting periods consistently focuses on the partnership level, section 446(b) must, at least, first be applied to the partnership level. The method of accounting of a partnership is determined at the partnership level. D. L. Wheelock, 10 B.T.A. 540">10 B.T.A. 540, 542 (1928). In John G. Scherf, Jr., 20 T.C. 346">20 T.C. 346, 347 (1953), in a Court-reviewed opinion we explained the significance143 of the partnership return which is consistent with our reasoning that we must first look at the possible distortion of income at the partnership level.The partnership return is more than just an information return. It has consequences that go beyond the mere disclosure to the Commissioner of profits of the enterprise. For example, the method of accounting used by the partnership in keeping its books and making its returns is conclusive on the individual partners. Thus, a partner who is on the cash basis must nevertheless account for his distributive share of the profits computed by the accrual system of accounting, whether or not he has in fact received such profits, if the partnership keeps its books and reports its income on the accrual basis. Percival H. Truman, 3 B.T.A. 386">3 B.T.A. 386; Truman v. United States, 4 F. Supp. 447">4 F.Supp. 447; Fritz Hill, 22 B.T.A. 1079">22 B.T.A. 1079, 1083; W. J. Burns, 12 B.T.A. 1209">12 B.T.A. 1209; Laurence D. Miller, 7 B.T.A. 581">7 B.T.A. 581, 583. Indeed, a partner is accountable for his distributive share of the profits even though state law forbids144 current distribution. Heiner v. Mellon, 304 U.S. 271">304 U.S. 271, 280-281.Similarly, even though the individual partner keeps his books and reports his income on a calendar year basis, he must nevertheless include his share of his partnership's income for the full fiscal year ending within the calendar year if 81 the partnership has elected to keep its books and file returns on a fiscal year basis. Section 188. And in computing its net income under the revenue laws, it is generally the partnership, not the individual partner, that exercises the various options open to taxpayers in computing net income under the Code. * See also E. J. Frankel, 61 T.C. 343">61 T.C. 343 (1973), affd. in an unpublished opinion (3d Cir. 1974).In addition to the reasons stated above for an examination at the partnership level, there are practical reasons why that must be the starting point. Distortion of income and the adoption and use of an accounting method are within the control of the partnership not the partners, particularly where, as here, we have the case of a limited partner. Distortion of income by prepayment of interest is controlled145 by the partnership when it enters into an agreement to pay interest. A limited partner has no control over the timing of an interest payment by the partnership. Because the partnership controls the timing of the payment, a scrutiny of that payment as to whether it distorts income must, therefore, first be made at the partnership level. Moreover, if the examination were made first at the partner level to see whether the prepayment of interest by the partnership distorted the partner's income, different results might flow to the different partners, all resulting from an act of the partnership over which the limited partners had no control. Accordingly, we conclude that we must first look at the partnership level to ascertain whether the prepayment of interest results in a distortion of income.The partnership on its 1-day initial taxable year, December 31, 1969, prepaid interest for approximately 4 years and 3 months. The interest was paid out of the capital contributed by the limited partners because the partnership had no other funds. The effect was to give petitioner-partner, on the last day of his taxable year, a deduction for a partnership loss of $ 36,800 for a capital contribution146 made the same day of $ 40,000. This was the result because the partnership during its 1-day initial taxable year earned no income and neither paid nor incurred any other deductible expenses. This is more than a distortion of income; it is "a distortion of non-income." Petitioners have utterly failed to show that the Commissioner abused the discretion granted to him in section 446(b) of the Code in disallowing the prepaid interest deduction to more clearly reflect income.82 Having found the income of the partnership to be distorted by the prepaid interest deduction it is not necessary for us to see whether the income of petitioner-partner is distorted. We do not decide, whether, under different circumstances, the deduction of prepaid interest by a partnership may not materially distort the income of the partnership but, nevertheless, might distort the partner's income necessitating an examination for distortion at the partner level.Petitioners rely upon John D. Fackler, 39 B.T.A. 395">39 B.T.A. 395 (1939); Court Holding Co., 2 T.C. 531">2 T.C. 531 (1943), revd. and remanded 143 F.2d 823">143 F.2d 823 (5th Cir. 1944), revd. *147 324 U.S. 331">324 U.S. 331 (1945); L. Lee Stanton, 34 T.C. 1 (1960). In Andrew A. Sandor, 62 T.C. 469">62 T.C. 469 (1974), a Court-reviewed case, we rejected petitioner's contentions as to the applicability of those cases on identical grounds urged by petitioner here.We reaffirm our decision in Andrew A. Sandor, supra, as we have consistently continued to do in G. Douglas Burck, 63 T.C. 556">63 T.C. 556 (1975), affd. 533 F.2d 768">533 F.2d 768 (2d Cir. 1976, 37 AFTR 2d 76-1009, 76-1 USTC par. 9283); James V. Cole, 64 T.C. 1091">64 T.C. 1091 (1975); S. Rex Lewis, 65 T.C. 625">65 T.C. 625 (1975). Petitioner here has presented nothing new or novel other than what was argued in Sandor except the partnership vs. partner distortion question which we have decided here.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620464/	ESTATE OF AUGUSTA C. NOLAND, DECEASED, MILDRED N. PEAKE, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Noland v. Comm'rDocket Nos. 29191-81, 29192-81. United States Tax CourtT.C. Memo 1984-209; 1984 Tax Ct. Memo LEXIS 467; 47 T.C.M. (CCH) 1640; T.C.M. (RIA) 84209; April 24, 1984. 467 In 1973, the decedent transferred stock to her four daughters as part of a settlement of litigation involving a bitter family dispute. In return she received, among other things, a release from all claims against her and broad powers to consume principal as well as income of a real estate trust. Held, the transfer of stock was made for an adequate and full consideration in money or money's worth and was not a taxable gift. Stock transferred by decedent to one daughter was not transferred on corporation's books but as dividends were delivered to the daughter, she deposited them in the decedent's bank account. Held,further, the value of stock is not includible in the decedent's gross estate under section 2036 because the transfer was made for adequate consideration, and there was no express or implied understanding reached contemporaneously with the transfer between the daughter and the decedent that the decedent should retain enjoyment of the property. Under the terms of trust decedent could demand an annual sum from income or principal. In each year from 1973 through 1977, she withdrew less than the minimum amounts available. In 1978, she withdrew no funds from468 the trust. Held,further, the undrawn amounts were not includible in estate as debts due decedent at her death but the decedent held a general power of appointment over the unclaimed amounts which was not limited by an ascertainable standard. Held,further, the amount includible in her gross estate is subject to the lapse limitation of section 2041(b)(2). Lee C. Bradley, Jr., for the petitioner. Jillena A. Warner, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: The respondent determined that in Docket Number 29192-81 there was a deficiency in the gift tax due from Augusta470 C. Noland, deceased, for the year 1973 in the amount of $34,067.75 and that in Docket Number 29191-81 there was a deficiency in the estate tax due from the Estate of Augusta C. Noland in the amount of $13,062.26. The cases have been consolidated for trial, briefing, and opinion. The issues for decision are: (1) whether the transfer of 714 shares of stock in Commercial Realty Company by Augusta C. Noland to her four daughters constituted taxable gifts; (2) whether 285 shares of stock in Realty Investment Planning, Inc., are includible in the gross estate of the decedent; and (3) whether the gross estate of the decedent includes $18,674.50 in accumulated amounts which the decedent could have withdrawn from a trust, but which were not withdrawn at the date of her death. FINDINGS OF FACT Some of the facts have been stipulated.The stipulations together with the attached exhibits are incorporated herein by reference. Augusta C. Noland, a resident of Birmingham, Alabama, died testate on January 19, 1978. She was survived by four daughters, Mildred N. Peake, Rosalie N. Gambrill, Augusta N. Bell, and Louis N. Townsend. One of the daughters, Mildred N. Peake, qualified as the executrix471 of her estate. The executrix was also a resident of Birmingham when the petitions were filed in these cases. Augusta C. Noland was the daugther of General Louis V. Clark.During his life, he transferred to her all 5,000 shares of the stock outstanding in Commercial Realty Company, an Alabama corporation, which owned several parcels of real property.At his death, his will, which was probated on March 27, 1964, gave all of his assets both real and personal to Augusta C. Noland "for life and at her death, share and share alike to her children." Mrs. Noland was the executor of his estate, which also contained several parcels of real estate. Over a period of years Mrs. Noland gave stock in Commercial Realty Company to each of her four daughters until by September 13, 1971, the date upon which the litigation described hereinafter was commenced, the stock was held as follows: NameSharesPercentage of OwnershipMrs. Peake1,07321.46%Mrs. Gambrill1,07121.42%Mrs. Townsend1,07121.42%Mrs. Bell1,07121.42%Mrs. Noland71414.28%TOTALS5,000100.00%For several years prior to the commencement of such litigation, Mrs. Noland served472 as the president and chief executive officer and as a director of Commercial Realty Company. B. Wayne Peake, the husband of Mildred N. Peake, was the vice-president and general manager of the company. Each of the daughter and their respective husbands were also directors thereby constituting a board of nine members. During the same period, Mrs. Noland, as executor and life tenant of her father's estate, used, controlled, and looked after its assets including the real properties contained therein. The stock of Commercial Realty Company was subject to an agreement entered into in 1954 by Mrs. Noland, the four daughters, and the corporation. In the agreement (1) each daughter agreed that she would not sell, hypothecate, or otherwise encumber her stock in the corporation except as provided in the agreement; (2) each daughter agreed that if she ever desired to sell her stock she would first offer it to the corporation at its book value and give the corporation 30 days within which to accept or reject the offer; and (3) each daughter also agreed that at her death the corporation would have the right and option to buy her stock at its book value. On September 13, 1971, Rosalie N. 473 Gambrill and Augusta N. Bell filed a complaint in the Circuit Court for the Tenth Judicial Circuit of Alabama, against Commercial Realty Company, Mildred N. Peake, B. Wayne Peake, and Louis N. Townsend. Subsequently, the Circuit Court found that Augusta C. Noland was an essential party to the suit and thereupon the complaint was amended to name her as an additional defendant. The complaint 1 alleged that on or before June 6, 1971, Mrs. Noland, while under undue influence from the Peakes, entered into a voting trust agreement with Mildred N. Peake and Louis N. Townsend under the terms of which actual control of Commercial Realty Company had been given to Mildred N. Peake by allowing her to vote all of the shares in the company owned by Mrs. Peake, Mrs. Townsend, and Mrs. Noland. It also alleged that through the exercise of the voting trust agreement, Commercial Realty Company was then in the process of guaranteeing certain debts tataling more than $160,000 of Louis N. Townsend to The First National Bank of Birmingham and other creditors and that Commercial Realty Company was being empowered to guarantee loans made to Mrs. Noland. 474 The complaint further alleged that through the exercise of the voting trust agreement at a meeting of the stockholders which was held on June 6, 1971, the defendants had caused George T. Gambrill and Frederick Bell to be removed from the board of directors of Commercial Realty Company; that certain stock certificates had been reissued to Louis N. Townsend and pledged by her to The First National Bank of Birmingham in violation of the restrictions set out in the 1954 agreement between the parties; that loans totaling $33,000 to $40,000 had been improperly made by Commercial Realty Company to Louis N. Townsend; and that through the exercise of the voting trust agreement, very broad authority over the business of the corporation had been granted to B. Wayne Peake including the unrestricted power to dispose of the corporation's real estate. On the same day that the complaint was filed, the Circuit Court enjoined the defendants from carrying out any of the alleged actions including the guaranteeing of stockholder debts, the selling of corporate real estate, the implementation of the voting trust agreement, and the granting of any special authority to B. Wayne Peake.This injunction475 remained in effect until the litigation was finally settled. Shortly after the lawsuit was filed, Augusta C. Noland by letter 2 advised Rosalie N. Gambrill and Augusta N. Bell, the complainants, that she was revising her will in such a manner as to disinherit them. In an attempt to dispose of the bitter stalemate which had developed, protracted negotiations were conducted among the parties, each of whom was separately represented by independent and competent counsel. Finally, on December 6, 1972, each of the parties and their separate counsel executed a document entitled Memorandum of Understanding which, among other things, provided that if the settlement of their differences as set forth therein was approved by the Circuit Court, the parties would exchange releases containing the following provision: Each of the parties hereto, separately, severally and jointly, releases each of the parties hereto and the parties hereto, separately, severally and in all fiduciary capacities (including the Clark Estate), release each other of and from all claims, actions, causes of action and demands of all kinds and natures whatsoever, presently and heretofore existing and hereby settles, 476 compromises and disposes of all claims, actions, causes of actions and demands and all differences have been fully and finally settled and disposed of in all respects.The Memorandum of Understanding was approved by the Circuit Court in a preliminary decree 3 which included the following findings: (1) For many years the parties, who are the principals in the Commercial Realty Company, have been having serious disputes and personality conflicts, have employed attorneys, made accusations against each other, argued and disagreed with each other, all to the disruption of the corporate business; and it is necessary from a corporate business standpoint for Commercial Realty Company to be divided into corporately independent units as provided for in this said Memorandum of Understanding; and * * (3) The aforesaid Memorandum of Understanding is approved and incorporated in and made part of this decree. (4) All parties are directed and ordered to proceed with diligence to implement and carry forward the several provisions of the Memorandum of Understanding and report such action to the Court for a final settlement order in this cause. 477 Briefly stated, the pertinent provisions of the settlement as set forth in the Memorandum of Understanding and as carried out by the parties, were as follows: (1) Mrs. Noland transferred her remaining 714 shares of Commercial Realty Company to the four daughters in equal shares so that immediately thereafter Mrs. Noland held no stock in Commercial Realty Company and each of the four daughters held 1,250 shares; (2) Commercial Realty Company was then divided into three separate corporations in the following manner: (a) 25 percent of the assets of Commercial Realty Company were transferred to a new corporation known as Townco, all of the stock in Townco was issued to Louis N. Townsend, and all of her outstanding stock in Commercial Realty Company was surrendered and cancelled; (b) 25 percent of the assets of Commercial Realty Company were transferred to a second corporation known as Realty Investment Planning, all of the stock in Realty Investment Planning was issued to Mildred N. Peake, and all of her stock, in Commercial Realty Company was surrendered and cancelled; and (c) the other 50 percent of the assets of Commercial Realty Company remained in Commercial Realty Company and478 all of its outstanding stock after the cancellation of the shares theretofore held by Mrs. Townsend and Mrs. Peake were held in equal shares by Rosalie N. Gambrill and Augusta N. Bell; (3) All of the parties executed an Indenture of Trust by which the Clark Estate was conveyed to a local bank as trustee under a trust which was to continue until ten years after the death of Mrs. Noland unless it was terminated by the unanimous consent of all of the parties. Article One of the trust provided in part as follows: The Trustee shall hold said Trust for the primary use and benefit of Augusta C. Noland (hereinafter sometimes referred to as the primary beneficiary) for and during her lifetime. During such period the Trustee shall pay to said primary beneficiary up to a "minimum sum" of $25,000.00 per annum in amounts and at times as requested by the primary beneficiary. This minimum sum shall be taken first from net income from the properties of the Trust, but if this shall be insufficient, then the Trustee is directed to apply working capital of the properties, or if this be insufficient, proceeds from new loans or mortgages or proceeds from the sale or principal assets to this purpose. 479 The primary intent of this Trust is toprovide for the needs of Augusta C. Noland during her lifetime. If, therefore, after use of income producing resources otherwise available to her, Augusta C. Noland shall, in the judgment of the Trustee independently exercised, require more funds than the aforesaid minimum sum for her support, maintenance, health, hospital or medical care in full accord with her aforesaid accustomed mode of living, then the Trustee shall pay to Augusta C. Noland such additional sum or sums out of the income and principal of the trust (to the exhaustion of same if required). All such payments of minimum sums and other funds shall be used for Augusta C. Noland and no other Grantor shall attempt in any way to acquire any part thereof. After the death of Mrs. Noland, the trust was to continue as four separate trusts, one for each daughter, with each daughter being entitled to receive the income from her separate trust. (4) Mrs. Noland agreed to, and thereafter did, revise her will so as to again include Mrs. Gambrill and Mrs. Bell and to treat the four daughters equally in the disposition of her testamentary estate. (5) All four daughters and their husbands480 joined in the guarantee of the mortgage on Mrs. Noland's home which had theretofore been guaranteed only by Mr. and Mrs. Peake. The settlement set forth in the memorandum was carried out by the parties, including the division of Commercial Realty Company and the execution of the trust for the Clark Estate and the settlement was approved in a final decree entered by the Circuit Court on June 21, 1974. In its final decree, the Circuit Court also approved the various other actions taken by the parties in carrying out the settlement, including the dismissal of the litigation; the termination of the voting trust; the termination of the 1954 agreement; and the restoration of the ousted members of the board of directors of Commercial Realty Company. The Court also assigned costs; directed the payment of certain expenses by the three corporations and the four daughters; and granted each party the general release set out hereinbefore, except for any rights pertaining to the trust for the Clark Estate. As indicated above, Mildren N. Peake was entitled, as part of the settlement, to all of the stock in Realty Investment planning. For some reason not entirely clear from the record, the481 certificates representing her stock in Realty Investment Planning were actually issued to her mother, Augusta C. Noland, who executed the certificates for transfer to Mrs. Peake and delivered them to her. The 285 shares of stock, however, were not transferred on the books of the corporation and remained outstanding in the name of Mrs. Noland until her death. The dividends paid on the stock during the balance of Mrs. Noland's life were delivered to Mrs. Peake but were deposited by her in Mrs. Noland's bank account. As the primary beneficiary of the trust for the Clark Estate, Mrs. Noland never requested or received the full sum available to her under Article One of the trust for any year during the remainder of her life. Furthermore, in each year of her life the net income of the trust was more than sufficient to cover the amounts which were paid to her and, as a result, no part of the corpus of the trust was used for such purpose. The following table reflects the amounts payable, the amounts actually paid, and the unpaid balances for each of the years following the creation of the trust in April of 1973 until her death in January of 1978: PeriodAmount PayableAmount PaidUnpaid BalanceApr. 1973-Dec. 1973$16,667.00$15,629.25$1,037.75Calendar Year 197425,000.0022,433.262,566.74Calendar Year 197525,000.0021,799.183,200.82Calendar Year 197625,000.0017,195.087,804.92Calendar Year 197725,000.0020,935.734,064.27TOTALS$116,667.00$97,992.50$18,674.50Calendar Year 1978$25,000.000$25,000.00482 In the notice of deficiency in Docket Number 29191-81, the respondent determined that the $18,674.50 which the decedent failed to request from the trust during the years 1973 through 1977 was includable in the gross estate as a debt due the decedent at her death. The respondent also determined that the 285 shares of stock in Realty Investment Planning was includable in the gross estate under section 2036 4 because the decedent had retained for her lifetime the right to receive the income from the stock. In the notice of deficiency in Docket Number 29192-81, the respondent determined that the transfer by the decedent to her daughters of her 714 shares of stock in Commercial Realty Company under the Memorandum of Understanding constituted a gift because there was no consideration in money or money's worth for the transfer. OPINION The Transfer of StockThe parties agree that the decedent, Augusta C. Noland, transferred her 714 shares of stock in Commercial483 Realty Company to her four daughters pursuant to the Memorandum of Understanding which was entered into in the settlement of the bitter family dispute over the operation of the company and the administration of the Clark Estate. The respondent determined that the transfer of the stock was made for an inadequate consideration and, therefore, the transaction constituted a taxable gift. The petitioner contends that the transfer was made for an adequate and full consideration in money or money's worth and, consequently, no taxable gift was made. 5Section 2512 provides that when property is transferred for less than an adequate and full consideration in money or money's worth, the excess of the value of the property over the consideration received is a gift. On the other hand, "a sale, exchange, or other transfer of property made in the ordinary course of business [a transaction which is bona fide, at arm's length, and free from any donative intent], will be considered484 as made for an adequate and full consideration in money or money's worth." Sec. 25.2512-8, Gift Tax Regs. In , a widow transferred property to her stepchildren in settlement of claims they filed asserting their right to property from her husband's estate. The Court held that the transfer was a business exchange, and that even though the claims by the stepchildren were unliquidated, their release had a recognizable value in money or money's worth. Although the settlement was reached prior to litigation, it was based upon the advice of independent counsel and was presumed to be economically advantageous to all of the parties. We stated: Gertrude and the children were in serious disagreement over the content of Jacob's estate.The children further believed that they were entitled to at least a part of the Florida and Indiana properties and apparently were willing to institute suit to determine their rights. Gertrude might successfully have resisted this suit, but, as with all litigation, the outcome could not be predetermined.The settlement was made upon advice of her attorney under circumstances which it may be assumed485 both Gertrude and her attorney regarded as "advantageous economically." Therefore, it is our view that the transfer by Gertrude of a remainder interest in the properties in question was made for an adequate and full consideration in money or money's worth. . See also and (W.D. mo. 1966). 6Similarly, in , appeal dismissed (4th Cir. 1948), a taxpayer's transfer of $120,000 to a trust for the benefit of her estranged daughter in settlement of a threatened lawsuit by the daughter was held to be a transfer for an adequate consideration within the meaning of the gift tax statutes. In the instant case, we are satisfied that Mrs. Noland had no donative intent because she was not motivated by love and affection or other thoughts which normally prompt the making of a gift. She and her attorneys obviously regarded the settlement486 as economically advantageous under the circumstances. First, in the settlement, the decedent was given greater lifetime benefits in the Clark Estate. Under the will of her father, she was entitled only to the income from the properties but under the settlement she could upon demand withdraw income or corpus up to $25,000 a year. In addition, the trustee was authorized to pay her additional amounts of income or corpus for her health, maintenance and support even if such payments totally exhausted the estate. Second, under the settlement Mrs. Noland received six additional guarantors for the mortgage on her home. Third, the broad release incorporated in the final decree freed her from liability for any breach of duty as a life tenant or fiduciary of the Clark Estate as well as the principal executive officer and director of Commercial Realty Company. The possible breaches included allegations that the estate had received substantial loans from the corporation while the decedent was a fiduciary of both, and that while the decedent was the principal executive officer of the corporation substantial corporate funds had been misused through unauthorized loans to the daughter, Louis487 N. Townsend. In addition, daughters Bell and Gambrill had alleged that the decedent, by executing the voting trust, permitted the other defendants to violate the 1954 agreement so as to shift control of the corporation to Mildred Peake and her husband. The settlement also relieved her from any liability for these alleged wrongdoings. Significantly, the settlement was finalized under the supervision of and pursuant to a decree of the Circuit Court. In fact, the final decree actually incorporated the compromise settlement as agreed to by the contesting litigants on the advice of their separate and independent counsel. A transfer under such circumstances in no realistic sense constitutes a gift subject to tax. ; ;The only case relied upon by the respondent, , affd. , cert. denied , is distinguishable on its facts. In Housman, payments were made to a son to avoid a will contest. 488 However, the Court found that the parties were not hostile, did not deal at arm's length, and did not compromise a bona fide will contest.The Court also found that the son's claim involved only a moral obligation and not a legally enforceable one. By contrast, in this case the Circuit Court specifically held that the decedent was a necessary party to the litigation, that the complaint stated a sufficient cause of action against her, and that the terms of the settlement were to be incorporated in the final decree. In view of all of the foregoing, we conclude that the transfer of the stock in Commercial Realty Company by the decedent to her daughters constituted part of a bona fide arm's length transaction which was free from donative intent and was made for a full and adequate consideration in money or money's worth. The transfer, therefore, did not constitute a taxable gift. Retained Lief InterestUnder the settlement agreement, Mildred N. Peake was to receive all of the stock in Realty Investment Planning. In some manner which does not appear from the record, certificates for the 285 shares of Realty Investment Planning were issued to the decedent who executed and489 delivered the certificates to Mrs. Peake. Mrs. Peake held the stock certificates throughout the life of her mother, but no transfer of the stock was made on the books of the corporation. Mrs. Peake testified that when dividends were paid on the stock she deposited the dividends in her mother's checking account; that this was a voluntary action on her part which was never mentioned to or discussed with her mother; and that she never reported the dividends in any gift tax return.7Section 2036(a)(1) provides that the value of the gross estate shall include the value of all property transferred by trust or otherwise with respect to which the decedent has retained for his life or for any period which does not in fact end before his death the possession or enjoyment of or the right to income from the property. However, section 2036(a)(1) will not apply unless the decedent retains enjoyment of the transferred property pursuant to an understanding or agreement reached contemporaneously with the transfer. ;490 . Section 20.2036-1(a), Estate Tax Regs., provides as follows: An interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, expressed or implied, that the interest or right would later be conferred. The existence of such an agreement can be inferred from the facts and circumstances surrounding the transfer and subsequent use of the property. . The agreement need not be legally enforceable or evidence by the instrument to transfer. In the instant case there is no evidence of an express agreement between the decedent and Mrs. Peake regarding the dividends or of an agreement by Mrs. Peake that she would refrain from transferring the stock on the corporate books. From this record we are unable to find an implied agreement on such matters. Mrs. Peake testified that she voluntarily deposited the dividend payments in her mother's checking account, which she handled for her mother from January of 1973 until491 she died in 1978. Respondent offered no evidence which tended to discredit or contradict this testimony, and we find it creditable and persuasive. Moreover, section 2036 contains an exception for a retained life interest arising in connection with a bona fide sale for an adequate and full consideration in money or money's worth. The term "sale" includes exchanges and other transfers. ; . In , it was held that where a decedent transferred land and reserved a life estate in settlement or a valid family dispute, the property was not includible in her gross estate under section 2036 because the transfer was for an adequate consideration. Since we have concluded in this case that the transfer made by the decedent to Mrs. Peake was for an adequate consideration in settlement of a bitter family dispute then under the specific exception set forth in the statute, any lifetime interest which might have been retained492 is not sufficient to cause the stock to be included in the estate under section 2036. The Amounts Due from Trust of Clark EstatePursuant to the terms of the settlement, the Clark Estate was placed in a trust under which the decedent was given a life interest. Under its terms, she was authorized to withdraw from the trust up to a minimum sum of $25,000 a year, at will, and if that were insufficient, then additional funds as required could be withdrawn for her support and maintenance or to provide her with health, hospital or medical care. These amounts were to be paid first out of income and then, if necessary, from corpus. From 1973, when the trust was created, through 1977, Mrs. Noland withdrew less than the minimum sum each year. All amounts withdrawn came from trust income. She requested no funds from the trust in 1978, the year of her death. The respondent, in his statutory notice, included in the gross estate the cumulative undrawn amounts through 1977 of $18,674.50 as a debt due the decedent. On this point he relies upon , revd. on another issue sub. nom .493 In the alternative, respondent now argues on brief that unclaimed amounts for all six years are includable in the decedent's estate on the grounds that she held a general power of appointment as to these funds which was not limited by an ascertainable standard. The petitioner contends that the right to withdraw the minimum sum was a personal right of the decedent which expired or lapsed at the end of each year so that the unclaimed amounts through 1977 were not receivables at her death in 1978. She further argues that the minimum sum was limited by an ascertainable standard, and that in any event, under the lapse of power provisions of section 2041(d)(2), the maximum amount that could be included in the estate for each year would be the excess over the greater of $5,000 or five percent of the value of the trust property. In , the decedent was the beneficiary of a trust which so far as is pertinent here provided that upon her death any net income then accrued should be paid to her estate and the corpus should be paid to her lawful descendants in such proportions as she should by last will appoint. The494 Board of Tax Appeals held that the accrued income constituted part of her gross estate as a debt due the estate. By contrast, the trust indenture before us contains no such provision with respect to accrued income, or accrued but unpaid withdrawals. Instead, upon Mrs. Noland's death, all trust funds were first to be applied to any indebtedness of the Clark Estate and then held in trust for the four remaindermen. From the plain language of the agreement, we agree with petitioner that the right of the decedent to annually request funds was not an obligation enforceable by the estate.We conclude, therefore, that the decedent's right to withdraw up to $25,000 from the trust "per annum" was a non-cumulative, personal right which expired or lapsed at the end of each year. Thus, the unclaimed amounts for 1973 through 1977 were not owed to her estate at her death in 1978. In his alternative contention, respondent argues that the unpaid amounts are includable in the estate because the decedent held a general power of appointment over the unclaimed funds for 1973 through 1978. Section 2041(a)(2) requires that the value of property subject to a general power of appointment created after495 October 21, 1942 be included in the decedent's gross estate. Section 2041(b)(1) defines a "general power of appointment" as a power exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. However, section 2041(b)(1)(A) provides that "[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." In this case, Mrs. Noland as the life beneficiary of the trust had the power to request up to $25,000 each year out of income or principal. Therefore, to the extent of $25,000 per year 8 she possessed a general power of appointment as defined in section 2041(b)(1), unless the power was limited by an ascertainable standard. A power is limited by such a standard "if the extent of the holder's duty to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them)." Section 20.2041-1(c)(2), Estate Tax Regs. 496 The determination of what legal rights and interests in property are created by a specific instrument is a question of state law. ; . In determining whether the decedent in this case had a general power over the minimum sum, we must look to the express language of the instrument as interpreted by Alabama law, if any. ; . The trust instrument contains the following unequivocal and unambiguous language: The Trustee shall hold said Trust for the primary use and benefit of Augusta C. Noland (hereinafter sometimes referred to as the primary beneficiary) for and during her lifetime. During such period the Trustee shall pay to the said primary beneficiary up to a 'minimum sum' of $25,000.00 per annum in amounts and at times as requested by the primary beneficiary. This minimum sum shall be taken first from net income from the properties of the Trust, but if this shall be insufficient, then the Trustee is directed to497 apply working capital of the properties or if this be insufficient, proceeds from new loans or mortgages or proceeds from the sale or principal assets to this purpose. It is difficult to imagine a more unqualified power than this. Moreover, the petitioner has not cited nor have we found any Alabama case law or statute which tends to place a support and maintenance limitation on this part of the trust. 9 We conclude, therefore, that during each year Mrs. Noland had a general power of appointment over the trust of up to $25,000. We have found hereinbefore that the decedent's power of appointment expired, or lapsed, at the end of each year to the extent that it was not exercised during that year. 498 As a general rule the lapse of a power of appointment is includible in the estate of a decedent as a release of the poser of appointment. Section 2041(b)(2). Except, however, that the lapse of a power of appointment during any calendar year during the decedent's life is treated as a release for purposes of inclusion in the gross estate under section 2041(a)(2) only to the extent that the property which could have been appointed by the exercise of the lapsed power exceeds the greater of $5,000 of five percent of the aggregate value at the time of the lapse of the assets out of which the lapsed power could have been satisfied. Section 2041(b)(2); section 20.2041-3(d)(3), Estate Tax Regs. Therefore, under section 2041(b)(2), the amount includible in the gross estate in this case for each of the years 1973 through 1978 is limited to the amount, if any, by which the lapsed portion of the power exceeded $5,000. 10With respect to the year 1978, the respondent has argued for the first time on brief that the499 decedent held a general power of appointment at the time of her death for the entire $25,000 which she could have withdrawn during that year.The respondent states, however, that he does not wish to increase the amount of the deficiency in estate tax beyond the amount originally asserted in the deficiency notice, which was based upon the $18,674.50 in unclaimed trust funds for the years 1973 through 1977. In her brief, the petitioner objects to the inclusion of the $25,000 for the year 1978 on the grounds that this is a claim for an additional deficiency which was not pleaded by the respondent and therefore should not be considered. The parties stipulated, however, that the entire $25,000 was available to her for the calendar year 1978 although she withdrew no funds during that year because of her death on January 19, 1978. Furthermore, their stipulation provides in part that "[a]ll stipulated facts shall be conclusive * " and that "except for relevancy, all objections to this stipulation and its exhibits are expressly waived unless stated in this stipulation." Inasmuch as the respondent has agreed to limit the deficiency in estate tax to the amount set out in the notice500 and inasmuch as both parties were aware of the situation with respect to the $25,000 being available for 1978 as reflected by their stipulation, we are satisfied that respondent's contention based upon a power of appointment for the year 1978 does not constitute an increase in the deficiency and does not prejudice the petitioner. To reflect the foregoing, and the concessions made by the parties, including the concession made by the respondent with respect to the deficiency in estate tax and to allow for additional deductible expenses chargeable to the estate as well as the possibility of an overpayment in the estate tax, Decisions will be entered under Rule 155.Footnotes1. At the trial, respondent objected to the admissibility of this document as proof of the statements made therein. For this purpose the document is hearsay, is not admissible, and has not been considered. The document, however, is admissible and has been considered as proof of the circumstances surrounding the transactions between the parties.↩2. See footnote 1, supra.↩3. See Footnote 1, supra.↩4. All section references are to the Internal Revenue Code of 1954, as in effect during the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩5. After a motion to intervene was denied, counsel for Rosalie N. Gambrill and Augusta N. Bell made a statement for the record at trial and filed a brief and reply brief amicus curiae in support of petitioners.↩6. See also Chase National Bank of the City of New York v. Commissioner,↩ a Memorandum Opinion of this Court, dated April 28, 1953.7. The record contains no evidence which tends to establish that the amount of such dividends exceeded the applicable annual exclusion from gift tax.↩8. Respondent does not contend that the general power exceeds $25,000 per year because Mrs. Noland's right to receive any sum from the trust in excess of $25,000 per year was within the independent judgment of the trustee that such sum was required "for her support, maintenance, health, hospital or medical care."↩9. Indeed, the trustee, in responding to a question about the distribution clause, wrote to Mrs. Peake: We have always interpreted this trust to mean that the Trustee shall pay to Mrs. Noland any amount which she requested up to $25,000 and that we were under no duty to ascertain why she requested the money or what she did with the money. We delieve the key words are "up to" and that the trust instrument simply says that we shall pay her that amount of money if requested by her.↩10. Petitioner did not offer any proof as to the value of the trust properties at the end of the various years. Thus, the exemption is limited to $5,000. Rule 142(a).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620465/	Alfred W. and Mary M. Hamacher, Petitioners v. Commissioner of Internal Revenue, RespondentHamacher v. CommissionerDocket No. 13052-88United States Tax Court94 T.C. 348; 1990 U.S. Tax Ct. LEXIS 21; 94 T.C. No. 21; March 12, 1990March 12, 1990, Filed 21 Decision will be entered under Rule 155. P used a room in his apartment only for business-related activities. One activity concerned that of an employee who was already provided with an office and the other activity concerned independent contractor status where a relatively large percentage of the activity took place at the home office. P claimed the allocable portion of his rent as a deductible expense and he also claimed automobile expenses for travel to and from his home office. R disallowed all expenses claimed with respect to the home office and a portion of the claimed automobile expenses as personal nondeductible expenditures. Held, a taxpayer may conduct more than one business activity from a home office or offices and qualify under sec. 280A(c), I.R.C.Held, further, P's employee activity did not meet the requirements of sec. 280A(c)(1), and if any of several business activities do not meet the requirements of sec. 280A(c)(1), the exclusivity test is not met with respect to any of the activities. Held, further, P's automobile expenses are not deductible because his home office is not within the purview of sec. 280A(c). Alfred W. Hamacher and Mary M. 22 Hamacher, pro se.Adolph J. Dean, Jr., for the respondent. Gerber, Judge. GERBER349 Respondent, in a statutory notice of deficiency dated March 11, 1988, determined deficiencies in petitioners' 1983 and 1984 Federal income tax in the respective amounts of $ 863.44 and $ 838. The deficiencies resulted from the disallowance of home office and automobile expense deductions related to petitioner Alfred W. Hamacher's activities involving theater and acting. After concessions, the issues presented for our consideration are: (1) Whether petitioners are entitled to deductions for home office expenses under section 280A; 1 and (2) whether petitioners are entitled to deductions for automobile expenses in excess of those allowed by respondent. Petitioners concede that because the additional automobile expenses were incurred in commuting to and from the home office, those expenses are deductible only if we find that their use of the home office qualified under section 280A(c)(1).23 FINDINGS OF FACTThe parties' stipulation of facts together with the attached exhibits are incorporated by this reference. Petitioners are Alfred W. Hamacher and Mary M. Hamacher, husband and wife, who resided in Atlanta, Georgia, at the time their petition was filed. References to "petitioner" in the singular refer to Alfred W. Hamacher.350 Petitioner earns his livelihood as a professional actor. He was awarded a bachelor of arts degree in theater and acting from Southeast Missouri State University. In 1972, under an acting fellowship from Wayne State University, petitioner earned an M.F.A. degree in acting. In 1976, petitioner and his family moved to Atlanta, Georgia, where he was hired to act by the Harlequin Dinner Theatre. He began performing in 1977 at the Alliance Theatre and numerous other major Atlanta theaters. Since then, he has performed over 40 different legitimate theater roles.In addition to stage acting, petitioner has performed in 5 major motion pictures, 10 television commercials, and 25 radio commercials. He has worked with such well-known people as Richard Dreyfuss, Tennessee Williams, Jane Alexander, Giorgio Totsi, Ann Miller, and Gene Barry. 24 He is a member of all three professional actors' unions: The AFTRA, related to television and radio; the Actors' Equity, related to the stage; and the Screen Actors' Guild, related to motion pictures.During the years at issue here, 1983 and 1984, petitioner was employed by the Alliance Theatre in Atlanta, Georgia, as an independent contract actor to perform in plays on its main stage and studio stage. Petitioner was interviewed for the plays by representatives of the Alliance Theatre. Petitioner auditioned for and performed his roles at the Alliance Theatre. Although most of petitioner's contract employment during 1983 and 1984 was through the Alliance Theatre, petitioner also worked as an actor doing radio and television commercials. This acting work was separate and independent from the Alliance Theatre.In 1979, in addition to performing, petitioner began to teach acting at Alliance Theatre's acting school, and in 1980 petitioner became the administrator of the school. He held this position during 1983 and 1984. He taught acting at the school; directed the school and its internal program; and was responsible for choosing the curriculum for all classes, selecting and directing25 plays and shows for the theater, and handling many of the administrative matters associated with those duties.During 1983 and 1984, petitioner received a salary of approximately $ 18,000 per year in his capacity as administrator 351 of the acting school. As a contract actor at the Alliance Theatre, petitioner received additional compensation of approximately $ 9,000 for 1983 and $ 14,000 for 1984. Petitioner's salary and nonsalary income for each year was combined and reported by Alliance on a single Form W-2. In addition to his income from Alliance, petitioner received income from other unrelated acting sources in the approximate amounts of $ 600 in 1983 and $ 1,000 in 1984.Petitioner utilized two offices in connection with his acting and administrative activities. One was provided by the Alliance Theatre from which petitioner performed his duties as administrator of the acting school. The other office was at his home. Petitioner's theater office had a telephone, typewriter, and office furniture. However, due to space and equipment limitations at the theater, this office was not used by petitioner exclusively. During periods when petitioner was not using his office, 26 other theater employees used petitioner's office to telephone students of the acting school regarding enrollment, to do various paperwork related to the theater, and to use his typewriter. The office hours at the theater were 9:00 a.m. to 5:30 p.m. Petitioner had access to the office during nonbusiness hours. Petitioner would generally leave the theater office at 4:30 p.m.Petitioner's home office was in one of the 6 rooms in his apartment and measured approximately 10 by 15 feet. Petitioner's home office contained a desk, files, office supplies, a bulletin board, scripts, theater memorabilia, a reel-to-reel tape recorder, acting and research books, and wardrobe, all of which were used in connection with his acting and administrative work. During 1983 and 1984, approximately half of petitioner's time rehearsing and developing his contract stage roles was spent in his home office and the remainder was spent at the Alliance Theatre rehearsal hall. Petitioner also used his home office to receive calls regarding acting roles, prepare for auditions, and rehearse parts for commercials. Because he was regularly interrupted at his theater office by telephone calls and employees with27 questions, petitioner used his home office to do whatever "creative thinking" was needed to direct the theater school. Petitioner also used his home office to develop the school's curriculum, select plays for the theater, 352 and otherwise perform some of his duties as administrator of the Alliance Theatre acting school. The Alliance Theatre did not require that petitioner have a home office.Petitioner spent the largest portion or percentage of his working hours at the theater office, not his home office. Based upon petitioner's estimates, he spent 20 percent of his time in his home office, 40 percent at his theater office and the remaining 40 percent acting on stage. Generally, petitioner used his home office on Saturdays and Sundays for approximately 4 hours per day, and on Mondays through Fridays for approximately 2 hours in the morning before going to work at the theater and 2 hours in the evening after coming home from working at the theater. In addition to working on school matters, petitioner would prepare for his own auditions, rehearsals, and performances during these periods. The home office was used exclusively by petitioner for purposes related to his employment28 as an actor and administrator of the acting school.Petitioners, on their 1983 and 1984 income tax returns, claimed deductions in the respective amounts of $ 1,018 and $ 1,024 for what they identified as "workshop/storage" expenses. These expenses related to petitioner's home office and represented one-sixth of petitioners' rental expenses for their apartment. Petitioners also claimed $ 2,209 in automobile expenses for 1983 and $ 2,019 for 1984.Respondent disallowed the claimed home office deductions because petitioners "failed to establish that the office was used exclusively on a regular basis as [petitioner's] principal place of business and that as an employee, [he] maintained this office for the convenience of [his] employer," as required under section 280A(c)(1)(A). Respondent also disallowed $ 1,563 and $ 1,571 of petitioners' claimed automobile expense deductions for 1983 and 1984, respectively. Respondent explained that "it has not been established that any amounts more than $ 646 in 1983 and $ 448 in 1984 were for an ordinary and necessary business expense, or were expended for the purpose designated."OPINIONThe first issue we must consider is whether petitioners 29 are entitled to home office deductions of $ 1,018 and $ 1,024 353 for 1983 and 1984, respectively. If we decide this issue in favor of petitioners, we must then consider whether petitioners are entitled to deductions for automobile expenses in excess of those allowed by respondent. Petitioners have conceded that their entitlement to additional automobile expense deductions is dependent upon a favorable decision on the section 280A issue.Section 280A, in general, provides that no deduction is allowed with respect to the business use of a taxpayer's personal residence:Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.See also Baie v. Commissioner, 74 T.C. 105">74 T.C. 105, 108 (1980). Section 280A(c) contains some limited and specific exceptions to this general rule which are, in pertinent part, as follows:SEC. 280A(c) Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use. -- 30 (1) Certain business use. -- Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis -- (A) [as] the principal place of business for any trade or business of the taxpayer,(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business.In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer.Therefore, for a deduction to be allowed under section 280A(c)(1), the provision petitioners rely upon, the taxpayer must establish that a portion of his dwelling unit is (1) exclusively used, (2) on a regular basis, (3) for the purposes enumerated in subparagraphs (A), (B), or (C) of section 280A(c)(1), and (4) if the taxpayer is an employee, the office 354 is maintained for the convenience of the employer. 2 In the present case, 31 the parties disagree on whether petitioner satisfied any of these four requirements. We first consider whether petitioner's use of his home office satisfies the exclusivity requirement. We will address the remaining requirements of section 280A(c)(1) as is necessary.The parties agree that petitioner regularly used his home office in connection with two separate and independent business activities during 1983 and 1984. Petitioner was both an independent contract actor and a salaried employee of the Alliance Theatre, responsible for administering its acting school.Because petitioner used his home office for two business uses, this case presents a unique question: When a taxpayer uses one home32 office for two separate and distinct business activities, whether both business uses must be of the types described in section 280A(c)(1) in order to satisfy the exclusive use requirement of that section. This is a fundamental question and one of first impression.In resolving this issue we are assisted by the legislative history of section 280A. Section 280A was added to the Internal Revenue Code by the Tax Reform Act of 1976 3 to provide "definitive rules relating to deductions for expenses attributable to the business use of homes." S. Rept. 94-1236 (1976), 1976-3 C.B. (Vol. 3) 807, 839. Congress was responding to cases (particularly those decided by this Court) in which a more liberal standard than that applied by the Internal Revenue Service for the deduction of home office expenses was held to be appropriate. Under these decisions, expenses connected to a home office were held deductible on the grounds that the maintenance of such office was "appropriate and helpful" to the taxpayer's business under the circumstances. See Bodzin v. Commissioner, 60 T.C. 820 (1973), revd. 509 F.2d 679">509 F.2d 679 (4th Cir. 1975);33 Newi v. Commissioner, T.C. Memo. 1969-131, affd. 432 F.2d 998">432 F.2d 998 (2d Cir. 1970); Gill v. Commissioner, T.C. Memo 1975-3">T.C. Memo. 1975-3. As reflected in the Senate Report, Congress was concerned that 355 under this "appropriate and helpful" standard, expenses which were otherwise personal in nature would be allowed as business deductions:In many cases the application of the appropriate and helpful test would appear to result in treating personal living, and family expenses which are directly attributable to the home (and therefore not deductible) as ordinary and necessary business expenses, even though those expenses did not result in additional or incremental costs incurred as a result of the business use of the home. Thus, expenses otherwise considered nondeductible personal, living, and family expenses might be converted into deductible business expenses simply because, under the facts of the particular case, it was appropriate and helpful to perform some portion of the taxpayer's business in his personal residence. * * * [S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 185.]34 Section 280A, therefore, was enacted to preclude the deduction of expenses attributable to the business use of a home office except under certain limited conditions, which are provided in section 280A(c). 4Congress intended that only expenses which were clearly ordinary and necessary business expenses would be deductible.Congress, in 1981, amended section 280A(c)5 to liberalize the home office rules, particularly as they were being interpreted by the Internal Revenue Service, to permit a business expense deduction for taxpayers having more than one trade or business. Prior to the amendment, the Internal Revenue Service allowed home office deductions only if the taxpayer was using his residence as the principal place of business of his main business activity. See Senate discussion35 on H.R. 5159 (The Black Lung Benefits Revenue Act of 1981), 97th Cong., 1st Sess., 127 Cong. Rec. 31966, 31968 (1981) (statement of Sen. Dole). By adding the words "for any trade or business of the taxpayer" to the end of subparagraph (A) of section 280A(c)(1), Congress made it "clear that a taxpayer can have a principal place of business for each separate trade or business of the taxpayer and if the regular and exclusive use tests are met, can deduct the expenses attributable to using his residence as the principal place of business for one or more such 356 businesses." (Emphasis added.) See Staff of the J. Comm. on Taxation, Summary of H.R. 5159, The Black Lung Benefits Revenue Act of 1981, 97th Cong., 1st Sess., at 11 (J. Comm. Print 1981).In light of the above statutory framework and legislative history, we conclude that expenses attributable to the use of a home office in conducting two or more separate business activities may36 be deductible. Section 280A was not intended to compel a taxpayer to physically segregate his different business activities when it would otherwise be unnecessary, cf. Soliman v. Commissioner, 94 T.C. 20 (1990), or to discourage an industrious individual from conducting more than one business activity out of his home. See Senate discussion H.R. 5159, supra, 127 Cong. Rec. at 31968. Therefore, the exclusive use requirement of section 280A(c)(1) does not demand that a home office be used exclusively in connection with only one business or only one of the types of uses enumerated in subparagraphs (A), (B), and (C). Thus, the fact that petitioner used his home office in conducting two business activities does not, in and of itself, violate the exclusive use requirement or destroy the applicability of section 280A(c)(1).We also conclude, however, that when a taxpayer utilizes one home office in conducting numerous business activities, each and every business use must be of the type(s) described in section 280A(c)(1). Otherwise, the exclusive use requirement of that section will not be satisfied and the general nondeductibility provision of section37 280A(a) will apply. Therefore, if only one of a number of uses qualifies under subparagraph (A), (B), or (C) of section 280A(c)(1), the expenses attributable to the business use of a home office will not be allowable as deductions even if the other uses are business related. 6 For example, if the taxpayer uses his home office in conducting two business activities, one which qualifies under section 280A(c)(1)(A), (B), or (C) and one which does not, the expenses attributable to the business use of the home office are not allowable as deductions. The taxpayer in this situation does not use the home office 357 exclusively for one or more of the purposes described in section 280A(c)(1) and the expenses are not deductible to any extent. For purposes of sec. 280A(c)(1), where a home office is put to both qualified and nonqualified uses, we are precluded from allocating expenses between those uses for purposes of their deductibility. The exclusive use requirement of sec. 280A(c)(1) is an all-or-nothing standard which was specifically imposed by Congress to put an end to any previous rules containing allocation methods. S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 184-186.38 Compare sec. 280A(c)(4)(C) where an allocation formula is specifically provided for purposes of sec. 280A(c)(4)(A) (when a portion of the taxpayer's residence is used in providing day-care services).In enacting section 280A, Congress intended to preclude expenses "otherwise considered nondeductible personal, living, and family expenses" from being "converted into deductible business expenses" merely because they have some connection to a business activity. S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 185. There was congressional concern that taxpayers who experienced minor incremental expenses could claim deductions, and that some could deduct personal expenses under the guise of business use of the home. Green v. Commissioner, 707 F.2d 404">707 F.2d 404, 407 (9th Cir. 1983), revg. 78 T.C. 428">78 T.C. 428 (1982). 39 7 Accordingly, a use that fails to qualify under section 280A(c) is to be treated as personal in nature for purposes of deducting any related expenses. This would be the case irrespective of whether the use has some relation to the taxpayer's business activity. Therefore, unless the taxpayer can satisfy each and every requirement enumerated in section 280A(c)(1), no deduction allocable to the business use of a home shall be allowed. One of those requirements is that the home office be used exclusively for the types of business purposes described in paragraph (1) of subsection (c). Therefore, we hold that where the taxpayer regularly uses his home office in connection with more than one business or activity, section 280A(c)(1) may apply, provided that each business use is of the type enumerated in section 280A(c)(1) and the home 358 office is so used exclusively. Accordingly, petitioners here must establish that each business use of their home office qualifies under section 280A(c)(1).40 In the present case, petitioner used his home office in connection with his acting business and his employment with the Alliance Theatre as administrator of its acting school. We first address whether petitioner's use of his home office as administrator of the acting school satisfies section 280A(c)(1). If it does not, petitioner cannot satisfy the exclusive use requirement of section 280A(c)(1) under our above analysis. Our consideration of this issue would, therefore, be completed. The general nondeductibility rule of section 280A(a) would govern, the exception provided in section 280A(c)(1) being inapplicable.Petitioner argues that, as administrator, he satisfies section 280A(c)(1)(A) because his home office was his "principal place of business" and his use of the home office for that purpose was "for the convenience of his employer." Respondent argues to the contrary. We agree with respondent.In the case of an employee, section 280A(c)(1) will apply only if the home office is used "for the convenience of his employer." Sec. 280A(c)(1). Neither the statute nor the proposed regulations provide us with any guidance as to when an office will be considered used for the convenience41 of the employer. See sec. 1.280A-2(g)(2), Proposed Income Tax Regs., 45 Fed. Reg. 52399 (Aug. 7, 1980). Such use, however, has been found where the employee must maintain the office as a condition of his employment, Green v. Commissioner, 78 T.C. 428">78 T.C. 428, 430 (1982), revd. on other grounds 707 F.2d 404">707 F.2d 404 (9th Cir. 1983), or when the home office was necessary for the functioning of the employer's business, or necessary to allow the employee to perform his duties properly. See Frankel v. Commissioner, 82 T.C. 318">82 T.C. 318, 325-326 (1984); Drucker v. Commissioner, 715 F.2d 67">715 F.2d 67, 70 (2d Cir. 1983), revg. 79 T.C. 605">79 T.C. 605 (1982). However, the home office cannot be "purely a matter of personal convenience, comfort, or economy" with respect to the employee. See Sharon v. Commissioner, 66 T.C. 515">66 T.C. 515, 523 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978).359 The record in this case does not support petitioners' contention that the home office was used for the convenience of the Alliance42 Theatre acting school. It is apparent from the facts in this case that petitioner's Alliance Theatre home office use was for his own convenience, comfort, or economy. His employer did not require or expect him to do any of his work at his home. To the contrary, petitioner's employer provided him with a suitable office which was accessible to petitioner at all times, including during nonbusiness hours, the same hours petitioner used his home office. See Drucker v. Commissioner, supra at 70. In addition, petitioners presented no evidence that in 1983 and 1984, petitioner's employer had any knowledge of the existence of the home office or that it was being used by petitioner in doing school related work. The fact that other theater employees regularly used petitioner's theater office does not improve his position because his office was used by others only when he was out. Many people engaged in businesses and professions may find it helpful to take work home with them, but that does not automatically establish that the home office is maintained for the convenience of their employer.Accordingly, we find that petitioner's use of his home office in43 connection with his employment as administrator of the acting school was not for the convenience of the Alliance Theatre, but is instead to be treated as a personal use. Consequently, petitioner's use of his home office does not comply with section 280A(c)(1). Thus, petitioner has not satisfied the exclusivity requirement of section 280A(c)(1), and, pursuant to section 280A(a), petitioner's home office deductions are not allowed except as provided in section 280A(b). It is clear from the wording of the statute and legislative history that this restrictive approach was intended and is not for us to alter.The final issue we must decide is whether petitioners are entitled to deductions for automobile expenses in excess of those allowed by respondent. Pursuant to petitioners' concession, we find that, because the automobile expenses were incurred in commuting to and from a home office which does not qualify under section 280A(c)(1), the automobile expenses are not deductible.*360 To reflect the foregoing and concessions of the parties,Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to this Court's Rules of Practice and Procedure.↩2. Sec. 280A(c)(5)↩ contains the further limitation that any deductions must be limited, for the years at issue here, to the excess of gross income derived from such use for the taxable year over those deductions allocable to such use, such as mortgage interest, which are permitted without regard to the business use concerned.3. Pub. L. 94-455, 90 Stat. 1520.↩4. Sec. 280A(b)↩ provides an additional exception for deductions allowable without regard to their connection with the taxpayer's trade or business such as taxes, interest, and casualty losses.5. Black Lung Benefits Revenue Act of 1981, Pub. L. 97-119, 95 Stat. 1635.↩6. However, we do not imply that sec. 280A(c) will not apply if those other business uses qualify under other paragraphs of sec. 280A(c)↩.7. In Frankel v. Commissioner, 82 T.C. 318">82 T.C. 318, 329 (1984), we stated that we would no longer follow our holding in Green v. Commissioner, 78 T.C. 428↩ (1982).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620466/	RONALD L. and JEANINE M. PHARES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPhares v. CommissionerDocket No. 3269-76United States Tax CourtT.C. Memo 1977-59; 1977 Tax Ct. Memo LEXIS 380; 36 T.C.M. (CCH) 262; T.C.M. (RIA) 770059; March 10, 1977, Filed 380 Marvin J. Garbis and Kenneth A. Reich, for the petitioners. Thomas C. Morrison, for the respondent. IRWINMEMORANDUM OPINION IRWIN, Judge: Respondent determined deficiencies in petitioners' income tax for the calendar years 1971 and 1972 as follows: Addition to Tax YearDeficiencySec. 6653(b) 11971$ 3,873$2,555197216,7018,351This case was submitted for decision without trial pursuant to Rule 122(a), Tax Court Rules of Practice and Procedure. There are no issues remaining to be decided. All of the facts have been stipulated. The stipulation of facts with the exhibits attached thereto are incorporated herein by this reference. Petitioners, Ronald L. and Jeanine M. Phares, husband and wife, resided in Denver, Colo., at the time of filing the petition herein and filed joint income tax returns for each of the years in question. During the calendar years 1971 and 1972, one or both of the petitioners owned, operated, and derived income from a real estate rental referral business known381 as Homefinders of Arizona. Similarly, in 1972 one or both of the petitioners owned, operated, and derived income from a real estate rental referral business known as Homefinders of Baltimore. Petitioners were on the cash method of accounting during both years. In the notice of deficiency mailed to petitioners on April 8, 1976, respondent made numerous adjustments in petitioners' income, deductions, and exemptions (including a reconstruction of petitioners' income using bank deposits and cash payments less nontaxable receipts and taxable amounts reported on petitioners' returns). Respondent also determined that all or part of the underpayment of tax in each of the years in question was due to fraud. Petitioners agree that they have the burden of proof to show that respondent's determinations in the notice of deficiency, other than the additions to tax for fraud under section 6653(b), are erroneous. While they neither admit nor deny the accuracy of respondent's adjustments, they concede that they have not met their burden of proof with respect to these adjustments and the Court should sustain respondent's determinations accordingly. Petitioners do not admit that they filed*382 fraudulent income tax returns for the years 1971 and 1972. However, they have stipulated for purposes of this case only that a decision shall be entered as if respondent had presented evidence sufficient to satisfy his burden of proof on the issue of fraud for each of the years in question. Accordingly, Decision will be entered for the respondent. Footnotes1. All statutory references herein are to the Internal Revenue Code of 1954 as in effect for the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620468/	Anchor Cleaning Service, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentAnchor Cleaning Service, Inc. v. CommissionerDocket No. 44647United States Tax Court22 T.C. 1029; 1954 U.S. Tax Ct. LEXIS 127; August 10, 1954, Filed August 10, 1954, Filed 127 Decision will be entered under Rule 50. 1. Held, accounts acquired by petitioner prior to the taxable years constituted a single capital asset composed of a list of customers; each individual customer's account lost by petitioner during the taxable years was a partial loss of such capital investment and no deduction is allowable therefor.2. Deductibility in taxable years of increase in New York State franchise tax payable by petitioner by reason hereof, determined. Concord Lumber Co., 18 T. C. 843; Curran Realty Co., 15 T. C. 341, followed. Seymour J. Wilner, Esq.,128 for the petitioner.Donald J. Fortman, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 1029 Respondent determined deficiencies in income tax of petitioner in years and amounts, as follows:Fiscal year endedMarch 31Deficiency1948$ 2,510.1719492,013.64Petitioner has acquiesced in certain of the adjustments made by respondent.FINDINGS OF FACT.The stipulation of facts filed by the parties with exhibits attached is adopted, and by this reference, made a part hereof.The petitioner, Anchor Cleaning Service, Inc., is a corporation organized on March 4, 1947, under the laws of the State of New York. It filed its tax returns for the years here involved with the collector of internal revenue for the second district of New York.On September 14, 1945, Herman Sperber owned all the capital stock of Anchor Cleaning Service, Inc. (a predecessor to petitioner, hereinafter sometimes called Anchor), a cleaning service corporation. At the same time Sperber was also carrying on a cleaning business as sole proprietor under the trade name "General Cleaning Service Company" (hereinafter called General). Prior to October 1, 1945, Irving 1030 M. Shapiro, 129 president of the petitioner corporation, had been carrying on the window cleaning business in partnership with other individuals.On September 14, 1945, Shapiro and Sperber entered into a executory agreement for the purchase from Sperber by Shapiro of the capital stock of Anchor and the name and goodwill of the business operated under the trade name of "General." This agreement provided, in part, as follows:WHEREAS, the Purchaser has agreed to buy the stock of the corporation and the other business upon the understanding that on the date of closing the corporation will own nothing but good will and that the Seller's present ownership of the business operated under the aforesaid trade name will likewise, on the date of closing, consist of nothing but good will, and * * (1) The Seller hereby agrees to sell and the Purchaser hereby agrees to buy the following: (a) All of the capital stock of the ANCHOR CLEANING SERVICE, INC.;(b) The name and the good will of the business now operated by the Seller under the trade name of GENERAL CLEANING SERVICE CO. at 611 Broadway, New York, N. Y.(2) It is understood and agreed by and between the parties hereto that on the date of closing130 the stock in the aforesaid corporation and the Seller's interest in the aforesaid business operated by him under the trade name will represent nothing but good will and the Purchaser is willing to pay for such good will, the price agreed upon.(3) The Purchaser agrees to pay to the Seller the sum of $ 81,908.82, as follows:* * * (19) If any of the accounts appearing on the list delivered at the time of the closing discontinues service before December 1, 1945, or are lost to some other concern before December 1, 1945, then and in either of such events the Seller shall pay back to the Purchaser for each $ 1.00's worth of window cleaning or porter service so discontinued or lost as aforesaid, the sum of $ 10.00 and for each $ 1.00's worth of general cleaning work so discontinued or lost as aforesaid, the sum of $ 9.00. It is agreed, however, that the Seller need not make such reimbursement to the Purchaser if such accounts are discontinued or lost due to the fault of the Purchaser.At Sperber's option, the loss so sustained may be returned to Shapiro either by cash, by return of any of the notes, by reducing any of the notes, or a combination of any of these alternatives.October131 1, 1945, was the actual date of closing of the transaction between Shapiro and Sperber, and on that date Sperber executed an instrument pursuant to the terms of the foregoing agreement to purchase to which were attached, as Schedule "A," lists of accounts of customers under the heading "Anchor Cleaning Service, Inc. Customers" and "General Cleaning Service Customers." Such lists were of customers for which the respective business entities were providing window and general cleaning service. These accounts 1031 were personal service accounts which could be freely discontinued by the customers and were not enforceable contracts. Following execution of the above agreements, Sperber was no longer in the window cleaning business, although he remained in business servicing only the floor waxing accounts. He operated this business under the name "Anchor" as permitted by the agreement of September 14, 1945, and exercised his right thereunder to select and solicit 26 inactive accounts and to deal with them for such business.The purchase price paid by Shapiro to Sperber for the stock of Anchor and the name and goodwill of General was the aggregate of the valuation of the accounts computed132 by multiplying the monthly dollar billing of each account by $ 9 for general cleaning accounts and by $ 10 for window cleaning accounts, both as shown in the separate columns of Schedule "A" attached to the aforementioned instrument of October 1, 1945. The journal entry made to record this transaction of October 1, 1945, is as follows:This opening journal entry is made to record the opening of a double entry set of books for Anchor Cleaning Service Co., the window and office cleaning business operated by Irving Shapiro. Then I have debit cost of route $ 83,972.72, credit indebtedness Herman Sperber, $ 22,000.Notes payable Herman Sperber, $ 61,972.72 to record the purchase of route and business by Irving Shapiro and his investment therein.The route includes 443 accounts at $ 10, $ 4,048.76, giving a total of $ 40,487.60 and 74 accounts at $ 9, $ 4,831.68, giving a total of $ 43,485.12, total of $ 83,972.72. 1Some time during the period October 1, 1945, 133 to March 4, 1947, Irving M. Shapiro employed a solicitor to acquire more customers. New customers were in fact obtained.Anchor Cleaning Service, Inc., a New York corporation, was dissolved by certificate of dissolution filed in the New York Department of State on December 30, 1946, and advertised in the American Banker, a daily newspaper, once each week for 2 successive weeks commencing January 6, 1947. In the liquidation of Anchor, the corporation dissolved on December 30, 1946, and Shapiro, its sole stockholder, acquired all of its assets. Thereafter, he carried on the window and general cleaning business as sole proprietor until March 4, 1947, on which date petitioner was incorporated and Shapiro transferred thereto the window and general cleaning business that he was carrying on as a sole proprietor in exchange for which he received all the capital stock thereof. The journal entry recording this transfer of a business to petitioner on March 4, 1947, shows that the following assets and liabilities were transferred:Cost of route; machinery and fixtures; truck and autos; notes payable Herman Sperber; loans payable Modern Industrial Bank; loans payable Nathan Shapiro; loans 134 payable Federal House and Window Cleaning Company; loans 1032 payable Keystone Window Cleaning Company; notes payable Chase National Bank; to record assets taken over and liabilities assumed as of this date as per Irving M. Shapiro's agreement in corporation's minutes.The value which had been assigned to each account on Schedule "A" attached to the instrument of October 1, 1945, for purposes of calculating the purchase price of the stock of Anchor Cleaning Service, Inc., and the name and goodwill of General Cleaning Service Company was deducted by the petitioner whenever a customer on those lists discontinued doing business with the petitioner. Schedule B (Cost of Operations) attached to petitioner's Federal income tax return for the fiscal year ended March 31, 1948, contains, among other items, one entitled "Route Expense -- $ 9,728.76" representing the total value assigned to the accounts which discontinued doing business with the petitioner during such years. Schedule B (Cost of Operations) attached to petitioner's Federal income tax return for the fiscal year ended March 31, 1949, contains, among other items, an item entitled "Route Expense -- $ 7,755.00" representing 135 the total value assigned to the accounts which discontinued doing business with the petitioner during such year. At no time did Shapiro or petitioner depreciate or amortize, or take obsolescence or other periodic adjustment with respect to these accounts. They remained capitalized at the purchase price thereof on petitioner's books until actual loss occurred.The New York State franchise tax for 1948 was 4 1/2 per cent and for 1949 was 5 1/2 per cent. Respondent made no allowance for such tax in adjusting petitioner's net income and determining the deficiency herein involved.OPINION.The primary question here is whether petitioner is entitled to deduct the losses sustained in the taxable years by reason of the discontinuance by certain of its customers of their general and window cleaning accounts which accounts petitioner had purchased.According to the pleadings herein, petitioner seeks to establish such deductions as either trade or business expenses under section 23 (a) of the Internal Revenue Code or as losses sustained by a corporation and not compensated for by insurance or otherwise under section 23 (f) thereof. 2136 1033 The facts found by us on this record not only do not establish the propriety of the claimed deductions under section 23 (a), supra, but to the contrary, tend affirmatively to refute them. It is quite clear that the acquisition of the accounts in question constituted a capital investment and that the principal element of the property so acquired was goodwill. The Pevely Dairy Co., 1 B. T. A. 385. Nor do we understand petitioner seriously to contend otherwise. This being true, the deductions sought cannot be justified under section 23 (a). Furthermore, since the element of goodwill is involved, it is also clear that such deductions are not allowable under section 23 (l). Cf. Red Wing Malting Co. v. Willcuts, 15 F. 2d 626. See also Regs. 111, sec. 29.23 (l)-3.With regard to petitioner's claims under section 23 (f), supra, the basic disagreement between the parties appears to be as to whether the accounts in question collectively constitute one capital asset or a composite of separate individual capital assets. Petitioner takes the latter view and maintains that the present situation is to be distinguished137 from those involving unitary business routes or customer lists wherein the aggregate of patrons constitutes the indivisible goodwill of a business entity. It is petitioner's contention that here there was a purchase of separate accounts, so evaluated and bargained for, and acquired for a consideration which equaled the total of the purchase prices individually so assigned to each. On the other hand, respondent takes the position that the accounts in controversy constitute one asset, consisting largely of goodwill, and composed, for the most part, of a list of customers who subscribed for petitioner's services. Respondent, therefore, argues that any increase or decrease in the number of such customers would be merely an incidental fluctuation of the whole listing; that, while such may cause a corresponding fluctuation in the value of the asset, goodwill, the entire asset itself is not thereby lost; and that any loss deduction must await a final disposition thereof. To support such divergent views, both parties cite and strongly rely upon Metropolitan Laundry Co. v. United States, 100 F. Supp. 803">100 F. Supp. 803.In the cited case the taxpayer, at the time of138 its organization in 1903, acquired certain plants, equipment, and laundry routes in both San Francisco and Oakland in exchange for its capital stock. Thereafter, for a period of approximately 40 years, the taxpayer successfully carried on its laundry business in the two cities. The operation in San Francisco was wholly distinct from that in Oakland, the business in the latter city being carried on under an entirely different name. In 1943, the United States took possession of the taxpayer's San Francisco plant and facilities for the use of the Armed Forces, whereupon the taxpayer was forced to abandon completely its San Francisco laundry routes, although it continued to operate its Oakland plant and to service its routes therein. Thereafter, upon being 1034 restored to possession of its San Francisco plant, the taxpayer immediately resumed operation and tried unsuccessfully for approximately 3 years to regain and re-establish its civilian business. Finally, in 1949, it closed its San Francisco plant and abandoned its laundry routes in that city.The United States District Court for the Northern District of California, Southern Division, sustained the taxpayer in its contention139 that its capital investment in San Francisco laundry routes was completely lost in 1943 when the routes were abandoned and that such loss was deductible under section 23 (f) of the Code. In the course of its opinion, the court said that:in a tax sense, a capital asset in the form of a list of customers regularly subscribing for goods or services is not to be regarded as an aggregation of disconnected individual subscribers. Such lists have been treated as unitary structures irrespective of incidental fluctuations and alterations. Houston Natural Gas Corporation v. Commissioner, 4 Cir., 1937, 90 F. 2d 814, natural gas consumers; Meredith Pub. Co. v. Commissioner, 8 Cir., 1933, 64 F.2d 890">64 F. 2d 890, magazine subscribers; Commercial National Insurance Co., 1928, 12 B.T.A. 655">12 B.T.A. 655, insurance policyholders; Rose C. Pickering, 1926, 5 B.T.A. 670">5 B.T.A. 670, newspaper subscribers; Appeal of The Danville Press, Inc., 1925, 1 B.T.A. 1171">1 B.T.A. 1171, newspaper subscribers. The gradual replacement of old patrons with new ones is not to be regarded as the exchange of old capital assets 140 for new and different ones, but rather as the process of keeping a continually existing capital asset intact. * The foregoing rationale is that to which respondent adverts for support of his present position. Later in its opinion and in answer to the Government's contention that the loss there sustained by the taxpayer was not recognizable for tax purposes because it was not evidenced by a "closed and completed" transaction since the taxpayer did not completely withdraw from the laundry business at the time its San Francisco routes were lost, the court spoke as follows:It may be granted that good will cannot exist in the abstract, apart from a going business, and that, generally speaking, the good will of a business cannot be entirely disposed of or destroyed while the business continues. But certainly a going concern can dispose of its business in a particular area or in respect to a particular product or service along with the incident good will without abandoning its entire business. * * And, * * * so long as the business and the good will disposed of may be assigned a distinct transferable value, the transaction may properly be recognized, for tax purposes, as a closed141 one. * Petitioner relies upon the language last above quoted to bolster its position. However, it is our considered opinion that petitioner draws scant support therefrom. The significant fact which is the key to the conclusion there reached by the court, as to the propriety of which we do not feel called upon to express an opinion, is not the loss by the taxpayer of part or all of its customers in San Francisco, but rather that following such loss, petitioner abandoned its entire 1035 San Francisco operation. The same is not true here. In this case, following the loss by petitioner of a portion of its customers, there was no abandonment or disposition by it of any identifiable segment of its business. Neither, for aught the record shows, did petitioner put itself in a position where it would be unable to solicit or to serve such customers should they later decide to return to it.Moreover, the accounts acquired by petitioner through Shapiro from his vendors constituted a single intangible asset in the form of a list of customers, petitioner's contentions to the contrary notwithstanding. That the total price paid was the sum of the monthly billing of each customer, 142 multiplied by $ 9 or $ 10, as the case may be, does not make each customer's account a separate unit or asset. The base thus employed was merely a formula for determining the total purchase price to be paid. What petitioner actually is seeking here is a deduction for a partial loss of a capital investment, which deduction is not permitted under the Code. Rather, any such deduction must await the final disposition of the capital investment. Respondent is sustained on this issue.There remains petitioner's claim with regard to the New York State franchise tax which it asserts will be increased as the result of the holding herein. Insofar as the liability on which such tax is based was proper and uncontested by petitioner, the deficiency for the taxable year before us will be reduced by that portion of the increase in State tax applicable thereto. Curran Realty Co., 15 T. C. 341. However, no deduction is allowed for the year in controversy for the additional State tax that will be payable with respect to the item herein litigated. Concord Lumber Co., 18 T. C. 843. Accordingly, we so hold.Decision will be entered under143 Rule 50. Footnotes1. These figures are as testified by petitioner's accountant.↩2. 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, * * ** * * *(f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620469/	Karl Laurence Kirkman v. Commissioner.Kirkman v. CommissionerDocket No. 4788-68.United States Tax CourtT.C. Memo 1970-180; 1970 Tax Ct. Memo LEXIS 179; 29 T.C.M. (CCH) 797; T.C.M. (RIA) 70180; June 29, 1970, Filed Karl Laurence Kirkman, pro se, 13301 Edinburgh Lane, Laurel, Md.R.S. Erickson, for the respondent. 798 STERRETTMemorandum Findings of Fact and Opinion STERRETT, Judge: The Commissioner determined a deficiency in petitioner's Federal income tax for the calendar year 1965 in the amount of $890.86. The sole issue presented for our decision is whether certain payments were received by petitioner as a "scholarship" or as a "fellowship grant" within the meaning180 of section 117(a)(1) of the Internal Revenue Code of 1954. 1Findings of Fact Some of the facts have been stipulated and the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. A summary of the salient facts is set forth below. At the time of filing his petition herein, Karl Laurence Kirkman (hereinafter referred to as the petitioner) had his legal residence in Laurel, Maryland. He filed his individual Federal income tax return for the taxable year 1965 with the director of the internal revenue service center, Philadelphia, Pennsylvania. During the year involved herein (1965), petitioner was enrolled in a program of study at Webb Institute of Naval Architecture (hereinafter referred to as Webb Institute), Glen Cove, Long Island, New York. He was a candidate during this period for a bachelor of science degree in naval architecture and marine engineering, which degree he received in June 1965. All undergraduate students at Webb Institute, including petitioner, were given scholarships covering the181 expenses of tuition, fees, board, lodging, and necessary work materials. Webb Institute students only furnished their own clothing and personal spending money. Each academic year at Webb Institute is divided into four parts. There are two academic semesters, a 10-week "practical work term," and one holiday period. The first academic semester begins the latter part of August and extends to about the middle of December. It is followed by the practical work term. The second academic semester begins about the middle of March and continues for 16 weeks until commencement and the beginning of the holiday period. Satisfactory completion of the 10-week practical work period between the first and second semesters of each academic year is a degree requirement for all Webb Institute students. The usual sequence consists of working as a mechanic in a shipyard the first year; as a cadet in the engine room of a ship the second year; and in a design office as a draftsman or junior engineer the third and fourth years. Students frequently arrange their own work term with private employers not affiliated with the Webb Institute. In cases where potential employers are unfamiliar with the practical182 work term program, Webb Institute assists students in securing suitable positions and in arranging for compensation at the "going rate" for such activities. Pertinent provisions of a document entitled "Winter Work Instructions" stating the purpose and requirements of the Webb Institute practical work program, which document was issued to the petitioner during his matriculation at Webb Institute, are set forth below: WEBB INSTITUTE OF NAVAL ARCHITECTURE WINTER WORK INSTRUCTIONS I Introduction * * In order to become a highly competent marine engineer or naval architect it is necessary to be thoroughly familiar with ship construction, terminology, arrangements, and operating practice, both in the deck and engineering departments. Experience indicates that many poor designs are made by designers with an adequate theoretical preparation but with an unfortunate lack of knowledge of current practice, and with no practical experience. The Webb winter work program is designed not only to introduce students to the essential practical phase of their preparation for a professional career, but also to enable them to learn materials which will make their theoretical studies more realistic. 183 Since learning is the primary objective, jobs which will give the best experience should be sought rather than those providing the highest rate of pay. II The Work Term * * Satisfactory completion of 10 weeks per year is a specific requirement for graduation and the Institute reserves the right to delay or refuse to grant a student's 799 degree if this requirement is not met and there are no mitigating circumstances. * * * VI Special Assignments during Work Period The following special projects will be completed during the work period and submitted not later than the end of the first week of the second semester: 1. Technical Report - all students * * * The technical report will be on 8 1/2 X 11 paper neatly handwritten or typed, using double spacing, and consisting of 900-1000 words. The paper should include the following: (a) General description of work done and assigned responsibilities. (b) Brief comment on working conditions. (c) Important things learned. (d) Suggestions and recommendations. * * * Hydronautics, Inc. (hereinafter referred to as Hydronautics) is a private corporation which has achieved prominence in the field of naval and industrial184 hydrodynamics. During his senior year (i.e., the period at issue herein) the petitioner successfully fulfilled the practical work term requirements by obtaining employment as a junior research scientist with Hydronautics. The petitioner had previously been employed by Hydronautics during the work term period of his junior year and also during the summer between his junior and senior years in college. He subsequently became a full-time employee at Hydronautics upon his graduation from Webb Institute in June of 1965. Hydronautics has neither a written nor an oral agreement with Webb Institute regarding work term arrangements. However, Hydronautics informed Webb Institute that it would like to have practical work term students if they were available. The officers of Hydronautics were familiar with the practical work term requirements instituted by Webb Institute because its professional staff included several Webb graduates. From the standpoint of Hydronautics, the primary purpose for hiring Webb Institute students during the 10-week practical work term was to evaluate their potential as future full-time employees. Hydronautics considered Webb Institute an excellent source of employees185 and desired to maintain good relations with the school. During its 10-year history up to the time of trial, Hydronautics had employed approximately 7 or 8 practical work term students. Of these, only petitioner and one other practical work term student subsequently returned to Hydronautics as permanent full-time employees. Petitioner made no agreement with Hydronautics as a condition of his winter work term to return as a full-time employee after graduation. Webb Institute does not participate in any way in the supervision or control of its students while they are employed by Hydronautics during the winter practical work term. Hydronautics has complete authority to prescribe the duties of its practical work term students. While employed at Hydronautics during the winter practical work term of his senior year, petitioner performed a variety of functions under the supervision of Hydronautics personnel. These functions were to some extent useful to Hydronautics. Although petitioner was permitted to work on his thesis during the winter practical work term at issue, he had to obtain the permission of a Hydronautics officer to do so, and his work on the thesis was not allowed to conflict186 with the needs of Hydronautics. During his 10-week winter work term employment with Hydronautics during 1965, petitioner received regular payments by check contemporaneous with the payment by Hydronautics of all employee wages. Such payments were commensurate with the "going rate" then being paid by industry to students. Hydronautics withheld Federal withholding and social security taxes from the payments to petitioner. These payments were denominated as payroll on Hydronautic's corporate books and deducted on its Federal income tax return as salary and wage expense. The payments made by Hydronautics to petitioner were computed on an hourly basis. He was paid only for those hours he worked and was paid overtime for any additional hours. Hydronautics did not intend to pay for petitioner's schooling and did not view the payments in question as either a gift or a scholarship. The payments to petitioner were handled and treated in the same manner as wages paid to any other Hydronautics part or fulltime employee. When petitioner left Hydronautics to return to school at the end of the winter work term in 1965, the payments from Hydronautics were terminated and he received no further187 financial assistance from Hydronautics while attending Webb Institute. Petitioner did not replace a regular 800 Hydronautics employee and was not replaced after returning to school. Petitioner received a raise or increase in salary for each of the three separate periods during which he was employed by Hydronautics. Although petitioner was made a member of the company group life and medical insurance policies while a student-employee at Hydronautics, he was not eligible for pension, salary continuation, vacation, sick leave, or emergency leave. Upon becoming a full-time employee at Hydronautics following his graduation from Webb Institute, petitioner received additional compensation and other benefits as a result of his prior work experience as a part-time employee. Petitioner timely filed his Federal income tax return for the taxable year 1965 with the director of the internal revenue service center, Philadelphia, Pennsylvania, showing a liability in the amount of $890.86, which amount was duly paid and assessed. On April 7, 1966, petitioner filed a claim for refund in the amount of $1.00 or more with the district director of internal revenue, Baltimore, Maryland, on the basis188 that payments received and reported as taxable income on his 1965 income tax return in fact represented a scholarship or fellowship grant excludable from gross income under section 117 of the Internal Revenue Code of 1954. On February 3, 1967, the assessment of $890.86 was abated and said amount, plus interest in the amount of $41.84, was refunded to petitioner. The Commissioner subsequently issued a statutory notice asserting a deficiency in the amount of $890.86, which notice contained the following explanation: The issue raised in your claim for refund requesting an exclusion from income of a portion of the compensation received from Hydronautics, Inc. under the provisions of Section 117(a) of the Internal Revenue Code has been given careful consideration and it has been determined that the claim is not allowable because you have failed to establish that any portion received is excludable as a scholarship or fellowship grant. Therefore, this income is includable in gross income under the provisions of Section 61 of the Internal Revenue Code. Since petitioner had intended to exclude from gross income as a scholarship189 or fellowship grant only those payments received during the 10-week period while at Hydronautics, the Mid-Atlantic Service Center received two separate checks from petitioner in the amount of $488.20 ($473.49 plus interest of $14.71) on February 14, 1967, and $444.50 ($417.37 plus interest of $27.13) on February 13, 1967. Petitioner remitted the $44.50 payment only as an advance deposit pending a resolution of the pending case here involved. Neither the payment of $488.20 nor the payment of $444.50 has been reassessed as tax and interest. Petitioner's payments have been held as advance deposits pending the outcome of the instant case. Opinion This case presents for our decision the familiar question of whether certain amounts received by the petitioner are excludable from his gross income as a "scholarship" or a "fellowship grant" within the meaning of section 117(a)(1), 2 or alternatively whether such amounts constitute compensation for services includable in the petitioner's gross income under section 61(a)(1). 3 Petitioner contends that the payments at issue herein qualify as a non-taxable "scholarship" or "fellowship grant"; whereas, respondent advances the position that190 such payments represent taxable compensation to the petitioner. We agree with the respondent. It is well settled that before the exclusionary provisions of section 117 become operative, it must first be established "that the payment sought to be excluded has the normal characteristics associated with the term 'scholarship'." Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407, 413 (1966), affirmed per curiam 373 F. 2d 742 (C.A. 4, 1967). See also Edward A. Jamieson, 51 T.C. 635">51 T.C. 635, 638 (1969) and Stephen L. Zolnay, 49 T.C. 389">49 T.C. 389, 396 (1968). Although the terms "scholarship" 191 and "fellowship grant" are not defined in the Code, such terms are defined, albeit rather generally, in 801 respondent's regulations.4 In Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 751 (1969), the Supreme Court approved the definitions contained in these regulations by stating that they "are prima facie proper, comporting as they do with the ordinary understanding of 'scholarships' and 'fellowships' as relatively disinterested, 'no-strings' educational grants, with no requirement of any substantial quid pro quo from the recipients." Section 1.117-4(c), Income Tax Regs., expressly excludes from the definition of "scholarship" and "fellowship grant" amounts representing "compensation for past, present, or future employment services" and amounts paid to an individual "to enable him to pursue studies or research primarily for the benefit of the grantor." With respect to this regulation, the Supreme Court in Bingler v. Johnson, supra, stated, in part, the following at pages 757 and 758: The thrust of the provision. dealing with compensation is that bargained-for payments, given only as a "quo" in return for the quid of services rendered - whether past, present, 192 or future - should not be excludable from income as "scholarship" funds. Careful consideration of the record herein compels us to the conclusion that the payments at issue were given to petitioner by Hydronautics principally as a quo in consideration for the quid of services he rendered while employed by Hydronautics during the 1965 winter work term. The record before us reveals that during the year involved herein (1965) petitioner was enrolled in a program of study at Webb Institute as a candidate for a bachelor of science degree in naval architecture and marine engineering. All Webb Institute students were required to complete satisfactorily a 10-week practical work period between the first and second semesters of each academic year. Petitioner was employed193 as a junior research scientist with Hydronautics, a private corporation in the field of naval and industrial hydrodynamics, during the 1965 practical work period. Webb Institute did not participate in any way in the supervision of petitioner while he was employed by Hydronautics, and Hydronautics had complete authority to prescribe petitioner's duties and supervise his work during the practical work term period. During the 10-week practical work period, petitioner received regular payments by check contemporaneous with the payment by Hydronautics of all employee wages. Hydronautics withheld Federal withholding and social security taxes from the payments to petitioner, denominated such payments as payroll on its corporate books, and deducted such payments as salary and wage expense on its Federal income tax return. Dr. Bennett L. Silverstein, vice-president of Hydronautics, testified at the trial of this case that the payments at issue were not intended by Hydronautics to pay for petitioner's schooling, and were not viewed either as a gift or scholarship. These payments were handled and treated by Hydronautics in the same manner as wages paid to any other Hydronautics part or full-time194 employee. Petitioner was paid on an hourly basis only for the hours he worked at Hydronautics during the practical work term, and the payments ceased as soon as he returned to school at the end of the winter work term in 1965. In view of the foregoing facts and evidence of record, we would be hard pressed not to find the existence of a "substantial quid pro quo" in the case at bar. Consequently, we hold that this case is governed by the principles enunciated in Bingler v. Johnson, supra, and the payments involved herein represent compensation for services includable in petitioner's gross income under section 61(a)(1). Petitioner is to be congratulated on an excellent presentation of his own case without the benefit of legal counsel. The main thrust of petitioner's argument is that the primary purpose of the practical work program was to further petitioner's education and training, rather than to benefit the grantor. See sec. 1.117-4(c)(2), Income Tax Regs.5 The evidence of record is to the contrary. Petitioner's own witness (Dr. Bennett Silverstein) testified that 802petitioner's services were of some use to Hydronautics, and that the primary purpose of Hydronautics195 in hiring Webb Institute practical work term students was to evaluate their potential as future full-time permanent employees. All evidence of probative value in the record before us is consistent with this testimony. Petitioner's reliance upon Commissioner v. Ide, 335 F. 2d 852 (C.A. 3, 1964), affirming 40 T.C. 721">40 T.C. 721 (1963); William Wells, 40 T.C. 40">40 T.C. 40 (1963); Chander P. Bhalla, 35 T.C. 13">35 T.C. 13 (1960); and Aileene Evans, 34 T.C. 720">34 T.C. 720 (1960), is misplaced. Those cases are readily distinguishable on their facts from the case at bar on the basis that the study and research activities involved therein did serve the primary purpose of furthering the taxpayer's education and training, and the payments involved therein did not represent compensation for services. 196 In essence, petitioner asks us to equate what might be referred to as "on-the-job training" to the grant of a scholarship or fellowship. To sustain this view would be to emasculate section 117. Accordingly, Decision will be entered for the respondent. Footnotes1. Unless otherwise designated, all future statutory references will be to the Internal Revenue Code of 1954.↩2. SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS. (a) General Rule. - In the case of an individual, gross income does not include - (1) any amount received - (A) as a scholarship at an educational institution (as defined in section 151(e)(4)), or (B) as a fellowship grant, * * ↩3. SEC. 61. GROSS INCOME DEFINED. (a) General Definition. - Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items;↩4. § 1.117-3. Definitions. (a) Scholarship. A scholarship generally means an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or a graduate, to aid such individual in pursuing his studies. * * * * * * (c) Fellowship grants. A fellowship grant generally means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. * * *↩5. In footnote 32 on page 758 of its opinion in Bingler v. Johnson, supra, the Supreme Court accepted the Government's position that the "primary purpose" test contained in paragraph (2) of sec. 1.117-4(c), Income Tax Regs., was merely an adjunct to the "compensation" provision contained in paragraph (1) of such regulations. The Court quoted the approved language from the Government's brief to the effect that while the second paragraph of the regulations supplemented the first by imposing a tax on bargained-for arrangements where an employeremployee relationship was not created, the general philosophy underlying both paragraphs was the same, i. e., the terms "scholarship" and "fellowship" do not include arrangements wherein the taxpayer provides a quid pro quo in return for money. Under this view, the petitioner herein would be taxable under either paragraph of the sec. 1.117-4(c)↩ regulations since we have found that he did in fact provide a quid pro quo in return for the payments at issue.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620471/	Wilfred Abel and Lillian Abel v. Commissioner.Abel v. CommissionerDocket No. 86494.United States Tax CourtT.C. Memo 1962-192; 1962 Tax Ct. Memo LEXIS 117; 21 T.C.M. (CCH) 1044; T.C.M. (RIA) 62192; August 13, 1962117 Taxpayers, in a joint return, took the husband's father and stepmother as dependents. They had contributed $850 for their joint support but the father had received $720 from Social Security. Respondent disallowed the father as a dependent. Held, contribution of over half of the amount available for the support of the father and stepmother was sufficient to make them both petitioners' dependents. Lee A. Kamp, Esq., for the respondent. MULRONEY Memorandum Opinion MULRONEY, Judge: The respondent determined a deficiency in petitioners' income tax for the year 1957 in the amount of $132. The sole issue is whether petitioners are entitled to a dependency exemption for Isaac Abel, father of Wilfred Abel, for the year 1957. All of the facts are stipulated and are so found. Petitioners are husband and wife, who118 reside in New York, New York, and they filed their joint 1957 Federal income tax return with the district director of internal revenue, Upper Manhattan District, New York, New York. In this return they claimed Wilfred's father and stepmother as dependency exemptions. It is stipulated petitioners provided financial support to the father and stepmother in the year 1957 in the total amount of $850. During said year the father received Old Age Benefits from the Social Security Administration of $60 a month, or a total of $720. The father and stepmother did not receive payments from any other governmental or private welfare agency for the year 1957. Respondent disallowed the dependency exemption for the father on the ground that taxpayers did not furnish over half of his support because the Social Security payments were allocable to his support alone. Respondent admits the dependency exemption for the stepmother was proper. Section 152, Internal Revenue Code of 1954, states that "the term 'dependent' means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer119 (or is treated under subsection (c) as received from the taxpayer): * * The father or mother of the taxpayer * * * (5) * * * stepmother of the taxpayer." * * * Respondent's computation starts with the total amount of the support for both as $1,570 ( $720 Social Security payments to the father, plus $850 contributed by petitioners). Respondent allocates one-half of this sum to each. In this manner, respondent arrives at $785 being the total amount expended for the support of each. Respondent allocates $785 of the contributed sum of $850 to the stepmother and says she is a dependent and the balance, or $65, together with all of the Social Security payments ( $720), are allocated to the father and it is held he is not a dependent. When the dependency of Wilfred's parents is questioned and it is stipulated he provided financial support for both of them in an amount that is more than half of the amount that was available for the support of both during said year, we feel the taxpayer has established both as his dependents. 1 In such a situation the issue of dependency should not turn on whether one or both parents received the less than half available portion from some outside source. *120 We feel that for the purposes of the dependency credit statutes, the parents can be treated as a unit. Respondent's computation so treats them by admitting the taxpayer does not have to bear the impossible burden of showing the total annual expenditures for the support of each parent. This, respondent admits, can be found by allocating half of the amount available for the support of both, to each parent. We think the same fund, out of which the expenses of both were paid, should receive the same allocation. Since petitioners contributed more than half of that fund, both parents were dependents. Decision will be entered for the petitioners. Footnotes1. We so held in a Memorandum Opinion (Carl G. Jordan, filed August 12, 1958) which respondent argues was wrongly decided.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620472/	Estate of Elizabeth Annis Hutchinson, Charles H. McConnell, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Hutchinson v. CommissionerDocket No. 1112-67United States Tax Court51 T.C. 874; 1969 U.S. Tax Ct. LEXIS 183; February 27, 1969, Filed 183 Decision will be entered under Rule 50. Decedent established four testamentary trusts, A, B, C, and D, for the benefit primarily of a son, daughter, and numerous other relatives and descendants, both living and unborn, with remainders over, through trustee, to the Board of Regents of the State of Iowa. The trust corpus of each trust was subject to invasion to meet the required distributions to beneficiaries. The overall life of the trusts was estimated at about 100 years. Held: That there was no reasonable certainty of a gift to charity of any ascertainable amount at the date of decedent's death. Therefore, the claimed deduction is disallowed. J. R. Austin and Marvin F. Peterson, for the petitioner.Ronald M. Frykberg, for the respondent. Irwin, Judge. IRWIN874 Respondent determined an estate tax deficiency of $ 41,515.57.The sole issue is the deductibility of a charitable bequest of the remainder interests in several family trusts which the decedent set up by will.Our ultimate question is whether there was a bequest to charity reasonably185 ascertainable in amount and deductible from the gross estate under section 2055(a)(1), I.R.C. 1954.875 FINDINGS OF FACTSome of the facts have been stipulated and are so found.Petitioner is the Estate of Elizabeth Annis Hutchinson, Charles H. McConnell, executor. Decedent died a resident of Des Moines, Iowa, on August 13, 1963. An estate tax return was filed with the district director of internal revenue at Des Moines by the executor on November 13, 1964, showing an estate tax due of $ 530,320.02 which was paid at that time.Decedent left a will dated October 21, 1961, which was admitted to probate August 26, 1963, and a codicil to the will dated August 12, 1963. After making a number of specific bequests, decedent directed, in Item XXIV of her will, that the residue of her estate be divided into four equal trusts, A, B, C, and D, for the benefit of her son and daughter and other relatives with remainders over to the Board of Regents of the State of Iowa. Following is a list of such beneficiaries living at the time of decedent's death showing their relationships to decedent and dates of birth:Relationship to decedentDate of birthCharles Robert HutchinsonSon9/17/1929Patty Messer HutchinsonDaughter-in-law7/31/1931Margery Hutchinson SeverenceDaughter9/ 2/1930Charles Robert Hutchinson IIGrandson1/15/1960John Waldon Severence IIGrandson8/19/1955Thomas Arthur SeverenceGrandson8/15/1956Margery Annis McConnellSister3/ 2/1905Charles H. McConnellBrother-in-law5/31/1904Donald W. AnnisBrother7/31/1894Albert David AnnisBrother9/24/1902Elsie Matheny AnnisSister-in-law10/15/1910Suzanne McConnell SchreiberNiece3/ 7/1933Charles Allen SchreiberHusband of niece,2/24/1931Suzanne McConnell Schreiber. Charles James McConnellNephew6/27/1936Jeffrey Allan SchreiberGrandnephew2/27/1956Catherine Lynn SchreiberGrandneice11/ 6/1958186 It is noted that the ages of the beneficiaries ranged from 3 years to 69 years on the date of decedent's death.Following are the material portions of decedent's will, including any modifications made by the codicil:ITEM XXIVI give, devise and bequeath the residue of my estate to Charles H. McConnell, In Trust, for the uses and purposes, and upon the terms and conditions hereinafter set forth:876 Section 1.The trust period shall commence upon the transfer of the property to the Trustee, and shall continue during the lives of my son, Charles Robert Hutchinson; my daughter, Margery Hutchinson Severence; my grandsons, Thomas Arthur Severence, John Waldon Severence II and Charles Robert Hutchinson II; my sister, Margery Annis McConnell; my brothers, Donald W. Annis and Albert David Annis; my brother-in-law, Charles H. McConnell; my sister-in-law, Elsie Matheny Annis; my niece, Suzanne McConnell Schreiber; my nephew, Charles James McConnell; husband of my niece, Charles Allan Schreiber; son of my niece, Jeffrey Allan Schreiber; and daughter of my niece, Catherine Lynn Schreiber; and the survivor of them, and for twenty-one (21) years thereafter, unless sooner terminated as 187 hereinafter provided.Section 2.The trust property shall be divided in kind into four equal shares which shall be held and administered as the Elizabeth Hutchinson Trust "A", which shall be for the primary benefit of my daughter, Margery Hutchinson Severence; the Elizabeth Hutchinson Trust "B", which shall be for the primary benefit of my son, Charles Robert Hutchinson; the Elizabeth Hutchinson Trust "C", which shall be for the primary benefit of my brother-in-law, Charles H. McConnell, my sister, Margery Annis McConnell and my niece, Suzanne McConnell Schreiber; and the Elizabeth Hutchinson Trust "D", which shall be for the purpose of providing educational benefits for members of my family and their descendants; but for convenience sometimes referred to herein as Trust "A", Trust "B", Trust "C" and Trust "D", respectively.Section 3.In the administration of my husband's estate and the management of the trusts created by his will, I have attempted to achieve the maximum income and growth commensurate with preservation of the principal, and I am deeply satisfied that by managing my own property in the same way, I have been able to make material provisions for my children during188 my lifetime and yet leave a substantial estate. I have given much time and thought to this Will and especially to the trusts which will represent the bulk of my estate, and in order to insure to the members of my family the advantages I have attempted to provide for them, I have decided to give my Trustee considerable discretion in the matter of adjusting benefits to their needs and deserts. Accordingly, I hereby grant to my Trustee the following special powers and discretions in the administration of Trusts "A", "B" and "C", which shall be in addition to other powers given him by this Will.(a) In the event of substantial changes in the cost of living, the Trustee shall be authorized to adjust all amounts specified herein for minimum annual distributions, every fifth year, commencing with the sixth full calendar year of the trusts, in proportion to changes in the cost of living as indicated by the "Consumers Price Index for Moderate Income Families in Large Cities, New Series (All Items) Published by the Bureau of Labor Statistics, U.S. Department of Labor (1947-1949=100)", or a comparable and equally reliable index; provided that such adjustments shall not reduce said distributions189 below the amounts specified herein; and provided, further, that such adjustments may be "rounded" to the nearest multiple of five ($ 5) Dollars.(b) In the event Margery Hutchinson Severence, Charles Robert Hutchinson, Suzanne McConnell Schreiber, Margery Annis McConnell or Charles H. McConnell, 877 while receiving income from one of the trusts, shall suffer some extreme financial hardship beyond his reasonable control, the Trustee shall be authorized to distribute to him in any calendar year out of the corpus of such trust, a maximum of one hundred (100%) percent of one of his minimum quarterly distributions for such year. [Elsie Matheny Annis was added to this list by the codicil to decedent's will.]* * * Section 4.The following provisions shall apply to all distributions of net income from Trusts "A", "B" and "C". * * (f) The Trustee shall make all quarterly and annual distributions out of net income to the extent thereof, and if the aggregate of the minimum distributions required from any trust for any year exceeds the net income of such trust for that year, the excess shall be charged against the corpus of such trust.Section 5.Distributions from the Elizabeth190 Hutchinson Trust "A", which is created for the primary benefit of my daughter, Margery Hutchinson Severence, shall be made, as follows:(a) During my said daughter's lifetime, all of the net income after any distributions required under paragraph (b), but not less than Two Thousand Four Hundred ($ 2,400) Dollars if such distributions are required, and not less than Four Thousand Eight Hundred ($ 4,800) Dollars if such distributions are not required, shall be distributed to her.(b) During the lifetime of my sister-in-law, Elsie Matheny Annis, but only so long as she remains unmarried, the sum of One Thousand Two Hundred ($ 1,200) Dollars per year shall be distributed to her; and during the lifetime of my brother, Dr. Albert David Annis, the sum of Two Thousand ($ 2,000) Dollars shall be distributed to him; provided, that if my daughter, Margery Hutchinson Severence, shall be widowed, divorced or legally separated, then in any such event, the Trustee shall distribute to my said sister-in-law, if she is then living and remains unmarried, out of corpus, the sum of Three Thousand ($ 3,000) Dollars; and shall distribute to my said brother, if he is then living, out of corpus, the sum of191 Three Thousand ($ 3,000) Dollars; and thereafter no distributions shall be made under this paragraph (b).(c) After the death of my said daughter, all of the net income after any distributions required under paragraph (b) shall be distributed in the following order, that is to say, distributions shall be made under paragraph (2) only if such net income cannot be distributed as provided in paragraph (1), and distributions shall be made under paragraph (3) only if such net income cannot be distributed as provided in paragraph (2).(1) To the daughters of Margery Hutchinson Severence in equal portions or to the survivor, provided that the portion of each such daughter shall be not less than One Thousand Two Hundred ($ 1,200) Dollars.(2) To Charles Robert Hutchinson.(3) To the children of Charles Robert Hutchinson in equal portions or to the survivor.(d) Upon the death of the last surviving beneficiary who, if living, would be entitled to income from the Elizabeth Hutchinson Trust "A", the corpus and any undistributed income of said trust shall be transferred to and become a part of the corpus of the Elizabeth Hutchinson Trust "D", created under this Will.878 Section 6.Distributions192 from the Elizabeth Hutchinson Trust "B", which is created for the primary benefit of my son, Charles Robert Hutchinson, shall be made, as follows:(a) During my said son's lifetime, all of the net income after any distributions required under paragraph (b), but not less than Four Thousand Eight Hundred ($ 4,800) Dollars, shall be distributed to him.(b) During the lifetime of my brother, Dr. Albert David Annis, the sum of One Thousand ($ 1,000) Dollars per year shall be distributed to him; and during the lifetime of my sister-in-law, Elsie Matheny Annis, but only so long as she remains unmarried, the sum of Six Hundred ($ 600) Dollars per year shall be distributed to her.(c) After the death of my said son, if he is survived by a wife who was living with him at the time of his death, the sum of Two Thousand Four Hundred ($ 2,400) Dollars per year shall be distributed to her during her lifetime, but only so long as she remains unmarried.(d) [Substituted from the codicil.] After the death of my said son, all of the net income after any distributions required under paragraphs (b) and (c) shall be distributed in the following order, that is to say, distributions shall be made under paragraphs193 (2), (3) and (4) only if such distributions cannot be made under paragraphs (1), (2) and (3), respectively.(1) To the children of my said son in equal portions or to the survivor, provided that the portion of each such child shall be not less than Two Thousand Four Hundred ($ 2,400) Dollars.(2) To the grandchildren of my said son in equal portions or to the survivor.(3) To Marjorie Hutchinson Severence.(4) To the daughters of Marjorie Hutchinson Severence in equal portions or to the survivor.(e) Upon the death of the last surviving beneficiary who, if living, would be entitled to income under the Elizabeth Hutchinson Trust "B", the corpus and any undistributed income of said trust shall be transferred to and become a part of the corpus of the Elizabeth Hutchinson Trust "D", created under this Will.Section 7.The Corpus of the Elizabeth Hutchinson Trust "C" shall be divided into three equal shares, for the primary benefit respectively of my brother-in-law, Charles H. McConnell, my sister, Margery Annis McConnell, and my niece, Suzanne McConnell Schreiber, and distributions therefrom shall be made, as follows:(a) From the share created for the primary benefit of my brother-in-law, 194 Charles H. McConnell, distributions shall be made, as follows:(1) During the lifetime of my brother-in-law, Charles H. McConnell, all of the net income, but not less than Two Thousand Four Hundred ($ 2,400) Dollars, shall be distributed to him.(2) After the death of my said brother-in-law, all of the net income shall be distributed in the following order, that is to say, distributions shall be made under paragraphs (ii) or (iii) only if distributions cannot be made under paragraphs (i) or (ii), respectively:(i) To my sister, Margery Annis McConnell, not less than Two Thousand Four Hundred ($ 2,400) Dollars.(ii) To my niece, Suzanne McConnell Schreiber, not less than One Thousand Two Hundred ($ 1,200) Dollars.(iii) To the children of Suzanne McConnell Schreiber born after 1955, in equal portions or to the survivor.879 (3) Upon the death of the survivor of Charles H. McConnell, Margery Annis McConnell, Suzanne McConnell Schreiber and the children of Suzanne McConnell Schreiber born after 1955, the remaining balance of said share shall be transferred to and become a part of the Elizabeth Hutchinson Trust "D", created under this Will.(b) From the share created for the primary195 benefit of my sister, Margery Annis McConnell, distributions shall be made, as follows:(1) During the lifetime of my sister, Margery Annis McConnell, all of the net income, but not less than Two Thousand Four Hundred ($ 2,400) Dollars, shall be distributed to her.(2) After the death of my said sister, all of the net income shall be distributed in the following order, that is to say, distributions shall be made under paragraphs (ii), (iii) and (iv) only if distributions cannot be made under paragraphs (i), (ii) and (iii), respectively.(i) To my children, Charles Robert Hutchinson and Margery Hutchinson Severence, in equal portions or to the survivor.(ii) To the children of Charles Robert Hutchinson and the daughters of Margery Hutchinson Severence, in equal portions, or to the survivor.(iii) To my niece, Suzanne McConnell Schreiber.(iv) To my grandniece, Catherine Lynn Schreiber.(3) Upon the death of the survivor of Charles H. McConnell, Margery Annis McConnell, Charles Robert Hutchinson, Margery Hutchinson Severence, the children of Charles Robert Hutchinson, the daughters of Margery Hutchinson Severence, Suzanne McConnell Schreiber and Catherine Lynn Schreiber, the remaining196 balance of said share shall be transferred to and become a part of the Elizabeth Hutchinson Trust "D", created under this Will.(c) [Substituted from the codicil.] From the share created for the primary benefit of my niece, Suzanne McConnell Schreiber, distributions shall be made as follows:(1) During the lifetime of my said niece, all of the net income shall be distributed to her.(2) After the death of my said niece, all of the net income shall be distributed in the following order, that is to say, distributions shall be made under paragraphs (ii) and (iii) only if distributions cannot be made under paragraphs (i) and (ii), respectively.(i) To the children of Suzanne McConnell Schreiber born after 1955, in equal portions or to the survivor.(ii) To my children, Charles Robert Hutchinson and Margery Hutchinson Severence, in equal portions, or to the survivor.(iii) To the children of Charles Robert Hutchinson and the daughters of Margery Hutchinson Severence, in equal portions, or to the survivor.(3) Upon the date of the death of the survivor of Charles H. McConnell, Suzanne McConnell Schreiber, the children of Suzanne McConnell Schreiber born after 1955, Charles Robert Hutchinson, 197 Marjorie Hutchinson Severence, the children of Charles Robert Hutchinson and the daughters of Marjorie Hutchinson Severence, the remaining balance of said share shall be transferred to and become a part of the Elizabeth Hutchinson Trust "D" created under this Will.(d) During the lifetime of Charles H. McConnell, the sum of Three Thousand ($ 3,000) Dollars shall be distributed to him each year on December 31, out of the corpus of the Elizabeth Hutchinson Trust "C", and said sum shall be charged equally against the three shares comprising said corpus.880 Section 8.The Elizabeth Hutchinson Trust "D" is created for the purpose of providing educational benefits, and in order to insure maximum flexibility, I direct that the income of the trust be accumulated and added to the corpus, and that distributions be made out of the corpus, as follows:(a) The Trustee shall make periodic distributions for the purpose of providing or helping to provide college educations in accordance with the conditions and requirements herein set forth.(1) All members of the following classes shall be eligible for benefits hereunder: Lineal descendants of my daughter, Margery Hutchinson Severence, born198 after 1955; lineal descendants of my son, Charles Robert Hutchinson, born after 1959; lineal descendants of my niece, Suzanne McConnell Schreiber, born after 1955; grandchildren of my nephew, Charles James McConnell; and lineal descendants of said grandchildren.(2) The Trustee shall compile and maintain during the continuance of the trust a record of births, marriages, divorces, legal separations, deaths, addresses, high school entrances, and any other statistics that may be necessary or desirable for the purpose of enabling the Trustee to determine the persons eligible for benefits and to notify them of such eligibility. It shall be the duty of each parent or guardian of a child who is eligible for benefits to furnish such statistics for such child, and it shall be the duty of each eligible child who desires benefits to see that all such statistics pertaining to his eligibility have been so furnished. The Trustee's record shall be turned over to the Iowa State Board of Regents at the end of the trust period.(3) The Trustee shall notify each eligible child of his eligibility on or before his fifteenth (15th) birthday and again during the first half of his senior year in high school, 199 so he will be able to properly plan his high school courses for college entrance.(4) Each eligible child for whom statistical information has been furnished the Trustee, shall be entitled to benefits upon furnishing the Trustee with evidence of his admission to the college he plans to attend. Upon receipt of such evidence, and of any other evidence of the child's intent which the Trustee may reasonably require, the Trustee shall forthwith pay over to him the sum of Five Hundred ($ 500) Dollars for transportation and personal expenses, and shall obtain from the admission's office of Iowa State University or the State University of Iowa, whichever offers courses that are most similar to the courses the beneficiary intends to take, a detailed estimate of the average cost at such university of dormitory room and board, tuition, fees, books and supplies for the ensuing school year.A sum equal to such estimate shall be deposited to an interest-bearing account in a government supervised and insured bank or savings and loan association, in the Trustee's name, as trustee for such beneficiary. The Trustee may increase said sum by five (5%) percent to cover any increases that may occur during200 the year, and any portion of such increase which is not so required may be retained for the following year. * ** * * (6) Any beneficiary who in any year shall have earned two-thirds (2/3) of the credit hours recommended by the college for his program and year, and whose progress report shall indicate a sincere effort to obtain a college education, shall be entitled to benefits, determined in the same manner, for the succeeding year, until he shall have received benefits for four years; provided that such benefits may be spread over an elapsed period of not more than six (6) 881 years if, because of circumstances beyond his reasonable control, the beneficiary requires such longer period.If a beneficiary shall have earned four full years' credits within the time prescribed herein, with an overall grade average equal to or above the all-college average for his college, and shall be recommended by his college faculty for further work toward a degree requiring in excess of four years, then upon his admission to such further work, he shall be entitled to benefits, determined in the same manner, for the minimum additional period required for such degree.(b) If any child who201 would be eligible for benefits under paragraph (a) shall notify the Trustee in writing on or after his twenty-first (21st) birthday that he does not desire such benefits, the Trustee shall distribute to him the sum of Three Thousand ($ 3,000) Dollars. If thereafter, before his twenty-seventh (27th) birthday, such child shall enter college, he shall be entitled to benefits in accordance with the provisions of paragraph (a), except that the first Three Thousand ($ 3,000) Dollars of such benefits shall be offset against the distribution theretofore made to him.(c) I direct my Trustee to inquire at appropriate times concerning the plans for secondary school educations for the children of my son, Charles Robert Hutchinson, and if such plans contemplate any unusual requirements for clothing, books, tuition and the like, the Trustee is authorized to distribute for such requirements, in whatever manner he deems advisable, up to Five Hundred ($ 500) Dollars per year for not more than four years for each such child.(d) I have excluded my grandson, John Waldon Severence II from the classes eligible for benefits under paragraph (a) for the reason that I believe his paternal grandparents will202 wish to furnish any financial assistance he, as their son's namesake, may need to obtain a college education, and I direct the Trustee to pay to said grandson on his eighteenth (18th) birthday, the sum of Three Thousand ($ 3,000) Dollars.(e) I have omitted the children of my nephew, Charles James McConnell, from the classes eligible for benefits under paragraph (a) for the reason that I believe their maternal grandparents will furnish any financial assistance they may need to obtain college educations, and I direct the Trustee to pay to each such child on his eighteenth (18th) birthday, the sum of Three Thousand ($ 3,000) Dollars.(f) At the end of the trust period defined in Section (1) of this ITEM XXIV, the remaining corpus of the trust shall be paid over to the Iowa State Board of Regents and held permanently as the "Elizabeth A. Hutchinson Scholarship Fund", to provide scholarships to students of any college under said Board's jurisdiction. In the administration of such fund, the Board of Regents shall have complete discretion as to the investments without being restricted by the laws of the State of Iowa pertaining to such funds, and may designate one or more of the treasurers203 of the colleges under its jurisdiction to act as depository or depositories therefor. While neither the Board of Regents nor any college under its jurisdiction shall be restricted in the selection of candidates for scholarships, it is my hope and desire that preference will be given to lineal descendants of the following: my husband, Charles S. Hutchinson; my sister, Margery Annis McConnell; my brother, Donald W. Annis; my brother, Dr. Albert David Annis; my sister-in-law, Elsie Matheny Annis and my daughter-in-law, Patty Messer Hutchinson, who meet the qualifications established for such scholarships. * * *882 Section 13.As to each of Trusts "A", "B" and "C", if, before the corpus is completely distributed as provided herein, the trust period shall end or the market value of the corpus on any accounting date shall be less than Ten Thousand ($ 10,000) Dollars, then in either event such trust shall be terminated and the corpus shall be distributed to the same beneficiaries and in the same proportions as though it constituted net income which was then distributable.The will provided that the word "children" and "grandchildren," as used therein, was to include legally adopted204 children.For the sake of brevity and to save some of the confusion of repetition of proper names, Charles Robert Hutchinson will be identified at times hereafter as decedent's son, Margery Annis McConnell as her sister, Charles James McConnell as her nephew, and Suzanne McConnell Schreiber as her niece.Daughters were born to decedent's nephew and his wife September 8, 1963, and June 7, 1966. The wife's date of birth was September 14, 1939. A daughter was born to decedent's daughter September 12, 1963.The executor of decedent's estate, Charles H. McConnell, was named trustee for all of the trusts. He was given broad powers over the management of the trust properties including the authorization to make loans to decedent's son and daughter for certain purposes.The portion of decedent's residuary estate available for the testamentary trusts at the date of decedent's death, without any allowance for Federal estate tax, was valued at $ 1,562,644.31 computed as follows:Total gross estate$ 1,945,561.28Less total of deductions shown on Schedules Jand K of return 110,692.231,834,869.05Less:Specific bequests $ 69,549.40Insurance proceeds 110,000.00State inheritance taxes 83,820.63Insurance payment 8,854.71272,224.74Residue before payment of Federal estate taxliability 1,562,644.31205 The estate consisted primarily of stock in three corporations. However, included in the estate was real estate in Chicago which at the time of decedent's death was under a "net income" lease to Beatrice Foods Co. for an unexpired term of 178 years. Real estate in Des Moines was also included.Except for some variation in the number and fair market value of shares of Beatrice Foods Co., American Telephone & Telegraph, and 883 General Motors held by the trusts, there have been no substantial year-to-year changes in the trust assets. The following table shows the value of the trust assets and trust income for the years 1964 to 1967, inclusive:Trust ATrust BAsset valueIncomeAsset valueIncome1964$ 363,500.06$ 2,964.44$ 355,422.37$ 2,700.441965364,292.0014,262.83356,133.2512,066.741966305,243.1313,852.34303,159.1311,723.671967345,798.7513,157.15339,542.3811,052.91Trust CTrust DAsset valueIncomeAsset valueIncome1964$ 363,500.06$ 2,964.44$ 363,500.06$ 2,964.431965364,292.0014,262.83380,513.5513,792.361966305,243.1313,852.34331,296.0310,406.351967345,798.7513,157.15382,013.5710,624.42206 It is professionally estimated that the overall life of the trusts will be about 100 years from the date of decedent's death. This is based on 15 designated lives in being (the birth date of the youngest was January 15, 1960) at testator's death plus 21 years.OPINIONOur question is whether under decedent's will there was a bequest to charity, the Board of Regents of the State of Iowa, through Trust D of an ascertainable value at the date of decedent's death. The Board of Regents is admittedly an instrumentality of the State of Iowa. 1In each of the trusts, A, B, C, and D, the family beneficiaries are to receive specified payments and/or annual minimum payments or share in the income207 during their lives and the remainder of the trust funds is to be paid into Trust D, subject to certain contingencies. Trust D is for the primary purpose of providing educational funds for decedent's lineal descendants and those of her niece and nephew with remainder over to the Board of Regents for use as a scholarship fund to be known as the Elizabeth A. Hutchinson Scholarship Fund. The trust period is to be for the lives of the above-named beneficiaries (except the daughter-in-law, Patty Messer Hutchinson), or the survivors of them, plus 21 years. It was estimated that the overall life of the trusts would be about 100 years.884 It is the present value of the amount remaining in Trust D, after all authorized distributions during the trust period, that the petitioner contends qualified for the charitable deduction.Respondent's position is that because of the contingencies governing the vesting of the charitable bequest in the Board of Regents the gift to charity, if any, is so uncertain and indefinite as to have no presently ascertainable value. He argues that there is more than a remote possibility that the corpus of one or all of the trusts will be exhausted by the permissive208 invasions of corpus before the end of the trust period so that there may be no "pouring over" into Trust D from the other trusts and no remainder of Trust D for the Board of Regents.Petitioner contends, on the other hand, that any invasion of trust corpus by the life beneficiaries is so remote as to be negligible. For the reasons stated below, we agree with the respondent's position.Fairly definite tests have been established for determining the deductibility under section 2055(a)2 of charitable gifts of remainder trust interests. Under the Commissioner's regulations, sec. 20.2055-2, the gift to charity is deductible, generally, only where the amount of the gift is "presently ascertainable" and the possibility of the failure of its passing to the charity is "so remote as to be negligible." The deduction is denied "if by reason of all the circumstances and conditions" it appears that a charity may never enjoy the benefits of the gift.209 In Merchant's Bank v. Commissioner, 320 U.S. 256">320 U.S. 256 (1943), the Supreme Court, at pages 259 and 261, said:The case * * turns on whether the bequests to the charities have, as of the testator's death, a "presently ascertainable" value or, put another way, on whether, as of that time, the extent to which the widow would divert the corpus from the charities could be measured accurately.* * * Congress and the Treasury require that a highly reliable appraisal of the amount the charity will receive be available, and made, at the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. * * Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. And, in these cases, the taxpayer 885 has the burden of establishing that the amounts which will either be spent by the private beneficiary or reach 210 the charity are thus accurately calculable. * * [Emphasis added.]See also Henslee v. Union Planters Bank, 335 U.S. 595">335 U.S. 595 (1949).In Humes v. United States, 276 U.S. 487">276 U.S. 487 (1928), where the charitable gift was conditioned upon the death of a 15-year-old beneficiary (niece) without issue, before reaching age 40, the Court said:Neither taxpayer, nor revenue officer -- even if equipped with all the aid which the actuarial art can supply -- could do more than guess at the value of this contingency. It is clear that Congress did not intend that a deduction should be made for a contingent gift of that character. * In Commissioner v. Sternberger's Estate, 348 U.S. 187 (1955), the Court emphasized, adhering to its ruling in the Humes case, that there can be no deduction where there is "no assurance that charity will receive the bequest or some determinable part of it."Petitioner makes the argument that the contingencies attending the charitable gift are not absolute and should give way to the indisputable charitable intent of the testator. We do not agree. The several contingencies211 relating to the trust corpus are real and substantial and obviously were intended to be given priority over the gift to charity. In our opinion they present an insurmountable obstacle to the deduction sought. They are in fact quite similar to (as to Trust D) and perhaps even more persuasive than those in the case of Estate of Philip Dorsey, 19 T.C. 493">19 T.C. 493 (1952), where deduction was denied because of the uncertainty of the extent of the possible invasion of trust corpus for the live beneficiaries. We said in that case:Furthermore, the extent of permissible invasion of corpus under Item 20 for the purpose of providing scholarships for the grandnieces and grandnephews of decedent cannot be ascertained. The decedent was survived by eleven grandnieces and grandnephews whose ages at his death were from 2 to 16 years. It is impossible to determine how many more grandnieces and grandnephews may be born during the term of the trust. The number of possible recipients of scholarship awards, even as of the date of decedent's death, was considerable. In view of the size of the trust fund and the other burdens placed on it by the will, the possibility, if not212 probability, that some part of corpus will be used for providing scholarships is apparent.A similar result was reached in Griffin v. United States, 267 F. Supp. 142">267 F. Supp. 142 (E.D. Ky. 1967), affd. 400 F. 2d 612 (C.A. 6, 1968), where the charitable bequest, the remainder of an educational trust fund, was to take effect after the education of all of the grandchildren, including those unborn at the time of the testator's death. The court there said:Life estates are much more readily and accurately ascertainable than the benefit to a class which can be enlarged by the volition of three separate couples of child bearing age. It is also not to be denied that the more grandchildren that can be born, the greater the possibility of income drain from charitable uses. The 886 Humes and Sternberger decisions, supra, do not allow a deduction based on fact situations such as the present case where an increase in grandchildren will substantially affect the amount of the charitable bequest. * * As to the effect of permissive invasions of trust corpus generally on the deductibility of bequests of remainders to charities, after life213 estates, see Kline v. United States, 202 F. Supp 849 (N.D. W. Va. 1962), affirmed per curiam 313 F. 2d 633 (C.A. 4, 1963), and cases there reviewed.In Henslee v. Union Planters Bank, supra, the Court pointed out the distinction between an indefinite or indeterminable right of the life beneficiary to corpus disbursements, as in the Merchants Bank case, and one where the disbursements are limited so as to conform to some ready standard as in Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151 (1929). In the Ithaca Trust Co. case the distributions were authorized to maintain the life beneficiary "in as much comfort as she now enjoys." In the Henslee case corpus could be invaded for the "pleasure", "comfort and welfare" of the testator's mother. The Court said that as in the Merchants Bank case the salient fact was that the purposes for which the corpus might be invaded did not lend themselves to reliable prediction.Our first question therefore is whether the deduction of any gift to charity is defeated by the possibility of invasion and exhaustion214 of the trust corpus before the gift ever takes effect. This question requires a careful examination of each of the trusts with particular regard to the number and potential lifetimes of the beneficiaries, their prospective financial needs, and the capacity of the trust funds to withstand the authorized distributions.In Trust A the principal beneficiary is decedent's daughter (Margery Hutchinson Severence) who is to receive all of the remaining trust income for life, with an annual minimum of $ 2,400, after certain specific payments of income to other named beneficiaries, referred to in the will as "paragraph (b)" beneficiaries. The "paragraph (b)" beneficiaries are decedent's sister-in-law, Elsie Matheny Annis, who is to receive $ 1,200 per year as long as she remains unmarried, and decedent's brother, Albert David Annis, who is to receive $ 2,000 per year. In case the decedent's daughter should become widowed, divorced, or legally separated, decedent's sister-in-law (if unmarried) and brother are each to receive in lieu of annual payments a lump sum of $ 3,000 out of the trust corpus with no further distributions to those beneficiaries after the daughter's death. If no distributions215 are required to be made to the sister-in-law and brother, the annual payments to the daughter are to be increased to an annual minimum of $ 4,800.887 After the death of decedent's daughter and after distributions to the "paragraph (b)" beneficiaries, the income is all to be distributed first to the daughters of decedent's daughter 3 with minimum distributions of $ 1,200 per annum, then to decedent's son, Charles Robert Hutchinson, and then to his children. Upon the death of the last surviving income beneficiary the corpus and any undistributed income is to be transferred to Trust D.The minimum distributions are subject to a cost of living adjustment every 5 years for216 substantial changes in the cost of living. In addition, the minimum distributions can be increased out of corpus by a maximum of 100 percent of the minimum quarterly distribution in any year if such beneficiaries suffer some extreme financial hardship beyond their reasonable control.Section 13 of Item XXIV of the will provides that Trusts A, B, and C will terminate if, "before the [trust] corpus is completely distributed," the trust period shall end or the trust corpus at any accounting date shall be less than $ 10,000 and thereupon the remaining trust funds will be paid over to the income beneficiaries. In this event, there would be no pourover into Trust D.The plan for the administration of Trust A under the provisions of decedent's will is complicated and involves various contingencies. To determine what value the remainder of the trust funds might have had at the date of decedent's death seems to us to be an impossible task. Actuarial tables might afford a sufficiently accurate means of determining the expected lifetimes of the life beneficiaries in being at the time of decedent's death but not the lifetimes of the unborn beneficiaries and not the amounts of the distribution. 217 For instance, at the time of decedent's death the principal income beneficiary of Trust A, decedent's daughter, was 32 years of age and was married. A daughter, a second beneficiary, was born to her soon after decedent's death. Whether there would be other daughters, 4 either born to her or adopted by her, and how many, we have no possible way of knowing. There are no accepted actuarial tables for determining such eventualities.Successor life beneficiaries of the trust before the "pourover" into Trust D were Charles Robert Hutchinson, a son, and his children. He was 33 years old at the date of decedent's death and was married and had one 3-year-old son. There was no way of knowing how many other children might be born to or adopted by him.888 Trust B and C involve equally unidentifiable beneficiaries and uncertain distributions of both income and corpus.Trust B is for the primary benefit of decedent's son (Charles Robert Hutchinson) who is to receive the income for life, after218 certain "paragraph (b)" income distributions, but not less than $ 4,800 per year. He was in his early thirties at the date of decedent's death, was married and had a 3-year-old son. The "paragraph (b)" beneficiaries are decedent's brother, Albert David Annis, who is to receive $ 1,000 per year for life and decedent's sister-in-law, Elsie Matheny Annis, who, as long as she remained unmarried, was to receive $ 600 per year. Other secondary beneficiaries who are to take after the death of Charles Robert Hutchinson are his surviving widow, who is to receive $ 2,400 per year for life as long as she remains unmarried, and his surviving children, who are to receive minimum annual distributions of $ 2,400 each. The son's surviving grandchildren are to receive all of the remaining income, after the required distributions to the "paragraph (b)" beneficiaries, in equal shares. At the time of decedent's death there was no way of knowing how many children would be born to or adopted by Charles Robert Hutchinson or how many grandchildren would survive him. Nor was there any way of determining the probability or extent of the invasion of trusts corpus to supply the minimum distributions.Trust219 C consists of three equal shares and is for the primary benefit of decedent's sister, her brother-in-law, Charles H. McConnell, and her niece. The sister and brother-in-law are to share the income for life with minimum distributions of $ 2,400 each. There are numerous secondary beneficiaries, including the niece under the brother-in-law's and sister's shares and the sister under the brother-in-law's share.The secondary beneficiaries under the brother-in-law's share are in order, the sister for $ 2,400 minimum, the niece for $ 1,200 minimum and her children born after 1955 equally. Under the sister's share secondary beneficiaries in order are the son and daughter equally, then the daughters of the daughter and the children of the son equally, then the niece, and last the grandniece. Under the niece's share the secondary beneficiaries in order are, children of the niece born after 1955, the son and daughter equally, and the daughters of the daughter and children of the son equally.In addition to the above, $ 3,000 a year is to be distributed to the brother-in-law out of the corpus of Trust C and charged equally to the three shares comprising the corpus.As in Trust A, the remaining220 trust funds in Trusts B and C, after death of the last surviving beneficiary, are to be transferred to Trust D.889 In each of the trusts, A, B, and C, any excess of distributions over income is to be charged against corpus and the trustee is authorized to adjust the amount of the distributions to conform to "substantial changes in the cost of living." Further, the trustee is authorized to make distributions out of corpus each year to the primary beneficiaries and the sister-in-law who might suffer "some extreme financial hardship" of up to 100 percent of their minimum quarterly distributions for such year.Thus, with Trusts B and C, as with Trust A, there is no reasonably accurate method of determining who all the beneficiaries will be, the distributions to which they may be entitled, or the extent to which such distributions may reduce trust corpus.Trust D is primarily for the purpose of providing educational benefits for the lineal descendants of decedent's daughter, born after 1955; the lineal descendants of decedent's son, born after 1959; the lineal descendants of decedent's niece, born after 1955; and the grandchildren of decedent's nephew and their lineal descendants. 221 The amount of trust assets that will remain in Trust D for transfer to the Board of Regents is at least as uncertain as the remainders of the other trusts.A major unknown quantity is the number of lineal descendants who may qualify for distributions. At the date of decedent's death, her son, daughter, niece, and nephew were all married and capable of giving birth to or adopting more children since their ages ranged at that date from 27 to 33. There is no telling how many more children they would have. Therefore, it is impossible to determine the number of children, their children, and their children's children, and so on during the period of the trust, can have. Other unknown quantities are the amount of the distributions that may be required for a college education and graduate school education over the 100-year estimated life of the trust and potential trust earnings over the trust period. There is no possible means of determining how many of the beneficiaries entitled to the education benefits may choose to accept the $ 3,000 cash payment in lieu of the educational benefits.Thus, the possibility of an insufficiency of trust income to meet the necessary distributions with222 resulting invasions of trust corpus, seems to us to require a disallowance of a deduction for any charitable gift. It is not beyond reasonable doubt that there may be no remaining funds in Trust D at the end of the trust period. See Estate of Philip Dorsey, supra. That case, as contrasted with the present one, involved a shorter trust period, a smaller class of potential private beneficiaries, and scholarship amounts which were limited to $ 1,000 yearly for no more than 4 years. The uncertainties found by this Court to be troublesome in Dorsey are magnified in the instant case. Even if we had found *890 that the remainders of Trusts A, B, and C that are to pour over into Trust D had presently ascertainable values, the uncertainties of D alone would disqualify any charitable deduction.Hence, with all due considerations to what must have been the altruistic motives of decedent to the charity, we think that the deduction claimed must be disallowed.In order to reflect an increased deduction for State inheritance taxes as set forth in the stipulation of facts,Decision will be entered under Rule 50. Footnotes1. Although respondent has at one time questioned whether the charitable gift was not impaired by the provision of decedent's will that it was her "hope and desire" that in the selection of candidates for scholarship "preference will be given to certain lineal descendants," respondent makes no contention of this point in his brief.↩2. SEC. 2055. TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES.(a) In General. -- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers (including the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer, or power, if the disclaimer is made before the date prescribed for the filing of the estate tax return) --↩3. The will specifically provided that the income was to go to the daughters of the decedent's daughter after the death of the latter even though at date the will was executed and at the date of decedent's death her daughter had two sons but no daughters. A daughter was born to the decedent's daughter however shortly after the decedent's death.↩4. See fn. 3, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620473/	DOUGLAS B. and BARBARA A. WHITE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWhite v. CommissionerDocket No. 5075-80.United States Tax CourtT.C. Memo 1981-220; 1981 Tax Ct. Memo LEXIS 522; 41 T.C.M. (CCH) 1429; T.C.M. (RIA) 81220; May 4, 1981. Douglas B. White, pro se. Constance L. Couts, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' income tax for the calendar year 1977 in the amount of $ 674. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision only whether petitioners are entitled to a deduction for a casualty loss resulting from the theft and partial destruction of an automobile registered in the name of their 21-year-old son. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners, husband and wife, who resided in Sacramento, 523 California at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1977 with the Director, Internal Revenue Service Center, Fresno, California. In 1976, petitioners acquired for their son, James Curtis White, a Ford Shelby Mustang automobile. The Mustang was registered in the name of petitioners' son, who at the time was 21 years of age. On October 20, 1977, the Mustang was stolen and later recovered partially destroyed. Petitioners had paid for the necessary liability insurance coverage for the Mustang, but no theft or collision insurance was maintained on the Mustang. At the time of the theft petitioners' son was a full-time student in a Glendale, Arizona automotive school, receiving financial support from petitioners for educational and living expenses. The automobile was in the possession of petitioners' son in Glendale, Arizona at the time it was stolen. When petitioners purchased the Mustang for their son and registered it in his name, the son promised to repay petitioners for the Mustang. Under date of March 16, 1979, petitioners' son signed a document addressed "To: Douglas B. White" recognizing his indebtedness524 to his father for the purchase price of the Mustang. The document signed by petitioners' son read: This is to confirm my indebtedness for money lent to me to purchase and repair the 1968 Ford Mustang Shelby in the amount of $ 3,375. This is in addition to any other indebtedness relating to my school expenses. The amount of the loss in value of the Mustang between the time of the theft and recovery was $ 2,250. Petitioners on their Federal income tax return claimed a casualty loss of $ 2,150, computed by showing a loss before insurance reimbursement of $ 2,250, no insurance reimbursement and a claimed casualty or theft loss of $ 2,150, arrived at by subtracting $ 100 from the amount of the loss. Respondent in his notice of deficiency disallowed the claimed casualty loss with the explanation: The $ 2,150 shown on your return as a casualty loss resulting from the theft of an automobile owned by your son is not allowed because it has not been established that you sustained any deductible loss. OPINION Section 165(c)(3), I.R.C. 1954, 1 allows a deduction to a taxpayer for "losses of property not connected with a trade or business, if such losses arise from fire, storm, 525 shipwreck, or other casualty, or from theft." In this case these is no dispute as to what happened with respect to the automobile registered in the name of petitioners' son. The automobile was stolen and when it was recovered had been damaged to such an extent that its value was $ 2,250 less than its value at the time it was stolen. The only issue here is whether petitioners are the proper parties to claim the casualty loss. Section 1.165-7(a)(3), Income Tax Regs., provides: (3) Damage to automobiles. An automobile owned by the taxpayer, whether used for business purposes or maintained for recreation or pleasure, may be the subject of a casualty loss * . Respondent points out that the regulations specifically refer to an automobile "owned" by the taxpayer. It is respondent's position that the automobile which was the subject of the theft or casualty loss in this case was not owned by petitioners. Petitioners take the position that since they were supporting their son while he was attending school, they owned the526 automobile even though it had been registered in their son's name and they had considered the amount paid for the automobile to be a loan to their son to enable him to purchase an automobile for himself. Petitioners in effect contend that since the automobile was destroyed, it is unlikely that their son would be able to repay them the money they expended to purchase the automobile for him. Mr. White in effect testified that the value of the Mustang was increasing both because of the type of automobile that had been purchased and the work that had been done on it by their son. He testified that any repayments petitioners received for advancing the money to purchase the automobile would have been received when their son sold the car and repaid them. The issue here is not a new one. In order for a taxpayer to be entitled to deduct a casualty loss, the loss must be of his property. Both the statute and the regulations are clear on this point. Where parents give property to an adult child and the property is lost in a casualty, the taxpayers are not entitled to a deduction for a casualty loss. Draper v. Commissioner, 15 T.C. 135">15 T.C. 135 (1950). The Draper case involved527 the destruction by fire of jewelry and clothes which the taxpayers had bought for their adult daughter who was a student at Smith College. In holding that the taxpayers were not entitled to deduct the uninsured portion of the loss by fire, we stated (at 135): "Basic in the law is the requirement that to support a deduction for loss of property, the claimant must have been the owner of the property at the critical time." In that case we pointed out that even though the taxpayers' daughter was dependent on them for her support, she was past 21 years of age and the clothes and jewelry given to her belonged to her. For that reason, the casualty loss was hers and not that of her parents. The same situation is present here. The automobile that was stolen belonged to petitioners' adult son. Since the automobile was not petitioners' property, they were not entitled to a casualty loss resulting from its theft and partial destruction. 2528 Although we decided the only issue before us for respondent, because of other issues which have been disposed of by the parties Decision will be entered under Rule 155. Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩2. There have been several Memorandum Opinion holding claimed losses connected with automobile accidents with respect to an automobile not owned by the taxpayer not to be deductible. See Miller v. Commissioner, T.C. Memo. 1975-110; Oman v. Commissioner, T.C. Memo. 1971-183↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620474/	JEFFERSON W. AND KIMBERLY A. WILLIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWillisDocket No. 14880-91United States Tax CourtT.C. Memo 1992-332; 1992 Tax Ct. Memo LEXIS 337; 63 T.C.M. (CCH) 3124; June 9, 1992, Filed 337 An appropriate order will be issued. Mark S. Mesler, for respondent. BUCKLEYBUCKLEYMEMORANDUM OPINION BUCKLEY, Special Trial Judge: This case was assigned pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. 1 Respondent determined a deficiency in petitioners' 1988 Federal income tax in the amount of $ 1,330. Prior to the call of the calendar in this matter, petitioners filed a motion for summary judgment, the gist of which is that respondent had admitted, through failure to deny, "that petitioners' amended return is true and correct." Petitioners further filed an amended motion for summary judgment in which they contended that the notice of deficiency was based on petitioners' original return, which had been superseded by their amended return, and accordingly the notice was invalid. Petitioners resided at Columbus, Georgia, 338 when they filed their petition herein. The procedural history of this case is as follows: Respondent filed a Motion for Protective Order on August 29, 1991, in which she requested relief from petitioners' document entitled "First Interrogatories and Request to Admit to Respondent". Respondent contended that discovery was premature, there having been no attempt at informal discovery. Respondent further contended that under our Rule 70(a)(2), discovery should not be commenced, without leave of Court, before the expiration of 30 days after joinder of issue. Petitioners' discovery requests were filed within the 30-day period. We granted respondent's Motion for a Protective Order on October 4, 1991. In our order we stated: Petitioners have not shown that, prior to undertaking formal discovery, they in good faith exhausted all efforts toward informal discovery within the intendment of this Court's Rules and .Respondent's motion for a protective order and our order went to both the request for answers to interrogatories and the request for admissions served by petitioners. The request for admissions was prematurely339 filed and is of no effect. Respondent has not admitted that an amended return apparently mailed by petitioners to respondent is correct, and at the hearing upon petitioners' motion for summary judgment, at which petitioners failed to appear, respondent advised the Court that the amended return had not been accepted for filing. We may grant summary judgment only where it is clear that there is no genuine issue as to any material fact, and a decision may be rendered as a matter of law. Rule 121(b). There are material issues of fact still to be decided, and the original motion for summary judgment will be denied. Petitioners' amended motion for summary judgment will also be denied as there are open material issues of fact still to be decided in this matter. There is no statutory authority for the filing of amended income tax returns, and the acceptance of amended returns rests within the discretion of the Commissioner. . Respondent has not chosen to accept petitioners' amended 1988 return. Even if she had done so, we note that the deficiency notice would still remain valid. There are material issues340 of fact still present in this case, and, accordingly, petitioners' motions for summary judgment will be denied. We warn petitioners once again that the Rules of this Court and our decision in , require the parties to enter into a good faith effort at informal discovery. We note that the Court might well have dismissed this matter against petitioners for lack of proper prosecution due to their failure to appear at the calendar call. We will restore the case to the general docket for calendaring for trial in due course. An appropriate order will be issued. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year at issue; Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620475/	STONEWALL J. JACKSON, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jackson v. CommissionerDocket Nos. 72002, 72119, 72127, 72244, 73625, 75762, 76448-76455, 76980.United States Board of Tax Appeals37 B.T.A. 1004; 1938 BTA LEXIS 953; June 7, 1938, Promulgated 953 Valspar stock had no fair market value when received by petitioners on or about February 14 and July 12, 1930. History of earnings outweighed by dark prospects and losses. O. Walker Taylor, Esq., and John F. McCabe, Esq., for petitioners Estate of Nathan T. Pulsifer, Bankers Trust Co., Executor, and Dorothea V. A. Swift. James A. O'Callaghan, Esq., and F. C. Laird, C.P.A., for petitioners Thomas R. Wyles and W. D. Waugh. G. L. Carroll, Esq., for petitioner Stonewall J. Jackson. H. A. Mihills, C.P.A., for petitioners Henry U. Birdseye, Hext M. Perry, Theodore Gabert, Philip L. Maury, George M. Seibert, E. C. Roberts, Horace S. Boutell, William E. Vincent, William J. Boston and Frank T. Hogan. J. R. Johnston, Esq., for the respondent. MURDOCK 1004 The Commissioner determined deficiencies in income tax for the calendar year 1930, as follows: PetitionerDocket No.DeficiencyStonewall J. Jackson72002$1,196.38Henry U. Birdseye721191,658.75Estate of Nathan T. Pulsifer721277,211.69Dorothea V. A. Swift7224411,740.14W. D. Waugh736251,271.57Hext M. Perry75762260.95Theodore Gabert76448403.56Philip L. Maury764494,441.00George M. Seibert76450$565.66E. C. Roberts764511,142.81Horace S. Boutell764528,194.88William E. Vincent76453704.00William J. Boston76454924.17Frank T. Hogan764552,179.58Thomas R. Wyles769802,110.51954 The only issue in the cases of the estate of Nathan T. Pulsifer and Dorothea V. A. Swift is whether or not the Valspar stock had 1005 any fair market value when it was received by those petitioners on or about February 14, 1930. The only issue in the other proceedings is whether or not the Valspar stock had any fair market value on or about June 12, 1930, when it was received by those petitioners. Each of the petitioners received Valspar stock and cash in exchange for some other stock which they had theretofore owned. They are in agreement as to the basis and period of holding applicable to the old stock. They also agree that the gain of each petitioner may be computed by deducting the basis from the total of the cash and the fair market value of the Valspar stock received and that it may be taxed to the extent of the cash received. The petitioners contend, however, that the Valspar stock had no fair market value when they received it, and, consequently, their gain is limited to the difference between the basis and the cash received. The Commissioner, in determining the deficiencies, has held that the Valspar stock had a value of $22.35 at the time it was received by955 these petitioners in June 1930. He used $22.22 and $22.12949 as the value of the stock in February in the cases of Pulsifer and Swift. Counsel for petitioners Wyles and Waugh argue in their briefs that certain amounts which those petitioners received in 1931 from trust funds set up in 1930 by the Detroit Graphite Co. were erroneously included by the Commissioner in computing the gain for 1930. No such issue was raised by the pleadings. The stipulated facts and the deficiency notices clearly indicate that there can be no such issue, since the distributions from the trust funds made in 1931 were not included by the Commissioner as a part of the amount realized in determining the deficiencies for 1930. This point will receive no further discussion. FINDINGS OF FACT. Valentine & Co., hereinafter referred to as Valentine, was a corporation organized under the laws of the State of New York on January 19, 1882. It succeeded to a business which had been established in 1832. The business consisted largely of the manufacture and sale of varnish. A large part of the production of the company was purchased in bulk and used by the manufacturers of vehicles, particularly in later years956 by the manufacturers of automobiles. The development of Duco by a competitor had a serious, if not a fatal, effect upon the varnish business being conducted by Valentine. The effect of this competition was evident in the early part of the year 1927 and caused the officers and directors of Valentine to consider what steps they might take so that the corporation could continue to manufacture and sell merchandise profitably. Efforts by Valentine to develop a product to compete with Duco were unsuccessful. Valentine had some initial success in an attempt to market some of its products in small containers. The officers decided 1006 that Valentine needed a larger line of products, including, in addition to clear varnishes, colored varnishes and paints. An attempt in 1929 to combine its business with that of the Detroit Graphite Co., hereinafter referred to as Graphite, failed. A proposal was made to organize a new company, to be called the Valspar Corporation, which was to take over the business of both Valentine and Graphite. "Valspar" was the name of the principal product manufactured by Valentine. Appraisals were made as of July 31, 1929, of the properties of957 each of the companies for the purpose of providing comparative data upon which to base the relative interest which each company was to have in the new corporation. The land of Graphite was appraised by officers of that company. All other properties were appraised by outside appraisers regularly engaged for the purpose. Graphite withdrew on November 11, 1929, and the negotiations were abandoned. One reason for the failure of the negotiations was the crash in the stock market, which occurred in the latter part of 1929, and convinced some of the parties to the negotiations that stock of the proposed Valspar Corporation could not be successfully marketed. Valentine then began negotiations for the acquisition of the business of the Con-Ferro Paint & Varnish Co., hereinafter called Con-Ferro. Con-Ferro was a relatively small corporation, organized in 1919 under the laws of the State of Missouri. Its principal business was the sale of cheap colored surfacing liquids in small packages to chain stores. Valentine intended to use Con-Ferro as an outlet for some of the off-color products which Valentine anticipated would result from its attempt to increase its line of high quality products. 958 The properties of Con-Ferro were appraised by outside appraisers regularly engaged for the purpose. Valentine entered into an agreement with Con-Ferro on January 10, 1930, pursuant to which the Valspar Corporation was organized on February 13, 1930. Valspar had an authorized capital stock of 750,000 shares of no par value. Provision was also made for an authorized issue of $6,000,000 par value of 10-year 6 percent convertible debenture bonds. Valspar acquired the capital stock of Valentine in exchange for $1,640,000 in cash and 198,000 shares of Valspar stock, and Valspar acquired all of the assets of Con-Ferro in exchange for $419,577.56 in cash and 4,480 shares of Valspar stock. Valentine distributed $650,000 of the cash received to its preferred stockholders and $990,000 to its common stockholders. It distributed the 198,000 shares of Valspar stock to its common stockholders on the basis of six shares of Valspar for each share of Valentine. Con-Ferro distributed all of the cash and Valspar stock which it received to its stockholders in exchange for their Con-Ferro stock on or about February 14, 1930. 1007 Valspar obtained the cash necessary for the acquisition959 of the Valentine and Con-Ferro properties by selling $2,500,000 par value of its 10-year 6 percent convertible debenture bonds dated February 1, 1930, at 93, or at a total discount of $175,000. It retained for organization expenses and working capital only $265,422.44 of the total amount received for the bonds. Valspar then had 202,480 shares of its no par stock outstanding. In April 1930 Valspar resumed negotiations with Graphite. Valspar, on June 11, 1930, obtained all of the net assets of Graphite as shown by a balance sheet dated June 11, 1930, exclusive of certain contingent and pending liabilities not reflected on the balance sheet, in exchange for $2,166,387.50 in cash and 77,000 shares of the common stock of Valspar. Valspar raised the cash necessary for this transaction by borrowing $2,310,000 from banks on its promissory note payable within six months with interest at 6 percent. This loan was secured by a mortgage of all of the assets being taken over from Graphite and by an hypothecation of the accounts receivable thereafter owned by Valspar. Graphite then changed its name to Fort-Twelfth Corporation, and on June 12, 1930, authorized the retirement of its preferred960 stock and the exchange of the cash, the Valspar stock, and the interest of the corporation in two trust funds, for its outstanding common stock. This liquidation was made on July 12, 1930, and was pursuant to the plan of reorganization. Valspar then had outstanding 279,480 shares of its capital stock, of which 198,000 shares had been issued to the former stockholders of Valentine, 4,480 to the former stockholders of Con-Ferro, and 77,000 to the former stockholders of Graphite. The Valspar stock was not listed on any exchange and there is no evidence in this record of any sales of that stock. One of the petitioners tried unsuccessfully to sell some of his stock shortly after he received it. He could not obtain an offer. Another recipient of the stock tried unsuccessfully to pledge it with a bank as collateral for a loan. The stock of Valentine, Con-Ferro, and Graphite had been closely held, and there is no evidence of sales of stock of any of those companies, except that an employee of Valentine in October 1929 entered into an agreement to buy 2,000 shares of Valentine at $140.26 per share. Valspar did not have earnings sufficient to pay the interest on its indebtedness961 after May 1930. Valspar never had a profitable year. It sustained a substantial loss in 1930 and a substantial loss in 1931. The operation of its business was taken over by the bankers in the latter part of 1931 and the company was placed in bankruptcy in 1932. 1008 Valentine, Con-Ferro, and Graphite had been operating profitably. The net earnings on the three companies for the five years preceding 1930 were as follows: YearValentine 1Con-Ferro 2GraphiteTotal1925$608,280.92$39,063.26$227,951.31$875,295.491926459,875.8825,709.02324,030.24809,615.141927314,419.5845,095.88205,830.20565,345.661928228,379.5393,790.59273,459.68595,629.801929607,902.86142,941.71207,447.26958,291.83The following statement shows as of January 31, 1930, a balance sheet of Valentine and a balance sheet of Con-Ferro taken from the books of those companies, together with certain other figures used in consolidating those two balance sheets: (Table omitted) 1009 The following962 is a similar balance sheet as of November 30, 1930: (Table omitted) 1011 The following is a statement of the assets and liabilities of Graphite taken from its books as of June 11, 1930, together with table showing changes made thereafter in connection with those items, and the figures at which the various items were placed upon the books of the new Valspar Corporation after the reorganization: (Table omitted) The book value of a share of stock, as computed from the consolidated balance sheet of January 31, 1930, was $21.84. The book value of a share of Valspar stock, as shown by the balance sheet of November 30, 1930, was $18.42. The Con-Ferro stockholders had the option of receiving 4,480 shares of Valspar stock or $112,000 in cash in lieu of the stock. They chose to accept the stock. The Graphite stockholders had the option of receiving $200,000 in cash in lieu of 9,000 shares of stock. They took the cash in lieu of the stock. The Valspar stock had no fair market value on or about February 14, 1930, and it had no fair market value on or about June 12, 1930. All of the facts stipulated in these proceedings are hereby incorporated in these findings by this963 reference. 1012 OPINION. MURDOCK: The only question for decision in this case is the fair market value of the Valspar stock on February 14 and on June 12, 1930. The first date is determinative in the Pulsifer and Swift cases, while the latter date is determinative in all of the remaining cases. The parties agree that each distribution was pursuant to a plan of reorganization, and the profit received by the stockholders is recognized only to the extent of the cash. They have also agreed upon the basis for gain or loss on all of the old shares surrendered. The Commissioner has not recognized a profit in any case in excess of the amount of the cash. But in every case he has computed a profit by attributing a certain fair market value to the stock. The petitioners contend that the stock had no fair market value. The stock of all of the companies was closely held and there were no sales at or near the dates in question. There were no sales of the Valspar stock. The Commissioner used $22.35 as the fair market value of the stock on July 12, 1930. He obtained that figure from a balance sheet for the new Valspar Corporation as of June 12, 1930, which he apparently964 constructed by taking the last available balance sheet and making certain adjustments thereto. He used two different figures to represent the fair market value of the stock on February 14, 1930, one in the case of Pulsifer and a different one in the case of Swift. Each was slightly less than the figure used as the value on July 12. He claims that his figures are justified, not only by the book values of the stock, but by earnings and the past history of the corporations. He also claims that the parties to the reorganization themselves recognized that the value of the Valspar stock was in the neighborhood of $25. His arguments are supported, for the most part, by evidence in the record which ordinarily would be entitled to great weight. Yet other evidence in this record indicates that that evidence upon which the Commissioner relies is not a reliable indication of the fair market value of the stock. A very serious situation in the affairs of Valentine developed when Duco came on the market. The officers of Valentine recognized the seriousness of that competition and they tried in every way they knew to save their corporation. They tried to save as much of its business as965 could be saved and they tried to develop profitable new lines. But immediately following the advent of Duco came the stock market crash and the depression, which began in the fall of 1929. Despite the earning history of its predecessors, Valspar never earned money. On the contrary, it sustained large operating losses. The effect of the two reorganizations was that the stockholders of Valentine, Con-Ferro, and Graphite received a very large amount of cash which they took out of the business. The stock which they received was never sold. 1013 Although it had a substantial book value, the evidence indicates that that book value was the result of certain writeups of the book value of a number of the assets which were not justified under the circumstances. The petitioners did not believe that the Valspar stock which they received had any fair market value at the time they received it, and, with one exception, they did not report it on their returns as having any fair market value. Subsequent events confirmed their opinions. Any reasonable person interested in buying this Valspar stock on the critical dates would have learned of the prospects of this company, and we can*966 not assume that any reasonable person knowing those prospects would have given anything for the stock. This is not a case of the disposition of stock where the gain or loss must be determined in some definite amount, but is a case where the question of further gain or loss is postponed under the statute to await the final disposition of the stock. See Paul & Mertens, sec. 52.01. It is, of course, possible that the stock may not have been entirely worthless, but, after considering all of the evidence, we have come to the conclusion that for the purposes of this case our finding that it had no fair market value on the critical dates is in accordance with the weight of the evidence. Reviewed by the Board. Decisions will be entered under Rule 50.VAN FOSSAN VAN FOSSAN, dissenting: I am unable to agree that on the record before us the stock in question has no fair market value. The fact that it amy be difficult, on the evidence, to find some intermediate figure between that found by respondent and that contended for by the petitioners (here, no value) does not absolve the Board of its duty to find such correct value. ARNOLD agrees with the above dissent. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Henry U. Birdseye; Estate of Nathan T. Pulsifer, Bankers Trust Co., Executor; Dorothea V. A. Swift; W. D. Waugh; Hext M. Perry; Theodore Gabert; Philip L. Maury; George M. Seibert; E. C. Roberts; Horace S. Boutell; William E. Vincent; William J. Boston; Frank T. Hogan; Thomas R. Wyles. ↩1. Fiscal year ended November 30. ↩2. 1927 was a period of 11 months. 1928 and 1929 were fiscal years ended November 30. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620476/	SANTIAGO J. HERNANDEZ AND MARIA C. HERNANDEZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHernandez v. CommissionerDocket No. 12415-79.United States Tax CourtT.C. Memo 1982-327; 1982 Tax Ct. Memo LEXIS 419; 44 T.C.M. (CCH) 96; T.C.M. (RIA) 82327; June 10, 1982. 419 Held, a $17,000 check drawn on a Swiss bank and deposited in petitioner's account was not additional income to petitioners in 1975. Held,further, petitioner adequately substantiated the business purpose of trips taken to Equador and New Haven in 1975 and the expenses incident thereto are deductible. Held,further, petitioners are not liable for an addition to tax for negligence under sec. 6653(a), I.R.C. 1954, for 1975. Luis Medina, for the petitioners. David M. Kirsch, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined a deficiency in, and an addition to, petitioners' 1975 Federal income tax in the amounts of $8,514 and $426, respectively. After concessions by respondent, the issues remaining for decision are (1) whether a bank deposit in the amount of $17,000 constituted unreported taxable income; (2) whether petitioners have substantiated travel and entertainment expenses in the amount of $1,517; (3) whether the gross income from petitioner's business was underreported in the amount of $6,000 and if so whether it resulted in an increase in taxable income by a like amount; and (4) whether petitioners are liable for an 420 addition to tax under section 6653(a)1 for negligent or intentional disregard of the rules and regulations. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by reference. Petitioner Santiago J. Hernandez and Maria G. Hernandez, husband and wife, resided in Miami, Fla., at the time of filing the petition herein. Petitioners filed their Federal income tax return for the taxable year 1975 with the Internal Revenue Service Center, Chamblee, Ga. Petitioner Maria C. Hernandez is a party herein solely by reason of having filed a joint return with Santiago J. Hernandez (hereinafter petitioner). Petitioner moved to the United States on October 10, 1961. Prior to that time he and his family resided in Havana, Cuba, 2 where he owned his own business. This business consisted of the manufacture and sale of office equipment and furniture. Petitioner 421 liquidated his business in 1960 following the communist takeover in Cuba. Petitioner stated that he decided to sell all of his equipment, get out of his business, and move to the United States because it was the new government's policy "to destroy private enterprises." After liquidating his business, petitioner had approximately 100,000 Cuban pesos which he kept in various Cuban banks. Most of this money was left behind in Cuba after petitioner left in 1961. Aproximately 75,000 pesos were left with his father-in-law, Jorge Dierksmeier (hereinafter Jorge), 25,000 were left with his parents, and a small amount was left with his wife, who immigrated to the United States about 8 months after petitioner. Although petitioner hoped that much of the money would eventually be brought out of Cuba with the family members he had left it with, the money was left in Cuba primarily to provide for their needs while they remained there. Beginning immediately after petitioner left Cuba, Jorge began to send the Cuban money left in his custody out of Cuba. The money was first converted into United States dollars 3 by purchasing such dollars on the black market in Cuba. 4 Jorge would give the dollars 422 to certain foreign diplomats with whom he was put in contact, who would then send a check in dollars to Edmund Ruch (hereinafter Ruch), a trusted friend in Switzerland. The dollars were then deposited into a Swiss bank account. Jorge was unaware of the actual amounts of money which made it safely to Switzerland. Some of the money never arrived in Switzerland because the persons to whom Jorge gave it did not send it on to Ruch but kept it for themselves. This was a risk which both Jorge and petitioner were aware of but which both were willing to accept. Jorge did not keep a record of how much money had been sent to Ruch since such transactions were illegal and he did not want there to be a record of these dealings. Shortly after leaving Cuba, petitioner periodically received small amounts of these expatriated funds by check or cash from Ruch and Gunther. Because 423 of the illegality of the transactions involved, only small amounts of money were exchanged and taken out of Cuba at a time, usually not exceeding $500. The largest portion of these funds were taken out of Cuba in 1972. In 1975, Jorge and his family moved from Cuba to Madrid, Spain. Jorge had remained in Cuba until that time because his son had previously been imprisoned for being an "imperialist" and was not released until then. After arriving in Spain, Jorge informed petitioner that he had a "surprise" for him and that petitioner would soon receive news from Ruch. Approximately 1 month later petitioner received a cashier's check for $17,000 from the Swiss Bank Corp.'s New York branch. Petitioner deposited this amount into a new account at the Merchant's Bank of Miami. Petitioner did not include the $17,000 in income for the taxable year 1975. In his notice of deficiency, respondent determined that this and other amounts based on source and application of funds was unreported taxable income, and increased petitioner's taxable income accordingly. 5424 In 1972, petitioner began his own business in Miami, Fla. This business consisted of the sale of store fixtures and refrigeration equipment for supermarkets and the design of supermarkets. Petitioner had both domestic and foreign customers. In each of his international transactions, petitioner required that the foreign customer open a letter of credit with an American bank before he would agree to send the merchandise requested. In this way petitioner was assured of being paid for the mechandise he shipped. In 1975, petitioner traveled to Equador in an effort to generate business there. One of the local governmental agencies placed an order with petitioner, but that sale was never consummated because the agency was unable to send petitioner a letter of credit. Petitioner incurred expenses in the amount of $1,009.73 while on this trip. These expenses included, among others, the cost of his roundtrip air fare, meals, and lodging. Sometime after his return from Equador petitioner prepared a summary sheet indicating the amount of his expenditures and the purpose of the trip, as indicated above. While in Equador, 425 petitioner met with certain people who expressed an interest in buying rubber tires for heavy equipment, trucks, and automobiles. Approximately 1 month after returning from Equador, petitioner made a trip to the Angstram Rubber Co. in New Haven, Conn., to investigate the purchase of such tires. Petitioner incurred expenses for this trip totaling $254.06, including, among others, the cost of his roundtrip air fair, meals, and lodging. Sometime after his return from this trip, petitioner prepared a summary sheet indicating the amount of his expenditures and the purpose for making such trip, as indicated above. Petitioner deducted the expenses incurred for the travel, meals, lodging expenses indicated above on his Schedule C for the taxable year in issue. Respondent disallowed these deductions in their entirety. 6On his Schedule C filed for the taxable year in issue, petitioner reported the following income and expense amounts in determining a net loss from his business of $1,703: Gross receipts$21,700 Cost of goods sold-18,681 Gross profit 73,019 Business expense deductions8 -4,722(including depreciation)Net loss($1,703)426 Petitioner's return for the taxable year 1975 had been prepared by his brother, Albert L. Hernandez (hereinafter Albert), who was an accountant. During the Internal Revenue Service audit of this return, Albert discovered that the worksheets he had prepared when completing the return had been lost and he therefore prepared that information again. While reviewing petitioner's 1975 tax situation, Albert discovered that an invoice in the amount of $4,738 for the purchase of supplies in 1974 had mistakenly been included in the cost of goods sold figure for 1975. He also discovered that the gross receipts figure for such year had been underreported by $2,174. At that time, Albert contacted the auditing agent to inform him of these discrepancies and conceded that an adjustment had to be made. In his notice of deficiency, respondent disallowed $6,000 of the claimed cost of goods sold. OPINION The first issue is whether the $17,000 bank deposit constituted unreported taxable 427 income. Petitioner maintains that the $17,000 is nontaxable because it constituted income which had been earned prior to the taxable year in issue while he resided in Cuba. Respondent maintains that the burden of proof on this issue is on petitioner and that he has failed to meet that burden. It is his contention that petitioner's explanation as to the source of the funds in issue is neither believable norcredible and should therefore be disregarded. Alternatively, respondent claims if we accept petitioner's explanation as to the source of the funds, the evidence presented was insufficient to establish how much, if any, of the funds transferred out of Cuba constituted the disputed funds herein. The determination of taxable income by respondent is presumptively correct and the burden is on petitioner to prove that this determination is wrong. See Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). 9428 This burden may be met by showing that the funds were obtained from a nontaxable source. See Burgo v. Commissioner,69 T.C. 729">69 T.C. 729, 743 (1978). 10 We find that petitioner has met his burden of proof. Both petitioner and Jorge testified in some detail as to why, how, and where the funds in issue were transferred out of Cuba. We have found both of them to be convincing witnesses and, in short, believe their testimony. Jorge specifically stated that he personally arranged to have the Cuban pesos exchanged for American dollars on the black market and to have those dollars sent to a trusted friend, Ruch, in Switzerland. Petitioner began to periodically receive small amounts of money, by check, from Ruch and Gunther shortly after leaving Cuba. Also, we note that the $17,000 was stipulated to have been received in the form of a cashier's check from the Swiss Bank Corp.True, no evidence was presented as to certain details of the transfer of these funds, such as the exact amount received by Ruch, the identity of the foreign officials, other than Gunther, who transferred the money to Switzerland, and whether the $17,000 in issue was brought out of Cuba by Jorge in 1975 or was transferred out prior to that time. Of course, in view of the secrecy that was required in making these illegal transfers, lack of knowledge of certain 429 of these details is hardly surprising. However, irrespective of these and other unknown facts, we find that the evidence presented established that the $17,000 bank deposit constituted income which had been earned in years prior to the taxable year in issue, and therefore hold for petitioner on this issue. The next issue is whether pursuant to section 274(d) petitioner has properly substantiated the travel and entertainment expenses incurred on trips made to Equador and to New Haven, Conn. 10 Because respondent has conceded that the amount, dates, and places of these expenditures were properly substantiated, we need only determine whether the business purpose of such expenditures has been substantiated. Petitioner maintains that the trips made to Equador and to New Haven, Conn., respectively, were solely for business reasons. Specifically, he claims that the trip to Equador was to generate new international business, and that the trip to New Haven was to investigate the purchase and sale of rubber tires to people he had contacted in Equador. 430 Respondent claims that petitioner has failed to meet the substantiation requirements of section 274(d) as to the business purpose of the trips herein. Therefore, he claims that the expenses incurred in making such trips are not deductible. Section 274(d) and the regulations thereunder provide that no deduction is allowable to a taxpayer for travel and entertainment expenses unless such expenses are substantiated by "adequate records or by sufficient evidence corroborating his own statement." Expenses incurred for traveling, including meals and lodging, must be substantiated by, interalia, the business purpose of the travel. Sec. 1.274-5(b)(2)(iii), Income Tax Regs.Pursuant to section 1.274-5(c)(2)(i) to meet the "adequate records" requirements of section 274(d), a taxpayer shall maintain an account book, statement of expense or similar record, and documentary evidence which, in combination, are sufficient to establish each element of the expenditure." Subparagraph (ii)(b) provides that in order to constitute an adequate record of business purpose, a written statement of business purpose is generally required but the degree of substantiation required may vary with the facts and 431 circumstances. Pursuant to section 1.274-5(c)(3)(i) and (ii), Income Tax Regs., the business purpose may be substantiated by petitioner's own oral statement containing specific information in detail as to such purpose together with, inter alia, other corroborative evidence sufficient to establish this purpose, including circumstantial evidence. In the instant case, we find that petitioner has substantiated the business purpose of the travel expenses in question pursuant to this regulation. Here, petitioner stated that the trip to Equador was to meet with persons whom he had been put in contact in an effort to generate new business.He stated that he had entered into negotiations for the sale of his merchandise with a local government agency, but because the agency could not provide him with a letter of credit, the sale was not consummated. With regard to his trip to New Haven, Conn., petitioner stated that his purpose was to visit the Angstram Rubber Co. to investigate the purchase of rubber tires for resale. He testified that while he was in Equador he met a number of people who were interested in acquiring rubber tires and he was hopeful of supplying their needs. In view of the 432 testimony given and other evidence, we find that petitioner's "own statement" provides sufficient detail as to the business purpose of these trips to satisfy the requirements of section 1.274-5(c)(3)(i), Income Tax Regs. Moreover, we find that the business purpose of these trips has been adequately corroborated by circumstantial and other evidence. Petitioner's business included sales to foreign customers in foreign countries. He testified in some detail of his business practice when selling to customers in foreign countries, and specifically, of his practice of requiring that the customer establish a letter of credit with an American bank before shipment would be made. Petitioner's trip to the Angstram Rubber Co. in New Haven was to investigate the purchase and resale of rubber tires to persons he had met in Equador a little more than a month prior to this trip. Further, with respect to both of the trips in question, petitioner prepared a summary sheet which indicated the amount of the expenditures incurred on each trip, which we note is not questioned herein by respondent, and the business purpose for making such trips. In view of the foregoing, and the record as a whole, we find 433 that petitioner has satisfied the substantiation requirements of section 274(d), and the regulations thereunder, and therefore hold for petitioner on this issue. The next issue is whether petitioner underreported the gross income from his business on his Schedule C filed for the taxable year 1975 by $6,000, and if so, whether it resulted in an increase in taxable income by a like amount. At the outset, we note that both of the parties have implicitly agreed that the gross income from petitioner's business, see sec. 1.63-1(b), Income Tax Regs., was underreported by at least $6,000. Petitioner conceded at trial and on brief that the cost of goods sold was overreported by $4,738, and at trial he admitted that the gross receipts were underreported by $2,174. Thus, he has in essence conceded that the gross income was underreported by $6,912. 11 Respondent has claimed both at trial and on brief that the gross income was underreported by $6,000 because of either an overreporting of cost of goods sold or a combination of such overreporting plus an understatement of gross receipts. Because of the evidence presented, we find that the gross income from petitioner's business 434 was underreported by $6,912. However, this does not result, as respondent contends, in a concomitant increase in taxable income. Petitioner had deductions for business expenses and depreciation in the amount of $4,722, 12 which, subtracted from the gross income as originally reported, resulted in a net loss of $1,703. See p.8, supra. Therefore, increasing the gross income by $6,912 results in a net profit (rather than a loss) of $5,209. 13 Petitioner's taxable income is increased accordingly. The last issue is whether petitioner negligently or intentionally disregarded the rules and regulations. Petitioner claims that he did not negligently or intentionally disregard any of the rules and regulations. Respondent claims on brief that petitioners were negligent or intentionally disregarded the rules and regulations in omitting the $17,000 bank deposit from their income, and in failing to keep adequate records to substantiate their expenses in accordance with section 274(d). 14*435 Since we have concluded above that the $17,000 bank deposit was not additional income in 1975 and that petitioner did keep records adequate to substantiate not only his expenses but also the business purpose of his trips to Ecuador and New Haven, which are the only expenses not conceded by respondent, we find that petitioners have carried their burden of proving error in respondent's determination of this addition to tax. We hold for petitioners on this issue. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year 1975.↩2. Petitioner apparently resided temporarily in San Juan, Puerto Rico, during 1961, just prior to arriving in the United States.↩3. The rate of exchange varied between 2 pesos to the dollar to 4 pesos to the dollar. ↩4. Jorge and Gunther Merten (hereinafter Gunther) were the only persons who engaged in the black market transactions. Gunther was a German national who could travel in and out of Cuba freely and often took the money out of Cuba for Jorge.↩5. Respondent conducted only an "office audit" of petitioners' return for 1975 and did not discuss his source and application of funds computation with petitioners before issuing his notice of deficiency.6. Certain other travel and entertainment expenses deducted by petitioner and disallowed by respondent were conceded by respondent on brief and are not in issue herein.↩7. This represents the gross income from petitioner's business for the taxable year in issue. See sec. 1.61-3, Income Tax Regs.↩8. This figure included the $1,517 of travel and entertainment expenses claimed by petitioner.↩9. All references to "rules" shall refer to the Tax Court Rules of Practice and Procedure. Respondent has not asserted that these expenses are not otherwise deductible under sec. 162 as ordinary and necessary business expenses.10 See also Troncelliti v. Commissioner,T.C.Memo. 1971-72↩.11. $4,738 + $2,174.↩12. This amount includes the $1,517 deduction claimed for travel and entertainment expenses, which we have held was properly deducted. ↩13. $6,912 - $1,703.↩14. Respondent does not base his negligence claim on petitioner's overstatement of cost of goods sold or understatement of gross receipts which petitioners concede for 1975.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620477/	Joseph V. Rafferty and Margaret M. Rafferty, Petitioners v. Commissioner of Internal Revenue, RespondentRafferty v. CommissionerDocket No. 2536-69United States Tax Court55 T.C. 490; 1970 U.S. Tax Ct. LEXIS 13; December 14, 1970, Filed 13 Decision will be entered for the respondent. Petitioners own 100 percent of the issued and outstanding stock of corporations A and C. Corporation A owned 100 percent of the stock of corporation B. Between 1960 and 1965 the sole activity of corporation B was the rental of the business situs formerly owned by corporation A to corporation A. In 1965, corporation B acquired land upon which it had constructed a plant that it rented to corporation C as its business situs. Held, the distribution of the stock of corporation B by corporation A to petitioners in 1965 constitutes a taxable dividend since corporation B was not engaged in the active conduct of a trade or business for the 5-year period preceding such distribution. Sec. 355 (b); sec. 1.355-1(c)(3), Income Tax Regs.Robert J. McDonough, for the petitioners.Robert B. Dugan, for the respondent. Dawson, Judge. DAWSON490 Respondent determined a deficiency in petitioners' Federal income tax for the year 1965 in the amount of $ 93,119.51. The only issue for decision is whether the distribution of 4,430 shares of stock of Teragram Realty Co., Inc., to petitioners by Rafferty Brown Steel Co., Inc., in 1965 constituted a distribution 14 on which no gain or loss is recognized under the provisions of section 355, I.R.C. 1954. 1491 FINDINGS OF FACTSome of the facts have been stipulated by the parties and are found accordingly.Joseph V. Rafferty and Margaret M. Rafferty (herein called petitioners) are husband and wife who resided in East Longmeadow, Mass., at the time the petition was filed in this case. Petitioners filed their joint Federal income tax return for the year 1965 with the district director of internal revenue, Boston, Mass.At all times pertinent hereto and to the present, petitioners have jointly owned all of the outstanding shares of stock of Rafferty Brown Steel Co., Inc. (herein called RBS), a Massachusetts corporation engaged in the distribution and processing of cold rolled sheet and strip steel. In May 1960 Teragram Realty Co., Inc. (herein called Teragram), was organized as a Massachusetts corporation and in June 1960, RBS transferred the real property owned by it in East Longmeadow, Mass., where it conducted its steel business, to Teragram in exchange for 4,430 shares of Teragram stock which 15 constituted all of the outstanding stock of Teragram. On June 30, 1960, Teragram then leased back the East Longmeadow realty to RBS for 10 years.The lease agreement entered into between RBS and Teragram provided, in part, as follows:Witnesseth, that in consideration of the Covenants herein contained, on the part of the said RAFFERTY-BROWN STEEL CO., INC., and its representatives, to be kept and performed by it the said TERAGRAM REALTY CO., INC., doth hereby lease unto the said RAFFERTY-BROWN STEEL CO., INC., the entire real estate holdings of the lessor located on Shaker Road in East Longmeadow, Massachusetts. The said real estate holdings shall include a Shepard-Niles ten (10) ton Overhead Bridge Crane -- 1957 Model which is agreed to be part of the said realty.To Have and to Hold the said premises hereby leased unto the said RAFFERTY-BROWN STEEL CO., INC., and its representatives from the First day of July, 1960 during the full term of ten years thence next ensuing:Yielding and Paying (except only in case of fire or other casualties hereinafter mentioned) as rent, the sum of $ 420,000.00 payable in equal monthly instalments of $ 35,000.00 with the first instalment to be payable 16 on July 1, 1960, the succeeding instalments to be paid on the first of each succeeding month thereafter for the balance of the term, and for such further time as the said lessee, or any other person or persons claiming under it shall hold the said premises or any part thereof: And the said lessee for itself and its representatives hereby covenants and promises with and to the said TERAGRAM REALTY CO., INC., its representatives and assigns, that it will, during the said term, and for such further time as the said Lessee or any other person or persons claiming under it, shall hold the said premises, or any part thereof, pay unto the Lessor or its assigns, the said monthly rent, upon the days hereinbefore appointed for the payment thereof (except only in case of fire or other casualty as hereinafter mentioned), and also all the taxes and assessments whatsoever, whether in the nature of 492 taxes now in being or not, which may be payable for, or in respect of the said premises, or any part thereof during said term, and for such further time as the said Lessee or any person or persons claiming under it shall hold the said premises or any part thereof: AND also will keep all and singular the 17 said premises in such repair as the same are in at the commencement of said term, or may be put in by the said Lessor or its representatives during the continuance thereof; reasonable use and wear, and damage by accidental fire or other inevitable accidents only excepted; and also it will pay the taxes levied for the use of the water furnished by the Town of East Longmeadow during the continuance of this Lease.Provided Always, that in case the premises or any part thereof shall, during said term, be destroyed or damaged by fire or other unavoidable casualty, so that the same shall be thereby rendered unfit for use and habitation, then, and in such case the rent hereinbefore reserved, or a just and proportionate part thereof, according to the nature and extent of the injury sustained, shall be suspended or abated, until the said premises shall have been put in proper condition for use and habitation and in case of such destruction or damage, or a like destruction or damage by any taking or appropriation by public authority for public uses, then the Lessor, its heirs or assigns, may terminate this lease.And it is also hereby understood and expressly agreed by the parties to this Indenture, 18 that all merchandise, furniture, and property of any kind, which may be on the premises during the continuance of this lease, is to be at the sole risk and hazard of the Lessee and that if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the use or abuse of the Town water, or by the leakage or bursting of water pipes, or in any other way or manner, no part of said loss or damage is to be charged to or be borne by the Lessor in any case whatever. And the Lessee further promises that it will keep whole and in good condition, all the window and other glass on the premises, and also the pipes, faucets, and water fixtures, and that it will leave the same whole and in good condition at the termination of this lease.In 1962 Rafferty Brown Steel Co., Inc., of Connecticut (herein called RBS Connecticut) was organized by the petitioners who have jointly owned all of its stock since its formation. RBS Connecticut was organized to acquire the assets of Hawkridge Bros. which operated a general steel products warehouse at Waterbury, Conn. After acquiring the assets of Hawkridge Bros., RBS Connecticut leased for its operations the real property owned 19 by Hawkridge Bros. in Waterbury for a 3-year period.In 1965 Teragram acquired a tract of unimproved real property in Waterbury. The approximate cost of the property and the preparation of this land for construction of a plant was $ 35,000. Teragram contracted for the construction of a plant on such site, arranged mortgage financing using both the Waterbury and East Longmeadow properties as security, and became the sole party obligated on the mortgage. On June 25, 1965, Teragram leased the facility in Waterbury to RBS Connecticut for a term of 14 years.Teragram has continued to own and lease the realty at Waterbury and East Longmeadow to RBS Connecticut and RBS which companies 493 have continued to operate their businesses at the respective locations through the present time. These properties are suitable for use by other companies in other types of businesses than those of RBS and RBS Connecticut.Since its formation in 1960, Teragram's chief executive officer has been Joseph V. Rafferty (herein referred to individually as petitioner) who has been and currently is the company's president and treasurer. Since its formation, Teragram has maintained separate books and records of account 20 and filed separate State and Federal tax returns.During the years in issue Teragram has derived all of its income from rent paid by RBS or RBS Connecticut. For the taxable years ended March 31, 1961, through March 31, 1965, Teragram received rental income from RBS in the following amounts:TYE Mar. 31 --Rental income19611 $ 31,500196242,000196342,000196442,960196542,960During this same period Teragram claimed recurring annual deductions on its Federal income tax returns for State and local taxes, interest, depreciation, and insurance. No deductions for wages or salaries during this period were claimed on such tax returns.The earned surplus account of Teragram increased from $ 4,119.05 as of March 31, 1961, to $ 46,743.35 as of March 31, 1966, while the earned surplus account of RBS increased from $ 331,117.97 as of June 30, 1959, to $ 535,395.77 as of June 30, 1965. In August 1965, RBS distributed the capital stock of Teragram, constituting 4,430 shares, to petitioners. Other than this stock distribution in 1965, neither RBS nor Teragram has paid any dividends during the years in question.Prior to the formation of Teragram, petitioner discussed with his accountant 21 his desire to provide for the orderly disposition of RBS. However, he indicated that he wished to exclude his daughters or future sons-in-law from the steel business, while providing them with something that produced a steady income, as opposed to the violently fluctuating income of the steel business. After Teragram was brought into being and during the period between June 1960 and August 1965, petitioner inquired into and discussed with his accountant the possibility of having RBS distribute the Teragram stock. The distribution of this stock was deemed desirable so that gifts of the stock could be made to the daughters of petitioners.494 The children of petitioners and the dates of birth of each of them are as follows:NameDate of birthMarySept. 12, 1942Joseph, JrJuly 14, 1944KevinApr. 22, 1946MarthaOct. 10, 1947AnneMay 20, 1951MichaelNov. 11, 1952ThomasNov. 10, 1954LouiseJan. 13, 1957JohnJan. 13, 1957Petitioner was advised by his accountant that the distribution of Teragram stock should not be effected until 5 years after Teragram was created; that the distribution, in the accountant's opinion, would not be a device for the distribution of earnings and profits; and, in his opinion, 22 the requirements of section 355 of the Internal Revenue Code regarding the active business provisions had been met. Petitioner has relied solely on his accountant for tax advice from 1948 through 1966 and was counseled by his accountant prior to 1960 that it would be advisable to have a separate real estate corporation formed. Petitioner has never entered into negotiations or taken any other steps to sell the stock of RBS, RBS Connecticut, or Teragram.ULTIMATE FINDINGS1. The primary purpose in forming Teragram and having all of its stock ultimately distributed to petitioners was to facilitate the distribution of assets among the Rafferty children in accordance with the estate plan of petitioner Joseph V. Rafferty.2. Petitioners have failed to establish that Teragram was engaged in the active conduct of a trade or business throughout the 5-year period preceding the distribution of its stock.OPINIONIn August 1965 all of the issued and outstanding stock of Teragram was distributed to petitioners by RBS. Petitioner treated this distribution as a nontaxable transaction under section 355. 224 25 26 Respondent takes 495 the position that (a) the distribution of stock to petitioners was used principally 23 as a device for the distribution of earnings and profits of RBS or Teragram or both; (b) Teragram was not engaged in the active conduct of a trade or business immediately after the distribution or for the 5-year period prior to the distribution; and (c) the distribution of Teragram stock to petitioners constitutes a taxable dividend. In urging that petitioners have failed to meet the "non-device" requirement of section 355(a)(1)(B), respondent argues that petitioners have not justified the incorporation of Teragram and the distribution 496 of Teragram stock to themselves with a valid corporate business purpose. Respondent, it would appear, takes a rather myopic view of the transaction in question. The facts unequivocally show that petitioner, through the incorporation of Teragram and the subsequent distribution of its stock by RBS, was seeking to insure the continued existence and success of RBS by precluding any daughters or future sons-in-law from participating in the management of RBS. By making inter vivos or testamentary 27 gifts of the Teragram stock, petitioner believed he would eliminate possible frictions which could arise between his sons, whom he envisioned as his successors in the management of RBS, and his daughters or future sons-in-law whom he envisioned as taking only a passive role in the management of RBS, if they should ever acquire an equity interest in that corporation. These reasons, rather than amounting to naked, personal reasons of the petitioners, as respondent contends, are very much intertwined with the most fundamental of business purposes of the corporation, that of continuity of the corporate enterprise and retention of successful and seasoned management personnel and policies. To hold that the implementation of a plan to avoid possible interfamily squabbling or conflict over management of a closely held corporation constitutes a shareholder, nonbusiness related reason seems to be completely at odds with the realities of the situation.Respondent asserts that the potential for interfamily conflict is as great, if not greater, as a result of the adoption of the plan to make the daughters the holders of only the property at which RBS conducts its business, rather than an interest 28 in RBS itself. We think that as a result of this planned distribution a mutuality of purpose among all members of the family is achieved regarding the continued prosperous operation of RBS. The Rafferty family members active in the management of RBS are free to pursue corporate policies which may include expansion and reinvestment of corporate profits into the steel business while the other family members, who would be inactive in the management of RBS in any event, are provided with a separate corporate entity whose operation they are free to guide either in the direction of further real estate investment or high cash dividend distributions.Thus, it is our opinion that not only does there exist a valid nontax reason for the separation of RBS and Teragram but also for the direct ownership of both by petitioners. With respect to whose nontax reason justifies such a conclusion, it is clear in this case that to distinguish between "corporate purpose" and "shareholder purpose" would be unrealistic and impractical, Lewis v. Commissioner, 176 F.2d 646">176 F.2d 646, 650 (C.A. 1, 1949), affirming 10 T.C. 1080">10 T.C. 1080 (1948), since the whole transaction was ostensibly devised to insure the continuity of RBS 29 without 497 subjecting it to conflict over its management by the various members of the Rafferty family. However, we hasten to point out that in reaching this conclusion we are by no means adopting the broader rule laid down in Estate of Parshelsky v. Commissioner, 303 F.2d 14">303 F.2d 14, 19 (C.A. 2, 1962), where it was stated:Furthermore, since most spin-offs, including the one involved in this case, concern closely-held corporations, it is not only difficult but often purely formalistic to distinguish between corporate and personal benefit. n12 The separate legal entity of corporations cannot obscure the fact that they are operated by their shareholders in the manner most likely to benefit themselves. [Citations omitted.] The benefits to the corporation and to the shareholders are virtually indistinguishable. Consequently, the courts have uniformly held transactions such as reallocations of ownership interests between different groups of shareholders to be tax-free reorganizations. [Citations omitted. Footnote omitted.]To the contrary, we think it is readily apparent that there are certain instances where a distinction between a corporate purpose and a shareholder purpose must be recognized, 30 i.e., where a distribution is effected solely for the purpose of enabling a shareholder to "milk" the parent corporation; where a distribution is effected for the purpose of meeting the personal obligations of the shareholders of the parent corporation; and where a distribution is effected solely for the purpose of reducing accumulated earnings and profits of the parent corporation which have been permitted to accumulate beyond its reasonable needs. These examples, which are illustrative only and are by no means an exhaustive compilation of shareholder reasons incompatible with the "business purpose" requirements of section 355, are mentioned merely to underscore the fact that there are situations where a shareholder purpose for a corporate separation will not meet the "business purpose" requirements of the statute. We deem respondent's arguments based on Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935), inapposite to the factual situation of the instant case and point out that the distribution here in question was indeed effected for cogent reasons related to the operation of RBS.Respondent next argues that under section 355(b) and section 1.355-1(c), Income Tax Regs., both RBS and Teragram 31 must have been engaged in the active conduct of a trade or business throughout the 5-year period preceding the distribution and immediately following such distribution. Petitioners contend that both RBS and Teragram meet these requirements. They stress that since 1960 Teragram has rented improved multipurpose real estate, maintained separate financial records, and filed its own Federal and State income and excise tax returns. It also, in 1965, arranged for the construction of a building and related facilities at Waterbury, Conn., which it financed through a mortgage on which it alone became liable. As a further indication of 498 its engagement in the active conduct of a trade or business, petitioners assert that had RBS ceased to occupy Teragram's rental property, other tenants could have been easily found or the properties could have been easily sold by Teragram.In attempting to discern precisely what constitutes the active conduct of a trade or business under section 355 and whether Teragram meets these requirements, we find helpful the Senate Finance Committee's report of changes made by it to the Revenue Act of 1954 as originally introduced in the House of Representatives (H.R. 32 8300, 83d Cong., 2d Sess.). In explaining its revision the Senate Finance Committee stated:Present law contemplates that a tax-free separation shall involve only the separation of assets attributable to the carrying on of an active business. Under the House bill, it is immaterial whether the assets are those used in an active business but if investment assets, for example, are separated into a new corporation, any amount received in respect of such an inactive corporation, whether by a distribution from it or by a sale of its stock, would be treated as ordinary income for a period of 10 years from the date of its creation. Your committee returns to existing law in not permitting the tax free separation of an existing corporation into active and inactive entities. It is not believed that the business need for this kind of transaction is sufficiently great to permit a person in a position to afford a 10-year delay in receiving income to do so at capital gain rather than dividend rates. Your committee requires that both the business retained by the distributing company and the business of the corporation the stock of which is distributed must have been actively conducted for the 33 5 years preceding the distribution, a safeguard against avoidance not contained in existing law. [S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 50-51 (1954). Emphasis added.]Hence, the mere division of the corporate entity into two corporations and the subsequent distribution of the stock of one of the corporations after each has been properly aged over 5 years must be deemed insufficient to meet the requirements of section 355(b). The corporation spun off, in addition to having been seasoned for 5 years, must have been engaged in the active conduct of a trade or business during such period. See sec. 1.355-1(c), 334 Income Tax Regs., elaborating on 499 this point; see also Massee, "Section 355: Disposal of Unwanted Assets in Connection with a Reorganization," 22 Tax L. Rev. 439">22 Tax L. Rev. 439, 459. In the instant case, between 1960 and approximately January 1965, Teragram's sole activity was the leasing of the East Longmeadow 35 property to RBS, its parent company. Under the terms of the lease between RBS and Teregram, RBS was responsible for all maintenance and repair work required by the property. Teragram held title to the property and paid various taxes and insurance premiums due with respect to the property. Petitioners, upon whom the burden of proof rests in this case, have shown no further activities on the part of Teragram during such period. Respondent points out, on the other hand, that for this same period Teragram's sole source of income was rent paid by RBS, its parent company; that Teragram apparently had no employees during this period; and that Teragram did not claim any deductions for compensation paid to its president and treasurer, Joseph V. Rafferty, for any services rendered during such period. In view of these facts we conclude that Teragram was not engaged in the active conduct of a trade or business for the 5-year period preceding the distribution of its stock to petitioners. 4 See Henry H. Bonsall, Jr., 317 F.2d 61">317 F.2d 61 (C.A. 2, 1963), affirming a Memorandum Opinion of this Court; Theodore F. Appleby, 35 T.C. 755">35 T.C. 755 (1961), affirmed per curiam 296 F. 2d 925 (C.A. 3, 1962), certiorari 36 denied 370 U.S. 910">370 U.S. 910 (1962); and Isabel A. Elliott, 32 T.C. 283 (1959). Our conclusion is not altered by virtue of Teragram's increased business activities which began around January 1965 when it acquired property in Waterbury, Conn., and contracted for the erection of a plant which it leased to RBS Connecticut, another steel company 100-percent owned by petitioners. While the fact that Teragram obtained the financing for this project through 37 a mortgage on which it alone became liable is an indication of some independent business activity on the part of Teragram, it is by no means conclusive. Moreover, this increased business activity did not commence until the very year of the distribution of the Teragram stock to petitioners. To hold, on the basis of this increased activity in 1965, if such activity does in fact constitute the conduct of an active trade or business, that Teragram has been so engaged since 1960 would simply result in the defenestration of the requirements of section 355(b).500 In their attempt to illustrate the separate active business of Teragram petitioners suggest that because of the multipurpose nature of Teragram's properties they could be easily rented or sold if RBS or RBS Connecticut decided to abandon them for some reason. It is just such a possibility of sale that has caught the awareness of the courts. In the Bonsall case at page 65, the Court of Appeals for the Second Circuit said:It is clear that careful scrutiny of purported "real-estate rental" businesses is necessary to prevent evasion of the purposes of the statute. The possibility of the shareholders abstracting accumulated earnings 38 at capital gains rates is present whenever a corporation owns its own factory or office building. Under taxpayers' interpretation, all that need be done is to transfer the building to a new corporation and distribute the stock received in return. The shareholders would then be free to sell their stock and pay a capital gains rate on the proceeds while the corporation can rent or purchase another building and reduce its accumulated earnings. The present case is little more than that, and it is note-worthy that the two prior cases decided under this section other than Coady, Theodore F. Appleby, supra, and Isabel A. Elliott, supra, were likewise factually similar. Only long application may completely clarify the difficult terminology of section 355. But obvious cases such as presented here plainly must be excluded from tax-free treatment.Here, after an easily arranged sale of Teragram's properties, petitioners would be free to liquidate Teragram or arrange a straight sale of their Teragram stock. The fact that this has not occurred is just as inconclusive as though a sale had taken place prior to trial. What is of crucial importance is that, regardless of the valid business purpose 39 for such a transaction, 540 petitioners have extracted through an attempted tax-free spin-off what are in substance passive, investment-type assets. This transaction is a "bailout" of the earnings and profits of RBS and Teragram and to this extent constitutes a "device" for the distribution of such earnings and profits. Petitioners have failed to prove otherwise.501 We are mindful of the fact that to some extent every corporate separation is a device for the distribution of earnings and profits insofar as there is direct ownership by the stockholders of something they did not previously hold directly. 6 However, what we must decide in this case is whether the transaction in question fits within the requirements of the statute and the expressed legislative purpose of providing "for non-recognition of gain or loss in cases which involve a mere rearrangement of the corporate 41 structure or other shifts in the form of the corporate enterprise which do not involve any distributions of corporate assets to shareholders." H. Rept. No. 1337, 83d Cong., 2d Sess., p. 34 (1954); accord, S. Rept. No. 1662, 83d Cong., 2d Sess., p. 43 (1954). For the reasons stated herein, we conclude that there has not been a mere rearrangement in the form of the corporate enterprise and a functional division of two corporations engaged in the active conduct of separate trades or businesses for the 5-year period preceding the distribution of the Teragram stock to petitioners. Accordingly, we hold that the distribution of Teragram stock to petitioners in August 1965 does not satisfy the requirements of section 355.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩1. Nine-month period.↩2. SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION.(a) Effect on Distributees. -- (1) General Rule. -- If -- (A) a corporation (referred to in this section as the "distributing corporation") --(i) distributes to a shareholder, with respect to its stock, or(ii) distributes to a security holder, in exchange for its securities,solely stock or securities of a corporation (referred to in this section as "controlled corporation") which it controls immediately before the distribution, (B) the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (but the mere fact that subsequent to the distribution stock or securities in one or more of such corporations are sold or exchanged by all or some of the distributees (other than pursuant to an arrangement negotiated or agreed upon prior to such distribution) shall not be construed to mean that the transaction was used principally as such a device).(C) the requirements of subsection (b) (relating to active businesses) are satisfied, and(D) as part of the distribution, the distributing corporation distributes --(i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, or(ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368 (c), and it is established to the satisfaction of the Secretary or his delegate that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax,then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities. * * (b) Requirements as to Active Business. -- (1) In general. -- Subsection (a) shall apply only if either -- (A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or(B) immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business.(2) Definition. -- For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if -- (A) it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged,(B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution,(C) such trade or business was not acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part, and(D) control of a corporation which (at the time of acquisition of control) was conducting such trade or business --(i) was not acquired directly (or through one or more corporations) by another corporation within the period described in subparagraph (B), or(ii) was so acquired by another corporation within such period, but such control was so acquired only by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period.↩3. Sec. 1.355-1 Distribution of stock and securities of controlled corporation.(c) Active business. Section 355 is not applicable unless the controlled corporation and the distributing corporation are each engaged in the active conduct of a trade or business. For specific rules in this connection see section 355(b) (1) and (2). Without regard to such rules, for purposes of section 355, a trade or business consists of a specific existing group of activities being carried on for the purpose of earning income or profit from only such group of activities, and the activities included in such group must include every operation which forms a part of, or a step in, the process of earning income or profit from such group. Such group of activities ordinarily must include the collection of income and the payment of expenses. It does not include --(1) The holding for investment purposes of stock, securities, land or other property, including casual sales thereof (whether or not the proceeds of such sales are reinvested).(2) The ownership and operation of land or buildings all or substantially all of which are used and occupied by the owner in the operation of a trade or business, or(3) A group of activities which, while a part of a business operated for profit, are not themselves independently producing income even though such activities would produce income with the addition of other activities or with large increases in activities previously incidental or insubstantial.↩4. See and compare sec. 346(b)(1), requiring the active conduct of a trade or business for the 5-year period preceding a distribution; sec. 1372(e)(5) defining "passive investment income" as gross receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken into account for purposes of this paragraph only to the extent of gains therefrom); and sec. 822(b) defining "gross investment income" as the gross amount of income during the taxable year from (A) interest, dividends, rents, and royalties, (B) the entering into of any lease mortgage, or other instrument or agreement from which the insurance company derives interest, rents, or royalties.↩5. See Whitman, "Draining the Serbonian Bog: A New Approach to Corporate Separations Under the 1954 Code." 81 Harv. L. Rev. 1243">81 Harv. L. Rev. 1243-1244, where this point is emphasized in a critique of the Parshelsky case:"In Estate of Moses L. Parshelsky n236 the Service leaned heavily on the corporate/shareholder distinction in the business purpose doctrine. As might have been predicted from the repudiation in Lewis v. Commissioner, n237 this was at best a weak link in the enforcement chain, and the Second Circuit discarded it. But again emphasis upon business purpose obscured the real issue. Here, the seventy-two-year-old sole shareholder of a business with large accumulated earnings spun off real estate assets worth more than 350,000 dollars to himself, ostensibly to facilitate his estate planning. It was this 'shareholder purpose' that finally legitimatized the separation. n238 But the whole transaction seems to have been a bailout, artfully contrived, perhaps, but a bailout nonetheless. Had Parshelsky tried to obtain the earnings himself without paying a dividend tax, he would probably have failed to qualify for a valid spin-off; the device concept under the 1951 act was weak, but it did cover glaring post-distribution sales. n239 * * Why then should the fact that he wanted to plot out his estate legitimatize a spin-off that would otherwise fail? Intent of the shareholder is relevant, but the statutory test speaks in terms of result, and the effect here has been a bailout. * * *" (Footnotes omitted.)6. See Mintz, "Corporate Separations," 36 Taxes 882">36 Taxes 882↩, 887 (1958).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620425/	DON E. NELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNell v. CommissionerDocket No. 26184-83.United States Tax CourtT.C. Memo 1986-246; 1986 Tax Ct. Memo LEXIS 365; 51 T.C.M. (CCH) 1219; T.C.M. (RIA) 86246; June 17, 1986. Robert J. Degroot and Robert J. McKenna (specially recognized), for the petitioner. Daniel K. O'Brien and William S. Garofalo, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: Respondent determined deficiencies in petitioner's individual income tax for the calendar years 1968 and 1969 in the respective amounts of $66,225.39 and $4,178.86, together with additions366 to tax for each year under the provisions of section 6653(b) 1 in the respective amounts of $33,112.69 and $2,089.43. By amendment to his answer filed at the time of trial, respondent affirmatively alleged, in the alternative, that if respondent's determination of additions to tax under section 6653(b) were disapproved, petitioner was liable for additions to tax for each year under the provisions of section 6651 and section 6653(a). The issues which we must determine are: 1. Whether petitioner filed an income tax return for the calendar year 1968; 2. Whether petitioner had unreported taxable income in the years 1968 and 1969, resulting from certain sales of stock owned by petitioner in each year, as well as additional income from certain unidentified bank deposits in the year 1968; 23. Whether petitioner is liable for additions to tax for fraud, under section 6653(b), for either or both of the years 1968 and 1969; and 4. In the alternative, in the event that additions to tax under section 6653(b) for either year are disapproved, whether petitioner is liable in either such year for additions to tax under section 6651(a) and/or section 6653(a). 367 The evidence herein was stipulated in part, and such facts, together with stipulated exhibits, are incorporated herein by this reference. FINDINGS OF FACT At the time of filing his petition herein, petitioner Don E. Nell was a resident of Elizabeth City, North Carolina. For the calendar year 1968, petitioner timely filed an individual income tax return as an "unmarried head of household," although at that time he was married to Audrey Nell. Such return showed a total tax liability of $2,545.17. After correcting such amount to $2,311.11 because of a mathematical error, respondent assessed the tax and credited petitioner's account for payment thereof through payments by petitioner and withholding on his salary, as reported.Said return reported, inter alia, wages or salary of $16,000 and a net loss from certain rental property in the amount of $1,663.93. No income from dividends or interest was reported, nor any capital gains or losses. For the year 1969, petitioner did not file an income tax return. From approximately 1962 through October of 1967, petitioner was vice president of Datacomp Service Corporation, Inc., a New York corporation. In the early part of November 1967368 a new corporation of the same name, Datacomp Service Corporation, was formed in the State of New Jersey and took over all of the assets and liabilities of the New York corporation. On November 16, 1967, the new New Jersey corporation (hereinafter "Datacomp") issued 31,625 shares of its common stock to petitioner, in return for petitioner's promissory note payable to Datacomp in the amount of $3,162.50. On May 9, 1968, Datacomp entered into an agreement with the Dumont Corporation of Salt Lake City, Utah, (hereinafter "Dumont") whereby Dumont "purchased" all of the assets of Datacomp in exchange for 3,563,573 shares of class A common stock and 330,349 shares of class B common stock of Dumont. In connection with this acquisition, the original shareholders of Datacomp received 5.2 shares of Dumont stock for each share of Datacomp common stock held. As the result of this exchange of stock, petitioner, as of May 10, 1968, owned 167,050 shares of class A common stock of Dumont. On that same date, petitioner was elected vice president and a director of Dumont. Petitioner was named president of Dumont in August of 1968 and continued in that capacity through November 30, 1968, when he369 terminated his connection with Dumont. After the May 9, 1968, acquisition of Datacomp by Dumont, the bid price for Dumont stock on the open market increased in accordance with the following listed summary: DateBid PriceMay 3, 19681 3/8May 16, 19683 3/4June 16, 19689 1/4October 15, 196810 1/2Orders suspending all trading in securities of Dumont were issued by the Securities and Exchange Commission on November 1, 1968. Margarete Contento (hereinafter "Contento") is a woman who for part of 1968 worked as a waitress in a restaurant in Englewood Cliffs, New Jersey. She worked for a salary and tips. In 1969, she was unemployed.She is a woman of limited education and little, if any, knowledge of investment, financial and tax affairs. She had no significant funds of her own. At some point in 1968, petitioner formed a liaison with Contento and moved in to her rented apartment in Paterson, New Jersey, where he lived with her as man and wife, together with Contento's son and two grandchildren. In 1969, petitioner, Contento, et al., moved to a single family house in Creskill, New Jersey. In the latter part or 1969, the house was damaged by fire, at370 a time when petitioner and Contento were absent. At some point in 1968, and after receiving his 167,050 shares of Dumont stock, petitioner caused one-half thereof, or 83,525 shares, to be transferred to the name of Contento. 3 The latter paid no consideration for the transfer of said stock to her, and at all relevant times acted as petitioner's nominee and subject to his direction and control, with respect to the stock and any proceeds therefrom. Petitioner caused Contento to open a stock brokerage account in 1968 in her name with the firm of Hardy & Company. Through this account, in the period August 30, 1968, through December 3, 1968, petitioner caused Contento to sell the following stocks at various times, in the following total amounts: Shares and CompanyCost 4Sales Price6,900Dumont$690.00$58,695.131,000Spooner Mines2,835.003,755.00200National Food Marketers2,933.502,354.50200Addressograph-Multigraph17,933.3415,076.49TOTAL SALES$79,881.12371 During that same year, Hardy & Company made disbursements to Contento with respect to transactions through the account in the total amount of $55,679.89, which were deposited in various bank accounts maintained in the name of Contento. Petitioner actively participated in maintaining the check ledgers and in drawing checks for Contento's signature, and substantial amounts from these accounts were paid to him or for his benefit. In 1968, petitioner caused Contento to open a stock brokerage account with the firm of Merrill, Lynch, Pierce, Fenner & Smith, Inc. During the period June 25, 1968, through December 31, 1968, petitioner caused Contento to make the following sales of stocks through this account, at the following prices: Shares and CompanyCost 5Sales Price1,600 Dumont$160.00$12,552.42100 National Food Marketers1,496.751,350.50TOTAL SALES$13,902.92During the year 1968, Merrill, Lynch, Pierce, Fenner & Smith, Inc. made disbursements to Contento with respect to sales of stock through the account in the total amount of $13,902.42. Of this amount, two checks372 totaling $5,394.61 were cashed, and the balance was deposited in various bank accounts maintained in the name of Contento. In 1968, petitioner caused Contento to open a stock brokerage account with the firm of Orvis Bros. & Co. In 1969, petitioner caused Contento to sell 3,000 shares of Silver Mac Mines stock through this account, with a cost of $1,103.63, at a sales price of $1,562.26. During the year 1969, Albert W. Dugan of Houston, Texas, purchased Dumont Corporation stock on three occasions, as follows: (a) On or about April 14, 1969, Mr. Dugan paid petitioner $7,000 for an undisclosed number of shares of Dumont. (b) On July 14, 1969, Mr. Dugan paid petitioner $5,000 for the purchase of 10,000 shares of Dumont. (c) On August 18, 1969, petitioner and Contento appeared personally in Mr. Dugan's office in Houston, Texas, at which time Mr. Dugan delivered a cashier's check to petitioner in the amount of $2,500 for the purchase of 10,000 shares of Dumont, and a further cashier's check in the amount of $5,000 for the purchase of 20,000 shares of Dumont, said check being payable to Contento at petitioner's direction. The above sales of Dumont stock to Mr. Dugan were negotiated373 on his behalf by a Mr. Gearhart (now deceased) who was a personal friend of Mr. Dugan's. 6The same Mr. Gearhart was also a friend of a Dr. William Bloom who, in 1969, was a practicing physician in New York City. Apparently through the intermediation of Mr. Gearhart, Dr. Bloom purchased Dumont stock from petitioner (whom he never met) on or about October 1, 1969, at a price of $2,000 for an undisclosed number of shares. 7On or about September 12, 1969, one William Howard (now deceased) purchased 12,000 shares of Dumont stock which was registered in the name of Contento for a price of 3,000. The sale was arranged by Mr. Howard's brother, Charles Howard, with petitioner, with the participation in some undisclosed fashion of Dr. Bloom and Mr. Gearhart. 8The purchase of the house at Creskill, New Jersey, in which petitioner and Contento lived in 1969, was arranged by petitioner, with title thereto being put in Contento's name. Contento supplied no funds374 of her own for this purchase, and all necessary funds were supplied by petitioner through accounts maintained in the name of Contento, described above. In his statutory notice of deficiency herein, respondent determined that petitioner had unreported short-term gains from the sale of securities in 1968 as follows: Number ofShort TermDescriptionBrokerCostSharesGain or LossSpooner MinesHardy & Co.$2,835.001,000$ 920.00 National FoodMarketHardy & Co.2,993.50200(639.00)National FoodMarketMLPF&S 1,496.75100(146.25)Addressograph-MultigraphHardy & Co.17,933.34200(2,836.85)Dumont Corp.Hardy & Co.6,90058,695.13 Dumont Corp.Hardy & Co.1,60015,232.16 Dumont Corp.MLPF&S 1,60012,552.42 Total Short Term Gain$83,777.61 In his statutory notice herein, respondent determined that petitioner had unreported long-term capital gains from the sale of securities in 1969 as follows: DescriptionSharesCostSelling PriceDumont Corp.24,000$14,500.00 Dumont Corp.8,0002,000.00 Dumont Corp.12,0003,000.00 Dumont Corp.10,0002,500.00 Dumont Corp.10,0003,000.00 Dumont Corp.20,0005,000.00 National Food100$1,522.001.75 Silver Mac Mines3,0001,103.63458.63 Total Long Term Capital Gain$30,460.38 Less: Section 1202 deduction - 50%(15,230.19)Taxable Long Term Capital Gain$15,230.19 375 In his statutory notice herein, respondent determined that petitioner had unreported income in 1968 from unexplained bank deposits in the following bank accounts on the following dates, in the following amounts: Date ofBankDepositAmountEnglewood National Bank7/30/68$2,500.00Acct. #301-00421-89/09/685,974.29Kings County Lafayette Trust11/04/682,000.00Acct. #03-005-2866Fort Lee Trust Co.4/10/681,000.00Acct. #01-4950-010/24/682,000.0011/01/682,000.0012/13/682,000.00Total Unidentified Unreported Income$17,474.29With respect to the bank accounts in the above table, the Englewood National Bank account was maintained in the name of Contento; the Fort Lee Trust Co. account was in the name of petitioner; and the name in which the account at Kings County Lafayette Trust was maintained is not disclosed in this record. There was an underpayment of tax by petitioner in each of the years 1968 and 1969, some part of which was attributable to fraud. OPINION Respondent determined in his notice of deficiency that petitioner had unreported taxable income in the form of short-term gains from the sales of securities376 in 1968, as well as from certain unidentified bank deposits in that year. For 1969, respondent further determined that petitioner had unreported income from long-term capital gains resulting from the sales of certain other securities. These specific adjustments to petitioner's income for both years were detailed in respondent's statutory notice of deficiency, as shown in our findings of fact. The burden of proof was on petitioner to show error in respondent's determinations with respect to these adjustments, ; Rule 142(a). So far as petitioner is concerned, he has failed to carry that burden of proof. With respect to respondent's determination of securities sales in 1968, the records of the various brokerage houses, as detailed in our findings of fact, were introduced in evidence, and through them the sales of the relevant securities could be traced. For 1969, the same evidence was in the record, together with the direct testimony of Contento and other third-party witnesses with regard to the individual direct sales of Dumont stock in that year to Messrs. Dugan, Bloom and Howard. We think that the evidence in this record377 -- mostly in the form of joint exhibits or testimony and evidence introduced by respondent -- clearly substantiates the bulk of the determinations with regard to securities sales, as determined by respondent. The evidence shows, as we have found, that in 1968 petitioner caused half of his Dumont shares to be put in the name of Margarete Contento, and that at all relevent times Contento served as petitioner's nominee or straw party for the purpose of effecting sales of securities which were really the property of petitioner. As part of this device, petitioner caused Contento to open and maintain various bank accounts, through which the proceeds of these sales, as well as perhaps other funds, flowed. The securities, and the proceeds of sales of securities, were nevertheless the property and the income of petitioner. Against this pattern of evidence, both documentary and through the testimony of witnesses at trial, petitioner, who had the burden on these issues, produced no evidence at all, except his unsupported and self-serving testimony that he had nothing to do with establishing the brokerage accounts in Contento's name, did not control the activity therein and had nothing to378 do with the various bank accounts which Contento maintained. Petitioner's testimony at trial was vague, evasive, and frequently contradictory, and we find it generally unworthy of belief. Petitioner simply adopted the tactic of "stonewalling." He repeatedly declined to identify his signature as endorsements on numerous checks made out to him which were presented to him at trial, on the grounds that he could not identify his signature because he was not a handwriting expert. One does not have to be a handwriting expert in order to identify his own signature, and we are satisfied that petitioner was simply not telling the truth when he refused to identify his signature on the various checks which were presented to him in the course of trial. Again, in the face of direct and explicit testimony, both of Mr. Dugan and of Contento -- that they had met with petitioner in Houston, Texas, on a certain day, at which time Mr. Dugan bought Dumont stock, some registered in petitioner's name and some registered in Contento's name -- petitioner flatly denied that he had ever gone to Houston or had ever met Mr. Dugan. We think the weight of the evidence herein proves the contrary. Again, petitioner379 denied at trial that he had ever filed a tax return for 1968, and denied what clearly appeared to be his signature on such return when it was introduced in evidence.Petitioner, however, never denied having filed a 1968 tax return up until the time of trial, including numerous prior interviews with respondent's agents with respect to his 1968 and 1969 tax affairs. Furthermore, petitioner on brief requested us to find that he had filed a Form 1040 for 1968, and at no time has petitioner ever disclaimed the credits to his 1968 account given by respondent based upon that return and the withholding and tax payments made therewith. Other instances in this record abound of petitioner's flat denials or evasions of facts which are otherwise clearly established in the record. We are the trier of facts. It is our duty to listen to the testimony, observe the demeanor of the witnesses, weigh the evidence, and determine what we will or will not believe. We are not required to accept testimony at face value, and we may discount a party's self-interested testimony, and place our reliance on other testimony which we believe is more reliable. See ,380 affg. and remanding ; ; . We have accepted, then, that the securities sold through Contento's various brokerage accounts in 1968 and 1969 were in fact the securities of petitioner, and that the income was his, as determined by respondent, with the following exceptions: A. For the year 1968, our findings show the amounts of sales of securities, the prices received therefor and the costs, either as determined by respondent in his statutory notice or as conceded on brief, with the exception of the alleged sale of 1,600 shares of Dumont stock through the Firm of Hardy & Co., at a price of $15,232.16. With respect to this item, the transcript of the Hardy & Co. brokerage account, which was introduced in evidence, shows that no such sale took place. With respect to this item, therefore, respondent's determination is disapproved. As to the rest of the securities sales in 1968, the determination is approved. B. For the year 1969, the evidence, plus respondent's concessions as to costs, establishes the basis for our381 findings with regard to the sale by petitioner in that year of $24,500 worth of stock of Dumont as well as the stock of Silver Mac. As to the additional $5,500 worth of Dumont stock as well as the National Food Marketers stock, as determined by respondent in his notice of deficiency, there was no evidence, and respondent has omitted this from his requested findings of fact, which we interpret as a concession on respondent's part as to these items. In other respects, therefore, respondent's determination of securities sales in 1969 is approved, in accordance with our findings of fact. With respect to respondent's determination of additional income from unidentified bank deposits for the year 1968, petitioner simply offered no evidence of any sort on this point, and respondent's determination must therefore be approved for failure of petitioner to carry his necessary burden of proof with respect thereto. In this connection, however, we note that respondent went to considerable lengths, which we find convincing, to demonstrate that such unidentified bank deposits did not come from the proceeds of stock sales so as to cause a duplication of income against petitioner for 1968. We382 turn now to the issue of respondent's determined additions to tax for fraud against petitioner for both years, under the provisions of section 6653(b). Here, the burden of proof is upon respondent to show fraud by clear and convincing evidence, sec. 7454, Rule 142(b). Fraud, as used in section 6653(b), means actual intentional wrongdoing. . The intent required is a voluntary, intentional violation of a known legal duty; in this case, to evade a tax believed to be owing. , cert. denied ; , appeal dismissed (5th Cir. 1977). Where direct evidence of fraudulent intent is not available, its existence may be determined from the conduct of the petitioner and the surrounding circumstances. . 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." Cf. .383 Considering all the evidence in this case as a whole, we are satisfied that respondent has carried his necessary burden of proof on the fraud issue as to both years. We are satisfied that in the transactions which we have described in our findings, Contento acted under the control and direction of petitioner, and as his nominee; that she had no funds of her own; and that petitioner used her to screen his receipt of income from sales of securities which he owned. The evidence shows that petitioner was a mature and sophisticated businessman, who at one time had held a high position with a major company. We think that he knew exactly what he was doing and what he intended to accomplish, which was the evasion of income tax on substantial income in both the years 1968 and 1969. In the face of clear and convincing evidence to this effect, we find his bald-faced denials at trial singularly unconvincing. For the years before us, the precise amount of underpayment resulting from fraud need not be proved. . The statute requires only a showing that "any part" of an underpayment results from fraud. We accordingly sustain respondent384 on the fraud issue. Given our disposition of the fraud issue, respondent's alternative claims for additions under sections 6651(a) and 6653(a) need not be considered. Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. ↩2. In addition to the above determinations, respondent determined additional income against petitioner for the year 1979 as unreported rental income. Although such item was placed in issue by petitioner's petition herein, the matter was addressed neither at trial nor on brief, and is deemed to be conceded.↩3. Contento testified that she received about 80,000 shares, using a round figure. Petitioner testified that he caused his shares to be divided equally, with one half being put in the name of Contento. We accept petitioner's testimony on this point as being more precise.↩4. Conceded on brief by respondent.↩5. See n. 4, supra.↩6. Respondent on brief conceded a cost basis of $600 in this stock.↩7. Respondent on brief conceded a cost basis of $100 in this stock.↩8. Respondent on brief conceded a cost basis of $100 in this stock.↩*. [Merill, Lynch, Pierce, Fenner & Smith]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620428/	STANLEY D. CLOUGH AND ROSEMARY A. CLOUGH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentClough v. Comm'rNo. 6836-02 United States Tax Court119 T.C. 183; 2002 U.S. Tax Ct. LEXIS 47; 119 T.C. No. 10; October 18, 2002, Filed 47 Respondent's motion to dismiss for lack of jurisdiction, as supplemented, granted. R filed a motion to dismiss for lack of jurisdiction on the ground that Ps' petition was not timely filed. R attached a copy of the certified mail list showing that the notice of deficiency was mailed on Dec. 4, 2001. The U.S. Postal Service postmark on the envelope in which the petition was mailed was dated Mar. 21, 2002, a date more than 90 days after the mailing of the notice of deficiency. R filed sworn declarations of the manager of the office that maintained the certified mail list stating that the list was obtained from records of that office. R also filed a declaration of a processing clerk of the U.S. Postal Service outlining the procedure that he follows in processing certified mail and stating that on Dec. 4, 2001, he placed a postal stamp on the certified mail list attached to R's motion. Ps object to the introduction into evidence of the certified mail list and the declarations on the grounds that these documents48 constitute inadmissible hearsay. Held: The certified mail list is a record of regularly conducted activity under Fed. R. Evid. 802(6) and is self- authenticated by the accompanying declarations under Fed. R. Evid. 902(11). Stanley D. Clough and Rosemary A. Clough, pro se.Karen N. Sommers, Melinda G. Williams, and Donna F.Herbert , for respondent. Dawson, Howard A., Jr.;Powell, Carleton D.DAWSON; POWELL184 OPINIONDAWSON, Judge: This case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7443A(b)(5) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGEPOWELL, Special Trial Judge: This matter is49 before the Court on respondent's motion to dismiss for lack of jurisdiction, as supplemented. Respondent contends that the Court lacks jurisdiction in this case on the ground that the petition was not filed within the time prescribed in sections 6213(a) and 7502(a). Petitioners resided in Sylmar, California, at the time the petition was filed. BackgroundOn or about December 28, 2001, petitioners received a notice of deficiency that respondent sent by certified mail. In the notice, respondent determined a deficiency of $ 51,440 in petitioners' 1999 Federal income tax and an accuracy-related penalty under section 6662(a) of $ 10,288. The notice of deficiency was addressed to petitioners at 13550 Foothill Blvd. Unit, Sylmar, California. Petitioners do not dispute that the Sylmar address was their correct address.185 The cover page of the notice of deficiency contained the following information: (1) The date of the notice of deficiency (December 4, 2001); (2) petitioners' primary taxpayer identification number; (3) the type of tax, the taxable year, and the amount of the deficiency and penalty; (4) the name of an Internal Revenue Service contact50 person, as well as a phone number, fax number, and hours to call; and (5) the last date to file a petition with the Court (March 4, 2002). 2 The notice of deficiency was issued by the Internal Revenue Service Center in Ogden, Utah (the Ogden Service Center).On April 1, 2002, the Court received and filed a joint petition for redetermination challenging the above-described notice of deficiency. The petition arrived at the Court in an envelope bearing a U.S. Postal Service postmark dated March 21, 2002.Respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not timely51 filed. Attached to respondent's motion to dismiss is a copy of a certified mail list. 3 The certified mail list indicates that on December 4, 2001, duplicate original notices of deficiency for the taxable year 1999 were mailed to petitioners. Petitioners are identified on the certified mail list by name, address, and primary taxpayer identification number. A U.S. Postal Service postmark dated December 4, 2001, appears in the lower right-hand corner of the certified mail list. The postmark, which is rectangular, identifies the U.S. Post Office as "IRS OGDEN UT USPS-84201" and includes the facsimile signature of Greg L. Holt. Petitioners object to respondent's reliance on the certified mail list on the ground the document constitutes inadmissable hearsay.The matter was called for hearing52 at the Court's motions session in Washington, D. C., on June 19, 2002. Counsel for respondent appeared. Respondent submitted a declaration executed by Susan D. Petersen (Ms. Petersen), the manager of the Correspondence/Processing Examination Department 186 at the Ogden Service Center. Ms. Petersen's declaration states that she is a custodian of various records, including certified mail lists. Ms. Petersen's declaration describes in general terms the procedures that are used in mailing notices of deficiency, including the transfer of notices of deficiency to the U.S. Postal Service and the Ogden Service Center's practice of retaining certified mail lists. Ms. Petersen's declaration states that the copy of the certified mail list attached to respondent's motion to dismiss was obtained from records maintained at the Ogden Service Center.Petitioners did not appear, but they filed a request to change the place of hearing. The Court continued the matter for further hearing to the Court's trial calendar in San Diego, California, on June 28, 2002. Petitioner Stanley D. Clough and counsel for respondent appeared at the second hearing and were heard.During the second hearing, respondent filed53 with the Court a supplement to the motion to dismiss and submitted a declaration executed by Greg L. Holt (Mr. Holt), a U.S. Postal Service mail processing clerk assigned to the Ogden Service Center.Mr. Holt's declaration states that his duties as a mail processing clerk include processing certified mail items delivered to him by Ogden Service Center personnel. Mr. Holt's declaration outlines the procedures that he follows in processing certified mail, including his practice of verifying the information contained in the Commissioner's certified mail lists, and, thereafter, placing a postmark stamp on each such list. Mr. Holt's declaration states that, on December 4, 2001, he placed a postmark stamp on the certified mail list that was attached as an exhibit to respondent's motion to dismiss. Petitioners also object to the admission of Mr. Holt's declaration on the ground that the document constitutes inadmissible hearsay. DiscussionThe Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Sec. 7442; Judge v. Commissioner, 88 T.C. 1175">88 T.C. 1175, 1180-1181 (1987);54 Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). The Court's jurisdiction to redetermine a deficiency 187 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 the Commissioner, after determining a deficiency, to send a notice of deficiency to a taxpayer by certified or registered mail. Pursuant to section 6213(a), a taxpayer has 90 days (or 150 days if the notice is addressed to a person outside of the United States) from the date the notice of deficiency is mailed to file a petition with the Court for a redetermination of the deficiency.The Commissioner bears the burden of proving by competent and persuasive evidence that a notice of deficiency was properly mailed to a taxpayer. Cataldo v. Commissioner, 60 T.C. 522">60 T.C. 522, 524 (1973), affd. per curiam 499 F.2d 550">499 F.2d 550 (2d Cir. 1974). We require the Commissioner to introduce evidence showing that the notice of deficiency was properly delivered to the U.S. Postal Service for mailing. Coleman v. Commissioner, 94 T.C. 82">94 T.C. 82, 90 (1990).55 The act of mailing may be proven by evidence of the Commissioner's mailing practices corroborated by direct testimony or documentary evidence. Id. The Commissioner is not required to produce employees who personally recall each of the many notices of deficiency which are mailed annually. Cataldo v. Commissioner, supra 60 T.C. at 524.There is no dispute in this case regarding the existence of the notice of deficiency dated December 4, 2001. Petitioners acknowledge receiving the notice of deficiency in late December 2001.Respondent asserts that the notice of deficiency was mailed to petitioners on December 4, 2001, and, therefore, the 90-day period for filing a timely petition with the Court expired on March 4, 2002 -- more than 2 weeks before petitioners mailed their petition to the Court. Petitioners concede that, if the notice of deficiency was mailed to them on December 4, 2001, their petition was not filed within the 90-day period prescribed in section 6213(a). The only dispute, therefore, is the date the notice of deficiency was mailed.Where the existence of a notice of deficiency is not disputed, a Postal Service Form 3877, Acceptance of Registered, Insured, C.O.D. 56 and Certified Mail, or its equivalent -- a certified mail list -- represents direct documentary evidence of 188 the date and the fact of mailing. Coleman v. Commissioner, supra 94 T.C. at 90-91; see Magazine v. Commissioner, 89 T.C. 321">89 T.C. 321, 324, 327 (1987). A properly completed certified mail list reflects compliance with Internal Revenue Service procedures for mailing deficiency notices. Coleman v. Commissioner, supra 94 T.C. at 90.Exact compliance with certified mail list procedures raises a presumption of official regularity in favor of the Commissioner. United States v. Zolla, 724 F.2d 808">724 F.2d 808, 810 (9th Cir. 1984). A failure to comply precisely with the certified mailing list procedures may not be fatal if the evidence adduced is otherwise sufficient to prove mailing. Coleman v. Commissioner, supra 94 T.C. at 91.Petitioners contend, however, that both the certified mail list and the declaration executed by Mr. Holt constitute inadmissible hearsay, and respondent has otherwise failed to prove the date that the notice of deficiency was mailed.In general, section 7453 and Rule 143(a) provide that Tax Court proceedings are to be conducted in accordance57 with the rules of evidence applicable in trials without a jury in the U.S. District Court for the District of Columbia. Consistent with this directive, we observe the Federal Rules of Evidence. 4Rule 801(c) of the Federal Rules of Evidence defines "hearsay" as "a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Rule 802 of the Federal Rules of Evidence provides that hearsay generally is not admissible except as otherwise provided. Rule 803(6) of the Federal Rules of Evidence provides an exception to the hearsay rule as follows: Rule 803. Hearsay Exceptions; Availability of Declarant Immaterial The following are not excluded by the hearsay rule, even though the declarant is available as a witness: * * * * * * * (6) Records of Regularly58 Conducted Activity. -- A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that 189 business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness, or by certification that complies with Rule 902(11), Rule 902(12), or a statute permitting certification, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.Rule 902 of the Federal Rules of Evidence, inter alia, provides: Rule 902. Self-authentication Extrinsic evidence of authenticity as a condition precedent to admissibility59 is not required with respect to the following: * * * * * * (11) Certified Domestic Records of Regularly Conducted Activity. -- The original or a duplicate of a domestic record of regularly conducted activity that would be admissible under Rule 803(6) if accompanied by a written declaration of its custodian or other qualified person, in a manner complying with any Act of Congress or rule prescribed by the Supreme Court pursuant to statutory authority, certifying that the record -- (A) was made at or near the time of the occurrence of the matters set forth by, or from information transmitted by, a person with knowledge of those matters; (B) was kept in the course of the regularly conducted activity; and (C) was made by the regularly conducted activity as a regular practice. A party intending to offer a record into evidence under this paragraph must provide written notice of that intention to all adverse parties, and must60 make the record and declaration available for inspection sufficiently in advance of their offer into evidence to provide an adverse party with a fair opportunity to challenge them. 561 Respondent argues that the copy of the certified mail list attached to the motion to dismiss should be admitted as evidence 190 of the date of mailing of the notice of deficiency under the exception to the hearsay rule set forth in rule 803(6) of the Federal Rules of Evidence. Respondent further argues that the declarations executed by Ms. Petersen (Ogden Service Center custodian of records) and Mr. Holt (U.S. Postal Service mail processing clerk) are sufficient to self- authenticate the certified mail list for purposes of admission into the record in this case under rule 902(11) of the Federal Rules of Evidence.Petitioners argue, however, that the certified mail list and the declaration executed by Mr. Holt 6 do not qualify under an exception to the hearsay rule because those documents were prepared in anticipation of litigation and, therefore, they are inherently unreliable. See Palmer v. Hoffman, 318 U.S. 109">318 U.S. 109, 113, 87 L. Ed. 645">87 L. Ed. 645, 63 S. Ct. 477">63 S. Ct. 477-114 (1943).62 As previously noted, the Commissioner is authorized to send notices of deficiency to taxpayers by certified or registered mail. Sec. 6212(a). Consistent with the mandate of section 6212(a), and in order to provide a means for determining the dates regarding the issuance of notices of deficiency, it is necessary and proper for the Commissioner to prepare and retain certified mail lists in the normal course of operations. It is, therefore, incorrect to state that the certified mail list was prepared in anticipation of litigation. Rather, it is a record of regularly conducted activities addressed by rule 803(6) of the Federal Rules of Evidence.The declarations executed by Ms. Petersen and Mr. Holt were prepared in the course of litigation in order to satisfy the requirements of rule 902(11) of the Federal Rules of Evidence. The purpose of the declarations is to authenticate the certified mail list. In short, the declarations show that: (1) The certified mail list was prepared and retained by respondent in the normal course of operations; and (2) the postmark stamp was placed on the certified mail list by Mr. Holt, a U.S. Postal Service mail processing clerk, consistent with normal63 practices. 7Petitioners have offered no evidence that the disputed documents are somehow unreliable. In the absence of any 191 such evidence, we shall admit the certified mail list and the declarations into evidence.In sum, respondent has produced competent and persuasive evidence that duplicate original notices of deficiency were mailed to petitioners on December 4, 2001. See Cataldo v. Commissioner, 60 T.C. at 524. Petitioners have not presented any evidence that the notices of deficiency were mailed on any date other than December 4, 2001. Because we conclude that the notices of deficiency were mailed to petitioners on December 4, 2001, it follows that the petition was not filed within the statutory 90-day period. Consequently, we shall grant respondent's motion and dismiss this case for lack of jurisdiction. 864 To reflect the foregoing,An order of dismissal for lack of jurisdiction will be entered granting respondent's motion to dismiss for lack of jurisdiction, as supplemented. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Sec. 3463 of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, 767, directs the Secretary to include on each notice of deficiency issued under sec. 6212 the date of the last day on which the taxpayer may file a petition with the Tax Court. See Rochelle v. Commissioner, 116 T.C. 356">116 T.C. 356, 359 (2001), affd. 293 F.3d 740">293 F.3d 740↩ (5th Cir. 2002).3. The Court has recognized that a certified mail list is the equivalent of a Postal Service Form 3877, Acceptance of Registered, Insured, C.O.D. and Certified Mail. See Stein v. Commissioner, T.C. Memo. 1990-378↩.4. Petitioners' exegesis on California law is beside the point.↩5. The Advisory Committee Notes pertaining to Fed. R. Evid. 902(11) state in pertinent part: 2000 Amendments The amendment adds two new paragraphs to the rule on self- authentication. It sets forth a procedure by which parties can authenticate certain records of regularly conducted activity, other than through the testimony of a foundation witness. See the amendment to Rule 803(6). * * A declaration that satisfies 28 U.S. C. 1746 would satisfy the declaration requirement of Rule 902(11), as would any comparable certification under oath. The notice requirement in Rules 902(11) and (12) is intended to give the opponent of the evidence a full opportunity to test the adequacy of the foundation set forth in the declaration.28 U.S. C. sec. 1746 (1994)↩ provides in pertinent part that any matter that is permitted to be proved by sworn declaration may be proved by an unsworn declaration in writing which is dated and states that the declaration is made under the penalty of perjury and is true and correct.6. Although petitioners do not challenge the declaration executed by Ms. Petersen, our analysis is equally applicable to her declaration.↩7. Petitioners have not argued that respondent failed to comply with the final sentence of Fed. R. Evid. 902↩.8. Although we lack jurisdiction in this case, petitioners are not without a remedy. In short, petitioners may pay the tax, file a claim for refund with the Internal Revenue Service, and if the claim is denied, sue for a refund in the Federal District Court or the Court of Federal Claims. See McCormick v. Commissioner, 55 T.C. 138">55 T.C. 138, 142↩ n.5 (1970).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620429/	Steven Michael Weinberg and Courtney Plummer Weinberg, Petitioners v. Commissioner of Internal Revenue, RespondentWeinberg v. CommissionerDocket No. 760-72United States Tax Court64 T.C. 771; 1975 U.S. Tax Ct. LEXIS 93; August 4, 1975, Filed 93 Decision will be entered for the respondent. P performed services as an intern and resident at three hospitals. He received monthly payments from the hospital where he was working at the time. He was required to remain at the hospital at meal times and was given a monthly cash meal allowance, which he used to purchase meals at the hospital cafeteria. Held, such payments do not constitute a scholarship or fellowship grant excludable under sec. 117, I.R.C. 1954; held, further, the cash allowance for food was compensation and not excludable under sec. 119, I.R.C. 1954. Cyril David Kasmir, for the petitioners.Kemble White, for the respondent. Simpson, Judge. SIMPSON772 The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:YearPetitionerAmount1968Steven Michael Weinberg$ 2,376.511969Steven Michael Weinberg417.781969Courtney Plummer Weinberg417.78The issues to be decided are: (1) Whether any of the amounts paid to the petitioner Steven Michael Weinberg in 1968 and 1969 by several hospitals in which he served as an intern and resident was excludable from gross income as a scholarship or fellowship grant under section 117 of the Internal Revenue Code95 of 1954; 1 and (2) whether additional cash allowances paid to him for meals and lodging by Parkland Memorial Hospital during 1968 and 1969 were excludable from income under section 119, relating to meals or lodging furnished for the convenience of the employer.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners, Dr. Steven Michael and Courtney Plummer Weinberg, were married in 1969 and maintained their residence in Dallas, Tex., at the time of filing their petition herein. He filed his individual Federal income tax return for the year 1968 with the District Director of Internal Revenue, Dallas, Tex. They filed individual returns for 1969 with the District Director of Internal Revenue, Dallas, Tex. Dr. Weinberg will sometimes be referred to as the petitioner. 296 Dr. Weinberg was graduated from the Iowa Medical School in June 1967. He received his license to practice medicine in Iowa in 1968 and his license to practice in Texas in 1970.773 From July 1, 1967, through June 30, 1968, Dr. Weinberg was a rotating intern at the University of Texas Southwestern Medical School (the university) in Dallas, Tex. From July 1, 1968, through June 30, 1972, he was a resident at the university specializing in general surgery. The university coordinated internship and residency training programs with hospitals in the Dallas area. Interns and residents were often rotated through several hospitals. Dr. Weinberg worked chiefly at Parkland Memorial Hospital (Parkland), which is the primary teaching facility of the university. He also worked at Presbyterian Hospital (Presbyterian) and Veterans Administration Hospital (Veterans) in Dallas. The internship and residency were required for Dr. Weinberg to be licensed to practice medicine and certified by the American Board of Surgery.Parkland was one of two hospitals operated by the Dallas County Hospital District (the district). The permanent staff of the district was composed of the members of the 97 faculty of the university. The chairman of a particular service within the university served as the chairman of that service in the district and directed, supervised, and controlled that service of the district.Patients were admitted to the district hospitals on the basis of medical need. After admission, they were assigned to medical teams made up of faculty members, residents, interns, and students, on the basis of the patient's particular medical problem. The district provided medical care for indigent citizens of Dallas County and a limited number of paying patients. The intern and residency program was established by the district to provide "education for graduate medical students, and [to] avail itself of the services of these physicians for the care of the indigent sick."While he was an intern in 1968, Dr. Weinberg spent time on the medical service, the psychiatric service, the pediatric service, and the obstetrical and gynecological service. During this time, he examined patients, participated in evaluations and in taking histories, proposed diagnoses, assisted in giving treatment, and participated in making rounds and in deciding which drugs or medications to prescribe. 98 He did not perform or assist in surgery during this time. Dr. Weinberg had no primary or direct responsibility for the care or treatment of patients. He was under close and immediate supervision at all times and could not prescribe or administer any treatment on his own initiative. His 774 performance was supervised and evaluated by the faculty of the university.As an intern, Dr. Weinberg attended lectures and conferences daily. He also attended seminars which were coordinated into the internship training program.On July 1, 1968, Dr. Weinberg started a 4-year surgical residency program with the university. During this program, he spent time on general surgery service, neurosurgery service, thoracic surgery service, and other surgical subspecialties.During his first year of residency, Dr. Weinberg examined patients, participated in evaluations and in taking patient histories, proposed diagnoses, assisted in giving treatment, made rounds, prescribed drugs and medications, and assisted in the performance of surgery. He participated in approximately 500 operations in his first year. He did not have any primary or direct responsibility for the care or treatment of patients. 99 He did not perform any services independently or without direct supervision.As a second-year resident, Dr. Weinberg was given more responsibility and was under less direct control. He continued to receive supervision, but it was less direct. As he continued in his residency, he was given more independence and received less supervision. He regularly attended 10 to 15 lectures, conferences, and seminars a week. He participated in approximately 600 operations during the first 6 months of his second year.During his internship and residency, Dr. Weinberg was on duty for 36 hours, off for 12, on for 12, off for 12, and then the cycle was repeated. He was on duty as much as 120 hours per week. When on duty, Dr. Weinberg was required to remain at the hospital during meal periods so that he would be available for emergency calls. Emergencies did occur requiring him to participate with others in providing medical treatment to patients during meal periods. While on duty at Parkland, Dr. Weinberg purchased all his meals at the hospital cafeteria or from coin-operated food machines. He spent approximately $ 100 per month on food in the cafeteria at Parkland.On March 24, 1967, Dr. 100 Weinberg entered into a contract with Parkland for his internship from July 1, 1967, through June 30, 1968. He agreed to conform to all hospital rules and discharge all the duties of a house staff officer. He was to be paid $ 260 per month plus "An additional cash allowance of $ 100.00 per month 775 * * to cover costs of food and housing whether purchased from the hospital or purchased outside." Dr. Weinberg was prohibited from any form of private practice without permission. On November 27, 1967, and February 5, 1969, he signed similar contracts for his residency program. During the first year of his residency, the basic monthly payment was to be $ 290, and during the second year, it was to be $ 455. In addition, he was to continue to receive the cash allowance of $ 100 per month for food and housing.In 1968, Dr. Weinberg was paid the following amounts by the hospitals:Parkland$ 3,299.79Presbyterian656.25Veterans247.66Total 4,203.70In 1969, he was paid $ 3,991.38 by Parkland and $ 1,429.62 by Veterans. In each year, he was paid only by the hospital where he was working at the time. He was also paid $ 1,000 each year by Parkland as a cash101 allowance for food and housing while he was working at Parkland. Dr. Weinberg was paid regularly with income and F.I.C.A. taxes withheld. He accrued 2-weeks vacation per year and received free hospitalization coverage, medical care, and free educational materials. He also received free laundry service for his white coats while he was a resident.Parkland had more than 300 interns, residents, and fellows on its medical house staff in 1968. While the staff physicians might have been able to carry on the work of the hospital without the assistance of the interns and residents, to have done so would have required the staff physicians to work harder and longer hours, and the quality of the medical care would have been diminished.On his 1968 and 1969 income tax returns, Dr. Weinberg excluded $ 3,600 and $ 1,800, respectively, of the basic payments which he received in connection with his internship and residency. Mrs. Weinberg excluded $ 1,800 on her 1969 income tax return. Neither Dr. Weinberg nor Mrs. Weinberg included on their returns for 1968 and 1969 any part of the allowance for meals and lodging. The Commissioner has determined that none of these payments were excludable 102 from income.776 OPINIONHere, we have another claim that the payments received by an intern and resident are excludable under section 117 as a scholarship or fellowship grant. In this case, the claim is based on the contentions that such payments were a scholarship or fellowship grant because of the degree of supervision and control over the activities of the intern and resident and because his services were not "necessary" to carry on the work of the hospital.A scholarship or fellowship grant is excludable from income under section 117(a). However, in the case of a taxpayer who is not a candidate for a degree, section 117(b)(2)(B) limits the exclusion "to an amount equal to $ 300 times the number of months for which the recipient received amounts under the scholarship or fellowship grant during such taxable year." Such exclusion is not allowable for more than 36 months. Although "scholarship" and "fellowship grant" are not defined in the statute, section 1.117-3(c) of the Income Tax Regulations provides: "A fellowship grant generally means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research." In addition, section103 1.117-4(c)(1) of such regulations states that if any "amount represents either compensation for past, present, or future employment services or represents payment for services which are subject to the direction or supervision of the grantor," it does not qualify for exclusion under section 117. In Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 751 (1969), the Supreme Court upheld the validity of such regulations and stated that the definitions contained therein comport with "the ordinary understanding of 'scholarships' and 'fellowships' as relatively disinterested, 'no-strings' educational grants, with no requirement of any substantial quid pro quo from the recipients."The test to be applied under the regulations is whether the primary purpose for making the payments to the taxpayer was to educate and train him or to compensate him for services rendered. See Robert W. Carroll, 60 T.C. 96">60 T.C. 96 (1973); Aloysius J. Proskey, 51 T.C. 918 (1969); Elmer L. Reese, Jr., 45 T.C. 407 (1966), affd. per curiam 373 F. 2d 742 (4th Cir. 1967). In a host of cases, 104 interns and residents have sought to exclude the payments received by them in connection with their internships or residencies, but the almost unanimous conclusion of the courts 777 has been that the intern or resident was furnishing valuable services to the hospital and that the payments received by him were compensatory. See Birnbaum v. Commissioner, 474 F. 2d 1339 (3d Cir. 1973), affg. without published opinion a Memorandum Opinion of this Court; Parr v. United States, 469 F. 2d 1156 (5th Cir. 1972); Hembree v. United States, 464 F. 2d 1262 (4th Cir. 1972); Rundell v. Commissioner, 455 F. 2d 639 (5th Cir. 1972), affg. per curiam a Memorandum Opinion of this Court; Quast v. United States, 428 F. 2d 750 (8th Cir. 1970); Woddail v. Commissioner, 321 F. 2d 721 (10th Cir. 1963), affg. a Memorandum Opinion of this Court; Sheldon A. E. Rosenthal, 63 T.C. 454">63 T.C. 454 (1975); Geral W. Dietz, 62 T.C. 578">62 T.C. 578 (1974); Jacob T. Moll, 57 T.C. 579">57 T.C. 579 (1972);105 Frederick Fisher, 56 T.C. 1201 (1971); Irwin S. Anderson, 54 T.C. 1547">54 T.C. 1547 (1970); Aloysius J. Proskey, supra;Tobin v. United States, 323 F. Supp. 239">323 F. Supp. 239 (S.D. Tex. 1971); Kwass v. United States, 319 F. Supp. 186 (E.D. Mich. 1970); Wertzberger v. United States, 34">315 F. Supp. 34 (W.D. Mo. 1970), affd. per curiam 441 F. 2d 1166 (8th Cir. 1971); but see Leathers v. United States, 471 F. 2d 856 (8th Cir. 1972), cert. denied 412 U.S. 932">412 U.S. 932 (1973). The facts of this case present no reason for reaching a different conclusion, and we hold that the payments made to Dr. Weinberg were for the services rendered by him to the hospitals and were not an excludable scholarship or fellowship grant.Dr. Weinberg worked primarily at Parkland during the years in issue, but on occasion, he was rotated to Presbyterian or Veterans. He received payments only from the particular hospital where he was working at such time. Furthermore, he was under formal106 contract with Parkland to perform services as directed, and he could not engage in private practice without permission. A disinterested "no-strings attached" motive by the various hospitals cannot be inferred from these arrangements. See Geral W. Dietz, supra;Jacob T. Moll, supra;Frederick Fisher, supra;Irwin S. Anderson, supra.The payments to Dr. Weinberg had none of the normal characteristics of a fellowship. See Irwin S. Anderson, 54 T.C. at 1550; Elmer L. Reese, Jr., 45 T.C. at 413. There is no evidence that he received the payments because of financial need or because of exceptional merit displayed in his prior academic work. See George L. Bailey, 60 T.C. 447">60 T.C. 447, 454 (1973); Robert Henry Steiman, 56 T.C. 1350">56 T.C. 1350, 1355 (1971); Aloysius J. Proskey, 778 51 T.C. at 924; Edward A. Jamieson, 51 T.C. 635">51 T.C. 635, 639 (1969). On the contrary, the payments to Dr. Weinberg had many of the characteristics107 of compensation. They were increased as he gained experience, and income and F.I.C.A. taxes were withheld on such payments. Compare Aloysius J. Proskey, supra, and Elmer L. Reese, Jr., supra, with Chander P. Bhalla, 35 T.C. 13">35 T.C. 13 (1960). He also received hospitalization insurance, free medical care, and 2-weeks paid vacation. These fringe benefits are characteristic of an employer-employee relationship. See Irwin S. Anderson, supra;Aloysius J. Proskey, supra.Dr. Weinberg testified that the services of interns and residents were not necessary for the operation of the hospitals because their services could have been performed by the attending staff physicians. Though he may have been correct in saying that the services of the interns and residents were not "necessary," we are not convinced that the hospitals could have operated as well without their services. As we stated in Frederick Fisher, 56 T.C. at 1215:More fundamentally, even if the Center could do without residents, it did not do without108 them; it used their services, and it paid for them. Many employees may be dispensable in the sense that their employers could "operate" without them. But such dispensability hardly renders their salaries noncompensatory. [Emphasis in original.]Dr. Weinberg and the other interns and residents worked long hours at the hospitals and performed extensive services in assisting in the care of patients. If we look at only one patient and the care provided him, it is conceivable that the staff physicians could have performed the services without the assistance of the interns or residents. However, to judge the value of the services furnished by the interns and residents, we cannot consider just one case, but we must consider all the patients cared for by the hospitals. It seems clear that if the staff physicians had been required to provide all of the medical care for all the patients of the hospitals, they would have been required to work many more hours, and one wonders whether the hospitals would have been able to care for as many patients. Furthermore, in providing medical treatment, the examination of the patient by several trained doctors and their views may often be of value, 109 even though one of the doctors may have more experience than the others. Thus, although the services of the interns and residents 779 may not have been "necessary," we are not convinced that they lacked value to the hospitals.Nor is the supervision and control exercised over Dr. Weinberg's services uncharacteristic of compensation. Probably every employee who receives compensation is subject to some supervision and control. For example, the services of the nurses and technicians who assisted in the care of the patients were subject to supervision and control, but the payments for such services are nonetheless compensation. See Tobin v. United States, 323 F. Supp. at 241. In fact, close supervision of Dr. Weinberg's work may have increased its benefits to the hospitals. See Frederick Fisher, 56 T.C. at 1212; Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494, 1505 (1970).We also hold that Dr. Weinberg may not exclude any of the allowance for meals and lodging. Section 119 provides that the value of meals furnished on the business premises of the employer for his convenience is excludable from the employee's110 gross income. Section 1.119-1(c)(2) of the Income Tax Regulations provides:(2) The exclusion provided by section 119 applies only to meals and lodging furnished in kind by an employer to his employee. * * * Cash allowances for meals or lodging received by an employee are includible in gross income to the extent that such allowances constitute compensation.In Burl J. Ghastin, 60 T.C. 264 (1973), a recent Court-reviewed opinion, we examined the legislative history of section 119 and reaffirmed our previous position that meals must be furnished "in kind" to qualify for the exclusion. See Michael A. Tougher, Jr., 51 T.C. 737">51 T.C. 737 (1969), affd. per curiam 441 F. 2d 1148 (9th Cir. 1971), cert. denied 404 U.S. 856">404 U.S. 856 (1971); Charles N. Anderson, 410">42 T.C. 410 (1964), revd. on other grounds 371 F. 2d 59 (6th Cir. 1966), cert. denied 387 U.S. 906">387 U.S. 906 (1967).Dr. Weinberg does not challenge such rule, but does argue that the cash allowance was equivalent to furnishing meals in kind since he was required111 to remain at the hospital at mealtime and used the allowance to purchase meals at the Parkland cafeteria. However, the cash allowance was given to him to use as he saw fit. There was no requirement that he use it for meals eaten at the hospital; he could have brought his meals from home. Moreover, there is no evidence indicating that the allowance was reduced when he was away on vacation or because of sickness; apparently, he received the allowance irrespective of whether he 780 was actually on duty during the week. In addition, Dr. Weinberg's employment contract characterized the allowance as "An additional cash allowance." For these reasons, it is clear that the allowance was merely additional compensation. 3The Fifth Circuit Court of Appeals, to which this case would be appealable, has rejected our position that meals must always be furnished "in kind" to be excludable under section 119. United States v. Barrett, 321 F. 2d 911 (5th Cir. 1963);112 compare United States v. Keeton, 383 F. 2d 429 (10th Cir. 1967); United States v. Morelan, 356 F. 2d 199 (8th Cir. 1966); Saunders v. Commissioner, 215 F. 2d 768 (3d Cir. 1954), revg. 21 T.C. 630">21 T.C. 630 (1954); with Wilson v. United States, 412 F. 2d 694 (1st Cir. 1969); Burl J. Ghastin, supra. However, Dr. Weinberg would not prevail even under the view of the Fifth Circuit. In Magness v. Commissioner, 247 F. 2d 740 (5th Cir. 1957), affg. 26 T.C. 981">26 T.C. 981 (1956), cert. denied 355 U.S. 931">355 U.S. 931 (1958), the Fifth Circuit held that a subsistence payment made to a Georgia highway patrolman was not excludable from gross income under section 39.22(a)-3 of Regs. 118, which then set forth the convenience of the employer rule now contained in section 119. The court held that since the subsistence payments were not restricted to reimbursements for specific expenses, but could be used for any purpose with no accounting, the payments were income113 and were not paid for the convenience of the employer. This view was not overruled by United States v. Barrett, supra, which allowed the highway patrolmen to exclude reimbursement for specific expenses incurred. In that case, the patrolmen were required to submit expense vouchers substantiating their expenses. In Barrett, the Fifth Circuit specifically held that its decision in Magness was distinguishable because the patrolmen in Barrett were limited to reimbursement for proven expenses. It is clear that the payments made to Dr. Weinberg were like the payments in Magness and not those in Barrett, and that under the view of the Fifth Circuit, such payments constitute additional compensation.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩2. Mrs. Weinberg is a party to this proceeding solely by virtue of receiving community property income from her husband in 1969.↩3. See Walter L. Peterson, T.C. Memo. 1974-293↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620430/	FEDERAL BEARINGS CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Federal Bearings Co. v. CommissionerDocket No. 9233.United States Board of Tax Appeals9 B.T.A. 1063; 1928 BTA LEXIS 4304; January 6, 1928, Promulgated 4304 The actual cash value of intangibles paid in to the taxpayer corporation in exchange for shares of common stock determined. Carl Ehlermann, Esq., and George W. Smyth, Esq., for the petitioner. P. J. Rose, Esq., for the respondent. SMITH 1064 This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ended January 31, 1919, January 31, 1920, and January 31, 1921, in the respective amounts of $19,428.27, $15,085.74, and $4,127.31. The question in issue is the actual cash value of intangibles paid in to the petitioner corporation for $750,000 par value common stock for the purpose of determining correct invested capital. FINDINGS OF FACT. From 1904 to 1910 Herman A. Schatz, his father and brother, John W. Schatz and Grover H. Schatz, owned and operated the Schatz Hardware Manufacturing Co., a corporation engaged in the manufacture and sale of ball bearings for commercial purposes, located at Chappaqua, N.Y. The bearings were of minor limits as to dimension, were not made with such accuracy as high-grade bearings used on highly organized mechanical equipment, and were used chiefly on4305 juvenile vehicles, baby carriages, gravity rollers and kindred devices. In 1910 they formed a corporation known as the Schatz Manufacturing Co., under the laws of the State of New York, to take over the business of the Schatz Hardware Manufacturing Co. and the Acme Ball Bearing Co. The amount of cash capital invested in the Schatz Manufacturing Co. was $45,000. In 1912 Herman A. Schatz and his brother first began to turn their attention to the high-grade-bearing field. They first developed a high grade of commercial bearing. Ball bearings were usually of a cup and cone type and had to be adjusted in position so that the balls had freedom, and the Schatz brothers saw the need for a self-contained bearing. They developed and experimented along these lines and produced an annular ball bearing, self-contained, that could be sold at a moderate price, and entered that field which was open at the time. That was in 1912, and the development indicated the desirability of patenting not only the bearing itself but the method used in producing the bearings. The experiments conducted by the Schatz brothers in 1912 and 1913 convinced them that their high-grade bearings had exceedingly4306 great possibilities because of ability to manufacture more economically due to the material and method employed. At that time ball bearings were being used in many different types of highly organized mechanisms such as machine tools, cotton-spinning machinery, different textile machines, pumps and motors. The automobile field, however, at that time offered the greatest possibilities because automobiles had so many moving members, and sales managers were making great claims for the ease with which their cars ran on account of the large number of ball bearings used therein. A fair 1065 average would be 12 to 13 bearings per car. The automobile business was making very rapid strides and offered untold possibilities in the sale of ball bearings. Herman A. Schatz had a thorough investigation made at that time of the patent situation relative to high-grade bearings, as to whether his company could manufacture under its new processes without infringing the so-called "Conrad" patents, under which practically all ball bearings were then manufactured. This investigation disclosed that under the Conrad patents the monopoly of the high-grade-bearing industry had been established; 4307 that the Conrad patents controlled the situation; that the Conrad licensees had established plants and refused to allow other concerns to enter the field. They had an absolute monopoly and dictated prices. Litigation had established that the licensees were the only ones who could manufacture a bearing having a continuous ring without any obstructions and thus dominated the art, and the Schatz brothers could not have broken into that field without developing noninfringing patents. The Conrad patents did not expire until 1923. Schatz consulted an eminent patent attorney and was advised that the inventions of himself and associates did not infringe the Conrad patents. Conrad patent 822723 covered a ball bearing where an outer and inner ring were employed, the problem being to get the balls between the two rings and keep them there without obstructing in any way the raceways that the balls ran on, because any obstruction of the raceways would seriously damage the bearing. Various methods had been tried. Under Conrad's method a ring is put inside of the outer ring and the ball is threaded in there. In order to retain the balls, he employed a separator and after he had put the4308 balls in and pulled the ring down as far as possible, he applied the separator and left the balls separated. This gave an interior ring that had no obstructions whatever and the balls revolved perfectly and were left separated, by the separator. Herman A. Schatz attacked the problem in quite a different way. He placed the balls around the inner ring and had his outer ring divided into two sections. Consequently, when the inner ring is placed within the outer ring, the balls can be inserted and the two sections of the outer ring brought together. There are no obstructions in the inner or outer rings. Thus Schatz not only obtained the same advantages Conrad had, but his bearing was designed more directly than was Conrad's for use on automobiles and took up not only the radial thrust but also the annular thrust. In this way Schatz converted his ball bearing from a two to a three-point bearing and made a very meritorious change over what had been previously the adopted standard of bearings in the automobile game. 1066 The various patents acquired by the Schatz brothers upon high-grade ball bearings were applied for and issued as follows: Patent No.Date applied forDate issued1073529Sept. 7, 1912Sept. 16, 19131073530Mar. 12, 1913Do.1176169Apr. 29, 1915Mar. 21, 19161176170doDo.1176133May 7, 1915Do.1301323Sept. 21, 1918Apr. 22, 19191301752Jan. 10, 1918Do.1339672June 21, 1919May 11, 19204309 The Schatz patents avoided the Conrad patents and enabled the Schatz Manufacturing Co. not only to manufacture high-grade ball bearings without the payment of royalties but also to manufacture at lower Cost. It was only through these patents that the Schatz Manufacturing Co. could enter the high-grade ball-bearing field. As the foregoing patent applications were filed, the Schatz Manufacturing Co. offered bearings made pursuant to these inventions, and from 1913 to 1915, inclusive, was also very actively engaged in producing and selling these bearings up to the capacity of its equipment, but this was to prove the product and satisfy the trade of the merit of the high-grade bearings manufactured, and not with the idea of the Schatz Manufacturing Co. being big enough or strong enough to enter the field actively. During the years 1913 to 1915 the Schatz Manufacturing Co. entered into contracts to manufacture ball bearings under its inventions, totaling $184,693, and filled at least 75 per cent of these orders. These customers in most instances continued as customers of the Federal Bearings Co., Inc., when formed. During the same period Herman A. Schatz conducted experiments4310 and made cost analyses which would indicate the difference between the cost of production under the company's inventions as against the other methods with the equipment available at that time and proved that the cost of production was reduced by some 25 per cent to 40 per cent. In 1914 it became apparent that in order to take advantage of the great opportunity afforded the patentees of the Schatz inventions to enter the high-grade ball-bearing field, Herman A. Schatz and his associates would have to form a new corporation with a larger capital, which would devote itself to high-grade ball-bearing production. Accordingly, the petitioner was formed under the laws of the State of New York, in December, 1915, with an authorized capital of $250,000, preferred, and $750,000, common stock, par value of each share $100, for the sole and exclusive purpose of manufacturing high-grade ball bearings under the five patents above mentioned, theretofore 1067 granted or applied for and specifically referred to in the certificate of incorporation. The petitioner received an offer in writing from the Schatz brothers of an exclusive license to manufacture, use and sell "full ground" bearings4311 under the five letters patent above mentioned, issued or applied for, in consideration of the issuance and delivery to them of $750,000 par value of authorized common stock of the petitioner and $50,000 in cash or securities acceptable to them. The offer was duly accepted by resolution of the incorporators at a meeting held December 21, 1915. The resolution recites that the incorporators consider the exclusive license offered them reasonably worth the consideration asked. The offer above referred to was duly accepted at a meeting of the board of directors of petitioner corporation, held December 22, 1915. Said license agreement was duly executed on December 22, 1915. It covers the United States and all foreign countries and the five patents and applications therefor referred to, and all later improvements made by any of the three Schatz brothers in full-ground bearings. It forms the foundation of the business of the petitioner, which has always been engaged exclusively in the manufacture of bearings pursuant to said patents and a few later ones which merely constituted improvements. Everything in and about the business is dominated by the patents. The preferred stock4312 in the amount of $250,000 par value was underwritten by E. Gray Parrott and Howard F. Butler of Boston, under date of March 1, 1915. They agreed to take the entire issue, to be paid for in cash, one-fourth to be paid not later than April 30, 1916, one-fourth by May 31, 1916, one-fourth by June 30, 1916, and the balance by July 31, 1916. This agreement was carried out. The underwriters made a thorough investigation to ascertain the value of the patents. They considered the profits made by the Schatz Manufacturing Co. in high-grade ball bearings and the fact that these patents gave entree to a field of business amounting from fifty to sixty million dollars per year, up to then a monopolized field. It was their judgment that the patents were very valuable and worth a great deal more than $250,000, and they were convinced that the payment of $250,000 cash for the preferred stock, to provide plant and equipment for the company's business, was a good investment. The preferred stock of the petitioner was entitled to cumulative dividends of 7 per cent a year, and in case of liquidation or other winding up, was entitled to par and accrued dividends. The preferred dividends were guaranteed4313 by the Schatz Manufacturing Co.1068 The preferred stock was sold to the public at par with a bonus of 25 per cent of common stock. The common stock given as a bonus was donated by the assignees of the patents, to whom the common stock was issued for the license to manufacture under the patents. Out of the proceeds from the sale of the preferred stock the $50,000 cash due to be paid to the patentees in pursuance of the agreement whereby the patentees assigned their rights in the patents to the petitioner was to be paid. During the year 1916 there was paid to Schatz brothers, assignees of the patents, the sum of $41,250. The balance of the $50,000 was paid to Schatz brothers in preferred stock. In or about August, 1916, the Schatz brothers were offered $50 per share for a controlling interest in the common stock of the petitioner. The offer was refused, the Schatz brothers being of the opinion that the stock was worth a great deal more than that. A few sales of the common stock were made during the latter part of 1916 at prices between $50 and $65 per share. The net profits and gross sales of the petitioner for the fiscal years ended January 31, 1917, to January 31, 1926, inclusive, 4314 were as follows: Fiscal year ended Jan. 31 - Gross salesNet profits1917$6,743.571918$222,310.2539,668.911919318,141.0234,373.061920472,206.6288,491.041921625,766.8632,692.601922$624,592.68$33,439.191923755,675.14129,673.0519241,040,080.16149,301.311925992,997.58154,976.761926315,786.56OPINION. SMITH: At the hearing of this proceeding question was raised by the respondent as to the jurisdiction of the Board so far as it related to a deficiency determined for the year ended January 31, 1919. The basis for the argument was that the tax had been assessed and that the respondent had not determined a deficiency for the period, within the meaning of the Revenue Act of 1926. In his brief, respondent admits the jurisdiction of the Board to entertain the proceeding for the three years ending January 31, 1919, January 31, 1920, and January 31, 1921. The pleadings in this case raise three issues, as follows: (1) Whether the petitioner is entitled to $250,000 in its invested capital for the fiscal years ended January 31, 1919, January 31, 1920, and January 31, 1921, on account of intangible assets acquired4315 at time of incorporation in 1915, for stock; (2) Whether the reduction in invested capital for 1920 and 1921 has been overstated by the Commissioner on account of the disallowance of at least $250,000 in invested capital for the immediately preceding year; 1069 (3) Whether the respondent has overstated the deduction for inadmissibles in the amount of $20,331 for the year 1920. The determination of the first issue will dispose of the second and no further reference will be made thereto. No testimony was taken nor any proof offered relative to the third issue and the respondent's motion for judgment with respect to that issue is granted. The petitioner contends that the value of the intangibles paid in to the corporation in exchange for $750,000 par value of its common stock had an actual cash value of at least $400,000. In support of its claim it has submitted a mass of evidence as to the situation which existed with respect to the manufacture of high-grade ball bearings during the period 1912 to the present time. The officers of the company were not desirous of selling the patent rights and getting out of the field of the manufacture of high-grade ball bearings. 4316 They were of the opinion that they could make the business a great success. They therefore refused to sell a controlling interest in their common stock in 1916, shortly after the petitioner was incorporated and before it got into production, at a price of $50 per share. At the time they held in excess of 60 per cent of the stock. We are of the opinion that this proves that the intangibles paid in to the corporation for the common stock had a very great value. In addition to all of these proofs of value expert testimony was offered as to the value of the patents. A patent attorney of wide experience in 1927 computed their value on the basis of amounts earned by the Schatz Manufacturing Co. in 1914 and 1915, and the growth of the automobile business as it could reasonably have been foreseen by the end of 1915. He concluded that the value of the patents at that time was between $400,000 and $500,000. In Nice Ball Bearing Co.,5 B.T.A. 484">5 B.T.A. 484, 496, we stated: The value of patents at any given date is, like the value of other property, a question of fact which must be determined upon the evidence. 4317 In the appeals of Dwight & Lloyd Sintering Co.,1 B.T.A. 179">1 B.T.A. 179; Gamon Meter Co.,1 B.T.A. 1124">1 B.T.A. 1124; and J. J. Gray, Jr.,2 B.T.A. 672">2 B.T.A. 672, the Board has laid down the rule that in determining the value of patents at any basic date it would take into consideration the history and the volume of profits produced by the use of the patents, the opinion testimony of men experienced in dealings in patents and in the products protected by the patent monopoly and would also consider the subsequent history of such patents, together with the volume of profits produced by their use in business, and upon the basis of such evidence determine the value at the basic date. From a consideration of all the testimony in this case we are satisfied that the actual cash value of the intangibles paid in to the petitioner corporation in December, 1915, for $750,000 par value of *1070 common stock was at least $250,000, the greatest amount which it can legally include in invested capital. Judgment will be entered on 15 days' notice, under Rule 50.Considered by TRUSSELL, LOVE, and LITTLETON.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620431/	JOE BUCK COKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCoker v. CommissionerDocket No. 3294-93.United States Tax CourtT.C. Memo 1994-129; 1994 Tax Ct. Memo LEXIS 137; 67 T.C.M. (CCH) 2515; March 29, 1994, Filed 137 Decision will be entered for respondent. Joe Buck Coker, pro se. Helen T. Repsis, for respondent. GOLDBERGGOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined deficiencies in petitioner's Federal income taxes for taxable years 1989 and 1990, in the amounts of $ 4,434 and $ 2,145, respectively. The issues for decision are (1) whether petitioner may exclude from gross income foreign earned income under section 911, and (2) whether inclusion of foreign earned income in petitioner's gross income violates the United States Constitution. Some of the facts were stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner138 resided at Eustace, Texas, when his petition was filed in this case. Petitioner is a United States citizen and resided in Eustace, Texas, during the taxable years 1989 and 1990. He was employed as a service representative by Epic Products International Corporation (Epic Products), a company based in Dallas, Texas, during those years. In that capacity, petitioner installed and serviced mechanical products sold by Epic Products that were additions to printing presses, and trained others in the operation of such products. At times, petitioner's employment required travel outside the United States. In 1989, petitioner worked outside the United States a total of 98 days, consisting of 97 days in Australia, and 1 day in Canada; in 1990, he worked outside the United States a total of 92 days, consisting of 77 days in Australia, and 15 days in Canada. Petitioner determined, and respondent agrees, that $ 15,772 of the $ 33,367.95 wages he earned in 1989 was earned while abroad, and that $ 9,280 of the $ 30,265.05 wages he earned in 1990 was earned while abroad. 2139 Respondent disallowed petitioner's claimed exclusions for foreign earned income for 1989 and 1990, on the ground that he was not a qualified individual, as defined in section 911(d)(1). Specifically, respondent contends that petitioner had no foreign tax home during either year, and was neither a bona fide resident of a foreign country or countries, nor was he present in a foreign country at least 330 days in 1989 and 1990, as required by sections 911(d)(3) and 911(d)(1)(A) and (B). Section 911(a) provides: (a) Exclusion from Gross Income. -- At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year -- (1) the foreign earned income of such individual, and (2) the housing cost amount of such individual. The amount of foreign earned income excludable from gross income is limited by section 911(b)(2)(A): (A) In general. -- The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily140 basis at an annual rate of $ 70,000.The term "qualified individual", for purposes of section 911, is defined in section 911(d)(1): (1) Qualified Individual. -- The term "qualified individual" means an individual whose tax home is in a foreign country and who is -- (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or (B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.For purposes of section 911, "tax home" is defined in section 911(d)(3): (3) Tax Home. -- The term "tax home" means, with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.Petitioner does not contend that he was a bona fide resident of a foreign141 country in 1989 or 1990, nor does he contend that he was present in a foreign country or countries for 330 days during either year. Instead, petitioner argues that the 330 day requirement set forth in section 911(d)(1)(B) is only applicable if a taxpayer claims the full $ 70,000 exclusion. Petitioner's theory is that being present in a foreign country for a minimum of 330 days qualifies a taxpayer for the full $ 70,000 exclusion, and presence for less than 330 days merely operates to reduce the maximum allowable amount proportionally. Thus petitioner argues that his presence in foreign countries for 92 days in 1990 reduces the maximum allowable amount according to the following formula: $ 70,000 X 92 days/330 days = $ 19,515 Petitioner further argues that his "tax home" was in the foreign countries where he worked during the time he was present in those countries. Petitioner's construction of section 911 ignores the plain language of the statute. To be a "qualified individual" for purposes of section 911, an individual must (1) have a tax home in a foreign country, and (2) be a bona fide resident of a foreign country for a period which includes the entire taxable year, or142 be present in a foreign country at least 330 full days during any 12-month consecutive period. Sec. 911(d)(1)(A) and (B) (emphasis added). Under section 911, an individual's tax home is considered to be located at his regular or principal place of business or, if the individual has no regular or principal place of business, then at his regular place of abode. Sec. 1.911-2(b), Income Tax Regs. Further, section 911(d)(3) specifically provides that an individual shall not be treated as having a tax home in a foreign country for any period during which his abode is within the United States. In 1989 and 1990, both petitioner's principal place of business and his abode were in the United States. Accordingly, we find that petitioner's tax home was in the United States during both taxable years. Additionally, petitioner was not present in a foreign country or countries at least 330 days during 1989 and 1990. Accordingly, we hold that petitioner was not a qualified individual for purposes of section 911 during 1989 and 1990, and therefore is not entitled to exclude any part of his foreign earned income from gross income. Petitioner next contends that it is unconstitutional for143 the United States to tax his foreign earned income. Petitioner cites no authority for this proposition, stating in his brief simply that, "The constitutional issues seem so obvious that there must be some factors that I am not aware of that make the Federal Government think that it is right to tax the foreign earned income of individual citizens." It is a well-settled rule that U. S. citizens are subject to income taxation by the United States on their worldwide income. Sec. 1; Cook v. Tait, 265 U.S. 47">265 U.S. 47 (1924); Rust v. Commissioner, 85 T. C. 284, 291 n.8 (1985); sec. 1.1-1(b), Income Tax Regs. The Supreme Court in Cook v. Tait, supra, holding that Congress had the power to tax income received by a native citizen of the United States, even when the citizen is domiciled abroad and the income was derived from property situated abroad, stated: the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, and was not and cannot be made dependent upon the domicile of the citizen, that being in144 or out of the United States, but upon his relation as a citizen to the United States and the relation of the latter to him as a citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country and the tax be legal -- the government having power to impose the tax. [Cook v. Tait, supra at 561.]Thus, based upon petitioner's status as a U.S. citizen, the United States has the power to tax petitioner's foreign earned income. Respondent's determination is sustained. Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. On line 22, Form 1040, U.S. Individual Income Tax Return for 1989 and Form 2555, Foreign Earned Income, attached to that return, petitioner claimed an exclusion for foreign earned income in the amount of $ 21,000; however, he stipulated that the amount he claims as excludable foreign earned income for that year is $ 15,772.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620432/	DAVID BRUCE BILLINGS Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentBillings v. Comm'rNo. 6148-03 United States Tax Court127 T.C. 7; 2006 U.S. Tax Ct. LEXIS 21; 127 T.C. No. 2; July 25, 2006, Filed 21 P's wife did not report embezzlement income on their joint 1999 return. After she was caught, P and she filed an amended tax return that reported the embezzlement income. P then applied for relief from joint and several liability under IRC sec. 6015(f). The Commissioner issued a notice of determination denying his request, and P filed a petition under sec. 6015(e) to review the Commissioner's determination. P and R stipulated that no relief is available under IRC sec. 6015(b) and (c). Held: Upon reconsideration, we no longer adhere to our prior holding that sec. 6015(e) gives us jurisdiction over such nondeficiency stand-alone petitions. Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494, 118 T.C. No. 31 (2002), revd. 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), no longer followed. Patrick Wiesner, for petitioner.Vicki L. Miller, for respondent. Holmes, Mark V.Mark V. Holmes7 OPINIONHOLMES, Judge: In 1999, Rosalee Billings began embezzling money from her employer. She kept her husband in the dark about her embezzlement and didn't report the ill-gotten22 income on their joint return. After she was caught in 2000, she confessed her theft to him, and together they signed an amended joint return that reported the stolen income and showed a hefty increase in the tax owed. He asked the Commissioner to be relieved of joint liability for the increased tax, but his request was refused because he knew about the embezzled income when he signed the amended return, and also knew that the increased tax shown on that amended return was not going to be paid.Billings began his case in our Court by filing a "nondeficiency stand-alone" petition -- "nondeficiency" because the IRS 8 accepted his amended return as filed and asserted no deficiency against him, and "stand-alone" because his claim for innocent spouse relief was made under section 6015 and not as part of a deficiency action or in response to an IRS decision to begin collecting his tax debt through liens or levies. The particular part of section 6015 under which he seeks relief is section 6015(f). 1 This subsection is the only one available to spouses against whom the IRS has not asserted a deficiency. In Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494 (2002) (Ewing I), 2 we held that the23 Tax Court had jurisdiction over nondeficiency standalone petitions like Billings's. The Ninth Circuit has now reversed us, Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), revg. Ewing I, 118 T.C. 494">118 T.C. 494, vacating 122 T.C. 32">122 T.C. 32 (2004); the Eighth Circuit has adopted the Ninth Circuit's position, Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 787 (8th Cir. 2006), affg. in part, vacating in part T.C. Memo 2004-93">T.C. Memo. 2004-93; and the Second Circuit has questioned our decision, see Maier v. Commissioner, 360 F.3d 361">360 F.3d 361, 363 n.1 (2d Cir. 2004), affg. 119 T.C. 267">119 T.C. 267 (2002).Billings's case24 is one of the large number of nondeficiency stand-alone cases that began accumulating on our docket while Ewing I was on appeal. We now revisit the question of whether we have jurisdiction to review the Commissioner's decisions to deny relief under section 6015(f) when there is no deficiency but tax went unpaid.BackgroundDavid Billings was well into a 30-year career at General Motors when he married Rosalee in 1996. Rosalee herself was a payroll clerk at South Kansas City Electric Company. The Billingses kept two checking accounts, and while both were jointly held, David and Rosalee each kept almost exclusive control over one of them. In 1999, Rosalee began to transfer money from the Electric Company's payroll account into the checking account that she controlled and into which she had her own pay directly deposited.9 Rosalee kept her embezzlement secret from her husband and she did not report on their 1999 return the nearly $ 40,000 that she had stolen. The Electric Company discovered the embezzlement in December 2000, fired her, and then notified the authorities. She told her husband what she had done and hired a lawyer, Patrick Wiesner. (Wiesner also represented David in this25 case and before the IRS.)In his capacity as Rosalee's lawyer, Wiesner advised her to report the embezzlement income to the IRS on an amended return. He told her that if she did, a sentencing judge would probably be more lenient and might even depart from the U.S. Sentencing Guidelines. But section 1.6013-1(a)(1) of the income tax regulations created a problem. It prohibits spouses who have already filed a joint return for a particular year from filing amended returns changing their status to married-filing separately once the deadline to file returns has passed. The due date for the Billingses' 1999 tax year -- April 15, 2000 -- was long past, and so Wiesner told David (whether in Wiesner's capacity as Rosalee's lawyer or as David's is unclear) that David also had to sign the amended return, or risk having his wife face a longer sentence in a more unpleasant facility. On March 19, 2001, David signed the amended return.That return included as taxable income the nearly $ 40,000 that Rosalee had embezzled in 1999. It also showed an increase in tax of over $ 16,000. When David signed the amended return, he knew that neither he nor his wife expected to be26 able to pay the increased tax. Wiesner, however, suggested that David himself might avoid liability for the extra tax by filing for innocent spouse relief under section 6015. He even filled out the required IRS form and had David sign it together with the amended return. The Billingses sent that form to the IRS, but it was never processed.As the Billingses feared, Rosalee's embezzlement led to a criminal charge -- one count of wire fraud. Less than a month later, in November 2001, she pleaded guilty. Her sentence apparently reflected a downward departure for acceptance of responsibility, though the probation officer who wrote the 16 sentencing report did not mention that the Billingses had filed an amended return. 327 In 2002, the Billingses filed for bankruptcy and received a discharge, which of course did not affect Rosalee's obligation to repay the money she'd embezzled or her own liability for the unpaid 1999 taxes. 11 U.S.C. secs. 523(a)(1), 507(a)(8) (2000). David retired from GM in 2003 and began collecting a pension, though he continues to work two other jobs. He and his wife have filed timely tax returns for later years as they came due.As the IRS had not processed David's original request for relief, he filed another one. In November 2002, the IRS denied his request for relief based on "all the facts and circumstances," but particularly because: you failed to establish that it was reasonable for you to believe the tax liability was paid or was going to be paid at the time you signed the amended return.David appealed, and the IRS issued its final determination, again denying him relief because he did not believe when he signed the amended return that the tax would be paid.The Commissioner argues: Instead of filing an amended return, [Rosalee] could have contacted respondent and informed28 him of the unreported embezzlement income. Once informed, respondent could have proceeded with examination procedures and [Rosalee] could have agreed to respondent's determination of additional tax.Resp. Br. at 30. This would have led to the determination of a deficiency and presumably allowed David to file a petition seeking relief under a different part of section 6015. See, e.g., Haltom v. Commissioner, T.C. Memo 2005-209">T.C. Memo 2005-209.Even under section 6015(f), Billings's position is not a weak one. In Rosenthal v. Commissioner, T.C. Memo 2004-89">T.C. Memo 2004-89, the petitioner was a widow who also had no knowledge of omitted income (in her case, an unreported IRA distribution to her late husband) when she signed the original 11 return, but did know about it when she signed the amended return that corrected that omission. We found that the Commissioner had abused his discretion by not giving her innocent spouse relief: It is unpersuasive to argue, as does respondent, that petitioner's voluntary filing of an amended 1996 return and her attendant payment of the delinquent taxes attributable to the omission of income from29 the original 1996 return militate against equitable relief simply because she had to have known of the omission before she filed the amended return and made the payment.Id.Before this case was tried, Billings and the Commissioner fully stipulated the facts under Rule 122. Billings was a resident of Kansas when he filed his petition, which means an appeal lies to the Tenth Circuit unless the parties stipulate differently.DiscussionA married couple can choose to file their Federal tax return jointly, but if they do, both are then responsible for the return's accuracy and both are jointly and severally liable for the entire tax due. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276">114 T.C. 276, 282 (2000). This can lead to harsh results, especially when one spouse hides information from the other, so Congress enacted section 6015, which directs the Commissioner to relieve qualifying "innocent spouses" from that liability. Sec. 6015(a). An innocent spouse may seek either (1) relief from liability under section 6015(b) if he can show that he was justifiably ignorant of unreported income or inflated deductions, or (2) have his tax liability allocated30 between himself and an estranged or former spouse under section 6015(c). Billings, however, looks to section 6015(f) for relief. Subsection (f) relief is available only to a spouse who is ineligible for relief under subsections (b) and (c) and who shows that "taking into account all the facts and circumstances, it is inequitable to hold [him] liable for any unpaid tax or any deficiency (or any portion of either)."Billings and the Commissioner stipulated that he did not qualify for relief under either section 6015(b) or (c) because no deficiency was ever asserted against him and his wife. They were right to do so, because both those subsections require a deficiency as a condition of relief. See, e.g., Block 12 v. Commissioner, 120 T.C. 62">120 T.C. 62, 66 (2003). Understanding why the Billingses owed tax but had no "deficiency" after they filed their amended return requires a bit of explanation: Section 6211(a) defines a "deficiency" as the "amount by which the tax imposed * * * exceeds * * * the amount shown as the tax by the taxpayer upon his return." (Emphasis added.) The Code itself doesn't tell us what effect the filing of an amended return has, but the related regulation does. 31 It states that "[a]ny amount shown as additional tax on an 'amended return' * * filed after the due date of the return, shall be treated as an amount shown by the taxpayer 'upon his return' for purposes of computing the amount of the deficiency." Sec. 301.6211-1(a), Proced. & Admin. Regs. Because the Billingses' amended 1999 return was filed well after April 15, 2000, and the Commissioner accepted that return, the increase in tax that it showed has to be treated as an amount shown on their return.That left Billings able to look only to subsection (f) for relief, and when the Commissioner denied it to him, left him with the problem of where to seek judicial review. He filed in our Court and, under our decision in Ewing I, he was right to do so because we had held that section 6015(e) gave us jurisdiction to grant (f) relief in nondeficiency stand-alone cases like his.Ewing I in turn built on two other cases. The first was Butler, where we had to decide whether we had jurisdiction to review the Commissioner's decision to deny 6015(f) relief when a taxpayer filed a petition to redetermine a deficiency asserted against her. We concluded that we did, because we had for a very long32 time treated claims for innocent spouse relief under old section 6013(e), Act of Jan. 12, 1971, Pub. L. 91-679, 84 Stat. 2063">84 Stat. 2063, 2063- 2064, repealed by Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201(e)(1), 112 Stat. 685">112 Stat. 685, 740 (1998) , as "affirmative defenses" to the Commissioner's deficiency determination. Butler, 114 T.C. at 287-288. This followed logically from our general rule that a petition to redetermine a deficiency gives us jurisdiction over the entire deficiency and not just the particular items listed in the notice of deficiency.So unless there had been some change in the law, a taxpayer challenging a notice of deficiency could, after enactment of section 6015, continue to argue that he was an 13 innocent spouse. What made Butler notable is that the Commissioner argued that section 6015(e)4 was precisely such a change in the law -- that this new section whose words seemed on their face to expand our jurisdiction had an esoteric meaning that shrank it instead. We disagreed, looking instead at the class of those covered by the language of the section -- individuals who elect to have subsection (b) or (c) apply -- and finding33 nothing in either section 6015(e)'s language or its legislative history "that precludes our review of the Commissioner's denial of equitable relief pursuant to section 6015(f) where the taxpayer has made the requisite election for relief pursuant to section 6015(b) or (c)." Butler, 114 T.C. at 290.Just a short time later, we decided Fernandez v. Commissioner, 114 T.C. 324">114 T.C. 324 (2000). Fernandez, unlike Butler, was a "stand-alone" case; i.e., one in which the claim for innocent34 spouse relief was not raised as a defense to a deficiency but by itself. 5 In Fernandez, we held that section 6015(e) also gave us jurisdiction over a stand-alone petition to review the Commissioner's denial of relief under section 6015(f): We first look to the prefatory language contained in section 6015(e)(1) which states: "in the case of an individual who elects to have subsection (b) or (c) apply." We conclude that this language does not contain words of limitation that confine our jurisdiction to review of an election under subsections (b) and/or (c), as respondent contends. Rather, we understand this language to encompass the procedural requirement applicable to all joint filers seeking innocent spouse relief and, therefore, states the prerequisite to seeking our review of such relief.Id. at 330. 635 We reasoned that section 6015(e)'s jurisdictional grant to determine "the appropriate relief available to the individual under this section" meant that we could grant relief to a deserving individual under any part of "this section" -- meaning 14 relief under subsection (b), (c), or (f) -- because the word "section" includes all subsections. Id. at 331.The problem we faced in Ewing I is that Congress amended section 6015(e) in 2000. It now reads (emphases showing new language):SEC. 6015(e). Petition for Review by Tax Court. (1) In general. -- In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply -- (A) In general. -- In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed --And here our problem began, because it might seem that the inclusion of the first new phrase was the inclusion of a new condition -- that an36 individual seeking innocent spouse relief must show that the Commissioner is asserting a deficiency against him. We raised the problem sua sponte in Ewing I, but both the Commissioner and Ewing took the position that the amendment did not deprive us of jurisdiction. Ewing I, 118 T.C. at 506.Given the difficulty of the issue, we analyzed the question at length, reasoning that Equitable relief under section 6015(f) is, and always has been, available in nondeficiency situations. Under these circumstances, the amendment to section 6015(e)(1) referring to situations where "a deficiency has been asserted" and the retention of the language in that same section giving us jurisdiction over "the appropriate relief available to the individual under this section" creates an ambiguity.Id. at 504.Having found an ambiguity, we then consulted the legislative history and found nothing indicating that the amendment of section 6015(e) * * was intended to eliminate our jurisdiction regarding claims for equitable relief under section 6015(f) over which we previously had jurisdiction. 37 The stated purpose for inserting the language "against whom a deficiency has been asserted" into section 6015(e) was to clarify the proper time for a taxpayer to submit a request to the Commissioner for relief under section 6015 regarding underreported taxes.Id. at 505.On appeal, the Commissioner changed his mind about the proper construction of the new language. The Ninth Circuit agreed with him (and the dissent in Ewing I) that the first 15 step in our reasoning -- finding that the amendment to section 6015(e) was ambiguous -- violated "the basic principle of statutory construction that 'a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.'" Ewing, 439 F.3d at 1014. It concluded that "the Tax Court lacked jurisdiction because no deficiency had been asserted." Id. at 1013. In Bartman, the Eighth Circuit adopted the Ninth Circuit's holding, though in doing so, it may have been somewhat imprecise in its use of the terms "assertion," "determination", and "assessment" of a deficiency. Id. at 787 (Tax Court has jurisdiction38 over section 6015 petitions "only where a deficiency has been asserted"); id. (Tax Court has no jurisdiction over section 6015 petitions "where no deficiency has been determined by the IRS"); id. at 788 (no Tax Court jurisdiction "because no deficiency had been assessed against Bartman"). 739 The opinions from the Eighth and Ninth Circuits create one of the unique problems that our Court sometimes has to face -- we have always believed that Congress meant us to decide like cases alike, no matter where in the nation they arose, so that our precedents could be relied on by all taxpayers. Appeals from our decisions, though, go to twelve different circuit courts and so we have often had to react to appellate reversal by only one of them. We concluded early on that, when that happens, we should keep deciding cases as we think right. Lawrence v. Commissioner, 27 T.C. 713">27 T.C. 713, 71716 (1957), revd. 258 F.2d 562">258 F.2d 562 (9th Cir. 1958). And although we also recognize an exception to that rule -- we won't follow our precedent in a case appealable to a circuit where we would surely be reversed, see Lardas v. Commissioner, 99 T.C. 490">99 T.C. 490, 495 (1992), explaining Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971) -- we do not always wait for the Supreme Court to restore consistency in construing the Tax Code when one or more circuit courts disagree with us. As we said nearly fifty years ago, we have "no desire40 to ignore or lightly regard any decisions of those courts," and have "not infrequently * * * been persuaded by the reasoning of opinions of those courts to change [our] views on various questions being litigated." Lawrence, 27 T.C. at 717.The opinions in Ewing I and Bartman change the judicial landscape, see Robinson v. Commissioner, 119 T.C. 44">119 T.C. 44, 51 (2002), and so we now reconsider our earlier reading of section 6015(e). In Ewing I, we thought that reading the key phrase in the amendment -- "In the case of an individual against whom a deficiency has been asserted" -- as limiting our jurisdiction made little sense if the remaining language, as we had construed it in Butler and Fernandez, continued to allow us to grant subsection (f) relief. This did not read the amendment entirely out of the statute, but led us to view it (especially in light of its legislative history) merely as a new timing requirement aimed at limiting speculative claims for innocent spouse relief. Cf. Lamie v. United States Trustee, 540 U.S. 526">540 U.S. 526, 534, 124 S. Ct. 1023">124 S. Ct. 1023, 157 L. Ed. 2d 1024">157 L. Ed. 2d 1024 (2004) (cautioning against comparisons between amended statutes and their predecessors to find ambiguity).After the opinions41 in Ewing I and Bartman, however, this reading becomes problematic, particularly when we consider that "deficiency" itself has a defined meaning -- the amount by which the tax imposed by the Internal Revenue Code exceeds the amount reported on a return, including an amended return. We now hold, consistently with those opinions, that the phrase establishes a condition precedent: A petitioner in this Court who seeks judicial review of a denial of relief must show that the Commissioner asserts that he owes more in tax than reported on his return. By amending section 6015 the way it did, Congress narrowed the class of individuals able to invoke our jurisdiction under section 6015(e)(1)(A)17 to those "against whom a deficiency has been asserted." We cannot fairly read Congress's phrasing of this qualification as other than a clear, though perhaps inadvertent, deprivation of our jurisdiction over nondeficiency stand-alone petitions. Placing that circumscription where it did, the "assertion of a deficiency" has become the "ticket to Tax Court" that notices of deficiency are in redetermination cases.We similarly continue to adhere to our reading in Ewing I of the amendment's legislative history42 as focused on the proper time for a taxpayer to request innocent spouse relief from the IRS. SeeEwing I, 118 T.C. at 504. But, though "the amendment was certainly all about timing [it] was also all about deficiencies. So it simply reinforces the idea that the elections in subsections (b) and (c) are also all about deficiencies." 8 The amendment's history shows no indication that Congress was thinking about nondeficiency relief under subsection (f) at all. And, whatever the merits of using legislative history to overcome the plain language of a statute, the merits of using the absence of legislative history to overcome the plain language of the statute must necessarily be weaker. 9 Reasoning that a partial repeal of our jurisdiction would have to be in the legislative history to be effective is, we think, a misreckoning after Ewing I and Bartman.43 We therefore overrule our holding in Ewing I in light of this subsequent precedent and now construe section 6015(e) as not giving us jurisdiction over nondeficiency stand-alone petitions. 10 But if we now think the disputed phrase is not ambiguous, its effect still seems to us anomalous. The legislative history that we reviewed in Ewing I strongly hints that limiting our jurisdiction was not the purpose Congress had in mind in passing the amendment. Still, "Congress enacts 18 statutes, not purposes, and courts may not depart from the statutory text because they believe some other arrangement would better serve the legislative goals." In re Cavanaugh, 306 F.3d 726">306 F.3d 726, 731-732 (9th Cir. 2002). Whatever "the gap in the section 6015 procedures that this case highlights is not one that can be closed by judicial fiat." Drake v. Commissioner, 123 T.C. 320">123 T.C. 320, 326 (2004).44 Our reading today may also create some confusion -- innocent spouse relief under all subsections of 6015 will remain available in this Court as an affirmative defense in deficiency redetermination cases because of section 6213(a), as a remedy on review of collection due process determinations because of section 6330(d)(1)(A), and as relief in stand-alone petitions when the Commissioner has asserted a deficiency against a petitioner. But until and unless Congress identifies this as a problem and fixes it legislatively by expanding our jurisdiction to review all denials of innocent spouse relief, it is quite possible that the district courts will be the proper forum for review of the Commissioner's denials of relief in nondeficiency stand-alone cases. 11 Because, however, the 2000 amendment to section 6015(e) eliminated our jurisdiction in such cases,45 An order will be entered dismissing the case for lack of jurisdiction.Reviewed by the Court.HALPERN, THORNTON, and KROUPA, JJ., agree with this majority opinion. LAROLARO, J., concurring: The Court today appropriately overrules the opinion of the Court in Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494 (2002), revd. Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006). With that result, I concur. 1 As I stated in my dissent in Ewing v. Commissioner, supra at 510, the Court's opinion there, while reaching a practical result, disregarded 19 the obvious plain reading of section 6015(e)(1). In accordance with such a plain reading, Congress has allowed the Court to review an individual's petition seeking equitable relief under 247 section 6015(f) (equitable relief) only when: (1) The Commissioner has asserted a deficiency against the individual, (2) the individual has affirmatively elected to have section 6015(b) or (c) apply, and (3) the taxpayer has timely petitioned the Court to determine the appropriate relief under section 6015.3 To the extent that Congress has not provided the Court with jurisdiction to decide a matter, the Court may not decide46 it. SeeUrbano v. Commissioner, 122 T.C. 384">122 T.C. 384, 389 (2004); Fernandez v. Commissioner, 114 T.C. 324">114 T.C. 324, 328 (2000).I agree with the overruling of Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494 (2002), because that case was wrongly decided. Section 6015(e)(1) is construed clearly and unambiguously on its face to provide that the Court is authorized by that section to decide a claim for equitable relief only where: (1) The Commissioner has asserted a deficiency against the taxpayer, (2) the taxpayer has affirmatively elected to have section 6015(b) or (c) apply, and (3) the taxpayer has timely petitioned the Court to determine the appropriate48 relief under section 6015. Accord Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 787 (8th Cir. 2006) ("The language of section 6015(e)(1) is clear and unambiguous"), affg. in part and vacating in part T.C. Memo 2004-93">T.C. Memo. 2004-93; see Commissioner v. Ewing, 439 F.3d at 1009, 1013 (9th Cir. 2006). Given such a plain reading, it is improper for the Court to resort to the legislative history 20 of section 6015(e)(1) to change that reading. In accordance with deeply ingrained principles of statutory construction, the Court must apply section 6015(e)(1) according to its terms, 4 see Commissioner v. Soliman, 506 U.S. 168">506 U.S. 168, 174, 113 S. Ct. 701">113 S. Ct. 701, 121 L. Ed. 2d 634">121 L. Ed. 2d 634 (1993); Garcia v. United States, 469 U.S. 70">469 U.S. 70, 76 n.3, 105 S. Ct. 479">105 S. Ct. 479, 83 L. Ed. 2d 472">83 L. Ed. 2d 472 (1984); Venture Funding, Ltd. v. Commissioner, 110 T.C. 236">110 T.C. 236, 241-242 (1998), affd. without published opinion 198 F.3d 248">198 F.3d 248 (6th Cir. 1999), and must not resort to the legislative history of the statute to find ambiguities in its terms so as to apply those terms inconsistently with their plain meaning, see Commissioner v. Ewing, 439 F.3d at 1013. SeeEwing v. Commissioner, 118 T.C. at 511-514 (Laro, J., dissenting) (discussing49 the plain meaning of the terms in section 6015(e)(1) vis-a-vis the reading given those terms by the Court's opinion in that case). Accordingly, unless the Court finds that all three of the referenced requirements have been met, section 6015(e)(1) does not allow the Court to review requests for equitable relief such as those presented by petitioner and the taxpayer in Ewing v. Commissioner, supra.While Congress allowed an individual to qualify for equitable relief in the appropriate case, Congress did not provide in section 6015(e)(1) that the Court could review whether a case was appropriate in the absence of an assertion of a deficiency against the individual, the individual's request for relief under section 6015(b) or (c), and the individual's timely petition to this Court. Whether it is more practical for this Court to decide the appropriateness of such a claim is not for us to opine. We must presume from a plain reading of the text of section 6015(e)(1) that Congress intended that we not have jurisdiction over such a petition and must give effect to the will of Congress as expressed through those terms. SeeConnecticut Nat'l Bank v. Germain, 503 U.S. 249">503 U.S. 249, 253-254, 112 S. Ct. 1146">112 S. Ct. 1146, 117 L. Ed. 2d 391">117 L. Ed. 2d 391 (1992);50 Griffin v. Oceanic Contractors, Inc., 458 U.S. 564">458 U.S. 564, 570, 102 S. Ct. 3245">102 S. Ct. 3245, 73 L. Ed. 2d 973">73 L. Ed. 2d 973 (1982); Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102">447 U.S. 102, 108, 100 S. Ct. 2051">100 S. Ct. 2051, 64 L. Ed. 2d 766">64 L. Ed. 2d 766 (1980).21 FOLEY, HAINES, GOEKE, and WHERRY, JJ., agree with this concurring opinion. CHIECHI; VASQUEZ; MARVELCHIECHI, J., dissenting: With all due respect, I am not persuaded by the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) 1 or the51 United States Court of Appeals for the Eighth Circuit (Eighth Circuit) 2 that the Court erred in holding in Ewing I that the Court had jurisdiction over the taxpayer's claim in that case for relief under section 6015(f). Nor does the Court Opinion 3 convince me that the Court should overrule that holding in Ewing I.52 Neither the Ninth Circuit nor the Eighth Circuit expresses disagreement with, and the Court Opinion reaffirms, see Court op. pp. 9, 12, 13, 17, 19, the Court's conclusion in Ewing I that, prior to the amendment in question of section 6015(e)(1), 4 the Court's jurisdiction to review claims for relief under section 6015 was not limited to claims for relief from taxes that may or may not have been underreported in returns, which taxpayers raised in either "deficiency" cases commenced in the Court pursuant to section 6213(a) or so-called stand-alone section 6015 "deficiency" cases, including so-called stand-alone section 6015(f) "deficiency" cases. That is to say, prior to the amendment of section 6015(e)(1) by the 2001 Consolidated Appropriations Act (amendment of section 6015(e)(1)), the Court's jurisdiction to review claims for relief under section 6015 included claims for relief under section 6015(f)22 from all or a portion of any unpaid taxes (i.e., taxes not paid when returns were filed) in so-called stand-alone section 6015(f) "nondeficiency" cases. 5SeeEwing v. Commissioner, 118 T.C. 494">118 T.C. 494, 500-502 (2002), revd. 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006); see also53 Fernandez v. Commissioner, 114 T.C. 324">114 T.C. 324 (2000); Butler v. Commissioner, 114 T.C. 276">114 T.C. 276 (2000).54 The question that the Court addressed sua sponte in Ewing I was whether the amendment of section 6015(e)(1) deprived the Court of its jurisdiction to review a claim for relief under section 6015(f) from all or a portion of any unpaid tax in a stand-alone section 6015(f) "nondeficiency" case. Ewing v. Commissioner, supra at 503. In resolving that question, the Court analyzed section 6015(e)(1) both before and after its amendment by the 2001 Consolidated Appropriations Act. 6Id. at 502-507. In analyzing that section after its amendment, the Court stated: Our interpretation of section 6015(e) concerns the new language "against whom a deficiency has been asserted". However, section 6015(e)(1)(A) still contains the provision giving this Court jurisdiction "to determine the appropriate relief available to the individual under this section " (emphasis added), which, as previously explained, we have held gives us jurisdiction over the propriety of equitable relief under section 6015(f). Equitable relief under section 6015(f) is, and always has been, available in nondeficiency situations. 55 Under these circumstances, the amendment to section 6015(e)(1) referring to situations where "a deficiency has been asserted" and the retention of the language in that same section giving us jurisdiction over "the appropriate relief available to the individual under this section" creates an ambiguity. Therefore, it is appropriate to consult the legislative history of the amendment made by the Consolidated Appropriations Act, 2001.Id. at 503-504.56 After having consulted the conference report accompanying the amendment of section 6015(e)(1), H. Conf. Rept. 106-1033, 23 at 1023 (2000), 3 C.B. 304">2000-3 C.B. 304, 353, the Court concluded: The conference report indicates that the language "against whom a deficiency has been asserted" was inserted into section 6015(e) to clarify the proper time for making a request to the Commissioner for relief from joint and several liability for tax that may have been underreported on the return. Congress wanted to prevent taxpayers from submitting premature requests to the Commissioner for relief from potential deficiencies before the Commissioner had asserted that additional taxes were owed. Congress also wanted to make it clear that a taxpayer does not have to wait until after an assessment has been made before submitting a request to the Commissioner for relief under section 6015. Overall, the legislative history indicates that Congress was concerned with the proper timing of a request for relief for underreported tax and intended that taxpayers not be allowed to submit57 a request to the Commissioner regarding underreported tax until after the issue was raised by the IRS. There is nothing in the legislative history indicating that the amendment of section 6015(e) by the Consolidated Appropriations Act, 2001, was intended to eliminate our jurisdiction regarding claims for equitable relief under section 6015(f) over which we previously had jurisdiction. The stated purpose for inserting the language "against whom a deficiency has been asserted" into section 6015(e) was to clarify the proper time for a taxpayer to submit a request to the Commissioner for relief under section 6015 regarding underreported taxes. * * * [Fn. refs. omitted.]Id.at 505.Based upon the Court's review of the language of section 6015(e)(1) both before and after its amendment by the 2001 Consolidated Appropriations Act, the legislative history of that act, and relevant caselaw, the Court held in Ewing I that the amendment of section 6015(e)(1) did not deprive it of its jurisdiction to review the denial of equitable relief under section 6015(f) with respect to unpaid tax in a stand-alone section58 6015(f) "nondeficiency" case. Id. at 505-506. The Ninth Circuit reversed that holding in Ewing II. Shortly thereafter, in Bartman, the Eighth Circuit expressed its agreement with the Ninth Circuit. 7 An appeal in this case normally would lie in the United States Court of Appeals for the Tenth Circuit. Consequently, the Court is not required to follow the opinions of the Ninth Circuit in Ewing II and the Eighth Circuit in Bartman (and in Sjodin). 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). Nonetheless, because the 24 Court Opinion concludes that those opinions "change the judicial landscape", Court op. p. 16, it proceeds to reconsider Ewing I and decides to overrule it. 859 I turn first to the Court Opinion to explain why I am not persuaded by that Opinion that the Court should overrule Ewing I. In deciding to overrule the Court's holding in Ewing I, the Court Opinion concludes that that holding becomes problematic, particularly when we consider that "deficiency" itself has a defined meaning -- the amount by which the tax imposed by the Internal Revenue Code exceeds the amount reported on a return, including an amended return. We now hold, consistently with those opinions [Ewing II and Bartman ], that the phrase ["against whom a deficiency has been asserted"] establishes a condition precedent: A petitioner in this Court who seeks judicial review of a denial of relief must show that the Commissioner asserts that he owes more in tax than reported on his return. By amending section 6015 the way it did, Congress narrowed the class of individuals able to invoke our jurisdiction under section 6015(e)(1)(A) to those "against whom a deficiency has been asserted." We cannot fairly read Congress's phrasing of this qualification as other 60 than a clear, though perhaps inadvertent, deprivation of our jurisdiction over nondeficiency stand-alone petitions. Placing that circumscription where it did, the "assertion of a deficiency" has become the "ticket to Tax Court" that notices of deficiency are in redetermination cases.Court op. p. 17.In asserting "that 'deficiency' itself has a defined meaning -- the amount by which the tax imposed by the Internal Revenue Code exceeds the amount reported on a return, including an amended return", Court op. p. 17, the Court Opinion apparently relies on section 301.6211-1(a), Proced. & Admin. Regs., see Court op. p. 9. In maintaining that the term "deficiency" has the meaning set forth in that regulation for all purposes of the Code, including section 6015, the Court Opinion fails to acknowledge, let alone discuss, a long line of cases holding that the term "return" in the Code generally means the original return. 9See, e.g., Badaracco v. 25 Commissioner, 464 U.S. 386">464 U.S. 386, 104 S. Ct. 756">104 S. Ct. 756, 78 L. Ed. 2d 549">78 L. Ed. 2d 549 (1984). 10 The Court Opinion is wrong in maintaining that the meaning of the term "deficiency" set forth in section 301.6211-1(a), Proced. & Admin. Regs., applies for all61 purposes of the Code.62 I agree with the Court Opinion that in the instant case there would be no "deficiency" extant after petitioner and his spouse filed their joint amended return if the meaning of that term in section 301.6211-1(a), Proced. & Admin. Regs., were applicable for purposes of section 6015. 1163 However, the Court Opinion does not consider, let alone answer, whether and why that meaning, and not the meaning established in cases such as Badaracco v. Commissioner, supra, should apply for purposes of section 6015, including section 6015(e)(1). 1226 The term "deficiency" that appears in section 6015(e)(1) in the phrase "against whom a deficiency has been asserted" is not clear, plain, or unambiguous. The Court's consideration in Ewing I of the legislative history of the amendment of section 6015(e)(1) was proper.Even assuming arguendo that the term "deficiency" that appears in section 6015(e)(1) in the phrase "against whom a deficiency has been asserted" were to have the meaning that the Court Opinion says it has, the Court Opinion's conclusions that rest on that premise are nonetheless logically flawed. It is a non sequitur for the Court Opinion to conclude that, because "'deficiency' itself has a defined meaning -- the amount by which the tax imposed by the Internal Revenue Code exceeds the amount reported on a return, including an amended return", Court op. p. 17, the phrase"against whom a deficiency as been asserted" (1) is "clear", "plain", and "not ambiguous", Court op. pp. 17, 18, 19; (2) establishes64 a "condition precedent" to the Court's jurisdiction under section 6015, Court op. p. 17; and (3) results in a "deprivation of our jurisdiction over nondeficiency standalone petitions", Court op. p. 17. The meaning that the Court Opinion gives to the term "deficiency" that appears in section 6015(e)(1) in the phrase "against whom a deficiency has been asserted" does not give meaning to that entire phrase; it only gives the meaning that the Court says it has to the term "deficiency" used in that phrase. The phrase "against whom a deficiency has been asserted" is not clear, plain, or unambiguous. Despite its assertions to the contrary, see Court op. pp. 17, 18, 19, the Court Opinion acknowledges as much, see Court op. p. 14 note 7. The Court's consideration in Ewing I of the legislative history of the amendment of section 6015(e)(1) was proper.In pointing out the Eighth Circuit's interchangeable use in Bartman of terms such as "assertion of a deficiency", "determination of a deficiency", "issue of a notice of deficiency", and "assessment of a deficiency" (discussed below), the Court Opinion states: Future cases may well show that Congress meant to give us jurisdiction65 when a deficiency was "asserted" because it wanted to allow taxpayers to petition for relief well before the IRS sends out a notice of deficiency or makes an assessment -- perhaps as soon as issuance of a revenue agent's report, or some other time during an examination, when the IRS first "states that additional taxes may be owed." H. Conf. Rept. 106-1033, at 1023 (2000) (quoted in Ewing I, 118 T.C. at 504). The terms "determination" and "assessment" are not customarily regarded as synonyms in tax law. A "determination" is the IRS's final decision, see, e.g., secs. 6212(a), 6230(a)(3)(B)). And an "assessment" is the specific procedure by which the IRS officially records a liability, see sec. 6203, triggering its power to collect taxes administratively. (The Code generally bars the IRS from assessing taxes that are being contested in our Court. Seesec. 6213(a).) We note too that, although notices of deficiency establish jurisdiction in most of our cases, see Bartman, 446 F.3d at 787, Congress has given us jurisdiction over cases66 in which there need be no deficiency -- for example, review of the Commissioner's determinations after IRS collection due process hearings. Sec. 6330(d)(1). However, because there was no deficiency lurking in this case at all, 13 we need not decide whether an "assertion of deficiency" is synonymous with a "notice of deficiency," much less an "assessment", in defining the limits of our jurisdiction under section 6015(e). * * Court op. p. 15 note 7; see also Court op. p. 14.67 27 Despite assertions to the contrary that appear in the Court Opinion, see Court op. pp. 17, 18, 19, the excerpt quoted above leaves no doubt that the Court Opinion concludes that the phrase "against whom a deficiency has been asserted" may have any one of several possible meanings. The Court Opinion thus acknowledges that that phrase is ambiguous. The internal inconsistency in the Court Opinion as to whether the phrase "against whom a deficiency has been asserted" is ambiguous is another material flaw in that Opinion. Having concluded that that phrase is ambiguous, the Court Opinion should have considered the legislative history of the amendment of section 6015(e)(1), as the Court properly did in Ewing I, in order to determine its meaning as used in section 6015(e)(1).28 Although the Court Opinion concludes that the phrase "against whom a deficiency has been asserted" is ambiguous, see Court op. p. 14 note 7, it also concludes, inconsistently, that that phrase is "clear", "plain", and "not ambiguous", Court op. pp. 17, 18, 19. Having concluded, albeit inconsistently, that the phrase "against whom a deficiency has been asserted" is not ambiguous, the Court Opinion should have interpreted68 that phrase according to its language. It did not. The Court Opinion holds that the phrase "against whom a deficiency has been asserted" requires that "A petitioner in this Court who seeks judicial review of a denial of relief must show that the Commissioner asserts that he owes more in tax than reported on his return." Court op. p. 17 (emphasis added). The Court Opinion's holding uses the present tense "asserts". In contradistinction, section 6015(e)(1) uses "has been asserted". By using the present tense, which is not found in section 6015(e)(1) in the phrase "against whom a deficiency has been asserted", the Court Opinion reads into that phrase a requirement that is not in that section. Having read such a requirement into section 6015(e)(1), the Court Opinion makes matters worse by failing to specify when the taxpayer must satisfy that requirement. Thus, the Court Opinion is unclear as to whether it requires a taxpayer who files a petition with the Court seeking section 6015 relief to show, at the time the taxpayer files the petition, thereafter during the pendency of the section 6015 Court proceeding, and/or at some other time, that "the Commissioner asserts that he [the taxpayer] 69 owes more in tax than reported on his [the taxpayer's] return." 14 Court op. p. 17.70 29 The only thing about the phrase "against whom a deficiency has been asserted" that is beyond question is that it does not require, as the Court Opinion does, more than that "a deficiency has been asserted" at some point in time. 15 The Court Opinion is wrong to read the words "has been asserted" out of the phrase "against whom a deficiency has been asserted" and to read the word "asserts" into that phrase.Although the Court Opinion declines to consider the71 legislative history of the amendment of section 6015(e)(1) in order to interpret the phrase "against whom a deficiency has been asserted", it nonetheless offers the following criticism of the Court's reliance on that legislative history in Ewing I: The amendment's history shows no indication that Congress was thinking about nondeficiency relief under subsection (f) at all. And, whatever the merits of using legislative history to overcome the plain language of a statute, the merits of using the absence of legislative history to overcome the plain language of the statute must necessarily be weaker. Reasoning that a partial repeal of our jurisdiction would have to be in the legislative history to be effective is, we think, a misreckoning after Ewing I and Bartman. [Fn. ref. omitted.]Court op. pp. 18-19.The Court Opinion does not explain why "Reasoning that a partial repeal of our jurisdiction would have to be in the legislative history to be effective is * * a misreckoning after Ewing I and Bartman." Id. In any event, I disagree with that conclusion, even though I agree with the Court Opinion that72 the legislative history of the amendment of section 6015(e)(1) does not indicate that, in adding the phrase "against whom a deficiency has been asserted", Congress had in mind a stand-alone section 6015(f) "nondeficiency" case. That is precisely the point that the Court was making in 30 Ewing I. In amending section 6015(e)(1), Congress had in mind only the proper timing of a request for relief from underreported tax in a return, namely, a "deficiency" situation. Ewing v. Commissioner, 118 T.C. at 505. Congress did not have in mind a stand-alone section 6015(f) "nondeficiency" case when it amended section 6015(e)(1) by adding the phrase "against whom a deficiency has been asserted". Since Congress did not have in mind such a case when it enacted the amendment of section 6015(e)(1), Congress could not have had in mind depriving, and Congress could not have intended to deprive, the Court of the jurisdiction that the Court had over such a case prior to that amendment. Id. at 504-505. If Congress had intended to deprive the Court of the jurisdiction that it had prior to the amendment of section 6015(e)(1) over a stand-alone section 6015(f) "nondeficiency case", it73 would have expressly and clearly so stated in the legislative history of that amendment. It did not. The silence of Congress is strident. 16I turn now to the Eighth Circuit's opinion in Bartman to explain why I am not persuaded by that opinion that the Court should overrule Ewing I. As discussed above, the Court Opinion points out, Court op. p. 14 note 7, that the Eighth Circuit in Bartman interchangeably used terms such as "determination of a deficiency", "issue of a notice of deficiency", and "assessed deficiency", even though those terms are not synonymous in the Federal tax law. The Eighth Circuit in Bartman also interchangeably used those74 terms with the phrase "a deficiency has been asserted" in section 6015(e)(1), evidently having concluded that all of those terms are synonymous in the Federal tax law. 1775 As the legislative 31 history of section 6015(e)(1) recognizes, 18 those terms are not synonymous in the Federal tax law. The Commissioner "determines that there is a deficiency" in a document known as a "notice of deficiency" that the Commissioner sends or issues to the taxpayer. Seesec. 6212(a). An "assessment" is the procedure by which the Commissioner officially records a tax liability. Seesec. 6203. However, there are limitations on the authority of the Commissioner to assess a "deficiency" that the Commissioner has "determined". See, e.g., secs. 6213, 6215. An "assessment" by the Commissioner is required before the Commissioner may proceed to collect a tax liability. Seesec. 6502.76 Although the Eighth Circuit in Bartman interchangeably used terms that are not synonymous in the Federal tax law, after a careful reading of the Eighth Circuit's opinion in Bartman (and its opinion in Sjodin that relied on Bartman), I believe that the Eighth Circuit in Bartman (and in Sjodin) construed the language "a deficiency has been asserted" that appears in the phrase "against whom a deficiency has been asserted" to mean "a deficiency has been determined" by the 32 Commissioner in a notice of deficiency. 1978 In reaching that conclusion, the Eighth Circuit may have been misled by the position that the Government advanced on appeal in Bartman (and in Sjodin). 20 In the briefs that the Government filed in Bartman (and in Sjodin), 21 the Government argued that the language "a deficiency has been asserted" that appears in the phrase "against whom a deficiency has been asserted" means "a deficiency has been determined" by the Commissioner. As explained above, the Commissioner "determines that there is a deficiency" in a document called a "notice of deficiency" that the Commissioner sends to the taxpayer. The legislative history of the amendment of section 6015(e)(1) belies the position77 of the Government on appeal in Bartman (and in Sjodin). 22See supra note 18.In apparently adopting the position advanced to it by the Government, the Eighth Circuit has not interpreted the phrase "against whom a deficiency has been asserted" that it held was "clear and unambiguous" and "plain," Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 787, 788 (8th Cir. 2006), affg. in part and vacating in part T.C. Memo. 2004-93, according to the language in that phrase. Instead, it has construed that 33 phrase and gave it a meaning that is contrary to, and not apparent from, the language in that phrase. 2379 I turn finally to the Ninth Circuit's opinion in Ewing II to explain why I am not persuaded by that opinion that the Court should overrule Ewing I. According to the Ninth Circuit, the language of the amendment of section 6015(e)(1) is "plain", Commissioner v. Ewing, 439 F.3d at 1013; "by interpreting the statute as not requiring the assertion of a deficiency, the Tax Court simply has written the language out of the statute", id. at 1014; and by doing so, the Tax Court violated "the basic principle of statutory construction that 'a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant'", id.With respect to the Ninth Circuit's conclusion in Ewing II that the language "against whom a deficiency has been asserted" is "plain", the Court Opinion in the instant case and the Eighth Circuit's opinions in Bartman and Sjodin belie that conclusion.With respect to the Ninth Circuit's conclusions in Ewing II that in Ewing I the Court wrote the language "against whom a deficiency has been asserted" out of section 6015(e)(1), thereby making that phrase "superfluous, void, 80 or insignificant", id., and violating a basic principle of statutory construction, id., that is not what the Court did in Ewing I. The Court found in Ewing I that Congress added the phrase "against whom a deficiency has been asserted" to section 6015(e)(1) in order to prevent a taxpayer from making a claim for relief under section 6015 until a "deficiency has been asserted" only in a situation where tax may or may not have been underreported in a return, namely, only in a "deficiency" situation. Ewing v. Commissioner, 118 T.C. at 505. Thus, under Ewing I, in a case where tax may or may not 34 have been underreported in a return, and only in such a case, must "a deficiency * * * [have] been asserted" in order for the Court to have jurisdiction over such a case. 24See id. Accordingly, Ewing I did not read the phrase "against whom a deficiency has been asserted" out of section 6015(e)(1) as amended by the 2001 Consolidated Appropriations Act and did not make that phrase superfluous, void, or insignificant in violation of a basic principle of statutory construction.81 I am not persuaded by the Ninth Circuit's opinion in Ewing II, the Eighth Circuit's opinions in Bartman and Sjodin, or the Court Opinion in the instant case that the Court erred in Ewing I. Consequently, I cannot in good conscience conclude that the Court should overrule Ewing I, and I dissent.COLVIN, COHEN, SWIFT, WELLS, GALE, and MARVEL, JJ., agree with this dissenting opinion.VASQUEZ, J., dissenting: Respectfully, I do not believe we should reverse our decision in Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494 (2002) (Ewing I), revd. 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006).We have previously considered what we should do when an issue comes before us a second time after a Court of Appeals has reversed a prior Tax Court opinion on the same point. Lardas v. Commissioner, 99 T.C. 490">99 T.C. 490, 494 (1992). In Lawrence v. Commissioner, 27 T.C. 713">27 T.C. 713, 716-717 (1957), revd. 258 F.2d 562">258 F.2d 562 (9th Cir. 1958), we decided that, although we should seriously consider the reasoning of the Court of Appeals which reversed our decision, we ought not follow the reversal if we believe it is incorrect. SeeLardas v. Commissioner, supra.The82 Tax Court, being a tribunal with national jurisdiction over litigation involving the interpretation of Federal taxing statutes which may come to it from all parts of the country, has * * * [an] obligation to apply with uniformity its interpretation of those statutes. That is the way it has always seen its statutory duty and, with all due respect to the Courts of Appeals, it cannot conscientiously change unless Congress or the Supreme Court so directs. [Lawrence v. Commissioner, supra at 719-720.]35 This case is not governed by the Golsen doctrine. See Court op. pp. 7, 16. In Ewing I, we interpreted the statute. If Congress disagrees with that interpretation, then Congress can revise the statute to provide otherwise. Neal v. United States, 516 U.S. 284">516 U.S. 284, 295-296, 116 S. Ct. 763">116 S. Ct. 763, 133 L. Ed. 2d 709">133 L. Ed. 2d 709 (1996).I do not believe that the opinions of the U.S. Courts of Appeals for the Eighth and Ninth Circuit "change the judicial landscape". See Court op. p. 16. The reasoning and analysis of the U.S. Courts of Appeals for the Eighth and Ninth Circuit is essentially the reasoning and analysis of the dissent in Ewing I. See Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 787-78883 (8th Cir. May 2, 2006); Ewing v. Commissioner, 439 F.3d at 1013-1015; Ewing I, supra at 510-528 (Laro, J., dissenting). These views (i.e., of the U.S. Courts of Appeals for the Eighth and Ninth Circuit and of the dissent in Ewing I) were before this Court in Ewing I; they were given serious consideration; and they were rejected.Accordingly, when a Court of Appeals reverses our original decision but neither addresses any new arguments nor provides any new analysis, as is the case herein, I do not believe we should reverse our original decision. Respectfully, I dissent.SWIFT, J., agrees with this dissenting opinion.MARVEL, J., dissenting: Relying on what the Court's Opinion asserts is the plain meaning of prefatory language in section 6015(e)(1), the Court holds that it does not have jurisdiction under section 6015(e)(1) to review the Commissioner's determination denying a taxpayer relief under section 6015(f) in a nondeficiency case. Specifically, the Court's Opinion concludes that, in order for us to have jurisdiction over a taxpayer's petition for relief under section 6015, the taxpayer must be a person "against whom a deficiency has been asserted and84 who elects to have subsection (b) or (c) apply". The Court bases its holding that we have no jurisdiction to decide this case on its conclusion that petitioner is not an individual "against whom a deficiency has been asserted". I disagree. Because I conclude that petitioner is an individual 36 "against whom a deficiency has been asserted", I contend that the Court's Opinion deciding the jurisdictional issue against petitioner is in error.Congress enacted section 6015 in 1998 as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105- 206, sec. 3201(a), 112 Stat. 734">112 Stat. 734. As originally enacted, section 6015(e)(1) provided, in pertinent part, that (1) In general. -- In the case of an individual who elects to have subsection (b) or (c) apply -- (A) In general. -- The individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section * * In 2001, Congress amended section 6015(e)(1), effective on December 21, 2000 (2001 amendment). Consolidated Appropriations Act, 2001, Pub. 85 L. 106-554, app. G, sec. 313, 114 Stat. 2763A-641). As a result, section 6015(e)(1) currently provides, in pertinent part,SEC. 6015(e). Petition for Review by Tax Court. -- (1) In general. -- In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply -- (A) In general. -- In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section * * The Court's Opinion concludes that we do not have jurisdiction because petitioner is not an individual against whom a deficiency has been asserted. Court op. p. 17. The Court's Opinion explains that there is no deficiency because petitioner reported the additional tax liability attributable to the embezzlement income on an amended return, and an amount reported on an amended return must be treated as an amount shown by the taxpayer upon his return in calculating the amount of a deficiency under section 6211(a). 86 See sec. 301.6211-1(a), Proced. & Admin. Regs.In reaching its conclusion, the Court relies upon the opinions of the Court of Appeals for the Ninth Circuit and the Court of Appeals for the Eighth Circuit in Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), revg. Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494 (2002) (Ewing I) and vacating 37 122 T.C. 32">122 T.C. 32 (2004), and Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 446 F.3d 785">446 F.3d 785 (8th Cir. 2006), affg. in part and revg. in part T.C. Memo. 2004-93. Both the Court of Appeals for the Ninth Circuit and the Court of Appeals for the Eighth Circuit concluded that the language added to section 6015(e)(1) by the 2001 amendment was clear and unambiguous and that the 2001 amendment limited our jurisdiction in section 6015(f) cases to those cases in which a deficiency has been asserted. However, the Court of Appeals for the Eighth Circuit in Bartman appears to have equated the language "against whom a deficiency has been asserted" to a requirement that a section 6015(f) case must arise from a deficiency determination by the Commissioner. See Bartman v. Commissioner, supra at 787 (Tax Court has no jurisdiction87 over a section 6015 petitioner "where no deficiency was determined by the IRS").The language that Congress chose to add to section 6015(e)(1) in 2001 stops far short of requiring that the Commissioner must actually have determined a deficiency. The determination of a deficiency is a technical concept that refers to the action taken by the Commissioner after he evaluates a taxpayer's tax situation and finally concludes that the taxpayer erred either in making a return that understated his tax -- 54 liability or in failing to make a return at all. The Commissioner "determines" a deficiency when he finally concludes that the taxpayer has understated his tax liability and reflects that determination in a notice of deficiency. See sec. 6212.Before the Commissioner issues a notice of deficiency, an extensive administrative examination or "audit" often occurs. It begins when the Internal Revenue Service (the Service) selects a taxpayer (in the case of a failure to file) or a taxpayer's return for examination and notifies the taxpayer of the examination. At that point, the Service has usually taken no position regarding the possible existence of a deficiency. The Service typically will88 take no position regarding the existence of a deficiency until the examination has been completed.If the Service concludes that there is an understatement of tax on a taxpayer's return, it will usually issue a preliminary report, commonly referred to as the 30-day letter. The 30-day letter advises the taxpayer that the Service believes adjustments 38 are necessary to the taxpayer's return and provides the taxpayer with a listing of the adjustments and a calculation of the taxpayer's correct income tax liability. The 30-day letter will also state the amount of the understatement that the Service contends the taxpayer has made, and it will calculate the deficiency and any additions to tax or penalties for which the Service alleges the taxpayer is liable.The 30-day letter gives the taxpayer an opportunity to dispute the Service's asserted tax deficiency administratively and to contest the proposed imposition of any addition to tax or penalty. The Commissioner usually will issue a notice of deficiency after the administrative appeal process has been completed and the case is unagreed, or after the time limit for pursuing an administrative appeal has expired without taxpayer action, or89 if the expiration of the period of limitations for assessment is about to expire. A taxpayer who agrees to the proposed deficiency or who voluntarily files an amended return reflecting the proposed deficiency ordinarily does not receive a notice of deficiency.With this background in mind, we must turn to the actual language of section 6015(e)(1) as amended. Although Congress is well aware of the words it has used in other sections of the Internal Revenue Code (the Code) to reflect that the Commissioner has determined a deficiency and issued a notice of deficiency, see sec. 6212(a), the words used by Congress in section 6015(e)(1) as amended do not contain any reference to a determination of a deficiency by the Commissioner. Section 6015(e)(1) refers only to "an individual against whom a deficiency has been asserted". It does not require that the Commissioner (or anyone else for that matter) must actually have determined a deficiency. The pertinent language of section 6015(e)(1) as amended requires only that a deficiency must have been asserted by someone, but it does not specify by whom or how or when.Because section 6015(e) as amended does not use the magic words "determine a90 deficiency" or specify that the deficiency must actually be asserted by the Commissioner, section 6015(e)(1) as amended screams out for interpretation. If Congress had intended to limit the right to petition this Court in section 6015 cases only to those taxpayers who had received a notice of deficiency, it is beyond debate that Congress knew how to say so clearly and unequivocally. The fact 39 that Congress did not refer to "an individual against whom a deficiency has been determined" or to "an individual against whom the Commissioner has determined a deficiency" is compelling evidence that Congress did not intend, when it amended section 6015(e)(1), to limit the right to petition this Court in section 6015 cases to those taxpayers to whom the Commissioner had mailed a notice of deficiency.This case illustrates why recourse to the legislative history is warranted now and was warranted in Ewing I. Petitioner filed a joint return for 1999 with his wife. On that return, there is an understatement of tax attributable to the erroneous items (unreported embezzlement income) of petitioner's wife. Petitioner discovered the understatement after the joint return was filed. On the advice of counsel, 91 petitioner and his wife filed an amended return for 1999 that reported the previously unreported embezzlement income of petitioner's wife and calculated an additional income tax liability attributable to the previously unreported embezzlement income. That additional tax liability was not paid when petitioner and his wife filed the amended return, nor has it been paid to date.Although respondent was under no legal obligation to do so, respondent processed the amended return 1 and, without issuing a notice of deficiency, assessed 292 the additional tax liability reported on the amended return. Subsequently, petitioner submitted a second Form 8857, Request for Innocent Spouse Relief, which respondent denied. 3 Petitioner then filed a petition in this Court seeking a review of respondent's determination. It is our jurisdiction over this petition that the Court's Opinion concludes is nonexistent.In order to apply section 6015(e)(1) to these facts, we must first decide what the term "asserted" means. Section 6015(e)(1) does not contain any definition, so, in accordance with accepted principles of statutory construction, we apply the commonly accepted definition. See, e.g., Muscarello v. United States, 524 U.S. 125">524 U.S. 125, 127-132, 118 S. Ct. 1911">118 S. Ct. 1911, 141 L. Ed. 2d 111">141 L. Ed. 2d 111 (1998); Nw. Forest Res. 40 Council v. Glickman, 82 F.3d 825">82 F.3d 825, 833 (9th Cir. 1996); Keene v. Commissioner, 121 T.C. 8">121 T.C. 8, 14 (2003). In Webster's Third New International Dictionary, the word "assert" means "to state or affirm positively, assuredly, plainly or strongly" or, alternatively, "to demonstrate the existence of". Webster's Third New International Dictionary 131 (1993). In Merriam Webster's Collegiate Dictionary, the word "assert" means "to state or declare positively and often forcefully or aggressively" or, alternatively, "to demonstrate the existence93 of". Merriam Webster's Collegiate Dictionary 69 (10th ed. 1997).In order to apply section 6015(e)(1) to these facts, we must also understand the term "deficiency". The term is not defined in section 6015. However, it is defined in section 6211(a). Section 6211(a) provides: (a) In General. -- For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of -- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over -- (2) the amount of rebates as defined in subsection (b)(2), made.Essentially, 94 a deficiency, as defined in section 6211(a), is the number remaining after the amount of tax shown on a taxpayer's return plus any amounts previously assessed as deficiencies (minus refunds) is subtracted from the taxpayer's correct tax liability.In order to ascertain whether a deficiency within the meaning of section 6211 has been asserted, we must analyze whether section 6211 requires us to examine the petitioner's original return or his amended return. The Court's Opinion did not make this analysis. Instead, the Court's Opinion, apparently relying on section 301.6211-1(a)), Proced. & Admin. Regs., concluded that a deficiency must be calculated with reference to the amended return.I believe that, if an analysis had been performed, it would have supported a conclusion that the references to "return" in sections 6211 and 6015 are to the taxpayer's original 41 return and not to an amended return. An amended return is a document of uncertain status under the Internal Revenue Code. There is no statutory requirement to file an amended return in the Code. See Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 104 S. Ct. 756">104 S. Ct. 756, 78 L. Ed. 2d 549">78 L. Ed. 2d 549 (1984). There is no regulatory or administrative requirement promulgated by95 the Commissioner requiring a taxpayer to file an amended return. See id. In fact, the Commissioner is not required to accept and process an amended return. See, e.g., Dover Corp. & Subs. v. Commissioner, 148 F.3d 70">148 F.3d 70, 72-73 (2d Cir. 1998), affg. T.C. Memo. 1997-339 and T.C. Memo. 1997- 340; Koch v. Alexander, 561 F.2d 1115">561 F.2d 1115, 1117 (4th Cir. 1977); Miskovsky v. United States, 414 F.2d 954">414 F.2d 954 (3d Cir. 1969). The Commissioner will process an amended return only when he chooses to do so. As the Court of Appeals for the Fourth Circuit stated in Koch v. Alexander, supra at 1117: There is simply no statutory provision authorizing the filing of amended tax returns, and while the IRS has, as a matter of internal administration, recognized and accepted such returns for limited purposes, their treatment has not been elevated beyond a matter of internal agency discretion. [Fn. ref. omitted.]There are many instances in which the Federal courts have examined provisions of the Code and determined that a statutory reference to "return" is to the taxpayer's original return.96 In Badaracco v. Commissioner, supra at 393, the United States Supreme Court stated: Indeed, as this Court recently has noted, Hillsboro National Bank v. Commissioner, 460 U.S. 370">460 U.S. 370, 378-380, n.10, 103 S. Ct. 1134">103 S. Ct. 1134, 75 L. Ed. 2d 130">75 L. Ed. 2d 130 (1983), the Internal Revenue Code does not explicitly provide either for a taxpayer's filing, or for the Commissioner's acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace. Thus, when Congress provided for assessment at any time in the case of a false and fraudulent "return," it plainly included by this language a false or fraudulent original return. In this connection, we note that until the decision of the Tenth Circuit in Dowell v. Commissioner, 614 F.2d 1263">614 F.2d 1263 (1980), cert. pending, No. 82- 1873, courts consistently had held that the operation of section 6501 and its predecessors turned on the nature of the taxpayer's original, and not his amended, return.8 _______________ 8 The significance of the original, and not the amended, return has been stressed in other, 97 but related, contexts. It thus has been held consistently that the filing of an amended return in a nonfraudulent situation does not serve to extend the period within which the Commissioner may assess a deficiency.See, e.g., Zellerbach Paper Co. v. Helvering, 293 U.S. 172">293 U.S. 172, 55 S. Ct. 127">55 S. Ct. 127, 79 L. Ed. 264">79 L. Ed. 264, 2 C.B. 341">1934-2 C.B. 341 (1934) (1934); National Paper Products Co. v. Helvering, 293 U.S. 183">293 U.S. 183, 55 S. Ct. 132">55 S. Ct. 132, 79 L. Ed. 274">79 L. Ed. 274, 2 C.B. 347">1934-2 C.B. 347 (1934); National Refining Co. v. Commissioner, 1 B.T.A. 236">1 B.T.A. 236 (1924). It also has been held that the filing of an amended return does not serve to reduce the period within which the Commissioner may assess taxes where the original return omitted enough income to trigger the operation of the extended limitations period provided by section 6501(e) or its predecessors. See, e.g., Houston v. Commissioner, 38 T.C. 486">38 T.C. 486 (1962); Goldring v. Commissioner, 20 T.C. 79">20 T.C. 79 (1953). And the period of limitations for filing a refund claim under the predecessor of section 6511(a) begins to run on the filing of the original, not the amended, return. Kaltreider Construction, Inc. v. United States, 303 F.2d 366">303 F.2d 366, 368 (CA3), cert. denied, 98 371 U.S. 877">371 U.S. 877, 83 S. Ct. 148">83 S. Ct. 148, 9 L. Ed. 2d 114">9 L. Ed. 2d 114 (1962).42 The undisputed facts of this case establish that (1) petitioner's original return understated his and his wife's income tax liability for 1999, and (2) there was a deficiency in income tax for 1999 resulting from that understatement. Given the commonly accepted definition of the term "assert", I contend that it is also clear that (1) petitioner and his wife "asserted" the deficiency on their amended 1999 return, and (2) respondent "asserted" the same deficiency when he assessed the additional tax liability reported on petitioner's amended 1999 return. If one concludes, however, that the language of section 6015(e)(1) is not clear because it is susceptible of more than one interpretation as outlined above, then recourse to the legislative history of section 6015(e)(1) as amended is warranted.In Ewing I, we reviewed the legislative history of the 2001 amendment to section 6015(e). After quoting pertinent language in the conference report accompanying the Consolidated Appropriations Act, 2001, see H. Conf. Rept. 106-1033, at 1023 (2000), we concluded as follows: The conference report indicates that the language "against whom 99 a deficiency has been asserted" was inserted into section 6015(e) to clarify the proper time for making a request to the Commissioner for relief from joint and several liability for tax that may have been underreported on the return. Congress wanted to prevent taxpayers from submitting premature requests to the Commissioner for relief from potential deficiencies before the Commissioner had asserted that additional taxes were owed. Congress also wanted to make it clear that a taxpayer does not have to wait until after an assessment has been made before submitting a request to the Commissioner for relief under section 6015 * * [Ewing v. Commissioner, 118 T.C. at 505 .]43 I contend that, in Ewing I, we properly relied on the legislative history to interpret whether petitioner was "an individual against whom a deficiency has been asserted" because the language does not support a conclusion that a deficiency must actually have been determined before a taxpayer may seek relief under section 6015, and interpretation is necessary to ascertain the meaning of section 6015(e)(1) as amended. I also contend100 that the legislative history makes it clear that the assessment of tax is one way, but not the only way, in which a deficiency may be asserted. 4101 Because I believe we properly concluded in Ewing I that section 6015(e)(1) as amended is ambiguous and that recourse to the legislative history of the 2001 amendment was appropriate, I respectfully dissent.COHEN and SWIFT, JJ., agree with this dissenting opinion. Footnotes1. Section references are to the Internal Revenue Code; Rule references are to the Tax Court Rules of Practice and Procedure.↩2. There is yet another Opinion in this case -- Ewing v. Commissioner, 122 T.C. 32">122 T.C. 32↩ (2004) -- but it dealt with our power to consider evidence outside the administrative record in reviewing the Commissioner's decisions.3. David argues that it was filing the amended return that led Rosalee to be sentenced to less than a year, which qualified her for residence in a halfway house rather than imprisonment. Although filing the amended return may well be one form of accepting responsibility, we found nothing in sentencing guideline precedents that suggests it was the only or most persuasive form. We also note that the Billingses made these decisions in late 2000, long before the Supreme Court held the guidelines to be merely advisory. SeeUnited States v. Booker, 543 U.S. 220">543 U.S. 220, 125 S. Ct. 738">125 S. Ct. 738, 160 L. Ed. 2d 621">160 L. Ed. 2d 621↩ (2005).4. Sec. 6015(e) (as before the 2000 amendment):SEC. 6015(e). Petition for Review by Tax Court. -- (1) In general. -- In the case of an individual who elects to have subsection (b) or (c) apply -- (A) In general. -- The individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed * ↩5. The Commissioner actually had asserted a deficiency against Fernandez, though our opinion in the case wasn't clear on the point. SeeEwing I, 118 T.C. at 500↩.6. The reference to "the procedural requirement applicable to all joint filers seeking innocent spouse relief" alludes to section 6015(f)(2), which establishes failure to win relief under subsections (b) and (c)↩ as a condition for relief under subsection (f).7. We construe Bartman's holding to be the sentence "We agree with the Ninth Circuit that the tax court lacks jurisdiction under section 6015(e) unless a deficiency was asserted against the individual petitioning for review," Bartman, 446 F.3d at 787. Future cases may well show that Congress meant to give us jurisdiction when a deficiency was "asserted" because it wanted to allow taxpayers to petition for relief well before the IRS sends out a notice of deficiency or makes an assessment -- perhaps as soon as issuance of a revenue agent's report, or some other time during an examination, when the IRS first "states that additional taxes may be owed." H. Conf. Rept. 106-1033, 1023 (2000), 3 C.B. 304">2000-3 C.B. 304, 353 (quoted in Ewing I, 118 T.C. at 504).The terms "determination" and "assessment" are not customarily regarded as synonyms in tax law. A "determination" is the IRS's final decision, see, e.g., secs. 6212(a), 6230(a)(3)(B). And an "assessment" is the specific procedure by which the IRS officially records a liability, see sec. 6203, triggering its power to collect taxes administratively. (The Code generally bars the IRS from assessing taxes that are being contested in our Court. Seesec. 6213(a).)We note too that, although notices of deficiency establish jurisdiction in most of our cases, see Bartman, 446 F.3d at 787, Congress has given us jurisdiction over cases in which there need be no deficiency -- for example, review of the Commissioner's determinations after IRS collection due process hearings. Sec. 6330(d)(1). However, because there was no deficiency lurking in this case at all, we need not decide whether an "assertion of deficiency" is synonymous with a "notice of deficiency," much less an "assessment", in defining the limits of our jurisdiction under section 6015(e). See generally sec. 1.6015-5(b)(5), Income Tax Regs.↩8. Camp, "Between a Rock and a Hard Place," 108 Tax Notes 359">108 Tax Notes 359, 368↩ (2005).9. The taxpayer in Bartman noted in oral argument that there is a presumption against implied repeals of federal jurisdiction, citing, for example, United States v. Lahey Clinic Hosp., Inc., 399 F.3d 1">399 F.3d 1, 9 (1st Cir. 2005). Seehttp://www.ca8.uscourts.gov/oralargs/oaFrame.html (case no. 042771). But that presumption is an application of the more general presumption disfavoring implied repeal of one statute by another -- a presumption irrelevant here because it would amount to using old section 6015(e) to rewrite the amendment, and one should not use a "statute that no longer is on the books to defeat the plain language of an effective statute." Am. Bank & Trust Co. v. Dallas County, 463 U.S. 855">463 U.S. 855, 872-873, 103 S. Ct. 3369">103 S. Ct. 3369, 77 L. Ed. 2d 1072">77 L. Ed. 2d 1072↩ (1983); see also 1A Sutherland Statutes and Statutory Construction, sec. 23:12 (6th ed.)(irreconcilable prior provision must yield to amendment).10. We stress that we are not revisiting our conclusion in Butler that relief under section 6015(f) is not committed to the Commissioner's unreviewable discretion, Butler, 114 T.C. at 290↩.11. See generally 5 U.S.C. sec. 703 (2000) (review in absence of special statutory proceeding); Owner-Operators Indep. Drivers Association v. Skinner, 931 F.2d 582">931 F.2d 582, 585↩ (9th Cir. 1991) (default rule is review in federal district court under general federal question jurisdiction).1. I disagree with the lead opinion in this case in that it sets forth dicta regarding jurisdiction in situations not before the Court in this case.↩2. Sec. 6015(e)(1) empowers the Court to review a taxpayer's stand-alone petition challenging the Commissioner's determination as to the taxpayer's administrative claim for relief from joint liability under sec. 6015. See generally Fernandez v. Commissioner, 114 T.C. 324">114 T.C. 324, 329 (2000) (coining the phrase "stand-alone petition" to refer to a petition filed to invoke our jurisdiction under sec. 6015(e)(1)). Sec. 6015(e)(1) provides in relevant part:SEC. 6015(e). (1) In general. -- In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply -- (A) In general. -- In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed * * [timely.]↩3. As discussed in Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494, 515 n.1, 519 (Laro, J., dissenting) (2002), revd. 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), Congress used the term "equitable relief" to refer to the relief provided in sec. 6015(f). See also id. (discussing the other two types of relief provided in sec. 6015(b) and (c)). As also discussed, the equitable relief provided in sec. 6015(f) was not available under former sec. 6013(e), but first arose during consideration in the conference underlying the enactment of sec. 6015. Seeid. at 515 n.1, 519, 522-526↩.4. Although the legislative history to a statute may sometimes override the statute's plain meaning interpretation and lead to a different result where the statute's history contains unequivocal evidence of a clear legislative intent, see Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102">447 U.S. 102, 108, 100 S. Ct. 2051">100 S. Ct. 2051, 64 L. Ed. 2d 766">64 L. Ed. 2d 766 (1980); see also Allen v. Commissioner, 118 T.C. 1">118 T.C. 1, 118 T.C. 1">118 T.C. 1, the legislative history underlying sec. 6015(e)(1) supports the conclusions set forth in this concurring opinion. SeeEwing v. Commissioner, 118 T.C. at 522-526↩ (Laro, J., dissenting).1. SeeCommissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006) (Ewing II ), revg. 118 T.C. 494">118 T.C. 494 (2002) (Ewing I ). In light of the Ninth Circuit's holding in Ewing II, the Ninth Circuit vacated Ewing v. Commissioner, 122 T.C. 32">122 T.C. 32↩ (2004), which addressed issues unrelated to the jurisdictional issue that the Court considered in Ewing I.2. SeeBartman v. Commissioner, 446 F.3d 785">446 F.3d 785 (8th Cir. 2006) (Bartman), affg. in part and vacating in part T.C. Memo 2004-93">T.C. Memo. 2004-93; see also Sjodin v. Commissioner, 174 Fed. Appx. 359">174 Fed. Appx. 359, 97 A.F.T.R.2d (RIA) 2622">97 A.F.T.R.2d (RIA) 2622, 2006-1 U.S. Tax Cas. (CCH) P 50357">2006-1 U.S. Tax Cas. (CCH) P50357 (8th Cir. 2006) (Sjodin ), vacating and remanding per curiam T.C. Memo. 2004-205↩.3. I refer to the "Court Opinion", and not to the "majority opinion", because a majority of the Court's Judges did not join the Opinion of the Court.↩4. The phrase "against whom a deficiency has been asserted" was added to sec. 6015(e)(1), effective on Dec. 21, 2000, by the Consolidated Appropriations Act, 2001 (2001 Consolidated Appropriations Act), Pub. L. 106-554, app. G, sec. 313, 114 Stat. 2763A-641 (2000). Essentially the same phrase was added to sec. 6015(c)(3)(B), effective on the same date, by the 2001 Consolidated Appropriations Act. Id. After that amendment, sec. 6015(c)(3)(B) provides: (B) Time for election. -- An election under this subsection for any taxable year may be made at any time after a deficiency for such year is asserted but not later than 2 years after the date on which the Secretary has begun collection activities with respect to the individual making the election. [Emphasis added.]↩5. Relief is available under sec. 6015(f) if, "taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)", and relief is not otherwise available to the taxpayer under sec. 6015(b) or (c)↩.6. In analyzing sec. 6015(e)(1) as amended by the 2001 Consolidated Appropriations Act, the Court relied on the following rules of statutory construction: In interpreting section 6015(e), our purpose is to give effect to Congress's intent. * * * We begin with the statutory language, and we interpret that language with reference to the legislative history primarily to learn the purpose of the statute and to resolve any ambiguity in the words contained in the language. * * * Usually, the plain meaning of the statutory language is conclusive. * * * If the statute is ambiguous or silent, we may look to the statute's legislative history to determine Congressional intent. * * * Finally, because the changes to the relief from joint and several liability rules "were designed to correct perceived deficiencies and inequities in the prior version" of the rules, this curative legislation should be construed liberally to effectuate its remedial purpose. * * Ewing v. Commissioner, 118 T.C. at 503↩.7. The Eighth Circuit followed Bartman in Sjodin v. Commissioner, __ Fed. Appx. __, 97 AFTR 2d 2622 (8th Cir. 2006)↩.8. In overruling Ewing I and holding that the Court does not have jurisdiction over the instant case, the Court Opinion acknowledges that "Billings's position is not a weak one." Court op. p. 7. Nonetheless, having held that the Court does not have jurisdiction over the instant case, the Court Opinion directs that an order be entered dismissing this case for lack of jurisdiction. Court op. p. 20. In doing so, perhaps the Court Opinion finds solace in its suggestion, which I consider to be an inappropriate and questionable suggestion, that "it is quite possible that the district courts will be the proper forum for review of the Commissioner's denials of relief in nondeficiency stand-alone cases." Court op. p. 20.↩9. Perhaps the Court Opinion believes that the parties implicitly agree that the meaning attributed by the Court Opinion to the term "deficiency" in sec. 6015 is correct because they "stipulated that * * [petitioner] did not qualify for relief under either section 6015(b) or (c) because no deficiency was ever asserted against him and his wife." Court op. p. 8. Suffice it to say that the Court is not bound by any stipulation of the parties as to the law. Godlewski v. Commissioner, 90 T.C. 200">90 T.C. 200, 203 n.5 (1988); Sivils v. Commissioner, 86 T.C. 79">86 T.C. 79, 82↩ (1986).10. In Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 393-394, 104 S. Ct. 756">104 S. Ct. 756, 78 L. Ed. 2d 549">78 L. Ed. 2d 549 (1984), the Supreme Court of the United States stated: Indeed, as this Court recently has noted, Hillsboro National Bank v. Commissioner, 460 U.S. 370">460 U.S. 370, 378-380, n. 10, 103 S. Ct. 1134">103 S. Ct. 1134, 75 L. Ed. 2d 130">75 L. Ed. 2d 130 (1983), the Internal Revenue Code does not explicitly provide either for a taxpayer's filing, or for the Commissioner's acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace. Thus, when Congress provided for assessment at any time in the case of a false or fraudulent "return," it plainly included by this language a false or fraudulent original return. In this connection, we note that until the decision of the Tenth Circuit in Dowell v. Commissioner, 614 F. 2d 1263 (1980), cert. pending, No. 82-1873, courts consistently had held that the operation of section 6501 and its predecessors turned on the nature of the taxpayer's original, and not his amended, return.8 8 The significance of the original, and not the amended, return has been stressed in other, but related, contexts. It thus has been held consistently that the filing of an amended return in a nonfraudulent situation does not serve to extend the period within which the Commissioner may access a deficiency. See, e.g., Zellerbach Paper Co. v. Helvering, 293 U.S. 172">293 U.S. 172, 2 C.B. 341">1934-2 C.B. 341, 55 S. Ct. 127, 79 L. Ed. 264 (1934); National Paper Products Co. v. Helvering, 293 U.S. 183, 55 S. Ct. 132, 79 L. Ed. 274, 1934-2 C.B. 347 (1934); National Refining Co. v. Commissioner, 1 B.T.A. 236">1 B.T.A. 236 (1924). It also has been held that the filing of an amended return does not serve to reduce the period within which the Commissioner may assess taxes where the original return omitted enough income to trigger the operation of the extended limitations period provided by section 6501(e) or its predecessors. See, e.g., Houston v. Commissioner, 38 T. C. 486 (1962); Goldring v. Commissioner, 20 T. C. 79 (1953). And the period of limitations for filing a refund claim under the predecessor of section 6511(a) begins to run on the filing of the original, not the amended, return. Kaltreider Constr., Inc. v. United States, 303 F.2d 366">303 F.2d 366, 368 (CA3), cert. denied, 371 U.S. 877">371 U.S. 877, 83 S. Ct. 148">83 S. Ct. 148, 9 L. Ed. 2d 114">9 L. Ed. 2d 114↩ (1962).11. That there would be no "deficiency" extant after petitioner and his spouse filed their joint amended return if the definition of that term in sec. 301.6211-1(a), Proced. & Admin. Regs., were applicable for purposes of sec. 6015 does not answer the question whether "a deficiency has been asserted" for purposes of sec. 6015(e)(1). See discussion below. Nor does it answer the question whether there is (1) a "deficiency", or an "understatement of tax", for purposes of sec. 6015(b) or (2) a "deficiency" for purposes of sec. 6015(c). Sec. 6015(b)(1)(B) requires that there be an "understatement of tax" in the return in order to obtain relief under sec. 6015(b). Sec. 6015(b)(1)(D) refers to whether it is inequitable to hold the taxpayer liable "for the deficiency in tax for such taxable year attributable to such understatement". Sec. 6015(b)(3) provides that the term "understatement" is defined by sec. 6662(d)(2)(A). Sec. 6662(d)(2)(A) generally defines that term as the excess of "the amount of the tax required to be shown on the return" over "the amount of the tax * * * shown on the return". Nothing in sec. 6015(b)↩ requires that "a deficiency has been asserted".12. The Court Opinion's ipse dixit that, for all purposes of the Code, the only meaning of the term "deficiency" is that set forth in sec. 301.6211-1(a), Proced. & Admin. Regs., not only ignores caselaw holding to the contrary, it also disregards that nothing in sec. 6015↩ requires a "deficiency" (or "understatement of tax") to continue to exist at any time after a taxpayer files an original return.13. I disagree that "there was no deficiency lurking in this case at all". There was a "deficiency" with respect to the original return filed by petitioner and his spouse. Nothing in the Court Opinion adequately explains why that "deficiency" with respect to the original return is not the "deficiency" in the phrase "against whom a deficiency has been asserted" in sec. 6015(e)(1). Nor does anything in the Court Opinion adequately explain why it apparently assumes that a "deficiency" must continue to exist at the time a claim for relief under sec. 6015(b)↩ is made. See discussion above and below.14. If the Court Opinion intends by its use of the present tense "asserts" to impose a jurisdictional requirement that, at the time a petition is filed and thereafter during the pendency of the sec. 6015 Court proceeding, the Commissioner must be asserting that the taxpayer "owes more in tax than reported on his [the taxpayer's] return", such a holding would result in the Court's not having jurisdiction over a case in which "a deficiency has been asserted" at some point in time in the administrative process and an ultimate determination has been made while the case is pending in a sec. 6015 Court proceeding that there is no "deficiency". I believe that any such result would be wrong, even assuming arguendo that the Court Opinion were correct that the phrase "against whom a deficiency has been asserted" is a jurisdictional requirement.Not only does the Court Opinion's holding read out of sec. 6015(e)(1) the words "has been asserted" in the phrase "against whom a deficiency has been asserted", it reads into that phrase the requirement that "the Commissioner" be asserting a "deficiency". Sec. 6015(e)(1) is silent, and thus ambiguous, regarding who must have asserted the "deficiency". If the Court Opinion were correct that the phrase "against whom a deficiency had been asserted" is "clear", "plain", and "not ambiguous", Court op. pp. 17, 18, 19, it would be inappropriate to consult the legislative history of the amendment of sec. 6015(e) in order to determine who must have asserted the "deficiency". However, it would be proper to consult the dictionary definition of the word "assert". The definition of the word "assert" in Webster's Third New International Dictionary Unabridged 131 (1993) is "state or affirm positively". Thus, petitioner could have "asserted" for purposes of sec. 6015(e)(1) a "deficiency" when he and his spouse filed their amended return and/or the Commissioner could have "asserted" a "deficiency" when the Commissioner assessed the increase in the tax shown in that amended return, which was attributable to the "deficiency" with respect to the original return. The point is that sec. 6015(e)(1) is not plain or clear regarding who must have asserted a "deficiency". It is thus necessary to consult the legislative history of the amendment of sec. 6015(e)↩.15. The Court Opinion seems to recognize as much when it states: Future cases may well show that Congress meant to give us jurisdiction when a deficiency was "asserted" because it wanted to allow taxpayers to petition for relief well before the IRS sends out a notice of deficiency or makes an assessment -- perhaps as soon as issuance of a revenue agent's report, or some other time during an examination, when the IRS first "states that additional taxes may be owed." * * Court op. p. 15 note 7.↩16. Senators Feinstein and Kyl recently introduced S. 3523, 109th Cong., 2d Sess., sec. 1 (2006), that would clarify that the Court has jurisdiction under sec. 6015(e) to review all claims for relief under sec. 6015(f)↩. In introducing that bill, Senator Feinstein stated: "this bill clarifies the statute's original intent". 152 Cong. Rec. S5962 (daily ed. June 15, 2006).17. To illustrate, the Eighth Circuit stated in Bartman: The IRS did not determine a deficiency against Bartman for tax year 1997. Bartman cites Ewing v. Commissioner, 118 T.C. 494">118 T.C. 494, 2002 WL 1150775">2002 WL 1150775 (2002), where the tax court found that it had jurisdiction to review a petition from a denial of a request for section 6015 relief, despite the fact that no notice of deficiency had been issued. Since briefing and oral argument in this case, however, the Ninth Circuit reversed the tax court and held that the tax court has no jurisdiction under section 6015(e) to consider a petition for review where no deficiency was determined by the IRS. Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009, 1012-14 (9th Cir. 2006). We agree with the Ninth Circuit that the tax court lacks jurisdiction under section 6015(e) unless a deficiency was asserted against the individual petitioning for review. The language of section 6015(e)(1) is clear and unambiguous: an individual may petition the tax court for review "[i]n the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) and (c) apply. . . ." 26 U.S.C. section 6015(e)(1) (emphasis added). As such, we end our inquiry into the meaning of the statute and apply its plain language. Citicasters v. McCaskill, 89 F.3d 1350">89 F.3d 1350, 1354-55 (8th Cir. 1996); Arkansas AFL-CIO v. FCC, 11 F.3d 1430">11 F.3d 1430, 1440 (8th Cir. 1993) (en banc). Applying the statute's plain language, we hold that the tax court had no jurisdiction to review Bartman's petition for review of the IRS's denial of her tax year 1997 refund request because no deficiency had been assessed against Bartman for tax year 1997. [Emphasis added; fn. ref. omitted.]Bartman v. Commissioner, 446 F.3d at 787-788↩.18. The conference report accompanying the 2001 Consolidated Appropriations Act states in pertinent part: Timing of request for relief. -- Confusion currently exists as to the appropriate point at which a request for innocent spouse relief should be made by the taxpayer and considered by the IRS. Some have read the statute to prohibit consideration by the IRS of requests for relief until after an assessment has been made, i.e., after the examination has been concluded, and if challenged, judicially determined. Others have read the statute to permit claims for relief from deficiencies to be made upon the filing of the return before any preliminary determination as to whether a deficiency exists or whether the return will be examined. * * Congress did not intend that taxpayers be prohibited from seeking innocent spouse relief until after an assessment has been made; Congress intended the proper time to raise and have the IRS consider a claim to be at the same point where a deficiency is being considered and asserted by the IRS. This is the least disruptive for both the taxpayer and the IRS since it allows both to focus on the innocent spouse issue while also focusing on the items that might cause a deficiency. * * * The bill clarifies the intended time by permitting the election under [section 6015] (b) and (c) to be made at any point after a deficiency has been asserted by the IRS. A deficiency is considered to have been asserted by the IRS at the time the IRS states that additional taxes may be owed. Most commonly, this occurs during the Examination process. It does not require an assessment to have been made, nor does it require the exhaustion of administrative remedies in order for a taxpayer to be permitted to request innocent spouse relief.H. Conf. Rept. 106-1033, at 1022-1023 (2000), 3 C.B. 304">2000-3 C.B. 304↩, 352- 353.19. Before the Eighth Circuit in Bartman began to use interchangeably various terms that have different meanings in the Federal tax law, see supra note 17, the Eighth Circuit stated: Congress created the United States Tax Court "to provide taxpayers with a means of challenging assessments made by the Commissioner without first having to pay the alleged deficiency. Without such a forum, taxpayers would have to pay the asserted deficiency and then initiate a suit in federal district court for a refund." Samuels, Kramer & Co. v. Commissioner , 930 F.2d 975, 979 (2d Cir. 1991). As an Article I court, the tax court is a court of "strictly limited jurisdiction." Kelley v. Commissioner, 45 F.3d 348, 351 (9th Cir. 1995). A notice of deficiency issued by the IRS pursuant to section 6212 is the taxpayer's jurisdictional "ticket to the Tax Court." Bokum v. Bokum v. Commissioner, 992 F.2d 1136">992 F.2d 1136, 1139 (11th Cir. 1993) (quoting Stoecklin v. Commissioner, 865 F.2d 1221">865 F.2d 1221, 1224 (11th Cir. 1989) ; Spector v. Commissioner, 790 F.2d 51">790 F.2d 51, 52 (8th Cir.1986) (per curiam) (citing Laing v. United States, 423 U.S. 161, 165, 96 S. Ct. 473, 46 L. Ed. 2d 416 n. 4 (1976), and holding that "the determination of a deficiency and the issue of a notice of deficiency is an absolute precondition to tax court jurisdiction"). Accordingly, the IRC provides that the tax court has jurisdiction over petitions for review from determinations regarding the availability of section 6015 relief only where a deficiency has been asserted against the taxpayer. section 6015(e)(1).Bartman v. Commissioner, 446 F.3d at 787.I also read the Eighth Circuit's opinion in Sjodin, which relied on Bartman, as construing the language "a deficiency has been asserted" to mean "a deficiency has been determined" by the Commissioner in a notice of deficiency issued to the taxpayer. Thus, the Eighth Circuit stated in Sjodin : "This circuit has recently concluded [in Bartman] that the issuance of a deficiency by the IRS is a prerequisite for tax court jurisdiction over a petition for review from an IRS determination regarding relief available under section 6015." Sjodin v. Commissioner, 174 Fed. Appx. 359">174 Fed. Appx. 359, 97 A.F.T.R.2d (RIA) 2622">97 A.F.T.R.2d (RIA) 2622, 2006-1 U.S. Tax Cas. (CCH) P 50357">2006-1 U.S. Tax Cas. (CCH) P50357↩ (emphasis added).20. The Government took the same position on appeal of Ewing I to the Ninth Circuit.↩21. See supra note 20.↩22. See supra note 20.↩23. The only reasonable alternative to my reading of the Eighth Circuit's opinion in Bartman is that, because of the Eighth Circuit's interchangeable use of various terms that are not synonymous in the Federal tax law, that Court's holding as to the meaning of the phrase "against whom a deficiency has been asserted" is ambiguous. In this connection, I note that the Court Opinion states: "We construe Bartman's holding to be the sentence 'We agree with the Ninth Circuit that the tax court lacks jurisdiction under section 6015(e) unless a deficiency was asserted against the individual petitioning for review'". Court op. pp. 14-15 note 7 (emphasis added). That statement of the Court Opinion ignores what the Eighth Circuit stated its holding to be in Bartman. The Eighth Circuit stated: "Applying the statute's plain language, we hold that the tax court had no jurisdiction to review Bartman's petition for review of the IRS's denial of her tax year 1997 refund request because no deficiency had been assessed against Bartman for tax year 1997." Bartman v. Commissioner, supra at 788↩ (emphasis added).24. Ewing Iwas not a case where tax may or may not have been underreported in a return. Ewing I was a case where the tax due shown in the return was not paid, the Commissioner assessed such unpaid tax, and the taxpayer sought relief under sec. 6015(f) in a stand-alone sec. 6015(f) "nondeficiency" case. SeeEwing v. Commissioner, 118 T.C. at 506↩.1. See, e.g., Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 104 S. Ct. 756">104 S. Ct. 756, 78 L. Ed. 2d 549">78 L. Ed. 2d 549↩ (1984).2. Assessment is a technical term in the tax field. It is generally used to describe the formal act of recording on the records of the Internal Revenue Service a tax liability that has been reported on a tax return, sec. 6201(a)(1), or that otherwise has become final and/or assessable, sec. 6213(b), (c), and (d). See sec. 6203↩.3. Petitioner filed his initial Form 8857 when he filed his amended return. However, respondent did not process that request. A copy of the initial Form 8857 is not in the record.↩4. The Commissioner's own regulations also are consistent with the legislative history. After sec. 6015(e) was amended in 2001, the Commissioner promulgated sec. 1.6015-5(b)(5), Income Tax Regs., entitled "Time and manner for requesting relief": (5) Premature requests for relief. -- The Internal Revenue Service will not consider premature claims for relief under section 1.6015-2, 1.6015-3, or 1.6015-4. A premature claim is a claim for relief that is filed for a tax year prior to the receipt of a notification of an audit or a letter or notice from the IRS indicating that there may be an outstanding liability with regard to that year. Such notices or letters do not include notices issued pursuant to section 6223 relating to TEFRA partnership proceedings. A premature claim is not considered an election or request under section 1.6015-1(h)(5). [Emphasis added.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620433/	Steamship Trade Association of Baltimore, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentS.S. Trade Asso. v. CommissionerDocket No. 6051-81United States Tax Court81 T.C. 303; 1983 U.S. Tax Ct. LEXIS 42; 81 T.C. No. 23; September 13, 1983, Filed 42 Decision will be entered for the respondent. Petitioner is a trade association of 49 employer-companies engaged in the business of maritime shipping and is exempt from tax as a business league under sec. 501(c)(6), I.R.C. 1954. Petitioner's exempt purpose is the promotion of labor-management harmony between its members and unions in the Port of Baltimore. During the years in issue, petitioner performed various administrative services with respect to the vacation pay and guaranteed annual income accounts provided for under the collective bargaining agreement. These activities include keeping track of how many hours each longshoreman worked for all petitioner's members, the computation of assessment rates to support the accounts, the collection of assessments from its members, the payment of benefits to eligible employees, and the accounting to the union with respect to these accounts. For its efforts, petitioner charges its members a fee based on the size of each member's hourly payroll. Held: The fees petitioner received from the administrative services performed with respect to the vacation pay and guaranteed annual income accounts were unrelated business income under43 sec. 512, I.R.C. 1954. Such fees were paid in proportion to services rendered and for services essentially commercial in nature. Neil S. Kurlander and A. Adgate Duer, for the petitioner.Howard Philip Newman, for the respondent. Sterrett, Judge. STERRETT304 By notice of deficiency dated February 11, 1981, respondent determined deficiencies in petitioner's Federal income taxes in the amounts of $ 149,318, $ 126,927, and $ 94,779 for the years 1975, 1976, and 1977, respectively. The sole issue for decision is whether petitioner's administration and management of the vacation benefit fund and the guaranteed annual income fund constitute the conduct of an unrelated trade or business, thereby subjecting petitioner to the unrelated business income tax imposed by section 511, I.R.C. 1954.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.Petitioner Steamship Trade Association of Baltimore, Inc., is a not-for-profit membership corporation incorporated46 under the laws of the State of Maryland. Its main office was located in Baltimore, Md., at the time of filing the petition herein. Petitioner filed a Return of Organization Exempt from Income Tax, Form 990, for each of the taxable years 1975, 1976, and 305 1977 with the Internal Revenue Service Center at Philadelphia, Pa.During the years at issue, petitioner was exempt from income tax as an organization qualified under section 501(c)(6). The members of petitioner are 49 employer-companies engaged in the business of maritime shipping and related services. Each of petitioner's members pays an equal amount of dues, $ 350 per year, to petitioner.The purpose of petitioner, as stated in article 1, section 2, of its bylaws is:to promote the interests of the Port of Baltimore and vicinity, to further the common interests of those business establishments which are directly engaged in or render services to the maritime trade in the Port of Baltimore, to render assistance to the membership in the solution of their maritime problems, to maintain harmony between management and labor, to foster just and equitable principles and practices among those engaged in the maritime trade, 47 to cooperate with public officers, other organizations and associations who, through the exercise of their authority or the conduct of their activities, govern, regulate or promote any of the affairs of the Port for the betterment, expansion, development and prosperity of the Port.Part III(2) of the Certificate of Incorporation of petitioner states that it was formed: "(2) To promote just and friendly relations between members of the corporation and their employees and associations of employees." In this respect, petitioner has for many years negotiated and administered collective bargaining agreements for its members with the International Longshoremen's Association (hereinafter referred to as ILA) for the Port of Baltimore. 1The collective bargaining agreement negotiated by petitioner for its members with the ILA for the Port of Baltimore covering the period48 October 1, 1974, through September 30, 1977, has been stipulated into evidence. It provides for a guaranteed annual income account to insure that all eligible employees covered by the agreement, who are properly registered, shall receive an annual income of at least 1,900 hours times a specified hourly rate of pay per contract year. It also sets forth a number of circumstances under which hours will 306 be debited in determining the guaranteed annual income payments to be made to eligible employees.In addition, the collective bargaining agreement provides for vacation pay to eligible employees. An employee who has received credit for not less than 675 hours and not more than 1,099 hours is entitled to 1 week's vacation pay; while an employee who has received credit for not less than 1,100 hours and not more than 1,299 hours is entitled to 2 weeks' vacation pay. The employee can receive additional weeks of vacation pay, up to a maximum of 6 weeks, if he satisfies more stringent hourly credit requirements. The collective bargaining agreement contains provisions outlining the circumstances under which employees will receive credit towards the computation of vacation pay eligibility. 49 The calculation of both guaranteed annual income pay and vacation pay under this collective bargaining agreement is complicated by the fact that the union employees covered by the agreement will generally work for a number of different employer-members of petitioner during any given time period. Consequently, since eligibility for both types of pay is based upon hours worked, single employer-members of petitioner are generally unable to determine their respective accrued liabilities for vacation and guaranteed annual income pay. Petitioner eradicates this problem by serving as a central repository for payroll information. Petitioner collects the payroll information, transmits this information to the Service Bureau Corp., which puts the information in a usable format, computes the assessment rate to support the accounts, administers the collection and disbursement of funds from the members, and reports to the ILA with respect to these functions.Petitioner's members make payments to the guaranteed annual income account and vacation pay account, which payments are deposited by petitioner in a bank account under its control. For the years in question, each employer-member paid a 50 fee to petitioner per man-hour on behalf of each worker in order to fund the vacation pay account. The fee per man-hour was $ 0.80 from January 1, 1975, to September 30, 1975; $ 1.10 from October 1, 1975, to April 30, 1976; $ 1.30 from May 1, 1976, to September 30, 1976; and $ 1.45 from October 1, 1976, through December 31, 1977. Petitioner retained $ 0.08 per 307 man-hour of these payments as its own fee for administering this account.With respect to the guaranteed annual income account, each employer-member paid a fee to fund this account based on each member's hourly payroll at the rate of $ 0.15 per man-hour. Petitioner retained $ 0.02 per man-hour as its fee for administering this account.The vacation pay and guaranteed annual income assessments are collected solely from members of petitioner. Petitioner has never attempted to perform administrative services for nonmembers.Petitioner retained $ 606,350, $ 540,932, and $ 502,323 in 1975, 1976, and 1977, respectively, as its fees for administering the vacation pay and guaranteed annual income accounts. These retained fees represent 10.1 percent, 7 percent, and 5.6 percent of petitioner's gross receipts in 1975, 1976, 51 and 1977, respectively.Petitioner pays the expenses of administering the vacation pay and guaranteed annual income accounts out of its retained fees. The major portion of such expenses are payments to the Service Bureau Corp., a commercial for-profit corporation, which is not related to petitioner. The Service Bureau Corp. provides computer services whereby it coordinates the information received from petitioner and puts it into a form petitioner can use to track each longshoreman's eligibility for benefits. 2 Petitioner transfers the relevant information to the Service Bureau Corp. without performing any substantial services so that if the members chose, they could have transmitted the information directly to the Service Bureau Corp. However, the Service Bureau Corp. is not in the business of interpreting provisions of collective bargaining agreements or attempting to resolve labor-management disputes.In return for the computer services received from 52 the Service Bureau Corp., petitioner pays a substantial fee, approximately $ 300,000 per year. The amounts retained by petitioner after paying this and other administrative expenses are used for its general operational purposes and to meet any 308 emergency that might arise, such as a prolonged strike or a shutdown as a result of an accident or natural disaster.In his notice of deficiency, respondent determined that petitioner's administration and management of the vacation pay and guaranteed annual income accounts constituted the conduct of an unrelated trade or business and that, therefore, the income from such activities was unrelated business taxable income subject to the tax on such income. 3OPINIONSection 501(c)(6) provides a tax exemption for the following organizations:(6) Business leagues, chambers53 of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.The above definition is amplified in section 1.501(c)(6)(1), Income Tax Regs., as follows:A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. * The parties have stipulated that petitioner qualified54 as an organization described in section 501(c)(6) and the regulations thereunder for the tax years in question. However, notwithstanding its qualification under these provisions, petitioner may still be liable for the tax imposed by section 511 if it has any unrelated business taxable income (hereinafter referred to as UBTI). UBTI is defined in section 512(a)(1) as the gross 309 income derived by any organization from any unrelated trade or business regularly carried on by it, less allowable deductions and other adjustments provided in section 512(b). The phrase "unrelated trade or business" is defined in section 513(a) as any trade or business the conduct of which is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance of the organization's exempt purpose or function. Therefore, gross income of an exempt organization is includable in the computation of UBTI if: (1) The income is derived from a trade or business; (2) the trade or business is regularly carried on by the organization; and (3) the conduct of the trade or business is not substantially related (other than55 through the production of funds) to the organization's performance of its exempt function. Sec. 1.513-1(a), Income Tax Regs.In the instant case, petitioner's exempt purpose is the promotion of labor-management harmony between maritime employers and unions in the Port of Baltimore. In furtherance of this exempt purpose, petitioner performs certain services -- the negotiation of collective bargaining agreements and the settling of grievances between longshoremen and employers -- which respondent concedes are within the scope of section 501(c)(6) because they promote the common interests of the industry. However, in addition to petitioner's roles as a contract negotiator and an arbitrator of contractual disputes, petitioner also performs several administrative activities with respect to the vacation pay and guaranteed annual income accounts. These activities include the keeping track of how many hours each longshoreman worked for all petitioner's members, the computation of the assessment rates to support the accounts, the collection of assessments from its members, the payment of benefits to eligible employees, and the accounting to the union with respect to the accounts. For 56 these services, petitioner charges its members a fee based on the size of each member's hourly payroll. Respondent asserts that these activities are severable from petitioner's activities as a contract negotiator and arbitrator and are not part of petitioner's exempt function. It is thus our task to determine whether the income from these activities is includable in petitioner's UBTI.310 A. Trade or business.The primary objective of the adoption of the unrelated business income tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt organizations on the same tax basis as the taxable business enterprises with which they compete. Sec. 1.513-1(b), Income Tax Regs.Section 513(c) provides the following clarification of the trade or business requirement embodied in section 513:SEC. 513(c). Advertising, Etc., Activities. -- For purposes of this section, the term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services. For purposes of the preceding sentence, an activity does not lose identity as a trade or business merely 57 because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Where an activity carried on for profit constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely because it does not result in profit.Thus, under this section, any activity which is carried on for the production of income from the sale of goods or performance of services constitutes a trade or business for purposes of the tax on unrelated business income. Accordingly, respondent asserts that petitioner's administrative activities with respect to the vacation pay and guaranteed annual income accounts constituted the performance of services for the production of income and thus satisfy the trade or business requirement.Petitioner, on the other hand, contends that its administrative activities are not conducted in a commercial manner and therefore should not be considered a trade or business. In support of this contention, petitioner argues that (1) in every major port in the United States, trade associations perform58 the administrative functions performed by it; (2) it would not be feasible to engage the services of a business concern to carry out the administrative activities it performs since administration of the accounts requires interpretation of complex provisions of the collective bargaining agreement; (3) it would not be feasible to permit a commercial organization to administer the accounts because of the need to preserve the confidentiality of the payroll information; (4) the only activities which 311 could be performed by a commercial organization in the administration of the vacation pay and guaranteed annual income accounts are performed by the Service Bureau Corp.; and (5) its administrative activities are not performed in a manner which has the characteristics of a trade or business under section 162. We will examine each of these contentions individually.With respect to petitioner's first contention that the administrative functions performed by it are performed by trade associations in every major port in the United States, petitioner has failed to carry its burden of this assertion. The only evidence introduced on this point was the uncorroborated testimony of Mr. William59 J. Detweiler, the president of petitioner, who stated that he was not aware of any third-party commercial organizations that perform the administrative functions of petitioner. There are several problems with this testimony. First, while we do not doubt the honesty of Mr. Detweiler, he worked in only two ports, and petitioner has failed to establish that he had firsthand knowledge of what was done in other ports. Second, we are not sure what administrative functions Mr. Detweiler was referring to in his testimony since he did not testify specifically about those activities at issue in this case. Finally, Mr. Detweiler did not state affirmatively that no commercial organization performed the services at issue; his answer to the relevant question was far from definitive.With respect to petitioner's second assertion that it would not be feasible to engage the services of a business concern to carry out the administrative activities it performs because such activities involve the interpretation of complex provisions of the collective bargaining agreement, petitioner misconstrues the point argued by respondent that there is a crucial distinction between petitioner's role as a labor60 negotiator and arbitrator and its role as a recordkeeper and collection and disbursement agent. Respondent has conceded that petitioner's activities as a labor negotiator and arbitrator are part of its exempt function and that it is only petitioner's activities as a recordkeeper and collection and disbursement agent that constitute an unrelated trade or business. We agree with respondent that these activities are severable and should be examined separately.312 With respect to petitioner's third contention that it would not be feasible for a commercial organization to administer the accounts because of the need to preserve the confidentiality of the payroll information, we do not believe that petitioner has adequately established either the need for confidentiality or the fact that its administration of these activities insures such confidentiality. Petitioner has failed to present any evidence, other than Mr. Detweiler's opinion, that the disclosure of payroll information could harm one of its members. Petitioner's members compete for business, are subject to the same union work rules regarding the number of workers required in a gang, and pay the same wages. The only 61 factor that might vary is the time required to complete a job; however, petitioner has failed to introduce any evidence that a work gang works faster for one employer than another. Consequently, each member should know or be able to calculate how many labor hours are required for a job based on its own experience. There is simply no evidence in the record to substantiate petitioner's claim for a need of confidentiality of the payroll information in question. Furthermore, there is no evidence in the record proving that it would be harder to obtain the information from petitioner than an outside business enterprise. After all, petitioner already transmits the payroll information to the Service Bureau Corp., which itself is a commercial enterprise. Finally, even assuming that disclosure of the payroll information could create a competitive advantage for one member, secrecy benefits individual members, not the industry as a whole. Even if one of petitioner's members lost a contract because of the disclosure of the payroll information in question, the work still would be done by another one of petitioner's members. The identity of an individual contractor would make no difference62 to the industry as a whole, only to the two members directly involved.With respect to petitioner's fourth contention that the only activities that could be performed by a commercial organization are being performed by the Service Bureau Corp., we simply do not find this argument convincing. We see no reason why some or all of the activities performed by petitioner could not be performed by either the Service Bureau Corp. or one of its competitors, such as a bank and/or accounting firm. A commercial business could report the payroll information to 313 the Service Bureau Corp., receive it back, collect the money from petitioner's members pursuant to the information received, and pay the benefits to the union employees. By performing these functions, petitioner is competing with nonexempt organizations.Finally, with respect to petitioner's fifth contention that its administrative functions are not performed in a manner that has the characteristics of a trade or business under section 162, petitioner relies primarily on the fact that the vacation pay and guaranteed annual income assessments are raised solely from its members and that it has never advertised the availability63 of its services to nonmembers. In advancing these arguments, petitioner ignores the definition of the term "trade or business" under section 513(c), which states that a trade or business includes "any activity which is carried on for the production of income from the sale of goods or the performance of services." Petitioner clearly sells a service for which it receives a substantial sum of money. In fact, a large portion of its receipts, over which it has discretionary control, are received by reason of its performing the challenged services. In a recent case, we held that, where a corporate taxpayer is involved, "the determinative factor in resolving the trade or business issue is whether the activity was engaged in with the intent to earn a profit." Professional Insurance Agents v. Commissioner, 78 T.C. 246">78 T.C. 246, 262 (1982), on appeal (6th Cir., Aug. 13, 1982). We think that requirement is clearly satisfied in the present case. The service performed was of plainly commercial nature. Petitioner receives membership dues of less than $ 20,000 per year, which constitutes only a small fraction of its gross revenues. Petitioner contends that substantially64 in excess of 50 percent of its gross revenues are derived from vacation pay and guaranteed annual income assessments and that without these fees, petitioner's members' dues would have to be raised substantially. There is thus an obvious profit motivation with respect to the activities in question. Accordingly, we hold that such activities constituted a trade or business activity for purposes of section 513(c).B. Regularly carried on.The second requirement that must be met in order to impose the tax on UBTI is that the trade or business be "regularly 314 carried on." Petitioner has advanced no argument in this case that its activities with respect to the vacation pay and guaranteed annual income accounts were not regularly carried on nor would we look with favor upon such argument in light of the ongoing and continuous nature of its activities. Accordingly, we hold that petitioner's trade or business was regularly carried on within the meaning of sections 1.513-1(a) and 1.513-1(c), Income Tax Regs.C. Not substantially related.The third and final requirement that must be met in order to impose the UBTI tax is that the conduct of the trade or business must not65 be substantially related to the organization's performance of its exempt function. This requirement necessitates an examination of the relationship between the business activities that create the income in question and the accomplishment of the organization's exempt purposes. Sec. 1.513-1(d)(1), Income Tax Regs. Section 1.513-1(d)(2), Income Tax Regs., provides the following explanation of the meaning of "substantially related":(2) Type of relationship required. Trade or business is "related" to exempt purposes, in the relevant sense, only where the conduct of the business activities has causal relationship to the achievement of exempt purposes (other than through the production of income); and it is "substantially" related," for purposes of section 513, only if the causal relationship is a substantial one. Thus, for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of those purposes. Where the66 production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization, the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade or business. Whether activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved.Thus, in order for petitioner to avoid the tax on UBTI, it must prove that its activities with respect to the vacation pay and guaranteed annual income accounts contribute directly and 315 importantly to the accomplishment of one or more of its exempt functions. In this regard, section 513(a) specifically states that the mere satisfaction of an exempt organization's need for operational funds is insufficient to establish the type of relationship necessary to avoid the tax.According to section 1.501(c)(6)-1, Income Tax Regs., an exempt business league is "an association of persons having some common business interest, the purpose of which is to promote such67 common interest and not to engage in a regular business of a kind ordinarily carried on for profit." To this end, petitioner's bylaws, to quote again, state that its general purpose is:to promote the interests of the Port of Baltimore and vicinity, to further the common interests of those business establishments which are directly engaged in or render services to the maritime trade in the Port of Baltimore, to render assistance to the membership in the solution of their maritime problems, to maintain harmony between management and labor, to foster just and equitable principles and practices among those engaged in the maritime trade, to cooperate with public officers, other organizations and associations who, through the exercise of their authority or the conduct of their activities, govern, regulate or promote any of the affairs of the Port for the betterment, expansion, development and prosperity of the Port.Petitioner's activities as a contract negotiator and arbitrator admittedly contributed to these exempt purposes since they benefit the industry as a whole rather than any individual member. Petitioner is not paid for these services directly but does receive dues of an equal68 amount from each member.However, petitioner's activities as a contract negotiator and arbitrator are accomplished separately from, and are unrelated to, petitioner's administrative activities of keeping track of each employee's hours and the collecting and disbursing of funds for the vacation pay and guaranteed annual income accounts. In return for these services, petitioner charges each member a fee based on the size of each member's hourly payroll. Petitioner does pay out a large portion of the fee it collects from the members to the Service Bureau Corp. in exchange for its computer processing of the information kept by petitioner. However, since the amounts paid out to the Service Bureau Corp. constitute only approximately half of the fees charged, petitioner still realizes a substantial profit from 316 the fees it receives from its members. It is this activity alone that respondent contends fails the test set forth under the regulations and is not part of petitioner's exempt function. We agree with respondent.Petitioner's administrative activities with respect to the vacation pay and guaranteed annual income accounts benefit each member of petitioner individually 69 rather than the industry as a whole. Each of petitioner's members is bound by the terms of the collective bargaining agreement negotiated by petitioner for its members. Under such agreement, each member is individually liable to contribute a certain amount of money per man-hour to the vacation pay and guaranteed annual income accounts. It is thus to each member's benefit to find an economical way to fulfill its individual responsibilities set forth under the collective bargaining agreement.In the instant case, petitioner performs a function that allows its members to share collectively the costs of their individual liabilities under the collective bargaining agreement. Were it not for petitioner performing these administrative activities, it would be incumbent on petitioner's members to procure a profit-making business enterprise to fulfill the ministerial role performed by petitioner. In exchange for its services, petitioner charges each member a different fee, based on the extent its services benefit each particular member. Petitioner's members thus receive a proportional benefit from their cost-sharing arrangement with petitioner based on the amount that each member utilizes70 petitioner's services. In Evanston-North Shore Board of Realtors v. United States, 162 Ct. Cl. 682">162 Ct. Cl. 682, 320 F.2d 375">320 F.2d 375, 378-379 (1963), cert. denied 376 U.S. 931">376 U.S. 931 (1964), the court emphasized just such proportional benefit as the most important factor demonstrating that a multiple listing system operated by member realtors was not exempt under section 501(c)(6). Similarly, in Contracting Plumbers Cooperative Restorration Corp. v. United States, 488 F.2d 684">488 F.2d 684, 688 (2d Cir. 1973), cert. denied 419 U.S. 827">419 U.S. 827 (1974), the court held that, where individual benefits are precisely proportional to a member's financial involvement in an organization, such organization is not exempt under section 501(c)(6) since the fundamentally nonexempt purpose of providing a necessary service at a reduced cost becomes too clear to be ignored. We 317 find the presence of such proportional benefits to be the determinative factor in this case. 471 In conclusion, we find that the administrative services performed by petitioner clearly benefited its members individually. Additionally, the profits received from its carrying on of these activities generate funds to finance its other exempt functions. However, these benefits are not enough to establish the requisite causal relationship between the activities in question and its exempt purposes. Accordingly, we hold that the income from petitioner's administrative activities with respect to the vacation pay and guaranteed annual income accounts was derived from a regularly carried on trade or business bearing no substantial relationship to petitioner's exempt function and is thus subject to the tax imposed by section 511(a).Decision will be entered for the respondent. Footnotes1. To facilitate these negotiations, petitioner has formed a trade practice committee, which represents it in negotiating collective bargaining agreements.↩2. Petitioner retains ownership of the computer programs.↩3. It is stipulated that if petitioner is liable for the unrelated business tax under sec. 511↩, the amounts of the deficiencies for 1975, 1976, and 1977 are correctly set forth by the statutory notice.4. In reaching this decision, we find our recent decision in Kentucky Municipal League v. Commissioner, 81 T.C. 156">81 T.C. 156(1983), distinguishable. The petitioner in that case, the Kentucky Municipal League, was a nonprofit organization exempt from tax under sec. 501(c)(4). The league was organized, owned, and operated by the cities of Kentucky to promote practical, effective, and economical government. Since 1954, the league assisted 70 of its members in the collection of unpaid license taxes in exchange for 50 percent of the amounts collected. The league did not collect the unpaid taxes itself relying instead on the assistance of a nonexempt organization which retained 37.5 percent of the taxes collected in exchange for its services. On its return for the tax year in question, the league reported gross receipts of $ 121,998, including its share of the unpaid taxes. Of this amount, 42 percent was composed of dues from members and only 24 percent was derived from the collection of unpaid taxes. The Commissioner determined that the league's share of unpaid taxes constituted unrelated business taxable income; however, we disagreed, finding that the league's collection activity was substantially related to the performance of its exempt function.We find our holding in Kentucky Municipal League distinguishable from our decision in the present case on three grounds. First, the receipts from petitioner's administrative activities with respect to the vacation pay and guaranteed annual income accounts represent a substantially larger percentage of its gross receipts than those from the collection of unpaid taxes did in Kentucky Municipal League. Second, in Kentucky Municipal League↩, the petitioner therein was performing a service which was not available from a commercial enterprise. Third and more importantly, each of the Kentucky Municipal League's members was itself a tax-exempt entity. Thus, it made no difference in that case that the activity in question clearly benefited some of the League's members individually rather than the group as a whole.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620434/	The Callaway Family Association, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentCallaway Family Asso. v. CommissionerDocket No. 554-78XUnited States Tax Court71 T.C. 340; 1978 U.S. Tax Ct. LEXIS 15; December 5, 1978, Filed 15 Petitioner is a family association formed as a nonprofit corporation to study immigration to and migration within the United States by focusing upon its own family history and genealogy. The administrative record shows its activities included researching the genealogy of its members for the ultimate purpose of publishing a family history. Respondent denied petitioner's application for an exemption from taxation under secs. 501(c)(3) and 501(a), I.R.C. 1954. Held: Petitioner's family genealogical activities are not insubstantial, and are not in furtherance of an exempt purpose, but rather serve the private interests of petitioner's members. Petitioner is therefore not operated exclusively for exempt purposes. Bruce R. Hopkins, for the petitioner.Byron J. Furseth, for the respondent. Wilbur, Judge. WILBUR340 OPINIONRespondent determined17 that petitioner did not qualify for exemption from Federal income tax under section 501(a) as an organization described in section 501(c)(3). 1 Petitioner challenges respondent's determination and has invoked 341 the jurisdiction of this Court for a declaratory judgment pursuant to section 7428. 2 The issue for our decision is whether petitioner is operated exclusively for educational purposes within the meaning of section 501(c)(3).This case was submitted for decision18 at an oral hearing held on October 12, 1978. The stipulated administrative record was submitted to this Court under Rule 217(b)(1), Tax Court Rules of Practice and Procedure. The evidentiary facts and representations contained in the administrative record are assumed to be true for purposes of this proceeding, and the administrative record is incorporated hereby by reference.Petitioner the Callaway Family Association, Inc., was incorporated on September 3, 1975, as a nonprofit corporation under the District of Columbia Non-Profit Corporation Act. It filed a Form 1023, Application for Recognition of Exemption, under section 501(c)(3) on December 28, 1976. The application was filed with the Field Office of the Internal Revenue Service in Washington, D.C., and was forwarded to the Office of the District Director of the Internal Revenue Service in Baltimore, Md. Respondent issued a final notice of determination dated October 20, 1977, affirming a prior adverse determination of June 8, 1977, which denied petitioner exemption under section 501(c)(3). Respondent determined that petitioner's genealogical activities are not in furtherance of an exempt purpose specified in section 501(c)(3)19 and that they serve the private interests of the Callaway family members.Petitioner's articles of incorporation set forth its purposes as follows:A. To study British immigration to the North American colonies in the early colonial period and to further knowledge and understanding of the contribution made by the descendants of those early colonists to the subsequent growth and development of the continental United States by tracing the migratory patterns of succeeding generations and by researching the social and economic milieu in which they lived. In abstracting and collecting historical data in furtherance of this objective, to concentrate research on the public and family records of the Callaway (as variously spelled) and related families, as being typical of the times and places in which they lived;342 B. To issue publications featuring abstracts of the raw historical and genealogical data collected and generalized articles based thereon and, ultimately, a synthesis of all collected data in the form of a history of social and economic development in pertinent parts of the United States, as typified by the growth and dispersal of the Callaway and related families20 ; andC. To provide instruction and education in the methodology of historical, biographical, and genealogical research, encouraging the compilation and preservation of accurate and complete records, and to promote scholarly writing.[Emphasis added.]These purposes are to be accomplished by activities including the annual publication of The Callaway Journal; 3 annual "meetings" with lectures; 4 workshops in genealogy research; and the ultimate publication of the history of the Callaway family. 5 This history, petitioner states, will be "an effort to chronicle the process of the peopling of America as seen through the eyes of one family."21 Petitioner stated in its application that a service made available to its members as a direct result of its activities is "assistance with the compilation of their own pedigrees." 6 In further description of the benefits and services it would provide, petitioner stated in its application:The "benefits" to be derived from this genealogical activity are highly intangible, but nevertheless real. Self-knowledge can only lead to greater family stability, benefiting both the individual and society, and a greater appreciation of the common heritage shared by all Americans.Petitioner presently has about 600 members. Petitioner actively solicited these members by means of letters directed primarily to Callaways throughout the country. Though 22 petitioner permits anyone to join its association, the 1975 solicitation letter was addressed to "My dear Callaway kin," and spoke of the need to create "a broad-based family association which could combine the time, talent, and financial support of an ever-increasing membership."343 In the 1976 solicitation letter, petitioner stated that:The immediate focus of our historical studies is the genealogy of the Callaway family, tracing the descent of present members as completely and accurately as surviving records permit.Ultimately, when the records have been sufficiently researched, a history of the Callaway family will incorporate the pedigrees of living descendants.The letter went on to state that a major objective and resulting by-product of its other activities would be to identify and locate the living descendants of the original Callaway immigrants. This would "enable them to become acquainted with each other and enjoy the fellowship of family ties at annual and other meetings of a social nature."The issue for our decision is whether petitioner is operated exclusively for educational purposes within the meaning of section 501(c)(3). Petitioner contends that its purposes23 are educational and benefit the general public. Petitioner maintains that its genealogical research and associated activities are a means to the end of providing insights to our country's history by use of a methodology which focuses on one family's development.Respondent, on the other hand, contends that the petitioner's purposes primarily serve the private interests of its members, the Callaway family, no matter how diverse and widespread that family might be. Respondent maintains that the administrative record supports a finding that petitioner aimed its organizational drive at Callaway family members, and appealed to them on the basis of their private interests. In its ruling letter dated October 20, 1977, respondent concluded that petitioner did not qualify for exempt status because:More than an insubstantial part of [petitioner's] activities consists of the compilation and publication of a genealogical history of the Callaway family, and this activity is not in furtherance of an exempt purpose specified in section 501(c)(3) of the Internal Revenue Code. Also [petitioner's], organization is serving the private interests of members of the Callaway family, rather than serving24 a public interest.Petitioner has the burden of proof and to prevail must show that respondent's ruling is incorrect. Rule 217(c)(2)(i), Tax Court Rules of Practice and Procedure. We find that petitioner has failed.Petitioner argues that there are "hundreds, perhaps thousands" of individuals who would become linked by participation 344 in its association. However, even though "family" may refer to many individuals with a common heritage, their interests, because of the size and diversity of the group, do not become a "public" interest. The mere number of members alone does not determine whether an organization's activities accomplish an exempt purpose. Whether there were 6 or 600 members, it is evident that they joined only because the purposes and activities of the organization were "for" and "about" Callaways. 7Respondent concedes that petitioner may have some "educational" purposes, 25 as that term is used in section 501(c)(3), 826 such as its lectures, panels, and publication of The Callaway Journal. However, as respondent noted on reply brief, petitioner was not denied exemption because it has no exempt purposes, but rather because its activities, taken as a whole, are not "exclusively" dedicated to exempt purposes. 9 Petitioner also engages in nonexempt activities serving a private interest, and these activities are not insubstantial. We note specifically petitioner's emphasis on compiling members' family lines and the Callaway family history. Petitioner's activities, when aggregated, demonstrate that primarily private interests are being served. Any educational benefit to the public created by petitioner's activities is incidental to this private purpose.Finally, petitioner relies heavily on Rev. Rul. 71-580, 2 C.B. 235">1971-2 C.B. 235, in which respondent granted tax-exempt status to a family association that compiled a family's genealogy for religious purposes. Petitioner insists that respondent must follow his own revenue ruling. However, we need not pass on this argument for we find that Rev. Rul. 71-580 is distinguishable.345 Rev. Rul. 71-580 involved the narrow issue27 whether a family association furnishing "genealogical information the [Mormon] Church needs in order to conduct certain religious ordinances in accordance with basic religious doctrines" is an exempt religious organization under section 501(c)(3). The Mormon Church follows a practice of setting up family groups to study the genealogy of each member family back to Adam and Eve. This is part of a broader goal of the church to record the names of all deceased persons and to perform baptism upon them, since Mormon theology holds that salvation for the dead can be effected by the living. The names of all known ancestors collected by each family group are stored in a central location. These records, they believe, will be the basis for judgment on the last day, since deceased ancestors of members may be accepted into the church through their living family members.It is evident that family genealogical associations play an integral role in Mormon religious practices. Accordingly, Rev. Rul. 71-580 analogized the exempt status allowed for this practice of the Mormon Church to cases which have upheld trusts for other religious practices, such as*28 Catholic masses for the dead and Hebrew memorial services for the repose of souls. The law of charity has traditionally recognized trusts for these and similar religious purposes as charitable on the theory that the religious purpose of the trust is of spiritual benefit to all the members of that faith and to the general public as well. We believe that this is a sufficient basis for distinguishing petitioner's case from the narrow circumstances encompassed in Rev. Rul. 71-580.Accordingly, for the reasons set forth we hold that petitioner failed to meet the requirements of section 501(c)(3), and that it does not qualify for tax-exempt status under that section.An appropriate decision will be entered. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise stated.↩2. The statutory prerequisites have been satisfied: petitioner exhausted its administrative remedies, sec. 7428(b)(2); the petition was filed by the organization whose qualification is at issue, sec. 7428(b)(1); and petitioner mailed its petition before the 91st day after respondent mailed his determination in this matter, sec. 7428(b)(3). See also Rule 210(c), Tax Court Rules of Practice and Procedure.↩3. Payment of annual dues is a prerequisite for membership and for receipt of the journal. Though major libraries may receive the journal free of charge, nonmembers and other libraries will be charged $ 5 a copy.↩4. The first annual meeting of the Callaway Family Association was held at Callaway Gardens, Pine Mountain, Ga., Oct. 1-3, 1976, and included speakers and a panel discussion.↩5. Ten percent of all dues received are placed in a savings account to cover the cost of publishing a Callaway family history. On Apr. 15, 1977, $ 999.49 was in this account.↩6. Petitioner stated that: "A research 'bank' has already been established under the custody and supervision of the Association's genealogist and will be constantly added to from year to year. All of this information will be available to answer individual inquiries of members."↩7. Vol. 1, 1976, of The Callaway Journal, Editor's Note: "The Journal is for you, about you, and it needs your talent."↩8. Sec. 1.501(c)(3)-1(d)(3)(i), Income Tax Regs.↩, refers to the term "educational" as relating to "the instruction of the public on subjects useful to the individual and beneficial to the community." It is important to note that especially in the area of defining "education," courts traditionally have broadly construed what would be considered "useful to the individual and beneficial to the community." Though the subject need not appeal to all individuals, its benefits must not be limited to one defined group such as the Callaway clan. Rather, there must be an indefinite group of beneficiaries.9. See Better Business Bureau v. United States, 326 U.S. 279">326 U.S. 279, 283 (1945): "the presence of a single non-educational purpose will destroy the exemption regardless of the number of truly educational purposes." In Baltimore Regional Joint Board Health and Welfare Fund, Amalgamated Clothing & Textile Workers Union v. Commissioner, 69 T.C. 554">69 T.C. 554↩ (1978), this Court applied the Better Business Bureau principle in determining whether the taxpayer organization served the private interests of its members.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620435/	Enrique Kaufman and Susana Kaufman v. Commissioner.Kaufman v. CommissionerDocket No. 1883-71.United States Tax CourtT.C. Memo 1973-121; 1973 Tax Ct. Memo LEXIS 168; 32 T.C.M. (CCH) 525; T.C.M. (RIA) 73121; May 31, 1973, Filed 168 Scholarships and fellowships: Excludability: Resident in psychiatry. - The stipend received by a doctor who was serving a residency in psychiatry was not excludable from income as a scholarship or fellowship. The payments represented compensation for services rendered. Thomas A. Luken, 1003 First Nat'l Bank Bldg., Cincinnati, Ohio, for the petitioners. Rudolph L. Jansen, for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined deficiencies in the joint income tax liability of petitioners Enrique N. and Susana Kaufman for the taxable year 1969 in the amount of $901.97. The sole issue for our169 determination is whether petitioners are entitled to a fellowship exclusion under section 117, Internal Revenue Code of 1954, 1 in the amount of $3,600 for the taxable year before us. Findings of Fact Some of the facts are stipulated and are so found. The petitioners are husband and wife and on the date of filing the petition in this case they were residents of Cincinnati, Ohio. They filed their joint Federal income tax return for the calendar year 1969 with the district director of internal revenue at Cincinnati. Susana Kaufman is a party herein only because she joined in filing the return; further reference to "petitioner" shall mean Enrique Kaufman only. In 1958 petitioner received the degree of Doctor of Medicine from the University of Buenos Aires, School of Medicine, in Argentina. On July 16, 1968, he reported for duty at Rollman Psychiatric Institute (sometimes hereafter "Rollman") in Cincinnati. He was enrolled in a 3-year program for physicians with four years' experience in nonpsychiatric practice. Prior to his appointment at Rollman, 170 petitioner submitted an application to the Ohio Department of State Personnel. He also corresponded with Russell D. Steele, M.D., Chief of Research & Training at Rollman with regard to a resident's expected stipend, availability of living quarters for residents with families, costs of food, and the possibility of Rollman reimbursing petitioner for travel expenses to be incurred in bringing his family to Cincinnati. Steele replied that petitioner's stipend for the first year of residency would be $13,104, subject to approval by the departments of the State of Ohio having authority over such matters. Steele also furnished general information on costs of private rental housing and food prices and notified petitioner that Rollman was not able to pay petitioner's transportation fares or to extend credit. Petitioner's application was approved and he was placed on the payroll of the Department of Mental Hygiene & Correction of the State of Ohio. Federal income tax was withheld from his stipend, and he was furnished a Form W-2, Wage & Tax Withholding Statement for 1969. Rollman Psychiatric Institute was opened in 1955 in response to reform legislation in Ohio as well as many other states171 aimed at remedying inadequate and inhumane care of the mentally ill. Ohio added a Bureau of Psychiatric Training and Research to its Mental Hygiene Department and launched plans for three receiving hospitals providing short-term but intensive treatment of the mentally ill. There are now six psychiatric and receiving institutions in Ohio, and their function is distinguishable from that of a larger number of state hospitals for the mentally ill which provide extended care. Another function of Rollman is to provide training to doctors who wish to specialize in psychiatry. At the time Rollman was founded, it was thought that scientific advances in the field of psychiatry were lagging behind those of other medical specialties and that too few students and scientists were attracted to psychiatry. Towards the end of fulfilling one of its statutory goals of conducting training programs, Rollman offers classroom training which occupies 30 to 40 percent of the time of the residents. However, the residents are not obligated to render future services to the State of Ohio or its departments as a result of receipt of such instruction, nor are they encouraged to enter private practice in Ohio. 172 Section 5129.01(B), Ohio Revised Code, vests with the Bureau of Psychiatric Training and Research the authority to carry on research and investigation into the causes and prevention of mental illness. Rollman was not engaged in any scientific research work during the taxable year in question. Formerly, two psychologists were carrying on research on a part-time contractual basis into the relationship between mental illness and glue sniffing and certain drug use. The daily cost of treating a patient at Rollman is three to four times greater than that at larger hospitals which treat psychiatric patients. The staff at Rollman is large in comparison to the patient load and consists of 6 full-time psychiatrists, 11 university affiliated psychiatrists, and 29 residents such as the petitioner. However, the inpatient hospital at the institute contains only 125 beds; the outpatient clinic receives about 14,000 visits annually. Rollman receives preferential treatment from the Probate Courts in its vicinity as to referrals. Rollman has discretion to accept or reject cases referred to it from courts. In practice probate judges refer psychiatric cases to Longview173 State Hospital in Cincinnati unless it clearly appears that a patient referral would be particularly appropriate for Rollman and Rollman has space for the patient. Longview has no such option. In most other respects, the Rollman Institute operates like a typical organization rendering health care services to the general public. Notwithstanding instruction given residents in a classroom setting, Rollman is operated on the basis that psychiatric training is best acquired through exposure to patients and to actual diagnosis and therapy. The residents are rotated among Rollman and Longview State Hospital and the Dayton Childrens' Psychiatric Hospital. The stipends paid to residents are uniform and are increased in the second and third years of the program in accordance with a published pay scale. A lower pay scale applies to residents appointed to Rollman with less than four years of practice experience. The requirements for selection for an appointment at Rollman are a degree from a medical school and completion of an internship in a program approved by the American Medical Association. Rollman receives an average of 15 to 20 applications annually and grants 10 or 11 appointments.174 Financial need is not a factor in selecting the new appointees. Petitioner's first-year duties at Rollman included obtaining a complete medical history from newly admitted patients, conferring with a senior staff physician on his findings, issuing signed standing orders for treatment and care, prescribing sedatives, antibiotics, narcotics or anticoagulants if necessary. Petitioner is subject to the supervision of staff physicians in the performance of his duties. Ultimate Finding The stipend received in 1969 by petitioner from Rollman Psychiatric Institute constitutes compensation for services rendered by petitioner. Opinion A determination as to whether petitioner is entitled to exclude from income $3,600 of the stipend received from Rollman must focus on section 1.117-4(c), Income Tax Regs. The regulations under section 117 have specifically been upheld by the United States Supreme Court in Bingler v. Johnson, 394 U.S. 741">394 U.S. 741 (1969). Section 1.117-4(c) (2) states that an amount paid to an individual to enable him to pursue studies or research "primarily for the benefit of the grantor" is not considered a scholarship or fellowship grant. The regulation further175 provides that the "primary purpose" of the studies or research must be to further the education and training of the recipient "in his individual capacity" if the amount paid is to be deemed excludable under section 117. Petitioner does not stress any unusual features of his appointment; rather, it is the nature of his work at Rollman and the objectives of Rollman that petitioner basically urges in support of his contention that the stipend received constituted amounts received as a scholarship or fellowship. It cannot be denied that petitioner receives valuable training and indeed classroom instruction at Rollman. Yet we are not convinced that the primary purpose of such training is to enhance petitioner in his individual capacity and not merely to better prepare the petitioner to render psychiatric services for the benefit of Rollman and the State of Ohio. It appears more accurate to conclude that the training petitioner received was incidental to the services he performed. See Irwin S. Anderson, 54 T.C. 1547">54 T.C. 1547 (1970) and Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918 (1969). The greater emphasis on didactic instruction at Rollman and perhaps the more reflective176 nature of petitioner's specialty may superficially support the view that a psychiatry residency is different from nonpsychiatric residencies. There is no legal support for that view, however. Petitioner stresses that his services were not really essential because the Rollman staff was large. Therefore, petitioner's work at Rollman could be viewed as being primarily for his own benefit. We have encountered this argument before in Frederick Fisher, 56 T.C. 1201">56 T.C. 1201, 1215 (1971), which also involved the case of a resident in psychiatry. Whether or not the resident is indispensable, it cannot follow necessarily that he did not in fact render services and that he was not compensated for those services. Petitioner cites Wrobleski v. Bingler, 161 F. Supp. 901">161 F. Supp. 901 (W.D. Pa. 1958), which held that the stipend paid to a resident in psychiatry at the Western State Psychiatric Institute and Clinic in Pennsylvania constituted an excludable scholarship or fellowship. We distinguished this case in Fisher, supra, noting a finding that Western State Psychiatric Institute and clinic was primarily an institution for teaching and research was essential to the holding177 of the District Court. The Commissioner has pursued the distinction between service oriented and teaching institutions and the relevance of this distinction to the section 117 in Rev. Rul. 71-106, 1 C.B. 35">1971-1 C.B. 35, Rev. Rul. 72-70, 1 C.B. 39">1972-1 C.B. 39 and Rev. Rul. 72-568, 48 I.R.B. 5">1972-48 I.R.B. 5. We cannot conclude that the Rollman Psychiatric Institute is primarily a research and teaching organization. The Superintendent of Rollman, John T. Toppen, M.D., petitioner's witness (and the only witness - petitioner himself did not testify) stated that not much research has been carried on recently at Rollman. As for teaching, actual classroom or didactic instruction does not require even half the petitioner's time. Learning through exposure to patients, to which residents devote most of their time at Rollman, could not be deemed primarily a teaching function. The history of Rollman above, which we sketched in our fact findings, shows that it was established by the State of Ohio to remedy a deficiency in mental hygiene services in that state. Although Rollman has enjoyed certain privileges in that state, since its beginning it has served the mental health needs of the*178 general population of Cincinnati and its environs. We think Rollman is distinguished from hospitals that receive psychiatric cases only in that it provides short-term intensive care. We note also that many of the indicia of an employment relationship are present in petitioner's case. On previous occasions we have relied on the withholding of income tax at the source from the taxpayer's stipend, a fixed pay scale based on years of seniority, the lack of tailoring of the stipend to the needs of the individual recipient, and a large number of patient visits to the grantor's facility as an indication of compensation and not a scholarship or fellowship. See Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494 (1970); Jacob T. Moll, 57 T.C. 579">57 T.C. 579 (1972). We hold on the basis of the entire record that the stipend received by petitioner in 1969 was not a fellowship or scholarship within the meaning of section 117 but was taxable compensation under section 61. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise specified. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620437/	Estate of Annie Gibney, Deceased, Title Guarantee and Trust Company, Administrator v. Commissioner.Estate of Annie Gibney v. CommissionerDocket No. 6184.United States Tax Court1945 Tax Ct. Memo LEXIS 87; 4 T.C.M. (CCH) 878; T.C.M. (RIA) 45290; September 10, 194587 Henry F. Matheis, Esq., Room 809, 176 Broadway, New York, N. Y., for the petitioner. Thomas R. Charshee, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion KERN, Judge: Respondent determined a deficiency in the income tax of the decedent for the period January 1, 1942, to May 26, 1942, in the sum of $145.77. That part of the deficiency is here in issue which arises by reason of respondent's disallowance of the sum of $754.51 as a capital net loss. The decedent had sold two pieces of improved real estate at a loss of $1,754.51, which loss was claimed in full as a deduction but which was allowed by respondent only in the amount of $1,000. [The Facts] The facts are found to be as stipulated. The stipulation, which is short, is set out verbatim as follows: "1. The petitioner is the administrator of the Estate of Annie Gibney, who died on May 26, 1942, at the age of 72, and who hereinafter is referred to as the decedent. "2. The income tax return of the decedent for the period January 1, 1942 to May 26, 1942 was duly filed with the Collector of Internal Revenue for the 1st District of New York. "3. The principal source of income of the88 decedent was derived from mortgages on real estate. In order for decedent to protect her investments, it was necessary for her to take over certain of the properties, on which she held mortgages, through foreclosure proceedings. The foreclosed properties were immediately put up for sale and listed with the real estate agent, who operated and managed the properties for the decedent, pending their sale. "4. In the taxable period, decedent owned six pieces of real estate, which had been acquired through foreclosure proceedings, five of which were improved with dwellings and from which she derived rental income. The operation of said properties from which income was derived was conducted at a loss. One of said properties was acquired on November 22, 1941, and was sold on May 1, 1942. Another was acquired on March 25, 1936 and was sold on April 28, 1942. The sale of the two aforementioned properties resulted in a loss of $1,754.51, and in her income tax return for 1942, decedent claimed said loss as a deduction. A photostatic copy of decedent's income tax return for 1942 is attached hereto and marked exhibit '1-A'." This exhibit indicates that from one of the properties decedent received89 $120 as rent. She expended on account thereof $6.00 for repairs, $6.00 for renting commissions, $10.50 for insurance, $63.34 for taxes and $5.05 for water. Her net receipts were $29.11 to which was added "Adjustments on Sale Cr." of $42.73, and from the result was deducted $37.00 depreciation leaving a net profit of $34.84. From the other property decedent received $315 as rent. She expended on account thereof $10.90 for repairs, $51.75 for renting commissions, $166.22 for taxes and $30 for water. Her net receipts were $56.13 to which was added "Adjustments on Sale Cr." of $89.72, and from the result was deducted depreciation in the sum of $56.66 leaving a net profit of $89.79. Petitioner contends that, since the decedent operated the real estate for profit and received rent therefrom, the real estate was used in the trade or business of the taxpayer and is not to be considered as "capital assets" pursuant to the provisions of section 117 (a) (1) of the Internal Revenue Code. Respondent contends that decedent was not engaged in a trade or business, pointing out that her principal source of income was from investments in mortgages, that the operation of the90 real estate here in question which was acquired through foreclosure proceedings resulted in a loss and concludes that "since there was no deliberate investment in the property with a view of engaging upon a business and the houses were immediately put up for sale after foreclosure, it is submitted that such facts preclude the decedent from being considered as engaged in a trade or business." Ordinarily the operation of rental property constitutes a trade or business, and the property itself is not a capital asset. Fackler v. Commissioner, 133 Fed. (2d) 509. Respondent does not dispute this general rule but argues that the facts of the instant case make the general rule inapplicable. These facts, we gather from respondent's brief, are: (1) the acquisition of the property was involuntary, (2) the operation of the property was not intended to be of long duration, (3) only a small part of decedent's income was derived from the rental of real estate, and (4) the net result of the operation of the particular rental properties was a loss. Respondent cites no cases which would indicate an exception to the general rule on account of the existence of any of these facts, nor*91 have we found any. To the contrary, the fact upon which respondent seems to rely most heavily in establishing an exception to the general rule, i.e., the fact that the acquisition of the property was involuntary, has been held to be without significance. A. L. Carter Lumber Co. v. Commissioner, 143 Fed. (2d) 296. In our opinion the other facts pointed out by respondent are equally immaterial. We decide the issue presented in favor of petitioner. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620438/	Estate of Marcellus L. Joslyn, Robert D. MacDonald, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Joslyn v. CommissionerDocket No. 5591-67United States Tax Court57 T.C. 722; 1972 U.S. Tax Ct. LEXIS 170; March 9, 1972, Filed 170 Decision will be entered under Rule 50. The estate incurred expenses in selling stock in a secondary offering. In computing the value of the stock for inclusion in the gross estate, the respondent ascertained the mean between the high and low selling prices of the stock at the date of death and reduced the value so ascertained by the expenses incurred in the secondary offering. Held, since the expenses of selling the stock were taken into consideration in computing the value of the gross estate, the petitioner may not also deduct them as expenses of administration under sec. 2053(a)(2), I.R.C. 1954. Malcolm George Smith, for the petitioner.Allan D. Teplinsky and Norman H. McNeil, for the respondent. Simpson, Judge. SIMPSON723 The respondent determined a deficiency in the Federal estate tax of the Estate of Marcellus L. Joslyn in the amount of $ 150,710.74. A number of issues have been settled; the issue remaining for decision is whether certain expenses incurred in connection with the sale of stock, having been allowed as a reduction in the value of the stock to be included in the gross estate, are also deductible as expenses of administration under section 2053 of the Internal Revenue Code of 1954. 171 1 FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.Marcellus L. Joslyn (the decedent), a widower, died testate a resident of California on June 30, 1963. The petitioner, the Estate of Marcellus L. Joslyn, Robert D. MacDonald, executor, maintained its office in Santa Monica, Calif., at the time of filing its petition in this case. A Federal estate tax return for Marcellus L. Joslyn's estate was filed with the district director of internal revenue, Los Angeles, Calif.On the date of his death, the decedent owned 66,099 shares of the common stock of Joslyn Mfg. & Supply Co. (the Joslyn stock). During the course of its administration, the estate was involved in certain costly litigation concerning the admissibility to probate and the validity of the decedent's will. As a result thereof, the estate incurred substantial extraordinary executor's and attorney's fees. In order to pay such fees and the balance of Federal and State taxes, it was necessary to sell assets of the estate, and a portion of the Joslyn stock held by the petitioner was selected as an asset to be sold for such purposes. 172 It was agreed that such stock would be sold through an underwriting group in a "secondary offering" to the public, and the sale of the stock was completed on April 6, 1965.The 66,099 shares of Joslyn stock were reported on the Federal estate tax return as having a value of $ 3,040,544 at the date of the decedent's death. An audit of the return was completed by the respondent after the sale of the stock, and upon its completion, the respondent's agent proposed an increase in the date-of-death value of the stock to $ 3,103,697.43. In his report, the agent computed the value of the stock as follows:724 Item 32, Joslyn Mfg. Co. Discount was allowed up to the distribution expenses incurred as follows:Fair market value at date of death determined by taking themean between the high and low$ 3,470,197.50Less: Travel expense$ 489.52Bond premium for underwriter13,679.09Attorneys for underwriter6,860.35Reimbursement to Joslyn Mfg46,366.66Additional cost for Joslyn Mfg1,081.30Costs of Kindel & Anderson1,327.70Additional costs Kindel & Anderson399.07Fees for registration7,546.38Underwriters fees288,750.00366,500.073,103,697.43Such valuation was reflected in the statutory notice of deficiency as 173 having been determined in accordance with section 20.2031-2 of the Estate Tax Regulations on the basis of stock exchange quotations at the date of death with an allowance for blockage elements. The respondent's proposed adjustment as to the value of the Joslyn stock was accepted by the petitioner.In this proceeding, the petitioner also claimed as administrative expenses a deduction for $ 366,500.07 relating to the secondary offering of the Joslyn stock. The respondent has denied a deduction for $ 359,194.71 of such expenses.OPINIONThe petitioner does not argue that the expenses of the secondary offering should be deductible instead of being taken into consideration in determining the value of the Joslyn stock; it argues that, and we must decide whether, it is entitled to deduct such expenses even though they resulted in a reduction in the value of the stock.The Federal estate tax is imposed upon the net value of a decedent's estate. Secs. 2001, 2051; sec. 20.0-2, Estate Tax Regs.; Estate of Henry E. Huntington, 36 B.T.A. 698">36 B.T.A. 698 (1937). Section 2031 and the regulations thereunder generally provide that property includable in the gross estate is to be valued at its retail or replacement 174 cost value. Sec. 20.2031-1(b), Estate Tax Regs.; Estate of Frances Foster Wells, 50 T.C. 871">50 T.C. 871 (1968), affd. 418 F. 2d 1302 (C.A. 6, 1969). However, when a large block of stock is to be valued, it may be valued by reference to the amount for which it could be sold to an underwriter. Sec. 20.2031-2(e), Estate Tax Regs.; Commissioner v. Stewart's Estate, 153 F. 2d 17 (C.A. 3, 1946), affirming a Memorandum Opinion of this Court; Thomas A. Standish, 8 T.C. 1204">8 T.C. 1204 (1947); Sewell L. Avery, 3 T.C. 963">3 T.C. 963 (1944). To compute the amount of the taxable estate, the value of the 725 gross estate is reduced by certain deductions. Section 2053(a) allows a deduction for the expenses of administration, and section 20.2053-3 (d)(2), Estate Tax Regs., provides that deductible administration expenses include the expenses of selling property of the estate when such sales are necessary to pay the expenses of the administration of the estate. Estate of Henry E. Huntington, supra.In Estate of Elizabeth W. Haggart, 14">13 T.C. 14 (1949), the value of a revocable trust was includable in the decedent's estate. Certain attorney fees and other expenses were incurred as a result of the inclusion of the property of the 175 trust in the gross estate. We held that such expenses could not be used to reduce the value of the trust property in computing the value of the gross estate; nor were they deductible as expenses of administration of the estate. We were reversed by the Third Circuit on the premise that it was incongruous for the corpus of the trust to be included in the gross estate without taking into account expenses chargeable thereto in determining the net estate subject to tax. Haggart's Estate v. Commissioner, 182 F. 2d 514 (C.A. 3, 1950). The court said at page 516:Whether * * [the expenses] are to be allowed as expenses of administration [n2] or whether they are to be allowed in diminution of the gross estate [n3] does not matter in this case. It comes out the same either way and, therefore, we refrain from committing ourselves to a choice. [Footnotes omitted.]In Emma Peabody Abbett, 17 T.C. 1293">17 T.C. 1293 (1952), we followed the view of the Third Circuit in Haggart; in Abbett, we allowed the expenses there in issue as a deduction from the gross estate. In Rev. Rul. 293, 2 C.B. 257">1953-2 C.B. 257, the respondent agreed that such trust expenses were allowable in computing the value of the trust property to 176 be included in the estate.The issue in this case is similar to that involved in Haggart's Estate v. Commissioner, supra, and Emma Peabody Abbett, supra. In those cases, it was held that the trust expenses should be taken into consideration in determining the amount of property subject to the estate tax, either by reducing the value of the property included in the estate or by allowing them as deductions. However, the courts clearly had in mind that a choice would have to be made -- they could not be both charged against the value of the property and deducted. If the expenses of the secondary offering of the Joslyn stock are allowed in computing the value of such stock to be included in the estate, and if the same expenses are also held to be deductible under section 2053(a), such expenses would be allowed twice in computing the amount of the estate ultimately subjected to taxation. Such a result was clearly not contemplated in Haggart's Estate v. Commissioner or in Emma Peabody Abbett, and it surely was not contemplated under section 2053(a). Compare sec. 2053(a)(4).726 In maintaining that it is entitled to deduct the selling expenses notwithstanding that they were offset against the 177 value of the stock, the petitioner relies upon Estate of Viola E. Bray, 46 T.C. 577">46 T.C. 577 (1966), affirmed per curiam 396 F. 2d 452 (C.A. 6, 1968), and other cases which followed our holding therein. However, Bray and the other cases which rely on it are distinguishable from the present case. In Bray, the question was whether the expenses of selling securities by an estate to secure funds for administration purposes could be deducted from the gross estate under section 2053 and offset against the sales price for income tax purposes. We held that section 642(g), which prohibits deducting the same item for both income and estate tax purposes, did not apply to an item which had been offset against the sales proceeds for income tax purposes. We said at page 582:When selling expenses are offset against selling price the seller is being taxed on the gain he actually receives. When securities are valued as of the date of death, no account is taken of the fact that the fiduciary might have to sell them. * We also pointed out that if the selling expenses were not offset against the proceeds, the income tax would be imposed upon the gross receipts, not the gain, a result completely contrary 178 to congressional intent and the statutory scheme of our income tax laws. Estate of Viola E. Bray, supra at 582; see also Estate of Walter E. Dorn, 54 T.C. 1651">54 T.C. 1651 (1970). Thus, our decision in Bray was based on the premises (1) that an offset is not a true statutory deduction, and section 642(g) was applicable only in the case of true statutory deductions; (2) that the taxes on income and on the estate are computed separately; and (3) that it is proper for the selling expenses to be offset against the proceeds in computing the tax on income and also proper to allow the same expenses to be deducted in computing the net estate subject to taxation. Estate of Viola E. Bray, supra at 580-582.In the present case, we are not concerned with two separate and distinct statutory schemes of taxation. The petitioner seeks to reduce the net estate subject to taxation twice by reason of the same selling expenses, once under section 2031 and then again under section 2053. We perceive no rational basis for allowing both the reduction in value and the deduction for the same expenses. There is no judicial authority supporting the allowance of both tax benefits, nor is there any indication that Congress179 intended to allow both tax benefits. On the contrary, attempts to reduce taxation by using the same item more than once have not been approved. Ilfield Co. v. Hernandez, 292 U.S. 62">292 U.S. 62 (1934); Marwais Steel Co. v. Commissioner, 354 F. 2d 997 (C.A. 9, 1965), affirming 38 T.C. 633">38 T.C. 633 (1962).727 In conclusion, we hold that since the expenses of the secondary offering were clearly allowed in determining the value of the Joslyn stock to be included in the estate, the same expenses are not also deductible under section 2053(a). However, we express no opinion as to whether such expenses should be offset against the value of the property includable in the estate or allowed as a deduction under section 2053, if the petitioner had not sought to do both.Because of the settlement of other issues,Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620439/	W. B. MATHEWS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mathews v. CommissionerDocket No. 10032.United States Board of Tax Appeals13 B.T.A. 1133; 1928 BTA LEXIS 3102; October 18, 1928, Promulgated 3102 Certain compensation received by the petitioner during 1923 held to be for personal services as an employee of a political subdivision of a State and therefore exempt from taxation under section 1211 of the Revenue Act of 1926. Homer Hendricks, Esq., and Robert N. Miller, Esq., for the petitioner. E. Meacham, Esq., for the respondent. GREEN 1133 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1923, for which the respondent 1134 determined a deficiency of $1,310.19. The error alleged is that the respondent erroneously included as a part of the petitioner's net income the salary of $12,000 paid to him as Special Counsel for the Department of Public Service of the City of Los Angeles. FINDINGS OF FACT. The petitioner is an individual and resides at Los Angeles, Calif.The City of Los Angeles is a municipal corporation of the State of California, authorized by law (section 54 of the Charter of the City of Los Angeles) - * * To provide for utilizing or controlling waters within or without, or partly within and partly without, the state of California, and for3103 the conservation, development, storage and distribution of water, and the generation, transmission and distribution of electrical energy, for the purpose of supplying said city and its inhabitants with water and electric energy, or either of them, and, to that end, to * * (c) Acquire, establish, construct, own, maintain and operate * * * any works, plants or structures * * * necessary or convenient for any such purpose. The "Department of Public Service" is (section 192 of the Charter of the City of Los Angeles) "a department of the government of said city" and is "under the management and control of a Board of Public ServiceCommissioners" which is empowered by law - * * * To manage and control all waters, water rights, * * * water works * * * and all electric plants, works, systems and equipments, and all electric power, belonging to the city; to construct, operate, maintain and extend water works * * * and other means for supplying the city and its inhabitants with water; also electric plants * * * and other means of supplying the city and its inhabitants with electricity for light, power, heat and other purposes; to acquire and take * * * and in its own name to hold, as3104 special trustee for the city, any and all property * * that may be necessary or convenient for such construction, operation, maintenance or extension; * * * to regulate and control the use, sale and distribution of water and electricity belonging to the city, * * * and * * * The collection of water and electric power and light rates; * * * to appoint, employ, and * * * remove a chief engineer of water works, * * * and electrical engineer, and such assistants, employees and laborers as the board may deem necessary; to fix their compensations and prescribe their duties; * * * to sue and be sued, and to require the services of the City Attorney, free of charge, in all cases to which the board is a party. Prior to the year 1923 the City of Los Angeles exercised its aforesaid powers, acquired property necessary for supplying itself and its citizens with water and electric current, and during the year 1923 and at all other times mentioned herein was actively engaged (through the aforesaid Board of Public ServiceCommissioners and Department 1135 of Public Service) in supplying water and electric current to itself and to its citizens. A part of the electric current generated3105 by the aforesaid Department of Public Service in the year 1923 was sold to the public, and the remainder was used by the City of Los Angeles for lighting streets and parks of said city, for lighting the public schools, for lighting the public library, for lighting and power in the city hall, for lighting and power in the police department, for lighting and power in the city jail, for lighting and power in the fire department, and for sundry other public purposes of said city. A part of the water distributed by the aforesaid Department of Public Service in the year 1923 was sold to the public, and the remainder was used by the City of Los Angeles for fighting fire in said city, for flushing public sewers, for sprinkling streets, for the public schools, for the city hall, for the city jail, for fire engine houses, for the public parks, for the public playgrounds, and for sundry other public purposes. Section 49 of the Charter of the City of Los Angeles provides: The powers and duty of the City attorney shall be as follows: (1) The City Attorney must prosecute and defend for the city all actions at law or in equity and special proceedings, for or against the city, or in which3106 it may be legally interested or for any officer of the city in any action or proceeding, when directed so to do by the council. (2) * * He shall give his advice or opinion in writing, to any officer, Board or Commission of the city, when requested so to do by such officer, Board or Commission; PROVIDED, that the council shall have control of all litigation of the city, and may employ other attorneys to assist the City Attorney herein * * . * * (5) The City Attorney may appoint such assistants, deputies, clerks, stenographers, and other persons as the council, by ordinance, shall prescribe. * * * Section 12 of the Charter of the City of Los Angeles provides: All legislative power of the City, except as hereinafter otherwise provided, is vested in the council, subject to the power of veto and approval by the Mayor, as hereinafter given and shall be exercised by ordinance; other action of the council may be ordered upon motion. On May 15, 1912, the following resolution was adopted unanimously by the aforesaid Board of Public ServiceCommissioners: WHEREAS the construction work of the Los Angeles Aqueduct is nearing completion and the work of installing the electrical3107 plants of the city is well under way and the time is rapidly approaching when this Board will take over the operation of the Aqueduct and the electrical plants and systems of the city and have charge of the distribution of water from the Aqueduct supply and of electricity from the city's electrical plants; and, WHEREAS in connection with the preliminary plans for the distribution of such water and electricity many legal questions and other legal matters are 1136 constantly arising and demanding attention, making it necessary and advisable that this Board have an attorney immediately at hand to render counsel and give attention to such questions and matters; and, WHEREAS the work of Mr. W. B. Mathews, as special counsel for the Los Angeles Aqueduct, has been and is intimately related to the legal questions now arising in this department and this Board desires the advice and counsel of Mr. Mathews in connection with this work and the City Attorney has consented thereto and advises that this step be taken; NOW, THEREFORE BE IT RESOLVED that the City Council and the Board of Public Works be requested to consent that Mr. W. B. Mathews act as special counsel for the Board of3108 Public ServiceCommissioners and in conjunction with the City Attorney attend to the legal matters arising in connection with the work of this Board. On May 23, 1912, the council of the City of Los Angeles unanimously adopted the following resolution: RESOLVED that the report of the Board of Public ServiceCommissioners, recommending and requesting the counsel to consent that Mr. W. B. Mathews act as Special Counsel for the Board of Public ServiceCommissioners, be adopted and that the said Board of Public ServiceCommissioners and the Board of Public Works be, and they are hereby authorized to employ or contract for the services of Mr. W. B. Mathews, either by original contract or contracts with said W. B. Mathews, or by modification of the existing contract between the City and W. B. Mathews or otherwise, as in the judgment of said Boards, or either of them, may be desirable. On December 13, 1912, pursuant to the foregoing authority, there was executed a written contract between the aforesaid Board of Public ServiceCommissioners of the City of Los Angeles, as first party and the petitioner as second party, wherein it was agreed: That the first party hereby employs said3109 second party as agent and attorney, to do and perform, in conjunction with the City Attorney of said city, such services of a legal character as may be required of said second party in connection with the construction and operation of the Los Angeles Aqueduct and power projects of said city and the sale and distribution of the water and electricity therefrom, including services as attorney in connection with litigation and legal controversies and other matters requiring the attention and service of an attorney and advisor in connection with said work and in connection with the business of conducting the Department of Public Services of said city. Such employment shall continue from year to year beginning with the first day of January 1913; provided that upon sixty (60) days' notice in writing * * * said employment hereunder may be terminated on the 31st day of December of any year hereafter. As compensation for all services to be rendered by said second party hereunder, said first party promises and agrees to pay to said second party the sum of Five Hundred ( $500) dollars, per month payable monthly. From January 1, 1913, to the present the petitioner has continuously served3110 said Board of Public ServiceCommissioners and the said Department of Public Service of the City of Los Angeles as Special Counsel. 1137 On June 17, 1922, it was unanimously resolved by the Board of Public ServiceCommissioners of the City of Los Angeles "that the City Council be requested to take the necessary steps to have the salary of W. B. Mathews, Special Counsel in the Department of Public Service, increased to One thousand dollars per month." On August 1, 1922, the council of the City of Los Angeles adopted the following resolution: RESOLVED that the report of the Board of Public ServiceCommissioners recommending and requesting that the City Council take the necessary steps to have the salary of W. B. Mathews, Special Counsel in the Department of Public Service, increased to One Thousand Dollars per month be adopted and that said Board of Public ServiceCommissioners be authorized to enter into a new contract with Mr. W. B. Mathews in lien of the existing contract for his services, said new contract to contract for the services of Mr. Mathews at a salary of $1,000 per month. On August 4, 1922, pursuant to the authority aforesaid, the Board of Public Service3111 Commissioners of the City of Los Angeles, as first party, and the petitioner, as second party, entered into a written agreement whereby it was agreed that: The first party hereby employs the second party as attorney and counsellor at law to do, perform and render legal assistance to the City Attorney of the City of Los Angeles, in relation to litigation now pending or which may hereafter be brought, either for or against the Board of Public ServiceCommissioners, of said City, or both, in connection with matters under the jurisdiction of the Public Service Commission of said City and incidentally to render such advice to the City Attorney and said Commission which his long association with the City's legal department peculiarly qualifies him to give. Said second party accepts said employment and promises and agrees well and faithfully and to the best of his ability to do, perform and render said services during the continuance of this agreement. It is mutually agreed that as compensation in full for all services to be rendered by said second party herein, the first party shall pay to the second party for his said services the sum of One Thousand Dollars ($1,000.00) per3112 month, beginning August first, 1922, payable on the last day of each month thereafter. This contract may be terminated at any time after August first, 1922, upon sixty (60) days notice in writing from either party to the other party that said employment hereunder is to be so terminated. (Italics supplied.) During the year 1923, and at all other times since his aforesaid first employment, the petitioner has occupied and used for his office, without any charge being made to him therefor, a suite of rooms in the office building owned and occupied by the Department of Public Service of the City of Los Angeles, known as the "Public Service Building"; all clerical and professional assistants needed and used by him in connection with the work of the aforesaid Department of Public Service have been paid by the said Department; all office fixtures and supplies necessary for the maintenance and operation of 1138 said office have been furnished by the said Department of Public Service without expense to the petitioner and all other necessary expenses incurred by him in connection with his duties as Special Counsel in the Department of Public Service have been paid by the said Department. 3113 The Department of Public Service is responsible for a large and permanent public enterprise. The gross revenues of the Department, for water and power, in the year 1923 in question, were approximately $15,000,000. In the year 1923, upwards of $100,000,000 was invested by the city in the property under the jurisdiction of the Department and approximately 3,000 persons were employed. During the year 1923, the petitioner devoted at least 90 to 95 per cent of his time to the fulfillment of his duties as Special Counsel. While he had connection with a private law firm, he gave practically no attention to it. He visited his private law office infrequently and would be away from it sometimes for several months, although he might be in the City of Los Angeles all during that time. During the year 1923, the services rendered by the petitioner to the Department were subject to control of the Board of Public Commissioners and the City Attorney. The petitioner always followed the wishes and policies of the Board where they were ascertainable or expressed. He understood, or tried to understand, what the policies of the Board would be. The petitioner's activities in litigation3114 affecting the Department of Public Service were under the control of the City Attorney, the chief legal officer of the city. The petitioner appeared in litigation, the City Attorney also appearing, if not in person, as an attorney named in the pleadings. This was only a part of petitioner's work as Special Counsel. His work has been of a miscellaneous character for a great many years. He looked after the interests of the Department before legislative bodies. He had a great deal to do with the general financial policies of the Department. He had much to do with the proceedings incident to the issuance and sale of bonds, and advised with the Department on questions of policy. He made appearances of a general nature in behalf of the Department before public and civic bodies. He generally attended meetings of the Board of Public ServiceCommissioners. In conjunction with the purchasing agent, he had a very active part in the consummation of land purchases and in the condemnation of land to enlarge, support and protect the water supply. He was chairman of a purchasing committee consisting of an engineer, an assistant engineer and himself. A great deal of the land the city has3115 bought during the last few years, amounting to $10,000,000 or $12,000,000, has been purchased through his department. 1139 During the year 1923 the City of Los Angeles paid to petitioner the aforesaid salary of $1,000 per month, or a total of $12,000. The petitioner was of the opinion that the salary was exempt from Federal income tax and did not report the same in his 1923 return. The respondent has included the salary in 1923 gross income and has determined that a deficiency results therefrom. OPINION GREEN: The question here is whether the salary of $12,000 paid the petitioner by the Department of Public Service of the City of Los Angeles was exempt or taxable income. Section 1211 of the Revenue Act of 1926 provides: SEC. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, 3116 credited, or refunded. The history of and reasons for the preceding section are set out and discussed in our opinion in the Appeal of George W. Fuller,9 B.T.A. 708">9 B.T.A. 708, and need not be repeated here. Suffice it to say that the statute is clear that if the compensation in question was "for personal services as an officer or employee of any State or political subdivision thereof," such compensation is exempt from Federal taxation. The services rendered by the petitioner were "personal" in their nature and were rendered to and for a "political subdivision" of the State of California. The greater portion of the respondent's brief has been devoted to the argument that the petitioner was not an "officer" of the Department of Public Service of the City of Los Angeles. The petitioner concedes that he was not an "officer" but contends that the facts show that he was, however, an "employee." The question thus narrows itself to whether the petitioner was or was not an "employee" of the city. The respondent contends he was an independent contractor. In 3117 B. F. Martin v. Commissioner,12 B.T.A. 267">12 B.T.A. 267, in which case we reviewed many of the decisions bearing upon the question, we said: The line of demarcation between an employee and an independent contractor is not precise. Several tests have been adopted from time to time by the Courts, but as the Supreme Court had occasion to observe in Standard Oil Co. v. Anderson,212 U.S. 215">212 U.S. 215, these are only more or less useful in "determining whose is the work and whose is the power of control." In Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514; 46 Sup.Ct. 172, Metcalf and Eddy were in 1917 consulting engineers who, either 1140 individually or as copartners, were professionally employed to advise States or subdivisions of States with reference to proposed watersupply and sewage-disposal systems. In each case the service was rendered in connection with a particular project for water supply or sewage disposal, and the compensation was paid in some instances on an annual basis, in others on a monthly or daily basis, and in still others on the basis of a gross sum for the whole service. The fees received by them for these3118 services were paid over to the partnership and became a part of its gross income, upon which an income tax was collected. The district court held that such compensation was not exempt from taxation, either by the provisions of the statute or under the Constitution. The Supreme Court, in affirming the decision of the district court, said in part: Nor do the facts stated in the bill of exceptions establish that the plaintiffs were "employees" within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. 3119 Chicago, Rock Island & Pacific Ry. Co. v. Bond,240 U.S. 449">240 U.S. 449, 456, 36 S.Ct 403, 60 L. Ed. 735">60 L.Ed. 735; Standard Oil Co. v. Anderson,212 U.S. 215">212 U.S. 215, 227, 29 S. Ct. 252">29 S.Ct. 252, 53 L. Ed. 480">53 L.Ed. 480. And see Casement v. Brown,148 U.S. 615">148 U.S. 615, 13 S. Ct. 672">13 S.Ct. 672, 37 L. Ed. 582">37 L.Ed. 582; Singer Mfg. Co. v. Rahn,132 U.S. 518">132 U.S. 518, 523, 10 S. Ct. 175">10 S.Ct. 175, 33 L. Ed. 440">33 L.Ed. 440. The facts in the instant case are substantially different from those in the Metcalf & Eddy case, supra. Here the services rendered by the petitioner for the Department of Public Service were at all times subject to the control of the Board of Public Commissioners and the City Attorney. The latter's name appeared on all the pleadings filed by the petitioner on behalf of the city and its subdivisions. The petitioner's employment was continuous and his compensation was on a definite monthly basis. He devoted practically no time to other matters. His office space, supplies and necessary help were all furnished him by the city. In John E. Mathews v. Commissioner,8 B.T.A. 209">8 B.T.A. 209, after quoting the above paragraph from 3120 Metcalf & Eddy v. Mitchell, supra, we said: We do not understand it to be the ruling of the Supreme Court that the relationship of employer and employee obtains only whenever the employer retains the right to direct the manner in which the business shall be done as well as the results to be accomplished, in other words, not only what shall be done, but how it shall be done. See Vane v. Newcombe,132 U.S. 220">132 U.S. 220. If this were so a physician who might be employed by a railroad company to devote his entire activities to the company could not be an employee of the company because clearly in such a case the employer would not expect to tell 1141 the physician how his work should be done. A skilled laborer is no less an employee because he uses his skill in the performance of his work. The term "employee" should not in our opinion be restricted only to menials. The petitioner was in our opinion an employee of the Board of County Commissioners of Duval County, Florida, during the year 1923, within the meaning of section 1211 of the Revenue Act of 1926. The facts in the instant case clearly point to the conclusion that the petitioner was*3121 in all respects an employee of a political subdivision of the State of California within the meaning of that term as used in section 1211 of the Revenue Act of 1926. It follows that the salary of $12,000 received by the petitioner for the calendar year 1923 is exempt from Federal income taxation, and that the deficiency determined by the respondent for that year should be disallowed. Cf. Byers v. Commissioner,8 B.T.A. 1191">8 B.T.A. 1191; Appeal of P. Frank Durkin,4 B.T.A. 743">4 B.T.A. 743; and Louisville, Evansville & St. Louis R.R. Co. v. Wilson,138 U.S. 501">138 U.S. 501. Reviewed by the Board. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620440/	FARMERS & MERCHANTS NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Farmers & Merchants Nat'l Bank v. CommissionerDocket No. 5570.United States Board of Tax Appeals8 B.T.A. 58; 1927 BTA LEXIS 2960; September 12, 1927, Promulgated 2960 1. An amount erroneously reported as income in 1919 is not allowable as a loss in 1920 when it is determined that it was not properly reported as income in 1920. 2. The unpaid balance of a promissory note for money borrowed was properly determined to be worthless and charged off within the taxable year, and was a proper deduction from gross income. H. L. Washington, Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. TRAMMELL 58 This proceeding is for the redetermination of income and profits taxes for 1920 in the amount of $3,051.53. The deficiency arises 59 through the action of the Commissioner in disallowing a loss in the amount of $1,507.60 with respect to certain dormant accounts which the petitioner had erroneously included in income for 1919 and which it had charged off in 1920, and the disallowance as deductions of certain debts which the petitioner alleged were ascertained to be worthless and were charged off during the taxable year. FINDINGS OF FACT. The petitioner is a corporation, having its office at El Dorado, Kans. It was engaged in the banking business. During the year 1919 it had on2961 its books certain dormant accounts of depositors in the amount of $1,507.60. These accounts had been dormant for some years and during 1919 the petitioner closed them out and included the amount thereof in its taxable income. In 1920 the national bank examiner, upon examination of the books of the bank, required the bank to restore these accounts as they were in 1919 and to give the individuals credit therefor. This was done and the petitioner, in its return for 1920, claimed a deduction from its income on account of this transaction. The respondent disallowed the deduction. In 1920 one C. C. Kruger was indebted to the petitioner in the amount of $8,350.84, represented by an unsecured promissory note. Kruger had been owing the bank for some time. The bank examiner insisted that this paper be charged off. During 1920 Kruger was called into the bank and an officer of the bank agreed with him to take 120 acres of land owned by Kruger and credit his account with the amount of $5,000. This land was not worth in excess of $5,000. The difference between that amount and the amount of the indebtedness, that is, $3,350.84, was charged off the books during the taxable year. Kruger2962 had no assets other than the land and the balance of the indebtedness was ascertained to be worthless in 1920. During 1920 the Peters Oil & Gas Co., a corporation, was indebted to the petitioner in the amount of $3,990.96. This was the unpaid balance on a note for $10,000 which the petitioner had received prior to 1920. Credits had been made on the note, reducing it to the amount stated. During 1920 it was ascertained that the Peters Oil & Gas Co. had no assets except two oil leases. During 1920 the Peters Oil & Gas Co. assigned their leases to the bank. One of these leases was an oil lease near Augusta and the other was near Gilroy in Williams County. Oil was being discovered near the Augusta lease in 1920, and wells had been drilled on both sides of it which were producing. Oil was being discovered within four miles of the tract on which the petitioner had a lease. Dry holes had been bored within half a mile of the other lease. The petitioner 60 paid $40 rental in 1921 on the lease near Augusta in order to prevent the lease from lapsing. The amount of $3,909.90, being the unpaid balance of the $10,000 note, was charged off the books of the petitioner as a2963 worthless debt before the close of the calendar year 1920. OPINION. TRAMMELL: The petitioner erroneously included in its income the amount of $1,507.60 in 1919 and at the direction of the bank examiner restored the amount to its books in 1920. The fact that the amount was not, in fact, taxable income in 1919 and should not have been included in that year is not sufficient reason for charging the amount off as a loss in 1920. In order to entitle the petitioner to a deduction on account of a loss, the transaction must come within the provision of the statute relating to losses. The petitioner is not permitted by the statute to report income in one year and take a loss in another because it erroneously reported income in the prior year. In such a situation a taxpayer's only remedy is to adjust its prior year's return with respect to the income erroneously reported. If it can not do that on account of the running of the statute of limitations, that fact does not permit a loss to be taken with respect thereto in another year. With respect to the Kruger indebtedness, it is clearly shown that Kruger had no assets in 1920 except the tract of land which he deeded to the petitioner2964 as partial payment on his indebtedness. While the petitioner introduced some evidence to the effect that the land was not worth $5,000, which is the amount of credit allowed on the note, we are not convinced that its value was less than that amount. The difference between $5,000 and the principal of the note was ascertained to be a loss during 1920 and was charged off. With respect to the amount of the indebtedness of the Peters Oil & Gas Co., it appears that the petitioner received during 1920, an assignment of two leases as security. The unpaid amount of the note was not ascertained to be worthless until the security was ascertained to be worthless. One of the leases was in territory where oil was being discovered and where there were producing oil wells. The petitioner paid rental on this lease during 1921 in order to prevent it lapsing and to keep it is effect. We are not convinced, from all the evidence, that this lease was ascertained to have no value during 1920 and for this reason it is our opinion that the unpaid balance on the Peters Oil & Gas Co. indebtedness was not ascertained to be worthless during the taxable year. Judgment will be entered on 15 days' notice,*2965 under Rule 50.Considered by MORRIS, SIEFKIN, and SMITH.	01-04-2023	11-21-2020

Subsets and Splits

No community queries yet

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