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https://www.courtlistener.com/api/rest/v3/opinions/4620443/	Arlean I. Herr, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert F. Herr, Petitioner, v. Commissioner of Internal Revenue, RespondentHerr v. CommissionerDocket Nos. 78089, 78090United States Tax Court35 T.C. 732; 1961 U.S. Tax Ct. LEXIS 230; February 6, 1961, Filed 230 Decisions will be entered under Rule 50. Held, transfers to certain trusts for minor grandchildren do not qualify in any part for the $ 3,000 statutory exclusion under section 2503(b), I.R.C. 1954, without the benefit of section 2503(c). However, such transfers held to qualify for the exclusions by reason of section 2503(c) to the extent of income interests up to the majorities of the beneficiaries. The fact that the trusts also provided for gifts of corpus and for further gifts of income from majority up to the age of 30 which would not comply with the requirements of section 2503(c) does not deprive the income interests up to majority from the benefits of the statutory exclusions. The term "property" as used in section 2503(c) means the aggregate of the elements of the entire gift that is being considered for classification as a present interest, in this case the income interests up to majority. 231 Norman H. Brown, Esq., for the petitioners.David E. Crabtree, Esq., for the respondent. Raum, Judge. RAUM733 OPINION.In issue are gift tax deficiencies determined against petitioners, husband and wife, for 1955. The facts have been stipulated. The question for decision is whether each petitioner is entitled to a $ 3,000 exclusion under section 2503 of the 1954 Code in respect of a 1955 transfer to each of four trusts established for the benefit of petitioners' minor grandchildren in 1954. The transfers in question were made by petitioner Robert F. Herr; his wife is involved herein only232 because she consented in her gift tax return to have one-half of her husband's gifts treated as having been made by her.On August 23, 1954, the husband, referred to as the settlor, created four trusts, each by separate declaration of trust for the primary benefit of a different minor grandchild. The four declarations of trust were identical except for the designation, by name and sex, of the grandchild who was to constitute the primary beneficiary of the particular trust. Relevant provisions of one of the trusts are as follows:FIRST: Settlor hereby declares that he holds 425 shares of common stock of Philco Corporation (which he is at this time transferring to himself as Trustee hereunder), IN TRUST, as follows:(a) To pay the net income to Settlor's granddaughter, FRANCEAN H. HALLINGER, until her arrival at age thirty (30) and then to pay over to her the principal.(b) If Settlor's said granddaughter shall die before reaching age thirty (30) the principal shall be paid (1) To her surviving issue, per stirpes, or, if she leaves no surviving issue(2) In equal shares to her siblings living at her death and to the issue of any sibling then deceased, such issue to take, per stirpes, 233 the share the deceased sibling would have received if living. * * THIRD: Trustee shall retain any share of income or principal payable to a minor, together with any income accruing thereon, and may invest and reinvest the same as in the case of other property comprising the principal of this trust and may apply so much of such income and principal as he deems necessary directly for the maintenance, support and education of the minor, or may pay the same to any person selected by him to disburse it, whose receipt shall be a complete acquittance to Trustee therefor, without in any case any order of 734 court or the intervention of any guardian. All unexpended sums of accumulated income and principal shall be paid to the minor at his or her majority or to his or her estate if the minor dies before majority.On January 19, 1955, petitioner Robert F. Herr added to the corpora of the trusts by transferring to each trust certain corporate stock having a then fair market value of $ 16,070.31. The primary beneficiaries were then 6, 4, 3, and 2 years of age, respectively. In the case of each such transfer, the present worth at the date of the transfer of the right to receive 234 the income from the transferred stock during the minority of the primary beneficiary was in excess of $ 6,000.In their gift tax returns for 1955 each petitioner claimed four annual exclusions of $ 3,000 each. The Commissioner disallowed the exclusion on the ground that "Transfers to donor's four grandchildren are deemed to have been gifts of future interests for which no exclusions are allowed. Section 2503, Internal Revenue Code of 1954." 1235 We dispose first of the contention that petitioners are entitled to the exclusions under section 2503(b) apart from subsection (c). 2 Subsection (b), to the extent that it is relevant here, was derived from section 1003(b)(3) of the 1939 Code, and the decisions relating to the latter provisions are pertinent.Plainly, as recognized by petitioners, the gifts of corpus represented future interests and could not comply with the requirements for the exclusion. However, a gift may be separated into its component parts one of which may qualify as a present interest so as to bring the statutory exclusion into play. Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18, 21. And petitioners contend that the income interest up to the 735 majority of each grandchild is not disqualified236 as a "future interest." 3 We disagree.As appears from paragraph Third of each trust instrument, the trustee is directed to "retain any share of income or principal payable to a minor, * * * and may invest and reinvest the same * * * and may apply so much of such income and principal as he deems necessary directly for the maintenance, support and education of the minor * * . All unexpended sums * * shall be paid to the minor at his or her majority * * ." That this provision requires the income interest in question to be classified as a future interest is made clear by Commissioner v. Disston, 325 U.S. 442">325 U.S. 442, where the Court said (pp. 448-449):The language of the trust instruments directs that the income be accumulated during minority. The subsequent provision for payments for maintenance and support may be said to indicate a departure237 from the policy of accumulation only when necessary, in the reasonable discretion of the trustees. If that is the appropriate interpretation of the trust instruments, then little difference from the Fondren case is involved. Even in its practical working, the trustees did not find the necessary prerequisites for a steady application of all or any ascertainable part of the income for education, support and maintenance.But, even though the trustees were under a duty to apply the income for support, irrespective of outside sources of revenue, there is always the question how much, if any, of the income can actually be applied for the permitted purposes. The existence of a duty so to apply the income gives no clue to the amount that will be needed for that purpose, or the requirements for maintenance, education and support that were foreseeable at the time the gifts were made. In the absence of some indication from the face of the trust or surrounding circumstances that a steady flow of some ascertainable portion of income to the minor would be required, there is no basis for a conclusion that there is a gift of anything other than for the future. * * To the same effect 238 is Hessenbruch v. Commissioner, 178 F. 2d 785 (C.A. 3). Accordingly, we hold that petitioner is not entitled to the claimed exclusions under subsection (b) without the benefit of subsection (c). We therefore pass to the question whether subsection (c) is operative to allow the exemption under (b) which would not otherwise be available under the provisions of (b) standing alone.Subsection (c) became part of our revenue law for the first time in 1954, and the legislative history discloses that it was in response to the difficulties arising in connection with the classification of a gift for the benefit of a minor as a present interest. H. Rept. No. 1337, 83d Cong., 2d Sess., p. 93; S. Rept. No. 1662, 83d Cong., 2d Sess., p. 127. However, as the foregoing report of the House Committee points out in its "Detailed Discussion of the Technical Provisions of the Bill" (p. A 322), the new provision merely "partially relaxes the 'future interest' restriction contained in subsection (b), in the case of 736 gifts to minors, by providing a specific type of gift for which the exclusion will be allowed," and the question before us is whether the gifts239 herein are within the range of the new provision.A superficial reading of subsection (c) would appear to exclude the present gifts from its coverage, for it requires that "the property and income therefrom" may be expended by or for the benefit of the minor prior to majority and to the extent not so expended will pass to the minor at 21 or to his estate or his appointee in the event of death before 21. And since the corpus of each trust which generates the income here in issue is payable to the beneficiary, pursuant to paragraph First, only upon attaining the age of 30 (with provision for other disposition in the event of prior death), it may be argued, as is done by the Government, that subsection (c) is inapplicable. That argument would be sound if the term "property" were treated as the equivalent of the trust corpus in this case. If one were to consider only the naked words of the statute, that interpretation would be a reasonable one. However, we are satisfied, upon examining the gift tax provisions generally as they have been judicially interpreted, that such is not in accord with the intention of Congress.As noted above, the Supreme Court has expressly recognized that240 a gift may be separated into component parts one of which may qualify as a present interest under the statute. Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18, 21; Commissioner v. Disston, 325 U.S. 442">325 U.S. 442, 447. We think it highly unlikely that the draftsmen of the pertinent provisions of the 1954 Code were unaware of these decisions which loomed so large in so limited a field. Certainly, if the donor had made a gift of income only to each grandchild subject to the conditions set forth in paragraph Third, it would comply fully with the requirements of subsection (c), and the Government does not contend otherwise. Cf. Jacob Konner, 35 T.C. 727">35 T.C. 727, decided this day. 4 The word "property" as related to that situation would refer to the entire subject of the gift. And it is difficult to see why such a gift should not similarly qualify as a present interest merely because it is coupled together with two other components (income from 21 to 30 and corpus at 30) which are future interests. For, both the Fondren and Disston cases have made it clear that one component may satisfy the conditions241 for a present interest while another fails to do so. Accordingly, it is our opinion that when considered in this context Congress intended the word "property" to mean, not the corpus of a trust, but rather the totality of elements that go to make up the entire gift that is being considered for classification as a present interest. 737 In this case the totality of those elements consists of all the income up to majority. In the aggregate all such payments constitute the "property" in question, and since this "property" and the accretions thereto must be expended for the benefit of the donee prior to majority or paid over to the donee at 21 or to the donee's estate or appointee in the event of death prior to 21, the requirements of subsection (c) are fully met. Otherwise, Congress would have intended the incongruous result of classifying such income payments up to majority as a present interest when not accompanied by a gift of corpus but as a future interest when the gift thereof is made in conjunction with a gift of corpus that fails to qualify. We cannot believe that it intended any such strange distinction, and we hold that the gifts of income up to majority satisfy the242 requirements of subsection (c).Decisions will be entered under Rule 50. Footnotes1. I.R.C. 1954:SEC. 2503. TAXABLE GIFTS.(b) Exclusions From Gifts. -- In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1955 and subsequent calendar years, the first $ 3,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year. Where there has been a transfer to any person of a present interest in property, the possibility that such interest may be diminished by the exercise of a power shall be disregarded in applying this subsection, if no part of such interest will at any time pass to any other person.(c) Transfer for the Benefit of Minor. -- No part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in property for purposes of subsection (b) if the property and the income therefrom -- (1) may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and(2) will to the extent not so expended -- (A) pass to the donee on his attaining the age of 21 years, and(B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment as defined in section 2514(c)↩.2. Both parties agree that a gift to a minor which does not satisfy the requirements of section 2503(c) may qualify as a gift of a present interest under section 2503(b). Gift Tax Regs. I.R.C. 1954, sec. 25.2503↩-4(c).3. Petitioners do not contend, nor could they successfully do so, that the income for the period between the ages of 21 and 30 is a present interest.↩4. In the Konner case, the Commissioner explicitly treated a series of income payments for a maximum period of approximately 10 years as "property" within the meaning of section 2503(c)↩ but contended that they failed to satisfy the requirements of those provisions for reasons that are not germane here.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620444/	MIRJANA GRUEVSKI AND STEPHAN GRUEVSKI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; FIELD FORCE, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGruevski v. CommissionerDocket Nos. 28826-89, 28827-89United States Tax CourtT.C. Memo 1990-291; 1990 Tax Ct. Memo LEXIS 309; 59 T.C.M. (CCH) 842; T.C.M. (RIA) 90291; June 12, 1990, Filed 309 An appropriate order will be issued in Docket no. 28826-89, and an appropriate order will be entered in Docket no . 28827-89. Nathaniel Ruff and Max Cohen, for the petitioners. J. Eric Lawson, for the respondent. HAMBLEN, Judge. HAMBLENMEMORANDUM OPINION This matter is before the Court on respondent's separate Motions to Dismiss for Lack of Jurisdiction as to petitioners Stephan Gruevski and Field Force, Inc., filed February 5, 1990. Petitioners answered on March 5, 1990, and this matter was set for hearing310 on June 18, 1990. Nonetheless, we have determined that this matter can be resolved without a hearing. By a notice of deficiency dated September 7, 1989, respondent determined deficiencies in joint Federal income tax and additions to tax against petitioners Stephan and Mirjana Gruevski in the following amounts: SectionSectionSectionTax YearDeficiency6653(b)(1)(A) 16653(b)(1)(B)66611986 $ 96,873$ 72,655$ 12,703$ 24,2181987116,08287,0618,37829,020By a separate notice of deficiency also dated September 7, 1989, respondent determined deficiencies in Federal income tax and additions to tax against petitioner Field Force, Inc. in the following amounts: Tax YearSectionEndedDeficiency6661Sept. 30, 1986$ 22,634$ 5,658Sept. 30, 198767,22216,806311 Respondent also determined additions to tax against petitioner Field Force, Inc. pursuant to sections 6653(b)(1) and 6653(b)(2) in the amounts $ 11,317 and $ 3,401 for taxable year ended September 30, 1986, and pursuant to sections 6653(b)(1)(A) and 6653(b)(1)(B) in the amounts of $ 50,417 and $ 6,255 for taxable year ended September 30, 1987. The deficiencies and additions to tax determined by respondent against all three petitioners were assessed by respondent pursuant to the jeopardy assessment procedures of section 6861. On December 4, 1989, when the petitions in these cases were filed, petitioner Mirjana Gruevski resided in Gary, Indiana, and the whereabouts of petitioner Stephan Gruevski were unknown. Petitioners Mirjana and Stephan Gruevski had been married at the time of filing their joint income tax returns but were divorced on September 25, 1989. Petitioner Field Force, Inc. ("Field Force") was a corporation solely owned by Stephan Gruevski and whose only place of business was in Indiana. The petitions filed on behalf of petitioners Stephan and Mirjana Gruevski and Field Force were signed only by Nathaniel Ruff ("Ruff") of the law firm Lesniak & Ruff and by Max Cohen312 ("Cohen") of the law firm Cohen & Thiros. The petition averred, among other claims, that Stephan Gruevski had abandoned his wife and children on May 28, 1989, that Stephan Gruevski had not contacted Mirjana Gruevski or his attorneys since that time, and that Mirjana Gruevski was an innocent spouse within the meaning of section 6013(e). The petitions further averred that Mirjana Gruevski and Field Force had filed an action for review of the jeopardy assessments in the U.S. District Court for the Northern District of Indiana that was still pending at the time the petitions were filed. In response to the petitions, respondent moved for dismissal of the cases against Stephan Gruevski and Field Force on the grounds that neither Mirjana Gruevski, Ruff, nor Cohen were authorized to file a petition on behalf of either Stephan Gruevski or Field Force. Petitioners submitted various documents and affidavits including a power of attorney over real estate interests, comprising the bulk of the Gruevskis' assets, given by Stephan Gruevski to Mirjana Gruevski on June 9, 1989. Petitioners also introduced an amended petition for guardianship filed by Mirjana Gruevski in Lake County Superior Court313 in Gary, Indiana, on February 16, 1990, in which she asked to be appointed guardian over the assets belonging to Stephan Gruevski ("the petition for guardianship"). The petition for guardianship explained that Stephan Gruevski had abandoned his wife and three children to avoid prosecution with respect to Federal income tax liability. The petition for guardianship further stated that, pursuant to the divorce decree, Mirjana Gruevski and the children had been awarded 80 percent of the family's assets and that, without the power to act on behalf of Stephan Gruevski, Mirjana Gruevski would not be able to protect her interests or those of her children. The petition for guardianship was not to have been finally adjudicated until March 1990 and this Court has not been informed of the final decision. Petitioners also submitted an affidavit from Nick Thiros ("Thiros") of the law firm Cohen & Thiros stating that Thiros was explicitly authorized to act as agent "in connection with any tax matters of [Stephan Gruevski] or any of his business entities." Respondent submitted a letter written by Patrick D. Hansen ("Hansen"), Assistant U. S. Attorney for the Northern District of Indiana, to314 Joseph Love ("Love"), the Group Manager of the Strategic Compliance Group of the Internal Revenue Service in Indianapolis, Indiana, dated July 12, 1989. In this letter, Hansen indicated that the Justice Department had received information from an unnamed informant, a prior employee of Field Force, to the effect that Stephan Gruevski had been diverting money from Field Force for his own uses through a number of different methods without reporting such monies as income. Additionally, the informant stated that Stephan and Mirjana Gruevski had operated a speedway business netting them $ 5,000 per month for six months a year and had not reported the income on their Federal income tax returns. Finally, the informant stated that Stephan Gruevski had fled the country for Bitola, Yugoslavia, taking some of the couple's assets and that Mirjana Gruevski was planning to liquidate the remaining assets and to join her husband in Yugoslavia. Respondent first argues that Stephan Gruevski was a fugitive from justice at the time the petition was filed and that, therefore, his petition should be dismissed. In Berkery v. Commissioner,90 T.C. 259">90 T.C. 259 (1988), Supplemental Opinion 91 T.C. 179">91 T.C. 179 (1988),315 affd. by unpublished opinion 872 F.2d 411">872 F.2d 411 (3d Cir. 1989), 2 we concluded that where a taxpayer is a fugitive from justice we have discretion to dismiss his case, even if he is prepared to be represented by counsel at trial. As we noted, Petitioner wishes to pick and chose which of the benefits and burdens of the U.S. legal system apply to him. Petitioner's contemptuous behavior toward the Federal courts, however, disentitles him to call upon the resources of this Court in the instant cases. Molinaro v. New Jersey, 396 U.S. [365], at 366 [1970]. We deem that behavior sufficient cause to exercise our discretion to dismiss these cases. Rules 123(b), 123 (d). * * Berkery v. Commissioner,90 T.C. 259">90 T.C. 259, 265-266 (1966).Nonetheless, we cannot conclude that Stephan Gruevski is a fugitive from justice. Although316 his whereabouts are unknown, there is no indication that he has been indicted or is threatened by imminent criminal prosecution. Because Stephan Gruevski has not been indicted, we fail to see how he could be a fugitive. Respondent next argues that neither Mirjana Gruevski nor the attorneys Ruff and Cohen were authorized to file petitions on behalf of Stephan Gruevski and Field Force. Ordinarily, a petition must be signed by the taxpayer who seeks a review of a deficiency determination and a petition signed by only one taxpayer with respect to a joint deficiency notice will not be valid with respect to the nonsigning taxpayer. Brooks v. Commissioner,63 T.C. 709">63 T.C. 709, 711 (1975). Where there is evidence that the taxpayer on whose behalf the petition was filed had intended to be represented by the person who actually signed the petition, and the taxpayer subsequently ratifies the petition, we have been liberal in allowing necessary amendments to the petition. Kraasch v. Commissioner,70 T.C. 623">70 T.C. 623 (1978);317 Carstenson v. Commissioner,57 T.C. 542">57 T.C. 542 (1972); Hoj v. Commissioner,26 T.C. 1074">26 T.C. 1074 (1956).3 Particularly where the taxpayer who has failed to sign a petition with respect to a joint deficiency is the spouse of the taxpayer who did file the petition, we have found implied consent and authorization. Brooks v. Commissioner, supra at 714; Holt v. Commissioner,67 T.C. 829">67 T.C. 829, 832 (1977).Nonetheless, our inquiry is one of facts and circumstances. See Abeles v. Commissioner,90 T.C. 103">90 T.C. 103 (1988). Petitioners argue that by giving Mirjana Gruevski a power of attorney with respect to real estate, Stephan Gruevski indicated his desire that Mirjana Gruevski manage his affairs in his absence because the bulk of his assets were real estate holdings. Furthermore, petitioners contend that the petition for guardianship should be interpreted as a ratification of318 the authority that was created in the power of attorney over real estate. Petitioners argue that this authority, then, empowered Mirjana Gruevski to file a petition in this Court on behalf of Stephan Gruevski. Petitioners maintain, therefore, that Mirjana Gruevski was acting as an agent of Stephan Gruevski when she authorized attorneys Ruff and Cohen to file the petition on behalf of herself and her ex-husband. We are not convinced that Mirjana Gruevski was authorized to file a petition in this Court on behalf of her ex-husband. To support her claims of authority, Mirjana Gruevski argues that the power of attorney Stephan Gruevski vested in her with respect to real estate establishes her authority over all his property interests. We do not see anything more in the power of attorney than Stephan Gruevski's intention that Mirjana Gruevski have control over his real estate investments. We are unable to perceive a veiled authority to file a petition on his behalf in this Court. We further note that at the time the petition was filed, Stephan and Mirjana Gruevski were divorced and we cannot assume that they intended to act in concert. In fact, the converse assumption is just as likely. 319 Petitioners further argue that when Mirjana Gruevski sought to be appointed guardian over her ex-husband's assets after his departure, that action constituted sufficient ratification of her filing of the petition on his behalf. In order to constitute a ratification, however, the ratifying action must be made by the principal, not the agent. In order to ratify Mirjana Gruevski's purported authority to file a petition in his behalf, Stephan Gruevski should have affirmed her action himself. The petition for guardianship was an action taken by Mirjana Gruevski, apparently without Stephan Gruevski's knowledge or approval. There is no indication that Stephan Gruevski wanted his ex-wife to be appointed guardian over all of his assets and interests, and, thus, the petition for guardianship cannot be interpreted as his ratification of her authority. We cannot accept petitioners' explanation of these events. We find that Mirjana Gruevski was not authorized by Stephan Gruevski to file the petition. By the same token, we conclude that Mirjana Gruevski was not authorized to authorize Ruff or Cohen to act as Stephan Gruevski's agent in filing a petition in this Court on behalf of Field320 Force. Petitioners next argue that Stephan Gruevski authorized Thiros to represent him in all tax matters on behalf of himself or his business and that this authority corrects the defects in the petitions. While an attorney may generally file a petition in this Court on behalf of a taxpayer, the petition will be deemed invalid if the case is not properly brought on behalf of the taxpayers and the taxpayer does not ratify the petition. Abeles v. Commissioner,90 T.C. 103">90 T.C. 103, 108 (1988);Rule 60(a)(1).4 Without ratification the case will be dismissed. Hazim v. Commissioner,82 T.C. 471">82 T.C. 471, 472 (1984).As noted above, Stephan Gruevski has made no action that could be interpreted as a ratification of the filing of a petition in this Court on behalf of either himself or Field Force. 321 Ordinarily the signature of a party or counsel to pleadings and other papers filed with the Court, as required by our Rules of Practice and Procedure, is effective for procedural purposes. Rules 23(a)(3) and 33. Furthermore, signature of counsel ordinarily represents that such counsel is authorized to represent the party or parties for whom the pleading is filed. Rule 33(b). However, when the authority of any such signer to execute the pleadings or represent one of the parties is questioned by respondent, then under these circumstances the person whose authority is in issue must submit more substantive evidence of such authority than has been presented here. We thus conclude that the petitions with respect to Stephan Gruevski and Field Force are invalid, and respondent's motion will be granted. The petition with respect to Mirjana Gruevski, however, is properly brought and will not be dismissed. To reflect the foregoing, An appropriate order will be issued in Docket no. 28826-89, and an appropriate order will be entered in Docket no. 28827-89.Footnotes1. Unless otherwise indicated all section references are to the Internal Revenue Code, as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. See also Smith v. Commissioner,T.C. Memo. 1989-325; Caruana v. Commissioner,T.C. Memo. 1989-371↩.3. See also Shopsin v. Commissioner,T.C. Memo. 1984-151↩.4. Rule 60(a)(1)↩ states in pertinent part: "A case timely brought shall not be dismissed on the ground that is it not properly brought on behalf of a party until a reasonable time has been allowed after objection for ratification by such party of the bringing of the case; and such ratification shall have the same effect as if the case had been properly brought by such party."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620445/	Harold V. Lamberson and Catherine H. Lamberson v. Commissioner.Lamberson v. CommissionerDocket Nos. 804-68, 2888-68.United States Tax CourtT.C. Memo 1970-131; 1970 Tax Ct. Memo LEXIS 228; 29 T.C.M. (CCH) 585; T.C.M. (RIA) 70131; May 28, 1970, Filed Harold V. Lamberson, pro se, 34 Spring Street Rd., Loudonville,N. Y. Jay S. Hamelburg, for the respondent. FEATHERSTONMemorandum Findings of Fact and Opinion FEATHERSTON, Judge: In these consolidated cases respondent determined deficiencies in petitioners' income tax for 1965 and 1966 in the amounts of $567.59 and $723.64, respectively. The only issue presented for decision is whether certain expenses paid by petitioner Harold V. Lamberson during 1965 and 1966 were traveling expenses "while229 away from home," within the meaning of sections 162(a)(2). 1Findings of Fact Harold V. Lamberson (hereinafter referred to as petitioner) and Catherine H. Lamberson, husband and wife, were residents of Albany, New York, at the time their petitions were filed. They filed joint Federal income tax returns for 1965 and 1966 with the district director of internal revenue, Albany, New York. Petitioner was employed as an attorney for the Veterans Administration (hereinafter V.A.) within New York State continuously from January 1946 until February 20, 1970, when he retired. As of May 13, 1964, petitioner's duty station was at Loudonville, New York, near Albany. At that time he was one of three V.A. attorneys employed in upstate New York. By memorandum dated March 10, 1965, the Chief Attorney of the New York Regional Office of the V.A. advised petitioner that due to heavy work loads and the need to review the effect of a new law expanding the rights of veterans with respect to G.I. insurance, "you are requested to report for indefinite duty at the NYRO on Monday, March 15, 1965 230 ." The memorandum instructed petitioner to reassign all of his Albany work to one of the other upstate New York V.A. attorneys, which he did. Subsequent to March 15, 1965, the V.A. had only two attorneys in upstate New York and never appointed anyone to replace petitioner. At the time of petitioner's reassignment it was expected that the need for his services in connection with the new insurance law would last only a few months; however, at that time petitioner could not foresee whether his employment in New York City would terminate in a short time. After March 15, 1965, petitioner performed no work in the Albany area (except for two occasions when he attended court there for the V.A.), and there was never any discussion about his returning to that area to work. Within two or three months after reporting to New York City petitioner completed his assignment regarding the new insurance law. However, he remained in the New York City office, and on January 31, 1966, was reassigned to the Brooklyn office, although his official duty station was not changed to Brooklyn until November 20, 1966, when he secured a competitive Civil Service position. Petitioner's entire stay in New York231 City between March 15, 1965, and November 20, 1966, was officially designated as a "detail." The term "detail" is defined for V.A. purposes as "a temporary assignment of an employee from his official position to another position within the agency without changing his Civil Service or pay status. At the end of the detail the employee returns to his official position." During the time petitioner was on detail he never received any per diem travel allowance. Catherine, who was employed as a real estate broker in Albany, continued to reside in Loudonville throughout 1965 and 1966, even after the change of petitioner's official duty station. During this period petitioner traveled on weekends between Loudonville and New York City by bus, at a cost of $9.40 per round trip. On his returns for 1965 and 1966 he deducted the cost of these trips ($319.60 for 34 trips in 1965, and $376 for 40 trips in 1966), plus his expenses while living in New York City (computed by him at $14 per day for 140 business days during 1965 and 150 business days during 1966). The figure of $14 per day was related to the per diem travel allowance paid by the V.A. in upstate New York, and did not have any specific232 relationship to the amounts actually expended by petitioner while living in New York City. 587 Respondent disallowed the claimed deductions in their entirety. Opinion Petitioner contends that while he was employed in New York City from March 15, 1965, through November 20, 1966, he was "away from home" within the meaning of section 162(a)(2), 2 and that, consequently, his expenses of living in New York City and traveling on weekends between there and Loudonville, where his wife remained, are deductible. As noted in our recent opinion in Lloyd G. Jones 54 T.C. (1970): The word "home" as used in that section is a term of art. It does not mean the taxpayer's domicile; rather it means his "tax home," i.e., the location233 of his principal place of business, employment, or station of duty. "The job, not the taxpayer's pattern of living," is the crucial factor. A taxpayer continues to have his "home" at his regular place of employment if he accepts "temporary employment of short duration" at another location; but if the assignment is of "substantial" or "indefinite" duration, the second location becomes his "home" within the meaning of section 162(a)(2). * * * In order for petitioner to prevail, therefore, his employment in New York City during the period in question must have been temporary. Petitioner argues that it was, relying on the fact that his assignment in the New York office was designated as a "detail" (defined by the V.A. as "a temporary assignment"). This argument is grounded on petitioner's claim that his "home for tax purposes and his official duty station is fixed by the U.S. Civil Service Commission and the government agency employing him * * ." We disagree. The designation by the Civil Service Commission and the V.A. of petitioner's official duty station is not determinative of the location of his "tax home." Cf. . That designation234 relates solely to administrative procedures within those agencies and bears no relation to petitioner's tax status. Indeed, petitioner was advised by his immediate superior that his stay in New York City would be "indefinite." However, we need not place any more weight upon this statement than on the contrary designation by the V.A. personnel records. The record before us clearly establishes that petitioner's stay in New York City was not temporary, but was expected to last for an indefinite period. Upon leaving Loudonville petitioner transferred all of his Albany area work assignments to another attorney; thereafter he did not perform any work in that area (except on two brief occasions) and never even discussed the possibility of returning there for the V.A. At the time of his reassignment he could not foresee the duration of his employment in New York City. When his assignment with respect to the new insurance law was completed he did not return to Albany, but instead remained in New York City. Finally, notwithstanding the formal designation of his employment in New York City as a temporary one, he never received any per diem travel allowance from the V.A. during that time. All235 of these factors serve to distinguish (C.A. 9, 1960), reversing , relied on by petitioner. We think it clear that petitioner's decision to retain a residence in Loudonville, thus giving rise to the expenses incurred here, was motivated by personal reasons unrelated to the carrying on of his trade or business as an employee of the V.A. Cf. . His wife was employed as a real estate broker in Albany, with income approximately equal to petitioner's. They obviously were unwilling to lose this source of income, as is borne out by the fact that she continued to live in Loudonville even after petitioner's duty station was officially changed to Brooklyn. We conclude that the expenses in issue here were not incurred while petitioner was "away from home," and are nondeductible personal expenses under section 262. Decisions will be entered for the respondent. 588 Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including - * * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620446/	W. Clark Wise and Honora Wise v. Commissioner.Wise v. CommissionerDocket No. 55815.United States Tax CourtT.C. Memo 1957-83; 1957 Tax Ct. Memo LEXIS 169; 16 T.C.M. (CCH) 361; T.C.M. (RIA) 57083; May 23, 1957Thomas F. Callahan, Esq., Hanna Building, Cleveland, Ohio, and Ira W. Patterson, Esq., for the petitioners. Maurice B. Townsend, Jr., Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: An income tax deficiency for the taxable year 1950 has been determined by the Commissioner against petitioners in the amount of $1,530.78. The issues for decision are (1) whether petitioner W. Clark Wise sustained a deductible net loss from harness racing of horses and (2) whether he sustained a deductible net loss from the operation of a farm during that year. General Findings of Fact Such facts as have been stipulated are so found. Petitioners, W. Clark and Honora Wise, husband and wife, filed joint Federal income tax returns for the year 1950 with the collector of internal revenue for the170 18th district of Ohio at Cleveland, Ohio. Inasmuch as the activities of W. Clark Wise are those with which we are here primarily concerned, "petitioner" as hereinafter used has reference to him. Petitioner is 77 years old and has been interested as part owner in an automobile agency for many years, since 1933, and was so interested during the year 1950. This activity occupied substantially all of his time, and he received income therefrom in the amount of $21,079.23 during the year 1950. Findings of Fact Issue 1 Since his youth petitioner has been interested in working, breeding, racing and dealing in horses. Beginning in 1947 and continuing through 1955 petitioner held a half interest in the following harness racing horses whose costs, winnings, depreciation and expense, and gain or loss from the owning and racing of which appear opposite their respective names: Deprecia-Name oftion andGainYearHorseCostWinningsExpensesor Loss1947Magnolia$2,400.00Baldwin1,250.00Guy Kuno750.00$1,724.16$3,383.50($1,659.34)1948MagnoliaBaldwinGuy Kuno3,528.275,753.85( 2,495.58)1949BaldwinGuy KunoBrooklawn600.001,227.703,382.90( 2,155.20)1950Baldwin938.19Brooklawn525.41Guy Kuno877.91Margo Abbey(Sold in 1950, Cap. Gain 517.50LaBelle Abbey(Sold in 1950, Cap. Gain 202.50-720.00 1Wise Paul110.00Clever Mack750.002,341.515,477.23( 3,135.72)1951BaldwinBuy KunoBrooklawnClever MacNora Vola1,250.003,781.995,676.67( 1,894.68)1952BaldwinGuy KunoClever MacDarn Trusty1,187.50Sidney Holmes175.002,900.065,853.84( 2,953.78)1953Clever MacDarn TrustySidney HolmesWhat's Up1,000.002,594.253,142.32( 548.07)Wise Paul1954What's UpWise PaulDarn Trusty5,078.655,112.10( 33.55)1955What's Up5,742.434,181.50Worthy Maid1,500.00381.45Darn Trusty234.50763.54Wise Paul117.54Total$5,976.93$5,417.03$ 559.90171 Although petitioner kept no formal books of account with respect to the horse racing operation until such books were prepared by an accountant during 1950, he did keep sufficient basic records of his income, cost, and expense so that his profit or loss could be determined at any time. During the year 1950 it was necessary for petitioner to attend substantially all the races in which his horses were entered because the trainer and driver were somewhat addicted to intoxicating liquors and it was necessary for him to see that the horse was in condition to race, that he was ready to race, and that the handlers were in proper condition. An additional reason for petitioner's attendance at the various races was the prospect of meeting people who would be interested in buying one of his horses. In addition, when the distance from the place where the horses were quartered to the track was relatively short, petitioner would transport the horses in his own trailer or small truck. On the other hand, if the distance172 was substantial, he would engage truckers to perform that work. During the non-racing season petitioner's horses were kept at the Stark County Fair Grounds in Canton, Ohio. The cost for the use of those facilities to petitioner during the non-racing season was low, the barn rent being only $12 a month. During the time the horses were kept at the fair ground in the non-racing season, they required substantial attention and petitioner made daily visits there in order to see that proper care was being given them. Although petitioner intended to profit by horse racing and the sale of race horses during 1950, he would have engaged in the activity as he had in years prior and since whether or not profit was forthcoming. Petitioner was not engaged in the racing and dealing in horses during 1950 as a business operation primarily for profit, but as a hobby. Opinion Issue 1 Whether or not petitioner intended to and did race and deal in horses during 1950 primarily for profit so that his activities may be said to constitute a business is the crux of this issue. We are convinced from petitioner's life-long interest in horses and racing, from his testimony, and from a long and largely173 consistent record of his net losses that he has engaged in the past and did in 1950 and in subsequent years engage in owning, racing, and dealing in harness racing horses whether or not he made a gain or suffered a loss from the operation. A comparison of his conduct of that operation with the successful and profitable operation of his automobile sales agency confirms this conclusion. His intent and desire to make a profit were entirely secondary to the gratification of his desire to remain active in an activity with which he had been allied all his life. His horse racing and dealing constituted a hobby rather than a business. The expenses thereof which result in the net losses here sought to be deducted cannot therefore be said to be the ordinary and necessary expense of carrying on a trade or business under section 23 of the Internal Revenue Code of 1939. The Commissioner has properly disallowed this loss deduction. Findings of Fact Issue 2 Petitioner was born and reared on a farm and, with his brother, rented and operated a 500-acre farm for several years after leaving the farm of his parents. Thereafter, he successively entered and after a period of operation left the dairy174 and road construction contracting businesses. Since 1933 petitioner has been part owner and active in the operation of an automobile sales agency from which he has derived virtually all of his income and to which business the major proportion of his life was devoted during subsequent years, including 1950. In June of 1948 he purchased a farm, consisting of about 42 acres of tillable ground, upon which there were a house, a barn, and miscellaneous farm buildings. The purchase price was $10,000. At the time of its purchase, the farm was in a run-down condition so far as its use for farming was concerned. The house and barn, although generally in good condition, were in need of some repair. Petitioner remodeled the house and rented it. He reroofed the barn and painted it and the outbuildings. He repaired fences and, in 1949, began fertilizing the soil in an effort to bring it to its full crop-producing capacity. During that year he purchased a tractor, a farm truck, and a mowing machine at a total cost of $1,420, fertilizer at a cost of $195.49, and seed at a cost of $140.62. He planted wheat, corn, and oats during that year and purchased and sold cattle, upon which latter transactions175 he reported income of $518.09. In 1950 petitioner purchased a side rake and manure spreader at a cost of $100, a wagon at a cost of $150, and a hay loader at a cost of $20. He also expended $404.26 for lime and fertilizer and approximately $62 for seed and reported a gross income of $529.90. The following schedule shows the farm income and expenses for the years 1949 and 1950: Items19491950Income: Sale of cattle$518.09$ 129.70Sale of grain71.40161.20Produce consumed100.00100.00Sale of chickens39.00Gas lease100.00Total$689.49$ 529.90Expenses: Seed and plants$140.62$ 62.30Repairs and maintenance210.00124.20Fertilizer and lime195.49404.26Veterinary18.0015.00Taxes29.6568.92Insurance49.6543.47Depreciation308.85657.50Labor457.06Feed4.00Machine hire62.54Gasoline91.66Freight10.00Auto upkeep42.80Total$952.26$2,043.71The farm has never produced a profit. The gross income shown above includes 13 per cent of its produce which was consumed by petitioner's family and returned by him as income. The failure of the farm operation to show a profit is due176 in large part to its size and the poor condition of its soil which has required petitioner to build up its productive capacity over a period of years. No recreational facilities exist on the farm and it has never been used by petitioner, his family, or friends for that purpose, except for occasional pheasant hunting by petitioner himself. He has consistently spent a regular portion of his time in farming activity and has, in each year of its operation, planted, cultivated, and harvested crops for sale over and above any amount of farm produce consumed by him. He has kept accurate records of account with respect to farm expense and income. Farm losses for 1954 and 1955 are sharply reduced from those of prior years. Although petitioner's farming activity has been at a loss since its inception in 1949, his purpose in engaging in that operation was primarily to rebuild the farm with the object of deriving a yearly profit therefrom. In 1950 he was carrying on a trade or business primarily for profit in operating his farm. Opinion Issue 2 It is true that evidence of consistent net loss in the conduct of a business operation is usually indicative of a hobby rather than the carrying177 on of a trade or business primarily for profit, but where such losses may be attributed to the repair and build-up of a badly run-down business facility, the indication does not necessarily follow. It is satisfactorily shown that such is the case here. Petitioner has not treated his farm as a hobby, but has very apparently, even at an advanced age, spent a regular proportion of his time actually laboring physically upon the farm and generally supervising its operation. He has each year raised grain crops for sale and has derived gross income therefrom. He has kept accurate account of his income and expense. He has spent a considerable amount in providing machinery for the operation of the farm. It is clear that he has conducted the operation with an object to rehabilitate his farm for the purpose of bringing it eventually to the point where income will exceed the expense of doing business. Of significance is the fact that, except for occasional pheasant hunting, petitioner, his family, and friends have never used the farm for recreation. Indeed, it is clear that no facilities for such use of the property exist. It might, of course, be argued that petitioner in laboring on the farm178 derives recreational enjoyment therefrom, but, if so, there would be no inconsistency with its operation as a business for profit for such is not uncommonly the case with respect to many businesses and their proprietors where there is no question but that the operation is a business and not a mere hobby. The Commissioner, on brief, argues at some length that the farm here involved could not have ever produced a profit because of its size. In so arguing he virtually asks that we take judicial notice that under the farm economy as it existed in 1950 and subsequent years 40-acre farms were not large enough to be profitably operated. We, of course, may not take judicial notice of such a fact and respondent has offered no evidence which would support it. We think petitioner, in the absence of contrary proof by respondent, has demonstrated that his farm will in due course show a profit and that his operation thereof during the taxable year 1950 was primarily the operation of a business to that end within the meaning of section 23(a)(1)(A) of the Code. Because no contention is made here that the farm expenses reported by petitioner are not reasonable, ordinary, and necessary, it follows179 that petitioner's farm loss as reported in his income tax return for 1950 was properly taken. Decision will be entered under Rule 50. Footnotes1. The $720 received on sale of petitioner's interest in Margo Abbey and LaBelle Abbey was reported on income tax return as capital gain, there being no basis as shown herein.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620447/	JAMES R. MOUDY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMoudy v. CommissionerDocket Nos. 35260-85; 1633-87.United States Tax CourtT.C. Memo 1989-216; 1989 Tax Ct. Memo LEXIS 216; 57 T.C.M. (CCH) 327; T.C.M. (RIA) 89216; May 4, 1989; As corrected May 9, 1989 James R. Moudy, pro se. Frank Simmons, and J. Craig Young, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax for the calendar years 1982 and 1983 in the amounts of $ 14,176 and $ 19,821, 218 respectively and an addition to tax under section 6651(a)(1) 1 for the year 1983 in the amount of $ 149.70. Certain issues have been disposed of by agreement of the parties leaving for our decision whether petitioner, James R. Moudy (petitioner), was a "qualified individual," within the meaning of section 911(d), entitled to elect to exclude from gross income, under section 911(a), a portion of the wages he earned while working in Nigeria in 1982 and 1983. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner's legal residence was in Hattiesburg, Mississippi at the time of the filing of the petitions in these cases. Petitioner filed his Federal income tax returns for the calendar years 1982 and 1983 with the Internal Revenue Service Center in Philadelphia, Pennsylvania. Petitioner was born and grew up in Hattiesburg, Mississippi. He has lived there his entire life except for work-related absences and two or three years he spent219 in Louisiana. Petitioner's parents have also lived in Hattiesburg their entire lives. Two of petitioner's siblings live in the Hattiesburg area as do a number of his friends and other relatives. During 1982 and 1983, petitioner maintained bank accounts in Hattiesburg and had a Mississippi driver's license. Petitioner has been married twice. Petitioner's first wife died prior to 1982 and petitioner remarried on August 12, 1983. Petitioner had three children by his first wife. These children were approximately four, six, and eight years old during 1982. During 1982 and 1983, the years here at issue, and for several years prior thereto, petitioner worked for Hughes Tool Company (Hughes). In 1981, while petitioner was working for Hughes, primarily as an operator on an oil rig in the Gulf of Mexico, he was approached by a manager about the possibility of taking a position overseas in Nigeria. Because such a position would involve a promotion to supervisor, would entail a raise in pay, and would provide substantial bonuses for overseas work, petitioner elected to accept an overseas position in Nigeria. Between October 1981 and December 1983, petitioner worked in Nigeria as220 a drilling supervisor for Hughes and its partner company in Nigeria, Alea Company, Ltd. (Alea). Petitioner was assigned to a 28/28 work schedule. Under this schedule he worked for a 28-day period and then was allowed a 28-day rest period. 2 Because of his duties as a supervisor, petitioner was not able to follow this schedule strictly. Petitioner lived and worked primarily in a compound in Izombe, Nigeria during each 28-day work period. Hughes provided all of petitioner's food and lodging at no cost to him when he was at the Izombe compound. Petitioner's work also required that he travel to Alea's headquarters in Lagos, Nigeria every two weeks. When petitioner was in Lagos, he stayed without cost to him at a hotel or at Alea's staff house. In addition, petitioner was required to drive or fly to other parts of Nigeria on occasion in connection with his work. When petitioner traveled on company business, Hughes paid all his food and lodging expenses. On occasion, 221 when petitioner was ahead in his work, he would play golf or go sailing. In addition, if his duties permitted, petitioner would occasionally, during his 28-day work periods, take a few days off and visit friends that he had made in the oil industry. Some of these friends were Nigerian and some were American, Italian, or German. When visiting these friends, petitioner would stay at their houses or a hotel. However, petitioner never stayed at the house of a Nigerian. Hughes did not pay petitioner's expenses when he traveled for personal reasons. Petitioner would also, on occasion, travel and visit friends in Nigeria for a few days during his 28-day rest period. Petitioner was not required by Hughes or the Nigerian government to leave Nigeria during his 28-day rest period. Petitioner was the legal guardian of his children and was often required to return to the United States to make decisions on their behalf in connection with the wrongful death action brought as a result of the death of his first wife. However, petitioner would have returned to the United States to visit his children even if his presence was not required in connection with the wrongful death action. During222 the years at issue, petitioner returned to the United States at some point during every 28-day rest period. Petitioner arrived in, and departed from, the United States on the following dates: Arrived in United StatesDeparted from United States-November 22, 1981December 26, 1981January 27, 1982March 9, 1982March 28, 1982May 1, 1982May 19, 1982June 26, 1982July 15, 1982August 21, 1982September 9, 1982October 16, 1982November 2, 1982December 11, 1982December 26, 1982January 28, 1983February 26, 1983March 30, 1983April 23, 1983May 26, 1983June 17, 1983July 28, 1983August 13, 1983September 15, 1983September 25, 1983November 20, 1983Petitioner spent, on average, approximately 19.5 days of each 28-day rest period with his family in Hattiesburg, Mississippi. However, due to his unpredictable schedule, petitioner spent as few as 10 days in the United States during one rest period and as many as 32 days in the United States during another. Hughes paid petitioner's round-trip air fare between the United States and Nigeria. Petitioner was not physically present in Nigeria for at least 330 full days during223 any period of 12 consecutive months that began or ended during the taxable years 1982 or 1983. Up until May 1982, petitioner's children lived at his parents' house in Hattiesburg, Mississippi. When petitioner returned to the United States during his rest periods, he also lived with his parents. In May 1982, a house petitioner was having constructed for himself and his children was completed. The house was located at 105 Chesterfield Road in Hattiesburg. Petitioner and his children moved into the new house in May 1982 and from that date until petitioner's remarriage, a housekeeper took care of petitioner's children. When petitioner returned to the United States during his rest periods, he stayed with his children in the new residence. After petitioner's remarriage on August 12, 1983, his wife cared for the children while petitioner was in Nigeria. Petitioner had the option of bringing his children, and later his second wife, with him to Nigeria but chose not to do so because of the country's unstable political situation. While in Nigeria, petitioner received personal correspondence from his second wife and children, but all other mail (i.e., monthly bills) were sent to him224 in Hattiesburg. In order to live and work in Nigeria, non-citizens are required by the Nigerian government to obtain a "residency permit" and pay Nigerian income taxes. Petitioner obtained a residency permit from the Nigerian government. He was then required to obtain an "aliens card" from the province in which the headquarters of Alea was located. The residency permit together with the aliens card allowed petitioner to stay in the Province of Lagos, Nigeria for a period of two years. The residency permit also allowed him to travel temporarily to other provinces within Nigeria. Along with the residency permit, petitioner was issued a "multiple re-entry visa" which allowed him to leave and re-enter Nigeria at his or his employer's convenience, without obtaining a visa for each entry. After obtaining the requisite residency permit and aliens card, petitioner obtained a "work permit" which allowed him to work in the Province of Lagos, Nigeria, the location of Alea's headquarters. Petitioner's employer, Hughes, paid an unspecified amount of income taxes to the Nigerian government on petitioner's behalf in 1982 and 1983. Even though petitioner was required by Nigerian law to obtain225 a residency permit, he could not own property in Nigeria under Nigerian law. Petitioner had certain personal belongings (i.e., work clothes, shoes, etc.) which he kept in his room at the Izombe compound. Petitioner obtained a Nigerian driver's license. He also opened a checking account with the Commerce Bank of Africa in Owerri, Nigeria. However, he did not write checks on the account and used it only to exchange currency. In December of 1983, Hughes ceased operations in Nigeria. All of Hughes' employees, including petitioner, left Nigeria at about this time. Some Americans remained behind and continued to work for other companies in Nigeria. The reigning government in Nigeria was overthrown shortly after petitioner left. Petitioner worked for Hughes until November 1984. During the remainder of his tenure with Hughes, he worked in Texas, Alaska, and Louisiana. He returned to Nigeria to work for a different company in 1986. Petitioner received wages from Hughes in 1982 in the amount of $ 56,890.50. Hughes withheld approximately $ 15,972 in U.S. Federal income taxes from petitioner's wages pursuant to section 3402. On his return for the calendar year 1982, petitioner excluded226 $ 48,525 of his total wages from gross income under section 911(a)(1) as foreign earned income. He computed his tax liability based on the tax rates applicable to a head of household. Petitioner reported his 1982 tax liability to be zero and claimed a refund of all amounts withheld from his wages. Petitioner received wages from Hughes in 1983 in the amount of $ 78,898.28. Hughes withheld $ 18,021 in U.S. Federal income taxes from his wages pursuant to section 3402. Petitioner's 1983 income tax return was received by the Internal Revenue Service Center at Philadelphia on May 1, 1984. On his return for the calendar year 1983, petitioner excluded $ 48,877 of total wages from his gross income under section 911(a)(1) as foreign earned income. He computed his tax liability based on the tax rates applicable to married persons filing separate returns and claimed entitlement to a refund of $ 16,827. In his notice of deficiency for petitioner's 1982 tax year, issued on August 2, 1985, respondent determined that petitioner was not entitled to exclude any portion of his 1982 wages under section 911(a)(1) and that petitioner owed U.S. Federal income taxes in the amount of $ 14,176. In227 his notice of deficiency for petitioner's 1983 tax year, issued on October 21, 1986, respondent determined that petitioner was not entitled to exclude any portion of his 1983 wages under section 911(a)(1) and that petitioner owed U.S. Federal income taxes in the amount of $ 19,821. Respondent also determined that petitioner was liable for an addition to tax under section 6651(a), in the amount of $ 149.70, for failure to timely file his 1983 return. OPINION Section 911(a) provides, in part, that "At the election of a qualified individual * * , there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year * * the foreign earned income of such individual * * ." Section 911(b)(1) defines the term "foreign earned income" as amounts received by an individual from sources within a foreign country which constitute earned income attributable to services performed by such individual "during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable." Section 911(d)(1), which defines the term "qualified individual," provides that: (1) * * The term "qualified individual" means228 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. The parties agree that petitioner was not physically present in any foreign country or countries for 330 full days during a consecutive 12-month period which began or ended in 1982 or 1983. Thus, in order for petitioner to be considered a qualified individual, entitled to take advantage of the exclusion provided by section 911(a), he must show that his tax home was in Nigeria during the years at issue and that he was a bona fide resident of Nigeria for an uninterrupted period which includes an entire taxable year. Because we conclude that petitioner's tax home was not in Nigeria during the years at issue, we need not reach the question of petitioner's bona fide residency. Section 911(d)(3) provides229 that, for purposes of section 911, a taxpayer's "tax home" is his home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). However, this section further provides that "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." Section 911(d)(3); section 1.911-2(b), Income Tax Regs.; Lemay v. Commissioner,837 F.2d 681">837 F.2d 681 (5th Cir. 1988), affg. a Memorandum Opinion of this Court. Therefore, even if petitioner's home for purposes of section 162(a)(2) was in Nigeria during the years at issue, he will not be treated as having a "tax home" in Nigeria (and will not be entitled to take advantage of the foreign earned income exclusion under section 911(a)) if, for the years at issue, his "abode" was in the United States. In Lemay v. Commissioner, supra, the taxpayer was an oil rig worker on an offshore rig in the territorial waters of Tunisia. The taxpayer worked a 28/28 schedule. Although the taxpayer spent most of his 28-day work period on the offshore rig, he was occasionally required, because of his supervisory position, to travel230 to his employer's main offices on the Tunisian mainland. While on the mainland, the taxpayer stayed in a hotel room or apartment provided by his employer. The taxpayer had minimal contact with Tunisian residents but did meet some Tunisian officials and occasionally attended informal gatherings or sporting events. The taxpayer's employer paid virtually all of his living expenses and provided him with round-trip air fare between Tunisia and the United States. The taxpayer returned to his home and family in Lake Charles, Louisiana during each 28-day rest period. The taxpayer maintained a residence in Lake Charles, was registered to vote in Lake Charles, maintained a bank account in Lake Charles, and possessed a Louisiana driver's license. In determining whether the taxpayer, in Lemay v. Commissioner, supra, had an abode in the United States during the year at issue, the Fifth Circuit applied the following language, taken from our opinion in Bujol v. Commissioner,T.C. Memo 1987-230">T.C. Memo. 1987-230, 53 T.C.M. (CCH) 762">53 T.C.M. 762, at 763-764, 56 P-H Memo T.C. par. 87,230 at 1112-87, affd. without published opinion 842 F.2d 328">842 F.2d 328 (5th Cir. 1988): "Abode" has been variously231 defined as one's home, habitation, residence, domicile, or place of dwelling. Black's Law Dictionary 7 (5th ed. 1979). While an exact definition of "abode" depends upon the context in which the word is used, it clearly does not mean one's principal place of business. Thus, "abode" has a domestic rather than vocational meaning, and stands in contrast to "tax home" as defined for purposes of section 162(a)(2) [Fn. ref. omitted.] Lemay v. Commissioner, supra at 683. Based upon the above language and its own examination of the facts, the court upheld our conclusion that the taxpayer retained strong economic, familial, and personal ties to his residence in Louisiana. In contrast, his ties to Tunisia were merely transitory. The court concluded that, since the taxpayer's abode remained in the United States during the year at issue, his tax home was not in Tunisia under section 911(d)(3). Therefore, he did not qualify for the foreign earned income exclusion under section 911(a). The facts of the instant case are, in many ways, similar to those present in Lemay v. Commissioner, supra. The most significant of these similarities are that: (1) Petitioner's232 children, and later his second wife, continued to live in Hattiesburg, Mississippi even after petitioner left for Nigeria; (2) Petitioner returned to his home and family during each 28-day rest period even though he was not required to do so by Hughes or the Nigerian government; 3 (3) Petitioner maintained a home for himself and his family, initially at the house of his parents and later at his own house; and (4) Petitioner maintained bank accounts in Hattiesburg, Mississippi. All of petitioner's bills were sent to his mailing addresses in Hattiesburg, rather than his address in Nigeria. Petitioner's parents and many of his friends lived in Hattiesburg as did two of his siblings. Here, as in the Lemay case, petitioner did more than merely maintain a dwelling in Hattiesburg. He retained strong economic, familial, and personal ties with the United States. Furthermore, as was the case in Lemay v. Commissioner, supra, petitioner's ties to the foreign country in which he worked were merely transitory. 233 There are minor factual distinctions between this case and the Lemay case. The taxpayer in Lemay v. Commissioner, supra, maintained his own home in the United States during the entire year at issue. In the instant case, petitioner did not maintain a separate home from that of his parents in the United States for the first four months of 1982. During this period, his children lived with his parents and he stayed at his parents' home when he was in Mississippi. However, we do not consider this factor significant. The term "abode" does not carry with it an implication of exclusiveness requiring the taxpayer to maintain a separate and distinct house. Rather, the term "abode" refers to the taxpayer's home, habitation, residence, domicile or place of dwelling. Therefore, as long as petitioner and his children resided with his parents in a permanent sense during the first four months of 1982, as opposed to merely visiting them, the fact that he and his family did not live in a separate house does not negate a finding that petitioner's abode was within the United States during all of 1982. The instant case is also factually distinguishable from the Lemay234 case in that petitioner was assigned to an oil rig and compound on the mainland of Nigeria while the taxpayer in the Lemay case was assigned to an offshore rig. Petitioner's assignment to the mainland of Nigeria could have caused him to be less isolated than the taxpayer in the Lemay case. However, petitioner's land-based assignment was, in many ways, similar to an assignment on an offshore rig in that his contacts with foreign citizens were extremely limited. 4 Petitioner remained in the compound at Izombe during his work period except for occasional excursions on company or personal business. When he did travel, he stayed at his employer's staff house, at hotels, or at the homes of his American, Italian, or German friends who were also in the oil industry. He never stayed at the home of a Nigerian friend because the living conditions were somewhat primitive. Petitioner remained significantly isolated from the mainstream of Nigerian life and did not develop personal ties to Nigerians outside the industry. Petitioner had a checking account with a Nigerian235 bank, while, in Lemay v. Commissioner, supra, the facts do not show whether the taxpayer maintained a foreign bank account. However, petitioner testified that he opened the checking account solely to exchange currency. He never wrote any checks on the account. Petitioner had very limited, if any, economic ties with Nigeria. In the instant case, petitioner had a Nigerian driver's license, while, in Lemay v. Commissioner, supra, the facts do not show that the taxpayer had a Tunisian driver's license. In our view, possession of a driver's license, in itself, is not a significant permanent tie to a foreign country. Such a license is often needed merely to carry out a taxpayer's work-related duties.5 In any event, petitioner also maintained a Mississippi driver's license and, therefore, any probative value that possession of a Nigerian driver's license might have is canceled out. 6In the instant case, petitioner was required by the Nigerian government to obtain a residency permit, 236 aliens card, and work permit, while in Lemay v. Commissioner, supra, the facts do not show that there was such a requirement. Petitioner testified at trial that the only reason he obtained the permits was to be entitled to work within the borders of Nigeria. Petitioner also testified that he was approached by Hughes about taking a position overseas (with the attendant promotion, raise in pay, and bonuses) and, when he indicated his interest, Nigeria just happened to be the place to which he was assigned. From the record, it appears that petitioner never had any long-term intention to stay in Nigeria as a resident. Petitioner could have brought his wife and children with him to Nigeria but never did so, thereby assuring his eventual return to the United States. Thus, petitioner had no permanent familial ties to Nigeria. Petitioner's decision in this matter indicates that any ties petitioner did have with Nigeria were merely transitory in nature and that petitioner intended to and did maintain strong economic, familial, and personal ties to the United States. In sum, after examining the record in the instant case, we conclude that petitioner maintained an abode237 within the United States during 1982 and 1983 and, therefore, under section 911(d)(3), his tax home was not in Nigeria. Thus, petitioner is not a qualified individual within the meaning of section 911(d)(1) and is not entitled to exclude any portion of his wages from Hughes under section 911(a). Decisions 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 at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. While assigned to an oil rig in the Gulf of Mexico, petitioner worked a "can to can't" schedule, which means, "You go out there and stay as long as you can; when you can't stand it anymore, you come in."↩3. Although petitioner testified that he was often required to return home in connection with the wrongful death action of his first wife, petitioner's testimony shows that he would have returned home in any event to be with his children and, later, his second wife.↩4. Brobst v. Commissioner,T.C. Memo. 1988-456↩, appeal filed (10th Cir., Dec. 19, 1988).5. Brobst v. Commissioner, supra.↩6. Welsh v. Commissioner,T.C. Memo. 1988-512↩, appeal filed (10th Cir., Jan. 27, 1989).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620448/	ESTATE OF ROBERT CITRINO, DECEASED, SAMUEL S. SAIBER, ADMINISTRATOR, AND M. LISBETH CITRINO, ET. AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Estate of Citrino v. CommissionerDocket Nos. 5974-83; 5975-83; 29520-83.United States Tax CourtT.C. Memo 1987-565; 1987 Tax Ct. Memo LEXIS 563; 54 T.C.M. (CCH) 1067; T.C.M. (RIA) 87565; 98 Oil & Gas Rep. 411; November 12, 1987. Winthrop Drake Thies, for the petitioners. Edward G. Martoglio and Caroline R. Ades, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: In these consolidated cases, respondent determined deficiencies in petitioners' Federal income tax for the calendar year 1977 as follows: PetitionersAmountEstate of Robert Citrino, Deceased,Samuel S. Saiber, Administrator,and M. Lisbeth Citrino(docket No. 5974-83)$ 9,708.00Stanley Wyman and Jean Wyman(docket No. 5975-83)$ 5,597.00Lewis Fromkin and Elaine Fromkin(docket No. 29520-83)$ 5,790.14567 The issues for decision are: (1) Whether Central Associates, a Pennsylvania limited partnership formed December 30, 1977, was an activity not engaged in for profit within the meaning of section 183; 2 and (2) In a situation where a timely petition was filed, whether the assessment and collection of the deficiency determined against the Estate of Robert Citrino is barred by the statute of limitations because the estate's administrator, who had previously filed a Notice Concerning Fiduciary Relationship pursuant to section 6903, was not mailed a copy of the deficiency notice. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Samuel S. Saiber, Administrator of the Estate of Robert Citrino, had his office in Newark, New Jersey, and petitioner M. Lisbeth Citrino resided in Secaucus, New Jersey, on the date the568 joint petition was filed in this case. Petitioners Stanley Wyman and Jean Wyman, husband and wife, resided in Springfield, New Jersey, on the date they filed their petition in this case. Petitioners Lewis Fromkin and Elaine Fromkin, husband and wife, resided in East Brunswick, New Jersey, on the date they filed their petition in this case. Robert Citrino, Stanley Wyman, and Lewis Fromkin each filed a joint Federal income tax return (Form 1040) with his spouse for the calendar year 1977. 3 Petitioners M. Lisbeth Citrino, Jean Wyman, and Elaine Fromkin are parties in this case solely because they filed joint income tax returns with their husbands during the year in issue. All further references to "petitioners" are to Robert Citrino, Stanley Wyman, and Lewis Fromkin in their capacity as limited partners in the Central Associates partnership. On December 30, 1977, Central Associates was organized under the laws of Pennsylvania as a limited partnership. 4 Central Associates (sometimes hereinafter referred to569 as the partnership) was formed to drill oil and gas wells, and to produce and sell the production of such wells. Central Associates was composed of one general partner and eight limited partners. The general partner was Compass Development, Inc., a Pennsylvania corporation whose president and sole shareholder was John Pfauth. Compass Development was a drilling company. The eight limited partners were Stanley Wyman, Lewis Fromkin, Robert Citrino, William Balsam, Thomas DiBiasi, Joseph Menker, Herbert Bressman, and Winthrop Drake Thies, a group of close friends, relatives and business associates. Joseph Menker and Herbert Bressman were friends of Wyman and Fromkin, respectively. William Balsam was Fromkin's brother-in-law, and Robert Citrino and Thomas DiBiasi were partners in the practice of law with Balsam. Winthrop Drake Thies was tax counsel to several partnerships that Wyman was involved in. 570 Petitioner Stanley Wyman and Mr. Pfauth structured the transaction involved in this case. Petitioners Stanley Wyman and Lewis Fromkin formed Central Associates. Earlier in 1977, before the formation of Central Associates, Fromkin and Wyman were engaged in forming and marketing limited partnership offerings for partnerships to be associated with Compass Development and others. They also formed Fromkin-Wyman Associates, Inc., which was a company hired by Compass Development as a management consultant to coordinate relations between Compass Development and third parties in various oil and gas ventures for which Compass Development was the driller. During the years prior to their association, Wyman had been in the financial planning field and Fromkin had been in the real estate construction industry. Wyman's first involvement with John Pfauth, president of Compass Development, was in 1976, and he had been involved in approximately seven drilling ventures with Pfauth prior to December of 1977. The record contains no evidence as to the nature of these prior ventures with Pfauth. In December of 1976, Wyman and Pfauth had formed Oil Resources Management Corporation to be the leasing571 agent responsible for locating and acquiring the rights to oil and gas leases, and to be the general partner in at least one limited partnership. However, Central Associates was Wyman's first personal investment in an oil and gas drilling venture. Fromkin's first involvement in an oil and gas drilling venture was with Pfauth and Wyman in June of 1977. Similarly, the record contains no evidence as to the nature of this prior venture, and it also appears that Central Associates was Fromkin's first personal investment in an oil and gas drilling venture. Central Associates was formed on December 30, 1977. No prospectus or other form of investment memorandum describing the limited partnership or outlining its benefits was prepared. Wyman and Fromkin offered limited partnership interests in Central Associates only to a small, inside group of their relatives, friends, and close business associates. The partnership agreement, also dated December 30, 1977, states that the partnership's principal business is the drilling of wells for oil and/or gas on certain leases to be contributed by the general partner, Compass Development. The contribution of the leasehold interest described below572 was Compass Development's sole contribution, as general partner, to the capital of the partnership. A document entitled "Assignment of Oil and Gas Lease" was executed on December 30, 1977. This document purported to transfer Compass Development's leasehold interest in a certain oil and gas lease on land located in Forest County, Pennsylvania, to Central Associates. The document is signed by John Pfauth, president of Compass Development, as assignor, and also by John Pfauth, president of Compass Development, general partner of Central Associates, as assignee. 5 Paragraph four of the document states that the assignee (Central Associates) agrees not to drill any oil or gas well except by contracting with the assignor (Compass Development) to do such drilling work for assignor's "then current rates, provided that its charges be comparable to charges by others for like work." Pfauth apparently offered a number of different leases or portions of leases from among which Wyman could make a choice. Wyman indicated that he chose the one described in the assignment because of its proximity to prior projects that had been successful. There is no evidence in the record as to these allegedly573 successful projects. Section 4.1 of the partnership agreement provided that the management of the partnership shall be carried on by the general partner. It further provided that the general partner shall have full and exclusive authority and responsibility to manage and control all the affairs and business of the partnership. 6 Section 5.3 of the partnership agreement stated that no limited partner shall take part in the management of, or transact any business for or on behalf of, the partnership. 7 Section 10.1 of the partnership agreement provided that the partnership would dissolve and terminate upon, among other things, the bankruptcy, insolvency, or dissolution of the general partner. 574 The partnership agreement required the limited partners to make the following capital contributions to the partnership: PercentageCapital ContributionLimited PartnerInterest 8CashNoteTotalLewis Fromkin9% $ 8,000$ 18,000$ 26,000Stanley Wyman9% 8,00018,00026,000William Balsam18% 16,00036,00052,000Robert J. Citrino9% 8,00018,00026,000Thomas DiBiasi9% 8,00018,00026,000Joseph Menker13.5%12,00027,00039,000Winthrop DrakeThies4.5%4,0009,00013,000Herbert Bressman9% 8,00018,00026,00081% $ 72,000$ 162,000$ 234,000575 The only documentary evidence by petitioners to establish payment of the cash contributions is copies of two canceled checks payable to Central Associates, one from Wyman, dated December 22, 1977, and one from Fromkin, dated December 21, 1977, each in the amount of $ 8,000. No other books or records, bank statements, deposit slips, or canceled checks were offered by petitioners regarding the other limited partners' cash contributions. 9Petitioners each executed a recourse promissory note for the balance of his capital contribution to the partnership. 10 Under576 the terms of the notes, the principal amount, together with interest accrued at a rate of eight percent per annum, was due on December 31, 1982. Thus, no payments of either principal or interest were due on the notes for five years, except from any production from the wells. 11577 Also on December 30, 1977, Central Associates and Compass Development executed a document entitled Turnkey Drilling Agreement. The purpose of a "turnkey" drilling agreement is to fix the cost of drilling the wells at a certain amount. Under the terms of this drilling agreement, Compass Development agreed to drill up to nine oil and gas wells for Central Associates on the leasehold interest that Compass Development had assigned to Central Associates. The drilling agreement provided that "The Partnership will give notice to the Driller from time to time, but in no event later than December 28, 1977 [two days before Central Associates was formed] of the number of wells (in not less than sets of three) to be drilled and completed hereunder." Of the nine wells to be drilled, six were to be producing wells and three were to be injection wells. 12Compass Development agreed to complete "all or a substantial portion of its work hereunder on or before December 31, 1977, and fully complete all of its work no later than December 31, 1978, time being of the essence in both instances." 578 In return for Compass Development's performance, the Turnkey Drilling Agreement provided that Central Associates agreed to pay Compass Development the sum of $ 30,000 for each producing well with Minimum Reserves and each completed injection well. "Minimum Reserves" was defined in the agreement as the estimated oil reserves in place in a producing well which have, based on the logs of the logging company, 13 a commercial value of at least $ 150,000 calculated at the rate of $ 14.77 per barrel (or at such higher price as shall then be commercially and lawfully paid for such oil). In the event that a producing well did not have Minimum Reserves, Compass Development covenanted to drill a substitute well or wells, as the case may be, so that each producing well contracted for had the required Minimum Reserves. 579 Central Associates agreed to pay Compass Development the $ 30,000 price for each of the nine wells to be drilled as follows. The sum of $ 8,000 per well was to be paid in cash or good check of Central Associates no later than December 30, 1977. 14 The agreement stated that this amount was attributable to the intangible or noncapital costs of drilling the wells. There is no evidence in the record to establish that any amount of money was ever transferred from Central Associates to Compass Development pursuant to this provision of the Turnkey Drilling Agreement. See nn. 9, 10, supra.According to the drilling agreement, the balance of the $ 30,000 price per well was to be paid by Central Associates with promissory notes. The sum of $ 18,000 per well was to be paid by the delivery to Compass Development on or before December 30, 1977 of Central Associates' Non-Capital Note. This note, recourse on its face and payable to Compass Development, 580 was dated December 30, 1977, and was signed by John Pfauth in his capacity as president of Compass Development, the general partner of Central Associates. Under the terms of the note, Central Associates agreed to pay Compass Development the sum of $ 162,000 ($ 18,000 per well times nine wells) together with interest at the rate of eight percent. The total principal and interest was due Compass Development on December 31, 1982. Thus, no payments of either principal or interest were due on the note for five years, except possibly from production from the wells. See n. 15, infra. Payment of this note was secured by the collateral assignment to Compass Development of the promissory notes executed by the limited partners as part of their capital contributions, which notes were also due on December 31, 1982, except to the extent prepaid by production from the wells. 15 In the event of a default by the partnership on the $ 162,000 note, Compass Development agreed in the Turnkey Drilling Agreement to look for payment first to the individual limited partners' notes, which also totaled $ 162,000 in the aggregate. Such default could not occur until December 31, 1982, or at least no581 liability could arise on the part of the limited partners before December 31, 1982, except possibly as to payments from production. The balance of $ 4,000 per well was to be paid by the delivery of Central Associates' Capital Note to Compass Development on or before December 30, 1977. This nonrecourse note was dated December 30, 1977, and582 was signed by John Pfauth in his capacity as president of Compass Development, general partner of Central Associates. The terms of the note provided that the principal amount of $ 36,000, together with interest at eight percent, was payable solely out of one-third of Central Associates' monthly Adjusted Net Revenues. "Adjusted Net Revenues" was defined as Central Associates' gross revenues after the payment of the landowner's royalty and overriding royalty interests, less 15 percent. The monthly adjusted net revenues, if any, were payable within ten days after the end of each calendar month, commencing with the month ending December 30, 1977. Payments, if any, were to be applied first to interest, then to principal. The note expressly stated that in no event shall any of the limited partners have any liability for payment of the note, except to the extent that Central Associates had made cash distributions to the limited partners of amounts which were required under the note to be paid to Compass Development. Wyman and Fromkin each received $ 7,500 from Compass Development after the formation of Central Associates. The record does not establish whether these amounts received583 from Compass Development were commissions for the marketing of Central Associates' limited partnership interests or finder's fees from Compass Development for arranging the Turnkey Drilling Agreement with the partnership. In either event the payments were unreasonable in view of the lack of arm's length dealing in this transaction among a small group of friends, relatives, and close business associates. See n. 9, supra. Wyman and Fromkin were signatories on the Howell State Bank (New Jersey) checking accounts of both Central Associates and Compass Development. One of their signatures was required on all checks of both entities. In summary, the payments under the drilling agreement were stated to be as follows: ItemCost Per WellCost for Nine WellsIntangible/Noncapital Costs:Cash$ 8,000$ 72,000Noncapital Note18,000162,000$ 26,000$ 234,000Tangible/Capital Costs;Capital Note4,00036,000$ 30,000$ 270,000In addition to the drilling agreement, Central Associates and Compass Development executed on December 30, 1977, a document entitled Operating Agreement. 584 In this agreement, Central Associates agreed to pay Compass Development five percent of the gross production of the wells, with a minimum of $ 100 per well, per month. In return, Compass Development agreed to operate and manage the wells and to take any necessary and reasonable action in order to properly operate and manage them. The fee for each well was to commence upon its completion, and the operator was given a first and preferred lien on the well to secure those operating fees. This agreement is dated December 30, 1977, and is signed on behalf of both Central Associates and Compass Development by John Pfauth. Before being permitted to drill oil and gas wells in Pennsylvania, state law requires the issuance of a drilling permit. However, many drillers ignore the law and drill without permits. To obtain a drilling permit, the driller must submit an application along with a plat showing where the well or wells will be located. From December, 1977 through the date of trial, no drilling permits were issued for the particular area where Central Associates' leasehold interest is located. Wyman and Fromkin had never seen any permits with respect to the Central Associates leasehold, 585 and had no knowledge as to whether Central Associates or Compass Development had ever obtained any such permits. Wyman and Fromkin had visited the Central Associates leasehold with John Pfauth, Wyman in late 1980 and Fromkin in late 1978 or early 1979. They each saw what Pfauth pointed out to them as Central Associates' wells. The wells they saw were marked with initials and well numbers that designated them as Central Associates' wells. The records of the State of Pennsylvania, however, reflect that there were several old oil wells located on the Central Associates' leasehold. The record does not establish that any new oil wells were in fact drilled by Compass Development on the leasehold interest assigned to Central Associates. Assuming any new wells were drilled, there is no evidence that any such wells met the "Minimum Reserves" requirements. On its initial U.S. Partnership Return of Income, which covers the period beginning on December 30, 1977 and ending on December 31, 1977, Central Associates reported a loss of $ 234,000. The partnership had no gross income during this period and the loss claimed was entirely attributable to its deduction of $ 234,000 as intangible586 drilling costs. The partnership calculated its deduction for intangible drilling costs based on the Turnkey Drilling Agreement dated December 30, 1977. The $ 234,000 consists of the $ 72,000 in cash and the $ 162,000 noncapital note that was required to be transferred from the partnership to its general partner Compass Development, the driller, pursuant to the Turnkey Drilling Agreement. 16 The record does not establish that Central Associates transferred $ 72,000 to Compass Development before, on, or after December 30, 1977. Further, the $ 162,000 noncapital note is not reflected as a liability of the partnership on any of the partnership returns that were filed. 587 The partnership again had no income from oil and gas wells in 1978, and its 1978 return shows a loss of $ 1,800. 17 In 1979 and 1980, the partnership reported $ 4,134 and $ 956, respectively, of gross income. However, the partnership's tax returns for these two years show net losses in the amounts of $ 2,815 and $ 3,418, respectively. The partnership did not file a return for 1981 and there is no evidence in the record that a return for 1982 or for any other subsequent year was ever filed. Thus, in the four partnership returns that were filed (1977, 1978, 1979, and 1980), the partnership claimed losses in the amounts of $ 234,000, $ 1,800, $ 1,815, and $ 3,418, respectively. On December 29, 1981, Compass Development filed in the United States Bankruptcy Court for the District of New Jersey a voluntary petition for reorganization588 under Chapter 11 of the United States Bankruptcy Code. As of 1981, Compass Development, as a drilling company, had contracted with about 80 unrelated limited partnerships for the drilling of various oil and gas wells in Pennsylvania and Kentucky. Consolidated Energy Corp. is the successor corporation to Compass Development. Stanley Wyman is now Consolidated Energy Corp.'s president, chairman of the board and largest stockholder. Lewis Fromkin is Consolidated Energy Corp.'s vice president and a member of its board of directors. By their terms, Central Associates' $ 162,000 noncapital note due Compass Development, and the limited partners' promissory notes which had been collaterally assigned to Compass Development were due to be paid on December 31, 1982. No demand for payment of these notes was ever made by Compass Development or Consolidated Energy Corp. on either the partnership or the limited partners on December 31, 1982 or thereafter. The plan of reorganization for Compass Development, now Consolidated Energy Corp., was confirmed by the Bankruptcy Court on March 14, 1984. Under the plan, all the notes held by Compass Development were acquired by Consolidated Energy Corp. 589 In addition, the due dates of the notes were extended until March 14, 1989, five years from the date of the plan of reorganization. Also under the plan of reorganization all the interest due on the notes was waived for the period prior to the effective date of the plan, March 14, 1984. Thus, as of the time of trial petitioners had not made any out-of-pocket payments on their notes dated December 30, 1977, and the maturity date of the notes was now March 14, 1989, with interest running only from March 14, 1984. The record does not contain any evidence as to why Compass Development, a corporation which filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, never tried to enforce the notes of Central Associates or of the limited partners. The record also does not explain why Compass Development agreed to extend the maturity date of $ 162,000 in notes due to it from December 31, 1982 until March 14, 1989, and waived over six years of interest that had accrued on the notes. 18590 As previously stated, Central Associates was formed on December 30, 1977. On its partnership return for the period ended December 31, 1977, Central Associates claimed a loss of $ 234,000. This loss was attributable to the partnership's deduction of $ 234,000 as intangible drilling costs. Petitioners Wyman, Fromkin, and Citrino were each allocated 11 percent, or $ 25,740, of this loss, and each deducted this amount on his individual income tax return for 1977. Each petitioner received full tax benefit from this deduction in 1977, as the partnership loss was offset against each petitioner's earned income. In his notices of deficiency to petitioners, respondent determined that petitioners failed to establish that Central Associates was an activity engaged in for profit. In addition, respondent determined that petitioners failed to establish that the alleged events, transactions, and expenditures associated with Central Associates ever occurred, either in fact or in substance. Thus, respondent disallowed petitioners' deductions of their respective distributive shares of the partnership's $ 234,000 loss for 1977. Respondent mailed the statutory notice of deficiency with respect591 to the Estate of Robert Citrino and Mrs. Margaret Citrino on December 16, 1982. 19 The notice was mailed to 345 Centre Street, Nutley, New Jersey (the Centre Street address), which was the late Robert Citrino's former business address, i.e., the address of the law firm of Citrino, Balsam & DiBiasi. Another copy of the notice of deficiency may have been mailed to 55 Enclosure, Nutley, New Jersey (the Enclosure address), the Citrinos' last known address. Robert Citrino had died on December 23, 1981, and Samuel S. Saiber had been appointed as administrator of his estate on May 27, 1982. Some five months later, on October 28, 1982, Mr. Saiber filed a Notice Concerning Fiduciary Relationship (Form 56) with the Internal Revenue Service, listing the Enclosure address as Mr. Citrino's last address. This notice stated that Mr. Saiber's mailing address was Saiber, Schlesinger, Satz & Goldstein, Gateway I, Newark, New Jersey (the Gateway I Address). A copy of the notice of deficiency relating to the Estate of Robert Citrino and Mrs. Margaret Citrino was not mailed to Mr. Saiber at his Gateway I address, but he or his counsel received a copy of the notice of deficiency that bore the Centre592 Street address. A petition was timely filed in this Court on behalf of the Estate of Robert Citrino, Deceased, Samuel S. Saiber, Administrator, and M. Lisbeth Citrino, Petitioners. 20 Attached to that timely petition was a copy of the notice of deficiency sent to the Centre Street address. OPINION The first issue for decision is whether the assessment593 and collection of the deficiency determined by respondent against petitioner, Estate of Robert Citrino, Deceased, Samuel S. Saiber, Administrator, is barred by the statute of limitations. Robert Citrino died on December 23, 1981, and Samuel S. Sabier was appointed as administrator of his estate on May 27, 1982. Pursuant to section 690321 and the regulations thereunder, Mr. Saiber filed a Notice Concerning Fiduciary Relationship with the Internal Revenue Service on October 28, 1982. That notice listed Mr. Saiber's Gateway I Address. On December 16, 1982, respondent mailed the notice of deficiency concerning the Estate of Robert Citrino and Mrs. Margaret Citrino to the late Mr. Citrino's former business address, the Centre Street address. However, no copy of the deficiency notice was mailed to Mr. Saiber at his Gateway I address. On March 18, 1983, a timely petition on behalf of the Estate of Robert Citrino, Deceased, Samuel S. Saiber, Administrator, and M. Lisbeth Citrino, petitioners, was filed in this Court. See n. 20, supra. Attached to the petition was a copy of the notice of deficiency sent to the Centre Street address. The estate argues, however, that since a copy594 of the deficiency notice was not mailed to the administrator of the estate at his Gateway I address, respondent is now barred by the statute of limitations under section 6501 22 from assessing and collecting the deficiency determined against the estate. 595 Section 6212, in regard to notices of deficiency, provides that: (a) In General. -- If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitle A or B or chapter 41, 42, 43, or 44, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail. (b) Address For Notice Of Deficiency. -- (1) Income And Gift Taxes and Taxes Imposed By Chapter 42. -- In the absence of notice to the Secretary under section 6903 of the existence of a fiduciary relationship, notice of a deficiency in respect of a tax imposed by subtitle A, chapter 12, chapter 42, chapter 43, or chapter 44 if mailed to the taxpayer at his last known address, shall be sufficient for purposes of subtitle A, chapter 12, chapter 42, chapter 43, chapter 44, and this chapter even if such taxpayer is deceased, or is under legal disability, or, in the case of a corporation, has terminated its existence.Specifically, the fiduciary (the administrator of the Estate of Robert Citrino) points to the first prepositional phrase of section 6212(b)(1) -- "In the absence of notice to the Secretary under section 6903 of the existence of a fiduciary relationship596 * * ." Relying upon that language, he says that such notice having been given here, that means that the notice of deficiency must be mailed to him at his "last known address" (the Gateway I address) to be valid. We disagree. If the fiduciary somehow removes himself from the purview of section 6212(b)(1), as he seeks to do, then there is no "last known address" provision applicable to him. He would then come within the general rule of section 6212(a) that respondent is "authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." However, it is well established that those are not the only means of giving notice of a deficiency. Ordinary mail and methods other than mailing may be used to send a notice of deficiency. See Frieling v. Commissioner,81 T.C. 42">81 T.C. 42, 51, and n. 13 (1983) and cases cited therein. Actual notice, such as the fiduciary received here, is sufficient. Contrary to the fiduciary's argument, section 6212 does not require personal service of the notice of deficiency. Also, the "last known address" provision is a shield or a safe harbor for respondent in case the notice is never received; it is not a sword to597 be used by the taxpayer where he has actually received the notice of deficiency. Delman v. Commissioner,384 F.2d 929">384 F.2d 929, 932 (3d Cir. 1967), affg. a Memorandum Opinion of the Court, cert. denied 390 U.S. 952">390 U.S. 952 (1968); Frieling v. Commissioner, supra at 52 and n. 14. The fiduciary stands in the shoes of the taxpayer, i.e., he assumes "the powers, rights, duties, and privileges" of the taxpayer (sec. 6903), but his rights do not rise above those of the taxpayer. Here the fiduciary actually received the notice of deficiency and timely filed a petition on behalf of the estate; he is not entitled to anything more. Thus, assuming respondent was required to mail the notice of deficinecy to the fiduciary, 23 we think this case falls squarely within our line of cases where (1) the notice of deficiency was not mailed to the last known address, (2) in spite of the incorrect address, the notice of deficiency or copy thereof was actually delivered to or somehow received by the taxpayer, and (3) a timely petition was filed. The deficiency notices in such cases are valid because they serve the two functions of section 6212: (1) they notify the taxpayer598 or his representative that a deficiency has been determined against him, and (2) they give the taxpayer the opportunity to petition this Court for redetermination of the proposed deficiency. Frieling v. Commissioner, supra,81 T.C. at 53; Goodman v. Commissioner,71 T.C. 974">71 T.C. 974, 977-978 (1979); Zaun v. Commissioner,62 T.C. 278">62 T.C. 278, 280 (1974); Clodfelter v. Commissioner,57 T.C. 102">57 T.C. 102 (1971), affd. 527 F.2d 754">527 F.2d 754, 757 (9th Cir. 1975); Brzezinski v. Commissioner,23 T.C. 192">23 T.C. 192, 195 (1954). See also Olsen v. Herlvering,88 F.2d 650">88 F.2d 650 (2d Cir. 1937). 599 In the present case, even though respondent failed to mail a copy of the deficiency notice to the estate's administrator, he received notice of the deficiency determined against the estate, and filed a timely petition in this Court. Thus, the deficiency notice issued to the estate served its two principal functions under section 6212. Therefore, we find that the period of limitations under section 6501(a) was suspended under section 6503(a) on December 16, 1982, the date the deficiency notice was mailed. Accordingly, the estate's argument that the assessment and collection of the deficiency determined against it is barred by the statute of limitations fails. The remaining, and principal, issue in this case is whether petitioners are entitled to deductions for their respective distributive shares of the $ 234,000 loss reported by Central Associates limited partnership in 1977. Resolution of this issue depends on whether Central Associates was an activity not engaged in for profit within the meaning of section 183. 24Whether an activity is engaged in for profit turns on whether the taxpayer entered the activity with an actual and honest objective of making a profit. 600 Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 666 (1979); Golanty v. Commissioner,72 T.C. 411">72 T.C. 411, 426-427 (1979), affd, without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). 601 As this Court has previously stated, section 183 is not a disallowance provision, but rather allows a taxpayer to deduct certain expenses which he could not otherwise deduct. Fox v. Commissioner,80 T.C. 972">80 T.C. 972, 1006 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner,731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. without published opinions sub nom. Hook v. Commissioner, Krasta v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner,734 F.2d 5">734 F.2d 5, 6-7, 9 (3d Cir. 1984); Brannen v. Commissioner,78 T.C. 471">78 T.C. 471, 500 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984). If an activity is not engaged in for profit, section 183(b) separates the claimed deductions into two groups. Section 183(b)(1) allows only those deductions which are not dependent upon a profit motive, e.g., interest and taxes. Section 183(b)(2) allows the balance of the deductions which would otherwise be permitted only if the activity was engaged in for profit, but only to the extent that the gross income derived from the activity exceeds the deductions602 allowed under paragraph (1). See n. 24, supra. During the only year before the Court, 1977, Central Associates had no gross income and its lone claimed deduction of $ 234,000 was for intangible drilling costs. Thus, if we find that Central Associates was an activity not engaged in for profit, no part of this $ 234,000 would be allowable as a deduction under section 183(b).Whether a partnership is an activity not engaged in for profit is determined at the partnership level. Fox v. Commissioner, supra,80 T.C. at 1006; Siegel v. Commissioner,78 T.C. 659">78 T.C. 659, 698 (1982); Brannen v. Commissioner, supra,78 T.C. at 505. To fall outside section 183, Central Associates must establish that it engaged in its oil and gas drilling activities with an actual and honest profit objective. Fox v. Commissioner, supra, 80 T.C. at 1996; Dreicer v. Commissioner, supra,78 T.C. at 644-645. While a reasonable expectation of profit is not required, Central Associates must have had an actual and honest objective of making a profit. Sec. 1.183-2(a), Income Tax Regs.; 603 Beck v. Commissioner,85 T.C. 557">85 T.C. 557, 569 (1985); Flowers v. Commissioner,80 T.C. 914">80 T.C. 914, 931 (1983); Dreicer v. Commissioner, supra,78 T.C. at 644-645; Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 33 (1979); Bessenyey v. Commissioner,45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967). The issue is one of fact to be resolved on the basis of all the surrounding circumstances. Beck v. Commissioner, supra,85 T.C. at 570; Flowers v. Commissioner, supra,80 T.C. at 931-932; Lemmen v. Commissioner,77 T.C. 1326">77 T.C. 1326, 1340 (1981); Dunn v. Commissioner,70 T.C. 715">70 T.C. 715, 720 (1978), affd. 615 F.2d 578">615 F.2d 578 (2d Cir. 1980). Petitioners have the burden of proving the requisite profit objective. Rule 142(a); Beck v. Commissioner, supra;Flowers v. Commissioner, supra;Golanty v. Commissioner, supra,72 T.C. at 426. In making this factual determination, we give greater weight to objective factors than to the taxpayer's mere statement of his intent. Sec. 1.183-2(a), Income Tax Regs.604 , Beck v. Commissioner, supra;Flowers v. Commissioner, supra;Siegel v. Commissioner, supra,78 T.C. at 699; Churchman v. Commissioner,68 T.C. 696">68 T.C. 696, 701 (1977). Section 1.183-2(b), Income Tax Regs., lists some of the relevant factors to be considered in determining whether an activity is engaged in for profit. These factors include: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. No single factor is decisive; rather, we must consider all the facts and circumstances with respect to the activity. Sec. 1.183-2(b), Income Tax Regs. Moreover, all nine factors605 do not necessarily apply in every case, and those that do not need not be discussed where no purpose would be served. Additionally, in determining whether Central Associates had an actual and honest objective of making a profit, we focus on the intent of those individuals who actually controlled the partnership's activities. Dean v. Commissioner,83 T.C. 56">83 T.C. 56, 74 (1984); Fox v. Commissioner, supra,80 T.C. at 1007-1008. Respondent argues that the general partner, Compass Development, controlled the partnership's activities, citing sections 4.1 and 5.3 of the partnership agreement which provide that the management of the partnership is to be carried on by the general partner and that no limited partner shall take part in the management of the partnership.25Since John Pfauth, president of the general partner, Compass Development, 606 did not testify in this case, respondent argues that petitioners have not produced any testimony regarding Central Associates' profit objective. 26 Petitioners argue that we should consider the testimony of Wyman and Fromkin on the issue of Central Associates' profit objective. Even though they were only limited partners, petitioners argue that their testimony regarding their involvement in the partnership shows that they had sufficient control of the partnership so as to make their intent relevant. Moreover, petitioners argue that they are content to rest upon the testimony of Wyman and Fromkin as to the predominant profit-making objectives of all those involved in Central Associates. Even though it is contrary to both the partnership agreement and the partnership tax returns filed to the effect that only the general partner managed the partnership's business, we will consider the testimony of Wyman and Fromkin regarding the partnership's profit objective since we are considering all the facts and circumstances with respect to the activity. See n. 26, supra. However, we again note that greater weight is given to objective factors than to petitioners' mere statement regarding607 their intent. 608 The first relevant factor provided in the regulation is the manner in which the taxpayer carried on the activity. Sec. 1.183-2(b)(1), Income Tax Regs. The inquiry here focuses on whether Central Associates was carried on in a businesslike manner. Based on the evidence in the record, or lack of it, we must conclude that Central Associates was not carried on in a businesslike manner. The maintenance of complete and accurate books and records indicates that an activity is carried on in a businesslike manner. Sec. 1.183-2(b)(1), Income Tax Reg. In the present case, petitioners have offered virtually no partnership books or records despite having been subpoenaed to produce them. The record lacks any of the partnership's ledgers, financial records, bank statements, canceled checks, or receipts. Petitioners argue that the lack of records is "an understandable aspect of the disorder attendant upon the bankruptcy of the General Partner, Compass Development." However, Central Associates is a separate entity and given the purported involvement and control of Wyman and Fromkin over the partnership, this lack of records is not understandable. Compass Development filed for reorganization under609 Chapter 11 on December 29, 1981. We think if Central Associates was carried on in a businesslike manner from its inception on December 30, 1977, until late 1981, petitioners would have been able to produce at least some partnership books or records, albeit incomplete. We find the fact that the general partner filed for reorganization four years after the inception of the partnership of little consequence in our determination of whether Central Associates was carried on in a businesslike manner. Thus, based on the evidence in the record we conclude that Central Associates was not carried on in a businesslike manner. Another factor we consider relevant in the present case is the expertise of the taxpayers or their advisors. Sec. 1.183-2(b)(2), Income Tax Regs. The regulation provides that preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive. Sec. 1.183-2(b)(2), Income Tax Regs. With regard to the formation of Central Associates, the record contains no surveys or geological reports that petitioners considered regarding the610 potential for successful production of oil on the Central Associates' leasehold property. Petitioner Wyman testified that he was offered a number of different oil and gas leases by John Pfauth, president of Compass Development, and that he chose the Central Associates' lease due to its proximity to prior projects that had been successful. However, there is no evidence in the record as to these allegedly successful projects. The next factor we consider relevant in this case relates to the history of losses reported by Central Associates. Sec. 1.183-2(b)(6), Income Tax Regs. The partnership reported losses in each of the tax returns it filed for periods ending in 1977, 1978, 1979, and 1980. The amounts of these losses reported were $ 234,000, $ 1,800, $ 2,815, and $ 3,418, respectively. For the partnership to just break even, that is, realizing enough gross income to pay off both the $ 162,000 noncapital note and the $ 36,000 capital note, plus interest, and to cover its royalty and operating expenses, it would have had to have had in excess of $ 500,000 in gross income over its first five years. During those five years Central Associates reported gross proceeds of $ 5,090. 27611 Petitioners argue that this break-even analysis is irrelevant since in 1977 the country was in the midst of an energy crisis, with increasing demands for oil and increasing costs for drilling. However, Central Associates was formed December 30, 1977. Therefore, the fact of any energy crisis in 1977 was known to petitioners at the time Central Associates was formed, and allegedly was the reason for the fixed-price Turnkey Drilling Contract. We find that the record does not support petitioners' argument that Central Associates' meager production was due to the energy crisis. Instead, we think the evidence in the record supports respondent's contention that Central Associates was not formed with the objective of making a profit, rather, it was formed to create the large partnership loss reported in 1977. Another listed factor we consider relevant in the present case relates to the financial status of petitioners. Sec. 1.183-2(b)(8), Income Tax Regs. The regulation provides that 612 if a taxpayer has substantial income from sources other than the activity, this may indicate that the activity is not engaged in for profit, particularly if the losses from the activity generate substantial tax benefits. Sec. 1.183-2(b)(8), Income Tax Regs. During 1977 each petitioners had substantial income from sources other than Central Associates. Wyman was in insurance sales, Fromkin was a business executive, and Citrino was an attorney. Each deducted on his 1977 individual return $ 25,740 as his respective distributive shares of the purported loss reported by Central Associates. Since each petitioner's income from sources other than Central Associates exceeded the $ 25,740 partnership loss deducted, each petitioner received full tax benefit in 1977 from this deduction. 28 These tax benefits take on added significance in view of our doubts as to whether petitioners even made their purported cash out-of-pocket payments to Central Associates. 613 In addition to the factors above, we find the following facts and circumstances relevant to our decision. Initially, petitioners have not shown that the limited partners, other than Wyman and Fromkin, made their required cash contributions to the partnership in accordance with the partnership agreement. We find it noteworthy the only documentary evidence of the limited partners' cash contributions was copies of canceled checks from Wyman and Fromkin in the amounts of $ 8,000 each. It was Wyman and Fromkin that each received $ 7,500 back from Compass Development, which Wyman testified were "finder's fees" for arranging the Turnkey Drilling Agreement with the partnership. In view of the lack of arm's length dealing here, these payments, whether labeled "commissions," "finder's fees," or something else, are unreasonable and cast serious doubt on the alleged cash capital contributions. Moreover, petitioners have not shown that the partnership paid the $ 72,000 to Compass Development under the Turnkey Drilling Agreement. This $ 72,000 is part of the $ 234,000 the partnership deducted on its 1977 return as intangible drilling costs. Wyman testified that all of the documents, including614 checks, were present at the "closing" on December 30, 1977, but he had no recollection of any specific checks. If the $ 72,000 had been paid to Compass Development under the drilling agreement, there should have been canceled checks to establish that fact. We find Wyman's vague, generalized, self-serving testimony does not meet petitioners' burden of showing that these payments were in fact ever made. See New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435 (1934); sec. 6001. Also the five-year balloon notes, while recourse on their face, do not appear to be bona fide indebtedness. No demand for payment of either principal or interest was ever made when they matured, even though Compass Development had filed for reorganization under Chapter 11, and should have had an incentive to collect any bona fide debts that were due and owing. Instead all accrued interest was forgiven, and Wyman and Fromkin ended up in control of the successor to Compass Development. In any event, the indebtedness represented by those notes would be too contingent to be treated as "payment" of intangible drilling costs. The absence in the record of any of the partnership's financial records615 and the lack of evidence regarding the general partner-driller strongly suggest that petitioners engaged in the expedient of drawing up papers to characterize the transactions in question as something contrary to the economic realities thereof, and did so solely to obtain tax benefits. In sum, when we consider the totality of the facts and circumstances in this case, we must conclude that petitioners have not met their burden of showing that Central Associates was formed or operated with an actual and honest profit objective. Rule 142(a). Therefore, Central Associates must be considered as an activity not engaged in for profit within the meaning of section 183. Thus, respondent's determinations are sustained. To reflect the foregoing, Decisions will be entered for the respondent.Footnotes1. The cases of the following petitioners have been consolidated: Stanley Wyman and Jean Wyman, docket No. 5975-83; Lewis Fromkin and Elaine Fromkin, docket No. 29520-83. ↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the taxable years in question, and all "Rule" references are to the Tax Court Rules of Practice and Procedure. ↩3. The Citrinos filed an amended income tax return (Form 1040X) for 1977 on May 3, 1978. This amended return has no bearing on the issues to be decided in this case. ↩4. The terms "partnership," "limited partnership," "general partner," "limited partners," "assignment," "subscription agreement," "notes," "turnkey drilling agreement," "operating agreement," "collateral assignment of note," "lease," "interest," "transfer," "payments," and "contributions," and all derivatives of those terms are used solely for convenience in describing the purported transactions. These terms are not intended as determinations or conclusions as to the legal effect of these various documents and transactions. ↩5. The Agreement of Limited Partnership, dated December 30, 1977, gives the principal place of business of Central Associates as Pittsburgh, Pennsylvania, whereas the Assignment of Oil and Gas Lease, dated December 30, 1977, gives the address of Central Associates as Cranford, New Jersey, using the same address as that for Compass Development. ↩6. However, the general partner was prohibited, without the unanimous consent of the limited partners, from using any asset of the partnership for any purpose other than as provided for in the partnership agreement, and from making any income tax election which, in the judgment of the partnership's accountant, was not in the best interests of the limited partners. ↩7. Central Associates' U.S. Partnership Returns of Income (Forms 1065) for both 1977 and 1978 state that each limited partner's time devoted to the partnership's business was either zero percent or none. ↩8. While these are the stated limited partners' percentage interests as they appear in the schedule of capital contributions, section 7.2 of the partnership agreement states that the partnership shall elect to expense all noncapitalized costs, and that these items shall be allocated 99 percent to the limited partners and one percent to the general partner. Whether this allocation has substantial economic effect within the meaning of section 704(b) and the regulations thereunder has not been raised as an issue in this case, and we do not address the matter.↩9. While Wyman testified generally that all documents, including checks, were present at the "closing," he had no recollection of any particular check or checks. We do not accept his testimony, and we do not accept the explanation that Pfauth's later bankruptcy somehow accounted for the missing documents. Any such canceled checks would not be in the records of the partnership but in the records of the individual limited partners. Accordingly, on this record, we can find payment only of the $ 16,000 by Wyman and Fromkin, and as will be indicated below, they received most of that back from the general partner. ↩10. Under the partnership agreement each limited partner was to execute a promissory note as part of his capital contribution, in the form set forth in Exhibit A thereto. Each limited partner was to deliver his note on or before December 30, 1977, "or such extension(s) not to exceed a total of 90 days as General Partner shall have designated * * *." Copies of only the notes executed by petitioners Wyman, Fromkin, and Citrino are in the record. The promissory notes executed by petitioners are not dated. Except for the signature lines, the notes executed by petitioners are identical. The note executed by Stanley Wyman is reproduced below, in its entirety. EXHIBIT A PROMISSORY NOTEFOR VALUE RECEIVED, on December 31, 1982, I promise to pay to the order of Central Associates Eighteen Thousand Dollars ($ 18,000) Dollars (sic), together with interest at the rate of Eight (8%) Percentum per annum, at the Livingston State Bank, 313 Mt. Pleasant Avenue, Livingston, New Jersey. Presentment, dishonor, protest and notice of any of the foregoing are hereby waived. Signed Stanley Wyman (L.S.)Printed Name: Stanley Wyman ↩11. Section 7.2 of the partnership agreement stated that any distribution which would otherwise be made to a limited partner shall first be used to prepay his note, applied first to accrued interest, then to principal. However, no distributions, and therefore no applications against their notes, were ever made to or for the limited partners. ↩12. A producing well is one from which oil is extracted and an injection well is a support system that reinjects the by-product of natural gas to force out more oil. ↩13. The drilling agreement required Compass Development to engage a recognized logging company that would be agreeable to both Compass Development and Central Associates. The logging company's job would be to log each oil-producing well with electric log, caliper and density and nuclear log with guard and caliper, and, to log each injection well with gamma and caliper log. There is no evidence in the record as to whether any logging company was ever engaged. ↩14. Thus, the sum of the cash payment due Compass Development for all nine wells would be $ 72,000. We note that under the partnership agreement the cash portion of the limited partners' capital contributions would also be $ 72,000. ↩15. Central Associates' $ 162,000 note recites that the limited partners' notes (which it describes as Subscriber Notes) are prepayable under certain conditions. However, the limited partners' notes that are in evidence do not so indicate. See n. 10, supra. The only mandatory prepayments would be those paid from production from the wells. See n. 11, supra.↩ Assuming the limited partners for some reason chose to prepay some portion of their notes or that there were production payments, presumably Central Associates would be bound under the terms of its note to apply such prepayments to prepay its note, applying any such prepayments first to interest, then to principal. If Central Associates failed or refused to apply such prepayments to prepay part of its $ 162,000 note, that would not accelerate payment of the limited partners' notes. 16. The parties argued and briefed various issues in regard to the deductibility of prepaid intangible drilling costs (IDC) under a turnkey drilling contract. This case does not involve whether or not there can be prepaid IDC under such a contract. See Keller v. Commissioner,79 T.C. 7">79 T.C. 7 (1982), affd. 725 F.2d 1173">725 F.2d 1173 (8th Cir. 1984). Here, the question is whether any payment of cash was actually made in 1977. Also, here the bulk of the "payment" was made by notes. Since the partnership appears to have been on the cash basis, those notes probably would not constitute payment of IDC in 1977. See Levy v. Commissioner,732 F.2d 1435">732 F.2d 1435 (9th Cir. 1984), affg. T.C. Memo. 1982-419↩. In view of our disposition of the case, we need not address these and other arguments of the parties as to basis and the amount "at risk" under section 465. 17. This $ 1,800 loss claimed was attributable to depreciation taken on drilling equipment allegedly owned through the partnership's issuance of its $ 36,000 capital note to Compass Development. That note could not be assigned, negotiated, or otherwise transferred and was payable solely out of one-third of the partnership's monthly "Adjusted Net Revenues." ↩18. That the Bankruptcy Court approved the plan of reorganization furnishes no explanation. The individual limited partners were not bankrupt or otherwise involved in the bankruptcy except as debtors who allegedly owed the bankrupt corporation money on their notes which allegedly were due and payable. ↩19. Mrs. Margaret Citrino and M. Lisbeth Citrino are one and the same. ↩20. The notice of deficiency was mailed on December 16, 1982. The petition was received by the Court on March 18, 1983, which was the 92nd day after mailing of the notice. See sec. 6213(a). However, the envelope in which the joint petition was mailed bears a handwritten notation, apparently be petitioners' counsel, Winthrop Drake Thies, that the envelope was "posted" at 10:50 p.m. on March 15, 1983, the 89th day. More importantly, that envelope bears a clear postmark date of March 16, 1983, the 90th day from the date of mailing of the notice of deficiency. Accordingly, such timely mailing constitutes timely receipt by the Court, and the petition was thus timely filed. Secs. 6213(a), 7502; Kahle v. Commissioner,88 T.C. 1063">88 T.C. 1063↩ (1987). 21. Section 6903 provides: Sec. 6903. NOTICE OF FIDUCIARY RELATIONSHIP. (a) Rights and Obligations of Fiduciary. -- Upon notice to the Secretary that any person is acting for another person in a fiduciary capacity, such fiduciary shall assume the powers, rights, duties, and privileges of such other person in respect of a tax imposed by this title (except as otherwise specifically provided and except that the tax shall be collected from the estate of such other person), until notice is given that the fiduciary capacity has terminated. (b) Manner of Notice. -- Notice under this section shall be given in accordance with regulations prescribed by the Secretary. ↩22. Section 6501(a) provides generally that the amount of any deficiency in income tax shall be assessed within three years after the return was filed. The mailing of a notice of deficiency under section 6212(a)↩ suspends the running of the period of limitations provided in section 6501. Sec. 6503(a). 23. The effect of filing a Notice Concerning Fiduciary Relationship is that the fiduciary assumes the powers, rights, duties, and privileges of the person the fiduciary is acting for. See n. 21, supra.↩ Thus, any statutory notice of deficiency concerning the person the fiduciary is acting for shall be sent to the fiduciary. See also S. Rept. 52, 69th Cong., 1st Sess. 30-31 (1926), 1939-1 C.B. (Part 2) 332, 355. Respondent contends, however, that the Notice Concerning Fiduciary Relationship was not filed in accordance with section 301.6903-1(b), Proc. and Admin. Regs. This regulation requires that the notice be filed with the district director for the district where the return of the person for whom the fiduciary is acting is required to be filed. Respondent argues that the estate has not introduced any evidence that the notice was filed with the Newark District Director's Office, as the regulation requires, and raises the possibility that the notice was perhaps filed with the Holtsville, New York office. We note that respondent does not offer the Court any evidence on this issue either. We agree with respondent, though, that based on the record as a whole, it cannot be determined with which office the Notice Concerning Fiduciary Relationship was filed by Mr. Saiber. However, we will assume that the fiduciary complied with the regulation. We still hold, for the reasons stated below, that the failure in this case to mail a copy of the notice of deficiency to the administrator (Mr. Saiber) does not bar respondent from assessing and collecting the deficiency determined against the estate. 24. Section 183, in relevant part, provides: SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) General Rule. -- In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1). (c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.In addition to his determination that Central Associates was an activity not engaged in for profit, respondent also contends that the transactions entered into by Central Associates were devoid of any economic substance and served no purpose other than to create artificial tax deductions for petitioners. The parties' briefs contain arguments on both the section 183 and the economic substance issues, as well as related questions pertaining to the timing of the partnership's deduction of the intangible drilling costs (sec. 461), whether the deduction resulted in a material distortion of income (sec. 446(b)), and whether the partnership's $ 162,000 note was a bona fide liability. See also n. 16, supra.↩ However, since we conclude that Central Associates was an activity not engaged in for profit, we need not address these other issues. In any event, our final conclusion would be the same even if we considered all of these other issues. 25. Respondent also cites the Revised Uniform Limited Partnership Act, which provides generally that limited partners wishing to retain their limited partnership status, with its concomitant limited liability, do not manage or act for the partnership. See sec. 303, Revised Uniform Limited Partnership Act (1976). ↩26. There are several areas where the testimony of Mr. Pfauth might have shed some light and might have furnished substantiating factual information to flesh out petitioners' rather vague, generalized, self-serving testimony. On brief, both parties complain about the other party's failure to call him as a witness, and ask the Court to draw inferences from the other party's failure. In his pretrial memorandum, respondent listed Mr. Pfauth as a witness, but did not call him to the stand. When respondent on brief asked the Court to draw an adverse inference from petitioners' failure to call him, petitioners understandably objected. Petitioners, however, accuse respondent of "ill-becoming 'game-playing'" and "near-duplicitous conduct," insisting that respondent had "firmly and unconditionally promised" to call Mr. Pfauth as a witness. It was respondent's prerogative not to call him as a witness. The purpose of identifying witnesses in advance is to avoid surprise at trial. If a party is satisfied with the record, he need not call a listed witness, so long as the other side is not unfairly deprived of the opportunity to call the witness. On brief petitioners seem to suggest such unfair deprivation, urging that Mr. Pfauth was in respondent's "'custody,' as it were," was in respondent's "possession" or was "secreted" during the trial by respondent. Apparently, this means Mr. Pfauth had been subpoenaed by respondent and was available on a telephone call. There is no indication that respondent's counsel refused to give petitioners the number at which Mr. Pfauth could be reached, or otherwise impeded any effort by petitioners to call him to the stand. The Court would not countenance any such improper conduct by any member of its bar. At any rate, the Court was not advised of any problem during the trial, but would have ordered Mr. Pfauth's appearance if requested to do so by either party. It appears that petitioners too chose not to call Mr. Pfauth as a witness, which is also their prerogative, but which does not change their burden of proof. Viewing this and other arguments on brief as a whole, the Court thinks both parties perhaps went a bit beyond zealous advocacy in their briefs and provided the Court with a bit more warmth than light on the issues. In any event, the Court will not draw any inferences from the failure of Mr. Pfauth to testify and will decide the case on the basis of the entire record that the parties chose to present. ↩27. We use the five-year period as a measuring point since both the partnership's notes and the limited partners' notes were five-year balloon notes. ↩28. The $ 25,740 deduction reduced the Wymans' 1977 adjusted gross income from $ 35,982 to $ 10,242; it reduced the Fromkins' adjusted gross income from $ 45,128 to $ 19,388; and it reduced the Citrinos' adjusted gross income from $ 62,276 to $ 36,536. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620449/	HENRY EGGINK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Eggink v. CommissionerDocket No. 6413.United States Board of Tax Appeals7 B.T.A. 152; 1927 BTA LEXIS 3240; May 28, 1927, Promulgated 3240 March 1, 1913, value of a one-half interest in certain real estate acquired in 1909, and the purchase price of the other one-half interest in the same property purchased March 1, 1915, determined. C. W. Pitts, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. LITTLETON152 The Commissioner determined a deficiency in income tax of $151.22 for the calendar year 1920. Petitioner claims that the Commissioner erred in his determination of the fair market value of his one-half interest in certain real estate on March 1, 1913, and the cost to him of the other one-half interest in the same property when acquired in 1915, for the purpose of the determination of the gain or loss upon the sale of the entire property in 1920 for $37,600. The Commissioner determined that the March 1, 1913, value of the petitioner's one-half interest in the 160 acres of land was $145 an acre, or $11,600, and that the purchase price paid by petitioner for the undivided half interest in the same property in 1915 was $145 an acre, or $11,600. Petitioner claims that three years' rental $480at per annum, or $1,440, for his half interest constituted a part of3241 the purchase price paid by him for the remaining one-half interest in 1915. FINDINGS OF FACT. Petitioner is an individual residing at Alton, Sioux County, Iowa. In 1909 he and his brother-in-law, Henry Walraven, jointly purchased a farm consisting of 160 acres, being the southwest quarter of section 10, township 94, range 47 west, in Sioux County, Iowa, for which they paid $100 an acre. They each ahd an undivided one-half interest. At the time of the purchase the farm and the improvements thereon were in very bad condition. The purchasers repaired the residence by putting on new siding, a new roof, new floors, new doors and windows, constructed considerable fencing, erected a hoghouse 24 by 32 feet and a new corncrib and granary, 24 by 32 feet, cleared the land of weeds and thistles, and otherwise improved the farm. On March 1, 1913, the land, buildings, and other improvements were in good condition and the fair market value of the farm on that date was $145 an acre. On June 6, 1913, Henry Walraven died testate, devising and bequeathing all his property, real, and personal, including his undivided one-half interest in the aforesaid farm, to his wife. During 153 3242 the year 1913 and prior years petitioner had rented his one-half interest in the farm to his brother-in-law, who owned the other onehalf interest, at $6 an acre, or $480 a year, payable on March 1 of each year. After the death of Walraven the widow continued to rent petitioner's interest at the same yearly rental. The rental for the year ending March 1, 1913, and the rentals for the years ending March 1, 1914 and 1915, had not been paid although Henry Walraven's estate was more than sufficient to pay his debts, including the rental, and his widow could have paid the rental for the years 1913, 1914, and 1915, and, although liability therefor was fully recognized, petitioner did not press the matter of payment of the rental for the time being until the widow could adjust the affairs of her deceased husband and make plans for the carrying on of farming operations. Early in July 1914, petitioner discussed with Mrs. Walraven the matter of his purchasing her undivided one-half interest in the 160 acres, effective March 1, 1915, and offered as the purchase price of her interest to assume her share of a mortgage amounting to $4,917.30, to pay $6,682.70 in cash and cancel the payment of3243 $1,440, representing rental of his one-half interest for the years ending March 1, 1913, 1914, and 1915, the purchase price in all being $13,040. After consideration Mrs. Walraven accepted this offer and a contract wherein Mrs. Walraven agreed to sell and petitioner agreed to purchase the one-half interest, effective March 1, 1915, was entered into. This agreement was carried out and the property transferred on March 1, 1915. The Commissioner refused to allow the cancellation of $1,440 rental as part of the purchase price paid by petitioner for the property in computing the gain or loss upon the sale thereof by petitioner in 1920 for $37,600. OPINION. LITTLETON: The only issues in this proceeding upon which evidence was submitted are whether the Commissioner erred in his determination that the March 1, 1913, value of the petitioner's undivided one-half interest in the farm was $145 an acre and whether the cancellation of the rental due for his one-half interest for the years 1913, 1914, and 1915, amounting to $1,440, constituted a part of the purchase price paid for the remaining one-half interest. Petitioner alleged in an amended petition that a first mortgage in the amount3244 of $24,600 and bearing interest at 5 per cent taken as a part of the sales price for the property in 1920 had no fair market value and should not, therefore, have been included as a part of the sales price in determining gain or loss. No evidence was submitted upon this point and no mention was made thereof in the brief filed. There was some testimony introduced to the effect that the fair 154 market value of petitioner's one-half interest in the property on March 1, 1913, $150was an acre, but in the proposed findings of fact submitted by the petitioner the Board is asked to find a fair market value on March 1, 1913, of $145 an acre, and we believe from a consideration of all the testimony that the value of $145 an acre was the fair market value of the property on March 1, 1913, and we have so found. This is the March 1, 1913, value found by the Commissioner. While the consideration mentioned in the contract of sale and the deed of transfer of the one-half interest in the property to the petitioner was $145 an acre, the evidence shows that the consideration paid by the petitioner in 1915 for a one-half interest in this property was $145 an acre plus the amount of $1,440*3245 rental accrued to the date of the transfer. The cost to petitioner, therefore, of the onehalf interest acquired in 1915 was $13,040. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620451/	DONALD GENE MASSEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent.Massey v. CommissionerDocket No. 17717-82.United States Tax CourtT.C. Memo 1984-210; 1984 Tax Ct. Memo LEXIS 468; 47 T.C.M. (CCH) 1648; T.C.M. (RIA) 84210; April 24, 1984. Donald Gene Massey, pro se. Michael S. Adelman, for the respondent. 469 PATEMEMORANDUM FINDINGS OF FACT AND OPINION PATE, Special Trial Judge: This case was assigned to Special Trial Judge Joan Seitz Pate pursuant to the provisions of section 7456(c) and (d) 1 and General Order No. 8, 81 T.C. XXIII (1983). Respondent determined a deficiency in petitioner's 1980 Federal income tax in the amount of $1,088.The sole issue for consideration is whether petitioner may deduct employee business expenses consisting of meals, lodging and mileage paid for the period September 15, 1980 through December 31, 1980, while petitioner was providing engineering services to Gilbert Associates. FINDINGS OF FACT Petitioner was a resident of Reading, Pennsylvania at the time he filed his petition. Petitioner filed a joint return with Lorrains M. Massey for the year 1980. Petitioner and Lorraine Massey have since been divorced. On April 16, 1982, respondent issued a notice of deficiency to both Don and Lorraine Massey. On July 13, 1982, Donald G. Massey filed a petition with this court contesting the adjustment made in470 the notice of deficiency. Consequently, Lorraine Massey is not a party to this suit. Petitioner is an engineer specializing in structural engineering as it relates to the nuclear business. He received a masters degree in structural engineering from the Georgia Institute of Technology. In June of 1979, petitioner moved with his family to Walkersville, Maryland. During the beginning of 1980 he worked on a job for Westinghouse Corporation in Pittsburgh, Pennsylvania. He left that job in March 1980 and was unemployed until September 15, 1980. During this period petitioner attempted to establish a business as a consulting engineer in the Walkersville area. From September 15, 1980 to December 31, 1980 petitioner provided engineering services to Gilbert Associates, a company located in Green Hills, Pennsylvania (near Reading, Pennsylvania). In the middle of 1979, the Nuclear Regulatory Commission had issued some inspection and enforcement bulletins to Gilbert, which required a large amount of work to be done in a short period of time. Gilbert had a "purchase order" arrangement with Omni International, Inc., Kansas City, Missouri (hereinafter referred to as "Omni") whereby Gilbert471 would contract with Omni to provide various types of temporary engineering personnel by issuing a purchase order naming the person "hired" and the terms of their engagement. They issued a document entitled "Request for Contract Employee" naming the petitioner and briefly describing his job assignment. Upon acceptance of the assignment, petitioner received from Omni an "Assignment Sheet" reciting the basic terms of the agreement, including his hourly rate of pay plus reimbursement of mileage expenses at fifteen cents per mile. Petitioner's reimbursement for his mileage expense was reported as wages on his Form W-2. Petitioner was informed that Gilbert expected his assignment to last approximately six months. In fact, petitioner completed his first assignment for Gilbert by the beginning of 1981. He received subsequent assignments which resulted in his continuing to work for Gilbert through September 23, 1983. 3Because petitioner's residence in Walkersville, Maryland was located approximately 115 miles from Green Hills, he rented a room at the Colonial Motor472 Lodge which he occupied from September 15, 1980 through the beginning of 1981. He paid Colonial Motor Lodge a total of $1,254.56 during 1980. Petitioner also deducted $60 per week for meals, based on an estimate of $10 per day for 6 days, and car expenses based on 5,980 business miles at twenty cents per mile. Petitioner asserts that all of his traveling expenses are deductible because his job with Gilbert was "temporary" and he is entitled to such deductions because he was away from home overnight. Respondent disallowed the deductions in full on the basis that petitioner's job with Gilbert was "indefinite." Alternatively, respondent maintains that petitioner's expenses are not deductible because they are not fully substantiated as required by section 274(d).Section 162(a)(2) allows a deduction for traveling expenses while away from home in pursuit of a trade or business. For purposes of this statute, a taxpayer's "home" generally means the vicinity of his principal place of business or employment. Kroll v. Commissioner,49 T.C. 557">49 T.C. 557 (1968). If the petitioner chooses to live a long distance from the place of his employment for personal reasons, the resulting473 travel costs are not deductible. Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 474 (1946); Kasun v. United States,671 F.2d 1059">671 F.2d 1059, 1061 (7th Cir. 1982). There is an exception to this rule, however, when the petitioner's employment is "temporary" rather than "indefinite." Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59 (1958); Tucker v. Commissioner,55 T.C. 783">55 T.C. 783 (1971). Work is temporary only if it can be expected to end within a short period of time. If it merely lacks permanence, it is "indefinite." Even if a job is temporary at the time it is accepted, developments may show that it has become indefinite. See Boone v. United States,482 F.2d 417">482 F.2d 417 (5th Cir. 1973); Kasun v. United States,supra.Determination of whether a job is temporary or indefinite is a factual question. The Court must examine all of the circumstances of the case before reaching its conclusion. Frederick v. United States,603 F.2d 1292">603 F.2d 1292, 1296 (8th Cir. 1979). In this case, we believe that petitioner's employment during 1980 was temporary. We note that the initial assignment was for a specific job and that474 petitioner was informed by both Omni and Gilbert that the job was expected to last approximately 6 months. In fact, such job lasted even a shorter period of time. It was not until petitioner proved himself to Gilbert that he had any indication that he would receive subsequent assignments. Therefore, during 1980, petitioner's employment was temporary. 4Since we have determined that petitioner's employment with Omni was temporary during the year 1980, we must consider respondent's alternative argument that petitioner has not adequately substantiated his expenses pursuant to the requirements of section 274(d). 5 This section requires that a taxpayer keep "adequate records" or produce "sufficient evidence corroborating his own statement" in order to deduct certain expenses, including traveling expenses. Section 1.274-5(b)(2) further details these requirements are they relate to travel expenses. 6475 After due consideration of the evidence, we find that petitioner has produced adequate records to meet the time, place and business purpose requirements of the regulations. With regard to his lodging, he also has substantiated the amount of his expenditures. Therefore, he is entitled to deduct the full amount of $1,254.56. 7With regard to meals, however, petitioner merely estimated the amount at ten dollars per day. This, however, does not meet the requirements of section 274(d). Because petitioner has not produced adequate records of his expenditures for meals, section 274(d) precludes the deduction of any amount. 8476 With regard to petitioner's automobile expenses for 1980, the Commissioner has allowed the deduction of a fixed mileage allowance of twenty cents per mile in lieu of actual costs. Section 274(d); section 1.274-5(h) Income Tax Regs.; Rev. Rul. 80-62, 1 C.B. 63">1980-1 C.B. 63, as modified by Rev. Rul. 80-203, 2 C.B. 101">1980-2 C.B. 101. Petitioner was reimbursed for his mileage at the rate of fifteen cents per mile and this reimbursement was included in his gross income. Therefore, since we have already found that petitioner has met the time, place and business purpose requirements, he is entitled to deduct twenty cents per mile for 5,980 miles for a total deduction of $1,196 for his business mileage. Accordingly - Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, and in effect during the taxable years at issue.↩3. During the entire period of his association with Gilbert, petitioner was treated by Omni as its employee.↩4. We specifically limit our determination to the year 1980. We do not decide whether subsequent job assignments from Gilbert would change this determination for later years.↩5. Section 274(d) states: (d) Substantiation Required.-No deduction shall be allowed-- (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), (2) * * * (3) * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, * * * (C) the business purpose of the expense * * * and (D) * * * The Secretary 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. ↩6. Section 1.274-5(b)(2) states: (2) Travel. The elements to be proved with respect to an expenditure for travel are -- (i) Amount. Amount of each separate expenditure for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the traveler's own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares, (ii) Time. Dates of departure and return for each trip away from home, and number of days away from home spent on business; (iii) Place. Destinations or locality of travel, described by name of city or town or other similar designation; and (iv) Business purpose. Business reason for travel or nature of the business benefit derived or expected to be derived as a result of travel.↩7. The amount is the total of the checks payable to Colonial Motor Lodge. The record does not reveal why these amounts exceed the rental testified to by the petitioner, but the Court is satisfied that these checks all substantiate petitioner's travel expense.↩8. We note that section 274(d) and section 1.274-5(h), Income Tax Regs. authorize the Commissioner to prescribe rules under which a taxpayer may elect to use a specified amount for meals while traveling in lieu of substantiating the actual cost of meals. For meals paid after December 31, 1982, Rev. Proc. 83-71↩, I.R.B. 1983-39, 19, allows "$9 per day for travel that requires a stay of 30 days or more in one general locality where the taxpayer's trade or business activity is conducted." Since the effective date of that pronouncement is December 31, 1982, however, it precludes our allowing petitioner a meal deduction for 1980.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620452/	CENTRAL SUPPLY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. STONEGA COKE & COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. VIRGINIA WHOLESALE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Central Supply Co. v. CommissionerDocket Nos. 32751-32753.United States Board of Tax Appeals21 B.T.A. 835; 1930 BTA LEXIS 1777; December 22, 1930, Promulgated 1777 An election to file separate returns by three affiliated corporations for 1922, precludes those three corporations, together with a fourth corporation which was brought into the group in 1923, from making a consolidated return for 1923 without the Commissioner's permission. J. F. Bullitt, Esq., for the petitioners. J. L. Backstrom, Esq., and P. A. Sebastian, Esq., for the respondent. LOVE 835 These proceedings are for the redetermination of deficiencies determined by the Commissioner in income tax for the year 1923, as follows: Central Supply Co. (Docket 32751)$3,927.67Stonega Coke & Coal Co. (Docket 32752)5,893.62Virginia Wholesale Co. (Docket 32753)7,491.19By proper order the cases were consolidated for hearing and final determination. The facts were submitted in part by stipulations, and in part by evidence, and there is no controversy as to such facts. The only issue presented is whether or not, under the law and the facts, the three petitioners, together with another corporation, Crab 836 Orchard Improvement Co., were entitled to make a consolidated income-tax return for the year 1923. 1778 FINDINGS OF FACT. For the sake of clarity, it may be stated that there are six corporations named and involved in the transactions herein considered: The Central Supply Co., hereinafter called the Supply Co.; Stonega Coke & Coal Co., hereinafter called the Stonega Co.; Virginia Wholesale Co., hereinafter called the Wholesale Co.; Crab Orchard Improvement Co., hereinafter called the Crab Orchard Co.; Crab Orchard Coal & Land Co.; and the New River Collieries Co. The two companies mentioned last are only incidentally associated in the general concept of the situation with which we are here dealing. The Stonega Co. is a Delaware corporation, and in the coal-mining business. The Wholesale Co. is a Virginia corporation and is a wholesale mercantile business company. The Supply Co. is a Virginia corporation and is engaged in selling mine supplies to the Stonega and other companies. All three companies maintained their general offices together in Philadelphia, and their operating offices in Big Stone Gap, Va. From the date of their several organizations down to and including 1921, 1922, and 1923, the Stonega Co. owned 99 per cent of the stock of the Wholesale Co. and the Supply1779 Co. They all kept their books and made tax returns on the calendar-year basis. For the year 1922, they elected to and did make separate income-tax returns. Prior to September 15, 1923, the Stonega Co. owned no stock and had no connection with the Crab Orchard Co. On September 15, 1923, the Stonega Co. purchased all the stock of the Crab Orchard Co., and held such stock during the remainder of that year. The Crab Orchard Co. owned a lease to what is known as the Eccles Colliery, but did not operate said Colliery, the same being operated, prior to September 15, 1923, by the New River Collieries Co., which owned its stock. The Crab Orchard Co. seems never to have engaged in any kind of operation, and entailed no expense and realized no income. After the purchase of the Crab Orchard Co. stock by the Stonega Co., the Eccles Colliery was operated by and in the name of the Crab Orchard Co., and during that operation of 3 1/2 months in 1923 it suffered a loss of $157,338.57. For the year 1923 the Supply Co., the Stonega Co., and the Wholesale Co. each realized substantial net profits, and the combined net profits of those three companies for the 3 1/2 months here involved were1780 sufficient to offset the loss sustained by the Crab Orchard Co. during that time; hence, the companies desired to make consolidated return for the year 1923. The companies were informed that, by 837 reason of the fact that they had elected to make separate returns for 1922, it was necessary to obtain permission of the Commissioner to change to a consolidated return. Thereupon they went to the office of the collector in Philadelphia, and one of the men in that office advised the officer making the inquiry to write a letter and make the request for the change and attach such letter to the consolidated return. In pursuance of that advice, the consolidated return for the four companies, that is, the three petitioners and the Crab Orchard Co., was made, and attached to such return was the following letter: MARCH 12, 1924. COMMISSIONER OF INTERNAL REVENUE, Washington, D.C.DEAR SIR: During 1922 Stonega Coke and Coal Company owned all the capital stock of Central Supply Company and Virginia Wholesale Company except directors qualifying shares. These two companies elected to file individual rather than a consolidated income tax return for the year 1922 purely for1781 convenience. Effective September 15, 1923, Stonega Coke and Coal Company acquired the entire capital stock of Crab Orchard Improvement Company. The business of Stonega Coke and Coal Company is mining and selling bituminous coal and manufacturing and selling coke. The business of Crab Orchard Improvement Company is mining and selling bituminous coal. Because of the relationship of Stonega Coke and Coal Company to Crab Orchard Improvement Company, Commissioner is requested to consolidate the income of Stonega Coke and Coal Company with the subsidiaries, namely, Central Supply Company, virginiaWholesale Company, and Crab Orchard Improvement Company, for the year 1923 and subsequent years. Yours very truly, (Signed) J. F. BULLITT, Vice-President. That consolidated return showed a net profit for the four companies (after giving effect to the loss of $157,338.87 sustained by the Crab Orchard Co.) of $1,454,385.67, with a tax of $181,770.74, which tax was paid by the Stonega Co. Sometime about December, 1926, or early in 1927, a revenue agent audited the books of the companies here involved, and made a report on the same. That report denied the right to make a consolidated1782 return for 1923 and made two adjustments, one of $18,838.95 and another of $110, favorable to the Stonega Co. That report was approved by the Commissioner and resulted in the determination of the deficiencies involved in these proceedings. It may be further pointed out that in the event it be decided that petitioners were entitled to make a consolidated return for 1923, then, by reason of the adjustments made as stated above, the Stonega Co. will be entitled to a refund of $2,341.12. 838 OPINION. LOVE: As indicated in our opening statement, the only controverted issue in this case is whether or not, in view of the facts as set out in our findings of fact and under the law, the petitioners, together with the Crab Orchard Co., are entitled to have their income-tax liability computed on a consolidated return for the year 1923. Petitioners urge five propositions or points as bases for their contentions that they are so entitled: 1. The equities of the case are all with the petitioners. 2. The Act of Congress did not require the petitioners to get the consent of the Commissioner of the Revenue for the filing of the consolidated return - they had the absolute1783 right to file the same without getting the consent of the Commissioner. 3. Petitioners followed literally the regulations of the Commissioner with reference to companies which became affiliated during a taxable year. In such case the consent of the Commissioner to the filing of a conslidated return is not required. 4. Equity will consider that as done which should have been done. 5. The last sentence in Section 240 of the Act of 1921 is unconstitutional and void. In this case it may be conceded that the Crab Orchard Co. was not affiliated with petitioners prior to September 15, 1923, and that subsequent to that date the four companies were affiliated. Section 240(a) of the Revenue Act of 1921 is the applicable statute in this case, and is as follows: SEC. 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis1784 of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner. With reference to points 1, 4, and 5 presented by petitioners, we fail to perceive the pertinency of any of them to the issue in this case. The right of two or more corporations to file a consolidated return is not an inherent right. It is merely a privilege granted, or a duty imposed by Congress under certain stipulated conditions. Congress certainly had the constitutional right to prescribe such conditions as it deemed proper. As an administrative measure, Congress lodged with the Commissioner discretionary authority to grant, or to refuse to grant, permission to change from one method to another after an election had been exercised. It may be granted that Congress meant that discretion to be the exercise of a sound, and not capricious discretion. A suggestion or showing that he has 839 refused to do what he was expected to do, or even what some other person would probably have done, falls far short of a showing that he has been guilty of an abuse of discretion. We fail to perceive1785 that there are any maxims or principles of equity pertinent in the case. Petitioners have no equitable right to file a consolidated return. Their right, if any they have, is a statutory right. If they bring themselves within the terms and conditions of the statute, their claim should be granted. If they fall without the ambit of the statute, their claim can not be granted. That brings us now to a consideration of the second and third points presented. Petitioners contend, first, that by reason of the fact that in 1923 a fourth corporation not therefore affiliated with the three that exercised the election for 1922, came into the group, there came into being a new taxable entity, which taxable entity had made no election and hence had a right under the statute, as well as under the regulations, to make a consolidated return. Petitioners' counsel in his brief presents a forceful argument in support of the contentions last above noted, and were it a case of first impression, would call for an extended discussion. The issue, however, has been elaborately considered and discussed in several decisions by the Board, and definitely decided adversely to petitioners. See particularly1786 . See also ; . If permission were necessary, then petitioners contend that it should be held that, in view of the fact that they accompanied their return with a letter requesting the right to change, and no affirmative action was taken denying such request for more than two years, by reason of such silence on the part of the Commissioner, he should be held to have consented to the change. The statute certainly contemplates a request being made, with a statement of grounds for such request, prior to the filing of the return, and an affirmative answer. Simply because the Commissioner fails to answer promptly can not be held to estop him from denying such request at a later date when his office force reaches that return in its auditing work. See ; ; ; affd., 1787 . Reviewed by the Board. Judgment will be entered for the respondent.LANSDON, MARQUETTE, ARUNDELL, and MURDOCK dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620479/	W. Harold Warren and Lilia L. Warren, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentWarren v. CommissionerDocket No. 40393United States Tax Court20 T.C. 378; 1953 U.S. Tax Ct. LEXIS 157; May 19, 1953, Promulgated 157 Decision will be entered for the respondent. From January 12, 1939, to and including June 14, 1947, petitioner W. Harold Warren was a substituted trustee for trusts created under the will of T. Frank Appleby, deceased. In such capacity he received commissions for collecting the income of the trusts and also commissions based on the corpus of the trusts. In determining whether petitioner is entitled to the relief provided for in section 107, Internal Revenue Code, as amended, for the taxable year 1947, held, the "total compensation for personal services" as those words are used in the Code include both the commissions for collecting income and also commissions paid as compensation for looking after the corpus. The Commissioner is sustained in thus applying the statute. Paul H. Smart, 4 T.C. 846">4 T. C. 846, affd. (C. A. 2) 152 F. 2d 33, followed. Robert V. Carton, Esq., for the petitioners.John J. Hopkins, Esq., for the respondent. Black, Judge. BLACK 379 The Commissioner has determined a deficiency in petitioners' income tax for the year 1947 of $ 995.03. The deficiency is due to two adjustments made by the Commissioner to the net income as disclosed by the return. These adjustments were:(a) Net profit from business$ 18.25(b) Trustee's commissions5,922.44The petitioners do not contest adjustment (a). Adjustment (b) is explained in the deficiency notice as follows:(b) It has been determined that the benefits of section 107 (a) of the Internal Revenue Code are not allowable with respect to an amount of $ 6,262.50 received as trustee's commissions in 1947 from the Estate of T. Frank Appleby, deceased.Petitioners by an appropriate assignment of error contest the action of the Commissioner in making adjustment (b).FINDINGS OF FACT.The facts have been embodied in a stipulation of facts with exhibits attached thereto. The facts are found as stipulated. The following is believed to be a sufficient summary of them for the purpose159 of a discussion of the issue to be decided.The petitioners are husband and wife whose address is Asbury Park, New Jersey. W. Harold Warren will sometimes hereafter be referred to as petitioner. The petitioners filed a joint income tax return for the taxable year 1947 with the collector for the first district of New Jersey at Camden, wherein they reported income on the cash receipts and expenditures basis of accounting.From January 12, 1939, to and including June 14, 1947, petitioner was a substituted trustee for trusts created under the last will and testament of T. Frank Appleby, deceased. During the period in which the petitioner acted as substituted trustee the corpus of the trust consisted of realty only.During the period in which the petitioner acted as substituted trustee he received the following trustee commissions under authority of the designated accountings, court order, or statutory authority: 380 YearCommissionsCommissionsTotalAuthorityreceivedon incomeon corpuscommissionsreceivedFourth Intermediate Accounting1940$ 1,028.62Fifth Intermediate Accounting19411,091.02Sixth Intermediate Accounting1942852.19Seventh Intermediate Accounting19441,214.43Final Accounting19462,824.96Order of Court19474,395.23$ 6,662.50N. J. S A. 3:11-21947224.77$ 11,631.22$ 6,662.50$ 18,293.72160 On June 14, 1947, an order from the Court in Chancery of New Jersey was entered approving the account of petitioner, sole surviving trustee of the estate of T. Frank Appleby, deceased. This order provided for trustee's commissions to be paid petitioner on corpus and on income in the amounts set out above. This order reads in part as follows:And it is further ORDERED, ADJUDGED and DECREED, that there be allowed to the trustees, present and prior, commissions of 2 1/2% based upon the agreed corpus of $ 500,000.00, amounting to the sum of $ 12,500.00, said sum to be apportioned among and paid to the several trustees or their representatives according to the time served as trustee by each, such apportionment to be subject to the approval of the Court. The allowance of commissions on corpus hereby made is in lieu of commissions on corpus heretofore allowed by order of this court dated September 21, 1944, and which remain unpaid.And it is further ORERED, ADJUDGED and DECREED, that said W. Harold Warren be allowed commissions at the rate of 5% on income in the amount of $ 4,395.23;OPINION.The issue here involved may be stated thus: In construing the phrase "total compensation for 161 personal services" for the purpose of applying section 107 (a) of the Code, are commissions received by a trustee of a trust governed by New Jersey law severable as between commissions received for collecting income and those received for administering corpus? The applicable statute is printed in the margin. 1162 As will be seen from our Findings of Fact petitioner collected in 1947 as surviving trustee of the estate of T. Frank Appleby, deceased, commissions covering corpus and collection of income which aggregated $ 11,057.73. Petitioner had also collected in prior years other 381 commissions as trustee of the same estate so that the total of the commissions which he collected for his services, including those collected in 1947, aggregated $ 18,293.72. The total of $ 11,057.73 which he collected in 1947 would not be "at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more" as those words are used in section 107, if the commissions are lumped together. Eighty per cent of $ 18,293.72 would be $ 14,634.97. Petitioner realizes that fact but he contends that the $ 6,662.50 commissions which he collected on corpus in 1947 should be viewed as a separate class of commissions and that inasmuch as he had not collected in prior years any commissions on corpus, he collected, in 1947, 100 per cent of that class of commissions and, therefore, is entitled to use the provisions of section 107 as to this $ 6,662.50. Petitioners163 have used that method in their joint income tax return for 1947.We do not think there is any merit in petitioner's contention. Commissions are commissions whether they are paid on the collection of income or are based on corpus. Added together they represented petitioner's compensation for his services as trustee of the estate. We see no warrant for separating these commissions into two separate classes for the purpose of applying the provisions of section 107 of the Code. There is nothing in the statute indicating that this should be done. We so decided in Paul H. Smart, 4 T. C. 846. In that case we held that in deciding whether a taxpayer is entitled to the relief provided for in section 107, as amended, the "total compensation for personal services" as that term is used in the Code must include both the commissions for collecting income and also commissions for looking after the corpus. That case involved commissions paid to a trustee of a New Jersey trust under circumstances which we think are not distinguishable from those which are present in the instant case. Our decision was affirmed by the second circuit in Smart v. Commissioner, 152 F. 2d 333,164 certiorari denied 327 U.S. 804">327 U.S. 804.The petitioner, however, contends that the Smart case, supra, was wrongly decided. Says petitioner in his brief: " Smart v. Commissioner of Internal Revenue, 152 F. (2d) 333 (2CCA) 1945, does not correctly state the law of New Jersey and is not controlling in regard thereto." It should be kept in mind that it is not a statute of New Jersey which we are construing. It is an act of Congress as embodied in section 107 of the Code and that section, we think, was properly construed in the Smart case. This case has been adhered to by the courts on several subsequent occasions. See Spears v. Commissioner, (C. A. 3, 1947) 164 F. 2d 486, affirming 7 T. C. 1271; George J. Hoffmann, Jr., 11 T. C. 1057; Ralph E. Lum, 12 T.C. 375">12 T. C. 375; Rosalyne A. Lesser, 1479">17 T. C. 1479; Alfred J. Loew v. Commissioner, 201 F. 2d 368, affirming 17 T. C. 382 1347. We are altogether unconvinced165 by petitioner's argument that the Smart case, supra, was wrongly decided. We adhere to it and decide the issue involved in favor of respondent.Decision will be entered for the respondent. Footnotes1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.(a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620480/	MICHAEL H. DIFFLEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDiffley v. CommissionerDocket No. 18328-82.United States Tax CourtT.C. Memo 1984-372; 1984 Tax Ct. Memo LEXIS 305; 48 T.C.M. (CCH) 547; T.C.M. (RIA) 84372; July 19, 1984. 305 During the taxable year at issue, D was self-employed as a real estate broker. Held, D is not entitled to deduct $14,020 of earnings as non-taxable receipts. Held further, D is liable for self-employment tax. Held further, interest and business deductions determined. Held further, D is liable for the additions to tax for negligence and failure to timely file a return. Michael H. Diffley, pro se. James W. Clark, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined the following deficiency in and additions to petitioner's 1980 Federal income tax: Additions to TaxDeficiencySec. 6653(a) 1Sec. 6651(a)(1)$14,309.90$715.00$2,146.00After concessions, the issues for decision are: (1) whether petitioner is entitled to deduct $14,020 as non-taxable receipts; (2) whether petitioner is liable for self-employment tax under section 1401; (3) whether petitioner is entitled to deduct the cost of home delivery of a newspaper; (4) whether petitioner 306 must capitalize $87.75 of telephone installation expenses; (5) the amount of interest which petitioner may deduct for 1980; (6) whether petitioner is liable for the addition to tax for negligence or intentional disregard of rules and regulations under section 6653(a); and (7) whether petitioner is liable for the addition to tax for failure to timely file a return under section 6651(a)(1). FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided at Sarasota, Florida, at the time his petition was filed in this case. Petitioner is a college graduate with a degree in mechanical engineering. During the taxable year at issue, petitioner was self-employed as a real estate broker. Petitioner submitted a Form 1040 containing numerous alterations to the Internal Revenue Service for the 1980 taxable year. The headings entitled "Income" and "Adjustments to Income" in the margin of the form were obliterated and replaced with the words "Receipts" and "Adjustments to Receipts." On line 23 of the form, the caption "Employee business expense (attach Form 2106)" was replaced with 307 "Non-taxable receipts." Among the many remaining changes was the deletion of the statement "Under penalties of perjury" from the paragraph which immediately precedes the petitioner's signature. The altered form, dated June 15, 1981, by petitioner, was received by the Internal Revenue Service on June 18, 1981. Petitioner calculated a net profit of $15,216 from his real estate business for the taxable year at issue. 2 In conjunction with the net profit reported, petitioner deducted $14,020 as non-taxable receipts on the modified line 23. Petitioner paid $72.84 in 1980 for home delivery of a newspaper. Petitioner reviewed the real estate classified advertisements contained in the newspaper for properties his clients might want to purchase and as a source of listing inventory for his business. Petitioner paid $87.75 to General Telephone Company of Florida in 1980 for installation of a telephone. The telephone was used by petitioner in his real estate 308 business. On December 27, 1979, petitioner received a loan from the Southeast First National Bank of Sarasota to finance the purchase of an automobile. A breakdown of the loan as shown on the loan agreement is as follows: Amount Received$2,000.00Optional Credit Life Insurance26.91Optional Credit Disability Insurance62.21Stamp Tax3.15Amount Financed$2,092.27Interest$ 275.47Investigation Fee25.00Finance Charge$ 300.47Total Payments$2,392.74 Annual Percentage Rate17.43%In addition, the loan agreement required petitioner to repay the loan in 18 equal monthly installments of $132.93 beginning on February 15, 1980. Petitioner paid all 11 of the loan installments due in 1980. OPINION Non-Taxable Receipts DeductionThe first issue for decision is whether petitioner is entitled to deduct $14,020 as non-taxable receipts. Petitioner reported $15,216 of net profit from his real estate business for 1980. Petitioner then entered $14,020 3309 on line 23 (of the Form 1040) which was altered to provide a fabricated deduction for non-taxable receipts. Petitioner argues that the deduction is valid because "[n]et receipt over expense are not income but rather an exchange for labor." We have repeatedly rejected in prior cases the argument made by petitioner. The amounts received by petitioner from his real estate business are includable in his gross income. Section 61; Beard v. Commissioner,82 T.C. 766">82 T.C. 766 (1984); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1119 (1983). Petitioner's argument is frivolous and his deduction for non-taxable receipts is therefore denied. Self-Employment TaxThe second issue for decision is whether petitioner is liable for self-employment tax imposed by section 1401. Petitioner argues that the self-employment tax is unconstitutional because it is a "direct tax levied without apportionment" and because "the trust fund for Social Security is bankrupt therefore the government has violated the intent of the law." Petitioner has again advanced a frivolous argument which we accordingly reject. 4 Petitioner is therefore liable for self-employment tax under section 1401.Newspaper DeductionThe third issue for decision is whether petitioner is 310 entitled to deduct $72.84 which he paid for home delivery of a newspaper. Respondent argues that the purchase of the newspaper subscription is a nondeductible personal expense under section 262. Petitioner contends that he reviewed the classified advertisements section of the newspaper for real estate listings in the furtherance of his real estate business and therefore the cost of purchasing the newspaper is a deductible expense. Although the newspaper may have been useful to petitioner in connection with his business, it was not shown to have been used solely or even principally for business purposes. Wallendal v. Commissioner,31 T.C. 1249">31 T.C. 1249, 1252 (1959). Accordingly, petitioner is not entitled to deduct the cost paid for the newspaper. Telephone Installment ExpenseThe next issue for decision is whether petitioner is required to capitalize $87.75 of telephone installation expenses paid for a phone used in his real estate business. Respondent argues that because the installation charges paid by petitioner are expected to create a benefit for more than one year they are required to be capitalized under section 263. Petitioner contends that his deduction of the charges as a current 311 business expense is proper. We agree with petitioner. Although as a general rule amounts paid which are empected to yield a benefit for more than a year are required to be capitalized under section 263, and exception to that rule exists for relatively minor expenses or where the useful life is short. See Sharon v. Commissioner,66 T.C. 515">66 T.C. 515, 527 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978); Galazin v. Commissioner,T.C. Memo. 1979-206; Sec. 1.162-6, Income Tax Regs. The telephone installation expenses paid by petitioner were relatively small compared to both his total telephone charges ($1,252.26) and his overall business expenses ($16,352.75). The record does not disclose how long the petitioner maintained the telephone installation after the year in question; if for but a short period, the regulation squarely applies; if for a longer period, the annual deduction would be too trivial to mention. We therefore hold that petitioner is entitled to deduct the amounts paid. Interest DeductionThe fifth issue for decision is the amount of interest petitioner is entitled to deduct with respect to a loan petitioner received from the Southeast First National Bank of Sarasota. In December, 312 1979, petitioner borrowed $2,000 from the bank to finance the purchase of an automobile. The loan agreement provided that petitioner was to repay the loan in 18 equal monthly installments of $132.93 beginning on February 15, 1980. The total interest charged by the bank was stated as $275. Petitioner paid the required 11 installments of $132.93 in 1980. Respondent argues that petitioner is entitled to deduct $168 of interest in 1980. Respondent determined this amount by equally prorating the stated interest of $275 over the eighteen-month term of the loan. Petitioner contends that he is entitled to an interest deduction of $248. Petitioner supports his contention by providing a loan amortization schedule that was prepared by him. We are unpersuaded by petitioner's argument and therefore hold that respondent's determination of the amount of interest which may be deducted is correct. Petitioner testified that the bank did not provide him with a loan amortization schedule detailing the portion of his monthly payments which were attributable to interest. Rather, petitioner personally prepared an amortization schedule (apparently using a computer program from his real estate business) 313 which he offers as evidence of the amount of interest paid. We are unconvinced that petitioner has carried his burden of proving the amount of interest which was paid. Rule 142(a). The loan amortization schedule prepared by petitioner shows $233 of interest for 1980. Petitioner, however, for unexplained reasons, argues that $248 is the correct amount of deductible interest. Moreover, in calculating the interest paid on the loan schedule petitioner failed to properly include the total funds which he received from the bank. Respondent's pro rata determination of the amount of interest is reasonable and is therefore sustained. Addition to Tax for Negligence The next issue for decision is whether petitioner is liable for the addition to tax for negligence or intentional disregard of rules and regulations under section 6653(a). Respondent argues that the modified Form 1040 submitted to the Internal Revenue Service by petitioner demonstrates an intentional disregard of rules and regulations. We agree. Petitioner knew that the altered form was not in compliance with the rules and regulations as he testified that he had filed proper returns for previous taxable years. Petitioner's 314 actions are sufficient grounds for the assessment of the addition to tax under section 6653(a). Beard v. Commissioner,supra.Addition to Tax for Failure to Timely File a ReturnThe final issue for decision is whether petitioner is liable for the addition to tax under section 6651(a)(1) 5315 for failure to timely file a required return. Respondent argues that an addition to tax under section 6651(a)(1) in the amount of 15 percent should be assessed against petitioner because the modified Form 1040 was not received by the Internal Revenue Service until June 18, 1981, more than two months after the return was due. 6 We agree. Petitioner has not shown that the failure to timely file a return was due to reasonable cause of that he had properly filed an extension of time for filing a return. Accordingly, the addition to tax of 15 percent under section 6651(a)(1) is sustained. 7316 To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect for the year in question. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Neither party disputes the $33,689 of total income reported by petitioner on the attached Schedule C (which was not altered). The net profit figure was obtained after subtracting $18,473 of business deductions, some of which are at issue.↩3. Petitioner apparently chose to deduct this amount because it reduced his tax liability to zero for the year at issue.4. See Fiorito v. Commissioner,T.C. Memo. 1981-576, affd. without published opinion 720 F.2d 682">720 F.2d 682↩ (7th Cir. 1983).5. SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX. (a) ADDITION TO THE TAX. -- In case of failure -- (1) to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; * * * ↩6. Although the modified Form 1040 was dated June 15, 1981 by petitioner, it is stamped as having been received by the Internal Revenue Service on June 18, 1981. Since petitioner offered no evidence pertaining to the date that the altered form was mailed, the date stamped as received by the Internal Revenue Service is the relevant date for the purpose of determining the addition to tax under section 6651(a)(1). See Abbey v. Commissioner,T.C. Memo. 1981-673↩. 7. On brief, respondent argues that petitioner is liable for the maximum 25 percent addition to tax imposed by section 6651(a)(1) because the modified Form 1040 submitted by him does not constitute a valid return. Although the argument put forth by respondent is not without merit (see Beard v. Commissioner,82 T.C. 766">82 T.C. 766↩ (1984), it was not properly pleaded by respondent by means of an affirmative allegation in his answer filed in this case or by an amended answer, and is therefore not at issue in the instant case. Rules 36(b); 41(a).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620482/	JOSEPH L. WARD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWard v. CommissionerDocket No. 3197-78.United States Tax CourtT.C. Memo 1979-252; 1979 Tax Ct. Memo LEXIS 273; 38 T.C.M. (CCH) 1006; T.C.M. (RIA) 79252; July 3, 1979, Filed Thomas A. Falik, for the petitioner. Eddie L. Gibson, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: Respondent determined deficiencies of $3,373, $3,372, and $4,097 for the years 1973, 1974, and 1975, respectively. The only issue presented for decision is whether petitioner is entitled to deduct certain payments incident to a divorce as alimony under section 215. 1274 This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and joint exhibits are incorporated herein by this reference.The pertinent facts are summarized below. Joseph L. Ward (petitioner) was a resident of Houston, Texas, when he filed the petition in this case. On or about July 21, 1972, petitioner and his wife, Betty Mae Ward (hereinafter Betty), were separated. On September 25, 1972, petitioner and his wife entered into an agreement entitled "Agreement for Division of Marital Property and for Support." In addition to providing for a division of their marital property, the agreement required petitioner to make payments "to Wife for her and the parties' minor children's support and maintenance." 2 On January 18, 1973, petitioner and Betty were granted a divorce in Texas. The divorce decree not only formally approved and incorporated by reference the written agreement of the parties, but also specifically ordered petitioner to "pay support and maintenance to Petitioner (Betty) for the parties' minor children." 3 The amounts paid and deducted by petitioner during the taxable years in issue, and the275 amounts disallowed by respondent, are as follows: YearAmount GlaimedAmount Disallowed1973$7,192.00$5,500.0019746,057.006,000.0019756,000.006,000.00276 The claimed deductions were disallowed to the extent that respondent determined them to be child support payments fixed by the divorce decree. Section 215 allows a husband to deduct amounts includable under section 71 in the gross income of his former wife. Under the general rule of section 71, 4 the wife's gross income includes periodic payments received in discharge of a legal obligation imposed on a husband under a decree of divorce or separate maintenance or under a written separation agreement. Section 71(b) provides that this general rule shall not apply to any amounts paid which are fixed in the decree or agreement as payable for the support of minor children. If the instrument merely calls for payments to be made "to the spouse for her support and the support of minor children," however, none of the amount is considered nondeductible child support. See Commissioner v. Lester,366 U.S. 299">366 U.S. 299, 305 (1961).277 Petitioner contends that neither the written agreement nor the court decree specifically designated any portion of the payments as child support. He argues that the court's approval and incorporation of the separation agreement in the decree conflicts with other language in the decree ordering petitioner to pay certain sums to Betty for the support of their children. This ambiguity, he maintains, precludes any portion of the payment from being considered as fixed for child support under section 71(b). Respondent does not challenge petitioner's construction of the separation agreement, which by itself clearly fails to fix any amount for child support. He does maintain, however, that in spite of the incorporation of the separation agreement in the subsequent divorce decree, the decree operated to fix a portion of the amounts payable under the agreement as child support. We agree with respondent. Attendant to an action for divorce under Texas law, the "Court may order either or both parents to make periodic payments or a lump-sum payment, or both, for the support of the child until he is 18 years of age in the manner and to the persons specified by the Court in the decree." 278 Tex. Fam. Code Ann., tit. II, sec. 14.05(a)(Vernon).Parties to the divorce may not, by their agreement, restrict the court's authority to make any order necessary for the support of their children. Myrick v. Myrick,478 S.W. 2d 859 (Tex. Ct. App. 1972); Murray v. Murray,350 S.W. 2d 593 (Tex. Ct. App. 1961); De Viney v. De Viney,269 S.W. 2d 936 (Tex. Ct. App. 1954); Hardin v. Hardin,247 S.W. 2d 614 (Tex. Ct. App. 1952). Section 14.06(b) of the Texas Code also provides that child support provisions in separation agreements may be subject to court scrutiny. Whether payments are ordered by the court pursuant to a divorce decree or made part of a separation agreement, such provisions may be modified or altered on subsequent application to the court under certain situations. Texas law does limit, however, the court's authority to subsequently modify or alter child support payments if the court has merely incorporated a separation agreement by reference in the decree. In that situation the child support provisions are not modifiable. Duke v. Duke,448 S.W. 2d 200 (Tex. Ct. App. 1969). Such a prohibition279 is predicated upon a belief that by mere incorporation into the divorce decree the duty to provide child support subsequent to the divorce arises only as a result of the parties' agreement, and not by exercise of court authority under section 14.05(a) of the Texas Code. Duke v. Duke,supra at 202. If the court does not merely incorporate a child support provision from a separation agreement in the divorce decree, its authority to subsequently modify or alter the amount of support is undiminished. Mobley v. Mobley,221 S.W. 2d 565 (Tex. Ct. App. 1949), is illustrative. In Mobley the parties to the divorce had previously entered into a separation agreement which settled property rights and required the husband to pay $200 per month in child support until the children finished school. The divorce decree, however, contained the following provisions (221 S.W. 2d at 566): It is further ordered that the care and custody of Robert Vernon Mobley and Barbara Sue Mobley is hereby awarded to the Defendant; the Plaintiff shall have the right to visit and be visited by said children at reasonable times; the Plaintiff shall pay the sum280 of $200.00 per month to the Defendant for the care and support of said children.It further appears to the Court that all community property rights have been settled out of Court and the Court hereby approves said settlement. * * The Texas Court of Civil Appeals held that because the support decree was based upon the terms of the statute authorizing the court to provide for child support, it was subject to subsequent modification by that court. The court reasoned as follows (221 S.W. 2d at 567): From an inspection of the face of the divorce decree it appears that the judge rendering the same treated the matter of child support and the settlement of community property rights as separate matters. The paragraph relating to child support does not show that it was based upon an agreement of the parties. In fact, it does not follow the terms of the agreement, in that the provision relating to the length of time during which the payments shall be made--until the children are through with their schooling--is omitted: It is apparent, therefore, that there must be evidence of an intent to exercise statutory authority under sec. 14.05(a) if the power of the court to alter281 the support obligation is to be preserved. 5282 Petitioner argues that Mobley is distinguishable from the present case because in Mobley the court did not specifically approve and incorporate the entire separation agreement. Such a distinction, we think, is immaterial. In the present case, the court had both the authority and the responsibility to insure adequate support for minor children, and it exercised that authority. In addition to setting out the child support obligation as a separate order in the decree, the court altered 6 the amount and duration of the payments called for by the separation agreement (as did the court in Mobley). The facts clearly indicate a deliberate attempt to invoke the authority granted to the court under sec. 14.05(a) of the Texas Code. Thus, notwithstanding the Texas court's approval and incorporation of the separation agreement, it has exercised its statutory powers to fix child support in the decree. Having concluded that the divorce decree specifically designated amounts payable for child support, we are now faced with a simple conflict between a divorce decree which fixes payments for support and a prior separation agreement which does283 not. As we observed in Thomson v. Commissioner,42 T.C. 825">42 T.C. 825 (1964), affd. sub nom. Metcalf v. Commissioner,343 F.2d 66">343 F.2d 66 (1st Cir. 1965), section 71(b) is written in the disjunctive. When both the decree and the agreement are effective and enforceable, it is necessary only that one or the other fix an amount as payable for child support. In the instant case the fixing of payments in the decree overrides the lack of specificity in the agreement. Petitioner argues that our opinion in Tinsman v. Commissioner,47 T.C. 560">47 T.C. 560 (1967), should control here. We cannot agree. That case dealt with two decrees from different jurisdictions. The first was a decree of separate maintenance issued in the District of Columbia which specified a single sum for both alimony and child support. The second, a divorce decree issued in Maryland, specified a single sum for child support alone. Since it was unclear whether the later decree was intended to supplant or modify the earlier decree with regard to classification of the payments to the wife, we held that the second decree failed to fix any amount for child support. We are not confronted with284 a Tinsman situation here. Rather, we have one decree in conflict with a prior separation agreement. It is clear that the delineation in the decree of certain payments as support supersedes the characterization of such payments in the written agreement. Moreover, in Tinsman the amount ordered to be paid under both decrees was identical. We think that coincidence was a material factor in finding a lack of specific designation in the later decree in that case. By contrast, the amount and duration of the payments specified in this case for child support differ from the terms of the separation agreement. 7285 Finally, petitioner contends that the divorce decree is a consent decree under Texas law, which must be construed in accordance with contract law so as to "carry out and effectuate to the fullest extent the intent of the parties." City of Pinehurst v. Spooner Addition Water Co.,432 S.W. 2d 515, 519 (Tex. 1968). The intent of the parties, petitioner argues, was that the payments were to be treated as alimony for tax purposes, not as nondeductible child support. This argument lacks merit. A review of Texas law in this area indicates that only that part of the judgment which was based upon the agreement of the parties is governed by the laws relating to contracts. Plumly v. Plumly,210 S.W. 2d 177 (Tex. Ct. App. 1948); Brady v. Hyman,230 S.W. 2d 342 (Tex. Ct. App. 1950); Lee v. Lee,509 S.W. 2d 922 (Tex. Ct. App. 1974). In the present case the duty to make payments specifically for the support of minor children arose not from the agreement of the parties, but from the exercise of court authority under section 14.05(a) of the Texas Code. Cf. Boyd v. Boyd,545 S.W. 2d 520 (Tex. Ct. App. 1976).286 Accordingly, we hold that the payments under the decree ordered specifically for the support of minor children are within the purview of section 71(b) and are therefore not deductible by petitioner under Section 215(a). To reflect a concession made by respondent for 1973 and our conclusion on the disputed 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 year in issue, unless otherwise indicated.↩2. In particular, the agreement called for the following payments over a term of 186 months: (a) $350.00 twice per month for the first sixty-three (63) months of said term; (b) $300.00 twice per month for the next fifty-seven (57) months except if wife has remarried, the amount of (a) or (b) shall be decreased by $100.00 per payment; (c) $200.00 twice per month for the next thirty-six (36) months; (d) $150.00 twice per month for the last thirty months of said term. ↩3. The amount and timing of the payments ordered in the decree differed markedly from the terms of the written agreement. The decree called for the following: (a) $250.00 twice per month until the parties' eldest child, Brian Joseph Ward, shall attain age eighteen (18) years on December 15, 1977. (b) $200.00 twice per month from December 15, 1977 until the parties' second child, Mary Dawn Ward, shall attain age eighteen years on September 2, 1985. (c) $150.00 twice per month from September 2, 1985 until the parties' youngest child, Scott Patrick Ward shall attain the age eighteen years on March 21, 1988.↩4. SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS. (a) General Rule.-- (1) Decree of divorce or separate maintenance.-- If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation. (2) Written separation agreement.--If a wife is separated from her husband and there is a written separation agreement executed after the date of the enactment of this title, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such agreement is executed which are made under such agreement and because of the marital or family relationship (or which are attributable to property transferred, in trust or otherwise, under such agreement and because of such relationship).This paragraph shall not apply if the husband and wife made a single return jointly. (3) Decree for support.--If a wife is separated from her husband, the wife's gross income includes periodic payments (whether or not made at regular intervals) received by her after the date of the enactment of this title from her husband under a decree entered after March 1, 1954, requiring the husband to make the payments for her support or maintenance. This paragraph shall not apply if the husband and wife made a single return jointly. (b) Payments to Support Minor Children.--Subsection (a) shall not apply to that part of any payment which the terms of the decree, instrument, or agreement fix, in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband. For purposes of the preceding sentence, if any payment is less than the amount specified in the decree, instrument, or agreement, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support.↩5. Accord, Ex Parte Hatch,410 S.W. 2d 773 (Tex. 1967); Forney v. Jorrie,511 S.W. 2d 379 (Tex. Ct. App. 1974); Alford v. Alford,487 S.W. 2d 429 (Tex. Ct. App. 1972). If evidence of the court's intent to exercise such authority is lacking, then the court is also stripped of its power to enforce the support obligation via a contempt judgment. See Ex Parte Jones,163 Tex. 513">163 Tex. 513, 358 S.W. 2d 370 (1962). Yet, it is clear that under Texas law the incorporation of a separation agreement in the decree does have legal significance. The agreement becomes an integral part of the judgment, having the same force and effect as any other judgment, and effects a conclusive adjudication of the parties rights in the absence of fraud or mistake. Moreover, in a suit on the judgment to enforce those rights the defendant is precluded from raising any contractual defenses because to do so would sanction a collateral attack on the judgment. Schwartz v. Jefferson,520 S.W. 2d 881 (Tex. 1975); Atkinson v. Atkinson,560 S.W. 2d 200 (Tex. Ct. App. 1977); Peddicord v. Peddicord,522 S.W. 2d 266↩ (Tex. Ct. App. 1975).6. See footnote 3, supra.↩7. Had petitioner sought and obtained a modification of the court decree so that the decree conformed precisely with the intent of the written agreement, an entirely different situation would be presented. The record contains no indication of any attempt to modify the decree, however, and we do not reach the issue of whether retroactive modification of the decree would have any consequences insofar as section 71(b) is concerned. Compare Gordon v. Commissioner,70 T.C. 525">70 T.C. 525(1978), Newman v. Commissioner,68 T.C. 494">68 T.C. 494 (1977), and Johnson v. Commissioner,45 T.C. 530">45 T.C. 530 (1966), with Van Vlaanderen v. Commissioner,175 F.2d 389">175 F.2d 389 (3d Cir. 1949), affg. 10 T.C. 706">10 T.C. 706 (1948), and Daine v. Commissioner,168 F.2d 449">168 F.2d 449 (2d Cir. 1948), affg. 9 T.C. 47">9 T.C. 47↩(1947).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620483/	CARTEX MILLS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cartex Mills, Inc. v. CommissionerDocket No. 97698.United States Board of Tax Appeals42 B.T.A. 894; 1940 BTA LEXIS 934; October 9, 1940, Promulgated 934 1. Petitioner was a corporation engaged in the manufacture of cotton goods and subject to the payment of processing taxes under the Agricultural Adjustment Act, declared unconstitutional January 6, 1936. The taxes imposed upon petitioner by that act for the year 1934 and accrued by it for 1934 were not paid until 1935. Held, such taxes were not deductible in 1935. 2. In 1935 petitioner enjoined the collection of such taxes and entered into an agreement with its vendees (known as the Charlotte agreement) to refund to them an amount equal to such tax on all undelivered goods and all goods delivered within 90 days prior to the invalidation of such tax, in the event it was invalidated. Amounts equal to such tax on goods delivered within 90 days prior to January 6, 1936, were accrued by petitioner in 1935. Held, such amounts were deductible in 1935, following Sanford Cotton Mills, Inc.,42 B.T.A. 190">42 B.T.A. 190. Richard B. Barker, Esq., for the petitioner. E. L. Corbin, Esq., for the respondent. KERN 894 This proceeding involves deficiencies in petitioner's income tax and excess profits tax liability for the year 1935 determined935 by respondent in the amounts of $3,082.53 and $1,120.92, respectively. That part of these deficiencies is in issue here which arises by reason of respondent's disallowance of deductions from gross income taken by petitioner for the taxable year with respect to processing taxes imposed under the Agricultural Adjustment Act. Petitioner not only contests the deficiency determined, but also claims a refund for alleged overpayments in the amounts of $624.83 income taxes and $41.13 excess profits taxes, basing this claim on the contention that processing taxes accrued by it in 1934 and deducted by it for that year, but not paid until 1935 should have been deducted in the latter year. FINDINGS OF FACT. All of the facts have been stipulated by the parties and we adopt such stipulation as our findings herein. A brief statement of the material facts is as follows: Petitioner is a corporation, with its principal office at Salisbury, North Carolina, and was engaged in the manufacture of cotton yarn and the processing of cotton into yarn during the years the Agricultural Adjustment Act was in effect. Under the provisions of the Agricultural Adjustment Act (declared unconstitutional936 by the Supreme Court on January 6, 1936) there was imposed upon petitioner a tax of 4.2 cents for every pound of cotton processed. Petitioner 895 paid processing taxes on cotton processed up to, and including March 1935. Processing taxes imposed and paid with respect to processing during January, February, and March, 1935, amounted to $8,392.29. In July 1935 petitioner filed a bill to enjoin the collection of said processing taxes, and in September 1935 a temporary injunction was granted by the United States District Court for the Middle District of North Carolina. In its decree the District Court waived the usual requirement that processing taxes imposed be impounded or placed in escrow as they became due, and in lieu thereof, allowed the collector to file notices of lien on petitioner's property in order to secure the payment of processing taxes becoming due. The temporary injunction was made permanent and petitioner's property released from lien in January 1936, after the decision of the United States Supreme Court in 937 United States v. Butler,297 U.S. 1">297 U.S. 1, declaring the Agricultural Adjustment Act unconstitutional. In August 1935 petitioner inserted in all its sales contracts the so-called Charlotte 90-day agreement, which provided as follows: If and when, for any reason, sellers liability for processing taxes levied under the AAA as heretofore and hereafter amended is increased, decreased, or terminated, or such taxes shall be invalidated by final decision of the U.S. Supreme Court, prices on any undelivered portion of this contract are subject to adjustment at a rate per pound computed on the basis of the conversion factors set up by Treasury Department Decision 4433, approved May 10th, 1934. In addition, the seller will credit on the purchaser's account the amount, computed on the basis of such conversion factors, of any such tax which, by reason of such invalidity, shall have been refunded to the seller or the seller shall have been relieved from paying, with respect to any delivered portion of this contract, invoiced within ninety days prior to such determination of invalidity, provided the buyer shall only be entitled to such credits with respect to such delivered938 portions, held on floor stocks, as to which direct refunds from the Government are not recoverable by the holders of such stocks. When the Supreme Court invalidated the tax on January 6, 1936, the petitioner was bound by the terms of the Charlotte agreement to refund to its vendees an amount equal to the tax on all goods delivered to the vendees during the 90-day period prior to January 6, 1936. The tax on the goods manufactured and delivered during 1935 with respect to which a refund was due amounted to $14,026.08. This amount was refunded to vendees by petitioner in 1936. During all the years in question petitioner kept its books and filed its returns on an accrual basis. Upon this basis petitioner accrued processing taxes in the year of imposition, regardless of when they were paid. Processing taxes in the amount of $8,919.51 imposed with respect to processing during 1934 were accrued in that year and deducted on petitioner's 1934 income tax return, even though payment was not made until 1935. Petitioner had a net loss for the year 1934 of $39,974.42. Processing taxes imposed during the year 1935 but not 896 paid, in the amount of $49,805.41, were accrued by939 petitioner and deducted on its 1935 income tax return. Included in this amount were taxes in the amount of $14,026.08 with respect to which petitioner made refunds to its vendees, and to which reference has been made heretofore. It is this latter amount which petitioner now claims is properly accruable and deductible by it for the year 1935, accruable, not as taxes (see J. A. Dougherty's Sons, Inc.,42 B.T.A. 892">42 B.T.A. 892), but as obligations incurred by it under the so-called Charlotte 90-day agreement, set out above. Petitioner has filed a claim for refund of all processing taxes paid. This claim was filed under the provisions of Title VII of the Revenue Act of 1936 which require a claimant to prove that the burden of the tax was not shifted before a refund can be made. No part of the processing taxes paid has been refunded to petitioner. The respondent has refused to allow as deductions or eliminations from petitioner's 1935 income any of the amounts described above. OPINION. KERN: Respondent has conceded error in disallowing the deduction claimed by petitioner from its gross income for the year 1935 in the amount of $8,392.29 representing processing taxes940 imposed in 1935 and paid in 1935. Therefore, there are but two questions remaining for our decision. The first question is whether taxes in the amount of $8,919.5 accrued in 1934 by petitioner, which was using the accrual method of accounting, but not paid by it until 1935, are properly deductible by it in the latter year, the taxes having been imposed by an act of Congress which was declared unconstitutional by the Supreme Court in 1936. This question involves the vexed problem of the correct treatment of deductions taken by reason of taxes paid under unconstitutional taxing statutes and void regulations, and, conversely, the treatment of refunds received by taxpayers in later years on account of such payments. For a general, although already outdated discussion of this problem, see Robert C. Brown, The Treatment for Federal Income Tax Purposes of Errors in the Deduction of Other Taxes, 86 U. of Pa. L.R. 385. In three relatively early cases, the Board, reasoning from an opinion of the Supreme Court in Norton v. Shelby County,118 U.S. 425">118 U.S. 425, which dealt with an entirely unrelated subject, reached a conclusion that taxes paid under a law later declared941 to be unconstitutional could not be considered as a legal deduction from gross income in the year in which they were paid, and that, therefore, a refund of such taxes in a later 897 year would not constitute taxable income in such year of refund. Inland Products Co.,10 B.T.A. 235">10 B.T.A. 235; affd., 31 Fed.(2d) 867; Philip C. Brown,10 B.T.A. 1122">10 B.T.A. 1122; Lehigh Valley Coal Sales Co.,15 B.T.A. 1401">15 B.T.A. 1401. For a criticism of two of these cases see Estate of William H. Block,39 B.T.A. 338">39 B.T.A. 338, 341. In each of these three cases the taxable year considered by the Board was the year in which the taxes were paid, and prior to the determination of deficiency there had been refunds of these taxes to the taxpayer. Later, in the case of E. L. Bruce Co.,19 B.T.A. 777">19 B.T.A. 777, the Board cited the three earlier cases of the Board, together with Norton v. Shelby County, supra, for the general proposition that taxes imposed by an unconstitutional statute could not be deducted from gross income either in the year of accrual or of payment, but stressed the fact that in those earlier Board cases the taxpayers942 had received refunds of the taxes so paid prior to the determination of the deficiency. Our decision in that case was that the payment was made in settlement of a suit brought by the state for the collection of taxes, was necessary in order to prevent protracted litigation and permit the taxpayer to proceed with its usual business, and was deductible as a loss or an ordinary and necessary expense. Some five years later, in the case of Charles F. Fawsett,30 B.T.A. 908">30 B.T.A. 908, we again considered the question of the deductibility of taxes paid under an unconstitutional statute and there held that where amounts are demanded and paid as taxes even under an unconstitutional statute and recovery of such amounts is impossible by reason of the limitation period prescribed by the statute, the amounts are deductible as "taxes paid." In that case we distinguished Philip C. Brown, supra,Inland Products Co., supra, and Lehigh Valley Coal Sales Co., supra, because of the fact that in those cases "the amounts illegally exacted were refunded to the taxpayers, and * , having been made whole, they were not in a position to claim deductions. 943 " No attempt was made to distinguish the decision of E. L. Bruce Co., supra, on this point, and, therefore, we must consider that part of the opinion in the latter case, to the effect that taxes paid or accrued under an unconstitutional statute can not be deducted as such, as dictum and no longer to be followed. Our conclusion with regard to E. L. Bruce Co., supra, is substantiated by a reference to it in the recent case of Dixie Margarine Co.,38 B.T.A. 471">38 B.T.A. 471, 475, as follows: In E. L. Bruce Co.,19 B.T.A. 777">19 B.T.A. 777, and Charles F. Fawsett,30 B.T.A. 908">30 B.T.A. 908, we held that amounts paid as taxes under unconstitutional and void state statutes, where such amounts had not been later refunded and refunds were barred by limitations or otherwise, were allowable deductions in computing Federal income tax liability for the years in which paid * * . Such amounts 898 have been held not to constitute allowable deductions from gross income for the year in which paid only in those cases where refund was received prior to the final determination of the tax liability for the year in which the refunded payment944 was made. Inland Products Co.,10 B.T.A. 235">10 B.T.A. 235; affd., 31 Fed.(2d) 867; Mary W. Leach,16 B.T.A. 781">16 B.T.A. 781; affd., 50 Fed.(2d) 371; and compare Joseph V. Horn,23 B.T.A. 1131">23 B.T.A. 1131. This quotation would seem to accurately state the rule now applied by us to the deduction of taxes imposed by unconstitutional statutes. The fundamental reason for this rule is well stated in Estate of William H. Block, supra, as follows: "Income tax liability must be determined for annual periods on the basis of facts as they existed in each period." (Italics supplied.) See also Central Loan & Investment Co.,39 B.T.A. 981">39 B.T.A. 981. It has been frequently said that taxation is a practical matter. To state that an unconstitutional statute should be considered as void ab initio may be sound legal metaphysics and helpful in some circumstances, but, as the Supreme Court itself has said in a recent decision, it is a broad statement, with "must be taken with qualifications." 945 Chicot County Drainage District v. Baxter State Bank,308 U.S. 371">308 U.S. 371. See also Anniston Manufacturing Co. v. Davis, 87 Fed.(2d) 773. To conclude, in an interpretation of the revenue acts, that substantial amounts paid pursuant to a taxing statute, vigorously enforced by the sovereign and not declared unconstitutional until a later year, are not "taxes paid or accrued within the taxable year" within the meaning of the revenue act would be, by way of understatement, highly impractical. As to taxes paid pursuant to a statute later held to be unconstitutional, both petitioner and respondent seem to agree with the rule above stated, for it is conceded that the processing taxes accrued by the petitioner for the year 1935 and paid by it in that year are properly deductible. Respondent, however, contends that those taxes accrued by the petitioner in 1934 and not paid until 1935 are not deductible by it from its gross income for the latter year. Petitioner, on the other hand, takes the rather startling position that while taxes paid under an unconstitutional statute may be properly deducted, there may be no accrual of taxes under such a statute. 946 As authority for this position it relies on the dictum in E. L. Bruce Co., supra, which we have already discussed. A careful reading of this dictum indicates that if it were followed no deduction would be permitted either in the year of accrual or the year of payment. That dictum, however, as we have pointed out, no longer states the law as it is now understood. We know of no sound reason based upon theory or practice to limit the application of the present rule stated in the quotation from Dixie Margarine Co., supra, set out above, to cases where amounts were paid as taxes under unconstitutional 899 statutes and not apply it to cases where amounts were accrued as such taxes and later paid. If, as petitioner contends, the taxes involved here were deductible by reason of the fact that no refunds have been made and that such refunds are impossible or improbable, they were properly deductible in the year in which they were accrued by petitioner, which was on the accrual basis. United States v. Anderson,269 U.S. 422">269 U.S. 422; *947 Ernest M. Bull, Executor,7 B.T.A. 993">7 B.T.A. 993; American Cigar Co.,21 B.T.A. 464">21 B.T.A. 464; Central United National Bank,33 B.T.A. 588">33 B.T.A. 588. On this issue our decision is for respondent. The remaining question is whether the Commissioner erred in disallowing as a deduction from the petitioner's gross income for 1935 or in failing to exclude from the gross income for that year an item of $14,026.08 representing processing taxes imposed on petitioner and accrued on its books in 1935, which it was under obligation to refund to its vendees in the event the Agricultural Adjustment Act was declared unconstitutional and which was refunded to its vendees in 1936 pursuant to agreements executed in 1935. Upon this issue our decision is for petitioner, on the authority of Sanford Cotton Mills, Inc.,42 B.T.A. 190">42 B.T.A. 190. Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620484/	ANNA M. PROVENZA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentProvenza v. CommissionerDocket No. 19990-83.United States Tax CourtT.C. Memo 1984-663; 1984 Tax Ct. Memo LEXIS 8; 49 T.C.M. (CCH) 360; T.C.M. (RIA) 84663; December 26, 1984. Anna M. Provenza, pro se. Clare J. Brooks, for the respondent. COHEN MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows: 9 Additions to TaxYearDeficiencySec. 6651(a)Sec. 6653(a)Sec. 6654 11977$1,326.00$331.50$66.30$47.1819781,482.00370.5074.1031.9719791,693.00423.2584.6570.5219801,753.00438.2587.65111.70The matters in dispute are whether petitioner's pension income is taxable, whether interest earned on certain bank accounts is taxable to petitioner, and whether the additions to tax should be sustained. FINDINGS OF FACT Petitioner is a retired school teacher who resided in Baltimore, Maryland, at the time she filed her petition herein. On or about February 18, 1977, she filed an individual income tax return for 1976, reporting on Schedule E thereof an amount received from the Maryland State Retirement System after exclusion of a portion attributable to her contribution into that system. On or about April 13, 1978, petitioner tendered to respondent a Form 1040 for the year 1977. Printed in the margins of that form were various references to petitioner's10 constitutional rights and other tax protest arguments.Asterisks referring to objections taken on the grounds of the Fourth and Fifth Amendments to the Constitution were inserted in those spaces on the form calling for information concerning petitioner's income and deductions. On or about June 26, 1978, petitioner was advised by the Internal Revenue Service that the form tendered by her for 1977 was not acceptable as an income tax return. She did not file any proper Federal income tax returns for the years in issue. Petitioner received an annuity from the Maryland State Retirement System during those years as follows: YearAmount1977$9,230.2819789,793.56197910,490.16198011,490.60During the years in issue, petitioner received interest income from the Savings Bank of Baltimore as follows: YearAmount1977$654.631978661.091979795.941980300.00During the years in issue, petitioner maintained two bank accounts at Loyola Federal Savings and Loan in the name of herself and her brother, Stephen P. Provenza. Petitioner, however, was the sole signatory on those accounts and she deposited checks payable11 to her into them. She received interest from them as follows: YearAmount1977$197.741978401.301979351.95198052.35During the years in issue, petitioner held 13 bank accounts at Loyola Federal Savings and Loan jointly with her brother and with their mother, Margaret Provenza. Sixty-five quarterly interest checks from Loyola Federal Savings and Loan on those accounts were cashed by Margaret Provenza during the years in issue. Such checks were sometimes payable to "Margaret Provenza or Anna M. Provenza or Stephen P. Provenza." Sometimes, however, such checks were payable only to Margaret Provenza. Margaret Provenza died in 1982. 2 The total amount of interest earned on the joint accounts during the years in issue was as follows: YearAmount1977$669.561978837.2319791,375.4519803 757.3012 Respondent's notice of deficiency determined that petitioner had interest income from the above accounts and from five other bank accounts in the name of Anna Megna Provenza at Loyola Federal Savings and Loan. Respondent has now conceded that those five accounts did not belong to petitioner and that the interest on those accounts is not taxable to petitioner. OPINION Gross income for income tax purposes includes all income from whatever source derived, including interest and pensions. Section 61(4) and (11). Petitioner asserts that the Sixteenth Amendment, adopted in 1913, was not intended to apply to persons in her position and that the Internal Revenue Code, therefore, does not apply to her. That argument and related arguments, to the extent that we can decipher them, are based on a misunderstanding of Supreme Court cases and are totally without merit.The Sixteenth Amendment was adopted "for the purpose of doing away for the future" with objections to the income tax based upon the constitutional requirement of apportionment of direct taxes among the states; thus disputes over whether the income tax was direct or indirect are moot. Brushaber v. Union Pacific Railroad Co.,240 U.S. 1">240 U.S. 1, 18 (1916).13 Petitioner asks the Court to reconsider our opinion in Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111 (1983), and to hold that the Supreme Court's opinion in Eisner v. Macomber,252 U.S. 189">252 U.S. 189 (1920), has defined income in such a way as to exclude retirement benefits. That argument is often referred to in our cases as the "equal exchange" theory, i.e., that payments received for labor are not taxable because the labor had a value equal to the money received for it, and no profit on the transaction was realized. In support of her position, petitioner attempts to incorporate a tax protest prochure 4 that merely makes those same arguments repeatedly rejected in Rowlee v. Commissioner,80 T.C. at 1119-1122, and in the numerous cases cited therein. We decline to waste any further judicial time on these spurious contentions. 14 Petitioner also contends that taxation of her state pension is "invidious discrimination," violates the equal protection clause of the Fifth Amendment of the Constitution, and violates the Tenth Amendment of the Constitution. She argues that discrimination results from the taxation of her state pension and failure to tax Federal social security benefits during the years in issue and that taxation of her pension thus violates the sovereignty of the State of Maryland. These arguments, however, are fallacious. Social security benefits are treated the same for tax purposes as to every beneficiary, including petitioner.Pensions and retirement allowances are taxed to an equal extent, whether paid by the Federal Government, the state government, or a private person. Section 1.61-11, Income Tax Regs. Thus there is no unlawful discrimination. Petitioner also disputes respondent's determination that she had unreported interest income from the various bank accounts in her name. First, with respect to the interest received from the Savings Bank of Baltimore, she presented savings passbooks at trial and asserted that the amounts of interest shown in the passbooks are not the15 same as the amounts determined by respondent. The amounts determined by respondent were the subject of a request for admissions served on petitioner by respondent and are deemed admitted because petitioner did not duly respond to that request. See Rule 90(c) and (e), Tax Court Rules of Practice and Procedure. Petitioner did not seek to withdraw the admissions, and permitting her now to contradict them would prejudice respondent because respondent, apparently relying on those admissions, did not have present at trial a witness from the Bank of Baltimore who could explain any discrepancy. In any event, the passbooks introduced in evidence by petitioner confirm respondent's determination with a minor discrepancy of $27.50 in the amount determined for 1980, and petitioner has not pursued this item in her briefs. Second, with respect to the joint accounts with her brother maintained by petitioner at Loyola Federal Savings and Loan, petitioner has admitted that one of the accounts was hers and has presented no evidence that the interest earned on those accounts did not belong to her. She has thus failed to meet her burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933);16 Rule 142(a), Tax Court Rules of Practice and Procedure.Third, with respect to the joint accounts maintained by petitioner, her brother, and their mother at Loyola Federal Savings and Loan, petitioner claims that the quarterly interest checks endorsed by her mother during the years in issue show that the income from those accounts belonged to her mother. Petitioner has not explained, however, the source of funds deposited into those accounts. She initially refused even to identify the joint holders of those accounts and did so only after the Court indicated that she had the burden of proof and was not satisfying it by her bald assertion that the income was not hers. 5 Her lack of candor reflects adversely on her credibility. In any event, the fact that one of the joint holders of an account endorsed the interest checks on that account does not prove that the income did not belong to another joint holder where there is no evidence as to the ownership of the funds on which the income is earned. Moreover, the records of Loyola Federal Savings and Loan show that petitioner was the sole signatory on one of the joint accounts; that petitioner's address was used as the address17 of the account holders; and that petitioner personally signed for withdrawals and transfers from some of those accounts. We, therefore, are not persuaded that the funds in the joint accounts did not belong to petitioner or that the interest earned on those accounts was not petitioner's income. The lack of merit to petitioner's arguments that she did not have taxable income, combined with the tax protest nature of the Form 1040 tendered by her for 1977, 6 compels the conclusion that her failure to file tax returns was not due to reasonable cause and that the underpayment of her taxes for the years in issue was due to negligence or intentional disregard of rules and regulations. Although she claims that she believed in good faith that her arguments had merit, she has not shown that she sought the advice of competent professionals, and she has conceded that her positions are contrary to the decisions of this Court and the advice given to her by18 respondent. The additions to tax under sections 6651(a) and 6653(a) must therefore be sustained. The additions to tax under section 6654 are mandatory absent exceptions not here shown to exist. Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 20-21 (1980). Because of respondent's concessions, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years here in issue.↩2. A death certificate of Margaret Provenza received in evidence lists Anna Provenza as the informant at the time of death and shows "NONE" in the space provided for the decedent's social security number. There is no evidentiary support for a claim, made by petitioner in her brief, that the social security number shown on the joint accounts belonged to the decedent. Even if that claim were proven, however, the result in this case would not be changed. ↩3. The numbers set forth in respondent's brief could not be verified from the exhibits, which show the above amounts.↩4. Listed among the contributors to the brochure is Irwin A. Schiff, who was convicted of willful failure to file income tax returns and against whom additions to tax for fraud have been upheld in relation to his failure to file returns on the basis of the same arguments. See also United States v. Romero,640 F.2d 1014">640 F.2d 1014, 1016 (9th Cir. 1981), affg. a similar criminal conviction, and Abrams v. Commissioner,82 T.C. 403">82 T.C. 403↩ (1984), awarding damages under sec. 6673 in such circumstances.5. Petitioner had vigorously resisted respondent's efforts to secure records from Loyola Federal Savings and Loan. See Provenza v. Rinaudo, an unreported case ( D. Md. 1984, 84-2 USTC par. 9582, 53 AFTR2d 84↩-1453).6. That form did not constitute an income tax return because it did not contain any information from which her tax liability could be determined. Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1176-1179↩ (1981).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537462/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:07 AM CDT - 693 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 Thomas Yeransian, in his capacity as the representative of certain contingent value rights under the Contingent Value Rights Agreement dated October 15, 2010, appellant, v. Willkie Farr & Gallagher LLP, appellee. ___ N.W.2d ___ Filed May 1, 2020. No. S-19-320. 1. Motions to Dismiss: Pleadings: Appeal and Error. A district court’s grant of a motion to dismiss on the pleadings is reviewed de novo, accepting the allegations in the complaint as true and drawing all rea- sonable inferences in favor of the nonmoving party. 2. Jurisdiction: Pleadings: Appeal and Error. An appellate court exam- ines the question of whether the nonmoving party has established a prima facie case of personal jurisdiction de novo. 3. Evidence: Appeal and Error. Generally, the control of discovery is a matter for judicial discretion, and decisions regarding discovery will be upheld on appeal in the absence of an abuse of discretion. 4. Judgments: Words and Phrases. An abuse of discretion occurs when a trial court’s decision is based upon reasons that are untenable or unrea- sonable or if its action is clearly against justice or conscience, reason, and evidence. 5. Jurisdiction: Words and Phrases. Personal jurisdiction is the power of a tribunal to subject and bind a particular entity to its decisions. 6. Due Process: Jurisdiction: States. Before a court can exercise per- sonal jurisdiction over a nonresident defendant, the court must deter- mine, first, whether the long-arm statute is satisfied and, second, whether minimum contacts exist between the defendant and the forum state for personal jurisdiction over the defendant without offending due process. 7. Constitutional Law: Jurisdiction: States. Nebraska’s long-arm stat- ute extends Nebraska’s jurisdiction over nonresidents having any - 694 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 contact with or maintaining any relation to this state as far as the U.S. Constitution permits. 8. Jurisdiction: States: Legislature: Intent. It was the intention of the Legislature to provide for the broadest allowable jurisdiction over non- residents under Nebraska’s long-arm statute. 9. Due Process: Jurisdiction: States. When a state construes its long-arm statute to confer jurisdiction to the fullest extent constitutionally permit- ted, the inquiry collapses into the single question of whether jurisdiction comports with due process. 10. Jurisdiction: States. To constitute sufficient minimum contacts, a defendant’s conduct and connection with the forum state must be such that he or she should reasonably anticipate being haled into court there. 11. Jurisdiction: States: Appeal and Error. In analyzing personal jurisdic- tion, an appellate court considers the quality and type of the defend ant’s activities and determines whether the nonresident defendant’s actions create substantial connections with the forum state, resulting in the defendant’s purposeful availment of the forum state’s benefits and protections. 12. Jurisdiction: States. A court exercises two types of personal jurisdic- tion depending upon the facts and circumstances of the case: general personal jurisdiction or specific personal jurisdiction. 13. Jurisdiction. General personal jurisdiction arises where a defendant’s affiliations with a state are so continuous and systematic as to render the defendant essentially at home in the forum state. 14. Jurisdiction: Words and Phrases. Specific personal jurisdiction requires that a claim arise out of or relate to the defendant’s contacts with the forum. 15. Jurisdiction. A defendant need not be at home in the forum state to be subject to specific personal jurisdiction, but, rather, there must be an affiliation between the forum and the underlying controversy. 16. Jurisdiction: Words and Phrases. Specific personal jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction. 17. Jurisdiction: Time. Specific personal jurisdiction is determined at the time a suit is commenced, and minimum contacts must exist either at the time the cause of action arose, at the time the suit was filed, or within a reasonable period of time immediately prior to the filing of the lawsuit. 18. Jurisdiction: Words and Phrases. For specific personal jurisdiction, there must be a substantial connection between the defendant’s contacts with the forum state and the operative facts of the litigation. 19. Jurisdiction: States: Contracts. While contractual agreements may be relevant to consideration of minimum contacts that support jurisdiction, - 695 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 the existence of a contract with a party in a forum state does not, in and of itself, provide the necessary contacts for personal jurisdiction. 20. ____: ____: ____. To determine whether a defendant’s contract supplies the contacts necessary for personal jurisdiction in a forum state, a court is to consider the parties’ prior negotiations and future contemplated consequences, along with the terms of the contract and the parties’ actual course of dealing. 21. ____: ____: ____. To determine whether a defendant’s contract supplies the contacts necessary for personal jurisdiction in a forum state, a court looks to whether the contracting party has created continuing relation- ships and obligations with citizens of another state. Appeal from the District Court for Douglas County: Peter C. Bataillon, Judge. Affirmed. James D. Sherrets, Diana J. Vogt, and James L. Schneider, of Sherrets, Bruno & Vogt, L.L.C., for appellant. Steven D. Davidson, of Baird Holm, L.L.P., for appellee. Heavican, C.J., Cassel, Stacy, Funke, Papik, and Freudenberg, JJ. Funke, J. Thomas Yeransian appeals the district court’s order dis- missing his complaint against the law firm of Willkie Farr & Gallagher LLP (Willkie). Willkie had represented Aspen Holdings, Inc. (Aspen), in 2009 and 2010, when Aspen merged with and was acquired by Markel Corporation (Markel). Yeransian, as a representative of Aspen’s former shareholders, brought suit against Willkie to obtain the Aspen attorney-client file for the former shareholders’ dispute with Markel over pay- ments from the merger. The district court found Willkie did not have the requisite minimal contacts with Nebraska for the court to have personal jurisdiction over it. Alternatively, the court found that Yeransian failed to present a claim upon which relief can be granted because Willkie had represented Aspen, and not its shareholders, and that Markel, as the surviving entity, was entitled to control of the file. Yeransian challenges both grounds. For the reasons set forth herein, we affirm. - 696 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 BACKGROUND Willkie is an international law firm with its principal place of business in New York, New York. Willkie does not have a Nebraska office. In 2009 and 2010, Willkie represented Aspen, a Delaware corporation with its principal place of doing business in Nebraska, in Aspen’s merger with Markel, a Virginia corpo- ration. At the time of the merger and now, some of Aspen’s shareholders reside in Nebraska. For the purpose of this rep- resentation, Willkie and Aspen entered into an engagement letter whereby Willkie stated that the client would be “Aspen Holdings, Inc.,” and explained that “[t]his engagement does not create an attorney-client relationship with any related persons or entities, such as parents, subsidiaries, affiliates, employees, officers, directors, shareholders or partners.” In July 2010, Aspen and Markel agreed to the terms of the merger and executed an “Agreement and Plan of Merger” (Merger Agreement). In October 2010, Aspen and Markel also executed a “Contingent Value Rights Agreement” (CVR Agreement). Pursuant to the Merger Agreement, the merger transaction closed later in 2010. Under both the CVR Agreement and the Merger Agreement, the parties elected to have Delaware law govern. Under the CVR Agreement, each share of Aspen’s com- mon stock and option was converted into the right to receive, among other compensation, certain contingent payments. This right had an initial principle value which was to be sub- jected to adjustment depending on factors set out by the CVR Agreement. Markel was periodically required to provide the holders of certain CVR rights (CVR Holders) certain informa- tion relevant to this changing value. The CVR Agreement des- ignated a representative to act on behalf of the CVR Holders (Holder Representative), including granting this representa- tive the authority to enforce any claim against Markel aris- ing under the CVR Agreement. When Markel was required to provide any notice under the CVR Agreement to the CVR - 697 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 Holders, the agreement specified that such notice be sent to the Holder Representative “with a copy (which shall not constitute notice)” sent to Willkie. Yeransian alleges he is the current Holder Representative. In September 2016, on behalf of the CVR Holders, Yeransian filed suit against Markel in the U.S. District Court for the District of Delaware. In the suit, Yeransian alleged that Markel violated its obligations under the CVR Agreement and sought pay- ment of the unpaid benefits. Yeransian claimed that there were ambiguities in the CVR Agreement and requested Willkie’s attorney-client file with Aspen to aid in resolution of the ambi- guities. Upon request, however, Willkie refused to provide the file, citing attorney-client privilege. In July 2018, Yeransian initiated the instant action in the district court for Douglas County, Nebraska, by filing a com- plaint against Willkie to acquire its Aspen file. The complaint’s claims included the following: (1) Willkie breached its contract for representation of Aspen, (2) Willkie breached its fiduciary duty to the CVR Holders under the CVR Agreement, and (3) restitution should be ordered for costs associated with the return of the file. Yeransian alleged that the Nebraska district court is a proper venue for these claims because Aspen’s prin- cipal place of business was in Omaha, Nebraska; Willkie repre- sented Aspen in 2009 and 2010 during the merger and in con- nection with the CVR Agreement; Willkie maintained regular contact with Aspen officers and employees in Douglas County in furtherance of this representation; and a substantial number of the CVR Holders continue to reside in Nebraska. Willkie filed a motion to dismiss for lack of personal juris- diction or, in the alternative, for failure to state a claim for which relief can be granted. Willkie claimed Markel is the rightful possessor of this file, because Willkie represented Aspen, not its shareholders, and Markel absorbed Aspen in the 2010 merger. Willkie asserted Markel acquired all prop- erty, rights, privileges, powers, and franchises of Aspen, including Willkie’s Aspen file on the merger. Accordingly, - 698 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 Willkie argued Yeransian should submit its request for the file to Markel. The district court granted Willkie’s motion and dismissed Yeransian’s claims. First, the court found Yeransian’s com- plaint failed to allege Willkie had the requisite minimum con- tacts with the State of Nebraska and that, as such, the court did not have personal jurisdiction over Willkie. The court dis- agreed that Willkie’s representation of Aspen could be used as a basis for personal jurisdiction, explaining that any contacts which may have arisen in 2009 and 2010 have long ceased before any cause of action arose based on Willkie’s declining to provide Yeransian the file. Additionally, the court held that those potential contacts with the State existed between Willkie and Aspen as a corporate entity and not Aspen’s individual shareholders. Even if there was personal jurisdiction, the court found Yeransian’s complaint also failed to state a claim upon which relief could be granted because Willkie’s client was Aspen and not Aspen’s shareholders, which meant Markel, as the surviving entity, was the rightful owner of the file. ASSIGNMENTS OF ERROR Yeransian assigns, restated, that the district court erred in (1) finding the court lacked personal jurisdiction over Willkie, (2) denying an initial discovery request on the issue of personal jurisdiction, (3) implying that Yeransian lacked standing, and (4) finding Yeransian failed to state a claim upon which relief can be granted. STANDARD OF REVIEW [1,2] A district court’s grant of a motion to dismiss on the pleadings is reviewed de novo, accepting the allegations in the complaint as true and drawing all reasonable inferences in favor of the nonmoving party. 1 Similarly, an appellate court examines the question of whether the nonmoving party 1 Patterson v. Metropolitan Util. Dist., 302 Neb. 442, 923 N.W.2d 717 (2019). - 699 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 has established a prima facie case of personal jurisdiction de novo. 2 [3,4] Generally, the control of discovery is a matter for judicial discretion, and decisions regarding discovery will be upheld on appeal in the absence of an abuse of discretion. 3 An abuse of discretion occurs when a trial court’s decision is based upon reasons that are untenable or unreasonable or if its action is clearly against justice or conscience, reason, and evidence. 4 ANALYSIS Personal Jurisdiction [5,6] Personal jurisdiction is the power of a tribunal to sub- ject and bind a particular entity to its decisions. 5 Before a court can exercise personal jurisdiction over a nonresident defendant, the court must determine, first, whether the long-arm statute is satisfied and, second, whether minimum contacts exist between the defendant and the forum state for personal jurisdiction over the defendant without offending due process. 6 [7-9] Nebraska’s long-arm statute extends Nebraska’s juris- diction over nonresidents having any contact with or maintain- ing any relation to this state as far as the U.S. Constitution permits. 7 It was the intention of the Legislature to provide for the broadest allowable jurisdiction over nonresidents under Nebraska’s long-arm statute. 8 When, as here, a state construes its long-arm statute to confer jurisdiction to the fullest extent constitutionally permitted, the inquiry collapses into the single 2 Nimmer v. Giga Entertainment Media, 298 Neb. 630, 905 N.W.2d 523 (2018). 3 Lombardo v. Sedlacek, 299 Neb. 400, 908 N.W.2d 630 (2018). 4 Id. 5 Nimmer, supra note 2. 6 Id. 7 Neb. Rev. Stat. § 25-536 (Reissue 2016). 8 VKGS v. Planet Bingo, 285 Neb. 599, 828 N.W.2d 168 (2013). - 700 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 question of whether jurisdiction comports with due process. 9 Therefore, the issue is whether Willkie had sufficient minimum contacts with Nebraska so that the exercise of personal juris- diction would not offend the traditional notions of fair play and substantial justice. 10 [10,11] To constitute sufficient minimum contacts, a defend ant’s conduct and connection with the forum state must be such that he or she should reasonably anticipate being haled into court there. 11 In analyzing personal jurisdiction, we con- sider the quality and type of the defendant’s activities and determine whether the nonresident defendant’s actions create substantial connections with the forum state, resulting in the defendant’s purposeful availment of the forum state’s benefits and protections. 12 [12-14] A court exercises two types of personal jurisdic- tion depending upon the facts and circumstances of the case: general personal jurisdiction or specific personal jurisdic- tion. 13 General personal jurisdiction arises where a defendant’s affiliations with a state are so continuous and systematic as to render the defendant essentially at home in the forum state. 14 Specific personal jurisdiction, in turn, requires that a claim arise out of or relate to the defendant’s contacts with the forum. 15 Yeransian’s arguments are solely based upon Willkie’s pres- ence within Nebraska during the Aspen and Markel merger. It is undisputed that Willkie’s principal place of business is in New York and that it does not have a Nebraska office. Further, 9 See id. 10 See Hand Cut Steaks Acquisitions v. Lone Star Steakhouse, 298 Neb. 705, 905 N.W.2d 644 (2018). 11 Id. 12 See Nimmer, supra note 2. 13 Id. 14 See Hand Cut Steaks Acquisitions, supra note 10. 15 See id. - 701 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 there are no allegations that Willkie has had a Nebraska pres- ence outside of its work surrounding the merger. Accordingly, there is an insufficient basis to establish general personal juris- diction and the issue before us is whether the district court had specific personal jurisdiction over Willkie. [15-18] A defendant need not be at home in the forum state to be subject to specific personal jurisdiction, but, rather, there must be an affiliation between the forum and the underly- ing controversy. 16 Specific personal jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction. 17 This inquiry is determined at the time a suit is commenced, and minimum contacts must exist either at the time the cause of action arose, at the time the suit was filed, or within a reasonable period of time immediately prior to the filing of the lawsuit. 18 Thus, there must be a substantial connection between the defendant’s contacts and the operative facts of the litigation. 19 Yeransian alleges Willkie created a substantial connection with Nebraska in the current subject matter through its work surrounding the 2010 merger and its drafting of the CVR Agreement. Yeransian’s argument centers on the allegation that by drafting the CVR Agreement, Willkie entered into a contractual relationship that envisioned continuing contacts in Nebraska due to Aspen’s previous presence and the CVR Holders’ continued residency in the forum state. [19-21] However, the CVR Agreement does not supply the contacts necessary to establish a continuing substantial con- nection. While contractual agreements may be relevant to consideration of minimum contacts that support jurisdiction, the existence of a contract with a party in a forum state does not, in and of itself, provide the necessary contacts for personal 16 Id. 17 Id. 18 See Nimmer, supra note 2. 19 Hand Cut Steaks Acquisitions, supra note 10. - 702 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 jurisdiction. 20 To determine whether a defendant’s contract sup- plies the contacts necessary for personal jurisdiction in a forum state, a court is to consider the parties’ prior negotiations and future contemplated consequences, along with the terms of the contract and the parties’ actual course of dealing. 21 A court looks to whether the contracting party has created continuing relationships and obligations with citizens of another state. 22 We begin by noting that Willkie was not a party to the CVR Agreement. Willkie participated in the process as a represent ative of Aspen. Willkie has no continuing obligations under the terms of the CVR Agreement. Any continuing relationship from the agreement would have extended to Aspen, which ceased to be an entity due to its merger with Markel in 2010. Additionally, Willkie has no obligations to the CVR Holders extending from Willkie’s agreement to represent Aspen in the merger process. Willkie’s representation was limited to Aspen as the corporate entity and explicitly did not extend to Aspen’s shareholders. This representation is detailed in the engage- ment letter, signed by an Aspen representative, stating that Willkie’s client would be “Aspen Holdings, Inc.,” and stipu- lating that “[t]his engagement does not create an attorney- client relationship with any related persons or entities, such as . . . shareholders . . . .” Contrary to the clear language of the engagement letter, Yeransian alleges that Willkie represented Aspen’s sharehold- ers during the merger and has continued to represent them as the CVR Holders. To support this claim, Yeransian points to the provision of the CVR Agreement which directs Markel to send any required notices to the Holder Representative “with a 20 See, RFD-TV v. WildOpenWest Finance, 288 Neb. 318, 849 N.W.2d 107 (2014); Kugler Co. v. Growth Products Ltd., 265 Neb. 505, 658 N.W.2d 40 (2003). 21 Hand Cut Steaks Acquisitions, supra note 10; Nimmer, supra note 2. 22 See Kugler Co., supra note 20. See, also, Walden v. Fiore, 571 U.S. 277, 134 S. Ct. 1115, 188 L. Ed. 2d 12 (2014). - 703 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 copy (which shall not constitute notice)” sent to Willkie. Citing this provision, Luke Yeransian, a former founder and chief executive officer of Aspen, stated in an affidavit that it was his understanding that “Willkie Farr remained as counsel for the [CVR] Holders following the conclusion of the merger.” The CVR Agreement’s notice provision instructing Markel to send a copy of notices under the agreement to Willkie is insufficient to indicate Willkie had any sort of attorney- client relationship with Aspen’s previous shareholders or that its representation of Aspen would continue until the expira- tion of the CVR Agreement. The notice provision does not label Willkie as the CVR Holders’ representative nor does it indicate that such copy is due to an existing or impending attorney-client relationship with the CVR Holders. While the notice provision directed that a copy of notices sent to the Holder Representative also be sent to Willkie, it specified that such copy would not constitute notice. The mere proxim- ity of the requirement of notice to the Holder Representative and Willkie does not, without more, establish an attorney- client relationship to the CVR Holders or evidence an exist- ing one. Similarly, citing only the notice provision, Luke Yeransian contended that the provision created an attorney-client rela- tionship with the CVR Holders. However, no evidence was offered that either party acted upon this alleged relationship such as the CVR Holders’ paying Willkie any fees or retainers for services, communications about the alleged representation between Willkie and any CVR Holders, or correspondence from any CVR Holder to Willkie about initiating the pending suit against Markel. Yeransian makes no allegations outlining Willkie’s authority to act on the CVR Holders’ behalf or the parameters of any sort of advisory role Willkie might have had with the CVR Holders. While Yeransian asks for discovery to obtain Willkie’s documents concerning Willkie’s representa- tion of Aspen, the motion did not seek to uncover evidence of an agreement between Willkie and the CVR Holders. Instead, - 704 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 the discovery only sought evidence of Willkie’s exposure to Nebraska during its representation of Aspen. Even if Yeransian was seeking discovery to uncover evidence of the alleged repre- sentation arrangement between Willkie and the CVR Holders, it is unclear why the Holder Representative and the CVR Holders would not have additional evidence beyond the notice provision of the CVR Agreement of such an arrangement. Accordingly, Luke Yeransian’s reading of the CVR Agreement’s notice pro- vision is also insufficient to establish Willkie had an attorney- client relationship with the CVR Holders. As explained, Willkie was not a party to the CVR Agreement or the merger. The notice provision of the CVR Agreement was insufficient to demonstrate or create an attorney-client relation- ship between Willkie and the CVR Holders. Willkie’s engage- ment letter, signed by a representative of Aspen, explained Willkie and Aspen’s attorney-client relationship and specified that Willkie represented Aspen as a corporate entity and did not represent Aspen’s shareholders. Willkie’s relationship with Nebraska was through its representation of Aspen, which did have a presence in Nebraska but which is no longer an entity. Now, neither Willkie nor Aspen have any continuing obliga- tions under the CVR Agreement. Instead, the CVR Agreement requires Markel to pay the CVR Holders according to exist- ing valuations of certain Markel activities. As the district court correctly found, Willkie’s representation of Aspen in the 2010 merger did not extend to the CVR Holders and is insufficient to establish a continuing substantial connection between Willkie and Nebraska under the operative facts of the current litigation. Yeransian also takes issue with the lower court’s consider- ation of the time difference between Willkie’s representation of Aspen during the 2010 merger and Yeransian’s seeking the attorney-client file in 2016, asserting the court created an “expiration date [for] specific jurisdiction analysis.” 23 23 Brief for appellant at 14. - 705 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 Yeransian misconstrues the court’s analysis. Instead of apply- ing an expiration date, the court was addressing Yeransian’s argument that the CVR Agreement created a substantial con- nection between Willkie and Nebraska under the operative facts of the litigation. The court correctly considered that Willkie did not represent the shareholders. The court also cor- rectly considered that even though Willkie represented Aspen in the 2010 merger that produced the CVR Agreement, that any relationship this representation may have had on the CVR Holders’ rights under the agreement was too attenuated from Willkie due to a lack of privity of contract and the length of time since Willkie’s participation. Further, despite Willkie’s having no attorney-client rela- tionship with the CVR Holders and no continuing obligations under the CVR Agreement, Yeransian claims Willkie has a continuing substantial connection with Nebraska because the CVR Holders are the current, rightful owners of Willkie’s attorney-client file as the previous shareholders to Aspen and they continue to reside within the state. This argument incorrectly presumes the CVR Holders are the current, rightful owners of the 2010 merger file. Aspen was incorporated under the laws of Delaware, and in the merger documents, the parties elected to have Delaware law apply. Under Delaware “General Corporation Law,” upon consum- mation of a merger, “all property, rights, privileges, powers, and franchises, and all and every other interest shall be there- after as effectually the property of the surviving or resulting corporation.” 24 “[A]ll . . . privileges” necessarily encompasses an attorney-client privilege and “all property” necessarily encompasses documentation of all premerger communications pursuant to an attorney-client privilege, including those com- munications relating to the negotiation of the merger itself. 25 24 Del. Code tit. 8, § 259 (2020). 25 See Great Hill Equity v. SIG Growth Equity Fund, 80 A.3d 155 (Del. Ch. 2013). - 706 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 As such, Markel, as the surviving corporation, is the current, rightful owner of Willkie’s attorney-client file on Aspen’s 2010 merger. Yeransian’s argument that Willkie has a continu- ing presence in Nebraska because the CVR Holders reside in Nebraska and are the current, rightful owners of Willkie’s attorney-client file with Aspen is, therefore, without merit. In consideration of all of the above, Yeransian failed to establish a continuing substantial connection under the opera- tive facts of the litigation to establish Willkie has sufficient minimum contacts with Nebraska for the exercise of specific personal jurisdiction. Jurisdictional Discovery Yeransian also assigns the district court erred in denying his motion regarding jurisdictional discovery. He argues that if discovery had been granted, he could have obtained further evidence of Willkie’s representation of Aspen and Willkie’s presence in Nebraska through that representation. Yeransian does not contend that such discovery would pro- duce evidence of an agreement for representation between Willkie and the CVR Holders or evidence of additional con- tinuing obligations to show Willkie had a continuing substan- tial presence in Nebraska. Even if Yeransian did seek evidence of an alleged arrangement where Willkie also represented the CVR Holders, he fails to allege why the CVR Holders would not already have such evidence. Instead, the evidence Yeransian sought concerned only Willkie’s representation of Aspen at the time of the merger, which representation and its presence in Nebraska is uncontested by Willkie. Accordingly, the district court did not abuse its discretion in denying Yeransian’s motion to conduct discovery in order to prove these unchallenged allegations. 26 26 See, Lombardo, supra note 3; Williams v. Gould, Inc., 232 Neb. 862, 443 N.W.2d 577 (1989). - 707 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports YERANSIAN v. WILLKIE FARR Cite as 305 Neb. 693 CONCLUSION The district court did not err in denying Yeransian’s motion for discovery and granting Willkie’s motion to dismiss Yeransian’s complaint for lack of personal jurisdiction. Because the district court correctly determined it lacked jurisdiction, we need not address Yeransian’s remaining assignments. Affirmed. Miller-Lerman, J., not participating.	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537491/	Nebraska Supreme Court Online Library www.nebraska.gov/apps-courts-epub/ 05/29/2020 12:08 AM CDT - 230 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Jerald Merrick, as assignee of Western Hay Services, Inc., appellant, v. Fischer, Rounds & Associates, Inc., doing business as Quality Truck Insurance, and Great West Casualty Company, appellees. ___ N.W.2d ___ Filed March 13, 2020. No. S-18-1173. 1. Summary Judgment: Appeal and Error. An appellate court will affirm a lower court’s grant of summary judgment if the pleadings and admitted evidence show that there is no genuine issue as to any material facts or as to the ultimate inferences that may be drawn from those facts and that the moving party is entitled to judgment as a matter of law. 2. ____: ____. In reviewing a summary judgment, the court views the evidence in the light most favorable to the party against whom the judgment was granted and gives such party the benefit of all reasonable inferences deducible from the evidence. 3. Insurance: Contracts: Appeal and Error. The interpretation of an insurance policy presents a question of law that an appellate court decides independently of the trial court. 4. Insurance: Agents: Brokers: Negligence: Proximate Cause: Liability: Damages. An insurance agent or broker who agrees to obtain insurance for another but negligently fails to do so is liable for the damage proxi- mately caused by such negligence. 5. Insurance: Agents. When an insured asks an insurance agent to pro- cure insurance, the insured has a duty to advise the insurance agent as to the desired insurance. 6. ____: ____. An insurance agent has no duty to anticipate what coverage an insured should have. 7. ____: ____. It is the duty of an insured to advise the agent as to the insurance he wants, including the limits of the policy to be issued. - 231 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 8. Insurance: Brokers: Negligence: Proximate Cause: Liability: Damages. A broker who agrees to obtain insurance coverage for another but fails to do so is liable for damage proximately caused by such negli- gence, including the amount that would have been due under such policy if it had been obtained. 9. Insurance: Agents: Brokers. If an insurance agent or broker undertakes to advise an insured, the agent or broker must use reasonable care to provide accurate information. 10. Insurance: Agents: Brokers: Contracts: Breach of Contract: Negligence. Absent evidence that an insurance agent or broker has agreed to provide advice or the insured was reasonably led by the agent to believe he would receive advice, the failure to volunteer information does not constitute either negligence or breach of contract for which an insurance agent or broker must answer in damages. 11. Insurance: Contracts. A court construes insurance contracts like other contracts, according to the meaning of the terms that the parties have used. When the terms of an insurance contract are clear, a court gives them their plain and ordinary meaning as a reasonable person in the insured’s position would understand them. 12. Insurance: Contracts: Liability. Whether an insurer has a duty to indemnify and defend an insured depends upon whether the insured’s claimed occurrence falls within the terms of the insurer’s coverage as expressed in the policy. 13. Insurance: Contracts: Liability: Damages. The insurer has a duty to indemnify an insured who becomes legally liable to pay damages for a covered occurrence. 14. Insurance: Liability. An insurer’s duty to defend is broader than the duty to indemnify. 15. ____: ____. An insurer has a duty to defend if (1) the allegations of the complaint, if true, would obligate the insurer to indemnify, or (2) a rea- sonable investigation of the facts by the insurer would or does disclose facts that would obligate the insurer to indemnify. 16. ____: ____. An insurer has a duty to defend its insured whenever it ascertains facts that give rise to potential liability under the policy. Conversely, an insurer is not bound to defend a suit if the pleadings and facts ascertained by the insurer show the insurer has no poten- tial liability. Appeal from the District Court for Scotts Bluff County: Andrea D. Miller, Judge. Affirmed. Michael W. Meister for appellant. - 232 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Sean A. Minahan and Patrick G. Vipond, of Lamson, Dugan & Murray, L.L.P., for appellee Fischer, Rounds & Associates, Inc. Robert S. Keith and Alexis M. Wright, of Engles, Ketcham, Olson & Keith, P.C., for appellee Great West Casualty Company. Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ. Funke, J. Jerald Merrick was injured in a truck accident in the course and scope of his employment. Merrick reached a settle- ment with his employer and received an assignment of rights against his employer’s insurance broker and insurer. Merrick filed this action claiming that the broker had a duty to advise Merrick’s employer to obtain workers’ compensation insur- ance and that the insurer had a duty to defend the employer in the underlying action. The district court for Scotts Bluff County granted summary judgment in favor of the broker and insurer. We affirm. BACKGROUND Western Hay Services, Inc. (Western Hay), is a company located in Morrill, Nebraska, that buys and sells hay and alfalfa and delivers the hay and alfalfa to feedlots and dairies in Colorado and Texas. During Western Hay’s first 4 years, owner Johnny Hill drove one truck and did not have employees. Hill subsequently added a second truck and, in 2009, hired Merrick as a truckdriver. Since its inception, Western Hay has purchased insurance through an insurance broker, Fischer, Rounds & Associates, Inc., doing business as Quality Truck Insurance (Fischer). Great West Casualty Company (Great West) issued Western Hay a commercial lines insurance policy, effective from September 1, 2008, to September 1, 2009, which provided three different forms of coverage: commercial auto coverage, - 233 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 commercial inland marine coverage, and commercial general liability coverage. Western Hay did not have workers’ compen- sation insurance. The commercial auto policy states that Great West will “pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ . . . caused by an ‘acci- dent’ and resulting from the ownership, maintenance or use of a covered ‘auto.’” The policy contains an exclusion entitled “Workers Compensation and Similar Laws,” which states that “[t]his insurance does not apply to . . . [a]ny obligation for which any ‘insured’ or any ‘insured’s’ insurer may be held liable under any workers compensation . . . law or any similar law.” The policy also contains an exclusion entitled “Employee Indemnification and Employer’s Liability” which states that the insurance does not apply to “‘[b]odily injury’” to an “‘employee’ of any ‘insured’ arising out of and in the course of . . . [e]mployment by any ‘insured.’” The commercial inland marine policy states that Great West will pay sums “because of ‘loss’ to ‘covered property’ while in your custody or control in the ordinary course of transit for which you are legally liable as a ‘trucker.’” Under the commercial general liability coverage provisions, “Coverage A” regarding “Bodily Injury and Property Damage Liability” states that Great West will “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which the insurance applies.” Coverage A contains exclusions equivalent to the workers’ compensation and employer’s liability exclu- sions in the commercial auto coverage provisions discussed above. In addition, Coverage A contains an exclusion for “‘[b]odily injury’” arising out of ownership, maintenance, use, or entrustment to others of any “‘auto.’” “Coverage C” regarding “Medical Expenses” states that Great West will pay medical expenses for “‘bodily injury’” caused by an accident “[b]ecause of your operations.” Coverage C contains all exclu- sions provided within Coverage A. - 234 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Hill’s daughter, Tracie Margheim, was responsible for handling Western Hay’s insurance needs. Margheim spoke with an insurance agent with Fischer on a yearly basis prior to renewal of Western Hay’s insurance and on occasion to increase the insurance for special cargo trips. In August 2008, a Fischer insurance agent called Margheim to discuss the annual renewal. Upon speaking with Margheim, the insurance agent completed a renewal checklist which included question 10: “Is work comp needed?” The agent answered question 10 as “does not have,” because Western Hay had elected not to purchase workers’ compensation insurance. Thereafter, a Fischer insurance agent spoke with Margheim, confirmed the information on the renewal checklist, and submitted the infor- mation for a quote. In February 2009, Margheim contacted Fischer and requested that workers’ compensation coverage be added to Western Hay’s insurance. Fischer’s agent asked Margheim to provide Western Hay’s payroll records in order to obtain a quote for the new workers’ compensation coverage. Margheim provided Fischer with Western Hay’s payroll information on April 1. The day prior, March 31, 2009, Merrick was injured in a truck accident while in the course and scope of his employ- ment with Western Hay. Margheim notified Great West of the claim on that date. On April 1 and again on April 6, Great West spoke with Margheim and advised that Western Hay did not have workers’ compensation, personal injury, or auto medi- cal insurance under the commercial lines policy. In a May 13 letter, Great West advised Western Hay that all liability claims had been paid for a total loss amount of $600 and that the file was closed. Great West later advised Western Hay that it would continue its investigation of the claim and assessment of coverage under a full reservation of rights. Great West indicated that it would consider all additional information Western Hay may provide and, if warranted, reconsider its coverage position. - 235 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 In 2012, Merrick filed a negligence action against Western Hay in the district court for Scotts Bluff County alleging he was injured in the truck accident and had incurred $309,154.10 in medical expenses as a result of his injuries. Merrick claimed that Western Hay was negligent for requiring him to drive during a high-wind warning and failing to carry workers’ com- pensation insurance. Merrick alleged that Western Hay was required to carry workers’ compensation insurance pursuant to Neb. Rev. Stat. § 48-106 (Reissue 2010) and that such insur- ance would have provided coverage for his injuries. Fischer was not notified of the lawsuit or asked to indemnify or defend Western Hay. Western Hay requested a defense and indemnity from Great West. After reviewing the allegations in the com- plaint, Great West sent a letter to Western Hay denying the request, indicating that the claim was not covered because the policy did not provide workers’ compensation coverage, cover- age for an injury to an employee of the insured, or coverage for potential liability for failing to provide workers’ compensa- tion benefits. In February 2016, the district court entered a stipulated judgment in favor of Merrick and against Western Hay in the amount of $800,000. As part of the settlement, Western Hay assigned its claims against Fischer and Great West to Merrick. Fischer and Great West were not notified in advance of the stipulated settlement. Thereafter, Merrick, as the assignee of Western Hay, filed the present action against Fischer and Great West. Merrick alleged in this action that Fischer was negligent in failing to procure workers’ compensation insur- ance for Western Hay when Western Hay had specifically requested such insurance for its trucking business, failing to notify Western Hay of Nebraska’s statutory requirement for employers to carry workers’ compensation insurance, and failing to warn Western Hay that its insurance did not cover injuries to employees while in the scope of their employment. Merrick separately alleged that Great West denied Western - 236 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Hay’s request for a defense in bad faith. Merrick alleged that Fischer and Great West are responsible for payment of the judgment entered against Western Hay. Fischer filed an answer which admitted that it is an insur- ance broker and alleged that it met any and all applicable duties and responsibilities. Great West filed an answer which alleged that Merrick’s claim is not covered under the relevant policy, because of the policy’s workers’ compensation and employer’s liability exclusions. Each defendant moved for summary judg- ment. Following a hearing, the district court issued an order sustaining both motions and dismissing Merrick’s complaint with prejudice. In considering Merrick’s claim against Fischer, the court found the undisputed evidence showed that on February 2, 2009, Western Hay called Fischer to request workers’ com- pensation insurance, but did not provide the payroll informa- tion necessary for Fischer to complete the quote until April 1, the day after Merrick’s accident. The court concluded that Fischer had no duty to secure workers’ compensation insur- ance for Western Hay until after the payroll records were pro- vided on April 1. The court further concluded that there was no evidence showing that Fischer breached a duty to obtain workers’ compensation insurance for Western Hay, failed to advise Western Hay regarding workers’ compensation insur- ance prior to its request for a quote, or failed to warn Western Hay that its insurance policy did not cover injuries to employ- ees in the course and scope of their employment. The court concluded that Fischer was entitled to judgment as a matter of law. As to Merrick’s claim against Great West, the court deter- mined that the policy at issue contains exclusions for claims based on workers’ compensation liability. The court determined that due to such exclusions, Great West was not required to defend Western Hay in the underlying lawsuit. The court con- cluded that Great West was entitled to judgment as a matter of law. - 237 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Merrick appealed. We moved the appeal to our docket pur- suant to our statutory authority to regulate the caseloads of the appellate courts of this State.1 ASSIGNMENTS OF ERROR Merrick assigns, restated, that the district court erred in (1) applying case law applicable to insurance agents rather than insurance brokers, (2) finding that Fischer fulfilled its duties as an insurance broker to Western Hay, and (3) finding that Great West did not owe a duty to defend Western Hay. STANDARD OF REVIEW [1,2] An appellate court will affirm a lower court’s grant of summary judgment if the pleadings and admitted evidence show that there is no genuine issue as to any material facts or as to the ultimate inferences that may be drawn from those facts and that the moving party is entitled to judgment as a matter of law.2 In reviewing a summary judgment, the court views the evidence in the light most favorable to the party against whom the judgment was granted and gives such party the benefit of all reasonable inferences deducible from the evidence.3 [3] The interpretation of an insurance policy presents a ques- tion of law that an appellate court decides independently of the trial court.4 ANALYSIS Fischer Not Negligent Merrick argues that, as an insurance broker, Fischer had a duty to advise Western Hay of its obligation as an employer under the Nebraska Workers’ Compensation Act to carry workers’ 1 See Neb. Rev. Stat. § 24-1106 (Cum. Supp. 2018). 2 Ray Anderson, Inc. v. Buck’s, Inc., 300 Neb. 434, 915 N.W.2d 36 (2018). 3 Id. 4 Gage County v. Employers Mut. Cas. Co., 304 Neb. 926, 937 N.W.2d 863 (2020). - 238 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 compensation insurance.5 Merrick contends that had Fischer “simply told Western Hay that [it] had to carry coverage” then Fischer “would have met its duty of providing sound advice to Western Hay.”6 Merrick thus argues that the court erred in dismissing his negligence claim against Fischer. [4-7] To prevail in any negligence action, a plaintiff must show a legal duty owed by the defendant to the plaintiff, a breach of such duty, causation, and resulting damages.7 An insurance agent or broker who agrees to obtain insurance for another but negligently fails to do so is liable for the damage proximately caused by such negligence.8 When an insured asks an insurance agent to procure insurance, the insured has a duty to advise the insurance agent as to the desired insurance.9 An insurance agent has no duty to anticipate what coverage an insured should have.10 It is the duty of an insured to advise the agent as to the insurance he wants, including the limits of the policy to be issued.11 In Polski v. Powers,12 this court noted that although it may be good business for an insurance agent to make insurance coverage suggestions, absent evidence that an insurance agent has agreed to provide advice or the insured was reasonably led by the agent to believe he would receive advice, the failure to volunteer information does not constitute either negligence or breach of contract for which an insurance agent must answer in damages. We went on to hold that it would be an unreasonable 5 See, Neb. Rev. Stat. § 48-103 (Reissue 2010); § 48-106. 6 Brief for appellant at 10. 7 Lewison v. Renner, 298 Neb. 654, 905 N.W.2d 540 (2018). 8 Hobbs v. Midwest Ins., Inc., 253 Neb. 278, 570 N.W.2d 525 (1997); Flamme v. Wolf Ins. Agency, 239 Neb. 465, 476 N.W.2d 802 (1991). 9 Dahlke v. John F. Zimmer Ins. Agency, 245 Neb. 800, 515 N.W.2d 767 (1994). 10 Id. 11 Manzer v. Pentico, 209 Neb. 364, 307 N.W.2d 812 (1981). 12 Polski v. Powers, 221 Neb. 361, 377 N.W.2d 106 (1985). - 239 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 burden to impose upon insurance agents a duty to anticipate what coverage an individual should have, absent the insured’s requesting coverage in at least a general way.13 Relying on this line of authority, the district court found that Fischer had no duty to advise Western Hay regarding workers’ compensation insurance until Western Hay requested a quote for workers’ compensation insurance in February 2009. Fischer responded to that request by asking for Western Hay’s payroll information in order to obtain a quote for the necessary cover- age. Fischer did not receive the requested information until after Merrick’s accident. On April 8, Fischer informed Western Hay that it had obtained a quote, but the quote was too expen- sive. The district court reasoned that under these facts, Fischer had no duty to obtain workers’ compensation insurance for Western Hay and advise Western Hay regarding such insur- ance until Western Hay’s request in February 2009. The court found that it was the actions of Western Hay which delayed the insurance quote and that Fischer had not provided Western Hay with any false information regarding the commercial line policy’s coverage or the need for workers’ compensation cov- erage. Thus, the court found that Fischer had not breached its duty to Western Hay and that Fischer was entitled to judgment as a matter of law. Merrick suggests that the district court did not sufficiently recognize that Fischer is an insurance broker and not an insurance agent. We have previously addressed the distinction between an insurance broker and an insurance agent. “A representative of the insured is known as an ‘insurance broker.’ A broker represents the insured by acting as a middleman between the insured and the insurer, soliciting insurance from the public under no employment from any special company, and, upon securing an order, places it with a company selected by the insured, or if the insured has no preference, with a company selected by the broker. 13 Id. - 240 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 In contrast, an ‘insurance agent’ represents an insurer under an exclusive employment agreement by the insur- ance company.”14 Merrick’s primary argument on appeal is that “the duty owed by an insurance broker differs from that of an insur- ance agent as to a broker’s duty to advise clients concerning certain matters.”15 Merrick argues that based on cases like the Eighth Circuit’s decision in Bell v. O’Leary,16 a broker owes an insured a duty to act with reasonable care, skill, and diligence. Merrick then goes on to argue, without supporting legal authority or standard of care testimony, that Fischer had an affirmative duty to advise Western Hay for insurance risks known to the trucking business and that in order for Fischer to fulfill its duty to act with reasonable care, Fischer was required to advise Western Hay to carry workers’ compensa- tion insurance. We find that under the facts of this case, and upon consid- eration of Merrick’s theory regarding the duty an insurance broker owes to an insured, Merrick’s reliance on the distinc- tion between an insurance broker and an insurance agent is misplaced. Merrick’s argument is not supported by the rationale articu- lated in our decision in Broad v. Randy Bauer Ins. Agency.17 In that case, we acknowledged that courts often use the term “insurance agent” loosely,18 but recognized the need to con- sider how agency principles affect an insurance intermediary’s contract liability. Upon review of agency principles recognized 14 Broad v. Randy Bauer Ins. Agency, 275 Neb. 788, 794, 749 N.W.2d 478, 483 (2008). See, also, Moore v. Hartford Fire Ins. Co., 240 Neb. 195, 481 N.W.2d 196 (1992); 3 Steven Plitt et al., Couch on Insurance 3d § 45:1 (2011). 15 Brief for appellant at 7. 16 Bell v. O’Leary, 744 F.2d 1370 (8th Cir. 1984). 17 Broad, supra note 14. 18 See, e.g., id.; Bell, supra note 16; 3 Plitt et al., supra note 14. - 241 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 in the insurance context, we concluded that an insurance agent is not personally liable to the insured for contracts the agent makes on behalf on the insurer.19 However, we recognized the existence of a valid cause of action against a broker for breach of contract to procure insurance, because the broker is the insured’s agent.20 Thus, Broad recognized that agency principles may dictate the causes of action available against a broker or agent. The distinction between an agent and a bro- ker is important because acts of an agent are imputable to the insurer and acts of a broker are imputable to the insured.21 Our decision in Broad did not suggest, as Merrick assumes, that agency principles affect the scope of the general duty that an insurance intermediary owes to an insured to act with reason- able care. [8,9] Here, Merrick has asserted a claim against Fischer for negligence. We have previously recognized that a broker who agrees to obtain insurance coverage for another but fails to do so is liable for damage proximately caused by such negligence, including the amount that would have been due under such policy if it had been obtained.22 If an insurance agent or broker undertakes to advise an insured, the agent or broker must use reasonable care to provide accurate infor- mation.23 Thus, Nebraska law requires an insurance broker to secure the insurance requested by the insured and if the insurance broker is advising the insured, the broker must do 19 Broad, supra note 14, citing Gieseke v. Hardware Dealers Mut. Fire Ins. Co., 46 Ill. App. 2d 131, 195 N.E.2d 32 (1963). 20 See Broad, supra note 14. 21 See, United Fire & Cas. Ins. Co. v. Garvey, 419 F.3d 743 (8th Cir. 2005); Mark Andy, Inc. v. Hartford Fire Ins. Co., 229 F.3d 710 (8th Cir. 2000); 3 Plitt et al., supra note 14. 22 Countryside Co-op v. Harry A. Koch Co., 280 Neb. 795, 790 N.W.2d 873 (2010), disapproved on other grounds, Weyh v. Gottsch, 303 Neb. 280, 929 N.W.2d 40 (2019). 23 Flamme, supra note 8. - 242 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 so with reasonable care. Merrick posits that Fischer’s duty in this case is broader than previously recognized by this court and encompasses a duty to evaluate risks within the insured’s business and advise the insured regarding those risks or, more specifically, to advise an insured employer to obtain workers’ compensation insurance even in the absence of a request for such insurance. We are persuaded that Merrick’s claim against Fischer is resolved by application of the Nebraska Court of Appeals’ decision in Hansmeier v. Hansmeier.24 There, the owners of a farming operation obtained insurance through an insurance agent. The farm had one full-time employee but did not pro- vide insurance for the employee. The employee then injured his thumb in an auger, and the injury was not covered under the farm’s liability policy. The farm had not complied with § 48-106(7), which provides that if an employer who is engaged in an agricultural operation, as described under § 48-106(2)(d), elects to be exempt from the Nebraska Workers’ Compensation Act, then the employer must provide employees written notice that the employer does not provide workers’ compensation coverage and the employee must sign the notice. Section 48-106(7) states that the failure to provide the required notice subjects the employer to liability under the Nebraska Workers’ Compensation Act for any employee not notified. The farm owners did not provide the required notice, the employee brought a workers’ compensation claim against the farm own- ers, and the parties reached a settlement. The farm owners in Hansmeier then brought a negligence claim against their insurance agent based on the failure to properly advise them regarding the necessity or availability of workers’ compensation insurance. The Court of Appeals found that any claim of negligence or negligent representa- tion failed as a matter of law. The court stated that the par- ties had discussed workers’ compensation insurance, but the 24 Hansmeier v. Hansmeier, 25 Neb. Ct. App. 742, 912 N.W.2d 268 (2018). - 243 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 farm owners elected not to purchase such insurance. The court found that the insurance agent had not provided any false information to the insureds and that the agent had no further responsibility to inform the insureds of their obliga- tions under the notice provisions of the Nebraska Workers’ Compensation Act.25 [10] We agree with the proposition articulated in Hansmeier that the Nebraska Workers’ Compensation Act governs employ- ers, not insurance agents.26 Our prior cases have generally indicated an insurance intermediary owes a duty of reasonable care, whether the intermediary is an agent or broker.27 Given that, under Hansmeier, the Nebraska Workers’ Compensation Act does not affect an insurance agent’s duty to act with reasonable care, we hold that the same is true for insurance brokers. Absent evidence that an insurance agent or broker has agreed to provide advice or the insured was reasonably led by the agent to believe he would receive advice, the failure to volunteer information does not constitute either negligence or breach of contract for which an insurance agent or broker must answer in damages.28 The Eighth Circuit Court’s decision in Bell is factually distinguishable.29 In that case, an insurance broker obtained flood insurance for two different owners of mobile homes. The mobile home owners experienced flood damage, and their insurance claims were denied because the policies had been issued erroneously. The insurer determined that the mobile homes were not eligible for flood insurance because they were located in unincorporated areas. The Eighth Circuit held that under Missouri law, an insurance broker who fails to determine whether a client is eligible for insurance coverage 25 See id. 26 Id. 27 See, Hobbs, supra note 8; Flamme, supra note 8. 28 See Polski, supra note 12. 29 Bell, supra note 16. - 244 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 is negligent.30 The court found that the insured had relied on the broker to obtain the requested insurance, that the broker accepted that responsibility, and that by failing to discover the insureds were ineligible for coverage and by failing to notify them of that fact, the broker was negligent.31 In the present case, even when the evidence is viewed in the light most favorable to Merrick, there is no failure to obtain effective insurance by Fischer that is analogous to the actions of the broker in Bell. Rather, the failure in this case was on the part of the insured for failing to request workers’ compensation insurance and failing to timely provide payroll information. Merrick acknowledged at oral argument that he was not alleg- ing any negligence in procuring the requested insurance and that he did not challenge the district court’s finding that the actions of Western Hay delayed the insurance quote by failing to provide the necessary information until 1 day after Merrick’s accident. Further, we note that the Eighth Circuit was applying Missouri law in Bell, and the Missouri Supreme Court has spe- cifically rejected the argument that insurance brokers have the duty Merrick is arguing for here.32 Just as in Hansmeier, Fischer never provided Western Hay with false information regarding insurance coverage and there were no agreements between Western Hay and Fischer which obligated Fischer to advise Western Hay of its obligation to maintain workers’ compensation insurance.33 As a result, Fischer had no duty to advise Western Hay of its obligations under the Nebraska Workers’ Compensation Act. Further, as we stated in Broad, a broker represents the insured by acting as a middleman between the insured and the 30 Id. 31 Id. 32 See, e.g., Emerson Elec. Co. v. Marsh & McLennan Co., 362 S.W.3d 7 (2012) (brokers have no duty to advise insured on its insurance needs unless they specifically agree to do so). 33 See Hansmeier, supra note 24. - 245 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 insurer, soliciting insurance from the public under no employ- ment from any special company, and, upon securing an order, places it with a company selected by the insured or, if the insured has no preference, with a company selected by the bro- ker.34 The evidence indicates that no order for workers’ com- pensation insurance was placed by Western Hay until February 2009 and that Western Hay failed to provide the necessary payroll information to secure such an order. As a result, Fischer did not breach its duty to Western Hay. Fischer is entitled to judgment as a matter of law. This assignment of error is without merit. Great West Owed No Duty to Defend Merrick argues that Great West had a duty to defend Western Hay in the underlying lawsuit and acted in bad faith when it failed to provide a defense. The district court found that the commercial lines policy clearly excluded coverage for work- ers’ compensation liability and that as a result, Great West was not required to defend Western Hay. Merrick argues that the workers’ compensation exclusion in the policy is inapplicable because the case was brought in district court, not workers’ compensation court. [11] A court construes insurance contracts like other con- tracts, according to the meaning of the terms that the parties have used. When the terms of an insurance contract are clear, a court gives them their plain and ordinary meaning as a reason- able person in the insured’s position would understand them.35 [12-14] Whether an insurer has a duty to indemnify and defend an insured depends upon whether the insured’s claimed occurrence falls within the terms of the insurer’s coverage as expressed in the policy.36 The insurer has a duty to indemnify 34 See Broad, supra note 14. 35 Federated Serv. Ins. Co. v. Alliance Constr., 282 Neb. 638, 805 N.W.2d 468 (2011). 36 Id. - 246 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 an insured who becomes legally liable to pay damages for a covered occurrence.37 An insurer’s duty to defend is broader than the duty to indemnify.38 [15,16] A court must initially measure an insurer’s duty to defend an action against the insured by the allegations in the complaint against the insured, but in determining its duty to defend, an insurer must look beyond the complaint and investigate and ascertain the relevant facts from all available sources.39 An insurer has a duty to defend if (1) the allega- tions of the complaint, if true, would obligate the insurer to indemnify, or (2) a reasonable investigation of the facts by the insurer would or does disclose facts that would obligate the insurer to indemnify.40 Thus, an insurer has a duty to defend its insured whenever it ascertains facts that give rise to potential liability under the policy.41 Conversely, an insurer is not bound to defend a suit if the pleadings and facts ascertained by the insurer show the insurer has no potential liability.42 Although an insurer is obligated to defend all suits against the insured, even if groundless, false, or fraudulent, the insurer is not bound to defend a suit based on a claim outside the coverage of the policy.43 To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the insurance policy and the defendant’s knowledge or reck- less disregard of the lack of a reasonable basis for denying the claim.44 37 Id. 38 Id. 39 Id. 40 Id. 41 Id. 42 Id. 43 Mortgage Express v. Tudor Ins. Co., 278 Neb. 449, 771 N.W.2d 137 (2009). 44 See LeRette v. American Med. Security, 270 Neb. 545, 705 N.W.2d 41 (2005). - 247 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Upon our de novo review of the commercial lines policy, we are persuaded that Western Hay’s underlying claim is excluded under the employer’s liability exclusion. As detailed above, both the commercial auto and commercial general liability provisions of the commercial lines policy contain a workers’ compensation exclusion and an employer’s liabil- ity exclusion. The workers’ compensation exclusion excludes any obligation for which any “‘insured’” may be held liable under any workers’ compensation law or similar law. The employer’s liability exclusion states that the insurance policy does not apply to “‘[b]odily injury’” to an “‘employee’ of any ‘insured’ arising out of and in the course of . . . [e]mployment by any ‘insured.’” We determine that the language of the employer’s liabil- ity exclusion is clear and unambiguous and that based on an ordinary understanding of the terms within the exclusion, a reasonable person in the insured’s position would understand that the policy does not cover injuries to employees occurring in the course and scope of their employment. The allegations in Merrick’s complaint in the underlying action made clear that he sought to hold Western Hay liable for damages based on injuries he sustained during the course and scope of his employment as a truckdriver. These allegations demonstrate that Great West had no potential liability under the commer- cial lines policy based on Merrick’s injuries. As a result, Great West had a reasonable basis for denying benefits of insurance coverage and did not act in bad faith in refusing to provide a defense to Western Hay. And it makes no difference here that Merrick’s claim was asserted in the district court rather than the Nebraska Workers’ Compensation Court. As we have already explained, the policy exclusion was clear and unambiguous. The procedure permit- ting a suit in the district court by an injured worker against an uninsured employer does not impose an obligation upon an insurer where the policy at issue clearly excludes any such coverage. - 248 - Nebraska Supreme Court Advance Sheets 305 Nebraska Reports MERRICK v. FISCHER, ROUNDS & ASSOCS. Cite as 305 Neb. 230 Based on the employer’s liability exclusion, Great West had no contractual obligation to defend or indemnify Western Hay in the lawsuit brought by Merrick. Great West had a valid basis for denying coverage, and thus, Great West is entitled to judgment as a matter of law. This assignment of error is with- out merit. CONCLUSION For the foregoing reasons, we affirm the decision of the dis- trict court granting summary judgment in favor of Fischer and Great West. Affirmed.	01-04-2023	05-29-2020
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PDF link will display a scanned image with file date stamp and judicial signatures. Beginning in 2010, Case Number link will display a scanned image with file date stamp and judicial signatures. ADA link will display an accessible file compatible with online reader devices. Click here to view Opinions and Orders from 1998 to 2009. Date Ct. Case Number Case Name Appealed From Reporter Citation May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Honolulu Student Housing One, LLC. v. Gonzalez (Order Dismissing Appeal). District Court, 1st Circuit, Honolulu Division May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Quiring v. The Association of Apartment Owners of Papakea (Order Granting May 18, 2020 Motion to Dismiss Appellate Court Case Number CAAP-XX-XXXXXXX for Lack of Appellate Jurisdiction). Circuit Court, 2nd Circuit May 28, 2020 ICA CAAP-XX-XXXXXXX [ADA] Schmidt v. Princekong Inc. et.al. (Order Dismissing Appeal). District Court, 1st Circuit, Honolulu Division May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Enos (Amended Opinion). ICA s.d.o., filed 04/30/2019 [ada], 144 Haw. 375. Application for Writ of Certiorari, filed 08/26/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 10/10/2019 [ada]. S.Ct. Opinion, filed 05/27/2020. Circuit Court, 1st Circuit May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Key (Order Rejecting Application for Writ of Certiorari). ICA s.d.o., filed 01/29/2020 [ada], 146 Haw. 118. Application for Writ of Certiorari, filed 03/30/2020. District Court, 1st Circuit, Wahiawa Division May 27, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Enos. ICA s.d.o., filed 04/30/2019 [ada], 144 Haw. 375. Application for Writ of Certiorari, filed 08/26/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 10/10/2019 [ada]. S.Ct. Amended Opinion, filed 05/27/2020 [ada]. Circuit Court, 1st Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Scriven (Order Approving Stipulation for Voluntary Dismissal of the Appeal). Circuit Court, 5th Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] Bergmann v. Hawai‘i Residency Programs, Inc. (Order Approving Stipulation to Dismiss Appeal With Prejudice). Circuit Court, 1st Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] Cornelio v. State (s.d.o., affirmed). Circuit Court, 2nd Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Thronas-Kaho‘onei (s.d.o., affirmed). Circuit Court, 5th Circuit May 26, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Liao (s.d.o., affirmed). District Court, 1st Circuit May 22, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Xu v. Ochiai (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 05/06/2020. Original Proceeding May 22, 2020 ICA CAAP-XX-XXXXXXX [ADA] DB v. BB (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing as Moot All Pending Motions in CAAP-XX-XXXXXXX). Family Court, 1st Circuit May 21, 2020 ICA CAAP-XX-XXXXXXX [ADA] Wilmington Trust v. Association of Apartment Owners of Waikoloa Hills Condominium (Order Granting Motion to Dismiss Appeal). Circuit Court, 3rd Circuit May 21, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Prudential Locations, LLC v. Gagnon (Order Dismissing Application for Writ of Certiorari). Consolidated with CAAP-XX-XXXXXXX. ICA mem. op., filed 04/15/2020 [ada]. Application for Writ of Certiorari, filed 05/15/2020. Circuit Court, 1st Circuit May 21, 2020 ICA CAAP-XX-XXXXXXX [ADA] JZ v. JZ (mem. op., affirmed, vacated and remanded). Family Court, 1st Circuit May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Baker (Order of Correction). ICA s.d.o., filed 04/18/2019 [ada], 144 Haw. 334. Application for Writ of Certiorari, filed 07/24/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 08/30/2019 [ada]. S.Ct. Opinion, filed 03/13/2020 [ada]. District Court, 1st Circuit, Honolulu Division May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] Schmidt v. Schmidt (Order Dismissing Appeal). Family Court, 1st Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Trubachev (Order Dismissing Appeal). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Grandinetti (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing All Pending Motions as Moot). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Grandinetti (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing All Pending Motions as Moot). Circuit Court, 3rd Circuit May 20, 2020 ICA CAAP-XX-XXXXXXX [ADA] Grace v. Yett Property Management, LLC (Order Dismissing Appeal). Labor and Industrial Relations Appeals Board May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Porter v. The Queen’s Medical Center (Order Accepting Application for Writ of Certiorari). ICA Opinion, filed 02/21/2020 [ada]. Motion for Reconsideration, filed 02/27/2020. ICA Order Denying Motion for Reconsideration, filed 03/04/2020. Amended Order Denying Motion for Reconsideration, filed 03/10/2020 [ada]. Application for Writ of Certiorari, filed 03/11/2020. S.Ct. Order Dismissing Application for Writ of Certiorari, filed 03/19/2020 [ada]. Application for Writ of Certiorari, filed 04/13/2020. Labor and Industrial Relations Appeals Board May 20, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] LO v. NO (Order Accepting Application for Writ of Certiorari). ICA mem. op., filed 02/06/2020 [ada]. Application for Writ of Certiorari, filed 04/03/2020. Family Court, 1st Circuit May 19, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Office of the Public Defender v. Connors (Fifth Interim Order). S.Ct. Interim Order re: Initial Summary Report and Initial Recommendations of the Special Master, filed 04/09/2020 [ada]. Consolidated with SCPW-XX-XXXXXXX. S.Ct. Interim Order, filed 04/15/2020 [ada]. S.Ct. Third Interim Order, filed 04/24/2020 [ada]. Concurrence re: Interim Order [ada]. S.Ct. Fourth Interim Order, filed 05/04/2020 [ada]. Original Proceeding May 19, 2020 ICA CAAP-XX-XXXXXXX [ADA] KG v. AG (Order Dismissing Appeal for Lack of Appellate Jurisdiction). Family Court, 2nd Circuit May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Martin (Order). ICA s.d.o., filed 03/29/2019. ICA Amended s.d.o., filed 03/29/2019 [ada], 144 Haw. 153. Application for Writ of Certiorari, filed 08/07/2019. S.Ct. Order Accepting Application for Writ of Certiorari, filed 09/18/2019 [ada]. S.Ct. Opinion, filed 04/22/2020 [ada]. S.Ct. Order of Correction, filed 04/23/2020 [ada]. Motion for Reconsideration, filed 05/14/2020. Circuit Court, 3rd Circuit May 19, 2020 ICA CAAP-XX-XXXXXXX [ADA] RSM Inc. v. Middleton (Order Dismissing Appeal). District Court, 3rd Circuit, North and South Hilo Division May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] In re Taniguchi Trust (Order Rejecting Application for Writ of Certiorari). ICA s.d.o., filed 02/24/2020 [ada]. Application for Writ of Certiorari, filed 04/07/2020. Circuit Court, 1st Circuit May 19, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Uchima. Opinion by Recktenwald, C. J. Concurring in Part and Dissenting in Part, And Concurring in the Judgment [ada]. Opinion by Nakayama, J., Dissenting From the Judgment [ada]. ICA s.d.o., filed 02/15/2018 [ada], 141 Haw. 396. Application for Writ of Certiorari, filed 05/24/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 07/05/2018 [ada]. Dissent by Nakayama, J., with whom Recktenwald, C.J., joins. District Court, 1st Circuit, Honolulu Division May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] In re Lauro (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 04/30/2020. Original Proceeding May 15, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] HawaiiUSA Federal Credit Union v. Monalim (Order Denying Motion for Partial Reconsideration). ICA s.d.o., filed 05/17/2018 [ada] 142 Haw. 216. Application for Writ of Certiorari filed 09/17/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 11/14/2018 [ada]. S.Ct. Opinion, filed 04/30/2020 [ada]. Concurring and Dissenting Opinion by Nakayama, J. in which Recktenwald, C.J., Joins [ada]. Motion for Partial Reconsideration, filed 05/11/2020. Circuit Court, 1st Circuit May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] In re Harshman (Order Denying Petition for Writ of Mandamus). Petition for Writ of Mandamus, filed 04/07/2020. Original Proceeding May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Young v. Chang (Order Denying Petition for Writ of Prohibition). Petition for Writ of Prohibition, filed 03/23/2020. Original Proceeding May 15, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Gallagher. Dissenting Opinion by Recktenwald, C.J. [ada]. Dissenting Opinion by Nakayama, J. [ada]. ICA s.d.o., filed 12/20/2017 [ada], 141 Haw. 247. Application for Writ of Certiorari, filed 03/01/2018. S.Ct. Order Accepting Application for Writ of Certiorari, filed 04/13/2018 [ada]. Circuit Court, 2nd Circuit May 15, 2020 S.Ct SCOT-XX-XXXXXXX [ADA] Lāna‘ians for Sensible Growth v. Land Use Commission. Dissenting Opinion as to Parts III (E) and IV By Wilson, J.[ada] Opinion Concurring in the Judgment and Dissenting by Recktenwald, C.J., in Which Nakayama, J., Joins.[ada]. Land Use Commission May 15, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Yamano v. Ochiai (Order Denying “Application for Writ of Prohibition/Mandamus”). “Application for Writ of Prohibition/Mandamus”, filed 05/06/2020. Original Proceeding May 15, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Shaw (mem. op., vacated and remanded). Circuit Court, 1st Circuit May 14, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Ted’s Wiring Service, Ltd. v. Department of Transportation (Order Rejecting Application for Writ of Certiorari). ICA mem.op., filed 12/26/2019 [ada], 146 Haw. 31. Application for Writ of Certiorari, filed 04/03/2020. Circuit Court, 1st Circuit May 14, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Tavares (Order Dismissing Certiorari Proceeding). ICA mem. op., filed 11/29/2019 [ada], 145 Haw. 299. Application for Writ of Certiorari, filed 01/23/2020. S.Ct. Order Accepting Application for Writ of Certiorari, filed 05/05/2020 [ada]. Circuit Court, 1st Circuit May 13, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] Pennymac Corp. v. Godinez (Order Accepting Application for Writ of Certiorari). ICA s.d.o., filed 12/06/2019 [ada], 145 Haw. 442. Application for Writ of Certiorari, filed 03/11/2020. Circuit Court, 2nd Circuit May 12, 2020 ICA CAAP-XX-XXXXXXX [ADA] Taylor v. Attorneys At Law, Crudele & De Lima (Order Dismissing Appeal for Lack of Appellate Jurisdiction and Dismissing All Pending Motions as Moot). Circuit Court, 3rd Circuit May 11, 2020 S.Ct SCWC-XX-XXXXXXX [ADA] State v. Jaentsch (Order Accepting Application for Writ of Certiorari). ICA s.d.o., filed 12/31/2019 [ada], 146 Haw. 32. Application for Writ of Certiorari, filed 04/01/2020. Family Court, 1st Circuit May 8, 2020 S.Ct SCPW-XX-XXXXXXX [ADA] Austin v. Browning (Order Denying Petition for Writ of Prohibition). Petition for Writ of Mandamus, filed 02/28/2020. Original Proceeding May 8, 2020 ICA CAAP-XX-XXXXXXX [ADA] In re The Estate of Stirling (Order Approving Stipulation to Dismiss Appeal). Circuit Court, 2nd Circuit May 8, 2020 ICA CAAP-XX-XXXXXXX [ADA] Pattioay v. State (Order Dismissing Appeal For Lack Of Appellate Jurisdiction, Dismissing All Pending Motions As Moot, And Directing Circuit Court To Treat Notice Of Appeal As Non-Conforming HRPP Rule 40 (c) (2) Petition For Post-Conviction Relief And Open A Circuit Court Special Proceeding). Circuit Court, 1st Circuit May 8, 2020 ICA CAOT-XX-XXXXXXX [ADA] Purugganan v. State (Order Dismissing Case Number CAOT-XX-XXXXXXX for Lack of Jurisdiction and Dismissing All Pending Motions as Moot). Non-Conforming Petition May 8, 2020 ICA CAAP-XX-XXXXXXX [ADA] Kadomatsu v. County of Kaua‘i (mem. op., affirmed). Circuit Court, 5th Circuit May 7, 2020 S.Ct SCMF-XX-XXXXXXX [ADA] February 2020 Notice of Passing the Hawai‘i Bar Examination. May 6, 2020 ICA CAAP-XX-XXXXXXX [ADA] State v. Jason (Order Granting Motion to Dismiss Appeal). 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https://www.courtlistener.com/api/rest/v3/opinions/4474371/	OPINION. Johnson, Judge: Under the view that no partnership between petitioner and his wife should be recognized for tax purposes, respondent determined petitioner taxable on all the profits from Drew’s Manstore in 1944 and 1945, but reduced such profits by $5,547.82 and $10,627.88, respectively, described as deductions “for salary to your wife and interest on her investment in the business.” The amounts of these deductions equal 30 per cent of profits computed without them. From this method of computation it is obvious that the deductions do hot represent determinations of reasonable compensation for services rendered and capital used, but merely a reallocation of business profits on a 10-30 per cent basis instead of the 50-50 per cent basis fixed by the parties’ instrument of January 23, 1943. Regardless of his recognition that the wife had invested capital in the business and had rendered valuable services to it, respondent now defends the determinations by the argument that the wife had not made any capital contribution and that her services are not shown by petitioner to have been vital or' substantial. He urges further that prior to 1943 petitioner and she had not purported to own the business jointly or to be partners, and he challenges the sufficiency of the instrument of January 23,1943, as a “foundation upon which to lay a claim of partnership.” We agree in principle that no partnership is recognizable in the absence of an intent to form one; cf. L. C. Olinger, 10 T. C. 423, and cases therein cited. But as petitioner does not contend that a partnership existed prior to 1943 and as the years here involved are 1944 and 1945, we perceive no occasion for deciding the question suggested. The instrument of January 23, 1943, however, leaves no doubt about intent. Petitioner thereby purported to convey to his wife “an undivided one-half interest in and to the business,” and it was specified that profits and losses should be shared equally. Thereafter, as before, business receipts were deposited in a joint bank account against which each could draw, and for 1943 and later years partnership income tax returns were filed. While the words “partner” and “partnership” are not used in the instrument, this omission lacks decisive significance, for, as said by the Supreme Court in Commissioner v. Tower, 327 U. S. 280: * * * A partnership is generally said to be created when persons join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession or business and when there is community of interest in the profits and losses. * * * whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both * * * is a question of fact * * * For tax purposes, moreover, the meaning of “partnership” is expanded by section 3797 (2), Internal Revenue Code, to include “a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.” The evidence indicates clearly that at the time of marriage in 1914 the wife had some separate funds; that she was gainfully employed after marriage; and that about half of the $2,500 invested in the dry cleaning business, with which petitioner began at Klamath Falls, originated with her. Respondent argues technically that this contribution is of no bearing on the issue, for the dry cleaning business was sold by 1930, and the clothing business, a distinct enterprise, was initially financed by a $2,000 loan. This loan, however, was procured on a note which both signed, and, as no outside capital has ever been used, it was presumably paid from business operating profits which were deposited in a joint bank account. For recognition that the wife made a capital contribution to the business, it is not necessary to find that the amount was large or that it can be traced through business transactions and changes over the years. Graber v. Commissioner (C. C. A., 10th Cir.), 171 Fed. (2d) 32; Weizer v. Commissioner (C. C. A., 6th Cir.), 165 Fed. (2d) 772; Wilson v. Commissioner (C. C. A., 7th Cir.), 161 Fed. (2d) 661. It is enough that the wife’s contribution was a material factor in the establishment and operation of the enterprise. Drew’s Manstore was developed from small beginnings. It grew from the joint efforts of petitioner and his wife in the use of a joint loan and jointly held funds derived from operation of the dry cleaning, business which had been launched less than a year before with the $2,500, of which the wife had contributed about half. Under such circumstances it is immaterial that the precise part of the clothing business and its earnings of later years attributable to the wife’s capital is not susceptible of proof, for it is clear that about half of the capital ever used by petitioner originated with her. Such evidence warrants the conclusion that she did make a contribution, and we have so found. The evidence is equally persuasive that she contributed vital services and participated in management. Respondent attempts to minimize the nature and extent of the services, alleging that the testimony about them is vague and that the “home training of a splendid family of four boys” would not have left her sufficient time for any substantial work at the store. However she managed it, we are convinced that she did a commendable job in both respects. Petitioner testified that she regularly had charge of “the office,” banking, and correspondence; signed checks and paid bills; that he relied on her in the purchase of stocks for sale to female patrons; that she sometimes accompanied him on purchasing trips, and in his absences took complete charge of the store; that she worked during “business hours and after hours,” and helped him “more and more as time went on.” Greer Drew corroborated these statements, adding that on occasion she independently purchased merchandise and hired and fired employees. Such services are vital and are of a managerial character. She rendered them not only during the taxable years, but had done so over many preceding years, and these prior services have a material bearing on the recognition of her status as a bona fide partner. Lawton v. Commissioner (C. C. A., 6th Cir.), 164 Fed. (2d) 380; Singletary v. Commissioner (C. C. A., 5th Cir.), 155 Fed. (2d) 207; Paul L. Kuzmick, 11 T. C. 288; Samuel Goodman, 6 T. C. 987; Leo V. Marks, 6 T. C. 659. Petitioner’s conveyance of the half interest in the business to her in 1943 as a gift, moreover, does not militate against such recognition, for, as said in Graber v. Commissioner, supra: * * * The so-called gift, as reflected by the gift tax return, was not intended to afford capital for the purpose of buying an interest in the partnership as in other cases. It was for the avowed purpose of acknowledging the wife’s interest ****** while it adds nothing to the vital question of partnership, it does not detract from the controlling realities. As petitioner has established that his wife contributed capital, rendered vital services, and shared in the control of Drew’s Manstore, the partnership between them, as manifested by the instrument of January 23,1943, and their subsequent conduct of the business, should be recognized for tax purposes. Allen v. Knott (C. C. A., 5th Cir.), 166 Fed. (2d) 798; Graber v. Commissioner, supra; Wilson v. Commissioner, supra; Paul L. Kuzmick, supra. And net profits of the business, distributable half to each under the written agreement, should be taxed half to each. Canfield v. Commissioner (C. C. A., 6th Cir.), 168 Fed. (2d) 907; Woosley v. Commissioner (C. C. A., 6th Cir.), 168 Fed. (2d) 330; Reuben Stiefel, 9 T. C. 576. In recomputing the net profits of the business, the Commissioner allowed the deduction of all salaries paid in 1944, but disallowed as excessive $11,712.50 of the salaries paid in 1945 to the four sons. By amendments to his answers, he prays that all salaries paid to the sons be disallowed and that increased deficiencies be determined accordingly. On brief, however, he modifies the issue so raised to contend that only the bonus payments should be disallowed. The bonus was $8,000 in 1944, $2,000 being paid to each son, and $20,000 in 1945, $5,000 being paid to each son. So reduced, the sons’ salaries, which he now concedes to be deductible, were $1,051.72 in 1944 and $3,212.50 in 1945, distributed as follows: [[Image here]] Respondent argues that the equal distribution of a percentage of annual profits among four sons whose value to the business varied greatly was in effect a gift, not compensation for services, especially since the three sons who were in the armed forces during 1944 and most of 1945 rendered services only for short periods. We should be impressed by this argument if the basic salary paid to each son was large enough to support an inference that it alone was intended as compensation. But in fact the amounts paid them in excess of bonus were too trivial to be considered full compensation. The testimony concerning the rate or method of computation is somewhat confusing, and $30 to $40 a week has been found, although Greer on cross-examination mentioned $300 a month as his, but the totals of $1,051.72 and $1,512.50 received by him above bonus in 1944 and 1945, respectively, would seem to indicate regular payment of even less than indicated by the rate found. In any event, total payments to each are to be deemed deductible salary to the extent that they represent reasonable compensation for services rendered and are nondeductible to the extent that they exceed it. Regulations 111, sec. 29.23 (a) (7)-(8); In re Rae's Estate (C. C. A., 3d Cir.), 147 Fed. (2d) 204; Samuel Rottenberg, 20 B. T. A. 589. Leaving for later discussion the effect of absences in the armed forces, and considering first the payments received by Greer Drew, who was not in military service, we find that Greet received $3,051.72 in 1944 and $6,512.50 in 1945. Greer was a seasoned business man, fitted by extensive college training, and seven years of practical experience as buyer and, on occasion, as manager of Drew’s Manstore, which had an annual sales volume well in excess of $200,000 in the taxable years. There is credible testimony that the amounts paid him were less than the compensation currently paid to qualified men rendering like services. Respondent emphasizes his employment with a lumber company in 1944 and his work in performing a logging contract in 1945 as materially reducing his participation in the clothing business. But Greer testified that he kept constantly in touch with that business and that his other activity fell during the months of the year when the seasonal business of the store required least attention. He engaged in this outside work at the suggestion of his draft board. We have found that the amounts paid him were not excessive, and hold them deductible in full. The issue in respect of payments to the other 3 sons is complicated by their absence in the armed forces. Frank entered the service in February 1942; he was then 25 years of age, and had been employed regularly in the store for about 3% years, or since his graduation from the University of Oregon. Lloyd entered the service in February 1943; he was then 24 years of age, and had been employed regularly about 3 years. Cecil entered the service in July 1943; he was then 20 years of age, and had been employed regularly only a month. All three assisted in store work during short leave periods, and all three resumed work in September or October 1945, returning in time for the most active season of the business. Frank and Lloyd also procured some merchandise and made business connections while in the service. In 1943 all the sons received a $1,750 bonus, and Lloyd and Cecil an additional $35 and $110, respectively, inferentially for services actually rendered. In 1944 all received a $2,000 bonus and no more; and in 1945 all received a $5,000 bonus and, in addition, Frank, who did not reach Klamath Falls until November 15, received $206.25, Lloyd received $756.25, and Cecil received $737.50. Lloyd has since remained with Drew’s Manstore, but on January 1, 1946, Frank and Cecil left to manage the newly acquired gun store in which each of the five Drews and their wives had a tenth interest. Admitting, as he must, that the three sons actually rendered little service in 1944 and 1945, petitioner relies on I. T. 3417,1940-2, C. B. 64, in which the Commissioner, adhering to administrative practice followed after World War I, ruled: * * * that salaries paid by employers to employees who were absent in the military or naval service * * , but who intended to return at the conclusion of such service, were allowable deductions from gross income. (See article 108, Regulations 45 (1920 edition), promulgated under the Revenue Act of 1918.) No provision of the code explicitly permits the deduction, but this Court has approved the ruling, saying in Berkshire Oil Co., 9 T. C. 903, that the salaries: * * qualify as a business expense, because such payments are justified by past services and an employer’s advantage in retaining the services of experienced personnel when released from service. * * * But as the deduction is a corollary of section 23 (a) (1) (A), relating to ordinary and necessary business expenses, the salaries paid to those absent in the armed forces must meet the general tests for deduction under that section. Inter alia, they must be “reasonable,” which we hold for present purposes to mean commensurate with the value of the employee’s normal services to the business, and they must be paid as an inducement for the employee’s return after discharge, for otherwise no business benefit would be contemplated. If the employee has a proprietary interest in the business or is a close relative of the employer, such- relations would not preclude a deduction of the salary paid him in absentia, but they do invite a special scrutiny of the payor’s motives, for a payment intended merely as a gift is obviously not a deductible expense. An analysis of the payments made to the 3 younger sons refutes rather than supports the view that they represented merely a continuation of compensation or an inducement to return. The value of their respective services was obviously not the same. Frank, the oldest, was a university graduate who had over 3 years of practical experience; Cecil, the youngest, was only 20; he had attended the university for only one year and had been employed only one month; Lloyd’s age and qualifications fell between the two. Yet all three received $2,000 in 1944 and over $5,000 in 1945, and in 1943 Cecil actually received more than the others, although he had not been employed until the middle of the year. When it is considered that Greer too received an equal part of the bonus, which was the major part of the payments in all years, we are forced to the conclusion that petitioner was acting as a father, refraining from parental discrimination, and not as an employer, nicely fixing compensation according to the recipient’s commercial value to the firm. He was, of course, at liberty to treat his sons alike, and he may deduct as a proper expense the payments for which commensurate services were rendered. But no business motive can be imputed to his payments of such disparate amounts as $2,000 and $5,000 to sons who were rendering little or no services, especially since they had never received so much for regular work. We can well believe that petitioner wished them to return to Kla-math Falls, but not for commercial reasons of benefit to himself. He arranged during their absence to acquire a second store, and did so, giving each an interest in it. Frank and Cecil were made comanagers of this in January 1946, while Greer and Lloyd remained at the clothing store. Petitioner cites Culbertson v. Commissioner (C. C. A., 5th Cir.), 168 Fed. (2d) 979, as an authority supporting his contention, but a partnership between the taxpayer-father and his son, absent; in the armed forces, was there involved. Petitioner’s sons were not partners, and his gratuitous distribution of a percentage of profits equally among them can not be regarded as an inducement for their return, since he was already planning to give each a proprietary interest in another store, and he employed two of them in it in January 1946 because the clothing business was not large enough for all. But this conclusion does not preclude petitioner’s right to deduct a part of the amounts paid which represents the fair value of services actually performed. The evidence shows that during a month’s leave in October 1944 Frank was active in aiding and making purchases for the store, and that he resumed work for it in October 1945. Lloyd worked a month in the summer of 1945 and permanently resumed work about the middle of September. Cecil resumed work about the first of October 1945. We have found that the fair value of Frank’s services was $250 in 1944 and $1,000 in 1945; of Lloyd’s services, $756.25 in 1945; and of Cecil’s services, $737.50 in 1945. These amounts are properly deductible. Decisions will be entered under Rule 50.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620488/	Barry S. Glass and Shirley P. Glass, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentGlass v. 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5072-82, 5074-82, 5228-82, 5229-82, 5337-82, 5442-82, 5529-82, 5661-82, 5868-82, 5869-82, 5870-82, 5871-82, 5872-82, 5873-82, 5907-82, 5908-82, 5915-82, 5924-82, 5936-82, 5957-82, 6063-82, 6116-82, 6139-82, 6200-82, 6365-82, 6382-82, 6395-82, 6557-82, 6828-82, 6837-82, 6838-82, 6839-82, 6841-82, 6850-82, 6857-82, 6870-82, 7045-82, 7121-82, 7128-82, 7310-82, 7786-82, 7808-82, 7977-82, 8074-82, 8413-82, 8415-82, 8580-82, 8739-82, 10129-82, 10287-82, 10444-82, 10622-82, 10623-82, 11087-82, 11810-82, 11811-82, 12000-82, 12809-82, 12926-82, 13062-82, 13241-82, 13242-82, 13285-82, 13320-82, 13415-82, 13617-82, 13667-82, 13689-82, 13998-82, 14197-82, 14309-82, 14310-82, 14311-82, 14312-82, 14313-82, 14314-82, 14315-82, 14470-82, 14712-82, 14731-82, 14732-82, 14733-82, 14803-82, 14856-82, 14949-82, 14959-82, 14960-82, 14961-82, 14968-82, 14969-82, 15002-82, 15007-82, 15018-82, 15058-82, 15073-82, 15094-82, 15097-82, 15260-82, 15646-82, 15704-82, 15788-82, 15844-82, 15914-82, 16284-82, 16285-82, 16350-82, 16419-82, 16629-82, 16630-82, 16631-82, 16632-82, 16753-82, 17308-82, 17311-82, 17452-82, 17453-82, 17460-82, 17463-82, 17853-82, 17917-82, 18399-82, 18400-82, 18401-82, 19184-82, 19185-82, 19318-82, 19488-82, 20138-82, 20423-82, 20983-82, 21016-82, 21282-82, 22277-82, 22783-82, 24028-82, 24371-82, 25066-82, 25070-82, 25174-82, 25411-82, 25506-82, 26314-82United States Tax Court87 T.C. 1087; 1986 U.S. Tax Ct. LEXIS 166; 87 T.C. No. 68; November 17, 1986, Filed Decisions will be entered for the respondent in those cases listed in Appendix B.Decisions will be entered under Rule 155 in those cases listed in Appendix C.Appropriate orders will be issued in those cases listed in Appendix D. During certain of the years in issue, petitioners engaged in commodity straddle transactions connected with trading on the London Metal Exchange. Petitioners intentionally sustained losses in year one of their commodity straddle transactions by entering into closing transactions on their sold commodity options. Held: Since the intentionally realized losses were not necessary or helpful in profiting from difference gains in petitioners' commodity straddle transactions, the transactions lacked a business or profit-making purpose. The losses were not "intended" by secs. 165(c) and 1234, I.R.C. 1954, and sec. 108 of the Tax Reform Act of 1984, Pub. L. 98-369, as amended by sec. 1808 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817. They were therefore shams in substance. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332 (1985)Martin M. Ruken, Robert E. Kolek, Kenneth C. 167 Shepro, Herbert L. Zarov, John S. Pennish, R. LaMar Bishop, and Gary S. Vandeweghe, for the petitioners.Stephen M. Miller and Carolyn A. Boyer, for the respondent. Nims, Judge. Sterrett, Simpson, Goffe, Chabot, Parker, Whitaker, Korner, Shields, Hamblen, Cohen, Clapp, Swift, Jacobs, Wright, Parr, Williams, and Wells, JJ., agree with this opinion. Gerber, J., did not participate in the consideration of this case. NIMS1091 In these consolidated cases, respondent determined aggregate deficiencies in excess of $ 61 million in petitioners' Federal income taxes for the years 1975 through 1980. 2Each of the petitioners in these cases entered into a series of transactions herein sometimes referred to for convenience as the London Options Transaction. The issues for decision are: (1) Whether the London Options Transactions are shams; and (2) if the transactions are not shams, whether they were entered into for profit under the standard set forth in section 108 of the Tax Reform Act of 1984. 3168 Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in Massachusetts at the time their respective petitions were filed: 18692-80, 19753-80, 20768-80, and 14968-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either New York, Connecticut, or Vermont at the time their respective petitions were filed: 13835-79, 1627-80, 9423-80, 9746-80, 9747-80, 9748-80, 10902-80, 11811-80, 12144-80, 19750-80, 19897-80, 19898-80, 4841-81, 11717-81, 1092 11718-81, 12324-81, 19181-81, 20627-81, 23591-81, 24091-81, 24604-81, 24755-81, 26700-81, 27400-81, 27719-81, 30709-81, 31186-81, 31188-81, 31190-81, 31191-81, 31192-81, 31262-81, 31278-81, 31299-81, 31327-81, 1347-82, 1982-82, 2018-82, 3280-82, 3770-82, 7128-82, 10129-82, 10287-82, and 13415-82.Petitioners in the following 169 docket numbers resided (or, if corporations, had their principal places of business or offices) in either New Jersey or Pennsylvania at the time their respective petitions were filed: 13142-80, 15770-80, 15771-80, 16558-80, 17351-80, 21188-80, 2459-81, 7214-81, 13809-81, 13810-81, 28496-81, 25066-82, 25070-82, and 25174-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either North Carolina or Maryland at the time their respective petitions were filed: 321-80, 6906-80, 12976-80, 17069-80, 22085-80, 22195-80, 5194-81, 6377-81, 6500-81, 6929-81, 7113-81, 7698-81, 8020-81, 8573-81, 8586-81, 9395-81, 10196-81, 11621-81, 11846-81, 11892-81, 11929-81, 12742-81, 13026-81, 13664-81, 14058-81, 14776-81, 20338-81, 22418-81, and 776-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Texas or Louisiana at the time their respective petitions were filed: 5544-79, 5395-80, 5396-80, 5397-80, 5398-80, 5399-80, 5400-80, 5401-80, 6315-80, 10721-80, 12901-80, 15592-80, 16656-80, 17117-80, 17457-80, 19492-80, 21817-80, 5540-81, 9926-81, 170 12841-81, 23475-81, 23544-81, 25348-81, 25349-81, 25877-81, 25879-81, 27633-81, 27634-81, 993-82, 3794-82, 5907-82, 5908-82, 11087-82, and 16285-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Michigan or Kentucky at the time their respective petitions were filed: 3565-80, 3566-80, 3568-80, 538-81, 7213-81, 2475-82, and 20983-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Illinois or Indiana at the time their respective petitions were filed: 15145-79, 16358-79, 9060-80, 1093 10642-80, 10643-80, 11067-80, 11068-80, 11173-80, 11174-80, 11175-80, 11176-80, 11177-80, 11195-80, 11205-80, 11206-80, 11207-80, 11216-80, 11605-80, 11755-80, 11756-80, 11757-80, 12609-80, 13223-80, 17336-80, 19419-80, 20531-80, 3561-81, 4987-81, 6762-81, 6763-81, 6764-81, 7851-81, 7852-81, 8431-81, 8432-81, 8434-81, 8545-81, 9501-81, 12878-81, 13276-81, 13898-81, 13913-81, 15875-81, 18428-81, 20514-81, 23324-81, 25639-81, 29423-81, 706-82, 3408-82, 3432-82, 5442-82, 5957-82, 6839-82, 10622-82, 13667-82, 14309-82, 14310-82, 14311-82, 14312-82, 171 14313-82, 14314-82, 14315-82, 14731-82, 14732-82, 14733-82, 14959-82, 14961-82, 15058-82, 15073-82, 15094-82, 15844-82, 15914-82, 16629-82, 16630-82, 16631-82, 4 16632-82, 17452-82, 17453-82, 17460-82, 20423-82, and 22783-82. Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Missouri, Nebraska, Minnesota, or Iowa at the time their respective petitions were filed: 12417-80, 17810-81, 17838-81, 19173-81, 25880-81, 2299-82, 8074-82, and 10623-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Utah, Wyoming, Colorado, Kansas, or Oklahoma at the time their respective petitions were filed: 8146-79, 8147-79, 8148-79, 8150-79, 8151-79, 8152-79, 8153-79, 8156-79, 8157-79, 8158-79, 8160-79, 8161-79, 8163-79, 8720-79, 9118-79, 9457-79, 9580-79, 9590-79, 9698-79, 9699-79, 9700-79, 12157-79, 15591-79, 1142-80, 1243-80, 1339-80, 2872-80, 2875-80, 3279-80, 3705-80, 4000-80, 4036-80, 4174-80, 4567-80, 8587-80, 8905-80, 9084-80, 9443-80, 10660-80, 10929-80, 172 11017-80, 11737-80, 11739-80, 11745-80, 11748-80, 11781-80, 11782-80, 11952-80, 12029-80, 12030-80, 12197-80, 12198-80, 12199-80, 12203-80, 12204-80, 12207-80, 12213-80, 12214-80, 12216-80, 12218-80, 12219-80, 12221-80, 12224-80, 12225-80, 12226-80, 12229-80, 12232-80, 12233-80, 12236-80, 12237-80, 12238-80, 12241-80, 12246-80, 12247-80, 12249-80, 12250-80, 12252-80, 12253-80, 12254-80, 12255-80, 12261-80, 12262-80, 12263-80, 12264-80, 12265-80, 12266-80, 12267-80, 12268-80, 12269-80, 12270-80, 12273-80, 12274-80, 12610-80, 12619-80, 13125-80, 13162-80, 1094 13199-80, 13540-80, 16204-80, 16319-80, 16556-80, 16557-80, 16560-80, 16563-80, 16681-80, 17148-80, 18137-80, 19395-80, 5 19396-80, 6 19664-80, 19665-80, 19666-80, 19669-80, 19670-80, 20078-80, 20079-80, 20292-80, 20293-80, 20295-80, 20296-80, 20297-80, 20298-80, 20299-80, 20362-80, 20522-80, 20697-80, 20699-80, 20700-80, 20701-80, 20703-80, 20770-80, 20771-80, 20847-80, 21035-80, 21036-80, 21037-80, 21039-80, 21126-80, 21127-80, 21128-80, 21129-80, 21130-80, 22511-80, 22512-80, 391-81, 537-81, 666-81, 667-81, 669-81, 670-81, 1233-81, 1563-81, 2029-81, 3001-81, 3003-81, 3004-81, 5123-81, 5237-81, 9845-81, 9940-81, 12219-81, 7 12806-81, 173 12827-81, 12828-81, 12838-81, 12847-81, 12850-81, 13132-81, 13938-81, 14134-81, 16702-81, 17452-81, 22409-81, 22412-81, 22904-81, 23123-81, 23124-81, 23322-81, 24207-81, 24208-81, 25047-81, 27176-81, 27177-81, 27223-81, 27224-81, 27225-81, 28431-81, 29252-81, 29646-81, 30640-81, 30641-81, 31348-81, 31349-81, 31350-81, 890-82, 3627-82, 7808-82, 14470-82, 14949-82, 14969-82, 15007-82, and 15788-82.Petitioners in the following docket numbers resided (or, if corporations, had their principal places of business or offices) in either Alabama, Florida, or Georgia at the time their respective petitions were filed: 4054-79, 10252-80, 11640-80, 11894-80, 12122-80, 14757-80, 15899-80, 19248-80, 20521-80, 22981-80, 2398-81, 12840-81, 15538-81, 24461-81, 1235-82, 2293-82, 3874-82, 13689-82, and 17463-82.Petitioners in the following docket numbers resided (or, 174 if corporations, had their principal places of business or offices) in either West Germany, Great Britain, Canada, or France at the time their respective petitions were filed: 12987-80, 16483-80, 16963-81, 17532-81, 18747-81, 19013-81, 23321-81, 28492-81, and 5074-82.The remaining petitioners resided (or, if corporations, had their principal places of business or offices) in either California, Arizona, Idaho, Montana, Nevada, Washington, Oregon, Alaska, or Hawaii at the time their respective petitions were filed. 81095 FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.I. IntroductionA typical London options transaction entered into by a petitioner involved a 2-year series of commodity trades and employed either an option-straddle or option-hedge trading strategy. Under the more prevalent option-straddle trading strategy, a petitioner purchased and sold options for future delivery of a specified metal in the first year of the transaction. Shortly thereafter, identical 175 offsetting positions were executed resulting in an expected ordinary loss and short-term capital gain in approximately the same amount for the first year. The short-term capital gain was then "rolled over" into either a short-term or long-term capital gain in the second year through the execution of a futures straddle.All London options transactions entered into by petitioners were conducted through one or more of 17 foreign broker/dealers operating on the London Metal Exchange (LME). Substantially all of the transactions were conducted with the following six so-called "major" broker/dealers: Rudolf Wolff & Co., Ltd. (Rudolf Wolff), Competex, S.A. (Competex), Gardner Lohmann Ltd. (Gardner Lohmann), Amalgamated Metal Trading Ltd. (Amalgamated), Rothmetal Trading Ltd. (Rothmetal), and Commodity Analysis Ltd. (Commodity Analysis).In the following section, a general description of the LME, the types of contracts traded, and the option-straddle and option-hedge trading strategies are presented. Then, each of the major broker/dealers and a representative London options transaction conducted by each of them are discussed in detail.II. BackgroundA. The London Metal Exchange (the LME)The 176 LME, a commodity exchange located in London, England, was established in 1877. Cash, future, and option 1096 contracts in silver, copper, zinc, tin, and lead are all traded on the LME.The LME maintains three categories of membership -- individual, representative, and associate subscribers. Individual subscribers are primarily persons prominent in metal trading but temporarily unaffiliated with a member company. Representative subscribers, the most important group, trade on behalf of their companies or organizations directly in the "ring," the part of the exchange where formal trading occurs. The third category of members, the associate subscribers, are entitled to participate in the market but may not trade directly in the ring. All members are subject to annual election.Before a company can be represented by a ring-dealing subscriber, it must meet stringent financial requirements. A margin of solvency test which includes both a proof of net asset worth and an independent bank or parent company guarantee is required. In addition, a ring-dealing company must be incorporated in the United Kingdom and be subject to British company law. During the years 1975 through 1980, there were 177 approximately 30 ring-dealing members of the LME.Unlike its American counterparts (e.g., the New York Stock Exchange and the Chicago Board Options Exchange), the LME does not operate as a clearing house for trades. Rather, all transactions on or subject to the rules of the LME are executed on a principal-to-principal basis. Thus, in each of these consolidated cases, a petitioner who purchased an option or futures contract through a broker/dealer was, in effect, actually purchasing that contract from the broker/dealer. Conversely, the broker/dealers were the purchasers of contracts whenever petitioners sold contracts in executing a London options transaction.Because the LME operates as a principal's market, broker/dealers are legally obligated to fulfill their part of any contract entered into with either another broker/dealer or a customer. A broker/dealer normally thus will lay off 9178 his trades; i.e., enter into an offsetting contract with another party. A broker/dealer who fails to lay off a trade is 1097 said to be running a position (taking a risk) in the market. The LME does not require broker/dealers to lay off trades.Trading on the LME occurs in three different ways: Formalized ring trading takes place twice a day during morning and afternoon sessions. Each metal is traded twice during each session in 5 minute "rings." After the close of the final ring of the morning session, the LME quotations committee announces the official buyers' and sellers' prices for the metals traded. The official prices are merely the last bid and offer prices prevailing at the close of the ring. The so-called "settlement price" is the official price for cash sellers of a particular metal.The afternoon session is similarly conducted with each metal again being traded in two separate rings. The London Financial Times reports the closing price of silver for the afternoon session as the "LME close." The closing prices of all other LME traded metals are reported as the "PM Unofficial."Kerb trading entails formalized trading by ring members (representative subscribers) for a period of 15 minutes following the close of both the morning and afternoon ring sessions. All metals are simultaneously traded on the kerb.Inter-dealer market trading consists of all trading which is not done 179 either on the ring or on the kerb. Approximately 80 percent of all LME trading occurs in the inter-dealer market. All inter-dealer trades are subject to LME rules.Because the LME operates as a principal's market, no accurate financial data summarizing the transactions entered into by the various broker/dealers exists. Trading volume can thus only be estimated. Although such estimates are reported in the London Financial Times, they do not reflect the substantial amount of trading activity which takes place on the inter-dealer market.Another significant difference between the LME and U.S. commodity exchanges is the LME's lack of limits on price changes for metals which are traded. Prices are free to fluctuate on the LME as market conditions dictate.B. Types of Contracts Traded1. Option ContractsThe three most common forms of options traded on the LME are call, put, and double options. A call option gives 1098 the holder (the buyer) the right to buy from the grantor (the seller or writer) a specified quantity of a commodity at an agreed upon price at any time before the option's expiration date. The holder of a put option has the right to sell a specified quantity of a commodity at 180 an agreed upon price to the grantor at any time before the option's expiration date. A third type of option is known as a double option. The holder of a double option has the right to either sell or buy the underlying commodity at the agreed upon price by the option's expiration date. A double option is in effect the combination of both a put and a call option.An option contract is unique in that the holder has the right but not the obligation to purchase or sell the stated commodity at the agreed price. Thus, while the grantor of an option might appear to be subject to unlimited risk, the holder is never at risk for more than the cost of the option.The price paid by the holder to the grantor to purchase an option is known as the premium. Each option contract contains a strike (basis) price, the agreed upon price at which the holder may exercise his right to either buy or sell the underlying commodity (depending on whether a call or put option has been granted). An option holder must declare his intention to exercise the option before the option's declaration date. An option holder's failure to declare by the declaration date represents an abandonment of the option. Finally, 181 the delivery date (or prompt date) is the date on which the underlying commodity has to be delivered if the option is exercised.The minimum contract size or unit for each metal traded on the LME is referred to as a "lot." Copper, lead, and zinc are traded in 25-ton lots. Tin is traded in 5-ton lots while silver is traded in 10,000 troy-ounce lots. Option premiums are expressed in pounds sterling (#) per ton except for silver, for which premiums are expressed in pences per ounce.The declaration date of an LME option is normally 1 trading day prior to the delivery date for each month of the option's existence. Thus, a 3-month call option granted on January 10 for delivery on April 10 (the delivery date), would have a declaration date of April 7. The holder would have to declare his intention to exercise the call option by 1099 April 7 or the option would be treated as having been abandoned.The so-called traditional LME option is known as a market option. The strike price of a market option is normally set at the current future trading price of the underlying metal. In addition, traditional LME options are usually traded for a specific delivery date -- 1, 3, 6, 9, or 12 months forward 182 from the day the option contract is made.A second type of option traded on the LME is known as a traded or dealer option. Unlike traditional LME options, delivery dates of traded options are not tied to specific future dates. Moreover, the strike price of a traded option may be set at, above, or below the current future trading price of the underlying metal. As explained infra, the relationship between the strike price of a traded option and the market price of the underlying commodity will be reflected in the premium received for the option.The primary difference between a traded option and a market option is flexibility, the former being far more flexible than the latter. Frequently, the holder or grantor of an option will want to "close out" his position prior to the option's declaration date. To close out a position, an option holder or grantor simply enters into an offsetting contract, thereby extinguishing all of his rights or obligations.The inflexibility of closing out a market option arises from the difficulty of entering into an offsetting contract with identical terms. Because the strike price of a market option is customarily set at the current market price of the 183 underlying commodity existing at the time the option is granted, the holder or grantor will normally be unable to enter into an offsetting position if the price of the underlying commodity has changed at the time of the desired closeout. In addition, the relatively rigid setting of declaration dates for market options makes it difficult to later contract for an offsetting position.A traded option, however, offers much greater flexibility. The holder or grantor of a traded option can easily enter into an offsetting position having the same strike price and delivery date. Of course, the premium paid or received by the holder or grantor for entering into an offsetting contract will reflect changes in underlying market conditions. Because 1100 the options involved in executing a London options transaction were intended to be closed out prior to their declaration date, petitioners in these consolidated cases predominately entered into traded option contracts.As previously noted, the strike price of a traded option can be set above, below, or equal to the current forward price of the underlying commodity. If the strike price of an option, as compared to the current market price of the underlying 184 commodity, is in favor of the holder of the option (e.g., a silver call option with a strike price of 300 pence per ounce when the current market price for silver is 350 pence per ounce), the option is said to be "in the money." Conversely, an option is "out of the money" if the strike price of the option as compared to the current market price of the underlying commodity is in favor of the grantor (e.g., a silver put option with a strike price of 300 pence per ounce when the current price of silver is 350 pence per ounce).In general, the amount of premium paid for an option is determined through negotiation and bargaining between willing buyers and sellers. Nevertheless, the premium paid for an option normally reflects two factors -- an intrinsic value and a time value. An option's intrinsic value measures the relationship between the strike price and the current price of the underlying commodity (i.e., if and to what extent the option is in or out of the money). The time value of an option relates to the amount of time remaining until the option expires (the declaration date).Broker/dealers charge fees in the form of commissions for executing options transactions. The amount 185 of and manner in which commissions are charged can vary significantly. For example, ring members normally trade "net" with each other. When ring members trade net, profits are made not from commissions but rather from the difference between the bid and offer price of the contracts being traded.Between a broker/dealer and a customer (e.g., a petitioner in these cases), however, commissions are normally charged based on a percentage of the strike price of the option. In addition, broker/dealers generally levy commissions only on the opening contract; thus no commissions are charged on the later closing transaction. Furthermore, at various times 1101 broker/dealers sometimes trade net with individual customers.As 186 previously noted, trading on the LME occurs either on the ring, kerb, or inter-dealer market. Options, however, are generally not traded in the fast-paced environment of either the ring or the kerb because in addition to premiums there must also be negotiated the delivery dates and strike prices. Thus, the vast majority of options are traded on the inter-dealer market where buyers and sellers are afforded the time to reach agreement on the various components of an option contract.2. Futures ContractsA futures (or forward) contract requires the buyer to receive and seller to deliver a specified quantity of a given commodity at some future date. As with options, the delivery (or prompt) date is the agreed upon future date on which delivery of the commodity is due. Selling short (or taking a short position) refers to the sale of a futures contract while buying long (or taking a long position) denotes the purchase of a futures contract.Although a future's contract is, of course, legally binding between the principals involved, actual delivery of the underlying commodity rarely occurs. Rather, like traded options, a futures contract is normally closed out before actual delivery occurs 187 by entering into an offsetting contract with identical terms. On the LME, futures contracts for metals are traded for delivery from the current date through 3 months forward, except for silver, which is traded from the current date through up to 7 months forward.The future price of a commodity will, of course, either exceed, equal, or be less than the cash (or "nearby") price of that commodity. In a normal market, the future price of a commodity is greater than its cash price. The difference between the two prices is known as the "contango." The contango represents the cost of holding a commodity and thus is primarily related to prevailing interest rates. Warehouse and insurance costs are also reflected in a commodity's contango.1102 Occasionally, a shortage in a commodity occurs, resulting in the cash price being greater than the future price. In such a situation, a "backwardation" is said to exist.C. StraddlesA straddle consists of the simultaneous holding of a long position (a purchased contract) of a commodity for delivery in a future month and a short position (a sold contract) for the identical amount of the same commodity for delivery in a different future month. The long and 188 short positions are commonly referred to as the legs of the straddle. Both option and futures contracts (or combinations of both) may be used in establishing (putting on) a straddle.The legs of a straddle may be entered into simultaneously, i.e., each leg may be purchased and sold at the same time on the same day. In addition, a straddle may be established by separately executing the legs at different times. Similarly, the legs of a straddle may be closed out (i.e., offsetting contracts purchased and sold) either simultaneously or separately.A switch transaction occurs when the holder of a straddle liquidates (i.e., closes out) one leg of the straddle and replaces the liquidated leg by either purchasing or selling (depending on whether a long or short position was liquidated) an identical quantity of the same commodity for delivery in a different month.The potential for profit from a straddle arises from changes in the price differential (hereinafter sometimes referred to as the spread) between the legs of the straddle. A straddle in which the long position is held in a month farther out than the short position will increase in value if the price differential between the legs widens 189 and will decrease in value if the price differential narrows. Conversely, a straddle in which the short position is held in a month farther out than the long position will increase in value if the price differential narrows and will decrease in value if the price differential widens.As previously noted, the legs of a straddle are not always either put on or closed out simultaneously. When a short or long position is not held in a straddle configuration (i.e., the position is unhedged), the potential for profit arises solely 1103 from the risk that the value of the position held will increase or decrease.Initial margin (or initial deposit) is the amount of money which a broker/dealer may require from a customer in order to initiate trading. Margin payments provide insurance to broker/dealers that losses incurred in a customer's account will be met. Except for certain long-term silver futures contracts, there was no LME requirement during the years at issue as to payment of initial margin. A broker/dealer thus might begin trading for a customer without having received any initial margin if the broker/dealer believed that any future funds due from the customer would be forthcoming.Although 190 the amount of initial margin is subject to negotiation, it is normally based upon a percentage of the value of the outstanding futures contracts. Initial margins for a straddle are generally lower than for unhedged trading (i.e., open positions) because of the substantial reduction in a customer's exposure in a straddle investment.Maintenance margin (or margin where the term "initial deposit" is used) is the amount of funds, if any, that a broker/dealer might require a customer to pay into his account after trading commences. The payment of maintenance margin, like initial margin, is negotiable.Broker/dealers periodically value the open positions in a customer's account in order to determine whether the payment of maintenance margin is required. This valuation procedure, undertaken daily by most broker/dealers, is known as marking to market. The most recent market prices and spreads are generally used in marking to market a customer's account.After a customer's account has been marked to market, and all relevant debits (e.g., losses on closed positions) and credits (e.g., previous margin deposits) have been taken into account, the net equity in a customer's account can be determined. 191 A customer's net equity thus approximates the amount of funds a customer would receive (or pay, if the net equity were negative) if all open positions in the account were immediately closed out. If a broker/dealer believes insufficient net equity exists in a customer's account the customer may be required to pay a maintenance margin.1104 The LME does not require or regulate the charging of commissions on futures contracts. Typically, though, commissions are charged based on a percentage of the contract price. 10 Commission percentages generally range from one-sixteenth of 1 percent to one-fourth of 1 percent per leg of each transaction. Commissions might be charged on the opening or closing transactions, or partly on both. As previously noted, ring members frequently trade net with each other without charging commissions.Frequently customers provide broker/dealers with the discretionary authority to trade on their behalf. Broker/dealers generally attempt to lay off their trades (see discussion, supra) when they conduct discretionary trading 192 since the laying off of trades is essential in order to avoid a possible conflict of interest with a customer. When discretionary trades are laid off, broker/dealers cannot, by definition, profit on the market movement of the contracts entered into with customers. Thus, the commissions charged for executing the trades are the broker/dealers' sole source of profit.III. The London Options TransactionsA. In GeneralIn the above section we have set forth a broad description of the LME and the types of contracts traded thereon. We turn now to a description of the actual transactions at issue in these consolidated cases. As previously noted, a typical London options transaction took place over a 2-year period in the form of either an option straddle or an option hedge. An option-straddle transaction, 11 the more prevalent trading strategy, was initiated by the following combination of trades in the first year of the transaction:(1) An option straddle was put on, consisting of the simultaneous purchase and sale (grant) of either a call or put option (or both), for identical quantities of the same commodity with different delivery dates; and1105 (2) A futures straddle was also put on, consisting 193 of the simultaneous purchase and sale of futures contracts for identical quantities of the same commodity with different delivery dates.Shortly after the option straddle was put on, the legs would be closed out through the purchase and sale of identical offsetting positions. The premium (purchase price) paid to buy an offsetting option which closed out the sold (granted) option would exceed the premium that had been received on the granted option, resulting in an overall net loss on the sold option leg of the straddle. Conversely, the premium received on the sale of an offsetting option which closed out the purchased option would exceed the premium that had been paid for the purchased option, resulting in an overall net gain on the purchased option leg of the straddle. The net loss and gain, which were approximately equal, would be reported as an ordinary loss and short-term capital gain for the first year of the 194 transaction. Since the expected tax result in the first year was generally an ordinary loss, such loss could be used to offset ordinary income from unrelated sources.Next, in a switch transaction, the so-called loss leg of the futures straddle would be closed out through the purchase (or sale) of an identical offsetting position and replaced by a new position with a different delivery date. (Because an inverse relationship normally exists between the legs of a futures straddle, one leg will have an unrealized loss while the other will have an unrealized gain.) The net loss on the closed leg of the futures straddle would be reported as a short-term capital loss in the first year of the transaction and would approximately equal the short-term capital gain incurred on closing out the purchased option position.The final step of a typical option-straddle transaction occurred in the subsequent year, although not earlier than 6 months after the switch. Both legs of the futures straddle would be closed out by offsetting trades, resulting in a gain approximately equal to the loss incurred on the switch transaction in the previous year. The gain incurred would be reported as either a short-term 195 or long-term capital gain in the second year of the transaction.1106 The second trading strategy employed by broker/dealers was the option-hedge transaction. In an option-hedge transaction, the sale of a call and/or put option was hedged by the purchase of a futures contract (to hedge the call) and/or the sale of a futures contract (to hedge the put). Shortly thereafter, the option positions would be closed out at a net loss through the purchase of an identical offsetting call and/or put option. Simultaneously with the purchase of the closing option positions, futures contracts would be executed to hedge the previously purchased and/or sold futures, thus forming one or more futures straddles. Finally, in the following year, the futures straddles would be closed out at a gain approximately equal in amount to the loss incurred on the sold options.Because both the option-straddle transaction and the option-hedge transaction strategies resulted in a capital gain in the second year of the transaction, many petitioners attempted to defer the gain (and possibly convert it into long-term gain) to the subsequent year by engaging in a rollover transaction. A rollover transaction simply entailed 196 putting on another futures straddle in the second year of the transaction, subsequently closing out the loss leg in a switch, and then closing out the straddle at a gain in the following year.B. Representative Transactions1. BackgroundEach of the petitioners in these consolidated cases entered into one or more London options transactions. All of the trades comprising a London options transaction were executed for petitioners by broker/dealers on a discretionary account basis. Consequently, all decisions regarding aspects of a transaction (e.g., types of commodities and contracts traded) rested with the broker/dealers. In accordance with general LME rules, all London options transactions were executed on a principal-to-principal basis between petitioners and their respective broker/dealers.The marketing and promotion of the London options transactions in the United States were conducted by persons known as finders. A finder would explain the London options transaction to a potential customer and 1107 then transmit money and documents to a broker/dealer if the person wished to engage in a transaction.Broker/dealers did not require petitioners to submit financial statements either prior 197 or subsequent to opening a trading account. In addition, the amount of funds remitted to the broker/dealers by petitioners was agreed upon at the time of or prior to entering into a London options transaction. Finally, petitioners in every case received nominal or no funds back from the broker/dealers with whom they dealt.2. Actual Transactionsa. IntroductionAll but a handful of the London options transactions at issue in these consolidated cases were conducted through the following six so-called major broker/dealers: Competex, Rudolf Wolff, Gardner Lohmann, Amalgamated, Commodity Analysis, and Rothmetal. As previously discussed, each of the broker/dealers employed either an option-straddle or option-hedge trading strategy. Rudolf Wolff, however, traded both option straddles and option hedges for its customers. In addition, Gardner Lohmann and AmalgamatedLondon options transactions occurred in tandem with Gardner Lohmann's executing the option trades and Amalgamated's executing the futures trades for petitioners. Thus, hereinafter the Gardner Lohmann and AmalgamatedLondon options transactions are sometimes collectively referred to as the Gardner/Amalgamated transactions.Below, 198 each of the broker/dealers, their particular trading strategies, and representative transactions of petitioners who traded with them are discussed.b. Broker/Dealers Employing the Option-Straddle Trading Strategyi. Competex(A) In GeneralCompetex, a Swiss corporation (and thus not a member of the LME), was incorporated on April 14, 1976. All of Competex's trading records were maintained at its headquarters 1108 in Geneva, Switzerland. At the time of trial, Competex was in voluntary liquidation.Sometime in 1976, James Gourlay (Gourlay) became employed as a manager of Competex under a verbal contract. Gourlay had extensive experience in commodity trading, including options. Prior to 1971, Gourlay was a partner in and representative subscriber for Rudolf Wolff. In 1971, Gourlay became an individual subscribing member of the LME after leaving Rudolf Wolff to form Ingleram Investments, Ltd. (Ingleram). Gourlay continued to operate Ingleram while he was employed as a manager at Competex.As manager for Competex, Gourlay employed an option-straddle trading strategy for the approximately 265 petitioners who had discretionary accounts with Competex. Between January and September 1976, option 199 straddles were executed for a substantial majority of petitioners who traded with Competex. Initially, simultaneous put and call options were bought and sold by petitioners for identical quantities of the same commodity for different delivery dates. Subsequently, all of the option positions were closed out through the purchase of offsetting positions. All of the granted options were closed out for a net loss, while the purchased options were closed out for a net gain.Although Gourlay intended to earn a net economic profit for petitioners dealing with Competex through changes in the spread, he was aware that certain favorable tax consequences resulted under existing American tax law for losses incurred on granted options. Thus, after learning that legislation ending such favorable tax treatment had been enacted (see discussion infra), Gourlay ceased using the option-straddle trading strategy.Gourlay's trading strategy also utilized futures straddles. For a substantial majority of petitioners who traded with Competex, a futures straddle with a 1-month spread was put on in early November 1976. The sold leg of the futures straddle had a delivery (prompt) date during the last week 200 of August 1977, while the bought leg had a delivery date during the last week of September 1977.Competex subsequently executed a total or partial switch in early December 1976 for each straddle. In a total switch, 1109 the entire bought leg was closed and replaced by a new long position for the same quantity with a delivery date in the last week of October 1977. In a partial switch, only a portion of the bought leg was closed and replaced. Thus, all straddles after a total switch had a 2-month spread between legs, while the straddles undergoing a partial switch had combined 1- and 2-month spreads.All of the 1-month spreads were closed out during the last week of April 1977. Then, on August 9, 1977, Competex closed out the long positions which had been put on during either the total or partial switch. The short positions were thus left open. On August 11, 1977, the short positions were closed, thus concluding the London options transactions executed by Competex.Each of those petitioners' London options transactions which were handled by Competex were executed by Competex at prevailing market prices. Neither Gourlay nor anyone acting under his direction or control artificially assigned 201 prices.Gourlay never personally placed any of petitioners' trades. John Pitcher, who was employed by Gourlay, was responsible for the actual execution of trades and related paperwork. As noted above, Competex did not always simultaneously execute the legs of straddle transactions.For the majority of petitioners who traded with Competex, Gourlay agreed to limit their losses to the amount of initial margin deposited. Competex charged commissions for executing transactions in a variety of ways, including charging the entire commission on the opening or closing transaction, charging half the commission on both the opening and closing transaction, or trading net. 12 All trades executed by Competex for petitioners were laid off by placing orders through ring-dealing members of the LME, including Rudolf Wolff, Gourlay's former employer.Verbal authorization to trade discretionary accounts on behalf of petitioners was frequently given to Gourlay by finders. In return, the finders were compensated with a percentage of the commissions earned by Competex. The 1110 following 202 promotional material describing the option-straddle trading strategy employed by Competex was sent by finders to prospective customers:You may have some interest in a tax shelter which we are recommending to some of our clients which has extremely high potential benefits. It has the following attributes:1. It is highly leveraged. For a $ 3,000 investment, a $ 25,000 1976 ordinary deduction can be acquired. That is the smallest amount which is available. However, greater write-offs are available with corresponding larger investments on an 8.3 to 1 ratio.2. The economic risk is limited. It is a hedging transaction in silver where parity between monthly contracts is an historical fact and which when accomplished by a knowledgeable member of such exchange, the chance of overall loss is slight. However, the premiums and commissions for handling the transaction approximately equal the original investment.3. Eighty-eight percent (88%) of the ordinary deduction taken in 1976 (the deduction less the original investment) will be recovered for tax purposes in 1977 but at capital gains rates. It is also possible to shelter the recovery by an additional transaction to take place in 1977. 203 To someone who has capital loss carry forwards, the benefits are even greater.Assuming a taxpayer in the 50% bracket, the tax consequences in 1976 are as follows; also assuming a $ 12,000 original investment and no shelter of the recovery in 1977:1976Amount invested=$ 12,000Ordinary deduction=100,000Tax savings (50%)$ 50,0001977Capital gain88,000Tax (25%)22,000Tax savings from overall transaction28,000Less premiums and commissions 12,000Economic gain16,000 The same taxpayer could shelter the capital gain recovery in 1977 as follows:1976Amount invested now for 197612,000Amount invested now for 19779,600Ordinary deduction100,000Tax savings50,000 1977Ordinary deduction from $ 9,600 investment80,000Tax savings$ 40,000 Capital gain (1976 recovery)$ 88,000Tax(22,000)Capital gain (1977 recovery)70,400(17,600)Tax savings from overall transaction50,400 Less premiums and commissions 21,600 Economic gain28,800 1111 The economic gain for a 70% taxpayer with the same investment of $ 21,600 would be $ 48,960.This type of shelter has been available for some time but over the last several months we have hesitated to recommend it to clients because of pending legislation before Congress to eliminate it 204 and the possibility that said legislation might be applied retroactively. The House Ways & Means Committee has now acted by passing HR 12224 to remove the shelter but said legislation will be effective July 1, 1976. Thus, there are about ten days within which to act.The transactions involve the purchase and sale of options. It is possible to deal in securities or commodities on varying exchanges but the shelter which we are suggesting you consider is handled on the London Metals Exchange through one of its members, Rudolf Wolff & Company of London and its affiliate company, Competex S.A. of Geneva, Switzerland. 13We are acquainted with reputable people in the States who are involved in perfecting the transactions contemplated and who have spent a considerable amount of time in London establishing the contacts for handling the transactions. They will handle the [transmitionsic] of the investment to Competex, the communication of the desired timing of tax effect to London, and will supply the investor with a schedule setting forth the tax consequences for tax reporting purposes.The reasons for using the London Metal Exchange are three-fold:1. A highly leveraged investment is available; 205 in this case 8.3 to 1.2. The premiums and commissions are negotiable; in this case 12%; an amount equal to the original investment.3. Silver options and contracts are written on a daily basis, thus avoiding wash sale treatment.Of course, all tax shelters are subject to attack by the IRS but there are private IRS rulings in existence approving the basic ordinary loss treatment. The transaction might be attacked by the IRS as a wash sale but that is unlikely because of the daily contracts on the London Exchange. It appears likely that the IRS will have less incentive to attack this shelter as a sham transaction since, if the proposed legislation is passed, as of July 1, it will no longer be available.1112 (B) Representative Competex PetitionerThe parties agreed that the options and futures trades of Dr. Judson Davison (Davison), docket No. 1132-80, were representative of the London options transactions entered into by petitioners who traded with Competex.Competex initiated Davison's London options transaction with a call option straddle on June 206 28, 1976. 14 On that date, Davison purchased a call option for 34 lots of silver (340,000 troy ounces) at a strike price of 299 pence per ounce for delivery on November 5, 1976. 15 Competex charged Davison a premium of 3.4 pence per ounce and a commission (based on the strike price) of .1875 percent for the option. Competex thus debited Davison's account # 13,466.13. 16Davison put on the other leg of the straddle on the same date by selling (granting) a call option for 34 lots of silver at a strike price of 305.1 pence per ounce for delivery on December 9, 1976. 17 The option sold for a premium of 3.8 pence per ounce, less a commission of .1875 percent. Competex thus credited # 10,974.99 to Davison's account. 18The 207 next day, June 29, 1976, Davison entered into a put option straddle. He purchased a put option for 14 lots of silver at a strike price of 255.1 pence per ounce for delivery on November 11, 1976. 19 The option was purchased at a premium of 2.8 pence per ounce plus a commission of .1875 percent. Competex debited # 4,589.64 to his account for the cost of the option. 20 Davison then sold a put option for 14 1113 lots of silver at a strike price of 255.2 pence per ounce for delivery on December 15, 1976. 21 The option sold for a premium of 3.1 pence per ounce, less a commission of .1875 percent. Competex credited the net price of # 3,670.10 for the sold option to Davison's account. 22On 208 July 9, 1976, Davison's June 28 call option straddle was closed out by the purchase and sale of offsetting positions. The bought leg was offset by the sale of an identical option (34 lots of silver at a strike price of 299 pence per ounce for delivery on November 5, 1976) for a premium of 18.5 pence per ounce. No commission was charged and Competex credited # 62,900 to Davison's account. 23 The sold leg was offset by the purchase of an identical option (34 lots of silver at a strike price of 305.1 pence per ounce for delivery on December 9, 1976) at a premium of 18.9 pence per ounce. Competex charged no commission and debited # 64,260 to Davison's account. 24On July 19, 1976, Davison's June 29 put option straddle was similarly closed out. The bought leg was offset by the sale of an identical option (14 lots of silver at a strike price of 255.1 pence per ounce for delivery on November 11, 1976) at a premium of 6.3 pence per ounce. Davison's account was credited with the net price 209 of the sold option of # 8,820. 25 The sold leg was offset by the purchase of an identical option (14 lots of silver at a strike price of 255.2 pence per ounce for delivery on December 15, 1976) at a premium of 6.6 pence per ounce. Competex debited Davison's account # 9,240 for the transaction. 26 Competex charged no commissions on the closing transactions.1114 As a result of the option-straddle transactions, Davison incurred a combined loss on the granted options in the amount of # 58,854.91 and a combined gain on the purchased options in the amount of # 53,664.23, after commissions. 27 Davison reported an ordinary loss of $ 104,976 on the granted options for 1976. The gain on the purchased options was reported as short-term capital gain.210 After closing out the option straddles, Competex put on a futures straddle for Davison's account. On November 2, 1976, Davison sold 60 lots of silver for delivery on August 22, 1977, at a price of 307.6 pence per ounce. 28 Competex charged Davison a commission of .1875 percent on 14 of the lots sold, resulting in a net credit to Davison's account of # 1,844,792.60. 29 On the same day, the other leg of the straddle was put on with Davison purchasing 60 lots of silver (again in two separate purchases of 14 and 46 lots) at a price of 311.6 pence per ounce for delivery on September 23, 1977. Competex again charged a .1875 percent commission on only 14 of the lots purchased, resulting in a net debit to Davison's account of # 1,870,417.95. 30211 On December 7, 1976, Davison closed out a portion of the loss leg of the straddle in a partial switch transaction. On that date, he offset a portion of the long position by selling 1115 33 lots of silver for delivery on September 23, 1977, at a price of 293.7 pence per ounce. No commission was charged, and Competex credited # 969,210 to his account. 31 Davison completed the switch by purchasing 33 lots of silver at a price of 296.7 pence per ounce for delivery on October 24, 1977. Competex charged no commission and debited # 979,110 to Davison's account. 32As a result of the partial switch, Davison incurred a loss, including commissions, of # 59,887.95 on futures trades in 1976. 33 Davison reported the loss as a short-term capital loss, thus offsetting the entire short-term capital gain of # 53,664.23 on the purchased options.Davison's 212 1976 London options transaction was completed in 1977 with the following trades. On April 29, 1977, the balance of the November 2, 1977, purchased silver futures (27 lots) that had not been offset in the December 7, 1976, partial switch transaction were closed out. On that date, Davison sold 27 lots of silver for delivery on September 23, 1977, at a price of 285.2 pence per ounce price. Competex credited # 770,040 to Davison's account (no commission was charged). 34 The sold lots offset the lots purchased by Davison on November 2, 1976, resulting in an overall loss of # 71,280, 35 which Davison reported as a short-term capital loss in 1977. Davison then purchased 27 lots of silver for delivery on August 22, 1977, at a price of 281.6 pence per ounce. Competex charged no commission on the purchase and thus 1116 debited # 760,320 to Davison's account. 36 The 27 lots purchased partially offset 213 the silver futures sold on November 2, 1976, resulting in a net gain of # 69,392.55, after commissions. 37 Davison reported the gain as a short-term capital gain. On August 9, 1977, the bought leg of the straddle put on by the December 7, 1976, partial switch transaction was closed out. In two separate transactions, Davison sold 20 lots of silver at a price of 267.3 pence per ounce and 13 lots of silver at a price of 267.4 pence per ounce, both for delivery on October 24, 1977. Competex credited # 882,220 to Davison's account (no commissions were charged). 38214 The sold silver futures offset those purchased by Davison in putting on the partial switch transaction and resulted in an overall net loss of # 96,890. 39 Davison reported the loss as a long-term capital loss. Because the entire bought leg of the straddle was liquidated, the short position was left open. Two days later, on August 11, 1977, the sold futures were liquidated by Davison purchasing 33 lots of silver futures at a price of 260 pence per ounce for delivery on August 22, 1977. Competex charged no commission on the transaction, and thus debited # 858,000 to Davison's account for the cost of the purchase. 40 Davison reported the net gain of # 157,080 1117 from the offsetting purchase as a short-term capital gain. 41Davison's 1976 London options transaction thus resulted in the following gains and losses:GainNet gainYearDescription(loss)Commission(loss)1976Ordinary loss --granted options (# 56,240)# 2,614.91(# 58,854.91)1976Short-term capital gain --purchased options 56,240 2,575.7753,664.23 1976Short-term capital loss --futures trades (59,070)817.95(59,887.951977Short-term capital gain --futures trades 59,110 807.4542 58,302.55 Total 40 6,816.08(6,776.08)215 On June 10, 1976, 18 days before Competex put on Davison's initial call option straddle, Davison paid $ 12,000 (# 6,779.66) to Competex as initial margin on his account. No further maintenance margin was subsequently paid. As shown above, Davison incurred a net loss after commissions of # 6,776.08 from entering into the London Options Transaction. Thus, the net equity in his account at the completion of the transaction was # 3.58 (# 6,779.66 initial margin less # 6,776.08 trading loss). Competex did not return these funds to Davison.ii. Rudolf WolffAs previously noted, Rudolf Wolff traded both option straddles and option hedges for petitioners in these consolidated cases. Approximately 80 of the 96 petitioners who executed London options transactions with Rudolf Wolff engaged in option-straddle transactions, while the remaining petitioners employed the option-hedge strategy. All of the London options transactions put on by Rudolf Wolff, whether option straddles 216 or option hedges, were initiated in 1975. The option-straddle transactions are discussed above, while the option-hedge transactions are presented infra.1118 Virtually all of the petitioners who engaged in an option-straddle transaction with Rudolf Wolff were introduced by and clients of Gourlay. 43 As noted above, Gourlay formed Ingleram in 1971 after the termination of his partnership interest in Rudolf Wolff. Before becoming employed as a manager at Competex, where he executed the option-straddle transactions described supra, Gourlay acted as a half-commission agent for Rudolf Wolff. In his capacity as a half-commission agent, Gourlay introduced clients to Rudolf Wolff who wished to engage in a London options transaction. Rudolf Wolff would execute the necessary trades (on a principal-to-principal basis), issue the related paperwork, and charge petitioners commissions for the option-straddle transactions. A portion of the commissions received by Rudolf Wolff subsequently would be paid to Gourlay.Although Rudolf Wolff executed the trades of petitioners who 217 engaged in option-straddle transactions, Gourlay ordered the trades and was responsible for the overall trading strategy. Gourlay employed an option-straddle trading strategy identical to that which he would later use at Competex. All relevant aspects of the two trading strategies (e.g., pricing and commissions) were similar. Thus, the representative option-straddle transaction of Competex petitioner Davison, described above, accurately reflects not only the Competex trading strategy but in addition the Rudolf Wolff option-straddle trading strategy. Consequently, an option-straddle transaction of a petitioner who traded through Rudolf Wolff is not presented. 44 iii. Gardner/Amalgamated(A) In General(1) IntroductionApproximately 175 petitioners in these consolidated cases entered into London options transactions with Gardner/Amalgamated. With few exceptions, all option trades were executed by Gardner Lohmann while Amalgamated1119 performed all futures transactions. Initially, a petitioner would pay Gardner Lohmann to execute an option-straddle transaction. 218 After putting on (and closing out) one or more option straddles, Gardner Lohmann would transmit the balance of any funds remaining in the account to Amalgamated for execution of a futures straddle. A more detailed discussion of the London options transactions put on by Gardner/Amalgamated is presented below.(2) Gardner LohmannJohn Schrader (Schrader) incorporated Gardner Lohmann in October 1970. Schrader subsequently became the managing director of Gardner Lohmann and was primarily responsible for directing Gardner Lohmann's trading. During the years at issue, Gardner Lohmann was not a ring-dealing member of the LME.Richard P. Pearson (Pearson), a chartered accountant, began performing part-time accounting functions for Gardner Lohmann in 1973. In 1974, Pearson was appointed financial director of Gardner Lohmann. Pearson was responsible for financial and administrative matters at Gardner Lohmann until August 1976, when he left the company.Schrader supervised the discretionary accounts of petitioners who entered into London options transactions with Gardner Lohmann. In that capacity, he employed the following option-straddle trading strategy which was similar to that used by Rudolf 219 Wolff. Sometime in 1976, Gardner Lohmann would execute either a put or call option straddle (or both) for a petitioner. Shortly thereafter, the option straddle would be closed out through the execution of identical offsetting positions. As a result, a petitioner would incur an ordinary loss on the granted option and a short-term capital gain (of approximately the same amount) on the purchased option.All option straddles put on by Gardner Lohmann were executed at prevailing market prices. Generally, Gardner Lohmann only charged commissions on the opening leg of an option straddle. Although commission rates were negotiable, Gardner Lohmann typically charged a rate of one-sixteenth per leg on the opening trade. Gardner Lohmann 1120 also agreed to limit petitioners' losses to the amount of their initial margin.Gardner Lohmann's general practice was to lay off its trades; however, not all trades executed by them were laid off. Schrader was responsible for deciding whether a trade would be laid off.Bell-Lewis was Gardner Lohmann's principal finder in the United States for potential customers who wished to engage in a London options transaction. The following promotional material 45 was 220 received by a petitioner who entered into a London options transaction with Gardner/Amalgamated:INCOME CONVERSION AND DEFERRAL PROGRAMThis program is APPLICABLE TO BOTH INDIVIDUALS AND CORPORATIONS. It is designed for those with high incomes and/or capital losses. The vehicle used for the program is the buying and selling of silver commodities - (puts, Calls and/or Contracts).THE PROGRAM IS COMPRISED OF TWO STEPSSTEP I CONVERTS ORDINARY INCOME INTO CAPITAL GAIN.STEP II DEFERS CAPITAL GAIN TAXABLE IN THE PRESENT YEAR TO POTENTIAL LONG TERM CAPITAL GAIN TAXED IN FUTURE YEARS.STEP IINCOME CONVERSION PROGRAMThis program is designed particularly for those with high incomes and capital losses. However, it can be effective even if a client does not have capital losses.The vehicle employed is an Option Hedge 46 with an optional tie-in to a Commodity Tax Straddle.The Internal Revenue Service has recently rendered a series of rulings which if professionally applied can result in truly remarkable tax savings opportunities.In part, one ruling states:"If a writer of a call engages in a closing transaction by payment of an amount equivalent to the value of the call at the time of such payment, 221 the difference between the amount so paid and the premium received by him is ordinary income or loss."1121 Thus, in the case of the writer (or seller) of an option that is closed out prior to the expiration date ordinary income or loss results. In the hands of the holder (or buyer) an option is a capital asset and gives rise to capital gain or loss.ILLUSTRATION:WRITER: Writes Call$ 10,000 premium receivedCloses Call10,500 premium paidOrdinary Loss (500)HOLDER: Buys Call$ 10,000 premium paidSells Call10,500 premium receivedCapital Gain 500 QUESTION: WHAT IS THE RATIONALE FOR CONSIDERING AN OPTION WRITER'S CLOSING TRANSACTION AN ORDINARY TRANSACTION AND NOT A CAPITAL TRANSACTION?According to the IRS ruling the closing writer is not transferring a "capital asset" within section [1221] of the Code and the closing transaction does not result in capital gain or loss because it does not involve a "sale or exchange". What is involved is the receiving of a premium or the incurring of an expense to release the writer from a contractual obligation.QUESTION: HOW DO I UTILIZE THE NEW RULINGS TO SERVE MY TAX PLANNING REQUIREMENTS?You establish hedges in options whereby you purchase and write 222 options for equal amounts of silver. Options would be set up with different expiration dates and possibly different striking prices.For hedges employing CALLS, a rise in the price of the underlying silver would create a capital gain on the long side and an approximate offsetting ordinary loss on the short side.For hedges employing PUTS, a drop in the price of the underlying silver would create a capital gain on the long side and an ordinary loss on the short side.THE OBJECTIVE OF THE PROGRAM, ASIDE FROM THE PROFIT MOTIVE, IS TO ACHIEVE AN ORDINARY LOSS APPROXIMATELY OFFSET BY A CAPITAL GAIN.QUESTION: WILL THE CONVERSION BE DONE IN ONE TRANSACTION?In most cases a series of diversified Option Hedge transactions selected to benefit from short-term price spreads and fluctuations would be used.QUESTION: WHAT HAPPENS SHOULD THE LOSS APPEAR ON THE LONG SIDE?1122 You would be generating ordinary income and capital loss. However, we anticipate the adverse tax effect will be absorbed in the total series of transactions and the net result should be ordinary loss and capital gains.QUESTION: HOW MUCH TIME IS REQUIRED TO ACHIEVE THE DESIRED CONVERSION?Actual time required depends upon the volatility 223 of the market. A $ 100,000 conversion could be generated in a week or in a month. As a rule of thumb it is anticipated that the transaction would take from 15 to 45 days.QUESTION: WHAT IS THE ESTIMATED COST AND RISK?The total pre-tax cost discounting any profit potential for accomplishing the desired conversion would be dependant on amount of write-off desired and at what time of year you initate the program. This would include commissions, fees, and documentation.Since at all times you are in a completely hedged position, long and short options for the same amount of silver, you are not subject to the ordinary risk of market fluctuations. You may, however, be subject to the risk of adverse spread variations. This would result when in the silver price movement the long and short option prices do not move uniformly up or down. This risk is far less than that incurred should you be either long or short an option and not be in a hedged position.QUESTION: WHY IS [SIC] SILVER FUTURES USED RATHER THAN OTHER COMMODITIES?Silver futures are used since historically the price fluctuation between various delivery months remains reasonably constant.QUESTION: WHY IS THE TRANSACTION PERFORMED 224 IN LONDON?There are two primary reasons:1. Exchange Guarantees - Commodity contracts traded in London are guaranteed by the Exchange on which the commodity is traded. Contracts traded in the United States are only guaranteed by the full faith and credit of the broker or dealer selling the contract.2. Centralized Market Place - In London commodity contracts are traded on a central commodity exchange (e.g., silver is traded on the London Metal Exchange). This afford [sic] price stability, as well as fluidity and liquidity in transacting trades. In the United States commodity contracts are traded directly between hundreds of brokerage houses which restricts liquidity and increases price differentials.QUESTION: IS THERE A LIMIT TO THE ORDINARY LOSS THAT AN INDIVIDUAL OR A CORPORATION CAN TAKE USING THIS PROGRAM?1123 No. While the amount of tax deduction based upon interest expense may be limited for an individual or corporation, there are no such limitations on ordinary losses realized from Option Hedges.QUESTION: WHAT IS THE PROFIT POTENTIAL IN OPTION HEDGES?The price relationship between two options in the same commodity with different expiration dates and/or different striking prices 225 can fluctuate based on changes in the price of the underlying commodity. This change in the relative values between the options can give rise to a profit or a loss.QUESTION: HOW CAN THE CAPITAL GAIN BE SHELTERED?The gain generated by the Option Hedge will almost certainly be short-term and can be handled as follows:1. For those with realized capital loss carry-forwards, long or short term, the gain can be offset dollar for dollar.2. For those with unrealized capital losses the gain offers an excellent reason for realizing the loss, thereby releasing capital while recouping a large portion of the loss through tax savings.3. For those without capital losses the Option Hedge would be used in conjunction with the Income Deferral Program, in which Tax Straddles are used to defer the short term capital gain and are structured to convert it into long term capital gain.STEP IIINCOME DEFERRAL PROGRAM USING COMMODITY TAX STRADDLEA Commodity Tax Straddle is the simultaneous purchase and sale of a like number of commodity future contracts for delivery in different months in the next taxable year. A rise in price would thus create a capital gain on the long side and an approximate offsetting capital 226 loss on the short side. The reverse would occur on a drop in price.The loss is realized in one tax period and the gain in the next. In this way the tax on the gain is deferred. For conversion from short-term to long-term gain the long position must be held for over six months and the gain must appear on the long side, which would occur only in a rising market.QUESTION: HOW DO I PROTECT MY GAIN AFTER REALIZING THE LOSS?By replacing the contracts covered to realize the loss with contracts for equal amounts of silver for delivery in the next taxable year but at the current market price.QUESTION: HOW IS A COMMODITY TAX STRADDLE USED IN CONJUNCTION WITH AN OPTION HEDGE?1124 This becomes vital for the Taxpayer who does not have realized or unrealized losses available to offset the short-term gain generated by the Option Hedge.For example, if in 1975 the Option Hedge creates an ordinary loss of $ 10,500 and a short-term gain of $ 10,000, the Commodity Tax Straddle would be used to create a $ 10,000 short-term loss in 1975 and a $ 10,000 short or long-term gain in 1976.QUESTION: WILL CURRENT TAX REFORM PROPOSALS AND PRESENT TAX LEGISLATION ADVERSELY AFFECT THIS PROGRAM?Main La Frentz & Co. 227 and Eli Warach have researched this question in detail and it is their opinion that neither current tax reform proposals nor present tax legislation would affect the Program.QUESTION: WHEN SHOULD I ENTER THE PROGRAM?As early in the tax year as is possible for you to approximate your taxable income.SUMMARYQUESTION: COULD YOU SUMMARIZE THE PROGRAM FOR ME?1. Dollars you would have paid in taxes can now be used for an additional year.2. Capital losses can now be used to reduce ordinary income.3. Income taxed at ordinary rates may now be taxed at the more favorable long term capital gain rates. i.e. For individuals a maximum of 35% For corporations a maximum of 30%THIS IS JUST A SUMMARY OF THIS PROGRAM LIKE ANY INVESTMENT, YOU SHOULD CONSULT YOUR TAX, LEGAL AND FINANCIAL ADVISORSWE ENCOURAGE YOU TO DO SO(3) Amalgamated.Amalgamated, located in London, England, was formed in 1975 as a wholly 228 owned subsidiary of Amalgamated Metal Corp.Amalgamated trades only in metals and during the years at issue was a full ring-dealing member of the LME.Between December 9, 1977, and May 30, 1980, Amalgamated owned a 40-percent investment interest in Gardner Lohmann. Amalgamated has never had a management interest in Gardner Lohmann.Terrance McGuinness (McGuinness), a commodities trader at Amalgamated, supervised the Amalgamated team which 1125 traded futures straddles for petitioners engaging in London options transactions. As previously noted, Gardner Lohmann would transfer petitioners' account balances to Amalgamated after executing option-straddle transactions. Amalgamated, under McGuinness' supervision, would then execute futures straddles for petitioners to defer (and convert, if possible) the short-term capital gain realized on the option-straddle transactions. Although Amalgamated attempted to conduct all straddle trading simultaneously, it was not always able to put on (or close out) the legs of a straddle at the same time.All legs of the futures straddles were executed at prevailing market prices. Amalgamated generally charged commissions of .1 pence per troy ounce on the 229 opening leg (i.e., the leg with the nearer delivery date) of a straddle transaction. During the years in question, it was Amalgamated's general practice to lay off all futures trades.Bell-Lewis acted as a finder for Amalgamated. The following letter soliciting a futures straddle was sent by Bell-Lewis to an Amalgamated petitioner:Dear [name]Bell-Lewis has been requested by the trading firms in London to contact their clients concerning the possible deferral of capital gain taxes that the client might be liable for in the present tax year.As you probably know, one of the auxiliary advantages resulting from the commodity option trading that your clients have been involved in has been the reduction of their ordinary income tax liability for 1976. However, the trading firms in London have found that many of their clients also have substantial capital gain liabilities that they should consider deferring into 1977 or after. Especially in light of the new changes on tax preferences in the 1976 Tax Reform Act. Such a deferral can be accomplished by a competent trading firm with minimal costs and risks by using certain trading techniques involving commodity future contracts.You should 230 contact your clients if you feel that they do have a capital gain problem at the present time.If either you or your clients wish to discuss the possibility of deferring this tax liability to some future date, please feel free to contact our office for further discussion. Of course, as in the past, these clients will be dealing directly with London firms with all trading decisions made by them. The normal range of trading commissions involved in such a program is very minimal. Bell-Lewis will be acting merely in an administrative capacity.1126 Any program of this nature must be started as quickly as possible since there are only about 60 days left in the year. Please direct your inquiries to Mr. Wallace Willard, Assistant Vice-President, Bell-Lewis.Enclosed you will find some illustrations which show the impact in the form of actual tax savings by using a capital gain deferral program.Sincerely,Bell-Lewis Associates, Inc.(S)Robert W. BellPresidentP.S. Of course, do not limit contacting your client to only those that participated in the options trading programs. All clients with any type of capital gain problem would qualify.(B) Representative Gardner/Amalgamated PetitionerThe parties 231 agreed that the London options transaction entered into by Eddie H. Anderson (Anderson), docket No. 20543-80, was representative of the London options transactions executed by Gardner/Amalgamated.Gardner Lohmann initiated Anderson's London options transaction on August 26, 1976, with a put option straddle. 47 On that date, Anderson sold a put option for 24 lots of silver (240,000 troy ounces) at a strike price of 243.3 pence per ounce for delivery on November 25, 1976. 48 Gardner Lohmann purchased the put option from Anderson at a premium of 16.2 pence per ounce, less a commission of .0625 percent. Gardner Lohmann thus credited # 38,515.05 to Anderson's account. 49The other leg of the straddle was executed (on the same date) by Anderson's purchasing from Gardner Lohmann a put option at a premium 232 of 6.4 pence per ounce for 24 lots of silver at a strike price of 238.4 pence per ounce for delivery on September 27, 1976. 50 Gardner Lohmann again 1127 charged a commission of .0625 percent, which resulted in a net debit of # 15,717.60 to Anderson's account. 51The put option straddle was subsequently closed out 5 days later. On August 31, 1976, the sold leg of the straddle was offset by the purchase of an identical option (24 lots of silver at a strike price of 243.3 pence per ounce for delivery on November 25, 1976) at a premium of 21.8 pence per ounce. The bought leg was similarly offset by the sale of an identical put option (24 lots of silver at a strike price of 238.4 pence per ounce for delivery on September 27, 1976) at a premium of 12.4 pence per ounce. No commissions were charged on either closing transaction. Gardner Lohmann debited # 52,320 (24 lots X 21.8 pence per ounce premium) to Anderson's 233 account for the offsetting purchased option and credited # 29,760 (24 lots X 12.4 pence per ounce premium) to his account for the offsetting sold option. The net result to Anderson from closing the put option silver straddle was a # 13,804.95 loss 52 on the sold (granted) leg and a # 14,042.40 gain 53 on the purchased leg.On August 31, 1976, the day Anderson's put option silver straddle was closed, Gardner Lohmann executed a call option straddle in copper wirebars for Anderson. The copper wirebars straddle was put on in the same manner as the silver straddle, with Gardner Lohmann only charging commissions on the opening legs of the straddle. The straddle was closed out the following day (September 1, 1976) through the purchase and sale of identical offsetting positions. The net result to Anderson from entering into the 234 copper wirebars call option straddle was a # 14,376.52 loss 1128 on the sold (granted) option and a # 11,183.31 gain on the purchased option. 54Taking into account both the silver and copper straddles, Anderson incurred a # 28,181.47 loss on the sold (granted) options and a # 25,225.71 gain on the purchased options in 1976. 55 The gain and loss were converted into dollars at a rate of 1.7745 dollars/pound. Anderson consequently reported an ordinary loss of $ 50,008 on the sold options and short-term capital gain of $ 44,763 on the purchased options on his 1976 Federal income tax return.Sometime prior to September 1976, Anderson made an initial margin deposit to Gardner Lohmann in the amount of $ 6,000. At the conclusion of his option trades, Anderson had $ 755 235 remaining in his account at Gardner Lohmann. 56 Gardner Lohmann forwarded these funds to Amalgamated for the futures straddle portion of Anderson's London options transaction.Amalgamated commenced the rollover transaction by putting on a futures straddle for Anderson on October 18, 1976. On that date, Anderson sold 45 lots of silver at a price of 288.7 pence per ounce for delivery on August 24, 1977. Amalgamated charged no commission on the sale. Thus # 1,299,150 was credited to Anderson's account. 57 Anderson then purchased 45 lots of silver for delivery on October 5, 1977, at a price of 293.4 pence per ounce plus a commission of .10 pence per ounce. Amalgamated debited Anderson's account # 1,320,750 for the purchase. 58236 1129 Seven days later, on October 25, 1976, Amalgamated closed out the loss leg of the futures straddle (which was on the sold side) by executing a switch transaction. Anderson offset the short position by purchasing 45 lots of silver for delivery on August 24, 1977, at a price of 295 pence per ounce. Competex charged no commission on the purchase, and thus debited # 1,327,500 to Anderson's account. 59 The switch was completed by Anderson's sale of 45 lots of silver for delivery on September 21, 1977, at a price of 298.4 pence per ounce, less a .10 pence per ounce commission charge. Amalgamated made a net credit of # 1,342,350 to Anderson's account. 60Anderson thus incurred a loss of # 28,350 from closing out the short position. 61 After converting the loss into dollars (at a conversion rate of 1.5782 dollars/pound), Anderson 237 reported a short-term capital loss in the amount of $ 44,742 on his 1976 income tax return. The short-term capital loss of $ 44,742 offset the $ 44,763 short-term capital gain that had been previously incurred on closing out the purchased options.The following year, on September 12, 1977, Amalgamated completed the rollover transaction and closed out Anderson's futures straddle. On that date, Anderson offset the entire bought leg of the futures straddle by selling 45 lots of silver for delivery on October 5, 1977. Anderson sold the 45 lots to Amalgamated in two separate transactions of 23 and 22 lots at a price of 259.2 and 259.3 pence per ounce, respectively, less commissions of .10 pence per ounce. Amalgamated credited the net sales proceeds of # 1,166,170 to Anderson's account. 62238 1130 Anderson then closed out the sold leg of the straddle by purchasing 45 lots of silver for delivery on September 21, 1977. The offsetting purchase again took place in two separate transactions of 23 and 22 lots, both at a price of 258.7 pence per ounce (no commissions were charged). Amalgamated thus debited # 1,164,150 to Anderson's account. 63As a result of the offsetting purchases and sales, Anderson incurred a loss of # 154,580 64 on the bought leg of the straddle and a gain of # 178,200 65239 on the sold leg in 1977. Anderson also entered into three separate straddles on January 25, April 5, and August 19 during 1977. Each of these straddles was closed out shortly thereafter on January 26, April 6, and August 24, respectively. 66 Anderson incurred a total net gain and loss (after commissions) of # 57,560 and # 53,310, respectively, from the three straddle transactions. 67 All of the gains and losses incurred by Anderson from completing the rollover transaction and executing the above three straddles were reported as short-term capital gains and losses, respectively, except for the # 154,580 loss 1131 incurred on the long leg of the rollover straddle which was reported as a long-term capital loss. Thus, overall, Anderson incurred a gain from futures trades in the amount of # 27,870 for 1977. 68240 After completion of the futures straddle portion of his London options transaction, Anderson's account balance at Amalgamated showed a balance of $ 2.54 owed to Amalgamated. 69Amalgamated did not require Anderson to remit the funds due and thus closed his account on October 12, 1977.A summary of Anderson's 1976-77 London options transaction is as follows:GainNet gainYearDescription(loss)Commission(loss)1976Ordinary loss --granted options (# 27,315)# 866.47(# 28,181.47)1976Short-term capital gain --purchased options 26,075 849.2925,225.71 1976Short-term capital loss --futures trades (28,350)(28,350.00)1977Short-term capital gain --futures trades 32,880 5,010.0027,870.00 Totals 3,290 6,725.76(3,435.76)241 iv. Commodity Analysis(A) In GeneralCommodity Analysis was chartered as a commodity commission brokerage house in London, England. During 1132 the years at issue, Commodity Analysis had two subsidiaries, Commodity Analysis Trading and Chart Analysis. Commodity Analysis Trading traded and exported physical goods while Chart Analysis performed technical market analysis and acted as an investment advisory company.David Monroe Anderson (Anderson) was the managing director 70 of Commodity Analysis from its inception until 1981, the year in which Commodity Analysis was sold to a British banking group. Anderson became an individual subscribing member of the LME in 1975 and has been an active commodity broker and trader since 1964.During the years at issue, Commodity Analysis was not a ring-dealing member of the LME. Ten employees of Commodity Analysis were engaged in its trading and brokering operations, including option trading. Another three to four people were employed in the margin department. Commodity Analysis received annual commissions in excess of 1.5 million pounds sterling during 1975, 242 1976, and 1977.Approximately 131 petitioners in these consolidated cases executed London options transactions with Commodity Analysis. Commodity Analysis put on two separate series of London options transactions during 1975-76 (hereinafter the 1975 series) and 1976-77 (hereinafter the 1976 series). Approximately 25 petitioners participated in the 1975 series while the remaining petitioners traded the 1976 series.Although a general option-straddle trading strategy involving option and futures straddles was employed by Commodity Analysis, the identical trading strategy was not used in both the 1975 and 1976 series. For the vast majority of petitioners who entered into London options transactions with Commodity Analysis during 1975-76 (the 1975 series), Commodity Analysis executed an option straddle using double options. 71 Shortly thereafter, the option straddle was closed out resulting in an ordinary loss on the granted option and a short-term capital gain (in approximately the same amount) on the purchased option.Concurrently 243 with the execution of the option straddle, Commodity Analysis would put on a futures straddle. 1133 Sometime prior to 1976, Commodity Analysis would close out the loss leg of the futures straddle in a switch transaction, thus generating a short-term capital loss. Six months later, in 1976, the futures straddle would be closed out at a capital gain approximately equal to the capital loss incurred in the switch transaction.For the 1976 series of London options transactions, Commodity Analysis used "ordinary" rather than double options in executing petitioners' option straddles. In addition, while only silver was traded in the 1975 series, other metals, such as copper wirebars, were traded during the 1976 series. The final significant difference between the 1975 and 1976 series was the creation of a butterfly straddle in the 1976 series after the loss leg of the futures straddle was closed out in a switch transaction. 72Anderson was aware that under American tax law, favorable treatment was accorded to losses on sold (granted) options and thus in both the 1975 and 1976 series 244 he would incur losses on the sold options if possible. Anderson's decision as to whether to employ double or ordinary options in executing the option straddles was based on whether he thought the market was in a vacillating stage (whereby double options were employed) or in a directional (upward or downward) phase (whereby ordinary options were used).Commodity Analysis would sometimes begin trading a petitioner's London options transaction before the receipt of initial margin if the client was well known to Commodity Analysis. In addition, because all trading was discretionary, Commodity Analysis would frequently agree with petitioners to limit their losses to the amount of initial margin deposited. Virtually all of petitioners' trades were laid off by Commodity Analysis.The majority of petitioners who dealt with Commodity Analysis were represented by an American company named London Commodity Options, Ltd. (LCOL). LCOL negotiated commission rates with Commodity Analysis on behalf of petitioners. For trades executed in the 1975 series, commissions were generally charged on the opening legs of the option and futures straddles. In the 1976 series, commissions 1134 were not charged on 245 any of the individual trades but rather debit notes representing commission charges were issued to petitioners after the option and futures straddles were closed. The second debit note (issued after the futures straddle was closed) was always in the amount which brought the account balance to zero.All Commodity Analysis transactions were executed at market prices and prevailing spread differentials. Commodity Analysis, however, did not always simultaneously put on or close out the legs of straddles for petitioners.The following promotional material was received from a finder by a petitioner who entered into a London options transaction with Commodity Analysis:AN INTRODUCTION TO LONDON COMMODITY OPTIONSOver the years, many systems have been devised to take advantage of the high leverage, the volatility and the unlimited profit potential of the commodity futures market. Yet, with each of these systems the investor is left vulnerable to losses well beyond his original investment should the market go against him.The only known method capable of setting an absolute limit on losses246 while still providing the potential for extraordinary capital gains is thru use of commodity Puts and Calls.Many U.S. investors are familiar with Put and Call options in securities but are unaware that a large international market exists in similar options in commodities.These options are traded in London and Paris in such world commodities as Cocoa, Sugar, Silver, Wooltops, Coffee, Copper, Lead, Zinc and Rubber. Like the futures contract they pertain to, options are traded by open outcry on their respective exchanges, thus providing high market liquidity.Purchase of an option gives the buyer the right to control a futures contract for a specified period of time of up to 18 months. The cost of the option is the full extent of the investor's financial commitment. He is never subject to a margin call. When the market moves in his favor, he has the right to exercise the option for a profit at any time prior to expiration date.HOW PUTS AND CALLS WORK FOR METhis market works in a very simple fashion and the brief explanation which follows will provide good understanding of its workings.A CALL OPTION is the right to buy a futures contract at the current market price (Striking Price) 247 in order to profit from an expected rise in the price of the commodity within the specified option time period. A profit is made when the commodity rises sufficiently to give your option a value which exceeds the cost (Premium) paid for it.1135 A PUT OPTION is the right to sell short a futures contract at the current market price in order to profit from an expected fall in the price of the commodity. Here a profit is made when the downward move is sufficient to give your option a value which exceeds the premium cost.A DOUBLE OPTION is simply a back to back Put and Call in the same commodity in order to profit from market moves in both directions. It is used when large see-saw moves are anticipated.If, during the life of the option, the market does not move sufficiently to give your option a value which exceeds its cost, a proportionate loss will occur. However, this loss cannot exceed the original premium cost. By contrast, those who trade the futures market directly can be hit with losses far in excess of their original investment.TRADING AGAINST PUTS AND CALLSThe owner of an option also has the right to use it as collateral for taking a direct futures position against the option. 248 This is called "HEDGING" and may be used to lock in an option profit if a market reversal appears imminent, or to capitalize on the many short term market moves which occur during the life of the option.Here again there are no margin calls to contend with and only a nominal hedge fee is charged.Profits and losses on closed out hedge positions must be settled immediately, whether thru account adjustment or cash payment.Before entering a hedge position, you should review this carefully with your Account Executive.HOW IS MY ACCOUNT MANAGED?Since we deal in only 10 world commodities, we have a significant advantage in specialization.Your Account Executive will recommend a portfolio based on intelligence from our highly respected London correspondents, knowledgeable independent advisory sources and our own review of market conditions. You will then be advised regularly on the status of your positions and given recommendations regarding exercising or hedging your options.SUMMARYAdvantages of Investing In Commodity Puts & Calls1. Unlimited profit potential in either upside or downside market.2. Limited, pre-determined risk. (LIKE ANY INVESTMENTS IN COMMODITIES ONLY RISK CAPITAL SHOULD 249 BE USED.)3. No margin calls or forced liquidations.* 4. No reserve deposit required. The premium cost is your only outlay.5. Tremendous money leverage on invested capital.6. Double options eliminate outguessing market direction.7. Large market moves provide ample opportunities to make money.8. Time periods of up to 18 months are available to achieve profit objective.9. Options permit direct futures trading without margin.1136 CONTRACT FULFILLMENT The contractual fulfillment of London Commodity Options, as represented and offered by Options Trading Corporation is protected by the Rules and Bylaws of the appropriate London Exchange. Soft commodities, e.g.: sugar, coffee, cocoa, are registered by the International Commodity Clearing House, Ltd. Metals, e.g.: silver, copper and zinc are registered by the London Metal Exchange.If you have any questions or need additional information please call us collect.(B) Representative Commodity Analysis PetitionerThe parties agreed that the 1975-76 London options transaction entered into by Gary Garff (Garff), 250 docket No. 21130-80, was representative of the London options transactions executed by Commodity Analysis. 73Commodity Analysis initiated Garff's London options transaction on December 15, 1975, by executing a double option straddle. On that date, Garff purchased a double option for 186 lots of silver (in two separate purchases of 93 lots) for delivery on March 16, 1976, 74 at a premium of 30.2 pence per ounce. The strike prices of the respective options were 202.57 and 200.57 pence per ounce, respectively. A commission of .2 pence per ounce was included in the option premium, 75 thus Garff's account balance at Commodity Analysis was debited # 561,720. 76Garff sold a double option on the same day 251 for 186 lots of silver for delivery on March 15, 1976, 77 at a strike price of 201.5 pence per ounce. The option was sold at a premium of 30 pence per ounce. No commission was charged, thus Commodity Analysis credited # 558,000 to Garff's account. 781137 The double option straddle was subsequently closed out 2 days later. On December 17, 1975, Garff offset the bought options by selling identical options for 186 lots of silver (again, in two separate transactions of 93 lots) at a premium of 31.65 and 32.35 pence per ounce, respectively. Commodity Analysis credited # 595,200 to Garff's account for the offsetting sale. 79Garff then offset the sold double option by purchasing an identical double option at a premium of 32 pence per ounce. Commodity Analysis debited Garff's account in the amount of # 595,200 80 for the offsetting purchase. No commissions were charged on either closing 252 transaction. The net result to Garff from closing out the double option straddle was a loss on the sold (granted) option in the amount of # 37,200 81 and a gain on the purchased options in the amount of # 33,480. 82Garff converted the # 37,200 loss on the sold double option to dollars at a conversion rate of 2.03 dollars/pound and reported an ordinary loss of $ 75,516 on his 1975 Federal income tax return. The gain on the purchased options was converted to dollars at the same rate, resulting in a short-term capital gain of $ 67,965.Concurrently with the execution of the option straddle, Commodity Analysis executed a futures straddle for Garff. On December 15, 1975, Garff purchased 75 lots of silver for delivery on August 16, 1976, at a price of 253 211.24 pence per ounce. On the same date, he sold 75 lots of silver for delivery on September 6, 1976, at a price of 212.7 pence per ounce. No commissions were charged, and Commodity Analysis thus debited Garff's account # 1,584,300 83 for the 1138 purchase, and credited # 1,595,250 84 to his account for the sale.On December 17, 1975, Garth closed out the loss leg (the short position) of the futures straddle by entering into a switch transaction. On that date, Garff purchased 75 lots of silver for delivery on September 6, 1976, at a price of 217.7 pence per ounce (no commission was charged). The total purchase price of # 1,632,750 85 was debited to Garff's account. The sold leg of the straddle put on 2 days earlier was thus entirely offset.Garff completed the switch by selling 75 lots of silver at a price of 218.6 pence per ounce for delivery on September 20, 1976. Commodity 254 Analysis credited # 1,639,500 86 to Garff's account for the sale.The closing out of the short side of the straddle resulted in a loss of # 37,500. 87 Garff converted the loss to dollars (at an exchange rate of 2.03 dollars/pound), and reported a short-term capital loss of $ 76,125 on his 1975 Federal income tax return. The short-term capital loss on the switch transaction offset the entire $ 67,965 short-term capital gain incurred by Garff on the purchased options. Thus, for 1975, Garff incurred a net short-term loss of $ 8,160.Garff's futures straddle was closed out the next year on July 2, 1976. On that date, Garff sold 75 lots of silver for delivery on August 16, 1976, at a price of 284 pence per ounce and purchased 75 lots of silver for delivery on September 20, 1976, at a price of 286.36 pence per ounce. No commissions were charged on either transaction, and Commodity Analysis credited # 2,130,000 88 to Garff's 255 account 1139 for the sale, and debited # 2,147,700 89 to his account for the purchase.Garff thus incurred a gain of # 37,500 90 on closing out the futures straddle. Garff converted the gain to dollars at a rate of 1.8 dollars/pound, and reported a net long-term gain of $ 67,500 for 1976.Sometime in 1975, Garff paid Commodity Analysis an initial margin deposit of $ 7,500 for putting on his London options transaction.Garff's 1975-76 London options transaction is summarized as follows:GainNet gainYearDescription(loss)Commission(loss)1975Ordinary loss -- grantedoption (# 37,200)(# 37,200)1975Short-term capital gain --purchased options 37,200 $ 3,72033,480 1975Short-term capital loss --futures trades (37,500)(37,500)1976Long-term capital gain --futures trades 37,500 37,500 Totals 3,720(3,720)c. 256 Broker/Dealers Employing the Option-Hedge Trading Strategyi. Rudolf Wolff(A) In GeneralRudolf Wolff was originally formed as a partnership in 1866 in London, England. In 1971, the partners dissolved the partnership and formed Rudolf Wolff as the main operating company. Rudolf Wolff also acts as a holding company for various worldwide subsidiaries. Since its inception, 1140 Rudolf Wolff has operated as a broker and merchant in metals and commodities.During the years at issue, Rudolf Wolff employed approximately 25 people in trading activities and was a ring-dealing member of the LME. In addition, Rudolf Wolff was a member of the London cocoa, coffee, sugar, and rubber exchanges and the New York and Hong Kong commodity exchanges. Francis Holford (Holford) was appointed secretary of Rudolf Wolff in 1971 and subsequently became managing director of the company in 1976. Holford's duties, however, have never involved the day-to-day operations of Rudolf Wolff's trading and brokering businesses.During the years at issue, G.C. Douglas Metals, Ltd. (Douglas), acted as a half-commission agent for Rudolf Wolff. Various Douglas personnel had desks within the offices of Rudolf Wolff, including 257 Dermot Butler (Butler), who began working for Douglas in 1970. Butler was a commodity broker and dealer with extensive experience on the English commodity markets in both options and futures trading.Although Butler was not employed by Rudolf Wolff, he effectively acted as Rudolf Wolff's option dealer until the late 1970's. Thus, Butler traded options not only for Douglas' clients which he introduced to Rudolf Wolff but also for some of Rudolf Wolff's own clients. In addition, Butler traded futures contracts as well. All option and futures contracts traded by Butler, whether for a Rudolf Wolff or Douglas client, were entered into on a principal-to-principal basis between the client and Rudolf Wolff.Butler devised the option-hedge trading strategy for the approximately 16 petitioners who entered into option-hedge London options transactions with Rudolf Wolff during 1975-76. Based on his belief that the silver market would rise in the long run, sometime in 1975 Butler would purchase a long position in silver futures for a petitioner's account. Concurrently, the long position would be hedged by the sale of an out of the money call option for silver. Shortly thereafter, the granted 258 (sold) option would be closed out at a loss in an offsetting trade, and a futures contract would be sold to form a futures straddle. Subsequently, in 1976, after a series of futures trades, the futures straddle 1141 would be closed out at a gain approximately equal to the loss incurred on the sold option.Because all petitioners engaging in option-hedge transactions with Rudolf Wolff maintained discretionary accounts, Butler was solely responsible for deciding which trades would be executed on their behalf. In implementing the option-hedge transactions, Butler was aware that under American tax law losses on sold (granted) options were treated as ordinary losses, while gains on long forward positions held for 6 months or more were reported as long-term capital gains. Butler thus sought to maximize the tax advantages to petitioners when making trading decisions.Commission charges for executing trades were negotiated among Rudolf Wolff, Butler (for Douglas), and the client. For Douglas' clients trading through Rudolf Wolff, commissions were generally charged based on some percentage of the underlying contract value. As a half-commission agent, Douglas would receive a portion of the commissions 259 charged by Rudolf Wolff. 91During the years at issue, Rudolf Wolff used a computer service to mark customers' accounts to market on a daily basis. All paperwork for petitioners' trades was generated by Rudolf Wolff. The paperwork would then be forwarded to the client's half-commission agent.Butler sometimes would begin a petitioner's trades before receipt of that petitioner's initial margin if Butler believed that the funds would eventually be forwarded. For virtually all petitioners entering into option-hedge transactions, Butler agreed to limit their losses to the amount of initial margin deposited. Butler controlled the losses incurred by carefully monitoring the accounts and placing stop-loss orders.All Rudolf Wolff trades ordered by Butler were executed at prevailing market prices. In addition, Rudolf Wolff laid off all of the trades executed.Petitioners who entered into option-hedge transactions were introduced to Butler by finders. The record, however, contains no example of the promotional material sent by 1142 finders 260 to petitioners who entered into London options transactions with Rudolf Wolff.(B) Representative Rudolf Wolff PetitionerThe parties agreed that the London options transaction entered into by Phil Hohnstein (Hohnstein), docket No. 1133-80, was representative of the option-hedge transactions executed by Rudolf Wolff.Rudolf Wolff initiated Hohnstein's London options transaction on December 15, 1975, by putting on an option hedge. On that date, Hohnstein purchased a futures contract for 100 lots of silver (1 million troy ounces) for delivery on September 15, 1976, at a price of 212.2 pence per ounce. Rudolf Wolff charged Hohnstein a commission of # 2,652.50 for the purchase (.125 percent of the underlying contract value), and thus debited # 2,124,652.50 to Hohnstein's account. 92261 On the same day, Hohnstein sold a call option for 100 lots of silver for delivery on January 15, 1976, at a strike price of 201.8 pence per ounce. 93 The option was sold for a premium of 2 pence per ounce, less a commission of # 2,522.50 (.125 percent). Rudolf Wolff thus credited # 17,477.50 to Hohnstein's account. 94Two days later, on December 17, 1975, Hohnstein closed out the sold option by purchasing an identical offsetting option (100 lots of silver for delivery on January 15, 1976, at a strike price of 201.8 pence per ounce) at a premium of 6.8 pence per ounce. Rudolf Wolff charged no commission on the transaction and thus debited # 68,000 to Hohnstein's account. 95The following day, December 18, 1975, after having left the bought futures contract in an open position overnight, Hohnstein entered into a futures straddle by selling a futures contract for 100 lots of silver for delivery on March 18, 1976, at a price of 206.9 pence per ounce. Rudolf Wolff charged a commission of # 2,586.25 on the transaction (.125 1143 percent) and thus credited # 2,066,413.80 to Hohnstein's account. 96262 The closing out of the sold (granted) option resulted in a loss of # 50,522.50, after commissions. 97 The loss was converted to dollars at an exchange rate of 2.0235 dollars/pound, 98 and Hohnstein consequently reported an ordinary loss from the granted option in the amount of $ 102,233 on his 1975 Federal income tax return.On January 21, 1976, Rudolf Wolff resumed trading for Hohnstein and put on a second silver futures straddle (hereinafter sometimes referred to as the 1976 straddle). 99263 On February 17, 1976, the short position of the original silver futures straddle (hereinafter sometimes referred to as the 1975 straddle) was closed out in a switch transaction and replaced with a new short position. Hohnstein incurred a gain of # 45,413.75 on the switch transaction, which was reported as a short-term capital gain for 1976.On March 2, 1976, Rudolf Wolff executed a third futures straddle for Hohnstein composed of a zinc short leg and a lead long leg. The straddle was closed out 3 days later on March 5, 1976, with Hohnstein incurring a # 12,540 short-term capital gain on the long position and a # 11,880 short-term capital loss on the short position.On March 26, 1976, Hohnstein closed out the short position of the 1976 straddle in a switch transaction. Hohnstein incurred a short-term capital loss of # 210,437.50 on the switch. The short leg was replaced by the sale of a new silver futures contract.On May 14, 1976, Hohnstein again closed out the short position of the 1975 straddle by purchasing an identical offsetting futures contract. Hohnstein incurred a # 378,585 short-term capital loss on the switch.On July 15, 1976, Hohnstein closed out the long leg of the 1975 straddle and the short leg of the 1976 straddle, 1144 leaving a new straddle composed of the short leg of the 1975 straddle and the long leg of the 1976 straddle. Hohnstein incurred a long-term capital gain of # 701,347.50 on the long position and a short-term capital loss 264 of # 594,765 on the short position.On September 2, 1976, Hohnstein closed out both legs of the remaining straddle. He incurred a long-term capital gain of # 383,336.25 on the long position and a short-term capital gain of # 105,757.50 on the short position.Overall, Hohnstein incurred a net gain of # 52,727.50 on futures trades for his 1975-76 London options transaction. 100 The gain was converted to dollars at an exchange rate of 1.7685 dollars/pound, 101 and Hohnstein consequently reported a long-term capital gain in the amount of $ 93,248.58 from the futures trades on his 1976 Federal income tax return.On December 15, 1975, Hohnstein wired an initial margin deposit in the amount of $ 9,500 to Rudolf Wolff's bank account in New York. On February 23, 1976, Butler returned $ 500 of the initial margin to Hohnstein. 265 At the conclusion of Hohnstein's 1975-76 London options transaction, $ 16 of net equity 102 remained in his account. 103Hohnstein's 1975-76 London options transaction is summarized as follows:GainNet gainYearDescription(loss)Commissions(loss)1975Ordinary loss --granted option (# 48,000)# 2,522.50(# 50,522.50)1976Long-term capital gain --futures trades 72,900 20,172.5052,727.50 Totals 24,900 22,695.002,205.00 1145 ii. Rothmetal(A) In GeneralRothmetal was incorporated under the laws of Bermuda on September 19, 1975, under the name of Thebes, Ltd. On October 14, 1975, the corporate name was changed to Rothmetal. During the years at issue, Rothmetal was not a ring-dealing member of the LME.Sometime in the fall of 1975, Anderson, the managing director of Commodity Analysis, introduced Philip Greenberg (Greenberg) to Michael Collins (Collins), the managing director of Rothmetal. Greenberg 266 had engaged in the trading of physical commodities, futures, and options during the prior 15 to 20 years. Although Greenberg primarily dealt in coffee and sugar, he also had traded silver, copper, lead, zinc, and copper wirebars on the LME.Greenberg subsequently became an advisor to Rothmetal in late 1975. Greenberg's duties included supervising finders who introduced business to Rothmetal, reviewing various transactional documents, and ensuring that initial margin deposits were sent. For his services, Rothmetal paid Greenberg 15 percent of the gross commissions earned on business he introduced to Rothmetal.Greenberg also actively participated in the creation of the option-hedge trading strategy employed by Rothmetal during 1975 through 1978. For the approximately 82 petitioners who entered an option-hedge London options transaction with Rothmetal, two straddles consisting of a long futures position hedged by the sale of a call option and a short futures position hedged by the sale of a put option would be executed in the first year of the transaction. Shortly thereafter, both options would be closed out in offsetting trades and replaced by futures contracts to form two futures 267 straddles with the open futures positions. Overall, the closing of the option positions resulted in a net loss in the first year of the transaction. Subsequently, in the next year, the futures straddles would be closed out for a net gain approximately equal to the net loss incurred on the sold options.All London options transactions were executed by Rothmetal on a discretionary basis. In addition, all trades 1146 were executed between Rothmetal and petitioners on a principal-to-principal basis. Commissions for trades were negotiable and depended upon a variety of factors. Commissions were listed as clearing charges on petitioners' final statements of account. Rothmetal laid off all trades with Commodity Analysis.The following promotional material was distributed by finders to petitioners who engaged in London options transactions with Rothmetal:COMMODITY TRADING STRATEGYThe Commodity Trading Strategy set forth on the attached flow chart ("Commodity Trading Strategy") is a complex financial transaction suitable only for persons having both substantial financial experience and substantial income subject to federal income taxes at a marginal rate of not less than 50%. In addition, 268 the Commodity Trading Strategy involves substantial risk factors. The following statement of risk factors and the attached flow chart are not intended to be a substitute for a detailed individual review by competent financial, tax and legal advisors taking into account the individual circumstances of each prospective client. EACH PROSPECTIVE CLIENT MUST MAKE AN INDEPENDENT JUDGMENT AS TO THE POTENTIAL BENEFITS AND RISKS OF THE COMMODITY TRADING STRATEGY. NO PERSON HAS BEEN AUTHORIZED BY ROTHMETAL TRADING LTD. OR ITS ASSOCIATES TO MAKE ANY OTHER REPRESENTATIONS OR WARRANTIES AS TO THE POTENTIAL BENEFITS AND RISKS OF THE COMMODITY TRADING STRATEGY.* * * IMPORTANT RISK FACTORS 1. Tax ConsequencesThe Commodity Trading Strategy is predicated upon certain interpretations of the existing provisions of the Internal Revenue Code and the regulations promulgated pursuant thereto. No ruling from the Internal Revenue Service has been obtained by Rothmetal as to the tax consequences of the Commodity Trading Strategy and Rothmetal does not presently intend to apply for such a ruling. CONGRESS IS PRESENTLY CONSIDERING CHANGES IN THE TAX LAWS WHICH, IF AND WHEN ENACTED, COULD EFFECTIVELY ELIMINATE 269 THE TAX BENEFITS OF THE COMMODITY TRADING STRATEGY. The tax consequences of the Commodity Trading Strategy may not be the same for all taxpayers. Accordingly, prospective clients must consult with their tax advisors with specific reference to their own tax situation under Federal tax law and the provisions of applicable state tax laws.1147 2. Margin TransactionsAll of the transactions contemplated by the Commodity Trading Strategy will be made as margin transactions. Because of the low margin deposits normally required in commodity futures trading an extremely high degree of leverage is typical of a commodity futures trading account. As a result, a relatively small movement in the prices of silver futures contracts and options will have a substantially greater effect on a client using the Commodity Trading Strategy. To the extent that the Commodity Trading Strategy involves "hedged" transactions, the risk of market fluctuation is reduced and lower margin deposits and fees are required. Generally, the fees charged as a result of transactions under the Commodity Trading Strategy will not exceed an amount equal to the initial margin deposit made at the time of commencing the Commodity 270 Trading Strategy transactions.3. Market FluctuationsThe Commodity Trading Strategy is intended to minimize the risks of fluctuations in the market price of silver futures contracts and options. However, the Commodity Trading Strategy is predicated upon the assumption that "spreads" between the prices for futures silver contracts in adjacent months will remain relatively constant. To the extent that the "spread" between the prices in adjacent months varies, the Commodity Trading Strategy may result in additional gain or loss.4. Other TransactionsDuring the course of the Commodity Trading Strategy, a client may wish to engage in other transactions involving the open positions created as a result of the Commodity Trading Strategy. To the extent that such transactions are engaged in, additional margin deposits, fees and market risks are entailed.* * * Each prospective client is requested to date this statement of risk factors and verify that such client has not received and is not relying upon any other representations or warranties concerning the Commodity Trading Strategy. Therefore, PLEASE WRITE THE FOLLOWING SENTENCE IN YOUR OWN HANDWRITING:"Except as set forth above, I have 271 not received nor am I relying upon any representations or warranties concerning the potential risks or benefits of the Commodity Trading Strategy."Dated: TAX SPREADSOur Trading Strategy turns ordinary income into long-term capital gains by using a unique application of the traditional commodity tax spread or straddle. Therefore, it would be appropriate to elaborate on the mechanics of spreads. In past years, the traditional tax spread has been 1148 used only to defer capital gains taxes from year to year or to convert short-term capital gains into long-term capital gains.When done properly, this method of investment minimizes the risks inherent in the market place because the tax-spreader always takes both sides of the market at the same time. That is, he simultaneously buys a long position (betting on the commodity investment to go up) and sells a short position (betting on the same commodity to go down). It is easily seen that it doesn't matter whether the commodity goes up or down, since always one side of the spread gains money while the other side loses an equivalent amount of money. The tax spread takes advantage of this by liquidating the loss side of the spread in the 272 present tax year while holding and hedging the equivalent unrealized gain until the succeeding tax year. This allows the taxpayer to deduct these losses against gains in the present year and thus defer the taxes until the following year. Everything discussed so far is common knowledge and has been used successfully for many years, but only in the area of capital gains.Our Trading Strategy is especially unique because of its ability to create ordinary losses in markets that heretofore only allowed for capital gains or losses. Recently the IRS ruled that any income or loss resulting from "closing transactions" from sales of put and call options to be classified as ordinary income or loss (see enclosed IRS letters and rulings). Our Trading Strategy always engages the sale or "writing" of put and call options where these transactions are liquidated by "buying back" the options in the future (closing transactions) and thus resulting in net ordinary losses.Our strategy constructs spreads where one side of the spread is a set of silver futures contracts bought or sold for net capital gains while on the other side are equivalent put or call option sales against the underlying silver contracts 273 for net ordinary losses (see enclosed flow chart). It is the combination of IRS rulings that permits organization of a series of these spread transactions which effectively convert ordinary income to long-term capital gains. For details on the mechanics of these transactions see enclosed example. As can be seen in the example, we create ordinary losses by selling put or call options at a lower price today than we buy them back for in the future. Whatever ordinary losses occur in these spreads, we automatically have equivalent capital gains since we are always hedged (i.e. on both sides of the market). Options are ideal with these transactions because of the limited down side movement in option premiums against an unlimited upside resulting in limited ordinary gains and unlimited ordinary losses (which are hedged) giving us exactly what we want in this type of tax spread.It would be appropriate here to define an option. A "call" is an option to buy property such as real estate, securities or commodity future contracts. A "put" is the opposite, an option to sell. The most common example of a call option is the real estate option to buy property. All options contracts include, 274 a span of time for which the offer is held open, an offering price for the property itself (called the striking price) and a cost for buying the option (called the option premium). For example, if 1149 you owned a piece of real estate, you could write an option against the underlying property for say, $ 100,000 that is good for the next six months. Anyone desiring to tie up this property at $ 100,000 offering price for six months would buy this option from you for say $ 1,000 (the option premium).One of three things can then happen to the option (a) The option is exercised if the option holder buys the property within six months for $ 100,000 (b) The option is not exercised within the six months and expires (c) Prior to the six month expiration, the option is sold to another party. In our transactions for taxes (a) and (b) never occur since the "sold" options are always bought back in a closing transaction prior to expiration or exercise.The preceding example can similarly be applied in the securities and commodities markets. We have chosen the commodities markets on the London Bullion Markets for tax transactions because of the following reasons (a) Real estate does not work because 275 of little liquidity, little market movement and no real "put" options available (b) The stock market options in the U.S. are not feasible because of no "put" options available, large fluctuations in spreads resulting in high risk, too little leverage available (i.e. it's ridiculous to buy $ 2,000,000 of IBM stock to create a $ 100,000 loss) and commission costs are exorbitantly high. (c) The U.S. commodities markets do not have puts and calls available which are what the IRS rulings are based on.The only alternate is to use the largest foreign market exchange in the world, the London Bullion Market, because all the tools that are needed are available at minimum risk. Here the tax client is insured that all transactions made are registered (cleared) trades through the Bullion Market with detailed records checked monthly by the Bank of England. He is also quoted a firm but low price for effecting these trades (no more than 15%) [sic] of the amount to be converted).OCT. 23, 1975(A)Buy (Long) 23, June '76(B)Sell (Write) 23, Jan '76 CallFutures ContractsOptions against underlyingat 222.70 [pence]silver from (A) at 215.40[pence] strike price & 20[pence] Premium. Client's Acct. iscredited with 680,000 X 20[pence] = [#]136,000(C)Sell (Short) 23, July '76(D)Sell (Write) 23, Feb '76 PutFutures ContractsOptions against underlyingat 229.40 [pence]silver from (C) at 213.80[pence] strike price & 27[pence] Premium. Client'sAcct. is credited with 680,000X 27 [pence] = [#]183,600OCT. 28, 1975 (Silver went down)(E)Sell (Short) 28, June '76(F)Closing transaction of CallsFutures at 220.30 [pence]from (B) by buying back at 17.70to hedge in loss from (A)[pence] X 680,000 = [#]120,360of 2.4 [pence] X 680,000 =debit vs. [#] 136,000 credit[#]16,320(B) giving a gain of [#] 15,640(G)Buy (Long) 28, July '76(H)Closing transaction of PutsFutures at 220.35 [pence]from (D) by buying back at 35.95to hedge in gain from[pence] X 680,000 = [#]244,460(C) of 9.05 [pence] Xdebit vs. [#] 183,600 credit680,000 = (#) 61,540(D) giving a loss of [#] 60,860Net hedged-in capital gain fromNet realized losses from optionstransactions (E) & (G) areclosing transactions (F) & (H)61,540 - 16,320 = [#] 45,220are 60,860 - 15,640 = [#] 45,220(or US $ 93,442) less clearing(or US $ 93,442) plus clearingcharges. These hedged-incharges of [#] 3,630 (or US $ 7,501)capital gains are held for atfor a total of $ 100,943 in losses.least 6 months for long-termgains.Note: You are advised to checkwith your tax counsel on presentIRS rulings regarding the treatmentof options closing transactionlosses.276 1150 (B) Representative Rothmetal PetitionerThe parties agreed that the 1975-76 London options transaction entered into by Robert A. Meese (Meese), docket No. 12009-80, was representative of the option-hedge transactions executed by Rothmetal.Rothmetal initiated Meese's London options transaction on October 9, 1975, by putting on two option-hedge straddles. On that date, Meese sold a call option for 102 lots of silver for delivery 104 on January 9, 1976, at a strike price of 216.4 pence per ounce. The option was sold for a premium of 21 pence per ounce, thus Rothmetal credited # 214,200 to Meese's account. 105 The call option was hedged 1151 by the purchase of a futures contract for 102 lots of silver for delivery on September 9, 1976. Rothmetal sold the futures contract to Meese at a price of 234.65 pence per ounce, and debited his account # 2,393,430. 106277 The second straddle was executed by Meese's selling a put option for a premium of 14 pence per ounce for 102 lots of silver for delivery on December 9, 1975, at a strike price of 212.15 pence per ounce. The put option was hedged by the sale of a futures contract for 102 lots of silver for delivery on October 8, 1976, at a price of 238.05 pence per ounce. Rothmetal credited # 142,800 107 and # 2,428,110, 108 respectively, to Meese's account for the sale of the put option and futures contract.The option positions were subsequently closed out 4 days later. The sold call option was offset by the purchase of an identical call option (102 lots of silver for delivery on January 9, 1976, at a strike price of 216.4 pence per ounce) at a premium of 20 pence per ounce, plus a commission charge of # 1,428. The sold put option was similarly offset by the purchase of an identical option 102 lots of silver for delivery on December 9, 1975, at a strike price of 212.15 pence 278 per ounce) at a premium of 17.1 pence per ounce, plus a commission of # 1,428. Rothmetal debited # 205,428 109 to Meese's account for the purchase of the call option and # 175,848 110 for the purchase of the put option.The call option leg of the straddle was replaced by the sale of a futures contract for 102 lots of silver for delivery on September 13, 1976, at a price of 234.65 pence per ounce. The put option leg of the second straddle was replaced by the purchase of a futures contract for 102 lots of silver for delivery on October 13, 1976, at a price of 235.95 pence per ounce. Rothmetal credited # 2,393,430 111 to Meese's account 1152 for the sale and debited # 2,406,690 112 to his account for the purchase.As a result of closing 279 out the sold options, Meese incurred a gain of # 8,772 113 on the call option and a loss of # 33,048 114 on the put option, after commissions. Thus, he incurred an overall net loss on sold options of # 24,276 (# 8,772 gain less # 33,048 loss) for 1975. Meese reported an ordinary loss of $ 50,000 from the sold options on his 1975 Federal income tax return.Rothmetal resumed trading for Meese on May 13, 1976. On that date, Meese purchased a futures contract for 15 lots of silver for delivery on August 13, 1976, at a price of 255.75 pence per ounce. The open position was closed out the following day by Meese's selling an identical offsetting contract at a price of 253.4 pence per ounce, less a commission of # 36. Overall, Meese incurred a loss of # 3,561 on the transaction. 115On 280 May 17, 1976, Meese closed out the two futures straddles by purchasing offsetting contracts. 116 Overall, he incurred a gain of # 24,990 on the straddles. Meese reported a long-term capital gain in the amount of $ 57,431.82 on his 1976 Federal income tax return.Meese had made an initial margin deposit to Rothmetal in the amount of $ 6,000 (# 2,912.62 on October 9, 1975. After his 1975-76 London options transaction was completed, Meese had # 65.62 remaining in his account at Rothmetal. 1171153 Meese's 1975-76 London options transaction is summarized as follows:GainNet gainYearDescription(loss)Commissions(loss)1975Ordinary loss --granted options (# 21,420)# 2,856(# 24,276)1976Long-term capital gain --futures trades 24,990 24,990 1976Short-Term capital loss --unhedged futures trades (3,525)36(3,561)Totals 45 2,892(2,847) OPINIONWhen the trial of this case, the so-called 281 London options case, commenced in 1983 it was said to be the largest single consolidation of cases in the history of the Tax Court. 118 Petitioners, numbering at one time over 1,400 (some of the petitioners have since settled their cases), claimed deductible losses from commodity straddle transactions in excess of $ 100 million on their respective returns for years from 1975 through 1980, resulting in deficiencies as determined by the Commissioner in excess of $ 61 million.Petitioners begin their argument with the following statement (footnotes omitted):On April 8, 1974, the Internal Revenue Service issued Private Letter Ruling 7404080200A (the so-called "Zinn Ruling") to the Chicago Board Options Exchange. The Zinn Ruling was the first of a series of private letter rulings that, taken together, illustrated the extraordinary attractiveness of hedged option trading as an investment vehicle for high bracket investors. Zinn and its progeny reaffirmed two principles. First, a person who bought an option held the underlying commodity as a capital asset. Accordingly, any loss or gain on a bought option 282 would be treated as capital. Second, one who sold or granted an option did not own the underlying commodity. Any gain or loss on a sold option would therefore be treated as ordinary.Notwithstanding the well-known position of the IRS that "No unpublished ruling or decision will be relied on, used, or cited, by any officer or employee of the Service as a precedent in the disposition of other cases" (sec. 601.601(d)(2)(v)(d), Statement of Procedural Rules), the private rulings received wide circulation and, as demonstrated 1154 by this case, spawned an offshore cottage industry in commodity tax straddles of very substantial proportions. The private rulings were apparently derived in part, at least, from section 1234 as it read at the time of the rulings. 119283 284 285 Congress responded to these developments by amending section 1234(b) (relating to option grantors). Sec. 2136(a), Pub. L. 94-455, 90 Stat. 1929, applicable to options granted after September 1, 1976. The effect of the amendment was to "reverse the private ruling with respect to closing transactions by providing that gain or loss from a closing 1155 transaction 120 is to be treated as short-term capital gain or loss," and also to provide "that income from the lapse of an option is to be treated as short-term capital gain." 121286 H. Rept. 94-1192 (1976), 1976-3 C.B. (Vol. 3) 19, 21.As indicated, the section 1234(b) amendment was only prospective in application. Furthermore, the amendment did not foreclose the potential for offsetting unrelated short-term or long-term capital gains with option-straddle short-term capital losses. The IRS thereafter issued Rev. Rul. 77-185, 1 C.B. 48">1977-1 C.B. 48, wherein it was ruled that losses incurred in the first year of a straddle 287 were but one step in a series of transactions which must be integrated and recognized, if at all, only upon conclusion of the scheme in a subsequent year. See Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, 385 (1982). This approach was rejected by this Court in the Smith case.A typical London options transaction involved a 2-year (or more) series of commodity straddles and employed either an "option straddle" or "option hedge" trading strategy, the mechanics of which are fully described subsequently.All London options transactions entered into by petitioners were conducted through 1 or more of 17 offshore broker/dealers operating on the basis of transactions on the London Metal Exchange (LME). Most of the transactions were conducted with the following 6 so-called "major" broker/dealers: Rudolf Wolff & Co., Ltd. (Rudolf Wolff), Competex, S.A. (Competex), Gardner Lohmann Ltd. (Gardner Lohmann), Amalgamated Metal Trading Ltd.1156 (Amalgamated), Rothmetal Trading Ltd. (Rothmetal), and Commodity Analysis Ltd. (Commodity Analysis). The trading strategies employed by each of the major broker/dealers are detailed in our findings of fact.By agreement of the parties, evidence regarding the trading strategies 288 of the remaining 11 broker/dealers was not presented at the trial of this case, pending a resolution of the issues presented herein. Evidence regarding the trading strategies of the 11 "minor" broker/dealers, involving less than 50 of the total number of petitioners, would have unduly extended the trial and greatly enlarged the already massive record.As mentioned above and as outlined below, the evidence reveals that the trading strategies of all 6 of the major broker/dealers fall within one of two generic types of transactions, and it appears likely that the trading strategies of the minor broker/dealers will do likewise. Petitioners who transacted straddle business through the 11 minor broker/dealers not described in our findings of fact will be given the opportunity through responses to orders to show cause to demonstrate how, if at all, their transactions materially differ from one of the two types of the generic transactions hereinafter described.Although the six major broker/dealers each devised a trading strategy of its own, these strategies were, in fact, simply variations on one of two themes. As stated, the transactions took the form either of an option straddle transaction 289 or an option hedge transaction. The option straddle transaction was the more prevalent of the two. Both the option straddle transaction and the option hedge transaction involved the use of multiple offsetting positions combining options and futures contracts. The contracts were predominantly silver contracts, but in a significant number of instances copper wirebar contracts were also used.The mechanics of the option straddle transaction were as follows:Shortly after the option straddle was put on, the legs would be closed out through the purchase and sale of identical offsetting positions. The premium (purchase price) paid to buy an offsetting option which closed out the sold 1157 (granted) option would exceed the premium that had been received on the sold option, resulting in an overall net loss on the sold option leg of the straddle. Conversely, the premium received on the sale of an offsetting option which closed out the purchased option would exceed the premium that had been paid for the purchased option, resulting in an overall net gain on the purchased option leg of the straddle. The net loss and gain, which were approximately equal, would be reported as an ordinary loss and 290 short-term capital gain for year one. Since the expected tax result in year one was, prior to the amendment of section 1234, an ordinary loss, such loss could be used to offset ordinary income from unrelated sources.Next, in a switch transaction, the so-called loss leg of the futures straddle would be closed out through the purchase (or sale) of an identical offsetting position and replaced by a new position with a different delivery date. (Because an inverse relationship exists between the legs of a futures straddle, one leg will have an unrealized loss while the other will have an unrealized gain.) The net loss on the closed leg of the futures straddle would be reported as a short-term capital loss in year one and would approximately equal the short-term capital gain incurred on closing out the purchased option position.The final step of a typical option straddle transaction occurred in year two, although not earlier than 6 months after the switch. Both legs of the futures straddle would be closed out by offsetting trades, resulting in a gain approximately equal to the loss incurred on the switch transaction in year one. The gain incurred would be reported as either a short-term 291 or long-term capital gain in year two. The net general objective was the realization of ordinary loss in year one, and the deferral of capital gain, short-term or long-term, to year two. While the tax losses anticipated were very substantial, the economic gains, if any, and losses were, by comparison, very small.Option hedge transactions were utilized by Rudolf Wolff and Rothmetal, two of the major broker/dealers, for approximately 97 of petitioners herein. In this version of the commodity straddle strategy, the sale of a call or put option, or both, was hedged by the purchase of a futures 1158 contract or the sale of a futures contract, or both. The option positions would then be closed out at a net loss through the purchase of identical offsetting options. Simultaneously, the initial futures contracts would be hedged with additional futures contracts, thus forming one or more futures straddles. In the following years, the futures straddles would be closed out at a gain equal in amount to the loss incurred on the sold options. The overall objective was the same as that of the option straddle transaction, namely, ordinary loss in year one and capital gain deferred to year two.As 292 pointed out in H. Rept. 94-1192, supra at 20-21, the decision as to entering into a closing transaction is within the discretion of the taxpayer. Consequently, certain characteristics of LME commodity trading take on special significance in the context of this case. For example, unlike its American counterparts (e.g., the New York Stock Exchange and the Chicago Board Options Exchange on which trading is regulated by the Commodity Futures Trading Commission), the LME does not operate as a clearinghouse for trades. Rather, all transactions on or subject to the rules of the LME are executed on a principal-to-principal basis. 122 Thus, the respective broker/dealers and petitioners were purchasing and selling options or futures contracts from and to each other, rather than petitioners purchasing and selling from and to unrelated third parties on the LME via the broker/dealers as agents.Actual "Ring" trading is conducted on the LME293 between professional commodity traders on a net basis, and the closing ring prices reported in the London Financial Times serve as benchmarks for the off-ring inter-dealer market described in our findings of fact. Unlike the regulated commodity exchanges in the United States, there are no limits on price changes for metals traded under LME rules.While it is true that the broker/dealers testified that they normally laid off their trades by entering into offsetting contracts with third parties, it is also true that all of petitioners' accounts were discretionary accounts, so that 1159 the broker/dealers had unlimited latitude in pricing the contracts into which they entered with petitioners. 123294 As a general rule, options are not traded on the ring or kerb (formalized trading by ring members after the close of ring sessions) because terms of individual option contracts have to be negotiated, but are traded on the inter-dealer market where buyers and sellers are afforded time to reach agreement on the various components of an option contract. This of course would afford ample opportunity to tailor-make contracts to achieve predetermined objectives.The LME does not require or regulate the charging of commissions on options or futures contracts, and the amount of and manner in which commissions are charged vary significantly.As manifested in our findings of fact, the broker/dealers exploited the foregoing possibilities in their promotional literature. For example, Gardner Lohmann invited its customers' attention to the potentials of its "Income Conversion Program" which was structured to exploit an apparent tax loophole. Similarly, Competex in its promotional literature described the "tax shelter" (Competex's 295 words) as one having "write-offs * * * on an 8.3 to 1 ratio." While James Gourlay, Competex's manager, professed an intention to earn a net economic profit for petitioners dealing with Competex through changes in the spread, the Competex promotional material overwhelmingly emphasized the tax objectives and hardly mentioned the economic gain or loss potential.On brief, respondent points to four factors which, it is argued, demonstrate the artificial and manipulative nature of the London options transaction. These factors are: artificial pricing, arbitrary fixing of commissions, artificial contangos, 124 and failure to require or maintain margin. 1160 Respondent's argument proceeds along the following lines:1. Pricing. -- Prices established by LME trading are 296 fair, authoritative, stand as the daily world-wide benchmark, and are based upon ring trading. Prices struck in trading between ring sessions reflect the trend of prices prevailing during the formal sessions, and vary only slightly, if at all. Wide variations from the official daily price could only be caused by events outside the influence of the parties to the trade, such as an announced shortage of the metal, a currency devaluation, or a dramatic change in interest rates. None of those things occurred during the years in question. Nevertheless, the prices used by the broker/dealers and petitioners for the futures trades were frequently far afield from official prices, as evidenced by the use of non-market contangos. As a result, excess gains or losses resulted, and always in just the right amounts to bring the accounts to zero. But futures manipulation was the tail wagging the dog, for while such manipulations were necessary to bring the accounts to zero, it was the "plugged" option premiums which caused the ordinary losses which are the subject of this case.Option premiums are negotiable, and there is no publication to which one can turn to determine a going market price. 297 Instead of letting the market dictate premiums based on the underlying fair market strike prices, 125 the brokers kept the strike prices the same, and by doing so they were able to select the premiums needed to produce the amount of loss purchased by petitioners. Each petitioner paid more to buy an offsetting option than he received when he sold the countervailing option, even though time had elapsed and the option was closer to declaration. 126298 Since time is one of the basic underpinnings of options and option pricing, one would expect under normal circumstances, and with all other things being equal, that with the lapse of time the grantor would pay less to buy back a closing transaction option than he received when initially selling the 1161 countervailing option and thus realizing a profit. In this case, every petitioner had a net loss on granting options. The premiums therefore could not have been a fair market price. 2. Commissions. -- The rates at which commissions were to be charged were not agreed upon in advance, commissions were determined by the broker/dealers without petitioners' knowledge or consent, commissions were charged at varying rates or not at all, depending upon the gain and loss objective sought, commissions were not routinely charged on each leg of straddles, as is customary in orthodox trading, and lump-sum commissions were sometimes charged in advance of trading without knowing in advance how much trading was to be done over a period of time and at what prices.3. Margins. -- In some cases trading was commenced before any initial margin was received, and in no case was maintenance margin required. In some cases no margin was ever required.4. Contangos. -- Under normal conditions, the cash price for immediate delivery will be less than the price for future delivery. The difference between these two prices is known as the contango, or spread differential. The major component of the contango is interest rates, i.e., the cost of financing for the period involved, while subsidiary components are the cost of insuring and storing the metal. Assuming constant 299 interest rates, a contango widens in an arithmetic progression and is known as a linear contango. This means that the difference in price between any two adjacent dates would be the same. Yet the evidence in this case clearly demonstrates that contangos were adjusted by the brokers in order to arrive at a predetermined outcome.In short, respondent is arguing that petitioners' London options transactions are factual shams. See Brown v. Commissioner, 85 T.C. 968">85 T.C. 968 (1985). Petitioners argue that they "invested in discretionary commodity trading accounts because they had the potential for significant profit accompanied by possible favorable tax treatment." (Emphasis supplied.) In some instances there were times when significant profits "actually could have been taken."1162 Petitioners also argue, perhaps more cogently, that respondent's allegation that petitioners paid for a prearranged tax result is refuted in that tax consequences varied widely, were dependent on market movements, and were sometimes adverse to petitioners. For more than half of the petitioners, declining silver prices made it impossible to achieve long-term capital gain in the second year of their London option investment. 300 For the overwhelming majority of such petitioners, the London option investment, as defined by respondent, resulted in adverse tax consequences. With reference to the term "as defined by respondent" petitioners state:Respondent has taken the anomalous position that additional trading in the second and third year of the investment on behalf of Petitioners whose initial "series" failed to achieve long term gain is not at issue in this case. When the investment is so defined, the tax consequences were adverse for the majority of petitioners.Even for those who successfully converted ordinary loss to long-term capital gain in the second year, the tax savings were often less than the amount invested. In short, petitioners argue that since they did not always get all of the tax benefits they bargained for, their commodity straddle strategies were legitimate.Unfortunately, the charts derived by petitioners to demonstrate the correctness of the foregoing assertion 127301 fail to account for rollovers into subsequent years, so that the economic effect of offsetting capital gains realized in year two, with the consequent tax postponement, cannot be independently determined.It requires no lengthy or elaborate analysis of the facts to demonstrate that petitioners did not enter into these transactions primarily for economic profit, and that the transactions under scrutiny were not "a type of tax-motivated transaction which Congress intended to encourage." Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001, 1019 (1984); see also Smith v. Commissioner, supra. The expected tax benefits completely overwhelm any potential economic benefits that might have been expected from the straddles.By means of the losses which petitioners intentionally incurred in year one through their commodity straddles, 1163 they sought to shelter over $ 100 million of ordinary income or short-term capital gains which they postponed, or "moved," to subsequent years. In the process, they expected to convert this income to long-term capital gains (although admittedly they did not always succeed in the latter). Thus, petitioners hoped to obtain substantial interest-free loans from the Government and achieve more favorable tax rates. At the same time, the actual economic gains realized through straddling were either miniscule 302 or nonexistent.In a nutshell, the focal point of this case is the deductibility of the losses claimed by petitioners in year one of the London options transaction. Section 165(c)(2) permits individuals to deduct losses incurred in any transaction entered into for profit, though not connected with a trade or business. The statutory language is amplified by section 1.165-1(b), Income Tax Regs., as follows:To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and * * actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.In determining deductibility, we believe that substance-over-form precludes us from focusing solely upon the losses incurred by the closing of the sold options in year one of the London options strategy, to the exclusion of all that followed. For this reason we hold, as we have done before, that the relevant transaction was petitioners' entire commodity tax straddle scheme. In Smith v. Commissioner, 78 T.C. at 390-391, we stated:We agree * * * that what petitioners invested 303 in * * were commodity tax straddles -- i.e., a prearranged, planned sequence of trading * * * -- not simple investments in butterfly straddles held solely for nontax profit objectives. For purposes of section 165(c)(2), then, we hold the relevant "transaction" to encompass petitioners' entire commodity tax straddle scheme. [Fn. ref. omitted.]What petitioners invested in here with the respective broker/dealers was a prearranged sequence of trading calculated to achieve a tax-avoidance objective -- not investments held for non-tax profit objectives.1164 In Fox v. Commissioner, supra, we held that the taxpayer did not enter into the tax straddle transactions there primarily for profit, nor were the transactions a type which Congress intended to encourage, and therefore that the taxpayer was not entitled to deduct his losses. The massive record in this case, which we have synthesized in as practical manner as possible in our findings of fact, overwhelmingly demonstrates that petitioners did not enter into these transactions primarily for economic profit. And had the transactions under scrutiny been of a type which Congress intended to encourage, surely it would not have been so quick 304 to move to forestall them as it did by amending section 1234, discussed supra. We would therefore have little hesitancy in deciding this case on the authority of Smith and Fox were it not for the intervening enactment of section 108 of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630) ("section 108").Before the 1986 amendment, section 108 provided:SEC. 108. TREATMENT OF CERTAIN LOSSES ON STRADDLES ENTERED INTO BEFORE EFFECTIVE DATE OF ECONOMIC RECOVERY TAX ACT OF 1981.(a) General Rule. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions -- (1) which were entered into before 1982 and form part of a straddle, and(2) to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply,any loss from such disposition shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit.(b) Presumption That Transaction Entered Into for Profit. -- For purposes of subsection (a), any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts 305 shall be rebuttably presumed to be part of a transaction entered into for profit.(c) Net Loss Allowed Whether or Not Transaction Entered Into for Profit. -- If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduction (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer's net gain or loss from all positions in such straddle.(d) Other Rules. -- Except as otherwise provided in subsections (a) and (c) and in sections 1233 and 1234 of such Code, the determination of 1165 whether there is recognized gain or loss with respect to a position, and the amount and timing of such gain or loss, and the treatment of such gain or loss as long-term or short-term shall be made without regard to whether such position constitutes part of a straddle.(e) Straddle. -- For purposes of this section, the term "straddle" has the meaning given to such term by section 1092(c) of the Internal Revenue Code of 1954 as in effect on the day after the date of the enactment of the Economic Recovery 306 Tax Act of 1981, and shall include a straddle all the positions of which are regulated futures contracts.(f) Commodities Dealer. -- For purposes of this section, the term "commodities dealer" has the meaning given to such term by section 1402(i)(2)(B) of the Internal Revenue Code of 1954 (as added by this subtitle).(g) Regulated Futures Contracts. -- For purposes of this section, the term "regulated futures contracts" has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1954 (as in effect before the date of enactment of this Act).(h) Syndicates. -- Subsection (b) shall not apply to any syndicate (as defined in section 1256(e)(3)(B) of the Internal Revenue Code of 1954).[Sec. 108; 98 Stat. 494, 630.]Section 1808(d) of the Tax Reform Act of 1986 amended section 108 as follows:(d) Section 108. -- Section 108 of the Tax Reform Act of 1984 is amended -- (1) by striking out "if such position is part of a transaction entered into for profit" and inserting in lieu thereof "if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business",(2) by striking out 307 subsection (b) and inserting in lieu thereof the following:"(b) Loss Incurred in a Trade or Business. -- For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.", (3) by striking out the heading for subsection (c) and inserting in lieu thereof the following: "(c) Net Loss Allowed. --",(4) by striking out subsection (f) and inserting in lieu thereof the following:"(f) Commodities Dealer. -- For purposes of this section, the term 'commodities dealer' means any taxpayer who -- "(1) at any time before January 1, 1982, was an individual described in section 1402(i)(2)(B) of the Internal Revenue Code of 1954 (as added by this subtitle), or"(2) was a member of the family (within the meaning of section 704(e)(3) of such Code) of an individual described in paragraph (1) to the extent such member engaged in commodities trading through an organization the members of which consisted solely of -- "(A) 1 or more individuals described in paragraph (1), and1166 "(B) 1 or more members of the families (as so defined) of such individuals.", and(4) by striking out subsection (h) and inserting in 308 lieu thereof the following:"(h) Syndicates. -- For purposes of this section, any loss incurred by a person (other than a commodities dealer) with respect to an interest in a syndicate (within the meaning of section 1256(e)(3)(B) of the Internal Revenue Code of 1954) shall not be considered to be a loss incurred in a trade or business."[Sec. 1808(d), Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817.]It will be observed that the 1986 amendment accomplishes several things:First, the concept of a "position" as part of a transaction entered into for profit is eliminated (second line of "flush" language at the conclusion of section 108(a)). The amended section 108(a) expressly distinguishes between a loss incurred by a commodities dealer in the trade or business of trading commodities and a loss incurred in a commodities transaction entered into for profit though not connected with a trade or business. Thus, the language of section 108(a) is now completely harmonized with that of section 165(c)(1), which allows losses incurred in a trade or business, and section 165(c)(2), which allows losses incurred in any transaction entered into for profit, though not connected with a trade 309 or business.Second, old section 108(b) is stricken and new material is substituted. Previously, section 108(b) provided a rebuttable presumption, applicable both to commodities dealers and some investors, that any position held by them was part of a transaction entered into for profit. New section 108(b) eliminates the rebuttable presumption and substitutes a per se rule that any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business. Since the rebuttable presumption is totally eliminated, it is no longer available to investors. Cf. Perlin v. Commissioner, 86 T.C. 388">86 T.C. 388 (1986).Third, the definition of commodities dealers is expanded somewhat to include certain family members. It is worth noting, however, that the definition of "commodities dealer" remains "an individual described in section 1402(1)(2)(B)"; i.e., an individual who is actively engaged in trading "section 1256 contracts" and is registered with a domestic 1167 board of trade. Sec. 1402(i)(2)(B). 128Section 1256 contracts are four specified types of contracts, including regulated futures contracts, used in domestic straddle transactions on a domestic 310 board of trade. See generally sec. 1256 and the definition contained in sec. 1256(b). 129311 Fourth, section 108(h) is amended to provide that losses incurred through a syndicate (defined in section 1256(e)(3)(B)), except by a commodities dealer, are not considered to be losses incurred in a trade or business.In summary, then, amended section 108 traces the pattern of the loss provisions of section 165(c)(1) and (2), and makes it clear that losses incurred by commodities dealers trading in commodities are deductible under section 108 since they are losses incurred in a trade or business. Investors, on the other hand, must meet the test of loss incurred in a transaction entered into for profit. In the context of commodity straddle transactions, the investor language parallels the section 165(c)(2) language which we construed in Smith and Fox, and (except as to commodities dealers) we think the effect of amended section 108 is to revalidate our holdings in those cases. Cf. Miller v. Commissioner, 84 T.C. 827">84 T.C. 827 (1985). The case before us does not 312 involve commodities dealers.1168 For completeness, we now summarize the legislative history of amended section 108.The section 108 amendment originated in the House and was adopted verbatim by the Conference Committee. The House report states that "It was not the intent of Congress in enacting section 108 to change the profit-motive standard of section 165(c)(2) or to enact a new profit motive standard." H. Rept. 99-426, at 911 (1985). The House report also states that "A taxpayer who does not satisfy indicia of trade or business status, such as the taxpayer in Miller v. Commissioner (84 T.C. 827">84 T.C. 827 (1985)), would not be considered in the trade or business of trading commodities." H. Rept. 99-426, at 911 (1985). The Conference Committee statement of managers states that "The conference agreement follows the House bill," but makes no reference to any profit-motive standard. The statement of managers discusses various aspects of the concept of commodities dealers, but does not deal with investors. H. Rept. 99-841 (Conf.), at II-845 (1986).At the time the Conference report was presented to the House for consideration, Mr. Rostenkowski, the floor manager in the House, made the following 313 statement:As chairman of the Committee on Ways and Means, I am often asked to participate in colloquies with other Members of the House of Representatives regarding the intent behind, or effect of, specific provisions in tax legislation. I take the responsibility to implement the decisions of the Committee on Ways and Means, and in this instance, the conference committee, very seriously. Consequently, I have limited the colloquies that I have agreed to participate in to those which do not attempt to modify the substantive agreement reached by the conferees on H.R. 3838. In addition, because we are discussing a conference agreement rather than a bill of merely one House of the Congress, for a colloquy to be considered as reflective of the conference agreement, it should be discussed in a substantially similar manner in both the House and the Senate. Otherwise, the views expressed can be considered only the views of one House and not necessarily reflective of the decisions made by the conferees. [132 Cong. Rec. H8360 (daily ed. Sept. 25, 1986).]In a colloquy on the Senate floor between Senator Dole and Senator Packwood (floor manager of the bill in the Senate) following the Conference 314 action, Senator Packwood concurred in a statement by Senator Dole that "I understand that the conference report does not amend the provisions of the 1984 act as they affect investors, and that 1169 the conferees rejected any additional benefit for those investors." 132 Cong. Rec. S13956 (daily ed. Sept. 27, 1986). 130Senator Dole also stated that "I further understand that the statement of managers explaining the conference report did not include the language of the House report that discussed investors and that the conference report is the entire agreement of the Conferees." Senator Packwood's concurrence also included this statement.In a floor statement on October 2, 1986, Mr. Rostenkowski reiterated that "As I indicated in my opening remarks to the House on September 25, 1986, I feel that a floor colloquy interpreting a provision of a conference report can only be considered valid by taxpayers and appropriate Government officials at the Treasury Department and IRS if it appears in substantially the same form in both the House and the Senate." Mr. Rostenkowski 315 also said that Senator Dole's colloquy with Senator Packwood regarding the treatment of investors in pre-ERTA straddles, located on page S13956 of the Congressional Record of September 27, 1986, does not reflect the House's interpretation of the Conference agreement. 132 Cong. Rec. E3389, E3391 (daily ed. Oct. 2, 1986).In deciding this case, we have used our best judgment in construing the statutory language actually enacted, giving full deference to the legislative history thus summarized.Since the original enactment of section 108, and as of the date of this opinion, this Court has decided seven commodity straddle cases. Four of these: Miller v. Commissioner, supra;Landreth v. Commissioner, T.C. Memo. 1985-413; Kurtz v. Commissioner, T.C. Memo 1985-410">T.C. Memo. 1985-410; and Perlin v. Commissioner, 86 T.C. 388">86 T.C. 388 (1986), each hold that the taxpayers there involved had a reasonable prospect of some profit from the transactions and were entitled to apply former section 108. The remaining three cases, Brown v. Commissioner, supra,Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985), and DeMartino v. Commissioner, T.C. Memo 1986-263">T.C. Memo. 1986-263, hold that the transactions there were shams.1170 All of the seven aforementioned 316 cases were decided after the enactment of section 108 in 1984 and before its amendment in 1986. In Miller, the taxpayer, an individual with substantial commodity trading experience, incurred losses in the amount of $ 103,325 on a series of gold futures straddle trades executed during 1979. The Court, finding these trades to be part of a commodity tax straddle scheme designed to realize tax losses of approximately $ 100,000 in 1979, stated that "But for section 108, * * * we would be prepared to find against [taxpayer] since [taxpayer] lacked the requisite economic profit objective necessary to enable [him] to deduct [his] commodity tax straddle losses in [1979]." 84 T.C. at 835. We, however, construed the 1984 version of section 108 to require the allowance as deductions of taxpayer's gold straddle trading losses.Both Landreth and Kurtz follow the rationale of Miller.Subsequently, in Forseth v. Commissioner, supra, we held that the losses incurred by the taxpayers on certain gold and platinum forward straddle trades were not allowable, finding that the trades were factual shams. In Forseth, the taxpayers opened discretionary trading accounts with L.M.E. Commodities, Ltd. (LMEC), 317 in London, authorizing the company to conduct discretionary trading in gold and platinum forward contracts on their behalf. 131 During 1980 and 1981, the taxpayers incurred large losses on the cancellation and offset of certain gold and platinum forward contracts executed by LMEC on their behalf. The taxpayers claimed these losses on their 1980 and 1981 Federal income tax returns.In sustaining respondent's disallowance of the losses in Forseth, we found that the transactions "were factual shams, inspired, designed, and executed by [LMEC] * * for the sole purpose of achieving for its investors capital and ordinary losses to offset their unrelated income in 1980 and 1981." 85 T.C. at 165. We relied on the following facts as indicia of sham: (1) The remarkable correlation between the tax needs of each taxpayer and the nature and amount of tax losses delivered by LMEC; (2) the remarkable correlation 318 1171 between the amount of the projected losses and the amount of losses actually delivered for various levels of margin deposits; (3) the remarkable correlation between the amount of margin deposits paid to LMEC by the taxpayers at the beginning of trading and the amount of overall net losses realized by the taxpayers on their commodity trades; (4) LMEC's willingness to undertake trades in gold and platinum forward contracts on behalf of the taxpayers prior to receiving margin deposits from them; and (5) the lack of evidence corroborating testimony that LMEC established long or short positions with market-making brokers before such positions were laid off with the taxpayers.Similarly, in Brown v. Commissioner, 85 T.C. 968">85 T.C. 968 (1985), we disallowed losses incurred by the taxpayers on straddle trades involving forward contracts for the purchase and sale of Ginnie Maes and Freddie Macs, finding that the "disputed transactions constituted factual shams which were inspired, designed, and executed * * * for the sole purpose of attempting to achieve tax losses for [the taxpayers]." 85 T.C. at 1000. In Brown, the taxpayers opened discretionary trading accounts with Gregory Investment & Management, 319 Inc. (GIM), which subsequently entered into forward contracts for the purchase and sale of Ginnie Maes and Freddie Macs with Gregory Government Securities, Inc. (GGS). The Court relied on the following facts in finding that these trades were not bona fide: (1) The forward contracts were bought and sold between the taxpayers and GGS; (2) the taxpayers executed powers of attorney authorizing GGS to perform any act on their behalf; and (3) GGS manipulated profits by foregoing a part of its fee or by utilizing its pricing formula.In Perlin v. Commissioner, supra, we allowed deductions for certain commodity straddle trading losses incurred by taxpayers who were professional commodity dealers or persons regularly engaged in investing in regulated futures contracts. We found that these trades were in fact executed by competitive open-outcry bidding in accordance with the regulations of the Commodity Futures Trading Commission and therefore were bona fide rather than prearranged or fictitious transactions. We further found that respondent had failed to overcome the presumption applicable to 1172 dealers and certain investors that the commodity straddles had been entered into for profit within 320 the meaning of section 108(b).DeMartino v. Commissioner, supra, found the straddles there involved to have been prearranged and therefore shams.We think the critical inquiry in this case must be whether the losses putatively incurred under petitioners' tax straddle scheme, i.e., the London options transaction, are deductible as claimed, or whether the London options transaction lacked economic substance and was therefore a sham. See Brown v. Commissioner, supra, and Forseth v. Commissioner, supra. The one consistent thread which runs through all of the cases consolidated in this proceeding is that losses, either ordinary or capital, were intentionally incurred in year one, followed by countervailing gains in year two or in many instances later as a result of rollovers. 132321 See Smith v. Commissioner, 78 T.C. at 390-391.For purposes of the discussion which follows we assume, without deciding, that the commodity options and futures contracts which petitioners entered into were actual contracts. In thus postulating this assumption, we necessarily focus our attention not on whether petitioners have sufficiently authenticated their transactions (i.e., proved that there were actual transactions), but rather whether such transactions, even if actually proven, are nevertheless sufficient to accomplish the tax results which petitioners contemplated. Thus, we are here focusing our attention not on questions of fact but on a question of law. If section 1234 losses are unallowable under a paradigm set of facts as postulated by petitioners, then the question of whether petitioners have introduced enough evidence to prove that the transactions are authentic becomes moot. See Blum, "Knetsch v. United States: A Pronouncement on Tax Avoidance," 40 Taxes 296">40 Taxes 296, 301 (April 1962). See Knetsch v. United States, 364 U.S. 361">364 U.S. 361 (1960).1173 Unless we accept the a priori premise upon which the commodity straddles in this case were marketed, namely, that formal compliance with the literal provisions 322 of the Internal Revenue Code ends the discussion of loss deductibility, then there must be some profit objective in commodity straddling beyond "impressive tax savings." See Goldfein & Hochberg, "Use of Commodity Straddles Can Effect Impressive Tax Savings," 29 J. Tax. 342 (1968). That objective could only be that a taxpayer, such as any of petitioners herein, sought to profit from a "difference" gain in excess of commissions and other costs upon the completion of his commodity trading.133323 (A difference loss or gain is the net difference exclusive of commission and other costs between loss and gain when all of the positions have been closed out. See Smith v. Commissioner, 78 T.C. at 366.)The tax rationale of commodity tax straddles is fully described in Smith v. Commissioner, 78 T.C. at 363-366. The option straddles and option hedges described in our findings of fact in this case are each a form of commodity tax straddle, the tax objective of each of which was to "move" income from year one of the straddle scheme to a subsequent year, and in the process convert it from ordinary income to long-term capital gain. 134In our findings of fact we have set out a representative overall London option transaction for each of the six major broker/dealers. 135324 As reflected in the following table all six produced substantial ordinary losses in year one and insignificant overall gains or losses (difference gains or losses plus commissions) upon the conclusion of the strategy. 136 All money is stated in English pounds (#).1174 DifferenceOrdinary (loss)gains (or loss)CommissionsBroker/dealerin year onebefore commissionsdebitedCompetex(56,240)40(6,816.08)Rudolf Wolff(48,000)24,900137 (22,695.00)Gardner/Amalgamated(27,315)3,290(6,725.76)Commodity Analysis(37,200)0(3,720.00)Rothmetal(21,420)45(2,892.00)There can be no real dispute that the tax centerpiece of the London options transaction was the closing of the sold option in year one with an ordinary loss objective and the moving of the offsetting capital gain to a subsequent year. The London option trades were consciously effected with this in mind. Petitioners no doubt realize that, given the complexity of trading in commodity options and futures and the relatively high cost of commissions, profiting from difference gains in amounts sizable enough to make the enterprise worthwhile is a difficult and hazardous undertaking at best. It follows logically, then, that 325 the intentional skewing of the transactions to realize year one losses introduces an additional negative element which prohibitively stacks the deck against the chances of significant financial success.Petitioners argue that under the London options transaction, there was a reasonable prospect for a profit. This argument conveniently overlooks the fact that in the critical year -- the loss year -- there was no prospect for any profit, for any other result would have destroyed the raison d'etre for entering into the London options transaction in the first place. We reemphasize at this point, however, that the focus of our attention is petitioners' entire tax straddle scheme, and not each separate straddle. It is the overall scheme which taints the deductibility of the year one losses. Smith v. Commissioner, 78 T.C. at 390-391; cf. Miller v. Commissioner, 84 T.C. at 843.In Landry v. Commissioner, 86 T.C. 1284">86 T.C. 1284 (1986) (involving the deductibility of losses in the first year of a real estate venture), the Commissioner had stated on brief that he did not dispute that taxpayer's long-range goal was to realize a profit, but argued that no deductions were 1175 allowable because taxpayer lacked 326 a primary good-faith intent to "earn a profit during the taxable year [emphasis in original] in which the deductions were claimed [emphasis added]." 86 T.C. at 1305. We rejected this argument, pointing out that many businesses are fraught with losses during their startup years. We stated that the statute there involved (sec. 183) mandates only that the activity be entered into or continued with an actual and honest ojective that it become profitable within a reasonable time. Since the taxpayers in the case before us had no perceptible profit objective and intentionally incurred losses in year one, their case is readily distinguishable from Landry.Since there was no prospect of any profit in petitioners' loss year -- year one -- they are left with the argument that mere technical compliance with the provisions of the Code is sufficient. Petitioners do not effectively articulate this argument by keying elements of the straddles to specific Code sections, but for present purposes, we will assume that they have done so. 138327 Section 165 allows as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 1234 determines the character of gains and losses attributable to option transactions, including commodity options. New section 108(a) allows losses sustained by investors in straddle transactions if incurred in a transaction entered into for profit. But did the intentional closing transactions in year one of petitioners' tax straddle scheme fit within what sections 165 and 1234, and new section 108(a), intended? In the words of the Supreme Court, "The question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended." Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 469 (1935). We think, as applied to this case, the question can be answered by positing and answering another question: Could petitioners have profited from difference gains in commodity straddle transactions had they not 328 in every instance entered into closing transactions 1176 on sold options in year one of the straddle operation? Since the answer to this question must be "yes," it must follow that there was no business or profit-making purpose behind the sold option closing transactions above and beyond tax deductions. The intentionally realized losses in year one were not necessary or helpful in profiting from difference gains in petitioners' commodity straddle transactions. Put in this light, the London options strategy was "a mere device which put on the form of [commodity option and futures transactions] as a disguise for concealing its real character," the obtaining of unallowable loss deductions. As such, the London options transaction lacked economic substance and was a sham. 139329 In Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332, 347 (1985), we defined "sham in substance" as "the expedient of drawing up papers to characterize transactions contrary to objective economic realities and which have no economic significance beyond expected tax benefits." Stated another way, a sham in substance is simply a mislabeling of what actually occurred. 140 Petitioners here purported to be seeking profits from difference gains, but they were actually skewing the transactions for the sole purpose of obtaining expected tax benefits.In Forseth v. Commissioner, 85 T.C. at 166, we held that section 108 is not available in commodity straddle cases involving factual shams, i.e., in those situations where the taxpayer does not establish the jural relationship he purports to create. See Professor Blum's article, supra at 310-311. We now hold that section 108 is likewise not available to permit loss deductions in the first year of commodity 330 straddle transactions when, as here, the sham involves a series of transactions having no business or profit-making function apart from obtaining tax deductions. The losses intentionally incurred by petitioners in this case 1177 were not intended by sections 165 and 1234 and amended section 108. Gregory v. Helvering, supra.We do not believe that Wehrly v. United States, 792 F.2d 878">792 F.2d 878 (9th Cir. 1986), requires a different result. The Ninth Circuit reversed and remanded the District Court judgment in favor of the Government following a jury verdict, holding that the retroactive "for profit" language of section 108 (before the 1986 amendment) requires the investor to have only a reasonable expectation of a profit. The Court held that profit must be a motive, but not necessarily (contrary to what the trial judge charged the jury) the primary motive for entering into a straddle transaction.Thus, the Wehrly reversal turned on what the Circuit Court found to be an incorrect standard for determining profit motive. The absence of economic substance in the London option transaction negates the existence of any profit motive. Our holding that the London option transaction was a sham in substance 331 is therefore not in conflict with Wehrly.In conclusion, we hold that the London option transaction -- petitioners' multiple and complex tax straddle scheme encompassing prearranged results -- lacked economic substance and was a sham. Petitioners consequently may not deduct the losses claimed by them in year one of their straddle transactions. It follows, of course, that since the straddle transactions were a sham, gains reported by petitioners in year two and thereafter do not constitute taxable income to them, and we so hold. This holding is also consistent with section 108(c) which expressly allows net losses, if any, if losses are disallowed under section 108(a) and (b).Except in docket Number 12833-81, respondent has advised the Court and petitioners that respondent no longer asserts the addition to tax for negligence under section 6653(a) insofar as the London options issue is concerned. We so hold. In docket Number 12833-81, respondent continues to assert the addition to tax for negligence under section 6653(a) on the basis of petitioner's failing to report offsetting gains in year two of his straddle transaction. 1178 Since we have held that the London options strategy and 332 the concomitant straddle transactions were a sham, there were no gains to report and the addition to tax for negligence for failure to report a fictitious gain may not be imposed.This opinion involves only the London option issue. As to those petitioners whose cases involve solely this issue, decisions will be entered for respondent. As to those petitioners whose cases involve one or more unrelated issues which have been settled, decisions will be entered under Rule 155. As to those petitioners whose cases involve one or more as yet unresolved and unrelated issues, appropriate orders will be issued.To reflect the foregoing,Decisions will be entered for the respondent in those cases listed in Appendix B.Decisions will be entered under Rule 155 in those cases listed in Appendix C.Appropriate orders will be issued in those cases listed in Appendix D. 1179 SCHEDULE 1LONDON OPTIONS CASESNet Tax Savings [Cost] of Investment1975 - 1976 Straddle12345CashTax savingsInvested atTax costNet taxinvestmentfrom 19757.5% forof 1976-76savings1975ord. loss1 yearLTCG[cost] 3 - 4Anderson, EddieN/ABunning, JohnN/AChadwick, JamesN/ADavison, JudsonN/ADrewes, Kenneth$ 8,400$ 31,611$ 33,982$ 16,941$ 17,041Emilson, HerbertN/AGarff, Gary7,50045,42148,82815,16933,659Hohnstein, Philip9,00050,57554,36816,46937,899Holmes, EricN/AKottinger, William7,00012,86013,8259,9613,864Meese, Robert6,00015,77116,95412,3544,600Miller, RobertN/ANeibaur, DarwinN/AOkies, Joseph3,0009,2359,9281,3608,568Schettler, Gordon10,00056,65660,90527,93732,968Schmidt, RobertN/ASigman, MichaelN/AWilliams, DonN/A333 1180 SCHEDULE 1LONDON OPTIONS CASESNet Tax Savings [Cost] of Investment1975-1976 Straddle6789Col. 1 invested atNet cashNet taxNet cash7.5% for 2 yearssavingssavings persavings per1-155625[cost] (5 - 6)$ 1 (5/1)$ 1 (7/1)Anderson, EddieBunning, JohnChadwick, JamesDavison, JudsonDrewes, Kenneth$ 9,707$ 7,334 2.03:1.87:1Emilson, HerbertGarff, Gary8,66724,992 4.49:1 3.33:1Hohnstein, Philip10,40127,498 4.21:13.06:1Holmes, EricKottinger, William8,089[4,225].55:1[.60]:1Meese, Robert6,934[2,334].77:1[.39]:1Miller, RobertNeibaur, DarwinOkies, Joseph3,4675,101 2.86:11.70:1Schettler, Gordon11,55621,412 3.30:12.14:1Schmidt, RobertSigman, MichaelWilliams, DonSCHEDULE 1LONDON OPTIONS CASESNet Tax Savings [Cost] of Investment1976-1977 StraddleRecognition of Gain in 197712345CashTax savingsInvested atTax costNet taxinvestmentfrom 19767.2% forof 1977STCGsavings1976ord. loss1 yearor * LTCG[cost] 3 - 4Anderson, Eddie$ 6,000$ 24,730$ 26,511$ 34,110[$ 7,599]Bunning, JohnUnable to obtain tax returnsChadwick, James3,0007,2617,784* 3,350* 4,434 1 Davison, Judson 12,00053,19657,02633,3981 23,628 Drewes, Kenneth9,60027,85429,57042,250[12,680]Emilson, Herbert6,00025,00026,80029.995[3,195]Garff, Gary7,75015,39816,50744,678[28,171]Hohnstein, PhilipN/AHolmes, Eric3,2507,4567,993* 3,832* 4,161 Kottinger, WilliamN/AMeese, RobertUnable to obtain tax returns2 Miller, Robert 11,00047,35750,7679,6552 41,122 Neibaur, Darwin12,00062,13066,603* 80,937[14,334]Okies, Joseph3,00010,75511,529* 12,495[966]Schettler, Gordon8,00053,85057,72786,465[28,738]Schmidt, Robert3,00013,84614,84317,776[2,933]Sigman, Michael3,7507,4868,025* 16,630[8,605]Williams, Don7,20020,89422,398* 8,650* 13,748 334 SCHEDULE 1LONDON OPTIONS CASESNet Tax Savings [Cost] of Investment1976-1977 StraddleRecognition of Gain in 19776789Col. 1 investedNet cashNet taxNet cashat 7.2% forsavingssavingssavings2 years[cost][cost][cost](5 - 6)per $ 1.00per $ 1.00Anderson, Eddie$ 6,895[$ 14,494][1.26:1][2.42:1]Bunning, JohnChadwick, James3,448986 1.48:1 .34:1 n1Davison, Judson 13,7909,838 1.97:1 .82:1 Drewes, Kenneth11,032[23,712][1.32]:1 [2.47]:1 Emilson, Herbert6,895[10,090][.53]:1 [1.68]:1 Garff, Gary8,906[37,077][3.637]:1 [4.87]:1 Hohnstein, PhilipHolmes, Eric3,735426 1.28:1 .13:1 Kottinger, WilliamMeese, Robertn2Miller, Robert 12,64128,471 3.74:1 2.59:1 Neibaur, Darwin13,790[28,124][1.19]:1 [2.34]:1 Okies, Joseph3,448[4,414][.32]:1 [1.47]:1 Schettler, Gordon9,193[37,931][3.59]:1 [4.74]:1 Schmidt, Robert3,448[6,381][.98]:1 [2.13]:1 Sigman, Michael4,309[12,914][2.29]:1 [3.44]:1 Williams, Don8,2745,474 1.91:1 .76:1 1181 APPENDIX 335 ABrenton and Sandra Hughes, docket No. 4054-79; Troy F. Ray and Mattie B. Ray, docket No. 5544-79; John D. Taylor and Marilyn F. Taylor, docket No. 5649-79; Arthur J. Grote and Delta J. Grote, docket No. 7605-79; Robert W. Gibbs and Ramona P. Gibbs, docket No. 7692-79; Calvin E. Carman, docket No. 8146-79; Leonard L. Telford and Leona M. Telford, docket No. 8147-79; Roy M. Kizerian and Ora Lee Kizerian, docket No. 8148-79; Scott B. Smith and Venita Smith, docket No. 8150-79; Paul S. Rogers and Susan M. Rogers, docket No. 8151-79; Warren J. Latey and Margaret F. Latey, docket No. 8152-79; Earl W. Sampson and Ler Lynn Sampson, Marilyn Stevens, docket No. 8153-79; William R. Clyde and Hazel S. Clyde, docket No. 8156-79; Robert H. Burgener and Diane Burgener, docket No. 8157-79; Steven R. Vareen and Karen F. Vareen, docket No. 8158-79; Richard F. Bennett and Darlene Bennett, Ronald D. Wightman and Ilse S. Wightman, docket No. 8160-79; David H. White, Mariano Martin and Dolores Martin, Reed Fietkau and Bessie Fietkau, Warren B. Davis and Marjorie W. Davis, Tats Masuda and Hatsue Masuda, Ben E. Lewis and Barbara W. Lewis, Andrew F. Wenta and Lorna A. Wenta, Clark L. Tolton and Asenatha A. 336 Tolton, Don J. Hobby and Rowena C. Hobby, docket No. 8161-79; Norman C. Kirby and Josie B. Kirby, Grant C. Mills and Georgia H. Mills, Asael S. Jones and Rossine W. Jones, Spencer G. Beck and June Beck, docket No. 8163-79, Thomas and Susanne Minas, docket No. 8668-79; George K. Riches and Shirley C. Riches, docket No. 8720-79; Michael L. Jones and Beverly H. Jones, docket No. 9118-79; John M. McKain and Barbara A. McKain, docket No. 9453-79; J. Gordon Brookover and Barbara J. Brookover, docket No. 9454-79; Al H. Kuykendall and Carolyn T. Kuykendall, docket No. 9455-79; Michael P. Naeve and Kaye Y. Naeve, docket No. 9456-79; Clarence William Pack and Pat F. Pack, docket No. 9457-79; George T. Davis and Jane W. Davis, docket No. 9458-79; Dale D. Jones and Leah B. Jones, docket No. 9459-79; Donald L. Pape and Darlyne Pape, docket No. 9460-79; Rjay Lloyd and Sara A. Lloyd, docket No. 9461-79; Richard S. Bowers and Jeannine M. Bowers, docket No. 9580-79; Dean H. Affleck and Zella M. Affleck, docket No. 9587-79; William McDougall and Marselle E. McDougall, docket No. 9588-79; Gene L. Glenn and Ruth Glenn, docket No. 9589-79; Ace S. Raymond and Marjorie K. Raymond, docket No. 9590-79; Richard 337 S. McLelland, Jr., and Susan M. McLelland, docket No. 9591-79; James W. Williams and Carol Williams, docket No. 9698-79; Neal C. Capel and Lucy Capel, docket No. 9699-79; Gordon O. Schettler and Dorothy Schettler, docket No. 9700-79; John L. Kallmeyer and Magda A. Kallmeyer, Burton E. Becker and Phyllis W. Becker, William Becker and Joyce G. Becker, Robert J. Oliver and Mary E. Oliver, docket No. 9830-79; John H. Affleck and Lynn I. Affleck, docket No. 9908-79; Terry Payne and Patricia Payne, docket No. 9993-79; Robert L. Bothwell and Margareth J. Bothwell, docket No. 10466-79; Robert J. Ostwinkle and Carol A. Ostwinkle, docket No. 11819-79; Paul N. Christensen and Winifred L. Christensen, docket No. 11822-79; Albert M. Carollo and 1182 Leona Carollo, docket No. 12157-79; J. Jerome Wildgen and Jacqueline Wildgen, docket No. 12427-79; Terry Payne and Patricia Payne, docket No. 12803-79; James Tisdale and Brenda S. Tisdale, docket No. 13009-79; Robert G. Tate and Lois J. Tate, docket No. 13580-79; Joseph A. Ivey, Jr., and Arline M. Ivey, docket No. 13586-79; Alvin B. Meyer, docket No. 13835-79; J. Harley Quint and Patricia E. Quint, docket No. 14469-79; Darwin Neibaur and June Neibaur, 338 docket No. 14502-79; R. M. Hobson, Inc., docket No. 14656-79; William B. Kottinger III and Dian Kottinger, docket No. 14944-79; James M. Bledsoe and Donallorene Bledsoe, docket No. 14947-79; Kay J. Smallwood and Virginia M. Smallwood, docket No. 15119-79; James P. Giangobbe and Patricia A. Giangobbe, docket No. 15144-79; Lawrence Graff and Dolores Graff, docket No. 15145-79; Roger E. Hildahl and Glenda (Hildahl) Allen, docket No. 15232-79; Jack Douglass, Josephine Douglass, Leon Nightingale, Jacqueline Nightingale and Steven R. Nightingale, docket No. 15238-79; Leslie L. Mitchell and Colleen Mitchell, docket No. 15259-79; Paul J. Villano, Jr., and Shirley N. Villano, docket No. 15260-79; Richard E. Kremp and Carole L. Kremp, docket No. 15286-79; James R. Barnard and Ann B. Barnard, docket No. 15340-79; John B. Crooks and Rita S. Crooks, docket No. 15591-79; Paul G. Rees, docket No. 16151-79; Lester B. Madsen and Patricia A. Madsen, docket No. 16319-79; Marvin Lipschultz and Beverlee Lipschultz, docket No. 16358-79; Robert A. Seaborn and Linda R. Seaborn, docket No. 16823-79; Allen Nobel Farms, Inc., docket No. 17421-79; Donald L. Lucas and Sally S. Lucas, docket No. 17539-79; Terry 339 W. Blankinship and Nora R. Blankinship, docket No. 321-80; Freddie C. Leguillon and Margo Leguillon, Joseph Sanfilippo and Marian R. Sanfilippo, Michael L. Sanfilippo and Judy L. Sanfilippo, docket No. 673-80; John P. Lee and Patricia Lee, docket No. 798-80; Robert E. Lee and Elizabeth I. Lee, docket No. 868-80; Otto L. Tiede and Helen Tiede, docket No. 956-80; Reed N. and Pauline Christensen, docket No. 957-80; Joseph D. Becker and Karen M. Becker, docket No. 958-80; Cornelius and Catherine Mahoney, docket No. 959-80; Gary L. and Linda J. Bringhurst, docket No. 960-80; Ira Neibaur & Sons, Inc., docket No. 961-80; Gustav E. Rosenheim and Alyce Rosenheim, docket No. 962-80; Frank L. and Lois K. Harms, docket No. 963-80; Lavell B. and Elma Winn, docket No. 964-80; Henry G. and Paula West, docket No. 965-80; Edward Bohrer and Gwenyth Bohrer, docket No. 966-80; Glen and Joaquina Sheppard, docket No. 967-80; Glenn H. Weyhrich and Carol J. Weyhrich, docket No. 1130-80; Robert W. Clark and Cynthia L. Clark, docket No. 1131-80; Judson A. Davison and Betty D. Davison, docket No. 1132-80; Phil Hohnstein and Dorothy Hohnstein, docket No. 1133-80; Marion G. Peterson and Bonnie H. Peterson, docket 340 No. 1134-80; Estate of Robert O. Barber, Deceased, Mary O. Barber, Personal Representative, and Mary O. Barber, Surviving Spouse, docket No. 1135-80; Dean T. Watkins and Janine Watkins, docket No. 1136-80; Kenneth E. Drewes and Lois Drewes, docket No. 1137-80; Robert F. Meger, docket No. 1138-80; Alvin L. Stratton and Jane A. Stratton, docket No. 1139-80; Harry L. Switzer and Ann H. Switzer, docket No. 1140-80; Levi D. Kuhn and Rose M. Kuhn, docket No. 1141-80; Edwin L. Madsen and Grace G. Madsen, 1183 docket No. 1142-80; Ed A. Butterfield and Barbara Butterfield, docket No. 1243-80; Jerry L. Butterfield and Karen P. Butterfield, docket No. 1339-80; Earl Kramer and Janet R. Kramer, docket No. 1627-80; Benjamin Kopf, Jr., and Marian M. Kopf, docket No. 2502-80; Lee Roy, docket No. 2569-80; Joe R. Wilmetti and Karen Wilmetti, docket No. 2872-80; Don V. Cook and Lynn S. Cook, docket No. 2875-80; J. Keith Ormond and Bonnie J. Ormond, docket No. 3205-80; Carvel R. Shaffer and Bonnie J. Shaffer, docket No. 3279-80; James M. Pahl and Freida J. Pahl, docket No. 3332-80; Glee Michaelson and Dorothy A. Michaelson, docket No. 3333-80; Sherman L. Ruff and Betty Ruff, docket No. 3334-80; Fred Tiede 341 and Irene Tiede, docket No. 3335-80; R. Michael Shaw and Beverly L. Shaw, docket No. 3336-80; Jerome Singer and Zenia Singer, docket No. 3565-80; Donald Thal and Eleanor Thal, docket No. 3566-80; Irving Rosengard and Sophie Rosengard, docket No. 3568-80; Nick C. Scholzen and Erroleen Scholzen, docket No. 3705-80; Lowell T. Niebaum and Karen D. Niebaum, docket No. 3999-80; Robert Bunning and Mary D. Bunning, docket No. 4000-80; John Bunning, Jr., and Esther Bunning, docket No. 4036-80; Michael G. Harris and Nancy S. Harris, docket No. 4174-80; Michael A. Davis and Lynn C. Davis, docket No. 4363-80; Harvey J. Widroe and Margery Widroe, docket No. 4457-80; Carl H. Church and Lynne H. Church, docket No. 4567-80; Garth H. and Margaret A. Wilson, docket No. 4665-80; Maurice J. Niebaum, docket No. 5055-80; Robert B. Bragg and Marcia G. Bragg, docket No. 5333-80; Hannah M. Bragg, docket No. 5334-80; Joe B. Hollingsworth and Billie S. Hollingsworth, docket No. 5395-80; Comer R. Youmans, Jr., and Margaret A. Youmans, docket No. 5396-80; William A. Jackson and Gloria C. Jackson, docket No. 5397-80; Charles T. Austin and Pat M. Austin, docket No. 5398-80; Charles J. Delancey and Eleanor M. Delancey, 342 docket No. 5399-80; George F. Elsenbrock and Margaret K. Elsenbrock, docket No. 5400-80; Raymond Killingsworth and Patsy Killingsworth, docket No. 5401-80; Keith L. Wedin and Sharon L. Wedin, docket No. 5465-80; Vernon J. Johnson and Jeanne P. Johnson, docket No. 5466-80; Eugene M. Higgins and Elaine H. Higgins, docket No. 5467-80; Paul M. White and Janice Lori White, docket No. 5468-80; Ernest W. Chalekson, docket No. 5469-80; Robert S. Feldman and Joan Feldman, docket No. 5470-80; Morgan W. Walker, docket No. 6315-80; John G. McGregor, Jr., and Jean R. McGregor, docket No. 6589-80; Estate of Barbara Silverman, Deceased, Jay I. Silverman, Personal Representative, and Jay I. Silverman, Surviving Spouse, docket No. 6590-80; Morris H. Fine and Beverly S. Fine, docket No. 6591-80; Naresh C. Jain, docket No. 6702-80; Robert W. Stenger and Kathie Stenger, docket No. 6840-80; Morton Edelstein, docket No. 6906-80; Paul Copperman, docket No. 7204-80; John R. Kinker and Betsy Kinker, docket No. 7829-80; Donald L. Lucas and Sally S. Lucas, docket No. 7836-80; Allen Dale Dykman and Marian Dykman, docket No. 8151-80; Ira Larsen and Helen J. Larsen, docket No. 8536-80; Dean R. Ackley and Sandra 343 Ackley, docket No. 8583-80; Wayne E. Taysom and Patricia R. Taysom, docket No. 8584-80; Ira A. Haskell and Donna Haskell, docket No. 8585-80; James E. Crowell and Lois C. Crowell, docket No. 8586-80; Calvin D. 1184 Nelson and Judith Nelson, docket No. 8587-80; Bernard I. Rabinovitz and Sylvia Rabinovitz, docket No. 8588-80; Stanley J. Greenfield and Betty J. Greenfield, docket No. 8589-80; Kenneth J. Gilson, docket No. 8711-80; Donald K. Richards and Iva Lu Richards, docket No. 8905-80; Robert M. and Berenice M. Healy, docket No. 9060-80; Daniel J. O'Connor and Irene G. O'Connor, docket No. 9076-80; Don G. Williams and Elaine I. Williams, docket No. 9084-80; Don L. Christensen and Lora Christensen, docket No. 9325-80; Joseph P. Klein and Kathy E. Klein, docket No. 9329-80; Larry W. Casey and Suanne Casey, docket No. 9330-80; Benjamin Feldman and Evelyn Feldman, docket No. 9331-80; Margaret Cole, Formerly Margaret Boleky, docket No. 9332-80; Edward J. Boleky III, docket No. 9333-80; John H. Payne and Dorothy Payne, docket No. 9418-80; Edward C. Hall and Stephanie M. Hall, docket No. 9423-80; Grant M. Christensen, docket No. 9443-80; William H. Geisler, docket No. 9590-80; Daniel J. and 344 Janice Breinin, docket No. 9746-80; Jerome and Rita Rosenbloom, docket No. 9747-80; Norman C. and Barbara B. Charles, docket No. 9748-80; Kenneth and Ana M. Young, docket No. 9763-80; Donald W. Geis and Joan E. Geis, docket No. 10188-80; Charles M. Shumate and Lillian Shumate, docket No. 10226-80; Ronald Pellerito and Estate of Sharon Pellerito, Deceased, Ronald Pellerito, Executor, docket No. 10252-80; Robert G. Condra and Helen I. Condra, docket No. 10269-80; James G. Glasper and Francine Y. Glasper, docket No. 10270-80; Herbert M. Elliott and Bonnie J. Elliott, docket No. 10525-80; Kenneth G. Frazee and Elva E. Frazee Barraclough, docket No. 10597-80; Harold W. and Dorothy H. Finley, docket No. 10604-80; Boyd R. Burkhardt and Judith C. Burkhardt, docket No. 10605-80; Brad Lipschultz Trust, by David Kardoff, Trustee, docket No. 10642-80; Allied Ventures, Inc., docket No. 10643-80; Stanley L. and Geraldine M. Heiner, docket No. 10660-80; Billimac C. Bradley and Mable G. Bradley, docket No. 10721-80; Leo M. Knudson and Betty L. Knudson, docket No. 10722-80; Hyrum J. Christiansen and Lou Etta Christiansen, docket No. 10723-80; Robert W. and Ramona P. Gibbs, docket No. 10724-80; David 345 K. Ricks and Janet L. Ricks, docket No. 10725-80; Stanley Snyder and Renee Snyder, docket No. 10902-80; Bert M. Rettner, docket No. 10922-80; Michael C. Romney and Dora P. Romney, docket No. 10929-80; John E. Biegger and Shirley A. Biegger, docket No. 10986-80; Ralph N. Creer and Jairene V. Creer, docket No. 11017-80; Pascal Dellegrazie and Doris Dellegrazie, docket No. 11067-80; Marvin Lipschultz and Beverlee Lipschultz, docket No. 11068-80; Vernon L. Watkins and Marilyn Watkins, docket No. 11096-80; Gary S. Vandeweghe and Barbara M. Vandeweghe, docket No. 11097-80; Alexander T.S. Healy and Mary Healy, docket No. 11140-80; Stanley R. Kielmar and Carol J. Kielmar, docket No. 11173-80; William M. Preskar and Angelina Preskar, docket No. 11174-80; John C. Sullivan, docket No. 11175-80; Lawrence Glick and Nancy Glick, docket No. 11176-80; Hubert C. Swartout and Helen R. Swartout, docket No. 11177-80; Louis Buddy Yosha and Janet Yosha, docket No. 11195-80; Brad, Mark and Jason Lipschultz Trust, by David Kardoff, Trustee, docket No. 11205-80; Jason Lipschultz Trust, by David Kardoff, Trustee, docket No. 11206-80; Mark Lipschultz Trust, by David 1185 Kardoff, Trustee, docket No. 11207-80; John 346 Healy and Charlotte M. Healy, docket No. 11208-80; Donald S. Sloane and Nora J. Sloane, docket No. 11212-80; John E. Kalsbeck and Jacqueline Kalsbeck, docket No. 11216-80; Holmes Hally Industries, docket No. 11282-80; Robert J. Dunn and Peggy A. Dunn, docket No. 11402-80; Benn Jacobson and Tiziana Jacobson, docket No. 11495-80; Paul R. and Louise I. Greenberg, docket No. 11496-80; Edward O. Breunig and Mary E. Breunig, docket No. 11574-80; Henry C. Ryder and Velma D. Ryder, docket No. 11605-80; William E. Casselman and Lucy B. Casselman, docket No. 11640-80; Lloyd S. Epstein and Bernice A. Epstein, docket No. 11689-80; R.D. Wightman and Ilse S. Wightman, docket No. 11737-80; Leonard L. Telford and Leona M. Telford, docket No. 11739-80; Robert D. Duffin and June S. Duffin, and Dean F. Johnson, docket No. 11745-80; Delbert Lambert and Karel Lambert, docket No. 11748-80; Frank P. Vantrepotte and Margaret T. Vantrepotte, docket No. 11755-80; Robert G. Kilburg and Margaret A. Kilburg, docket No. 11756-80; Howard Zuker and Linda Zuker, docket No. 11757-80; Harold L. Melsheimer and Sabrina Melsheimer, docket No. 11780-80; Douglas C. Stewart and Mary L. Stewart, docket No. 11781-80; Clarence 347 Wm. Pack and Pat F. Pack, docket No. 11782-80; Lee I. Bromiley and Dianna C. Bromiley, docket No. 11783-80; Wayne L. Taylor and Sandra H. Taylor, docket No. 11811-80; Manny and Sally Karbelnig, docket No. 11823-80; Jasper O. McCollough, Jr., and Joan H. McCollough, docket No. 11894-80; John L. Knight and Judith H. Knight, docket No. 11952-80; Ronald A. Nielsen, docket No. 12006-80; Robert A. and Vivian K. Meese, docket No. 12009-80; Robert F. Miller, docket No. 12027-80; William M. and Sybil A. Regitz, docket No. 12028-80; Warren and Rena Noland, docket No. 12029-80; Weldon and Judy Noland, docket No. 12030-80; Louis M. Niven and Dolores R. Niven, docket No. 12067-80; W. Paul Mahan and Sandra L. Mahan, docket No. 12122-80; Bernard Zwerling and Lillian Zwerling, docket No. 12144-80; David A. Tallant and Ruth A. Tallant, docket No. 12164-80; Ross E. Siddoway and Imogene Y. Siddoway, docket No. 12197-80; Neils P. Neilson and Irma S. Neilson, docket No. 12198-80; Calvin E. Carman, docket No. 12199-80; Richard F. Bennett and Darlene Bennett, docket No. 12203-80; Glorus R. Rowley, docket No. 12204-80; Paul S. Rogers and Susan R. Rogers, docket No. 12207-80; Frank Naccarato and Joyce Naccarato, 348 docket No. 12213-80; Roland L. Raetz and Gwendolyn S. Raetz, docket No. 12214-80; Wendell E. McDermaid and Fern McDermaid, docket No. 12216-80; Myron L. Brady and Ivie P. Brady, docket No. 12218-80; A. Grant Watson and Stella Watson, docket No. 12219-80; Max Hambelton, docket No. 12221-80; Delos G. Fotheringham and Genevieve C. Fotheringham, Robert B. Johanson and Elizabeth Johanson, Max A. Newren and Coy M. Newren, Richard N. Paul and Edith D. Paul, L. Jay Waldron and Larue Waldron, docket No. 12224-80; Chris S. Lloyd and Carole H. Lloyd, docket No. 12225-80; Leslie K. Feil and Dianne Feil, docket No. 12226-80; Paul I. Nixon, Jr., and Sheri L. Nixon, docket No. 12229-80; Cloyd R. Russell and Janice L. Russell, docket No. 12232-80; Vernon Cavill and Marjorie F. Cavill, docket No. 12233-80; O. Verl Reed and Fern Reed, docket No. 12236-80; 1186 Ralph W. Bleazard and June Bleazard, docket No. 12237-80; James T. Bruce and Janet Bruce, George A. Dean and Jacqueline M. Dean, Martin C. Lindem, Jr., and Margaret M. Lindem, docket No. 12238-80; Estate of Mary R. Gardner, Brenda Ruth Lister, and Ivan Leonard Gardner, Co-Personal Representatives, docket No. 12241-80; Ralph Bleazard and June Bleazard, 349 docket No. 12246-80; Edwin G. Knight and Connie M. Knight, docket No. 12247-80; Heinz F. Rahde and Gisela Rahde, docket No. 12249-80; William P. Werrett and Delrean Werrett, docket No. 12250-80; Harry C. Davis and Darlene I. Davis, docket No. 12252-80; Estate of Mary R. Gardner, Brenda Ruth Lister, and Ivan Leonard Gardner, Co-Personal Representative, docket No. 12253-80; Marv R. Bell and Gladys M. Bell, docket No. 12254-80; D. Creed Brimhall and Elinor B. Brimhall, docket No. 12255-80; William A. Edginton and Lucia B. Edginton, docket No. 12261-80; Warren B. Davis and Marjorie W. Davis, docket No. 12262-80; Roger C. Bare and Blanche M. Bare, J. Blaine Bingham and Darlene R. Bingham, Leonard E. Bluhm and Barbara B. Bluhm, Verda Davis, George M. Fitz and Angeline M. Fitz, Louis B. Freeman and Jayne H. Freeman, Ray C. Gaines and Dorothy J. Gaines, Robert S. Lawson and Betty Lou Lawson, Estate of Donald H. Main, Sr., and Genevieve J. Main, Personal Representative, Levay J. Maestas and Lucy T. Maestas, Doyle E. McInelly and Naida M. McInelly, Richard L. Pulsipher and Kathleen Pulsipher, Boyd L. Peterson and Linda Peterson, A. Eugene Powell and Donna Powell, Ruth P. Prather, Arnold E. Rothermich 350 and Patricia Rothermich, Stuart H. Sorensen, Jack Stephensen and Laura Stephensen, Clyde B. Taylor and Jacqueline Taylor, Harold W. Wack and Patricia Wack, Lavar J. Wilkinson and Marian J. Wilkinson and John D. Richards, Jr., and Dianne A. Richards, docket No. 12263-80; George W. Irwin and Ivonda J. Irwin, docket No. 12264-80; Angela A. Arriz, docket No. 12265-80; Kearn G. Kendall and Vicki R. Kendall, Carl J. Larsen and Shirlee A. Larsen, docket No. 12266-80; Grant Mills and Georgia Mills, docket No. 12267-80; Estate of Leroy Wagstaff, Carol Buhler, Personal Representative and Leah M. Wagstaff, docket No. 12268-80; Glen S. Gold and Virginia Gold, docket No. 12269-80; Edward J. Arriz, Helen M. Evans, Robert H. Hout and Elaine T. Hout, Robert Pecharich and Nancy Pecharich, docket No. 12270-80; Mariano Martin and Delores Martin, docket No. 12273-80; John A. Paskett and Elaine P. Paskett, docket No. 12274-80; David B. Bartell and Santa M. Bartell, docket No. 12343-80; Albert H. Landry and Bonnie M. Landry, docket No. 12344-80; James V. Decker and Patricia P. Decker, docket No. 12345-80; Louis Steven Long and Esther R. Long, docket No. 12410-80; Joseph C. Sapala and Barbara J. Sapala, 351 docket No. 12417-80; Gerald R. Alderson and Roberta G. Alderson, docket No. 12491-80; Shirley Mae Cassidy, docket No. 12608-80; Thomas D. Rice and Winifred E. Rice, docket No. 12609-80; Richard C. Jensen and Valeen Jensen, docket No. 12610-80; Jon R. Young and Lillian G. Young, docket No. 12611-80; Edward L. Gelbach and Sandra L. Gelbach, docket No. 12612-80; Marcia K. Wallace, docket No. 12613-80; Michael Bell, docket No. 12614-80; Thomas P. Sheils and Helen K. Sheils, docket No. 12615-80; Geoffrey B. Edwards and Suzanne W. Edwards, docket No. 1187 12616-80; Howard M. Borris and Jill B. Borris, docket No. 12617-80; Erwin L. Hoffman and Arlene R. Hoffman, docket No. 12618-80; David K. Miller and Linda C. Miller, docket No. 12619-80; Jay A. Redack and Teri H. Redack, docket No. 12620-80; Kenneth Fertig and Claire Gordon, docket No. 12621-80; Howard L. Thaler and Deike Thaler, docket No. 12622-80; Robert W. Bell and Geraldine Bell, docket No. 12623-80; Jack E. Rowe and Patricia S. Rowe, docket No. 12624-80; Gene R. and Rose Mary Hedin, docket No. 12625-80; Benjamin T. Richards and Mary Maureen Richards, docket No. 12721-80; Michael J. Gertner and Judy Gertner, docket No. 12767-80; George 352 E. Van Auken and Ruby I. Van Auken, docket No. 12774-80; Don Stanisich and Shirley Stanisich, docket No. 12793-80; Ralph M. and Molly Wolveck, docket No. 12834-80; Ronald A. Melanson and Florence T. Melanson, docket No. 12864-80; Benn Jacobson, docket No. 12884-80; T.B. Hudson and Dorothy Hudson, docket No. 12901-80; Max W. and Jo Elsie Deason, docket No. 12928-80; Herbert J. Cropper and Patsy R. Cropper, docket No. 12970-80; John J. Dilli, docket No. 12976-80; Robert Franklin and Ann Franklin, docket No. 12987-80; James Toskas and Dale Toskas, docket No. 13049-80; Charles A. Ware and Opal L. Ware, docket No. 13066-80; Phillip Ariew and Jennell Ariew, docket No. 13067-80; Dennis L. Tank and Ann G. Tank, Deceased, by Dennis L. Tank, Surviving Spouse, docket No. 13068-80; John L. Taylor and Martha E. Taylor, docket No. 13069-80; Coleman L. McVea and Eleanor L. McVea, docket No. 13125-80; Dent Dustin and Betty Dustin, docket No. 13126-80; Nelson D. Sirlin and Kathleen A. Sirlin, docket No. 13142-80; Wendell B. Whitacre and Pierrette J. Whitacre, docket No. 13155-80; David A. Scholzen and Judy Scholzen, docket No. 13162-80; Stephen R. Landau, docket No. 13192-80; Keith V. Scholzen and 353 Shelly B. Scholzen, docket No. 13199-80; Lester M. Kaufmann and June B. Kaufmann, docket No. 13223-80; Ronald E. Baker and Judith R. Baker, docket No. 13383-80; James M. Saunders and Pauline B. Saunders, docket No. 13452-80; Mary Lu Scholzen, docket No. 13540-80; Richard E. Spaulding, docket No. 13604-80; Daniel Olonoff and Charlotte Olonoff, docket No. 13616-80; Robert L. Clement and Maurilia Clement, docket No. 13765-80; Laurence B. Torin and Phyllis A. Torin, docket No. 14448-80; Joseph L. Browning, docket No. 14757-80; Jennifer Moore Bailey, Formerly Jennifer Claire Klungvedt and Jennifer Claire Moore, docket No. 15144-80; Donald R. Metz and Cathryn S. Metz, docket No. 15592-80; James S. and Nancy T. Froelich, docket No. 15770-80; Reading Coca-Cola Bottling Works, Inc., docket No. 15771-80; Vincent R. Ruocco and Loyce M. Ruocco, docket No. 15811-80; Charles S. Eytel and Mary Ann Eytel, docket No. 15899-80; R. Clyde Ashworth and Shirley Ashworth, docket No. 16204-80; Harold H. Halford and Janet E. Halford, docket No. 16319-80; Scott D. Gordon and Jacquelin Gordon, docket No. 16483-80; Richard N. Smith and Alice O. Smith, docket No. 16556-80; James B. Kennard and Eleanor K. Kennard, 354 docket No. 16557-80; Charles T. Koval and Joan Koval, docket No. 16558-80; Melvin I. Masterson and Mildred I. Masterson, docket No. 16559-80; Norman D. Nelson and Janet H. Nelson, docket No. 16560-80; Henry S. Pachoe, docket No. 16561-80; Sherwin Nelson, docket No. 16562-80; Richard S. 1188 McLelland, Jr., and Susan M. McLelland, docket No. 16563-80; Vivian J. Stone, docket No. 16656-80; Joseph B. Olson and Betty J. Olson, docket No. 16680-80; Wayne R. Viehweg and Mary Jane Viehweg, docket No. 16681-80; Visut Kanchanapoom and Meechai Kanchanapoom, docket No. 16856-80; Robert W. Bell and Geraldine Bell, docket No. 16857-80; Edward R. Ritvo and Jean K. Ritvo, docket No. 16858-80; Snethen P. Harris, Jr., and Olga W. Harris, docket No. 17069-80; Herbert H. Blankinship and V. Elizabeth Blankinship, docket No. 17117-80; Edward A. Lewis, docket No. 17147-80; Kim K. Collins and Carol R. Collins, docket No. 17148-80; Stephen N. Engberg and Marlene J. Engberg, docket No. 17336-80; John E. and Dorothy M. Keane, docket No. 17351-80; Estate of Leona C. Bryant, Deceased, Marvin D. Bryant, Executor, and Marvin D. Bryant, Surviving Spouse, docket No. 17457-80; Francis J. and Nancy E. Baron, docket No. 355 17644-80; Ace Spencer Raymond and Melanie P. Raymond, docket No. 18137-80; Jack V. Labbee and Lorraine Labbee, docket No. 18654-80; Arnold S. Hiatt and Anne W. Hiatt, docket No. 18692-80; Karl F. and Julia C. Kundert, docket No. 19091-80; Estate of Jack Sarver, Deceased, Irene Sarver, Personal Representative and Irene Sarver, Surviving Spouse, docket No. 19247-80; Kenneth P. Kirchman and Budagail S. Kirchman, docket No. 19248-80; J.M. Hess Construction Co., Inc., docket No. 19382-80; Roscoe E. Abney and Ruby L. Abney, Marshall R. Craig and Ruth H. Craig, Harold A. Dalebout and Louise G. Dalebout, M. Carl Gibson and Irma B. Gibson, Werner Haack and Helen E. Haack, Robert E. Hall and Joyce Hall, Rex G. Hutchinson and Nina G. Hutchinson, Forrest Kleinman and Mary I. Kleinman, Charles B. Morton and Jean G. Morton, James R. Olsen and Lorna S. Olsen, Elbert Stoker and Caroline Stoker, A. Harper Wallace and Ellen W. Wallace, docket No. 19395-80; Douglas M. Adams and Vera H. Adams, Kenneth L. Allred and Ruth H. Allred, Jack H. Alston and Meade L. Alston, Gloria B. Barraclough, Clarence R. Bennion and Ione Bennion, George L. Boyce and Katherine S. Boyce, Gilbert L. Bradshaw and Beth N. Bradshaw, 356 Barney Brooks and Alice Brooks, Anna H. Brown, Sharon Lee Brown, Helen C. Bullock, Denzil M. Cazier and Arlie A. Cazier, Jane T. Chabries, Edward L. Christensen and Margaret P. Christensen, Robert A. Christensen and Kay M. Christensen, David B. Cook and Sharon P. Cook, George V. Coon and Beth J. Coon, Leroy J. Darling and Janice R. Darling, Joseph K. Davis and Leona B. Davis, Thurmis M. Engle and Joy Engle, Stephen W. Farr, Roger Ferguson and Gay Lou Ferguson, Paul W. Flandro and Marian B. Flandro, Allen A. Francis and Margaret A. Francis, Herold L. Gregory and Mary E. Gregory, Don A. Hansen and Rose L. Hansen, Lynn M. Hansen and Elizabeth Hansen, Wilford H. Hansen and Esther J. Hansen, Ralph E. Hardy and Marian S. Hardy, Dee O. Howell and Barbara W. Howell, James M. Hunter and Mildred M. Hunter, Marvin D. Jensen and Leone R. Jensen, Noal W. Jensen and Renee S. Jensen, William A. Llewelyn and Jaunita O. Llewelyn, Norman Lowe and Verla Lowe, Eleanor Lyon, Burt W. Match and Betty Match, Thomas J. May and Norma May, Robert W. McBride and Audrey J. McBride, Paul W. McCullough, Douglas D. Mellen and Penny Mellen, Robert S. Miyake and Akiko 1189 Miyake, Jean R. Morton and Thelma Morton, Richard 357 K. Obyn and Maria A. Obyn, Glade Owen and Jean Owen, I. Reed Payne and D. Ruth Payne, Thomas B. Petersen and Colleen Petersen, Donald R. Roberts and Beth R. Roberts, G. Raymond Robinson and Dorthey M. Robinson, Bill J. Rosenhan and Gloria D. Rosenhan, Edward D. Snow and Anne G. Snow, Leland S. Standifird and Ruth Standifird, Wesley O. Swenson and Virginia Swenson, Max N. Tassainer and Mary E. Tassainer, Harry G. Taylor and Alice D. Taylor, Wayne D. Taylor and Fawn J. Taylor, Stuart E. Temple and Christine Temple, Deloy A. Thorpe and Marlene A. Thorpe, Zelda E. Tidwell, Owen J. Traynor, Jr., and Jacqueline M. Traynor, James D. Turner and Leatha M. Turner, Ross O. Van Orden and Della R. Van Orden, John A. Vincent and Kay N. Vincent, David L. Woody and Shirley D. Woody, Harold Adams and Cora M. Adams, Hobart Barbour, Jr., and Dama J. Barbour, Thomas J. Bender, Jr., and Ruth W. Bender, Eleanor O. Blonquist, Richard L. Billings and Una G. Billings, George D. Burgess and Afton D. Burgess, Ranald H. Devey and Rose A. Devey, Beverly N. Frederikson, Lawrence A. Hood and Margaret Hood, Val B. Jennings and Sarepta P. Jennings, Warren J. Latey, Jr., and Margaret F. Latey, Dale W. Lewis and Jean 358 W. Lewis, Curtis B. McGurie and Eileen W. McGurie, George H. Pratt and Vivian J. Pratt, Carol S. Rayburn, Clifford D. Roper and Charlene Roper, Orlando L. Sanchez and Lucy I. Sanchez, Maurine Edna Haltiner, Betty G. Johnson, Calvin N. Paxton and June M. Paxton, John R. Rork and Anneliese B. Rork, Leo J. Zanelli and Wilma L. Zanelli, docket No. 19396-80; Wilbert Washington and Lyvonne Washington, docket No. 19419-80; Carlos E. Velasco and Barbara E. Velasco, docket No. 19492-80; Don S. Milligan and Myrna I. Milligan, J. Eugene Seaich and Dorothy Seaich, Tats Masuda and Hatsue Masuda, L. Ione Curtis Senn, J.H. Swasey and Elizabeth C. Swasey, Morris D. Young and Lorraine P. Young, June F. Copp, Stanley M. Follett and Colleen B. Follett, Dently T. Mellen and Dee Mellen, docket No. 19664-80; Glenn J. Bethers and Tella M. Bethers, Tom Green, Melvin W. Blake and Norma L. Blake, Henry I. Elswood and Fay B. Elswood, Wells J. Iverson and Anna B. Iverson, docket No. 19665-80; Bud M. Compton and Marie B. Compton, William R. Farris and Gloria M. Farris, Rulon P. Madsen and Ramona H. Madsen, Hilding M. Marlowe and Mary W. Marlowe, Carl Molyneux and Helen J. Molyneux, Marvin J. Peterson and Geneva 359 C. Peterson, Olean Petersen and Margaret H. Petersen, Michael H. Thurman, Michael H. Thurman and Joyce S. Thurman, Ralph H. Harrison and La Vaun E. Harrison, docket No. 19666-80; Richard J. Bradford and Helen Bradford, George E. Buck and Stella B. Buck, Dean A. Clark and Marion B. Clark, Stanley L. Cross and Cora Jean Cross, Julie A. Hurst, George K. Imaizumi and Mary S. Imaizumi, Paul I. Nixon, Jr., and Sheri L. Nixon, Lyman K. Porter and B. Bernice Porter, docket No. 19669-80; Leland V. Child and Barbara Child, docket No. 19670-80; Champlain Oil Co., Inc., docket No. 19750-80; CBCS, Inc., docket No. 19751-80; Mitchell T. Curtis and Louise F. Curtis, docket No. 19752-80; C. Herbert Emilson and Pauline V. Emilson, docket No. 19753-80; Alexis DeAzevedo and Linda DeAzevedo, docket No. 19754-80; Theodore Osman and Helene B. Osman, docket No. 1190 19897-80; Stephen C. Osman and Harle S. Osman, docket No. 19898-80; Cloid L. Hinckley and LaVon S. Hinckley, docket No. 20078-80; Glenn E. Bray and Mildred H. Bray, Ewing J. Hunt and Ona A. Hunt, Hattie S. Kippen, Gene M. Richards and Ann H. Richards, Thaola H. Tucker, Wallace E. Wahlen and Lucille Wahlen, Rex M. Bradford and Luella B. Bradford, 360 docket No. 20079-80; James R. Clark, docket No. 20138-80; Warren R. Adair and Patricia Adair, docket No. 20292-80; Clyde Benton and Majoria Benton, Garth J. Swallow and Carma C. Swallow, docket No. 20293-80; Frank L. Sagendorf and Roxie A. Sagendorf, docket No. 20295-80; Roland L. Raetz and Gwendolyn S. Raetz, Jennie B. Vandrimmelen, Donald D. Drake, and Marceil Drake, docket No. 20296-80; Glorus R. Rowley, docket No. 20297-80; Shirl D. Kemp and Barbara Kemp, Francelle E. Larsen, docket No. 20298-80; O. Verl Reed and Fern Reed, docket No. 20299-80; Floyd L. Tarbet and Karen L. Tarbet, docket No. 20362-80; Laurence E. Drivon and Rosemarie Drivon, docket No. 20436-80; Dick Fouts and Betty Fouts, docket No. 20521-80; Byron H. Bowman and Avonell G. Bowman, docket No. 20522-80; David D. Leiter and Judith A. Leiter, docket No. 20531-80; Eddie H. Anderson, docket No. 20543-80; R. James Rigney and Jean C. Rigney, docket No. 20574-80; Richard G. Scott and Jeanene W. Scott, docket No. 20697-80; Dean W. McDonald and A. Jeanne McDonald, docket No. 20699-80; Morgan Thomas and Joyce Thomas, docket No. 20700-80; Robert C. Rider and Marie E. Rider, docket No. 20701-80; Carl E. Dudley and Ethel Dudley, 361 docket No. 20703-80; Thomas J. and Mary F. Kenney, docket No. 20768-80; Laurence W. Bell and Emma L. Bell, docket No. 20770-80; R. Max Rogers and Florence F. Rogers, docket No. 20771-80; Fae Z. Hacker, docket No. 20847-80; Gilbert L. Robbins and Merlyn A. Robbins, docket No. 21035-80; Dix H. McMullin and Renae McMullin, docket No. 21036-80; Lowell R. Simpson and Sandra S. Simpson, docket No. 21037-80; Joseph C. Jacobs and Emily L. Jacobs, William G. Poulsen and Barbara A. Poulsen, Lorin K. Smith and Cleone C. Smith, docket No. 21039-80; Ken Garff Co., Inc., docket No. 21126-80; Ken Garff Foreign Cars, Inc., docket No. 21127-80; Estate of Marjorie H. Garff, Deceased, Kendall Day Garff, Executor, and Kendall Day Garff, Surviving Husband, docket No. 21128-80; Robert H. Garff and Kathi Garff, docket No. 21129-80; Gary Garff and Linda Garff, docket No. 21130-80; Arthur J. Dellinger, docket No. 21179-80; Dorothy R. Dellinger, docket No. 21180-80; Robert M. Ryan and Helen R. Ryan, docket No. 21188-80; Leonard M. Shlain and Carole Shlain, docket No. 21282-80; George P. Dorsey and Marie L. Dorsey, docket No. 21817-80; John S. Pennish and Evelyn W. Pennish, docket No. 22035-80; Marvin C. Friedman 362 and Frances J. Friedman, docket No. 22085-80; W. Robert Hightower and Alice C. Hightower, docket No. 22195-80; Donald W. Frei and Susan S. Frei, docket No. 22511-80; John L. Johnson and Penney Johnson, docket No. 22512-80; Allen T. Noble and Billie D. Noble, docket No. 22867-80; Ben W. Walters and Carol L. Walters, docket No. 22981-80; Albert Starr and Marcia D. Starr, docket No. 277-81; Gail B. Horne and Miriam C. Horne, docket No. 278-81; James A. Wood and O. Joann Wood, docket No. 279-81; Paul W. Lowden, docket No. 387-81; David R. Michelson and 1191 Kathleen M. Michelson, docket No. 388-81; Robert E. Wolfer and Marie J. Wolfer, docket No. 389-81; Edward A. Johnson and Janice M. Johnson, docket No. 390-81; Charles M. Parrish and Gloria F. Parrish, docket No. 391-81; Richard D. Chapman and Marlys K. Chapman, docket No. 392-81; James D. Barger, docket No. 463-81; Kurt G. Schroeder and Marlies Schroeder, docket No. 537-81; Raymond C. Stubbs and Jacqueline Stubbs, docket No. 538-81; Mark R. Cram and Melba N. Cram, docket No. 666-81; Robert V. Johnson and Dorothy D. Johnson, docket No. 667-81; Walter W. Schnekenburg and Velda Schnekenburg, docket No. 668-81; Cloyd E. Russell and Geneve Russell, 363 Richard F. North and Betty Jane North, docket No. 669-81; Kent Andreason and Joy Andreason, Darryl P. Dong, docket No. 670-81; Ronald Singer and Shelley Singer, docket No. 705-81; Robert B. Steele and Avis J. Steele, docket No. 910-81; Jesse A. Henriques and Mary Q. Henriques, docket No. 911-81; Raymond C. Avansino, Jr., and Kristen A. Avansino, docket No. 927-81; Kimball C. Kaufman and Faye T. Kaufman, docket No. 940-81; Leonard A. Zell, docket No. 998-81; Dale E. Shirley and Patti Shirley, docket No. 1000-81; Stanley M. Higashino and Betty Y. Higashino, docket No. 1009-81; Philip N. Leavitt and Barbara Leavitt, docket No. 1051-81; Maurice Engleman and Shirley Engleman, docket No. 1109-81; Estate of Harry X. Bergman, Deceased, Shirley Engleman, Heir At Law, docket No. 1110-81; Alfred R. Barca, docket No. 1232-81; Ralph E. Springer and Beverly Springer, docket No. 1233-81; William Schaan Co., Formerly Baker Livestock Auction, Inc., docket No. 1240-81; Harold V. Feeney, Jr., and Mary A. Feeney, docket No. 1241-81; Richard H. Lussier and Suzanne D. Lussier, docket No. 1242-81; Joel W. Renbaum and Barbara P. Renbaum, docket No. 1403-81; Ruth E. Kreiss, docket No. 1404-81; Starling E. 364 Kay and Beatrice Kay, docket No. 1405-81; John Varni and Lena M. Varni, docket No. 1501-81; Stephen P. Miller, docket No. 1539-81; A. Edward Warren and Alvarene A. Warren, docket No. 1563-81; Robert E. Nordyke, docket No. 1802-81; Ira Sankey and Edna Sankey, docket No. 1871-81; William R. McCurtain and Mamie McCurtain, docket No. 2029-81; John C. Nelson and Mazel P. Nelson, docket No. 2030-81; W. Roy Brown and Evelyn Brown, docket No. 2078-81; Kenneth Lemings and Carolyn Lemings, docket No. 2373-81; Myron and Lynda Finkelstein, docket No. 2398-81; Lawrence Ernest Weisheit and Elizabeth Anne Weisheit, docket No. 2459-81; Jerry M. Hess and Joan E. Hess, docket No. 2579-81; Julian O. Standen and Elizabeth G. Leavy, docket No. 2658-81; Rex H. Crockett and Jeanne M. Crockett, docket No. 3001-81; Alan du Bois and Marjorie du Bois, docket No. 3002-81; Calvin D. Nelson and Judith Nelson, docket No. 3003-81; Kenneth J. Huber and Emma C. Huber, docket No. 3004-81; James A. Brinton and Lorraine H. Brinton, docket No. 3066-81; Edward M. Geritz and Marjorie J. Geritz, docket No. 3185-81; Lesly H. and Doris M. Meyer, docket No. 3269-81; Philip N. Leavitt and Dawn Leavitt, docket No. 3286-81; Walter 365 W. Klosterman and Nancy M. Klosterman, docket No. 3337-81; Manuel P. Perez and Mary Jo Perez, docket No. 3544-81; Jack A. Scaman and Florence A. Scaman, docket No. 3545-81; Richard G. Rowland and Sandra A. Rowland, docket No. 3546-81; William J. 1192 Gammie, docket No. 3547-81; Louis S. Cole and Ursula A. Cole, docket No. 3561-81; Robert A. Paisley and Phyllis R. Paisley, docket No. 3583-81; Thomas J. Miklautsch and Helen B. Miklautsch, docket No. 3618-81; John Gunderson and Carol J. Gunderson, docket No. 3802-81; John L. and Barbara Mortensen, docket No. 4135-81; Frank W. Paulin, docket No. 4270-81; Leon Kaufman and Judy P. Kaufman, docket No. 4348-81; Robert L. Roth and Alberta Roth, docket No. 4419-81; Donald J. Doot and Emily H. Doot, docket No. 4467-81; Stanley Antonio and Eva Antonio, docket No. 4468-81; Otto L. Bendheim and Ronnie K. Bendheim, docket No. 4496-81; Garabed Messrobian and Anne Messrobian, docket No. 4785-81; Robert Bishop and Simone C. Bishop, docket No. 4786-81; George and Irma C. Anderl, docket No. 4827-81; Robert S. Leventhal, docket No. 4841-81; Winthrop H. Hall and Susan H. Hall, docket No. 4894-81; Charles E. Andre and Bartis N. Andre, docket No. 4909-81; John 366 R. Flynn and Florence M. Flynn, docket No. 4910-81; Estate of Jack J. Sarver, Deceased, and Irene Sarver, Personal Representative, and Irene Sarver, docket No. 4911-81; Paul W. Berezny, Jr., and Louise M. Berezny, docket No. 4987-81; Michael S. Musulin and Wanda L. Musulin, docket No. 5083-81; Joseph E. Giovanini and Clarice J. Giovanini, docket No. 5123-81; Leonard H. Lubich and Marion Lubich, docket No. 5194-81; Raymond E. Prouhet and June L. Prouhet, docket No. 5237-81; Donald F. Williams and Barbara J. Williams, docket No. 5458-81; Manning J. Post and Florence S. Post, docket No. 5539-81; Joseph K. Brown and Sara L. Brown, docket No. 5540-81; Dale D. Jones and Leah B. Jones, docket No. 5541-81; Raymond C. Nann and Barbara M. Nann, docket No. 5618-81; Max Tonn and Gladys Grace Tonn, docket No. 5621-81; Richard A. Leland and Virginia C. Leland, docket No. 5669-81; Matt M. Musulin and Mary A. Musulin, docket No. 5787-81; Stanley D. Harmon and Bette G. Harmon, docket No. 5812-81; Irvin G. Lane and Rosemarie Lane, docket No. 5813-81; Marvin C. and Dorothea Bonine, docket No. 6114-81; Scott H. Gaidano and Susan Jane Doelger, docket No. 6115-81; Benjamin F. Davis, Formerly Benjamin F. 367 Dick, docket No. 6145-81; Estate of Ruth Ann Peterson, Deceased, Edward W. Peterson, Executor, and Edward W. Peterson, docket No. 6146-81; Abraham and Geryll Lee Joffe, docket No. 6147-81; Howard H. Goldberg and Jessa K. Goldberg, docket No. 6377-81; Melvin L. Meyerowitz and Betty Meyerowitz, docket No. 6500-81; Edward H. Margolin and Bonnie Margolin, docket No. 6556-81; Robert L. Riddle, docket No. 6583-81; Jafar Shah-Mirany and Carol Shah-Mirany, docket No. 6762-81; Carl E. Nauta and Anita L. Nauta, docket No. 6763-81; James M. Finneran and Jo Anne Finneran, docket No. 6764-81; Charles Epstein and Ruth L. Epstein, docket No. 6929-81; Julian R. Goldberg and Barbara Goldberg, docket No. 7113-81; Howard Ratliff and Gloria Ratliff, docket No. 7213-81; Joseph R. Grund and Josephine M. Grund, docket No. 7214-81; O. Melvin and Letitia A. Phillips, docket No. 7372-81; Myron H. Center and Eleanor R. Center, docket No. 7389-81; Arnold Brown and Phyllis Brown, docket No. 7698-81; Marvin Lustbader and Marilyn Lustbader, docket No. 7851-81; Robert B. Lipschultz, docket No. 7852-81; Stuart Hack and Ellen Hack, docket No. 8020-81; Robert B. Lipschultz and Sari 1193 Lipschultz, docket No. 8431-81; 368 Bar-B-Que Industries, Inc., docket No. 8432-81; Fred J. Krone and Audrey L. Krone, docket No. 8434-81; Frank A. DiJohn and Nancy DiJohn, docket No. 8545-81; Jacob D. Hornstein and Betty S. Hornstein, docket No. 8573-81; Morton H. Perry and Dorothy G. Perry, docket No. 8586-81; Richard and Mary Juanita Bukey, docket No. 8589-81; Marvin J. Kahn and Helene R. Kahn, Deceased, docket No. 9395-81; George F. Baumann and Marcella Baumann, docket No. 9501-81; Lawrence G. Soderholm, Jr., and Dora M. Soderholm, docket No. 9635-81; S.A. Nathan, Jr., docket No. 9705-81; Richard and Jeannine Sebastian, docket No. 9716-81; O. Brent Black and Sally N. Black, docket No. 9845-81; Thomas C. and Frances Cotter, docket No. 9917-81; Clemon J. and Ivy C. Herrington, docket No. 9926-81; Dennis B. Iverson and Deborah S. Iverson, docket No. 9940-81; Glen T. Gardner and Dina Mori Gardner, docket No. 10003-81; Ellis H. Goodman and Louise K. Goodman, docket No. 10196-81; William E. Callighen, Shirley M. Callighen, Anthony L. Llewellyn, Sandra L. Llewellyn, Wilson Darell Murphy, and Linda S. Murphy, docket No. 10939-81; Sheldon E. Friedman and Debby B. Friedman, docket No. 11621-81; Robert Glenn and Yvonne Glenn, 369 docket No. 11717-81; Robert Glenn, docket No. 11718-81; New State Lands, Inc., docket No. 11797-81; Eugene Stoller and Doris Stoller, docket No. 11820-81; Zell C. and Myrna Hurwitz, docket No. 11846-81; Franklin Goldstein and Frances Goldstein, docket No. 11892-81; Howard Levinton and Peggy J. Levinton, docket No. 11929-81; John B. Cook and Mary W. Cook, Barry E. Fitzgerald and Cheryl K. Fitzgerald, Donald W. Hurta and Marian Hurta, David C. Johnson and Kaye Johnson, docket No. 12219-81; Herbert Fisher and Rosalind Fisher, docket No. 12324-81; Raymond G. Berggreen and Phyllis P. Berggreen, docket No. 12352-81; James D. Wyatt and Donna S. Howard, Formerly Donna S. Wyatt, docket No. 12525-81; Stanley Safier and Kitty Safier, docket No. 12742-81; Paul B. Baker and Barbara Baker, docket No. 12806-81; Don L. Christensen and Marva Christensen, docket No. 12827-81; James L. Spindler and Jacqueline Spindler, docket No. 12828-81; Harold M. Moore and Anastasia Moore, docket No. 12829-81; Erwin Hoffman and Arlene Hoffman, docket No. 12830-81; Theodore Makower and Frances Makower, docket No. 12831-81; Jon A. Masterson and Marquerite A. Masterson, docket No. 12832-81; Larry W. Casey and Suanne 370 Casey, docket No. 12833-81; Howard L. Thaler and Deike Thaler, docket No. 12834-81; John C. Brown and Mary M. Brown, docket No. 12835-81; Michael D. McGee and Priscilla A. McGee, docket No. 12836-81; Sidney T. Lubin and Deborah Lubin, docket No. 12837-81; Clarence Wm. Pack and Pat F. Pack, docket No. 12838-81; Lucela C. Lowry, docket No. 12839-81; Walter Wall and Karen Wall, docket No. 12840; Robert C. Noren and Willie M. Noren, docket No. 12841-81; Marcia Wallace, docket No. 12842-81; Glenn H. Weyhrich and Carol J. Weyhrich, docket No. 12843-81; Dean T. Watkins and Lillian Watkins, docket No. 12844-81; John F. Patzman and Ruth A. Patzman, docket No. 12845-81; Cecilia Tallichet, docket No. 12846-81; Bernina Sewing Machine Co., Inc., docket No. 12847-81; Joseph E. Okies and Bonnie L. Okies, docket No. 12848-81; Homer S. Satterfield and Marguerite Satterfield, 1194 docket No. 12849-81; Norman D. Nuttall and Sandra Nuttall, docket No. 12850-81; American Electric Contracting Corp., docket No. 12863-81; Gabriel H. Schwartz and Jody Schwartz, docket No. 12878-81; Alvin Akman and Marion Akman, docket No. 13026-81; Salvatore P. Giambra and Katherine W. Giambra, docket No. 13064-81; Karl M. Johnson, 371 docket No. 13132-81; Theodore Wanderer and Bonnie L. Cannon, docket No. 13133-81; Marvin Lipschultz and Beverlee Lipschultz, docket No. 13276-81; Leonard Gilmor and Sandra Gilmor, docket No. 13664-81; Gennaro Licosati and Margaret Licosati, docket No. 13707-81; Seymour Holtzman and Evelyn Holtzman, docket No. 13809-81; Frank P. Cuscela and Mary Lee Cuscela, docket No. 13810-81; Edward Ozzie and Mary Ann Ozzie, docket No. 13898-81; John C. Sullivan, Jr., and Kathleen Sullivan, docket No. 13913-81; Philip S. and Jane B. York, docket No. 13938-81; Jack E. Cweiber and Elaine H. Cweiber, docket No. 14058-81; Siegfried and Corina M. Jachmann, docket No. 14134-81; Robert E. Lee and Elizabeth I. Lee, docket No. 14353-81; Lettie B. Pierce, docket No. 14441-81; Harvey J. Widroe and Margery Widroe, docket No. 14446-81; James S. Jones, docket No. 14608-81; John A. and Barbara J. Artukovich, docket No. 14670-81; Herbert M. Greenbaum and Gay Greenbaum, docket No. 14776-81; Craig M. Berge and Nancy Berge, docket No. 15327-81; Jack Olshansky and Shirley Olshansky, docket No. 15328-81; Richard L. Miner and Rhea R. Miner, docket No. 15329-81; Clayton A. Neilson and Betty Joan Neilson, docket No. 15332-81; 372 Thomas D. Armour and Darlene Armour, docket No. 15333-81; Salvatore E. Tomaso and Virginia Tomaso, docket No. 15334-81; La Grand Neilson and Yvonne Neilson, docket No. 15335-81; Franklin D. Transtrum and Dianne Transtrum, docket No. 15336-81; Richard E. and Joyce Maddalena, docket No. 15389-81; James F. Zahner and Eva J. Zahner, docket No. 15507-81; Wayne E. Taysom and Patricia R. Taysom, docket No. 15536-81; Gustav E. Rosenheim and Alyce M. Rosenheim, docket No. 15537-81; Leo P. Ayotte and Nancy C. Ayotte, docket No. 15538-81; Vinyl Products Manufacturing, Inc., docket No. 15540-81; Richard Fraige, docket No. 15541-81; Fred Kayne and Lenore E. Kayne, docket No. 15675-81; Arthur O. Silver, docket No. 15875-81; George S. Kurata and Eleanor T. Kurata, docket No. 15930-81; La Donna Reichardt, docket No. 15934-81; Herbert J. Cropper and Mariann C. Cropper, docket No. 15967-81; Donald N. Van Hees and Patricia C. Van Hees, docket No. 15987-81; Gerald G. Dolgash and Marianne J. Dolgash, docket No. 16015-81; A. Douglas Hulen and Helen M. Hulen, docket No. 16288-81; D. Max Hodel and Joanne S. Hodel, docket No. 16388-81; Michael P. Haines and Gail K. Haines, docket No. 16398-81; Kermit L. Lilja 373 and Lillian M. Lilja, docket No. 16469-81; James D. Medema and Millie M. Medema, docket No. 16481-81; Dennis L. Tank and Elaine K. Tank, docket No. 16517-81; James J. Koehler and Alice Koehler, docket No. 16702-81; George Robertson and Dorothy Robertson, docket No. 16770-81; Wendell W. Mason and Renee S. Mason, docket No. 16890-81; Robert B. Franklin and Anne W. Franklin, docket No. 16963-81; Isaac and Loraine D. Baranowicz, docket No. 17033-81; Larry J. Hale and Alixe M. Hale, docket No. 17108-81; Cole L. MacPherson and Virginia S. 1195 MacPherson, docket No. 17187-81; Montague Guild, Jr., and Andrea C. Guild, docket No. 17394-81; Kent R. Swallow and Peggy Lou Swallow, docket No. 17452-81; Keith G. LeCheminant and Virginia LeCheminant, docket No. 17453-81; Kenneth Dennis and George Ann Dennis, docket No. 17524-81; David R. Michelson and Kathleen M. Michelson, docket No. 17525-81; James V. Decker and Patricia P. Decker, docket No. 17528-81; Gale R. Livingston and Florence Livingston, docket No. 17529-81; Murray W. Hall and Wendy J. Hall, docket No. 17532-81; Dwight W. Ripley and Ramona Ripley, docket No. 17603-81; Irwin Winston and Sharon Winston, docket No. 17665-81; Barry S. Neidorf 374 and Carol Neidorf Biener, docket No. 17682-81; Jack Pelzer and Jeanne Pelzer, docket No. 17762-81 Richard A. Hoiekvam and Sharon G. Hoiekvam, docket No. 17810-81; Melvin J. Masterson and Mildred J. Masterson, docket No. 17828-81; Alvin D. Blumberg and Amelia Blumberg, docket No. 17829-81; James D. and Debera McElmury, docket No. 17838-81; Paul W. Bennett and Janet L. Bennett, docket No. 17924-81; Alan H. Sands and Gloria Sands, docket No. 17932-81; Ronald S. Sands and Hedy Sands, docket No. 17933-81; Robert Chartoff and Vanessa Chartoff, docket No. 17935-81; Alexis K. DeAzevedo and Linda C. DeAzevedo, docket No. 17996-81; Frank and Marla Raper, docket No. 18041-81; Milford J. Seby and Ann M. Seby, docket No. 18217-81; James A. Neilson and Donna J. Neilson, docket No. 18264-81; Chester Chin and Lily Chin, docket No. 18337-81; David Perrin and Beverly Perrin, docket No. 18416-81; Leon Siegal, docket No. 18428-81; Brad A. Perrin and Barbara L. Perrin, docket No. 18573-81; Peter F. Shish, Deceased, docket No. 18671-81; Edward W. and Sharon G. Taylor, docket No. 18747-81; Richard C. and Suzanne A. Kurtz, docket No. 18929-81; Jerome B. Morgan, docket No. 18939-81; Gordon and Claire A. LaBossiere, 375 docket No. 19013-81; John J. Bardet, docket No. 19080-81; Robert L. Bothwell and Margaret H. Bothwell, docket No. 19103-81; Harvey and Marcella B. Karp, docket No. 19108-81; Frederick B. and Beverly J. Poneman, docket No. 19173-81; John L. Vogelstein and Jacqueline W. Vogelstein, docket No. 19181-81; Herbert M. Kristal and Evelyn S. Kristal, docket No. 19331-81; Gerald L. Moore and Bette Jo Moore, docket No. 19336-81; Stuart Bandman and Myrna Bandman, docket No. 19758-81; Sheldon J. Davis, docket No. 19912-81; Morris Shub and Sadie Shub, docket No. 20338-81; Richard C. Cavanaugh and Doris J. Cavanaugh, docket No. 20492-81; John W. McElhatton and Judith McElhatton, docket No. 20514-81; Sidney Elston and Dorothy Elston, docket No. 20627-81; Jerome M. Paros and Linda L. Paros, docket No. 20641-81; Robert F. Kuhne and Sylvia W. Kuhne (1975), Robert F. Kuhne and Roberta Kuhne (1976), docket No. 20689-81; William M. Lee and Louise D. Lee, docket No. 20933-81; Gail C. Goodrich and Frances A. Goodrich, docket No. 21155-81; Steve Musulin and Joyce Musulin, docket No. 21170-81; Richard Lewis and Gladys Lewis, docket No. 21641-81; Ben Jacobson, docket No. 21896-81; James R. Clark and Kathleen 376 Clark, docket No. 21906-81; David N. Kuhn and Elizabeth T. Kuhn, docket No. 22192-81; William D. Rippy, docket No. 22244-81; Robert E. Longman and Carolyn A. Longman, docket No. 22359-81; Lincoln C. White and Jean White, 1196 docket No. 22409-81; Lincoln C. White and Aline White, docket No. 22412-81; Manning Post and Florence S. Post, docket No. 22413-81; Farouk A. Habra and Mary L. Habra, docket No. 22414-81; John A. Habra and Carol M. Habra, docket No. 22415-81; Robert Schmidt and Sandra C. Schmidt, docket No. 22417-81; Stephen D. Harlan, Jr., and M. Joan Harlan, docket No. 22418-81; James L. Herrell, docket No. 22419-81; William W. Taylor and Barbara C. Taylor, docket No. 22420-81; Frank Peppiatt and Valerie Peppiatt, docket No. 22436-81; James R. Compton and Marjorie L. Compton, docket No. 22450-81; James A. Heath and Roberta B. Heath, docket No. 22498-81; Samuel A. Megeath III, docket No. 22522-81; O. Seaburn Eaton and Kingsley B. Eaton, docket No. 22548-81; Mary Irene Gallio, as Special Administrator of the Estate of Mike Gallio, Deceased, and Mary Irene Gallio, Individually, docket No. 22644-81; Joseph E. Giovanini and Clarice J. Giovanini, docket No. 22904-81; John G. McGregor, 377 Jr., and Jean R. McGregor, docket No. 22966-81; Allen Fujimoto, docket No. 23122-81; Richard N. Smith and Alice O. Smith, docket No. 23123-81; James B. Kennard and Eleanor K. Kennard, docket No. 23124-81; Robert R. Heikes and Annie E. Heikes, docket No. 23321-81; Edwin L. Madsen and Grace G. Madsen, docket No. 23322-81; Guilford C. Babcock and Gwendolyn G. Babcock, docket No. 23323-81; Kenneth E. Pickens and Barbara M. Pickens, docket No. 23324-81; Charles E. Westenburg and Donna L. Westenburg, docket No. 23376-81; Stanton G. Schwartz and Helene G. Schwartz, docket No. 23445-81; Joseph C. Magliolo and Pauline Magliolo, docket No. 23475-81; Roy O. Martin, Jr., and Barbara Martin, docket No. 23544-81; Mel Brooks and Anne B. Brooks, docket No. 23591-81; Thomas R. Moore and Margaret K. Moore, docket No. 24091-81; Jack A. Garfield and Bertha I. Garfield, Alma V. Nicol and Olga A. Nicol, docket No. 24207-81; Scott C. Evans and Joyce M. Evans, docket No. 24208-81; David B. and Margaret L. Beardslee, docket No. 24272-81; Stephen M. Stone and Linda L. Stone, docket No. 24461-81; Roger Stinard and Rebecca D. Stinard, 1 docket No. 24519-81; Andrew J. Werner and Elaine A. Werner, docket No. 24604-81; 378 James W. Freston and Margie S. Freston, docket No. 24755-81; A. Edward Warren and Alvarene A. Warren, docket No. 25047-81; Hugh C. Thompson III and Paula S. Thompson, docket No. 25089-81; Charles H. Willingham and Nancy P. Willingham, docket No. 25090-81; Frederick P. Dooley and Lois P. Dooley, docket No. 25091-81; Z. James and Lois Mae Ponczak, docket No. 25257-81; Hugh L. Clearman and Dorothy Clearman, docket No. 25348-81; Hugh L. Clearman and Dorothy Clearman, docket No. 25349-81; Earl Taylor, docket No. 25538-81; Richard H. Kolb and Silvia R. Kolb, docket No. 25639-81; Arturo G. Torres and Janice I. Torres, docket No. 25877-81; Walter E. La Borde and Ila D. La Borde, docket No. 25879-81; George E. Middleton and Emma L. Middleton, docket No. 25880-81; Al H. Kuykendall and Carolyn T. Kuykendall, docket No. 1197 25994-81; Harry McCool and Leota McCool, docket No. 26011-81; Franklin D. Transtrum and Dianne Transtrum, docket No. 26122-81; Melvin J. Fischer and Jane E. Fischer, docket No. 26203-81; Clyde A. Herr and Genevieve L. Herr, docket No. 26271-81; William H. Moseley and Martha T. Moseley, docket No. 26290-81; Harold Engelson and Louise Engelson, docket No. 26700-81; Michael J. and 379 Sandra Grafe, docket No. 26768-81; Michael S. Fabricant, docket No. 26925-81; Dennis Michael Romano and Carol A. Romano, docket No. 26999-81; Malcolm M. Berenson and Claudia K. Berenson, docket No. 27176-81; Dave E. Theurer and Gayle M. Theurer, docket No. 27177-81; Roy M. Kizerian and Ora L. Kizerian, docket No. 27223-81; John L. Jackson and Yvonne L. Jackson, docket No. 27224-81; Robert H. Burgener and Diane Burgener, docket No. 27225-81; Gordon D. Bozarth and Amy (Bozarth) Candray, docket No. 27237-81; Fortune Pope and Catherine Pope, docket No. 27400-81; James W. Salley and Mildred S. Salley, docket No. 27633-81; James W. Salley, Inc., docket No. 27634-81; Melvin M. Kazdin and Phyllis R. Kazdin, docket No. 27719-81; Robert P. Warmington and Loring P. Warmington, docket No. 27932-81; Richard C. Bruno, docket No. 28076-81; George A. Miller and Maurine C. Miller, docket No. 28431-81; James A. Morgan and Suzanne N. Morgan, docket No. 28492-81; Missile Alloy Metal Cutting, a.k.a. Supreme Industries, docket No. 28493-81; William H. Clark and Mildred V. Clark, docket No. 28495-81; Charles T. Koval and Joan Koval, docket No. 28496-81; Thomas T. Anderson and Myrna Anderson, docket No. 380 28730-81; William E. McGlashan and Christney C. McGlashan, docket No. 28731-81; Chester U. Mortensen and Janet U. Mortensen, docket No. 29252-81; James Lerman and Simone D. Lerman, docket No. 29331-81; Stanton Joseph and Susan C. Joseph, docket No. 29417-81; David D. Leiter and Judith A. Leiter, docket No. 29423-81; Wayne R. Viehweg and Mary Jane Viehweg, docket No. 29646-81; Edward M. O'Reilly and Sarah E. O'Reilly, docket No. 30042-81; John B. Park and Judith E. Park, docket No. 30045-81; Cecil Finegold and Ruth Finegold, docket No. 30434-81; Raymond Finegold and Jessie J. Finegold, docket No. 30435-81; Leon H. Glaser and Betty J. Glaser, docket No. 30546-81; James L. Herrell, docket No. 30618-81; Paul R. Yedinak and Nancy V. Yedinak, docket No. 30640-81; Terry J. Happel and Joan L. Happel, docket No. 30641-81; James S. Jones, docket No. 30708-81; Donald J. Hayden and Carol Hayden, docket No. 30709-81; Arnold L. Brink and Patricia A. Brink, docket No. 30920-81; Estate of Reuben Tucker and Josephine Tucker, docket No. 30974-81; Rulon D. Robison and Joan H. Robison, docket No. 31139-81; Howard C. Sharp and Marjorie Sharp, docket No. 31178-81; Irving J. Beers and Marcia B. Beers, docket 381 No. 31186-81; Marvin L. Sears, docket No. 31188-81; T.O. Richardson, Inc., docket No. 31190-81; Raymond A. Davis and Ruth M. Davis, docket No. 31191-81; Robert N. Langerman and Goldythe B. Langerman, docket No. 31192-81; Norton and Adrienne Sperling, docket No. 31262-81; Seymour Resnick and Marian Resnick, docket No. 31278-81; Laurence E. Drivon and Rosemarie Drivon, docket No. 31288-81; Leslie Bokor and Estate of Magda Bokor, Deceased, Leslie Boker, Executor, docket No. 31299-81; Stephen Robert 1198 and Eileen L. Robert, docket No. 31327-81; Harry H. Ennis and Virginia Ennis, docket No. 31348-81; James H. Pingree and Janice B. Pingree, docket No. 31349-81; Dennis E. Bale and Dorothy G. Bale, docket No. 31350-81; Kenneth A. Koorndyk, Sr., and Johanna M. Koorndyk, docket No. 31536-81; Harold H. Kay and Lorraine E. Kay, docket No. 31589-81; Carl Morton and Sharon C. Morton, docket No. 31614-81; Halco Spring & Manufacturing Co., Inc., docket No. 183-82; Angelo Pantele and Patricia Pantele, docket No. 678-82; Samuel F. Hutchinson and Judith A. Hutchinson, docket No. 706-82; Joseph J. Askin and Gloria Askin, docket No. 776-82; Jose A. Rodriguez and Lora E. Rodriguez, docket No. 784-82; Howard 382 E. Kay and Cheryle D. Kay, docket No. 849-82; Oral T. Dalton and Bonnie B. Dalton, docket No. 890-82; Melvyn A. Horwitt, docket No. 993-82; Alex Milstein, docket No. 1199-82; Michael Sigman and Diane Sigman, docket No. 1235-82; Edward H.L. Mason and Margaret M. Mason, docket No. 1295-82; William J. and Veronica Tiedemann, docket No. 1347-82; Elizabeth P. Hazen, docket No. 1353-82; Benjamin F. Johnson and Sylvia G. Johnson, docket No. 1496-82; Lowell E. Hoskins and Betty E. Hoskins, docket No. 1536-82; Maynard H. Frudden and Dorothy N. Frudden, docket No. 1568-82; Richard A. Baniszewski and Nancy J. Baniszewski, docket No. 1775-82; Franklin O. Barnes and Roberta Barnes, docket No. 1790-82; Hillel Sharlin and Diane Sharlin, docket No. 1813-82; George E. and Linda K. Deeb, docket No. 1834-82; Richard P. Singer and Nancy K. Singer, docket No. 1841-82; Jack and Betty Rubinstein, docket No. 1982-82; Jules Salit and Edith Salit, docket No. 2018-82; Lewis and Ada Burrows, docket No. 2080-82; Larry J. Dermody and Barbara Dermody, docket No. 2283-82; Robert L. Sutter and Janet K. Sutter, docket No. 2284-82; Michael M. Gibson and Carla C. Gibson, docket No. 2285-82; Frederick L. Krueger and 383 Patricia Krueger, docket No. 2286-82; Michael D. Kowitz, docket No. 2287-82; Ralph A. Dahlstrom, Jr., docket No. 2293-82; Gerald B. Lee and Marilyn M. Lee, docket No. 2299-82; Arben K. Andersen and Peggy R. Andersen, docket No. 2300-82; William B. Moore and Dawn O. Moore, docket No. 2308-82; Howard E. Lemon and Carolina Lemon, docket No. 2334-82; Velvet O'Donnell Corp., docket No. 2475-82; Renee R. McGuinn, docket No. 2648-82; Barry K. Saltzman and Marietta Saltzman, docket No. 2776-82; Warren E. Drew, docket No. 2782-82; Gene and Carol Watts and Gene Watts, docket No. 2844-82; Nona L. Drew, docket No. 2881-82; Jerry M. Hess and Joan E. Hess, docket No. 2906-82; David Cook, docket No. 3122-82; Robert J. McKay and Elizabeth G. McKay, docket No. 3280-82; John A. McGuinn, docket No. 3406-82; Marilyn Cook, docket No. 3408-82; Allen Rubin and Noreen Rubin, docket No. 3432-82; Ralph K. Duffin and Patricia A. Duffin, docket No. 3519-82; Kenneth and De Etta Green and Kenneth Green, docket No. 3534-82; James and Jane Chadwick, docket No. 3535-82; Michael and Phyllis Manning, docket No. 3537-82; Raymond and Bonnie Spore, docket No. 3538-82; Harold L. Canada and Dorothy F. Canada, docket No. 384 3627-82; Donald E. and Marilyn L. White, docket No. 3685-82; Patrick J. Gilmartin and Geraldine M. Gilmartin, docket No. 3770-82; Alfred L. Friedlander and Paula Friedlander, docket No. 3794-82; David E. Farkas and Pamela 1199 Farkas, docket No. 3864-82; Jules Klein and Shirley M. Klein and Jules Klein, docket No. 3874-82; Alan B. Andrews, docket No. 3968-82; Robert S. Feldman and Joan Feldman, docket No. 3999-82; Edward L. Gelbach and Sandra L. Gelbach, docket No. 4000-82; Janet L. Stennett, docket No. 4001-82; Shelby E. Ross and Charlotte Ross, docket No. 4002-82; Robert L. Amstadter and Barbara Amstadter, docket No. 4003-82; Matthew H. Steinberg and Joyce S. Steinberg, docket No. 4004-82; Seymour C. Morrow and Donelda Morrow, docket No. 4005-82; Phillip A. Wiedrick and Veeva J. Wiedrick, docket No. 4006-82; John L. Stennett, docket No. 4007-82; Louis Zipperman and Sylvia Zipperman, docket No. 4008-82; Julius L. Gray and Sharon C. Gray, docket No. 4009-82; Henry Jaffe and Florence Jaffe, docket No. 4010-82; Raul A. Vernal and Susan B. Vernal, docket No. 4011-82; Richard V. Vosburgh and Barbara E. Vosburgh, docket No. 4017-82; Dean M. Lloyd and Marchey A. Lloyd, docket No. 4160-82; James 385 O. Johnston and Joan S. Johnston, docket No. 4509-82; Rene I. Marasigan and Ramona Marasigan, docket No. 4518-82; Daniel S. Garcia and Yolanda Garcia, docket No. 4629-82; Robert A. Lassalle and Catherine Lassalle, docket No. 4630-82; Victor S. Sands and Charlene L. Sands, docket No. 4631-82; Leonard W. Glass and Catherine R. Glass, docket No. 4763-82; Leonard W. Glass and Catherine R. Glass, docket No. 4764-82; Now Designs, Inc., docket No. 4821-82; Jay J. Eller and Helene P. Eller, docket No. 4907-82; Peter Gray, a.k.a. Peter Grazis and Ellen B. Gray, a.k.a. Ellen B. Grazis, docket No. 4993-82; Arnold L. Stanley, docket No. 5070-82; Alex Morales and Novella Morales, docket No. 5072-82; Wayne A. and Sharyn Rutledge, docket No. 5074-82; Bill J. Hawthorne and Danette S. Hawthorne, docket No. 5228-82; David M. Snow and Barbara J. Snow, docket No. 5229-82; Estate of Paul M. Magnuson, Deceased, Bank of California N.A., Executor, and Evelyn P. Magnuson, docket No. 5337-82; Joseph Lewinbuk and Aliza Lewinbuk, docket No. 5442-82; Robert S. and Jane S. Flowers, docket No. 5529-82; Estate of Gary P. Glance, Deceased, Donald R. Price, Executor, docket No. 5661-82; Michael P. Naeve and Kaye Y. 386 Naeve, docket No. 5868-82; Reed N. Christensen and Pauline L. Christensen, docket No. 5869-82; J. Ramon Yorgason and Marilyn Yorgason, docket No. 5870-82; James A. Jacobson and Deborah B. Jacobson, docket No. 5871-82; Henry G. West and Paula West, docket No. 5872-82; J. Gordon Brookover and Barbara J. Brookover, docket No. 5873-82; Jerome S. Glazer, docket No. 5907-82; Estate of Louis A. Glazer, Deceased, Lillian L. Glazer, Executrix, and Lillian L. Glazer, docket No. 5908-82; Gerald J. Gonda and Beverly J. Gonda, docket No. 5915-82; James P. Riley and Pamela J. Riley, docket No. 5924-82; James W. Fox and Edra Y. Fox, docket No. 5936-82; Bernard Katz and Lee Katz, docket No. 5957-82; Kenneth J. Johnson and Doris T. Johnson, docket No. 6063-82; William L. Boddie and Sybil A. Boddie, docket No. 6116-82; Frank Chadwick and Jo Ann Chadwick, docket No. 6139-82; John T. and Jeannette M. Kelsey, docket No. 6200-82; Gerald and Charneth Belanger, docket No. 6365-82; James C. Truman and Suzanne A. Truman, docket No. 6382-82; Daniel A. Farkas, docket No. 6395-82; Roger S. Carlson and Barbara W. Carlson, docket No. 6557-82; Daniel Melnick, docket No. 1200 6828-82; William A. Mallet and Jeanne Mallet, 387 docket No. 6837-82; Monroe L. Mallet and Helga Mallet, docket No. 6838-82; Eugene W. Dach and Virginia Dach, docket No. 6839-82; Gerald W. Noga and Donna C. Noga, docket No. 6841-82; William G. Stich and Helma S. Stich, docket No. 6850-82; Jack M. Gravelle and Donna J. Gravelle, docket No. 6857-82; Hal and Ruth Dauernheim, docket No. 6870-82; Ki Dong Kang and Soonho Kang, docket No. 7045-82; James L. Johnston and Joanne F. Johnston, docket No. 7121-82; Keith E. and Adrienne G. Mullenger, docket No. 7128-82; Michael C. Monozon and Judith A. Monozon, docket No. 7310-82; Edward C. Maddocks and LaFern Maddocks, docket No. 7786-82; James H. Benson and Catherine E. Benson, docket No. 7808-82; Sidney A. Blubaugh and Irene A. Blubaugh, docket No. 7977-82; Edward E. Lee, Jr., and Betty J. Lee, docket No. 8074-82; Maurice J. Niebaum, docket No. 8413-82; Emory M. Wright, Jr., and Marguerite C. Wright, docket No. 8415-82; Morris H. Fine and Beverly S. Fine, docket No. 8580-82; Brent C. Berge and Deborah Berge, docket No. 8739-82; Donald R. Levin and Eleanore Levin, docket No. 10129-82; Harvey Klein and Phyllis Klein, docket No. 10287-82; John W. Lattimore and Virginia Lattimore, docket No. 10444-82; 388 Daniel B. Artmann and Karen Artmann, docket No. 10622-82; Gerald J. Schmidt and Mary A. Schmidt, docket No. 10623-82; Robert J. Foreman and Elizabeth Foreman, docket No. 11087-82; John McKain and Barbara A. McKain, docket No. 11810-82; Roderick Silveira and Mary Ann Silveira, docket No. 11811-82; Donald King and Sandra R. King, docket No. 12000-82; John G. McGregor, Jr., docket No. 12809-82; H. Thomas and Marilyn J. Hood, docket No. 12926-82; Vincent L. Gillis and Nadine L. Gillis, docket No. 13062-82; Ted A. Pierce and Marilyn R. Pierce, docket No. 13241-82; Estate of Theodore R. Pierce, Deceased, Theodore A. Pierce, Personal Representative, docket No. 13242-82; Richard V. and Evangeline L. Escobar, docket No. 13285-82; Edward A. Johnson and Janice M. Johnson, docket No. 13320-82; Leander and Helen Katsidhe, docket No. 13415-82; Raymond G. Maynard and Grace A. Maynard, docket No. 13617-82; Henry Rabinowitz and Marcia Rabinowitz, docket No. 13667-82; M. Ervin Wahnish and Jacqueline A. Wahnish, docket No. 13689-82; Frank H. Carson and Devora M. Carson, docket No. 13998-82; Alexander S. Rados and Sandra S. Rados, docket No. 14197-82; Gordon I. Segal and Carole B. Segal, docket No. 14309-82; 389 Estate of Elfriede H. Levan, Deceased, and Arthur B. Levan, Surviving Husband, docket No. 14310-82; Kenneth J. Fitzgerald and Mary Fitzgerald, docket No. 14311-82; Irving Gerson and Ann Gerson, docket No. 14312-82; Samuel H. Levinson and Florence Levinson, docket No. 14313-82; Charles W. Samet and Sara K. Samet, docket No. 14314-82; Martin M. Wales and Carolyn Wales, docket No. 14315-82; George C. Pingree and Anne C. Pingree, docket No. 14470-82; Lee P. Sperling and Babette K. Sperling, docket No. 14712-82; Irving M. Ringel and Lois E. Ringel, docket No. 14731-82; Frank J. Soltes and Ann A. Soltes, docket No. 14732-82; Andrew L. Heard and Barbara A. Heard, docket No. 14733-82; Eugene Malitz and Judith Malitz, docket No. 14803-82; Ronald W. Strahan and Patricia J. Strahan, docket No. 14856-82; John Gamble, Jr., and Delores D. Gamble, docket No. 1201 14949-82; Robert Sharfstein and Lillian Sharfstein, docket No. 14959-82; Estate of John Paul Jacobs, Deceased, and Eileen A. Jacobs, Surviving Spouse, docket No. 14960-82; Louis Kamerlink and Emma Kamerlink, docket No. 14961-82; David Dewees and Anne Dewees, docket No. 14968-82; Alvin I. Smith and Bernice Smith, docket No. 14969-82; Ronald W. 390 Spindler and Diane M. Spindler, docket No. 15002-82; S. Arthur Gregerson and Montess Gregerson, docket No. 15007-82; John W. Pfuhl and Maren C. Pfuhl, docket No. 15018-82; Carl H. Schwerdtfeger and Lucille T. Schwerdtfeger, docket No. 15058-82; Norbert J. Mann and Barbara M. Mann, docket No. 15073-82; William J. Cohen and Eileen M. Cohen, docket No. 15094-82; Clair Chadwick and Evelyn Chadwick, docket No. 15097-82; Charles Haines and Lucille Haines, docket No. 15260-82; George T. Davis and Jane W. Davis, docket No. 15646-82; Darrell B. Edwards and Marceline J. Edwards, docket No. 15704-82; W. Grant Evans and Helen B. Evans, docket No. 15788-82; Arthur B. Camp and Denise K. Camp, docket No. 15844-82; William Blau and Meredith Blau, docket No. 15914-82; Herbert Radley and Charlene Radley, docket No. 16284-82; Estate of James E. Grisham, Deceased, and Mary F. Grisham, Surviving Spouse, docket No. 16285-82; Thornton B. Stearns and Diane C. Stearns, docket No. 16350-82; Fred H. Landeen and Elizabeth Rae Landeen, docket No. 16419-82; Joel M. Cohen, docket No. 16629-82; Harry Berger and Paulette Berger, docket No. 16630-82; Joseph Interlandi and Grace Howell, Formerly Grace Interlandi, docket 391 No. 16631-82; Jerome Richard and Sue S. Richard, docket No. 16632-82; Burton H. Greenberg and Ann M. Greenberg, docket No. 16753-82; Carl E. Vogelsang and Martha J. Vogelsang, docket No. 17308-82; Abbey J. Grunewald, docket No. 17311-82; Adolphe Bitterman and Pearl E. Bitterman, docket No. 17452-82; Frank P. Hesser, docket No. 17453-82; Robert M. Turf and Barbara A. Turf, docket No. 17460-82; Harold Q. Vander Kley and Norma I. Vander Kley, docket No. 17463-82; Reuben C. Tullis and Nancy F. Tullis, docket No. 17853-82; John Vancza, Jr., and Georgia F. Vancza, docket No. 17917-82; Robert D. Exel, docket No. 18399-82; Donald J. Martinson and Norma Martinson, docket No. 18400-82; Leo M. Knudson and Betty L. Knudson, docket No. 18401-82; L. Rodney Larsen, docket No. 19184-82; L. Rodney Larsen and Anita R. Larsen/Craig, docket No. 19185-82; Mitchell Halopoff and Patricia A. Halopoff, docket No. 19318-82; Kenneth R. Weitzman, docket No. 19488-82; Jack Mendelsohn, docket No. 20138-82; Adrian Finkelstein and Parvaneh Finkelstein, docket No. 20423-82; Thomas Klein and Linda Klein, docket No. 20983-82; H. Allan Collier and Patricia Collier, docket No. 21016-82; John C. and Rebecca R. Kunzman, 392 docket No. 21282-82; William D. Rippy, docket No. 22277-82; John Perry, docket No. 22783-82; Allen Beallo and C. Ruby Beallo, docket No. 24028-82; Stephen W. Solomon and Carole A. Solomon, docket No. 24371-82; Harry J. Noznesky, Deceased, and Serena Noznesky, docket No. 25066-82; Peter H. Noznesky and Sally A. Noznesky, docket No. 25070-82; Philip A. Noznesky and Sheila Noznesky, docket No. 25174-82; Otto S. Shill, Jr., and Betty R. Shill, docket No. 25411-82; H. Glenn Holland and Carolyn 1202 Holland, docket No. 25506-82; and Louis E. Carabini and Anna Carabini, docket No. 26314-82.APPENDIX B9454-79,9456-79,9458-79,9461-79,9580-79,9587-79,9588-79,9589-79,9590-79,9830-79,9908-79,9993-79,11819-79,11822-79,12427-79,12803-79,13009-79,13580-79,13586-79,15259-79,15260-79,16151-79,16319-79,17421-79,956-80,957-80,958-80,960-80,961-80,962-80,963-80,964-80,965-80,966-80,967-80,1130-80,1131-80,1132-80,1135-80,1136-80,1137-80,1139-80,2502-80,3332-80,3333-80,3334-80,3568-80,3705-80,4174-80,4363-80,5333-80,5334-80,5399-80,5400-80,5401-80,5465-80,5467-80,5468-80,5469-80,6315-80,6590-80,6591-80,7204-80,8151-80,8584-80,8587-80,8589-80,8711-80,9325-80,9329-80,9332-80,9333-80,9423-80,9443-80,9746-80,9747-80,9748-80,10270-80,10597-80,10643-80,10660-80,10721-80,10722-80,10902-80,11017-80,11140-80,11173-80,11174-80,11175-80,11176-80,11195-80,11205-80,11206-80,11207-80,11208-80,11212-80,11402-80,11496-80,11574-80,11605-80,11780-80,11781-80,11782-80,11783-80,12067-80,12164-80,12344-80,12417-80,12491-80,12608-80,12612-80,12613-80,12614-80,12615-80,12616-80,12617-80,12618-80,12619-80,12620-80,12621-80,12622-80,12721-80,12774-80,12901-80,12970-80,12987-80,13068-80,13126-80,13142-80,13162-80,13192-80,13452-80,13604-80,13616-80,15592-80,15899-80,16319-80,16559-80,16560-80,16561-80,16563-80,16656-80,16680-80,17117-80,17148-80,17351-80,17644-80,18137-80,18654-80,19091-80,19248-80,19382-80,19492-80,19751-80,19897-80,19898-80,20543-80,20574-80,21126-80,21127-80,21179-80,21180-80,21188-80,22085-80,277-81,278-81,279-81,389-81,392-81,911-81,1232-81,1233-81,1240-81,1563-81,2029-81,2030-81,2398-81,2459-81,2579-81,3001-81,3002-81,3003-81,3066-81,3286-81,3337-81,3544-81,3545-81,3802-81,4467-81,4827-81,4987-81,5083-81,5123-81,5237-81,5787-81,5812-81,6145-81,6377-81,6500-81,6762-81,6764-81,6929-81,7113-81,7372-81,7698-81,7852-81,8020-81,8573-81,8586-81,8589-81,9395-81,9705-81,9845-81,9917-81,9926-81,10196-81,11621-81,11797-81,11846-81,11892-81,11929-81,12525-81,12742-81,12828-81,12830-81,12834-81,12836-81,12840-81,12842-81,12848-81,12863-81,13026-81,13133-81,13664-81,14776-81,15327-81,15328-81,15389-81,15507-81,15538-81,15675-81,15930-81,15934-81,16702-81,17394-81,17603-81,17665-81,17682-81,17762-81,17924-81,17932-81,17933-81,17935-81,18428-81,18929-81,18939-81,19108-80,19331-81,20338-81,22359-81,22412-81,22417-81,22522-81,23324-81,23445-81,23544-81,24604-81,25089-81,25090-81,25091-81,25257-81,25348-81,26290-81,27237-81,27400-81,28431-81,29252-81,29417-81,30709-81,30920-81,31589-81,784-82,849-82,993-82,1347-82,1353-82,1496-82,1813-82,1982-82,2283-82,2286-82,2287-82,2782-82,2881-82,3864-82,3968-82,3999-82,4004-82,4007-82,4008-82,4010-82,4509-82,4518-82,4629-82,4630-82,4763-82,4764-82,5072-82,5337-82,5661-82,6063-82,6395-82,6837-82,6839-82,7121-82,7786-82,8074-82,10129-82,11811-82,12000-82,12926-82,13062-82,13617-82,14803-82,14968-82,14969-82,15018-82,16284-82,17308-82,19318-82,19488-82,20138-82,22783-82,25174-82,25506-82.393 1203 APPENDIX C13278-78,5544-79,5649-79,8720-79,9453-79,9455-79,9460-79,14944-79,15144-79,321-80,2569-80,4000-80,5466-80,5470-80,6589-80,6906-80,8585-80,8586-80,8588-80,9084-80,9330-80,9331-80,10226-80,10269-80,10605-80,10723-80,10986-80,11097-80,11755-80,11757-80,11811-80,11823-80,11894-80,12122-80,12345-80,12609-80,12610-80,12611-80,12928-80,13049-80,13066-80,13067-80,13069-80,14448-80,16556-80,16557-80,16562-80,16856-80,17069-80,19750-80,19752-80,19753-80,19754-80,20138-80,22867-80,22981-80,387-81,390-81,391-81,463-81,538-81,910-81,927-81,998-81,1109-81,1110-81,1241-81,1242-81,1405-81,1539-81,1871-81,2658-81,3004-81,4348-81,4785-81,4786-81,4909-81,5669-81,6115-81,12831-81,12833-81,12835-81,12837-81,12841-81,12847-81,13064-81,14353-81,15332-81,15334-81,15336-81,15536-81,15987-81,16890-81,16963-81,20933-81,22409-81,22498-81,23122-81,23123-81,23322-81,25047-81,25639-81,26122-81,26271-81,26925-81,27176-81,27634-81,30042-81,30045-81,30435-81,30974-81,31262-81,31299-81,31348-81,31349-81,31350-81,890-82,1295-82,1536-82,1568-82,2284-82,2285-82,2308-82,2334-82,2475-82,2648-82,2776-82,3627-82,3794-82,4003-82,4006-82,4017-82,4160-82,4631-82,5070-82,5529-82,6116-82,6841-82,7808-82,10623-82,13285-82,13320-82,13415-82,14856-82,15007-82,16350-82,18400-82,21282-82,25066-82,25070-82.394 APPENDIX D4054-79,7605-79,7692-79,8146-79,8147-79,8148-79,8150-79,8151-79,8152-79,8153-79,8156-79,8157-79,8158-79,8160-79,8161-79,8163-79,8668-79,9118-79,9457-79,9459-79,9591-79,9698-79,9699-79,9700-79,10466-79,12157-79,13835-79,14469-79,14502-79,14656-79,14947-79,15119-79,15145-79,15232-79,15238-79,15286-79,15340-79,15591-79,16358-79,16823-79,17539-79,673-80,798-80,868-80,959-80,1133-80,1134-80,1138-80,1140-80,1141-80,1142-80,1243-80,1339-80,1627-80,2872-80,2875-80,3205-80,3279-80,3335-80,3336-80,3565-80,3566-80,3999-80,4036-80,4457-80,4567-80,4665-80,5055-80,5395-80,5396-80,5397-80,5398-80,6840-80,7829-80,7836-80,8536-80,8583-80,8905-80,9060-80,9076-80,9418-80,9590-80,9763-80,10252-80,10525-80,10604-80,10642-80,10724-80,10725-80,10922-80,10929-80,11067-80,11068-80,11096-80,11177-80,11216-80,11282-80,11495-80,11640-80,11689-80,11737-80,11739-80,11745-80,11748-80,11756-80,11952-80,12006-80,12009-80,12027-80,12028-80,12029-80,12030-80,12144-80,12197-80,12198-80,12199-80,12203-80,12204-80,12207-80,12213-80,12214-80,12216-80,12218-80,12219-80,12221-80,12224-80,12225-80,12226-80,12229-80,12232-80,12233-80,12236-80,12237-80,12238-80,12241-80,12246-80,12247-80,12249-80,12250-80,12252-80,12253-80,12254-80,12255-80,12261-80,12262-80,12263-80,12264-80,12265-80,12266-80,12267-80,12268-80,12269-80,12270-80,12273-80,12274-80,12343-80,12410-80,12623-80,12624-80,12625-80,12767-80,12793-80,12834-80,12864-80,12884-80,12976-80,13125-80,13155-80,13199-80,13223-80,13383-80,13540-80,13765-80,14757-80,15144-80,15770-80,15771-80,15811-80,16204-80,16483-80,16558-80,16681-80,16857-80,16858-80,17147-80,17336-80,17457-80,18692-80,19247-80,19395-80,19396-80,19419-80,19664-80,19665-80,19666-80,19669-80,19670-80,20078-80,20079-80,20292-80,20293-80,20295-80,20296-80,20297-80,20298-80,20299-80,20362-80,20436-80,20521-80,20522-80,20531-80,20697-80,20699-80,20700-80,20701-80,20703-80,20768-80,20770-80,20771-80,20847-80,21035-80,21036-80,21037-80,21039-80,21128-80,21129-80,21130-80,21282-80,21817-80,22035-80,22195-80,22511-80,22512-80,388-81,537-81,666-81,667-81,668-81,669-81,670-81,705-81,940-81,1000-81,1009-81,1051-81,1403-81,1404-81,1501-81,1802-81,2078-81,2373-81,3185-81,3269-81,3546-81,3547-81,3561-81,3583-81,3618-81,4135-81,4270-81,4419-81,4468-81,4496-81,4841-81,4894-81,4910-81,4911-81,5194-81,5458-81,5539-81,5540-81,5541-81,5618-81,5621-81,5813-81,6114-81,6146-81,6147-81,6556-81,6583-81,6763-81,7213-81,7214-81,7389-81,7851-81,8431-81,8432-81,8434-81,8545-81,9501-81,9716-81,9940-81,10003-81,10939-81,11717-81,11718-81,11820-81,12219-81,12324-81,12352-81,12806-81,12827-81,12829-81,12832-81,12838-81,12839-81,12843-81,12844-81,12845-81,12846-81,12849-81,12850-81,12878-81,13132-81,13276-81,13707-81,13809-81,13810-81,13898-81,13913-81,13938-81,14058-81,14134-81,14441-81,14446-81,14608-81,15329-81,15333-81,15335-81,15537-81,15540-81,15541-81,15875-81,15967-81,16015-81,16288-81,16388-81,16398-81,16469-81,16481-81,16517-81,16770-81,17033-81,17108-81,17187-81,17452-81,17453-81,17524-81,17525-81,17528-81,17529-81,17532-81,17810-81,17828-81,17829-81,17838-81,17996-81,18041-81,18217-81,18264-81,18337-81,18416-81,18573-81,18671-81,18747-81,19013-81,19080-81,19103-81,19173-81,19181-81,19336-81,19758-81,19912-81,20492-81,20514-81,20627-81,20641-81,20689-81,21155-81,21170-81,21641-81,21896-81,21906-81,22192-81,22244-81,22413-81,22414-81,22415-81,22418-81,22419-81,22420-81,22436-81,22450-81,22548-81,22644-81,22904-81,22966-81,23124-81,23321-81,23323-81,23376-81,23475-81,23591-81,24091-81,24207-81,24208-81,24272-81,24461-81,24519-81,24755-81,25349-81,25538-81,25877-81,25879-81,25880-81,25994-81,26011-81,26203-81,26700-81,26768-81,26999-81,27177-81,27223-81,27224-81,27225-81,27633-81,27719-81,27932-81,28076-81,28492-81,28493-81,28495-81,28496-81,28730-81,28731-81,29331-81,29423-81,29646-81,30434-81,30546-81,30618-81,30640-81,30641-81,30708-81,31139-81,31178-81,31186-81,31188-81,31190-81,31191-81,31192-81,31278-81,31288-81,31327-81,31536-81,31614-81,183-82,678-82,706-82,776-82,1199-82,1235-82,1775-82,1790-82,1834-82,1841-82,2018-82,2080-82,2293-82,2299-82,2300-82,2844-82,2906-82,3122-82,3280-82,3406-82,3408-82,3432-82,3519-82,3534-82,3535-82,3537-82,3538-82,3685-82,3770-82,3874-82,4000-82,4001-82,4002-82,4005-82,4009-82,4011-82,4821-82,4907-82,4993-82,5074-82,5228-82,5229-82,5442-82,5868-82,5869-82,5870-82,5871-82,5872-82,5873-82,5907-82,5908-82,5915-82,5924-82,5936-82,5957-82,6139-82,6200-82,6365-82,6382-82,6557-82,6828-82,6838-82,6850-82,6857-82,6870-82,7045-82,7128-82,7310-82,7977-82,8413-82,8415-82,8580-82,8739-82,10287-82,10444-82,10622-82,11087-82,11810-82,12809-82,13241-82,13242-82,13667-82,13689-82,13998-82,14197-82,14309-82,14310-82,14311-82,14312-82,14313-82,14314-82,14315-82,14470-82,14712-82,14731-82,14732-82,14733-82,14949-82,14959-82,14960-82,14961-82,15002-82,15058-82,15073-82,15094-82,15097-82,15260-82,15646-82,15704-82,15788-82,15844-82,15914-82,16285-82,16419-82,16629-82,16630-82,16631-82,16632-82,16753-82,17311-82,17452-82,17453-82,17460-82,17463-82,17853-82,17917-82,18399-82,18401-82,19184-82,19185-82,20423-82,20983-82,21016-82,22277-82,24028-82,24371-82,25411-82,26314-82.395 Footnotes1. Cases of petitioners listed in Appendix A are consolidated herewith.↩2. The years stated merely represent the range of taxable years at issue; not all petitioners had deficiencies determined for each of these years.↩3. Division A of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494. Except as otherwise stated, all section references (except to sec. 108↩ of the Tax Reform Act of 1984 are to sections of the Internal Revenue Code of 1954 in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.4. Petitioner Joseph Interlandi in docket No. 16631-82 resided in California.↩5. Petitioners Werner Haack and Helen E. Haack in docket No. 19395-80 resided in California.↩6. Eighty-four separate petitioners were listed on the joint petition in docket No. 19396-80. Two unspecified petitioners resided in New York and Oregon, respectively.↩7. Petitioners Donald W. Hurta and Marian Hurta in docket No. 12219-81 resided in Texas.↩8. Petitioners Wilson Darell Murphy and Linda S. Murphy in docket No. 10939-81 resided in Texas.↩9. The term "trading back-to-back" as used herein is synonymous with the term "laying off" as used herein.10. The contract price, or underlying contract value, is computed by multiplying the price per ounce or ton by the total number of ounces or tons.↩11. The term "option-straddle transaction" as used herein denotes a type of trading strategy↩ based upon the use of both options and futures contracts. The term is to be distinguished from the term "option straddle" which is simply a straddle consisting of option contracts.12. When trading net, the commission was included in the option premium or added to or subtracted from the price of the metal.↩13. Although Competex traded with Rudolf Wolff, the record reveals no evidence that Competex and Rudolf Wolff were affiliated in terms of ownership.↩14. Confirmations of contract issued by Competex to Davison detail each purchase and sale.↩15. The option's declaration date was Oct. 29, 1976↩16. The amount debited is calculated as follows:↩Premium -- 340,000 ounces X 3.4 pence per ounce premium# 11,560.00Commission -- 340,000 ounces X 299 pence per ounce strikeprice X .1875% commission rate 1,906.13Amount debited 13,466.1317. The option's declaration date was Dec. 1, 1976.↩18. The amount credited is calculated as follows:↩Premium -- 340,000 ounces X 3.8 pence per ounce premium# 12,920.00Commission -- 340,000 ounces X 305.1 pence per ounce strikeprice X .1875% commission rate 1,945.01Amount credited10,974.9919. The option's declaration date was Nov. 4, 1976.↩20. The amount debited is calculated as follows:↩Premium -- 140,000 ounces X 2.8 pence per ounce premium# 3,920.00Commission -- 140,000 ounces X 255.1 pence per ounce strikeprice X .1875% commission rate 669.64Amount debited4,589.6421. The option's declaration date was Dec. 7, 1976.↩22. The amount credited is calculated as follows:↩Premium -- 140,000 ounces X 3.1 pence per ounce premium# 4,340.00Commission -- 140,000 ounces X 255.2 pence per ounce strikeprice X .1875% commission rate 669.90Amount credited3,670.1023. The amount credited is calculated as follows: 340,000 ounces X 18.5 pence per ounce premium = # 62,900↩24. The amount debited is calculated as follows: 340,000 ounces X 18.9 pence per ounce premium = # 64,260↩25. The amount credited is calculated as follows: 140,000 ounces X 6.3 pence per ounce premium = # 8,820↩26. The amount debited is calculated as follows: 140,000 ounces X 6.6 pence per ounce premium = # 9,240↩27. The amount of gain or loss is calculated as follows:June 28June 29Total netGranted optionscall optionput optiongain (loss)Amount credited-soldoptions # 10,974.99 # 3,670.10 # 14,645.09 Amount debited-offsettingpurchased options 64,260.00 9,240.00 73,500.00 Net gain (loss) (53,285.01)(5,569.90)(58,854.91)↩June 28June 29Total netPurchased optionscall optionput optiongain (loss)Amount debited-purchasedoptions # 13,466.13# 4,589.64# 18,055.77Amount credited-offsetting sold options 62,900.008,820.0071,720.00Net gain (loss) 49,433.874,230.3653,664.2328. Competex purchased the silver futures from Davison in two separate transactions of 14 and 46 lots.↩29. The amount credited is calculated as follows: (600,000 ounces X 307.6 pence per ounce price) - (140,000 ounces X 307.6 pence per ounce price X .1875% commission rate) = # 1,844,792.60↩30. The amount debited is calculated as follows: (600,000 ounces X 311.6 pence per ounce price) + (140,000 ounces X 311.6 pence per ounce price X .1875% commission rate) = # 1,870,417.9531. The amount credited is calculated as follows: 330,000 ounces X 293.7 pence per ounce price = # 969,210↩32. The amount debited is calculated as follows: 330,000 ounces X 296.7 pence per ounce price = # 979,110↩33. The loss incurred on the offsetting futures trades is calculated as follows:↩11/2/76 Purchase -- 33 lots at 311.60 pence per ounce# 1,028,280.00 12/7/76 Offsetting sale -- 33 lots at 293.70 pence perounce price 969,210.00 Gain (loss)(59,070.00)Commissions817.95 Net gain (loss)(59,887.95)34. The amount credited is calculated as follows: 270,000 ounces X 285.2 pence per ounce price = # 770,040↩35. The net loss is calculated as follows:↩11/2/76 Purchase -- 27 lots at 311.60 pence per ounce# 841,320 4/29/77 Offsetting sale -- 27 lots at 285.2 pence per ounce770,040 Net gain (loss)(71,280)36. The amount debited is calculated as follows: 270,000 ounces X 281.6 pence per ounce price = # 760,320↩37. The net gain is calculated as follows:↩11/2/76 Sale -- 27 lots at 307.6 pence per ounce# 830,520.004/29/77 Offsetting purchase -- 27 lots at 281.6 pence per ounce760,320.00Gain (loss)70,200.00Commissions (on 11/2/76 sale)807.45Net gain (loss)69,392.5538. The amount credited is calculated as follows:200,000 ounces X 267.3 pence per ounce price# 534,600130,000 ounces X 267.4 pence per ounce price347,620Total amount credited882,220Note: Competex paid Davison an average price of 267.339 pence per ounce for the 33 lots of silver futures.39. The net loss is calculated as follows:↩12/7/76 Purchase -- 33 lots at 296.70 pence per ounce price# 979,1108/9/77 Offsetting sale -- 33 lots at 267.339 pence per ounce 882,220Net loss 96,89040. The amount debited is calculated as follows:330,000 ounces X 260 pence per ounce price = # 858,000↩41. The net gain is calculated as follows:↩11/2/76 Sale -- 33 lots at 307.6 pence per ounce# 1,015,0808/11/77 Offsetting purchase -- 33 lots at 260 pence per ounce 858,000Net gain 157,08042. The short-term capital gain on futures trades in 1977 is calculated as follows:# 69,392.55 (see note 39 supra) + # 157,080 (see note 43 supra) -# 71,280 (see note 37 supra) - # 96,890 (see note 41 supra↩) = # 58,302.5543. The few petitioners who were not clients of Gourlay, nonetheless, apparently engaged in similar option-straddle transactions.↩44. A detailed description of Rudolf Wolff is set forth infra↩ in conjunction with the option-hedge transactions executed by Rudolf Wolff.45. Although the promotional material was not sent by Bell-Lewis, it is representative of the material received by Gardner/Amalgamated petitioners.↩46. Although the promotional material describes the program as an option hedge, Gardner/Amalgamated petitioners in fact entered into option-straddle transactions.↩47. Confirmations of contract issued by Gardner Lohmann and Amalgamated to Anderson detail each purchase and sale.↩48. The option's declaration date was Nov. 22, 1976.↩49. The amount credited is calculated as follows:↩Premium -- 240,000 ounces X 16.2 pence per ounce premium# 38,880.00Commission -- 240,000 ounces X 243.3 pence per ounce strikeprice X .0625% commission rate 364.95Amount credited38,515.0550. The option's declaration date was Sept. 24, 1976.↩51. The amount debited is calculated as follows:↩Premium -- 240,000 ounces X 6.4 pence per ounce premium# 15,360.00Commission: 240,000 ounces X 238.4 pence per ounce strikeprice X .0625% commission rate 357.60Amount debited15,717.6052. The loss on the sold (granted) option is calculated as follows:↩Amount credited - sold option# 38,515.05 Amount debited - offsetting purchased option52,320.00 Net gain (loss) (13,804.95)53. The gain on the purchased option is calculated as follows:↩Amount debited - purchased option# 15,717.60Amount credited - offsetting sold option29,760.00Net gain (loss) 14,042.4054. The details of the copper wirebars call option straddle have been omitted because they mirror the previous silver put option straddle, except for, of course, the prices and quantities involved.↩55. The gain and loss are respectively computed as follows:↩Sold optionsPurchased optionsSilver put optionstraddle (# 13,804.95)# 14,042.40Copper wirebar calloption straddle: (14,376.52)11,183.31Net gain (loss) (28,181.47)25,225.7156. Anderson's final account balance at Gardner Lohmann is computed as follows:↩Loss on sold options(# 28,181.47)Gain on purchased options25,225.71 Net gain (loss) (# 2,955.76)Loss in dollars at 1.7745 dollars/pound conversion rate$ 5,245 Amount of initial margin deposit6,000 Account balance after Gardner Lohman option trades$ 755 57. The amount credited is calculated as follows: 450,000 ounces X 288.7 pence per ounce price = # 1,299,150↩58. The amount debited is calculated as follows: 450,000 ounces X (293.4 pence per ounce price plus .10 pence per ounce commission) = # 1,320,75059. The amount debited is calculated as follows:450,000 ounces X 295 pence per ounce price = # 1,327,500↩60. The amount credited is calculated as follows:450,000 ounces X (298.4 pence per ounce price less .10 pence per ounce commission) = # 1,342,350↩61. The loss incurred is calculated as follows:↩10/18/76 Sale -- 45 lots at 288.7 pence/ounce# 1,299,150 10/25/76 Offsetting purchase -- 45 lots at 295 pence/ounce1,327,500 Net gain (loss) (28,350)62. The amount credited is calculated as follows:↩230,000 ounces X (259.2 pence per ounce price less.10 pence per ounce commission) =# 595,930220,000 ounces X (259.3 pence per ounce price less.10 pence per ounce commission) =# 570,240Amount credited: 1,166,17063. The amount debited is calculated as follows: (230,000 ounces plus 220,000 ounces) X 258.7 pence per ounce price = # 1,164,150↩64. The loss on the bought leg is calculated as follows:↩Oct. 18, 1976 Purchase -- 45 lots at 293.4 (less commission)# 1,320,750 Sept. 12, 1977 Offsetting sale -- 45 lots at average priceof 259.25 (less commission) 1,166,170 Net gain (loss) (154,580)65. The gain on the sold leg is calculated as follows:↩Oct. 25, 1976 Sale -- 45 lots at 298.4 (less commission)# 1,342,350Sept. 12, 1977 Offsetting purchase -- 45 lots at 258.71,164,150Net gain (loss) 178,20066. Neither petitioner nor respondent argues, nor do we find, that the straddles should be excluded from Anderson's London options transaction. For convenience, we have omitted the details of the transactions.↩67. The total net gain and loss are computed as follows:↩Net gains -- Jan. 25 Sold leg# 13,860Apr. 5 Sold leg23,220Aug. 19 Sold leg20,480Total net gains 57,560Net losses -- Jan. 25 Bought leg12,540Apr. 5 Bought leg21,870Aug. 19 Bought leg18,900Total net losses 53,31068. The net gain is computed as follows:GainsSold leg of rollover straddle# 178,200Sold legs of three additional straddles57,560Total gains 235,760LossesBought leg of rollover straddle154,580Bought legs of three additional straddles53,310Total losses 207,890Net gain (loss) 27,870Note: Anderson apparently rolled over the net gain from 1977 to 1978 by initiating another rollover transaction in 1977. The second rollover transaction, however, is not at issue.69. The amount owed Amalgamated by Anderson is computed as follows:↩1976 Loss on futures trades# 28,350.00 1977 Gain on futures trades27,870.00 Net gain (loss) (# 480.00)Loss in U.S. dollars (1.5782 conversion rate)($ 757.54)Initial margin deposit forwarded to Amalgamatedby Gardner Lohmann 755.00 Amount owed $ 2.54 70. A managing director in England is analogous to a chief executive officer in the United States.↩71. The purchaser of a double option has the option to either put or call the underlying commodity at a specified price before the option's expiration date.↩72. A detailed discussion of butterfly straddles is presented in Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, 360-361↩ (1982).. Trading against an option can enhance potential. Additional funds may be required in certain situations as your Account Executive can explain.↩73. As previously noted, Commodity Analysis also executed a second series of London options transactions during 1976-77. Because only minor differences exist between the 1975 and 1976 series, a Commodity Analysis London options transaction put on during 1976-77 is not presented.↩74. The option's declaration date was Mar. 11, 1976.↩75. Commodity Analysis charged the commission by a debit note.↩76. The amount debited is calculated as follows:1,860,000 ounces X 30.2 pence per ounce premium = # 561,720↩77. The option's declaration date was Mar. 10, 1976.↩78. The amount credited is calculated as follows:1,860,000 ounces X 30 pence per ounce premium = # 558,000↩79. The amount credited is calculated as follows:(93,000 ounces X 31.65 pence per ounce premium) + (93,000 ounces X 32.35 pence per ounce premium) = # 595,200↩80. The amount debited is calculated as follows:1,860,000 ounces X 32 pence per ounce premium = # 595,200↩81. The loss on the sold (granted) option is calculated as follows:↩Amount credited - sold option# 558,000Amount debited - offsetting purchased option595,200Net loss 37,20082. The gain on the purchased options is calculated as follows:↩Amount debited - purchased options# 561,720Amount credited - offsetting sold options595,200Net gain 33,48083. The amount debited is calculated as follows:750,000 ounces X 211.24 pence per ounce price = # 1,584,300↩84. The amount credited is calculated as follows:750,000 ounces X 212.7 pence per ounce price = # 1,595,250↩85. The amount debited is calculated as follows:750,000 ounces X 217.7 pence per ounce price = # 1,632,750↩86. The amount credited is calculated as follows:750,000 ounces X 218.6 pence per ounce price = # 1,639,500↩87. The loss is calculated as follows:↩12/15/75 Sale -- 75 lots at 212.7# 1,595,250 12/07/75 Offsetting purchase -- 75 lots at 217.71,632,750 Net gain (loss) (37,500)88. The amount credited is calculated as follows:750,000 ounces X 284 pence per ounce price = # 2,130,000↩89. The amount debited is calculated as follows:750,000 ounces X 286.36 pence per ounce price = # 2,147,700↩90. The gain is calculated as follows:12/15/75 Purchase# 1,584,3007/02/76 Offsetting sale 2,130,000Net gain (loss) 545,700↩12/17/75 Sale1,639,500 7/02/76 Offsetting purchase 2,147,700 Net gain (loss) (508,200)Overall net gain (loss) 37,500 91. The record does not reveal whether or how Butler (or Douglas) was compensated for Butler's execution of option trades for non-Douglas clients at Rudolf Wolff.↩92. The amount debited is calculated as follows:1,000,000 ounces X 212.2 pence per ounce price plus # 2,652.50 commission = # 2,124,652.5093. The option's declaration date was Jan. 14, 1976.↩94. The amount credited is calculated as follows:1,000,000 ounces X 2 pence per ounce premium less # 2,522.50 commission = # 17,477.50↩95. The amount debited is calculated as follows:1,000,000 ounces X 6.8 pence per ounce premium = # 68,000↩96. The amount credited is calculated as follows:1,000,000 ounces X 206.9 pence per ounce price less 2,586.25 commission = # 2,066,413.8097. The loss on the sold (granted) option is calculated as follows:↩Amount credited - sold option# 17,477.50 Amount debited - offsetting purchased option68,000.00 Net gain (loss) (50,522.50)98. The exchange rate used was that existing on Dec. 1, 1975.↩99. For convenience, we have omitted the details of the futures trades executed in 1976. All amounts noted include commissions, where charged.100. The net gain is computed as follows:# 45,413.75 (2/17/76 gain) + # 12,540.00 (3/5/76 gain) - # 11,880.00 (3/5/76 loss) - # 210,437.50 (3/26/76 loss) - # 378,585.00 (5/14/76 loss) + # 701,347.50 (7/15/76 gain) - # 594,765.00 (7/15/76 loss) + # 383,336.25 (9/2/76 gain) + # 105,757.50 (9/2/76 gain) = # 52,727.50↩101. The exchange rate used was that existing on Sept. 8, 1976.↩102. The net equity is calculated as follows:↩12/15/75 Initial margin deposit$ 9,5002/23/76 Margin returned 500Net margin deposited 9,000Loss - granted options102,233Gain - futures trades93,249Net equity 16103. The record does not reveal whether Rudolf Wolff remitted the $ 16 of net equity to Hohnstein.↩*. Amount of '77 STCG estimated to equal '76 ordinary loss -- not enough detail on tax return.↩104. Due to an apparent computer programming error, the same declaration and delivery dates were contained on all Rothmetal option contracts.↩105. The amount credited is calculated as follows:1,020,000 ounces X 21 pence per ounce premium = # 214,200↩106. The amount debited is calculated as follows:1,020,000 ounces X 234.65 pence per ounce price = # 2,393,430107. The amount credited is calculated as follows:1,020,000 ounces X 14 pence per ounce premium = # 142,800↩108. The amount credited is calculated as follows:1,020,000 ounces X 238.05 pence per ounce price = # 2,428,110↩109. The amount debited is calculated as follows:1,020,000 ounces X 20 pence per ounce premium plus # 1,428 commission = # 205,428↩110. The amount debited is calculated as follows:1,020,000 ounces X 17.1 pence per ounce premium plus # 1,428 commission = # 175,848↩111. The amount credited is calculated as follows:1,020,000 ounces X 234.65 pence per ounce price = # 2,393,430↩112. The amount debited is calculated as follows:1,020,000 X 235.95 pence per ounce price = # 2,406,690↩113. The gain incurred on the call option is calculated as follows:↩10/09/75 Sale# 214,20010/13/75 Offsetting purchase205,428Net gain 8,772114. The loss incurred on the put option is calculated as follows:↩10/09/75 Sale# 142,80010/13/75 Offsetting purchase175,848Net loss 33,048115. The loss is calculated as follows:↩5/13/76 Purchase -- 15 lots at 255.75 pence per ounce# 383,6255/14/76 Offsetting sale -- 15 lots at 253.4 pence per ounce,less # 36 commission 380,064Net loss 3,561116. For convenience, we have omitted the details of the transactions.↩117. The net equity in Meese's account at the conclusion of his London options transaction is calculated as follows:# 2,912.62 initial margin -- # 24,276 loss on sold options -- # 3,561 loss on unhedged futures trades + 24,990 gain on futures trades = # 65.62↩118. Internal Revenue Service, 1983 Annual Report, Commissioner and Chief Counsel 36.↩119. Prior to Sept. 2, 1976, sec. 1234 provided:SEC. 1234. OPTIONS TO BUY OR SELL.(a) Treatment of Gain or Loss. -- Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, a privilege or option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option or privilege relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).(b) Special Rule for Loss Attributable to Failure to Exercise Option. -- For purposes of subsection (a), if loss is attributable to failure to exercise a privilege or option, the privilege or option shall be deemed to have been sold or exchanged on the day it expired.(c) Special Rule for Grantors of Straddles. -- (1) Gain on lapse. -- In the case of gain on lapse of an option granted by the taxpayer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option expired.(2) Exception. -- This subsection shall not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business.(3) Definitions. -- For purposes of this subsection -- (A) The term "straddle" means a simultaneously granted combination of an option to buy, and an option to sell, the same quantity of a security at the same price during the same period of time.(B) The term "security" has the meaning assigned to such term by section 1236(c).(d) Non-Application of Section. -- This section shall not apply to --(1) a privilege or option which constitutes property described in paragraph (1) of section 1221;(2) in the case of gain attributable to the sale or exchange of a privilege or option, any income derived in connection with such privilege or option which, without regard to this section, is treated as other than gain from the sale or exchange of a capital asset;(3) a loss attributable to failure to exercise an option described in section 1233(c); or(4) gain attributable to the sale or exchange of a privilege or option acquired by the taxpayer before March 1, 1954, if in the hands of the taxpayer such privilege or option is a capital asset.Thus, sec. 1234(c)(1) as in effect prior to Sept. 2, 1976, only addressed the character of the gain realized on the lapse of an option which had been granted as part of a straddle. Sec. 1234 did not address the character of the gain or loss realized on a closing transaction entered into with respect to a granted option prior to the lapse of that option. Respondent therefore issued the so-called Zinn Ruling to specifically deal with this issue. In response to the Zinn Ruling, Congress subsequently amended sec. 1234(b), specifically providing that gain or loss from a closing transaction is to be treated as short-term capital gain or loss. (See discussion in text, infra↩).120. A closing transaction occurs where the writer of the option terminates his obligation under that option by reacquiring it, or by making a payment equivalent to the value of an offsetting option. See H. Rept. 94-1192 (1976), 1976-3 C.B. (Vol. 3) 19, 22.↩121. Sec. 1234(b), as amended by sec. 2136(a), Pub. L. 94-455, 90 Stat. 1929, provides:SEC. 1234(b). Treatment of Granator of Option in the Case of Stock, Securities, or Commodities. -- (1) General rule. In the case of the grantor of the option, gain or loss from any closing transaction with respect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 6 months.(2) Definition. -- For purposes of this subsection -- (A) Closing transaction. -- The term "closing transaction" means any termination of the taxpayer's obligation under an option in property other than through the exercise or lapse of the option.(B) Property. -- The term "property" means stocks and securities (including stocks and securities dealt with on a "when issued" basis), commodities, and commodity futures.(3) Nonapplication of subsection. -- This subsection shall not apply to any option granted in the ordinary course of the taxpayer's trade or business of granting options.↩122. In a New York Times editorial entitled "Back from the Futures," May 2, 1986, the commodity investment product generated by principal-to-principal trading in the United States is called a "leverage contract" and is argued to "serve no redeeming function."↩123. Since the broker/dealers involved in this case were beyond the subpoena power of the Court, neither the Court nor respondent had access to the books and records of the broker/dealers. The testimony of the broker/dealer witnesses that they "normally" laid off trades, while not necessarily lacking credibility, remains unsubstantiated by objective evidence. No documentary evidence of laid-off trades was introduced. We note that sec. 982 ("Admissibility of Documents Maintained in Foreign Countries") was added by Pub. L. 97-248, 96 Stat. 629, the Tax Equity and Fiscal Responsibility Act of 1982, applicable with respect to formal document requests mailed after Sept. 3, 1982124. A contango is defined in Webster's Third New International Dictionary (1976) as the "premium or interest paid on a fixed day on the London Stock Exchange by a buyer to the seller to be allowed to defer payment until a future settlement." The parties stipulated the following definition of "contango": "The difference of the future price over the cash or nearby prices when the future price is higher than the cash or nearby [price]."↩125. The parties stipulated that the term "strike price" means -- "The agreed price at which the holder of an option may call or put."↩126. The parties stipulated that the term "declaration date" means -- "The date on which the holder of an option must declare his intention to exercise his option."127. Appendices 1 and 2 to petitioners' brief are reproduced as Schedule 1 herein, pages 1179 - 1180.128. Sec. 1402(i) provides:SEC. 1402(i). Special Rules for Options and Commodities Dealers. -- (1) In general. -- In determining the net earnings from self-employment of any options dealer or commodities dealer -- (A) notwithstanding subsection (a)(3)(A), there shall not be excluded any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts, and(B) the deduction provided by section 1202 shall not apply.(2) Definitions. -- For purposes of this subsection -- (A) Options dealer. -- The term "options dealer" has the meaning given such term by section 1256(g)(8)(B) Commodities dealer. -- The term "commodities dealer" means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission.(C) Section 1256 coontracts. -- The term "section 1256 contract" has the meaning given to such term by section 1256(b)↩.129. Sec. 1256(b) provides:SEC. 1256(b). Section 1256 Contract Defined. -- For purposes of this section, the term "section 1256 contract" means -- (1) any regulated futures contract,(2) any foreign currency contract,(3) any nonequity option, and(4) any dealer equity option.↩130. The first clause of this statement does not appear to be born out by the statutory language actually enacted, as above discussed.↩131. LMEC was owned by James Gourlay. In the instant case, Gourlay was employed as a manager for Competex and handled the option straddle transactions for the approximately 265 petitioners who opened discretionary trading accounts with Competex. He testified as a witness for petitioners.↩132. The parties use the term "rollovers" to indicate the postponement of realized net gains to a year or years subsequent to year two by means of offsetting realized year two gains with losses in year two. To incur such losses in year two it was, of course, necessary under the London option transaction to incur a further offsetting gain, but one not intended to be realized until the next succeeding year.133. It has been said that logically a commodity straddle would be held in the expectation of profiting from a change in the "spread" or "premium," the difference in price between two futures and/or options contracts. While the price movements of the two contracts will have some relationship to each other, as the prices will be affected by similar economic conditions, neither in theory nor in practice are the fluctuations identical. See Dailey, "Commodity Straddles in Retrospect: Federal Income Tax Considerations," 47 Brooklyn L. Rev. 321↩ (Winter 1981).134. Unlike the situation in Smith, in this case the income intended to be sheltered in year one, at least initially, was ordinary rather than capital. See amendment to sec. 1234 by sec. 2136(a), Pub. L. 94-455, applicable to options granted↩ after Sept. 1, 1976135. "Transaction" in this sense refers to the entire series of transactions from the opening to the closing of an account.136. Since Gardner Lohmann and Amalgamated coordinated their efforts, their London options transaction was combined.↩137. The disproportionate size of the Rudolf Wolff commission is unexplained by the size or number of transactions.↩138. The dissenting Justices in Knetsch v. United States, 364 U.S. 361">364 U.S. 361 (1960), thought the interest deductions claimed by the taxpayer there should be allowed since the transactions leading to the interest charges were "real and legitimate," so that the formal requirements of sec. 163(a) (the interest deduction section) were met. The majority found the overall transaction to be a sham.139. Judge Learned Hand characterized the transaction which led to the Supreme Court's famous substance-over-form holding in Gregory v. Helvering in the following manner: "All these steps were real, and their only defect was that they were not what the statute means by a [reorganization], because the transactions were not part of the conduct of the business of either or both companies; so viewed they were a sham, though all the proceedings had their usual effect." Helvering v. Gregory, 69 F.2d 809">69 F.2d 809, 811 (2d Cir. 1934), affd. 293 U.S. 465">293 U.S. 465↩ (1935).140. See Gideon, "Mrs. Gregory's Grandchildren: Judicial Restrictions of Tax Shelters," 5 Virginia Tax Rev. 825, 828 (Spring 1986)↩.1. 49,467 of STCG 104,976 absorbed by '77 LTCL c/o, effectively giving STCG, LTCG treatment.↩2. $ STCG of $ 106,078 sheltered by STCG c/o of $ 13,381 + LTCG c/o of 73,443. Only 19,254 picked up in income.↩1. On Nov. 29, 1983, the Court granted petitioner's motion in docket No. 24519-81 to substitute Rebecca D. Stinard, as surviving spouse and heir of Roger D. Stinard, deceased, for decedent Roger Stinard.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620490/	Smith Brothers Refinery Company, Inc. v. Commissioner.Smith Bros. Refinery Co. v. CommissionerDocket No. 8807.United States Tax Court1946 Tax Ct. Memo LEXIS 292; 5 T.C.M. (CCH) 17; T.C.M. (RIA) 46010; January 16, 1946292 BLACK Order Denying Judgment on the Pleadings BLACK, J.: For the reasons stated in the Memorandum attached hereto, it is ORDERED, that petitioner's motion for judgment on the pleadings should be and it is hereby denied. Memorandum to Accompany Order Denying Petitioner's Motion for Judgment on the Pleadings BLACK, Judge: The petitioner has moved for judgment on the pleadings, in that the allegations of fact in support of Issue 1, admitted in the answer, show that the distribution in kind by the petitioner did not result in taxable income to the petitioner. In support of its motion, petitioner cites ; . While respondent has denied all three of petitioner's assignments of error, including assignment of error 1, he has admitted the correctness of all the facts which petitioner has alleged in support of its assignment of error 1. In , the dividend resolution provided for a dividend of a certain amount payable in a named stock at a declared valuation. The Supreme Court held that293 no sale or exchange of the stock resulted and the distribution of the stock was not used to discharge an indebtedness of the corporation, but was a mere distribution in kind and there was no taxable gain to the corporate taxpayer in making the distribution to its stockholders. The dividend resolution in the instant case, under which petitioner made distribution in kind of the $200,000 overriding royalty was not incorporated in the statement of facts which petitioner gave in support of its assignment of error 1, nor was any statement made as to what the resolution contained. We have no information as to what that dividend resolution contained. This missing fact, we think, is important and precludes us from giving petitioner judgment on the pleadings. It, of course, requires no citation of authorities that the determination of respondent is presumably correct and the burden is on petitioner to show there was error. Mertens in his law of Federal Income Taxation, Vol. 1, section 9.68, entitled "Earnings or Profits Are Not Realized by Corporation on Distribution in Kind" says: Regardless of the book adjustments of surplus a distribution by a corporation in kind does not result in294 any realization of earnings or profits by the corporation. However, there are circumstances under which corporations have been held taxable upon a distribution in kind; these cases usually involve the liquidation of a debt created by a prior dividend declaration. (Italics supplied.) The author then, in a footnote, cites and . The Callanan Road Improvement Co. case held that where a corporation declared a dividend of $12,000 and paid such dividend to its stockholders by the delivery to them of liberty bonds which cost $12,000 but which had a fair market value of $10,636.80 at the date of delivery, and by the payment of $1,363.20 cash, that the corporation was entitled to take a loss of $1,363.20. In the Bacon-McMillan Veneer Co. case, we held that a dividend of a definite amount, paid in liberty bonds, of a value in excess of cost gives rise to taxable gain. We do not understand that the Supreme Court's decision in , nullifies the correctness of the decisions above cited, for the facts are distinguishable. 295 In order to grant petitioner's motion for judgment on the pleadings in the instant case, we would have to assume that the dividend resolution was a resolution authorizing a distribution in kind, and that the distribution in kind was not in payment of a debt by the corporation to its stockholders, created by a prior dividend resolution. It may well be that the dividend resolution in the instant case simply authorized a distribution in kind and that the distribution in kind was not in liquidation of a debt created but we do not thnk we are authorized to assume it. Respondent's counsel in opposing petitioner's motion for judgment on the pleadings, among other things, said: Now, to permit a judgment on the pleadings I should think it would be necessary to go forward and show the nature of that contract under which the sale was made; what the overriding royalties were, and how they were to be distributed; and the nature of the resolution of the corporation which declared that this be distributed as a dividend to the stockholders. (Italics supplied.) As alaready indicated we at least agree with that part of respondent's statement, that before this Court could grant judgment for petitioner*296 on the pleadings, we would have to know the nature of the resolution which directed the distribution of the overriding royalty to petitioner's stockholders. Inasmuch as we do not have that information, petitioner's motion for judgment on the pleadings, we think, should be denied. An order will be entered denying petitioner's motion.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620491/	HOWARD M. TAYLOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. INTERNATIONAL BEDDING CO., ASSOCIATED BUILDING CO., AND DIAMOND PILLOW, FEATHER & DOWN CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Taylor v. CommissionerDockets Nos. 12732, 12733.United States Board of Tax Appeals14 B.T.A. 863; 1928 BTA LEXIS 2897; December 20, 1928, Promulgated 2897 Corporations A, B and C were affiliated. The president and treasurer of corporation A was also the president and treasurer of corporation B, which owned all the stock of corporation A. Upon the evidence, held that a withdrawal of funds by the individual from corporation A constituted a loan and not a taxable distribution, and that the amount should be included in the invested capital of the affiliated corporations. R. M. O'Hara, Esq., and Allen C. Girdwood, Esq., for the petitioners. Brooks Fullerton, Esq., for the respondent. SIEFKIN863 These are proceedings duly consolidated for hearing and decision for the redetermination of deficiencies in income and profits taxes as follows: DocketKind of taxYearDeficiencyNo.Howard M. Taylor12732Income tax1920$7,927.47International Bedding Co12733Income and profits tax19211,314.59The errors assigned in Docket No. 12732 are as follows: (1) The respondent has treated a loan to petitioner by the Associated Building Co. of $58,806.23 as a taxable distribution of corporate earnings to the extent of $46,047.98, the balance of $12,758.252898 being treated by respondent as return of capital. (2) In making the allocation between the taxable distribution and the return of capital, respondent has erroneously computed the available earnings accumulated from February 28, 1913, to March 10, 1920, of both the Associated Building Co. and the International Bedding Co. (3) In determining that portion of the amount of $58,806.23 constituting a taxable distribution of earnings respondent has erroneously taken into consideration the available earnings accumulated since February 28, 1913, of the Associated Building Co. (4) In determining that portion of the amount of $58,806.23 constituting a taxable distribution of earnings respondent has erroneously failed to reduce the available earnings of International Bedding Co. and the Associated Building Co. by the operating deficit of the Diamond Pillow, Feather & Down Co. 864 The errors assigned under Docket No. 12733 are: (1) The respondent erred in computing the tax against the consolidated corporations under the provisions of section 302 of the Revenue Act of 1918 instead of section 301 of the said Act. (2) The respondent erred in reducing the consolidated invested2899 capital by the amount of $58,806.23. FINDINGS OF FACT. The petitioner, Howard M. Taylor, is an individual residing at Baltimore, Md.The petitioners, International Bedding Co., the Associated Building Co., and the Diamond Pillow, Feather & Down Co., are Maryland corporations and were affiliated in 1920 and 1921. Howard M. Taylor, prior to March 10, 1920, was the owner of 196 shares of the total of 400 outstanding shares of stock of the International Bedding Co. He also owned 80 shares of the total of 200 shares of outstanding stock of the Diamond Pillow, Feather & Down Co. The remainder of the stock of these two corporations was owned by Franklin L. Groff. Taylor offered to either sell Groff his holdings in the International Bedding Co. and the Diamond Pillow, Feather & Down Co., or buy Groff's holdings in those two companies. Groff did not desire to do either, but finally agreed to sell his holdings to Taylor, and Taylor agreed to pay cash therefor. Taylor borrowed $100,000 in his own name from the Merchants' National Bank, giving a note therefor, and on March 10, 1920, paid this amount to Groff and received Groff's stock. Taylor has been president, treasurer2900 and a director of each of the three companies since March 10, 1920. Taylor did not own any of the stock of the Associated Building Co. This stock was owned by the International Bedding Co. The Associated Building Co. borrowed $100,000 from the Eutaw Savings Bank and Fred R. Dorton, giving therefor two mortgages on its property, one for $70,000 and one for $30,000. With this money there was paid off a mortgage on the Associated Building Co. amounting to $23,000, and one on some land which the Associated Building Co. had purchased, amounting to about $18,000. The difference between the sum of these amounts and the $100,000 borrowed, amounting to $58,806.23, was received by Taylor directly from the Associated Building Co. Taylor took out $100,000 life insurance made payable to his estate in order to protect the company against the indebtedness. He gave the Associated Building Co. no note, nor did he agree to pay any interest upon the alleged loan. No part of this amount has been repaid by Taylor, no interest has been demanded by the Associated Building Co., nor has any been paid. The amount 865 advanced to Taylor was treated at the direction of Taylor as an account2901 receivable on the books of the Associated Building Co. This is the only entry on any of the books of any of the corporations with regard to this item. There was no authorization by the board of directors for the transfer of this amount to Taylor. Taylor added to the $58,806.23 he had received from the Associated Building Co. about $42,000 of his own money and paid off the amount which he owed the Merchants' National Bank. The earnings of the International Bedding Co. accumulated between February 28, 1913, and March 10, 1920, amounted to $20,064.37. The earnings accumulated prior to February 28, 1913, amounted to $19,378.43. The accumulated earnings of the Associated Building Co. since February 28, 1913, amounted to $12,601.18. The deficit of the Diamond Pillow, Feather & Down Co. on March 10, 1920, amounted to $11,713.70, of which $8,476.57 had accrued between February 28, 1913, and March 10, 1920. The balance of the deficit existed on February 28, 1913. The International Bedding Co., the Associated Building Co., and the Diamond Pillow, Feather & Down Co. were affiliated during the years 1920 and 1921. The capital stock of the consolidated companies was $30,000. 2902 Of the amount of $58,806.23 which Taylor received from the Associated Building Co., the respondent has considered $12,758.25 as a return of capital and $46,047.98 as a distribution of surplus earnings. The respondent excluded the amount of $58,806.23 from the invested capital of the three consolidated companies and computed the invested capital to be $7,323.80. OPINION. SIEFKIN: The principal question is whether an amount of $58,806.23, received by Howard M. Taylor from the Associated Building Co. in 1920 was a loan. The respondent has treated $12,758.25 of it as a return of capital, and the remainder, $46,047, as a distribution of earnings, taxable to Taylor, and has excluded the whole amount of $58,806.23 from invested capital of the three corporations. The evidence discloses that Taylor owned no stock of the Associated Building Co. Stock of that company was held by the International Bedding Co., another corporation of which Taylor was the sole stockholder. Apparently no action was taken by the directors of any of the corporations authorizing the payment of a dividend of $58,806.23 to Taylor, nor was any action of any kind taken by the directors with regard to the transfer2903 of this amount to Taylor. It was treated as an account receivable on the books of the Associated Building Co. and Taylor testified that it constituted a loan to him in the ordinary course of business of the corporation. No note was 866 given for this amount, nor was any interest agreed upon, charged, or paid. No part of the principal amount has ever been repaid, but in order to protect the corporation against this loan, Taylor took out $100,000 life insurance payable to his estate. In , Foster, president of the corporation and the sole stockholder, with the exception of those holding qualifying shares, made withdrawals and his personal account was charged. The principal cause of Foster's indebtedness was his withdrawal of funds to purchase a vacant piece of property required by the corporation. On August 1, 1919, the corporation ceased doing active business. At the time of the hearing the corporation was in the process of liquidation. At the time Foster's indebtedness to the corporation was substantially as large as it was in 1918, but the corporation's surplus was and always had been more than sufficient2904 to take care of Foster's indebtedness. In that case we said: The only evidence we have is to the effect that Foster borrowed some $80,000 and promised to pay it back. The corporation gave him the use of it with the full right to reclaim it. Foster, so far as the evidence shows, was solvent and able to pay the amount, and upon the strength of his promise as an account receivable the corporation, to some extent, secured credit at the bank. By its balance sheet it held out to third persons that Foster's indebtedness was part of its assets, and Foster certified to this. We know of no authority for saying that Foster or the corporation could have contended for his or its own advantage that this belonged to Foster by way of dividend. Irrespective of whether Illinois law permitted such a dividend, we can not find any evidence that one was intended. When, in the future, either in the ordinary course or in final liquidation, Foster is relieved of the indebtedness, it will be necessary to consider whether he then realizes income. Meanwhile, what is for all other purposes a loan is not to be construed as a dividend solely to support a tax. See *2905 . Like other accounts receivable, the amount is within the petitioner's invested capital, and the Commissioner's determination is reversed. From all the evidence we conclude that the $58,806.23 was loaned to Taylor and is, therefore, not taxable income to him. The respondent erred in including this amount in Taylor's taxable income and in excluding it from the invested capital of the three petitioning corporations. No evidence was introduced or argument submitted with reference to the assignment of error in Docket No. 12733 with respect to the computation of the tax under section 302 of the Revenue Act of 1918. No error is apparent in the respondents action in that respect and we assume that whatever adjustments result from this opinion will be properly taken care of upon the settlement. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620493/	JAMES FINLEY AND HANNALORE FINLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFinley v. CommissionerDocket No. 22921-82United States Tax CourtT.C. Memo 1983-295; 1983 Tax Ct. Memo LEXIS 495; 46 T.C.M. (CCH) 247; T.C.M. (RIA) 83295; May 25, 1983. Charles M. Mattingly, Jr., for the petitioners. Louis R. Mandel,Greg Amway, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge: This case is before the Court on respondent's motion to dismiss for lack of jurisdiction. Petitioners filed a written objection to respondent's motion and a hearing thereon was held. Respondent contends that the petition was not filed within the period prescribed496 by sections 6213(a) and 7502. 1To facilitate the disposition of this case, our findings of fact and opinion have been combined. Respondent determined an income tax deficiency of $9,496.53 for 1977. He mailed a statutory notice of deficiency to petitioners by certified mail on June 9, 1982. Therefore, September 7, 1982, was the last day under section 6213(a) for the petitioners to petition this Court for a redetermination of the deficiency. Their petition was not received until September 13, 1982, the ninety-sixth day after the date of the notice. The envelope in which the petition was enclosed was mailed for Smithtown, New York, and bore a partially illegible postmark made by a private postage meter. There were no other postal markings on the envelope. Section 6213(a) provides that a taxpayer residing within the United States may file a petition with this Court for a redetermination of a deficiency within 90 days after a statutory notice of deficiency is mailed to the taxpayer. If a petition is received within the 90-day period, the petition is deemed filed497 on the date it is received. However, if a petition is received more than 90 days after the mailing of the deficiency notice, the petition is considered filed when mailed but only if the requirements of section 7502 are satisfied. Section 7502(a) provides, generally, that a petition will be deemed to be timely filed, notwithstanding untimely receipt, if the envelope containing the petition bears a postmark by the United States Postal Service which falls within the 90-day period. Section 7502(b) authorizes the Secretary of the Treasury to prescribe regulations for determining when, and to what extent, section 7502(a) will be applied to postmarks not made by the United States Postal Service. , affd. per curiam ; . Pursuant to such authority, section 301.7502-1(c)(1)(iii)(b), Proced. and Admin. Regs., has been promulgated. It provides that a privately metered mailing for a petition qualifies for the timely mailing rule of section 7502(a) only if two conditions are satisfied: (1) the postmark on the envelope must bear498 a date on or before the ninetieth day, and (2) the Court must receive the petition no later than the time in which a letter would ordinarily be received if mailed from the petitioner's point of origin on the ninetieth day. If the petition is not received in the ordinary course of the mails, it nevertheless will be treated as timely if petitioner establishes (1) that the petition was actually deposited in the mail before the last collection of mail on or before the last day prescribed for filing, (2) that the delay was due to a delay in transmission of the mail, and (3) the cause of such delay.See also , affg. a Memorandum Opinion of this Court. Petitioners argue that they should be permitted to offer evidence establishing that the petition was mailed on the ninetieth day. They cite no cases in support of their position. Respondent on the other hand urges that the Court may not consider extrinsic evidence since petitioners have not satisfied the first prong of the regulation that the private postage meter postmark bear a date on or before the last day of the period prescribed for filing. 2 In support499 of his view respondent cites us to . However, Wiese is factually inapposite for its concerned a private postmark which was clearly dated the ninety-first day. We need not dwell further on the question for even if petitioners were to establish that the petition was timely mailed, they must further show (1) that the six-day delay in receiving the petition was due to a delay in the transmission of the mail and (2) the cause of the delay. ; see also Sec. 301.7502-1(c)(1)(iii)(b), Proced. and Admin. Regs. The petitioners have offered no evidence on the reason for the delay and whether it was due to a problem in transmission of the mail. Thus, even accepting petitioners' evidence*500 to the effect that the petition was mailed on the ninetieth day, as their accountant and his secretary attest, there would still be a failure of proof. Accordingly, respondent's motion to dismiss for lack of jurisdiction will be granted. An appropriate order will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩2. We agree that such evidence is not admissible when an envelope bears a legible U.S. postmark. The same rule applies where the envelope bears a legible postmark made by a private meter after the last day for timely filing. ; sec. 301.7502-1(c)(1)(iii). Proced. and Admin. Regs.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620495/	SECURITY BANK S.S.B. & SUBSIDIARIES, f.k.a. SECURITY SAVINGS AND LOAN ASSOCIATION & SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSecurity Bank S.S.B. v. CommissionerDocket Nos. 472-92, 15464-93.United States Tax Court105 T.C. 101; 1995 U.S. Tax Ct. LEXIS 45; 105 T.C. No. 9; August 15, 1995, Filed 45 Decisions will be entered under Rule 155. P, a savings and loan association, acquired by repossession properties securing mortgage loans made by P to the owner-debtors of the properties. At the time P obtained possession of the properties, there was due substantial unpaid interest. P subsequently sold the properties at a gain, and recovered some of the previously unpaid interest. Held: amounts representing the recovery of unpaid interest on the sale of the foreclosure properties are currently taxable as ordinary income, and are not treated as credits to a bad debt reserve. Robert A. Schnur and Sara Berman Jensen, for petitioners. Mark D. Petersen, for respondent. NIMS, Judge NIMS102 OPINION NIMS, Judge: Respondent determined the following deficiencies in petitioner's Federal income tax: Fiscal Year EndingDeficiencyJune 30, 1985$ 75,644June 30, 1986112,277June 30, 1987103,992June 30, 1988121,356Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the sole issue remaining for decision46 is whether petitioner is required to report currently as ordinary income its realized gains from the sale of real property that it acquired through foreclosure or similar method, to the extent there existed unpaid interest on the loans secured by the property. All of the facts have been stipulated and are found accordingly. The stipulations of facts and the attached exhibits are incorporated herein by this reference. Petitioner, Security Bank S.S.B., is the parent of an affiliated group within the meaning of section 1504. Petitioner is a corporation licensed under Wisconsin law to transact business as a savings and loan association. Petitioner's principal place of business was located in Milwaukee, Wisconsin, when it filed its petitions. During the years at issue, petitioner received cash deposits from the public and made loans that were predominantly secured by interests in real property. These activities, among others, enabled petitioner to qualify as a "domestic building and loan association" within the meaning of section 7701(a)(19). Most of petitioner's loans were secured by way of first mortgages on residential real property. 103 Petitioner keeps its books and files for Federal47 income tax returns on the basis of a fiscal year ended June 30. During its fiscal years ended June 30, 1985, June 30, 1986, and June 30, 1987, petitioner reported its taxable income on the cash receipts and disbursements method of accounting. For its fiscal year ending June 30, 1988, petitioner, in compliance with the requisite Internal Revenue Code provisions, changed to the accrual method of accounting. For all years before the Court, petitioner computed its deduction for bad debts by using the reserve method of accounting for bad debts, as authorized by section 593(b). Petitioner used the percentage of taxable income method permitted by section 593(b)(2) to determine reasonable additions to its bad debts reserve. Most of the properties that secured the loans made by petitioner were located in Wisconsin. Under Wisconsin law, when a borrower defaults on a mortgage note and fails to cure such default the lender's primary remedies are either: (1) To institute a court foreclosure action; or (2) to accept a deed from the borrower in lieu of foreclosure. Most of the properties involved in this case were acquired by petitioner by way of foreclosure, while the remaining ones were acquired48 by accepting a deed in lieu of foreclosure. Ordinarily, petitioner waived its right under Wisconsin law to seek a deficiency judgment against the defaulting debtor. At the time petitioner acquired each of the aforementioned properties, either by way of foreclosure or by acceptance of a deed in lieu of foreclosure, there existed an amount of unpaid interest on the underlying defaulted debt. In most cases when petitioner foreclosed, it would typically bid, at a sheriff's sale, an amount equal to the sum of the outstanding principal and interest on the underlying loan, plus interest on that total amount, plus advances and costs. If petitioner's bid was the highest or only bid and it was confirmed by the court, then petitioner would acquire title to the property by way of a sheriff's deed. Receipt of such a deed would extinguish any interest of the mortgagor in the underlying property or the proceeds received from its sale. Petitioner generally attempted to dispose of the acquired properties as soon as practicable, and eventually sold them to unrelated third parties. In some instances, petitioner realized a gain from the resale of a property because the proceeds received exceeded petitioner's49 adjusted basis in the 104 property. At other times, petitioner realized a loss because the proceeds received were less than adjusted basis. Petitioner accounted for its gains by crediting the amount of each gain to a bad debt reserve, and accounted for its losses by charging the amount of a loss to the bad debt reserve. Only the properties on which petitioner realized gains (hereinafter called the Foreclosure Properties) are the subject of this case. For its fiscal year ended June 30, 1988, petitioner's practice was to accrue and report the unpaid interest on a loan only for a period ending 90 days after the borrower defaulted on the loan. The unpaid interest that is the subject of the dispute in this case is the mortgage interest that remained unpaid at the time the properties were acquired by petitioner in foreclosure actions or by deeds in lieu of foreclosure. No further interest, as such, was "earned" on the mortgages between the time petitioner obtained the Foreclosure Properties and the time petitioner sold them. The following table reflects by year and category the gain realized by petitioner on the sale of the Foreclosure Properties: Interest toExcess of GainDate ofover InterestYearGainForeclosureto Foreclosure6/30/85$ 562,834.00$ 296,824.00$ 266,010.006/30/86657,493.00316,164.00341,329.006/30/87181,178.95100,294.1180,884.846/30/88202,386.83151,023.9551,362.88Totals1,603,892.78864,306.06739,586.7250 Respondent's deficiency notice for petitioner's 1985 and 1986 fiscal years states that "you must include, in your gross income, gain from the sale of foreclosed property to the extent that it represents accrued but unpaid interest up to the date of judgment in foreclosure." Respondent's deficiency notice for petitioner's 1987 and 1988 fiscal years states: It has been determined that you received interest income of $ 115,393 and $ 162,318 for the respective years ended June 30, 1987 and June 30, 1988. These amounts, which were not reported in your returns, represent the gain from the sale of foreclosed properties to the extent of accrued but 105 unpaid interest on the original indebtedness of the mortgagors. Therefore your taxable incomes for the respective years ended June 30, 1987 and June 30, 1988 are increased by $ 115,393 and $ 162,318 respectively.In connection with petitioner's change from the cash to the accrual method of accounting beginning with its June 30, 1988, fiscal year, petitioner filed a Form 3115 reflecting a net section 481(a) adjustment in the amount of $ 11,618,936 for such year. This section 481(a) adjustment did not include the unpaid and accrued interest51 that makes up respondent's interest income adjustment for petitioner's June 30, 1988, fiscal year. The precise issue presented by this case has been considered previously by two appellate courts, and the result in each appellate court decision supports respondent's position here. These decisions are Gibraltar Fin. Corp. of California v. United States, 825 F.2d 1568">825 F.2d 1568 (Fed. Cir. 1987), revg. 10 Cl. Ct. 31">10 Cl. Ct. 31 (1986); and First Charter Fin. Corp. v. United States, 669 F.2d 1342">669 F.2d 1342 (9th Cir. 1982), affg. in part, revg. in part, and remanding an unreported U.S. District Court case. The issue is one of first impression in the Tax Court. A sale of property which had been acquired by foreclosure or deed in lieu of foreclosure is within the ambit of section 595 which provides: SEC. 595. FORECLOSURE ON PROPERTY SECURING LOANS. (a) Nonrecognition of gain or loss as a result of foreclosure. -- In the case of a creditor which is an organization described in section 593(a), no gain or loss shall be recognized, and no debt shall be considered as becoming worthless or partially worthless, as the result of such 52 organization having bid in at foreclosure, or having otherwise reduced to ownership or possession by agreement or process of law, any property which was security for the payment of any indebtedness. (b) Character Of Property. -- For purposes of sections 166 and 1221, any property acquired in a transaction with respect to which gain or loss to an organization was not recognized by reason of subsection (a) shall be considered as property having the same characteristics as the indebtedness for which such property was security. Any amount realized by such organization with respect to such property shall be treated for purposes of this chapter as a payment on account of such indebtedness, and any loss with respect thereto shall be treated as a bad debt to which the provisions of section 166 (relating to allowance of a deduction for bad debts) apply. (c) Basis. -- The basis of any property to which subsection (a) applies shall be the basis of the indebtedness for which such property was secured (determined as of the date of the acquisition of such property), properly increased for costs of acquisition. 106 (d) Regulatory Authority. -- The Secretary shall prescribe such regulations as he may53 deem necessary to carry out the purposes of this section.Thus, section 595(a) provides, in the case of a savings and loan association described in section 593(a) (which the parties agree includes petitioner), that no gain or loss is to be recognized, and no debt is to be considered as becoming worthless or partially worthless, as the result of the acquisition of property by mortgage foreclosure or other procedure having similar effect. Pursuant to section 595(b), any property so acquired is to be considered as having the same characteristics as the indebtedness for which the property was security. Section 595(b) also provides that any amount realized with respect to such property is to be treated as a payment on account of such indebtedness, and any loss with respect thereto is to be treated as a bad debt. Section 595(c) provides that the basis of any property so acquired is to be the basis of the indebtedness for which the property was security. Section 595(d) confers authority on the Secretary to "prescribe such regulations as he may deem necessary to carry out the purposes" of section 595. Under section 1.595-1(e)(6), Income Tax Regs., "An amount realized with respect to 54 acquired property means an amount representing a recovery of capital", such as proceeds from the sale or other disposition of property, payments on the original indebtedness by or on behalf of the debtor, and "collections on a deficiency judgment obtained against the debtor (other than amounts treated as interest under applicable local law)". Section 1.595-1(e)(6)(i), Income Tax Regs., provides that Any amount realized shall be applied against and reduce the adjusted basis of the acquired property, and to the extent that such amount exceeds the adjusted basis, it shall, in the case of a creditor using the specific deduction method of accounting for bad debts, be included in gross income as ordinary income, or, in the case of a creditor using the reserve method of accounting for bad debts, be credited to the appropriate bad debt reserve * .As previously noted, petitioner uses the reserve method of accounting for bad debts. Under section 1.595-1(e)(6)(ii), Income Tax Regs., a loss is recognized if the amount realized on the sale or other disposition 107 of the property is less than the adjusted basis of the property. For completeness, we also quote section 593(c), since that55 section contains the authority for petitioner's treatment of its reserves for bad debts: SEC. 593. RESERVES FOR LOSSES ON LOANS. (c) Treatment of reserves for bad debts. (1) Establishment of reserves. Each taxpayer described in subsection (a) which uses the reserve method of accounting for bad debts shall establish and maintain a reserve for losses on qualifying real property loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. For purposes of this title, such reserves shall be treated as reserves for bad debts, but no deduction shall be allowed for any addition to the supplemental reserve for losses on loans.When enacted in 1962, section 595 effected a major change in the law for transactions described in section 595(a) occurring after December 31, 1962, in fiscal years ending after such date. Revenue Act of 1962, Pub. L. 87-834, sec. 6, 76 Stat. 960, 982; S. Rept. 1881 (1962), 3 C.B. 753">1962-3 C.B. 753-754. Under prior law, the foreclosure event was considered a taxable event. Section 595 eliminates the mortgage foreclosure as a separate taxable event, and the recognition of gain or loss is postponed until56 sale or other disposition of the acquired property. In making this change, Congress viewed deferring recognition of gain or loss until disposition of the property secured by a mortgage as more in accord with the economic realities of a mortgage foreclosure by a mutual savings institution, because such proceeding was essentially an incidental step in the process of collecting on the loan. This step made no significant change in the lender's economic relationship to the property used to secure the loan. Also, by postponing recognition of gain or loss until the collection process actually yielded proceeds from the sale or other disposition of the property, Congress was able to eliminate the uneven results that existed under prior law. Id.Prior to enactment of section 595, the foreclosure event was considered a taxable transaction in which a bad debt deduction would have arisen if the bid price was less than the amount outstanding on the loan. S. Rept. 1881, supra, 1962-3 C.B. at 753. If the property was bid in at the amount 108 of the loan, no bad debt deduction was allowed. A gain or loss would have occurred, however, if the fair market value of the 57 property differed from the bid price. Id. If the property was successfully bid in by the lender, a gain or loss was usually also realized on the subsequent disposition of the property. Id.Prior to the enactment of section 595, a body of case law developed under which a cash method lender was deemed to have received accrued but unpaid interest upon the acquisition of property in a mortgage foreclosure. See Gibraltar Fin. Corp. of California v. United States, 825 F.2d 1568">825 F.2d 1568, 1572 (Fed. Cir. 1987). Under that case law, a lender using the cash method was required to recognize accrued but unpaid interest as taxable income where the mortgaged property was "bought in" at a mortgage foreclosure sale by applying the bid price not only to the amount of the debt but also to the amount of the unpaid interest. Id. at 1572-1573. A cash method lender also was required to recognize the unpaid interest as taxable income where the mortgaged property was acquired in lieu of foreclosure and the fair market value of the property exceeded the basis of the debt (plus costs). See, e.g., Helvering v. Missouri State Life Ins. Co., 78 F.2d 778">78 F.2d 778 (8th Cir. 1934).58 As the court in Gibraltar noted, This body of case law did not apply to an accrual basis * * [lender] who had already reported the interest as income prior to the foreclosure, which would generally be the case. If the interest income were not properly accruable (e.g., because collection was too uncertain) an accrual method lender would be on the same footing as a cash method lender. [Gibraltar Fin. Corp. of California v. United States, supra at 1572 n.2; citation omitted.]Although petitioner changed to the accrual method of accounting for the fiscal year ended June 30, 1988, under respondent's theory in this case unpaid delinquent interest should have been included in income to the extent of any gain on the properties which were disposed of in that fiscal year. Respondent agrees, however, that the unpaid delinquent interest for the fiscal year ended June 30, 1988, does not include the interest accrued by petitioner for the period ending 90 days from the date of default, since that portion had previously been included in taxable income. Under the 109 regulations, such portion would properly be added to basis. Sec. 1.595-1(d), Income Tax59 Regs.Petitioner's 90-day accrual practice, begun when petitioner changed from the cash to the accrual method of accounting, is apparently in conformity with requirements of the regulations of the Federal Home Loan Bank Board. See 12 C.F.R. sec. 563 c.11(b), Uncollectible Interest on Loans; see also, Gibraltar Fin. Corp. of California v. United States, 10 Cl. Ct. 31">10 Cl. Ct. 31, 35 n.2 (1986), revd. 825 F.2d 1568">825 F.2d 1568 (Fed. Cir. 1987); Peat, Marwick, Mitchell and Co., 1 Taxation of Financial Institutions, sec. 17.06[2], 17-11 through 17-13 (1983). Respondent argues that even though section 595 affected the pre-1963 case law insofar as that law relied upon foreclosure as a separate recognition event for tax purposes, it does not follow that the enactment of section 595 was intended to overrule the fundamental and well-settled tax principle that interest constitutes ordinary income under section 61(a)(4). Respondent points out that, as noted above, foreclosure was eliminated as a separate taxable event because Congress was of the view that, for mutual savings institutions, such a proceeding was essentially a step in the process of collecting60 on the loan. Congress accordingly postponed recognition until the collection process yielded actual proceeds, including previously unpaid interest, from the sale or other disposition of the acquired property. According to respondent, when there is an actual recovery of unpaid interest during the collection process there is no logical reason to permit a lender to escape recognition of the unpaid interest as taxable income in the year of its recovery. Respondent asserts that neither the language of the statute nor its legislative history suggests that Congress intended to overrule, for mutual savings associations, the fundamental tax principle that interest constitutes taxable income under the Internal Revenue Code. Petitioner argues that the plain language of section 595 requires that all gains from the sale of properties acquired by foreclosure or a similar procedure are to be treated as credits to the seller's bad debt reserve, and that this result is supported by the regulations and the legislative history. Petitioner reads section 595(b) to mean that the entire amount of any gain or loss realized upon a sale is to be treated 110 as a credit or charge to the selling institution's 61 bad debt reserve. Petitioner also argues that the definition of "amount realized" in the second sentence of section 1.595-1(e)(6), Income Tax Regs., limits this concept to a recovery of capital, and that a recovery of interest does not fall within the statutory rule as so narrowed. Furthermore, the regulations also provide that any amount realized in excess of adjusted basis, under an accounting for bad debts method such as petitioner's, is to be credited to a bad debt reserve, and this would include previously uncollected interest. Sec. 1.595-1(e)(6)(i). In this connection we note that the only reference to interest in any part of the relevant section 595 regulations is to be found in a parenthetical clause relating solely to deficiency judgments against the debtor. Sec. 1.595-1(e)(6), Income Tax Regs; see First Charter Fin. Corp. v. United States, 669 F.2d at 1350. It may be useful at this point to recapitulate some essential facts. During the four fiscal years at issue, petitioner realized a total gain in sales of the Foreclosure Properties of $ 1,603,892.78. This amount is made up of interest to the date of foreclosure of $ 864,306.06, and gain62 totaling $ 739,586.72 in excess of the latter amount. Thus, regardless of the outcome of this case, petitioner will have had the benefit of deferral of at least $ 739,586.72. Respondent does not seek to tax this amount currently. Respondent's argument essentially tracks Rev. Rul. 75-251, 1 C.B. 175">1975-1 C.B. 175. Rev. Rul. 75-251 takes the position that (1) Section 1.595-1(e)(6)(i) of the regulations provides that any "amount realized", to the extent it exceeds basis, is credited to a bad debt reserve. (2) Regulation section 1.595-1(e)(6) limits the application of the foregoing by defining the amount realized as a recovery of capital. (3) Under pre-section 595 law, interest received in connection with a foreclosure proceeding is not a recovery of capital, (citing Helvering v. Midland Mut. Life Ins. Co., 300 U.S. 216">300 U.S. 216, 81 L. Ed. 612">81 L. Ed. 612, 57 S. Ct. 423">57 S. Ct. 423 (1937)). (4) Only that portion of the amount realized upon the disposition of foreclosure property "representing the capital characteristics" of the property is chargeable to a bad debt 111 reserve under section 595. The portion "representing the interest characteristic63 of the property" represents interest income to a cash method taxpayer in the year realized, and is reportable as such. Rev. rul 75-251, 1 C.B. 175">1975-1 C.B. 175. It is true, as indicated by the revenue ruling that the regulation defines the section 595(b) term "amount realized" as "an amount representing a recovery of capital". Sec. 1.595-1(e)(6), Income Tax Regs. (Emphasis added.) But the same regulation uses "amount realized" in a different way; i.e., to specify the treatment for tax purposes of an excess of sales proceeds over adjusted basis (without any reference to interest). Sec. 1.595-1(e)(6)(i), Income Tax Regs.Although the regulation has been criticized as poorly drafted in that respect, we agree with respondent that the unrecovered interest is currently reportable. Section 595(b) begins by stating that foreclosure type property is to be considered as having the same characteristics as extinguished indebtedness. We construe this to mean as being like an interest producing indebtedness. Section 595(b) then goes on to say that when the property is sold, any amount realized is to be treated as a payment on account of the indebtedness. 64 In Gibraltar Fin. Corp. of California v. United States, 825 F.2d at 1574, the taxpayer argued that the definition of "amount realized" contained in section 1001 ("the sum of any money received plus the fair market value of the property (other than money) received") should be applied in the context of section 595(b). Thus, the taxpayer argued, "amount realized" would include recovered interest, and since section 1.595-1(e)(6)(i), Income Tax Regs., expressly provides that "Any amount realized shall * * to the extent that such amount exceeds the adjusted basis * * * be credited to the appropriate bad debt reserve", no amount of interest is currently taxable under the regulation. The Government responded in Gibraltar Fin. Corp. v. United States, supra, as here, by arguing that under the regulation, "amount realized" is limited to the "recovery of capital", so recovered interest must be currently taxable. Id. The Federal Circuit agreed, observing that "the language on which taxpayer relies is restricted by the part of the regulation which limits 'amount realized' to 'recovery of capital.'" Id., 825 F.2d at 1574.65 Regardless of whether 112 we give the two juxtaposed parts of the regulation this construction, we agree with respondent's position that "amount realized" in the context of section 595(b) includes recovered interest, and, as already indicated and as further discussed infra, we believe the "same characteristics" language of section 595(b) must override any implication in section 1.595-1(e)(6)(i) that recovered interest need not be currently reported. We repeat: section 595(b) flatly states that "any amount realized * * * shall be treated * * * as a payment on account of such indebtedness * * * ." (Emphasis added.) The "indebtedness" that the foreclosed property secured possessed the characteristic of yielding interest. To have the same characteristics as the "indebtedness" the foreclosed property must also have that ability of producing interest, and in the case before us "that characteristics bore fruit." See First Charter Fin. Corp. v. United States, 669 F.2d 1342 (9th Cir. 1982) at 1351 (Sneed, J., specially concurring). It follows that unpaid interest, to the extent recovered on the sale of the Foreclosure Properties, is required by the language66 of section 595(b) to be treated as interest paid on an indebtedness, and we so hold. As such, it must be reported currently as ordinary income. Prior cases have also noted the disparity between the tax treatment of uncollected interest in the hands of accrual basis and cash basis taxpayers, if petitioner's position were to prevail. This disparity was succinctly described in First Charter Fin. Corp. v. United States, supra at 1349-1350, and quoted with approval in Gibraltar, supra at 1577, as follows: An accrual method taxpayer recognizes interest as it accrues. It will therefore take ordinary income at the time the payment is due. The amount previously reported as accrued interest is applied to the taxpayer's basis in the property. Consequently, all that it receives when it sells the foreclosure property is a recovery of capital. Treas. Reg. section 1.595-1(d). Any recovery of that interest from the sale of the property cancels out this increase in basis, and no credit is assigned to the bad debt reserve. If the recovery of accrued but unpaid interest by a cash method taxpayer is not treated as ordinary income, the cash method taxpayer67 will take a nontaxable credit to its bad debt reserve. This credit may or may not reduce the taxpayer's bad debt deduction in a later year. The cash method taxpayer at least defers the gain. A mere difference in choice of accounting method should not have such significant consequences, absent some clear indication to the contrary. [Citation omitted; fn. ref. omitted.]113 We believe this analysis additionally supports our conclusion as to the current taxability of recovered interest in the case before us. Petitioner relies on two other cases which have dealt with aspects of section 595(b). The first of these is Allstate Savings & Loan Association of Bristol v. Commissioner, 68 T.C. 310">68 T.C. 310 (1977), affd. 600 F.2d 760">600 F.2d 760 (9th Cir. 1979). The second is First Federal Savings & Loan Association v. United States, 228 Ct. Cl. 569">228 Ct. Cl. 569, 660 F.2d 767">660 F.2d 767 (1981). Neither is apposite. In Allstate Savings & Loan Association v. Commissioner, supra at 320, we held that because the expenses of selling foreclosed property are inherently capital in nature, recovery of the expenses is 68 a recovery of capital. Such expenses would therefore be accounted for through appropriate charges or credits to a bad debt reserve, and would not be currently deductible. Since receipt of interest is not a recovery of capital, it is therefore fully consistent not to treat it as a credit to the bad debt reserve, but as ordinary income. First Charter Fin. Corp. v. United States, supra at 1349. In First Fed. Sav. & Loan Association v. United States, supra at 796, the Court of Claims agreed with the taxpayer in that case that rents received by a savings and loan association during the period between foreclosure and sale are not ordinary income, but are credits to a bad debt reserve. The Court of Claims felt that consistency required this result because Congress explicitly forbade savings and loan associations from taking a depreciation deduction. As the Court of Appeals for the Ninth Circuit pointed out in discussing Bristol, "No principles of taxation or fairness require that recovery of * * * unpaid interest be treated as a credit to the bad debt reserve." 669 F.2d at 1349. We have considered petitioner's argument69 regarding public policy considerations and find it unpersuasive. 114 To reflect the foregoing and concessions, Decisions will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620496/	THE NIS FAMILY TRUST, FRANK NI, TRUSTEE, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentNis Family Trust v. CommissionerNo. 9820-99; No. 9821-99; No. 9822-99United States Tax Court115 T.C. 523; 2000 U.S. Tax Ct. LEXIS 91; 115 T.C. No. 37; December 4, 2000, Filed An appropriate order imposing a sanction on Crystal D. Sluyter shall be issued, and other appropriate orders shall be issued. The cases are before the Court on R's motions for judgment on the pleadings and partial summary judgment and on the Court's orders to show cause why it should not (1) impose penalties on Ps for instituting or maintaining proceedings primarily for delay or for advancing frivolous or groundless positions, and (2) require Ps' attorney, S, to pay excess costs, expenses, and fees for her bad faith course of conduct by which she unreasonably and vexatiously multiplied these proceedings. In the petitions, Ps fail to address any of the adjustments made in the notices of deficiency, raising only meritless tax- protester arguments. Ps, therefore, have conceded those adjustments and, with respect to the deficiencies in tax determined by R, entry of judgment on the pleadings is appropriate. Sec. 7491, I.R.C., does not add to the burden of respondent as the movant for judgment on the pleadings in these cases. R has92 shown that partial summary judgment is appropriate for the accuracy-related penalties determined by R. Ps have abandoned their return positions, relying, instead, on a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments. S, Ps' attorney, has, in bad faith, aided Ps in that strategy by making additional meritless tax-protester arguments, making meritless motions and responses to motions, and abusing the Court's subpoena power. Neither Ps or S have shown that the orders to show cause should not be made absolute. 1. HELD: With respect to the deficiencies in tax determined by respondent, judgment will be entered on the pleadings. Rule 120(a), Tax Court Rules of Practice and Procedure. 2. HELD, FURTHER, sec. 7491, I.R.C., does not add to movant's burden for judgment on the pleadings with respect to such deficiencies in tax. 3. HELD, FURTHER, with respect to the sec. 6662, I.R.C., accuracy-related penalties, partial summary93 judgment will be granted for R. Rule 121(a), Tax Court Rules of Practice and Procedure. 4. HELD, FURTHER, in each case, P (or Ps) will be required to pay penalties ($ 25,000 in docket No. 9822-99; $ 500 in docket No. 9820-99 and $ 5,000 in docket No. 9821-99) on account of instituting and maintaining these proceedings primarily for delay and taking frivolous and groundless positions. Sec. 6673(a)(1), I.R.C. 5. HELD, FURTHER, S will be required to pay personally $ 10,643.75 for R's excess attorney's fees reasonably incurred by R on account of S's bad faith course of conduct in which she unreasonably and vexatiously multiplied the proceedings. Sec. 6673(a)(2), I.R.C.Crystal D. Sluyter, for petitioners.Dale A. Zusi, Paul K. Webb, and Debra K. Moe, for respondent. Halpern, James S.HALPERN524 OPINIONHALPERN, JUDGE: These cases have been consolidated for trial, briefing, and opinion (the consolidated cases or these cases). Respondent has determined deficiencies in income tax and accuracy- related94 penalties under section 6662 as follows: Taxable Petitioner[s] Year Deficiency Penalty _____________ _______ __________ _______ The Nis Family Trust, Frank Ni, Trustee 1995 $ 83 $ 17 Nis Venture Trust, Frank Ni, Trustee 1995 172,702 34,540 Hae-Rong and Lucy B. Ni 1995 186,988 37,398These cases are before the Court on (1) respondent's motions for (A) judgment on the pleadings and (B) partial summary judgment and (2) the Court's orders to show cause why it 525 should not impose (A) penalties on petitioners pursuant to section 6673(a)(1) and (B) require counsel for petitioners, Crystal D. Sluyter, to pay costs, expenses, and fees (without distinction, costs) pursuant to section 6673(a)(2).Unless otherwise indicated, all section 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.BACKGROUNDRESIDENCEAt the time the petitions95 were filed, all petitioners resided in San Jose, California.NOTICES OF DEFICIENCYBy separate notices of deficiency, each dated February 19, 1999 (collectively, the notices of deficiency or notices), respondent determined the deficiencies in tax and penalties set forth above. 2 Respondent's determinations were based on the following adjustments:NIS FAMILY TRUSTRespondent disallowed petitioner's deduction for fiduciary and attorney's fees in the amount of $ 600 because of petitioner's failure to establish the amount, if any, of such fees paid during the taxable year for ordinary and necessary expenses incurred in connection with trust administration96 or the management of trust assets. Respondent disallowed petitioner's deduction for a charitable contribution in the amount of $ 1,800 because of petitioner's failure to substantiate (1) the existence and amount of any contribution, (2) that a contribution was made to a charitable organization, and (3) that the claimed contribution was not a prohibited transaction resulting in personal benefit or inurement. Respondent disallowed petitioner's claimed exemption deduction in the 526 amount of $ 100 because of petitioner's failure to show entitlement to such deduction under either section 651 or 652.NIS VENTURE TRUSTRespondent disallowed petitioner's cost of goods sold in the amount of $ 404,420 and a deduction for Schedule C, Profit or Loss From Business, expenses in the amount of $ 9,737 because of petitioner's failure to substantiate such expenditures and to show that such expenses were incurred in a trade or business. Respondent disallowed an S corporation loss in the amount of $ 20,131 because of petitioner's failure to substantiate such loss and show that the loss was a business loss. On various grounds, respondent disallowed an income distribution deduction in the amount of $ 1,500, 97 a deduction for attorney's fees of $ 1,500, a deduction for an exemption of $ 100, and a Schedule E, Supplemental Income and Loss, expense for rent in the amount of $ 1,021.HAE-RONG AND LUCY B. NIRespondent increased petitioners' gross income by $ 439,230 based on the alternative grounds that (1) the Nis Family Trust and the Nis Venture Trust (together, the Trusts) are shams with no economic substance, (2) the Trusts are grantor trusts, (3) under the assignment of income doctrine, petitioners are taxable on the income and deductions of the Trusts, or (4) if the Trusts are recognized for tax purposes, sections 652 or 662 function to increase the gross income of petitioners. Respondent also made certain resultant adjustments and other adjustments that are not fully explained.PLEADINGSA separate petition in each of the consolidated cases was filed on May 21, 1999. None of the petitions fully complied with our Rules, and, in each case, petitioner (petitioners in the case of Hae- Rong and Lucy B. Ni) was ordered by the Court to file an amended petition. In each case, petitioner (or petitioners) filed an amended petition (together, the amended petitions) stating the following disagreement, 98 and reasons therefor, with the adjustments set forth above (and accompanying penalty):527 I disagree with all the adjustments and changes the Commissioner has made. I do not believe that there was any underlying liability due to a lack of consideration. I have previously submitted facts with the Internal Revenue Service "IRS" in support of my position in an effort to resolve the matter administratively. The IRS failed or refused to consider those facts or my good faith effort to resolve the matter. The following facts were submitted to the IRS in April of 1999: 1. "It does not appear that the United States and the State of California (each a body politic with their respective governments) are under any legal obligation to protect our property and ourselves; 2. That although I may have accepted some commercial benefits, it does not appear that the tax in question bears a fiscal relation to those benefits; 3. In addition, regardless of the fact that some commercial99 benefits may have been accepted, it does not appear that any obligation to pay any particular tax in return was ever disclosed." Factually, this case is distinguished from cases such as United States v. Sloan, 939 F.2d 499">939 F.2d 499 and similar cases because the presumption of Cook v. Tait, 265 U.S. 47">265 U.S. 47, 68 L. Ed. 895">68 L. Ed. 895, 44 S. Ct. 444">44 S. Ct. 444 has been overcome due in part to statutes such as 50 U.S.C. section 1520 as enacted in 1976.The IRS has not disputed these facts. Therefore, petitioner brings only an issue of law before the court. The legal conclusion drawn from the above facts is that no liability could have been incurred regardless if income was earned or not because of a lack of consideration, see also State of Wisconsin, et al. v. J.C. Penney Company, 311 U.S. 435">311 U.S. 435, 85 L. Ed. 267">85 L. Ed. 267, 61 S. Ct. 246">61 S. Ct. 246, and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274">430 U.S. 274, 51 L. Ed. 2d 326">51 L. Ed. 2d 326, 97 S. Ct. 1076">97 S. Ct. 1076.Respondent filed answers to the amended petitions on September 24, 1999. In each answer, respondent denied making errors in his adjustments.CONSOLIDATIONBy motion100 filed November 23, 1999, respondent moved to consolidate these cases for trial, briefing, and opinion (the motion to consolidate). We ordered petitioners to make any objection to the motion to consolidate by December 13, 1999. No objection was made, and we granted the motion to consolidate on December 21, 1999.CASES SET FOR TRIALBy notice dated December 29, 1999, these cases were set for trial at the trial session of the Court commencing on June 5, 2000, in San Francisco, California (the trial session).528 ADMISSIONSOn March 16, 2000, respondent served Respondent's Requests for Admissions (the requests for admissions) on all petitioners herein. See Rule 90. None of the petitioners responded to the requests for admissions. Therefore, each matter as to which respondent requested admission is deemed admitted (the deemed admissions). See Rule 90(c). We will set forth some of the deemed admissions in the discussion that follows.APPEARANCE OF CRYSTAL D. SLUYTEROn April 10, 2000, Crystal D. Sluyter, attorney, entered her appearance in each of these cases, on behalf of the respective petitioner (or petitioners).MOTIONS FOR PROTECTIVE ORDEROn April 10, 2000, petitioners, "by and101 through" Ms. Sluyter, separately moved in each case for a protective order "in regards to discovery and production of documents" (motions for protective order or the motions). The motions all state: "This motion should be granted because the respondent is not entitled to receive any private and confidential books and records from petitioners." No affidavits accompany the motions. The motions are accompanied, however, by documents entitled "Memorandum of Points and Authorities" (the memoranda). The memoranda state as follows: "The gravamen of Petitioners' case is that respondent has no legitimate authority over their lives and property." The memoranda continue: The petitioners entered evidence that the Internal Revenue Code (IRC) was not applicable to them. * * * * * * * * * As the Petitioners maintain that Respondent lacks legitimate authority over their lives and property, it would be imprudent to allow Respondent to have Petitioners' books and records before evidence is provided to the contrary.The motions are all signed by Ms. Sluyter.On April 11, 2000, the Court102 ordered respondent to respond to the motions. On April 24, 2000, respondent filed an 11-page response. 529 On April 25, 2000, the Court denied the motions.MOTIONS FOR JUDGMENT ON THE PLEADINGSOn April 12, 2000, respondent, by a separate motion in each case, moved for judgment on the pleadings (the motions for judgment on the pleadings or the motions). On April 13, 2000, the Court ordered petitioners to respond to the motions for judgment on the pleadings. On April 19, 2000, in response to the motions, all of the petitioners filed similar documents, captioned "Petitioners' Objections to Respondent's Motion for Judgment on the Pleadings and Supporting Memorandum" (sometimes, petitioners' objections). The memorandum portion of each of petitioners' objections states that, although, in the petition, petitioner (petitioners, in the case of Hae-Rong and Lucy B. Ni) did state that there were no issues of fact in dispute, such is no longer the case. Each such memorandum portion claims: There is no evidence to suggest that there is a bona fide political relationship between the petitioners and the "UNITED STATES" and the "STATE OF CALIFORNIA." There is no evidence103 that the petitioners are subject to the written will of individuals called "CONGRESSMEN." * Each of petitioners' objections includes an affidavit of Ms. Sluyter wherein, among other things, she claims, without further detail: "There is a factual dispute as to the Petitioners relationship to the United States and the State of California." Ms. Sluyter signed the petitioners' responses.COURT'S ORDER DATED APRIL 24, 2000By order dated April 24, 2000 (the April 24 order), the Court (1) calendared the motions for judgment on the pleadings for hearing at the trial session and (2) ordered that, at the trial session (A) petitioners show cause why the Court should not impose a penalty pursuant to section 6673(a)(1) (which provides for a penalty if, among other things, a proceeding is instituted or maintained primarily for delay or the taxpayer's position is frivolous or groundless), and (B) Ms. Sluyter show cause why she should not be required to pay costs pursuant to section 6673(a)(2) (which provides that costs may be imposed on counsel who has multiplied the proceedings in any case unreasonably and vexatiously). 530 MOTIONS TO COMPELOn April 24, 2000, by one consolidated104 motion, made in each of these cases, respondent moved to compel (1) production of documents and (2) answers to interrogatories (the motions to compel). In support of the motions to compel, respondent set forth a history of unfulfilled requests for both informal and formal discovery. In support of the motion to compel answers to interrogatories, respondent set forth the following description of an April 4, 2000, meeting among respondent's counsel, Ms. Sluyter, and an individual named Mark MacDonald: On April 4, 2000, respondent's counsel met with attorney Sluyter and Mark MacDonald, a representative of petitioners, regarding respondent's informal and formal discovery requests and about the legal theories presented in these consolidated cases. Attorney Sluyter and Mr. MacDonald set forth a variety of arguments on petitioners' behalf, including: (1) that what the United States government calls the "federal law" is not applicable to petitioners Frank [Hae-Rong] and Lucy Ni, (2) that Frank [Hae-Rong] and Lucy Ni have no affiliation to the "so- called United States," (3) that the Internal Revenue Service105 has no jurisdiction to audit the income tax returns of Frank [Hae- Rong] and Lucy Ni, and (4) that Frank [Hae-Rong] and Lucy Ni can have no tax liability because no consideration exists between the Ni's and the United States government. Further, Attorney Sluyter stated that petitioners would not be providing respondent's counsel with responses to the aforementioned interrogatories and would not be providing respondent's counsel with any of the requested documents. Finally, attorney Sluyter stated that she would be filing a protective order with this Court regarding respondent's counsel's discovery requests.Respondent asked that petitioners be ordered to produce documents pursuant to 100 separately numbered requests in Respondent's First Request for Production of Documents (the document request) and answer 59 separately numbered interrogatories propounded in Respondent's First Set of Interrogatories (the interrogatories). Respondent asked for sanctions if petitioners failed to comply with any such order.By order dated April 25, 2000 (the April 25 order), the Court ordered petitioners, on or before106 May 8, 2000, to produce the documents asked for in the document request and answer the interrogatories. The Court set the sanctions portion of the motions to compel for hearing at the trial session.531 On May 26, 2000, the Court filed as a status report Respondent's Supplements to Respondent's Motions To Compel Production of Documents and To Compel Responses to Interrogatories (the status report). Attached to the status report are copies of petitioners' responses to the document request and interrogatories (petitioners' responses). In response to the document request, petitioners provided two documents: "Declaration of Trust of the NIS Venture Trust" and a purported trust indenture relating to "The Nis Family Trust". In response to 83 of 100 requests for documents, petitioners responded: "There are no documents responsive to this request." Such requests included respondent's requests for documents supporting the various deductions claimed by petitioners in their returns. In response to an interrogatory asking petitioners to state their legal theory, a portion of petitioners' response is as follows: Petitioners will prevail because none of the witnesses are able to107 prove that the petitioners are subject to the will of any individuals, including individuals referred to as "CONGRESSMEN." As such, any demands or claims to petitioners' property are void. The tax system is voluntary not mandatory and the IRS Commissioner has not [sic] oath of office to the United States. In addition, petitioners can show that the individuals of the IRS have no legitimate authority over the lives and property of the petitioners. The only "authority" these individuals have is enforcing their arbitrary will at gun-point. * Ms. Sluyter signed petitioners' responses.MOTIONS TO QUASHOn May 25, 2000, by five consolidated motions, made in each of these cases (motions to quash), respondent moved to quash subpoenas (the subpoenas) served on Charles Rossotti, Peggy Rule, Kevin Johnson, Andrew Bricker, and James Ledbetter. The subpoenas are signed by Ms. Sluyter, and seek to compel attendance of the individuals subpoenaed to testify at the trial session on behalf of petitioners. Mr. Rossotti is the Commissioner of Internal Revenue; Ms. Rule is the Internal Revenue Service (IRS) District Director, Central108 California District; Mr. Johnson is a Revenue Agent of the IRS; Mr. Bricker is a Special Agent in the Criminal Investigation Branch of the IRS; and Mr. Ledbetter is an Appeals 532 Officer of the IRS. Respondent made various arguments as to why the subpoenas ought to be quashed. Principally, respondent argued that none of the individuals can give testimony that is required or relevant for the Court to redetermine the deficiencies determined in these cases.By order dated May 26, 2000, the Court ordered petitioners, on or before June 1, 2000, to file a response to the motions to quash, suspended compliance with the subpoenas, and set the motions to quash subpoenas for hearing at the trial session.On June 5, 2000, petitioners lodged with the Court "Petitioners' Response to Respondent's Motion to Quash Subpoenas with Supporting Memorandum of Points and Authorities" (the response to the motion to quash or the response). Because the response was late, the Court gave petitioners leave to file it. In pertinent part, the response contains the following argument: The issue before the COURT is whether or not the individuals of the so-called INTERNAL REVENUE SERVICE109 (IRS) and the UNITED STATES GOVERNMENT have legitimate authority over the lives and property of the petitioners. * * * Each witness has initiated force against the petitioners. They have each * * * made the wild claim that the individuals of the so-called UNITED STATES GOVERNMENTn2 have not only a right to control petitioners' life and property, but also a right to a portion of that property. Petitioners have the right to collaterally attack ALL so-called "evidence" against them. * * * that includes all so-called "facts" frivolous legal conclusions; 110 conclusions such as the absurd claim that petitioners are subject to so-called "FEDERAL LAW" with no further requirements. _______________ n2 There is no "entity" commonly called "GOVERNMENT." What is referred to as "GOVERNMENT" is nothing more than individuals. These individuals use various "titles" appended to their names as if that gives them legitimate authority over the lives and property of other people.In the response, petitioners also claim, with respect to respondent's counsel, Paul Webb, that he is a liar. They state:533 In his [Webb's] last pleading HE111 OUTRIGHT LIEDn1 about the Zimmerman case in Fresno.[3] * *112 ______________n1 WEBB should be sanctioned for his outrageous lie. The response is signed by Ms. Sluyter.MOTIONS FOR RECONSIDERATIONOn June 5, 2000, by one consolidated motion, made in each of these cases, petitioners moved for reconsideration of (1) our denial of the motions for protective order and (2) the April 25 order (motions for reconsideration). Among the arguments advanced by petitioners in the motions for reconsideration is that the existence of the Internal Revenue Code is not evidence that the Code is binding on petitioners. Petitioners explain that respondent's counsel: still refuses to provide any evidence that the petitioners are subject to the so-called "CONGRESS." That is all so-called "FEDERAL LAW" is. It's the written will of individuals referred113 to as "CONGRESSMEN." It demands no reverence, no allegiance and no compliance. * * * Until there is evidence that Petitioners are subject to the will of these individuals, then what the so-called "IRC" says is wholly irrelevant because there is no evidence that it is binding first. What is frivolous n2 is maintaining that the petitioners are subject to so-called "FEDERAL LAW" while refusing to produce evidence that Petitioners are subject to the written will of individuals referred to as "CONGRESSMEN." The filing of a so-called "RETURN" is no evidence114 that Petitioners are subject to the will of individuals referred to as "CONGRESSMEN." * * * * * * * * *534 Just because the petitioners filed so-called "RETURNS" out of fear is no evidence that a legitimate obligation to do so exists. * * _______________ n2 One must also [take] into consideration that most of those individuals referred to as "CONGRESSMEN," that [sic] if they can be identified at all by the respondent, are more then likely DEAD or not referred to as "CONGRESSMEN" and [sic] longer. Are petitioners subject to the written will of individuals who are dead?115 Ms. Sluyter signed the motions for reconsideration. We denied them.TRIAL SESSIONThese cases came on for hearing (the hearing), pursuant to notice, at the trial session. At the hearing, respondent moved to amend the motions for judgment on the pleadings to limit them to the deficiencies in each case (and exclude the penalties). Counsel for petitioners stated that she had no objection to those motions, and the Court granted them. The Court took the motions for judgment on the pleadings, as amended (still, motions for judgment on the pleadings), under advisement. Respondent also informed the Court that he would be making a motion for partial summary judgment with respect to the penalties determined by him in each case. The Court gave respondent leave until July 5, 2000, to make such motion and allowed petitioners until August 4, 2000, to respond.The Court did not conduct proceedings on those portions of the April 24 order ordering (1) petitioners to show cause why they should not be subject to a penalty under section 6673(a)(1) and (2) Ms. Sluyter to show cause why she should not be required to pay costs pursuant to section 6673(a)(2). Rather, the Court ordered that compliance116 with such orders (the orders to show cause) be extended to August 25, 2000, at which time, petitioners and Ms. Sluyter were to show cause, in writing, why the orders to show cause should not be made absolute.The Court denied the motions to quash on the grounds that no trial was held and the subpoenas were no longer in force. The Court denied the sanctions portion of the motions to compel.The Court continued the consolidated cases and retained jurisdiction. 535 SUBSEQUENT ACTIONS BY PARTIESOn June 7, 2000, respondent, by separate motion in each case, moved for partial summary judgment as to the section 6662(a) penalty (the motions for partial summary judgment or motions). No petitioner responded to any of the motions for partial summary judgment.Neither petitioners nor Ms. Sluyter has filed any response to the orders to show cause.Respondent has filed various memoranda of points and authorities in support of the motions for judgment on the pleadings and partial summary judgment and the orders to show cause, as well as the affidavit of Paul K. Webb, one of respondent's attorneys, in connection with the order to show cause as to Ms. Sluyter.Petitioners have attempted to file117 a document styled "Emergency Motions for Continuance and Request for Sanctions", accompanied by Ms. Sluyter's declaration in support of that document. We returned those documents to Ms. Sluyter accompanied by a letter dated August 9, 2000, explaining, among other things, that, since the cases are neither calendared for trial nor set for hearing, no continuance could be granted. By that letter, we advised Ms. Sluyter how to ask for more time to respond to the Court's orders. By letter dated August 31, 2000, we returned to Ms. Sluyter a document styled "Emergency Motion for Extension", since such document lacked Ms. Sluyter's original signature and, thus, was not a proper document. See Rule 23(a)(3). We again advised Ms. Sluyter how to ask for more time to respond.DISCUSSIONI. MOTIONS FOR JUDGMENT ON THE PLEADINGSA. INTRODUCTION1. RULE 120(a)In pertinent part, Rule 120(a) provides: "After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." The pleadings in these cases consist of the petitions, amended petitions, and answers, since no other pleadings were 536 required or permitted. See Rule 30. The answers were118 all made before April 12, 2000, which is the date on which respondent made the motions for judgment on the pleadings. The motions for judgment on the pleadings were made sufficiently in advance of the date of the trial session, June 5, 2000, so as not to delay trial of these cases. The procedural requirements of Rule 120(a) were, thus, satisfied. As amended, the motions ask that the Court find that there is due from the various petitioners the deficiencies in tax set forth above. Petitioners object.2. RULE 34(b)Rule 34 deals with petitions. In pertinent part, Rule 34, provides: (b) CONTENT OF PETITION IN DEFICIENCY OR LIABILITY ACTIONS: The petition in a deficiency or liability action shall contain * * * * * * * * * * (4) 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 or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignments119 of error shall be deemed to be conceded. Each assignment of error shall be separately lettered. (5) Clear and concise lettered statements of the facts on which petitioner bases the assignments of error, except with respect to those assignments of error as to which the burden of proof is on the Commissioner.3. RESPONDENT'S ARGUMENTSRespondent's argument is the same in each of the motions. In docket No. 9820-99, respondent states: Petitioner's amended petition fails to meet these requirements [Rule 34(b)] and in fact states that "petitioner brings only an issue of law before the court." * * Tax Court Rule 34(b)(4) states that "Any issue not raised in the assignments of error shall be deemed to be conceded."Respondent then summarizes the amended petition and states thatpetitioner has failed to comply with Rule 34(b) by, in effect,failing to assign any error to respondent's determinations ofdeficiencies. For that reason, respondent argues, the motion shouldbe granted: [The amended petition] * * * merely sets forth frivolous legal positions120 which are contrary to established law and unsupported by a reasoned, 537 colorable argument for change in the law. Petitioner's amended petition fails to present any specific allegations of error, any meritorious reasons for disagreeing with the notice of deficiency, nor any facts in support of any such disagreement. * * * * * * * * * * Because petitioner's amended petition merely sets forth frivolous arguments and as such does not allege any justiciable error with respect to the notice of deficiency, respondent should be granted judgment in his favor based upon the pleadings. [Citations omitted.]4. BURDEN OF PROOFA judgment on the pleadings is a judgment based solely on the allegations and information contained in the pleadings and not on any outside matters. See Rule 120(a) and (b); see also Fed. R. Civ. P. 12(c); Black's Law Dictionary 848 (7th ed. 1999). The movant has the burden of showing entitlement to judgment on the pleadings. See Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 408 (1984). He must show that the pleadings do not raise a genuine121 issue of material fact and that he is entitled to a judgment as a matter of law. See id.; see also 2 Moore, Moore's Federal Practice, sec. 12.38, at 12-102.1 (3d ed. 2000) ("Judgment on the pleadings should be granted if the movant 'is entitled to judgment as a matter of law'", quoting Burns Intl. Sec. Servs. v. International Union United Plant Guard Workers, Local 537, 47 F.3d 14">47 F.3d 14, 16 (2d Cir. 1995)). At the hearing, we asked respondent to address whether the provisions of recently enacted section 7491 add to his burden as movant in these cases. Respondent believes that they do not. We agree.Section 7491 was enacted by section 3001(a) of the Internal Revenue Service Restructuring & Reform Act of 1998 (RRA 1998), Pub. L. 105-206, 112 Stat. 685, 726-727. As so added, section 7491 is effective with respect to court proceedings arising in connection with examinations by respondent commencing after July 22, 1998, the date of the enactment of RRA 1998. See RRA 1998 sec. 3001(c). Respondent concedes that section 7491 is effective with respect to these Court proceedings. Provisions of section 7491 pertinent to this case 538 are set forth in the margin.4 Among other things, section122 7491 provides that, in any court proceeding, the burden of proof as to any factual issue is on the Secretary where the taxpayer, who has satisfied certain other requirements, produces credible evidence with respect to that issue. See sec. 7491(a).123 Section 7491 does not add to respondent's burden as the movant for judgment on the pleadings in these cases because, in part, the burden on the movant is to show that there are no material facts in dispute. See, e.g., Abrams v. Commissioner, supra; see also Enron Oil Trading & Transp. v. Walbrook Ins. Co., 132 F.3d 526">132 F.3d 526, 529 (9th Cir. 1997) (with respect to Fed. R. Civ. P. 12(c), which is similar to our Rule 120(a), judgment on pleadings for defendants reversed when they failed clearly to establish that, on the face of pleadings, no material issues of fact remained to be resolved and they were entitled to judgment as a matter of law). Once the movant shows that there are no material facts in dispute, as he has here, see infra section I.B., then there remain only legal issues for the Court to decide. Since there remain only legal issues, burden of proof, and, therefore, section 7491, are irrelevant.B. DISCUSSIONRespondent has determined deficiencies in tax against each of the petitioners, and the petitioners have filed petitions. We have jurisdiction to redetermine the correct amount of such deficiencies. See sec. 6214(a). As set forth supra in section124 I.A.2., the petition in a deficiency case must set forth each 539 and every error that the petitioner alleges to have been committed by the Commissioner and clear and concise statements of facts upon which the petitioner bases the assignments of error. Furthermore, any issue not raised in the assignments of error is deemed conceded. See id. A petition that makes only frivolous and groundless arguments makes no justiciable claim, and it is properly subject to a motion for judgment on the pleadings. See Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403 (1984); see also Rodriguez v. Commissioner, T.C. Memo 1995-67">T.C. Memo 1995-67 (judgment on the pleadings granted where petitions merely set forth frivolous "protester arguments that have been heard by this Court on many occasions and rejected"); Wright v. Commissioner, T.C. Memo 1990-232">T.C. Memo 1990-232 (frivolous argument in petition that petitioner was exempt from Federal taxation justified granting respondent's motion to dismiss for failure to state a claim); Brayton v. Commissioner, T.C. Memo 1989-664">T.C. Memo 1989-664 (taxpayer made meritless "tax-protester" arguments; quoting Abrams, the Court stated: "A judgment on the pleadings is appropriate125 where a petition raises no justiciable issues."). We may grant a motion for judgment on the pleadings as to less than all the issues in a case. See Brock v. Commissioner, 92 T.C. 1127">92 T.C. 1127, 1133 (1989); Caplette v. Commissioner, T.C. Memo 1993-46">T.C. Memo 1993-46 (partial judgment on the pleadings, except as to fraud penalty, where petition merely contained "tax protester arguments that have been heard and rejected by this Court on many occasions").The amended petitions all contain the same arguments: (1) The petitioners have no tax liability "due to a lack of consideration", (2) "[i]t does not appear that the United States and the State of California (each a body politic with their respective governments) are under any legal obligation to protect our property and ourselves", (3) although petitioners may have accepted some commercial benefits, "it does not appear that the tax in question bears a fiscal relation to those benefits", and (4) "regardless of the fact that some commercial benefits may have been accepted, it does not appear that any obligation to pay any particular tax in return was ever disclosed".Those are all frivolous arguments. On numerous occasions, courts126 have rejected similar arguments. See, e.g., McLaughlin v. Commissioner, 832 F.2d 986">832 F.2d 986, 987 (7th Cir. 540 1987) ("The notion that the federal income tax is contractual or otherwise consensual in nature is not only utterly without foundation but * * has been repeatedly rejected by the courts."); United States v. Drefke, 707 F.2d 978">707 F.2d 978, 981 (8th Cir. 1983) (taxpayer unsuccessfully argued that taxes are debts only incurred when individuals contract with the Government for services). The cases cited in the amended petitions are not relevant to the adjustments made in the notices of deficiency. None of those cases relates to the validity of the trusts involved or to the substantiation of expenses, which are the issues set forth in the notices. Furthermore, the statute cited in the amended petitions, 50 U.S.C. section 1520 (1982), has long since been repealed. When it was effective, the statute related to the testing of chemical and biological agents on humans. Clearly such a statute is not relevant to our redetermination of any deficiency in petitioners' Federal income taxes.In the amended petitions, petitioners state that "[petitioners bring] 127 only an issue of law before the court." In petitioners' responses (to the motions for judgment on the pleadings), petitioners claim that that no longer is the case. Nevertheless, petitioners have not moved to amend the amended petitions to aver any facts in support of their assignments of error. See Rules 34(b), 41(a). Indeed, in petitioners' responses to the motions, petitioners' claim: "[t]here is no evidence" (1) "to suggest that there is a bona fide political relationship between the petitioners and the 'UNITED STATES' and the 'STATE OF CALIFORNIA'" and (2) "that the petitioners are subject to the written will of individuals called 'CONGRESSMEN'". Those claims do not raise any factual issue relevant to our redetermination of the deficiencies determined by respondent. Those are frivolous claims of no merit. Petitioners have raised no factual issues for decision by us.None of the petitions or amended petitions assign any error that we consider justiciable: Petitioners rely on meritless tax-protester arguments that demand no respect from the courts. Petitioners have failed to make any legitimate challenge to the deficiencies determined by respondent. They have not assigned any128 error that could possibly influence us to redetermine the deficiencies determined by respondent.541 C. CONCLUSIONIn the petitions, petitioners have failed to address any of the adjustments made in the notices of deficiency. We, therefore, consider petitioners to have conceded those adjustments. See Rule 34(b)(4). They have made no other argument of which we take cognizance. We shall grant the motions for judgment on the pleadings. 5129 II. MOTIONS FOR PARTIAL SUMMARY JUDGMENTA. INTRODUCTION1. BACKGROUNDThe motions for partial summary judgment ask for partial summary adjudications as to the section 6662(a) penalties. Those motions were made following respondent's amendments to the motions for judgment on the pleadings to remove the penalties from the scope of those motions and, thus, to limit them to the deficiencies in each case. Respondent explained his action in amending the motions for judgment on the pleadings as resulting from his concern that the pleadings alone did not satisfy the burden of production that section 7491 imposes on him with respect to petitioners' liabilities for the section 6662 penalties.6 See sec. 7491(c). Apparently, respondent was concerned that, because of section 7491(c), we would refuse to enter judgment on the pleadings with respect to the section 6662 penalties.130 542 2. SECTION 6662 ACCURACY-RELATED PENALTIESSection 6662(a) provides for an accuracy-related penalty in the amount of 20 percent of the portion of any underpayment of tax attributable to, among other things (1) negligence or disregard of rules or regulations (hereafter, simply, negligence) or (2) any substantial understatement of tax. Negligence has been defined as the failure to exercise the due care of a reasonable and ordinarily prudent person under like circumstances. See Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). A substantial understatement exists for any taxable year if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown on the return for the year or $ 5,000. See sec. 6662(d)(1)(A).3. SUMMARY JUDGMENTA summary judgment is appropriate "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b). "A partial summary adjudication may be made which does not dispose of all the issues131 in the case." Id. The party moving for summary judgment has the burden of showing the absence of a genuine issue as to any material fact. See, e.g., Espinoza v. Commissioner, 78 T.C. 412">78 T.C. 412, 416 (1982).B. DISCUSSIONAs noted in our background discussion, petitioners are deemed to have admitted certain facts. The deemed admissions were made pursuant to Rule 90(c). By the deemed admissions, the petitioners have each admitted negligence in the preparation and filing of his (their) income tax return for 1995. The admissions referred to in Rule 121(b), include those deemed admitted under Rule 90(c). See, e.g., Marshall v. Commissioner, 85 T.C. 267">85 T.C. 267, 272 (1985). Respondent can rely on a deemed admission of negligence to show that there is no genuine issue as to any material fact and that the taxpayer was negligent as a matter of law. See, e.g., Battikhi v. Commissioner, T.C. Memo 1998-208">T.C. Memo 1998-208; McIlvane v. Commissioner, T.C. Memo 1994-104">T.C. Memo 1994-104. We have here, however, more 543 than conclusory deemed admissions of negligence. By the deemed admissions, petitioners are also deemed to admit numerous additional facts that, when taken together, establish that132 each failed to exercise the due care of a reasonable and ordinarily prudent person under like circumstances. For example, each petitioner is deemed to admit that the Trusts are shams, created primarily for income tax purposes. Petitioners assigned no error to respondent's determination of a penalty or set forth any facts contradicting respondent's grounds. We are satisfied that all of the underpayments of tax here in question are attributable to negligence, and so find.Moreover, by the deemed admissions, petitioners are deemed to admit to copies of their 1995 income tax returns. We have examined those copies and, based on the deficiencies in tax determined by respondent, which we will sustain, we find that all of the underpayments of tax here in question are attributable to substantial understatements of tax.C. CONCLUSIONBased either on the negligence of petitioners or their substantial understatements of income tax, the motions for partial summary judgment shall be granted. Petitioners are liable for the section 6662 penalties determined by respondent.III. ORDERS TO SHOW CAUSEA. PENALTY PURSUANT TO SECTION 6673(a)(1)1. INTRODUCTIONPetitioners in each of these cases have133 been ordered to show cause why the Court should not impose a penalty pursuant to section 6673(a)(1) (the order to show cause or the order). No petitioner has obeyed the order. Respondent has filed his memorandum of points and authorities in support of the order (respondent's memorandum). For the reasons that follow, we shall make the order to show cause absolute. 544 2. SECTION 6673(a)(1)Section 6673 provides for the imposition of penalties and the awarding of costs. Section 6673(a) applies to proceedings before the Tax Court; in pertinent part, it provides: (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 (C) the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $ 25,000. 134 3. DISCUSSIONA taxpayer's position is frivolous "if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. * * * The inquiry is objective. If a person should have known that his position is groundless, a court may and should impose sanctions." Coleman v. Commissioner, 791 F.2d 68">791 F.2d 68, 71 (7th Cir. 1986); see also Hansen v. Commissioner, 820 F.2d 1464">820 F.2d 1464, 1470 (9th Cir. 1987) (trial court's finding that taxpayer should have known that claim was frivolous allows for section 6673 penalty); Booker v. Commissioner, T.C. Memo 1996-261">T.C. Memo 1996-261.We have already concluded that the petitions make nothing but frivolous arguments. See supra sec. I.B. Hae-Rong Ni is both petitioner in his own right and, as trustee, petitioner for the trusts. He was not represented by counsel when he filed the petitions in these cases. Attached to respondent's memorandum is a copy of a diploma issued by Oregon State University in 1984, conferring on one Hae-Rong Ni the degree of Doctor of Philosophy. In respondent's memorandum, he states that Hae-Rong Ni is highly educated and, thus, should have been aware that the arguments that he135 was making on his own behalf and on behalf of the trusts are frivolous. Respondent argues that, had Hae-Rong Ni conducted any research at all, he would have found that courts have rejected similar arguments. Petitioners have failed to respond to respondent's memorandum, and we accept as true 545 respondent's representation as to Hae-Rong Ni's education. We also agree that he should have known that his positions were frivolous. Consequently, we find that petitioners' positions in each of these cases are frivolous.Moreover, we believe that petitioners both instituted and maintained these proceedings primarily for delay. All of the petitioners filed returns and reported items of income and deduction. Petitioners Hae-Rong and Lucy B. Ni reported total taxes due of $ 2,516. None of those returns claim that petitioners are not subject to the Federal income tax, as petitioners claim in the petitions. The notices of deficiency are based on the positions taken by petitioners in their returns. Respondent's principal adjustment questions the independent tax existence of the trusts. Other adjustments disallow deductions and other amounts for lack of substantiation. Petitioners have made no attempt136 to meet respondent's adjustments head on. By the deemed admissions, petitioners admit the following: Neither petitioners Hae-Rong or Lucy B. Ni, in their own right, nor petitioner Hae-Rong, as trustee of the Trusts, appeared before respondent for the scheduled audit of their (his) return. Neither petitioners Hae-Rong or Lucy B. Ni, nor any representative on their behalf, appeared before respondent to comply with summonses issued to such petitioners even though ordered to do so by the U.S. District Court for the Northern District of California. None of the petitioners have provided records to respondent to substantiate the deductions, losses, and other items claimed by them on their returns, nor do they have such records. Moreover, by the April 25 order, we ordered petitioners to produce documents to respondent and answer his interrogatories. We have reviewed petitioners' responses to the April 25 order, copies of which are attached to the status report (filed by respondent). Those responses are inadequate and, we believe, not made in good faith. It appears to us that petitioners abandoned their return positions before they filed the petitions in these cases. We assume that they concluded137 that their return positions lacked merit. See, e.g., Johnston v. Commissioner, T.C. Memo 2000-315">T.C. Memo 2000-315 (reviewing "long line of authority" prohibiting assignment to a trust of income earned from rendering personal services). Rather than press positions in which they appear to have lost confidence, petitioners chose, instead, to pursue a strategy of noncooperation 546 and delay, undertaken behind a smokescreen of frivolous tax-protester arguments.Clearly, the taxpayers in these cases deserve penalties under section 6673(a)(1). In determining the amounts of those penalties, we take account of the repeated incidents of petitioners' noncooperation and nonresponsiveness, both during respondent's examinations of their returns, see Cary v. Commissioner, T.C. Memo 1988-128">T.C. Memo 1988-128, affd. without published opinion, 900 F.2d 262">900 F.2d 262 (9th Cir. 1990), and during the pendency of this case. We also take account of the fact that, as these proceedings progressed, and counsel appeared for petitioners, petitioners' frivolous arguments multiplied. See infra sec. III. B.3. Finally, we are aware that petitioner Hae-Rong Ni (also known as Frank Ni) is here both in an individual capacity138 and as trustee for the trusts. By the deemed admissions, petitioners admit that (1) during the taxable year in question, the trusts were the alter egos of petitioners Hae-Rong and Lucy B. Ni and (2) the trusts were shams, created primarily for income tax purposes. Petitioners abandoned their return positions before they filed the petitions in these cases. Since petitioners abandoned their return positions before they filed the petitions in these cases, we assume that petitioners recognize the truth of the deemed admissions, and have brought the Trust cases only to ensure that respondent does not assess the same deficiency against both the Nis, as individuals, and the Trusts. See supra note 5. However, petitioner Hae-Rong Ni, as trustee, has not limited himself to filing protective petitions in the Trust cases. He has raised the same frivolous arguments with respect to the Trust that he has raised in his individual capacity. Such duplication has served to burden respondent and the Court and delay disposition of these cases. We will, therefore, impose penalties not only on Hae-Rong (and Lucy B.) Ni but also on the Trusts. Taking into account the actions of petitioner Hae-Rong Ni in the139 Trust cases and petitioners Hae-Rong and Lucy B. Ni in their case, the amounts in dispute in each case, respondent's efforts to dissuade petitioners from their groundless arguments, and the time and effort of the Court required to dispose of these cases, we believe that the maximum penalty, in the amount of $ 25,000, is appropriate with respect to petitioners Hae-Rong and Lucy B. Ni, and smaller penalties, in the amount of $ 500 in the case at 547 docket No. 9820-99, and $ 5,000 in the case at docket No. 9821-99, are appropriate with respect to each of the Trusts.4. CONCLUSIONThe order to show cause shall be made absolute, and petitioner (petitioners) in each case shall pay to the United States a penalty pursuant to section 6673(a)(1) in the amount of $ 25,000 in docket No. 9822-99, $ 500 in docket No. 9820-99, and $ 5,000 in docket No. 9821-99.B. COSTS PURSUANT TO SECTION 6673(a)(2)1. INTRODUCTIONMs. Sluyter has been ordered to show cause why she should not be required to pay costs pursuant to section 6673(a)(2) (the order to show cause or the order). She has not obeyed the order. Respondent has filed his memorandum of points and authorities in support of the order (respondent's140 memorandum), along with the declaration of Paul K. Webb, Esq. (the Webb declaration). For the reasons that follow, we shall make the order to show cause absolute.2. SECTION 6673(a)(2)Section 6673(a)(2) provides for counsel's liability for excessive costs. In pertinent part, section 6673(a)(2) provides: COUNSEL'S LIABILITY FOR EXCESSIVE COSTS. Whenever it appears to the Tax Court that any attorney or other person admitted to practice before the Tax Court has multiplied the proceedings in any case unreasonably and vexatiously, the Tax Court may require -- (A) that such attorney or other person pay personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct * 3. DISCUSSIONa. BAD FAITHSection 6673(a)(2) is a relatively new provision, 7 and, in Harper v. Commissioner, 99 T.C. 533">99 T.C. 533 (1992), we discussed fully the standards for imposing costs under it. While there 548 may be some question as to whether, before we impose costs, we must find that the attorney or other person admitted to practice before the Tax Court (without distinction, 141 attorney) acted in bad faith, see Harper v. Commissioner, supra at 545, we have no trouble in finding that, in these cases, Ms. Sluyter did act in bad faith. The standard of bad faith that we believe is here satisfied is the standard described by us in Harper v. Commissioner, viz., that the challenged actions are entirely without colorable pretext or basis and are taken for reasons of harassment or delay or for other improper purposes. Harper v. Commissioner, supra at 546. For purposes of determining bad faith, a claim is colorable if it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claims. See Nemeroff v. Abelson, 620 F.2d 339">620 F.2d 339, 348 (2d Cir. 1980) (citing "ABA Model Rules of Professional Conduct" sec. 3.3, Comment (Discussion Draft 1980)); see also Golden Eagle Distrib. Corp. v. Burroughs, 801 F.2d 1531">801 F.2d 1531, 1537 (9th Cir. 1986) (similar standards for imposing sanctions pursuant to Rule 11, Fed. R. Civ. P.). Bad faith may be found not only in the actions that led to the litigation but also in the conduct of the litigation. See Harper v. Commissioner, supra.142 Ms. Sluyter entered her appearances in the consolidated cases on April 10, 2000, after the petitions had been filed. It is clear that, on that date, Ms. Sluyter was aware of the meritless tax- protester arguments made in the petitions. On April 4, 2000, a week before her appearances, Ms. Sluyter met with respondent's counsel (the April 4 meeting), and she both repeated and added to the specious arguments made in the petition. Respondent has provided us with a letter from respondent's counsel to Ms. Sluyter, dated April 11, 2000 (the April 11 letter), analyzing various cases and statutory provisions, and showing the lack of merit in Ms. Sluyter's arguments made at the April 4 meeting. We have examined the April 11 letter. It put Ms. Sluyter on clear notice that143 her arguments were meritless. Nevertheless, Ms. Sluyter has persisted in those and similar arguments. She has signed documents submitted to respondent and the Court that contain meritless and, in some instances, inflammatory, statements: e.g.:549 [P]etitioners can show that the individuals of the IRS have no legitimate authority over the lives and property of petitioners. The only "authority" these individuals have is enforcing their arbitrary will at gun point. * * * * * * * * * * There is no "entity" commonly called "GOVERNMENT." What is referred to as "GOVERNMENT" is nothing more than individuals. These individuals use various "titles" appended to their names as if that gives them legitimate authority over the lives and property of other people. * * * * * * * One must also [take] into consideration that most of those individuals referred to as "CONGRESSMEN," that if they can be identified at all by the respondent, are more then likely DEAD or not referred to144 as "CONGRESSMEN" and [sic] longer. Are petitioners subject to the written will of individuals who are dead? * * * * * * Just because the petitioners filed so-called "RETURNS" out of fear is no evidence that a legitimate obligation to do so exists. * * We believe that, by those statements, Ms. Sluyter intended to make legal claims, and those claims are entirely without color. No attorney could reasonably believe that Ms. Sluyter's "dead congressmen" claim is more than meritless or the Federal Government lacks authority to collect income taxes.Moreover, we believe that Ms. Sluyter made those claims for delay or other improper purposes. As stated supra in section III.A.3, it appears to us that petitioners abandoned their return positions in favor of a strategy, undertaken behind a smokescreen of frivolous and tax-protester arguments, of noncooperation and delay. Ms. Sluyter abetted that strategy by reiterating and multiplying those frivolous and tax-protester arguments (see the discussion infra in sec. III.B.3.b). We believe that there is ample evidence that Ms. Sluyter conducted145 this litigation in bad faith. 8 b. UNREASONABLE AND VEXATIOUS MULTIPLICATION OF PROCEEDINGSIn sum, the following actions, among others, lead us to believe that Ms. Sluyter unreasonably and vexatiously multiplied the proceedings before the Court: 9146 Petitioners' motions for protective order were made on April 10, 2000, the day Ms. Sluyter entered her appearances. 550 The motions were signed by Ms. Sluyter. Those motions were made in response to respondent's discovery requests. We ordered respondent to respond and, after considering that response, denied the motions. In essence, the memoranda that accompany the motions state that, until respondent proves that he has legitimate authority over petitioners' lives and property, they should not be required to comply with respondent's requests for discovery. We again point out that petitioners filed returns reporting items of income and deduction. Section 7602(a)(1) establishes the Secretary's authority to examine a taxpayer's books and records to determine the correctness of any return. Clearly, Ms. Sluyter knew that when she signed the motion. We say that because respondent has brought to our attention another proceeding in which Ms. Sluyter represented tax-protesters challenging the Commissioner's summons enforcement action. That proceeding, Zimmerman v. United States, 2000 U.S. Dist. LEXIS 2039">2000 U.S. Dist. LEXIS 2039, 85 A.F.T.R.2d (RIA) 1091; 2000-1 U.S. Tax Cas. (CCH) P50,295 (E.D. Cal. 2000), involves findings and recommendations147 submitted by U.S. Magistrate Judge O'Neill to the Hon. Anthony W. Ishii, Judge, U.S. District Court for the Eastern District of California. In his findings and recommendations (all of which are adverse to the Zimmermans), Magistrate Judge O'Neill states that, under section 7602(a)(1), to ascertain the correctness of any return, the "Secretary is authorized to examine 'any books, papers, records, or other data which may be relevant or material' for IRS inquiry". 10 Id. Moreover, respondent's right to obtain discovery is established by our Rules. See Rule 70(a). The motions were groundless, and Ms. Sluyter had reason to know that; the motions served no purpose other than to delay these proceedings and annoy the Court and respondent.148 Ms. Sluyter also signed Petitioners' Objections to Respondent's Motion for Judgment on the Pleadings and Supporting Memorandum. That document makes the unsupported statement that petitioners have no bona fide political relationship to the United States and the frivolous argument that there is no evidence that petitioners "are subject to the written will 551 of individuals called CONGRESSMEN". It accompanied Ms. Sluyter's affidavit stating: "There is a factual dispute as to the Petitioners relationship to the United States and the State of California." No legitimate factual dispute is raised in the pleadings or was otherwise before the Court. The response was unreasonable and contributed to the delay in concluding these proceedings.We have detailed the subpoenas signed by Ms. Sluyter. Respondent moved to quash the subpoenas, and petitioners filed the response to the motions to quash. Among those subpoenaed was Charles Rossotti, Commissioner of Internal Revenue. At the trial session, we denied the motions to quash on the grounds that no trial was held and the subpoenas were no longer in force. We agree, however, with the principal argument made by respondent in the motions to quash: viz. 149 , the testimony of the subpoenaed witnesses is irrelevant to the Court's redetermination of the deficiencies determined by respondent. The statement in the response to the motions to quash that the issue before the Court is whether the IRS and the U.S. Government "have legitimate authority over the lives and property of the petitioners" is, as we have discussed, groundless, and served only to unreasonably protract these proceedings. Moreover, the response contains the unsupported (and unsupportable) charge that respondent's counsel lied about Zimmerman v. United States, supra. The response also claims, without support: "Each witness has initiated force against the petitioners." Such charges can only have been made to vex or distress respondent, his counsel, and this Court.From the time Ms. Sluyter entered her appearances in these cases to the present, she has acted to multiply these proceedings by actions that are both unreasonable and vexatious. There remains only the question of the amount of costs we shall require her to pay.4. COSTS"Attorney's fees awarded under section 6673(a)(2) are to be computed by multiplying the number of excess hours reasonably expended on the litigation150 by a reasonable hourly rate. The product is known as the 'lodestar' amount." Harper v. Commissioner, 99 T.C. at 549. Respondent has submitted 552 respondent's memorandum in support of the order to show cause. In support of respondent's memorandum, respondent has submitted the Webb declaration (declaration of Paul K. Webb, respondent's counsel). Attached to the Webb declaration are copies of respondent's internal time keeping records, reflecting the total time expended on the consolidated cases by, among others, attorneys Paul K. Webb, Dale A. Zusi, and Debra K. Moe. Their total time spent working on the cases is set forth, as well as their time spent working on the cases since the appearance of Ms. Sluyter. Since the appearance of Ms. Sluyter, the hours spent working on the cases by Mr. Webb, Ms. Zusi, and Ms. Moe are 202.75, 17.25, and 13.5, respectively. Respondent asks reimbursement only for those hours spent by his attorneys on tasks that would not have been required in the absence of Ms. Sluyter's "vexatious actions multiplying these proceedings" (excess hours).Respondent asks reimbursement for 56.75 hours of Mr. Webb's time, at a rate of $ 125 an hour. Mr. Webb is151 the attorney with day-to-day responsibility for the cases. He is an attorney employed in respondent's San Jose, California, District Counsel's office. He has been a member of the California State Bar since 1987. He has detailed the time he spent on the cases, which involved time spent on research, drafting, review of submissions to the Court, and appearances. Based in part on the costs of living and attorney wages in San Jose, California, respondent asks reimbursement at a rate of $ 125 an hour for Mr. Webb's time. The hourly rate properly charged for the time of a Government attorney is the "amount to which attorneys of like skill in the area would typically be entitled for a given type of work on the basis of an hourly rate of compensation." Harper v. Commissioner, 99 T.C. at 551. Petitioners and Ms. Sluyter have made no response to the order to show cause. We have no reason to believe that $ 125 an hour is not a reasonable hourly charge for Mr. Webb's time or that 56.75 is not the number of excess hours Mr. Webb expended on this litigation. We are familiar with the procedural and factual history of this case and believe that 56.75 hours was reasonably necessary for152 Mr. Webb to do the work he described. See United States v. $ 12,248 U.S. Currency, 957 F.2d 1513">957 F.2d 1513, 1520 (9th Cir. 1992). We find that $ 125 is a reasonable hourly charge for Mr. Webb's time and 56.75 is the number of excess hours 553 he reasonably expended on this litigation. The lodestar amount for Mr. Webb's time is $ 7,093.75.Respondent asks reimbursement for 10.25 hours of Ms. Zusi's time, at a rate of $ 200 an hour. Ms. Zusi is the abusive trust coordinating attorney for the Central California District of the IRS. She has practiced law for more than 15 years, both with District Counsel and as a trial attorney and Assistant U.S. Attorney with the Department of Justice. Ms. Zusi's hours were spent on research, advice, review of submissions in these cases, and appearances. Also based on local rates of compensation for attorneys, respondent asks reimbursement at a rate of $ 200 an hour for Ms. Zusi's time. For similar reasons as with respect to Mr. Webb, we find that $ 200 is a reasonable hourly charge for Ms. Zusi's time and 10.25 is the number of excess hours she reasonably expended on this litigation. The lodestar amount for Ms. Zusi's time is $ 2,050.Respondent asks reimbursement153 for 7.5 hours of Ms. Moe's time, at a rate of $ 200 an hour. Ms. Moe is Mr. Webb's supervisor. She is an Assistant District Counsel in respondent's San Jose, California, District Counsel's office. Ms. Moe has been practicing law since 1982. Also based on local rates of compensation for attorneys, respondent asks reimbursement at a rate of $ 200 an hour for Ms. Moe's time. For similar reasons as with respect to Mr. Webb, we find that $ 200 is a reasonable hourly charge for Ms. Moe's time and 7.5 is the number of excess hours she reasonably expended on this litigation The lodestar amount for Ms. Moe's time is $ 1,500.The total lodestar amount for the time of Mr. Webb, Ms. Zusi, and Ms. Moe is $ 10,643.75. Respondent has not itemized costs for travel expense, photocopying, or supplies used in preparing the cases. Respondent limits his request for costs to the total lodestar amount. We shall require Ms. Sluyter to pay costs in that amount.C. CONCLUSIONWe find that $ 10,643.75 is a reasonable amount for respondent's excess attorney's fees incurred by reason of Ms. Sluyter's unreasonable and vexatious multiplication of these proceedings. Therefore, we shall make the order to show154 cause absolute and order Ms. Sluyter personally to pay respondent $ 10,643.75 pursuant to section 6673(a)(2), that 554 she make payment by means of a certified check, cashier's check, or money order in favor of the IRS, that such payment be delivered to respondent's counsel at the Office of District Counsel in San Jose, California, not later than 30 days from the date the order is served, and that respondent report to the Court if such payment is not timely received.IV. CONCLUSIONTo reflect the foregoing,An appropriate order imposing a sanction on Crystal D. Sluyter shall be issued, and other appropriate orders shall be issued. Footnotes1. Cases of the following petitioners are consolidated herewith: Nis Venture Trust, Frank [Hae-Rong] Ni, trustee, docket No. 9821-99 and Hae-Rong and Lucy B. Ni, docket No. 9822-99.↩2. Copies of those notices of deficiency are attached as Exhibits A through C to respondent's requests for admissions. As set forth below, petitioners failed timely to deny respondent's requests for admissions, and, therefore, such requests are deemed admitted. See Rule 90. Petitioners are also deemed to admit that petitioner Hae-Rong Ni is also known as Frank Ni.↩3. Apparently, petitioners are referring to respondent's response to petitioners' motions for protective order, in which respondent states, among other things: Petitioners' counsel has already argued these same frivolous legal positions before the United States District Court in an unrelated summons enforcement case. The District Court, in an unpublished opinion, summarily rejected these arguments. See Zimmerman, et al. v. United States, 85 A.F.T.R.2d 1091; 2000-1 U.S. Tax Cas. P50,295 (E.D. Cal. 2000) (Zimmermans argued that they are not subject to federal taxation because "they are neither citizens or residents" of the United States, they have no political relationship to the United States and owe no allegiance to the United States and the United States is under no duty to protect the Zimmermans; the responsibility to pay tax is based on a reciprocal agreement for the United States to protect the Zimmermans).We see no inaccuracy in respondent's statements about the Zimmerman case, which we further discuss infra in sec. III.B.3.↩4. SEC. 7491. BURDEN OF PROOF (a) BURDEN SHIFTS WHERE TAXPAYER PRODUCES CREDIBLE EVIDENCE. -- (1) GENERAL RULE. If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. (2) LIMITATIONS. Paragraph (1) shall apply with respect to an issue only if -- (A) the taxpayer has complied with the requirements under this title to substantiate any item; (B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and (C) in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii). * * * * * * * (c) PENALTIES. Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.↩5. Under various of the theories underlying respondent's adjustments with respect to petitioners Hae-Rong and Lucy B. Ni (e.g., the income of the Trusts is taxed to Hae-Rong and Lucy B. Ni because the Trusts are shams with no economic substance), the Trusts would owe no income tax and there could be no deficiency in tax. Respondent has, nevertheless, with respect to the Trusts, determined deficiencies in tax. We recognize that respondent may issue inconsistent notices in order to protect his interests. We will delay entering decisions in these cases until the parties have had the opportunity to advise us how we should deal with any inconsistencies.↩6. Because of respondent's amendments to the motions for judgment on the pleadings, we do not determine the adequacy of petitioners' pleadings with respect to the sec. 6662 penalties. Rule 34(b)(4) provides that the petition shall contain: "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 or liability. * * * Any issue not raised in the assignments of error shall be deemed to be conceded." We need not determine whether, in fact, petitioners failed to assign error to respondent's determinations of the sec. 6662↩ penalties and, thus, are deemed to concede their liabilities for such penalties, thereby allowing for judgment on the pleadings with respect to such liabilities.7. Sec. 6673(a)(2)↩ was added to the Code by sec. 7731(a) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2400, and applies to positions taken after Dec. 31, 1989, in proceedings pending on or commenced after such date.8. Rule 201(a)↩ provides: "Practitioners before the Court shall carry on their practice in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association." (Model Rules.) Our finding that Ms. Sluyter conducted this litigation in bad faith brings into question her conduct under the Model Rules. See, e.g., Model Rules 3.1, 3.2, and 3.3.9. In relevant part, the term "vexatious" means to cause or create, or intended to cause or create, vexation or annoyance. The American Heritage Dictionary 1915 (4th ed. 2000).↩10. In Zimmerman v. United States, 2000 U.S. Dist. LEXIS 15101">2000 U.S. Dist. LEXIS 15101, 86 A.F.T.R.2d (RIA) 6414">86 A.F.T.R.2d 6414, 2000-2 U.S. Tax Cas. P50,786 (E.D. Cal. 2000), Judge Ishii imposed sanctions against Ms. Sluyter under Fed. R. Civ. P. 11↩ for tax-protester type arguments that she had advanced in the proceeding discussed in the text and in a related, subsequent proceeding.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620500/	RONALD L. CHALLIS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentChallis v. CommissionerDocket No. 1960-89United States Tax CourtT.C. Memo 1993-307; 1993 Tax Ct. Memo LEXIS 308; 66 T.C.M. (CCH) 117; July 14, 1993, Filed 308 Decision will be entered under Rule 155. Ronald L. Challis, pro se. For respondent: Stephen S. Ash. WHALENWHALENMEMORANDUM FINDINGS OF FACT AND OPINION WHALEN, Judge: Respondent determined the following deficiencies in and additions to petitioner's Federal income tax: Additions to Tax and InterestSec.Sec.Sec.Sec.YearDeficiency6653(b)(1)6653(b)(2)665466611981$ 13,824$ 6,912.0050% of the$ 1,060--interest dueon $ 13,82419828,3194,159.5050% of the810$ 2,079.75interest dueon $ 8,319198316,9008,450.0050% of the1,0214,225.00interest dueon $ 16,900198416,4448,222.0050% of the1,0344,111.00interest dueon $ 16,444The issues for decision after respondent's concessions are: (1) Whether respondent erred in determining the above deficiencies in petitioner's Federal income taxes for 1981, 1982, 1983, and 1984; (2) whether any part of the underpayment for each year is due to fraud; and (3) whether respondent properly determined additions to tax under section 6654(a) for failure to pay estimated income tax. All section references are to the Internal309 Revenue Code as amended. FINDINGS OF FACT The parties to this case have stipulated some of the facts. The Stipulation of Facts that they filed and the exhibits attached thereto are incorporated herein by this reference. At the time petitioner filed the petition in this case, he resided in the Village of Oak Creek, Arizona. Petitioner is a graduate of the University of Arizona Law School. He is licensed as an attorney at law by the State of Arizona and, during the years in issue, he engaged in the practice of law. Earlier in his career, for approximately 5 years, he had been a prosecutor for the State of Arizona. For calendar year 1980, petitioner and his wife filed a joint Federal income tax return with the Internal Revenue Service. For calendar years 1981, 1982, 1983, and 1984, petitioner and his wife filed a series of documents, each of which is on an Internal Revenue Service Form 1040 but none of which constitutes a valid income tax return. Petitioner and his spouse set forth on each of the forms their names, social security numbers, address, filing status, and their claim of two exemptions as called for by the form. They inserted either the phrase "Object-Self Incrimination" 310 or the word "None" on each of the other lines of the forms, and they signed and dated the forms. Attached to the forms filed for 1981 and 1983 are various protester-type materials describing an individual's right to avoid self-incrimination, and various other written materials concerning the complexities of the Internal Revenue Code and the inability of expert return preparers to agree on the proper treatment of certain items. In this opinion, we shall refer to the above documents as the purported tax returns. Petitioner and his spouse did not transmit a payment with any of the purported tax returns, nor did they make estimated income tax payments during any of the years in issue. After petitioner and his spouse submitted each of these documents to the Internal Revenue Service, they received a registered letter from the Internal Revenue Service over the signature of the Director of the Service Center at Ogden, Utah, warning them that the purported return did not meet the requirements of the Internal Revenue Code. The letters also informed petitioner and his spouse of the requirements of a proper return and of the criminal penalties that might result from the willful failure to311 file a return or to pay tax due and owing. In response to one or more of these letters from the Service Center, petitioner and his spouse wrote to the Director of the Service Center and stated their willingness to comply, "If you can show us how to comply with your requirements without incriminating ourselves". We note that petitioner and his wife filed a document similar to the purported returns with the Internal Revenue Service for their 1987 tax year. The Criminal Investigation Division of the Internal Revenue Service did not contact petitioner or his spouse regarding their failure to file a valid Federal income tax return for any of the years in issue. However, the purported returns for 1983 and 1984 were both stamped with a date and the words "Received Criminal Investigation * * * Internal Revenue Service Ogden, Utah". Petitioner maintained numerous accounts with Arizona banks during the years in issue. Petitioner held at least three bank accounts in 1981, six bank accounts in 1982, six bank accounts in 1983, and four bank accounts in 1984. One account, which was open throughout the years in issue, was an attorney's trust account, as required by the State of Arizona. 312 Several of the other accounts were certificates of deposit, the proceeds of which petitioner withdrew upon maturity to deposit in another bank offering a more advantageous interest rate. He also maintained accounts at Paine Webber, United Bancorp of Arizona, Liquid Capital Income, and Rauscher-Pierce. In March 1986, an agent employed by the Internal Revenue Service, Mr. Craig Joines, attempted to contact petitioner and his spouse regarding the tax years at issue. Agent Joines called petitioner's law office but was informed that petitioner had retired. Agent Joines wrote to petitioner and his spouse but never received an answer. He visited petitioner's father-in-law and requested that petitioner be told that Agent Joines was looking for him. Petitioner never contacted Agent Joines. In December 1986, petitioner's case was reassigned to Agent Cheryl Dowell. Because the efforts of Agent Joines to contact petitioner and his spouse had been futile, Agent Dowell analyzed petitioner's bank records, which the Internal Revenue Service had summonsed, to determine petitioner's taxable income for the years in question. On August 27, 1987, Agent Dowell sent a copy of her Revenue Agent's313 Report to petitioner and his spouse and invited them to come to her office to discuss the report. From September 1, 1987, through October 8, 1987, petitioner and his spouse sent several letters to Agent Dowell in which they requested copies of the "evidence which you used to assess our taxes." Agent Dowell denied these requests while explaining generally how she had determined petitioner's net income. Agent Dowell continued to encourage petitioner and his spouse to meet with her to discuss her report. Petitioner and his spouse made no effort to meet with Agent Dowell, and they never presented any business records or other information to her. On October 31, 1988, respondent issued a notice of deficiency covering petitioner's 1981, 1982, 1983, and 1984 taxable years. OPINION Petitioner's Unreported IncomeThe parties to this case have stipulated that "the total deposits made into the checking accounts maintained by petitioner in the enumerated banks for the years at issue" are as follows: BANK/BROKERACCOUNT1981198219831984Arizona BankXXXX$ 31,423$ 15,178$ 17,231$ 20,043Arizona BankXXXX45,606580-- -- 1st Interstate BankXXXX11,000-- -- -- Rauscher-PierceXXXX6,000-- -- -- Arizona BankXXXX-- 4,31332,9572,9091st Interstate BankXXXX-- 20,000-- -- Arizona BankXXXX-- 16,949-- -- Southwest S&LXXXX-- 20,074-- -- Paine-WebberXXXX-- 11,000-- -- Arizona BankXXXX-- -- 16,94947,951Arizona BankXXXX-- -- 16,59242,0001st Interstate BankXXXX-- -- 15,664-- VNBXXXX-- -- 20,965-- TOTAL DEPOSITS94,02988,094120,358112,903314 After trial respondent conceded that the deposit of $ 20,074 into Southwest S&L account number 339 in 1982 should "not [be] considered in gross deposits". Accordingly, the gross deposits into petitioner's listed accounts in 1982 is reduced to $ 68,020. The parties to this case have also stipulated that "the nontaxable bank account transfers made by petitioner for the years at issue" were $ 39,540.49, $ 27,949.13, $ 77,506.33, and $ 81,592.48, respectively. If these nontaxable transfers are subtracted from the total deposits, and the difference is divided in half to reflect the fact that Arizona is a community property State, the result is as follows: 198119821983 1984 Gross deposits$ 94,029.00 $ 68,020.00 $ 120,358.00 $ 112,903.00 Less: transfers<39,540.49><27,949.13><77,506.32><81,592.48>Net deposits54,488.51 40,070.87 42,851.68 31,310.52 1/2 Net deposits27,244.26 20,035.44 21,425.84 15,655.26 Respondent included one-half of the net deposits, as computed above, in petitioner's taxable income. Based thereon, and based upon certain concessions, respondent recomputed the deficiencies in and additions to petitioner's Federal315 income tax for the years in issue, as follows: Sec.Sec.Sec.YearDeficiency6653(b)(1)6653(b)(2)66541981$ 8,993$ 4,49750% of the$ 690interest dueon $ 8,99319825,0162,50850% of the484interest dueon $ 5,01619835,3362,66850% of the326interest dueon $ 5,33619843,5301,76550% of the223interest due$ 3,530We note that respondent concedes the inapplicability of the section 6661 additions determined by respondent in the notice of deficiency. In this opinion, we refer to the above tax deficiencies as the reduced tax deficiencies. Petitioner claims that respondent made two broad errors in computing the reduced tax deficiencies. First, petitioner asserts that there are additional nontaxable transfers of funds which respondent failed to take into account. Petitioner's post-trial brief makes this assertion as follows: It is Petitioner's position that the following are nontaxable bank account transfers made by the Petitioner for the years at issue: 1. The sum of $ 11,200 in the year 1981 deposited in Arizona bank account ending with the numbers 934 on October316 7, 1981. Petitioner testified that his deposit had to come from the 1980 Valley National Bank account number ending with the numbers 157, a copy of the interest statement from [sic] which is on file with the Court as Petitioner's Exhibit. Thus, the $ 54,489 figure under the 1981 column of Cheryl Dowell's Schedule C, designated as Exhibit 35-AL should have deducted from it the sum of $ 11,200 for a total of $ 43,289. 2. Petitioner testified that the $ 20,000 1982 deposit in the account with First Interstate Bank ending with the numbers 818 was the result of a transfer from First Interstate Account No. 719, existing in 1981. Petitioner further testified that the $ 20,074 1982 deposit in Southwest Savings and Loan, Account No. 339, came from the 1981 First Savings Account No. 330. 3. Petitioner further testified that the 1983 deposit Bank Account No. 304 in the sum of $ 15,664 came from the 1982 Liquid Capital and Paine-Webber accounts. Number 2 above would reduce the 1982 income figure on Exhibit 35-AL by the sum of $ 40,074, leaving a balance of $ 20,071. Number 3 above would reduce the 1983 income figure on Exhibit 35-AL by the sum of $ 15,664, leaving a balance of $ 27,188.317 Second, petitioner claims that respondent's recomputation of the subject tax deficiencies does not take into account certain business expenses which he was not permitted to substantiate at trial. Petitioner's post-trial brief states as follows: Petitioner feels also that a basis for appeal lies in the fact that the Court would not accept Petitioner's checks in evidence to show obvious and legitimate business expenses. The checks spoke for themselves, being made out to the Arizona State Bar Association, West Publishing Company, and the like and totaled more that $ 13,000 for 1981 and between $ 8,000 and more than $ 9,000 for the years 1982 and 1983. To appoint an agent and witness for the Respondent as the sole determiner of the amount of deductions allowed Petitioner is to subvert the adversary system and deny a fair hearing to Petitioner.Based upon the above argument, petitioner requested "that he be given a reasonable time within which to submit documentation of expenses to the court which [Agent] Cheryl Dowell refused to allow." The bank deposits method of reconstructing income is an appropriate basis for respondent's determination of a deficiency when a taxpayer318 has failed to provide information necessary to compute income. ; . The taxpayer bears the burden of proving that respondent's determination is wrong and that the bank deposits are derived from nontaxable sources. Rule 142(a); ; , affd. . All Rule references are to the Tax Court Rules of Practice and Procedure. We reject both of petitioner's contentions and sustain respondent's determination of the subject tax deficiencies and additions to tax as recomputed after trial. As quoted above, petitioner's first contention is that in recomputing his unreported income under the bank deposits method, respondent failed to take into consideration four transfers between accounts. The first involves a deposit of $ 11,200 on October 7, 1981, to Arizona Bank account number 934. Petitioner contends that the source of the deposit is319 Valley National Bank account number 157. Petitioner relies upon an account statement from the Valley National Bank that shows that for 1980 interest was paid in the amount of $ 2,076.57 on a certificate of deposit. The statement does not show the principal balance of the certificate and does not substantiate a transfer of all or part of the proceeds of the certificate to Arizona Bank account number 934. Petitioner also relies on his testimony that "to the best of my knowledge, that came from Valley Bank account number --- -- 157." We find petitioner's testimony to be too vague and speculative to substantiate the source of the subject deposit as a transfer from Valley National Bank account number 157. The next deposits that petitioner claims came from transfers are: (1) A deposit of $ 20,000 to First Interstate Bank account number 818 in 1982, and (2) a deposit of $ 20,074 to Southwest Savings & Loan account number 339 in the same year. Petitioner testified as follows: It's my belief that those amounts came, from what the Court will see in the letter from First Interstate Bank, Account Number XXXX0719, or from my First Federal Account, which the Court has a record of in our320 stipulations, I believe, and some of that may have been contributed from the Paine Webber account for 1981. All three of those accounts are from 1981. I believe that they contributed to the two $ 20,000 deposits that are for 1982, but that's all I have to give the Court in that regard.As to the $ 20,074 deposit, we note that after trial, respondent conceded petitioner's position and removed that amount from the total deposits. As to the $ 20,000 deposit, we find petitioner's testimony to be too vague and speculative to prove that the deposit is a transfer from another account. The last deposit that petitioner claims came from a transfer is a deposit of $ 15,664 to First Interstate Bank, account number 304, in 1983. Petitioner testified as follows: In 1983 Ms. Dowell has indicated amounts for which I've been given credit, but there is an amount on her Exhibit 35-AL for $ 15,664 in Account Number 304 from First Interstate Bank, and it's my position that that came from two accounts which were closed prior to this account opening. One from the Liquid Capital account and one from the Paine Webber, both of which should be in our stipulated exhibits. But again, I have no321 -- I cannot show those transfers and have not been able to come up with the information for those.Once again, we do not accept petitioner's testimony as proof that the source of the subject deposit is a transfer from other accounts. Petitioner's second contention is that the Court improperly delegated to an agent of the Internal Revenue Service the job of determining the amount of allowable business deductions, and he requests a further opportunity to substantiate the expenses which the agent refused to allow. Petitioner's contention is without merit. At trial, he sought the introduction of a series of checks into evidence. They had not been included in the Stipulation of Facts, and respondent objected to their admission into evidence on the ground that they had not been exchanged with respondent's counsel 15 days prior to trial, as required by the standing pre-trial order issued in this case. Petitioner did not respond to the objection of respondent's counsel that the subject checks had not been exchanged as required by the standing pre-trial order. We note that the standing pre-trial order provides that "The Court may refuse to receive in evidence any document or material322 not so * * exchanged, unless otherwise agreed by the parties or allowed by the Court for good cause shown." See Rule 132(b). Accordingly, the Court excluded the checks from evidence. Nevertheless, it offered to hold the record of the case open for the purpose of allowing petitioner to meet with respondent's agent so that he could present the checks to the agent in an attempt to substantiate any additional business expenses. The reduced deficiencies are the product of petitioner's meeting with respondent's agent. Under these circumstances, it is clear that petitioner has had ample opportunity to substantiate any business expenses to which he is entitled, and we deny his request for a further opportunity. Fraud AdditionsRespondent determined that petitioner is liable for additions to tax under section 6653(b)(1) and (2) for each of the years at issue. Respondent bears the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). As a preliminary matter, we note that Congress amended section 6653(b) in 1982 to add the interest addition contained in section 6653(b)(2). Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 323 sec. 325(a), 96 Stat. 324, 616. This amendment applies to taxes the last day for payment of which (without regard to any extension) is after the date of enactment of TEFRA, September 3, 1982. TEFRA sec. 325(b), 96 Stat. 617. Therefore, the fraud addition set forth in section 6653(b)(2) does not apply to taxes due for calendar year 1981. Section 6653(b)(1) provides an addition to tax equal to 50 percent of the underpayment if any part of the underpayment is due to fraud. Section 6653(b)(2) provides an addition to tax equal to 50 percent of the interest payable under section 6601 with respect to any portion of the underpayment that is attributable to fraud. An underpayment of tax is due to fraud if it results from the taxpayer's specific intent to evade a tax believed to be owing. E.g., , affg. . Thus, in order to prove that an underpayment is due to fraud, respondent must show that the taxpayer intended to evade a tax known to be due by conduct designed to conceal, mislead, or otherwise prevent the collection of such tax by respondent. ,324 affg. ; . The existence of fraudulent intent is a factual question to be decided on the basis of an examination of the entire record. ; . It may never be presumed but must be established by affirmative evidence. . Because direct proof of a taxpayer's intent is rarely available, however, fraud may be established by circumstantial evidence. ; , affd. without published opinion . In considering the existence of fraud, the courts have identified certain so-called badges of fraud that are indicative of culpable behavior. These badges include: (1) An understatement of income; (2) maintaining inadequate records; (3) failure325 to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealment of assets; (6) failure to cooperate with tax authorities, ; (7) making false or inconsistent statements to revenue personnel, ; and (8) filing of false documents, , affd. . Also among the factors that we may consider is the taxpayer's intelligence, education, training, and experience. See , affg. ; . Respondent argues that several badges of fraud are present in petitioner's case. Respondent contends that one badge of fraud is the fact that petitioner, an experienced lawyer, chose to file the purported tax returns for 1981 through 1984 on which he made frivolous claims of his privilege against326 self-incrimination. Respondent also contends that petitioner's use of multiple bank accounts, his failure to present business records, and his failure to cooperate with revenue agents, all prove that the underpayments are due to fraud. Petitioner argues that his purported tax returns were filed in good faith, out of bona fide fear of self-incrimination. Although never clearly articulated, petitioner seems to argue that he feared that inaccuracies on a completed income tax return could lead to prosecution for criminal tax fraud or for perjury. He further explains that he held multiple bank accounts to facilitate taking advantage of changing interest rates and other premiums offered by competing banks. Petitioner argues that respondent has not proven that he kept inadequate business records, and he asserts that he would have met with respondent's agents during the examination phase of this case had they provided him with documentation of the evidence against him. At the outset, we note that submission of a Form 1040, comparable to the purported returns in this case, on which the taxpayer asserts a blanket claim of privilege and supplies no information from which the taxpayer's327 liability can be determined, is equivalent to submitting no return at all. ; . Moreover, there is nothing in the record of this case which convinces us that petitioner genuinely perceived a danger of self-incrimination by filing a valid Federal income tax return. However, even if he did, we would agree with the suggestion contained in respondent's brief that, as an attorney, petitioner either knew or should have known, from numerous reported cases, that the filing of a document similar to the purported returns is not a valid method of claiming the privilege against self-incrimination. ; ; ; . Notwithstanding the above, the issue here is whether petitioner is liable328 for the fraud addition under section 6653(b). We must decide whether respondent has proven by clear and convincing evidence that petitioner intentionally committed an act or acts for the specific purpose of evading a tax which he believed to be owing. E.g., . Petitioner's conduct in filing the purported returns for 1981 through 1984 constitutes a failure to file tax returns but, standing alone, it does not establish fraud. ; ; . Furthermore, the totality of the other facts in this case does not establish petitioner's fraudulent intent. We find plausible petitioner's explanation for his use of multiple bank accounts during the period in question. In addition, we note that respondent was able to determine petitioner's income from the bank accounts which petitioner maintained during the years in issue. Respondent has presented no evidence of any effort by petitioner to conceal income or to otherwise mislead*329 respondent. Section 6654(a) AdditionsRespondent determined that petitioner is liable for additions to tax for failure to pay estimated income tax under section 6654 for each year at issue. Petitioner failed to make any payments of estimated tax in any year. The addition to tax under section 6654(a) is mandatory unless petitioner can prove that he falls into one of the statutory exceptions under section 6654(e). . Petitioner has introduced no such proof. Accordingly, petitioner is liable for additions to tax under section 6654 for all years in issue. Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620501/	EDGAR S. EVERHART JR., AND HELEN E. EVERHART, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; ASSOCIATED NAVAL ARCHITECTS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEverhart v. CommissionerDocket Nos. 11631-78, 11746-78.United States Tax CourtT.C. Memo 1982-396; 1982 Tax Ct. Memo LEXIS 354; 44 T.C.M. (CCH) 459; T.C.M. (RIA) 82396; July 14, 1982. 354 Held: The sale of a shipyard by petitioner Edgar S. Everhart to petitioner Associated Naval Architects is to be respected for tax purposes. Held further: Marine railways, piers and wharves involved herein are properties described in section 1250 and thus the recapture provision of that section is to be applied. William P. McKeithan,Joseph C. Kearfott, and Robert S. Parker, Jr., for the petitioners. Michael R. Moore and John C. McDougal, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: In these consolidated cases respondent determined the following deficiencies: Petitioner(s)Docket No.YearDeficiencyEdgar S. Everhart, Jr.11631-781973$324,430.20and Helen E. Everhart19748,974.28Associated Naval11746-789/30/7313,608.07Architects, Inc.9/30/7426,848.129/30/7524,564.63Due to an order granting a joint motion to sever an issue from the January 1980 trial of this case 1355 and to a concession, 2 the issues remaining for our determination are: (1) Whether an alleged sale of a shipyard, the Curtis Yard property, by petitioner Edgar S. Everhart to Associated Naval Architects, Inc. (ANA) should be respected for tax purposes or whether the purported sales price of the property contains a disguised dividend from ANA to the petitioner-shareholder; (2) If the sale of property is respected then we are called upon to determine whether certain marine railways, piers and wharves are properties described in section 12453 or whether section 1250 is applicable to these properties; 356 and (3) Whether petitioners are entitled to attorneys' fees. FINDINGS OF FACT Some of the facts have been stipulated. These fact together with the exhibits attached thereto are incorporated herein by this reference. Petitioners Edgar S. Everhart, Jr., and Helen E. Everhart were husband and wife residing in Virginia Beach, Virginia, at the time they filed their petition herein. They filed timely 1973 and 1974 joint Federal income tax returns with the Internal Revenue Service Center in Memphis, Tennessee. Helen E. Everhart is a party solely by virtue of her filing of joint returns with her husband. Petitioner Associated Naval Architects, Inc. (ANA), was a Virginia corporation with its principal place of business at Portsmouth, Virginia, at the time its petition was filed with this Court. ANA's Federal income tax returns for its taxable years ended September 30, 1973, September 30, 1974 and September 30, 1975 were tiely filed with the Internal Revenue Service Center in Memphis, Tennessee. These returns were filed reflecting use of a combined accrual and completed 357 contract method of accounting. Petitioner Edgar S. Everhart (hereinafter Everhart), along with a partner, began business in 1946 as a manufacturer of small pleasure boats. This enterprise was commenced on a 2.5 acre parcel of waterfront land facing the western branch of the Elizabeth River in West Norfolk (now Portsmouth), Virginia. In 1948 Everhart and his partner incorporated ANA and transferred to it all of the assets of the boat manufacturing business. Everhart became president of ANA and has served in that capacity at all times relevant to this proceeding. From 1968 to 1973 Everhart was Chairman of the Board of Directors of ANA. In the early 1950's, ANA expanded its operations to include ship repair and maintenance. To this end, ANA constructed and placed in operation a 200 ton capacity marine railway. The railway, which includes one or more large wooden cradles which rests on rails, is used to move a vessel onto dry land, thus exposing the vessel's hull for appropriate repair. A 6.67 acre tract that adjoined the ANA property was owned and operated as a shipyard during most of the 1950's by Curtis-Dunn Marine Industries, Inc. (Curtis-Dunn). The tract was improved by various 358 buildings, piers, wharves, marine railways and other improvements. This tract along with its improvements is hereinafter referred to as Curtis Yard. Sometime prior to 1959, Curtis-Dunn received a loan from American National Bank that was guaranteed by the Small Business Administration (SBA). Curtis Yard was conveyed by Curtis-Dunn by deed of trust as security for the loan. On February 6, 1959 there was an outstanding balance on the loan of $225,000. On that date Curtis-Dunn was adjudicated a bankrupt. In January of 1959 ANA acquired an option to buy Curtis-Dunn. The option was never exercised owing to ANA's inspection of Curtis-Dunn's financial records which revealed the corporation's insolvency. Seaborn J. Flournoy (Flournoy), a business acquaintance of Everhart in the late 1950's, was a businessman and investor. Flournoy and his wife together with another married couple, owned all of the stock of Flournoy-Moorman Corporation (Flournoy-Moorman). As of early 1959, Flournoy-Moorman had substantial investment income. Flournoy-Moorman wished to increase its income attributable to the rental of real estate in order to avoid classification as a personal holding company. Flournoy 359 was aware of the Curtis-Dunn bankruptcy and of ANA's interest in the business use of Curtis Yard. Shortly after the Curtis-Dunn bankruptcy, ANA, through Everhart, and Flournoy-Moorman, through Flournoy, reached an oral agreement concerning Curtis Yard. Flournoy-Moorman agreed to purchase Curtis Yard and to lease it to ANA for a 15-year term. Flournoy-Moorman was to front a minimum of $150,000 which would be used to purchase Curtis Yard. If the property could be acquired for less than $150,000 then Flournoy-Moorman would purchase the property and invest in capital improvements to the property so as to raise its total investment in the Curtis Yard to $150,000. ANA was to pay annual rent to Flournoy-Moorman in an amount equal to 10 percent of Flournoy-Moorman's investment. Furthermore, ANA would be responsible for repairs and improvements to the property (except for improvements made possible by the Flournoy-Moorman's initial investment) and ANA would have the right to purchase the property during the last 6 years of the lease. Such right, if not exercised by ANA prior to the end of the lease, would ripen into ANA's obligation to purchase the property at the end of the lease. The 360 purchase price to ANA, whether by right or obligation, was to be $150,000. Finally, it was agreed that Flournoy-Moorman would make a loan to ANA repayable in redeemable ANA stock and that Flournoy would become a director of ANA. During the course of the Curtis-Dunn bankruptcy proceeding Curtis Yard was advertised and offered for sale. At an auction on May 26, 1959 Flournoy-Moorman bid $206,500 for the property but the SBA's bid of $225,000 (an amount equal to the SBA's mortgage deficiency) prevailed. Subsequently, the SBA advertised the property for sale inviting sealed bids to be opened on September 10, 1959. The sole bid was received from ANA in the amount of $157,600. The SBA rejected the bid. Owing at least in part on the somewhat deteriorated character of Curtis Yard, ship repair businesses other than ANA showed little interest for Curtis Yard. Thus, on December 1, 1959, the date upon which the SBA held its second auction for the sale of Curtis Yard, the sole bid was that of Flournoy-Moorman for $115,000. The SBA, sensing the lack of interest in the property and realizing the necessity to beef up security at Curtis Yard through the winter months, deemed it prudent to accept 361 the bid and rid itself of the burdens attending maintenance of the property. Pursuant to its oral agreement, Flournory-Moorman supplemented its $115,000 investment for the purchase of Curtis Yard with $35,000 for certain improvements and repairs necessary to place the property in operating condition. The oral agreement was reduced to writing through execution of the following documents: (a) A lease agreement under which Flournoy-Moorman leased Curtis Yard to ANA for a term slightly in excess of 15 years ending December 31, 1974 at an annual rental of $15,000. (b) An agreement under which Flournoy-Moorman agreed to sell Curtis Yard to ANA at any time between January 1, 1968 and January 1, 1974 for $150,000. ANA was required to buy the property no later than January 1, 1974 for $150,000, payable in equal annual installments over at least 5 but not more than 10 years. (c) An agreement pursuant to which Flournoy-Moorman would loan ANA $1,400 quarterly for 5 years, with interest at 6 percent per annum. The loans were to be repaid on January 2, 1965 in ANA stock that was redeemable at book value out of ANA's retained earnings. ANA also agreed to elect Flournoy as one of its directors. 362 After execution of the lease, ANA made the repairs necessary to get Curtis Yard into operation and the property was used as an integral part of ANA's business of repairing and maintaining marine vessels. ANA's use of Curtis Yard together with the employment of its own contiguous property formed, quite naturally, the basis of a unified shipyard operation. From 1959 through 1973 approximately 80 percent of ship repair performed by ANA was accomplished at Curtis Yard. On October 4, 1966 Flournoy-Moorman sold Curtis Yard to Mr. and Mrs. Flournoy for $135,000 subject to the agreements between Flournoy-Moorman and ANA. On August 30, 1962 ANA had 452 shares of stock oustanding whose ownership was divided as follows: Edgar S. Everhart388 sharesWilliard O. Forbes29 sharesWilliam S. Havens24 sharesS. J. Flournoy5 sharesW. D. Barton6 sharesFor the period 1960 through 1967, the gross income and after tax profits and losses of ANA from the operation of its business (excluding income from the operation of a subsidiary and certain extraordinary income) were as follows: Fiscal Years EndedGross SalesNet Profit (Loss)9/30/60$920,133.76$1,807.56 9/30/61756,790.52(113,803.38)9/30/621,191,145.2862,037.72 9/30/631,171,977.1824,216.64 9/30/64986,055.9117,001.07 9/30/651,289,293.0623,284.24 9/30/661,151,312.0720,992.52 9/30/671,728,163.4381,806.50 In 363 order to meet working capital needs for the years 1961-1968, ANA found it necessary to obtain short-term bank loans. To secure the loans, ANA frequently assigned receipts from its business contracts to banks. A summary of loans made to ANA in those years follows: Fiscal Year EndedTotal Amount Borrowed9/30/61$485,0009/30/6290,0009/30/6395,0009/30/6430,0009/30/65270,0009/30/66175,0009/30/679/30/68140,000 In 1963 ANA purchased the National Welding Supply Company (National Welding) for $29,000. This purchase was made so as to afford ANA a fertile source of wholesale industrial gases and welding equipment. Additionally, the terms of purchase were extremely favorable to ANA. National Welding proved to be a progressively profitable operation throughout the 1960's. In 1967 ANA reaped a profit of $20,199 from the operations of its subsidiary, National Welding. The profits from National Welding for 1968 and 1969 were $24,027 and $29,405 respectively. Approximately 95 percent of ANA's business in the mid 1960's was derived from United States government contracts for slip repair. Due to the insecurities attending Congressional appropriations for vessel repair and ANA's inability to attract 364 private commercial business, the financial outlook for ANA's ship repair business was unclear in the late 1960's. Additionally, difficulties with its employees' union and an ANA warehouse fire in early 1968 contributed to the company's uncertain financial picture. In late 1967 ANA anticipated the need to make considerable capital improvements on the marine railways. Such improvements were necessary for Navy recertification and to increase the capacity of the railways so that ANA could be more competitive in its quest for repair work of large vessels. In late 1967 Flournoy indicated to Everhart that he wanted to divest himself of Curtis Yard. Flournoy was willing to sell the property to ANA under the terms of the 1959 option. Additionally, Flournoy was amendable to a sale of Curtis Yard to Everhart for the $150,000 price cited in the option which ANA possessed. Everhart, as president of ANA since 1948, was intimately familiar with the ship repair business. Curtis Yard had a value in excess of the $500,000 in 1968. Having an awareness that Flournoy wished to part with Curtis Yard, in early 1968 Everhart consulted his banker, Stockton H. Tyler (Tyler), then a senior vice president 365 of Seaboard Citizens National Bank (now United Virginia Bank). Everhart asked whether Tyler felt that Everhart, in his individual capacity, should purchase Curtis Yard, rather than having ANA purchase the property. Tyler's response was that it would be preferable if Everhart purchased the property and leased it to ANA and that the bank would lend Everhart funds for this purpose. Tyler believed that any debt incurred by ANA for the purchase of the property would reflect negatively on its financial statement. In light of ANA's need to borrow substantial sums of money from the bank to meet operating expenses, Tyler thus advised against an ANA purchase. On December 28, 1967 Everhart indicated to his attorney that he intended to purchase Curtis Yard for the $150,000 price cited in the 1959 agreement between Flournoy-Moorman and ANA and that the transaction would be financed by a local bank. Additionally, Everhart stated that he would enter into a 10-year lease arrangement with ANA whereby ANA would use Curtis Yard pursuant to the same rental terms and conditions as existed under Flournoy-Moorman's lease with ANA. In view of the prospective failure of ANA to exercise its option, the 366 attorney advised that consent to the proposed action be secured from all stockholders of ANA. On April 1, 1968 the stockholders and directors of ANA ratified Everhart's proposed action. The consent included a provision whereby ANA's option to purchase Curtis Yard was cancelled or transferred by ANA to Everhart. On April 1, 1968 ANA deeded to Everhart all of its interest in Curtis Yard thereby releasing its option to purchase the property. Flournoy sold Curtis Yard to Everhart for $150,000. The sale was consummated through delivery of a deed dated March 28, 1968 and through execution of a bill of sale from Seaborn J. and Georgia T. Flournoy to Edgar S. Everhart, dated April 1, 1968. On April 1, 1968, Everhart borrowed the full purchase price of $150,000 from Seaboard Citizens National Bank. On the same date he leased Curtis Yard to ANA for an annual rental charge of $15,000. The lease was substantially the same as ANA's prior lease with Flournoy-Moorman except that the term of the lease commenced on April 1, 1968 and was to end on March 31, 1978. At the time of his acquisition of Curtis Yard, Everhart had no definitive plans for future disposal of the property. After Everhart 367 purchased Curtis Yard he increased his personal liability insurance from $100,000 to $1 million so as to protect himself against any claim which might arise out of his ownership of Curtis Yard. For the fiscal years 1968 through 1973, ANA made the following expenditures respecting its own property and Curtis Yard: MaintenanceFiscal YearandCapitalEnding September 30RepairExpendituresTotal1968$ 46,658$ 74,209$120,867196947,182107,197154,379197038,41611,65550,071197147,69515,71063,405197249,86147,64097,501197368,49458,571127,065Total$298,306$314,982$613,288 Of the totals listed above, approximately $240,000 was for maintenance and repair of Curtis Yard and $250,000 was for capital expenditures relating to the Yard. Additionally, in the years 1962 through 1967 ANA expended in excess of $110,000 on Curtis Yard. The capital improvements made by ANA to Curtis Yard during the fiscal years 1968 through 1973 included rebuilding of the compressed air and electrical distribution systems and rebuilding and upgrading of waterfront improvements, including the marine railways. Under the terms of lease agreement between Everhart and ANA all alterations, additions and improvements to Curtis Yard became 368 the property of the lessor, Everhart. During the period 1968-1973 ANA secured new major commercial clientele which lessened its reliance on government contracting. This work proved more profitable than government work as evidenced by the following summary of ANA's shipyard business gross sales and profits and losses: (See supra p. 8 for a comparable summary for the years 1960-1967.) (Amounts shown below do not include ANA's net income from its wholly owned unconsolidated subsidiary, National Welding Supply Company.) Fiscal YearGross SalesNet Profit (Loss)1968$1,663,834$62,746 19692,134,56970,318 19701,949,549(2,701)19711,267,38219,952 19721,719,28374,503 19732,259,650101,053 As of September 30, 1973 ANA had not declared a dividend to its shareholders since its incorporation. For the years 1968 and 1969 ANA borrowed significant sums of money for working capital. After 1969 ANA no longer borrowed money for its working capital. In addition to increases in its gross sales and net profits, ANA's financial status was greatly improved by its sale in 1970 of its subsidiary, National Welding Supply Company, for $300,000. A satisfactory sale of ANA's subsidiary could not be accomplished 369 prior to 1970. Everhart's plan to sell Curtis Yard to ANA was formulated sometime in 1972. Everhart was certainly aware of the tremendous value of Curtis Yard and he needed a purchaser so that he could cash in on the investment he made in the Yard's acquisition in 1968. With ANA's shipyard business expanding and considering that ANA had been searching for investment possibilities, it appeared that ANA would be the most logical purchaser of Curtis Yard. Everhart was advised by his accountant that if he wanted to sell Curtis Yard to ANA, he should divest himself of enough stock in ANA so as to reduce his ownership of ANA below 80 percent in order to secure capital gains treatment on the sale of depreciable property. 4On September 26, 1973 ANA had 446 shares of stock issued and outstanding whose ownership was divided as follows: Edgar S. Everhart388 sharesWillard O. Forbes29 sharesWilliam S. Havens24 sharesS. J. Flournoy5 sharesOn September 27, 1973 Everhart gave 28 shares of ANA stock to St. Christopher's Episcopal Church and 8 shares to each of his four children. Thus, the ownership of the 446 shares of ANA stock wad divided as follows after Everhart's transfer: 370 Edgar S. Everhart328 sharesWillard O. Forbes29 sharesWilliam S. Havens24 sharesSeaborn J. Flournoy5 sharesKatherine E. Paull8 sharesAnne E. Bradley8 sharesBrandt C. Everhart8 sharesJames E. Everhart8 sharesSt. Christopher'sEpiscopal Church28 sharesBy deed dated September 28, 1973, Edgar S. and Helen E. Everhart conveyed Curtis Yard to ANA. The price for the property was $750,750. ANA transferred $150,750 to Everhart and issued a promissory note for $600,000, payable in eight annual installments of $75,000. Interest on the unpaid balance was calculated at 4 percent per year. The directors of ANA approved ANA's acquisition of the property from Everhart in a formal document entitled "Consent of Directors of Associated Naval Architects, Incorporated." On September 28, 1973 Curtis Yard had a fair market value of no less than $750,750. On September 30, 1973 ANA had unappropriated retained earnings of at least $680,554.54. From the date of its incorporation in 1948 through its fiscal year ended September 30, 1973 ANA did not pay a dividend to its shareholders. From 1968 to 1973 Everhart was president and treasurer of ANA. Willard O. Forbes was vice president of ANA and William S. Havens 371 was its secretary. Both Forbes and Havens were minority shareholders. On January 11, 1972, the Board of Directors of ANA adopted a resolution that upon the death or retirement of Forbes or Havens, their stock in ANA would be redeemed. Stock purchase agreements were executed the following October. ANA stock owned by Everhart was not subject to a purchase agreement. On his 1973 return, petitioner reported the transfer of Curtis Yard (including buildings, marine railways, piers, wharves, machinery and land) as an installment sale on which he reported capital gain, section 1231 gain, and certain ordinary income. His computation of the gain was as follows: BuildingsGross Sales Price 09/28/7397,405.00Cost 03/28/6836,199.00Less Depreciation Allowed14,429.72Adjusted Basis21,769.28Plus Net Selling Expenses97.4321,866.71Profit75,538.29Gross Sales Price97,405.00Less Allowable Mortgage Assumption0.00Seller's Equity97,405.00Percent of Profit = Profit/Equity = 77.551%Collections This Year19,558.85Times Percent of Profit77.551Reportable Income15,168.08Deferred Profit, December 31, 197360,370.21Ordinary Income % = 2.96% of Profit on SaleReportable Ordinary Gain2,238.38Reportable Long-Term 1231 Gain12,929.70BuildingsGross Sales Price 09/28/7335,027.00Cost 03/28/6813,017.00Less Depreciation Allowed8,641.32Adjusted Basis4,375.68Plus Net Selling Expenses35.044,410.72Profit30,616.28Gross Sales Price35,027.00Less Allowable Mortgage Assumption0.00Seller's Equity35,027.00Percent of Profit = Profit/Equity = 87.408%Collectio s This Year7,033.39Times Percent Of Profit87.408Reportable Income6,147.74Deferred Profit, December 31, 197324,468.54Ordinary Income % = 2.15% of Profit on SaleReportable Ordinary Gain658.29Reportable Long-Term 1231 Gain5,489.45Marine RailwayGross Sales Price 09/28/73372,672.00Cost 03/28/6837,707.00Less Depreciation allowed28,260.96Adjusted Basis9,446.04Plus Net Selling Expenses372.789,818.82Profit362,853.18Gross Sales Price372,672.00Less Allowable Mortgage Assumption0.00Seller's Equity372,672.00Percent of Profit = Profit/Equity = 97.365%Collections This Year74,832.24Times Percent of Profit97.365Reportable Income72,860.41Deferred Profit, December 31, 1973289,992.77Ordinary Income % =.67% of Profit on SaleReportable Ordinary Gain2,445.15Reportable Long-Term 1231 Gain70,415.26Piers & WharvesGross Sales Price 09/28/73106,832.00Cost 03/28/687,541.00Less Depreciation Allowed5,652.35Adjusted Basis1,888.65Plus Net Selling Expenses106.861,995.51Profit104,836.49Gross Sales Price106,832.00Less Allowable Mortgage Assumption0.00Seller's Equity106,832.00Percent of Profit = Profit/Equity = 98.132%Collections This Year21,451.78Times Percent of Profit98.132Reportable Income21,051.06Deferred Profit, December 31, 197383,785.43Ordinary Income % =.46% of Profit on SaleReportable Ordinary Gain489.03Reportable Long-Term 1231 Gain20,562.03MachineryGross Sales Price 09/28/7384,985.00Cost 03/28/6839,900.00Less Depreciation Allowed20,560.84Adjusted Basis19,339.16Plus Net Selling Expenses85.0419,424.20Profit65,560.80Gross Sales Price84,985.00Less Allowable Mortgage Assumption0.00Seller's Equity84,985.00Percent of Profit = Profit/Equity = 77.144%Collections This Year17,064.92Times Percent of Profit77.144Reportable Income13,164.56Deferred Profit, December 31, 197352,396.24Ordinary income % = 31.36% of Profit on SaleReportable Ordinary Gain13,164.56LandGross Sales Price 09/28/7353,829.00Cost 03/28/6815,636.00Less Depreciation Allowed0.00Adjusted Basis15,636.00Plus Net Selling Expenses53.8515,689.85Profit38,139.15Gross Sales Price53,829.00Less Allowable Mortgage Assumption0.00Seller's Equity53,829.00Percent of Profit = Profit/Equity = 70.852%Collections This Year10,808.82Times Percent Of Profit70.852Reportable Income7,658.26Deferred Profit, December 31, 197330,480.89Reportable Long-Term 1231 Gain7,658.26372 Marine Railways, Piers and WharvesMuch of ANA's ship repair and modification business dealt with the repair of deteriorating vessels and vessel parts. Additionally, governmental regulation would necessitate certain changes and repairs to vessel parts. On occasion, ANA, pursuant to an owner's specifications, would adapt a vessel for a specific oceanic purpose, such as deep sea diving. These adaptations did not constitute a general overhaul of ships. The marine railways, piers and outfitting wharf situated on Curtis Yard were essential appurtenances to ANA's ship repair business. The outfitting wharf was necessary in order to work on large vessels. Marine railways were required by ANA to gain access to the hull of a ship for its repair and maintenance. The construction of marine railways is effected by driving pilings into the ground to a depth sufficient to support a weight of 15 long tons per pile. Railway logs are then set on pile caps. A steel flatbar is then affixed on top of the logs. Roller frames are set upon the track logs so that cradles may move freely to transport a vessel to and from the water. The cradles are pulled up and down the rails by chains, motors and 373 other gear of the marine railway. A vessel is moved onto a cradle while the cradle is submerged in the water.The cradle is then pulled onto dry land, thereby exposing the vessel's hull. With the use of marine railways to bring vessels to drydock, ANA was able to perform services including cleaning and painting of the underwater areas of vessels, checking outboard bearings and propellers and maintaining and repairing vessel cooling systems. ANA often removed sections of the hull plating and replaced it along with replacing vessel machinery such as engines, pumps and generators.ANA had machinists who evolved special bolts and very heavy nuts out of bar stock so as to aid in the repair machinery. Any deteriorated pipes or valves in vessels systems relating to waste, lubrication and fresh water were repaired by ANA. Inutile sewage tanks were replaced by ANA through use of one of the following supply sources: (1) customers sometimes furnished the tanks, (2) ANA purchased tanks and (3) ANA constructed the tank which was then installed pursuant to the customer's specifications. ANA's business of making repairs and modifications and maintaining boats, barges and harbor vessels has remained 374 essentially the same throughout the years relevant to this proceeding. Depreciation deductions taken by Everhart on marine railways, piers and wharves and the manner in which he treated the gain on these Curtis Yard assets are detailed above. During fiscal year ended September 30, 1978 ANA incurred expenses for dredging around the marine railways and claimed on its tax return an investment tax credit for the dredging. In his notice of deficiency dated July 20, 1978 sent to petitioners Edgar S. Everhart, Jr., and Helen E. Everhart, respondent determined, as a result of an alleged "sham sale" of Curtis Yard that the excess of the purchase price ($750,750) over Everhart's cost ($150,000), i.e. $600,750, was to be treated as a dividend to Everhart in 1973. Respondent determined in the alternative that if the sale of Curtis Yard was bona fide then an adjustment in the character of the gain reported by Everhart was required. Such an adjustment is attributable to respondent's view that marine railways, piers and wharves are section 1245 property and are not, as petitioner urges, section 1250 assets. 5375 In his notice of deficiency dated July 20, 1978 sent to Associated Naval Architects, Incorporated, respondent reduced the amount of depreciation deductions allowable to the corporation. This reduction is based on the theory that Everhart's sale to the corporation was a "sham" and accordingly the $750,750 cost basis assigned to the Curtis Yard assets should not be respected. Rather, respondent calculated depreciation deductions by assigning a $150,000 cost basis to Curtis Yard.6OPINION The principal issue herein concerns an alleged sale of Curtis Yard by Everhart to 376 ANA. Everhart was, at all times relevant to this proceeding, the majority stockholder of ANA. The facts are set out in detail in our findings and will be repeated here only when necessary. The dispute emerges from the fact that on April 1, 1968 ANA, which was leasing Curtis Yard from Flournoy from 1959 through 1968, surrendered its right under the leasing arrangement to purchase Curtis Yard. Concurrently, Everhart purchased the property from Flournoy for $150,000. Everhart entered into a leasing arrangement with ANA which in essence was indistinguishable from the corporation's arrangement with Flournoy. On September 28, 1973 Everhart sold Curtis Yard to ANA for $750,750. Respondent's position is that this purported sale was a sham transaction which should not be respected for tax purposes. The Government reasons that Curtis Yard was absolutely essential to the success of ANA's shipyard business operation and that Everhart intended all along to convey the property to ANA. Respondent argues that but for one exception, on September 28, 1973 Everhart and ANA were in the identical position vis a vis Curtis Yard that they would have been had ANA exercised its option to purchase 377 Curtis Yard from Flournoy. That exception involves the alleged sale which, according to respondent, permitted Everhart to siphon off $600,750 of ANA's retained earnings in the form of capital gains in lieu of dividends. Section 301 and section 316 provide that any distribution of money or property made by a corporation to its shareholders with respect to its stock is a dividend to the extent of corporate earnings and profits. Section 301 is applicable only to property distributed by a corporation to a shareholder in his capacity as a shareholder. Section 1.301-1(c), Income Tax Regs.The longstanding principle that the substance of a transaction and not its form controls tax liability is involved herein. See Gregory v. Helvering,293 U.S. 465">293 U.S. 465 (1935); Minnesota Tea Co. v. Helvering,302 U.S. 609">302 U.S. 609 (1938); Yamamoto v. Commissioner,73 T.C. 946">73 T.C. 946 (1980), affd. in unpub. opinion 672 F.2d 924">672 F.2d 924 (9th Cir. 1982). Courts have frequently applied the step transaction doctrine so as to elevate substance over form. See e.g. Helvering v. Alabama Asphaltic Limestone Co.,315 U.S. 179">315 U.S. 179 (1942); Crenshaw v. United States,450 F.2d 472">450 F.2d 472 (5th Cir. 1971); Kimbell-Diamond Milling Co. v. Commissioner,14 T.C. 74">14 T.C. 74 (1950), 378 affd. per curiam 187 F.2d 718">187 F.2d 718 (5th Cir. 1951); Bausch & Lomb Optical Co. v. Commissioner,30 T.C. 602">30 T.C. 602 (1958), affd. 267 F.2d 75">267 F.2d 75 (2nd Cir. 1959). The doctrine of substance over form has also been expressed through an analysis of the business purpose of the particular transactional form employed by the taxpayer. See e.g. Gregory v. Helvering,supra;West Coast Marketing Corp. v. Commissioner,46 T.C. 32">46 T.C. 32 (1966).Respondent's condemnation of Everhart's capital gain treatment (and installment sale election) of the sale of Curtis Yard commences with an allegation that there was no bona bide sale. He submits that ANA, with Everhart as its majority stockholder, president, and chairman of its board of directors, was the alter ego of Everhart. Although frequently avoiding a detailed discussion of the step transaction doctrine, respondent expresses his argument as follows: Everhart resorted to a step transaction to gain favorable tax treatment.Three steps were involved: (1) Everhart's acquisition of Curtis Yard in 1968 at a "ridiculously cheap" price, with knowledge that ANA was going to expend considerable sums of money to make capital improvements to the property; (2) in the years 1968-1973 379 Everhart caused ANA to make substantial capital improvements to Curtis Yard; and (3) the sale of Curtis Yard to ANA at a substantially appreciated price, once the capital improvements had been completed and the corporation had demonstrated its earning potential. Thus, respondent alleges that Everhart, at the time of his purchase of Curtis Yard in 1968, had already devised a plan wherein his sale, years hence, of Curtis Yard to ANA was a certainty. 7Respondent buttresses his argument by alleging that it was not until ANA utilized Curtis Yard as an integral part of its operation that ANA had the potential to be a profit-making enterprise. The fact that Everhart's salary from ANA provided his livelihood is also highlighted by respondent. He reasons that Everhart's investment motive in acquiring Curtis Yard coupled with the fact that his salary was derived from ANA establish that Everhart had a preconceived plan to cash in 380 on his investment only through ANA's eventual purchase of the property. Despite respondent's allegation that a step transaction was involved herein, he does not address the most salient feature of the step transaction theory, i.e. the disregard of purposeless intervening steps. Respondent does not explicitly ask us to ignore the 1968 sale of Curtis Yard from Flournoy to Everhart.Rather, respondent argues that dealings between ANA and Everhart were not at arm's length and consequently payments from ANA to Everhart in 1973 should be viewed as distributions of corporate earnings, masquerading as something that might produce more beneficial tax consequences. Thus, respondent maintains that of the $750,750 purchase price paid by ANA, $600,750 should be dividends to Everhart and $150,000 should constitute ANA's cost for the property. Respondent so contends even in the face of his concession that the fair market value of Curtis Yard was at least equal to the price paid by ANA for the property. Considering the posture of the argument and respondent's concession concerning the value of Curtis Yard, respondent's assertion that Everhart's sale to ANA was a sham does not specifically propose 381 any explanation as to how and when Curtis Yard was transferred to ANA at a cost of $150,000. There is no specific mention that in 1968 Everhart made an express promise or was under any obligation to transfer Curtis Yard to ANA. Nor is it specifically argued that ANA was the actual purchaser of the property in 1968 for $150,000 and that Everhart was a mere conduit. Cf. Commissioner v. Court Holding Co.,324 U.S. 331">324 U.S. 331 (1945) (where corporation negotiated a sale of a building and then was liquidated and erstwhile shareholders then formally contracted for the sale of the building it was held that the corporation was the actual seller); Palmer v. Commissioner,44 T.C. 92">44 T.C. 92 (1965) (where shareholders contracted to sell real property and received part payment therefore and 2 days later the property was transferred to their corporation to carry out the sales contract with the purchaser, we held that the sale was to be ascribed to the shareholders). Respondent has stipulated herein that Everhart's acquisition of Curtis Yard in 1968 was a purchase. To hold for respondent herein would be tantamount to construing the above stipulation to mean that Everhart's acquisition, although a purchase, 382 was meaningless. Inasmuch as the fact that parties are not free to stipulate conclusions of law, Rose Ann Coates Trust v. Commissioner,55 T.C. 501">55 T.C. 501, 511 (1970), affd. 480 F.2d 468">480 F.2d 468 (9th Cir. 1973); Davis v. Commissioner,241 F.2d 701">241 F.2d 701 (7th Cir. 1957), we do not find ourselves constrained by the stipulation. Yet, we find that the parties' factual stipulation that Everhart's acquisition was a purchase does comport with the legal realities which flow from the label "purchase." "Taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed." Corliss v. Bowers,281 U.S. 376">281 U.S. 376, 378 (1930). Where there is a transaction with economic substance which is compelled or encouraged by business realities, is imbued with tax independent considerations and is not shaped solely for tax avoidance features that have meaningless labels attached the transaction must be respected. Lyon Co. v. United States,435 U.S. 561">435 U.S. 561 (1978). Furthermore, where the transactional form employed evidences economic realities it is of no moment that a different but equally feasible form would have resulted in a greater tax. Gregory v. Helvering,supra.The burden of proving 383 that respondent's determination herein is erroneous is upon petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a); Tax Court Rules of Practice and Procedure. We hold that petitioners have sustained their burden. In 1968 there was significant uncertainty as to ANA's future prosperity. Despite its banner year in 1967, the vagaries of ANA's financial fortunes are highlighted by its 1962 shipyard operation profit which was in excess of $62,000 and its average profit of about $21,000 for the next 4 years. Additionally, labor union difficulties plagued ANA during the 1960's. Furthermore, approximately 95 percent of ANA's business in the mid-1960's was derived from United States Government contracts for ship repair. Due to insecurities attending Congressional appropriations for vessel repair and ANA's inability to attract private commercial business, the financial outlook for ANA's ship repair operation was unclear in the late 1960's. In fact, the growing success of ANA's wholly-owned subsidiary, National Welding Supply Company, posed the possibility that if ANA's shipyard operation would falter, greater emphasis on the operation of the subsidiary could eventuate so as to 384 provide Everhart and other corporate employees with a livelihood. It is with this perspective that Everhart entered into the purchase agreement with Flournoy for Curtis Yard. We believe that at such time Everhart might very well have contemplated the possibility of a future sale to ANA if the corporation proved successful. We are equally certain, however, that Everhart was also aware of the potential downfall of ANA. It is perhaps because of this perception that Everhart wanted to acquire Curtis Yard in his individual capacity. For even if ANA were to falter, Everhart could then salvage through sale at least a portion of the benefits of his tremendous bargain purchase of 1968. Thus while we believe that Everhart, as a sophisticated businessman, entertained a host of possibilities, we are unable to accept respondent's contention that Everhart devised any definitive plan to sell Curtis Yard to ANA. We are equally unpersuaded that ANA's project of capital improvements somehow proves the existence of Everhart's certain scheme to sell Curtis Yard. For even if there was a careful plan to erect improvements, we are unwilling to accept respondent's implicit assumption that erection 385 of improvements will necessarily result in a highly prosperous business. While the installment of these improvements was intended to bolster ANA's standing in the competition for large private commercial business, respondent seems to ignore the risk factor inherent in any business venture. ANA, with its history of increasing and decreasing profits, was not exempt from risk. Respondent argues that Everhart bore none of the burdens of ownership of Curtis Yard. We perceive the situation somewhat differently. Everhart borrowed $150,000 from Seaboard Citizens National Bank to purchase Curtis Yard. While the rent paid by ANA to Everhart would cover all annual loan payments required of Everhart, Everhart was still required to make the balloon payment of $78,750 to the bank in 1973.While it is also clear that the lease arrangement between Everhart and ANA mandated that ANA carry $300,000 of insurance under the lease, Everhart increased his insurance up to $1 million to protect himself against liability claims arising out of the use of the property. Thus, we believe that there were elements of economic reality associated with Everhart's acquisition of Curtis Yard. We further note that 386 ANA borrowed significant sums of money in 1961-1968 to meet its operating expenses. There is no suggestion in the record that Seaboard Citizens National Bank would definitely not have loaned money to ANA for the 1968 purchase of Curtis Yard. However, when bank officials were asked whether ANA or Everhart should purchase Curtis Yard from Flournoy, the bank advised that Everhart be the purchaser. This advice was based on the bank's preference that one of its loan customers which was borrowing heavily to meet operating needs should not be investing in fixed assets. What is of crucial significance in our decision is the time factor involved between the date of Everhart's purchase of Curtis Yard in April of 1968 and his sale of the property to ANA in September of 1973. This 5-1/2 year period lends itself readily to a rejection of respondent's claim that in 1968 Everhart had a definitive intent to sell the property to ANA in the future. The time frame also evidences the fact that risks borne by Everhart were in fact meaningful rather than merely incidental and short lived. Respondent acknowledges that it is unique to find that a shareholder's entire profit resulting from an alleged 387 transfer to his closely held corporation constitutes dividend distributions when that transfer was for a price at least equal to the fair market value of the transferred asset. However, we are, in essence, urged by respondent in this instance to depart from the usual considerations of the fair market value of the property transferred because of the particular circumstances herein. Respondent relies heavily in Goldstein v. Commissioner,T.C. Memo 1960-276">T.C. Memo. 1960-276, affd. 298 F.2d 562">298 F.2d 562 (9th Cir. 1962), in support of his contention. In that case the taxpayer was the dominant shareholder of a closely held corporation. The corporation held a long-term lease on a parcel of property used in its business. As evidenced by corporate minutes, the corporation desired to own the property so as to be in a better position to procure a loan and increase its working capital. The board of directors authorized corporate officers to negotiate for the purchase of the land. Subsequently, the board decided that the taxpayer would purchase the property in his individual capacity and perhaps at some future time would sell it to the corporation. Through a series of transactions the taxpayer acquired the property 388 on December 8, 1953 for $35,000. On December 31, 1953 the taxpayer sold the property to his corporation for $75,000.The contention that the taxpayer received a $40,000 dividend from his corporation was upheld by this Court. Respondent maintains that Goldstein is analogous to the instant case. We disagree. First, respondent suggests that even though there was some evidence that the property involved had a fair market value of $75,000, "that did not dissuade the Court from finding that Goldstein's profit was really a disguised dividend." Respondent misapprehends the Court's view of the facts. While there was testimony of an appraiser who opined that the property was worth about $79,000, the Court noted that there was no satisfactory explanation of the effect on value of the corporate lease which still had 42 years to run. Observing that the taxpayer himself would not pay more than $35,000 for the property because of its attending lease, we implicitly rejected the notion that the corporation paid the price of a willing buyer with no compulsion to purchase. In fact, on appeal the Ninth Circuit recognized that the taxpayer "sold it at a price in excess of what the most persuasive 389 evidence shows was the fair market value." Goldstein v. Commissioner, 298 F.2d at 567.Second, the corporation, which expressed an intent to acquire the property, purchased the property from the taxpayer just 23 days after its acquisition by the taxpayer. It is thus by no means surprising that the Court viewed the $40,000 profit as not reflective of the worth of the property but rather as a dividend distribution. Respondent states that the taxpayer's dominance over his corporation in Goldstein was the chief factor leading to the Court's conclusion. Our reading of the case reveals that such dominance is a factor which invites careful scrutiny but is not in and of itself a proper basis for disregarding the particular transactional form employed. For the reasons noted above we hold that Everhart's sale of Curtis Yard to ANA 5 1/2 years after his purchase of the property was a bona fide sale to be respected for tax purposes. Marine Railways, Piers and WharvesOn his 1973 and 1974 income tax returns Everhart allocated the proceeds received from the sale of Curtis Yard to the various assets of Curtis Yard. Gain on marine railways, piers and wharves was reported as section 1250 gain 390 (ordinary income component) and section 1231 gain. Respondent argues that the marine railways, piers and wharves are section 1245 assets. Thus, respondent, in view of the greater depreciation recapture required by section 1245 than that required by section 1250, maintains that a greater portion of the gain on these assets should be reported as ordinary income. Section 1250(c) provides that the term "section 1250 property" means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167. The parties agree that the relevant marine railways, piers and wharves were subject to a depreciation allowance. Accordingly, the dispute is focused upon the definition of section 1245 property as found in section 1245(a)(3). Respondent's argument centers on section 1245(a)(3) (particularly section 1245(a)(3)(B)(i)) which provides in relevant portion: (3) Section 1245 property.--For purposes of this section, the term "section 1245 property" means any property which is or has been property of a character subject to the allowance for depreciation provided in 391 section 167 (or subject to the allowance of amortization provided in section 185) and is either-- (A) personal property, (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property) -- (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, * * . In defining property described in section 1245(a)(3)(B), section 1.1245-3(c)(2), Income Tax Regs., directs our attention to the regulations promulgated under the investment tax credit provisions. 8392 Section 1.48-1(d)(2), Income Tax Regs., provides: (2) Manufacturing, production, and extraction. For purposes of the credit allowed by section 38, the terms "manufacturing", "production", and "extraction" include the construction, reconstruction, or making of property out of scrap, salvage, or junk material, as well as from new or raw material, by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles, and include the cultivation of the soil, the raising of livestock, and the mining of minerals. Thus, section 38 property would include, for example, property used as an integral part of the extracting, processing, or refining of metallic and nonmetallic minerals, including oil, gas, rock, marble, or slate; the construction of roads, bridges, or housing; the processing of meat, fish, or other foodstuffs; the cultivation of orchards, gardens, or unrseries; the operation of sawmills, the production of lumber, lumber products or other building materials; the fabrication or treatment of textiles, paper, leather goods, 393 or glass; and the rebuilding, as distinguished from the mere repairing, of machinery. Respondent contends that the marine railways, piers and wharves were used an integral part of ANA's manufacturing business. More specifically, he maintains that because it was sometimes necessary during ship repair for ANA to manufacture certain replacement parts, such as bushings for propellers, special nuts and bolts and other parts, ANA was in the manufacturing business.In addition, respondent asserts that modifications to vessels effected by ANA so as to adapt vessels to another use is evidence of the existence of a ship rebuilding business as distinguished from ANA's routine repair business. We sustain petitioner on this issue. ANA was in the business of repairing and maintaining vessels. In fact, respondent has so stipulated before trial, and only upon brief does he seek to expand the boundaries of ANA's business.Even so, the merits of respondent's contention are dubious. The adaptation of vessels, on occasion, for certain specific occeanic purposes involved only the addition of certain appurtenances so as to accommodate the specific purpose. No major ship overhaul was effected. Thus, 394 we cannot view these occasional adaptations as constituting a ship rebuilding business. Nor does it appear to us that modification of vessels arising from government regulation constitutes ship rebuilding.As a typical case, government regulation mandated that ships effect changes in sewage disposal. Thus, ANA inserted holding tanks after attending to sewage pipes. We do not perceive such efforts as falling under the heading of ship rebuilding. While we are aware that there exists a fine line between the repairing and rebuilding of vessels, we simply dno not believe that the level of activity undertaken by ANA may be elevated to the category of ship rebuilding.Respondent also notes ANA's "manufacture" of nuts and bolts, bushings for propellers, and other parts from raw stock. Suffice it to say that activity leading to the evolution of these parts was necessary to effect ship repair and did not amount to a manufacturing business in and of itself. Finally, respondent points to the fact that ANA claimed an investment credit in the fiscal year ended September 30, 1978 for dredging around the marine railways. Thus, respondent continues, ANA must have concluded that the marine railways *395 were used an integral part of manufacturing in that year. See section 48(a)(1)(B)(i). Everhart urges that in light of respondent's audit of his 1973 and 1974 returns the credit was claimed on the 1978 corporate return to prevent a "whipsawing" effect.The 1978 tax year of ANA is not before us and the matter of ANA's claimed credit for 1978, in our view, sheds no light on whether ANA was in the manufacturing or rebuilding business. We find Everhart's "whipsaw" contention plausible. Yet even if it were entirely incredible, we do not believe in this instance, that what ANA returned in 1978 governs the propriety of Everhart's 1973 and 1974 claims. Petitioners' prayer for attorneys' fees must be rejected as this Court is not empowered to grant such fees to petitioners. McQuiston v. Commissioner,78 T.C. 807">78 T.C. 807 (1982). To reflect the foregoing, Decisions will be entered for the petitioners.Footnotes1. During the years in issue petitioner Edgar S. Everhart was a limited partner in four limited partnerships involved in rehabilitating and renting low income housing. Partnership losses claimed by petitioner were reduced or disallowed in their entirety by respondent. For judicial economy and in view of a realistic possibility of settlement of this issue the parties moved to sever it from the January 1980 trial of this case. The motion was granted as reflected in the Court's order of December 19, 1979. 2. One of the principal issues in this case concerned the fair market value of the Curtis Yard property. This shipyard property was allegedly sold by the petitioner Edgar S. Everhart to Associated Naval Architects, Inc. on September 28, 1973. Although a great portion of the trial was directed to this issue respondent subsequently conceded the issue. See respondent's brief, p. 3, 29.↩3. All statutory references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue.↩4. See section 1239.↩5. Respondent's alternative determination was premised on the notion that the fair market value of Curtis Yard on September 28, 1973 was $205,000. Subsequent to trial respondent conceded that the value of Curtis Yard on the date it was sold by Everhart was at least equal to the sales price of $750,750. Accordingly, it is not purposeful to reproduce respondent's computation underlying its recharacterization of alleged section 1250 gain as section 1245↩ gain.6. Respondent's alternative determination is his notice of deficiency which assigns a cost of $205,000 to Curtis Yard is no longer appropriate in view of respondent's concession that the property was worth at least $750,750 on the date of its sale to ANA.↩7. Respondent's apparent reluctance to discuss the step transaction doctrine at any length in his briefs is due perhaps to his stipulation that the 1968 transfer of Curtis Yard to Everhart from Mr. and Mrs. Flournoy was indeed a purchase of the property by Everhart.↩8. Section 48 defines what property is subject to the investment credit allowed by section 38. Section 48(a)(1)(B) specifically qualifies for the credit certain tangible property "used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water or sewage disposal services." The quoted words are also employed in section 1245(a)(3)(B)(i) and thus section 1.1245-3(c)(2) refers us to section 1.48-1(d)(2)↩ for a definition of the identical phrase.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620502/	DONALD LEE ATKINSON and EMMA J. ATKINSON, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, RespondentAtkinson v. CommissionerDocket No. 4179-83United States Tax CourtT.C. Memo 1984-378; 1984 Tax Ct. Memo LEXIS 292; 48 T.C.M. (CCH) 577; T.C.M. (RIA) 84378; July 24, 1984. Donald Lee Atkinson, pro se. James R. Million, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: In a statutory notice mailed on November 30, 1982, respondent determined a deficiency of $16,930.59 in petitioners' Federal income tax liability for 1977. After concessions, the only issue remaining for decision is whether petitioners are entitled to a claimed $75,000 bad293 debt deduction in connection with payments they were required to make under personal guarantees of loans of a closely held corporation. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The petitioners, Donald Lee and Emma J. Atkinson, are husband and wife and resided in Holden, Missouri, at the time they filed their petition herein. Petitioners timely filed their 1977 joint Federal income tax return. Although Emma J. Atkinson was not actively involved in the business, she did join in executing the loan guarantees described below. Subsequent references to "petitioner" refer only to Donald Lee Atkinson. Petitioner has been involved in various aspects of the electronics business for approximately twenty years. He was a full time employee of several major electronics companies from 1959 through 1965. After 1965, he was employed as a television repairman for approximately five years. In or about 1970, petitioner became self-employed as a radio and television repairman and he performed contract work for various companies in Missouri. Although the time frame is unclear from the record, petitioner also was involved as a partner in a partnership which294 operated a retail C.B. radio store in Chilahowee, Missouri. In addition, petitioner owned a farm and was engaged in farming throughout the 1970's. Petitioner decided in 1975 to import C.B. radios and sell them at retail. He enlisted the services of David Erisman, who had some prior experience in the import business, to assist him. Petitioner and Mr. Erisman decided to form a corporation to conduct the business. They incorporated Power Communications, Inc. (hereinafter referred to as "Power") under the laws of the State of Missouri on October 6, 1975. Petitioner and David Erisman have each owned 50% of the outstanding stock of Power since its incorporation. Upon incorporation, each contributed $250 for a total of $500 invested capital. The reason only $500 was invested in Power upon incorporation is that this was the minimum capital required for a corporation in the State of Missouri in 1975. In order to finance acquisition of Power's opening inventory of radios, a loan was obtained in the name of Power in the amount of $17,537.50 from the Farmers and Commercial Bank of Holden, Missouri, on February 23, 1976. This loan was evidenced by a note and was personally guaranteed295 by petitioners. The record does not indicate whether Mr. Erisman participated in the guarantees. Two deeds of trust and 250 C.B. radios were given as security for the loan. A second loan was obtained in the name of Power from the same bank on May 25, 1976, in the amount of $65,000. This loan also was personally guaranteed by petitioners and was evidenced by a note. The security given for this loan was the same as for the first loan, with the addition of 1,000 C.B. radios. The proceeds of this loan also were used to purchase C.B. radios for Power's inventory. For unexplained reasons, the first note was rewritten on May 24, 1977, and the second note was rewritten on August 16, 1977. Each of the new notes reflected petitioners, rather than Power, as the maker of the note. In 1977, Power was experiencing financial difficulties and was unable to make payments on the notes. Therefore, petitioner was called upon by the bank creditor to pay $74,892.50 pursuant to his personal guarantees. Of this amount, petitioner actually paid a total of $22,987.50 in 1977. Power has not repaid petitioner any portion of the $22,987.50, and Power ceased doing business in 1977. Petitioners reported296 a $75,000 business bad debt deduction on their 1977 joint Federal income tax return with respect to the loan guarantees. Power obtained additional loans from the Farmers and Commercial Bank of Holden, Missouri, on the following dates and in the following amounts: DateAmountDec. 18, 1975$ 6,000.00Dec. 19, 197513,000.00Jan. 12, 197619,000.00Jan. 15, 197625,750.00Aug. 4, 19764,392.50Sep. 14, 197610,000.00Oct. 16, 19762,000.00Oct. 29, 1976500.00Jan. 20, 197716,592.53Total Additional Loans1 $97,235.03With respect to the loans listed immediately above, the stipulation states: "These notes were repaid at various times by Power or petitioners. Petitioners were guarantors on some, and probably all, of the above notes." OPINION The issue to be decided in this case is whether petitioners are entitled to an ordinary deduction as a result of business bad debts for the payments which they made pursuant to the loan guarantees involved herein. Respondent argues that the payments petitioners made give rise to capital losses297 on the grounds that the payments constituted capital contributions to Power or, in the alternative, that the debts with respect to which the payments were made were nonbusiness bad debts.Respondent also argues that, in any event, the amount claimed by petitioners in excess of the $22,987.50 actually paid by petitioners in 1977 is not deductible. It is well recognized that payments made by a shareholder pursuant to guaranteed debt obligations may constitute capital contributions to the corporation on whose behalf the guarantees were made. Smyers v. Commissioner,57 T.C. 189">57 T.C. 189, 198 (1971); Santa Anita Consolidated, Inc. v. Commissioner,50 T.C. 536">50 T.C. 536, 550 (1968); Casco Bank & Trust Co. v. United States,544 F.2d 528">544 F.2d 528 (1st Cir. 1976), cert. denied, 430 U.S. 907">430 U.S. 907 (1977); Plantation Patterns, Inc. v. Commissioner,462 F.2d 712">462 F.2d 712, 723 (5th Cir. 1972), affg. a Memorandum Opinion of this Court. If the payments are treated as capital contributions, petitioner is not entitled to a bad debt deduction under section 166 of the Internal Revenue Code298 of 1954, as amended and the regulations promulgated thereunder. 2The analysis traditionally followed in determining whether payments made by a shareholder with respect to guaranteed debt are to be treated as capital contributions is to consider all of the facts in light of the traditional debt versus equity criteria. Smyers v. Commissioner,supra at 198; Santa Anita Consolidated, Inc. v. Commissioner,supra at 550. These criteria include, 299 among others, the formal indicia of debt, the availability of outside credit, the repayment history and prospects, whether there was subordination of the debt, the use made of the loan proceeds, whether participation in management occurred as a result of the payments, the adequacy of the capital structure (including the debt/equity ratios) and the intent of the parties. See e.g., Dixie Dairies v. Commissioner,74 T.C. 476">74 T.C. 476, 493 (1980); United States v. Uneco, Inc.,532 F.2d 1204">532 F.2d 1204 (8th Cir. 1976). Some of these debt/equity criteria typically are not applicable to guaranteed debt situations. This is due to the fact that in such situations the shareholders do not actually loan money to the corporation, but rather loan their personal credit which allows the corporation to obtain funds from a third party. It is also established that no deduction for a bad debt or capital loss is available unless (and only to the extent) the taxpayer has made an outlay of cash or of property having a cash value. Crown v. Commissioner,77 T.C. 582">77 T.C. 582, 592 (1981);300 Helvering v. Price,309 U.S. 409">309 U.S. 409 (1940). Giving a guaranty or the substitution of a guarantor's personal note for that of the stated primary obligator, in satisfaction of the guaranty, does not constitute such an outlay until the note is actually paid. Crown v. Commissioner,supra at 593; Perry v. Commissioner,49 T.C. 508">49 T.C. 508 (1968); Eckert v. Burnet,283 U.S. 140">283 U.S. 140 (1931). We find that the payments involved herein were contributions of capital and that petitioners' capital loss in 1979 is limited by the $22,987.50 he actually paid in that year. It is apparent that Power was severely undercapitalized. The initial (and only) stated paid-in capital of $500 related simply to the minimum capitalization requirements of Missouri law, and not to any estimate of the actual needs of the business. See Estate of Miller v. Commissioner,24 T.C. 923">24 T.C. 923 (1955). Funds derived from the bank loans which petitioner personally guaranteed were required to obtain the initial inventory with which Power commenced business operations.No outside credit was available to Power except upon the personal credit and guarantee301 of petitioner. With the capital of only $500, any repayment of the loans by Power was totally dependent upon the success of Power, a factor strongly indicating undercapitalization. See Gilbert v. Commissioner,248 F.2d 399">248 F.2d 399, 407 (2nd Cir. 1957). Power's inordinately high debt/equity ratios support our conclusion. These ratios ranged from 35 to 1 initially (obtained by dividing the initial loan proceeds of $17,537.50 by $500 capital), to a high of 193 to 1 on October 29, 1976, when the total outstanding principal debt reached its highest level of $96,380.03. It appears to us that there never was a bona fide debtorcreditor relationship between petitioner and Power. See Casco Bank & Trust v. Commissioner,supra at 533. The nature of the relationship was demonstrated when the notes were rewritten in 1977, designating petitioners rather than Power as the makers of the notes. Because the bank was relying on petitioners' credit and not Power's, petitioners were the true borrowers of the money which they then, in effect, contributed as capital to Power. The nature of the transactions herein are very similar to those involved in Plantation Patterns, Inc. v. Commissioner,462 F.2d 712">462 F.2d 712 (5th Cir. 1972).302 Therein, a corporate officer who controlled the majority of the shares of the corporation personally guaranteed a loan to creditors of the corporation. The Court's observations in that case are applicable to the present one: The guarantee enabled Mr. Jemison to put a minimum amount of cash into New Plantation immediately, and to avoid any further cash investment in the corporation unless and until it should fall on hard times. . . [W]e think that the result is that Mr. Jemison's guarantee simply amounted to a covert way of putting his money "at the risk of the business." Stated differently, the guarantee enabled Mr. Jemison to create borrowing power for the corporation which normally would have existed only through the presence of more adequate capitalization of New Plantation. (462 F.2d at 722-723) Petitioner, who is appearing pro se, does not understand how, since he "lost" more money than he "made" in 1977, he could possibly owe any taxes. The reason, of course, is that for Federal income tax purposes capital losses cannot be offset directly against petitioner's ordinary303 income, except to the limited extent authorized by the Internal Revenue Code of 1954, as amended. Petitioner apparently does not understand that ordinary and capital losses are treated differently because they are considered under the law to be of a different character. 3In light of our resolution of the debt/equity issue, we need not address the nonbusiness bad debt argument made by respondent. Petitioners will be allowed a capital loss on the payments304 they actually made in 1977 with respect to their guaranty of the debts of Power, subject to the limitations imposed on capital losses by section 1211 and other appropriate sections of the Internal Revenue Code of 1954, as amended. To reflect concessions of the parties and in light of the above conclusions, Decision will be entered under Rule 155.Footnotes1. The highest total debt outstanding at any one time was $96,380.03, the balance on October 29, 1976.↩2. Section 1.166-9(c), Income Tax Regs., provides: (c) Obligations issued by corporationsNo treatment as a worthless debt is allowed with respect to a payment made by the taxpayer in discharge of part or all of the taxpayer's obligation as a guarantor, endorser, or indemnitor of an obligation issued by a corporation if, on the basis of the facts and circumstances at the time the obligation was entered into, the payment constitutes a contribution to capital by a shareholder.↩3. Neither party has raised the applicability of section 1244, which allows ordinary loss treatment, up to specified limits, on which otherwise would be a capital loss on qualifying small business corporation stock. However, it is clear that this section is not properly applicable to this case because the stock involved, which was issued prior to November 1978, was not issued pursuant to a plan, as required under section 1.1244(c)-1(f), Income Tax Regs. In addition, while we have considered it, we find no evidence in the record which would support the application of the Corn Products doctrine as set forth in Corn Products Refining Co. v. Commissioner,350 U.S. 46">350 U.S. 46↩ (1955).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620504/	Gilles Frozen Custard, Inc., a corporation v. Commissioner. Paul M. Gilles and Faythe S. Gilles v. Commissioner.Gilles Frozen Custard, Inc. v. CommissionerDocket Nos. 5550-67, 5551-67.United States Tax CourtT.C. Memo 1970-73; 1970 Tax Ct. Memo LEXIS 287; 29 T.C.M. (CCH) 311; T.C.M. (RIA) 70073; March 26, 1970, filed Martin J. Torphy and E. Campion Kersten, 231 Wisconsin Ave., Milwaukee, Wis., for petitioners. Robert M. Burns, for respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, Judge: The respondent determined deficiencies in income tax against Gilles Frozen Custard, Inc. (hereinafter referred to as288 petitioner) for the taxable years 1963, 1964, and 1965 in the respective amounts of $5,919.44, $5,707.80, and $8,424.36; and against Paul M. Gilles and Faythe S. Gilles for the taxable years 1963, 1964, and 1965 in the respective amounts of $264.11, $313.84, and $395.56. The respondent having conceded certain issues, those remaining for decision are: (1) whether petitioner may deduct as reasonable compensation amounts paid to Paul M. Gilles and Celia Gilles in 1963, 1964, and 1965; (2) whether an expenditure of $824.87 made by petitioner in 1963 constituted a deductible expense for repairs or a capital expenditure; and (3) whether amounts paid by petitioner to Paul Gilles in 1963, 1964, and 1965 as reimburseennt of expenses with respect to his automobile constituted deductible business expenses of petitioner or whether such amounts represented payment by petitioner of personal expenses of Paul Gilles and taxable income to him. Findings of Fact Some of the facts have been stipulated and are incorporated herein by this reference. The petitioner is a Wisconsin corporation and at the time it filed its petition herein its place of business was located at 7515 West Bluemound Road, 289 Milwaukee, Wisconsin. It employed an accrual method of accounting. It filed its Federal income tax returns for the years 1963, 1964, and 1965 with the district director of internal revenue, Milwaukee, Wisconsin. Petitioners, Paul M. and Faythe S. Gilles, are husband and wife and resided in Brookfield, Wisconsin, at the time they filed their petition herein. They filed joint returns for the taxable years 1963, 1964, and 1965 with the district director of internal revenue, Milwaukee, Wisconsin. Faythe Gilles is a party to this proceeding only as a result of having filed joint returns with her husband during the years in question. The petitioner was organized on March 8, 1938, by Paul Gilles who has continuously served as its president. The original capitalization consisted of 520 shares of common stock of a par value of $10 per share. Paul Gilles owned 280 shares and his mother, Celia Gilles, owned 40 shares. The remaining shares were owned by 6 other individuals unrelated to the Gilleses. Thereafter Celia Gilles was issued 2 additional shares and Paul Gilles's wife, Faythe Gilles, was issued 1 share. In March 1963, Paul Gilles purchased 60 shares owned by C. Tonkin. The petitioner's290 outstanding stock was held as follows during the greater part of 1963 and throughout the years 1964 and 1965: 312 Paul M. Gilles340 sharesCelia Gilles42 sharesFaythe Gilles1 sharePaschale Shaffer40 sharesLester VanLuyk50 sharesLorayne Reiff45 sharesAlice Haase 5 sharesTotal523 sharesShaffer, VanLuyk, Reiff, and Haase are not related to the Gilleses. Since its organization petitioner has operated an independent drive-in frozen custard business in Milwaukee, Wisconsin. Throughout the years the business has been conducted at the same location. While the location was once in a relatively unpopulated area, during the years in question it was a part of a heavily populated neighborhood because of the city's growth. It was within 1 block of one high school, 6 blocks of another, and 12 blocks of still another. During the years in question petitioner operated both a retail and a wholesale business in frozen custard. Its drive-in was open for retail business from March 1 until Thanksgiving time. During the retail season the drive-in was open 7 days a week, from 10:30 a.m. until 12:00 p.m. Monday through Thursday, and from 10:00 a.m. until291 12:30 or 1:00 p.m. on Fridays, Saturdays, and Sundays. Throughout the retail season petitioner sold a large variety of frozen custard products, 14 different sandwich items, and various beverages, the customers being served at the windows of the custard stand. Petitioner's principal product was a superior ice cream product which, pursuant to Wisconsin statute, was designated "frozen custard." In producing such custard petitioner used a purchased mix and utilized a machine which yielded 12 gallons of finished product for each 10 gallons of mix. Very few sellers of ice cream or frozen custard in the Milwaukee area utilized a mix, or produced a product, as high in quality as did the petitioner. During the retail season the drive-in was a popular meeting place for young people not only from the schools in the immediate area but also for those from schools throughout the city of Milwaukee, and 65 percent to 75 percent of petitioner's customers were teenaged. Because of the youthful make-up of its patronage, petitioner encountered substantial problems because of large crowds, traffic, noise, litter, and disturbances. During the retail season it was necessary for petitioner to have each292 day approximately 18 to 20 employees working in split shifts. Because of employee turnover, the petitioner actually employed 38, 36, and 48 persons, respectively, during 1963, 1964, and 1965. The majority of employees in each year were new to petitioner's business and required training. Apart from Paul Gilles and Robert Linscott, the petitioner paid its employees wages which ranged from $1.40 per hour to $2.35 per hour. Petitioner's wholesale business, consisting of the production and sale of frozen custard, operated throughout the years in question and was heavier during the winter months when the retail business was closed. Petitioner had from 11 to 14 wholesale customers annually during the years in question. During the months the retail business was closed petitioner employed only 2 persons, Paul Gilles and Robert Linscott. Prior to the fall of 1963 the street upon which petitioner's drive-in was located was a minor east-west artery which served as the main road to Madison, Wisconsin, the state capitol. At that time an expressway south of petitioner's location was opened and the traffic flow past petitioner's drive-in dropped from approximately 24,000 cars a day to approximately293 12,000 cars a day. Two franchised restaurants moved into the immediate neighborhood, one in 1962 and the other in 1964 or 1965. There are presently over 100 drive-in restaurants in Milwaukee. At one time all drive-ins in Milwaukee were independently operated. However, because of the growth of franchised drive-ins there are very few independent drive-ins remaining in Milwaukee. Petitioner's drive-in is one of the finest independent drive-in restaurants in the Milwaukee area. Through the years the petitioner's board of directors has been comprised as follows: 1938-1942 Paul M. Gilles, C. Tonkin and E.R. Reiff 1943-1957 Paul M. Gilles, Celia Gilles and E.R. Reiff 1958-1960 Paul M. Gilles, Celia Gilles and Lorayne Reiff 1961-1965 Paul M. Gilles, Celia Gilles, Faythe Gilles and Lorayne Reiff During the years in question Paul Gilles was petitioner's president, general manager and treasurer. Lorayne Reiff was petitioner's vice president. Her principal duties consisted of attending the annual directors' meetings. The only compensation she 313 received was $100 per year. Celia Gilles, Paul Gilles' mother, was petitioner's assistant treasurer. Throughout the years in question, 294 as in prior years, Paul Gilles was responsible for substantially every phase of petitioner's business. He was responsible for all hiring, training, and supervision of petitioner's employees; for purchasing materials and equipment used in petitioner's business; for maintaining order on the business premises; for dealing with problems arising because of petitioner's youthful patronage; and for all matters of general policy, such as petitioner's pricing policy and product-line. Throughout the retail season Paul Gilles devoted about 15 hours a day, 5 i/2 days per week, to petitioner's business. In addition to performing the above duties, he did maintenance and repair work on the business premises and the equipment used in the business, and he frequently worked at the counter, fountain and grill and in the manufacture of frozen custard. During the offseason his work included the manufacture of frozen custard for petitioner's wholesale customers, regular maintenance and repainting, cleaning and maintenance of equipment preparatory for the next retail season, and bookkeeping. In each of the years in question he devoted approximately 4,000 hours to the business of the petitioner. He did295 not take any regular vacations and was never away from the business for any substantial length of time. Paul Gilles enjoys an excellent reputation as a businessman in the community, is wellknown to petitioner's customers, and petitioner's success is largely attributable to his efforts. Petitioner's sales in each year from 1938 to 1962 were as follows: YearsSales1938$20,607.72193927,701.55194032,434.55194152,171.30YearsSales1942$64,941.20194352,051.66194459,250.60194550,022.69194696,399.041947 117,678.301948140,963.101949137,108.311950140,678.961951150,470.131952165,193.051953172,853.231954 148,464.501955152,707.471956149,626.411957157,170.011958163,493.881959165,297.621960171,062.571961185,593.971962198,269.23Petitioner reported sales, gross income, and taxable income during the years in question as follows: SalesGross IncomeTaxable Income1963$223,886.84$116,804.84$7,962.351964235,633.41124,905.6614,446.411965242,082.35128,129.734,962.87Since its incorporation in 1938 and throughout296 out the years in question the petitioner has paid total dividends of $74,076. 2 The book value of petitioner's stock was approximately $154 per share on December 31, 1963; $174 per share on December 31, 1964; and $178 per share on December 31, 1965. Its earned surplus was $75,282.77 on December 31, 1963; $85,651.25 on December 31, 1964; and $87,897.93 on December 31, 1965. It has not paid any dividends since 1958. In 1957 petitioner adopted a qualified pension plan, the funding of which297 required a substantial amount of its earnings. Throughout the years in question the petitioner was considering a building program to expand its facilities. The program did not progress beyond discussions with an architect because petitioner lacked sufficient funds to initiate the program. 314 During the years in question Paul Gilles received the following amounts from petitioner in salary and bonus: 3YearsSalaryBonus1963$24,000$6,000196424,0006,000196530,00010,000In January of each of these years a salary of $24,000 and a bonus of $6,000 were approved unanimously by petitioner's board of directors. The $6,000 increase in salary and the $4,000 increase in bonus in 1965 were298 approved unanimously by petitioner's board of directors at a special meeting on December 28, 1965. These increases were granted in consideration of the good year enjoyed by petitioner in 1965 and in consideration of Paul Gilles' present and past services to petitioner. The fact that Paul Gilles did not receive any bonuses during the years 1957-1960 was also a consideration of petitioner's board of directors in approving the increases in his salary and bonus for 1965. During the years in question the petitioner made contributions to a qualified pension plan. Paul Gilles' share of such contributions was $5,304.78 for each of the taxable years 1963, 1964, and 1965. Petitioner also paid insurance premiums on his behalf in the amounts of $484.47 in 1963, $482.41 in 1964, and $477.56 in 1965. The total amount of compensation paid in the taxable years 1963, 1964, and 1965 by petitioner for the services of Paul Gilles (salary, bonus, insurance premiums, and pension plan contributions) and deducted by petitioner was as follows: 1963$35,789.25196435,787.19196545,782.34In the notice of deficiency addressed to the petitioner, the respondent determined that such299 claimed deductions were excessive. He determined that a reasonable allowance for those years for salary or other compensation for the services of Paul Gilles (including pension plan contributions and insurance premium payments on his behalf) was $20,069.08, $20,071.30, and $20,005.18, respectively, and disallowed amounts claimed in excess thereof. Reasonable allowances for compensation (salary, bonus, insurance premiums, and pension plan contributions) for the taxable years 1963, 1964, and 1965 for services rendered by Paul Gilles are $30,000, $30,000, and $40,000 respectively. Celia Gilles operated the petitioner's business during the years 1942 through 1945 when Paul Gilles was in the armed services. Her responsibilities at that time were similar to those of Paul Gilles during the years in question, although the drive-in was not open as much during such former period. During the years in question her age was in the upper 70's. She has not actively participated in the work at the drive-in since 1946, although until 1953 she assisted Paul Gilles in keeping petitioner's books. Since 1953 her only activity has consisted of attending the annual directors' meetings and advising Paul300 Gilles in regard to problems encountered in the business. The compensation which she received from the petitioner through the years was as follows: YearsSalaryBonus1942-0--0-1943$ 900-0-1944-452,550-0-1946-491,200-0-1950-521,200$1001953-541,2005001955-651,800500The $600 increase in salary in 1955 was approved unanimously by petitioner's board of directors and was prompted by the consideration that her age would prevent her inclusion under petitioner's pension plan when it became effective. The amounts of $1,800 in salary and $500 in bonus paid by petitioner to Celia Gilles for the taxable years 1963, 1964, and 1965 were approved unanimously by petitioner's board of directors. In its income tax returns for each of the taxable years 1963, 1964, and 1965 the petitioner deducted as compensation paid to Celia Gilles the amount of $2,300. 315 In the notice of deficiency the respondent determined that for each of the taxable years in question the amount of $100 per year constituted reasonable compensation for Celia Gilles and disallowed as a deduction the amounts claimed in excess thereof. A reasonable allowance301 for each of the taxable years 1963, 1964, and 1965 for salary or other compensation for services rendered by Celia Gilles is $700. Robert Linscott has been employed by petitioner for approximately 20 years. Throughout the years in question he acted as petitioner's assistant manager and his primary duties consisted of assisting Paul Gilles in the operation of petitioner's business. His workload was approximately 60 hour a week. During the years in question he received the following amounts from petitioner in salary and bonus: YearSalaryBonus1963$9,887.40$1,000.0019649,091.712,000.0019659,393.702,500.00The above amounts were claimed by the petitioner as deductions, and in the notice of deficiency the respondent raised no question with respect to the deductibility thereof. Petitioner's drive-in building has an aluminum canopy which, in the course of time, becomes oxidized. In 1963 petitioner paid $824.87 to have the canopy cleaned and coated with a plastic finish. Soap and water and an abrasive were used to clean the canopy after which the finish was applied with a brush. The work did not involve any alteration to structural parts of the302 drive-in buildings, nor was it done to prolong its useful life. It was not part of a general remodeling or redecoration of the drive-in. The cleaning and application of the finish served only to maintain the drive-in building in an efficient operating condition. While the finish carried a 5-year guarantee to retain its appearance and protective properties, within 2 years after the work was completed the condition of the canopy was approximately the same as before such work was done. In its return for the taxable year 1963 petitioner claimed the amount of $824.87 as a repair expense. In the notice of deficiency the respondent determined that the above expenditure constituted a capital expenditure rather than a deductible expense, and allowed depreciation deductions for the years in question based upon an estimated useful life of 5 years. Throughout the years in question Paul Gilles used his automobile in connection with petitioner's business. Although no contemporaneous records were kept of the mileage driven for business purposes, it has been stipulated that the automobile was driven 3,545 miles in 1963, 3,169 miles in 1964, and 3,150 miles in 1965 in making deliveries of frozen303 custard to petitioner's wholesale customers. During each of the years in question the automobile was also used to make retail deliveries, to transport merchandise and employees of petitioner, and to make trips to petitioner's bank and bookkeeper. During each of the years in question the automobile was also used by Paul Gilles to make trips to Chicago to attend dairy and restaurant conventions and for trips in 1964 to Highland Park and in 1965 to Waukegan to examine new equipment. In addition to its use for making wholesale deliveries, the automobile was used for the above-described business needs of petitioner to the extent of approximately 5,591 miles in 1963, 6,727 miles in 1964, and 7,036 miles in 1965. During the years in question the total mileage related to petitioner's business was approximately 9,136 miles in 1963, 9,896 miles in 1964, and 10,186 miles in 1965. Approximately 75% of this mileage was driven by Paul Gilles and the remainder was driven by other employees of petitioner. In the taxable years 1963, 1964, and 1965 the petitioner paid Paul Gilles the respective amounts of $1,100, $1,213.75, and $1,253.09 and in its returns deducted such amounts as representing reimbursements304 of auto expenses incurred on behalf of the corporation. In the notice of deficiency, the respondent allowed petitioner $500 as auto expenses in each of the years 1963-1965 and disallowed the remainder with the notation that "it has not been established that the amounts in excess of amounts shown as being allowable constitute ordinary and necessary business expense or were expended for the purpose designated." In the notice of deficiency mailed to Paul and Faythe Gilles, the respondent determined that the disallowed portion of the automobile expense reimbursements constituted dividend income to Paul Gilles. Opinion The principal issue relates to the reasonableness of the amounts claimed by petitioner as deductions as compensation of Paul and Celia Gilles for the taxable years 1963, 316 1964, and 1965. Section 162(a) of the Internal Revenue Code of 19545 provides for the deduction of all ordinary and necessary business expenses, including a reasonable allowance for salaries or other compensation for personal services actually rendered. 305 The total amount of compensation paid to Paul Gilles (salary, bonus, insurance premiums, and pension plan contributions) and deducted by petitioner for those years was $35,789.25, $35,787.19, and $45,782.34, respectively. The respondent determined that a reasonable allowance for compensation of Paul Gilles for those years was $20,069.08, $20,071.30, and $20,005.18, respectively, and disallowed amounts claimed in excess thereof. The burden of proving the amount of reasonable compensation rests upon the petitioner. Clinton Co. v. Commissioner, (C.A. 7) 159 F. 2d 102, affirming a Memorandum Opinion of this Court. See also Walker v. Commissioner, (C.A. 7) 362 F. 2d 140, affirming a Memorandum Opinion of this Court and cases cited therein. The question of what constitutes reasonable compensation is one of fact to be determined from all the evidence. Huckins Tool and Die, Inc. v. Commissioner, (C.A. 7) 281 F.2d 549">281 F. 2d 549, affirming a Memorandum Opinion of this Court; and Clinton Co. v. Commissioner, supra. Among the factors to be considered are the volume of the taxpayer's business, the experience, skill, and and qualifications of the306 employee, the importance of the services which the employee performs, the amount of time the employee devotes to the business, the extent to which the employee's services contribute to the success of the business, and the standard of compensation for similar services in the industry. Consolidated Apparel Co., 17 T.C. 1570">17 T.C. 1570, aff'd. on this issue (C.A. 7) 207 F.2d 580">207 F. 2d 580. In addition, in determining whether the compensation paid is reasonable, amounts paid or contributions made on behalf of the employee by the employer to a pension plan must be taken into account. Section 404 of the Internal Revenue Code of 1954 and the regulations thereunder. 6 See also Consolidated Apparel Co., supra further, it is also clear that payments by an employer of insurance premiums on behalf of an employee constitute compensation to the employee and 317 are to be considered in determining the reasonableness of the total compensation paid. Draper Co., 5 T.C. 822">5 T.C. 822. 307 We have carefully considered all the evidence adduced in light of the above factors and have concluded that reasonable compensation of Paul Gilles (including salary, bonus, insurance premiums, and pension plan contributions) for each of the taxable years 1963 and 1964 is $30,000, and for the taxable year 1965 is $40,000. In reaching our conclusion we have accorded great weight to the fact that he acted as president, general manager, and treasurer of the petitioner and was responsible for substantially every aspect of petitioner's business, that he worked extremely long hours, and that the petitioner's success was largely due to his efforts. In addition, we have taken into consideration the testimony of a witness called by the petitioner and a witness called by the respondent, each of whom testified, in effect, that the salary and bonus paid in the years in question constituted reasonable compensation for the services rendered. We have also given some weight to the fact that although Paul Gilles, his mother, and his wife owned the controlling interest in the corporation during the years in question, the minority interest was represented on the board of directors and concurred in the308 compensation paid. The total compensation paid Paul Gilles in those years and deducted by the petitioner exceeded the amounts we have found to be reasonable by the respective amounts of $5,789.25, $5,787.19, and $5,782.34, consisting of pension plan contributions and insurance premiums paid on his behalf. Since, in our opinion, the evidence adduced does not establish that greater amounts than found by us would constitute reasonable allowances as compensation of Paul Gilles, it is our conclusion that, in addition to the pension plan contributions and the insurance premium payments, the petitioner is entitled to deduct for the taxable years 1963, 1964, and 1965 no greater amounts than $24,210.75, $24,212.81, and $34,217.66, respectively. The petitioner claimed a deduction of $2,300 for each of the taxable years 1963, 1964, and 1965 as compensation of Celia Gilles, mother of Paul Gilles. Although during the taxable years in question she retained title of assistant treasurer, the fact is that she has not been active in that position since 1953. During the years in question she did attend annual directors' meetings and she did advise Paul Gilles in regard to problems encountered in petitioner's309 business. However, there is no evidence in the record to establish that she rendered any services to the petitioner which would justify an allowance of $2,300 as compensation for her. The petitioner contends that she was undercompensated in the period from 1942 through 1945 when Paul Gilles was in the armed services. However, petitioner has failed to adduce proof of what her services were worth in those years. The respondent has allowed the petitioner a deduction of $100 for each of the years in question as reasonable compensation for her services, apparently for attending directors' meetings. We have concluded that an additional $600 per year would constitute a reasonable allowance for compensation for her. The record shows that she was voted a $600 increase in salary in 1955 because of the fact that, due to her age, she would not be eligible for the benefits of the petitioner's pension plan when it became effective. We think it clear, therefore, that the $600 was intended as retirement pay. Furthermore, considering her services to petitioner in prior years, it is our opinion that the amount of $600 paid in each of the taxable years 1963, 1964, and 1965 constituted a reasonable allowance310 as compensation for her services in such prior years. The respondent determined that the amount of $824.87 paid by petitioner in the taxable year 1963 to have the canopy over petitioner's drive-in building cleaned and coated with a plastic finish constituted a capital expenditure rather than a deductible expense. We think the respondent erred in this respect. As pointed out in section 1.162-4 of the Income Tax Regulations, the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but merely keep the property in an ordinarily efficient operating condition, may be deducted as an expense. See also Illinois Merchants Trust Co., 4 B.T.A. 103">4 B.T.A. 103. While the plastic finish carried a 5-year guarantee, the evidence establishes that this work was not done to prolong the life of the drive-in building but only to maintain it in an efficient operating condition. Nor was the work a part of any general remodeling of the drive-in. In our opinion it did not materially add to the value of the drive-in building nor appreciably prolong its life. Accordingly, we hold that the amount of $824.87 is deductible for the taxable year311 1963 as an ordinary and necessary business expense. 318 During each of the taxable years 1963, 1964, and 1965 Paul Gilles used his own automobile in making deliveries of frozen custard to petitioner's wholesale customers. It has been stipulated that in those years the automobile was driven for that purpose 3,545 miles, 3,169 miles, and 3,150 miles, respectively. The automobile was also used on behalf of petitioner to make retail deliveries, to transport merchandise and employees of petitioner, to make trips to petitioner's bank and bookkeeper, and to make other trips out of town on behalf of petitioner's business. No records were kept as to the mileage driven on behalf of the petitioner. Paul Gilles made certain estimates of the mileage driven for these additional uses on behalf of petitioner, but conceded that they were "rough" estimates. Under the circumstances we have exercised our best judgment, pursuant to the rule of Cohan v. Commissioner, (C.A. 2) 39 F.2d 540">39 F. 2d 540, and, bearing against the petitioner upon whom rests the burden of proof, have found that the automobile was used for these additional purposes of petitioner to the extent of 5,591 miles in 1963, 6,727312 miles in 1964, and 7,036 miles in 1965. Therefore, the total mileage the automobile was driven on behalf of petitioner in 1963, 1964, and 1965 was 9,136, 9,896, and 10,186, respectively. For the taxable years 1963, 1964, and 1965 Rev. Proc. 64-10, 1964-1, (Part 1) C.B. 667, and Rev. Proc. 66-10, 1 C.B. 622">1966-1 C.B. 622, provided that, in lieu of actual operating and fixed costs, the costs of operating an automobile for business purposes could be deducted if computed at a rate of 10" per mile for the first 15,000 miles of business use each year. Accordingly, petitioner is entitled to deduct for the taxable years 1963, 1964, and 1965 the respective amounts of $913.60, $989.60, and $1,018.60 paid by petitioner to Paul Gilles as reimbursement of costs of operating his automobile. The amounts which petitioner actually paid Paul Gilles as reimbursement for costs of operating his automobile in those years were $1,100, $1,213.75, and $1,253.09, respectively. The excess reimbursement paid in those years in the respective amounts of $186.40, $224.15 and $234.49 is not deductible by the petitioner. The respondent determined that to the extent amounts paid by petitioner313 to Paul Gilles as reimbursement exceeded his costs of operating the automobile on petitioner's behalf, such excess constituted dividend income to Paul Gilles. We agree. Such excess reimbursement represented payments by petitioner of the personal expenses of Paul Gilles. In view of the fact that petitioner had sufficient earnings and profits, we accordingly hold that Paul Gilles was in receipt of dividend income in each of the taxable years 1963, 1964, and 1965 in the respective amounts of $186.40, $224.15 and $234.49. See Irving Sachs, 32 T.C. 815">32 T.C. 815, affd. (C.A. 8) 227 F.2d 879">227 F. 2d 879, certiorari denied 364 U.S. 833">364 U.S. 833, and cases cited therein. Decisions will be entered under Rule 50. Footnotes2. Throughout its history, petitioner has paid dividends as follows: ↩YearsTotal Divi-OutstandingDividendsPaiddends PaidSharesper share1939$ 520.00520$ 1.0019401,820.005203.5019412,860.005205.501942520.005201.0019431,560.005203.0019442,600.005205.0019452,600.005205.0019465,220.0052210.0019475,220.0052210.001948$ 7,830.00522$ 15.00194910,440.0052220.00195010,440.0052220.00195110,440.0052220.00195210,440.0052220.001953 -0-522-0-1954-0-522-0-19551,305.005222.501956-0-522-0-1957-0-522-0-1958261.00522.503. Prior to the years in question, Paul Gilles received the following amounts from petitioner in salary and bonus: ↩YearsSalaryBonus1938$ 1,610-0-19392,420-0-1940-433,000-0-1944-454,000-0-194610,000-0-194710,000$ 2,500194710,000$ 2,500194812,5002,500194915,0002,5001950-5215,0003,500195315,00015,0001954-5624,0006,0001957-6024,000-0-1961-6224,0006,0005. Section 162(a) provides in part as follows: SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including - (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; Section 1.162-7 of the Income Tax Regulations provides in part as follows: Compensation for personal services. (a) There may be included amoung the ordinary and necessary expenses paid or incurred in carrying on any trade or business a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. Section 1.162-9 of the Income Tax Regulations provides in part: Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. * * ↩6. Section 404 provides in part as follows: DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN. (a) General Rule. - If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income); but, if they satisfy the conditions of either of such sections, they shall be deductible under this section * * Section 1.404(a)-1(b) of the Income Tax Regulations provides in part as follows: In order to be deductible under section 404(a), contributions must be expenses which would be deductible under section 162 (relating to trade or business expenses) or 212 (relating to expenses for production of income) if it were not for the provision in section 404(a) that they are deductible, if at all, only under section 404(a). Contributions may therefore be deducted under section 404(a) only to the extent that they are ordinary and necessary expenses during the taxable year in carrying on the trade or business or for the production of income and are compensation for personal services actually rendered. In no case is a deduction allowable under section 404(a)↩ for the amount of any contribution for the benefit of an employee in excess of the amount which, together with other deductions allowed for compensation for such employee's services, constitutes a reasonable allowance for compensation for the services actually rendered. What constitutes a reasonable allowance depends upon the facts in the particular case. * * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620505/	Arnold F. Heiderich and Irma L. Heiderich, Petitioners, v. Commissioner of Internal Revenue, Respondent. Henry A. Ramey and T. Lucille Ramey, Petitioners, v. Commissioner of Internal Revenue, RespondentHeiderich v. CommissionerDocket Nos. 34209, 34210United States Tax Court19 T.C. 382; 1952 U.S. Tax Ct. LEXIS 26; December 4, 1952, Promulgated 26 Decisions will be entered under Rule 50. In 1943 petitioners, sole stockholders of a corporation, received liquidating dividends on its dissolution and properly paid capital gains tax thereon. In 1947 petitioners, as transferees of the assets of the liquidated corporation, paid certain tax deficiencies which had been determined against the corporation. Held, that the 1947 payments must be treated as capital losses and not ordinary losses. Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6. 27 David Beck, Esq., for the petitioners.John J. Hopkins, Esq., for the respondent. Hill, Judge. HILL 382 The respondent determined deficiencies in income tax against the petitioners as follows:YearPetitionerDeficiency1947Arnold F. and Irma L. Heiderich$ 5,855.541947Henry A. and T. Lucille Ramey6,336.04These cases were consolidated for hearing. The parties have entered into a stipulation with respect to certain adjustments made by the respondent in arriving at his determination. This stipulation will be given effect upon recomputation of any tax liability of the petitioners under Rule 50 of the Rules of Practice before The Tax Court of the United States.The only issue remaining for our decision is in fact an identical claim of overpayment presented in each petition and this issue concerns the question whether the petitioners are entitled to deduct from gross income as ordinary losses amounts paid by them during the taxable year in satisfaction of their respective liabilities as transferees of the assets of a liquidated corporation or whether such payments are to be treated as capital losses.FINDINGS OF FACT.The facts have been stipulated28 and are so found. Only those necessary for an understanding of the issue presented are included herein.The petitioners, Arnold F. Heiderich and Irma L. Heiderich, are husband and wife who reside in Glen Ridge, New Jersey, and they duly filed their joint income tax return on the cash basis for the taxable year 1947 with the collector of internal revenue for the fifth district of New Jersey.383 The petitioners, Henry A. Ramey and T. Lucille Ramey, are husband and wife who reside in West Orange, New Jersey, and they duly filed their joint income tax return on the cash basis for the calendar year 1947 with the collector of internal revenue for the fifth district of New Jersey.Prior to September 30, 1943, the petitioners herein were the sole owners of all the issued and outstanding stock of a New Jersey corporation, the U-Drive-It Co. of Newark. On September 30, 1943, pursuant to a resolution of the board of directors, the corporation was liquidated and dissolved and all of its assets (other than the lease of the premises then occupied by the corporation) were transferred and assigned to Arnold F. Heiderich and Henry A. Ramey, as tenants in common, each to the extent of an equal29 undivided one-half share thereof. Thereafter on November 12, 1943, the lease was also assigned to them by the corporation. For the taxable year 1943, the petitioners duly reported as long term capital gains distributions which they received in liquidation of the corporation.On June 21, 1946, respondent determined deficiencies and penalties in income tax, declared value excess-profits tax, and excess profits tax against the corporation for the taxable years ended December 31, 1937, to December 31, 1942, and the taxable period January 1, 1943, to September 30, 1943, totaling $ 75,288.41, and on the same date he notified petitioners that they were liable for the amount of such deficiencies as transferees of the assets of the corporation. The parties involved filed petitions with The Tax Court of the United States. 1 Pursuant to stipulations of the parties, we entered decisions on October 31, 1947, wherein it was held that the total deficiency against the corporation was $ 14,913.45. In the year 1947 the petitioners made payment of this amount, together with interest amounting to $ 5,028.18, of which amount $ 3,595.07 covered the period from September 30, 1943, the date of liquidation, 30 through the date of payment, October 16, 1947. The parties have stipulated that this portion of the interest was fully deductible as interest by the transferees of the corporation in the amounts so paid by them. The parties also stipulated that the amounts of legal fees incurred in contesting the transferee liabilities are also fully deductible in 1947, the year in which they were paid.OPINION.Only one issue is before us and it involves the question whether there has been incurred an ordinary or a capital loss where persons who had received distributions on liquidation of a corporation (capital gains) in a later year were required to satisfy a liability of the corporation as transferees of its assets.384 Applicable sections of the Code are set out in the footnote below. 231 The Supreme Court in , affirming , reversing , held that any such loss resulting from satisfaction of transferee liability is a capital loss in the year of payment. We find no basis for a distinction between this case and the case before us. Accordingly, we hold that when the petitioners, as transferees of the assets of the liquidated corporation, paid the debt of the corporation, which included interest on the deficiency up to the date of liquidation, the tax consequence was a capital loss to the transferees in the year of payment.Decisions will be entered under Rule 50. Footnotes1. Docket Nos. 12064, 12065, 12066, 12067, and 12068.↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (b) Interest. -- All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from the taxes imposed by this chapter. * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * ** * * (g) Capital Losses. -- (1) Limitation. -- Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117. * * SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(c) Distribution in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * *SEC. 117. CAPITAL GAINS AND LOSSES.(b) Percentage Taken Into Account. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: 100 per centum if the capital asset has been held for not more than 6 months;50 per centum if the capital asset has been held for more than 6 months.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620506/	Doris Farid-Es-Sultaneh, Petitioner, v. Commissioner of Internal Revenue, RespondentFarid-Es-Sultaneh v. CommissionerDocket No. 2968United States Tax Court6 T.C. 652; 1946 U.S. Tax Ct. LEXIS 241; April 5, 1946, Promulgated 241 Decision will be entered under Rule 50. Basis -- Property Transferred Under a Prenuptial Agreement. -- A transfer of property by a prospective husband to a prospective wife pursuant to a prenuptial agreement is not a sale or exchange giving the wife a new basis for the property, but is a gift, so that the property in the hands of the wife retains the same basis as it had in the hands of the transferor. August Merrill, Esq., and Zivel B. Niden, C. P. A., for the petitioner.Clay C. Holmes, Esq., for the respondent. Murdock, Judge. MURDOCK 653 OPINION.The Commissioner determined deficiencies in the petitioner's income tax of $ 1,298.69, $ 27,758.11, and $ 706.37 for the calendar years 1937, 1938, and 1939. The respondent has conceded that the petitioner is entitled to a deduction of $ 16,000 for 1937. The petitioner presses no assignment of error except one that the Commissioner erred, in determining her profit from the sale in 1938 of 12,000 shares of S. S. Kresge Co. stock, by holding that her basis for gain or loss on that stock was the same as that of her former husband, S. S. Kresge. The facts have been stipulated.The petitioner is a citizen of the*242 United States. She filed her income tax return for 1939 with the collector of internal revenue for the third district of New York.The petitioner received 2,500 shares of S. S. Kresge Co. stock, part in December 1923 and the rest in January 1924, under a prenuptial agreement with S. S. Kresge, whom she married in April 1924. They were divorced in 1928. The petitioner received stock dividends on the stock which increased her shares many times. She sold 12,000 shares in 1938. The Commissioner held, in determining the deficiency, that her basis on the shares sold was the same as that of S. S. Kresge, adjusted for the dividends, since the transfer was a gift and she took the donor's basis.The petitioner contends that she acquired the shares for a consideration larger than the basis of the donor.The determination of the Commissioner is approved upon the authority of , and .Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620507/	William L. Frost, Petitioner v. Commissioner of Internal Revenue, RespondentFrost v. CommissionerDocket No. 2146-71United States Tax Court61 T.C. 488; 1974 U.S. Tax Ct. LEXIS 164; January 28, 1974, Filed 164 Decision will be entered for the respondent. Petitioner received a cash bonus to sign a professional baseball contract and sought to utilize the income-averaging provisions of sec. 1301 et seq. Held: Petitioner cannot utilize such provisions since he is not an "eligible individual" under sec. 1303. Sec. 1303(c)(2)(B) is not applicable since petitioner's training in college during the base period years is not work within the meaning of that provision. William L. Frost, pro se.Nicholas G. Stucky, for the respondent. Irwin, Judge. IRWIN488 Respondent determined a deficiency of $ 1,825.10 in the income tax of petitioner for the taxable year 1966.The sole issue for determination is whether petitioner was an "eligible individual" in 1966 within the meaning of section 13031 thereby entitling him to the benefit of income averaging under sections 1301 through 1305. The resolution of this issue depends upon whether the $ 15,000 bonus payment made to petitioner in 1966 by the San Francisco Giants Professional Baseball Club (hereinafter called the Giants) was income attributable to work performed by the petitioner in substantial part during two or more of the base165 period years 1962 through 1965 within the purview of section 1303(c)(2)(B).489 FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner William L. Frost resided in Berkeley, Calif., at the time his petition in this case was filed. For the taxable year 1966 petitioner filed his individual income tax return with the district director of internal revenue, San Francisco, Calif. On April 23, 1969, petitioner filed an amended Federal income tax return for the taxable year 1966 with the Internal Revenue Service Center, Ogden, Utah. That amended return constituted a timely claim for refund in the amount of $ 1,826.10. The basis for this refund claim was petitioner's contention that he was entitled to the benefit of income averaging pursuant to the provisions of sections 1301 through 1305. On or about June 6, 1969, the United States made a refund of $ 1,826.10 to petitioner.On December 166 28, 1970, the Commissioner of Internal Revenue issued a statutory notice of deficiency to petitioner determining that petitioner was not entitled to the benefit of income averaging for the taxable year 1966 and asserted the above deficiency of $ 1,825.10.Petitioner is a professional baseball player. His baseball experience began in his hometown of Ontario, Calif., where he started pitching in Little League at the age of 10. After his Little League experience petitioner continued to pitch in Ontario's Pony and Colt Leagues.Petitioner attended Chaffey High School in Ontario, graduating in 1963. During each of his academic years there petitioner played on the high school baseball team. In his senior year he was selected to the all-league team. While attending Chaffey High School petitioner was contacted by several colleges and universities, including Arizona State, UCLA, and the University of California at Berkeley (hereinafter called University of California or Cal) with respect to playing college baseball.Petitioner chose to attend the University of California and was awarded a baseball scholarship effective at the commencement of his freshman year in the fall of 1963.In the167 spring of 1964 petitioner pitched for the Cal freshman team and that summer played American Legion baseball in Ontario.In the spring of 1965 petitioner was a sophomore and pitched for Cal's varsity baseball team. At the conclusion of the season petitioner was drafted in approximately the 20th round in the annual baseball player draft by the Cincinnati Red Legs. Both the National and American Leagues hold joint selection meetings in the spring of each year at which time the member teams, on a rotating basis, select or "draft" college athletes whom they would, by league rules, have a right to employ.490 After the 1965 college draft the Cincinnati Red Legs offered petitioner a $ 12,000 bonus, a 2-year college scholarship worth $ 2,000 per year, and a $ 400-per-month contract with a Cincinnati class A farm team. This offer was rejected by petitioner and apparently no further negotiations took place.During the summer of 1965 petitioner played nonprofessional baseball for the Grand Junction Eagles Baseball Club of Grand Junction, Colo. Petitioner joined the Grand Junction team because of the excellent coach there.In the spring of 1966 petitioner was a junior at Cal and again168 played on the varsity baseball team. Petitioner had an outstanding season in 1966 and was generally considered to be the team's best pitcher. Petitioner was selected for various California all-star teams and was selected as a first-team All-American baseball player by the College Coaches of America.At the end of the 1966 college baseball season petitioner was the number one draft choice of the San Francisco Giants in a "special phase" draft. The "special phase" draft is conducted annually by the two major leagues to select players, like petitioner, who had previously been drafted but who were not signed.After the draft, contract negotiations were entered into between petitioner and the Giants. These negotiations culminated in an offer to petitioner which was accepted by him in a telegram dated June 14, 1966. 2169 The Giants, by their agent, administrative secretary John S. Schwarz, acknowledged petitioner's telegram and confirmed the agreement by telegram dated June 15, 1966. 3On June 16, 1966, petitioner entered into a written contract with the Fresno Giants Baseball Club. This ballclub is a farm team of the San Francisco Giants. Although the Fresno team was the contracting party with respect to the contract, 170 the bonus payments in question were in fact paid to petitioner by the Giants and all negotiations 491 surrounding the contract were between petitioner (and his authorized representatives) and the Giants (by its authorized representative). 4Pursuant to the terms of the contract calling for a cash bonus of $ 30,000, the Giants paid petitioner the first installment in the amount of $ 15,000 in 1966 and the final installment in the amount 171 of $ 15,000 in January 1967. The $ 15,000 installment paid in 1966 is the income which petitioner seeks to income average.The Giants' baseball club keeps its books and pays its taxes on the basis of a fiscal and taxable year ending October 31. At the time of the payment of the $ 15,000 bonus in question, the Giants, on its books and records, treated the $ 15,000 bonus as a current year's expense. Subsequently in 1968, for the purpose of reporting its Federal income tax liabilities in accordance with Rev. Rul. 67-379, 2 C.B. 127">1967-2 C.B. 127, the Giants capitalized this $ 30,000 bonus and depreciated said amount over a 48-month period beginning July 1966.While petitioner was attending Cal, he trained hard to improve his skills as a baseball pitcher. This training was year-round. Throughout these years petitioner received coaching instruction.During petitioner's sophomore and junior years he was scouted by Edward F. Montague, a talent scout for the Giants. Mr. Montague saw petitioner pitch several games in both of these years. However, it was during petitioner's junior year that Mr. Montague first recommended to the Giants that they draft the172 petitioner.This recommendation went to Carl Hubbell, who was director of player development for the Giants. Mr. Hubbell, in his capacity as director of player development, was familiar with petitioner's baseball accomplishments and was also familiar with the facts, circumstances, and negotiations surrounding the bonus contract here in question. According to his testimony all of the $ 30,000 bonus paid to petitioner was meant as an inducement for petitioner to pitch in the Giants' organization. As Mr. Hubbell explained, the amount of bonus which the Giants offer a college baseball player as an inducement to sign a player contract is based upon what the Giants feel that player will be able to contribute to the Giants' organization in future years.The Giants would not have paid petitioner anything if petitioner had not signed the contract and agreed to pitch in the Giants' organization.492 No part of the bonus was paid to petitioner simply because he developed into a good pitcher at Cal. Similarly, no part of the bonus was paid to petitioner as compensation for his pitching at Cal.Prior to the negotiations after petitioner's junior year, there was never any agreement beween173 the Giants and petitioner that the Giants would pay petitioner a bonus if he had a good college baseball career.During at least 1 of the 4 years preceding 1966, petitioner furnished less than one-half of his support. For the taxable year 1966 petitioner reported $ 18,554.35 as his adjusted taxable income, of which $ 15,000 constituted the first installment payment of the bonus here in question. Petitioner had never been married prior to 1967.OPINIONSections 1301 through 1305 provide for income averaging. In order to utilize these provisions, a taxpayer must qualify as an "eligible individual" under section 1303.The general rule to be satisfied in meeting the test of whether a taxpayer is an "eligible individual" is whether such individual has furnished at least one-half of his support during each of the 4 base period years. 5Sec. 1303(c)(1).174 The parties here have stipulated that petitioner has not satisfied the requirements of that section. Accordingly, unless petitioner falls within one of the exceptions to section 1303(c)(1), he is not entitled to average his 1966 income.In this instance the parties have further stipulated that the only possible exception available to petitioner is the exception contained in section 1303(c)(2)(B). Under that provision, a taxpayer may be an "eligible individual" even though he does not qualify under section 1303(c)(1) if more than one-half of his adjusted taxable income for the computation year is "attributable to work performed by him in substantial part during 2 or more of the base period years."Therefore, for the petitioner to prevail he must demonstrate that the $ 15,000 bonus reported on his 1966 tax return was "attributable to work performed by him in substantial part" during 2 or more of the years 1962 through 1965.It is undeniable that petitioner spent many years of toil and effort in order to improve his skills as a baseball player. These years included 1962 through 1965. It is equally true that this work culminated in the production of a salable product: the ability 175 to play baseball proficiently. It is also equally clear that if petitioner had not spent this time 493 and effort to perfect his skills as a baseball pitcher, the Giants would not have offered the bonus in issue.The real issue in this case thus turns upon the resolution of the following two questions: (1) Whether petitioner's toil and effort spent in becoming an outstanding college baseball player constituted work within the meaning of section 1303(c)(2)(B); and, if so, then (2) whether the bonus received was attributable to such work.Petitioner's argument basically is that his pitching ability is a marketable product and that this product was developed over a number of years including the years encompassed by the base period. He further contends that the sale of this product was the direct result of the work involved in developing his pitching skill. In other words, petitioner is claiming that while strictly speaking the bonus payment was designated as an inducement to sign a professional contract, in fact it was attributable to his toil and training in college as a baseball player. Implied in this contention is the argument that this toil and training constitutes work176 within the meaning of section 1303(c) (2)(B).In James B. Heidel, 56 T.C. 95">56 T.C. 95 (1971), the facts were similar to the ones here. In that case the petitioner was an outstanding football player at the University of Mississippi during the base period years. Immediately after his college career he was drafted by both the New York Jets of the then American Football League and the St. Louis Cardinals of the National Football League. The Cardinals signed Heidel and paid him a $ 50,000 bonus. The petitioner there contended that his efforts, activities, and performance in connection with his playing college football constituted work within the meaning of section 1303(c)(2)(B) and that the bonus was attributable to such work. Like this case, Heidel's contract indicated that the bonus was paid as an inducement to sign the contract. 56 T.C. at 98, 105. In that case we held that the bonus was not attributable to work performed during at least 2 of the base years.Specifically, we stated at page 106:While we might assume that petitioner's performance as a football defensive halfback at Ole Miss in 1963 and 1964 was responsible, in substantial177 part at least, for the contract he was offered by the Cardinals, it is not clear that petitioner's activities at Ole Miss qualify as "work" within the meaning of section 1303(c)(2)(B), see Wilson v. United States, 322 F. Supp. 830">322 F. Supp. 830 (D. Kan. 1971), or, even if it does, that the bonus was attributable to that work. Conversely, it would also be reasonable to assume that the Cardinals were not paying petitioner $ 50,000 for football he had played at Ole Miss, but were paying him either to sign their contract rather than sign the New York Jets contract or to play football for the Cardinals in the future.In any event the burden was on petitioner to prove that the bonus was attributable to work performed by petitioner during 1963 and 1964, and in the absence 494 of evidence indicating that the payment was for something other than stated in the contract, and in the light of our doubts that petitioner's activities at Ole Miss were the type of work intended to be covered by subparagraph (B), we conclude that petitioner has failed to carry his burden of proof, and we must decide this issue against petitioner. [Fn. omitted.]In that case we did not really178 come to grips with the issue of what constituted work within the meaning of section 1303(c)(2)(B). The fact that the bonus was paid as an inducement should not preclude a finding that it was also attributable in substantial part to work performed in the base period years.In Heidel we cited Wilson v. United States, 322 F. Supp. 830 (D. Kan. 1971), in reference to the question of whether the training involved constituted work within the meaning of section 1303(c)(2)(B). In that case a former Miss America contended that she was an "eligible individual" for income averaging under section 1303(c)(2)(B). The plaintiff there argued that her participation in beauty contests and dramatic offerings, her dramatic and modeling courses, and her modeling activities, all of which occurred prior to her Miss America title, constituted work which could be attributable to income which indirectly resulted from her being Miss America. The court there refused to accept these contentions and held that her earnings as Miss America were not attributable to her activities in the base period years. In so holding the court stated at page 832:It is no doubt true, 179 as plaintiff asserts, that it is the Miss America title and the demand for the titleholder that is indirectly responsible for the income which she receives. However, the title, except for the scholarship, provides only the opportunity to earn income. The disputed income in this case was the result of appearances on behalf of various companies and organizations, all of which were made during the period of plaintiff's reign. She was being paid for these appearances, not for winning the title of Miss America, and it is beyond dispute that if she had not made these appearances she would not have received the income at issue. Although it may be true that the plaintiff received invaluable preparation for competition in the Miss America contest through her participation in the activities previously enumerated, and that she did these with the object of becoming Miss America, the work which actually produced the income was performed only during the period of her reign, and not in the years prior to her selection as Miss America. * * It is the rule that when a statute provides an exception to the general rules governing the taxation of income, the taxpayer claiming its benefits must180 bring himself clearly within the congressional grant. United States v. Robertson, 190 F.2d 680">190 F.2d 680 (10th Cir. 1951), aff'd. 343 U.S. 711">343 U.S. 711, 72 S. Ct. 994">72 S.Ct. 994, 96 L. Ed. 1237">96 L.Ed. 1237 (1952). This she has not done. I hold that plaintiff's participation in various activities with the object of achieving the title of Miss America was not "work," within the meaning of the major accomplishment rule.While the court there flatly stated that the plaintiff's base period activities were not work within the meaning of the statute, this statement was without discussion and was unsubstantiated. In addition, 495 that case is distinguishable from petitioner's circumstance. In the Wilson case, the plaintiff's preparatory activities were aimed at obtaining the title of Miss America. The income received there was clearly attributable to her activities during her reign and not attributable to her base period activities. In petitioner's case the bonus was paid on account of his ability as a pitcher, an ability developed in part during the base period years; it was not a salary for future services. The reading of these cases181 thus sheds little light upon what constitutes work within the meaning of the statute.The regulations in this instance are of no help. See sec. 1.1303-1(c)(3), Income Tax Regs. Turning to the congressional intent in enacting the income-averaging provisions and section 1303(c)(2)(B) in particular, we find the following general comments:A general averaging provision is needed to accord those whose incomes which fluctuate widely from year to year the same treatment accorded those with relatively stable incomes. Because the individual income tax rates are progressive, over a period of years those whose incomes vary widely from year to year pay substantially more in income taxes than others with a comparable amount of total income but spread evenly over the years involved. This occurs because the progressive rates take a much larger proportion of the income in taxes from those whose incomes in some years are relatively high. The absence of any general averaging device has worked particular hardships on professions or types of work where incomes tend to fluctuate. This is true, for example, in the case of authors, professional artists, actors, and athletes as well as farmers, fishermen, 182 attorneys, architects, and others. [H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 234; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 644.]The purpose of section 1301, et seq., is thus to grant relief from the hardship otherwise resulting from the bunching of income received from personal services rendered over a long period of time. But since it is a relief statute, it is to be given "close scrutiny" and is not entitled to a liberal interpretation. The burden is on the taxpayer to show that he comes within the meaning of the statute. See Breen v. Commissioner, 328 F. 2d 58, 62 (C.A. 8, 1964), affirming a Memorandum Opinion of this Court, certiorari denied 379 U.S. 823">379 U.S. 823 (1964).Concerning section 1303(c)(2)(B) in particular we find the following statement:A second concern of this provision is that the individual be a member of the labor force in both the computation year and in the 4 base period years. It has been necessary, however, to approximate this result in some cases. The general rule provides that183 the individual and his spouse must have furnished one-half or more of his own support in each of the base period years. However, it was not intended to exclude from the benefits of the averaging provision an individual who, although in the labor force, was unemployed in part or all of the base period years. * * A second exception is provided for the individual who, although not self-supporting in the 4-year base period, nevertheless, has income 496 in the current year more than half of which is attributable in substantial part to work he has done in two or more of the base period years. This is designed to make sure that those who have performed some work of a substantial nature which occurred over a period of years will be eligible for averaging even though below the 25-year age limit. * * [H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 238; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 648.]The only other specific reference to section 1303(c)(2)(B) is found in section 211(a) of the Technical Explanation of the section in H. Rept. No. 749, 88th Cong., 1st Sess. 184 (1963), 1964-1 C.B. (Part 2) 422, where an example of its application is given:B, an unmarried U.S. citizen who was born on January 15, 1945, is a calendar-year taxpayer. B, who had no income previously and whose parents have always furnished more than 50 percent of his support, sells for a large sum in 1964 a novel which he wrote in substantial part in 1962 and 1963. The proceeds of the sale constitute more than 50 percent of B's adjusted taxable income for 1964. Accordingly, B is an eligible individual in 1964 and, if he otherwise qualifies, may choose the benefits of income averaging.Having reviewed the legislative history of the income-averaging provisions and in particular the discussion pertaining to section 1303 (c)(2)(B), we conclude that work for the purpose of that section means gainful employment during two or more of the base period years which generates income -- be it for an employer or self-employment. In this instance petitioner's many years of toil were training to become a professional baseball player. Petitioner was not paid for this effort; 6 all he could hope for was that if he trained hard enough he would become a proficient185 ballplayer and would ultimately obtain a professional contract.In the example in the Technical Explanation, the individual there was not training to become a novelist; he was in fact a novelist as evidenced by the sale of his novel. The payments there were for the finished work product, not for the training to produce that finished product.We, therefore, find that playing college baseball is not work within the purview of section 1303(c)(2)(B). Thus we need not consider the issue of whether such bonus was attributable to petitioner's performance in college. While it may186 appear that this is a deserving case for income averaging it is the prerogative of Congress, not the courts, to make such a determination.Decision will be entered for the respondent. Footnotes1. All references are to the Internal Revenue Code of 1954, as amended, in effect in 1966.↩2. The telegram read, in part, as follows:"I hereby agree to accept terms with the San Francisco Giants baseball organization as follows[:] A bonus of 30,000 dollars for signing a contract[,] 15,000 dollars payable when contract is approved by National Association of Professional Baseball Leagues and 15,000 dollars payable January sixth 1967[.] Also the incentive bonus plan plus one year college scholarship (2000) for my senior year of college[.] * "↩3. This telegram read, in part, as follows:"This will acknowledge receipt of your telegram accepting our offer of a professional baseball player contract with a club in our organization for 1966 season[.] Salary five hundred dollars month[.] Bonus for signing contract thirty thousand dollars ($ 30,000) payable as follows: A first installment of fifteen thousand dollars when contract is approved by National Association of Professional Baseball Leagues and final installment of fifteen thousand dollars ($ 15,000) on January sixth 1967 * * Understand you will report to Candlestick Park tomorrow to sign contract. * * *"↩4. The contract was on a form provided by the National Association of Professional Baseball Leagues and was entitled "Uniform Player Contract." In a space designated for "Special Covenants" the contract provided:"Player Bill Frost is to receive a cash bonus of Thirty Thousand Dollars ($ 30,000) for signing this contract, payable as follows: A first installment of Fifteen Thousand Dollars ($ 15,000) when this contract is approved by the National Association of Professional Base Ball Leagues, and a final installment of Fifteen Thousand Dollars ($ 15,000) on January 6, 1967."↩5. The base period years are the 4 taxable years immediately preceding the computation year. Sec. 1302(c)(3). The computation year is the taxable year for which the taxpayer claims the benefit of income averaging. Sec. 1302(c)(1)↩.6. We note that petitioner received a baseball scholarship while attending Cal, but we are of the opinion that these payments cannot be treated as payments (in the employment sense) for playing baseball. While it is true that an athletic scholarship is based on ability and the promise to participate in the specified sport, the purpose of the funds is to defray the educational costs of attending college and not for playing in the specified sport.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620508/	Craig Earl v. Commissioner.Earl v. CommissionerDocket No. 110850.United States Tax Court1943 Tax Ct. Memo LEXIS 286; 2 T.C.M. (CCH) 173; T.C.M. (RIA) 43247; May 25, 1943286 William J. Reinhart, Jr., Esq., 63 Wall St., New York City, for the petitioner. Walt Mandry, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: Respondent determined deficiencies in income taxes for years and in amounts as follows: YearAmount1937$1,021.7019386,362.0719395,763.63In reporting his income for the above taxable years petitioner had deducted as compensation for personal services, payments made to one Betty Brigham in the following amounts: YearAmount1937$15,601.00193829,840.93193930,121.54Respondent disallowed the deduction of each of these amounts under section 23 (a) of the Revenue Acts of 1936 and 1938, in so far as they severally exceeded the sum of $10,000 per annum, on the ground that they were unreasonable. The issue considered here is whether that action was correct. Findings of Fact Petitioner resides at Hillsdale, New York, and filed his Federal income tax returns for the taxable years with the collector of internal revenue for the Second District of New York. The form of radio program known as a question-and-answer program was originated over the Washington Station of the Columbia287 Broadcasting System in the Spring of 1936. It was suggested by John Heiney, a Washington newspaperman, and was called the "Professor Quiz" program. After a five-months' trial the results were discouraging and the Columbia Broadcasting System was about to drop the program when it was decided to give it one last tryout in New York City. Petitioner, who for a number of years prior to 1936 had been professionally engaged as a lecturer and sleight of hand artist, was living in a rooming house in New York City, in such poor financial circumstances that it was necessary for him to borrow some money for living expenses from Betty Brigham. Miss Brigham had been a concert lecturer and stage artist and had traveled and performed extensively for some years. She had thereafter worked for Artist Bureaus in Boston as the agent for talent. In such latter capacity she had acted as the agent for petitioner in procuring him engagements in line with his profession for which he paid her a commission of 30 per cent which was then and is now a customary and reasonable commission for such services in and around Boston. About the time in the Fall of 1936 when Columbia Broadcasting System discontinued the288 "Professor Quiz" program in Washington and decided to give it one last tryout in New York, the employee of Columbia who was in charge of the "Professor Quiz" program heard petitioner in an audition and offered to give him "air time" without compensation for services if he would put on the "Professor Quiz" program. Petitioner accepted. He then had to devise the format of the program. He lacked radio experience and needed help. He wrote the questions and answers for the first broadcast. It was determined that thereafter the questions and answers to be used would be selected from those submitted by the listening audience, if they could be induced to so cooperate. The "Professor Quiz" program was to be broadcast at the same time as the Jack Benny program, then the biggest half hour program in radio. In the meantime, Betty Brigham had left the theater business and was employed by Helena Rubenstein, the cosmetic firm, as head of its educational department in New York City. She, however, continued to keep in touch with some of the professional people whom she had represented, among whom was petitioner. In connection with her cosmetic educational work, she spent considerable time in New York. 289 So, in September 1936, shortly after the petitioner was invited to become "Professor Quiz" on the radio program of that name, and had accepted, he discussed the possibilities with Miss Betty Brigham and asked her if she would help him in the venture. She then agreed to do everything she could to "put the show over" for which petitioner agreed to pay her one-third of what he received. He tried out his first broadcast with her before giving it. The "Professor Quiz" program which opened in New York about the first of October 1936 was successful from the start. By the middle of October the radio audience was mailing in questions and answers for the program at the rate of 6,000 to 7,000 per week. Each one had to be read and evaluated and the best 30 to 50 questions and answers selected for use "on the air." Betty Brigham read or supervised the reading and selection of a comparatively small list from which petitioner selected those to be used on the program. The "Professor Quiz" program consisted of propounding as many of the selected questions to chosen contestants as the length of the program would permit. Great care had to be exercised not only in the choice of the questions but the290 approximate equality of the mental capacity of the contestants to answer such questions. The programs were intended to combine education and amusement in such a way as to appeal most strongly to the radio audience. Prizes were rewarded to the writers of the selected questions and to the contestants. Betty Brigham notified the contestants chosen for each program, instructed them as to what they were to do and how they were to do it. She kept the "score" on the programs by there grading each contestant upon the result of which the prizes were awarded. After the middle of October the preparation for and conducting of the "Professor Quiz" program required all the time and attention of petitioner and Betty Brigham. Petitioner has a contract with Columbia Artists Bureau and John Heiney for the life use of the name "Professor Quiz," and was the dominant individual, so far as the public was concerned, in conducting that program. In December 1936 Columbia Broadcasting System agreed to pay petitioner $100 per week as "Professor Quiz" for putting on this radio program for a period of 10 weeks. Of this amount petitioner's agent, William Gernannt, received 20 per cent and the balance was paid291 to petitioner who, in turn, paid one-third of the amount which he received to Betty Brigham. During that time the program continued to gain rapidly in popularity which correspondingly increased the work incident thereto. Soon after December the number of questions received by "Professor Quiz" amounted to twenty or thirty thousand per week. The separate room which Columbia Broadcasting System had set aside for Betty Brigham and two assistants to consider and answer became insufficient. Late in March of 1937, an advertising agency representing the Nash Kelvinator Company contracted to sponsor the program. This company agreed to pay petitioner $750 a week. Under this contract payment for each broadcast was made by its sponsor to Columbia Broadcasting System, which deducted the 10 per cent payable to its subsidiary, Columbia Artists Bureau, and paid the balance to William Gernnant, the agent of petitioner. He, in turn, deducted his agent's commission of 20 per cent and turned over the balance to petitioner who deposited the amount in his account and paid one-third for himself. His custom was to pay Betty Brigham $100 per week on account and the balance due at the end of each calendar292 year. Under this arrangement. which lasted for two years, the sponsor provided office space, essentials and the salaries of the staff and announcer, as well as the cost of the prizes. Betty Brigham and the advertising agency representing the sponsor were jointly responsible for the selection of the prize winners. The sponsor furnished the increasing number of assistants Betty Brigham required for her work in connection with the program. These assistants sometimes numbered as many as 28, who were paid from $20 to $25 per week each. Betty Brigham set up a system under which they worked, and supervised its conduct. Under this sponsorship, the program was broadcast from different cities, which required considerable traveling. On these trips Betty Brigham acted as petitioner's secretary and "buffer." She frequently represented him in speaking engagements before local clubs and organizations. About the middle of 1939 the contract with the sponsor was changed and the program "Professor Quiz" was sold as a "package." Under this arrangement the sponsor paid one lump sum to petitioner's agent, who then set up books for the program and a separate bank account from which he paid all salaries, 293 commissions, including his own, announcer's fees, cost of prizes, expenses of traveling, rent, telephone, etc., and the balance was then distributed by petitioner's agent directly, one-third to Betty Brigham and two-thirds to petitioner. Petitioner married Brigham on May 12, 1937. In October 1941 the show went off the air. The petitioner in his income tax return for the year 1937 reported on Schedule A thereof "Income from salaries and other compensation for personal services" the sum of $46,803.10 as received from the "Columbia Broadcasting Co. with payments to me through my manager William Gernannt, Tappant, N. Y.," and from such gross sum deducted as expenses of the program the sum of $26,782.10 leaving a balance of $20,021, which he reported as taxable income from salaries and other compensation for personal services. Among the expenses so deducted was the sum of $15,601, with the explanation "Betty Brigham, pursuant to contract entitling her to 1/3 my gross income." The petitioner reported the income and deductions for the years 1938 and 1939 in a similar manner. Betty Brigham in her income tax return for the year 1937 reported on Schedule A thereof "Income from salaries and294 other compensation for personal services" the sum of $15,601 with the explanation as received from "Dr. Craig Earl, known as 'Professor Quiz' pursuant to contract," and after deducting therefrom expenses of $1,200 reported the balance as taxable income from salaries and other compensation for personal services. Betty Brigham reported her income for the years 1938 and 1939 in a similar manner. The respondent in the notice of deficiency allowed the petitioner a deduction of $10,000 in each of the years 1937, 1938 and 1939 as reasonable compensation paid Betty Brigham, disallowed the balance of the claimed deductions as excessive, and rejected the contention that a partnership existed. The foregoing amounts, admittedly paid by petitioner to Betty Brigham as compensation for her services during the respective taxable years, were reasonable. Opinion Petitioner contests the action of the respondent upon two grounds. He argues (1) that the compensation he paid Betty Brigham for her services during the taxable years was reasonable when considered with the circumstances existing at the time he and she made the oral contract under which that compensation was contingently payable, and (2) 295 that he and Betty Brigham were joint venturers or partners in putting on the "Professor Quiz" radio program under that contract as a result of which relationship she was entitled to the moneys he paid her. We decide the question on the first ground, without considering the second. Section 23 (a) of the controlling Revenue Acts provides as follows: In computing net income there shall be allowed as deductions: (a) Expenses. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. Whether the contested payments as salaries to Betty Brigham by petitioner were reasonable is a question of fact. The payments here were made under a contract296 which, in effect, provided that no compensation was payable unless petitioner was paid. In the circumstances disclosed here, the receipt of any compensation by the petitioner and therefore by Betty Brigham was highly contingent. The program had already failed to go over in Washington. Petitioner was practically without radio experience and was financially embarrassed. He had nothing to lose from the venture. He needed the experience, the judgment, ability and help of Betty Brigham. She agreed to and did supply those qualities upon which, we think, a substantial part of the success of the "Professor Quiz" program rested. This agreement was made before the program had succeeded, when any success was, to say the least, highly speculative. The respondent, by his Regulations, has recognized that contingent compensation payments, such as these, require more liberality in their treatment than fixed payments. Not only that, but respondent there accepts the conclusion that the reasonableness of such a contract should be judged, not by the circumstances later revealed by the actual working out of the contract, but by those conditions which existed at its inception. Art. 23 (a)-6, Regulations297 94 and 101; section 19.23 (a)-6, Regulations 103. Having considered all such circumstances as well as the record generally, we believe and have so found that the disputed compensation payments here were reasonable, and are therefore deductible. See (Austin v. United States, 28 Fed. (2d 677; William S. Gray & Co. v. United States, 68 Ct. Cl. 480">68 Ct. Cl. 480, 35 F.2d 968">35 F.2d 968. And this conclusion is not disturbed by the fact that, some six months after the execution of the contract under which these payments were made, petitioner and Betty Brigham were married. See Anna E. Riley, 29 B.T.A. 160">29 B.T.A. 160; det. for review dismissed, 70 F.2d 1013">70 F.2d 1013; Grace Johnson Munroe, 32 B.T.A. 995">32 B.T.A. 995. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620509/	Frances Jones Clow v. Commissioner.Clow v. CommissionerDocket No. 111241.United States Tax Court1943 Tax Ct. Memo LEXIS 62; 2 T.C.M. (CCH) 982; November 3, 194362 LEECH Order LEECH, Judge: On April 14, 1943, this Court promulgated its Findings of Fact and Opinion, through Division number 6, directing that "Decision will be entered under Rule 50". On May 4, 1943, that Opinion was served on both parties, and is reported at . On June 3, 1943, petitioner filed a motion for rehearing and reconsideration which motion was, on June 4, 1943, denied. On September 15, 1943, the matter came on regularly for hearing under Rule 50 upon the proposed recomputation of the respondent and the counter-proposal by the petitioner which included a formal objection to the recomputation submitted by the respondent. The premises considered, the necessity of supplementing our Findings of Fact and Opinion heretofore promulgated, as above stated, is apparent. Wherefore, it is ORDERED: (1) That the order of denial of the above mentioned motion for reconsideration be and the same is hereby vacated; (2) That the Findings of Fact and Opinion heretofore promulgated, to which reference is hereinabove made, be and the same are hereby modified as follows: The following additional fact is found: Petitioner did not have in substance, the 63 ownership of the corpora of these trusts during the taxable years. At the end of the Opinion, just prior to the direction of the entry of the decision, shall be added the following: Respondent supports his determination on another ground, to wit: that the contested income was taxable to petitioner under section 22(a), upon the authority of . He argues this position here secondarily to his contention just discussed. We feel constrained to observe, however, that, in our opinion, there is no merit in this latter position. When we consider all of the factors here relevant to the determination of this contention, as we must do, it is not believed that petitioner remained, in substance, the owner of the corpora of these trusts during the tax years. We have so found. Consequently, there is no premise for the application of section 22(a). , and cases cited therein. (3) In all other respects, the Findings of Fact and Opinion heretofore promulgated, as above set out, shall be and remain exactly as so promulgated. (4) The parties are directed to file recomputations*64 under Rule 50 in accordance with the Opinion heretofore promulgated as herein modified.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620511/	JAMES BROWN and PHYLLIS BROWN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. CARL HAAB and JOAN HAAB, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Brown v. CommissionerDocket Nos. 1859-74 1861-74.United States Tax CourtT.C. Memo 1977-15; 1977 Tax Ct. Memo LEXIS 428; 36 T.C.M. (CCH) 77; T.C.M. (RIA) 770015; January 24, 1977, Filed 428 Held: On the facts, petitioners' horse breeding activities, carried on through their Subchapter S corporation, were conducted with a bona fide intent to make a profit. John L. Carey, for the petitioners. Mark E. O'Leary, for the respondent. BRUCE MEMORANDUM FINDINGS OF FACT AND OPINION BRUCE, Judge: Respondent determined deficiencies in Federal income taxes in these consolidated cases as follows: Docket No.YearDeficiency1859-74 1429 1969$2,870.6219703,288.241861-74 21966$1,417.2719701,922.90An analysis of the horses bred for sale and sold by Timber Trails from the inception of the corporation until October 31, 1972, is as follows: Year EndingNumber SoldTotal Sales Price10.31.717$1,105.0010.31.7273,070.00An analysis of the breeding horses which were sold by Timber Trails from the inception of the corporation until October 31, 1972, is as follows: Year EndingNumber SoldTotal Sales Price10.31.714$ 535.0010.31.7231,260.00The type of horse in which petitioners were interested and which Timber Trails undertook to breed and raise was a "working type" quarter horse. In 1967 weanlings of this type horse were selling for between $500 and $600. It was the petitioners' plan that Timber Trails would initially acquire a breeding herd of from 12 to 15 mares, from which they expected 12 or 13 foals each year. From these foals the corporation would retain one or two fillies each year and sell the remainder. Because the gestation period was 11 months and the foals required 5 or 6 months to430 wean, petitioners expected no profit within the first two years of their operation. Petitioners intended to increase the size of the breeding herd if their projection of profits from the enterprise reached fruition. With hay to be grown on the farm, and with petitioners performing most of the necessary labor, the annual cost of maintaining each horse was estimated to be between $125 and $150. At this scale petitioners expected gross receipts to exceed breeding costs by $3,000 to $4,000 a year. Timber Trails' operations were plagued with problems from the outset. Perhaps foremost in leading to its short-lived entry into the horse-breeding business was the change in market demand for the small, stocky "working type" quarter horse to the taller, leggier "racing type" quarter horse. This change in market demand from the type horse which Timber Trails bred was reflected in the prices which they brought when marketed in 1971 and 1972. In addition to the marketing problems which confronted Timber Trails, two of the mares which it owned were infertile and another couple of colts were lost. Also, an epidemic of strangles 2/ went through the herd for four or five months, requiring431 unanticipated veterinary care. During 1971, the year Timber Trails marketed its first horses, petitioners foresaw the lack of profitability in continuing their present breeding operations. As a result they decided to disband that activity and utilize the corporate facilities for boarding outside horses. At the time of trial herein Timber Trails no longer owned any horses. The gross receipts and taxable income reported on the returns of Timber Trails from the time of its inception until October 31, 1974, are as follows: Taxable Income Year EndingReportedGross Receipts10.31.67[ 754.00) $ 010.31.68(15,209.00)010.31.69(15,039.00)150.0010.31.70(21,097.00)211.0010.31.714,073.0012,407.0010.31.72(20,636.00)4,649.0010.31.732,969.0010.31.74939.00 The profit shown for the fiscal year ending October 31, 1971, is misleading, however, and was produced by two related actions. Petitioners were advised by their accountants that the Internal Revenue432 Service would require that the corporation be paid for the services rendered to the shareholders' personal animals and also that it would be in their own best interest to soon show a profit for the corporation. Consequently, at a special meeting of the board of directors of Timber Trails held on January 2, 1971, each family was assessed a charge of $5,000 for the care of their personal horses and their personal use of corporate vehicles from the time of the corporation's inception. In addition some expenses which would have been properly reportable that year were shifted to the next fiscal year. As to its overall activities in the first five complete years of operation, Timber Trails averaged $16,586 in expenses per year. A partial breakdown of these average expenses annually include depreciation of $4,765.40, interest of $3,011, feed of $1,269.80, insurance of $1,178.20, veterinary care of $717.40, shoeing and trimming of $581, fertilizer of $446.20, and breeding fees for three years of $1,127.33. Only $17 was spent directly on advertising by Timber Trails, although petitioners promoted its horses by word of mouth and some advertising costs were included in auction fees. In433 addition to their time, petitiones have invested almost $130,000 in capital and loans to Timber Trails. Respondent disallowed expenses of $12,899 and $14,567 claimed by Timber Trails for its fiscal years ending in 1969 and 1970, respectively, those amounts constituting all expenses of the corporation other than interest and taxes. Respondent's action reduced each family's undistributed loss from Timber Trails from $7,520 and $10,548 to $1,070 and $3,265 for 1969 and 1970, respectively. Respondent also disallowed an investment credit of $7.98 and $8.00 claimed in 1969 by petitioners Brown and petitioners Haab, respectively. OPINION From 1968 through 1972, petitioners conducted a horse breeding operation through their wholly-owned Subchapter S corporation, Timber Trails, Inc. Despite a reported profit for fiscal year 1971, the corporation sustained losses annually throughout the entire period. For the years before us, 1969 and 1970, respondent disallowed many of the expenses incurred by the corporation and correspondingly disallowed much of the losses and an investment credit claimed by petitioners on their individual returns. If Timber Trails' horse breeding actvities constituted434 a trade or business, then petitioners are entitled to deduct the items at issue. Whether Timber Trails was operated with the intention of making a profit is the question that we must decide. Francis X. Benz,63 T.C. 375">63 T.C. 375, 382 (1974); Margit Sigray Bessenyey,45 T.C. 261">45 T.C. 261, 273 (1965), affd. 379 F. 2d 252 (C.A. 2, 1967), certiorari denied 389 U.S. 931">389 U.S. 931 (1967). Intention is a question of fact to be determined in light of all the facts and circumstances revealed upon the record, including the taxpayers' testimony. Patterson v. United States,459 F. 2d 487, 493 (Ct. Cl. 1972). The test to be applied is not one of reasonableness but rather good faith intention or expectation of realizing a profit. Francis X. Benz,supra, at 383. 3/ Both parties have emphasized the facts and circumstances435 which they argue conclusively prove the opposite results that they urge upon us. Respondent questions the sincerity of petitioners' intent based on the plan which petitioner Carl Haab testified they envisioned for Timber Trails. Respondent points to the actual expenses incurred, an average of $16,586 in the first five years, and the recurring nature of many of those expenses, combined with an acknowledge built-in loss for the first two years, as opposed to projected receipts of $3,000 to $4,000 in excess of breeding and raising costs of 10 to 12 foals each year as proof that no profit was intended. With the advantage of hindsight, we can see the costly error made by petitioners' decision to engage in their horse breeding actvities. However, a mere objective comprison of figures is misleading. We must view this evidence in conjunction with the additional evidence that petitioners contributed considerable time and money to the enterprise, that this was their first experience with the breeding of horses, and that after they realized that they would be unable to profit from their actvity it was disbanded. Petitioners' entrance into their horse breeding activities stemmed from two436 basic factors: (1) their personal interest in registered quarter horses, and (2) in searching for a small farm to purchase where they could board their personal horses, petitioners discovered a larger farm with investment value and sufficient acreage on which to raise additional horses. It might be concluded that petitioners' personal interest in horses clouded their business judgment. However, the quality of their judgment is not the question before us. Patterson v. United States,supra, at 494. We are unable to reconcile the scale of Timber Trails' horse operation with lack of an intent to make a profit therefrom. Both Brown and Haab devoted considerable time and Labor to the construction of the corporate facilities and to the care and maintenance of the corporation's animals, the latter of which exceeded 25 in number before the horse breeding activities were abandoned. We do not think that the horse breeding endeavor can be equated with an extension of the pleasure petitioners received from their personal trail riding. We have listened to the testimony of petitioner Carl Haab and observed his demeanor. Despite the adverse inference which could be437 drawn from his testimony that due to the advice of their accountants that it would be advisable to soon show a profit certain measures were taken to do just that, his forth-rightness in revealing the evidence lends credibility to his statements of the petitioners' intent. Upon consideration of the entire record, we are convinced that the factors which corroborate petitioners' self-professed profit motive predominate. In order to reflect the concession by petitioners Brown, Decision will be entered under Rule 155 in docket No. 1859-74. Decision will be entered for the petitioners in docket No. 1861-74. Footnotes1. Petitioners James and Phyllis Brown / Strangles is an infectious febrile disease of horses, marked by congestion of mucous membranes and a tendency to form abscesses in various parts of the body.2 Petitioners Carl and Joan Haab These cases were consolidated for trial, briefing, and opinion pursuant to a joint motion of the parties on May 5, 1975. Due to a concession by petitioners Brown, the only question remaining for our determination is whether the horse breeding activities of Timber Trails, Inc., a Subchapter S corporation owned equally by all the petitioners, constituted a trade or business within the meaning of the relevant sections of the Internal Revenue Code of 1954. FINDINGS OF FACT. Some of the facts have been stipulated and they are so found. Petitioners James and Phyllis Brown are husband and wife residing in Bremen, Indiana. They filed joint Federal income tax returns for the calendar years 1969 and 1970 with the Internal Revenue Service Center at Covington, Ky. Petitioners Carl and Joan Haab are also husband and wife residing in Bremen, Indiana, and they, too, filed joint Federal income tax returns for 1966, 1969, and 1970 with the Internal Revenue Service Center at Covington, Ky. Hereinafter use of the singular person will refer to petitioner James Brown and petitioner Carl Haab. James Brown and Carl Haab became acquainted in the early 1960's, when both boarded horses at the same farm in Bremen, Indiana. Both men were trail riders and they usually transported their horses from Bremen to a state or national park in Southern Michigan or Southern Indiana, where they would ride the park trails. Among horsemen there is a substantial difference between a trail rider and a horse showman. None of the petitioners were involved with the showing of horses, although both families included several children who were involved with horse shows through their 4-H activities. In the mid-1960's Brown and Haab became dissatisfied with the boarding facilities at their present location, and they began to tour the area around Bremen for a parcel of 15 to 20 acres of land on which to board their personal horses. At that time the Browns owned two or three horses and the Haabs owned four or five horses. Although unable to find a suitable tract of 15 to 20 acres, during their search petitioners located an unimproved farm of about 60 acres situated adjacent to the Bremen city limits. The farm consisted of 20 acres of timberland and 40 acres of tillable soil, and it was located approximately one mile from each petitioner's home. Despite the fact that the acreage was in excess of that needed for boarding their personal horses, the petitioners considered that the farm's close proximity to the city limits of Bremen made it ideal as a site for a future real estate subdivision. Petitioners also considered that they would be able to sell some of the standing timber. In addition to the benefits expected from the land's appreciation in value and from the sale of timber, petitioners decided that the farm would be large enough to breed and raise registered quarter horses - the type of horses which they owned and in which they were interested. Inasmuch as neither Brown nor Haab had theretofore been involved with horse breeding, prior to embarking upon their venture with additional horses, petitioners discussed the subject with several other horsemen and horse breeders in the local area, including Larry Powell, who was National Director of the American Quarter Horse Association at the time of trial. Petitioners also retained attorney James Neu for professional advice as to the form and manner of operations. Having decided to do business in corporate form, upon Neu's recommendation, a firm of certified public accountants, Umbaugh & McQueen, was retained to advise further in the business venture. On March 30, 1967, Timber Trails, Inc., was incorporated under the laws of the State of Indiana. Timber Trails was on the accrual method of accounting for Federal income tax purposes and it reported income for each fiscal year ending on October 31. During the taxable years in issue, each of the petitioners owned a one-fourth interest in Timber Trails. Each of the shareholders is also an officer of the corporation. On November 30, 1967, the shareholders elected to have Timber Trails treated as a Subchapter S Corporation under sections 1371 and 1378 of the Internal Revenue Code of 1954. The Articles of Incorporation of Timber Trails state, in part, that the corporation may "Buy, sell, breed, rent and board horses and other animals. Train horses and other animals and give riding instructions and in general to carry on the business of operating a stable and all matters incidental thereto, including the power to buy, sell and deal generally in horse food, supplies and equipment of all and every kind of description." Timber Trails is a member of both the American and the Indiana Quarter Horse Associations.In April, 1967, petitioners made a down payment to purchase the 60-acre farm, and the contract of purchase was subsequently ratified and taken over by the corporation. During the taxable years in issue, the activities of Timber Trails were primarily conducted by the petitioners. The corporation had no other employees, although a part-time trainer was hired at one time and additional casual labor was employed from time to time. During 1969 and 1970, James Brown was employed as a vice-president of the Bremen-Gray Iron Foundry, Inc., and he devoted about 20 to 25 hours per week to the activities of Timber Trails. Carl Haab retired from his employment at Wyatt Grain Co. in 1966, although he remained as an officer and director of that corporation, and during 1969 and 1970 he worked about 20 hours per week at Bornemann Fabrics, Inc., another business in which he held an ownership interest. Also during those years Carl Haab devoted 40 to 50 hours per week to the activities of Timber Trails. One of the first activities undertaken by petitioners after purchase of the farm was to construct a horse barn. A local contractor was hired to build the outer structure, and Brown and Haab completed the inside with 25 box stalls. Timber located on the farm which was cut by Brown and Haab and hauled by them to a local sawmill was used to complete the interior work on the barn and to build fences and gates. The corporate facilities also include an open horse training area, a tack room, and a storage area. Brown and Haab also fed the horses, cleaned the barn, and planted, mowed and baled hay once their horse operation began. Brown and Haab's trail horses were moved from their former boarding place to the pasture on the farm shortly after its acquisition, but their children's horses were not moved until after completion of the barn some time in 1968. It was in November of 1967 that Timber Trails first acquired horses of its own. Haab initially contributed 4 brood mares to the corporation and Brown contributed 3 such animals, including one that was in foal. The breeding herd of Timber Trails held during and on hand at the end of each fiscal year was as follows: / In addition to the brood mares represented on this chart, Timber Trails acquired a stallion in 1969.1 / ↩Total BreedingBreeding Horses onHorses Held Year EndingHand at end of YearDuring Year10.31.670010.31.687710.31.69141410.31.70161610.31.71121810.31.727123. / Although petitioners' brief was devoted largely to analysis of the facts in relation to the regulations promulgated under section 183, Internal Revenue Code of 1954↩, both parties recognize the inapplicability of that section to the years currently before us.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620515/	GEORGE O. GRANT AND DONNA J. GRANT, ET AL. 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Grant v. CommissionerDocket Nos. 8284-79, 8285-79, 8286-79.United States Tax CourtT.C. Memo 1982-480; 1982 Tax Ct. Memo LEXIS 267; 44 T.C.M. (CCH) 893; T.C.M. (RIA) 82480; August 18, 1982. 267 Held: A deposit received by G corporation was not received as an advance payment for the sale of goods, but was received as the purchase price for shares of its stock that were purportedly issued for security purposes only. G corporation is, therefore, not required to recognize any gain or loss upon receipt of the deposit. Held further: Distributions made by G Corporation in redemption of the stock of shareholders G and T are substantially disproportionate with respect to those shareholders, within the meaning of section 302(b) (2). Held further: Shareholder T has not met his burden of proof respecting the basis of his shares of G Corporation's stock. Peter Bartlett, for the petitioners. Thomas Tomashek, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined deficiencies in petitioners' income taxes as follows: Taxable YearIncome TaxDocket No.PetitionersEndingDeficiency8284-79George O. GrantDecember 31, 1973$30,403.82and Donna J. Grant8285-79Glacier BayJanuary 31, 19744,072.00Seafoods, Inc.8286-79Harold W. TobeyDecember 31, 1970107.68and E. Maxine TobeyDecember 31, 1971269.19December 31, 197354,418.42The three dockets have been consolidated 268 for purposes of trial, briefing, and opinion. As a result of concessions by the parties, the only issues remaining for our determination are (1) whether Glacier Bay Seafoods, Inc. must treat $350,000 that it received from Young's Seafoods, Ltd. as being received as an advance payment for goods and, therefore, include the $350,000 in its gross income for its fiscal year ending January 31, 1974; and (2) whether distributions made by Glacier Bay Seafoods, Inc. to George O. Grant and Harold W. Tobey in the amount of $127,377.59 each represent distributions of dividends to them. If we find that the distributions made by Glacier Bay Seafoods, Inc. are not taxable as dividends, we must also determine whether Harold W. Tobey's shares of Glacier Bay Seafoods, Inc.'s stock had a basis of $39,874.79 as of October 3, 1973. FINDINGS OF FACT Some of the facts in these cases were stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. George O. Grant (hereinafter Grant) and Donna J. Grant, husband and wife, filed a Federal income tax return for the taxable year 1973 with the Internal Revenue Service Center, Ogden, Utah. They resided 269 in Anchorage, Alaska, at the time their petition herein was filed. Petitioners Harold W. Tobey (hereinafter Tobey) and E. Maxine Tobey filed a Federal income tax return and two Applications for Tentative Refund from Carryback of Net Operating Loss or Unused Investment Credit (Form 1045) for the taxable year 1973 with the Internal Revenue Service Center, Ogden, Utah. They resided in Anchorage, Alaska, at the time their petition herein was filed. Glacier Bay Seafoods, Inc. (hereinafter Glacier) filed a Federal income tax return for its fiscal year ending January 31, 1974, with the Internal Revenue Service Center, Ogden, Utah. It also filed an amended tax return (Form 1120X) for its fiscal year ending January 31, 1974. At the time it filed its petition herein, Glacier's principal place of business was Ouzinkie, Alaska. Glacier was organized, under the laws of the State of Alaska in February 1972, for the purposes of operating a seafood processing plant and selling seafood products. After its inception, Glacier primarily produced shrimp and also produced other seafood products. Until October 3, 1973, Glacier had 50,000 shares outstanding owned by the following individuals: Number ofName of HolderShares HeldPercentageGeorge O. Grant20,75041 1/2%Harold W. Tobey20,75041 1/2%Jane Yesenski6,00012 %Baine Cater2,5005 %50,000100 %270 Glacier handled its own domestic sales. Its foreign sales, however, were handled by Glacier Bay Seafood Sales Corporation (hereinafter Sales). At all times relevant to this case, Sales' shareholders and the number of shares held by each of them corresponded exactly with Glacier's shareholders and the number of shares held by them. Sometime after October 3, 1973, Sales become qualified as a domestic international sales corporation (DISC), under section 992. 2The primary purchaser of Glacier's shrimp products was Young's Seafoods, Ltd. (hereinafter Young), which was located in London, England. Shortly after Glacier was formed, representatives of Young indicated their interest in either acquiring ownership of Glacier's seafood processing plant or participating in its ownership. Although Glacier refused to sell any ownership interest in the plant to Young at that time, it approached Young in 1973, when the market for shrimp had declined, proposing that it acquire an interest in the plant. Young orally agreed that it would purchase 50 percent of the stock of both Glacier and 271 Sales for $350,000. Accordingly, Glacier and Young entered into a written agreement, which was dated August 17, 1973, whereby Glacier promised to repurchase and cancel all of its outstanding stock, to reissue the stock as of September 15, 1973, and to deliver a certificate in the amount of 25,000 shares, representing 50 percent of Glacier's authorized capital stock, to Young. After the agreement was executed, Young learned that if it transferred the agreed purchase price of $350,000 for Glacier's stock outside the United Kingdom, it would incur what is referred to by the parties as a "penalty" equal to 20 percent of the purchase price. No such penalty, however, would be imposed if Young transmitted the funds as a deposit for goods to be purchased. Consequently, Tobey and Marvin Frankel (hereinafter Frankel), an attorney who practiced law in Alaska and represented Young there, engaged in discussions regarding alternative means by which the funds could be transferred by Young to Glacier without the penalty being imposed. As a result of those discussions, it was agreed between Glacier and Young, by teletypes dated September 14, 1973, and September 18, 1973, that the total deposit 272 of $350,000 would be recorded on the corporation's books "as a deposit on product which is permanent and not repayable." It was further agreed by those teletypes that Glacier and Sales would "secure this deposit by issuance to [Young] of 25,000 treasury shares [each] for security purposes only and a deposit agreement insuring [Young] 50 percent of the vote, profits, dissolutionment and three members on [the] board of directors, but never as an offset against shipments to [Young]." On October 3, 1973, a formal agreement that contained substantially the same terms as were agreed upon in the teletypes was executed by Glacier, Sales, and Young. Pertinent provisions of that agreement, in which Glacier and Sales are referred to as "Glacier", are as follows: 1. In consideration of the mutual covenants contained herein, Young agrees to deposit with Glacier $350,000 on or before October 3rd, 1973, as a non-refundable deposit.2. Glacier agrees to issue to Young, for security purposes only, 25,000 shares of capital stock in each of Glacier's corporations. The parties agree that Young, holding these shares for security purposes only shall have the right to vote the shares, to profits, to participation 273 in dissolution, and all other incidents of stock ownership while this agreement is in effect. 3. The parties acknowledge that the deposit made by Young shall never be used as a credit against shipment by Glacier to Young. 4. Glacier represents and warrants that: c. Twenty five thousand (25,000) shares issued by each Glacier corporation for security purposes only shall represent 50% of the outstanding stock of each corporation; no additional shares shall be issued without unanimous consent of the Board of Directors. 5. Young acknowledges that, as of the effective date of this agreement there are to be no corporate cash balances. 6. The parties acknowledge that of the $350,000.00 deposit made by Young, the sum of $114,750.00 is to be used to acquire capital stock from certain present stockholders, and $28,600.00 is to be used to reimburse Glacier for the down payment on the boat Cloverleaf, dock hoist, and ice plant and miscellaneous equipment.8. All agreements, representations and warrantees [sic] made herein shall survive the execution of this agreement and the delivery of the shares for security purposes. 10. The certificates delivered to Young shall bear a legend [in] 274 substantially the following form: "The shares represented by this certificate may not be transferred in that they are issued for security purposes only." 11. The parties acknowledge that no capital expenditures in excess of $10,000.00 are to be made without unanimous consent of the Board of Directors. 12. The parties acknowledge that no additional capital stock of Glacier is to be issued without unanimous consent of the Board of Directors. 13. Shareholders, Cater, Grant and Tobey shall be entitled to have the right of first refusal to purchase each others stock. Such right must be exercised in writing within 30 days on the terms and conditions offered by any outside party. Young shall have the right of second refusal to purchase any such shares on the same terms as set out above. If any of the shares so offered are not accepted within the periods prescribed, the offeror shall be free from the provisions of this agreement, provided however, that if any such shares are thereafter acquired by any shareholder who is a party to this agreement, such shares shall be subject to all the provisions of this agreement. All shares of the corporation shall have endorsed the following: "The 275 shares represented by this certificate are subject to the terms of an agreement dated October 3, 1973, between Glacier and Young." Also on October 3, 1973, Glacier and Sales entered into a deposit agreement with Young, as they had agreed to do in the previously mentioned teletypes.The deposit agreement also provides that Glacier shall issue 25,000 shares of capital stock to Young "for security purposes only" and that Young shall have the right to vote such shares, the right to share in profits, the right to participate in dissolution, and "all other incidents of stock ownership while this agreement is in effect." It further provides that out of the $350,000 deposited by Young, "$114,750.00 is to be used to acquire capital stock from certain present shareholders." Upon receipt of the $350,000 from Young, it was intended that Glacier, in order to have 25,000 shares that it could then issue to Young, redeem Yesenski's 6,000 shares and Cater's 2,500 shares and also acquire shares held by Grant and Tobey. Yesenski and Cater were to receive $13.50 per share each, or $114,750 in total (8,500 shares X $13.50). Tobey had determined by "roughly pencil[ing] out some figures" that $13.50 per 276 share was a "reasonable figure" to pay for the shares of Yesenski and Cater. Yesenski, accordingly, received $81,000 from Glacier for her 6,000 shares. Cater, however, refused to sell his shares. Upon Glacier's receipt of the $350,000, Tobey and Grant received $127,377.59 each from Glacier; $16,875 of the amount received by each was received in exchange for 1,250 shares acquired by Glacier from each, which were to substitute for the 2,500 shares that were to have been acquired by Glacier from Cater. Grant computed the remaining amount to be distributed by Glacier to Tobey and to him. He computed the amount under a method which, in his opinion, reflected a formula that had been agreed upon by Young. First, he reconciled Glacier's bank accounts to determine the amount of cash in its accounts as of October 1, 1973. Then, he added to such amount the total amount of "bona fide" accounts receivable due to Glacier as of October 1, 1973, subtracted from it the total amount of accounts payable owed by Glacier as of October 1, 1973, and made further adjustments to it for the amount of certain purchases made by Glacier, at Young's direction, between August 15, 1973, and October 1, 1973. 277 As a result of Grant's computations, $110,502.59 was distributed by Glacier to each of the individual petitioners herein. Grant and Tobey on October 3, 1973, each surrendered to Glacier his stock certificate for 20,750 shares and each received a new certificate for 11,250 shares of Glacier's stock. Young, also on October 3, 1973, received a stock certificate for 25,000 shares of Glacier's stock, bearing a legend indicating that the shares were issued for security purposes only. As provided by paragraph 13 of the agreement previously set out, the following statement is inscribed on the back of the stock certificate: The shares represented by this certificate are subject to the terms of an agreement dated October 3, 1973, between Glacier and Young. As a result of the foregoing transactions, on and after October 3, 1973, Tobey and Grant held 11,250 shares each of Glacier's common stock, Cater held 2,500 shares of its common stock, and Young held its remaining 25,000 shares, allegedly for security purposes only. On October 3, 1973, a special meeting of stockholders of Glacier was held in Anchorage, Alaska. The minutes of that meeting indicate "Norman Young (Young's Seafood, Ltd.)," 278 as a shareholder of the corporation, was present. At the meeting, resignations were presented of all the former officers and directors of Glacier and an election was held for new directors to hold office until the annual meeting of stockholders. The new board of directors was composed of Norman Young, William H. Miles, Edwin D. Young, George O. Grant, Baine Cater, and Harold W. Tobey. 3At the first meeting of the new directors, also held on October 3, 1973, "it was RESOLVED, that as of the 1st day of October, 1973, Glacier Bay Seafoods, Inc.'s stockholders, including Young's Seafoods, Ltd. would share the profits from October 1st, 1973." The new directors also elected new officers, including Norman Young as vice-president. Young had an international letter of credit issued by Barclay's Bank. Each time Glacier shipped a van of products to Young, it would bring the bill of ladings relating to the shipment to its bank in Anchorage, and receive an immediate deposit to its account, through the letter of credit. Subsequent to Glacier receiving the 279 deposit of $350,000 from Young, all sales by Glacier to Young continued to be paid for by the letter of credit. Young never received for its deposit any credit against the purchase price of goods. For approximately one month in 1974, Grant engaged in negotiations with Joseph P. Llanos (hereinafter Llanos) regarding the sale of all his stock in Glacier and in Sales to Llanos. During the course of the negotiations, Llanos and his wife, who was a book-keeper, stayed at Glacier's seafood processing plant for 10 days, observing the operation of the plant and examining Glacier's books and records. Sometime in October 1974, Grant reached an agreement with Llanos respecting the sale of his stock to Llanos. On November 2, 1974, Grant and Llanos executed a document entitled "Temporary Agreement of Sale," in which Grant agreed to sell his 11,250 shares in Glacier and in Sales to Llanos. That document contains no indication as to the percent of Glacier's shares outstanding represented by Grant's 11,250 shares. Subsequently, Llanos gave the "Temporary Agreement of Sale" to his attorneys, who were members of the same law firm which represented Young, and asked them to prepare a formal stock 280 purchase agreement from it. The agreement that Llanos' attorneys composed states that Grant's 11,250 shares of Glacier and of Sales represent 45 percent of the outstanding stock of each company. Grant and Llanos executed that agreement. By letter dated February 25, 1975, Paul F. Robison, an attorney who was connected with the same law firm as Frankel, demanded on behalf of Young that Grant and Tobey return $63,385 each to Glacier. The letter stated that Tobey and Grant had each withdrawn, in October 1973, $63,385 more than the amount that was intended to be distributed to them. The demand for these funds was made because Young disagreed with the computation that Grant had made to determine the amount to be distributed. The dispute concerning the funds continued for at least 5 months. During that time, Tobey advised Young that if there was a proper accounting, he would repay any funds that he owed. From the inception of Glacier until Grant sold his shares of its stock to Llanos, Grant operated its seafood processing plant. After Llanos purchased the shares, he began to operate the plant, but then he desired to start an electrical contracting company. Consequently, he ceased 281 managing Glacier's plant. Thereafter, Glacier was unable to find competent management for the plant and, as a result, it became financially troubled. Apparently on account of Glacier's financial difficulties, Young became interested in selling the Glacier shares which it held. By letter dated August 13, 1975, Norman Young on behalf of Young advised Llanos, "As I have previously suggested to Harold Tobey, we would be prepared to sell all or part of our shareholding if this would help your situation in any way." By teletype dated August 22, 1975, Edwin Young notified Tobey that Young had commenced "discussions with a U.S.A. Company. Idea being they buy our shareholding in Glacier Bay * ." Young, however, failed to sell their "shareholding" in Glacier in August 1975. Subsequently, Tobey thought that if he could acquire all of Glacier's stock, he would be able to successfully operate its plant. In this connection, he had discussions with Young's representatives respecting Young exchanging the shares held by it for a debenture issued by Glacier. On October 2, 1975, Young and Glacier executed a written agreement in which Young promised to surrender its shares of Glacier stock in 282 exchange for a debenture in the amount of $350,000, plus interest at the rate of 6 percent. The legal department of Young's parent company objected to the agreement on the ground that it contained a provision which suggested that there was a responsibility on the part of Glacier's shareholders to insure that its creditors were paid. 4 The agreement therefore, was revised so as to eliminate that provision. The new agreement was signed by Norman W. Young on behalf of Young. The following provisions appear in both the original and revised agreements: WHEREAS, a substantial shareholder, HAROLD W. TOBEY, has outlined a program for restructuring and refinancing Glacier Bay in such manner as to put said company on a sound financial and operating basis, pursuant to which he has secured options to purchase all other outstanding shares of common stock of Glacier Bay, save and except those currently owned by Young's, and WHEREAS, the aforesaid restructuring plan will require a change in relationship of the parties 283 hereto, if such plan is to be successful; THEREFORE, based upon the mutual promises, covenants and considerations, heretofore and hereafter expressed, the parties agree: 1. Young's shall tender to Glacier Bay all of its outstanding shares in Glacier Bay, and does hereby renounce its equity interest in the said company, other than its right to participate as may be hereinafter set forth. Before the shares held by Young were actually converted to a debenture, a fire occurred at Glacier's plant "which resulted in almost a total loss" of it. When Young learned about the fire, it reneged on the above agreement. Glacier, on its tax return for the fiscal year ending January 31, 1974, did not treat the $350,000 received by it from Young's as taxable income. Respondent determined that the $350,000 represented prepaid income for future sales and increased Glacier's taxable income accordingly. On the joint Federal income tax return which he filed for the year 1973 Tobey reported the $127,377.59 that he received from Glacier as being received in exchange for his stock as follows: DescriptionDateDateGross SalesLong-termof PropertyAcquiredSoldPriceBasisCapital Gain9,500 shs.2/7210/73$127,377.59$30,000$97,377.59Glacier BaySeafoodsRespondent 284 determined that the entire $127,377.59 received by Tobey was taxable as ordinary income, rather than as long-term capital gain, on the ground that the distribution made by Glacier was a dividend. Respondent also determined that the distribution by Glacier to Grant was a dividend, which was taxable as ordinary income, and was, therefore, incorrectly reported by him as long-term capital gain. Based on that determination, he increased Grant's taxable income for the year 1973 by $82,026.59, computed as follows: Cash distribution$127,377.59Gain reported5285 $90,503.00Less Section 1202 deduction45,252.0045,251.00Dividend adjustment before dividend exclusion$ 82,126.59Dividend exclusion100.00Increase in taxable income$ 82,026.59 Tobey now contends that as of October 3, 1973, the basis of his stock was $39,874.79. In this connection, he offered the testimony of Phillip Cowart (hereinafter Cowart), a certified public accountant, who had worked with Glacier's books of account from approximately 1975 until 1978. Cowart neither maintained Glacier's books of accounts nor conferred with those who did so. He testified that from examining certain pages of Glacier's general journal, general ledger, and cash receipts journal, he concluded that Tobey's basis for his stock, as reflected by the corporate records, was either $26,674.47 or $39,874.79. Copies of the pages upon which Cowart relied in attempting to determine the basis of Tobey's stock have also been submitted to show its basis. OPINION The issues remaining for our decision are whether the $350,000 payment that Glacier received from Young was 286 an advance deposit for goods, which must be included in its taxable income for its fiscal year ended January 31, 1974, and whether the distributions in the amount of $127,377.59 received from Glacier by Tobey and Grant are taxable to them as dividends. If the distributions by Glacier to Grant and Tobey are not taxable as dividends, we must also determine whether Tobey has established that the basis for his shares of Glacier stock as of October 3, 1973, was $39,874.79. Young's Payment to GlacierWhere a taxpayer actually receives advance payments, over which he has unrestricted control, for the sale of goods in the ordinary course of his business, such payments are includable in his gross income upon their receipt. S. Garber, Inc. v. Commissioner,51 T.C. 733">51 T.C. 733, 736 (1969) (advance payments received from customers for fur garments); Hagen Advertising Displays, Inc. v. Commissioner,47 T.C. 139">47 T.C. 139, 145-146 (1966), affd. 407 F.2d 1105">407 F.2d 1105 (6th Cir. 1969) (advance payments made by customers for advertising signs). Respondent asserts that the $350,000 received by Glacier from Young was received as an advance payment for goods and is, accordingly, includable in Glacier's gross income in the year 287 in which it was received. Glacier argues that the $350,000 was not received by it as an advance deposit for the sale of goods, but, instead, was received as a contribution to its capital in exchange for an equity interest in Glacier. In support of his assertion that the $350,000 received by Glacier represents an advance deposit for goods, respondent refers us to the agreement executed on October 3, 1973, by Glacier, Sales, and Young. He particularly points to those provisions of it that indicate that Young agreed to deposit $350,000 with Glacier as a "non-refundable deposit" and Glacier agreed to issue 50 percent of its outstanding stock to Young's "for security purposes only." Respondent (after recognizing that this Court has not adopted the rule enunicated in Commissioner v. Danielson,378 F.2d 771">378 F.2d 771, 775 (3rd Cir. 1967)) argues that Glacier is bound by the terms of that agreement because it has not adduced "strong proof" to show that the substance of what transpired was different from the form of the agreement, citing Schmitz v. Commissioner,51 T.C. 306">51 T.C. 306, 316-318 (1968), affd. sub. nom. Throndson v. Commissioner,457 F.2d 1022">457 F.2d 1022, 1025 (9th Cir. 1972) and Hummel v. Commissioner,T.C. Memo 1970-341">T.C. Memo. 1970-341, 288 affd. per curiam by an unreported opinion (9th Cir. 1973 32 AFTR2d 73-5333, 73-2 USTC par. 9595). When the parties to an agreement have clearly and unambiguously set out the terms of their agreement, a party to the agreement indeed must adduce strong proof to demonstrate that the true agreement of the parties is other than the language of the written agreement indicates. Stephens v. Commissioner,60 T.C. 1004">60 T.C. 1004, 1012 (1973), affd. without opinion, 506 F.2d 1400">506 F.2d 1400 (6th Cir. 1974); Schmitz v. Commissioner,supra at 318. However, where the agreement contains ambiguities or discrepancies, the surrounding facts and circumstances must be considered to determine the substance of their agreement. Peterson Machine Tool, Inc. v. Commissioner, 79 T.C. (July 14, 1982); Ciaio v. Commissioner,47 T.C. 447">47 T.C. 447, 461 (1967). 6In the present case, the October 3, 1973, agreement contains no language expressly stating that the $350,000 received by Glacier from Young is an advance payment for the sale of goods. Rather, the agreement provides (at paragraph 3), "The parties acknowledge that the deposit made by Young shall never be used as a credit against shipment 289 by Glacier to Young." 7 Further, the agreement fails to explain specifically what the payments shall "be used as a credit against." Accordingly, this case is an appropriate one in which to consider all the evidence relating to the agreement of the parties. In looking initially to the face of the agreement, we think that respondent, by relying on the term "deposit" (in paragraph 1) therein, rests his case on a weak foundation. Although a deposit of money may be made as an advance payment for goods, deposits are frequently made for other purposes. For example, money placed in a bank or given as security for performance of a contract is ordinarily considered to be deposited. We, consequently, ascribe no significance to the term "deposit" standing alone. As noted, an advance deposit received for the sale of goods is income upon receipt. We do not believe that the amount in question was such an advance deposit. Tobey testified to the effect 290 that the deposit was never credited against the price of goods purchased by Young and that Young paid for all goods purchased from Glacier by letter of credit, and we have so found.We note that the documentary evidence submitted corroborates Tobey's testimony that the deposit was not treated as an advance payment for goods. Teletypes transmitted to Young on September 13, 1973, and September 14, 1973, by Frankel and Tobey, respectively, indicate that the deposit was not intended to be used as an offset against shipment. The teletype transmitted by Tobey states, "All sales would be handled by letter of credit as presently done." Moreover, as earlier noted, it was agreed by Young and Glacier in October 1975 that the shares held by Young would be converted into a debenture in the amount of $350,000, plus interest at the rate of 6 percent. This fact demonstrates to us that the amount of $350,000 deposited by Young was not applied against the price of goods purchased by Young, but rather was still intact in October 1975. We find that the $350,000 in question was not received as an advance deposit for goods, but, instead, as indicated infra, was received as the purchase price for the 25,000 291 shares of Glacier's stock that were purportedly issued for security purposes only. We, therefore, hold that Glacier was not required to recognize any gain or loss upon the receipt of the money, under section 1032(a). 8Distributions to Grant and TobeyAs a general rule, any distribution of property made by a corporation with respect to its stock is taxable as a dividend to the recipient, to the extent of the corporation's earnings and profits. Sections 301(a) and (c) and 316(a). Section 302(a) provides an exception to that general rule where a corporation redeems its stock. See section 302(d). If the redemption qualifies under either section 302(b)(1), (2), or (3), 9292 293 it is treated as being in part or full payment in exchange for its stock. Since stock is generally a capital asset, any gain realized on the deemed exchange will be capital gain. Section 1222. In order to qualify under section 302(b)(1), "a redemption must result in a meaningful reduction of the shareholder's proportionate interest in the corporation." United States v. Davis,397 U.S. 301">397 U.S. 301, 313 (1970). Section 368(a)(1) defines the term "reorganization" to include a recapitalization. Under section 354(a)(1) and (2), no gain or loss is recognized by a stockholder in a corporation, which is a party to the reorganization, if pursuant to the plan of reorganization his stock 294 is exchanged solely for stock "in such corporation or in another corporation a party to the reorganization." However, section 354(a)(3) provides that if such shareholder in exchange for his stock receives any other property (commonly referred to as "boot"), he must refer to section 356 to determine the tax treatment of the exchange. Gain realized on the exchange, if any, is taxable to the shareholder to the extent of the "boot" received. Section 356(a)(1). Such gain is treated as a dividend, if the exchange "has the effect of the distribution of a dividend." Section 356(a)(2). In appropriate cases, the tests enunciated in section 302 may be useful for purposes of determining whether an exchange "has the effect of the distribution of a dividend," within the meaning of section 356(a)(2). See, e.g., Wright v. United States,482 F.2d 600">482 F.2d 600, 605 (8th Cir. 1973). But cf. Shimberg v. United States,577 F.2d 283">577 F.2d 283 (5th Cir. 1978) (not applying the principles of section 302 in a case involving section 356). Since our ultimate conclusion in the present case is that no reorganization occurred, it is unnecessary for us to consider the appropriate test to determine whether the distributions in 295 question are equivalent to a dividend under section 356(a)(2). Respondent contends that the transaction, which occurred on October 3, 1973, was a recapitalization, within the meaning of section 368(a)(1)(E), whereby Young received 25,000 shares of stock in Glacier for security purposes only. Thus, as he views the transaction, Tobey and Grant each surrendered 20,750 shares of Glacier's stock, which represented 41.5 percent of its outstanding stock preceding the transaction, in exchange for 11,250 shares of its stock, representing 45 percent of its stock after the transaction, and $127,377.59 in cash; accordingly, in his view, both Tobey's and Grant's proportionate interests in Glacier were increased as a result of the transaction.He, therefore, contends that such exchange had the effect of the distribution of a dividend, under section 356(a)(2), and the cash distributed to each of them should be taxed as a dividend. 10296 Petitioners claim that Young became the owner of the 25,000 shares transferred to it on October 3, 1973, and the redemption of their shares, therefore, was substantially disporportionate, under section 302(b)(2). If, as a result of the October 3, 1973, transaction, Young did not become the owner of the 25,000 shares transferred to it, then we must decide this issue for respondent. In that event, Glacier would be regarded as the owner of the 25,000 shares, which would be treated as treasury shares, and the proportionate interests of Tobey and of Grant in Glacier would have been increased. On the other hand, if Young did become the owner of the 25,000 shares transferred to it, then we must decide this issue for petitioners. Under those circumstances, Glacier would be considered to have had 50,000 shares of stock 297 outstanding after the transaction and the distributions in redemption of Grant's stock and Tobey's stock would be substantially disproportionate, within the meaning of section 302(b)(2). 11 Thus, we must confront the question of whether Young became the owner of the 25,000 shares transferred to it. The October 3, 1973, agreement is ambiguous on this point. The recital in 298 paragraph 2 to the effect that Young shall hold "the shares for security purposes only" supports respondent's position. However, the statement in paragraph 2 indicating that Young shall have "all other incidents of stock ownership" tends to establish that the stock was sold to Young. Paragraph 4(c) also contains contradictory language. First, it refers to the 25,000 shares being issued "for security purposes only," indicating that Glacier and Sales were pledging treasury shares. Then, it states that those shares "shall represent 50 percent of the outstanding stock of each corporation." As treasury shares, the shares would not have been outstanding. Since the contract is ambiguous respecting whether the transfer of the shares to Young constituted a sale, we will look beyond the form of the agreement to all available evidence to determine whether the shares, in substance, were sold to Young.For purposes of Federal income taxation, the question of whether a person is the owner of property is a question of fact to be determined from all the facts and circumstances. Schoenberg v. Commissioner,302 F.2d 416">302 F.2d 416, 418-419 (8th Cir. 1962), affg. a Memorandum Opinion of this Court; Snyder v. Commissioner,66 T.C. 785">66 T.C. 785, 790-792 (1976). 299 In determining the owner of corporate stock, the critical factor is who has beneficial ownership of the stock as opposed to mere legal title of it. Yelencsics v. Commissioner,74 T.C. 1513">74 T.C. 1513, 1527-1529 (1980); Hoffman v. Commissioner,47 T.C. 218">47 T.C. 218, 232-233 (1966), affd. 391 F.2d 930">391 F.2d 930 (5th Cir. 1968). It is command over property and its economic benefits that constitute its beneficial ownership. Yelencsics v. Commissioner,supra.Ownership of common stock generally involves three important rights: (1) the right to vote, (2) the right to share in earnings, and (3) the right to share in net assets on liquidation.See Himmel v. Commissioner,338 F.2d 815">338 F.2d 815, 817 (2nd Cir. 1964), revg. 41 T.C. 62">41 T.C. 62 (1963). The substance of a transaction as opposed to its mere form is decisive of its tax consequences. Having considered the circumstances of the issuance of Glacier's shares to Young in light of the principles set forth in the above-cited cases, we are satisfied that in substance Young held the shares not as a mere pledgee, but as an owner. 12300 Petitioners have testified that the October 3, 1973, agreement was devised so as to avoid the "penalty" which would have been imposed by the United Kingdom if Young had received an out-right transfer of Glacier's shares. We find petitioners' explanation of the October 3, 1973 agreement credible. By the agreement, Young received precisely the same elements of ownership, other than legal title to the shares, as it would have received under the agreement executed on August 17, 1973. No documents make any reference to Young transferring funds to Glacier as an advance payment for goods or as a loan. No document limits the amount that Young is entitled to receive under the October 3, 1973, agreement from Glacier's profits or upon Glacier's dissolution or indicates that any such amounts received by Young shall 301 reduce a debt owed by Glacier to Young. No documents reflect those acts of Glacier that would constitute a default so as to permit Young to foreclose on the securities. In short, there is no evidence that the parties, in effect, intended to accomplish any different result by their October 3, 1973, agreement than by their August 17, 1973, agreement (other than avoid the "penalty"). Young clearly possessed all the attributes to stock ownership after October 3, 1973.A representative of Young, who voted the shares held by it, was present at shareholder meetings beginning on that date. Young had effective control of Glacier, since out of Glacier's six directors, three were its representatives. It was entitled to share in Glacier's profits derived on or after October 1, 1973, and to participate in its assets upon dissolution. The two October 1975 agreements, by which Young agreed to exchange the shares held by it for a debenture, also support petitioner's position. Those agreements indicate that Young was renouncing its "equity interest" in Glacier and that the Glacier stock held by Young was "owned by [it]." Considering that the legal department of Young's parent corporation reviewed 302 the original agreement and permitted the language quoted above to remain in the revised agreement, we think that such language demonstrates that Young regarded itself as owning the 25,000 shares of stock in Glacier which it held. Respondent argues that the description of Grant's percentage of ownership of the outstanding stock of Glacier and of Sales in the stock purchase agreement between Grant and Llanos totally ignores the stock held by Young and that such description, therefore, supports his position. As noted in our finding of facts, the stock purchase agreement indicates that Grant's 11,250 shares of Glacier and of Sales represented 45 percent of the outstanding stock of each company. 13304 Petitioners have, in our opinion, adduced sufficient evidence to overcome whatever negative inference may be drawn from that representation. In this connection, we are especially influenced by certain references in the October 3, 1973, agreement and the October 1975 agreements between Glacier and Young that we believe reflect their understanding as to the true character of the shares issued. In paragraph 4 of the October 3, 1973 agreement, Glacier represented that the 25,000 shares issued 303 by each corporation would represent 50 percent of the outstanding stock of each corporation. In the October 1975 agreement (at paragraph 1), Young agreed to tender to Glacier "all of its outstanding shares" in Glacier. We think that this evidence of the understanding of Glacier and Young as to the nature of the shares outweighs whatever contrary understanding as to their nature may be gleaned from the stock purchase agreement between Grant and Llanos. Having determined that Young, in substance, owned the 25,000 shares of Glacier stock that were issued to it on October 3, 1973, we hold that the distributions received by Grant and Tobey in redemption of their stock are substantially disproportionate with respect to them, within the meaning of section 302(b)(2), and therefore, are taxable as paid in exchange for their stock, section 302(a), rather than as dividends. Basis of Tobey's stock in GlacierCowart, the certified public account whose testimony Tobey submitted respecting the basis of his Glacier stock, was unable to determine, from Glacier's accounting records, whether the basis of Tobey's stock was $26,674.47 or $39,874.79. He was unable to determine the basis on account of his uncertainty as to how to treat one bookkeeping entry in the amount of $13,200.32. No evidence was submitted as to the transaction recorded by such bookkeeping entry or the transactions recorded by the other bookkeeping entries before us. The entries by themselves, although evidentiary, are not conclusive as to the basis of Tobey's stock. 305 See Dean v. Commissioner,57 T.C. 32">57 T.C. 32, 44 (1971); Inter-City Television Film Corp. v. Commissioner,43 T.C. 270">43 T.C. 270, 289 (1964). In accordance with the foregoing, we hold that Tobey has not met his burden of proving that the basis of his Glacier stock as of October 3, 1973, was $39,874.79. Rule 142(a), Tax Court Rules of Practice and Procedure.Decision will be entered for the petitioner in docket No. 8284-79.Decisions will be entered under Rule 155 in docket Nos. 8285-79 and 8286-79.Footnotes1. Cases of the following petitioners are consolidated herewith: Glacier Bay Seafoods, Inc., docket No. 8285-79 and Harold W. and E. Maxine Tobey, docket No. 8286-79.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩3. In 1973, Norman Young was the director of Young and William H. Miles was its purchasing agent. Edwin D. Young is Norman Young's brother.↩4. They apparently objected to a portion of the agreement that states, "It is the intention of the parties to operate through this agreement to insure payment of creditors * *."↩5. On the Schedule D filed with Grant's tax return for 1973, it appears as though he reported, as a result of the distribution by Glacier, long-term capital gain in the amount of $106,503. The schedule indicates that Grant had two long-term capital gains, as follows: DescriptionDateDateGross SalesLong-termof PropertyAcquiredSoldPriceBasisCapital GainCommon Stock3/7210/73$16,000$16,000Glacier Bay3/7210/73110,503$20,00090,503SeafoodsIt would appear that Grant simply reported separately those proceeds that were received by him for the 1,250 shares that he transferred to Glacier at $13.50 per share (1,250 X $13.50 = $16,875) in lieu of the shares that were to have been transferred by Cater and the amount received ($110,503) by him under the formula that allegedly was agreed upon by Young.6. See Revzin v. Commissioner,T.C. Memo. 1977-68↩.7. See Mantell v. Commissioner,17 T.C. 1143">17 T.C. 1143, 1144↩ (1952), in which it was held that a deposit made by lessees did not constitute taxable income when received by lessor (lease agreement expressly provided that the deposit was not to be applied as rent).8. SEC. 1032. EXCHANGE OF STOCK FOR PROPERTY. (a) Nonrecognition of Gain or Loss. No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation.↩9. SEC. 302(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. (B) Limitation.--This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. (C) Definitions.--For purposes of this paragraph, the distribution is substantially disproportionate if-- (i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of-- (ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time. For the purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder's ownership of the common stock of the corporation (whether voting or non-voting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value. (D) Series of redemptions.--This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not 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.↩10. In their brief petitioners assert that respondent incorrectly contends, as an alternative argument, that Grant and Tobey received for the redemption of their shares an amount exceeding the amount agreed upon by Young and that the excess, therefore, should be treated as a dividend. Although respondent previously may have made this argument, we are unable to find any place in the record where he does so. In any event, we would consider respondent to have abandoned this argument, if he made it, as he made no argument either at trial or in his brief to support it. See Duncan Industries, Inc. v. Commissioner,73 T.C. 266">73 T.C. 266, 275↩ n.8 (1979).11. After the redemption, Grant and Tobey would each own less than 50 percent (11,250 shares/50,000 shares = 22.5 percent) of the total combined voting power of all classes of stock entitled to vote. Section 302(b)(2)(B). Since before the transaction each owned 41.5 percent (20,750 shares/50,000 shares) of Glacier's sole class of outstanding stock, the redemption would be disproportionate with respect to each of them if after it each owned less than 33.2 percent (80 percent X 41.5 percent) of its outstanding stock. Section 302(b)(2)(C) and section 302(b) ("flush" language). Since after the redemption, each would own 22.5 percent (11,250 shares/50,000 shares) of its outstanding stock, the redemption would be substantially disproportionate, within the meaning of section 302(b)(2)↩, with respect to Tobey and Grant.12. Cf. Madden v. Commissioner,T.C. Memo. 1980-350, in which this Court found that the taxpayer, who had obtained shares of stock in two corporations as collateral for advances, could not, based on the facts in that case, be regarded as holding the shares only as security for the advances, but was regarded as having acquired an equity interest in the corporations. (The shares were held by the taxpayer in his name. After he received the shares, he became an officer of both corporations and became involved in their day-to-day activities.)13. Grant contends that, in fact, his 11,250 shares in each corporation represented only 22.5 percent of the outstanding stock of each company; that is, he contends that each company had 50,000 shares outstanding, since Young held 25,000 shares of each company with all incidents of stock ownership. He contends that since Llanos and his wife had conducted an examination of Glacier's books and records, they were aware that the 11,250 shares which Llanos was acquiring in each corporation represented only 22.5 percent of the outstanding stock of each corporation. At trial, Grant conjectured that the attorneys who wrote the stock purchase agreement may have used the 45 percent figure in it either inadvertently by adding together the percent of stock that he owned in Glacier and in Sales or intentionally to conceal Young's alleged ownership in Glacier.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620516/	STEPHEN J. SLATTERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. J. CAMERON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ESTATE OF ROBERT M. TIETZ, LOUISE C. TIETZ, ADMINISTRATRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Slattery v. CommissionerDocket Nos. 9312-9314.United States Board of Tax Appeals9 B.T.A. 1123; 1928 BTA LEXIS 4290; January 10, 1928, Promulgated 4290 A partnership of four members dissolved and one of the members received in exchange for his interest in the partnership and cash in a certain amount, assets of the partnership which cost the partnership more than the value of the partnership interest plus the cash. The three remaining members deducted their proportionate shares of the difference as losses. Amounts of losses determined. Franklin C. Parks, Esq., for the petitioners. M. N. Fisher, Esq., for the respondent. SIEFKIN1123 These are proceedings for the redetermination of deficiencies in income taxes for the year 1922 in the following amounts: Stephen J. SlatteryNot shown.W. J. Cameron$875.55Estate of Robert H. Tietz1,251.44Action of the respondent in disallowing as a deduction from income for 1922 of the proportionate share of each of the petitioners in a loss alleged to have been sustained jointly by all three in the disposition of certain paving contracts, is alleged as error. On motion the cases were consolidated for hearing and decision. The facts were stipulated. FINDINGS OF FACT. On January 1, 1922, the petitioners, Cameron and Slattery, 4291 were members of the partnership of W. J. Cameron & Co., of 400 Chamber of Commerce Building, Denver, Colo., doing business as contractors for paving and the like. The partnership was composed of four partners, including petitioners Cameron and Slattery, Robert H. 1124 Tietz, since deceased, whose estate is now represented in this proceeding by Louise C. Tietz, administratrix, and one J. H. Miller. The aforesaid partnership continued in business from January 1, 1922, to March 21, 1922, on which latter date Miller withdrew from the partnership. On March 21, 1922, the aforesaid partnership had among its assets certain contracts for paving representing a cost and expenditure to the partnership of $75,000 and these contracts were assigned by the partnership to Miller. In consideration of receiving these contracts from the partnership, Miller relinquished his one-fourth interest in the partnership assets which interest was estimated and agreed among the four partners to be worth $45,181.06. In addition to relinquishing his one-fourth interest in the partnership, Miller also agreed to pay to the three remaining members of the partnership the sum of $15,000 and in the event4292 of the happening of contingencies as specified in the contract hereinafter referred to, agreed to pay the further sum of $4,818.94. Miller actually paid to the three remaining members of the partnership the amount of $15,000, but he did not, and has never, paid the balance of $4,818.94. Petitioners, Slattery, Cameron and Tietz, as parties of the first part, and Miller, as party of the second part, executed an agreement providing for the withdrawal of Miller from the partnership and the settlement of his interests, such contract being as follows: CONTRACT. THIS CONTRACT, Made and Concluded this 21st day of March, A.D. 1922, by and between W. J. Cameron, Robert H. Tietz, and Stephen J. Slattery, all of Denver, Colorado, parties of the first part, and James H. Miller, of Denver, Colorado, party of the second part, WITNESSETH, that, Whereas, the parties of the first part and the party of the second part are now partners doing business under the firm name and style of W. J. Cameron & Company, and have been engaged in the general contracting business, which said partnership the parties hereto have decided to terminate; and, Whereas, the party of the second part is desirous4293 of taking over certain contracts taken in the name of said partnership, and certain property of the partnership, and withdrawing from said partnership; and Whereas, the parties of the first part are desirous of continuing a co-partnership under the firm name and style of W. J. Cameron & Company, and of continuing the business of said firm. Now, THEREFORE, in consideration of the premises, and of the mutual promises hereinafter set forth, and in further consideration of the transfers, assignment and money paid this date, it is hereby agreed by and between the parties hereto as follows: 1. That the co-partnership heretofore doing business under the firm name and style of W. J. Cameron & Company shall be this date dissolved and terminated, and settlement between the partners shall be made as hereinafter in this contract provided. 1125 2. The parties of the first part hereby sell, assign, transfer, and set over unto the party of the second part all the right, title and interest of W. J. Cameron & Company and of the parties of the first part in and to those certain contracts in writing with the State Highway Department of the State of Colorado, being known as Federal4294 Aid Projects, Nos. 129 and 133, dated September 1st and September 6th, 1921, said contracts providing for the construction of a cement pavement on Federal Boulevard from the Northern limits of the City and County of Denver in a northerly direction about eight and one-half (8 1/2) miles, also all tools and equipment purchased and used in the above contracts. 3. The parties of the first part hereby sell, assign, transfer, and set over unto the party of the second part all the right, title and interest of W. J. Cameron & Company and of the parties of the first part in that certain gravel screening plant and equipment and contract for land, said plant and said land being situated on the East side of Federal Boulevard and North of Clear Creek in Jefferson County, Colorado, and the parties of the first part agree to execute a quit-claim deed to the party of the second part of any interest in said land. 4. The parties of the first part hereby sell, assign, transfer, and set over unto the party of the second part all the right, title and interest of W. J. Cameron & Company and of the parties of the first part in and to that certain bank account known as the W. J. Cameron & Company4295 Paving account at the International Trust Company of Denver, Colorado, said account being in the sum of Five Thousand Two Hundred Twenty-five and 89/100 Dollars ($5,225.89). 5. The party of the second part agrees to pay to the parties of the first part upon the execution of this agreement the sum of Nineteen Thousand Eight Hundred Eighteen and 94/100 Dollars ($19,818.94), Fifteen Thousand Dollars upon signing of this agreement and balance upon completion of Highway contract #129 and #133, and to accept the transfers and assignments made this date by this instrument in full consideration therefor, and in full satisfaction and payment for his interest in said partnership known as W. J. Cameron & Company. 6. The party of the second part hereby does sell, assign, transfer, and set over unto the parties of the first part all his right, title and interest in and to the partnership known as W. J. Cameron & Company, and all property and business of said partnership, except the property transferred to the party of the second part by this instrument. 7. The party of the second part hereby assumes all responsibility and liability for the further performance of said contracts with4296 the State Highway Department of the State of Colorado, hereinbefore referred to, and agrees to hold W. J. Cameron & Company and the parties of the first part harmless from any claims or demands of any nature whatsoever which may arise hereafter form further operations under said contracts, and particularly to hold said W. J. Cameron & Company and said parties of the first part harmless on account of any liability which may arise by reason of the bond or bonds executed by W. J. Cameron & Company, or any of the parties of the first part, for the faithful performance of said contracts with said State Highway Department of Colorado. 8. The party of the second part hereby releases to the parties of the first part, the full and complete right to the use of the name of W. J. Cameron & Company, or any part thereof, and consents that said parties of the first part may hereafter conduct a co-partnership under said name of W. J. Cameron & Company, but without liability to the party of the second part hereafter. 1126 9. The parties of the first part agree to hold and save harmless the party of the second part from any liability whatever arising from operations, or transactions4297 of parties of the first part, or of W. J. Cameron & Company after the date of this agreement. This agreement shall be binding upon, and inure to, the benefit of the heirs, executors, administrators, and assigns of the respective parties hereto. IN WITNESS WHEREOF, the parties hereto have hereunto set their names and seals on the day and year first above written. W. J. CAMERON. (SEAL.) STEPHEN J. SLATTERY. (SEAL.) ROBERT H. TIETZ. (SEAL.) Parties of the First part.J. H. MILLER. (SEAL.) Parties of the second part.ADDENDA: The balance of payment, amounting to FOUR THOUSAND EIGHT HUNDRED EIGHTEEN AND 94/100 DOLLARS, is to be paid on or before Two Years from date, if there is a profit from the contracts of Federal Aid Projects Nos. 129 and 133, or from a future contract for the extension of Federal Boulevard paving, or from the operation of disposal of the sand and gravel plant. W. J. CAMERON. (SEAL.) STEPHEN J. SLATTERY. (SEAL.) ROBERT H. TIETZ. (SEAL.) Parties of the First part.J. H. MILLER. (SEAL.) Party of the second part.The terms of the contract were met and complied with by the parties. Miller made no profit on4298 "the contracts of Federal Aid Projects Nos. 129 and 133, or from a future contract for the extension of Federal Boulevard paving, or from the operation or disposal of the sand and gravel plants," which are referred to and contained in the aforesaid contract. In the computation of the alleged deficiency in tax of the petitioners for the taxable year 1922, the respondent has not allowed to the petitioners, nor to the partnership, W. J. Cameron & Co., the deduction of any loss on account of the transaction herein described and more specifically set forth in the contract as above. OPINION. SIEFKIN: As we construe the transaction set out in the above findings each of the three petitioners parted with a one-fourth interest in assets costing $75,000 or $18,750 each, and received (1) a twelfth interest (one-third of Miller's one-fourth interest) in the remaining assets of the former partnership; (2) a one-third interest in $15,000 cash paid by Miller; and (3) a one-third interest in a possible right to receive $4,818.94 (depending upon a future event 1127 which did not happen). We adopt the valuation placed by the parties upon Miller's interest. Based upon such value the*4299 net assets of the partnership were $180,724.24. The assets of the partnership excluding the assets sold, were thus of a value of $120,543.18, assuming that the consideration paid by Miller for the contracts was their value. Upon such basis each petitioner, at the time of the transfer, received an interest in property worth $10,045.26, cash of $5,000 and the possibility of getting $1,606.31 more. We, therefore, hold that in 1922, when the contingency governing the last item was still undetermined, each petitioner had sustained a loss of $2,098.43 which was deductible in that year. Until it was determined that each would not receive an additional payment of $1,606.31 that portion is not deductible. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620517/	APPEAL OF LOUIS KRATTER.Kratter v. CommissionerDocket No. 4723.United States Board of Tax Appeals4 B.T.A. 52; 1926 BTA LEXIS 2388; April 22, 1926, Decided Submitted November 17, 1925. 2388 Donald Horne, Esq., for the taxpayer. J. W. Fisher, Esq., for the Commissioner. 52 Before TRUSSELL and GREEN. This appeal is from a determination of a deficiency in income tax for the year 1920, in the amount of $1,279.96. The taxpayer 53 alleges that the Commissioner erred in disallowing as a deduction from gross income for the 1920 the amount of $15,000, paid by him in the year 1921 in settlement of liability incurred in 1920. FINDINGS OF FACT. The taxpayer is an individual residing at Brooklyn, N.Y. He is, and was during the year 1920, engaged in the wholesale grocery business in Brooklyn. On May 28 and June 7, 1920, the taxpayer contracted in writing to purchase from the American Sugar Refining Co., hereinafter called the Refining Company, 1,020 barrels of sugar, at 22 1/2 cents a pound, delivery to be made during the months of July to December, 1920, inclusive. The taxpayer in July, 1920, accepted and paid for under these contracts one delivery, consisting of 30 barrels of sugar. When the next delivery was sent to him a short time later he refused to accept it because the market price of sugar had declined. On two or three other2389 occasions the Refining Company attempted to deliver sugar to the taxpayer under these contracts, which the taxpayer refused to accept. Altogether, the Refining Company sent to the taxpayer four truckloads of sugar, only the first of which he accepted. The last attempt made by the Refining Company to deliver sugar to the taxpayer under these contracts was in October, 1920. Sugar began to decline shortly after the taxpayer's orders were placed, and between the time and the end of the year 1920 the price dropped from $22.50 to $4.80 a hundred pounds. It was this decline which caused the taxpayer's breach of the contracts mentioned. Each time the taxpayer refused to accept a delivery of sugar from the Refining Company he had a telephone conversation with the representative of that company in which he was warned that the Refining Company would have to sue. About two months after the first delivery he received a letter from the Refining Company to the effect that it intended to sue. After the last refusal to accept delivery of sugar, he also received a letter in which the Refining Company informed him it would sue for the balance of the difference between the contract price of the2390 sugar and the market price, and for expenses of storage etc. The taxpayer in each of his conversations with the representative of the Refining Company stated that he could not accept the sugar because it would ruin him. The total difference between the contract price and the market price of the sugar covered by the taxpayer's breach of contracts amounted to about $47,000. No record was made on the taxpayer's books of the sugar orders until sugar was delivered. Then the Refining Company was credited 54 with the amount of the shipment, and when payment was made it was charged with the amount thereof. There was, therefore, no book entry with reference to the sugar covered by the contracts referred to, except for the first delivery of 30 barrels. This was in accord with the taxpayer's usual method of handling purchases of merchandise. The taxpayer did not enter on his books the estimated loss that he would sustain under the contracts involved herein. The first entry of any kind made on his books of account in regard to this loss was in 1921, after it had been adjusted. Early in the year 1921 the taxpayer fromed a corporation, L. Kratter, Inc., which took over all of*2391 the assets of the business theretofore conducted by him and all of its liabilities, with the exception of his liability to the Refining Company under the contracts of May 28 and June 7, 1920. Subsequently, the taxpayer entered into negotiations with the Refining Company to settle his liability to that company for breach of his contracts. After negotiations the Refining Company accepted $15,000 in full settlement of the taxpayer's liability, and a written contract of settlement was entered into by L. Kratter, Emanuel Kratter, and L. Kratter, Inc., on October 24, 1921. Payment of the $15,000 was actually made by the corporation and charged to the taxpayer's personal account on the corporation's books. The taxpayer did not deduct, in his return for the year 1920, any amount on account of the loss involved therein. However, he subsequently claimed the right to deduct as a loss for the year 1920 the amount paid to the American Sugar Refining Co. under the settlement of October 24, 1921. The Commissioner refused to allow the deduction. The deficiency is $1,279.96. Order will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620518/	National Securities Series -- Industrial Stocks Series, National Securities and Research Corporation, Empire Trust Company, Trustee, Petitioner, et al., * v. Commissioner of Internal Revenue, RespondentNational Sec. Series--Industrial Stocks Series v. CommissionerDocket Nos. 19617, 19618, 19619, 19620United States Tax Court13 T.C. 884; 1949 U.S. Tax Ct. LEXIS 22; December 2, 1949, Promulgated 22 Decisions will be entered for the petitioners. Each of the petitioners is an open end investment trust whose shareholders are entitled at any time, at their option, to surrender their shares for redemption and receive the proportionate share of the underlying trust assets and net earnings to the date of surrender. During the taxable periods in question, each of the petitioners, incident to the redemption of its shares, made distributions of net earnings to its shareholders and included such sums as dividends paid in the computation of its basic surtax credit. Held, that the accumulated net earnings distributed by the petitioners during the taxable year on the redemption of shares were not "preferential dividends" within the meaning of section 27 (h) and the petitioners are entitled to include such sums as dividends paid in determining their basic surtax credits under sections 362 (b) and 27 (b) (1) of the code. Richard Y. Holcomb, Esq., for the24 petitioners.Ellyne E. Strickland, Esq., for the respondent. Arundell, Judge. ARUNDELL885 OPINION.These cases, consolidated for trial and opinion, involve the following deficiencies in income taxes:Docket No.Taxable periodDeficiency19617Aug. 1, 1944, to Apr. 30, 1945$ 86.7019618Fiscal year ended Apr. 30, 19451,962.3019619Aug. 1, 1944, to Apr. 30, 1945207.4719620Fiscal year ended Apr. 30, 19451,933.44The petitioners are unincorporated investment trusts whose Federal income tax returns for the taxable periods involved herein were filed on a cash basis with the collector of internal revenue for the second district of New York. In the case of each petitioner the following issues are presented:(1) Whether the earnings which the petitioner paid out to its shareholders on redemption of shares were preferential dividends within the meaning of section 27 (h) of the Internal Revenue Code and, therefore, not includible as dividends paid in computing its basic surtax credit allowed under sections 362 (b) and 27 (b) (1) of the code.(2) Whether the petitioner is entitled to deduct Federal stamp taxes paid by it during the taxable year upon the 25 original issue of its shares as ordinary and necessary business expenses within the meaning of section 23 (a) of the code.The facts were stipulated by the parties, and they are set out to the extent necessary for an understanding of the issues.The petitioners are "regulated investment companies," as defined in section 361 (a) of the code, which hold property in trust, invest and reinvest such property in securities, and receive dividend or interest income from the securities and capital gains from sales thereof. All of the petitioners were created under a single trust agreement, and they differ only in the nature of their assets, which consist of different types of securities. Petitioners regularly issue certificates representing shares in the property held in trust and regularly redeem the certificates under the provisions of the trust agreement. Each petitioner issues only one class of shares.As a regulated investment company, each of the petitioners is subject to tax under section 362 (b) of the Internal Revenue Code1 upon 886 its Supplement Q net income and Supplement Q surtax net income. In computing its Supplement Q net income and surtax net income there is allowed26 a credit for taxable dividends paid (exclusive of capital gains dividends) during the taxable year, which, with minor exceptions not material to the instant case, is the same as the basic surtax credit computed under section 27 (b) (1) of the code. Section 27 (h) provides that a distribution shall not be considered as dividends paid in computing the basic surtax credit unless such distribution is "pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that the former is entitled (without reference to waivers of their rights by shareholders) to such preference."27 Petitioners are so-called open end investment companies, which means that their shareholders are entitled at any time, at their option, to surrender their shares for redemption. Upon redemption, the shareholder is entitled to receive the value of the shares as determined in accordance with the provisions of the trust agreement, such value representing a proportionate share of all the assets of the petitioner whose shares are surrendered, including a portion of net income received, plus income receivable, at the date of surrender.During the taxable year, each of the petitioners redeemed a considerable number of its shares at the request of its shareholders and paid the surrendering shareholders, in addition to their proportionate share of the company's assets, their allocable portion of the net income received and receivable up to the date of surrender. The latter amounts were treated as dividends paid by each of the petitioners in computing its basic surtax credit.The respondent, however, has determined that the distributions of earnings by the petitioners upon redemption of their shares during the taxable year were "preferential dividends" within the meaning of section 27 (h)28 and, therefore, has held that those amounts may not be treated as taxable dividends paid in computing the basic surtax credit.887 The precise question presented was determined by the Circuit Court of Appeals for the Second Circuit in New York Stocks, Inc. v. Commissioner, 164 Fed. (2d) 75. In that case the Circuit Court of Appeals reversed the decision of this Court in New York Stocks, Inc., 8 T.C. 322">8 T. C. 322, and held that sums distributed by an open end trust to its stockholders upon the redemption of their shares, representing earnings for the taxable year up to the date of redemption, did not constitute preferential dividends within the meaning of section 27 (h). After careful reconsideration of the authorities, it is our opinion that the conclusion reached by the Circuit Court of Appeals represents the correct view of the subject.There, as here, the respondent contended that a distribution of earnings made incident to the redemption of the shares of those stockholders who elected to redeem without a simultaneous pro rata distribution to all other shareholders of the same series who did not redeem, resulted in29 a preferential payment of dividends within the meaning of section 27 (h). The Circuit Court of Appeals, in New York Stocks, Inc. v. Commissioner, supra, expressly rejected this argument and pointed out the obvious impossibility of requiring the petitioner to declare and pay a complete dividend every time a share was offered for redemption. The court stated that to accept respondent's argument would in effect deny the credit to a class of taxpayers which Congress by section 361 evidently intended to favor.The Circuit Court cited the report of the House Committee on Ways and Means (H. Rept. 1860, 75th Cong., 3d sess., p. 23) 1939-1 C. B. 728, 744, dealing with the Revenue Act of 1938, wherein section 27 (h) was enacted in its present form as an authoritative expression of congressional intent. That report reads in part as follows:Subsection (h) of the bill, relating to "preferential dividends", has the same purpose as section 27 (g) of the existing law * * . No dividends-paid credit should be allowed in the case of a distribution not in conformity with the rights of shareholders generally inherent in their stock-holdings, 30 whether the preferential distribution reflects an act of injustice to shareholders or a device acquiesced in by shareholders, rigged with a view to tax avoidance. * * * The committee believes that no distribution which treats shareholders with substantial impartiality and in a manner consistent with their rights under their stockholding interests, should be regarded as preferential by reason of minor differences in valuations of property distributed.In reaching its conclusion that the payments such as those paid by the petitioners herein were not preferential dividends within the meaning of section 27 (h), the Circuit Court of Appeals reasoned as follows:* * * The shareholder on selling stock of a special series gets his proportionate share of the accrued net income of those companies that make up the series. Thus one who redeems prior to a dividend date will get his pro rata share of the earnings for the period he held his shares, while he who retains 888 his stock gets the earnings over the entire period. This provides an intrinsically fair method for distributing its earnings to all its shareholders, including those who dispose of their stock during the taxable year. 31 Whether to redeem and when to redeem are determinations wholly within the province of each shareholder. Each has equal opportunity to redeem; all are treated with substantial impartiality. Hence we agree with the dissenting judges below that the distribution is not a preferential dividend within the meaning of § 27 (h).Referring to the statement of legislative policy set out above, this Court, in United Artists Theatre Circuit, Inc., 1 T. C. 424, 430, concluded that:These observations do not cover the precise issue before us, but they lend support to our conclusion that where a distribution is made available in conformity with the rights of each stockholder, where no act of injustice to any stockholder is contemplated or perpetrated, where there is no suggestion of a tax avoidance scheme, and where each stockholder is treated with absolute impartiality, the distribution is not preferential within the meaning of the statute.In our opinion, there is no discrimination in the petitioners' treatment of their shareholders in respect to their distributions of earnings incident to the redemption of their shares which would warrant the classification of32 such payments as preferential dividends within the meaning of section 27 (h).The respondent relies on the same cases here as he did in New York Stocks, Inc. v. Commissioner, supra, but we now think those cases were correctly distinguished by the Second Circuit in its reversal of that case. In May Hosiery Mills, Inc. v. Commissioner, 123 Fed. (2d) 858, the taxpayer was required to set aside a fund from its net earnings for the retirement of its preferred stock and acquired the shares to be retired by purchase in the open market. The earnings distributed incident to the redemption of those shares were sought to be deducted as a dividends-paid credit, but such a credit was denied on the ground that the distribution was preferential, as there was lacking an equal opportunity on the part of all stockholders to have their stock redeemed at the same time. In Black Motor Co. v. Commissioner, 125 Fed. (2d) 977, the dividend payments regarded as "preferential" were not made in proportion to the percentage of stock of the same class owned by each stockholder. In Forstner Chain Corporation, 45 B. T. A. 19,33 the taxpayer, pursuant to a resolution of its board of directors, offered to purchase not more than 50 shares of its preferred stock from its three shareholders at $ 450 a share. Two of the three stockholders waived their rights to redemption and payments made to the third in excess of the issued price of the stock were held to be preferential. There the agreement to repurchase its shares was entered into long after the issuance of the stock and was clearly intended to effect a preferential distribution to one of the three stockholders. The other cases relied on by the respondent are distinguishable 889 on similar grounds. Cf. Monte Glove Co., 44 B. T. A. 539; Budd International Corporation, 45 B. T. A. 737; Safety Convoy Co. v. Thomas, 139 Fed. (2d) 219.Respondent points out that the instant case is governed by the provisions of the 1942 Act rather than the earlier legislation which was considered in New York Stocks, Inc. v. Commissioner, supra, and therefore argues that that decision should not be regarded as completely controlling. However, 34 counsel have stipulated that petitioners come within similar provisions of the 1942 Act and respondent points to no changes in the later act which would suggest a different treatment of the issue than that accorded by the Circuit Court.Therefore, on the authority of New York Stocks, Inc. v. Commissioner, supra, we conclude that the distribution of earnings by the petitioners on the redemption of their shares during the taxable year were not preferential dividends within the meaning of section 27 (h) and may properly be included by the petitioners as dividends paid in computing their basic surtax credits under section 362 (b).As the decision on the first issue serves to give each petitioner a basic surtax credit greater than the net income of each, after taking into consideration all adjustments made by the respondent, including the disallowance of stamp taxes as an ordinary and necessary expense, it follows that there will be no deficiencies, and, as no net income was reported by any of petitioners and no taxes were paid by any of them at any time, it becomes unnecessary for us to pass on the second issue.Decisions will be entered for the petitioners35 . Footnotes. Proceedings of the following petitioners are consolidated herewith: National Securities Series -- Preferred Stock Series, National Securities and Research Corporation, Empire Trust Company, Trustee; National Securities Series -- Stock Series, National Securities and Research Corporation, Empire Trust Company, Trustee; and National Securities Series -- Low-Priced Bond Series, National Securities and Research Corporation, Empire Trust Company, Trustee.↩1. SEC. 362. TAX ON REGULATED INVESTMENT COMPANIES.* * * *(b) Method of Taxation of Companies and Shareholders. -- In the case of a regulated investment company which distributes during the taxable year to its shareholders as taxable dividends other than capital gain dividends an amount not less than 90 per centum of its net income for the taxable year computed without regard to net long-term and net short-term capital gains, and complies for such year with all rules and regulations prescribed by the Commissioner, with the approval of the Secretary, for the purpose of ascertaining the actual ownership of its outstanding stock:(1) Its Supplement Q net income shall be its adjusted net income (computed by excluding the excess, if any, of the net long-term capital gain over the net short-term capital loss, and without the net operating loss deduction provided in section 23 (s)) minus the basic surtax credit (excluding capital gain dividends) computed under section 27 (b) without the application of paragraphs (2) and (3). For the purposes of this paragraph the net income shall be computed without regard to section 47 (c).(2) Its Supplement Q surtax net income shall be its net income (computed by excluding the excess, if any, of the net long-term capital gain over the net short-term capital loss, and without the net operating loss deduction provided in section 23 (s)) minus the dividends (other than capital gain dividends) paid during the taxable year increased by the consent dividends credit provided by section 28. For the purposes of this paragraph and paragraph (5) the amount of dividends paid shall be computed in the same manner as provided in subsections (d), (e), (f), (g), (h), and (i) of section 27 for the purpose of the basic surtax credit provided in section 27↩. For the purposes of this paragraph the net income shall be computed without regard to section 47 (c).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620519/	SHELDON P. BARR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBarr v. CommissionerDocket No. 30270-86United States Tax CourtT.C. Memo 1995-120; 1995 Tax Ct. Memo LEXIS 116; 69 T.C.M. (CCH) 2155; March 22, 1995, Filed 116 Decision will be entered under Rule 155. Sheldon P. Barr, pro se. For respondent: Nancy M. Vinocur and John Aletta. DAWSONDAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was heard by Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7443A(b)(4) 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 JUDGE DINAN, Special Trial Judge: Respondent determined a deficiency in petitioner's Federal income tax and additions to tax for the year 1982 as follows: Additions to Tax andAdditional InterestYearDeficiencySec. 6659Sec. 6661Sec. 6621(d)1982$ 183,368$ 12,422$ 14,195120% of the adjusted ratedue on $ 7,133In addition, by 117 amendment to answer filed December 21, 1993, respondent asserted additions to tax pursuant to section 6653(a)(1) and (2), and an increased addition to tax pursuant to section 6661. On February 8, 1988, the parties filed a Stipulation of Settlement pertaining to some issues. The issues remaining for decision are: (1) Whether petitioner is entitled to claim a partnership loss, an investment tax credit, and a business energy investment credit because of his alleged participation as a limited partner in Nutmeg Associates #2 Limited Partnership (Nutmeg 2); (2) whether petitioner is liable for additions to tax pursuant to sections 6659 and 6661; (3) whether petitioner is subject to the provisions of section 6621(d) which is now section 6621(c); (4) whether petitioner is liable for additions to tax pursuant to section 6653(a)(1) and (2); and (5) whether petitioner is liable for an increased addition to tax pursuant to section 6661. The burden of proof is on respondent with regard to issues (4) and (5) which constitute new matter raised by respondent in an amendment to answer. Rule 142(a). FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of fact and accompanying118 exhibits are incorporated herein by this reference. Petitioner resided in Baldwin, New York, when he filed his petition in this case. In 1982, petitioner was a practicing attorney in the law firm of Barr & Bell, 370 Seventh Avenue, New York, New York. In 1981, petitioner caused to have incorporated a firm called Enersonics. He was the secretary of the firm. Enersonics advertised itself to be the manufacturer of an "Energy Brain" but, in fact, Enersonics had no manufacturing facilities. Its address was 370 Seventh Avenue, New York, N.Y., the location of petitioner's law firm. Enersonics did, however, purchase Energy Brains from Frank Leja, who manufactured Energy Brains in Massachusetts at a firm known as CS&M. The Energy Brain is a microprocessor which is programmed to transmit energy savings directives to the energy-consuming equipment being utilized. The unit controls and monitors energy input for heating, air conditioning, and electrical usage. The Saxon Energy Corp. (Saxon) was incorporated in 1981 and was established to purchase from Enersonics the systems obtained by Enersonics from CS&M. Saxon would then lease the energy systems to third parties. Archibald U. Braunfeld, 119 a certified public accountant, was chairman of the board of Saxon. Saxon's address was 21 East 40th Street, New York, N.Y, which was the office of a certified public accounting firm named Braunfeld & Davitian. Petitioner actively participated in the business affairs of Saxon. In October 1982, Enersonics and Saxon entered into an agreement (the agreement) which provided that Enersonics would sell exclusively to Saxon all of the energy conservation systems manufactured 2 by it for the period beginning October 1982 and ending December 31, 1984. Saxon agreed that it would not purchase, sell or lease energy conservation systems or equipment manufactured by any other supplier. The agreement provided that the purchase prices for the various systems and the terms of payment were as follows: a. System 1 - $ 80,000.00 payable as follows: $ 4,000 payable upon ordering of the equipment and the balance by a 25-year note. b. System 2 - $ 240,000.00 payable as follows: $ 11,450.00 payable upon ordering of the equipment and the balance by a 25-year note. c. System 3 - $ 480,000 payable as follows: $ 22,900.00 payable upon ordering of the equipment and the balance by a 25-year note. d. 120 System 4 - $ 720,000 payable as follows: $ 34,320.00 payable upon order of the equipment and the balance by 25-year note. e. System 5 - $ 960,000 payable as follows: $ 45,800.00 payable upon ordering of equipment and the balance by a 25-year note. A brochure provided by Saxon to potential lessees of its energy systems stated, inter alia: MARKETING OF THE SYSTEM The Lessee will be responsible for the (sic) marketing the energy savings produced by the system. The Lessee may retain a qualified service company to locate a potential user on behalf of the Lessee. However, the Lessee is free to do his own marketing if he so desires. Installation of the system at the site designated by the Lessee, and service maintenance for the first 12 months are included in the Lease rental and will be arranged for by SEC[;] thereafter, said functions become the responsibility of the Lessee. 121 There are service companies available who will perform the functions of placing the system[,] maintaining it, and collecting the users payments, as well as auditing users['] savings for a fee of approximately 15% of Lessee's receipts from the user of the system. * * * DESCRIPTION OF THE "ENERGY BRAIN" The Energy Brain is a computer system which consists of an intelligent computer "cycle type heating control timer." The brain's time computer controls a building's heating system, based upon actual heat loss for a given outdoor temperature. It computes the required "On Time" in percentages of a full heating cycle, and varies the "On Time" with the changing outdoor conditions. The Brain is fed information from Transmitting (sensing) devices which are a part of the system, relating to temperature and outdoor conditions which transmitters, format (sic) into form for the computer to act upon. With this information, the computer through an Interfacing Unit regulates the heating plant in the building. The "Energy Brain" will provide for the minimum necessary heating and most efficient operation of the users['] heating plant to keep the temperature at a comfortable level for the occupants122 of the building. The "Energy Brain" is available in the following five configurations: 001. The simplest system regulates heating. 002. Regulates heating, but is a more sophisticated system. 003. Regulates heating and air conditioning. 004. Regulates heating and air conditioning as well as having the capacity to provide for periods when a building is not occupied such as holidays, weekends, etc. by turning down the temperature to lowest point which will still prevent freezing, condensation, etc. and can be programmed to compute the minimum necessary time to start up the user's heating or air conditioning unit to bring the condition of the premises to the minimum required for comfortable starting of the work day without expensive waste of fuel. 005. Is a more comprehensive unit which, in addition to containing the features of 004 is larger and more sophisticated. It has the capabilities to effectuate efficiencies for the user's production machinery. * * "ENERGY BRAIN" EQUIPMENT LEASING PROGRAM FIRST YEAR ESTIMATED TAX WRITEOFF ILLUSTRATION Fair AdvanceInvestmentTax 2 Market Lease& EnergyEquivalentSavingsPositive 1ValuePayments 2Credits DeductionMultiple50%Cash 80,00010,00016,00042,0004.2 21,00011,000240,00028,60048,000124,6004.3662,30033,700480,00057,20096,000249,2004.36124,60067,400720,00085,800144,000373,8004.36186,900101,100960,000114,400192,000498,4004.36249,200135,200123 ALH was a service corporation which allegedly entered into energy systems management agreements with Saxon's lessees. It was located at petitioner's law offices at 370 Seventh Avenue, New York, New York. Sometime during the beginning of 1982, Kamal Fereg (Fereg) was hired by petitioner through an unemployment agency. A few months after he was hired, Fereg was designated president of ALH by petitioner. In 1982, Fereg was the only employee of ALH. The business affairs of ALH were conducted by petitioner, and Fereg's activities as president of ALH were directed by petitioner. Petitioner prepared and submitted to Fereg for his signature two letters dated January 27, 1982. Both letters were prepared on letterhead that read: Kamal M. Fereg Engineering Consultant 2700 Kennedy Blvd. #414 Jersey City, New Jersey 07306 201-451-7514 Both letters were addressed to Saxon Energy Corp., 21 East 40th Street, New York, New York 10016. While one of the letters contained much more information than the other, pertaining to the "Enersonics Systems 001, 002, 003, 004, and 005 automatic energy control systems", each letter represented the fair market values of the systems to be at least: 124 $ 80,000 for 001 system $ 240,000 for 002 system $ 480,000 for 003 system $ 720,000 for 004 system One of the letters valued the 005 system at $ 860,000, and the other letter valued the same system at $ 960,000. Fereg had not provided any of the data or information contained in the January 27, 1982, letters. He made no independent evaluation of the systems valued in the letters. The January 27, 1982, letters were given to potential investors in the Saxon Energy Program. When Fereg signed the January 27, 1982, letters, he had never seen an energy management system or an energy brain. During 1982, at the direction of petitioner, Fereg, on behalf of ALH, purchased Tour and Anderson's 210C energy brains for approximately $ 500 or $ 600 and affixed Enersonic labels to them. On December 23, 1982, Charles J. Davitian (Davitian), as the general partner, and petitioner, as a limited partner, filed in the State of New York a Certificate of Limited Partnership for Nutmeg Associates #2 Limited Partnership. The stated purpose of the partnership was to provide management services in the field of energy conservation, including the owning, leasing and/or exploitation of energy conservation125 equipment and other related activities. Davitian was a certified public accountant and a partner in the certified public accounting firm of Braunfeld & Davitian in New York, New York. Petitioner alleges that he made a $ 20,000 contribution to the capital of Nutmeg 2 prior to December 31, 1982. He further alleges that, prior to December 31, 1982, Saxon and Enersonics had entered into a contract pursuant to which Saxon purchased from Enersonics an energy system for $ 1,700,000. Petitioner then states that Nutmeg 2 rented the system from Saxon and paid Saxon a $ 195,000 advance rental payment. Petitioner next alleges that, prior to December 31, 1982, Saxon and Nutmeg 2 executed an agreement by which Saxon passed through to Nutmeg 2 its entitlement to the investment and energy tax credits resulting from the purchase by Saxon of the energy system. Petitioner also informed the Court that the energy system leased by Nutmeg 2 from Saxon was placed in service at Bob Brown Chevrolet, Inc. (Brown), in Iowa in 1983. He states that the equipment was placed in Brown by Iowa Energy Consultants (Iowa) which, petitioner alleges, was a subcontractor of ALH. On its 1982 U.S. Partnership Return126 of Income, Nutmeg 2 reported a guaranteed payment of $ 2,500, other deductions of $ 2,500, and a rental advance payment of $ 195,000, resulting in a loss of $ 200,000. It also reported that it had an unadjusted basis in qualified investment property in the amount of $ 1,700,000. On his 1982 joint Federal income tax return, petitioner reported a pass-through loss of $ 19,800 from Nutmeg 2, an investment tax credit of $ 17,445, and a business energy investment credit of $ 16,830, all of which were disallowed by respondent. Petitioner states that Nutmeg 2 retained ALH as its management agent for its energy system and that ALH in turn hired Iowa as its agent. Therefore, petitioner argues that Iowa in 1983 entered into an agreement with Brown on behalf of Nutmeg 2 to install and service an energy system on Brown's premises in Iowa. In 1979, Arthur Jones (Jones) founded the company known as Iowa Energy Consultants (Iowa). He continued to be the owner of Iowa at the time of trial. In 1980, a salesman who worked for Jones contacted Bob Brown Chevrolet, which was located in Des Moines, Iowa, to sell it an energy management system. In May or June of 1980, Iowa prepared an Energy Management127 Analysis report for Brown. The objective of the Iowa report was: Providing a turnkey system from preliminary engineering and project layout, to installation, service, maintenance, and operation of the project. This service will include all program changes required, production of specified energy management reports and training of on-site personnel. The price of the program proposed by Iowa to Brown was $ 42,000. Jones stated that the $ 42,000 included everything: Obviously the design of the system -- by "system", I mean all the wiring, peripherals, stuff like that -- labor to install all of that, the energy management computers, basically anything that was needed to accomplish what we had set forth in the proposal. The $ 42,000 price included two energy management systems. The proposal contemplated that Brown would own the energy management systems. Brown did not accept Iowa's May/June 1980 proposal. Brown, however, was still interested in having energy management equipment installed. Jones then contacted Frank Leja, who manufactured energy management systems in Massachusetts under the company name of CS&M, to determine what energy systems were available to fulfill128 Brown's needs. On April 11, 1983, Brown entered into an agreement with Iowa which provided that Iowa would install energy equipment at Brown that it had acquired from Frank Leja. The agreement, however, listed the owner of the energy equipment as Saxon. Jones had never heard of Nutmeg 2 when he entered into the April 11, 1983, agreement with Brown. Iowa installed two energy units at Brown -- an EB-3 and an EB-4. At the time of trial, Iowa was still servicing the energy systems. Jones did ultimately deal with petitioner, as a representative of Saxon, in obtaining the energy equipment. At the time of the April 11, 1983, agreement, Jones had never heard of ALH. The April 11, 1983, agreement provided that Saxon would be paid 50 percent of the energy savings effected by the installation of the energy systems. Iowa was to receive 15 percent of Saxon's 50-percent earnings from the energy savings. Iowa had no agreement to share its 15-percent commission with anyone. Iowa was the sole servicer of the Brown energy system. In 1985, when Iowa sent to Saxon an energy savings check pursuant to the terms of the April 11, 1983, agreement, the check was returned to Iowa by Saxon with instructions129 that the check be reissued to ALH. Davitian who, as we have previously noted, is a certified public accountant, was the general partner of Nutmeg 2 which was formed in 1982. His responsibilities as general partner of Nutmeg 2 were to maintain the records of the partnership and to prepare its tax returns. He received all of his information for the maintenance of Nutmeg 2's books of account and for the preparation of Nutmeg 2's tax returns from petitioner. All of the financial operations of Nutmeg 2 were orchestrated by petitioner. Nutmeg 2's office was located at Davitian's office at 21 East 40th Street, New York, New York. He never saw a lease that allegedly had been executed between Saxon and Nutmeg 2. He did all that he was told to do by petitioner pertaining to the alleged business affairs of Nutmeg 2. Nutmeg 2 never received any investor's funds pertaining to any energy systems. The $ 195,000 advance rental payment allegedly made by Nutmeg 2 to Saxon was never disbursed through any Nutmeg 2 account. In 1986, a grand jury of New York County returned an indictment against petitioner, Leonard Freedman, Kamal Fereg, Charles Taylor, Frank Leja, Saxon Energy Corp., Enersonics, 130 Inc., and ALH Energy Management Corporation. The indictment charged the defendants, inter alia, with conspiracy to defraud in the first degree in an Energy Brain Leasing Program. The indictment alleged, in part, in Count One: It was a purpose of the conspiracy to obtain money from the public by fraudulent means. In furtherance of this purpose the conspirators agreed to misrepresent the fair market value of the Energy Brain Equipment. The conspirators further agreed to cooperate in the leasing of the overvalued Energy Brain Equipment to the public. The conspirators agreed to conceal the fair market value of the Energy Brain Equipment. The conspirators agreed to obtain money from the public by leasing the overvalued Energy Brain equipment. The conspirators agreed that the Energy Brain equipment leased to the public by Saxon would be purchased from Enersonics, who obtained the Energy Brains from Frank Leja. The conspirators agreed that Archibald Braunfeld, a Certified Public Accountant, would act as the President of Saxon. The conspirators agreed that Archibald Braunfeld would be a figurehead President and that Saxon would be falsely represented as "independent." The conspirators131 agreed to misrepresent Saxon as "independent" falsely representing that there was an "arms length transaction" between Saxon and Enersonics, the seller of the Energy Brain. The conspirators agreed to conceal Sheldon Barr's control of Saxon and the collusion between Saxon and Enersonics. On April 30, 1987, petitioner was tried and found guilty of a scheme to defraud in the first degree, count 1, and nine counts of grand larceny in the second degree. Petitioner attempted to testify at trial as an expert in energy management systems. The Court rejected his bid to testify as an expert. Susan Hazelhurst (Hazelhurst), a principal engineer at Xenergy, Inc., of Burlington, Massachusetts, testified as an expert at trial for respondent and assessed the fair market value and the profit potential of the 1982 Energy Brains EB 1-5 and the 1983 Energy Brains A 1-4. Her assessments of the fair market values of the various energy brains were as follows: FAIR MARKET VALUE OF SYSTEMFair Market Value Energy Brain UnitMatching Product (Retail to End User)1982EB1TA 210C$ 795EB2PTI Basic 41,295EB3Solidyne Micromizer 80001,600EB4Solidyne Micromizer 32002,240EB5Aegis ESS244,8001983A1TA 210C795A2PTI Basic 41,295A3Solidyne Micromizer 80001,600A4Solidyne Micromizer 32002,240132 OPINION The Commissioner's determinations are presumed to be correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); . The first issue for decision is whether petitioner is entitled to claim a partnership loss, an investment tax credit, and a business energy investment credit because of his alleged participation as a limited partner in Nutmeg 2. Petitioner testified that Saxon purchased from Enersonics an energy system for $ 1,700,000 and that Nutmeg 2 rented the system from Saxon and paid Saxon a $ 195,000 advance rental payment. He next testified that Saxon and Nutmeg 2 entered into an agreement which provided that Saxon passed through to Nutmeg 2 its entitlement to the investment and energy tax credits which arose from Saxon's purchase of the energy system. No such agreement was produced at trial. There are two reasons why petitioner may not prevail in this case. The first reason is that the $ 1,700,000 allegedly paid to Enersonics by Saxon for the energy system in issue is outlandish. The second reason is that Nutmeg 2 never rented any energy133 system from Saxon. We will first address ourselves to the sale price of $ 1,700,000 allegedly paid by Saxon to Enersonics for the energy system. Sale Price of the Energy System(s)Petitioner testified that Saxon purchased an energy system from Enersonics for $ 1,700,000. Nutmeg 2 then allegedly rented the system from Saxon and paid an advance rental payment of $ 195,000 to Saxon. Petitioner next testified that Nutmeg 2 rented the energy system to Bob Brown Chevrolet in Des Moines, Iowa. Brown agreed to pay 50 percent of the energy savings effected by the installation of the energy system as rental payment for the equipment. Petitioner initially testified that the energy system installed at Brown was a custom model and had no model number. Respondent's witness, Arthur Jones, founded Iowa Energy Consultants in 1979. In 1980, a salesman who worked for Jones contacted Brown to sell it an energy management system. Jones contacted Frank Leja, who manufactured energy management systems in Massachusetts under the company name of CS&M, to determine what energy systems were available to fill Brown's needs. On April 11, 1983, Brown and Iowa entered into an agreement pursuant134 to which Iowa installed two energy systems at Brown. The energy systems were an EB-3 and an EB-4 which Iowa had acquired from Frank Leja. The agreement, however, listed the owner of the equipment as Saxon. Respondent's expert witness at trial was Hazelhurst. She was graduated in 1977 from the University of Massachusetts, where she received a B.S. in mechanical engineering. From 1980 through the time of trial, she was employed by Xenergy, Inc., of Burlington, Massachusetts, where she is Director of Engineering. She is responsible for a department of 14 professionals providing engineering metering, evaluation, and design services for utility and end-use customers. She is also responsible for energy management system consulting services and is project manager of utility load planning programs. Xenergy was commissioned by respondent to assess the fair market value and the profit potential to a taxpayer of the Saxon Energy Corp. Energy Brain energy management systems offered in 1982 and 1983. An assessment of the fair market value of the Energy Brain equipment was made using a competitive product evaluation. In such an evaluation, a value is assigned based upon the market price135 of a matching product. Where a market price is determinable for products similar to the product being valued, the competitive product valuation is preferred to an income stream analysis. In this case, Hazelhurst also analyzed profit potential of the Energy Brain equipment based upon the lease arrangements using a cumulative cash-flow before taxes. Hazelhurst determined the fair market value of the Saxon Energy units offered in 1982 and 1983 as follows: Fair Market Value of SystemFair Market Value Energy Brain UnitMatching Product (Retail to End User)1982EB1TA210C$ 795EB2PTI Basic 41,295EB3Solidyne Micromizer 80001,600EB4Solidyne Micromizer 32002,240EB5Aegis ESS244,8001983A1TA 210C795A2PTI Basic 41,295A3Solidyne Micromizer 80001,600A4Solidyne Micromizer 32002,240In her valuation report, Hazelhurst also reported: The potential for the taxpayer making a profit on the lease arrangement before taxes has also been assessed. Without the substantial tax benefits of the investment tax credit and the business energy investment credit based on the Saxon Energy Corporation valuation, the taxpayer can only lose 136 money under the terms of the lease and over the reasonable life of the equipment. A before tax cash flow analysis over an optimistic 15-year life is summarized below: Profit Potential of SystemEnergyBefore Tax 15 Year15 Year Net PresentBrain UnitNet Cash Flow Value of Cash Flow1982EB1-$ 11,476-$ 9,785EB2- 38,025- 28,322EB3- 75,549- 56,143EB4- 113,074- 83,965EB5- 150,599-111,7871983A1 - 51,237- 17,397A2 - 126,373- 41,859A3 - 251,171- 82,142A4 - 592,780-191,591We have thoroughly reviewed Hazelhurst's evaluation report, and we are persuaded that Hazelhurst's evaluations are fully documented and professionally determined. Her report establishes that the fair market values of the EB-3 and EB-4 energy units installed at Brown in 1983 were $ 1,600 and $ 2,240, respectively. Petitioner's contention that the energy systems ultimately installed at Brown were purchased by Saxon from Enersonics for $ 1,700,000 is patently ludicrous. The Role of Nutmeg 2 in Placing Energy Systems in Brown's FacilitiesOn December 23, 1982, Davitian, as general partner, and petitioner, as a limited partner, 137 formed Nutmeg 2 as a limited partnership in the State of New York. Davitian was a certified public accountant and a partner in the certified public accounting firm of Braunfeld & Davitian in New York, New York. His responsibilities as general partner of Nutmeg 2 were to maintain the records of the partnership and to prepare its tax returns. He received all of the information needed to keep Nutmeg 2's books of account and to prepare its tax returns from petitioner. All of Nutmeg 2's alleged financial dealings were orchestrated by petitioner. Nutmeg 2's office was located at Davitian's office at 21 East 40th Street in New York, New York. He never saw the lease allegedly entered into between Nutmeg 2 and Saxon. Nutmeg 2 never received any investor's funds pertaining to any energy systems. The $ 195,000 advance rental payment allegedly made by Nutmeg 2 to Saxon was never disbursed through any Nutmeg 2 account. Petitioner failed to produce at trial the agreement or a copy thereof allegedly entered into between Nutmeg 2 and Saxon. Petitioner testified that Nutmeg 2, in order to facilitate its business and to locate an end user of its energy management system, retained the services138 of ALH. He further testified that ALH paid Iowa as its agent to enter into an agreement on behalf of Nutmeg 2 to install Nutmeg 2's energy systems at Brown. According to petitioner, the agreement dated April 11, 1983, provided that for every dollar saved through the installation of the energy systems, Brown would pay 50 cents to Iowa on behalf of Nutmeg 2. He also testified that an agreement existed between ALH and Nutmeg 2 which provided that Nutmeg 2 would pay 15 percent of the 50 percent in energy savings it received to ALH to compensate ALH for the services it rendered in finding the location for the energy systems, monitoring the savings, obtaining the payments from the end user, and disbursing the payments to the proper parties. Petitioner did not produce at trial the alleged agreement or a copy thereof between ALH and Nutmeg 2. Jones, the founder and owner of Iowa, testified that a salesman who worked for him first contacted Brown in 1980 to sell it an energy management system. The initial efforts of Iowa to sell Brown an energy management system were unsuccessful, but Jones persisted. Jones contacted Frank Leja, who manufactured energy management systems in Massachusetts139 under the company name of CS&M. Jones, however, was required to deal with petitioner, who represented Saxon, in order to obtain an EB-3 and an EB-4 energy system. On April 11, 1983, Saxon, as owner of the EB-3 and EB-4 energy management systems, Brown as the end user, and Iowa as the Manager/Dealer, executed an agreement which provided for the installation and management of the energy management systems at Brown. An addendum to the agreement was also executed on April 11, 1983. The agreement and the addendum were signed by James Conlon on behalf of Saxon, Ronald Brown on behalf of Brown, and Arthur K. Jones on behalf of Iowa. Nowhere in the agreement or the addendum is there any reference to Nutmeg 2 or ALH. Jones testified that on April 11, 1983, when he signed the agreement with Saxon and Brown, he had never heard of Nutmeg 2 or ALH. The agreement provided that Saxon was to receive 50 percent of the energy savings effected by the installation of the energy management systems. Jones testified that Iowa was to receive 15 percent of Saxon's 50 percent earnings. Jones further testified that Iowa did not agree to share its 15-percent commission with anyone. Iowa was the sole140 servicer of the Brown energy management systems. In 1985, Iowa sent to Saxon a check for the energy savings pursuant to the terms of the April 11, 1983, agreement. The check was returned to Iowa by Saxon with instructions that it be reissued to ALH. Iowa reissued the check, payable to ALH, on December 31, 1985. It was during this period that the attorney general of the State of New York was conducting the investigation of petitioner that resulted in his indictment and conviction for conspiracy to defraud in the first degree in his Energy Brain Leasing Program. On its 1982 partnership return, Nutmeg 2 reported $ 2,500 guaranteed payments to partners, an advance rental payment to Saxon of $ 195,000, $ 1,200 paid for professional fees, and $ 1,300 for typing, printing, telephone, and messengers, all resulting in an ordinary income loss of $ 200,000. The partnership also reported that it had total qualified investment in 10-percent property with an unadjusted basis of $ 1,700,000. On his 1982 joint return, petitioner reported a pass-through loss of $ 19,800 from Nutmeg 2, an investment tax credit of $ 17,445, and a business energy investment credit of $ 16,830, all of which were141 disallowed by respondent. We have already found as a fact that in 1982-83, the fair market values of EB-3 and EB-4 energy management systems were $ 1,600 and $ 2,240, respectively. Petitioner alleges that Enersonics sold the energy management system(s) ultimately installed at Brown to Saxon for $ 1,700,000. There is no evidence in the record that Saxon bought anything from Enersonics other than the energy management system hardware. That petitioner, as the de facto alter ego of Nutmeg 2, would assign a $ 1,700,000 price tag to hardware that could be bought on the open market for not more than $ 3,840 is preposterous. There is not a scintilla of evidence in this record to substantiate petitioner's farrago of absurdity that Nutmeg 2, ALH or he, other than in his role as the operative of Saxon, had anything to do with the installation of the energy management systems at Brown. Petitioner called no witnesses at trial to corroborate the fantasia to which he testified. We do not accept the self-serving and uncorroborated testimony of petitioner. . This is particularly true where petitioner's testimony142 is predicated on various and sundry alleged legal contracts and agreements, none of which were produced at trial. Transactions that lack economic substance and are conducted for the sole purpose of reducing tax liability are disregarded for tax purposes by the courts. ; ; . The facts and circumstances of this case compel the conclusion that the purported participation by Nutmeg 2 in the installation of the energy management system at Brown was a sham in substance. Nutmeg 2 was not involved in a bona fide business activity which would permit a pass through of any deductions to petitioner. Respondent's disallowance of the pass-through deductions from Nutmeg 2 claimed on petitioner's joint Federal 1982 income tax return is fully sustained. NegligenceIn an amendment to answer filed December 21, 1993, respondent asserted additions to tax pursuant to section 6653(a)(1) and (2). Since 143 the additions to tax for negligence were raised by respondent in her amended answer, she bears the burden of proof. Rule 142(a). Section 6653(a)(1) provides for an addition to tax equal to 5 percent of the underpayment if any part of the underpayment is due to negligence or intentional disregard of rules and regulations. Section 6653(a)(2) provides that there shall be added to the tax an amount equal to 50 percent of the interest payable under section 6601 with respect to the portion of the underpayment which is attributable to negligence or intentional disregard of rules and regulations. Negligence has been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances. , affd. ; . Respondent has clearly shown that the understatement of tax on petitioner's 1982 Federal income tax return was due to negligence at the least. Respondent's determination on this issue is sustained. Valuation OverstatementSection 6659(a) 144 provides for an addition to tax for an underpayment of tax which is attributable to a valuation overstatement. The addition to tax is an amount equal to the applicable percentage of the underpayment so attributable. As applicable to this case, section 6659(b) provides that if the valuation claimed is more than 250 percent of the correct valuation, the applicable percentage is 30 percent. Where there is a lack of economic substance, section 6659 is applicable because the taxpayer's correct basis in the asset is zero. , affg. . Because the correct basis in the asset is zero, any basis claimed in excess of zero is a valuation overstatement. , affg. ; . Petitioner has failed to prove that his alleged participation as a limited partner in Nutmeg 2 was anything other than a sham. Respondent is sustained on this issue. Substantial Understatement145 of TaxSection 6661(a) provides for an addition to tax if there is a substantial understatement of income tax. The amount of the addition to tax is equal to 10 percent of the amount of any underpayment attributable to such understatement. Section 6661(b)(1)(A) provides, in general, that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Section 6661(b)(2)(B) provides that the understatement is deemed reduced to the extent it is attributable to (1) the treatment of an item for which there was substantial authority, or (2) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return. However, section 6661(b)(2)(C) provides that in cases involving tax shelters, the adequate disclosure provisions do not apply and the substantial authority provisions do not apply unless the taxpayer reasonably believed that the tax treatment of such item by the taxpayer was more likely than not the proper treatment. Petitioner, who at one time was licensed to practice146 law and who did in fact practice law, must have known that his alleged participation as a limited partner in Nutmeg 2 was a sham. Respondent is sustained on this issue. We are mindful that section 6661(b)(3) provides that there shall not be taken into account that portion of the substantial understatement on which a penalty is imposed under section 6659, and this will be reflected in the Rule 155 computation in this case. Interest on Substantial Underpayments Attributable to Tax-Motivated TransactionsSection 6621(c) (formerly section 6621(d)) provides for an interest rate of 120 percent of the adjusted rate established under section 6621(b) if there is a "substantial underpayment" (an underpayment which exceeds $ 1,000) in any taxable year attributable to one or more "tax motivated transactions". The increased rate applies to interest accrued after December 31, 1984, even though the transaction was entered into prior to that date. , affd. per curiam without published opinion . Congress specifically amended section 6621(c)(3)(A), adding*147 to the list of tax-motivated transactions "any sham or fraudulent transaction." The deductions and credits in this case were disallowed because Nutmeg 2 was a sham. Accordingly, the increased rate of interest under section 6621(c) is applicable. To reflect the foregoing and the settlement of some issues, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the taxable year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. As we have previously noted, Enersonics had no manufacturing facilities. Enersonics obtained its energy conservation equipment from CS&M.↩2. Does not include initial location fee if service company is retained.↩1. Does not include income from energy savings.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620520/	GEORGE A. HUNT, JR. and CECILE C. HUNT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHunt v. CommissionerDocket No. 8150-76.United States Tax CourtT.C. Memo 1978-150; 1978 Tax Ct. Memo LEXIS 365; 37 T.C.M. (CCH) 646; T.C.M. (RIA) 780150; April 18, 1978, Filed Michael D. Annis, for the petitioners. William R. McCants, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $47,054.74 in petitioners' 1972 Federal income tax. By an amendment to his answer, respondent alleged that the deficiency was actually $65,824.44 and that a $3,291.22 addition to tax is due under section 6653(a). 1/ Respondent has conceded one issue, and the issues remaining for decision are as follows: 1. Whether the proceeds from the sale of landfill removed from a parcel of land owned by petitioners should be treated as a reduction in their basis for the land. 2. If issue 1 is answered in the negative, whether petitioners are entitled to cost depletion under section 611(a) in respect of the landfill removed from368 a natural deposit of sand located on the property. 3. If issue 2 is answered in the negative, whether petitioners are entitled to percentage depletion under section 613 in respect of the sand excavated and sold from the property.4. Whether income derived from a peat operation was properly attributable to petitioners or to their wholly owned corporation, Jasmine Plaza, Inc.5. Whether any part of the underpayment of taxes "is due to negligence or intentional disregard of rules and regulations" within the meaning of section 6653(a). FINDINGS OF FACT 1. GeneralPetitioners George A. Hunt, Jr., and Cecile C. Hunt, husband and wife, were legal residents of Clearwater, Florida, when they filed their petition. Petitioners filed a joint Federal income tax return for 1972 with the Director, Southeast Service Center, Chamblee, Georgia. 2. Landfill Sales Income IssueOn November 26, 1971, petitioners acquired approximately 30 acres of land south of Tarpon Springs, Florida, known as the Estes-Mahon tract (sometimes referred to herein as the tract) for a total consideration of $95,291.46. The property was located approximately 1,000 feet from a paved highway and369 was accessible only by way of a dirt road. The tract, which consisted of three subparcels, was bordered on the north and south by small poorly kept houses, on the west by railroad tracks, and on the east by undeveloped land. One parcel of approximately 6 acres, located to the west of the access road, was low and swampy. The eastern subparcel, approximately 4 acres in area, was relatively flat. The center section of approximately 20 acres was high rolling land.The southern half of this center section (south half) was thickly wooded. A prominent hill covered with dead or diseased citrus trees was situated on the center section's north half (north half). This hill was composed of high-grade yellow sand which had economic value for use as landfill. Since the early 1960's, George A. Hunt, Jr. (hereinafter petitioner), was engaged in various land development ventures. Until March 1972, he was president and chairman of the board of directors of George Hunt, Inc. (the company), a construction firm engaged in building roads, residential subdivisions, shopping centers, and other commercial projects. During 1972, the company was engaged in the construction of a Ramada Inn campsite370 approximately 2 miles from the Estates-Mahon tract. Landfill was needed in completing this construction. Petitioner's primary purpose in purchasing the Estes-Mahon tract was to obtain a source of needed landfill. He knew he could remove sand from the north half of the tract and sell the sand to the company for use as landfill at the Ramada Inn construction site. Petitioner could not have obtained a county permit for a landfill pit operation on the Estes-Mahon tract. In order to obtain a permit to remove the sand, petitioner submitted to the county a plan for subdividing the tract for residential use. The plan was approved in January 1972, and it permitted petitioner to excavate the hill to certain authorized levels. Petitioner's primary intent in purchasing the Estes-Mahon tract was to excavate and sell sand from the center subparcel, but he was also aware that the subparcel of land east of the access road was suitable for residential development. To develop and subdivide the center section where the hill was located required a substantial amount of excavation because the hill was so high sewerage facilities could not be installed except at prohibitive costs. The approved371 subdivision plan called for neighborhood lanes terminating in cul-de-sacs in the south half of the center subparcel. Local county ordinances restricted tree removal, and the plan did not authorize wholesale excavation of this heavily wooded area. Sand deposits underlying that portion of the property, except for the lanes and cul-de-sacs, were not commercially recoverable. Herbert McNairy, an engineer with the company when petitioner acquired the tract, initially estimated that there were approximately 100,000 cubic yards of sand available on the center parcel. It was his opinion, however, after studying the approved subdivision plan and a topographical map of the tract, that the proposed excavation of the north half of the center parcel would yield 92,280 cubic yards of sand and the areas subject to excavation in the south half would yield additional sand. During 1972 and 1973, petitioner excavated sand from the tract. Most of the excavated sand was sold to the company for use at the Ramada Inn campsite. Equipment owned by the company was used to load the sand on trucks owned by R. Smith & Sons (Smith), and Smith's trucks transported the sand to the construction site. The company372 paid Smith 30 cents per cubic yard for hauling and 95 cents per cubic yard for the sand. Smith in turn gave petitioner checks made payable to George Hill Fill Dirt (GHFD) on the basis of a price of 95 cents per cubic yard for the sand removed from the Estes-Mahon tract and delivered to the Ramada Inn campsite. During 1972, Smith's payments to GHFD totaled approximately $90,800 (without regard to $3,668.79 sales tax). In April 1973, petitioner received an additional $20,000 from Smith on the sale of sand. On occasion, petitioner sold sand from the tract to customers other than the company. A major part of these sales occurred when a dirt fill pit owned and operated by the company was closed and the company's customers came to the tract for sand. In making these sales petitioner normally charged 60 cents or 75 cents per cubic yard. In 1972 petitioner received $12,590.96 from these sales. Among other factors, the price of landfill is dependent upon whether the buyer or seller furnishes the loading equipment, which party pays for transporting the landfill to the construction site, the distance from the landfill to the construction site, the quality of the landfill, and the amount373 of landfill purchased. In September 1973, petitioner transferred the tract to George Hunt, Inc., in exchange for a one-half undivided interest in two-thirds of a parcel of property known as the "Tarpon Avenue Property" located on the northwest corner of highway No. 19 and Tarpon Avenue in Tarpon Springs. At the time of this exchange, the major portion of the excavation on the north half of the Estes-Mahon tract had been completed. However, excavation of the sand underlying the lanes and cul-de-sacs on the south half had not begun. No income from the sale of the sand was reported by petitioners on their 1972 joint Federal income tax return. 3. Peat and High-grade Soil Sales IssueIn late 1972, petitioner started an operation involving the sale of high-grade soil. This product was composed of peat mixed with sand or sawdust. The peat was obtained free of charge from George Hunt, Inc. The sand came from the Estates-Mahon tract. The peat was excavated in a wet state and had to be dried out. Land in Clearwater, Florida, approximately 10 miles from the tract, was maintained for this purpose. In late 1972 or early 1973, petitioner was advised by his accountant, Wilbur374 Van Scoik (Van Scoik), to put this business in Jasmine Plaza, Inc.'s (Jasmine) name. Jasmine was incorporated in 1969 and was wholly owned by petitioners. A separate bank account for Jasmine was established in January 1973 for the business. Sales in 1972 and 1973, however, were made in the name of petitioner, GHFD, or George Hunt Top Soil. In 1972, petitioner sold approximately 600 cubic yards of this high-grade soil for a total sum of $1,913.50, 2/ including sales tax. None of this income was reported for Federal income tax purposes by Jasmine or petitioners. For the fiscal year ended February 28, 1974, Jasmine reported on its Federal income tax return income from the 1973 sales of this soil. 4. Additions to Tax IssueFor many years, including 1972, petitioners had Van Scoik or members of his accounting firm prepare their income tax returns. With regard to the sand sales, it was Van Scoik's opinion that the receipts should be applied first to reduce petitioners' basis in the375 land and, if such proceeds exceeded that basis, only then would petitioners have taxable income. Petitioners relied on his advice. When Van Scoik gave this opinion, he thought that the company, through Smith, was the only purchaser. In addition, he was not aware of the 1972 sales of high-grade topsoil. In his statutory notice of deficiency, respondent determined that petitioners failed to report on their 1972 joint Federal income tax return receipts of $80,162.37 from the sale of fill dirt and he allowed a 5-percent depletion deduction against this amount. In an amendment to his answer, respondent alleged that petitioners failed to report an additional $28,988.34 of receipts from the sale of fill dirt and topsoil and that petitioners are not entitled to the 5-percent depletion allowance. In addition, respondent alleged that petitioners are liable for an addition to tax equal to 5 percent of the underpayment under section 6653(a). OPINION 1. Landfill Sales Income IssuePetitioner makes a series of alternative contentions as to the proper tax treatment of the proceeds received from the sale of landfill from the Estes-Mahon tract: First, petitioner contends that the376 income derived from the landfill sales should be applied to reduce his basis in the tract. As a first alternative, petitioner argues that, under sections 611 and 612, he is entitled to a cost depletion allowance in respect of the income derived from the landfill sales. As a second alternative, petitioner maintains that under section 613(a) he should be allowed percentage depletion deductions from the landfill sales proceeds.A.Reduction in basisPetitioner contends that he purchased the Estes-Mahon tract for subdivision purposes. The hill located on the property, he maintains, had no value for such purposes and, indeed, had to be removed if the tract was to be subdivided. Petitioner argues, therefore, his basis in the tract consisted of the purchase price increased by the cost of removing the hill and decreased by the proceeds from the sale of the landfill. Petitioner analogizes the facts with respect to the subdivision of the property to those situations where a taxpayer acquires a construction site with the intention of demolishing or removing the buildings situated thereon. In such circumstances, the taxpayer's basis for the property is "increased by the net cost of377 demolition or decreased from the net proceeds from demolition." Sec. 1.165-3(a)(1), Income Tax Regs.; Hillside National Bank v. Commissioner,35 T.C. 879">35 T.C. 879, 881-882 (1961); Lynchburg National Bank & Trust Co. v. Commissioner,20 T.C. 670">20 T.C. 670, 673-674 (1953), affd. 208 F.2d 757">208 F.2d 757 (4th Cir. 1953). Even if we assume that the building demolition cases are apposite, they do not aid petitioner's cause. In the instant case, petitioner's primary purpose in acquiring the Estes-Mahon tract was not to subdivide it but was to excavate and sell the sand from the hill located thereon. Petitioner testified that he asked a "Mr. Howard, who lived in this area, * * * to show * * * [him] where * * * [he] could acquire another hill, because * * * [he] had done this two miles north of here." He explained that "the demand for fill was building up at a good price." As to his subdivision plans, petitioner testified that "the only way we could get permission to remove that hill would be to come up with a plan of development for a subdivision." This testimony and other evidence of record show quite clearly that petitioner acquired the Estes-Mahon tract primarily378 to obtain a source of landfill. Having so acquired the tract, he continued the operation of his trade or business of selling landfill. The trial record simply will not support a finding that he removed the hill and sold the excavated sand primarily to improve the tract for use as a subdivision. Thus, the factual premise of petitioner's argument is missing. Petitioner's contention that his receipts from the sale of the landfill should first be applied to reduce his basis in the Estes-Mahon tract, therefore, must be rejected. B. Cost depletion issuePetitioner's second contention is that he is entitled to cost depletion for the sand removed from the Estes-Mahon tract. In this respect, section 611 provides for a "reasonable allowance for depletion" in the case of extraction from mines and other natural deposits. The allowance is intended to return to the owner, taxfree, his capital investment over the productive life of the natural deposit. United States v. Cannelton Sewer Pipe Co.,364 U.S. 76">364 U.S. 76, 81 (1960); Parsons v. Smith,359 U.S. 215">359 U.S. 215, 220 (1959). Under the general rule for determining cost depletion, the number of units remaining in the379 natural deposit as of the taxable year is first estimated.Then the portion of the adjusted basis of the property allocable to the depletable asset is divided by the number of units thus estimated, and the quotient represents the depletion unit.This amount, multiplied by the number of units sold during the taxable year, determines the depletion deduction for the year. Sec. 1.611-2(a), Income Tax Regs.Under section 612, the general rule is that "the basis on which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 1011" for the purpose of determining gain or loss from disposition of the property. The beginning point for determining the adjusted basis of mineral property under section 1011 thus is its cost. The regulations provide that the basis for cost depletion of mineral property does not include the "residual value of land and improvements at the end of operations." They further state that "the basis for cost depletion does not include amounts representing the cost or value of land for purposes other than mineral production." Sec. 1.612-1(b), Income Tax Regs.In substance, petitioner has the burden of showing what portion380 of the $95,291.46 purchase price paid for the entire Estes-Mahon tract is properly allocable to the natural deposit, i.e., the removable sand. Potts Run Coal Co. v. Commissioner,19 B.T.A. 1">19 B.T.A. 1, 5 (1930). Since the inquiry is directed toward ascertaining petitioner's basis for the sand deposit comprising the hill, the allocation must be made as of the date of the purchase. Sec. 1.611-2(d)(1), Income Tax Regs.; Beaver Dam Coal Co. v. United States,370 F.2d 414">370 F.2d 414, 417 (6th Cir. 1966). The value of the tract for subdivision purposes at some subsequent date is relevant only insofar as such value tends to show values as of the acquisition date. As to the valuation of a mineral deposit, section 1.611-2(e)(4), Income Tax Regs., prescribes the ground rules for the present value method which petitioner evidently purports to use, as follows: The value of each mineral deposit is measured by the expected gross income (the number of units of mineral recoverable in marketable form multiplied by the estimated market price per unit) less the estimated operating cost, reduced to a present value as of the date for which the valuation is made at the rate of interest381 commensurate with the risk for the operating life, and further reduced by the value at that date of the improvements and of the capital additions, if any, necessary to realize the profits. * * * Section 1.611-2(e)(3), Income Tax Regs., states that: The operating cost includes all current expense of producing, preparing, and marketing the mineral product sold (due consideration being given to taxes) exclusive of allowable capital additions * * * and deductions for depreciation and depletion, but including cost of repairs. Petitioner's contentions as to his basis in the sand deposit comprising the hill was summarized in his brief as follows: * * * Petitioners contend that at the time the Estes-Mahon property was acquired, the sand deposits were properly valued at $100,000.00 while the surface land was properly valued at $57,000.00 for a total value of $157,000.00. The purchase price was $95,291.00.Accordingly, Petitioners' sand deposits had a basis for cost depletion purposes of $60,691.00 computed as follows: 100,000/157,000 X $95,291.00 = $60,691.00. The remaining $34,600.00 represents Petitioners' capital investment in the surface land for which no depletion is claimed. 382 To support these values, petitioner relies upon the testimony that there were 100,000 cubic yards of removable sand on the tract, which could be sold for $1 per cubic yard. To support the claimed surface value, petitioner relies upon the testimony of Douglas Mason (Mason), a local real estate broker who testified the tract had a value of $57,000 at the time it was acquired. We are not satisfied that the testimony cited by petitioner shows how much of the $95,291.46 purchase price is allocable to the land. Ten of the 30 acres comprising the Estes-Mahon tract were either extremely low or flat and had no marketable sand deposits. Deposits of sand were located on the other 20 acres, but sand could not be excavated from the thickly-wooded southern half of the 20-acre portion (except in clearing streets) because local ordinances restricted tree removal. The 10 acres comprising the northern half of the 20-acre portion was the only area from which sand could be excavated, and the record contains no evidence of what portion of the $95,291.46 paid for the entire tract is equitably allocable to these 10 acres. For this reason alone petitioner's proof fails. Beaver Dam Coal Co. v. United States,supra at 417-418;383 cf., Geoghegan & Mathis, Inc. v. Commissioner,453 F.2d 1324">453 F.2d 1324, 1328 (6th Cir. 1972), affg. 55 T.C. 672">55 T.C. 672 (1971), cert. denied 409 U.S. 842">409 U.S. 842 (1972).Moreover, even if petitioner is entitled to have the allocation made with respect to the entire tract, he has not made the requisite showing. Petitioner arrives at a total value of $157,000 for the entire tract--$100,000 for the sand deposits and $57,000 for the tract's subdivision value. Yet petitioner bought the 30-acre tract of land for $95,291.46 on November 26, 1971, only a short time before the excavation began. There is no explanation of why, if petitioner's valuation figures are reasonably accurate, the tract sold for $60,000 less than its actual value. 3/ The extreme position taken by petitioner immediately renders it suspect. 384 Mason's testimony, relied upon to establish the $57,000 valuation of the surface rights, was not directed to the residual value of the Estes-Mahon tract after the sand was removed. Rather, his testimony dealt with the value of the tract as "subdivision property" as it stood in December 1971, "without regard to the economic value of the fill dirt source located on the property." His value estimate, according to his oral testimony, was not influenced by the fact that "there were large hills on the property." In fact, his written appraisal report does not mention them. He based his testimony entirely "on comparable sales" of property located in the vicinity, 4/ and he admitted that he had only "a general recollection of the property in the area." This testimony as to the value of the surface rights provides no reliable foundation for allocating385 the $95,291.46 purchase price in part to the sand deposit and the balance to the rest of the tract or the residual value of the land from which the sand was removed. And the testimony as to the value of the sand deposit as such is even less satisfactory. Such testimony consists of an engineering estimate that approximately 100,000 to 115,000 cubic yards of sand could be excavated from the tract and testimony by others that the sand could be sold for $1 per cubic yard.Thus, petitioner's evidence merely reflects an estimate of the amount of gross income obtainable from the sale of the excavated sand. But depletion is related to the mineral deposit, i.e., to the minerals in place, sec. 1.611-1(d)(4), Income Tax Regs., and not merely to the gross income obtainable from the sale of the extracted minerals. As contemplated by section 1.611-2(e)(4), Income Tax Regs., quoted in part above, the value of the mineral deposit is to be determined by adjusting the amount of the expected gross income by the cost of producing that income and by interest thereon during the production period. The record contains no satisfactory evidence on the cost of excavating and loading the sand. George Hunt, 386 Inc.'s, equipment was, in fact, used in doing the loading and excavation work, and there is no testimony as to reasonably anticipated cost of such work. Moreover, the record raises serious doubts as to the accuracy of the $1 price for the sand. As reflected in our Findings, petitioner netted 95 cents per cubic yard for sand sold to meet the needs at the Ramada Inn campsite, but George Hunt, Inc., controlled by petitioner, was the contractor doing that work. We are not convinced that the 95-cents' price was representative. Indeed, certain invoices were stipulated showing that some of the sand was sold for as low as 60 cents and 75 cents per cubic yard or ton. Petitioner seeks to explain these lower prices on the theory that this sand was sold at such prices to meet contract commitments he had made at other sand pits he operated. We are not convinced that those contract commitments do not reflect the reasonably anticipated price for excavated sand more accurately than the Ramada Inn campsite prices. The record simply will not support the findings of fact needed to compute a cost depletion allowance with respect to the sand. We hold that petitioner has not shown that he is entitled387 to such an allowance. 2. Percentage Depletion Allowance IssueSection 613(a) 5/ provides that the allowance for depletion under section 611 in "the case of the mines, wells, and other natural deposits listed in subsection (b)" shall be a percentage, as specified in subsection (b), based on the type of mineral extracted, of the gross income from the property limited, however, to 50 percent of taxable income, subject to certain adjustments irrelevant herein. Section 613(b)(6)(A) provides that the percentage depletion for "sand" will be 5 percent. A catchall provision, section 613(b)(7), provides a 14-percent percentage depletion allowance for "all other minerals" not separately classified in sections 613(b)(1) through (6). Section 613(b)(7)(A), however, excludes from this group of minerals "soil, sod, dirt, turf, water, or mosses." 388 Respondent argues that the landfill excavated by petitioner from the tract falls within the section 613(b)(7)(A) excluded group. The notice of deficiency allowed percentage deplation in respect of the gross income derived from sand sales computed at the rate of 5 percent prescribed for sand. In an amended answer respondent alleged that petitioner received the disputed income from "the sale of soil and fill dirt" and that the sale of such materials was not subject to the percentage depletion allowance. Thus, the burden of showing that the material excavated and sold from the Estes-Mahon tract was not sand rests with respondent. Rule 142(a), Rules of Practice and Procedure of this Court. Although petitioner, and apparently everyone involved with the sand sale operation in everyday business transactions, referred to the extracted landfill from time to time as dirt, we think the technical classification was in reality "yellow sand" 6/ which qualifies for a 5-percent depletion allowance under section 613 (b)(6)(A). The notice of deficiency so determined, and respondent has not carried his burden of showing otherwise. 389 3. High-grade Topsoil Sales IssuePetitioner contends that the receipts totaling $1,913.50 from the sale in 1972 of high-grade topsoil are properly attributable to Jasmine, petitioner's wholly owned corporation, rather than to himself. We disagree. Although petitioner's accountant advised him that it would be best to put these operations in Jasmine's name, petitioner failed to do so in 1972. Sales of the high-grade topsoil were made in the name of petitioner, GHFD, or George Hunt Top Soil rather than in Jasmine's name and the record does not show that this treatment of such sales was erroneous. A separate bank account for the operation by the corporation was not opened until January 1973. Sales receipts and expenses incurred up to this date were run through petitioner's personal bank account. We conclude petitioner operated this business as his own during 1972. 4. Negligence Penalty Under Section 6653(a)Section 6653(a) provides that if any part of an underpayment of Federal income 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 the390 underpayment." Since respondent first claimed in an amendment to his answer that petitioner was liable for this negligence penalty, respondent has the burden of proof. Rule 142(a), United States Tax Court Rules of Practice and Procedure.Reasonable reliance on the advice of an expert is enough to avoid the negligence penalty. Industrial Valley Bank & Trust Co. v. Commissioner,66 T.C. 272">66 T.C. 272, 283 (1976). In the instant case, respondent has failed to prove that petitioners, as be contends, did not reasonably rely on the advice of Van Scoik, his long-time accountant, in not reporting the proceeds from the sale of the sand and the high-grade soil on their 1972 joint Federal income tax return. Van Scoik testified that, in his view, petitioner had no taxable income on the theory that the proceeds of the sand sales were to be first applied against the tract's basis and that the proceeds did not exceed this basis. When he gave his advice he was not aware that petitioner made sales of sand to more than one customer and that sales of highgrade soil were made in 1972. However, there is no evidence that petitioner withheld such information from Van Scoik. While we disagree391 with Van Scoik's views on the tax treatment of the sand and soil sales income, we do not think petitioner was negligent or intentionally disregarded the regulations. To reflect the foregoing, Decision will be entered under Rule 155.7/ Footnotes1. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax year in issue, unless otherwise noted.2. /↩ The parties stipulated that gross proceeds received in 1972 from these sales were $1,118.50. However, the underlying invoices reflect that $1,913.50 is the correct amount.3. / With respect to the fact that petitioner paid $95,291.46 for the tract, Mason testified: Q. Are you aware that Mr. Hunt paid $95,000.00 for that property or approximately $95,000.00 for that property in November of 1971? A. Yes, I'm aware of that. Q. And yet you valued the property at $57,000.00. A. That is correct. Q. Do you think Mr. Hunt got took or-- A. In 1971 or December of 1971 if I had had that property listed at $95,000.00, I wouldn't have even presented it to Mr. Hunt because I probably would not have listed it because I would have thought I would be wasting my advertising dollars advertising that at $95,000.00.↩4. / With respect to the 20 acres on which the sand deposit was located, Mason testified: Q. Then you valued this subject property without ever inspecting the terrain of the north half of the 20 acre tract. A. Yes. I was asked to give an appraisal of that property. And I did it solely on comparable sales in the area.↩5. SEC. 613. PERCENTAGE DEPLETION. (a) General Rule. -- In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion). For purposes of the preceding sentence, the allowable deductions taken into account with respect to expenses of mining in computing the taxable income from the property shall be decreased by an amount equal to so much of any gain which (1) is treated under section 1245 (relating to gain from disposition of certain depreciable property) as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231, and (2) is properly allocable to the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.↩6. /↩ At trial, Santiago Lloveras, a professional civil engineer and land surveyor, described the excavated materials as "yellow sand." Mason, a real estate broker in Clearwater, Florida, referred to the material as "fill dirt or soil, top soil, or white sugar sand, or whatever you want to call it." This illustrates the loose terminology used in the landfill business.7. / In accordance with Key Buick Co. v. Commissioner,68 T.C. 178">68 T.C. 178↩ (1977), petitioner's request for an award of reasonable attorneys' fees is denied.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620521/	JOHN W. CROWDER AND CONSTANCE S. CROWDER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCrowder v. CommissionerDocket No. 18000-82.United States Tax CourtT.C. Memo 1984-543; 1984 Tax Ct. Memo LEXIS 133; 48 T.C.M. (CCH) 1359; T.C.M. (RIA) 84543; October 9, 1984. John W. Crowder, pro se. David L. Miller, for the respondent. GOFFE MEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined a deficiency in petitioners' Federal income tax for the taxable year 1978 in the amount of $14,300, and an addition to tax under section134 6653(a)1 in the amount of $715. After concessions by the parties, the issues for decisions are: (1) whether the $1,610 payment made by petitioners for advice and documents relating to the creation and use of the John W. Crowder Trust is deductible; (2) whether petitioners have met their burden of substantiating the purchase dates and cost basis in gold and silver stock certificates sold in 1978; (3) whether petitioners owned a cash hoard of $12,000 that was omitted from the sources and application of funds analysis used by the Commissioner; and (4) whether petitioners are liable for an addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. FINDINGS OF FACT A majority of the facts were stipulated. The stipulation of facts, supplemental stipulation of facts, and accompanying exhibits are so found and incorporated herein by reference. John W. Crowder (Mr. Crowder) and Constance S. Crowder, husband and wife, were residents135 of Eugene, Oregon, at the time the petition in this case was filed. Petitioners timely filed a joint Federal income tax return for the taxable year 1978 with the Internal Revenue Service Center at Ogden, Utah. Petitioners subsequently delivered an amended joint Federal income tax return to the examiner auditing the original return. In 1978, petitioners established the John W. Crowder Trust (the trust). Petitioners purchased the materials and documents for the formation of the trust from the Institute of Religious Services in Ventura, California. Petitioners paid the promoters $1,610 in the taxable year 1978. The Internal Revenue Service notified petitioners before the filing of petitioners' Federal income tax return for the taxable year 1978 that the trust was invalid as an attempt to assign income.Nevertheless, Constance S. Crowder, fiduciary for the trust, filed a Federal fiduciary income tax return for the trust for the taxable year 1978. The trust's only reported income consisted of $10,331.66 of consultation income earned by Mr. Crowder. The fiduciary return also showed deductions of $3,107.32, including $1,350 for a vehicle leasing transaction between the trust136 and petitioners. The trust subsequently filed an amended fiduciary return for the taxable year 1978, with entries of zero for all items. The parties have stipulated that all income reported by the trust was taxable as petitioners' income, and that the vehicle leasing transaction between the trust and petitioners was a nullity. In April 1979, before filing their joint Federal income tax return for the taxable year 1978, petitioners decided that the trust had been misrepresented and attempted to find the promoters for a refund of the fee. The petitioners were unable to contact the promoters or to receive a refund of any portion of the $1,610 paid in the taxable year 1978. Petitioners nonetheless utilized the trust as a reporting device for the taxable year 1978 and omitted Mr. Crowder's consultation income from their joint return. They also included several items on the joint return relating to income from or deductions for payments to the trust. Finally, petitioners deducted the $1,610 payment under section 212. The petitioners did not view this payment as a loss until after the end of the 1978 taxable year. Petitioners sold 100 shares of Loraine silver stock and137 100 shares of Volkforstein gold stock in the taxable year at issue. The certificates were purchased at coin shows and sold for a total of $1,400 on July 1, 1978. Petitioners claimed a long-term capital loss of $2,150 on their joint return. No purchase dates or purchase prices have been established. Petitioners did not have a cash hoard at the beginning of the taxable year 1978. Petitioners never mentioned such a hoard at any point during the discussions and interviews with agents and employees of respondent until three hours before trial. The Commissioner determined, in his statutory notice, that the John W. Crowder Trust was devoid of economic reality and disallowed all items on petitioners' joint Federal income tax return for the taxable year 1978 relating to income from or deductions for payments to the trust.The $1,610 deduction for the creation of the trust was disallowed as a nondeductible personal expense.The Commissioner also determined that no cost basis or holding period had been established for the gold and silver stock certificates sold in 1978, and that the gross receipts from those sales were thus taxable as short-term capital gain. The Commissioner138 further determined an addition to gross income in the amount of $20,299 by reference to a sources and application of funds analysis. A number of additional adjustments were made in the statutory notice disallowing all or part of deductions claimed for depreciation, business expenses, employee business expenses, taxes, and miscellaneous itemized deductions, and determining that no cost basis or holding period had been substantiated for real estate sold in 1978. The majority of these additional adjustments were conceded prior to trial. The net of all of the adjustments determined was an increase in petitioners' adjusted gross income from the $13,381 reported on petitioners' joint return to $50,903. OPINION The statutory notice of deficiency is presumptively correct, and petitioners have the burden of disproving each individual adjustment. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). In the absence of any evidence presented as to the majority of the adjustments made in the statutory notice of deficiency, petitioners are deemed to have conceded the correctness139 of the Commissioner's determination, except as modified by the joint stipulation. Further, to the extent that the stipulated figures vary from the amounts determined in the statutory notice, the respondent is deemed to have adopted as correct the figures contained in the stipulation. The firstissue for decision is whether the $1,610 payment made by petitioners for advice and documents relating to the creation and use of the John W. Crowder Trust is deductible. Petitioners claimed the $1,610 payment as a deduction under section 212 on their original return, and as a casualty loss under section 165 on their amended return and at trial. Respondent disallowed the deduction as a nondeductible personal expense. Petitioners have the burden of proof on this issue. Rule 142(a). In order for this expense to be deductible under section 212, the payment must be either a cost of managing and conserving income-producing property under section 212(2) or incurred for legitimate tax advice and tax planning under section 212(3). The trust itself was devoid of economic reality, and was used140 as a mere device to assign income and avoid taxation. Vercio v. Commissioner,73 T.C. 1246">73 T.C. 1246 (1980); Markosian v. Commissioner,73 T.C. 1235">73 T.C. 1235 (1980); Wesenberg v. Commissioner,69 T.C. 1005">69 T.C. 1005 (1978). This Court denied a deduction where the payment was for advice on rearranging title to income or planning one's personal and family affairs, as is typical with this type of trust. Luman v. Commissioner,79 T.C. 846">79 T.C. 846 (1982); Epp v. Commissioner,78 T.C. 801">78 T.C. 801 (1982). Petitioners must prove that a specific portion of the $1,610 was allocated for the payment of a deductible item. As petitioners have failed to meet their burden of proving that any portion of the payment to the promoters was for any deductible purpose under section 212, the Commissioner's determination is sustained. Welch v. Helvering,supra;Rule 142(a). In the alternative, petitioners argue that the $1,610 payment resulted in a theft loss because the trust failed to perform its expected tax-saving function. Petitioners bear the burden of proving that the $1,610 payment represents a theft loss. Rule 142(a). 141 The pertinent parts of section 165 provide: (a) GENERAL RULE.--There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * * (c) LIMITATION ON LOSSES OF INDIVIDUALS.--In the case of an individual, the deduction under subsection (a) shall be limited to-- * * * (3) losses of property not connected with a trade or business, if such losses arise from * * * theft. * * * * * * (e) THEFT LOSSES.-- * * * [a]ny loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss. [Emphasis added.] We need not examine the nature and deductibility of the loss sustained, if any, as petitioners admitted that they did not view this payment as a loss or theft until after the end of the taxable year 1978, thus clearly falling outside the parameters of deductibility under section 165. The second issue for decision is whether petitioners met their burden of substantiating the purchase dates and cost basis in goldand silver stock certificates sold142 in 1978. The stipulation of the parties described the certificates as 100 shares of Loraine silver stock and 100 shares of Volkforstein gold stock. At trial, Mr. Crowder stated that the certificates were for 1000 shares of Loraine gold stock purchased on April 1, 1975, and 1000 shares of Blactaine silver stock purchased on July 1, 1976. Mr. Crowder was not sure of the purchase dates until shortly before trial, and relied only upon his memory for both the descriptions of the certificates and the purchase dates. Mr. Crowder testified that, when purchased, the fair market value of the gold certificates was between $2.50 and $2.80 per share, and the silver certificates had a value of "somewhere around $ .75" per share. No evidence was offered as to the actual purchase prices. The values at sale of the gold and silver stock were stated to be $1.15 to $1.20 and $ .35 per share, respectively. Mr. Crowder's statements as to both purchase dates and valuations were not supported by any documents, were reconstructions and approximations, and were inconsistent with both the stipulations and cost basis claimed for the stock on the return. Mr. Crowder's vague and contradictory statements fail143 to meet petitioners' burden of substantiating the cost basis or holding period of the stock, and the Commissioner's determination is sustained. Welch v. Helvering,supra;Rule 142(a). The third issue is whether petitioners owned a cash hoard of $12,000 that was omitted from the sources and application of funds analysis used by the Commissioner. Petitioners have not contested the validity of the Commissioner's analysis, which determined a failure to report gross income in the amount of $20,299 for the taxable year 1978. Petitioners' only contention is that the sources of funds shown in the analysis should be corrected to include a cash hoard of $12,000 accumulated by petitioners over a period of time and applied by them toward various purchases during the 1978 taxable year. Petitioners' assertion that they kept $12,000 in cash in their home is supported only by Mr. Crowder's self-serving testimony. We are not required to accept the witness' implausible testimony when it is uncorroborated by documentary evidence. Gatling v. Commissioner,286 F.2d 139">286 F.2d 139, 143 (4th Cir. 1961),144 quoted with approval in Nocholas v. Commissioner,70 T.C. 1057">70 T.C. 1057, 1064 (1978). Generally, absent independent verification, we are disinclined to believe testimony of the existence of a cash hoard. Burgo v. Commissioner,69 T.C. 729">69 T.C. 729, 745 (1978). Testimony of a cash hoard revealed for the first time on the day of trial is little more than "a belated and blatant concoction which [is] not entitled to any credit." United States v. Gay,567 F.2d 1206">567 F.2d 1206, 1207 (2d Cir. 1978), quoted with approval in United States v. Greene,698 F.2d 1364">698 F.2d 1364, 1371 (9th Cir. 1983). After observing the demeanor of the witness, we find that petitioners' claim of a cash hoard is not credible, and we hold that no such hoard existed. Petitioners bear the burden of disproving the Commissioner's determination of an addition to tax, under section 6653(a), for negligence or intentional disregard of rules and regulations resulting in underpayment of tax. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972); Rule 142(a). It is clear145 that petitioners failed to report a substantial portion of their income by use of the trust, and as reflected by the Commissioner's reconstruction of petitioners' income and expenditures.Petitioners have offered no reasonable cause for this underpayment, and have failed to disprove negligence or intentional disregard of the rules and regulations. Moreover, petitioners sought no advice as to the legal and tax consequences of the formation and operation of the trust. Before petitioners filed their return, they were advised by the Commissioner that the trust was invalid, and had themselves decided that the promoters had misrepresented the attributes of the trust.They nonetheless made the decision to use the trust device as an attempt to improperly assign income. United States v. Basye,410 U.S. 441">410 U.S. 441 (1973); Commissioner v. Culbertson,337 U.S. 733">337 U.S. 733 (1949); Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930). The addition to tax under section 6653(a) is, therefore, upheld. Hanson v. Commissioner,696 F.2d 1232">696 F.2d 1232, 1234 (9th Cir. 1983), affg. a Memorandum Opinion of this Court; Schulz v. Commissioner,686 F.2d 490">686 F.2d 490 (7th Cir. 1982);*146 Vnuk v. Commissioner,621 F.2d 1318">621 F.2d 1318, 1321 (8th Cir. 1980), affg. a Memorandum Opinion of this Court. 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 relevant years, and all rule references are to this Court's Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620523/	DAVID HERBERT BOTCHFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Botchford v. CommissionerDocket No. 53118.United States Board of Tax Appeals29 B.T.A. 656; 1933 BTA LEXIS 906; December 27, 1933, Promulgated 906 Held that the evidence fails to prove that respondent was in error in determining that certain payments were in the nature of additional compensation rather than a gift. Walter E. Hettman, Esq., and Kenneth N. Logan, C.P.A., for the petitioner. Dean P. Kimball, Esq., for the respondent. VAN FOSSAN 656 OPINION. VAN FOSSAN: The respondent determined that a payment of $30,000 made to petitioner in the year 1928 was additional compensation for services rendered and found a deficiency for that year in the amount of $5,563.05. Petitioner contends the payment was a gift. For a period of 14 years prior to 1928 petitioner had been vice president and general manager of Columbia Steel Corporation. Prior to August 1, 1927, his salary had been $20,000 per year. On that date it was changed to $30,000. In September of the same year petitioner suffered an attack of acute neuritis and high blood pressure. He was confined to his bed for a time and then on advice of his physician took a trip to Honolulu. Not being benefited, petitioner returned and later took a trip east for similar purposes. In the early part of December 1927 petitioner907 resigned his position, the company accepting the same December 19, 1927. On December 23, 1927, a special meeting of the executive committee of the board of directors of the Columbia Steel Corporation was held and the following resolution adopted: D. H. Botchford, Remuneration: On motion of Director Fleishhacker, seconded by Director Drum, it was Resolved that the Executive Committee recommend to the Board of Directors for their approval the following settlement to be made with Mr. Botchford upon his leaving the Company. That Mr. Botchford's connection with the Company cease as of December 31, 1927; that an additional year's salary be credited to Mr. Botchford, there being charged against this amount the personal account of Mr. Botchford with the Company, and the remaining balance to be paid to Mr. Botchford in twelve equal monthly installments during the year 1928; and that President Grant and Director Dall be constituted a committee of two to draft appropriate resolutions covering this action, for consideration by the Board. On January 16, 1928, the board of directors adopted the following resolution: RESOLVED: THAT WHEREAS D. H. Botchford resigned as General Manager908 of this Corporation on December 19, 1927, after having been in the service of this Corporation and its predecessor for many years; and 657 WHEREAS the condition of the health of said D. H. Botchford might make it difficult for him to procure immediate remunerative employment; RESOLVED: That this Corporation pay to J. D. Grant and C. G. Dall the sum of $30,000 less the amount of the personal indebtedness of said D. H. Botchford to this Corporation and that said J. D. Grant and C. G. Dall shall hold the sum so paid to them for the benefit of D. H. Botchford and shall be authorized to pay over said sum to him in twelve equal installments during the calendar year 1928, or at such other times or manner as said J. D. Grant and C. G. Dall shall determine. The "personal indebtedness" of petitioner to the corporation referred to in the resolution amounted to $14,417.84. This sum was to be credited to petitioner's account and the balance of the $30,000 paid in installments. These payments were made monthly in amounts of $1,500, the final balance being $644.90, paid in December 1928. Petitioner did not return the sums so received and credited as income. The company deducted909 the payment of $30,000 as an expense under the caption, "Compensation allowed D. H. Botchford for services to December 31, 1927, $30,000." In this case there is a direct conflict between the phrasing of and the inferences and conclusions to be drawn from the official corporate records and the testimony of certain of the witnesses for petitioner. Certain key words used in the resolution, such as "remuneration", "settlement with D. H. Botchford", "additional year's salary", "pay to J. D. Grant and C. G. Dall the sum of $30,000". together with the treatment by the company of the payment as an expense deduction in its tax return, it being described as "compensation allowed D. H. Botchford for services to December 31, 1927", suggest compensation rather than a gift. These resolutions and other records were coincident in time with the payment and presumptively accurately reflect the attitude of the company. The burden was on petitioner to rebut the natural inferences thus arising. There is nothing to demonstrate that these characterizations were merely inartistic. Under the holding of the Circuit Court of Appeals for the Second Circuit, the burden was on petitioner to prove that the910 action of the company officials in claiming a deduction for "compensation allowed D. H. Botchford for services to December 31, 1927" was unauthorized if such be the fact, , and no such proof was submitted. Certain of the directors testified that they intended the payment as a "donation." Under the circumstances of the case, however, we feel constrained to hold that petitioner has not proved the respondent's determination to be in error. See The case differs fundamentally from ; affd., . In that case the payment was officially designated as a gift, both by the directors and stockholders. The 658 payment was charged to surplus and no deduction was claimed in the corporate tax return. Likewise, the case differs from the case of . The court in that case held that the official characterization of the payment, in the authorizing resolution, as "an honorarium" clearly indicated the intention of the corporation to*911 make a gift. Comparable considerations were the basis of the decision in . Cf. ; ; ; . Though we do not deem it necessary to enter into a discussion of the matter, we may call attention to the implications arising from the fact that corporation directors have been held to have no authority, without authorization of the stockholders, to make a gift. ;We hold that the petitioner has failed to prove that the respondent was incorrect in his determination that the payment of $30,000 was additional compensation. Reviewed by the Board. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620524/	PAUL C. HARDING AND AUDREY T. HARDING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHarding v. CommissionerDocket Nos. 22157-92, 2150-93United States Tax CourtT.C. Memo 1995-216; 1995 Tax Ct. Memo LEXIS 218; 69 T.C.M. (CCH) 2625; May 18, 1995, Filed 218 Decisions will be entered for respondent. For petitioners: Robert L. Harding. For respondent: James F. Kearney. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent, in these consolidated cases, determined Federal income tax deficiencies in the amounts of $ 15,312 and $ 6,997 for 1987 and 1988, respectively. Respondent also determined additions to tax for 1987 under section 6653(a)(1)(A)1 in the amount of $ 766 and for 1988 under section 6653(a)(1) in the amount of $ 350; and for 1987 and 1988 under section 6659 in the amounts of $ 1,559 and $ 2,099, respectively. Additional interest under section 6621(c) and an addition to tax under 6653(a)(1)(B) were determined to apply to $ 5,196 of the 1987 income tax deficiency. Additional interest under section 6621(c) was determined to apply to the entire 1988 income tax deficiency. The issues for our consideration are: (1) Whether petitioners donated an oil and gas partnership interest to a qualified charitable organization during 1986; (2) if donated, whether the fair market value of the interest was of a sufficient amount to permit petitioners to be entitled to charitable contribution carryovers from 219 1986 to 1987 and 1988; and (3) whether petitioners are liable for the above-mentioned additions to tax and additional interest. FINDINGS OF FACT 2Petitioners, who were at all pertinent times husband and wife, resided in New Smyrna Beach, Florida, at the time their petitions in these cases were filed. During December 1980, petitioners paid $ 20,000 for a one-twenty-ninth interest in Washington County Oil & Gas, Ltd., a Florida limited partnership (Partnership). The private placement memorandum concerning Partnership, among other matters, notified investors220 that the attorney rendering the tax opinion was also counsel to the general partner, and that the attorney's fee was not set at arm's length. The private placement memorandum contained an explanation of the alleged tax benefits associated with an ownership interest in Partnership, including the deduction of intangible drilling and development costs, the deduction of dry hole costs, and depletion allowances in connection with any income from production. Under the proposed development plan, petitioners' $ 20,000 investment would generate deductions against their ordinary income from other sources as of the time of investment. Partnership owned an interest in three oil wells located in Washington County, Ohio. Partnership's general partner was Charles H. Vodicka (Vodicka); it was operated by Petro Oil & Gas Corp. (Petro) (a Delaware corporation with limited net worth and limited experience as an oil and gas operator). Sandhill Energy, Inc. (Sandhill), was the subcontractor of Petro, and it also subleased drilling sites to Partnership. In 1987, Sandhill filed for bankruptcy. Petitioners, through the promoter of their partnership interest, became aware of an opportunity to contribute221 their one-twenty-ninth interest to a section 501(c)(3) charitable organization. Petitioners neither were familiar nor had prior association with the section 501(c)(3) organization. During December 1986, petitioners completed the documentation to cause their one-twenty-ninth interest to be transferred to the section 501(c)(3) organization. In an amended 1986 Federal income tax return, petitioners reported a charitable deduction of $ 108,043 attributable to the donation of their one-twenty-ninth interest in Partnership. The amount claimed was based on an appraisal obtained through Partnership and the promoter prior to the filing of the 1986 amended return, but after the donation was made and the original 1986 return was filed. Due to a maximum contribution deduction limited to 30 percent of adjusted gross income, only $ 61,955 was claimed for 1986, and petitioners claimed contribution carryovers in the amounts of $ 21,338 and $ 24,750 to their 1987 and 1988 taxable years, respectively. Petitioners' 1986 return, in addition to the $ 108,043 contribution of the partnership interest, reflects other property contributions of $ 300 and cash contributions of $ 950. Likewise, petitioners' 222 1988 return, in addition to the $ 24,750 carryover, reflects property contributions of $ 100 and cash contributions of $ 657. Subsequent to filing their 1986 income tax return, petitioners, through their son, an attorney, inquired in a July 1, 1987, letter about the oil reserves in the contributed property and about the appraisers' credentials. In a July 6, 1987, response, Vodicka advised that reserve estimates had been performed by a Dr. Chase, who was chairman of the petroleum engineering department of Marietta College, and that he would be glad to provide a recent curriculum vitae. Petitioners were also told in that letter that Dr. Chase was independent from Partnership and that his letter regarding the oil and gas reserves could be obtained from Petro-Analysis, Inc. The private placement memorandum, however, stated that Dr. Chase was not independent from Partnership and that his relationship with Partnership was one of the risk factors involved in investing. Petitioners relied on an opinion by Dr. Hunter Herron for the value placed on the donated interest. Dr. Herron's opinion, in turn, relied on Dr. Chase's reserve estimates. In a letter dated July 11, 1986, Dr. Chase 223 provided an estimate of the reserves in the three Partnership properties. Dr. Chase's letter contained the following caveats: (1) "the reserves * * * computed in this study are, at best, approximations of the volumes of oil and gas which may exist"; (2) "Production data was not made available * * * for this study"; (3) "production decline curves and subsequent recoverable reserve calculations which are judged to be more accurate than volumetric reserve calculations could not be made"; (4) the logs used as a base for the estimates are not constantly reliable, and readings from different tools and the process of gathering and interpreting the information is subjective; and (5) Dr. Chase did not know the pressure within the various well zones. The general partner opined in the private placement memorandum that, due to certain geological features and the closeness of the well sites, the oil-bearing formations should be considered "semi-developmental", and that adjoining wells could have significantly different results. Statistical data was gathered by others, and Dr. Chase needed to make assumptions in order to estimate formation thickness, porosity, and oil and gas saturations. Dr. 224 Chase also noted that his assumptions could be materially affected if, e.g., other well logs in the vicinity did not remain constant. Dr. Chase thus pointed out that it "is critical to appreciate the inaccuracies which may be inherent in volumetric reserve calculations due to this assumption [regarding other wells in the same field or vicinity of the subject wells]." Dr. Chase also included an extensive disclaimer about the accuracy of the data underlying his estimations and renounced any possible liability due to errors in his estimations. Dr. Herron found Partnership's three wells to have a total value of $ 3,714,600, based on Dr. Chase's reserve estimates. Thus, petitioner's one-twenty-ninth interest was estimated to have a $ 108,000 3 value. Those values were reached by first estimating future revenue on Dr. Chase's reserve estimates. Then Dr. Herron applied a 10-percent discount factor to reach the future interest, which was further reduced by a 25-percent business risk factor. (The 25-percent risk factor was used because the well had no production history.) Dr. Herron's estimate was also reduced by any royalty payments. Dr. Herron signed petitioners' 1986 Form 8283, 225 which contained information about the claimed partnership interest contribution. Dr. Herron's report was purely hypothetical and dependent solely on the accuracy of Dr. Chase's reserve estimates. Dr. Chase had used the "volumetric method" to estimate the reserves. The volumetric method relies on electronic sampling and the extrapolation of the possible universe of reserves. Dr. Chase did not testify. Moreover, no information was provided to establish the accuracy of his estimates. Dr. Herron knew that there had been limited production from the wells; however, he did not use this information in reaching his valuation opinion. The placement memorandum indicated that drilling sites were obtained without warranty of title and that losses might arise from title defects in assignment rights. Partnership's production revenue was burdened by a 25-percent royalty and a 20-percent working interest. 226 Partnership's general partner had no experience in oil and gas operations. Possible defaults may have existed with respect to two of the leases because drilling may not have begun within the lease's required 45 days. Partnership filed tax returns with the State of Ohio reporting (for the three leases) 17 and 121.1 barrels of oil production for 1981 and 1982, respectively. Partnership also reported 523.20 and 1,915.90 cubic feet of gas production for 1981 and 1982, respectively. No oil or gas was produced after December 31, 1982. In fact, there is no indication that any activity took place after the limited production in 1982. Furthermore, at the time of petitioners' donation, both unpaid debt and mechanics' liens dating back to 1983 and exceeding $ 100,000 encumbered the leased property. OPINION The parties have analyzed petitioners' claimed contribution from two perspectives. First, respondent focuses on the bona fides of the transaction by questioning whether petitioners possessed an interest to contribute and, if petitioners possessed such an interest, whether it was actually transferred to a section 501(c)(3) organization. Second, respondent contends that the value 227 of petitioners' interest was insufficient to generate the contribution carryovers to 1987 and 1988. If respondent's position is sustained on either ground, then petitioners' claimed deduction must fail. We first consider the question of value. Section 170(a) provides taxpayers with a charitable deduction for contributions to organizations described in section 170(c). The parties agree that the intended donee organization was one that fits within the requirements of section 170(c) (i.e., it is a section 501(c)(3) organization). Section 1.170A-1(c)(1), Income Tax Regs., requires that the amount of a contribution in property be determined by its fair market value at the time of the donation. Regarding the allowance for depletion, section 1.611-2(d)(1) and (2), Income Tax Regs., focuses on the determination of the fair market value of mineral interests. That section provides: d) Determination of fair market value of mineral properties, and improvement, if any. -- (1) If the fair market value of the mineral property and improvements at a specified date is to be determined for the purpose of ascertaining the basis, such value must be determined, subject to approval or revision by228 the district director, by the owner of such property and improvements in the light of the conditions and circumstances known at that date, regardless of later discoveries or developments or subsequent improvements in methods of extraction and treatment of the mineral product. The district director will give due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties and improvements, bona fide offers, market value of stock or shares, royalties and rentals, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property and improvements was in question, the amount at which the property and improvements may have been inventoried or appraised in probate or similar proceedings, and disinterested appraisals by approved methods. (2) If the fair market value must be ascertained as of a certain date, analytical appraisal methods of valuation, such as the present value method will not be used: (i) If the value of a mineral property and improvements, if any, can be determined upon the basis of cost or comparative values and replacement229 value of equipment, or (ii) If the fair market value can reasonably be determined by any other method. "[F]air market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Sec. 1.170A-1(c)(2), Income Tax Regs. Fair market value is a question of fact, and it is determined by examining the entire record. Skripak v. Commissioner, 84 T.C. 285">84 T.C. 285, 320 (1985). From a judicial perspective, valuation questions are both factual and judgmental. Hamm v. Commissioner, 325 F.2d 934">325 F.2d 934, 940 (8th Cir. 1963), affg. T.C. Memo 1961-347">T.C. Memo. 1961-347; CTUW Georgia Ketteman Hollingsworth v. Commissioner, 86 T.C. 91">86 T.C. 91, 98 (1986); Buffalo Tool & Die Manufacturing. Co. v. Commissioner, 74 T.C. 441">74 T.C. 441, 452 (1980). In 1980, petitioners paid $ 20,000 for a one-twenty-ninth interest in Partnership, which owned three oil and gas properties. Partnership was a typical tax-shelter investment prevalent during the early 1980's. 230 The taxpayers attempted to immediately deduct multiples of the investment against their ordinary income from other sources. After the deductions had reduced their tax basis and/or their amount at risk, the potential for recapture or for the gain on the disposition of the interest became a problem. Petitioners had reached that point. There was no income earned in any year. Moreover, limited production was reported for 1981 and 1982, and no production was reported in any year thereafter. 4 In late 1986, the shelter promoter advised petitioners how they could contribute their partnership interest to a charitable entity in order to obtain tax benefits. The attempted contribution would also serve to avoid the fate of most burned-out shelter investments (i.e., gain on their disposition). Petitioners were also motivated to donate their interest by the fact that, through the promoters, petitioners' interest was valued at $ 108,000. At the pertinent times, Partnership was essentially dormant. No deductions were currently available to petitioners, and no income had ever been realized. Hence, we find it unlikely that petitioners' one-twenty-ninth interest (acquired for $ 20,000) was231 worth $ 108,000. We also note that the promoters placed a high value on the partnership interest shortly before the operating subcontractor (the only one with expertise in the oil and gas business) petitioned into bankruptcy. Petitioners' experts seek to magnify the value of the partnership interest by using a purely theoretical approach. This attempt must fail. Petitioners argue that Hightower v. Commissioner, T.C. Memo. 1972-252, presented this Court with a similar factual situation in which the taxpayer contributed an oil and gas interest from an unproductive concern. Petitioners also stress that the Court approved a valuation method that used estimates of future production based on estimates of reserves. This method also applied an interest discount and other factors in reaching a value. In Hightower, this Court accepted and modified estimates232 of oil and gas reserves. The Court explained that the estimated reserves were a reasonable reflection of "the volume of gas to use as a starting point in determining the fair market value of the wells." It is clear that the Court was satisfied with the record and supporting data. In the instant case, Dr. Chase furnished an estimate of the reserves in the three properties held by Partnership through a letter dated July 11, 1986. Dr. Chase's letter contained numerous caveats: (1) "the reserves * * computed in this study are, at best, approximations of the volumes of oil and gas which may exist"; (2) "Production data was not made available * * * for this study"; (3) "production decline curves and subsequent recoverable reserve calculations which are judged to be more accurate than volumetric reserve calculations could not be made"; (4) the logs used as a base for the estimates are not constantly reliable; (5) readings from different tools and the process of gathering and interpreting the information is subjective; and (6) additionally, the pressure within the various well zones was unknown to Dr. Chase. The statistical data regarding the wells was apparently not gathered by Dr. 233 Chase. He had to make assumptions and estimate formation thickness, porosity, and oil and gas saturations. Dr. Chase also noted that his assumptions could be materially affected if, for instance, well logs (of other wells in the vicinity) did not remain constant. Dr. Chase pointed out that it "is critical to appreciate the inaccuracies which may be inherent in volumetric reserve calculations due to this assumption [regarding other wells in the same field or vicinity of the subject wells]." Dr. Chase also included an extensive disclaimer regarding the accuracy of the underlying data and any liability for the failure of his estimate to measure up to reality. We find Dr. Chase's estimates to be, at best, poorly grounded, without substance, and unconvincing. 5234 Petitioners purchased their partnership interest for $ 20,000. There was little, if any, activity or income. Hence, we are unwilling to rely on a purely theoretical estimate of value. Respondent notes that, if the wells produced at the same rate as reflected in the 1982 Ohio reports, it would have taken over 400 years to consume the projected reserves in Dr. Chase's report. Petitioners offered no comparative or actual selling prices of Partnership oil and gas interests. Alternative valuation methods or estimates were not considered by either Dr. Chase or Dr. Herron. No explanation was provided for their resorting to a theoretical method. Considering the circumstances here, we refuse to rely on the valuation offered by petitioners. Consequently, petitioners have not shown that their one-twenty-ninth interest in Partnership was worth an amount that would have exceeded $ 61,955, and, thus, cause the contribution carryovers from 1986 to the 1987 and 1988 tax years. Accordingly, petitioner is not entitled to any contribution deduction attributable to Partnership for 1987 or 1988. Because we have decided that petitioners have not proven a sufficient value to cause a charitable235 contribution carryover to 1987 and 1988, it is unnecessary to decide the "bona fides" issues raised by respondent. Finally, we consider the additions to tax determined by respondent. Respondent determined that petitioners are liable for the valuation overstatement addition pursuant to section 6659. Under that section a valuation overstatement results if the value claimed is more than 150 percent of the correct value. Our finding that petitioners failed to show a value in excess of the 1986 threshold of $ 61,955 insures that the value claimed is more than 150 percent of the correct value. 6 The addition applicable for valuation overstatements in the case of charitable contributions is 30 percent. Sec. 6659(f)(1). 236 Respondent may waive the contribution valuation overstatement addition where (1) the claimed value was based on a qualified appraisal made by a qualified appraiser, and (2) the taxpayer made a good faith investigation of the value of the contributed property. Sec. 6659(f)(2)(A) and (B). The record appears to support a finding that Drs. Chase and Herron were qualified appraisers. But the weaknesses we have found, and the caveats and conditions expressed, cause the appraisal petitioners relied on to fall far short of being "qualified" within the meaning of section 6659(f)(2). The requirements for a "qualified appraisal" for purposes of section 6659(f) are set forth in the regulations under section 170. Subdivision (ii)(I) of section 1.170A-13(c)(3), Income Tax Regs., provides that the fair market value of the contributed property meet the requirements of section 1.170A-1(c)(2), Income Tax Regs. That section defines fair market value as: the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. * * * The appraisal used by petitioners237 to support their claimed contribution was purely hypothetical, and it was not based on the appraisers' personal knowledge. This appraisal, at best, was the maximum conceivable estimate value for petitioners' partnership interest. It is obvious that it did not take into account the extant realities or a price that a willing buyer and a willing seller would have paid for the partnership interest (which had an insignificant production record and no proven propensity to produce). We also note that the longstanding mechanics' liens against the properties were not accounted for in the appraisers' reports. We are not surprised that the appraisers did not reference any specific sales or purchases, even though the three wells that Partnership owned are part of a larger collection of wells. Such information would likely have shown that the partnership interest was not worth anything near what Dr. Herron calculated. Petitioners did inquire about the source and nature of the reserves, after the donation and filing of their original 1986 return. However, we cannot say that this would have been a sufficient inquiry under the circumstances. Petitioners did not ask about comparable sales 238 of other wells or partnership interests. This would have shown petitioners that the estimates and appraisers' hypothesis were out of line. Petitioners invested $ 20,000, and they received no income while holding the property (about 6 years). Thus, petitioners should have been at least somewhat skeptical about whether their partnership interest was then worth $ 108,000. We find that the appraisal petitioners relied on was not qualified within the meaning of section 6659(f). Accordingly, respondent did not err in determining a 30-percent addition to tax for a valuation overstatement each year at issue. Respondent also determined a 5-percent addition to tax in each year for negligence or intentional disregard of rules or regulations under section 6653(a). Section 6653(a)(1)(A) for 1987 and section 6653(a)(1) for 1988 provide for a 5-percent addition to tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations. If section 6653(a)(1)(A) applies for 1987 then section 6653(a)(1)(B) provides for a further addition to tax equal to 50 percent of the interest attributable to that portion of the underpayment resulting from negligence or intentional239 disregard of rules or regulations. Negligence is defined as a lack of due care or failure to do what a reasonable and prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947-948 (1985). Petitioners bear the burden of showing that they were not negligent. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). Petitioners' relatively unquestioning reliance on the appraisers was not reasonable under the circumstances, and it results in their negligence within the meaning of section 6653(a). Although petitioners did inquire about their appraisal and the reliability of the appraisers, the response that they received from Partnership was, at best, indistinct. Petitioners were advised that Dr. Chase was independent, although the private placement memorandum stated otherwise. Petitioners were eventually referred to other possible sources to determine the reliability of the appraisal or reserves and to review the appraisers' qualifications. There is no indication that petitioners made any further inquiry or that they sought any information supporting the valuation. Considering240 their $ 20,000 investment, Partnership's lack of income or income prospects, and the lack of facts with which to support the $ 108,000 claimed value, petitioners were not reasonable in their reliance on the valuation, appraisal, or statement of the reserves presented to them. Moreover, we note that petitioners did not show any pattern of past charitable giving commensurate with the relatively large amounts involved in this case. Other than the $ 108,043 amount claimed for the partnership interest, petitioners' giving pattern does not comport with the controverted amounts in issue. Even more telling is petitioners' lack of information or involvement with the donee/charitable organization. We accordingly find that respondent did not err in determining additions for 1987 under section 6653(a)(1)(A) and (B), and for 1988 under section 6653(a)(1). Respondent determined that petitioners were liable for additional interest under section 6621(c) for 1987 and 1988. Section 6621(c) provides for interest at 120 percent of the normal rate on substantial understatements attributable to tax-motivated transactions. Section 6621(c)(3)(A)(i) defines a tax-motivated transaction to include valuation*241 overstatements within the meaning of section 6659(c). Our finding that such valuation overstatements under section 6659 occurred here causes section 6621(c) to apply with respect to both taxable years. Hence, respondent's determination of this additional interest is sustained. To reflect the foregoing, Decisions will be entered for respondent.Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The parties' stipulation of facts, along with attached exhibits are incorporated by this reference.↩3. Although $ 108,000 is somewhat less than one-twenty-ninth of $ 3,714,600, we accept the parties' stipulations on this matter.↩4. This limited production was considered insufficient by petitioners' experts to project the value or profitability of the properties.↩5. See also Osterhout v. Commissioner, T.C. Memo. 1993-251, describing the volumetric method as follows: We are not convinced of the accuracy of the geology reports relied upon by petitioners. In calculating the reserve estimates of the Balboa and Drake prospects, the geologists resolved every doubt in favor of the maximum possible reserves, assumed every well would be drilled, and utilized a method of valuation that was known to be characteristically high but not particularly accurate. Rather than utilizing independent data in determining the amount of the reserves, the geologists used assumptions provided by the sublessors, and, in fact, the reports were commissioned by the sublessors. Moreover, Osterhout ignored the significantly lower oil reserve estimates and price assumptions contained in the independent report pertaining to the Drake prospect prepared by Coopers & Lybrand. With respect to Balboa, Osterhout never received an independent determination as to the viability of the program.↩6. Petitioners claimed $ 108,043 as the value. They failed to show that the value exceeded $ 61,955. Even if petitioners had proven that the value was $ 61,955 (i.e., the threshold after which carryover to 1987 or 1988 would occur), the valuation overstatement would be at least 174 percent of actual value.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620526/	WESTERN HIDE & FUR COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Western Hide & Fur Co. v. CommissionerDocket No. 44294.United States Board of Tax Appeals26 B.T.A. 354; 1932 BTA LEXIS 1326; June 9, 1932, Promulgated 1326 A taxpayer invoking the provisions of section 240(d) of the Revenue Act of 1924, and section 240(f) of the Revenue Act of 1926, for the consolidation of its accounts with those of another corporation must show the necessity for the consolidation and a method of "accurate distribution or apportionment" of the income and expenses of the two companies engaged in related trades or businesses and owned or controlled by the same interests. Russell D. Morrill, Esq., and Francis L. Casey, Esq., for the petitioner. J. M. Leinenkugel, Esq., and T. G. Histon, Esq., for the respondent. SMITH 354 The Commissioner determined deficiencies in the petitioner's income taxes for the years and amounts as follows: 1924$6,203.1019252,474.3519262,062.20The petitioner alleges that the Commissioner erred in not consolidating its accounts with the accounts of John Finnigan Company and not determining its net income for the years 1924, 1925, and 1926 in accordance with section 240(d) of the Revenue Act of 1924, and section 240(f) of the Revenue Act of 1926. The facts were stipulated. FINDINGS OF FACT. The petitioner is an1327 Arkansas corporation, with its principal office at Little Rock. At all times during the years 1924, 1925, and 1926 the Central Leather Company owned 100 per cent of the issued and outstanding capital stock of John Finnigan Company and 52 per cent of the issued and outstanding capital stock of the petitioner. The remainder of the petitioner's stock was owned during this period by R. L. McKinney, the local manager of the company. During 1924, 1925, and 1926 petitioner was engaged solely in purchasing and selling hides and furs, its purchases being confined to the local market in and around Little Rock. John Finnigan Company was engaged at all times during 1924 and 1925 in buying and selling hides and furs for its own account in the Southwest, and, in addition thereto, performed services for and extended facilities to the petitioner as hereinafter stated, and 355 also performed services for and extended facilities to certain other organizations controlled by the Central Leather Company. Such services performed and facilities as were extended to the petitioner are as hereinafter stated. During the years 1924 and 1925 the John Finnigan Company directed and controlled1328 the management of petitioner and certain other corporations controlled by Central Leather Company and engaged in the same business as the petitioner, and arranged for storage of hides and furs purchased by all of these corporations so that hides and furs of a particular kind or quality were gathered together in a certain warehouse, and those of another kind or quality were stored in another warehouse, regardless of which member of the group of corporations purchased them. During the years 1924 and 1925, and John Finnigan Company furnished to petitioner general supervisory services, arranged petitioner's corporate records, and handled the head office accounting, billing, collection and credit service for petitioner. During the years 1924 and 1925 petitioner and its local manager were under the direct supervision and control of R. E. Paine, president of the John Finnigan Company, whose salary and expenses were paid entirely by the John Finnigan Company. By reason of the John Finnigan Company's financing the purchases of hides and furs by the petitioner, the petitioner's account on the books of the John Finnigan Company showed monthly debit balances owing by petitioner to John1329 Finnigan Company during the years 1924, 1925, and 1926, as follows: Month192419251926January$184,980.74$84,523.52$124,484.95February199,184.8970,157.08123,129.09March158,818.8769,871.80123,868.31April175,127.6189,519.27119,224.50May141,272.2294,511.97137,831.11June148,654.7565,141.92136,034.31July134,352.9541,735.84132,081.61August75,096.1144,830.56136,124.47September69,181.2747,738.72128,974.80October57,328.3857,731.5087,201.80November44,883.0195,917.8589,710.23December67,922.00116,276.23111,844.20Total1,456.802.80877,956.261,450,509.38Monthly average121,400.2373,163.02120,875.78No interest or the equivalent thereof was directly or indirectly paid by petitioner or charged against petitioner by the John Finnigan Company or Central Leather Company for or on account of the financing of petitioner by the John Finnigan Company during the years 1924, 1925, and 1926. 356 Petitioner's sales of hides and furs in 1924 and 1925 were as follows: YearTotal salesSales by or through John Finnigan Co.1924$820,157.01$287,039.921925855,832.39307,123.981330 The gross sales of the John Finnigan Company for the years 1924 and 1925 amounted to $1,088,896.45 and $687,238.46, respectively. The expenses of the two companies for these years were as follows: John Finnigan Co.Western Hide & Fur Co.Item1924192519241925Wages$17,639.45$11,870.68$17,274.77$15,733.76Salary40,175.8624,085.6015,280.0015,786.65Light, heat, and water940.39499.31458.97403.72Stationery and office supplies591.32362.14500.44617.46Traveling3,859.922,655.896,043.076,276.33Repairs562.62543.95242.80Telephone and telegraph2,304.971,479.032,515.762,825.90Insurance2,992.381,751.661,561.851,093.57Rent456.3350.002,855.002,880.00Taxes4,291.553,584.98691.89571.08Auto1,388.20805.701,038.741,036.23Legal500.00840.60Depreciation1,114.27658.88600.00Bad debts9,378.062,872.122,930.59Agent's profit35,629.8038,546.527,177.871,585.89DonationLoss, foreign exchangeInterest13.11286.79Juarz hide accountHauling82.68214.65169.01Miscellaneous844.981,130.602,046.252,417.76Commission9,980.93Total122,752.78101,718.5957,915.1755,214.741331 The expenses of petitioner set forth above were incurred and paid solely for and in connection with its local activities and for its local manager and employees in purchasing and handling hides and furs during the years 1924 and 1925, and includes no item or charge for services performed or interest or charge for money advanced by the John Finnigan Company. The proceeds of all sales made by the John Finnigan Company for petitioner were credited to petitioner's account without deductions, charge or diminution, directly or indirectly, for commissions, expenses of handling overhead and storage or any other charge or expenses of any kind or nature. No charges of any kind or nature were ever made against petitioner, either directly or indirectly, by the John Finnigan Company or Central Leather Company for or on account of any of the services rendered by the John Finnigan Company to petitioner. 357 No payments were ever made nor were services of any kind, shape or manner ever rendered by petitioner to or for the account of the John Finnigan Company or Central Leather Company, either directly or indirectly, in consideration of or in return for the noninterest-bearing advances1332 or services. The John Finnigan Company practically ceased to do business during the year 1926, except to finance the purchase of hides and furs by the petitioner by advances to the petitioner for that purpose in that year. The income and deductions of the John Finnigan Company, as finally determined for Federal income-tax purposes, for the years 1924, 1925, and 1926, are as follows: Item192419251926Gross income$177,805.66$132,716.45$13,082.39Deductions122,736.3691,372.259,973.90Net income55,069.3041,344.203,108.49The Central Leather Company, with which the John Finnigan Company filed consolidated income-tax returns for 1924, 1925, and 1926, showed consolidated net losses as follows: 1924$2,206.306.1419255,007,795.771926161,386.62The Commissioner determined that the petitioner was not affiliated with the Central Leather Company or any other company during the taxable years, and asserts deficiencies against the petitioner on its separate net income as reported in the consolidated returns filed by the Central Leather Company as follows: 1924$49,624.79192521,794.7619262,138.101333 plus, for 1926, $15,137.43 due to intercompany income on hides which was eliminated on the books of the Central Leather Company and restored on the books of the petitioner. OPINION. SMITH; Section 240(d) of the Revenue Act of 1924 and section 240(f) of the Revenue Act of 1926 are identical and are as follows: In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order 358 to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses. The respondent contends that the mandatory requirement upon him to make the reallocation applies only where the necessity exists because of inaccurate distribution or apportionment, asserting that the instant proceeding does not require a consolidation of accounts. This Board considered the above provision of the Revenue Acts in 1334 Nowland Realty Co.,18 B.T.A. 405">18 B.T.A. 405, 414; affd., 47 Fed.(2d) 1018, and denied the consolidation of the accounts of that petitioner with another taxpayer on the facts presented in that proceeding. We there said: * * * the statute specifically provides that the consolidation of the accounts as provided for therein shall be made "if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions or capital between or among such related trades or businesses." This requirement must be met in order for accounts to be consolidated. * * * In affirming the Board's decision in the above case, the Circuit Court of Appeals for the Seventh Circuit (Nowland Realty Co. v. Commissioner, 47 Fed.(2d) 1018, 1021) said: It is not perfectly clear from a reading of section 240(d), Act of 1924 (26 USCA § 993 note), to what extent a court may review the action of the commissioner to ascertain whether a fact situation exists which makes it necessary to consolidate accounts in order to make an accurate distribution of profits. What is meant by the word "accurate" as used in the statute? 1335 Who determines whether a consolidated statement depicts more accurately distribution or apportionment of gains than two independent statements? While we are not inclined to deny to the board or to this court the right to review the question presented by this test, yet obviously there is, we think, some discretion left in the commissioner, and the exercise of that discretion can only be disturbed when an abuse of it is shown. Section 240(d) of the Revenue Act of 1921 is substantially the same as the provisions of the later acts now under consideration, and has been considered in Broadway Strand Theatre Co.,12 B.T.A. 1052">12 B.T.A. 1052, and Roessler & Hasslacher Chemical Co.,25 B.T.A. 915">25 B.T.A. 915. In both cases the consolidation of accounts was denied. In the first case, we said: * * It has not been shown that there was such an intermingling of the accounts of the two businesses in question as would necessitate the consolidation of their accounts in order to make "an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses," or that the accounts should be consolidated to obviate1336 the situation as pointed out in Report No. 275 of the Committee on Finance "to prevent the arbitrary shifting of profits among related businesses." In Roessler & Hasslacher Chemical Co. the petitioner contended that certain expenditures it had made "should be distributed or apportioned so that a part thereof may be used to offset Niagara's 359 [Electro Chemical Co.] income, another part used to offset the income of Perth Amboy [Chemical Works], and the remainder left to the R. & H. Company." The facts of that case show the amounts expended by that petitioner in conducting the businesses of the three chemical companies. That petitioner sought an apportionment of the expenses under one of three methods: first, a percentage based upon a witnesses' opinion; second, on the basis of gross sales; or, third, on the basis of capital. In rejecting the proposed methods, we said: The methods suggested by the petitioner are short cuts. They are less onerous as to proof. But there were obviously better and more accurate methods which anyone wanting to make a reasonably accurate distribution would adopt in preference. Where some allocation is proper under section 240(d), 1337 it is incumbent upon a petitioner before this Board to prove a more accurate method of distribution or allocation than those suggested by this petitioner, or at least to show sufficient justification for failure to do so. Even if every other question in this case were decided in the petitioner's favor, nevertheless, we could not make any allocation. We need decide nothing more. The petitioner contends that its income should be reduced and the income of the John Finnigan Company increased by "an amount equal to at least 6% on the average monthly debit balances" owing to John Finnigan Company by reason of advances to the petitioner. The allocation contended for, in effect, amounts to, first, allowing petitioner a deduction for interest that was not paid in the taxable years and for which no liability has been shown to have been incurred in these years; and, second, crediting the John Finnigan Company with income which, according to the evidence, it neither received nor had any right to receive in these years. In this manner petitioner contends that the interest "deduction" should be allocated for the years under consideration in the following amounts: 1924$7,284.0119254,389.7819267,252.551338 It is to be noted that the statute provides for the consolidation of accounts "if necessary in order to make an accurate distribution or apportionment of * * * deductions." We believe that Congress used the word "deductions" in this provision as meaning the deductions provided for in section 234 of the act. Obviously, the proposed method of allocating on amount representing 6 per cent of the petitioner's average monthly debit balance on advances from the John Finnigan Company is not an accurate distribution of the deductions within the purview of the statute. No agreement for the payment of interest on these advances has been disclosed by the record, and no interest was in fact paid, but should we nevertheless consolidate the accounts of the two companies, there would have to 360 be "an accurate distribution or apportionment" between them and we would still have no allowable interest deduction to apportion. Only "interest paid or accrued within the taxable year on its indebtedness" would be deductible by the petitioner (section 234(2) of the Revenue Act of 1924); the amounts proposed are not within the purview of that provision of the statute, and are apparently not included1339 in the accounts to be consolidated. The instant proceeding is very much like Roessler & Hasslacher Chemical Co., supra, except that one comes under the 1924 and 1926 Acts and the other under the 1921 Act. However, this difference is not material. There, the three corporations had filed consolidated returns, just as here, and one had been held without the affiliated group, just as here. There, certain expenditures were made on behalf of three corporations, which that petitioner sought to have apportioned; here, certain expenditures were made by the John Finnigan Company, a portion of which petitioner contends should be apportioned to it to determine its true income. The petitioner contends that the John Finnigan Company "paid for various services to Petitioner in 1924 and 1925, * * * and this expense was deducted in item 22 'Other Deductions' of Finnigan's Accounts in Central's Consolidated Federal income tax return * * * in the amount of $103,457.57 in 1924 and $74,356.80 in 1925." These amounts appear on the return as "Branch & Genl. Expense Hide Buying Cos." The facts show that the John Finnigan Company performed services for and extended facilities to the1340 petitioner and other organizations controlled by the Central Leather Company. Obviously, these amounts are not wholly attributable to the services of the John Finnigan Company on behalf of the petitioner. The parties stipulated, and we have made findings accordingly, the amounts of the expenses of the John Finnigan Company and the petitioner for the years 1924 and 1925. Likewise, we have found from the stipulation the amounts of petitioner's sales, the John Finnigan Company's sales, and the sales of the John Finnigan Company for the petitioner. The petitioner contends that some portion of these expenses is properly deductible by it, and they should be allocated between the John Finnigan Company and petitioner on one of the following bases, or, in the discretion of the Board, on a combination of such bases: Sales by Finnigan for Petitioner/Total Sales by Finnigan for Petitioner and itself X Finnigan's General Expense = Portion of Finnigan's Expenses allocable to Petitioner. 2. Petitioner's total sales/Petitioner's and Fingan's total sales X Combined expense of Petitioner & Finnigan = Petitioner's share of combined expenses. 3. Sales by Finnigan for Petitioner/Petitioner's1341 total sales X Petitioner's net income = Portion of Petitioner's income allocable to Finnigan for services. 361 The combination proposed is to use the average of the result of the three formulae. We are not impressed with such proposals. First, no showing is made respecting the sales and expenses of the other corporations controlled by the Central Leather Company and for which the John Finnigan Company rendered the same sort of services rendered to or for the petitioner; and, second, even assuming that all the amounts shown are attributable to the petitioner and the John Finnigan Company and that the other companies in the group may be ignored, the proposals do not accurately establish the expenses to be apportioned or allocated to each company. Here, as in the Roessler & Hasslacher Chemical Co. case, supra, "there was no effort made to segregate accurately any of the expenses to determine the amount applicable to each company. It does not appear that such an attempt would have been futile or that it was necessary to rely upon an approximation." If the accounts of the petitioner and the John Finnigan Company were consolidated under section 240(d) of the 19241342 Act, and section 240(f) of the 1926 Act, we would nevertheless be confronted with the problem of breaking up the accounts and segregating the items attributable to each in order to determine the petitioner's correct tax liability. We have no sufficient evidence on which to make such a segregation. Separate accounts were kept by or for each company and the detailed expense of each is shown. We can not determine that the method used does not accurately distribute or apportion the items of income and expenses; certainly the proposed methods would not more accurately distribute or apportion these items between the petitioner and the John Finnigan Company. Furthermore, no showing is made with respect to expenses for 1926. Although the evidence establishes that the petitioner and the John Finnigan Company were engaged in related trades or businesses, owned or controlled by the same interests, the evidence does not disclose an abuse by the respondent of the discretion reposed in him by refusing to consolidate the accounts of these two corporations. His action is sustained. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620527/	ALBERT'S, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Albert's, Inc. v. CommissionerDocket No. 8891.United States Board of Tax Appeals10 B.T.A. 1132; 1928 BTA LEXIS 3957; March 1, 1928, Promulgated 3957 1. INVENTORIES. - The alleged inaccuracies in opening or closing inventories can not be presumed merely because by their use a high proportion of merchandise gain as compared with sales is disclosed. 2. SPECIAL RELIEF. - The record of this case does not disclose any such abnormal conditions affecting the capital or income of the petitioner as to make a prima facie case requiring the assessment of profits taxes under the provisions of section 328 of the Revenue Act of 1918. H. W. B. Taylor, Esq., and Thomas P. Boyd, Esq., for the petitioner. A. H. Fast, Esq., for the respondent. TRUSSELL 1132 This proceeding seeks a redetermination of petitioner's income and profits tax for the calendar year 1919, respondent having asserted a deficiency in the sum of $4,885, by letter dated September 11, 1925. Petitioner alleges (a) that the inventory figures shown upon the books are incorrect and far in excess of the cost or market value, whichever is lower, of the actual inventory of December 31, 1919, and (b) that owing to alleged abnormalities petitioner is entitled to have its profits taxes determined under the provisions of section 3283958 of the Revenue Act of 1918. FINDINGS OF FACT. Petitioner, a California corporation, was engaged in the operation of a department store in the years 1916 to 1924, inclusive, at San Rafael. For the calendar year 1919 petitioner made an income and profitstax return, which, barring some slight inaccuracies, showed facts substantially as follows: Gross sales$167,252.31Merchandise bought for sale$122,715.64Inventory at beginning of year75,925.55Total198,641.20Inventory at end of year99,513.31Cost of goods sold99,127.89Gross merchandise profit68,124.42Total deductions31,987.21Net income36,137.21Average invested capital for year75,011.88Excess-profits tax9,500.05Income tax2,425.17Total tax liability11,925.221133 After an examination of petitioner's books of account by a revenue agent, the Commissioner determined that petitioner's net income for the year was $46,378.74 and that there was a deficiency in income and profits tax in the amount of $4,885. The City of San Rafael is located a short distance from San Francisco, and in 1919 had a population of about seven or eight thousand. 3959 OPINION. TRUSSELL: The record of this action does not show in what manner the Commissioner arrived at his finding that the net income was greater than that shown in the petitioner's return, and it does not appear that the petitioner now raises any issue as to Commissioner's net income figures being supported by its books of account. There is some testimony and much argument intended to raise the issue that petitioner's closing inventory for 1919 is incorrect and does not reflect the true cost or market value, whichever is lower, of the inventory and that therefore the figures of net income are distorted. But there is no testimony from which we can find any specific error in the inventory or any basis upon which it might be claimed that such inventory should be corrected or revised. The chief burden of petitioner's position seems to be simply that figures produced an amount of net income out of proportion to the business transacted. It is impossible, however, for us to find in the record any basis for concluding that the inventories are incorrect or that there must be any proper revision of the inventory figures. Petitioner's testimony in support of his claim for special3960 relief consists of a showing that the net income as found by the Commissioner is more than 27 per cent of the gross sales, and a showing that, for 1921 and subsequent years, there have been publications of the result of researches showing that the average percentage of income to gross sales of department stores in California have been much less than the percentage found in the petitioner's case for 1919. In respect to this testimony it must be noted that the published results of researches made apply to years subsequent to the one here under review, and apparently overlook the fact that the year 1919 was a year of high prices in the mercantile trade, while in the year 1921 and subsequent years much lower prices prevailed. Examining the data respecting sales, merchandise profits, and invested capital as shown by the petitioner's return, it appears that the gross merchandise profit was near 40 per cent of the gross sales and that such profits represented a mark-up of cost prices to an average extent of about 60 cents per dollar. It may well be that fact that a petitioner in the year 1918 was able to sell his goods at high prices, and so realize proportionate profits, is not in itself3961 an 1134 abnormality as described in section 327(d) of the Revenue Act of 1918. It is further noted that the total tax liability as determined by the Commissioner is only approximately 36.2 per cent of the net income, and, although it may be granted that other taxpayers fail to realize profits upon which that rate of tax could be computed, such fact does not establish an abnormality of income but rather indicates that in the petitioner's peculiar situation it was able to realize a high rate of profit upon the amount of goods sold during the year 1919. We are, therefore, of the opinion that the record does not show such a set of facts as to require the operation of the relief sections of the Revenue Act of 1918. The deficiency in income and profits taxes for the calendar year 1919 is in the amount of $4,885. Judgment will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620528/	Arthur J. Bouchard and Irene S. Bouchard v. Commissioner.Bouchard v. CommissionerDocket No. 40038.United States Tax CourtT.C. Memo 1954-243; 1954 Tax Ct. Memo LEXIS 2; 13 T.C.M. (CCH) 1223; T.C.M. (RIA) 54348; December 31, 1954, Filed 2 Petitioner received $5,610 and $2,800 in 1948 and 1949, respectively, from a corporation which hoped to derive a profit from the successful development of various ideas upon which petitioner was working. There was no understanding that petitioner was personally obligated to repay the corporation the amounts received; and the corporation expected to recover the amounts it paid petitioner, if at all, out of the profits. Held, the amounts received by petitioner were ordinary income. Martin J. Torphy, Esq., 231 West Washington Avenue, Milwaukee, Wis., for the petitioners. Richard D. Hobbet, Esq., for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: Respondent determined deficiencies in the income tax of3 petitioners for the years 1948 and 1949 in the amounts of $193 and $1,527.68, respectively, an addition to tax under section 291(a) of the 1939 Code of $48.25 for the year 1948, and additions to tax under section 293(a) of the 1939 Code of $9.65 and $76.38 for the years 1948 and 1949, respectively. The issues for decision are whether respondent correctly determined that the amounts received by Arthur J. Bouchard from the Juneau Stamping & Manufacturing Co. in the years 1948 and 1949 represented ordinary income, and correctly determined additions to tax under sections 291(a) and 293(a) of the 1939 Code. [Findings of fact] Arthur J. Bouchard (hereinafter referred to as petitioner) and Irene S. Bouchard are husband and wife and reside in Wauwatosa, Wisconsin. Neither filed an income tax return for the year 1948. They filed a joint return for the year 1949 with the collector of internal revenue for the district of Wisconsin. In 1947 petitioner approached Carl F. Hofmeier, president of the Juneau Stamping & Manufacturing Co. (hereinafter referred to as Juneau) with an idea for deriving profits from the production and sale of certain items, including a dishwasher, a combination4 ashtray and glass-holder, a heater cover for Army tanks, and other articles. He also had an idea for realizing profits by acquiring steel for Hotpoint Electric Co. At that time petitioner was without money. Petitioner and Hofmeier entered into an informal agreement as a result of their discussions, but they do not now agree as to its terms. According to petitioner's understanding of the agreement, he was to work on the furtherance of his ideas for deriving profits; Hofmeier or Juneau was to advance petitioner money to cover his living and travel expenses; the initial profits were to be used to reimburse Hofmeier or Juneau for the amounts advanced; aind the remaining profits were to be evenly divided. Neither party understood that petitioner would be personally liable for the repayment of the amounts received. Juneau paid petitioner $5,610 and $2,800 in the years 1948 and 1949, respectively, under the above arrangement which it charged off as an expense for contract work. Respondent stipulated that petitioner was not an employee. Petitioner has not repaid any of the above amounts, and neither petitioner nor Hofmeier are of the opinion that petitioner is obligated to repay Juneau. 5 There is a dispute, however, as to whether Juneau owes petitioner an additional sum. [Opinion] Petitioners are not contending that the amounts received from Juneau were gifts. Cf. . They do contend, however, that the amounts received were loans and not compensation for services. Certainly money received as a loan is not income. . But there is nothing in the record to indicate that the questioned amounts were received as loans. Petitioners have advanced two theories upon which they rest their contention that the payments received were loans. The first is based upon petitioner's understanding that Juneau was to be reimbursed out of the initial profits. But such an arrangement does not give rise to an indebtedness. It is simply a procedure for sharing the profits. Under petitioner's understanding of the agreement, Juneau paid for petitioner's services hoping to recover its expenditures out of the profits. Cf. . Petitioners' second theory is that no understanding was reached as to the terms of the agreement; and, hence, 6 there was no binding contract. They argue that in the absence of a contract there was no consideration and petitioner was legally obligated to repay the amounts received. But assuming, arguendo, that petitioner did become legally obligated to repay the amounts in dispute, it is clear that petitioner did not think he was under such an obligation. Where money is received under these circumstances, the fact that the taxpayer may be legally obligated to repay the amounts received does not prevent them from being taxed as ordinary income. ; ; ; , (on appeal C.A. 6). In , the Supreme Court said: " * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * 7 " As we view the facts, petitioner received payments from Juneau because he was or appeared to be performing services as a result of which Juneau hoped to derive a profit. There was no understanding that the money would be repaid, except to the extent Juneau was reimbursed out of profits. While it appears that Hofmeier was anxious to aid the petitioner and his family, who were without money, there is nothing in the record to indicate that the payments were gifts rather than compensation for services. Nor is there any indication that petitioner was restricted in his use of the money received. Under these circumstances the only logical conclusion is that the payments were received for services rendered and are, therefore, taxable as ordinary income. There is some indication in the record that $410 and $600 received by petitioner in 1948 and 1949, respectively, were in the nature of advances for travelling expenses. But such payments are taxable as income when received. . Petitioner is, of course, entitled to deduct allowable expenses which he actually incurred. However, petitioners have not attempted to establish the right to a business8 expense deduction; and while there is some indication in the record that such expenses were incurred, there is no evidence establishing the year in which they were incurred or the amount, if any, which was expended. Petitioners do not contest respondent's determination of additions to tax of 25 per cent for the year 1948 for failure to file a return and of 5 per cent for each of the years 1948 and 1949 on the ground that at least part of the deficiency was due to negligence, or intentional disregard of rules and regulations but without intent to defraud. While there is some indication in the record that petitioner believed that no part of the amounts received was taxable income, this alone is not sufficient to rebut the respondent's determination. Cf. . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620529/	DEL MAR ADDITION, B. G. BARNES, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Del Mar Addition v. CommissionerDocket No. 94804.United States Board of Tax Appeals40 B.T.A. 833; 1939 BTA LEXIS 793; October 31, 1939, Promulgated 793 Upon the facts herein, held, that petitioner is an association taxable as a corporation; held, further, that sections 105 and 106 of the Revenue Act of 1935, as amended by Revenue Act of 1936, are not unconstitutional; and held, further, that a capital stock tax return filed January 12, 1939, for the year 1936 was ineffective to secure the "credit" granted by sections 105 and 106, as amended, where the sole purpose in filing the return was to defeat petitioner's excess profits tax liability. George S. Atkinson, Esq., and M. S. Carneiro, C.P.A., for the petitioner. Elmer L. Corbin, Esq., for the respondent. ARNOLD 833 This proceeding involves a deficiency in income tax for the fiscal year ended November 30, 1936, in the amount of $3,421.09 and a deficiency in excess profits tax for the same period in the sum of $2,575.14. Three errors are alleged: (1) That petitioner is not an association taxable as a corporation, (2), in the alternative, that sections 105 and 106 of the Revenue Act of 1935 as amended by the Revenue Act of 1936 are unconstitutional, and (3), in the second alternative, that if sections 105 and 106, as amended, 794 apply and petitioner is subject to corporate excess profits tax, petitioner is entitled to a $25,000 exemption in computing the amount of its excess profits tax liability. FINDINGS OF FACT. Under date of May 9, 1925, B. G. Barnes, Charles A. Krausse, Gus H. Krausse, Perry J. Lewis, Morris Stern, A. L. Wright, and O. O. Wright, who resided in Bexar and Neuces Counties, Texas, entered into an agreement relating to the purchase, subdivision, and resale of a 200-acre tract of land located partly within and partly without the city limits of Corpus Christi, which they had contracted to purchase from E. B. Cole. The several parties invested $100,000 and loaned another $100,000 for use in the enterprise. The interests of the parties were in proportion to the amount each invested, and were first set forth in a written instrument on January 17, 1935, as hereinafter appears. Their agreement reads in part as follows: * * WHEREAS, we desire to subdivide and sell said property, and to provide against the tying up of said land, in the event of the death of any of us, and to avoid the delay incident thereto, and it will be expensive and inconvenient for all of us to execute deeds to795 said property, and releases of liens taken in part payment therefor: 834 Now, THEREFORE, we hereby agree that the title to said property shall be vested in the said A. L. WRIGHT, B. G. BARNES and CHAS. A. KRAUSSE, who shall hold same in trust, and subdivide and sell said land in such tract, or tracts, as they may desire, either for cash or credit, and upon such terms as to them may seem best, and execute deeds and releases thereto, giving to said Trustees full power and authority to do and perform any and every act whatsoever requisite and necessary to be done, in and about the premises, as fully and to all intents and purposes as we might do if personally present, hereby ratifying and confirming, all and singular, all acts whatsoever that said Trustees shall and may do by virtue hereof. After paying all expenses in connection therewith, and paying off and discharging indebtedness of every kind and character that may be placed against said property, said Trustees shall account to us for our respective interests therein. It is contemplated that all matters in connection with said property, and all instruments in connection therewith, will be executed solely by the said796 A. L. WRIGHT; but in order to facilitate the handling of the same, it is expressly agreed that, in case of the absence, death, inability, refusal, or failure of any of the Trustees herein named to act, the other Trustee, or Trustees, may, if they desire, constitute and appoint any of us as Substitute Trustee, or Trustees, without other formality than a designation in writing, and any of us so appointed as Substitute Trustee shall thereupon hold and possess all the title, rights, and powers herein conferred on the Trustee whose successor he is, and such right to appoint a successor, or Substitute Trustee, shall exist as often and whenever, from any of said causes, any Trustee, original or substitute, can not, or will not act. It is expressly agreed that any one (1) of the Trustees herein named, or that may be selected, as herein provided, shall have full and complete authority to convey any or all of said land, for such prices and upon such terms and with such covenants of warranty as he may deem best, and to release any lien given in part payment for any of said property, and to do every act that the three Trustees could do, and a subdivision, Contract, Deed or Release from any797 one of the Trustees herein named, or from any one of their successors, shall be as binding as though it were executed by all, and no purchaser or payor shall ever be required to see to the application of any amounts paid by him to any of said Trustees. It is further expressly agreed that the death of the parties herein shall not revoke this trust, but that the Trustees named, or their successors, shall, in such event, account to the heirs, executors, administrators or assigns of such deceased party in like manner as they are required to account to the surviving parties. By deed dated June 4, 1925, E. B. Cole and his wife, Anna R. Cole, granted, sold and conveyed for cash, the land aforementioned, which was therein described, to A. L. Wright, B. G. Barnes and Charles A. Krausse, trustees for the participants. The subdivision and sale of this acreage, known as the Del Mar Addition, was handled by A. L. Wright, as field manager, and B. G. Barnes, as financial manager, until the death of Wright in 1930. Thereafter, the business was managed by Barnes alone. No additional purchases of property were ever made, discussed, or considered. The only reports the trustees made to the798 participants consisted of a copy of the annual audit, which showed the net earnings of each participant. No receipts, certificates or evidence of any kind or nature were ever 835 issued to the participants. No meetings of any kind were ever held by the trustees or by the participants and no minutes were kept. The petitioner had no seal. Its sales were handled through the field office by an office force consisting of a stenographer and a bookkeeper and the trustees. The sales were made by the trustees, or through certain general agents. By August 4, 1930, B. G. Barnes, who was then 64 or 65 years of age, was the sole surviving trustee and was practically the only member of the original contracting parties authorized to carry on, since the two brothers, A. L. Wright and O. O. Wright, were dead, the father and son, Charles A. Krausse and Gus H. Krausse, respectively, and Morris Stern had transferred their interests by bills of sale, and Perry J. Lewis was a hopeless invalid. On August 4, 1930, an instrument was executed by the then interested parties designed to supplement and extend the powers of the trustee so as to permit the appointment of any of the then interested799 parties as substitute trustee, and it more specifically enumerated the powers and duties of the trustee intended to be conferred on the trustees by the original agreement. The last paragraph of this agreement is as follows: It is considered by us that all of the supplemental and enlarged powers herein expressed in terms were implied in said original agreement and deed and were intended by the makers thereof, and they have been herein set forth by us that any doubt of such powers may be removed by an express grant of same. It is intended by us that this instrument shall in no wise revoke the trusteeship set up in said original agreement and deed, and if any court of final jurisdiction shall ever decide that it would have such effect, then this instrument shall become ipso facto null and void and of no effect, the same as if it had never been executed and the trusteeship set forth in said original agreement and deed shall continue to exist as if this instrument had not been made by us. No substitute trustee was ever appointed under this agreement. Thereafter, and on January 17, 1935, B. G. Barnes, individually, and for the purpose of establishing a record so that the heirs800 of interested parties could secure the appointment of a receiver or trustee by the court, executed a declaration of trust: * * * to and for the benefit of the persons hereinafter named and in the proportions hereinafter set forth, viz.: M. W. Terrell, San Antonio, Texas1/40thEstate of P. J. Lewis, deceased, of which P. J. Lewis, Jr. is executor1/10thM. L. Frank of Maverick County, Texas3/20thsEstate of Robert I. Cohen, represented by Robert I. Cohen, Jr., Galveston, Texas, executor of the will of Robert I. Cohen, deceased1/40thEstate of A. L. Wright, represented by Sealy Hutchings, Jr. of Galveston, Texas, executor of the will of A. L. Wright, deceased7/20thsB. G. Barnes, Neuces County, Texas1/4thMrs. O. O. (May) Wright, Neuces County, Texas1/20thMrs. M. L. Thompson of California1/20th836 This instrument recites that the "trust" owned one lot and it was contemplated that other property in the Del Mar Addition may be acquired from time to time. By the terms thereof Barnes obligated himself to account to the above named persons or their lawful representatives for all property owned or thereafter acquired, and for all net profits; 801 that in case of his death before the termination of the trust, title and ownership of the property and profits were to vest in the aforesaid persons in the proportions set forth; that the trust was to endure for three years unless sooner terminated; that a duplicate of the indenture was deposited with the Guaranty Title & Trust Co. of Corpus Christi, which was to constitute delivery in case of the grantor's death. In addition to selling lots the trustees constructed houses on the property and encouraged others to build on the lots sold. In 1935, the trustee built 35 or 40 houses, as there was an active demand for homes but little demand for vacant lots. The houses were constructed by arrangements made with two contractors whereby they built the houses, the trustee sold them, and the net profits were divided equally between the trustee and the contractor. The money necessary for these improvements was borrowed by the trustee. B. G. Barnes continued to act as trustee and by November 30, 1937, all of the property and assets of the petitioner had been sold and the proceeds had been distributed to the interested parties. None of the parties interested in the Del Mar Addition802 enterprise made any commitments absolving any one of the others from personal liability for the acts of the trustee. The individual members discussed their personal liability, but it was their belief that the enterprise would create no liabilities. Upon completion of the enterprise in 1937 the interested parties had realized considerable profit from the standpoint of the capital invested. For the fiscal year ended November 30, 1936, and for the years prior thereto, the petitioner filed fiduciary returns of income on Form 1041. The return for the taxable year disclosed a net income of $24,880.62, and the distribution thereof among the several beneficiaries. The respondent accepted the net income as reported but computed petitioner's tax liability at corporate rates, which resulted in the deficiencies herein asserted. Prior to January 12, 1939, the petitioner had filed no capital stock tax returns. On that date it filed a capital stock tax return for 1936, declared a value of $250,000 for its capital stock, and paid a tax thereon of $250. Attached to said return is the following statement: This return is filed for the purpose of fixing the declared value of capital stock803 in the Del Mar Addition in case the contention of the Government is sustained that the Del Mar Addition is an Association taxable as a Corporation. 837 In filing this return, the Del Mar Addition does not admit that it is an Association but denies that it has any corporate attibutes [sic] and contends that it should be taxed as a pure trust. OPINION. ARNOLD: This petitioner was created to subdivide, improve, and sell a tract of land, and its creators adopted the trust mechanism as a medium for carrying on their enterprise and dividing their gains. Our question is whether the organization so created should be considered an association taxable as a corporation. The fundamental principles involved have been fully discussed in Morrissey v. Commissioner,296 U.S. 344">296 U.S. 344, and its companion cases; Swanson v. Commissioner,296 U.S. 362">296 U.S. 362; Helvering v. Coleman-Gilbert Associates,296 U.S. 369">296 U.S. 369; Helvering v. Combs,296 U.S. 365">296 U.S. 365. In each of these cases the agreement involved purported to create an ordinary trust, but in each instance the Court held that an organization having so many of the804 features of a corporation should be treated for tax purposes as an association taxable as a corporation. The salient features of a trust, created and maintained as a medium for the carrying on of a business and sharing its gains, were fully set forth in the Morrissey opinion, supra, and may be briefly restated as follows: (1) Trustees, as a continuing body with provision for succession and holding title to property; (2) centralized management; (3) security from termination or interruption by death of owners of beneficial interest; (4) transfer of beneficial interest without affecting continuity of enterprise; and (5) limitation of personal liability to property embarked in the undertaking. If, as petitioner contends, its tax status turns upon how closely it resembles a corporation, its salient features should be compared with those above set forth to determine wherein petitioner's features are analogous to a corporation, and wherein there is a marked dissimilarity. If the comparison shows that corporate features preponderate it should be held to be an association and taxed as though it were a corporation. 805 N. B. Whitcomb Coca-Cola Syndicate,35 B.T.A. 1031">35 B.T.A. 1031; affd., 95 Fed.(2d) 596; Bert v. Helvering, 92 Fed.(2d) 491, affirming 34 B.T.A. 805">34 B.T.A. 805. An analysis of the trust instrument herein reveals that provision was definitely made for three of these features, namely; title was taken in the trustees as a continuing body with provision for succession; management and control were centralized in the trustees; and the enterprise was secured against termination or interruption through the death of owners of beneficial interests. While the instrument contains no provisions relative to the transfer of beneficial interests, the right existed and such interests were actually transferred 838 by the participants by bill of sale, the usual method by which the transfer of title to personal property is declared and established, without affecting the continuity of the enterprise. The failure to include a specific provision limiting the personal liability of the participants will not prevent the classification of this enterprise as an association, since it is resemblance, and not identity, with which we are concerned. The absence806 of such a limitation did not prevent the court in Bert v. Helvering, supra, from holding a syndicate to be an association, and its absence will not prevent a like classification here. The failure to include the provision in the present trust instrument may be partially explained by the belief of the participants that the enterprise would create no liabilities in excess of their original investments. B. G. Barnes testified that the matter of personal liability was discussed and "It was considered there might have been a personal liability, but they did not consider they were going into a business where any liability would be created." This indicates that the parties thought it unnecessary to limit their liability to the property embarked in the undertaking. While the witness Barnes testified that no use was ever made of the instrument executed by the interested parties on August 4, 1930, it aids in interpreting the trust agreement of May 9, 1925, by more specifically declaring the intention of the interested parties under the generalities of that instrument. It clearly shows the parties intended by the May 9, 1925, agreement, a continuing business organization807 under representative management until the purposes of the trust were fully accomplished. This petitioner has attempted to fortify its theory that it is preponderantly akin to a trust or partnership by stressing the absence of corporate forms and procedure, but we think this argument is answered by the Supreme Court's language in Helvering v. Coleman-Gilbert Associates, supra, wherein it stated: The significant resemblance to the action of directors does not lie in the formalities of meetings or records but in the fact that, by virtue of the agreement for the conduct of the business of a joint enterprise, the parties have secured the centralized management of their undertaking through designated representatives. Recent decisions of the Board have pointed out that the purpose for which a trust is created is probably the most important single factor to be determined where the question raised is that of a trust or an association, Cleveland Trust Co., Trustee,39 B.T.A. 429">39 B.T.A. 429, 435; and that it is the powers conferred by the trust instrument which determine the character of the trust, 808 Lee H. Marshall Heirs,39 B.T.A. 101">39 B.T.A. 101, 110. See also Williams Trust,39 B.T.A. 612">39 B.T.A. 612, and the Morrissey and companion cases, supra. The purpose of the present trust was stated in the trust instrument to be a "desire to subdivide and sell" 839 the property acquired. The trustee, B. G. Barnes, testified that this was the purpose, and in furtherance of that purpose the property was improved, houses were built and sold, an office force was maintained, and all the land acquired was sold to the public in the ordinary course of business. Both the provisions of the trust agreement and the activities conducted thereunder convince us that this was a so-called "business trust", Bogert, Trusts and Trustees, vol. 2, p. 971 et seq., which was created as a convenient method for dealing in real estate, developing the acreage, improving it, and selling the property to the public. It was definitely an organization for profit, the profits were still coming in during the taxable year, and the trust should, in our opinion, be classified as an association taxable as a corporation. We find no conflict in our decision here with the Supreme Court's decision809 in Lewis & Co. v. Commissioner,301 U.S. 385">301 U.S. 385, or with our decision in Gibbs-Preyer Trust #1,39 B.T.A. 492">39 B.T.A. 492. Upon an examination of Commissioner v. Gerstle, 95 Fed.(2d) 587, affirming 33 B.T.A. 830">33 B.T.A. 830, we think that case is distinguishable on its facts. While each proceeding must stand upon its own particular facts we find support for our conclusion in the decisions of the courts in Thrash Lease Trust v. Commissioner, 99 Fed.(2d) 925, affirming 36 B.T.A. 444">36 B.T.A. 444; certiorari denied, 306 U.S. 654">306 U.S. 654; Wellston Hills Syndicate Fund v. Commissioner, 101 Fed.(2d) 924, affirming 36 B.T.A. 575">36 B.T.A. 575; and Kilgallon v. Commissioner (C.C.A., 7th Cir.), 96 Fed.(2d) 337; certiorari denied, 305 U.S. 622">305 U.S. 622. Petitioner's first alternative contention is that sections 105 and 106 of the Revenue Act of 1935, as amended by sections 401 and 402 of the Revenue Act of 1936, are unconstitutional because they are arbitrary and capricious and are violative of the due process clause of the Fifth Amendment to the Constitution. The respondent810 asserts that it is unnecessary for the Board to pass upon the constitutionality of section 105, since the deficiency relates to excess profits taxes and no deficiency has been asserted with respect to the capital stock tax. Section 105, as amended, provides for an excise tax of one dollar per $1,000 upon the "adjusted declared value" of petitioner's capital stock. Section 106, as amended, imposes an excess profits tax upon each income tax taxable year ending after the close of the first year in respect of which petitioner is taxable under section 105. The rates of tax prescribed are 6 percent on that portion of the net income in excess of 10 percent and not in excess of 15 percent of the "adjusted declared value" of petitioner's capital stock as fixed and determined under section 105, and 12 percent on the net income in excess of 15 percent of the adjusted declared value. The constitutionality of section 105 of the Revenue Act of 1935 has been considered and decided adversely to petitioner's contention 840 in Allied Agents, Inc. v. United States,26 Fed.Supp. 98. In considering the question the court found it necessary to examine the relationship811 that existed between the capital stock and the excess profits taxes provided for in sections 105 and 106, respectively, of the 1935 Act and like provisions appearing in the National Industrial Recovery Act and the Revenue Act of 1934, sections 215 and 216 of the National Industrial Recovery Act, and sections 701 and 702 of the Revenue Act of 1934. In its discussion of the constitutional question the court held that "the two taxes are inseparable and must be considered together", and this petitioner has recognized the inseparability of the two taxes by alleging the unconstitutionality of both taxes in order to reach the one in which it is interested. In our opinion the reasoning of the court in Allied Agents, Inc., supra, is dispositive of petitioner's contention. Furthermore, in A. J. Crowhurst & Sons, Inc.,38 B.T.A. 1072">38 B.T.A. 1072, and W. & K. Holding Corporation,38 B.T.A. 830">38 B.T.A. 830, 844, the Board has upheld the constitutionality of sections 215 and 216 of the National Industrial Recovery Act, the provisions of which are substantially identical to the sections here involved. See also 812 Chicago Telephone Supply Co. v. United States (Ct. Cls.), 23 Fed.Supp. 471; certiorari denied, 305 U.S. 628">305 U.S. 628, which discusses the constitutionality of sections 701 and 702 of the Revenue Act of 1934. Petitioner cites and relies upon Oertel Co. v. Glenn,13 Fed.Supp. 651; affd., Glenn v. Oertel Co. (C.C.A., 6th Cir.), 97 Fed.(2d) 495. That case related to the right of the taxpayer to file an amended capital stock tax return and correct the alleged mistake of fact under sections 215 and 216 of the National Industrial Recovery Act, 48 Stat. 195, 207, and 208. The District Court discussed the constitutional question, but turned its decision upon the fact that there had been no proper determination of value. The Circuit Court ignored the constitutional question but affirmed the taxpayer's right to file an amended return where the return was filed within the period as extended. We can see no reason for holding that these decisions invalidate the sections in question, or that they are authority for a determination that sections 105 and 106, as amended, are unconstitutional. The second alternative issue813 is whether petitioner's delinquent filing of its 1936 capital stock tax return will satisfy the statutory requirements. The capital stock tax return filed by petitioner on January 12, 1939, was due during the month of July 1936. The return was filed in 1939 after the case was at issue and five days before the hearing, for the sole and only purpose of obtaining the benefit of an exemption for excess profits tax purposes should it be held that petitioner was liable to tax as an association. In this return 841 petitioner fixed the adjusted declared value of its capital stock at $250,000, which would prevent the imposition of an excess profits tax, since 10 percent of the declared value of its capital stock is in excess of petitioner's taxable net income. In determining the excess profits tax deficiency respondent reduced the petitioner's net income by the amount of its income tax liability and taxed the remainder at the rate of 12 percent upon the theory that, no declaration of value of the capital stock having been made, the applicable rate was 12 percent. Sec. 106, as amended. The respondent contends that, since petitioner did not file a capital stock tax return as required814 by the statute, it is not entitled to a "credit" of 10 percent of the value declared on January 12, 1939, in computing its excess profits tax liability. The statutory requirements for filing the capital stock tax return are specific. Section 105(d) of the Revenue Act of 1935 provides that "Every corporation liable for tax under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed. * * ." The section further provides that "The tax shall, without assessment by the Commissioner or notice from the collector, be due and payable to the collector before the expiration of the period for filing the return." Under the foregoing provisions, petitioner's filing of the capital stock tax return on January 12, 1939, for the year 1936 was not a timely return, as it should have been filed on or before July 31, 1936. The only exception to the statutory rule is where the time for filing has been extended and there is no evidence here that any such extension was granted. The petitioner, however, relies upon that portion of section 105(f) which provides that "For the first year ending June 30 in respect of which" 815 a capital stock tax is imposed "the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value cannot be amended)," and contends that the capital stock tax return filed on January 12, 1939, was its "first return" under section 105, as amended. The first return under the 1936 Act, as amended, is important because of the inseparability of the capital stock tax and the excess profits tax. In Allied Agents, Inc., supra, the court explained the reason for and nature of the two taxes as follows: * * * The main purpose of the new plan for levying these two taxes was to do away with the difficult and innumerable controversies in determining the actual value of invested capital or capital stock; let the taxpayer make a declaration of the value of the capital stock; and then apply an excess-profits tax framed in such a way that there would be an inducement to the taxpayer to place a fair and reasonable value on the stock and if it did not, would so increase the excess-profits tax that little or nothing would be gained by putting 842 an unreasonably low value thereon. This plan made816 the taxes self-adjusting and, as before stated, Congress had the right to prescribe the basis for the two taxes. It prescribed the declared value as this basis. * * * Moreover, except in very unusual situations such as no statute can guard against, the taxpayer cannot control the taxes that it will pay under the two statutes under consideration by its statement as to the declared value. These statutes are so framed that the higher the declared value of the capital stock the lower will be the excess-profits tax, and the lower the declared value the higher will be the excess-profits tax. In this way when the two taxes are considered together, as they should be, they are as stated above self-adjusting both as to the taxpayer itself and in comparison with what is paid by others under them. If this petitioner should be permitted to file a return more than two years after it was due and, with full knowledge of its taxable net income, declare a value for its capital stock which would wipe out its excess profits tax liability, the primary purpose of the Congress in enacting the two taxes would be defeated. Petitioner urges that to impose the excess profits tax now would result in an817 undue hardship, but it must be remembered that from 1925 to the taxable year this petitioner has had benefits to which it was not entitled under the as it should have been treated as a corporation for those years. The Oertel case, supra, and Philadelphia Brewing Co. v. United States (Ct. Cls.), 27 Fed.Supp. 583, held that an amended capital stock tax return could be filed within the period for filing such returns as extended. These decisions do not hold that a taxpayer may file a return more than two years after it is due. The weight of authority, however, is opposed to any filing of an amended return, whether timely or otherwise, as shown by the decisions in Haggar Co. v. Commissioner (C.C.A., 5th Cir.), 104 Fed.(2d) 24, affirming 38 B.T.A. 141">38 B.T.A. 141; Blake & Kendall Co. v. Commissioner (C.C.A., 1st Cir.), 104 Fed.(2d) 679; and Jocob Froehlich Cabinet Works v. United States (U.S. Dist. Ct.), 28 Fed.Supp. 882. The Board's recent decision in 818 Flomot Gin Co.,40 B.T.A. 689">40 B.T.A. 689, is distinguishable. In that case the taxpayer was permitted to file a return out of time because a return filed timely was deemed to be incomplete and not in "substantial compliance" with the statute. No such facts obtain here. In its brief the taxpayer states that "This return was filed for the sole and only purpose of, in the alternative, getting the benefit of the credit for excess profits tax purposes, if it should be held that petitioners are liable as an association." The deliberate filing of such a return for the purposes stated is not the return required by section 105(f) and its filing and acceptance by the Commissioner is ineffective to secure the credit granted by sections 105 and 106, as amended, and will not relieve this taxpayer from its excess profits tax liability. Cf. Taylor Securities, Inc.,40 B.T.A. 696">40 B.T.A. 696; Gladstone Co., Ltd.,35 B.T.A. 764">35 B.T.A. 764. 843 In view of the foregoing discussion we hold that petitioner is an association taxable as a corporation, that section 105 and 106 of the Revenue Act of 1935, as amended, are not unconstitutional, and that petitioner is subject819 to excess profits tax liability. Reviewed by the Board. Decision will be entered for the respondent.TURNER TURNER, dissenting: Under the common plan of the various revenue acts, each particular tax or group of taxes, such as excise taxes, is imposed under a separate title. The statutory provisions, substantive or administrative, peculiar to a particular tax are regularly included in the title imposing the tax. Beginning with the Revenue Act of 1918, each of the revenue acts has concluded with a title or titles under some such heading as "General Administrative Provisions" or "General Provisions," which provisions have been made applicable to all taxes imposed by the act in so far as they were not inconsistent with or contrary to the specific or peculiar provisions of the various tax-imposing titles. The period to be covered by the return and the time within which a return may be filed is regularly fixed by the provisions of the title wherein the tax is imposed and no instance comes to mind where any such title has ever contained words or provisions to indicate that the filing of delinquent returns was contemplated. Regardless of that fact, however, section820 3176 of the Revised Statutes, as amended, has been extended and applied to all of the revenue acts as part of the "General Administrative Provisions" or "General Provisions" either by specific reenactment or by reference. The last revenue act to specifically amend or reenact section 3176 was the Revenue Act of 1926, and so much of that section as is pertinent to the discussion here reads as follows: SEC. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima821 facie good and sufficient for all legal purposes. * * * The Commissioner of Internal Revenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall 844 add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * * * In the instant case the question is whether or not the petitioner had the right or could under the statute file an effective capital stock tax return after the time prescribed by statute. Section 105(d) of the Revenue Act of 1935 provides that "every corporation liable for tax under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed" but contains no provision for the filing of delinquent returns. It822 continues as follows: "All provisions of law (including penalties) applicable in respect of the taxes imposed by section 600 of the Revenue Act of 1926 shall, insofar as not inconsistent with this section, be applicable in respect of the taxes imposed by this section." Section 600 of the Revenue Act of 1926 levies an excise tax upon the sale or lease by the manufacturer of certain specified articles. Monthly returns are required and, consistent with the general plan of the revenue acts, section 600 contains no provision for the filing of delinquent returns. Section 1100 of the Revenue Act of 1926, the first section of Title XI - General Administrative Provisions - provides, however, that "All administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act." Section 1103 of that title reenacts the provisions of section 3176 of the Revised Statutes, part of which has been quoted above, and from the provision quoted it appears that the filing of delinquent returns not only is anticipated but is required, even though it may be necessary for a collector, a deputy collector, 823 or the Commissioner of Internal Revenue himself to make such returns. I am unable to find anything in the statute to indicate that any exception was made or intended with respect to capital stock tax returns. The reasoning advanced in the majority opinion is that the purpose of Congress in imposing the excess profits tax would be defeated if delinquent capital stock tax returns were permitted, since a taxpayer filing a delinquent capital stock tax return could declare a value for its capital stock which would wipe out any liability for excess profits tax. While such a case may be possible, the Commissioner at all times has the power to prevent it. Where a taxpayer fails to make and file a return or list at the time prescribed by law, the collector or a deputy collector is directed by the statute to make a return for such taxpayer, or the Commissioner himself may make the return, and the statute further provides that any return so made "shall be prima facie good and sufficient for all legal purposes." A return so made 845 would, in my opinion, constitute the taxpayer's first return within the meaning of section 105(f) and the taxpayer would be bound by the value therein824 declared for his capital stock, and his return subsequently filed would be ineffective to change the value so established. If, however, the collector, his deputy, or the Commissioner fails to act, it is my view that the statute not only permits but anticipates the filing of a delinquent return by the taxpayer, subject to the penalty prescribed. For the reasons stated above, I respectfully note my dissent. ARUNDELL, SMITH, and LEECH agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/411753/	695 F.2d 164 Neima BORMEY, Plaintiff-Appellant,v.Richard S. SCHWEIKER, Secretary of Health and HumanServices, Defendant-Appellee. No. 81-3315 Summary Calendar. United States Court of Appeals,Fifth Circuit. Jan. 14, 1983. Agustin R. Guitart, Metairie, La., for plaintiff-appellant. Louis J. Volz, III, Asst. U.S. Atty., New Orleans, La., for defendant-appellee. Appeal from the United States District Court for the Eastern District of Louisiana. Before RUBIN, JOHNSON and GARWOOD, Circuit Judges. GARWOOD, Circuit Judge: 1 This is an appeal from a summary judgment upholding the appellee's decision to reduce appellant's Supplemental Security Income benefits by one third pursuant to 42 U.S.C. Sec. 1382a(a)(2)(A), because she was living in the household of her parents and receiving support and maintenance from them. The principal question is whether this statutory one-third reduction was applicable. We hold that it was not, as to a part of the time in issue, and remand the case for further proceedings. I. 2 The material facts are undisputed. Appellant Neima Bormey ("Bormey") was born on January 10, 1958. She suffers from a degenerative disease of the legs and arms, which has rendered her permanently disabled, and she lives at home with her parents and two sisters. In July 1974, the district office of the Social Security Administration determined that Bormey was eligible for full Supplemental Security Income ("SSI") benefits as a disabled child. The administrative record shows that Bormey was paid full benefits because her parents told the district office that they had no income. 3 On November 8, 1977, when Bormey was 19, she made an application with the district office to be made the payee of her SSI benefits. On November 10, 1977, the district office, having learned that her father had worked and earned income as a painter for the past five years, notified Bormey that her SSI benefits were being suspended effective December 1977. The district office maintained that she was ineligible to receive those benefits because her father's income was deemable to her since she was under 21 and a student. 4 Bormey, who was represented by counsel and continued to be throughout all the subsequent administrative proceedings, requested a hearing before an administrative law judge ("ALJ"). On August 19, 1978, the ALJ ordered reinstatement of her benefits. He found that Bormey was an adult, and was not a regular student, and that, as such, her father's income was not deemable to her.1 No party has challenged this determination. The ALJ remanded the case to the district office for recalculation of benefits. 5 On October 2, 1978, the district office, following the August 1978 remand by the ALJ, determined that because Bormey was not contributing any money toward the household expenses, she was living in the household of her parents and receiving support and maintenance from them, and that accordingly the SSI benefits payable to her commencing in December 1977 must be reduced by one third pursuant to 42 U.S.C. Sec. 1382a(a)(2)(A) and the then implementing regulation, 20 C.F.R. Sec. 416.1125 (now sections 416.1130-416.1145). 6 Bormey had been paid no SSI benefits during the period December 1977 through September 1978. In October 1978, she was paid in a lump sum ($1,208.58) benefits, reduced by one third on account of the support and maintenance she had received, for that period, and monthly payments to her were resumed at the rate of $126.27, also reflecting the one-third reduction.2 7 On January 22, 1979, Bormey requested another hearing before an ALJ. At this hearing, which was held on May 7, 1979, both Bormey and her father testified that before her benefits were terminated, she contributed $100 a month toward the household expenses; that she lived in her parents' house with her mother and father and two sisters; that during the time her benefits were terminated, she had no income and was therefore unable to make any contributions; that after her benefits were resumed in October 1978, she again contributed $100 a month to the household expenses; that monthly household expenses totaled $697.10, of which $400 was for food and the balance for mortgage payments and utilities; that her pro rata share of the total household expenses was $139 per month; and that were she to receive full benefits, she would pay her pro rata share of all the household expenses. 8 The ALJ held that the one-third statutory reduction in Bormey's benefits was proper, and his decision was affirmed by the Administration's Appeals Council, thus becoming a final decision of the appellee, the Secretary of Health, Education, and Welfare (now the Secretary of Health and Human Resources), who administers the SSI program. 9 Having exhausted her administrative remedies, Bormey filed suit against the appellee in federal district court under 42 U.S.C. Sec. 405(g) seeking judicial review of the adverse decision. Both parties filed motions for summary judgment. The district court referred the matter to a magistrate, who conducted a hearing and recommended that appellee's motion for summary judgment be granted. The district court accepted the magistrate's recommendation and rendered summary judgment for appellee.3 II. 10 Our review is ordinarily limited to determining whether the record as a whole contains substantial evidence to support the appellee's findings. Thomas v. Schweiker, 666 F.2d 999, 1001 (5th Cir.1982). However, we must also determine whether appellee applied the proper legal standard in reducing Bormey's SSI benefits, and whether the proceedings below were conducted in conformity with the applicable statutes and regulations. See Strickland v. Harris, 615 F.2d 1103, 1108 (5th Cir.1980); Ferran v. Fleming, 293 F.2d 568, 571 (5th Cir.1961); Chamberlain v. Schweiker, 518 F. Supp. 1336, 1338 (C.D.Ill.1981). 11 The first question raised by Bormey is whether, upon becoming an adult, she had a right to the standard (or full) SSI payment without regard to any support or maintenance she had received, or was receiving, from her parents before or at the time she became an adult. Bormey, in effect, argues that unearned income received by a recipient while he or she is a child cannot be used to reduce SSI benefits once the recipient becomes an adult, even though after becoming an adult that income is still being received. We disagree. 12 The statutes which govern the SSI program plainly show it was Congress's intent that SSI benefits be paid only to the extent an individual's minimum income level is not being met from other sources. See H.R.Rep. No. 92-231, 92d Cong., 2d Sess., reprinted in [1972] U.S.Code Cong. & Ad.News 4989, 5135-36. See also Weiss v. Schweiker, 519 F. Supp. 763, 765 (S.D.N.Y.1981). Under 42 U.S.C. Sec. 1381a,4 a disabled individual's eligibility for SSI benefits is determined "on the basis of his income and resources." Under 42 U.S.C. Sec. 1382a,5 income is defined as including both earned and unearned income, and unearned income includes "support and maintenance furnished in kind" to the individual. If the individual lives in the household of another and receives both maintenance and support from that person, then the amount payable to the individual is reduced by one third. 42 U.S.C. Sec. 1382a(a)(2)(A). 13 It has long been recognized that in questions of statutory interpretation, the construction of a statute by an agency charged with its administration is entitled to some deference. Dennard v. Richards Group, Inc., 681 F.2d 306, 315 (5th Cir.1982). The appellee has interpreted these statutes to require that an individual's income be an important factor in determining his or her initial or continuing eligibility for SSI benefits and the amount thereof. See 20 C.F.R. Secs. 416.202 and 416.203.6 Eligibility for SSI benefits and the amount payable is therefore based on the actual need of the individual whether at the time he or she makes an initial application for benefits or whether he or she already receives them. It follows that the actual needs of a recipient will be considered even when he or she becomes an adult. Thus, the income received by a child, which he or she still receives after becoming an adult, will be considered in determining eligibility for, and the amount of, SSI benefits. 14 The "benefit anomalies" described by Bormey in her brief which may occur as a result of this construction flow from the differences in the level of generosity of the applicant's or recipient's relatives or friends, and the statute was fashioned to recognize those generosity differences in determining initial and continuing eligibility for, and the amount of, SSI benefits. See Usher v. Schweiker, 666 F.2d 652, 659 (1st Cir.1981). We hold that the unearned income being received by a recipient at the time he or she becomes an adult must be considered by the Social Security Administration in determining eligibility for, and the amount of, SSI benefits at that time. 15 The next question raised by Bormey is whether the unearned income, in the form of support and maintenance, received by her from her parents triggered the statutory one-third reduction in her SSI benefits. 16 Before October 3, 1980, the application of the statutory one-third reduction was governed by 20 C.F.R. Sec. 416.1125, which was originally adopted on January 29, 1974. 39 Fed.Reg. 3674 (1974).7 This regulation was, however, amended on July 7, 1978, and subpart K of the amended regulation provided that its provisions would be effective with January 1974, unless specifically indicated to the contrary. Effective October 3, 1980, the regulation was revised and reorganized. 45 Fed.Reg. 65541 (1980). The substantive provisions, however, remain essentially the same as the 1978 version and now appear as sections 416.1130-416.1145. 17 Section 416.1125, as amended in 1978, was in effect when Bormey's case was heard by the ALJ in May 1979.8 The ALJ, however, applied the original (1974) version, and held that the statutory one-third reduction was applicable. This holding was based on the ALJ's finding that Bormey's contribution was less than her pro rata share of the household expenses, and on his conclusion that she was therefore living in the household of her parents and receiving support and maintenance from them. The magistrate who considered the motions for summary judgment on October 15, 1980, applied the amended (1978) version of section 416.1125, but he also determined that Bormey's benefits should be reduced by the statutory one-third reduction. 18 Applying the amended regulation to the facts found by the ALJ, we hold that although there is substantial evidence to uphold his factual findings, both the ALJ and the magistrate erred in their legal conclusion that the SSI benefits payable to Bormey were subject to the statutory one-third reduction. 19 Under section 416.1125(b)(1)9 as amended in 1978, the standard payment amount for an eligible individual who (1) lives in another person's household and (2) receives both support and maintenance in kind from such person, is to be reduced by one third, in lieu of determining the actual dollar value of such support and maintenance as unearned income to the eligible individual. This one-third reduction is statutory, 42 U.S.C. Sec. 1382a(a)(2)(A),10 and when applicable, is irrebuttable regardless of any payment the individual may make toward his or her support and maintenance. Section 416.1125(b)(1). See also 43 Fed.Reg. 29277, 29278-29279 (1978). 20 The first question is whether Bormey lived in the household of another. An eligible individual is presumed to be living in another person's household whenever the household has at least one other member who is not the eligible individual's spouse, minor child, or a person whose income is deemable to the individual, section 416.1125(b)(2), unless the eligible individual has an ownership interest in the home, is liable to the landlord for payment of any portion of the rental charges, is living in a substitute home in the form of a noninstitutional care situation, or is paying at least a pro rata share of the average monthly total household operating expenses. Section 416.1125(b)(3). 21 The evidence shows that Bormey lived with her parents and two sisters; that none of their income was deemable to her; and that she failed to satisfy any of the exceptions of section 416.1125(b)(3). We therefore hold that the ALJ and the magistrate correctly determined that Bormey was living in the household of another. 22 The second question is whether Bormey received both support and maintenance from her parents. Under section 416.1125(a),11 support and maintenance in kind is defined as encompassing food, clothing, and shelter. When an eligible individual lives in another person's household he or she is presumed to be receiving in-kind support and maintenance in the form of both food and shelter from that person, and the one-third reduction applies unless the presumption is rebutted. Section 416.1125(b)(4). The applicability of the one-third reduction may be rebutted by showing, among other things, that an eligible individual does not receive both food and shelter from the person in whose household he or she lives. Section 416.1125(b)(6)(iii). 23 Bormey proved that before her SSI benefits were erroneously suspended in December 1977, and after they were resumed in October 1978, she contributed $100 a month toward the payment of the household expenses. The evidence shows that as of May 1979 the pro rata monthly cost of Bormey's food was $80 and that of her shelter was $59. The evidence does not indicate whether Bormey's $100 payment was earmarked for food or for shelter. This $100 amount, however, was sufficient to cover the entire cost of one item and part of the other. The reasoning of the appellee, the ALJ, and the magistrate presumes that the $100 payment covered only part of each. We reject this presumption. Where a payment is capable of covering the entire cost of each item (whether food or shelter) considered separately, as well as part of the other, we presume that it was intended as such, in the absence of any indication to the contrary. We hold that Bormey rebutted the presumption that the statutory one-third reduction applied by showing that she did not receive, without paying therefor, both food and shelter from her parents. 24 When an eligible individual lives in a household of another and receives from that person only food or shelter in kind, such support or maintenance is unearned income. Section 416.1125(d).12 In such case, effective with payments for December 1974, the maximum value of such support or maintenance is presumed to be one third of the applicable payment standard. The individual may rebut this presumption by establishing that the current market value of such support or maintenance, less any payment he or she makes therefor, is lower than the presumed value. Section 416.1125(d). 25 Because the ALJ and the magistrate erred in determining that the statutory one-third reduction applied, no determination was made as to whether, and if so to what extent, the then current market value of Bormey's food or shelter, less any payment made therefor, was lower than the presumed value. The case must therefore be remanded to the appellee for further proceedings to determine the proper amount of benefits due Bormey since October 1978, when she recommenced making her payments to her father.13 26 As to the period from December 1977 through September 1978, when Bormey was unable to make any payments to her parents because of the erroneous suspension of her benefits, she claims that appellee is estopped to apply the statutory one-third reduction. Bormey argues that if she had been paid her benefits during this time she would have used them to continue her $100-a-month payments to her parents for her food or shelter. 27 There is some surface appeal to Bormey's argument, but we must reject it. At the May 1979 hearing Bormey, through her attorney, made it quite clear that she had not paid any of the lump-sum payment she received in October 1978 to her parents, and that she considered herself under no obligation to do so. Her position was that while her benefits were suspended she did not, expressly or impliedly, agree to reimburse her parents, either absolutely or conditionally on her receipt of benefits, for any of the food or shelter they furnished her during this period. Nor, according to her, did any such obligation arise as a matter of law.14 Her estoppel argument is based on the premise that if she had timely received the benefit checks she would have used them to pay for her support or maintenance. But what she seeks to achieve by estoppel is to force the government to now put her in a better position than she would have been in if matters had proceeded as she says they should and would have but for the erroneous suspension of her benefits. Even if she had received full benefits ($1,611.52) throughout this ten-month suspension period, and had accordingly continued to pay $100 a month ($1,000) to her parents for support or maintenance, she would have been left with only $611.52,15 as opposed to the $1,208.58 she eventually received in a lump sum and asserts she is entitled to fully retain. Bormey has not suffered any ultimate financial prejudice by reason of the erroneous suspension of her benefits.16 Moreover, there is no assertion, nor any indication in the record, that the suspension of benefits was for any invidious reason or consideration, or was anything other than a bona fide, and quite understandable, factual error. In these circumstances, we do not believe that the considerations of "justice and fair play," United States v. Lazy F C Ranch, 481 F.2d 985, 988 (9th Cir.1973), weigh so heavily as to authorize an estoppel against the government. See Schweiker v. Hansen, 450 U.S. 785, 101 S. Ct. 1468, 67 L. Ed. 2d 685 (1981); Augusta Aviation, Inc. v. United States, 671 F.2d 445, 448-50 (11th Cir.1982). Accordingly, we uphold the statutory one-third reduction of benefits applicable to the period December 1977 through September 1978, during which Bormey's parents, in whose house she lived, furnished her support and maintenance without any reimbursement. 28 We reverse the judgment of the district court and remand the case to that court with directions to further remand the case to appellee for a redetermination of Bormey's benefits for October 1978 and subsequent months in accordance with this opinion. 29 REVERSED AND REMANDED. 1 Under the regulations, "a child under age 21" living with one or both parents may have "deemed" to the child the income of a parent who is ineligible for SSI benefits. See 20 C.F.R. Sec. 416.1165 (1982). Under section 416.1101 (1982) a "child" is defined as an unmarried person, not the head of a household, who either is "under age 18 or is under age 22 and a student." So far as is here relevant, these same regulatory provisions were applicable to Bormey at all pertinent times. Since Bormey was unmarried, was not the head of a household, was living with her parents, and was over 18 and under 21, her status as a "child" whose father's income could be "deemed" to her depended on whether she was "a student." She attended school, but did so irregularly. The ALJ determined that her school attendance was not sufficiently regular so as to constitute her a "student"; since she was over 18 and not a "student," she was not "a child"; since she was not a "child" her parents' income could not be "deemed" to her, and denial of her benefits on the basis of such "deeming" was accordingly held to be erroneous 2 Although it is undisputed that Bormey received full SSI benefits from July 1974 to November 1977, there is no direct evidence of the dollar amount of those payments as actually made to Bormey. However, it is indicated that full benefits were to be at the following monthly rates: from 7/1/74 to 6/30/75, $146.00; from 7/1/75 to 6/30/77, $157.70; from 7/1/77 to 6/30/78, $177.80; from 7/1/78, $189.40 3 The district judge's April 27 order granting appellee's motion for summary judgment, and denying that of appellant, recites that notice of the filing (on April 9) of the magistrate's Findings and Conclusions was given the parties and "no objections thereto have been filed." This, however, does not prevent review of the judgment below under Nettles v. Wainwright, 677 F.2d 404 (5th Cir.1982) (en banc). There is no showing that the parties had been informed that objections must be filed within ten days of filing of the magistrate's report, as required by Nettles. Id. at 408. Moreover, "[t]he Nettles bar only prevents one from challenging factual findings that have been adopted or accepted by the district court." Tijerina v. Estelle, 692 F.2d 3, 5 n. 1 (5th Cir.1982). Here, appellant does not challenge the magistrate's, or the district court's, resolution of any disputed factual issues 4 42 U.S.C. Sec. 1381a provides: "Sec. 1381a. Basic entitlement to benefits "Every aged, blind, or disabled individual who is determined under part A to be eligible on the basis of his income and resources shall, in accordance with and subject to the provisions of this subchapter, be paid benefits by the Secretary of Health, Education, and Welfare." 5 42 U.S.C. Sec. 1382a provides, in part: "Sec. 1382a. Income; definition of earned and unearned income; exclusions from income "(a) For purposes of this subchapter, income means both earned income and unearned income; and-- "... "(2) unearned income means all other income, including-- "(A) support and maintenance furnished in cash or kind; except that (i) in the case of any individual (and his eligible spouse, if any) living in another person's household and receiving support and maintenance in kind from such person, the dollars amounts otherwise applicable to such individual (and spouse) as specified in subsections (a) and (b) of section 1382 of this title shall be reduced by 33 1/3 percent in lieu of including such support and maintenance in the unearned income of such individual (and spouse) as otherwise required by this subparagraph, ...." 6 20 C.F.R. Sec. 416.202 (1982) provides: "Sec. 416.202 Who may get SSI benefits. "You are eligible for SSI benefits if you meet all of the following requirements: "(a) You are-- "(1) Aged 65 or older (Subpart H); "(2) Blind (Subpart I); or "(3) Disabled (Subpart I). "(b) You are a resident of the United States (Sec. 416.1602), and-- "(1) A citizen or a national of the United States (Sec. 416.1603); "(2) An alien lawfully admitted for permanent residence in the United States (Sec. 416.1604); or "(3) An alien permanently residing in the United States under color of law (Sec. 416.1605). "(c) You do not have more income than is permitted (Subparts K and D). "(d) You do not have more resources than are permitted (Subpart L). "(e) You file an application for SSI benefits (Subpart C)." (Emphasis added.) 20 C.F.R. 416.203 (1982) provides: "Sec. 416.203 Initial determinations of SSI eligibility. "(a) What happens when you apply for SSI benefits. When you apply for SSI benefits we will ask you for documents and any other information we need to make sure you meet all the requirements. We will ask for information about your income and resources and about other eligibility requirements and you must answer completely. We will help you get any documents you need but do not have. "(b) How we determine your eligibility for SSI benefits. If you apply for SSI benefits in the first month of a calendar quarter, we determine your eligibility for the whole calendar quarter. If you apply for benefits in the second or third month of the calendar quarter, we determine your eligibility for SSI benefits separately for each month in that calendar quarter. After the first quarter, we determine your eligibility for whole calendar quarters." See also 20 C.F.R. Sec. 416.410 (1982). 7 The original (January 1974) version of 20 C.F.R. Sec. 416.1125 provided: "Sec. 416.1125 Unearned income; support and maintenance. "(a) Unearned income includes support and maintenance furnished in cash or in kind. Support and maintenance may generally be defined as room and board, and would also include other incidentals necessary to an individual's normal sustenance. "(b) In the case of any eligible individual (or eligible individual and eligible spouse) living in another person's household and receiving support and maintenance in kind from such person, such individual's (or eligible individual and eligible spouse) payment standard of $130 per month (or $195 per month for an eligible individual and eligible spouse) will be reduced by one-third in lieu of including the value of such support and maintenance as unearned income to the individual (or eligible individual and eligible spouse). "(c) Such one-third reduction in the payment standard will apply only for months wholly spent in the household of another person. Thus, the reduction is made beginning with the first full calendar month in which an individual (or eligible individual and eligible spouse) lives in another person's household and ends with the last such full calendar month. "(d) Such one-third reduction will apply regardless of whether the individual (or eligible individual and eligible spouse) is making any payment for support and maintenance (room and board) to the person in whose household he is living. "(e) Such one-third reduction in the payment standard will not apply where an individual (or eligible individual and eligible spouse) are living in a commercial establishment (e.g., rooming or boarding house) or institution. 'Another person's' household refers to the household of a private individual. "(f) Such one-third reduction in the payment standard will not apply where only support or maintenance (i.e., room or board) is furnished in kind, both support and maintenance must be furnished for such reduction to apply. Where only support or maintenance is furnished in kind, the value of such support or maintenance will be included as unearned income in accordance with paragraph (a) of this section. "... "(h) Such one-third reduction in the payment standard will not apply to the payment standard of any individual who is subject to the provisions of Sec. 416.1185 and is living in the household of the person from whom income is or would be deemed." (Emphasis added.) 8 The provisions of section 416.1125(b), as amended in 1978, became effective October 1, 1976 for all new and pending claims and for all redetermined cases which do not receive lower payments solely because of the amendment. Even if revised subsection (b) did not apply, the result in Bormey's case is the same under original subsection (b) insofar as the inapplicability of the statutory one-third reduction is concerned. See section 416.1124(f) of original regulation. Under either version, subsection (d) of the amended (1978) section 416.1125, which became effective with SSI payments for December 1974, applied (see note 12, infra) 9 20 C.F.R. 416.1125(b), as amended in 1978, provided: "Sec. 416.1125 Unearned income; support and maintenance. "... "(b) One-third reduction for individual living in another person's household--(1) General. The standard payment amount for an eligible individual (or both members of a couple as defined in Sec. 416.120(c)(5)), who lives in another person's household and receives support and maintenance in kind from such person, will be reduced by one-third in lieu of determining the value of such support and maintenance as unearned income to the eligible individual (or couple). The one-third reduction when applicable, is made beginning with the first full calendar month in which an eligible individual (or couple) lives in another person's household and receives both food and shelter from that other person, and ends with the last such full calendar month. The one-third reduction in the standard payment amount applies regardless of any payment the individual (or couple) may make toward the support and maintenance unless, effective October 1976, that payment meets the requirements of paragraph (b)(3)(iv) of this section. Effective with amounts payable for December 1974, when the one-third reduction applies, any additional in-kind support and maintenance an eligible individual (or couple) receives is not counted as income regardless of the source. "(i) For purposes of this paragraph (b), the one-third reduction applies for a particular month only if an eligible individual lives in another person's household throughout a calendar month except for temporary absences (see paragraph (j) of this section) and receives in-kind support and maintenance in the form of both food and shelter from the person in whose household he or she lives. An individual may live in two or more households during an entire month and be subject to the one-third reduction if he or she does not maintain his or her own household during this period. "... "(iii) Where the one-third reduction is not applicable, but the eligible individual (or couple) is receiving in-kind support and maintenance which is not excluded from income under the provisions of this subpart K, such support and maintenance is valued as described in paragraphs (c) through (i) of this section. "(2) Another person's household. A household refers to a personal place of residence which is not a commercial establishment (e.g., a rooming or boarding house), a noninstitutional care home as defined in Sec. 416.1125(c), or an institution as defined in Sec. 416.231(b). An eligible individual (or couple) will be presumed to be living in another person's household (except as provided by paragraph (b)(3)), whenever the individual (or couple) lives in a household which has at least one other member who is not: "(i) The individual's spouse (as defined in Sec. 416.1005); or "(ii) A minor child; or "(iii) A person whose income is deemable to the individual under Sec. 416.1185 (published as a notice of proposed rulemaking with interim effect at 42 FR 3316, January 18, 1977) or Sec. 416.1190. "(3) Not another person's household. An individual is not considered to be living in another person's household when: "(i) The eligible individual or a living-with spouse has an ownership or life estate interest in the home; or "(ii) The eligible individual or a living-with spouse is liable to the landlord for payment of any portion of the rental charges; or "(iii) The eligible individual is living in a substitute home in the form of a noninstitutional care situation as defined in Sec. 416.1125(c)(5); or "(iv) The eligible individual is paying at least a pro rata share of the average monthly total household operating expenses as described in paragraph (b)(5) of this section. "(4) Receiving in-kind support and maintenance. When an eligible individual (or couple) lives in another person's household (as described in paragraph (b)(2)), he or she will be presumed to be receiving in-kind support and maintenance in the form of both food and shelter from the person in whose household he or she lives, and the one-third reduction will apply unless the presumption is rebutted as provided in paragraph (b)(6). "(5) Total household operating expense. Total household operating expenses means the average of total monthly expenditures for food, rent or mortgage payments, real property taxes, heating fuel, gas, electricity, water, sewer services and garbage collection services. The term refers only to amounts actually expended by the household for the purposes specified in this paragraph (5); it does not include the value of any in-kind support and maintenance provided by a source external to the household. A pro rata share of total household operating expenses is determined by dividing the monthly average of these expenses by the number of persons in the household regardless of age or individual consumption of any of the items. Payment of an amount which is within $5 of the monthly pro rata share is considered to meet the pro rata requirement. A pro rata share is generally determined by averaging the specified household expenses for the 12-month period prior to determination. If independent or collateral verification is not available to establish payment of a pro rata share the eligible individual (or couple) shall state the reason therefor and submit other evidence of probative value. "(6) Rebuttal. Applicability of the one-third reduction may be rebutted by showing that an eligible individual: "(i) Does not live in another person's household; or "(ii) Does not live in another person's household throughout a month; or "(iii) Does not receive both food and shelter from the person in whose household he or she lives. An individual who purchases (i.e., pays for) his or her own food, or who receives food from someone other than the householder is not receiving in-kind support and maintenance as required in paragraph (b)(4); ... "... "(7) Deeming. When an eligible individual and a person whose income must be deemed to the eligible individual under Sec. 416.1185 (see paragraph (b)(2)(iii) of this section), or Sec. 416.1190 both live in another person's household within the meaning of this paragraph (b), the deeming rules apply to the eligible individual in addition to the one-third reduction rules. "(8) Effective date. The provisions set forth in this paragraph (b) are effective October 1, 1976. However, in the case of any recipient who receives a lower supplemental security income payment or becomes ineligible upon redetermination solely through the application of these rules (i.e., there has been no actual change in his or her living arrangement) the provisions are effective on the first day of the quarter following the redetermination. "(c) Household situations not included under paragraph (b) of this section. The reduction in the payment standard for living in the household of another and described in paragraph (b)(1) of this section will not apply in the following situations and support and maintenance provided in kind will be valued as provided herein and in paragraphs (d) and (e) of this section: "(1) In the case of an eligible individual (or eligible individual and eligible spouse) who lives in another person's household and receives in-kind support and maintenance from that other person in the form of food only or shelter only, but not both. "... "(3) In the case of an individual who is subject to the provisions of this part regarding the deeming of income (Sec. 416.1185 (published as a notice of proposed rulemaking with interim effect at 39 FR 2487 and amended at 42 FR 3316, January 18, 1977) or Sec. 416.1190) and who is living in the household of the person from whom income is or would be deemed. In such case, any support and maintenance furnished by the person in whose household the individual is living is not counted as income. "(4) In the case of an eligible individual (or eligible individual and eligible spouse) who lives in his or her own household, including a commercial establishment (e.g., rooming or boarding house). "(5) In the case of an eligible individual (or eligible individual and eligible spouse) who has been placed in a noninstitutional care situation and receives nonexcludable in-kind support and maintenance. For purposes of this section, a noninstitutional care situation exists when: (i) an individual or couple is placed by a public or private agency under a specific program of protective placement such as foster or family care; and (ii) the placement is in a private household which is licensed or otherwise approved by the placing agency to provide such care; and (iii) the placing agency retains responsibility for continuing supervision; and (iv) the person providing the care accepts payment from the individual, the placing agency, or some other party." (Emphasis added, except section headings.) 10 See note 5, supra 11 20 C.F.R. Sec. 416.1125(a), as amended in 1978, provided: "(a) General. Unearned income includes support and maintenance furnished in cash or in kind unless otherwise excluded under this subpart K. Support and maintenance in kind encompasses food, clothing, and shelter or any portion of any or all of such items. Unless otherwise specified herein, the value of in-kind support and maintenance refers to its current market value. For purposes of this subpart K, the term standard payment amount refers to the Federal payment rate as described in Secs. 416.410-416.413." 12 20 C.F.R. Sec. 416.1125(d), as amended in 1978, provided: "(d) Valuation of support and maintenance for individuals in household situations. When an eligible individual (or eligible spouse) lives in a household (i.e., is not in an institution), the reduction in the payment standard described in paragraph (b) of this section is inapplicable, and the provisions of Secs. 416.1185 (see paragraph (c)(3)) and 416.1190 do not apply, any support and maintenance received in kind but not received in lieu of cash wages (see Sec. 404.429(c) of this chapter) is unearned income. In such cases effective with payments for December 1974, the maximum value of such support and maintenance is presumed to be that amount which, for an individual or a couple with no other income, would result in payment at two-thirds of the applicable payment standard; i.e., the value is presumed to be one-third of the payment standard, plus the exclusion applicable to unearned income. This presumption will be applied in determining the benefits payable unless it is rebutted by the individual's establishing that the current market value of such support and maintenance, less any payment he makes therefor, is lower than the presumed value. This rule will apply in the following circumstances: "(1) When an eligible individual (or eligible individual and eligible spouse) lives in the household of another and receives from that other person only support or maintenance in kind as described in paragraph (c)(1) of this section.... "(2) When an eligible individual (or eligible spouse) lives in his own household, including a commercial establishment, and receives support and maintenance in kind." (Emphasis added, except for section heading.) 13 Each party shall be afforded an opportunity to present additional evidence, if desired, on the question of the then current market value of the food and shelter furnished Bormey, less any payment made for same We express some doubt as to the validity of the amount of presumptive reduction of section 416.1125(d). When an individual living in the household of another pays the cost neither of his or her food nor of his or her shelter, the statutory one-third reduction applies. If the individual pays either for his or her food or for his or her shelter, one might logically assume that a rebuttable one-sixth (or other fraction smaller than one third) reduction in benefits would be in order. The appellee, however, presumes a full one-third reduction even though one item of support and maintenance is being paid by the individual. Unlike the statutory one-third reduction, there appears to be no statutory basis for this regulatory presumptive one-third reduction. On remand, we invite the appellee and Bormey to consider the validity of the presumptive one-third reduction of section 416.1125(d). Our doubts are apparently not shared by the Ninth Circuit, although it may not have directly addressed the above-indicated concerns. Young v. Schweiker, 680 F.2d 680, 682 (9th Cir.1982). 14 At the May 1979 hearing, Bormey's attorney stated to the ALJ: "I think for the period in which the payments were suspended, I think the full benefit will be, got to be paid because the Administration is estopped from raising the issue that she was not contributing to household expenses, because the Administration with its action was claiming that position. But we don't raise in connection with that point any specific issues that claimant is going to repay Mr. Bormey [her father]. What we're trying to say is, from now on, if she gets full benefits, if she gets full benefit, she will contribute, she will contribute to the household expenses for instance starting from this point right now, not to the past. I think in the past we cannot go back and see was any obligation between the father and the claimant to pay or not to pay. They supported, at that time, without any obligation and nobody is asking for that money, I mean we're not asking for that money for claimant to repay Mr. Bormey. I think she's entitled to that during the period in which the payment[s] were suspended, she's entitled to the full benefits." This position was never modified or retracted. 15 Indeed, to have been entitled to full benefits, without any reduction for the value of any unreimbursed food or shelter, she would have had to pay more than $100 a month, as the foregoing portions of this opinion reflect 16 Nor have her parents been shown to have suffered legal prejudice as a result of such suspension. There was no claim or showing that they were legally obligated to support Bormey. Even if they were, the increased benefits Bormey seeks, she seeks for herself, not for them. See note 14, supra. Moreover, the administrative record reflects that Bormey successfully sought to have herself determined not a "child" in order to avoid having her father's income "deemed" to her, thus rendering her ineligible for any benefits. By its erroneous suspension of benefits, the government may have "imposed" upon the generosity of Bormey's parents, but a certain amount of such "imposition" is in any event inherent in the statutory scheme of reducing benefits for support and maintenance donated by others. The remedy for this instance of erroneous "imposition" on her parents is surely not to grant Bormey a greater net financial recovery than she could have possibly obtained had the error she complains of not occurred	01-04-2023	08-23-2011
https://www.courtlistener.com/api/rest/v3/opinions/4620530/	Bernard C. Hasson and Helen Hasson v. Commissioner.Hasson v. CommissionerDocket No. 49325.United States Tax CourtT.C. Memo 1955-121; 1955 Tax Ct. Memo LEXIS 218; 14 T.C.M. (CCH) 443; T.C.M. (RIA) 55121; May 16, 1955218 Held, deficiencies determined on the basis of a net worth computation are sustained, with adjustments for certain errors in the computation. Willis S. Siferd, Esq., Cook Tower, Lima, Ohio, for the petitioners. Alvin J. Ivers, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion This proceeding involves deficiencies in tax and penalties determined against petitioners as follows: Additions to taxSec.Sec.YearIncome tax293(a)294(d)1949$1,639.86$ 81.99$261.3619501,660.9683.05259.5719512,010.10100.51357.24The issues to be decided are: (1) whether petitioners had unreported income for the taxable years 1949, 1950, and 1951, as determined by respondent by the net worth and expenditures method, (2) whether part of any219 deficiencies for such years is due to negligence or an intentional disregard of the applicable rules and regulations by petitioners, requiring the imposition of the 5 per cent penalty under section 293(a) of the 1939 Code; and (3) whether petitioners are liable for the additions to tax provided for by section 294 because of the failure to file declarations of estimated tax and the substantial underestimation of estimated tax. Some of the facts were stipulated. Findings of Fact The stipulated facts are so found and are incorporated herein by this reference. Bernard C. Hasson (hereinafter referred to as petitioner) and Helen Hasson are husband and wife, residing in Lima, Ohio. They filed joint Federal income tax returns for the years here in issue, 1949, 1950, and 1951, with the collector of internal revenue at Toledo, Ohio. Petitioner left high school in 1934 at the age of 17, and was initially employed as a gasoline service station attendant. In 1935 he went to work for one Weaver Haus, who operated coin machines such as pinball machines, slot machines, and jukeboxes. His starting wage was approximately $20 per week with free room and board. In a year's time his salary rose220 to $70 per week plus semiannual bonuses. Haus died in October 1936, and the business was subsequently operated by his widow for a period. In 1937, petitioner, his brother Raymond Hasson, and two other individuals operated the business; but by the end of 1938, petitioner and the two other individuals had left and it was thereafter conducted solely by Raymond Hasson. The record does not show that petitioner retained any proprietary interest in this business. Petitioner did not report, on his Federal income tax returns, the sale of an interest in this business to his brother. Petitioner was employed by Westinghouse from 1938 to 1942. His starting wage was $.74 per hour, but after about 2 months, his earnings approximated $275 to $375 per month. Petitioner was married in 1938. He and his wife separated after a year or two and they were divorced in 1942. After the separation, he lived at home with his parents. Petitioner was inducted into the Army in March 1943, and was honorably discharged for medical reasons in the latter part of the same year. In 1944, petitioner obtained employment at the Elks Lodge in Lima, Ohio, as assistant steward or bartender at a salary of $70 per week. 221 He was made assistant manager in 1947. His wages rose gradually during the period of his employment at the Elks Lodge from approximately $3,500 for each of the years 1944 and 1945 to the sum of $6,378.48 for the year 1949, $6,155.89 for the year 1950, and $5,675.30 for the first 11 months of 1951. While employed at the Elks Lodge, petitioner lived with his parents until his second marriage in January 1946, to Helen Hasson, also a petitioner herein. In preparation for his marriage, petitioner purchased a duplex residence in Lima, Ohio, late in 1945. The purchase price was $8,750, including 4 rooms of furniture, and was financed almost entirely by a mortgage. Petitioner saved money from his various jobs and by December 31, 1945, he had accumulated certain cash savings which were not deposited in any bank. During the course of an examination by a revenue agent in 1952, petitioner stated that his cash hoard at January 1, 1946, amounted to approximately $3,500; he later revised this amount to $5,000. In each of the years 1946, 1947, and 1948, petitioners expended approximately $1,000 more than the cash receipts reported on their returns. Such reported cash receipts consisted of salary222 in the amounts of $3,500.00, $3,701.25, and $4,732.66, for the years 1946, 1947, and 1948, respectively, plus approximately $400 in rents from their duplex during each of these years. During 1947 and 1948, petitioner made 2 personal loans from a local bank in the amounts of $710.25 and $574.89. Petitioners reported as their net income for the years 1949, 1950, and 1951, the respective amounts of $5,744.40, $5,335.31, and $6,614.58. Respondent determined that petitioners' returns and records did not reflect their entire income and, by the net worth method, he determined that petitioners had failed to report income in the amount of $8,324.33 for each of such years. Two children were born to petitioners, one in 1946 and the other in 1947. Petitioners' living expenses were $2,500 during each of the years in issue. In addition, in 1950 they purchased a new $4,600 automobile and a television set for $503. Petitioner spent $150 to $200 for a vacation trip to Florida in 1950. They acquired an additional amount of cash in that year as the result of an insurance settlement for tornado damage to their home. The insurance proceeds amounted to $4,114.04, of which $1,693.74 was spent for repairs, 223 leaving them a net balance of $2,420.30. In 1951 petitioners purchased a new $18,000 home in Lima, Ohio. They also spent $2,250 in that year for furniture and appliances for this new home. In December 1951, petitioner left his employment with the Elks Lodge and purchased an interest in the Continental Bar in Lima. Respondent determined, as part of his net worth computation, that petitioner's capital account in this business amounted to $14,304.53 at December 31, 1951. In addition to the $5,675.30 salary which he received from the Elks Lodge in 1951, petitioner reported on the return filed for that year his distributive share of profits from the operation of the Continental Bar, amounting to $804.53. Also reported was the sum of $900, received by petitioner as a fee for the administration of the estate of his brother, Raymond Hasson. Petitioners did not report the receipt of $240 interest in 1951 on a $3,000 loan made to one Herbert Arps in 1950 (repaid in 1951), nor did they report the receipt of $88 interest in that same year from Raymond Hasson on a one-year note for $1,200, dated October 18, 1950. Petitioner borrowed $3,000 from his mother in 1951 and gave her a note for224 such sum, dated November 14, 1951. Petitioners also obtained $1,000 in 1951 from the sale of certain items of furniture from their old home. Petitioners received no substantial gifts or inheritances during the taxable years 1949, 1950, and 1951. Petitioners filed no declarations of estimated tax for the taxable years 1949, 1950, and 1951. The following net worth computation is a condensation of that used by respondent in his determination of the deficiencies herein, but it has been adjusted to bring it into accord with our findings of fact and to take into account certain concessions by respondent: 12/31/4812/31/4912/31/5012/31/51ASSETSCash in Bank$ 2.34$ 2.34$ 3,191.05$ 2,114.50Note Receivable - Raymond Hasson1,200.00Residence & Furniture - 943 Richie Ave.8,750.008,750.006,329.705,329.70Improvements - 943 Richie Ave.2,218.533,212.664,103.344,324.27Automobiles3,404.823,404.824,600.004,600.00Household Furniture00503.002,753.00Capital Account, Continental Bar00014,304.53Residence - Lost Creek00018,000.00Note Receivable - Herbert Arps003,000.00Total Assets$14,375.69$15,369.82$22,927.09$51,426.00LIABILITIESMortgages Payable$ 7,654.30$ 7,197.56$ 6,722.55$15,915.07Note Payable - Anna Hasson0003,000.00Total Liabilities$ 7,654.30$ 7,197.56$ 6,722.55$18,915.07NET WORTH6,721.398,172.2616,204.5432,510.936,721.398,172.2616,204.54Increase in Net Worth$ 1,450.87$ 8,032.28$16,306.39AdjustmentsAdd: Income Tax Withheld561.70549.50641.21Personal Expenses re residence195.10183.49Attorney fee re auto wreck150.00Estimated Living Expenses2,500.002,500.002,500.00$ 4,707.67$11,265.27$19,597.60Less: Depreciation, rental property208.09237.06471.56Profit on auto trade95.18Refund, prior year's income tax24.906.5238.76Insurance re personal injury477.78Reconstructed Adjusted Gross Income$ 4,474.68$10,926.51$18,609.50Total Reconstructed Adjusted Gross Income for 1949, 1950 and 1951$34,010.69Total Reported Adjusted Gross Income for 1949, 1950, and 195119,660.32Total Unreported Income for 1949, 1950, and 1951$14,350.37Additional Income Allocated Equally to Each of the Taxable Years 1949,1950, and 1951$ 4,783.46225 Opinion RICE, Judge: Respondent determined, on the basis of a net worth computation, that petitioners had failed to report a total of $24,973.01 in income during the years 1949, 1950, and 1951. Petitioners contend that respondent's failure to show the source of such disputed income precludes the use of the net worth and expenditures method of reconstructing income; and, in any event, that if certain errors in respondent's net worth computation were corrected, the computation would show that petitioners had correctly reported their income during the years in question. It is well settled that, under section 41 of the 1939 Code, the Commissioner may determine deficiencies in the income of a salaried individual on the basis of a net worth computation. The increase in net worth determined by such computation is evidence of income derived by the taxpayer during the period in which the increase occurs. , affd. - Fed. (2d) - (C.A. 4, April 12, 1955). Deficiencies so determined are presumptively correct and, where there are no books or records which accurately reflect the amounts of the unreported income, the burden of proof rests on the226 taxpayer to show that the net worth computation is erroneous. Lacking the cooperation of the taxpayer, it may be impossible for the Commissioner to ascertain the source of the unreported income so determined, but the showing of such source is not an essential prerequisite for sustaining a deficiency determined under the provisions of section 41. (C.A. 3, 1952), certiorari denied ; , affd. (C.A. 3, 1941). A taxpayer cannot shift the burden of proof merely by his ability to conceal the origin of his unreported income. We have given careful consideration to each of the various items in respondent's net worth computation which are in dispute. Unfortunately, as is so frequently true in net worth cases, there is a paucity of documentary evidence in the record, and petitioner attempts to meet his burden of proof by reliance on his own self-serving testimony and the not disinterested testimony of his mother. Much as we dislike to decide issues on the burden of proof, the evidence was not sufficiently convincing to support findings227 of fact that petitioner possessed various assets at the beginning of the net worth period for which he was not given credit in respondent's computation. We have incorporated into our findings of fact an adjusted net worth computation which takes into account certain items which we have found in petitioners' favor but, nevertheless, it discloses a total unreported income for the 3 years in issue, amounting to $14,350.37. Petitioner contends that he had accumulated cash approximating $9,000 to $10,000 by December 31, 1948, such cash allegedly being kept at various times in his home, in a strong box in his mother's home, and in the safe at the Elks Lodge. However, petitioner's testimony on this matter was vague and conflicting. He claims to have amassed this sum by January 1, 1946, and yet he stated, during an examination by a revenue agent, that the amount of accumulated cash at this date approximated but $3,500, and subsequently revised this figure to $5,000. Petitioner's history of employment and earnings, the purchase of a home in 1945 financed almost entirely by a mortgage, and the financing of moderately small purchases in 1947 and 1948 by personal loans convinces us that he did228 not possess a cash hoard of $9,000 to $10,000 during the years 1946 through 1948. Petitioners' witnesses testified that he kept certain envelopes in the safe at the Elks Lodge and it is quite possible that he did have accumulated cash on hand aggregating $3,500 on January 1, 1946, as he first stated to the revenue agent. But it appears that this amount was spent during the following three years and we are unable to find as a fact that he had any undeposited sum of cash on hand on December 31, 1948. Accordingly, no adjustment can be made in respondent's net worth computation with respect to this item. Petitioner also contends that part of the increase in his various assets during the net worth period was derived from the repayment of a debt owed him by his brother prior to the beginning of the period rather than from taxable income earned during the period. This debt allegedly consisted of a loan by petitioner to his brother in 1941, amounting to $1,200 plus the sum of $4,400 owed petitioner in payment for the sale of his alleged proprietary interest in the coin machine business conducted by his brother. However, the evidence indicates that the $1,200 loan was made in 1950, and we229 have so found. As for the purported sale by petitioner of an interest in the coin machine business, the record does not substantiate the possession of such an interest. It does not appear that petitioner reported any income from this business on his various income tax returns nor did he report the realization of gain on the sale of such interest in 1946 on his return for that year. Without documents of sale, cancelled checks or some other evidence indicating possession and sale of an interest in this coin machine business, we must hold that respondent did not err in failing to include this $4,400 item among petitioner's assets at December 31, 1948. We have found that petitioner borrowed the sum of $3,000 from his mother in 1951 and have adjusted respondent's net worth computation to take this into account. It also appears that respondent's estimate of petitioner's living expenses is excessive and we have made a finding of fact that such expenses approximated $2,500 annually during the years in issue. Respondent's computation also errs in failing to give petitioners credit for the receipt of $1,000 in 1951 from the sale of certain items of furniture and in overstating the amount expended*230 by petitioners in repairing tornado damage to their old home. Taking these various adjustments and certain concessions into account, the adjusted net worth computation results in a finding that petitioners failed to report income amounting to $14,350.37 during the years 1949, 1950, and 1951. Petitioners do not contest respondent's proration of the total amount of unreported income equally over the years in issue. Lacking more precise evidence as to when such income was actually earned, such method must be sustained. . Petitioners have offered no evidence and made no argument on brief with respect to the imposition of the 5 per cent negligence penalty under section 293(a) and the additions to tax under section 294(d) for failure to file declarations of estimated tax and substantial understimation of estimated tax. Consequently, we deem the issues raised with respect to these items to have been conceded. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1872894/	137 B.R. 527 (1992) In re SENIOR CARE PROPERTIES, INC., Debtor. Bankruptcy No. 91-07267-B. United States Bankruptcy Court, N.D. Florida, Tallahassee Division. February 25, 1992. Russell S. Bogue, III, Tampa, Fla., for movant. W. Kirk Brown, Tallahassee, Fla., for debtor. Ashley Rusher, Winston-Salem, N.C., for Eastpoint. ORDER ON MOTION FOR RELIEF FROM STAY LEWIS M. KILLIAN, Jr., Bankruptcy Judge. This matter came before the Court on the motion of the creditor, NBD Trust Company of Florida, N.A., as trustee ("NBD"), for relief from the automatic stay. NBD initially moved for relief from the stay on August 29, 1991. After conducting a preliminary hearing, the Court continued the stay in effect pending the result of a final hearing. Prior to the final hearing, the parties reached an agreement, subject to the approval of the bondholders for which NBD is acting as trustee, whereby the debtor agreed to give NBD a replacement lien on all of the furniture, fixtures, and equipment at the facility. The bondholders would not consent to the agreement, which resulted in NBD moving for the rescheduling of a final hearing on the motion for relief from the stay. Having considered the argument of counsel and for the reasons set forth below, we find that NBD is not entitled to relief from the stay or additional adequate protection. 528 The debtor operates a nursing home in Franklin County, Florida. When it acquired the home in November, 1990, the debtor assumed all the obligations of the previous owner, Eastpoint. These obligations include a loan agreement, a mortgage and security agreement, and a collateral assignment of rents and leases, all held by NBD. As part of the sale price of the home, Eastpoint received a second mortgage that is subordinate to NBD's mortgage. Subsequent to the assumption of the liabilities, the debtor defaulted on its obligations to NBD. On June 12, 1991, the debtor filed for protection under Chapter 11 of Title 11, United States Code. The parties stipulate that the value of the nursing home is $2,900,000 and that the liens on it amount to approximately $2,683,000, with approximately $2,270,000 owed to NBD and approximately $413,000 owed to Eastpoint. The debtor and Eastpoint previously entered into an adequate protection agreement, approved by Court order, whereby the debtor agreed to pay Eastpoint $5,933.22 per month. This is the same amount called for in the promissory note executed at the time of the transfer of the nursing home. NBD recognizes that there is equity in the property and that the property is necessary for an effective reorganization. It has moved for relief from the stay under § 362(d)(1) which provides that: On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay (1) for cause, including the lack of adequate protection of an interest in property of such party in interest. 11 U.S.C. § 362(d)(1). In the alternative to relief from the stay, NBD prays for adequate protection payments from the debtor. The debtor's equity in the property is approximately $220,000, the value of the property less the total amount of the liens. NBD's equity cushion is approximately $530,000, the value of the property less its lien. NBD asserts that its interest is not adequately protected. It contends that it has an interest not only in the home, but also in the equity cushion that is being eroded by the post-petition accumulation of interest. Consequently, it seeks relief from the stay. The debtor contends that NBD's equity cushion is sufficient to adequately protect NBD's interest. NBD's asserts two arguments that it is not adequately protected. First, it contends that the cushion is not sufficient to protect its interest. Second, as a secured creditor, it asserts an interest in the equity cushion that should be protected. NBD contends that case law requires a minimum cushion to be between 20% and 40%. In this case, NBD's equity cushion is approximately 18% of the value of the property. There are many cases where the percentage level of the equity cushion has been the determining factor as to whether a creditor was entitled to adequate protection. See In re McKillips, 81 B.R. 454, 458 (Bkrtcy.N.D.Ill.1987) (citing numerous cases). There is at least one case that holds that an oversecured creditor is only entitled to adequate protection when the value of the secured claim declines. In re Lane, 108 B.R. 6 (Bkrtcy.D.Mass.1989). Whether a creditor's interest should be adequately protected must be determined on a case by case basis rather than by mechanical application of a formula. In re Kost, 102 B.R. 829 (D.Wyo.1989). The circumstances of each case must be considered. In Kost, where the equity cushion was 11.5%, the court considered that the collateral was deteriorating in value, there was no insurance, the debtor was unable to maintain the property, and the real estate market in the area was declining. Consequently, the court found that the secured creditor was not adequately protected. In In re Strause, 97 B.R. 22 (Bkrtcy.S.D.Cal. 1989), the court considered the debtors' history of payment on the secured notes, when it determined that a 6% equity cushion was insufficient to adequately protect the creditor. 529 In this case, NBD is protected by an 18% equity cushion. The debtor has shown a reasonable likelihood of reorganizing, it is current with its real estate taxes and its payments to the second mortgage holders, and it has filed its plan of reorganization, albeit the day before the final hearing to lift the stay. Further, there has been no showing that the property is in disrepair or is in danger of deterioration. It appears that NBD is adequately protected by the $530,000 equity cushion. Even if the equity cushion was not sufficient, there is some question whether an oversecured creditor would be entitled to periodic cash payments as adequate protection. Section 506(b) allows an oversecured creditor interest on its claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose. However, this allowance is limited to the difference between the value of the collateral and the amount of the claim. 11 U.S.C. § 506(b), see also United Savings Assoc. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). If periodic cash payments were permitted, it is conceivable that, over time, the secured creditor would be paid more than § 506(b) allows, unless, as one court suggests, the payments are taken from the creditor's cushion. See In re McCombs Properties VI, Ltd., 88 B.R. 261 (Bkrtcy.C.D.Cal.1988); see also David Gray Carlson, Oversecured Creditors Under Bankruptcy Code Section 506(b): The Limits of Postpetition Interest, Attorneys' Fees, and Collection Expenses, 7 Bankr.Dev.J. 381 (1990). In his article, Carlson points out that Timbers would be violated if a creditor were to receive more payments than the total, original equity cushion. Id. at 384. NBD also claims that secured creditors have an interest in the equity cushion. If it is recognized that a secured creditor does have such an interest, then, NBD argues, § 361(3) allows for adequate protection by providing the creditor the indubitable equivalent of its interest in the property. NBD's assertion of an interest in the equity cushion has been recognized, without analysis, by at least one court. In re Milleson, 83 B.R. 696 (Bkrtcy.D.Neb.1988); Matter of Underwood, 87 B.R. 594 (Bkrtcy. D.Neb.1988). However, it has been rejected by another. McCombs, supra. We recognize that an argument could be made that Justice Scalia's statement in Timbers that oversecured creditors have a perfected security interest in the cushion is dispositive of this issue. See Timbers, 484 U.S. at 374, 108 S.Ct. at 631. However, Justice Scalia's discussion relates to the entitlement of the secured creditor to the payment of interest to the extent of the value of the property. It does not suggest that the secured creditor is entitled to adequate protection of the entire cushion through periodic payments. Since any interest payments come out of the cushion, then to the extent payments are made prior to plan confirmation, the cushion available to that secured creditor is accordingly reduced. In McCombs, the court found that the unsecured creditors and the debtor have rights to the cushion and the secured creditors' rights are confined to those rights specified in § 506. The court observed that if the debtor were required to protect the full value of the security including the cushion then the use of the cushion as adequate protection would be eliminated. We agree with the McCombs decision, and conclude that secured creditors do not have an interest in the equity cushion that would entitle them to adequate protection. Although a substantially oversecured creditor is not entitled to adequate protection payments, it is not without remedy. In many instances involving oversecured creditors, debtors use the bankruptcy process to delay making payment to the oversecured creditor. Then, upon the oversecured creditor filing for relief from stay, the debtor will contend that there is equity in the property and that the creditor is adequately protected, therefore relief should be denied. However, § 362(d)(1) provides that relief may be granted "for cause." The delay in paying a creditor for an inordinate length of time has been recognized as a cause for relief. See In re *530 Novak, 121 B.R. 18 (Bkrtcy.W.D.Mo.1990); In re A.J.N. Enterprises, Inc., 464 F.Supp. 394 (E.D.La.1978); In re Empire Steel Co., 228 F.Supp. 316 (D.Utah 1964). Unreasonable delay in such instances can be unduly prejudicial to creditors. We agree with these cases and recognize that such delay to the prejudice of creditors is cause for relief from the stay. Although NBD has not been paid for at least the eight months that this debtor has been protected by the bankruptcy code, it has failed to show that there has been any prejudice to creditors from the delay. Further, it appears that the debtor is moving toward the confirmation of a plan of reorganization. NBD has failed to show that cause exists for lifting the stay or that it is entitled to further adequate protection. The replacement lien on all of the furniture, fixtures, and equipment at the facility is sufficient protection of NBD's interest. Accordingly, it is ORDERED AND ADJUDGED that NBD's motion for relief from the automatic stay is denied. DONE AND ORDERED.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4620531/	Alfred Campbell v. Commissioner.Campbell v. CommissionerDocket No. 24108.United States Tax Court1950 Tax Ct. Memo LEXIS 11; 9 T.C.M. (CCH) 1128; T.C.M. (RIA) 50308; December 18, 195011 Dependency credits determined. Alfred Campbell, pro se. Cyrus A. Neuman, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion The petitioner in the above-entitled proceeding requested a redetermination of his income tax liability for the year 1947, in the amount of $190. In the petition error was assigned based on respondent's failure to allow petitioner dependency credits for his two minor children. The return for the period here involved was filed with the collector for the district of Michigan at Detroit, Michigan. Findings of Fact The petitioner, Alfred Campbell, resided at Waterford, Michigan, during the taxable year here involved. The petitioner was separated from his wife, Ada Campbell, on May 5, 1947. A divorce decree was rendered in October, 1947. Pursuant12 to the divorce decree, petitioner paid a total of $191 toward the support of his two children during the period October to December 31, 1947 During the period January 1 to May 5, 1947, the petitioner lived with his family and paid $25 per week to Mrs. Campbell for general household expenses. In addition, he paid the sum of $191 for hospital expenses of one of the children. He also made a payment of $35 for mortgage interest on the house in which the family resided, as well as a payment of $38.40 for property taxes. The house was jointly owned by the petitioner and Mrs. Campbell. Mrs. Campbell was employed as a school teacher during 1947 and earned income of $2,565.86. With this money, together with the money furnished by petitioner, and an $50additional which she borrowed, she paid all the necessary expenses of support of the two minor children. The expenses included day care at $10 per week, food, clothing and medical expenses, except for the specific hospital bills of $191 paid by petitioner. Except for negligible personal expenses, Mrs. Campbell expended her entire net income on the maintenance of her household and children. Mrs. Campbell expended in excess of $2,000 on the*13 support of the two minor children in the calendar year 1947. Mrs. Campbell furnished more than one-half the support of the two minor children in the calendar year 1947. The petitioner furnished less than one-half the support of the two children in the calendar year 1947. Opinion ARUNDELL, Judge: The facts as found establish that petitioner furnished less than one-half the support of his two minor children in the calendar year 1947. It follows that he is not entitled to the two dependency credits sought to be taken by him in his income tax return for that year. Section 25 of the Internal Revenue Code. The action of the respondent is sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620532/	Roy G. Fitzgerald v. Commissioner.Roy G. Fitzgerald v. CommissionerDocket No. 4451.United States Tax Court1945 Tax Ct. Memo LEXIS 151; 4 T.C.M. (CCH) 663; T.C.M. (RIA) 45228; June 22, 1945151 Joseph W. Sharts, Esq., 905 Commercial Bldg., Dayton 2, O., for the petitioner. Cecil H. Haas, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: Respondent has determined a deficiency in income tax of the petitioner for the calendar year 1941 in the sum of $2,143.45. The only submitted issue is whether petitioner is entitled to a deduction of $4,452.72, in the computation of his income tax for 1941 as an indebtedness which became worthless during that year. This indebtedness consisted of moneys petitioner advanced to his daughter and son-in-law during the years 1933 to 1936, inclusive. It is contended by petitioner that these advances were made as loans whith the expectation of repayment and that the indebtedness became worthless in the taxable year. Findings of Fact Petitioner is a resident of Dayton, Ohio, and a lawyer by occupation. He filed his individual income tax return for the year 1941 with the collector of internal revenue for the first district of Ohio at Cincinnati. In computing his taxable income on this return he deducted $4,452.72 as a debt which became worthless in that year. The debt consisted of money advanced152 to his daughter, Ruth F. Hume, and her husband, Thomas L. Hume, Jr. Its amount is based upon a statement furnished the petitioner by his son-in-law, setting out the various advances and computing a total of $4,452.72. The correct total of the items listed is $4,352.72. Thomas L. Hume, Jr., married petitioner's daughter in 1923. The couple has 3 children and in 1941 lived in their own home in Washington, D.C., which they had purchased in 1925. Thomas L. Hume, Jr., has been, for many years, employed as a salesman of investment securities on a commission basis and in 1941 was so employed by his father, a securities dealer in Washington, D.C.During the period 1933 to 1936, Thomas L. Hume, Jr., was in straitened financial condition due to the depression and lack of activity on the security market. During this period, at his and his wife's request, the petitioner advanced them various sums of money totaling $4,352.72. Of this total, $884.13 was evidenced by promissory notes, all of which were signed by Hume and his wife except one signed by Hume alone. The notes carried interest after maturity. The other items were advanced upon request by Hume and his wife but no note was requested153 or given. These advances by petitioner were for the purpose of supplying the funds with which Hume paid premiums upon his insurance policies, interest and principal on the loan on his home, as well as general living expenses and doctors' bills. Of the total, $700 was advanced for the purpose of defraying the expenses of Hume in moving his family to New York to accept a position there with a security house. Petitioner at various times wrote his daughter and son-in-law inquiring as to their financial condition and asking for repayment, but during the years following 1936 the income of the son-in-law was not more than the actual amount needed to pay the normal expenses of maintaining his family and no repayment was made. Thomas L. Hume, Jr., and his wife, in 1941, were occupying their home at 3114 45th Street. N.W., Washington, D.C. The title to this property stood in both of their names. It had been purchased in March 1925 for $12,500. It is located in Wesley Heights, one of the best residential sections of Washington. Subsequent to its purchase there had been many public improvements, tending to increase the value of property at that location. After its purchase, the Humes built154 a garage and added a maid's room to the house. In 1941 the property was worth not less than $12,000. At that time it was encumbered with a first mortgage of $5,489.15 and a second mortgage of $550. In that year Hume was indebted for a bank loan of $500. In 1941 petitioner communicated with Hume and advised him that it was his intention to claim a deduction on his income tax return for that year in the total amount of his above-mentioned advances. In response Hume prepared a statement from his records of the various advancements, expressed regret at his inability to pay and assured petitioner that he would do anything that he could to aid him in securing the allowance of the deduction. Sometime prior to the close of the year 1941, petitioner wrote a Washington attorney who was a close friend of his and a friend of Hume, asking him to look into the matter and collect from Hume the indebtedness or advise him as to the possibility of collection. The attorney, after talking with Hume, advised petitioner orally against filing suit and stated that, in his opinion, a judgment would not be collectible. This opinion he confirmed later in the following year by letter. The amounts advanced155 by petitioner to his son-in-law and daughter in a total of $4,352.72 represented an indebtedness on their part to him. The advances were made with the expectation of repayment. No part of this indebtedness became worthless in the year 1941. Opinion Respondent makes two contentions, first, that the advances by petitioner to his son-in-law and daughter were gifts and not loans in that none of them was made with the expectation of repayment, and, second, that if they were loans, the indebtedness did not become worthless to any extent in 1941 and in fact was not uncollectible in that year. We think the evidence clearly establishes the fact that the advances in question were made with the expectation of repayment and we have so found. However, we think it equally clear that respondent must be sustained upon his second contention. The conclusion is inescapable that the question of the possibility of collection of the indebtedness was determined without consideration of the equity owned by the son-in-law and daughter in their Washington home. It is true that it was the only property they possessed from which collection of the indebtedness could have been made. We can not but feel, however, 156 that petitioner was unwilling to take steps for collection because the result would have been to strip his daughter and his grandchildren of the home in which they lived. Considering all of the conditions revealed, we do not attach great weight to the so-called employment of a Washington attorney to enforce collection, and the opinion rendered by him. He was a friend of all the parties and his connection with the matter was at the time when petitioner was attempting to perfect his claim for the deduction of the indebtedness on his income tax return. In any event, the facts established show that the opinion expressed by the attorney was not justified in view of the existence of an equity in the Hume home in excess of the total amount of the indebtedness owed to petitioner by the Humes plus other indebtedness of the husband. Section 23 (k) of the Internal Revenue Code provides for the deduction of "Debts which become worthless within the taxable year; * * ". This language was substituted in by section 124 (a) of the Revenue Act of 1942 for the language in the former acts permitting the deduction of "Debts ascertained to be worthless and charged off within the157 taxable year". This amendment is made retroactive, by section 124 (d) of the Revenue Act of 1942, to taxable years beginning after December 31, 1938 and has been given retroactive application. Cittadini v. Commissioner, 139 Fed. (2d) 29. There is absolutely no showing that the condition with respect to possibility of collection changed in any way between 1938, 1939, 1940 or 1941, and aside from all other questions there is no basis for a conclusion that the indebtedness became worthless in 1941. On this ground alone petitioner would necessarily be denied the deduction. We think, moreover, that the facts clearly show that in 1941 the indebtedness was not worthless but, on the other hand, was in all probability collectible in full, if petitioner had been willing to take legal steps to enforce his collection by sale of the Hume home. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620533/	Frank J. Matula, Jr., and Esther Matula, Petitioners, v. Commissioner of Internal Revenue, RespondentMatula v. CommissionerDocket No. 92559United States Tax Court40 T.C. 914; 1963 U.S. Tax Ct. LEXIS 64; September 3, 1963, Filed 64 Decision will be entered for the respondent. Petitioner, Frank J. Matula, Jr., secretary-treasurer of a local labor union, was tried, convicted, and sentenced for committing perjury by giving false testimony before a legislative committee in 1956 in violation of section 118, Cal. Pen. Code, a felony. The local union was not a party to the criminal proceeding but paid the legal fees, expenses, and costs of said petitioner's defense and appeals in 1956 and 1957. Held, that the amounts so paid by the employer in each year constituted taxable income to the petitioners. Turner L. Smith and Joseph Sternbach, for the petitioners.L. Justin Goldner and Aaron S. Resnik, for the respondent. Hoyt, Judge. HOYT914 OPINIONRespondent determined deficiencies in the income tax of petitioners for the years 1956 and 1957 in the amounts of $ 2,669.65 and $ 8,537.59, respectively. The deficiencies result in each instance from the addition to and inclusion in petitioners' taxable income by respondent of legal fees and costs paid by the employer of petitioner Frank J. Matula, Jr. The only issue presented is whether such payments constitute taxable income to petitioners under section 61 of the Internal Revenue Code. 1Some of the facts have been agreed to and stipulated by the parties and are found 66 accordingly.The petitioners, Frank J., Jr., and Esther Matula, were husband and wife and resided in Los Angeles, Calif., during 1956 and 1957. They filed joint income tax returns for those years with the office of the district director of internal revenue at Los Angeles. Esther Matula is a petitioner herein because she filed joint returns with her 915 husband; the term petitioner as used hereinafter will refer only to Frank J. Matula, Jr.Petitioner was employed as secretary-treasurer of local 396, Package and General Utility Drivers, International Teamsters Union, 2 in the years in question; he had been so employed for many years and at time of trial was still so employed. In that office he was the operating head and manager of the local with power and authority to hire and fire union employees. He was a member of the union's executive board and presided as chairman at membership meetings.In September67 of 1955, the California Assembly Standing Committee on Governmental Efficiency and Economy, hereinafter referred to as the committee, began a series of official legislative hearings in Los Angeles regarding the disposal of rubbish and garbage in that area. The heads of certain organizations were subpoenaed to testify and produce records of their concerns. These included Sam Egigian, president of the State Rubbish Collectors' Association and Fred Ferrier, president of local 396. Various other witnesses were served with subpoenas to appear before the committee including business agents of the local and petitioner, Frank J. Matula, Jr. He was subpoenaed individually and not in his official capacity as secretary-treasurer of the local. In response to his subpoena, Matula appeared, was sworn and testified under oath before the committee on October 3, 1955.Subsequently on June 7, 1956, Matula was indicted by the Los Angeles grand jury for perjury in violation of section 118, Penal Code of California, a felony. The indictment charged that the testimony he had given before the committee on October 3 of the previous year was knowingly false with respect to material matters.In due course68 the petitioner entered a plea of not guilty to the charge in the indictment and he was tried by a jury in the Los Angeles County Superior Court, beginning March 18, 1957. The trial concluded on May 11, 1957, and the jury found the defendant guilty as charged by the indictment. Thereafter, the petitioner appealed his conviction through appropriate California appellate courts and ultimately to the Supreme Court of the State of California, where motion for a new trial was denied and the judgment of conviction was affirmed. The Supreme Court of the United States denied petitioner's petition for certiorari.On August 19, 1957, petitioner had been sentenced in the Superior Court; he was granted probation for a period of 5 years on condition, inter alia, that he serve the first 6 months thereof in the county jail and pay a fine of $ 2,500. After his appeals were lost he served approximately 5 months in jail and paid his fine.916 Petitioner and the local union anticipated his indictment and the day before action by the grand jury was taken there was a special meeting of the union's executive board at which petitioner "explained that he must put up bail at the time of arraignment69 in his case that will be pending in Superior Court."At this meeting the board passed motions that "we" pay the premium on the bail bond and hire lawyers to defend the officers and business agents of the local union. Several officers and agents of the local had testified before the committee and Philip Watler, a business agent of the local, was also indicted about the same time as the petitioner.Grant B. Cooper, a practicing lawyer in the Los Angeles area, was contacted through another lawyer who had offices in the same building, and he was initially seen by the petitioner and the local's regular lawyer, John C. Stevenson. He was retained by the local to defend petitioner and Watler. Later Grant B. Cooper's wife, Phyllis N. Cooper, also a practicing lawyer, was retained to assist her husband with the cases. After the petitioner's conviction, Cooper and another lawyer, named Selvin, were retained by the local to prosecute the various appeals that were undertaken. All of these actions were taken with the full knowledge, consent, and approval of petitioner. In fact, he was the moving factor, as is demonstrated by the minutes of various board meetings. Right after the petitioner's70 indictment, at a meeting of the board on June 21, 1956, petitioner reported to the board on the case. The minutes of the meeting read, in part, as follows:The Secretary made a report regarding the case in court against himself and Business Agent, Philip Watler. The Board was pleased to know that he had obtained the finest attorney in the city to represent the officers of this Local union. A motion was made and seconded that the Secretary be impowered to do everything humanly possible and leave no stone unturned, in order to defend himself and Business Agent, Philip Watler. Motion carried unanimously. The Secretary explained to the Board about the cost of the attorneys for their defense, and they were more than pleased with the effort the Secretary has made so far in figuring out ways and means to bring our case to a successful conclusion.From time to time after the union had first voted to hire lawyers to defend their officers and agents, the petitioner reported to the executive board and to the general membership on developments in, and the condition and progress of, his case. The board met regularly toward the end of each month and there was a general membership meeting71 each month except during the 3 summertime months. Both the board and the membership voted to pay the legal fees, expenses, and costs incurred in connection with the petitioner's defense of the criminal charge of perjury and of the subsequent appeals, and bills for such charges were approved for payment. These fees and expenses were paid by local 396 out of its general operating funds as follows: 917 $ 7,897.39 in 1956$ 20,201.18 in 1957None of the payments in question were made to or through the petitioner; the local paid the respective lawyers for their fees and expenses directly by its checks.Local 396 was not a party defendant in the criminal proceeding against the petitioner; it was not named as a defendant in the indictment, nor was it separately charged with any criminal offense.After the indictment and before the petitioner's trial, the local voted unanimously to reelect Matula as its secretary-treasurer. Since then and even after conviction and loss of petitioner's appeals, Matula has been reelected to the same position on several occasions, the last being on December 9, 1962. The union paid petitioner his full salary during the entire period including72 the period he spent in jail.Prior to the time the petitioner testified before the committee, he and another union agent subpoenaed to testify were advised by the local's regular attorney, John C. Stevenson, to tell the truth. Local 396 never authorized petitioner to give false testimony before the committee and had no knowledge prior to his appearance before the committee on October 3, 1955, as to what his testimony would be. The local never ratified or confirmed the commission of perjury by petitioner.Petitioner did not report any of the amounts paid by local 396 to his lawyers as income in his income tax return for any year.The crucial facts in this case are:Petitioner, secretary-treasurer and manager of local 396, gave false testimony before a California legislative committee.He was indicted for perjury, was tried, and convicted.He lost his appeals, was sentenced, and paid his debt to society.The local, acting through its executive board, retained lawyers to defend petitioner and to prosecute his appeals, and paid their fees and expenses from its general funds. The membership of the local approved these actions and expenditures.The union was not indicted and no part 73 of the payment of fees and expenses were paid for its own defense. All amounts involved were paid for the defense of the charges against petitioner and for the appeals taken by him following his conviction.On these facts, the sole question is whether the payments constitute taxable income to petitioner in the years in which they were made under section 61, I.R.C. 1954.We have held in a long line of cases, beginning with Sarah Backer, 1 B.T.A. 214">1 B.T.A. 214 (1924), that payments of legal expenses incurred in the unsuccessful defense of criminal charges are not deductible for income tax purposes. Henry L. Peckham, 40 T.C. 315">40 T.C. 315 (1963); Thomas A. 918 , 26 T.C. 562">26 T.C. 562 (1956), and cases there cited. Petitioner's reliance on Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467 (1943); Deputy v. du Pont, 308 U.S. 488">308 U.S. 488 (1939); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); and Kornhauser v. United States, 276 U.S. 145 (1928), is misplaced. Those cases are clearly distinguishable74 on their facts, and we do not understand any of them to require the allowance of a deduction of such expenses. Thomas A. Joseph, supra; cf. Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30">356 U.S. 30 (1958), affirming 242 F. 2d 14 (C.A. 3, 1957), 26 T.C. 427">26 T.C. 427 (1956).It is also well settled that a corporation which pays the fines and/or legal expenses of unsuccessful defense of criminal charges against its officers or employees may not take an income tax deduction for the amounts so paid. Tank Truck Rentals v. Commissioner, supra;Gould Paper Co. v. Commissioner, 72 F. 2d 698 (C.A. 2, 1934), modifying and remanding on other issues 26 B.T.A. 560">26 B.T.A. 560 (1932); Pantages Theatre v. Welch, 71 F. 2d 68 (C.A. 9, 1934); Burroughs Building v. Commissioner, 47 F. 2d 178 (C.A. 2, 1931), affirming 18 B.T.A. 101">18 B.T.A. 101 (1929).Here the issue presented is not as to the deductibility by the corporation of such expenses, 75 but rather whether or not they constitute taxable income to the officer who benefits from the payments. Section 61 of the Internal Revenue Code of 1954 is very broad and all-inclusive in its definition of gross income. The Supreme Court has repeatedly held that Congress has intended, by its broad definition of gross income, to exercise the full measure of its taxing power and tax all gains except those specifically exempted. Commissioner v. Lo Bue, 351 U.S. 243 (1956), and cases there cited. 3We have held that where a corporation pays the fine imposed personally on its president, convicted of willful evasion of the corporation's income tax by filing false and fraudulent corporate returns, such payments constitute taxable income to the beneficiary. Irving Sachs, 32 T.C. 815">32 T.C. 815 (1959),76 affd. 277 F. 2d 879 (C.A. 8, 1960), certiorari denied 364 U.S. 833">364 U.S. 833. The only differences between the facts involved in Sachs and those presented here are that petitioner there was an officer and minority stockholder rather than merely an officer and employee, and the payments made for his benefit by the corporation were of fines rather than of legal fees and expenses.We can see no material distinction between the payment of fines imposed following criminal conviction and legal fees and expenses paid in an unsuccessful effort to defend against criminal charges. In the Burroughs case, the Court refused to recognize the distinction saying (p. 180):919 If the fines and costs cannot be deducted, the legal expenses incurred in litigating the question whether the taxpayer violated the law and whether fines should be imposed should naturally fall with the fines themselves.So, also, if the payment of fines imposed on a corporate officer following his conviction constitutes income to him, the payment of his legal expenses incurred in litigating the question should naturally constitute income to him as well.We see no77 valid distinction between the case of an officer-stockholder and an officer-employee. Nor do we feel it necessary to characterize the nature of the payments. Cf. Mary B. Heyward, 36 T.C. 739">36 T.C. 739 (1961), affd. 301 F. 2d 307 (C.A. 4, 1962). Whether the payments are regarded as dividends, compensation, or other income to the officer, their taxability to the recipient is the same. The payment of fines or personal legal defense expenses of a corporate officer by his corporation fall within the broad definition of gross income "from whatever source derived" in section 61 of the Code unless some other Code section would exclude them. 478 Most of the arguments relied upon by petitioner here were made by the taxpayer in Sachs. 5 In answering those arguments in Sachs we said (p. 820):The petitioner contends that he was not enriched by the payment by the corporation, that he was merely indemnified against the loss to which he was subjected by his conduct of the corporate affairs. He argues that his net worth was not increased, pointing out that before the fine was imposed he had the same net worth as he had after it was paid. He further argues that as a prerequisite to a holding that income was received, the obligation which was satisfied must have been a debt incurred for a consideration. He illustrates this by stating that if one buys groceries he receives the value of what he has purchased and that this is his gain, offset by the requirement of payment for them; and if another pays for the groceries, the man is richer by the value of the groceries, not the amount of the payment, which only measures the value of the goods furnished.Thus the petitioner would have us look to the net result of both the imposition of the fine and its payment by the corporation. But we think this view of the petitioner misses79 the point entirely. While it is true that the filing of a corporate return was an act on behalf of the corporation, it certainly cannot be said to have been a part of his duty to file a false and fraudulent return. In so doing he became personally liable for the fine and costs. The corporation was not a party to the criminal proceedings and was not liable for the fine to any extent. The petitioner makes some point of the fact that in the indictment and 920 judgment the petitioner was described as president and treasurer of the corporation. This, however, was merely descriptive and did not in any way make the corporation a party defendant. If the corporation had not paid this amount for him he would have had to pay it out of his own resources. * * *80 Here petitioner was the sole defendant in the perjury case. It was petitioner alone who was tried, convicted, fined, and sentenced to jail for the very personal crime of perjury. It was certainly no part of his official duty as secretary-treasurer of local 396 to violate the law by giving false testimony before the California legislative committee, and we have found that the union had no knowledge that he would testify falsely when he appeared before the committee.We have also found that the local never ratified petitioner's criminal conduct. The record is completely barren of evidence that the union's executive board or its general membership were ever informed of what false testimony was given by petitioner or of the details of his offense. Ratification, in our view, would not alter the tax consequences in any event, and it, of course, presupposes full knowledge of the facts and circumstances. Jameson v. Gavett, 22 Cal. App. 2d 646">22 Cal. App. 2d 646, 71 P. 2d 937 (1937), and the other cases on which petitioner relies, are all civil cases involving civil liability of the master for a servant's acts; none of them are tax cases and as Gavett81 points out "approval and ratification by the master with full knowledge of the surrounding circumstances may fix liability upon the master for an act of the servant which was outside the scope of employment." (Emphasis added.) Even if the local had ratified petitioner's perjury with full knowledge of the facts and circumstances, it would have incurred no criminal responsibility, been subject to no fine or other penalty. It was not in any way a party to the criminal prosecution of Matula for perjury. Therefore, even with ratification, which we have found did not occur, the criminal proceeding remained personal to the petitioner.The union was affected only indirectly by being deprived of his services while he stood trial and later served time in jail. The amounts spent for lawyers, costs, and the expenses of trial and appeals were not expended in defense of the local but rather in defense of petitioner personally. The payments by local 396 here involved were payments of personal expenses of petitioner and not of the union. We are not impressed with petitioner's argument that the union was on trial and would be adversely affected by petitioner's conviction.In Forty-Four Cigar Co., 2 B.T.A. 1156">2 B.T.A. 1156 (1925),82 we held that expenditures made by a corporation to pay lawyers' fees, expenses, and costs of settling a case with a relative of its president could not be deducted by the company. The board and stockholders duly voted to pay such costs because the corporation's business was being damaged by the family fracas. We said there:In final analysis, the money and credit of the corporation were paid out for the purpose of settling disagreement in the family of the president of the company, 921 who owned practically all of the stock. To be sure, it was done with the consent and upon the recommendation of the minority stockholders and officers, who feared that if it were not done the company would be ruined. The transaction amounted to a withdrawal of corporate assets and their use for the personal benefit of the president and principal stockholder. The facts are that the president had insufficient means, except by using the assets of the corporation, to enable him to induce his relative to cease his pernicious activities. That those activities, if continued, would probably have resulted in the ruin of the corporation's business does not, in our opinion, render the payments a loss83 to or an ordinary and necessary business expense of the corporation, or deprive them of their essential character as personal expenditures of its president. [Emphasis added.]So, too, here we can only conclude that what the union's board or membership felt about the adverse effects of petitioner's criminal prosecution and conviction on their affairs did not change the essential nature of the payments as purely personal to the petitioner. Cf. Ernest E. Lloyd, 22 B.T.A. 674 (1931); George L. Rickard, 12 B.T.A. 836">12 B.T.A. 836 (1928).Matula was retained as an employee after his indictment and conviction; his salary was increased by the local union in 1957 and it was continued and paid even while he was serving time in jail. We think that under all of the facts and circumstances disclosed by the record here the payments by the union resulted in an economic benefit to and enrichment of the petitioner. If the union had not retained lawyers for petitioner and then paid their fees and costs, he would have been compelled to retain and pay his own lawyers and expenses in defending himself against the perjury charge and prosecuting84 his appeals. He arranged, acquiesced in, and approved the selection and retention of the lawyers to represent him. He benefited personally and directly from such actions and payments, and the result was the same as if the union had paid the amounts involved to the petitioner and he had, in turn, made payments to his lawyers for their fees and expenses.We approve the respondent's determination that the petitioner received taxable income in each of the years upon the payment by local 396 of his legal fees and expenses incurred in connection with his unsuccessful efforts to avoid conviction for perjury.Decision will be entered for the respondent. Footnotes1. All Code references herein are to the Internal Revenue Code of 1954 unless otherwise specifically indicated.↩2. Petitioner's employer will be referred to throughout this opinion as the union, or local 396, or the local.↩3. Whereas these cases involved construction of sec. 22(a), I.R.C. 1939, and sec. 61, I.R.C. 1954↩, is here involved, the sections are substantially similar and for present purposes can be viewed as the same.4. Petitioners do not argue that the payments for their benefit constitute gifts and are therefore excludable on that basis. Certainly there was no indication here that local 396 was motivated by a detached and disinterested generosity toward petitioner and the dominant reason for the payments was to make a gift to him out of affection, respect, admiration, charity, or like impulses. Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278 (1960); cf. Mary B. Heyward, 36 T.C. 739">36 T.C. 739↩ (1961).5. Whereas the crime committed by Sachs was filing a false and fraudulent return for his corporation, petitioner's criminal conviction here was for the more personal crime of perjury. As we observed in Sarah Backer, 1 B.T.A. 214">1 B.T.A. 214, 216 (1924): Manifestly the commission of perjury can, under no circumstances, be recognized as part of a taxpayer's business; * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474391/	OFINION. Black, Judge: (1) Petitioners’ first contention is that the entire Renegotiation Act of 1943, as amended by the Revenue Act of 1943, is unconstitutional. This proceeding was heard and petitioners’ brief was filed prior to the Supreme Court’s decision in Lichter v. United States, 334 U. S. 742. The Supreme Court sustained the constitutionality of the Renegotiation Act in the Lichter case. It, therefore, follows that petitioners’ attack on the general constitutionality of the Renegotiation Act is without merit, and it is overruled. (2) Petitioners’ next contention is that the Renegotiation Act is unconstitutional if applied to petitioners’ sales to Defense Plant Corporation. Petitioners concede that the Tax Court upheld the constitutionality of the act as applied to Defense Plant Corporation sales in National Electric Welding Machines Co., 10 T. C. 49, but they do not concede the correctness of the Tax Court’s decision in that case and continue to press it as one of the issues of law in this proceeding. Neither of the three cases decided by the Supreme Court in its opinion in the Lichter case, supra, had in it the precise question here raised. However, in National Electric Welding Machines Co., supra, we went into the constitutionality of the Renegotiation Act amendment of July 1, 1943, expressly including contracts with the Defense Plant Corporation, and we held that the provisions dealing with sales made under such contracts were constitutional. We think it is unnecessary here to repeat our discussion in that case. We think it is sufficient to say that we adhere to it. It follows that petitioners' contention (2) is denied. (3) The next issue which petitioners raised in their petition and which they strongly urge in their brief is that the first $458,300 (u/i2 of $500,000) of petitioners’ sales was not renegotiable in view of section 403 (c) (6) of the Renegotiation Act. Section 403 (c) (6) of the Renegotiation Act reads as follows: This subsection shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless (A) the contract or subcontract provides otherwise pursuant to subsection (i), or is exempted under subsection (i), or (B) the aggregate of the amounts received or accrued in such fiscal year by the contractor or subcontractor and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts (including those described in clause (A), but excluding subcontracts described in subsection (a) (5) (B)) do not exceed $500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $25,000 for such fiscal year. If such fiscal year is a fractional part of twelve months, the $500,000 amount and the $25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph. Speaking with reference to the foregoing provision of the Renegotiation Act, petitioners contend in their brief as follows: Even though the aggregate of the amounts received is in excess of $500,000.00, it does not necessarily follow that Congress intended that a contractor or subcontractor should be deprived of its profits in respect of amounts received on the first $500,000.00 of sales. To state it another way, it does not seem reasonable that Congress intended that a competitor of petitioners with sales of less than $500,000.00 should be entirely exempt from renegotiation in respect of its entire sales under $500,000.00 and at the same time that petitioners should be deprived of their profits in respect of sales up to $500,000.00 on an annual basis. In Supply Division, Inc., 9 T. C. 1103, we held that the taxpayer in that case, whose aggregate renegotiable sales were in excess of $500,000, was subject to renegotiation notwithstanding its subcontracts were in amounts of less than $100,000 each. In that case, among other things, we said: * * * Under the terms of paragraph (6), subsection (e) is applicable to all contracts and subcontracts to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, regardless of whether they contain the provisions required under subsection (b), unless “the aggregate of the amounts received or accrued in such fiscal year * * * do not exceed $500,000.” Here the aggregate of the amounts received or accrued was $1,692,243.98, which clearly exceeds the $500,000 limitation. * * * In the instant case it has been stipulated that petitioners’ net sales for the period January 1 to November 30,1943, were $634,444.66. It has also been agreed that of this amount $72,380.54 was nonrenegotiable. This leaves $562,064.12 of petitioners’ net sales which are renegotiable. Thus, it is clear that in the instant case the limitation of $500,000 provided in section 403 (c) (6) is exceeded. Petitioners concede this fact if the sales to the Defense Plant Corporation are included. We have held they must be included under our decision in National Electric Welding Machines Co., supra. But, while petitioners concede that the $500,000 limitation has been exceeded if we take into account the Defense Plant Corporation sales, they argue in substance that we should construe section 403 (c) (6) so as to exempt $500,000 of the contractor’s sales from renegotiation. Petitioners base this argument on the premise that because a contractor whose sales do not exceed $500,000 is not renegotiated at all, therefore, Congress must have intended to exempt $500,000 of sales from renegotiation to the contractor whose profits are renegotiable under the law. Pursuing this argument further, petitioners arrive at the conclusion that not more than $23,011.43 of their profits during the period in question should be held to be excessive. We find no support for this theory, either in the legislative history of the act or in the regulations which have been promulgated to govern its enforcement. Therefore, petitioners’ contention that the first $458,300 of its sales during the period in question is not renegotiable is rejected. (4) Petitioners contend in the alternative that, if we hold that the first $458,300 of sales during the fiscal period in question is renegotiable, the act if so applied is unconstitutional. Petitioners’ precise point in this respect, so far as we have been advised, has not been passed upon in any renegotiation case thus far decided by the Tax Court. It was not involved under the facts in the three cases which were before the Supreme Court in Lichter v. United States, supra. However, we think the rationale of the Supreme Court’s, opinion in the Lichter case is applicable, and petitioners’ contention that the act is unconstitutional if thus applied is denied. Cf. Stein Brothers Mfg. Co., 7 T. C. 863. (5) The assignment of error here presented is that respondent erred in allowing only $50,000 instead of $75,000 for salaries on an annual basis to the partners in making its determination of excessive profits. In Stein Brothers Mfg. Co., supra, we pointed out that section 403 (c) (3) of the Renegotiation Act, applicable hereto, provides for recognition of deductions allowed for income tax purposes. A partnership is not allowed any deduction for income tax purposes on account of compensation of inactive partners, but the renegotiating authorities have recognized that allowance should be made for reasonable compensation for services actually rendered by them. In the instant case, in making its determination of petitioners’ excessive profits, the respondent has allowed $50,000 on an annual basis as a deduction for services actually rendered to the partnership by the four partners. Respondent has apportioned eleven-twelfths of this amount to the period here in question and has allocated the resulting figure to renegotiable sales and to nonrenegotiable sales on a proportionate basis. At the hearing there was considerable evidence devoted to what would be reasonable salaries for the four partners of the business during the period in question. After careful consideration of all this evidence, we have found that a reasonable amount for salaries of the four partners would be $60,000 on an annual basis. Of this amount eleven-twelfths should be apportioned to the period here in question and the resulting amount should be allocated to renegotiable sales and nonrenegotiable sales on the same proportionate basis as respondent Used in its determination. (6) Petitioners’ last contention is that they received no excessive profits whatever during said fiscal period from January 1 to November 30, 1943. The statute involved in this case is the Renegotiation Act of 1943, enacted February 25, 1944. Subsection (a) (4) (A) of that act provides: * * * In determining excessive profits there shall be taken into consideration the following factors: (i) efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs and economy in the use of materials, facilities, and manpower; (ii) reasonableness of costs and profits, with particular regard to volume of production, normal pre-war earnings, and comparison of war and peacetime products; (ill) amount and source of public and private capital employed and net worth; (iv) extent of risk assumed, including the risk incident to reasonable pricing policies; (v) nature and extent of contribution to the war effort, including inventive and development contribution and cooperation wth the Government and other contractors in supplying technical assistance; (vi) character of business, including complexity of manufacturing technique, character and extent of subcontracting and rate of turn-over; (vii) such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted. In respondent’s notice of determination which is the basis of this appeal, it states: In determining the excessive profits hereinafter determined, due consideration has been given to all such financial, operating and other data and information áo furnished or obtained, to each of the contentions so presented and to all of the factors referred to in subsection (a) (4) (A) of the Renegotiation Act. The burden of proof to show that respondent erred in its determination of excessive profits is on petitioners. Nathan Cohen, 7 T. C. 1002. We have carefully considered the whole record and we find no error in respondent’s determination except in the matter„of the salaries allowed for the four partners discussed in (5) above. Petitioners’ contention that we should find no excessive profits whatsoever during the period in question is not sustained. The foregoing disposes of all the issues raised by petitioners. Respondent has raised an affirmative issue by an amendment to its answer filed at the hearing. In this amendment respondent asks that we determine the excessive profits of petitioners to be $80,000 instead of $70,000 as determined in respondent’s notice. Respondent bases its contention for this increase in petitioners’ excessive profits solely on the ground that in its original determination it allowed too much salary for the four partners and that a reasonable allowance for salaries of the four partners would be not more than $25,000. The burden of-proof to sustain its affirmative allegations is on respondent. Nathan Cohen, supra. We do not think respondent has sustained this burden and we so hold, and we find against its contention that we should increase the amount of petitioners’ excessive profits to $80,000. Our ultimate conclusion is that petitioners’ profits for the period here in question subject to renegotiation were excessive in the amount .of $61,880. Reviewed by the Court. An order will be issued in accorda/rwe herewith.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474392/	OPINION. Van Fossan, Judge: The issue before us is whether or not the petitioner may be granted the benefit of section 721 (a) (2) (C) of the Internal Revenue Code1 because it had abnormal income in the taxable year, of the class set forth in that section, attributable to prior years.2 The picture presented is that of a small but efficient manufacturer of plumbing fittings called upon to produce bronze bushings for Rolls-Royce aircraft engines — under specifications and requirements theretofore wholly unknown to the petitioner. That the new and untried field of operation demanded much experimentation and development can not be gainsaid. Going beyond the range of its previous experience and knowledge and the scope of its contemporaneous advice, suggestions, and instructions, the petitioner was forced to overcome, by exploration, trial, and research, currently considered impossible obstacles in order to produce the articles required by Packard and demanded by the exacting specifications of the English designed aircraft engine. The three most important requirements imposed by Packard were 11) an extraordinary degree of hardness, (2) chilled castings by the permanent mold method, and (3) a finish tolerance limited to 15 millionths of an inch in mean depth. Later, the problems of mold coating and centrifugal casting complicated the situation and their solution required further research, experimentation and development. There were no methods of manufacture known to the petitioner or obtainable by it whereby it could meet such unusual exactness and precision of construction. Consequently, new processes, new equipment, and new techniques had to be developed in usable form to accomplish the desired result.. At the outset, we must keep in mind the fact that the petitioner’s operations during the years under consideration were confined within very narrow limits. It had abandoned entirely its normal manufacture of plumbing fittings and was undertaking a new, unfamiliar, and untried procedure, consisting of the production of a particular type of bushing to be used in the Rolls-Royce aircraft engine, which was being built by only one manufacturer, Packard. The petitioner was confronted by a blank wall of inexperience in the peculiar new art which was to be responsible for the creation of the needed bushing, and was challenged by precisely the kind of necessity which has so often been the mother of American invention. The record reveals clearly that the statutory and the regulatory requirements have been met by the petitioner. The research and development required to perfect the process of manufacture extended over a period of considerably more than twelve months. The petitioner’s abnormal income in 1944 was not the result of increased prices, low operating costs, decreased competition, or improvement in business conditions. The respondent quotes from Soabar Co., 7 T. C. 89, to the effect that the two major purposes of enacting the excess profits legislation were to provide additional revenue and to prevent the creation of war millionaires, and emphasizes the following excerpt: * * * Congress anticipated that business for many taxpayers would improve because’ of external changes and it intended the tax to apply in those cases. It also realized that there might be some instances in which the income of the base period years might not satisfactorily reflect internal changes in the business. That is, there might be cases in which the increase in profits of the tax year over those of the base years might be attributed, at least in part, to internal changes and development of a particular business or some phase of that business to its full stature and to that extent would not be attributable to the outside business stimulus. * * * and then concludes: Viewing section 721 (b) in the light of the foregoing, it would seem that Congress intended to extend relief only when the abnormal income described in section 721 (a) (2) (C) constituted the fruition of the initiative and enterprise of the taxpayer in engaging in original research and development. In our opinion, both the excerpt and the respondent’s conclusion fit precisely the facts in the case at bar. The law does not mean that an article itself must be an entirely new product, but it may be a new type of the article or an improvement therein which necessitates original research and development of tangible property and the processes of manufacture, and which results in the abnormal income defined in section 721 (a) (1).. See W. B. Knight Machinery Co., 6 T. C. 519; Rochester Button Co., 7 T. C. 529. The respondent treats the record as showing that the petitioner merely “adapted” its plant to wartime requirements. The Defense Plant Corporation provided certain standard machinery needed for bushing manufacture, but the petitioner invented, designed, and developed particular equipment essential to its research, experimentation, and production, such as molds, tools, dies, casting machines, and special furnaces. Such equipment bore no relation whatever to the petitioner’s prewar activities. Due to Government restrictions and prohibitions, the petitioner was compelled to abandon its normal business. Fortunately for it, it secured from Packard the opportunity to develop the needed bushing. Here, as in W. B. Knight Machinery Co., supra, the work of experimenting and developing constituted a radical departure from the art and methods of manufacture employed by petitioner theretofore, and it thus produced a new and different product having little or no relation to its old products. However, the income derived in 1944 from the sale of the bushings was not the result in its entirety from research or development, as contended by petitioner. Some part of such income was due to efficient management and the skillful use of machinery in the plant, as well as the use of new machinery and equipment acquired by petitioner without which it could not have produced the quantity produced in 1944. Ramsey Accessories Mfg. Corporation, 10 T. C. 482. Some part of such income is also due to increased demand. It is true that petitioner received orders for a greater number of bushings in 1942 than in 1944, but more than one-half in number of bushings of the 1942 orders were canceled in 1943 due, in part, to a reduction in demand for spare parts. The number of bushings ordered in 1944 was substantially in excess of the number ordered in 1943. It is to be noted, too, that the number of engines manufactured by Packard was greatly in excess of the number manufactured in prior years. Therefore, a certain portion of the income derived from the sale of bushings does not come within the intendment of the statute. Eitel-McCullough, Inc., 9 T. C. 1132. The period of research and development extended into 1944. This is conceded by petitioner, for it allocated $68,894.59 of its net abnormal income as computed by it to 1944. The respondent argues that, although petitioner kept a record as to materials and labor which went into the bushings, there was no breakdown in such records of materials, labor, manufacturing, and overhead as between research or development and production, and that, therefore, petitioner, in attempting to sustain its burden of establishing its net abnormal income and the amount thereof attributable to prior years, was “forced to indulge in reconstruction based on estimates.” He does not suggest that the estimates or reconstruction were unreasonable or without basis. As stated in Rochester Button Co., supra, “it is easy to understand that a taxpayer’s books are not kept with prophetic vision as to the future requirements of income tax legislation.” Here, as in that case, “the burden of going forward with any possible contradictory material reasonably fell upon respondent.” We have observed that it is difficult to make precise allocation of amounts of income attributable to various factors or periods. Ramsey Accessories Mfg. Corporation, supra. After considering all the evidence, it is'our conclusion that petitioner’s net abnormal income for the year 1944 is attributable to the extent of $68,360.65 to 1943 and $3,978.66 to 1942, and we have so found. Reviewed by the Special Division. Decision with respect to excess pro-fits tax liability for 1944 w^l he entered u/nder Rule 50. SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. (a) Definitions. — For the purpose of this section— (1) Abnormal income. — The term “abnormal income” means income of any class in-cludible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years, or, if the taxpayer was not in existence for four previous taxable years, the taxable years during which the taxpayer was in existence. (2) Separate classes ofincome. — Each of the following subparagraphs shall be held to describe a separate class of income : * * • • • • (C) Income resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; * * * (b) Amount Attributable to Other Tears. — The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. In the case of amounts otherwise attributable to future taxable years, if the taxpayer either transfers substantially all its properties or distributes any property in complete liquidation, then there shall be attributable to the first taxable year in which such transfer or distribution occurs <or if such year is previous to the taxable year in which the abnormal income is includible in gross income, to such latter taxable year) all amounts so attributable to future taxable years not included in the gross income of a previous taxable year.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474393/	OPINION. Arnold, Judge: Respondent contends that the entire corpus of the trust created by decedent must be included in her gross estate under section 811 (c) of the Internal Revenue Code, (a) as a transfer in contemplation of death, or (b) as a transfer intended to take effect in possession or enjoyment at or after decedent’s death. As an alternative, respondent contends that section 811 (c) requires a portion of the trust corpus to be included in decedent’s gross estate because the transfer was made after the Joint Resolution of March 3, 1931, and decedent retained for her life a portion of the income from the property transferred. The value of that portion of the trust corpus which would be included in decedent’s gross estate under respondent’s alternative contention is $222,082.20. Petitioner contends that no part of the corpus of decedent’s trust is includible in her gross estate (a) as a transfer in contemplation of death; (b) by reason of her retention of an interest in income for her lifetime; (c) by reason of the existence of a possibility of reverter by operation of law; or (d) as property in which decedent had an interest at the time of her death. Two recent decisions of the Supreme Court, Commissioner v. Church, 335 U. S. 632, and Spiegel v. Commissioner, 335 U. S. 701, decided January 17, 1949, support respondent’s contention that the instant transfer in trust was one intended to take effect in possession or enjoyment at or after decedent’s death. We shall pass the other contentions advanced by the parties. The Church case held that a trust agreement that reserved a life income to the settlor was intended to take effect in possession and enjoyment at the settlor’s death, and the value of the trust property should be included in the settlor’s gross estate. The Spiegel case held that where a settlor has conveyed away less than all of his property ownership and attributes, present or prospective, section 811 (c) requires the value of the property transferred in trust to.be included in the settlor’s gross estate. In the Spiegel case the Supreme Court pointed out that its discussion of the “possession or enjoyment” provision of section 811 (c) in the Chur eh case: * * * demonstrates that the taxability of a trust corpus under this provision of section 811 (c) does not hinge on a settlor’s motives, but depends on the nature and operative effect of the trust transfer. In the Church case we stated that a trust transaction cannot be held to alienate all of a settlor’s “possession or enjoyment” under section 811 (c) unléss it effects “a bona fide transfer in which the settlor, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property. After such a transfer has been made, the settlor must be left with no present legal title in the property, no possible reversionary interest in that title, and no right to possess or to enjoy the property then or thereafter. In other words such a transfer must be immediate and out and out, and must be unaffected by whether the grantor lives or dies.” We add to that statement, if it can be conceived of as an addition, that it is immaterial whether such a present or future interest, absolute or contingent, remains in the grantor because he deliberately reserves it or because, without considering the consequences, he conveys away less than, all of his property ownership and attributes, present or prospective. In either event the settlor has not parted with all of his presently existing or future contingent interests in the property transferred. * * * In this case the decedent reserved a life interest in the trust income, which means that section 811 (c), as interpreted by the Church case, requires the inclusion of the trust corpus in her gross estate. Admittedly there is a remote possibility of a reverter in this case. Such a possibility of reverter brings into play the principle announced in the Spiegel case. Upon the authority of these two cases, we hold that section 811 (c) requires the inclusion of the value of the trust corpus in the decedent’s gross estate. After the Church and Spiegel decisions were promulgated, petitioner filed a motion for further hearing. This motion was set down for argument on March 16,1949, at which time counsel for and against the motion were heard. After carefully weighing and considering their arguments, it is our opinion that no useful purpose will be served by further delaying our decision on the issue presented. Accordingly, petitioner’s motion for further hearing is denied. In redetermining decedent’s estate tax liability, consideration will be given to the increased deficiency requested by the respondent. Decision will be entered under Rule 50.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474389/	OPINION. LeMiRe, Judge: The statute of limitations issue, which we have decided for the petitioner, hinges upon the question of whether the return filed March 5, 1925, purporting to be a consolidated return for the petitioner and'the Harvey Coal Co. for 1924, was a sufficient return to start the running of the statute in favor of the company. It is agreed that if the return was a valid return, the collection of the proposed deficiency has long since been barred. However, before ruling on the statute of limitations issue, we must first determine the jurisdictional question, for without jurisdiction we would have no authority to rule on the statute of limitations in either proceeding. It is obvious, we think, and the parties agree, that one or the other of the deficiency notices is invalid, either because it does not cover the taxpayer’s taxable year or, as to the second, because it covers the same period as the first and is prohibited under section 272 (f), Internal Revenue Code. A preliminary motion was filed by the petitioner to require the Commissioner to make an election as to which notice he would rely upon and for dismissal of the other petition. A later motion was filed by the petitioner for dismissal of the petition based on the second deficiency notice. Both of these motions were denied without prejudice to the petitioner to renew them at the trial of the case on the merits. At such hearing the petitioner did renew both motions. The Court took the motions under advisement and reserved its ruling as to the jurisdictional question. On that issue we hold that the first deficiency notice of transferee liability, that of April 22,1943, was a proper notice in that it covered the entire period of the taxpayer’s operations for the year 1924, and was in effect a notice for the entire year. See Commissioner v. Forest Glen Creamery Co., 98 Fed. (2d) 968; certiorari denied, 306 U. S. 639. The proceeding under Docket No. 5896, based upon the second deficiency notice, that of June 1,1944, will therefore be dismissed for want of jurisdiction. The essential requirement of a valid return, as set forth by section 239 of the Revenue Act of 1918, and subsequent acts, and as often emphasized by this and other courts, is that it shall state specifically the items of gross income and the allowable deductions and credits upon which the tax may be computed. Thus, in Lucas v. Colmer-Green Lumber Co., 49 Fed. (2d) 234, the court said: * * * Section 239 of the Revenue Act of 1918 * * * required every corporation to “make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title.” This information is essential to an assessment of the tax, and to procure it is the object of requiring the return. * * * See also United States v. National Tank & Export Co., 45 Fed. (2d) 1005; F. A. Hall Co., 3 B. T. A. 1172; American Vineyard Co., 15 B. T. A. 452; Peerless Iron Pipe Exchange, Inc., 23 B. T. A. 900; Cem Securities Corporation, 28 B. T. A. 102; affd., 72 Fed. (2d) 295; certiorari denied, 293 U. S. 613. F. A. Hall Co., supra, involved facts much like those in the instant case. There the taxpayer and another corporation which acquired all of its stock on August 1,1918, filed a consolidated or joint return for the entire year 1918. The Commissioner contended that the taxpayer should have filed a separate return for the period January 1 to July 31,1918, and that the return filed was not a valid return and did not start the running of the statute. We held that the return was sufficient to start the running of the statute in favor of the taxpayer. See also National Tank & Export Co., 3 B. T. A. 1217; affd., 35 Fed. (2d) 381; and Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553. In Stetson & Ellison, supra, we said that: Where a consolidated return has been prepared and filed in good faith, and the names of the companies included in the consolidation are made clear to the respondent, and all of the “items of gross income and the deductions” are included therein, although said items of income and deductions may not be in sufficient detail to enable the respondent to accurately compute the tax against each of the companies, there is a “substantial” compliance with the statute. In American Vineyard Co., supra, we held that a joint return filed for 1918 by a corporation which had been organized during the year and its predecessor corporation, whose assets it had acquired upon organization, was not the return required by law for either company and did not start the running of the statute of limitations. In so holding we pointed out that: * * * The two corporations were not affiliated and it is not contended that they were. They did not file a consolidated return, and it is not contended that they were entitled to file such a return. The return simply included the income of one corporation for one portion of the calendar year 1917 and of the other corporation for the remainder of the year, but made no segregation or separation of the income, gain, profits or deductions of the two corporations. This return did not specify nor give any information by which the income of either of the companies could be determined. There was no specification as to what proportion of the income was received by one or the other. As a further reason for our holding in the American Vineyard Co. case, we pointed out that the statute did not provide for or warrant the filing for 1917 of joint returns by two corporations for a taxable year when one retires from business at some time during the period. In Cem Securities Corporation, supra, we held that a return similar to that considered in American Vineyard Co., supra: * * * in failing to show separately the items of its income, deductions, and credits, did not meet the requirements of the statute and was inadequate to start the running of the limitations period. The only difference between the two cases was that in the American Vineyard Co. case the return bore the names, in its heading, of both corporations. We said that that was not an effective distinction; that: * * * The substance of the matter in both cases is that the return includes the operations of two companies without a segregation of items as required by statute and hence is not the statutory return of the company filing it. * * * The return under consideration contained the separate items of gross income and deductions of both Harvey Coal Co. and Harvey Coal Corporation. The items pertaining to Harvey Coal Co. were set out in a separate schedule and were plainly identified. While the return may not have been in proper form and may not have met all the requirements of the law and the Commissioner’s regulations, we think that it was adequate to start the running of the statute of limitations, as the petitioner contends. The Commissioner used the return as a basis for an additional assessment against the petitioner for 1924, and in so doing the Commissioner made separate computations for each of the corporations. The notice of deficiency for 1924, sent to the petitioner March 5,1929, was said to be based upon “The Revenue Agent’s reports, supplemental valuation report and your several briefs” filed in the case. The computation attached to the notice showed an increase in the loss of'Harvey Coal Co. for the period January lto October 31, 1924, from $5,673.87, as shown in the company’s books, to $25,637.31. That loss, however, was not allowed to Harvey Coal Corporation. The Commissioner did not at any time call upon the petitioner or Harvey Coal Co. to file any additional return for any portion of the year 1924, or question the adequacy of the return filed by them until the present controversy arose. In the absence of any concealment or misrepresentation on the part of the taxpayer, and with all of the essential facts upon which the present action is based having been known to the Commissioner for many years, little can be said to justify so long a delay in his efforts to collect the taxes which he now claims to be due. In any event, we think, for the reasons stated above, that any tax liability of Harvey Coal Co. for 1924 is barred by the statute. Reviewed by the Court. Decision will be entered for the petitioner.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474390/	OPINION. MtjRdock, Judge-. The petitioner claims relief under section 722 (b) (4). It has been stipulated that this petitioner is entitled to use the excess profits credit based on income. The average of the normal earnings of such a taxpayer for a base period are compared with its earnings for the taxable year in determining its excess profits tax. This is accomplished through an excess profits credit. The issue in this case relates solely to the question of what amount should be regarded as normal average base period net income for the purpose of computing the excess profits credit based upon income. The actual earnings of the base period are used for that purpose, unless one of the relief provisions applies. Here one of the relief provisions has already been applied by the Commissioner. That is, the Commissioner has computed an excess profits credit under the growth formula to arrive at a credit substantially higher than that computed by the use of actual earnings during the base period. See section 713 (f) applicable to 1941 and section 742 (h) applicable to 1942 and 1943. The petitioner claims, however, that it is entitled to an even greater credit, computed under section 722 by the use of a constructive average base period net income to represent what it says should be regarded as its normal earnings for the base period. The petitioner is a corporation which was organized on September 30,1939. It took over on that date a business of selling play suits and work shirts which had previously been conducted by Irwin B. Schwabe, an individual, under the name of Irwin B. Schwabe Co. The business did not include the manufacture of the play suits and work shirts being sold. The claims for relief filed by the petitioner relate only to that part of its business involving the sale of work shirts and, consequently, relief can not be based upon any other phases of its business. Blum Folding Paper Box Co., 4 T. C. 795. The base period for the purpose of section 722 began on October 1, 1936, and ended on September 30, 1940. The petitioner was in existence only during the last twelve months of that period. The parties have stipulated that the petitioner is an acquiring corporation and the business previously conducted by Schwabe as a sole proprietorship is a component corporation. See section 740 (a) (1) (D), (b) (5), and (h). Where, as here, the income of the sole proprietorship is included with the income of the taxpayer in computing the average base period net income, the taxpayer is to be treated as if the business of the sole proprietorship during that period had been a part of the business of the taxpayer. See sec. 722 (e) (2). Section 722 allows relief where a taxpayer establishes that its excess profits tax without the relief, is excessive and discriminatory, and further establishes what would be a fair and just amount to represent normal earnings to be used as a constructive average base period net income. The tax is to be considered excessive and discriminatory where a taxpayer, like this one, entitled to use the excess profits credit based on income, shows that its average base period net income is an inadequate standard of normal earnings because the taxpayer changed the character of the business during the base period and the average base period net income does not reflect the normal operation of the business for the entire base period. The term “change in the character of the business” is defined to include, inter alia, a change in the operation or management of the business, a difference in the capacity for production or operation, and the acquisition before January 1, 1940, of a part of the assets of a competitor, resulting in the elimination or diminution of its competition. Section 722 (b) (4) provides that the change shall be deemed to have been made two years before it occurred if the business of the taxpayer had not reached the earning level by the end of the base period which it would have reached if the change had actually occurred two years earlier. The same sub-paragraph also refers to a change in the capacity for production or operation of the business consummated after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940. These are the provisions of section 722 (b) (4) under which this petitioner claims relief. It was incumbent upon the petitioner to prove in this proceeding (1) that it changed the character of its business during the base period, (2) that its average base period net income is an inadequate standard of normal earnings because of that change, and (3) what would be a fair and just amount to represent normal earnings for use in determining constructive average base period net income. ■ Furthermore, the petitioner will not be entitled to relief under section 722 unless the constructive average base period net income which it establishes is greater than its average base period net income determined, under the growth formula. That is, the relief which it has been granted already under the growth formula will stand until the petitioner shows that it is entitled to greater relief under section 722. Homer Laughlin China Co., 7 T. C. 1325. The petitioner contends that it changed the character of its business in several ways within the meaning of section 722 (b) (4). Its arguments are unsound in so far as they are based upon the assumption that either Irwin or I. B. S., separate corporations, engaged in the manufacture of shirts, were components of the petitioner or in any other way so identified with the petitioner, engaged only in sales, as to make their acts acts of the petitioner for present purposes. Irwin, rather than the petitioner, acquired Tupelo’s plant at New Albany. The record does not show that Irwin became a part of the business of Irwin B. Schwabe Co. which the petitioner later took over, and even if Tupelo is to be regarded as a competitor, nevertheless, the petitioner has not shown that either it or its component acquired any of the assets of Tupelo. Likewise, any commitments of Schwabe or I. B. S. based upon manufacturing, all of which were made after the petitioner was organized and had taken over the sales business, can not be regarded as commitments of this petitioner. The petitioner bases some of its arguments upon the employment of Doron and his election to the office of vice president. There was no commitment to Doron which would aid the petitioner under section 722, and the evidence as a whole does not show that the petitioner is entitled to any relief or that it even qualifies for relief on the basis of its contentions based solely upon the employment of Doron. The petitioner’s argument that there was a difference in its capacity for operation before and after May 1938 is the strongest one advanced and the only one of its contentions to support a change in the character of its business which will be discussed in detail. The petitioner argues that Schwabe was restricted in two ways under his arrangement with Tupelo. One was that Tupelo was unwilling to use more than an undisclosed portion of its manufacturing capacity to manufacture shirts for Schwabe. The other was that Tupelo was dealing directly with some of the large mail order and chain store companies, and its understanding with Schwabe was that he would in no way compete in that field with Tupelo. There is opinion testimony to the effect that Schwabe could have sold more work shirts during the first part of the base period had Tupelo been willing to manufacture more shirts for him. However, there is little, if any, evidence in the record to support those opinions. The evidence does not show the exact arrangement in this respect between Tupelo and Schwabe. For example, it does not show how many shirts or what portion of the total capacity of Tupelo was available to Schwabe at any particular time during the base period, whether this maximum changed from time to time or remained the same, or the relation at any time during the base period between the number of shirts actually sold by Schwabe and the maximum that Tupelo would have manufactured for him. There is no evidence of any particular instance in which Schwabe could have sold additional shirts but was prevented from doing so because Tupelo would not manufacture them for him. His sales in 1937 were far below his sales in 1936. There is no evidence to show that thé falling-off was due to a reduction in the allotment fixed by Tupelo. It may have been due instead to the fact that Schwabe was unable to sell in that year as many shirts as Tupelo would have manufactured for him. The increase in inventories is not adequately explained. Thus, it is not so clear that Schwabe’s capacity to make sales during the first part of the base period was limited by his inability to have more shirts manufactured by Tupelo. Schwabe, as long as he was dependent upon Tupelo for the manufacture of his shirts, could not have gone into competition with Tupelo by endeavoring to make sales of his shirts to any of the large chain store or mail order houses, but just how much of a restriction upon him that was is not so clear. However, he began to make sales to Penney during the last four months of 1938; his sales to Penney during the remainder of the base period were large; he began to make sales to Sears and to Kress during the third year of the base period; those sales increased during the fourth year of the base period and in that year sales were made to Montgomery Ward; and Doron, who like Schwabe was an experienced salesman, was employed by the petitioner, beginning in September 1939. The statute provides that “a difference in the capacity for * * * operation” shall be regarded as a change in the character of the business for the purpose of section 722 (b) (4). After May 1938 the entire production of Irwin was available to Schwabe and the petitioner, and they actually sold to the large chain store and mail order houses. Prior to that time some undisclosed portion of the capacity of Tupelo was available to Schwabe and he was not in position to solicit as customers any of the large chain store or mail order houses. Do these circumstances indicate a difference in the capacity for operation of this petitioner after May 1938 as compared to before May 1938 within the meaning of section 722 (b) (4) ? It will be assumed for present purposes that they do. The next question is whether the petitioner has shown that its average base period net income is an inadequate standard of normal earnings because of a change such as the one described in the preceding paragraph. Closely related to that is the further question of what would be a fair and just amount to represent normal earnings for use in determining constructive average base period net income. The petitioner argues that the demand for work shirts exceeded its available supply at all times during the base period; this continued until the I. B. S. plant reached full production; the earning level of the business at the end of the base period was not as great as it would háve been had the change in the character of the business occurred two years earlier; twice the volume of shirts actually sold during the calendar year 1939 could have been sold had they been available; and, therefore, its average base period net income is an inadequate standard of normal earnings. It argues that the constructive average base period net income should be for the 1941 credit $72,986.42, and for the credits for the later years $87,349.45, compared with actual averages of $20,179.19 and $23,988.98, and averages under the growth formula of $33,858.40 and $41,067.27.1 The respondent has not argued the question of whether or not the petitioner changed the character of its business. His argument is that, even assuming a change, nevertheless, the petitioner has not shoyra that its average base period net income was an inadequate standard of normal earnings because of any change in the character of the business, or that a fair and just amount to represent its average normal earnings would exceed the average base period net income under the growth formula. While it might seem reasonable to conclude that the sales of this business would have been greater in the first part of the base period if Schwabe had had all the shirts he could sell and had been free to sell them to anyone to whom he could make a sale, nevertheless, this record does not justify the conclusion that they would have been great enough to produce earnings in excess of the average allowed under the growth formula. Indications in the record that the sales made by Schwabe were limited by factors other than the number of shirts which Tupelo would have manufactured for him have already been mentioned. There is also some evidence tending to show that the sales during the latter part of the base period would not have been greater under any circumstances. There were then no restrictions upon the prospective customers to whom sales might be made, but the petitioner argues that its sales were still limited by lack of shirts, since the Irwin and I. B. S. plants were not able to manufacture as many shirts during the whole of that period as they could have manufactured had they gotten started 2 years earlier. That is true, of course, with regard to I. B. S., but it is not at all clear in the case of Irwin. The production record of Irwin indicates that it could have manufactured more work shirts during the latter part of the base period, but that it merely kept pace with the work shirt selling demands of the business of the petitioner. For example, it produced 23,203 dozen work shirts in the four weeks ended December 16, 1939, and it maintained an average production of over 19,000 dozen for the 5 periods of 4 weeks each preceding that date. Thereafter its production of work shirts declined, declined even more rapidly than its inventories increased. The increases in its inventories also indicate to some extent that lack of work shirts to sell was not responsible for the failure to earn greater profits during the base period. The petitioner argues that the inventories in the latter part of that period were merely sufficient to cover the undelivered Penney orders as of the end of each fiscal year. However, the inventory of finished and unfinished work shirts increased by about $36,000 during the last year of the base period, while the undelivered orders of Penney decreased by more than 3,000 dozen shirts. Furthermore, Penney supplied its own material for the shirts which it ordered and the cost of such material would hardly be reflected in the inventories of the petitioner. There are some other indications that the ability of the petitioner to sell work shirts during the latter part of the base period was not taxing the capacity of Irwin to make such shirts. For example, the work shirt capacity of Irwin was deliberately limited early in 1940 by a partial change-over to the manufacture of sport shirts. There may have been competition from the other Tupelo plants which were reopened about that time. Schwabe stated at the annual meeting of the directors of the petitioner on September 30, 1940, that “competition on work shirts became so keen that it was necessary for the corporation to manufacture [sic] additional items.” There is thus some reason to believe that the petitioner had fully realized by the end of 1939 the full benefit which it was going to derive from the termination of Tupelo and the new relationship with Irwin. The record does not show what portion of the petitioner’s profit for any year was attributable to the work shirt business as distinguished from the play suit and later the sport shirt business. Even if it were apparent that the average actual earnings of the petitioner for the base period were an inadequate standard of normal earnings because of the difference in its business after May 1938 as compared to prior to May 1938, nevertheless, the petitioner would still lose because it has failed to show that a fair and just amount to represent normal earnings for use in determining constructive average base period net income would exceed its average base period net income as determined under the growth formula. The petitioner is not entitled to the relief claimed under section 722, but must be content with the substantial benefits given it under the growth formula. Reviewed by Special Division. The excess profits net Income for the base period years for the purpose of the 1941 credit is somewhat less than the same figures for the purpose of the credits for the later years because of a change in the law. See section 711 (b) (1) (A), repealed with respect to taxable years beginning after December 31, 1940, by sections 202 (c) (2) and 205 of the Revenue Act of 1941.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620534/	Peter C. Jurs v. Commissioner. Albert E. Jurs v. Commissioner. Raymond M. Young v. Commissioner. Eugene E. Jurs v. Commissioner.Jurs v. CommissionerDocket Nos. 112660, 112661, 112662, 112663.United States Tax Court1943 Tax Ct. Memo LEXIS 146; 2 T.C.M. (CCH) 658; T.C.M. (RIA) 43393; August 20, 1943146 Edgar B. Stewart, Esq., 1215 Financial Center Bldg., Oakland, Calif., for the petitioners. Harry R. Horrow, Esq., for the respondent. SMITH Memorandum Findings of Fact and Opinion SMITH, Judge: These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for the calendar year 1940 as follows: Docket No.PetitionerDeficiency112660Peter C. Jurs$ 863.04112661Albert E. Jurs2,953.61112662Raymond M. Young3,219.52112663Eugene E. Jurs648.09The question in issue is whether the petitioners are taxable upon the entire distributive shares of a partnership known as Shand and Jurs Co., or whether such distributive shares constituted community income taxable one-half to each partner and one-half to his wife. Findings of Fact Petitioners are residents of Berkeley, California. They filed their income tax returns for the calendar year 1940 with the collector of internal revenue for the first district of California. For the period commencing January 1, 1939, and including the entire calendar year 1940, the petitioners were partners in and were all of the partners of a manufacturing and sales business doing business under147 the name and style of Shand and Jurs Co., and their relationships, as partners in such business, were defined by an agreement and articles of co-partnership dated December 31, 1938. For a period commencing in 1934 and ending December 31, 1938, such business was operated under the name of Shand and Jurs Co. by Albert E. Jurs as the sole proprietor thereof. During the period July 1, 1937, to December 31, 1938, petitioners Peter C. Jurs, Raymond M. Young, and Eugene E. Jurs were employed by Albert E. Jurs in the operation of the business under the provisions of an employment agreement which was executed about November 5, 1937. Under such agreement each of the petitioners was to receive a salary and in addition thereto a bonus represented by the profits of the business in excess of salaries. Albert E. Jurs was to receive a stated amount as a rental upon the assets of the business owned by him at July 1, 1937. The bonus earned each year was to be in part divided and in part held for the credit of the several petitioners. It was understood at the time that Peter C. Jurs, Raymond M. Young, and Eugene E. Jurs would eventually have a capital interest in the business. It was the desire of148 Albert E. Jurs that the respective wives of the petitioners should not be allowed to have any voice in the management of the business and with that thought in mind the wives of the petitioners signed a waiver of the employment agreement which certified that each had read the employment agreement and: * * fully understands the same, and being fully convinced of its reasonableness and of the benefits that she will directly or indirectly receive therefrom, does hereby join in, ratify and approve said agreement and each and all of the terms thereof, waiving any community interest to which she might be entitled in and to any property or thing of value made subject to the provisions of said agreement. This waiver was signed by the wives at or about the same time as the employment agreement was signed by the petitioners. The petitioners entered into an agreement and articles of co-partnership as of January 1, 1939. These articles of co-partnership provided that the shares or interests of the respective partners in the capital, profits and losses of the partnership are vested as follows: Albert E. JursOne-third (1/3)Raymond M. YoungOne-third (1/3)Eugene E. JursOne-sixth (1/6)Peter C. JursOne-sixth (1/6)149 The co-partnership agreement recites that it is the desire of the parties to provide for the acquisition of a deceased or withdrawing partner's interest in the partnership by the surviving or continuing partners. Paragraph 10 of the agreement provides that in the event of the dissolution of the partnership by reason of the death or withdrawal of any of the parties, the interest of such deceased or withdrawing partner should be sold to the surviving or continuing partners, the price to be ascertained by an audit of the books of the partnership, with no value to be placed on the good will of the business. Provision was made for the manner in which the money value of such interest was to be paid to the withdrawing partner or his legal representative. Paragraph 11 of the agreement provides that upon the death or withdrawal of the first party, Albert E. Jurs, his interest was to be transferred to his sons (Peter and Eugene) to augment their partnership interests equally, and in the event of the death or withdrawal of the remaining partners their interests were to be transferred to Albert E. Jurs to augment his interest. Provision was made in paragraph 14 of the agreement for the admission150 into partnership of another son of Albert E. Jurs, his interest to be acquired through a transfer of a portion of his father's interest. The articles of co-partnership were executed by the petitioners during the month of May, 1939. At about the same time the respective wives of the petitioners executed a waiver of similar tenor to that attached to the employment agreement reading as follows: Each of the undersigned does hereby certify that she has read the foregoing Agreement and Articles of Co-partnership between Albert E. Jurs. Raymond M. Young, Eugene E. Jurs and Peter C. Jurs, dated as of December 31st, 1938, and fully understands the same, and being fully convinced of its reasonableness and of the benefits that she will directly or indirectly receive therefrom, does hereby join in, ratify and approve said Agreement and Articles of Co-partnership and each and all of the terms thereof, waiving any community interest to which she might be entitled in and to any property or thing of value made subject to the provisions of said agreement. Various other documents were executed by the petitioners and their wives, at or about the time the agreement and articles of co-partnership were151 executed, for the purpose of facilitating the carrying out of the provisions of such articles of co-partnership relating to disposition of assets in the event of the death or withdrawal of the partners. In their income tax returns for the calendar year 1940 each of the petitioners reported as taxable income one-half of his distributive share of the profits of the partnership and his wife reported in a separate return as taxable income one-half of her husband's distributive share of partnership income. In the determination of the deficiencies the respondent has held that the entire distributive income of each partner is taxable to him and no part of it to his wife. The distributive shares of the partnership income for 1940 constituted the separate property of the partners. Opinion The question for decision is whether the petitioners are taxable upon the full amount of their distributive shares of the partnership of Shand and Jurs Co. for 1940, or upon only one-half thereof. The respondent has determined in each case that the entire amount of the distributive share of each petitioner in the partnership income is taxable to him alone on the ground that the wife of each petitioner, 152 by the terms of the rider attached to and made a part of the partnership agreement, expressly waived her community interest in the income from the partnership. It is the petitioners' contention herein that the waiver signed by the wives of the petitioners was not expected to be given effect except upon the death or withdrawal of a partner; that "there was no intention, by the execution of the rider, in any way to alter the community status of the partnership interests." The question here is what was the legal effect of the execution of the waiver by the petitioners' wives? They all read the partnership agreement before executing the waiver. They all understood that they were "giving up" something in connection with their community property interest. For instance, the wife of Eugene E. Jurs testified as follows: Q. At any rate when you signed that agreement, in view of the language "waiving any community interest" was it your intention that you would claim any community interest thereafter? A. After when? Q. After signing the agreement? A. No. It is undoubtedly true that neither the petitioners nor their wives foresaw the tax consequences of the execution of the waivers. We153 think that the language of the waiver is not ambiguous. By signing it each wife waived "any community interest to which she might be entitled in and to any property or thing of value made subject to the provisions of said agreement." This was a contract between the petitioners' wives and the petitioners. They signed "being fully convinced of its reasonableness and of the benefits that she will directly or indirectly receive therefrom." Agreements between spouses in California affecting the status of their income or property, whether separate or community, are given effect for Federal income tax purposes. . In , it was held that the intention of parties to a written agreement must be determined from its terms and testimony of parties that they intended to cover subjects not included therein must be disregarded. So here, we think, that the statements by the petitioners and their wives that the waiver was to be given effect only upon the death or withdrawal of the partner must be disregarded. The language154 employed in the rider follows closely the language of waivers which have been held by the California decisions to dispose of the wife's community interest. See ; . Cf. . We are of the opinion that the respondent did not err in his determination that the petitioners are liable to income tax upon their full distributive shares of the partnership income in 1940. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620535/	Bert Ruud and Emma Ruud v. Commissioner.Ruud v. CommissionerDocket No. 2006-64.United States Tax CourtT.C. Memo 1969-252; 1969 Tax Ct. Memo LEXIS 45; 28 T.C.M. (CCH) 1284; T.C.M. (RIA) 69252; November 26, 1969, Filed William S. Holden, Idaho First Nat'l Bank Bldg., Idaho Falls, Idaho, for the petitioners. Gary C. Randall, for the respondent. SCOTT 1285Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies46 in petitioners' income taxes and additions to taxes under section 6653(a), I.R.C. 1954, 1 for the calendar years and in the amounts as follows: YearDeficiencyAddition to tax under sec. 6653(a) I.R.C. 19541955$23,397.84$1,169.8919564,140.64207.0319585,897.01294.851959 1,099.5854.98$34,535.07$1,726.75By answer to amneded petition filed October 15, 1968, respondent claimed an increased deficiency for the year 1956 of $3,013.20 in tax and $150.66 in addition to tax making the total deficiency for this year $7,153.84 and the total addition to tax under section 6653(a) $357.69. 2Some of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for our decision47 the following: (1) The amount of gain realized by petitioners from receipts from the condemnation of their ranch and hotel properties and the amount of such gain, if any, which is not to be recognized under section 1033. (2) Whether petitioners' stock in Compressed Products Corporation became worthless in 1955 and their stock in Blind Bull Company became worthless in 1954 or 1955, and, if so, the amount of petitioners' loss from such worthlessness. (3) Whether there were debts owed to petitioner Bert Ruud by Blind Bull Coal Company from a loan of $7,055.67 and a guarantee of $3,000 paid by petitioner, 3 and if so, did these debts become worthless in 1954 or 1955? (4) Whether petitioners failed to report a profit of $7,369.94 realized by them in 1956 from the operation of the San Dee Motel. (5) Is the underpayment of tax, if any, by petitioners in each of the years here in issue due to negligence or intentional disregard of rules and regulations? Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioners are48 husband and wife who filed joint Federal income tax returns for the years 1955 through 1959 with the district director of internal revenue in Boise, Idaho, reporting their income on the cash basis. At the time of the filing of the petition in this case, petitioners resided in Boise, Idaho. Home Ranch and Alpine Properties In 1918 petitioners acquired approximately 650 acres of ranch property located in southeastern Idaho referred to as the home ranch property. It was conveyed to petitioner by George D. and Florence L. Keyser by deed dated May 22, 1918. This deed was recorded on November 12, 1919. The consideration recited in the warranty deed is the sum of $10 and other valuable consideration. The deed shows the cancellation of $20 of internal revenue stamps. In November 1919 the applicable statute required internal revenue stamps in the amount of 50 cents per $500 of purchase price. When petitioner went to record his deed, the clerk stated to him that some amount of revenue stamps should be placed on the deed and canceled. Petitioner placed the sum of $20 in stamps on the deed without knowledge of the requirement of the statute as to the amount of stamps required and without49 reference to the actual amount of the purchase price of the property. Petitioner entered into a written contract with George D. Keyser for the purchase of the land and certain machinery and horses. Petitioner was unable to find the contract and believes it was destroyed at the time of a fire at his bank or at the time of a fire at his home. The contract did not provide for the purchase of any cattle. It is petitioner's recollection that the cost assigned to the land in the contract was over $65,000. Petitioner gave five separate checks to George D. Keyser with a notation on all except one that it was in payment on the contract. One of these checks dated May 22, 1918, was in the amount of $15,000, one dated October 4, 1918, was in the amount of $5,000, one dated October 30, 1918, was in the amount of $20,000, one dated December 28, 1918, was in the amount of $7,040.80, and one dated April 1, 1919, was in the amount of $27,247.30. The check for $7,040.80 1286 was the one which bore no notation. However, a receipt dated January 3, 1919, from G. D. Keyser/per L. Kelly given to petitioner for $7,040.80 bore the notation, "on account." Petitioner made arrangements to purchase the50 ranch late in 1916 and began purchasing the cattle needed to stock the ranch. During the last month of 1916 and throughout 1917 he purchased over 300 head of cattle from persons other than the Keysers. The home ranch property had been purchased by the Keysers in 1914 and 1915 in three separate transactions. One purchase was of 120.15 acres for $1,500, another was of 160 acres for $2,150, and the third was of 462.37 acres for $13,000. The approximately 650 acres sold to petitioners in 1918 were the major part of the three tracts totaling approximately 742 acres which the Keysers had purchased in 1914 and 1915 for $16,650. In order to profitably operate a cattle ranch in the section of Idaho where the home ranch is located, it is necessary to have the right to use forest land for grazing. This was also the situation at the time the Keysers acquired the home ranch property and at the time they sold it to petitioner. A grazing permit is required for use of forest land for grazing. Such permits are issued in relationship to the amount of land contained in a parcel. Therefore, the value of the land greatly increases when the total area is large enough to make the owner eligible for a51 forest grazing permit. The cost of land in Idaho which could be used for cattle grazing had substantially increased between 1915 and 1917 because of the inflation occasioned by World War I. Petitioner acquired the Alpine property which lies on the Idaho-Wyoming border near the home ranch in several parcels. Petitioner purchased 140 acres of this land from David Porter. The warranty deed dated July 15, 1920, was executed by David Porter to the petitioners for the 140 acres of land. It does not state the price of the land but shows a canceled internal revenue stamp of 50 cents. However, petitioner paid Porter $1,300 in cash for the land and assumed a mortgage to the Union Central Life Insurance Company in the amount of $800. About 4 or 5 years after his purchase from David Porter, petitioner purchased 160 acres of land from a widower named Olsen. At the time Olsen verbally agreed to sell the land to petitioner, petitioner paid him $1,250. Later, petitioner paid an additional $500 to Olsen who at the time was going to the East for the funeral of one of his parents. The verbal agreement was that Olsen was to return and give petitioner a deed to the land. Petitioner took possession52 of the land but Olsen never returned to give him a deed to the property. Bonneville County, Idaho advertised the property for sale for unpaid taxes of $80. Petitioner paid the $80 and received a tax deed to the property. Shortly thereafter petitioner paid Jennie Reese $1,250 for a small parcel of land allowing her to remove the building thereon. Petitioner also paid R. L. Bixby $1,800 for 1 1/2 acres. The Alpine property was composed of these various tracts which cost petitioner a total of $6,980. Fires during the 1940's destroyed petitioners' home and the Largilliere Company Bank in which petitioner had always had an account and kept a safety deposit box. Most of his records were destroyed either in the bank fire or in the fire at petitioner's home. During the years 1942 and 1944 the home ranch was subject to several floods which destroyed a number of the buildings as well as fencing. In the years 1944 and 1945 petitioners made substantial improvements on their ranch property. They overhauled the farm buildings, installing sidings and improving the roofs. The woodshed, milkhouse, and miscellaneous improvements including a water well, barns, and extensive fencing were built at53 approximately the same time. Improvements were made during the time the home ranch and Alpine property were held by petitioner which have the following bases to petitioners: Alpine hotel (net of depreciation)$ 7,500House on ranch15,000Granaries (net of depreciation)7,912Miscellaneous capital improvements29,700In 1955 the United States Government began condemnation proceedings against the home ranch and Alpine properties in order to obtain the rights to such property prior to its flooding by the Palisades Dam. On February 12, 1955, the declaration of taking was filed by the Government covering the two properties which consisted of approximately 1,000 acres. In connection with the declaration of taking, a check in the amount of $152,250 was deposited with the Clerk 1287 of the United States District Court, District of Idaho, and made subject to withdrawal of petitioners. At that time title to the property passed to the United States. The petitioners contested the amount of the award in the United States District Court for the District of Idaho, and were granted an additional award of $20,120.65 on December 15, 1955. This additional award was paid54 to the clerk of the court on January 12, 1956. It was made subject to withdrawal by petitioners at that time. The $152,250 sum was disbursed to petitioners on January 3, 1956. The sum of $20,120.85 4 was paid by check to petitioners on January 14, 1956. However, petitioners did not cash the check which was subsequently canceled. A replacement check was issued, but not cashed until sometime subsequent to 1964. No gain from the disposition of their home ranch and Alpine properties was reported by petitioners on their joint Federal income tax returns for any of the years 1955 through 1959. The $152,250 made available to petitioners in 1955 as a result of the condemnation proceedings is allocable to petitioner's properties as follows: Land exclusive of home$ 98,507Farm home (home ranch)28,795Alpine hotel15,155Granaries 9,093Total$151,550Plus attorney fees 700 $152,250 The $20,127 made available to petitioners in 1956 as a result of the condemnation proceedings is allocable to petitioners' properties as follows: 55 PropertySalespricesAllowableexpensesSales priceless expenseLand exclusive of home$13,080$1,161$11,919Farm home (home ranch)3,8253413,484Alpine hotel2,0051711,834Granaries 1,2171171,100Total $20,127$1,790$18,337 During the summer of 1956 petitioner and his family moved into the living quarters provided for the operator of the San Dee Motel located in Idaho Falls, Idaho. Petitioners agreed to buy the San Dee Motel for a total price of $155,000 and made payments of $36,000 during 1956. The living quarters which were provided for the owner/operator of the San Dee Motel included a large living room, dining room, kitchen, master bedroom with bath, another bedroom with bath, a full basement, a basement bedroom, and a bathroom for a total square footage of 1,835. This 1,835 square feet was approximately 19.8 percent of the total motel square footage of 9.268. Petitioners remained in the motel until sometime in 1957. In September 1957 they moved into a house they had constructed on a lot in Boise, Idaho, which they had purchased in April of 1957. After 1956 no further payment on the $155,000 purchase price of the56 motel was made and subsequently the seller repossessed the motel. Compressed Products Corporation Stock Petitioners own 63,300 shares of stock of the Compressed Products Corporation, a Nevada corporation (hereinafter referred to as Compressed). Petitioner began investing in this stock sometime in the early 1950's and had purchased a total of 21,100 shares of stock at $1 par value prior to a reorganization of the company. At the time of the reorganization the stock was split three for one giving petitioners 63,300 shares of stock with a basis of $21,100. On May 31, 1955, Compressed filed a petition in the United States District Court for the District of Nevada, Las Vegas, Nevada, for reorganization under chapter 10 of the Bankruptcy Act. After several years of procedure in the Bankruptcy Court, a second plan of reorganization was submitted to the Court. This second plan was approved by the Court on November 10, 1960. At the time Compressed filed its petition in the United States District Court, its only assets were its royalty agreement with the Delicate Corporation of America 1288and certain patents, trademarks, and associated rights relating to the manufacture of a sanitary57 napkin and machinery for the manufacturing process. Over $445,000 of creditors' claims were filed against the debtor corportion in years subsequent to the filing of the petition for reorganization. Approximately one-half of the claims were disallowed and additional claims were compromised at approximately 10 cents on the dollar. Debtor claims by persons connected with the ownership or management of the corporation were reduced from $65,702.52 to $41,833.89. Preferred stock was issued in settlement of these claims. Sometime in 1955 after the petition was filed on May 31, 1955, the patents, trademarks, associated rights, and machinery were licensed to American Hygienic Corporation who advanced a sum in excess of $100,000 to Compressed to allow it to pay its creditors as proposed in the second plan of reorganization. Once the plan of reorganization was approved, Compressed ceased to be an operating corporation. All its machinery, equipment, patents, trademarks, and associated rights were used by American Hygienic Corporation under the terms of its license agreement. Since 1955 Compressed has had no income or expense other than the royalty payments hereinafter described and the payment58 of an annual license fee to the State of Nevada to keep the corporation alive. No income statements or balance sheets have been prepared and no meetings of stockholders or officers have been held. Since 1955 American Hygienic Corporation has used the patents, trademarks, and associated rights of Compressed and has paid a royalty in accordance with the terms of its agreement of between $3,000 and $3,500 per year. This royalty is then applied against the $110,000 advance made by American Hygienic Corporation and the funds are retained by American Hygienic Corporation. At the present time the outstanding balance due on the advance from American Hygienic Corporation is approximately $67,000. It is estimated that at the rate of return experienced since 1955 it will be another 20 years before the royalties to American Hygienic Corporation retire the advance made by that corporation. At that time the funds can then be applied to claims of the preferred stockholders and then the common shareholders. There has been no market whatsoever for the sale of Compressed's stock since 1955, nor have there been any known sales of this stock. Blind Bull Coal Company Stock Sometime in the 1930's59 petitioners began acquiring stock in the Blind Bull Coal Company (hereinafter referred to as Blind Bull) which operated a coal mine in Wyoming about 12 miles southeast of petitioners' Alpine property. The Blind Bull mine contains approximately 20 million tons of coal and is one of the highest, if not the highest, coal mine in the United States. Because of its elevation, difficulties have been experienced in mining and transportation of coal during much of each year because of the weather conditions. Petitioners along with other shareholders purchased stock yearly to make improvements and to keep the mine going. By 1944 petitioners had acquired a large portion but not a majority of the outstanding 197,002 shares of capital stock. The stock had a par value of $1. In 1944 petitioner purchased stock from Frank Merrill. The purchase price for the stock was paid in part by $9,000 to $10,000 in cash in 1944. The balance was paid from funds obtained by petitioner on two notes to the Largilliere Company Bank which he executed in May 1945, one in the amount of $7,500 for 6 months and the other in the amount of $13,500 for 4 months. After petitioners' purchase of stock from Frank Merrill, he60 had 101,198 shares in his name, some of which belonged to his children. In 1950 petitioner sold his Blind Bull stock to the IdahoCoal Mining Company which was controlled by J.B. Williamson. By the terms of the agreement of purchase and sale dated July 20, 1950, the sales price of the stock was to be $71,850.58 payable $10,000 at the time of delivery and the balance in installments beginning September 28, 1950, the amount of the payments to be based on the tons of coal that were mined. The agreement provided that in the event of payments of the principal or interest being delinquent and remaining delinquent for 30 days the seller, after notice in writing to the buyer, should have the right to all voting powers and voting rights of the capital stock until such delinquent payments were made to the seller. The buyer covenanted not to commit waste of the property and to conduct the business in an efficient, competent, and businesslike manner, keeping full and accurate books of account and furnishing the seller with a 1289 copy of the annual audit of such books. The buyer also convenanted to pay all taxes when due and to operate the mine in its usual and customary mining operation61 similar in character to previous operations and that no capital stock in the treasury should be sold for less than par value. The stock certificates were held in escrow by the Idaho Bank of Commerce. The stock remained in the name of the seller and upon default of the buyer was to be returned to the seller. Petitioners did not report their sale of the Blind Bull stock on their 1950 income tax return. An additional tax for the year 1950 was assessed against and paid by petitioners on the basis of an audit by an agent of respondent who considered petitioners' basis in the Blind Bull stock to be $30,000. Shortly after the $10,000 initial payment on the Blind Bull stock, Williamson came to petitioner seeking to borrow money to apply on the purchase of a grader. In order to keep the mine operating so as to insure payment by Williamson on the contract of sale of the Blind Bull stock, petitioner loaned the IdahoCoal Mining Company $7,055.67 on a 3-month note at 6 percent interest. Petitioner prior to 1954 had cosigned a $5,000 note payable to the Idaho First National Bank as guarantor for IdahoCoal Mining Company and Blind Bull. In September 1955 the bank called upon the guarantors62 to make good the note and petitioner paid $3,000 to the bank and cosigned a renewal note in the amount of $2,000. Petitioner and his attorney went to the mine several times to check on production. Each time Williamson was gone and the mine was not operating according to the agreement. In 1954 petitioners regained the stock held in escrow because of Williamson's default on the terms of the contract. Williamson absconded with all of the corporation's files, records, and stockbooks. During the period from 1950 through 1954 when Williamson had control of Blind Bull much of the personal property of the company in the form of equipment and furniture was mortgaged, sold, or otherwise disposed of. Taxes were not paid during this period of time and royalty payments due to the Government were either not paid or were only partially paid. The mining lease was in jeopardy. The minutes of the board of directors meeting dated September 29, 1954, stated in part: Mr. Merrill stated that after an extensive investigation arising from trips to Salt Lake City, Utah; Cheyenne, Kemmer and Evanston, Wyoming, Rexburg, Idaho and to the Blind Bull Coal Company mine, it was apparant that practically all63 personal property of the company had been mortgaged, sold and or otherwise disposed of. Also, payments to the government on account of Social Security and other taxes had not been settled. Royalty payments were past due and many other obligations contracted for by Williamson in his apparent involved entity operations were unpaid. Also, that the lease with the government was in jeopardy by reason of unpaid coal royalty. Mr. Merrill was advised by government officials that coal to a value of approximately $125,000.00 had been disposed of without any accounting to the government. Mr. Merrill stated that the present directors were obligated to do any and all things necessary to protect the interest of minority stockholders of the company. After some discussion of the problems of the company as outlined by attorney Merrill, it was duly moved seconded and approved that President Ruud, with legal assistance of our attorney be empowered to take any action necessary to safeguard the investment of the stockholders and remaining assets of the company. * * * As the company had no funds of any nature it was evident that arrangements would be necessary to meet accruing bills. The Directors64 present decided that any stockholder, who at any time, advanced funds to the company to meet current bills, should be refunded such amounts from any funds that may later become available, together, with 6% interest. A representative from Blind Bull met with government officials in an attempt to make satisfactory arrangements for the back royalty payments due from 1950 to 1954. In 1955 the royalty payments were compromised by Blind Bull paying $1,090.40 instead of the approximately $5,000 originally due the Government. In December 1955 Ruud loaned to Blind Bull $3,000 at 6 percent interest to enable it to meet pressing obligations. Blind Bull repaid $1,500 of this loan in December 1956 and the remaining $1,500 in June 1957. Suit was filed by Blind Bull against the Idaho Bank of Commerce, IdahoCoal Mining Company, Gray River Coal Company, and their officers in the District Court of the Ninth Judicial District for the County of Bonneville, State of Idaho. 1290 The third amended complaint dated April 6, 1957, alleges that Blind Bull was defrauded by chattel mortgages being placed on its personal property and the sale of its equipment as well as stored coal. Damages asked65 for were: 1. For depletion of assets$48,086.742. Obligations wrongfully incurred20,448.013. Stored coal converted 9,000.00Total$77,534.75 The suit was lost sometime later in 1957. In October 1957 Lincoln County sold all the personal property in the form of equipment and machinery which Blind Bull still held for taxes owed the County. The Blind Bull bank account was finally closed on June 1, 1958, and the corporation ceased to conduct any business whatsoever after that date. The corporate charter was forfeited for nonpayment of license fees on November 30, 1960. The following schedule shows the receipts and disbursement of Blind Bull for the period October 9, 1954, through June 1, 1958: 90 ReceiptsDisbursementsDateItemAmountDateItemAmount10-11-54Bank note$ 2,000.0010-9-54Capital stock tax--Wyoming$ 25.0011-30-54By transfer of old10-9-54Capital stock tax--Idaho62.50First Security Bank10-9-54Lincoln County Recorder--legalaccount34.23record28.0010-9-54Fred Ring & Assoc.--minute book5.7510-9-54A. A. Merrill--legal1,000.0011-4-54Capital stock tax--Wyoming25.0012-1-54A. A. Merrill--travel expenses275.0010-30-55Bert Ruud--advance3,000.005-13-55Fred Ring & Assoc.--officeservices125.006-1-55Idaho First National Bank--notes and interest56.676-15-55Capital stock tax--Idaho100.006-15-55Capital stock tax--Wyoming25.0012-29-55Idaho First National Bank--noteand interest2,091.6612-29-55Dept. of Interior--lease bal.1,090.408-30-56Coal royalty--Joe Goyen76.301-4-56L. H. Merrill--legal expense35.009-15-56Coal royalty--Joe Goyen227.101-5-56Tandy & Wood--bond premium50.0010-10-56Coal royalty--Joe Goyen963.339-27-56Capital stock tax and penalty--11-6-56Interest on C.D.100.00Idaho110.0011-14-56Coal royalty--Joe Goyen499.6812-14-56Bert Ruud--to apply on note1,500.0012-13-56Coal royalty--Joe Goyen663.4512-15-56Fred Ring & Assoc.--office1-6-57Bond deposit retornedservices250.00$2,500. Interest $1002,600.005-16-57Capital stock tax--Idaho100.005-16-57Capital stock tax--Wyoming50.006-6-57Tandy & Wood--bond premium27.259-10-57A. A. Merrill--%filing fee for suit200.009-10-57A.A.Merrill--Filing fee for suit200.005-23-58Tandy & Wood--C.D. Int.75.003-31-58L.H. Merrill--Deposition fee100.004-2-58Court reporter32.104-28-58Witness fee15.004-28-58Witness fee28.005-23-58Fred Ring & Assoc.--officeservices 242.00Total $10,239.09Total $9,876.6766 1291 The following tables show the balance sheets and profit and loss statements of Blind Bull for the years 1944 to 1949 and 1953 to 1957: 90 Balance Sheet 90 1944-1949194419451946194719481949AssetsCurrent assetsCash$ 9,509.43$ 6,966.51$ 10,222.56$ 7,223.13$ 1,704.28$ 349.31Investments and Cert. of dep.11,885.2418,385.2418,385.2418,385.2419,842.8220,056.24Accounts receivable 406.6311,864.64Total current assets$ 21,801.30$ 37,216.39$ 28,607.80$ 25,608.37$ 21,547.10$ 20,405.55Fixed assetsOffice equipment31.67350.97327.28303.59279.90256.21Mine equipment18,836.7313,740.7320,105.5217,918.9122,218.6122,179.64Road construction15,349.2014,960.4814,571.7614,183.0413,794.3213,405.60Miscellaneous 2,470.9811.671,536.321,899.941,543.87Total fixed assets$ 36,688.58$ 29,063.85$ 35,004.56$ 33,941.86$ 38,192.77$ 37,385.32Intangible assetsMine lease permit150,000.00150,000.00150,000.00150,000.00150,000.00150,000.00Less depletion 10,481.9210,503.6210,703.6210,623.8810,698.5610,698.56Total intangible assets $139,518.08$139,496.38$139,296.38$139,376.12$139,301.44$139,301.44Total assets $215,880.98$205,776.62$202,908.74$198,926.35$199,041.31$196,992.31LiabilitiesAccounts payable$ 729.02$ 1,191.16$ 493.40$ 232.32$ 232.32Notes, bonds, etc.payableHospital fee--reserve 535.99535.99535.99535.99535.99535.99Total liabilites$ 1,265.01$ 1,727.15$ 1,029.39$ 1,029.39$ 768.31$ 768.31Capital account197,002.00197,002.00197,002.00197,002.00197,002.00197,002.00Earned surplus 17,613.977,047.474,877.35894.961,271.00(778.00)Total capital accounts $214,615.97$204,049.47$201,879.35$197,896.96$198,273.00$196,224.00Total capital and liabilities $215,880.98$205,776.62$202,908.74$198,926.35$199,041.31$196,992.3167 1292 90 Balance Sheet 90 1953-195719531954195519561957AssetsCurrent assetsCash$ 105.23$ 792.00$ 303.27$ 888.13$ 883.54Investments and Cert. of dep.Accounts receivableTotal current assets$ 105.23$ 792.00$ 303.27$ 888.13$ 883.54Fixed assetsOffice equipment161.45139.64119.77105.39Road construction17,723.2217,064.5016,405.7815,747.0615,088.Road construction17,723.2217,064.5016,405.7815,747.0615,088.34Miscellaneous 573.33314.12174.50Total fixed assets$ 35,358.77$ 33,416.64$ 31,885.53$ 30,390.13$ 15,088.34Intangible assetsMine lease permit1 192,490.561 195,745.921 199,277.511 198,88.051 211,982.68Less depletion 10,798.5610,798.5610,798.5610,798.5610,798.56Total intangible assets $181,692.00$184,947.36$188,478.95$187,889.49$201,184.12Total assets $217,156.00$219,156.00$220,667.75$219,167.75$217,156.00LiabilitiesAccounts payable$ 11,448.01$ 11,448.01$ 11,448.01$ 11,448.01$ 11,448.01 11,448.01Notes, bonds, etc., payable9,000.0011,000.0012,511.7511,011.759,000.00Hospital fee--reserve 535.99535.99535.99535.99535.99Total liabilities$ 20,984.00$ 22,984.00$ 24,495.75$ 22,995.75$ 20,984.00Capital account197,002.00197,002.00197,002.00197,002.00197,002.00Earned surplus (830.00)(830.00)(830.00)(830.00)(830.00)Total capital accounts $196,172.00$196,172.00$196,172.00$196,172.00$196,172.00Total capital and liabilities$217,156.00$219,156.00$220,667.75$219,167.76$217,156.0068 1293 90 Profit and Loss Statement 90 1944-1949194419451946194719481949Income:Mine lease and coal$17,090.42$ 1,928.00$4,952.69$ 7,865.00$9,070.90$6,764.17Yard--coal10,870.2217.50Sale of assets7,545.3313,336.41669.11Interest50.11194.5595.86507.58325.92Miscellaneous--Income adjustment319.34Total income $35,825.31$15,332.02$5,147.24$ 8,629.97$9,578.48$7,090.09Expenses:Advertisement61.92136.619.60Audit and legal expenses175.00250.00273.1075.0075.00Capital stock tax77.5077.5077.5077.5077.5077.50Car and truck expenses2,482.98356.39326.17Depreciation3,994.232,518.971,833.292,764.473,095.593,293.45General expense1,896.93889.12Hauling and yard labor1,398.436.18327.90Insurance344.29165.45197.5197.2597.98Interest and bond263.0550.0050.0050.00Lease expense216.3064.50Mine depletion54.3221.70200.0066.3874.68100.00Mine labor12,900.87150.00Mine supplies1,486.16400.00488.52Mine expense584.501,236.991,000.47357.14244.28Office expense2,274.5259.7555.7092.19148.51164.77Oil, gas and supplies1,371.38272.78158.80311.10Other taxes: except income1,991.84483.24175.8433.00Road expense175.00644.76Royalty on coal782.04268.505,000.001,106.00867.75Salary--manager2,400.002,400.002,400.003,300.003,600.003,600.00Travel expense 186.31207.98109.30186.00Total expenses $34,726.27$ 9,403.38$7,509.94$12,513.61$9,202.44$9,139.09Net profit or (loss) $ 1,099.04$ 5,928.64($2,362.70)($3,883.64)$ 376.04($2,049.00)69 1294 90 Profit and Loss Statement 90 1953-195719531954195519561957Income:Mine lease and coal$ 986.60$2,429.86Yard--coalSale of assets300.00($14,643.07)Interest------50.00100.00Miscellaneous--Income adjustment$ 118.022,500.00Total income $ 1,286.60$ 118.02$2,479.86($12,043.07)Expenses:AdvertisementAudit and legal expenses$1,275.00$ 511.75$ 35.00$ 200.00Capital stock tax52.50112.50125.00110.00150.00Car and truck expensesDepreciation5,571.041,942.131,531.111,495.40658.72General expense27.25Hauling and yard laborInsuranceInterest and bond491.36148.33215.59Lease expense1,090.40Mine depletionMine laborMine supplies5,200.00Mine expenseOffice expense273.1543.75125.00250.00Oil, gas, and suppliesOther taxes:except income2,300.00Road expenseRoyalty on coal3,708.18Salary--managerTravel expenseTotal expenses $17,596.23$3,373.38$3,531.59$1,890.40$1,251.56Net profit or (loss)($16,309.63)($3,255.36)($3,531.59)$ 589.46($13,294.63) 1295 In each70 of the years 1955, 1956, and 1959 petitioners failed to report some of their interest income. In each of the years 1958 and 1959 petitioners failed to report some of their partnership income. In 1956 petitioners failed to report their profit from operation of the San Dee Motel. In 1955 petitioners failed to report gain from the sale of creamery certificates and certain unidentified income. Respondent in his notice of deficiency determined petitioners' income in each of the years here in issue by increasing reported income by those items which petitioners failed to report. In addition, respondent determined that petitioners had a capital gain of $66,987.75 in 1955 from the condemnation of their farm and disallowed the capital losses claimed by petitioners on their return for the year 1955 for worthlessness of petitioners' stock in Compressed and Blind Bull and for debts resulting from a loan to IdahoCoal Mining Company and payment on a note as guarantor for that company and Blind Bull. By affirmative allegation in his answer respondent claimed an increased deficiency based on a capital gain to petitioners from the payment received by them from the government in 1956 with respect71 to the condemnation of their farm. Ultimate Findings of Fact 1. Petitioners paid $65,000 for the home ranch land and this was the amount of their basis in that land in 1955 when the property was condemned. 2. Petitioners paid $6,980 for the land known as the Alpine property and this amount was their basis in that land when the property was condemned in 1955. 3. The cost of the San Dee Motel to petitioners was the contract price of $155,000 and this is the amount to be used in determining the cost of their residence in the motel which was purchased to replace their home on the home ranch property which was condemned. 4. Petitioners' Compressed stock became wholly worthless in 1955. 5. Petitioners' Blind Bull stock did not become wholly worthless in either 1954 or 1955. 6. The debt owed petitioner by Blind Bull, because of petitioner's payment as guarantor of its note, did not become worthless in either 1954 or 1955 and the debt owed petitioner by the IdahoCoal Mining Company did not become worthless in either of these years. 7. Petitioners' failure to keep proper records and to accurately report their taxable income in each of the years in issue was due to negligence72 or intentional disregard of rules and regulations. Opinion Gain on Condemnation In order to determine the amount of gain, if any, which petitioners realized from the condemnation of their home ranch and Alpine properties and the amount of such gain, if any, which is to be recognized, two questions of fact must be resolved. The first is the amount of petitioners' bases in these properties and the second is the cost to petitioners of qualifying replacement properties. The deed transferring the home ranch property to petitioner does not show the price petitioner paid for the property and it is necessary to determine this fact from other evidence. The evidence shows that petitioner drew five checks to George Keyser in the amounts of $15,000, $5,000, $20,000, $7,040.80, and 27,247.30 which bore notations to the effect that they were in payment on the "contract." However, the "contract" for the sale of the ranch was not produced since it had apparently been destroyed in a fire. Petitioner recalled that he did obtain some machinery and horses in addition to the land and that the cost of the land was "over $65,000." George Keyser had acquired the property which he sold to petitioners73 in 1918 in several transactions beginning 4 years prior to the sale to petitioners. These acquisitions began in 1914 and ended in 1915. One tract was purchased on July 31, 1914, from a partnership of S.F. Groves and Son for the sum of $13,000. Another tract was conveyed to Keyser on December 14, 1914, by William H. and Myrtle E. Cary for the sum of $2,150. A third tract was conveyed to George Keyser by Charles and Irene Fleming on August 2, 1915, for the sum of $1,500. Respondent argues that it is unreasonable to assume that land for which Keyser paid $16,650 would be sold to petitioners 3 or 4 years later for over $20,000 and that any amount in excess of $20,000 paid by petitioner to Keyser must have been for cattle or other property. However, we are persuaded by the evidence that petitioners paid at least $65,000 for the land comprising the 1296 home ranch and have so found. Between 1915 and late 1917 when petitioner completed arrangements to purchase the home ranch property there had been an increase in land prices due to the entrance of this country into World War I. Also, the quantity of land sold to Keyser to petitioners was sufficiently large to obtain a type of permit74 for grazing cattle on government forest lands which could not be obtained by an owner of substantially smaller parcels of land. Therefore, the parcel comprising the home ranch was more valuable per acre than the smaller parcels of which it was comprised because the owner of this larger quantity of land was able to obtain a grazing permit for government forest lands. Respondent urges that since the total price 4 years prior to the sale to petitioners was only $16,650 and the stamp tax paid upon the recording of petitioners' deed was $20 indicating a purchase price of $20,000, we should determine the purchase price to be $20,000. Petitioners adequately explained the fact that only $20 worth of stamps were placed on the deed when it was recorded and on the basis of all this evidence including the evidence showing purchases by petitioner of cattle from other sources, we have concluded that the cost to petitioners of the home ranch land was $65,000. Petitioners urge that a letter dated June 13, 1919, from the Largilliere Company Bank regarding a $21,000 loan shows a payment toward the contract for the purchase of the home ranch in addition to the $74,288.10 paid by checks. However, 75 we find that the evidence indicates that the $21,000 loan was used for one of the payments represented by the checks comprising the $74,288.10. The amount paid for the Alpine property is a purely factual issue. Our finding that the various payments for this land total $6,980 disposes of this issue. Therefore, we conclude that the total cost to petitioner of the land condemned was $71,980, which when added to the basis for miscellaneous improvements of $29,700 to which the parties agree and the $7,912 agreed basis of the granaries, results in a basis of $109,592 exclusive of the agreed basis of $7,500 for the Alpine hotel and the agreed basis of $15,000 for the house on the home ranch on which petitioners contend no gain is recognizable. The parties have stipulated that $15,155 of the $152,250 which they agree petitioners constructively received in 1955 for their condemned property is allocable to the Alpine hotel and $28,795 of this amount is allocable to petitioners' home on the home ranch property. The parties also agree that $1,834 of the net receipts of condemnation proceeds in 1956 is allocable to the Alpine hotel and $3,484 of such net receipts is allocable to petitioners' 76 home on the home ranch property. Respondent now concedes that the San Dee Motel was property similar to the Alpine hotel property and that no gain is recognizable from the condemnation of the Alpine hotel. Section 10335 governs treatment of involuntarily converted property which, of course, includes property condemned by the government for purposes of public domain. Respondent on brief conceded that to the extent the receipts allocable to the 1297 house on the home ranch were reinvested in the residence in the motel, the gain on the condemnation of the home is not to be recognized under section 1033. However, respondent argues that petitioner's total investment in the San Dee Motel was $36,000 and that 19.8 percent of such amount is all that is allocable to the portion of the motel used by petitioners as a home. 77 Petitioners in 1956 entered into a contract to purchase the San Dee Motel for $155,000. However, they defaulted on the contract at the end of the year having paid only $36,000 of the contract price. Petitioners maintain that the contract price of $155,000 for the purchase of the motel is the amount invested for the purpose of computing the cost of the residence portion of the motel which was replacement property for their home under section 1033. 6 Petitioner would therefore consider 19.8 percent of $155,000 as the cost of the replacement property. We agree with petitioner that the cost of the San Dee Motel was $155,000. 78 The parties stipulated that petitioners "agreed to buy the San Dee Motel for $155,000.00 and made total payments thereon of $36,000.00 during 1956 within the required time limitations for like-kind reinvestments." The amount petitioners agreed to pay for the property is its purchase price. See William B. Cusack, 48 T.C. 156">48 T.C. 156 (1967) which holds replacement property to have been purchased even though no payment was made except a small downpayment and the property was reconveyed to the seller the year following its purchase pursuant to a provision permitting such reconveyance if certain conditions were not complied with. Therefore 19.8 percent of $155,000 or $30,690 is the cost allocable to the new residence petitioners acquired to replace their home for which they received $28,795 in a condemnation award in 1955 and $3,484 in 1956. Since we do not have the year 1957 before us, it is not necessary for us to determine what adjustment, if any, is required to be made in that year because of petitioner's default with respect to all but $36,000 of the $155,000 purchase price of the San Dee Motel. Worthlessness of Compressed Products Corporation Stock The second issue is79 whether petitioner's stock in Compressed became worthless in 1955 so as to be deductible as a capital loss in that year under section 165(g). 7 A loss from worthless stock is deductible only in the year in which the stock becomes worthless. The facts here clearly show some value of the Compressed stock at the end of 1954 and neither party contends that this stock did not have value at the beginning of 1955. Petitioner says the stock had no value after 1955 because the claims of its creditors filed and allowed in the reorganization proceeding filed on May 31, 1955, exceeded any possible amount the company might hope to receive as royalties for the licensing of all its assets. The license agreement had been entered into in 1955 and an advance of $110,000 was received from the licensee to pay claims of creditors. Since in 1955 the liabilities of Compressed exceeded80 the value of its assets, the stock had no liquidating value. However, 1298 even though a corporation's assets are less than its liabilities, if there is reasonable hope or expectation that its assets will exceed its liabilities sometime in the future, its stock, while having no liquidating value, has a potential value and is not worthless. Joseph C. Lincoln, 24 T.C. 669">24 T.C. 669 (1955), affd. 242 F. 2d 748 (C.A. 6, 1957). Usually when the stock of a corporation becomes worthless there is some "identifiable event" in the corporation's life which puts an end to any expectation that the corporate assets will exceed its liabilities. In some cases the liabilities so far exceed the assets that this fact, itself, shows the stock to be worthless. In Sterling Morton, 38 B.T.A. 1270">38 B.T.A. 1270, 1279 (1938), affd. 112 F. 2d. 320 (C.A. 7, 1940), we stated in this respect: There are, however, exceptional cases where the liabilities of a corporation are so greatly in excess of its assets and the nature of its assets and business is such that there is no reasonable81 hope and expectation that a continuation of the business will result in any profit to its stockholders. In such cases the stock, obviously, has no liquidating value, and since the limits of the corporation's future are fixed, the stock, likewise, can presently be said to have no potential value. Where both these factors are established, the occurrence in a later year of an "identifiable event" in the corporation's life, such as liquidation or receivership, will not, therefore, determine the worthlessness of the stock for already "its value had become finally extinct." * * In our view the Compressed stock had ceased to have any value in 1955 whether or not the filing of the reorganization petition was an identifiable event putting an end to value of the stock. See Charles W. Steadman, 50 T.C. 369">50 T.C. 369, 376 (1968), on appeal (Jan. 3, 1969, C.A. 6), and cases there cited. On May 31, 1955, when Compressed filed a petition for reorganization, its only assets were its royalty agreements with Delicate Corporation of America and certain patents, trademarks and associated rights relating to the manufacture of a sanitary napkin and machinery for the manufacturing process. The patents, 82 trademarks, and associated rights and machinery were licensed to American Hygienic Corporation which advanced a sum in excess of $110,000 to Compressed to allow it to pay its creditors. Beginning in 1955 Compressed ceased to be an operating corporation and since that time has had no income other than the royalty receipts which are applied as payments against the advance and no expenses except payments of annual license fees to the State of Nevada to keep the corporation alive. After 1955 no income statements nor balance sheets have been prepared and no meetings of the stockholders of officers have been held. At the time of trial the outstanding balance on the advance to American Hygienic Corporation was approximately $67,000. It is estimated that at the rate of return experienced since 1955 it will be another 20 years before the royalties from American Hygienic Corporation will retire the advance made to Compressed by that corporation. At that time the funds will be applied to the claims of the preferred stockholders. However, Compressed's patents will expire prior to the time its advance from American Hygienic Corporation is repaid if the rate of return from the royalties does not83 substantially increase. Petitioner contends that the filing of the petition for reorganization, cessation of business, and transfer of all its assets to American Hygienic Corporation constituted "identifiable" events causing the Compressed stock to become worthless in 1955. Respondent contends that Compressed's stock did not become valueless until 1960 when its second plan of reorganization was finally approved. In view of the circumstances of Compressed in 1955 we conclude that its stock was valueless in that year even though its reorganization plan was not finally approved until 1960. In determining when stock becomes worthless the Code does not require the shareholders to be "incorrigible optimists." United States v. S.S. White Dental Mfg. Co., 274 U.S. 398">274 U.S. 398 (1927). We hold that petitioners are entitled to a deduction in 1955 of a long-term capital loss in the amount of $21,100 because their stock in Compressed became worthless in that year. Worthlessness of Loans to and Stock of Blind Bull Coal Company The principles of law we discussed in connection with the issue concerning the worthlessness of the Compressed stock are applicable to the determination of84 whether the stock of Blind Bull became worthless in 1954 or 1955. However, the financial circumstances of Blind Bull in 1954 and 1955 differ materially from the 1299 financial circumstances of Compressed in 1955. Although petitioners contend that Blind Bull was insolvent in 1954 and 1955, the evidence in this case does not support their contention. Petitioners argue that because much of the personal property of Blind Bull had been mortgaged, sold, or otherwise disposed of in 1954 and 1955 and payments for social security taxes and mine royalties were past due, the company was insolvent. However, the financial position of Blind Bull at the end of 1955 does not indicate insolvency. We have made adjustments to the balance sheet of Blind Bull as shown in its Federal income tax returns in all instances where the evidence as a whole indicates the adjustments to be necessary to show a fair picture of the company's financial situation. Mine equipment which is shown at $15,185.48 in the balance sheet has been reduced to $994.28 to adjust for an Austin-Western speeder which the evidence shows was sold by the Idaho Bank of Commerce in April 1954. The basis of the mine lease was shown on85 the books at $150,000 until Williamson took over the company in 1950. In 1953 the mine lease was shown on the books at $192,490.56 because of charging losses of the company as development costs added to the mine lease account. In 1955 such charges had increased the basis of the mine lease on the company's books to $199,277.51. In 1945 respondent's agents in an audit of Blind Bull determined the value of the mine permit to be $27,000 based on actual cost less depreciation allowed of $2,213.64. Using the actual cost as determined in 1945 by respondent's agents less depreciation allowable as of 1955, the value of the mine lease would be $24,491.42 instead of the $188,478.95 as shown on the books. Based on the balance sheet shown on the income tax return for 1955 with the adjustments heretofore discussed, an evaluation of the assets and liabilities of Blind Bull at the end of 1955 is as follows: AssetsCash$ 303.27Office equipment119.77Mine equipment994.28Road construction16,405.78Miscellaneous 174.50Total$17,997.60Mine lease$27,000.00Less depletion 2,508.58 24,491.42Total assets$42,489.02LiabilitiesAccounts payable$11,448.01Notes, bonds, etc. payable12,511.75Hospital fee-reserve 535.99Total liabilities 24,495.75Assets in excess of liabilities $17,993.2786 Although as of the end of 1955 Blind Bull did not have sufficient liquid assets to meet its obligations, and in this sense of the word "insolvency" it was insolvent, its assets adjusted as best the evidence enables us to make adjustments, exceeded its liabilities by approximately $18,000. This fact indicates that the stock of the company was not worthless as of the end of 1955. See Commissioner v. Bachrach, 182 F.2d 261">182 F. 2d 261, 264 (C.A. 7, 1950), affirming a Memorandum Opinion of this Court. If the assets shown on the balance sheet had less value than stated or if the liabilities were greater than stated, it was the petitioners' burden to show these facts. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287 (1946). No such evidence is contained in the record. The record also contains other evidence indicating the Blind Bull stock did not become worthless in 1955 or before. In 1956 Joe Goyen under an arrangement with Blind Bull mined coal from the mine paying a certain amount for each ton of coal extracted. Blind Bull had income from this source in the amount of $2,429.86 giving87 a profit for the year 1956 of $589.46. Continuation of a corporation in business 1300 frequently indicates continuation of worth of the corporate stock. Joseph C. Lincoln, supra. In April 1957 Blind Bull filed a suit against IdahoCoal Mining Company, Idaho Bank of Commerce, and the officers of these companies claiming the amount of $77,534.75. There is no evidence in the record to indicate that Blind Bull did not have some expectation of recovery when it instigated the suit. The suit was not concluded adverse to Blind Bull until the latter part of 1957 and it was not until the conclusion of the suit that Lincoln County sold most of Blind Bull's machinery to obtain payment of overdue taxes. The pendency of the suit is some indication that the Blind Bull stock did not become worthless in 1955 or prior thereto. Cf. Boehm v. Commissioner, supra. Blind Bull's lease was of one of the finest soft coal mines in the United States but because of the location of the mine, it was difficult to operate successfully. The lease was, in itself, the principal asset of Blind Bull and was the asset which originally induced the shareholders to invest in the company. 88 Under these circumstances as long as Blind Bull retained its lease there was some potential value to its stock. Since we have concluded that the stock of Blind Bull did not become worthless in 1955 or prior thereto, it is not necessary to deterimne the basis of such stock held by petitioners. For the same reason we have concluded that the stock of Blind Bull did not become worthless in 1955, we conclude that the debt to petitioner by Blind Bull which arose from his payment of $3,000 as a guarantor on the corporation's notes did not become worthless in that year. The $7,055.67 loan which petitioners claim became worthless in 1955 appears from the evidence to have been a loan to IdahoCoal Mining Company. If the loan was made to that company, there is no evidence in the record to support petitioners' contention that the debt was uncollectible in 1955 or prior thereto. If the loan was to Blind Bull, we conclude that petitioners have failed to establish its worthlessness in 1955 or prior thereto for the same reason that we held the stock of Blind Bull not to have become worthless in 1955 or prior thereto. Profit from Operation of San Dee Motel Petitioners alleged error in respondent's89 determination of their profit in 1956 from the operation of the San Dee Motel. This issue was not one disposed of by agreement of the parties. However, petitioners offered no evidence in support of their allegation that respondent erred in his determination of such profit. We therefore sustain respondent's determination of petitioners' profit from the operation of the San Dee Motel because of petitioners' failure of proof. Additions to Tax Respondent determined additions to tax under section 6653(a)8 for negligence or intentional disregard of rules and regulations. The burden of proof is upon petitioners to show error in this determination. Gaylord C. Peters, 51 T.C. 226">51 T.C. 226, 232 (1968). 90 Some of the items adjusted by respondent in the statutory notice of deficiency for the years in issue were the result of differences of opinion between respondent and petitioners or a misunderstanding of fact or law on the part of petitioners. If these were the only omissions of income from petitioners' returns or the only erroneous deductions claimed, we would conclude that petitioners had shown that their underpayment of tax for the years in issue was not due to negligence or intentional disregard of rules or regulations. However, in all the years in issue petitioners omitted from income items which should have been included in income and offered no evidence of the reasons for such omissions. Section 6653(a) provides for the addition to tax if "any part" of any underpayment is due to negligence or intentional disregard of rules and regulations. We therefore hold that petitioners are liable for the additions to tax under section 6653(a) in each of the years here in issue. Decision will be entered under Rule 50. 1301 Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. The year 1957 is not before us as no deficiency for this year was determined by respondent. The parties have agreed that petitioners sustained a net operating loss in 1957 of $18,377.15, which is available for carryback purposes. Appropriate adjustment for this agreed net operating loss carryback can be made in the recomputation under Rule 50.↩3. Petitioner will refer to Bert Ruud. Emma is a party to this suit because the Ruuds filed joint income tax returns.↩4. The 20 cents difference in the award of December 15, 1955, and the check of January 14, 1956 is not explained in the record.↩1. Internal Revenue Field Report dated December 20, 1945 carries value of mine permit at $27,000.00, less prior depletion allowances of $2,213.64 equals $24,786.36.↩5. SEC. 1033. INVOLUNTARY CONVERSIONS. (a) General Rule. - If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsory or involuntarily converted - * * (3) Conversion into money where disposition occurred after 1950. - Into money or into property not similar or related in service or use to the converted property, and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1950, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: (A) Nonrecognition of gain. - If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe. For purposes of this paragraph - (i) no property or stock required before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition; and (ii) the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of subsection (c) of this section, the unadjusted basis of such property or stock would be its cost within the meaning of section 1012. (B) Period within which property must be replaced. - The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending - (i) one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or (ii) subject to such terms and conditions as may be specified by the Secretary or his delegate, at the close of such later date as the Secretary or his delegate may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe. * * * (b) Residence of Taxpayer. - Subsection (a) shall not apply, in the case of property used by the taxpayer as his principal residence, if the destruction, theft, seizure, requisition, or condemnation of the residence, or the sale or exchange of such residence under threat or imminence thereof, occurred after December 31, 1950, and before January 1, 1954.↩6. Petitioners erroneously based their contention on Sec. 1034. Sale or Exchange of Residence. However, subparagraph (3) of Sec. 1034 (i) Special Rule for Involuntary Conversions, plainly states that section 1033 applies in this case. Sec. 1034(i) Special Rule for Involuntary Conversions. - (1) In general. - For purposes of this section, the destruction, theft, seizure, requisition, or condemnation of property, or the sale or exchange of property under threat or imminence thereof - * * * (B) if occurring after December 31, 1953, shall not be treated as the sale of such property. * * * (3) Cross reference. - For treatment of residences involuntarily converted after December 31, 1953, see section 1033↩ (relating to involuntary conversions).7. Sec. 165(g) Worthless Securities. - (1) General rule. - If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.↩8. 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/4620536/	EDWARD T. FRANKLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Franklin v. CommissionerDocket No. 26969.United States Board of Tax Appeals23 B.T.A. 1325; 1931 BTA LEXIS 1726; August 27, 1931, Promulgated 1726 The petitioner held liable as a transferee under section 280 of the Revenue Act of 1926. Henry W. Wales, Esq., for the petitioner. W. F. Wattles, Esq., for the respondent. TRAMMELL 1325 Under section 280 of the Revenue Act of 1926 the respondent has proposed for assessment against the petitioner as transferee of the assets of the Franklin Tandy Coal Company, Chicago, Ill., deficiencies in the income and profits taxes of that company in the amounts of $856.03 and $6,186.57 for 1919 and 1920, respectively. The only questions raised by the petition as amended and not waived by the petitioner are (1) whether the provisions of section 280(a) (1) of the Revenue Act of 1926 are constitutional; (2) whether collection of the deficiencies from the Franklin Tandy Coal Company was barred by limitations on the date the respondent notified the petitioner that he proposed to assess the deficiencies against him; and (3) the petitioner's liability as transferee for the payment of the deficiencies. FINDINGS OF FACT. The petitioner is a resident of La Grange, Cook County, Ill. The Franklin Tandy Coal Company, an Illinois corporation, filed its1727 income-tax returns for the calendar years 1919 and 1920 with the collector of internal revenue on March 14, 1920, and March 14, 1921, respectively. Under date of January 2, 1925, there was received in the Bureau of Internal Revenue the following waiver, which was thereafter duly signed by the respondent: IT:CA:2442-9 DECEMBER 13, 1924. (Date) INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of existing Internal Revenue Laws, Franklin Tandy Coal Company a taxpayer, of Chicago, Illinois, and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1919 under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the 1326 industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period1728 of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. (SEAL) (Signed) FRANKLIN TANDY COAL CO. Taxpayer.By E. T. FRANKLIN President.ATTEST: HENRY W. WALES SecretaryD. H. BLAIR CommissionerOn February 18, 1926, the respondent assessed against the Franklin Tandy Coal Company deficiencies in tax of $856.03 for 1919 and $6,186.57 for 1920, which are the taxes here in controversy. During 1921 the Franklin Tandy Coal Company ceased to do business and distributed its assets in liquidation to the petitioner, its sole stockholder. As a result of such distribution the company became and ever since has been wholly insolvent and without property of any kind or character. In the distribution of the assets of the company the petitioner received money or property of a sum or value in excess of the taxes here involved with interest allowed by law. On October 6, 1926, the Superior Court of Cook County, Illinois, 1729 entered a decree dissolving the Franklin Tandy Coal Company and on December 1, 1926, certificate of dissolution was filed with the Secretary of State of the State of Illinois. On February 25, 1927, the respondent sent the petitioner a notice that he proposed to assess against him the deficiencies in tax of the Franklin Tandy Coal Company here involved. OPINION. TRAMMELL: The petitioner did not file a brief and his position with respect to the different issues is determinable only from the petition as amended. In the petition as amended it is alleged that the provisions of section 280(a)(1) of the Revenue Act of 1926 are unconstitutional and void (1) in that they deny to the petitioner the due process of law guaranteed by the Fifth Amendment to the Constitution and (2) in that they violate section 1 of Article III of the Constitution, which provides for the vesting of the judicial power of the United States in the courts. The questions raised by these allegations were 1327 disposed of adversely to the petitioner's contention by the Supreme Court in 1730 Phillips v. Commissioner of Internal Revenue,283 U.S. 589">283 U.S. 589. With respect to the question as to whether collection of the deficiencies from the Franklin Tandy Coal Company was barred by limitations on February 25, 1927, when the respondent notified the petitioner that he proposed to assess the deficiencies against him, the facts show that the company's returns for 1919 and 1920 were filed on March 14, 1920, and March 14, 1921, respectively. The statutory five-year periods for assessment for these years expired on March 14, 1925, and March 14, 1926, respectively. However, prior to March 14, 1925, the company filed a waiver extending the period for assessing 1919 taxes for one year from the expiration of the statutory period, or until March 14, 1926. The respondent therefore had until March 14, 1926, within which to make assessment of taxes against the company for 1919 and 1920. However, prior to this date and on February 18, 1926, the respondent assessed the deficiencies here involved. He then had six years from that date in which to make collection from the company. (Section 278(d) of the Revenue Acts of 1924 and 1926.) Clearly collection of the deficiencies1731 from the company was not barred by limitations on February 25, 1927, when the respondent notified the petitioner of his proposal to assess the deficiencies against him. But the period of limitations for assessment of the deficiencies of the company against the petitioner is not coextensive with that for collection from the company. Section 280(b)(1) of the Revenue Act of 1926 limits the period to "within one year after the expiration of the period of limitations for assessment against the taxpayer," which in this case was the company. The respondent therefore had until March 14, 1927, within which to assess the deficiencies against the petitioner. Having on February 25, 1927, notified the petitioner that he proposed to assess the deficiencies against him, the respondent acted within the time provided by the law. The period of limitations upon the assessment of the liability of the petitioner as transferee having been suspended until the expiration of 60 days after our decision becomes final, the assessment of the deficiencies against the petitioner is not barred by limitations. See section 280(d) of the Revenue Act of 1926. The remaining question is whether the petitioner1732 is liable as transferee for the payment of the deficiencies. The petitioner admits that the company distributed its assets in liquidation to him as its sole stockholder and as a result of such distribution became and thereafter remained wholly insolvent and without property of any kind or character. He also admits that in such distribution he received *1328 money or property of a sum or value in excess of the deficiencies here involved, together with interest allowed by law. In view of the foregoing we think the petitioner is liable under section 280 of the Revenue Act of 1926 as transferee of the assets of the Franklin Tandy Coal Company for the payment of the deficiencies. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620538/	Alfred R. Bachrach, Petitioner, v. Commissioner of Internal Revenue, RespondentBachrach v. CommissionerDocket No. 26810United States Tax Court18 T.C. 479; 1952 U.S. Tax Ct. LEXIS 173; June 10, 1952, Promulgated 173 Decision will be entered under Rule 50. 1. Petitioner and his three associates over a period of years organized corporations to hold and manage tenement properties. They followed a pattern of undercapitalizing corporations and, pursuant to agreement after incorporation, advanced funds in proportion to their holdings with which to acquire the properties sought and for additional working capital. The properties usually had one or more mortgages running from two to five years which were seldom paid out, the intention of the stockholders being, after operation costs, to divide proportionately the income of the corporation. The advances were carried on the books as open accounts or as "loans payable." No note or certificate was given, no interest was paid or was to be paid and there was no time limitation within which advances were to be repaid. The investments were considered temporary and after liquidation of one corporation reinvestment was made in a similar corporation. Held, under the facts, that petitioner's advances to E corporation were capital contributions and his loss upon E's liquidation is not deductible in full as a bad debt, but is deductible as a capital loss subject 174 to the limitations of section 117 of the Internal Revenue Code. Isidor Dobkin, 15 T. C. 31, affd. per curiam(C. A. 2), 192 F. 2d 392, followed.2. Petitioner and his associates caused their D corporation to make a loan on a parcel of its property, but were required by the mortgagee to personally guarantee the payment of the mortgage. Upon opportunity to sell the property, which the purchaser desired to be clear of the mortgage and the mortgagee, not willing to accept satisfaction of the loan, petitioner and associates, in order to make the sale, substituted their personal notes for the corporate note and became primarily liable for the corporate indebtedness in proportion to their respective interests. Held, that petitioner, being on a cash basis, and having paid out nothing on his liability in the tax year, made no "constructive payment" on the corporate mortgage and is not entitled to the bad debt deduction claimed. Helvering v. Price, 309 U.S. 409">309 U.S. 409; Eckert v. Burnet, 283 U.S. 140">283 U.S. 140. Alan Demar, Esq., for the petitioner.Michael J. Kenny, Esq., for the respondent. Turner, Judge. TURNER 479 The respondent determined a deficiency in income tax against petitioner for the year 1945 in 175 the amount of $ 1,647.80. Petitioner has not taken exception to all the adjustments made by respondent to his 480 income tax liability and concedes a deficiency of $ 532.05, leaving in controversy a deficiency in income tax in the amount of $ 1,115.75.The two questions presented are (1) whether a claim of loss resulting from the worthlessness of advances to a corporation is deductible as a business bad debt or as a long term capital loss, and (2) whether petitioner sustained a deductible loss when he guaranteed the payment of a corporate mortgage by giving his promissory note.FINDINGS OF FACT.Some of the facts have been stipulated and are found accordingly.Petitioner is an individual and a resident of New York City. He filed his income tax return for 1945 with the collector of internal revenue for the third district of New York. He is engaged in the practice of public accounting in New York City and filed his return on the cash receipts and disbursements basis.Petitioner and his associates, since 1925, have organized forty to fifty corporations in which titles to respective pieces of property were vested. Petitioner's associates were usually his two brothers and one Ira Rosenstock, 176 a close personal friend, who, with petitioner's father, had organized similar corporations over a period of several years prior to 1925. Usually the four composed the investing group but occasionally the group varied by the addition of another member. A piece of property for sale could be found by any one of the group and, after discussion, if it was deemed desirable, the property was purchased. Property located in the Harlem district of New York City was preferable, although it was considered a greater business risk because of the class of tenants in that district and the treatment the property received from them. The property was more desirable if there were one or more mortgages on it. The properties were purchased subject to the mortgages thereon or by the assumption of the mortgages. Mortgages on the property acquired ran from two to five years and were seldom paid by the corporation holding the property. Sometimes, due to an amortization contract, a corporation paid part of the mortgage, but the properties were not considered permanent investments.The proportionate interest of each member of the group in the corporations formed varied at times, but usually Rosenstock's 177 interest was 60 per cent and petitioner and his brothers had equal interests in 40 per cent of the investment. It was agreed that each member would advance in proportion to his stockholdings whatever other money the corporation might need, and payments from the corporation to the stockholders were made in the same proportions. The group attempted fairly to estimate normal operating expenses before any substantial amount of return was received and the corporation was capitalized 481 for that amount. Such expenses as a superintendent's salary, coal, insurance, interest, and taxes might be paid before rent income would cover them. The capitalization of the corporations ranged from $ 1,000 to $ 2,000. The amount invested in the stock of the respective corporations was never sufficient to cover the purchase price of the property bought. The stockholders under their agreement with each other, and after the formation of a corporation, advanced the necessary funds which, with or without the capital paid into the corporation, composed the purchase price of the property acquired for the corporation. In some instances all the purchase price was not paid at once but payment was extended under 178 a purchase contract. Some advances might be made for other reasons.No note, certificate, or anything was given by the corporations to substantiate the advances made by petitioner and his associates nor was the time fixed within which the advances were to be repaid. No interest was collected by them from the corporations on the advances they made. The advances were shown on the books of the corporation as open accounts or "loans payable."When a corporation showed earnings the stockholders would start withdrawing the money they had advanced and thereby reduce their risks. In anticipation of a possible foreclosure of the mortgage on the corporate property the stockholders would repay themselves as quickly as possible.During the year 1930 petitioner and his associates organized a corporation under the name of Est Realty Company, Inc., sometimes hereinafter referred to as Est Company. They invested $ 1,200 in the capital stock of the company, which stock was held in the following proportions:StockholderPer centIra Rosenstock50 Harold D. Bachrach16 2/3Alfred R. Bachrach16 2/3Herbert H. Bachrach16 2/3It was estimated that it would take $ 1,200 to run the property to be acquired. The 179 stockholders had to advance a good deal more to buy the property that was purchased.Est Company purchased two parcels of tenement property in 1930 which were respectively located at 46 East 132d Street and 121 West 134th Street. The former was disposed of in 1934 and the latter was sold in February 1945. These properties were the only capital assets ever held by Est Company. It is not shown what was the purchase price of the two parcels of property, their market value, nor the number and amount of the mortgages, if any, that existed 482 on the properties either at their acquisition or on their disposal. Petitioner had been unable to locate the books of Est Company since some renovation was made in the office in 1945. Est Company became defunct November 30, 1945.Beginning at the fiscal year ended November 30, 1930, and through the fiscal year ended November 30, 1945, the books of the company (by stipulation of parties) reflected the following payments and repayments, payments and repayments being in direct proportion to the stockholdings of the stockholders:Year ended Nov. 30payments to Corporation$ 9,907.001930 --repayments1,874.668,032.34payments to Corporation100.001931 --8,132.34repayments400.007,732.34payments to Corporation7,176.971934 --14,909.31repayments802.0014,107.31payments to Corporation7,565.001935 --21,672.31repayments7,089.0414,583.271936 --payments to Corporation705.0015,288.271937 --repayments100.0015,188.271939 --repayments607.0014,581.271945 --payments to Corporation225.00 Net Total on November 30, 1945$ 14,806.27180 None of the money advanced to the company was used to pay off its mortgage or mortgages. It is not shown for what purposes the above payments were made.483 Petitioner's share of the net total payment, $ 14,806.27, on November 30, 1945, was $ 2,467.71, which was in direct proportion to his stockholdings. Petitioner claimed a business bad debt in the amount of $ 2,467.71 on his 1945 income tax return.Petitioner was not in the business of lending money to corporations. The advances he made to Est Company constituted a capital investment which became worthless in 1945.The petitioner and his three associates caused one of their organizations, Dune Realty Corporation, to borrow $ 3,500 on a piece of its property. The lender was not satisfied to have the corporation's mortgage but required the four individuals, who were the stockholders of the corporation, to personally guarantee the payment of the mortgage. Later when the corporation was about to sell the property and the prospective purchaser wanted the property clear of the mortgage, the mortgagee would not accept payment of the indebtedness, when approached on the matter, as he desired to continue to receive the interest of 6 per cent 181 on the loan. In order to make the sale petitioner and his associates executed their promissory notes, in 1945, for the unpaid balance of the mortgage, petitioner's share being $ 525. Petitioner paid nothing in 1945 for the note. The real estate was released from the lien and petitioner claimed a loss deduction of $ 525 in his income tax return.In the statement to the notice of deficiency respondent made the following explanation of adjustments:(a) It is held that the deduction of $ 2,467.71, claimed for a loss resulting from the worthlessness of moneys paid to the Est Realty Corporation, represents a long-term capital loss which reduces your reported capital gains to the extent of $ 1,233.85.(b) Deduction of $ 525.00 claimed for loss on a guarantee of a mortgage disallowed for lack of substantiation.OPINION.Petitioner contends that he is entitled to the deductions of both amounts for the reasons that the sum of $ 2,467.71 was a business bad debt that resulted from the worthlessness of alleged loans which he had made to that extent to the Est Company and the amount of $ 525 was a loss he had sustained by giving his promissory note in guaranty of payment of that much of a mortgage 182 owed by Dune Realty Corporation, which resulted in the corporation's property being released from the mortgage.The first question is whether the advances were contributions to capital or loans. If they were loans, we then have the question of whether they were business or nonbusiness debts, the answer to which in turn depends on whether petitioner was in the business of making loans to corporations, as he contends.484 Section 23 (k) (1) and ( 4), Internal Revenue Code 1183 permits, respectively, deductions of business bad debts and nonbusiness debts, while capital loss deductions are permitted by section 23 (g), but only to the extent as provided in section 117, the applicable subsections of which are (a) (1) and (b), 2184 185 under which respondent made his determination. The parties are at issue on whether the advances involved are to be treated as business bad debts or contributions to capital. In order that the sum of $ 2,467.71 be allowed as a business bad debt deduction, petitioner must show not only that his advances to Est Company were loans and not contributions to capital but that he was in the business of making loans to corporations.Petitioner claims that he had been in the business of organizing corporations and making loans to them; that he had been so engaged 485 over a long period of years; that it was his intention to establish a creditor-debtor relationship with the corporations, as well as a proprietary interest in them; and, that that intention, as well as the low capitalization of the corporations, was due to the risk involved in handling the properties acquired. Petitioner relies on Vincent C. Campbell, 11 T.C. 510">11 T. C. 510, and claims the facts of that case are on all fours with the facts herein. However, we think not. In it the parties were agreed that a debt was owing to the taxpayer. The question was whether the debt was a business or a nonbusiness debt under section 23 (k) (4). Here we 186 have a dispute as to there being a debt, and our question arises under section 23 (k) (1).Est Company was organized with a small amount of capital, which was inadequate for the carrying out of its purpose of acquiring certain property or for its operations. The stockholders knew so in advance of forming Est Company, and followed their usual pattern and their agreement by advancing the necessary funds so that the purpose of the company could be carried out. Their advances were made in the same proportion as their original capital contributions, which invites scrutiny of the true nature of the stockholders' advances to the company. Wilshire & Western Sandwiches, Inc. v. Commissioner, 175 F. 2d 718. There was no evidence of a loan, such as a note, no provision for, or expectation of, the payment of interest and no fixed date for the repayment of the so-called "loans." See United States v. South Georgia Railway Co., 107 F. 2d 3; Daniel Gimbel, 36 B. T. A. 539; and Commissioner v. O. P. P. Holding Corporation, 76 F. 2d 11, affirming 30 B. T. A. 337. Petitioner's only security was the corporation itself and that was speculative. It thus appears that petitioner was not a maker of loans 187 but was an investor.A similar question to the one we have here was presented in Isidor Dobkin, 15 T. C. 31, affd. per curiam (C. A. 2), 192 F.2d 392">192 F. 2d 392. In it the taxpayer and three associates organized a corporation to hold and manage a parcel of New York City business property. Approximately $ 27,000 was required to finance the purchase over and above outstanding first and second mortgages. Dobkin and his associates each paid $ 7,000, of which $ 500 was designated capital stock and the remaining $ 6,500 was set up on the corporation's books as "Loans Payable." When additional working capital was required, the equality of investment was maintained by equal contributions. It was held that the entire amount paid in by Dobkin was intended to be risk capital and his loss upon liquidation of the corporation was not deductible in full as a bad debt but was deductible as a capital loss subject to the limitations of section 117. Language apropos to the instant case appears in the opinion, at page 32, as follows:Petitioner's contention that the funds which he paid in to Huguenot should be treated as loans so as to entitle him to a bad debt deduction on the corporation's 486 liquidation runs 188 squarely into our decision in Edward G. Janeway, 2 T. C. 197, affd., 147 Fed. (2d) 602.Ordinarily contributions by stockholders to their corporations are regarded as capital contributions that increase the cost basis of their stock, thus affecting the determination of gain or loss on ultimate dispositions of the stock. Harry Sackstein, 14 T. C. 566. Especially is this true when the capital stock of the corporation is issued for a minimum or nominal amount and the contributions which the stockholders designate as loans are in direct proportion to their shareholdings. Edward G. Janeway, supra.When the organizers of a new enterprise arbitrarily designate as loans the major portion of the funds they lay out in order to get the business established and under way, a strong inference arises that the entire amount paid in is a contribution to the corporation's capital and is placed at risk in the business. Cohen v. Commissioner, 148 Fed. (2d) 336; Joseph B. Thomas, 2 T. C. 193. The formal characterization as loans on the part of the controlling stockholders may be a relevant factor [n1] but it should not be permitted to obscure the true substance of the transaction. Sam Schnitzer, 13 T. C. 43, 60.Footnote 189 one states:The determinative intent described in Wilshire & Western Sandwiches, Inc., 175 Fed. (2d) 718, must necessarily be the objective intent disclosed by all the pertinent factors in the case and not the formal manifestation of intent declared by the taxpayer. Cf. O'Neill v. Commissioner, 170 Fed. (2d) 596, certiorari denied, 336 U.S. 937">336 U.S. 937.The opinion also calls attention to the question of inadequate capitalization being a situation which the Supreme Court stated was not before it in Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521, 526;As material amounts of capital were invested in stock, we need not consider the effect of extreme situations such as nominal stock investments and an obviously excessive debt structure.and then points out thatWhen at a later date this Court was confronted with the above situation, we held that the capital there paid in must be treated as stock rather than indebtedness. Swoby Corporation, 9 T.C. 887">9 T. C. 887.Petitioner states that in the Dobkin case "the petitioners there made their loans at the inception of the corporation which loans remained constant and unchanged up to the time of liquidation of the corporation." Petitioner and his associates understood at 190 the inception of Est Company that they would advance the necessary funds for the company to acquire the property sought and on which to operate. There were instances when the equity of the property was purchased under contract so that the first advances did not cover the purchase price of the property. The record does not reveal the purchase price, the value of the property, the amount of the mortgages on the property, or for what purpose the subsequent advances were made to Est Company. As far as we can tell, such advances might have been made in pursuance of a purchase contract, and we are unable to conclude 487 that petitioner has established that he became a creditor of Est Company rather than an investor.He also contends that in Edward G. Janeway, 2 T. C. 197, affd. (C. A. 2) 147 F. 2d 602, referred to in the above quotation, the Court had under consideration an isolated transaction of the taxpayer while petitioner's activities were "extensive, varied, continuous and regular" for he had "made numerous loans to the Est Realty Corporation over an extended period of time commencing with November 30, 1930, and terminating on November 30, 1945." As we have pointed out, petitioner 191 has failed to show the purpose for which the advances were made, except that on the formation of a corporation it was undercapitalized, and the stockholders, under their agreement, immediately after formation of the company, were to advance the necessary funds for the acquisition of the property selected for the corporation to hold, and for its operation.We are not impressed with petitioner's contention that his activities were "extensive, varied, continuous and regular" with respect to making "loans" to corporations. Organizing corporations for the purpose of holding properties over a period of years may be "extensive," "continuous," and "regular" as to time and for investments. The record does not reveal the number of corporations that might have been in existence during any one year, but it is clear that there were many liquidations of corporations that had been organized and reinvestments of funds in new corporations. It was never the intention of petitioner and his associates to pay off the mortgages on the properties acquired -- "The mortgages were there when they bought them and they were there when they sold them except that they might have been reduced by amortization 192 payments by Est." The mortgages were usually two to five years of duration and the respective investments were seldom longer. Consequently, there was an "extensive," "continued," and "regular" investment and reinvestment in title-holding corporations, although the type of investment was not "varied."Furthermore, except for petitioner's financial interest in the respective corporations organized, there was no activity on his part with respect to the actual operations of the properties held. His activities were primarily with his accounting practice.After carefully considering all the facts before us, we reach the conclusion that the advances petitioner made to the Est Realty Corporation were contributions of capital, and sustain respondent on this issue. For cases in which the facts were otherwise, see Vincent C. Campbell, supra; and Weldon D. Smith, 17 T.C. 135">17 T. C. 135.On the other issue, petitioner contends that the giving of his note and thus becoming primarily liable for his part of the Dune Realty 488 Corporation's mortgage which he, with his associates, had personally guaranteed, was a "constructive payment" of the corporate mortgage since the property of the company was released from 193 the lien, although he expressed his doubts on the question.As petitioner was on the cash receipts and disbursements basis and paid out nothing on his liability, he is not entitled in the taxable year 1945 to the deduction of $ 525, his share of the assumed liability. Helvering v. Price, 309 U.S. 409">309 U.S. 409; Eckert v. Burnet, 283 U.S. 140">283 U.S. 140.Respondent did not err in disallowing the deduction.Decision will be entered under Rule 50. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (k) Bad Debts. -- (1) General rule. -- Debts which become worthless within the taxable year; or (in the discretion of the Commissioner) a reasonable addition to a reserve for bad debts; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. This paragraph shall not apply in the case of a taxpayer, other than a bank, as defined in section 104, with respect to a debt evidenced by a security as defined in paragraph (3) of this subsection. This paragraph shall not apply in the case of a taxpayer, other than a corporation, with respect to a non-business debt, as defined in paragraph (4) of this subsection. * * (4) Non-business debts. -- In the case of a taxpayer, other than a corporation, if a non-business debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. The term "nonbusiness debt" means a debt other than a debt evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩2. SEC. 117. CAPITAL GAINS AND LOSSES.(a) Definitions. -- As used in this chapter -- (1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (1), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer; * * *(b) Percentage Taken into Account. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: 100 per centum if the capital asset has been held for not more than 6 months;50 per centum if the capital asset has been held for more than 6 months.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620539/	La Verdad, Petitioner v. Commissioner of Internal Revenue, RespondentLa Verdad v. CommissionerDocket No. 22393-82XUnited States Tax Court82 T.C. 215; 1984 U.S. Tax Ct. LEXIS 109; 82 T.C. No. 20; January 31, 1984, Filed 109 Decision will be entered for the respondent. Petitioner was organized to be a vehicle to provide education and charity. In its application for tax-exempt status, it failed to provide details regarding its proposed operations. Held, petitioner has failed to prove that it will operate exclusively for exempt purposes under sec. 501(c)(3), I.R.C. 1954. Douglas R. Drysdale, for the petitioner.Elizabeth Sullivan, for the respondent. Clapp, Judge. CLAPP215 OPINIONRespondent determined that the petitioner, La Verdad, does not qualify for exemption from Federal income tax under section 501(1)1 as an organization described in section 501(c)(3). Petitioner challenges respondent's determination by invoking the jurisdiction of this Court for a declaratory judgment pursuant to section 7428. The issue for decision is whether the petitioner has established that it will operate exclusively for one or more exempt purposes within the meaning of section 501(c)(3).This case was submitted fully stipulated pursuant to Rule 122. Pursuant to Rule 217(b), the parties filed with this Court the administrative record relating111 to the request for a determination that petitioner qualifies as an exempt organization. The facts in the administrative record are assumed to be true for purposes of this proceeding. The record shows that petitioner has exhausted its administrative remedies.Petitioner was incorporated on May 29, 1981, under the laws of the State of Montana. At the time the petition was filed, petitioner's registered office was located in Ennis, Mont.Petitioner described on its application for recognition of exemption (Form 1023) its planned activities as follows:216 * * * to be a vehicle to provide for the encouragement, provision and promotion of education; denominational, interdenominational and nondenominational religious training and philosophy; studies of the sciences; and the administration and provisions of charity and charitable programs.These activities will be carried out with a minimum of administrative expenses to insure the greatest possible furtherance of the educational objectives.Petitioner plans to commence its activities at the time tax-exempt status is secured.When asked on the Form 1023 to describe what benefits, services, or products it will provide, petitioner112 answered: "Supporting charitable, religious, scientific, literary or other educational endeavors by funding individuals or organizations." Petitioner indicated on its application that it will provide scholarship benefits and student aid. When asked to describe the terms and conditions, petitioner stated:Prior to the grant of any benefits or aid, terms and conditions will be established in conformity with applicable statutes and regulations. If appropriate, advance approval of such guidelines and procedures will be obtained from the I.R.S.The number of grants that petitioner anticipates making is unknown. When responding to the question on the Form 1023 to describe the procedure for supervising its grants, petitioner stated: "Upon granting of scholarships, appropriate procedures for obtaining information regarding performance under the grant will be established." No financial data was supplied with the application. Petitioner indicated that it has no assets. One hundred percent of the financial support will be donations. No solicitations are planned. No fundraising program exists or is planned.Respondent requested further information from petitioner on December 1, 1981, 113 including a detailed explanation as to how petitioner planned to accomplish its objectives and how petitioner planned to secure donations. Petitioner responded on January 5, 1982, that:The organization plans to accomplish its objectives through grants for purposes appropriate to, and in conformity with, a tax exempt organization as defined by the Internal Revenue Codes. It may do so through grants, scholarships, and conceivably could operate a charitable program. Additionally, however, it will operate through outright grants. It does not intend to engage in "charitable programs" as that term is used in connection with 217 many tax exempt organizations, the programs of which operate on a "trickle down" theory.Petitioner stated that the donations to be received by the corporation will be from its organizers, their friends, associates, and others "interested in the entirety of a contribution reaching its appropriate and legitimate object." There are no fliers, news articles, or letters soliciting donations nor are any planned.It is anticipated that scholarships will be given including, but not limited to, those going into ministry. Scholarships will be based upon financial114 need as well as excellence of attainment. When asked to furnish a copy of a scholarship application, petitioner responded:We have no scholarship applications at the present time. The preferred method of operation would to [sic] be to utilize supervisory personnel in secondary schools and ministers of congregations to determine those individuals who are capable of great attainment in the service of their fellow man, but who are unable to reach their goals because of financial limitations.By letter dated January 28, 1982, respondent requested from petitioner more detailed information regarding its proposed activities and the administration of its grant program as well as a proposed budget for 3 years, reflecting anticipated income and expenditures.Specifically in response to a request to describe in detail and, if possible, to give specific examples of how it planned to serve as a vehicle "to provide for the encouragement, provision and promotion of education," petitioner responded by letter dated February 15, 1982:The Corporation will provide counseling and financial assistance in the acquisition and provision of education to individuals handicapped by lack of funds or status, 115 all in accordance with applicable statutes and regulations in the Internal Revenue Code.Petitioner's assistance will not be limited to a particular race or religious belief.Petitioner stated that no specific number or amount of grants are planned to be awarded in any year. Petitioner has not made any calculations as to the number of persons eligible to receive scholarships during the next 2 years, such a 218 determination being speculative in petitioner's view. When asked for a description of procedures for insuring that grantees had complied with the purpose of the grant, petitioner stated: "Determination of the grantees reporting procedure would be on an ad hoc basis, and sufficient to insure a matter of control and prevent any possible misuse of funds." When asked to indicate the objective criteria used to select a recipient, petitioner responded:The primary objective criteria in selecting a recipient is that he is in no way connected with any member of the Corporation or any donor to it. The objective criteria will be inability of the individual receiving the grant to otherwise receive education or appropriate charitable benefits without assistance, and at the 116 same time possess sufficient competency to engage in the prospective activity.Petitioner has not formulated any budgets, stating that all of those involved with the corporation are working without remuneration and plan to continue to do so. There will be no receipts or expenditures until tax-exempt status is obtained. Petitioner plans to acquire no assets or liabilities but rather plans to utilize donations of time, equipment, etc.Petitioner concluded by saying that:In short, it is the desire and sole intention of the organizers and of the corporation itself to provide for education and charity without any diminution by reason of perquisites and consideration given, paid or allowed to any member of the Corporation or anyone connected with it.Respondent issued an initial adverse ruling on petitioner's application on March 19, 1982, concluding that because petitioner had not described in detail its proposed activities, petitioner had failed to establish that it was organized and operated exclusively for tax-exempt purposes. After petitioner filed a protest, the final adverse ruling as to petitioner's exempt status under section 501(c)(3) was issued on August 6, 1982. This ruling117 was made for the following reasons:You have failed to establish that you will be operated exclusively for exempt purposes as required by section 501(c)(3) of the Code. You have failed to establish that no part of your net earnings will inure to the benefit of private individuals. You have failed to establish that you will serve public rather than private interests.219 Pursuant to section 501(a), an organization described in section 501(c)(3) shall be exempt from Federal taxation. An organization will qualify under section 501(c)(3) if three requirements are satisfied: (1)It is organized and operated exclusively for exempt purposes; (2) no part of its net earnings inures to the benefit of any private shareholder or individual; and (3) it devotes no substantial part of its activities to political or lobbying activity. If petitioner fails to meet any one of these three requirements, it will not qualify for tax-exempt status. Western Catholic Church v. Commissioner, 73 T.C. 196">73 T.C. 196, 207 (1979), affd. 631 F.2d 736">631 F.2d 736 (7th Cir. 1980). Hancock Academy of Savannah, Inc. v. Commissioner, 69 T.C. 488">69 T.C. 488, 492 (1977).118 Respondent in the final adverse ruling determined, inter alia, that petitioner did not satisfy the first requirement, in that petitioner failed to establish that it will be operated exclusively for exempt purposes. The burden of proof is on the petitioner to establish that respondent's determination is erroneous. Hancock Academy of Savannah, Inc. v. Commissioner, supra; Rule 217(c) (2) (i).Petitioner maintains that the administrative record demonstrates it will operate exclusively for exempt purposes. Respondent contends that petitioner's description of its proposed activities is not adequate to make an objective determination as to whether petitioner will in fact operate exclusively in furtherance of exempt purposes. For the reasons discussed below, we agree with the respondent.Petitioner has not begun operations and does not plan to commence its activities prior to obtaining tax-exempt status. It is acknowledged that an organization may seek tax-exempt status prior to beginning operations. It must, however, describe proposed operations in sufficient detail to permit the conclusion that the organization will meet the necessary requirements of119 the exemption. See World Family Corp. v. Commissioner, 81 T.C. 958">81 T.C. 958 (1983); Dumaine Farms v. Commissioner, 73 T.C. 650">73 T.C. 650 (1980). 2 Without adequate information, the denial of exemption is warranted. Church in Boston v. Commissioner, 71 T.C. 102">71 T.C. 102 (1978); General Conference of the Free Church of America v. Commissioner, 71 T.C. 920 (1979).220 In its application and subsequent submissions in response to respondent's requests for information, petitioner merely has made statements as to its intended purposes without supplying any concrete information as to how it proposes to carry out those purposes. Petitioner has no fundraising program, and no solicitations are planned. Petitioner intends to receive its financial support from120 donations from organizers, their friends, and others that are interested, yet petitioner has supplied no estimate of anticipated income.Petitioner has indicated that it will provide grants and scholarships. Petitioner has not determined the number of grants that will be given in any year or the amounts that will be provided. Petitioner has stated that the primary criteria for selecting a recipient is that he is in no way connected with any member of the organization. Petitioner has also indicated that recipients would be chosen on the basis of "financial need" and "excellence of attainment" but has not shown how it intends to define those broad terms. While scholarship applications might shed some light as to the criteria petitioner proposes to use, petitioner does not have any such applications nor are any contemplated. Instead, petitioner intends to use "supervisory personnel in secondary schools and ministers of congregations" for the selection process, but petitioner does not indicate on what basis these persons will make the determinations.Petitioner has not established any procedures for insuring that the grants will be used for the intended purpose by the recipients. 121 On its Form 1023, petitioner stated that appropriate procedures would be established upon the granting of scholarships. It also stated that prior to any grants, terms and conditions governing their use would be established. Petitioner has not provided any details as to what those terms, conditions, and procedures will be. When asked subsequently to clarify the followup procedures which would be instituted to prevent the misuse of funds, petitioner stated that the grantee reporting procedure would be on an ad hoc basis.This Court has held that the distribution of grants must be made in an objective and nondiscriminatory manner in order to constitute an activity in furtherance of an exempt purpose. Church in Boston v. Commissioner, supra at 107. Absent disclosure of the criteria for selecting recipients and supervising 221 grants, it is impossible to determine whether petitioner will operate in an objective and nondiscriminatory manner. Failure to establish criteria for disbursements of grants creates a potential for abuse. Bethel Conservative Mennonite Church v. Commissioner, 80 T.C. 352">80 T.C. 352, 360 (1983), on appeal122 (7th Cir., July 11, 1983). While we have no reason to believe that petitioner is not sincere in its assurances that it will comply with the statute and the regulations, good intentions alone are not enough. Petitioner must supply sufficient information about its proposed activities to warrant a conclusion that it will operate in furtherance of exempt purposes. 3 Petitioner has simply provided broad, vague generalities as to how it intends to carry out its objectives. Petitioner has not furnished the number or amount of the grants to be awarded, defined the criteria for selecting recipients, or developed procedures for supervising grants. The administrative record does not demonstrate that the petitioner will operate exclusively in furtherance of an exempt purpose. Therefore, respondent's denial of petitioner's request for tax-exempt status was reasonable.Because we have found that petitioner failed to establish that it will *123 operate exclusively for exempt purposes, we need not address ourselves to the other grounds stated by respondent in the final determination letter.Our holding does not preclude the petitioner from filing a new application for exemption and developing a more complete administrative record. Houston Lawyer Referral Service, Inc. v. Commissioner, 69 T.C. 570">69 T.C. 570, 577-578 (1978). 4Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended, and all references to Rules are to the Tax Court Rules of Practice and Procedure.↩2. See also Pius XII Academy, Inc. v. Commissioner, T.C. Memo. 1982-97, affd. 711 F.2d 1058">711 F.2d 1058↩ (6th Cir. 1983).3. See Pius XII Academy, Inc. v. Commissioner, supra↩.4. See also Interneighborhood Housing Corp. v. Commissioner, T.C. Memo 1982-661">T.C. Memo. 1982-661; Pius XII Academy, Inc. v. Commissioner, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620540/	Roth Packing Co., a Corporation v. Commissioner.Roth Packing Co. v. CommissionerDocket No. 83257.United States Tax CourtT.C. Memo 1962-78; 1962 Tax Ct. Memo LEXIS 231; 21 T.C.M. (CCH) 403; T.C.M. (RIA) 62078; April 9, 1962231 Held: That the respondent did not err in disallowing as deductions amounts claimed by the petitioner as reasonable additions to its reserve for bad debts for the taxable years 1956 and 1957. Malcolm D. Young, Esq., for the petitioner. Jack Morton, Esq., for the respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, Judge: The respondent determined deficiencies in income tax for the taxable years 1956 and 1957 in the respective amounts of $9,339.16 and $2,656.36. The only issue presented is whether the respondent erred in disallowing as deductions amounts claimed by petitioner as reasonable additions to its reserve for bad debts for each of the taxable years. Findings of Fact Some of the facts are stipulated and are incorporated herein by this232 reference. The petitioner is a Nebraska corporation with its principal place of business in Glenwood, Iowa. It maintains its accounting records and files its income tax returns on an accrual method of accounting. Its Federal income tax returns for the taxable years in question were filed with the district director of internal revenue at DesMoines, Iowa. Ever since its incorporation on January 22, 1951, petitioner has been in the meat packing business. It ships meat in carload lots to various parts of the United States. Although it deals in hides and also makes some local sales of meat to local businessmen as an accommodation, these are minor portions of its business. Petitioner slaughters and ships about 40 carloads of beef a week, the shipments having an average value of about $9,500 to $11,000 and consisting of about 28,000 pounds of meat each. Its annual volume of sales is about $20,000,000.00. For the years 1956 and 1957 its gross sales, as shown by its returns, were $16,543,876.75 and $15,100,859.63, respectively. The petitioner sells to chain stores, such as A. & P., Winn-Dixie, and National Tea Company, and also to so-called "breakers" in such cities as New York, Boston, 233 and Philadelphia. "Breakers," as distinguished from chain stores, are generally small independent organizations which apparently buy in carload lots and break the shipments down into smaller portions for disposition. About 70 percent of petitioner's products is sold to breakers. The petitioner's sales to chain stores are on open account. The large chain stores usually have good credit and there is little risk exposure in selling to them. There is greater risk exposure in selling to breakers, with respect to some of whom it is difficult to obtain good credit information. As a result of serving the petitioner and other packing houses in the Omaha area, the petitioner's bank obtains information about breakers who are poor credit risks and in such cases warns the petitioner and such other packing houses. Some of the petitioner's sales to breakers are on open account, but other sales to them are made by use of an order bill of lading, in which cases payment must be made before receipt of the meat. The percentage of sales which is made by bills of lading varies considerably from time to time, depending upon economic conditions; at times only 60 or 70 percent of weekly sales to breakers234 may be by order bills of lading, while at other times such sales may be as high as 80 percent. Most sales on open account are kept open for less than one month; actually the petitioner tries to obtain payment for all sales within 7 to 10 days from the time of sale. Sales, payments for which are made after 7 to 10 days, are considered by the petitioner as slow paying accounts. In such cases the petitioner generally refuses to make further sales to those customers. In instances where meat is shipped with an order bill of lading and the buyer refuses to pay the bill and accept the meat, it is necessary for petitioner to attempt to sell the meat at whatever price it can get at the place where the meat has been shipped. This usually results in selling the meat at a lesser price, since the time taken to find the new buyer usually allows the meat to become stale and thereby worth less. In such instances the difference is treated by the petitioner on its books as adjustments to sales, rather than as bad debts. The petitioner pursued the policy of reducing its year-end accounts receivable in order to show a more favorable balance sheet by turning over some types of accounts receivable to235 its bank for collection. The bank gave petitioner credit in the amount of such accounts, subject to collection. Such accounts receivable are not assigned to the bank, and under the bank's policy the petitioner's account would be charged if collection were not effected within 15 to 17 days. However, in no instance was it ever necessary to charge the petitioner's account. At the end of 1956 and 1957 there were approximately $157,000 and $185,000, respectively, of petitioner's accounts receivable in the hands of the bank upon which the petitioner had received credit. The petitioner's aggregate outstanding accounts receivable as of the end of the years 1951 to 1957, inclusive, without reference to any accounts receivable held by the bank were: Accounts Re-Yearceivable1951$163,633.90195248,889.691953199,378.201954236,055.751955230,512.631956272,737.811957248,605.21The petitioner has, ever since its inception, maintained the reserve method of treating bad debts. An analysis of the bad debt reserve account of the petitioner for the years 1951 through 1957, is as follows: Year EndDateDebitCreditBalanceExplanation12-31-51$ 6,342.86$ 6,342.86Set up Bad Debt Reserve12-31-524,942.76Addition to Reserve12-31-52$4,835.25 16,450.37Bad debts charged-off12-31-539.796,440.58Bad debt charge-off, RalphStoddard12-31-549.79Recovery of Ralph Stoddardaccount12-31-546,909.38Addition to Reserve12-31-549,685.823,673.93Bad debt charge-off LibertyPacking Co.3- 5-5512.50Bad debt charge-off WhiteCity12-31-5512,639.89Addition to Reserve12-31-555,141.3911,159.93Adjust 1955 Bad Debt Provi-sion12-31-566,605.85 217,765.78Addition to Reserve12-31-576,000.0023,765.78Addition to Reserve236 The following is an analysis of petitioner's accounts receivable account at the end of the year 1956: BalanceWhen ObligationWhen ObligationName of Account12-31-56Arose in 1956Paid in 1957A. & P. Tea Co., Buffalo$ 6,610.2612/281/7A. & P. Tea Co., Detroit25,451.3512/24, 29, 311/7, 9A. & P. Tea Co., Mineola18,025.0212/27, 281/7A. & P. Tea Co., Bronx32,219.7812/24, 26, 291/19A. & P. Tea Co., Louisville7,565.5212/311/9A. & P. Tea Co., Maspeth30,057.6912/28, 301/11, 14A. & P. Tea Co., Hawthorne, N. Y.10,788.3812/261/14A. & P. Tea Co., Philadelphia16,905.4612/26, 281/7, 9A. & P. Tea Co., Washington, D.C.23,165.0212/19, 26, 271/10, 19A. & P. Tea Co., Newark, N.J.26,605.3812/22, 26, 271/7, 11A. & P. Tea Co., Westwood, Mass10,630.1412/311/15Al Nieto, Bronx1,770.8912/27, 291/7Government Employee Purchases129.23various dates1/15, 25Frank Guarino, Chicago182.5012/291/7Guggenheim Brothers, Chicago661.5412/24, 291/4, 10H. A. Salzman, Rock Island, Ill.685.2812/51/28Joliet Packing Co., Joliet, Ill.19,397.1612/281/7J. Krieger573.7612/271/4Mayfair Packing Co.17,043.5812/151/912/312/1Miscellaneous Sales41.6512/21/4Orleans Canning Co.862.0012/24, 291/7, 9Proctor & Gamble4,204.9212/281/4Safeway Store, Glenwood, Ia.368.9612/261/26Schroeder Feed Mill, Tabor, Ia.530.1012/291/11Sinai Kosher Sausage, Chicago748.2212/241/7Standard Meat Co., Chicago970.9712/241/9341.9012/291/14Vienna Sausage Co., Chicago851.2612/291/11Wilno Kosher Sausage, Chicago890.1512/291/11Winn-Dixie, Inc., Greenville, S.C.14,459.7412/291/7Total Accounts Receivable, 12/31/56$272,737.81237 The following is an analysis of petitioner's accounts receivable account at the end of the year 1957: BalanceWhen ObligationWhen ObligationName of Account12-31-57Arose in 1957Paid in 1958Alex Meat Specialties$ 1,859.1312/19, 27, 311/3, 18A. & P. Tea Co., Baltimore, Md.9,577.6212/261/18A. & P. Tea Co., Bronx11,589.7912/271/13A. & P. Tea Co., Detroit40,700.2412/20, 23, 301/17A. & P. Tea Co., Maspeth, N. Y.11,217.3812/211/4A. & P. Tea Co., Norfolk47,021.0312/24, 311/9, 23A. & P. Tea Co., Yeadon, Pa.34,720.4112/21, 26, 271/9A. & P. Tea Co., Washington, D.C.43,029.8012/19, 26, 271/10, 13A. & P. Tea Co., Youngstown, Ohio11,566.9912/311/9Al Nieto, Bronx4,529.7412/19, 21, 281/7Davis Market, Glenwood, Ia.409.8712/24, 311/7, 13, 14Frank Guarino2,799.9812/291/10Government Employee Purchases6.89Gaylord Market91.2012/311/13Haskell Produce, Omaha130.5412/31Hermes Drive-In, Glenwood, Ia.28.3512/231/22John Roth & Son, Omaha11.2012/27, 311/8J. Krieger, Brooklyn, N. Y.577.5112/261/4Knauss Bros., Poughkeepsie10,195.5812/171/13Midtown Packing Co., N. Y.(1,000.00)(credit)Proctor & Gamble, Cincinnati4,500.0012/311/8Payroll Deduction18.771/11Red & White, Randolph, Ia.$ 9.5212/302/4Safeway Stores, Glenwood, Ia.3,710.3711/26, 12/3, 10,11, 17, 241/4713.5912/312/3Schroeder Feed Mill, Tabor, Iowa1,041.2012/21, 24, 27, 311/6, 14, 17, 22Schukerts, Omaha400.3512/17, 18, 20, 241/3Sinai Kosher Sausage5,665.0612/26, 281/3, 13Vienna Sausage, Chicago1,804.6912/26, 281/9Wilno Kosher Sausage Co., Chicago2,491.8312/261/6General Journal entry of auditor (J-142,12/31/57), allowance against Decembersales(813.42)Total Accounts Receivable 12/31/57$248,605.21238 C. A. Buscher, who has been engaged in the meat packing business for about 36 years, has been president of the petitioner since its incorporation, and has been responsible for the petitioner's credit policies and for establishing the petitioner's policy with respect to its bad debt reserve. It was he who determined that at the end of the taxable year 1956 the bad debt reserve should be increased to $17,765.78 by the addition thereto of an amount of $6,605.85, and that at the end of the taxable year 1957 such reserve should be increased to $23,765.78 by the addition thereto of an amount of $6,000. His determination was made after personally examining the individual accounts receivable and considering the total amount of accounts outstanding, as was his custom each year, and after discussing the matter with petitioner's auditors. In determining such amount he took into consideration the fact that sales were generally in carload lots, resulting in individual accounts receivable in the approximate amount of $10,000, and the fact that he considered that there was a business recession in 1956 and 1957 and that the risk would be greater if such recession should continue. As shown in the239 above analysis of the bad debt reserve account, the petitioner charged against its reserve on December 31, 1954, as a bad debt, the amount of $9,685.82 owing from Liberty Packing Company. In 1954 such customer owed the petitioner for two loads of meat, in the approximate amount of $20,000, and had ordered a third load. Buscher was able to induce the customer to pay for one of the loads which had previously been delivered, and then refused to ship any further meat to such customer, thereby limiting the possible loss on such customer. The account receivable of Knauss Brothers in the amount of $10,195.58, shown in the list of accounts receivable as of the end of 1957, was incurred on December 17, 1957, and was paid on January 13, 1958. At December 31, 1957, Buscher was concerned about this account because it had not been paid. This customer had been slow to pay in the past. At some time not established by the record, Knauss Brothers owed the petitioner approximately $25,000, and the petitioner adopted a policy of insisting upon payment before making further shipments. Petitioner continued to ship to such customer in 1958, and as a result sustained a loss in an undisclosed amount in240 that year. In its return for the taxable year 1956 the petitioner claimed a bad debt deduction in the amount of $6,121.53, which was the amount of the addition to the reserve in that year in the amount of $6,605.85, minus an amount of $484.32 representing a partial recovery on the Liberty Packing Company account which had been charged against the reserve in 1954. In the notice of deficiency the respondent determined that any addition to the reserve for the taxable year 1956 was unreasonable. He therefore disallowed the amount claimed by the petitioner as a deduction for that year. However, instead of disallowing the amount of $6,121.53 which the petitioner had actually deducted in its return, the respondent disallowed the amount of $6,605.85 which the petitioner had added to the reserve for bad debts. This had the effect of increasing the petitioner's reported taxable income by $484.32 more than the petitioner had deducted. In its return for the taxable year 1957 the petitioner deducted the amount of $6,000 which had been added to the reserve as of the end of the year 1957. In the notice of deficiency the respondent disallowed this claimed deduction, determining that any addition241 for 1957 was unreasonable. Neither the amounts of $6,121.53 and $6,000 claimed by the petitioner as deductions for the taxable years 1956 and 1957, respectively, nor any portions thereof, constituted reasonable additions to its reserve for bad debts for those years. Opinion The question presented is whether the respondent erred in holding that the petitioner is not entitled to deduct any amount as a reasonable addition to its reserve for bad debts for the taxable years 1956 and 1957, pursuant to section 166(c) of the Internal Revenue Code of 1954 and the regulations promulgated thereunder. 1242 Section 166(c) of the Code provides that in lieu of specific deductions for bad debts, "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." Essentially a bad debt reserve constitutes an estimate of the loss which can reasonably be expected to result from debts outstanding at the close of the taxable year. The ultimate question is whether the balance in the reserve at the end of the year is adequate to cover such expected losses. Under the reserve method the reserve is reduced by charging against it specific debts which become worthless, and is increased by crediting to it any recoveries on debts previously charged off. The taxpayer is then entitled to deduct the amount of the addition to the reserve which is necessary to bring the year-end balance to the appropriate amount. On the other hand, if such balance in the reserve is already adequate to cover the amount of the year-end accounts receivable which reasonably can be expected to become worthless, the taxpayer is not entitled to deduct an addition to the reserve. See Ira Handelman, 36 T.C. 560">36 T.C. 560, O. P. Lutz, 29 T.C. 469">29 T.C. 469,243 and R. Gsell & Co., 34 T.C. 41">34 T.C. 41 (reversed on other issues (C.A. 2), 294 F. 2d 321). In determining the amount of a reasonable addition to a reserve an important consideration is the taxpayer's past experience in collecting its accounts. However, there must also be taken into consideration the circumstances existing at the time the estimate is made, including conditions of business prosperity. Black Motor Co., 41 B.T.A. 300">41 B.T.A. 300, affd. (C.A. 6), 125 F. 2d 977, and R. Gsell & Co., supra.See also section 1.166-4 of the Income Tax Regulations.Where, as here, the respondent has, in the exercise of his discretion as provided by statute, determined that a claimed addition to a reserve is not reasonable, the burden of proof is upon the petitioner to show that the respondent has abused his discretion. Paramount Liquor Co. v. Commissioner (C.A. 8) 242 F. 2d 249, affirming a Memorandum Opinion of this Court, S. W. Coe & Co. v. Dallman, (C.A. 7) 216 F. 2d 566, Union National Bank and Trust Co. of Elgin, 26 T.C. 537">26 T.C. 537, and C. P. Ford & Co., 28 B.T.A. 156">28 B.T.A. 156.244 The petitioner contends that its additions to the reserve were reasonable since, it claims, the balance in the reserve resulting from such additions was necessary in order to cover losses which might reasonably be anticipated from its accounts outstanding as of the end of each of the taxable years 1956 and 1957. It argues that it was subject to risk of loss in relatively large amounts since customarily sales were made in carload lots at a price of approximately $10,000 per car, pointing to its experience in 1954 of finding it necessary to charge off approximately $9,700 as a bad debt resulting from the Liberty Packing Company account. It also points out that as of the end of 1957 it had on its books an account due from Knauss Brothers in the approximate amount of $10,200, about which it was concerned since that customer had previously been slow to pay. The petitioner also contends that at the end of each of the taxable years 1956 and 1957 an economic recession was in progress which must be taken into consideration in determining a reasonable estimate of losses which might be expected from the accounts receivable existing at such times. It is contended that there must be taken into245 consideration not only the amount of accounts receivable existing on the books, but also those which had been turned over to the bank for collection. We have given careful consideration to all the evidence of record, including the opinion testimony of an official of petitioner's bank, but have concluded and have found as a fact that neither the amounts of $6,121.53 and $6,000 claimed by the petitioner as deductions for the taxable years 1956 and 1957, respectively, nor any portions thereof, constitute reasonable additions to its reserve for bad debts for those years. The balance in the reserve account at December 31, 1956, prior to the addition thereto of $6,605.85, was $11,159.93. During 1956 and 1957 no bad debts were charged against the reserve. From 1951, the year of petitioner's incorporation, through 1955 the total amount of bad debts experienced by the petitioner was $14,049.25. The bad debts charged against the reserve during those years were relatively small, except for the Liberty Packing Company debt. It seems clear, therefore, that the petitioner's past history would not justify the deduction of any additions to its reserve. The balance of $11,159.93 would appear to246 be adequate to cover any losses which might reasonably be expected upon the basis of petitioner's experience. (Such balance should, of course, be increased by the recovery in 1956 of $484.32 on the Liberty Packing Company account which had been charged off in 1954.) We also note that of the accounts receivable of $272,737.81 and $248,605.21 shown on the petitioner's books as of the end of the taxable years 1956 and 1957, respectively, $222,852.70 (about 82 percent) and $213,847.22 (about 86 percent), respectively, represented accounts receivable due from chain stores, which the evidence establishes were good credit risks. The record does not show the details as to the accounts receivable held by the bank at the end of the taxable years 1956 and 1957, in the respective amounts of $157,000 and approximately $185,000. Buscher's testimony indicates that they may have consisted, at least in part, of chain store accounts, and it may be that they included some accounts arising out of sales made upon order bills of lading. In any event, the record shows that in no instance had the bank ever found it necessary to charge the petitioner's account because of failure to collect any accounts turned247 over to it. It would thus appear that the accounts which might have been considered as subjecting the petitioner to risk of loss would be the remaining accounts receivable shown on its books as of the end of the taxable years 1956 and 1957, in the respective amounts of approximately $50,000 and approximately $35,000. Of these remaining accounts, it is to be noted that there were only two relatively large ones in 1956 and one in 1957. Although Buscher testified that he examined all the accounts outstanding at the end of each year, the only one as to which he specifically stated that he had any concern was the account of Kanuss Brothers in the amount of $10,195.58 outstanding at the end of 1957. He stated that his concern with respect to that account was due to the fact that that customer had been slow to pay and that it was necessary to limit sales to Knauss as he had in the case of the account of Liberty Packing Company in 1954. Even though there may have been some reasonable question as to the Knauss account, it is obvious that even if it were considered as uncollectible in full, the reserve in the amount of $11,159.93 would be sufficient to cover such anticipated loss. Buscher248 testified, in effect, that in 1956 and 1957 there was a minor business recession and that the risk would be greater if the trend should continue. 2 Such testimony, however, is not sufficient, in our opinion, to establish that conditions were such as to reasonably lead to the belief that they would have any substantial effect upon the collection of the particular accounts outstanding as of the end of the years in question, In this connection it may be stated that the effect any recession might have upon accounts receivable subsequently arising would have no bearing upon the determination of the reserve contemplated by the Code. See S. W. Coe & Co. v. Dallman, supra.Upon a consideration of the whole record, we cannot conclude that the petitioner has shown that there249 was an abuse by the respondent of his discretion in determining that petitioner was not entitled to deduct any addition to its reserve for bad debts in the years in question. Indeed, the stipulated facts show that all the accounts outstanding at the end of each of the years 1956 and 1957 were paid - practically all of them in January following the close of the year. The Knauss account, which arose on December 17, 1957, was paid on January 13, 1958. These facts corroborate the reasonableness of the respondent's determination. Paramount Liquor Co. v. Commissioner, supra, and Black Motor Co., supra. The petitioner has made much of the fact that at the hearing counsel for the respondent stated that the respondent had computed, under the formula set forth in Black Motor Co., supra, total reserve requirements for the petitioner as of December 31, 1956 and December 31, 1957, in the respective amounts of $2,843.08 and $2,809.24. We find it unnecessary to here determine precisely what balance would be appropriate in the bad debt reserve account as of those dates. Suffice it to say that we are of the opinion that the reserve was adequate without any250 additions and that consequently the petitioner is not entitled to deduct any additions to the reserve for such years. In view of the foregoing, we approve the respondent's determination except to the extent that he disallowed for the taxable year 1956 a greater deduction than that actually taken by the petitioner in its return for that year. Decision will be entered under Rule 50. Footnotes1. Uncollectible Accounts Receivable written-off by petitioner 12-31-52: Colonial Provisions$ 429.46Fairway Meat1,317.76Guggenheim700.36Harris Beef Co.1,438.64B. Anderson3.98North River498.96White House Beef446.09$4,835.25Buscher testified as follows: Well, in '56 and '57, I think more or less that we had a little condition that looked like we were going to go downhill a little bit, in fact, it was what you call a recession, and, of course, the gamble would be bigger if this would continue on. Taking it up with our auditors, we felt that it was right and fitting and proper that we enhance this to protect ourselves.2↩ In 1956, petitioner received a bad debt recovery of $484.32 on the 1954 Liberty Packing Company charge-off. The amount of $484.32 was credited directly to bad debt expense. After debiting bad debt expense in 1956 for $6,605.85 for the increase to the bad debt reserve account, a net bad debt deduction of $6,121.53 resulted as shown on petitioner's 1956 income tax return.1. Section 166 of the Internal Revenue Code of 1954 provides in part: 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. § 1.166-4 of the Income Tax Regulations provides in part: § 1.166-4 Reserve for bad debts. (a) Allowance for deduction. A taxpayer who has established the reserve method of treating bad debts and has maintained proper reserve accounts for bad debts or who, in accordance with paragraph (b) of § 1.166-1, adopts the reserve method of treating bad debts may deduct from gross income a reasonable addition to a reserve for bad debts in lieu of deducting specific bad debt items. (b) Reasonableness of addition to reserve - (1) Relevant factors. What constitutes a reasonable addition to a reserve for bad debts shall be determined in the light of the facts existing at the close of the taxable year of the proposed addition. The reasonableness of the addition will vary as between classes of business and with conditions of business prosperity. It will depend primarily upon the total amount of debts outstanding as of the close of the taxable year, including those arising currently as well as those arising in prior taxable years, and the total amount of the existing reserve. (2) Correction of errors in prior estimates. In the event that subsequent realizations upon outstanding debts prove to be more or less than estimated at the time of the creation of the existing reserve, the amount of the excess or inadequacy in the existing reserve shall be reflected in the determination of the reasonable addition necessary in the current taxable year.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620541/	DOUGLAS L. HOPPES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHoppes v. CommissionerDocket No. 18883-87.United States Tax CourtT.C. Memo 1989-228; 1989 Tax Ct. Memo LEXIS 228; 57 T.C.M. (CCH) 366; T.C.M. (RIA) 89228; May 11, 1989. R. Brent Young, for the petitioner. Deborah H. Delgado, for the respondent. TANNENWALDMEMORANDUM OPINION TANNENWALD, Judge: Respondent determined a deficiency of $ 11,045.00 in petitioner's Federal income and an addition to tax of $ 542.00 pursuant to section 6651(a)(1) 1 for the taxable year 1982. Since petitioner does not dispute the addition to tax, the issue for decision is whether petitioner was a qualified individual under section 911(a) during 1982. 230 All of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by reference. Petitioner resided in Kimball, Nebraska, at the time of the filing of his petition. He untimely filed an individual Federal income tax return for 1982. In 1982, petitioner was employed by Sedco Dhabi, Ltd. (Sedco), as a driller and was stationed in the United Arab Emirates. Petitioner's work schedule consisted of alternate 28- day periods of work and rest. At the time petitioner began his employment with Sedco, on June 17, 1980, it was for an indefinite period. Petitioner terminated his employment with Sedco on September 11, 1982, and returned to the United States shortly thereafter. Petitioner possessed a resident visa issued on August 16, 1980, by the United Arab Emirates, which Sedco assisted him in obtaining. Upon accepting employment abroad, petitioner left what little personal belongings he had with relatives in the United States. Sedco provided petitioner with temporary living quarters at his work site in 1982. Petitioner leased an apartment in Magalluf (Mallorca), Spain, from April 1, 1982, until February 28, 1983. During 1982, petitioner231 was physically present in the following locations on the following dates: United StatesJanuary 4 through January 29September 17 through December 31Mallorca, SpainFebruary 28 through March 26April 25 through May 21June 20 through July 15August 16 through September 10London, EnglandSeptember 10 through September 17Abu Dhabi,January 1 through January 3United Arab EmiratesJanuary 30 through February 27March 27 through April 24May 22 through June 19July 16 through August 15During 1982, petitioner did not speak the native language of the United Arab Emirates, did not visit any natives of the United Arab Emirates in their homes, nor did he date any native of the United Arab Emirates during this time. On July 15, 1983, petitioner married Dawn Appleton, a citizen of the United Kingdom. Petitioner met his wife in Spain in July 1982, and prior to their meeting, petitioner dated several women of differing nationalities. Since 1977, petitioner has at all times maintained a bank account at a bank in Kimball, Nebraska. During 1982, he also maintained a bank account in Mallorca, Spain, to facilitate the depositing of checks232 drawn on his U.S. bank account and to make funds available. Petitioner paid no foreign income taxes in 1982. He was not registered to vote in the United Arab Emirates, Spain, or in the United States prior to his registration in Nebraska in 1984. He did not have a United Arab Emirates driver's license. A qualified individual may elect to have his foreign earned income excluded from gross income. Sec. 911(a). A qualified individual is one who has a tax home in a foreign country and who is (1) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country for an uninterrupted period which includes an entire year (bona fide residence test), section 911(d)(1)(A), or (2) a citizen or resident of the United States and who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months (physical presence test), section 911(d)(1)(B). Petitioner made an election on his 1982 Federal income tax return to exclude his foreign earned income under the bona fide residence test, claiming to be a resident of Abu Dhabi, United Arab Emirates. He does not claim to satisfy233 the requirements of the physical presence test. Similarly, although there are indications in the record that petitioner returned to the United States for a short period in 1981, respondent has made no contention that, if we hold that petitioner was a bona fide resident of the United Arab Emirates, he has not satisfied the entire taxable year requirement of section 911(d)(1)(A). Nor has respondent contended that petitioner has not satisfied the tax-home requirement of that section. 2 Thus, the sole issue before us is whether petitioner was a bona fide resident of the United Arab Emirates. The determination of whether a United States citizen is a bona fide resident of a foreign country is primarily a factual234 question requiring an analysis of all relevant facts and circumstances. Dawson v. Commissioner,59 T.C. 264">59 T.C. 264, 268 (1972). A taxpayer must produce strong proof to establish bona fide residency in a foreign country.3Schoneberger v. Commissioner,74 T.C. 1016">74 T.C. 1016, 1024 (1980); Rule 142(a). This requirement of a higher than normal standard of proof, i.e., preponderance of the evidence, is consistent with the legislative history reflecting the intent of Congress to infuse a restrictiveness into the interpretation of section 911. See Schoneberger v. Commissioner, supra at 1024 n.7. Moreover, the test is one of bona fide residence in a foreign country as opposed to nonresidence in the United States. Estate of Roodner v. Commissioner,64 T.C. 680">64 T.C. 680, 683 (1975). To the extent feasible, the applicable principles are those of section 871 and the regulations thereunder which relate to the determination of residence of an alien individual in the United States. Schoneberger v. Commissioner, supra at 1023;235 sections 1.871-2(b), 1.911-2(c), Income Tax Regs. However, the section 911 test is not simply an unqualified mirror image of section 871. Indeed, as we have previously observed in Nelson v. Commissioner,30 T.C. 1151">30 T.C. 1151, 1154 (1958), "it is quite possible that an alien may be found to be a resident of the United States while a citizen may be found not to have been a resident of a foreign country or countries, under very similar facts, the ultimate result in both cases consisting of the denial of a special benefit, i.e., exemption from income tax, not clearly shown to be applicable." Thus, resolution of the bona fide residence issue "is peculiarly related to the facts in any given case." See Sochurek v. Commissioner,300 F.2d 34">300 F.2d 34, 37 (7th Cir. 1962), revg. 36 T.C. 131">36 T.C. 131 (1961). In Dawson v. Commissioner, supra at 268 n. 4, we adopted the list of factors as set forth in Sochurek v. Commissioner,300 F.2d at 38, considered to be relevant in determining whether a person is a bona fide resident of a foreign country. While all such factors may not be present in every situation, those appropriate should be properly236 considered and weighed. Sochurek v. Commissioner,300 F.2d at 38. Petitioner made no effort to participate in the activities of his chosen community on social and cultural levels, to identify with the daily lives of the people, to learn the language of the region, or generally to become assimilated into the foreign environment. We realize that assimilation into the foreign environment is not a prerequisite to attaining the status of bona fide residency. Nevertheless, evidence of assimilation is extremely important in foreign residency cases where reliable, objective evidence of the taxpayer's intentions with respect to the nature and duration of his stay is often difficult to ascertain. 4 We are not unaware of the fact that the parties have stipulated that "petitioner was inhibited from assimilating into the local culture by the barriers of language." But this element (which petitioner did not seek to alleviate) is not sufficient to overcome the absence of the above-mentioned elements or those hereinafter discussed. 237 Petitioner's nonpayment of foreign income taxes is another factor militating against his being a bona fide resident of the United Arab Emirates. Schoneberger v. Commissioner,74 T.C. at 1028. Indeed, as far as the record herein discloses, petitioner paid no taxes to the United Arab Emirates. Moreover, the fact that petitioner was not physically present in the United Arab Emirates for a large part of 1982 cannot be ignored. That he had a resident visa from the United Arab Emirates is not determinative. Schoneberger v. Commissioner,74 T.C. at 1027. Also, the facts that petitioner had a one-year lease of an apartment and maintained a checking account in Spain do not lead to a conclusion that he was a bona fide resident of the United Arab Emirates. 5The facts that, during the period in question, petitioner had very few personal effects in the United States, that he was not registered to vote in the United States, and that he was single and left no spouse in the United States do not persuade us that he was a bona fide resident of the United Arab*238 Emirates. As we have previously pointed out, see page 5, supra, the test is not nonresidence in the United States but bona fide residence in a foreign country. In short, petitioner has not carried his burden of showing by strong proof that he was a bona fide resident of the United Arab Emirates during the year in issue. In reaching this conclusion, we recognize that we have reached the opposite conclusion in other seemingly parallel cases. E.g., Schoneberger v. Commissioner, supra.But this result stems from the fact that each case involving the issue of bona fide residency in a foreign country is sui generis and requires us to draw a line, a necessary element in the daily grist of judicial life. Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code 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. Other cases involving taxpayers in situations comparable to that of petitioner have been decided on the issue of "tax home" as defined in sec. 911(d)(3). E.g., Lemay v. Commissioner,837 F.2d 681">837 F.2d 681 (5th Cir. 1988), affg. T. C. Memo. 1987-356; Benham v. Commissioner,T. C. Memo. 1989-215; Bujol v. Commissioner,T.C. Memo. 1987-230, affd. in an unpublished order 842 F.2d 328">842 F.2d 328↩ (5th Cir. 1988).3. That this case is fully stipulated does not lessen that burden. Reinhardt v. Commissioner,85 T.C. 511">85 T.C. 511, 516↩ n.6 (1985).4. See Croyle v. Commissioner,T. C. Memo. 1980-501. Compare Brueck v. United States,228 F. Supp. 112">228 F. Supp. 112↩ (N.D. Ind. 1963).5. These elements would be relevant if petitioner claimed he was a bona fide resident of Spain.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620542/	EASTERN BUILDING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Eastern Bldg. Corp. v. CommissionerDocket No. 101222.United States Board of Tax Appeals45 B.T.A. 188; 1941 BTA LEXIS 1163; September 25, 1941, Promulgated 1163 1. By contract petitioner was obligated to pay certain sums periodically to sinking fund trustees in order to meet interest and retirement requirements under a bond issue. The contract did not, directly or indirectly, require the payments to be made from annual gross income. Held, contract did not expressly deal with earnings and profits of the taxable year and petitioner is not entitled to credit for payments made thereunder pursuant to section 26(c)(2), Act of 1936. 2. Petitioner in the taxable year purchased certain of its bonds at a discount. In the following year it disposed of these bonds by transferring them to the sinking fund as part of its required sinking fund payments, receiving a credit of the face amount thereof. Held, petitioner thereby received income in the taxable year. Joseph B. Miller, Esq., for the petitioner. John R. Wheeler, Esq., for the respondent. KERN 188 This proceeding involves income and excess profits tax liability for the calendar year 1936. The Commissioner has determined a dein income tax for the calendar year 1936. The Board adopts the 189 tax in the amount of $140.08. Petitioner1164 claims a refund in the amount of $6,767.64 based on its failure to take a deduction to which it claims it is entitled. The total amount in controversy is thus $7,582. Petitioner filed its Federal income and excess profits tax returns for 1936 with the collector of internal revenue for the second district of New York. There are two questions involved in the present controversy: (1) Whether for the purpose of computing the surtax on undistributed profits petitioner is entitled to a credit for $89,500 paid into a sinking fund as an amount which is required by contract to be paid or irrevocably set aside under the terms of a written contract within the year in discharge of a debt within the meaning of section 26(c)(2) of the Revenue Act of 1936. (2) Whether the discount at which petitioner in 1936 purchased its own bonds, which were disposed of for face value in 1937, is taxable income of the petitioner in 1936, the year petitioner bought them in. FINDINGS OF FACT. The Eastern Building Corporation, petitioner herein, is a corporation organized in February 1921 under the laws of the State of New York. It was a realty corporation, whose principal asset consisted of a United1165 States Post Office building on Varick Street in New York City. Petitioner's income was derived substantially from rentals under a lease of that building. On August 1, 1924, petitioner executed an "Indenture of Trust Mortgage" with the Irving Bank-Columbia Trust Co., as trustee, under which an original issue of bonds in the principal amount of $2,000,000 was made. Inter alia, the indenture provided for the establishment of a sinking fund and the annual deposit therein of certain sums of money for the retirement of the bonds and interest thereon. The language of the indenture is as follows: SECTION 4. The Corporation further covenants that in order to provide for the retirement of bonds of the said initial issue from time to time outstanding hereunder prior to their expressed maturity, and for the payment of interest on such bonds, it will establish an interest and sinking fund, and will deposit therein the several amounts to be computed in the manner and used for the purposes in this section provided. The Corporation further covenants that it will deposit with the Trustee during each twelve (12) months period, from but not including August 1, 1924, to and including1166 August 1, 1926, one hundred fifty thousand dollars ($150,000), during each twelve (12) months period from but not including August 1, 1926, to and including August 1, 1938, one hundred sixty-five thousand dollars ($165,000), during each twelve (12) months period from but not including August 1, 1938, to and including August 1, 1940, one hundred seventy thousand dollars ($170,000), and during the six (6) months period from but not including August 190 1, 1940, to and including February 1, 1941, eighty-five thousand dollars ($85,000). One fourth part of the amount so to be deposited during each such twelve (12) months period, and one half part of the amount so to be deposited in the said six (6) months period, less in each case an amount equal to three (3) months' interest on all bonds of the said issue at the time outstanding, shall be deposited with the Trustee on each first day of November and of May occurring in each such period, and one fourth part of the amount so to be deposited during each such twelve (12) months period, and one half part of the amount so to be deposited in the said six (6) months period, plus in each case the amount deducted in determining the amount1167 of the last preceding deposit, shall be deposited with the Trustee on each twenty-fifth day of January and of July occurring in each such period. The amount deposited in such fund on each first day of November and of May shall be in cash and/or bonds of the said initial issue at par value. Of the amount deposited upon each twenty-fifth day of January and of July, an amount equal to the amount of interest next maturing on bonds of the said initial issue at the time outstanding shall be in cash, and the balance may be in cash and/or bonds of the said initial issue at par value. Any cash at any time on deposit in the said sinking fund, except only such portion of the deposits herein provided to be made on the twenty-fifth day of January and of July of each year as shall equal the interest next maturing on bonds of the said initial issue at the time outstanding (which amount shall be by the Trustee retained and applied to the payment of such interest as herein provided) shall be available upon the order of the Corporation for the purchase of bonds of the said initial issue at the time outstanding, at prices not in excess of the price or value whereat such bonds may at the next ensuing1168 interest payment date be redeemed through the operation of the said sinking fund, and pursuant to the terms of the said bonds; provided, however, that if there be on any day sixty-five (65) days preceding any date whereon interest is payable on bonds of said initial issue on deposit in the said sinking fund cash funds equal to or in excess of fifteen thousand dollars ($15,000) available, under the provisions of this paragraph, for the purchase of bonds, all such funds so on deposit and available shall be by the Trustee exhausted, as nearly as may be, in the redemption of bonds of the said issue on the then next ensuing interest payment date as provided in the said bonds in respect of redemption through the operation of the said sinking fund; and for the purpose of effecting such redemption the Trustee is hereby authorized and directed by lot to select bonds of the said issue in principal amount aggregating, as nearly as may be, the amount of cash so on deposit and available, and to publish notice of redemption of bonds so selected, in the manner provided in article five of this indenture, and upon selection of bonds for redemption the availability of funds appropriated to such redemption, 1169 for purchase of bonds shall cease. The Trustee shall on each successive day whereon interest matures on bonds of the said initial issue, out of funds on deposit with it in the said interest and sinking fund, make payment of such interest in like manner as the Corporation herein covenants to do, if there be in the said fund monies sufficient thereunto. During 1936 petitioner paid to the sinking fund trustee $89,677.50, consisting of cash and bonds issued under the indenture and surrendered in lieu of cash at their face value. Of this sum $89,500 was used for the purchase, retirement, and cancellation of outstanding bonds. 191 Attached to the income tax return of petitioner for 1936 was a rider claiming that, although no credit was taken for the $89,500 paid to the sinking fund in 1936, in computing the surtax on undistributed profits, the petitioner was entitled to a credit therefor under the provisions of section 26(c)(2) of the Revenue Act of 1936. In the year 1936 petitioner bought in some of its own bonds in the face amount of $34,000, paying therefor $31,039.50. These bonds were shown on the balance sheet of petitioner as of December 31, 1936, as an investment1170 and were carried at $31,039.50, the purchase price. The interest on these bonds was collected and credited to income account in 1936. Petitioner disposed of these bonds in 1937 by transferring them to the sinking fund as part of the required annual payment. Petitioner was credited with the face value of the bonds. No accounting of any income attributable to this purchase of its own bonds at a discount was made by petitioner in its 1936 return. The gain thereon was reported in its return for 1937, the year in which the bonds were disposed of. Respondent included in taxable income for 1936 a profit of $2,334.64, arrived at by deducting the purchase price of such bonds in the sum of $31,039.50 from the face amount of $34,000 of such bonds, less unamortized discount of $625.86. As of December 31, 1935, petitioner's balance sheet showed a surplus of $264,799.40 and undivided profits in the amount of $59,381.68, totaling $324,181.08. As of December 31, 1936, petitioner's balance sheet showed a surplus of $264,799.40 and undivided profits in the amount of $100,271.81, totaling $365,071.21. The undivided profits as of December 31, 1935, are included in the $100,271.81 figure1171 for December 31, 1936. Cash dividends of $63,150 were paid in 1936. OPINION. KERN: The first question presented by this proceeding is whether, for the purpose of computing the surtax on undistributed profits, petitioner is entitled to a credit for certain sums paid to a sinking fund pursuant to a trust indenture for the retirement of bonds. The applicable statute is section 26(c)(2) of the Revenue Act of 1936, set out in the margin. 11172 192 The facts in the instant case disclose a debt which arose when the bonds were issued. The indenture of trust, which is a written contract executed by the corporation prior to May 1, 1936, required that a certain sum of money be irrevocably set aside within the taxable year in discharge of that debt. And, as we said in , the fact that the petitioner had the option of redeeming the bonds or purchasing them does not affect the result. Our ultimate question, therefore, narrows down to an issue similar to one involved in the Michigan Silica Co. case, i.e., whether the provision of the trust indenture requiring the depositing of sums certain in the sinking fund "expressly deals with the disposition of earnings and profits of the taxable year." In the cited case, under somewhat different facts, we concluded that it did; here we reach the opposite conclusion. Regardless of whether petitioner realized any earnings and profits in the taxable year, the regular annual payment was still required by the indenture of trust. Without earnings, petitioner would have had to resort to some other manner of obtaining the necessary1173 funds. This could have been done by applying accumulated surplus, if any, by the sale of assets, by issuing additional stocks or bonds, or by any other method of borrowing. Since the indenture does not require the payments to be from current earnings and profits or to be measured by current earnings and profits, it becomes immaterial whether the payments actually were out of earnings and profits of the taxable year. Provisions granting special exemptions are to be strictly construed. . The three decisions which petitioner relies upon, ; ; and , are all readily distinguishable. As was pointed out by the Board in the latter case, the terms "earnings and profits of the taxable year" do not have to be written into the contract; but in all three of those cases the Board said that there must be some provision in the contract which, when read in the light of reason, expressly deals with the distribution of earnings and profits of the taxable year. Annual gross receipts1174 were referred to in the contracts in each of those cases, and we held that gross receipts necessarily included earnings and profits. We do not have a similar state of facts in the instant case, for neither annual gross receipts nor any specific 193 receipts are mentioned in the indenture; and therein lies the distinction. The second and sole remaining issue for our determination is whether the discount at which petitioner in 1936 purchased its own bonds, which were disposed of for face value in 1937, is taxable income of the petitioner in 1936 or, as the petitioner contends, in the later year of disposition. It appears that the sole purpose of the purchase of the bonds in 1936 was to have them on hand for deposit in the sinking fund at a later date at their face value. By this procedure the petitioner actually realized a profit between what it paid for the bonds and their face value. Petitioner claims that the purchase of the bonds was a transaction entered into for profit and that, consequently, no income was realized until petitioner disposed of the bonds. The actions of petitioner point to the inescapable conclusion that they were purchased for retirement. However, 1175 its purpose in purchasing its own bonds is immaterial. As we said in (affd., ): * * The purchase of the bonds by the petitioner constituted such a closed transaction as gives rise to recognizable gain or loss under the revenue act. The fact that the petitioner had such bonds available for resale is not controlling. Such a resale would be an entirely new transaction. See also . On this issue we hold for respondent. Decision will be entered for the respondent.Footnotes1. SEC. 26. CREDITS OF CORPORATIONS. In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax - * * * (c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS. - * * * (2) DISPOSITION OF PROFITS OF TAXABLE YEAR. - An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purpose of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word "debt" does not include a debt incurred after April 30, 1936. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620543/	POLICYHOLDER'S NATIONAL LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Policyholder's Nat'l Life Ins. Co. v. CommissionerDocket No. 83875.United States Board of Tax Appeals37 B.T.A. 60; 1938 BTA LEXIS 1086; January 14, 1938, Promulgated 1086 Interest paid by the petitioner on "founder's certificates", the payment of which was not obligatory, held, not to be interest paid upon indebtedness and, hence, not deductible from gross income. Holton Davenport for the petitioner. Gerald W. Brooks, Esq., for the respondent. SMITH60 This is a proceeding for the redetermination of a deficiency in income tax for 1933 in the amount of $329.55. The question in issue is the right of the petitioner to deduct $2,564.16 from its gross income of 1933 which was paid to the holders of its founder's certificates. FINDINGS OF FACT. The petitioner is a mutual life insurance company, organized and existing under the laws of the State of South Dakota and having its principal place of business at Sioux Falls, South Dakota. It was organized in 1919. At the time of organization it was understood that at a later date it would be changed to a stock company. In 1926 the plan was changed to one which has been followed ever since. The company issues four ordinary forms of life insurance policies, 61 namely, ordinary life, twenty-payment life, twenty-year child's policy, and twenty-year endowment. 1087 All policies contain a special five-year endowment feature as follows: POLICYHOLDER'S NATIONAL LIFE INSURANCE COMPANYSioux Falls, South Dakota. The coupon attached to this Policy which becomes due and payable upon the payment of the 6th annual premium on this policy or upon the previous death of the Insured, will be, when due, either paid to the Insured (or to the Beneficiary in event it becomes payable by the death of the Insured) in cash; or if so requested in writing by the Insured at the time of the application for this Policy may be applied to the purchase of a FOUNDER'S CERTIFICATE. In accordance with the agreement contained in the application for this policy, the amount of all FOUNDER'S CERTIFICATES shall be carried as a separate and distinct liability and whenever the amount of such CERTIFICATES outstanding shall equal $100,000 the DIRECTORS shall take the necessary action to change the Company to a STOCK COMPANY and STOCK in the said company will be issued in exchange for all FOUNDER'S CERTIFICATES and of an equivalent Par Value. Until such time as the change to a STOCK basis shall be made the BOARD OF DIRECTORS may at their discretion pay interest on all outstanding1088 FOUNDER'S CERTIFICATES in an amount not to exceed 6% per annum. Then follows a "Coupon" stating: COUPON POLICYHOLDER'S NATIONAL LIFE INSURANCE COMPANYagrees to pay Dollars to the Insured on provided all premiums to and including the 6th shall have been paid; or, immediately on receipt of due proof of the prior death of the Insured to pay said sum to Beneficiary, provided this coupon has not been assigned to the purchase of a FOUNDER'S CERTIFICATE as provided above. In event the Insured elects to purchase a FOUNDER'S CERTIFICATE with the coupon, the CERTIFICATE so purchased and delivered in lieu of the above cash payment shall be for a par value of and the difference transferred to the Company's surplus for the benefit of the certificate holders. Secretary.As executed, these coupons are payable in cash in amounts equivalent to $30 for each $1,000 of insurance, but otherwise redeemable in certificates of $15 par value for each $1,000 of insurance. (Note: On policy contracts sold since 1934 or 1935, on a $30 coupon, the certificate par value has been $10). Practically all of the policyholders have elected to take founder's certificates in lieu of cash. In his1089 application for the policy the insured signs a proxy or consent 62 authorizing the change to a stock company when the par value of the certificates issued reaches $100,000. In 1926 practically all of the then policyholders converted their policies to the new plan and as the policies were dated back the petitioner commenced issuing founder's certificates at once. A founder's certificate reads as follows: FOUNDER'S CERTIFICATE POLICYHOLDER'S NATIONAL LIFE INSURANCE COMPANYNo. Amount KNOW ALL MEN BY THIS INDENTURE that is the owner of $ of the Founder's Fund of the Policyholder's National Life Insurance Company of Sioux Falls, South Dakota, and that the amount of said fund represented by this Certificate and all other Certificates of like nature will be carried by the Company as separate and distinct liability and whenever the total amount of such outstanding certificates shall equal $100,000.00, the Company agrees to amend its articles of Incorporation and transform the Company into a Stock Company by legal action of policyholders. Upon surrender of this Certificate, the owner thereof shall be entitled to stock in said Company, par value of which shall be equal1090 to the face of this certificate. No redemption of this Founder's Certificate, either inwhole or in part shall be made except as above provided. The Board of Directors, however, are authorized to pay interest on said Founder's Fund in an amount not to exceed 6% providing in their judgment the financial condition of the Company shall warrant such payment. This Founder's Certificate is issued by the Company and is negotiable and transferable. Said transfer should be duly recorded at the Home Office of the Company. IN WITNESS WHEREOF the duly authorized Officers of the Company have hereunto subscribed their names and caused the corporate seal to be hereto affixed this day of 19 President.Secretary.When a coupon matures the company transfers $30 from its surplus account and places $15 to the "Founder's Fund" and $15 to "Founder's Surplus." Upon each $30 coupon the founder's certificate is in the amount of $15. The founder's fund and founder's surplus are always equal in amount. Each increases with the conversion of a coupon. Founder's certificates outstanding are shown on the petitioner's books under the caption "Founder's Fund." The amount therein was approximately1091 $12,000 in 1929. The amount had increased to $50,332.50 in 1933, and has since risen to more than $80,000. Upon policies issued from 1934 or 1935, the division of a $30 coupon will be $10 transferred to the founder's fund and $20 to the founder's 63 surplus. Under the new arrangement the founder's surplus will increase faster than the founder's fund, but at the end of 1933 the founder's fund and the founder's surplus were equal in amount. Up to 1929 no interest, so-called, was paid on the founder's certificates. In 1929 the matter was discussed in a board of directors' meeting and, after receiving an opinion from counsel, the board of directors directed that "interest" be paid upon the founder's certificates. In 1933, $2,564.16 was paid as interest on the founder's certificates. Similar distributions have been made in each subsequent year. The amount distributed represented 6 percent on the par value of the outstanding certificates. No deduction was ever taken or claimed for income tax purposes until an actuary raised the question at the time the respondent was conducting an investigation of petitioner's income tax return for 1933. The petitioner's income tax1092 return for 1933 has attached to it a copy of the taxpayer's annual convention edition report for the year 1933, made to every state in which it is licensed to do business. In this report the $9,990 of increase in the founder's fund during the year is listed under the heading "Capital Stock." In the same report the amount here in question, namely, $2,564.16, is shown under the heading "Dividends to Policyholders." The annual report of all life insurance companies, convention edition, uses the same form for both stock insurance companies and mutual insurance companies. There is no separate form for mutual insurance companies and about the only difference is that when mutual companies fill in the form the place for "Capital Stock" is left blank. OPINION. SMITH: In section 203 of the Revenue Act of 1932 it is provided that in the case of a life insurance company the term "net income" means the gross income less certain items, among which is: (8) INTEREST. - All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after1093 September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title. The crucial question in this case is whether the $2,564.16 paid by the petitioner in 1933, representing 6 percent on the founder's certificates, was paid as interest on the petitioner's indebtedness. The petitioner points to the fact that the policy contract provided in each case that "the amount of said fund represented by this Certificate 64 and all other Certificates of like nature will be carried by the Company as separate and distinct liability" and that the founder's certificate provides that: * * The Board of Directors, however, are authorized to pay interest on said Founder's Fund in an amount not to exceed 6% providing in their judgment the financial condition of the Company shall warrant such payment. It is argued therefrom that the distribution made by the petitioner in 1933 to holders of its founder's certificates was interest paid upon its indebtedness. If it was paid on its indebtedness it is deductible from gross income; if not, it is not deductible. In 1094 ; affd. (C.C.A., 9th Cir.), , this Board stated at page 725: This question has been presented a number of times to the Board and the courts under slightly varying facts. In some cases the so-called stock was to be retired at a fixed date, ; reversed, , and in others at the option of the corporation or the stockholder, ; affd., . In some cases the interest or dividends were payable regardless of earnings, , and in others payments were to be made only out of surplus or profits, , sustaining ; ; ; affd., . None of the decided cases lay down any comprehensive rule by which the question presented may be decided in all cases, and "the decision1095 in each case turns upon the facts of that case." ; affirming ; ;. In each case it must be determined whether the real transaction was that of an investment in the corporation or a loan to it. On this the designation of the instrument issued by the corporation, while not to be ignored, is not conclusive, . The real intention of the parties is to be sought and in order to establish it evidence aliunde the contract is admissible. If the evidence establishes "that dividends paid are, according to the intent of the parties, in fact interest, and the stock on which the dividends are paid is merely held by the creditor as security, it makes no difference what the reason was for paying in that form." The question here presented does not turn upon the fact of whether the petitioner considered its1096 founder's fund a liability or whether the distributions made to the holders of founder's certificates were characterized as interest. The question is whether the petitioner borrowed money from its policyholders which it was obligated to pay back and whether the amounts designated as interest represent interest which was paid upon such borrowings. In ; affd., , the Board said: * * A corporate creditor is one who has loaned to the corporation money or its equivalent, usually for compensation or interest, at a fixed rate, 65 to be repaid at a designated time or in a designated manner. The stockholder risks his money in the enterprise. The creditor assumes no such risk. * * The facts in this case clearly show that as a means of inducing persons to take out life insurance policies the petitioner afforded them an opportunity of eventually becoming a stockholder in the company. Each policyholder understood that by means of the coupon attached to his policy and made a part thereof, he could, upon the maturity of the coupon, receive a founder's certificate in the amount of $15 for each $1,0001097 of insurance contracted for. The petitioner did not obligate itself to redeem the certificate for $15 or for any other amount. It did, however, obligate itself to issue to the holder of the certificate $15 of the capital stock of the company as soon as the founder's fund should reach the amount of $100,000. The founder's fund was always at the risk of the business. It was just as much at the risk of the business as the founder's surplus or the free surplus of the company. It is plain from the provisions of the policy coupon and the founder's certificate that the petitioner was not obligated to pay interest upon the amount of the founder's certificate. The board of directors were, however, authorized in their discretion to pay interest on those certificates in an amount not to exceed 6 percent "providing in their judgment the financial condition of the Company shall warrant such payment." The evidence shows that no interest was paid upon these founder's certificates until 1929. In that year the board of directors, considering the financial condition of the company and believing that it was morally obligated to pay the interest, did pay it. But this did not constitute interest1098 paid upon an obligation of the company. The holders of the founder's certificates had a proprietary interest in the company. To all intents and purposes the distribution made constituted a division among the holders of the founder's certificates of a part of the profits or assets of the business. We are of the opinion that the respondent correctly held that the amount of $2,564.16 paid in 1933 did not represent a payment by the petitioner of interest upon its indebtedness, but a voluntary distribution to the holders of the founder's certificates of a part of the profits or assets of the petitioner. The amount was not a legal deduction from gross income. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620545/	RAYMOND KONG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKong v. CommissionerDocket No. 33624-87United States Tax CourtT.C. Memo 1990-480; 1990 Tax Ct. Memo LEXIS 525; 60 T.C.M. (CCH) 696; T.C.M. (RIA) 90480; September 6, 1990, Filed Petitioner's motion to dismiss will be granted. Martin N. Gelfand, for the petitioner. Erin Collins, Howard Rosenblatt, and John Kent, for the respondent. FAY, Judge. FAYMEMORANDUM OPINION This case was assigned to Special Trial Judge Larry L. Nameroff pursuant to section 7443A(b) of the Code 1 and Rule 180 et seq. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. 526 OPINION OF THE SPECIAL TRIAL JUDGE NAMEROFF, Special Trial Judge: This case is before the Court on petitioner's motion to dismiss for lack of jurisdiction. Petitioner alleges that the notice of deficiency was invalid for reasons set forth in , revg. . At a hearing on the motion on May 30, 1990, a stipulation of facts was submitted by the parties as well as petitioner's brief in support of his motion. Respondent's brief in opposition was filed on June 4, 1990. Although respondent did not move to dismiss this case for lack of jurisdiction on the grounds of an untimely petition, the parties have stipulated that if the notice of deficiency is valid, this case should be dismissed for failure to file a timely petition. (The notice of deficiency was mailed to petitioner's last known address on April 15, 1983, and the petition was filed herein on October 13, 1987.) At the time of the filing of the petition, petitioner resided in Los Angeles, California. Accordingly, this case is subject to appeal to the Ninth Circuit Court of Appeals. All of the facts have been stipulated. The527 stipulation of facts and attached exhibits are incorporated herein by reference. Petitioner Raymond Kong timely filed his Federal income tax return for the taxable year 1979 with the Internal Revenue Service Center at Fresno, California. Respondent timely mailed a notice of deficiency together with attachments for the taxable year 1979 by certified mail on April 15, 1983, to petitioner's last known address. The notice of deficiency reflects a deficiency of $ 174,428.10 as the result of the disallowance of a partnership loss with respect to Petromatrix Partners Ltd. (Petromatrix) claimed on petitioner's 1979 return in the amount of $ 249,183. The second page of the explanation of adjustments provides as follows: In order to protect the government's interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum rate of 70 percent. The tax assessment will be corrected when we receive the original return, or when you send a copy of the return to us. The increase in tax may also reflect investment credit or new jobs credit which has been disallowed. On March 4, 1983, respondent mailed a Form 872A528 to petitioner, requesting him to extend the statute of limitations for the taxable year 1979. Petitioner did not respond to said letter. The parties stipulated various documents from respondent's administrative file pertaining to petitioner's 1979 tax year:A. A document entitled "Report Transmittal" (Form 4665), dated April 6, 1983, consisting of one page, is an internal document used for an examiner's notes. That document states that the 872A form, together with a publication explaining the requests for extension, were sent to petitioner. The report transmittal further states that petitioner did not respond. B. A document entitled "Transcript of Account" for petitioner's taxable year 1979 is dated July 13, 1981. That document reflects that petitioner's 1979 return was filed on or before April 15, 1980; the tax on petitioner's return was $ 1,324; the adjusted gross income (loss) was ($ 146,981); the total withholding was $ 1,422; and a refund was issued on June 2, 1980, in the amount of $ 98. C. A copy of petitioner's Schedule K-1 for Petromatrix for the taxable year 1979. The K-1 reflects an ordinary loss in the amount of $ 249,183 for petitioner's investment in Petromatrix. 529 D. A document entitled "Statutory Notice Correspondence and Instruction Sheet", dated April 6, 1983, consisting of two pages. Page one of this form was used by the examining agent for the purpose of forwarding the taxpayer's return information to the person who typed the notice of deficiency in the instant matter. Page two is a procedural checklist setting forth the information examined by the agent prior to the issuance of the statutory notice. Page one lists petitioner's Social Security number, name and address, and the amount of the deficiency of $ 174,428.10 for the taxable year ending December 31, 1979. Page one further requests the preparation of the original and an unstated number of copies of "L-long" (presumably a certain type of notice of deficiency), with additional instructions for an address to refer to in reply. A section of page one entitled "paragraph description" was left blank. Page two, entitled "70 Percent Investor Work Sheet," has check marks for the categories "Current Transcript in File," "Current AMDISA in File," "AmletD in File," and "Copy of K-1 from 2nd Tier Return." (None of the acronyms were defined in this record.) The name of Petromatrix, its530 employer identification number, and the loss per petitioner's return were also listed on page two. The 1979 partnership return for Petromatrix was filed on April 17, 1980. Petitioner's Form K-1 attached to the partnership return incorrectly listed petitioner's Social Security number as 570-48-1290. However, prior to the issuance of the notice of deficiency, respondent generated a computer transcript entitled "IMF Taxpayer Name Directory" which reflected petitioner's correct Social Security number (570-48-1090). Respondent thereby verified that the Form K-1 attached to the partnership return was the K-1 for petitioner in the instant matter. In the taxpayers received a notice of deficiency disallowing deductions from a partnership with which the taxpayers had no connection. The tax was computed using the then highest marginal rate. The notice of deficiency contained the identical language as that quoted above from petitioner's explanation of adjustments. In Scar, the taxpayers, after petitioning this Court, filed a motion to dismiss for lack of jurisdiction alleging that the notice of deficiency was invalid. We held that531 the notice of deficiency was valid. Section 6212(a) provides: "If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitle A or B or chapter 41, 42, 43, or 44, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." (Emphasis added.) On appeal, the Ninth Circuit interpreted section 6212(a) and held that the "determination" requirement of that section "has substantive content." . The Ninth Circuit concluded "that the Commissioner must consider information that relates to a particular taxpayer before it can be said that the Commisisoner has 'determined' a 'deficiency' in respect to that taxpayer." .The Ninth Circuit reversed this Court's ruling and held that the notice of deficiency was invalid because "the Commissioner's purported notice of deficiency revealed on its face that no determination of tax deficiency had been made." . Subsequently, in , the Ninth532 Circuit had another opportunity to consider Scar. The Ninth Circuit stated: Furthermore, as the Tax Court has since pointed out, Scar did not even require any affirmative showing by the Commissioner that a determination set forth in an alleged notice of deficiency was made on the basis of the taxpayers' return. Only where the notice of deficiency reveals on its face that the Commissioner failed to make a determination is the Commissioner required to prove that he did in fact make a determination. .[.] Thus, the Ninth Circuit has stated the general rule that where the notice of deficiency reveals on its face that the Commissioner failed to make a determination, respondent is entitled to prove that he did in fact make a determination. In this case we are bound to follow the dictates of the Ninth Circuit. See , affd. . The instant notice of deficiency reveals on its face that it was issued without the benefit of petitioner's income tax return. The533 tax was computed at the then maximum 70-percent rate. Thus, the notice of deficiency falls within Scar. The fact that the amount disallowed was the same as the amount claimed on the return (for the correct partnership) is not relevant for this purpose. See .Therefore, we will consider whether the evidence shows that, notwithstanding the language on page two of the explanation of adjustments in the notice of deficiency, respondent made the requisite determination. Included in petitioner's administrative file was a transcript of account dated July 13, 1981. Respondent argues that "it is undisputed that respondent examined and utilized this transcript prior to the issuance of the notice of deficiency." That sentence is not stipulated by the parties, and it is clear to the Court that respondent did not examine and utilize this transcript, even though it was in the file. The transcript showed a negative adjusted gross income included therein of $ 146,981. In disallowing a loss presumed to have been claimed on the return in the amount of $ 249,183, it would be unreasonable to utilize a maximum rate of 70 percent, if534 respondent was aware of the adjusted gross income on petitioner's return. Had respondent utilized the limited information available from the transcript of account, his computation should have at least approximated the following: Adjusted gross income (loss) per return ($ 146,981)Adjustment for disalllowed loss+249,183 Adjusted gross income revised102,202 Less: personal exemption$ 1,000standard deduction2,300-3,300 Taxable income, per examination$ 98,902 Deficiency in tax computed thereon 2$ 50,814 The notice of deficiency herein determined a deficiency of $ 174,428.10. It is obvious that respondent simply arrived at this figure by multiplying the disallowed deduction by 70 percent, the maximum marginal tax rate possible for 1979. In so535 doing, respondent completely ignored the other information available concerning petitioner, as well as applicable law. Respondent argues that respondent need not physically handle a taxpayer's return in order to make a determination, but is entitled to rely upon taxpayer return information such as found in respondent's various data bases as well as relevant third-party information, including Form K-1. We note that the Ninth Circuit has stated in : the Commissioner could not determine a deficiency for the Scars without examining their return for 1978 to see whether they had claimed a deduction for such an investment. Similarly, in this case respondent presumed that petitioner had taken a deduction with regard to Petromatrix and, in absence of a valid waiver of the statute of limitations, assumed the maximum tax rate, which procedure the Ninth Circuit has found to be contrary to section 6212. Respondent did not use the return information to determine the deficiency. It is true that the contents of the administrative file reflect that respondent verified petitioner's Social Security number based upon the536 conflict between the transcript of account and petitioner's Form K-1. Respondent also requested petitioner to extend the statute of limitations. Respondent used that information to identify this petitioner (correct Social Security number) and to decide to issue a notice of deficiency (no extension of the statute of limitations). He ignored the relevant tax and income data in the transcript of account. Indeed, all respondent determined was that he did not have sufficient information to avoid sending a notice of deficiency based upon disallowance of a presumed loss claimed, utilizing the maximum tax bracket. This is exactly what happened in Scar, except that, in addition, in Scar, the wrong partnership was identified, allegedly inadvertently. The opinion in Scar reveals that respondent had intended to issue a notice of deficiency to the Scars with regard to the "correct" partnership, based upon the same presumptions. Had he done so, we believe the Ninth Circuit's ruling would have been the same. Under these circumstances, following the dictates of the Ninth Circuit, we are constrained to hold that respondent did not make the necessary determination. Accordingly, 537 the notice of deficiency is invalid under Petitioner's motion to dismiss will be granted. Footnotes1. All section references are to the Internal Revenue Code. All Rule references are to the Tax Court's Rules of Practice and Procedure.↩2. On taxable income of $ 98,902 in 1979, the income tax is computed as $ 46,190 plus 69 per cent of the taxable income in excess of $ 92,200; $ 46,190 plus (.69 X $ 6,702) = $ 50,814.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620546/	VINCENT WHALEY WHEELER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWheeler v. CommissionerDocket No. 29334-82.United States Tax CourtT.C. Memo 1984-502; 1984 Tax Ct. Memo LEXIS 167; 48 T.C.M. (CCH) 1178; T.C.M. (RIA) 84502; September 20, 1984. Vincent W. Wheeler, pro se. Mark Priver, for the respondent. PANUTHOS MEMORANDUM FINDINGS OF FACT AND OPINION PANUTHOS, Special Trial Judge: This case was heard pursuant to the provisions of section 7456(d) 1 and General Order No. 8 of this Court, 81 T.C. XXIII (1983). 168 Respondent determined a deficiency in petitioner's 1979 Federal income tax in the amount of $1,483 and an addition to tax pursuant to section 6653(a) in the amount of $74.00. The issues for decision are (1) whether petitioner is entitled to employee business expenses in the amount of $3,000 for travel and lodging; and (2) whether petitioner is liable for the addition to tax pursuant to section 6653(a) for negligence. Other adjustments set forth in the notice of deficiency have been settled by the parties. Some of the facts have been stipulated and are incorporated herein by this reference. At the time of filing the petition herein, petitioner resided in Los Angeles, California. Petitioner Vincent Whaley Wheeler is a college graduate and an engineer by profession. For a period from 1966 to 1971 he was a job shopper also known as a contract engineer. As such petitioner would work for an organization for period of time and complete a certain job or project. In 1971 petitioner commenced employment with the Federal Aviation Administration (FAA) as an Air Traffic Controller. In February of 1973 after it was determined that petitioner was colorblind, his duties were changed to169 that of an electrical engineer responsible for power-generation systems located in Salt Lake City, Utah. In April of 1979 petitioner was retired by "an agency filed Disability Retirement" due to a job related injury. In the late fall of 1978 petitioner had interviewed for employment with General Dynamics Corporation. 2 On April 1, 1979, petitioner decided to accept employment with General Dynamics in San Diego, Calidornia, as a tool manufacturing engineer in the aircraft division. He commenced employment soon thereafter. In October of 1979 petitioner was transferred from the aircraft division to the missile division of General Dynamics and worked as a technical writer. In December of 1979 petitioner was transferred to the operations division for training as a numerical control engineer. On June 27, 1980, petitioner was terminated from his employment with General Dynamics. In August of 1980 petitioner obtained employment with Douglas Aircraft in Los Angeles, California, as a numerical control engineer. In 1976 petitioner purchased a motor home for which he paid approximately $8,000. The claimed expenses relate170 to the period of time that petitioner worked for General Dynamics in the Los Angeles area and lived in his motor home. Section 162(a)(2) provides for a deduction for ordinary and necessary traveling expenses, including expenses for meals and lodging, while away from home in pursuit of a trade or business. The tests of deductibility are set forth in . The expense must be reasonable and necessary, incurred in the pursuit of a trade or business, and incurred while the taxpayer is "away from home". This Court has held that as a general rule "home" as used in section 162(a)(2) means vicinity of the taxpayer's principal place of employment. . Petitionerrelies upon an exception to the general rule. A taxpayer's personal residence may be the "tax home" if the principal place of business is "temporary". . Employment is "temporary" if it can be expected to last for only a short period of time. . Whether employment is "temporary" or171 "indefinite" is a question of fact to be determined based upon the evidence in each case. . Petitioner has the burden of proof with respect to this question of fact. While petitioner testified that he thought that his employment at General Dynamics was temporary in nature and, in fact, defined a job shopper as a person seeking temporary employment, other evidence in the record refutes his position. Petitioner's belief that his employment with General Dynamics was temporary was founded on the theory that he hoped to return to the FAA and was in fact taking action in the hope of being reemployed there. However, there was no understanding with General Dynamics that his work would be temporary. General Dynamics did not know of his intention to return to the FAA. As late as December of 1979 when petitioner was transferred to the operations division as a numerical control engineer he was placed in a training program which lasted approximately 6 months. It would be illogical to conclude that General Dynamics would place petitioner in a 6-month training program with the intention of terminating him at the end of the*172 6 months. Even if petitioner had met the tests as set forth in , petitioner has not overcome the substantiation requirements of section 274(d). Petitioner's testimony was vague and disorganized and he presented almost no documentation to show the expenses that were incurred in the year in issue. Accordingly, respondent is sustained in full on this issue. With respect to the addition to tax for negligence under section 6653(a), petitioner has the burden of proof. . Petitioner has not satisfied his burden to show that there has not been an intentional or negligent disregard of the rules and regulations. Accordingly, respondent is sustained on this issue. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Hereinafter referred to as General Dynamics.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620547/	LOUIS V. COUGHLIN and JOAN L. COUGHLIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentCoughlin v. CommissionerDocket No. 8110-71.United States Tax CourtT.C. Memo 1973-243; 1973 Tax Ct. Memo LEXIS 47; 32 T.C.M. (CCH) 1137; T.C.M. (RIA) 73243; October 29, 1973, Filed Louis V. Coughlin and Joan L. Coughlin, pro se. Robert J. Murray, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AN OPINION FEATHERSTON, Judge: Respondent determined a deficiency of $1,091.83 in petitioners' 1968 Federal income tax. The issues for decision are: (1) What amount, if any, are petitioners entitled to deduct under section 165 1 as a casualty loss in 1968; and (2) whether petitioners have been denied any rights under48 the Sixth Amendment to the United States Constitution. 2 FINDINGS OF FACT Louis V. Coughlin and Joan L. Coughlin (hereinafter referred to jointly as petitioners), husband and wife, resided in Swisher, Iowa, at the time their petition was filed with this Court. They filed a joint Federal income tax return for 1968 with the director of the Midwest Service Center in Kansas City, Missouri. On December 20, 1968, a fire occurred in the residence in which petitioners were living in Oxford, Iowa, distroying most of their personal possessions and household goods. Following the fire, petitioners and their children complied a list of the property items which had been destroyed. Petitioners computed the replacement values of the individual property items by comparing the listed items with similar ones advertised for sale at the time the list was prepared. In this manner, petitioners calculated the replacement cost of the distroyed property of $13,255.94. Following the fire, petitioners submitted their property list to their insurer, United49 Fire & Casualty Company (hereinafter United), to support a claim under a fire insurance policy. This policy provided that petitioners were entitled to reimbursement to the extent of the actual 3 cash value of their destroyed property. The term "actual cash value" was defined in the policy as replacement cost less depreciation. The maximum coverage under the policy however, was $6,000. The adjuster who handled petitioners' claim concluded that the "approximate original cost" of the property on the list was $13,000. To determine the actual cash value of the property, the adjuster accepted petitioners' estimated replacement costs and applied what he believed to be an appropriate depreciation rate. He concluded that the actual cash value of the listed property at the time of the firs was $5,921.94 and that the damaged property had a negligible salvage value. He further determined that petitioners incurred clean-up expenses of $448.86. The loss of property plus the clean-up expenses resulted in a total loss, for insurance purposes, of $6,370.80.On the basis of the adjuster's report, United paid petitioners $6,000, the maximum amount to which they were entitled under their insurance50 policy. In their 1968 return, petitioners deducted $3,528 as a "Fire loss." They arrived at this figure by taking the current replacement cost of the listed property and reducing it by approximately 30 percent for depreciation and 4 obsolesence. To that figure, they added an amount for property which they claimed had been destroyed in the fire but had not been included in the list. The figure they arrived at - $9,628 - was reduced by the $6,000 of insurance proceeds received from United and by the $100 limitation imposed by section 165(c) (3). In the notice of deficiency, respondent determined that petitioners were not entitled to any casualty loss deduction, since the amount of their loss did not exceed the amount they received from United. ULTIMATE FINDING OF FACT The fair market value of petitioners' property destroyed in the fire in 1968 was $6,370.80. OPINION Section 165(a) 2 allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." In the case of an individual who sustains a loss from "property not connected with a trade or business,," section 165(c) (3) 3 provides that, if the loss is to be51 deductible under section 165(a), it must "arise from fire, storm, shipwreck, or other casualty." The section also provides that the loss shall be deductible "only to the extent that the amount of loss * * * arising from each casualty * * * exceeds $100." Under the applicable regulations - section 1.165-7(b) (1), Income Tax Regs. - the deductible amount of the loss is the lesser of (1) the difference between the fair market value of the property before and after the casualty, or (2) the adjusted basis for the property. 52 To 6 the extent the loss exceeds any recovery that is received and the $100 limitation imposed by section 165(c) (3), it is deductible. The parties acknowledge that petitioners sustained a casualty loss in 1968 as a result of the fire and that they received $6,000 from their insurer. The question is whether their loss exceeded the amount of this recovery plus the $100 limitation imposed by section 165(c) (3). We believe that it did. The adjuster who handled petitioners' insurance claim, as detailed in our Findings, concluded that the actual cash value of the property listed with United was $5,921.94 immediately before the fire and that petitioners had incurred clean-up expenses of $448.86. The adjuster arrived at the actual cash value of the property by reducing the replacement costs of the various items on the list by what he believed were reasonable depreciation rates. He also concluded that, for all practical purposes, the property had no salvage value after the fire and that the original cost of the property was approximately $13,000. The record clearly shows that petitioners' basis in the destroyed property was approximately $13,000. It is 7 also clear that53 the clean-up expenses ($448.86) incurred by petitioners are deductible as a casualty loss. Lena L. Steinert, 33 T.C. 447">33 T.C. 447, 450-451 (1959). The only question is the fair market value of the property when it was destroyed. On consideration of the entire record, we think the adjuster's conclusion that the property was worth $5,921.94 prior to the fire is reasonable and that this figure represents the fair market value of the property at that time. Edmund W. Cornelius, 56 T.C. 976">56 T.C. 976, 978-981 (1971). The total loss sustained by petitioners was thus $6,370.80. 4 This amount, less the $6,000 recovered from the insurance company and the $100 limitation imposed by section 165(c) (3), or $270.80, is the casualty loss deduction to which petitioners are entitled. Petitioners' remaining argument is that the case should be dismissed on the ground that they were denied54 their right to a "speedy trial" under the Sixth Amendment to the United States Constitution. The basis for their 8 argument is that this case was not brought to trial until more than 4 years after they filed their 1968 return. Since this is not a criminal proceeding, petitioners' reliance on the Sixth Amendment is misplaced. Fleming v. Nestor, 363 U.S. 603">363 U.S. 603, 613 (1960). Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax year in issue, unless otherwise noted. ↩2. SEC. 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. ↩3. SEC. 165. LOSSES. * * (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - * * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. ↩4. Petitioners contend that other property not listed with the insurance company was destroyed in the fire. However, there is not sufficient credible evidence in the record to show that any such property was destroyed or damaged in the fire, or the amount of the loss attributable to such property. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620551/	FASHION CENTER BUILDING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JACOB STEINBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fashion Center Bldg. Co. v. CommissionerDocket Nos. 63825, 71715.United States Board of Tax Appeals31 B.T.A. 167; 1934 BTA LEXIS 1148; September 14, 1934, Promulgated 1148 Where a corporation purchases property and assumes a preexisting indebtedness on the same, such assumption held not to be "other property", as that term is used in section 203(d)(1) of the Revenue Act of 1926. Oscar Moss, C.P.A., for the petitioner. T. F. Callahan, Esq., for the respondent. ADAMS168 OPINION. ADAMS: These proceedings involve the income tax liability of the Fashion Center Building Co., a California corporation, for the calendar year 1928, and the liability of Jacob Steinberg, an individual, as transferee. The tax proposed by respondent is $11,565, plus penalty thereon of $2,891.25. The facts are stipulated, and the stipulation is included herein by reference as our findings of fact. The petitioner, Jacob Steinberg, concedes that, in the event we find Fashion Center Building Co. liable for the tax, he is liable as transferee. The facts are summarized as follows: During the year 1923 Jacob Steinberg, an individual, acquired a vacant lot at the cost of $240,000, $60,000 of which was paid in cash, the balance represented by notes secured by a lien on the property conveyed to him. Prior to the year 1925 Steinberg1149 paid $5,000 on these notes. During the year 1925 he received $11,875 net for an easement. During the year 1927 Steinberg transferred the property, subject to encumbrances of $175,000, to the Fashion Center Building Co., the petitioner here, and received therefor 2,249 shares of the capital stock of the company, the company assuming the encumbrances of $175,000 against the property. The Fashion Center Building Co. was organized in 1927, under the laws of the State of California, with an authorized capital stock of $250,000, divided into 2,500 shares of a par value of $100 each. Two hundred and fifty-one shares of its capital stock were sold at par for cash and 2,249 shares were issued to Jacob Steinberg in the manner above set out. Immediately after the transfer of the vacant lot to the Fashion Center Building Co., Jacob Steinberg owned more than 80 percent of the outstanding capital stock of the corporation. During the year 1928 the Fashion Center Building Co. sold the vacant lot for a total consideration of $375,000, payable by immediate liquidation by the purchaser of the mortgages on the property in the amount of $175,000, the remainder, $200,000, being evidenced by1150 an installment note payable over a period of five years from February 8, 1928. During the year 1928, before any payments were received thereon, the Fashion Center Building Co. distributed the installment note of $200,000 to Jacob Steinberg, and was dissolved by order of the Superior Court of the State of California. The Fashion Center Building Co. did not file a Federal income tax return for the year 1928, and the transaction regarding the transfers of the property was covered by individual income tax returns. Under these facts petitioners present two issues. Issue (1), as stated in petitioners' brief, is: "The Commissioner erred in determining 169 that the Fashion Center Building Company realized any taxable gain from the disposition of an installment obligation during the calendar year 1928." On this issue they relied upon three points, as follows: (a) The sale of the property by Jacob Steinberg to the Fashion Center Building Company was a transaction wherein, under the provisions of Sec. 203(d)(1) of the Revenue Act of 1926, gain was recognized to Jacob Steinberg in an amount not to exceed $175,000. (b) The basis for determining the gain or loss from the sale1151 of the property acquired by the Fashion Center Building Company from Jacob Steinberg was, under the provisions of Sec. 113(a)(8) of the Revenue Act of 1928, the adjusted cost to Jacob Steinberg, increased in the amount of gain recognized to Jacob Steinberg upon the sale of the property to the Fashion Center Building Company. (c) The Fashion Center Building Company did not derive taxable gain upon the disposition of an installment obligation during the year 1928, under Sec. 44(d) of the Revenue Act of 1928, for the reason that the fair market value of the obligation transferred did not exceed the basis of said installment obligation in the hands of the Fashion Center Building Company. Petitioners contend under (a) above, that the sale of the lot by Jacob Steinberg to the Fashion Center Building Co. was a transaction wherein gain was recognized to Jacob Steinberg in an amount not to exceed $175,000; that the Fashion Center Building Co. purchased the property at a price of $399,990, being $175,000 indebtedness assumed, plus $224,900, value of capital stock issued; that the cost of the adjusted basis of the property to Jacob Steinberg was $228,125; that the gain to Steinberg upon1152 the sale was, therefore, $171,775. The pertinent provisions of the Revenue Act of 1926 are as follows: SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section. * * (b)(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. Petitioners contend that although there would have been no gain or loss under the above quoted provisions of the statute to Jacob Steinberg, yet section 203(b)(4), as quoted above, modified by section 203(d) is as follows: (d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property 170 received1153 in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. Petitioners say that this section applies by reason of the fact that the Fashion Center Building Co. assumed the indebtedness on the property conveyed to it, amounting to $175,000, and that this was other property under the terms of section 203(d)(1) quoted above. With this contention of petitioners we cannot agree. The liabilities assumed by the corporate vendee are not treated as "other property" received as referred to in the above quoted section; ; ; . In , the court said: To attribute to the exchange now in question of property solely for corporate stock the effect of causing gain or loss to a party to1154 that exchange, or of justifying the adoption of a new basis for computing depletion or depreciation of the transferred property, would involve an obvious disregard of substance and reality, as immediately after the exchange was effected, the beneficial interests of the transferors in the transferred property remained in existence and unimpaired, being substantially the same as they were before the exchange occurred, no third person then having acquired any beneficial interest in property which was a subject of the transfer. It is apparent that property owners do not gain or lose by transferring their properties solely in exchange for all the capital stock of a corporation brought into existence to take over that property where such stock is apportioned between the transferors in accordance with their respective beneficial interests in the transferred property. We conclude that the sale of the property by Jacob Steinberg to the Fashion Center Building Co. was a transaction in which no gain was recognized to Steinberg. It follows that the basis to Fashion Center Building Co. was the cost to Steinberg. Petitioners' contention under (c) also falls by reason of our holding above. 1155 Petitioners' second contention, as stated in the brief, is as follows: "The Commissioner erred in determining any penalty for failure of the Fashion Center Building Co. to file a return for the calendar year 1928 within the time prescribed by law." Petitioner has presented us no reasonable excuse for having failed to file the return as required by law. The evidence discloses that petitioner corporation was in existence during a part of the year 1928. Its sole assets were sold on February 8, 1928. There was a distribution in complete liquidation and legal dissolution on April 6, 1928. The Revenue Act of 1928 required the filing of a corporate Federal income tax return by the Fashion Center Building Co.*171 None was filed by it. The law and regulations make it mandatory upon a corporation to file Federal income tax returns, regardless of the amount of its net income, and in case of liquidation or dissolution to furnish certain additional information. The petitioner did none of these things. Twenty-five percent penalty has been properly asserted by the Commissioner. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620552/	George J. Leitner and Eleanor Leitner v. Commissioner.Leitner v. CommissionerDocket No. 82554.United States Tax CourtT.C. Memo 1962-69; 1962 Tax Ct. Memo LEXIS 238; 21 T.C.M. (CCH) 368; T.C.M. (RIA) 62069; March 29, 1962238 George J. Leitner, 777 St. Mark Ave., Brooklyn, N. Y., pro se. Arthur S. O'Neill, Jr., Esq., and Colin C. Macdonald, Esq., for the respondent. RAUMMemorandum Opinion RAUM, Judge: The Commissioner determined a deficiency of $941.67 in the 1957 income tax of petitioners, husband and wife, who filed their joint return for that year with the district director for the district of Brooklyn, New York. They reside in Brooklyn, New York. The husband will be referred to as petitioner. The deficiency was based upon (a) the disallowance of all of the itemized deductions, in the amount of $4,193.16, for lack of substantiation, and (b) the disallowance of dependency exemptions for petitioner's father and mother-in-law and of an exemption for blindness. Petitioner was the sole witness. He was not represented by counsel. We heard his story and were impressed with his candor and honesty, although, at times, his testimony was not as clear or as satisfactory as could be desired. (1) Deductions. Upon the basis of petitioner's testimony, and applying the suggestion made in (C.A. 2), with respect to some items, we reach the following239 conclusions and make the following findings: (a) Petitioner made deductible charitable contributions in 1957 in the total amount of $300, consisting of gifts of $200 worth of precision tools and $50 worth of clothes to an organized charity and $50 in miscellaneous charitable donations. (b) Petitioner paid $92.16 of deductible interest in 1957 in connection with the purchase and maintenance of a cooperative apartment. (c) Petitioner paid the following deductible taxes in 1957: New Jersey Unemployment insurance taxes, $22.87; local cigarette taxes, $30; local admissions taxes, $5; local sales taxes, $50; real estate taxes, $151.63. (d) Petitioner paid the following amounts in 1957 for medicines and drugs to the pharmacies indicated: Whelan Drugs, $228.80; Borker and Gordon, $259.50; Adler Pharmacy, $115; Master Chemists, $97.76. (e) Petitioner paid the following amounts in 1957, for medical treatment for himself, his wife and his father, to the following physicians and opticians: Dr. Uviller, $325; Dr. Brenner, $100; Dr. Barney, $90; Dr. Gluck, $50; Dr. Tole, $40; Community Opticians, $130. Also, petitioner paid the following hospital and nursing home expenses for his father240 in 1957: Linden General Hospital, $399.85; Crown Heights Nursing Home, $315.30. (f) Petitioner incurred and paid the following deductible miscellaneous expenses in 1957: Union dues, $62.50; subscriptions to trade journals, $196; purchase of tools, $39.53. (g) Petitioner claimed deduction of $350 for books purchased by him in 1957 relating to his work. Since these were capital assets the deduction claimed is not allowable. However, petitioner is entitled to depreciation with respect to these books as well as those acquired prior to 1957. The evidence before us is unsatisfactory in this connection, but applying the Cohan rule, we find that $30 is a reasonable allowance for depreciation of petitioner's trade books for 1957. (2) Dependency exemptions. Petitioner's claim to a dependency exemption for his father in 1957 must be sustained. The evidence shows that his father lived with him during the entire year and received his sole support from petitioner during that period apart from some social security payments. Although the evidence is not entirely satisfactory we are persuaded that the support furnished by petitioner exceeded the social security payments, and we therefore find241 as a fact that petitioner furnished more than one-half of his father's support for 1957. A second dependency exemption was claimed for petitioner's mother-in-law who, during the entire year 1957, was in a State institution in California. Petitioner contributed $20 every three weeks towards her maintenance. A sister-in-law also made some contribution towards that maintenance, and there was submitted in evidence a "Multiple Support Agreement" (Form 2120) in which she waived her right to claim the exemption in favor of petitioner. The difficulty, however, is that we are not satisfied on this record that petitioner and his sister-in-law together contributed more than 50 percent towards the mother-in-law's support. The evidence shows that the total cost of her support was $120 a month. We cannot approve petitioner's claim to a dependency exemption for his mother-in-law. A third exemption, claimed for blindness, was disallowed by the Commissioner. There was no evidence showing error in this respect. Petitioner raised two other issues, not dealt with in the deficiency notice, one relating to a deduction for educational expenses incurred in 1954 and the other relating to a deduction*242 for loss on the sale of his cooperative apartment. There is no merit to either of these points, and we do not find it necessary to deal with them further. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620554/	JEAN G. PUGEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Pugel v. CommissionerDocket No. 5926-73.United States Tax CourtT.C. Memo 1975-11; 1975 Tax Ct. Memo LEXIS 362; 34 T.C.M. (CCH) 43; T.C.M. (RIA) 750011; January 15, 1975, Filed George W. Steers and William C. Ruthford, for the petitioner. Charles L. Eppright, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined a deficiency of $512.92 in petitioner's Federal income taxes for 1969. The issues for decision concern respondent's disallowance of dependency exemptions and child care deductions with respect to petitioner's three children. FINDINGS OF FACT Some of the facts are stipulated and are found accordingly. The stipulations of facts and attached exhibits are incorporated363 herein by this reference. Petitioner resided in Seattle, Washington, at the time the petition herein was filed. She filed her Federal income tax return for the calendar year 1969 with the Western Service Center, Ogden, Utah. Petitioner and Stanley L. Pugel (hereinafter Stanley) were married on June 21, 1947. Three children, Gordon, Mary Lou, and Ronald, were born during this marriage. On April 19, 1966, petitioner and Stanley were divorced by decree of the King County Superior Court, which awarded custody of the children to petitioner and visitation rights to Stanley. Stanley was ordered to pay $70.00 per month for the support of each child and to be financially responsible for their medical and dental care. Each of the three children was in the legal custody of petitioner throughout the calendar year 1969, and each received over half of his support during that year from his parents. Both Mary Lou and Ronald were under the age of 13 throughout the year in issue. The parties concede that petitioner and Stanley, respectively, furnished at least the following amounts in support of each child during 1969: GordonMary LouRonaldPetitioner$1,192.69$1,025.48$ 696.64Stanley$1,389.66$1,284.661,248.66364 During 1969, five people were members of petitioner's household: petitioner, her three children, and her sister, Theresa Stafford. They occupied the family home which, prior to the divorce, was held by petitioner and Stanley as community property. The agreed fair rental value of the residence was $275 per month. On May 19, 1965 (several months before the divorce decree), the Superior Court on petitioner's motion ordered Stanley to "remain away from the family home and not interfere or molest the [petitioner] in any manner whatsoever," except in the exercise of certain visitation rights. On June 3, 1965, Stanley was held in contempt of the court's order for failure to remain away from petitioner's residence. On January 19, 1966, Stanley was restrained from entering the family house, calling for or returning the children at or to the front door, or communicating with petitioner other than as necessary in connection with visitation. Similar restraining orders were entered after the divorce, on September 30, 1966 and January 21, 1971. 1The decree365 of divorce divided the community property in kind between petitioner and Stanley. It was silent as to the family home except that it ordered the sale thereof and the division of the proceeds as follows: $4,901.83 plus accrued interest to Stanley's mother in repayment of a loan, the next $9,355.00 to petitioner to make up for unequal division of the other property, and the balance to the parties in equal shares. No sale took place pursuant to this direction. The decree was modified in August 1971, again requiring immediate sale and ordering the appointment of a receiver to consummate the sale in the event Stanley failed to do so. In 1972, petitioner purchased all of Stanley's right, title and interest in the residence, for a stated consideration of $26,000.00. Petitioner also reimbursed Stanley at that time for all real estate taxes on the property which Stanley had paid subsequent to the entry of the decree of divorce. The $26,000.00 (less selling costs of $2,600.00) was allocated as provided in the decree, resulting in a net distribution of approximately $3,935.31 to Stanley and $13,290.31 to petitioner. Petitioner was employed as a clerk at the Veterans Administration Hospital366 in Seattle. She worked on the day shift approximately 60 percent of the time and on the night shift the remaining 40 percent. Prior to June 1968, she paid a woman $100 a month plus room and board to care for her children while she was at work. Petitioner and her sister, Theresa Stafford, were concerned that this babysitter was not giving the children proper attention. Petitioner and Theresa therefore agreed that Theresa would move from Livermore, California and would receive free room and board from petitioner in exchange for taking care of the children in petitioner's absence. This arrangement continued throughout 1969. Living with petitioner was relatively inconvenient for Theresa both from a personal and employment standpoint. She was not used to sharing living quarters with four other people, and petitioner's home was also at a considerable distance from Theresa's Seattle friends. She took a cut in salary when she left Livermore, and was required to commute 100 miles per day until she changed jobs in August 1969. Since Theresa did not arrive home until 6:15 in the evening, petitioner paid other babysitters a total of approximately $470 during 1969 to take care of the two younger367 children after school and to prepare dinner. During 1969, petitioner incurred out-of-pocket expenses of $3,038.66 in maintaining the household consisting of herself, her three children, and Theresa Stafford. Petitioner's two younger children were enrolled in St. Luke School during the year in question. Besides the regular tuition, petitioner was informed by the school that attendance required the family to make "[a] regular weekly * * contribution by way of the Sunday Offertory Collection, according to the financial accountability between you and God." Petitioner contributed approximately $257 to the parish during 1969. OPINION Petitioner claims that she is entitled to dependency exemptions with respect to her three children and child care deductions with respect to her two younger children. Respondent determined that petitioner should not be treated as providing one-half of the support of any of her children in 1969, so that they were not her dependents during that year. He, therefore, disallowed all of those deductions. 2368 The principal point at issue is who should be deemed to have furnished the portion of the agreed fair rental value of the family home, occupied by petitioner and the children, properly allocable to the support of the children. Petitioner contends that she should receive full credit for such allocable portion because she alone was entitled to the use and occupancy of the home. Respondent replies that, subsequent to the divorce, the home was owned by petitioner and Stanley as tenants in common and that each was therefore entitled to such use and occupancy, with the result that such allocable portion should be divided equally between them. The family home originally constituted community property of petitioner and Stanley. As a result of the divorce decree, which did not deal specifically with title to the home, they became owners thereof as tenants in common. ; . 3 Under the rule ordinarily applicable in such a situation, half of the fair rental value of lodging occupied by children of the marriage is considered to have been supplied369 by each parent. Cf. (C.A. 4, 1970), affirming per curiam ; . Where, however, the decree of divorce or separate maintenance provides that one parent shall be entitled to the exclusive use and occupancy of the premises, that lodging is deemed to have been furnished entirely by such parent. ; Delbert. Cf. (N.D. Ohio, 1970).4The task which confronts us is to determine what provision, if any, was370 made in the divorce proceeding herein with respect to the use and occupancy of the family home. In discharging this task, we are required to grapple with a decree in which the local divorce court unfortunately did not articulate its action in regard to the family home with precision and clarity -- a situation which has plagued us in other areas of the tax law dealing with the severance or modification of the marital relationship. Compare . The divorce decree herein, by itself, simply directed that the family home be sold and specified the manner in which proceeds of such sale were to be divided between petitioner and Stanley. But the findings of fact and conclusions of law accompanying the decree made it clear that petitioner would not be required to pay rent pending the sale. We think that this provision is significant. As a tenant in common of the family home, petitioner was entitled to the use and occupancy coextensively with Stanley and, at least in the absence of an ouster of Stanley, would not have been required to pay rent. Compare , with .371 Thus, either the inclusion of the provision relieving petitioner from the obligation to pay rent was a meaningless act on the part of the divorce court (a conclusion which we would be hesitant to reach) or it was designed to relieve petitioner from any claim of ouster by Stanley. Under the circumstances, we think that the provision dispensing with petitioner's obligation to pay rent should be equated with a direction that she was to have the exclusive use and occupancy of the family home until it was sold. We are buttressed in our analysis by the various protective orders of the divorce court barring Stanley from the house. While we hesitate to accord these orders a status whereby they would be considered as affecting the property rights as such of petitioner and Stanley, 5 we think that they may appropriately be taken into account in determining the scope of the provisions of the divorce decree. 6372 In short, on the basis of the record herein as a whole and the inferences which can be drawn therefrom, we are satisfied that the instant situation falls within the ambit of , and , and that accordingly petitioner is entitled to the full amount of the portion of the agreed fair rental value of the family home allocable to the children. Since the amount involved ($660 for each child) is sufficient to carry petitioner over the requisite level, we hold that she is entitled to the dependency exemptions for each of the three children. In view of our holding, we need not reach the further questions relating to the treatment as support via child care expenses of petitioner's out-of-pocket household expenses attributable to her sister (cf. 7 or relating to how certain church contributions by petitioner should be allocated in computing the amount of support. Our holding that petitioner is entitled to dependency exemptions for the children is also determinative of her right to deduct $470 as agreed child care expenses under section 214. 373 To reflect our holding herein and various other concessions of the the parties, Decision will be enteredunder Rule 155.Footnotes1. The order dated January 21, 1971 is a temporary restraining order; nothing appears in the record as to its final disposition.↩2. Sections 151(e), 152, and 214(d)(1). All statutory references are to the Internal Revenue Code of 1954, as amended and in force during the year in issue.↩3. Subsequent orders of the divorce court in the instant case confirmed that such ownership resulted.↩4. See ; ; John J. Frick,↩ T.C. m/emo. 1963-229. To the extent that , purports to qualify the "use and occupancy" exception to the ordinary rule, it does so within the specific confines of Oklahoma law.5. Compare (C.A. 2, 1972), affirming per curiam ; . We note that in both of these cases we were dealing with a situation where the protective order in question was issued by a court which did not have jurisdiction over actions for divorce of separate maintenance. See . Here the divorce decree and protective orders were issued by the same court. ↩6. The pre-divorce decree protective orders may also be used as an aid to interpretation of the decree, even though they were apparently merged into, and became inoperative at the time of, the decree. See .↩7. See also .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620555/	KAMMACK, RISH SONS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hammack, Rish Sons Co. v. CommissionerDocket No. 10516.United States Board of Tax Appeals6 B.T.A. 1054; 1927 BTA LEXIS 3341; April 26, 1927, Promulgated 3341 Frank Reagan, Esq., for the petitioner. A. H. Murray, Esq., for the respondent. STERNHAGEN 1054 This proceeding involves a deficiency of $1,819.14 for the year 1919, and overassessments for the years 1916 and 1917 in the amounts of $55.60 and $1,668.36, respectively. The issues are: (1) Failure of the Commissioner, in computing the overassessment for 1917, to allow as a credit against the total tax liability of that year interest in the amount of $113.81 paid on additional assessment asserted by the Commissioner and paid in 1921; (2) failure of the Commissioner to allow as deductions for 1919 the expenses of the first 15 days of the year, amounting in the aggregate to $4,454.99; and (3) reduction of invested capital for 1919 by the amounts of $1,857.99 and $31.17, on account of income and profits taxes for prior years. Respondent moved to dismiss the proceeding as to 1917 for lack of jurisdiction, on the ground that the total tax for that year, as shown in the deficiency notice, is less than the total tax shown by the petitioner upon its return. The parties agree that for 1916 there is an additional tax to be paid of $31.17. FINDINGS OF FACT. 3342 Petitioner is a Georgia corporation with its principal office at Edison, Calhoun County. On its income and profits-tax return for 1917, petitioner showed a total tax of $461.07. The total tax for the same year as computed by the Commissioner in the deficiency notice is $334.35; and the overassessment of $1,668.36 is shown in the deficiency notice as follows: Total tax assessable$334.35Tax previously assessed:Original, April 1918 list, page 9, line 8$461.07Additional, February 1920 list, page 4, line 9599.02Additional, March 1924 list, page 7, line 2942.622,002.71Overassessment1,668.36In its return for 1919, petitioner reported gross sales of $157,133.03, and total purchases of $136,248.59, and a net income of $5,131.46. The books of account show total sales of $6,769.57 for the period January 1 to January 15, 1919, and $157,133.03 for the period January 16 to December 31, 1919; also total merchandise purchases of $3,462.59 for the period January 1 to January 15, 1919, and $136,248.59 1055 for the period January 16 to December 31, 1919. The books of account also show general expenses, salaries, office expenses, and3343 advertising, of $992.40 from January 1 to January 15, 1919. The Commissioner added to the net income shown by petitioner's return the sum of $5,882.56, purporting to represent the sales of the fifteen-day period, January 1 to January 15, 1919, omitted from petitioner's gross income, but failed to allow the deduction of $3,462.59, purchases made during the same period, also omitted from the return. The Commissioner reduced the invested capital for 1919 by the amounts of $1,857.99 and $31.17, because of income and profits taxes of prior years. OPINION. STERNHAGEN: The total tax for 1917, as shown in the deficiency notice, is less than the tax shown on petitioner's return plus amounts previously assessed as deficiencies. Respondent's motion to dismiss the appeal as to 1917 is granted and order will be entered accordingly. ; . As the basis for the determination of the deficiency for 1919, the Commissioner caused an examination to be made of the petitioner's books, and found that the original return covered the period from January 16 to December 31, inclusive, 3344 by reason of the fact that the petitioner, on January 16, inaugurated a new set of accounts. Finding that the items of income for the period January 1, 1919, to January 15, 1919, had been omitted in the petitioner's computation of taxable net income, the Commissioner added to income the amount of $5,882.56, alleged to represent the sales of the fifteen-day period which had been omitted from the original return. The petitioner, at the hearing, presented in evidence the merchandise purchase and sales accounts for the fifteen-day period in question, from which it appears that the gross sales amounted to $6,769.57, and the gross purchases to $3,462.59. We have found, therefore, that the revision of the net income resulting from the inclusion of the fifteen-day period should be accomplished in part by increasing it by the difference between these two amounts, namely, $3,306.98, and not by the amount asserted in the deficiency notice of $5,882.56. This means that the Commissioner overstated the net income in this respect by the difference between $5,882.56 and $3,306.98, or $2,575.58. Petitioner contends that the net income shown in the deficiency notice should be further reduced3345 by $992.40, representing general expenses, salaries, office expenses, and advertising, of the fifteen-day period, but proof of the failure of the Commissioner to allow these expenses as deductions is lacking. 1056 The petitioner does not dispute the correctness of the amounts by which the Commissioner has reduced invested capital for 1919, because of income and profits taxes for prior years, but merely questions the right of the Commissioner to make such a reduction. No evidence was offered to show that the Commissioner's action is not in accordance with . Judgment will be entered on 20 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620560/	PRESTON R. BASSETT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bassett v. CommissionerDocket No. 63263.United States Board of Tax Appeals33 B.T.A. 182; 1935 BTA LEXIS 790; October 11, 1935, Promulgated 790 1. The petitioner in contemplation of the sale of certain stock made an irrevocable gift on trust of part of his shares to his wife for life, with reversion to himself on her death, naming himself as trustee. The executory contract of sale was later carried out and petitioner received the proceeds of the sale as trustee. Held, that a bona fide trust of the shares was created and the capital gain on the sale was not income taxable to the petitioner under section 166 or 167 of the Revenue Act of 1928. 2. Under the same sale in 1929, $20,000 of the purchase price was deposited by the buyer in a bank to be held in escrow for nine months to guarantee certain obligations of the contract, and was not paid over to the sellers until 1930. Held, that no part of this sum was includable in the income of the petitioner as one of the sellers in 1929. Howard M. Bassett, Esq., for the petitioner. I. Graff, Esq., for the respondent. ARUNDELL182 This case comes before us on respondent's determination of a deficiency in petitioner's income tax for the year 1929 in the sum of $1,860.85. Two questions are involved. (1) Whether, under sections791 166 and 167, Revenue Act of 1928, petitioner derived income from the sale of certain stock which he had given to his wife 183 with reversion to himself on trust for life. The trust was created without power of revocation in the petitioner, the settlor, but in contemplation of the sale which eventually took place. (2) The other question is whether that portion of the contract price which was held in escrow until the year after the sale constituted gross income to petitioner in the year of sale. This question involves any gain derived on the sale on both (a) the stock owned by him personally, and (b) the stock which he held as trustee for his wife. The facts were stipulated and, briefly stated, are as follows. FINDINGS OF FACT. Petitioner is an individual, residing at Rockville Center, New York. From April 10, 1929, petitioner was the owner of 55 shares of common stock of Hall & Connolly, Inc., represented by a single certificate which he endorsed on that day and delivered to his attorney, who was also secretary of the company, with instructions to place 30 shares of this stock in trust for the petitioner's wife, Jeanne M. Bassett. On April 12, 1929, the company's792 secretary delivered to petitioner two new stock certificates in proper form, one for 25 shares drawn to petitioner individually, and the other for 30 shares drawn to petitioner as trustee for his wife. The petitioner thereupon executed a trust covering these 30 shares, the provisions of which are set out below, and delivered a copy of the trust agreement to his wife and showed her the stock certificate representing the res. By the terms of the trust instrument petitioner declared himself trustee of the 30 shares "in an irrevocable trust to pay the net income thereof to my wife, Jeanne M. Bassett, for and during the term of her natural life, and at her death such trust to cease and the principal sum to go to her husband, and his heirs forever." The trustee was to have full power and discretion to reinvest the principal from time to time as he might see fit. At the time this trust was created negotiations had been practically completed for the signing of the contract to sell the stock of Hall & Connolly, Inc., and petitioner's knowledge of this fact was one of the reasons inducing him to create a trust at this time, in order that he might reduce the income tax levied on the capital793 gain in the event that the contract should be signed and the sale completed. Another fact motivating petitioner's action in making a gift on trust to his wife was that the petitioner's three sisters were at that time beneficiaries of four or five trusts to the extent of from $25,000 to $30,000 in each instance, and that he himself was the beneficiary of five trusts to the extent of $35,000. On April 13, 1929, the day after petitioner's creation of the trust, the agreement for the sale of all the capital stock of Hall & Connolly, 184 Inc., the relevant provisions of which are set out below, was executed between Theodore Hall and Joseph Connolly, the sellers, and J. E. McAuley, the buyer. The parties to this contract had agreed to its terms on April 12, but did not actually execute it until the next day. Hall & Connolly each owned 125 shares of the capital stock, which, with the 55 shares owned by petitioner as an individual and trustee, constituted the entire outstanding stock of the company. On or about July 12, 1929, the petitioner endorsed and delivered to the buyers under the contract the two certificates for 25 and 30 shares, respectively, held by him individually794 and as a trustee; and at the same time the buyers, pursuant to the contract, paid the sellers the sum of $140,000, $12,000 of which had been put in escrow at the time the agreement was executed. Of this amount petitioner received $11,229.51 as his share on account of his own 25 shares, and $13,475.41 on account of the 30 shares held by him as trustee for his wife. Petitioner deposited the check for the amount of trust shares in a new account opened in the South Shore Trust Co. of Rockville Center, New York, on July 29, 1929, and thereafter invested this sum in other securities which petitioner purchased in his own name but the income from which was turned over by him to his wife for her own benefit and use. Paragraph 4 of the contract of sale provided as follows: 4. In the event that said purchase shall be consummated, it is agreed between the parties hereto that the sum of Twenty Thousand ($20,000) Dollars, being the balance of the purchase price, shall be deposited at the same time with the depository aforesaid by the buyer, which said sum shall be held in escrow to indemnify the buyer against any loss or liability on account of accounts receivable, bad debts and for liabilities795 not disclosed by the books of the Corporation. Said amount of Twenty Thousand ($20,000) Dollars shall be paid to the sellers at the expiration of nine (9) months from the date of consummation of said purchase less the amount of any uncollected accounts and accounts receivable and less any amounts paid for any liabilities or obligations not disclosed by the books of the Corporation at the date of the consummation of the purchase and which the Corporation shall have paid subsequent to the consummation of the purchase. Such sums or amounts so withheld or deducted shall be paid by the said depository to the buyer and any such uncollected accounts receivable shall be assigned by the buyer to the sellers. Pursuant to this provision the amount of $20,000 representing the balance of the agreed purchase price was deposited with the bank on July 29, 1929, and held in escrow to indemnify the buyers against any loss or liability because of accounts receivable, bad debts, and liabilities not disclosed by the books of the corporation. Pursuant to the same provision, nine months thereafter, or on or about April 18, 1930, the amount of $20,000 was released from escrow and paid in full to the796 sellers, the petitioner receiving therefrom, on or about April 22, 1930, $1,634.59 as his share on account of the 25 shares held 185 by him individually, and $1,971.97 on account of the 30 shares held by him as trustee for his wife. These funds were placed on deposit in petitioner's general business bank account, petitioner recognizing at all times his obligation to pay 6 percent on this part of the corpus of the trust so deposited. OPINION. ARUNDELL: The first question raised in this case is whether the gain derived from the sale in 1929 of the 30 shares of Hall & Connolly stock held in trust by the petitioner for the benefit of his wife constitutes income taxable to the petitioner. The petitioner created an irrevocable trust, naming his wife beneficiary for life, with reversion to himself and his heirs on her death, He named himself trustee and reserved full powers to manage the investment of the turst property. Assuming that a valid trust was created, a point which respondent does not concede and which will be considered hereafter, respondent's cardinal contention is that the trust would be comprehended under section 167, Revenue Act of 1928, the pertinent portion797 of which reads as follows: Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor. The respondent urges on us the argument that, since the petitioner and his heirs have a reversion after his wife's death of the whole corpus of the trust, any gain which would constitute income under the Federal taxing statutes and which was not distributable to petitioner's wife would therefore "be held or accumulated for future distribution" to petitioner, within the meaning of the statute. The provision respecting the distribution of income in the trust deed is in very simple terms and merely states that the petitioner has created an irrevocable trust "to pay the net income thereof to my wife, Jeanne M. Bassett, for and during the term of her natural life, and at her death such trust to cease and the principal sum to go to her husband, and his heirs forever." It does not appear therefore in798 so many words what disposition would be made of capital gain such as that involved here, but, as under the rule applicable in most states any capital gain would be added to the corpus of the trust and only gain derived from the use of the corpus would be distributable to the beneficiary, we may concede so much to the respondent's argument, that the capital gain here in question by being added to the corpus would ultimately return to the petitioner. We may concede also that such capital gain, although under local law not "income" of the trust, would clearly be income under the Federal 186 statutes. Merchants Loan & Trust Co. v. Smietanka,255 U.S. 509">255 U.S. 509; Charles Kaplan,26 B.T.A. 379">26 B.T.A. 379; affd., 66 Fed.(2d) 401. To make such a capital gain presently taxable to the settlor, however, it must come within the provisions of section 167. That section makes taxable to the settlor only such part of the income of a trust as "may in the discretion of the grantor of the trust * * * be distributed to the grantor or be held or accumulated for future distribution to him * * ." Obviously, the crucial phrase here is "in the discretion of the799 grantor of the trust." There is no ambiguity in this phrase. It imports an unfettered command over the income of the trust resident in the settlor, or, if not completely unfettered, hampered only by a control not adverse to the settlor's. It imports a command over the income existing not only at the time of the creation of the trust, for obviously the settlor of a trust has at this time full power to make what disposition he likes of both corpus and income, but a continuing power which may be exerted in the future from time to time after the creation of a trust and as the income on the corpus arises. "Discretion", as defined by Webster, means "freedom to decide or to act according to one's judgment; unrestrained exercise of choice or will." Obviously the present trust does not come within this definition, for the settlor had no discretion to withhold income from the beneficiary and accumulate it for future distribution to himself. The fact that capital gains would be added to the corpus and eventually distributed to him, as already pointed out, was not the result of any exercise of his discretion, but came about through the operation of a general rule of law. It is true that800 the petitioner in his capacity as trustee had the discretion to invest and reinvest the corpus of the trust and thereby to multiply capital gains on such conversions of the corpus, but this power was exercised by him in his capacity as trustee and not as settlor. This was his duty as the trustee. It is the power of the settlor that is aimed at by the statute and the functions of petitioner as settlor and trustee must not be confused. Cf. Reinecke v. Smith,289 U.S. 172">289 U.S. 172. But, even if this power of investment be treated as inhering in the petitioner as settlor, we do not think that that fact brings it within the section. Cf. Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339. We are of the opinion, therefore, that the capital gain realized on conversion of the trust assets was not income to be held or accumulated for future distribution to the settlor by reason of any exercise of discretionary powers on his part, and consequently that no part of it is includable within his gross income. Respondent relies on 801 Malcolm W. Greenough,29 B.T.A. 315">29 B.T.A. 315; affd., 74 Fed.(2d) 25; and Charles Kaplan,26 B.T.A. 379">26 B.T.A. 379; affd., 66 Fed.(2d) 401. Both of these cases are clearly distinguishable. 187 In the first the settlor made an irrevocable gift on trust for the term of five years, the income to be paid to himself and the corpus to revert to himself, and named himself as one of three trustees (none of whom except the petitioner was a beneficiary), but as the only trustee who might not be removed on motion of the two others. The trustees were given power to "determine in their discretion what receipts shall be deemed income and what principal." In such circumstances we held, and the Circuit Court (First Circuit) affirmed our judgment, that gain realized from the sale of trust assets, although constituting corpus of the trust under local Massachusetts law, was properly taxable as income to the settlor-trustee in the year of its realization by the trust. Obviously the grantor and sole beneficiary of the trust there had complete control and was simply utilizing the trust device to manipulate, as he saw fit, his receipt of income - the kind802 of situation which section 167 sought to put an end to. In the Kaplan case we had a situation closely analogous to that here. Petitioner made a gift on trust to his wife for life, to himself for life, remainder over to his children, irrevocable without his wife's written consent, and named himself trustee. The trustee was given full powers of management. So far we have stated no incident which is not present in the instant case. But the trustee or trustees were given additional power "to distribute the income arising from the trust property from time to time in such amounts and at such times as they shall think fit, with power to reserve a reasonable portion of the income", any such accumulated income to be held for the benefit of the particular persons entitled to it. We thought the case came within section 219(h), Revenue Act of 1924: "It contemplates a trust wherein the grantor retains dominion over the trust income to the extent of diverting it to himself." In other words, petitioner could take income that normally would go to his wife, accumulate it, and then after her death pay it over to himself as the next life tenant. The Circuit Court (First Circuit) affirmed803 in principle, saying: Kaplan is under the obligations imposed upon the trustees by the trust instrument. Among these is that he shall exercise his powers as trustee with due regard to the rights and interests of the immediate beneficiary [citations]. The large discretion given to the trustee diminishes these rights, but it does not extinguish them. Applying the law as above stated, the portion of the income properly taxable to Kaplan personally was the entire income minus that portion of it which constituted the irreducible minimum of which the trustee had no right to deprive Mrs. Kaplan. The commissioner held as above stated that the entire income was taxable to Kaplan personally. In this he fell into error, as did the Board of Tax Appeals in affirming his decision. * * The Kaplan case is readily distinguishable on its facts from the instant one, for the petitioner here had no control of the income of the trust at any time, either capital gains or ordinary income. 188 The recent case of Margaret S. Sawtell,32 B.T.A. 687">32 B.T.A. 687, was one wherein the petitioner created a trust on April 30, 1930, to terminate at the end of the same year, solely804 for her own benefit, the income to be paid to her alone and the corpus to revert to her on termination of the trust. At the time the trust was created a sale of the trust assets was pending. We held the capital gain on the sale to be income to the petitioner under section 167 of the Revenue Act of 1928. While we believe that that result was entirely correct on the ground that the trust was not a real one within the intent of the revenue act, but a mere disguise to postpone the realization of income, we are of opinion that the construction given section 167 in that case was too broad and was unnecessary in reaching the decision. In Francis J. Stokes,28 B.T.A. 1243">28 B.T.A. 1243; affd., 79 Fed.(2d) 256, we held that where the income of a trust was distributable to the grantor's children during their minority and the grantor's wife was given power to withdraw securities or money from the trust, and a similar power was reserved to the grantor but to be exercised by him only on the death of his wife, the grantor retained no powers that would bring him within section 166 or 167 of the 1928 Revenue Act and he was not taxable on the income. The Circuit Court said in805 affirming: "It is not a question of the power of Congress to provide that under such facts as before the court the income of the trust is taxable to the settlor (Burnet v. Wells,289 U.S. 670">289 U.S. 670; DuPont v. Commissioner,289 U.S. 685">289 U.S. 685), but it is a question of whether or not Congress has given statutory authority to tax the income derived from the fund to the settlor." This brings us to respondent's secondary contention in support of the proposition that the present trust falls under section 167. Admitting by implication that the precise words of that section do not cover the present situation, the respondent offers a gloss on the section in the form of the House Report on the corresponding section in the Revenue Act of 1932. The section of the later act reads: Where any part of the income of the trust is or in the discretion of the grantor * * may be held or accumulated for future distribution to the grantor. [Italics ours.] Such an amendment of the provision, as Holmes, J., said in 806 Lewellyn v. Frick,268 U.S. 238">268 U.S. 238, in respect to a similar amendment to another provision of the statute, "does not help, but if anything hinders the collector's construction of the present law." Such an enlargement of the scope of the provision in the 1932 Act can not be read retrospectively into the 1928 Act. We must not lose sight of the fact that the trust has been treated as a separate taxable entity since the Revenue Act of 1916. Merchants Loan & Trust Co. v. Smietanka, supra. And its definition in 189 the revenue acts as a "taxpayer" has been pursued to its logical conclusion in a long series of decisions. Baltzell v. Mitchell, 3 Fed.(2d) 428; Anderson v. Wilson,289 U.S. 20">289 U.S. 20. This distinction between classes of taxpayers has been rigidly adhered to by the Supreme Court, even in the circumstances of the Wilson case, supra, where hardship to the beneficiaries, who were "men of flesh and blood", might have been relieved but for the necessity which the Supreme Court felt imposed by the statute to treat the trust, a mere "abstraction", as having a separate existence. 807 Such a provision as section 167, therefore, since it obliterates well recognized lines between classes of taxpayers, and seeks to tax to the settlor what is nominally the income of the trust or of the beneficiary, is anomalous, and finds its excuse only in the recognized necessity to prevent evasion. This was, of course, its confessed purpose, cf. House Report 179, 68th Cong., p. 21; Senate Report 298, p. 25; both on section 219(h), Revenue Act of 1924; and, within the words of the section, every effort should be made to effect this purpose, Burnet v. Wells, supra; but we do not think its meaning should be extended by construction beyond the unambiguous import of its words. Consequently, we do not think that the Committee Reports of Congress on section 219(h), Revenue Act of 1924, the prototype of section 167, employing language of wider meaning than the terms of the enactment, may be availed of. United States v. Shreveport Grain & Elevator Co.,287 U.S. 77">287 U.S. 77, 83; Crooks v. Harrelson,282 U.S. 55">282 U.S. 55, 61. Respondent's other contentions may be briefly disposed of. He contends that in the circumstances of the sale contemplated808 at the time the trust was created petitioner made a gift of the proceeds of the stock after sale and not of the stock itself. This contention rests on the assumption that the trust was a mere device to avoid taxation and as such is to be disregarded, for otherwise it is clearly demonstrable that the gift of the stock covered by an executory contract of sale is something essentially different from the gift of the proceeds received on the sale after its consummation, Williston on Sales, § 1, 2. The sale might well have never gone through. In fact, such a possibility was contemplated by the parties and expressly provided for in the contract, for if certain representations of the sellers were not made good by the three months' audit provided, the buyer might withdraw. He might, indeed, withdraw in any case, but if caprice were his only motive, he forfeited the $12,000 which he had put in escrow on signing the contract. Evidently, then what petitioner's wife received on April 12, 1929, was a gift of stock with an interest in the contract of sale, which was agreed upon on the day the trust was created and signed on the next day after. 809 As for the respondent's contention that the present case falls within the ambit of section 166 on the theory that the petitioner as trustee 190 had revested in himself during the year the title to the trust property, we need only point out that petitioner's title after the creation of the trust was that of a fiduciary only for the benefit of his wife, an entirely different thing from title held for his own benefit. Helvering v. Duke,290 U.S. 591">290 U.S. 591. Respondent's argument that the trust was not a bona fide one we regard as without substantial merit. We are of the opinion, therefore, that any gain on the proceeds of the sale of the Hall & Connolly stock held in trust by the petitioner for his wife was not taxable to the petitioner. The question remains whether the portion of the purchase price of the shareholders distributable to petitioner individually - not what was distributable to him as trustee for his wife, for that question is eliminated by our decision of the first issue - which was held in escrow until 1930 and then paid over to the sellers, was taxable to petitioner in 1929, the year of the sale; or in 1930, the year it was actually paid. 810 Petitioner was on a cash basis. We think it clear from the provisions of the contract that the $20,000 to be placed in escrow with Chase National Bank as depositary was withheld by the buyers as a guarantee that the warranties and representations were true and would be faithfully carried out. It was obviously impossible to determine precisely the value of cash accounts receivable and physical assets, which were guaranteed to be $60,000, until a reasonable time had been allowed for the payment by the sellers of outstanding liabilities and for the collection of accounts receivable. Therefore, $20,000 was deposited with a common agent, who should hold this amount for both buyers and sellers until the question as to the value of these assets should be clearly resolved. It does not appear from the contract, nor from the facts stipulated, whether the depositary paid interest on $20,000 to the sellers, and we may not infer this fact without evidence. Generally, as the Supreme Court said in Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445, the income tax law is concerned only with realized gains. Moreover, where the petitioner is, as here, on the cash basis, pretty811 clear evidence of his command over the money held in escrow would have to be present to justify our holding that it was received in the year of execution of the contract, although not paid over until nine months later. Respondent relies on Federal Development Co.,18 B.T.A. 971">18 B.T.A. 971; and on Blaine L. Stoner,29 B.T.A. 953">29 B.T.A. 953; since reversed, 79 Fed.(2d) 75. In the Federal Development Co. case the petitioner was a vendor of land under lease who had promised the purchaser possession by a certain date, with liquidated damages for every day which the lessee held over, the purchaser withholding $50,000 of the purchase price as a guarantee. Upon this sum the purchaser agreed to pay interest to the vendor at an agreed rate. We 191 held that the portion of the purchase price so withheld and not paid to the vendor until the following year was income to the petitioner in the year of purchase. The instant case is obviously distinguishable. What has generally been made decisive of the receipt of income by a taxpayer is whether he may exercise an unlimited command over it, and this holds true although for contractual or other reasons he812 may eventually have to part with some or all of it later on. In North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417, the Supreme Court held that the taxpayer, whether on the cash or accrual basis. had received income in 1917 to the extent of certain moneys then in litigation between it and the Government, for in that year the District Court had paid these moneys over to the taxpayer, and thereafter the outcome of the litigation on appeal would only be a contingent liability which might or might not be realized. Here the petitioner had no command over the $20,000 deposited in escrow in July 1929 until it was paid over to him in April of the following year. We think the present case is ruled, therefore, by Commissioner v. Cleveland Trinidad Paving Co., 62 Fed.(2d) 85 and Stoner v. Commissioner, supra. In the former case it was held that the percentage of the payment to be made by a city on a completed paving contract which was retained by the city to guarantee maintenance of the pavement was not taxable to the contractor until the year of its actual receipt. In the latter case, the Circuit Court held that a sum received by*813 the seller of certain stock and under the contract deposited by him on his own behalf and that of the other stockholders in a bank to guarantee against possible liabilities for income tax and other liabilities of the corporation which might not be on its balance sheet at the time the agreement of sale of the stock was carried out, which sum was not withdrawn by the petitioner for his own use until two years later, was taxable to him only in the latter year. The court thought that petitioner never received the fund except as a fiduciary and consequently he could not have realized income on it until his possession of it in that capacity had ceased. The present case is all the stronger, as petitioner here did not have even a qualified control of the money in escrow, nor, so far as is evident, any benefit from it, until the year 1930. We hold, therefore, that the share of this $20,000 distributable to the petitioner in his individual capacity for the 25 shares held in his own name which he had sold, in the sum of $11,229.51, should not be included in his gross income for the year 1929. Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620562/	Betty W. Crissey, et al.1 v. Commissioner.Crissey v. CommissionerDocket Nos. 81774, 81775, 84450-84452, 86060-86063. emo. 1961-189.United States Tax CourtT.C. Memo 1961-189; 1961 Tax Ct. Memo LEXIS 160; 20 T.C.M. (CCH) 947; T.C.M. (RIA) 61189; June 27, 1961Hugh O. Mussina, Esq., 6338 Town Hill Land, Dallas, Tex., for the petitioners in Docket Nos. 81774 and 81775. Emil Corenbleth, Tex., for the petitioners in Docket Nos. 84450-84452 and 86060-86063. Harold D. Rogers, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined deficiencies in petitioners' income tax for the years and in the amounts as follows: DocketNo.PetitionerYearDeficiency81774Betty W. Crissey1955$ 284.7681775Edgar R. Crissey1955284.7684450William M. andFrances F. Thy-fault19551,264.421956876.3119571,144.9386060William M. andFrances F. Thy-fault1/1/58$ 490.44through3/31/5884451James J. and AnneBeebe19551,382.541956966.061957958.8286062James J. Beebe1958927.3586063Anne K. Beebe1958927.3584452Carl S. and Lois H.Potter1956437.281957354.9986061Carl S. and Lois H.Potter1958935.30161 The respondent at the trial took the position that either the deficiencies determined against Betty W. Crissey and Edgar R. Crissey (Docket Nos. 81774 and 81775) should be sustained or that the deficiencies determined against the Thyfaults, Beebes, and Potters (Docket Nos. 84450, 84451, 84452, 86060, 86061, 86062, and 86063) should be sustained, but not both. On brief, however, the respondent concedes that there are no deficiencies against Betty W. Crissey and Edgar R. Crissey (Docket Nos. 81774 and 81775). The sole issue presented for our decision is the correctness of the respondent's action in determining that petitioners Thyfault, Beebe, and Potter did not acquire a severable and amortizable covenant not to compete at the time they purchased the Roby L. Nichols Agency in September 1953. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioners Betty W. Crissey and Edgar R. Crissey are husband and wife residing at 3320 Villanova, Dallas, Texas. They filed separate income tax returns for 1955 with the director at Dallas. Petitioners William M. Thyfault and Frances F. Thyfault are husband and wife residing at 3609 McMillan Street, Dallas, 162 Texas. They filed their joint income tax returns for 1955, 1956, and 1957 and for the taxable year ended March 31, 1958, with the director at Dallas. Petitioners James J. Beebe and Anne K. Beebe are husband and wife residing at 6246 Marquita Avenue, Dallas, Texas. They filed joint income tax returns for 1955, 1956, and 1957 and separate income tax returns for 1958 with the director at Dallas. Petitioners Carl S. Potter and Lois H. Potter are husband and wife residing at 862 Berkinshire Drive, Dallas, Texas. They filed joint income tax returns for 1956, 1957, and 1958 with the director at Dallas. On March 16, 1950, Edgar R. Crissey purchased the Roby L. Nichols Agency from Roby L. Nichols for $50,000. Crissey obligated himself to continue the name of Roby L. Nichols Agency for a period of 5 years. Crissey acquired from Nichols the rights to renew certain fire and casualty insurance policies. These policies normally were written for periods of 1, 2, 3, and 5 years. One of the conditions of the sales agreement executed on March 16, 1950, by Nichols and Crissey was the covenant by Nichols not to compete by engaging in the fire and casualty insurance business in Dallas for a period163 of 8 years. The Nichols Agency handled the sale of fire and casualty insurance only. Crissey operated the agency individually until April 1, 1951, when he formed a partnership with George B. Perfect. During August 1953, Crissey and Perfect began negotiations with William M. Thyfault and James J. Beebe concerning the sale to them of the Nichols Agency. Most of the negotiations were handled by Perfect and Thyfault with the approval of Beebe and Crissey. Thyfault and Beebe insisted on the inclusion in any sales contract of a covenant not to compete which would safeguard their renewal rights on existing policies. They would not have been interested in purchasing the Nichols Agency without such a covenant because otherwise the renewal rights would have been in jeopardy. A sales price of $60,000 was agreed upon by the parties. The price was determined by taking into consideration the furniture and fixtures, the name, and the 6-year covenant not to compete. The name Roby L. Nichols meant nothing to Thyfault and Beebe but they felt obligated to continue to use the name for the balance of the 5-year period to which Crissey had originally agreed. In order to acquire $10,000 as down payment164 with which to purchase the Nichols Agency, Thyfault and Beebe consulted their banker, Willis M. Beavers, president of Merchants State Bank, with respect to the possibility of obtaining a loan. As a condition for granting a loan, Beavers insisted upon the proposed purchase of the Nichols Agency being approved by a certified public accountant, John J. Mimier. Mimier advised Thyfault and Beebe that any sales contract for the purchase of the Nichols Agency would need an allocation of the consideration involved so as to show specifically the cost of the business assets and of the covenant not to compete. His purpose in so advising them was to remove any uncertainty concerning the cost of the business properties and of the covenant. A sales contract transferring the Nichols Agency from Crissey and Perfect to Thyfault and Beebe was drafted and subsequently executed by all parties in the presence of Beavers at the Merchants State Bank. The contract was dated September 1, 1953, and contained a covenant not to compete, reading as follows: 5. Sellers agree that neither they nor their respective wives, will for a period of six years from September 1, 1953, reenter the fire and casualty business165 as a recording or soliciting agent within Dallas County, Texas, and that they will not, directly or indirectly, conduct an insurance business as a recording or soliciting agent during such period. If either Sellers or the wife of either Seller shall default in the performance of this covenant, Purchasers shall be released from the payment of any sums due such defaulting party under this agreement. The sales agreement dated September 1, 1953, was not acceptable to the accountant, John Mimier, because it failed specifically to allocate the purchase price among the various business assets and the covenant not to compete. The parties then agreed that an additional paragraph would be added to the contract allocating the purchase price as follows: $5,000 to furniture and fixtures; $10 for the name of Roby L. Nichols; and the balance of $54,990 to the covenant not to compete. The contract thereafter was revised by the addition of the following paragraph: 10. It is agreed by and between Sellers and Purchasers that the purchase price set forth in the preceding Section 4 hereof in the aggregate amount of $60,000.00 is allocated in the manner following: $5,000.00 of said purchase price for166 the furniture, fixtures and supplies described upon Exhibit "A"., $10.00 thereof for the use of the name "Roby L. Nichols Agency"; and the remainder of the purchase price for the covenant contained in the preceding Section 5 hereof wherein Sellers agree for themselves and their respective wives not to compete with Purchasers for the six year period therein provided. The revised contract was executed by all of the parties several days after the execution of the first contract. At the time of the sale of the Nichols Agency there were no profits from the business remaining because the renewals were running poorly. Thyfault, Beebe, and Carl Potter (who later joined the partnership) initially lost money in the operation of the Nichols Agency but operated at a profit the subsequent Beebe-Thyfault Agency. Amortization deductions were claimed annually during the years in issue by Thyfault, Beebe, and Potter, in the total amount of $9,165 per year, or one-sixth of the cost of the covenant not to compete. The covenant not to compete, contained in the sales contract executed by the parties in September 1953, was separately bargained for and dealt with, and was an asset severable from the167 other assets of the business and had a value at the time of acquisition of $54,990. Opinion Petitioners contend that the agreement by Crissey and Perfect to refrain from engaging in the insurance business in Dallas for a period of 6 years was a contract separately bargained for in good faith, with a realistically determined and separately assigned value and that therefore they are entitled to amortize the consideration paid for this covenant not to compete over the life of the covenant under the principles enunciated in such decisions as Ullman v. Commissioner, 264 F.2d 305">264 F. 2d 305, affirming 29 T.C. 129">29 T.C. 129; Wilson Athletic G. Mfg. Co. v. Commissioner, 222 F.2d 355">222 F. 2d 355; Aaron Michaels, 12 T.C. 17">12 T.C. 17; and Commissioner v. Gazette Tel. Co., 209 F.2d 926">209 F. 2d 926. Cf. Income Tax Regs., sec. 1.167(a)(3). The respondent on brief has taken the position that the covenant not to compete was never dealt with in good faith as a separate item during the negotiations conducted preliminary to the sale of the business in September 1953, and that the allocation in the revised contract of $54,990 to the covenant was merely "window168 dressing" inserted solely to assist the purchasers to obtain a tax benefit by way of amortization deductions. A situation somewhat similar to that here involved arose in Frances Silberman, 22 T.C. 1240">22 T.C. 1240. There, the taxpayers were partners operating under the name of Tissue Products Company, a manufacturer of facial tissues. The taxpayers had purchased the interest of Harry Rothman, a previous partner in Tissue Products Company, under an agreement executed January 10, 1944, for $37,500. The book value of Rothman's interest in the partnership was $23,125. The excess in the amount of $14,375 was treated by the taxpayers as having been paid solely for Rothman's covenant not to compete by engaging in the business of manufacturing or selling paper tissues in the metropolitan New York area for a period of 3 years. In upholding the taxpayers' contention that they acquired an amortizable covenant for $14,375, we stressed the fact that the nature of the business was substantially one of personal service, that Rothman could readily have taken away a substantial amount of the taxpayers' sales by soliciting their customers, and that the taxpayers accordingly would have been foolhardy169 not to have insisted on such a covenant. There was no evidence to indicate that the value of the assets exceeded the book value nor was there any suggestion of abnormal profits which would indicate any good will value. In prior transactions in which interests in the same business had been acquired or disposed of, no values had been attributed to good will. Rothman agreed under the contract of sale to return $12,000 to the taxpayers in the event that prior to May 31, 1946, he should violate the covenant not to compete. The name of the business was found to have no significant value. The Tissue Products Company had no brand name of its own and did not engage extensively in advertising. As in Frances Silberman, supra, the record here supports petitioners' contention that they in good faith negotiated for and acquired from Crissey and Perfect a covenant not to compete for a period of 6 years, and that the consideration allocated thereto is realistic and severable from the consideration paid for the other business assets. The parties here clearly dealt at arm's length in negotiation for and consummating the sale of the business in September 1953. The executed contract of170 sale itself provides strong evidence of the intention of the parties. The contract not only contains a covenant on the part of Crissey and Perfect prohibiting them from engaging in the insurance business for 6 years but also provides a specific allocation of consideration to the covenant. Further, the contract provides for a forfeiture of consideration in the event of a breach of the covenant by the sellers. The importance of the contractual provisions and the weight to be given the written contract in situations such as this has been well expressed by the United States Court of Appeals for the Second Circuit in Ullman v. Commissioner, supra: when the parties to a transaction such as this one have specifically set out the covenants in the contract and have there given them an assigned value, strong proof must be adduced by them in order to overcome that declaration. The tax avoidance desires of the buyer and seller in such a situation are ordinarily antithetical, forcing them, in most cases, to agree upon a treatment which reflects the parties' true intent with reference to the covenants, and the true value of them in money. An insurance agency engaged in the business171 of selling fire and casualty insurance is essentially a personal service business and the sellers here clearly were in a position subsequently to compete by contacting former customers. It is also apparent from the testimony here that Thyfault and Beebe considered the inclusion of a covenant not to compete to be of prime importance and would not have proceeded with the purchase of the business had such a covenant not been included. They feared competition and considered it to be of the highest importance to safeguard the renewal rights they wanted to acquire. Further, as in Frances Silberman, supra, there is no evidence that the other assets of the business were in fact worth more than the consideration allocated to them, nor is there any indication of abnormal profits which would suggest the existence of good will. Thyfault and Beebe lost money in the operation of the Roby L. Nichols Agency because the volume of premium renewals did not reach their expectations. In the prior transaction by which Crissey had purchased the Roby L. Nichols Agency in 1950, no value was attributed to good will. We therefore are unable to accept as realistic the respondent's characterization172 of the facts, i.e., that the insertion of the covenant not to compete and the specific allocation thereto of consideration were not in good faith and were primarily taxmotivated. Mimier's reason for recommending the specific listing of the consideration allocable to the business assets and to the covenant not to compete was to remove any uncertainty as to the cost of the various properties and of the covenant. Perfect, one of the two selling partners, testified that he fully understood the tax consequences of the covenant not to compete and that at the time the agreement was executed, he expected to report his share of the profits from the sale of the covenant as ordinary income. He subsequently so reported such profits. For the foregoing reasons, we are of the opinion that the covenant not to compete here in issue was dealt with separately and in good faith and that the consideration assigned thereto was realistically determined. The petitioners Thyfault, Beebe, and Potter therefore are entitled to amortization deductions to the extent of the price paid for the acquisition of the covenant ($54,990) over its 6-year life. Decisions will be entered for the petitioners in Docket Nos. *173 81774 and 81775. Decisions will be entered under Rule 50 in Docket Nos. 84450, 84451, 84452, 86060, 86061, 86062, and 86063. Footnotes1. Proceedings of the following petitioners are consolidated herewith: EDGAR R. CRISSLEY, Docket No. 81775; WILLIAM M. THYFAULT and FRANCES F. THYFAULT, Docket Nos. 84450, 86060; JAMES J. BEEBE and ANNE BEEBE Docket No. 84451; CARLS S. POTTER and LOIS H. POTTER, Docket Nos. 84452, 86061; JAMES J. BEEBE, Docket No. 86062; and ANNE BEEBE, Docket No. 86063.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620564/	Joseph H. Sherman, Jr., and Sophie Sherman, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentSherman v. CommissionerDocket No. 22498United States Tax Court16 T.C. 332; 1951 U.S. Tax Ct. LEXIS 280; February 15, 1951, Promulgated 280 Decision will be entered under Rule 50. Petitioner, who resided with his family in a house owned by him in Worcester, Massachusetts, was employed during 1945 and for several years prior thereto as production manager and purchasing agent at a factory located near Worcester. In 1945 he started and operated as sole proprietor a part time sales business in New York City. Although he had a mailing address in New York, he had no office or place of business, and had no employees. While in New York he stayed at a hotel, generally several days at a time. During the year he spent more time in Worcester than in New York, but the profits realized from the New York venture exceeded his Worcester salary. Held, the petitioner's "home" for tax purposes was in Worcester and he is entitled to deduct his expenses for travel to and from New York City, for meals and lodging while there, and certain expenditures made in carrying on his New York business under the provisions of section 23 (a) (1) (A), I. R. C.Robert D. Price, Esq., and Francis X. Reilly, Jr., Esq., for the petitioners.Leo C. Duersten, Esq., for the respondent. Raum, Judge. Van Fossan, J., dissents. Opper, J., concurs only in the result. Disney, J., dissenting. Arundell, Leech, and Hill, JJ., agree with this dissent. RAUM333 The respondent determined a deficiency in income tax for the calendar year 1945 in the amount of $ 1,129.68, which was based in effect upon disallowance of one-half of the total deduction of $ 5,129.73 claimed on the return, in computing income from a business operated by petitioner Joseph H. Sherman, Jr., as "Traveling -- (Worcester to New York 4 days each week)." The Commissioner's action was predicated upon the theory that, although petitioner and his family resided in Worcester, Massachusetts, where he was employed, the greater part of his time was spent in New York where he conducted a part time business and New York was therefore his "home" for income tax purposes; 282 accordingly, the Commissioner disallowed the $ 5,129.73 deduction claimed as travel expense in New York, but he allowed $ 2,564.86 as travel expense for 2 days a week said to be spent in Massachusetts.By amended petition, the total amount claimed by petitioner was reduced to $ 5,063.32 and broken down into the following components:(1) Transportation$ 806.40(2) Room and meals1,631.65(3) Postage, telephone and telegraph207.61(4) Entertainment1,517.85(5) Other -- Tips for entertainment, travel, and hoteland other hotel charges749.81(6) Gifts150.00Total5,063.32By answer to the amended petition, the Commissioner now asserts an increased deficiency, based upon the disallowance of all these amounts except the $ 806.40 for transportation. In a reply to the answer to the amended petition it is contended that even if petitioner's home were New York, he would be entitled not only to the $ 806.40 allowance for transportation, but also living expenses in Worcester, alleged to be in excess of the "room and meals" item in New York, and that the remaining four items (postage, etc.) would be deductible as ordinary 334 and necessary expenses283 under section 23 (a), irrespective of whether petitioner's home be regarded as Worcester or New York.FINDINGS OF FACT.Petitioners are husband and wife. In their joint income tax return for the year 1945 filed with the collector of internal revenue for the district of Massachusetts, they gave their address as 31 Orne Street, Worcester, Massachusetts. Joseph H. Sherman, Jr., is referred to herein as the petitioner.Petitioner has lived in Worcester all of his life. In 1945 he and members of his family lived in a house owned by him at 31 Orne Street. He paid real estate taxes and poll taxes to the City of Worcester, where he was a registered voter from 1932 to 1949, inclusive. One of his two children attended school in Worcester, and he and his family were parishioners of St. John's Church located in that city. He estimated that his household expenses for the maintenance of his family at Worcester were between $ 3,500 and $ 4,000 per year.During the calendar year 1945, and for several years prior and subsequent thereto, petitioner was employed by the Haskins Manufacturing Company, which manufactured plastic products. Its offices and factory were situated near Worcester. He284 had no proprietary interest in the enterprise; he served in the capacity of "production manager and purchasing agent." His duties were to see that production was maintained and that the machines produced at their fastest rate. He also handled the purchase of machines for the factory, and did some real estate work for the company. He received $ 4,066.40 as compensation for services rendered to it during the year 1945. It employed between 75 and 125 people, depending upon the season. A subforeman and a foreman in the machine department assisted petitioner in the maintenance of production. The position of production manager and purchasing agent did not require petitioner's full time and attention, and production was maintained when he was absent from the plant.Prior to 1945, the petitioner had never engaged in the business of selling plastic products. Early in that year he formed the Metropolitan Sales Company in New York City, which he operated as a sole proprietorship. The company's principal business during 1945 consisted of selling plastic combs and plastic toys to the jobbing trade. Sales made through it represented about 80 per cent of the entire production of the Haskins285 Manufacturing Company. Petitioner maintained a mailing address in New York City at 799 Broadway where he picked up mail pertaining to this business. He had no employees at this address and customers did not come there to transact business. It was his practice to call on those who sent letters, and 335 the sales of the Metropolitan Sales Company were due entirely to his personal efforts. In his income tax return for the year 1945, he reported the results of the Sales Company's operations, as follows:Gross receipts$ 141,850.60Merchandise bought for sale126,471.23Gross profit$ 15,379.37Depreciation17.89Expenses7,020.547,038.43Net profit$ 8,340.94In Schedule C, attached to his 1945 return, petitioner itemized the expenses totaling $ 7,020.54, as follows:Commissions$ 813.26Freight55.31Office supplies98.30Rent660.00Advertising10.50Telephone190.14Miscellaneous expenses19.22Postage44.08Traveling -- (Worcester to New York 4 days each week) --5,129.73Total$ 7,020.54In lieu of the $ 5,129.73 figure in the foregoing tabulation, petitioner now claims $ 5,063.32 as a deduction, which consists of the 286 following items:(1) Transportation$ 806.40(2) Room and meals1,631.65(3) Postage, telephone and telegraph207.61(4) Entertainment1,517.85(5) Other -- Tips for entertainment, travel, and hotel andother hotel charges749.81(6) Gifts150.00Total5,063.35All of these items, except item (5), reflect expenditures actually made by petitioner on trips to New York in connection with the business of the Metropolitan Sales Company during the year 1945.Although Schedule C attached to the return indicates that petitioner spent 4 days each week in New York City and in traveling between Worcester and New York City, 4 days represented in fact the maximum time spent by him in that city and in traveling in any one week. During 1945, the total time actually spent by him in New York City was 102 days; he spent 216 days in Worcester and 43 1/2 days in traveling to and from New York City. There were some weeks during 1945 when petitioner did not travel to New York City. 336 The number of days he spent in New York City in any week depended upon the length of time it took him to sell his allotment of plastic goods produced by the Haskins Manufacturing 287 Company. The machines of that company were running 7 days and nights each week and petitioner worked regularly at the factory on Saturdays and approximately thirty Sundays. Either he or "Mr. Haskins" had to be there on Sunday to give technical assistance in the event a machine broke down, and on that day they scheduled production for the coming week.In traveling to and from New York City in connection with the business of the Metropolitan Sales Company the petitioner utilized the ordinary modes of travel, and his total transportation expense of $ 806.40 represented the cost of train and plane tickets.The postage, telephone and telegraph expenses of $ 207.61 included in petitioner's travel expense record were incurred while in New York City, and were necessary to communicate with customers, some of whom were not in New York City, and to advise the factory of sales.The entertainment expense of $ 1,517.85 was incurred by petitioner in entertaining his customers. Such entertainment was customary in his business, was reasonable in amount, and was necessary to get business.The item of gifts in the amount of $ 150 represents the total amount of Christmas gifts to customers of the Metropolitan288 Sales Company. It was a common procedure for similar business concerns to give their customers Christmas gifts, and petitioner limited such gifts to those which in his judgment were necessary.During the year 1945, the petitioner's home for tax purposes was in Worcester, Massachusetts.OPINION.Petitioner claims a deduction in the amount of $ 5,063.32 under section 23 (a) (1) (A) of the Internal Revenue Code for expenditures made in connection with his business trips to New York. In seeking to disallow all of that amount above $ 806.40 (for transportation), respondent argues that petitioner's "home" was in New York within the meaning of section 23 (a) (1) (A), and that his New York expenses cannot be regarded as having been incurred while "away from home." We think that respondent's position cannot be sustained by the record in this case.Although the return indicates that petitioner spent 4 days a week in New York, there is convincing evidence that 4 days was merely the maximum time that he spent in New York in any one week; that in some weeks he spent all of his time in Worcester; that he was actually in New York an aggregate of 102 days during 1945 as against an aggregate of 289 216 days in Worcester; and that he spent more time in 337 Worcester during 1945 in connection with his employment with the Haskins Manufacturing Company than he did in New York and in traveling to and from New York on the business of the Metropolitan Sales Company.This is not the case of a taxpayer who keeps his place of residence at a point where he is not engaged in carrying on a trade or business and claims deductions for living expenses and cost of traveling to and from his residence. Cf. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465; Mort L. Bixler, 5 B. T. A. 1181, 1184. The petitioner owned and maintained a home for his family in Worcester and was employed by the Haskins Manufacturing Company in a factory located not far from his residence at the beginning of the year 1945. This was his principal place of business and his home at that time. During 1945 he continued his employment with Haskins and it continued to be an important source of livelihood to him. In 1945 he undertook a business venture in New York City under the name of the Metropolitan Sales Company. In order to carry on both of these activities, 290 he had to make expenditures for transportation to and from New York City, meals and lodging while there, and for telephone, telegraph and other items. He maintained no house or apartment in New York; he merely stayed at a hotel on each trip. This Court has heretofore recognized that a taxpayer may have more than one occupation or business, and has held that where it is shown that the taxpayer has two occupations which require him to spend a substantial amount of time in each of two cities, he is entitled to the deduction of traveling and other ordinary and necessary business expenses incurred in connection with attendance upon the one removed from his residence. Walter F. Brown, 13 B. T. A. 832; Joseph W. Powell, 34 B. T. A. 655, affd., 94 Fed. (2d) 483 (CA-1).This case is unlike S. M. R. O'Hara, 6 T. C. 841, in which the taxpayer, a lawyer, was held to have her "home" at her principal place of employment where she was required to spend full time over a period of years, notwithstanding that she visited her apartment or family residence on weekends in another 291 city where she handled some legal matters for clients at such times. The Court stressed the comparatively inconsequential degree of activity on such occasions and the relatively meager returns therefrom. Here, on the other hand, petitioner's Worcester employment was a significant source of income to him; it was of a permanent character, and his roots were in Worcester where he spent the greater part of his time during the tax year. He had no office or place of business in New York, other than a mailing address. On his New York trips he would stay at a hotel, at most only a few days at a time. While it is true that his rewards from the New York venture in 1945 exceeded his Worcester earnings for that year, that fact alone cannot shift his "home" from Worcester to New York.338 We hold that petitioner's "home" was Worcester and that his New York "traveling expenses (including the entire amount expended for meals and lodging)" are deductible. These include at least the item of $ 806.40 identified as "Transportation", the item of $ 1,631.65 identified as "Room and Meals", and possibly also the item of $ 207.61, 1293 identified as "postage, Telephone and Telegraph." However, it292 is unnecessary to determine whether the latter item is strictly classifiable as "traveling expenses," for it is in any event deductible as an "ordinary and necessary" business expense under section 23 (a) (1) (A). 2 Similarly, we are satisfied that the items of $ 1,517.85 for entertainment expenses and $ 150 for gifts to customers are deductible as "ordinary and necessary" business expenses under section 23 (a) (1) (A). But we do not approve the deduction of the item of $ 749.81 alleged to represent "Tips for entertainment, travel, and hotel and other hotel charges." The proof of expenditures for these purposes was vague and unsatisfactory. Moreover, even if some portion of this amount did represent deductible expenditures actually made, we are not satisfied as to whether some or all of them may not have been included in one or more of the other items.We hold that petitioner is entitled to deductions under section 23 (a) (1) (A) for items (1), (2), (3), (4), and (6), but is not entitled to any deduction for item (5).Decision will be entered under Rule 50. DISNEYDisney, J., dissenting: Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, in my opinion, prescribes for us a concept of a "business home," at which living expenses, and to which expense of travel from the taxpayer's294 actual home, are not deductible under section 23 (a) (1) (A) of the Internal Revenue Code. As I comprehend this concept, it is that there should be allowed only business expenses at such place or in pursuance of business in connection with that place. We had earlier, in fact, it *339 seems to me, recognized that for purposes of the statute "home" means a business location, post or station. See George W. Lindsay, 34 B. T. A. 840, quoting Mort L. Bixler, 5 B. T. A. 1181; William Lee Tracy, 39 B. T. A. 578; and Walter M. Priddy et al., 43 B. T. A. 18. In the instant case, the petitioner set up a business at a considerable distance from his home. This is the same situation as in the Flowers case and it is unaffected, I think, by the fact that he also had a business (not his principal business so far as income is concerned) at his actual home. Moreover, I am unable to distinguish S. M. R. O'Hara, 6 T.C. 841">6 T. C. 841. I therefore dissent. Footnotes1. Respondent suggests in his brief that this item may be a duplication of telephone and postage expenses already allowed in the amounts of $ 190.14 and $ 44.08, respectively. However, this issue was not raised at the trial or prior thereto, and we are satisfied that the $ 207.61 item relates only to such expenditures made while petitioner was in New York and does not duplicate the other similar expenditures which were presumably made while he was in or about Worcester.↩2. Respondent urges that petitioner has limited himself to claiming deductions herein only as "traveling expenses." We do not agree that the issue is thus limited. While it is true that the amended petition is inartistically drawn in this respect, we think that, read as a whole, it puts in issue the deductibility under section 23 (a) (1) (A)↩ of the contested expenditures as traveling expenses and as ordinary and necessary business expenses. The ordinary and necessary expenses here involved were incurred in connection with petitioner's traveling and a fair reading of the amended petition discloses the intention to raise the issue in both aspects.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620565/	WILLIAM E. BOEING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boeing v. CommissionerDocket Nos. 94779, 95704.United States Board of Tax Appeals47 B.T.A. 5; 1942 BTA LEXIS 752; June 2, 1942, Promulgated 752 These proceedings were originally decided in favor of petitioner upon the ground that the beneficiaries of the trust and not the trust itself were the donees of the gifts. The Commissioner petitioned for review to the Circuit Court of Appeals for the Ninth Circuit. That court reversed the Board upon the grounds that the gifts were of "future interests", an issue which was not raised by the Commissioner at the time of the hearing before the Board. The mandate of the court directs the Board to take further proceedings in the said cause "in accordance with the opinion and judgment of this court." Twelve days after the mandate of the court was received by the Board, the Commissioner filed a motion to which was attached an amended answer setting forth in detail affirmative allegations with respect to the issue of future interests and asking for increases in the deficiencies, and for leave to file same. Held, that such motion was timely filed, the Commissioner should be permitted to file his amended answer, and the proceedings should be set down for further hearing on the issue of "future interests." Prior opinion entered March 9, 1942 (published at 46 B.T.A. 492">46 B.T.A. 492),753 is superseded. BLACK 5 OPINION. BLACK: These proceedings were consolidated and involve deficiencies in gift taxes which the Commissioner determined against petitioner in the amounts of $1,312.51 for the year 1936 and $1,312.50 for the year 1937. The deficiency in each case resulted from the 6 disallowance by the Commissioner of one of the two $5,000 exclusions claimed by the petitioner on his gift tax return filed for each of the taxable years. The following statements taken from the record in Docket No. 94779, involving the year 1936, apply equally to both proceedings, and similar statements in Docket No. 95704, involving the year 1937, need not be printed. The Commissioner explained his determination of the deficiency in the deficiency notice as follows: Two exclusions are claimed by you against the gifts placed in trust. However, inasmuch as it has been held by the Circuit Courts of Appeals in the cases of and , that a trust represents one beneficiary, only one exclusion therefor may be allowed. See also 754 . The petitioner by an appropriate assignment of error assailed the correctness of the Commissioner's determination. The Commissioner's answer denied that he had erred as alleged in the petition, and raised no affirmative issue. Following a hearing on the merits, the Board decided in petitioner's favor and held that there was no deficiency, basing its decision upon the ground that the two beneficiaries of the trust were the donees of the gift and not the trust itself, as the Commissioner had determined. The Commissioner thereupon petitioned for review by the United States Circuit Court of Appeals for the Ninth Circuit. In his statement of points on review the Commissioner urged that the Board erred in failing to hold that the interests of the beneficiaries of the trust involved were future interests within the meaning of the statute and in failing to hold that under section 504(b) of the Revenue Act of 1932 no exclusions are permissible with respect to the gifts of insurance premiums made by the donor. In its opinion, see 755 , the court held that "The Board was right in rejecting the proposition of law advanced by the Commissioner" that the trust was the donee "person", but further held, on the authority of ; and , that "on the basis of the record before it it was wrong in holding that there were no deficiencies in taxes for the two years." In reaching its conclusion the court, among other things, said: * * * Under the very recent decisions in , and , it is clear that the gifts in the case before us were of future interests so far, at least, as concerns the proceeds and the income from the proceeds of the policies themselves. These mature only upon the death of the trustor. By the terms of the trust the trustee is to collect and invest all moneys "which may be due or become due" under the policies. The net income from invested funds received by the trustee 11 is to be distributed one-half to the wife and one-half756 to the son during their lives. In the event the wife does not survive the trustor, the entire trust is to be administered for the benefit of the son and his issue, if any; and conversely, if the son predeceases the trustor, leaving no issue, the entire corpus is to be transferred to the wife, or in the event of her prior death to two named beneficiaries or their issue. Other contingencies, not here material, are provided against. Clearly, the beneficiaries have no right to the present enjoyment of the policy proceeds, and they will never have that right unless they survive the trustor, or, in any event, unless they survive the possible lapse of the policies. Their use and enjoyment are "postponed to the happening of a future uncertain event", and the gifts thus import the difficulties which it was the purpose of Congress to avoid. , page 404. After stating its view on the question of "future interests" in the part of its opinion just quoted, the court concluded by stating: * * * Accordingly, the decision must be reversed and the cause remanded to redetermine or compute the deficiences. Since the applicability of the future757 interests provision of the statute was not considered and no issue was made in respect of it, opportunity should be given the taxpayer to present evidence on that issue if he so desires. As the matter stands the Commissioner has assessed deficiencies based on an exclusion of $5,000 for each of the two years, although the taxpayer appears to be entitled to none. The Board of Tax Appeals is a body authorized by statute to operate under rules of its own adoption. Whether, in the light of its rules and of Sec. 272(e), (f) of the 1932 act, 26 U.S.C.A. Int. Rev. Acts, page 560, the Board may or should redetermine a greater deficiency than the amount of which notice has been given the taxpayer is a question which we have not considered and do not undertake now to decide. The question is not before us since no assertion of an additional deficiency has yet been made by the Commissioner in conformity with the statute. Following its opinion which reversed the Board, the court issued its mandate. This mandate was filed with the Board November 29, 1941, and, omitting formal parts, reads as follows: ON CONSIDERATION WHEREOF, it is now here ordered and adjudged by this Court, that the758 decision of the said Board of Tax Appeals in this Cause be, and hereby is reversed, and that this cause be, and hereby is remanded to the said Board of Tax Appeals for further proceedings in harmony with the opinion of this court. YOU, THEREFORE, ARE HEREBY COMMANDED that such further proceedings be had in the said cause in accordance with the opinion and judgment of this court, * * * On December 11, 1941, the Commissioner filed a motion in which he moved that the Board: (1) * * * vacate and set aside its report entered February 1, 1940, (2) * * * permit the respondent to file the attached amended answers claiming increases in the deficiencies as proposed in the deficiency notices dated May 13, 1938, and July 21, 1938, and (3) * * * grant the petitioner an opportunity to present evidence on the issue relating to the applicability of the future interests provision of the statute if he so desires. On January 20, 1942, petitioner filed a reply to respondent's motion in which he stated among other things that he did not desire 8 to present evidence on the issue relating to the applicability of the future interests provision of the statute but would rely on the record759 as heretofore made. Petitioner also in his reply opposed the granting of respondent's motion to file amended answers asking for increased deficiencies. By direction of the Board both parties have filed their briefs in support of their respective contentions. We construe the opinion and the mandate of the court, which we have quoted, to amount to a direction for a rehearing, the one issue upon rehearing to be that of future interests. If petitioner does not desire to offer any further evidence on that issue, that of course is his privilege. But his declination to offer any additional evidence should not foreclose the right of the Commissioner, by leave of the Board, to amend his answer at or before the rehearing and claim an increased deficiency. The burden of proof will of course be upon the Commissioner to establish his right to an increased deficiency after it is properly pleaded. See Rule 32, Board's Rules of Practice. Section 513(e) of Title III (relating to gift tax) of the Revenue Act of 1932 reads as follows: (e) INCREASE OF DEFICIENCY AFTER NOTICE MAILED. - The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount760 so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the donor, and to determine whether any additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing. As we view the situation, the Commissioner has moved to amend his answer and ask for an increased deficiency before a "rehearing" within the meaning of the foregoing statute. "Rehearing" in appellate practice is defined in Cyclopedic Law Dictionary, 3d Ed., as "a second consideration on further argument, given to a cause after decision." As we have already stated, it seems plain to us that the court, in reversing and remanding these proceedings, has directed a rehearing at which the issue of "future interests" is to receive consideration. That is the very occasion and purpose of the reversal and remand of the Board's prior decision. It is of course perfectly true that the Commissioner will get no increase in the deficiencies which he has already determined unless he asserts them in a proper pleading "at or before the rehearing." 761 . The Moise decision clearly prohibits an increase in the deficiencies under the pleadings now on file. See also ; affd., ; ; . The Commissioner, however, by motion duly filed, seeks to file an amended answer in which by affirmative allegations he raises the 9 issue of "future interests" and in which he clearly and succinctly sets forth his grounds for an increased deficiency and, after setting forth these grounds, concludes as follows: WHEREFORE respondent respectfully prays that the deficiency claimed in his notice of deficiency be increased in accordance with the foregoing computation and now asserts a claim for such increase of deficiency as the statute in such a case provides. We think respondent's motion to file his amended answer raising the new issue of "future interests" and asking for an increased deficiency is, under the circumstances existing in these proceedings, a timely motion. Rule 19 of762 the Board's Rules of Practice provides in part as follows: No motion for rehearing, further hearing, reconsideration or the like may, except by special leave of the Board, be filed more than 30 days after the opinion has been served; and no motion for vacation or revision of a decision may, except by special leave of the Board, be filed more than 30 days after the decision has been entered. As we have already stated, we construe the opinion and mandate of the court as requiring us to rehear and reconsider these proceedings on the issue of "future interests" and therefore no motion that we do so is necessary from either party, and the foregoing language of Rule 19 is not applicable. If we are in error, however, in concluding that the Ninth Circuit has itself directed a rehearing by the Board on the issue of future interests and that it is necessary for one of the parties to move for one, if any is to be had, then we think the motion which respondent has filed can reasonably be construed as a motion for rehearing, following the mandate of the court. This motion, coming twelve days after the mandate of the court was received by the Board, is, we think, a timely motion even though763 it does come more than 30 days after our prior opinion was entered and more than 30 days after our decision was entered pursuant to such opinion. Furthermore, we think we have the power to grant it without violating any provision of Rule 19, supra, for the rule itself provides that a rehearing may be granted by "special leave of the Board" beyond the 30-day period fixed in the rule. Wherefore, for the reasons herein above stated, an order will be entered granting respondent's motion for leave to file his amended answers lodged with the Board December 11, 1941, and the proceedings will be set for a rehearing in due course on the issue of "future interests." The present opinion replaces and supersedes the opinion herein entered March 9, 1942 (published at ), which was 10 by order of the Chairman dated March 27, 1942, referred to the Board for review. Reviewed by the Board. STERNHAGEN and HILL dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620568/	FRANCISCO AND ANGELA AGUIRRE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAguirre v. Comm'rNo. 9379-00LUnited States Tax Court117 T.C. 324; 2001 U.S. Tax Ct. LEXIS 59; 117 T.C. No. 26; December 28, 2001, Filed 59 Respondent's motion for summary judgment granted. Petitioners (Ps) filed returns for 1992-94. Respondent (R) examined those returns, and Ps signed a Form 4549, Income Tax Examination Changes, in which they waived the right to contest their tax liability in the Tax Court and consented to the immediate assessment and collection of tax for 1992-94. R issued to Ps a notice of intent to levy with respect to Ps' taxes due for tax years 1992-94. Ps requested a hearing pursuant to sec. 6330(b), I.R.C., solely to dispute the amount of their tax liabilities for 1992-94. R sent a notice of determination to Ps stating that collection of their tax liability for 1992-94 would proceed. Ps petitioned this Court to review R's determination. R subsequently filed a motion for summary judgment, to which Ps did not respond. Held: Ps may not contest their underlying tax liability for tax years 1992-94 because, by signing Form 4549, they consented to the immediate assessment and collection of tax for those years. Francisco and Angela60 Aguirre, pro se.David C. Holtz, for respondent. Colvin, John O.COLVIN325 OPINIONCOLVIN, Judge: This matter is before the Court on respondent's motion for summary judgment. For reasons stated below, we will grant respondent's motion.All section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.BackgroundPetitioners are married and lived in Hacienda Heights, California, when they filed their petition.Petitioners filed joint returns for 1992, 1993, and 1994. Respondent examined petitioners' 1992, 1993, and 1994 returns in 1995. On July 13, 1995, petitioners signed a Form 4549, Income Tax Examination Changes, in which they consented to the immediate assessment and collection of tax for 1992, 1993, and 1994. It stated:Consent to Assessment and Collection -- I do not wish to exercise my appeal rights with the Internal Revenue Service or to contest in United States Tax Court the findings in this report. Therefore, I give my consent to the immediate assessment and collection of any increase in tax and penalties, and accept any decrease61 in tax and penalties shown above, plus any additional interest as provided by law. I understand that this report is subject to acceptance by the District Director.In 1999, respondent sent to petitioners a Notice of Intent to Levy and Notice of Your Right to a Hearing relating to petitioners' 1992-94 tax years. Petitioners then filed a Form 12153, Request for a Collection Due Process Hearing, for those tax years. 1 Petitioners requested the hearing solely to dispute the correctness of their underlying tax liabilities. On August 22, 2000, respondent sent petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the determination letter), in which respondent stated that collection from petitioners of their tax liability for 1992-94 would proceed. On September 5, 2000, petitioners filed a petition for lien or levy action under section 6320(c) or 6330(d).Respondent62 filed a motion for summary judgment on April 13, 2001. On April 17, 2001, the Court issued an order directing 326 petitioners to file a response to respondent's motion. The order included a reminder to the parties that the case would be called from the calendar at the April 30, 2001, Los Angeles, California, trial session. Petitioners failed to file a response to respondent's motion, and they did not attend, or have someone appear on their behalf at, the calendar call.DiscussionA. Contentions of the PartiesRespondent contends, inter alia, that petitioners waived their right to challenge collection of their tax liability for 1992- 94 because they signed Form 4549 consenting to the immediate assessment and collection of their tax liability for those years.In their petition, petitioners stated as a basis for relief only that:We disagree with the determination, because although we were present at the time of the original audit, many of our deductions were disallowed when they were correct. We have been requesting an audit reconsideration to present general ledegers [sic] and documents properly organized in order to verify our deductions63 in a cohesive manner.B. Summary JudgmentSummary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678">90 T.C. 678, 681 (1988). We may grant summary judgment if the pleadings, answers to interrogatories, depositions, admissions, affidavits, and any other acceptable materials show that there is no genuine issue of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 520 (1992), affd. 17 F.3d 965">17 F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753">90 T.C. 753, 754 (1988). The moving party bears the burden of proving that there is no genuine issue of material fact. Dahlstrom v. Commissioner, 85 T.C. 812">85 T.C. 812, 821 (1985); Jacklin v. Commissioner, 79 T.C. 340">79 T.C. 340, 344 (1982).327 C. AnalysisNo genuine issues of material fact preclude us from deciding this matter. Rule 121(b). We conclude that respondent is entitled to summary judgment. First, by signing Form 4549, petitioners consented to the immediate assessment and collection of their tax liability for 1992-94. See Hudock v. Commissioner, 65 T.C. 351">65 T.C. 351, 363 (1975)64 (Form 4549 is evidence of the taxpayer's consent to the immediate assessment and collection of the proposed deficiency). Petitioners cannot now challenge the tax liability to which they have consented.Petitioners signed the Form 4549 in 1995, before enactment in 1998 2 of sections 6320 and 6330, which provide procedures for an Appeals Office hearing and judicial review of collection actions. However, our deficiency jurisdiction existed in 1995. By signing the Form 4549, petitioner explicitly waived the right to contest in the Tax Court their tax liability for the years included in the Form 4549. Petitioners thus expressly waived the opportunity to obtain prepayment judicial review of their tax liability for those years. Petitioners requested the section 6330 hearing and filed their petition in this case solely to dispute the correctness of their underlying tax liabilities. The fact that section 6330 now provides an opportunity to contest tax liability for taxpayers who did not receive a notice of deficiency, sec. 6330(c)(2)(B), provides no consolation to petitioners who themselves made the choice not to receive such notice, see Sego v. Commissioner, 114 T.C. 604">114 T.C. 604, 611 (2000)65 (taxpayers who deliberately refused to accept delivery of the notices of deficiency repudiated the opportunity to contest the notices of deficiency in Tax Court).Second, by failing to file a response to respondent's motion and to attend the calendar call, or have someone appear on their behalf, petitioners waived their right to contest the motion. Rule 121(d); Lunsford v. Commissioner, 117 T.C. 159">117 T.C. 159, 2001 U.S. Tax Ct. LEXIS 48">2001 U.S. Tax Ct. LEXIS 48, 117 T.C. No. 16">117 T.C. No. 16 (2001).*328 Accordingly, we will grant respondent's motion for summary judgment.An appropriate order and decision will be entered. Footnotes1. The record does not indicate whether respondent conducted a hearing in petitioners' case.↩2. Secs. 6320 and 6330↩ were enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3401, 112 Stat. 685, 746.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620569/	Estate of Louis H. Rowe, Deceased, H. Lewis Brown, Edward C. Rowe and W. Lee White, Executors v. Commissioner.Estate of Louis H. Rowe, Deceased v. CommissionerDocket No. 25531.United States Tax Court1952 Tax Ct. Memo LEXIS 244; 11 T.C.M. (CCH) 415; T.C.M. (RIA) 53220; April 24, 1952244 Held, unpaid balance of loans made by stockholder to wholly-owned corporation not deductible as business bad debt in year of liquidation of corporation when value of corporate assets are not shown to be less than the balance of the debt. H. Lewis Brown, Esq., for the petitioners. Joseph F. Rogers, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The respondent determined a deficiency in the decedent's income tax for the year 1944 of $9,134.66. The sole issue here is whether decedent is entitled to a deduction of $29,304.57 for a bad debt in 1944. Findings of Fact The facts stipulated are found accordingly. The petitioners are the executors of the Estate of Louis H. Rowe, who died January 31, 1951. The decedent, a practicing attorney who resided in New York City, 245 was interested in farming in upstate New York. In October, 1925 Rowe's Ranch, Inc., sometimes hereinafter referred to as the corporation, was incorporated under the laws of New York. This corporation was wholly-owned and controlled by Louis H. Rowe. The corporation acquired title to several farms. The "Fiske Farm" and "Lyon Farm" of Naples, New York, and the "Dantz Lot" in Cohocton, New York, were conveyed to Rowe's Ranch, Inc. on November 5, 1925, by Louis H. Rowe. The "Home Place" in Atlanta, New York, was conveyed to the corporation on November 7, 1925, for $15,000 by Ellen Rowe. The "Hamlin Farm" also of Atlanta, New York, was conveyed on January 8, 1926, to the corporation by Hamlin for $10,000. The "West Farm" was received in exchange for the "Lyon Farm" in 1934. Louis H. Rowe owned or held interests in several farms in his individual capacity. The "Corey Place" in Cohocton, New York, was purchased by the decedent and his brother, William L. Rowe, in 1917. In 1920, Louis H. Rowe quitclaimed his one-half interest to his brother. The "Avoca Farm," Avoca, New York, was bought by Rowe in September, 1934, for $750. The "Weyland Road Property," Steuben County, New York, was purchased246 by the decedent in 1922. Rowe bought the "Polmanteer Farm" in 1935, and the "Metzinger Farm" in Naples, New York, also in the 1930s. Louis H. Rowe visited the various farms owned by himself or the corporation, which were operated chiefly by tenant farmers, approximately six to twenty times a year, remaining from two days to two weeks at a time. He was sometimes accompanied by his law associate and by his chauffeur. The "Home Place" consisted of 108 acres. Before it was conveyed to Rowe's Ranch, Inc. in 1925, the decedent had spent approximately $40,000 in improving it by the construction of a house which had cost that amount. In 1931, $12,500 was received by Rowe's Ranch, Inc. from the mother of L. Corrin Strong and at the same time the corporation executed a deed to the "Home Place" to L. Corrin Strong. This deed was not recorded. L. Corrin Strong never took possession of the property. Rowe's Ranch, Inc. continued to operate the farm and to pay the taxes on the property until 1946. The books of the corporation carried the transaction as a sale but no indication of the transaction is found on the 1931 corporate income tax return. The decedent's law associate was of the opinion that247 the unrecorded deed was actually a mortgage. The decedent also received an additional $12,500 from Strong's mother, which was secured by the collateral of stock in the Lincoln Realty Company. The latter transaction was settled in 1946. In 1946 the deed from Rowe's Ranch, Inc. to Strong was recorded. Strong then conveyed the property to Louis H. Rowe personally and the decedent executed a bond and mortgage to Strong for $12,500. William L. Rowe, the decedent's brother, occupied the "Home Place" until his death in 1933, and his family has continued to occupy it since then. William L. Rowe looked after the farm operations until his death, after which the decedent performed this task. The books of Rowe's Ranch, Inc., which were kept by Louise A. Johnson, the decedent's secretary, who died between 1943 and 1945, showed that the corporation, between 1925 and 1944, borrowed $135,652.34 from the decedent, of which $94,647.77 was repaid to him. The unpaid balance was computed at $41,004.57, of which $26,225 is represented by two demand notes of $18,240 and $11,729.45, executed in 1931 by Louis H. Rowe as president of the corporation, payable to himself individually. Of the total $29,969.45248 evidenced by the two notes, $3,744.45 represented interest. Checks were drawn on the Chase National Bank of the City of New York by the decedent or his agent to the order of Rowe's Ranch, Inc., as follows: YearAmount1933$1,421.0019341,430.4419352,350.5019362,777.001937 (through Dec. 14th)1,395.00$9,373.94The Certificate of Incorporation of Rowe's Ranch, Inc. was dissolved on December 15, 1937, pursuant to section 203-A of the Tax Law of New York. During the years 1925 through 1937 Rowe's Ranch, Inc. filed corporate income tax returns which do not reflect the debts owed to Louis H. Rowe by balance sheet or otherwise. A corporation known as Reim's Realty Corporation was organized by the decedent with Rowe's Ranch, Inc. as sole stockholder except for qualifying directors' shares. In liquidating Rowe's Ranch, Inc. in 1944 the property then held by Rowe's Ranch, Inc. was conveyed to Reim's Realty Corporation for shares of stock in the new corporation. This stock was then distributed to Louis H. Rowe, the sole stockholder249 of Rowe's Ranch, Inc., as a final liquidating dividend. In 1944 the "Fiske Farm" and the "Hamlin Farm" were owned by Rowe's Ranch, Inc. at the time of liquidation. The value of these farms was $4,000 and $8,000, respectively, the prices at which the properties later sold. The "Avoca Farm" was never operated as a farm. Beside his interest in the practice of law and in the farms in New York State, the decedent had interests in the coal business, real estate in New York City, and at one time he was interested in the fruit business. In his individual income tax return for 1944, Louis H. Rowe did not list any income from farming. In his return for that year the decedent claimed a bad debt deduction of $29,304.57. An explanation of this deduction was given on the return as follows: "BAD DEBTS "During the years from 1926 to 1944, the taxpayer advanced to Rowe's Ranch, Inc. a New York Corporation, sums of money aggregating a net amount, after repayments, of $41,004.27. Rowe's Ranch, Inc. was fully and finally liquidated in 1944, and the taxpayer received from said corporation a first and final liquidating dividend of the value of $11,700.00; leaving a bad debt, chargeable in 1944, 250 of $29,304.57." Opinion VAN FOSSAN, Judge: In this proceeding the petitioners seek a deduction as a business bad debt of $29,304.57 in the year 1944 under section 23 (k) (1) of the Internal Revenue Code. 1The petitioners state in their brief that through oversight the value of the final liquidating dividend from Rowe's Ranch, Inc. to the decedent was not properly251 computed and that the credit on the debt should have been $14,000 instead of $11,700. This correction reduces the balance of the debt to $27,004.57. In determining the amount of the debt owed to Louis H. Rowe by the solely-owned corporation, the petitioners have subtracted the amounts repaid to the decedent on account of the loans he had made. The record of the loans and repayments was kept by Louis H. Rowe's secretary, who died prior to the decedent. The record of the debt could not, therefore, be authenticated as correct by any person familiar with the decedent's loan transactions. Of the total amounts of the loans, $26,225 is represented by two demand notes, the remainder of the debt being evidenced only by the company records. In the year of liquidation of Rowe's Ranch, Inc., 1944, the properties owned by the corporation were the "Fiske" and "Hamlin" farms. The "Home Place" was the subject of an unrecorded transaction between the corporation and L. Corrin Strong in 1931. A deed had been given to Strong in 1931 but it was not recorded until 1946, at which time Strong deeded the property to the decedent in exchange for a mortgage. The "Home Place" was operated as a farm by decedent's252 brother until 1933 and later by the decedent for Rowe's Ranch, Inc. Taxes on the property were paid by the solely-owned corporation. Strong never took possession of the "Home Place." William L. Rowe's family resided on the property and continued to do so at the time of the hearing. Rowe's Ranch, Inc. had received $12,500 in 1931 in consideration of the deed which was not reflected in its income tax return for that year. Whether the transaction be considered a sale which was never consummated or a mortgage, it is apparent that Rowe's Ranch, Inc. retained a substantial interest in the "Home Place" after 1931. The continued operation of the farm, its use as a residence by the family, the payment of taxes by the corporation, the lack of transfer of possession to Strong, and the subsequent recording of the mortgage in 1946 indicate that the decedent and the corporation maintained a continuing interest in the property despite the deed in 1931. When, in 1944, the corporation was liquidated, the "Home Place" was not included in the valuation of corporate assets for the purpose of determining the debt owed to decedent after liquidation. Two years later Louis H. Rowe was deeded the title to253 the property by Strong and mortgaged it back to Strong. Members of the family of decedent's brother continued to occupy the house until the time of hearing. At no time during the period 1931-1946 did the decedent or the solely owned corporation treat the property as having been sold or otherwise disposed of. In any fair evaluation of the liquidating dividend in 1944, we are of the opinion that the value of the corporation's interest in the "Home Place" must be included. Thus at the time of the liquidation of Rowe's Ranch, Inc., that corporation owned not only the "Hamlin" and "Fiske" farms but also a valuable interest in the "Home Place." Whether designated as that of a mortgagor or otherwise, the equitable interest of Rowe's Ranch, Inc. in the 108-acre farm which had cost $15,000 and the house which had been built at a cost of $40,000, apparently was of a value at least equal to the unpaid balance of the debt owed the decedent. Petitioners have not established the contrary. For this reason, the petitioners' claim must fail. Decision will be entered under Rule 50. Footnotes. Note: After this dissolution the corporation continued to function to a limited extent until final liquidation in 1944.↩1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. * * *(k) Bad Debts. - (1) General Rule. - Debts which become worthless within the taxable year; or (in the discretion of the Commissioner) a reasonable addition to a reserve for bad debts; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. This paragraph shall not apply in the case of a taxpayer, other than a bank, as defined in section 104, with respect to a debt evidenced by a security as defined in paragraph (3) of this subsection. This paragraph shall not apply in the case of a taxpayer, other than a corporation, with respect to a non-business debt, as defined in paragraph (4) of this subsection.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620570/	ESTATE OF HAZARD E. REEVES, DECEASED, ALEXANDER G. REEVES, HARRY MILLER, AND THE BANK OF NEW YORK, CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Reeves v. CommissionerDocket No. 28208-90United States Tax Court100 T.C. 427; 1993 U.S. Tax Ct. LEXIS 28; 100 T.C. No. 28; May 17, 1993, Filed; As Corrected May 27, 1993 28 Decision will be entered under Rule 155. Decedent owned 511,160 shares of Realtron stock. The value of the shares was included when valuing the gross estate and was included in determining the value of the residue which qualified for the marital deduction pursuant to sec. 2056, I.R.C. The shares formed part of the decedent's general estate out of which the marital bequest could be satisfied. The executors of decedent's estate sold the Realtron shares to the Realtron Employees' Stock Ownership Plan, qualifying the estate for a deduction of 50 percent of the proceeds pursuant to sec. 2057, I.R.C.Held: The marital deduction must be reduced by the deduction allowed under sec. 2057, I.R.C. in order to prevent a double deduction of the value of the shares. For petitioner: Alfred Wheeler. For respondent: Michael Goldbas. HAMBLENHAMBLEN428 HAMBLEN, Chief Judge: Respondent determined a deficiency in the Federal estate tax of the Estate of Hazard E. Reeves (petitioner) in the amount of $ 1,100,700.69. This case is before the Court pursuant to Rule 122 on the parties' fully stipulated facts. The issue for our decision is whether the marital deduction must be adjusted to reflect 29 the deduction allowed for the sale of employer shares to an Employee Stock Ownership Plan (ESOP) under section 2057. Unless otherwise noted, all section references are to the Internal Revenue Code in effect at decedent's date of death, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT All of the facts have been stipulated pursuant to Rule 91. The stipulation of facts and exhibits are incorporated as our findings by this reference. At the time of the filing of the petition in this case, two of the executors of decedent's estate were residents of the State of New York, and one was a resident of the State of New Hampshire. The estate's mailing address was in New York, New York. On October 30, 1985, Hazard E. Reeves (decedent) executed his Last Will and Testament (will). On November 20, 1985, and February 25, 1986, respectively, decedent executed a first and a second codicil to his will. Under the terms of the will and the codicils thereto, decedent appointed Alexander G. Reeves, Harry Miller, and Bank of New York as executors of his estate. In addition, decedent made specific bequests of personal property to named individuals and 30 his surviving spouse. Further, he made general cash bequests to individuals other than his surviving spouse. Decedent did429 not, however, specifically bequeath his interest in 511,116 shares of Realtron Corporation class A common stock. Realtron is a domestic corporation whose shares are not publicly traded. Article twelve, subpart(c) of the will grants to the executors the power "[to] sell at public or private sale and to exchange or otherwise dispose of any stocks, bonds, securities, or other personal property constituting assets of my estate not specifically bequeathed." Decedent bequeathed the residue of his estate to a trust. The trust's terms direct the trustees to pay the net income from the trust at least quarterly to, or for the benefit of, decedent's surviving spouse. The principal of the trust could be used by the trustees for the support, maintenance, and welfare of decedent's surviving spouse. Decedent directed that the remainder interest of the trust be used to pay estate taxes owed by his surviving spouse's estate and then distributed to her grandchildren. Decedent died on December 23, 1986. In September 1987, the executors sold the 511,116 shares of Realtron31 stock to Realtron's Employee Stock Ownership Plan for the amount of $ 2,555,580. On March 23, 1988, pursuant to an extension, the executors timely filed a Federal estate tax return. They valued the gross estate as of decedent's date of death at $ 20,410,045.55, which included the 511,116 shares of Realtron Corporation class A common stock, valued at $ 5,111,160. 1 On the return, the executors claimed a marital deduction of $ 11,583,568, made up of the following items: 32 (1) One-half of the value of the property held jointly, prior to decedent's death, which passed to decedent's surviving spouse by operation of law; (2) The value of the tangible personal property bequeathed to decedent's surviving spouse; and (3) The net fair market value of the residuary bequest which was treated as Qualified Terminable Interest Property (QTIP) pursuant to section 2056(b)(7). In determining the value of the residuary, the executors included the $ 5,111,160 "date of death" value of the Realtron shares. 2430 The executors also claimed a deduction from the gross estate33 of $ 1,277,790, pursuant to section 2057. The deduction so reported equals 50 percent of the proceeds from the sale of the Realtron stock to the Realtron Employee Stock Ownership Plan. OPINION 1. The marital deductionSection 2056 permits an estate to claim a marital deduction for the value of property interests passing outright from a decedent to the decedent's surviving spouse "except as limited by subsection (b)". One of the limitations in subsection (b) is the denial of deductibility for a "terminable interest". Sec. 2056(b)(1). That, generally, is a property interest that will terminate or fail "on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur". Sec. 2056(b)(1). Section 2056(b)(7) contains an exception to this "terminable interest rule". It provides a marital deduction for "qualified terminable interest property". That, generally, is property which passes to the surviving spouse from the decedent, from which the surviving spouse can claim "all the income from the property, payable annually or at more frequent431 intervals", and, while she is alive, no one else can appoint any part of the property34 to anyone but her. Sec. 2056(b)(7). Here, the parties agree that the executors properly elected to treat the lifetime interest in the residuary trust bequeathed to decedent's surviving spouse as a terminable interest that qualifies for QTIP treatment. Satisfaction of the conditions of section 2056(b)(7) is not in controversy. 2. Limitation on double deductionsSection 2056(b)(9) was added as a technical correction to the marital deduction provisions. Technical Corrections Act of 1982, Pub. L. 97-448, sec. 104(a)(2)(A), 96 Stat. 2365, 2380. Section 2056(b)(9) provides as follows: DENIAL OF DOUBLE DEDUCTION. -- Nothing in this section or any other provision of this chapter shall allow the value of any interest in property to be deducted under this chapter more than once with respect to the same decedent.Apparently, the only legislative material regarding section 2056(b)(9) is a statement in a staff report prepared for the use of the Committee on Ways and Means. That report states the purpose of section 2056(b)(9) as follows: In order to insure that there is not a double deduction as a marital deduction and a charitable deduction for charitable remainder interests, 35 the bill would clarify that the value of any interest in property may be deducted only once in computing the estate tax or gift tax liability. [Staff of Joint Comm. on Taxation, Description of H. R. 6056, Technical Corrections Act of 1982 (J. Comm. Print 1982) at 12.]3. Section 2057Section 2057, enacted as part of the Tax Reform Act of 1986, provided in pertinent part: (a) GENERAL RULE. -- 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 an amount equal to 50 percent of the qualified proceeds of a qualified sale of employer securities. [Pub. L. 99-514, sec. 1172(a), 100 Stat. 2085, 2513-2515.]In sum, section 2057 provides an estate tax deduction for 50 percent of the proceeds from a sale of employer securities to an Employee Stock Ownership Plan (ESOP). The legislative432 history indicates that section 2057 was intended to encourage transfers of employer securities to ESOPs. See H. Rept. 100-391, at 1045 (1987), 132 Cong. Rec. S7902 (daily ed. June 19, 1986). Congress repealed section 2057 as of December 19, 1989. Omnibus Budget Reconciliation Act of 1989, Pub. 36 L. 101-239, sec. 7304, 103 Stat. 2301, 2352. There is no dispute that the estate has satisfied the conditions imposed by section 2057 for deduction of 50 percent of the proceeds from the sale of the Realtron stock to the ESOP. The dispute here, rather, is whether petitioner has taken a double deduction for the interest in the Realtron shares. Respondent argues that petitioner included the date-of-death value of those shares in the QTIP marital deduction and also claimed the ESOP deduction for half the sale proceeds of those shares under section 2057. Respondent contends that section 2056(b)(9) prohibits such a "double deduction". 4. The allowable deductionsWe are unaware of any case applying section 2056(b)(9). Nonetheless, we find that the plain language of the statute denies petitioner a double deduction resulting from its claiming the full date-of-death value of the Realtron shares as part of the marital deduction plus the value of half the proceeds as an ESOP deduction. It is well established that statutes are to be construed so as to give effect to their plain and ordinary meaning unless to do so would produce absurd results. United States v. American Trucking Associations, Inc., 310 U.S. 534">310 U.S. 534, 543-544 (1940).37 Here, our construction of section 2056(b)(9) -- that it prevents more than one deduction for the value of any property interest in an estate tax context -- gives effect to its plain meaning and produces sensible results. 338 Section 2056(b)(9) provides that, for estate tax purposes, 4 the value of an "interest in property" may be deducted only once with respect to the same decedent. 433 The "value" of a deductible interest passing to the surviving spouse is determined as of the decedent's date of death, unless the executors elect the alternate valuation method under section 2032. Sec. 20.2056(b)-4(a), Estate Tax Regs. Here, the parties agree that the value of the Realtron stock, determined as of decedent's date of death, entered into the computation of the value of the residuary estate. The value of that residuary, in the form of a QTIP trust, 39 was included in the amount of the marital deduction under section 2056(a). The term "interest in property" also has a meaning in the provisions of the Internal Revenue Code relating to the marital deduction. The marital deduction provisions first came into the Internal Revenue Code in the Revenue Act of 1948, ch. 168, sec. 361(a), 62 Stat. 110, 117. The Senate report accompanying that legislation explained the concept of an "interest in property", as compared to the property itself. The report stated "in the case of a bequest, devise, or transfer of an interest which may be satisfied out of, or with the proceeds of, any property of the decedent's general estate or of a trust, the interest * * * [in property] is an interest in any and all of such property." S. Rept. 1013, 80th Cong., 2d Sess. (1948), 1 C.B. 285">1948-1 C.B. 285, 333. The language from the legislative history helps to make clear that section 2056(b)(9) operates to limit the marital deduction claimed here. When decedent died, his residuary estate constituted "an interest passing to the surviving spouse" within the meaning of section 2056(a), the marital deduction provision. That interest was an 40 interest in "any and all" of the property, or in "the proceeds of" the property that formed the residuary estate. S. Rept. 1013, supra at 333; see Meyer v. United States, 364 U.S. 410">364 U.S. 410 (1960). Here the decedent died possessed of Realtron shares which were included in his gross estate. The shares were not specifically bequeathed. Thus the shares, or the proceeds of their sale, were among the assets of the general estate out of which the marital bequest could be paid. Cf. section 2056(b)(2). Petitioner has failed to show that the cash434 received from the sale of the shares was not used to fund the marital trust. Nor has petitioner identified any provision of the will or of local law that would forbid the sales proceeds from being used for that purpose. Thus, under the facts of this case, the interest in property that passed to decedent's spouse included an interest in "any and all" of the Realtron stock, or in the proceeds of that stock. Estate of Cunha v. Commissioner, 279 F.2d 292">279 F.2d 292, 299 (9th Cir. 1960), affg. 30 T.C. 812">30 T.C. 812 (1958). Accordingly, when the estate's executors claimed an ESOP41 deduction of $ 1,277,790 for the proceeds from the sale of that stock under section 2057, they of necessity deducted part of the "value" of the surviving spouse's interest. They also claimed a marital deduction for the entire $ 5,111,160 value of the surviving spouse's interest in that stock. In so doing, they undertook to deduct part of the value of her interest in the Realtron shares "more than once" within the meaning of section 2056(b)(9). Section 2056(b)(9) precludes them from doing so. Neither the Internal Revenue Code nor the Regulations provide specific guidance as to the manner in which section 2059(b)(9) is to be applied with respect to ESOP deductions under section 2057. We believe, however, that the Internal Revenue Code provisions, read together in the manner above, lead to a result that is consistent with the intent of the statute. As noted above, section 2056(a) provides for a marital deduction of an interest passing to the surviving spouse, except as limited by subsection 2056(b). Section 2056(b)(9) provides such a limit. Here, the entire value of the surviving spouse's interest in the Realtron stock, some $ 5,111,160, contributed to the marital deduction. 42 Section 2056(b)(9) precludes deducting any part of that amount twice. Thus, the estate is precluded from deducting the additional $ 1,277,790 amount of the ESOP deduction. Section 2056(a) provides, however, that the limitations of section 2056(b) operate to reduce the amount of the marital deduction. Accordingly, we hold that the marital deduction is to be reduced by $ 1,277,790, the amount of the ESOP deduction, while the ESOP deduction in the amount of $ 1,277,790 is to be allowed in full. This will permit petitioner a deduction of the $ 5,111,160 value of the surviving spouse's interest, but not more or less than the value of that interest. This is consistent with the provision435 under section 2056(b)(9) that the value of an interest be deducted "only once". This approach is also consistent with the treatment provided in similar situations, wherein the marital deduction is reduced by the amount of deductions taken under other sections of the Federal estate tax provisions. 543 Respondent's position is that the marital deduction is to be reduced by the value of the stock -- said to be some $ 2,252,111 -- at the time it was sold to the ESOP. This approach, however, would reduce the total deductions attributable to the Realtron stock to $ 3,833,370 (the sum of the value that respondent would allow as a marital deduction, $ 2,555,580, plus the amount allowed as an ESOP deduction, some $ 1,277,790). That amount is less than the value of that stock as part of the marital deduction -- $ 5,111,160, a value that respondent does not contest. Respondent's position, therefore, would allow a deduction of less than the value of the surviving spouse's interest. Section 2056(b)(9), however, allows the full value of such interest -- but no more. Without more guidance from the statute and regulations, we think respondent's position is at odds with section 2056(b)(9). Petitioner makes a number of arguments in support of its position, but we find them unpersuasive. For example, petitioner quotes the statement in the congressional staff explanation of section 2056(b)(9), set forth above. Staff of Joint Comm. on Taxation, Description of H.R. 6056, Technical Corrections44 Act of 1982 at 12 (J. Comm. Print 1982). Relying on this statement, petitioner contends that Congress was primarily concerned with the potential double deduction where a marital deduction allowable under section 2056(b)(7) for QTIP property could overlap with the charitable deduction claimed with respect to the remainder interest in the same QTIP property. Petitioner, thus, concludes that Congress did not intend to restrict the marital deduction in the amount of any ESOP deduction. The staff statement regarding the purpose of section 2056(b)(9) indicates that Congress did intend to prevent a436 double deduction in the charitable remainder/marital deduction context. The statement also indicates, however, that for estate tax purposes, section 2056(b)(9) serves to "clarify" the general congressional intent that "the value of any interest in property may be deducted only once." Description of H.R. 6056, supra at 12. (Emphasis added.) We believe that this general intent applies to the deduction at issue here. Further, it is well settled that, where a statute is clear on its face, we require unequivocal evidence of legislative purpose before construing the statute so as to45 override the plain meaning of the words used therein. Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 742, 747-748 (1984). We perceive no legislative purpose at odds with our reading of section 2056(b)(9). In addition, we note that "if Congress has made a choice of language which fairly brings a given situation within a statute, it is unimportant that the particular application may not have been contemplated by the legislators". Barr v. United States, 324 U.S. 83">324 U.S. 83, 90 (1945). Petitioner contends, alternatively, that it did not receive double deduction for its interest in the Realtron shares. It offers calculations that purportedly prove that less than 100 percent of the value of the Realtron shares was deducted. Petitioner comes to this conclusion by assuming that, because approximately 25 percent of the value of the gross estate is made up of the value of the Realtron shares ($ 5,116,110/$ 20,410,045), only 25 percent of the deductible residuary bequest, some $ 2,686,490, is made up of the Realtron shares. Adding the $ 1,277,700 value of the ESOP share yields a total deduction attributable to the Realtron stock of $ 3,964,28046 -- only 78 percent of the value of that stock as it was included in the gross estate. Petitioner has the burden of proving that respondent's determination of deficiency is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Here, however, petitioner has not demonstrated that the executors allocated the value of the Realtron stock over the entire gross estate.6 Nor has petitioner shown that all, or any portion, of the proceeds from the sale of the stock passed to a recipient other than the marital trust. The evidence shows that the full date-of-death437 value of the Realtron stock, some $ 5,111,160, was used to determine the value of the residuary that qualifies for the marital deduction. When the $ 1,277,790 value of the ESOP deduction is considered, it appears that the Realtron stock, with a maximum value of $ 5,111,160, generated deductions of $ 6,388,950. We think section 2056(b)(9) precludes the excess deduction. 47 In this regard, if decedent had bequeathed the Realtron stock directly to his spouse, we think it clear that section 2056(b)(9) would preclude the estate from claiming both a marital deduction for the value of that stock plus an ESOP deduction for the value of the proceeds on the sale of that stock. Plainly, the value of the same interest would be deducted more than once. We do not believe that the prohibition against double deductions for estate tax purposes should be defeated where the executors are able to do indirectly what the decedent could not do directly -- that is, use the stock or its proceeds to fund the residuary, claim the full value of that stock as a marital deduction, and claim half the proceeds of the sale of that stock as an ESOP deduction. In this case, however, it appears that petitioner has done exactly that; more to the point, petitioner has not proved otherwise. Petitioner also contends that the proceeds from the sale of the Realtron shares used to compute the ESOP deduction constitute a different property interest from the value of the Realtron shares used to compute the marital deduction and that the prohibition of section 2056(b)(9) against double deductions48 does not apply. We disagree. As noted above, the pertinent legislative history explains that the surviving spouse's interest in marital deduction property extends both to the property involved and also to the proceeds of that property. S. Rept. 1013, supra. The District Court's opinion in Provident National Bank v. United States, 436 F. Supp. 587">436 F. Supp. 587, (E.D. Pa. 1977), revd. 581 F.2d 1081">581 F.2d 1081 (3d Cir. 1978), cited by petitioner, does not require a different conclusion, as the opinion of the Court of Appeals for the Third Circuit, id. at 1086, makes clear. Petitioner points to the legislative history of section 2057 and contends that section 2057 cannot be limited by the restriction of section 2056(b)(9) because Congress has not438 explicitly so limited section 2057. Petitioner states that section 2057 "conspicuously omits even a suggestion that any such condition was intended and affirmatively demonstrates that no limitations on the Section 2057 deduction were contemplated, other than those * * * specifically set forth." We cannot accept petitioner's conclusion. Section 2056(b)(9) was effective49 in 1981 and relates to double deductions that are derived from any of the provisions of chapter 11, i.e., the estate tax provisions. Section 2057, part of chapter 11, was effective as of 1986. The legislative history shows that Congress, in enacting section 2057, sought to encourage the sale of qualifying shares to an ESOP. We believe, however, that Congress did not want to encourage such sales at a cost of granting a double deduction to an estate. If Congress did not want section 2056(b)(9), which was already a part of the Code, to apply with respect to deductions taken pursuant to section 2057, we think it would have expressly so provided when enacting or, later, when amending section 2057. (We also note that, under our holding herein, it is the marital deduction, and not the ESOP deduction, that will be limited by the provisions of section 2056(b)(9).) Petitioner cites such cases as Estate of Miller v. Commissioner, 407">400 F.2d 407 (3d Cir. 1968), affg. 48 T.C. 251">48 T.C. 251 (1967), and Estate of Pfeifer v. Commissioner, 69 T.C. 294">69 T.C. 294 (1977). In those cases, we determined that the operative statutory50 language permitted both a charitable and a marital deduction with respect to the same interest in a decedent's property. Since those cases were decided, however, Congress has enacted section 2056(b)(9), which prohibits such double deductions. In this case, a plain reading of the statutes, including section 2056(b)(9), precludes petitioner's claims of the full amounts of both the marital and ESOP deductions based upon the same interest. Petitioner also urges that, to limit the marital deduction by operation of section 2056(b)(9), the ESOP deduction would have to be a "payment, expense, or encumbrance which reduces the date-of-death value of the property actually bequeathed to the surviving spouse." We know of no such limitation. In fact, petitioner contends that at least one of the reasons that section 2056(b)(9) was enacted was to preclude taking a marital deduction and a charitable remainder deduction for the same interest. A charitable remainder, 439 however, does not operate as a payment, expense, or encumbrance which reduces the date of death value of the property actually bequeathed to the surviving spouse. Relying upon some language in the legislative history, petitioner contends51 that 2057 provides for an exclusion from the gross estate rather than a deduction. We think it sufficient to point out that the plain language of section 2057 uses the phrase "the value of the taxable estate shall be determined by deducting from the value of the gross estate * * * [the amount of the ESOP deduction]." (Emphasis added.) Once again, we will not look behind the language of an unambiguous provision to clear up ambiguity in the legislative history. Based on the foregoing and due to concessions by the parties, Decision will be entered under Rule 155. Footnotes1. The record does not explain why, 9 months after decedent's death, the Realtron shares were sold for half their value on the date of his death.↩2. On a rider to schedule M of its estate tax return, petitioner computed the marital deduction as follows: Bequests to Surviving Spouse↩ItemNumberDescriptionValue1.Joint property passing byoperation of law (Schedule E).$ 25,000 2.Tangible Personal Property12,600 (Schedule F, Item 7) bequeathedunder Article THIRD (b).3.Residuary estate bequeathed underArticle EIGHTH to Alexander G.Reeves, Harry Miller and The Bankof New York as Trustees for thebenefit of Annette B. Reeves topay income to her for life. Valueof trust calculated as follows:Gross Estate20,410,045.55 Less: Joint Property(825,000.00)Tangible Personal Property (12,600.00) Legacies (50,000.00) Charitable Bequest (1,049,693.00) Non-Marital Trust (3,250,000.00) Administration Expenses (1,105,653.24) Debts (1,162,610.21) Mortgages (94,940.55)Net Residuary Estatebefore death taxes $ 12,859,548.55 TOTAL$ 13,697,148.55 3. One of the oldest principles of income tax law is the requirement that the Internal Revenue Code should not be interpreted to allow the taxpayer "the practical equivalent of a double deduction." Charles Ilfeld Co. v. Hernandez, 292 U.S. 62">292 U.S. 62, 68 (1934); see United States v. Skelly Oil Co., 394 U.S. 678">394 U.S. 678, 685 (1969); Ambac Industries, Inc. v. Commissioner, 487 F.2d 463">487 F.2d 463 (2d Cir. 1973), affg. 59 T.C. 670">59 T.C. 670 (1973). In addition to sec. 2056(b)(9), secs. 642(g), 663(a), 832(d), 834(d), 1312, and 7852 all operate to deny double deductions; see also sec. 1.161-1, Income Tax Regs.↩: "Double deductions are not permitted. Amounts deducted under one provision of the Internal Revenue Code of 1954 cannot again be deducted under any other provision thereof."4. By its terms, sec. 2056(b)(9) controls the provisions of "this section", that is, sec. 2056 itself, "or any other provision of this chapter". In context, "this chapter" is chapter 11 of subtitle B of title 26. Chapter 11 is entitled "Estate Taxes", and it includes secs. 2001 through 2210 of the Internal Revenue Code. Sec. 2056(b)(9)↩ thus controls all the estate tax provisions at issue here.5. Thus, when proceeds from the sale of property bequeathed to the surviving spouse are used to pay administrative expenses of the estate, the marital deduction is reduced by the amount of such expenses deducted under sec. 2053. Sec. 20.2056(a)-2(b)(2), Estate Tax Regs. Similarly, if property bequeathed to the surviving spouse is damaged by a casualty, the marital deduction is reduced by the amount of the casualty loss deducted under sec. 2054. Sec. 20.2056(a)-2(b)(3), Estate Tax Regs.↩6. Petitioner does not contend that State law determines the allocation of the estate's assets, as might be the case when an estate lacks sufficient assets to pay all debts, taxes, and legacies. See, e.g., Estate of Short v. Commissioner, 68 T.C. 184">68 T.C. 184↩ (1977).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620571/	KATHERINE KRAFT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kraft v. CommissionerDocket No. 89426.United States Board of Tax Appeals40 B.T.A. 240; 1939 BTA LEXIS 877; July 18, 1939, Promulgated 877 A trust indenture executed in 1930 provided that settlor could, by an instrument in writing executed and served upon the trustees at least five days prior to expiration of any calendar year, revoke the trust after the end of such year. No further instrument of revocation was provided, nor notice required. Settlor was not a trustee. Held, that section 166, Revenue Act of 1934, is applicable, without violating constitutional rights of petitioner, and respondent did not err in including the income of the trust in computing net income of the settlor for the calendar year 1934. Earl A. Darr, Esq., for the petitioner. E. O. Hanson, Esq., and Thomas H. Lewis, Jr., Esq., for the respondent. DISNEY240 OPINION. DISNEY: This proceeding involves income tax for the calendar year 1934. Respondent determined deficiency of $9,731.84, all of which is in issue. The facts were stipulated, and we find the facts as so stipulated, and will set same forth herein only in so far as 241 necessary for consideration of the issue presented. The issue is as to taxability to settlor in 1934 of income of a trust set up in a prior year, made878 revocable in any year by an instrument served prior to the year, which notice had not been given prior to the year 1934. Respondent applied section 166 of the Revenue Act of 1934, and petitioner contends that the act should not be applied to income for the year 1934 and, if applied, the application would be violative of constitutional rights. The salient fact is that each of the trust instruments herein involved executed in 1930, provided that the trustor, the petitioner herein, had the right: * * * by an instrument in writing executed under her hand and seal and served on the Trustees at least five days before the expiration of any calendar year, to revoke this trust after the end of any such calendar year; the intent hereof being that the trust hereunder shall continue from year to year unless the party of the first part revokes same after the end of any such year, but that said power of revocation shall not exist or be in the party of the first part at any time during any calendar year but that same shall arise or come into existence only after the end of any such calendar year, nor shall there be power to revest in the party of the first part any part of the corpus of this879 trust during any such calendar year, but that the latter power shall arise and come into existence only after the end of such calendar year. No instrument of revocation was executed prior to the year 1934. The trustor was not a trustee, and neither of the trustees was a beneficiary under the trust. Is section 166, Revenue Act of 1934, which became law May 10, 1934, applicable to the situation? Petitioner, in effect, contends that upon December 26, 1933, which was the last day upon which she could execute the instrument necessary to revocation of the trust to affect the year 1934, she had no knowledge that such law would be passed, and therefore to apply it to tax her upon the trust income for that year would be retroactive legislation, contrary to the Fifth Amendment to the Constitution of the United States. It will be noticed that the trust provision is that the trustor had a right "by an instrument [in writing, etc., served at least five days before the end of any year] to revoke this trust after the end of any such calendar year." No further instrument is provided for, nor notice mentioned. The revocation was to be effected by the written instrument, revoking880 the trust as of after the end of the year. During 1934, therefore, petitioner could have done everything necessary to revoke the trust, and the passage of time, until the arrival of the next year, was the only element necessary to full effect of revocation. Section 166 of the Revenue Act of 1934 provides that: Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor * * * the 242 grantor of such trust is chargeable with the income of such part of the trust. The only requirement of revocation was action by the trustor herself in executing and serving upon the trustees a written instrument. By that action and by that instrument the trust was revoked after the end of the year in which the instrument was executed and filed. It is obvious that in order to effect revocation the trustor must, by and in the instrument served upon the trustees, state in effect "I hereby revoke, etc." In the absence of such language, or if the trustor in the instrument merely states in effect "I intend on or after January 1 next, to revoke" the trust, it is apparent that the beneficiary could successfully challenge881 the attempt at revocation, for the trust indenture expressly provides that revocation is by the instrument served, prior to the end of the year by at least five days. It is undeniable, then, that during 1934 petitioner was vested with the right to revoke the trust, and to reinvest in herself title to the corpus thereof, subject only to the passage of time. To say that there was no power vested in the trustor would be to contradict the terms of the instrument; and to say that this was not power, by executed instrument, to reinvest herself with corpus merely because such reinvesting was subject to at least five days of interim interest by the trust, would be to say that an estate can not be vested merely because some other estate, such as a life estate, postpones enjoyment. The trust indenture herein requiring no further action by trustor than the execution and service of the written instrument, specifically stating that the revocation was by the written instrument, plainly shows vested power to reinvest trust corpus within the calendar year. By that instrument trustor was reinvested, though enjoyment was postponed. The additional language stating the intent to be that882 the power of revocation does not exist in the taxable year is not sufficient to overcome the positive requirement that the revocation is by the written instrument. The instrument is not merely a notice of intent to revoke, but is the revocation itself, subject to passage of time until the next year, as to enjoyment but not as to title. It would be a strained interpretation indeed which would say that the trustor during 1934 was vested with no power over the corpus; and further strain to say that such power was not one to reinvest, for by the act and instrument, in 1934, trustor could be reinvested, with not even a condition precedent, but only a waiting period before taking possession. The statute does not require that the trustor be vested with a power to reinvest in himself possession or enjoyment of the income, but only "title to any part the corpus." Vested title or estate does not depend upon possession. Nonreceipt of actual income by a trustor with power to revoke was held immaterial in Simpson v. Commissioner, 77 Fed.(2d) 668, 243 where trustor could revoke on December 31 of any year. Moreover, when trustor herein reinvests herself883 with title to corpus the only remaining effect of the trust is assignment of income thereafter accruing, taxable to settler under Reinecke v. Smith,289 U.S. 172">289 U.S. 172, and various other cases. Under the particular facts here, therefore, we hold that petitioner was in 1934 vested with power to reinvest title to corpus in herself. That the statute is intended to apply to trusts of this type is plainly indicated by the Conference Report on section 166 of the Revenue Act of 1934, where it is said: Amendments nos. 96 and 97: Under existing law, the income from a revocable trust is taxable to the grantor only where such grantor (or a person not having a substantial adverse interest in the trust) has the power within the taxable year to revest in the grantor title to any part of the corpus of the trust. Under the terms of some trusts, the power to revoke cannot be exercised within the taxable year, except upon advance notice delivered to the trustee during the preceding taxable year. If this notice is not given within the preceding taxable year, the courts have held that the grantor is not required under existing law to include the trust income for the taxable year884 in his return. The Senate amendments require the income from trusts of this type to be reported by the grantor. The House recedes. [Conference Report No. 1385, 73d Cong., 2d sess., p. 24.] As to constitutionality, in Warren H. Corning,36 B.T.A. 301">36 B.T.A. 301, we sustained the statute against such attack, and though the case has been reversed, 104 Fed.(2d) 329, the reversal was not upon that ground. We think extended discussion of this issue is not necessary. We are not convinced by the cases adduced by petitioner that we should declare the statute unconstitutional. We are concerned here with a question of taxation of income derived from property owned, not retroactive treatment of a previous action or deed. Simpson v. Commissioner, supra, is, in our opinion, under the facts in this record, answer to the charge of unconstitutional legislation. There as here the Fifth Amendment to the Constitution was invoked, for substantially the same reasons as here urged, and was held not contravened, though the trustor could revoke the trust only upon the last day of the year as to which the tax was sustained. Under our conclusion above, that*885 not only upon December 26, but at any time prior thereto during the taxable year, the trustor could revoke and reinvest title to the corpus in herself, subject only to delayed enjoyment, it is obvious that the cited decision is controlling here. See also Clapp v. Heiner, 51 Fed.(2d) 224; Corliss v. Bowers,281 U.S. 376">281 U.S. 376; and Burnet v. Wells,289 U.S. 670">289 U.S. 670. We hold that the statute involved did not effect an encroachment upon rights constitutionally guaranteed in petitioner, and that respondent did not err in including the income from the trust in computing petitioner's net income. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620572/	Candy Bros. Mfg. Co., Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCandy Bros. Mfg. Co. v. CommissionerDocket No. 25692United States Tax Court17 T.C. 298; 1951 U.S. Tax Ct. LEXIS 98; September 19, 1951, Promulgated 98 Decision will be entered for the respondent. Petitioner from December 17, 1940, was a wholly owned subsidiary of its parent corporation. For 1941 the parent and subsidiaries, including petitioner, filed a consolidated excess profits tax return, using petitioner's net operating loss for 1941, but not its net operating loss for 1940. The year 1941 was the last consolidated return period for the consolidated group. The Commissioner, in the deficiency notice here involved, for the years 1942 and 1943, denied to petitioner deduction of its net operating losses for 1940 and 1941, in the computation of surtax net income in computation of excess profits tax under section 710 (a) (1) (B), Internal Revenue Code. Held, that the Commissioner did not err in denying the deductions. D. J. Jorden, 11 T. C. 914; Doylestown & Easton Motor Coach Co., 9 T.C. 846">9 T. C. 846; Regulations 110, section 33.31 (d), promulgated March 14, 1941. Elmer K. Weppner, Esq., for the petitioner.George E. Gibson, Esq., for the respondent. Disney, Judge. DISNEY298 This case involves deficiencies in excess profits tax for the calendar year 1942 in the amount of $ 17,300.02 and for the calendar year 1943 in the amount of $ 840.43. The petitioner contends that instead of deficiencies there are overpayments of $ 8,140.73 for 1942 and $ 10,129.01 for 1943. The only question presented is whether the Commissioner in determining "Corporation surtax and net income" of the petitioner under section 710 (a) (1) (B) of the Internal Revenue Code erred in disallowing100 deductions of net operating loss carry-overs from the years 1940 and 1941.299 FINDINGS OF FACT.The parties have stipulated and we find, as follows:The petitioner is a corporation, organized and existing under the laws of Missouri with its principal office at 1501 Locust Street, St. Louis, Missouri. It is now, and during the period here involved was, engaged in the business of manufacturing and selling cough drops, candy fruit drops, and other hard candies.Since December 17, 1940, petitioner has been a wholly owned subsidiary of Universal Match Corporation, a corporation organized and existing under the laws of Delaware, which on or about that date acquired by purchase all of petitioner's capital stock.The petitioner has at all times material kept its books and filed its returns on the accrual basis and for calendar years. Its returns for the period here involved were filed with the collector of internal revenue for the first district of Missouri at St. Louis, Missouri.For the year 1940 petitioner filed a corporation income, declared value excess-profits and defense tax return (Form 1120), reporting a net loss thereon. It did not file a corporation excess profits tax101 return (Form 1121) for said year, since it had no excess profits net income.Petitioner sustained a net operating loss for the year 1940 in the amount of $ 8,222.24.For the year 1941 petitioner filed a separate corporation income and declared value excess-profits tax return (Form 1120), reporting a net loss thereon.Petitioner sustained a net operating loss for the year 1941 in the amount of $ 45,734.23.For the year 1941, Universal Match Corporation and its subsidiaries, including the petitioner, as an affiliated group of corporations, for the first time filed a consolidated excess profits tax return in accordance with the privilege granted by section 730 of the Internal Revenue Code. Petitioner's net operating loss for 1941 was deducted in said consolidated return and allowed by the Commissioner, and the consolidated excess profits net income of the affiliated group was thereby reduced by the full amount of said net operating loss. No deduction was taken in said consolidated return and none was allowed by the Commissioner for a carry-over of petitioner's net operating loss for the year 1940.The year 1941 was the last consolidated return period of the aforesaid affiliated group. 102 On March 15, 1943, petitioner filed for the year 1942 a corporation income and declared value excess-profits tax return (Form 1120) reporting a net income of $ 21,440.04, and a corporation excess profits tax return (Form 1121) reporting an excess profits net income of 300 $ 20,975.58. In the latter return petitioner reported an excess profits tax liability of $ 8,140.73 which it paid in four installments as follows:March 15, 1943$ 2,035.19May 26, 19432,035.18September 15, 19432,035.18December 18, 19432,035.18On January 7, 1946, the Commissioner and the petitioner executed an agreement pursuant to section 276 (b) of the Internal Revenue Code to extend the time within which the Commissioner might assess any additional income and excess profits taxes for the taxable year 1942 to June 30, 1947, and thereafter on March 7, 1947, March 9, 1948, and March 7, 1949, executed additional agreements extending the time to June 30, 1950.On March 15, 1944, petitioner filed for the year 1943 a corporation income and declared value excess-profits tax return (Form 1120) reporting a net income of $ 32,018.65, and a corporation excess profits tax return (Form 1121) reporting103 an excess profits net income of $ 32,018.65. In the latter return petitioner reported an excess profits tax liability of $ 21,579.42 which it paid in four installments as follows:March 15, 1944$ 5,394.85May 27, 19445,394.85September 15, 19445,394.85December 5, 19445,394.87On November 8, 1946, the Commissioner and the petitioner executed an agreement pursuant to section 276 (b) of the Internal Revenue Code to extend the time within which the Commissioner might assess any additional income and excess profits taxes for the taxable year 1943 to June 30, 1948, and thereafter on March 9, 1948, and March 7, 1949, executed additional agreements extending the time to June 30, 1950.In the aforesaid returns of the petitioner for the years 1942 and 1943, no deductions were taken for carry-overs of the net operating losses sustained by petitioner in the years 1940 and 1941.On September 24, 1948, petitioner filed claims for refund of excess profits taxes paid by it for the years 1942 and 1943, in the respective amounts of $ 8,140.73 and $ 10,129.01, stating as grounds therefor that it is entitled to deductions for the aforesaid net operating loss carry-overs in determining104 corporation surtax net income for purposes of section 710 (a) (1) (B) of the Internal Revenue Code.If the petitioner's corporation surtax net income for the year 1942, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined without allowing a deduction for the net operating loss carry-over from the years 1940 and 1941, the corporation surtax 301 net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 35,813.02.If the petitioner's corporation surtax net income for the year 1942, for the purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined by allowing a deduction for the net operating loss carry-over from the years 1940 and 1941, the corporation surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is zero.If the petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined without allowing a deduction for the net operating loss carry-over from the year 1941, the corporation105 surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 32,456.46.If the petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined by allowing a deduction for the net operating loss carry-over from the year 1941, the corporation surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 14,313.01.In addition to the above stipulated facts we find as follows: In the notice of deficiency dated August 12, 1949, from which this appeal is taken, the respondent allowed as deductions in determining petitioner's "Corporation surtax net income" for calendar years 1942 and 1943 as computed under section 15 of the Internal Revenue Code for the purpose of the taxes under chapter 1 of the Code, net operating loss deductions of $ 35,813.02 and $ 18,143.45, respectively, with the following explanation:1942(e) Net operating losses for the year 1940 in the sum of $ 8,222.24 and for the year 1941 in the sum of $ 45,734.23 are allowed as a net 106 operating loss carry-over.1943(d) Net operating loss for the year 1941 in the sum of $ 45,734.23 less $ 27,590.78 allowed as a carry-over for the year 1942 or $ 18,143.45 is allowed as a net operating loss carry-over.However, in determining petitioner's corporation surtax net income for 1942 and 1943 for purposes of section 710 (a) (1) (B) of the Internal Revenue Code he omitted said net operating loss deductions with the following explanation:Your contention that the corporation surtax net income, as computed under Section 15 of the Internal Revenue Code for the purpose of the taxes under Chapter 1, should be used in computing the excess profits tax under Section 302 710 (a) (1) (B) for the years 1942 and 1943 is denied. Under the provisions of Section 33.31 (e) of Regulations 110 the net operating loss sustained by you for the year 1940, for which year you filed a separate excess profits tax return, is not allowable as a net operating loss deduction for the purpose of computing your excess profits net income for any year subsequent to 1941, the last year for which a consolidated excess profits tax return was filed. Accordingly, it is held that such net operating107 loss may not be availed of in computing your excess profits tax liability under Section 710 (a) (1) (B) for the year 1942.The net operating loss for the year 1941, allowable in computing the corporation surtax net income under Section 15 for the purpose of Chapter 1 tax for the years 1942 and 1943, was availed of in a consolidated excess profits tax return for the year 1941. Accordingly it is held that such net operating loss may not again be availed of in computing your excess profits tax liability for the years 1942 and 1943 under Section 710 (a) (1) (B) of the Internal Revenue Code.Petitioner's corporation surtax net income for the year 1942, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, computed without regard to the credit provided in section 26 (e) of the Code, is $ 35,813.02.Petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, computed without regard to the credit provided in section 26 (e) of the Code, is $ 32,456.46.OPINION.The petitioner had net operating losses for the years 1940 and 1941. It seeks to carry them forward for use, as to the taxable years 1942 and 108 1943, in the computation of "Corporation surtax net income" under section 710 (a) (1) (B) of the Internal Revenue Code. Since December 17, 1940, petitioner has been a wholly owned subsidiary of Universal Match Corporation and for 1941, and for that year only, a consolidated excess profits tax return was filed by Universal Match Corporation and its subsidiaries, including petitioner, as an affiliated group. Therein the petitioner's net operating loss for 1941 was deducted and allowed and consolidated excess profits net income was thereby reduced in the full amount of the net operating loss for 1941. No deduction was taken in the consolidated return, or allowed, for the carry-over of the petitioner's net operating loss for 1940. The petitioner filed separate excess profits tax returns for 1942 and 1943 and did not therein take deductions for the carry-overs for net operating losses for 1940 and 1941, but has since filed claim for refund, claiming deduction of such net operating loss carry-overs. The claims have been denied.It is the petitioner's contention, in substance, that its corporation surtax net income for 1942 and 1943 for the purposes of section 710 (a) (1) (B) should 109 be computed in the same manner as for purposes of chapter 1 by inclusion of deduction of net operating loss carry-overs.303 In our opinion, this case is controlled by our conclusions in D. J. Jorden, 11 T. C. 914 (923-7). We there considered net operating loss for 1940 which had in large part been included in a consolidated excess profits tax return, and after interpretation of the statute and regulations concluded that the operating loss for 1940 sustained by the petitioner during the consolidated return periods could not be used in computing its excess profits tax net income for 1941, a taxable year subsequent to the last consolidated return period; also that operating loss sustained by the petitioner prior to the consolidated return period, that is, in 1939, could not be used in computing its excess profits tax income for 1941. We there relied upon Regulations 110, section 33.31 (d), which was promulgated, pursuant to section 730 of the Internal Revenue Code, on March 14, 1941. Section 730 of the Internal Revenue Code, added by section 201, Second Revenue Act of 1940, authorized the Commissioner to prescribe such regulations as he deemed 110 necessary in order that tax liability of affiliated groups making consolidated returns and of each corporation therein both during and after the period of affiliation might be determined in such manner as clearly to reflect excess profits tax liability and to prevent avoidance thereof. Regulations were issued in reliance thereon, and Regulations 110, section 33.31 (d), provides in pertinent part that:* * * no net operating loss sustained during a consolidated return period of an affiliated group shall be used in computing the net income of a subsidiary * * * for any taxable year subsequent to the last consolidated return period of the group. No part of any net operating loss sustained by a corporation prior to a consolidated return period of an affiliated group * * * shall be used in computing the net income of such corporation for any taxable year subsequent to the consolidated return period * * .As above seen, it was this regulation that was interpreted in D. J. Jorden, supra.Petitioner argues, in substance, that although [as required by section 730 (a) of the Internal Revenue Code] participation in the filing of the consolidated return for 111 1941 was consent to Regulations 110, such regulations were prior to the enactment on October 21, 1942, of section 710 (a) (1) (B) as to limitation of excess profits tax by percentage of "Corporation surtax net income" so that it did not by such consolidated return consent to disallowance of its 1940 and 1941 net operating losses in determination of corporation surtax net income under section 710 (a) (1) (B). We can not agree with such contention. The regulations, so consented to, not only cover both the period prior to the consolidation and the period of consolidation, as here involved, but also provide in general terms against use, after the consolidated period -- and the taxable years here are after such period -- of operating losses during or prior to the consolidated period in computing the net income of a subsidiary. Since the computation of "Corporation surtax net income" involves the 304 computation of net income, being net income minus a credit, it becomes apparent that the regulations promulgated in 1941 are properly applicable to the statute and problem here involved. We deem immaterial the fact that the Commissioner did not disallow the net operating losses for112 1940 and 1941 in the deficiency as to taxes under chapter 1 of the Code, for petitioner had filed separate corporation income and declared value excess-profits tax returns for 1940 and 1941 so that consolidation was not therein involved. D. J. Jorden, supra.The petitioner does not attack the validity of the regulation and we discern no reason against its application here. It is clear, we think, that the language of section 730, above referred to, authorized regulations, as to consolidated returns, to cover the situation here presented; and further that Regulations 110 do, somewhat carefully, cover the instant question and factual situation. Therefore we need not consider Basalt Rock Co., 10 T. C. 600, revd. 180 F. 2d 280, or Sokol Bros. Furniture Co. v. Commissioner, 185 F. 2d 222, disagreeing with the reversal in the Basalt case, which cases petitioner sees as distinguished from the present situation.Further, and only as to the carry-forward of operating losses from 1941, the year of consolidation, it is apparent, we think, that such carry-forward would*113 involve duplication of deductions since petitioner's net operating loss for 1941 was deducted in the consolidated excess profits tax return for 1941. Such a result was not intended. Doylestown & Easton Motor Coach Co., 9 T. C. 846 (850). Petitioner argues, in substance, that there is no such duplication because the benefit to the parent corporation is subject to regulations with respect to the basis of the stock of petitioner in the hands of the parent. In our view this is immaterial. Therefore regardless of Regulations 110 we think that the disallowance by the Commissioner of the carry-over net operating loss from 1941 was within the statute.We conclude and hold that the Commissioner did not err in denying deduction of the operating losses for 1940 and 1941.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620574/	Estate of Bertha M. Redford, Deceased, the First National Bank of Chicago, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Redford v. CommissionerDocket No. 5962-67United States Tax Court55 T.C. 364; 1970 U.S. Tax Ct. LEXIS 24; December 1, 1970, Filed 24 Decision will be entered for the respondent. Held, amounts remaining in a pension plan account on the date of death of petitioner's decedent were properly included in her (decedent's) gross estate. Vernon T. Squires and William R. Dickinson,26 Jr., for the petitioner.James F. Hanley, Jr., for the respondent. Irwin, Judge. IRWIN364 Respondent determined a deficiency of $ 4,183.32 in the state tax of petitioner's decedent. Certain questions having been resolved by the parties, the sole issue presented is whether, under section 2033 or section 2037, 1 the value of amounts remaining in a pension plan account on the date of death of petitioner's decedent was properly included in her gross estate. Should we resolve this question in the negative, petitioner will be entitled to a refund for overpayment of estate taxes.FINDINGS OF FACTMany of the facts have been stipulated by the parties. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.The First National Bank of Chicago, the petitioner herein, is executor for the Estate of Bertha M. Redford, deceased. Bertha M. Redford (hereinafter Bertha) died27 testate on June 29, 1963, leaving as her only heirs at law a daughter, Berneice E. Rice, and a son, Lester L. Becker. On September 25, 1964, petitioner filed a Federal estate tax return for the Estate of Bertha M. Redford, deceased (hereinafter the estate) with the district director of internal revenue, Chicago, Ill. Included in the estate tax return was an interest described as the "Walgreen Profit Sharing Retirement Trust" (hereinafter the Redford account). The date of death value of the Redford account is now 365 agreed by the parties to have been $ 73,438.68. Whether or not this account should have been included in Bertha's estate for Federal estate tax purposes is, as stated above, the sole question before us. Should we determine that the account was improperly included in the estate tax return, petitioner will be entitled to a refund of estate taxes paid.Percy J. Redford (hereinafter Percy), Bertha's second husband, had, during his lifetime, worked for the Walgreen Co. On June 7, 1958, Percy died intestate. He was survived by Bertha, and by a brother and sister, both of whom resided in Canada. Neither of Bertha's children had ever been adopted by him.While with28 the Walgreen Co., Percy was a participant in what was then known as the Charles R. Walgreen Memorial Pension Trust Plan (hereinafter the pension plan). Pertinent provisions of this plan are as follows:AGREEMENT* * * Whereas, the Company desires that a pension trust be established and maintained to provide income to its eligible employees after their retirement, from funds paid to the Trust in part by the Company and in part by such employees, upon the terms and conditions hereinafter set forth; * * Article IIParticipating Employees * * Section 3. Form of Acceptance. Acceptance of the Trust by an eligible employee shall be evidenced by such employee signing and delivering to the Trustees an acceptance in substantially the following form:TO THE TRUSTEES OF THECHARLES R. WALGREENMEMORIAL PENSION TRUST:Having been born on the day of , and my eligibility to become a participating employee under the provisions of the Charles R. Walgreen Memorial Pension Trust having been determined, I hereby voluntarily accept the terms and conditions set forth in the agreement dated December 17, 1940, creating such Trust (a copy of which I have received and read) 29 and any amendment to such agreement at any time adopted pursuant to its provisions, and on behalf of myself and my heirs, executors, administrators and assigns I agree to be bound by such agreement and any such amendment and to perform all of the agreements therein contained by me to be performed, including the agreement to make payments to you as therein provided.* * * I hereby designate , now residing at , , , as the beneficiary 366 to whom payments shall be made by you as provided in said agreement in the event of my death, hereby reserving the right to change such beneficiary in the manner provided in said agreement.* * * Section 5. Beneficiaries. Each participating employee shall have the right, as provided in the form of acceptance set forth in Section 3 of this Article II, to designate one or more beneficiaries to receive all payments payable after his death pursuant to the provisions of Article VII hereof by naming such beneficiary in such form of acceptance. In the event more than one beneficiary shall be named appropriate changes may, subject to the approval of the Trustees, be made in such form of acceptance. Each participating30 employee who shall have so designated one or more beneficiaries shall have the right at any time to change and successively change such beneficiary or beneficiaries by signing and delivering to the Trustees a written instrument in such form as the Trustees shall prescribe for the purpose. The construction of the Trustees with respect to any designation made hereunder shall be conclusive and binding upon all parties, and no person claiming to be a beneficiary or other person shall have the right to question any action of the Trustees which, in the judgment of the Trustees, fulfills the intent of the participating employee who made such designation. * ** * * Article VIIPayments to Employees * * Section 2. Amount and Time of Payments. Upon a participating employee (1) either (i) reaching the basic retirement age while still an employee of the Company and thereafter ceasing to be an employee of the Company, or (ii) ceasing to be an employee of the Company prior to reaching the basic retirement age because of permanent disability or death (hereinafter called 'Event 1', * * "(a) If Event 1 shall first occur the accumulated credit shall be applied by paying the participating31 employee each month, throughout the period beginning on the first day of the month following the occurrence of Event 1 or on such later date as the Trustees, with the consent of the participating employee, shall select for the commencement of such payments, which day in no event shall be later than the first day of the month following the day when such participating employee shall reach age 70, and continuing until the accumulated credit is exhausted an amount which the Trustees shall determine and consider reasonable for pension purposes; provided, however, that such monthly payment shall not be (i) less than a minimum of $ 25.00 or 25% of such participating employee's average monthly compensation during the 36 months immediately preceding the occurrence of Event 1, whichever amount is the greater, or (ii) more than 50% of such average monthly compensation. The above-mentioned minimum may be reduced by the Trustees, with the consent of the participating employee, to a lesser amount. If in the judgment of the Trustees such maximum amount would constitute an unreasonable amount for pension purposes it may be reduced to such amount, not less than the above-mentioned minimum, as the32 Trustees shall consider reasonable. The Trustees may, in their sole discretion, at any time after the occurrence of Event 1 and before the participating employee reached age 70, use all or any part of the accumulated credit then remaining 367 unpaid to provide a life annuity of a type appropriate for such participating employee. * * * The trustees, upon the written request of the participating employee, may, in their sole discretion, at any time after the occurrence of Event 1 and within the taxable year of the participating employee in which Event 1 occurs, pay the entire amount of the accumulated credit to the participating employee for the purpose of enabling him to purchase a life annuity or fixed payment annuity contract, satisfactory in form and terms to the participating employee and to the Trustees.* * * Section 6. Effect of Death. If the occurrence of Event 1 is due to death of the participating employee, or if he dies after the occurrence of such event and before receiving payment of the full amount to which he shall be entitled, his designated beneficiary, or, if there be no such beneficiary, his personal representative or any other person legally entitled33 to receive payments from the Trustees shall succeed to all of the rights and privileges which the participating employee would have had if the occurrence of such event had not been due to his death or if he had survived the occurrence of such event, as the case may be, provided, however, that in cases where there is no beneficiary, payment of such balance may, in the discretion of the Trustees, be made in a lump sum to such personal representative or other person legally entitled thereto. * * Article XIMiscellaneous * * Section 2. Amendment. This agreement may be amended at any time and from time to time by an instrument in writing executed by the Company and all of the then acting Trustees hereunder and such amendment shall become effective after 30 days' written notice thereof shall have been given to all participating employees, unless within said 30 days more than 1/3 in number of all participating employees shall object thereto in writing, * ** * * Section 7. Non-assignability. In no event shall the Trustees pay any money or assign any property payable, distributable or standing to the credit of any participating employee to any assignee or creditor 34 of such employee; and no participating employee shall have the right by way of anticipation or otherwise to assign or dispose of any moneys or other property which may be payable, distributable or stand to his credit under the Trust, and every attempted assignment or other disposition of such moneys or property, or any part thereof, shall be absolutely void.[Emphasis supplied. Footnotes omitted.]Pursuant to the power vested in him, under the pension plan, to designate beneficiaries, on March 31, 1958, Percy named Bertha as his beneficiary. The designation was addressed to the trustees of the Charles R. Walgreen Memorial Pension Trust, and directed that:Under the provisions of the Charles R. Walgreen Memorial Pension Trust, and under the provisions of Continental Assurance Company policy No. G 574, I hereby revoke any and all previous designations inconsistent herewith and 368 designate as beneficiary under both said Pension Trust and said Insurance Policy: [Bertha was named.]* * * The right to change the beneficiary hereby designated is reversed.This designation was not changed during his lifetime. Accordingly, after his death, the trustees of the pension plan directed35 all payments from the Redford account to Bertha.On November 21, 1959, using a form provided by the Walgreen Co., Bertha filed with the trustees of the pension plan a document which purported to designate her two children as successor beneficiaries under the pension plan. The terms of this document were as follows:Under the provisions of the Charles R. Walgreen Memorial Pension Trust, I hereby revoke any and all previous designations inconsistent herewith and designate as beneficiaries under said Pension Trust:ProportionateshareNameAddressRelationshipAge(percent)I. Mrs. Berneice RiceRoute 5 Allegan,Daughter4750Mich.II. Lester L. BeckerReadlyn, IowaSon4850In making the above designations, it is my intent that if any one of the above named beneficiaries predeceases me, or dies after my death before receiving all payments, the share, or the unpaid portion which he or she would have received if living shall be distributed equally to the living lawful descendant or descendants of such deceased beneficiary, but if there are none or said lawful descendant or descendants are not then living, then such share shall go to the other36 named beneficiary, or if said other named beneficiary be deceased, equally to his or her living lawful descendants.The above form was received by a Miss Thomas -- one of the Walgreen clerks assigned to the pension plan. Receipt of the document was acknowledged by an appropriate notation on its face, and it was thereafter committed to file. As was the case with almost all such instruments, no notification of its receipt was communicated to the trustees of the pension plan -- it then being Walgreen's practice to allow such matters to rest until circumstances dictated the need for an investigation with respect to an impending distribution. Accordingly, at no time did Bertha receive word from the company with respect to the effectiveness or propriety of her purported designation. The instrument naming her children as successor beneficiaries was not, during her lifetime, amended. At the time of the within proceeding, payments from the Redford account were being made to her two children. 237 369 On October 1, 1961, the Walgreen Co. adopted a new retirement plan (which was in effect at the time of Bertha's death) entitled the "Walgreen Profit-Sharing Retirement Trust" (hereinafter the profit-sharing plan). Pertinent provisions of the new plan which was viewed by the trustees as a continuation of the pension plan, but which restated and superseded the provisions of the older plan, were as follows:WALGREEN PROFIT-SHARING RETIREMENT TRUST * * Whereas, by instrument dated December 17, 1940, as amended by further instruments dated as of September 30, 1944, January 30, 1951, October 1, 1956 and October 1, 1957, said Walgreen Co. established the "Charles R. Walgreen Memorial Pension Trust"; andWhereas, said Walgreen Co., said subsidiaries and said Trustees desire to restate and supersede said Charles R. Walgreen Memorial Pension Trust by this Instrument, entitled "Walgreen Profit-Sharing Retirement Trust," and hereinafter called the "Agreement," and by a separate instrument made a part hereof and incorporated herein by reference, entitled "Walgreen Profit-Sharing Retirement Plan," and hereinafter called the "Plan";Now, Therefore, in consideration of the mutual38 undertakings of the parties hereto, it is Hereby Agreed as follows:Article I -- Effective Date of AgreementThis Agreement and the Plan, made a part hereof and incorporated herein by reference, restate and supersede, effective as of October 1, 1961, the "Charles R. Walgreen Memorial Pension Trust." [Emphasis supplied.]Walgreen Profit-Sharing Retirement PlanSection 1 -- Introduction1.1 This instrument constitutes the Walgreen Profit-Sharing Retirement Plan, referred to herein as the "Plan" and is incorporated by reference into the Walgreen 370 Profit-Sharing Retirement Trust referred to herein as the "Agreement," dated the 2nd day of February, 1962. * * 1.3 The effective date of the Plan is October 1, 1961. The term "Plan Year" is the twelve consecutive calendar months ending with each September 30, subsequent to the effective date. * * Section 7 -- Distribution of Account Balances7.1 Upon an active participant attaining his normal retirement date at age 65, or upon the termination of his employment after attaining his 60th birthday, or in the event of his retirement because of total and permanent disability, or in the event of his death, the balance in his account39 at his account determination date shall be the balance therein, after all adjustments thereto have been made in accordance with Section 6 hereof.* * * 7.3 It is intended that distribution of the balance in a participant's account or accounts shall be made in monthly installments either to the participant or to his beneficiary. The amount of each monthly installment shall be as determined by the Trustees and normally shall be within the following limits:(a) Minimum -- The greater of $ 25 or 25% of the participants average monthly compensation during the 36 months immediately preceding the date his employment was terminated; and(b) Maximum -- 50% of such average monthly compensation. * * 7.4 If the event establishing the account determination date is the participant's normal retirement, disability retirement or death, distribution of his account shall normally be made by monthly installments beginning with the month next following the month in which such event occurs. If the participant continues in the regular employ of the Company, monthly installments shall normally begin with the month following the month in which his regular employment is terminated. * * 7.8[1] Each40 participant from time to time may name any person or persons as beneficiaries or successor beneficiaries to whom payments from his account balance are to be made in the case of his death before he receives all of such balance.A beneficiary of a participant may name a successor beneficiary hereunder provided he has such power under the designation naming him a beneficiary.Each beneficiary designation shall be in a form prescribed by the Trustees and shall be effective only when filed in writing with the Trustees by the participant or beneficiary during his lifetime. Each such designation shall revoke all prior designations.* * * [2] If at any time a balance remains in the account of a deceased participant and there are no persons then entitled to receive payments from his account balance, either under a beneficiary designation properly made or as a surviving spouse entitled to payments from the participant's account balance in accordance with the provisions of the immediately preceding paragraph, the Trustees in 371 their discretion may distribute the deceased participant's account balance to either:(a) Any one or more or all of the next of kin (including the surviving41 spouse of such next of kin), in such proportions as the Trustees determine, of the last to die of the persons otherwise entitled in accordance with this provision to receive payments from such account balance; or(b) The legal representative or representatives of the estate of the last to die of the persons otherwise entitled in accordance with this provision to receive payments from the participant's account balance.(Numerals [1] and [2] inserted for clarification.) * * Section 8 -- Miscellaneous * * 8.4 No participant may borrow from the Trust Fund. The interests of participants and their beneficiaries under the Plan are not in any way subject to their debts or other obligations and may not be voluntarily or involuntarily sold, transferred or assigned.[Emphasis supplied.]Notwithstanding the preambulatory language of the profit-sharing plan in which it is treated as having superseded the older pension plan, it was the opinion of the trustees that since the new plan was merely a restatement of the old, the distribution of accounts under the new plan was intended to and did comport with the method of distribution employed under the old plan. In any event, it 42 was their belief that the provisions of the new plan governed all distributions taking place after 1962 irrespective of the participant-employee's date of death.OPINIONIn the instant case we are primarily called upon to interpret the language of a company retirement plan, viz, the Walgreen Company Pension Plan. The interpretation we choose will determine whether petitioner's decedent (heretofore referred to as Bertha) possessed, at the time of her death, a property interest includable in her estate for Federal tax purposes. 3We begin our inquiry by focusing on article VII, section 6, of the pension plan contract. By its terms, this provision clearly states that any account not fully dissipated at the time of a participating employee's death, no successor beneficiary having been named, will be paid out43 to the personal representative of the employee, or to any other person legally entitled to receive payments. The controversy in this case has arisen because it is argued that article VII, section 6, 372 fails to consider what is to happen in the event of the later death of a person (in this case, Bertha) who was designated as a successor beneficiary by an instrument which failed to arm such beneficiary with a power to appointment over funds still unused at the time of his or her death. 4 With respect to this position, petitioner contends, in the alternative, that if the alleged vacuum left by article VII, section 6, is to be filled, it is necessary to look to (a) the explicit provisions of section 7, paragraph 7.8[2], of the profit-sharing plan, or (b) the practices which were normally followed by the trustees of the pension plan under circumstances such as those present in this case.44 With respect to part (a) of petitioner's argument, it has been stated in our Findings of Fact that the trustees (upon whose opinion petitioner relies) were of the belief that, under facts such as those present in this case, any distributions taking place after 1962 were to be governed by section 7, paragraph 7.8[2], of the profit-sharing plan. However, no evidence was introduced by petitioner to show that such was within the contemplation of the parties when the earlier pension plan agreement was entered into by Percy and the Walgreen Co. Nor, in light of the fact that the profit-sharing plan completely superseded the pension plan, can it be said that article II, section 3, of the pension plan bound Percy and his heirs to such a result since that section, by its terms, is limited to pension plan amendments, and does not consider the possibility of later documents superseding the pension plan in its entirety. Accordingly, since petitioner has not directed us to any rule of Illinois law calling for a contrary conclusion, it is our opinion that section 7, paragraph 7.8[2], cannot be given the effect which petitioner would have us attribute to it.As we interpret petitioner's alternate45 argument, it is asserted that since the practices adopted by the trustees of the pension plan were pursued with uniformity and consistency, they must be accorded the status of custom and usage, and must, therefore, be treated as binding on all persons deriving their interest through the original contracting party -- the participating employee. Accordingly, since it was the practice of the trustees to distribute unused amounts to the heirs of the last taker under the plan, the upshot of petitioner's argument is that the amounts which ultimately were distributed to Bertha's heirs passed to them by operation of the pension plan, and that since, during 373 her life, Bertha had neither the possession of nor the power of disposition over such amounts, they cannot be regarded as having been a part of her estate at the time of her death. (Compare sec. 7, para. 7.8[2], of the profit-sharing plan.)By contrast to the above, respondent argues that any portion of the Redford account which did not pass to Bertha by virtue of Percy's designation must be regarded as having been retained by Percy and must be treated as having passed to Percy's estate on the occasion of his death. Respondent46 then argues that, since Percy died intestate, Bertha, being the sole heir of his personal estate under Illinois law, 5 must be treated as having received Percy's retained interest in the Redford account by way of intestacy. Were this so, Bertha's designation of November 21, 1959, would be effective, and the persons named in that instrument would have to be regarded as having received their interest directly from Bertha. Our decision is to favor this approach.Though the testimony in favor of petitioner's position is scant, it was shown that a practice had developed whereby, under47 circumstances like those present in this case, amounts left in a pension plan account on the death of the last-named beneficiary would be distributed to the heirs of that person. However, little effort by petitioner was addressed to the question of whether this practice would, under Illinois law, be accorded the status of custom and usage to the extent that it would be considered binding on Percy and his estate, the entity through whom, respondent claims, Bertha acquired her interest. All we are told is that the distributional procedures adopted by the trustees were later formally incorporated into the profit-sharing plan, a document which specifically superseded the pension plan. No mention is made of the reason why the procedures followed by the trustees were not added to the pension plan by way of the amendment process described in article II, section 3, of the pension plan. Nor is there any suggestion that these procedures were made known to any of the 7,000 or 8,000 Walgreen employees who participated in the pension plan. Under these circumstances, our study of Illinois law leads us to the conclusion that an Illinois court would find it very difficult to accord these unwritten48 distributional procedures the effect sought by petitioner.Under Illinois law, "custom or usage" is admissible to explain or 374 make clear what a contract means but not to contradict a meaning obvious on the face of the instrument. Hufford v. National Retail-Owned Grocers, 16 Ill. App. 2d 1">16 Ill. App. 2d 1, 147 N.E. 2d 437, 440 (1957), and cases cited therein. This is in accord with the commonly expressed principle that a contract will be construed so as to give effect to the intention of the parties. Katz v. Brooks, 65 Ill. App. 2d 155">65 Ill. App. 2d 155, 212 N.E. 2d 508, 510 (1965). Where, therefore, it appears that commercial or trade practices have been conducted with such a degree of regularity and uniformity that they have taken on the mantle of custom or usage, it may be "presumed that parties [to an agreement] had [such practices] in mind * * and that they entered into the contract intending that such custom or usage was a part thereof." Wilke Metal Prod. v. David Architectural Metals, 92 Ill. App. 2d 265">92 Ill. App. 2d 265, 236 N.E. 2d 303, 307 (1968).From the above, 49 it is clear that custom or usage may provide contracting parties, such as Percy and the Walgreen Co., with rights and obligation not specifically alluded to by the terms of their agreement. However, since the role played by custom and usage derives its efficacy from the understanding and implied acquiescence of the parties, a party to an agreement cannot be bound by custom or usage unless he either knew or should have been aware of its existence and nature. Hufford v. National Retail-Owned Grocers, supra;Katz v. Brooks, supra; and, generally, 5 Williston, Contracts, sec. 661 (3d. 1961). Moreover, where there is no proof of actual knowledge, implied knowledge will be imputed only where the practices in question are so notorious that the contracting parties would normally be cognizant of them. Traff v. Fabro, 337 Ill. App. 83">337 Ill. App. 83, 84 N.E. 2d 874, 877 (1949); Katz v. Brooks, supra;Kelly v. Carroll, et al., 223 Ill. App. 309">223 Ill. App. 309 (1921); Restatement, Contracts, sec. 50 247, comment b. 6 Put another way, "A usage or custom to be binding must be so uniform, long-established, and generally acquiesced in, and so well-known, as to induce the belief that the parties contracted with reference to it." Traff v. Fabro, supra.Additionally, since the incidence of custom and usage is a question of fact, Gourley v. Chicago & E. I. Ry. Co., 295 Ill. App. 160">295 Ill. App. 160, 14 N.E. 2d 842, 848 (1938),51 its presence must be proven like any other fact. In this regard, the burden of proof rests with the party asserting its presence. Armour Grain Co. v. U.S. Grain Corp., 241 Ill. App. 332">241 Ill. App. 332 (1926); Restatement, Contracts, sec. 247(c). In the present case we 375 are persuaded that petitioner has failed to meet that burden. Not only are we uninformed as to whether the practices in question were ever made known to Percy, but we are also uninformed as to whether any of the Walgreen employees who participated in the pension plan were ever apprised of the unwritten distributional methods employed by the trustees. Under such circumstances, it can hardly be said that these practices were so well known as to induce the belief that Percy contracted with reference to them. Accordingly, petitioner's argument with respect to these practices must fail.With the above in mind, we now return to article VII, section 6, of the pension plan -- the provision on which respondent has grounded his case. As we have stated, this provision clearly indicates that, if a successor beneficiary has not been designated, amounts not consumed on the date of death of a participating52 employee will be paid to the personal representative of his estate. However, under petitioner's interpretation, a problem arises where the person to die is a taker who has succeeded the participating employee. Given such circumstances, petitioner argues that the language of article VII, section 6, cannot be read to provide for a reversion of amounts yet unused to the personal representative of the original employee's estate. We disagree.Looking at article VII, section 6, we note the following directive:if * * the participating employee * * * dies * * * before receiving payment of the full amount * * , his designated beneficiary, or, if there be no such beneficiary, his personal representative * * shall succeed to all of the rights and privileges which the participating employee would have had * * In our view the language quoted above was designed to focus on one problem, viz, the possibility that amounts contained in a given account would be unused on the death of a participating employee. In the event of such an occurrence, the above provision permits the continued distribution to a beneficiary where one has been designated. However, where a person has not been 53 so designated, article VII, section 6, in our opinion, contemplates a distribution of all such amounts to the employee's estate so that such funds will be disposed of in accordance with the testamentary wishes of the employee. Only by this method of distribution could it be certain that amounts still owing to an employee on his death would find their way into the hands of the natural objects of his bounty, be they persons named in a will or persons taking in the event of intestacy. If our interpretation thus far is correct -- and we do not read petitioner's brief as being in dispute with such interpretation -- then it would appear equally appropriate to conclude that where, as a result of an incomplete designation, less than all of the amounts left in a pension account on the death of an employee might not be consumed, then the ultimate distribution of 376 any such unused amounts should also be made through the employee's estate.In this case, Percy's designation of March 31, 1958, was incomplete in that it failed to envisage the possibility of Bertha's death prior to the exhaustion of the Redford account. Accordingly, it is our conclusion that under the terms of article54 VII, section 6, of the pension plan, any amounts left in the Redford account at the time of Bertha's passing were to be distributed to Percy's estate, there to be disposed of according to the laws of intestacy of the State of Illinois. This being so, Bertha, being Percy's sole heir in the event of intestacy, must be deemed to have possessed, at her death, a vested interest in such amounts includable in her estate under section 2033 of the Code.Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩2. Sec. 7, par. 7.8[2], of the Walgreen Profit Sharing Retirement Plan (adopted in 1961 and reproduced at length at a later point in this opinion) would have directed that the funds in the Redford account, absent a valid designation by Bertha, be distributed to Bertha's children in precisely the manner described above. Consequently it is not clear whether the distributions to Bertha's children were being made pursuant to her designation, as opposed to sec. 7 of the profit-sharing plan, the activation of which would have required a preliminary finding by the trustees that her designation was invalid.By contract, it is clear Bertha's executor (the petitioner herein) did initially believe in the propriety of the designation, and treated it as a validly exercised power of appointment. As a result, the subject matter of the Redford account was included in Bertha's estate under sec. 2041. However, this position was taken by the executor without having first reviewed the terms of the Mar. 31, 1958, designation filed by Percy. As soon as this document was brought to the executor's attention, it immediately changed its position, determining that Bertha had never been vested with the authority to make such a designation.Because, inter alia↩, that portion of the Redford account originally included in Bertha's estate tax return was less than the fair market value of the account on date of death, respondent asserted the deficiency contained herein. However, as a result of having changed its position with respect to that portion of the account on which tax had already been paid, petitioner-executor asserted a claim for refund (see sec. 6402(a)) in conjunction with the petition which it filed in opposition to the respondent's deficiency determination.3. SEC. 2033. PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST.The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.↩4. Respondent has asserted that Percy's designation of Mar. 31, 1958, was sufficient to provide Bertha with a power of appointment. However, it is our impression that this document did no more than name Bertha as primary beneficiary. Nowhere in the designation is there any reference to a power of appointment. Nor, in light of the fact that Percy reserved the right to rescind his designation, does it appear that he viewed the instrument as a plan of complete disposition in which Bertha would have the final say.↩5. Ill. Ann. Stat. ch. 3, sec. 11 (Smith-Hurd 1961):Rules of Descent and DistributionThe intestate real and personal estate of a resident decedent * * * after all just claims against his estate are fully paid, descends and shall be distributed as follows:* * * Third, when there is no descendant but a surviving spouse and also a parent, brother, sister * * of the decedent: the entire personal estate * * * to the surviving spouse * * *↩6. b↩. A party cannot be bound by usage unless he either knows or has reason to know of its existence and nature. Accordingly one who seeks either to define language or to annex a term to a contract by means of usage must show either that the other party is actually aware of the usage, or that the existence of the usage in the business to which the transaction relates is so notorious that a person of ordinary prudence in the exercise of reasonable care would be aware of it. If so notorious, actual knowledge of it is immaterial.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620575/	Estate of Theodore E. Beauregard, Jr., Deceased, Theodore E. Beauregard III and Yvonne Marie B. Beauregard, Special Administrators, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Beauregard v. CommissionerDocket No. 11163-77United States Tax Court74 T.C. 603; 1980 U.S. Tax Ct. LEXIS 110; June 26, 1980, Filed 110 Decision will be entered under Rule 155. At the time of his accidental death, the decedent was a covered person under his employer's travel accident policy. By its terms, the policy vested in the decedent certain incidents of ownership, including the right to designate and change beneficiaries and elect installment payments of the proceeds. However, during his lifetime decedent and his ex-wife had entered into a property settlement agreement, the terms of which were incorporated into a divorce decree (court order) whereby decedent was required to "maintain the minor children as beneficiaries in connection with any group accident and health policies." Held, since under California law applicable to the facts of this case the court order divested decedent of all incidents of ownership in the policy, its proceeds are not includable in his gross estate. Morton v. United States, 457 F.2d 750">457 F.2d 750 (4th Cir. 1972), followed. Melvyn Mason, for the petitioner.Karl D. Zufelt, for the respondent. Nims, Judge. NIMS603 OPINIONRespondent has determined an estate tax deficiency of $ 25,182.62. Because of a concession made by petitioners, the sole remaining issue for our determination is whether the proceeds of a travel accident policy under which the decedent was a "covered person" are includable in his gross estate.The facts in this case were fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.Theodore E. Beauregard III and Yvonne Marie Beauregard, who, as the fiduciaries of the decedent's estate, are the 604 petitioners herein, resided in Woodland Hills, Calif., at the time the petition was filed. There being no last will and testament, 112 they were appointed special administrators of the decedent's estate by order of the Superior Court of California, San Mateo County, on March 7, 1978.The decedent, Theodore E. Beauregard, Jr. (Beauregard), died on November 20, 1973, leaving as his heirs his 16-year-old son, the aforementioned Theodore E. Beauregard III, and his 15-year-old daughter, the aforementioned Yvonne Marie Beauregard.Beauregard commenced employment with Hazeltine Corp. (Hazeltine) in 1972 and worked continuously for Hazeltine thereafter until his death.Hazeltine, as policyholder, acquired and maintained a Business Travel Accident Insurance Policy (the policy), issued by the Home Insurance Co. (Home Co.). The policy provided for the payment of certain benefits, in amounts of up to $ 125,000, to any covered person who sustained injury or loss of life while on Hazeltine business and during the course of any bona fide trip. Beauregard suffered a fatal automobile accident on such a trip. The term "Covered Person" as used in the policy included "All employees of the Policy Holder under 70 years of age, except truck drivers and their helpers." Beauregard was a covered person within this definition.All premiums113 due on the policy were paid by Hazeltine.Under the policy, certificates of insurance were not required to be, nor were they, delivered to any employee. All employees received a booklet which contained, among other things, two pages purporting to include "the various important facts" which employees of Hazeltine "should know about this additional coverage," i.e., coverage under the policy. (Emphasis supplied.)Regarding the right to designate a beneficiary, the booklet stated that "In the event of your death, the benefit is payable to the beneficiary named by you for purposes of your group life insurance described at page 26."The policy, on the other hand, provided that --The right of designation or change of beneficiary is reserved to the Covered Person and the consent of the beneficiary or beneficiaries shall not be requisite to surrender or assignment of the insurance coverage with respect to which the beneficiary designation has been made or to any change of beneficiary or beneficiaries * The booklet also did not advise employees of their right to 605 elect installment payments of the proceeds rather than a lump-sum payment, although the policy further provided114 that the covered person had the right to direct that the policy benefits be paid to the beneficiaries in installments, including interest, over a 3-, 5-, or 10-year period, in accordance with a formula set forth in the policy, in lieu of payment in a lump sum. At no time did Beauregard exercise any right with respect to a mode of payment.The policy further provided that --If the covered person has elected monthly installment payments under this policy and the beneficiary shall die before the payment of all of the monthly installments to which entitled, the commuted value of any remaining monthly installments, at the rate of interest used to determine such installments, will be paid in one sum to the estate of the deceased beneficiary, unless the Covered Person has designated otherwise.The policy further provided, by an endorsement dated September 13, 1971, that if, at the death of a covered person, no beneficiary had been effectively designated, then the benefits payable would be paid to the persons who were the beneficiaries under a separate and distinct group life insurance policy maintained by Hazeltine for the benefit of its employees. The separate group life insurance 115 policy provided that an employee could at any time name or change beneficiaries. At the time of his death, Beauregard had designated his children, Theodore E. Beauregard III and Yvonne Marie Beauregard, as the beneficiaries of such other group life insurance policy.In the booklet page dealing with accident coverage, the employees were nowhere referred to the policy itself for a more complete statement of their benefits and rights under the policy.The policy provided that Hazeltine could at any time cancel the policy, which cancellation would be effective upon receipt of such notice of cancellation by Home Co.An interlocutory judgment of dissolution of marriage (the court order) between Beauregard and his then spouse, Suzanne, was entered on July 6, 1972, and became final on September 26, 1972. The court order provided that both Suzanne and Beauregard "shall maintain the minor children as beneficiaries in connection with any group accident and health policies available to them in connection with their employment." The court order recited that a property settlement agreement dated May 21, 606 1972, was received in evidence and the court order entered pursuant thereto.The 116 above provisions relating to group accident and health policies appear under paragraph "2" of the court order which deals generally with the support of Beauregard's minor children until such time as they marry, reach 21 years of age, become self-supporting, or leave the custody of their mother.Following the death of Beauregard, Home Co. paid, under the policy, the sum of $ 125,000, equally divided, to Beauregard's two above-named children.On Schedule D of the estate tax return, the fiduciaries reported, as an includable asset, the $ 40,000 proceeds of the Hazeltine group life policy coverage on Beauregard's life. In addition, Schedule D reflects the following:THE FOLLOWING IS NOT INCLUDABLE:Receipt of $ 125,000 pursuant to an accidental death policy maintained by deceased's employer for employees as a class.Petitioners' contentions are essentially threefold, as follows:1. Beauregard did not possess any rights in the Policy by reason of the fact that it was unilaterally cancellable at any time by Hazeltine;2. Beauregard's rights were limited to those set forth in the Employee Booklet and since, under the terms of the Employee Booklet, Hazeltine decreed that the beneficiary117 of the benefit would be the person named by Beauregard for purposes of his group life insurance, he was thereby required to forego his right to elect under the Policy without costly related consequences which, petitioners say, is not an incident of ownership within the intendment of section 2042(2). 13. At the time of his death Beauregard was subject to both a Property Settlement Agreement and a Court Order which ordered him to maintain his children as the beneficiaries of the Policy, thereby effectively removing from him the right to designate a beneficiary.Respondent counters with the argument that the terms of the policy reserved to Beauregard, exclusively, the right to designate or change beneficiaries and the right to elect optional settlement modes. The respondent apparently concedes, however, as stated in the "Points Relied Upon" section of his opening brief, 118 that "The decedent's power to name beneficiaries was, however, limited by the terms of an Interlocutory Judgment of 607 Dissolution of Marriage which required that he maintain his minor children as beneficiaries of the policy." Respondent's argument on brief and reply brief is predicated upon this limiting condition. Respondent contends that Beauregard, nevertheless, had the power within the strictures of the court's judgment to modify the time and manner of payment of the policy proceeds; that the terms of the court order required only that the policy's benefits be paid to his children until they gained their majority; and that Beauregard was free to designate beneficiaries to receive the benefits after such period.Both parties to this controversy thus appear to proceed upon the tacit assumption that a strict application of the so-called "policy facts" doctrine is here inappropriate and we accordingly accept the case in this posture and reach our decision on this basis. 2120 Clearly, the provisions of the policy included powers which, if "possessed" by the decedent at his death (sec. 2042(2)), fall squarely within the term "incidents of ownership" as defined in the estate 119 tax regulations. 3 The policy granted the insured the right of designation or change of beneficiary and the right to direct the payment of the policy benefits in installments rather than in a lump sum.Did Beauregard possess at his death any of the above (or any 608 other) incidents of ownership, exercisable alone or with another? At least one court has held, and the Commissioner has ruled, that if the power to cancel an insurance policy is exercisable only by terminating employment, such power is not 121 considered to be an incident of ownership. Landorf v. United States, 187 Ct. Cl. 99">187 Ct. Cl. 99, 408 F.2d 461">408 F.2d 461 (1969); Rev. Rul. 72-307, 1 C.B. 307">1972-1 C.B. 307, modifying situation 1 in Rev. Rul. 69-54, 1 C.B. 221">1969-1 C.B. 221. Thus, if the employee makes an irrevocable assignment of his insurance, retaining no other rights in the policy except the right to cancel it by terminating his employment, the proceeds are not includable in his gross estate.A presumable corollary would be that no incident of ownership exists where the insured under a group policy does not irrevocably assign the policy but nevertheless lacks any powers or rights with respect thereto, except the right to be covered -- the proceeds being simply payable to a beneficiary selected by the employer. The tacit assumption of no incidents of ownership in this posture was essentially the point of departure for two circuit courts, on almost identical facts, in Estate of Connelly v. United States, 551 F.2d 545">551 F.2d 545 (3d Cir. 1977), and In re Estate of Lumpkin, 474 F.2d 1092 (5th Cir. 1973),122 revg. 56 T.C. 815">56 T.C. 815 (1971). Each of these courts thus proceeded to look for other incidents of ownership -- the Lumpkin court found one; the Connelly court did not. But cf. Commissioner v. Treganowan, 183 F.2d 288">183 F.2d 288, 293 (2d Cir. 1950), revg. 13 T.C. 159">13 T.C. 159 (1949) ("we are unwilling to hold this right [to terminate the coverage by resigning] ownerless * * * or at least that decedent failed to possess any of the incidents of ownership").We conclude from the revenue rulings adverted to above that the Commissioner no longer presses the position taken in the Treganowan case. Therefore, in the case before us we, too, proceed from the assumption that the mere fact that Beauregard was a covered person under the policy does not, per se, bring the policy within the ambit of section 2042(2).Petitioners argue, among other things, that the court order dissolving Beauregard's marriage obliterated any power which Beauregard may have had to indirectly change the beneficiary, and, therefore, that he possessed no incidents of ownership. As noted, respondent does not apparently deny that the court order effectively123 restricted the decedent from freely designating beneficiaries, but urges that since Beauregard was required only 609 to maintain his minor children as beneficiaries until they married, attained age 21, became self-supporting, or left the custody of their mother, Beauregard was free to name beneficiaries to succeed to whatever policy proceeds might remain unpaid after such time.We think there is substantial merit to petitioner's argument, for once it has been agreed that the policy terms are impacted by the court order, then the effect of that impact must be determined under State law. In Morton v. United States, 457 F.2d 750 (4th Cir. 1972), the court applied West Virginia insurance law to determine whether the deceased insured held incidents of ownership at his death. The facts in Morton were summarized by the Circuit Court in the following manner:Briefly, the policy was taken out in 1932 by the decedent at the instigation of his father-in-law, who wanted to provide financial security for his daughter. The decedent paid none of the premiums on this insurance policy and it is clear that he never considered that he "owned" it. The premiums124 were paid by his father-in-law, then by a corporation owned by the decedent's wife and her sister, and finally by the decedent's wife until the decedent's death in 1963. The policy was kept in the office safe of another corporation owned by the decedent's wife and her sister. [457 F.2d at 751; fn. ref. omitted.]The policy contained the usual powers customarily reserved to an insured as owner of the policy. In 1938, the insured executed an endorsement of the policy effecting an irrevocable designation of beneficiaries and mode of settlement. The court, applying West Virginia and general insurance law, held that "Most authorities are * * in agreement that the insured cannot deal with the policy in such a way as to defeat the irrevocably designated third party beneficiaries' interest in the proceeds, by, for example, surrendering the policy for its cash surrender value, without the consent of the beneficiaries, and we think the district court was clearly correct that this result would obtain in West Virginia." (457 F.2d at 753; fn. refs. and citations omitted.) In short, the policy facts were overridden by the application125 of State law. Under the law of West Virginia, as found by the court, 4 the insured in Morton had effectively divested himself of the power to exercise incidents of ownership either alone or in conjunction with any other person.We thus must inquire as to whether the court order effectively 610 divested Beauregard of the power to exercise incidents of ownership in the policy. Petitioners have invited our attention to a number of California cases and cases in other jurisdictions which, according to petitioners, compel a holding that Beauregard was, in fact, divested. Before discussing these cases, however, we must amplify respondent's arguments in opposition on this point. Respondent argues that notwithstanding Beauregard's obligation to name his two children as beneficiaries, he nevertheless had the power under the policy to modify the time and manner of payment of the proceeds and the power to name supplemental126 beneficiaries to succeed to the policy proceeds which would remain unpaid after the time his children attained age 21. 5 Respondent argues that the exercise by Beauregard of such powers would not have contravened the court order, and, therefore, notwithstanding the court order, Beauregard retained incidents of ownership. If such were true, we would then need to examine the thrust of Estate of Connelly v. United States and In re Estate of Lumpkin, supra, but for reasons hereinafter stated we need not do so.Respondent's arguments127 notwithstanding, we think Beauregard's interest, if any, in the policy must be determined at the time of death; i.e., the only time a transfer taxable under the estate tax could have occurred. Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327 (1929). On this basis, whatever Beauregard could have done with the policy had he lived until his two children had attained age 21, became self-supporting, or left the custody of their mother is of no significance; 6 the relevant inquiry is, what incidents of ownership, if any, did Beauregard possess at the time of death? 128 Although assuming arguendo that the policy terms might have vested Beauregard with such residual rights in the policy as the right to name a contingent 611 beneficiary (the gist of one of respondent's arguments), thus perhaps conjuring up section 2037 analogies, 7 in our judgment the court order and the California law applicable thereto, discussed infra, effectively foreclose such an argument. As will further appear, any right in Beauregard to elect installment payments was likewise effectively divested.It is our opinion that Beauregard's rights under the policy must be determined under California law and that under a correct interpretation of that law respondent must lose. On this point, the parties have drawn our attention to no decisions of the California Supreme Court which are on point on this issue, nor have we found any. Therefore, after giving proper regard to relevant rulings of other California courts we are of the opinion that, under California law, had Beauregard taken (in derogation of the court order) any of the steps suggested by respondent, the guardian of Beauregard's minor children could have obtained the lump-sum proceeds for them in an action brought on their behalf. See Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456 (1967). This legal right, vested in the guardian, 129 effectively nullified any incident of ownership in the policy possessed by Beauregard at his death.While, as stated, there are no California Supreme Court decisions, a very analogous situation was presented to an intermediate California appellate court and decided adversely to the position respondent would have us take here. In Reliance Life Ins. Co. of Pittsburgh v. Jaffe, 121 Cal. App. 2d 241">121 Cal. App. 2d 241, 263 P.2d 82">263 P.2d 82 (Ct. App. 1953), the facts were briefly as follows: The insured and his spouse, in contemplation of divorce, entered into a property settlement agreement in which it was agreed, among other things, that "Reliance Life Insurance Co. policy #1091164 in the name of [the insured husband] is to be maintained by the husband, the beneficiaries are to be [the couple's two children, then minors], share and share alike, or to the survivors of them." 263 P.2d at 84. Prior to his death, the insured executed a change of beneficiary whereby he directed that the proceeds of the policy be placed in two equal trusts, with each child a beneficiary and the insured's sister the trustee of both trusts, each trust130 to 612 terminate upon the beneficiary's attaining age 21. Following the death of the insured, the trustee and the potential guardian of the minor children filed competing claims with the insurance company, whereupon it interpleaded the proceeds. The trial court held for the trustee and the appellate court reversed.We think the following language of the Reliance Life court states the law of California as it would be applied to the facts of the case before us:But the [insured] may waive his right to change the beneficiary and by contract he may convert the contingent interest [of the beneficiary] into a vested equitable interest in the policy which may not be subsequently defeated by an effort to change the beneficiary. Chilwell v. Chilwell, 40 Cal. App. 2d 550">40 Cal. App. 2d 550, 553, 105 P.2d 122">105 P.2d 122; Shoudy v. Shoudy, 55 Cal. App. 344">55 Cal. App. 344, 351, 203 P.2d 433">203 P.2d 433.No question having been raised with respect to the execution of the property settlement, it is assumed to be valid and based upon sufficient consideration. The children as third-party beneficiaries may enforce the provisions therein made expressly131 for their benefit in the same manner as can a party to the agreement. Civil Code, § 1559. Regardless of whether the insured complies with the terms of the contract, it operates as an equitable assignment of the proceeds of the insurance policy. Mutual Life Insurance Co. v. Henes, 8 Cal. App. 2d 306">8 Cal. App. 2d 306, 311, 47 P.2d 513">47 P. 2d 513.After so stating the applicable California law, the Reliance Life court then went on to look into what was meant by the term "beneficiary" in the context of the property settlement agreement. The trustee argued that the interest which the insured attempted to vest in the children by the creation of a trust was in fulfillment of the property settlement. "But in interpreting that contract," stated the court, "its language must control and not a gratuitous interpretation thereof." 263 P.2d at 85. The court held that the parties contemplated that the children were to receive the proceeds as beneficiaries without restrictions on their rights such as a trust during their minority.Petitioners aptly demonstrate the relevance of the holding in Reliance Life in their brief in 132 the following manner:In ascertaining that which would be permitted under the Court Order, assuming arguendo that Beauregard could and did select a settlement option of ten years, the proceeds to his children until majority (approximately six years), with the balance to another, the result would have been that the children would have received approximately sixty percent (60%) of the proceeds and the downstream beneficiary approximately forty percent (40%) of the proceeds. Had Beauregard more directly limited the rights of his children to receive only 60% of the proceeds, there would have been no question that he would have been in violation of the Court Order. Yet Respondent argues that the Court 613 Order should be read in such a way so as to permit indirectly that which would not be done directly.We agree with petitioners that such a result would have contravened the directive of the court order and, therefore, that Beauregard lacked even such contingent rights in the policy which, assuming arguendo might be considered incidents of ownership, he could have freely exercised.The holding in Reliance Life has been consistently applied in subsequent California decisions133 and we reiterate our belief that it reflects the law of California applicable in this case. Greenberg v. Greenberg, 264 Cal. App. 2d 896">264 Cal. App. 2d 896, 71 Cal. Rptr. 38">71 Cal. Rptr. 38 (Ct. App. 1968); In re Sears' Estate, 182 Cal. App. 2d 525">182 Cal. App. 2d 525, 6 Cal. Rptr. 148">6 Cal. Rptr. 148 (Ct. App. 1960); Halldin v. Usher, 315 P.2d 418 (Ct. App. 1957), revd. on another issue 49 Cal. 2d 749">49 Cal. 2d 749, 321 P.2d 746">321 P.2d 746 (1958). 8It follows that Beauregard did not possess at his death any of the incidents of ownership in the policy ascribed to him by respondent and therefore the proceeds are not includable in his gross estate. Since we have so found, it becomes unnecessary for us to consider other alternative134 arguments advanced by petitioners.To reflect a concession made by petitioners,Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year in issue, except as otherwise expressly indicated.↩2. But see, for example, Commissioner v. Noel's Estate, 380 U.S. 678">380 U.S. 678, 85 S. Ct. 1238">85 S. Ct. 1238 (1965) (flight insurance proceeds held includable in gross estate even though insured had no opportunity to exercise incidents of ownership; decedent "gave" policy to spouse at the airport); Nance v. United States, 430 F.2d 662 (9th Cir. 1970) (custom, usage, and practice of insurance company could not override an incident of ownership contained in policy); Schwager v. Commissioner, 64 T.C. 781">64 T.C. 781 (1975) (the possibility of a "mistake" by taxpayer did not vitiate an incident of ownership); S. Simmons, "'Incidents of Ownership' -- Some Haunting Reminders," 57 A.B.A.J. 815 (August 1971). In United States v. Rhode Island Hospital Trust Co., 355 F.2d 7↩ (1st Cir. 1966), a leading case in this area, the court noted the principle of the heavy predominance of the "policy facts" over the "intent facts." Most, if not all, of the cases, however, which hold for the Commissioner on the policy facts do so on the basis that the express language of the policy prevails over unenforceable intentions of the parties. See R. Stephens, G. Maxfield & S. Lind, Federal Estate and Gift Taxation, par. 3.13 [4] [c], P. 4-297 (1978 ed.).3. Sec. 20.2042-1(c)(2), Estate Tax Regs., reads as follows:(2) For purposes of this paragraph, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. See subparagraph (6) of this paragraph for rules relating to the circumstances under which the incidents of ownership held by a corporation are attributable to a decedent through his stock ownership.↩4. See Commissioner v. Estate of Bosch, 387 U.S. 456↩ (1967).5. Respondent does not argue that Beauregard had a reversionary interest, the value of which exceeded 5 percent of the value of the policy at Beauregard's death. Sec. 2042(2); cf. Rev. Rul. 76-113, 1 C.B. 277">1976-1 C.B. 277. Since Beauregard's coverage in the group policy had no ascertainable value prior to death, a 5-percent or more reversionary interest would have no value. See Rev. Rul. 76-490, 2 C.B. 300">1976-2 C.B. 300↩.6. As stated previously, the court order required Beauregard to "maintain the minor↩ children as beneficiaries in connection with any group accident and health policy." (Emphasis added.)7. Under sec. 2037, property is includable in the gross estate if, at the death of the decedent, possession or enjoyment by the recipients could have been obtained only by surviving the decedent and↩ the decedent retained a 5-percent or more reversionary interest in the property.8. The same court of appeals had previously applied essentially the same rule in Waxman v. Citizens Nat. Trust & Savings Bank, 123 Cal. App. 2d 81">123 Cal. App. 2d 81, 266 P.2d 48">266 P.2d 48↩ (Ct. App. 1954).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4339319/	BRENDA FRANCES BARTLETT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBartlett v. Comm'rDocket No. 22669-10United States Tax CourtT.C. Memo 2012-254; 2012 Tax Ct. Memo LEXIS 251; 104 T.C.M. (CCH) 267; September 4, 2012, Filed251 Decision will be entered for respondent.Brenda Frances Bartlett, Pro se.Michael T. Garrett, for respondent.JACOBS, Judge.JACOBSMEMORANDUM OPINIONJACOBS, Judge: Respondent determined a $43,668 deficiency in petitioner's 2008 Federal income tax and an $8,734 accuracy-related penalty under section 6662(a). 1255 BackgroundThere are no facts in dispute. Petitioner resided in Colorado when she filed her petition. In 2008 petitioner, then 50 years of age, retired from Qwest Communications, where she had worked for 27 years, the last 7 of which as a customer communications technician.Using the TurboTax program to file her Form 1040, U.S. Individual Income Tax Return, for 2008, she reported the following amounts of income:Wages$43,831Interest207State tax refund659Pension gross amount223,870Pension taxable amount119,400Other income2,250Total166,347The $223,870 reported as the gross amount of pension distributions on line 16(a) of petitioner's return is incorrect. Petitioner actually received $221,398 in retirement distributions from State Street Retirement Services in 2008. The 256 difference, $2,472, represents the misreporting 252 of $224 in additional wage income and $2,250 in additional other income. 2The $119,400 reported as the taxable amount of the pension distributions on line 16(b) of petitioner's return is also incorrect; the correct amount is the same as the gross amount, i.e., $221,398. Consequently, on line 16(b) petitioner underreported the taxable amount of her pension distributions by $101,998. 3In addition, petitioner underreported her wage income by $224 and the amount of other income by $2,250. The correct total income petitioner received in 2008 was $270,819.Petitioner reported a total tax liability of $44,619. This amount included the 10% additional tax under section 72(t) for the $119,400 reported as the taxable 253 amount in retirement distributions. Respondent determined that petitioner's correct tax liability for 2008 was $88,287, which included the section 72(t) additional tax for the correct taxable amount in retirement distributions. This resulted in an 257 understatement of income tax of $43,668. Because the understatement of income tax was greater than $5,000 as well as greater than 10% of the tax required to be shown on the return, respondent determined that petitioner substantially understated her income tax and was liable for an accuracy-related penalty under section 6662(a). Seesec. 6662(d).Petitioner admits that her income was misreported and that her taxable income was underreported. She maintains that she reported all of her income and that the mistakes made were "honest mistakes" resulting from her lack of familiarity with the TurboTax program. Petitioner claims she used the audit portion of the TurboTax program, believing the audit portion would catch any mistakes she otherwise might make.DiscussionPetitioner acknowledges she received all the income determined by respondent. She claims she relied on TurboTax to properly prepare her 2008 income tax return and thus she was not negligent 254 because there was reasonable cause for the underpayment. Seesecs. 6662(c), 6664(c).It is apparent that a portion of the information petitioner entered into the TurboTax program was incorrect; hence the mistakes made (which resulted in the underpayment) were made by petitioner, not TurboTax. TurboTax is only as good 258 as the information entered into its software program. See Bunney v. Commissioner, 114 T.C. 259">114 T.C. 259, 267 (2000). Simply put: garbage in, garbage out.Petitioner's errors were not merely isolated computational or transcription errors. Seesec. 1.6664-4(b)(1), Income Tax Regs. Petitioner systematically underreported her income and this resulted in an underpayment of tax on her Federal tax return. Petitioner did not have reasonable cause for any portion of the resulting underpayment. Respondent's determinations as to both the tax deficiency and penalty are sustained.Decision will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code in effect for 2008.↩2. The $2 difference is due to rounding errors.↩3. Petitioner used $50,000 of the retirement distributions to purchase two bank CDs, one a 7-month CD for $25,000, and the second an 18-month CD for $25,000. Petitioner claims that the $50,000 so used constitutes a qualified IRA rollover contribution and hence is nontaxable. Seesec. 408(d)(3)(A)(i)↩. Petitioner's position is not correct because the $50,000 was not rolled over into an qualified IRA or a qualified individual retirement annuity.	01-04-2023	11-14-2018
https://www.courtlistener.com/api/rest/v3/opinions/1126617/	637 So. 2d 591 (1994) STATE of Louisiana, Plaintiff-Appellee, v. William BOSTIC, Defendant-Appellant. No. 26,000-KA. Court of Appeal of Louisiana, Second Circuit. May 4, 1994. 592 Geary S. Aycock, West Monroe, Joseph (Sib) Abraham, Jr., El Paso, TX, for defendant-appellant. Jerry L. Jones, Dist. Atty. by J. Michael Ruddick, Monroe, for plaintiff-appellee. Before NORRIS, J., and LOWE and PRICE, JJ. Pro Tem. LOWE, Judge Pro Tem. The Ouachita Parish district attorney charged appellant William E. Bostic with conspiracy to distribute marijuana, a Schedule I substance, and possession of a Schedule I substance with intent to distribute in violation of LSA-R.S. 40:966(A)(1). The conspiracy charge was dropped, and Bostic entered a plea of not guilty to the charge of possession with intent to distribute. At a trial on the merits, the jury found Bostic guilty as charged. Bostic was sentenced to eleven years at hard labor and was fined $5,000 with one year default time should he fail to pay. Bostic appeals his conviction and sentence, assigning six errors: (1) The trial court erred in denying Bostic's motion to suppress. (2) The trial court erred in granting the Motion to Quash the subpoenas issued to the Louisiana State Police for production of arrest reports and documents of 54 other similarly situated out-of-state defendants and denying the Public Records Request for said documents. 593 (3) The trial court erred in deviating from the felony sentencing guideline recommendations of 24 to 36 months discretionary jail sentence. (4) The trial court erred in finding aggravating circumstances sufficient to deviate from the sentencing guidelines under Sections 209(A) and (B). (5) The trial court erred in finding that the 750 pounds of marijuana in this case created an aggravating circumstance under the Felony Sentencing Guidelines, Section 209(B), thereby justifying deviation from said felony guideline recommendations. (6) The trial court erred in imposing an excessive sentence in violation of the U.S. Constitution, and Article 1, Section 20 of the Louisiana Constitution. We affirm. FACTS Bostic was traveling east on Interstate 20 through Ouachita Parish December 19, 1992. The road was wet from rain earlier in the day. Bostic approached a construction zone in a large white Mallard motor home with North Carolina plates. The speed limit changed from 65 miles per hour to 45 miles per hour. Thinking the road was about to narrow to one lane, Bostic sped up to pass other vehicles. Trooper Neal noticed Bostic as he entered the construction zone. His mental impression that Bostic was exceeding the speed limit was confirmed when the motor home entered his radar range going 70 miles per hour. Trooper Neal stopped Bostic to issue a traffic citation for speeding. When Bostic produced a driver's license from Tennessee, Trooper Neal asked him about the two differing states on the driver's license and the plates. Bostic became nervous, broke eye contact, made outward hand movements, and rubbed his head back and forth. Trooper Neal thought it odd Bostic would be traveling alone in such a large vehicle. Bostic's presence on I-20 in Ouachita Parish when he claimed to be coming from Slidell, Louisiana, made Trooper Neal suspicious. When asked for the motor home's registration, Bostic invited Trooper Neal inside while he looked for the papers. Bostic became more nervous. He moved his hands back and forth, he licked his lips as if his mouth were dry, and he appeared to be getting ill. By the time Bostic retrieved the vehicle registration, Trooper Anderson had arrived. When Trooper Neal went to his unit to run a license and registration check, Trooper Anderson walked over and advised Trooper Neal that Bostic was nervous and should be watched. After the license and registration proved to be in proper order, Trooper Neal returned to where Bostic stood and asked his permission to search the vehicle. Bostic consented, signing the consent to search form Trooper Neal gave him. Trooper Neal searched the motor home and found about 750 pounds of marijuana. Bostic was arrested and charged with possession of marijuana with intent to distribute. DISCUSSION Assignment of error number 1. The trial court erred in denying Bostic's motion to suppress. Bostic argues the initial traffic stop was pretextual, his continued detention was illegal, and his consent to search was invalid. Under such circumstances, he reasons, the search was illegal, so the marijuana should have been suppressed. A. THE INITIAL TRAFFIC STOP AS PRETEXT. In his first argument in this assignment of error, Bostic asserts Trooper Neal's subjective intention when he stopped the vehicle was to search it. This intent was motivated only by Bostic's out-of-state license plate. This subjective intention on the part of Trooper Neal, Bostic says, makes the stop a violation of his constitutional rights. Thus the evidence seized is the product of an illegal search, and should have been suppressed. Trooper Neal testified he first saw Bostic speeding through a construction zone, on a wet road, in a large motor home, passing other vehicles. Bostic admitted he sped up 594 to pass others, thinking the road would change to one lane. There is a split of authority concerning how to assess the constitutionality of allegedly pretextual searches. The United States Court of Appeals for the Fifth Circuit adopted an objective test in U.S. v. Causey, 834 F.2d 1179 (5th Cir.1987), saying: "So long as the police do no more than they are objectively permitted to do, their motives in doing so are irrelevant and hence not subject to inquiry." Causey, supra at 1184. Here Trooper Neal was authorized to stop Bostic and to issue him a citation for speeding. The fact he may have hoped to gain an opportunity to search the motor home for drugs is of no moment. Trooper Neal's stop of Bostic is not invalid under Causey. A more subjective standard for evaluating allegedly pretextual searches was stated by the United States Court of Appeals for the Eleventh Circuit in United States v. Smith, 799 F.2d 704 (11th Cir.1986) and adopted by the Tenth Circuit in U.S. v. Guzman, 864 F.2d 1512 (10th Cir.1988). Under this test, an objectively reasonable search is not invalid solely because the officer acted out of improper motivation. Instead, the court should inquire whether a reasonable officer would have made the stop in the absence of the invalid purpose. Smith, supra at 709-710; Guzman, supra at 1517. The record here is devoid of evidence concerning general practice among troopers, or what a reasonable trooper would have done, when confronted by such a flagrant speeding violation. However, common knowledge dictates that a reasonable trooper would have stopped a motor home driving 25 miles per hour in excess of the speed limit given the road conditions at the time. Trooper Neal's stop of Bostic is not invalid under Smith and Guzman. Thus the initial traffic stop was valid and not pretextual, so Bostic's first argument with regard to this assignment of error is without merit. B. LEGALITY OF BOSTIC'S CONTINUED DETENTION. In his second argument for suppression of the marijuana, Bostic contends his continued detention was illegal. He claims that after Trooper Neal determined his drivers license and registration were in order, he should have been allowed to leave without further delay for additional questioning. Bostic argues Trooper Neal's retention of his license and registration kept him from being free to go, amounting to an illegal detention and a violation of Bostic's constitutional right to be free from unreasonable searches and seizures. It appears Bostic argues this illegal detention vitiates his later consent to the search of the motor home, making the marijuana a fruit of the illegal detention which should have been suppressed at trial. Since the initial stop of Bostic was legal, the question presented is whether at any time before he consented to the search of his vehicle, the detention became illegal. To determine whether Bostic was detained too long, the court must look to the diligence of the police in pursuing a means of investigation likely to confirm or to dispel their suspicions quickly. United States v. Sharpe, 470 U.S. 675, 105 S. Ct. 1568, 84 L. Ed. 2d 605 (1985); State v. Walker, 530 So. 2d 1200 (La. App. 2d Cir.1988), writ denied, 532 So. 2d 763 (1988); State v. Arrington, 556 So. 2d 263 (La.App. 2d Cir.1990). There is no bright-line rule for when a detention lasts too long. Each instance must be assessed in view of the surrounding circumstances. Arrington, supra at 266. In State v. Bunnell, 517 So. 2d 439 (La. App. 1st Cir.1987), the court found an otherwise lawful traffic detention became illegal once a state trooper exceeded the limits of the permissible detention for the express and sole purpose of obtaining defendant's consent to search. There, the trooper purposefully withheld issuing a traffic citation because he was suspicious and wanted to determine if the defendant was involved in some criminal activity. Rather than issuing the citation and allowing defendant to proceed on his way, the trooper detained the defendant for half an hour, far beyond the time deemed reasonable to investigate a minor traffic violation. He did so solely for the purpose of obtaining consent to search the car, having only a generalized suspicion about the occupants based on their nervousness and out-of-state driver's license and registration. The 595 court held the marijuana seized during that consent search had to be suppressed because the defendant, who initially refused permission to search the vehicle, gave his consent only after being illegally detained. Unlike the Bunnell case, Bostic never refused to give his consent for Trooper Neal to search the motor home. He freely gave his consent after being detained no longer than ten minutes. Roughly five minutes passed while Bostic located his registration. In the remaining time, Trooper Neal waited for the information on Bostic's license and registration. Trooper Neal filled out the consent form in his car while waiting for the return on the drivers license and registration information. In Arrington, supra, the court found the cause, method, and duration of a detention for a traffic violation was reasonable. In that case, immediately after stopping the defendant, the officer observed his nervous behavior, his inability to produce proof of registration and insurance, and his efforts to block the officer's view of the car's interior. The officer checked the defendant's driving record and discovered defendant's background of drug and weapon offenses. A drug dog already on the scene quickly alerted. The court held the officer diligently pursued the investigation in a manner likely to confirm or to dispel his suspicions quickly. Likewise, Trooper Neal diligently pursued his investigation in a manner likely to confirm or to dispel his suspicions quickly. Before obtaining Bostic's consent to search, Trooper Neal logically proceeded by checking Bostic's license and registration. He completed his check within ten minutes. Although Trooper Neal never returned Bostic's license and registration, and although he subjectively intended to detain the vehicle until he searched it, Bostic was not being illegally detained. If Bostic had initially refused consent, and had Trooper Neal continued to detain him, the outcome here might have been different. However, under the circumstances, Bostic's consent was not given while he was being illegally detained, hence this second argument is meritless. C. THE CONSENT IS INVALID. In his final argument for the suppression of the marijuana, Bostic asserts the consent to search was invalid because it was not freely and voluntarily given. He states that when he consented to the search of the vehicle, he was confronted by two armed state troopers, Troopers Neal and Anderson. He further states that when Trooper Neal obtained his consent to search, Trooper Neal never told him the reason for the search or the extent of the search, never fully explained the consent form, never explained his right to refuse consent, never gave him his Miranda warnings, and never returned his drivers license or registration. Bostic argues the totality of these circumstances made his consent to search involuntary, mandating suppression of the marijuana. Whether Bostic was informed of his Miranda rights before he gave his consent to the search is irrelevant here. Miranda v. Arizona, 384 U.S. 436, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966), applies only to the admissibility of statements taken from a suspect during custodial interrogation. [A] consent to search does not amount to a statement, either inculpatory or exculpatory, stemming from custodial interrogation. It is neither "testimonial" nor "communicative" and therefore is not a statement against which Miranda was intended to protect. State v. Ealy, 530 So. 2d 1309, 1315 (La. App. 2d Cir.1988), writ denied. Thus, Miranda warnings are not necessary to validate a consent search. United States v. D'Allerman, 712 F.2d 100 (5th Cir.), cert. denied, sub nom. D'Alleman v. United States, 464 U.S. 899, 104 S. Ct. 254, 78 L. Ed. 2d 240 (1983); State v. Williams, 353 So. 2d 1299 (La.1977), cert. denied, 437 U.S. 907, 98 S. Ct. 3098, 57 L. Ed. 2d 1138 (1978). Because Trooper Neal legally stopped Bostic, this case does not present a situation where consent resulted from violation of his constitutional rights. The issue in this case is whether Bostic's consent was freely given. It is well settled that a warrantless search conducted pursuant to a valid consent is permitted by the Louisiana and United 596 States constitutions. Schneckloth v. Bustamonte, 412 U.S. 218, 93 S. Ct. 2041, 36 L. Ed. 2d 854 (1973); State v. Bodley, 394 So. 2d 584 (La.1981); State v. Murphy, 465 So. 2d 811 (La.App. 2d Cir.1985). A consent is valid when it is freely and voluntarily given by a person with common authority or other sufficient relationship to the premises or effects sought to be inspected. Bodley, supra; State v. Owens, 480 So. 2d 826 (La.App. 2d Cir.1985), writ denied, 486 So. 2d 748, cert. denied, 479 U.S. 840, 107 S. Ct. 145, 93 L. Ed. 2d 87 (1986). While a valid consent search is a recognized exception to the warrant requirement, the burden is on the state to prove the consent was freely and voluntarily given. Voluntariness is a question for the trier of fact to be determined by the totality of the circumstances. The trial court's finding is to be given great weight upon appellate review. State v. Edwards, 434 So. 2d 395 (La.1983); State v. Brown, 478 So. 2d 600 (La.App. 2d Cir.1985). While knowledge of the right to refuse consent is one factor to be taken into account, it is not determinative of the issue of voluntariness of the consent. State v. Dunbar, 356 So. 2d 956 (La.1978). State v. Dickerson, 579 So. 2d 472, at 480 (La.App. 3d Cir.1991). The consent to search form Bostic signed was concise and easily understandable. It told him the reason for the search and the extent of the search. In pertinent part, the consent form states: In order to cooperate in an investigation being conducted by the Louisiana Office of State Police, I, Kenneth [sic], residing at Rt. 3, Box 317, Proffitt Rd., Gatlinburg, TN 37738, do hereby voluntarily authorize TFC J.C. Neal of the Louisiana Office of State Police to search 88 Mallard, N.C. DYS4272, and its contents, which are owned or controlled by me and remove any items the Louisiana Office of State Police deems pertinent to their investigation, providing a receipt is furnished for the removed items. No promise, threat, or coercion of any kind has been made against me by the Louisiana Office of State Police and I have been informed by the above named State Police Officer that I may refuse to consent to any search and that I may revoke my consent to search at any time. /s/ W.E. Bostic Before Bostic signed the consent form, Trooper Neal explained it to him. After it was explained, Bostic silently read that form for himself and indicated he understood. Thus the record shows Bostic understood he was giving Trooper Neal permission to search the vehicle and its contents. The form clearly informed Bostic he had the right to refuse or to revoke his consent. This case is typical of cases where officers obtain motorists' consent to search their vehicles. Generally, officers perform searches when they are on duty. Officers on duty usually wear uniforms which include side arms. In this case, there is no evidence which suggests the troopers threatened Bostic with their side arms other than by wearing them at the time he gave his consent. If the fact the troopers were wearing side arms is sufficient to vitiate consent, then practically all consent searches will be invalid for the same reason. Bostic has not shown Trooper Neal's retention of his drivers license and registration made his consent invalid. Bostic consented immediately after Trooper Neal completed his background check. Nothing suggests Trooper Neal threatened to keep Bostic's license and registration unless he signed the consent form. From the face of the record, it appears Bostic was neither coerced nor threatened and the state met its burden of showing Bostic's consent was freely and voluntarily given. This assignment of error lacks merit. Assignment of error number 2. The trial court erred in granting the state's motion to quash the subpoenas duces tecum and in denying the public records request for certain documents. Before the motion to suppress hearing, Bostic sought to discover information contained in numerous unrelated criminal police reports and citations. He issued at least nine subpoenas duces tecum directed to officers of the Department of Public Safety and Corrections, Office of State Police. He requested 597 the initial arrest reports and traffic citations issued to 54 other out-of-state defendants. Bostic intended to use the information to prove the conduct of the state police violated his constitutional rights. He claimed that if the vehicles had not been from out-of-state, the officers would not have enforced the traffic violations and sought to search the vehicles. The Department moved to quash Bostic's subpoenas duces tecum. In its motion to quash, the Department argued the number of items sought was so great that the subpoenas were unreasonable and oppressive within the meaning of LSA-C.Cr.P. Art. 732 and that the information sought had no rational relationship with the material issues in the merits of Bostic's case. Second the Department argued that any information directly pertaining to Bostic's criminal case must be sought by motion adverse to the district attorney and is subject to the discovery rules set out in LSA-C.Cr.P. Arts. 716 et seq. Next, the Department stated that some of the information sought might be public record, obtainable only upon proper request and payment of the appropriate fee. Finally, the Department argued that because the subpoenas called for the appearance of nine state police officers, the imposition on the public safety function and the disruption of state business was unreasonable and oppressive. The district court, in part, quashed and vacated Bostic's subpoenas duces tecum by limiting him to ten requests for production. At that time Bostic filed a public records request. Although he designated the district court's denial of his public records request as error, the record shows no such denial and Bostic did not argue such a denial as error in his brief. In regard to the subpoenas duces tecum, the Code of Criminal Procedure provides: [t]he court shall issue subpoenas for the compulsory appearance of witnesses at hearings or trials when requested to do so by the state or the defendant. LSA-C.Cr.P. Art. 731. A subpoena may order a person to produce at the trial or hearing, books, papers, documents, or any other tangible things in his possession or under his control, if a reasonably accurate description thereof is given; but the court shall vacate or modify the subpoena if it is unreasonable or oppressive. LSA-C.Cr.P. Art. 732. The fourth circuit had interpreted these provisions as being mandatory if certain conditions are met. In State v. Shropshire, 468 So. 2d 582 (La.App. 4th Cir.1985), and State v. Phillips, 465 So. 2d 794 (La.App. 4th Cir. 1985), the court stated: Unless a subpoena requesting the production of books, documents, etc., is unreasonable or oppressive, the court has no discretion, but "shall issue the subpoenas ... when requested to do so by the State or the defendant." The opposing party or the person to whom the subpoena is directed may move the court to quash the subpoena. The court may then decide if there exists [sic] grounds for quashing the subpoena. Shropshire, supra at 583. We should also include the additional codal requirement that the request include a "reasonably accurate description" of the items requested. Phillips, supra at 795. However, in State v. Buras, 439 So. 2d 1187 (La.App. 4th Cir.1983), the court held the trial judge had discretion to decide whether to issue a subpoena duces tecum. These cases can be reconciled by reading Buras to state that the decision of whether grounds exist for vacating or modifying the subpoena rests within the discretion of the trial judge. In the present case, the trial court did not express its reason for vacating and modifying Bostic's subpoenas. However, pursuant to the Code of Criminal Procedure, it could only have decided to do so if the subpoenas either failed to give reasonably accurate descriptions, or were unreasonable or oppressive. This decision rested within the trial court's discretion. If the district court abused its power in vacating and modifying the subpoenas by limiting Bostic to ten subpoenas, then he was denied his mandatory right to have twelve witnesses summoned at this hearing. LSA-C.Cr.P. Art. 738. However, Bostic has 598 not shown any abuse of the trial court's discretion. Even if the trial court abused its discretion, Bostic has not demonstrated that the error affected his substantial rights. LSA-C.Cr.P. Art. 921. This is so because the information sought by Bostic would not have proved his constitutional rights were violated. The evidence shows Bostic was stopped because he was driving a large white motor home, albeit with out-of-state plates, which passed other vehicles on a wet road at 70 miles per hour in a 45 miles per hour construction zone. Unless Bostic proved that large white motor homes bearing Louisiana license plates which passed other vehicles on wet roads at 70 miles per hour in a 45 miles per hour construction zone were not stopped by the state police, he could not prove his equal protection rights were violated. The information Bostic sought would not prove such vehicles were not stopped by the state police. This assignment of error is without merit. Assignment of error numbers 3, 4, and 5. The trial court erred in deviating from the Felony Sentencing Guidelines and in finding aggravating circumstances. Here, the statutory minimum sentence exceeds the sentence recommended by the Guidelines. In such cases, the Guidelines provide that the statutory minimum becomes the sentence recommended by the Guidelines, unless aggravating circumstances justify imposing a more severe sentence. La.S.G. § 211; LSA-R.S. 40:966(B)(2). In State v. Smith, 629 So. 2d 333 (La.1993), the Louisiana Supreme Court made it clear that a sentencing court has "the discretion to deviate from the Guidelines, even grossly, where the record supports such a deviation," so long as the court specifies "for the record the ... aggravating circumstances which justify the departure." Smith, supra at 337. The court observed "the Guidelines specifically avoid mandating the amount of weight to be applied to aggravating ... factors which differentiate a specific defendant from the typical defendant." Smith, supra at 336-337. Additionally, § 209(B)(19) is an "omnibus factor which provides the trial court with even greater discretion to deviate from the Guidelines when an atypical case arises for which the aggravating ... considerations do not fall into one of the listed factors." Smith, supra at 337. A reviewing court is required "to look to both the Guidelines and the factual findings upon which a sentence is based." Smith, supra at 336. La.S.G. § 209(B)(14) states that if "the offense was a major economic offense" then that may be considered an aggravating factor. This section allows upward departure where a defendant's act caused major economic damage to the victim, like arson or theft involving a large economic loss. State v. Strother, 606 So. 2d 891 (La.App. 2d Cir. 1992), writ denied, 612 So. 2d 55 (La.1993); State v. Perow, 607 So. 2d 888 (La.App. 2d Cir.1992). In the present case, the sentencing court factually found that Bostic was in possession of more than 750 pounds of marijuana with the intent to distribute. The street value of the drugs was somewhere between $450,000 and $750,000. The court considered this a major economic offense, and therefore an aggravating factor. According to Strother and Perow, both supra, the trial court erred in considering this an aggravating factor since possessing marijuana with the intent to distribute does not cause major economic damage to the victims. However, the sentencing court did properly treat the sheer quantity as an aggravating circumstance, distinguishing this case from the typical. In State v. Lowery, 609 So. 2d 1125 (La.App. 2d Cir.1992), writ denied, 617 So. 2d 905 (La.1993), this court held 271 pounds of marijuana in a possession with intent to distribute case did constitute an aggravating factor. The court said, "the sentencing guidelines do not contemplate that transporting 271 pounds of marijuana across state lines is a typical case of possession with intent to distribute." Lowery, supra at 1133. Accordingly, if 271 pounds is enough to make the Lowery case atypical, then 750 pounds is an amount large enough to bring the present case outside the realm of the typical case. Therefore, the trial court did not err in finding 599 aggravating circumstances and deviating from the Felony Sentencing Guidelines. These assignments of error have no merit. Assignment of error number 6. The trial court erred in imposing an excessive sentence. Whether the sentence imposed is too severe depends on the circumstances of the case and the background of the defendant. A sentence violates LSA-Const. Art. 1, § 20 (1974) if it is grossly out of proportion to the seriousness of the offense or nothing more than a purposeless and needless infliction of pain and suffering. State v. Bonanno, 384 So. 2d 355 (La.1980). A sentence is considered grossly disproportionate if, when the crime and punishment are considered in light of the harm done to society, it shocks the sense of justice. Bonanno, supra; State v. Hogan, 480 So. 2d 288 (La.1985); State v. Richardson, 545 So. 2d 714 (La.App. 2d Cir. 1989). A trial court has wide discretion to sentence within the statutory limits. Absent a showing of manifest abuse of discretion, we do not set aside a sentence as excessive. State v. Square, 433 So. 2d 104 (La. 1983); State v. Madison, 535 So. 2d 1024 (La. App. 2d Cir.1988). When Bostic was sentenced on May 3, 1993, the statutory penalty for possession of marijuana with intent to distribute was imprisonment at hard labor for not less than five years nor more than thirty years and payment of a fine of not more than fifteen thousand dollars. LSA-R.S. 40:966(B)(2). The actual sentence imposed is within the statutory limits. Thus, absent a showing of manifest abuse of discretion, Bostic's sentence should not be set aside as excessive. In ruling on Bostic's motion to reconsider sentence, the sentencing court considered that possessing 750 pounds of marijuana is a very serious offense, evidencing an intent to participate in or facilitate major drug trafficking. Considering that federal drug conspiracy charges have been brought against Bostic, and that novice drug couriers usually do not transport the amount of marijuana Bostic possessed, the evidence adduced at the trial and sentencing hearing tends to prove he was in fact involved in an ongoing drug distribution organization. Additionally, the state pointed out two cases involving a substantial amount of marijuana, but less than in the case at bar, in which the defendants received comparable sentences. In State v. Perez, 569 So. 2d 609 (La.App. 2d Cir.1990), writ denied, 575 So. 2d 365 (La.1991), the defendant was sentenced to imprisonment for ten years for possessing 96.6 pounds of marijuana with intent to distribute. Perez was an original supplier with authority to accept payments for and make decisions regarding the marijuana distribution. In State v. Thompson, 543 So. 2d 1077 (La. App. 2d Cir.1989), writ denied, 551 So. 2d 1335 (La.1989), the defendant was sentenced to seven years, six months in prison for possessing 260 pounds of marijuana with intent to distribute. Although Thompson was a first felony offender, the court considered the large amount of contraband and Thompson's alcohol and drug abuse as factors for upholding the sentence. The court noted Thompson received no more than half the maximum sentence allowable and held it was not excessive. Bostic faced a maximum of thirty years in prison and a fifteen thousand dollar fine. The actual sentence imposed is about a third of that maximum. Considering the circumstances of this case, we cannot say the trial court abused its discretion in sentencing Bostic. CONCLUSION The trial court correctly denied Bostic's motion to suppress the marijuana seized during the search of the vehicle. Bostic was legally stopped for flagrantly violating traffic laws by speeding on Interstate 20, and none of his constitutional rights were violated. Bostic's consent to the search of the vehicle was freely and voluntarily given. The trial court did not abuse its discretion in deciding grounds existed for modifying the subpoenas duces tecum issued by Bostic. Although the trial judge never stated grounds for doing so, Bostic has not pointed out any abuse of the trial court's discretion. *600 The trial court properly found sufficient aggravating circumstances present to depart from the sentence recommended by the Felony Sentencing Guidelines. Despite the trial court's erroneous finding that this was a major economic offense, it correctly found the quantity of marijuana alone was a sufficient aggravating circumstance justifying upward departure from the Guidelines. The sentence imposed does not violate either the United States or the Louisiana constitution. The sentence imposed is within the statutory limits, and it cannot be said that, given the circumstances of this case, the trial court abused its discretion in sentencing Bostic to approximately one-third the maximum allowable sentence. For the foregoing reasons, Bostic's conviction and sentence are AFFIRMED. NORRIS, J., concurs in the result.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4474410/	OPINION. Hill, Judge: Petitioner here seeks by a designated “third amended return,” filed almost three and a half years after the due date of the return for the taxable year 1942, to withdraw his deduction of a war loss and recompute his tax for that year. Such war loss, which arose through the capture by the Japanese in 1942 of the property of the Philippine Railway Co.,, in which petitioner held bonds, was deducted by him from his gross income for 1942 after he had requested a ruling from the respondent as to whether he was entitled to do so under the provisions of section 127, Internal Revenue Code. He adhered to such deductions in two amended returns filed subsequent to his original one. Petitioner raises this issue because if he is allowed (.o withdraw his election to take the war loss involved he will not be required to report the amount of the recovery of such loss in the year of recovery to the extent required by section 127 (c) of the Internal Revenue Code. It is our opinion that petitioner’s contention is untenable. We believe that, in accordance with section 127 of the Internal Revenue Code, the war loss involved was properly deductible by petitioner in the year 1942. The question he raises is an attempt not merely to arrive at a different computation of his tax for 1942, but also an effort to change the basis on which his computation of tax for a subsequent year will be made. If he is permitted to reopen his taxable year 1942 for the purpose of affecting his tax liability for other years, the result will be a departure from the rule of strict annual accounting and will place an unnecessary obstacle in the orderly administration of our tax laws. We think that, in the interest of the regular and ascertainable flow of revenue, petitioner’s election to take the war loss deduction in 1942 must be treated as binding. We so hold. To conclude otherwise, we believe, would be a departure from the principle of Security Flour Mills Co. v. Commissioner, 321 U. S. 281, in which the Court stated as follows with respect to the scheme of the annual accounting period: The rationale of the system is this: It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment and collection capable of practical operation. The case at bar is also not distinguishable in principle from those involving a question of whether a husband and wife who filed a joint return could, after the due date of the return, recompute their tax on the basis of separate returns. In refusing to allow the taxpayer so to do, the United State Court of Appeals for the Tenth Circuit, in Champlin v. Commissioner, 78 Fed. (2d) 905, stated that: To permit taxpayers to change their minds ad libitum for fifteen years would throw the department into inextricable confusion. The general rule is that where a taxpayer has exercised an option conferred by statute he cannot retro-activély and ex parte rescind his action. See also Rose v. Grant, 39 Fed. (2d) 340; certiorari denied, 283 U. S. 867; Bartlett v. Delaney, 75 Fed. Supp. 490; affd., 173 Fed. (2d) 535; Burke & Herbert Bank & Trust Co., 10 T. C. 1007. It follows that respondent did not err in his determination. Reviewed by the Court. Decision will be entered, under Rule SO.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474411/	OPINION. Black, Judge: The principal question for our determination in this proceeding is whether the petitioner herein, as the successor bank, having acquired the assets of the smaller banks in a reorganization, is entitled to certain “recovery exclusions” from its taxable income in 1942 and 1943 within the meaning of section 22 (b) (12) of the Internal Revenue Code.1 Respondent contends that the issue herein is res judicata by reason of the prior decision of the Board of Tax Appeals in the case of this petitioner in Docket No. 89720, and, if it is not, that the recoveries in 1942 and 1943 on the debts which were owed to and charged off by predecessor banks during 1933 do not constitute recovery exclusions under section 22 (b) (12) of the code which are to be excluded from petitioner’s gross income in 1942 and 1943. We shall consider the issue of res judicata first. In 1933 Marine Bancorporation owned about 90 per cent of the stock of the petitioner and six smaller banks. In 1933, pursuant to a plan of reorganization, the assets of the six smaller banks were transferred to petitioner, subject to all their liabilities, and thereafter the business of the six smaller banks was to be carried on by petitioner through branches. Immediately prior to the transfer the smaller banks charged off their books certain debts considered to be worthless or subject to criticism by either state or national bank examiners. Deductions were claimed for some of such debts in the income tax returns for 1933. In 1934 petitioner made recoveries on some of the debts which had been charged off in 1933, but in its income tax return for 1934 it claimed that such recoveries were not income, but a return of capital. Respondent determined that the recoveries should be included in income, and, on petition to redetermine the deficiency, the Board upheld the respondent, which was affirmed by the Circuit Court of Appeals for the Ninth Circuit. We found that the debts- at the time of the transfer had a zero basis in the hands of the predecessor banks for the reason that they had been ascertained to be worthless and charged off in a prior year and, therefore, held that the recoveries in 1934 were taxable income to the petitioner. As we have already stated, our decision was affirmed by the Ninth Circuit in National Bank of Commerce of Seattle v. Commissioner, supra, though it followed a somewhat different line of reasoning than that used by the Board of Tax Appeals. In Commissioner v. Sunnen, 33 U. S. 591, the Supreme Court expounded the doctrine of res judicata with particular reference to issues of tax law, stating in pari, as follows: These same concepts are applicable in the federal income tax field. Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action. Thus if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year. But if the later proceeding is concerned with a similar or unlike claim relating to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. Collateral estoppel operates, in other words, to relieve the government and the taxpayer of “redundant litigation of the identical question of the statute’s application to the taxpayer’s status.” Tait v. Western Md. R. Co., 289 U. S. 620, 624. ******* And so where two cases involve income taxes in different taxable years, collateral estoppel must be used with its limitations carefully in mind so as to avoid injustice. It must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged. Tait v. Western Md. R. Co., supra. If the legal matters determined in the earlier case differ from those raised in the second case, collateral estoppel has no bearing on the situation. * * * Since our decision in Docket No. 89720, Congress enacted section 116 of the Revenue Act of 1942 (sec. 22 (b) (12), I. R. C.). This new section in effect excludes from gross income amounts otherwise taxable which are attributable to the recovery of bad debts, prior taxes and “delinquent amounts” to the extent the prior deduction or credit of such items did not reduce the tax liability of the taxpayer. In this proceeding, therefore, a different tax statute is involved, and the question is whether petitioner is entitled to its benefits. Because of this change in the law and in the issue involved, we conclude that the doctrine of res judicata is not applicable. Commissioner v. Sunnen, supra. Cf. C. D. Johnson Lumber Corporation, 12 T. C. 348. On the merits petitioner contends that, since none of the deductions in the 1933 returns of the smaller banks involved herein resulted in a reduction of taxable income to the predecessor banks in view of other losses disclosed upon their returns, the predecessor banks, therefore, would, if they were still in existence, be entitled to the benefit of the “recovery exclusion” provided for in section 22 (b) (12) and, since it acquired all of the assets of the predecessor banks in a reorganization pursuant to which the basis of the said accounts is the same in its hands as in the hands of the predecessor banks, it is, therefore, entitled to the benefit of the “recovery exclusion.” In other words, petitioner contends that for the purposes of section 22 (b) (12) (D) it stands in the shoes of the predecessor banks. Section 22 (b) (12) (D) defines “recovery exclusion” and provides, with respect to the recovery of a bad debt, prior tax, or delinquency amount, that upon the recovery during the taxable year of such bad debt, prior tax, or delinquency amount there shall be excluded from gross income such part of the amount recovered “which did not result in a reduction of the taxpayer’s tax.” The charge-off herein was made by the predecessor banks, which were entities separate and distinct from the petitioner. We think it is clear that the same entity must charge off and recover in order to be entitled to the “recovery exclusion” under section 22 (b) (12). In Michael Carpenter Co., 47 B. T. A. 626; affd., 136 Fed. (2d) 51, we had a similar situation. In that case the taxpayer, pursuant to a tax-free reorganization, acquired in exchange for its capital stock the business and assets of a Wisconsin corporation. Among the assets acquired were claims for reimbursement against certain milling companies for processing taxes included in the 1935 flour prices paid by the Wisconsin corporation. During 1937 the taxpayer received directly or through the Wisconsin corporation certain amounts on account of processing taxes paid by the Wisconsin corporation to the milling companies upon flour which had been consumed by the Wisconsin corporation in its baking operations in 1935. The income tax return of the Wisconsin corporation for 1935 showed a loss of $27,768.29. Subsequent to the receipt of the payments, an amended return was filed in the name of the Wisconsin corporation by its former officers reflecting this refund, which amendment resulted in reducing the net loss from $27,768.29 to $15,861.79. The taxpayer’s return for 1937 did. not reflect as income the amounts received from the milling companies during that year. We determined that the claims the taxpayer acquired from the trans-feror constituted capital assets and that they had a zero basis in the transferor’s hands at the time of the exchange, and we held, therefore, that anything realized thereon by the taxpayer in 1937 constituted taxable income. The taxpayer contended that, since the Wisconsin corporation’s assets were acquired pursuant to a tax-free reorganization, all property received by it had the same basis in its hands as the property had in the hands of the transferor; that the contract rights had a basis of $1.38 per barrel in the transferor’s hands and had the same basis in petitioner’s hands; and that it received only $1 per barrel by virtue Of the payments by the millers and, therefore, realized no taxable income. We pointed out, however, that the separate identity of the transferor and transferee must be recognized, and we held that the “1935 loss of the Wisconsin corporation was not transferable to or usable by petitioner, either directly or indirectly, and that the personal defense available to the transferor did not survive the transfer to petitioner.” The Seventh Circuit, in affirming the Tax Court, referred to section 116 of the Revenue Act of 1942 (sec. 22 (b) (12) of the code), which was not before us at the time of our decision, and stated in part as follows: Taxpayer relies heavily on this amendment. The amendment was not before the Tax Court at the time of its decision. The Government claims it is inapplicable for two reasons: (1) It was not this taxpayer’s tax which had been affected by the payment, but the predecessor’s; * * * It is to be noted that the amendment provides that the exclusion shall be. applicable to instances where the expense involved the reduction of taxpayer's taw. We think also Rice Drug Co., 10 T. C. 642, supports the conclusion we have reached. In that case we said: * * * The National Bank of Commerce case, supra, is clearly authority that the same entity must charge off and recover, in order to exclude the recovery from income. Moreover, as to the petitioner here, the debt was not bad; the petitioner had never charged off any deduction for loss, and, therefore, for that reason it was not interested in the question of restoration of income, or whether in the deduction it had a tax benefit — concepts inhering in this question. It simply acquired an asset with a basis of zero, as admitted, and, therefore, ordinarily would properly be charged with income when it recovered thereon. * * * While in the Rice Drug Co. case we had before us section 711 (a) (1) (E) of the code, relating to the excess profits tax, and did not have before us section 22 (b) (12), nevertheless, we think that what we said there is pertinent here and is authority in support of respondent’s position. We hold, therefore, that, since the deductions in 1938 in question were not made by petitioner, but by the predecessor banks, the petitioner is not entitled to the benefit of the “recovery exclusion” provided for under section 22 (b) (12). It follows, therefore, that the recoveries made by petitioner upon the accounts herein constitute income in 1942 and 1943. National Bank of Commerce of Seattle, supra. Decision will be entered for the respondent. SEC. 22. GROSS INCOME. [[Image here]] (b) Exclusions From Gross Income. — The following items shall not be included in gross income and shall be exempt from taxation under this chapter: **** » (12) Recovery op bad debts, prior taxes, and delinquency amounts. — Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, ox amount. For the purposes of this paragraph : **** * (D) Definition of Recovery Exclusion. The term “recovery exclusion”, with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer’s tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax or amount under this paragraph.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474413/	OPINION. ARundell, Judge: Petitioner contends in this proceeding that it is entitled to the increased deductions claimed in its tax returns for 1942 and 1943 to compensate for abnormal depreciation suffered by various items of its printing equipment in producing maps and other printed material for the armed forces during those years. The deficiencies herein result from the respondent’s refusal to allow any additional depreciation for either year. Petitioner had in prior years depreciated its items of equipment on the straight line basis, assigning to each unit an estimated life of 10 years, with the exception of 2 trucks, which were assigned a 5-year period. The straight line method of depreciation assumes a uniform annual rate over the life of the asset and, under ordinary circumstances, no adjustments are made to reflect the increased or decreased usage of the asset during any taxable year. This method contemplates the setting aside in each year of a sufficient sum in order that at the end of the useful life of the' asset the aggregate of the annual amounts of allowed depreciation, plus its salvage value, will equal its original cost. United States v. Ludey, 274 U. S. 295; Graves, Cox & Co., 27 B. T. A. 546. The straight line method having been uniformly applied by petitioner in prior years, it should not be abandoned for the years in question unless there is a cogent reason for a change. Lake Charles Naval Stores, 25 B. T. A. 173 (petition to review dismissed, C. C. A., 5th Cir.). However, petitioner contends that such factors as the excessive use of its machinery, its operation by inexperienced personnel, the demand of war work which prevented the normal stoppage of the machinery for repairs, and the increased amounts expended for repairs, replacements, and maintenance during the years involved, evidence the fact that the remaining useful life of such equipment was reduced and that petitioner is entitled to claim the additional depreciation involved herein. Essentially, the petitioner argues that the only plausible method of determining the extent of the increased wear and tear on its equipment during 1942 and 1943 was the approximate ratio between the usage in those years and the usage in prior years. The burden of showing the reasonableness of the rates of accelerated depreciation claimed rests upon the petitioner. Had petitioner previously depreciated its equipment on a “unit of production” basis, this case would present little difficulty, as petitioner has clearly shown the increased usage of its various items of equipment during the years involved, which is the principal consideration in computing depreciation under that system. However, under the straight line basis, the principal question is whether the useful life of the equipment has been diminished, and usage is merely one factor to be considered in making such a determination. Moreover, we believe that the straight line method contemplates reasonable variations from year to year in the use of depreciable assets, so long as the remaining useful life of the assets is not reduced below or extended beyond the term of years originally selected as its normal useful life. Therefore, to prevail herein, the petitioner must justify the increased rate of depreciation it claims by showing not only that there were increased usage and other conditions which would normally tend to accelerate the exhaustion of its equipment, but that in fact such factors actually did materially reduce its useful life. Woodside Cotton Mills, 13 B. T. A. 266. In our opinion, petitioner has wholly failed to present satisfactory evidence that the useful life of its printing equipment was so reduced by usage in 1942 and 1943 as to warrant the substitution of- accelerated rates in lieu of the normal rates it had previously used in computing depreciation. Petitioner’s general manager testified that when the rates of abnormal or accelerated depreciation were selected it had no way of determining how long its machinery would last and that no effort was made in either 1942 or 1943 to determine the remaining useful life of each of the various items of equipment involved. The only witness produced by petitioner who testified on the subject stated that under normal operation the 6 second-hand presses had an estimated useful life of from 10 to 15 years. As respondent has allowed petitioner to depreciate this equipment at a normal rate of 10 per cent on a straight line basis over a 10-year period, the minimum life estimate, respondent’s disallowance of accelerated depreciation does not on its face appear to have been arbitrary or unreasonable. As far as we can ascertain from the record, the machines were never thoroughly examined to determine exactly the extent of actual exhaustion during the years in question, nor is there any specific evidence as to the effect of the use of inexperienced or incompetent help on the normal wear of such equipment. In fact, no evidence of any significance has been presented by petitioner relative to items other than the photo composing machine and the 6 presses. Petitioner points to the increased amounts expended by it on repairs, replacements, and maintenance as proof of the actual- abnormal wear suffered by its machinery during 1942 and 1943. The untoward expenditures for repairs do not necessarily demonstrate the deterioration of equipment, but may, on the contrary, be evidence that such repairs adequately compensated for the increased wear and tear to which the machines were subjected. This may well be the case here, as the record shows that the cost of repairs of the equipment in question rose from $702.97 in 1941 to $3,944.55 in 1942 and $5,036.63 in 1943. Although there is some suggestion that this increase possibly was due to a rise in the cost of parts and labor, there is no evidence as to the extent of increased costs, and certainly there is no basis for assuming that these factors alone were responsible for so marked an increase in the cost of repairs. In this connection, it is also interesting to note that this equipment was at the time of hearing still being used in the petitioner’s business. Although petitioner points out that it has been unable to get delivery of new machinery ordered in 1943, there is no indication that the old equipment does not still produce work of quality acceptable to its customers. Finally, the various rates of accelerated depreciation selected by petitioner on its different pieces of equipment were not based upon actual examination of the machinery, nor were they computed by any uniform method. The rates appear to have been determined by petitioner’s general manager, following discussions with its accountant and the manufacturer’s representative, and to be the result of a general appraisal of such factors as the increased usage and repairs, untrained personnel, and the other factors previously mentioned. Petitioner requests that, if we decide that it is not entitled to the accelerated depreciation claimed, we should determine what amount or rate of accelerated or abnormal depreciation should be allowed for the years 1942 and 1943. In our opinion, the record provides no adequate basis for the computation of rates of depreciation which would be more reasonable than those which were used by petitioner in prior years under the straight line method and have been allowed by respondent for the years involved. Moreover, the computation of depreciation must be an intelligent estimate, not a mere guess. Lake Charles Naval Stores, supra. After careful consideration of all the evidence herein, we are of the opinion that the petitioner has failed to sustain the burden of showing that it is entitled to the accelerated depreciation claimed by it in its 1942 and 1943 Federal tax returns. Therefore, respondent’s determination of the deficiencies herein is sustained. Decision will be entered for the respondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620578/	Melvin Mailloux and Abigail Mailloux v. Commissioner. Robert R. Foley and Mary J. Foley v. Commissioner.Mailloux v. CommissionerDocket Nos. 79473, 79474.United States Tax CourtT.C. Memo 1961-188; 1961 Tax Ct. Memo LEXIS 161; 20 T.C.M. (CCH) 942; T.C.M. (RIA) 61188; June 23, 1961Leland E. Fiske, Esq., Adolphus Tower, Dallas, Tex., for the petitioners. Graham R. E. Koch, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: A deficiency has been determined in the income tax of each of the petitioners for the year 1954 in the amounts as follows: DocketNo.79473Melvin and Abigail Mail-loux$26,942.8379474Robert R. and Mary J.Foley26,577.19The sole issue for determination, which162 is identical as to each petitioner, is whether or not respondent has erred in including in the income of each for the year at issue the fair market value at 50 cents per share of certain stock received by each during that year. Another issue pertaining to petitioner Mailloux is whether the respondent has erred in disallowing as a casualty loss deduction the amount of $1,043.20. Findings of Fact Such facts as have been stipulated are accordingly so found. Melvin and Abigail Mailloux are husband and wife and formerly resided at 10156 Baronne Circle, Dallas, Texas, and filed their joint income tax return for the calendar year 1954 with the district director at Dallas. Robert R. and Mary J. Foley are husband and wife and reside at 10135 Rock Moor Drive, Dallas, Texas, and filed their joint income tax return for the calendar year 1954 with the district director at Dallas. Melvin Mailloux, hereinafter referred to as Mailloux, and Robert R. Foley, hereinafter referred to as Foley, were in the securities business during the years 1952 through 1954. About the middle of April 1954, Critchell Parsons entered into a series of discussions with Foley and Mailloux regarding the financing163 of a uranium venture and petitioners undertook to do certain things, such as assisting in clearing the issue of stock for sale in Texas, attracting private capital when it was in the private financing stage, and assisting in securing an underwriter for public financing. Parsons was the principal organizer of a corporation known as Rocky Mountain Uranium Corporation, hereinafter referred to as Rocky Mountain. He acquired uranium claims in his name and signed the purchase money notes therefor. These uranium claims, which were ultimately transferred to Rocky Mountain for stock, were owned by Beaver Lodge Oil Corporation and Gene W. Hewett, Clarence Spangler, Herman Lewis, and Parsons. Petitioner's' names did not appear on any of the documents showing ownership of the uranium claims. Petitioners' names did not appear on any of the notes given in acquiring these uranium claims. Petitioners did not have any ownership rights in those uranium claims. Rocky Mountain was incorporated on May 3, 1954. On May 18, 1954, rights acquired or to be acquired in certain mining claims were transferred to the corporation in exchange for 1,450,000 shares of its stock of 10 cents per share par value, 164 which stock was issued as follows: NumberNameof sharesCritchell Parsons900,000Beaver Lodge Oil Corporation450,000Gene W. Hewett40,000Herman H. Lewis40,000Clarence J. Spangler20,000Total1,450,000On May 18, 1954, Parsons delivered to Mailloux and Foley two certificates, Numbers 3 and 4, for the 120,000 shares of Rocky Mountain stock each, or a total of 240,000 shares, out of his 900,000 shares issued in his name and endorsed in blank. The arrangement between petitioners and Parsons called for them to receive, in addition to the Rocky Mountain stock, 10 percent of monies raised by private sales of Rocky Mountain stock prior to the public offering and such private sales were to be at 50 cents per share. Petitioners received $12,000 in commissions under the 10 percent of sales arrangement. Uranium mining claims held by the corporation were Circle Cliffs No. 1 Group, Circle Cliffs No. 2 Group, La Sal Junction Group, Green River Group, Notom Bench Properties, and The Boyd Group. Petitioners actively participated in acquisition of the La Sal and Green River claims which were acquired on or about June 13, 1954. Parsons' purpose in transferring165 240,000 shares of Rocky Mountain stock to petitioners was to compensate them for their services. It was the understanding between petitioners and Parsons that this stock would only be sold after mutual discussion and agreement. The purpose of this understanding was to prevent the destruction of the market by rapid liquidation. During 1954 both petitioners sold portions of their Rocky Mountain stock at prices ranging up to almost per share as follows: Melvin MaillouxNumberGross salesDateof sharesprice6- 18,275$ 4,137.507- 12,500450.8111-241,000699.9211-243,5003,499.6711-261,0001,062.4212- 15,2757,912.0012-17100289.9212-172,0005,999.83Total23,650$24,052.07Robert R. Foley6- 18,275$ 4,137.508- 55,0002,866.8611-243,5003,499.6712- 15,2007,799.5012-172,0005,999.8312-174001,199.92 1Total24,375$25,503.28The records of Rocky Mountain show that Parsons made the following sales of Rocky Mountain stock during the year 1954: GrossNumber ofsalesDatePurchasersharesprice5-18Mrs. E. B. Jansen(Johnson)50,000$ 2,500.005-26Parker Harrison10,0005,000.006- 1Various Purchasers82,50012,000.006- 2P. H. Leavell10,0005,000.006- 3R. E. Houser600$ 300.006- 4Sandra Parsons50050.006- 4Misses Marshall andSmith62562.506- 4R. E. Allen35,00017,500.006- 7Various Purchasers6,5003,250.006- 8Mr. Ezzell1,000500.006- 9Various Purchasers12,0006,000.006-10Various Purchasers5,0002,500.006-14Various Purchasers2,0001,000.006-17Various Purchasers2,0001,000.006-22Various Purchasers8,0004,000.006-25M. C. Parsons10,0001,000.006-25Various Purchasers1,000500.007-12Peter Morgan25,0001,910.007-13Various Purchasers800400.007-16Various Purchasers10,0005,000.007-22Various Purchasers8,0002,000.007-22Various Purchasers19,5009,750.007-23Various Purchasers5,0001,250.007-30Various Purchasers10,0005,000.008- 2Various Purchasers200100.008-30Jenine Cooper10010.008-31Various Purchasers10,0005,000.009- 7Various Purchasers6,0001,750.0010-20Various Purchasers2,0001,000.0010-27Various Purchasers6,5006,500.0010-29R. J. Crowley3,000750.0010-29R. J. Crowley200100.0011- 1Norma J. Riddle27527.5011-12Various Purchasers4,0002,000.0012- 1Various Purchasers3,0001,500.0012-21Various Purchasers5,0002,500.0012-28Herman Lewis60,0006,000.00Total415,300$114,710.00166 Mrs. E. B. Jansen (Johnson) was a friend of Parsons and the price which she paid for her shares was set arbitrarily and bore no relation to market price. Misses Marshall and Smith were employees of Parsons' company, Beaver Lodge Oil Corporation, and were given a preferential price on the shares they acquired. M. C. Parsons was a relative of Parsons and was given preferential treatment on the purchase of Rocky Mountain stock. Peter Morgan was the underwriter of Rocky Mountain stock and was given a special price as an incentive on the stock which he purchased for himself. Jenine Cooper and Norma Riddle were also employees of Parsons. Herman Lewis was one of the original organizers and a director of Rocky Mountain. In addition, he was mining superintendent of Rocky Mountain and in charge of field operations and because of this, he was given an option on 60,000 shares of Rocky Mountain stock at 10 cents per share as an incentive. The records of Rocky Mountain show that the corporation made sales of Rocky Mountain stock during the year 1954 as follows: GrossNumber ofsalesDatePurchasersharesprice5-13Critchell Parsons50,000$ 5,0005-20R. Paul Cressen22,00011,0005-24William T. Townsend100505-24Helen L. Johnson2001005-24Wendell Merritt, Jr.2001005-24George E. McCormick2001005-24D. E. Kester1,0005005-24W. E. Bondurant1,0005005-24Lucille H. Pipkin1,0005005-25Various Purchasers4,0002,0005-28Various Purchasers29,10014,5506- 1Various Purchasers56,10028,0506- 2Various Purchasers30,01015,0056- 4Various Purchasers28,50014,2506- 7Various Purchasers2,0001,0006- 8Various Purchasers3001506- 9Various Purchasers38,70019,3506-17Various Purchasers10,0005,0006-18Turner, White, At-wood, McLane &Travis8,0004,0006-18Julian M. Meer9,5004,7506-25Various Purchasers13,5006,7506-29Various Purchasers10,0005,0006-30Various Purchasers3,5008756-30Various Purchasers35,70017,850Total354,610$156,430167 Petitioners, as salesmen, actually sold Rocky Mountain stock in May and June of 1954 at 50 cents per share. On August 23, 1954, Peter Morgan & Company, as underwriters, offered for sale 210,000 shares of Rocky Mountain stock at $1.15 per share. A national market for Rocky Mountain stock existed at least as early as November of 1954 with a price range in that month being from 1 1/8 to 3 3/8. Later in October 1954 a disagreement developed between Parsons and petitioners over the stock that petitioners had received in May. This disagreement arose as a result of petitioners' failure to obtain a clearance for the public sale of Rocky Mountain stock in Texas and the fact that an underwriter for such public sale generally had not been obtained. In December 1954 Parsons placed a stop order with the transfer agent on the transfer of petitioners' Rocky Mountain stock and in 1955 the transfer agent filed suit to determine ownership rights as between Parsons and petitioners. This suit was settled in May of 1956. Mailloux's garage burned in 1954, destroying some household goods stored therein. After the fire Mailloux made up a list of items stored in the garage from memory and placed168 values thereon based upon his own opinion. On their income tax return for the calendar year 1954 the Foleys reported no income as a result of their receiving 120,000 shares of Rocky Mountain stock in May of that year. Upon audit, the respondent determined that the stock represented additional income to the Foleys in the amount of $60,000, with the following explanatory paragraph: (a) It is determined that you realized income in the amount of $60,000.00 from the receipt of 120,000 shares of the capital stock of Rocky Mountain Uranium Corporation as compensation for services rendered or to be rendered to such corporation. In their income tax return for the calendar year 1954 the Maillouxes reported no income as a result of having received 120,000 shares of Rocky Mountain stock in that year and, in addition, deducted from their income a casualty loss of $1,564.80 for fire damage based upon estimated replacement cost new, less 20 percent depreciation. Upon audit the respondent determined that the stock represented additional income to the Maillouxes in the amount of $60,000 and also determined that the casualty loss did not exceed $521.60, with the following explanatory paragraphs: 169 (a) It is determined that you realized income in the amount of $60,000.00 from the receipt of 120,000 shares of the capital stock of Rocky Mountain Uranium Corporation as compensation for services rendered or to be rendered to such corporation. (b) It is determined that you had a deductible casualty loss as the result of a fire not to exceed $521.60, rather than $1,564.80 claimed on your return. * * * Petitioners each received 120,000 shares of Rocky Mountain stock in 1954 as compensation for services. At the time such stock was received it had a value of at least 50 cents per share. The fair market value of household goods of petitioner Mailloux completely destroyed by fire in the year at issue was not greater than $521.60. Opinion Petitioners have not reported as income the fair market value of the Rocky Mountain stock received by them on May 18, 1954, from Parsons. They point to section 351(a) of the Internal Revenue Code of 19541 as their authority for not so doing, claiming that they, being members of a joint venture which owned mining claims which were contributed to Rocky Mountain in exchange for its stock, have transferred property for170 stock within the meaning of that section which makes such an exchange nontaxable. Respondent contends the stock received by petitioners was in payment for services rendered by them; that they were not members of the joint venture and therefore owned no interest in the mining claims held by it and cannot be held to have transferred interests in such mining claims for the stock received by them. Petitioners' proofs relative to their relationship to the joint venture are not persuasive that they were at any time prior to and including May 18, 1954, members thereof. They had performed no services171 in acquiring mining claims by that date. From the form of the transactions whereby the venture acquired the mining claims afterwards contributed to Rocky Mountain for stock of that corporation, it seems fair to conclude that they were not considered to be such members because neither of their names appears upon the transfer documents as owners of such claims nor were they named as obligors upon notes given in the acquisition thereof. Although others who were concededly joint ventures had likewise performed no services in acquiring mining claims, they were each issued stock in exchange for such claims by the issuing corporation while no stock was issued to petitioners. This appears to be consistent only with the conclusion that petitioners contributed no interest in the claims and that those to whom the stock was issued had done so and prior thereto had been the owners of transferable interests therein. Petitioners' proofs fail to rebut such a conclusion. It follows by a process of elimination that petitioners received their stock from Parsons, whether he was acting personally or as agent for Rocky Mountain, for services rendered and to be rendered by them in aiding in the financing172 of the mining venture, assisting in clearing with Texas State authorities the sale to the public of the corporation's stock, attracting private capital, and assisting in the securing of an underwriter for the public sale of stock. We are strengthened in this conclusion by the fact that when a dispute later arose between Parsons and petitioners relative to the sale by petitioners of their stock, Parsons sought return of a portion thereof at least partly for the reason that no State clearance had as yet been obtained by petitioners for the public sale of Rocky Mountain stock. When petitioners, subsequent to the formation of Rocky Mountain and the receipt of stock from Parsons, assigned to him a portion of their stock in the acquisition of an additional mining claim, we think they did so extrinsic of any former arrangement they may have had with Parsons, the joint venture, or Rocky Mountain, in an effort and with the intention of acquiring an ownership in such additional claims. Having so concluded, it is then necessary to determine the fair market value of the stock received by petitioners on May 18, 1954. Arthur A. Lynch, 29 T.C. 1174">29 T.C. 1174; Allen v. Commissioner, 107 F. 2d 151;173 Whitlow v. Commissioner, 82 F.2d 569">82 F. 2d 569. Petitioners contend that should we find they received their stock in consideration of services rendered and to be rendered, we must nevertheless hold that it had no ascertainable fair market value on the date they received it because of the alleged restriction upon its sale placed upon it by Parsons. We think the record amply demonstrates the fallacy of this contention. Whatever restrictive arrangement existed between Parsons and petitioners relative to the sale of their stock was for the purpose of maintaining the market value thereof and was to their mutual benefit. It is clear that no absolute restriction against its sale was contemplated, but only that sufficiently small amounts should be offered for sale at any one time that the market therefore would not be depressed. In fact, petitioners and Parsons both disposed of substantial portions of their stock in 1954. If an enforceable restriction upon the sale of petitioners' stock existed, its practical effect was not sufficient to affect its fair market value. In fact, so far as it is shown by this record, until late in 1954, petitioners' sales of their stock were not affected174 thereby. It seems doubtful too that, in view of the unequivocal agreement by Parsons to transfer stock to petitioners in return for their services, a binding restriction upon its sale by them could not have been effectuated by Parsons. This is borne out to some extent by his transfer of the stock endorsed in blank. We conclude that such restrictions upon petitioners' stock as may have existed had no bearing upon its fair market value when they received it. Was the fair market value of the stock on May 18, 1954, 10 cents per share as claimed by petitioners or was it at least 50 cents per share as claimed by respondent. We think it was at least 50 cents per share. Sales of stock within a reasonable period either prior or subsequent to a valuation date are strong evidence of its fair market value on that date. American Wire Fabrics Corporation, 16 T.C. 607">16 T.C. 607; Estate of Leonard B. McKitterick, 42 B.T.A. 130">42 B.T.A. 130. We have ample evidence of such sales here. Rocky Mountain records disclose sales of 354,610 shares during 1954 ranging in price from 10 cents to 50 cents a share. 175 Petitioners sold 48,025 shares of their stock during that period at prices ranging from 18 cents to $3 per share. Parsons during the same period sold 415,300 shares at prices ranging from 5 cents to $1 per share. Of all the shares sold, 475,460 were sold during the same period at 50 cents per share. When an underwriter had been obtained for the public offering of the stock, it was offered for sale at $1.15 a share. We find that the fair market value of the stock on May 18, 1954, was not less than 50 cents per share. Petitioners contend that should we conclude as above, they are taxable only upon that portion of their stock which was removed from sales restriction during 1954. Because, as we have held above, such restriction as may have existed did not affect the fair market value of petitioners' stock, it follows that this contention has no merit. On this issue, the respondent's determination is sustained. Petitioner Mailloux suffered the complete destruction by fire during 1954 of used household furnishings and equipment. In his return for 1954 he deducted therefor as a casualty loss the amount of $1,564.80. The Commissioner has disallowed $1,043.20 of that amount and has allowed*176 as such loss $521.60 which he contends represents the fair market value of the goods immediately prior to the fire. Mailloux is not an expert appraiser of used household furnishings and equipment. The amount of loss claimed on his return was arrived at by his listing from memory immediately after the fire the items destroyed, the valuing of each item by reference to advertisements of sales of such property, the totaling of such amounts, and an arbitrary deduction from such total of 20 percent thereof. We are not shown by the record what the destroyed items were and the record is silent as to their original cost and their age. That they were destroyed and that Mailloux thereby suffered a casualty loss is undisputed but, without more, he has failed to sustain his burden of proof, and we are therefore relegated to the principle laid down in Cohan v. Commissioner, 39 F.2d 540">39 F. 2d 540, to dispose of the issue. We think respondent in his allowance of $521.60 has himself properly done so, and we sustain him upon this issue. Decisions will be entered for the respondent. Footnotes1. Typographical error in this figure in Stipulation of Facts.↩1. SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. (a) General Rule. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620579/	JOHN B. YOUNG AND MARTHA H. YOUNG, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent LOUISE F. YOUNG, F.K.A. LOUISE Y. AUSMAN, AND JAMES R. AUSMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentYoung v. CommissionerNo. 20435-97; No. 21489-97United States Tax Court113 T.C. 152; 1999 U.S. Tax Ct. LEXIS 38; 113 T.C. No. 11; August 20, 1999, Filed 38 Decisions will be entered under Rule 155. Ps, H and W, were divorced in 1988. Pursuant to their 1989 property settlement, H transferred to W his promissory note for $ 1,500,000. After H defaulted on the note, a State court entered judgment in favor of W. In 1992, as part of a settlement agreement relating to the judgment, H transferred property to W in exchange for the promissory note. The transfer satisfied the principal, accrued interest, and legal and collection expenses due pursuant to the terms of the promissory note. 1. HELD: Sec. 1041 applies to the 1992 transfer of property, from H to W, that resolved a dispute that arose from their property settlement. 2. HELD, FURTHER, W's 1992 gross income includes $ 308,906 relating to the value of property transferred to her to discharge certain debts. 3. HELD, FURTHER, W may deduct, pursuant to section 212(1), I.R.C., legal and collection expenses attributable to the collection of taxable income. Herman Spence III, Frank H. Lancaster, and Martin L. Brackett,Jr., for petitioners in docket No. 21489-97.Edwina L. Charlemagne, for respondent. Foley, Maurice B.FOLEY153 FOLEY, JUDGE: Respondent determined the following deficiencies in, addition to, and penalty related to, petitioners' Federal income tax: John B. Young and Martha H. Young, docket No. 20435-97: Penalty Year Deficiency Sec. 6662(a) ____ __________ ____________41 1992 $ 636,856 $ 126,241 1993 98,716 19,685 Louise F. Young, f.k.a. Louise Y. Ausman, and James R. Ausman, docket No. 21489-97: Addition to Tax Year Deficiency Sec. 6651(a)(1) ____ __________ ________________ 1992 $ 212,888 $ 21,121 1993 609,319 --Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The cases have been consolidated for purposes 154 of trial, briefing and opinion. After concessions by the parties, the remaining issues for decision are:1. Whether the transfer of property to resolve John B. Young and Louise F. Young's dispute that arose from their property settlement is subject to section 1041. We hold it is.2. Whether the value of property transferred to Louise F. Young, to discharge certain debts, must be included42 in her gross income. We hold it does.3. Whether Louise F. Young is entitled, pursuant to section 212(1), to a deduction for legal and collection expenses attributable to the collection of taxable income. We hold she is.FINDINGS OF FACTAt the time the petitions were filed, petitioners resided in North Carolina. John B. Young and Louise F. Young were married in 1969 and divorced in 1988. On October 9, 1989, they entered into a Mutual Release and Acknowledgment of Settlement Agreement (the 1989 Property Settlement), which provided for the distribution of their marital property. On that date and pursuant to the terms of the 1989 Property Settlement, John delivered to Louise his promissory note for $ 1,500,000. The note was secured by a deed of trust on property that John received as part of the 1989 Property Settlement. The note provided that John would make five annual payments, which included interest, and, in case of default, would pay reasonable legal and other expenses relating to collection proceedings.In October 1990, John defaulted on the note, and in November 1990, Louise filed a collection suit in the Superior Court of Mecklenburg County, North Carolina. In May 1991, the43 court entered a judgment (the Judgment) in favor of Louise, awarding her principal and interest owed pursuant to the note and reasonable legal expenses in an amount that was to be determined by the court at a later date. In 1991, after the Judgment, John paid Louise $ 160,000, all of which Louise recognized as interest income on her 1991 Federal income tax return.In 1992, Louise initiated, and paid $ 8,475 of expenses relating to, litigation to execute the Judgment. She canceled the execution proceedings, however, to allow the parties to 155 negotiate a settlement. On December 9, 1992, Louise and John entered into a Settlement Agreement and Release (the 1992 Agreement) that resolved Louise's collection suit. John agreed to transfer to Louise a 59-acre tract of land (the Land) that he received as part of the 1989 Property Settlement. In exchange, Louise authorized the cancellation of the Judgment and agreed to surrender to John the promissory note. Pursuant to the 1992 Agreement, the transfer of the Land, in December 1992, discharged all of John's debts to Louise, which totaled $ 2,153,845 and included the following: (1) $ 1,500,000 of note principal; (2) $ 344,938 of accrued interest; 44 (3) $ 300,606 of legal expenses; and (4) $ 8,300 of collection expenses. At the time of the transfer, John's basis in the Land was $ 130,794.The 1992 Agreement also provided that Louise grant John an option to repurchase the Land for $ 2,265,000. John assigned the option to Investment Partners of Charlotte, Ltd., which exercised the option on December 31, 1992, and consummated the purchase of the Land from Louise on January 11, 1993. On that latter date, Louise's attorneys received $ 300,000 of the sales proceeds (i.e., which discharged Louise's obligation to pay for their legal services), Louise received the remainder of the proceeds, and she marked John's promissory note "Paid and Satisfied".OPINIONI. TRANSFER OF PROPERTY INCIDENT TO DIVORCERespondent contends that section 1041 applies to John's transfer of the Land to Louise. John agrees with respondent's contention, while Louise contends that section 1041 does not apply.Section 1041(a) provides that "No gain or loss shall be recognized on a transfer of property from an individual to * * * a former spouse, but only if the transfer is incident to the divorce." If section 1041 applies, the transferee's basis in the property 45 is the transferor's adjusted basis. See sec. 1041(b)(2).A transfer of property is "incident to the divorce" if it either occurs within 1 year of the divorce or is "related to the cessation of the marriage". Sec. 1041(c). The statute does not define the phrase "related to the cessation of the marriage", 156 but temporary regulations provide a safe harbor for certain transactions occurring within 6 years of the divorce. The regulations provide that such transfers are related to the cessation of the marriage if the transfer is "pursuant to a divorce or separation instrument, as defined in section 71(b)(2)". Sec. 1.1041-1T(b), Q&A-7, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). A section 71(b)(2) divorce or separation instrument includes a "written instrument incident to * * * a [divorce] decree". Sec. 71(b)(2).The parties agree that the 1989 Property Settlement was, pursuant to section 71(b)(2), "incident to" the divorce decree because its purpose was to divide the marital property. The 1992 Agreement resolved a dispute arising under the 1989 Property Settlement and completed the division of marital property. See, e.g., Stevens v. Commissioner, 439 F.2d 69">439 F.2d 69, 70 n.4 (2d Cir. 1971)46 (paraphrasing "incident to" as "[implementing] the terms of the decree"); Barnum v. Commissioner, 19 T.C. 401">19 T.C. 401, 407 (1952) (paraphrasing "incident to" as "related to"); Hesse v. Commissioner, 7 T.C. 700">7 T.C. 700, 704 (1946) (paraphrasing "incident to" as "in connection with"). We conclude that the 1992 Agreement was "incident to" the divorce decree, and, as a result, the transfer of the Land was, pursuant to the regulations, "related to the cessation of the marriage". See sec. 1.1041-1T(b), Q&A-7, Temporary Income Tax Regs., supra. Even if the regulations were not applicable, the transfer satisfied the statutory requirement that the transfer be "related to the cessation of the marriage". See sec. 1041(c). Accordingly, section 1041 is applicable.II. VALUE OF PROPERTY TRANSFERRED INCLUDABLE IN GROSS INCOMERespondent determined that John's transfer of the Land discharged a $ 308,906 debt to Louise for legal and collection expenses (i.e., $ 300,606 legal plus $ 8,300 collection), and, as a result, such amount is includable in Louise's 1992 gross income. Louise failed to present any evidence relating to the collection expenses, and, therefore, 47 the $ 8,300 is includable in her gross income. Louise contends, however, that John was obligated to pay the legal expenses; she was merely a conduit for the payment of the fees to her attorneys; and the 157 value of property transferred to discharge this debt is not includable in her gross income. We reject her contentions.Generally, taxpayers are treated as realizing taxable income when their expenses are paid by another. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426, 99 L. Ed. 483">99 L. Ed. 483, 75 S. Ct. 473">75 S. Ct. 473 (1955); O'Malley v. Commissioner, 91 T.C. 352">91 T.C. 352, 358 (1988). Louise was obligated to pay the legal expenses. The fact that her attorneys were paid directly out of the sales proceeds does not relieve her from tax on that income. See Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 729, 73 L. Ed. 918">73 L. Ed. 918, 49 S. Ct. 499">49 S. Ct. 499 (1929) (holding that a third person's payment of a taxpayer's obligation is equivalent to the receipt of the amount of the obligation by the taxpayer). Accordingly, we sustain respondent's determination.III. Deductibility of Legal and Collection ExpensesRespondent contends that Louise may deduct $ 2,573 of the collection expenses she paid in 1992 (i.e., 48 $ 8,475) and $ 91,071 of the legal expenses she paid in 1993 (i.e., $ 300,000). John's transfer of property that discharged his obligation to pay interest, legal expenses, and collection expenses (i.e., $ 344,938, $ 300,606, and $ 8,300, respectively) resulted in $ 653,844 of taxable income to Louise. Respondent calculated the deductions based on the ratio of the $ 653,844 of taxable income to the $ 2,153,845 of total debts discharged by the transfer (i.e., $ 653,844 divided by $ 2,153,845 equals 30.36 percent). See Kelly v. Commissioner, 23 T.C. 682">23 T.C. 682, 688 (1955), affd. 228 F.2d 512">228 F.2d 512 (7th Cir. 1956) (allowing a deduction for legal expenses allocable to the recovery of taxable income). We sustain respondent's contentions.Contentions we have not addressed are irrelevant, moot, or meritless.To reflect the foregoing,Decisions will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620580/	Jon R. Pollei and Carol J. Pollei, Petitioners v. Commissioner of Internal Revenue, Respondent; Harry W. Patrick and Renee L. Patrick, Petitioners v. Commissioner of Internal Revenue, RespondentPollei v. CommissionerDocket Nos. 28737-84, 28738-84United States Tax Court94 T.C. 595; 1990 U.S. Tax Ct. LEXIS 39; 94 T.C. No. 35; April 18, 1990April 18, 1990, Filed 39 Ps petitioned this Court to contest R's determination that Ps' travel between their homes and office was commuting. Ps were unsuccessful in this Court and appealed to the Court of Appeals, which reversed and entered judgment for Ps. Because Ps were not the "prevailing [parties]" in this Court, they were precluded from seeking fees and costs under sec. 7430, I.R.C. Following their successful appeal, Ps filed a motion with the Court of Appeals requesting that they be awarded their costs and attorneys' fees incurred during the appeal and that the appellate court issue an order directing "the United States Tax Court to award [Ps] their costs and attorneys fees incurred in the trial of this matter * * pursuant to [sec.] 7430." Ps filed a similar motion with this Court requesting that we award them their trial court costs. The Court of Appeals denied the application for attorneys' fees and only awarded a portion of Ps' appellate court costs. The Court of Appeals provided no other commentary with respect to Ps' motion, did not expressly or implicitly issue a mandate regarding trial court fees and costs, and did not otherwise remand these cases back to this Court to consider this or40 any other issue, although Ps had requested them to do so. Held, this Court is without authority to consider Ps' motion for costs and attorneys' fees under sec. 7430 because the "law of the case" doctrine precludes our reexamination of matters considered and acted upon (either expressly or by implication) by a Court of Appeals. Steven D. Woodland, for the petitioners.Ronald J. Gardner, for the respondent. Gerber, Judge. GERBER596 OPINIONPetitioners have moved for litigation costs under section 7430. 1 This otherwise routine type of motion becomes unique here because we (the trial court) decided the case in favor of respondent and the appellate court reversed, finding in favor of petitioners. Petitioners were unable to seek fees at the trial level 2 and the appellate court did not expressly or implicitly remand the cases for any purpose other than entry of decision. Accordingly, petitioners now seek our jurisdiction and ask us to decide the litigation costs and fees issue. In these circumstances, we must first decide whether we have jurisdiction or authority to consider whether petitioners are entitled to costs and fees under section 7430. A brief chronological41 review of the underlying litigation is helpful to frame and focus upon this issue.Respondent determined deficiencies in the 1981 Federal income tax of petitioners Jon R. Pollei and Harry W. 597 Patrick. 3 Petitioners were captains with the Salt Lake City Police Department. The income tax deficiencies resulted solely from the disallowance of tax credits and maintenance and operating expense deductions arising from petitioners' daily use of personally owned, unmarked police cars to travel between their residences and police headquarters. Respondent's position was that petitioners' daily round-trip42 travel between their homes and headquarters was a nondeductible personal commuting expense. Secs. 162, 262; sec. 1.262-1(b)(5), Income Tax Regs. This Court was petitioned to redetermine those tax deficiencies. Petitioners argued that their situation varied from the usual commuting case because, under police regulations, they were required to be on duty any time they entered their private, police-equipped cars and to provide police services during the time they were traveling between their homes and police headquarters. After a trial, we held for respondent, in essence, as follows:Commuting is essential to most employees' employment, but is not a deductible expense. Commuting is one of the expenses that is so inherently personal that it cannot qualify for deductibility, irrespective of its role in the taxpayer's trade or business. Moss v. Commissioner, 80 T.C. 1073">80 T.C. 1073, 1080 (1983), affd. 758 F.2d 211">758 F.2d 211 (7th Cir. 1985); Fred W. Amend Co. v. Commissioner, 55 T.C. 320">55 T.C. 320, 325, 326 (1970), affd. 454 F.2d 399">454 F.2d 399 (7th Cir. 1971); Bakewell v. Commissioner, 23 T.C. 803">23 T.C. 803, 805 (1955).43 Petitioners did not argue or prove that they incurred additional expense in driving to and from headquarters and their residences due to the requirement to call in or begin their "tour of duty." They simply argue that the travel time had been designated by the department as occurring during their "tour of duty."[Pollei v. Commissioner, 87 T.C. 869">87 T.C. 869, 873 (1986). Fn. ref. omitted.]Our opinion was filed and served upon the parties on October 28, 1986. Petitioners appealed our decision to the U.S. Court of Appeals for the Tenth Circuit. The Court of Appeals, relying upon Christey v. United States, 809">841 F.2d 809 (8th Cir. 1988), and Sibla v. Commissioner, 611 F.2d 1260">611 F.2d 1260 (9th Cir. 1980), affg. 68 T.C. 422">68 T.C. 422 (1977) and 67 T.C. 870">67 T.C. 870 (1977),44 reversed, holding that "the employment conditions imposed upon petitioners caused them to incur expenses in maintaining and operating their personally-owned 598 vehicles while traveling to and from [police] headquarters and that such expenses should be deductible under section 162(a)." Pollei v. Commissioner, 877 F.2d 838">877 F.2d 838, 842 (10th Cir. 1989). On June 13, 1989, the Court of Appeals entered judgment for petitioners.Soon after judgment was entered, petitioners filed a motion with the Court of Appeals requesting that they be awarded their costs under 28 U.S.C. sections 1920 and 2412 (1982) and attorneys' fees incurred in the appeal under section 7430, and that the court issue an order directing "the United States Tax Court to award [petitioners] their costs and attorneys fees incurred in the trial of this matter in the United States Tax Court pursuant to [section] 7430." 446 On August 4, 1989, petitioners also filed a similar 599 motion with this Court requesting that we award them their trial court costs. 5 By an order filed August 30, 1989, the Court of Appeals "[denied] the application for attorneys45 fees" and "[awarded] [petitioners'] costs for docket fees and brief reproduction [incurred during the appeal] in the amount of $ 335.63." The Court of Appeals issued no other commentary with respect to petitioners' motion.Our jurisdiction or authority to consider petitioners' motion is a fundamental and threshold issue which neither party has addressed. Our sua sponte inquiry was prompted because the Court of Appeals was asked to decide and/or to remand on the issue of litigation costs and fees; it issued an order with respect to that request; and it did not issue a mandate or otherwise remand these cases back to this Court to consider any issue or take any further action, other than the implicit requirement that we enter a decision for petitioners. 6 Although petitioners requested that the Court of Appeals direct us to award petitioners the costs they incurred in litigating at the trial level, the Court of Appeals (without explanation) did not grant petitioners' request and only awarded petitioners a portion of the costs incurred during the appeal.47 Pursuant to section 7482(a), the U.S. Courts of Appeals 7 have exclusive jurisdiction to review the decisions of the Tax Court. Such review shall be in the same manner and to the same extent as decisions of the District Courts in civil actions tried without a jury. Sec. 7482(a)(1). Upon such 600 review, the Courts of Appeals "shall have power to affirm or, if the decision of the Tax Court is not in accordance with law, to modify or to reverse the decision of the Tax Court, with or without remanding the case for a rehearing, as justice may require." Sec. 7482(c); see also 28 U.S.C. sec. 2106 (1982).The general rule is that perfection of an appeal operates to transfer jurisdiction of the case to the Court of Appeals -- that is, the jurisdiction of the trial court ceases and that of the Court of Appeals begins. Once an appeal is commenced, the trial court is generally without authority to act upon matters relating48 to the subject matter of the appeal until the mandate from the appellate court is returned. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373">470 U.S. 373 (1985); Griggs v. Provident Consumer Discount Co., 459 U.S. 56">459 U.S. 56 (1982); Garcia v. Burlington Northern Railroad, 818 F.2d 713 (10th Cir. 1987); Hunter Douglas Corp. v. Lando Products, 235 F.2d 631">235 F.2d 631, 632-633 (9th Cir. 1956). The purpose underlying this general rule is to avoid confusion and inefficient use of limited judicial resources that may result from two courts simultaneously considering the same issues. Matter of Thorp, 655 F.2d 997">655 F.2d 997 (9th Cir. 1981); Matter of Combined Metals Reduction Co., 557 F.2d 179">557 F.2d 179 (9th Cir. 1977); see also Griggs v. Provident Consumer Discount Co., supra at 58-59.There are, however, limited exceptions to this general rule. Even though a judgment on the merits has been properly appealed and is pending in the Court of Appeals, the lower court may retain jurisdiction over certain matters, 49 without appellate court approval or sanction, such as those that are collateral to the appeal, in aid of the appeal, to correct clerical mistakes, in aid of execution of a judgment that has not been superseded, and to maintain the status quo between the parties pending the appeal. See, e.g., N.L.R.B. v. Cincinnati Bronze, Inc., 829 F.2d 585 (6th Cir. 1987); Krull v. Celotex Corp., 827 F.2d 80">827 F.2d 80 (7th Cir. 1987); Garcia v. Burlington Northern Railroad, supra;Piamco, Inc. v. Shell Oil Co., 799 F.2d 262">799 F.2d 262 (7th Cir. 1986); Island Creek 601 , 764 F.2d 437">764 F.2d 437 (6th Cir. 1985); Venen v. Sweet, 758 F.2d 117 (3d Cir. 1985); National Service Industries, Inc. v. Vafla Corp., 694 F.2d 246 (11th Cir. 1982); Davis v. United States, 667 F.2d 822">667 F.2d 822 (9th Cir. 1982); Matter of Thorp, supra; Hoffman for and on behalf of N.L.R.B. v. Beer Drivers & Salesmen's Local Union No. 888, 536 F.2d 1268 (9th Cir. 1976);50 see also Home Group, Inc. v. Commissioner, 92 T.C. 940">92 T.C. 940 (1989). The awarding of attorneys' fees and costs is generally considered collateral to the appeal of the merits of a case. See, e.g., Krull v. Celotex Corp., supra;Thomas v. Capital Security Services, Inc., 812 F.2d 984">812 F.2d 984 (5th Cir. 1987); Venen v. Sweet, supra;League of Women Voters of Cal. v. F.C.C., 751 F.2d 986">751 F.2d 986 (9th Cir. 1985); Masalosalo by Masalosalo v. Stonewall Ins. Co., 718 F.2d 955">718 F.2d 955 (9th Cir. 1983); Rothenberg v. Security Management Co., 677 F.2d 64">677 F.2d 64 (11th Cir. 1982); but see Janicki v. Pizza, 501 F. Supp. 312">501 F. Supp. 312 (N.D. Ohio 1980).A lower court's authority to address any issues after an appeal is completed, however, is generally limited by any action taken by the appellate court with respect to those issues during the appeal. A holding on an issue by an appellate court must be followed in all subsequent proceedings in the same case in the trial court or on a later appeal in the appellate51 court. This rule, which has been referred to as the "law of the case" doctrine, generally operates to preclude a reexamination of issues decided upon appeal, either by the lower court on remand or by the appellate court itself upon a subsequent appeal. See, e.g., Quern v. Jordan, 440 U.S. 332">440 U.S. 332, 347 n. 18 (1979); In re Sanford Fork & Tool Co., 160 U.S. 247">160 U.S. 247 (1895); Rutherford v. United States, 806 F.2d 1455 (10th Cir. 1986); Estate of Whitlock v. Commissioner, 547 F.2d 506">547 F.2d 506 (10th Cir. 1976). The issues which the lower court is precluded from considering include those that were decided by the appellate court expressly or by necessary implication. United States v. White, 846 F.2d 678">846 F.2d 678 (11th Cir. 1988); Rutherford v. United States, supra;Matter of Beverly Hills Bancorp, 752 F.2d 1334">752 F.2d 1334 (9th Cir. 1984); Doe v. New York City Dept. of Social Services, 782">709 F.2d 782602 (2d Cir. 1983); Gray Panthers v. Schweiker, 716 F.2d 23 (D.C. Cir. 1983);52 Estate of Whitlock v. Commissioner, supra.In this regard, the lower court is bound not only by the appellate court's determinations but by the appellate court's mandate. Rutherford v. United States, supra;Doe v. New York City Dept. of Social Services, supra;Maggard v. O'Connell, 703 F.2d 1284 (D.C. Cir. 1983). The lower court's duty on remand is to carry out the decree of the appellate or higher court. The trial court cannot give other or further relief, review any matter decided on appeal for error apparent, or otherwise intermeddle with the higher court's decree. The trial court on remand is guided and confined by the higher court's decree and direction. The lower court, however, may consider and decide any matters left open by the mandate. 8In re Sanford Fork & Tool Co., supra;Rutherford v. United States, supra.53 Early in the history of this Court, the Board of Tax Appeals had occasion to decide an issue somewhat similar to the one confronting us now. See Peavy-Byrnes Lumber Co. v. Commissioner, 31 B.T.A. 985">31 B.T.A. 985, 987-993 (1935), affd. 86 F.2d 234">86 F.2d 234 (5th Cir. 1936). In that case, the taxpayer appealed the Board's holding to the U.S. Court of Appeals for the Fifth Circuit. The Court of Appeals reversed the Board's holding and remanded the case "'with directions to redetermine petitioner's tax liability in accordance with its finding'" and upon a specific basis set out both in the Court's opinion and in the mandate. 31 B.T.A. at 986, quoting 69 F.2d 712">69 F.2d 712, 714 (5th Cir. 1934). The case had been remanded for the sole purpose of the Board's making a mathematical calculation according to a formula stated in 603 the mandate, and for entering judgment in accord therewith. On remand, the taxpayer moved the Board for leave to amend its pleading to present a new issue not previously raised and considered by the Board or the Court of Appeals. The new issue would have required the introduction54 of additional evidence. If the new issue was decided in the taxpayer's favor, it would have altered the amount of tax liability that would have been calculated under the appellate court's formula and mandate. The Board ruled that it did not have authority to adjudicate the new issue, holding as follows:The rule seems to be well settled by the weight of authority that an inferior tribunal, upon remand of a cause by an appellate court, can not take any action not reasonably within the express or implied directions of the reviewing court. Upon entry of our decision on November 10, 1932, the proceeding was fully and finally disposed of so far as concerned this Board, and upon appeal to the Circuit Court our general jurisdiction over the case then and there was ended. When our decision was reversed and the case remanded our jurisdiction was restored only to the extent necessary to carry out the court's directions. The case of In re Sanford Fork & Tool Co., 160 U.S. 247">160 U.S. 247, 255, clearly states the rule as follows:When a case has been once decided by this court on appeal, and remanded to the Circuit Court, whatever was before this court, and disposed of55 by its decree, is considered as finally settled. The Circuit Court is bound by the decree as the law of the case; and must carry it into execution, according to the mandate. The court can not vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided on appeal; or intermeddle with it, further than to settle so much as has been remanded.[31 B.T.A. at 987. See also Amerada Hess Corp. v. Commissioner, 65 T.C. 1161">65 T.C. 1161 (1976); Romm v. Commissioner, 255 F.2d 698">255 F.2d 698 (4th Cir. 1958), affg. an unreported Order of this Court.]The Board in Peavy-Byrnes Lumber also relied upon Kansas City Southern Railway v. Guardian Trust Co., 281 U.S. 1">281 U.S. 1 (1930), a case that is analogous to the present proceeding. In that case, the Court of Appeals was asked to reverse the decree of the lower court and award the appellant its costs, plus those as between "solicitor and client" (i.e., attorneys' fees), or in the alternative, that a final decree be without prejudice to enable the appellant56 to sue for such expenses. The Court of Appeals reversed the lower court and in responding to the costs and attorneys' 604 fees question, stated "'our conclusion is that our just course is to leave the taxation of costs to the court below under the principles, rules, and practice in equity,'" and "'as a conclusion of the whole matter,'" the Court of Appeals gave directions for the entry of a specific decree with "costs." 281 U.S. at 7, quoting Central Improvement Co. v. Cambria Steel Co., 210 F. 696">210 F. 696, 723 (8th Cir. 1913). The Supreme Court affirmed the decree of the Court of Appeals. The mandate from the Supreme Court set out the decree of the Court of Appeals, ordered that it be affirmed, and remanded the case to the District Court. On remand to the District Court, the party that prevailed on appeal requested that it be awarded its costs, plus those between "solicitor and client." The District Court held that the proper construction of the decree of the Court of Appeals limited recovery of costs to those taxable between "party and party," with none allowed for costs between "solicitor and client." On appeal of this57 decree, the Court of Appeals, apparently assuming that its decree and the mandate of the Supreme Court authorized the District Court to award costs as between "solicitor and client," reversed the decree. Appeal was then again taken to the Supreme Court to decide whether the District Court had jurisdiction or authorization to award costs as between "solicitor and client." In reversing the Court of Appeals and affirming the District Court, the Supreme Court held as follows:The decree here affirmed required the "taxation of costs * * under the principles, rules and practice in equity." It undoubtedly covered ascertainment of amounts taxable between party and party. There was no specific reference to any additional allowance. The language used disclosed no intention to require more than the usual taxation. * * For the proper construction of the decree under consideration, regard is to be had to the issues before the court on appeal, the findings applied for and the directions given. * ** * * The failure of the court [of appeals] to make the requested special finding, to adopt the alternative suggestion or to take any action in reference to the parts of the application relating58 to the [prevailing party's] damages and expenses in the injunction suits goes to show a purpose to deny any recovery of expenses in addition to the costs which under established practice are taxable as between party and party. And the opinion makes it clear that the decree directed to be entered below was intended to be an end of the whole matter. It is plain that the 605 stockholders' application was denied and that the decree did not authorize or permit the taxation of costs as between solicitor and client.The mandate required the execution of the decree. The District Court could not vary it or give any further relief. * * * That court was right in holding that, by the decree of the Circuit Court of Appeals and the mandate of this court, the costs recoverable * * * were limited to those taxable between party and party.[Citations omitted. 281 U.S. at 9-11; see also Briggs v. Pennsylvania Railroad, 334 U.S. 304">334 U.S. 304 (1948).]In the cases before this Court, petitioners first presented the costs issue to the Court of Appeals after prevailing on appeal. It was at that point that the awarding of costs under section 743059 became ripe for decision. Pursuant to section 7430(c)(2)(A) and Rule 231, 9 petitioners were precluded from requesting that we award them litigation costs after the trial of this case. At that time, petitioners had not "substantially prevailed" for purposes of allowing them to move this Court for the awarding of litigation costs under section 7430. See supra note 4.In petitioners' motion, the Court of Appeals was requested to award petitioners their costs under 28 U.S.C. sections 1920 and 2412 (1982) and attorneys' fees for prosecuting the appeal under section 7430, and60 to "direct the United States Tax Court to award [petitioners] their costs and attorneys fees incurred in the trial of this matter in the United States Tax Court pursuant to [section] 7430." In response, the Court of Appeals awarded costs in the amount of $ 335.63 and denied the application for attorneys' fees. Under these circumstances, we find that (1) we do not have jurisdiction or authority to grant petitioners' motion for costs because the Court of Appeals did not issue a mandate or otherwise remand the case to us to consider that issue, although requested to do so; and (2) under the "law of the case" doctrine, the Court of Appeals has implicitly and in effect denied what petitioners are requesting here, thereby precluding us from addressing these matters further.606 When we entered our decision after the trial of these cases, the proceeding was fully and finally disposed of so far as this Court's involvement, and upon appeal to the Court of Appeals for the Tenth Circuit, our general jurisdiction over the cases then and there ended. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373">470 U.S. 373 (1985); Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982);61 Peavy-Byrnes Lumber Co. v. Commissioner, 31 B.T.A. at 987. This is not a situation where the trial court retains jurisdiction over the awarding of costs even after appeal has been taken. Collateral jurisdiction over this issue was precluded because petitioners were not the prevailing party in the Tax Court and, therefore, had no standing to apply for costs under section 7430 at the end of the Tax Court proceeding. See supra note 4. Thus, our jurisdiction over the Tax Court proceeding ended. When our decision was later reversed, the Court of Appeals entered judgment and made no attempt to restore our jurisdiction for any purpose, including to consider the awarding of costs to petitioners. Although petitioners were first permitted to request costs during appeal, the Court of Appeals, without explanation, did not award them costs under section 7430, did not issue a mandate regarding trial court costs, and did not remand these matters to us for our consideration of this or any other issue, even after petitioners so requested. The Court of Appeals concluded its consideration of these cases and made its judgment final, with the possible exception62 of a rehearing en banc or appeal to the Supreme Court.Where the merits of a case have been decided upon an appeal, the trial court must proceed in accordance with the direction contained in the mandate. The trial court is without jurisdiction to act on any issue unless the mandate, at least implicitly, allows for consideration of the issue. In re Sanford Fork & Tool Co., 160 U.S. at 255; Mackall v. Richards, 116 U.S. 45">116 U.S. 45, 47 (1885); Rutherford v. United States, supra;Gibbons v. Brandt, 181 F.2d 650">181 F.2d 650, 651 (7th Cir. 1950); In re Chicago, R. I. & P. Railway, 162 F.2d 257">162 F.2d 257, 258 (7th Cir. 1947); Mays v. Burgess, 152 F.2d 123">152 F.2d 123, 124 (D.C. Cir. 1945). As the Supreme Court held in Kansas City Southern Railway v. Guardian Trust Co., 281 U.S. at 11: Where an appellate court provides for some costs and is 607 silent as to others, "It is plain that the [application for those other costs] was denied and that the decree did not authorize or permit the taxation of [those other] costs" 63 by the lower court. Accordingly, because the Court of Appeals only awarded some costs and ordered judgment for petitioners, did not issue a mandate regarding trial court costs, either expressly or implicitly, and did not remand these cases to us for this or any purpose other than entry of decision, we do not have jurisdiction or authority to consider petitioners' motion for costs and attorneys' fees under section 7430. 1064 The "law of the case" doctrine precludes our reexamination of issues that have been decided expressly or by necessary implication by a superior court on appeal. In re Sanford Fork & Tool Co., 160 U.S. 247 (1895). In the present cases, petitioners asked the Court of Appeals to award them attorneys' fees that were incurred during the appeal and to direct us to award them costs and attorneys' fees incurred during the Tax Court proceeding. Although we cannot say that petitioners' request for a mandate regarding fees was expressly denied by the Court of Appeals, we are convinced, by "necessary implication," that this is what the Court of Appeals intended. 11 If the appellate court wished our consideration of this issue, its mandate could have issued to that effect. To properly construe the appellate court's decree, "regard is to be had to the issues before the court on appeal, the findings applied for and the directions given." Kansas City Southern Railway v. Guardian Trust Co., 281 U.S. 1">281 U.S. 1, 10 (1930). The failure of the Court 608 of Appeals to grant petitioners' request or to take any action in reference thereto65 goes to show a purpose to deny petitioners any award for costs under section 7430. Kansas City Southern Railway v. Guardian Trust Co., supra.One might argue that the Court of Appeals' failure to grant petitioners' motion or request that the costs and fees matter be remanded to this Court for further proceedings is not dispositive of that issue. But we find the effective denial here to be dispositive because it was within the authority of the Court of Appeals to remand this matter for our consideration when requested to do so. We distinguish the case of Liberty Mutual Insurance Co. v. E.E.O.C., 691 F.2d 438 (9th Cir. 1982), where the court found that its silence on a66 costs issue, although raised by the parties, did not amount to an implicit denial of costs. The court held that there was "no reason, however, why our earlier silence did not simply leave the matter of costs open for consideration by the district court on remand." 691 F.2d at 441. Unlike Liberty, where the appellate court's remand apparently did not foreclose the lower court from considering the costs issue, in our case the appellate court was specifically asked to remand the case to allow this Court to address the costs issue, and it did not. One can hardly say that this silence has left the matter of costs open for consideration by the trial court on remand.If petitioners had not requested the Court of Appeals to remand or for relief on the costs and fees issue at the trial level, it would then appear that the matter would be within our authority for consideration and decision. It could then be construed that the collateral issue concerning costs and fees was "left open" by the mandate even though there was no remand for that purpose. In a per curiam opinion, the Supreme Court indicated that its silence on fees (under section 4 of the Clayton67 Act) did not dispose of the matter and left the lower courts free to consider that collateral matter after its final judgment on the merits of the case. Perkins v. Standard Oil Co., 399 U.S. 222">399 U.S. 222, 223 (1970). It should be noted that the silence in Perkins was apparently due to the failure of the parties to advance the issue at the 609 Supreme Court level. We are accordingly without jurisdiction or authority to reexamine the costs and fees issue. 1268 Appropriate orders and decisions will be issued. Footnotes1. All section references are to the Internal Revenue Code as amended and in effect for the period under consideration. All Rule references are to this Court's Rules of Practice and Procedure.↩2. As we will discuss more fully, infra, at the conclusion of these cases at the trial level, petitioners were not the "prevailing [parties]" and not entitled to costs or fees. See sec. 7430(c)(2)(A)↩ and Rules 230-233.3. Although not identified as petitioners in the text of this opinion, Carol J. Pollei and Renee L. Patrick are also parties in these actions.↩4. 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.* * * (c) Definitions. -- For purposes of this section -- (1) Reasonable litigation costs. -- (A) In general. -- The term "reasonable litigation costs" includes --(i) reasonable court costs,(ii) the reasonable expenses of expert witnesses in connection with the civil proceeding,(iii) the reasonable cost of any study, analysis, engineering report, test, or project which is found by the court to be necessary for the preparation of the party's case, and(iv) reasonable fees paid or incurred for the services of attorneys in connection with the civil proceeding. * * (2) Prevailing party. -- (A) In general. -- The term "prevailing party" means any party to any proceeding described in subsection (a) (other than the United States or any creditor of the taxpayer involved) which --(i) establishes that the position of the United States in the civil proceeding was unreasonable, and(ii)(I) has substantially prevailed with respect to the amount in controversy, or(II) has substantially prevailed with respect to the most significant issue or set of issues presented.The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(d), 100 Stat. 2085, 2752, amended sec. 7430(c)(2)(A)(i) by changing the "unreasonable" standard to a "not substantially justified" standard for amounts paid after Sept. 30, 1986, in civil actions or proceedings commenced after Dec. 31, 1985. However, this and other courts have held that the "substantially justified" standard is not a departure from the "reasonableness" standard. Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 764 n. 7 (1989); Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 84 (1987), and cases cited therein, affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988). Furthermore, the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 6239, 102 Stat. 3342, 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, 1988.5. The parties in this case were allowed to file briefs addressing this matter and the last brief was filed Feb. 12, 1990.↩6. It has been this Court's experience that Courts of Appeals frequently do not issue an express mandate in an opinion or in a separate order. In other words, where a holding has been reversed, the Circuit Court so states in its opinion or judgment which is served upon this Court and we, in turn, effectuate the mandate by issuance of our decision in accord with sec. 7481(a)(3). That is what occurred in this case. The Court of Appeals, in its holding, simply recited that our holding was reversed. The issue that we are confronted with, however, arises because the Court of Appeals did not grant petitioners' motion to direct the trial court to consider the issue of litigation costs and fees at the trial level. We must consider whether that precludes or preempts our consideration of this fee issue.↩7. Other than the U.S. Court of Appeals for the Federal Circuit.↩8. The law of the case doctrine, however, has its exceptions. A decision of an appellate court may not be binding upon the lower court under certain limited and exceptional circumstances. Included are situations where the evidence produced in a subsequent trial held on remand is substantially different from that of the trial that resulted in the appeal, controlling authority has since made a contrary decision of the law applicable to the issues decided on appeal, and the decision of the appellate court was clearly erroneous and would work a manifest injustice. Bloom v. International Brotherhood of Teamsters Local 468, 752 F.2d 1312 (9th Cir. 1984); United States v. Williams, 728 F.2d 1402">728 F.2d 1402 (11th Cir. 1984); Otten v. Stonewall Insurance Co., 538 F.2d 210 (8th Cir. 1976). See also Standard Oil Co. of Cal. v. United States, 429 U.S. 17">429 U.S. 17 (1976), where the Supreme Court held that a judgment entered in accordance with an appellate court's mandate may be reopened by the lower court under Fed. R. Civ. P. 60(b) without appellate court leave for purposes of considering later events. But see United States v. Fernandez, 506 F.2d 1200">506 F.2d 1200↩ (2d Cir. 1974).9. Rule 231 provides, in pertinent part, as follows:(a) Time and Manner of Claim: * *(2) Unagreed Cases: Where a party has substantially prevailed and wishes to claim reasonable litigation costs, and there is no agreement as to that party's entitlement to such costs, a claim shall be made by motion filed --(i) Within 30 days after the service of a written opinion determining the issues in the case;↩10. Our reliance on the fact that the Court of Appeals did not issue a mandate or remand the case to this Court is not a matter of semantics. This is not a situation where the appellate court, although failing to remand, has otherwise provided the lower court with some direction or instruction. Compare Estate of Whitlock v. Commissioner, 547 F.2d 506">547 F.2d 506, 510↩ (10th Cir. 1976), where the Court of Appeals held that although the mandate to the Tax Court did not specifically remand the case with directions to enter a new decision in accord with the Court of Appeals' opinion or contain any other instructions, "The opinion of the appellate court may be consulted to ascertain the intent of the mandate." In the present case, there was no mandate, remand, or other instruction to this Court regarding trial court fees and costs.11. Petitioners could have moved the Court of Appeals to reconsider, amend, or clarify its order, but they did not do so. See Briggs v. Pennsylvania Railroad, 334 U.S. 304">334 U.S. 304, 306 (1948); Estate of Whitlock v. Commissioner, supra↩.12. We note for the possible convenience of and assistance to the Court of Appeals that upon remand we would have decided the sec. 7430 fees and costs issue adversely to petitioners. We address here what we believe to be a rare circumstance. In order for petitioners to be successful, they must show that the Government's position was "unreasonable" in a setting where the Government's position was sustained by the lower court and then reversed by an appellate court. Although that possibility may on occasion occur, its likelihood is small.Sec. 7430(a) generally provides that a "prevailing party" in a court proceeding may be awarded "reasonable litigation costs." For proceedings, such as the present one, that commenced before Jan. 1, 1986, sec. 7430(c)(2)(A)(i) defines "prevailing party," in pertinent part, as any party to a court proceeding which "establishes that the position of the United States in the civil proceeding was unreasonable."Respondent's position in this litigation was that the expenses petitioners incurred in traveling between their respective homes and police headquarters were personal commuting expenses and, therefore, not deductible. Respondent relied upon secs. 162, 212, and 262, the regulations promulgated thereunder, and established case law such as Fausner v. Commissioner, 413 U.S. 838">413 U.S. 838 (1973), and Commissioner v. Flowers, 326 U.S. 465 (1946). However, there was no case or regulations addressing whether expenses incurred by police officers in commuting between their homes and police headquarters were deductible when being required to use their personally owned, unmarked police cars. In fact, the case authority available at the time generally indicated that commuting expenses were not deductible even if there was some additional business-related purpose for the commute, provided, however, that additional expenses were not incurred. See Fausner v. Commissioner, supra.Respondent's arguments were, therefore, rational and sound. The fact that respondent ultimately was unsuccessful in litigation does not automatically render his position unreasonable.The cases considered by the Court of Appeals do not directly address the same issue or establish that respondent's position was unreasonable. Christey v. United States, 841 F.2d 809">841 F.2d 809 (8th Cir. 1988), which involved the deductibility of expenses incurred by State highway troopers for on-duty meals, was decided subsequent to our opinion and the commencement of the appeal in this case. Likewise, Sibla v. Commissioner, 611 F.2d 1260">611 F.2d 1260, 1266 (9th Cir. 1980), affg. 68 T.C. 422">68 T.C. 422 (1977) and 67 T.C. 870">67 T.C. 870 (1977), was decided by a divided panel of the Court of Appeals for the Ninth Circuit. In dissenting, Judge Kennedy was of the opinion that the expenses at issue (fireman's share of expenses of a mandatory organized mess at the firehouse) were not business expenses. Similarly, in the Tax Court only a plurality of 7 out of 15 judges found that the expenses were business expenses. Respondent's challenge of petitioners should not be regarded as the advocacy of an unreasonable or irresponsible legal position. See Cherry v. United States, 4 Cl. Ct. 20">4 Cl. Ct. 20, 23 (1983).We also note that we have not reached the question of the reasonableness of petitioners' claim for $ 12,251.10 in legal costs and fees in connection with the representation of cases at the trial level involving combined income tax deficiencies of $ 979.30. The reasonableness of the fees and costs would not be reached unless it was first decided that respondent's position was unreasonable.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620585/	ROBERT D. BOOTH AND JANICE BOOTH, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Booth v. CommissionerDocket Nos. 2544-94, 2545-94, 2546-94, 5754-94, 5755-94, 5893-94, 9229-94, 9230-94United States Tax Court108 T.C. 524; 1997 U.S. Tax Ct. LEXIS 32; 108 T.C. No. 25; 21 Employee Benefits Cas. (BNA) 1494; June 17, 1997, Filed 32 Decision will be entered for petitioners in docket Nos. 2544-94, 2546-94, 5755-94, 5893-94, and 9229-94; decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties in docket Nos. 2545-94 and 9230-94; an appropriate decision for respondent will be entered in docket No. 5754-94 as to the deficiency and the addition to tax under section 6651(a)(1) and for petitioner with respect to the penalty. Secs. 419 and 419A, I.R.C., as enacted by the Deficit Reduction Act of 1984, Pub. L. 98-369, secs. 511(a), 512(a), 98 Stat. 494, 854, 862, limit an employer's deductions for contributions made to a welfare benefits fund for employees. These limitations do not apply to a welfare benefits fund that is part of a "10 or more employer plan" described in sec. 419A(f) (6), I.R.C. Under the Prime Plan, in which Ps participated, each participating employer made a one-time, nonrevertible contribution to a single trust, equal to the amount necessary to fund the dismissal wage and death benefits of its qualifying employees. The trust segregated each contribution into a separate account for payment of benefits to only the contributing employer's33 qualifying employees. If an employer's account did not have enough assets to pay a promised benefit, the trustee could supplement the account's assets with assets from a "suspense account" that was funded primarily by actuarial gains and amounts forfeited from the employers' accounts in certain enumerated situations. Each employer selected options under the Prime Plan, including participation and vesting requirements. Except through the suspense account, an employee had no right to receive benefits from other than his or her employer's account. Held: The Prime Plan is a "welfare benefit plan" within the meaning of sec. 419, I.R.C.Held, further: The Prime Plan is not within the scope of sec. 419A (f) (6), I.R.C., because it is an aggregation of separate plans each having an experience-rating arrangement with the related employer. Held, further: None of the corporate Ps are liable for the accuracy-related penalties determined by R. Charles38 A. Pulaski, Jr., Janet E. Barton, and Tim A. Tarter, for petitioners. Katherine H. Ankeny, Anne W. Durning, and Randall P. Andreozzi, for respondent. LAROLARO525 LARO, Judge: The docketed cases, consolidated for purposes of trial, briefing, and opinion, consist of four groups of test cases selected by the parties to resolve their disputes concerning the "Prime Financial Benefits Trust Multiple Employer Welfare Benefit Plan and Trust". 2 (We hereinafter refer to this "plan" as the Prime Plan and the trust as the Trust. 3) Each of these four groups consists of a closely held corporation and one or more of its owner/employees. In regard to each group, the Commissioner of Internal Revenue (the Commissioner or respondent) determined that the corporation could not deduct the amounts that it reported as contributions to the Trust and that the individual(s) had income to the extent that the contributions benefited him or her (or them). Each petitioner petitioned the Court to redetermine the Commissioner's determination of the resulting deficiencies in Federal income tax, penalties, and, in one case, an addition to tax. Respondent's notices of deficiency listed the following deficiencies, 39 addition to tax, and penalties: 4Robert D. Booth & Janice Booth (R&J Booth), docket No. 2544-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1990$ 15,180---$ 3,03619918,920---1,784N.L. Booth & Son, Inc. (N.L. Booth), docket No. 2545-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1989$ 34,000---$ 6,800199021,883---4,377John N. Booth & Debra Booth (J&D Booth), docket No. 2546-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1990$ 17,820---$ 3,564199110,263---2,053Young & Young, Ltd. (Young & Young), docket No. 5754-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1989$ 12,744$ 637$ 2,549Howard S. Young & Elaine P. Young (the Youngs),docket No. 5755-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1989$ 14,008---$ 2,802Bruce E. Traegde & Patricia Traegde (the Traegdes),docket No. 5893-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1989$ 14,008---$ 2,80240 Billy J. Johnson & Ruth Johnson (the Johnsons),docket No. 9229-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1990$ 83,972---$ 16,794Johnson Systems, Inc. (Systems), docket No. 9230-94Addition to TaxPenaltySec.Sec.YearDeficiency6651(a) (1)6662(a)1990$ 108,675---$ 21,73541 527 We decide the following issues: 1. Whether the Prime Plan is a welfare benefit plan or a plan deferring the receipt of compensation. We hold it is a welfare benefit plan. 52. Whether the Prime Plan is a 10 or more employer plan described in section 419A(f)42 (6). We hold it is not. 63. Whether the corporate petitioners are liable for the penalties determined by respondent. 7 We hold they are not. Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the relevant years, Rule references are to the Tax Court Rules of Practice and Procedure, and43 dollar amounts are rounded to the nearest dollar. FINDINGS OF FACT I. BackgroundA. Prime Financial Partners, L.P. (Prime)Prime is a master limited partnership that was traded on the American Stock Exchange during most of the relevant years. Prime was formed on April 16, 1987, under the laws of the State of Delaware, to acquire the financial services and real estate activities of a group of Prime's affiliated entities. Prime's general partner is Prime Partners Limited Partnership (Limited), an Arizona limited partnership, whose general 528 partner is Prime Financial Partners, Inc. (Financial), an Arizona corporation. On December 31, 1988, the outstanding stock of Financial and the limited partnership units of Limited were held by Thomas G. Cummings, Jerry P. Franks, Anthony L. Tominac, Marvin D. Brody, and Donald A. Waldman. Joel Boyarsky and a corporation joined this list of owners on December 31, 1989, as did William G. Stalnaker on December 31, 1990. Mr. Tominac and the corporation terminated their ownership interests in both entities during 1990, and Messrs. Franks and Stalnaker terminated their ownership interests in the entities during 1991. On December 31, 1991, 44 the outstanding stock of Financial and the limited partnership units of Limited were held by Messrs. Cummings, Brody, Waldman, and Boyarsky. During the relevant years, Prime was an investment banking and financial services firm that earned revenues mostly by investing and placing money. Prime also earned revenues from commissions and administrative services generated by the Prime Plan. Prime researched, developed, and began marketing the Prime Plan in 1988. The Prime Plan provided death benefits and dismissal wage benefits (DWB's) to qualifying employees of participating employers. On November 29, 1991, Prime filed for protection under Chapter 11 of the U.S. Bankruptcy Code. B. Development of the Prime PlanMr. Brody developed the concept of the Prime Plan in 1988 in response to 1984, 1986, and 1987 tax legislation that limited the tax benefits a small business owner derived from a pension plan. Mr. Brody expected that the Prime Plan would provide meaningful tax deferral to small businesses with few employees. The Prime Plan purported to enable business owners to make tax deductible contributions for employee benefits, while allowing them to accumulate wealth through the45 appreciation of assets purchased by the plan with their contributions. The Prime Plan had some similarities to a defined benefit pension plan, but the Prime Plan had fewer limitations on funding, benefits, and accessibility to funds. Prime marketed the Prime Plan primarily to highly compensated small business owners with five to six employees. These business owners could expect to receive the following 529 benefits from the Prime Plan, as the plan was advertised to them: 1. The employer would currently deduct a one-time contribution that it made to the Prime Plan to fund DWB's and death benefits, and the contribution would not be taxable to the employer's employees until received as benefits; 2. The employer could contribute to pension plans, as well as to the Prime Plan, but, in the case of the Prime Plan, the employer would not be subject to the rules limiting contributions to pension plans; 3. Contributions to the Prime Plan would earn income tax-free because the Trust, although not a tax-exempt entity, would invest each employer's contributions in life insurance and municipal bonds; 4. The employee/owners could reap personally most of the benefits offered by the Prime Plan by46 basing an employee's receipt of benefits on compensation and by using vesting schedules to limit the benefits payable to employees other than the owners themselves; 5. Trust assets would be insulated from creditors; 6. Death benefits would not be subject to income tax or, with minimal planning, estate tax. As of December 31, 1994, approximately 800 employers had participated in the Prime Plan. On that date, approximately 625 of these employers continued to participate in the Prime Plan. C. David WeissMr. Weiss is an attorney who was employed during the relevant years by the law firms of Streich Lang and Snell & Wilmer. In early 1988, Prime contacted Mr. Weiss to help create a welfare benefit plan subject to section 419A(f) (6) and to draft a tax opinion that would be used to market the plan nationwide. Mr. Weiss initially refused, believing there was insufficient guidance on section 419A(f) (6) to allow him to create such a plan. Mr. Weiss later agreed to do so. Mr. Weiss was a principal architect of the Prime Plan and the Trust, and he wrote a series of tax opinion letters related thereto. These letters included opinions dated June 2, 1988, July 25, 1988, April 12, 1989, 47 June 30, 1990, October 1, 1991, and April 1, 1993. 530 D. Dr. William L. RabyDr. Raby is an accountant with a national reputation in areas related to the Prime Plan and the Trust. At the behest of Mr. Weiss, Streich Lang engaged Dr. Raby from February 1988 to the beginning of 1990, to assist Mr. Weiss in forming the desired plan and to express a concurring opinion on Mr. Weiss' tax opinions related thereto. Prime informed Dr. Raby that it wanted to develop a plan that offered a front-end reduction of taxes for small employers and a deferral of income for their employees. Dr. Raby and Mr. Weiss advised Prime that the plan needed an element of risk-shifting to qualify for the desired benefits, and that a "suspense account" could be used to accomplish the required shifting of risk. Dr. Raby and Mr. Weiss later presented Prime with different provisions for the Prime Plan, some of which Prime found unacceptable for marketability purposes. Dr. Raby and Mr. Weiss redrafted the unacceptable provisions, and Prime found the redrafted provisions more to their liking. Dr. Raby wrote an opinion concurring with Mr. Weiss' tax opinion dated June 2, 1988, and Dr. Raby concurred with Mr. Weiss' 48 opinion dated April 12, 1989. Dr. Raby's concurrences were based on his understanding of the tax law including the "possible purposes" of section 419A(f) (6). Dr. Raby's concurrences, as well as Mr. Weiss' opinions that related thereto, did not address any version of the Prime Plan that is at issue herein; they discussed a hypothetical plan that evolved into the instant versions. Dr. Raby's name was used to promote versions of the Prime Plan that were marketed to the public. At Mr. Weiss' request, Dr. Raby performed services in May and June 1993, in connection with respondent's consideration of issues flowing from the Prime Plan. Dr. Raby's fees were paid from the suspense account (the Suspense Account) that was part of the Trust. The Suspense Account served primarily as the depository for amounts forfeited by the employers and employee groups connected to the Prime Plan. E. The TrustThe Trust was a separate, taxable entity apart from Prime and its affiliates. The Trust owned all of its assets, and it was supervised by an independent trustee. The Trust's assets consisted of the money and other property contributed by the 531 participating employers, and any earnings (or less any49 losses) thereon, less payments made by the trustee. The Trust's first trustee was Northern Trust Bank of Arizona, N.A. (Northern). Northern was succeeded by Security Pacific BankArizona (Security Pacific) on or about June 30, 1990. Firstar Metropolitan Bank & Trust (Firstar) succeeded Security Pacific effective January 2, 1992. Firstar's trustee fees included an asset management fee of 1 percent of the market value up to $ 2 million per account, with 0.8 percent of the market value on the balance, plus a $ 15 per item transaction charge. F. The Administrator of the Prime PlanThe Prime Plan was overseen by an administrator. Improved Funding Techniques, Inc. (IFTI), was the Prime Plan's first administrator. On October 24, 1990, Financial's board of directors approved a letter of intent with IFTI under which IFTI would assume all plan administration together with related overhead and expenses in return for existing and projected administration fees. Prime entered into an administrative services agreement with IFTI in July 1991. In consideration for providing administrative services to the Prime Plan, IFTI billed participating employers directly in accordance with the following50 fee schedule: New plan installation:$ 250Annual service costsFirst 5 participants:10506 to 10 participants:145011 & over:1650+ $ 20 perparticipantTrustee's transaction fees:15per transactionIndividual benefit certification:Vested participants:50Non-vested participants:35Plan amendments:250Plan terminations:650+ $ 75 perparticipantRevised plan valuations:750Special projects & consulting:150per hour junior250per hour seniorUnder the Agreement with IFTI, Prime received a percentage of profits equal to 10 percent of IFTI's fees for administration of each plan where the annual fees (net of actuarial costs) exceeded $ 1,000 per plan and 20 percent of the fees for 532 administration of each plan where the fees (net of actuarial costs) exceeded $ 1,500. In 1992, Prime moved the bankruptcy court to terminate its agreement with IFTI and to subcontract the administration services to William M. Mercer, Inc. II. The Trust AgreementsA. OverviewThe Prime Plan and the Trust were established and operated pursuant to the Prime Plan and Trust Agreement, effective August 31, 1988, as subsequently amended and restated by 51 various versions of the agreement dated December 31, 1988, December 21, 1989, June 30, 1990, January 2, 1992, and November 1, 1993. (The Prime Plan and Trust Agreement and each of these amended versions are collectively referred to as the Trust Agreement and separately referred to by the corresponding date.) Most of the amendments were made to the language originally used in the August 31, 1988, Trust Agreement in order to enhance the marketability of the Prime Plan by increasing an employer's control over its contributions (and income or loss thereon). Other amendments were made to comply with changes in the law. Employers became participants in the Prime Plan by completing an agreement (Adoption Agreement) that enumerated the key specifications of the plan and allowed each employer to tailor the plan to its employees by selecting various options that would apply to its employees. An employer could change the options that applied to its employees, and modify the Adoption Agreement in any other regard (e.g., to increase DWB's, death benefits, or both), with the permission of Prime and the trustee. An employer's plan year was the 12-month period that was set forth in the Adoption 52 Agreement, and the employer listed in its agreement the date that the Prime Plan became effective with respect to its employees. Once an employer executed an Adoption Agreement, the employer was bound to make a one-time contribution to the Trust, equal to the amount determined by the Prime Plan's actuaries to be sufficient to fund the employer's employees' vested DWB's and level of death benefits selected by the employer in the Adoption Agreement, as well as to pay miscellaneous charges on 533 the transaction. 8 The employer's initial contribution for DWB's was ascertained through actuarial assumptions developed by the Prime Plan's actuaries. The actuaries generally employed the following assumptions prior to 1991: Interest:7% per annum, compounded annuallySalary scale:Average annual salary increases of 7%Mortality:Pre-severance forfeiture age:NonePost-severance forfeiture age:Assumed rates ofmortality are based onthe Society of Actuaries1951 Group AnnuityMortality TableTerminations: Each employee was assumedto terminate beforereaching the forfeiture age53 The Trust used each employer's contributions to purchase insurance products to fund the DWB's and death benefits promised under the Prime Plan. The employer designated in its Adoption Agreement the insurance company from which the insurance products for its employees were to be purchased, as well as the type and amount of these products. The employer could designate in its Adoption Agreement vesting periods and percentages, which determined the amount of DWB's that would be paid to its employees. The employer could designate in its Adoption Agreement its employees' "Year of Participation" and "Year of Service", as those terms were defined in the Trust Agreement. B. The August 31, 1988, Trust Agreement1. OverviewPrime and Northern Trust entered into the August 31, 1988, Trust Agreement, "establishing a Multiple Employer Welfare Benefit Fund and Trust for the exclusive benefit of the participating Employers, their Employees, and in the case of life benefits, their Beneficiaries". Under this agreement, each participating employer had its own "Employee Group" that consisted of its employees (the Covered Employees) who met the minimum age and service requirements set forth54 by the employer in the Adoption Agreement. The Trust Agreement designated each participating employer as a "Plan Administrator". Generally, each Plan Administrator exercised all discretionary and other authority 534 to control and manage the operation and administration of the Prime Plan. Under the Trust Agreement, each Plan Administrator delegated to Prime most of its duties and responsibilities with respect to the Prime Plan, including: (1) Applying rules determining eligibility, (2) calculating service and compensation credits, (3) preparing employee communication material, benefit reports, and reports required by governmental agencies, (4) calculating benefits, (5) advising employees on their rights and options, (6) applying contributions, (7) processing claims, (8) recommending decisions on the Trust's administration and the maintenance of accounts, and (9) maintaining an account for each Covered Employee. 9Prime received a fee for performing these services. 55 2. DWB'sA Covered Employee generally received a DWB upon termination of his or her employment for a reason other than "cause". The amount of the DWB, which was set forth by the employer in the Adoption Agreement, was based on a percentage of the Covered Employee's compensation in the calendar year immediately preceding termination as well as his or her years of service at the time of termination. In no case could a DWB exceed two times compensation during the immediately preceding calendar year, and a DWB could not be greater than the amount shown in the vesting schedule set forth by the employer in the Adoption Agreement. If an employee had severed his or her employment when the employer made the initial contribution, the employee's DWB generally equaled the amount shown as his or her "Vested Severance Benefit" in that year's annual report. Prime had the sole discretion to pay the DWB in a lump sum or to pay the DWB in monthly installments not to exceed 24 months after the Covered Employee's termination date. The payment of DWB's was secured by the insurance company that issued insurance policies on the life of each Covered Employee. A Covered Employee's DWB generally was56 forfeited to the Suspense Account if he or she: (1) Was discharged for "cause", (2) terminated employment after attaining a stated age, or 535 (3) died while employed. Under the August 31, 1988, Agreement, employment meant "working as an employee, partner or proprietor in the same occupation or profession", and a discharge for "cause" occurred when the discharge resulted from "a proven dishonest or criminal act committed in the course of the Employee's employment with the Employer". The same agreement defined: (1) The stated age as the "Forfeiture Age", which was defined as "an age which is three years prior to a Covered Employee's Normal Retirement Date", (2) the "Normal Retirement Date" as a date set forth by the employer in the Adoption Agreement, and (3) a "Termination of Employment" as "the earliest of the date on which an Employee become [sic] Totally Disabled, resigns or is discharged without Cause." The Normal Retirement Age generally was set forth by the employers as (1) the later of age 65 or completion of 10 years of participation in the Prime Plan, or (2) if the participating employer had a qualified plan, the definition given that term under the qualified plan. DWB's that57 were forfeited due to death or the attainment of the Forfeiture Age were segregated into the Suspense Account to be used to increase that employer's Covered Employees' DWB's or death benefits, to provide new welfare benefits, to provide benefits for replacement employees, or to distribute to the Covered Employees if and when the employer withdrew from the Prime Plan. Contributions made to fund DWB's were invested in flexible premium adjustable life policies (universal life policies) or, in the case of a Covered Employee who was determined to be uninsurable, in a tax-exempt money market fund. Prime maintained commission-sharing arrangements with the insurance companies that wrote these insurance policies. Prime usually earned a commission equal to 22 percent of the amount paid for life insurance and 1.2 percent of the amount paid to fund DWB's. Employers typically contributed $ 50,000 to the Trust. Generally, $ 6,000 of this amount was used to purchase life insurance and the balance ($ 44,000) to fund DWB's. 3. Death BenefitsIf a Covered Employee died while employed, a death benefit became payable to his or her beneficiary in the amount set 536 forth by the employer in the Adoption58 Agreement. This amount was generally stated as a percentage of the Covered Employee's compensation or, if higher, a set minimum amount. For a Covered Employee who was other than a standard underwriting risk, the death benefit could be reduced or eliminated, depending on the provisions of the employer's Adoption Agreement. Death benefits were typically funded through universal life policies. Under such a policy, the premiums in excess of the amount necessary to fund current mortality and administrative expenses are typically invested by the carrier at a fixed rate of return. This rate of return may vary over time, although carriers generally guarantee a specified minimum return. The amounts paid by the Trust for the universal life policies were generally separated into two amounts: (1) The target premium, which was the cost of the life insurance, and (2) the excess premium, which was an amount placed into a side fund for payment of DWB's. In the cases where second and subsequent year contributions were made by an employer, the contributions were usually made to pay a renewal premium on the life insurance or to increase the side fund. Contributions were also sometimes made in years59 subsequent to the first year to purchase additional insurance for newly eligible employees or to increase the amount of insurance for employees with salary changes so that the plan remained within the terms of the Adoption Agreement and the provisions of the Code that were believed related thereto. If the employer failed to make the required contributions to keep the policy in force, Prime was required to make these contributions from assets allocable to the employer's Employee Group. Universal life policies offer a policy owner certain options regarding the cash surrender value of the policy. Under one option, the policy's cash surrender value is included in the face amount paid to the beneficiary upon the insured's death. Under a second option, the carrier pays both the face amount and cash surrender value to the beneficiary upon the insured's death. Under the Trust Agreement, the Trust had to elect the second option for each universal life policy that it acquired. When the insured died, the carrier paid the beneficiary the policy's face amount, thus discharging the Prime 537 Plan's obligation to pay the deceased employee's vested death benefit, and the carrier paid the Trust the cash60 surrender value associated with the policy. Under the universal life policies acquired by the Trust, the Trust could obtain a policy's cash surrender value before the insured died by surrendering the policy. The amount received was usually reduced by a surrender charge during the first several years of the policy. A death benefit was not payable if a Covered Employee died on or after the date he or she terminated employment or was discharged for cause. In the case of an owner/employee, a death benefit was not payable when he or she terminated his or her employment. A death benefit also was not payable when the owner/employee continued to work but reached the date that was the later of age 70-1/2 or the 10th anniversary of his or her participation in the plan. Upon termination of employment, a Covered Employee could, with Prime's approval, elect to convert to individual coverage or purchase his or her life insurance policy for its cash surrender value. Absent such an election, the policy was surrendered or transferred to the life of another Covered Employee. The forfeited proceeds from the sale or surrender of life insurance were segregated into the Suspense Account and used to increase61 the employer's Covered Employee's DWB's or death benefits, to provide new welfare benefits, to provide benefits for replacement employees, or to distribute to the Covered Employees if and when the employer withdrew from the Prime Plan. If an employee severed employment without a vested DWB, the cash surrender value of his or her life insurance policy, if surrendered, was added to another policy in the Employee Group. 4. Obligations and LiabilitiesAn employer that participated in the Prime Plan was required to make an actuarially determined contribution in any year in which one of its employees became eligible for a DWB or the employer elected to increase the amount payable to its Covered Employees under the Adoption Agreement. An employer had no obligation to make additional contributions to provide for the payment of DWB's if there were insufficient assets in the Trust allocable to its Employee Group. An 538 employee's right to a DWB extended only to his or her allocable share of Employee Group assets. If there were insufficient assets allocable to an Employee Group to pay a Covered Employee's DWB, procedures were set forth to pay a smaller benefit commensurate with the available62 assets. The employer relinquished all rights to the contributions made to the Trust, and no amounts could revert to the employer or be used for purposes other than the benefit of the Covered Employees or for the payment of taxes and expenses of the Trust's administration. Neither the employer, Plan Administrator, Prime, or the trustee had any liability to pay any benefits provided under the Plan beyond the assets in the Trust allocable to the applicable Employee Group. Neither the employer, Plan Administrator, Prime, or the trustee was responsible for contributions that were required for any other participating employer. 5. Separate AccountingPrime was required to maintain separate accounts reflecting the share of each Employee Group and to determine the December 31 value of the insurance contracts and tax-exempt money market bond fund allocable to each Employee Group. Prime was required to keep accurate and detailed accounts of all transactions, investments, receipts, and disbursements. Prime was required to file a written report of this information with each employer within 60 days after each December 31st. At the end of each plan year, the Prime Plan's actuaries were required63 to calculate experience gains and losses with respect to each Employee Group, whether or not any gains or losses had actually occurred. Experience gains and losses were measured by comparing each employee's theoretical compensation to actual compensation and by comparing the expected rate of return on the assets held in the Employee Group account with the actual rate of return on these assets. To the extent that the theoretical compensation exceeded actual compensation, or the expected rate of return exceeded the actual rate of return, an experience gain resulted and the amount of the experience gain had to be forfeited to the Suspense Account. 539 Neither Prime nor its actuaries ever implemented the Trust provisions requiring an annual calculation of experience gains and losses. Prime changed its method of calculating experience gains and losses effective June 30, 1990, because the unexpected number of accounts which incurred experience gains created a significant concern among the plan participants and their advisers. Prime believed that this could potentially create non-recoverable Suspense Account assets and alarm plan participants. Prime wanted to reduce the amount of experience64 gain subject to forfeiture and find a way to allow Suspense Account distribution on withdrawal. 6. Employer Withdrawal From the Prime PlanEmployers could withdraw from the Prime Plan at any time by submitting written notification to Prime, accompanied by documentation showing that the necessary ownership interest of the employer had approved the withdrawal. The necessary ownership interest was the percentage listed by that employer in its Adoption Agreement. If an employer failed to pay Prime's annual administrative fee, Prime had the sole discretion to force that employer to withdraw from the Prime Plan. Upon an employer's withdrawal, assets were distributed to all living Covered Employees who were employed during the period that began 18 months before Prime's receipt of the notice. Excess assets remaining in the Trust allocable to the Employee Group after payment of all benefits and the employer's share of the Trust's tax liability were distributed pro rata using the aggregate compensation received by each Covered Employee over the period not to exceed 5 years that was listed by the employer in the Adoption Agreement. For an owner/employee who anticipated employment beyond65 the Forfeiture Age, the Trust Agreement did not prohibit that owner from withdrawing his or her company from the Prime Plan and receiving a withdrawal distribution. For an owner-employee who anticipated retiring, the Trust Agreement did not prohibit that owner from withdrawing his or her company from the Prime Plan and receiving a withdrawal distribution. Prime's actuaries assumed that no employee would forfeit benefits upon retirement, and no employee ever forfeited a DWB because he or she retired or 540 stayed employed beyond the Forfeiture Age. Prime's actuaries assumed that no payments would come from the Suspense Account to supplement the payment of benefits from the Trust. 7. Amendment and Termination of the Prime PlanPrime retained the right to amend, modify, or delete any provision of the Trust Agreement. Prime retained the right to terminate the Prime Plan in certain circumstances, one of which was if the plan failed to satisfy section 419A(f)(6). 8. The TrusteeThe trustee was compensated under the terms of a written agreement that it entered into with Prime. All reasonable costs incurred by the trustee in performance of its duties were paid from the Trust, as was66 the case with all taxes levied or assessed against the Trust. The trustee and insurer withheld any taxes that were required to be withheld from any payment to a Covered Employee and/or beneficiary. C. The December 31, 1988, Trust AgreementPrime amended the Trust Agreement on or about December 31, 1988. In relevant part, the following amendments were made. First, Prime deleted the requirement that forfeited DWB's and forfeited proceeds from the sale or surrender of life insurance policies be segregated into the Suspense Account to be used to provide benefits to the corresponding employer's Covered Employees. Prime replaced this requirement with a provision stating that these forfeitures would be experience gains subject to the existing provisions, except as otherwise modified by the amendments. One of these amendments required experience gains to be allocated annually to the Suspense Account and allowed Prime to direct the trustee to invest these amounts in tax exempt securities or leave the amounts in each applicable Employee Group subject to a lien. Second, Prime was given the power to use the Suspense Account assets in any manner consistent with a purpose or objective of67 the Prime Plan, including supplementing the payment of DWB's to an Employee Group with insufficient assets to pay projected benefits due to experience losses suffered by 541 that Employee Group. Another new provision provided that neither Prime nor the Trustee had any liability to a Covered Employee for the manner in which Suspense Account assets were used or allocated among the Employee Groups. Third, Prime removed the obligation of an employer to make an actuarially determined contribution in any subsequent year in which an employee became eligible for a DWB. Prime replaced this obligation with an obligation to do so only if the employer notified Prime that the employer intended to make such a contribution. D. The December 21, 1989, Trust AgreementPrime amended the Trust Agreement a second time on or about December 21, 1989. Prime made these amendments primarily to reflect matters affecting the trustee. None of these amendments are relevant to our discussion herein. E. The June 30, 1990, Trust AgreementPrime amended the Trust Agreement a third time on or about June 30, 1990. In relevant part, Prime made the following amendments. First, Prime inserted Security Pacific68 as the successor trustee. Second, Prime added a provision allowing DWB's to be funded through the purchase of a second to die life insurance policy. Another new provision allowed the funding of death benefits through the purchase of term insurance and second to die life insurance policies. Third, Prime added a requirement that an employer had to make actuarially determined contributions in any subsequent year in which the employer notified Prime that the employer intended to make a contribution for an employee who was entitled to a greater vested percentage of his or her DWB than in the year the Adoption Agreement was executed. Fourth, Prime expanded the Trust's existing provisions to state that the trustee would not be liable to a Covered Employee or beneficiary with respect to shortfalls in any of the benefits. The existing provisions were further expanded to provide that neither Prime nor the trustee would be liable to a Covered Employee or beneficiary as to decisions on the use of Suspense Account assets to supplement or not to 542 supplement a DWB. Other new provisions reflected limits on the Trust's liability and stated that Prime's maintenance of separate accounts was not a 69 separate trust fund. Fifth, Prime replaced the term "experience gain" with the term "Asset Gains, Liability Gains and Overfunded Gains", and set forth a "measurable event" method of allocating gains to the Suspense Account. Prime defined a measurable event as: a severance, death, or attainment of Forfeiture Age of one or more Covered Employees, or the withdrawal of the Employee Group. Prime set forth another new provision that provided an objective formula under which Prime was allowed to release a portion of the Suspense Account when a measurable event occurred and an Employee Group had insufficient assets to pay DWB's, or an Employee Group withdrew from the Trust. This formula was stated as follows: fair market value of suspense account on valuation Date x theoretical actuarial liability for employee group/theoretical actuarial liability for Trust x actual employer contributions/theoretical employer contributions Prime added other provisions that defined the relevant terms in the formula and gave Prime the absolute discretion not to use the formula if using it would be inconsistent with a purpose of the Prime Plan. Sixth, Prime added a provision that specified that a withdrawing70 employer's written notice must list a withdrawal date no later than 90 days after Prime received the notice. Prime added another new provision specifying that it would deliver to the employer within 60 days of Prime's receipt of the notice an accounting of the employer's account in the Prime Plan. Seventh, Prime listed the asset allocation procedures that it would use to distribute assets to employees of a withdrawing employer. Eighth, Prime listed the trustee's rights and duties to include: (1) The right to be reimbursed for the employment of experts that it considered necessary to carry out its obligations, (2) the right to be held harmless from and against any loss, liability, or expense incurred without gross negligence, breach of trust, or violation of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, 543 arising out of its administration of the Trust, and (3) the ability to reimburse itself, in certain circumstances, from amounts held in the Trust, starting with the Suspense Account. F. The January 2, 1992, Trust AgreementPrime amended the Trust Agreement a fourth time on or about January 2, 1992. In relevant part, the following 71 amendments were made. First, Prime inserted Firstar as the successor trustee. Second, Prime added a provision requiring forfeiture of a DWB upon actual retirement rather than upon reaching the Forfeiture Age. Another new provision defined the term "retirement" to mean "a Covered Employee's severance from service with an Employer other than for Cause, Death or Total Disability, where such Covered Employee cannot show proof of subsequent employment or an attempt to obtain subsequent gainful employment to Prime". Another new provision set forth the allocation of "Employer Withdrawal Gains" to the Suspense Account. G. The November 1, 1993, Trust AgreementPrime amended the Trust Agreement a fifth time on or about November 1, 1993. In relevant part, the following amendments were made. First, Prime added a provision stating that the amount of gains allocated to the Suspense Account at the time of a measurable event would equal the total gains multiplied by the ratio of an employer's total contributions made to the Prime Plan as of December 31 over the total of all contributions which the employer should have made to fully fund its Employee Group's benefits. Prime also amended the72 measurable event formula to read as follows: fair market value of suspense account valuation date x actual employer contributions/total employer contributions to the Trust x actual employer contributions/theoretical employer contributions Another new provision gave Prime the sole discretion not to use the measurable event formula wherever Prime concluded that the formula would give a Covered Employee a larger 544 benefit upon an employer's withdrawal than he or she would have received as a DWB. Second, Prime replaced the phrase "terminated his employment with the Employer on account of Retirement" with the phrase "remained in the employ of the Employee Group beyond his Forfeiture Age". Third, Prime added a provision allowing the use of Suspense Account assets to pay all fees and costs incurred in litigating with the Commissioner issues related to the Prime Plan. Permissible fees and costs included those of attorneys, accountants, actuaries, and expert witnesses. Before this amendment, Prime had spent $ 215,000 from the Suspense Account to pay for legal services rendered mainly by Mr. Weiss and Mr. Brody in defense of the Commissioner's challenge of the deductibility of employers' 73 contributions to the Prime Plan. Mr. Weiss had authorized the payment of these amounts. III. Prime's Duties in Operation of the Prime PlanPrime implemented the provisions of each employer's account in the Prime Plan, issued annual reports and generated tax filings on each account, and dealt with insurance providers. Prime's responsibilities also included tracking money by Employee Group, reviewing advertisements and sales materials, assisting with tax audits, responding to legal issues, and assisting in interpreting the Trust's provisions. Prime computed each Covered Employee's vested DWB by multiplying: (1) That employee's compensation listed on his or her Form W-2 (Wage and Tax Statement) for the year before the year the employer made the contribution, by (2) the accrual percentage, by (3) the years of service (or the maximum accrual years, if applicable), by (4) the employee's vesting percentage as determined in accordance with the vesting schedule selected by the employer in the Adoption Agreement. The accrual percentage was a "plug" in that the percentage was based on how much money the employer believed it could afford to spend for a certain benefit. 545 IV. The Trust's74 Financial InformationA. OverviewThe Trust began accepting contributions from employers in November 1988. As of June 30, 1992, the Trust had received $ 92,273,952 in contributions, broken down as follows: $ 15,852,213 in 1988, $ 29,453,541 in 1989, $ 25,281,057 in 1990, $ 14,178,375 in 1991, and $ 7,508,766 in 1992. Prime never valued the Trust as a whole, and Prime never filed a Form 5500 (Annual Return/Report of Employee Benefit Plan) for the Prime Plan as a whole. Neither the Prime Plan nor the Trust had a 1988 Form 1041 (U.S. Fiduciary Income Tax Return) filed on its behalf. Norstar Trust Co. of Rochester, New York, filed 1989 and 1990 Forms 1041 that reported the following items of income and expense for a complex trust named "Prime Financial Benefits Trust--New York" (E.I.N. 86-0633138) (the New York Trust): 19891990Tax-exempt income$ 10,905$ 64,477Total income- 0 -- 0 -Fiduciary fees50010,623Total deductions- 0 -- 0 -Taxable income- 0 -- 0 -Total tax- 0 -- 0 -Security Pacific filed 1990 through 1994 Forms 1041 that reported the following items of income and expense for the Trust, listed on the forms as a complex trust 75 named "Prime Financial Benefits Trust" (E.I.N. 86-6184818): 1019901991199219931994Interest income$ 232,158$ 372,992$ 351,722$ 106,927$ 92,464Other income:---9,453---------forfeituresOther income: refund------------4,012trustee feesTax exempt income55,46734,812295,340118,79714,498Total income232,158382,445351,722106,92796,476Taxes10,306- 0 -13,572- 0 -7,519Fiduciary fees53,83663,29322,994- 0 -- 0 -Attorney, accountant13,247136,44096,205104,764173,804Other deductions3,500- 0 -161,76110,547Other deductions:- 0 -- 0 -173,55079,263128,000mgmt/admin feesExemption100100100100100Taxable Income164,781199,276(20,428)(22,898)(182,687)Total tax46,13961,017- 0 -- 0 -- 0 -76 546 The Trust paid no benefits in 1988. From 1989 through 1994, the Trust paid $ 30,420,770 in employer withdrawal benefits and DWB's as shown below: 1989199019911992DWB's (number)065057Withdrawal dist.$ 468,274$ 2,292,366$ 3,848,663$ 10,732,521DWB's (amount)011,985682,394640,125Total468,2742,304,3514,531,05711,372,64619931994TotalDWB's (number)8756256Withdrawal dist.$ 6,227,028$ 4,117,684$ 27,686,536DWB's (amount)727,947671,7832,734,234Total6,954,9754,789,46730,420,770B. Suspense Account transactionsThe first Suspense Account transaction was a deposit of a $ 37,841 death forfeiture on December 21, 1990. The following chart is a summary of all Suspense Account activity through October 31, 1994: Total OutTotal InAccounting fees$ 4,184---Actuarial gains---$ 252,977Administrative fees192,000---Death benefit3,398---Death forfeitures---474,839Expense allocations22,939---Interest earned---48,581Legal fees387,990256Miscellaneous2,011---Trustee fees4,203---Unrealized loss17,035---Totals633,760776,653Mr. Weiss77 approved of the use of Suspense Account assets to pay legal fees, administrative fees, and trustee fees. Approximately $ 280,000 of the legal fees were paid to Snell & Wilmer and Streich Lang. 547 V. Young & YoungA. OverviewThe Youngs are husband and wife, and they resided in Sedona, Arizona, when they petitioned the Court. The Youngs owned 100 percent of the stock of Young & Young, a corporation providing medical care in and around Sedona, during the relevant years. Young & Young's principal place of business was in Arizona, when it petitioned the Court. During the relevant years, Howard Young was a radiologist working out of a hospital through a partnership in which Young & Young was a 50-percent partner. Elaine Young was a dermatologist with her own practice. Carleen Garcia was the nurse and office manager of Elaine Young's practice. Young & Young reported its operations for Federal income tax purposes on a calendar year, and it used the cash receipts and disbursements method on its relevant Federal income tax returns. These returns reported the following information: 19881989199019911992Total income$ 440,673$ 571,125$ 672,543$ 622,323$ 639,859Compensation of164,000327,000450,000315,000367,000officersSalaries & wages86,55136,60042,65623,247- 0 -Pension, profit-73,46277,76993,556160,351102,506sharing, plansEmployee benefit17,36856,2306,7619,4185,425programsTaxable loss2,44412,54924,32720,9451,87578 Of the reported compensation, Howard Young received $ 111,500, $ 163,500, $ 225,000, $ 167,500, and $ 166,000 during the respective years. The Youngs filed timely a joint 1989 Federal income tax return. On January 7, 1994, the Commissioner mailed them a notice of deficiency reflecting a determination that the Youngs' 1989 taxable income was increased by $ 50,030 on account of a taxable transfer of property from Young & Young under section 83. The notice also stated that the Youngs were liable for a $ 2,802 accuracy-related penalty under section 6662(a) because the underpayment of tax was due to negligence. On the same day, the Commissioner mailed Young & Young a notice of deficiency reflecting a determination that its 1989 taxable income was increased by $ 50,030 because its 548 contribution to the Trust was governed by subpart D. 11Young & Young had filed its 1989 tax return on March 23, 1990, 8 days after the due date. The notice of deficiency also stated that Young & Young was liable for: (1) A $ 637 addition to tax for delinquency under section 6651(a)(1), and (2) a $ 2,549 accuracy-related penalty under section 6662(a) because its underpayment of income tax was due to a substantial79 understatement. B. Young & Young's Introduction to the Prime PlanDonald A. Waldman was the Youngs' tax adviser. In December 1989, Mr. Waldman introduced the Youngs to the Prime Plan, advising Howard Young that the plan provided life insurance as well as tax deferral. Howard Young viewed the Prime Plan as a "wise business investment for the company" because it provided life insurance, which he needed at that time, and because of "the tax deferment." Howard Young relied on Mr. Waldman in choosing to participate in the Prime Plan and in reporting the tax ramifications that flowed therefrom. Mr. Waldman was competent to give an opinion on the Prime Plan. C. Young & Young's Adoption of the Prime PlanYoung & Young joined the Prime Plan by executing an Adoption Agreement dated and effective as of December 1, 1989, and by making a $ 50,030 contribution to the Trust approximately 16 days later. Young & Young's $ 50,030 contribution80 was applied to the full accrual of DWB's for its Covered Employees ($ 42,526) and the cost of their death benefits ($ 7,500). Young & Young deducted the full contribution on its 1989 tax return. Young & Young's three employees (the Youngs and Carleen Garcia) became Covered Employees under the Prime Plan as of December 1, 1989. On January 14, 1992, Elaine Young executed an addendum to Young & Young's Adoption Agreement electing retroactively to waive her right to participate in the Prime Plan. In all, Young & Young executed the following Adoption Agreements during its participation in the Prime Plan: Date effective12/01/8912/01/8912/01/8912/01/8912/01/89DWB percentageNot listedNot listed1.55%1.907%3.814%Years of serviceNot listedNot listed101010Vesting schedule4/404/404/404/404/40Normal retirement age5555555565Death benefit multipleNot listedNot listed2.3203.3303.330Date executed12/01/8912/01/894/06/9006/23/9212/30/92D. Administration of Young & Young's Account in the Prime PlanImproved Funding Techniques, Inc. (IFTI), prepared the 1989 annual report for Young & Young's account in the Prime81 Plan, and IFTI delivered the report to Howard Young on December 27, 1991. The report included an actuarial valuation signed by Deloitte & Touche and provided the following calculation of vested DWB's for Young & Young's Covered Employees: 1988AccrualYears ofVestingVestedCompensationpercentageServicepercentDWBHoward Young$ 111,5003.814%10100%$ 42,526Carleen Garcia11,3323.8142- 0 -- 0 -The 1989 report addressed only Young & Young's Employee Group, and it did not provide any information concerning the Trust as a whole. The report used a 3.814 accrual percentage for the DWB's which had been unstated in any of the Adoption Agreements executed by Young & Young before the report was prepared. On December 30, 1992, Young & Young executed an Adoption Agreement allowing for the 3.814 percent accrual percentage. Other annual reports prepared for Young & Young's account reported the following relevant information: 198919901991Fund value at yearend$ 50,018$ 46,185$ 48,015Policy values- 0 -46,00548,026Surrender valueN/A38,02640,446Additional contribution available(4)1,4673,866Date of report12/27/9112/27/9102/12/9382 On March 16, 1990, Prime forwarded to Young & Young a copy of the 1989 summary plan description required by section 102 of ERISA. The description was later restated to reflect the amendments to the Trust Agreement through January 1992. 550 E. Forms 5500-C/R (Return/Report of Employee Benefit Plan)Forms 5500-C/R filed with the Commissioner for Young & Young's account in the Prime Plan included the following information: 19891990199119921993Yearend assets$ 100,018$ 38,204$ 40,435$ 43,066$ 43,256Income1032,8533,9304,3621,913Expenses11414,6671,6991,7311,723Contributions100,030- 0 -- 0 -- 0 -- 0 -These forms also reported the payment of insurance commissions of zero, $ 7,793, zero, zero, and zero in the respective years from 1989 through 1993. F. Young & Young's Withdrawal From the Prime PlanOn August 8, 1994, Howard Young requested that an estimate be calculated for Young & Young's withdrawal from the Prime Plan. VI. N.L. BoothA. OverviewRobert and Janice Booth (R&J Booth) are husband and wife, and they resided in Scottsdale, Arizona, when they petitioned the Court. John and Debra Booth (J&D83 Booth) are husband and wife, and they resided in Scottsdale, Arizona, at the time of their petition. During the relevant years, Robert Booth was vice president and secretary of N.L. Booth, a corporation engaged in the construction business in Phoenix, Arizona, and he owned 11.1 percent of N.L. Booth's stock. John Booth was N.L. Booth's president and treasurer, and he owned 25 percent of N.L. Booth's stock. N.L. Booth's remaining stock was owned by Phyllis Booth, the mother of John and Robert Booth. N.L. Booth's principal place of business was in Arizona when it petitioned the Court. N.L. Booth reported its operations for Federal income tax purposes on a fiscal year ending July 31, and it used an accrual method on its relevant tax returns. These returns reported the following information: Taxable year07/31/8907/31/9007/31/9107/31/9207/31/93endedTotal income$ 612,603$ 1,230,318$ 1,009,373$ 1,235,227$ 889,174Compensation of176,300274,600451,200437,892239,200officersSalaries & wages49,64974,65537,76752,01453,296Pension, profit-40,0008,50043,261152,464150,696shar. plansEmployee benefit- 0 -100,00056,739- 0 -- 0 -programsTaxable income69,279478,09895,100231,648101,79284 Of the reported compensation, Robert Booth received $ 92,600, $ 139,600, $ 228,000, $ 119,746, and $ 122,000 during his 1989 through 1993 taxable years, respectively, and John Booth received $ 85,300, $ 134,800, $ 224,800, $ 314,946, and $ 117,200 during the same respective years. R&J Booth filed timely joint 1990 and 1991 Federal income tax returns. On November 16, 1993, the Commissioner mailed them a notice of deficiency reflecting a determination that R&J Booth's taxable income for 1990 and 1991 was increased by $ 46,000 and $ 26,100, respectively, on account of taxable transfers of property from N.L. Booth under section 83. The notice also stated that R&J Booth were liable for $ 3,036 and $ 1,784 in accuracy-related penalties under section 6662(a) for the respective years. On the same day, the Commissioner mailed to J&D Booth a notice of deficiency reflecting her determination that J&D Booth's 1990 and 1991 taxable income was increased by $ 54,000 and $ 30,639, respectively, on account of taxable transfers of property from N.L. Booth under section 83. J&D Booth had timely filed a joint Federal income tax return for each of these years. The notice also stated that J&D Booth 85 were liable for $ 3,564 and $ 2,053 in accuracy-related penalties under section 6662(a) for the respective years. The Commissioner also mailed a notice of deficiency to N.L. Booth on that date, reflecting a determination that its 1989 and 1990 taxable income was increased by $ 100,000 and $ 56,739, respectively. The notice stated that N.L. Booth's contribution to the Prime Plan was governed by subpart D. The notice also stated that N.L. Booth was liable for $ 6,800 and $ 4,377 in accuracy-related penalties under section 6662(a) for the respective years because its underpayments of income tax were due to substantial understatements. N.L. Booth filed timely 1989 and 1990 tax returns. 552 B. N.L. Booth's Introduction to the Prime PlanBarclay D. Schultz was N.L. Booth's insurance agent for the Prime Plan. On July 17, 1990, Mr. Schultz contacted Prime about N.L. Booth's possible participation in the Prime Plan. Sixteen days later, Joseph P. Waters, N.L. Booth's certified public accountant, furnished N.L. Booth with computations of projected earnings from participating in the Prime Plan. Robert and John Booth (collectively, the Booths), individually and in their capacity as officers 86 of N.L. Booth, relied upon competent and informed tax and investment advisers before joining the Prime Plan and in reporting the tax ramifications that flowed therefrom. C. N.L. Booth's Adoption of the Prime PlanN.L. Booth joined the Prime Plan by executing an Adoption Agreement dated and effective as of July 31, 1990, and by contributing $ 25,030 to the Trust 37 days later. N.L. Booth was required to make a remaining contribution of $ 75,000 to the Trust by October 15, 1990. N.L. Booth made this contribution, without interest, on January 30, 1991. N.L. Booth's 1989 tax return claimed a $ 100,000 deduction for accrued contributions owed the Trust. N.L. Booth's 1990 tax return claimed a $ 56,739 deduction for accrued contributions owed the Trust. On February 14, 1992, N.L. Booth paid Firstar Metropolitan Bank & Trust (Firstar) $ 55,000 of this amount; N.L. Booth never paid the remaining $ 1,739. Generally, the $ 55,000 contribution was applied as follows: (1) An increase in DWB's resulting from the change in the accrual percentage, (2) an increase in vesting, and (3) the cost of a death benefit. In all, N.L. Booth executed the following Adoption Agreements relating to its participation87 in the Prime Plan: Date effective07/31/9007/31/9001/01/9107/31/90Dismissal wage benefit percentage4.1962.846.544.196Years of service10101010Vesting schedule4/404/404/404/40Normal retirement ageSame asSameSameSame401 (a)Death benefit multiple4.1222.6924.1224.122Date executed07/31/9007/31/9007/30/9110/01/91553 D. Administration of N.L. Booth's Account in the Prime PlanOn August 12, 1991, IFTI forwarded the 1990 annual report for N.L. Booth's account in the Prime Plan to John Booth. The report pertained only to N.L. Booth's Employee Group. The report included an actuarial valuation signed by Deloitte & Touche and provided the following calculations of vested DWB's: 1989AccrualYears ofVestingVestedCompensationpercentServicepercentDWBJohn Booth$ 84,9004.19610100$ 35,624Robert Booth84,9004.1961010035,624Andrew Alvis36,9004.1962- 0 -- 0 -Thomas Geary37,6744.1964402,529Trevor Naugle39,9004.1961010016,742The report did not provide any information on the Trust as a whole. On September 14, 1992, IFTI forwarded the 1991 annual88 report for N.L. Booth's account to John Booth. This report included another actuarial valuation signed by Deloitte & Touche. In order to accommodate the 1991 contribution, the accrual percentage for DWB's was increased to 6.54 percent. In all, the annual reports for N.L. Booth's account in the Prime Plan included the following information: 19901991199219931994Fund value at yearend$ 100,281$ 151,615$ 150,370$ 160,563$ 169,572Contribution- 0 -55,000- 0 -- 0 -- 0 -in transitPolicy values- 0 -96,219149,983160,176169,181Surrender valueN/A90,412141,438151,632160,636Additional contrib.3,9764,26315,64723,05835,386availableDate of report08/12/9109/14/9202/23/9412/08/9401/16/96E. Forms 5500-C/RForms 5500-C/R for N.L. Booth's account in the Prime Plan included the following information: 1990199119921993Yearend assets$ 100,282$ 145,808$ 141,825$ 152,019Income25247,0253,89210,194Expenses- 0 -1,4997,8751,215Contributions100,03055,000- 0 -- 0 -These forms did not list any insurance commissions paid from 1990 through 1993. 554 VII. Systems89 A. OverviewThe Johnsons are husband and wife, and they resided in Waco, Texas, when they petitioned the Court. Systems' principal place of business was in Waco, Texas, when it petitioned the Court. Since 1990, Systems' only employees have been the Johnsons and Robert J. Carr. Mr. Carr, a certified public accountant (C.P.A.), is Systems' controller. Mr. Johnson initially owned 49 percent of Systems' common stock, and Mrs. Johnson owned the rest. On December 1, 1990, Systems canceled the shares of stock initially issued to the Johnsons and reissued 21 shares to Mr. Carr, 39 shares to Mr. Johnson, and 40 shares to Mrs. Johnson. On February 2, 1991, Mr. Johnson held 79 shares of Systems' stock through a partnership known as Chief Smokey, Ltd., and Mr. Carr owned the remaining shares. Systems reported its operations for Federal income tax purposes on a fiscal year ending on September 30, and it used the cash method on its relevant tax returns. These returns included the following information: Taxable year ended09/30/9009/30/9109/30/9209/30/93Total income$ 51,643$ 725,000$ 606,132$ 909,028Compensation of officers- 0 -303,200102,200143,000Salaries & wages20,4811,0001,0007,855Pension, profit-sharing, plans- 0 -- 0 -- 0 -- 0 -Employee benefit programs- 0 -301,150300,000700,000Taxable income (loss)(24,159)35,132145,3847,51890 Of the reported compensation, Mr. Johnson received zero, $ 150,000, $ 142,500, $ 120,000, and $ 130,000 during his respective taxable years from 1989 through 1993, and Ms. Johnson received zero, $ 9,000, $ 16,900, $ 15,500, and $ 13,000 during the same respective years. Johnson Roofing, Inc. (Roofing) is an affiliate of Systems. Roofing's relevant tax returns included the following information: Taxable year ended10/31/8910/31/9010/31/9110/31/92Total income$ 1,865,045$ 1,939,495$ 1,582,097$ 1,893,945Compensation of officers233,988300,60010,200- 0 -Salaries & wages50,495429,644535,298603,235Pension, profit-sharing,- 0 -- 0 -- 0 -- 0 -plansEmployee benefit programs1,087- 0 -- 0 -- 0 -Taxable income (loss)114,719123,189(197,520)(471,113)555 Of the reported compensation, Mr. Johnson received $ 73,000, $ 234,988, and $ 288,000 in his respective taxable years from 1988 through 1990. Ms. Johnson received $ 20,580, $ 31,200, and $ 15,600 during the same respective years. Neither of the Johnsons received any compensation from Roofing during their 1991 through 1993 taxable years. The Johnsons filed timely their joint91 1990 Federal income tax return. On March 3, 1994, the Commissioner mailed them a notice of deficiency reflecting a determination that the Johnsons' 1990 taxable income was increased by $ 297,299 on account of a taxable transfer of property from Systems under section 83. 12 The notice also stated that the Johnsons were liable for a $ 16,794 accuracy-related penalty under section 6662(a) because the underpayment of tax attributable to section 83 was due to negligence. On the same day, the Commissioner mailed Systems a notice of deficiency reflecting a determination that its 1990 taxable income was increased by $ 300,000 because its contribution to the Trust was governed by subpart D. Systems filed timely its 1990 tax return. The notice also stated that Systems was liable for a $ 21,735 accuracy-related penalty under section 6662(a) because its underpayment of income tax was due to a substantial understatement. B. Systems'92 Introduction to the Prime PlanMax Chapman, Systems' independent C.P.A., introduced the Johnsons to the Prime Plan, stating that it would be "useful in tax planning". Mr. Carr was also involved in meetings concerning Systems' decision to join the Prime Plan, and he reviewed some of the plan's literature. One of the main selling features of the Prime Plan from Mr. Carr's perspective was the "very thick opinion letter". Mr. Johnson, individually and on behalf of Systems, relied upon competent and informed tax and investment advisers before joining the Prime Plan and in reporting the tax ramifications that flowed therefrom. 556 C. Systems' Adoption of the Prime PlanSystems joined the Prime Plan by executing an Adoption Agreement dated and effective as of December 20, 1990, and by making a $ 300,000 contribution to the Trust 6 days later. The contribution funded the full accrual of DWB's for Systems' three employees ($ 264,000), as well as their death benefits ($ 36,000). When Mr. Johnson made that contribution, he believed the money could not be lost to an employee of another Employee Group. Systems' three employees became Systems' Covered Employees in 1990. On March 12, 1991, 93 Mr. Johnson, on behalf of Systems, amended the 1990 Adoption Agreement effective as of December 31, 1990, to change the DWB accrual percentage to 176 percent and the years of service multiple to one. No change was made to the vesting schedule. In all, Systems submitted the following Adoption Agreements relating to its participation in the Prime Plan: Date Effective12/20/9012/20/9012/20/9012/20/90Dismissal wage benefit percentage176176176200Years of service1115Vesting scheduleImmediateImmediateImmediate4/40Normal retirement age not listed6565Not listed65Death benefit multiple16.27516.27516.27515.695Date executedNotNotNot12/20/90executedexecuteddatedOn December 2, 1991, IFTI sent Systems copies of substitute pages 1 and 5 for its Adoption Agreement. These pages changed the employer yearend to September 30, the Normal Retirement Date to 65, and the death benefit multiple to 16.275. D. Administration of Systems' Account in the Prime PlanThe 1989 annual report on Systems' account in the Prime Plan pertained only to Systems' Employee Group, and it did not provide any information regarding the Trust94 as a whole. On March 6, 1991, IFTI forwarded the 1990 annual report for Systems' account to Mr. Johnson. The report included an actuarial valuation signed by Deloitte & Touche and provided the following calculations of vested severance benefits for Systems' Covered Employees: 1989AccrualYears ofVestingVestedCompensationpercentServicepercentSeveranceMr. Johnson$ 140,0001761100$ 246,400Ms. Johnson9,000176110015,840Mr. Carr1,00017611001,760In the 1990 annual report, the Prime Plan's actuary used a DWB of 176 percent, 1 year of service, 100 percent vesting, and a 16.275 death benefit multiple. These numbers were different from those set forth in the Adoption Agreements. Adoption Agreements with the percentages and multiples used in the 1990 annual report were prepared, but never executed by Systems. IFTI contacted Systems on numerous occasions in 1991 and 1992, stating that Systems needed to provide the executed Adoption Agreements. Mr. Carr executed, but failed to date, an Adoption Agreement with the correct percentages and multiples. The annual reports for Systems' account in the Prime Plan included the following95 information: 19901991199219931994Fund value at yearend$ 300,000$ 304,342$ 317,443$ 326,944$ 338,487Policy values- 0 -303,424316,513327,064338,607Surrender valueN/A240,440255,413269,293283,222Additional- 0 -17,31229,86344,16457,460contribution availableDate of report3/06/9111/16/922/23/948/15/946/28/95E. Forms 5500-C/RForms 5500-C/R filed with the Commissioner on Systems' account in the Prime Plan reported the following information: 19901991199219931994Yearend Assets$ 300,081$ 241,358$ 256,343$ 269,173$ 283,102Income8121,58826,32426,09124,134Expenses- 0 -80,31111,33913,26110,205Contributions300,000- 0 -- 0 -- 0 -- 0 -These forms also reported the payment of zero, $ 38,546, zero, zero, and zero in insurance commissions during the respective years. VIII. On-Site Project Management, Inc. (On-Site)A. OverviewThe Traegdes are husband and wife, and they resided in Tempe, Arizona, when they petitioned the Court. On-Site is an S corporation that was incorporated on July 2, 1984. Mr. Traegde was its president, and he owned96 98.4022 percent of 558 its stock on December 31, 1989. Ms. Traegde was On-Site's vice president, and she owned the rest of its stock on that date. The 1989 Federal income tax returns of On-Site and the Traegdes were filed timely. On-Site reported its operations for Federal income tax purposes on a calendar year, and it used the cash method on its relevant tax returns. These returns included the following data: 19881989199019911992Total income$ 1,130,895$ 1,108,792$ 923,488$ 114,270$ 603,522Compensation of120,910213,985219,62171,011135,519officersSalaries & wages234,900387,389122,142135,72486,660Pension, profit-104,29647,3001,585- 0 -- 0 -sharing, plansEmployee benefit- 0 -- 0 -- 0 -1,7114,116programsOrdinary income471,158232,440371,926(230,453)213,508(loss)Of the reported compensation, Mr. Traegde received $ 117,536, $ 201,956, $ 205,870, $ 56,808, and $ 125,207 during the respective years. B. On-Site's Introduction to the Prime PlanThomas J. Connelly was the Prime Plan's sales agent for On-Site. Mr. Connelly introduced Mr. Traegde to the Prime Plan in late 1988. Mr. Connelly had observed97 that Mr. Traegde did not have a succession plan for his business or any estate planning, that the Prime Plan offered death benefits for Mr. Traegde, and that the Prime Plan would give Mr. Traegde a source of funds to close his business when he decided to leave. On October 4, 1988, Mr. Connelly wrote to On-Site's C.P.A., Thomas P. Joynt, explaining the Prime Plan. On November 7, 1988, Mr. Joynt replied with certain questions about the Prime Plan, as well as On-Site's possible participation therein. On November 17, 1988, Mr. Connelly responded to Mr. Joynt's letter. Mr. Connelly discussed the Prime Plan with Mr. Traegde. Based on these conversations, and after reading the promotional literature on Prime, Mr. Traegde concluded that the risks involved in the Prime Plan were minimal. Mr. Traegde expected to get his DWB if he sold or closed his business, and he knew that he could withdraw On-Site from the Prime Plan at any time. Mr. Traegde also discussed Mr. Weiss' 559 opinion letter on the Prime Plan with Mr. Joynt, and Mr. Traegde relied on Mr. Joynt's advice with respect thereto. C. On-Site's Adoption of the Prime TrustOn-Site joined the Prime Plan by executing an Adoption Agreement98 on December 28, 1988, effective as of December 31, 1988, and by contributing $ 100,026 to the Trust on the same day. On-Site's contribution was applied primarily as follows: $ 89,645 to the full accrual of DWB's for its Covered Employees and $ 10,340 to the cost of their death benefits. As of December 31, 1988, On-Site's Covered Employees were Mr. Traegde and four other employees. Other On-Site employees became Covered Employees during 1989, and still others became Covered Employees in subsequent years. On December 29, 1989, On-Site made an additional contribution of $ 50,030 to the Prime Plan. On-Site made no contributions to the Prime Plan in 1990, 1991, or 1992. On-Site submitted the following Adoption Agreements relating to its participation in the Prime Plan: Date effective12/31/8812/31/8811/01/8912/31/89DWB percentage25.0725.54N/A23.82Years of service77N/A8Vesting schedule4/404/40N/A4/40Normal retirement dateSame asSame asSame asSame as401(a)401(a)401(a)401(a)Death benefit multiple5.365.362.862.231Date executed12/28/8812/28/8811/01/8912/28/89Date effective09/04/9012/31/8801/01/89DWB percentage2425.5427.220Years of service877Vesting scheduleN/A4/404/40Normal retirement dateSame as 401(a)Same as 401(a)Same as 401(a)Death benefit multipleN/A2.862.86Date executed10/18/9002/11/9202/11/9299 On-Site's agreement dated November 1, 1989, also reduced the minimum death benefit from $ 50,000 to $ 25,000. D. Administration of On-Site's Account in the Prime PlanOn August 15, 1989, Prime forwarded to On-Site a 1988 actuarial valuation for On-Site's account in the Prime Plan, signed by Laventhol & Horwath. On March 11, 1991, IFTI forwarded a 1988 annual report for On-Site's account in the Prime Plan to Mr. Traegde. This report included an actuarial valuation signed by Deloitte & Touche and provided the following calculations of vested severance benefits for On-Site's Covered Employees: 1987AccrualYears ofVestingVestedEmployeeCompensationpercentServicepercentSeveranceMr. Traegde$ 156,00025.54545$ 89,645Larry French36,40025.541- 0 -- 0 -Erik Kallstrom35,98425.541- 0 -- 0 -Jeanne Sharon21,84025.541- 0 -- 0 -Norman Burke- 0 -25.54N/AN/AN/ARichard Murphy- 0 -25.54N/AN/AN/AMichael Brandt- 0 -25.54N/AN/AN/AK. Diane Small- 0 -25.54N/AN/AN/ADenise Minix- 0 -25.54N/AN/AN/ASteve Boyles- 0 -25.54N/AN/AN/A560 The 1988 report did not refer to 100 another participating Employee Group, and it did not provide any information on the Trust as a whole. The report related only to the On-Site's Employee Group. On March 11, 1991, IFTI forwarded the 1989 annual report for On-Site's account in the Prime Plan to Mr. Traegde. This report included an actuarial valuation signed by Deloitte & Touche, and it listed nine other employees of On-Site, none of whom qualified for a 1989 vested severance benefit. In order to accommodate On-Site's 1989 contribution, the accrual percentage for DWB's was increased from 25.54 percent to 27.220 percent. The 1989 report acknowledged a $ 50,000 contribution from On-Site, and applied the $ 50,000 amount to the increase in DWB's allowed because of the change in the accrual percentage, the increase due to the increased vesting of Mr. Traegde, and the increase due to the cost of death benefits. The annual reports for On-Site's account in the Prime Plan listed the following relevant data: 1988198919901991Fund value at yearend$ 99,996$ 138,653$ 158,161$ 167,047Policy values99,996138,653157,814167,055Surrender valueUnstatedUnstated136,959147,056Addit. contr. available(11)261,519128,443Date of report03/11/9103/11/9107/10/9101/20/93101 19921992199319931994Fund value at$ 177,095$ 177,095$ 184,012$ 176,364$ 148,625yearendPolicy values177,103177,103186,612178,964177,545Surrender value157,104157,104166,613161,097162,772Addit. contr.202,263197,155248,761243,663296,318availableDate of report09/9403/9509/9403/95;10/9510/95On March 31, 1989, Prime forwarded to On-Site its 1988 summary plan description. On April 4, 1990, Prime forwarded to On-Site its 1989 summary plan description. On 561 February 24, 1993, Prime forwarded to On-Site its summary plan description with amendments through January 1992. E. Forms 5500-C/RForms 5500-C/R filed with the Commissioner on On-Site's account in the Prime Plan included the following information: 19891990199119921993Yearend assets$ 138,653$ 137,306$ 147,048$ 157,095$ 164,013Income38,86714,16313,05413,08712,434Expenses24115,5103,3123,0765,516Contributions50,030- 0 -- 0 -- 0 -670These forms also reported the payment of $ 11,858, $ 13,797, $ 54, zero, and zero in insurance commissions during the respective years. OPINION We must determine102 the tax consequences flowing from the Prime Plan, a purported multiple employer welfare benefit plan that has been marketed nationwide by its promoters as a viable tax planning device and subscribed to by hundreds of entities whose employee/owners have sought primarily the promised tax benefits. The designers of the Prime Plan struggled to comply with section 419A(f) (6)'s exception to the applicability of subpart D. The designers followed the evolution of subpart D through the Congressional committees, and they aspired to create a valid welfare benefit plan that met the legislative intent for section 419A(f) (6). The designers were familiar with the tax and labor provisions of employee benefit law. Based on their understanding of the genesis of subpart D, the drafters concluded that section 419A(f) (6) covered their design for the Prime Plan. One of the designers, Mr. Weiss, requested a ruling from the Commissioner that the Prime Plan qualified under section 419A(f) (6). The Commissioner did not issue a ruling in reply to Mr. Weiss' ruling request, and, to date, the Commissioner has not issued regulations construing section 419A(f) (6). On May 1, 1995, the Commissioner released 103 Notice 95-34 (the Notice), 1 C.B. 309">1995-1 C.B. 309, to provide guidance on "the significant tax problems" raised by certain trust agreements being promoted as multiple employer welfare benefit funds exempt from the limits of sections 562 419 and 419A. Id. Although the Notice did not mention the Prime Plan by name, the Notice indicated that the Commissioner disagreed with Prime that its plan was within section 419A(f) (6). Having failed in their attempt to receive the Commissioner's assurance that the Prime Plan was a 10 or more employer plan under section 419A(f) (6), Prime nevertheless began marketing the plan in 1988, relying on the designers' opinions as to the validity of the promised tax benefits that Prime believed flowed from the Prime Plan. The Commissioner now challenges these tax benefits in the instant litigation. The Commissioner argues primarily that the Prime Plan is a plan of deferred compensation. Petitioners argue that the Prime Plan provides merely welfare benefits. The Commissioner argues alternatively that the Prime Plan is actually an aggregation of plans that is outside the scope of section 419A(f) (6). Petitioners argue that the Prime Plan104 is a single 10 or more employer plan within section 419A(f) (6). We must resolve these disputes. We do so with the benefit of a comprehensive and detailed evidentiary record developed by the parties up to, including, and after trial, as well as with the aid of the parties' briefs and other voluminous submissions that have focused on issues which have been in dispute at one time or another throughout this proceeding. We analyze the law that applies to the issues at hand, giving due regard to all arguments made by the parties with respect to these issues. 1. Type of Plan: Welfare Benefit or Deferred CompensationWe pass first on whether the Prime Plan is a plan of welfare benefit or deferred compensation. If the Prime Plan is a deferred compensation plan, section 404(a) (5) prohibits a participating employer from deducting a contribution until the year in which an amount attributable to the contribution is includable in the gross income of employees participating in the plan, assuming that separate accounts are maintained for each employee. If a separate account is not maintained for each employee, section 404(a) (5) does not allow an employer to deduct the contribution even105 in the year in which an attributable amount is included in the gross income of an employee. See also sec. 1.404(a)-12(b) (3), Income Tax 563 Regs. If, on the other hand, the Prime Plan is a welfare benefit plan, subpart D generally limits the employer's deduction for its contributions to the amount that would have been deductible had it provided the benefits directly to its employees. Subpart D's limitations are inapplicable when section 419A(f) (6) applies. Section 419A(f) (6) generally lets an employer fully deduct its contributions in the year made, although its employees may not have to report these contributions as income until a later year. We agree with petitioners that the Prime Plan was a welfare benefit fund. See sec. 419(e) (1), (2) (B), (3) (B); sec. 1.162-10, Income Tax Regs; see also Schneider v. Commissioner, T.C. Memo 1992-24">T.C. Memo. 1992-24; Moser v. Commissioner, T.C. Memo. 1989-142, affd. on other grounds 914 F.2d 1040">914 F.2d 1040 (8th Cir. 1990). Mr. Weiss testified credibly that he designed the Prime Plan intending entirely to provide employees with "real" welfare benefits that would not be subject to 106 abuse, and we read the record to support his testimony. The DWB's under the Trust Agreement also are not payable upon the happening of a certainty, but more closely resemble insurance payable only in the case of an uncertainty. See Harry A. Wellons, Jr., M.D., S.C. v. Commissioner, 31 F.3d 569">31 F.3d 569 (7th Cir. 1994), affg. T.C. Memo 1992-704">T.C. Memo. 1992-704. Although the Prime Plan had features of deferred compensation (e.g., the payment of DWB's upon an employee's termination from employment based on his or her compensation and length of service, the presence of vesting schedules), these features were swallowed up by the Prime Plan's valid welfare benefit purpose so as to make the deferred compensation features incidental and meaningless for purposes of our analysis. Respondent argues that this Court's jurisprudence provides that the DWB's were deferred compensation, citing mainly Grant-Jacoby, Inc. v. Commissioner, 73 T.C. 700">73 T.C. 700 (1980); New York Seven-Up Bottling Co. v. Commissioner, 50 T.C. 391">50 T.C. 391, 398 (1968); New York Post Corp. v. Commissioner, 40 T.C. 882">40 T.C. 882, 888 (1963);107 and Harry A. Wellons, Jr., M.D., S.C. v. Commissioner, T.C. Memo 1992-704">T.C. Memo. 1992-704. We disagree. The plan at issue in each of the cases cited by respondent is distinguishable from the Prime Plan. Such is also true with respect to the benefits provided under each plan. Nor do we agree with respondent's reading of the Seventh Circuit's opinion in Harry A. Wellons, Jr., M.D., S.C. v. 564 Commissioner, 31 F.3d 569 (7th Cir. 1994), to provide that the DWB's were deferred compensation because the Prime Plan had some indicia of a deferred compensation plan. All welfare benefit plans bear some element of deferred compensation, see Wheeler v. United States, 768 F.2d 1333">768 F.2d 1333, 1336 (Fed. Cir. 1985); Greensboro Pathology Associates, P.A. v. United States, 698 F.2d 1196">698 F.2d 1196, 1200 (Fed. Cir. 1982), and respondent's reading of the Seventh Circuit's opinion emasculates the right of a taxpayer to avail itself of the tax attributes of a welfare benefit plan. Unlike the Prime Plan, the plan at issue in Wellons was "more akin to a deferred compensation plan than the sort of 'welfare benefits' 108 arrangement contemplated by the regulations". Harry A. Wellons, Jr. M.D., S.C. v. Commissioner, 31 F.3d at 572. Nor do we agree with respondent's claim that the DWB's were deferred compensation because an employer could voluntarily terminate its participation in the Prime Plan. We are unable to find any requirement in the applicable statutory and regulatory provisions that would limit welfare benefits to cases in which an employer could not voluntarily terminate its participation in a plan. We find in the statutory text that the Congress knew how to say "involuntary separation" when it wanted. See, e.g., sec. 501(c) (17) (D), which is referenced in sec. 419A(f) (1) (A). In the absence of a legislative pronouncement that limits severance benefits to cases where an employer could not voluntarily terminate its participation in a plan, we refuse to adopt such a pronouncement here. Although respondent is concerned that the ability of a participating employer to terminate voluntarily its participation in the Prime Plan allows the employer to control the timing of income to its employees, we regard that concern as misplaced. Respondent's concern could also109 be expressed with respect to the pension plan of a corporation owned by a single shareholder. Although the shareholder may be the only employee, it does not necessarily follow that such a pension plan provides for receipt of deferred compensation merely because the owner/shareholder has the ability to terminate the pension plan at will. We hold for petitioners on this issue. 565 2. 10 or More Employer Plan; Experience-Rating AgreementsWe turn to the second issue; namely, whether the Prime Plan is a "10 or more employer plan" that lacks "experience-rating arrangements with respect to individual employers." See sec. 419A(f) (6). Petitioners assert that the Prime Plan is within section 419A(f) (6); i.e., the Prime Plan is a single plan that covers more than 10 employers, no one of which made more than 10 percent of the Trust's total contributions, and the plan has no experience-rating arrangements with respect to individual employers. Respondent asserts that the Prime Plan is outside the scope of section 419A(f) (6); i.e., the Prime Plan is an aggregation of plans that has experience-rating arrangements with respect to all participating employers. We agree with respondent that110 the Prime Plan does not meet the requirements of section 419A(f) (6). The Prime Plan is an aggregation of separate welfare benefit plans, each of which has an experience-rating arrangement with the contributing employer. We start our analysis with a discussion of the history of subpart D. 13 Subpart D, which consists of sections 419 and 419A, was enacted by the Congress as part of Deficit Reduction Act of 1984, Pub. L. 98-369, secs. 511(a) and 512(a), 98 Stat. 484, 854-862. Subpart D limits an employer's deduction for contributions to a welfare benefit plan. The Congress enacted subpart D because it was concerned with the law under which employers received current deductions for contributions to welfare benefit plans, while the benefiting employees excluded these amounts from their current income. As stated by the House Ways and Means Committee, in proposing a change to the prior law, The committee has concluded that the favorable tax treatment of employer contributions to welfare benefit plans, as compared with employer payments of wages and salary, is inappropriate in view of the favorable tax treatment already provided to employees, i.e., the exclusion of many of these benefits111 from adjusted gross income. In addition, the committee believes that the current rules under which employers may take deductions for plan contributions far in advance of when the benefits are paid allows excessive tax-free accumulation of funds. The committee's concern has been caused by recent discussion among tax practitioners as to the tax-shelter potential of welfare benefit plans. 566 Commentators have pointed out that the combination of advance deductions for contributions and the availability of tax exemption for certain employee benefit organizations (such as the voluntary employees' beneficiary association or VEBA) provides tax treatment very similar to that provided to qualified pension plans, but with far fewer restrictions. * * * In one article on the use of employee benefit plans as a tax shelter, an example is given of how a small professional corporation may utilize the tax benefits of a severance pay plan funded by a VEBA. In this example, the employees of the corporation are two doctors, ages 50 and 55, with annual salaries of $ 150,000 and $ 200,000, respectively, and three other workers, ages 20 to 36, with annual salaries of $ 10,000 to $ 18,000. The example indicates112 that the corporation could make tax deductible annual contributions to a tax-exempt VEBA of more than $ 55,000 annually under terms that would make it unlikely that the three lower-paid employees would receive substantial benefits from the plan. * * Thus, the committee is concerned that substantial advance funding of welfare benefits will ultimately lead to an unacceptable tax burden for many taxpayers who do not participate in these programs. * * * [H. Rept. 98-432 (Part 2), at 1275-1276 (1984).]As reflected in the report of the conference, the Congress enacted subpart D with the understanding that subpart D's principal purpose was "to prevent employers from taking premature deductions, for expenses113 that have not yet been incurred, by interposing an intermediary organization which holds assets which are used to provide benefits to the employees of the employer." H. Conf. Rept. 98-861, at 1155 (1984); 1984-3 C.B. (Vol. 2) 1, 409. The conference report states that "While in many cases welfare benefit funds are designed to function in a manner similar to insurance arrangements, the conference [was] concerned that there [were] no clear standards of limitations applicable to such funds that [prevented] their utilization for substantial nonqualified deferred compensation funding outside the general pension plan funding, accrual and vesting rules." [Id. at 1155.]The conference report commented as follows on the meaning of the term "funds": a retired life reserve or premium stabilization account ordinarily is to be considered a fund or part of a fund, since such an account is maintained for an individual employer and that employer has a determinable right to have the amount in such an account applied against that employer's future costs of benefit claims or insurance premiums. A similar situation exists with respect to premium arrangements, 114 under which an employer may, in some cases, pay an insurance company more in a year than the benefit costs incurred in that year and the employer has an unconditional right 567 in a later year to a refund or credit of the excess of payments over benefit costs. In contrast, an ordinary disability income policy under which an employer pays a premium so that employees who become disabled in that year may collect benefit payments for the duration of disability is not a fund, since the employer has no right to recover any part of the premium payment and the future benefit payments to an employee whose disability occurs during the period for which the premium is paid is not contingent on any further payments by the employer. * * [Id. at 1155.]yThe rules of subpart D, however, do not apply to a multiemployer plan described in section 419A(f) (6). Section 419A(f) (6) provides: (6) Exception for 10-or-More Employer Plans.-- (A) In general.--This subpart shall not apply in the case of any welfare benefit fund which is part of a 10 or more employer plan. The preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers. 115 (B) 10 or more employer plan.--For purposes of subparagraph (A), the term "10 or more employer plan" means a plan-- (i) to which more than 1 employer contributes, and (ii) to which no employer normally contributes more than 10 percent of the total contributions contributed under the plan by all employers.According to the conferees, this exception was prescribed "because under such a plan, the relationship of a participating employer to the plan often is similar to the relationship of an insured to an insurer." H. Conf. Rept. 98-861, at 1159; 1984-3 C.B. (Vol. 2) at 413. The conferees went on to explain that: "notwithstanding compliance with the 10-percent rule, and consistent with the discussion above on definition of a fund, a plan is not exempt from the deduction limits if the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund than an insured to an insurer." [Id. at 1159.]Petitioners argue that the Prime Plan is within this exception, and that any uncertainty should116 be resolved in their favor because respondent has not issued proper guidance under section 419A(f) (6). Petitioners assert that Mr. Weiss asked the Commissioner for a ruling on the Prime Plan, and that the Commissioner refused to accommodate him. Petitioners assert that Mr. Weiss was forced to withdraw his request for ruling 18 months after he submitted it because he was led to believe that the Commissioner would never 568 rule on his request. We understand petitioners to argue that the Commissioner should have issued Mr. Weiss guidance under section 419A(f) (6), and that the Commissioner should now be penalized for failing to do so. Petitioners rely on Gould v. Gould, 245 U.S. 151">245 U.S. 151, 153 (1917), for the proposition that any doubts as to the reach of section 419A(f) (6) must be resolved in their favor. We do not agree with petitioners that any ambiguity is to be resolved in their favor. See Helvering v. Stockholms Enskilda Bank, 293 U.S. 84">293 U.S. 84, 93 (1934). Subsequent to the Gould case, the Supreme Court stated as follows: We are not impressed by the argument that, as the question here decided is doubtful, all doubts should117 be resolved in favor of the taxpayer. It is the function and duty of courts to resolve doubts. We know of no reason why that function should be abdicated in a tax case more than in any other. * * * [White v. United States, 305 U.S. 281">305 U.S. 281, 292 (1938).]See United States v. Stewart, 311 U.S. 60">311 U.S. 60, 71 (1940) ("those who seek an exemption from a tax must rest it on more than a doubt or ambiguity. Exemptions from taxation cannot rest upon mere implications. * * * Exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced"; (citations and internal quotation marks omitted)). Section 419A(f) (6) may be interpreted in light of all pertinent evidence, textual and contextual, as to its meaning. See Commissioner v. Soliman, 506 U.S. 168">506 U.S. 168, 173 (1993); Crane v. Commissioner, 331 U.S. 1">331 U.S. 1, 6 (1947); Old Colony R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 560 (1932); see also Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274">106 T.C. 274, 300 (1996). A statute speaks for itself, and its legislative118 history will help us discern the meaning of the words therein when the words are "'inescapably ambiguous'". Garcia v. United States, 469 U.S. 70">469 U.S. 70, 76 n.3 (1984) (quoting Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384">341 U.S. 384, 395 (1951) (Jackson, J., concurring)); see also Ex parte Collett, 337 U.S. 55">337 U.S. 55 (1949). Legislative history will also help us to discern text, which is otherwise unambiguous, when the text's plain meaning defeats the statute's stated purpose. As observed recently by the Court of Appeals for the Ninth Circuit, the circuit in which an appeal of this case lies: 569 We may not adopt a plain language interpretation of a statutory provision that directly undercuts the clear purpose of the statute. In Brooks v. Donovan, 699 F.2d 1010">699 F.2d 1010 (9th Cir. 1983), we refused to adopt a plain language interpretation of a statute governing pension funds. We reasoned that the "court must look beyond the express language of a statute where a literal interpretation 'would thwart the purpose of the overall statutory scheme or lead to an absurd or futile result.'" 119 Brooks, 699 F.2d at 1011 (quoting International Tel. & Tel. Corp. v. General Tel. & Elec. Corp., 518 F.2d 913">518 F.2d 913, 917-918 (9th Cir. 1975)). In reaching our conclusion, we followed the Supreme Court's approach in United States v. American Trucking Associations, 310 U.S. 534">310 U.S. 534, 60 S. Ct. 1059">60 S.Ct. 1059, 84 L. Ed. 1345">84 L.Ed. 1345 (1940). There the Court noted that "when [a given] meaning has led to absurd results * * this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one 'plainly at variance with the policy of the legislation as a whole,' this Court has followed that purpose, rather than the literal words." Trucking Associations, 310 U.S. at 543. * * * [Albertson's, Inc. v. Commissioner, 42 F.3d 537">42 F.3d 537, 545 (9th Cir. 1994), affg. 95 T.C. 415">95 T.C. 415 (1990).]Accordingly, in interpreting section 419A(f)(6), we look to the statute as written by the legislators, 120 and we consult the statute's legislative history to learn its intended purpose and to resolve ambiguity in the words used therein. Landgraf v. USI Film Prods., 511 U.S. 244">511 U.S. 244 (1994); Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102">447 U.S. 102, 108 (1980). Petitioners must prove that the Prime Plan falls within the scope of section 419A(f) (6), which, as they read it, removes the Prime Plan's participating employers from the bowels of subpart D. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); see also Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, 593 (1943). Deductions are strictly construed and allowed only when a "'clear provision'" allows for one. INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79, 84 (1992) (quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934)); Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 493 (1940). Petitioners argue that the Prime Plan is a single plan. Petitioners assert that the word "plan" is construed broadly, and that the need121 for the Trust to have a single pool of funds would make the phrase "experience-rating arrangements with respect to individual employers" surplusage. Petitioners assert that the Congress enacted section 419A(f) (6) "to encourage small employers to provide on a tax-advantaged basis welfare benefits to their employees, who, generally speaking, had not received such benefits in the past." 570 Petitioners assert that the Prime Plan satisfies Congressional intent. Petitioners also argue that the Prime Plan lacked "experience-rating arrangements with respect to individual employers". Petitioners define the relevant phrase by reference to a footnote in the House committee report; the footnote indicates that the term "purely experience-rated" means "the employer is entitled to an automatic rebate if the amount paid exceeds the benefit claims and is liable if the benefit claims exceed the amount paid". H. Rept. 98-432 (Part 2), supra at 1280 n.18. Petitioners also look to section 1851(a) (8) (B) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2860, which describes an experience-rated insurance policy to mean "the employer has a contractual right to a refund or dividend based solely122 upon the experience of such employer". Petitioners assert that the conferees' use of the word "often" in their explanation of section 419A(f) (6) means that the Prime Plan did not have to function as a risk-distributing insurer in order to fall within that section. Petitioners assert that the Suspense Account satisfied any risk shifting requirement inherent in section 419A(f) (6) because actuarial gains were pooled to supplement underfunded benefits of other employers. We disagree with petitioners' assertion that the Prime Plan is a single plan for purposes of subpart D. The Prime Plan is nothing more than an aggregation of individual, unique plans formed by separate employers who have: (1) Delegated to a common administrator their (the employers') duties and responsibilities with respect to the respective plans that each employee/owner has tailored personally for his or her business and (2) contributed funds to a trust overseen by a common trustee that was required to disburse each employer's contributions, and earnings thereon, primarily for the benefit of the contributing employer's employees. The fact that Prime structured the Prime Plan to have one administrator, one Trust, 123 and a Suspense Account with some commonality among all employers does not change the fact that each of the employers separately had the unbridled authority to select many of the relevant terms under which its employees would collect benefits from the Prime Plan, that no Employee Group had a right to any contributions, or earnings thereon, which had been made by the employer of another Employee571 Group, and that a severed employee could end up receiving less than his or her promised benefit, even though the Prime Plan, as a whole, had enough assets to compensate the employee for this shortage. We reject petitioners' claim that the Prime Plan is a "10 or more employer plan" based on the language and Congressional purpose of subpart D and section 419A(f) (6). We interpret the word "plan" to mean that there must be a single pool of funds for use by the group as a whole (e.g., to pay the claims of all participants), and we interpret the phrase "10 or more employer plan" to mean that 10 or more employers must contribute to this single pool. We do not interpret the statutory language to include a program like the instant one where multiple employers have contributed funds to an independent124 party to hold in separate accounts until disbursed primarily for the benefit of the contributing employer's employees in accordance with unique terms established by that employer. We are unpersuaded that the word "plan", as it appears in section 419A(f) (6), is satisfied by Prime's attempt to aggregate multiple plans as a single plan. In arguing that the Prime Plan is a unitary "plan" for 10 or more employers within the scope of section 419A(f) (6), petitioners rely on the following features: (1) The Prime Plan had a common administrator, and the Trust had a single trustee, neither of whom was accountable to or controlled by any one participating employer; (2) participating employers irrevocably delegated to Prime the responsibility for a variety of administrative and other functions; (3) Prime exercised unreviewable authority over the calculation of employer contributions, as well as the determination of benefit distributions and forfeitures to the Suspense Account; (4) Prime was responsible for determining the amount of all disbursements from the Suspense Account in accordance with an objective formula set forth in the Trust Agreement; and (5) the Suspense Account served a limited125 common interest of all participating employers. We conclude, however, that the foregoing features are outweighed by the following features that point to the result that we reach today: (1) Prime was required to maintain separate accounts and a separate accounting for each Employee Group; (2) the Trust Agreement limited an employee's right to benefits under the Prime Plan to the assets of his or her Employee Group; (3) an annual valuation 572 was performed for each Employee Group's account, and an annual valuation has never been performed for the Trust as a whole; (4) the summary plan description required by section 102 of ERISA was prepared separately for each Employee Group; (5) the arrangement and the adoption agreement signed by each employer were very similar to an arrangement and adoption agreement used by separate employers' establishing a separate plan under the terms of a master plan; (6) each employer selected its employees' level of benefits, vesting schedule, and minimum participation requirements, separate and apart from the selections made by the other employers; (7) each employer's contribution benefited primarily its employees, and not the employees of other employers; 126 (8) the Trust Agreement provided rules under which an employee's benefits would be reduced in the event of a shortfall, and without subsidy from the Trust as a whole; and (9) the Prime Plan did not pool all claim risks within the Trust. Petitioners' argument focuses mainly on the fact that a single trust serviced multiple employers. Their argument ignores the fact that the account of each participating employer was kept separate from that of every other employer, and, most importantly, that an employer's contributions benefited primarily its own Employee Group. The applicability of section 419A(f) (6) does not rest on whether more than nine employers contribute to a single trust. Section 419A(f) (6) requires a single plan, the existence of which is not established by Prime's sponsorship of a program under which multiple employers contribute to a single trust. But for the fact that a single promoter formed a common trust and offered many employers the ability to enroll in a program that was administered by a common overseer, we find little meaningful commonality among each participating employer's participation in the Prime Plan. Contrary to petitioners' assertion, our interpretation127 of the term "10 or more employer plan" does not make surplusage of the phrase "experience-rating arrangements with respect to individual employers". The phrase has meaning, for example, when a multiple employer trust maintains a single pool of assets from which all claims could be paid and charges each group of participants a different premium. If one were to look solely at physicians and construction workers, two of 573 the vocations of employees covered by the Prime Plan, and assume that the turnover rate of these two groups is different, the Prime Plan, if structured with a single pool of assets, would almost certainly have to charge different premiums to the different groups based on each group's turnover rate in order to lure them into and retain them in the plan. In the context of the Prime Plan, however, a single pool was simply not desirable because prospective participating employers did not want to accept the risk that their contributions would be used to pay the severance claims of other employers' employee groups that possessed different levels of severance risk. We find additional support for our interpretation in the testimony of Charles C. DeWeese, F.S.A., M.A.A.A., an128 expert on multiple employer plans, who concluded that each Employee Group was a separate plan. Mr. DeWeese testified that the typical multiple employer trust allows a participant to collect benefits from 100 percent of the trust's assets, and petitioners' expert, E. Paul Barnhart, F.S.A., M.A.A.A., did not disagree. 14 Mr. Barnhart testified that the attributes described by Mr. DeWeese were found typically in a multiple employer trust, and that, except for the Trust, he (Mr. Barnhart) had never seen a multiple employer trust that did not possess those attributes. Mr. DeWeese and Mr. Barnhart both testified that the Prime Plan was dissimilar to a traditional multiple employer plan, mainly because of its lack of these attributes.129 We disagree with petitioners' reading of the legislative history to indicate that the Congress enacted section 419A(f) (6) to encourage plans such as the Prime Plan. We read this history to point to a legislative intent that is contrary to the intent espoused by petitioners. The House committee articulated its concern about the tax-shelter potential of welfare benefit plans and about the ability of small business owners to achieve the effect of a qualified pension plan, but with fewer limitations. H. Rept. 98-432 (Part 2), supra at 1275. The committee also noted that "substantial advance funding 574 of welfare benefits will ultimately lead [inappropriately] to an unacceptable tax burden for many taxpayers who do not participate in these programs." Id. at 1276. Bearing these expressions of legislative intent in mind, we are unable to agree with petitioners that the Congress was encouraging the type of tax planning techniques promoted in the Prime Plan. We also disagree with petitioners' assertion that the Prime Plan lacked "experience-rating arrangements with respect to individual employees". The legislative history of subpart D sets forth the House committee's intent to disallow130 the tax benefits which petitioners claim flow from the Prime Plan, and the examples of abuse that the House committee cited in its report describe precisely what Prime is attempting to accomplish through the Prime Plan. The legislative history states that section 419A(f) (6) was enacted because the relationship of a participating employer to a 10 or more employer plan typically resembles the relationship of an insured to an insurer. H. Conf. Rept. 98-861, supra at 1159; 1984-3 C.B. (Vol. 2) at 413. The legislative history states further that a 10 or more employer plan is outside the scope of section 419A(f) (6) if "the liability of any employer who maintains the plan is determined on the basis of experience rating because the employer's interest with respect to such a plan is more similar to the relationship of an employer to a fund than an insured to an insurer." H. Conf. Rept. 98-861, supra at 1159; 1984-3 C.B. (Vol. 2) at 413. The term "experience-rated" means generally that premiums (contributions) are adjusted to reflect experience. See also United States v. American Bar Endowment, 477 U.S. 105">477 U.S. 105, 107 (1986)131 ("experience rated * * means that the cost of insurance to the group is based on that group's claims experience, rather than general actuarial tables"). The Congress knew this, as evidenced by the fact that the House committee defined the term "purely experience-rated" in its report. Yet, the Congress declined to inscribe the term "experience-rated" in section 419A(f) (6), choosing, instead, to use the term "experience-rating arrangements". We believe that the scope of the term "experience-rating arrangements" is wider than that of "experience-rated". The conferees stated that a plan is outside the scope of section 419A(f)(6) if any employer's liability "is determined on the basis of experience rating". If the conferees had meant to equate the term "experience-rating arrangements" with the term "experience 575 rated", they could (and we believe would) have said that a plan is outside the scope of section 419A(f)(6) if any employer's liability "is experience rated". The conferees did not. Nor did the Congress provide in section 419A(f)(6)(A) that the first sentence therein "shall not apply to any plan * * [that is experience rated] with respect to individual employers." The essence132 of experience rating is the charging back of employee claims to the employer's account. The Prime Plan accomplished the same result by adjusting the employees' benefits to equal its employer's contributions. The Prime Plan charged back the employees' claims to their employers' accounts by carrying the accounts' yearend balances over to future years and limiting an employee's benefits to the amount in his or her employer's account. This was an experience-rating arrangement. Mr. DeWeese concluded that experience-rating may occur by adjusting benefits, rather than premiums, and Mr. Barnhart agreed. Mr. Barnhart also acknowledged that the term "experience-rating" means that, over time, the premiums less expenses equal the benefits. This credible expert testimony supports our view that the Prime Plan had experience-rating arrangements with respect to all participating employers. We also conclude that the Prime Plan had experience-rating arrangements because each employer's relationship to the Trust was more akin to the relationship of an employer to a fund, than of an insurer to an insured. In the typical setting of a self-funded welfare benefit plan, an employer contributes to a fund133 from which all of its employees' claims are paid; another employer's employees may not recover amounts from the first employer's fund. An insurer in the typical insurer/insured relationship, on the other hand, usually collects premiums from many employers and pays the claims of each of the employer's employees. The insurer typically spreads the risk of claims among all employers by charging each employer a premium commensurate with its covered risk. The relationship of the Trust to each participating employer more closely mirrored self-funding than insurance. As a matter of fact, the Trust Agreement provided that each employee's claim could be funded only from the account of the employee's employer, and that an employee did not have recourse against the employer, the Trust, or any other person, to the 576 extent of any shortfall. It also is relevant that: (1) Prime accounted for each employer's account separately; (2) the Trust Agreement provided rules under which an employee's benefits would be reduced in the event of a shortfall; (3) the Trust held and invested an employer's contributions until benefits had to be paid to its employees; (4) the Prime Plan did not pool all claim risk134 within the Trust; and (5) an employer's contributions to the Trust could pay its employees' claims after the year's end, while an insurer will not return an insured's premiums to it at the end of the policy. Petitioners argue that the Suspense Account provided the risk shifting necessary for the Prime Plan to qualify under section 419A(f)(6). We do not agree. Notwithstanding the reasons asserted by petitioners for the Suspense Account, the record shows clearly that the Suspense Account's primary purpose was to pay fees and expenses, and that only a de minimis amount of funds was actually disbursed from the Suspense Account to satisfy employee claims. The record also demonstrates that amounts were not transferred into the Suspense Account based on exposure to risk, and that the Suspense Account did not serve to spread among the participating employers the risk of incurring DWB's. Even if one were to assume arguendo that the Suspense Account did serve to shift some risk, our view would not change. We are unable to find that any such shift would have been meaningful. As a point of fact, the risk of severance never shifted from the employers to the Trust. 15 The Trust never assumed135 any risk of loss for any amount placed therein. Contributions never provided a meaningful benefit to persons other than the contributing employer's employees. Although it is true that actuarial gains were pooled in the Suspense Account to supplement underfunded benefits of other employers, we do not believe that this pooling technique shifted risk significantly. As a point of fact, less than 0.1 percent of the benefits came from the Suspense Account. Accordingly, we hold that the Prime Plan is not within the requirements of section 419A(f)(6). Thus, the participating 577 employers are subject136 to subpart D. Under section 419, each employer's deduction for its contribution to its separate plan is limited to the plan's "qualified cost" for the year, less the plan's after-tax income. Sec. 419(a), (b), and (c); see also National Presto Indus., Inc. v. Commissioner, 104 T.C. 559">104 T.C. 559, 566-567 (1995). An employer's qualified cost equals the qualified direct cost for the taxable year, plus an addition to a qualified asset account. Sec. 419(c)(1). Respondent has proffered to the Court calculations of each corporation's qualified cost and allowable deduction with respect to its plan. These calculations show that Young & Young is entitled to deduct $ 11 for 1989, and that no other corporation is allowed a deduction with respect to its plan. Petitioners do not dispute the mechanics of respondent's calculations, and petitioners have not supplied the Court with alternative calculations of qualified cost. Petitioners' position, which we have rejected, is that the corporations can deduct their contributions in full. We have reviewed respondent's calculations, and we are satisfied that they are correct. Accordingly, we sustain respondent's determination that137 the corporations are not allowed any deduction for the subject years with respect to their contributions to the Prime Plan, except for Young & Young which may deduct $ 11 for 1989. 163. PenaltiesRespondent determined that each corporate petitioner was liable for a penalty under section 6662(a) because it substantially understated its Federal income tax. See sec. 6662(b)(2). As relevant herein, section 6662(a) imposes an accuracy-related penalty equal to 20 percent of an underpayment that is due to a substantial understatement of income tax. In the case of a corporation, a substantial understatement exists if its income tax was understated by the greater of 10 percent of the tax required to be shown on the return or $ 10,000. Sec. 6662(d)(1)(A). For this138 purpose, tax is not understated to the extent that the treatment of an item is based on substantial 578 authority or is adequately disclosed in the return or in a statement attached to the return. Sec. 6662(d)(2)(B). Substantial authority exists when the weight of authority supporting the treatment of an item is substantial when compared to the weight of authority supporting contrary treatment. Sec. 1.6662-4(d)(3)(i), Income Tax Regs. To determine whether substantial authority is present, all authorities which are relevant to the tax treatment of an item, including those authorities pointing to a contrary result, are taken into account. Id. Examples of authority include statutory and regulatory provisions, legislative history, and administrative interpretations of the Commissioner. Sec. 1.6662-4(d)(3)(iii), Income Tax Regs. Legal opinions are not authority. The authorities underlying a legal opinion, however, may give rise to substantial authority for the tax treatment of an item. Id.We conclude that the corporate petitioners are not liable for the penalties in dispute. We have agreed with petitioners that the Prime Plan is not a plan of deferred compensation and whether the139 Prime Plan is within the scope of section 419A(f)(6) is a novel question. Although we decide the latter question in favor of respondent, we are persuaded that petitioners' position is supported by a well-reasoned construction of the relevant statutory provisions. Sec. 1.6662-4(d)(3)(iii), Income Tax Regs. We decline to uphold respondent's determination of the penalties against the corporate petitioners in the circumstances herein. We have considered all arguments made by the parties for contrary holdings and, to the extent not discussed above, find them to be irrelevant or without merit. 579 To reflect the foregoing, Decision will be entered for petitioners in docket Nos. 2544-94, 2546-94, 5755-94, 5893-94, and 9229-94; decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties in docket Nos. 2545-94 and 9230-94; an appropriate decision for respondent will be entered in docket No. 5754-94 as to the deficiency and the addition to tax under section 6651(a)(1) and for petitioner with respect to the penalty. Footnotes1. Cases of the following petitioners are consolidated herewith: N.L. Booth & Son, Inc., docket No. 2545-94; John N. Booth & Debra Booth, docket No. 2546-94; Young & Young, Ltd., docket No. 5754-94; Howard S. Young & Elaine P. Young, docket No. 5755-94; Bruce E. Traegde & Patricia Traegde, docket No. 5893-94; Billy J. Johnson & Ruth Johnson, docket No. 9229-94; and Johnson Systems, Inc., docket No. 9230-94.↩2. We have obtained this name from the underlying trust agreement, as originally drafted and as later amended on the first two occasions. The third amended version of the trust agreement used the name "Prime Financial Benefits Multiple Employer Welfare Benefit Plan and Trust". The fourth and fifth amended versions used the name "Prime Financial Multiple Employer Welfare Benefit Plan and Trust". Our use of the original name refers to all of these versions.↩3. Although we use the word "plan" in the singular to refer to the Prime Plan, we do not mean to suggest that the Prime Plan is a single plan. As discussed below, we conclude it is not. We use the word "plan" merely for clarity and convenience.↩4. All of the years refer to the calendar year, except: (1) N.L. Booth's 1989 and 1990 years refer to its taxable years ended July 31, 1990 and 1991, respectively, and (2) Systems' 1990 year refers to its taxable year ended Sept. 30, 1991.↩5. In light of a concession by respondent that amounts attributable to contributions to the Prime Plan are not includable in the gross income of the individual petitioners under sec. 83 if the plan is determined to be a welfare benefit plan, our holding on this issue makes it unnecessary to decide certain other issues in dispute; namely: (1) Whether the Trust maintains separate accounts for each employee under sec. 404(a) (5), (2) whether the employees' rights are subject to a substantial risk of forfeiture under sec. 83, (3) whether the Traegdes extended the period of limitation for assessment of tax on income recognizable under sec. 83, and (4) whether the petitioning individuals are liable for penalties under sec. 6662(a)↩. We express no opinion on these issues.6. Our holding on this issue moots another issue in dispute; namely, whether contributions to the Prime Plan are current or capital expenditures. We express no opinion on this issue.↩7. With respect to the addition to tax under sec. 6651(a) (1), the parties stipulated that Young & Young filed its 1989 tax return untimely. Given the additional fact that in petitioners' brief they do not challenge respondent's determination of this addition to tax, we sustain respondent's determination without further discussion. Rule 142(a).↩8. The Prime Plan's initial actuary was Laventhol & Horwath. Deloitte & Touche replaced Laventhol & Horwath as the Prime Plan's actuary in 1990.↩9. The Trust Agreement generally required the maintenance of separate accounts for each Covered Employee to assure each participating employer that any contributions that it made to the Prime Plan were segregated and considered assets of its Employee Group.↩10. We are unable to determine whether the New York Trust is the same entity as the Trust. The entities have different E.I.N.'s, and the New York Trust's Forms 1041 reported that it was created on Aug. 1, 1988, while the Trust's Forms 1041 reported that it was created on Aug. 31, 1988. The 1990 Form 1041 filed for the Trust also reported that the "OLD NAME OF FIDUCIARY" was "NORTHERN TRUST BANK OF ARIZONA N.A.". Our Opinion is not affected by whether the New York Trust and the Trust are the same or different entities.↩11. Subpart D refers to subpart D of subchapter D of chapter I of subtitle A of the Code.↩12. The notice also increased the Johnsons' 1990 income by $ 184,099 on account of "Agreed Items".↩13. In National Presto Indus., Inc. v. Commissioner, 104 T.C. 559 (1995), and General Signal Corp. v. Commissioner, 103 T.C. 216">103 T.C. 216 (1994), supplemented by 104 T.C. 248">104 T.C. 248↩ (1995), this Court addressed other issues under subpart D. 14. We were not impressed with the testimony of petitioners' other expert, Kenneth D. Klingler, F.S.A. We find his testimony at trial unpersuasive and unhelpful, and we do not rely on it. Sammons v. Commissioner, 838 F.2d 330">838 F.2d 330, 334 (9th Cir. 1988), affg. in part and revg. in part on another issue T.C. Memo. 1986-318; Christ's Estate v. Commissioner, 480 F.2d 171">480 F.2d 171, 174 (9th Cir. 1973), affg. 54 T.C. 493">54 T.C. 493 (1970); Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274">106 T.C. 274, 301-302↩ (1996).15. In this regard, we disagree with Mr. Barnhart, who testified that he believed the Suspense Account operated to share the risk of severance among employers. Relying on this belief, Mr. Barnhart concluded that the Suspense Account operated to make the Prime Plan a single plan. Mr. Barnhart agreed, however, that, absent the shift of severance through the Suspense Account, the Prime Plan would be an aggregation of separate plans.↩16. Respondent determined, and petitioners do not dispute, that Young & Young was a qualified personal service corporation taxable at a single rate of 34 percent. See sec. 11(b)(2). Accordingly, Young & Young's $ 11 deduction reduces its deficiency by $ 4.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620588/	LENNARD D. GREENBAUM and MARGERY E. GREENBAUM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGreenbaum v. CommissionerDocket No. 7898-84.United States Tax CourtT.C. Memo 1987-222; 1987 Tax Ct. Memo LEXIS 216; 53 T.C.M. (CCH) 708; T.C.M. (RIA) 87222; April 29, 1987. Edward I. Sussman, for the petitioners. Brian Masumoto, for the respondent. PARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined deficiencies in petitioners' 1978 and 1979 Federal income tax of $26,992.15 and $185.00, respectively. By amendment to answer, respondent also seeks increased interest pursuant to section 6621(c). 1 After concessions, 2 the issues for decision are: (1) whether the purchase and subsequent leasing of certain computer equipment by the Threeby Associates general partnership ("3B") should be respected for Federal tax purposes; if so, (2) whether 3B claimed the proper amount of depreciation in its first taxable year; (3) whether 3B qualified as a "noncorporate lessor" eligible to claim the investment tax credit ("ITC") under section 46(e)(3); and, (4) whether petitioners' investment with 3B generated a substantial underpayment of tax attributable to a tax-motivated transaction within219 the meaning of section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated and the stipulation and attached exhibits are incorporated herein by this reference. Petitioners resided in Altamonte Springs, Fla., when they filed their petition. The TransactionIn 1976, Tom Martin and Paul Raynault formed Computer Financial Company, Inc. ("CFI") to own and lease computer equipment.220 CFI also projected residual values of large computers and advised computer owners, lessors and lessees with respect thereto. On May 24, 1978, CFI purchased from International Business Machines Corp. ("IBM") the following computer equipment (sometimes referred to as the "equipment" or the "3148") at the prices set forth below: 1 Model 3148-K Central Processor$658,450.001 Model 2150 Control Store Extension13,950.001 Model 4660 Integrated Storage Control63,220.001 Model 3047-1 Power Unit14,440.00$749,160.00The Agreement for Purchase of IBM Machines provides: The Customer agrees to purchase and International Business Machines Corporation (IBM) by its acceptance of this Agreement agrees to sell, in accordance with the following terms and conditions, the machines and features listed below and more fully described in the attached Specification Sheets. Under such terms and conditions, IBM will 1) sell machines to the Customer, 2) provide warranty service for machines and 3) as available, furnish programming and programming services, all as described herein. The Customer agrees to accept the machines, warranty service, programming and programming services221 under the terms and conditions of this Agreement. The Customer further agrees with respect to the machines and programming to accept the responsibility for 1) their selection to achieve the Customer's intended results, 2) their use and 3) the results obtained therefrom. The Customer also has the responsibility for the selection and use of, and results obtained from, any other equipment, programs or services used with the machines and programming. It further provides: Commencing on the Date of Installation of each machine and continuing for the duration of the warranty period, IBM agrees to provide, at no additional charge to the Customer, except as set forth in the Section entitled "Exclusions," warranty service to keep the machines in, or restore the machines to, good working order. Also on May 24, 1978, CFI executed a lease agreement with Meijer, Inc., ("Meijer") a Michigan corporation, providing for the rental of all the equipment to Meijer for an initial term of 18 months commencing on June 1, 1978. After the initial term, the lease was terminable by either party. The rent payments under the lease were to be made according to the following schedule: 3Months 1 through 12$23,501 per monthMonths 13 through 18$20,288 per month222 The monthly rent decreased by $3,213 after the twelfth month, when IBM's free maintenance policy terminated. 4The Meijer lease was a net lease the benefits of which were assignable by the lessor. Upon its termination the equipment was to be returned to the lessor or the lessor's designee. On June 1, 1978, petitioner 5 entered into an agreement for the formation of 3B, a New York general partnership. Also signing the agreement were Barbara H. Schwartz, Alfred P. Slaner, Raymond Dubrowski and Beatrice Goldschmidt for Golby Company. The partnership223 filed its income tax returns for the calendar years in issue using the accrual method of accounting. On June 22, 1978, a Business Certificate for the partnership was filed with the County Clerk, New York County, New York, signed by the same parties as those signing the partnership agreement, except that Lawrence E. Goldschmidt, not his wife, signed for Golby Company. At all relevant times, Mr. Goldschmidt was a partner of Michael Oshatz in the law firm representing petitioner in this case. As described more fully below, Oshatz promoted the 3B investment to Goldschmidt, who interested other 3B investors. 6Petitioner held a 20 percent share in 3B, for which he paid $27,000 by check dated June 21, 1978. By the terms of the partnership agreement, all allocations and distributions were to be pro rata. On June 1, 1978, 3B and CFI entered into a Marketing and224 Remarketing Agreement. Paragraphs 1-3 of that agreement provide as follows: 1. Marketing Service. CFI had the sole responsibility for locating the Lessee and arranging the Lease. For this marketing effort. [sic] CFI shall receive a monthly fee of 15% of the actual monthly revenue collected from the Lessee during the initial lease term and any subsequent terms with [Meijer]. 2. Remarketing Service. The [3B] Partnership agrees that at the end of the [Meijer] Lease or any subsequent lease with respect to the Equipment, CFI shall have the right to the exclusion of all others [sic] brokers or the Partnership's own efforts to remarket the Equipment at the time it becomes available for remarketing. The Partnership agrees that it shall notify CFI within 5 business days of any notices of information received from the initial Lessee or any subsequent Lessee of the potential availability of the Equipment to be remarketed by CFI and of any other information that bears on the lease or the equipment. CFI shall receive a monthly service fee of 5% of the actual monthly revenue collected from any subsequent lessees. At any period after the Equipment has been owned for 7 years, 225 CFI can, at its sole discretion, arrange for the sale or the lease of the Equipment. The fee for a sale shall be 5% of the net sale proceeds. 3. Structure and Debt Placement Service. CFI had the sole responsibility for arranging the debt ("Debt") used to partially finance the purchase of the Equipment and setting up the financial structure of the transaction. For this service, CFI will be paid a fee equal to 15% of the cost of the Equipment. This fee will be paid out of the first proceeds available from the lease or sale of the Equipment after the Debt has been repaid and the Partnership has recovered its full equity investment. Thus, CFI was entitled to three fees: (1) a marketing fee of 15 percent (or 5 percent, for lessees other than Meijer) of the rental payments; (2) a sale fee of 5 percent of the net sale proceeds; and (3) a financing fee of 15 percent of the cost of the equipment payable out of the first proceeds available after debt retirement and equity recovery. On June 2, 1978, 3B purchased the equipment from CFI for $749,160 cash. 7 The cash was transferred to CFI on June 27, 1978, $127,357 from partnership capital, and the balance through a loan from Term226 Industries ("Term"), a New York corporation. CFI assigned its interest in the Meijer lease to 3B. 3B granted Term a security interest in both the equipment and the lease. The Bill of Sale between CFI and 3B provided as follows: KNOW ALL MEN BY THESE PRESENTS, that COMPUTER FINANCIAL INC., a New Jersey corporation having its principal place of business at One University Plaza, Hackensack, New Jersey (the "Seller") for and in consideration of the sum of SEVEN HUNDRED FORTY NINE THOUSAND, ONE HUNDRED SIXTY ($749,160.00) DOLLARS, lawful money of the United States paid by THREEBY ASSOCIATES (the "Partnership"), a New York general partnership consisting of Barbara H. Swartz, [sic] Alfred P. Slaner, Raymond Dubrowski, Lennard E. Greenbaum [sic] and Goldby Associates [sic] and having its principal place of business at 655 Madison Avenue, New York, New York (the "Buyer") the receipt whereof is hereby acknowledged has bargained and sold, and by227 these presents does grant and convey unto the Buyer, its heirs, executors, administrators, successors, and assigns the IBM Computer Equipment on Schedule A attached hereto and all rights to service in the IBM Purchase Agreement dated May 24, 1978 with respect to the Equipment. TO HAVE AND TO HOLD the same unto the said Buyer, heirs, executors, administrators, successors and assigns forever. IN WITNESS WHEREOF, the parties hereto have executed this Bill of Sales [sic] as of this 2 day of June, 1978. COMPUTER FINANCIAL INC. By /s/ Tom Martin THREEBY ASSOCIATES By /s/ Lawrence E. Goldschmidt Schedule A listed the equipment at issue here. By letter dated June 5, 1978, CFI notified Meijer that all rental payments for use of the equipment should be forwarded to Bankers Trust Company of New York. No documents are in the record to evidence the transaction by which Bankers Trust obtained the right to receive lease payments. On June 28, 1978, CFI, Martin and Raynault, and Computer Finders, Inc., another Martin/Raynault company, executed a limited guarantee in favor of Term for the principal amount of the loan to 3B plus interest. It is unclear what consideration, if228 any, flowed to the guarantors for their undertaking. After the Meijer lease terminated, CFI re-leased the equipment 8 (less one megabyte of memory) to the Rouse Company of Columbia, Maryland. 9 This lease was dated November 28, 1979 and commenced upon installation of the equipment on December 10, 1979. Monthly rent was $10,687 and the initial lease term was 20 months. One megabyte of the computer's memory was re-leased to CMI of Troy, Michigan for $1,400 a month, for an initial term of 36 months. 10During 1979, CFI incurred $7,718 for additional IBM features for the equipment, to remove some memory from the equipment, and to insure expeditious delivery of the equipment (presumably to Rouse). Although Raynault knew he had to get Oshatz' consent to purchase the additional features, CFI planned to claim these as 1979 tax deductions, since they were not incurred229 by 3B. The Rouse Company elected not to renew its lease at the end of the initial lease term. Apparently because CFI would have to pay Term under its guarantee, it leased back the equipment on August 1, 1981 after the Rouse lease ended. CFI then paid 3B rent in an amount equal to its guarantee payments to Term. 11The Transaction ParticipantsWhen Raynault met Oshatz in 1971, he was impressed with Oshatz' ability to understand his business, and sought Oshatz' legal services. Although the first computer leasing venture in which Oshatz represented Raynault was unprofitable, Raynault's subsequent activities were very profitable for both him and Oshatz. From 1971 to 1978, almost all of Raynault's computer leasing work was done with corporate investors and Oshatz helped negotiate these transactions with firms like General Electric Credit Corporation and Bank of America. CFI did not have the cash to finance its purchases and always had an investor lined up before it purchased a computer. Oshatz was equally impressed with Raynault, whose abilities he thought were of the highest caliber. Oshatz had230 asked Raynault to keep him in mind if a relatively small transaction arose, because he or some of his associates would be very interested in a leasing shelter that was within their financial means. Therefore, when Raynault called to Oshatz' attention the transaction at issue in this case, Oshatz was interested. Raynault informed Oshatz of the term of the lease, the monthly rental amount, the financial ability of the lessee, and the profit potential involved. Raynault told Oshatz that between $125,000 and $200,000 profit could be expected on a $125,000 investment. At some point after the investment, Raynault provided Oshatz with three schedules disclosing (1) the basic facts of the deal (debt/equity percentages, "implicit maintenance costs," expensed versus capitalized costs, lease rates and term, and loan repayment), (2) "cash flow" from the Meijer lease, and (3) tax benefits. Oshatz did not see these schedules before the 3B investment, but he was shown the figures that appeared on the tax benefits schedule ("Schedule 3"): SCHEDULE 3 - TAX BENEFITSYear19781979198019811234Income:$157,456.70 * $246,283.20 $161,820 $126,220 Expenses: 15%/5% fee23,618.51 36,942.50 8,091 6,311 Interest38,002.81 64,432.14 44,734 31,139 Depreciation201,198.86 143,713.47 119,761 95,809 ImplicitMaint.25,104.90 19,859.10 Total$287,925.08 $264,947.21 $172,586 $133,259 Profit(Loss)($130,468.38)* ($18,663.91)($10,766)($ 7,039)Cash Flow231 SCHEDULE 3 - TAX BENEFITSYear1982198319841985567(sale)Income:$98,448$76,800$59,904$131,940Expenses: 15%/5% fee4,9223,8402,9956,597Interest19,96710,6122,6690Depreciation71,85747,90523,9520ImplicitMaint.Total$96,746$62,357$29,616$ 6,597Profit(Loss)$1,702$14,443$30,288$117,838Cash Flow$ 9,519$117,838Thus, the 1979 loss could be as low as ($7,652). Schedule 3 projected lease income until the time of sale and "residual" value of the equipment at the time of sale. Raynault repeatedly testified that these figures were intended only to satisfy Oshatz' concern over whether or not he could lose money, and presented a "worst case scenario." According to Raynault, Schedule 3 was a worst case scenario because the periodic percentage reductions in both lease income and residual value which were applied in the schedule were projected232 to begin a year before the reasonable investor in 1978 would have anticipated. 12Although Oshatz could not say specifically what expenses would be incurred by CFI, he expected that Raynault would make a reasonable profit through the imposition of fees on the transaction. He understood that investor profit would be made only after the underlying debt was paid off. Although he did not obtain an independent appraisal of the equipment's value, Oshatz trusted Raynault's opinion. Oshatz thought about the deal's risk. He thought that the investors could take a deduction for the component of the equipment's purchase price deemed to be applicable to the maintenance IBM provided for one year, but knew they were without a ruling from respondent so stating. He also thought a large part of the debt would be amortized during the233 first brief lease term but still wondered about adequate economic return. After Oshatz was contacted by Raynault, he spoke to Lawrence Goldschmidt, his law partner. Goldschmidt and Oshatz had discussed on several occasions the possibility of buying and leasing a computer. In a brief discussion, Oshatz revealed to Goldschmidt what he thought was a good opportunity and asked whether or not Goldschmidt believed he could put the money together. Goldschmidt was in the habit of investing with friends, relatives and office clients. They generally relied on his business judgment in selecting an appropriate investment and entered into the transaction based on his recommendation. Oshatz had told Goldschmidt who the promoters were, that he had represented them for a long time and had the highest regard for them, and that their expertise lay in projecting residual values. This expertise was important here, Oshatz emphasized, because in the leasing business a good part of any profit was in the residual value of the leased equipment. He told Goldschmidt that the debt required might not be repaid until all the rental payments had been made. Oshatz discussed with Goldschmidt the quality234 of the lessee, as well as the tax benefits. After a few minutes Goldschmidt agreed to the transaction. Either the same day or soon after Raynault called Oshatz, Oshatz told Raynault that he and his investors would take the deal. The documents used in the 3B transaction were drafted under the direction of Oshatz by an associate in his firm. Goldschmidt never read any of the documents involved, except perhaps the partnership agreement, and merely signed them in reliance on Oshatz. Oshatz, however, could not recall whether he reviewed all the documents or to what extent they were generated from prior agreements. Goldschmidt is designated managing partner in the 3B Partnership Agreement, and although he conceived his role as being available for consultation regarding the remarketing of the equipment, he did not materially participate in any of the negotiations with CFI. Further, he had no recollection of the re-leasing. Goldschmidt did not recall discussing fees with anyone. In 1978, Goldschmidt was familiar with the small end of IBM's computer product line through computerization of some of the mortgage investment activities in which he was involved. Also, various people235 that Goldschmidt knew socially were in the computer leasing field. Prompted by their success, Goldschmidt did some research on buying and leasing computer equipment. Goldschmidt had not invested in any equipment leasing transactions before 1978. However, he did attempt to invest in several leasing transactions involving trucks and an oil rig. As a real estate attorney, Goldschmidt did not do any legal work regarding equipment leasing transactions. Petitioner had invested with Goldschmidt in the past. Regarding the 3B transaction, Goldschmidt told petitioner only that he thought it was an attractive investment, it had a real shot at making some money, and no risk of losing the invested funds. IBM ComputersBecause of IBM's maintenance policies and practices, and the lack of moving parts in its computers, physical deterioration plays little or no role in computer obsolescence. IBM's introduction of new technology is the most important factor affecting the value of older computers. As more sophisticated, less expensive equipment appears, it becomes more cost effective to use a newer computer. As of the early 1970's, it was customary for IBM to introduce a new line236 or generation of computers every four to six years. The IBM System 360 computer line was introduced in 1964. This was replaced in 1970 by the IBM System 370 computer line. The IBM 3148 was introduced in July of 1976. In 1977, IBM announced three models -- the 3031, 3032, and 3033. The 3148 and the 3031, 3032 and 3033 represented substantial advances over prior models, but were not new "generations" because they were compatible with other members of the System 370 generation. Because of their timing and technological advancement, however, and because IBM had represented that its development of new technology would be "evolutionary" and not "revolutionary," many thought these models were the early members of a new generation. In January of 1979 IBM announced the Model 4300 product line. Initial reports indicated this line would offer up to four times the processing capability per dollar of the previously available computers. The 4300 represented the most extensive increase in price/performance capability in the history of IBM. The increase far exceeded what most industry experts were predicting before its release. The 4300 sent the used computer leasing industry into disarray, 237 and values of earlier models dropped more dramatically than expected. On their 1978 Form 1040, petitioners claimed a partnership loss derived from their 3B activities in the amount of $27,624. This included depreciation deductions passed through to them by 3B. 3B claimed 1978 depreciation deductions of $201,199 on a depreciable basis of $704,196, using the class life asset depreciation range (ADR) system and the "modified half year convention." They also claimed an ITC of $14,084 in connection with their 3B investment. On their 1979 Form 1040, petitioners claimed no losses or credits in connection with 3B. Respondent determined deficiencies which were based on disallowance of 1978 and 1979 losses and credits. Petitioner concedes 1978 losses in excess of $27,000 and respondent concedes error regarding disallowance of a 1979 3B loss. See n. 2, supra.OPINION In this case, respondent argues (1) that the transaction lacked economic substance, (2) that petitioners did not have the benefits nor the burdens of ownership of the equipment, (3) that petitioners entered into the transaction with no valid business purpose other than the receipt of tax benefits, (4) that even if238 we respect the transaction, petitioners are not eligible to claim the ITC because they failed the so-called 15 percent test under section 46(e)(3)(B), (5) that even if we respect the transaction, the partnership incorrectly reported depreciation deductions for 1978, and (6) that petitioners' resulting substantial underpayment of tax is attributable to a tax motivated transaction. Petitioners argue that the transaction was a bona fide business transaction which should be respected for Federal tax purposes, entered into with a business purpose and which had economic substance. They also counter respondent's investment tax credit, depreciation deduction and section 6621(c) arguments. Economic SubstanceGenerally, the form of a leasing transaction should be respected so long as the lessor retains significant and genuine attributes of a traditional lessor. Frank Lyon Co. v. United States,435 U.S. 561">435 U.S. 561, 585 (1978); Estate of Thomas v. Commissioner,84 T.C. 412">84 T.C. 412, 432 (1985). "We cannot ignore the reality that the tax laws affect the shape of nearly every business." Frank Lyon Co. v. United States,supra at 580. Therefore, the239 existence of tax benefits accruing to an investor does not necessarily deprive a transaction of economic substance. Frank Lyon Co. v. United States,supra at 581; Packard v. Commissioner,85 T.C. 397">85 T.C. 397, 417 (1985); Estate of Thomas v. Commissioner,supra at 432. When, however, a transaction has no economic purpose other than to obtain favorable tax consequences, the form of the transaction will be disregarded by the Court. Rice's Toyota World, Inc. v. Commissioner,81 T.C. 184">81 T.C. 184, 195 (1983), affd. on this issue 752 F.2d 89">752 F.2d 89 (4th Cir. 1985); Grodt & McKay Realty, Inc. v. Commissioner,77 T.C. 1221">77 T.C. 1221, 1243, 1244 (1981). This Court has recently decided a number of cases involving computer equipment leasing transactions. See Torres v. Commissioner, 88 T.C. (Mar. 30, 1987); Bussing v. Commissioner, 88 T.C. (Feb. 23, 1987); Gefen v. Commissioner,87 T.C. 1471">87 T.C. 1471 (1986); James v. Commissioner,87 T.C. 905">87 T.C. 905 (1986); Mukerji v. Commissioner,87 T.C. 926">87 T.C. 926 (1986); Coleman v. Commissioner,87 T.C. 178">87 T.C. 178 (1986);240 Estate of Thomas v. Commissioner,supra; and Rice's Toyota World, Inc. v. Commissioner,supra.13 We analyze this case under the teachings of those cited above. In Frank Lyon Co. v. Commissioner,supra, the Supreme Court addressed the question of whether a sale and leaseback of an office building should be respected for tax purposes. Finding that sufficient non-tax reasons existed for the transaction, and that the lessor retained sufficient attributes of a traditional lessor, the Court respected the form of the transaction, giving the purchaser-lessor interest, depreciation and other deductions in connection with the arrangement. Our interpretation of Frank Lyon was affirmed on appeal in Rice's Toyota World, Inc. v. Commissioner,supra. There it was held that a sale and leaseback will be respected for Federal tax purposes if we find either (1) the taxpayer had a business purpose for the transaction241 such as economic profit apart from tax benefits, or (2) there was a realistic objective possibility of economic profit on the part of the investors. Rice's Toyota World, Inc. v. Commissioner,81 T.C. at 209; 752 F.2d at 91-92. We found that an economic profit was reasonably likely when the transaction was entered into in Estate of Thomas v. Commissioner,supra. We therefore rejected respondent's reliance on Rice's Toyota World in that case, and concluded the purchaser-lessor was the true owner of the asset involved, and was entitled to claim the tax benefits. 84 T.C. at 434-439. Estate of Thomas involved a set of facts facially similar to those present here. There, brokers located potential computer lessees. The partnership which hired the brokers acquired legal title to the equipment, for which it paid fair market value. The partnership invested somewhat more than 10 percent of the systems' cost in cash and financed the balance with nonrecourse debt from third-party lenders. Our opinion in Coleman v. Commissioner,supra, turned on the burden of proof regarding ownership. We found that title to242 the equipment had already been transferred by the party from whom the taxpayer sought to derive his equity interest. We therefore concluded the taxpayer had not shown he had a depreciable interest in the equipment. In Coleman we also examined the equipment's fair market value to determine whether the taxpayer had "genuine indebtedness." We did not, however, engage in the Rice's Toyota analysis of profit potential or business motivation. In Mukerji v. Commissioner,supra, we found for the taxpayers on the strength of their objective potential profit showing. Because the Rice's Toyota tests are disjunctive, we simply commented in a footnote that the taxpayers also had a profit motive. See Mukerji v. Commissioner,supra,87 T.C. at 928 n. 34. In James v. Commissioner,supra, we found for respondent because the taxpayer had failed to show any realistic potential for profit. We also stated there that as sophisticated investors, the taxpayers should have known that the transactions at issue could not achieve non-tax profit. The subjective Rice's Toyota test, therefore, could not be relied on by them. 243 James v. Commissioner,87 T.C. at 924 n. 5. Gefen v. Commissioner,supra, also involved IBM computer equipment similar to that involved here. There, we approved the transaction as having economic substance. We found that a reasonable investor could have expected an economic profit and held that 1984 residual value projections of 20 percent as of 1977 were reasonable. In Bussing v. Commissioner,supra, we disregarded elements of the transaction which were mere window dressing, but allowed the taxpayers to claim distributive losses with respect to the balance of the transaction, up to their amounts at risk. In Torres v. Commissioner,supra, we held that the transaction virtually assured the taxpayers an economic profit, that their partnership had the benefits and burdens of ownership of the computer equipment and that they engaged in their computer leasing activities for profit. In analyzing the transaction here for objective profit potential, we must determine what the 1978 investor should have expected regarding the computer's residual value. We now therefore review and evaluate the expert testimony. Paul Raynault14244 was stipulated to be an expert, qualfied to testify on computer value. His report was based on his "learning curve" forecast methodology. This assumes that both lease income and residual sale value decrease at an average rate of 22 percent a year. Because technology was assumed to advance at a rate of between 20 and 25 percent annually, Raynault inferred that older computers would have to drop in price at that rate if they were to stay competitive. Thus, Raynault concluded that old computers should drop to 78 percent of their previous value each year. When the 22 percent decrements would begin under Raynault's theory is somewhat ambiguous. Apparently, they begin only when a new generation of computers is introduced, although some decrement in value smaller than 22 percent occurs soon after sale by IBM. This initial drop is attributable to restriction of the availability of the ITC to the purchaser of used equipment. Also, the cost of maintenance must usually be deducted from the price of used equipment for it to be competitive with new equipment, giving245 rise to an additional value decrement. Schedule 3, which was included in Raynault's report, projected a residual sale value for 1985 and lease income values for prior years. The income and sale value projections were apparently based on the following methodology. The 1978 and 1979 income value figures represented the actual gross receipts to be expected from the Meijer lease. For 1980, an income value was determined by discounting the 1979 figure first 16 percent (10 percent for ITC unavailability and 6 percent for free maintenance unavailability) and then 22 percent (the first of the annual decrements, beginning the year in which a new line of computers will likely be announced). The 1981-1984 income values were arrived at by discounting the prior year's value 22 percent. The 1985 residual sale value was derived by discounting the original cost of $749,160 16 percent after the first year of ownership and 22 percent each succeeding year, as illustrated by the following chart: DateResidual Value% DecreaseJune, 1978$749,160.00June, 1979629,294.4016%June, 1980490,849.6322%June, 1981382,862.7122%June, 1982298,632.9122%June, 1983232,933.6722%June, 1984181,688.2622%June, 1985141,716.8422%October, 198515 131,329.0016 7.33% 246 Raynault assumed in Schedule 3 that annual rent decrements would begin at the end of the Meijer lease, in December of 1979. He assumed that a new line of computers would be introduced by then. Raynault also included in his trial report a "more likely scenario." Raynault had not provided this schedule to the 3B partners or Oshatz at the time of their investment. There, he assumed that a new computer line would be released a year after the end of the Meijer lease and that 22 percent annual decrements would not begin until that time, i.e., the end of 1980. Under the "more likely scenario," then, the 1985 sale price would be derived by ascribing each value in the above chart (except the first two) to the following year. The first two values would remain with their respective years, and the 1979 value would remain constant for 1980. The October 1985 value is derived by discounting $181,688.26 (the June 1985 value) by 7.33 percent for a final residual value247 of $168,370.51. 17Raynault analyzed the fees charged by CFI for marketing and re-marketing by looking to those customarily charged in the industry. He stated that they are generally tied to the work performed, and that CFI's marketing fees were reasonable by that standard. He did not comment on CFI's work relating to its debt placement fee. Raynault testified that a tax deduction for IBM's free maintenance could be justified on four grounds. First, the cost of providing free maintenance is probably reflected in the purchase price IBM charges because it does not provide free maintenance to rental customers. Second, the used market discounts a machine that no longer qualifies for free maintenance. Third, the IRS has ruled, in a private letter ruling with respect to other investors in a similar arrangement, that the maintenance component of the purchase price of IBM equipment is a deductible expense. Fourth, Meijer agreed to pay a higher rent during the initial 12 months of the lease, acknowledging inclusion248 of the maintenance fee for those months. Petitioner's second expert, Esmond C. Lyons, Jr., was also stipulated to be qualified. Lyons was not involved with IBM computers in June of 1978, but with sales and marketing of high performance image processing equipment. The report he prepared around the time of trial was based, however, on information in his company's comprehensive data base that would have been available in June of 1978. Lyons believed it was predictable that as of June 1978 the residual value of the 3148 could be expected to fall somewhere between two extremes. If competitive pressures became much stronger than expected, IBM might reduce list prices by an additional 15 to 20 percent over their expected market decline in value. With such market decline to December 1979 of 15-20 percent, 18 3148 prices would be about 60-65 percent of the original IBM list price. 19Conversely, if the 3148's continued to sell well, used249 prices after 18 months would be about 80-85 percent of the IBM list price. 20 This was typical of most predecessor products in the first few years after initial introduction. Lyons concluded, then, that as of June 1978, a used IBM 3148 could be expected to be selling 18 months later for between 60 percent and 85 percent of list price. Under the most probable conditions, the equipment would be selling for between 70-75 percent of the IBM list price. 21 The list price for the computer system in question at the time of the transaction at issue here was $749,160. Therefore, the December, 1979 value that a 1978 investor should have anticipated was between $525,000 and $560,000. Lyons did not project a residual value for 1985. Lyons observed that in June of 1978, there was little reason to expect that IBM would soon introduce250 new models with price performance specifications that were radically better than historical norms, and we so find. Lyons did not state, however, whether an announcement of a new computer should have been expected in 1979, as in Raynault's Schedule 3, or in 1980, as in Raynault's "more likely scenario." Petitioner's final expert witness, George McCanless, testified regarding the fees charged by CFI to 3B. He was the only expert not stipulated as qualified by the parties. We accepted his testimony as that of an expert. McCanless testified that CFI's broker's fee was fair, in part because the Meijer lease provided 3B with such high rental payments. McCanless also testified that he was unqualified to address the reasonableness of the debt placement fee charged by CFI. Respondent's expert was S. Paul Blumenthal. Blumenthal was stipulated to be a qualified expert. In rendering his opinion, Blumenthal relied on a report prepared by his company in March of 1978 which evaluated the fair market and future residual value of the IBM System 370/148-J. The 370/148-J is basically the same as the system at issue in this case, the 370/148-K, with the exception that the former has approximately251 half the memory size of the latter. Blumenthal also relied on a report dated December 29, 1978, which evaluated fair market and future residual values as of October 1978. This report expanded on a June 9, 1978 analysis of the used 3148-K market. The June 9 report contained only figures, whereas the December 1978 report added analysis and justification for the residual value figures in the report. According to Blumenthal the fair market value of a used system in June 1978 was 87 percent of the list price or $651,770. 22 The projected residual value of the used system in December of 1979, at the end of the 18 month lease to Meijer, was 65 percent of the June 1978 list price or $486,954. The projected June 1985 residual value of the same system was 5 percent of its cost, or $37,458. In his projections, Blumenthal anticipated residual value of the 3148 would be affected through introduction of a replacement machine for the 3148 by December of 1979. 252 After evaluating the experts' testimony, we find Lyons to be the most reliable. We find Raynault's testimony flawed in several respects. The most obvious is his potential for bias. Although he is undoubtedly qualified to render an opinion on residual value, as the promoter of the instant transaction Raynault exposes himself to possible lawsuits if his investment program collapses. Also, Raynault testified at one point that as long as technological advancement proceeded at a rate of 22 percent per annum, the year in which new technology is introduced would not affect residual value. 23 Yet much of the testimony of both petitioner's and respondent's experts focuses on when the introduction of new technology should have been expected, i.e., when new equipment would begin to force down the value of older technology. We find the issue to be important to our inquiry regarding economic profit. For these reasons, although we take into account Raynault's testimony, we discount its weight accordingly. Blumenthal did not use253 a uniform annual decrement like Raynault, but attempted to target specific events that would impact residual value by specific amounts. Although we acknowledge the superior precision of such a method when events can be predicted with reasonable certainty, we find that, in light of IBM's secretive marketing, Blumenthal's technique is less than completely reliable. Accordingly, we give his opinion appropriate, but not dominant weight. We found Lyons to be a forthright and convincing witness. We accord his testimony the greatest weight. Perhaps his persuasiveness derives in part from the fact that his projections had the least specificity. We infer from this a candid concession that all the residual value projections involved a degree of crystal-ball gazing. Unfortunately, however, Lyons did not offer a projected residual value, or range of values, for 1985, but stopped at 1979. We therefore find his projections for that year to be accurate, and will extrapolate from them 1985 values. New computers came on the market in January, 1979, dramatically depressing the resale market. Petitioner's expert, Lyons, stated that a 1978 investor would not have anticipated introduction of254 such a radically advanced machine so soon. He did not comment, however, on whether a 1978 investor would have anticipated 1979 or 1980 introduction of a new machine of average technological advancement, i.e., one sufficient to begin the 22 percent value decrements Raynault posited. Raynault's Schedule 3 (his worst case scenario) assumed new equipment would be introduced by December, 1979. His more likely scenario posited a December, 1980 introduction date. Respondent's expert stated that introduction of new technology should have been expected no earlier than 1980. We view as reasonable the assumption that new technology would be introduced in 1980, and proceed on the basis of that assumption. Because we found Lyons to be the most credible expert, we will apply to his 1979 residual value figure Raynault's assumptions regarding the introduction date of new technology and the average annual value decrements. Such application yields a residual value in October, 1985 of $164,059.06, or 21.9 percent of the cost of the equipment. 24255 This $164,059.06 residual value is approximately 97 percent of Raynault's "more likely scenario" sale value. Because the difference is de minimis, we accept Raynault's more likely scenario as reflecting the values a reasonable investor should have anticipated. Next, we address petitioner's argument that the debt placement fee is to be computed other than in accord with Paragraph 3 of the Marketing and Remarketing Agreement. Read literally, paragraph 3 would provide a debt placement fee of 15 percent of the cost of the equipment (i.e., $749,160) or $112,374 payable out of the first proceeds after debt retirement and equity recovery. 25 In other words, the investors would get their money back but would make no profit until this entire amount was paid to CFI. Petitioner seeks to disavow the clear language of the agreement, and to show that the debt placement fee was intended to divert to CFI only 15 percent of the first proceeds received after debt retirement and equity recoupment. Initially, we note that this fee is not clearly treated in either fashion on Schedule 3. 26 Thus, we cannot look to that document for evidence of the parties' intent. Moreover, we assume the256 fees were never paid due to a collapse in the market for used computer equipment. Thus, we cannot look to the parties' actual conduct for evidence of their intent. We are thus left with little more than Oshatz' and Raynault's testimony. Raynault's testimony was equivocal, and it is of little help here. Although Oshatz testified that the fee was intended as an 85 percent-15 percent split, he did not indicate whether the split was to begin before or after investor equity was recovered. We conclude that this testimony, so fraught with the potential for bias, cannot override the clear language of the agreement. 27 Therefore, we think that Paragraph 3 of the relevant agreement should be interpreted in accord with257 its clear import. It contemplates a fee of 15 percent of the cost of the equipment payable out of the first proceeds available after the investors break even. With this in mind, we turn to the economics of the transaction. A 1978 investor, looking at Schedule 3 and the other documents and agreements he was to be bound by would have made the following analysis to determine whether or not he had a reasonable possibility of an economic profit: Cash Downpayment$127,357.00Broker's Fee: Months 1-1860,561.0028 Months 19-60 33,537.50Sale Fee8,457.70Debt Placement Fee112,374.00Debt Service Interest211,555.95Principal621,803.00Total Expenses1,175,646.15Rental Income1,074,489.90Sale Proceeds169,154.00Total Income1,243,643.90Profit (Loss)67,997.75258 Therefore, having made the above calculation, the reasonable 20 percent investor would have expected to earn $13,599.55 over seven years on a $27,000 investment, or roughly 6 percent interest compounded annually. While a theoretical investor might have found a more profitable investment, we will not second guess a taxpayer's business judgment. See Estate of Thomas v. Commissioner,84 T.C. 412">84 T.C. 412, 440 n. 52 (1985). We thus believe that at the time of the investment, there was economic substance to the transaction. Benefits and Burdens of OwnershipRespondent mounts a second substance over form argument which, like his economic substance argument, asks us to disregard the instant transaction and rearrange the equities to deprive 3B of rights in the equipment sufficient to enable it to pass through tax losses to its partners. He argues that the benefits and burdens of ownership did not pass to 3B. Like his economic substance argument, however, this argument must fail. Respondent relies on Sun Oil Co. v. Commissioner,562 F.2d 258">562 F.2d 258 (3d Cir. 1977), revg. a Memorandum Opinion of this Court, cert. denied 436 U.S. 944">436 U.S. 944 (1978). He argues259 that the rights of control over the asset and enjoyment of profits, and the risk of loss all were with CFI, not 3B. Therefore, CFI should be deemed the owner of the equipment, and 3B denied the tax benefits. In Sun Oil, the taxpayer "sold" to and simultaneously "leased" back from a tax-exempt trust parcels of real estate. In reversing this Court, the Third Circuit held that the taxpayer had retained too many of the risks, burdens and benefits of ownership of the property to be viewed as a mere lessee. Characterizing the transactions as financings, the circuit court denied the taxpayer the claimed tax benefits. In this case, the presence of some of the Sun Oil factors does not persuade us that, in the absence of so many others, we should disregard the transaction here under the principles of that case. Although the lease here was a net lease, we have repeatedly held that such a lease is common, and will not be a factor in determining the bona fides of a transaction. See, e.g., Gefen v. Commissioner,supra, at 1492-1493. There is no evidence here that CFI could repossess the property at any time, as was the case in Sun Oil. Moreover, there is260 no evidence here that at the time the transaction was entered into, the buyer knew it would realize quarterly returns on its investment equivalent to market interest rates, without regard to the fair market rental value of the property, as was the case in Sun Oil. Finally, there is no evidence here that the buyer could be deprived of the property for nominal amounts above its predetermined investment return, as was the case in Sun Oil. To the contrary, any economic results more favorable than those Raynault predicted as likely would inure to the benefit of the 3B investors including petitioners. We are aware that Martin and Raynault, the principals of CFI, guaranteed the buyer's note obligation, and were ultimately forced to lease back the equipment at a price reflecting the guarantee payments owed and not the fair market rental value of the equipment. Under all the facts and circumstances, however, we view this arrangement as tantamount to insurance of the rent payments, not as indicative of a financing arrangement. We consider in this regard that the purpose of the transaction in Sun Oil was to enable the taxpayer to raise capital without incurring a debt obligation261 on its books. Sun Oil Co. v. Commissioner,562 F.2d at 259. Here, nothing indicates that CFI was seeking to raise capital. Rather, it was seeking to broker computer equipment for a profit. Without an investor to buy the equipment, CFI would not have entered into the transaction. We also recognize that if the economic results were substantially less favorable than Raynault predicted as likely, CFI's fee might decrease. This would not happen until 3B's profits had shrunk to nothing, however. In any event, by this arrangement CFI merely assumed the same risk any other trade creditor assumes when providing goods or services to a start-up business, i.e., that profits will be insufficient to pay. Finally, we have considered that CFI paid for, and intended to claim as 1979 tax deductions, additional features, memory removal, and expeditious delivery of the equipment. Even if we were to admit evidence of actions occurring after 1978, the only tax year left in issue here, however, and assume as well that these actions are some evidence that the parties treated CFI, not 3B, as the owner of the equipment, we would not be persuaded that under all the facts and circumstances, 262 the parties treated CFI as the owner. There is a wealth of countervailing evidence that the parties treated 3B as the owner. This includes documentary evidence such as the Bill of Sale, Lease Assignment, and security and mortgage agreements. Cf. Grodt & McKay Realty Inc. v. Commissioner,77 T.C. 1221">77 T.C. 1221, 1238 (1981) (weight of the evidence, including documents, shows taxpayer treated a third party as the owner); Sun Oil Co. v. Commissioner,562 F.2d at 258 (documents, not parties' conceptions of them, govern legal characterization of the transaction). In Grodt & McKay Realty Inc. v. Commissioner,supra, at 1241, also relied upon by respondent, we stated "the agreements are clear that petitioners have no right to possess the [assets involved] or to exercise any real control or dominion over them." This is clearly a distinguishable case and without more, we think the evidence here shows petitioners had the benefits and burdens of ownership. Profit MotiveRespondent argues that petitioner's investment was not an activity engaged in for profit, and that their loss deductions are, consequently, limited by section 183. The263 issue of whether the requisite profit objective existed is one of fact which is to be resolved by examination of the surrounding facts and circumstances. Capek v. Commissioner,86 T.C. 14">86 T.C. 14, 37 (1986); Hager v. Commissioner,76 T.C. 759">76 T.C. 759, 784 (1981). In making this determination, the Court will give greater weight to objective facts than mere statements of intent. Surloff v. Commissioner,81 T.C. 210">81 T.C. 210, 233 (1983). The burden of proof is on petitioners to show the existence of a profit objective. Rule 142(a). In this case, the facts show a profit motive. First, 3B bought the equipment from CFI for the same price CFI paid IBM. There is no allegation, as we do not think there could be, that 3B paid more than fair market value for the equipment. Second, we have found that there was a reasonable possibility for economic profit apart from tax benefits. That profit approximated the yield of a 6-percent investment compounded annually. As such, the profit is not de minimis. Moreover, the comparison between economic profit and tax benefits is not so disproportionate as to indicate lack of profit motive. Petitioners could have expected264 net deductions over the life of the investment of $533.26 and credits of $14,084 for total tax benefits, assuming a 50 percent marginal tax rate, of $14,350.63. 29 Thus, petitioner was looking at an investment which would yield an economic return of $13,599.55, and which would also generate $14,350.63 in tax benefits. We will not require a dollar for dollar matching of tax and economic benefits to determine profit motive. Estate of Baron v. Commissioner,83 T.C. 542">83 T.C. 542, 558 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986). As such, these figures are close enough to pass muster. Finally, Oshatz 30 had been doing legal work for Raynault's computer leasing activities for 7 years and knew they had made substantial profits. When this transaction arose Oshatz asked about265 the term of the lease, rental payments, the lessee's financial ability, and profit potential. He received revenue projections showing that the deal could not lose money, and was told that investors could possibly double their investment. This is further proof that the partners were engaged in the activity for profit. On the basis of the objective facts of record, petitioner has met his burden on the profit motive issue. ITC Eligibility266 On their 1978 tax return, petitioners claimed an ITC of $14,084 attributable to their 3B investment, which respondent disallowed. Petitioners have the burden of proving their entitlement to the credit. Rule 142(a). The ITC is disallowed to a noncorporate lessor like 3B unless, for the first 12 months of the lease, the amount of certain section 162 deductions exceeds 15 percent of the rental income produced by the property. Sec. 46(e)(3)(B). 31 The parties disagree on whether this requirement is met here, and because there is agreement regarding the rental income from the equipment for the first 12 months, the allowability of the credit turns on whether any amount may be deducted by 3B for maintenance expenses. 32267 Respondent argues that since IBM did not sell machines without the maintenance service (even at a discount), since 3B paid no out-of-pocket amount for the first year's maintenance, and since petitioners' sole purpose in allocating a portion of the purchase price to maintenance was to qualify for the ITC, the deduction for maintenance expense should be denied in full, and petitioners should be denied the ITC as a nonqualifying noncorporate lessor. Alternatively, respondent contends that if the deduction is allowed, it should be limited to the rent differential in the Meijer lease. 3B's use of the rate IBM charges for monthly maintenance of a machine used 24 hours a day, seven days a week is criticized as a mere manipulation of the economics to generate tax benefits, and one which will allow the expense deduction and the ITC availability to vary from lease to lease, depending on equipment usage. The issue here is whether the disputed portion of the equipment's purchase price can be currently deducted, or must be capitalized as part of the equipment's purchase price. The parties' discussion of relevant authority is found wanting. They focus on a private letter ruling by respondent268 and our decision in Miller v. Commissioner,85 T.C. 1064">85 T.C. 1064 (1985). Private letter rulings have no precedential value. Sec. 6110(j)(3); Woods Investment Co. v. Commissioner,85 T.C. 274">85 T.C. 274, 281 n. 15 (1985). As we discuss further below, Miller has only marginal relevance. In Seligman v. Commissioner,84 T.C. 191">84 T.C. 191 (1985), affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986), we held that administrative expense payments in connection with a computer leasing transaction had to be capitalized as part of the equipment's cost. 33 The ITC was consequently lost to the noncorporate lessors. The payments, although incurred within the first 12 months of the lease, bought services for the entire duration of the 41 month lease, and were therefore capital expenditures, not expenditures giving rise to section 162 deductions. The "expenditures" here bought services for only the initial 12 month part269 of the lease during which payments were made, i.e., the part of the lease with which section 46(e)(3)(B) is concerned. They were not capital for that reason. For other reasons, however, we nevertheless find for respondent. For an item to be deductible during the taxable year, among other things, it must be paid or incurred during the taxable year. Sec. 162(a). Commissioner v. Lincoln Savings & Loan Assn.,403 U.S. 345">403 U.S. 345, 352 (1971). From the facts recited immediately below, we think it clear that 3B did not pay or incur any expenses for maintenance. To the contrary, IBM provided free maintenance to purchasers of its equipment. The treatment of the item by all parties, including IBM, is strong evidence of this. See Waddell v. Commissioner,86 T.C. 848">86 T.C. 848, 896 (1986). 34270 The Agreement for Purchase of IBM Machines between IBM and CFI states that CFI agrees to purchase only "machines and features." IBM agrees to "sell" machines and "provide" warranty service. The agreement goes on to state that "IBM agrees to provide, at no additional charge to the Customer * * * warranty service." (Emphasis supplied.) In the Bill of Sale between CFI and 3B, CFI conveyed to 3B the equipment "and all rights to service in the IBM purchase agreement" but allocated no separately stated amount for the maintenance service. We note further that IBM did not sell the machines at a discount without warranty service. Miller v. Commissioner,supra, in which petitioners place great reliance, is of no help to them. Although we allowed the ITC to the taxpayers there, despite their obvious attempt to shoulder just enough of the maintenance expenses to meet the 15 percent test, there was no question that substantiated expenditures were actually made for maintenance. Those expenditures were clearly above and beyond the equipment's purchase price. See Miller v. Commissioner,supra at 1068. Section 1.46-4(d)(3)(ii), Income Tax Regs.271 , provides that "if the lessee is obligated to pay to the lessor a charge for services which is separately stated or determinable, the expenses incurred by the lessor with respect to the services are not taken into account [in determining the amount of section 162 deductions for purposes of the 15 percent test]." Thus, although petitioners point to the rental decrease after the first 12 months as evidence that a portion of the payment is allocable to the maintenance costs, we could as easily view that differential as an amount "the lessee is obligated to pay to the lessor * * for services * * * separately stated or determinable." We hold for respondent on this issue. 35DepreciationWe are asked to determine whether 3B properly applied the modified half year convention when claiming depreciation deductions under the class life asset depreciation range system. Respondent contends that 3B, a calendar year taxpayer, was not entitled to claim a full year272 of depreciation when it was only in existence for, at most, 7 months in its first taxable year. Petitioner contends that 3B's deduction for a full calendar year's depreciation is sanctioned by respondent's regulations. We agree with respondent. Section 1.167(a)-11(c)(2)(iv)(b), Income Tax Regs., controls. It provides: If the actual number of months in a taxable year is other than 12 full calendar months, depreciation is allowed only for such actual number of months, and the term "taxable year," for purposes of this subparagraph, shall mean only such number of months. * * See also Ocrant v. Commissioner,65 T.C. 1156">65 T.C. 1156 (1976); sec. 1.167-10(b), Income Tax Regs. Thus, 3B may claim only a ratable portion of the equipment's first year of depreciation deductions in its first taxable year. Respondent argues further that we should allow 3B to claim depreciation, if at all, only from June 9, 1978, when the equipment was placed in service, and not from any earlier date such as June 1, the date the partnership agreement was signed. 36 Respondent relies on section 1.167(a)-11(c)(2)(iv)(c), Income Tax Regs., for this proposition. 37273 3B employed the modified half-year convention of section 1.167(a)-11(c)(2)(ii), Income Tax Regs. That subdivision and section 1.167(a)-11(c)(2)(iv)(b), Income Tax Regs., entitle 3B to claim depreciation deductions as of the first day of its taxable year, inasmuch as the equipment was placed in service during the first half of its taxable year. The regulation relied on by respondent clearly applies to property placed in service after November 14, 1979. The equipment here was placed in service prior to November 14, 1979. Respondent argues, however, that we should apply the regulation and in support, points to Ocrant v. Commissioner,supra, and section 1.6031-1(a)(1), Income Tax Regs.We need not consider whether the regulation relied on should be applied in contravention of its expressly stated effective date. We find that even if applicable, the regulation precludes depreciation deductions for any month prior to the month in which the taxpayer begins his activity. As long as the correct month is used, however, it does not disallow depreciation deductions for any day prior to the day the taxpayer begins his activity. 3B may claim depreciation from June 1, 1978. 38274 Section 6621(c)Respondent also seeks increased interest pursuant to section 6621(c). He first asserted the applicability of additional interest in his First Amendment to Answer. As such, respondent bears the burden of proof as to the additional interest. Rule 142(a). Section 6621(c) provides for an increase in the interest rate where there is a "substantial underpayment" (an underpayment of at least $1,000) in any taxable year "attributable to 1 or more tax motivated transactions." The additional interest accrues after December 31, 1984, even though the transaction was entered into prior to the date of enactment of section 6621(c). Solowiejczyk v. Commissioner,85 T.C. 552">85 T.C. 552 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). Section 6621(c)(3)(B) gives the Treasury authority, by regulation, to add to the categories of transactions that, under section 6621(c), will be treated as tax motivated transactions. Under that275 broad grant of authority, on December 26, 1984, the Treasury promulgated section 301.6621-2T, Temporary Proced. & Admin. Regs., T.D. 7998, 49 Fed. Reg. 50391 (Dec. 28, 1984), 1 C.B. 368">1985-1 C.B. 368, which addresses certain questions and answers that are likely to arise under section 6621(c). Pursuant to this regulation, an underpayment attributable to a deduction disallowed under section 165(c)(2) relating to a transaction not entered into for profit is one attributable to a tax-motivated transaction. Sec. 301.6621-2T, Q & A-4, Temporary Proced. & Admin. Regs. We have previously looked to this regulation to guide decisions in this area. See, e.g., Helba v. Commissioner,87 T.C. 983">87 T.C. 983 (1986); The Stanley Works and Subsidiaries v. Commissioner,87 T.C. 389">87 T.C. 389 (1986). For 1978, petitioners deducted $27,624 in losses attributable to their 3B investment. They also claimed an ITC of $14,084. We have disallowed the ITC because 3B has not met the requirements of section 46(e)(3)(B). We have also disallowed 3B some depreciation-based deductions because of its improper use of the modified half year convention under section 1.167(a)-11(c)(2). Under276 respondent's temporary regulation, the underpayment 39 of tax based on the amount of the claimed losses that are disallowed is attributable to a tax-motivated transaction if the losses relate to a transaction not entered into for profit. See section 301.6621-2T, A-4(2), Temporary Proced. & Admin. Regs. We have held, however, that the transaction at issue here was one of economic substance. We have rejected respondent's profit motive arguments. The losses do not relate to a transaction not entered into for profit. Respondent, therefore, is not entitled to increased interest. To reflect our conclusions and the parties' concessions, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect during the years in issue and all Rule references are to the Tax Court Rules of Practice and Procedure. Sec. 6621(d) was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of Pub. L. 99-514, 100 Stat. 2744. We use the reference of the Internal Revenue Code of 1986. ↩2. Petitioners concede all deductions claimed in excess of the cash they invested, i.e., $27,000. Respondent concedes petitioners claimed no 1979 deductions or credits as a result of their partnership investment. Because respondent's statutory notice of deficiency based all of petitioners' 1979 deficiency on their partnership activities, we deem this to be a total concession by respondent for the 1979 taxable year.↩3. The lease payments by Meijer were higher than IBM's base rental rate. Meijer agreed to the higher rate because if it rented from IBM, IBM would impose a substantial surcharge for the long hours during which Meijer intended to operate the computer. A quid pro quo for Meijer appears to be the brief duration of the lease. ↩4. The partnership of which petitioner was a member deducted $3,747 for maintenance expenses on its 1978 tax return, based on IBM's maintenance charge for continuously run computers. IBM varied this charge depending on how much time the computer was run. Meijer intended to run the equipment continuously.↩5. Petitioner Lennard D. Greenbaum will hereinafter be referred to as petitioner.↩6. Oshatz was counsel of record in this proceeding until the day of the trial. He first moved to withdraw when this case was called, 10 days before trial, and his partner, Edward I. Sussman, acted as counsel of record thereafter.↩7. So stipulated. Because respondent argues on brief that 3B cannot be considered the owner of the equipment for Federal income tax purposes, we do not deem that point disposed of by the stipulation that 3B "purchased" the equipment.↩8. The Rouse lease identifies the equipment as the "3148J." The equipment at issue here is the 3148K. ↩9. At the commencement of the Rouse and CMI leases, a substituted note was negotiated between Term and 3B. ↩10. The CMI lease identifies the equipment as the model "J-K." The equipment at issue here is the 3148K.↩11. Another substituted note was then negotiated between Term and 3B.↩*. Note:↩ This assumes that Lessee will return the equipment at the end of the lease. If it stays on rent through the end of December, income will increase by $14,202.00 and losses will decrease by $11,012.00 after $3,190.00 interest.12. We note that real life proved to be even worse than the "worst case scenario." Percentage reductions apparently were to begin when a new generation of equipment was introduced. In January, 1979, new equipment was introduced which threw the market for used IBM equipment into disarray. Schedule 3 assumed introduction of new equipment in December, 1979.↩13. See also Coleman v. Commissioner,T.C. Memo. 1987-195; Lansburgh v. Commissioner,T.C. Memo 1987-164">T.C. Memo. 1987-164; L.W. Hardy Co. v. Commissioner,T.C. Memo. 1987-63↩.14. Because of his involvement in structuring the arrangement, Raynault appeared as a fact witness as well as an expert.↩15. The residual value reflected on Schedule 3 is $131,940. We are not informed of what assumptions gave rise to this figure. ↩16. 1/3 of the annual 22 percent decrease is 7.33 percent. (June-October is 1/3 of a year.)↩17. Raynault's chart gives a final figure of $169,154.00. We are not aware of where our methodology diverges from his, but for reasons stated below, we use his figures.↩18. This would seem to correlate to Raynault's reductions for loss of the ITC and free maintenance. ↩19. No annual decrement in value, such as Raynault projected in Schedule 3, appears to be factored in by Lyons for December, 1979 values.↩20. See n. 18, above.↩21. Although Lyons phrases his conclusion as 70-75 percent of the "current IBM list price," he appears to mean the 1978 list (petitioner's purchase) price, not the December 1979 list price, which might be different. The sentence in the report following this quoted fragment, which speaks of $749,160 as the list price, confirms this.↩22. The report speaks of the discount for the 370/148-K central processing unit ("CPU") and does not address separately discounts for the other equipment in which petitioners invested. All parties seem to accept application of the CPU discount percentages to all the equipment.↩23. Raynault stated it was because the IBM 4300 was so advanced that the investment here became unprofitable, not because of the time of its introduction.↩24. Esmond Lyons concluded that a June, 1978 investor could expect a December, 1979 value of between $525,000 and $560,000. Using the median of those two figures, $542,500, as a starting point, we can extrapolate in the chart below what Lyons would have predicted as an October, 1985 sale value, using Raynault's 22 percent annual decrements. We assume here that Lyons would not begin the decrements until after December 1980 in accord with Raynault's more likely scenario assumption: ↩DateResidual Value% DecreaseDecember, 1979$542,500.00December, 1980542,500.00December, 1981423,150.0022%December, 1982330,057.0022%December, 1983257,444.4622%December, 1984200,806.6822%October, 1985164,059.0618.3% (10/12 X22%)25. We note that paragraph 2 of the agreement described another fee as a percentage of "net sale proceeds." That language was not used in paragraph 3. ↩26. According to Schedule 3, the investor's equity begins to be recovered in 1984 and is fully recovered in 1985. In these years, however, net income is greater than the amount shown as "cash flow," i.e., equity recovery. We are not informed whether this excess income is to go to CFI, debt repayment or elsewhere.↩27. Because this fee was not discussed by the transaction participants at the time of the investment, we are less inclined to give great weight to the post-hoc testimony of these interested witnesses.↩28. If these months were attributable to a Meijer renewal, the broker's fee would have been higher, but the investors would have earned a profit in any event. Moreover, Meijer had no right to renew, as the lease was terminable by either party, and we think that if Meijer anticipated keeping the computer on lease after 18 months it would have negotiated an option clause and/or reduced rental payments. There is no evidence of such discussions and, as events turned out, the lease was allowed to terminate after 18 months.↩29. This computation assumes the benefits of credits and deductions we disallow below. We factor them in because they were projected by Raynault and our inquiry focuses on what petitioner's investment motive was at the time he invested. Obviously, if we did not factor in these benefits, the comparison of economic benefits to tax benefits would be greater, strengthening petitioner's case.↩30. The decision to invest was made largely in reliance on Goldschmidt's expertise derived from Oshatz. Although not a partner, Oshatz was the party on whom the partnership relied for purchase negotiations and management and who, therefore, should be the focus of our profit motive inquiry. See Fox v. Commissioner,80 T.C. 972">80 T.C. 972, 1008 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner,731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. without published opinion sub nom. Zemel v. Commissioner,Rosenblatt v. Commissioner,Krasta v. Commissioner,Leffel v. Commissioner,Hook v. Commissioner,734 F.2d 5">734 F.2d 5↩-9 (3d Cir. 1984).31. Sec. 46(e)(3) provides, in pertinent part, as follows: (3) Noncorporate lessors. -- A credit shall be allowed by section 38 to a person which is not a corporation with respect to property of which such person is the lessor only if -- (A) the property subject to the lease has been manufactured or produced by the lessor, or (B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property. Petitioners do not contend 3B manufactured or produced the property at issue. Respondent did, however, raise in his reply brief for the first time the argument that 3B fails the first test of sec. 46(e)(3)(B), that the term of the lease must be less than 50 percent of the useful life of the property. Respondent contends that the leaseback to CFI in 1981 reduced to writing the true nature of the transaction from the outset, namely, a lease from 3B to CFI from the time of 3B's purchase of the equipment to its sale. This argument conflicts with respondent's theory that 3B was never the equipment's owner. Further, petitioners had no opportunity to address the issue. We therefore do not consider it. ↩32. Since we disallow the maintenance expense deduction in full, we need not decide whether the broker's fee, the only other possible sec. 162 deduction apparent from the record, could be used for the 15-percent test under sec. 1.46-4(d)(3)(ii), Income Tax Regs. Sec. 46(e)(3)(B) requires that the relevant deductions exceed 15 percent of the applicable rent. The broker's fee equalled but did not exceed 15 percent of the rent in the first 12 months of the lease. Since we disallow the maintenance expense deduction in full, the broker's fee, even if fully qualifying for ITC purposes would therefore not help petitioners. We note also that neither party briefed or argued the effect of these fees on the availability of the ITC. See also Thielking v. Commissioner,T.C. Memo. 1987-201↩.33. See also Nelson v. Commissioner,T.C. Memo. 1985-292, affd. 793 F.2d 179">793 F.2d 179 (8th Cir. 1986). In both Seligman and Nelson,↩ unlike this case, the fees allegedly deductible under sec. 162 were separately stated.34. Compare Houchins v. Commissioner,79 T.C. 570">79 T.C. 570, 592-593 (1982), and Lemmen v. Commissioner,77 T.C. 1326">77 T.C. 1326, 1350-1351 (1981), cattle breeding shelter cases in which we determined, where there were separate maintenance agreements, that components of the purchase price of cattle were↩ allocable to maintenance. Significantly, in both cases, unlike here, we found that the taxpayers' stated purchase prices far exceeded the fair market value of the assets purchased. Moreover, maintenance charges were separately stated to the taxpayers.35. We note that disallowance of the maintenance as a sec. 162 expense may also impact on the amount of allowable losses petitioners may deduct. The parties are directed to account for this in the Rule 155 computation.↩36. Respondent does not argue that June 22, the date 3B's business certificate was filed, should be deemed the first day depreciation deductions are allowable. ↩37. (c) For purposes of this subparagraph, for property placed in service after November 14, 1979, other than depreciable property described in paragraph (c)(2)(iv)(e) of this section, the taxable year of the person placing such property in service does not include any month before the month in which the person begins engaging in a trade or business or holding depreciable property for the production of income.↩38. We note that 3B's depreciable basis may be impacted by our holding regarding the deductibility of maintenance expenses. The parties are directed to account for this in the Rule 155 computation.↩39. The regulations proposed under sec. 6621 perfectly equate the term underpayment with a sec. 6211 deficiency. See sec. 301.6621-2T, A-2. Cf. sec. 6653(c) (defining underpayment for purposes of sec. 6653).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620589/	SHEIKESS GLORIA CHERRY-EL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCherry-El v. CommissionerDocket No. 11346-79United States Tax CourtT.C. Memo 1982-404; 1982 Tax Ct. Memo LEXIS 347; 44 T.C.M. (CCH) 502; T.C.M. (RIA) 82404; July 19, 1982. Sheikess Gloria Cherry-El, pro se. Susan B. Watson, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes: TaxableAdditions to TaxYearDeficiency6651(a) 6653(a) 6653(b)1975$1,192.00$298.00$59.60$596.001976995.46248.8749.77497.73348 The issues presneted for our decision are: (1) whether peitioner is exempt from the payment of Federal income tax; (2) whether petitioner is liable for the additions to tax for fraud under section 6653(b); 1 and (3) alternatively, in the event we determine that petitioner's underpayments were not due to fraud, whether petitioner is liable for the additions to tax under sections 6651(a) and 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner Sheikess Gloria Cherry-El resided in Baltimore, Maryland, at the time she filed her petition in this case. For the taxable years here in issue, 1975 and 1976, petitioner failed to file Federal income tax returns on the due dates. She also failed to file any State income tax returns for those years, although she had filed Maryland State Income Tax Returns from 1966 through 1974. For the years prior to 1975 that petitioner did file Federal income tax returns, she claimed two exemptions349 and reported all of her income. Petitioner's only dependent is her son. During the years 1975 and 1976, petitioner was employed by Lever Brothers, for whom she had worked since June 1966. As compensation for her services, petitioner received a salary, and has experienced regular income increases. Petitioner received gross income of $10,056.44 in 1975 and $9,577.38 in 1976. During the course of her employment with Lever Brothers, petitioner filed various Forms W-4 (Employee's Withholding Exemptions Certificate) and W-4E (Exemption from Withholding). On a W-4 dated August 3, 1970, petitioner claimed "0" withholding exemptions. On October 7, 1975, she filed a W-4 claiming 13 withholding allowances. As a result of these W-4's, $1,103.33 was withheld in 1975 (the W-4 claiming 13 exemptions not being effective to eliminate withholding until late in 1975) and nothing was withheld for 1976. Petitioner filed a W-4E for 1977 certifying that she incurred no liability for Federal income tax for 1976 and that she anticipated that she would incur no liability for Federal income tax for 1977. The effect of filing this form was that no taxes would be withheld from her wages. Petitioner350 joined the Moorish Science Temple (the Temple) during 1975. Leaders of the Temple have at various times counseled its members to avoid paying Federal income tax by filing false W-4's and W-4E's and by not filing Federal income tax returns. In his statutory notice of deficiency, respondent determined petitioner had unreported income of $10,065.44 in 1975 and $9,577.38 in 1976, representing wages she received from Lever Brothers. Petitioner was also allowed the standard deduction for 1976 and two exemptions for 1975 and 1976. OPINION Petitioner asserts that she, as a Moorish American, is exempt from Federal income taxation. We have rejected this argument numerous times in cases involving members of the same Moorish Science Temple. Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304 (1982). 2 Those cases clearly dispose of this issue and require that we sustain respondent's determination. On the question of the additions351 to tax for fraud, the burden of proof rests on respondent to show that at least some portion of the understatement of income for each year was due to fraud with the intent to evade tax. Section 7454(a), Estate of Temple v. Commissioner,67 T.C. 143">67 T.C. 143, 159 (1976); Rule 145(b), Tax Court Rules of Practice and Procedure. Fraud means an intentional wrongdoing and the intent required is the specific purpose to evade a tax believed to be owing. Mitchell v. Commissioner,118 F.2d 308">118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A. 424">40 B.T.A. 424 (1939). Fraud must be established by clear and convincing evidence. Brittingham v. Commissioner,66 T.C. 373">66 T.C. 373, 403 (1976), affd. 598 F.2d 1325">598 F.2d 1325 (5th Cir. 1979). Failure to file a return, standing alone, does not in itself establish fraud. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 93 (1970); Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 19 (1980), on appeal (7th Cir. Dec. 22, 1981); Cirillo v. Commissioner,314 F.2d 478">314 F.2d 478, 482 (3d Cir. 1963); Jones v. Commissioner,259 F.2d 300">259 F.2d 300 (5th Cir. 1958); revg. 25 T.C. 1100">25 T.C. 1100 (1956); 352 First Trust and Savings Bank v. United States,206 F.2d 97">206 F.2d 97 (8th Cir. 1953). This is so because in order to impose the fraud penalty it must be shown that the taxpayer is "motivated by a specific purpose to evade a tax known or believed to be owing." Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Tomlinson v. Lefkowitz,334 F. 2d 262 (5th Cir. 1964). "The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either." Mitchell v. Commissioner,118 F.2d 308">118 F.2d 308, 311 (5th Cir. 1941). 3353 Failure to file may be considered, however, in connection with other factors in determining whether fraud is present. "The critical question is whether the circumstances attending a particular failure to file warrant an inference of intention to evade taxes." Cirillo v. Commissioner, supra at 482. See also, Grosshandler v. Commissioner,supra.We therefore must examine the evidence contained in the record beyond the mere fact of non-filing in order to determine whether petitioner's actions reflect a deliberate attempt to evade her income tax obligations. In support of his fraud determination, respondent notes that as a long-time employee of Lever Brothers, petitioner had filed both Federal and Maryland income tax returns for many years prior to 1975. Additionally, she claimed 13 exemptions that she knew would eliminate withholding on her salary. Nevertheless, on the entire record before us, we do not believe petitioner had the requisite intent to evade a tax believed to be owing. We found her to be an honest and sincere witness, who embraced the religious and racial beliefs of the Moorish Science Temple. The sect's leaders had convinced354 her that these religious and racial beliefs, and her affiliation with the Temple, accorded her a tax exempt status. Evidence adduced at trial indicates that petitioner, along with other members of the Moorish Science Temple, were informed that a conference was held between leaders of the Temple and officials of the Internal Revenue Service at which it was decided and agreed that until a more formal method was devised for indicating the tax-exempt status of the Temple members, all members of the sect should file W-4 Forms claiming the additional exemptions. Although we find it implausible that respondent's representatives actually agreed to such an arrangement, we believe petitioner was actually convinced by the leaders of the sect that such a compromise had been reached, and therefore decide the fraud issue for petitioner. Compare Wiggins-El v. Commissioner,T.C. Memo. 1981-495, with Habersham-Bey v. Commissioner, supra.The additions to tax for failure to file a return and for negligence are another matter. Although again respondent shoulders the burden of proof due to the fact that both issues were raised by respondent belatedly in an amendment355 to the answer ( Florists' Transworth Delivery Assoc. v. Commissioner,67 T.C. 333">67 T.C. 333, 348 (1976); Rule 142(a), Tax Court Rules of Prctice and Procedure), respondent must prevail. Petitioner admits to having filed no returns for either of the years before us, and the record is replete with indications of negligence and intentional disregard of the rules and regulations. Petitioner argues that she now realizes that she should have filed returns claiming tax-exempt status, but she claims to have been misled by one Sheik Clarence Reynolds-El, who deceived her into thinking that the proper approach was not to file anything. The fact remains, however, that in spite of this new-found wisdom, petitioner as of the time of trial had still not filed any documents purporting to be returns for either year. Even if she had, forms claiming taxexempt status and nothing more do not qualify as "returns" and the addition to tax under section 6651(a) would still be applied. Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169 (1981). In the absence of reasonable cause excusing either violation, we must sustain the additions to tax under sections 6651(a)(1) and 6653(a). Decision356 will be entered under Rule 155.Footnotes. The issues with respect to the additions to tax under secs. 6651(a) and 6653(a) were raised for the first time in an amendment to the answer.↩1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise specified.↩2. See also, Bratton-Bey v. Commissioner,T.C. Memo. 1982-19, on appeal (4th Cir. Jan. 25, 1982). Wiggins-El v. Commissioner,T.C. Memo. 1981-495; Gaines-El v. Commissioner,T.C. Memo. 1975-54↩.3. The statute itself formerly provided that part of the deficiency must be due to fraud "with the intent to evade tax." Sec. 293(b), I.R.C. 1939; Cirillo v. Commissioner,314 F.2d 478">314 F.2d 478, 482 (3d Cir. 1963). This "intent to evade" language was deleted by the passage of the Internal Revenue Code of 1954, see sec. 6653(b); however, we have held that "this difference in wording was not a change in the proof necessary to show that a taxpayer is liable for an addition to tax for fraud," Goodwin v. Commissioner,73 T.C. 215">73 T.C. 215, 227 (1979), and the specific intent to evade tax remains a "necessary element of proof under sec. 6653(b)." Considine v. Commissioner,68 T.C. 52">68 T.C. 52, 61, n. 8 (1977); on appeal (9th Cir. December 1, 1980). See, e.g., Loftin and Woodward, Inc. v. United States,577 F.2d 1206">577 F.2d 1206, 1244 (5th Cir. 1978); Wilson v. Commissioner,76 T.C. 623">76 T.C. 623, 633 (1981); Conforte v. Commissioner,74 T.C. 1160">74 T.C. 1160, 1201↩ (1980), on appeal (9th Cir. August 28, 1981).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620590/	Estate of Joseph Nemerov, Deceased, Irving A. Nemerov and William T. Nemerov, Executors v. Commissioner.Estate of Nemerov v. CommissionerDocket No. 51303.United States Tax CourtT.C. Memo 1956-164; 1956 Tax Ct. Memo LEXIS 128; 15 T.C.M. (CCH) 855; T.C.M. (RIA) 56164; July 11, 1956128 1. The decedent, a lawyer, agreed to undertake work for clients on a contingent basis. The question involves four of such arrangements. He performed some services in each matter prior to his death but did not complete the required services and at the time of his death the issues involved in each matter had not been determined. More than a year after decedent's death, in some instances several years later, the executors received payments of fees for decedent's services, three of which were fixed by court order. Upon the facts, held, that at the time of decedent's death, the value of the decedent's services, in each instance, could not have been determined and there could not have been a quantum meruit recovery. The subsequently recovered fees are not includible in decedent's gross estate. 2. Held, upon the facts, that a decree of a New York Court that the decedent during his lifetime had made a completed gift in trust to a friend, excluded $8,000, which was paid by the petitioners under the court's decree to settle the beneficiary's claim, from the assets of the gross estate, so as to entitle petitioners to deduction of $8,000 under section 812(b)(3), 1939 Code. 130 Nathan D. Shapiro, Esq., 50 Court Street, Brooklyn, N. Y., for the petitioners. John James O'Toole, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion The Commissioner determined a deficiency in estate tax in the amount of $40,367.22. The deficiency results from several adjustments of the Commissioner increasing the net amount of the estate. During the trial of this case each party made certain concessions to the other to which effect will be given in a Rule 50 recomputation. In the petition, the petitioners made claim for the first time for a deduction of $8,000 which was paid by the estate in settlement of a claim against the estate. There remain for decision two issues, as follows: (1) Whether the decedent, at the time of his death had an interest in four legal fees in four separate causes, which were received after his death, so as to be includible in the gross estate within the meaning of section 811(a), 1939 Code. (2) Whether the estate is entitled to a deduction for $8,000, which petitioners paid in settlement of a claim against the estate, under section 812(b)(3), 1939 Code. Findings of Fact Joseph Nemerov, the decedent, died131 testate on June 2, 1949, a resident of New York County, New York. The petitioners are the duly appointed and acting executors of the decedent's estate. The decedent's will was admitted to probate by a Surrogate of New York County on June 9, 1949. The estate tax return was filed with the collector of Internal Revenue for the third district of New York on September 1, 1950. For 37 years before his death the decedent was a member of the bar of New York state. He was admitted to practice in various Federal courts and he also practiced before the Interstate Commerce Commission and the Securities and Exchange Commission. The decedent at the time of his death was a member of a law partnership, Nemerov and Shapiro. The decedent reported his income on a cash basis. The accountant's report of the income and expenses of the law partnership for the period from June 2, 1949 to May 31, 1950, when the partnership was liquidated, is incorporated herein by this reference. In determining the deficiency in estate tax, the respondent included in the gross estate a net amount for fees from old cases in the amount of $57,430.12. Petitioners and the respondent now agree that the net fees from the132 law partnership amounted to $48,000. The respondent agrees that his determination of the amount of this item was excessive to the extent of $9,430.12. Petitioners concede that it is proper to include $48,000 in the value of the taxable net estate. Issue 1: Legal Fees. - (A) New York Central RR. Co. litigation, $3,664.37. - In December 1943 the New York Central Railroad Company brought an action in the New York Supreme Court against the New York and Harlem Railroad Co. and certain minority stockholders for a declaratory judgment. New York Central contended that it was not liable to pay Federal income and excess profits taxes of Harlem. The issue involved interpretation of a lease. Flora Pfeiffer, a minority stockholder, was one of the original defendants and she was represented in the action by the decedent. It was agreed between Pfeiffer and the decedent that no fee was to be paid by Pfeiffer, and that a legal fee for petitioner's services, if there was any fee, would be fixed by the court. In October 1945 the New York Supreme Court dismissed the complaint. In 1947 the Appellate Division affirmed the judgment, and in March 1948 the Court of Appeals affirmed. Thereafter, on133 June 25, 1948, decedent and other counsel for minority stockholders moved for an allowance of counsel fees. The motion was denied under order dated November 9, 1948, and under a decision of the same date it was held that the attorneys for the minority stockholders, including the decedent, were not entitled to any allowance for counsel fees. From this decision and order, appeal was taken by attorneys for minority stockholders, including the decedent. The appeal was pending at the time of the decedent's death on June 2, 1949. After the death of the decedent, the Appellate Division, on June 28, 1949, reversed the decision and order of November 9, 1948, and referred the proceeding to an official referee. Thereupon, the defendant railroad company, New York and Harlem Railroad Co., appealed from the order of June 28, 1949, and on May 26, 1950, the Court of Appeals affirmed the order of the Appellate Division. During October and November 1950, the official referee held hearings on the petitions of attorneys for fees, which hearings were concluded on November 16, 1950, upon the filing of a stipulation under which the parties agreed to the fixing of fees for attorneys. Under the stipulation, 134 there was allowed a fee for the services of the decedent on behalf of Pfeiffer, and on December 12, 1950, the petitioners, the executors of the decedent's estate, received the net amount of $3,664.37. (B) 121 Varick Street, $321.70. - During his lifetime, the decedent was retained by the owners of premises at 121 Varick Street, New York City, to take all necessary proceedings to reduce the assessed tax valuations of the premises for the tax years 1945-1946 and 1946-1947. There was an agreement between the decedent and this client that the decedent was not to be paid for his services unless a reduction of the assessed tax valuation was obtained; and if a reduction was obtained, he was to receive 33 1/3 per cent of any tax savings. The decedent filed applications for the reduction of the assessed values for the years involved and thereafter "certiorari proceedings" were instituted and filed by the decedent on October 23, 1945, for the tax year 1945-1946; and on October 7, 1946, for the tax year 1946-1947. No hearings were held in these "certioraris" during the lifetime of the decedent. After the decedent's death, the owner of the premises engaged another lawyer, Alexander Berley, who135 attended hearings before the Tax Commission during 1951, and obtained reductions in the tax assessments for the years 1945-1946, and 1946-1947. The executors of the decedent's estate asserted a claim for legal fees and after negotiations with Berley they received, on October 25, 1951, $321.70, which was paid to the estate of the decedent in satisfaction of the claim for legal fees which was made by the estate. (C) Pittsburgh Railways Co., $8,341.89. - On May 10, 1938, Pittsburgh Railways Co. had filed a voluntary petition for reorganization under Section 77(b) of the Bankruptcy Act in the United States District Court for the Western District of Pennsylvania. In October 1944 while these proceedings were still pending and undetermined, the decedent was retained to represent some owners of securities in Pittsburgh Railways Co. in the hearings. It was agreed by the individuals and the decedent that no fee was to be paid by them to the decedent, and that if he were to receive any legal fee, application therefor would be made to the court and the court would fix the fee to which the decedent might become entitled in accordance with the law and procedure in bankruptcy and reorganization136 cases. The decedent engaged a law firm in Pittsburgh to act as counsel, and he also retained a New York attorney, M. J. Dix, to collaborate in the proceedings. These attorneys were to share in any fees which might be awarded. On July 1, 1949, after the decedent's death, a plan for reorganization of Pittsburgh Railways Co. was prepared and submitted to the necessary parties. Prior to July 1, 1949, during the decedent's lifetime, there were several hearings and appeals in which the decedent participated under his agreement with the security holders who had retained the decedent. After July 1, 1949, hearings were held from time to time on the plan of reorganization, and on March 27, 1950, the Securities and Exchange Commission approved the plan, and on May 1, 1950, the United States District Court approved the plan. After May 1, 1950, the District Court held several hearings on applications for fees. The executors of the decedent's estate retained a Pittsburgh attorney, A. H. Berkman, to represent the estate of the decedent in the hearings on the applications for fees. Finally, by an order dated June 30, 1952, the District Court made awards of fees; $40,000 to the Pittsburgh law137 firm which the decedent had retained; $90,000 to the New York lawyer, Dix, whom the decedent had retained; and $15,000 to the estate of the decedent. Also, the court allowed an award of $1,000 moneys which had been advanced by the decedent. The executors were dissatisfied and asked leave of the Circuit Court of Appeals for the Third Circuit to appeal from the allowance of the District Court. The application was denied on August 6, 1954. The reason the executors of petitioners' estate wee dissatisfied with the District Court's allowances of fees for the services of all of the associated attorneys, including the decedent, is as follows: On August 22, 1951, the executors of the decedent's estate entered into an agreement with Dix and the Pittsburgh law firm, Pritchard, Lawlor, Malone & Geltz, in which it was agreed that the total fees which might be allowed thereafter by the District Court would be pooled and shared proportionately; Dix would receive 37 1/2 per cent; the Pritchard law firm, 37 1/2 per cent; and the estate of Joseph Nemerov would receive 25 per cent. Because of their dissatisfaction, the executors commenced a special proceeding in the District Court in Pittsburgh, petitioning138 the court to direct Dix and the Pritchard firm to comply with the agreement of August 22, 1951. The District Court dismissed this special proceeding on June 22, 1954, and, as stated above, the Court of Appeals for the Fifth Circuit denied petitioners' application for leave to appeal on August 6, 1954. On October 6, 1952, the executors of the decedent's estate received from the trustees of Pittsburgh Railways Co. the allowance for fees of $15,000, and the sum of $1,000 for reimbursement for advances by the decedent. The executors paid A. H. Berkman, and others, $6,658.11 for legal fees and disbursements in connection with a dispute they had had with the attorney, Dix, and in connection with the application for allowances. The executors have not received and are not entitled to receive any further moneys in the Pittsburgh Railways matter. After paying $6,658.11 to Berkman, the executors had left out of the allowance of $15,000, the sum of $8,341.89. The petitioners concede that the payment of $1,000, reimbursement for moneys advanced by the decedent, is includible in the gross estate. The respondent concedes that with respect to fees in the Pittsburgh Railways Co. matter, he erroneously139 included in the value of the gross estate $21,250. There remains in dispute between the parties in this matter $8,341.89, which amount was received by the petitioners on October 6, 1952. (D) American Light and Power Co., $40,500.67. - In September and October 1946, the decedent was retained by Paul Shanik, an attorney, as Shanik's attorney, and by other holders of common stock of American Power and Light Company and of Electric Bond and Share Company, as well as by the Special Protective Common Stockholders Committee of American Power and Light Company, to appear to object to a proposed joint plan (the 1946 plan) of American Power and Light Company (hereinafter called American), and of Electric Bond and Share Company (hereinafter called Electric), under Section 11 of the Public Utility Holding Company Act of 1935, to retire preferred stock of and to settle certain claims against American. It was agreed that no fee would be paid to the decedent by those who retained him, and that if the decedent became entitled to any fee, the fee would be fixed by the Securities Exchange Company (hereinafter called S.E.C.), pursuant to prescribed procedures under applicable law. Shanik acted as associate140 counsel with the decedent. American was a public utility holding company having a portfolio of assets of about $250,000,000. For the purpose of obtaining necessary accounting and statistical assistance, the decedent engaged Theodore R. Mackoul as a financial accountant and consultant. Also, the decedent enlisted the cooperation of another attorney, Louis Kipnis. The 1946 plan of American was withdrawn as a result of opposition of the Special Protective Committee which opposition was guided by the decedent. On April 8, 1948, a new joint plan of American and Electric was filed. Hearings on the 1948 plan began on May 25, 1948, in Washington, D.C. and continued until August 27, 1948. The decedent engaged Leo B. Mittelman, another attorney, to attend the hearings in Washington. Following the completion of the hearings, and after the decedent's death, a compromise plan was approved by S.E.C. on September 22, 1949. From October 3, 1949 until November 7, 1949, various events transpired pursuant to the approval of S.E.C. relating to the compromise plan which lead up to the hearing on the compromise plan on November 7, 1949 in the United States District Court for the Southern District141 of New York. Among the several intervening steps which were taken was the issuance of an order of the S.E.C. on October 4, 1949, approving the compromise plan in which order the S.E.C. reserved, inter alia, jurisdiction over the payment of fees and expenses already incurred or to be incurred. On November 14, 1949, after a hearing on November 7, 1949, the order of the District Court approving the above-mentioned plan was entered. The compromise plan provided that American would pay all legal fees and expenses approved by the Commission. In June 1949, following the death of Joseph Nemerov, the law firm of Nemerov & Shapiro was substituted by the Protective Committee as its counsel. Mittelman remained as associate. Shanik and Kipnis continued to act in the matter. Neither the decedent nor the firm of Nemerov & Shapiro filed any application with S.E.C. for legal fees or disbursements. On March 2, 1950, by an agreement in writing, Mittelman agreed to prepare, file, and, if necessary, argue on a joint application for allowances for fees for services rendered and expenses incurred in the reorganization proceedings by the decedent and the members of his staff, by Kipnis, by Mittelman, 142 and by the firm of Nemerov & Shapiro and its staff. Mittelman agreed to render all services that might be required in behalf of the application. Under the above agreement of March 2, 1950, Shanik was to receive 11 per cent of the gross allowance for legal fees, Mittelman was to receive 37 1/2 per cent of the remaining sum, after certain deductions, and the balance was to go to the estate of Joseph Nemerov. Also, all reimbursement of expenses was to go to the estate of Joseph Nemerov. Notwithstanding the agreement of March 2, 1950, and in violation and breach thereof, Mittelman filed with S.E.C. an application for an allowance solely on his own behalf, in which he requested S.E.C. to allow him the sum of $200,000 as compensation for his legal services. The application was filed on September 27, 1950, without the knowledge or consent of the executors of Nemerov's estate who are the petitioners here. By reason of the breach of the agreement by Mittelman, the executors of the Joseph Nemerov estate, Shanik, and the firm of Nemerov & Shapiro commenced an action in the Supreme Court of New York on November 9, 1950, to restrain Mittelman from violating the terms of the agreement of143 March 2, 1950, and from prosecuting his personal application for an allowance in violation of the agreement. In that action the plaintiffs demanded judgment and asked the court to determine, construe, and declare the precise rights and the legal relationship of the plaintiffs and Mittelman under the agreement. In addition, the petitioners made an application, dated November 9, 1950, to S.E.C. to stay Mittelman from violating the terms of the settlement agreement of March 2, 1950. The Supreme Court proceedings were settled by an agreement whereby Mittelman agreed to file a joint application in place of the individual application theretofore filed by him. Thereafter, pursuant to this new agreement on about December 5, 1950, Mittelman filed a joint application with S.E.C. for an allowance for fees on behalf of himself, Shanik, Kipnis, the decedent's estate, and the firm of Nemerov & Shapiro. It was then agreed that the estate should receive 50 per cent of the fees allowed by S.E.C. under the joint application. During the month of January 1951, hearings were held by S.E.C. upon the application in which all parties concerned participated, Shanik, the firm of Nemerov & Shapiro, Nathan144 D. Shapiro, attorney for the decedent's estate, Kipnis, and Mittelman. On about October 1, 1952, the S.E.C. awarded a gross legal fee of $110,000 but directed that the decedent's estate, Kipnis, and Nemerov & Shapiro should receive not more than a 45 per cent share thereof by reason of the fact that any fee payable to the estate and to Kipnis and to Nemerov & Shapiro in excess of 45 per cent would constitute an unreasonable distribution of legal fees. On September 11, 1952, petitioners agreed to accept 45 per cent of the fee of $110,000 for itself, the firm of Nemerov & Shapiro, and Kipnis. On October 7, 1952, the petitioners received and paid out the following moneys in the American Power & Light Co. case: RECEIVED l45 per cent of gross fee of$110,000$49,500.00Disbursement allowed to Nemerov& Shapiro1,000.00Disbursement allowed to petitionerby SEC10,417.09Total$60,917.09PAID OUTAllowance to Louis Kipnis$2,500.00Allowance to Nemerov &Shapiro5,841.708,341.70Net, before the following disburse-ments$52,575.39DISBURSEMENTSNathan D. Shapiro$ 124.78Nemerov & Shapiro, Mack-oul collection440.00Ace Reporting Co.92.85657.63Balance$51,917.76145 The above schedule shows that S.E.C. awarded $11,417.09 as reimbursement of disbursements. The parties agree that of this sum, $1,000 was paid through the Nemerov & Shapiro partnership, and the petitioners concede that $10,417.09 is includible in the gross estate of the decedent. Accordingly, the net amount of the legal fee which is in dispute in the American Power & Light matter is the net amount of $40,500.67, after deducting $8,999.33 (disbursements to Kipnis, the Nemerov law firm, and others) from $49,500. To summarize the facts relating to items A, B, C, and D, supra: In each of the four matters above-described, none of the causes had proceeded to a determination or decision, and in none had the required legal services to bring the cause to a determination or decision been completed before the death of the decedent. In order to bring each of the causes to the point of completion, attorneys other than the decedent rendered services after the death of the decedent, and the participation of the decedent in each was only part of the entire amount of legal services required and supplied. The decedent died before he had prosecuted to completion, settlement, or judgment the legal146 services which he undertook to perform but was unable to perform to completion. The decedent did not file any claim for compensation for services which he had rendered prior to his death in any one of the four matters, except in the New York Central RR. litigation where a motion which was filed was denied. In none of the matters was any compensation for the decedent's services agreed upon in advance. Rather, he undertook and volunteered services in each matter on a wholly contingent basis. As of the time of the decedent's death, no value could be placed upon the services which he had rendered in each matter up to the time of his death. There were no statutorily fixed fees to which he could have made claim at the time of his death. At the time of the decedent's death, his legal services rendered in each of the four matters up to that time had no market value, and at that time the services which the decedent had rendered in each matter were not compensable. Issue 2: Alleged Trust for D. Foster. - The decedent never entered into the bonds of matrimony. During his lifetime, decedent had a friend, Diana Foster. On June 14, 1950, Diana filed a complaint in the Supreme Court of New147 York against the executors of the estate of the decedent in which it was alleged that for many years prior to the decedent's death, and up to the time of his death, Diana and the decedent had enjoyed a mutual relationship of trust, confidence, devotion, love, and affection; that in about June 1935, the decedent created a trust for the benefit of Diana, wherein he designated her the beneficiary, and himself the trustee, and declared that he would hold in trust for her benefit cash in the amount of $10,000, which he had in his possession. It was further alleged that the decedent had added cash and securities to the trust, that the corpus of the alleged trust had a value of $250,000 at the time of the decedent's death, and that the executors of the decedent's estate had failed and refused to honor the plaintiff's claim and pay over to her the corpus of the alleged trust or any part thereof. It was alleged further that the plaintiff had no adequate remedy at law. The executors filed an answer denying the material allegations in the complaint. On April 28, 1952, there was trial at which testimony on the part of Diana was submitted. On May 9, 1952, the Supreme Court entered an interlocutory148 judgment in which the following were decreed, inter alia: "ORDERED, ADJUDGED and DECREED that the defendants, as Executors of the Estate of Joseph Nemerov, deceased, account to the plaintiff for the proceeds of an express parol trust created by said Joseph Nemerov, deceased, for the plaintiff; * * "ORDERED, ADJUDGED and DECREED, that upon the taking and stating of the account of the defendants, the plaintiff may recover from the defendants, such sum as may be found to be due her from the Estate of Joseph Nemerov, deceased, and costs, interest and disbursements may be applied for in the final judgment to be entered herein; * " After entry of the interlocutory decree and under the direction of the justice presiding at the trial, the executors paid the sum of $8,000 to Diana on June 2, 1952. The sum of $8,000 was paid by the executors as the result of a settlement entered into in open court on May 27, 1952. The settlement stipulation provided as follows: * "This settlement proceeds from a conference this morning in open court wherein the practical considerations affecting this case were brought to the attention of counsel, and because of such considerations149 and for no other reason, this settlement has been made."Between April 20, 1950 and July 16, 1951, the petitioners made payment aggregating the sum of $115,972.02, on account of the Federal estate taxes. The executors of the decedent's estate elected to have the gross estate of the decedent valued in accordance with the provisions of section 811(j), 1939 Code. None of the legal fees in question were received by the executors of the decedent's estate within one year after decedent's death. The stipulation of facts is incorporated herein by this reference. Opinion HARRON, Judge: Issue 1: The first question is whether the value at the date of decedent's death of legal fees, or the amounts of fees actually received by the estate of Joseph Nemerov, deceased, in 1950, 1951, and 1952, more than one year after the date of the decedent's death, are includible in the gross estate. The executors of the estate collected, more than one year after the decedent's death, a share of fees in four cases in which the decedent had rendered some services. Upon all of the facts, it must be concluded that in each instance the amounts received by the executors were to no extent realizations of the150 values of actual or inchoate rights of the decedent which existed at the time of death. The services that had been performed before death were not compensable as of the time of decedent's death or within one year thereafter. There could have been no quantum meruit recovery since each case was taken on a contingent basis. The above is obvious with respect to item B, 121 Varick Street, where the service to be performed by the decedent was to endeavor to obtain reduction in the assessed valuations of the property. All that the decedent did was to file "certiorari proceedings." After his death, the owners of the property engaged another lawyer and eventually the new lawyer completed the work required in the matter. At the time of the decedent's death there was no accrual of whatever amount, if any, the decedent's limited services in the matter were worth. His fee for services was wholly contingent upon the obtaining of a reduction in taxes. The petitioners finally received $321.70 in 1951, as payment for decedent's limited services, but only after negotiating with the attorney who succeeded Nemerov. In the New York Central RR. and Harlem Railroad Co. matter (Item A), decedent was retained151 on a contingent basis. The decedent was not to receive any fee unless one was awarded under a court decree or order. On November 9, 1948, the court having jurisdiction in New York denied a motion of attorneys, including the decedent, for fees. Decedent died on June 2, 1949. At that time no right to a fee for legal services had accrued and at that time, as the facts show, there could not have been any quantum meruit recovery. In the other two matters involving the Pittsburgh Railroad and the American Power and Light Co., (C) and (D), no plan had been approved as of June 2, 1949, at the time of the decedent's death. In both cases, the statutory procedures applicable to each one provided that the matter of attorney's fees was for a District Court to determine after hearings on applications for fees, and under those procedures, applications for fees could not be made until a United States District Court fixed the time for filing such applications. See . The facts establish that at the time of the decedent's death, the precedent contingency, in each instance, had not occurred under which the right to fees had accrued, and that at the152 time of the decedent's death no quantum meruit claim for fees could have been made. The decedent reported his income on a cash basis. The facts relating to all four matters and particularly to the proceedings involving the Pittsburgh Railways Company and the American Power and Light Company, establish that the net benefit accruing to the decedent's estate, at the time of his death and one year later, for the decedent's services in each matter up to the time of his death could not have been evaluated for the purpose of including the fees or the value of decedent's services in the decedent's estate. Cf. ; . The facts relating to all four matters are such that this case is distinguishable, in our opinion, from , reversing . See , where it was observed that neither a taxpayer nor a revenue officer could do any more than guess at the value of the contingency involved in that case. The same may be said here with equal propriety. Under153 this issue, the respondent's determination that fees received by the estate after the decedent's death are includible in the gross estate is reversed. Issue 2. - The petitioners seek either a deduction or an exclusion from the gross estate of $8,000 for the claim of Diana. Section 812(b)(3), 1939 Code, provides in part that "* * * The deduction herein allowed in the case of claims against the estate, * * , or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * " The respondent argues that there is no evidence here establishing that the claim of Diana is based upon adequate and full consideration in money or money's worth. Petitioners rely upon the interlocutory judgment of the Supreme Court of New York which decreed that an express parol trust was created by the decedent for Diana and ordered the executors of his estate to render an accounting of the proceeds in the oral trust. Petitioners rely upon Rosenman v. United States, 53 Fed. (2d) [Supp.] 722, reversed on another issue, . Upon154 consideration of the evidence before us, we believe that this issue comes within the Rosenman case. The complainant, Diana, claimed that the decedent had created an oral trust during his lifetime for her benefit in the amount of $10,000. There was trial upon her complaint, evidence was adduced, and the Supreme Court of New York sustained the claim that an inter vivos, oral trust had been created. In the Rosenman case, the son of the decedent claimed that his father had made an inter vivos gift to him of securities having a value of $167,000. There was no litigation in court of the issue about the alleged gift to the son. Instead, the executors negotiated a settlement and paid the son $25,000. Thereupon, a petition was filed by the executors in the Surrogate's Court asking for approval of the settlement on the basis of their opinion that the deceased had in fact made a gift to his son during his lifetime. Here, the question of whether the decedent made a gift in trust for the benefit of Diana was litigated, and the court decreed that a gift had been made under an oral trust. The court ordered the executors of the decedent's estate to render an accounting to Diana, as the beneficiary155 of the trust, of the proceeds of the oral trust. The executors rendered such accounting and thereafter the parties agreed that the amount to which Diana was entitled under the oral trust was $8,000. The facts here closely resemble the facts in the Rosenman case. The executors of Rosenman's estate were allowed deduction of $25,000 for the claim against the estate which they had paid. The court concluded that " * * The judgment of the Surrogate's Court approving the settlement of $25,000 had the effect of excluding from the gross assets of the estate so much of the securities which the executors had been administering." The above conclusion of the court was founded upon the premise that a completed gift had been made, inter vivos, by the decedent. The same reasoning is proper here, unless we ignore and give no effect to the judgment and decree of the Supreme Court of New York. That decree was made in a contested, adversary proceeding; it did not follow from a nonadversary proceeding. Furthermore, the court made a determination of a property interest, and the rule to be followed here is that under such circumstances effect shall be given to the adjudication by and the decree*156 of a state court. It is held that the decree of the Supreme Court of New York and its approval of the settlement of the executors under that decree had the effect of excluding from decedent's gross estate assets which the executors had been administering to the extent of $8,000. Under this issue the petitioners are sustained. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620591/	J.L. INDUSTRIES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JAMES L. LAYTON AND AMY S. LAYTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJ.L. Industries, Inc. v. CommissionerDocket Nos. 4011-86, 7886-86.United States Tax CourtT.C. Memo 1987-531; 1987 Tax Ct. Memo LEXIS 523; 54 T.C.M. (CCH) 905; T.C.M. (RIA) 87531; October 19, 1987. Alan F. Segal, for the petitioners. John L. Comeau, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: In these consolidated cases, respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows: Additions to TaxI.R.C.Docket No.YearDeficiencySection 6653(b) 1J.L. Industries1977$ 1,953$ 2,0804011-8619784,7552,37819795,1492,575James L. and19773,0911,546Amy S. Layton 19787,1473,5747886-86197910,0595,030524 The issue to be determined is whether there are underpayments of tax due to fraud of James L. Layton, who was the president, treasurer, and sole shareholder of J.L. Industries, Inc. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. The principal office of petitioner J.L. Industries, Inc., and the residence of petitioners James L. and Amy Layton were in Illinois at the time their petitions were filed. Petitioner J.L. Industries, Inc. (the corporation), was incorporated in Rhode Island in 1974. During 1977, 1978, and 1979, the corporation was engaged in the business of selling railroad equipment and providing railroad consulting services to domestic and foreign companies. At all relevant times, James L. Layton (petitioner) was the president, treasurer, and sole shareholder of the corporation. Petitioner was the corporate officer responsible for all the business matters of the corporation, including preparation of corporate journals and ledgers. The corporation employed the cash method of accounting and adopted a taxable year ending December 31. The corporate bank account was maintained at525 the First National Bank of Chicago. Prior to the years in issue, petitioner was employed by Worthington Corporation (Worthington). As an employee of Worthington, petitioner sometimes secured cash advances for travel expenses, and he accounted for such expenditures on vouchers submitted to his employer. In 1967 or early 1968 petitioner opened two personal bank accounts at the First National Bank of Barrington. One such account was labeled "J. L. Layton Special Account" (the Special Account). Petitioner deposited into the Special Account checks received from Worthington for advances or reimbursement of travel expenses. During the years in issue, the corporation performed services for various domestic companies and acted as an agent for certain Canadian companies. Customers of the corporation were billed both for services and for expenses incurred in travel on behalf of the customer. Checks received from domestic customers or for services billed to the Canadian customers were deposited in the corporate bank account in Chicago. Such deposits were entered in the cash receipts journal maintained by petitioner for the corporation. Invoices to Canadian companies for expenses526 incurred on behalf of those customers were prepared for petitioner and contained "special instructions" that checks in payment of such invoices be payable to J. L. Layton and sent to his home address in Barrington. Such checks were deposited by petitioner in the Special Account. Funds in that account were disbursed toward various personal expenses of petitioner and his family. During the years in issue, income tax returns for the corporation were prepared by an accountant, and the individual tax returns for James L. and Amy Layton were prepared by another accountant with the same firm. None of those returns reported the reimbursement of expenses from Canadian companies deposited into the Special Account. Petitioner did not advise the accountants of the existence of the Special Account. The amounts of income and expenses reported on the corporate returns for 1977, 1978, and 1979 were taken from the journals and ledger maintained by petitioner for the corporation. In those records, petitioner listed as "travel and entertainment expense" cash advances made to him by the corporation in even dollar amounts. The accountant who prepared the corporate tax returns deducted the total527 shown on the ledger as travel and entertainment expenses without requesting substantiating receipts or detailed breakdown of the expenses claimed. The gross receipts and travel and entertainment expenses reported on the corporate return and the unreported reimbursements for the years in issue were as follows: ReportedUnreportedGrossReportedReimbursementsYearReceiptsT & E Expensesof T & E Expenses1977$ 93,803$ 19,037$ 8,018.82 1978111,57723,43314,572.801979161,59626,82518,127.86The total amounts deposited in the Special Account represent gross receipts of the corporation and taxable income of petitioner and should have been reported by the taxpayers during the years in issue. In addition, during 1979, petitioner deposited into the Special Account a check for $ 600 commission income from a Canadian customer. That sum was not reported on the corporate or individual returns for 1979. In 1980, during the course of an audit of petitioners' tax returns for the years in issue, petitioner was requested to produce books and records of the corporation, including records of expenses incurred528 for travel and entertainment. Petitioner prepared certain typewritten listings of expenses that previously had not been in existence, dated them to make them appear that they had been prepared during the years in issue, and presented them to the auditing agent as if they were contemporaneous records prepared during the years in issue. On April 16, 1984, petitioner entered a plea of guilty to filing false individual income tax returns for 1978 and 1979, in violation of section 7206(1). In relation to that plea, petitioner signed a Plea Agreement containing the following paragraphs: 8. In agreeing to plead guilty to these counts, JAMES L. LAYTON acknowledges and agrees that the following facts are true and that the United States could prove said facts beyond a reasonable doubt. He also stipulates to the admissibility of these facts and the documentary and other exhibits which would support them. Specifically, he agrees and admits: (1) As charged in Count One of the information, during the calendar year in 1978, he received $ 14,572 in payments from various Canadian clients which he knowingly and willfully did not include on the adjusted gross income line or taxable income529 lines of his joint individual income tax return for 1978. These payments were obtained by directing his Canadian clients to reimburse him personally at his home address in Barrington, Illinois, for travel expenses he had incurred in connection with his business, but for which he had previously been paid from his company, J.L. Industries Inc., a corporation wholly owned by the defendant and his wife. He deposited these payments into the James L. Layton special account at the First National Bank of Barrington. He then did not inform his return preparer of these payments, therefore causing his return preparer to prepare a return which did not include these payments as income to the defendant in 1978. On April 11, 1979 he then signed and filed the individual income tax return for himself and his wife knowing that it was false in the statement of adjusted gross income and taxable income, because those lines did not include this additional income of $ 14,572. (2) In a similar manner, as charged in Count Two of the information, during the calendar year 1979, he received $ 18,727 in payments from various Canadian clients which he knowingly and willfully did not include in information530 provided to his tax preparer for inclusion on the adjusted gross income and taxable income lines of his joint individual income tax return for 1979. On June 7, 1980 he signed his 1979 joint individual income tax return knowing it was false in the statement of gross income and taxable income because those lines did not include this additional income at $ 18,727. * * * 13. Defendant understands and agrees that nothing in this agreement shall limit the Internal Revenue Service in its collection of any taxes, interest or penalties from the defendant JAMES L. LAYTON AND J.L. Industries, Inc. The defendant agrees to cooperate fully with the Internal Revenue Service in its assessment and collection of taxes, interest and penalties from him and from J.L. Industries, Inc. (1) For purposes of determining his civil income tax liability and the civil income tax liability of J.L. Industries, Inc., the defendant admits that in 1977, 1978 and 1979, he listed as expenses on the books of J.L. Industries, Inc., his wholly owned corporation, the costs of his travel for Canadian clients. When Canadian clients reimbursed these expenses, he deposited them to his own account rather than crediting531 them as income of J.L. Industries, Inc. In this manner, according to records presently available from the defendant and the corporation, he reduced the net income of J.L. Industries, Inc. by approximately $ 8,019 for 1977, $ 14,572 for 1978 and $ 18,727 for 1979. He then did not include these amounts as income to himself on his joint individual income tax returns for 1977, 1978, and 1979, although he knew they were taxable income, since he had not personally incurred any of the expenses for which they were intended as reimbursement. * * OPINION The 50-percent addition to tax in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell,303 U.S. 391">303 U.S. 391, 401 (1938). Respondent has the burden of proving, by clear and convincing evidence, an underpayment of tax and that some part of the underpayment for each year was due to fraud. Section 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure. This burden is met if it is shown that the taxpayer intended to evade taxes532 known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. A fraudulent underpayment of taxes may result from an overstatement of deductions as well as an understatement of income. Hicks Co. v. Commissioner,56 T.C. 982">56 T.C. 982, 1019 (1971), affd. 470 F.2d 87">470 F.2d 87 (1st Cir. 1972); Neaderland v. Commissioner,52 T.C. 532">52 T.C. 532, 540 (1969), affd. 424 F.2d 639">424 F.2d 639 (2d Cir. 1970). The existence of a 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). Fraud will never be presumed. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Fraud may, however, 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 requisite533 fraudulent intent. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105-106 (1969). Respondent must prove fraud in each of the years involved. Drieborg v. Commissioner,225 F.2d 216">225 F.2d 216, 220 (6th Cir. 1955). A pattern of consistent underreporting of income for a number of years, especially when accompanied by other circumstances showing an intent to conceal, justifies the inference of fraud as to each of the years. Holland v. United States,348 U.S. 121">348 U.S. 121, 129 (1954); Estate of Mazzoni v. Commissioner,451 F.2d 197">451 F.2d 197 (3d Cir. 1971); Agnellino v. Commissioner,302 F.2d 797">302 F.2d 797 (3d Cir. 1962); Otsuki v. Commissioner, supra.Petitioners admit in this case that there was unreported corporate and individual income for each of the years in issue and that there was an underpayment of both corporate and individual income tax for each of the years in issue. 2 As to 1978 and 1979, petitioner admitted in the Plea Agreement that he knowingly filed false individual income tax returns. 534 Petitioner now contends that he maintained his expense records and the Special Account in the same manner after commencing business through the corporation as he did when he was employed by Worthington; that he did not realize that the reimbursement checks deposited in the Special Account constituted taxable income; that the Special Account was not kept a "secret" from the corporate tax return preparer because the accountants' fees and certain taxes were paid by checks written on the Special Account; that a careful accountant would have inquired for records of exact travel and entertainment expenditures instead of accepting the total from the ledgers that included checks written to petitioner for even amounts; and that he cooperated fully with the Internal Revenue Service during the audit of the corporate returns. Separate banks accounts and other means of concealing assets are frequently cited as evidence of fraud for criminal or civil purposes. We are unpersuaded by petitioner's suggestion that the bank account was not secret and the practice was not fraudulent because it could have been easily discovered by the accountants. Failure to take additional steps that would have made535 discovery less likely does not negate fraudulent intent. The United States Court of Appeals for the Seventh Circuit, to which our decision in this case is appealable, recently stated: It cannot be expected that all tax payment evaders approach their problem in the same way. They have demonstrated a certain misguided freedom to use their own devices as they deem best to suit their own circumstances. Although the defendants in the cases we have reviewed used some different methods of attempting to conceal their assets * * , the cases are not distinguishable on that ground. * * [United States v. Conley,826 F.2d 551">826 F.2d 551, 87-2 USTC par. 9469 at 89,340 (7th Cir. 1987).] We do not believe petitioner's testimony at trial that he did not understand that reimbursement of expenses received from his Canadian customers was taxable income. That testimony is contradicted by the admissions in the Plea Agreement that he signed his 1978 and 1979 individual income tax returns knowing they were false because he did not include the unreported reimbursement checks. The conviction pursuant to his plea related only to 2 years and two returns and, even for those years, 536 does not collaterally estop either petitioner or the corporation from disputing the additions to tax fraud. Wright v. Commissioner,84 T.C. 636">84 T.C. 636 (1985). Those prior statements as to his state of mind and intent, however, impeach his present assertion that he lacked knowledge of the taxability of the funds. Petitioner's argument that he cooperated with the examining agent during the audit is contradicted by evidence that he fabricated documents to present to the auditing agent. He presented to the agent records purportedly reflecting travel on behalf of particular clients; he now admits that those documents were typed at the time of the audit. The typewritten records bore his signature and handwritten dates appearing to reflect the date of execution. Other records, however, showed that petitioner was travelling away from home on dates handwritten on the typed expense reports. Although petitioner assets that he was merely trying to be "helpful" in making up records for the examining agent, the probable effect of the documents was to mislead the examining agent. Based on the total record, respondent has satisfied his burden of proof by clear and convincing evidence537 that the underreporting of income and underpayment of tax on the corporate and individual income tax returns for each of the years in issue was due to fraud. The additions to tax are therefore sustained. Decisions will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code as amended and in effect during the years in issue, except as otherwise noted. ↩. The liability of Amy S. Layton is limited to the amounts of the deficiencies. ↩2. At trial, petitioners' counsel stated: Mr. Layton admits that the taxes on his corporate return JLI and his personal returns were understated for the years in question. As the result of the failure to include in corporate income the expense reimbursements mentioned * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620593/	ESTATE OF NANCY H. MILLER, DECEASED, WALTER FADER, JR., EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Miller v. CommissionerDocket No. 16513-92United States Tax CourtT.C. Memo 1994-25; 1994 Tax Ct. Memo LEXIS 28; 67 T.C.M. (CCH) 1994; January 24, 1994, Filed 28 For petitioner: Walter Fader, Jr.For respondent: Donna F. Herbert. GERBERGERBERMEMORANDUM OPINION GERBER, Judge: Petitioner, by a motion filed November 29, 1993, moved to vacate or revise a stipulated or agreed decision entered October 29, 1993. Petitioner does not seek our reconsideration of the merits because the decision reflecting a 1988 income tax deficiency was entered in accord with the agreement of the parties. Instead, petitioner contends that the settlement was entered into under a "mistaken belief * * that there was tax due and owing." Rule 162 of this Court's Rules of Practice and Procedure permits the filing (without leave of the Court) of motions to vacate and revise a decision within 30 days. In this regard, petitioner's motion was timely filed. This Court's Rules, however, do not provide precepts for vacating or revising a decision. Traditionally, we have looked to the Federal Rules of Civil Procedure for guidance where our rules are silent. Rule 1(a) of this Court's Rules of Practice and Procedure; . Rule 60 1 provides for relief from a judgment29 or order. More specifically, Rule 60(b) concerns a number of situations involving mistakes, inadvertence, neglect, newly discovered evidence, fraud, etc. Accordingly, we must consider petitioner's specific claim to determine whether Rule 60(b) provides any guidance in this matter. Petitioner alleges the following facts in support of the motion to vacate the decision in this case: (1) That the executor agreed to settle this controversy under the mistaken belief that the decedent had realized proceeds from the sale of her residence during 1988. (2) Since entering into the settlement (agreed decision executed by executor October 14, 1993), the executor contends that certain facts had been "surreptitiously covered up" and not available to him. (3) According to the executor, these facts reveal that the decedent sold her residence to her nephew in 1986 and claimed a one-time exclusion of sale proceeds on her 1986 Federal income 30 tax return. The nephew did not want the sale to be known to the State of California for fear of additional real property taxes being assessed in accord with the so-called Proposition 13. Accordingly, the nephew and his wife's names were merely added to the title of the realty in 1986, and there was no recording of a deed transferring the property during 1986. (4) The property was sold in 1988 to an unrelated third party and decedent reported the sale on her 1988 Federal income tax return, again claiming the one-time exclusion. The executor believes that decedent's nephew received the proceeds of this sale. (5) The executor contends the nephew was the true owner and that the tax burden on the 1988 sale should fall on the nephew rather than petitioner. Respondent objects to the granting of petitioner's motion arguing that the executor has not shown that the alleged facts were not available to him, and if available whether the alleged facts can be supported by documentary evidence. For example, respondent notes that petitioner could have supplied documents showing the various deeds, titles, etc. Finally, respondent notes that she will be prejudiced because the facts as reported31 by petitioner were relied upon to resolve this matter, and, in the interim, the period for assessment would have passed with respect to the nephew. Rule 60(b) in pertinent part, permits discretion to relieve a party from a final judgment for "(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); * * (6) any other reason justifying relief from the operation of the judgment." Relief under the catch-all language of Rule 60(b)(6) is available for reasons other than those specifically designated in subparts 60(b)(1) through (5). . Additionally, a motion for reconsideration under Rule 60(b)(6), requires a showing of extraordinary circumstances not related to inadvertence or neglect already covered in Rule 60(b)(1). Petitioner's motion specifically addresses a Rule 60(b)(1) or (2) situation, and other extraordinary circumstances that could be considered under Rule 60(b)(6) are not asserted here. Although "Rule 60(b) motions should be liberally32 construed to see that cases are tried on the merits and to dispense with 'technical procedural problems' * , 'there is a compelling interest in the finality of judgments which should not be lightly disregarded.'" (quoting . Here, the executor claims that the information concerning the nephew's alleged ownership came to his attention between the time of settlement (October 14, 1993) and the time of the motion (November 29, 1993). It should be noted, however, that decedent's accountant, in a June 2, 1992, letter addressed to the Internal Revenue Service, which was attached to the document filed as a Petition in this case, states that claim for the exemption was mistakenly filed with decedent's 1986 return because "Her former tax preparer generated the form on his computer and mistakenly included the form in her 1986 tax return." The letter also stated that a new preparer filed an amended return for 1986 withdrawing the claim for the exemption. Finally, the same letter contains the explanation33 that for decedent's 1988 tax year the $ 125,000 one-time exemption covered the $ 124,020 gain realized on the sale of decedent's residence. In a subsequent Amended Petition signed by the executor, the same facts were reiterated. Accordingly, the executor here had ample time to determine the factual circumstances surrounding the reporting of the sale in both 1986 and 1988. Further, if the executor's new position is correct, he allowed his allegations that 1988 was the correct year to represent his position even though he had not checked the deeds, titles, etc., prior to making those allegations. We find that these circumstances fall short of the standard of due diligence and excusable neglect. Moreover, we find the executor's allegations to be somewhat incongruous in that it is alleged that these facts were "surreptitiously" kept from the executor, even though he was aware that exemption claims were made for both 1986 and 1988. In summary, we do not find this situation to represent the type of "excusable neglect" envisioned in Rule 60(b). Finally, it would also prejudice respondent to grant petitioner's motion. Therefore, petitioner's Motion to Vacate or Revise Decision will*34 be denied. An appropriate order will be issued. Footnotes1. Unless otherwise noted, rule references are to the Federal Rules of Civil Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620594/	Leo Moceri v. Commissioner.Moceri v. CommissionerDocket No. 3690-67.United States Tax CourtT.C. Memo 1969-33; 1969 Tax Ct. Memo LEXIS 263; 28 T.C.M. (CCH) 155; T.C.M. (RIA) 69033; February 18, 1969, Filed John J. Kane, Jr., 1405 Superior Bldg., Cleveland, Ohio, for the petitioner. Larry L. Nameroff, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax and additions to the tax for the years and in the amounts as follows: 11AdditionsYearDeficiencySec. 6653(a)Sec. 6651(a)Sec. 66541958$3,022.52$151.13$ 755.63$ 80.6619597,784.99389.251,946.25212.9319603,497.56174.88874.3997.9219613,179.00158.95794.7589.01The issues for decision are: (1) Whether the petitioner had taxable income in each of the calendar years 1958 through 1961, and, if so, the amount thereof. (2) If petitioner did have taxable income in the years264 1958 through 1961, whether any part of his underpayment of tax was due to negligence or to intentional disregard of rules and regulation, whether his failure to file returns for the years in issue was due to reasonable cause and not due to willful neglect, and whether he is liable for the addition to tax for underpayment of estimated tax. Findings of Fact Petitioner, Leo Moceri, is an individual whose residence at the time of the filing of the petition in this case was Akron, Ohio. He filed no Federal income tax returns for the years 1958 through 1961. Petitioner was born in Detroit, Michigan, and lived there until about 1930. Beginning sometime in 1927 petitioner began "bootlegging" whiskey for another person. In 1929 he began to buy and sell whiskey "on his own." He would buy his whiskey in Detroit and take it to Toledo by car where he would sell it. He would use part of his profits from the sale of each carload of whiskey to buy more whiskey and would save most of the balance. He kept the money he saved in the house in which he was living. In 1930 petitioner moved from Detroit to Toledo, Ohio, but continued his bootlegging business until sometime in 1932 156 when he and265 seven or eight other members of the Licavoli gang were indicted for murder. The "Licavoli gang" had the general reputation of being engaged in "bootlegging" activities. Petitioner received news of his indictment from a newspaper story and immediately left Toledo with his wife, Marguerite. When he left Toledo he took the money he had been saving with him. He stopped at his mother's home in Detroit and left part of the money with her and kept the remainder. From the time of his indictment in 1932 until 1951 petitioner was a fugitive and moved with his wife from place to place using various aliases. He would return at times to his mother's home and get some of the money he had left with her. During the years when he was a fugitive petitioner lived on money he had previously saved. He always owned a car during those years. In 1951 he was apprehended in Los Angeles and brought back to Toledo to answer the murder indictment. At the time he was arrested in Los Angeles, he had $1,800 in cash on his person and a Cadillac automobile. The murder indictment against petitioner was dismissed, he was indicted and convicted of extortion, and sentenced to a term of from one to five years. On July 2, 1957, petitioner266 was released from prison. His wife and his brother went to meet him upon his release. Prior to his confinement in the penitentiary, petitioner had lent his sister over $13,000. While petitioner was in prison, petitioner's sister repaid $600 at one time and at another time $10,000 of the amount to petitioner's wife. Petitioner's wife had come from California after petitioner's apprehension and had gone to the home of petitioner's sister to live. Petitioner's wife purchased a trailer with part of the $10,000 repaid to her by petitioner's sister and moved from the home of petitioner's sister into the trailer which she placed in a trailer park in Detroit. She lived in the trailer and kept the part of the $10,000 in cash which she had left in the trailer while petitioner was in the penitentiary. Petitioner's wife was employed in an apparel shop during most of the time petitioner was in the penitentiary and for a short while after his release. Her take-home pay during most of the time of her employment was approximately $55 a week. Petitioner's wife bought some furnishings for the trailer on credit and paid for the furnishings from her own earnings. She also saved some part of her earnings267 and kept such savings in cash in the trailer. Petitioner's wife purchased a Plymouth automobile and later an Oldsmobile automobile while petitioner was in prison and she still owned the Oldsmobile at the beginning of 1958. When petitioner was released from prison his sister repaid him $1,000 of the over $13,000 he had loaned to her. Petitioner's mother died while petitioner was in prison. After petitioner was released from prison his brother Joe handed him a box containing cash. Petitioner had been told by his brother that their mother shortly before she died had handed petitioner's brother the box containing petitioner's cash and asked petitioner's brother to keep it for petitioner until petitioner was released from prison. In 1956 petitioner's wife was injured in an automobile accident and received a net payment for damages of $2,500.00. She deposited this $2,500 in the Manufacturers National Bank of Detroit. In 1958 petitioner purchased a home at 340 Monroe Street, N.W. in Warren, Ohio. Preceding the actual purchase, petitioner had indicated to the real estate firm handling the transaction that he wished title to be taken in the name of a James Matash. Matash lived in Warren268 and was in the home remodeling business. When petitioner and his wife went to the First Federal Savings and Loan Association of Warren to obtain a loan for a part of the purchase price they found that the bank would lend the money to them if they took title to the home in their own names and they did take title in their names. Petitioner paid $4,000 down on the home and financed $7,000 of the price through a mortgage loan from the First Federal Savings and Loan Association of Warren. In his application for this loan, dated November 3, 1958, petitioner stated that "applicant is 51 years of age, employed by Imperial Home Imp. Co. the past 6 mons., earning $400-500 per month and is married." Petitioner had hoped to become a salesman for Imperial Home Improvement Company but was never actually so employed. On the loan application petitioner also listed the name of his wife Marguerite and listed as references the Manufacturers National Bank of Detroit and the furniture company from which she had purchased furniture for the trailer on credit. 157 Petitioner under date of May 18, 1959, made another application for a loan to the First Federal Savings & Loan Association of Warren. 269 In this application he stated that the purpose of the loan was to "refinance and use to [purchase] 410 Mahoning N.W." He further stated that "applicant is 52 years of age, employed by Imperial Home Impr. Co. the past year, earning $400-500 per month, and is married." Petitioner made another application, dated January 8, 1960, to the same institution for a loan of "max - 15 year." The purpose of the loan was stated to be for "refinance and use in business." He also stated that "applicant is 52 years of age, employed by Imperial Home Imp. Co." as a salesman. In 1958 when petitioner purchased the home on Monroe Street in Warren, he still owned the house trailer and he and his wife were living in this trailer which they had moved from Detroit to Warren. At that time petitioner also owned two cars. Petitioner spent $3,525.79 for improvements on the Monroe Street house in 1958 and $11,700 for such improvements in 1959. Petitioner and his wife both personally worked on the improvements to the house from November 1958 until the latter part of 1959. During this time petitioner was not otherwise employed. Petitioner sold the Monroe Street property in 1960 for $21,000 and in that year purchased270 an apartment in a cooperative apartment building. In 1961 petitioner moved from Warren to Akron, Ohio. The police had kept close surveillance of petitioner in Warren and petitioner had for this reason decided that he preferred to live in Akron. In Akron petitioner purchased property from a person named Lucas and took title in the name of Leonard Martin. Lucas was a part owner of King Steer's Drive-in in Akron. In 1958 petitioner purchased two 1958 Chevrolet Impalas at a cost of $2,480 and $2,475, respectively. He sold his 1956 Oldsmobile and one of the 1958 Chevrolet Impala's for $1,600 and $2,200, respectively, in 1958. In 1959 petitioner purchased two automobiles. One was a Chevrolet Corvair, title to which was taken in his wife's name. The price he paid for the Corvair was $2,313. The other car which petitioner purchased in 1959 was a 1960 Chevrolet Impala. Petitioner paid $80 cash down on this car, was allowed a credit of $1,342.50 for a 1958 Chevrolet which he traded in and financed the remaining cost of the car. In 1961 petitioner purchased a 1961 Cadillac. This car had been won in a raffle by an acquaintance of petitioner and petitioner purchased the car from the individual271 who had won it. In that same year petitioner applied for and received a loan of $3,000 from the Akron Dime Bank. Petitioner gave the bank as security for this loan a lien on his 1961 Cadillac and had the loan guaranteed by Nunzie Destro. Petitioner advised the loan officer of the bank that he was employed by King Steer, Inc. as manager. At that time petitioner had hoped to be able to purchase the stock of this drive-in and operate it as his business. He was not able to purchase the stock and was never employed by King Steer, Inc. In 1961 petitioner applied to the State of Ohio for a certificate of title for a 1962 Oldsmobile. He was indicted in 1962 under the Auto Title law RC 4505.19E on the grounds that he unlawfully used a false and fictitious address in an application for a certificate of Title to a Motor Vehicle. He pleaded guilty to the indictment and was convicted and sentenced to 60 days in the workhouse. Petitioner had listed an incorrect street number for his address on his application for the certificate of title. Petitioner's wife was not gainfully employed at any time during 1958 or 1959 and had no income during the years 1958 through 1961 other than the sum of $680.66272 in 1960 shown on the income tax return she filed for that year. Petitioner's wife never knew the nature of petitioner's employment, if any, at least from the time of petitioner's indictment for murder when they left Toledo. Petitioner and his wife were living in a furnished apartment in Los Angeles, California, which they rented for $55 per month at the time petitioner was apprehended. Petitioner's wife would stay at home most of the time and her only employment was in housekeeping. The investigation of petitioner's income tax liability for the years here in issue arose in connection with certain agents being assigned to an "Organized Crime Drive." The file given to the special agent assigned to investigate petitioner's tax liability contained statements to the effect that petitioner was connected with the "Licavoli gang." The special agent reviewed police records, investigated leads he was given and made other investigations but found no indication that petitioner was employed during the 158 years here in issue. He found no indications of income which petitioner might have received during the years here in issue During the course of the investigation the special agents interrogated273 petitioner with respect to any income he might have received during the years here in issue. Petitioner told the special agents during this investigation that he had not filed any income tax returns because he did not have any income. He told them that he had money but would not answer their question as to where his money came from. Petitioner would not answer the special agent's question as to whether he ever received any gifts or inheritances. He also told the agents that he had no books and records. After petitioner had been interviewed by the special agents, an attorney representing petitioner told the Regional Counsel in Cincinnati that petitioner had a cash hoard in Detroit while he was in the penitentiary and that his brother held this for him. This attorney also told the Regional Counsel that petitioner's sister gave petitioner's wife money. The special agents talked to petitioner's brother and he told them that his mother on her death bed gave him a box of money to hold for petitioner until petitioner got out of jail. He told them that when petitioner was released from jail, he and petitioner got the box and counted the money, but he would not tell the agents how much money274 was in the box. Petitioner was indicted under section 7203 of the Internal Revenue Code of 1954 for each of the years 1958 through 1961 for willful failure to file Federal income tax returns. Petitioner was tried and found not guilty. Respondent determined deficiencies in petitioner's Federal income tax for the calendar years 1958 through 1961 on the basis of increases in his net worth plus nondeductible expenditures. The computation attached to respondent's notice of deficiency is as follows: 159 ASSETS12-31-5712-31-5812-31-5912-31-6012-31-61Cash and Bank AccountsCash on hand$5,049.40Savings Account #29-551 Mfg. National Bank, Detroit2,500.00Savings Account #34289 First Fed. Sav. & Loan, Warren$ 2,532.21$ 171.91Savings Account #TS-29-1169 Mfg. Nat. Bank, Detroit$ 3,841.75Savings Account #3206-3822 First Nat. Bank, Miami300.00Checking Account #3206-3822 First Nat. Bank, Akron$ 365.05Real Estate340 Monroe St., Warren, Ohio11,000.0011,000.00340 Monroe St., Improvements - A. Morgan807.571,105.46340 Monroe St., Improvements - J. Pascarella990.001,700.00340 Monroe St., Improvements - N. Gilbert1,728.223,403.12340 Monroe St., Improvements - H. Lisi1,125.00340 Monroe St., Improvements - Other J. Pascarella4,366.428955 Collins Avenue, Miami, Fla.12,590.0013,590.00577 Hidden Valley Dr., Akron, Ohio27,061.76MiscellaneousLoan receivable - Ray and Rose Randazzo2,300.002,300.002,300.002,300.00 2,300.001954 Howard Trailer, SN7414-41 4,450.604,450.604,450.604,450.60Total Assets $14,300.00$23,808.60$42,212.51$24,482.35 $29,726.81275 160 LIABILITIES12-31-5712-31-5812-31-5912-31-6012-31-61Mortgage Loan #10939 First Fed. Sav. & Loan$ 6,983.57$ 3,865.26Note - Ben Schick - 8955 Collins Ave., Miami10,590.00Mortgage Loan #67846, Akron Sav. & Loan, 577 Hidden Valley$16,134.27Total Liabilities $ 6,983.57$14,455.26 $16,134.27Assets less liabilities - Net Worth$14,300.00$16,825.03$27,757.25$24,482.35$13,592.54Less prior year's net worth14,300.0016,825.0327,757.2524,482.35Increase in net worth2,525.0310,932.22( 3,274.90)(10,889.81)Adjustment to increase in net worth9,208.5710,783.8316,063.2123,339.86Adjusted gross income as corrected11,733.6021,716.0512,788.3112,450.05Adjusted gross income per returnUnderstatement of income 11,733.6021,716.0512,788.3112,450.05Additions:Purchased 1958 Chevrolet Impala F58F141310$ 2,480.00Purchased 1958 Chevrolet Impala F58F2153322,475.00Purchased 1960 Chevrolet Corvair 00769W1411189$ 2,313.00Purchased 1960 Chevrolet Impala 01837F11690380.00Water Utilities Paid38.88$ 22.12Electric Utilities Paid85.5645.05Gas Utilities Paid184.4085.76Interest Paid - First Fed. Sav. & Loan Acct. #1093953.57253.9022.37Other Personal Cost of Living Expenses8,000.008,000.006,000.006,000.00Purchased 1961 Oldsmobile 615M038813,352.35Purchased 1961 Cadillac 61 G0143934,300.00Expense of Sale - 340 Monroe St., Warren1,191.00Interest Paid - First Fed. Sav. & Loan Acct. #11942271.88Payments on 1960 Chevrolet - Universal C.I.T.1,477.02Paid Loan Expense - First Fed. Sav. & Loan105.00Interest Paid - Dime Bank of Akron, Ohio Loan #42-4740.00Interest and Taxes Paid Akron Sav. & Loan702.51Purchased 1962 Oldsmobile3,850.00Transfer funds to Marguerite - Chase Fed. Savings & Loan3,841.75Transfer 8955 Collins Ave. to Marguerite13,590.00Transfer Howard Trailer to Marguerite4,450.60[sic]Total Additions $13,008.57$10,955.74$16,872.05$32,474.86 12-31-5812-31-5912-31-6012-31-61Reductions:Sale of 1956 Oldsmobile 567M68577$1,600.00Sale of 1958 Chevrolet F58F1413102,200.00Pro Rata Tax Rebate - 340 Monroe St.$ 171.91Refund of Real Estate Commission 340 Monroe$ 90.02Unidentified Check Deposited - Union Sav. & Trust Bank, Warren3816Income Reported on Form 1040, 1960 Marguerite Moceri680.66Sale of 1960 Chevrolet$2,100.00Sale of 1961 Cadillac4,035.00Sale of 1961 Oldsmobile3,000.00Total Reductions $3,800.00$ 171.91$ 808.84$9,135.00Additions less Reductions - Net Adjustment to Net Worth $9,208.57$10,783.83$16,063.21$23,339.86276 161 Opinion Petitioner contends that the net worth statement on which respondent based his determination is arbitrary and therefore the presumptive correctness of respondent's determination is rebutted. He further contends that the evidence shows certain specific errors in the determination and that particularly there is error in respondent's determination of cash-on-hand at the beginning of 1958. Petitioner also takes the position that judgment of his acquittal of the indictment under section 7203 for willful failure to file Federal tax returns is collateral estoppel in this case. He distinguishes Helvering v. Mitchell, 303 U.S. 391">303 U.S. 391 (1938), which holds that a judgment of acquittal in a criminal action is no bar to a civil action arising out of the same facts on the ground that the Court in its unreported Memorandum Opinion in United States v. Leo Moceri, (N.D. Ohio), filed March 26, 1965, stated that "not one scintilla of proof appears in the record to the effect that the defendant during the years involved engaged in any income-producing activity." We do not agree with petitioner that this holding by the District Court distinguishes this case from Helvering v. Mitchell, supra.277 The differences in the nature of the proof required and the party upon whom the burden rests in a criminal and civil case was the basis for the holding in Helvering v. Mitchell, supra. In the instant case there is not one scintilla of proof that petitioner engaged in any income producing activities during the years in issue. However, this conclusion does not dispose of the case since the burden in the instant case is on petitioner to show that respondent's determination is either arbitrary or erroneous. Numerous cases have held that computation of income by the net worth plus nondeductible expenditures method in the notice of deficiency does not per se cause respondent's determination to lose its presumption of correctness even though no probable source of income is shown to exist. Although some errors have been shown to exist in respondent's net worth computation (without considering petitioner's claimed "cash on hand from bootlegging") such as the failure to include the cost of the Oldsmobile purchased by petitioner's wife as an asset at December 31, 1957 and the failure to consider cash which petitioner's wife might have accumulated other than that left from the278 money repaid to her by petitioner's sister, these errors are minor. Unless petitioner did have substantial cash at the end of 1957 which he had retained from his bootlegging days, respondent's net worth computation is substantially correct. In the state of this record, we do not consider it necessary to rule on petitioner's contention that respondent's computation is arbitrary. If we were to conclude that petitioner did not have substantially more cash on hand than the amount determined by respondent, we certainly would not consider respondent to be arbitrary in not accepting as true various statements made to him to the effect that petitioner did have such cash on hand. If we conclude from the evidence that petitioner did have substantial cash on hand at the end of 1957 which he had accumulated during his bootlegging days, petitioner has sustained his burden of showing error in respondent's determination by such evidence. In this case we must determine whether the preponderance of the evidence supports the conclusion that as of January 1, 1958, petitioner had cash accumulated in prior years in excess of the amounts determined by respondent sufficient to cover his increases in279 net worth plus nondeductible expenditures for the four years 1958 through 1961. Such amounts as computed by respondent total approximately $59,000 so that to completely explain respondent's computation of his "income" petitioner would have to show approximately $60,000 in cash as of December 31, 1957, in addition to his cash-on-hand at December 31, 1957, as determined by respondent. Petitioner testified that at the beginning of 1958 he had "over $70,000" remaining from cash accumulations from his "bootlegging" days. He testified that he was engaged in "bootlegging" from 1927 through 1932 and that from 1929 through 1932 was in the "bootlegging" business for himself. He testified that he ran at least 50 carloads of whiskey from Detroit to Toledo a month making a profit of from $500 to $700 a carload during this entire 3-year period. He also testified that he saved much of these profits and kept the money in his living quarters in cash until he was indicted for murder and became a fugitive. His testimony was that he took some of the money with him when he became a fugitive and left the remainder with his mother. Petitioner's mother died while petitioner was in the penitentiary. Petitioner280 testified that when he was released 162 from the penitentiary his brother gave him his remaining cash which his mother had kept until her death and that the remaining cash was over $70,000. In analyzing the evidence we find support for the fact that petitioner was a "bootlegger" during the period 1927 through 1932 from his indictment as a member of the "Licavoli gang". This gang was generally believed to be engaged in bootlegging. In fact it was because of petitioner's activities in this connection that his income tax liability was subjected to investigation as a part of respondent's "Organized Crime Drive." From the evidence as a whole we conclude that petitioner was engaged in bootlegging during the period of approximately five years prior to the year 1933. The evidence also supports the conclusion that during his "bootlegging" days petitoner accumulated cash. Petitioner's wife testified to the fact that she and petitioner moved from one place to another during petitioner's fugitive days and that there was money available from petitioner for the costs of their many moves and for their living expenses. Her testimony indicates that they lived modestly. If we accepted petitioner's281 estimate of his earnings during his bootlegging days, it would appear that his total earnings for the years 1929 through 1932 would amount to over $1,000,000. If petitioner's cash when he became a fugitive were even half such amount, it would appear that he would have substantial cash remaining when he was apprehended in 1951 since from the testimony of his wife as to their living standards the amount they spent during 19 years as fugitives would not approach $500,000. Respondent argues that we should not accept petitioner's testimony because of his criminal record and the fact that he has been shown to have falsified several loan applications. Respondent argues that the actions of petitioner during the years here in issue and the living standards of his wife while he was in the penitentiary belie any substantial cash being available to petitioner. While petitioner was in the penitentiary his wife lived very modestly in a trailer, bought furniture and perhaps an automobile on time payments and worked for a small salary. However, respondent now accepts the fact and has conceded that during all this time she had over $5,000 in cash in the trailer. The explanation petitioner's wife282 gave was that she wanted to establish her credit and that in fact she did establish credit references which she and petitioner used when they applied for a loan for the purchase of a house. Petitioner's explanation for obtaining the loan for the house was that he wished to establish credit and his explanation for purchasing the automobile on credit was that it helped him obtain insurance. He stated that he had hoped to become a salesman for the company by which he stated he was employed and that he had hoped to acquire the "drive-in" business by which he stated he was employed. These explanations might not appear as adequate for petitioner's actions if there did appear in the record any probable or even possible source of income for petitioner during the years here in issue. Petitioner stated he had no source of income and no employment. Petitioner's wife stated that she knew of no employment of petitioner and that for approximately a year he spent most of his time working with her in improving the house they had purchased. The special agent after diligent investigation could find no evidence that petitioner was gainfully employed during the years here in issue. During these years283 petitioner was continuously under surveillance by the police and the agent reviewed all the police records with respect to petitioner. The preponderance of the evidence in this record is that petitioner was not gainfully employed during any of the years here in issue. There is evidence independent of petitioner's testimony which indicates that petitioner had substantial accumulated cash as of the beginning of 1958. When petitioner was apprehended in 1951 he had $1,800 cash on his person and an automobile. Sometime before his apprehension he had loaned his sister over $13,000. The fact that this loan was made is not questioned by respondent and respondent calls attention to the fact that he has given credit for the trailer purchased with the partial repayment of this loan to petitioner's wife while petitioner was in the penitentiary, to the cash remaining from the partial repayment, and to the remainder owed to petitioner as of January 1, 1958 in his computation of net worth. We consider the inference that might be drawn from such a substantial loan by petitioner to his sister to be that petitioner had cash well in excess of the amount of the loan. A fugitive dependent on his accumulated284 cash for living expenses would be unlikely to loan his total cash to a relative. 163 If petitioner had been willing to show respondent's agents any remaining cash which he had and permit them to count the money, we might have better evidence in this case. Petitioner instead, while insisting he still had some cash, refused to tell the agents how much, where the cash was, or to let them see it. This "lack of cooperation" if these actions when petitioner knew he was under criminal investigation are to be termed "lack of cooperation" we have considered along with all the evidence in this case. While the evidence is not overwhelmingly in favor of petitioner, we do conclude that the preponderance of the evidence is that petitioner did have cash-onhand as of the beginning of 1958 in an amount sufficient to account for the increases in his net worth plus nondeductible expenditures as determined by respondent for the years 1958 through 1961. Decision will be entered for petitioner.	01-04-2023	11-21-2020

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